Leidos Holdings, Inc. Q3 FY2022 earnings

Leidos reported third-quarter fiscal 2022 revenue of $3.61 billion, up 3.6% from the prior-year quarter. Operating income was $281 million, down 7.9%, and operating margin was 7.8%, down 1.0 percentage point. Net income attributable to Leidos common stockholders was $162 million, down 21.0%, and diluted EPS was $1.17, down 18.2%. The profit decline reflected a foreign currency forward contract loss tied to the Cobham Aviation Services Australia acquisition, higher interest expense, and a higher effective tax rate. Revenue growth came from the Navy Next Generation Enterprise Network Recompete Service Management, Integration and Transport contract, the NASA Advanced Enterprise Global Information Technology Solutions contract, and increased deployments on the Defense Healthcare Management System Modernization program. On a non-GAAP basis, adjusted EBITDA was $372 million, down 8%, and adjusted EBITDA margin was 10.3%, down from 11.6%. Non-GAAP diluted EPS was $1.59, down 12%, and non-GAAP net income was $221 million, down 15%.

Cash generation was a bright spot. Operating cash flow was $748 million, up 32.4% from the prior-year quarter, and capital expenditures were $27 million, up 12.5%. Free cash flow, a non-GAAP measure, was $721 million. Deferred revenue was $450 million, up 9.0%, while remaining performance obligations were $14.30 billion, down 2.1%. Operating cash flow conversion was 462% of net income attributable to Leidos shareholders, and free cash flow conversion was 329%. The company returned cash to shareholders through dividends and declared a quarterly dividend of $0.36 per share.

Segment performance was mixed. Defense Solutions grew on the Navy NGEN-R SMIT ramp and force protection programs, but margin declined on program mix and investments in prototype development contracts. Civil grew on the NASA AEGIS ramp, software upgrades, and increased maintenance activity in security products, and margin expanded. Health declined as disability exam volumes normalized and competition increased, and margin declined. Net bookings were $4.1 billion, a book-to-bill ratio of 1.1, and total backlog was $35.0 billion, of which $7.4 billion was funded. Notable awards included a $1.5 billion Sentinel task order, a $358 million NAVSEA Medium Unmanned Undersea Vehicle contract, and a $138 million DISA Defense Enclave Services task order.

For the full fiscal year 2022, Leidos updated revenue guidance to $14.2 billion to $14.4 billion, adjusted EBITDA margin guidance to 10.3% to 10.5%, non-GAAP diluted EPS guidance to $6.20 to $6.40, and operating cash flow guidance to at or above $1.0 billion. The company completed the Cobham Special Mission acquisition after the quarter closed for $305 million Australian dollars, subject to working capital adjustments. It realized a loss on the related foreign exchange forward contract. Management noted that the year-ago quarter's profitability was elevated due to temporarily increased workload and decreased indirect expenses from the COVID-19 pandemic, as well as write-ups on certain contracts. Risks include the continuing resolution funding the U.S. government at fiscal 2022 levels until December 16, 2022, and the possibility of a shutdown. About 87% of revenue comes from U.S. government contracts, and 8% from international customers. The TCJA research cost capitalization provision could increase income taxes payable and net deferred tax assets by approximately $150 million in fiscal 2022, with the cash impact in fiscal 2023. Leidos also faces foreign exchange headwinds, LIBOR transition risk, and legal and arbitration matters.

For the first nine months of fiscal 2022, revenue was $10.70 billion, up 4.4%, operating income was $823 million, down 6.7%, and net income attributable to Leidos common stockholders was $508 million, down 12.3%. Diluted EPS was $3.68, down 9.1%. Operating cash flow was $881 million, up 7.3%, and capital expenditures were $76 million, up 7.0%. Operating margin was 7.7%, down 0.9 percentage point.