Leidos Holdings, Inc. Stock

Good morning, everyone. My name is Sheila Kahyaoglu with the Jefferies Aerospace, Defense and Airlines Equity Research team for those on the webcast. And we have Chris Cage here, who's Executive VP and CFO of Leidos. So Chris, thank you. And Stuart, of course, Stuart Davis, who runs the IR practice at Leidos.

Chris, maybe just to start off for -- there's been a lot of news around IT services. The stock prices have been volatile. I think Leidos is successful in a lot of elements. What do you think makes Leidos successful? And how do you think the company succeeds from here?

Yes, definitely. Well, thanks, Sheila. It's always great to be here with you and the conference you guys put on, first-class job. Leidos, I mean, IT services is just one of the dimensions of what we do. And I think it's really our deep mission understanding with our customers. We're in the center of the action across so many different customers. And what we bring to bear is the expertise to ensure that their mission success is paramount.

We've demonstrated that time and time again, which is why Leidos is positioned with some of the biggest programs on the digital side in the federal government domain and then helping them manage their environments has led to how we can help them in other ways now as we talk about software modernization, now branching into what we're doing in the defense side on the products, hardware arena. Leidos is touching so many aspects of making their mission outcomes successful, and that's the key to our success.

Maybe could you talk about the 5 growth pillars and what NorthStar 2030 means?

Sure. Well, Tom Bell came on board a little over 3 years ago now. And one of the first things we did under his leadership was refresh the strategy. Out of that process came NorthStar 2030, and we've identified 5 key growth pillars that have actually morphed slightly as we fast forwarded and got into execution mode. Just quickly, those are defense tech, a lot of great things going on in our defense tech portfolio. The demand signal from the customer is very robust. Our energy infrastructure growth pillar, we did a major acquisition earlier this year to add to that capability, very excited about the demand signals in that domain as well.

Cyber, clearly, both on the offense and the defensive side, cyber -- it's not getting any safer out there. The risk posture is highly elevated. Customers are demanding more capabilities. Mission and digital. And again, we talked a little bit about that, some of the IT digital services that we perform, mission software services we perform. And then finally, managed health services. So we've got these 5 growth pillars.

We're seeing several of them that are really showing acceleration from growth and momentum perspective. Love to see that. And we put our money where our mouth is on the investment side. As I mentioned, energy infrastructure. And before that, we added capabilities in the cyber domain. So that's the guiding Leidos' investment decisions is where we're going to put both our internal resources and inorganic plays to ensure that these 5 growth pillars achieve their full potential.

As we think about your organic growth, I think you grew 4% organically in the second quarter, 5% in the first half. Your guidance implies, as you raised it, 8% in the second half. Can you walk us through some of the drivers of that ramp?

Well, certainly, some of the -- as I mentioned, in the defense tech arena, we're seeing some of those programs. We've been carefully curating these contract vehicles and demonstrating our capability and the demand signal continues to grow. So some of the areas you'll see increased output would be in our integrated air defense arena, I think our IFPC program, our Counter-UAS with some of our passive radar detection capabilities under the ABADS program. Hopefully, we'll see a successful outcome of our maritime autonomy testing. We're in the thick of that right now with our Navy customer, and that could lead to some acceleration here in the fourth quarter if we're one of the awardees there.

So we have a lot going on in that part of the business that will be catalyst for some second half growth. I mentioned earlier, the energy business, we had acquired Entrust. That is continuing to be a growth catalyst for us in the energy infrastructure side. And then there's just any number of other programs. The FAA has been on a nice run this year. There's a demand signal to accelerate some of the programs that we have been operating on for them. They're looking to modernize the air traffic control experience. And so in addition to some of the legacy programs that we're executing and accelerating, we're in the heat of the battle in a competitive process for a position on the Common Automation Platform of the future.

And Leidos feels like we're very well positioned to be a key player in that regard. So most of the things that are going to lead to second half acceleration are already kind of in the bag in backlog and execution, but there are a few things from an award perspective that we believe will play out and those could provide some additional momentum heading into '27.

I want to follow up on 2 items you mentioned. FAA was very contentious this time last year. Can you let us know what you do on FAA? How big of a revenue stream it is for you? And what sort of the Common Automation Platform opportunity includes and how it could expand the business?

Well, we're a big player in the FAA have been for decades. And they look to us to run several of components of the air traffic management system, certain software applications that support that. Our ERAM program, we have other programs, TFDM, et cetera. So through a variety of programs, we're a critical provider to them. And some of those are sustaining legacy systems. Some of those are helping them modernize the experience, pre-flight, in air, en route, air traffic management, et cetera.

So it's a sizable piece of the business for us today. I won't put specifics on that because I don't think we've called that out, but it's also an attractive margin profile. So we do good work, and we're well treated to do that good work for them. The common automation platform, again, is the future of that in-flight air traffic management. And there's multiple pieces of software that exists today that they're bringing together under this future program. It will help them modernize and simplify how they manage air traffic and make it safer and better for everybody involved. And safety is a critical aspect of this.

One of the reasons why we're one of the finalists in this process is because of our track record, understanding where they operate, the criticality of it. And our team with their expertise, it's second to none. So we are going through this down select phase process, wanting to see increased capability demonstrations along the way. And like I said, we had hoped that there would be a decision process that would be happening sometime soon. It's a little bit unclear when the finish line is, but we do expect them wanting to move forward and get this thing going.

When that happens, you've got a big development modernization effort over the next few years and then a sustainment tail to that beyond. It will become the new standard and some of the legacy programs that we support will go away and others will still be part of that future ecosystem.

And is this part of the $12 billion modernization program?

It's part of that. There's a subset of that funding, multiple billion dollars associated with this effort in all likelihood to modernize the software.

You mentioned IFPC as one of the catalysts for growth drivers in the second half. Can you remind us where we are on that program in terms of delivery?

Sure. So we've been scaling up our production capability and have -- today, we're manufacturing about 4 units per month. But by the end of the year, given the investments we made in tooling and the demand signal, we expect to be at about double that rate of quantity. So you'll see that program take a nice step function forward in 2027 over what it's contributing to Leidos in '26. And so the team has just done great work under the leadership of our Defense President and her team. So very pleased with that.

And that's whether it was Defense of Guam or Korea, they're seeing more and more capabilities to field IFPC as a part of the integrated air defense solution. It's a very affordable system. Beyond that, we're looking at how do we look at the All-Up Round magazine? And so there's more opportunities for Leidos to take some of that manufacturing in-house to further increase our competitiveness on the program and affordability and then position ultimately for a potential second interceptor capability, which the government is looking at, too. So I think we're -- we've demonstrated that we're a critical part of this solution, and there was a $4 billion IDIQ vehicle put in place about over a year ago, and they've consistently now issued task orders against that. So we're seeing that program ramp up nicely because of that.

That's great to hear. Maybe switching to health for a little bit. It's been the most contentious program you have, which is VBA. Can you talk about sizing that business and just level set us on what the VBA medical disability exam looks like from a revenue and profit perspective. And I don't think the RFP is out.

No.

I was refreshing the website every day since mid-June, and I got tired eventually. So just update us on where we are on that program.

Well, it's interesting. I mean, not to disagree with you. You characterized it as the most contentious program that we have. I'd characterize it as the most successful program that we have. And this is the fruits of our success. The team has done an outstanding job being a critical provider to the VBA, done everything we've asked them to do. And the result of that has been a very well-run program that's delivered exceptional profitability.

But like all things, there is the next iteration of what this program is going to become. And people are eagerly awaiting as are we on what that future looks like, right? So what do we know today? The RFP for the future procurement is not yet out. The expectation is that we will see an RFP in the fall, maybe in October. We have seen a draft performance work statement that gave us an indication of where we think they're going with this. There's no big surprises in there. I think the one thing of note is their expectation to consolidate kind of all 6 regions of performance into this new future contract. Our read on that is, hey, Leidos is one of the only 2 providers that operate in all 6 places today.

So from a risk and credibility perspective of being able to execute and hit the ground running, I think we're well positioned in that regard to demonstrate that we're going to be an important partner, should be an important partner because one of the best performing partners. But -- there's other changes that have gone on that we talked about on our last call. In the near term, we did adjust some of our pricing on a few of the programs. They've paused the incentive part of the program for the next 6 months to the end of the year. So we expect that to come back in this future contract, but we'll have to wait and see the specificity of that.

Our goal and our job is to resecure this franchise, and that's what we plan to do. Now competitively, what do we need to do to make that so? That we'll know more as we unpack the recompete. I have every expectation that when we get to the other side of that, that our health business will still be the most profitable segment in our portfolio. The variables could be, does the VBA continue to award this to 4 different providers? Or do they decide that now is the time to consolidate back to 3 or even 2? I think those things are all in play. They've got to assess what do they want to accomplish. And we're -- we value our relationship. In the meantime, continuing to deliver excellent performance between now and that recompete decision is job #1.

Is it fair to say the business is about $2 billion of revenue and represents 45% of your earnings?

It's not 45% of Leidos' earnings. It's a meaningful share of Leidos' earnings. $2 billion is probably not out of the range when you consider all 6 of the contract vehicles in there, maybe a little bit less than that because we do other things for -- within that QTC business of Leidos too. But yes, it's certainly north of $1 billion worth of activity, and it's been a highly profitable program.

And you mentioned what does the VBA do in terms of consolidating? And Stuart has been super helpful in having me understand this and some of the channel checks because I think most people don't understand. I think you have 40% share of the VBA program, I might be wrong there, but you have an all-encompassing coverage program, which I think differentiates Leidos more than the competitors. How would an RFP that consolidates from 4 vendors to 2 work in your view?

Well, again, that's speculation whether that will happen or not, but we certainly, I think the customer had been there previously. They scaled up capacity, I believe, in their minds because the demand signal was elevated and was going to continue to stay elevated. And that's our expectation is the volume that we're operating at today is going to persist, right? So it starts there. There's a lot of activity, a lot of veterans that need to be served. It's an important mission.

The question is, do you need -- are you more efficient if you have more vendors supplying capacity to the ecosystem? Or do you look at fewer vendors and decide, boy, they had access to an ample provider network. They had unused appointment availability in all their clinics. And why would I need to manage 4 different providers when I can get the job done with 3 or 2? I think that's all part of the evaluation trade space. And so we'll see what their receptivity is to keeping it status quo or rethinking what the ultimate need is to serve the mission.

How do we think about exam volumes? I think you mentioned in the first half of the year, they were at $2.8 million per quarter or annually.

Annually.

How do we think about normalized volumes post PACT Act here?

Well, what we -- clearly, the PACT Act created this elevated demand signal. There was an increase in aged claims. We've worked through that now. Industry has and the VA, and they've done a good job because they prioritized getting that back down to a more normative level. And I think that's actually what we're seeing. Actually, in just in August, the claims volume increased 6% and the total claims completed decreased 1%. So there's still a heavy demand signal that's coming and industry is generally able to meet that, but there are months where you're not able to meet this elevated demand. That's why we think the $2.8 million here to stay, right?

That's indicative of where this should be and we expect will be as we kind of fast forward here over the duration of this next program. And the number of aged inventory of claims has come down to a level that's about where it was pre-PACT Act. So I think we've kind of hit this nice equilibrium where we can count on the sustained consistent volume demand signal that's been coming at us, and we've been stepping up to.

Maybe one more on health. Can you update us on MHS GENESIS, where you are on that program and how we should think about it going forward?

Yes. Well, I mean, again, starting with really proud of the success of that program, delivering this electronic health record system to the Department of War on time and under budget program, highly successful. Since that time, we've been continuing to support that customer with enhancements and O&M capabilities. And now they're looking ahead to what the next support needs to look like in the future. And as of today, we're negotiating a 1-year extension with them to continue that support as it looks like today.

But they want to give themselves the optionality, it's unclear whether they will do so, to perhaps pull out the software licenses that are kind of this bundled offering and perhaps go directly to whether it's an Oracle or a Philips, whoever, to procure those software licenses direct. Like I said, that may happen, they may not happen. Structuring the arrangement such that if they do, we can just pull that work scope away and adjust the price accordingly. But we stand ready to support them in whatever capacity that they need.

I would tell you that, that's never been where we've made our returns. I mean it's a very modest return reselling a third-party software solution. We do it if they ask us to. But if they pull that scope away and buy that directly, it changes the top line on the program a little bit, but not meaningfully the bottom line contribution.

So as we think about that program, is it fair to say it's a $350 million contributor today, and it will transition in next year and it could be going to 0 with no software and $50 million to $100 million if there's a software element?

I don't see a scenario where it's 0. I mean there's a need for sustainment and support, and they're looking for that, right? So there's absolutely work scope where they're going to need a key provider, supplier by their side to help them sustain it, modernize it, upgrade it, patch it, what have you. So that's a meaningful amount of activity in some future scenario. Now whether that is something we have to compete competitively for or what have you, that's unknown. But -- so there's always -- there's a work -- there's a role to play here supporting this customer in this mission, and we expect to be part of that.

Yes, if they do pull some of the software into a direct procurement model, that puts some downside pressure on the number that you cited, which is not far off. And whether that's $100 million, $150 million TBD depending upon who they can negotiate with directly, right? Not everybody is going to want to play ball that way and what terms and conditions they get and what time they pull that out. But I think the main thing to focus on is there's still a substantial role to play supporting the software application and being part of the modernization of it into the future, and that's Leidos' sweet spot.

Great. Turning to your defense business. It represents 22% of sales, $3.6 billion of revenue. You grew 6% in the quarter, 2.2x book-to-bill. How do we think about your defense? First of all, I guess, what helped drive that 2.2x book-to-bill outside of IFPC? And how do we think about this business going forward?

Well, first of all, Sheila, I mean, you're just wizard with the facts and figures there. I'm uber impressed by all what you've got your fingertips here.

I have an iPad.

Okay. All right. Well, you've done your homework. And so yes, the defense business, everything you cited there, we're proud of.

And you have a good IR guy.

Well, he helps too.

He's helpful.

So this is what we love about the business. It's been hitting on all cylinders and whether it's a nice award that we secured in the space domain to continue that franchise of what we're doing with the Wide Field of View family of programs. You're right, IFPC and follow-on orders to expand that capability. ABADS, the customer is talking about -- they gave us a nice award. They're already talking about increasing the scope and scale on that particular program. And so there's been any number of things.

But the big activity in Q2, specifically for that book-to-bill was tied to the IFPC volume. And so the integrated air defense demand signal continues to be robust. It does not yet include what we're expecting to see ultimately in our munitions franchise, right? The framework agreement that we've talked about for our low-cost containerized munitions, none of that's in a book-to-bill number yet. None of that's in backlog yet. And that's potentially north of $1 billion type of activity that we ultimately expect to realize.

So the defense team has got a lot of great things going on. There are several areas of that, that are continuing to accelerate. And most near term that we're excited about and hopefully, maybe have something to celebrate if we're successful in Q3 is on the maritime side. Can we secure our position on the maritime unmanned surface vessel opportunity that we're auditioning for as we speak?

Do you mind if I ask you, if I'm sounding ignorant, what is that program? And it kind of came back from nowhere. So how do we think about that opportunity?

Yes. Well, I mean, so we've talked about maritime clearly is an area that the Leidos has robust capabilities. And we've got a nice set of capabilities in the undersea domain. We obviously, many years ago, bought kind of the premier architecture engineering firm in Gibbs & Cox. So our ability to design the vessels and whether it's the Trump battles -- class battleship or what have you, second to none.

But also Leidos has invested for decades in the autonomy arena, right? And we knew that, that was where this was going. That's what we needed to position for. And so Leidos has been invited to this competition. The Navy is looking to procure, hopefully, up to 30 medium-sized unmanned surface vessels. We were 1 of 7 people invited to the competition to -- and those trials are ongoing as we speak. And the expectation is the Navy has got money that they want to obligate here before the end of the government fiscal year. That's not to say it will definitely happen, but they are up against the clock and stand to potentially lose a portion of that if they don't get that under contract.

So there's an urgency to move. There's a competitive process going on right now to demonstrate that you've got the goods. We've partnered with the shipbuilder because that's not what we do, but we bring so much else to the table here. And like I said, we're hopeful and no guarantees that we will be one of the awardees. There'll be multiple awardees as part of this, for this first set of vessels that they procure. But it really kind of paves the way for a future franchise position. And then you think about the O&M that goes around with this, too, there's a real potential here for the long game to increase the scale of what we do in the maritime domain. So I think that's something that bears watching here, certainly at the end of the government fiscal year or worst case into the early part of our fourth quarter.

And can you update us on the $869 million Army MACRO award that you won? What is that? And how does that drive the long-term profile of the segment?

Yes. I mean that gives us an opportunity to compete in an area, probably more in the software domain than anything else than we haven't in the past. So it does, it creates new capacity for us, what that vehicle does. I wouldn't say it came with any immediate work that we're turning on day 1, but I'd say it's a very important positioning with our customers to demonstrate Leidos' bona fides and what we can do in the command and control C5ISR domain where we've got some real expertise.

So that's what I would view MACRO II as is one more important vehicle that gives us access to a customer area for work that we should be able to scale up into '27. I don't view it as a significant catalyst for us in the near term, but one of many areas that will provide a modest tailwind into next year.

Homeland represents an equal size, about 21% of sales to defense. And you've actually grown quite a bit in that business. I think revenue growth of 32%, but organic of 15%. How do you think about outside of Entrust, what the drivers of that growth were in Homeland?

Well, some of it comes back to the conversation on the FAA side that we were having earlier. They have been looking to accelerate some programs that we had been executing on. And so they had some more funding. They were getting after it, and our team was stepping up and helping them accelerate mission outcomes. So that's certainly been going on. We've had good success. Part of homeland includes the homeland defense of some of our critical partners in Australia and the U.K. and the Australia team, in particular, has seen some acceleration on the work they're doing. We had won a nice position in the Counter-UAS domain. We won an important contract in the health arena. So we're really expanding our presence beyond the legacy IT business in our Australian customer. And then there's the TSA.

So that's an important customer for us, too, and we do a lot of logistics support for the TSA today, even outside of what we do on manufacturing some of the equipment that's ultimately going to move to a joint venture. But the logistics side of the work stays with Leidos. So we've just seen some acceleration across several of those areas. Very pleased to see the Homeland organization not just show that strong growth, but improvement in profitability. So the margins are ticking up, and we think there's more room to go up from here.

Can you talk about Entrust? What's kind of going on with the business today? What have you learned since the acquisition? And kind of what are revenue opportunities?

Yes. So Entrust, I mean, this was a big move. We had built a very nice kind of organically grown energy infrastructure, energy transmission engineering distribution business. And it was performing exceptionally well. Entrust gave us an opportunity to basically double the size of that business and significantly scale up our capability. We're about 5 months into that acquisition, right? So right now, the team is doing a great job on very detailed integration. And so by the end of the year, we'll have completed the -- kind of think of all the back-office systems and put them on a common set of infrastructure, and that will help them gain some efficiencies in how they execute the business.

Before that, in the near term, really getting the combined organization aligned, right? The leadership, the segments underneath that leadership sales, go-to-market, those kinds of things. So we've -- rather than operating it as 2 complementary businesses, have that fully aligned, and that work will be done here in short order. So great progress by the team on positioning that for future success.

What we're pleased with is, first of all, their receptivity and uptake on us bringing technology and training their engineers on the tools that we had built out that had proven to be significant efficiency drivers for Leidos. So that's been very welcome and been well received. And then our customers' acknowledgment, right? So getting invited to some larger opportunities. We had signaled an opportunity at a Canadian presence and some bigger, more meaty things with some of our existing utility clients. They were in the gas domain, which was not an area that we participated in the past.

So there are some opportunities there with some of our legacy utility customers that also operated in the gas arena, like, for example, Duke Energy that we weren't participating in projects for them in that regard. And now we have an opportunity to bid on some of those. So I like what I'm seeing. I think the teams are highly aligned and motivated. We've expanded our addressable market collectively, probably by 3x from where it was with just the business that we were executing before. So no shortage of opportunities to pursue, and I expect that growth momentum to continue as we pivot into '27.

And just to -- how do we, I guess, think about what Entrust offers? Is it just a complete software solution? Is there a product that aligned with it? And what's the growth rate of the business now that you've 3x the addressable market?

Yes. It's less about software or products. It's -- we are using our software proprietary tools to help our customers deliver engineering packages for major -- whether it's a modest upgrade or a new transmission line, the engineering design drawings, et cetera, that we have to deliver, that's still highly people dependent, but augmented by technology. And that's the work that we do as a trusted provider to the utilities and the demand signal, as you can imagine, right, trying to bring more power online the boom that AIs and data centers are providing, it's like how do you get the power to where it needs to be? And how do you help them as a trusted provider that has this capacity to scale up for these mega engineering projects.

And we've expanded our reach too, into the front end of that process with new generation assets and how do we play inside the fence on some of the engineering. So that's where we touch and the value that we bring to the table. Where does it go from here? I mean, again, I think that momentum taking 30% roughly is where we benchmark it of the manpower out of the equation, given technology deployment allows us to operate more profitably and more competitively as we compete for a tremendous demand signal coming from utilities directly or some of the data center developers that are looking to make sure that they've got power to meet their needs.

Maybe one on margins before I forget. You talked about second half margins, at least in health stepping down 200 bps as you have suspension of incentive payments. I guess how do we think about margins for the overall company as well in light of what happens with health?

Well, I mean, we're very proud of the margins that we've been delivering over the last several years. And -- but we have signaled that even this year, when we went into the year, they were a little bit elevated to where they were going to settle in for the long haul. And now with the changes that we've faced in health, we've signaled that those margins will moderate down, averaging about 20% for the Health segment for the back half of the year.

But you think about what's going on elsewhere in the portfolio, and I was very pleased to see -- I mentioned Homeland earlier, doubling our energy presence. It's proving out that, that's a margin-accretive line of business, and you will continue to see that show up in Homeland's results. In the defense space, where we're maturing our product offerings and quantities, the throughput is elevated. You'll continue to see that show up in nice margin improvement over time. And I think both of those businesses have good runway ahead of them to continue to grow margins into '27 and into '28.

And the other part, in digital and intel, I mean, the team is doing great work. I would say there's a little bit more range bound on the margin potential in those businesses. We're harvesting what we can. The area that has potential to help margins over time there is if the customer does continue to shift to more fixed price outcome-based contracting. We've had some opportunities to have conversations with customers about converting programs from a cost-plus arrangement to fixed price. Nobody's pulled trigger on anything substantial yet. But as those conversations take shape and more opportunities present themselves, there could be longer-term ways that we can drive margins higher in that part of the portfolio, too.

So too soon to put specificity around what '27 looks like, given all the puts and takes. I think, obviously, with health moderating down a little bit, that will bring the enterprise margins down somewhat going into next year. We're going to work hard to get uplift in other parts of the portfolio, but that's going to take a little bit more time to fully offset the health piece.

That makes sense. Maybe one on shifting gears to capital allocation. How do we think about Entrust was $2.4 billion acquisition, potentially higher CapEx needs. I think they're doubling year-over-year. What you're looking to spend your capital on and free cash flow conversion?

Well, thanks for that. I'd say that, first of all, yes, we're well positioned. We did Entrust. We very quickly paid down some of the short-term borrowings that we took on as part of that. So exited Q2 with a leverage ratio that's at the low end or even below our comfort zone, right, in our target. So we've got capacity. But that being said, we're working hard to be -- continue to be a great cash-generating business. Went into this year expecting that we would elevate our CapEx number. We signaled up to as much as $350 million. Last quarter, we pulled that back to $250 million.

So it's still up from where it was last year, but kind of more in the high end of a range that we've signaled that we're comfortable operating in. That gives us an opportunity to invest in a little bit more capacity to modernize some of our classified facility space because the demand signal that we're seeing with some of our intelligence customers and that business has grown nicely. It's a good return on investment to position that part of the business to grow and scale.

Heading into the future, again, the good news is our facilities footprint is largely in a good spot. There might be some opportunities to selectively scale up in certain locations. I mentioned on the maritime side, there might be a bigger presence we need in our Long Beach, Mississippi facility, for example, to execute on a program like that or in Huntsville, it's a high-class problem when you're potentially growing out of some of your production footprint.

But we're in a good spot right now. We'll probably be at the margins increase tooling, things like that to help ensure that we stay ahead of the game. I think cash flow conversion will continue to be a strength of the business. But the meanwhile, we're putting our energy into optimizing some of our back-end processes. It's not glamorous, but our enterprise transformation office is helping us get after our billing cycle, as an example, and our payable cycle, deploying more technology and AI into the solution space. And ultimately, we'll see that take a day or so out of our DSO, which will be a nice cash conversion for us.

Last one, just to end. I think as we head towards NorthStar 2030, what do you think investors underappreciate about Leidos here?

I think the power of the portfolio, again, coming off of Q2, where you think about it, we signaled a couple of headwinds in the health business that were outside of our control, pausing of incentives, et cetera. But we were able to raise guidance through all of that because of the strengths of other parts of the portfolio. So I think we've got a very robust defense business, defense technology business within that, that is underappreciated and accelerating.

I think the beauty of the energy part of our portfolio, low capital intensity, low care and feeding, high return are underappreciated and Leidos has -- and then on top of all that, our digital backbone where we're in the most impactful, most consequential missions that our customers have to execute on and increasingly, that cyber protectiveness, digital connectedness is going to be paramount to help them execute their mission successfully, and Leidos is positioned across all of those domains.

That's great to hear. Well, thank you so much Chris for being here.

Greetings. Welcome to Leidos Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker, Stuart Davis from Investor Relations. Stuart, please go ahead, sir.

Good morning, and welcome to our second quarter fiscal year 2026 earnings conference call. The presentation slides we'll be using are on our Investor Relations website.

Turning to Slide 2. Today's discussion contains forward-looking statements based on the environment as we currently see it, and thus includes risks and uncertainties. Today's press release contains more information on the specific risk factors that could cause actual results to differ materially.

Finally, on Slide 3, we'll discuss GAAP and non-GAAP financial measures. A reconciliation between the two is included in today's press release and presentation slides.

With that, I'll turn the call over to CEO, Tom Bell, who will begin on Slide 4.

Thanks, Stuart. I'm pleased to report another strong quarter for Leidos. Second quarter revenue grew 7% year-over-year, 4% organically to a record $4.6 billion. Adjusted EBITDA margin remained best-in-class at 13.8%. Operating cash flow reached a Q2 record of nearly $800 million and we booked $5 billion in net awards, delivering a solid 1.1 book-to-bill ratio.

Customer procurement activity is beginning to accelerate. So we anticipate continued positive bookings momentum through the rest of this year. Our year-to-date financial performance indicates to us that our NorthStar 2030 growth strategy is working. And as a result, I'm pleased we can raise the midpoint of our 2026 revenue guidance by $100 million, raise the midpoint of our EPS guidance by $0.05 and raise operating cash flow guidance by $50 million.

Now let me take a few moments to highlight some important developments in two of our segments that I know are top of mind for our investors, Defense and Health. In Defense, our team delivered another exceptional quarter. Revenue growth accelerated, margins expanded and award velocity is accelerating. Defense posted a 2.2 book-to-bill ratio in the second quarter. Over the trailing 12 months, this equates to a 1.9 book-to-bill ratio. This level of customer traction gives us continued confidence in this segment's robust business outlook as a part of Leidos. And importantly, these bookings do not yet reflect the benefit from several major defense tech programs begun this year. These include our over $1 billion framework agreement with the Department of War to deliver 3,000 low-cost containerized munitions by 2030.

Our unique position in the testing phase of the Navy's next-generation medium unmanned surface vessel. This positions us for a potential production award in Q4. And our recent award to provide the sensor payloads for an additional 18 missile warning and missile tracking satellites in support of golden dome. But in addition to these hardware successes, our Defense team continues to leverage the unique power of One Leidos, bringing together hardware and software, products and services to win in ways few competitors can match.

To illustrate the power of this unique One Leidos capability, let me briefly highlight Leidos' role in the recent operation Jailbreak Akathon by the U.S. Army. There, engineers from our defense and digital businesses worked side-by-side to rapidly develop and deploy secure, open application programming interfaces that enabled our hardware to integrate seamlessly with the Army's evolving command and control architecture. And perhaps more importantly, we demonstrated those same capabilities on non-Leidos systems validating secure interoperability using open and documented standards.

Our team was among the first to complete the Army's Technical Sprint objectives. They consistently led the operation jail breaks progress metrics by demonstrating the speed, agility and success that today's software-defined battlefield demands. That performance reinforced Leidos' leadership role in open architectures, and it represents a major step in helping the Pentagon rid themselves of a huge issue. That issue is the prevention of seamless battlefield understanding and seamless command and control due to proprietary software vendor lots.

By bringing together advanced hardware, mission software, systems integration and deep operational expertise, all housed within One Leidos, we delivered differentiated capabilities at the speed our customers required. We believe this truly positions us to lead in the defense tech of the future. And our performance during this hackathon is garnering us more and more customer interaction and customer traction.

Now in Health, Demand for our VBA medical disability exam business remains strong through the second quarter, and we are now actively positioning this business for the customers' upcoming recompete. The VA recently advised that it is reviewing certain administrative aspects of the medical disability examination program. And as a part of that review, the VA has decided to suspend incentive payments for all vendors for the rest of this year. In addition to embracing this customer decision, we've worked proactively with the VA to apply the real savings we've been able to achieve in our existing regions contract through focused insertion of technology and innovation, across our predischarge and international contracts.

Taken together, this now gives us a clear picture of the probable 2026 full year performance for this business. And that outlook is fully reflected in our enhanced 2026 guidance I mentioned earlier.

Elsewhere in Health, I'd like to clarify some recent reporting surrounding the next phase of MHS GENESIS. Under our original 10-year contract, Leidos successfully developed and deployed globally the Department of War electronic health record system on time and under budget. We are very proud of this fact. And consistent with the original vision for this program, our execution now enables the Defense Health Agency to procure underlying software directly from commercial vendors if they so choose.

As the DHA finalizes its long-term acquisition strategy for the new health care delivery solution program, we'll continue to support and enhance MHS GENESIS under a sole-source bridge contract. And whatever structure comes next, we believe we are well positioned to continue supporting both the DHA and MHS GENESIS. Also, while looking forward, we're leveraging our unique MHS GENESIS expertise for the My Service Treatment record pilot program we discussed during last quarter's call. We're actively progressing this new program across both the Department of War and the VA and believe it can be a significant business driver for us in the future.

Finally, on capital deployment, during the second quarter, we completed our previous 2022 board share repurchase authorization with a $66 million open market share repurchase. A new border authorization is now in place. So we anticipate resuming repurchases as prudent when our trading window opens.

In closing, our second quarter results once again demonstrate the strength and resilience of the Leidos portfolio and the value of our NorthStar 2030 Strategy. We're seeing meaningful growth emerge across our defense tech, energy and cyber growth pillars. And because of the benefits of our NorthStar 2030 Strategy and the resilience of our portfolio, we can once again raise our full year guidance.

With that, I'll turn the call over to Chris now and then look forward to our conversation. Chris?

Thank you, Tom, and thank you, everyone, for joining us today. Let's jump right into the results on Slide 5. As Tom highlighted, revenues for the quarter was $4.56 billion, up 7% in total and 4% organically year-over-year. Bottom line performance remained strong. Adjusted EBITDA was $631 million for the second quarter for an adjusted EBITDA margin of 13.8%.

Non-GAAP diluted earnings per share grew to $3.26, and we were able to turn those earnings into cash at a record pace. In the quarter, we generated $793 million of cash flows from operating activities and $761 million of free cash flow.

Turning to the segment-level view on Slide 6. Homeland led all segments with 32% total and 15% organic growth. Growth reflected robust demand in commercial energy infrastructure and domestic and international air traffic management as well as some benefit from foreign exchange movements. Defense accelerated to 6% organic growth as we ramped up production on Integrated Air Defense and counter UAS programs. And Intel and Digital maintained its robust growth rate from Q1, principally from strong intelligence community demand.

As expected, Health segment revenues contracted from the full incorporation of the fourth vendor on the BVA Medical Disability Examination Regions contract. Even so, we were able to maintain health margins through continued efficiencies enabled by technology insertion. Profitability increased significantly in Defense and Homeland from Q1 levels through strong program execution. Changes in estimates at completion were a tailwind in the quarter, consistent with our historical experience. In addition, margin benefited from prudent corporate cost management and excellent award and incentive fee performance.

As shown on Slide 7, we paid down the remaining $300 million of commercial paper tied to the Entrust acquisition and ended the quarter with a very strong balance sheet. At quarter end, we had $6 billion of debt and $748 million of cash and cash equivalents. Gross leverage fell to 2.5x.

Finally, on to the forward outlook on Slide 8. As Tom indicated, we're enhancing our guidance for revenues, earnings and cash. Specifically, we're raising the lower end of our ranges for revenue by $200 million in non-GAAP diluted EPS by $0.10. and increasing our operating cash flow guidance by $50 million. We're now expecting CapEx to be closer to $250 million for the year. So the implied free cash flow guidance is up about $150 million. We're maintaining our adjusted EBITDA margin guidance of mid 13%. And this guidance excludes any impact from the pending SES joint venture with Analogic, which we still expect to close later this year.

Importantly, we are diversifying the earnings power of the company, so we are able to raise guidance despite the BVA MD changes that layer in over the third and fourth quarters this year. In fact, on an organic basis, we expect the rest of Leidos to grow approximately 7% in revenues and 19% in adjusted EBITDA in 2026. Diving a little deeper we see Health segment sustaining revenues around Q2 levels for the rest of the year with non-GAAP OI margins around 20%.

Conversely, Defense growth will accelerate and post high single-digit growth for the year. If you exclude the airborne ISR business, which is in a transition phase, Defense will grow double digits in 2026, which is a better indicator of its launch point heading into 2027.

With that, operator, we're ready to take questions.

[Operator Instructions] Our first question is going to come from the line of Scott Mikus with Melius Research.

Tom and Chris, on DIMSOM/MHS GENESIS, the next -- the reports indicate the next phase -- DHA, sorry, plan to do the integration internally. Did you get information from the customer on why they chose to go that route? And is this kind of a one-off situation? Or do you expect other agencies to limit the role of systems integrators going forward?

Thanks, Scott. Appreciate the question. I think, honestly, the trend here is that there is an interest in-sourcing across many government agencies right now. What they're interested in-sourcing is the systems integration, as you say, but also the acquisition of commercial technology per the aspirations of this administration. So we see that trend continuing across many agencies. That being said, while that has been a value-added service for Leidos in the past, what we're able to do is transition our value-added services into higher-level mission systems integration capabilities. Just integrating the system was what got them to the place where they can now commercially acquire the software themselves and perhaps do some of the systems integration themselves.

But as you're seeing with MHS GENESIS, there's still a need for us to maintain the system, enhance the system and partner with them in terms of making the system match fit for the future. So while we see a lot of conversations around in-sourcing and it's understandable why our customer would want to make sure that they have organic capability. It's difficult to see that they can in-source it all and have the manpower necessary to do the whole work. And so we're seeing them also contract with us as their partner going forward. When you cut away from that, and raise up back to the 30,000-foot level, you see that for all that's changed, very little has changed. There's a little bit of churn. There's a little bit of change in what our partnership looks like. But at the end of the day, they're still looking for us to help them maintain, enhance and make sure the system is working for the future.

Scott, I'd just add that even in the case of DHMSM, ongoing negotiations are taking place around how we can continue to support them even with the current set of activities. So it's trending the way Tom talked about potentially, but at the same time, the customer doesn't necessarily have the capacity to jump in and do all the activities that Leidos has historically supported. So there's a good chance that we perpetuate that as is, and then we'll play for the value-added piece as the future becomes more clear.

Our next question comes from the line of Matt Akers with BNP Paribas.

I just wanted to follow up on the VBA recompete commentary you gave in the opening remarks. I think you said the incentive payments going away in the rest of this year? Is there any conclusions that we could draw from -- for 2027? Any more clarity there? Any thoughts on kind of where margins could go in that Health business?

Sure. Thanks for the question, Matt. I'm not surprised. It's one of the first ones that was asked this morning. Yes, as I said on my prepared remarks, we were informed in late May that the customer was considering withdrawing the incentive scheme from all vendors for the medical disability exam business, and we concurred with their decision there. As I said, that's driven by some administrative issues they have that their auditability and how those incentive payments have been given is in question. And so while they sort themselves out, they want to pause those incentive payments. It's been very clear that that's for this year only. And I was just with the leadership of the Veterans Administration yesterday to seek clarity on where all this is going.

And it became clear in that conversation that while cost is one concern the veterans administration has, value better in experience, quality are still things that they are very, very keenly focused on. So while we do not yet have a draft RFP for the recompete, and so we don't know the exact terms that will be a part of the next contract here. I'm pretty sure incentives will be a part of it. and that quality timeliness schedule and cost will be another thing that they focus on incentivizing.

So -- just like in the past, where we are very adroit at understanding the rules and working hard to delight our customer and therefore, have a very good business as a result. We expect that whatever the RFP asks for, we'll be able to compete and win because we believe it's going to play to our strengths.

At the same time, it's also clear that the customer is highly likely to extend the current contract at least through the first part of next year. As I said, they haven't issued a draft RFP yet for the region's contract. And so -- they're running out of time as it's already August to adjudicate the proposal process. And so we've been informed that they probably will extend the contract through a good part of the early part of next year. And at the same time, for international and predischarge work we do, we've been informed that they plan to extend that for another year.

So you can already see bridges to that future working out through the first 6, 9 months of next year. And we feel very strongly that the -- our right to win and the things that have always distinguished Leidos QTC in this marketplace, we'll continue to distinguish ourselves and give us a premier place in the future of the VBE work.

So all told, some changes going on. But very importantly, I want to foot stomp once again, Matt, that those changes for this year are fully enveloped in our improved guidance for 2026, so we feel very confident that we understand how this business is going to perform as part of Leidos this year. And we feel very strongly that the rise in the other growth pillars of our NorthStar 2030 Strategy is going to help buoy the rest of the business so that we can improve our guidance on the year despite these changes in costs that are going to be layered in at the rest of this year. I hope that helps, Matt.

Our next question is going to come from the line of Colin Canfield with Cantor.

As I think about the theme of other parts of the business, essentially offsetting the health margin dynamic and the health growth dynamic. Can you perhaps talk about the free cash flow trends for the company, essentially kind of what do you think are the kind of key levers to get you back to kind of high single-digit low double-digit free cash flow growth? And where do you see the most risk?

Colin, Chris here. Thanks for that. First of all, I mean, extremely pleased with the Q2 numbers we just put up on free cash flow, a banner quarter best ever in the second quarter. And second consecutive quarter we've raised guidance for the year, and then you might have picked up on the fact that we don't see a need now to spend the full amount of CapEx that we had signaled previously, prudently pulling back on that. And therefore, that raises the full year free cash flow outlook even further. So I like the trajectory of the team's performance on free cash flow. And I think that as you think about the investments required in some of the other growth pillars, yes, there will be some additional investments required to propel our Defense Tech business forward. But that, again, fits within the framework that we've talked about historically, looking at 1% to 1.5% of revenue as we see the landscape today.

So this is a cash-generating business. It will continue to be a cash-generating business. And beyond that, we've got our enterprise transformation office working hand in glove with my team on how do we take days out of our DSO performance. The benefit of that work is yet to be realized. So good news there ahead of us as they complete some of those efforts. So I think the trajectory on free cash flow performance will continue to be strong. And I see this as an area that we'll be able to show upward momentum as we move forward.

Colin, just to pick up a couple of themes there that Chris bread crumbed. What I hope you hear from Chris is that our philosophy as Leidos has never changed from being a low capital intensity business. So while we are certainly leaning in to certain aspects of the business, for instance, our defense tech business, where some investment is required to jump start that engine of growth in the future.

On the whole, we still see ourselves as a relatively low capital intensity business, and we plan to keep it that way. That's because the growth pillars we've identified, be it defense tech energy, all we're doing in cyber, our digital modernization aspirations, things we're doing for the FAA and exciting opportunities there, opportunities to help transform TSA and the airport experience for Americans. All these things are areas where it will perpetuate a low capital intensity high cash return, high cash conversion business for Leidos that we expect to perpetuate into the future.

That's great. And then maybe one follow-up. If you could talk about the free cash flow per share algorithm and where you're seeing the greatest level of sponsor interest across kind of all the sub-portfolio assets? And maybe if you could characterize the interest between sponsors and strategics.

Well, on the free cash flow per share, I mean, as Tom alluded to in his comments, you saw us repurchasing shares. You saw us re-up the share repurchase authorization. No commitment on quantum there, but I think our track record would suggest that has been an area of capital deployment. So you'll see the share count reduce over time, and you'll see the free cash flow conversion remains strong. As it relates to M&A, I think that's where you're going with some of the comments on sponsor portfolios. Again, I think there's areas that we'll look to complement our growth pillars over time.

We've got a lot on our plate right now, digesting what's going on with the Entrust integration, which is going exceedingly well. And at the same time, the offloading of the SES business into that joint venture, which we're still extremely excited about and look forward to being able to provide more color on that once we get to closing later this year. So net-net, an active dialogue and active surveilling of the landscape, and we'll continue to keep our powder dry for the right moves to make there as they present themselves.

Our next question is going to come from the line of Seth Seifman with JPMorgan.

I wanted to start off asking about the cadence of award activity. And I think you made some encouraging comments at the outset of the call. I guess, when we think about the intelligence and digital business, how does the bookings environment look through the end of the fiscal year on September 30? And is there opportunity to exit the government fiscal year with a higher backlog in that business than what we saw at June 30?

Yes. Thank you, Seth. Yes, I was rather forward in my comments that we are seeing customer activity pick up. I think that's evident in our book-to-bill ratio this quarter. But more importantly, it's indicative of the backlog of awards we see awaiting adjudication in all of our customers' coffers, if you will.

From a macro lens, this administration is obviously anxious to demonstrate to the public that they can deliver in advance of the November midterms. And so you hear Secretary for instance, projecting that the vast majority of his unobligated funds from the reconciliation budget of 2025 will be on contract before October 1. And so you're hearing administration officials understand that they want to and need to put this money to work for the economy and put this work -- money to work for the government, and we see indications that that's happening. So -- as these obligations flow, we believe those are going to support our second half bookings, which are totally aligned with what this customer wants be that a more intelligent intelligence community, a stronger defense community aligned with what we've said are our priorities, space, Maritime and now munitions.

And so it's no surprise that we're seeing the early indications of that flow through to our Defense business with a book-to-bill ratio greater than 2. Tremendous opportunity for us to now capitalize on those bookings to deliver revenue into the future. So -- we are seeing this occur. We're seeing customer activity pick up. We are confident that, that will continue through the quarter. We're now in the third quarter of this year. And we feel like there's every possibility that a good chunk of that $23 billion of proposals that we have in are going to be adjudicated over the next 3, 6, 9, 12 months.

Okay. Okay. Great. And then maybe sticking with the intelligence and digital business, there's been some talk about trying to convert more of that work to fixed price over time. How quickly do you see that evolving? How quickly can -- would you expect that mix to change within that intelligence and digital segment?

Yes. The -- we are in a lot of conversations with customers across all agencies about opportunities for fixed price contracts. In fact, it's almost a weekly occurrence that a customer comes to us and says, "Could you give me an unsolicited to turn this work into fixed price?" That's a conversation we welcome. In fact, that's a conversation sometimes we vote because we know this administration is very keen to have a fixed-price outcome-based results. And fixed-price outcome-based results are something that we feel very comfortable is in our wheelhouse. And so we're seeing that happen. It's certainly happening in the intelligence agency. But at the same time, I hope you've seen our very proactive move to position ourselves for better service to the intelligence community coming on. Full spectrum cyber has been something we've talked about as a growth pillar for Leidos for the last 1.5 years. It's something we leaned into with Kudu.

And it's something that is paying tremendous dividends for us in terms of the customer appreciation for our value add as this country becomes more and more cyber savvy, if you will. And so we're very much leaning into that. And here recently, just last week, perhaps you caught the fact that we announced a major partnership with Core Reeve. That whole partnership is geared at positioning ourselves, positioning Leidos to be the preferred provider of secure cloud, AI, sovereign AI for the intelligence community to include the Department of War. Because we know that as the appetite for trusted mission AI solutions grows, the need for the intelligence agencies and the Department of War to have sovereign capabilities through which -- at which they provide those capabilities is going to grow. And that's right in our wheelhouse of knowing a thing or two about how to build a 705 compliance gift and ensure that the digits get from it to the point of use seamlessly, flawlessly and in a cyber secure way. So we're very eager to continue to lean into our cyber intelligence and national security objectives, and we feel very good that we're in a great position to do so.

Chris, do you have anything to add?

Well, just to build on that, Seth, I would say that, again, you've seen the trend in fixed price percentage of our work increase over time. It's something we know how to do. Encouragingly, in this environment as the customers ask for these fixed price opportunities. It plays to our strength on rolling out new capabilities like Parkade, -- you might have seen another press release announcing a new software tool that we think is a game changer and differentiated, and it's the kind of thing that we do want to sell on a fixed-price outcome-based basis to our customers. And so as we roll out more capabilities like that and more are coming, again, the environment where they're receptive to fixed-price contracting plays well to get those deals done. So excited about the trajectory we're seeing in that part of the business.

Our next question will come from the line of Tobey Sommer with Truist.

I was hoping to get your perspective on the Defense business, not just the programs that you've touched on in your prepared remarks, which you're getting some visibility into, but also what you may be seeing over the horizon in terms of opportunity? And what the addition of more hardware in the mix bodes for margin in Defense?

Yes. Thanks for that, Tobey. We're very bullish about our Defense Tech business. And again, just to step back, when we announced our NorthStar 2030 growth strategy, we said that Defense Tech would be 1 of our growth pillars and the specific engines we selected under that growth biller were space and maritime. We are now at the point where we're expanding the number of growth engines we see as plausible and probable in our defense business to include munitions and to include counter UAS capabilities in keeping with some other things. So we're very bullish about the suite of products we have in our defense tech business. and the opportunities for them to be key enablers for macro programs like golden dome and macro needs like base defense and counter UAS, which as we all see around the world, is growing in importance every day.

On the munitions front, it's very important that we talk for just a minute about two programs in addition to the IFPC program we've talked about for years. IFPC is now a program that is hitting its full stride in production, we're delivering more and more units every year, every month. And it's a program that is hitting its test objectives and hitting its fielding objectives with the customers.

So we feel like that program is in full swing now. But quickly on the heels. We've got the small cruise missile, which has been named by the U.S. Air Force as AGM-190A or recently renamed Sphere by the customer. And that program also is undergoing flight tests and actual deployment in exercises and in combat. And so we're very pleased that our small cruise missile has found great customer receptivity and the scaling in both the SOCOM and the U.S. Air Force is a conversation that is ongoing in addition to scaling it to a family assistance.

Part of that family assistance is what allowed us to have our LCCM framework that we announced earlier this year. That program is moving along very adroitly. We're ticking off critical milestones. And we have a production readiness and scaling review scheduled for later this month. So you can see how quickly we're moving from rapid prototyping into scaled production. And that means we're on track for full flight tests next summer and full rate production thereafter and 3,000 units before the end of this decade.

All told, the addressable markets that we're talking about here just for low-cost and containerized munitions is in excess of $44 billion over the next 10 years. And so when you combine what we're doing on IFPC, SCM low-cost containerized munitions, you add our very specific exquisite, some people call it Gucci capability in space sensing payloads. You add our with Leidos Gibs and Cox and our LAVA software for autonomy our whole autonomous vessels capability for what we all know is the future of the U.S. Navy. We feel very good about hitting our stride on a number of engines in this defense tech business, which leads us to the bullish outlook that I talked about before and like Chris talked about in his prepared remarks of double-digit profitability, and we can start to see double-digit CAGR of revenue growth. So very bullish on the opportunity for this growth pillar to pay tremendous dividends for us over the coming 5 to 10 years.

Chris, anything you'd add to that?

Just to -- Tobey, back to your question on margins, and Tom alluded to it, as we see these more maturity in some of the programs we've already fielded a being a great example, radar systems. We're seeing the profitability of those programs increase, as you would expect. On our space payloads, every tranche has had higher profitability than the previous tranche 0, 1, 2. Now we've announced our most recent win. And so again, more quantities, more maturity, you're seeing the trajectory exactly the way we want to see it. And therefore, again, continue to be very bullish around looking out to 2030, the margins in that part of the business really accelerating.

I just looked up my note here, and my notes say that we have a $12 billion pipeline of visual opportunities in the next 12 months. So we are very excited about the opportunities in front of us here.

Our next question comes from the line of Sheila Kahyaoglu with Jefferies.

Lots of helpful color on health and all the moving pieces. As we think about the removal of the incentive fees in Q2 and for the remaining part of the year. How do we think about '26 and '27, which is the VBA overhang, what's a good baseline for profitability? I know it's hard because the RFP isn't out yet, as it relates to VBA and give some as we think about those two programs transitioning in '26 on the revenue and margin side?

Yes. Thanks, Sheila. I'll start, and then I'll ask Chris to pick up some details. Again, we think that as these changes that the customer is requesting of us get layered in over the remainder of this year over the next 6 months. The fourth quarter performance of that business probably is a good jumping off point for what we're looking at for 2027. So as I said in my prepared remarks, with the VA administrator yesterday, the need for quality, the need for veteran experience the need for capacity to do more exams quickly and more efficiently is a key for them. But also key for them is the partnership that we've had in the past. So -- we feel like we've got a good jumping off point. We are eager to see the draft RFP, but the whole point of a draft RFP is to have a dialogue about the law of unintended consequences and what it incents us to do.

So the conversations that we're having with the Veterans Administration is we look forward to the dialogue around that RFP to ensure that it continues to incentivize the behavior at the veterans and the taxpayer would expect this administration to put at the forefront. We think that plays to our strengths. We think that means this will continue to be a viable, strong business for us in the future. But there's so much, Sheila, that is focused on this specific 1 element of our value add to what we do in managed health.

And I'd like to maybe broaden the aperture a little bit beyond that. because the fact is, while that's one part of what we do, this is a market that is looking to grow annually to about -- from $13 billion today to about $15 billion by the 2030. And in Behavioral Health, an area of focus for us to grow in and Rural Health, two of our growth engines we've talked about before, that market is expected to grow by 4.3% and 4.5%, respectively. And so -- on a CAGR basis.

And so we expect to continue to have our MDE business, which also is projected to grow at about 2%, 2.1% level. But -- we look at that as a base of business from which we continue to grow our managed health pillar. And we expect to grow our managed health pillar by leaning into the very large rural health network we have, our proprietary capability of providing rural health around the whole of the United States. And our already premier place in behavioral health. Again, we talked on last call about Military OneSource and that takeaway that we were awarded for that program, a huge a huge testament to our capability to help the Department of War and the Veterans Administration with Behavioral Health that is so required for these communities.

And so we see the fourth quarter as the probable sustaining feature for this MDE business over the long run. But we also look to grow things like my STR, things like military OneSource, things like the Military Family leave counseling program that we do and our rural health business that is a tremendous opportunity for us to grow into the future. So understand why MDE gets so much heat and light but there are growth engines beyond it that we're focused on also.

Chris, anything to add?

Yes. Tom, you covered it well. I'd say that, yes, obviously, job 1 is to resecure this franchise. And as Tom pointed to, the rules of engagement are becoming clearer. And we're partnering with the customer. We're absorbing the headwinds that the back half of this year will have because of the changes in those conditions. And the strength of the portfolio is shining through the world overcoming then. But -- so Q4 run rate, resecure the recompete, anticipate some level of efficiencies that we just priced into predischarge and international ripple into that recompete when it is secured at some point next year, that's job one.

But beyond that, I'd generally highlight, we've added a lot of additional talent and health because there are so many good things going on, as Tom talked about. New Growth Officer, a new Chief Product Officer in Health, bringing a lot of expertise to how we take not only My STR but the whole rural campaign to the next level. I mean, you have to appreciate that Leidos through our QTC subsidiary has a network of more than 15,000 providers, 90 clinics. We do 2.8 million examinations annually. So you think about the activity level that we're putting through here, there's a massive platform at scale here that we can leverage for so much more in this domain. So that's -- that's the game we're playing. That's the opportunity that's ahead of us, transitioning to resecure this recompete and then building from there.

Our next question will come from the line of Ken Herbert with RBC.

Tom and Chris, I just wanted to take a minute and see if you can talk about the guide for this year. It looks like organically, you're guiding in the second half to, call it, 4%, maybe 4.5% growth. As you look at the various segments after really strong bookings through the first half of the year, where do you see the most conservatism maybe across the segments? And maybe can you just talk about what's embedded in the top line guide relative to risk associated with the CR or other timing around contracting activity?

Ken, thanks, Chris here. I mean, obviously, the guide -- the conversation we just had about what's going on in health is fully incorporated in that back half, right? So those -- the health run rate kind of staying at the Q2 levels on the top line. But meanwhile, building momentum in other parts of the portfolio, certainly, you saw a robust quarter in Q2 out of Homeland, and there's an opportunity to continue to see that tick up over the back half. The growth rate won't be as robust, but the absolute dollars of revenues increase.

And great news about that business is you're not at risk significantly from any shutdown or even CR implications because predominantly, it's driven by what's going on internationally and what's going on with our energy business. We see that Defense, obviously, is going to continue to accelerate on the top line. And -- we -- there are some new program starts in there that are anticipated. They have modest contributions for the year. We think the ranges that we provided allow for that. And if things break our way, you'd see us certainly trending towards the top end of that.

In Intel and Digital, those are probably the areas that are most vulnerable if there are some continued disruptions at year-end. We don't anticipate a shutdown. But at the same time, we'll get a continuing resolution of some kind and then let this play out after the midterms are resolved. So I think there's opportunities for more acceleration in Defense. I think we're pretty range bound on what we talked about in health and Homeland continues to excel. If we get the FAA program broke our way, which is a massive opportunity. Again, there's some upside there as well. So I think the guidance gives you a good range of outcomes that we fully expect to deliver on.

Long and short, Ken, is we've got our out here at Leidos and we're never going to stop working.

Our next question will come from the line of Gavin Parsons with UBS.

Appreciate all the color on VBA, but I apologize if I missed your expectation for the timing of the RFP. Are you still expecting that this year? And is that what you need to have full visibility into financials on that program going forward?

Yes. Sure, Gavin. Yes. And no apologies necessary. Yes, we expect the draft RFP any day. And then we hope that, that will turn into a formal RFP, let's call it, 30, 45, 60 days later, and then you're in the bid process. Any way you slice that given it's August 4 today means that you're probably not submitting formal bids until close to the end of the year. And that means they're making decisions early next year in all likelihood. That's why what I said, Gavin, about indications -- clear indications from the customer that we can expect an extension of our current domestic regions contract for up to 6 months. That's a contractual pause that is in the contract that they have now. So we fully expect that they'll be exercising that option in the coming months, which will perpetuate the current contract into next year possibly as far as mid next year. And for the predischarge in international, we've also gotten indications that -- or commitments from the customer that they expect to exercise the 1-year of 2-year extensions enabled to them in the next month. So that contract doesn't stop at the end of September.

So what you're starting to see here is the draft RFP will come into focus over the coming next couple of few months. By the time we talk on our next earnings call, I expect to have a firm RFP and understand exactly what that business is going to look like going forward. But in the meantime, even the runway for 2027 is starting to clear up because we see the international and predischarge probably extended through September 2027. We see the regions contract probably extended through the better part of next year. And so regardless of what happens with the RFP for the domestic regions contract, you're talking about half a year or so of implementation on that program. So we're starting to see the clouds part. We can start to see our way more clearly, very clearly through the end of this year and starting to see what next year looks like, but we'll wait to see the actual RFP in the next 2, 3 months to give an indication of how that looks for us in the future going forward.

Okay. That's very helpful. And I mean, as you can tell, everybody is worried about the margins on that program. You guys performed pretty well on the current iteration. I appreciate you don't have full financial visibility yet. Would you anticipate having the opportunity if there is a margin reset to invest and improve that margin over time?

Yes. A lot is said about our margin in this business, but the fact is our margins are good in that business because we have invested in that business to be the technology leader, to be the volume leader and to be the quality leader. Again, in conversations that I had with the VA just yesterday, quality, the need for us to maintain a focus on better and quality is key. As Chris was just articulating, our presence around the whole of the nation is not to be trivialized. It's a tremendous presence we have built up over the years, which gives us the capacity to lean in to help this administration continue to serve veterans differentially. .

Add to that, the 12 mobile units we use that go to the veteran to serve them where they are. We're going to continue to lean in to invest in this business to serve the veterans disproportionately. As a result of that, we think that we are in a reasonably good place from a right to win standpoint. And then once we see the RFP, we'll play the tune that the piper calls. And so we will lean in to continue to differentiate ourselves and we think that differentiating ourselves in the market, especially in this administration, which is so interested in outcome-based contracting, we can play a very strong game in outcome-based contracting that delivers for the veteran, delivers for the taxpayer and delivers for our shareholders.

Our next question will come from the line of John Godyn with Citi.

A couple of the themes from the call upward momentum in free cash flow and a healthy balance sheet. I just wanted to revisit how you're balancing growth investments versus M&A versus repurchases? And maybe just get a little bit more detail on that thought process.

Yes. So we've always had, John, a balanced approach to capital allocation. That's been a hallmark for Chris and I, and our leadership of this corporation. And you can expect that to continue. Obviously, we have leaned in this year from a capital expense standpoint to make sure we are seizing the moment in our defense tech business. But as I indicated earlier, that's not a sustained expectation. That's a point in time expectation. So a 1.5 capital intensity is something that you should you should assume is more the norm.

The Board authorized a new $20 million share repurchase program on Friday. You can expect us to continue to deploy capital equally around the pitch. M&A targets right now are very expensive, and our valuation is not. And so you wouldn't expect me to lean into a very high-priced M&A at this point with my valuation where it is right today. So -- we're going to continue to be the business leaders you expect us to be. We're going to deploy capital intelligently and prudently for all of our stakeholders and all of our shareholders, while at the same time, we remain laser-focused on fully supporting every aspect of this administration's national security agenda.

So our priority is always going to be investing in the capacity and the needs of our nation's war fighters. And then once we've satisfied that we're going to continue to grow the business intelligently through organic and inorganic and share repurchase and dividend type of activities.

Got it. Very helpful. And I completely appreciate the sort of logic behind balance. But as you mentioned, the valuation is now at multiyear lows. And at different times in the past on the M&A side, you've made very bold moves. I'm just curious if there's appetite to make a bold move on the repurchase to take advantage of market conditions.

Well, again, John, we wouldn't want to tip our hand there. But I mean, again, the reauthorization is in place. I think you've seen over the last couple of years that we've been active when there's no other demands on the capital. The great news is there's a lot of capacity to put to work, and we don't intend on just sitting around on that. So we hear you. We also agree that the valuation isn't where it should be, and we're working hard to correct that.

Michelle, it looks like we have time for one more question.

All right. Our last question is going to come from the line of Mariana Perez Mora with Bank of America.

Tom, you just mentioned a couple of sequentials before, $12 billion in the pipeline for digital opportunities. Could you mind discussing the nature of those opportunities? Are there new opportunities for Leidos? Are they recompete opportunities? What kind of duration they are? Are they like a material type contracts are more about like fixed price and higher-margin opportunities for you guys?

Yes. Thanks for that, Mariana. So yes -- and again, to put that in context, you have to step back. Look, our Defense Tech business has, as I said, $5 billion in awards year-to-date, that includes things like common hypersonic bodies, Army macro 2, Air Combat Command intelligence, IFPC Mobile, I mentioned that in my comments and out our wide area passive sensor production. We also -- if you look back 18, we've got $10 billion of awards in that business. So very clear that momentum is moving. Obviously, 5 minus 10 means we had 5 over the last year, 5 in the last -- in the year-to-date 6 months. And so we're very excited about the trajectory we've got going on here.

What we're assuming in that pipeline of opportunities is things like the opportunity in front of us at the Navy's medium unmanned surface vessel program. We are leaning into designing the BBG X battleship. We anticipate that there are opportunities for us in this pipeline for small cruise missile as I mentioned, and LCCM production contracts. And so that pipeline over the next 12 months includes most of the things you know and follow-ons to programs that we have right now.

I didn't talk a lot about counter UAS, Mariana, but that's an area that this administration is very keen to understand Leidos' capabilities in. Obviously, we have some very exquisite capabilities when it comes to sensing unmanned aerial vehicles, but we also have some robust capabilities when it comes to non-kinetic effects against unmanned aerial vehicles.

And so -- the $12 billion of pipelines we see over the next 12 months includes follow-on contracts, new contracts for production of materials that we've talked about before. And then perhaps things like our presence in the counter-UAS. All told, we're talking about growing our Huntsville workforce by leaps and bounds. We've grown that workforce by 13% from the beginning of this year and 33% of that is manufacturing people. And so we're very much a growth engine for the Huntsville economy. Our Defense Tech business is something we're leaning into and expecting to grow into the future. And this pipeline and the robust nature of it is indicative of how positive we see about it in the future.

And Michelle, I want to thank you for your participation and help on today's call. And thank you to all those that joined in, and we look forward to continuing the dialogue over the next quarter.

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.

Greetings. Welcome to Leidos First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker, Stuart Davis from Investor Relations. Stuart, you may begin.

Thank you, and good morning, everyone. Joining me on today's earnings conference call are CEO, Tom Bell; and CFO, Chris Cage. Today's call is being webcast on the Investor Relations portion of our website where you can find the earnings press release and the presentation slides for today's call.

As shown on Slide 2, our discussion today will contain forward-looking statements based on the environment as we currently see it, and thus includes risks and uncertainties. Our press release contains more information on the specific risk factors that could cause actual results to differ materially from anticipated results.

Turning to Slide 3. We'll also discuss both GAAP and non-GAAP financial measures. In today's press release and presentation slides contain a reconciliation between the 2.

And now let me turn the call over to Tom, who'll begin on Slide 4.

Thank you, Stuart, and good morning, everyone. Today, I am pleased to report a very strong start for Leidos in 2026. First quarter revenue was up 4% year-on-year to $4.4 billion, and profitability remained excellent to start 2026, with adjusted EBITDA of 14%. As a result of this strong core performance and the immediately accretive nature of our Entrust acquisition, we are raising our 2026 guidance for revenue by $500 million, non-GAAP diluted EPS by $0.05 and operating cash flow by $50 million. Execution of our NorthStar 2030 growth strategy is now in full swing. And these strong Q1 results set the stage for our multiyear growth trajectory beginning this year. Chris will go through our Q1 financials in detail later on this call.

What I'd like to spend my time with you on this morning is the story behind these Q1 numbers and the fact that they represent another proof point that Leidos is built to thrive. Our scale, our unparalleled customer understanding, our ongoing corporate investments in our [ Golden Bolts ], our market-leading exploitation of AI, they are all allowing us to quickly adapt to this changing market dynamics and rapidly deploy learnings to all of our customers and all of our businesses.

We are driving our business and executing our NorthStar 2030 growth strategy through a few simple principles. The first is increasing our investments in our 5 growth pillars. Our growth pillars, markets where we see robust revenue growth to deliver superior top and bottom line results, remain Defense Tech, managed health, digital infrastructure and cyber, energy resilience and mission software.

The second principle is continuing to make Leidos faster, leaner and more focused, ensuring that speed is king at Leidos.

And the third principle is leveraging our scale through technology insertion and learning across our whole business.

Here are some examples of how we're delivering against this strategy in 2026. In Defense, we're capitalizing on years of technological investment to work with the Department of War as one of their key disruptors able to reliably produce at scale. We are currently pursuing accelerated procurement agreements such as framework agreements, to field a number of Leidos advanced products and capabilities.

Let me illustrate a few for you this morning. Munitions is a clear area of focus by the Department of War and one of historical strength for Leidos. Following a string of successful flight tests of our small cruise missile, now designated the AGM-190A by our customer, we are working with the Department of War to accelerate production of the SCM itself, progress work on derivatives of this product and field iterations of this technology for even more challenging warfighter needs. All in all, we can clearly see a path to production runs of thousands of these products in this decade alone.

We're also working to respond to the U.S. Navy for a marketplace acquisition approach to produce MUSVs and mission payloads at scale quickly. Our offering combines Leidos' Gibbs & Cox expertise, commercial boat yard capability, Leidos' proven LAVA software, integrated command and control, our exquisite C5ISR and counter C5ISRT to deliver real-world scale effects for the U.S. Navy.

Related to this, you probably saw recent press reports about one of Leidos' existing MUSVs, the Seahawk MUSV, being operationally not experimentally deployed as part of the Theodore Roosevelt Carrier Strike Group. This is the U.S. Navy's first and only medium unmanned surface vehicle to reach this level of customer confidence, relevance and actual deployment.

And we're also conducting advanced discussions regarding scaling production of Leidos' Air Shield high-power microwave counter UAS technology. That technology consistently outperforms all competitors in range and lethality. In addition to these framework agreements and other agreements, we've begun serial production of our ALPS product under our $2.2 billion ABADS-MD contract. ALPS is a Leidos developed passive sensing system that delivers persistent, wide area awareness at a fraction of legacy costs. In fact, you may have noticed last month at the Department of War Golden Dome update that our ALPS program was highlighted as a key sensor informing the Golden Dome architecture. Quoting General [ Guetlein ] himself, "the testing of the Army's advanced long-range persistent surveillance radar is tangible proof of our progress. " This is a powerful customer validation of ALPS' ReadyNow role in enabling a layered integrated defense network.

All this momentum is translating directly into strong demand across our entire Defense Tech portfolio. In total, we've earned over $9 billion of awards for our Defense Tech business in the last 15 months alone, and we can see clearly a path to another $8 billion in our next 12-month pipeline.

In Health, we are injecting real-world digital sophistication into mission-critical care with excellent customer impact, a standout example here is our recent $456 million Military OneSource award. This program provides confidential counseling, financial planning, tax assistance, career coaching and more to military personnel and their families. This directed award is a testament to Leidos' superior and repeatable digital innovations.

By applying the predictive analytics from our Military and Family Life Counseling program, to this customer's Military OneSource needs, we are shifting the focus from reactive care to proactive force readiness. This award is in the wheelhouse of our managed health growth pillar, and grows our strategic moat in this market. By harmonizing these programs, MFLC and Military OneSource, we give the customer optionality to sync these ecosystems into a single high-efficiency care delivery model.

We are embedding Leidos into the mission's digital DNA, ensuring long-term customer stickiness, improving our disruptive value across the managed health market. Elsewhere in Health, we've secured a first of its kind award for a pilot program called My Service Treatment Record. Here, we've been selected to exclusively develop an AI-driven tool to automate the medical record transfer for service members from the Department of War to the Veterans Administration.

As the architects of MHS Genesis, Leidos was uniquely qualified to aggregate Department of War data at speed and scale necessary to expedite this transfer. A transfer that today is manual, paper-intensive, frustratingly slow and laborious. This new platform acts as another strategic entry point into the broader disability examinations mission. It allows us to further stitch together fragmented legacy systems with a seamless end-to-end digital thread. With the ability to automate everything from record retrieval to claim submission we are directly advancing both the Department of War and the VA's digital-first initiatives. In turn, this ensures Leidos and our technology are deeply embedded in both our customers' long-term operational road map.

Also of note, in our ongoing Veterans Benefits exam business, I'm pleased to report that our disability exam volume remained high through the first quarter and customer satisfaction, veteran satisfaction with their treatment at Leidos QTC clinics remains best in class. We are very much looking forward to working with the customer on our continued leading role providing these mission-critical services to our nation's veterans, beginning with an industry day later this month. Together, these wins and our robust ongoing business give us confidence in our Health growth pillar and its sustainable growth through the decade.

Now I'd like to take a minute to also update you on the 3 substantial portfolio moves we've undertaken in the last 12 months. Most recently, I was very pleased to have announced our intent to strengthen our nation's Homeland Defense by agreeing to combine our SES business into a joint venture with Analogic. Our joint venture will create a focused American leader in this critical global market. And through our significant minority interest in this JV, our shareholders will continue to participate in the market upside this JV will help unlock.

Regarding our Kudu acquisition of last year, the nonkinetic effects you probably read about an Operation Absolute Resolve and Operation Epic Fury reinforce just how critical these capabilities are to our customers' missions. That demand is exactly what we foresaw in acquiring Kudu to combine with our existing business. The combination of Kudu's elite offensive cyber tools with our robust signal processing capabilities and our established defensive cyber leadership has created the integrated tool kit that our customers increasingly rely on. It also aligns directly with the recently published national cyber strategy.

Leidos' full-spectrum cyber capacity is delivering against surging demand. We currently see a total cyber pipeline valued at $24 billion, a 21% increase since the acquisition of Kudu. The acquisition has also accelerated our use of AI technology to deliver cyber mission software and operations with unprecedented velocity.

And speaking of velocity, we executed a quick, clean close of Entrust this past March, just 2 months after we announced the acquisition itself. That speed sets us up to accelerate delivery for our customers at a time when demand for energy infrastructure services is expanding every day. And closing this deal rapidly allows us to quickly gain the top and bottom line efficiencies we envisioned for this transaction this year.

Integration is ahead of schedule, the cultural alignment is seamless, and the financial upside is already surfacing in our consolidated numbers. Strategically, this combination expands our business' breadth and depth and is already producing new opportunities. For instance, as a result of our combined prowess, we've received our first energy generation plant RFP. And we've been selected to perform detailed design for Canada's largest battery electrical storage facility.

Building on this momentum, our team is focused on targeting a refreshed order pipeline of $10 billion. This represents growth of 230% post close, made possible by rapidly bringing our teams together to prosecute the market as one. And on the operational side, we've deployed Leidos' AI tools, Skywire across the new organization. Teams are already seeing significant opportunity to deliver high-quality services and solutions to more customers faster and cheaper.

This is exactly what our NorthStar 2030 strategy is all about. Our Kudu and Entrust acquisitions provide us tremendous accelerants in high-growth markets, for scale and technology unite to deliver superior top and bottom line returns.

And we aren't just looking at acquisitions to drive growth. I'm also pleased to announce that we are balancing these strategic moves with a surgical venture stage investment to ensure Leidos stays at the forefront of the market's innovation curve. We have committed a multiyear $100 million investment in a marquee PE firm with a proven track record in the federal technology space. This partnership gives us early access to a vetted pipeline of high-growth disruptors with mission-ready capabilities in AI, advanced cyber and autonomy to name a few.

By continuing to be at the forefront of technological breakthroughs of all types, we ensure our customers have the technology they need tomorrow, integrated into the Leidos growth pillars today.

To close out my prepared remarks this morning, I'd also like to spend a moment on AI and what it means for Leidos. As I have said on past calls, we are not reacting to AI. AI is nothing new to Leidos. We are scaling with AI. AI is not a threat to our business model, it's an accelerant of our business model because at our core, Leidos exists to make customers' outcomes smarter and more efficient. And AI allows us to do just that, work faster at greater scale with higher impact.

What AI is doing in very practical terms is simply compressing the bottom of the solution value chain. It's making it easier to do things that were historically hard to do but it does not obsolete things that are hard to get. So things like routine development, basic analytics, data integration, AI is compressing the time to deliver these results. And that compression is of great value to us. We welcome it and are exploiting it because it frees up our highly specialized talent to focus where we create the most value, leveraging the multitude of things we have that are the very things that are hard to get, solving our customers' most complex mission-critical problems with deep customer understanding, the right people with the right specialty security clearances, real-world regulatory permission, Leidos' privileged access to our customers' digital infrastructure at scale, et cetera.

AI makes us faster and AI makes us more efficient. And all these shifts reinforce they don't erode the digital advantages that Leidos enjoys. Our market position in highly cleared environments, our deep regulatory experience, our access to proprietary data and most importantly, the trust we built with customers over decades. These are not disrupted by AI, they are amplified by it. In our markets, real costs are not measured in dollars, they are measured in risk, mission accomplishment risk. And as AI increases the clock speed of our customers' mission execution, that risk only grows. So in turn, this only further strengthens our position as the trusted mission AI experts, the sober, cerebral, experienced, relatable experts deploying AI for our customers' success in ways they know they can trust.

As part of this, as I've just alluded to, is an often underappreciated advantage for Leidos in this booming world of AI, the sheer scale of our federal digital infrastructure business. Our digital infrastructure business, the very large privileged position we enjoy today in our customers' digital ecosystem is not a vulnerability in an AI world, it's a strength because that ecosystem is foundational to how our customers are and will adopt AI securely and effectively.

Every day, more than any other company we deliver open, secure, repeatable and mission-critical solutions for our customers. Capabilities we're currently grouping into 4 offerings, Uphold our cyber and resilient networks product suite; Insight, our Secure Cloud and data product suite; Forward, our customer digital experience product suite; and Headway, our information advantage product suite. Taken together, these product suites strengthen Leidos' position as the scaled, trusted integrator of AI-enabled mission systems in our customers' environments for their mission success. That's why we believe we are uniquely positioned to continue to lead in this market, and that's why we continue to see scalable growth in this business.

So Leidos is out of the blocks in 2026 playing offense. We are very excited about where we are today and where we are taking this business tomorrow, all guided by our clear NorthStar 2030 growth strategy.

I'll now turn the call over to Chris to review our Q1 financial performance and provide an update outlook on the rest of 2026. And then I'll look forward to your questions. Chris?

Thank you, Tom, and thank you, everyone, for joining us today. We are off to an impressive start in 2026 and now more than ever, we see our matchless portfolio as a key to driving superior performance and value creation over the coming years.

Let's jump right into the results, starting with the income statement on Slide 5. Revenues were $4.4 billion, up 4% in total and 3% organically year-over-year with especially robust growth in the Intelligence and Digital and Homeland segments. Revenues grew year-over-year as customers accelerated mission execution, especially for innovative products and solutions supporting the intelligence community, commercial energy infrastructure, and domestic and international air traffic management.

Bottom line performance remained strong. Adjusted EBITDA was $614 million for the first quarter, up 2% year-over-year for an adjusted EBITDA margin of 14%. Non-GAAP diluted EPS grew 5% to $3.13, driven by higher adjusted EBITDA, lower share count and a lower tax rate. Changes in estimates at completion were a modest headwind in the quarter, yet profitability remained high through prudent cost management, excellent award and incentive fee performance and a $15 million insurance reimbursement for previously recorded legal expenses.

Digging a little deeper, let's turn now to the segment drivers on Slide 6. Intel and Digital revenues increased 7% year-over-year, with 6% coming organically. Revenue growth was driven by recent contract awards and increased volumes for intelligence community mission support as well as $22 million from the acquisition of Kudu Dynamics.

Non-GAAP operating income margin increased from 9.7% in the prior year quarter to 10.2%, which is excellent performance for this portfolio. For Health, we sustained our excellent performance on the top and bottom line. Revenues were unchanged from a year ago, and profitability was relatively stable across periods. Homeland revenues increased 6% year-over-year, given surging demand for energy infrastructure engineering services and domestic and international air traffic control systems. Non-GAAP operating margin of 8.5% compared to 9.4% in the prior year quarter, reflected changing customer requirements on a fixed price program.

Lastly, Defense revenues of $883 million were up slightly compared to the prior year quarter, as strong growth in integrated air defense systems offset the wind down of [ some airborne ] surveillance programs due to a scheduled delay on a fixed price development program, Defense non-GAAP operating margin was 8.3% compared to 9.8% in the prior year quarter.

Turning to cash flow and the balance sheet on Slide 7. In the quarter, we generated $301 million of cash flows from operating activities and $270 million of free cash flow. Operating cash performance was exceptionally strong for the first quarter, building off of a record Q4. DSO was 59 days after normalizing for the impact of the Entrust acquisition. With strong EBITDA generation, proactive collections and disciplined working capital management, Leidos is a cash machine, and we are turning that into long-term shareholder value.

Our Entrust acquisition is a confident move in 1 of our 5 strategic growth pillars. We had planned to fund the purchase price of $2.4 billion with $500 million of cash on hand, $500 million in commercial paper and $1.4 billion of new bonds. With our robust cash generation over the last 2 quarters, we borrowed less and have begun to pay it off sooner than anticipated and our commercial paper balance to the $300 million at the end of the first quarter, which will pay off throughout 2026.

We were also able to repurchase $200 million of stock in the open market as part of our balanced capital deployment strategy. We ended the quarter with $6.3 billion of debt, $457 million in cash and cash equivalents and a gross leverage ratio of 2.6x. This provides us with ample capacity to continue to invest in line with our NorthStar 2030 strategy.

Finally, on to the forward outlook on Slide 8. As Tom mentioned, we're raising our 2026 guidance for revenues, earnings and cash. Specifically, we're increasing revenue guidance by $500 million to a new range of $18 billion to $18.4 billion, maintaining our adjusted EBITDA margin guidance at mid-13s, raising our non-GAAP diluted EPS guidance of by $0.05, yielding $12.10 to $12.50 and increasing our operating cash flow guidance by $50 million to approximately $1.8 billion.

For context, I'll address 3 major aspects of our forward outlook, the organic view, the quarterly cadence and the longer-term view. First, the raises to revenue, earnings and cash guidance primarily reflect our Entrust acquisition. So after only a little more than a month post close, we've enhanced our outlook and now expect the deal to be accretive to non-GAAP EPS and cash in 2026 with substantially more accretion as deal synergies are realized in 2027 and beyond. Our view of the rest of Leidos for 2026 is largely unchanged from where we initially guided in February.

Our forward guidance does not incorporate any impact from the pending joint venture we announced in our security products business, which we anticipate closing sometime in the back half of the year. Until then, SES and general automation assets and liabilities will appear as held for sale on the balance sheet, and there will be no change to the income statement as the materiality threshold for discontinued operations will not be met. Once the deal closes, we will no longer show revenue from our minority position and our share, roughly 40% of the joint venture net income will be reflected as equity method income within our operating income.

Second, we see Q2 as the likely low point this year in revenue growth and margin. At this point, we view Q1 revenue overperformance as a pull-forward from the second quarter as opposed to a notable market reacceleration, which we still expect in the second half of the year. Though there are many encouraging signs like the framework discussions that Tom described, procurement is still recovering from the protracted government shutdown. Still, we're pleased with the solid book-to-bill ratio of 0.8 in the quarter and 1.1x for the trailing 12 months. and we expect awards to pick up significantly over the course of the year.

On the bottom line, we won't have the benefit of the insurance reimbursement benefit in Q2. More important, near-term growth investments will rise given our ability to lock in franchise positions on a number of compelling opportunities, including the Military OneSource Award and My Service Treatment Record Pilot in the Health segment and the multiple potential product lines within the Defense business. We're excited about the long-term upside these opportunities can create.

And third, we remain extremely bullish on the long-term outlook for the business. As we shape our portfolio towards the growth pillars, we're enhancing the financials of the business, reducing unnecessary complexity while maintaining virtuous diversity. In the case of the Security Products joint venture, we are preserving significant upside for our shareholders. We've talked about optionality in the past. Now you can see how that looks in action.

With that, operator, we're ready to take questions.

[Operator Instructions] Our first question is going to come from the line of Sheila Kahyaoglu with Jefferies.

Maybe -- a lot to digest there. Maybe if you could just talk about profitability and the impact within Defense contracting 150 bps, how much of it was from the fixed price program? How do you expect that to trend? And maybe if you could give us an update on key programs and Dynetics within Defense?

Sheila, thanks, it's Chris. Yes. So the Defense profitability, that was kind of reflecting the development stage program on our Space Wide Field of View Tranche 1, which we're all in on getting that program delivered this year and on track to do so. But we're really encouraged about the new programs that we've been awarded and are ramping up. When you think of things like our IFPC program, which were continuing to win the next slot for our [ PoNS ] program, our [ AVAD ] program. Those all have superior economic profiles with them. And as those programs ramp up in larger quantities this year, you'll see that Defense level profitability continue to trend positively over the course of the year.

So the business is on track. We're really excited about the growth prospects there and the team is laser focused on the pricing and bidding strategies to make sure we can deliver solid profitability with that.

Our next question will come from the line of David Strauss with Wells Fargo.

This is Josh Korn on for David. I wanted to ask if -- I think last quarter, you discussed the tripling of CapEx this year to $350 million. You talked about some growth investments in the remarks with only $31 million of CapEx in Q1, is that still the plan? And kind of what does that look like as the year goes on?

Thanks, Josh. Yes. And we did earmark a sizable increase in our CapEx for this year, anticipating the need to invest. But that need hasn't risen in the first quarter to a level that we might have anticipated. Part of our anticipation of a second quarter that is higher spend rate is lower profitability because of that. And so we do anticipate spending more in CapEx this year, whether or not we spend the whole $350 million or not is to be determined based on how these programs layer in.

I think what you should take away from this is we continue to be good stewards of our cash. We don't spend money just because we budgeted it. We earmark it and wait for the trigger to release it.

Our next question will come from the line of Tobey Sommer with Truist Securities.

I was hoping you could elaborate on the outlook for the Health business, both the existing portfolio in exams as well as areas of expansion that you're targeting and how those could change the composition of margin within that business?

Yes. Thanks, Tobey. Yes, so as I said in my prepared remarks, we're very encouraged by the fact that our volume remained high in that business in the first quarter of this year. So while we provisioned for the year outlook that Chris and I gave you last quarter for the effects of the fourth vendor, the fact is our volumes are staying high and remaining robust as we enter this year. The second thing that's happening is the VA, the Veterans Benefits Exam, is challenging the system to continue to burn off backlog. So we're hopeful that those volumes will remain elevated through the rest of this year.

We're also encouraged by the fact that the customer is having an industry day later this month to talk about how we perpetuate how we serve veterans in this country. And so we're very optimistic that through the investment of technology, through the leaning in of innovative business models, we're going to be able to continue to serve more veterans, faster, cheaper than our competitors and make sure that we remain robustly profitable in this business.

At the same time, that's a good base. What we're focused on is this managed Health business being a growth pillar for Leidos. So what you saw in the 2 awards that we talked about this quarter, the Military OneSource directed award and My Service Treatment Record Pilot program are indications of how we're leaning into the digital ecosystems of both the Department of War and the Veterans Administration to continue to serve them boldly.

We see behavioral health as a major engine within that growth pillar, where we think we can differentially serve veterans and their families in this in this time. And rural health has always been an area that has been underserved and again, an area where we think we can lean in to help serve our nation's veterans where they live as opposed to asking them to come to where we are. And so we're very -- we remain bullish on our Health growth pillar, and we remain bullish that it can remain a mainstay of Leidos' top line and bottom line growth story.

Our next question will come from the line of Scott Mikus with Melius Research.

Tom, you touched on the portfolio moves you made in the portfolio recently. When I look at the latest portfolio in aggregate, it does everything from integrated air and missile defense, airport infrastructure modernization, hypersonic missiles, maritime autonomy. So a lot of broad offerings. Our investors are going to be challenged to actually analyze. You're moving the SES business to a JV. But internally, do you think the business would benefit from a more streamlined portfolio? And could we see that over the next, say, 12 to 24 months?

What we did -- thanks for the question, Scott. What we did at the beginning of this year was streamline how we are organized for delivery of these effects. You'll recall that the new Defense business is a larger Defense business focused on the complete suite of how we serve the Department of War as opposed to having it fragmented within Leidos. That management focus and that attention, while the portfolio and the offerings are broad, is bringing the desired effect for execution.

We've recently announced a COO in our Defense business to help drive execution and drive scaling of the products in the portfolio. And so we're very excited and encouraged by the activity we have going on in that Defense portfolio. You're right that this area of our portfolio is one of intense activity right now, but those are activities that are going to pay great dividends for our shareholders in the years to come. And as we ramp up these framework agreements, these accelerated purchase agreements and these traditional purchase agreements to field products at scale.

So will help you continue to understand the portfolio and we'll help with what the capabilities are that we're focused on as you will remain cognizant of. While we had Defense Tech has a broad area of interest, we were focused on maritime and space. We remain focused there, but the fact is the customer continues to come to us with more opportunities as they look for reliable companies to help them scale production of the effects they need for the battles they see in the future. So we're very bullish on our Defense Tech business and excited as a part of the Leidos portfolio.

Our next question will come from the line of John Godyn with Citi.

I wanted to revisit the shape of the year and the comments about kind of revenue and margins around the shape of the year. It sounds like there may be a bit of a dip at least in revenue in 2Q. And I wanted to just make sure we frame that correctly and give you a chance to be a little more precise. Sometimes those things can just be a bit of an overhang on the stock if they're not kind of clarified in a moment. So maybe you could just kind of discuss the shape on revenue and margins. And hopefully, we can get there.

John, thanks. This is Chris. And I agree. I mean we're very pleased with the start to the year we had. And as I trailed in my remarks, maybe a little bit of that is pull forward from Q2. As we see the robustness of our pipeline and award activity and the proposal pits that are very active, we're still expecting a significant amount of that to translate into momentum in Q3 and Q4. So as we've gone through all of our planning activity really see the step function on growth building in the third quarter and fourth quarter. And with that, you'll see the high margin rates that we've come to demonstrate time and time again.

Q2 itself, just as we look at which programs are in early phases of transition, which programs are winding off a little bit, that is probably more similar to Q1, maybe a small step down on run rate and profitability building to the back half of the year and then carrying that momentum into 2027. So that's how I'd frame it out.

We've got a lot of cash capacity and capital to put to work, and we'll continue to be active on the deployment side over the course of the year. So we're really excited about how things are setting up for us.

And while it's a little lumpy this year, it's not dimming our outlook on the year as a whole.

Our next question comes from the line of Noah Poponak with Goldman Sachs.

I was wondering if it's possible to attempt to speak to the multiyear or maybe just even next year directionally beyond this year in the Health segment. I guess just as we all look at the VBA exam data and you have a few moving pieces here. You've talked about this year revenue kind of being flattish, margins being down a little bit. I guess what I'd like to wondering a little bit, are we looking at a 1-year minor reset or is this a multiyear period where revenue could be down more than just a little bit? How much did the margins reset, if you could give us your latest thinking there?

Sure, Noah. Thanks. As we're in May already, and the customer is having his industry day later this month, we'll know more when we go to these industry days, and we hear what their plans are for this contract in the future. That said, it's becoming difficult to imagine a seismic shift in how we serve veterans in this nation. And so I'm remaining very bullish that we'll maintain our ability to serve the most veterans, the most effectively with the best results. And so we're leaning in. As we've said in past calls to talk about how we use technology to shorten the cycle time of veterans getting the benefits they deserve. We expect that with leaning into that technology, we'll be able to continue to be a leader in this marketplace. And we anticipate that marketplace will remain largely unchanged in how the Veterans Benefits Administration serves veterans.

At the same time, what we're doing, as I alluded to, is leaning into the digital ecosystem of the Department of War and the Veterans Benefits agency to make sure that we're a part of the ecosystem beyond just providing Veterans Benefits exams. And we're also very focused on expanding how we serve veterans in the rural areas of our country. And so we are bullish on the long-term growth trajectory. I wish I had more definitive things to tell you about exactly how that's going to pan out. But that being said, with time being what it is, I anticipate it's going to continue to be more of what it is today than some radical departure from the status quo.

Noah, I'd just add, I mean, beyond VBA, which is a very well run part of the business. I mean the team has evidenced by the Military OneSource takeaway and looking ahead to $6 billion and expected submits over Q2 and Q3 have a lot of other avenues to scale this business up. My service treatment record were very small in a pilot phase. I mean that could turn into a very nice technology-oriented high revenue and profit stream for us over time as we prove out this capability. So yes, our expectations are health is platform, modest reset this year with the growth trajectory in the future, as Tom has talked about, and the team's got a lot of momentum behind building that up on many dimensions.

And Chris, I guess, just on the margin, you sort of described their interesting and thoughtful ways that you could keep growing, but if the mix of the business that's driving the growth changes, does the margin change a lot over a 2-, 3-year window? Or can you kind of hang around where you're at right now?

Yes. No, I see that staying above that 20% margin threshold and we're well above that today, and that's absolutely in the zone beyond what we're going to win next, we're relentlessly focused on operational improvements, technology improvements to enable our processes. This unified health platform is a capability the team is deploying internally later this year, as an example, that will take more cost out of our delivery equation. So yes, no, the great thing about this part of the portfolio with how customers contract predominantly fixed price, fixed unit rate really incentivizes operational efficiencies and that's where we excel. So very confident we can keep the high margin profile of this business into the future.

Our next question will come from the line of Jonathan Siegmann with Stifel.

This is actually Sebastian Rivera on the line for Jon today. Maybe one on maritime. You guys have an impressive USV and EUV portfolio, and I appreciate the commentary on Seahawk in the prepared remarks. I was wondering if you have seen an increase in demand related to the conflict in Iran, specifically around your Sea Dart that I believe can be used for demining and then if you could just kind of maybe frame how you see that opportunity ramping up, that would be super helpful.

Sure. Yes. Our surface and subsurface autonomous programs are seeing increased pull by the Department of Navy. I can't comment on specific theaters or specific programs when it comes to that, except to say the Navy is very moving very quickly now with their MUSV industry program, and we are one of a few companies that we believe incredibly deliver against that need.

As I've said in the Pentagon building boats fast is really not that difficult. Building boats that are autonomous fast is only slightly more difficult, but building autonomous boats fast that have real mission effects and real mission payloads, that's the secret sauce. And that's where Leidos excels because with our Gibbs & Cox, with our philosophy about deploying commercial boat yards, not trying to build boats ourselves, but really leaning into the autonomy package, the design of the vessels, the command and control of the fleet and the mission effects, especially with our exquisite C5ISR packages and counter C5ISRP packages. That's where we are really getting the attention of the U.S. Navy when it comes to scale effects quickly for what they see in front of them. And so I'm very bullish about the maritime portfolio we have under Cindy's leadership, and I'm going to be very excited to talk about big wins in future conference calls.

Our next question comes from the line of Peter Arment with Baird.

Tom, thanks for your comments on the CapEx earlier. Just thought I'd drill in a little more. How are you thinking about this elevated level of CapEx? Is this something that you expect to continue at this higher rate just given the investment opportunities that you kind of laid out in terms of your long-term strategy? Or is this kind of do we reset down to kind of the lower level once we get through this period of investment spending?

Yes. Thanks, Peter. No, I don't anticipate continuing at this level in perpetuity. I think this is a fixed finite period of time where investment in these production programs is critical whether that's just this year or with a little overhang into early next year remains to be seen. But it's not something that we are gearing up to do in perpetuity. In that regard, I'll mention the SEC -- excuse me, the SES joint venture. One of the reasons we purposefully formed that joint venture was because that business wasn't one of our growth pillars, we didn't want to start leaning into the capital intensity that, that business would require from Leidos if we were going to invest in it to fully grow.

So forming this JV allows us to leverage the money necessary to grow the business and participate in the upside as a minority share of that joint venture, but not lean into it with Leidos cash from the beginning. And so again, what you -- what I'm trying to point to you, Peter, is a picture of being diligent and focused about where we spend capital, when we spend capital and how we spend capital, but not get ourselves into perpetual streams of capital spend. I hope that helps.

Our next question comes from the line of Seth Seifman with JPMorgan.

So it seems like the market relative to what's going on in products, it seems like the market taking a more skeptical view of growth potential in services. And we see where some of the budget is concentrated and in some ways, that's not super surprising. But if we were to see the type of overall budget growth, even if not at the level that the administration has requested, but say, even half of that or something like that would be a robust -- a fairly robust level of overall budget growth. How do you think about the consequences of that for your intelligence and digital business and the potential to grow in that type of environment?

Seth, I'm really glad you asked the question. While the $1.5 trillion budget request for the Department of War gets a lot of heat and light in the press, the bigger story is the more interesting story for us. Our IC budgets in the intelligence community for America have grown 4% to 5% annually since 2022. And we see that continuing in the future. And if you dive deeper into the classified budgets, you see a lot of money going into the digital infrastructure part of the whole ecosystem of our defense and intelligence communities. And so that's why in my prepared remarks, I spent so much time talking about the fact that AI isn't a disruptor to us it's a propellant to our progress in this business.

And that's why our digital infrastructure business isn't a wait -- waiting to be obsoleted by AI, but rather, it is our entry point and our foundation from which our customers are going to embrace AI and upgrade their capability. We're very focused on leveraging those 2 things, our digital infrastructure business and our cybersecurity chops with our AI philosophy of exploiting these tools to move up the value chain in our customer spend and continue to help them have scaled effects at speed in an AI-enabled world.

And so we don't see the negativity of being obsoleted in this market, we see it as an opportunity to tremendously grow our scale in the intelligence community and the Department of War. I mentioned the operations that we all watched over the recent months and the effect -- the nonkinetic effects that were brought to bear there -- and that's exactly why we are leaning into this part of our value to our nation.

Our next question comes from the line of Gautam Khanna with Cowen.

Yes. I was wondering besides the VBA contract, if you could update us on what are the big upcoming recompetes. I know DHMSM is out there and some others over the next, call it, 12 to 24 months?

Yes. The -- you mentioned, Gautam, the DHMSM recompete, we expect some near-term continuity through an extension mechanism with a longer-term contracts still evolving in our customers' mind. We are not exactly sure how they proceed with that program, and we're in deep dialogue with them on that. In the meantime, we expect near-term continuity through an extension mechanism.

Also in that portfolio, we have our Antarctic program and expect continuity of operations while they -- the customer there continues to decide how they're going to prosecute the Antarctic in the future. And so there are other recompetes happening, but again, very buoyed by the 2 recent wins, the Military OneSource directed award of being almost $0.5 billion directed award is tremendous for us.

And the opportunity for us to grow that with other aspects of what we're already doing, I mentioned -- and this My STR Pilot, where I think the opportunity to turn this pilot program into something that veterans are going to love moving from a highly laborious paper-driven process to a digital my service treatment record transfer is going to be a tremendous benefit for veterans and the veterans administration to remove a major pain point. So lots of goodness happening in the Health business.

Gautam, I mean I think Tom nailed it, looking at the list of key recompetes, there's nothing that rises to our top programs worth noting that you didn't already talk to, in fact, almost 70% of our next 12-month pipeline is focused on new business and takeaway activity. So it's very much skewed towards great opportunities to propel growth. But nonetheless, anything that's in the recompete category where we've had great success, above 90% win rates we're laser-focused on. But I wouldn't say there's anything I would highlight that's warranting note that the major program level at this point in time.

Michelle, looks like we have time for just one more question.

And our last question will come from the line of Ken Herbert with RBC Capital Markets.

Maybe Tom or Chris, I wanted to just follow up on Entrust, if you can give an update on integration there. And I think, Tom, in particular, you called out a $10 billion opportunity pipeline or order pipeline, how do we think about timing on that? And what's been the customer reception since you've now owned the business?

Yes. Thank you for that. And yes, we're very excited about Entrust, as I mentioned in my prepared remarks, we closed almost 2 months to the day from when we announced it. So a very clean, quick close, reflecting well on our team and the due diligence and the Leidos team. The integration, as I said, is seamless. The cultural alignment is fantastic. The deployment of AI tools into Entrust are a big bonus that those engineers are enjoying, and we are enjoying having learned some technology tools that Entrust had that we're going to benefit from our electric services business on our side. So it is truly a synergistic relationship.

As you know, it expands our footprint and it also expands the value services we can provide Customers have been very receptive to it. There's -- even in customers where there is overlap, they see benefit in the scale we're now bringing to their projects and increased capacity that we're bringing to their problems. And in terms of the $10 billion pipeline, One of the benefits of this business is it is not as long a cycle business as the rest of Leidos. It tends to work a little bit more quickly. So as we book orders there, they are liquidated within a year or 2, and we book more orders. So I think you can see -- you can look for rapid growth of our new scaled energy business in the coming quarters and the coming years.

Thank you. And I would now like to hand the conference back over to Stuart Davis for closing remarks.

I want to thank you, Michelle, for your assistance on this morning's call, and thank you all who joined the call for your interest in Leidos. I look forward to getting together over the next quarter and enjoy this Cinco de Mayo.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.

Good afternoon, everyone. Welcome back to the Aerospace and Defense track at the 2026 JPMorgan Industrials Conference. I'm Seth Seifman, the A&D analyst, and we are very grateful to have with us Leidos, and we have CFO, Chris Cage, and we have Stuart Davis from Investor Relations, who I'm sure many of you know. And we'll do -- I think we'll do some Q&A here with Chris. And we'll ask for some questions from the audience as well. So feel free to raise your hands. And maybe we'll get started.

Well, great. So thanks for having us out. Great venue this year. A well attended conference. So you made it easy on us too in our neck of the woods. Thanks for that.

Cool. Yes. No, I like to change to Washington. So speaking of Washington, we're a little over a year into the administration and they've taken some different approaches -- in the headlines, but maybe some other changes as well. So what adaptations have you made in response to a changing landscape for federal IT? And what have the changes under the new administration meant for the business?

Yes. No doubt, it's been certainly an interesting 15 months or so under this administration. I think one of the first things they'd us do last year was ensure that we could communicate the value that we brought to our customers. It was really imperative that you understood. It's not just proposing on a particular contract, but really stepping back in and being able to articulate and demonstrate the value you brought to their mission. And I think that helps sharpen us. And that was an exercise that we went through last year.

And now as we move forward, I think this administration, they're eager to get things done to make an impact. And to that end, they want to see contractors, partners that come to the table that demonstrate the capabilities that they are bringing to the table, not so much on what's on a power point but what's a live demonstration, what is a prototype product, what is something that's ready to be fielded. And so that's different, right? Where it does require you to ensure you are looking ahead to what the demand signal is and what their needs are and have that unparalleled customer understanding and position yourself to anticipate those needs. It did -- does require in certain cases, investing upfront a little bit more. Thankfully, Leidos is in a great position with the capacity to be able to do that and the demand signal from the team for that funding is robust, and we're able to make great choices the things that we want to lean into.

Okay. I'm going to ask -- I imagine if you've been having meetings today, you've probably gotten a lot of practice answering this question. But I wanted to ask about the proliferation of AI. It seems hard to have a conversation with anyone these days without talking about AI. But one of the concerns when people think about what that means and they think about federal services, how do you think about the impact? Do you see -- is this something that people are -- I think investors right now are just imagining what are -- what's the next thing that could be disrupted by AI? Or do you see a shifting landscape between, let's say, companies like Leidos, commercial software providers and the AI labs?

Yes. Definitely, the ecosystem continues to evolve. And I think this is where it's -- Leidos is in a unique position given our size and scale and the position that we hold on so many of our customers' critical programs that oftentimes we'll look to, to be the orchestrator of how do we bring AI to bear to impact the mission. So you're right, AI is certainly disruptive. It's bringing efficiencies to the table that were unforeseen before.

But it's like -- there's more, a lot more to the story than just having AI drive efficiencies into the code writing process or even the user interface. When you think about getting deeply into the customer mission, you got to understand that you've got to be able to bring scale and security to the table. You've got to be able to -- actually, it brings the integration of these capabilities back into vogue, right, this integrator concept of how do you bring AI and connect it with the information, the mission outcomes, et cetera. So I think Leidos is certainly finding that there's there, there as it relates to AI being a tool that drives efficiency for us, but also generates a need for us to help our customers unlock the full value of that.

To that end, we've again -- another area of investment as we've looked over the past year to ensure we deepened our partnership with leading AI labs and getting more of our Leidos employees access to these tools and capabilities, whether it be ChatGPT or Claude or Gemini, what have you, right? I mean we're spending the money to make sure that we've got the expertise across the board there and that we know the best way to unlock the full value of that for our customers. I don't think that conversation is going away anytime soon. But again, that's the way we're navigating the landscape today.

Okay. And I guess that's probably -- would it be safe to say that, that is most relevant in the intelligence and digital segment?

I'd say, certainly, the -- yes, most relevant there for sure, more on probably on the digital side. Although the intel side, I mean, there's still -- these tools and techniques, and I've seen some powerful ways that our teams are leveraging these AI to help the analysts in the op center understand how to make the most of the information that's available to them, the intelligence you can glean from that, the robustness of where you can dig deeper into your analysis and targeting what have you. But on the digital side, as it relates to being in the customer's IT environment and how do you use these tools and techniques to drive efficiencies into delivery model. Yes. That's our largest segment of the business, as you well know, intelligence and digital, and it kind of was the area, certainly on the digital side last year that was kind of most in the eye of DOGE, and we've come through that successfully. And now we're looking for that business to continue to get back on to a nice growth trajectory for us.

Right. And is that -- you mentioned that, I think the guidance for this year in intelligence and digital is mid- to high single digits. I think last year, the segment grew about 2%. Is that acceleration coming mainly on the digital side from decline to growth or are there other drivers? Kind of what gives you the confidence in that acceleration?

Yes. Well, I'd say most of the near-term growth that we feel confident in is more on the intelligence side. So we did win a couple of very nice large programs, middle-ish of last year that are ramping up and accelerating. And we see, again, that demand signal with our intelligence customers growing. Cyber is a capability that fits into that part of the business, and that's an area of growth and expansion with our Kudu Dynamics acquisition from last year and helping our customers with more full spectrum cyber capabilities. And obviously, what's going on today in Iran drives even more need for mission support activities to our intelligence customers.

So in the near term, that's what we see as a catalyst for growth looking ahead to '26 as we move to the back half of the year, I mean the pipeline and the digital side of the business has filled back up and given us probably a little bit more [ muted ] the first half of '25 as customers were kind of reassessing how they are moving forward with larger procurements. Now we've seen that pace pick back up. And so we're -- we're seeing a lot of activity that could hopefully lead to some nice wins here in '26 to propel the digital side to growth as we look to '27 and beyond.

Okay. And so that growth rate for the whole business implies that the intelligence part of it is actually growing quite robustly?

Yes. That business this year probably is a double-digit grower. Modest growth, some growth in digital this year, but blending to that mid- to high single digits. Yes.

Yes. Excellent. Okay. Moving on to health, I mean I think the medical exam business has been a key driver of the company's financial performance in recent years. Maybe if you could talk about where that goes going forward, how you're thinking about the recompete there and the potential to sustain both the level of the business as well as the profitability?

Well, it's -- listen, it's been an excellent business for Leidos. It's been very well run by the team and delivering a critical mission in support of our veterans. We're proud to have done that work for decades now, right? So it's not new to us and just -- all we've seen over the last number of years is the demand signal to serve veterans has increased. And so Leidos plays an important role in that ecosystem.

I would say, in '26, we've signaled that business coming off of two excellent years is modestly down on the top line and the margin but still a very important part of the portfolio. And we're looking ahead, have been looking ahead for the last year plus on the recompete that's on the horizon for us there. So that's -- sometime before the end of the year, the customer needs to reaward that program for a number of years. We stand ready to do that.

I think we've certainly had our eye on continuing to advance the technology differentiation aspects of how we go about that mission. And I think the team has leaned into that, and we've got some compelling capabilities. But we also pride ourselves on the level of service that we perform, the throughput, the capacity that we've built, all things about how that program runs.

So our expectation is we, of course, secure our position on the recompete. I do think there's more that we can do to help that particular customer on the end-to-end equation of how a life cycle of disability exams works, not just doing the examination, but there's more that we can bring to bear there. And then there's also disruptive technology that can help streamline when and where examinations are even needed. But all of that's part of the equation, things we think about all the time.

We've got a great health business writ large. It's not just what we do with the VVA but clearly, looking ahead to opportunities on the reserve health readiness, recompete, life after Dim Sum, expanding our mission support in other parts of the VA and the HHS. So the team's got a robust set of opportunities that they're going after. But our focus is on behavioral and rural kind of expanding that platform into those clearly unmet mission needs for the customer.

Yes. So what was set aside for that in the reconciliation bill last year? And to what extent have you seen activity there in terms of RFPs? Or any indication that there might be some awards coming? And is there a familiarity in that customer community with the work that you've done at the VA?

Well, certainly, because VA will play a role too. I mean, so you're right. In the One Big Beautiful Bill, there was $50 billion identified to support rural care and just like other parts of the One Big Beautiful Bill, a little slow to see that flowing into contractual opportunities. We do think there's a there, there ultimately. But our focus immediately is the adjacencies within VA and expanding into how they support their veterans and beyond the VA, active duty service members and their dependents with care in the community network and things like that. So we've got a pipeline of things we're going after and rural clearly is an area that we've demonstrated we can reach the hard-to-reach veteran as it relates to disability examinations invested in a fleet of mobile clinics to have that impact. They're getting well utilized and continuing to look at what's the next step to make sure we're supporting our veteran community and other service members in those hard-to-reach communities.

So I think time will tell. I think that, again, looking ahead over the next couple of years, I see this as a growth catalyst for us. It's probably not something that moves the needle for us on but we're playing the long game here on this particular growth vector.

And when you think about kind of the core VA work, do you see more companies showing up for the recompete? Or do you expect it to be mostly the folks who are there now?

Yes. I mean it's hard for me to product. I do think the VA understands they've got the right capacity in place to serve the mission need. And they've spent some time over the last few years, adding some capacity to the equation. You don't need to overcapacitize it. There's inefficiencies that get created for them and for the contractor community, right, too much of a good thing. So I think they've got the right capacity. And they -- this isn't one that is -- they have a number of factors that they look at to determine how do they want to meet this need and doing it with, like I said, timeliness, quality, customer satisfaction throughput. Those are all important criteria in making those determinations. So our expectation, just like anything that we go after, there's always competition. We've got to be on our A game, got to be sharp and I expect that we will.

Yes. Excellent. And so then when we look at kind of beyond this year and we think about the health business, and you think about the opportunity set out there, that's a segment that should be growing as we think about going into the last few years...

Our expectation is definitely that business is a growth business for us. It's a growth pillar. I do think that it's a very large business for us, a very profitable business and so the growth rate might be a little bit more modest there than other parts of the portfolio. But yes, my expectation sitting here today is '27 and beyond are growth years for that part of the portfolio.

Okay. Another one of the new segments, Homeland. And so a couple of topics to touch on there. First of all, just maybe most immediately, DHS still -- no appropriations for fiscal '26. Is that affecting the company in the near term?

Well, first of all, Seth, we've got to resegment every so often to keep you and Rocco on your toes. Getting to your question in hand on the DHS, obviously, we would love for there to be funding for that customer set. It's disappointing that there's not. But I would say, as it relates to broad impacts for Leidos, very modest. Of course, we feel for a couple of the programs that are impacted and some employees that aren't able to serve the mission, but it won't move the needle writ large for us as it relates our Q1 results.

Now there's some award decision, things like that, that we'd love to see moving forward, and they're not right now. So we'll have to wait that out. And the hope is we get back to ordinary course of business here pretty soon.

Are some of those decisions related to scanning products? Or is that something that can move ahead separately with reconciliation funding?

Yes, not so much on the scanning products, CBPs funded and borders and port security equipment, some of those things are moving forward on the scanner side. Certainly, we're servicing our installed base and there's some potential funding available if they're buying new equipment. We're not seeing a lot of that in the airport side right now. But what we are doing is working with the TSA on piloting new modernized throughput experience. We think there's a lot of efficiencies that can be brought to bear there and some of that with Leidos equipment, but not necessarily just with Leidos equipment with other equipment in the ecosystem. But kind of certainly software and how much labor it really takes to provide a secure high throughput experience. And those are the kinds of things that we need to get through get the DHS back to business completely. And obviously, there's a new administrator coming on board there too, Secretary, I should say, that will ultimately help break some of those logjams.

Not to put you on the spot too much, but is that a business that you see as core to the portfolio long term?

The security detection side of the portfolio? I would say it's a business that we know well because we invented some of the technology that's on the ports and border side. We've augmented that. I want to make sure that business can be unlocked to see its full potential. I do think that there is some benefit that Leidos brings certainly on the software side because some of the core algorithm detection, the software capabilities and how we network that together and visualize the ecosystem of your security footprint for the customer, Leidos helps bring that secret sauce together. But the key is making sure it can reach its full potential and today, we think that's part of Leidos and excited to continue to help realize that vision.

Okay. I guess elsewhere in the Homeland business, FAA is a customer and I think a place where there's some opportunity and people traveling often get confronted with some of the challenges at the FAA. What's the opportunity there? What are the contracts specifically that Leidos is pursuing?

Well, I mean Leidos is an important partner and supplier to the FAA today. It has been for almost 50 years. It's just been a long-standing customer and some of the most critical air traffic management software systems, our Leidos-developed products. So we expect to be an important mission partner with them into the future. And so you think about this goal of modernizing the air traffic experience, and there's a lot to that. So far, the FAA has named a prime integrator to play a role to help them oversee and orchestrate this. That's not a role that Leidos was suited to play well. But where we do think we should play a role is on the new modern software capabilities. We've already demonstrated that we've got a lot of that, that we have been working on, and we have sold elements of that to other countries. We've got a demonstration center down here, downtown that we've had that customer in to showcase what Leidos has to offer. And so yes, we expect that ultimately, we will play a role in that of some kind. It's still a little bit unclear how they're going to go about procuring that. We've all been waiting. Again, one of these things where, just like with other aspects with all this funding, it's hard to predict exactly what form it will take, but we have taking every opportunity to make sure they understand how we can be a new, modern provider of state-of-the-art software but also somebody that has intimate knowledge of the FAA and the mission and take that -- and understand the safety and security and everything that goes along with software that is this critical.

So I do expect that it will be something here in the next quarter or two that we'll have line of sight on and clarity. I do think we need to get after it. This administration wants to clearly put some points on the board with some wins, and this would be one of the big areas that they're focused on. So to get to done, you've got to get the contract let, and therefore, we're eager to get to that point.

Yes. It was just something people would certainly notice. The energy business is something that is relatively, as an A&D analyst, something that been learning a little bit more about over the past few months since you announced the ENTRUST acquisition. I guess that's up to, I guess, about $1.3 billion or so this year for the energy business. Maybe talk about what drives growth in your energy business and why you see it as a good place for Leidos to be allocating capital?

Absolutely. Well, first of all, the $1.3 billion just for clarity is a pro forma with ENTRUST closed on a full year basis, right? So that won't be the results this year, but that is the trajectory that our combined business will be on. And so we're very excited about it. We've got a business that Leidos has grown internally over the last decade or so, and the team has done a really nice job of serving an important customer need. And this is one where you've got to earn that customer trust doing work for publicly traded utilities. There is a customer relationship aspect to that, then you've got to earn your way in. And once you do, you're a trusted provider to them. And what they've seen is the demand signal continues to ratchet up, right? So whether it's just the ordinary course development and expansion infrastructure projects, whether it's responding to natural disasters, whether it's hardening and modernizing the grid, securing power lines underground in California because wildfire risk or now the explosion of new energy demand coming from data centers, there's a robust appetite for engineering projects to help them do all of that, to bring power online, to do it in a way that's reliable, secure, predictable, et cetera. And we've been serving that mission interest, it helps us expand our reach, it broadens our geographical footprint, gets us access to even more blue-chip utility customers. It brings us access to the gas market, which we weren't in. We did not previously serve gas utilities. So there's transmission and distribution aspects to supporting them as well. So similar capabilities for a different client set.

And so all of that together just says this is an area we really like, and we like it because low capital intensity, right? So this is a business that doesn't take a tremendous amount of investment. It takes playing the long game and earning your way in and then being able to do that efficiently. And what makes it a little bit unique for us is since this business has grown up out of an A&D contractor for the large part that we have had a robust amount of investment that we've been able to put behind our technology and AI tools, et cetera, for deployment into the federal government. It was easy to find applications of those tools and techniques to this customer set in this market. So it has the benefit of that technology backing that we're now able to leverage into the ENTRUST accounts and profile.

So I think it's going to be an excellent marriage. I'm excited about getting to close. That data is still uncertain, but very near term, I would expect that hopefully within the next 30 days. And yes, we got an integration plan ready to go, and I expect this to be a nice tailwind on our growth story and our margin story in the years ahead.

And that business has been growing relatively quickly in recent years. How fast has it been growing?

It's been a double-digit grower for us for the last several years inside Leidos. So definitely happy with that. I know we sold a small piece of it last year called Varec, and we're really trying to hone that part of the portfolio to the core piece of where we want to take this business, but it's really done well for us over the last several years. And like I said, we've only seen the customer demand signals continue to ratchet up.

Do you see it as a place that's ripe for incremental M&A in the future?

I think that will depend. I certainly would say our near-term focus in the next 12 months, let's call it, is integrate this business well, get it operating seamlessly together, delight our current customers, leverage technology. And then you got to stand back and maybe understand geographically, are there areas in the market that you're still not in, where you need to be, especially as you look at where some of the new capacity will be coming online. So through that lens, we'll pay attention to it, but I wouldn't say there's any near-term expectation that we need to add more to what we've got.

When you look at the competitive landscape in this business, are you the biggest player or one of the biggest players?

Yes, one of the biggest players. I mean, when we did this pro forma, we were saying, hey, top 3, top 4 in the transition distribution market. So clearly, have been moving up the ranks here. There's a few large, but I'd say it from a pure engineering perspective, we're getting to be to the top of the list. Some of the larger providers also do construction projects, and that's not in Leidos' bailiwick. So obviously, a material player and certainly somebody that continues to command our customers' respect and attention.

Okay. I want to make sure we have time to get to the Defense segment since that's something that I would imagine should be the fastest-growing segment within the company over the next few years?

Yes, save the best for last, Seth. So very excited about the defense piece of the business. And I know that you've been on this journey with us for a while. You've been down, and you've seen Huntsville in its earlier days, and I was just down there a couple of weeks ago, and it's night and day from what you saw, too, as far as furthering our capability, building out our production lines, really ratcheting up things for more high-volume output.

So very excited about the defense business. I mean we put more together with that as we entered into 2026. We combined our Defense Systems business with other parts of our defense portfolio to kind of have a holistic customer concentration and access to that to the Department of War, thinking about some of the stuff we do on the software and the logistics side as it fits in with some of the product ecosystem. And we've got a number of things now that are already accelerating or on the cusp of accelerating our portfolio.

Yes, maybe we can talk about some of those things. And I guess, first of all, if we take defense, I think it's about a $4-ish billion segment. And then so should we think about something in the [ 2s ] is kind of the -- what you might think of as like products with potentially fast growth?

Yes, that's the round numbers, [ 2 and growing ]. And that will be the faster growth, although there are still plenty of other important opportunities on some of the more services-oriented stuff. But yes, the product side of the business. And again, more of these have been several years in the maturation process, getting to the point where quantities are going up and profitability should therefore go up because we've kind of passed the early phases where you've had to prove through the development phase that you can get something to the capability that you needed. I think we've matured that in most of the things that we're manufacturing. Now there will always be some new emerging capabilities that we're focused on next but excited about that.

Yes. And what would you highlight as kind of the top two or three growth drivers within that portion of defense?

Yes. So I mean, the two most significant programs in the near term, one would be our indirect fire protection program. We were able to secure a $4 billion IDIQ on that last year. Now we've seen the Army customer order a number of lots underneath that IDIQ. Defense of Guam, Korea now fiscal year '25, talking about fiscal year '26. So the order quantities are ratcheting up and we've expanded our capacity to meet those quantities. So that's program #1.

And late last year, we won a program called ABADs, Air-base Air-Defense, and this is our passive radar detection system. So those products, a couple of different product lines there that we're excited about scaling up the manufacturing of those units to support our Air Force customer and again, these are some capabilities that you can imagine in a future world with Golden Dome, like how do you have the architecture to protect the United States. These are some of the capabilities that we would point to.

So those are some things that are ratcheting up there. We've obviously got aspirations in the maritime arenas in space. Those are two of our -- that's part of our growth pillars. Space in particular right now, it's smaller, but it's got a lot of growth potential there as we've positioned ourselves on the missile warning, missile track satellite payload detection capability there and have been a player on the first few tranches and look for other ways to proliferate that capability with our SDA and the space force writ large.

So you guys have been a payload provider for Tracking Layer. I forget, have you disclosed who -- which of the primes that you work with?

I don't know that we have consistently -- okay, Northrop, SpaceX on Tranche 0, Sierra Space. So we've had a variety of providers, so that the FDA has seen us in action on a couple of different fronts here. And you're right, being the payload providers, the place that we want to be. And again, that's an area that we've expanded our capacity, both in San Diego and in Huntsville to build large amount of quantities there.

Right. And is that in preparation for, I guess, there's -- what SDA is doing in Tracking Layer, there's Golden Dome where there was a bunch of separate money directed at missile warning, missile tracking satellites. Do you see those efforts emerging at some point since they're kind of headed in the same goal?

Yes, it seems inevitable that they'd collide at some point and get wrapped with that overall umbrella. I mean they're -- for the same intention of missile warning, missile track, defending our nation against hypersonic threats. That's -- the space layer has got to be part of the Golden Dome architecture. And so ultimately, I would expect that those will converge and that just brings a bigger tailwind and probably more urgency to move at pace would be my expectation once we really start to see the Golden Dome money flowing with intention on the architecture that they're working towards.

Yes. Okay. And on Maritime, what made your focus on maritime as a growth pillar? That's a market that's fairly nascent. I guess you've got a few different players looking to grow in that market. So how do you think about your competitive advantage?

Yes. I mean Maritime, it's interesting because I think many people would say, I mean, it's obvious that Navy in the future fight needs more capability, can't afford to have all manned platforms, autonomies got to have a role to play. Leidos has long had a maritime business, long had an autonomy capability, have demonstrated that robustly to the Navy. And so that's exciting. So we've got proven chops there. And then a few years ago, actually almost 5 years ago now, we acquired a company called Gibbs and Cox. So we did make an inorganic move into this arena to acquire naval architecture and engineering capability. So as a leading designer, so we've got the chops, the design. We've got the chops for the autonomy.

And increasingly now, the other secret sauce that I would say we bring to the party is it's the payload. So you think about the autonomous mission, okay, it's not just having a boat that can be unmanned. It's like, well, what capability can you deliver? And so increasingly, you're seeing the customer interest level peaked as you're talking about the payloads, and that's back to what Leidos can bring out of our defense business, back to what Leidos can bring out of our cyber capabilities. There's real mission impact that we can have on the payload side of that equation, too. So we think there'll be ultimately a lot of dollars flowing here, and we think we're well positioned in the portfolio to take advantage of that.

Okay. Maybe we're out of time here. But maybe just as a last one, I wanted to check on -- we spent a lot of time yesterday. We had some folks from DoD and from think tanks, talking about increasing missile production. I recall being in Huntsville and talking about launchers and the degree to which maybe your defense business has exposure to missile launchers and to that kind of ramp-up.

Yes. And munitions. I mean, so yes, we are part of the critical supply chain for a major manufacturer in that regard today. I think, therefore, you will see some appetite for us to scale up our capability to support their ability to scale up as it relates to a portion of that weapon platform. And we also have -- today, we've got a small glide munition that had a role to play for the special forces. We've developed a derivative of small cruise missile capability that's been in advanced flight testing. And now there is interest from the customer and yet even more impactful, affordable, low-cost containerized munition that we're in advanced discussions with the customer on. So look for us to play a role in that ecosystem, too. And clearly, there is a lot of appetite and need to get more capacity in the supply base there.

Excellent. Great. Chris, thank you very much. Appreciate it.

Thanks, Seth. Appreciate it.

Good to have Tom Bell, CEO of Leidos with us today. My name is Sameer Garg. I sit within our investment banking and run our global aerospace and defense practice. Tom, maybe we can kick off with what you're seeing in the markets. Any opening remarks you'd like to make around the strategy of the company, and then we'll dive into some of the key themes you want to highlight.

Great. Thank you, Sameer, and thank you all for joining us today. It's a pleasure to speak to you all. In terms of opening comments, let me just say it's a pleasure to be back at the Citi conference. I was here 2 years ago, fresh off the back of the Munich Security Conference, and a lot was changing then. Never did I envision though, 2 years ago that I'd be back 2 years later and still a lot was changing. And so a lot is going on in the dynamic environment in which we operate. and that is creating a tremendous amount of opportunities that we at Leidos are very, very excited about.

In terms of opening comments to kind of frame the company, obviously, Leidos for all of you that know is a $17.5 billion, $18 billion company with 48,000 Leidosians where we primarily serve the U.S. government in the federal IT space, national security and the intelligence community, health, veterans health also. And we have a major presence in Australia and the U.K. So very excited about the business we were able to run through 2025. I think Sameer will probably talk more about 2025.

But despite headwinds in 2025, we announced record earnings, record cash and record profit revenue. And we're excited about not only the trajectory of the business, but the clarity of the strategy we've laid out for how we're going to grow this business. I think that's something that in the past, perhaps we didn't do a good job articulating. And now we are very keen to be very clear and transparent about our growth strategy and explain why that makes us a good bet in the environment in which we find ourselves. So with that as my opening comments, over to you.

Yes. Let's dive into it. So over the course of the day, we've talked about the key megatrends that are underpinning the tailwinds we see within the broader defense and government markets. So if you could maybe talk us through the business lines within Leidos and what are those megatrends? And how are you benefiting across those within your business lines? That would be a good place to start maybe.

Thanks, Samir. And yes, for people who haven't had a chance because they've been here to catch up with our earnings call yesterday, I announced on that earnings call yesterday a renaming and a slight reorientation of the 5 sectors in which we run Leidos. And so I'll run through them and their new names now.

First and foremost, we have our digital modernization business that remains the core of the core of what this business has always been run by Steve Huff. Next, we have our defense business, which we've aggregated all the defense products that used to be spread out both in defense and in our national security business into one defense sector. That's run by Cindy Gruensfelder.

We now have a homeland business, specifically called homeland. That's where our Australia, U.K. energy and our DHS and Department of Transportation work happens. So think of everything about defending the homeland, no matter what homeland you're speaking of.

Next, we have our health business, which obviously is a mainstay of us, led by Liz Porter and one that we are also intent to grow with. And last but not least, certainly not least, is our intelligence business that used to be housed in our national security business, but we've cleared some of the non-intelligence community business out of that sector so that we have a clear line of sight about how we serve our intelligence community as effectively as possible in a specific focus areas. So Intel, health, defense, homeland and intelligence. Thank you.

Great. Great. So as we then think about the -- how these markets are positioned, obviously, a lot of tailwinds across '25, '26. We're yet to see the 2026 President's budget to be released, but what are you expecting to see? And how does that impact some of the business lines that you mentioned?

Yes. So 2 aspects to that, that I'll take your question and take liberty with. First is the Department of War budget itself. Obviously, there's lots of talk in Washington, D.C. about that eclipsing $1 trillion in the 2027 budget, but also perhaps trending toward $1.5 trillion. We remain -- it remains to be seen where that dust settles. But regardless, that is a bigger budget for the Department of War, and we expect it will grow.

So our defense business, which again is all the aggregations of how we serve the Department of War, except for digital modernization, stands to benefit from that. Obviously, we have 2 growth pillars in that business now. We've announced that maritime and space were 2 engines that we expected to grow our defense growth pillar through. And we have many, several programs of record in those 2 areas that we look forward to advancing with a bigger budget.

The -- outside the Department of War, though, we also see a lot of money flowing to the agencies that we serve from the one big beautiful bill. Remember, the reconciliation package in 2025 and the budget that flowed to agencies as a result of that, think TSA modernization, think FAA modernization. And we're waiting for those customers to start spending that money in line with the priorities that this administration has laid out, again, FAA modernization, TSA modernization.

So again, while energy is our growth pillar within our homeland sector, we're being opportunistic about where we serve this nation from an air traffic control standpoint and an airport modernization standpoint to make sure that as this customer wants to lean into those problems that we would all agree are vexing problems that this nation needs to solve, we're there to help them service that.

The Intel community is also an area of budget growth for this administration. They do want the intelligence community to be more adroit at making sure our government is the smartest government on the face of the earth. And so we're expecting to be a big part of that with our focused line of effort around our intelligence business.

Then you move over into digital modernization. And I think we'll probably Sameer talk a little bit about AI and that whole world of digital modernization. But as a preamble to that, we think that digital modernization is not a dinosaur, but rather a growth pillar for us. And so we do expect to exploit AI to help grow that business.

And last but not least, our long-term presence in the health benefit -- the health business, where we've been a major service to our veterans in the United States and to the active service members and their families in providing multifaceted health benefits exams, multifaceted services to help make sure that our fighting force is fit for service and that our veterans are well taken care of.

So in each of those 5 sectors, we have one growth pillar each. It is purposely organized in that regard. So -- we had been operating in a capabilities-based organization, which helped us improve our profitability to the 14.1% that we printed last year. Now we've refined that to be much more focused on top line growth and revenue growth, and that's where the form follows function of the strategy.

Great. Before we get into some of the results and the outlook side of things, 2025 is certainly a very eventful year for a variety of reasons, DOGE, government shutdown, et cetera. Maybe a couple of questions around that. One, as you think about 2026 on forward, what do you think is the legacy of DOGE for companies that are more service-focused, more labor-focused thoughts on that?

Yes. Thank you. Yes. Certainly, 12 months ago, DOGE was the thing sucking all the oxygen out of the room. And yet we didn't see it as the inherent threat that some others saw it as. We saw it as an opportunity. We had an administration come in who was talking about how do I make government services faster, more efficient and more effective. And frankly, what American would argue against that? Who doesn't want government services to be faster, more effective and more efficient.

So we leaned into it, and we actually went proactively to DOGE and spoke about opportunities we had been seeing for years because of our privileged position as a valued contractor with the federal government to say, look, here's a catalog of ideas about how to make the government faster and more efficient. And as a result of that, we had a very productive dialogue with DOGE early in the year.

Now obviously, there were some fits and starts there. And net-net, the general business did suffer some hits. But every time there was a contract that was canceled or something put on, remember, the wall of receipts, we also used that as an opportunity to say, now let's talk about how we do better. And as a result, very proud of Steve and the team and how they navigated that year.

DOGE still exists as a fundamental foundation in this administration. While DOGE has gone away, the people have been picked up by the various administrations. And again, we're maintaining those relationships with them in that capacity. and maintaining our relationship with cabinet level secretaries to say, how do we make your department better, more efficient and more effective at providing the services you're set up to do. So those came and went, but the spirit of DOGE lives on.

Lives on. Great. 2025, '26 also saw the government take economic stakes in critical industries, including defense. I know you alluded to the theme of partnerships and co-investments with your customers on the earnings call. Talk to us a bit about what type of opportunities are these? Why now? And what does Leidos uniquely bring to the table relative to your peers?

The conversations that occur from time to time in the government about taking ownership positions, I choose to look past the headline and understand the why they feel this way. And the why is always because they have a passion for what that industry provides or the capabilities that they think are critical for our national security. And that national security can be very wide from chips to steel to defense companies.

For us, the conversations have become very active around how we can help the Department of War, how we can help this administration secure the borders, make air travel safer and make our Department of War more effective at what they need to do against threats that Sameer are not new or not something that this administration invented. They've been discussed in national security strategies for the better part of a decade. This administration is just very animated to actually do something about it and get to done in the coming years, not the next decade.

And so yes, we're very excited to not only be talking about getting behind growth we've always envisioned programs like IFPC or Wide Field of View, these are programs that we always knew we were going to ramp up, but now there's added momentum behind ramping them up to the levels we always expected, but then also other areas, new areas that we didn't expect there to be a demand signal for, which are adjacent to businesses we have proven prowess in. And so we're actively engaged with conversations.

We're not at liberty right now, Sameer, to announce any of them because we don't want to get ahead of the Department of War, but there's exciting opportunities, as I said yesterday on our earnings call for new franchise programs for Leidos. And for us, that's a very exciting probability.

Great. So that's a good segue into the results and outlook. We'll touch upon that on a couple of topics. I guess looking at the past year or so, we've seen a clear bifurcation in performance across your peers. And there is a little bit of folks that are a class of folks who are performing materially better than others. You touched upon DOGE and how you welcome that opportunity to be more efficient, et cetera. Can we maybe double-click a little bit on what other things are you doing? And somewhat related to that is a question, we can -- you can choose to answer it now around the R&D investments that you're making within the company.

Sure. Well, first of all, the separation that occurred in 2025, I think, was a manifestation and a recognition that Leidos is a different company. It is a different company in a peer group that's conveniently most of you track it over here as a federal services and IT company.

And I understand that because a part of our business is that, and that is the heritage from which we came. But that ignores the movement over the last decade of how we've moved this company to be a much more multifaceted service of federal governments, federal products and federal IT up the value stream, if you will. And so I think one of the things that got recognized in 2025, and we're looking forward to continuing to discuss in 2026 and 2027 is not only the digital modernization business, which is that federal IT business that we're mostly categorized as, and we don't see that again as a dinosaur, that's yesterday's news.

We think we can lean into growing that, but a defense tech company. And with all the promise that one of the private equity-backed startups has, but also with a track record of being able to deliver the technologies to our war fighters. This is something that the Department of War recognizes and is very excited about, and that's why we have this privileged position to be in conversations with them around these framework agreements.

We look forward to leaning into our intelligence chops because as you can appreciate, we don't do IT in those agencies. We do real mission software and real multifaceted full-spectrum cyber effects for our government, something that this administration is talking very publicly about the need for this country to have full-spectrum cyber.

So the Kudu acquisition we did last year and our cyber growth pillar anticipated that, that was a need that this nation was going to have to get behind. So we're very excited about that.

Our health business, as I said before, this is a multifaceted not only in the Department of War and the Veterans Administration, but also in other agencies where we do fit-for-service exams for service members, think the secret service. And we're looking forward to growing that business because we really very much expect that, that's the future.

And then, again, homeland. Homeland is the #1 talking point of this administration, has been, I expect, will continue to be. And so again, we're in a privileged position where we serve the Department of Homeland Security and the Department of Transportation in making sure that our nation is secure. And our energy growth pillar fits very well in that because our energy infrastructure is one of our vulnerabilities. If you are somebody who wishes ill on America, you're going to look to disrupt our energy infrastructure.

And so our energy play is not only to better serve the public utilities around America, but also bring the tools and techniques we know they'll need to make them more resilient, more cybersecure and more effective to withstand any future scenario.

Great. And just to follow up on the R&D side. So 2023 to '24, Leidos spent about 17% on the internal, the company-funded R&D. That number accelerated to 24% in the past year or so. Talk to us a little bit about the kinds of initiatives. Obviously, you have to be careful about prioritizing, as you mentioned. What are the types of initiatives? And more importantly, as you think about return on this invested capital, how do you think about measuring those?

Well, I appreciate you doing the math to go back in time and figure those things out, Sameer, because it highlights an important point. We haven't reacted to an EO that says, shall spend more money on your capabilities. This is part of a plan that Chris and I have put in place over the last 3 years to position this company for the environment we saw occurring regardless of who the President was going to be in 2026 and 2027. And so we've been increasing our internal R&D to make sure that we remain a technology-based services provider, a technology-based provider of solutions to our customers.

What you didn't say, and which is also true is our CapEx is growing 3x from last year to this year. Again, not in reaction to an EO that says spend more of your own money, but a natural manifestation of our putting ourselves in a place that we want programs of records. We want to be in a place where we have secure compartmentalized facilities for customers to do the work that can only happen in skips of a certain certification level. And again, matching our R&D so that we have the internal capability that is the golden bolt around which our solutions are built. And so yes, we'll spend more money this year.

At the same time, we don't see that as a new plateau for Leidos. It is a purposeful mountain we've come up to, and now we're here. We don't expect that to maintain for the years to come, but we're very happy that we're in this place to spend this money to make sure that we're the company our customers need us to be.

Great. Maybe moving towards the energy side of the house. Obviously, congrats on the Entrust acquisition. It's an exciting way to play the AI infrastructure as well as the energy upstream value chain. The business, however, as you mentioned, sits within the homeland business line now, still somewhat subscale relative to other business lines.

So from your perspective, as you highlight it to be a growth pillar, should we be expecting more M&A there? Is it the organic growth strategy that you want to continue to see play out? How should we be thinking about that?

Thanks, Samir. Yes. Yes, I don't think of it as subscale in the Leidos terms because how big a business is within Leidos is interesting, but not really important to me. What's more important to me is, are they at scale in the competitive market space, right? And so the thing about our Entrust acquisition, when we close the deal and we combine these 2 companies, we'll be about a $1.3 billion, $1.3-plus billion business. And that puts us in the top 3 of these energy engineering companies in the United States.

When you combine that with the efficiency we expect to be able to put into Entrust when it comes to AI engineering tools we've built and delivered into our engineers, we think we're going to have the 3,000 new Leidosians that come to us with the Entrust deal more efficient, more effective and able to organically grow this business. That's our playbook for now.

In keeping with what I've said publicly in the past, I believe in digesting what's on your plate before you take another serving of mashed potatoes. And so we're going to be digesting this. We're going to be integrating it effectively. We proved to ourselves in 2025 that we could integrate a company very quickly. We did that with our Kudu acquisition. We got to done by the end of the year. And so we're very excited about our muscle memory of how to integrate something fast and deliver benefits from it for the rest of the enterprise.

We plan to integrate Entrust as quickly as possible and get to done and then get their efficiency up, pay off the debt, bring our balance sheet back to well below our target ratio number and then see where we go from there.

Great. Maybe moving towards the defense systems side of the house where, as you mentioned, a lot of the products have now been consolidated. So the North Star 2030 strategy is somewhat absent on the aerial unmanned and counter unmanned side of things. But we have heard the company talk about the autonomous capabilities and everything related to it, whether it's on the maritime side, et cetera. So can you walk us through how Leidos thinks about this unmanned domain, just given the relevance within the current administration?

Yes, sure. And it's the danger of having growth pillars. Certain people feel excluded from it. So let's go back and revisit what these growth pillars represent for us. What we said was we identified these 5 growth pillars where we had a differentiated technology and we knew we could make very good money at doing it, serving that market. And it was a market that was growing and based on enduring needs. And so that's how we picked the 5 growth pillars we have today.

But we also said because the team has done such an excellent job in '23, '24 and '25 of proving the profitability of the portfolio of Leidos, again, last year, 14.1% that we're very proud of. That gives us the opportunity that this is an [indiscernible] strategy. It's not that I'm not investing in here in order to differentially invest in my growth pillars. It's that I can continue to invest at the base level in everything that I've been involved in. It's just that these 5 areas demand increased investment.

And so something like UAS and counter-UAS maintains its level of investment as customer pull comes in those areas, and we are seeing some customer pull in those areas, we're happy to fund it as part of the [indiscernible] strategy of we want everything to rise and nothing is being diminished. Everything is coming up. And so I think we also, Sameer, announced a part of that on our earnings call yesterday, where I talked about our ALPS and MRADR systems that are at its core, manned, unmanned and cruise missile defense systems in a passive setting.

So very excited about the opportunities for us to continue to lean in there. There is a demand signal, especially in 2026 with the Semiquincentennial of America and the World Cup events around the nation that sadly are also going to be high security issues. And so we look forward to partnering with our customers to make sure that we make sure the public is safe and secure at all those events.

That's great. Looking at the clock, I know we have about 13 minutes or so. Maybe we'll switch the conversation a little bit to what you alluded to earlier on the AI side of things. So clearly, the narrative around disruption from AI continues to gain pace. There's all kinds of research talking about, obviously, the benefits, but certainly the disruption that comes from adopting AI at the pace that it is getting adopted. So maybe a good place to start is what has been Leidos' overall AI strategy? And within that, if you could touch upon your partnership with OpenAI.

Sure. Thank you. So AI is not new to Leidos. Depending on what you consider AI, we've been at it for decades, but certainly seriously for many years. It has jumped on to the public consciousness with ChatGPT and everybody getting one on their phone. And certainly, there is a lot of conversation around now what it's going to do -- to work and what markets is it going to disrupt. But we aren't caught up in a hurricane here. We've been looking at this, making sure we're adroit at exploiting AI for years.

Last year, we took the step to talk internally about being an AI-first company. That AI was going to have to be a part of everything we did and every solution we put forward to our customers. So we started talking internally about it being the latest commercial technology that we would exploit, not a threat. Our whole business model is built on taking commercial technologies and making them work for our customers. We think AI is that latest thing.

And so to follow that up, last year, we actually deployed Open AI on every desktop in for Leidos, for every Leidosians not every. Some people in classified space can't do it. But most Leidosians have access to OpenAI. And we put this on people's desktops, and we said, play, get familiar with it. not on your phone silly play, but now play with it in terms of how you make your business processes better, faster and cheaper.

And so we defanged it a little bit last year. And then this year, again, yesterday, I announced that I've stood up an enterprise transformation office internal to Leidos. The intent here, Will Johnson will be leading that for me, is that he will bring all of this together. Now we've got a whole bunch of chickens running, everybody playing with AI. Now we're going to collect that all back in and go through a very purposeful way to say, how do we combine the power of AI, the power of technology with business process reengineering to make Leidos and the overhead of Leidos far more efficient, far more effective so that we can take more Leidosians from the back office and put them closer to the customer. Very excited about this and very excited about the promise that, that holds for us, not only in now reducing the cost of running Leidos, much to Chris' pleasure, but also how we're going to prototype, how AI can transform our customers' business operations for them. So we're treating ourselves as customer zero in this regard.

Let's do it to us. Let's learn about how we can make our processes better, faster, cheaper and then turn those tools over to our digital modernization business and say, now go forward and help our customers, help the government be better, faster, cheaper, which is kind of full circle to your first question, Sameer, because that's what DOGE started with. How do I make the federal government faster and more efficient, smarter and more effective. That's what we plan to do to ourselves and then take those tools through our DigMod business into our customer communities and say, we can do this with you, too. And that's very exciting for me. I just don't see AI as the threat that others see it. I see it as the next commercial technology that we are called to exploit.

And so within that, if we sort of follow through on that thread, as you think about your customer base and certainly fairly diversified customer base, any customers that jump out to you that have been early adopters of AI and consequently, those are maybe somewhat insulated from it?

The department, cabinet-level department that gets the most press about deploying AI is the Department of War. And yet, again, I think they're at the same point in the journey I was 1.5 years, 2 years ago, which is deploy it onto the desktops in the Pentagon to let Sameer play with it and figure out how to make it, make your job better. But I don't think it's yet to the point where it's doing more than that. It's going to be more at the -- create an app that tells me when I come in, in the morning, pulls these 3 data sets down and gives me a situation summary on something, for instance.

Got it. Okay. That makes sense. And very tactical.

It's going to be very tactical. It's not systematic.

I guess as -- when you think about going from '25 to '26, this is now back into the internal [ iDose ] side of things. What does that enterprise transformation look like? And how do you operationalize that for customers?

Yes. Well, the first thing is the charge for our enterprise transformation office is to go out of business, get it done fast and be done because I don't think this is a sustaining part of the company. So I'm really excited about the opportunity to exploit this fast. There are obviously business processes that are clearly complicated and need business process reengineering.

And I'm very excited about the fact that instead of a Kaizen event with multiple black belts and big white boards and hundreds of people for weeks trying to map the process out, we can use these tools to help us understand the process better and understand what better looks like faster and then deploy them to the bottom line of the company so that we can actually improve our results this year. That means by the end of this year, next year, those tools, those successes are now proof points for our DigMod business to take to our customers or for any of our businesses to take to their customers and say, we can help you do this for your operations also.

And so within that, what data points should investors be looking at when they think about the AI strategy being deployed at Leidos -- we had Chris Calio, CF-RTX, talk about how they're starting to see growth at an elevated level while the headcount has stayed the same. And that's one way the core program has been working. Any data points or perhaps if it's too premature, that's fine. But anything that we could be keeping an eye out for?

Sure, Sameer. Well, the first thing that brought this issue to light for Chris and I was the fact that if you look back at history, our revenue growth and headcount growth was pretty one-to-one correlated. As Leidos grew, headcount grew with it. And the first thing, and this was years ago, we started to talk about is, hey, that's unsustainable because there's a war for talent. Remember when we used to talk about the war for talent.

There's a war for talent. And if every new dollar of revenue requires x amount of a belly button to come to Leidos, this is unsustainable. We can't find enough smart people. So we started talking about how do we bend that curve, which is kind of what I hear you saying and Chris was talking about. So how do we grow revenue without growing headcount? And then that morphed, frankly, into, well, maybe bending the curve isn't ambitious enough. Maybe what we have to do is crush the curve. And the curve isn't overall headcount now, but it is back office headcount. It is running the business headcount because what I'm very excited about is Leidosians want to come to serve customers.

And we are a better company when more of our employees are closer to the customer, closer to the point of need, closer to have that frontline obsession of the customer. And so over time, when successful this year, I think our attrition rate will be what our attrition rate is, but you'll start to see our headcount to revenue change, and you'll see our back office to front office also change. And those are 2 things that I'm going to be measuring.

Great. On the software development side, obviously, it seems like, again, the market seem to be perhaps over-indexing, but it seems like anything on the software development side seems to have a target on its back. How is Leidos leveraging that paradigm shift to be an effective partner to their customers?

Yes, thanks. Yes, it is -- we are caught up in a storm where many industrials are. And so people are waiting kind of like you talked about separating who's a winner and who's not a winner in this environment. I think that same dynamic is happening now.

I think what our customers are looking for is exactly what I described, which is people who are not afraid of this or trying to deny this, but are leaning into it and saying, now I want to work with you to exploit it. Because you just can't take a suite of tools, put them on a desk and say, make it work.

We still are dealing with highly complicated business systems in our customer communities, just like Leidos is highly complicated. So to the degree we're successful doing that for ourselves in a complicated business environment, we'll be able to translate that to our customers and help them understand our ability to do that for them. And then we're at the point where then we can help them build software and build systems that make their employees more effective and more efficient.

Great. I see we're just out of time. So maybe I'll yield the floor to you to make any closing remarks, and then we'll close out.

Thank you. Well, I'll end with where I started, which is to thank Citi for hosting this today, and thank you for your time in this fireside chat. I'm tremendously bullish. Of course, you would expect me to be about the trajectory of the business. I think 2025 lays a foundation. Our growth pillars are clear. The execution engine that we've got running in Leidos right now is coming.

Chris talks about write-ups versus write-downs, and we're setting records for how we are writing up performance on contracts as opposed to down. That's a symptom of a well-run company that is firing on all cylinders. You match the trajectory we have for our growth pillars with the unexpected growth that we can see now in areas like I mentioned, the framework agreements, the TSA modernization, the FAA modernization. And I'm just excited that '26 is going to be another exceptional year for Leidos, leading to exceptional years to come.

Great. We will then leave it at that.

Thank you, Sameer.

Thank you for your time.

Appreciate it.

Greetings. Welcome to Leidos Fourth Quarter Fiscal Year 2025 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker, Stuart Davis from Investor Relations. Stuart, you may begin.

Thank you, operator, and good morning, everyone. I'd like to welcome you to our fourth quarter and fiscal year 2025 earnings conference call. Joining me today are Tom Bell, our CEO; and Chris Cage, our CFO. Today's call is being webcast on the Investor Relations portion of our website where you'll also find the earnings release and supplemental financial presentation slides that we're using today.

Turning to Slide 2 of the presentation. Today's discussion contains forward-looking statements based on the environment as we currently see it and as such, does include risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.

Finally, as shown on Slide 3, we'll discuss GAAP and non-GAAP financial measures. A reconciliation between the 2 is included in today's press release and presentation slides.

With that, let me turn the call over to Tom Bell. We'll begin on Slide 4.

Thank you, Stuart, and good morning, everyone. I'm pleased you've been able to join us to discuss another strong quarter for Leidos, capping off an outstanding 2025. Of course, 2025 was a very dynamic year, the complexities of DOGE early and the longest U.S. government shutdown towards the end. But despite these challenges, we were able to deliver on our promises. Importantly, first, to our customers, and as a result to our shareholders.

We're pleased to have recorded 2025 revenue toward the top of our guidance, and earnings and cash ended the year above our guidance. 2025 adjusted EBITDA margin was 14.1%, a year-over-year increase of 120 basis points. Non-GAAP diluted earnings per share grew by 17% and free cash flow grew by 26%. Q4 revenue was $4.2 billion, a year-over-year decrease of 3.6%. But normalized for the extra week in our fourth quarter of 2024 and the 6-week government shutdown in 2025, Q4 revenue would have grown approximately 4%. Chris will give you all the details on our financials later on this call.

In addition to those financials, another significant highlight of our fourth quarter was net bookings of $5.6 billion, delivering a book-to-bill ratio of 1.3x. This matched the 1.3 book-to-bill ratio we also delivered in the third quarter of 2025. And our year-over-year funded backlog is up 15%. This momentum illustrates our NorthStar strategy's strong alignment with administration priorities and enduring trends.

Let me mention a few of our key awards in the quarter. The Air Force awarded us a 5-year $2.2 billion contract to deploy Leidos' passive radar systems for base defense against fixed and rotary wing aircraft and cruise missiles. This award validates years of investment in our [ ALPS and Murata ] systems that detect threats without emitting a signal. Our continued [ IRAD ] investment in this powerful technology is precisely what the administration is asking for, and Leidos is pleased that the U.S. Air Force has recognized our capabilities with this order.

Leidos also won a new 6-year $455 million Air Force Cloud One next Architecture and Common Shared Services program. Leveraging our experience in 0 trust, automation and multi-cloud brokering, we will deliver the ubiquitous, secure commercial grade technology, the Department of War requires across the globe wherever the mission calls.

And we secured positions on 2 key 10-year IDIQs, the Missile Defense Agency's $151 billion Shield program supporting Golden Dome and the Defense microelectronic activities, $25 billion program to modernize military technology through advanced engineering and prototyping. Though neither of these IDIQs are counted in our backlog numbers, both vehicles provide streamlined access for Leidos to bring innovative solutions to top priority national security missions.

I'm also especially pleased with the building blocks of profitable growth we are assembling. We are maintaining a productive working relationship with this administration, increasing the rate of investment in our growth pillars and realigning our organization to best implement our NorthStar 2030 strategy. 2025 has proven that our efforts to anticipate the uniquely challenging national security environment we are in, we are spot on.

Our customers need a new kind of national security company that delivers cutting-edge hardware and software combined to tackle challenges quickly and at scale. They need the best commercial tech integrated into those solutions from undersea to space to cyber, and they need industry partners that can secure the homeland while enabling global operations to secure the piece. Leidos brings the speed, scale, security and portfolio that uniquely responds to today's environment. We are redefining what it means to be a national security company, and we are excited to be accelerating outcomes.

So we are now firmly in strategy execution mode for our NorthStar 2030 strategy with a strong bias for velocity and a strong productive sense of urgency. As evidence of this, let me recap a couple of the bigger steps we've taken in line with our NorthStar 2030 strategy. In May, we acquired Kudu Dynamics, bringing exquisite cyber capabilities to our cyber growth pillar and providing deep differentiators across the company. Kudu represents a highly focused, technology-rich company through which we had a clear strategy to drive increased Leidos value. The acquisition is already performing exceptionally well, generating rapid growth, providing entry into new markets and sustaining robust profitability.

And we have taken steps to tightly align our business around our energy growth pillar. In October, we divested Varec, a noncore legacy energy asset. And last month, we agreed to acquire ENTRUST Solutions Group. ENTRUST is a top energy engineering firm with a consistent track record of growth and strong profitability. Together, we have the scale to be a power engineering and design leader in the U.S. And with the deals clear cross-sell revenue opportunities and cost synergies, along with the deployment of our powerful AI-enabled tools, we will increase our competitiveness in this high-growth market. These actions improve our business mix while maintaining our strong balance sheet.

And in keeping with our strategy, we are also investing organically in support of our national security priorities. In 2025, we invested $312 million in IRAD and capital expenditures to fund amazing innovations and develop radical solutions. As a result, programs like IFPC, wide field of view and maritime autonomy are ready to scale up to meet customer demand. In fact, we've increased our investments in solutions in each of the last 3 years and that will continue in 2026.

As I said earlier, regarding the U.S. Air Force Award, the administration is looking to partner with firms that are willing and able to lean into innovation and put their money behind their technical prowess. We are currently negotiating several important, exciting co-investment opportunities with this administration around critical war fighting and national needs where we have unique capabilities in the defense tech and mission systems space.

So to continue to seize on the opportunities in front of us, we will triple our capital expenditure investments this year to $350 million. This will be used to make key capitalized investments, expand production capacity and expand and upgrade our classified facilities. These investments are for key national priority high-return projects for our customers that we expect to accelerate our growth in the near term. And we will accomplish all this while holding on to the profitability that we've proven for this business over the recent years. With our NorthStar 2030 strategy in place and gaining traction, organic and inorganic investments will become more prevalent in our capital management strategy.

Also, I'm pleased to advise that I have realigned our organization to best execute our growth strategy. Form follows function. We will continue to operate in 5 sectors that roll up into 4 reporting segments. And we believe this NorthStar 2030 organizational construct will best align how we report financial performance in line with our NorthStar strategy and business priorities.

Defense, led by Cindy Gruensfelder, takes our portfolio of defense tech programs and adds Department of War programs in the areas of force protection, mission software and logistics that were formally in our national security sector. This will better enable Cindy to prosecute integrated defense efforts like Golden Dome and C5ISR. This segment will continue to house our space and maritime growth pillar.

Homeland brings together all Leidos' business that play a key role in securing the Homeland, the #1 priority of this administration. It combines our commercial and international business with our homeland security work and air traffic management portfolio previously in National Security and Health and Civil respectively. This segment also includes our energy infrastructure growth pillar for a more resilient American energy infrastructure and our mission software for key customers like the FAA.

With Vicki Szymanski retiring, Roy Stevens will lead Homeland. Intelligence sharpens our focus on innovative technologies and services for the U.S. intelligence community. This sector leads full-spectrum cyber growth pillar and aggressively advances mission software for our IC customers. Serving our intelligence agencies and making sure that we have the smartest government on the face of the earth is a real passion for me.

And that passion is shared by Jason O'Connor, a long time [ Leidosion ] who also spearheaded the Kudu acquisition and has stepped up to lead our intelligence sector. Digital modernization, led by Steve Hall, continues as a stand-alone growth pillar, delivering IT modernization services and solutions for all customers, while also providing CIO and CISO functions for Leidos. Steve and his team are embracing our AI-first philosophy to exploit AI for a more efficient Leidos and for more effective solutions to our customers. For financial reporting, the intelligence and digital modernization sectors roll up into the intelligence and digital segment.

And last, but certainly not least, health is led by Liz Porter. Liz is sharpening our focus on accelerating our managed health services growth pillar. Managed health is of keen importance to Leidos and the nation and we are positioning to expand this business by improved access to [indiscernible] care and growing our health footprint with both the Department of War and the Veterans Administration.

I've also made 2 other changes to our leadership team. First, Ted Tanner has joined us to be our new Chief Technology Officer. A veteran of multiple Silicon Valley start-ups, Ted brings a proven track record of bold innovation. He has led the development of AI and machine learning capabilities for the Department of War, intelligence and civilian agencies. Ted embraces the hardest problems, brings clarity to complexity, elevates the teams around him and delivers outcomes that matter. Ted succeeds Jim Carlini, whose leadership laid the technical foundation on which we are building our robust future. I've asked Jim to remain at Leidos as a special adviser to me on national security and other matters.

Will Johnson, Another long time, Leidosion, has taken on a new role as our Enterprise Transformation Leader. I'm charging Will with driving significant outcomes in workplace efficiency through business process reengineering, unlocked via the power of technology, particularly AI. Will's mission is to deliver measurable transformational cost reduction outcomes for us and then help transfer them into our customer solutions.

So in summary, 2025 was another very positive year for Leidos. And given that, what's past is prologue, I am convinced that 2026 will be a year that traction from our strategic action becomes even more evident. We will lock in the cultural and financial gains from 2023, '24 and '25, demonstrate the power of NorthStar 2030 strategy, its growth pillars and our alignment with this administration's priorities and propel ourselves into 2027 with even stronger success and momentum.

With that, now I'll pass the call over to Chris for a deeper look at our 2025 results and our financial guidance for 2026. Chris?

Thanks, Tom, and good morning, everyone. As Tom highlighted, 2025 was an outstanding year for Leidos, marking the third straight year of double-digit non-GAAP earnings and cash flow growth. We are focused on and delivering sustainable growth over the long term. Also, as Tom mentioned, despite external market pressures, performance exceeded initial projections across nearly all key metrics, enabling us to raise guidance twice this year and exceed the top end of our margin, earnings and cash flow ranges this quarter. Our performance stands as a testament to the strength of our differentiated portfolio, the precision of our NorthStar 2030 strategy, and the discipline and agility of our entire team.

Please turn to Slide 5. For the year, revenues of $17.2 billion were up 3.1%. For the quarter, revenues of $4.2 billion were down 3.6%. Year-over-year comparisons include the impact of 2 major factors: the 6-week government shutdown in 2025 and an extra work week in 2024 as part of our 4-4-5 financial calendar. These impacts were concentrated in the fourth quarters and the extra work week is about twice as impactful as the shutdown. Together, these 2 factors decreased revenue growth by about 7 percentage points for the quarter and 2 percentage points for the year. The underlying business grew strongly across the entire portfolio with especially robust demand in integrated air defense, intelligence community mission support, energy infrastructure and full spectrum cyber.

Adjusted EBITDA margin for the fourth quarter was 13.2%, up 160 basis points year-over-year. On a full year basis, adjusted EBITDA margin increased 120 basis points to 14.1%, exceeding the top end of our high 13s guidance from the last call. Our margin expansion journey has meaningfully changed how we view what is possible and that change permeates the entire company. The sectors are more focused on program execution with 6 consecutive quarters of positive net EACs and all of our functional organizations are continually pursuing operating efficiencies.

Non-GAAP diluted EPS was $2.76 for the quarter and $11.99 for the year. In 2025, non-GAAP diluted EPS was up 17%, $1.78 above 2024 and $0.24 above the high end of our prior guidance range. The primary driver of the robust EPS growth was consistently strong EBITDA. Growth was propelled further by accretive capital deployment. We retired 4.4% of our diluted share count over the year, which contributed about $0.50 EPS.

Turning now to an overview of our segment results on Slide 6. I'm proud that all 4 segments contributed to our strong results. Every segment grew revenues for the year and improved margins for the quarter and the year. Looking at the year-over-year revenue comparisons, the extra work week and shutdown had roughly the same impact on the sector as the company as a whole with one exception. Commercial International was unaffected by the shutdown and the extra work week lowered growth by about 5 points for the quarter and 1 point for the year.

National Security and digital showed strong and consistent underlying growth. In addition to contributions from Kudu, we had sustained uplift from the robust business development results over the past year. Segment non-GAAP operating income margins rose 160 basis points in the quarter, and 20 basis points for the year, reflecting a more profitable business mix and excellent execution. Health and Civil revenues were up a bit for the year and down a bit for the quarter, absent the extra work week and shutdown. The managed health services business was a moderate headwind in the quarter and a moderate tailwind for the full year. And volumes on DHMSM were lower as the electronic health record transition to a [indiscernible].

Health and Civil non-GAAP operating margins increased 80 basis points in the quarter and 170 basis points for the year as the result of strong program and cost management as well as technology-driven efficiencies. Accounting for the extra work week, commercial and international revenues grew nicely in the quarter and the year. Segment growth was led by improved performance in the U.K. and increased engineering support for commercial utilities which offset the Varec divestiture.

Segment non-GAAP operating margins jumped 180 basis points in the quarter and 230 basis points for the year, with better performance across the C&I portfolio driven by strong execution and business mix in the U.K. and Australia, operational gains in SES and increased use of AI to accelerate grid engineering execution within commercial energy. Lastly, Defense Systems remained aligned with administration priorities and sustained robust revenue growth throughout 2025. Q4 performance was bolstered by accelerated production of small [indiscernible] munitions and IFPC [ Increment 2 ] systems as well as preparing for 2026 production on a range of systems. Segment non-GAAP operating margins rose 680 basis points in the quarter and 160 basis points for the year as we moved into the production phase on several key programs.

Turning now to cash flow and the balance sheet on Slide 7. Cash generation is a hallmark of Leidos, and we generated record fourth quarter and full year operating cash flows of $495 million and $1.75 billion, respectively. Outperforming our cash flow guidance by $100 million reflects our commitment to profitable growth and $150 million in cumulative Section 174 cash tax savings, of which $75 million was realized in Q4.

Netting out capital expenditures, free cash flow for the quarter was $452 million or 127% of non-GAAP net income. For the year, free cash flow was $1.63 billion for a 104% conversion rate. In the fourth quarter, we repurchased $305 million worth of shares and paid $55 million in dividends to end the year with $1.1 billion in cash and cash equivalents, $4.6 billion in debt and a leverage ratio of 1.9x gross debt to adjusted EBITDA.

As Tom mentioned, we're excited to take advantage of our balance sheet to further the strategy through the acquisition of ENTRUST. We plan to pay the all-cash purchase price of $2.4 billion with $500 million of cash on hand, $500 million in commercial paper that we will pay down during 2026 and $1.4 billion in new bonds. We expect the transaction to close in Q2, subject to regulatory approval and other customary closing conditions. At the time of close, our pro forma gross leverage will be 2.6x, comfortably below our 3x target, affording us the capacity to capitalize on organic growth and potential future M&A opportunities in line with NorthStar 2030.

Now on to the forward outlook on Slide 8. In 2025, our diversified portfolio proved resilient in evolving market conditions. As Tom said, 2026 will be the year that the impact of concentrating corporate investments and shaping the portfolio towards the growth pillars shows clear dividends as we accelerate growth throughout the year and further separate from the pack in 2027.

Getting to the specifics, for 2026, we expect revenues between $17.5 million and $17.9 billion, reflecting growth of up to 4% over 2025. We expect revenue growth will build throughout the year ending with sustained momentum approaching double digits. We're guiding to mid-13s adjusted EBITDA margin in 2026. This level normalizes some of the onetime benefits of 2025 and secures a sustainable baseline. We expect to continue to invest to accelerate our growth pillars, [indiscernible] high level of program execution, maintain strong cost management and drive indirect cost efficiencies through the enterprise transformation initiative.

We expect non-GAAP diluted earnings per share between $12.05 and $12.45 which assumes interest expense of approximately $200 million and an effective tax rate of about 24%. We're also assuming a weighted average share count of approximately $129 million. We expect another robust year of operating cash flow at $1.75 billion despite a $90 million year-over-year headwind from Section 174 timing. Free cash flow will be down a bit as we triple our CapEx spend to $350 million. This guidance does not include any accommodation for the ENTRUST acquisition. We plan to update the guidance post close, likely on our first quarter call.

In 2026, we'll be operating in our new segment structure, and to help your modeling, we recast 2024 and 2025 financials in the new structure and filed them with our press release. Let me spend a few minutes outlining these segments and how we see them performing in 2026.

The largest intelligence and digital was $5.7 billion in revenues in 2025 at 10.1% non-GAAP operating income margin. In 2026, we see mid- to high single-digit revenue growth at steady margins. This trajectory is supported by a full year of Kudu, the continued phase-in of several large cyber and IT awards and an increasing velocity in our bid pipeline. Longer term, we expect to sustain mid-single-digit growth with opportunities for margin improvement.

Last year, the Health segment generated $4.7 billion in revenues, with non-GAAP operating income margin of 25.5%. In 2026, we expect modestly lower revenue and margin from the additional vendor on the VBA MDE work and continued transition on DHMSM. Beyond 2026, we see health inflecting to growth and sustaining robust profitability above 20% as administration priorities to unlock make market opportunities in rural and behavioral health as well as enhanced automation to deliver better, faster and cheaper solutions for our veterans.

Homeland delivered $3.1 billion in revenues with non-GAAP operating income margins of 9.2% in '25. We expect growth to track the corporate average and keep that pace through the decade as global imperatives unfold. While margins are likely to be relatively stable in '26, this portfolio's blend of fixed price work and commercial exposure provides a clear opportunity for margin expansion over the longer term.

In 2025, defense accounted for $3.7 billion of revenues, with non-GAAP operating income margin of 10.1%. We anticipate revenue growth above our corporate range in with a modest decline in margins as some high-margin airborne programs [indiscernible]. Looking further out, this segment with its more robust investment profile, offers significant opportunity for growth and margin expansion through 2030 as increased Homeland defense opportunities come online.

With that, operator, we're ready for questions.

[Operator Instructions] Our first question will come from the line of Seth Seifman with JPMorgan.

I wanted to ask, starting off, you could talk a little bit about the investment areas that you're expecting to put additional CapEx and the way that, that supports, I assume, supports some of the ramp in the defense business? And to the extent that, that may or may not be related to the co-investment opportunities you talked about with DoD?

Sure. Let me start by saying yes and we are investing in potential co-development opportunities with the Department of War, but it's not exclusively with the Department of War. The Department of Transportation, the FAA has significant program opportunities, as I'm sure you are all aware. And we are very keen on investing in our health business to ensure that we continue to accelerate away from the pack in that important business to Leidos.

So, yes, as I said in my prepared remarks, Seth, we are negotiating several framework agreements with the Department of War when it comes to co-investment opportunities for exciting franchise programs for Leidos going forward. But that's not where all of that CapEx and all of that investment is going. We're investing in all the growth pillars now that we have a sound key strategy to grow this company into the future.

Yes, Seth, I mean, and just to dive a little deeper and certainly, in the defense area, that is the area that over the last few years, we've continued to ramp up our level of investment, and you're seeing the results of that with the increasing growth rates. Looking ahead to '26, certainly, our maritime growth pillar is an area where you'll see an expansion of some of our facility space there. What we're doing in Integrated Air Defense, the [indiscernible] award is, again, a reinforcement that we have products that the government wants and how do we ramp up our production capacity hypersonics, et cetera. So there's a number of programs there that will support that investment, and we're looking forward to realizing the returns on those.

Great. Great. And then maybe just as a quick follow-up, a little bit more model oriented. You talked about growth accelerating through the year, exiting double-digit [indiscernible] approaching double digit, so strong exit rate, but I guess the implication is much softer growth in the beginning of the year. Kind of how should we think about the early part of the year and which of the segments are seeing that weakness?

Yes, Seth. So I mean I think the pattern is right. I mean lower growth in the first half of the year, acceleration in the back half of the year. Some of the things that we've been talking about over the last several quarters, we haven't seen any significant money yet put towards some of the Golden Dome initiatives, the FAA modernization, et cetera, those are catalysts that can help propel the second half. We've got some new program wins that we'll be starting up. Tom talked about a couple of those. So you'll see that pattern increase in the back half of the year.

And then we've got a very robust business development pipeline. Obviously, we're pleased with the 1.3 in Q4, back-to-back quarters of 1.3 book-to-bill and the team. That's despite the fact that we saw a lot of slippage into 2026 from the award pipeline. So you'll see some of those across a number of the business segments drive growth in the second half of next year.

Yes. And just to put a little context on that, Seth, we saw about $7 billion in awards slipped from Q4 into this quarter. And our -- we have now $20 billion of pending awards and a $49 billion of backlog. So we have high proposal activity. Yes, there is a lag probably because of that long government shutdown we discussed in the fourth quarter. But we expect those awards to start coming in, and that will feed growth through the end of the year as those programs get on to execution.

[Operator Instructions] Our next question comes from the line of John Godyn with Citi.

I wanted to pick up on those last comments around book-to-bill. When I think of what we've seen from other services players, we've seen a dip and then an expectation of a bounce in book-to-bill. You guys have performed very well. So there's no dip. But despite that, it sounds like you still think that the award activity and the bookings backdrop is going to accelerate from here based on what you just said. And I was just hoping you can maybe elaborate on that and shed some additional color on what the shape of that might be through the year?

Thanks, John, certainly. Well, first of all, let's put this in context. We've been investing in our growth segment and our growth function for the better part of 2.5, 3 years now. We recognize that this was an area where we needed to make sure we had the best-in-class capabilities to help our customers understand how Leidos can make their solutions better, faster and cheaper. And so we've been investing in this function. We've brought in a lot of new leadership. And so the 1.3 book-to-bill ratio in both the third and fourth quarters of last year is no accident. It's no -- it's not happenstantial. It's the purposeful effect of a purposeful plan to invest in our growth function and then the manifestation of those efforts coming through the past. Yes, as I just said to Seth, we still see a robust pipeline, an order backlog, and we expect those orders to continue. We're very happy with both our recompete win rate and our takeaway win rate. And so we feel very good about the capacity we have built in our growth function and we expect that to continue to pay dividends.

Yes, John, I would only add that, I mean, looking at the trends here, the next 12-month pipeline of submittal activity is the highest point of the year in the fourth quarter. So we've seen that [indiscernible] and looking at the percentage of activity, we expect the bulk of that 3/4 of that to be geared towards new business and takeaway. So there is some recompete turf to protect, but that's -- again, like we like to see a smaller percentage in next year's bid pipeline, and all of our segments have a robust number of opportunities that they're pursuing.

[Operator Instructions] Our next question comes from the line of Gautam Khanna with TD Cowen.

Yes. I wanted to just ask you about the VA medical exam recompete. What your expectations are for how the terms might change? What you guys are doing to maybe sustain the profitability of it because typically recompetes got to sharpen the pencil. And any view on timing, any updates on that?

Sure. Well, first of all, we're very proud of Liz and Larry and the LQTC and health business that we run. We've got a fantastic execution machine there that has helped our customer decreased backlog of veterans awaiting exams by almost 60%. And so we are very proud of what we've been able to do to serve that customer and serve this nation.

Certainly, as we announced health as being one of our growth pillars, we have no intention to see this market space despite, as Chris mentioned in his commentary, the entry of the fourth vendor and the possibility of a work share reallocation. That being said, we see volume continuing to go up. And therefore, we think we have everything to compete and win for to continue to serve our customers best in this nation's veterans best.

We have, as we've said, 2 prime focuses for how we're going to grow our health business. One is rural health transformation and the other is behavioral and integrated health exams and services. But on your specific question on the medical disability exams, we do see that in the middle of this year, we expect an RFP in a bid for the next phase of that program. Details at this point are pretty light about exactly what the customer is looking for, but we're actively engaged with them as we speak. And as we've been saying for a number of years now, we continue to invest differentially in our medical disability exam business to make sure that we can make sure veteran exams are done better, are done faster and are done less expensively for the veterans administration.

And we expect those will be the 3 things that the Veteran Benefit agency wants to see. They want to see costs come down. They want to see the number of veterans that get services go up and they want to see the efficiency and effectiveness of those exams be less mistake prone. And so that's everything we're focused on and what we expect to see. We'll update you as the year goes on. As we say, we expect a recompete and a bid somewhere in the summer and we'll keep you very well informed on that.

Chris, anything to add?

Just 2 quick points, Gautam, I might add. Number one, we just recompeted the program and look at our performance, right? So we've proven that every time we can sharpen the pencil, we can deliver for the customer and for Leidos and our shareholders. Number two, if you go back to my prepared remarks, we kind of gave a horizon view in looking at health beyond '26, robust profitability above 20%. That certainly contemplates how we envision this recompete unfolding over time, right? This is an area that we can sustain very attractive returns in and we're excited to demonstrate that.

[Operator Instructions] Our next question comes from the line of Colin Canfield with Cantor.

Maybe turning to the FY '26 growth guidance as well as margin. Perhaps if you could talk us through where you are forecasting the greatest degree of conservatism? And what are the key milestones that you need to see in order to lift both growth and margin guidance? And then essentially, as we think of that bridging into next year, is it fair to assume any outperformance of this year's guidance is a higher basis for next year? Or are there any kind of onetime things in nature that might pull in this year versus next year?

Yes. Colin, this is Chris. The conservatism, like the way you frame that. I mean there's certainly a lot of irons in the fire and a lot of make market opportunities that we're chasing. Clearly, defense has demonstrated a robust track record. That's probably the area that some decisions get made if a Beautiful Bill funding rolls out, Golden Dome activities accelerate, especially maritime, you could see that growth trend pick up more quickly. So there are some opportunities there that we're just monitoring. And then the FAA one, as Tom mentioned, the teams are ready to execute. We've put in very compelling offers to the customer. We built demonstration ready capabilities. We are ready to go. So those things could be pulled forward and we could see some uplift.

On the margin front, I think the commentary we just had on health certainly is the area that we built into what we believe the business will be running at from a reduced volume and accommodated that. If that plays out a little differently, there could be some upside there. So we think we factored all that in.

As it relates to one-timers, none of those are contemplated in the guide that we've rolled out. So as we deliver over the course of the year, I do believe that points the direction of how the momentum will carry into '27 and beyond for NorthStar 2030.

[Operator Instructions] Our next question is going to come from the line of Tobey Sommer with Truist.

In the sort of product and defense tech area, I was wondering if you could give us an update on the areas that you think have hit their stride with sort of programs of record and areas that are still developing that may demonstrate some progress here in '26 in that direction?

Yes, sure. Thank you, Tobey. Let's see. Well, first, let's start with IFPC. We were awarded a $4.1 billion IDIQ to ramp production, and that is going well. We have a target procurement of some 317 systems to be delivered by 2030. And we think that with the readying of the defense industrial base, FMS possibilities and of course, Golden Dome, that is a very good bet for us to continue to grow. So we're very bullish on IFPC. You see the customer investing in a second interceptor that solidifies their seriousness of the system as a whole. And as the lead systems integrator for that, we sit in service to our customer to make sure that, that system is all that they want it to be.

Hypersonics was mentioned earlier. Obviously, we -- the Department of War is fast tracking some 6 tech priorities to include scaled hypersonics. So that shows you that they're serious about it. And our recent awards of Silicon and [indiscernible] OTAs those mirror the Army's success of the [ Dark Eagle ] program. And so we're very happy with where that program is going from here. I mentioned in my prepared remarks, the [indiscernible] award although we can't say much more about that. Again, Homeland Security and base defense are where those programs excel, and both of those things are very high priorities for the Department of War.

Wide field of view in the space area, we are very bullish on our opportunities to serve the space forces needs there. They are -- they have a budget climbing towards $40 billion, and we are a vital partner for the technical contributions across the Space Development Agency and all their tranches to date. So we've been accelerating internal investment there.

The FDA's tranche 0 mission has been successful, and we are a key part of that. We've delivered 2 tranche one payloads to Northrop with the remaining ones coming this year, following a successful critical design review, which we published in the press. We remain on track to deliver 18 satellites for the FDA for Tranche 2 by the end of the year. And we're positioning for growth with -- for Tranche 3 and for Tranche 4 to make sure that our payloads that are serving this nation now in space continue to do so into the future.

What I'm not talking about is the 2 IDIQs I mentioned, the Shield IDIQ and the Microelectronics IDIQ. Again, these are areas where we've been investing in us being in those IDIQs gives us the opportunity to help the customers serve the nation through task orders therein, and we -- we are very bullish about that.

And so we're very excited about several of the framework agreements that we have in negotiation and conversation with the Department of War to, as I said earlier, continue to build programs of records for our defense business. So we're very bullish on being a defense tech company, and we're very excited about the opportunities for us to continue to grow that business under Cindy's leadership.

Yes. Tobey, I'd only add, Tom had a robust list there and there's others. Maritime certainly is one of those areas with our SEDAR product, ADC Mark V. What we're talking about with medium unmanned surface vessels. Those are the ones that have more runway and variance for the U.K. and Australia customer as well. So excited about the prospects in our maritime part of the portfolio there is too.

[Operator Instructions] Our next question will come from the line of Ken Herbert with our RBC Capital Markets.

Yes. Maybe if you could address capital allocation. I think you said you'll be gross leverage about 2.6x on a pro forma basis after ENTRUST. How are you thinking about incremental M&A opportunities this year? Where are your priorities? And what does the guidance imply for buybacks this year?

Yes, thanks. So first of all, again, this is a long arc that I think if you go back to the earnings calls past, I've transmitted pretty clearly that while we we're searching for our growth strategy. We would have a capital deployment strategy that was very shareholder-friendly. We still have a rigorous return on investment capital analysis for any investment and any outflow of Leidos dollars, and we will continue to do that.

But now with our NorthStar 2030 strategy in hand and we've been firmly in strategy execution mode, meeting the moment also of this administration, we are very well poised to deliver on and invest in those growth pillars that we've discussed. So we've increased investment over the last 3 years. We will continue to increase investment. And yes, inorganic and organic investments will be the lion's share of how we deploy our capital in the near term. That being said, we will continue our dividend program, and we will look opportunistically for other shareholder-friendly deployments of capital as the need arises.

Chris?

Yes. I mean, Ken, to get to your specific question on the repos, we haven't baked any into the guide that we gave you for this year. I mean, you can see that with ENTRUST coming online, there's a lot of capital going to that. But we have more capacity, and the priorities are what Tom laid out, and we'll monitor things as the year unfolds.

[Operator Instructions] Our next question comes from the line of Scott Mikus with Melius Research.

Tom, we've seen a lot of software stocks come under pressure year-to-date because of concerns that AI could drive down the cost for companies to develop software internally. We also hear from defense companies that AI will accelerate the shift towards outcome-based contracting. But are you concerned that AI could cause a race to the bottom on price, particularly for digital modernization programs?

Yes, Scott, I see and hear and certainly see the stock market effect of the fear of AI overtaking the world and understand why some people might say that. But for us, the proliferation of AI isn't frat, it's a force multiplier for everything we've always wanted to do. So we continue to lean into all commercial technologies. It is part of the business model that has made Leidos successful, and we don't see AI as being any different. We want to look at it, understand it, exploit it and be able to serve our customers with it no matter which model of AI, they want to embrace. That is why Will Johnson and our [indiscernible] business embrace AI internally. We are very keen to make sure that we are the beta tester of how AI makes organizations faster and more efficient. And we expect that beta testing AI internally to Leidos will not only deliver bottom line results for us but also help us prototype and then deliver top line benefits for our customers as they seek to exploit AI to make their operations more efficient.

So ultimately, we see AI as an opportunity to help our customers shift budgets away from maintenance and into high-value mission outcomes which is, of course, the business we're in, making their outcomes smarter and more efficient. I hope that helps, Scott.

Yes, it does. And then a quick question. You noted the backlog figures do not include anything from the Golden Dome IDIQ or the Microelectronics IDIQ. But does the guide assume that you will receive task orders this year that would convert to revenue? Or is that purely upside to the guide?

Yes. We don't ever include IDIQs. We only include the task orders when they come in. Of course, our business development and our sectors all want to assume that they get task orders that deliver revenue and profit in the year, and that's what they hunt for every year.

And Scott, just -- I mean, as with any annual guide that we put out, there always is some element of new business that has to be won throughout the year. Whether that comes from Golden Dome or comes from the robust number of other submittals that we have in the pipeline, it can be any number of those sources. But yes, if Golden Dome ramps up in any material way, we see upside from that.

Golden Dome, FAA, the microelectronics all of them. There's a ton of opportunities out there where we're poised to exploit over the coming months.

[Operator Instructions] Our next question will be from the line of Jonathan Siegmann with Stifel.

You've highlighted Maritime as an area that could be potential for this year incrementally. Just can you talk a little bit about where the government is and the progress in identifying programs and when we might expect to actually hear something on some of these?

Yes. Thank you. Yes, the Department of Navy has a well-understood and publicized MUSV program for a large quantity of medium unmanned surface vehicles. We have had robust dialogue with the Department of NATO -- the Department of the Navy and [ IndoPaycom ], the combatant commanders who want to have this capability. And what we are actually talking about, Jonathan, is not only how we can help make sure that there are vessels built but the critical key sauce for Leidos that we've been talking and has been exciting customers greatly is the payload and mission packages that makes those vessels effective in a war scenario.

And so what our secret sauce is, is not only how we can partner with private equity and shipyards around the United States to either retrofit or new build unmanned surface vessels. Frankly, that's not hard. The hard part is how do you make those vessels effective in the battle of the future, what IndoPaycom and other combatant commanders are anxious about. And that's where Leidos' long-term investments in our R&D, in C5ISR, in space really give us a differentiator in terms of how that vessel becomes effective for the combatant commander.

Now as far as timing, we are eager also. The dialogue in the Department of Navy is robust. We expect them to come forward with their firm plans soon, but we're still waiting. I hope that helps, Jonathan.

[Operator Instructions] Our next question comes from the line of Gavin Parsons with UBS.

I really appreciate all the guidance by segment. If I wrap all that up, can you hold and expand the mid-13% EBITDA margin beyond '26?

Yes. I think we dropped some bread crumbs for you there, Gavin, to see that the best is yet to come on margins in our newly formed Homeland segment. and certainly with additional upside in defense. So those are the areas that I would point to on a longer-term horizon where we would expect some additional margin expansion opportunities. I mean clearly, we've talked a lot about health today and the work that they've done, the great work that they've done to demonstrate the value they're bringing to the veterans agency. So the expectation is, yes, we're not done with margins, but consolidate the gains we've made, reprioritize, fund the critical investments for growth and then deliver exceptional results on that in '27 and beyond.

And don't negate the effects of our transformation office. We're very bullish about that being able to help Leidos become more efficient. And as a result, obviously, there could be some margin uplift there as our overheads come down. And as the year goes on, as we bring in ENTRUST, we expect that to be margin accretive. So we're very excited about the portfolio that's laying out for the year to come.

Operator, it looks like we have time for one more question.

Our last question will come from the line of Greg Konrad with Jefferies.

I just wanted to follow up on the investment conversation. I mean, you talked about 3x CapEx in '26 and continuing to increase investment. I mean, how do you think about that stepping up beyond this year? How much of that is kind of in backlog and scaling versus future decisions? And then with that, how do you think about cash on cash returns because with some of these deals, we've seen better working capital offset those investments?

Yes, Greg. So I mean we haven't mapped out the '27 and beyond yet. I mean, clearly, the items we're investing in this year are to scale up, for the most part, scale-up capabilities that are in hand, programs that we're executing on or see a clear line of sight demand for expansion, and we're finding ways to accommodate a higher ramp up on those than perhaps was previously contemplated. And you're right, as you think about with any investment outlay that we make, clearly, how do we get cash back in the door to make the cash-on-cash return more attractive.

ENTRUST will be an example of that. How do we bring cash in from that business more rapidly, find ways to optimize their working capital performance. I think that's a strength of Leidos and an area that Tom alluded to, our transformation office, one of the initial things they're going to be taking on are ways that we can look to even streamline our DSO process. And if we could take a day or 2 out of there, that really moves the needle for Leidos. So we're going to be focused on that heavily. We're going to be looking to realize attractive returns and all the investments that we make.

But I don't think that you would say the $350 million of CapEx is the new normal going beyond this year. It was situation dependent. We have the capacity to do that if the business case is there, but not necessarily what we see on an enduring basis.

And I would now like to hand the conference back over to Stuart Davis for closing remarks.

Operator, I appreciate your assistance on this morning's call, and thank you all for tuning in this morning and your interest in Leidos. We look forward to updating you again soon. Have a great day.

This concludes today's conference call. Thank you for participating, and you may now disconnect.

Greening. Welcome to the Leidos conference call to discuss the pending acquisition of ENTRUST Solutions Group. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Stuart Davis from Investor Relations. Stuart, you may now begin.

Thank you, and good morning, everyone. I appreciate everyone tuning in on such short notice. Joining me on today's call are CEO, Tom Bell; and CFO, Chris Cage. We'll be using the presentation slides that are located on the Investor Relations portion of our website for today's discussion. Beginning on Slide 2, today's call will contain forward-looking statements based on the environment as we currently see it, and thus includes risks and uncertainties. Our press release contains more information on the specific risk factors that could cause actual results to differ materially from anticipated results.

Also, our presentation includes non-GAAP financial measures. These measures are defined at the back of today's presentation and should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. And now let me turn the call over to Tom, who will begin on Slide 4.

Thank you, Stuart, and good morning, everyone. Today marks an important day for Leidos as we move with conviction in the execution of our NorthStar 2030 strategy. We announced the acquisition of ENTRUST Solutions Group, a premier power and energy service provider, in the support of our energy growth pillar.

As we discussed on our last earnings call for more than 2 decades, Leidos has provided world-class engineering services for commercial electric utilities with a focus on transmission and distribution. And now with the acquisition of ENTRUST, we will turbocharge our energy business, which is at the core of this administration's economic agenda.

Like us, ENTRUST is a top power and utilities engineering and design firm. They bring a focus on electric and gas infrastructure with a consistent track record of growth and strong profitability. Their financial performance is underpinned by highly visible revenue streams tied to long-term master service agreements with diversified blue chip clients across the country.

Turning to Slide 4. There are 5 primary strategic reasons that ENTRUST is the right acquisition for Leidos now. First, as I already mentioned, it's fully aligned with our well-thought-out NorthStar 2030; second, ENTRUST's capabilities and customers perfectly complement our own thriving energy business; third, our 2 businesses are culturally aligned, so we can integrate rapidly and hit the ground running on day 1; fourth, the nation is at the early stages of a transformational investment in our energy infrastructure; and fifth, the energy market is fragmented and beginning to consolidate. Now Leidos will become a scaled player in this market, which will accelerate growth and enhance margins.

Perhaps most importantly, though, this deal generates a strong return on invested capital for our investors, and it preserves our significant balance sheet capacity. Chris will cover this last aspect of the deal shortly. But in the meantime, let me dive a little deeper into the compelling strategic rationale for this move beginning on Slide 5.

When we rolled out our NorthStar 2030 strategy last year, we identified 5 growth pillars, each having 3 distinct characteristics: customer needs and spending would grow robustly, Leidos had a proven ability to perform cutting-edge profitable work, and Leidos had clear differentiated technical capabilities that could be actively advanced. Our energy Infrastructure business, where we make our nation's electric grid more resilient and more secure, fits that description precisely. Our energy business has long been a hidden gem within Leidos with its double-digit growth and double-digit margins.

As a growth pillar, we've stepped up investment in our proprietary grid engineering and AI design tools, including Skywire that makes Leidos' design processes smarter, more efficient and more effective for our customers. And in preparation for today, last year, we divested a noncore legacy energy asset from this growth pillar known as Varec. Now with the ENTRUST acquisition, we cement our position in exactly the area where the market is growing robustly, and we're confident we can leverage Leidos' AI prowess and technical investment to drive top and bottom performance and better serve our customers.

I'm excited to increase our exposure and competitiveness in this high-growth, profitable commercial market.

Turning to Slide 6. ENTRUST is the perfect complement to our capabilities and customers. Each of the 3 revenue pies represented here is enhanced by the combination of our 2 companies. Together, Leidos and ENTRUST will create an integrated platform with industry-leading capabilities in engineering and program management. Our complementary service offerings will provide a broad range of engineering, design and analysis support for power generation, power delivery and gas transmission and distribution.

While we share clients amongst the major utilities, our services are highly complementary, which paves the way for deeper relationships across the power delivery sector. ENTRUST increases our exposure to power engineering, providing entry into the electric power generation and gas. In turn, we see opportunity to expand our core Leidos nonengineering services, especially cyber and IT to ENTRUST customers.

This acquisition also expands our national footprint. It allows us to deepen our reach to an expanded set of blue chip companies and utility customers who are looking for partners located in their service regions.

Turning to Slide 7, due diligence revealed a unique cultural alignment between our 2 businesses. We approached the market in a similar fashion, measure and drive to the same KPIs, have similar organization structures and have similar compensation and benefits levels. ENTRUST brings us 3,100 new Leidocians. They possess a great mix of skills and a like focus on flawless program execution, what I call promises made, promises kept. They also share our passion for unparalleled customer understanding to drive superior growth.

The key takeaway here is that there is shared excitement about this acquisition across both companies. And our consistent cultures, outlooks and practices means we can integrate rapidly and deliver on our acquisition business case right out of the gate.

Regarding the market we serve, you can see on Slide 8 that our nation is currently in a robust investment stance for its energy infrastructure. As noted in the executive order on Strengthening the Reliability and Security of the United States Electric Grid, the U.S. is experiencing an unprecedented surge in electric demand. This is driven by technological advancements, the expansion of data centers and an increase in domestic manufacturing. This increase in demand, coupled with the existing capacity challenges, places a significant strain on our nation's power grid. So energy companies are investing more on a sustained basis, both in power generation to meet the massive demand from the AI economy, and transmission and distribution to increase the resilience of aging infrastructure. Together, these forces are driving large capital investments for the decades to come, all of which requires engineering support. And these investments are supported by the administration, which rightly recognizes energy as the fundamental driver of our economy and our national security.

Finally, on Slide 9. This transaction will make us a scale player in a market where scale is increasingly important. Our clients require partners that bring the full range of engineering depth, excellent technical innovation and geographic reach.

Upon closing, we will be the third largest provider of transmission and distribution engineering services and the fourth largest power engineering firm in the country. Importantly, the ENTRUST acquisition also keeps us as a power engineering pure play without exposure to construction risks.

In summary, the ENTRUST acquisition marks a significant advancement in our NorthStar 2030 strategy. It adds depth and breadth to our energy service offerings, which in turn will enable us to more effectively compete for future opportunities in a fast-growing market essential to our nation. This is exactly what our customers need and exactly what this administration is looking for.

And so with that, I'll now pass the call over to Chris to run through the financial aspects of the transition.

Thank you, Tom, and thank you, everyone, for joining us today. I'm now on Slide 10. This acquisition offers compelling returns for our shareholders. ENTRUST will bring about $650 million in annual revenues at attractive margins along with clear line of sight to double-digit revenue growth. Together, we are a $1.3 billion powerhouse with the ability to accelerate revenue growth and margins significantly. For example, we can now apply our Skywire AI tool to ENTRUST accounts, delivering proven savings to date of 30% while improving efficiency for clients.

Please turn to Slide 11 for the financial highlights of the transaction. We're acquiring ENTRUST for an all-cash purchase price of approximately $2.4 billion. Net of the present value of a tax asset this represents a multiple of around 16x ENTRUST's next 12-month EBITDA, which is favorable compared to similar transactions in the market. When factoring expected revenue and cost synergies, we see a tremendous opportunity to unlock value for our shareholders.

Considering the impact of onetime transaction-related expenses, the combination is expected to be accretive to adjusted EPS in 2027, with significant accretion thereafter as we realize synergies. Importantly, we are not sacrificing our strong balance sheet with this transaction. We have a committed bridge facility in place, but we plan to issue $1.4 billion in bonds during the next open window. We expect to finance the remainder of the acquisition with $500 million of cash on hand and $500 million in commercial paper that we would pay down over the course of 2026.

Post closing, we expect leverage of 2.6x gross debt to trailing 12 months EBITDA on a pro forma basis, which is within our target range and leaves us with plenty of firepower for further capital deployment to drive long-term shareholder value.

Finally, in terms of timing, we expect the transaction to close in the second quarter of 2026, subject to regulatory approvals and other customary conditions.

With that, operator, we're ready to take questions.

[Operator Instructions] Our first question comes from Scott Mikus with Melius Research.

It's nice acquisition. ENTRUST has very good margins. I'm just curious how sustainable those are. You also called out that it has long-term master services agreement. So I'm just curious how long are those agreements typically?

Scott, Chris, I'll get started here. I'd say that on the master agreement side, I mean, they vary and this is our business model as well. Sometimes you're talking 3- to 5-year arrangements, and if you're performing well, those are consistently reupped, sometimes there's no end date, right? Those are the relationships that are in place. Regarding the margins, I mean, we've seen steady progress in our business. And as we surveil the landscape for companies, it's not unusual to see margins like this, but this is a well-run business that clearly, the work that they do is highly valued by their clients. And what we're most excited about is the ability to bring these 2 companies together, leverage our technology solutions as part of their delivery offering, and that's what gives us confidence that this has got a lot of runway on the margin side.

Okay. And then a quick one, just is there any overlap or -- between the 2 portfolios or any parts of ENTRUST that may be noncore that you could potentially divest after closing the deal?

As we see it right now, Scott, no. The due diligence didn't give us sight of any part of the company that we don't like. The only part of the combined entity that we didn't care for was what I referenced in my prepared remarks with the divestment of Varec by us last year. But this is a very synergistic merger between the 2 companies. As I tried to talk about a little bit, it gives us upstream in the energy value stream into power generation, and it gives us an adjacency into the gas transmission and distribution market. And those are the key synergies that we're excited about. We see nothing that isn't core to the business we want to build.

Our next question comes from the line of John Godyn with Citi.

I just wanted to follow up on a couple of things in the slides to the extent you can elaborate. You guys mentioned a clear visibility into revenue and cost synergies. I'm curious if there's any way to kind of put a dimension around that, frame that for us? And then there is this comment about significant firepower remaining in the balance sheet for future deals. I just wanted to give you an opportunity to elaborate on that, that kind of struck me as interesting given the size of this deal.

John, sure. This is Chris. Let me get started here. On the balance sheet side, again, as we've talked about in the prepared remarks, 2.6x leverage at close on a pro forma basis, part of the financing would be commercial paper, as I pointed out, and that would get paid down over the course of the year. So you can imagine that leverage point by the end of '26 is even lower than that. So we're below a target range there. The business that we have is growing. This business is growing, so the capacity will continue to increase. We're not foreshadowing a next move here, but we're saying that we're not locked out of anything else that we find that could help accelerate the NorthStar 2030 strategy.

So I think it's just paying off the hard work we -- the groundwork we've laid over the last 18, 24 months to get the balance sheet in great shape, which gives us tremendous flexibility.

Regarding the synergies here, I mean, again, this is 2 complementary businesses, well-run, low execution risk. They plug right in. We'll get them integrated into our common financial BD, HR platforms by the end. The teams will be off and running. And on the cost synergy side, it's mostly again driven by our technology insertion around AI and helping them take manpower away from the engineering effort for their clients. And as Tom alluded to, the gas market opens up for Leidos. There's cross-selling opportunities there. There's cross-selling opportunities for us on the IT side, which we do for our clients that they don't do today. So there's a lot of touch points for us to expand our reach here.

And just building on that last point, John, the -- we're very excited to have 3,100 new Leidocians that have all the tickets, if you will, or the stamps that they can do this work, and yet, we've been a technology company that have been investing in technology, AI-enabled power engineering. And we feel very good about our opportunity to take those tools into those 3,100 employees and make them ever more efficient, which then gives us better customer satisfaction, more work and more pennies drop into the bottom line.

That's great. You guys have done a lot of deals historically. Is there a percentage of revenue that synergies typically kind of find their way to? Is there any way to kind of put some math around that?

Yes, I'd say when we come out, John -- if you bear with us, when we come out and lay this into our guidance when the deal closes, we can put more specificity around that. But there's tens of millions of dollars we ultimately expect will be realized on the synergy front on the bottom line from these transactions coming together.

Our next question comes from the line of Sheila Kahyaoglu with Jefferies.

Congratulations on your first big deal, Thomas.

Thank you, Sheila.

Maybe if you could just talk about, you called out the mid-teens growth rate, if you could elaborate on that a bit more. And how -- you mentioned scale several times, how that really helps ensure you guys are winning more business? And can you just talk about the overall market size and what you think share growth could look like?

Well, let me start at the end and work my way back, Sheila. The market is growing by leaps and bounds. And of course, we're all at work today or working from home today knowing that 1 million Americans are out of power because of this storm that has just hit our country over the weekend. Statistically, there's projected to be a 1/3 increase in electricity demand across the United States over the next 5 years. That's tremendous demand on an aging infrastructure. The infrastructure today averages 40 years old and has some 409,000 miles of wire and cables to carry that electricity across the United States. So we know that resilience of that infrastructure is fragile, and companies are working hard to invest in revitalizing them. We also know that cybersecurity is a key demand. One of the things that we're looking forward to bringing into this market on an increased basis as a result of this acquisition is the cybersecurity tools that Leidos is known for as a national defense, national security contractor.

In terms of scale, as Chris mentioned in his comments, it essentially doubles the size of our business, and it makes us the third largest transmission and distribution engineering company, and it makes us the fourth in the whole design process. So this gives us the scale and the geographic reach to reach customers, on customers where there is an existing Leidos relationship and also an existing ENTRUST relationship. We've looked at that as a part of due diligence and can see tremendous synergy even there. We were doing different things for those companies than ENTRUST was doing. And so we see opportunity for us to simply do more for those customers as a one-stop shop, if you will.

And so we're very excited about that and the opportunity to expand Leidos into new geographic regions that we were serving, but not with a main focus. So very exciting expansion for Leidos.

Our next question comes from the line of Ken Herbert of RBC Capital Markets.

Tom and Chris, congrats on the deal.

Thank you, Ken.

Thanks, ken.

I wondered, Tom or Chris, if you can comment on customers. Is there any material customer concentration? Or as you look at customer credits, any unique concern there with the ENTRUST customer base?

In terms of customers, we know the market well. So there's no customers that ENTRUST is bringing us that we don't know who they are or what they're about. It's just they have a privileged position with those customers. And then there's some customers, as I was just saying to Sheila, where we both have relationships, but they're highly complementary and synergistic. In terms of the second part of your question...

That was about credit risk, ken, was asking about. These guys pay their bills and the answer is yes. Something we looked hard at in diligence, Ken, is how is the AR turning over, who is their customer base? And everything we saw says that they're doing work with blue chip clients, and that's something we'll continue to diligently approach as we move forward here. But to Tom's point, I mean, there is some alignment within the customer sets. We serve similar customers, but we do different things for them. So that's why this is, we believe, highly complementary.

And as we look at the customer base, are there any customers that are over 10% of sales, or is this more details emerge?

Not that we've identified yet at this point, Ken. So I don't expect that to be the case. But again, as we get this transaction closed and roll out some additional information for you in the coming months, we'll make sure we share any of those highlights, but I don't see that being an issue.

[Audio Gap] the line of Peter Arment of Baird.

Tom, Chris, nice deal. Is there any -- I'm sorry if I missed this. Is there any disclosure on kind of current backlog? And then, Chris, is the typical contracts here fixed price? And what's the best way to think about that?

Yes. Peter, first on backlog. I mean this is a little different business model. We've talked about the master service agreements. And so those are frameworks. Think of those as IDIQ types that put us in the game and allow us to serve a client. But typically, you're going to see shorter duration projects and tasks underneath that, that might turn over in months or certainly inside of a year. You're not going to see any long-term contracts under backlog. So it will churn highly. But as we've proven with our business, I mean, it is on a nice upward trajectory on growth, and you just got to keep feeding that engine, but we've got a robust business development model to do that.

Second part of your question was, remind me. Oh, contract type...

On the fixed price, yes.

Yes. So what you're typically going to see here is a lot of time and material type of work. I mean, sometimes there's fixed price arrangements. There's no cost plus here, but it's either going to be T&M, sometimes you'll have a fixed price arrangement and opportunities, again, to attract high margin on your delivery performance there.

Got it. Looks like a great fit. Congrats guys.

Low execution risk on these projects. We're talking about things that -- again, that's the part that we like to boast as this is a business that can run exceptionally well and you've got -- you're not taking on fixed-price development efforts whatsoever.

Our next question comes from Seth Seifman of JPMorgan.

Can you hear me now?

Yes.

So I guess maybe just not being kind of as familiar with this market, maybe can you just walk us through an example of what one of these agreements is like? And it sounds like -- I think we all know that kind of there's a lot of demand for power, and we all see stuff about data centers and need for gas turbines and all that. It sounds like this is more focused on transmission and distribution. So kind of walk us through what are customers looking for you guys to do? And how that sort of market is -- what real underlying thing is driving the growth in that part of the transmission and distribution market?

Yes. Let me go first, Seth, and then we can see if Chris wants to add any color. The key here are these master service agreements. And if you think about traditional government contracting, think of them as an IDIQ. You develop a relationship with a customer, you prove to them that you can do work on smaller projects, and as you deliver, you are invited to do more robust work for that utility. Think of things like redesigning the power distribution cables that come out of a power distribution factory. Think about the transmission lines in your neighborhood. Think about the distribution lines that exist on the large infrastructure that you see around the nation. These are all parts of the value stream that we deliver engineering products for. Sometimes those lines are affected by storms as we're seeing right now. Sometimes those lines need to be replaced because of aging. Sometimes they need to be moved because of human traffic flows.

And so you have a relationship, you have the capacity, you have the full spectrum of capabilities to satisfy what a utility needs when they have an engineering project, and they don't have the capacity organically inside their own company. And so if you've built trust with these companies, they contract with you, as Chris said, in a time and material type of fashion under your master service agreement to provide the engineering to them. Key is, as I mentioned before, is having the stamps, having the qualifications to do the work. And with our technology investments that we've made in this business in the past, now we believe the utilities we serve will have the benefit of having the AI technology, the technology tools we have and possibly the cybersecurity tools that we can deploy into those companies and into those projects.

I hope that kind of helps.

Seth, let me just add one thing. When you think about major capital projects for utilities is the demand signal is rising and there needs to be more generation capacity brought on to the grid, about 5% of the budgets to build those capital projects is tied to the engineering effort, okay? So that's where -- that's the spot where we're serving. So that's the math. You think about the billions and ultimately, trillions is going to be invested in hardening the grid, new generation capacity. You've got to get that energy from the generating asset into a substation, into the ultimate end user, whether that's a data center or home, et cetera. And so we're -- with ENTRUST now, we're playing across that whole value chain on the engineering and design side. And the demand signal is very robust, and that's, again, without taking any of the construction risk on building the actual capital projects.

And I mentioned this in my prepared remarks, this doesn't give us exposure to construction risk. We're not getting into the utility construction business. That's something we don't think is core to us. And so this is a pure play power engineering, gas engineering play for us in a complementary fashion.

Our next question comes from the line of Tobey Sommer of Truist.

Could you describe how you might -- may be able to target growth faster than the market? Is this a question of amplifying the -- and growing the sales team, the combination enabling better performance and responsiveness to your customers? How do you differentiate yourself from a growth perspective within the market?

I think the key is capacity. Having capacity is the key, Tobey. And this is an area where utilities want folks that are in their geographic region, as you can appreciate. Every state, every municipality has slight tweaks to their engineering demands and the specifications with which energy is transmitted through their area. And so having that local understanding and then having the capacity to serve the market will give us a position to not only capture the 1/3 increase in spend on the top line, but also do more for these customers over the next 5, 10 years. And that's really the key here. And that's why I said in my prepared remarks that scale is increasingly important because the utility customers don't want to go to 5 shops to do a job. They would love to come to 1 shop and have you do it all. And that's what this puts us in the position to do.

And as we've already talked about with our technology insertion that not only adds capacity, but it adds competitiveness to make sure we're delivering at the most affordable rates to be able to -- and ensure that savings between our customers and Leidos ultimately. So I think those are some of the foundational aspects that will help us scale this business up on the trajectory it's in.

So my follow-up would be around your cyber and other AI opportunities. In your existing business, has that added capability led to project or customer wins such that it is a source of differentiation within the market?

Yes. And one area I mentioned in my prepared remarks was IT services. Obviously, another core of Leidos is providing IT services. And we've had the great success of being able to deliver IT services for some of our utilities now. That's an area that ENTRUST doesn't do, and we look forward to working with and talking to their customers about possibly also helping them with their IT infrastructure. And again, once you get -- help those customers with their IT infrastructure, then cyber resilience is again very critical, and we have tools and techniques to help those customers with that issue. So yes, in short.

Our next question comes from the line of Jonathan Siegmann with Stifel.

Tom and Chris, congratulations on the transaction.

Thank you.

So the company has had a long history and good success of building scale. It looks like you're doing it again in this business. Just at a real high level, what are you most excited about? Is it the revenue or the cost side that you really think it's going to be the kicker here? And then when we think about what we as external observers will have, do you intend to maybe give some more transparency on the business as it grows?

Yes. Thank you. The thing I'm most excited about is positioning Leidos to really be a player in helping this nation in a critical national security area. Our President and the EO I referenced in my prepared remarks has made it very clear that electrical and energy security is national security. We are a national security company at our core. And we've always had this crown jewel, but now this gives us scale. And it gives us scale at a time and a place when the demand is robust and the administrative support is so keen.

And so I am very excited about positioning Leidos to be able to serve another aspect of this government's need to secure the homeland and make sure that our energy grid is as resilient and secure as possible. Chris?

Yes. No. I mean, I would say you asked if we're more excited about revenue or cost side, and I'd say both. But I mean this is predominantly around growth and scaling up this business. We've given you a little bit of visibility around our energy business in the past number of quarters. You'll hear more from us, obviously, about that going forward because this does move the needle. This has the power, on a combined basis, to really improve the overall growth rate and margin trajectory for Leidos. And so we're very excited about that. But the primary thing we expect out of this team and this combined business is to really drive the growth. The cost synergy side will take care of itself, and that's not eliminating positions, that's applying technology. So it's -- we've got a clear recipe for success there.

Our next question comes from the line of Noah Poponak with Goldman Sachs.

Tom, I guess, at a high level, when you came into the company, the company had -- prior to your arrival had done some M&A that took write-downs and -- or ended up having some question marks. I mean you obviously have a great balance sheet and cash flow profile that your investors like. Can you talk a little bit about how this is different than the past, or your level of confidence and visibility that this is different than the past? And why this -- a little bit more about how you feel you know this fits that improved strategy compared to some of the M&A historically?

Yes. Thank you for that, and happy to, Noah. So Obviously, as you referenced, I joined the company in 2023. And at the time I made very clear that I thought we had enough on our plate that I wanted to prove we could digest it effectively. And so we set about instilling a promises made, promises kept culture at Leidos, and we improved margins on the book of bill that we had in hand at the time. In 2024, as you know, we afforded ourselves the luxury of undertaking the year of deep strategic thinking, which uncovered 5 very specific growth pillars that we knew customer needs were growing, Leidos could serve those customer needs and make good money doing it. One of those was energy. I think that was a surprise to many people, but as we looked to our hidden jewels within Leidos, we knew we had this key capability in our energy infrastructure business. And we knew that the grid was becoming more and more of a national priority. And so it became one of our growth pillars.

I have high confidence that we won't stub our toe in this acquisition for 2 primary reasons. We've done that due diligence eyes wide open, not just on an opportunistic, "Hey, there's an asset available, do you want to buy it," but really going out and cultivating the market to find the acquisition that was most synergistic to what we were today and what we wanted to become tomorrow. And that's how we found ENTRUST. I want to be clear with that. ENTRUST didn't come to us, we went out and cultivated the market to find ENTRUST. And then second, this is going to be in our Homeland Security business, our Homeland business. That is now the same leadership team that essentially did the Kudu acquisition last year and was very accretive from day 1.

And so we're very excited about the muscle memory that this leadership team has exhibited, their ability to do rapid integration and provide synergies very quickly, and I'm very confident in that leadership team delivering the same, even though the scale of this is bigger.

I appreciate all that detail. And just 1 follow-up on the margins. Could you elaborate a little bit on how the legacy ENTRUST margins are -- where they are compared to the legacy Leidos energy infrastructure margin? And then in your slide on the pro forma that the high teens kind of splits the difference, is there an opportunity for that pro forma to land at the legacy ENTRUST given the scale and synergy and cross-pollinization learnings that you're discussing?

Yes. Noah, Chris here. And so the answer to the last part first, yes. We will be satisfied if we level out in the high teens and call it a day. I mean that's -- we noted on the slide that's our expectations for '26, but we're not telling you about what our expectations for '27 and '28 are now, but you can imagine that they're more robust.

As it relates to our business, again, we've got a few more dimensions to it, as Tom pointed out, some of the IT work, some of the energy efficiency work. For the core piece that's most similar to what ENTRUST does, I'd say we're on par or even slightly better, but there's few more things in the portfolio. And now that's where we're confident. We have an opportunity to lift some of their margin performance up a little bit with technology. But again, I think we'll find in time that the power of these 2 businesses coming together will help those results be even better as we look to the future.

And I would also just add, promises made, promises kept. We want to put a bogey out there we know we can achieve. We're very excited about learning from the 3,100 Leidocians that are coming to us as a part of this acquisition for how they generated the profitability they generated. So it is a reciprocal synergy that we're looking forward to.

[Audio Gap] Gautam Khanna with Cowen.

I just had 2 questions. One, you mentioned this gets you in the #3 or #4 position in the market. Is that good enough? Or is this something you think you might add on to at some point to bolster your position even further? And then I was curious just in terms of the employee base at ENTRUST, are they mostly North American based? Or is there an opportunity to kind of move into lower-cost regions over time with respect to the employee base?

Yes. Thanks. I'll take the first part and maybe the second also and then kick it over to Chris. First, this does not suggest that we are done with M&A as we execute our NorthStar 2030 strategy. It also doesn't suggest we're going to immediately do another acquisition in this space. We're going to continue to cultivate possible inorganic plays across all 5 growth pillars. And we're also going to continue to invest in those growth pillars organically. And so this is the continuation of a shareholder-friendly capital philosophy that we've had. Now that we have a strategy, we're going to be very diligent in executing that strategy according to the growth pillars we have laid out.

So maybe is the answer to your question. And that's why we're very excited about the fact that we've been able to take advantage of the good housekeeping we've proven over the last years to put ourselves in where we have balance sheet that has not only the capacity to do this deal, but any other deal that comes across those growth pillars.

In terms of geography and where you do the engineering, yes, there is some Canadian exposure that comes with this business that we're very excited about because not only does that give us customer access in Canada, but it gives us a labor force in Canada that allows us to do some clever things with the clock in terms of doing engineering around a wider zone of time zones and also take advantage of labor rates that sometimes are less expensive in the United States or less expensive in Canada. So very excited about that opportunity, too. Chris, anything to add?

The only thing I would add, Gautam, is historically even it's small, but in our business, we've got some delivery capability coming out of India today for our energy business today. So again, as part of how we grow and scale this up, we'll certainly be looking for areas where we can capitalize on some cost arbitrage on the delivery model. But primarily having people in the location where your customers are is a paramount aspect of being successful with those clients.

[Audio Gap] Seth Seifman with JPMorgan.

Just wanted to ask, I guess, zooming out and looking at the wider portfolio, when you thought about making this investment, I imagine you were already quite advanced in this process at the time. But the President discussed looking for a very significant increase in the budget. The department is also very focused in making sure contractors are investing in their capabilities, and you have a business in Defense Systems that should be scaling up significantly in the coming years. So just to -- maybe if you could address sort of how you thought about investing here versus in defense? And second of all, that this -- the focus here would suggest that you have a high level of confidence in the ability of Defense Systems to ramp up in the coming years and that they have the capital and the capability that they need.

Yes. Seth. Thanks for the question. Again, we have 5 growth pillars and 4 of them are squarely in the Department of Defense, Department of War wheelhouse. And we plan to continue to resource those strategies and those growth pillars adequately. And if an inorganic play comes to pass in one of those growth pillars, we will be eager to jump on it. The timing of this just did work out that, again, as I said, the team did a great job in 2025, canvassing the environment for worthy acquisition targets for us that would give us everything we wanted that we identified as a part of our year of deep strategic thinking to support our energy growth pillar. And ENTRUST came to the top of the barrel, and they were keen to have an exit to a strategic player like us too. And so the -- it was a marriage made in heaven that we were very happy to fulfill, but you shouldn't think of it as a priority. It's not prioritizing one pillar over another, it's the result of good hard work by Vicki Schmanske and her team to find this asset and put us in a position to secure it at the beginning of this year.

Well, I just would -- just to build on that, I think that you addressed both his questions because there is an implied vote of confidence to our defense team in this too because they have laid a lot of groundwork, built off of the Dynetics acquisition from a number of years ago. And now if you look at -- yes, there could be inorganic that complements their portfolio. But I think what you see today is more organic investment along the lines of what the Department of War is looking for of how do you put some skin in the game? How do you come to the table with proven capability? How do you ramp up your capacity? We are thinking through and working on all those things in that part of the portfolio as we speak. So very excited about where that's going to.

And I'm showing no further questions at this time. I would now like to hand the call over to Stuart Davis for closing remarks.

Operator, thanks for your assistance on this morning's call, and we really appreciate everybody hopping on the call so early on a Monday morning, the day after a snowstorm. I appreciate your interest in Leidos. I'll be available all day for questions related to this acquisition. Have a great day.

This concludes today's conference. Thank you for participating. You may now disconnect.

All right. It's 12:10, so I'll say good afternoon. I'm Noah Poponak. I'm the Aerospace & Defense Equity Research Analyst at Goldman. Our next presentation out of our sector is going to be from Leidos.

With me on the stage is Chris Cage, who's the CFO. Chris, thanks so much for being with us today.

Always a pleasure, Noah. You guys do a great job here with this conference. We love coming to it every year.

Awesome. Glad to hear that.

Let's maybe just start on the kind of government backdrop. What is it like to be someone selling to the government these days? It's been an interesting time. Our things normalizing at all or is it still somewhat choppy out there?

Yes, it's definitely been an interesting year and certainly not one that we had anticipated as we finished our year of deep strategic thinking at the end of last year. Coming into the year, we thought it would be a little bit different environment. But we've, I think, proven how nimble we've been as a company and how centrally positioned we are to our customers' missions as we've navigated this environment earlier this year with DOGE, then obviously kind of with the longest government shutdown in history that most recently wrapped up.

Filing through all of that, where we've been able to up our guidance a couple of different times this year, certainly on the bottom-line side, earnings and margins have been strong throughout, and we're in a position to close it out on a great deal. So very interesting environment. I think what we've seen is probably taken a little bit longer for some things to get up and running than we would have hoped from the government decision-making side. Certainly, the shutdown impacted that to a degree.

But I think big picture, when you step back, it's actually very exciting because this administration is focused on getting things done. And as we really look at where we're positioned relative to that, there's just so many vectors that we should be participating in, in a meaningful way in the years to come that we're very excited about that.

As we -- or I guess, earlier in the year, as the funding environment was slower, there was discussion in the industry of that being attributable to a change in administration. And these things happen when there's changes in administration, people are moving around different positions, different leadership roles, et cetera, but then there was also DOGE and I still -- I'm not sure exactly what -- where that's going. And then the '26 request had total federal civilian spending down such that it seemed like there was just a prioritization shift inside of national security spending or, I guess, total government spending. I guess my question is, are those debates and machinations still going on as we move into 2026? Or are we kind of back to what 2023 and 2024 felt like as we go into 2027?

Yes. Well, I think we'll see over the next few months, we generally feel like the funding dynamics aren't a concern for us as we look at, again, the portfolio and how we've positioned it over the years and where we're positioned with our customers on critical mission priorities, growth vectors for the administration. Yes, there has been some strategic reprioritization in some of the federal civilian agencies over the course of this year and probably going forward have been more impacted. Those haven't been traditionally where Leidos has played a big role.

In the areas that we are well penetrated in civilian space like the FAA, there's obviously a demand signal that's robust for modernizing that particular platform. So the VA is another civilian agency customer that is -- there's a clear demand signal to support our veterans and improve and increase throughput and timeliness. So I feel like, again, this gets back to how are you positioned? What portfolio composition do you have? Yes, there are always some realignment of where those priorities are and more of that now is going to pivot towards, we think, the Department of War and some of the priorities there in this administration and border security and other areas in the DHS front that we're excited about capturing.

Okay. That is helpful. In the third quarter, specifically, your organic revenue growth accelerated quite nicely, and the book-to-bill was pretty strong. Should we read that as the start of a reacceleration? Or was that seasonality or random timing?

Yes. I'd say we're obviously proud of the performance in Q3, proud of the whole team. We've been laying the groundwork this year as we were just talking about through changes in direction and DOGE and everything like that and be able to come through that and demonstrate the resiliency of the portfolio and the growth acceleration, I feel really good about that.

I think the book-to-bill is indicative of some nice new wins and programs that will ramp up and help us on the growth front. I think that looking ahead, we still probably have a couple of quarters of key decisions that need to take place. The shutdown probably pushed things out just a little bit. But we're expecting the momentum to be picking up as we look to the back half of '26 and really continue to accelerate into '27 and '28. So like the quarter performance, definitely, that shows that there's areas that are on a nice growth trajectory, but there's more to come to feel like we're on a consistent path across all parts of the portfolio.

Okay. And just to make sure we fully -- or not fully, but just in a little bit more detail, discuss or touch on shutdown. Is the pace of activity or the operations of your customers coming out of the shutdown pretty quickly back to normal? Or is it slow? Or does it not actually matter because you are deemed critical across so much of your portfolio?

Yes. I mean there's a couple of things to unpack there. I mean there is the support activity that we perform for our customers. And you're right, most -- much of that was not impacted during the shutdown. So we didn't have active contracts that we had to ramp back up in many cases, some but not very many, right? So there were -- and then we're getting all of our people that were impacted back ramped up and ready to go.

And so that was contemplated within the guidance framework that we put out for the full year. And since the shutdown ended a little bit earlier than what we had accommodated for in our guidance, we feel obviously really good about the rest of 2025 outlook. As it relates to getting on with some of the administration priorities and looking to everything we want to get done, they want to get done over the next 3-plus years, that has to ramp back up.

There's probably some award decisions that might have happened that maybe will take -- be pushed out 30 to 60 days as that -- we're up against the holiday period. So I think that's probably what you see is, yes, you lost some time there with customer -- government customers not in the office, making critical decisions. They're getting back to it. There's certainly a lot of engagement happening. But my expectation is some of the awards that we would have hoped would have be Q4, we're now looking at Q1.

Okay. Great. Okay. You've referenced the vectors and the priority areas, and you mentioned a few of them briefly. What are the 2 or 3 that are large for Leidos now but can grow at a high rate, and therefore, they really move the needle for you? And then what are the 2 or 3 that are small for Leidos today but could become much larger?

Yes. Well, on the larger front that move the needle, I mean, I'd say we have a large enough multibillion-dollar defense systems business that still 15-ish percent of the portfolio, but that's sizable and certainly bigger in size and scale than some of the defense tech companies that are being talked about out there. So we can deliver at scale in that business, and there are substantial demand signals across a variety of our product portfolio from the detection side to the effector side, to the maritime autonomy side.

And I think we have a role to play as we talk about Golden Dome and when we all understand what that reference architecture looks like. So I'm excited about that one growing at a high rate, again, looking ahead over a multiyear trajectory. In the DigMod and cyber pillar, growth pillar, especially the cyber part of that, that can grow, I think, at a sizable clip going forward. The demand signal there, I mean, the threat vector is evolving. AI is changing the dynamics of how you protect from cyber threats. It's also creating opportunities to advance your offensive cyber capabilities. And so definitely expect that -- and we've had some nice wins in the cyber domain as we look back over the last 12 months. I expect that to be an area that can accelerate growth.

On the smaller side, the one I'd feature is in our energy infrastructure business. We have quietly grown formidable transmission and distribution engineering services business over the last decade. And it has been growing at a double-digit rate and has margins above our corporate average. So attractive part of the portfolio. And obviously, there's a huge demand signal from energy infrastructure, protecting critical infrastructure, growing the capacity to serve the data centers and AI needs.

And so we're seeing that the demand on that business is very robust, and we're also seeing the fact that Leidos can bring some of our investments in AI to that particular market to make our delivery model more effective and more efficient, and that's helping us compete and win effectively in that area. So I'm excited about that one continuing to grow sizably to become a more meaningful part of our portfolio.

Interesting. Okay. You didn't mention health in answering that. Is that because health is very large, has a large base, it will be hard for its growth rate to be much higher than the corporate average? Or is it because I hit you with a random question and then...

Yes. No, I mean I could have talked about any number of them. On our health business, we're super proud of how that's performed over the last several years, right? And that -- it's the leading grower and margin performer in the company. I think what you should expect, at least in the near term is consolidate those gains, it has probably got a little bit more modest growth near term coming off of an excellent year, but we're very excited about extending those capabilities into the rural and behavioral area where we have some work today.

We know the demand signal is robust. We know that there was a lot of reconciliation funding put into rural health care, and we've got, again, with the platforms that we've built and the reach that we have serving veterans, we think there's a role we can continue to play in a more meaningful way there. That's going to take a little bit more time for that to accelerate the way we expect it to in the next few years. But it's a great part of the portfolio, and there's nothing wrong with consolidating at what we've got now, letting a few of the other areas tick up as that one continues to find its footing for the next year and as we look ahead to '27 and '28.

Okay. What would you say is the percent chance out of 100 or the likelihood that the Health segment revenue has a down year over the next 5 years?

Over the next 5 years, I'm confident there's -- the demand signal writ large is high and the opportunity set is robust, and we just have to continue to perform with excellence as we have, and we think that -- even if we look narrowly within one of our main customers in the VBA, we see a tremendous amount of opportunity where we can help them with parts of the end-to-end delivery that they're self-performing today, and this administration has been very open to great ideas that drive efficiency even if it means that they need less VA workers to perform those activities. So I think, again, looking at that longer-term trajectory, we're very bullish on the health business and where it's going and the teams have an attractive long-range plan associated with it, and we just have to go make it happen.

Okay. Over the years, as that business has grown at a very strong pace, you all have discussed some versions of recompetes or new competition and then those would seem to just sort of not happen. I guess I've lost track of what competition even is there in the exam qualification business? And are there recompetes to be aware of in that business?

We're in the business where there's always a recompete to be aware of. It's just a matter of when, right? Because the government doesn't give you lifetime contracts, they'll give you 3-, 5-, 10-year contracts sometimes. So this is a business that, yes, it's inevitable, you'll be recompeting for your work. As we look ahead, the next -- we've got runway on some of our contracts through 2026. So there will be a competition that we'll have to undertake later next year, and there are some additional contracts that have more runway beyond that.

But again, that's par for the course. That's what we do. All of our work comes up for rebid at various cycles. But we attack that as if it's the first time we're going to go win something, right? We take -- always take a fresh look at how are we showing up, what are the win themes, how competitive are we, what do the customers really need? And the good news about this particular customer is they have been an early migrator towards an outcome-based contract. We want these things performed at these price points, we'll incentivize you to meet critical delivery outcomes that they care about, timeliness, customer satisfaction, throughput, et cetera.

We'll disincentivize you if you have penalties if you can't hit certain criteria. And we love to sign up for things like that. We'll bet on ourselves every time that we can meet those performance criteria that they're interested in, and we love the fact that they are willing to put skin in the game on achieving those outcomes. And I think that's helped propel the results that you see in that portfolio. But as we look to the recompete, we know they'll be interested in somebody that can meet those performance criteria have demonstrated success in that regard. So we think that's certainly something to our advantage.

But we're hoping that they're even more interested in how technology can enable this whole end-to-end outcome because we think that's an area where Leidos has been investing, we'll continue to invest in ways that we can help them streamline things to be more efficient. And we fully expect to resecure our position there going forward.

Okay. When is there next a major recompete in health or specifically recompeting within the VA disability qualification?

Yes. So back to what I was talking about. Later in 2026, I think you have to watch that space. So unclear exactly when that will come out, but there is always an opportunity to extend it. So for example, we've got 2 things to watch in health next year. One is on our Dim Sum program which you're familiar with. That is -- that ran its course and was extended for another year last year. So sometime in 2026, call it, summer, there's a reaward of the follow-on to that in the maintenance and operation and whatever else they want to put into that mix.

They previously extended us 1 year. There's certainly a possibility they could extend us again. Same thing on the VBA side. There's always a possibility they could just extend the current contract performance. But if things go according to plan, sometime probably third or fourth quarter, you're talking about a recompetition decision there. So those are the ones we're watching.

Okay. How long ago did this customer move to outcomes-based as you just described?

Yes. It's been years. I mean, certainly, ever since we've been affiliated with this business and the heritage here, this was a part of the Lockheed Martin acquisition that we did in 2016. So prior to that, this subsidiary had a position with the VA. And what the VA has done over time has moved to a more outsourced model, but they've always had kind of a fixed price per examination buying model because they kind of were able to evaluate themselves what it was costing them internally to do different types of examinations depending upon the condition that was present.

So they more recently added the incentives and disincentives probably 1 year, 1.5 years ago as they -- when the PACT Act legislation came about to say there was going to be a higher demand signal on veterans needing to be served, the VA wanted to make sure industry was stepping up their game, putting -- building out more capacity, focusing on the experience, focusing on throughput.

So probably back in '23 or '24, I don't remember exactly when, those incentives and business incentives were put in place. And I think you can see from our track record over the last 1.5 years, 2 years, we've been able to benefit from meeting the criteria to allow you to achieve the incentives. It doesn't mean that's a given. You have to continue to stay on your game and do it.

But that's the main reason the health margins are much higher than...

It is a reason. Volume helps, too. Again, when you have fixed infrastructure that you put in place to serve a need, obviously, the more throughput that you can drive through that, the better to capitalize on that fixed investment cost, coupled with maximizing the incentives. Two reasons there.

How can Leidos participate in Golden Dome? And is Golden Dome definitely even happening?

Yes. Well, I think it's going to happen. I think this administration is dead set on moving forward in that, and they put real resources behind it. General Guetlein has been focused on this. There is a reference architecture that they are working on. I mean, in theory, it's done, but not been shared with industry yet. I absolutely...

It is done.

Yes. That's our understanding, right? We eagerly await to learn more there. But we know and already talking with some of our key customers, we're obviously bidding on the major $150 billion multiple award IDIQ vehicles that they've led out to industry. So that's real as a one buying vehicle to get access to Golden Dome capability. But even outside of that, there's plenty of avenues. And Leidos should participate in a meaningful way, and we think we've got capabilities that serve -- when you think about the upper layer in space, the underlayer, protecting critical infrastructure and bases and then the C2 connectivity stitching it all together, Leidos has a role to play, we believe, in all of those aspects.

So we're excited because some of the products that we already have to offer that we've already invested in, a key aspect of this is, can you deliver capabilities within a time frame that matters. I mean, Trump definitely wants to put points on the board around how can I demonstrate that we've actually delivered on this in his administration. So you're not talking about programs that you're going to be developing and delivering 10 years from now. What can you produce and deliver in the next few years? And so we think maritime autonomy is a big piece of that, too.

So there's a lot of things at play, and we've got our PICTE program, force protection, capability that they've already got an IDIQ buying vehicle in place that they can up quantities there. Satellite payloads, again, the upper layer, we've got proven capabilities on the wide field of e-programs with SDA today. We've got detection capabilities for counter UAS in our AirShield and MXR and ALPS capability for passive detection. So there's a lot of different offerings that we can bring to bear at speed. So we're excited about the role we think we can play here. There's going to be a lot of people that play roles in Golden Dome.

Have you had any funded awards into your funded backlog that are specific to Golden Dome?

Not that I could say that's a Golden Dome funded award.

But if you included, that's something they could buy otherwise, but there's a good chance it's long lead Golden Dome?

Well, I mean, the indirect fire protection, I mean there's a multibillion-dollar award, IDIQ vehicle that we won last year. We've had a couple of different task orders ordering real units underneath that IDIQ this year. We're already bidding and pricing on things that can be delivered next year. So that's one that I would point to. Certainly, there's other bids that are in the customers' hands right now under evaluation so they can make a determination on and we would say those are capabilities that fit under that Golden Dome umbrella.

Okay. And then there's a large IDIQ vehicle that is basically just all of the [indiscernible] and they could award like anything?

TBB on how they solicit tasks for individual capabilities or products underneath that, but our bids submitted there and we expect to get a position on that. And again, one more avenue for them to potentially buy.

And that having not yet awarded specifics out from under it is just waiting on the finalization of the architecture?

I think that's a key aspect to it. Obviously, things will follow from there. But I don't know that, that will hold up MDA from getting that particular IDIQ in place, so they're ready to go. Everybody wants to be ready to go. And there's enough latitude in that buying framework for them to buy the things that they need to match the architecture that -- Guetlein is coming up with.

Okay. You mentioned the FAA. There's an ongoing process for modernization of FAA. There's a competition for a prime contractor role that you are -- where you are not bidding. Why does that not make sense for Leidos? And how will you otherwise participate?

That's a great question. Well, we're a key partner to the FAA today and have been for 50 years. We're on a number of applications, some of which fit into where they want to go in the future and will be replaced by a modern system. Others that will continue to run and perform through that aren't impacted by what they're doing to modernize, right? So we're a critical provider. We understand, we believe, the FAA mission, the airspace, the needs better than anybody. And we've got some commercial offerings that we've sold internationally to show we've got a modern air traffic management system.

As it relates to the prime integrated role, I mean, it's an interesting way the FAA is going about this. I think they are really looking for somebody to be this lead integrator. As we understood that particular opportunity, it made it very clear to us that if you were in that role, you couldn't also be a critical provider underneath that role for what is called the common automation platform, the key software capability. And that's really where we think we have the strongest offering and capabilities and can add the most value.

So it would be -- it just didn't seem like the right move for Leidos to sign up to some integration role where you're this orchestrator, I guess, especially overseeing a variety of towers underneath it, some of which construction projects aren't in our sweet spot and then limit our ability to participate in the core software design development. That was our read of the situation and one that we confirmed our understanding with the customer.

And sorry, that's -- if you're the prime or the integrator, you can't sub anything or it's with...

No, just -- as it relates to you couldn't self-perform that particular common automation platform, software development piece. This will evolve. In addition to that, I mean, just staring at the whole risk return profile of that particular role, we didn't feel like it suited us well, right? That being said, we are excited to be -- to have a role to play here, and we do expect to be a serious bidder for the common automation platform. And that's something, again, you've got a multiyear development effort here, right?

This is a capability that they want to deploy in this administration's time horizon. It's not going to happen overnight, but it's going to be a multiyear effort to get there. And so we're ready to go in that regard, and we look forward to hopefully playing a meaningful role in that area while serving the FAA well throughout this whole process on active programs today and ones that will continue in the future.

Got it. Leidos is primarily an advanced technology company, but you have some hardware, some products, you mentioned defense systems. We also see your name when we go through the airport, but you do things in autonomous, and we saw your counter UAS offering at AUSA. I guess, how do you think about in managing the business strategically, how much hardware and handheld product do you want in the business? And then as we see valuations, public and private of defense tech and drone companies or companies that only do counter UAS that are higher than your valuation, are you thinking about attempting to monetize some of the things that you have? Or do you want to just grow it?

Yes. We got a question of that variation recently in our last call. But I would say this, I mean, we -- it's not for us about hardware or software or IT. I mean I think there is a thread that connects them all that we feel like they fit together, right? Our ability to stitch together a network key offerings or more and more of these hardware products rely upon a software component to that or you talk about the physical cyber protection aspect that we can bring to bear. So we like products in the portfolio. I think the other thing is we've been able to demonstrate you can do that work effectively, get a good return and do it in a way that's not overly capital intensive.

So I think that, that's a balance that we're focused on striking appropriately. And I think we have been able to, and I think we can continue to be able to do that and have more hardware-oriented aspects of the portfolio. There's certainly a demand signal from customers on -- show me something tangible, right? Show me it's harder to -- they want demonstration-ready things, outcomes, whether it's software or hardware. And so we've been prioritizing that.

As it relates to the valuations, we agree with you. I mean I think that that's an underappreciated aspect of our portfolio in our opinion. It's got great heritage. It's got size and scale. I mean, we've got multiple different pieces of that, that on their own could be bigger than some of these defense tech companies that are getting crazy valuations. So we believe it belongs in the portfolio. We're going to scale that business up. We hope that and expect that the valuation should ultimately reflect that. But I mean, as with any part of the portfolio, you continuously evaluate what you have and what makes sense for the future. But right now, it's a growth pillar for us to focus on that particular area, and we're excited about the future prospects there.

Okay. We have about 5 minutes left. Let's check to see if there are any questions from anyone in the audience before I go through my final few. Any questions for Chris?

Thank you, Noah.

Don't be shy. Everyone's having salmon. All right. I'd love to hear you just talk about margins in general, and maybe it makes sense to go by segment, but you guys have been able to expand margins. A lot of that's in health, but other places as well. And when Tom came in and you and him as a team, I think I've heard you guys lay out a lot of new continuous improvement, long-term strategic planning around just running the business more efficiently and more profitably. So how much -- it's -- when I hear those, it sounds like there's still a lot of margin expansion ahead of you, but you also have now fairly high margins relative to your industry. So what are you doing on that front now? And where can margins go?

Well, we're doing several things. And I would agree. I mean we're proud of having industry-leading margins. This year, we've guided to high 13s, but I think what we're comfortable saying is, hey, sustaining margins in the 13s is a priority for us, and we think doable even with Health, as you pointed out, performing exceptionally well. So consolidate those gains, keep those. As we look at the portfolio, we think a couple of areas, in particular, have gas in the tank on margin improvement over time. This doesn't happen overnight, but we've been laying the groundwork in Defense Systems and talked about some of these things.

As the volumes of these -- some of these products ramp up more significantly, we're going to see improvement in those margins because structurally, how we price them, the learning curves that we've come down, the investments that we've already made, et cetera. So as that growth rate accelerates, and I think looking ahead to '27 and '28, I'm very excited about the margin potential in that part of the portfolio. In Commercial International, it's probably the other one that has the most room to move up.

Part of that is because of the energy business we talked about earlier. Structurally, it is -- we're dealing business with commercial companies on commercial terms. There is a reward for driving cost out of the delivery model, which we're proving out with the application of AI. And the demand signal is robust. They need this type of capability to meet the surging demand for bringing energy infrastructure online. So I see that as a tailwind for us on margin improvement. Those are the areas that have a clear line of sight to kind of multiyear improvements.

Within our largest segment, National Security and Digital, I mean the work is never done. We are -- it's probably a little bit more range bound there in the near term, but there is modest upside there that we're eking out through our own internal efficiencies, our own, what we call, repeatable offerings. We're a year into having consolidated all of our digital modernization work together under one umbrella. And under that leader, Steve Holt, the team has been focused on now as we cut across critical agencies like the Department of War, NASA, Social Security, et cetera, how are we doing some of these like-kind things the same way on a repeatable basis to drive efficiencies out. And AI is part of that equation.

So I think there is some modest gains that we'll reap there as well. And then what we haven't gotten after, but we are now is looking internal to Leidos. We've got a big transformation agenda ahead of us in 2026. Tom has fleeted up a leader to take a role as leading that transformation efforts, and we focused on how do we apply AI and other technologies into our own processes to drive tremendous efficiencies.

I think '26 is a year where we will be priming that pump and making some investments to achieve that, and you can expect that to pay dividends as we get to '27 and '28. So I'm really excited about that. There'll be a real campaign around that. And it's like with everything, the application of AI for us has historically been customer-facing, but there's -- we're seeing real opportunities and early returns on how there's more of our business process reengineering that could be undertaken and enabled by AI. So look for those -- for that project to pay dividends, and we'll have more to say about that as we advance through 2026.

Awesome. AI is an enormous, long topic, but there's a lot of debate in your market as to whether or not it will help you improve your business internally, plus will the government buy AI from its existing technology company, industrial base? Or will AI do some of the things you do? What do you think about?

I think all of the above. I mean I think that we're certainly approaching an eyes wide open around. There are efficiencies to be gained. We're partnering with our customers. We're used to how do we help them -- how do we apply AI to the mission outcome they're trying to achieve. And we've been doing that for a long time and have a track record of success. As it relates to -- as they just want to consume more AI internally, we're partnering with commercial companies. We have been, right?

That's part of our ecosystem to how do we get into a big customer agency like that with complex mission outcomes where we understand that dynamic and we can bring a best-of-breed software or AI solution to the table to help that customer. So I think that creates opportunities, too. And then over time, there are some aspects of the work we do, both internally and elsewhere that AI can help disintermediate and that creates efficiencies. And that's our job to find efficiencies and to redeploy those resources on other things, capture that and savings of how we go to market. But again, I think we're in a great position with the breadth and scale of our portfolio to find a number of opportunities to do that optimally and help our customers and then redirect those resources to other priority areas.

Excellent. Okay. We're out of time. So we'll wrap up there. Chris, thanks so much for being here.

Thanks, Noah.

I appreciate it.

My pleasure. Good to see you. Thank you.

Welcome to Leidos Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your first speaker, Stuart Davis from Investor Relations. Sir, you may begin.

Thank you, and good morning, everyone. Joining me on today's earnings conference call are CEO, Tom Bell; and CFO, Chris Cage. Today's call is being webcast on the Investor Relations portion of our website, where you can find the earnings press release and the presentation slides for today's call. As shown on Slide 2, and our discussion today will contain forward-looking statements based on the environment as we currently see it and thus includes risks and uncertainties. Our press release contains more information on the specific risk factors that could cause actual results to differ materially from anticipated results.

Turning to Slide 3. We'll also discuss both GAAP and non-GAAP financial measures, and today's press release and presentation slides contain a reconciliation between the 2. And now let me turn the call over to Tom, who will begin on Slide 4.

Thank you, Stuart, and welcome, everyone. Today, I'm pleased to report another excellent quarter of performance for Leidos, including top line growth of 7%, adjusted EBITDA margin of 13.8% and operating cash flow of $711 million. So far in 2025, we've grown revenue 5%, grown EBITDA 13% and grown EPS 18%. These strong results enable us to raise guidance for 2025, marking our second guidance raise of the year. And we've been able to deliver these results despite the headwinds of [indiscernible] earlier in the year, and the current government shutdown. Even through the dynamic market environment of 2025, we've been able to achieve improving strong performance.

Regarding the current government shutdown, most of our programs have not been impacted. I see 3 primary reasons for this fact. Our programs are considered mission essential by our customer. They are funded or they are beyond the scope of discretionary budgets. This, in turn, reflects our business' ongoing alignment to true enduring customer needs, current administration priorities and our ability to thrive in a business environment that rewards outcome-based contracting. Our portfolio matches the moment with solutions that speak directly to many top priorities: Golden Dome, air traffic control modernization, border security, service to veterans, maritime, autonomy, et cetera. We have the products and services that match our nation's ongoing needs.

And we are accelerating our business pace today, responding to our customers' desire to work with firms that invest in innovation, can deliver real outcomes quickly, have a proven track record of lowering costs and know how to deliver on time and on cost. Our improved financial performance over the past 2 years has enabled us to turbocharge our investments in our Leidos Golden Domes. We're accelerating our focus on creating new solutions to vexing problems in areas ranging from air travel to rural health. Our customers' missions have always been our central focus. The founding motivation for Leidos over a decade ago was to shed advisory work to focus on real mission performance. And with Leidos' expanded position in defense tech, we're focused on getting innovative solutions into the hands of war fighters in areas like counter UAS, low-cost cruise missiles, hypersonics and autonomous maritime vessels.

Leidos' core business model is to make our customers' outcomes smarter and more efficient. We're always working in every program to deploy technology to drive down costs for our customers. For example, this quarter, we rewon a $0.5 billion counterterrorism contract, a contract that had never been reawarded to an incumbent in large part because of our introduction of automation and AI to deliver smarter customer outcomes. And we continue to demonstrate to our customers our ability to perform for them on outcome-based contracts. An example about this -- about which we are very proud is our having delivered on time and under budget the very complex electronic health record system for the Department of Ore. This performance is a direct reflection of our commitment to a promises made, promises kept culture in action.

Our NorthStar 2030 strategy is now firmly in place in guiding all our actions. With growth pillars that tightly align to our customers' priorities we are building momentum to drive accelerated growth through 2026 and into the future. As you will recall, our 5 NorthStar 2030 strategy growth pillars are: Space and maritime, energy infrastructure, digital modernization and cyber, mission software and managed health services. On our past 2 quarterly earnings calls, I've highlighted elements of 2 of these pillars, cyber in Q1, and maritime in Q2. Today, I'd like to highlight our energy infrastructure growth pillar.

For more than 2 decades, Leidos has provided world-class engineering services for commercial electric utilities. The services we provide typically involve the design and placement of high-power transmission lines, electric substations and/or electric distribution infrastructure. And over the past 7 years, this business has grown by double-digit CAGRs while also delivering double-digit margins. It now represents more than $600 million worth of Leidos' annual revenues.

As you will no doubt know, the United States is amid a sustained robust investment posture in its energy infrastructure. Electric utilities are aggressively expanding the grid to meet growing demand from electrification, reindustrialization and data center growth. At the same time, they are also investing to improve the grid's reliability and resilience against extreme weather events. Following a record investment level in 2024, U.S. utilities plan to invest well over $1 trillion in this area over the next decade, and we are prepared to help.

Leidos proprietary engineering and design tools arm our power engineers with the latest data and tools. This ensures they are always the most efficient and effective engineers in the market. One such tool our engineers use is our proprietary software product, Skywire, powered by Leidos Trusted Mission AI that makes every step of the design process smarter, more efficient and more effective for our customers. Simply put, Leidos' Skywire is an AI platform that revolutionizes the efficiency of distribution system engineering. Over the past 12 months, Skywire has been used to optimize some 18,000 projects for 25 major utilities. And we're now extending the use of this AI technology across the entire value chain from distribution to transmission to create a smarter, safer and more secure grid.

Reduction of project costs enabled by Skywire of 30% is routine. And as we expand the use of these solutions across all of our programs, we're seeing powerful lift in our commercial success. We've increased revenue on more than half of our top accounts by some 50%.

In addition to Leidos' AI Golden Bolt deployment in this market, we're also deploying other all of Leidos capabilities to the energy market. We're currently proving out the use of advanced analytics in drone fleets to provide real-time grid damage intelligence. Utilities spend billions annually on this need. And through our products and tools, we see opportunity to radically accelerate storm recovery for millions of Americans.

We've helped the key customer in the energy sector successfully migrate their mission-critical software applications to the cloud, a long-standing core Leidos competency. And we're investing in deploying AI-assisted defensive cyber solutions to protect our customers' grids from cyber attacks.

In addition, we're also on the cutting edge of helping our nation expand our power generation means. We're collaborating with small modular and microreactor OEMs to prototype nuclear reactors for a secure military-grade sources of energy as our team leans into this exciting model for energy resilience in America.

So the energy infrastructure pillar of NorthStar 2030 represents a focused robust area of growth for Leidos, our innovative technology offerings differentiate us in a rapidly growing market, and we see multiple channels by which we can grow this line of business for Leidos.

Now turning to other aspects of the business. On Golden Dome, the Department of War is finalizing that program's reference architecture and is evaluating proposals for the $150 billion Shield IDIQ procurement. We're very much in the mix here, and we expect vigorous government reengagement on this subject later this month. In the meantime, we're having healthy customer conversations about unique Leidos capabilities that could have a critical role in Golden Dome such as interceptor modernization and advanced radar surveillance systems.

On air traffic control modernization, the FAA is currently evaluating bids for the prime integrator role, which we [ no bid ] due to conflict of interest stipulations contained in that solicitation. Our focus remains where we see our greatest value add, perpetuation of our position in the development of key systems and technologies that are central to delivering our next-generation air traffic control system. And at the same time, we continue to move out with the FAA to enhance the current system in ways that are aligned to their future blueprint.

On airport security modernization, we, along with our TSA customer, are executing a pilot program at the Houston and Sacramento airports to demonstrate the viability and scalability for smarter, safer and more efficient checkpoint operations. Our demonstrated approach includes digitized checkpoints, remote baggage screening and cybersecurity [indiscernible]. And on border security, customer -- Customs and Border Protection is moving out quickly to bolster non-intrusive inspection at the border as provided for in the reconciliation law. We've received an order for 24 of our mobile VACIS systems that will deliver very quickly over the coming months.

This progress and pace is reflected in our current bookings tempo. We had a 27% sequential increase in funded backlog, 1 of the largest in our history, which tells me that our customers are moving out to accomplish missions with pace.

Also, as part of our 1.3x book-to-bill ratio this quarter, we were awarded an extension to 1 of our core franchise programs to enhance and sustain the MHS Genesis Electronic Health Record for the Department of Ore. We are expanding our contribution under an asset contract to support the ARTEMIS program and loyal duration space exploration. And we received a large award to modernize Kazakhstan's air traffic control system using our Skyline X comprehensive air traffic management system.

We are optimistic about our near-term growth prospects given our $69 billion pipeline of near-term opportunities, which includes $24 billion of bids awaiting adjudication.

Regarding capital deployment, this quarter, we repurchased another $100 million worth of shares on the open market, and we accelerated payoff of $450 million on our term loan. We have also increased our quarterly dividend. This marks our third dividend increase in 3 years. Shareholders of record on December 15 will receive a dividend of $0.43 per share, a 7.5% increase over our past dividend. This speaks to our ongoing conviction regarding the earnings and cash generation potential of our business.

In addition, given our sharpened strategic focus through our NorthStar 2030 strategy, I'm pleased that we recently completed the divestiture of [indiscernible], a noncore legacy energy asset, Acquired in 2006, the disposition of this asset will allow both Leidos and Varick to advance their respective missions and best maximize long-term value.

Our strong balance sheet position and powerful free cash flow gives us multiple pathways to continue to grow shareholder value. Consistent with our NorthStar 2030 strategy, we will continue to accelerate investments in our growth pillars while we also opportunistically return capital to shareholders.

I'm very pleased that our ongoing 2025 strong performance allows us to, again, improve guidance, reaffirming our guidance on revenue and cash while increasing our guidance on EBITDA and EPS.

Now before I pass the call over to Chris, I wanted to take a moment to give a special shout out to our 47,000-plus [ Leidoceians ] that in a year of profound challenges have shown incredible resilience and focus. Their brilliance has been essential to our success. And the momentum we are building through this, our strategic pivot year, is a testament to their commitment to our customers and their missions. I am truly excited about what lies ahead for this team. So with that, over to you, Chris.

Thank you, Tom, and thank you, everyone, for joining us today. With another quarter of strong financial performance on the books, Leidos is demonstrating its ability to navigate complex market dynamics while delivering mission success for our customers, growth opportunities for our employees and financial rewards for our shareholders. Though we take pride as a team in what we've accomplished, we remain focused on finishing out 2025 strong and setting a path for a successful 2026.

As Tom indicated, the shutdown impact so far has been modest, and we remain confident in our ability to thrive in the missions we serve despite any near-term uncertainty.

With that, let's take a closer look at our third quarter results, starting with the income statement on Slide 5.

Revenues were $4.47 billion, up 7% in total and 6% organically year-over-year. Our positive momentum enabled us to overcome the moderate headwinds from ongoing government efficiency reviews to post sequential growth of 5%, our best sequential third quarter since coming out of the pandemic in 2020. Each segment improved sequentially with especially robust growth in National Security and Digital and Defense Systems. Bottom line performance remains strong through consistent program execution, AI-driven cost efficiencies and overall prudent cost management. Even as we stepped up growth investments as discussed on the Q2 call, and increased legal reserves by $24 million, we still generated $616 million in adjusted EBITDA for the quarter, up 3% year-over-year for an adjusted EBITDA margin of 13.8%.

Non-GAAP diluted EPS grew 4% to $3.05 as a lower share count more than offset slightly higher interest expense and tax rate.

Digging a little deeper, let's now turn to the segment drivers on Slide 6. National Security and Digital revenues increased 8% year-over-year, with 7% coming organically. Record revenue growth was driven by recent contract awards and increased volumes for defense IT and mission support for intelligence customers. The multibillion-dollar classified award this quarter is ramping on plan and will provide healthy growth for several quarters. We also generated $26 million in revenues at attractive margins from the acquisition of Kudu Dynamics. This marks the first full quarter of contribution from Kudu, and we're focused on integrating quickly and unlocking new growth vectors.

Non-GAAP operating income margin decreased modestly from 10.5% in the prior year quarter to 10%. Margins in the low to mid 10s is the right near-term ZIP code for National Security and Digital business. Health & Civil revenues increased 6% year-over-year with an uptick on our large infrastructure operations programs as well as continued high volumes within the managed health services business. Medical disability exam volumes helped drive record non-GAAP operating income margin of 25.7%, along with some nonrecurring items across the portfolio, including a prior period incentive award pickup and equitable cost adjustment and an EAC pickup tied to successful deployment of a key fixed price program.

Commercial & International revenues were essentially flat and non-GAAP operating margin of 8.1% was down 70 basis points on a year-over-year basis. The Security Products business moderately pressured both revenue and fee as product deliveries shifted into Q4, and we increased investments to accelerate our AI deployment. The energy infrastructure business that Tom highlighted once again led the sector in growth and profitability.

Lastly, in Defense Systems, again, is 1 of our strongest performing segments, growing 11% year-over-year, its seventh consecutive period of high single to low double-digit growth. Growth was paced by increased volumes in Integrated Air Defense, including the indirect fires protection capability Increment 2 system and multiple radar surveillance systems as well as the small glide munitions and hypersonic missile programs. Bottom line performance was consistent with our expectations, with non-GAAP operating margins of 8.9%. This level of profitability is the result of a higher mix of materials in the initial phases of production on multiple programs as well as increased investments to pursue large opportunities like Golden Dome and maritime autonomy. We're still progressing towards sustainable double-digit profitability in Defense Systems.

Turning to cash flow and the balance sheet on Slide 7. In the quarter, we generated $711 million of cash flows from operating activities and $680 million of free cash flow for a free cash flow conversion ratio of 171%. Q3 was a phenomenal collections quarter as the government prioritized disbursements at the end of their fiscal year, and we aggressively manage working capital, improved DSO by 2 days and began to deduct some previously capitalized R&D costs.

After the $450 million debt paydown and $100 million share repurchase, we ended the quarter with $4.7 billion of debt for a gross leverage ratio of 2x, and $974 million in cash and cash equivalents. Importantly, we'll now have no debt principal payments due until 2028. And even with the increased dividend, our capital commitment is not changing materially given aggressive share repurchases over the past 2 years.

Our strong balance sheet stands as a key tool to unlock shareholder value through capital investments to drive growth, strategic M&A to accelerate our growth pillars in opportunistic share repurchases.

Finally, on to the forward outlook on Slide 8. Based on our robust performance year-to-date and confidence in our positioning, we're enhancing our 2025 outlook. Consistent with Tom's remarks, we're reaffirming our revenue guidance of $17 billion to $17.25 billion, raising our adjusted EBITDA margin guidance from mid-13s to high 13s, raising our non-GAAP diluted EPS guidance by $0.30 at the midpoint for a new range of $11.45 to $11.75, and we're reaffirming our operating cash flow guidance of approximately $1.65 billion.

Let me provide a little perspective on the guidance. First, with the quarter to go, we left wider ranges around revenue and EPS than usual, a proactive hedge against a less predictable government environment. Second, our team and our diverse portfolio are proving to be exceedingly agile. We've been able to absorb top line hits that could approach 3%, and split nearly equally across government efficiency imperatives and the potential for up to a 3-month shutdown and still slightly improved revenue guidance over the year. Third, we are full steam ahead on funding key investments in the fourth quarter, deepening our conviction in a mission-driven, technology-enabled and inherently profitable future. And fourth, cash flow is a metric that is most impacted by the current environment. We expect all of the additional earnings from the raised guidance to convert to free cash flow, but the timing is uncertain in this environment.

With that, operator, we're ready to take questions.

[Operator Instructions] The first question comes from the line of Ken Herbert with RBC.

Chris or Tom, 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. You just called out the organic growth investments, some select M&A and other opportunities or priorities. 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?

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.

Our next question coming from the line of Sheila Kahyaoglu with Jefferies.

Congratulations on great results. Maybe if we could talk about Defense Systems because it was 1 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?

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?

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 [indiscernible] 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 [indiscernible] 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.

Our next question comes from the line of Peter Arment with Baird.

Chris, nice results. Chris, could you talk a little bit about, you've done a great job guys expanding margins in the Health & Civil segment. Just kind of the sustainability. Obviously, the record examinations volume, obviously, being a part of that all, but just how do you think about the business just sustaining these levels going forward?

Yes. Sure thing, Peter. I mean, again, the team has been knocking it out of the park there. And it's the portfolio that we have differentiated ourselves through innovation and investment -- ongoing investment around the quality and the efficiency of care, timeliness, all of the key metrics to customers really prioritizing. So we've been able to stay ahead of that curve, and we're certainly aware that as they're expanding capacity with other vendors in that environment, we like how we're positioned to sustain a very robust piece of that action. And the team is looking beyond just what's going on in the VBA business. Obviously, we're focused on our growth pillar there, expanding into rural and behavioral health care in other areas, and there's a very robust set of opportunities as we're looking at funding and the federal and state levels through CMS that we're looking to figure out how we can help those customers expand and meet their needs around exam delivery, telehealth, et cetera.

So this team, I wouldn't bet against them. They've performed time and again, and we have given ourselves the opportunity to really turbocharge the investments in AI and innovation to ensure that we can meet that mission head on and deliver robust margins into the future.

Yes. And Peter, if you don't mind, I'm going to pile on here just to give a little shout out to our customer. This administration has made it a focus to serve our nation's veterans and to work down the backlog of health exams that our veterans need to access the benefits that they deserve. And because we've been investing in this business for years, we have the capacity to serve that need. But we are not stopping there. We're very focused on the insertion of technology into this business so that exams are better, faster, cheaper, and we do it in a way that we can sustain this level of business and profitability for years to come. So we're very bullish on leaning into this environment and continuing to have a very robust Health & Civil business as a part of the Leidos portfolio.

Our next question comes from Tobey Sommer with Truist.

I wondered if we could get your view of your submitted bid expectations for next year. I know we're in a shutdown and so forth, but if you could compare and contrast the amount of bids that you're submitting this year and give us an indication for what growth might look like in those numbers as we get into?

Yes. So as we discussed on the call, Tobey, we are very happy with the volume of business that is in our pipeline. We've got, as we said, $69 billion of near-term efforts that we are tracking and that are in the pipeline that we plan to submit against, and $24 billion that is already submitted and just awaiting adjudication. We're seeing a little slowdown in customer decisions in that pipeline because of the government shutdown. However, we expect as soon as the government shutdown ends, customers are going to return to the workplace and get after those decisions.

So we think orders could pick up and pace very dramatically even in this quarter. But certainly, there will be some lag into next year. So I expect next year to be a big book-to-bill year and a big business development effort with a whole suite of products and services across the whole of Leidos, whether that's FAA or TSA or Department of Homeland Security or the DoD, in the Department of State, everywhere we look we see a buildup, almost a bow wave of needs and opportunities for us to pursue. And our business development team is very actively pursuing them.

Tobey, I'd add, I mean, obviously, early in the year, we had to pivot because there were some things that we were pursuing that got reprioritized by the customer. But since that time, as Tom just talked about, momentum has been building, the activity level has been elevated. And we expect next year to have a submittal year that exceeds this year overall. That's the goal in the plan. And it's a nice mix of -- there are some recompetes out there that we're chasing, of course, but a lot of new work. And with the backdrop against a set of win rates that have continued to hold up quite well, we're very pleased with where those are. It's a good recipe for success.

SP1 Our next question comes from the line of Jonathan Siegmann with Stifel.

Just the health side on the medical exam has been a real nice source of strength. Just can you give us an early preview of how you're thinking about how that holds up next year? And any kind of changes you see in today's environment possibly impacting that positively or negatively?

Jonathan. So again, the trends have been strong there, of course. And the customer -- I mean, the administration really had a focus on driving down the backlog of aged claims, and we've been slowly chipping away at that all year. The trends are good, but we're not at that goal. So the demand signal we think will remain elevated. You may be tracking again that they did introduce a fourth provider in some of the regions, and we're well aware of that. So that's an area that -- you have to stay ahead of the competition through innovation and technology, great performance, good customer satisfaction, and we'll continue to prioritize those things. So I'd say, next year is a year that it'd be difficult to add to the capacity that we're seeing right now given that fourth vendor, but sustaining the levels of performance is our expectation and then building off of that by expanding into these other areas that are part of our managed health services platform.

So the exam business is in great shape. We're already looking ahead to the follow-on, the recompete that happens at the end of 2026. So the team has been shaping towards that for ever since the last contract was awarded. So we're prioritizing this as a really important part of our business, and we're in a great spot.

Our next question comes from Gavin Parsons with UBS.

First, I would just love to clarify what you're assuming for the shutdown impact in 4Q? And then second, would love to just hear a little bit more on where you're focusing investment and how we see that come through the financials?

Yes. Sure, Gavin. Before I turn it over to Chris to go over the specifics of our guidance and what we're assuming on shutdown, I really do want to foot stop the thanks to the Leidoceans who have been leaning into this environment. And it is no small feet that we've been able to overcome the shutdown and DOGE headwinds of 2025 almost holistically. I mean, again, just to put it in perspective, this is our second guidance raise for the year. And we've been able to hold our revenue guidance throughout. That is directly to the spirit of our Leidos teams that have been working to offset programs that have been canceled or curtailed and work for on-contract growth and other wins in other places to make sure that we continue to serve our customers and our communities. So a real big shout out to the team that has been so resilient through the year and a real testament to the diversity of the Leidos portfolio. It's not that we are a one-trick pony, and we're totally beholden to 1 type of business that has been more affected by DOGE and the shutdown, we're very diverse, and therefore, we have the opportunity to lean on other aspects of the portfolio as the year unfolds.

Chris, do you want to underscore the guidance?

Sure. Thanks, Gavin. So Gavin, as we said in our prepared remarks, we left a little wider ranges because of the uncertainty in the environment. We're obviously all hopeful that the shutdown comes to an end here quickly. And I think if that were to be the case, you would see us trending towards the higher end of the guidance ranges that we put out for EPS and revenue. But we left a little bit wider range to accommodate the risk that it extends towards the end of the year. I don't expect that to be the case, but there's always that potential.

And the 1 area that, again, probably the least direct control over is cash. If the shutdown goes longer, even if it ends here in the -- late in the fourth quarter, there's always risk that some of the collections do leak into 2026. It will all show up in time, but that's why we didn't change our cash guidance at this point in time. So I think we've accommodated a variety of outcomes. We're hopeful that those more extreme situations aren't in play and that we're able to get back to ordinary course of business here quickly.

Regarding technology, yes. I mean, we've stepped up technology. Being in this position, having built the capacity in the business with such high margins and great returns has afforded us the ability and it's perfect timing because this environment the customer is looking for proven solutions to deploy. And so we've been able to lean into investing in prototypes and different kinds of technology and capacity for example, in our Huntsville facilities to meet the moment as it relates to expanding the programs that Tom talked about.

Obviously, AI investments are central to a lot of that too. But you're seeing that proliferated across a variety of our business segments in a number of areas, we call it our innovation fund where Leidos is putting a lot of its own resources, not company R&D -- funded R&D into this. And I think those things will really allow us to hit the ground running into '26 on an accelerated basis.

Our next question comes from Seth Seifman with JPMorgan.

Okay. Just to clarify a little bit more on that last question. When we think about the programs that you're talking about moving from R&D towards production, the capital investment, the capacity to ramp up on the types of opportunities that you're talking about that all exists already. And I guess related to that, it looks like this year is probably going to underrun, to some degree, the CapEx forecast that we had back at the beginning of the year. Do we think about that as reflecting some investments that may move to future periods? Or was the initial outlook just a little bit conservative?

Yes. Thanks for the question. The -- yes, the majority of the CapEx we need to facilitize for the production programs I mentioned has been made. And at the same time, I do want to say that we've given a little bit more freedom to our defense tech business to make sure they have the resources necessary to continue to facilitize for the customer pull. We're in a very unique situation where this administration is very focused on lethality for select products and solutions. We meet the moment with our defense business that has very, very specific lethal production programs that are meeting the moment for base defense, counter UAS, small cruise missiles and the like.

And so we're going to be a little bit more comfortable with a higher CapEx rate in our defense business, but on the whole of Leidos. keeping that within CapEx expenditures that you, our investors, have grown accustomed to. So on balance, again, leveraging the portfolio and making sure that we use the portfolio as a strength, we can invest a little bit more in our defense business, while we don't have to invest the same amount of CapEx in other parts of the business. Chris, anything you would add?

Well, and Seth, I mean, to your comment, you're correct. I mean we have underspent the original expectations in '25 on CapEx. Some of that was just good, prudent management along the way. Some of that is expenditures we would have liked to have made, but there's been some delays in customer decisions that would drive the need for those investments, including what's going on with our airborne ISR business in Australia. So those are some things that could still take place here as we look into the early part of 2026, but all the while sitting in the the affordability envelope that we've laid out for you guys over time.

So I think we're in a great position there, have some capacity to step it up if the needs arise, but we'll certainly ensure that those incremental investments, we believe, are going to generate attractive returns for our shareholders.

Our next question comes from Colin Canfield with Cantor Fitzgerald.

As we think about kind of normalizing for shutdown results and the bridge from this year's mid-single-digit organic performance to next year. What are kind of some of the key puts and takes or contracts that you would flag as we think about the building blocks for mid-single-digit organic growth to potentially high single-digit organic growth next year?

Yes. Colin, I think too early to lay out any specifics on 2026. We obviously have to see when the shutdown ends and how quickly things get back to the ordinary course of business. But as Tom laid out, I think you can expect to see our Defense Systems business leading the way as an area [indiscernible] a number of programs that could accelerate away and drive growth. Obviously, our energy infrastructure business that was highlighted today is an area that we expect to see strong growth momentum and going into 2026. We talked about our large award in the intelligence community this quarter that will be ramping going into next year. So there's several things that have momentum behind them, not to mention the additional opportunities that may emerge through Golden Dome funding and air traffic control and of course, border security.

Juxtaposed against that, it has been a year of DOGE, and we've navigated that well. And there'll be some programs that ultimately trade out of the portfolio or have ended over the course of the year. We did sell a small business in Barrick that you heard us talk about that's very modest. Think of that as a $40 million top line business. And then we're almost through all of the portfolio shaping we've spoken about in the past, specifically our Antarctic support program, and that will ultimately come out of the portfolio in 2026.

So we're excited about the growth momentum and looking at a number of levers there. But to put all that into a framework on what the growth expectations are for '26 is just little premature for that.

A little context also, Colin, as we came out of DOGE and we started to gain traction on the 1 BBB law, things like FAA, ATC modernization, Golden Dome, our border security opportunities and airport screening modernization, those were all areas that got tremendous traction. But then with the government shutdown, there's been a little hiatus there. And as I tried to suggest in my prepared remarks around Golden Dome, we expect as soon as this government shutdown is over, tremendous customer uptake and activity on all of these programs and more because the future is not waiting. So as soon as the government shuts down is over, we expect tremendous customer interaction to take place. The team is ready for it. We are excited about it. But exactly how those things will unfold and how those cards will come to play is something we're still calculating.

And as we come out of the shutdown, we'll put together our '26 plan, and then we'll have something to talk to you about what we expect next year.

Our next question comes from Mariana Perez Mora with Bank of America.

This is Samantha on for Mariana today. Just talk a little bit about your international business, where are we seeing some pockets of strength or some slowness?

Sure. Well, our international business is focused in Australia and the U.K., as you know. In each of those countries, we have a relatively large business and about 2,000 employees. We've got a leadership team in place in both of those countries that we're very proud of and very confident in. And they're both very aggressively figuring out how they expand their business in line with our NorthStar 2030 strategy. This is a point that I make internally all the time. Some people say, oh, international is not a growth area for Leidos, to which I answer, [indiscernible]. We have a domestic homeland defense business in the U.K. and Australia and we have 5 growth pillars. And I am very confident and comfortable growing our international business in those 2 countries and maybe select other countries consistent with those growth pillars. That's the key.

The growth pillars are the key to how we're going to grow Leidos regardless of what country or what Homeland you're discussing growing it in. So we're very bullish about growing our Australia and the U.K. business. We're going to be opportunistic elsewhere in the world, but not silly because our business is 1 where you have to be domiciled organic and local. You can't just parachute in and sell more products from a production line in the United States. And so international remains a part of our growth story, consistent with our NorthStar 2030 growth pillars. I hope that helps.

Our next question comes from the line of Scott Mikus with Melius Research.

Tom, you talked about the franchise program opportunities at your Defense Tech business, and we've seen a lot of defense tech companies raise capital at lofty valuations that don't have the track record of Dynetics. So does it make sense to potentially explore spinning off Dynetics given that it might attract a higher valuation outside of the broader Leidos portfolio?

I think the corollary is also true, where we have a golden jewel in our Dynetics and Defense Tech business that has people and analysts get more comfortable with and they see the fact that we're stake, not just sizzle. They're going to start to value Leidos on the whole a little bit more robustly. So I'm looking at it at the other side of the straw, if you will, that says, I've got this wonderful asset. It's called Leidos Dynetics in Huntsville, Alabama. We're growing a business around it because we have a defense tech business that is more than just platforms, it's also mission systems. It's the ability to combine rapid prototyping and rapid fielding of platforms with the software and the smart and the mission systems that makes it effective for our war fighter. And that's the thing that these other people that are getting a lot of press can't do. They may be able to build products quickly and innovatively, but so can we. What we can do that they can't do is put the mission packages on them and make them relevant to the war fighter in the next years.

And so I'm very excited about it. I have no plans to do anything, but invest in it and help sell the story that Leidos should be valued more because we have this crown jewel called Leidos Dynetics.

Our next question comes from Gautam Khanna TD Securities.

I was wondering if you could comment on recompetes next year. I know you mentioned the VBA contract. But if you could just call out what percentage of sales? And if there are any lumpier recompetes out there that we should be monitoring?

Gautam, yes, sure. This is Chris. I probably can't put a percentage on it just yet. We're fine-tuning all of that '26 playing. But I can tell you, there's a couple more significant ones we're paying attention to. Our reserve health readiness program is a large 1 that we expect could be decided here in the fourth quarter. I referred to an Australian airborne program. That's 1 where there was an expanded scope opportunity there, but still a key recompete for our commercial international business. Those are 2 of the larger ones running through the list, I am just eyeballing here of anything else of consequence, we've got a CBP opportunity. But I'd say beyond those 2, actually, it lines up to be a pretty nice year, more weighted towards new business and takeaways than recompetes. But of course, those critical franchises we're going to focus on, and we already have, putting our best foot forward on our proposals there.

And there are no further questions in the queue at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.