Exelis [XLS] on Friday said its first quarter earnings rose due to lower restructuring costs while sales were down due in large part to less work under United States government contracts in Afghanistan and the Middle East.
The company also said the planned spin off of its Mission Systems segment into a new publicly-traded company called Vectrus remains on track for this summer. Sales at Mission Systems, which is not part of Exelis’ continuing operations, are expected to be down in the high teens this year in percentage terms, David Melcher, Exelis president and CEO, said on an investor call.
Exelis had said previously that Vectrus would begin with about $1.5 billion in sales but now the company projects that that the military and government services business will start with revenue between $1.2 billion and $1.3 billion due to the declining U.S. military activity in Afghanistan and the Middle East, “which will obviously be a significant factor for Vectrus in the future,” a company spokesman told Defense Daily. Exelis will continue to provide more “clarity” around Vectrus as the spin-off process continues, he said.
Net income climbed 17 percent to $52 million, 27 cents earnings per share (EPS), from $44 million (23 cents EPS) a year ago. Excluding separation costs related to the pending spin off of Mission Systems, adjusted EPS was 29 cents, still four cents below consensus predictions, due in part to lower than expected sales.
The increase in profit was due to lower restructuring charges in the C4ISR Electronics and Systems segment, which posted a 147 gain in operating income from a year ago. The Information and Technical Services segment had an 11 percent decline in operating income after adjusting for separation expenses.
Sales were just over $1 billion, down 12 percent from just under $1.2 billion a year ago. In addition to less work on government contracts in Afghanistan and the Middle East, Exelis said there were volume declines in domestic night vision and counter-improvised explosive device jammer products. International business accounted for 10 percent of sales.
Orders in the quarter were a strong $1 billion and total and funded backlog stood at $9.4 billion and $3.4 billion, respectively, flat with the end of 2013. Funded backlog was up 21 percent from a year ago. The company said that 25 percent of the orders were related to international business.
Melcher said that the budget deal crafted by Congress earlier this year is providing more certainty around defense budgets and spending over the next two years.
Free cash flow in the quarter was a disappointing outflow of $165 million, but the company said its annual guidance here remains unchanged at around $250 million. Sales are still expected to be about $4.6 billion and adjusted EPS between $1.52 and $1.59.