Leidos [LDOS] on Tuesday posted solid second quarter financial results driven by strong revenue growth and orders although net income was down due to higher taxes.
Based on the results, Leidos increased its sales and earnings guidance for 2019 and believes the outlook remains bright into the coming years.
The outline of a two-year budget deal between Congress and the Trump administration that increases defense and non-defense spending the next two years and “allows for stable, predictable” budgets to create “a supportive foundation for the continued growth of our business,” Roger Krone, chairman and CEO of Leidos, said on the company’s earnings call.
Even though the budget deal proposes a relatively flat budget in fiscal year 2021 versus 2020 when factoring in for inflation, Krone said that overall the expected budgets are positive and given that appropriations can take 18 to 24 months before actually being spent, the funding flow looks good in the out years. He also said that within the expected defense and federal civilian accounts of various agencies “we’re seeing a lot of favorable movement for us; modernization, digital transformation, move to the cloud, back office efficiencies, consolidation across federal government writ large.”
Krone expects Congress to finish work on most of the government’s spending bills, with the possible exception of the Department of Homeland Security, before the start of the federal fiscal year in October.
Net income in the quarter dipped 6 percent to $136 million, 93 cents earnings per share (EPS), from $144 million (94 cents EPS) a year ago. Adjusted earnings, which exclude various non-operating costs such as integration and restructuring costs, gains and losses from business sales and other tax adjustments, were $1.16 EPS versus $1.12 a year ago and a nickel above consensus estimates.
Operating margin dipped 20 basis points to 7.7 percent.
Sales increased 8 percent to $2.7 billion from $2.5 billion, with growth across the company’s three business segments. Excluding revenue from a year ago from Leidos’ former commercial cyber security business, which was sold during the first quarter of 2019, organic growth was 9 percent.
Leidos said the growth was driven by new awards and increased volume on existing contracts. The company booked $3 billion in orders during the quarter, driving total backlog to a record $21.7 billion, up 4 percent from the end of last year. Funded backlog at the end of the quarter was $6.3 billion, down $111 million from the end of last year.
With a strong first half of the year combined with a rosy outlook ahead, Leidos lifted and narrowed its sales guidance to between $10.7 billion and nearly $11 billion versus prior expectations of between $10.5 billion and $10.9 billion. The company now expects adjusted earnings to be between $4.50 EPS and $4.75 EPS versus the prior outlook of between $4.30 EPS and $4.65 EPS.
On Monday, Leidos announced a two cent, or 6 percent increase, in its quarterly dividend to 34 cents per share, the first dividend hike in the company’s history. Krone said the added pay to shareholders demonstrates the company’s “confidence in our long-term performance.”
The company’s pipeline of potential opportunities is $30 billion based on bids awaiting decisions and Krone said Leidos is focusing its business capture efforts on bigger opportunities. The company is pursuing the architecture and network portion of the Navy’s Next Generation Enterprise Network with an award expected in 2020, which is later than the original plan for this fall, he said.
Krone also said the company expects awards in the next month or two on two contracts for which Leidos is the incumbent, one for the Department of Energy’s Hanford site and the other for the Defense Information Systems Agency’s Global Solutions Management Operations (GSM-O). Jefferies aerospace and defense analyst Sheila Kahyaoglu estimates the annual sales to Leidos from Hanford at $360 million and more than $550 million for GSM-O.