Leidos Holdings, Inc. 2026 Q2 Earnings Call

Good morning. 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 two, 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 three, 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.

Thanks, Stuart. I'm pleased to report another strong quarter for Leidos. Second quarter revenue grew 7% year-over-year, 4% organically, to a record $4.6 billion. Adjusted EBITDA margin remained best in class at 13.8%. Operating cash flow reached a Q2 record of nearly $800 million. We booked $5 billion in net awards, delivering a solid 1.1 book-to-bill ratio. Customer procurement activity is beginning to accelerate, so we anticipate continued positive bookings momentum through the rest of this year. Our year-to-date financial performance indicates to us that our NorthStar 2030 growth strategy is working. As a result, I'm pleased we can raise the midpoint of our 2026 revenue guidance by $100 million, raise the midpoint of our EPS guidance by $0.05, and raise operating cash flow guidance by $50 million.

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. Defense posted a 2.2 book-to-bill ratio in the second quarter. Over the trailing 12 months, this equates to a 1.9 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. 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. Our recent award to provide the sensor payloads for an additional 18 missile warning and missile tracking satellites in support of Golden Dome. In addition to these hardware successes, our defense team continues to leverage the unique power of One Leidos, bringing together hardware and software, products and services to win in ways few competitors can match. To illustrate the power of this unique One Leidos capability, let me briefly highlight Leidos' role in the recent Operation Jailbreak Hackathon by the U.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.

Perhaps more importantly, we demonstrated those same capabilities on non-Leidos 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's progress metrics by demonstrating the speed, agility, and success that today's software-defined battlefield demands. That performance reinforced Leidos' leadership role in open architectures, 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, 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, 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 remained strong through the second quarter, 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. 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, 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 successfully developed and deployed globally the Department of Defense Electronic Health Records system on time and under budget. We are very proud of this fact. 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 healthcare delivery solution program, we'll continue to support and enhance MHS Genesis under a sole source bridge contract.

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. 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 portfolio and the value of our NorthStar 2030 strategy.

We're seeing meaningful growth emerge across our defense tech, energy, and cyber growth pillars. Because of the benefits of our NorthStar 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? Thank you, Tom. Thank you everyone for joining us today.

Let's jump right into the results on slide five. As Tom highlighted, revenues for the quarter was $4.56 billion, up 7% in total and 4% organically year-over-year. Bottom-line performance remained strong. Adjusted EBITDA was $631 million for the second quarter for an adjusted EBITDA margin of 13.8%. Non-GAAP diluted earnings per share grew to $3.26. 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 six, 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. 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 seven, we paid down the remaining $300 million of commercial paper tied to the ENTRUST 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. Gross leverage fell to 2.5 times. Finally, onto the forward outlook on slide eight. As Tom indicated, we're enhancing our guidance for revenues, earnings, and cash. Specifically, we're raising the lower end of our ranges for revenue by $200 million in non-GAAP diluted EPS by $0.10 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-13s%. This guidance excludes any impact from the pending SES joint venture with Analogic, which we still expect to close later this year.