Leidos (NYSE: LDOS) reported Q2 FY2026 revenue of $4.56 billion, up 7.2% from $4.25 billion a year earlier, while GAAP diluted EPS fell to $2.81 from $3.01. Demand for defense technology, energy, air traffic management, and intelligence support drove revenue growth, but acquisition and restructuring costs and a difficult prior-year comparison weighed on margins; operating and free cash flow improved substantially.
Core Financial Results
For the quarter ended July 3, 2026, reported revenue growth included 3.9% organic growth. GAAP profitability declined partly because Leidos recorded $29 million of acquisition, integration, and restructuring costs, while the prior-year quarter included several one-time non-operating benefits, including a $25 million insurance reimbursement for legal costs.
The difference between GAAP and adjusted earnings was material: GAAP diluted EPS declined 7%, but non-GAAP diluted EPS increased 2% after excluding acquisition-related costs, acquired intangible amortization, and an asset impairment charge.
| Metric | Q2 FY2026 | Q2 FY2025 | Year-over-year change |
|---|---|---|---|
| Revenue | $4,558 million | $4,253 million | +7.2% |
| Operating income / margin | $514 million / 11.3% | $571 million / 13.4% | About -10% / -2.1 pp |
| Net income / margin | $356 million / 7.8% | $393 million / 9.2% | -9% / -1.4 pp |
| GAAP diluted EPS | $2.81 | $3.01 | -7% |
| Non-GAAP diluted EPS | $3.26 | $3.21 | +2% |
| Adjusted EBITDA / margin | $631 million / 13.8% | $647 million / 15.2% | -2% / -1.4 pp |
| Operating cash flow | $793 million | $486 million | About +63% |
| Non-GAAP free cash flow | $761 million | $457 million | About +67% |
Non-GAAP free cash flow equals operating cash flow less payments for property, equipment, and software.
Business and Segment Performance
Homeland produced the fastest reported and organic revenue growth, while Health was the only segment with lower revenue. Intelligence & Digital and Defense delivered mid-single-digit growth with relatively stable operating margins.
| Segment | Q2 FY2026 revenue | Year-over-year change | Operating margin | Prior-year margin |
|---|---|---|---|---|
| Intelligence & Digital | $1,499 million | +6.5% | 9.5% | 9.6% |
| Health | $1,086 million | -7.6% | 23.4% | 25.8% |
| Homeland | $1,018 million | +32.0% | 9.0% | 8.3% |
| Defense | $955 million | +6.2% | 8.8% | 8.7% |
Homeland benefited from continued demand in the Air Traffic and Energy businesses and included $141 million of revenue from the Entrust acquisition. Excluding acquisition and divestiture effects, Homeland organic revenue increased 15.1%. Its margin improvement reflected a more favorable security-products mix, better program performance, and lower indirect expenses.
Health revenue and margin declined primarily because of lower medical disability examination volumes. Intelligence & Digital benefited from recent awards and higher intelligence mission-support volumes, while Defense growth came from increased demand across several defense technology product lines.
Leidos recorded $4.9 billion of net bookings, resulting in a quarterly book-to-bill ratio of 1.1. Total backlog reached $48.7 billion, up 5% year over year, while funded backlog increased 44% to $10.2 billion. Significant awards included a $475 million U.S. Air Force avionics support contract, a $456 million Military OneSource contract, and a $350 million electronic-warfare support modification.
Prior-year segment results were recast to reflect the reporting structure adopted at the beginning of fiscal 2026.
Profitability, Cash Flow and Balance Sheet
Revenue growth did not translate into higher operating profit. Selling, general and administrative expenses rose to $283 million from $217 million, acquisition, integration, and restructuring costs increased to $27 million from $2 million, and the Corporate operating loss widened to $58 million from $9 million. Interest expense also increased to $69 million from $55 million.
The adjusted EBITDA margin decline partly reflected the unusually favorable comparison created by prior-year one-time gains. Health’s lower volumes and margin also offset improved profitability in Homeland.
Cash flow moved in the opposite direction from earnings. Operating cash flow reached $793 million, equivalent to 224% of net income attributable to common shareholders. Changes in tax balances and working-capital liabilities were more favorable than in the prior-year quarter, contributing to the improvement. After $32 million of property, equipment, and software payments, free cash flow was $761 million, with a conversion ratio of 185% relative to non-GAAP net income attributable to common shareholders.
During the quarter, Leidos repaid $300 million of debt and returned $127 million to shareholders through $72 million of share repurchases and $55 million of dividends. At quarter-end, the company held $748 million in cash and cash equivalents and had $6.0 billion of debt.
FY2026 Guidance
Leidos raised the lower ends of its full-year revenue and non-GAAP EPS ranges and increased its operating cash flow outlook. The upper ends of the revenue and EPS ranges were unchanged, while adjusted EBITDA margin guidance remained in the mid-13% area.
| Metric | Latest FY2026 guidance | Previous guidance | Change |
|---|---|---|---|
| Revenue | $18.20–$18.40 billion | $18.00–$18.40 billion | Lower end raised by $0.20 billion |
| Adjusted EBITDA margin | Mid-13% | Mid-13% | Unchanged |
| Non-GAAP diluted EPS | $12.20–$12.50 | $12.10–$12.50 | Lower end raised by $0.10 |
| Operating cash flow | Approximately $1.85 billion | Approximately $1.80 billion | Increased by $0.05 billion |
The revisions narrow the company’s guidance ranges from the lower end while maintaining the previous upper bounds for revenue and adjusted EPS.
Management View
CEO Tom Bell said Leidos is seeing growth across its Defense Tech, Energy Infrastructure, and Cyber priorities, along with greater visibility into the long-term role of Managed Healthcare. Management attributed the enhanced guidance to the company’s balanced portfolio, contract awards, and cash generation.
Risks Investors Need to Watch
- Margin pressure: Operating, net income, and adjusted EBITDA margins all declined. Acquisition and restructuring expenses, higher corporate costs, and the absence of prior-year one-time gains could continue to affect comparisons.
- Health volume weakness: Lower medical disability examination volumes reduced both Health revenue and margin, making future volume trends important for one of Leidos’ most profitable segments.
- Acquisition contribution and execution: Reported revenue increased 7.2%, compared with 3.9% organic growth. Entrust contributed meaningfully to Homeland’s results, while acquisition, integration, and restructuring costs reduced current-period earnings.
- Debt and interest expense: Leidos ended the quarter with $6.0 billion of debt, and quarterly interest expense increased year over year despite the $300 million debt repayment during the period.
- Backlog funding and conversion: Only $10.2 billion of the $48.7 billion backlog was funded. Revenue realization depends on customer funding, contract execution, option exercises, and the timing of task orders.
Summary
Leidos’ Q2 FY2026 results combined demand-driven revenue growth and substantially higher cash generation with lower GAAP earnings and narrower margins. Homeland was the main growth engine, while lower medical disability examination volumes pressured Health. The raised lower ends of full-year revenue and adjusted EPS guidance provide a firmer outlook, but margin recovery, Health volumes, acquisition execution, debt costs, and the conversion of backlog into funded revenue remain the main areas to monitor.
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