Leidos [LDOS] on Tuesday posted strong second quarter results driven primarily by gains in its federal health solutions and defense businesses but despite a strong first half to 2021 the company didn’t raise its financial outlook for the year given uncertainties due to concerns over a surge in a new variant of the COVID-19 virus.
Net income increased 10 percent to $169 million, $1.18 earnings per share (EPS) from $153 million ($1.06 EPS). Adjusted earnings, which exclude acquisition, integration and restructuring costs, were $1.52 EPS in the quarter, six cents shy of consensus estimates. Operating margin declined 70 basis points to 7.8 percent.
Sales increased 18 percent to a quarterly record of $3.4 billion from $2.9 billion a year ago with organic revenue up a whopping 16 percent and the remainder due to acquisitions. A good chunk of the organic growth, about 5 percent, was due to an easy comparison versus a year ago when COVID-19 impacts weighed on sales.
Leidos fully reopened its facilities around mid-July as COVID appeared to be waning but a recent surge in the Delta variant of the virus is worrying.
“A lot has changed in the past weeks,” Roger Krone, chairman and CEO of Leidos, said on the company’s earnings call Tuesday morning. “The highly contagious Delta variant and the infection trends are disturbing.”
Leidos doesn’t expect its customers to start shutting down their offices again but there is no guarantee, Krone said.
“In the face of that uncertainty, we have decided to keep our current forward guidance in place,” he said.
Sales are still forecast to range between $13.7 billion and $14.1 billion and adjusted earnings between $6.35 and $6.65 EPS.
In the quarter, the primary organic sales drivers included an increase in veteran’s disability examinations after pausing a year ago due to COVID, the startup of work under the Navy’s Next Generation information technology contract, and work under a Department of Energy contract in support of cleaning up a former plutonium manufacturing site.
Operating profit at the Defense Solutions and Health Solutions was higher, more than offsetting a decline in the Civil Solutions segment, which suffered from fewer deliveries of port, border and airport security screening systems.
Orders in the quarter were a robust $3.8 billion, helping to drive backlog to a record $33.5 billion, up 9 percent from $30.7 billion a year ago. Krone said business development at the company is “driving our industry leading organic growth,” adding later that at the end of the quarter the company had $49 billion in outstanding bids, $35 billion of which represents potential new business, all of which points to positive outlook.
Free cash flow in the quarter was a $4 million outflow. Leidos still expects to generate at least $875 million in operating cash flow this year. Last Friday, the company raised its quarterly dividend payment by 2 cents per share, or 6 percent, to 36 cents EPS, demonstrating confidence in quality earnings and cash generation, Krone said.
The dividend increase was the first in two years for Leidos.