Full Transcript: Leidos Holdings Q2 2026 Earnings Call

Leidos Holdings (NYSE: LDOS ) reported second-quarter financial results on Tuesday. The transcript from the company's second-quarter earnings call has been provided below. This transcript is brought to you APIs. For real-time access to our entire catalog, please visit for a consultation.

8% adjusted EBITDA margin and record operating cash flow of nearly $800 million. 05, and operating cash flow by $50 million, supported by strong performance in Defense and Health segments. 2 book-to-bill ratio and significant contracts like a $1 billion agreement with the Department of Defense. In Health, the VBA Medical Disability Exam business is strong, despite the VA suspending incentive payments for the year.

The company anticipates contract extensions and is positioning for future growth. Capital deployment included completing a $66 million share repurchase and receiving a new authorization for future buybacks. Management highlighted a focus on the North Star 2030 strategy, with growth pillars in Defense Tech, Energy, and Cyber, and sees continued strong bookings momentum. Full Transcript OPERATOR Greetings.

Welcome to Leidos Holdings' second 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 speakers' presentations, there will be a question-and-answer session.

To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 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, Investor Relations Good morning and welcome to our second quarter fiscal year 2026 earnings conference call. The presentation slides we'll be using are on our Investor Relations website.

Turning to slide 2. 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 the specific risk factors that could cause actual results to differ materially. Finally, on slide 3, we'll 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'll turn the call over to CEO Tom Bell, who will begin on slide four. Tom Bell, Chief Executive Officer Thanks, Stuart. I'm pleased to report another strong quarter for Leidos Holdings.

6 billion. 8%. 1 book-to-bill ratio. Customer procurement activity is beginning to accelerate, so we anticipate continued positive bookings momentum through the rest of this year.

05, and raise operating cash flow guidance by $50 million. Now let me take a few moments to highlight some important developments in two of our segments that I know are top of mind for our investors: Defense and Health. In Defense, our team delivered another exceptional quarter. Revenue growth accelerated, margins expanded, and award velocity is accelerating.

2 book-to-bill ratio in the second quarter. 9 book-to-bill ratio. This level of customer traction gives us continued confidence in this segment's robust business outlook as a part of Leidos Holdings. And importantly, these bookings do not yet reflect the benefit from several major defense tech programs begun this year.

These include our over $1 billion framework agreement with the Department of Defense to deliver 3,000 low-cost containerized munitions by 2030, our unique position in the testing phase of the Navy's next-generation medium unmanned surface vessel—this positions us for a potential production award in Q4—and our recent award to provide the sensor payloads for an additional 18 missile warning and missile tracking satellites in support of Golden Dome. But in addition to these hardware successes, our defense team continues to leverage the unique power of One Leidos Holdings, bringing together hardware and software products and services to win in ways few competitors can match.

S. Army. There, engineers from our Defense and Digital businesses worked side by side to rapidly develop and deploy secure open application programming interfaces that enabled our hardware to integrate seamlessly with the Army's evolving command-and-control architecture. And perhaps more importantly, we demonstrated those same capabilities on non-Leidos Holdings systems, validating secure interoperability using open and documented standards.

Our team was among the first to complete the Army's technical sprint objectives. They consistently led the Operation Jailbreak progress metrics by demonstrating the speed, agility, and success that today's software-defined battlefield demands. That performance reinforced Leidos Holdings' leadership roles in open architectures, and it represents a major step in helping the Pentagon rid themselves of a huge issue. That issue is the prevention of seamless battlefield understanding and seamless command and control due to proprietary software vendor lock.

By bringing together advanced hardware, mission software, systems integration, and deep operational expertise all housed within One Leidos Holdings, we deliver differentiated capabilities at the speed our customers require. We believe this truly positions us to lead in the defense tech of the future, and our performance during this hackathon is garnering us more and more customer interaction and customer traction. Now, in Health, demand for our VBA Medical Disability Exam business remains strong through the second quarter, and we are now actively positioning this business for the customer's upcoming recompete.

The VA recently advised that it is reviewing certain administrative aspects of the Medical Disability Examination program, and as a part of that review, the VA has decided to suspend incentive payments for all vendors for the rest of this year. In addition to embracing this customer decision, we've worked proactively with the VA to apply the real savings we've been able to achieve in our existing Regions contract through focused insertion of technology and innovation across our pre-discharge and international contracts.

Taken together, this now gives us a clear picture of the probable 2026 full-year performance for this business, and that outlook is fully reflected in our enhanced 2026 guidance I mentioned earlier elsewhere. In Health, I'd like to clarify some recent reporting surrounding the next phase of MHS GENESIS. Under our original 10-year contract, Leidos Holdings successfully developed and deployed globally the Department of Defense Electronic Health Record System on time and under budget.

We are very proud of this fact, and consistent with the original vision for this program, our execution now enables the Defense Health Agency to procure underlying software directly from commercial vendors if they so choose. As the DHA finalizes its long-term acquisition strategy for the new Health Care Delivery Solution program, we'll continue to support and enhance MHS GENESIS under a sole-source bridge contract, and whatever structure comes next, we believe we are well positioned to continue supporting both the DHA and MHS GENESIS.

Also, while looking forward, we're leveraging our unique MHS GENESIS expertise for the My Service Treatment Record pilot program we discussed during last quarter's call. We're actively progressing this new program across both the Department of Defense and the VA and believe it can be a significant business driver for us in the future. Finally, on capital deployment—during the second quarter, we completed our previous 2022 Board share repurchase authorization with a $66 million open market share repurchase. A new Board authorization is now in place, so we anticipate resuming repurchases as prudent when our trading window opens.

In closing, our second quarter results once again demonstrate the strength and resilience of the Leidos Holdings portfolio and the value of our North Star 2030 strategy. We're seeing meaningful growth emerge across our Defense, Tech, Energy, and Cyber growth pillars and, because of the benefits of our North Star 2030 strategy and the resilience of our portfolio, we can once again raise our full-year guidance. With that, I'll turn the call over to Chris now and then look forward to our conversation. Chris Cage, Chief Financial Officer Thank you, Tom.

And thank you everyone for joining us today. Let's jump right into the results on slide 5. 56 billion, up 7% in total and 4% organically year over year. Bottom-line performance remained strong.

8%. 26, and we were able to turn those earnings into cash at a record pace. In the quarter, we generated $793 million of cash flows from operating activities and $761 million of free cash flow. Turning to the segment-level view on slide 6, Homeland led all segments with 32% total and 15% organic growth.

Growth reflected robust demand in commercial energy infrastructure and domestic and international air traffic management, as well as some benefit from foreign exchange movements. Defense accelerated to 6% organic growth as we ramped up production on integrated air defense and counter-UAS programs, and Intel and Digital maintained its robust growth rate from Q1, principally from strong intelligence community demand. As expected, Health segment revenues contracted from the full incorporation of the fourth vendor on the VBA Medical Disability Examination Regions contract.

Even so, we were able to maintain Health margins through continued efficiencies enabled by technology insertion. Profitability increased significantly in Defense and Homeland from Q1 levels through strong program execution. Changes in estimates at completion were a tailwind in the quarter, consistent with our historical experience. In addition, margin benefited from prudent corporate cost management and excellent award and incentive fee performance.

As shown on slide 7, we paid down the remaining $300 million of commercial paper tied to the NTRUST acquisition and ended the quarter with a very strong balance sheet. At quarter end, we had $6 billion of debt and $748 million of cash and cash equivalents. 5 times. Finally, onto the forward outlook on slide 8.

As Tom indicated, we're enhancing our guidance for revenues, earnings, and cash. 10, and increasing our operating cash flow guidance by $50 million. We're now expecting CapEx to be closer to $250 million for the year, so the implied free cash flow guidance is up about $150 million. We're maintaining our adjusted EBITDA margin guidance of mid-13%, and this guidance excludes any impact from the pending SES joint venture with Analogic, which we still expect to close later this year.

Importantly, we are diversifying the earnings power of the company, so we are able to raise guidance despite the VBA MDE changes that layer in over the third and fourth quarters this year. In fact, on an organic basis, we expect the rest of Leidos Holdings to grow approximately 7% in revenues and 19% in adjusted EBITDA in 2026. Diving a little deeper, we see Health segment sustaining revenues around Q2 levels for the rest of the year with non-GAAP OI margins around 20%. Conversely, Defense growth will accelerate and post high single-digit growth for the year.

If you exclude the Airborne ISR business, which is in a transition phase, Defense will grow double digits in 2026, which is a better indicator of its launch point heading into 2027. With that, operator, we're ready to take questions. OPERATOR Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced.

To withdraw your question, please press star 11 again. In fairness to all, we ask that you please limit yourselves to one question and one follow-up. One moment while we compile our Q&A roster. Our first question is going to come from the line of Scott Mekas with Milius Research.

Your line is open. Please go ahead. Scott Mekas, Analyst Morning, Tom and Chris, on DHMSM/MHS Genesis. The reports indicate the next phase, DHA, sorry, plan to do the integration internally.

Did you get information from the customer on why they chose to go that route? And is this kind of a one-off situation, or do you expect other agencies to limit the role of systems integrators going forward? Tom Bell, Chief Executive Officer Thanks, Scott, appreciate the question. I think, honestly, the trend here is that there is an interest in insourcing across many government agencies.

Right now, what they're interested in insourcing is the systems integration, as you say, but also the acquisition of commercial technology per the aspirations of this administration. So we see that trend continuing across many agencies. That being said, while that has been a value-added service for Leidos in the past, what we're able to do is transition our value-added services into higher level mission systems integration capabilities. Just integrating the system was what got them to the place where they can now commercially acquire the software themselves and perhaps do some of the systems integration themselves.

But as you're seeing with MHS Genesis, there's still a need for us to maintain the system, enhance the system, and partner with them in terms of making the system match-fit for the future. So while we see a lot of conversations around insourcing, and it's understandable why our customer would want to make sure that they have organic capability, it's difficult to see that they can insource it all and have the manpower necessary to do the whole work. And so we're seeing them also contract with us as their partner going forward. When you cut away from that and raise up back to the 30,000-foot level, you see that for all that's changed, very little has changed.

There's a little bit of churn, there's a little bit of change in what our partnership looks like. But at the end of the day, they're still looking for us to help them maintain, enhance, and make sure the system is working for the future. Chris Cage, Chief Financial Officer Scott, I'd just add that even in the case of DHMSM, ongoing negotiations are taking place around how we can continue to support them even with the current set of activities. It's trending the way Tom talked about, potentially, but at the same time, the customer doesn't necessarily have the capacity to jump in and do all the activities that Leidos has historically supported.

There's a good chance that we perpetuate that as is, and then we'll play for the value-added piece as the future becomes more clear. Scott Mekas, Analyst Okay, I'll stick with one. Thank you. OPERATOR Thank you, Scott.

Thank you. And one moment as we move on to our next question. Our next question comes from the line of Matt Akers. Your line is open.

Please go ahead. Matt Akers, Analyst Yeah. Hey, good morning, guys. Thank you for the question.

I just wanted to follow up on the VBA recompete commentary you gave in the opening remarks. I think you said the incentive payments going away in the rest of this year. Is there any conclusions we could draw for 2027? Any more clarity there?

Any thoughts on where margins could go in that Health business? Tom Bell, Chief Executive Officer Sure. Thanks for the question, Matt. Not surprised it's one of the first ones that is asked this morning.

Yes. As I said in my prepared remarks, we were informed in late May that the customer was considering withdrawing the incentive scheme from all vendors for the medical disability exam business, and we concurred with their decision there. As I said, that's driven by some administrative issues they have, that their auditability and how those incentive payments have been given is in question. And so while they sort themselves out, they want to pause those incentive payments.

It's been very clear that that's for this year only. And I was just with the leadership of the Veterans Administration yesterday to seek clarity on where all this is going. And it became clear in that conversation that while cost is one concern, the Veterans Administration has value, veteran experience, quality are still things that they are very, very keenly focused on. So while we do not yet have a draft RFP for the recompete, and so we don't know the exact terms that will be a part of the next contract here, I'm pretty sure incentives will be a part of it and that quality, timeliness, schedule, and cost will be another thing that they focus on incentivizing.