Leidos [LDOS] on Tuesday posted higher sales and earnings in its second quarter driven by two acquisitions earlier this year and a payment related to patent infringement, more than offsetting higher than expected negative impacts from the ongoing pandemic.
Net income increased 13 percent to $153 million, $1.06 earnings per share (EPS), from $136 million (93 cents EPS). Adjusted earnings, which exclude acquisition, integration and restructuring costs, asset impairment charges, and the gain or loss on the sale of a business, were $1.55 EPS, well above consensus estimates of $1.11.
During the quarter, Leidos recorded an $81 million net gain from a payment by VirnetX, Inc., related to a favorable claim by VirnetX against Apple Inc. [AAPL] that included patents from Science Applications International Corp. [SAIC] and were retained by Leidos after it was spun-off from SAIC.
At the operating level, Leidos’ Civil and Defense Solutions Groups both posted higher earnings that were more than offset by a steep decline at the Health Group, which suffered more than the other groups from COVID-19-related impacts. Operating margin increased 80 basis points to 8.5 percent. Still, the top lines for all three segments were dented by the coronavirus, which in turn crimped operating income.
Sales in the quarter were up 7 percent to $2.9 billion from $2.7 billion a year ago, driven by the acquisition in January of Dynetics and then in the spring by the acquisition of the security detection and automation businesses of L3Harris Technologies [LHX].
Leidos said sales and adjusted income in the quarter were $132 million and $68 million lower, respectively, due to COVID.
Organic growth was down 3 percent.
The pace of the recovery during the second quarter was slower than Leidos expected due to the pandemic and the company is now forecasting the start of a return to normal in the fourth quarter, Roger Krone, chairman and CEO of Leidos, said during the company’s earnings call. The company’s topline was also impacted on difficulties in getting security clearances for new employees and the ongoing protest of the Navy’s $7.7 billion Next Generation Enterprise Networks (NGEN) Recompete contract that was won by Leidos but has been protested in federal court.
More than 50 percent of Leidos’ employees continue to telework, Krone said. The company has been successful in hiring new employees, he said, noting that new hires in during the second quarter grew 8 percent versus the first quarter. Krone also said that business activity remains robust as the company submitted $8 billion in proposals from mid-March through June, which is more proposal activity than the same period a year ago.
Still, the quarter was a tough one to manage.
“Leidos’ second quarter results demonstrate the resiliency of our business model, the value of our market diversity, and the strength of our team as we delivered on commitments through the most challenging quarter I have seen in my career,” said Krone, who before joining Leidos in 2014 was a senior executive in Boeing’s [BA] defense business.
Despite the uneven results during the quarter, Leidos had strong orders of $4.6 billion, driving backlog to a record $30.7 billion, up 27 percent from $24.1 billion since the beginning of the year. The orders were boosted by wins in the Defense Solutions group and for NASA’s Human Lander system, the company said.
After lowering its sales and earnings guidance following the first quarter, Leidos again adjusted its outlook on Tuesday after the second quarter. Sales are now forecast to be between $12.2 billion to $12.6 billion, down $300 million from the prior projection and $400 million lower than originally expected.
Guidance for adjusted earnings was increased 25 cents EPS to between $5.25 and $5.55 EPS. That’s closer to the $5.30 to $5.65 forecast following the close of the first quarter.
The reduction in the sales outlook is due to COVID impacts, the delay in the NGEN program, and other program delays and adjustments, James Reagan, Leidos’ chief financial officer, said on the call. The increase on earning guidance is driven by the VirnetX gain, a lower tax rate and reduced interest expense, he said.
The guidance assumes a return to normal run rates with customers in the fourth quarter and continuing “unimpacted” in 2021, Reagan said. Leidos expects organic growth to exceed 10 percent next year, he said.
Leidos said that an earlier federal stimulus package, the CARES Act, allowed it to defer some federal and state income tax payments from the second quarter to the third and to defer paying its portion of social security taxes for the rest of the year.