10-Q: Leidos Holdings Q2 2026: Revenue Surges on Acquisitions, Profitability Faces Headwinds

Leidos Holdings reported a 7.2% revenue increase in Q2 2026, driven by the Entrust acquisition, though operating income saw a 10.0% decline due to integration costs and higher interest expenses.

Summary

• Leidos Holdings reported revenues of $4.56 billion for the three months ended July 3, 2026, a 7.2% increase from $4.25 billion in the prior year period.
• For the six months ended July 3, 2026, revenues were $8.96 billion, up 5.4% from $8.50 billion in the prior year period.
• Operating income for the three months decreased by 10.0% to $514 million, and for the six months decreased by 7.2% to $1.02 billion.
• Net income attributable to Leidos common stockholders was $354 million for the quarter and $682 million for the six months.
• The company completed the acquisition of Entrust for $2.4 billion, which is expected to enhance its energy infrastructure capabilities.
• The divestiture of the Security Enterprise Solutions and Industrial Automation businesses is expected to be completed in the second half of fiscal 2026.
• Total backlog increased to $48.7 billion as of July 3, 2026, from $46.2 billion in the prior year.

Sentiment

Score: 7

Explanation: StockSavvy.ai views this filing as moderately positive, reflecting strong revenue growth driven by acquisitions and continued demand in key segments, despite a decrease in operating income due to integration costs and increased interest expenses.

Positives

• Revenue increased by 7.2% to $4.56 billion for the three months ended July 3, 2026, and by 5.4% to $8.96 billion for the six months ended July 3, 2026.
• The acquisition of Entrust for $2.4 billion is expected to strengthen the Homeland segment's energy infrastructure capabilities.
• Net bookings increased to $4.9 billion for the three months and $8.2 billion for the six months ended July 3, 2026, compared to $3.9 billion and $6.0 billion, respectively, in the prior year.
• Total backlog grew to $48.7 billion as of July 3, 2026, from $46.2 billion as of July 4, 2025.
• The Intelligence & Digital segment saw a 6.5% revenue increase for the quarter and a 7.0% increase for the six months, with operating income up 5.2% and 7.9% respectively.
• The Homeland segment revenue increased significantly by 32.0% for the quarter and 19.0% for the six months, largely due to the Entrust acquisition.
• The effective tax rate decreased to 21.1% for the three months and 21.5% for the six months ended July 3, 2026, compared to 24.1% and 23.9% in the prior year periods, respectively.

Negatives

• Operating income decreased by 10.0% to $514 million for the three months and by 7.2% to $1.02 billion for the six months ended July 3, 2026.
• Net income attributable to Leidos common stockholders decreased by 9.5% to $354 million for the quarter and $682 million for the six months.
• Non-operating expense, net increased by 18.9% to $63 million for the three months and by 35.2% to $142 million for the six months, primarily due to increased interest expense.
• The Health segment experienced a revenue decrease of 7.6% for the quarter and 3.8% for the six months, with operating income down 16.2% and 9.0% respectively.
• The Defense segment's operating income decreased by 3.9% for the six months, despite revenue growth.
• Corporate operating loss increased significantly to $58 million for the quarter and $75 million for the six months, due to insurance reimbursements in the prior year and increased acquisition/integration costs.

Risks

• The company is subject to ongoing investigations and reviews by government agencies, which could have a material adverse effect.
• Active indirect cost audits by the Defense Contract Audit Agency remain open for fiscal 2024 and subsequent years, with potential for adverse profitability adjustments.
• A Federal Grand Jury Subpoena was received in August 2022 related to a criminal investigation by the U.S. Department of Justice Antitrust Division, with an indeterminate potential for fines or liabilities.
• The company's performance is significantly affected by U.S. government spending, and a potential federal government shutdown due to failure to pass appropriations bills could impact operations.
• Changes in international trade policies, including tariffs, could increase the cost of goods, although the company expects to recover some costs contractually.
• The divestiture of the SES Business is expected to be completed in the second half of fiscal 2026, and the company will retain a 41.5% non-controlling equity interest in the new joint venture.

Future Outlook

The company anticipates meeting its liquidity needs for the next 12 months through cash generated from operations, existing cash balances, its commercial paper program, and potentially sales of accounts receivable and borrowings from its revolving credit facility. The company expects to recover certain portions of increased costs due to tariffs through contractual measures.

Management Comments

• The company is fully cooperating with the DOJ Antitrust Division investigation and conducting its own internal investigation.
• Management believes it has adequately reserved for potential adjustments from audits or reviews of contract costs.
• Management does not believe off-balance sheet arrangements will have a material effect on liquidity, capital expenditures, or financial condition.
• Management has evaluated the effectiveness of disclosure controls and procedures and found them to be effective.
• Management has disclosed to auditors and the audit committee all significant deficiencies and material weaknesses in internal control over financial reporting and any fraud involving management or employees with significant roles in internal control.

Industry Context

StockSavvy.ai notes that Leidos operates in the defense and government contracting sector, which is heavily influenced by U.S. government budget allocations and priorities. The company's strategic focus on defense tech, energy infrastructure, cyber, mission and digital solutions, and managed health services aligns with key government spending areas. The reported revenue growth, particularly in the Homeland and Intelligence & Digital segments, reflects continued demand for these services. However, the decline in operating income highlights the impact of integration costs from significant acquisitions and broader economic factors like rising interest rates affecting non-operating expenses.

Comparison to Industry Standards

• The company's revenue growth of 7.2% for the quarter and 5.4% for the six months is strong compared to the broader aerospace and defense industry, which typically sees more moderate growth.
• The significant increase in debt ($6.0 billion from $4.6 billion) due to acquisitions, while common in M&A-heavy sectors, increases financial leverage and interest expense, a trend observed across many companies undertaking large acquisitions.
• The company's reliance on U.S. government contracts (approximately 83-85% of revenue) is typical for large defense contractors, but also exposes it to government funding risks, such as potential shutdowns or budget reallocations, which are industry-wide concerns.
• The integration of Entrust, a significant acquisition, is a common strategy in the industry to expand capabilities and market reach, though it often leads to short-term increases in integration costs and potential impacts on profitability, as seen in Leidos' results.

Legal Proceedings

• The company is involved in various claims and lawsuits arising in the normal conduct of business, none of which are expected to have a material adverse effect.
• Active indirect cost audits by the Defense Contract Audit Agency remain open for fiscal 2024 and subsequent fiscal years.
• The company received a Federal Grand Jury Subpoena in August 2022 related to a criminal investigation by the U.S. Department of Justice Antitrust Division.

Stakeholder Impact

• Shareholders may be impacted by the decrease in net income and earnings per share, despite revenue growth.
• Creditors are impacted by the increase in total debt to $6.0 billion, although the company remains in compliance with its financial covenants.
• Employees may be affected by integration costs and restructuring activities related to acquisitions and divestitures.
• Government agencies, as primary customers, are subject to potential disruptions from government shutdowns, which could impact Leidos' operations and revenue.

Next Steps

• The divestiture of the SES Business is expected to be completed during the second half of fiscal 2026.
• Sales of certain aircraft are expected to be finalized during the second half of fiscal 2026.
• The company will continue to evaluate the tariff environment and potential impacts of higher tariffs.
• The company will continue to evaluate the impacts of ASU 2024-03 for future disclosures.

Key Dates

Recommendation

While revenue growth driven by acquisitions is positive, the decline in operating income and net income, coupled with increased debt and ongoing investigations, warrants a cautious approach. The company's strong backlog and market position in government contracting provide stability, but the integration challenges and rising interest expenses suggest holding the stock until profitability trends improve and acquisition synergies are more fully realized.

Keywords

Leidos Holdings, 10-Q Filing, Quarterly Report, Acquisition, Entrust, Revenue Growth, Government Contracts, Defense Technology