Leidos Holdings, Inc. Q3 FY2023 earnings

Leidos reported revenue of $3.92 billion for the fiscal 2023 third quarter, up 8.7% from $3.61 billion in the prior-year quarter. Demand rose across all three segments, led by digital modernization and medical examination work. The bottom line told a different story. A $699 million pre-tax, non-cash impairment and restructuring charge, mostly tied to the Security Enterprise Solutions reporting unit, drove an operating loss of $336 million. That compares with operating income of $281 million a year earlier. Operating margin fell to negative 8.6% from 7.8%.

Net loss attributable to Leidos common stockholders was $399 million, or $2.91 per diluted share, against net income of $162 million and diluted EPS of $1.17 in the prior-year quarter. Through nine months, revenue was $11.46 billion, up 7.1%, while the net loss was $30 million and diluted EPS was negative $0.22. A year earlier the nine-month figures were net income of $508 million and diluted EPS of $3.68. The quarter included a $599 million goodwill impairment charge and $88 million of asset impairment charges. The goodwill write-down is not deductible for tax purposes, which weighed on the tax line.

Segment performance split sharply. Defense Solutions revenue rose 7%, and Health revenue rose 18% on higher medical examination volumes, incentive awards and recovery of prior expenditures. Civil revenue rose 6%, but the segment absorbed $688 million of impairment and restructuring charges related to SES and swung to a large operating loss. On a non-GAAP basis, adjusted EBITDA was $451 million, an 11.5% margin, up from $372 million and 10.3% a year earlier. Non-GAAP diluted EPS was $2.03, up 28%. Bookings in the quarter included a ten-year U.S. Army contract with a maximum value of $7.9 billion, a $918 million seven-year Department of Homeland Security contract, and a $125 million five-year Army task order.

Cash generation was a bright spot. Operating cash flow was $795 million for the quarter, up 9.1% from $729 million, and free cash flow was $745 million. Year-to-date operating cash flow was $861 million, down 0.7% from $867 million, as higher tax payments offset strong collections. Capital expenditures were $50 million in the quarter, up 85.2%, and $129 million year to date, up 69.7%. Days sales outstanding was 57, a 2-day improvement from the second quarter of 2023. Net bookings totaled $7.9 billion, a book-to-bill ratio of 2.0 for the quarter and 1.2 for the trailing twelve months. Backlog ended at $38.0 billion, of which $9.0 billion was funded. Remaining performance obligations were $15.5 billion, up 8.4% from $14.3 billion, and deferred revenue was $449 million, flat against $450 million.

Management raised full-year fiscal 2023 guidance on every metric. Revenue is now guided to $15.1 billion to $15.3 billion, up from $14.9 billion to $15.2 billion. Adjusted EBITDA margin guidance moved to 10.5% to 10.7% from 10.1% to 10.5%, and non-GAAP diluted EPS to $6.80 to $7.10 from $6.40 to $6.80. Cash flows provided by operating activities are now expected at or above $850 million, versus at or above $700 million previously. The board declared a quarterly dividend of $0.38 per share on October 27, 2023, a 6% increase over the prior quarter's amount, payable December 29, 2023. Leidos held $750 million in cash and $4.7 billion of debt at September 29, 2023. The largest risk is the budget. A continuing resolution funds the government only through November 17, 2023, and failure to pass appropriations or another CR would trigger a partial or complete shutdown. About 87% of quarterly revenue came from U.S. government contracts. The Tax Cuts and Jobs Act provision requiring research and development costs to be capitalized and amortized is expected to raise 2023 tax cash payments by roughly $270 million. Higher interest rates lifted net interest expense, and management flagged inflation and procurement delays as continuing exposures.