Leidos Holdings, Inc. Q3 FY2025 earnings call

• Performance: Leidos had top line growth of 7%, adjusted EBITDA margin of 13.8% and operating cash flow of $711 million in Q3 2025. So far in 2025, revenue grew 5%, EBITDA 13% and EPS 18%. - Business highlights: Energy infrastructure business used AI tool Skywire to optimize 18,000 projects for 25 major utilities, with 30% reduction in project costs routine. Golden Dome program is in the mix for the $150 billion SHIELD IDIQ procurement. Air traffic control modernization focus remains on key systems. Airport security modernization pilot program at Houston and Sacramento airports. Border security received order for 24 mobile VACIS systems. - Capital deployment: Repurchased $100 million worth of shares, accelerated payoff of $450 million on term loan, increased quarterly dividend for third time in 3 years, completed divestiture of Varec. - Employee recognition: Thanked over 47,000 Leidoceans for their resilience and focus in a challenging year.

National Security and Digital revenues increased 8% year-over-year, with 7% coming organically. Non-GAAP operating income margin decreased modestly from 10.5% in the prior year quarter to 10%. Health & Civil revenues increased 6% year-over-year, with medical disability exam volumes helping drive a record non-GAAP operating income margin of 25.7%. Commercial & International revenues were essentially flat, with a non-GAAP operating margin of 8.1% down 70 basis points year-over-year. Defense Systems grew 11% year-over-year, its seventh consecutive period of high single to low double-digit growth, with non-GAAP operating margins of 8.9%. Energy Infrastructure led the sector in growth and profitability.

• Reaffirmed revenue guidance of $17 billion to $17.25 billion and operating cash flow guidance of approximately $1.65 billion. - Raised adjusted EBITDA margin guidance from mid-13s to high 13s and non-GAAP diluted EPS guidance by $0.30 at the midpoint for a new range of $11.45 to $11.75. - Acknowledged government shutdown may cause some lag in customer decisions but expects orders to pick up dramatically once shutdown ends.

Government shutdown may cause slowdown in customer decisions in the pipeline, impacting the timing of orders and revenue recognition.

Q: Nice results. Chris or Tom, I maybe just wanted to start on the balance sheet. You've done a really good job with the cash flow in the quarter and getting leverage down. Specifically, how do we think about M&A in this environment? How are you thinking about it? And where are you focused in terms of specific opportunities? And what's the potential that you maybe look to accelerate the pace of acquisitions here?

A: Yes. Thanks, Ken. Yes, as we've tried to be consistent throughout, we'll always have a shareholder-friendly view of our capital deployment. And so while we didn't have a strategy for Leidos per se, we were very focused on share repurchases and capital deployment, investing in our growth strategies organically. As exemplified by the Kudu acquisition that we announced last quarter, now that we have a very defined growth strategy, NorthStar 2030, with specific growth areas where we know markets are growing, we can be profitable, and we see very good opportunities for us to grow Leidos top line and bottom line. We are now focusing on that a little bit more. That's not to say that it's a swing to all inorganic, it's just that now inorganic will be more a part of the playbook now that we've got a defined set of areas where we're willing to play. We'll continue to be judicious. We'll continue to be very prudent. We are focused on a holistic approach to the capital deployment, and we're always going to have the hurdle rates and shareholder value first in mind for how we deploy capital. So whether that's internal, external or share buybacks or dividend increases, we're going to have the same type of a lens.

Q: Congratulations on great results. Maybe if we could talk about Defense Systems because it was one of the highest growers in the portfolio. How do you think about the growth within that segment and just moving past DOGE and potential like issues with civil customers as we've seen from a recent competitor, how does that impact your portfolio?

A: Thanks, Sheila, and appreciate the question. Yes, we're very, very proud of our Defense Systems business and frankly, I'm happy to highlight some of the opportunities that we see that we're leveraging in that business. We're tracking about 10 different franchise programs that we expect to deliver about $15 billion in potential value over the next 5 years. These are programs like air and base defense systems, counter-UAS systems, hypersonic missiles, our black arrow small cruise missile that you may have read about in the press or heard about and nonkinetic effects for counter UAS areas. Also in defense, as we discussed last quarter, we have our maritime area, where we're very bullish on our opportunity to help this administration increase the size and lethality of the U.S. Navy. And I'm very proud that both in Australia and the U.K., we have corollary unmanned autonomous vehicle programs that have synergy with what we're doing here in the U.S. So all in all, we see a tremendous pivot for our defense business from heavy in the R&D and heavy in the seed corn, if you will, and now really pivoting to LRIP and programs of record, which has always been our plan since we acquired our defense tech business some years ago. With that, Chris, do you want to talk a little bit about the shutdown? Chris Cage: Yes, sure, Sheila. Obviously, it's been a year where we've had to overcome a lot of twists and turns. And specific to your question around our Fedserv portfolio, actually, I think it's proving to be quite resilient. Our teams have been able to execute in this environment, exceedingly agile -- in an agile way. And it's mostly impacted our DigiMod business, but we still were able to deliver double-digit -- I'm sorry, mid-single-digit growth in our -- in that area in Q3 and on a year-to-date basis. And so that's through driving more IT efficiencies for our customers and on-contract growth. And you look beyond that, you see that of the missions we perform for our veterans benefits administration are mission essential. And those areas, the demand continues to be very robust. And obviously, our FAA business, we're seeing that we're a central part of the programs we're performing on today and hopefully a big part of the future there, too. So our portfolio is very well insulated, and we'll continue to be nimble there, but it's been holding up quite nicely in this environment.