Leidos [LDOS] on Tuesday reported lower operating profit and sales in its first quarter driven by a loss related to the pending sale of a biomass power plant, the drawdown of United States military forces from overseas contingencies, and lower government spending.
The company’s net income increased 11 percent to $41 million, 55 cents earnings per share (EPS), on the strength of an $18 million profit contribution from discontinued operations, which suffered an $8 million loss a year ago. Net income a year ago was $37 million (47 cents EPS).
Excluding results from the discontinued businesses, operating income tumbled 56 percent to $38 million versus $87 million a year ago. A previously disclosed $40 million impairment charge related to the pending sale of a biomass power plant for a price that was below the carrying value drove most of the earnings decline.
The power plant is part of the company’s Health and Engineering segment, which swung to a $7 million operating loss in the quarter due to the charge despite improved operating margins stemming from an increase in products sales.
Earnings were also hampered by a 19 percent drop in operating profit to $62 million at the National Security Solutions segment due to lower performance adjustments on contracts and previously reports costs to exit facilities.
Leidos’ sales fell 5 percent in the quarter to $1.2 billion from $1.3 billion a year ago.
The National Security Solutions segment drove the lower sales due to the troop drawdown, reductions in defense and government spending, and increased competition that led to fewer contract awards. Sales in the segment were down 9 percent to $862 million.
The Health and Engineering segment partially offset the lower top line in the national security business, with sales up 3 percent to $385 million on higher volume in the engineering and security products businesses.
Roger Krone, Leidos’ chairman and CEO, said on the earnings call that Leidos has received certification by the Transportation Security Administration (TSA) of the company’s for the new threat detection standard for medium-speed explosive detection systems (EDS), which are used to screen checked baggage at airports. The certification is the first for the company in the medium-speed category, which so far has been the domain of Safran Group’s Morpho Detection business and L-3 Communications [LLL], opening a new market for Leidos. The company is currently the only provider to TSA of reduced size EDS, which have a lower speed and smaller footprint than the medium-speed systems.
A large order from a customer in the Middle East is about to ship, although revenue from the contract will be recognized in the third quarter instead of the second quarter as had been expected, Mark Sopp, outgoing chief financial officer of Leidos, said on the call.
Krone said the quarter’s results were inline with Leidos’ expectations and the company left its guidance for the year intact. Sales are expected to be between $4.6 billion and $5 billion and earnings from continuing operations $2.20 to $2.45.
Orders in the quarter were $891 million and Krone said while the book-to-bill ratio was slightly better than a year ago, the company has more work to do in terms of winning business and “our business development improvements have yet to bear fruit in this metric.”
Total backlog at the end of the quarter stood at $7.5 billion, down 15 percent from a year ago, and funded backlog stood at $2.8 billion, down 11 percent from a year ago.
The order tally and backlog don’t yet include a big contract award the company won from the United Kingdom Ministry of Defense in April, worth more than $2 billion over 13 years, for the Logistics Commodities and Services Transformation. Sopp said the company expects the contract to generate about $225 million annually in sales.