Leidos Holdings, Inc. Q2 FY2025 earnings

Leidos closed the quarter ended June 28, 2024 with revenue of $4.13 billion, up 7.7% from $3.84 billion a year earlier. Operating income rose 43.5% to $475 million, and operating margin climbed to 11.5% from 8.6%. Net income attributable to Leidos common stockholders was $322 million, up 55.6%, and diluted EPS came in at $2.37, up 58.0%. On a non-GAAP basis, adjusted EBITDA was $559 million at a 13.5% margin, and non-GAAP diluted EPS was $2.63, up 46% year over year. Management pointed to higher volumes and earned incentives in managed health services, plus tighter cost control across the company, as the main drivers of the profit improvement. Through the first six months, revenue of $8.11 billion was up 7.6% and operating margin of 11.0% was up 3.1 percentage points.

Health & Civil did most of the heavy lifting, posting the strongest growth and a sharp margin expansion on higher volumes, greater case complexity and better incentive performance in managed health services. National Security and Digital grew modestly, helped by the Sentinel contract and the DES program. Defense Systems improved on better program execution in airborne surveillance and reconnaissance and hypersonics. Commercial & International was the clear weak spot, swinging to an operating loss after write-downs on UK programs whose cost and schedule were rebaselined.

Cash generation was the standout. Operating cash flow of $374 million was up 128.0% from $164 million, and capital expenditures of $23 million were down 42.5%, producing non-GAAP free cash flow of $351 million. Year to date, operating cash flow of $437 million was up 562.1%. Net bookings totaled $4.0 billion, a book-to-bill ratio of 1.0, and backlog ended the quarter at $36.5 billion, of which $8.0 billion was funded. Days sales outstanding was 58, a one-day improvement from the prior-year quarter. Leidos returned $165 million to shareholders, split between $114 million of share repurchases and $51 million of dividends, and ended the period with $823 million of cash and $4.7 billion of debt. The board declared a quarterly dividend of $0.38 per share, payable September 27, 2024.

Guidance for the full fiscal year 2024 was raised on the profit lines. Leidos now expects revenue of $16.1 billion to $16.4 billion, an adjusted EBITDA margin of approximately 12%, non-GAAP diluted EPS of $8.60 to $9.00, and cash flows provided by operating activities of approximately $1.3 billion. The revenue range and the cash flow target are essentially unchanged from the prior outlook, while the margin and EPS ranges moved higher.

The risk list is familiar but real. Roughly 86% of quarterly revenue came from U.S. government contracts, so the appropriations calendar matters. Congress still has to pass the twelve appropriations bills for government fiscal year 2025, and failure to do so or to pass a continuing resolution by September 30, 2024 would trigger a full or partial shutdown. International sales were about 9% of revenue, exposing the company to foreign regulatory and geopolitical risk, and higher tariffs on imported IT hardware could raise procurement costs, though cost-plus contracts are expected to absorb part of that. The UK rebaselining that hurt Commercial & International is the kind of fixed-price execution risk that can repeat. On the balance sheet, remaining performance obligations of $13.8 billion were down 0.7% and current deferred revenue of $296 million was down 3.0%, both modest declines that bear watching. Leidos also flagged the new 15% global minimum tax framework, which it does not currently expect to be material.