On February 14, 2023 Leidos Holdings, Inc. (NYSE: LDOS), a FORTUNE 500 technology, engineering, and science company, reported financial results for the fourth quarter and fiscal year 2022 (Press release, Leidos, FEB 14, 2023, View Source [SID1234627176]).
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Roger Krone, Leidos Chairman and Chief Executive Officer, commented: "The fourth quarter marked a strong finish to a banner year for Leidos, with record revenue and non-GAAP diluted EPS driving us to the top end of our revenue guidance range and beyond our EPS guidance range for the year. Our performance validated that our diversified and resilient portfolio and our investments in technology and innovation are positioning us for growth in key customer missions, including digital modernization, cyber, hypersonics, and force protection. Each and every day, our 45,000 people are helping our customers execute on important missions and meet the world’s most complex challenges."
Summary Operating Results
(in millions, except margin and per
share amounts)
Three Months Ended
Year Ended
December 30,
2022
December 31, 2021
December 30,
2022
December 31, 2021
Revenues
$ 3,697
$ 3,491
$ 14,396
$ 13,737
Net income
$ 180
$ 176
$ 693
$ 759
Net income margin
4.9 %
5.0 %
4.8 %
5.5 %
Diluted earnings per share (EPS)
$ 1.28
$ 1.23
$ 4.96
$ 5.27
Non-GAAP Measures*:
Adjusted EBITDA
$ 397
$ 359
$ 1,493
$ 1,510
Adjusted EBITDA margin
10.7 %
10.3 %
10.4 %
11.0 %
Non-GAAP diluted EPS
$ 1.83
$ 1.56
$ 6.60
$ 6.62
*Non-GAAP financial measures should be considered in addition to, but not as a substitute for, the information provided in accordance with GAAP. Management believes that these non-GAAP measures provide another measure of Leidos’ results of operations and financial condition, including its ability to comply with financial covenants in our debt agreements. See Non-GAAP Financial Measures at the end of this press release for more information and a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures.
Revenues were $3.70 billion for the quarter and $14.40 billion for the year, up 6% and 5% over the comparable 2021 periods, respectively. For the quarter and the year, all segments grew, led by broad-based strength across the Civil segment.
Net income was $180 million, or $1.28 per diluted share, for the quarter, and $693 million, or $4.96 per diluted share, for the year. Net income margin for the quarter was 4.9%, down 10 basis points year-over-year. Net income in the quarter reflected impairment charges of $37 million incurred by exiting and consolidating underutilized leased spaces as part of an ongoing facility rationalization effort. Net income margin for the year decreased to 4.8% from 5.5% in fiscal year 2021, primarily as a result of the $26 million net benefit from an adjustment to legal reserves related to the Mission Support Alliance (MSA) joint venture recorded in the first quarter of fiscal year 2021 and the $19 million of expense related to an adverse arbitration ruling in the second quarter of fiscal year 2022. For the quarter net income was up 2%, and diluted EPS was up 4% compared to the fourth quarter of fiscal year 2021. For the year net income and diluted EPS were down 9% and 6%, respectively, compared to fiscal year 2021.
In addition, net interest expense in the quarter increased to $51 million from $46 million in the fourth quarter of 2021. The weighted average diluted share count for the quarter was 138 million, compared to 142 million in the prior year quarter, primarily as a result of the $500 million accelerated share repurchase agreement implemented in the first quarter of fiscal year 2022.
Adjusted EBITDA was $397 million for the fourth quarter (10.7% margin), up 11% over the fourth quarter of 2021. For the year adjusted EBITDA was $1.49 billion (10.4% margin), down 1% over fiscal year 2021. Non-GAAP net income was $255 million for the quarter and $919 million for the year, which generated non-GAAP diluted EPS of $1.83 for the quarter and $6.60 for the year. For the quarter, non-GAAP net income was up 14%, and non-GAAP diluted EPS was up 17% compared to the fourth quarter of fiscal year 2021. For the year non-GAAP net income was down 3%, and non-GAAP diluted EPS was essentially flat compared to fiscal year 2021.
Cash Flow Summary
Net cash provided by operating activities for the quarter was $105 million; after adjusting for payments for property, equipment and software, quarterly free cash flow was $52 million. For the year net cash provided by operating activities was $986 million (144% operating cash flow conversion ratio), and free cash flow was $857 million (94% free cash flow conversion ratio).
For the quarter Leidos used $258 million in investing activities and $135 million in financing activities. For the year Leidos used $313 million in investing activities and $865 million in financing activities. During the quarter Leidos completed the acquisition of Cobham Special Mission for a preliminary purchase consideration of approximately $190 million United States dollars, net of $6 million of cash acquired, which is subject to working capital adjustments. Cobham Special Mission provides airborne border surveillance and search and rescue services to the Australian Federal Government.
During the fiscal year 2022, Leidos returned $741 million to shareholders, including $199 million as part of its regular quarterly cash dividend program and $542 million in share repurchases. As of December 30, 2022, the Company had $516 million in cash and cash equivalents and $4.9 billion in debt.
On February 10, 2023, the Leidos Board of Directors declared that Leidos will pay a cash dividend of $0.36 per share on March 31, 2023, to stockholders of record at the close of business on March 15, 2023.
New Business Awards
Net bookings totaled $3.7 billion in the fourth quarter of fiscal year 2022 and $15.4 billion for fiscal year 2022, representing book-to-bill ratios of 1.0 and 1.1, respectively. As a result, backlog at the end of fiscal year 2022 was $35.8 billion, of which a record $8.4 billion was funded. Included in the quarterly bookings were several notable awards:
Expendable Hypersonic Multi-mission ISR and Strike (Mayhem) . Under a $334 million, 51-month contract, Leidos will assist the U.S. Air Force Research Laboratory (AFRL) in designing and developing a large-class air-breathing hypersonic system that surpasses current air-breathing systems in range and payload. The Mayhem system will use a scramjet engine to generate thrust, propelling the vehicle across long distances at speeds greater than Mach 5. Leidos will leverage its corporate depth in digital engineering (DE) and model based systems engineering (MBSE) to develop the concept from idea to an operational system.
Social Security Administration (SSA) IT Support Services Contract II (ITSSC2). The SSA awarded Leidos two new ITSSC2 task orders to provide systems and infrastructure support for the SSA’s Deputy Commissioner of Systems (DCS) and the Office of Systems Operations and Hardware Engineering (OSOHE). The indefinite delivery/indefinite quantity, time and material task orders have a combined estimated value of $1.5 billion over approximately 67 months if all options are exercised.
U.S. Space Development Agency (SDA) Tranche 1 Tracking Layer. Leidos received a subcontract with Northrop Grumman Strategic Space Systems to develop hypersonic defense sensors for the SDA. Through this award, the Leidos team will develop and build the sensor payload for a proliferated constellation of Low-Earth Orbit satellites for the Tranche 1 Tracking Layer. The Tracking Layer constellation will detect and track advanced hypersonic and ballistic missile threats as part of SDA’s missile defense architecture.
Forward Guidance
Leidos is initiating fiscal year 2023 guidance as specified in the table below.
Measure
FY23 Guidance
Revenues (billions)
$14.7 – $15.1
Adjusted EBITDA Margin
10.3% – 10.5%
Non-GAAP Diluted EPS
$6.40 – $6.80
Cash Flows Provided by Operating Activities (millions)
at or above $700
Fiscal year 2023 guidance for cash flows provided by operating activities reflects approximately $300 million of additional cash taxes compared to fiscal year 2022, primarily related to the Tax Cuts and Jobs Act of 2017 provision requiring the capitalization and amortization of research and development costs that went into effect on January 1, 2022. While awaiting potential Congressional action in 2022, Leidos accrued, but did not pay the incremental 2022 cash taxes and now expects to make payments in 2023 to cover both the 2022 and 2023 tax amounts. The actual impact on cash flows provided by operating activities will depend on the amount of research and development costs Leidos will incur, whether Congress modifies or repeals this provision and whether new guidance and interpretive rules are issued by the US Treasury, among other factors.
For information regarding adjusted EBITDA margin and non-GAAP diluted EPS, see the related explanations and reconciliations to GAAP measures included elsewhere in this release.
Leidos does not provide a reconciliation of forward-looking adjusted EBITDA margins or non-GAAP diluted EPS to net income margin or diluted EPS, due to the inherent difficulty in forecasting and quantifying certain amounts that are necessary for such reconciliation. Because certain deductions for non-GAAP exclusions used to calculate projected net income may vary significantly based on actual events, Leidos is not able to forecast on a GAAP basis with reasonable certainty all deductions needed in order to provide a GAAP calculation of projected net income margin, diluted EPS or net income attributable to Leidos shareholders at this time. The amounts of these deductions may be material and, therefore, could result in projected net income margin, net income attributable to Leidos shareholders and diluted EPS being materially less than projected adjusted EBITDA margins and non-GAAP diluted EPS.
Conference Call Information
Leidos management will discuss operations and financial results in an earnings conference call beginning at 8 A.M. eastern time on February 14, 2023. Analysts and institutional investors may participate by dialing +1 (877) 869-3847 (U.S. dial-in) or +1 (201) 689-8261 (international dial-in).
A live audio broadcast of the conference call along with a supplemental presentation will be available to the public through links on the Leidos Investor Relations website (View Source).
After the call concludes, an audio replay can be accessed on the Leidos Investor Relations website or by dialing +1 (877) 660-6853 (toll-free U.S.) or +1 (201) 612-7415 (international) and entering conference ID 13735521.