Several months into the job as the new chief of Leidos [LDOS], Roger Krone on Wednesday outlined three key priorities to win business: a stronger focus on business development, streamlining the organization and reducing its cost structure.
Early in November Leidos took a major step toward fulfilling one of Krone’s priorities with the “strategic hire” of Michael Leiter, the former director of the National Counterterrorism Center under Presidents George Bush and Barack Obama, as executive vice president for Business Development and Strategy, Krone said.
Leidos recorded $1.2 billion in bookings in its third quarter for a book-to-bill ratio of 90 percent versus sales in the quarter of $1.3 billion and Krone said he expected the company to be “more competitive” in turning bids into wins.
The company’s $13.9 billion in outstanding bids at the end of the quarter is “strong” but bookings are not “as strong” as they could be, Krone said, adding that given Leiter’s “strong track record of leadership and operational excellence in the markets we serve” he “will be a powerful catalyst that we will use to propel our business development efforts.”
Krone, who became CEO of Leidos in July, said that improving business development was his top priority but said the company is still “a quarter or two away from really being where we need to be externally focused on the customer and back winning our fair share.” Improving bookings will take time given the fiscal and political environment but the goal is to meet or beat sales, he said.
With Leiter in charge of business development, Krone is now turning to organizational alignment and reducing the company’s cost profile.
“We are on track with the cost reduction commitments we discussed previously and are extending the scale and scope of those reductions into the next fiscal year,” Krone told investors on the company’s third quarter earnings call. “These additional cost cutting initiatives are centered on extracting process efficiencies and reducing indirect costs. While we won’t share with you the specific dollar targets for this additional scope, we are confident these actions will help us win more business more profitably over time.”
In the quarter Leidos swung to net income of $34 million, 46 cents earnings per share (EPS), versus a $3 million (4 cents EPS) loss a year ago. Earnings in the quarter were dented by a $17 million pre-tax impairment charge in the company’s Health and Engineering business, with $14 million of the write off related to the company’s Reveal Imaging acquisition three years ago and the Transportation Security Administration’s announcement last month that it plans to buy fewer X-ray screening systems for aviation checkpoint security over the next few years.
A year ago Leidos’ earnings suffered from $87 million of bad debt expense, separation costs related to the split with Science Applications International Corp. [SAIC], and impairment charges. Earnings from continuing operations were $72 million (65 cents EPS), topping consensus estimates by 12 cents.
Sales were down 10 percent to $1.3 billion in the quarter from $1.4 billion a year ago, driven lower mainly by a decline at the National Security Solutions segment, which is still experiencing lower revenue related to the drawdown of United States military forces overseas, and from reduction in defense and government spending due to the sequestration a year ago, budget cuts, and increased competition that has meant fewer contract awards.
Sales were also off in the Health and Engineering segment on lower revenues in commercial health consulting and security products. In addition to weakness at the Reveal unit, the security business was hit by “logistics and administrative delays” related to a large contract in the Middle East, Mark Sopp, Leidos’ chief financial officer, said on the earnings call.
Krone said that the company’s security business, which also includes products for scanning cargo at ports, and a variety of radiation detection systems, is sill about the same size as in its “recent history.” He said Leidos is still “very optimistic” about the security business, which is the company’s “most profitable business.”
Both the National Security and Health and Engineering segments posted higher operating profits and total operating margins were 5.6 percent versus negative territory a year ago.
Krone said that company’s use of cash remains focused on dividends followed by investments in growth, maintaining investment grade credit ratings, and returning value to shareholders. The company lowered its share count in the quarter by 12 percent.
Mergers and acquisitions also remain a low priority, Krone said. He mentioned two divestitures of small business units during the quarter, which were first disclosed on the company’s second quarter call in September, and said he is still “tweaking” the portfolio, with some adjustments expected in the near-term and others that “require strategic review of all options” before acting.
Total backlog at the end of the quarter stood at $8.3 billion, down 16 percent from a year ago, while funded backlog was $2.7 million, off 10 percent from a year ago. Free cash flow was a robust $175 million.
Leidos left its financial guidance for the fiscal year unchanged, although Sopp said sales are expected to be in the upper half of the current $4.9 billion to $5.1 billion range and the same with earnings from continuing operations, which are forecast to be between $2.10 to $2.30 EPS.