LDOS stock looks like a compelling candle over candle swing trade setup on the daily chart.

On October 29, 2019, Leidos Holdings (LDOS) reported financial results for the third quarter of fiscal year 2019.

Roger Krone, Leidos Chairman and Chief Executive Officer, commented: “We are pleased with the continued momentum in our business reflected in our third quarter results, which set new records in revenue, backlog and bookings. Our results underscore our success in growing all segments of our business and demonstrate our ability to deliver our broad capabilities across our diverse customer base.”

Summary Results

Revenues for the quarter were $2.84 billion, compared to $2.58 billion in the prior year quarter, reflecting a 10.1% increase.

Operating income for the quarter was $249 million, compared to $203 million in the prior year quarter. Operating income margin increased to 8.8% from 7.9% in the prior year quarter. Non-GAAP operating income margin for the quarter was 10.4%, compared to 10.2% in the prior year quarter, primarily attributable to the payment of an arbitration award relating to a contract in a prior business operation, partially offset by lower net profit write-ups in the current year quarter and increased bad debt expense on certain international contracts.

Diluted earnings per share (“EPS”) attributable to Leidos common stockholders for the quarter was $1.11, compared to $0.96 in the prior year quarter. Non-GAAP diluted EPS for the quarter was $1.36, compared to $1.14 in the prior year quarter. The weighted average diluted share count for the quarter was 145 million compared to 153 million in the prior year quarter, primarily due to stock repurchases during 2019 and the fourth quarter of 2018.

Defense Solutions

Defense Solutions revenues for the quarter of $1,354 million increased by $104 million, or 8.3%, compared to the prior year quarter. The revenue increase was primarily attributable to new awards and a net increase in program volumes, partially offset by the completion of certain contracts.

Defense Solutions operating income margin for the quarter was 6.9%, compared to 7.1% in the prior year quarter. On a non-GAAP basis, operating income margin for the quarter was 8.0%, compared to 8.5% in the prior year quarter, primarily attributable to lower net profit write-ups in the current quarter, partially offset by new awards and favorable program mix.

Civil

Civil revenues for the quarter of $973 million increased by $92 million, or 10.4%, compared to the prior year quarter. The revenue increase was primarily attributable to new awards and a net increase in program volumes, partially offset by the impact of the sale of our commercial cybersecurity business and lower net profit write-ups in the current quarter.

Civil operating income margin for the quarter was 5.9%, compared to 10.4% in the prior year quarter. On a non-GAAP basis, operating income margin for the quarter was 7.8%, compared to 13.2% in the prior year quarter, primarily attributable to increased bad debt expense on certain international contracts, start-up costs on new program awards and lower net profit write-ups in the current quarter.

Health

Health revenues for the quarter of $508 million increased by $64 million, or 14.4%, compared to the prior year quarter. The revenue increase was primarily attributable to a net increase in program volumes and new awards, partially offset by the completion of certain contracts and the impact of the sale of our health staff augmentation business during the current quarter.

Health operating income margin for the quarter was 12.4%, compared to 11.7% in the prior year quarter. On a non-GAAP basis, operating income margin for the quarter was 14.8%, compared to 14.2% in the prior year quarter, primarily attributable to favorable program mix.

Cash Flow Summary

Net cash provided by operating activities for the quarter was $349 million compared to $371 million in the prior year quarter. The decrease was primarily due to proceeds received from the termination of interest rates swaps in the prior year quarter, the prefunding of our quarterly dividend and higher tax payments. These activities were partially offset by more favorable timing of working capital changes and $59 million received in payment of an arbitration award relating to a contract in a prior business operation.

Net cash used in investing activities for the quarter was $102 million compared to $15 million net cash provided by investing activities in the prior year quarter. The increase in cash outflows was primarily due to cash paid related to the acquisition of IMX Medical Management Services, Inc. and its affiliated businesses and proceeds from the settlement of a promissory note in the prior year quarter, partially offset by proceeds received for the divestiture of our health staff augmentation business.

Net cash used in financing activities for the quarter was $204 million compared to $134 million in the prior year quarter. The increase was primarily due to an increase in stock repurchases, partially offset by the timing of dividend and debt payments.

As of September 27, 2019, the Company had $635 million in cash and cash equivalents and $3.0 billion of debt.

New Business Awards

Net bookings totaled $5.2 billion in the quarter, representing a book-to-bill ratio of 1.8.

Notable recent awards received include:

  • U.S. Intelligence Community: The Company was awarded contracts valued at $1.3 billion, 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.
  • Transportation Security Administration Screening Equipment: The Company was awarded a follow-on contract by the Transportation Security Administration (“TSA”) to continue providing maintenance, sustainment and logistics support services for TSA checkpoint screening equipment. Leidos will support more than 10,000 pieces of passenger screening equipment at nearly 450 airports and other government facilities throughout the U.S. The single-award, fixed-unit-price contract has a four-month base period of performance, four one-year options, followed by an eight-month option, and a total approximate value of more than $926 million, if all options are exercised.
  • U.S. Army Intelligence Aircraft Support Services: The Company was awarded a task order by the U.S. Army to provide aircraft intelligence, surveillance, and reconnaissance support services. Under the contract, Leidos will provide operations, sustainment, program management, cybersecurity, and engineering support services for the U.S. Army’s Product Director, Airborne Reconnaissance Low. The single-award, cost-plus-fixed-fee contract has a one-year base period of performance followed by four one-year option periods with an approximate value of $428 million, if all options are exercised.
  • National Institutes of Health Software Development Support: The Company was awarded a follow-on contract by the Eunice Kennedy Shriver National Institute of Child Health and Human Development within the National Institutes of Health to provide a wide range of software development services in support of the Office of Extramural Research. Under the contract, Leidos will provide services including design, development, and application testing services following the eRA Agile software development lifecycle. The single-award, cost-plus-fixed-fee contract has a one-year base period of performance followed by four one-year option periods, and an approximate value of $150 million, if all options are exercised.
  • The Company’s backlog at the end of the quarter was $23.9 billion, of which $5.7 billion was funded.

Forward Guidance

As a result of the Company’s year-to-date performance and updated expectations, the Company is revising its fiscal year 2019 guidance as follows:

  • Revenues of $10.90 billion to $11.00 billion, up from previous guidance of $10.65 billion to $10.95 billion;
  • Adjusted EBITDA margins of 10.2% to 10.4%, up from previous guidance of 9.9% to 10.1%;
  • Non-GAAP diluted EPS of $4.90 to $5.10, up from previous guidance of $4.50 to $4.75; and
  • Cash flows provided by operating activities at or above $875 million, up from previous guidance of $825 million.
  • Non-GAAP diluted EPS excludes amortization of acquired intangible assets and an equity method investment, asset impairment charges, integration and restructuring costs, gain on sale of business and other tax adjustments. See Leidos’ non-GAAP financial measures and the related reconciliation to GAAP measures included elsewhere in this release.

The Company does not provide a reconciliation of forward-looking adjusted EBITDA margins (non-GAAP) or non-GAAP diluted EPS to GAAP net income, 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 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 at this time. The amounts of these deductions may be material and, therefore, could result in projected GAAP net income and diluted EPS being materially less than projected adjusted EBITDA margins (non-GAAP) and non-GAAP diluted EPS.

On October 14, 2019, Leidos was awarded a follow-on prime contract to continue providing maintenance, sustainment and logistics support services for the Transportation Security Administration’s checkpoint screening equipment. The single award, fixed unit price contract has a four-month base period of performance, four one-year options, followed by an eight-month option, and a total approximate value of more than $926M if all options are exercised. Work will be performed nationwide. Under the contract, the company will provide services that include: preventative, corrective, and depot maintenance; integrated logistics support, information technology infrastructure development and maintenance; and management of TSA’s Service Response Center.

On October 25, 2019, Leidos announced that its board of directors has declared a quarterly cash dividend of $0.34 per outstanding share of common stock of Leidos Holdings, Inc. The cash dividend is payable on Dec. 27, 2019 to stockholders of record as of the close of business on Dec. 16, 2019.

LDOS stock in the daily time frame is in a downtrend as of October 29, 2019 but has formed a candle over candle reversal; however, the MACD is solidly bearish.

LDOS does not meet the stringent requirements for inclusion in the GST portfolio at this time. The technical chart shows the stock under distribution after a Symmetrical Triangle break down. The stock trades at a P/S ratio of 1.10 which isn’t bad but it may need to work off its overbought status a bit more. However, a short-term swing trade may be setting up for traders. There’s a clearly define stop-loss level just below $78.55, with a target price of $84.22.

Disclosure: we do not hold any position in LDOS stock.

Leidos Holdings In the News