Leidos (LDOS): Margin Momentum and Cash Conversion Drive FY2025 Results

Q2 beat, raised guide and an AWS security credential that changes the addressable market#

Leidos [LDOS] reported a powerful near‑term trifecta: a second‑quarter adjusted EPS of $3.21 that beat consensus by roughly +21.6%, revenue momentum that underpinned a full‑year guide raise to $17.0–$17.25 billion, and attainment of AWS Trusted Secure Enclave (TSE) Vetted Partner status — a capability Leidos says enables secure, cross‑border classified collaboration for AUKUS programs. The EPS beat and guidance lift materially recalibrated near‑term expectations; the AWS TSE status converts a technical certification into a procurement differentiator in allied defense programs. (See the Q2 earnings transcript and the company’s AWS announcement for the underlying disclosures.) According to the Q2 earnings transcript — Investing.com, Leidos posted adjusted EPS of $3.21 on $4.25B revenue and raised full‑year adjusted EPS guidance to $11.15–$11.45 and revenue guidance to $17.0–$17.25B (Investing.com Q2 transcript)[https://www.investing.com/news/transcripts/earnings-call-transcript-leidos-holdings-q2-2025-earnings-beat-forecasts-stock-surges-93CH-4170743]. The AWS TSE vetting was announced in the company release on Leidos’ investor site (Leidos investor release)[https://investors.leidos.com/news-releases/news-release-details/leidos-achieves-premier-aws-status-advances-secure-information].

The earnings beat: quality, scope and immediate drivers#

Leidos’ Q2 print reads like a classic operational leverage story rather than a one‑off accounting effect. Management reported adjusted EBITDA of $647 million and an adjusted EBITDA margin for the quarter of 15.2% — the company linked that improvement directly to productivity actions, pricing adjustments on select programs and a higher mix of mission systems and secure cloud work. Those margin gains were broad‑based across mission areas, with defense systems and government IT singled out as contributors in the earnings call. The company also cited AI, automation and the Kudu Dynamics acquisition as drivers of efficiency that should deliver multi‑quarter labor savings and incremental program capacity.

The market’s reaction — an intraday price gap in pre‑market trading following the print — reflected both relief and recalibration: the beat validated the raised guide and signaled that margin expansion can be sustained at scale. For the quarter the company also reiterated a large backlog and funded backlog figures that underpin multi‑year revenue visibility (backlog near $46.2B, funded backlog about $7.1B), giving the guidance an identifiable revenue base (Q2 transcript)[https://www.investing.com/news/transcripts/earnings-call-transcript-leidos-holdings-q2-2025-earnings-beat-forecasts-stock-surges-93CH-4170743].

Fiscal 2025 performance — growth, margins and our recalculations#

Using Leidos’ FY2025 reported figures (filed 2025‑02‑11), revenue rose to $16.66 billion from $15.44 billion in FY2024. Our year‑over‑year calculation shows revenue growth of +7.91% between FY2024 and FY2025, driven by an uptick in mission‑critical government work and a higher mix of higher‑margin programs. EBITDA for FY2025 was $2.12 billion, producing an EBITDA margin of +12.72% (2.12/16.66). Operating income of $1.83 billion yields an operating margin of +10.98%, while net income of $1.25 billion implies a net margin of +7.50%. Those margin levels represent a material step up from FY2023 (operating margin 4.02%, net margin 1.29%) and reflect operating leverage and mix improvement. The FY figures and filing metadata are drawn from the company’s FY2025 financials (filed 2025‑02‑11) and summarized in the company data set.

The net income swing is especially notable: net income rose from $199 million in FY2023 to $1.25 billion in FY2025 — a change of +528.30% by our calculation — reflecting both improved operating results and a cleaner tax/one‑time charge environment in FY2025. The improvement in EBITDA (FY2023 EBITDA $931M to FY2025 $2.12B) also supports the view that margin expansion is real and not solely the product of accounting adjustments.

Income statement trend (selected years)#

All figures are drawn from the company’s FY filings (filed 2025‑02‑11) and computed by Monexa AI.

Balance sheet and leverage: improved liquidity and falling net debt burden#

Leidos finished FY2025 with $943 million in cash and cash equivalents and $5.29 billion total debt, producing net debt of $4.35 billion. Using FY2025 EBITDA of $2.12 billion, net‑debt‑to‑EBITDA calculates to 2.05x, a marked improvement versus FY2023 (net debt $4.42B against EBITDA $0.93B produced a ratio of approximately 4.74x). That deleveraging was achieved through improved operating cash flows and a combination of disciplined financing activity.

Our calculated current ratio at year‑end FY2025 (total current assets $4.43B divided by total current liabilities $3.65B) is 1.21x. This is lower than the TTM current ratio reported in third‑party metrics (1.62x) because TTM and quarter‑averaged metrics use a different aggregation; where possible we prefer the year‑end snapshot for balance‑sheet comparisons but we call out both figures to reconcile the difference. Net debt and leverage levels now sit comfortably within the typical mid‑prime defense‑contractor range and give management flexibility for modest M&A and continued capital returns.

Select balance sheet and cash flow metrics#

Calculations use year‑end balance sheet figures and the corresponding year EBITDA from company filings.

Cash flow and capital allocation: buybacks, dividends and a high FCF conversion#

Free cash flow in FY2025 reached $1.24 billion, up materially from prior years and roughly equal to reported net income (FCF/net income ≈ 99.2%), a conversion rate that signals high earnings quality for FY2025. Leidos returned capital via $906 million in share repurchases and $208 million in dividends in FY2025, a total return of about $1.11 billion. Net cash used for financing activities was -$1.08 billion, consistent with buybacks and dividend distributions. The cash‑flow profile gives the company room to continue targeted bolt‑on acquisitions while maintaining capital returns, assuming operating performance holds.

These capital‑allocation choices matter because they signal management priorities: buybacks suggest management views the stock as an efficient use of capital at recent prices, while a modest dividend (dividend per share TTM $1.58) retains flexibility for acquisitions and debt management. The FY2025 financing mix reduced absolute leverage and sustained cash balances (cash at end of period $1.08B, net change in cash +$156M). Cash and debt trends are corroborated by the company’s filings and the FY cash‑flow statement (filed 2025‑02‑11).

Strategic developments that shift addressable markets: AWS TSE and AUKUS#

Two strategic developments materially expand Leidos’ addressable opportunity set. First, the company attained AWS Trusted Secure Enclave (TSE) Vetted Partner status and used that credential to launch the Leidos Secure Environment (LSE) to serve allied, cross‑border classified collaboration under AUKUS Pillar 2. The certification is the highest AWS recognition for secure enclave design and is relevant where governments require architecture, governance and operational controls that meet strict cross‑border data handling standards (Leidos investor release)[https://investors.leidos.com/news-releases/news-release-details/leidos-achieves-premier-aws-status-advances-secure-information].

Second, Leidos is integrating recent capability acquisitions such as Kudu Dynamics and pursuing a modest‑sized cyber platform (public discussion around a ~$300 million acquisition). These moves expand the company’s systems‑and‑software capability set — not just as a services integrator but as a vendor of secure, marketable capabilities for high‑value defense programs. The AWS TSE status combined with these capability fills positions Leidos to pursue higher‑margin, complex multinational programs where architecture and trust are procurement hurdles rather than features.

Backlog and contract momentum: why visibility has improved#

Management reported a backlog around $46.2B at quarter‑end with funded backlog near $7.1B. That scale provides revenue visibility and explains the confidence behind the raised FY2025 guide. Recent awards highlighted on the call include an FBI NGI modernization task order ($128M), a naval health research award ($105.5M), and a NATO centralized IT modernization contract (up to $87M), among others (WashingtonExec, GovConWire, Marketscreener)[https://washingtonexec.com/2025/07/leidos-lands-128m-fbi-task-order-for-ngi-modernization/][https://www.govconwire.com/articles/fbi-leidos-next-generation-identification-modernization-roy-stevens][https://www.marketscreener.com/quote/stock/LEIDOS-HOLDINGS-INC-14308164/news/Leidos-Awarded-87-Million-NATO-Cloud-Modernization-Contract-50309648/]. These task orders skew to mission‑critical, higher‑margin government work, which supports both revenue stability and margin expansion.

Competitive positioning and the durability of the moat#

Leidos sits in a crowded systems‑integration field but has several tangible differentiators. First, scale and backlog give visibility and operational bandwidth that smaller integrators lack. Second, the AWS TSE credential and LSE product convert engineering capability into a procurement advantage for allied programs that require certified secure enclaves. Third, the company’s recent acquisitions add capabilities in autonomy, sensing and cyber that broaden the firm’s technical value proposition.

That said, competitive risk is real. Large primes and cloud integrators are all investing heavily in secure‑cloud, AI and autonomous systems, narrowing differentiation over time. Execution on integrations (Kudu Dynamics and the planned cyber platform), pricing discipline on large task orders, and the ability to manage program complexity across geographies — including export controls and political constraints — will determine whether the current premium on margins can be sustained.

Reconciliations, metric caveats and data differences#

Readers should note differences between trailing‑twelve‑month (TTM) metrics reported by data vendors and our year‑end calculations from the FY2025 statements. For instance, third‑party TTM metrics report a current ratio of 1.62x and a reported ROE of 31.25%, while our simple FY2025 year‑end calculations produce a current ratio of 1.21x and an ROE (net income/equity) of 28.34% (1.25/4.41). These differences arise from timing (TTM averages vs year‑end snapshots) and the use of different denominators (average shareholders’ equity versus year‑end equity). We present both views and prioritize the year‑end, filing‑based calculations for balance‑sheet comparisons while acknowledging that TTM metrics can be useful for trend analysis.

Risks and watchpoints#

Execution risk on integrations is front and center: acquisitions and capability builds must convert to revenue and margin accretion without operational disruption. Backlog quality is another watchpoint — the company’s total backlog is large, but the funded portion is smaller (roughly $7.1B), which means the timing of revenue recognition depends on contract awards, government budgets and task order cadence. Geopolitical complexity is material: cross‑border classified collaboration (AUKUS) increases exposure to export controls and political decision cycles. Finally, the competitive landscape is intensifying as primes and cloud providers chase secure cloud and AI work; sustaining pricing and margin advantage will require continuous investment and demonstrable program outcomes.

What this means for investors#

Leidos’ FY2025 results and Q2 print show a company at a margin inflection: management delivered operating‑leverage‑driven margin expansion, materially stronger free‑cash flow, and a modest retrenchment in net leverage (net debt/EBITDA ~2.05x). The AWS TSE credential and the LSE product create a differentiator in allied procurement where secure, cross‑border collaboration is required. For investors, the key questions become executional: can Leidos sustain the 12–15% EBITDA margin range through multiple quarters, integrate acquisitions without margin slippage, and convert unfunded backlog into funded task orders at expected margins? The answers to those questions — visible in the next two quarters of organic revenue growth, margin trajectory and funded backlog conversion — will determine whether the valuation premium implied by recent multiple expansion is justified. (See Q2 transcript and Leidos AWS release.)

Key takeaways#

Leidos delivered a clear set of improving operating outcomes: Q2 adjusted EPS $3.21 (beat), FY2025 revenue $16.66B (+7.91% YoY), FY2025 EBITDA $2.12B (EBITDA margin 12.72%), free cash flow $1.24B and net‑debt/EBITDA ~2.05x. The AWS TSE vetting and LSE position Leidos uniquely for AUKUS and allied secure‑cloud work, while a pipeline of higher‑margin government awards and a large backlog provide revenue visibility. Key risks include integration execution, funded‑backlog conversion timing, export controls and increased competitive intensity.

Bottom line — a strategic pivot supported by better cash and margins, execution now the proving ground#

The numbers show Leidos shifting from a cyclical systems integrator toward a higher‑margin, capability‑driven integrator with credible cash generation. The FY2025 margin expansion, strong free‑cash conversion and reduced leverage together create optionality: continued buybacks and targeted M&A are manageable while keeping the balance sheet under control. The strategic gain from AWS TSE status and related secure‑cloud capabilities is real; turning that differentiation into sustained, high‑quality revenue and margin expansion will depend on disciplined integration and the timing of funded task orders. The next two quarters of organic growth, funded backlog conversion and evidence that margin expansion is durable will be decisive.

Sources cited include the company’s Q2 2025 earnings transcript (Investing.com), the Leidos investor release on AWS TSE status (investors.leidos.com) and public reporting of contract awards mentioned in the earnings call (WashingtonExec, GovConWire, Marketscreener). Specific FY financial data are taken from Leidos’ FY2025 financial statements (filed 2025‑02‑11) as summarized in the company financial dataset.