Leidos Hints At Layoffs, Business Divestitures As Federal Revenues Drop

Reston, Va.-based federal solution provider Leidos hinted at layoffs and business divestitures in its third quarter earnings report as the company continues to streamline its operations.

Earnings for the quarter overall, which ended Oct. 31, were mixed for Leidos, which has struggled in previous quarters. Sales for the quarter were $1.28 billion, down 10 percent year over year. Operating income for the quarter came in at $72 million, however, compared to a $5 million loss in the same quarter last year. The company's national security solutions division sales were down 10 percent year over year to $105 million, driven by reductions in government spending.

"We are disappointed by these results and we are making operational and organizational changes to improve the outcome," CFO Mark Sopp said on an earnings call, referring to the declining federal sales.

[Related: Leidos Lands U.S. Counterterrorism Director As New EVP Of Business Development, Strategy]

CEO Roger Krone stated in the company's third quarter earnings report Wednesday that his "next priority is to streamline our organization and reduce our cost profile." That includes extending the initiatives started last year as the solution provider announced plans to reduce overhead, shed corporate layers through layoffs and divest itself of less lucrative portions of the business.

"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 said on the earnings call.

The new cost cutting measures will be focused on process efficiencies and indirect costs, Krone said.

In addition, Krone said Leidos will look to divest "a subset of our portfolio that is not a natural fit for the business model we aspire to." He said Leidos has already sold off two such divisions this year. By doing that, Krone said Leidos will be able to better focus on the areas that have made it successful over the last 40 years.

While Krone declined to say how much cost savings could be expected, he did say they could be expected over the next 12 to 18 months.

"I will refrain from presenting a specific timeline on these initiatives as maximizing value for these assets is more important. However, know that this is a top priority for me and my team and it is my intention to focus the company around our core competencies sooner rather than later," Krone said.

While he declined to answer questions about what areas of the business might be divested or see cutbacks, Krone said he is "not looking at changing the complexion of the company."

"These are smaller moves like the ones we completed in the quarter. Especially if the management attention is disproportionally higher than the return that we get from the business, it doesn't make sense...We think of it more as it's a portfolio cleanup than it is a major repositioning of Leidos," Krone said on the earnings call.

Key appointments over the quarter have helped Leidos prepare for and execute on these changes, Krone said. He specifically mentioned the September hire of former NSA employee James Bahal as Vice President of Business Development and the November hire of former federal counterterrorism official Michael Leiter as Executive Vice President of Business Development and Strategy.

Leidos expects sales of $4.9 billion to $5.1 billion in its fiscal year 2015. The company expects cash flows from operating activities and continuing operations to come in at or above $300 million.