- Revenue: $4.13 billion, up 7.7% year over year.
- Adjusted EBITDA: $559 million, up 33% year over year.
- Adjusted EBITDA Margin: 13.5%, increased 260 basis points.
- Non-GAAP Net Income: $360 million.
- Non-GAAP Diluted EPS: $2.63, up 46% year over year.
- National Security and Digital Segment Revenue: Increased 1% year over year.
- National Security and Digital Segment Operating Income Margin: 10.4%, up 20 basis points.
- Health and Civil Segment Revenue: Increased 22% year over year.
- Health and Civil Segment Operating Income Margin: 24.9%, up from 14% a year ago.
- Commercial and International Segment Revenue: Increased 3% year over year.
- Commercial and International Segment Operating Income Margin: 0.7%, impacted by UK write-downs.
- Defense Systems Segment Revenue: Increased 6% year over year.
- Defense Systems Segment Operating Income Margin: 10.3%, up 170 basis points.
- Cash Flow from Operating Activities: $374 million.
- Free Cash Flow: $351 million.
- DSOs: 58 days, improved by one day year over year.
- Share Repurchases: $114 million in Q2.
- Cash and Cash Equivalents: $823 million.
- Debt: $4.7 billion.
- Gross Leverage Ratio: 2.4 times.
- Updated Revenue Guidance for 2024: $16.1 billion to $16.4 billion.
- Updated Adjusted EBITDA Guidance: Approximately 12%.
- Updated Non-GAAP Diluted EPS Guidance: $8.60 to $9.
- Operating Cash Flow Guidance: Approximately $1.3 billion for the year.
Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Leidos Holdings Inc (LDOS, Financial) reported a record quarter with an adjusted EBITDA margin of 13.5%.
- Adjusted diluted EPS increased by 50% year-over-year, showcasing strong profitability.
- The company raised its full-year guidance, reflecting confidence in continued growth.
- Leidos Holdings Inc (LDOS) is halfway through its $500 million share repurchase plan, indicating strong cash flow and shareholder value focus.
- The company is making significant progress in its strategic focus areas, including operational improvement, profitable growth, and robust cash conversion.
Negative Points
- The UK business experienced $39 million in write-downs due to changing requirements and schedule slippages.
- The Veterans Benefits Administration (VBA) customer has implemented measures to manage budget challenges, potentially impacting near-term case volumes.
- National security and digital segment growth was modest, with a tough year-over-year comparison due to spikes in large digital modernization programs last year.
- Commercial and international segment margins were suppressed to 0.7% due to write-downs, impacting overall profitability.
- There are $3 billion of awards currently under protest, which could delay revenue recognition and impact short-term growth.
Q & A Highlights
Q: How should we think about the incremental margins in managed healthcare and the competitive landscape?
A: (Thomas Bell, CEO) The strong performance is due to our investments in technology and our commitment to serving veterans. We expect the volume of veterans needing case management to remain high. Our strategy is to continue investing in technology to serve our customers better and to grow this business over time. (Christopher Cage, CFO) We've made significant investments in physical locations, mobile locations, and provider networks, which have contributed to our strong performance and customer satisfaction.
Q: What are the challenges in hiring and training account managers and capture teams?
A: (Thomas Bell, CEO) There is a high demand for talent, but Leidos is becoming a destination of choice for top talent due to our investment in people, processes, and tools. We focus on supporting our employees to serve their customers effectively. (Christopher Cage, CFO) We are investing in technology and partnering new hires with experienced solution architects to help them understand the breadth of our offerings.
Q: Can you provide an update on the portfolio pruning initiatives?
A: (Thomas Bell, CEO) We are halfway through building our business strategy based on our proprietary hypothesis of the future. We are focusing on doubling down on our core strengths and investing in areas that will drive growth. While we are not planning a major pivot, we are looking for adjacent areas for investment. There are no parts of the business that we plan to divest at this time.
Q: What are the upcoming recompetes and key opportunities to watch for?
A: (Christopher Cage, CFO) Key recompetes include the VBA disability exam business and opportunities in hypersonics and integrated logistics support with the TSA. We also have a significant pipeline of bids awaiting adjudication, which positions us well for future growth. (Thomas Bell, CEO) We have a robust pipeline of $26 billion in pending awards and $70 billion in total pipeline, which we are confident will drive future growth.
Q: Can you explain the expected performance in the national security and digital segment for the second half of the year?
A: (Thomas Bell, CEO) This segment is a core part of Leidos, and we are focused on revenue growth. We have strong leadership and are investing in repeatable business models and speed to serve our customers better. (Christopher Cage, CFO) While we had an excellent first half, we expect some moderation in margins due to milestone timing and special project work. However, we see upside potential in the future.
Q: How are you thinking about working capital and cash flow for the rest of the year?
A: (Christopher Cage, CFO) We have made significant improvements in cash management and expect strong performance in the third and fourth quarters. There are no major headwinds anticipated, and we are focused on converting earnings into cash. (Thomas Bell, CEO) We are cautious due to the uncertainty in the market and budget challenges, but we are confident in our ability to deliver strong cash flow.
Q: What is the outlook for the health and medical exam business, considering the upcoming recompete?
A: (Thomas Bell, CEO) We are awaiting the RFP and are prepared for any scenario. We do not expect a decrease in profitability but are cautious due to the uncertainty. (Christopher Cage, CFO) The VBA has requested more funding from Congress, indicating strong demand. We are focused on optimizing performance and growing the business.
Q: Can you provide more details on the commercial and international segment, especially regarding the write-downs and future outlook?
A: (Thomas Bell, CEO) The write-downs were primarily due to fixed-price contracts in the UK with changing requirements and schedule slippages. We have taken steps to address these issues and are confident in the future performance of this segment. (Christopher Cage, CFO) Our commercial energy business is performing well, and we expect stronger margins in the second half of the year.
Q: How are you approaching the counter-UAS market, and what are your capabilities in this area?
A: (Thomas Bell, CEO) We have a range of technologies in our portfolio, including Dynetics' IFPC and Enduring Shield, as well as capabilities within our Leidos Innovation Center and Defense Systems segment. We are evaluating our technologies to determine the best solutions for our customers' counter-UAS needs.
Q: What is the expected impact of the VBA disability exam business on margins and profitability in the second half of the year?
A: (Christopher Cage, CFO) We expect lower throughput in the near term due to budget challenges, which will impact margins. However, we are prepared for any scenario and are focused on optimizing performance. (Thomas Bell, CEO) The underlying business remains solid, and we are confident in our ability to deliver strong results.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
