Leidos sees success with Lockheed integration

Leidos is seeing success as it continues its efforts to integrate heritage Leidos with the Lockheed Martin IT business it merged with last year.

The company has touted itself as relatively conservative regarding financial targets since the merger last year with the former Lockheed information systems and global solutions business but is now striking a more upbeat tone on its outlook.

In its second quarter earnings call Monday, Leidos Chief Financial Officer Jim Reagan told investors the contractor has already achieved its cost synergy goal for 2017 and has raised its annual savings forecast.

The company now expects $400 million in annual recurring cost synergies, up from the prior $350 million outlook, Reagan said. That raises Leidos’ total cost savings target to $1.3 billion by 2019 from the previous $1.2 billion forecast.

Half of the total integration process is done, while the integration of Leidos and the former Lockheed information systems and global solutions business is “on schedule” for 90-percent completion by the end of next year’s first quarter, Reagan told analysts on the call.

Leidos initially met investor skepticism upon the deal’s original January 2016 announcement over the company’s goals to realize strong profitability through consolidation of IT systems and other overhead when it doubled its scale from $5 billion to $10 billion.

The company’s stock fell by nearly a quarter in the two weeks after that announcement but recovered quickly and ended the year up almost 32 percent. In morning trade Thursday, shares in Leidos soared as high as 8 percent and hit a new 52-week high of $57.08.

That also came in response to Leidos’ profit guidance lift that now sees adjusted earnings before interest, taxes, depreciation, and amortization of 9.8 percent-10.2 percent versus the previous 9.5 percent-10 percent range. Investors closely watch adjusted EBITDA margins as a measure of a company’s bottom-line performance.

Reagan added Leidos has “significantly reduced its dependencies on Lockheed Martin transition support” and expects to exit its transition agreement with Lockheed in the third quarter. Ending that agreement will “realize additional cost savings,” Reagan said.

On July 1, Leidos transitioned IS&GS employees into a consolidated human resource and payroll management system and moved all purchasing activity into a single procurement system, Reagan said. The process of migrating to one financial system, which Reagan called the “single most important integration activity,” is targeted for next year’s first quarter.

To realize the added savings, Leidos now expects to pay $275 million in total integration costs versus its previous $235 million outlook. The higher expense, Reagan said, seeks to “generate a high return on investment” and “drive additional savings just as we have delivered on the target thus far.”