Leidos [LDOS] on Thursday posted higher sales and earnings in its second quarter driven the acquisition last year of a former Lockheed Martin [LMT] segment, improved operating results and a lower than expected tax rate.
The acquisition of the Information Systems & Global Solutions (IS&GS) business in the 2016 third quarter drove the entire sales increase, with revenues for the quarter at $2.6 billion versus $1.3 billion a year ago. The IS&GS segment added $1.4 billion to the top line, and the business achieved 6 percent organic growth versus its performance a year ago when it was still part of Lockheed Martin.
Leidos’ legacy business was down 6 percent versus a year ago.
Net income more than doubled to $98 million, 64 cents earnings per share (EPS), from $41 million (55 cents EPS) a year ago. Excluding various amortization, acquisition and integration, and restructuring costs associated with the IS&GS deal, per share earnings were $1.04, topping analysts’ expectations by 24 cents EPS.
Based on results so far this year, including outperforming targets associated with integrating IS&GS, Leidos raised its adjusted earnings guidance for the year to between $3.45 and $3.60 EPS versus the prior outlook of between $3.05 to $3.35. The sales guidance was raised $100 million on the low end of the prior range to between $10.1 billion and $10.4 billion.
Roger Krone, chairman and CEO of Leidos, said on the company’s earnings call that cost savings synergies associated with the IS&GS acquisition continue to grow, with expected annual rates topping $400 million, up from $240 million originally, by 2019.
James Reagan, chief financial officer of Leidos, said the company has achieved three key integration milestones related to IS&GS, including transitioning the segment’s human resource and payroll management system to Leidos’ legacy system, streamlining purchasing activity, and beginning the process of migrating financial systems.
The successful completion of a portion of the IS&GS financial management system to Leidos’ solution gives the company confidence about “the most important integration activity still ahead of us,” Reagan said. “And that’s the consolidation of the remaining financial systems, which is slated for the first quarter of 2018.”
Organic sales at Leidos declined due to the completion of certain programs in the Defense Solutions segment, lower work on a United Kingdom Ministry of Defence contract in the Civil segment, and lower revenues in the commercial health business that is under the Health segment.
Krone said the confirmation this week of several key Defense Department officials is a positive sign, although there are still a “high number of unfilled leadership appointments and the approaching government fiscal year-end” show continued “headwinds … to a more normalized procurement and acquisition pace with our customers.”
Bookings in the quarter were $2.7 billion and total backlog stood at $17.1 billion, down from $17.7 billion at the end of 2016.