Beset by continued drags on defense and government spending and lower volume in its health and engineering group, Leidos Holdings [LDOS] on Thursday posted declines in income and sales in its fourth quarter and expects sales to contract further in 2015.

The company also announced that Stu Shea, the company’s president and chief operating officer and the architect of the breakup of the old SAIC into Leidos and the new SAIC [SAIC], will resign effective April 6. The company said the decision for Shea to resign was mutual and that it continues to look for internal and external candidates to succeed John Jumper, chairman and CEO of Leidos, who announced his intention earlier this year to relinquish his CEO position once a new chief executive is hired.

Leidos Chairman and CEO John Jumper. Photo: Leidos
Leidos Chairman and CEO John Jumper. Photo: Leidos

Net income plummeted 76 percent to $44 million, 52 cents earnings per share (EPS), from $182 million ($2.17 EPS) a year ago. Results a year ago included a $96 million income tax benefit, which favorably skewed earnings. Excluding the impact of discontinued operations, earnings from continuing operations of $47 million (56 cents EPS) were 11 cents above consensus estimates.

Sales in the quarter tumbled 18 percent to $1.3 billion from $1.6 billion as both the National Security Solutions (NSS) and Health and Engineering segments suffered contractions.

There is continued spending pressure on the Defense Department, federal government, “and more recently the intelligence community,” Jumper said on the company’s earnings call. The impact of sequestration and the resulting lack of clarity in committing funds to programs, delayed decisions, and the high level of protest activity continue to weigh on our results.”

The immediate future isn’t looking any brighter.

Jumper said the company’s outlook for 2015 assumes the trends from 2014 carry-over “as budget outlays lag appropriations and uncertainty dominates significant decisions about the debt ceiling, complicated by the implementation of healthcare legislation.”

Sales in FY ‘14 were $5.8 billion, down 11 percent from $6.5 billion in FY ‘13. Leidos is forecasting revenue in its FY ’15 between $4.9 billion and $5.1 billion.

Net income in FY ’14 was $161 million ($1.94 EPS) versus $514 million ($6.19 EPS) in FY ’13, due to bad debt expense on two energy construction contracts, higher expenses on two international contracts, and the tax benefit that boosted results a year ago. Excluding some of these impacts, including continued separation expenses and adjustments to income tax provisions, non-Generally Accepted Accounting Practices EPS was $1.96 for FY ’14 and is expected to be between $2.35 and $2.55 EPS in FY ’15.

In the fourth quarter, sales at the Health and Engineering segment were down 27 percent to $355 million on lower volume in engineering services, health and non-intrusive inspection systems businesses. Operating income fell 42 percent to $19 million due to start-up costs at a biomass power plant, legal charges, and an unfavorable contract adjustment.

At NSS, sales fell 14 percent to $941 million on the drawdown of United States military forces from overseas operations and the completion of several intelligence programs. Leidos also cited sequestration and budget cuts as factors in the decline. Operating income ticked up more than a percent to $82 million due to improved fee performance on existing contracts.

Bookings in the quarter were $623 million and $5 billion for the year. Total backlog at the end of the fiscal year stood at $9.3 billion, down from $10.1 billion a year ago. Funded backlog was $3 billion, down $400 million from a year ago.

Leidos also announced that it plans to divest its cyber security hardware business unit Cloudshield Technologies as part of portfolio shaping initiatives. Jumper said the company’s cyber strategy is focusing on the “agility offered by software-based solutions as opposed to hardware.” He added that the company received an $80 million contract in the fourth quarter from the intelligence community.