Leidos (LDOS) Q3 2025: Funded Backlog Jumps 27% as Defense and Energy Pillars Accelerate
Leidos delivered a standout Q3, propelled by a 27% sequential surge in funded backlog and robust organic growth across defense, health, and energy infrastructure. Strategic execution on North Star 2030 pillars is translating into higher guidance and margin resilience, even as government shutdown risks linger. Investors should focus on the company’s expanding pipeline and operational agility, positioning Leidos for above-peer growth as federal priorities shift toward modernization and resilience.
Summary
- Backlog Momentum: Funded backlog surged, reflecting accelerated government demand for mission-critical solutions.
- Portfolio Diversification: Broad-based growth across defense, health, and energy insulated results from shutdown and Doge headwinds.
- Strategic Capital Allocation: Ongoing investments in AI, innovation, and targeted M&A underpin long-term growth trajectory.
Performance Analysis
Leidos posted 7% total revenue growth and 6% organic growth year over year, with each major segment delivering sequential improvement. The National Security and Digital segment led with 8% revenue growth, driven by new contract awards and defense IT expansion. Health and Civil also posted 6% growth, with record medical disability exam volumes and strong managed health services margins. Defense Systems outperformed with 11% growth, its seventh straight quarter of high single or low double-digit expansion, fueled by integrated air defense and advanced munitions programs.
Adjusted EBITDA margin reached 13.8%, supported by AI-driven cost efficiencies and disciplined program execution. Cash flow from operations hit $711 million, boosted by aggressive working capital management and government disbursements. The company used this strength to pay down $450 million in debt, repurchase $100 million in shares, and raise its quarterly dividend for the third consecutive year. Commercial International revenues were flat, but the energy infrastructure business remained a standout, with double-digit growth and margin leadership.
- Backlog Surge: Funded backlog rose 27% sequentially, one of the largest increases in company history, signaling robust demand visibility.
- Segment Margin Dynamics: Health and Civil margins hit a record 25.7%, while Defense Systems margins remain below target due to material mix and early-phase investments.
- Cash Flow Strength: Free cash flow conversion reached 171%, supporting both debt reduction and capital returns.
Leidos continues to demonstrate operational agility, absorbing government shutdown and Doge program impacts while maintaining or raising guidance. The company’s diversified portfolio and alignment with enduring federal priorities are paying off in both near-term results and long-term positioning.
Executive Commentary
"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."
Tom Bell, Chief Executive Officer
"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, and opportunistic share repurchases."
Chris Cage, Chief Financial Officer
Strategic Positioning
1. North Star 2030: Growth Pillars in Action
The five-pillar North Star 2030 strategy—space and maritime, energy infrastructure, digital modernization and cyber, mission software, and managed health services—continues to guide capital allocation and business development. This quarter, energy infrastructure took center stage, with Leidos leveraging proprietary AI tools like Skywire, an AI-driven engineering platform, to deliver 30% cost reductions and win major utility projects. The company’s ability to cross-pollinate AI and analytics across pillars is driving both differentiation and margin expansion.
2. Defense Systems Transition: From R&D to Production
The defense portfolio is pivoting from heavy R&D to low-rate initial production (LRIP) and programs of record, unlocking scale and revenue visibility. Key programs include air and base defense, hypersonic and small cruise missiles, and unmanned maritime platforms. The Dynetics business, a core asset in defense tech, is being positioned as a crown jewel, with management emphasizing its unique integration of rapid prototyping and mission systems software.
3. Health and Civil: Managed Services Scale and Innovation
Health and Civil margins reached new highs, powered by record medical exam volumes and operational innovation. The business is expanding beyond veteran services into rural and behavioral health, leveraging technology and AI to drive efficiency and customer satisfaction. Management is confident about sustaining high performance despite new competitors and evolving contract structures.
4. Energy Infrastructure: AI-Enabled Grid Modernization
Energy infrastructure revenue now exceeds $600 million annually, and is growing at double-digit rates. Proprietary AI and analytics are enabling Leidos to capture outsized share of the US utility grid modernization wave, with $1 trillion in planned industry investment over the next decade. The business is also branching into nuclear microreactors and advanced grid cybersecurity, reflecting a multi-channel growth strategy.
5. Capital Deployment: Balanced and Opportunistic
Leidos is deploying capital across organic investment, targeted M&A, share buybacks, and rising dividends, all within a conservative leverage framework. The company recently divested the non-core VARIC asset and completed the first full quarter of Kudu Dynamics integration, with an eye toward further portfolio shaping and bolt-on acquisitions in strategic growth areas.
Key Considerations
This quarter’s results underscore Leidos’ ability to execute on a multi-pronged growth strategy while maintaining operational discipline. The company’s alignment with federal priorities, technology leadership, and capital allocation flexibility are creating a differentiated investment case.
Key Considerations:
- Pipeline Depth: $69 billion in near-term opportunities, with $24 billion in submitted bids awaiting adjudication, supports multi-year growth visibility.
- Operational Agility: The portfolio’s diversity allowed Leidos to offset shutdown and Doge impacts, with limited program disruption and strong on-contract growth.
- Margin Leverage: AI-driven cost efficiencies and mix shift toward higher-value services are supporting margin expansion, particularly in health and energy.
- Portfolio Shaping: Ongoing divestitures and targeted M&A are sharpening strategic focus and improving capital efficiency.
- Government Funding Risk: Shutdown timing and efficiency reviews remain wildcards, but management has built guidance buffers to absorb potential volatility.
Risks
Federal budget uncertainty and extended government shutdowns remain the most significant near-term risks, with potential delays in contract adjudication and cash collections. Competitive intensity in managed health services and the entrance of new vendors could pressure volumes, while international growth is subject to geopolitical and regulatory complexity. Leidos’ exposure to large recompetes, such as the VBA and reserve health readiness contracts, introduces periodic revenue concentration risk.
Forward Outlook
For Q4, Leidos guided to:
- Revenue in the $17.0 to $17.25 billion range for the full year
- Adjusted EBITDA margin in the high 13s percent
- Non-GAAP diluted EPS of $11.45 to $11.75
- Operating cash flow of approximately $1.65 billion
Management left guidance ranges wider than usual to hedge against shutdown-related unpredictability, but remains “full steam ahead” on funding key investments. All incremental earnings from raised guidance are expected to convert to free cash flow, though timing may be impacted by government payment cadence.
- Book-to-bill is expected to remain above 1, with a strong mix of new awards and recompetes in the pipeline.
- Further AI and innovation investments are planned for Q4 to accelerate growth levers into 2026.
Takeaways
Leidos is executing on a balanced growth and capital return strategy, with strong operational performance across defense, health, and energy segments. The company’s backlog surge and pipeline depth offer rare visibility in a turbulent government contracting environment.
- Backlog and Pipeline Strength: The 27% sequential backlog increase and $69 billion pipeline provide a foundation for sustained growth, especially as shutdown headwinds subside.
- Margin and Cash Flow Resilience: AI-driven efficiencies and disciplined cost management are supporting margin expansion and robust free cash flow, enabling shareholder-friendly capital allocation.
- Strategic Levers for 2026: Investors should monitor the pace of government contract adjudication, the ramp of defense production programs, and the scaling of AI-enabled energy and health solutions as key drivers of next year’s performance.
Conclusion
Leidos’ Q3 results underscore the company’s ability to deliver growth and margin expansion despite macro and federal funding headwinds. Strategic focus on North Star 2030 pillars, operational agility, and disciplined capital deployment set the stage for above-sector growth as government modernization and resilience priorities accelerate.
Industry Read-Through
Leidos’ performance and commentary highlight a broader industry pivot toward outcome-based contracting, digital modernization, and AI-driven operational efficiency in federal services. The surge in funded backlog and focus on grid, defense, and health modernization signal robust demand tailwinds for peers with diversified portfolios and technology leadership. Investors should expect continued consolidation and portfolio shaping across the sector, as government priorities and funding cycles reward agile, innovation-focused contractors with mission-critical capabilities.