Leidos Growth Accelerates as Margins Keep Shrinking
Leidos raised its full-year guidance again after revenue growth accelerated to 7% even as net income margin fell for a third straight quarter.
Leidos Holdings (LDOS) reported accelerating revenue growth alongside continued margin compression in its second quarter, a combination that has now defined three consecutive quarters for the government-services and technology contractor. Revenue rose 7% year over year, up from 4% growth in the first quarter, while GAAP net income margin fell to 7.8% from 9.2% a year earlier, extending a decline that began in the fourth quarter of 2024.
The quarter's growth was driven largely by acquisitions rather than organic expansion. Organic revenue growth was 4%, meaning acquired revenue, chiefly from the Entrust deal, accounted for roughly three of the seven percentage points of headline growth. That dynamic showed up clearly at the segment level: Homeland revenue surged 32% to $1.02 billion, with $141 million of that increase coming from Entrust and the balance from Air Traffic and Energy demand, while Health revenue declined 8% to $1.09 billion on lower medical disability exam volumes. Homeland's segment margin expanded to 9.0% from 8.3% even as Health's fell to 23.4% from 25.8%, underscoring how the portfolio's growth engine and its margin drag are now different businesses.
GAAP diluted earnings fell 7% year over year to $2.81 a share, a steeper decline than the first quarter's 8% drop would suggest given the smaller base, as net income fell 9%. Non-GAAP diluted EPS growth decelerated sharply to 2%, reaching $3.26, down from 5% growth in the prior quarter. Adjusted EBITDA margin fell to 13.8% from 15.2% a year earlier, a wider gap than the first quarter's compression to 14.0% from 14.2%, indicating the erosion is building rather than stabilizing. Acquisition, integration and restructuring costs rose to $27 million from $2 million a year earlier, reflecting new NorthStar 2030 realignment charges and costs tied to the Entrust and Analogic transactions.
Cash generation moved in the opposite direction. Operating cash flow rebounded to $793 million, a 224% conversion ratio, from just $301 million in the first quarter, and non-GAAP free cash flow rose to $761 million from $270 million. Bookings also strengthened, with $4.9 billion of net awards and a 1.1x book-to-bill ratio in the quarter, up from $3.3 billion in the first quarter, pushing total backlog up 5% year over year to $48.7 billion and funded backlog up 44%. Cash on hand nonetheless fell to $748 million from $1,108 million at fiscal year-end, while total debt rose to $6.0 billion, as the balance sheet absorbed the Entrust acquisition; total assets grew to $15.6 billion from $13.5 billion and goodwill rose to $7.66 billion from $6.34 billion.
Leidos raised its full-year guidance for the second consecutive quarter. The company now expects revenue of $18.20 billion to $18.40 billion, up from a prior range of $18.00 billion to $18.40 billion, non-GAAP diluted EPS of $12.20 to $12.50, up from $12.10 to $12.50, and operating cash flow of roughly $1.85 billion, up from roughly $1.80 billion.
The quarter also brought a structural change to how Leidos reports its business. Effective at the start of fiscal 2025, the company replaced its prior segment structure with four new segments — Intelligence & Digital, Health, Homeland and Defense — plus separately disclosed corporate costs, a realignment that changes the basis for period-over-period comparisons going forward.
Leidos also disclosed in April the formation of a security screening joint venture with Analogic and Altaris, which will contribute about 1,500 employees and roughly $625 million of projected 2025 revenue from its Security Enterprise Solutions business once it closes in the second half of the year.