Leidos [LDOS] on Thursday reported lower fourth quarter earnings than a year ago due various acquisition and restructuring costs despite a doubling of sales due mainly to a large acquisition last year and growth in its federal health and international work, and contract award fees.
Net income in the quarter was $59 million, 39 cents earnings per share (EPS), less than half the $127 million ($1.72 EPS) awarded a year ago. Costs related to amortization of acquired intangible assets, acquisition and integration, restructuring and asset impairment, lopped $88 million from the bottom line.
Excluding the various costs, per share earnings in the quarter would have been 75 cents, a nickel lower than a year ago, and eight cents per share below consensus estimates. Per share results also suffered from a higher share count stemming from the issuance of stock to Lockheed Martin [LMT] shareholders related to the acquisition of the Information Systems & Global Solutions (IS&GS) segment last summer.
Also excluding the acquisition and restructuring costs, operating margin would have been 9.4 percent, up a percent from a year ago.
The IS&GS business added nearly $1.4 billion to Leidos’ $2.6 billion in sales in the fourth quarter. The divestiture of the company’s heavy construction engineering business trimmed about $100 million from the quarter’s revenue. A year ago sales were $1.3 billion. Organic sales were up nearly 5 percent.
Leidos executives said the integration of IS&GS is going well, resulting in an improved cost structure and allowing the company to bid on opportunities that neither business could before. Roger Krone, chairman and CEO of Leidos, said on the company’s earnings call that the business development staffs from both organizations have been integrated and revamped.
Krone said that IS&GS adds “strong qualifications in enterprise network transformation domain” that gives Leidos a chance with a military customer in procurement that is a “potential future franchise.” Another opportunity with a military customer allows Leidos to take advantage of biometrics capabilities that are part of IS&GS and include “technical innovations and past performance” that allow the company to “significantly improve our competitive position,” he said.
A third opportunity Leidos is pursuing that it probably wouldn’t have before as a prime contractor is for a large enterprise network protection program for a federal civilian customer, Krone said. The combination of Leidos and IS&GS provides a portfolio of research and development investments that Krone said fill the customer’s need and create a differentiated solution in the proposal.
Overall in 2016 net income dipped 4 percent to $244 million ($2.35 EPS) from $254 million ($3.43 EPS) a year ago while sales increased 37 percent to $7 billion from $5.1 billion on the strength of the IS&GS deal, which added $2 billion to the top line. Free cash flow was $417 million.
Orders for the quarter were $1.8 billion and for the year $7 billion. Total backlog at the end of 2016 stood at $17.7 billion, with $6 billion funded, versus a total of $9.9 billion a year ago, $2.5 billion of which was funded.
Leidos raised its sales and earnings forecast for 2017 based on how 2016 ended for the company. Sales are now forecast to be between $10 billion and $10.4 billion, a $200 million increase from earlier expectations. Adjusted earnings are now expected to be between $3.05 and $3.35 EPS, up 15 cents from the prior outlook. Orders are expected to exceed sales this year.
While the Trump administration is keen on increasing defense spending, which Krone called a “positive,” he said it will take a while for these plans to play out and that the sales impacts to the defense industry are more likely to be felt beginning in 2018. He also said the federal budget outlook for the government’s current fiscal year 2017 remains uncertain ahead of the expiration of a continuing budget resolution in late April.
“We are taking a cautious approach with regards to the macro environment until these uncertainties resolve,” Krone said. He said the company is focused on what it can “control,” which is improving cost structure and cost synergies with the IS&GS deal.