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Introduction & Market Context

Leidos Holdings (NYSE:LDOS) presented its second quarter fiscal 2026 results on August 4, 2026, showcasing strong performance that exceeded Wall Street expectations and prompted the defense contractor to raise its full-year guidance. The company reported revenue of $4.56 billion and adjusted earnings per share of $3.26, beating analyst estimates of $4.44 billion and $2.91 per share, respectively. Shares responded positively, rising 7.28% to $127.36 from the previous close of $118.72.

The presentation highlighted what CEO leadership characterized as "the strength and resilience of NorthStar 2030 Strategy on full display," with exceptional defense performance offsetting headwinds in the health segment. The company achieved a 1.1 book-to-bill ratio overall and a remarkable 2.2 book-to-bill in its Defense segment, supporting a robust growth outlook.

Quarterly Performance Highlights

As shown in the following chart of key financial metrics, Leidos delivered substantial year-over-year improvements across most major performance indicators for the second quarter of fiscal 2026.

Revenue grew 7.2% year-over-year to $4.56 billion from $4.25 billion in the prior-year quarter. Non-GAAP diluted earnings per share increased 1.6% to $3.26 from $3.21, representing a significant beat against the $2.91 consensus estimate. The most impressive performance came in operating cash flow, which surged 63.2% to a second-quarter record of $793 million from $486 million in the prior year.

However, adjusted EBITDA margin declined 140 basis points to 13.8% from 15.2%, reflecting mix shifts and challenges in the health business. Despite this margin compression, management maintained its full-year adjusted EBITDA margin guidance at the mid-13% level, indicating confidence in margin stabilization through the remainder of the year.

Segment Performance Analysis

The company’s segment-level performance revealed a bifurcated story, with three segments posting solid growth while the health business contracted. The following chart illustrates revenue and operating margin performance across Leidos’s four operating segments.

The Homeland segment emerged as the standout performer, with revenue jumping 32.0% to $1.02 billion and operating margins expanding 280 basis points to 12.1%. This growth was driven by commercial energy infrastructure and air traffic management work, though organic growth of 15% indicated that acquisitions also contributed meaningfully to the segment’s expansion.

Defense revenue increased 6.2% to $955 million, with operating margins essentially flat at 9.9%. Management highlighted accelerating momentum in defense tech, munitions, maritime systems, space sensing, and counter-unmanned aircraft capabilities. The segment’s 2.2 book-to-bill ratio in the quarter suggests continued strong growth ahead.

Intelligence & Digital posted 6.5% revenue growth to $1.50 billion with operating margins holding steady at 10.1%, demonstrating consistent execution in this core business.

The Health segment presented the primary challenge, with revenue declining 7.6% to $1.09 billion and operating margins contracting 250 basis points to 23.8%. The presentation noted that "VBA medical disability exam demand remained high" but acknowledged changes in the business environment, including the suspension of incentive payments that weighed on segment performance.

The following table breaks down organic growth rates by segment, providing insight into growth quality.

On an organic basis, total company revenue grew 4%, with Homeland leading at 15% organic growth, followed by Intelligence & Digital and Defense both at 6%. The Health segment’s 8% organic decline underscores the challenges facing that business line. Acquisitions, primarily the Entrust acquisition completed in March 2026 and Kudu Dynamics acquired in May 2025, contributed $150 million to total revenue in the quarter.

Financial Strength & Capital Allocation

Leidos demonstrated robust financial discipline and strong cash generation during the quarter, as illustrated in the following capital allocation summary.

The company generated record second-quarter operating cash flow of $793 million and free cash flow of $761 million, enabling management to pay off the remaining $300 million in commercial paper from the Entrust acquisition ahead of schedule. This early debt reduction demonstrates the company’s commitment to maintaining balance sheet flexibility.

The balance sheet remains healthy with approximately $2.0 billion in liquidity, total debt of $6.0 billion, gross leverage of 2.5 times, and net leverage of 2.1 times. Management noted that this "healthy balance sheet with no near-term debt obligations can fund growth investments, strategy-aligned M&A, and share repurchases."

During the quarter, Leidos returned $127 million to shareholders while investing $32 million in capital expenditures. The company’s low-capital-intensity model continues to support strong free cash flow generation, with free cash flow conversion reaching 185% in the quarter compared to 110% in the prior year.

The following reconciliation details the company’s free cash flow calculation and conversion metrics.

Forward-Looking Statements

Based on strong first-half performance, Leidos raised its full-year fiscal 2026 guidance across multiple metrics, as shown in the following comparison of current and prior guidance.

The company increased the low end of its revenue guidance by $200 million, narrowing the range to $18.20-$18.40 billion from the prior $18.00-$18.40 billion range. This represents a $100 million increase at the midpoint. Non-GAAP diluted EPS guidance was also raised, with the range moving to $12.20-$12.50 from $12.10-$12.50, a $0.05 increase at the midpoint.

Operating cash flow guidance increased to approximately $1.85 billion from $1.80 billion, a $50 million raise. Combined with lower expected capital spending of around $250 million, this implies approximately $150 million in additional free cash flow for the year.

Management’s key assumptions for the updated guidance include:

  • Strong first-half performance that "de-risked initial plan"
  • Incorporation of changes in the VBA medical disability exam environment
  • Weighted average diluted share count of 126 million
  • Exclusion of the pending SES/Analogic joint venture expected to close in the second half

The presentation emphasized "exceptional defense performance" with accelerating revenue and expanding margins, supported by the 2.2 book-to-bill ratio. Management also noted that the "health landscape coming into focus" with clarity around the recompete framework, while MHS Genesis success is opening new business opportunities.

According to the earnings call transcript, management expects organic revenue growth of about 7% for the rest of the company excluding health, with defense growth accelerating to high single digits for the full year, or double digits excluding airborne ISR. The company pointed to a $12 billion pipeline of visible defense-tech opportunities over the next 12 months.

Detailed Financial Analysis

The following reconciliation provides transparency into the adjustments between GAAP and non-GAAP financial metrics.

For the quarter ended July 3, 2026, Leidos reported GAAP operating income of $514 million compared to non-GAAP operating income of $584 million, with the $70 million difference primarily attributable to acquisition, integration and restructuring costs of $39 million, amortization of acquired intangibles of $30 million, and asset impairment charges of $1 million.

GAAP net income attributable to common stockholders was $354 million, or $2.81 per diluted share, compared to non-GAAP net income of $411 million, or $3.26 per diluted share. The company’s adjusted EBITDA of $631 million represented a 13.8% margin on reported revenue.

Segment-level operating income reconciliations reveal the impact of acquisition-related costs across the business.

The most significant adjustments occurred in the Homeland segment, where $31 million in acquisition, integration and restructuring costs were excluded from non-GAAP results, reflecting integration activities from recent acquisitions. The Defense segment had $11 million in similar adjustments, while Intelligence & Digital and Health had smaller adjustments of $9 million and $5 million, respectively.

Market Response and Valuation

Leidos shares rose 7.28% to $127.36 following the earnings release and presentation, building on a 3.18% premarket gain to $122.50. The positive market reaction reflects investor approval of the earnings beat, guidance raise, and record cash generation.

Despite the recent gains, the stock remains well below its 52-week high of $205.77, though significantly above its 52-week low of $98.86. At the current price, Leidos trades at a price-to-earnings ratio of 10.87, suggesting attractive valuation relative to earnings power. The company’s 30% return on equity reflects strong profitability, while its 12% free cash flow yield indicates robust cash generation relative to market capitalization of $14.93 billion.

The combination of strong execution, raised guidance, record cash flow, and disciplined capital allocation positions Leidos favorably as it continues executing its NorthStar 2030 strategy, though investors will be watching for stabilization in the health segment and continued momentum in defense and homeland security markets.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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