Leidos Holdings reports strong financial results in Q2 2015

Leidos Holdings, Inc. (NYSE: LDOS), a national security, health and engineering solutions company, today reported financial results for the second quarter of calendar year 2015.

Roger Krone, Leidos Chairman and Chief Executive Officer commented: "Second quarter results exceeded our expectations on revenue, cash flow, and earnings. The strong program performance and focused efforts of our employees allowed us to grow our non-GAAP earnings per share nearly 20% from the prior year, and generate robust cash from operations. Our track record of execution to our commitments continues to improve, and our technical leadership and customer-centric solutions continue to be recognized. The recent decision by the Department of Defense to award the Defense Healthcare Management System Modernization (DHMSM) contract to the team led by Leidos is an important milestone, and a recognition of the world-class health IT capabilities of the Company. We look forward to continuing our long and distinguished history of supporting the Military Health System and enabling the DoD to execute their missions. I remain confident that our focus on serving the needs of our customers and increasing value to our shareholders will help us achieve even greater success."

Second Quarter Summary Results

Revenues for the quarter were $1.26 billion, reflecting a revenue contraction of 4 percent, compared to $1.31 billion in the prior year.

Operating income from continuing operations for the quarter was $64 million compared to an operating loss from continuing operations of $410 million in the prior year. The current quarter includes a $29 million loss on the Plainfield Renewable Energy facility ("Plainfield") due to a price reduction and classification of Plainfield as held for sale. The company closed the sale of Plainfield on July 24, 2015. The prior year quarter included $510 million of impairment losses.

Diluted earnings per share from continuing operations for the quarter was $0.50 compared to a diluted loss per share of $5.93 in the prior year. The diluted share count for the quarter was 74 million, which is consistent with the prior year. Non-GAAP diluted earnings per share from continuing operations for the quarter excluding the aforementioned losses was $0.73 compared to $0.61 in the prior year.

In March 2015, the Company announced a change in its fiscal year end from the Friday nearest the end of January to the Friday nearest the end of December. The year-to-date results are for the six months ended July 3, 2015, which includes the last month of the previous fiscal year ended January 30, 2015, whereas the results for the prior period are for the six months ended August 1, 2014. The quarterly results are for the three months ended July 3, 2015, whereas the results for the prior period are for the three months ended August 1, 2014.

National Security Solutions

National Security Solutions revenues for the quarter decreased $46 million, or 5 percent, compared to the prior year. The revenue contraction was due to contract activities associated with Overseas Contingency Operations ("OCO Contracts"). Excluding the revenue declines associated with OCO Contracts, the remaining revenue for the National Securities Solutions segment increased slightly. OCO Contracts contributed approximately $50 million in revenues for the quarter.

National Security Solutions operating income margin for the quarter was 8.4 percent, which was consistent with the prior year resulting from reductions in indirect costs coupled with improved program performance offsetting the impact of revenue declines.

Health and Engineering

Health and Engineering revenues for the quarter decreased $2 million, or 1 percent. The slight revenue contraction reflects higher sales volume in our engineering business, which was offset by revenue decreases in our health and security products businesses.

Health and Engineering operating loss for the quarter was $7 million compared to operating loss of $482 million for the prior year. Operating loss for the quarter was impacted by the previously discussed $29 million loss on Plainfield. The quarter was also impacted by a reduction in revenue from a business that typically generates higher margins. These decreases were offset by a reduction in indirect expenses. Operating loss for the three months ended August 1, 2014 included non-cash impairment charges of $510 million.

Cash Flow Summary

Cash flow provided by operating activities from continuing operations for the quarter was $151 million, primarily due to net income adjusted for the aforementioned non-cash loss on Plainfield, as well as improvements in working capital efficiency.

Cash flows used in financing activities of continuing operations was $149 million, which included $100 million to repurchase shares of our stock in the May 2015 Accelerated Stock Repurchase (ASR) transaction, a cash dividend of $24 million, or $0.32 per share and $17 million for the retirement of debt. The Company intends to continue paying dividends on a quarterly basis, although the declaration of any future dividends will be determined by the Company's Board of Directors each quarter and will depend on earnings, financial condition, capital requirements and other factors.

As of July 3, 2015, the Company had $365 million in cash and cash equivalents and $1.1 billion in long-term debt.

New Business Awards

New business bookings totaled $4.0 billion in the quarter, representing a book-to-bill ratio of 3.19.

Notable recent awards received include:

• United Kingdom Ministry of Defense: The Company was awarded a prime contract by the UK Ministry of Defense to assist in the transformation of its delivery and operation of logistics commodities and services. This transformation addresses inventory management, commodity procurement, distribution, and supply chain management capabilities. The single-award prime contract has a 13-year period of performance, and an expected total contract value of approximately $2.8 billion over the life of the contract.
   
• United States Army: The Company was awarded a prime contract by the U.S. Army Research Laboratory (ARL) to provide intelligence, surveillance and reconnaissance (ISR) concepts research and development (R&D). The multiple-award cost-plus fixed-fee indefinite-delivery indefinite-quantity contract has a five-year period of performance and a total contract value of approximately $49 million for all awardees. Leidos is one of seven awardees eligible to compete for task orders under the contract.
   
• United States Navy: The Company was awarded a prime contract by the U.S. Navy to provide scientific, engineering, and technical services in support of the Naval Surface Warfare Center, Carderock Division (NSWCCD). The single-award, cost-plus fixed-fee indefinite-delivery/indefinite-quantity contract has a four-year period of performance and a total contract value of approximately $49 million.
   
• Intelligence Community: The Company was awarded contracts valued at $365 million, if all options are exercised, by U.S. national security and intelligence clients. Though the specific nature of these contracts is classified, they all encompass mission-critical services that help to counter global threats and strengthen national security.
   
• U.S. Agency for International Development: The Company was awarded a prime contract by the U.S. Agency for International Development (USAID) to provide scientific and management support for the Agency's Malaria Vaccine Development Program (MVDP). The single-award, cost-plus fixed-fee contract has a five-year period of performance and a total contract value of approximately $23.7 million.

The Company's backlog of signed business orders at the end of the quarter was $10.2 billion, of which $2.8 billion was funded. Compared to the second quarter of the prior year, total backlog increased 22 percent, primarily due to the United Kingdom Ministry of Defense award, and funded backlog decreased 4 percent. Backlog does not include any estimate of future task orders expected to be awarded under IDIQ, GSA Schedule or other master agreement contract vehicles.

Forward Guidance

As a result of the Company's year-to-date performance and updated expectations for the second half, the Company is updating guidance for revenues, non-GAAP diluted earnings per share from continuing operations, and cash flows provided by operating activities from continuing operations for calendar year 2015. The updated calendar year 2015 guidance is:

• Revenues of $4.8 billion to $5.0 billion versus the prior range of $4.6 billion to $5.0 billion;
   
• Non-GAAP diluted earnings per share from continuing operations of $2.40 to $2.60, up from the previous range of $2.20 to $2.45; and
   
• Cash flows provided by operating activities from continuing operations of at or above $250 million, up from previous guidance of at or above $200 million.

Calendar year 2015 guidance excludes the impact of potential future acquisitions, divestitures, and other non-ordinary course items.

Conference Call Information

Leidos management will discuss operations and financial results in an earnings conference call beginning at 8 A.M. eastern time on August 5, 2015.