On August 2, 2022 Leidos Holdings, Inc. (NYSE: LDOS), a FORTUNE 500 science and technology leader, reported financial results for the second quarter of fiscal year 2022 (Press release, Leidos, AUG 2, 2022, View Source [SID1234617274]).
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Roger Krone, Leidos Chairman and Chief Executive Officer, commented, "Leidos remains on track for another year of solid organic growth and core business profitability. The affirmation of our Defense Enclave Services contract award by the Government Accountability Office demonstrates our leadership in digital modernization across the federal government, with strong demand for our technology solutions and services across our diversified business portfolio. We continue to execute on our disciplined and balanced capital allocation strategy to drive shareholder value. And, we are proving our ability to compete successfully for talent with another quarter of robust hiring."
Revenues for the quarter were $3.60 billion, up 4% in total and organically compared to the second quarter of fiscal year 2021. Revenues grew across all reportable segments; the largest contributors were continued growth of the Navy Next Generation Enterprise Network Recompete (NGEN-R) Service Management, Integration and Transport (SMIT) contract and increased deployments on the Defense Healthcare Management System Modernization (DHMSM) program.
Net income was $172 million and diluted EPS was $1.24. Net income and diluted EPS were up 1% and 5% year-over-year, respectively, and net income margin decreased from 4.9% to 4.8% year-over-year. Net interest expense increased to $50 million from $46 million in the second quarter of fiscal year 2021. In addition, the weighted average diluted share count for the quarter was 138 million compared to 143 million in the prior year quarter, which benefited from the retirement of 0.3 million shares as part of the final settlement of the Accelerated Share Repurchase (ASR) agreement implemented in the first quarter of fiscal year 2022.
Adjusted EBITDA was $366 million for the second quarter, up 2% year-over-year. Adjusted EBITDA margin decreased from 10.4% to 10.2% over the same period. Non-GAAP net income was $220 million for the second quarter, which was up slightly year-over-year, and non-GAAP diluted EPS for the quarter was $1.59, which was up 5% compared to the second quarter of fiscal year 2021.
Cash Flow Summary
In the second quarter of fiscal year 2022, Leidos generated $40 million of net cash provided by operating activities, used $8 million in investing activities and generated $6 million in financing activities. After adjusting for payments for property, equipment and software, quarterly free cash flow was $19 million.
In the quarter Leidos entered into a 364-day term loan credit agreement for a senior unsecured term loan facility in an aggregate principal amount of $380 million, and the proceeds were used to repay the $380 million senior unsecured term loan entered into on May 7, 2021. As of July 1, 2022, Leidos had $339 million in cash and cash equivalents and $5.2 billion of debt, including $150 million of Commercial Paper Notes outstanding.
After the close of the quarter, Leidos entered into a definitive agreement with private equity firm Advent International to acquire Cobham Aviation Services Australia’s Special Mission business. The acquired business provides Border Force Airborne Surveillance and Maritime Safety Search and Rescue services to the Australian Federal Government. The acquisition is subject to customary closing conditions, including regulatory approvals.
On July 29, 2022, the Leidos Board of Directors declared that Leidos will pay a cash dividend of $0.36 per share on September 30, 2022 to stockholders of record at the close of business on September 15, 2022.
New Business Awards
Net bookings totaled $2.2 billion in the quarter, representing a book-to-bill ratio of 0.6. As a result, backlog at the end of the quarter was $34.7 billion, of which $7.5 billion was funded. During the quarter Leidos received several particularly important awards:
Defense Information Systems Agency (DISA) Defense Enclave Services (DES). DISA awarded Leidos a single-award, indefinite delivery, indefinite quantity (IDIQ) contract with a total estimated value of $11.5 billion and a four-year base period of performance followed by three two-year option periods. Through the DES contract, Leidos will consolidate enterprise IT services and provide standardized, responsive and cost-effective solutions for more than 370,000 users spanning 22 Department of Defense (DoD) agencies and field activities with over 500 sites both in the U.S. and abroad. This work will focus on mission value and user experience, while improving cybersecurity, network availability and reliability for Fourth Estate agencies.
Program Executive Office (PEO) Integrated Warfare Systems (IWS) Undersea Warfare Combat System and Product Support. Leidos was awarded a follow-on contract to support the Navy’s PEO IWS Directorate. Under the contract, Leidos will perform a range of support services, including shipboard modernization, curriculum development, training conduct, depot support, technical data, maintenance planning and management. The single award, cost-plus-fixed-fee contract holds an approximate value of $291 million and includes a one-year base period of performance with four additional one-year option periods.
Navy Medical Performance Research. Leidos was awarded a new task order by the Naval Medical Readiness Logistics Command, Detachment Fort Detrick, to support research to maximize warfighter performance and survivability in the aviation, underwater and special warfare environments. Under the contract, Leidos will support research on the human cognitive and physiological factors associated with military operations. The research focuses on motion sickness, aeromedical standards, hypoxia, fatigue assessment, aviation safety and both neurocognitive and neurophysiological effects. The contract holds an approximate value of $53 million and includes a one-year base period of performance with four one-year options and one six-month option.
Punta Cana Security Checkpoint Upgrade. Leidos was selected by the Dominican Republic’s Punta Cana International Airport to upgrade their security checkpoints. Punta Cana hosts more than 4 million tourists annually with strong projected growth over the coming years. The Leidos solution will keep passengers and staff safe while enhancing operational efficiencies and increasing passenger throughput. For example, using enhanced screening techniques, passengers will no longer need to remove electronics and liquids from carry-on bags. Implementation will be completed in the first half of 2023.
Forward Guidance
Leidos does not provide a reconciliation of forward-looking adjusted EBITDA margins or non-GAAP diluted EPS to net income 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 at this time. The amounts of these deductions may be material and, therefore, could result in projected net income and diluted EPS being materially less than what may be implied by 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 8:00 A.M. eastern time on August 2, 2022. Analysts and institutional investors may participate by dialing +1 (877) 869-3847 (toll-free U.S.) or +1 (201) 689-8261 (international callers).
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 callers) and entering conference ID 13731269.