Leidos [LDOS] on Tuesday posted higher sales in the first quarter driven by gains across its operating segments, although earnings fell due largely to positive legal adjustment a year ago that buoyed results at the time and lower operating income in its Defense Solutions and Civil segments.

Net income in the quarter declined 14 percent to $177 million, $1.25 earnings per share (EPS), from $205 million ($1.42 EPS) a year ago. Excluding various acquisition related costs and amortization of acquired intangible assets, adjusted per share earnings of $1.58 topped consensus estimates by 8 cents.

Sales in the quarter increased 5 percent to a record $3.5 billion from $3.3 billion a year ago, with 4 percent of the gain organic.

At the operating level, all three of the companies’ segments drove the higher topline result with the main drivers being the Navy Next Generation Enterprise Network Recompete Service Management, Integration and Transport contract and the Defense Healthcare Management System Modernization program.

The primary reason for the fall in earnings was an adjustment to legal services related to a joint venture that added $26 million to the bottom line a year ago that benefited the Civil segment. In the recent quarter, the segment also took a write-down on another joint venture program.

Operating margin across the segments fell 1.5 percent to 7.8 percent.

Operating income was also down in the Defense Solutions segment largely on higher research and development investments.

Leidos’ Health segment turned in a strong quarter on the earnings front due to program efficiencies.

Orders in the quarter were strong, coming in at $5.4 billion, driving backlog to a record $36.3 billion, 12 percent higher than the $32.6 billion a year ago. The largest, and “most impactful” contract in the quarter for the $11.5 billion, 10-year Defense Information Systems Agency Defense Enclave Services (DES) digital modernization effort isn’t included in the bookings due a protest, Roger Krone, chairman and CEO of Leidos, said on the company’s earnings call.

General Dynamics [GD] is protesting the DES award. The Government Accountability Office is due to decide on the protest in June. If the protest is rejected and no further legal actions hold up the award, Leidos officials said the ramp-up in revenue from the contract will be slow.

Guidance for the year was unchanged, with sales still expected to be between $13.9 billion and $14.3 billion and adjusted earnings between $6.10 and $6.50 EPS. Cash flow is expected to be at least $1 billion.

In the quarter, free cash flow was $65 million and Krone said the company’s ability to “generate cash gives us significant firepower for further capital deployments.”

Leidos initiated a $500 million accelerated share repurchase during the quarter and Krone said the company is still interested in acquisitions that can add technology, new strategic capabilities, new customers and strengthen existing customer relationships. As for large deals, he said they would have to “accelerate” the company’s strategy.

Chris Cage, Leidos’ chief financial officer, said there are some space companies that are coming to market now that are interesting.

Krone said that Russia’s war against Ukraine has shown that the “world is still a very complicated place” and that defense budgets will remain strong for the “foreseeable future.” There is also the dynamic that as defense budgets go up, so do federal civilian accounts, which benefits all of Leidos, he said.

Fiscal year 2022 defense spending will begin to find its way to Leidos during the second of 2022 and Krone said he expects strong government spending again in FY ’23 and FY ’24.

“I just think we’re at a place relative to government spending that’s going to favor our industry,” he said.