Leidos Holdings, Inc. Reports Second Quarter Fiscal Year 2017 Results

August 3, 2017 Investor Relations

-- Revenues: $2.57 billion

-- Operating Income: $166 million

-- Diluted Earnings per Share: $0.64

-- Non-GAAP Diluted Earnings per Share: $1.04

-- Net Bookings: $2.7 billion (book-to-bill ratio of 1.0)

RESTON, Va.Aug. 3, 2017 /PRNewswire/ -- Leidos Holdings, Inc. (NYSE: LDOS), a FORTUNE 500® science and technology solutions company, today reported financial results for the second quarter of fiscal year 2017.

Roger KroneLeidos Chairman and Chief Executive Officer, commented: "Our second quarter performance exceeded expectations, and reflects our focus on delivering strong program performance to our customers while successfully integrating the IS&GS acquisition. Our results year-to-date give us confidence to increase our cost synergy targets for the transaction as well as our full year margin and earnings guidance. We remain committed to leveraging this transformational transaction to deliver value to our customers, employees, and shareholders."

Summary Results

Revenues for the quarter were $2.57 billion, compared to $1.29 billion in the prior year quarter. The current quarter increase was primarily due to $1.37 billion of revenue attributable to the Information Systems & Global Solutions business ("IS&GS Business") acquired from Lockheed Martin during the third quarter of fiscal year 2016.

Operating income for the quarter was $166 million, compared to $75 million in the prior year quarter. Operating margin increased to 6.5% from 5.8% in the prior year quarter. The current quarter results include $67 million of amortization of intangible assets, $16 million of acquisition and integration costs, $9 million of amortization of equity method investments and $6 million of restructuring charges related to the acquisition of the IS&GS Business. The prior year quarter results included $15 million of acquisition and integration costs, $2 million of amortization of intangible assets and $1 million of restructuring charges.

Diluted earnings per share ("EPS") attributable to Leidos common stockholders for the quarter was $0.64, compared to $0.55 in the prior year quarter. Excluding the items mentioned above, non-GAAP diluted EPS for the quarter was $1.04, compared to $0.68 in the prior year quarter. The weighted average diluted share count for the quarter was 153 million, up from 74 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 in connection with the acquisition of the IS&GS Business.

Defense Solutions

Defense Solutions revenues for the quarter of $1,243 million increased by $458 million, or 58%, compared to the prior year quarter. The revenue growth was primarily attributable to the acquired IS&GS Business and growth in our airborne programs, partially offset by reduced scope and completion of certain contracts.

Defense Solutions operating income margin for the quarter was 5.1%, compared to 7.6% in the prior year quarter. On a non-GAAP basis, operating margin for the quarter was 8.8%, compared to 7.6% in the prior year quarter, primarily due to strong performance on certain contracts and lower indirect costs.

Civil

Civil revenues for the quarter of $875 million increased by $575 million, or 192%, compared to the prior year quarter. The revenue increase is primarily attributable to the acquired IS&GS Business, partially offset by the divestiture of the heavy construction business in fiscal 2016, and reduced scope and completion of certain contracts.

Civil operating income margin for the quarter was 7.5%, compared to 6.7% in the prior year quarter. On a non-GAAP basis, operating income margin for the quarter was 11.0%, compared to 7.3% in the prior year quarter, reflecting favorable adjustments on contracts.

Health

Health revenues for the quarter of $454 million increased by $251 million, or 124%, compared to the prior year quarter. The revenue increase is primarily attributable to the acquired IS&GS Business, partially offset by lower revenues from our commercial health business due to timing.

On both a GAAP and non-GAAP basis, Health operating income margin for the quarter was 16.3%, compared to 8.9% in the prior year quarter, primarily attributable to higher margins on IS&GS contracts.

Cash Flow Summary

Net cash flows provided by operating activities of continuing operations for the quarter were $177 million compared to $72 million in the prior year quarter. The higher operating net cash inflows were primarily due to the timing of billing and collections activities, partially offset by higher payments for taxes and restructuring and integration expenses.

Net cash flows used in investing activities of continuing operations for the quarter were $9 million compared to net cash flows provided of $19 million in the prior year quarter. The $28 million increase in net cash used was primarily due to proceeds from the disposition of a business in the second quarter of fiscal 2016 that did not recur in fiscal 2017 and increased payments for purchases of property, plant and equipment.

Net cash flows used in financing activities of continuing operations for the quarter were $112 million compared to $30 million in the prior year quarter. The higher financing cash outflows were primarily due to repayments of long-term debt and higher dividend payments.

As of June 30, 2017, the Company had $262 million in cash and cash equivalents and $3.2 billion of debt.

New Business Awards

Net business bookings totaled $2.7 billion in the quarter, representing a book-to-bill ratio of 1.0.

Notable recent awards received include:

  • Veterans Benefits AdministrationLeidos was awarded a multiple-award indefinite-delivery/indefinite-quantity contract by the U.S. Department of Veterans Affairs to continue to provide medical disability examinations for the Veterans Benefits Administration. The contract has a one-year base period of performance, four one-year options, and a total contract ceiling of $6.8 billion, if all options are exercised.
  • Defense Threat Reduction AgencyLeidos was awarded a contract by the Defense Threat Reduction Agency ("DTRA") to support DTRA's Cooperative Biological Engagement Program and Cooperative Threat Reduction Program through a worldwide Scientific & Technical Engagement Partnership program. The single-award, time and materials contract has a one-year base period of performance, four one-year options, and a total contract value of approximately $170 million if all options are exercised.
  • U.S. ArmyLeidos was awarded a task order by the U.S. Army to provide program management solutions to the Department of Defense ("DoD") Biometrics program, including the DoD Automated Biometrics Identification System. The single-award cost-plus incentive-fee contract has a one-year base period of performance, four one-year options, and a total contract value of approximately $132 million, if all options are exercised.
  • Intelligence Community: The Company was awarded contracts valued at $225 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 of signed business orders at the end of the quarter was $17.1 billion, of which $5.0 billion was funded.

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, adjusted EBITDA margins, and non-GAAP diluted earnings per share from continuing operations. The updated guidance, which is based on a 12-month period from December 31, 2016, to December 29, 2017, is as follows:

  • Revenues of $10.1 billion to $10.4 billion versus the prior range of $10.0 billion to $10.4 billion;
  • Adjusted EBITDA margins of 9.8% to 10.2% versus the prior range of 9.5% to 10.0%;
  • Non-GAAP diluted earnings per share from continuing operations of $3.45 to $3.60, up from the previous range of $3.05 to $3.35; and
  • Cash flows provided by operating activities from continuing operations 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 disposal 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 8 A.M. eastern time on August 3, 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 13665424.

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, VirginiaLeidos 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, operating income, earnings, earnings per share, charges, backlog, 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 August 3, 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

     

Six Months Ended

 
   

June 30,

   

July 1,

   

June 30, 

   

July 1,

 
   

2017

   

2016

   

2017

   

2016

 

Revenues

 

$

2,571

   

$

1,288

   

$

5,151

   

$

2,600

 

Cost of revenues

 

2,233

   

1,141

   

4,503

   

2,295

 

Selling, general and administrative expenses

 

143

   

56

   

287

   

116

 

Acquisition and integration costs

 

16

   

15

   

35

   

24

 

Restructuring expenses

 

6

   

1

   

19

   

1

 

Equity losses of non-consolidated subsidiaries

 

7

   

   

   

 

Operating income

 

166

   

75

   

307

   

164

 

Interest income

 

2

   

2

   

4

   

5

 

Interest expense

 

(36)

   

(15)

   

(74)

   

(29)

 

Other income (expense), net

 

3

   

(2)

   

6

   

(2)

 

Income from continuing operations before income taxes

 

135

   

60

   

243

   

138

 

Income tax expense

 

(37)

   

(19)

   

(71)

   

(44)

 

Net income

 

98

   

41

   

172

   

94

 

Less: net income attributable to non-controlling interest

 

   

   

2

   

 

Net income attributable to Leidos common stockholders

 

$

98

   

$

41

   

$

170

   

$

94

 

Earnings per share:

               

Basic

 

$

0.65

   

$

0.56

   

$

1.13

   

$

1.31

 

Diluted

 

0.64

   

0.55

   

1.11

   

1.27

 

Weighted average number of common shares outstanding:

               

Basic

 

151

   

73

   

151

   

72

 

Diluted

 

153

   

74

   

153

   

74

 
                 

Cash dividends declared per share

 

$

0.32

   

$

0.32

   

$

0.64

   

$

0.64

 
 

 

 

 

 

LEIDOS HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions)

 

         
   

June 30,
 2017

 

December 30,
 2016

ASSETS

       

Current assets:

       

Cash and cash equivalents

 

$

262

   

$

376

 

Receivables, net

 

1,832

   

1,657

 

Inventory, prepaid expenses and other current assets

 

340

   

348

 

Total current assets

 

2,434

   

2,381

 

Property, plant and equipment, net

 

215

   

259

 

Intangible assets, net

 

1,006

   

1,589

 

Goodwill

 

4,922

   

4,622

 

Deferred tax assets

 

13

   

16

 

Other assets

 

292

   

265

 
   

$

8,882

   

$

9,132

 

LIABILITIES AND EQUITY

       

Current liabilities:

       

Accounts payable and accrued liabilities

 

$

1,330

   

$

1,427

 

Accrued payroll and employee benefits

 

475

   

483

 

Dividends payable

 

17

   

23

 

Income taxes payable

 

4

   

21

 

Long-term debt, current portion

 

84

   

62

 

Total current liabilities

 

1,910

   

2,016

 

Long-term debt, net of current portion

 

3,147

   

3,225

 

Deferred tax liabilities

 

362

   

540

 

Other long-term liabilities

 

222

   

204

 

Stockholders' equity:

       

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

 

   

 

Additional paid-in capital

 

3,321

   

3,316

 

Accumulated deficit

 

(105)

   

(177)

 

Accumulated other comprehensive income (loss)

 

8

   

(4)

 

Total Leidos stockholders' equity

 

3,224

   

3,135

 

Non-controlling interest

 

17

   

12

 

Total equity

 

3,241

   

3,147

 
   

$

8,882

   

$

9,132

 

 

 

 

 

LEIDOS HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

 

 

 

   

Three Months Ended

 

Six Months Ended

   

June 30,

 

July 1,

 

June 30,

 

July 1,

   

2017

 

2016

 

2017

 

2016

                 

Cash flows from operations:

               

Net income

 

$

98

   

$

41

   

$

172

   

$

94

 

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

               

Depreciation and amortization

 

80

   

9

   

162

   

17

 

Stock-based compensation

 

10

   

8

   

20

   

16

 

Bad debt expense

 

5

   

(1)

   

12

   

 

Other

 

20

   

(4)

   

15

   

(3)

 

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

               

Receivables

 

11

   

(28)

   

(179)

   

(76)

 

Inventory, prepaid expenses and other current assets

 

29

   

4

   

35

   

(7)

 

Accounts payable and accrued liabilities

 

(86)

   

(11)

   

(123)

   

7

 

Accrued payroll and employee benefits

 

79

   

53

   

(7)

   

2

 

Deferred income taxes and income taxes receivable/payable

 

(75)

   

(2)

   

(44)

   

7

 

Other long-term assets/liabilities

 

6

   

3

   

26

   

1

 

Net cash provided by operating activities of continuing operations

 

177

   

72

   

89

   

58

 

Cash flows from investing activities:

               

Payments for property, plant and equipment

 

(16)

   

(3)

   

(23)

   

(7)

 

Collections on promissory note

 

   

   

2

   

 

Net proceeds from sale of assets

 

7

   

   

7

   

3

 

Proceeds from disposition of business

 

   

23

   

   

23

 

Other

 

   

(1)

   

   

(1)

 

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

 

(9)

   

19

   

(14)

   

18

 

Cash flows from financing activities:

               

Payments of long-term debt

 

(47)

   

(1)

   

(69)

   

(2)

 

Proceeds from issuances of stock

 

6

   

4

   

7

   

6

 

Repurchases of stock and other

 

(19)

   

(10)

   

(25)

   

(19)

 

Dividend payments

 

(52)

   

(23)

   

(102)

   

(46)

 

Net cash used in financing activities of continuing operations

 

(112)

   

(30)

   

(189)

   

(61)

 

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

 

56

   

61

   

(114)

   

15

 

Cash flows from discontinued operations:

               

Net cash used in investing activities of discontinued operations

 

   

   

   

(1)

 

Net decrease in cash and cash equivalents from discontinued operations

 

   

   

   

(1)

 

Net increase (decrease) in cash and cash equivalents

 

56

   

61

   

(114)

   

14

 

Cash and cash equivalents at beginning of period

 

206

   

609

   

376

   

656

 

Cash and cash equivalents at end of period

 

$

262

   

$

670

   

$

262

   

$

670

 
 

 

 

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) and corporate expenses. 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

 

Six Months Ended

   

June 30,
 2017

 

July 1,
 2016

 

Dollar change

 

Percent change

 

June 30,
 2017

 

July 1,
 2016

 

Dollar change

 

Percent change

Revenues:

                   

Defense Solutions

 

$

1,243

   

$

785

   

$

458

   

58.3

%

 

$

2,537

   

$

1,565

   

$

972

   

62.1

%

Civil

 

875

   

300

   

575

   

191.7

%

 

1,717

   

661

   

1,056

   

159.8

%

Health

 

454

   

203

   

251

   

123.6

%

 

897

   

374

   

523

   

139.8

%

Corporate expenses

 

(1)

   

   

(1)

   

NM

 

   

   

   

NM

Total

 

$

2,571

   

$

1,288

   

$

1,283

   

99.6

%

 

$

5,151

   

$

2,600

   

$

2,551

   

98.1

%

                                 

Operating income (loss):

                               

Defense Solutions

 

$

63

   

$

60

   

$

3

   

5.0

%

 

$

142

   

$

131

   

$

11

   

8.4

%

Civil

 

66

   

20

   

46

   

230.0

%

 

120

   

42

   

78

   

185.7

%

Health

 

74

   

18

   

56

   

311.1

%

 

121

   

34

   

87

   

255.9

%

Corporate expenses

 

(37)

   

(23)

   

(14)

   

NM

 

(76)

   

(43)

   

(33)

   

NM

Total

 

$

166

   

$

75

   

$

91

   

121.3

%

 

$

307

   

$

164

   

$

143

   

87.2

%

                                 

Operating income margin:

                               

Defense Solutions

 

5.1

%

 

7.6

%

         

5.6

%

 

8.4

%

       

Civil

 

7.5

%

 

6.7

%

         

7.0

%

 

6.4

%

       

Health

 

16.3

%

 

8.9

%

         

13.5

%

 

9.1

%

       

Total

 

6.5

%

 

5.8

%

         

6.0

%

 

6.3

%

       
                                         

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:

   

June 30,
 2017

 

December 30,
 2016

Defense Solutions:

       

Funded backlog

 

$

2,326

   

$

3,171

 

Negotiated unfunded backlog

 

5,064

   

4,936

 

Total Defense Solutions backlog

 

$

7,390

   

$

8,107

 

Civil:

       

Funded backlog

 

$

2,007

   

$

1,950

 

Negotiated unfunded backlog

 

4,883

   

5,250

 

Total Civil backlog

 

$

6,890

   

$

7,200

 

Health:

       

Funded backlog

 

$

660

   

$

854

 

Negotiated unfunded backlog

 

2,151

   

1,575

 

Total Health backlog

 

$

2,811

   

$

2,429

 

Total:

       

Funded backlog

 

$

4,993

   

$

5,975

 

Negotiated unfunded backlog

 

12,098

   

11,761

 

Total backlog

 

$

17,091

   

$

17,736

 

Total backlog at June 30, 2017, included $120 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 income (expense), net; (ii) interest expense; (iii) interest income; (iv) income tax expense 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 expense associated with acquired intangible assets.
  • Restructuring expenses – Represents costs associated with lease termination and severance costs (including those 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 on the difference between the book value and fair value of equity method investments that were recorded in connection with the acquisition of the IS&GS Business.
  • Gains and losses on disposal 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 June 30, 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

 

$

166

   

$

16

   

$

67

   

$

6

   

$

9

   

$

   

$

264

 

Non-operating expense, net

 

(31)

   

   

   

   

   

1

   

(30)

 

Income from continuing operations, before income taxes

 

135

   

16

   

67

   

6

   

9

   

1

   

234

 

Income tax expense1

 

(37)

   

(6)

   

(26)

   

(2)

   

(4)

   

   

(75)

 

Net income

 

98

   

10

   

41

   

4

   

5

   

1

   

159

 

Less: net income attributable to non-controlling interest

 

   

   

   

   

   

   

 

Net income attributable to Leidos common stockholders

 

$

98

   

$

10

   

$

41

   

$

4

   

$

5

   

$

1

   

$

159

 
                             

Diluted EPS attributable to Leidos common stockholders

 

$

0.64

   

$

0.07

   

$

0.27

   

$

0.02

   

$

0.03

   

$

0.01

   

$

1.04

 

Diluted shares

 

153

   

153

   

153

   

153

   

153

   

153

   

153

 
                                           

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

                   

 

   

Quarter Ended June 30, 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

 

$

135

   

$

16

   

$

67

   

$

6

   

$

9

   

$

1

   

$

234

 

Depreciation expense

 

13

   

   

   

   

   

   

13

 

Amortization expense

 

76

   

   

(67)

   

   

(9)

   

   

 

Interest expense, net

 

34

   

   

   

   

   

   

34

 

EBITDA

 

$

258

   

$

16

   

$

   

$

6

   

$

   

$

1

   

$

281

 

EBITDA margin

 

10.0

%

                     

10.9

%

 

 

 

 

LEIDOS HOLDINGS, INC.

UNAUDITED NON-GAAP FINANCIAL MEASURES [CONTINUED]

(in millions, except per share amounts)

 

     
   

Quarter Ended July 1, 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

 

$

75

   

$

15

   

$

2

   

$

1

   

$

   

$

93

 

Non-operating expense, net

 

(15)

   

   

   

   

(3)

   

(18)

 

Income from continuing operations, before income taxes

 

60

   

15

   

2

   

1

   

(3)

   

75

 

Income tax expense1

 

(19)

   

(6)

   

(1)

   

   

1

   

(25)

 

Net income

 

$

41

   

$

9

   

$

1

   

$

1

   

$

(2)

   

$

50

 
                         

Diluted EPS attributable to Leidos common stockholders

 

$

0.55

   

$

0.13

   

$

0.01

   

$

0.01

   

$

(0.02)

   

$

0.68

 

Diluted shares

 

74

   

74

   

74

   

74

   

74

   

74

 
                                     

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

                 

 

   

Quarter Ended July 1, 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

 

$

60

   

$

15

   

$

2

   

$

1

   

$

(3)

   

$

75

 

Depreciation expense

 

7

   

   

   

   

   

7

 

Amortization expense

 

2

   

   

(2)

   

   

   

 

Interest expense, net

 

13

   

   

   

   

   

13

 

EBITDA

 

$

82

   

$

15

   

$

   

$

1

   

$

(3)

   

$

95

 

EBITDA margin

 

6.4

%

                 

7.4

%

 

 

 

 

LEIDOS HOLDINGS, INC.

UNAUDITED NON-GAAP FINANCIAL MEASURES [CONTINUED]

(in millions, except per share amounts)

 

     
   

Six Months Ended June 30, 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

 

$

307

   

$

35

   

$

136

   

$

19

   

$

9

   

$

   

$

506

 

Non-operating expense, net

 

(64)

   

   

   

   

   

1

   

(63)

 

Income from continuing operations, before income taxes

 

243

   

35

   

136

   

19

   

9

   

1

   

443

 

Income tax expense1

 

(71)

   

(14)

   

(53)

   

(7)

   

(4)

   

   

(149)

 

Net income

 

172

   

21

   

83

   

12

   

5

   

1

   

294

 

Less: net income attributable to non-controlling interest

 

2

   

   

   

   

   

   

2

 

Net income attributable to Leidos common stockholders

 

$

170

   

$

21

   

$

83

   

$

12

   

$

5

   

$

1

   

$

292

 
                             

Diluted EPS attributable to Leidos common stockholders

 

$

1.11

   

$

0.14

   

$

0.54

   

$

0.08

   

$

0.03

   

$

0.01

   

$

1.91

 

Diluted shares

 

153

   

153

   

153

   

153

   

153

   

153

   

153

 
                                           

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

                     

 

   

Six Months Ended June 30, 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

 

$

243

   

$

35

   

$

136

   

$

19

   

$

9

   

$

1

   

$

443

 

Depreciation expense

 

26

   

   

   

   

   

   

26

 

Amortization expense

 

145

   

   

(136)

   

   

(9)

   

   

 

Interest expense, net

 

70

   

   

   

   

   

   

70

 

EBITDA

 

$

484

   

$

35

   

$

   

$

19

   

$

   

$

1

   

$

539

 

EBITDA margin

 

9.4

%

                     

10.5

%

 

 

 

 

LEIDOS HOLDINGS, INC.

UNAUDITED NON-GAAP FINANCIAL MEASURES [CONTINUED]

(in millions, except per share amounts)

 

     
   

Six Months Ended July 1, 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

 

$

164

   

$

24

   

$

3

   

$

1

   

$

   

$

192

 

Non-operating expense, net

 

(26)

   

   

   

   

(5)

   

(31)

 

Income from continuing operations, before income taxes

 

138

   

24

   

3

   

1

   

(5)

   

161

 

Income tax expense1

 

(44)

   

(10)

   

(1)

   

   

1

   

(54)

 

Net income

 

$

94

   

$