Lockheed Martin [LMT] on Tuesday reported higher fourth quarter sales and earnings, which beat consensus estimates, and announced it is separating its realigned information technology and services segment and combining it with Leidos [LDOS] in a transaction valued at $5 billion.

Sales increased 3 percent to $12.9 billion from $12.5 billion a year ago due to the $9 billion acquisition last November of Sikorsky Aircraft from United Technologies Corp. [UTX]. Net income also rose 3 percent to $933 million, $3.01 earnings per share (EPS), from $904 million ($2.82 EPS), topping analysts’ expectations by a nickel per share.

The earnings results included severance charge and non-recoverable acquisition costs related to Sikorsky that wiped $44 million and $28 million from the bottom line, which was offset by a $71 million gain related to reinstatement of the federal research and development tax credit for all of 2015.

The F-35 Joint Strike Fighter. Photo by Lockheed Martin.
The F-35 Joint Strike Fighter. Lockheed Martin delivered 45 of the aircraft to domestic and international customers in 2015, a 25 percent increase over 2014. Photo by Lockheed Martin.

The divestiture of Lockheed Martin’s Maryland-based Information Systems & Global Solutions (IS&GS) segment is structured as a Reverse Morris Trust for tax efficiencies. Lockheed Martin will receive a $1.8 billion cash payment and $3.2 billion in stock, which will give it a 50.5 percent ownership stake in Leidos.

The cash payment will be used to repay debt, pay dividends, and or repurchase stock, Lockheed Martin said.

Leidos will remain headquartered in Northern Virginia and will continue to be led by Roger Krone, the company’s chairman and CEO, and Jim Reagan, chief financial officer. Lockheed Martin will be entitled to designate three new directors to service on the Leidos board, which currently numbers 10 directors.

The divestiture of IS&GS is expected to be completed during the third or fourth quarter of 2016 and is subject to approval by Leidos shareholders and government regulators. Leidos said that IS&GS senior managers are expected to join the company’s leadership.

Lockheed Martin said that until the transaction closes, IS&GS will continue to operate as a business segment within continuing operations. As part of its strategic review of IS&GS, Lockheed Martin has realigned some programs into other business segments. Mission IT and services programs that support the company’s platforms are now in the Mission Systems and Training (MST) segment, energy solutions programs have been moved to the Missiles and Fire Control (MFC) segment, and space services program are now within Space Systems. Technical services program have been moved to IS&GS from MFC.

Excluding the Sikorsky deal, sales in the quarter were essentially flat, with increases at Aeronautics and MFC offset by declines at IS&GS and MST. Aeronautics benefited from higher production and sustainment on the F-35 Joint Strike Fighter and higher deliveries of C-5 transport planes.

The company delivered 45 F-35s in 2015, a 25 percent jump over 2014, and plans to deliver 53 in 2016, ramping up to 59 or 60 in 2017, and around 100 aircraft in 2018, Marillyn Hewson, Lockheed Martin’s chairman, president and CEO, said on Tuesday’s earnings call. She said the F-35 is “getting much more stable” as production ramps up.

Operating earnings at the segment level were essentially flat in the quarter versus a year ago at $1.4 billion as increases at MFC, IS&GS and Aeronautics were wiped out by a decline at MST. Profit at Space Systems was flat.

Orders in the quarter were $26 billion and backlog, with a big boost from Sikorsky, soared to a record $99.6 billion from $80.5 billion at the end of 2014. Excluding Sikorsky, backlog was still a robust $84 billion.

With the benefit of Sikorsky, Lockheed Martin increased its sales guidance for 2016 to between $49.5 billion and $51 billion versus a prior outlook that was flattish with 2015. That forecast includes around $5 billion from IS&GS, which eventually will become part of Leidos once the divestiture is complete. Sales in 2015 were $46.1 billion, up a percent from $45.6 billion in 2014.

International revenue accounted for 21 percent of the company’s total sales in 2015, up 6 percent from a year ago, Hewson said.

Bruce Tanner, Lockheed Martin’s chief financial officer, said that the outlook for Sikorsky has changed since the company announced last July its offer for the helicopter manufacturer. Sikorsky’s commercial helicopter sales peaked in 2014 at around $1.5 billion and Lockheed Martin expected 2016 sales to be about half of that, he said, but now the forecast is about one-quarter or around $375 million due to the continued collapse of global oil and gas markets.

Per share earnings are expected to range between $11.45 and $11.75 this year, an increase over the $11.21 posted in 2015. Net income in 2015 was $3.6 billion, in line with 2014.

Free cash flow in 2015 was $4.2 billion and the company returned $5 billion to shareholders, a record, with $1.9 billion spent on dividends and the rest through share repurchases. Operating cash flow is expected to increase in 2016.