Lockheed, Leidos to Create $5 Billion IT Business

Lockheed's Profit Projection Puzzles Investors
  • Company to merge some units with Leidos, receive $1.8 billion
  • Lockheed's guidance for earnings per share misses estimates

Lockheed Martin Corp. fell sharply before ending little changed as a planned spinoff of its information technology business and recent takeover of Sikorsky Aircraft left investors confused regarding the company’s growth prospects.

The stock pared the drop as Lockheed executives assured analysts that earnings are poised to climb after the company absorbs integration costs for Sikorsky this year. The world’s largest defense contractor also announced it will combine its information systems division with Leidos Holdings Inc. in a tax-free, $5 billion transaction.

LMT US Equity GP
LMT US Equity GP

Analysts had puzzled over a company chart predicting “neutral or higher” earnings per share for 2017 in the wake of the deals. Executives explained during a conference call that the measure referred to the Leidos transaction, where Lockheed expects a lower share count to counteract the income lost from the divested business.

“Having now heard the explanation of what this slide really means, we think there will be some relief that Lockheed is still on the earnings and cash growth trajectory that we had previously anticipated,” Robert Stallard, an aerospace and defense analyst at RBC Capital Markets, said in a report to clients Tuesday.

Lockheed fell as much as 5 percent before the conference call. The shares then trimmed the decline, closing 0.5 percent lower at $209.93 in New York.

Cash Payment

Lockheed will receive a $1.8 billion special cash payment after regulators approve the combination of its IT unit with Leidos Holdings Inc. The maker of fighter jets and missile systems will use the proceeds to repay debt, pay dividends and potentially buy back stock, it said in a statement.

Leidos tumbled 9 percent, the biggest trading drop since March, on a day when major U.S. indexes advanced.

The deal helps Lockheed, long the largest U.S. government’s largest information technology provider, shed less profitable businesses amid growing competition from Silicon Valley companies. It also will help ease the debt load from Lockheed’s $9 billion purchase of Sikorsky in late 2015.

A record order backlog and rising Department of Defense budget “position the corporation for a bright future of top-line growth and increasing cash flows,” Marillyn Hewson, Lockheed’s chairman and chief executive officer, told analysts Tuesday.

Lockheed shareholders will receive about 50.5 percent of the combined IT services company, with Leidos shareholders owning the rest. The tax-free transaction, known as a Reverse Morris Trust, is expected to close in the second half.

Lockheed also said it shifted some government information technology and technical services units to other divisions ahead of the Leidos deal.

Sikorsky Impact

The manufacturer provided the first glimpse at how this year’s results will be reshaped by the addition of Sikorsky, the biggest U.S. military helicopter maker, which it bought from United Technologies Corp. Lockheed said it expected net sales of $49.5 billion to $51 billion in 2016, a consolidated operating profit of $5.6 billion to $5.75 billion and diluted earnings per share of $11.45 to $11.75.

Analysts had predicted $49.8 billion in sales, a $6.06 billion operating profit and $12.25 in per-share earnings, according to estimates compiled by Bloomberg before the company’s statement.

Lockheed reported a fourth-quarter profit of $3.01 a share on Tuesday, more than the $2.94 average of 19 analyst estimates compiled by Bloomberg. The earnings report by Lockheed kicks off a week in which Boeing Co., Raytheon Co. and Northrop Grumman Corp. will also disclose financial results.

Leidos, based in Reston, Virginia, has a market value of $3.59 billion and provides scientific, engineering and other technical services with a special emphasis on national security, engineering and health.

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