Title

Presentation

Leidos Holdings, Inc. beats earnings expectations. Reported EPS is $3.13, expectations were $2.88.

Operator: 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.

Stuart Davis: 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.

Thomas Bell: 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?

Chris Cage: 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.

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

Sheila Kahyaoglu: 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?

Chris Cage: 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.

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

Joshua Korn: 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?

Thomas Bell: 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.

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

Tobey Sommer: 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?

Thomas Bell: 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.

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

Scott Mikus: 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?

Thomas Bell: 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.

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

John Godyn: 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.

Chris Cage: 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.

Thomas Bell: And while it’s a little lumpy this year, it’s not dimming our outlook on the year as a whole.

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

Noah Poponak: 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?

Thomas Bell: 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.

Chris Cage: 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.

Noah Poponak: 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?

Chris Cage: 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.

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

Unknown Analyst: 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.

Thomas Bell: 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.

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

Peter Arment: 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?

Thomas Bell: 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.

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

Seth Seifman: 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?

Thomas Bell: 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.

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

Gautam Khanna: 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?

Thomas Bell: 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.

Chris Cage: 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.

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

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

Kenneth Herbert: 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?

Thomas Bell: 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.

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

Stuart Davis: 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.

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

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