Leidos [LDOS] on Tuesday reported higher sales but lower earnings with the top line gains driven by higher volume, new program wins and recent acquisitions and the bottom line impacted by a tough comparison from a year ago when the company benefited from the sale of its commercial cyber security business, a charge on an international program, and negative impacts from the COVID-19 pandemic.
The company also lowered its guidance for sales and earnings this year to account for COVID impacts, which are partially offset by the acquisition on Monday of the security detection and automation businesses of L3Harris Technologies [LHX].
Net income in the quarter dove 39 percent to $115 million, 80 cents earnings per share (EPS), from $189 million ($1.29 EPS) a year ago, 17 cents per share below consensus estimates. Operating income at the company’s segments was flat and operating margin fell 90 basis points to 6.6 percent.
Adjusted earnings of $1.19 EPS were up slightly from $1.13 EPS a year ago but still missed consensus estimates by 4 cents EPS. Adjusted earnings exclude non-operating expense, income tax expense, and other items such as acquisition and restructuring costs and gains on the sale of businesses.
Sales increased 12 percent to $2.9 billion from $2.6 billion a year ago, with 8 percent of the growth organic. The COVID pandemic chipped $50 million from sales and $9 million from operating income.
In January, Leidos closed its acquisition of Dynetics, which contributed $129 million in sales in the quarter, 30 percent better than it did a year ago, Roger Krone, chairman and CEO of Leidos, said on the company’s earnings call. He highlighted Dynetics’ growth in fast growing areas, specifically hypersonics, space exploration and unmanned systems, as key revenue drivers.
Bookings were exceptionally strong at $5.5 billion—nearly two times sales—and helped drive backlog to a record $28.3 billion, up 17 percent since the start of the year. The favorable resolution of two protested awards to Leidos, on which the company was the incumbent, drove the backlog.
Given the impacts from the pandemic so far and expected hits ahead, primarily in the second quarter, and the contributions from security detection and automation acquisition, Leidos reduced its sales guidance by $100 million to between $12.5 billion to $12.9 billion, representing 13 to 16 percent growth over 2019. Krone said most of the sales lost this year from COVID will be recoverable in 2021.
James Reagan, Leidos’ chief financial officer, said on the call that the COVID and related impacts will chop about $370 million from sales this year with the L3Harris deal adding back about $290 million. Krone and Reagan said that the company has identified $270 million in related COVID impacts but is adding another $100 million to be conservative due to difficulty quantifying impacts such as travel restrictions, slower turnaround times, and other uncertainties.
Krone also said that he believes the U.S. government will begin its fiscal year 2021 under a continuing budget resolution, which is a change from his prediction in February that Congress would complete its budget obligations on time. Budget delays will also dent sales this year.
Guidance for adjusted earnings was clipped to between $5 and $5.30 EPS from the prior outlook of between $5.30 to $5.65 EPS due to COVID-19 impacts. Operating cash flow is still expected to be at least $1 billion.
Leidos didn’t provide detailed guidance for 2021 but Reagan said the company expects high single-digit organic growth next year with adjusted operating margins of at least 10 percent. The adjusted margin forecast for 2020 is between 9.8 and 10 percent.
Leidos agreed to acquire the L3Harris security detection and automation business in February, well before the COVID pandemic severely curtailed global travel. Krone told investors on Tuesday that the deal still makes sense and aligns well with expected changes at airport checkpoints as travelers go through security.
Following the deals for the security detection and automation business and Dynetics, Leidos’ priority for capital deployment is lowering its debt, Krone said. The company will continue its dividend payments and investing in research and development and capital needs to “drive growth,” he said.