Leidos Holdings, Inc. (LDOS) Earnings

Management highlights

### Overall Financial & Strategic Performance - Q2 2026 delivered record revenue of $4.6 billion, with adjusted EBITDA margin of 13.8%, a Q2 record operating cash flow of nearly $800 million, and $5 billion in net bookings for a 1.1 book-to-bill ratio. - Management confirms the North Star 2030 growth strategy is delivering results, with meaningful growth emerging across the defense tech, energy, and cyber growth pillars. ### Defense Segment Updates - Secured multiple major new awards, including an over $1 billion framework agreement with the Department of War to deliver 3,000 low-cost containerized munitions by 2030, holds a leading position in the Navy's next generation medium unmanned surface vessel testing (positioned for a Q4 2026 production award), and won an award to provide sensor payloads for 18 additional missile warning/tracking satellites for the Golden Dome program. - Leidos' 'one Leidos' integrated capability (combining hardware, software, products, and services) was validated at the U.S. Army's Operation Jailbreak Hackathon, where the team completed objectives first and demonstrated open, secure interoperability that solves the DoD's proprietary software vendor lock problem, reinforcing Leidos' leadership in open architectures for defense tech. - Defense tech has expanded growth engines beyond space and maritime to now include munitions and counter UAS, with a $12 billion opportunity pipeline over the next 12 months and a $44 billion 10-year addressable market for low-cost containerized munitions alone. ### Health Segment Updates - Demand for the VBA MDE business remains strong, and Leidos is actively positioning for the upcoming recompete. The VA suspended incentive payments for all vendors for the remainder of 2026 during an administrative review; this change is fully incorporated into updated 2026 guidance. - Leidos successfully delivered the 10-year MHS Genesis electronic health record program for the Defense Health Agency (DHA) on time and under budget, consistent with the original contract vision. DHA will now procure underlying commercial software directly, and Leidos continues to support and enhance MHS Genesis under a sole source bridge contract, and is well positioned for future opportunities. - Leidos is progressing the My Service Treatment Record (MySTR) pilot program across the DoD and VA, which management expects to become a significant future business driver. ### Capital Deployment & Balance Sheet - Completed the 2022 board share repurchase authorization with a $66 million open market repurchase in Q2, and a new board repurchase authorization is now in place, with repurchases expected to resume when the trading window opens. - Paid off the remaining $300 million of commercial paper tied to the In-Trust acquisition, ending the quarter with a strong balance sheet: $6 billion of total debt, $748 million in cash, and gross leverage of 2.5 times.

Guidance

Management upgraded full-year 2026 guidance as follows: - Revenue: raised the lower end of the revenue range by $200 million, and increased the midpoint of full-year guidance by $100 million. Excluding health segment changes, organic revenue growth for the rest of the business is expected to be approximately 7%. - Non-GAAP diluted EPS: raised the lower end of the range by 10 cents, and increased the midpoint by 5 cents. - Operating cash flow: increased full-year guidance by $50 million. - Capital expenditures: now expected to be closer to $250 million for the full year, bringing implied full-year free cash flow guidance up by approximately $150 million. - Adjusted EBITDA margin guidance is maintained at 13%. - Guidance excludes the impact of the pending SES joint venture with Analogic, which is still expected to close in late 2026. - Segment-specific outlooks: Health segment revenues are expected to hold around Q2 levels for the remainder of 2026; defense segment full-year 2026 growth will accelerate to high single-digits, or double-digits excluding the transitioning airborne ISR business. Organic adjusted EBITDA growth for the non-health portion of the business is expected to hit 19% in 2026.

Segment performance

Leidos reported total Q2 2026 revenue of $4.56 billion, up 7% year-over-year (YoY) and 4% organically. The segment level results are: 1. Homeland: 32% total YoY revenue growth and 15% organic growth, driven by robust demand in commercial energy infrastructure, domestic/international air traffic management, and foreign exchange benefits. Profitability improved from Q1 2026 levels. This segment contributes ~24% of total company revenue based on overall growth weighting. 2. Defense: 6% organic YoY growth, with accelerated ramp-up of production for integrated air defense and counter UAS programs. Excluding the transitioning airborne ISR business, the segment is on track for double-digit full-year 2026 revenue growth. Profitability increased significantly from Q1 levels, and margins expanded with strong program execution. The segment achieved a 2.2 Q2 book-to-bill ratio and 1.9 trailing 12-month book-to-bill ratio. This segment contributes ~31% of total company revenue. 3. Intel and Digital: maintained robust Q1 2026 growth levels, driven by strong demand from the intelligence community. This segment contributes ~27% of total company revenue. 4. Health: revenue contracted due to the full inclusion of a fourth vendor on the VBA Medical Disability Examination (MDE) Regions contract. The segment maintained stable margins through technology-enabled efficiencies, with non-GAAP operating income margins expected to hold around 20% for the rest of 2026. This segment contributes ~18% of total company revenue.

Risks & headwinds

- Government agencies have an increasing trend toward insourcing systems integration and direct commercial software acquisition, which could change the nature of Leidos' contract roles and create some near-term churn. - A potential government shutdown or continuing resolution (CR) at the end of the fiscal year could create timing disruptions to award and revenue recognition, most notably for the Intel and Digital segment. - Uncertainty around the terms of the upcoming VBA MDE recompete, which will not be fully clear until the RFP is released, creates uncertainty around 2027 health segment margin and revenue levels. - Current M&A valuations for target assets are elevated relative to Leidos' own current market valuation, which could limit inorganic growth opportunities in the near term.

Analyst Q&A

• Q: Multiple agencies are showing interest in insourcing systems integration, including for the next phase of MHS Genesis. Is this a broader trend, and how does it impact Leidos? /

  A: Management confirms insourcing is a broad trend across many government agencies, aligned with the current administration's aspirations. However, agencies do not have the in-house manpower to take over all work, so Leidos transitions its role to higher-level mission systems integration and ongoing maintenance/enhancement of existing systems. There will be some churn, but customers still rely on Leidos as a partner, and ongoing negotiations for MHS Genesis still leave open opportunities for Leidos to continue supporting the program. (312 characters)

• Q: With VA incentive payments suspended in 2026, what is the outlook for the 2027 VBA MDE recompete and health segment margins? /

  A: The incentive suspension is confirmed to be only for 2026, and the VA has indicated it will likely extend the current contract through the first half of 2027, with pre-discharge and international contracts extended for another year. The VA still prioritizes quality, timeliness, and veteran experience, so management expects incentives to return in the next contract, which will play to Leidos' strengths. All 2026 changes are already incorporated into guidance, and Leidos will leverage its existing scale and technology investments to compete effectively. (398 characters)

• Q: What is driving free cash flow momentum, and what are the key capital allocation priorities given Leidos' current valuation? /

  A: Q2 2026 delivered record free cash flow, and lower-than-expected planned CapEx has lifted full-year guidance. Leidos remains a low capital intensity business (1-1.5% of revenue), with ongoing work to reduce DSO that will further improve cash flow. Management maintains a balanced capital approach: prioritizing investments in defense tech growth, keeping powder dry for prudent M&A (target valuations are currently elevated), and using share repurchases to take advantage of Leidos' depressed valuation with a new repurchase authorization now in place. (387 characters)

• Q: What is the nature of the $12 billion defense tech opportunity pipeline over the next 12 months, and how is it contributing to margin expansion? /

  A: The pipeline includes both follow-on contracts for existing programs (such as IFPIC counter UAS, and space payloads) and new production awards for programs like low-cost containerized munitions and the Navy's unmanned surface vessel program. As programs mature and scale, margins improve: each new tranche of space payload contracts has delivered higher profitability than the prior one, and mature production programs like IFPIC are already seeing expanding margins. This positions defense segment margins to accelerate through 2030. (356 characters)