Leidos Holdings, Inc. Reports Second Quarter Fiscal Year 2015 Results

RESTON, Va., Sept. 9, 2014 /PRNewswire/ -- Leidos Holdings, Inc. (NYSE: LDOS), a national security, health and engineering solutions company, today reported financial results for the second quarter of fiscal year 2015, which ended August 1, 2014.

Roger Krone, Leidos Chief Executive Officer commented: "In the second quarter, we experienced deterioration in the sales pipeline for our commercial health and engineering businesses, which caused us to reappraise our long-term forecasts, resulting in goodwill and intangible impairment charges. Despite these accounting charges, Leidos revenue declines moderated, our non-GAAP EPS from continuing operations increased double-digits and cash flow from operations was solid.  As we confront the realities of the government budget and the competitive commercial landscape, our near future entails some difficult challenges and lots of hard work. It is my mission to make our people and our capabilities succeed and drive substantial value for our employees, our customers and our shareholders."

Second Quarter Fiscal Year 2015 Summary Results

Revenues for the second quarter of fiscal year 2015 were $1.31 billion, reflecting a revenue contraction of 10 percent, as compared to $1.46 billion in the prior year.

Operating loss from continuing operations for the second quarter was $410 million, as compared to operating income from continuing operations of $10 million in the prior year. Operating loss from continuing operations includes non-cash goodwill and intangible impairment charges of $510 million.

Diluted loss per share from continuing operations for the second quarter was $5.93 compared to diluted earnings per share from continuing operations of $0.05 in the prior year. The diluted share count for the quarter was 74 million, down 12 percent from 84 million in the prior year. Non-GAAP diluted earnings per share from continuing operations, which excludes the non-cash impairment charges, for the second quarter was $0.61 compared to $0.53 in the prior year.

Second Quarter Fiscal Year 2015 Segment Operating Results

National Security Solutions

National Security Solutions revenues for the second quarter of fiscal year 2015 decreased $94 million, or 9 percent, compared to the prior year. The revenue contraction was primarily attributable to contract activities tied to the drawdown of overseas U.S. military forces and reductions in defense and U.S. Government spending resulting from sequestration and budget cuts.

National Security Solutions operating income margin for the second quarter was 8.4 percent, up from 7.1 percent in the prior year. The increase in operating income margin was primarily due to net favorable changes in contract estimates in the second quarter of fiscal year 2015, as compared to net unfavorable changes in contract estimates in the prior year which was negatively impacted by two international fixed price development programs.

Health and Engineering

Health and Engineering revenues for the second quarter of fiscal year 2015 decreased $64 million, or 14 percent, compared to the prior year. The revenue contraction reflects a decline in engineering services primarily due to the completion of two energy design-build construction projects, lower sales in our commercial health consulting business, and lower sales volume in the security products business due to the timing of shipments.

Health and Engineering operating loss for the second quarter was $482 million compared to $3 million in the prior year. The second quarter of fiscal year 2015 was negatively impacted by non-cash impairment charges for health goodwill of $369 million, engineering goodwill of $117 million, and health customer related intangibles of $24 million. In addition, the second quarter of fiscal year 2015 was impacted by operating losses due to production shortfalls and outage at the Plainfield biomass power plant and lower sales volume from higher margin security products. The prior year quarter included an impairment charge of intangible assets of $30 million and an unfavorable change in contract estimates on the Plainfield construction project.

Corporate and Other

Corporate and Other segment operating loss was $6 million for the second quarter of fiscal year 2015 compared to $59 million in the prior year. In the prior year, there were separation transaction and restructuring expenses associated with the September 2013 spin-off of $19 million and costs to establish infrastructures for the two companies of $14 million.

Six Months Ended Fiscal Year 2015 Summary Results

Revenues for the first half of fiscal year 2015 were $2.62 billion, reflecting a revenue contraction of 14 percent, as compared to $3.05 billion in the prior year.

Operating loss from continuing operations for the first half of fiscal year 2015 was $323 million, as compared to operating income from continuing operations of $87 million in the prior year. Operating loss from continuing operations includes non-cash goodwill and intangible impairment charges of $510 million.

Diluted loss per share from continuing operations for the first half of fiscal year 2015 was $5.25 compared to diluted earnings per share from continuing operations of $0.50 in the prior year. The diluted share count for the first half of fiscal year 2015 was 75 million, down 11 percent from 84 million in the prior year. Non-GAAP diluted earnings per share from continuing operations, which excludes the impairment charges, for the first half of fiscal year 2015 was $1.21 compared to $1.13 in the prior year.

Cash Generation and Capital Deployment

Cash flow provided by operating activities of continuing operations for the second quarter of fiscal year 2015 was $124 million. Cash flow provided by investing activities of continuing operations for the second quarter fiscal 2015 was $68 million which was attributed to proceeds received related to the U.S. Treasury cash grant for the Plainfield plant of $80 million less expenditures for property plant and equipment of $12 million.

During the second quarter of fiscal year 2015, the Company paid a cash dividend of $0.32 per share. On September 6, 2014, the Company's Board of Directors declared a quarterly cash dividend of $0.32 per share payable on October 30, 2014 to stockholders of record as of the close of business on October 15, 2014. The Company intends to continue paying dividends on a quarterly basis, although the declaration of any future dividends will be determined by the Company's Board of Directors each quarter and will depend on earnings, financial condition, capital requirements and other factors.

As of August 1, 2014, the Company had $358 million in cash and cash equivalents and $1.3 billion in long-term debt.

New Business Awards

New business bookings totaled $889 million in the second quarter of fiscal 2015, representing a book-to-bill ratio of 0.7.

Notable recent awards received include:

• Intelligence Community. The Company was awarded contracts valued at $445 million, if all options are exercised, by U.S. national security and intelligence clients. Though the specific nature of these contracts is classified, they all encompass mission-critical services that help to counter global threats and strengthen national security.

• U.S. Army Armament, Research, Development and Engineering Center. The Company was awarded a prime contract by the U.S. Army's Armament, Research, Development and Engineering Center. The multiple-award cost-plus-fixed-fee/firm fixed-price, indefinite delivery/indefinite quantity contract has a five-year period of performance and a contract ceiling of $300 million for all awardees.

• Nation Oceanic and Atmospheric Administration. The Company was awarded a prime contract by the National Oceanic and Atmospheric Administration Office of Coast Survey to provide hydrographic surveying services. The multiple-award, indefinite delivery/indefinite quantity contract has a five-year period of performance and a total contract value of $250 million for all awardees.

• Ameren Illinois. The Company was awarded a prime contract by Ameren Illinois to implement business and residential energy efficiency programs for customers of the state's second largest utility. The single-award time and material contract has a three-year period of performance and a total contract value of $55 million. The agreement covers work Leidos will perform to help business and residential customers save energy through Ameren Illinois's ActOnEnergy^® portfolio of energy efficiency solutions.

• Centers for Disease Control and Prevention. The Company was awarded a task order by the Centers for Disease Control and Prevention to provide development, support and maintenance of the National Healthcare Safety Network. The single-award time and materials task order has a one-year base period of performance, four one-year options and a total contract value of approximately $44 million, if all options are exercised.

• U.S. Navy Space and Naval Warfare Systems Center Atlantic. The Company was awarded a prime contract by the U.S. Navy Space and Naval Warfare Systems Center Atlantic to provide systems engineering, technical and management support services. The single-award, indefinite delivery/indefinite quantity contract has a one-year base period of performance, four one-year options and a total contract value of $25 million, if all options exercised.

• General Services Administration. The Company was awarded the One Acquisition Solution for Integrated Services prime contract by the General Services Administration to provide a full range of professional services. The multiple award, indefinite delivery/indefinite quantity contract has a five-year base period of performance, and one five-year option. There is no ceiling limit on this flexible contract vehicle.

The Company's backlog of signed business orders at the end of the second quarter of fiscal year 2015 was $8.41 billion, of which $2.89 billion was funded.  As compared to the end of the second quarter of fiscal year 2014, total backlog decreased 6 percent and funded backlog was relatively flat. Backlog does not include any estimate of future task orders expected to be awarded under IDIQ, GSA Schedule or other master agreement contract vehicles.

Forward Guidance

As a result of the Company's second quarter financial performance and reduced expected performance in our Health and Engineering segment, the Company is lowering guidance for non-GAAP diluted earnings per share from continuing operations and cash flows provided by operating activities from continuing operations for fiscal year 2015. The Company expects its fiscal year 2015 revenues to be consistent with the forward guidance affirmed on June 4, 2014. The revised fiscal year 2015 guidance is:

• Revenues of $4.9 billion to $5.1 billion;

• Non-GAAP diluted earnings per share from continuing operations of $2.10 to $2.30, down from the previous range of $2.35 to $2.55; and

• Cash flows provided by operating activities from continuing operations of at or above $300 million, down from previous guidance of at or above $350 million.

Fiscal year 2015 guidance excludes the impact of potential future acquisitions and other non-ordinary course items.

About Leidos

Leidos management will discuss operations and financial results in an earnings conference call beginning at 8 a.m. eastern on September 9, 2014.  A live audio broadcast of the conference call along with a supplemental presentation will be available to the public through links on the Investor Relations section of the Leidos web site (http://investors.leidos.com).

Leidos is a science and technology solutions leader working to address some of the world's toughest challenges in national security, health and engineering. The Company's approximately 21,000 employees support vital missions for our government and the commercial sector, develop innovative solutions to drive better outcomes and defend our Nation's digital and physical infrastructure from 'new world' threats. Leidos is headquartered in Reston, Virginia with employees located worldwide. For more information, visit www.Leidos.com.

Forward-Looking Statements

Certain statements in this release contain or are based on "forward-looking" information within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by words such as "expects," "intends," "plans," "anticipates," "believes," "estimates," "guidance" and similar words or phrases. Forward-looking statements in this release include, among others, estimates of future revenues, operating income, earnings, earnings per share, charges, backlog, outstanding shares and cash flows, as well as statements about future dividends, share repurchases and acquisitions. These statements reflect our belief and assumptions as to future events that may not prove to be accurate. Actual performance and results may differ materially from the guidance and other forward-looking statements made in this release depending on a variety of factors, including: changes to our reputation and relationships with government agencies, developments in the U.S. Government defense budget, including budget reductions, implementation of spending cuts (sequestration) or changes in budgetary priorities; delays in the U.S. Government budget process; delays in the U.S. Government contract procurement process or the award of contracts; delays or loss of contracts as result of competitor protests; changes in U.S. Government procurement rules, regulations and practices; our compliance with various U.S. Government and other government procurement rules and regulations; governmental reviews, audits and investigations of our company; our ability to effectively compete and win contracts with the U.S. Government and other customers; our ability to attract, train and retain skilled employees, including our management team, and to obtain security clearances for our employees;  the mix of our contracts and our ability to accurately estimate costs associated with our firm-fixed-price and other contracts; our ability to realize as revenues the full amount of our backlog; our ability to comply with certain agreements entered into in connection with the CityTime matter; cybersecurity, data security or other security threats, systems failures or other disruptions of our business; resolution of legal and other disputes with our customers and others or legal or regulatory compliance issues; our ability to effectively acquire businesses and make investments; our ability to maintain relationships with prime contractors, subcontractors and joint venture partners; our ability to manage performance and other risks related to customer contracts, including complex engineering or design build projects; our ability to profitably operate and recover our investment in the Plainfield Renewable Energy project; the failure of our inspection or detection systems to detect threats; the adequacy of our insurance programs designed to protect us from significant product or other liability claims; our ability to manage risks associated with our international business; our ability to declare future dividends based on our earnings, financial condition, capital requirements and other factors, including compliance with applicable laws and contractual agreements; risks associated with the September 2013 spin-off of our technical, engineering and enterprise information technology services business, such as disruption to business operations, or a failure to realize the expected benefits of the September 2013 spin-off; and our ability to execute our business plan and long-term management initiatives effectively and to overcome these and other known and unknown risks that we face. These are only some of the factors that may affect the forward-looking statements contained in this release. For further information concerning risks and uncertainties associated with our business, please refer to the filings we make from time to time with the U.S. Securities and Exchange Commission, including the "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Legal Proceedings" sections of our latest annual report on Form 10-K and quarterly reports on Form 10-Q, all of which may be viewed or obtained through the Investor Relations section of our web site at www.leidos.com.

All information in this release is as of September 9, 2014. The Company expressly disclaims any duty to update the guidance or any other forward-looking statement provided in this release to reflect subsequent events, actual results or changes in the Company's expectations. The Company also disclaims any duty to comment upon or correct information that may be contained in reports published by investment analysts or others.

CONTACTS:

Investor Relations:
John P. Sweeney, CFA
571.526.6402
John.P.Sweeney@leidos.com

Media Relations:
Melissa Koskovich
571.526.6851
Melissa.I.Koskovich@leidos.com

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