Moody's Places Ratings on Leidos (LDOS) Under Review for Downgrade
Moody's Investors Service has placed the Baa2 senior unsecured ratings of Leidos Holdings, Inc. (NYSE: LDOS) under review for downgrade following revenue contraction, executive turnover and weaker than expected credit metrics.
Ratings:
Senior unsecured, Baa2 placed under review for downgrade
RATINGS RATIONALE
Since the company's spin-off transaction of September 2013, revenues, earnings and cash flows have declined significantly with weakness in both the health/engineering and national security business lines. The company has guided to a further 11% - 13% revenue contraction in FY15. Softer credit metrics will accompany the unfavorable trend. Leidos' policy of deploying its free cash flow and excess cash balance toward dividends/stock repurchases lessens financial flexibility. This policy and the unfavorable performance trend may be incompatible with the current rating level. An unanticipated degree of executive management team turnover complicates the prospect for business stabilization.
The review will center around the extent to which revenue, earnings, and cash flow may weaken over the intermediate term, and the resulting impact on credit metrics. The willingness of Leidos to continue aggressively returning cash to shareholders will also be covered in relation to the weaker operating performance and the company's liquidity profile. We expect to conclude the review before mid-year.
The principal methodology used in this rating was the Global Aerospace and Defense published in June 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Ratings:
Senior unsecured, Baa2 placed under review for downgrade
RATINGS RATIONALE
Since the company's spin-off transaction of September 2013, revenues, earnings and cash flows have declined significantly with weakness in both the health/engineering and national security business lines. The company has guided to a further 11% - 13% revenue contraction in FY15. Softer credit metrics will accompany the unfavorable trend. Leidos' policy of deploying its free cash flow and excess cash balance toward dividends/stock repurchases lessens financial flexibility. This policy and the unfavorable performance trend may be incompatible with the current rating level. An unanticipated degree of executive management team turnover complicates the prospect for business stabilization.
The review will center around the extent to which revenue, earnings, and cash flow may weaken over the intermediate term, and the resulting impact on credit metrics. The willingness of Leidos to continue aggressively returning cash to shareholders will also be covered in relation to the weaker operating performance and the company's liquidity profile. We expect to conclude the review before mid-year.
The principal methodology used in this rating was the Global Aerospace and Defense published in June 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.