Amid continued headwinds in government spending and losses from discontinued operations, Leidos [LDOS] on Wednesday reported drops in first quarter net income and sales, although earnings results beat analysts’ expectations after stripping out losses from businesses the company is preparing to divest.
Net income tumbled nearly 50 percent to $31 million, 47 cents earnings per share (EPS), from $81 million (92 cents EPS) a year ago. Excluding discontinued operations, operating income was $46 million (59 cents EPS), a 15 percent increase versus a year ago while per share earnings beat consensus estimates by a nickel.
The decline in net income was due in part to higher than anticipated losses at an alternative energy facility the company operates and has struggled with and which it plans to sell. Earnings were also hindered by timing of severance and regulatory charges in the corporate sector, Mark Sopp, Leidos’ chief financial officer, said on the earnings call.
Sales fell 17 percent to $1.3 billion from $1.6 billion a year ago, due to the drawdown of United States military forces from war theaters, lower defense and government spending stemming from sequestration and budget cuts, less work on two energy plant projects, continued delays in shipments of non-intrusive inspection systems, and declines in federal and commercial health business.
Free cash in the quarter was an $18 million outflow.
At the segment level, both the National Security Solutions, and Health and Engineering sectors had lower sales, although NSS managed a solid 8 percent gain in operating earnings to $77 million on program execution and the lack of an impairment charge that dampened results a year ago. The Health and Engineering sector didn’t fare as well on the earnings front as operating income slid 29 percent to $25 million due to lower sales and the loss at the power plant. Sector results a year ago also included a gain due to the favorable resolution of a legal matter.
The company expects headwinds in government spending to continue, at least deep into 2015.
John Jumper, chairman and CEO of Leidos, said on the earnings call that his company expects government “outlays to continue to decrease” the federal fiscal year 2015, which ends in September of that year, and so “I think we are in for continued pressure and declines at least” through then. He added that “we are probably less optimistic than others about the situation.”
Lou Von Thaer, head of the NSS segment, said that the Defense Department’s procurement and research, development, testing and evaluation budgets are under even more stress because less controllable costs such as personnel and facilities are increasing.
“While we look forward to being more optimistic, we see more pressure on these budgets for at least a couple more years,” Von Thaer said.
Jumper also warned that given political differences between Democrats and Republicans in Congress, the potential for a Continuing Resolution to fund the federal government at the start of FY ’14 is a possibility.
The company is beginning to work to expand its international business, both in commercial and government areas, Jumper said.
“Steps are being taken in a small number of countries where we have an existing footprint, relationships, and past performance credentials,” Jumper said.
Bookings in the quarter were light, $857 million for a book-to-bill ratio of 0.6, while total backlog stood at $8.8 billion, down 6 percent from a year ago. Funded backlog stood at $3.1 billion, up 5 percent in the past year.
As part of portfolio reshaping efforts, Jumper said Leidos in May sold the Counter Bomber family of products used to detect person-borne improvised explosive devices. The product line was part of Science and Engineering Technology Corp., which was acquired in 2010. The buyer and sale price for Counter Bomber wasn’t disclosed.
Leidos maintained its sales, earnings and cash flow guidance for its FY ’15.