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May 5, 2020, 1:32 p.m. EDT

10-Q: LEIDOS HOLDINGS, INC.

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of Leidos Holdings, Inc.'s ("Leidos") financial condition, results of operations, and quantitative and qualitative discussion about business environment and trends should be read in conjunction with Leidos' condensed consolidated financial statements and related notes. The following discussion contains forward-looking statements, including statements regarding our intent, belief, or current expectations with respect to, among other things, trends affecting our financial condition or results of operations, backlog, our industry, the impact of our merger and acquisition activity, government budgets and spending, our business contingency plans, a charge related to an international receivable and our ability to recover certain costs through the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"). Such statements are not guarantees of future performance and involve risks and uncertainties, including uncertainties relating to the coronavirus outbreak ("COVID-19") and the actions taken by authorities and us to respond, and actual results may differ materially from those in the forward-looking statements as a result of various factors. Some of these factors include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K, as updated by the risk factor in this report and periodically through our subsequent quarterly reports on Form 10-Q. Due to such uncertainties and risks, you are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. We do not undertake any obligation to update these factors or to publicly announce the results of any changes to our forward-looking statements due to future events or developments. Unless indicated otherwise, references in this report to "we," "us" and "our" refer collectively to Leidos and its consolidated subsidiaries. Overview We are a FORTUNE 500(R) science, engineering and information technology company that provides services and solutions in the defense, intelligence, civil and health markets. We bring domain-specific capability and cross-market innovations to customers in each of these markets by leveraging seven core capabilities: cyber; digital modernization; integrated systems; mission software systems; mission support; operations and logistics; and sensors, collection and phenomenology. Our domestic customers include the U.S. Department of Defense ("DoD"), the U.S. Intelligence Community, the U.S. Department of Homeland Security, the Federal Aviation Administration, the Department of Veterans Affairs and many other U.S. government civilian agencies, as well as state and local government agencies. Our international customers include foreign governments and their agencies, primarily located in Australia and the United Kingdom ("U.K."). We operate in three reportable segments: Defense Solutions, Civil and Health. Additionally, we separately present the unallocable costs associated with corporate functions as Corporate. Effective the beginning of fiscal 2020, certain contracts were reassigned from the Civil reportable segment to the Defense Solutions reportable segment. Prior year segment results have been recast to reflect this change. Business Environment and Trends U.S. Government Markets During the three months ended April 3, 2020, we generated approximately 89% of our total revenues from contracts with the U.S. government. Accordingly, our business performance is affected by the overall level of U.S. government spending, especially on national security, homeland security and intelligence, and the alignment of our service and product offerings and capabilities with current and future budget priorities of the U.S. government. On February 10, 2020, the President submitted the government fiscal year ("GFY") 2021 budget proposal to Congress, which included discretionary spending levels for defense and non-defense programs of $741 billion and $590 billion, respectively. Congress and the Administration have now shifted their collective attention to mitigating the impact of COVID-19, which has most likely delayed the GFY 2021 budget cycle and could result in a re-evaluation of GFY 2021 spending levels. COVID-19 is affecting major economic and financial markets, and effectively all industries and governments are facing challenges, and has resulted in a period of business disruption, the length and severity of which cannot be predicted. On March 27, 2020, the President signed the CARES Act, a $2 trillion coronavirus response bill to provide widespread emergency relief for Americans and the country's economy. Section 3610 of the CARES Act authorizes federal contracting officers to reimburse companies for the cost of employees who cannot work due to facility closures or other restrictions and their job duties cannot be performed remotely. The timing and amount of recovery is uncertain as it will depend on each government agency and/or contracting officer's implementation of the authority granted in Section 3610 of the CARES Act. Table of Contents LEIDOS HOLDINGS, INC.

International Markets







                                                                                           Three Months Ended
                                                                  April 3,         March 29,
                                                                    2020             2019            Dollar change        Percent change
                                                                                          (dollars in millions)
        Revenues                                                 $ 2,889          $  2,577          $        312                 12.1  %
        Operating income                                             192               192                     -                    -  %
        Non-operating (expense) income, net                          (62)               54                  (116)               214.8  %
        Income before income taxes                                   130               246                  (116)               (47.2) %
        Income tax expense                                           (15)              (57)                   42                (73.7) %
        Net income attributable to Leidos common
        stockholders                                             $   115          $    189          $        (74)               (39.2) %
        Operating margin                                             6.6  %            7.5  %
        Segment and Corporate Results
                                                       Three Months Ended
                                 April 3,      March 29,
        Defense Solutions          2020          2019         Dollar change      Percent change
                                                     (dollars in millions)
        Revenues                $ 1,705       $  1,491       $        214                14.4  %
        Operating income             95            104                 (9)               (8.7) %
        Operating margin            5.6  %         7.0  %
        


The increase in revenues for the three months ended April 3, 2020, as compared to the three months ended March 29, 2019, was primarily attributable to $129 million of revenues related to the acquisition of Dynetics Inc. ("Dynetics"), program wins, a net increase in program volumes and higher net profit write-ups in the current quarter. This was partially offset by the completion of certain contracts and $22 million of temporary reductions in some parts of the business due to the impacts of COVID-19.







                                                      Three Months Ended
                               April 3,       March 29,
        Civil                    2020           2019         Dollar change       Percent change
                                                    (dollars in millions)
        Revenues              $    654       $    623       $        31                   5.0  %
        Operating income            59             58                 1                   1.7  %
        Operating margin           9.0  %         9.3  %
        


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The increase in revenues for the three months ended April 3, 2020, as compared to the three months ended March 29, 2019, was primarily attributable to program wins and a net increase in program volumes, partially offset by the completion of certain contracts, $24 million of negative impacts from reduced volume on certain contracts due to the impacts of COVID-19 and an $11 million impact from the sale of our commercial cybersecurity business in the prior year quarter. The increase in operating income for the three months ended April 3, 2020, as compared to the three months ended March 29, 2019, was primarily due to program wins, partially offset by lower fees on certain programs, product volume timing related to the impacts of COVID-19 and the completion of certain contracts.







                                                      Three Months Ended
                               April 3,       March 29,
        Health                   2020           2019         Dollar change       Percent change
                                                    (dollars in millions)
        Revenues              $    530       $    463       $        67                  14.5  %
        Operating income            73             45                28                  62.2  %
        Operating margin          13.8  %         9.7  %
        


The increase in revenues for the three months ended April 3, 2020, as compared to the three months ended March 29, 2019, was primarily attributable to a net increase in program volumes, program wins and an $11 million impact from our acquisition of IMX Medical Management Services, Inc. in the third quarter of fiscal 2019. This was partially offset by a $25 million impact from the sale of our health staff augmentation business in the third quarter of fiscal 2019. The increase in operating income for the three months ended April 3, 2020, as compared to the three months ended March 29, 2019, was primarily due to a net increase in program volumes and net profit write-downs in the prior year quarter.







                                                    Three Months Ended
                              April 3,       March 29,
        Corporate               2020           2019         Dollar change      Percent change
                                                   (dollars in millions)
        Operating loss       $    (35)      $    (15)      $        (20)                 NM
        


NM - Not meaningful







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                                     LEIDOS HOLDINGS, INC.
        The estimated value of our total backlog was as follows:
                                              April 3,       January 3,
                                                2020            2020
                                                    (in millions)
        Defense Solutions:
        Funded backlog                       $  3,936       $   3,063
        Negotiated unfunded backlog            12,294          11,974
        Total Defense Solutions backlog      $ 16,230       $  15,037
        Civil:
        Funded backlog                       $  1,296       $   1,267
        Negotiated unfunded backlog             6,254           2,978
        Total Civil backlog                  $  7,550       $   4,245
        Health:
        Funded backlog                       $    975       $   1,083
        Negotiated unfunded backlog             3,548           3,725
        Total Health backlog                 $  4,523       $   4,808
        Total:
        Funded backlog                       $  6,207       $   5,413
        Negotiated unfunded backlog            22,096          18,677
        Total backlog                        $ 28,303       $  24,090
        


The change in Defense Solutions backlog reflects $1,762 million of backlog acquired as a result of the acquisition of Dynetics.







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        LEIDOS HOLDINGS, INC.
        


Additionally, on February 12, 2020, we entered into a senior unsecured delayed-draw term loan facility providing for $1.0 billion of commitments from certain financial institutions in connection with the acquisition of L3Harris Technologies' ("L3Harris") security detection and automation businesses. The maturity date will be two years from the funding date if we draw on this commitment. As of April 3, 2020, we have not drawn any funds under the delayed-draw term loan facility.

May 05, 2020

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