Leidos [LDOS] on Thursday posted strong earnings in its third quarter driven by sales of higher margin security detection products and improved program performance in its national security business while overall sales edged up slightly.

Net income jumped 44 percent to $49 million, 67 cents earnings per share (EPS), from $34 million (46 cents EPS), driven by higher margins in both the National Security Solutions, and Health and Engineering segments and a lower share count. Earnings from continuing operations excluding non-cash asset impairment charges were $52 million (71 cents EPS), beating consensus estimates by a nickel.

Leidos Chairman and CEO Roger Krone. Photo: Leidos
Leidos Chairman and CEO Roger Krone. Photo: Leidos

Operating profit in the Health and Engineering segment more than tripled to $13 million on the higher sales of security detection products, which carry higher margins. Profit at the National Security Solutions segment was up on improved program performance coupled with lower indirect costs.

Overall profit margin increased 160 basis points to 7.2 percent in the quarter from a year ago.

Sales in the quarter were up 2 percent to $1.3 billion from just under $1.3 billion a year ago. The increase was due to higher volume in the engineering business and security products business within the Health and Engineering segment, which delivered 12 percent higher sales of $418 million.

Sales at the National Security Solutions segment were down 3 percent to $878 million on a decline in revenue from war-related contracts.

Roger Krone, Leidos chairman and CEO, said on an analyst call that the “overall market has improved,” adding that if a two-year bipartisan budget deal awaiting Senate approval is passed, the amount of spending for defense and domestic budgets in fiscal years 2016 and 2017 “would bring a real lift to the market both in terms of predictability as well as real growth to our industry in future years.”

Orders in the quarter were $1.5 billion and total backlog increased $2.7 billion to $10.5 billion since the end of January. Funded backlog was up $100 million to $2.8 billion over the same period. The company said it has bids outstanding on $11 billion in potential business.

Based on year to date results, Leidos raised its sales guidance to between $5 billion and $5.1 billion from a prior outlook of between $4.8 billion and $5 billion. Earnings from continuing operations excluding non-cash asset impairment charges are expected to be between $2.65 and $2.80 EPS versus prior guidance of between $2.40 to $2.60 EPS. The company also increased its operating cash flow expectations by $50 million to at least $300 million.

With Leidos in a strong cash position, Krone said preserving the dividend will remain the top priority but management plans to discuss with the company’s board later this year “more aggressive ways to use our cash to drive growth.” More aggressive cash uses include spending internally like higher research and development spending and investing special test equipment to support products and product development.

Krone said that while Leidos continues to look at potential acquisitions there aren’t any properties that meet its goals for growth. As such, the company so far has opted to favor paying down debt and accelerating dividends, he said.