Leidos Q3 2026 Earnings Results & Report

Leidos EPS Results

• Actual EPS: $3.62
• Consensus EPS: $3.04
• Beat/Miss: Beat by +$0.58
• One Year Ago EPS: $3.05
• EPS Beat Rate: 8 of last 8 quarters

Leidos Revenue Results

• Actual Revenue: $4.63 billion
• Expected Revenue: $4.71 billion
• Beat/Miss: Missed by -$84.33 million
• YoY Revenue Growth: +3.60%

Leidos (NYSE:LDOS) (NYSE: LDOS) is a technology, engineering and science company that provides services and solutions to government and commercial customers. Its work supports defense, intelligence, civil government, health and transportation missions, with offerings that include information technology modernization, systems integration, cybersecurity, data analytics, artificial intelligence, engineering and mission operations.

The company also provides health technology and scientific services, transportation management systems, aviation and security solutions, and support for complex government programs. Leidos serves customers primarily in the United States while supporting selected international programs and operations.

Leidos traces its origins to Science Applications International Corporation, which was founded in 1969. The current Leidos was established in 2013 through the separation of SAIC’s government solutions business, and it expanded its capabilities through the 2016 acquisition of Lockheed Martin’s Information Systems & Global Solutions business. The company is headquartered in Reston, Virginia, and is led by Chief Executive Officer Thomas A. Bell.

Leidos Q3 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Strong third-quarter execution: Revenue rose 4% to $4.63 billion, adjusted EBITDA margin improved to 13.9%, non-GAAP EPS increased 19% to $3.62, and free cash flow reached $476 million. Year-to-date free cash flow of $1.5 billion has already surpassed the company’s original full-year target.
• Positive Sentiment: Bookings and backlog strengthened: Net awards totaled $5.5 billion, producing a 1.2x book-to-bill ratio, while defense posted a 1.9x quarterly and 2.0x year-to-date book-to-bill. Total backlog reached $49.6 billion and funded backlog rose 22% year over year to $11.1 billion.
• Positive Sentiment: Defense technology and energy remain key growth engines. Leidos cited more than a dozen defense programs moving from development into production, including IFPC, munitions, hypersonics, and space sensing, while its energy pipeline expanded significantly and management maintained expectations for double-digit energy growth and mid-to-high-teens margins.
• Negative Sentiment: The VBA disability-exam recompete remains a major uncertainty. Although management believes the draft RFP favors Leidos’ incumbent position and expects current contracts to continue through the first half of 2027, executives said 2027 is unlikely to be a bottom-line growth year as the business adjusts to the new contract structure.
• Neutral Sentiment: Leidos raised or narrowed elements of its 2026 outlook after selling its Security Enterprise Solutions business, while maintaining adjusted EBITDA expectations in the mid-13% range. The company also warned that procurement delays, unfavorable decisions, cost-plus revenue pressure, and the VBA transition could temper growth momentum in the fourth quarter and into 2027.

Presentation

[Operator]

Greetings. Welcome to Leidos' third quarter 2026 earnings conference call. A brief question and answer session will follow the formal presentation. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Stuart Davis, from Investor Relations. Stuart, please go ahead.

[Stuart Davis, SVP of Investor Relations at Leidos]

Good morning, and welcome to our third quarter 2026 earnings conference call. The presentation slides we will be using are on our investor relations website. Turning to slide two, today's discussion contains forward-looking statements based on the environment as we currently see it, and thus includes risks and uncertainties. Today's press release contains more information on specific risk factors that could cause actual results to differ materially. Finally, on slide three, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is included in today's press release and presentation slides. With that, I will turn the call over to CEO Tom Bell, who will begin on slide four.

[Tom Bell, CEO at Leidos]

Thank you, Stuart, and good morning, everyone. I am glad you could join us on this U.S. election day to review another strong quarter at Leidos. Revenue grew 4%. Adjusted EBITDA improved to 13.9%. Non-GAAP diluted EPS increased 19% year-over-year, and free cash flow was $476 million in the quarter. I will note here that this quarter's cash performance already brings our year-to-date cash flow to $1.5 billion, surpassing our original full-year target. Net awards totaled $5.5 billion, a book-to-bill ratio of 1.2x, and in defense and homeland, two of our growth drivers, book-to-bill was significantly above that. This performance allows us to once again enhance our 2026 guidance for the year. Our sustained momentum in 2026 reflects the strength of our focused team, united behind our NorthStar 2030 strategy and committed to delivering on our customers' most critical missions.

[Tom Bell, CEO at Leidos]

Let me highlight a few examples of our NorthStar strategy in action this quarter. First, we are continuing to sharpen our portfolio. We closed our joint venture combining our Security Enterprise Solutions business with Analogic. The new JV is now a scaled market leader, well-positioned to grow in the $5 billion global security products market. Leidos maintains a significant equity share in this JV, so our shareholders will share in the venture's long-term upside. It also lets us focus our people and our investments where they create the most value under our NorthStar 2030 strategy. Second, we are continuing to move quickly in this market with outcome-based commercial offerings. This is a clear mandate from this administration, and I believe it is a lasting change in how our customers will buy. It is also a strong fit for what Leidos does best.

[Tom Bell, CEO at Leidos]

In health, where we appreciate the military and veteran healthcare mission end-to-end, we are applying our unparalleled customer knowledge to proactively build solutions for emerging customer needs, opening up new growth opportunities for Leidos. My Service Treatment Record, MySTR for short, is a great example. We launched MySTR well before the President's September 8th executive order on veterans' benefits and employment, because we saw the need coming. MySTR is now in beta test, and we are working toward contract award and full customer rollout. As MySTR will run in the customer's cloud, we also look forward to adding new capabilities and functionality over time. Military OneSource is another health example. Our earlier investments in case management technology and provider networks allowed us to stand up a global support operation for Military OneSource in just 75 days. Military OneSource now serves nearly 5 million service members and their families.

[Tom Bell, CEO at Leidos]

That is what it looks like to build once and reuse at scale. In intelligence, we are building a portfolio of commercial cyber and AI products. Parcata, unveiled in July, is the furthest along. It is an automated cybersecurity platform that finds software vulnerabilities across enterprise networks and fixes them without manual intervention. It completes the whole AI-powered patching process in minutes, far faster than existing options.

[Tom Bell, CEO at Leidos]

Today, Parcata is focused on our intelligence community's needs. We expect to make Parcata more widely and commercially available later this year. We are also investing in an exciting, robust new technology foundation for everything Leidos develops. Our CTO, Ted Tanner, is leading this effort that builds on the same core Leidos capabilities demonstrated in the real world at Operation Jailbreak and now also at Operation Reveille Forge. This new Leidos technology foundation will allow hardware, software, products, and services to be seamlessly woven together.

[Tom Bell, CEO at Leidos]

This will serve our customers and help Leidos win in ways we believe few customers and competitors can match. Third, our defense tech business is now consistently winning. This business of ours is truly in a unique space where we are increasingly seen as a mature disruptor, pairing our differentiated technology with Leidos' scale, mission expertise, software strength, and delivery track record. This is translating into winning now because our customers simply want it all, fast innovation in a partner they know can integrate, produce, and deliver at scale.

[Tom Bell, CEO at Leidos]

This quarter alone in defense, we won another major contract on the Space Development Agency's AMDT3 program for advanced infrared space sensing payloads, several OTAs for munitions, including a new Air Force Special Operations Command production award for Havoc Spear, and follow-on contracts for the Navy's nuclear-armed SLCM-N program, and a large contract to begin production of a new Army program that builds on our already unrivaled suite of passive sensing solutions. This translated into a defense book-to-bill ratio of 1.9x this quarter and 2.0x year-to-date. This gives us the foundation for revenue growth and margin expansion for years to come. Fourth, energy is rapidly integrating and scaling into a market leader. SkyWire, which we launched earlier, makes electric power distribution engineering more efficient, and it is foundational to our opportunity here, and another example of commercial offerings.

[Tom Bell, CEO at Leidos]

We've now created sister AI-powered tools for gas and power generation projects. As a result, we're actively pursuing a large number of new projects in a larger addressable market, including opportunities in data centers around the nation. We're also actively positioning to meet the growing need for stronger grid cybersecurity. Our path to double-digit revenue growth and mid-to-high teens margin in energy gets clearer every day. In summary, these four examples show the deliberate portfolio choices we're making as a part of NorthStar 2030. We're investing where our capabilities truly stand out and building repeatable commercial offerings. That's NorthStar 2030 in action, and it's how we're positioning Leidos to perform through the rest of this decade. Now, before I turn the call over to Chris, I'd like to share a few words on the VBA MDE recompete.

[Tom Bell, CEO at Leidos]

As this competition is now active and the RFP is still in draft, I'll obviously be somewhat reserved. First, we expect the final RFP later this month. As such, we believe it's highly likely our existing contracts will be extended through the first half of 2027, in line with the customer's planned new contract start date of July 1st, 2027. Second, we will, of course, be putting our best foot forward to win. We've always been committed to value, veteran experience, and quality, and these are the things that the VBA focuses on. The draft RFP also clearly recognizes the value of demonstrated performance. So, I continue to see significant upside in Leidos for our investors as we keep executing our NorthStar 2030 strategy. As such, you can expect us to continue to invest in our differentiated capabilities and deploy capital strategically to accelerate growth and create lasting value.

[Tom Bell, CEO at Leidos]

I look forward to your questions after Chris walks through the numbers. Chris?

[Chris Cage, CFO at Leidos]

Thank you, Tom. Let's jump right into the results on slide five. Revenue for the quarter was $4.63 billion, up 4% in total and 1% organically year-over-year. Bottom line performance remains strong. Adjusted EBITDA was $644 million for the third quarter, for an adjusted EBITDA margin of 13.9%, up 10 basis points both sequentially and year-over-year. Non-GAAP diluted EPS grew 19% year-over-year to $3.62. Cash performance was a noteworthy highlight. In the quarter, we generated $523 million of cash flows from operating activities and $476 million of free cash flow. That comes to a free cash flow yield of 105% for the quarter and 121% over the trailing 12 months. Let me work through some of the details. First, as expected, our results were materially shaped by the recent changes on our VBA disability exam contract.

[Chris Cage, CFO at Leidos]

Excluding our health segment, which was fundamentally driven by the VBA, revenues grew 9% and non-GAAP operating income grew 48% for the rest of Leidos. We've been on a journey to diversify the earnings power of the company, so it's great to see that show up in the results. In addition, our entire team acted with urgency around cost control, which substantially drove margin and earnings, though it put downward pressure on our growth rate on cost-plus contracts. Second, our team has worked hard on tax optimization strategies to reduce cash taxes and leave more cash available to invest in the business. This quarter's non-GAAP effective tax rate of 15.1% reflects some non-recurring pickups on state taxes, as well as a new approach to calculating our research tax credit that was reviewed and accepted by the IRS.

[Chris Cage, CFO at Leidos]

The research tax credit component is a structural change to our tax rate, though the impact will be more modest in the out years. Turning to the segment view on slide six. Homeland led all segments with 32% total and 15% organic growth. Growth was broad-based, underpinned by robust demand in domestic and international air traffic management. Defense growth year-over-year, up 3%, reflects the impact of large product component purchases in the third quarter of 2025. The segment continues to ramp production of integrated air defense and counter-UAS programs, which led to 4% sequential growth. Intel and Digital grew 1% year-over-year, as strong intelligence community demand was offset by reductions in certain federal civilian IT programs. Health segment contraction was driven by the VBA business for the reasons we've previously outlined.

[Chris Cage, CFO at Leidos]

Margins were up significantly at Intel and Digital and Homeland, flat at Defense, and down less than expected at Health. This across-the-board performance reflected the cost actions I mentioned earlier, as well as strong award fee scores, more higher-margin commercial work, and positive EACs. As shown on slide seven, we repurchased $500 million of shares on the open market in the quarter, consistent with our view that our stock is trading below its intrinsic value. The board also authorized a $0.02 Increase to the quarterly dividend. This allocation of capital is wholly consistent with our philosophy. Most important, we will fund the organic growth needs of the business. Capital expenditures stepped up in Q3 from our first half run rate, and the fourth quarter should step up even more, primarily from investments in defense tech production capacity. The robust cash generation of the business offers ample capacity beyond CapEx.

[Chris Cage, CFO at Leidos]

Our strong and flexible balance sheet is an important tool for driving long-term shareholder value through a balanced approach to capital deployment. At quarter end, we had $6 billion of debt, $630 million in cash and cash equivalents, and a gross leverage ratio of 2.5x. Our balance sheet shows the assets and liabilities of SES as held for sale. Immediately after the quarter, we closed on the divestiture of SES and retained a 41.5% equity interest in the new joint venture. As Tom mentioned, our stake provides a significant value creation opportunity for Leidos and its shareholders as the JV increases market share, drives operating leverage, and ultimately advances to a liquidity event. Finally, onto the forward outlook on slide eight. Our new ranges reflect the impact of the SES divestiture, our Q3 results, and our updated outlook. Let me walk you through the puts and takes.

[Chris Cage, CFO at Leidos]

Prior to the close, we forecast SES revenue in the fourth quarter to be approximately $200 million, which is directly reflected in the new revenue guidance range. We expected SES to deliver about $0.12 of non-GAAP diluted EPS in Q4, so the new narrowed range is up around $0.37 on an adjusted basis at the midpoint. With Q4 cash projection of roughly $20 million for SES and another $30 million in transaction costs, we are effectively raising our operating cash flow guidance by $100 million. Finally, we are maintaining our adjusted EBITDA guidance in the mid-13s. The guidance assumes that the government is operating under a continuing resolution through the end of the year. For 2026, diluted share count is at 126 million, and the non-GAAP effective tax rate is around 20%. The guidance implies that Q4 revenues will be near Q3 levels.

[Chris Cage, CFO at Leidos]

We will continue to see pressure on cost plus revenue from indirect efficiencies, and we will have a full quarter of impact from the VBA contract changes we have previously disclosed. Also, while third quarter bookings were solid, there were some delays and some decisions that did not go our way, which will temper our growth momentum in Q4 and into 2027. On the positive side, customer procurement activity appears to be accelerating, and our near-term pipeline remains large. We expect Q4 Health segment margins to be in the high teens, driven mostly by the VBA contract changes we previously discussed, and we are not assuming the same level of EACs in the fourth quarter as we saw in the third quarter. Although we have not completed planning for 2027 and key dependencies remain, we continue to see Q4 as a reasonable jumping-off point for our 2027 performance.

[Chris Cage, CFO at Leidos]

With that, operator, we are ready to take questions.

[Operator]

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please limit yourselves to one question before getting back into the queue. At this time, we will pause momentarily to assemble our roster. Our first question is going to come from the line of John Godyn with Citi. Your line is open. Please go ahead.

[John Godyn, Analyst at Citi]

Hey, guys. Thanks for taking my question. I wanted to dialogue a bit more on the bookings environment. You reported a strong 1.2x book-to-bill in the quarter. You mentioned there were some signs of customer procurement activity accelerating. I was just hoping you'd talk a bit more about the leading-edge demand signals that are driving bookings, and maybe elaborate a bit on defense tech, intelligence, cyber, some of the things that were highlighted in the press release as being hot right now. Thanks.

[Tom Bell, CEO at Leidos]

Sure, John. Thanks for the question. Yes, as Chris mentioned in his comments, the environment is improving, and we do see customers beginning to move with more alacrity around their procurement decisions. At the same time, frankly, there are procurement decisions that continue to slide around, but we don't see that as abnormal to a normal functioning government procurement cycle. We see promise that as we head into the next fiscal year of this government, in it already, we're going to continue to see that momentum be maintained. On our book-to-bill ratio, I'm glad you picked up on the 1.2x being pretty respectable, and it is. But what makes it even more interesting to me is the fact that it's been crescendoing through the year. You'll recall that in the first quarter, we had a book-to-bill of 0.8x.

[Tom Bell, CEO at Leidos]

In the second quarter, we had a book-to-bill of 1.1x, and this last quarter, we had a book-to-bill of 1.2x. So, I feel very good about the momentum that is being built by the team in growing the business. Except for that, I would also want to remind everybody, on my very first earnings call as CEO of this corporation, I talked about the more important measure is total backlog. Book-to-bill can be episodic. Quarters can come and go. But total backlog is also a great news story, where it's up to $49.6 billion, 4% year-on-year, and we have excellent growth in funded backlog, $11.1 billion, up 22% year-on-year and 8% sequentially. So, we're really building the backlog, which is more important to the sustained growth of the company than the episodic book-to-bill. One area that I'd also like to focus is on OTAs.

[Tom Bell, CEO at Leidos]

As probably most analysts know, OTAs are increasingly of interest to our customers as they want to field critical capabilities quickly. In OTAs, it's a little-known fact that Leidos is actually a market leader here. We have currently 212 OTA contracts, including 33 that were awarded just this year for a $6.6 billion ceiling. So, this new mechanism that our customers are leaning on to speed up the acquisition process is something we're very proud to be leaning into also with them. That's what gives us a very positive forward outlook. We have $28 billion right now awaiting decision, including $21 billion that is new and takeaway business, and we're very happy with where that's all going. As you mentioned, our book-to-bill in defense was 2.0x year-to-date. Our book-to-bill in our organic growth in homeland was 15%.

[Tom Bell, CEO at Leidos]

The growth engines that we have are growing very responsibly, and as Chris mentioned in his prepared remarks, if you take out managed health, it is up almost 50% year-on-year. We are very happy about that.

[Chris Cage, CFO at Leidos]

John, I would only add, not to throw more stats at you, but if you look at our next 12 month pipeline, from where it was a year ago, that is up 15% too. That is what we talk about when we look ahead, and the activity seems to be accelerating. No shortage of deals out there that the teams are focused on. About 40% of that next 12 month pipeline is in defense. You also asked about cyber, and we announced the US Cybercom award, $160 million, that Kudu let us help penetrate. Followed that up by another $99 million OTA award in the cyberspace. A lot of good activity going on across the business.

[John Godyn, Analyst at Citi]

Thanks, guys. Very thorough.

[Operator]

Thank you. One moment for our next question. Our next question comes from the line of Tobey Sommer with Truist. Your line is open. Please go ahead.

[Tobey Sommer, Analyst at Truist]

Thank you. I wanted to ask on the defense tech side and related business where you are investing in production capacity. What does the arc of that look like based on your current wins and maybe near-term pipeline for additional wins on when the investments peak and the profitability with ramping production kind of shines through?

[Tom Bell, CEO at Leidos]

Sure. Thanks, Tobey. Defense tech is a shining star for us, and as I said in my prepared remarks, it is a business that is now winning consistently because the customer is increasingly seeing us as the mature disruptor. We are not just PowerPoint charts, and we are not just slick T-shirts at trade shows. We are a company that they understand. We are a company that has been there in the past, and they know we will be there in the future.

[Tom Bell, CEO at Leidos]

But at the same time, we are able to move agilely and adroitly to make sure that we are responding to the customer's real critical needs right now. We are investing ahead of that need. As I said at the beginning of this year, we would be increasing our CapEx to make sure we are positioning the company for that growth in this critical part of our portfolio.

[Tom Bell, CEO at Leidos]

At the same time, I think you are seeing in the numbers that we are being very judicious about the money we are spending. We are not just spending it because we budgeted it. We are spending it as the opportunities actually trigger and they actually unfold. You will continue to see us be very disciplined with how we spend our money to fund growth and make sure that when it is in an organic growth mode, we are funding it on the things that the customer is really going to buy. I mentioned in my comments, the foundation to double-digit growth is intact, and we are growing increasingly confident for that. Part of the reason for that is, we have got more than a dozen programs that are right now moving from development into rate production.

[Tom Bell, CEO at Leidos]

For instance, IFPC, something we have talked about for a couple years now, it is on pace to reach full rate potential in 2027. That is exciting for us since moving only to LRIP in 2025. This program has tripled in revenue and meaningfully expanded its margins, a huge, great base for our team in Huntsville. There is more than $10 billion in defense tech awards over the last 18 months that we have secured, and $6 billion year-to-date. We are very excited about the backlog, again, we are building in this business. As Chris was just saying about the whole, we have got a pipeline of over $14 billion of visible opportunities within the next 12 months. We expect defense's book-to-bill ratio to remain robust, and they continue to build backlog.

[Chris Cage, CFO at Leidos]

Yeah, Tobey, I'd only add, obviously you're looking for that to show up, those investments to show up as increased margin in that segment, and we're very bullish that that is the path we're on. You'll see that progress in 2027 upward. You'll see that progress over the next several years upward. So there's gas in the tank on the return on those investments showing up over time. The team's focused on that, and the product lines that Tom talked about are all accretive to margins as they ramp up their production volumes here over the next handful of years. So, the elevated level of investment won't be for everything. You look at that over the next couple years, but the profitability on the other side of that will be showing up here throughout the rest of this decade, certainly.

[Tom Bell, CEO at Leidos]

Thanks for the question, Tobey.

[Operator]

Thank you. And one moment as we move to our next question, which will come from the line of Ken Herbert with RBC Capital Markets. Your line is open. Please go ahead.

[Ken Herbert, Analyst at RBC Capital Markets]

Yeah. Hi, good morning. I wanted to first ask on the health segment in particular, Tom, you called out that you feel like, as you review the draft RFP, that obviously it plays well to Leidos. I wanted to see if you can drill down on that a bit and specifically maybe highlight where you see the real opportunity for Leidos relative to that, the draft RFP you're working through. And then just as a follow-up, Chris, I think you guided to high teens margins in the segment for the fourth quarter. Should we think about that as a good starting point or run rate into the first half of 2027 while the existing contract works through? Thank you.

[Tom Bell, CEO at Leidos]

Thank you, Ken. Yes, sure. As I mentioned in my prepared remarks, I am going to be somewhat reserved. Despite your question, I am going to remain a little bit obtuse here. We do believe that we are well-positioned to compete for this work. Leidos comes to this from a position of obvious strength. We are the top provider in this business now, and we have been for over two decades. We have an excellent track record of veteran satisfaction and timeliness and accuracy, and we know that those are the things that the veteran and the Veterans Administration and every member of the House and Senate care deeply about. We have invested in this capacity to make sure that we can handle the volume as it has gone up through the years, and we have invested in innovation.

[Tom Bell, CEO at Leidos]

We are known as an innovator in this space, developing, for instance, the mobile clinics that met the veterans where they were. Most importantly, what gives us some confidence going into this competition is the fact that we understand the mission, and we understand this is a no-fail mission, and we are locked at the hip with the Veterans Administration in understanding the criticality of making sure, just as this administration has said a number of times, that veterans get the benefits they deserve in a timely way.

[Tom Bell, CEO at Leidos]

While we are still dealing with the draft RFP, we know that it looks toward the things that are the strength for us, and we also are buoyed by the fact, if you have read the draft, that it leans into the fact that they want to award two to four companies per service group, and two of those have to be experienced and be able to stand up capacity in 30 days. That leans well on our incumbency. It also talks very much about rewarding those who deliver the goods for the Veterans Administration in timeliness, quality, and cost by higher work volumes. Net-net, the draft RFP reads pretty well for us, and we are very bullish about it.

[Tom Bell, CEO at Leidos]

At the same time, we are taking absolutely nothing for granted, because we also understand that the Veterans Administration is trying to be an excellent steward of the taxpayer dollar, and we need to be their partner in that, as we have always been in the past. Chris, do you want to deal with a few of the specifics also?

[Chris Cage, CFO at Leidos]

Yeah. Ken, just to talk more about the margin profile, obviously, we are pleased with how the team came through Q3, a little bit better than we expected. Q4 exit rate, I do think is a good place to model out the first half of next year in the high teens, and then to Tom's earlier comments, expecting a continuation of our current contract through the middle of the year. On the other side of that, all the puts and takes about how we compete as we get more clarity on where that is landing, we will be able to give you more indications of what the back half of the year looks like. We will certainly be able to tackle that in February. But I think you are seeing the team continue to find ways to overdeliver.

[Chris Cage, CFO at Leidos]

That is just what they do, and this business will continue to be an excellent piece of the portfolio for us for years to come.

[Ken Herbert, Analyst at RBC Capital Markets]

Mm-hmm. Thank you.

[Operator]

Thank you. Our next question is going to come from the line of Peter Arment with Baird. Your line is open. Please go ahead.

[Peter Arment, Analyst at Baird]

Hey, thanks. Good morning, Tom and Chris.

[Tom Bell, CEO at Leidos]

Hey Peter.

[Peter Arment, Analyst at Baird]

Hey, intelligence and digital had really good margin performance this quarter. You called out good execution and cost management. You also mentioned there was a little bit of EAC adjustments. Maybe you could just talk to the margin performance, how you are thinking about the durable nature here of the margin performance that we saw this quarter, and expectations as we think about going forward. Thanks.

[Tom Bell, CEO at Leidos]

Yeah, Peter, I am so glad you asked this question, because I need to throw a little sunshine on this team, because not only did they have good margins, they had record margins based on excellent execution across the segment. We are very proud of our team there, and very proud of the fact that it is coming in even stronger than we had anticipated in our financial planning. In the intelligence side, our business grew double digits in the quarter. In our digital side, while it contracted modestly, the profitability was very, very robust, and the team is doing a great job there. We also have this segment because it is so critical to the value of our customers going forward. I think it is sometimes overlooked that the customer spends over $57 billion in this world on an annual basis, just the digital side.

[Tom Bell, CEO at Leidos]

The federal IT spend is up 10% in fiscal year 2027 president budget request. So, the money continues to flow into the digital ecosystem of this government, and as we're a very large provider of the digital infrastructure for most federal agencies, we see that opportunity to serve them and to modernize their infrastructure as core to our responsibilities, and then, these days, make that infrastructure cyber secure, critical to our country, critical to national security, and critical to the functioning of this government. So, we're very excited about the business. We're very pleased with the team's performance. To date, record execution and record margins, and Chris will give a little bit more detail.

[Chris Cage, CFO at Leidos]

Yeah. Well, appreciate the question, Peter, and I would say this is the playbook. You look at digital especially, and they run some of the largest programs in the company, and as typically is the case, as you mature those programs, you deploy technology, you get into the customer's environments, you find opportunities to drive efficiencies, and that's what they're doing, whether that's a concerted effort with what we've been after with our repeatable offerings, now called mission drivers, and some of the commercial products that the intel team is leaning into. All of those things will give us confidence about the ability to drive the margin portfolio in this part of the business higher over time.

[Chris Cage, CFO at Leidos]

We did talk about EACs were very favorable in the quarter, and as we look ahead to Q4, we're not always predicting that level of sustained success, but this clearly shows you what the art of the possible is, and I like the trajectory of this segment's margin performance.

[Peter Arment, Analyst at Baird]

Appreciate the call, gentlemen. Thank you.

[Tom Bell, CEO at Leidos]

Thank you.

[Chris Cage, CFO at Leidos]

Thanks, Peter.

[Operator]

Thank you. Our next question is from the line of Jonathan Siegmann with Stifel. Your line is open. Please go ahead.

[Jonathan Siegmann, Analyst at Stifel]

Hey, good morning. Thank you for taking my question.

[Tom Bell, CEO at Leidos]

Sure.

[Chris Cage, CFO at Leidos]

Sure, Jonathan.

[Jonathan Siegmann, Analyst at Stifel]

Hey, the defense order is fantastic, and you had talked about high single-digit defense growth this year, but you have that one offset you are dealing with. Can you kind of walk through the timing of that, and is that all done now, just moving forward, just how good could 2027 be for that segment? Thank you.

[Chris Cage, CFO at Leidos]

Yeah, let me jump in here, Jonathan. You are right. The momentum is definitely building. You have seen the bookings quarter-over-quarter continue to accelerate. This quarter, from a growth rate perspective, 3.5%. Some of that is just a very robust Q3 of last year coming off of an elevated level of long lead procurements. So, we are now seeing clear runways for some of the programs that we featured to ramp up, specifically our IFPC program, as Tom alluded to, that has tripled in volume, and it is moving up further in 2027. Our ABADS program with some of our ALPS and Marauder technologies, et cetera, will be accelerating. The customer is looking to add more ceiling, perhaps, to that vehicle. Common Hypersonic Glide Body, we are on a clear run rate to accelerated production there of certain units.

[Chris Cage, CFO at Leidos]

So, that is what gives us confidence that you will see a higher growth rate in the Q4. You will see a higher growth rate. The team is focused on how do we get this business to a double-digit growth rate over time, and I think the building blocks are there for us to be able to lay that out for you in 2027. And we will put more meat on that bone when we get to February.

[Tom Bell, CEO at Leidos]

If you don't mind, Jonathan, I'm going to jump on and also broaden your question a little bit to the rest of the defense portfolio that we're so proud of. There's a lot of discussion in Washington, D.C. and around the nation about our weapons stockpile and the magazine depth of the country, and the urgency to create new sources of supply for munitions. We're leaning into that, and we have a pathway for our munitions side of our defense tech business to be a billion-dollar business by 2030 annually. We're very excited about where that business is going. The building blocks are there. IFPC, as Chris already mentioned, is a big base for Huntsville, but small cruise missile, as I said in my prepared remarks, Havoc Spear, is moving very quickly in LRIP program.

[Tom Bell, CEO at Leidos]

Low-cost containerized munitions, we announced before the fact that we had signed a framework agreement for that business. We've not yet gotten a contract for that, so that's backlog to come. As soon as we translate that framework agreement into a contract, there's going to be a big booking of an order book for the 3,000+ missiles we expect to make there. Sea-launched nuclear-armed cruise missile, I mentioned in my prepared remarks. The abbreviation for it is SLCM-N, if you're tracking that. We've got an OTA on that, and we're very excited about where that program's going, and as Chris just mentioned, hypersonics. I mentioned space and our franchise of space sensor payloads, which is so critical to this nation's defense. Not mentioned yet, but I can't help but say it, is our counter-UAS capabilities.

[Tom Bell, CEO at Leidos]

Counter-UAS capability not only animates the Department of War, but it also very much animates the Department of Homeland Security. We've had very robust conversations with both customer sets there about the suite of capabilities Leidos brings to bear, from sensors to effectors to command and control to the complete shield of our counter-UAS capabilities. Frankly, that's turning heads in our customers' community as they understand the threat is evolving quickly, and they're looking for solutions. Just like I was saying before, seen as the mature disruptor, they're seeing that we have disruptive, relevant, ready-now solutions for these emerging threats, and it's a very exciting place for us to be. Net-net, our defense tech business is a very, very core part of the portfolio that we're very proud of, and it's growing just as we expected.

[Jonathan Siegmann, Analyst at Stifel]

Thank you for the comments.

[Tom Bell, CEO at Leidos]

Thanks, Jonathan.

[Operator]

Thank you. Our next question comes from the line of Gautam Khanna with TD Cowen. Your line is open. Please go ahead.

[Gautam Khanna, Analyst at TD Cowen]

Yeah, I had two questions. On the VBA rebid, given the commentary about the first half next year, should we think that earnings for the company, just given the timing of the defense ramp and what have you, will not grow in 2027 and 2028? As a follow-up, if I could ask about the maritime strategy as part of NorthStar 2030, given the MUSV outcome, what is sort of the plan from here? Thank you.

[Tom Bell, CEO at Leidos]

Let me take the maritime first, and then we will work back on the whole. Yes, obviously, we were disappointed with the MUSV non-selection in this round, but I would underscore that phrase that I just used. We were not selected in the first round of 30 boats, but we are in the marketplace, and we are actively working several very intense customer engagements where the unique capabilities that we were offering as a part of the MUSV competition and the timeliness that we were committed to deliver those products with the effects that those products were envisioned to be able to have, is gaining traction both within the Navy and outside the Navy in the Department of War. So, yeah, we were disappointed. We would have loved to have booked an order for 10 of those vessels.

[Tom Bell, CEO at Leidos]

That didn't come our way, but we're in the marketplace, and we certainly don't see it as a dead end. Our maritime ambitions remain robust. Do not forget the fact that it doesn't get talked about a lot, but we have a very robust business also in undersea warfare. While unmanned surface vessels are what people are talking mostly about, the competitive edge for the American Navy continues to be our submarine force, and our effect in that part of the value proposition of our customer is very key. On the whole, I'll let Chris continue to talk about how you should think of our fourth quarter as our jumping off point for 2027.

[Chris Cage, CFO at Leidos]

Yeah, exactly, Gautam. I think that the implied fourth quarter as the jumping off point, if you run that out, think through the dynamics in the business where there's growth and where there might be further step-down in the VBA, it's clear that 2027 is not a bottom-line growth year for the company. It's accelerating top-line growth in other parts of the portfolio. But I'm very bullish on the rest of the portfolio accelerating as we look ahead to 2028 and beyond, that there's a lot of momentum elsewhere as we look at high-margin energy business, defense tech products ramping up, that it's way too early to suggest that there's not a bottom-line growth story beyond this near-term transition in the VBA. That's the journey we're on.

[Chris Cage, CFO at Leidos]

I think we just demonstrated the power of the portfolio in Q3, absent health, and we'll continue to focus on accelerating the rest of those business growth drivers in higher-margin parts of the portfolio.

[Tom Bell, CEO at Leidos]

Thanks, Gautam.

[Gautam Khanna, Analyst at TD Cowen]

Thank you.

[Operator]

Thank you. Our next question will come from the line of Noah Poponak with Goldman Sachs. Your line is open. Please go ahead.

[Noah Poponak, Analyst at Goldman Sachs]

Hey. Good morning, guys.

[Tom Bell, CEO at Leidos]

Hey, Noah.

[Noah Poponak, Analyst at Goldman Sachs]

Not sure what you're going to be able to say to this, but is there a way to frame the boundaries of the VBA outcome? What happens to health revenue in the best-case outcome for you? What happens to health revenue in the worst-case outcome for you? On the margins, this high teens jumping off, but I guess that references the current contract. Can they go up again once you're on the new contract? Do they definitely go down? How much do they go down? I guess, you've referenced the stock price relative to intrinsic value, and I think that case could be made, but stocks just hate uncertainty, and the stock's been having to live with this undefined thing that takes a long time to play out for a while. I don't know if it's possible to bound the ranges of what could happen.

[Tom Bell, CEO at Leidos]

Well, I'll start, and then I'll let Chris jump in if he's got any color he'd like to add. First of all, no, I'm not able to bound it, and I'll remind you that that's because it's still a draft RFP. We haven't seen the final RFP, and certainly, the bounding of what it will be will depend on how we prevail through the first six months of next year in this competition. We expect the customer is going to be making a decision in the, let's call it, April, May timeframe. At that point, we'll know what we've won and where we're positioned and how much volume is coming our way and how we can continue to be of service to this country.

[Tom Bell, CEO at Leidos]

Frankly, the boundary conditions aren't going to be able to be articulated until the second quarter of this year, probably halfway through 2027, excuse me, I'm talking about. But, and here's the big but, like you, we can do a sum-of-the-parts analysis of Leidos, and even if we assume away the whole of the VBA business, which is a pretty amazing conclusion to draw, but if we zero it out, still the valuation of this company and our current valuation is way below the sum of the parts of the rest of Leidos.

[Tom Bell, CEO at Leidos]

I do believe the market has somewhat overburdened the stock price with the fear of the unknown of the VBA, but I think if somebody did some robust analysis, they would see what I said about the sum of the parts, and even if you zero it out, and then you would have to run your own analysis on what's the likelihood that the market leader leaning into this competition gets zeroed out and has no position on this business going forward. I think that's pretty well-

[Noah Poponak, Analyst at Goldman Sachs]

What is your 2026 earnings and EBITDA without VBA?

[Chris Cage, CFO at Leidos]

No, we cannot give you that level of detail. I mean, that is below the disclosure level that we talk about. Looking ahead, looking at what we think are exciting parts of the portfolio, you could make a case that there is undervalued assets in the portfolio. I would only add, and Tom was going there, that the way the draft is set up, there is an upside case that Leidos comes out of this with more work share than we have today. Work share drives profitability, volume matters, and so there is absolutely a bullish case that says the best-performing provider could have increased work share in this future contractual decision.

[Chris Cage, CFO at Leidos]

We want to be able to make that a reality for you and our shareholders, and we are going to work hard to do that, but it is too early for us to commit to that as a reasonable expectation at this juncture. Thanks for your question, Noah.

[Noah Poponak, Analyst at Goldman Sachs]

Okay, thanks.

[Operator]

Thank you. Our next question will come from the line of Gavin Parsons with UBS. Your line is open. Please go ahead.

[Gavin Parsons, Analyst at UBS]

Thanks. Morning.

[Tom Bell, CEO at Leidos]

Hey, Gavin.

[Gavin Parsons, Analyst at UBS]

I know you can't size VBA, but you talked about top-line growth being 9% in the quarter excluding. Any way you can frame for us what top line could grow next year ex-VBA?

[Chris Cage, CFO at Leidos]

Yeah, again, you are trying to get ahead of us to 2027. I think I just alluded to defense has a real possibility to be a double-digit grower. We hope to put a finer point on that as we advance the ball towards February. Energy, our expectation is that is going to be a double-digit grower. Our cyber portfolio, which is a very robust part of Leidos, has the ability to be a double-digit grower. So those are three important pieces of what we have that we could see that outcome next year. The other parts of the business, there are some things ahead of us that still matter on the winning front, especially in digital. We got several irons in the fire there that we need to see play out before we can put a finer point on their near-term growth trajectory.

[Chris Cage, CFO at Leidos]

I think absent the health business, you would expect to see a very above-market growth rate across our portfolio, and we will be able to put more color on that here in time.

[Gavin Parsons, Analyst at UBS]

Okay, I appreciate it. Then in the prepared remarks, you mentioned Parcata as a commercial offering. Could you just talk about the broader commercial potential on cyber?

[Tom Bell, CEO at Leidos]

Well, as we all know, the AI-powered vulnerability detection is a big problem for every company and everybody who has a computer system right now. Parcata is the automated way to do that without human interface. As I said, we have created this product, developed originally through a DARPA challenge and developed by our Kudu subset of Leidos, and it is a proprietary AI platform that goes and autonomously detects and patches software in minutes, that is without human intervention. Right now, it is focused on working with our intelligence customers and on their challenges. Very shortly, later this month, later this year, we expect to make that commercially available to other members of the government and potentially outside companies. So, it is a real-time, very effective patch that makes the speed of detecting, patching, and deploying in minutes, and obviously, that is something that the world needs more of.

[Tom Bell, CEO at Leidos]

We're very excited about the opportunity, but at this point, given the speed with which this whole market is moving, we can't exactly found what that means for us.

[Chris Cage, CFO at Leidos]

But there's more right behind it, whether it's another product called Orbit, and there's a third product coming out of Intel. We've talked previously about MySTR, which is essentially a software product commercially priced offering. So, in various pockets of the portfolio under Ted's leadership and elsewhere, we're going to see more of that in time. Not the preponderance of what we do, but a nice complement to how we deliver value for our customers.

[Gavin Parsons, Analyst at UBS]

Thanks, [inaudible].

[Tom Bell, CEO at Leidos]

Great. Thanks.

[Operator]

Thank you. Our next question will come from the line of Sheila Kahyaoglu with Jefferies. Your line is open. Please go ahead.

[Sheila Kahyaoglu, Analyst at Jefferies]

Good morning, guys, and thank you so much. I appreciate you don't want to get ahead on 2027, so maybe on, without excluding health, just thinking about your defense business, great book to bill in the quarter, some momentum building. Consensus has about 3% organic defense growth and 10% EBIT growth next year. I guess the drivers of that are really within homeland and defense segment earnings. Can you talk about some of the pieces really stepping up next year as we think about those ramps and some production programs, and I guess within homeland, what's driving that growth?

[Chris Cage, CFO at Leidos]

Well, I'll start. I mean, certainly on the homeland side, the team's been on a tear this year, the last few quarters in particular. The FAA's been an important customer and some international air traffic customers in the U.K., Kazakhstan, et cetera. There's momentum in the FAA part of that portfolio, and there's long-term potential. We could see some momentum next year, certainly beyond that, and what we want to do on the airport modernization side. Getting out of the OEM piece of the security detection business is one thing, but the logistics capability that we offer there to our customers has room to grow. Of course, the crown jewel in homeland is what's happening with energy, and we've seen consistent strong growth out of our existing business this year.

[Chris Cage, CFO at Leidos]

The integration of the ENTRUST acquisition is now essentially complete, will be finally complete by the end of the year, so that's going to be a growth catalyst for Leidos with a strong market demand signal. We've talked a lot about some of the defense product portfolio pieces that are accelerating and from contract actions that have already been decided. So, clear line of sight to space accelerating with more wide field of view payloads, clear line of sight to IFPC volumes accelerating, MXR, ALPS product line in the passive detection arena. Tom highlighted a lot of the momentum in munitions, which is more 2028 than 2027, but you'll see some contributions in 2027 certainly there too. So, those are the things, Sheila, that I'd focus on at this point in time that says we have confidence in those growth rates accelerating. Tom, you'd add to that?

[Tom Bell, CEO at Leidos]

Yeah, Sheila, I appreciate. Good talking to you again. As Chris just mentioned, the energy play as a big part of our homeland security is critical. As you know, the surge in capital investments by utilities around the nation is robust, as they deal with aging infrastructure, and they deal with massive AI-driven increases in demand. Our ENTRUST acquisition is largely now behind us. Integration is done. We are now focused on growth, and we are very, very targeted at a pipeline that has grown some 230% since the acquisition. We now have over $10 billion of orders targeted there. So, our energy business is robust. On the other side of the equation, FAA modernization. We just celebrated 10 straight years of 100% uptime on our ERAM program for the FAA.

[Tom Bell, CEO at Leidos]

The FAA Terminal Flight Data Manager program is really moving out well with this customer, and we are on track to complete deployment at all 89 airports by the end of 2028. So, that part of the program is continuing to grow. We are one of the four competitors in phase two of the FAA's CAP program, and we anticipate they will be making a down select in mid-2027 as they work toward doing a brand new air traffic control system for the United States by 2028. We are very excited about that, and we are also very excited about leaning in with the Department of Homeland Security with rethinking the airport experience. They recently canceled the Gold+ privatization program. However, we had always been on the IDIQ called Screening Partnership Program, the SPP program. There are some rather large airports that are now opting into the SPP program.

[Tom Bell, CEO at Leidos]

We believe we have a differentiated capability to deploy at airports to make the passenger experience much smoother, much more efficient, and much more effective for the traveling public, and we look forward to leaning into that. So, both the homeland business and the defense business are firing on all cylinders.

[Sheila Kahyaoglu, Analyst at Jefferies]

Okay, great. Thank you.

[Tom Bell, CEO at Leidos]

Thank you.

[Operator]

Thank you. Our last question is going to come from the line of Louie DiPalma with William Blair. Your line is open. Please go ahead.

[Louie DiPalma, Analyst at William Blair]

Tom, Chris, Stuart, Stephen, and Megan, good morning.

[Tom Bell, CEO at Leidos]

Hey.

[Chris Cage, CFO at Leidos]

Hey, Louie.

[Louie DiPalma, Analyst at William Blair]

Tom and Chris, when you discuss the potential bullish scenario for the VA disability contract, is that scenario primarily the reduction in vendors from four to two for the regions, and are there other bullish scenarios?

[Tom Bell, CEO at Leidos]

The current draft envisions between two and four vendors in each service group, and it envisions six service groups. The four domestic regions, they call them now, would be service groups, and then international and pre-discharge would be two other service groups. So, six service groups in total, IDIQ for each, two to four vendors for each of the six. How it is going to work is two vendors per service group need to be ready to stand up capability and serve veterans within 30 days. So, there is an incumbent preference there. New entrants, possibly, to round out the four, have to be ready to stand up their capability within a year. So, that gives you a year where potentially in a service group, you are one of two vendors.

[Chris Cage, CFO at Leidos]

The only thing I would add to that, Louie, so number of vendors is one element of the upside bullish case, and the other is even in a scenario where there are four vendors in a region, they have not committed to an equal work share.

[Tom Bell, CEO at Leidos]

No.

[Chris Cage, CFO at Leidos]

At least in the draft, it contemplates the best performing vendors get a disproportionate amount of work share. So, you could play those scenarios out to say whether it is fewer vendors or you are one of the top performing vendors on some criteria, you could come out with a work share that is more significant than what we have today.

[Louie DiPalma, Analyst at William Blair]

Excellent. That potential increase in market share would potentially offset the decrease in pricing. There are scenarios in which for 2027 or 2028 your EBITDA would actually increase?

[Tom Bell, CEO at Leidos]

We do not want to get ahead of that, Louie. Right now, we are still dealing with a draft RFP. We will see what the final RFP says. Then we have to create our bid strategy and figure out what is in the best interests of Leidos and how we are going to maximize our service to this nation and our return to our shareholders.

[Chris Cage, CFO at Leidos]

Thank you, Louie.

[Louie DiPalma, Analyst at William Blair]

Excellent. Thanks, everyone.

[Tom Bell, CEO at Leidos]

Thanks.

[Operator]

Thank you, and I would now like to hand the conference back over to Stuart Davis for closing remarks.

[Stuart Davis, SVP of Investor Relations at Leidos]

Thank you, Michelle, for your assistance on this morning's call, and thank you, everybody, for spending time with Leidos. Appreciate your interest, and we look forward to speaking soon. Have a great day.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.

Participants

Executives

• Stuart Davis, SVP of Investor Relations
• Tom Bell, CEO
• Chris Cage, CFO

Analysts

• John Godyn, Analyst at Citi
• Tobey Sommer, Analyst at Truist
• Ken Herbert, Analyst at RBC Capital Markets
• Peter Arment, Analyst at Baird
• Jonathan Siegmann, Analyst at Stifel
• Gautam Khanna, Analyst at TD Cowen
• Noah Poponak, Analyst at Goldman Sachs
• Gavin Parsons, Analyst at UBS
• Sheila Kahyaoglu, Analyst at Jefferies
• Louie DiPalma, Analyst at William Blair