Higher taxes led Leidos to report a slight dip in its fourth quarter earnings, but sales were strong and adjusted earnings easily topped analysts’ estimates.
Net income in the quarter fell nearly 4% to $181 million, $1.26 earnings per share (EPS), from $188 million ($1.25 EPS) a year ago. Per-share results rose a penny due to a reduced share count.
Excluding the tax adjustments and other non-operating costs, adjusted earnings of $1.51 EPS topped consensus estimates by $0.16. Income taxes were a $46 million expense in the fourth quarter versus a $38 million benefit a year ago.
Sales in the quarter rose nearly 12% to a record $3 billion from $2.7 billion a year ago. Organic growth increased a handsome 14%. The difference between reported sales and organic growth is the sale by the company of its former commercial cyber security business.
Roger Krone, chairman and CEO of Leidos, credited the company’s business development prowess and employee hiring initiatives for the strong organic growth.
Krone noted that a Leidos-led group landed one of the company’s “biggest re-competes” in December when it won a $4 billion, 10-year contract to provide site services, including security, records management, and road upkeep, at the Energy Department’s Hanford Site in Washington state. The award is being protested by a rival.
At the operating level, all three of the company’s business segments posted higher sales, led by double-digit gains at Civil and Defense Solutions. The higher sales were driven by new awards and more work on existing contracts. Operating income was also higher at each segment, driven by whopping double-digit gains at Defense Solutions followed by Civil, and a mid-single digit increase at Health.
Segment operating margin in the quarter increased 170 basis points to 8.8%.
Orders in the quarter were $3 billion and for the year $14.5 billion, driving total backlog at the end of 2019 to a record $24.1 billion, up 16% from $20.8 billion a year ago.
For the year, sales increased 9% to $11.1 billion from $10.2 billion, with organic growth up a stout 11%. Net income jumped 15% to $667 million ($4.60 EPS) from $581 million ($3.80 EPS) in 2018. Adjusted earnings were $5.17 EPS for 2019.
Free cash flow for 2019 was $871 million.
For 2020, Leidos is expecting sales between $12.6 billion and $13 billion, up about 7% on an organic basis.
Krone is optimistic about the prospects for the federal government’s fiscal 2021 budget to be approved before elections in November, saying “I just don’t see a lot of appetite for having the budget process roll through the election season.” He also doesn’t expect the Trump administration’s proposal for a 10% cut in the federal civilian budget to pass, saying Democrats in the House won’t accept a “significant decline.”
Krone expects congressional appropriators to conclude their work this summer.
