What Leidos (LDOS) Said on Its Q3 Earnings Call

Key Points

• Leidos delivered stronger Q3 results: Revenue rose 4% to $4.63 billion, adjusted EBITDA margin reached 13.9%, and non-GAAP EPS increased 19% to $3.62. Year-to-date free cash flow of $1.5 billion exceeded its original full-year target.
• Defense and Homeland Security supported momentum: Backlog grew 4% to $49.6 billion, with defense bookings strength and Homeland Security revenue up 32%. Management expects defense-technology production, alongside energy and cyber, to be an important growth driver.
• The outlook still depends on the VBA contract recompete: Leidos raised its 2026 outlook, but flagged the contract’s timing and outcome as key uncertainties. Management expects existing contracts may be extended into the first half of 2027 as the new award process proceeds.

Leidos NYSE: LDOS reported third-quarter 2026 results marked by higher revenue, earnings growth and strong cash generation, while management highlighted momentum in defense technology, homeland security and energy businesses as offsets to changes in its Veterans Benefits Administration disability exam work.

Revenue rose 4% year over year to $4.63 billion, including 1% organic growth. Adjusted EBITDA totaled $644 million, producing a 13.9% margin that was up 10 basis points from both the prior quarter and a year earlier. Non-GAAP diluted earnings per share increased 19% to $3.62.

Cash generation was a central feature of the quarter. Leidos generated $523 million of operating cash flow and $476 million of free cash flow, bringing year-to-date free cash flow to $1.5 billion, above the company’s original full-year target, CEO Tom Bell said.

“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,” Bell said. “This quarter’s cash performance already brings our year-to-date cash flow to $1.5 billion, surpassing our original full-year target.”

Bookings, backlog and defense technology

Net awards totaled $5.5 billion during the quarter, resulting in a 1.2x book-to-bill ratio. The company’s total backlog reached $49.6 billion, up 4% from a year earlier, while funded backlog rose 22% year over year and 8% sequentially to $11.1 billion.

Defense was a particular source of bookings strength, with a 1.9x quarterly book-to-bill ratio and a 2.0x ratio year to date. Bell said the company won another Space Development Agency AMDT3 contract involving advanced infrared space-sensing payloads, several other transaction authority awards for munitions, an Air Force Special Operations Command production award for Havoc Spear, follow-on work on the Navy’s SLCM-N program, and a contract to begin production for a new Army passive-sensing program.

Bell said Leidos has more than a dozen defense programs transitioning from development into rate production. He cited the Indirect Fire Protection Capability, or IFPC, program, which entered low-rate initial production in 2025 and is expected to reach full-rate potential in 2027. According to Bell, the program has tripled in revenue and expanded margins.

CFO Chris Cage said defense revenue rose 3% from the prior year, reflecting a difficult comparison with large product-component purchases in the third quarter of 2025. Defense revenue increased 4% sequentially as integrated air-defense and counter-unmanned aircraft system programs ramped production.

Cage said management expects growth to accelerate as programs including IFPC, ABADS, Common Hypersonic Glide Body work, space payloads and other product lines advance. He added that the company expects returns from higher defense-technology production investments to contribute to segment margin improvement beginning in 2027 and over the following years.

Segment performance and portfolio actions

Homeland Security was the company’s fastest-growing segment, with revenue up 32% in total and 15% organically. Growth was supported by domestic and international air-traffic-management demand, Cage said. Defense grew 3%, while Intel and Digital revenue increased 1% as intelligence-community demand was partly offset by reductions in certain federal civilian IT programs.

The Health segment contracted because of changes in the VBA disability exam contract. However, Cage said that excluding Health, company revenue grew 9% and non-GAAP operating income increased 48% year over year.

Margins increased significantly at Intel and Digital and Homeland, were flat at Defense, and declined less than expected at Health. Management attributed the performance to cost-control actions, strong award-fee scores, a greater mix of higher-margin commercial work and favorable estimates-at-completion adjustments.

Bell said the Intel and Digital segment delivered record margins in the quarter. The company is also developing commercial cyber and artificial intelligence offerings, including Parcata, an automated cybersecurity platform designed to identify and patch software vulnerabilities. Bell said Parcata is currently focused on intelligence-community customers and is expected to become more broadly available later in 2026.

Leidos also closed the combination of its Security Enterprise Solutions business with Analogic. The company retained a 41.5% equity interest in the new joint venture. Cage said the venture’s assets and liabilities had been classified as held for sale at quarter-end, and management views the retained stake as a long-term value-creation opportunity.

Capital deployment and outlook

During the quarter, Leidos repurchased $500 million of shares and raised its quarterly dividend by $0.02. At quarter-end, the company had $6 billion of debt, $630 million in cash and cash equivalents, and a gross leverage ratio of 2.5x.

Management said capital expenditures increased from first-half levels and are expected to rise further in the fourth quarter, largely to support defense-technology production capacity.

Leidos raised its 2026 outlook after adjusting for the SES divestiture, third-quarter performance and its updated operating outlook. Cage said the revised guidance reflects the removal of approximately $200 million in expected fourth-quarter SES revenue and about $0.12 of fourth-quarter non-GAAP diluted EPS. The company maintained adjusted EBITDA margin guidance in the mid-13% range.

The outlook assumes the U.S. government operates under a continuing resolution through year-end. Management said fourth-quarter revenue is expected to be near third-quarter levels, with pressure from indirect efficiencies on cost-plus revenue and a full-quarter impact from changes to the VBA contract.

VBA recompete remains a key variable

Bell said Leidos expects the final VBA Medical Disability Examinations request for proposals later in November and believes existing contracts will likely be extended through the first half of 2027, consistent with a planned July 1, 2027, start date for new work.

Management said the draft solicitation contemplates six service groups and between two and four providers for each group. Two providers per group would need to be capable of beginning service within 30 days, while other potential entrants could have up to a year to establish capacity.

Bell said the draft RFP emphasizes demonstrated performance, timeliness, quality and cost, which he said align with Leidos’ more than two decades of experience in the business. Cage said Health segment margins in the high teens during the fourth quarter represent a reasonable starting point for the first half of 2027, subject to the eventual contract outcome.

While management did not provide a detailed 2027 forecast, Cage said the company views the fourth-quarter run rate as a reasonable starting point. He said defense, energy and cyber could be double-digit growth areas in 2027, while the timing and outcome of the VBA recompete remain important variables for the broader company outlook.

About Leidos (NYSE:LDOS)

Leidos Holdings, Inc 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.

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