Leidos [LDOS] on Tuesday reported slightly higher earnings on a solid increase in sales in its second quarter, driven by growth across its segments.
Net income rose a scant 1 percent to $172 million, $1.24 earnings per share (EPS), from $170 million ($1.18 EPS) a year ago. Excluding various acquisition-related, amortization and asset impairment costs, adjusted earnings of $1.59 EPS topped consensus estimates by three cents.
Operating income was higher at two of the company’s three segments, Defense Solutions and Healthcare, but fell at Civil due to an adverse ruling and related legal fees totaling $17 million stemming from the acquisition in 2016 of Lockheed Martin’s [LMT] former Information Systems & Global Solutions segment.
At Healthcare, the bottom-line improvement was mainly due to a $28 million equitable adjustment to cover costs incurred related to COVID-19.
Sales increased 4 percent to $3.6 billion from $3.4 billion, led by a rampup in work on the Navy Next Generation Enterprise Network Recompete Service, Integration and Transport contract and deployments of the Defense Healthcare Management System Modernization program. The company also listed several other programs that aided the top-line, including Enduring Indirect Fires Protection Capability contracts, NASA’s Advanced Enterprise Global Information Technology Solutions program, increased work on the Military and Family Life Counseling program, and higher demand on existing programs with commercial energy provider and the Department of Energy.
Leidos left its 2022 guidance intact but expects sales in the upper half of the range and earnings in the lower half. Current revenue is higher than expected due to the rampup on recent contract wins and growth on existing contracts, Chris Cage, the company’s chief financial officer, said during an earnings call. As for earnings, he said the arbitration ruling, headwinds from foreign exchange rates, interest expense, and lower profit from the startup of some new programs mean “it will be challenging to perform at or above the midpoint of the EPS” and operating income margin ranges for the year.
Sales are forecast to be between $13.9 billion and $14.3 billion and adjusted earnings between $6.10 and $6.50 per share. The outlook also assumes that the federal government will begin its fiscal year on Oct. 1 under a continuing resolution.
Free cash flow in the quarter was $19 million, orders $2.2 billion and backlog stood at $34.7 billion, up 4 percent from $33.5 billion a year ago.
Roger Krone, chairman and CEO of Leidos, said on the call that orders have been challenging for two reasons, including drawn out procurement processing, award protests and delays in “special projects” that get added to contracts. The government is slower to spend money that’s been authorized and appropriated in part due to worker retirements and the dynamics of remote work, and in the case of larger programs taking the time to ensure everything is done right to avoid protests, he said.
Krone noted that “the bigger the program the more likely to protest.”
The company’s order book doesn’t include the Defense Information Systems Agency’s Defense Enclave Services (DES) contract, potentially worth $11.4 billion over 10 years, or two recent task orders with the Social Security Administration that have been protested.
The DES contract won’t have a material impact to sales this year but will begin to pick up in 2023 and even more in 2024, Krone said.
In his scripted remarks, Krone highlighted the company’s successes in hiring, saying “quarter after quarter we’ve demonstrated that talent acquisition is a core Leidos strength.” Despite a competitive market for labor, Leidos hired nearly 3,600 employees in the second quarter, its second largest hiring quarter in five years.
Krone also said it appears that voluntary attrition has peaked and the company is putting a greater focus on retaining its employees.