WASHINGTON (Reuters) - Lockheed Martin Corp LMT.N on Tuesday announced a $5 billion tax-free deal to combine its information systems and government services business with Leidos Holdings Inc LDOS.N, and forecast a lower-than-expected profit in 2016.

Marillyn Hewson, Chairman, President and CEO of Lockheed Martin, participates in a panel discussion at the 2015 Fortune Global Forum in San Francisco, California November 3, 2015. REUTERS/Elijah Nouvelage

Lockheed’s shares fell as much as 5 percent amid confusion over future prospects for the Pentagon’s No. 1 supplier, although the stock recovered after Lockheed officials reassured analysts they still expected rising sales and earnings in coming years.

Leidos shares dropped as much as 9 percent and were off 7.6 percent at $49.56 in mid afternoon. Lockheed was down 0.8 percent to $209.25.

Leidos, which was split off from Science Applications International Corp SAIC.N in 2013, said the combined company would have annual revenues of $10 billion, making it the largest U.S. government services provider.

It forecast improved margins and a slight boost in earnings if the deal goes through, and promised shareholders a $1 billion special dividend, or about $13.50 a share.

Lockheed would receive a one-time payment of $1.8 billion, and use the money to pay down debt, raise its dividend and possibly buy back shares. It also projected a $1.5 billion gain when the deal is finalized in the third or fourth quarter.

Separately, Lockheed reported higher profit and revenues for the fourth quarter and the full year. But the company forecast 2016 earnings of $11.45 to $11.75 per share, below expectations.

Despite initial concerns, Rob Stallard, an analyst with RBC Capital Markets, said the Leidos deal appeared to be neutral at worst for Lockheed’s earnings per share. He added that the company was “still on the earnings and cash growth trajectory that we had previously anticipated.”

Lockheed said the Leidos deal would lower its share count by 15 million shares through a split-off transaction, offsetting the effect of about $360 million in lost profit that would go to the combined company.

Lockheed also said it had a record backlog of $99.6 billion, including $15.6 billion contributed by Sikorsky Aircraft, the helicopter maker acquired from United Technologies Corp UTX.N last year and bode well for future sales growth.

Lockheed Chief Executive Officer Marillyn Hewson told analysts the company was not seeing a big pullback in orders from the Middle East or elsewhere due to the sharp drop in oil prices.

She said about 21 percent of 2015 revenues came from international sales, and demand remained strong for missile defense equipment, F-35 fighter jets and munitions.

But officials said lower oil prices had cut sharply into Sikorsky’s projected commercial helicopter sales.