Leidos Q3 FY2026 Earnings: EPS Rises 16% on 4% Revenue Growth

Leidos (NYSE: LDOS) reported fiscal Q3 2026 revenue of $4.63 billion, up 4% from $4.47 billion a year earlier, while diluted GAAP EPS rose 16% to $3.28 from $2.82. Improved program execution, cost discipline and a lower effective tax rate supported earnings, although free cash flow declined year over year and companywide organic revenue growth was limited to 0.6%. Following the SES joint venture transaction, Leidos reduced its full-year revenue range but raised its non-GAAP EPS and operating cash flow guidance.

Core Earnings Results

Revenue growth reflected higher demand for defense technology products, air traffic management solutions and intelligence mission support, together with the ENTRUST Solutions acquisition. Lower volumes in managed health services and certain federal civilian IT programs partially offset those gains.

Adjusted EBITDA increased 5%, and its margin improved by 10 basis points. GAAP net income grew faster, aided by a lower effective tax rate, while quarterly operating and free cash flow both declined from unusually higher year-earlier levels.

The quarter included $12 million of acquisition, integration and restructuring costs. Non-GAAP net income, which excludes those and certain other items, increased 14% to $455 million.

Business and Segment Performance

Homeland was the largest growth contributor, while Health was the clear drag on consolidated performance. Intelligence & Digital and Defense delivered modest revenue growth with improved GAAP operating margins.

Intelligence & Digital benefited from recent awards and expanded work across intelligence programs, offset by reductions in federal civilian IT. Better program execution, award-fee performance and cost discipline lifted its margin by 190 basis points.

Health revenue and margin declined because of expected program shifts and lower managed-health-services volumes. Its operating income fell to $240 million from $324 million, making the segment the largest offset to gains elsewhere.

Homeland revenue included $142 million from ENTRUST. Excluding acquisition and divestiture effects, the segment still grew organically by 14.8%, supported by air traffic management and electric-power distribution engineering demand. At the company level, however, organic revenue increased only 0.6% to $4.488 billion.

Defense growth was supported by demand for air defense, sensing and C5ISR systems. Its GAAP margin improved to 8.7%, although its non-GAAP margin was nearly unchanged at 9.7%.

Quarterly bookings reached $5.5 billion, producing a book-to-bill ratio of 1.2. Total backlog increased 4% to $49.6 billion, while funded backlog rose 22% to $11.1 billion.

Profitability, Cash Flow, and the Balance Sheet

Quarterly operating cash flow of $523 million still represented 128% of net income attributable to common stockholders, while free cash flow conversion was 105%. Both ratios declined sharply from 194% and 171%, respectively, in the prior-year quarter. A less favorable movement in accounts payable and accrued liabilities was one contributor to the year-over-year cash flow decline.

Leidos returned $556 million to shareholders during the quarter, consisting of $504 million in share repurchases and $52 million in dividends. That exceeded quarterly free cash flow by $80 million. The board subsequently increased the quarterly dividend by 4.7% to $0.45 per share.

Cash and cash equivalents stood at $630 million on October 2, down from $1.108 billion at the start of the fiscal year, while reported debt increased to approximately $6.0 billion from about $4.65 billion. The year-to-date period included $2.338 billion spent on an acquisition and $1.397 billion of debt issuance proceeds.

Lower Taxes and a Smaller Share Count Amplified EPS Growth

The 16% increase in GAAP EPS substantially exceeded operating income growth of approximately 3%. Pretax income was nearly unchanged at $482 million, compared with $484 million a year earlier, as higher interest expense offset operating income growth.

Tax expense nevertheless fell to $69 million from $115 million, implying an effective rate of approximately 14% versus 24% in the prior-year quarter. Leidos attributed the lower rate primarily to a larger federal research tax credit and reduced unrecognized tax benefits. Diluted weighted-average shares also declined to 125 million from 130 million, further lifting per-share earnings relative to net income growth.

FY2026 Guidance

After closing its transaction with Altaris on October 5, Leidos contributed its Security Enterprise Solutions and Industrial Automation businesses to a newly formed joint venture. Reflecting the joint venture adjustment, year-to-date results and the current outlook, management lowered the revenue range while increasing non-GAAP EPS and operating cash flow expectations.

The guidance therefore points to a smaller reported revenue base following the portfolio transaction but improved earnings and cash generation expectations.

Recent Insider Transactions

Available six-month insider data show more shares purchased than sold, although the net amount was small relative to total insider holdings. These transactions do not by themselves establish insiders’ views about the company’s outlook.

Among the latest ten reported entries, eight were zero-price stock awards without share quantities in the supplied data. The two entries with reported sale values were as follows.

Risks Investors Need to Watch

• Health segment pressure: Health revenue fell 12%, while its operating margin contracted by 430 basis points. Continued managed-health volume weakness could offset growth in other segments.
• Limited companywide organic growth: Reported revenue increased 4%, but organic revenue rose only 0.6%. The $142 million ENTRUST contribution accounted for a meaningful portion of consolidated growth.
• Lower cash flow and higher debt: Operating cash flow and free cash flow declined year over year, while debt increased to approximately $6.0 billion. Quarterly shareholder distributions also exceeded free cash flow.
• Backlog funding and conversion: Only $11.1 billion of the $49.6 billion backlog was funded. Recognition of the remaining backlog depends on customer funding, contract execution and the exercise of options or task orders.

Summary

Leidos delivered modest revenue growth but faster EPS expansion, supported by better program execution, cost control, a lower tax rate and fewer diluted shares. Homeland and Defense demand offset a sizable Health contraction, while the difference between 4% reported growth and 0.6% organic growth highlights the contribution from ENTRUST. The raised EPS and cash flow outlook is constructive, but investors still need to monitor Health performance, cash conversion, debt and the impact of the newly formed joint venture on future reported revenue.