Leidos Holdings, Inc. Q1 FY2022 earnings

Leidos reported first quarter fiscal 2022 revenue of $3.49 billion, up 5.4% from the prior-year quarter. Operating income was $271 million, down 12.0%. Operating margin was 7.8%, down 1.5 percentage points. Net income attributable to Leidos common stockholders was $175 million, down 14.6%. Diluted EPS was $1.25, down 12.0%. The profit decline reflects a $26 million net benefit from an adjustment to legal reserves related to the Mission Support Alliance joint venture recorded in the first quarter of fiscal 2021. The company said revenues grew across all reportable segments, with the largest contributors being the start-up of the Navy Next Generation Enterprise Network Recompete Service Management, Integration and Transport contract and increased deployments on the Defense Healthcare Management System Modernization program.

Non-GAAP results also declined. Adjusted EBITDA was $358 million, down 8% year-over-year. Adjusted EBITDA margin was 10.2%, compared with 11.7%. Non-GAAP net income was $223 million, down 10%. Non-GAAP diluted EPS was $1.58, down 9%. The adjusted EBITDA decline was primarily due to the MSA adjustment and a return to more normative indirect spending levels. Cash generation weakened. Operating cash flow was $93 million, down 61.1%. Capital expenditures were $28 million, up 7.7%. Free cash flow was $65 million. Operating cash flow conversion ratio was 53%, and free cash flow conversion ratio was 29%. Deferred revenue was $382 million, down 11.8%. Remaining performance obligations were $15.4 billion, down 3.8%. The operating cash flow decrease was primarily due to lower sale of accounts receivable and timing of customer and vendor payments.

Commercial momentum was a bright spot. Net bookings totaled $5.4 billion, a book-to-bill ratio of 1.6. Backlog reached a record $36.3 billion, of which $7.1 billion was funded. The increase in backlog includes $685 million of backlog acquired through business combinations in Defense Solutions. Total backlog at April 1, 2022, included a negative impact of $33 million from exchange rate movements. Awards included a NASA AEGIS contract with a total estimated value of $2.5 billion and a ten-year period of performance, an FAA NISC contract worth $1.7 billion over 10 years, and VBA medical disability examination contracts totaling approximately $1.7 billion. The U.S. Navy awarded Gibbs & Cox a surface combatant ship design engineering services contract with a potential value of $319 million through 2027. The U.S. Army awarded a gunnery training systems modernization contract with a total estimated value of $104 million over five years. Segment performance was mixed. Defense Solutions grew on the Navy NGEN-R SMIT and IFPC programs, but faced the completion of the NASA Human Landing System base contract and Afghanistan-related programs. Civil was hurt by the prior-year MSA benefit and a write-down on a minority-interest joint venture program. Health improved on DHMSM and MFLC volumes.

Guidance for full fiscal year 2022 is unchanged. Leidos expects revenues of $13.9 billion to $14.3 billion, adjusted EBITDA margin of 10.3% to 10.5%, non-GAAP diluted EPS of $6.10 to $6.50, and cash flows provided by operating activities at or above $1.0 billion. The company also declared a quarterly cash dividend of $0.36 per share, payable June 30, 2022, to stockholders of record on June 15, 2022. Leidos generated approximately 87% of total revenues from U.S. government contracts. The 2022 Consolidated Appropriations Act includes $782 billion in defense spending and $730 billion in non-defense spending. The GFY 2023 President's Budget Request totals $5.8 trillion, with $813 billion in defense spending and $769 billion in non-defense spending. Risks include U.S. government spending and budget priorities, inflation and interest rates, supply chain constraints, COVID-19, and the vaccine mandate injunction. A tax change under the Tax Cuts and Jobs Act of 2017 could reduce fiscal 2022 cash from operations by approximately $150 million. Leidos also faces LIBOR transition risk and contract protest risk. The company used $500 million for an accelerated share repurchase and paid $51 million in dividends during the quarter.