On August 1, 2023 Leidos Holdings, Inc. (NYSE: LDOS), a FORTUNE 500 science and technology leader, reported financial results for the second quarter of fiscal year 2023 (Press release, Leidos, AUG 1, 2023, View Source [SID1234633588]).

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Thomas Bell, Leidos Chief Executive Officer, commented, "It is my honor to lead Leidos into its second decade of top-line growth, which we plan to complement with a sharper focus on earnings and cash through disciplined financial management. This focus is underscored by the strong second quarter results announced today, characterized by record revenues and adjusted EBITDA. Propelling our future performance, we will remain dedicated to resolving with pace the most challenging problems faced by our customers, our nation, and its allies—an approach that distinctly sets Leidos apart."

Summary Operating Results

Three Months Ended

(in millions, except margin and per share amounts)

June 30, 2023

July 1, 2022

Revenues

$ 3,838

$ 3,597

Net income

$ 210

$ 172

Net income margin

5.5 %

4.8 %

Diluted earnings per share (EPS)

$ 1.50

$ 1.24

Non-GAAP Measures*:

Adjusted EBITDA

$ 420

$ 366

Adjusted EBITDA margin

10.9 %

10.2 %

Non-GAAP diluted EPS

$ 1.80

$ 1.59

* Non-GAAP financial measures should be considered in addition to, but not as a substitute for, the information
provided in accordance with GAAP. Management believes that these non-GAAP measures provide another
measure of Leidos’ results of operations and financial condition, including its ability to comply with financial
covenants. See Non-GAAP Financial Measures at the end of this press release for more information and a
reconciliation of our selected reported results to these non-GAAP measures.

Revenues for the quarter were $3.84 billion, up 7% compared to the second quarter of 2022. Revenues grew year-over-year primarily due to increased demand across all customer segments, especially for digital modernization, hypersonics, and medical examinations solutions.

Net income was $210 million and diluted EPS was $1.50. Net income and diluted EPS were up 22% and 21% year-over-year, respectively. Adjusted EBITDA was $420 million for the second quarter, up 15% year-over-year. Adjusted EBITDA margin of 10.9% increased from 10.2% in the second quarter of 2022. Non-GAAP net income was $252 million for the second quarter, up 15% year-over-year, and non-GAAP diluted EPS for the quarter was $1.80, up 13% year-over-year.

The primary drivers of increased earnings were improved business mix and program execution within each segment as well as reduced indirect spending across the company.

Cash Flow Summary

In the second quarter Leidos generated $164 million of net cash provided by operating activities and used $44 million in investing activities and $164 million in financing activities. Net cash provided by operating activities benefited from strong collections and working capital management. Days Sales Outstanding (DSO) for the quarter was 59, a 3-day improvement from the first quarter of 2023.

Investing activities consisted primarily of $40 million in property, equipment and software payments, which resulted in quarterly free cash flow of $124 million. Financing activities were driven by the payment of the remaining $320 million of principal on the 364-day term loan credit agreement from May 6, 2022, netted against borrowings of $200 million of commercial paper notes. In addition, Leidos returned $50 million to shareholders in the second quarter as part of its regular quarterly cash dividend program. As of June 30, 2023, Leidos had $329 million in cash and cash equivalents and $4.9 billion of debt.

On July 28, 2023, the Leidos Board of Directors declared a cash dividend of $0.36 per share to be paid on September 29, 2023, to stockholders of record at the close of business on September 15, 2023.

Business Development

Net bookings totaled $2.9 billion in the quarter, representing a book-to-bill ratio of 0.8. As a result, backlog at the end of the quarter was $34.2 billion, of which $8.3 billion was funded. Included in the quarterly bookings were several notable awards:

Common Hypersonics Glide Body (CHGB) Follow-On. The U.S. Army Program Executive Office Missiles and Space (PEO MS) awarded Leidos a four-year, $428 million prime contract to develop and test new CHGB prototypes. Under this follow-on, the Dynetics team expects to build up to 31 new CHGB prototypes to support Army and Navy requirements.
Centers for Medicare and Medicaid Services (CMS) Office of Information Technology End-User Centric IT Support. The CMS OIT awarded Leidos a contract with a total estimated value of $197 million over five years to provide seat-management services for CMS OIT employees and contractors and their personal computers, mobile devices and productivity services enabled through those devices. Under the contract, Leidos will continue to deliver engineering, innovation and accessibility compliance support to an onsite and remote workforce with a focus on fostering a positive end-user experience.
Royal Saudi Air Force (RSAF) Contractor Engineering & Technical Services Follow-On (CETS V). The RSAF awarded Leidos a contract with a total estimated value of $105 million over four years to maintain and enhance RSAF Command, Control, Communications, Computers and Intelligence (C4I) systems, including ground communications, radars, and IT systems, and support various aircraft platforms and systems support programs.
Defense Enclave Services (DES) DoDNet Planning and Design (DPAD). The Defense Information Systems Agency (DISA) awarded Leidos a DES task order with a total estimated value of $69 million over 55 months to migrate 14 Defense Agencies and Field Activities (DAFAs) to DoDNet. This award is the second task order under the DES effort to 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. The work will focus on mission value and user experience, while improving cybersecurity, network availability and reliability.
In addition, Leidos expanded its partnership network in support of technology offerings. As part of a Trusted Generative AI campaign, Leidos strengthened its collaboration with industry leaders, harnessing shared expertise to drive innovation in AI. These partnerships allow Leidos to work with the most advanced models available—from OpenAI’s GPT-4 through Microsoft to Google’s Bard and Amazon’s Bedrock. This collaboration enables secure environments that protect sensitive data while leveraging the power of Generative AI. In addition, Leidos and Aalyria have partnered to integrate Aalyria’s Spacetime networking technology with Leidos’ global-scale network management and protection solutions for critical government missions. By integrating Spacetime into new and existing solutions, the companies are developing multi-domain mission infrastructure capabilities that are secure, resilient and capable of spanning air, land, sea and space.

Forward Guidance

Leidos is updating its fiscal year 2023 guidance as follows:

FY23 Guidance

Measure

Current

Prior

Revenues (billions)

$14.9 – $15.2

$14.7 – $15.1

Adjusted EBITDA Margin

10.1% – 10.5%

10.3% – 10.5%

Non-GAAP Diluted EPS

$6.40 – $6.80

$6.40 – $6.80

Cash Flows Provided by Operating Activities (millions)

at or above $700

at or above $700

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 August 1, 2023. 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 13739546.