Chief Financial Officer at Leidos
Thanks, Roger, and thanks to everyone for joining us today. I have worked at Leidos for 23-years, and I have personally benefited from the forward-thinking developmental programs that Roger referenced earlier. My predecessor and Mentor, Jim Reagan, created a very strong team in set of processes and disciplines that I have had the opportunity to help shape over the last few years. Going forward, my initial areas of focus will be threefold: delivering on our financial commitments, integrating acquisitions and prioritizing spending on investments to execute our strategy. With that, let's jump right into the second quarter fiscal year 2021 results.
Beginning with the income statement on Slide 5, I will first run through the financial results at the corporate level, then turn to the segment level to address the primary revenue and profitability drivers. As Roger said, the highlight of the quarter was our organic growth, which is truly unprecedented in our industry at our scale. Revenue quarter were $3.45 billion up 18% compared to the prior year quarter. Excluding acquired revenues of $58 million, revenues increased 16% organically. Notably, revenues grew organically across all three reportable segments. The organic growth is somewhat inflated by the drop in the revenues last year as a result of the pandemic when for example, our VA disability exam business was almost entirely shutdown. Even if we add back the 132 million direct pandemic effect in the prior year, organic revenue growth was still 11%.
Adjusted EBITDA was 359 million for the second quarter, which was up 5% year-over-year. Adjusted EBITDA margin decreased from 11.8% to 10.4% over the same period. Excluding the VirnetX gain from the prior period, adjusted EBITDA margin increased by 140 basis points in the quarter. This was primarily due to strong program management, higher volumes on some fixed price programs and better direct labor utilization. Non-GAAP net income was 218 million for the second quarter, which was down 2% year-over-year and non-GAAP diluted EPS for the quarter was $1.52, also down 2% compared to the second quarter of fiscal year 2020. Excluding the impact of VirnetX gain from last year's results, non-GAAP diluted EPS was up 37%. Our effective tax rate on non-GAAP income in the quarter was 24% compared to the 22% we anticipated for fiscal year 2021, this negatively impacted non-GAAP diluted EPS by $0.04. The tax rate increase was primarily across our international business. The largest single driver was that in Q2, we recognized the full impact of a recently enacted increase in the U.K. corporate tax rate from 19% to 25%.
Now, for an overview of the segment results on Slide 6; Defense Solutions revenues increased by 14% compared to the prior year quarter. Excluding the acquisitions of 1901 Group and Gibbs & Cox, organic revenue was up 12%, primarily from ramping up recent contract wins such as NGEN and increased weapon systems development within Dynetics. Civil revenues increased 5% compared to the prior year quarter, with about half coming from the SD&A acquisition and half driven by increased demand on large programs such as Hanford site integration. Health revenues increased 62% compared to the prior year quarter, and all of that growth was organic. We had a large year-over-year increase on the DHMSM as well as a nice ramp on the new Military and Family Life Counseling program or MFLC. The largest increase, though, was in the VA disability examination business in our QTC subsidiary. Remember, this was the business hardest hit by the pandemic in the year-ago quarter and now volumes are higher than ever as we continue to work through the backlog of exams.
On the margin front, Defense Solutions non-GAAP operating income margin for the quarter came in at 8.3%, which was up 20 basis points compared to the prior year quarter. Civil non-GAAP operating margin declined from 12.9% in the prior year quarter to 9.1% as we had fewer deliveries of our border and port security systems and airport screening systems.
Finally, and most significantly, health non-GAAP operating income margin for the quarter was up to 17.8% compared to 5.3% in the prior year quarter. This quarter's strong margin performance benefited from the significantly increased revenue volume, but the year-over-year improvement was enabled by the strategic investments we made a year-ago to keep our workforce in place and ready to meet the coming customer demand.
Turning now to cash flow and the balance sheet on Slide 7, operating cash flow for the quarter was 17 million and free cash flow, which is net of capital expenditures, was a usage of four million. During the second quarter, we settled the accounts receivable monetization program, which negatively affected our operating and free cash flow by $94 million. On a year-to-date basis, the AR monetization program is neutral to cash flow, and we do not plan to sell any more receivables. During the quarter, we used working capital to fund the start-up of new programs and the expansion of existing programs and drive strong organic growth. You can see this impact most clearly in the drawdown of advanced payments compared to last year.
Cash generation from the business segments was right on plan for the first half of the year and actually ahead of last year. But that performance is overshadowed by one-time non-operational cash benefits in the first half of 2020. These include 225 million from the AR monetization program; 85 million from VirnetX; 48 million in CARES Act tax deferrals; and 103 million in lower cash taxes, which is just a timing issue. During the second quarter, we paid down 27 million of debt and returned 48 million to shareholders in quarterly dividends. As laid in Friday's 8-K, our Board of Directors approved a 6% increase in the dividend beginning in September. This is our first increase in two-years and reflects our confidence in the future outlook and commitment to shareholder returns. In addition, we paid net consideration of 376 million to acquire Gibbs & Cox, which positions us to provide a broad set of engineering solutions to the U.S. and international navies. Gibbs & Cox is contributing a little more than 100 million in revenues this year at margins above the Defense Solutions segment average, given its higher proportion of fixed price work.
To finance the transaction, we borrowed 380 million with a one-year maturity at very attractive terms, no more than LIBOR plus 113 basis points. As of July 2, 2021, we had 338 million in cash and cash equivalents and 5.1 billion of debt. Last month, we established a commercial paper program for short-term liquidity management. Commercial paper will give us more flexibility at a lower cost than selling accounts receivables. Commercial paper is only available to us because our debt is investment grade, and we view our investment-grade rating as a strategic asset. Over the remainder of the year, our primary capital deployment priority will be debt pay down as we return to a normalized leverage ratio of three times. We remain committed to our long-term balanced capital deployment strategy, which consists of being appropriately levered and maintaining our investment-grade rating, returning a quarterly dividend to our shareholders reinvesting for growth, both organically and inorganically and returning excess cash to shareholders in a tax-efficient manner.
On to the forward outlook. As shown on Slide 8, we are maintaining our guidance for fiscal year 2021, including revenue between 13.7 million and 14.1 billion, adjusted EBITDA margin between 10.5% and 10.7%; non-GAAP diluted earnings per share between $6.35 and $6.65; and operating cash flow at or above 875 million. As the year progresses, we normally tighten our guidance ranges, but there are a lot of forces at play, including worsening of the COVID situation with a more contagious Delta variant in stagnation in vaccination rates as well as ongoing challenges in the global supply chain, especially around computer chips. On revenues, NGEN is ramping well, but this is still a new customer and new contract. So we don't want to have an established history of order flow and don't want to get ahead of ourselves. The Intelligence Community award decisions have slowed noticeably, and we are also incrementally more cautious on the bounce back of the international airport screening market. So we are not forecasting a return to growth there until 2023.
The Gibbs & Cox acquisition should keep us comfortably in our revenue range, but it likely won't put us above the range. We expect revenue to grow fairly linearly through the back half of the year from Q2 levels. Growth drivers in the third and fourth quarters include the full contribution of Gibbs & Cox, the continued ramp on NGEN, MFC and several other programs. Towards the end of the year, we expect the VA medical exams will begin to return to their pre-pandemic levels. On EBITDA margins, year-to-date performance in the second quarter was 11.1% to land in the guidance range for the year, adjusted EBITDA margin for the back half of the year will be around the same level as this quarter. Non-GAAP diluted EPS will generally follow revenue and margin. However, we are now forecasting the FY 2021 tax rate to be between 23% and 23.5% instead of our original 22% forecast, which slightly outweighs the accretion from Gibbs & Cox. In addition to the international tax headwinds I mentioned earlier, we are now forecasting a lower deduction for share-based compensation based on stock price performance over the first half of the year.
Finally, we expect cash flow to follow our normal pattern and accelerate in the back half of the year to land us at the guided level. Over the past five-years, we have generated an average of 65% annual operating cash flow in the third and fourth quarters. That pattern will be slightly more pronounced this year as a result of the working capital that we have devoted in the first half of this year to drive 17% year-over-year growth. We have a detailed execution plan to achieve our operating cash flow guidance.
And with that, I will turn the call over to Hector so we can take some questions.