Summary
Leidos posted fiscal 2023 second quarter revenue of $3.84 billion, up 6.7% from the prior-year quarter. Demand was broad, with digital modernization, hypersonics and medical examinations work driving the increase. Operating income climbed 22.1% to $331 million, and operating margin rose 1.1 percentage points to 8.6%. Net income attributable to Leidos common stockholders was $207 million, up 21.1%, and diluted EPS reached $1.50, up 21.0%. Through six months, revenue was $7.54 billion, up 6.3%. On a non-GAAP basis, adjusted EBITDA of $420 million rose 15%, with a margin of 10.9% against 10.2% a year earlier, and non-GAAP diluted EPS of $1.80 was up 13%. Management credited improved business mix, program execution and lower indirect spending.
Defense Solutions and Civil both improved profitability. Management pointed to digital modernization work such as the Navy NGEN-R SMIT contract and hypersonics programs, including the Space Development Agency Wide Field of View effort, as revenue drivers. Civil's margin gain also reflected a $17 million adverse arbitration ruling and related legal fees booked in the prior-year quarter. Health was the weak spot. The prior-year quarter contained a $28 million equitable adjustment tied to COVID-19 costs, which made for a difficult comparison even as medical examination volumes and the Social Security Administration ITSSC II contract lifted revenue.
Cash generation was uneven. Operating cash flow for the quarter was $164 million, up 264.4%, helped by strong collections and favorable timing of customer advance payments. Year to date, operating cash flow was $66 million, down 52.2%, as higher tax payments of $152 million and a $62 million CARES Act payroll tax payment weighed on the first half. Capital expenditures were $40 million for the quarter, up 90.5%. Free cash flow, a non-GAAP measure, was $124 million. The company ended the quarter with $329 million in cash and $4.9 billion of debt, and it repaid the remaining $320 million on its 364-day term loan.
Net bookings totaled $2.9 billion, a book-to-bill ratio of 0.8. Backlog stood at $34.2 billion, of which $8.3 billion was funded, down from $34.7 billion a year earlier. Remaining performance obligations of $13.9 billion were down 7.9%, and current deferred revenue of $305 million was down 2.2%. Awards in the quarter included a four-year, $428 million Common Hypersonics Glide Body follow-on from the U.S. Army, a $197 million CMS end-user IT support contract, a $105 million Royal Saudi Air Force follow-on and a $69 million Defense Enclave Services task order. For full fiscal year 2023, Leidos raised the low end of its revenue guidance range and narrowed its adjusted EBITDA margin range to 10.1% to 10.5% from 10.3% to 10.5%. It held non-GAAP diluted EPS guidance at $6.40 to $6.80 and still expects operating cash flow at or above $700 million.
The risk list is familiar for a government services contractor. About 85% of quarterly revenue came from U.S. government contracts, so the appropriations calendar matters. Congress must pass 12 appropriations bills or a continuing resolution by September 30, 2023, or face a partial or complete shutdown. The TCJA research and development capitalization rule is expected to push tax cash payments up by roughly $300 million in 2023. Health margin pressure and a book-to-bill ratio of 0.8 are worth watching into the second half, and the narrowed adjusted EBITDA margin guidance suggests the mix shift toward lower-margin work is not fully behind the company.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2023 | Q1 FY2023 | QoQ | Q2 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $3.81B | $3.68B | +3.6% | — | — |
| Gross profit | $542.0M | $475.0M | +14.1% | — | — |
| Gross margin | 14.2% | 12.9% | +1.3 pp | — | — |
| Sales & marketing | $237.0M | $233.0M | +1.7% | — | — |
| Operating income (loss) | $331.0M | $265.0M | +24.9% | — | — |
| Operating margin | 8.7% | 7.2% | +1.5 pp | — | — |
| Net income (loss) | $207.0M | $162.0M | +27.8% | $177.0M | +16.9% |
| Net margin | 5.4% | 4.4% | +1.0 pp | — | — |
| Diluted EPS | $1.50 | $1.17 | +$0.33 | — | — |
Risks
Approximately 85% of revenues in the quarter ended June 30, 2023 and 86% year to date came from U.S. government contracts, leaving results highly exposed to federal budget decisions. Congress has not yet passed the 12 GFY 2024 appropriations bills, and failure to pass them or a continuing resolution by September 30, 2023 would result in a partial or complete federal government shutdown.
The TCJA provision eliminating current deduction of research and development costs is expected to increase fiscal 2023 income taxes payable and net deferred tax assets by $110 million each, add $75 million to unrecognized tax benefits, and raise 2023 tax cash payments by approximately $300 million. The ultimate impact depends on whether Congress modifies or repeals the provision and on new Treasury guidance.
Non-operating expense, net rose to $57 million for the quarter ended June 30, 2023 from $46 million a year earlier, and to $115 million year to date from $95 million, driven by higher net interest expense from increased interest rates and refinancing activity. The company carried $4.9 billion of outstanding debt at both June 30, 2023 and December 30, 2022, and refinanced its term loan and revolving facilities during fiscal 2023.
Remaining performance obligations fell 7.9% to $13.9 billion at June 30, 2023 from $15.1 billion a year earlier, and net bookings for the six months ended June 30, 2023 were $5.9 billion versus $7.6 billion in the prior-year period. Total backlog was $34.2 billion at June 30, 2023 compared with $34.7 billion at July 1, 2022, with the Civil segment backlog declining to $9.8 billion from $10.9 billion.
Health segment operating income decreased 3.2% for the quarter ended June 30, 2023 and 6.1% year to date versus the prior-year periods, with the year-to-date decline attributed partly to increased labor costs and a higher volume of net write-ups in the prior year. The prior-year periods also included $28 million in COVID-19 stop work order recoveries that did not repeat.
An adverse arbitration ruling related to the 2016 acquisition of the Information Systems & Global Solutions business from Lockheed Martin drove $17 million and $19 million of legal reserves and fees in the prior-year quarter and year-to-date periods, respectively, and the company remains subject to reviews, investigations, claims and lawsuits described in its commitments and contingencies note.
International sales represented approximately 9% of total revenues for the quarter and year to date ended June 30, 2023, up from 8% a year earlier, increasing exposure to international regulatory and geopolitical risk. Higher tariffs on imported IT hardware could raise procurement costs, though the company expects to recover portions through cost-plus contracts.
SaaS KPIs
All quarters →Net bookings
Adjusted EBITDA margin
Book-to-bill ratio
Adjusted EBITDA
Funded backlog
Backlog
Free Cash Flow
Operating cash flow conversion ratio
Non-GAAP free cash flow conversion ratio
Non-GAAP diluted EPS
Days Sales Outstanding (DSO)
Summary, forecast, risks and KPIs are extracted from Leidos Holdings, Inc.'s SEC filings for Q2 FY2023 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 1, 2026.