Leidos (LDOS) Q3 2026 earnings review
Leidos raises its profit plan, but underlying sales barely grow
Leidos, the government technology and defense contractor, grew per-share profit through tax breaks and buybacks while its underlying sales stalled. Reported revenue rose 4% to $4.63 billion because of the Entrust utility acquisition, as sales from businesses owned a year ago edged up 0.6%. Chief executive Tom Bell raised the full-year profit outlook, but by our math the plan has fourth-quarter profit per share falling 7% from a year ago.
| Sales from businesses owned a year ago | +0.6% +3.9% last quarter |
|---|---|
| Reported revenue | $4.63B +3.6% from a year ago |
| Profit per share, excluding one-offs | $3.62 +19% from a year ago |
| Full-year profit per share outlook | Raised $0.25 middle of the range: $12.60 |
⚖️ Verdict: ⚪ Neutral
The story is unchanged because lower taxes and share buybacks drove the earnings raise while the operational debates stayed open. By our math, a drop in the tax rate added $0.38 per share, more than the entire full-year outlook boost. One caution: Health margin beat what the second-half plan pointed to, which says the plan was cautious, while Defense revenue grew 3% and fell behind its full-year target.
The question now is whether the 69% jump in funded Defense backlog will turn into revenue fast enough to offset shrinking Health profits in 2027. Either new missile and radar contracts ramp up in the fourth quarter, or the backlog was mostly early government funding that converts slowly. Fourth-quarter Defense revenue growth and the 2027 Health outlook will settle it.
🐂 Bull Case
Homeland Commercial Work Lifts Sales and Margins
Leidos provides technology and engineering to government agencies and commercial clients. Its Homeland division sells airport security equipment, air traffic control software, and electric grid design. In March, the group bought Entrust Solutions, a power engineering firm, for $2.34 billion to expand its commercial utility business.
Homeland was the only segment to post double-digit growth this quarter. Segment revenue rose 32.1% from a year ago to $1.02 billion, including $142 million from Entrust. Sales from businesses it owned a year ago still rose 14.8%, carrying the rest of the company.
Operating margin excluding one-offs in Homeland jumped 3.8 percentage points to 11.3%, which Leidos attributed to a higher mix of commercial work and cost control. What to watch: Homeland underlying sales growth in the first quarter of 2027, when the Entrust purchase passes its one-year mark. Holding double-digit growth then would prove the utility business is expanding on its own.
Share Buybacks Returned in Force
Earlier this year, Leidos paused large share repurchases while it borrowed money to buy Entrust and used its last 2022 buyback approval. In the second quarter, the Virginia contractor spent $72 million on its own shares while paying down $300 million of short-term debt.
In the third quarter, the company bought back $504 million of stock and raised its quarterly dividend by 4.7% to $0.45 per share. Those purchases lowered the diluted share count by 3.8% from a year ago to 125 million shares, which added to per-share profit growth.
What to watch: fourth-quarter share repurchases in the cash flow statement. Because the company has already spent $1.62 billion of operating cash flow and holds $6.03 billion in debt, another large buyback would require borrowing or drawing down its $630 million cash balance.
Funded Backlog Grew Into the Federal Deadline
Funded backlog is the value of contracts for which the government has already set aside money. A standing debate is whether Leidos's recent order growth comes from durable demand or from federal agencies rushing to assign funds before the government fiscal year ended on September 30.
In the third quarter, which ended October 2, Leidos booked $5.5 billion of net orders, or 1.2 times its quarterly revenue. Funded backlog rose 22.0% from a year ago to $11.06 billion, while total backlog grew 4.0% to $49.55 billion (3.2% by our math excluding $371 million acquired with Entrust). Intelligence and Digital operating margin excluding one-offs also rose 1.6 percentage points to 11.5% on "strong award fee scores and disciplined cost management".
What to watch: the ratio of net bookings to revenue in the fourth quarter. Because the September 30 government funding deadline has now passed, keeping the twelve-month ratio at or above 1.1 would show that contract wins do not depend on year-end budget rushes.
🐻 Bear Case
A Lower Tax Rate Drove the Profit Raise
"Leidos delivered another quarter of strong financial performance, allowing us to enhance our 2026 guidance for the third consecutive quarter," chief executive Tom Bell said. The headline profit per share excluding one-offs rose 18.7% from a year ago to $3.62, and the company raised its full-year target by $0.25 at the middle of the range.
- Sales from businesses owned a year ago: up 0.6% from a year ago
- Pre-tax profit: $482 million, down from $484 million a year ago
- Effective tax rate: 14.3%, down from 23.8% a year ago by our math
- Profit per share boost from the lower tax rate: $0.38 by our math
Bell's framing overstates operating progress because taxes and buybacks did the work. Leidos cut its tax bill through "an increase in the federal research tax credit and a decrease in unrecognized tax benefits". Without that tax drop, profit per share excluding one-offs would have been $3.24 by our math, up 6.2% rather than 18.7%, and the $0.38 tax benefit alone exceeds the $0.25 full-year outlook raise.
What to watch: the effective tax rate in the fourth quarter and the 2027 outlook. If the tax rate returns toward 24% next year, per-share profit growth will stall unless underlying sales accelerate.
Defense Orders Have Not Turned Into Revenue Growth
The Defense division builds radar, space sensors, and cruise missiles, and it is both a strengthening order driver and a second-half delivery risk. Last quarter, management said full-year Defense revenue would grow 7% to 9%, which by our math required second-half growth of 10% to 14%.
This quarter, the division won $272 million for space missile-tracking sensors, $155 million for a sea-launched missile, and $27 million for Havoc Spear small cruise missiles. That lifted Defense total backlog 39.7% from a year ago to $14.65 billion and funded backlog 69.0% to $3.81 billion. Yet Defense revenue grew only 3.4% to $992 million, missing the ~$1.06 billion quarterly pace implied by the full-year target, while segment margin excluding one-offs dipped to 9.7%.
What to watch: fourth-quarter Defense revenue. By our math, the segment must grow at least 17.7% from a year ago in the fourth quarter just to reach the 7% bottom of management's full-year target.
Health Revenue and Margins Keep Stepping Down
Health is Leidos's most profitable division, generating 39.5% of segment operating profit from 23.1% of revenue this quarter. The Department of Veterans Affairs added a fourth contractor to its medical disability exam programme and suspended bonus payments for the rest of 2026, resetting the division's earnings.
In the third quarter, Health revenue fell 11.7% from a year ago to $1.07 billion on "expected program shifts and reduced volumes on managed health services programs". Operating margin excluding one-offs dropped 4.5 percentage points from a year ago to 22.8%, and Health total backlog fell 21.0% to $6.32 billion. Because the 22.8% margin beat management's 20% second-half plan, it shows the plan was cautious, not that the fee suspension has gone away.
What to watch: fourth-quarter Health operating margin excluding one-offs. Management called the fourth quarter the starting point for 2027, so a drop to 20% would lock in a lower profit base for next year.
Risks this quarter didn't answer
Four standing concerns from prior quarters could not be checked from the third-quarter earnings release alone.
- Veterans medical exam contract bidding: management expected a formal request for proposals by this call; the release does not mention it or the one-year contract extension.
- Government insourcing of technology integration: Leidos won a 12-month, $318 million bridge contract on the MHS GENESIS military health record system and deployed its UpHold Effect AI software on an Army cyber contract, which "dramatically compresses threat response windows and eliminates analyst alert fatigue", but the release gives no update on what work the government is moving in-house.
- Fixed-price contract mix: the quarterly filing will show whether fixed-price revenue rose from $1.86 billion last quarter.
- Antitrust investigation: the status of the 2022 Justice Department subpoena lives in the quarterly filing's legal note, which is not yet available.
👓 Other Themes
Joint Venture Close Trims the Revenue Plan
On October 5, three days after the third quarter ended, Leidos closed an agreement with Altaris, "contributing the Security Enterprise Solutions and Industrial Automation (SES) businesses to a newly formed joint venture". The balance sheet carried $904 million of assets and $171 million of liabilities held for sale for those units. Removing their fourth-quarter sales caused Leidos to trim its full-year revenue plan by $200 million.
💲 Other KPIs
Fell 30.0% from a year ago ($680 million) and stepped down from $761 million last quarter. Operating cash flow was $523 million after $79 million flowed out for accounts payable, while spending on property, equipment, and software rose to $47 million. That equalled 105% of net profit excluding one-offs.
By our math, total debt of $6.03 billion minus $630 million of cash leaves $5.40 billion in net debt, up $1.86 billion since the start of the year. The defense contractor issued $1.40 billion in long-term debt this year to buy Entrust, raising quarterly net interest expense by 31.4% from a year ago to $67 million.
Overhead and administrative spending fell 9.7% from a year ago ($290 million) and dropped from $283 million in the second quarter. By our math, that reduced overhead by 0.8 percentage points of revenue to 5.7%, offsetting a 0.7-point rise in the cost of delivering services and keeping GAAP operating margin steady at 11.9%.
🔮 Guidance
Cut. The middle of the range moved down $200 million to $18.10 billion (5.4% annual growth by our math) after Leidos moved its security equipment unit into a joint venture on October 5. By our math, that leaves $4.51 billion for the fourth quarter, or 7.2% growth from a year ago against an easy comparison weakened by last year's six-week government shutdown.
Raised. The middle of the range rose $0.25 to $12.60, or 5.1% growth for the year. It is the third raise this year, and larger than the prior two moves: +$0.05, +$0.05, +$0.25. By our math, after $10.03 in the first nine months, the plan leaves $2.57 for the fourth quarter, down 6.9% from $2.76 a year ago.
Unchanged. The government contractor kept its full-year target at roughly 13.5%, down from 14.1% delivered in 2025. Because the margin ran at 13.9% across the first nine months, by our math a 13.5% full-year figure points to 12.3% in the fourth quarter, reflecting lower Health profitability.
Raised. Management lifted the target by $50 million for a third straight quarter (+$50M, +$50M, +$50M), pointing to 8.6% growth over 2025. With $1.62 billion already collected in the first nine months, by our math the plan leaves $283 million for the fourth quarter, down 42.8% from $495 million a year ago.
❓ Key Questions
Has the Veterans Affairs agency issued the medical exam bid?
Last quarter, management expected a formal request for proposals on the medical disability exam contract by this call. Because Health generates nearly 40% of segment profit, the bidding terms will set the division's 2027 margin.
How will Defense revenue jump 18% in the fourth quarter?
Defense revenue grew 3.4% in the third quarter, leaving a 17.7% fourth-quarter jump by our math to reach the bottom of management's 7% to 9% full-year growth target.
What will the effective tax rate be in 2027?
Research tax credits and tax reserve releases cut the third-quarter tax rate to 14.3% from 23.8% a year ago, adding $0.38 per share by our math. Investors need to know how much of that lower rate repeats.
How much fourth-quarter revenue did the security joint venture remove?
Leidos cut its full-year revenue outlook by $200 million after moving its security and automation unit into a joint venture on October 5. Disclosing the exact revenue removed will show whether underlying fourth-quarter expectations changed.