Q3 2025 Leidos Holdings Inc Earnings Call
Welcome to leidos third quarter 2025 earnings conference call.
A brief question and answer session will follow the formal presentation. At this time, our participant on a list and only mode. After the speaker's presentation, there will be a question and answer session to ask a question during the session. You will need to press star 1, 1 on your telephone. You will then hear an automated message. Advising your hand is raised to withdraw your question. Please press star 1 1 again.
Please be advised that today's conference is being recorded.
I would like to end the conference over to your first speaker.
So with Davis from investigations. So what you may begin?
Thank you and good morning, everyone. Joining me on today's earnings conference, call our CEO, Tom Bell and CFO Chris cage.
The services, we provide typically involve the design and placement of high power transmission lines, electric substations, Andor electric distribution are infrastructure.
And over the past 7 years. This business has grown by double-digit keggers while also delivering, double-digit margins.
It now represents more than 600 million dollars worth of losses and 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 reindeer 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 us utilities plan to invest well over 1 trillion dollars 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.
1 such tools are Engineers. Use is our proprietary software product, skywire powered by Lidos trusted Mission AI that makes every step of the design process, smarter more efficient and more effective for our customers.
simply put Lidos is 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 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 losses is AI golden deploy bolt deployment in this market, we're also deploying other all of Lidos capabilities to the energy Market.
We're currently proving out, the use of advanced analytics and 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 migrated their mission critical software applications to the cloud.
A long-standing core Lidos 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.
For collaborating with small modular and micro reactor 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 Lidos.
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 Lidos
Programs reference architecture and are evaluating proposals for the $150 billion Shield IDIQ procurement.
We're very much in the mix here, and we expect vigorous government re-engagement on this subject later this month.
In the meantime, we're having healthy customer conversations about unique Lidos 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 know bid due to conflict of interest stipulations contained in that solicitation.
Our Focus remains where we see our greatest value ad.
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 cyber security hardening.
And on Border Security customer and 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 vas systems, that will deliver very quickly over the coming months.
This progress and pace is Ari 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 1.3 times 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 War.
We are expanding our contribution, under a NASA contract to support the Artemis program and luring 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 dollar pipeline of near-term opportunities, which includes 24 billion of bids awaiting. Adjudication,
Regarding Capital deployment this quarter, we repurchased another 100 million dollars 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 15th or receive a dividend of 43 cents 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 varrock
A non-core legacy, energy asset.
Required in 2006. The disposition of this asset will allow both Lidos and varric 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.
We affirming our guidance on revenue and cash while increasing our guidance on ibida and eps.
Give a special shout out to our 47,000 plus Lidos 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, 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, Lytos 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 and 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 impacts so far have 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.
Are 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 the specially. Robust growth in National Security and digital and defense systems.
Bottom line performance remains strong through consistent program, execution, AI driven cost efficiencies in overall prudent cost management.
even as we stepped up growth Investments, as discussed on the Q2 call and increase legal reserves by 24 million, we still generated 616 million in adjusted Evita for the quarter up 3% year-over-year for an adjusted Evita margin of 13.8%
Non-gaap diluted EPS grew 4% to 3 dollars. 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 multi-billion 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 factors.
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 and civil revenues increase 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 help Drive record, non-gaap operating income margin of 25.7%, along with some non-recurring items across the portfolio, including a prior period, incentive award pickup inequitable 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 is product delivery shifted into Q4.
And we increase investments to accelerate our AI deployment.
The energy infrastructure, business that Tom highlighted once again, led the sector in growth and profitability.
Single to low double digit growth.
Growth was paced by increased volumes and integrated air defense, including the indirect fires protection, capability increment to 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 the Golden Dome and maritime autonomy.
we're still progressing towards sustainable double-digit profitability, in defense systems,
Turning to cash flow in 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 Rd costs.
After the 450 million Debt Pay down and 100 million share repurchase. We ended the quarter with 4.7 billion of debt for a gross, leverage ratio of 2 times 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 purchases 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, Sherry purchases.
Finally onto the forward, outlook on Friday.
Based on our robust performance year to date and confidence. In our positioning, we're enhancing our 2025 Outlook.
Consistent with Tom's, remarks were reaffirming our Revenue guidance of 17 billion to 17.25 billion.
Raising our adjusted. Our margin guidance from mid-13th
Raising our non-GAAP diluted EPS guidance by $0.30 at the midpoint, for a new range of $1.145 to $1.175.
And for reaffirming our operating cash flow. Guidance of approximately 1.65 billion.
Let me provide a little perspective on the guidance.
First with a quarter to go, we left, wider ranges around revenue and EPS than usual.
A proactive hedge against the less predictable government environment.
Second, our team and our diverse portfolio are proving to be exceedingly agile.
We've been able to absorb Topline hits that could approach 3%. Split nearly equally across government, efficiency imperatives and the potential for up to a 3-month shutdown and still slightly improve Revenue. Guidance over the years.
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 forth cash flow, is the 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.
Thank you.
So we draw a question. Simply press star 1 1 again.
As a reminder, please limit yourself to one question per person before getting back into the queue.
At this time, we will pause momentarily to assemble our roster.
The first question comes from the line of can Herbert with RBC, your line is now open.
Accelerate the pace of Acquisitions here.
Yeah, thanks Ken. Yeah, as, 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 Lidos per se, uh, we were very focused on uh share repurchases and capital deployment investing in our growth strategies organically as exemplified by the kudu acquisition uh that we announced last quarter uh 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. Uh, Lidos Topline and bottom line.
We're now focusing on that a little bit more. That's not to say that it's, uh, you know, 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, I will continue to be judicious. We'll continue to be very prudent. Uh, we are, uh, we are focused on a uh, a a holistic approach to uh, the capital deployment. And we're always going to have the hurdle rates and, uh, 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.
Thank you.
Thank you. Our next question, coming from the line of Chile with Jeffrey, s and Stalin.
Um good morning Tom and Chris and congratulations on great results. Um maybe if we could talk about a 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 those 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. Yeah. We're very, very proud of, uh, our defense systems business. And, you know, frankly, uh, I'm happy to highlight some of the opportunities that we see, uh, that were leveraging in that business. We're we're tracking about 10 different franchise programs that we expect to deliver about 15 billion dollars in potential value over the next 5 years. These are programs like uh, are and base defense systems counter uas systems Hypersonic missiles are Black Arrow, small Crews missile that you may have read about in the press, or heard about and non-kinetic uh effects for counter uas. Uh,
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, uh, increase the size and lethality of the US Navy. And I'm very proud that, uh, both in Australia and the UK, we have corollary unmanned autonomous vehicle programs that have Synergy with what we're doing here in the US. So all in all, we see a tremendous pivot for our defense business from
heavy in the R&D and heavy in the, uh, Seed corn, if you will. And now really pivoting to lrip and programs of Records, which has always been our plan since we acquired, uh, our defense Tech business some years ago with that Christian want to talk a little bit about the shutdown. Yeah, sure. Seila. Um, you know, obvious obviously it's been, you know, a year where we've had to overcome a lot of twists and turns and specific to your, your question, around our fed portfolio. Actually, I think it's proving to be quite quite resilient, you know, our teams have been able to execute in this environment um exceedingly agile in an agile way and you know it's mostly impacted our digital business but we still are able to deliver uh double digit. I'm sorry. Mid single digit growth in our um, 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 and on
contract growth and you look beyond that, you see that, uh, the missions we perform for our veterans, uh, benefits Administration are, you know, Mission essential and those areas the demand continues to be a very robust and obviously our FAA business
Will continue to be nimble there, but, uh, it's been holding up quite nicely in this environment.
Great. Thank you. Thank you.
Thank you.
Our next question comes from the line of Peter Armand with bear. The Line is now open.
Hey, Peter.
Got there, Peter.
Please check. Do you guys got me now. Okay, there you are.
I'm sorry about that. Yeah, good morning, Tom Chris, nice results. Um hey Chris could you talk a little bit about um you know you've done a great job guys expanding margins in the health and civil uh segment just kind of the sustainability, obviously the record uh, examinations volume, obviously being a part of that all. But just how do you think about the business? Just sustaining these levels going forward? Thanks. Yeah. Sure thing Peter, I mean the again, the team has been knocking it out of the park there and you know, it's the portfolio that we have differentiated ourselves through Innovation uh and investment ongoing investment around, you know, the quality and the efficiency of care timeliness, all of the key metrics, the customers really prioritizing. So we've been able to stay ahead of that curve. And, you know, 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, you know, the team is looking Beyond, just what's going on in the BBA business? Obviously we're, you know, focused on our growth, pillar their expanding into Rural and Behavioral Health Care in other areas. And there's a very robust set of opportunities as we're looking at, uh, funding and, you know, the federal and state levels, uh, through CMS that we're looking to figure out how we can help those those customers expand. And meet their needs around exam, delivery tella, Health, Etc. So, you know, this team, uh, I wouldn't bet against them. They've performed time and again and and we have, you know, given ourselves the opportunity to really turbocharge the investments in Ai and Innovation to ensure that we can meet that mission. Um, head on and deliver robust margins into the future. Yeah. And Peter, if you don't mind, I'm I'm going to pile on here. Just to give a little shout out to our customer. Uh, this Administration has made it a focus to serve our nation's veterans and to, uh, work down the backlog.
Of uh, Health exams that are veterans need to access the benefits that they deserve and because we've been uh, investing in this business for years.
We have the capacity to serve that need uh, but uh we're 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 for years to come. So, we're we're very bullish on, uh, leaning into this environment, and continuing to have a very robust, uh, health and civil business, as a part of the light, of course, portfolio.
Appreciate all the call. Thanks Tom Chris, thank you.
Thank you.
Our next question.
Is from.
Truest your line is now open.
Thank you. Uh, I I wondered if we could get your view of your, uh,
Submitted bid expectations for for next year. And I want to shut down 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, uh, growth might look like in those numbers as we get into 26. Yeah. So, as, as we, uh, discussed on the call, Toby, we we are very happy with the volume of business that is in our pipeline. Uh, we've got, as we said, 69 billion dollars of near-term, uh, efforts that we
Are tracking and in our 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 uh, slowdown in customer decisions in in in, in that pipeline because of the government shutdown.
products and services across the whole of Lidos, whether that's
FAA or TSA or Department of Homeland, Security, or the dod, uh, 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. Uh, team is very actively pursuing them and Toby, add. I mean, obviously early in the year, you know, we had to Pivot because there were some things that we were pursuing that, uh, you know, got re prioritized by the customer. But uh, since that time as Tom just talked about momentum has been building the activity levels been elevated and you know, we expect next year to have a a submittal year that exceeds this year. Overall, that's that's the goal in the plan and it's a nice mix of. You know, are there? There are some recompete out there that we're chasing of course but uh a lot of new work and you know with the backdrop against a set of wind rates that have continued to hold up quite well, we're very pleased with where those are. Uh, you know, it's a good recipe for success.
I appreciate the elaboration. Thank you. Thanks got Toby.
Our next question, call from the line of Johnson Sigmund with stifel your line is now open.
Morning, Tom, Chris. Thanks for the question.
Um, just the health side on, the medical exam has been a real nice source of strength. Just can you give us a early preview of how you're thinking about how that holds up uh, next year and any kind of changes you see in today's environment uh possibly impacting that positively or negatively. Thank you. Yeah. Hey Jonathan so um you know again the trends have been been strong there of course and you know the customer. I mean the administration really had a focus on driving down the backlog of age claims and we've been slowing slow slowly chipping away at that all year. The trends are good but we're not at that goal. So the demand signal uh we think will remain elevated. Um you may be tracking again that they did introduce a fourth provider in some of the regions and you know, we're well aware of that. So you know that's an area that uh uh you have to stay ahead of the competition through, you know, Innovation and Technology great performance. Good customer satisfaction and we'll continue to prioritize those things. So I'd say, you know, next year's a year
Here that, uh, it'd be difficult to add to the capacity that we're seeing right now, uh, given that fourth vendor, but sustaining, the levels of performance is, you know, our expectation and then building off of that by expanding into these other areas that are part of our Managed Health Services platform. So, uh, the exam businesses in great shape, we're already looking ahead to, you know, the follow on the recompete, that happens at the end of 2026. So the team's been shaping towards that for, you know, ever since the last contract was awarded. So you know, we're we're prioritizing this. This is a really important part of our business and, you know, we're in a great spot.
Thank you very much. Thank you.
Thank you.
Our next question comes from Gavin Parsons with UBS, the Line is now open.
Thanks morning. Hey, Gavin
First, I just love to clarify what you're assuming for the the shutdown impact in for you. And then second would would love to just um, hear a little bit more on on where you're focusing investment and how we see that uh come through the financials. Thanks.
Yeah, sure Gavin uh, you know, before I turn it over to Chris to go over the specifics of, of our guidance and what we're assuming on shutdown. I I really do want to uh, foot Stomp, The thanks to the Lidos who have been leaning into this environment. And, you know, it is, it is no uh, small feat that we've been able to overcome the shutdown. And
Doge headwinds of 2025, uh, almost holistically. I, I mean, again just to put it in perspective. This is our second guidance raise for the year and, uh, We've we've been, uh, able to hold our Revenue guidance throughout that is that is, uh, that is directly to the, uh, spirit of, uh, 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 Lidos portfolio. It's not that we are a 1 trick pony and we're we're totally beholden to 1 type of business that has been more affected by Doge and
We had the opportunity to lean on other aspects of the portfolio as the year unfolds. Chris do you want to?
Underscore the the guidance sure. Uh, thanks. Thanks Gavin. So, you know, Gavin, as we said in a prepared remarks, we left a little wider ranges because of, you know, the uncertainty and the environment, we're obviously all hopeful that the shutdown comes to an end here quickly. Um, and I think if that were to be the case, you would see us trending towards the higher end of the, the guidance ranges that we put out, uh, for EPs and revenue, but we left a little bit, wider range to accommodate the risk that it extends. Um, you know, towards the end of the year, uh, don't expect that to be the case, but there's always that potential and and the 1 area that again, probably the least direct control over is cash. If the shutdown goes longer, even if it uh, ends here in the late in the fourth quarter, you know there's always risk that some of the the collections uh do leak into 2026, it'll all show up in time but you know that's why we didn't change our cash guidance at this point in time. So I think we've accommodated uh you know, a variety of outcomes.
Were were hopeful that, um, you know, 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, you know, we've had stepped up technology being in this position. Having built the capacity in the business with this High margins in, in great returns as afforded us the ability and it's perfect.
Timing. Because this this environment, you know, the customers looking for proven solutions to deploy. Um you know in and so we've been able to lean into uh investing in you know, 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. And in a number of areas, we call it our Innovation fund, where Lidos is putting a lot of its own resources, not company R&D, uh, funded R&D into this and, uh, and I think those things will really allow us to, you know, hit the ground running into 26 on an accelerated basis.
Thank you very much, thanks.
Hey um, thanks very much and uh good morning. Good morning.
Just to, um, to to clarify, uh, um, a little bit more on that last question. But when we think about the, the programs that you're talking about, moving from, uh, R&D towards production, the the the the capital investment the, the capacity to to ramp up on the types of opportunities that you're talking about that that all um exists already and and I guess related
It's that it looks like this year is probably going to underrun um to some degree. The the capex forecast that we had back at at the beginning of the year. Um, do do we think about that as reflecting some some investment that's maybe moved to Future periods or um was the the initial Outlook just a little bit uh a little bit conservative.
Yeah, thanks for the question. The the uh,
Yes, the the majority of the capex, we need to uh facilitate for the production programs. I mentioned has been made and at the same time uh I 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 facilitate for the customer pull. We're in a very unique situation where this Administration is very focused on lethality for select uh products and solutions. We meet the moment with our uh, defense business that has
uh,
very, very specific lethal production programs that are meeting the moment for base defense counter uas, uh small Crews missiles and and and and and the like. And so uh we're going to be a little bit more comfortable with a higher capex rate in our Defence business, but on the whole of Lidos keeping that within uh capex expenditures.
Some of that uh 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, um, Investments, including, you know, what's going on with our, 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 fitting 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 if the needs arise. But we'll certainly ensure that those incremental Investments, We Believe are going to generate a tractor to return for our shareholders.
Great. Thank you very much. You thank you. Seth.
Thank you.
Our next question.
um, Colin Canfield with canceled his child, the let us know, open
Hey, thank you for the question.
Because we think about normalizing for shutdown results and the bridge from this year's mid to go digital organic performance for next year.
water kind of some of the equipment and takes for contracts that you would flag. As we think about the building blocks for Mid single digits, organic growth to potentially High single digit organic growth next year. Thank you.
Yeah hey Colin, I I think um you know 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, you know, as Tom laid out, I think you can expect to see our defense systems business leading the way as an area or 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 in going into 2026. Uh, we talked about our large, uh, award in the intelligence Community. This quarter, that we'll be ramping going into next year. So there's several things that have momentum behind them. Not to mention the, you know, additional opportunities that may emerge through golden dome funding and you know, air traffic control and of course, border security juxtaposed against that, um, you know, it has been a year of Doge and we've now
Navigated that well and you know, there'll be some programs that ultimately attrit out of the portfolio or have, you know, ended over the course of the year. Uh, we did sell a small business in varrock that you heard us talk about. That's very modest. I think of that as a 40 billion dollar Topline 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 you know, will ultimately come out of the portfolio in 2026. So we, we
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 a little premature for that, you know, uh, a little, a little context. Also Colin, um, as we came out of Doge and, uh, we started to gain traction on the 1LE B law.
Uh, 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 uh 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 uh, and activity on all of these programs and more because uh, the future is not waiting. Uh, 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 uh, those things will unfold and how those cards will will come to play. Uh, is is something we're uh, still calculating. And as we come out of the shut,
Down. We'll, we'll put together our 26 plan and and then we'll have something to talk to you about about what we expect next year.
Got it. Thank you for the call.
You bet.
Thank you.
Our next question comes from Mariana Paris. Mora with Bank of America, your line is now open.
Hi, good morning. This is Samantha styro. I'm from Ariana today. Samantha, let me just talk a little bit about your international business where we seeing some pockets of strength or some slowness.
Countries. We have a relatively large, uh, business and about 2,000 employees. Uh, we've got a leadership team in place in both of those countries that were very proud of and very confident in and they're both, uh, very aggressively figuring out how they expand their business in line with our Northstar 2030 strategy. This is a point, uh, that I I make internally all the time. Some people say, ah, International is not a growth area for Lidos to which I answer oh contrar. Uh, we have a domestic Homeland defense business in the UK 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 are the key to how we're going to grow Lidos regardless of what country or what Homeland you're discussing growing it in. So we're very bullish about growing our Australia and the UK business, we're going to be opportunistic elsewhere in the world but not silly because our business is 1 where you have to be dohuk organic and uh and and local. You can't just parachute in and sell more products from a production line, uh, in, in the United States. And so,
Uh International remains a part of our growth story consistent with our Northstar 2030, uh, growth pillars. I hope that helps
Yeah, fantastic.
Thank you.
Our next question comes from the line of Scott makers with Milius research and is now open.
Morning, Tom and Chris. Very nice. Thanks Scott.
Tom you talking about the franchise program opportunities at your defense Tech business and we've seen a lot of things tech companies, raise Capital at lofty valuations that don't have the track record of Dianetics. So does it make sense to potentially explore spinning off? Dianetics? Given that it might attract a higher valuation outside of the broader loss portfolio.
I think, uh, the corollary is also true, uh, where we have a golden jewel in our Dianetics and defense tech business, uh, that as people, uh, 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 Lidos on the whole a little bit more, uh, robustly. So, I'm looking at it from the other side of the straw, if you will, that says I've got this wonderful asset: it's called Lidos Dianetics in Huntsville, Alabama. We're growing a business around it because we have a defense.
Right. Thank you.
I know with TD, security if your line is now open.
Good morning, welcome. Thanks.
Good morning and good results, guys. Thank you.
I was wondering if you could comment on, recompete next year. I know you mentioned the, uh, the VBA contract. But
if you could just call out what percentage of sales and if there are any, um,
Lumpier, uh, recompete out there that we should be monitoring.
There was an expanded uh scope opportunity there but still a key recompete for our Commercial International Business. Those are 2 of the larger ones um you know, running running through the list. Um,
You know, I'm just eyeballing here. If anything else of consequence, we've got a CBP opportunity. But you know, I'd say Beyond those 2. Actually. It lines up to be a pretty nice year, more weighted towards new business and takeaways and recompense. 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.
Thank you.
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