Leidos grew Q2 revenue 7.2% to $4.56B, but only 3.9% organically, as the Entrust acquisition offset a shrinking Health segment; GAAP EPS fell 6.6% to $2.81 while guidance was nudged up.
Revenue
$4.6B
+7.2% YoY
Net income
$354M
-9.5% YoY
Diluted EPS
$2.81
-6.6% YoY
Operating margin
11.3%
Revenue up 7%, earnings down: the Entrust deal adds sales while Health shrinks and last year's one-off gain drops out
Leidos, the Reston, Virginia government contractor, reported second-quarter fiscal 2026 revenue of $4,558 million, up 7.2% from $4,253 million a year earlier (quarter ended July 3, 2026). The growth is partly bought: $141 million came from Entrust, the utility-engineering firm Leidos acquired on March 27, 2026. Excluding acquisitions and a small divested business, organic revenue (sales from businesses owned in both periods) grew 3.9%.
Profit moved the other way. Operating income fell 10.0% to $514 million, net income attributable to shareholders fell 9.5% to $354 million, and diluted EPS fell 6.6% to $2.81 from $3.01. EPS fell less than net income because the diluted share count dropped to 126 million from 130 million after buybacks.
Two things explain almost all of the $57 million drop in operating income: the Health segment earned $49 million less, and Corporate costs rose by $49 million. The Corporate increase is mostly a comparison effect. A year ago Leidos booked a $25 million insurance reimbursement for legal costs, a one-time gain, and this year it is carrying deal and restructuring costs for Entrust, the planned Analogic joint venture and its "NorthStar 2030" reorganization.
Key figures
Metric
Q2 FY2026
Q2 FY2025
YoY Change
Revenue
$4,558M
$4,253M
+7.2%
Organic revenue growth
+3.9%
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Operating margin is the share of revenue left after running the business, before interest and tax. Non-GAAP EPS is the company's adjusted figure. It adds back deal and restructuring costs ($29M pre-tax this quarter), amortization of acquired intangible assets ($40M) and a $1M impairment. Book-to-bill is new contract bookings divided by revenue: above 1.0 means the order book grew during the quarter.
The gap between GAAP and adjusted results shows up clearly this quarter. GAAP EPS fell 6.6%, while adjusted EPS rose 1.6%. The difference comes mostly from Entrust-related costs and amortization, which are real costs of the acquisition strategy but won't recur at this level. Even on the adjusted basis, profitability declined: adjusted EBITDA fell 2% to $631 million, and its margin dropped 1.4 points. Management attributes part of that decline to the prior-year quarter's "several one-time, non-operational gains".
Segment performance
Leidos reorganized into four segments at the start of fiscal 2026, and the prior year has been restated to match.
Segment
Revenue
YoY
Operating income
Op. margin (vs. last year)
Intelligence & Digital
$1,499M
+6.5%
$142M
9.5% (9.6%)
Health
$1,086M
-7.6%
$254M
23.4% (25.8%)
Homeland
$1,018M
+32.0%
$92M
9.0% (8.3%)
Defense
$955M
+6.2%
$84M
8.8% (8.7%)
Corporate
n/a
n/a
-$58M
(vs. -$9M)
Health is the weak spot, and it matters most for profit. It is Leidos' highest-margin business. It earned $254 million, nearly half of total operating income, on less than a quarter of revenue. Revenue fell 7.6% and operating income fell 16.2%, which the 10-Q attributes to "a net decrease in volumes." Health's total backlog fell to $6.6 billion from $8.0 billion a year ago (-18%), the only segment with a shrinking order book. Its funded backlog, the portion Congress has actually appropriated, rose to $1.2 billion from $0.5 billion. Quarterly bookings included a $325 million contract modification for the Defense Health Agency's reservist medical-exam program (RHRP). That extension runs up to 30 months "while the DHA finalizes its long-term transition strategy". The work is covered for now, but its long-term future is unsettled.
Homeland grew fastest, but most of the growth is acquired. Revenue rose 32.0%. That includes $141 million from Entrust and a $14 million boost from currency movements. The organic rate was 15.1%, still the strongest in the company. The company cites demand for energy infrastructure and air traffic management work. Margin improved to 9.0% even after higher amortization and acquisition costs.
Intelligence & Digital grew 6.5% (5.8% organically) on "program wins, partially offset by the completion of certain contracts," with a flat margin.
Defense grew 6.2% on program wins and higher volumes on existing contracts. The quarterly margin held at 8.8%, but six-month operating income is down 3.9% because "higher-margin contracts" were completed.
Below the operating line: more debt, lower tax rate
Leidos financed the $2.4 billion Entrust purchase partly with $1.4 billion of new senior notes issued in March ($600M at 4.10% due 2029, $800M at 5.00% due 2036). Total debt is now $6.0 billion, up from $4.6 billion at the start of the year, and cash is $748 million. Net interest expense rose to $69 million from $55 million. A lower effective tax rate partly offset this: 21.1% versus 24.1%, which the filing attributes to a decrease in unrecognized tax benefits. That rate is not guaranteed to hold in future quarters.
Cash generation was strong. Operating cash flow was $793 million and free cash flow was $761 million, which the company puts at 185% of adjusted net income. Leidos used that cash to repay $300 million of debt, buy back $72 million of stock and pay $55 million in dividends. The quarterly dividend rose to $0.43 from $0.40.
Orders: the backlog is growing and more of it is funded
Net bookings were $4.9 billion, up from $3.9 billion a year ago, for a 1.1x book-to-bill. Backlog, the value of contracted work not yet performed, reached $48.7 billion, up 5.4%. That includes $371 million from Entrust. The more telling change is funded backlog, up 43.5% to $10.2 billion. Every segment's funded backlog grew, with the largest dollar increases in Defense (to $3.4B from $2.0B) and Homeland (to $3.7B from $2.9B). Funded work is less exposed to budget delays than unfunded options. That matters because the 10-Q notes Congress is "increasingly expected" to use a short-term continuing resolution after September 30, 2026. A continuing resolution temporarily funds the government at the prior year's levels. If Congress fails to pass even that, the government would partly or fully shut down.
Takeaway: The 7% revenue growth depends heavily on acquisitions. Organic growth was 3.9%, and the two businesses driving growth, Homeland and energy infrastructure, earn margins below 10%. Health, the most profitable segment at 23%, is shrinking, and its backlog is down 18%. So even setting aside last year's one-off insurance gain, Leidos' profit mix is moving toward lower-margin work. That helps explain why GAAP EPS fell while revenue rose.
Portfolio changes ahead
On April 14, 2026, Leidos agreed to combine its Security Enterprise Solutions and Industrial Automation businesses (the "SES Business": airport and border screening equipment) with Analogic Corporation in a new joint venture controlled by Altaris. Leidos will keep a 41.5% minority stake. The deal is expected to close in the second half of fiscal 2026, and the businesses' $943 million of assets are already classified as held for sale. After the deal closes, those revenues leave Leidos' consolidated results. Its share of the joint venture's profit will then appear as equity earnings, so reported revenue growth will get harder to compare year on year.
Guidance and outlook
Management raised its fiscal 2026 guidance:
Measure
New guidance
Prior guidance
Revenue
$18.20B-$18.40B
$18.00B-$18.40B
Adjusted EBITDA margin
Mid-13%
Mid-13%
Non-GAAP diluted EPS
$12.20-$12.50
$12.10-$12.50
Operating cash flow
~$1.85B
~$1.80B
First-half revenue was $8,958 million, so the guidance implies $9.24B-$9.44B in the second half. That is a step up from Q2's run-rate, and it relies on a full half-year of Entrust. The raise lifts the bottom of each range rather than the top, so management is narrowing toward the upper end rather than expecting a stronger year. The unchanged mid-13% EBITDA margin target is below last year's Q2 level (15.2%), which confirms that the lower margin is expected to persist rather than a one-quarter dip.
Our read: the order book is healthy (1.1x book-to-bill, funded backlog up by more than 40%), and the cash flow supports steady debt paydown after the Entrust borrowing. The watch items for Q3 are (1) whether Health revenue stabilizes, since it drives a disproportionate share of profit, (2) how a continuing resolution or shutdown after September 30 affects new-award timing, and (3) the SES divestiture closing, which will reset the revenue base.
Source: Leidos Form 10-Q for the quarter ended July 3, 2026 (filed August 4, 2026), with non-GAAP, organic-revenue and guidance figures from the same-day earnings release (Form 8-K Exhibit 99.1).