Leidos [LDOS] on Tuesday said it has agreed to acquire the naval architecture and marine engineering firm Gibbs & Cox for $380 million in cash, a deal that will strengthen its capabilities in ship design and enhance its work on unmanned maritime systems.
The deal appears to be borne out, at least in part, of the company’s loss last summer to
L3Harris Technologies [LHX] to design and build a prototype Medium Unmanned Surface Vehicle (MUSV) for the Navy, part of the service’s push toward autonomous unmanned maritime vessels for surface and sub-surface operations. The award to L3Harris is worth up to $281 million for nine MUSVs and related support and equipment.
In a statement included with the release of its fourth quarter and 2020 financial results, Leidos said the acquisition positions it for “long-term growth in the maritime unmanned market,” which requires “tight integration of ship design and autonomy systems.”
The acquisition is expected to close during the second quarter, subject to regulatory approvals.
“We’ve learned a lot about autonomy and the Navy business, and in our MUSV program I think we had a very competitive bid but we didn’t win, and as good as we were about the mission equipment on the autonomy, I think there were things that we learned in naval architecture and ship design,” Roger Krone, chairman and CEO of Leidos,” said during the company’s fourth quarter earnings call. “And in the discussions with Gibbs & Cox we’re very excited about how Gibbs & Cox brings their capability around the design of the ship and the ship systems and we bring, if you will, the mission equipment and we’re really excited about how that will fuel growth for our maritime business going forward.”
Leidos’ core competencies in maritime unmanned systems stem from its work designing and developing the 132-foot trimaran Sea Hunter MUSV, first for the Defense Advanced Research Projects Agency and now the Navy. In 2019, Sea Hunter became the first ship to autonomously navigate from San Diego to Pearl Harbor and back without any crew aboard.
Gibbs & Cox, which is based in Arlington, Va., and has 525 employees, also has capabilities in 3-D modeling and design, and specialty engineering.
“In addition to being positioned on the front end of next generation vessels, the business combination provides significant tailwinds for participation in the maritime unmanned market and accelerates Gibbs & Cox’ expansion in the undersea domain,” Krone said.
Gibbs & Cox is participating in the Navy’s Ghost Fleet Overlord Large USV program and is the design agent for Fincantieri on the Navy’s FFG(X) frigate program, and is also the design agent for Lockheed Martin’s [LMT] Freedom-variant of the Navy’s Littoral Combat Ship. The company was founded in 1929.
The pending deal for Gibbs & Cox closely follows Leidos’ $215 million acquisition of 1901 Group, which provides managed information technology and cloud solutions to the public and private sectors. Krone said that acquisition “fits with our digital transformation business” and “accelerates our ability to offer services on an as-a-service basis, which we believe is a growing trend in the industry.”
Both acquisitions are considered strategic and add capabilities and deepen customer relationships, Krone said. Both deals will also be immediately accretive to adjusted per share earnings, he said.
1901 Group and Gibbs & Cox will report within Leidos’ Defense Solutions segment.
In the fourth quarter, Leidos’ net income increased 9 percent to $197 million, $1.37 earnings per share (EPS), from $181 million ($1.26 EPS) a year ago. Excluding acquisition integration and restructuring costs, and asset impairment charges, adjusted earnings were $1.63 EPS, two cents above consensus estimates, and 12 cents higher than a year ago. Adjusted operating margin of 10.7 percent was up 20 basis points from a year ago.
Sales in the quarter increased 10 percent to $3.3 billion from $3 billion a year ago due primarily to the acquisitions last year of Dynetics and the Security Detection and Automation (SD&A) businesses of L3Harris. Organic revenue was down nearly 2 percent.
For 2020, net income slid 6 percent to $629 million ($4.36 EPS) from $670 million ($4.60 EPS) in 2019. Adjusted per share earnings in 2020 were $5.83 versus $5.17 a year ago. Sales in 2020 increased 11 percent to $12.3 billion from $11.1 billion a year ago on the acquisitions of Dynetics and the SD&A businesses with organic growth approaching 2 percent.
Impacts from the ongoing COVID-19 pandemic dampened sales by about $12 million in the fourth quarter and $198 million for 2020. The pandemic negatively impacted operating income by about $8 million and $96 million for the same periods, respectively.
In 2021, Leidos is forecasting sales growth of 11 to 15 percent to between $13.7 billion and $14.1 billion, with most of the gains being organic. Adjusted earnings are expected to range between $6.15 and $6.45 EPS. The outlook excludes potential impacts from the Gibbs & Cox deal.
Orders in the quarter were $3.3 billion and for the year $17.8 billion and total backlog at the end of 2020 stood at a record $31.9 billion, up from $24.1 billion a year ago.
Krone doesn’t expect the Biden administration’s forthcoming defense budget request for fiscal year 2022 to impact outlays before 2023. No major cuts are expected but “rather flattish to slightly declining budget numbers with focus on modernization and reprioritization,” he said, adding that there will be an increased focus on healthcare and civil infrastructure, “particularly transportation.”