Leidos [LDOS] on Monday posted record sales driven mainly by two acquisitions earlier this year and the company mustered a slight increase in organic growth, overcoming headwinds related to the COVID-19 pandemic.
The company also said that if some program wins that were protested are ultimately resolved in its favor, which it expects, organic growth in 2021 will reach double-digits.
Net income in the third quarter was relatively flat, $163 million, $1.13 earnings per share (EPS), versus $162 million ($1.11 EPS) a year ago as higher profits at the company’s operating segments were largely offset by higher net interest expense.
Adjusted earnings of $1.47 EPS, which exclude acquisition integration and restructuring costs, asset impairment charges and some other costs, were 11 cents higher than a year ago and beat consensus estimates of $1.23 EPS. Adjusted operating margin of 10.7 percent was unchanged from a year ago.
Sales in the quarter increased 14 percent to $3.2 billion from $2.8 billion a year ago, driven by $376 million in acquired revenue from the acquisitions of Dynetics in January and the security detection and automation business of L3Harris Technologies [LHX] in May.
Organic revenue managed a nearly 2 percent increase on program wins and volume gains. Negative impacts from COVID-19 decelerated in the third quarter versus the second quarter but still knocked about $109 million off the top-line and $23 million from operating income, Roger Krone, chairman and CEO of Leidos, said on the company’s earning’s call. Absent the COVID hit to sales in the quarter, organic revenue would have been up nearly 6 percent, James Reagan, Leidos’ chief financial officer, said.
In the second quarter, the ongoing pandemic chopped $223 million from sales and $78 million from operating income, Krone said.
In “future quarters,” he said the company continues to expect to recover more than 70 percent of COVID impacts.
Given the company’s third quarter results, Leidos increased its adjusted earnings guidance for the year and narrowed its sales outlook.
The company now expects adjusted per share earnings between $5.65 and $5.85 versus prior expectations of between $5.25 and $5.55 EPS. Sales are forecast to be between $12.3 billion and $12.5 billion versus prior guidance of between $12.2 billion and $12.6 billion. Adjusted operating margin is pegged at between 10.6 and 10.8 percent, 60 basis points above the previous outlook.
Krone expects the federal government to continue operating under a continuing budget resolution into 2021, possibly into next March, but said this won’t impact the company’s 2020 outlook.
The company didn’t offer detailed guidance for 2021 but expects organic growth of “at least” between 10 and 12 percent and adjusting operating margin of about “10.3 percent or better,” Reagan said. The guidance assumes the company prevails in outstanding protests of awards Leidos won and that customers are able to continue to manage through the pandemic, he said.
Even if a continuing resolution lasts until next March, or later, the company doesn’t expect it to negatively impact its rough 2021 outlook, Krone said.
Orders in the quarter totaled $4.3 billion and backlog reached a record $31.7 billion, and “coupled with our strong new business pipeline provides a strong foundation for accelerated growth into next year and beyond,” Krone said. The backlog excludes protested more than $9 billion in wins that have been protested by losing bidders with the Defense Health Agency, the Army Special Operations Command, and the nearly $8 billion Navy Next Generation Enterprise Network contract, he said.
Oral arguments for the Navy contract will be heard on Nov. 13 before the U.S. Court of Federal Claims and Krone said Leidos expects a “favorable outcome shortly thereafter.”
Free cash flow in the quarter was $562 million.