Leidos [LDOS] on Tuesday reported that net income surged in its first quarter driven by work in its health business and sales were up handsomely driven by growth across its operating segments.
Net income jumped 73 percent to $283 million, $2.27 earnings per share (EPS), from $164 million ($1.17 EPS) a year ago. Adjusted earnings, which exclude acquisition, restructuring, and certain amortization costs, were $2.29 EPS, 59 cents above consensus estimates. Operating income margin was up 3.2 percent to 10.4 percent.
Sales increased more than 7 percent to $4 billion from $3.7 billion a year ago led by a 19 percent gain at the Health and Civil segment followed by single-digit increases at Defense Systems, Commercial and International, and National Security and Digital. Organic sales were up 8 percent on increased volume for managed health services, airborne surveillance and reconnaissance, and hypersonics, security detection products, C5ISR, and defense network modernization.
The strong first quarter combined with agreement on the fiscal year 2024 budget and a corporate realignment last year led Leidos to dramatically increase its earnings guidance for 2024. The forecast for adjusted earnings was raised by 90 cents per share to between $8.40 and $8.80 EPS and adjusted operating margin a percent to the mid- to high-11 percent range. Guidance for sales was also increased by $300 million to between $16 billion and $16.4 billion.
Tom Bell, CEO of Leidos, said on the company’s earnings call the profitable growth is due to the corporate restructuring into a “capabilities focused organization,” investment in organic disruptive technologies, with a particular focus on trusted mission artificial intelligence, full spectrum cyber, and secure rapid software, and a merit-based profit and growth strategy.
Bell also called out the trilateral Australia, United Kingdom, and U.S. security agreement called AUKUS as a strong opportunity for Leidos. AUKUS is arranged in two pillars, the first is aimed at helping Australia acquire nuclear-powered, conventionally-armed submarine fleet, and the second is focused on the joint development of advanced capabilities.
“The focus of AUKUS Pillar 2 is seamless information sharing, AI and autonomy, advanced cyber, hypersonics, and electronic warfare,” he said. “This list reads like a catalogue of Leidos’ strength,” he added, highlighting the company’s new Commercial and International segment as well as its ability to reach across the enterprise to meet emerging needs of the AUKUS members and other international customers.
Leidos is in the thick of developing a strategy to guide growth for the next decade, Bell said. The strategy will be complete in early 2025, but he offered several “principles that are guiding our work,” including “doubling down on our core strengths, seeking to exploit the power of repeatable business models, making speed a conscious competitive discriminator, differentially investing in the areas of greatest potential, building trusted mission AI into everything we do, and uncovering unique opportunities to expand Leidos into logical, closely adjacent growth markets.”
Orders in the quarter were $3.7 billion and backlog stood at $36.6 billion, up 4 percent from $35.1 billion a year ago. Free cash flow in the quarter was $46 million.