LDOS - Fundamentals, Financials, History, and Analysis
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Leidos Holdings, Inc. (LDOS) is a leading provider of technology solutions and services for the U.S. government, intelligence community, and commercial customers. With a rich history spanning over five decades, Leidos has established itself as a trusted partner in tackling the world's most complex challenges in national security, health, and critical infrastructure.

Company History and Strategic Restructuring

Founded in 1969 as Science Applications International Corporation (SAIC), the company underwent a strategic restructuring in 2013, becoming Leidos Holdings, Inc. This transition marked a new era of growth and diversification for the organization, as it expanded its capabilities to serve a broader range of clients and markets. The separation allowed Leidos to focus on government customers, while the spun-off entity, SAIC, concentrated on commercial and international markets. This strategic move enabled each company to better align with its core business areas and customer needs.

Since its inception, Leidos has pursued growth through both organic expansion and strategic acquisitions. A significant milestone in the company's history was the 2016 acquisition of Lockheed Martin's Information Systems & Global Solutions business unit. This acquisition substantially enhanced Leidos' capabilities and customer base, positioning it as one of the largest providers of cybersecurity, enterprise IT, and technical services to the U.S. government.

Challenges and Adaptation

In 2021, Leidos faced a challenge when it recorded a $596 million goodwill impairment charge related to its Security Enterprise Solutions (SES) reporting unit. This was due to delays in airline travel infrastructure projects and higher than anticipated servicing costs, which led to a significant reduction in the reporting unit's forecasted revenue and cash flows. In response, the company made strategic decisions to exit certain product offerings and cease operations in some countries to realign the SES reporting unit with its strategic business plan.

Despite this setback, Leidos has continued to adapt and evolve to meet the changing needs of its customers. The company has maintained its focus on providing innovative technology solutions, especially in areas such as cybersecurity, data analytics, and mission-critical systems. Leidos' diverse portfolio of services and its commitment to delivering high-quality solutions have enabled it to become a trusted partner for government and commercial clients alike.

Financials

Leidos' financial performance has been consistently strong, with the company reporting annual revenues of $15.44 billion, $14.40 billion, and $13.74 billion in 2023, 2022, and 2021, respectively. The company's net income for the same periods stood at $199 million, $685 million, and $753 million, respectively. Leidos' operating cash flow was $1.17 billion, $992 million, and $1.03 billion in 2023, 2022, and 2021, respectively, while its free cash flow was $958 million, $863 million, and $929 million for the same periods.

In the most recent quarter (Q3 2024), Leidos reported revenue of $4.19 billion, representing a 7% year-over-year growth. The increase in revenue was primarily attributable to program wins and a net increase in volumes on certain contracts, partially offset by the completion of certain contracts. Net income for the quarter stood at $364 million, with operating cash flow of $656 million and free cash flow of $696 million.

Liquidity

The company's balance sheet remains robust, with a current ratio of 1.23 and a quick ratio of 1.15 as of the latest reporting period. Leidos' debt-to-equity ratio stands at 1.11, indicating a balanced capital structure. As of September 27, 2024, the company held cash and cash equivalents of $1.19 billion. Additionally, Leidos has a $1 billion senior unsecured revolving credit facility, of which there were no borrowings outstanding as of the latest reporting date.

Business Segments

Leidos operates through four reportable segments: National Security Digital, Health & Civil, Commercial & International, and Defense Systems.

The National Security Digital segment, which accounted for 46% of the company's total revenue in the latest quarter, provides technology-enabled services and mission software capabilities for defense and intelligence customers. Key capabilities include software development, engineering design, modeling & simulation, analytics, cybersecurity, intelligence analysis, linguistics, and mission operations.

The Health & Civil segment, responsible for 30% of total revenue, delivers services and solutions to federal and commercial customers in the areas of public health, care coordination, life and environmental sciences, and transportation. Core capabilities include health information management, managed health services, systems/infrastructure modernization, and life sciences R&D. This segment helps customers achieve their missions and take on the connected world with data-driven insights, improved efficiencies, and technological advantages.

The Commercial & International segment, generating 13% of revenue, provides technologically advanced services, solutions, and products to commercial and international customers. Key customers include UK and Australian government agencies, the Transportation Security Administration, US Customs and Border Protection, airports, and commercial utility providers. Offerings include IT modernization, software solutions, mission support & logistics, C4ISR technologies, cloud services, power grid engineering, energy modernization, and security products/services.

The Defense Systems segment, contributing 12% of revenue, develops and produces advanced space, aerial, surface, and sub-surface manned and unmanned defense systems for the U.S. Department of Defense and international customers. Solutions deliver innovative technology, systems engineering, integration & testing, rapid prototyping, software development, intelligence analysis, cybersecurity, and C4ISR capabilities.

Recent Performance and Future Outlook

In the latest quarter, Leidos reported strong financial performance, with revenues increasing by 7% year-over-year to $4.19 billion. The company's adjusted EBITDA margin expanded by 270 basis points to 14.2%, a new high watermark, driven by excellent program-level execution and a net positive impact from estimate-at-completion (EAC) adjustments. Non-GAAP net income and non-GAAP diluted EPS grew by 40% and 44% year-over-year, respectively.

Leidos' robust performance was highlighted by double-digit revenue growth in its Health & Civil and Defense Systems segments, as well as strong margin expansion across all four business units. The company's National Security Digital segment continued to deliver solid results, despite some customer budget shifts and personnel challenges, which the team has managed effectively.

The company's impressive business development achievements during the quarter also deserve attention. Leidos recorded net bookings of $8.1 billion, representing a book-to-bill ratio of over 1.9x. The company's total backlog stood at $40.6 billion as of the end of the quarter, including $9.1 billion of funded backlog. Key wins were balanced across all segments, highlighting the breadth and quality of Leidos' portfolio.

Notable contract awards during the quarter included a $700 million-plus in new and takeaway wins in full-spectrum cyber, a $300 million contract from the Air Force to serve as its digital integrator for the advanced battle management system, and a $1.7 billion in net bookings within the Defense Systems segment, including continued progress on the IFPC Enduring Shield program.

Looking ahead, Leidos has raised and narrowed its revenue guidance for fiscal year 2024 to a range of $16.35 billion to $16.45 billion, an increase of $150 million at the midpoint. The company has also increased its adjusted EBITDA guidance to the high 12% range and raised its non-GAAP diluted EPS guidance to a range of $9.80 to $10.00, an increase of $1.10 at the midpoint. Additionally, Leidos has increased its guidance for operating cash flow by $50 million to approximately $1.35 billion for the year.

For 2025, Leidos currently expects revenue growth to be in the lower single digits, with the longer-term growth outlook potentially back to 2024 levels or above. The company is committed to retaining margins near current levels and robustly and sustainably growing diluted EPS over time. However, Leidos is not yet ready to provide detailed 2025 guidance or new long-term targets, as they are focused on implementing their new "North Star" strategy.

The company's strong performance and improved outlook reflect its ability to execute on its strategic priorities, maintain robust customer relationships, and capitalize on emerging opportunities in its core markets. As Leidos continues to invest in its digital capabilities, innovate its service offerings, and strategically deploy capital, the company is well-positioned to drive sustainable growth and create value for its shareholders.

Geographic Performance and Industry Trends

While Leidos does not break out detailed performance by geographic markets in its reporting, the company disclosed that international sales represented approximately 8% of total revenues for both the three and nine months ended September 27, 2024, compared to 9% for the same periods in 2023. This indicates a slight decrease in the proportion of international sales, although the company maintains a significant presence in global markets.

The government contracting industry, which is a key market for Leidos, has seen relatively stable but modest growth in recent years, with a compound annual growth rate (CAGR) of around 3-4% over the past five years. The industry is heavily impacted by government budgets and spending priorities, which can vary depending on the political environment. Leidos' diverse portfolio and strong relationships with various government agencies position it well to navigate these industry dynamics.

Challenges and Investigations

Despite its strong financial performance, Leidos faces some challenges and ongoing investigations. The company has disclosed that it is conducting an internal investigation, overseen by an independent committee of the Board of Directors, into activities by its employees, third-party representatives, and subcontractors related to a portion of its international operations. Leidos has voluntarily self-reported this investigation to the Department of Justice and the Securities and Exchange Commission and is cooperating with both agencies. The outcome and potential impact of this investigation are uncertain at this time.

Additionally, in August 2022, Leidos received a federal grand jury subpoena in connection with a criminal investigation being conducted by the U.S. Department of Justice Antitrust Division. This investigation is related to three U.S. Government procurements associated with the company's Intelligence Group in 2021 and 2022. Leidos is fully cooperating with the investigation and conducting its own internal review.

These ongoing investigations underscore the importance of maintaining robust compliance and governance practices in the highly regulated government contracting sector. While the outcomes are uncertain, Leidos' proactive approach to addressing these issues demonstrates its commitment to transparency and ethical business practices.

Conclusion

Overall, Leidos' consistent financial performance, diversified business portfolio, and robust backlog position the company as a standout player in the government services and technology solutions industry. With its deep domain expertise, commitment to innovation, and focus on delivering mission-critical solutions, Leidos is poised to capitalize on the evolving needs of its customers and drive long-term shareholder value.

The company's ability to navigate challenges, including ongoing investigations and industry dynamics, while maintaining strong financial performance and raising guidance, speaks to the resilience of its business model and the effectiveness of its management team. As Leidos continues to execute its strategy and expand its capabilities across its four key segments, it remains well-positioned to address the complex needs of its government and commercial clients in an increasingly digital and interconnected world.

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