Leidos [LDOS] on Tuesday posted a hefty loss in its second quarter due mainly to two impairment charges associated with its commercial health and engineering businesses, while sales also fell on a decline in work in these businesses and for overseas contingencies.

Net income swung to a $438 million loss, $5.92 earnings per share (EPS), from profit of $42 million (50 cents EPS) a year ago. Leidos took charges of $510 million due to what new CEO Roger Krone described as a “deterioration in revenue and in our sales pipeline” in the commercial health and engineering businesses that forced a reappraisal of their long-term forecasts.

Leidos CEO Roger Krone. Photo: Leidos
Leidos CEO Roger Krone. Photo: Leidos

The company’s chief financial officer, Mark Sopp, said some large electronic health records opportunities that had been expected in the second quarter and now are uncertain. He also said that hospital information technology budgets are stressed.

Excluding the non-cash charges, per share earnings were 61 cents EPS, a penny below consensus estimates. Despite the charges, Krone told investors on an earnings call that the company is still enthusiastic about health and engineering sector.

“Longer term that is one that is seeing increased government involvement and is starting to require the big data and analytic capabilities that we currently provide to the intelligence and defense customers,” Krone said. “This is a market where Leidos has significant opportunities [and] we are committed to competing and growing in.”

Sales in the quarter fell 10 percent to $1.3 billion from nearly $1.5 billion a year ago. Revenues were off in both of the company’s segments, with Health and Engineering contracting 14 percent to $381 million and National Security Solutions 9 percent to $925 million.

Leidos said the Sales in National Security Solutions were down due mainly to the drawdown of United States forces in contingency operations, which accounted for 7 percent of the decline, and to a lesser extent reductions in defense and federal spending from sequestration and budget cuts.

In the Health and Engineering sector, business was lower mainly due to the completion of two energy design-build projects, the falloff in work for commercial health and engineering, and lower sales from the security products business because of the timing of shipments.

The largest charges in the Health and Engineering sector, $393 million, had to do with the commercial health business, while the engineering business tallied $117 million of goodwill impairment. The sector also suffered from an operating loss at a power plant.

Krone, who has been on the job for about seven weeks, said he has begun an in-depth review of the company’s operations with the aim of fine tuning the business and improving returns. He also said the “right cost structure” needs to be put in place to enable the company to better compete on price.

As for capital deployment, Krone said the strategy is unchanged with maintaining the dividend a priority, investing organically, and keeping an “appropriate level of financial leverage.”

Mergers and acquisitions remain on the table as does portfolio reshaping, Krone said. The company divested wasted management and disaster preparedness businesses that generated $20 million in proceeds during the quarter, he said. There aren’t any specific acquisition targets at the moment and Krone said that he isn’t comfortable for the time being on deals in the engineering space.

Orders totaled $889 million in the quarter for a book-to-bill ratio that was 70 percent of sales while backlog stood at $8.4 billion, down 6 percent from a year ago. The company said funded backlog was basically flat at $2.9 billion. Leidos said it has $12.1 billion in bids outstanding.

For the rest of the year Leidos left its sales guidance intact at between $4.9 billion and $5.1 billion, although it cut its earnings guidance by 25 cents EPS to between $2.10 and $2.30. The earnings guidance is down due to higher than expected losses at the power plant and the weaker outlook for the commercial health and engineering businesses. Krone and Sopp said the federal business is doing better than planned, which is why the sales guidance was unchanged.