On February 15, 2022 Leidos Holdings, Inc. (NYSE: LDOS), a FORTUNE 500 technology, engineering, and science company, reported financial results for the fourth quarter and fiscal year 2021 (Press release, Leidos, FEB 15, 2022, View Source [SID1234608102]).

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Roger Krone, Leidos Chairman and Chief Executive Officer, commented: "2021 was a banner year for Leidos, with industry-leading organic revenue growth and expanded profitability. In addition, we enhanced our market presence during the year with strategic acquisitions and investments that added important technical capabilities. Despite the ongoing impact of COVID-19 and an extended Continuing Resolution, we are positioned to grow in 2022, bolstered by our scale, differentiated technical offerings, and dedicated workforce."

As of December 31, 2021, Leidos ended the three-year forecast period laid out at its 2019 Investor Day, exceeding or achieving all financial targets. Over the period, Leidos grew revenues at a compound annual growth rate of 10%, achieved a net income margin of 5.5% and converted 164% of its net income attributable to Leidos stockholders into cash flows from operations. In addition, Leidos grew organically at a compound annual growth rate of 7% (versus 5% target), achieved an adjusted EBITDA margin of 10.8% (versus 10% or greater target) and converted 116% of its adjusted net income into free cash flow (versus 100% or greater target).

Summary Operating Results

Revenues were $3.49 billion for the quarter and $13.74 billion for the year, up 7% and 12% over the comparable 2020 periods, respectively. Excluding acquired revenues of $52 million for the quarter and $325 million for the year, organic revenues increased 6% and 9%, respectively. For the year revenues grew organically across all reportable segments. The largest contributors for the quarter and the year were the increase in veterans’ disability examinations after the pause from the COVID-19 pandemic and the ramp-up of the Navy Next Generation Enterprise Network Recompete (NGEN-R) Service Management, Integration and Transport (SMIT) contract.

Net income was $176 million, or $1.23 per diluted share, for the quarter, and $759 million, or $5.27 per diluted share, for the year. Net income margin for the quarter was 5.0%. The weighted average diluted share count for the quarter was 142 million, compared to 144 million in the prior year quarter. For the year net income and diluted EPS were both up 21% compared to fiscal year 2020. Net income margin for the year increased to 5.5% from 5.1% in fiscal year 2020 as a result of strong program management, higher volumes on certain fixed price programs and $26 million net benefit from an adjustment to legal reserves related to the Mission Support Alliance joint venture recorded in the first quarter of fiscal year 2021.

Adjusted EBITDA was $359 million for the fourth quarter, representing an adjusted EBITDA margin of 10.3%. For the year adjusted EBITDA was $1.51 billion (11.0% margin), up 14% over fiscal year 2020. Non-GAAP net income was $224 million for the quarter and $952 million for the year, which generated non-GAAP diluted EPS of $1.56 for the quarter and $6.62 for the year. For the year non-GAAP net income and non-GAAP diluted EPS were up 13% and 14%, respectively, compared to fiscal year 2020.

Cash Flow Summary

Net cash provided by operating activities for the quarter was $210 million for an operating cash flow conversion ratio of 121%. After adjusting for payments for property, equipment and software, quarterly free cash flow was $177 million for a free cash flow conversion ratio of 80%. For the year net cash provided by operating activities was $1.03 billion (137% conversion) and free cash flow was $927 million (98% conversion).

For the quarter Leidos used $37 million in investing activities and $69 million in financing activities. For the year Leidos used $730 million in investing activities and $113 million in financing activities. On November 22, 2021, Leidos signed a definitive agreement within the Defense Solutions segment to dispose of its Aviation & Missile Solutions LLC ("AMS") business to focus on leading-edge and technologically advanced services, solutions and products. The sales price will be approximately $18 million, subject to certain adjustments, and the sale is expected to be completed during the first quarter of fiscal year 2022.

During fiscal year 2021, Leidos made open market repurchases of common stock for an aggregate purchase price of $237 million and returned $199 million to shareholders as part of its regular quarterly cash dividend program. In addition, Leidos borrowed $380 million, paid down $106 million of debt and completed strategic acquisitions and investments for preliminary purchase consideration of approximately $627 million. As of December 31, 2021, the Company had $727 million in cash and cash equivalents and $5.1 billion in debt.

On February 11, 2022, the Leidos Board of Directors declared that Leidos will pay a cash dividend of $0.36 per share on March 31, 2022, to stockholders of record at the close of business on March 15, 2022. In addition, the Board authorized a stock repurchase program under which Leidos may repurchase up to 20 million shares of its common stock, which supersedes the prior February 2018 share repurchase authorization. Stock repurchases may be made on the open market at prevailing market prices or in privately negotiated transactions including through accelerated share repurchase or derivative transactions, transactions with Leidos retirement and deferred compensation plans, transactions under 10b5-1 plans or 10b-18 plans or any of the foregoing combined or otherwise. Whether repurchases are made and the timing and actual number of shares repurchased depends on a variety of factors including price, corporate capital requirements, other market conditions and regulatory requirements. The repurchase program may be accelerated, suspended, delayed or discontinued at any time.

New Business Awards

Net bookings totaled $3.2 billion in the fourth quarter of fiscal year 2021 and $15.5 billion for fiscal year 2021, representing a book-to-bill ratio of 0.9 and 1.1, respectively. As a result, backlog at the end of fiscal year 2021 was $34.5 billion, of which $7.4 billion was funded. Included in the quarterly bookings were several notable awards:

Air Combat Command Intelligence, Surveillance and Reconnaissance Program. Leidos was awarded a task order by the Air Combat Command (ACC) Acquisition Management and Integration Center (AMIC) to continue its support to ACC intelligence, surveillance and reconnaissance (ISR) operations. Under the contract, Leidos will provide subject matter expertise and threat mitigation support for ACC ISR operations along with a full range of intelligence support and ISR operational services that encompass analysis and assessment support, ISR training support and intelligence support for HQ ACC Staff, subordinate NAF Staffs, Centers and Wings. The single-award, firm-fixed price task order has a one-year base period of performance, four one-year options and a total contract value of up to approximately $531 million if all options are exercised.
Hypersonic Thermal Protection System Capability. Dynetics, a wholly owned subsidiary of Leidos, was awarded a contract to develop Hypersonic Thermal Protection System (TPS) prototypes for the U.S. Army’s Rapid Capabilities and Critical Technologies Office (RCCTO). Under the contract, Dynetics will also support materials research, novel inspection and acceptance efforts. The cost-plus-fixed fee award has a total value of up to $479 million over six years.
Federal Parent Locator Service. Leidos was awarded a new prime contract to continue supporting the Office of Child Support Enforcement (OCSE) within the Department of Health and Human Services, Administration of Children and Families. Under the contract, Leidos will continue to support OCSE’s Federal Parent Locator Service (FPLS) with operations and maintenance, continuation of system development and enhancement, data center operations and a disaster recovery center. The single award contract has a maximum value of $76 million and a period of performance of approximately five years if all options are exercised.
Forward Guidance

Leidos is initiating fiscal year 2022 guidance as specified in the table below.

Measure

A provision of the Tax Cuts and Jobs Act of 2017 went into effect on January 1, 2022, that requires companies to capitalize and amortize research and development costs over five years rather than deducting such costs in the year incurred for tax purposes. The guidance for cash flows provided by operating activities does not take into account the effects of this legislative change, because it assumes that the provision will be deferred, modified or repealed. If the provision remains in effect, Leidos currently estimates that cash flows provided by operating activities would decrease by approximately $150 million in fiscal 2022 and net deferred tax assets would increase by a similar amount. The actual impact on cash flows provided by operating activities will depend on the amount of research and development costs the Company will incur, on whether Congress modifies or repeals this provision and on 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 15, 2022. 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 13726189.