Leidos Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 29, 2024, compared with the quarter ended March 31, 2023. The request metadata says “2023 Q1,” but the filing is for 2024 Q1.
Business context
Leidos provides technology, engineering, and mission-support services, principally to U.S. government customers. The company reported under four realigned segments beginning in fiscal 2024: National Security and Digital, Health & Civil, Commercial & International, and Defense Systems. Prior-year segment results were recast. U.S. government contracts generated approximately 87% of revenue in both periods.
Financial results
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $3.975 billion | $3.699 billion | +7.5% |
| Operating income | $415 million | $265 million | +56.6% |
| Operating margin | 10.4% | 7.2% | +3.2 percentage points |
| Net income | $283 million | $164 million | +72.6% |
| Net income attributable to Leidos common stockholders | $284 million | $162 million | +75.3% |
| Diluted EPS | $2.07 | $1.17 | +$0.90 |
| Operating cash flow | $63 million | $(98) million | +$161 million |
Segment revenue and operating income were: National Security and Digital, $1.793 billion and $175 million; Health & Civil, $1.199 billion and $222 million; Commercial & International, $509 million and $34 million; Defense Systems, $474 million and $21 million. Health & Civil posted the strongest revenue growth, while Defense Systems operating income declined year over year.
Cash, debt, and liquidity
Cash and cash equivalents were $633 million at March 29, 2024, down from $777 million at December 29, 2023. Total debt was approximately $4.7 billion, with $43 million classified as current; no revolving-credit borrowings or commercial paper were outstanding. The company had a $1 billion revolving facility and reported compliance with debt covenants. Management expects to meet liquidity needs over the next 12 months using operating cash flow, cash balances, and available financing sources.
Investing activities used $12 million, mainly reflecting $17 million of payments for property, equipment, and software. Financing activities used $228 million, including $53 million of dividends and $183 million of share repurchases and other. The quarterly dividend was $0.38 per share.
Material changes and management commentary
- Operating income rose substantially, led by Health & Civil’s higher managed-health volumes, program ramp-ups, wins, and favorable business mix. National Security and Digital and Commercial & International also improved; Defense Systems margins fell due to program mix.
- Net bookings were an estimated $3.7 billion, versus $3.0 billion a year earlier. Total backlog was $36.571 billion, compared with $35.086 billion; funded backlog was $7.965 billion.
- Remaining performance obligations were $14.3 billion; Leidos expected to recognize approximately 62% within 12 months and 78% within 24 months. These obligations and backlog exclude certain unexercised options and potential future task orders.
- Operating cash flow improved year over year, primarily because of lower tax payments, including the absence of a prior-year $62 million CARES Act payroll-tax payment, partly offset by increased working capital. Receivables reduced operating cash flow by $281 million in the quarter.
- The effective tax rate increased to 23.1% from 20.8%, mainly due to increased unrecognized tax benefits and a reduced federal research-credit benefit, partly offset by higher excess tax benefits from stock-based compensation.
Outlook, risks, and unusual items
The filing provides no specific quantified company revenue, earnings, or cash-flow guidance. Management discussed pending federal fiscal 2025 appropriations and a proposed federal budget, and noted the business’s exposure to government spending priorities. Leidos said it did not currently expect higher tariffs or Pillar Two global minimum tax rules to have a material impact.
- An internal investigation into possible conduct involving international operations is ongoing; Leidos has self-reported to and is cooperating with the Department of Justice and SEC. A separate DOJ Antitrust Division investigation concerning three government procurements is also ongoing. The company said it could not estimate potential fines, penalties, or other liabilities.
- Defense Contract Audit Agency indirect-cost audits remain open for fiscal 2021 and later years. Leidos believes it has adequate reserves but cannot predict final adjustments.
- The company recorded a $596 million non-cash goodwill impairment in fiscal 2023 in the Security Enterprise Solutions reporting unit. It reported no impairment in the 2024 quarter but warned that adverse forecast changes could require further impairment.
- The VirnetX Apple II case concluded after the Supreme Court denied review in February 2024; Leidos received no proceeds.
- Management said routine claims and lawsuits were not expected to materially affect financial position, results, or cash flows. It also reported effective disclosure controls; accounting-system migrations led to related control updates during the quarter.
Important facts for investors to verify
- Whether operating-margin gains, particularly in Health & Civil, are sustainable and how Defense Systems program mix develops.
- Whether bookings convert into funded work and revenue, given that much of reported backlog is unfunded and subject to change.
- Working-capital trends, especially receivables and the timing of customer billings and collections.
- Potential financial, regulatory, and reputational consequences of the ongoing government investigations and contract audits.
- Debt maturities, interest costs, covenant headroom, and the continued pace of dividends and share repurchases.