Leidos(LDOS) - 2025 Q2 - Quarterly Report

Part I - Financial Information Item 1. Financial Statements The unaudited condensed consolidated financial statements for the period ended July 4, 2025, reflect revenue growth, increased net income, higher total assets, and positive cash flow from operations Condensed Consolidated Statements of Operations Highlights (in millions, except per share data) | Metric | Three Months Ended July 4, 2025 | Three Months Ended June 28, 2024 | Six Months Ended July 4, 2025 | Six Months Ended June 28, 2024 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $4,253 | $4,132 | $8,498 | $8,107 | | Operating Income | $571 | $475 | $1,101 | $890 | | Net Income Attributable to Leidos | $391 | $322 | $754 | $606 | | Diluted EPS | $3.01 | $2.37 | $5.80 | $4.42 | Condensed Consolidated Balance Sheet Highlights (in millions) | Metric | July 4, 2025 | January 3, 2025 | | :--- | :--- | :--- | | Total Current Assets | $4,781 | $4,334 | | Total Assets | $13,549 | $13,010 | | Total Current Liabilities | $2,948 | $3,560 | | Total Liabilities | $8,842 | $8,550 | | Total Stockholders' Equity | $4,707 | $4,460 | Condensed Consolidated Statements of Cash Flows Highlights (in millions) | Metric | Six Months Ended July 4, 2025 | Six Months Ended June 28, 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $544 | $494 | | Net cash used in investing activities | ($336) | ($33) | | Net cash used in financing activities | ($193) | ($387) | Note 2–Revenues Remaining Performance Obligations totaled $16 billion, with most revenue derived from U.S. government customers, and disaggregated revenues reached $4.23 billion for the quarter - Remaining Performance Obligations (RPO) stood at $16 billion, with approximately 61% expected to be recognized as revenue in the next 12 months and 80% within 24 months[36] Disaggregated Revenues by Customer-Type (Three Months Ended July 4, 2025, in millions) | Customer Type | National Security & Digital | Health & Civil | Commercial & International | Defense Systems | Total | | :--- | :--- | :--- | :--- | :--- | | DoD and U.S. Intelligence Community | $1,324 | $253 | $2 | $486 | $2,065 | | Other U.S. government agencies | $507 | $995 | $99 | $23 | $1,624 | | Commercial and non-U.S. customers | $26 | $19 | $465 | $34 | $544 | | Total | $1,857 | $1,267 | $566 | $543 | $4,233 | Note 3–Acquisitions, Goodwill and Intangible Assets The acquisition of Kudu Dynamics for $291 million resulted in $244 million in goodwill and $57 million in intangible assets, contributing $12 million in revenue and increasing total goodwill to $6.36 billion - Completed the acquisition of Kudu Dynamics on May 23, 2025, for a preliminary purchase consideration of $291 million, net of cash[45] - The acquisition added $244 million in tax-deductible goodwill and $57 million in intangible assets, contributing $12 million in revenues to the National Security & Digital segment for the quarter[46] Goodwill by Reportable Segment (in millions) | Segment | Goodwill at Jan 3, 2025 | Acquisition | Goodwill at July 4, 2025 | | :--- | :--- | :--- | | National Security & Digital | $2,758 | $244 | $3,002 | | Health & Civil | $1,366 | $0 | $1,366 | | Commercial & International | $772 | $0 | $803 | | Defense Systems | $1,188 | $0 | $1,188 | | Total | $6,084 | $244 | $6,359 | Note 6–Debt Long-term debt increased to $5.1 billion due to a $1 billion senior note issuance, used for debt retirement and a $500 million share repurchase, while maintaining covenant compliance - On February 20, 2025, the company issued $1 billion in new senior notes: $500 million at 5.40% due 2032 and $500 million at 5.50% due 2035[65] - Proceeds from the new notes were used to retire $500 million of senior notes due May 2025 and to repurchase $500 million of common stock via an Accelerated Share Repurchase (ASR) agreement[65] - As of July 4, 2025, the company was in compliance with all financial covenants for its debt facilities[69] Note 8–Earnings Per Share A $500 million Accelerated Share Repurchase (ASR) on February 20, 2025, led to the retirement of 3.6 million shares at an average price of $138.44 per share - On February 20, 2025, the company entered into a $500 million Accelerated Share Repurchase (ASR) agreement[72] - The ASR resulted in the total repurchase of 3.6 million shares at an average price of $138.44 per share, which were subsequently retired[72] Note 9–Income Taxes The OBBBA enactment on July 4, 2025, introduced immediate R&D expensing and 100% bonus depreciation, decreasing income taxes payable by $150 million and deferred tax assets by $130 million - The enactment of the OBBBA tax legislation on July 4, 2025, allows for immediate expensing of U.S. R&D costs and reinstates 100% bonus depreciation[75] - The immediate impact of the OBBBA was a $150 million decrease in income taxes payable and a $130 million decrease in deferred tax assets[75] - The estimated full-year fiscal 2025 impact is a decrease of approximately $280 million to income taxes payable and a $245 million decrease to net deferred taxes[75] Note 10–Business Segments All four business segments reported revenue growth, with Health & Civil being the most profitable at $311 million in operating income, and Commercial & International showing a significant turnaround Segment Revenues and Operating Income (Three Months Ended, in millions) | Segment | Revenues (Q2 2025) | Revenues (Q2 2024) | Operating Income (Q2 2025) | Operating Income (Loss) (Q2 2024) | | :--- | :--- | :--- | :--- | :--- | | National Security & Digital | $1,872 | $1,813 | $188 | $183 | | Health & Civil | $1,272 | $1,263 | $311 | $307 | | Commercial & International | $566 | $561 | $40 | ($11) | | Defense Systems | $543 | $495 | $41 | $34 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue increased by 2.9% for the quarter, operating margin improved to 13.4%, total backlog grew to $46.2 billion, and liquidity remains strong with $930 million in cash, aided by tax benefits Consolidated Results of Operations Highlights (in millions) | Metric | Three Months Ended July 4, 2025 | Three Months Ended June 28, 2024 | % Change | | :--- | :--- | :--- | :--- | | Revenues | $4,253 | $4,132 | 2.9% | | Operating Income | $571 | $475 | 20.2% | | Operating Margin | 13.4% | 11.5% | N/A | - Corporate operating loss decreased significantly, primarily due to a $25 million insurance reimbursement for legal costs[114] - The OBBBA tax legislation is anticipated to decrease federal and state tax payments by approximately $150 million in fiscal 2025[134] Bookings and Backlog Net bookings reached $3.9 billion for the quarter, increasing total backlog to $46.2 billion due to new awards and a policy change to include sole-source IDIQ estimates - Effective Q1 2025, the company changed its backlog policy to include estimated future revenue on task orders expected under sole-source IDIQ contracts[121] Total Backlog by Segment (in millions) | Segment | July 4, 2025 | June 28, 2024 (Recast) | | :--- | :--- | :--- | | National Security & Digital | $24,861 | $22,385 | | Health & Civil | $10,788 | $10,622 | | Commercial & International | $5,099 | $4,585 | | Defense Systems | $5,462 | $3,959 | | Total | $46,210 | $41,551 | Liquidity and Capital Resources The company maintained strong liquidity with $930 million in cash and a $1 billion credit facility, generating $544 million in operating cash flow, while using cash for acquisitions, share repurchases, and dividends - Cash and cash equivalents stood at $930 million, with an additional $1 billion available under the revolving credit facility[126] - Net cash from operating activities for the six months ended July 4, 2025, increased to $544 million from $494 million in the prior year, driven by higher earnings and tax benefits from the OBBBA[136][137] - Investing activities were primarily driven by the $285 million net cash paid for the Kudu Dynamics acquisition[138] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes in market risk exposure were reported compared to the previous Annual Report on Form 10-K - There were no material changes in market risk exposure during the quarter[153] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective, excluding the Kudu Dynamics acquisition from the Q2 internal control evaluation - Management concluded that disclosure controls and procedures were effective as of July 4, 2025[154] - The recently acquired Kudu Dynamics was excluded from the evaluation of internal control over financial reporting for the second quarter of fiscal 2025[155] Part II - Other Information Item 1. Legal Proceedings Details on legal proceedings, including claims, lawsuits, and government investigations, are provided in Note 11 of the condensed consolidated financial statements - Details on legal proceedings are provided in "Note 11–Commitments and Contingencies" of the financial statements[158] Item 1A. Risk Factors No material changes to risk factors were reported compared to the disclosures in the Annual Report on Form 10-K - No material changes to risk factors were reported for the quarter[159] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 589,667 shares at an average price of $138.97 per share, primarily through an ASR, with 3.8 million shares remaining authorized for repurchase Share Repurchases for the Quarter Ended July 4, 2025 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 5 - April 30, 2025 | — | $— | | May 1 - May 31, 2025 | 569,772 | $138.44 | | June 1 - June 30, 2025 | 19,895 | $153.96 | | July 1 - July 4, 2025 | — | $— | | Total | 589,667 | $138.97 | - As of July 4, 2025, 3,793,813 shares may yet be purchased under the publicly announced repurchase program[161]