Leidos Holdings Earnings Call Shows Profits Over Noise

Leidos Holdings Inc ((LDOS)) has held its Q4 earnings call. Read on for the main highlights of the call.

Leidos Holdings Inc. struck an upbeat tone on its latest earnings call, underscoring strong profit growth, record cash generation, and robust bookings despite a noisy quarter for reported revenue. Management framed calendar quirks, a government shutdown, and award timing as temporary drags, while stressing growing momentum and confidence in accelerating through 2026.

Revenue Growth Masks Underlying Strength

Leidos reported 2025 revenue of $17.2 billion, up 3.1% year over year, even with calendar and shutdown pressures. Executives argued the underlying business grew more strongly across the portfolio once those one-off factors are stripped out, reinforcing the view that demand remains solid.

Margins Push Higher Above Guidance

Profitability was a standout, with 2025 adjusted EBITDA margin hitting 14.1%, a 120-basis-point improvement from the prior year. In the fourth quarter, adjusted EBITDA margin reached 13.2%, up 160 basis points and topping the high end of earlier guidance, signaling improved mix and execution.

EPS Delivers Double-Digit Growth

Non-GAAP diluted EPS for 2025 climbed 17% to $11.99, an increase of $1.78 versus 2024 and $0.24 above the top of prior guidance. Fourth-quarter non-GAAP EPS came in at $2.76, giving investors evidence that earnings power is expanding faster than revenue.

Record Cash and Free Cash Flow Conversion

Leidos generated a record $1.75 billion in operating cash flow for the year, including $495 million in the fourth quarter. Free cash flow reached $1.63 billion with 104% conversion for the full year and $452 million in Q4 at 127% of non-GAAP net income, representing roughly 26% growth and a key support for capital returns.

Bookings, Backlog and Pending Awards Surge

Fourth-quarter net bookings totaled $5.6 billion, sustaining a 1.3 times book-to-bill ratio already achieved in the prior quarter. Funded backlog rose 15% year over year and total backlog reached about $49 billion, with roughly $20 billion of additional awards pending, underscoring multi-year visibility.

Portfolio Shaped by M&A and Divestitures

Management highlighted the acquisition of Kudu Dynamics in May, describing it as rapidly growing and profitable within the portfolio. The company also exited noncore Barrick in October and agreed to acquire Entrust Solutions Group for $2.4 billion in cash to deepen its energy engineering footprint.

Big Wins and Strategic Contract Positions

Among notable fourth-quarter wins, Leidos secured a $2.2 billion U.S. Air Force passive radar contract and a $455 million Air Force Cloud One Next award. The company also gained spots on two large IDIQ vehicles, the $151 billion Missile Defense SHIELD and the $25 billion Defense Microelectronics program, opening doors to future task orders.

Capital Returns Stay Disciplined

Leidos repurchased $305 million of stock in the fourth quarter and cut its diluted share count by 4.4% during 2025, which management said contributed about $0.50 to EPS. The company also paid $55 million in dividends while maintaining capacity for growth investments, signaling a balanced capital allocation approach.

Reported Q4 Revenue Hit by Timing Factors

Fourth-quarter revenue fell 3.6% year over year to $4.2 billion, but management tied the decline largely to external timing issues. They cited a six-week U.S. government shutdown and an extra work week in 2024, which together reduced reported Q4 revenue growth by roughly seven percentage points and full-year growth by about two points.

2026 Guidance Normalizes Margins

Looking ahead, Leidos guided 2026 adjusted EBITDA margins to the mid-13% range, below 2025’s 14.1% as certain one-time benefits roll off. Revenue is expected at $17.5 billion to $17.9 billion, up to about 4%, suggesting a more conservative near-term outlook even as management emphasizes building momentum through the year.

Health Segment Faces Transitional Drag

The Health segment is expected to see modestly lower revenue and margin in 2026, reflecting structural changes in key programs. Management pointed to the addition of another vendor on VBAMDE work and a transition of the DHMSM electronic health record program into sustainment, while noting Managed Health Services was a headwind in Q4.

Award Slippage Adds Timing Volatility

Roughly $7 billion of expected awards slipped from the fourth quarter into the following period, underscoring the inherent timing risk in the government contracting pipeline. Executives also reminded investors that IDIQ vehicles do not count as backlog until task orders are issued, creating both uncertainty and upside potential for 2026 revenue.

CapEx Ramp to Pressure Free Cash Flow

Leidos plans to triple capital expenditures to about $350 million in 2026 as it scales production capabilities and classified facilities. While this heavier investment is designed to support future growth, management acknowledged that free cash flow will be down versus 2025 as a result.

Leverage to Rise with Entrust Deal

To finance the $2.4 billion Entrust acquisition, the company expects to use $500 million of cash, $500 million of commercial paper, and $1.4 billion of new bonds. Pro forma gross leverage should increase to roughly 2.6 times from the current 1.9 times, which management views as still within its comfort range.

Program Mix and Competition Create Risks

The company cautioned that some defense margins may edge lower in 2026 as high-margin airborne programs taper. Volumes in DHMSM have already declined as the project shifts into sustainment, and competition, including in areas like VA medical exams, could pressure pricing and terms in future contract recompetes.

Guidance Points to Steady but Building Growth

For 2026, Leidos guided revenue of $17.5 billion to $17.9 billion, implying up to about 4% growth and a trajectory that builds toward a double-digit exit rate. Non-GAAP EPS is projected at $12.05 to $12.45 on mid-13% EBITDA margins and roughly $1.75 billion in operating cash flow, with free cash flow temporarily lower due to a significant step-up in capital spending and guidance excluding the Entrust transaction.

Leidos’ earnings call painted a picture of a contractor leaning into growth with stronger margins, rising EPS, and record cash, even as near-term optics are muddied by timing noise and heavier investment. Investors will watch whether the company can convert its swollen backlog, stepped-up CapEx, and pending Entrust deal into the faster growth and durable earnings trajectory management is targeting through 2026 and beyond.