Leidos [LDOS] on Tuesday posted higher earnings and sales in its fourth quarter with each operating segment contributing to the top-line growth and the bottom-line benefiting from lower taxes.
Net income in the quarter was up 2 percent to $180 million, $1.28 earnings per share (EPS), from $176 million ($1.23 EPS) a year ago. Excluding a $37 million impairment charge, which was related to facility consolidation, and acquisition, integration and amortization costs, per share earnings of $1.83 were well above year-ago levels and beat consensus estimates by 22 cents EPS.
Sales increased 6 percent to a record $3.7 billion from $3.5 billion, with organic growth up 5 percent.
At the operating level, sales growth was led by the Civil and Health segments on NASA’s Advanced Enterprise Global Information Technology Solutions contract, energy programs, the Defense Healthcare Management System Modernization, and work for the Social Security Administration. Defense Solutions sales were essentially flat although up slightly.
Segment operating income fell slightly as declines in the Health and Defense Solutions segments more than offset an increase in Civil.
For the year, net income fell 9 percent to $693 million ($4.96 EPS) from $759 million ($5.27 EPS) in 2021. Excluding various charges and acquisition-related costs, per share results for the year were down two pennies to $6.60. Sales in 2022 increased 5 percent to a record $14.4 billion from $13.7 billion, with 4 percent organic growth.
Leidos Chairman and CEO Roger Krone said that despite a slow start in 2022, contract activity was up “dramatically” in the fourth quarter with $23 billion in submitted proposals under evaluation, 92 percent of which represents potential new business. The passage of the fiscal year 2023 Omnibus spending bill that includes increases for defense and civil spending shows “Demand trends are very positive for our business,” he said during the company’s earnings call.
However, Krone highlighted the upcoming expected clashes between the Biden administration and House Republicans around the debt ceiling and the FY ’24 budget request, as well as a potential government shutdown this fall, all adding up to “what I think I’m seeing is customers wanting to get things under contract” by this June.
Krone sees the potential for a deal on the debt ceiling that includes constraints on future federal spending similar to the 2011 Budget Control Act that led to 10 years of sequestration through caps in discretionary spending.
Leidos posted robust orders totaling $15.4 billion in 2022 for a book-to-bill ratio 1.1 times sales. The strong orders led to a 4 percent increase in total backlog to $35.8 billion and a 13 percent increase in funded backlog to a record $8.4 billion versus a year ago.
Leidos introduced guidance for 2023, with sales expected to be up between 2 and 5 percent to between $14.7 billion and $15.1 billion. Adjusted earnings are expected to be between $6.40 and $6.80 EPS. Adjusting operating margin is expected to be between 10.3 percent and 10.5 percent. In 2022, adjusted margin was 10.4 percent, down from 11 percent in 2021.
Free cash flow in 2022 was $857 million but headwinds are expected in 2023 due to about $300 million of additional cash taxes related to required capitalization and amortization of research and development costs.
The outlook for 2023 assumes the federal government operates under a continuing resolution for the entire fourth quarter but doesn’t shutdown.