Leidos Holdings, Inc. reports third quarter fiscal year 2017 results

November 2, 2017 Investor Relations

Revenues: $2.50 billion

Diluted Earnings per Share: $0.53

Non-GAAP Diluted Earnings per Share: $0.95

Net Bookings: $3.1 billion (book-to-bill ratio of 1.2)

Raising Full Year Earnings per Share and Margin Guidance

RESTON, Va., November 2, 2017 – Leidos Holdings, Inc. (NYSE: LDOS), a FORTUNE 500® science and technology solutions company, today reported financial results for the third quarter of fiscal year 2017.

Roger Krone, Leidos Chairman and Chief Executive Officer, commented: "Our third quarter results, including particularly strong margins and earnings, reflect continued momentum in our operational execution as a leading provider of science and technology solutions and services to our customers. We were able to leverage our scale to increase innovation, lower cost, and drive strong bookings which position us well for future growth."

Summary Results

Revenues for the quarter were $2.50 billion, compared to $1.87 billion in the prior year quarter. The current quarter results include $1.29 billion of revenue attributable to the Information Systems & Global Solutions business ("IS&GS Business") acquired from Lockheed Martin in August 2016, compared to $620 million of revenues in the prior year quarter.

Operating income for the quarter was $151 million, compared to $101 million in the prior year quarter. Operating margin increased to 6.0% from 5.4% in the prior year quarter. The current quarter results include $76 million of amortization of intangible assets, $21 million of acquisition and integration costs, $6 million of restructuring charges and $2 million of amortization of equity method investments related to the acquisition of the IS&GS Business. The prior year quarter results included $44 million of acquisition and integration costs, $27 million of amortization of intangible assets and $5 million of restructuring charges. Excluding these items, non-GAAP operating income for the quarter was $256 million compared to $177 million in the prior year quarter.

Diluted earnings per share ("EPS") attributable to Leidos common stockholders for the quarter was $0.53, compared to $0.80 in the prior year quarter. Excluding the items mentioned in the preceding paragraph, non-GAAP diluted EPS for the quarter was $0.95, compared to $1.25 in the prior year quarter. The weighted average diluted share count for the quarter was 154 million, up from 114 million in the prior year quarter primarily due to the issuance of approximately 77 million shares of Leidos common stock to participating Lockheed Martin stockholders during the third quarter of fiscal year 2016 in connection with the acquisition of the IS&GS Business.

Defense Solutions

Defense Solutions revenues for the quarter of $1,201 million increased by $192 million, or 19%, compared to the prior year quarter. The revenue growth was primarily attributable to the acquired IS&GS Business and growth in certain airborne programs, partially offset by a contract write-up in the prior year quarter that did not recur in the current period and completion of certain contracts.

Defense Solutions operating income margin for the quarter was 6.7%, compared to 9.2% in the prior year quarter. On a non-GAAP basis, operating margin for the quarter was 8.4%, compared to 9.6% in the prior year quarter, primarily due to a contract write-up on a certain contract in the prior year quarter that did not recur in the current period.

Civil

Civil revenues for the quarter of $838 million increased by $279 million, or 50%, compared to the prior year quarter. The revenue increase is primarily attributable to the acquired IS&GS Business.

Civil operating income margin for the quarter was 6.0%, compared to 6.8% in the prior year quarter. On a non-GAAP basis, operating income margin for the quarter was 11.2%, compared to 9.3% in the prior year quarter, reflecting stronger program performance and profit write-ups on certain contracts.

Health

Health revenues for the quarter of $464 million increased by $164 million, or 55%, compared to the prior year quarter. The revenue increase is primarily attributable to the acquired IS&GS Business.

Health operating income margin for the quarter was 13.6%, compared to 9.3% in the prior year quarter. On a non-GAAP basis, operating income margin for the quarter was 16.4%, compared to 12.3% in the prior year quarter, primarily attributable to higher margins on certain IS&GS contracts.

Cash Flow Summary

Net cash provided by operating activities for the quarter were $268 million compared to $273 million in the prior year quarter. The lower operating net cash inflows were primarily due to higher payments for taxes and interest, partially offset by lower payments for acquisition and integration expenses and lower vendor payments.

Net cash used in investing activities for the quarter were $19 million compared to net cash provided of $16 million in the prior year quarter. The decrease in net cash from investing activities was primarily due to cash acquired as part of the acquisition of the IS&GS business in the prior year quarter.

Net cash used in financing activities for the quarter were $175 million compared to $463 million in the prior year quarter. The decrease is primarily due to payment of a special cash dividend offset by the borrowings to finance the IS&GS acquisition in the prior year quarter. In addition, there were higher debt repayments in the quarter versus the prior year quarter.

As of September 29, 2017, the Company had $287 million in cash and cash equivalents and $3.1 billion of debt.

New Business Awards

Net bookings totaled $3.1 billion in the quarter, representing a book-to-bill ratio of 1.2.

Notable recent awards received include:

  • Social Security Administration: Leidos was awarded a prime contract to provide information technology services in support of the SSA Agency Strategic Plan. Under this follow-on contract, Leidos will provide lifecycle activities for software improvement, database and data administration, software engineering and management support and systems administration and security support. The multiple-award indefinite delivery/indefinite quantity contract has up to a ten-year period of performance, should all option periods be exercised, with a total contract ceiling of $2.3 billion.
  • Department of Homeland Security: Leidos was selected as the prime task order awardee by the General Services Administration Federal Systems Integration and Management Center, on behalf of the Department of Homeland Security, to provide operations and maintenance, security, optimization, enhancement, design, engineering, architecture, integration, configuration, testing, and expansion of the Homeland Secure Data Network and the Classified Local Area Network under the Secure Enterprise Network Systems, Services and Support ("SENS3") task order. The single-award task order has a base period and five one-year option periods, with a total estimated value of approximately $684 million.
  • United States Army Contracting Command: Leidos was awarded a firm-fixed-price contract to provide support for the Afghan Air Force ("AAF") and Special Mission Wing ("SMW") helicopter/fixed-wing fleets. Through the Afghanistan Contractor Logistics Support contract, Leidos will deliver all flight operations, maintenance, and logistics, and will provide mentoring for the AAF and SMW to operate and maintain aircraft. Work will be performed in Kabul, Afghanistan, with an estimated completion date of May 31, 2020 and potential value up to $728 million.
  • Intelligence Community: The Company was awarded contracts valued at $390 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.

The Company’s backlog at the end of the quarter was $17.7 billion, of which $5.6 billion was funded.

Forward Guidance

As a result of the Company's year-to-date performance and updated expectations, the Company is updating its fiscal year 2017 guidance as follows:

• Revenues of $10.1 billion to $10.4 billion, no change from prior guidance;

• Adjusted EBITDA margins of 10.2% to 10.4% versus the prior range of 9.8% to 10.2%;

• Non-GAAP diluted earnings per share from continuing operations of $3.60 to $3.75, up from the previous range of $3.45 to $3.60; and

• Cash flows provided by operating activities from continuing operations at or above $490 million, up from previous guidance at or above $475 million.

Non-GAAP diluted earnings per share excludes amortization of acquired intangible assets, asset impairment charges, restructuring expenses, acquisition and integration costs, amortization of equity method investments, gains and losses on sale of assets and businesses and adjustments to the income tax provision to reflect non-GAAP exclusions. See Leidos' non-GAAP financial measures and the related reconciliation included elsewhere in this release.

The Company does not provide a reconciliation of forward-looking adjusted EBITDA margins (non-GAAP) or non-GAAP diluted earnings per share from continuing operations to GAAP net income (loss), due to the inherent difficulty in forecasting and quantifying certain amounts that are necessary for such reconciliation. Because certain deductions for non-GAAP exclusions used to calculate projected net income (loss) may vary significantly based on actual events, the Company is not able to forecast on a GAAP basis with reasonable certainty all deductions needed in order to provide a GAAP calculation of projected net income (loss) at this time. The amounts of these deductions may be material and, therefore, could result in projected GAAP net income (loss) and diluted earnings per share from continuing operations being materially less than projected adjusted EBITDA margins (non-GAAP) and non-GAAP diluted earnings per share from continuing operations.

Conference Call Information

Leidos management will discuss operations and financial results in an earnings conference call beginning at 7:30 A.M. eastern time on November 2, 2017. Analysts and institutional investors may participate by dialing +1 (877) 869-3847 (U.S. dial-in) or +1 (201) 689-8261 (international dial-in).

A live audio broadcast of the conference call along with a supplemental presentation will be available to the public through links on the Leidos Investor Relations website (http://ir.leidos.com).

After the call concludes, an audio replay can be accessed on the Leidos Investor Relations website or by dialing +1 (877) 660-6853 (toll-free U.S.) or +1 (201) 612-7415 (international) and entering conference ID 13671145.

About Leidos

Leidos is a FORTUNE 500® science and technology solutions and services leader working to solve the world’s toughest challenges in the defense, intelligence, homeland security, civil and health markets. The company’s 32,000 employees support vital missions for government and commercial customers. Headquartered in Reston, Virginia, Leidos reported annual revenues of approximately $7.04 billion for the fiscal year ended December 30, 2016.

For more information, visit www.leidos.com.

Forward-Looking Statements

Certain statements in this release contain or are based on “forward-looking” information within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by words such as “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “guidance” and similar words or phrases. Forward-looking statements in this release include, among others, estimates of future revenues, EBITDA margins (including on a non-GAAP basis), operating income, earnings, earnings per share (including on a non-GAAP basis), charges, backlog, bookings, contract values, outstanding shares and cash flows, as well as statements about future dividends, share repurchases, acquisitions and dispositions. These statements reflect our belief and assumptions as to future events that may not prove to be accurate.

Actual performance and results may differ materially from the guidance and other forward-looking statements made in this release depending on a variety of factors, including: changes to our reputation and relationships with government agencies, developments in the U.S. Government defense budget, including budget reductions, implementation of spending cuts (sequestration) or changes in budgetary priorities; delays in the U.S. Government budget process; delays in the U.S. Government contract procurement process or the award of contracts; delays or loss of contracts as a result of competitor protests; changes in U.S. Government procurement rules, regulations and practices; changes in interest rates and other market factors out of our control; our compliance with various U.S. Government and other government procurement rules and regulations; governmental reviews, audits and investigations of our Company; our ability to effectively compete for and win contracts with the U.S. Government and other customers; our ability to attract, train and retain skilled employees, including our management team, and to obtain security clearances for our employees; factors relating to the transaction with Lockheed Martin, including, tax treatment; the possibility that we may be unable to achieve expected synergies and operating efficiencies within the expected time-frames or at all, the integration of the acquired Information Systems & Global Solutions business being more difficult, time-consuming or costly than expected; the effect of any changes resulting from the transaction in customer, supplier and other business relationships; general market perception of the transaction and exposure to lawsuits and contingencies associated with the Information Systems & Global Solutions business; the mix of our contracts and our ability to accurately estimate costs associated with our firm-fixed-price and other contracts; our ability to realize as revenues the full amount of our backlog; cybersecurity, data security or other security threats, systems failures or other disruptions of our business; resolution of legal and other disputes with our customers and others or legal or regulatory compliance issues; our ability to effectively acquire businesses and make investments; our ability to maintain relationships with prime contractors, subcontractors and joint venture partners; our ability to manage performance and other risks related to customer contracts, including complex engineering projects; the failure of our inspection or detection systems to detect threats; the adequacy of our insurance programs designed to protect us from significant product or other liability claims; our ability to manage risks associated with our international business; our ability to declare future dividends based on our earnings, financial condition, capital requirements and other factors, including compliance with applicable laws and contractual agreements; and our ability to execute our business plan and long-term management initiatives effectively and to overcome these and other known and unknown risks that we face. These are only some of the factors that may affect the forward-looking statements contained in this release. For further information concerning risks and uncertainties associated with our business, please refer to the filings we make from time to time with the U.S. Securities and Exchange Commission ("SEC"), including the “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Legal Proceedings” sections of our latest Annual Report on Form 10-K and quarterly reports on Form 10-Q, all of which may be viewed or obtained through the Investor Relations section of our website at www.leidos.com.

All information in this release is as of November 2, 2017. The Company expressly disclaims any duty to update the guidance or any other forward-looking statement provided in this release to reflect subsequent events, actual results or changes in the Company’s expectations. The Company also disclaims any duty to comment upon or correct information that may be contained in reports published by investment analysts or others.

 

LEIDOS HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in millions, except per share amounts)

 
   

Three Months Ended

 

Nine Months Ended

   

September 29,
 2017

 

September 30,
 2016

 

September 29,
 2017

 

September 30,
 2016

Revenues

 

$

2,503

   

$

1,868

   

$

7,654

   

$

4,468

 

     Cost of revenues

 

2,189

   

1,630

   

6,692

   

3,925

 

     Selling, general and administrative expenses

 

141

   

88

   

428

   

204

 

     Acquisition and integration costs

 

21

   

44

   

56

   

68

 

     Restructuring expenses

 

6

   

5

   

25

   

6

 

     Equity earnings of non-consolidated subsidiaries

 

(5)

   

   

(5)

   

 

Operating income

 

151

   

101

   

458

   

265

 

     Interest income

 

1

   

3

   

5

   

8

 

     Interest expense

 

(36)

   

(28)

   

(110)

   

(57)

 

     Other (expense) income, net

 

   

(1)

   

6

   

(3)

 

Income from continuing operations before income taxes

 

116

   

75

   

359

   

213

 

Income tax (expense) benefit

 

(37)

   

17

   

(108)

   

(27)

 

Net income

 

79

   

92

   

251

   

186

 

Less: net (loss) income attributable to non-controlling 
  interest

 

(3)

   

1

   

(1)

   

1

 

Net income attributable to Leidos common stockholders

 

$

82

   

$

91

   

$

252

   

$

185

 

Earnings per share:

               

     Basic

 

$

0.54

   

$

0.81

   

$

1.67

   

$

2.18

 

     Diluted

 

0.53

   

0.80

   

1.65

   

2.13

 

Weighted average number of common shares 
   outstanding:

               

     Basic

 

152

   

112

   

151

   

85

 

     Diluted

 

154

   

114

   

153

   

87

 
                 

Cash dividends declared per share

 

$

0.32

   

$

13.96

   

$

0.96

   

$

14.60

 

 

 

 

 

LEIDOS HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions)

 
   

September 29,
 2017

 

December 30,
 2016

ASSETS

       

Current assets:

       

Cash and cash equivalents

 

$

287

   

$

376

 

Receivables, net

 

1,797

   

1,657

 

Inventory, prepaid expenses and other current assets

 

487

   

348

 

Total current assets

 

2,571

   

2,381

 

Property, plant and equipment, net

 

212

   

259

 

Intangible assets, net

 

925

   

1,589

 

Goodwill

 

4,976

   

4,622

 

Deferred tax assets

 

   

16

 

Other assets

 

239

   

265

 
   

$

8,923

   

$

9,132

 

LIABILITIES AND EQUITY

       

Current liabilities:

       

Accounts payable and accrued liabilities

 

$

1,500

   

$

1,427

 

Accrued payroll and employee benefits

 

435

   

483

 

Dividends payable

 

18

   

23

 

Income taxes payable

 

4

   

21

 

Long-term debt, current portion

 

64

   

62

 

Total current liabilities

 

2,021

   

2,016

 

Long-term debt, net of current portion

 

3,043

   

3,225

 

Deferred tax liabilities

 

337

   

540

 

Other long-term liabilities

 

215

   

204

 

Stockholders' equity:

       

Common stock, $.0001 par value, 500 million shares authorized, 151 million 
  and 150 million shares issued and outstanding at September 29, 2017 and 
  December 30, 2016, respectively

 

   

 

Additional paid-in capital

 

3,335

   

3,316

 

Accumulated deficit

 

(72)

   

(177)

 

Accumulated other comprehensive income (loss)

 

31

   

(4)

 

Total Leidos stockholders' equity

 

3,294

   

3,135

 

Non-controlling interest

 

13

   

12

 

Total equity

 

3,307

   

3,147

 
   

$

8,923

   

$

9,132

 

 

 

LEIDOS HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 
   

Three Months Ended

 

Nine Months Ended

   

September 29,
 2017

 

September 30,
 2016

 

September 29,
 2017

 

September 30,
 2016

Cash flows from operations:

               

Net income

 

$

79

   

$

92

   

$

251

   

$

186

 

Adjustments to reconcile net income to net cash 
  provided by operations:

               

Depreciation and amortization

 

92

   

37

   

254

   

54

 

Stock-based compensation

 

12

   

9

   

32

   

25

 

Bad debt expense

 

(1)

   

1

   

11

   

1

 

Other

 

8

   

   

23

   

(3)

 

Change in assets and liabilities, net of effects of 
  acquisitions and dispositions:

               

Receivables

 

24

   

216

   

(155)

   

140

 

Inventory, prepaid expenses and other current 
  assets

 

(86)

   

(70)

   

(46)

   

(80)

 

Accounts payable and accrued liabilities

 

128

   

29

   

5

   

36

 

Accrued payroll and employee benefits

 

(37)

   

(4)

   

(44)

   

(2)

 

Deferred income taxes and income taxes 
  receivable/payable

 

(6)

   

(26)

   

(50)

   

(19)

 

Other long-term assets/liabilities

 

55

   

(11)

   

81

   

(10)

 

Net cash provided by operating activities of continuing operations

 

268

   

273

   

362

   

328

 

Cash flows from investing activities:

               

Payments for property, plant and equipment

 

(19)

   

(13)

   

(42)

   

(20)

 

Acquisition of business

 

   

25

   

   

25

 

Collections on promissory note

 

   

4

   

2

   

4

 

Net proceeds from sale of assets

 

   

   

7

   

3

 

Proceeds from disposition of business

 

   

   

   

23

 

Other

 

   

   

   

(1)

 

Net cash (used in) provided by investing activities of 
  continuing operations

 

(19)

   

16

   

(33)

   

34

 

Cash flows from financing activities:

               

Payments of long-term debt

 

(125)

   

(100)

   

(194)

   

(102)

 

Proceeds from debt issuance

 

   

690

   

   

690

 

Payments for debt issuance and modification costs

 

(4)

   

(30)

   

(4)

   

(30)

 

Proceeds from issuances of stock

 

3

   

19

   

10

   

25

 

Repurchases of stock and other

 

(1)

   

(1)

   

(26)

   

(20)

 

Special cash dividend payment

 

   

(993)

   

   

(993)

 

Dividend payments

 

(48)

   

(48)

   

(150)

   

(94)

 

Net cash used in financing activities of continuing 
  operations

 

(175)

   

(463)

   

(364)

   

(524)

 

Net increase (decrease) in cash, cash equivalents and 
  restricted cash from continuing operations

 

74

   

(174)

   

(35)

   

(162)

 

Cash flows from discontinued operations:

               

Net cash used in investing activities of discontinued 
  operations

 

   

   

   

(1)

 

Net decrease in cash, cash equivalents and 
  restricted cash from discontinued operations

 

   

   

   

(1)

 

Net increase (decrease) in cash, cash equivalents and 
  restricted cash

 

74

   

(174)

   

(35)

   

(163)

 

Cash, cash equivalents and restricted cash at 
  beginning of period

 

287

   

684

   

396

   

673

 

Cash, cash equivalents and restricted cash at end of 
  period

 

$

361

   

$

510

   

$

361

   

$

510

 

 

 

LEIDOS HOLDINGS, INC.
UNAUDITED SEGMENT OPERATING RESULTS
(in millions)

During the quarter ended March 31, 2017, the Company completed its business reorganization, which resulted in identification of three reportable segments (Defense Solutions, Civil, Health). Additionally, we separately present the costs associated with corporate functions as Corporate. The Company commenced operating and reporting under the new organizational structure effective the beginning of fiscal 2017. As a result of this change, prior year segment results and disclosures have been recast to reflect the new reportable segments.

The segment information for the periods presented was as follows:

   

Three Months Ended

 

Nine Months Ended

   

September 29,
 2017

 

September 30,
 2016

 

Dollar 
change

 

Percent change

 

September 29,
 2017

 

September 30,
 2016

 

Dollar 
change

 

Percent change

Revenues:

                               

Defense Solutions

 

$

1,201

   

$

1,009

   

$

192

   

19.0

%

 

$

3,738

   

$

2,574

   

$

1,164

   

45.2

%

Civil

 

838

   

559

   

279

   

49.9

%

 

2,555

   

1,220

   

1,335

   

109.4

%

Health

 

464

   

300

   

164

   

54.7

%

 

1,361

   

674

   

687

   

101.9

%

Total

 

$

2,503

   

$

1,868

   

$

635

   

34.0

%

 

$

7,654

   

$

4,468

   

$

3,186

   

71.3

%

                                 

Operating income 
  (loss):

                               

Defense Solutions

 

$

80

   

$

93

   

$

(13)

   

(14.0)

%

 

$

222

   

$

224

   

$

(2)

   

(0.9)

%

Civil

 

50

   

38

   

12

   

31.6

%

 

170

   

80

   

90

   

112.5

%

Health

 

63

   

28

   

35

   

125.0

%

 

184

   

62

   

122

   

196.8

%

Corporate

 

(42)

   

(58)

   

16

   

NM

 

(118)

   

(101)

   

(17)

   

NM

Total

 

$

151

   

$

101

   

$

50

   

49.5

%

 

$

458

   

$

265

   

$

193

   

72.8

%

                                 

Operating income 
  margin:

                               

Defense Solutions

 

6.7

%

 

9.2

%

         

5.9

%

 

8.7

%

       

Civil

 

6.0

%

 

6.8

%

         

6.7

%

 

6.6

%

       

Health

 

13.6

%

 

9.3

%

         

13.5

%

 

9.2

%

       

Total

 

6.0

%

 

5.4

%

         

6.0

%

 

5.9

%

       
               

NM - Not Meaningful

             

 

LEIDOS HOLDINGS, INC.
UNAUDITED BACKLOG BY REPORTABLE SEGMENT
(in millions)

Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts. Backlog value is based on management's estimates about volume of services, availability of customer funding and other factors, and excludes contracts that are under protest. Our estimate of backlog comprises both funded and negotiated unfunded backlog. Backlog estimates are subject to change and may be affected by several factors including modifications of contracts, non-exercise of options, foreign currency movements, etc.

Funded backlog for contracts with the U.S. Government represents the value on contracts for which funding is appropriated less revenues previously recognized on these contracts. Funded backlog for contracts with non-U.S. Government entities and commercial customers represents the estimated value on contracts, which may cover multiple future years, under which Leidos is obligated to perform, less revenue previously recognized on the contracts.

Negotiated unfunded backlog represents estimated amounts of revenue to be earned in the future from contracts for which funding has not been appropriated and unexercised priced contract options. Negotiated unfunded backlog does not include future potential task orders expected to be awarded under indefinite delivery/indefinite quantity ("IDIQ"), General Services Administration Schedule or other master agreement contract vehicles, with the exception of certain IDIQ contracts where task orders are not competitively awarded or separately priced but instead are used as a funding mechanism, and where there is a basis for estimating future revenues and funding on future task orders is anticipated.

The estimated value of backlog as of the dates presented was as follows:

   

September 29,
 2017

 

December 30,
 2016

Defense Solutions:

       

Funded backlog

 

$

2,266

   

$

3,171

 

Negotiated unfunded backlog

 

4,998

   

4,936

 

Total Defense Solutions backlog

 

$

7,264

   

$

8,107

 

Civil:

       

Funded backlog

 

$

2,679

   

$

1,950

 

Negotiated unfunded backlog

 

4,950

   

5,250

 

Total Civil backlog

 

$

7,629

   

$

7,200

 

Health:

       

Funded backlog

 

$

638

   

$

854

 

Negotiated unfunded backlog

 

2,163

   

1,575

 

Total Health backlog

 

$

2,801

   

$

2,429

 

Total:

       

Funded backlog

 

$

5,583

   

$

5,975

 

Negotiated unfunded backlog

 

12,111

   

11,761

 

Total backlog

 

$

17,694

   

$

17,736

 

Total backlog at September 29, 2017, included $163 million of benefit due to the impact of foreign currency movement between the U.S. dollar and the British pound.

LEIDOS HOLDINGS, INC.
UNAUDITED NON-GAAP FINANCIAL MEASURES
(in millions, except per share amounts)

The Company uses and refers to non-GAAP operating income, adjusted EBITDA and non-GAAP EPS from continuing operations, which are not measures of financial performance under generally accepted accounting principles in the U.S. ("GAAP") and, accordingly, these measures should not be considered in isolation or as a substitute for the comparable GAAP measures and should be read in conjunction with the Company's consolidated financial statements prepared in accordance with GAAP.

Management believes that these non-GAAP measures provide another measure of the Company's results of operations and financial condition, including its ability to comply with financial covenants. These non-GAAP measures are frequently used by financial analysts covering Leidos and its peers. The Company's computation of its non-GAAP measures may not be comparable to similarly titled measures reported by other companies, thus limiting their use for comparability.

Non-GAAP operating income is computed by excluding the following items from income from continuing operations: (i) other (expense) income, net; (ii) interest expense; (iii) interest income; (iv) income tax (expense) benefit adjusted to reflect non-GAAP adjustments; and (v) the following discrete items:

  • Acquisition and integration costs – Represents costs related to the acquisition and integration of the IS&GS  Business. 
      
  • Amortization of acquired intangible assets – Represents the amortization of the fair value of the acquired intangible assets. 
      
  • Restructuring expenses – Represents costs associated with lease termination and severance costs related to the Company's acquisition of the IS&GS Business and the September 2013 spin-off of its former technical services. 
      
  • Amortization of equity method investments – Represents the amortization of the fair value of equity method investments acquired with the IS&GS Business. 
      
  • Gains and losses on sale of assets and businesses – Represents the gains or losses on certain sales of real estate and businesses. 
     
  • Asset impairment charges – Represents impairments of long lived intangible and tangible assets.

Non-GAAP operating margin is computed by dividing non-GAAP operating income by revenue.

Adjusted EBITDA is computed by excluding the following items from income from continuing operations, before income taxes: (i) discrete items as identified above; (ii) interest expense; (iii) interest income; and (iv) depreciation expense.

Adjusted EBITDA margin is computed by dividing adjusted EBITDA by revenue.

LEIDOS HOLDINGS, INC.
UNAUDITED NON-GAAP FINANCIAL MEASURES [CONTINUED]
(in millions, except per share amounts)

The following tables present the reconciliation of the non-GAAP measures identified above to the most directly comparable GAAP measures:

   

Quarter Ended September 29, 2017

   

As reported

 

Acquisition and integration costs

 

Amortization of intangibles

 

Restructuring expenses

 

Amortization of equity method investments

 

Non-GAAP results

Operating income

 

$

151

   

$

21

   

$

76

   

$

6

   

$

2

   

$

256

 

Non-operating expense, net

 

(35)

   

   

   

   

   

(35)

 

Income from continuing 
  operations, before income taxes

 

116

   

21

   

76

   

6

   

2

   

221

 

Income tax expense1

 

(37)

   

(8)

   

(30)

   

(2)

   

(1)

   

(78)

 

Net income

 

79

   

13

   

46

   

4

   

1

   

143

 

Less: net loss attributable to non-
  controlling interest

 

(3)

   

   

   

   

   

(3)

 

Net income attributable to Leidos 
  common stockholders

 

$

82

   

$

13

   

$

46

   

$

4

   

$

1

   

$

146

 
                         

Diluted EPS attributable to Leidos 
  common stockholders

 

$

0.53

   

$

0.08

   

$

0.30

   

$

0.03

   

$

0.01

   

$

0.95

 

Diluted shares

 

154

   

154

   

154

   

154

   

154

   

154

 
 

(1) Calculation uses an estimated statutory tax rate on non-GAAP tax deductible adjustments.

 

   

Quarter Ended September 29, 2017

   

As reported

 

Acquisition and integration costs

 

Amortization of intangibles

 

Restructuring expenses

 

Amortization of equity method investments

 

Non-GAAP results

Income from continuing 
  operations, before income taxes

 

$

116

   

$

21

   

$

76

   

$

6

   

$

2

   

$

221

 

Depreciation expense

 

16

   

   

   

   

   

16

 

Amortization expense

 

78

   

   

(76)

   

   

(2)

   

 

Interest expense, net

 

35

   

   

   

   

   

35

 

EBITDA

 

$

245

   

$

21

   

$

   

$

6

   

$

   

$

272

 

EBITDA margin

 

9.8

%

                 

10.9

%

 

 

LEIDOS HOLDINGS, INC.

UNAUDITED NON-GAAP FINANCIAL MEASURES [CONTINUED]

(in millions, except per share amounts)

 
   

Quarter Ended September 30, 2016

   

As reported

 

Acquisition and integration costs

 

Amortization of intangibles

 

Restructuring expenses

 

Non-GAAP results

Operating income

 

$

101

   

$

44

   

$

27

   

$

5

   

$

177

 

Non-operating expense, net

 

(26)

   

   

   

   

(26)

 

Income from continuing operations, before 
  income taxes

 

75

   

44

   

27

   

5

   

151

 

Income tax expense1

 

17

   

(11)

   

(11)

   

(2)

   

(7)

 

Net income

 

92

   

33

   

16

   

3

   

144

 

Less: net income attributable to non-controlling 
  interest

 

1

   

   

   

   

1

 

Net income attributable to Leidos common 
  stockholders

 

$

91

   

$

33

   

$

16

   

$

3

   

$

143

 
                     

Diluted EPS attributable to Leidos common 
  stockholders

 

$

0.80

   

$

0.29

   

$

0.14

   

$

0.03

   

$

1.25

 

Diluted shares

 

114

   

114

   

114

   

114

   

114

 
 

(1) Calculation uses an estimated statutory tax rate on non-GAAP tax deductible adjustments.

 

   

Quarter Ended September 30, 2016

   

As reported

 

Acquisition and integration costs

 

Amortization of intangibles

 

Restructuring expenses

 

Non-GAAP results

Income from continuing operations, before 
  income taxes

 

$

75

   

$

44

   

$

27

   

$

5

   

$

151

 

Depreciation expense

 

10

   

   

   

   

10

 

Amortization expense

 

27

   

   

(27)

   

   

 

Interest expense, net

 

25

   

   

   

   

25

 

EBITDA

 

$

137

   

$

44

   

$

   

$

5

   

$

186

 

EBITDA margin

 

7.3

%

             

10.0

%

 

 

LEIDOS HOLDINGS, INC.

UNAUDITED NON-GAAP FINANCIAL MEASURES [CONTINUED]

(in millions, except per share amounts)

 
   

Nine Months Ended September 29, 2017

   

As reported

 

Acquisition and integration costs

 

Amortization of intangibles

 

Restructuring expenses

 

Amortization of equity method investments

 

Loss (gain) on sale of assets and businesses

 

Non-GAAP results

Operating income

 

$

458

   

$

56

   

$

212

   

$

25

   

$

11

   

$

   

$

762

 

Non-operating expense, net

 

(99)

   

   

   

   

   

1

   

(98)

 

Income from continuing operations, before 
  income taxes

 

359

   

56

   

212

   

25

   

11

   

1

   

664

 

Income tax expense1

 

(108)

   

(22)

   

(82)

   

(10)

   

(4)

   

   

(226)

 

Net income

 

251

   

34

   

130

   

15

   

7

   

1

   

438

 

Less: net loss attributable to non-controlling 
  interest

 

(1)

   

   

   

   

   

   

(1)

 

Net income attributable to Leidos common 
  stockholders

 

$

252

   

$

34

   

$

130

   

$

15

   

$

7

   

$

1

   

$

439

 
                             

Diluted EPS attributable to Leidos common 
  stockholders

 

$

1.65

   

$

0.22

   

$

0.85

   

$

0.10

   

$

0.04

   

$

0.01

   

$

2.87

 

Diluted shares

 

153

   

153

   

153

   

153

   

153

   

153

   

153

 
 

(1) Calculation uses an estimated statutory tax rate on non-GAAP tax deductible adjustments.

 

   

Nine Months Ended September 29, 2017

   

As reported

 

Acquisition and integration costs

 

Amortization of intangibles

 

Restructuring expenses

 

Amortization of equity method investments

 

Loss (gain) on sale of assets and businesses

 

Non-GAAP results

Income from continuing operations, before 
  income taxes

 

$

359

   

$

56

   

$

212

   

$

25

   

$

11

   

$

1

   

$

664

 

Depreciation expense

 

42

   

   

   

   

   

   

42

 

Amortization expense

 

223

   

   

(212)

   

   

(11)

   

   

 

Interest expense, net

 

105

   

   

   

   

   

   

105

 

EBITDA

 

$

729

   

$

56

   

$

   

$

25

   

$

   

$

1

   

$

811

 

EBITDA margin

 

9.5

%

                     

10.6

%

 

 

LEIDOS HOLDINGS, INC.

UNAUDITED NON-GAAP FINANCIAL MEASURES [CONTINUED]

(in millions, except per share amounts)

 
   

Nine Months Ended September 30, 2016

   

As reported

 

Acquisition and integration costs

 

Amortization of intangibles

 

Restructuring expenses

 

Loss (gain) on sale of assets and businesses

 

Non-GAAP results

Operating income

 

$

265

   

$

68

   

$

30

   

$

6

   

$

   

$

369

 

Non-operating 
  expense, net

 

(52)

   

   

   

   

(5)

   

(57)

 

Income from 
  continuing 
  operations, before 
  income taxes

 

213

   

68

   

30

   

6

   

(5)

   

312

 

Income tax expense1

 

(27)

   

(21)

   

(12)

   

(2)

   

1

   

(61)

 

Net income

 

186

   

47

   

18

   

4

   

(4)

   

251

 

Less: net income 
  attributable to non-
  controlling interest

 

1

   

   

   

   

   

1

 

Net income 
  attributable to 
  Leidos common 
  stockholders

 

$

185

   

$

47

   

$

18

   

$

4

   

$

(4)

   

$

250

 
                         

Diluted EPS

 

$

2.13

   

$

0.54

   

$

0.21

   

$

0.05

   

$

(0.05)

   

$

2.87

 

Diluted shares

 

87

   

87

   

87

   

87

   

87

   

87

 
 

(1) Calculation uses an estimated statutory tax rate on non-GAAP tax deductible adjustments.

 

   

Nine Months Ended September 30, 2016

   

As reported

 

Acquisition and integration costs

 

Amortization of intangibles

 

Restructuring expenses

 

Loss (gain) on sale of assets and businesses

 

Non-GAAP results

Income from continuing 
  operations, before income taxes

 

$

213

   

$

68

   

$

30

   

$

6

   

$

(5)

   

$

312

 

Depreciation expense

 

24

   

   

   

   

   

24

 

Amortization expense

 

30

   

   

(30)

   

   

   

 

Interest expense, net

 

49

   

   

   

   

   

49

 

EBITDA

 

$

316

   

$

68

   

$

   

$

6

   

$

(5)

   

$

385

 

EBITDA margin

 

7.1

%

                 

8.6

%

 

 

LEIDOS HOLDINGS, INC.

UNAUDITED NON-GAAP FINANCIAL MEASURES [CONTINUED]

(in millions, except per share amounts)

 

The following tables present the reconciliation of the non-GAAP operating income by reportable segment and Corporate:

 
   

Quarter Ended September 29, 2017

   
   

Operating income (loss)

 

Acquisition and integration costs

 

Amortization of intangibles

 

Restructuring expenses

 

Amortization of equity method investments

 

Non-GAAP operating income (loss)

 

Non-GAAP operating margin

Defense Solutions

 

$

80

   

$

   

$

21

   

$

   

$

   

$

101

   

8.4

%

Civil

 

50

   

   

42

   

   

2

   

94

   

11.2

%

Health

 

63

   

   

13

   

   

   

76

   

16.4

%

Corporate

 

(42)

   

21

   

   

6

   

   

(15)

   

NM

Total

 

$

151

   

$

21

   

$

76

   

$

6

   

$

2

   

$

256

   

10.2

%

 

   

Quarter Ended September 30, 2016

   
   

Operating income (loss)

 

Acquisition and integration costs

 

Amortization 
of 
intangibles(1)

 

Restructuring expenses

 

Non-GAAP operating income (loss)

 

Non-GAAP operating margin

Defense Solutions

 

$

93

   

$

   

$

4

   

$

   

$

97

   

9.6

%

Civil

 

38

   

   

14

   

   

52

   

9.3

%

Health

 

28

   

   

9

   

   

37

   

12.3

%

Corporate

 

(58)

   

44

   

   

5

   

(9)

   

NM

Total

 

$

101

   

$

44

   

$

27

   

$

5

   

$

177

   

9.5

%

 

   

Nine Months Ended September 29, 2017

   
   

Operating income (loss)

 

Acquisition and integration costs

 

Amortization of intangibles

 

Restructuring expenses

 

Amortization of equity method investments

 

Non-GAAP operating income (loss)

 

Non-GAAP operating margin

Defense Solutions

 

$

222

   

$

   

$

82

   

$

   

$

2

   

$

306

   

8.2

%

Civil

 

170

   

   

98

   

   

9

   

277

   

10.8

%

Health

 

184

   

   

32

   

   

   

216

   

15.9

%

Corporate

 

(118)

   

56

   

   

25

   

   

(37)

   

NM

Total

 

$

458

   

$

56

   

$

212

   

$

25

   

$

11

   

$

762

   

10.0

%

 

   

Nine Months Ended September 30, 2016

   
   

Operating income (loss)

 

Acquisition and integration costs

 

Amortization 
of 
intangibles(1)

 

Restructuring expenses

 

Non-GAAP operating income (loss)

 

Non-GAAP operating margin

Defense Solutions

 

$

224

   

$

   

$

4

   

$

   

$

228

   

8.9

%

Civil

 

80

   

   

17

   

   

97

   

8.0

%

Health

 

62

   

   

9

   

   

71

   

10.5

%

Corporate

 

(101)

   

68

   

   

6

   

(27)

   

NM

Total

 

$

265

   

$

68

   

$

30

   

$

6

   

$

369

   

8.3

%

 

 

NM - Not Meaningful 

 

(1) Amortization was based on the preliminary fair value of the acquired intangibles and was subject to change once purchase accounting was finalized.

 

 

About

Media Contact:

Melissa Koskovich, SVP Communications, (571) 526-6850, melissa.l.koskovich@leidos.com

Investor Contact:

Kelly M. Freeman, Investor Relations, (571) 526-7686, kelly.m.freeman@leidos.com

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