Leidos Holdings, Inc. - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-33072


			Leidos Holdings, Inc.
			(Exact name of registrant as specified in its charter)

Delaware

20-3562868

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

1750 Presidents Street,

Reston,

Virginia

20190

(Address of principal executive offices)

(Zip Code)

(571) 526-6000

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock, par value $.0001 per share

LDOS

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares issued and outstanding of each of the issuer’s classes of common stock as of October 25, 2022, was 136,689,557 shares of common stock ($.0001 par value per share).

LEIDOS HOLDINGS, INC.

FORM 10-Q

TABLE OF CONTENTS


Part I		Page
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Income	2
	Condensed Consolidated Statements of Comprehensive Income	3
	Condensed Consolidated Statements of Equity	4
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
	Note 1–Basis of Presentation and Summary of Significant Accounting Policies	7
	Note 2–Revenues from Contracts with Customers	9
	Note 3–Acquisitions, Divestitures, Goodwill and Intangible Assets	12
	Note 4–Fair Value Measurements	14
	Note 5–Derivative Instruments	15
	Note 6–Debt	16
	Note 7–Accumulated Other Comprehensive Income (Loss)	18
	Note 8–Earnings Per Share	18
	Note 9 –Income Taxes	19
	Note 1 0 –Business Segments	19
	Note 1 1 –Commitments and Contingencies	21
	Note 1 2 –Subsequent Events	22
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23
	Overview	23
	Business Environment and Trends	24
	Results of Operations	24
	Bookings and Backlog	27
	Liquidity and Capital Resources	27
	Off-Balance Sheet Arrangements	29
	Guarantor and Issuer of Guaranteed Securities	30
	Contractual Obligations and Commitments	30
	Critical Accounting Policies	30
	Recently Adopted and Issued Accounting Standards	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
Part II
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	33
Signatures		34

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	September 30, 2022		December 31, 2021
	(in millions)
Assets:
Cash and cash equivalents	$	807	$	727
Receivables, net	2,284		2,189
Inventory, net	286		274
Other current assets	464		429
Total current assets	3,841		3,619
Property, plant and equipment, net	671		670
Intangible assets, net	977		1,177
Goodwill	6,618		6,744
Operating lease right-of-use assets, net	593		612
Other long-term assets	399		439
Total assets	$	13,099	$	13,261

Liabilities:
Accounts payable and accrued liabilities	$	2,301	$	2,141
Accrued payroll and employee benefits	813		605
Short-term debt and current portion of long-term debt	1,027		483
Total current liabilities	4,141		3,229
Long-term debt, net of current portion	3,975		4,593
Operating lease liabilities	591		589
Deferred tax liabilities	24		239
Other long-term liabilities	229		267
Total liabilities	8,960		8,917

Commitments and contingencies (Note 11)

Stockholders’ equity:
Common stock, $0.0001 par value, 500 million shares authorized, 137 million and 140 million shares issued and outstanding at September 30, 2022, and December 31, 2021, respectively	—		—
Additional paid-in capital	1,982		2,423
Retained earnings	2,239		1,880
Accumulated other comprehensive loss	(135)		(12)
Total Leidos stockholders’ equity	4,086		4,291
Non-controlling interest	53		53
Total stockholders' equity	4,139		4,344
Total liabilities and stockholders' equity	$	13,099	$	13,261

See accompanying notes to condensed consolidated financial statements.

Table of Contents

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Three Months Ended				Nine Months Ended
	September 30, 2022		October 1, 2021		September 30, 2022		October 1, 2021
	(in millions, except per share amounts)
Revenues	$	3,608	$	3,483	$	10,699	$	10,246
Cost of revenues	3,095		2,942		9,136		8,740
Selling, general and administrative expenses	233		233		727		625
Bad debt expense (recoveries)	(1)		(1)		3		(11)
Acquisition, integration and restructuring costs	4		6		12		21
Asset impairment charges	—		3		3		3
Equity earnings of non-consolidated subsidiaries	(4)		(5)		(5)		(14)
Operating income	281		305		823		882
Non-operating expense:
Interest expense, net	(50)		(47)		(148)		(138)
Other (expense) income, net	(10)		2		(7)		1
Income before income taxes	221		260		668		745
Income tax expense	(57)		(52)		(155)		(162)
Net income	$	164	$	208	$	513	$	583
Less: net income attributable to non-controlling interest	2		3		5		4
Net income attributable to Leidos common stockholders	$	162	$	205	$	508	$	579

Earnings per share:
Basic	$	1.18	$	1.45	$	3.71	$	4.11
Diluted	1.17		1.43		3.68		4.05

See accompanying notes to condensed consolidated financial statements.

Table of Contents

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	Three Months Ended				Nine Months Ended
	September 30, 2022		October 1, 2021		September 30, 2022		October 1, 2021
	(in millions)
Net income	$	164	$	208	$	513	$	583
Foreign currency translation adjustments	(75)		(29)		(158)		(12)
Unrecognized gain on derivative instruments	18		4		54		18
Pension adjustments	1		—		(19)		—
Total other comprehensive (loss) income, net of taxes	(56)		(25)		(123)		6
Comprehensive income	108		183		390		589
Less: net income attributable to non-controlling interest	2		3		5		4
Comprehensive income attributable to Leidos common stockholders	$	106	$	180	$	385	$	585

See accompanying notes to condensed consolidated financial statements.

Table of Contents

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)


	Shares of common stock	Additional paid-in capital		Retained earnings		Accumulated other comprehensive income (loss)		Leidos stockholders' equity		Non-controlling interest		Total stockholders' equity
	(in millions, except for per share amounts)
Balance at December 31, 2021	140	$	2,423	$	1,880	$	(12)	$	4,291	$	53	$	4,344
Net income	—	—		175		—		175		2		177
Other comprehensive income, net of taxes	—	—		—		32		32		—		32
Issuances of stock	1	15		—		—		15		—		15
Repurchases of stock and other	(4)	(526)		—		—		(526)		—		(526)
Dividends of $0.36 per share	—	—		(48)		—		(48)		—		(48)
Stock-based compensation	—	16		—		—		16		—		16
Capital distributions to non-controlling interest	—	—		—		—		—		(2)		(2)
Balance at April 1, 2022	137	$	1,928	$	2,007	$	20	$	3,955	$	53	$	4,008
Net income	—	—		171		—		171		1		172
Other comprehensive loss, net of taxes	—	—		—		(99)		(99)		—		(99)
Issuances of stock	—	10		—		—		10		—		10
Repurchases of stock and other	—	(2)		—		—		(2)		—		(2)
Dividends of $0.36 per share	—	—		(50)		—		(50)		—		(50)
Stock-based compensation	—	19		—		—		19		—		19
Capital distributions to non-controlling interest	—	—		—		—		—		(1)		(1)
Balance at July 1, 2022	137	$	1,955	$	2,128	$	(79)	$	4,004	$	53	$	4,057
Net income	—	—		162		—		162		2		164
Other comprehensive loss, net of taxes	—	—		—		(56)		(56)		—		(56)
Issuances of stock	—	13		—		—		13		—		13
Repurchases of stock and other	—	(4)		—		—		(4)		—		(4)
Dividends of $0.36 per share	—	—		(51)		—		(51)		—		(51)
Stock-based compensation	—	18		—		—		18		—		18
Capital distributions to non-controlling interest	—	—		—		—		—		(2)		(2)
Balance at September 30, 2022	137	$	1,982	$	2,239	$	(135)	$	4,086	$	53	$	4,139

See accompanying notes to condensed consolidated financial statements.

Table of Contents

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)


	Shares of common stock	Additional paid-in capital		Retained earnings		Accumulated other comprehensive income (loss)		Leidos stockholders' equity		Non-controlling interest		Total stockholders' equity
	(in millions, except for per share amounts)
Balance at January 1, 2021	142	$	2,580	$	1,328	$	(46)	$	3,862	$	9	$	3,871
Net income	—	—		205		—		205		—		205
Other comprehensive income, net of taxes	—	—		—		9		9		—		9
Issuances of stock	—	14		—		—		14		—		14
Repurchases of stock and other	(1)	(123)		—		—		(123)		—		(123)
Dividends of $0.34 per share	—	—		(49)		—		(49)		—		(49)
Stock-based compensation	—	15		—		—		15		—		15
Capital contributions from non-controlling interest	—	—		—		—		—		38		38
Balance at April 2, 2021	141	$	2,486	$	1,484	$	(37)	$	3,933	$	47	$	3,980
Net income	—	—		169		—		169		1		170
Other comprehensive income, net of taxes	—	—		—		22		22		—		22
Issuances of stock	1	9		—		—		9		—		9
Repurchases of stock and other	—	(3)		—		—		(3)		—		(3)
Dividends of $0.34 per share	—	—		(48)		—		(48)		—		(48)
Stock-based compensation	—	17		—		—		17		—		17
Capital contributions from non-controlling interest	—	—		—		—		—		1		1
Balance at July 2, 2021	142	$	2,509	$	1,605	$	(15)	$	4,099	$	49	$	4,148
Net income	—	—		205		—		205		3		208
Other comprehensive loss, net of taxes	—	—		—		(25)		(25)		—		(25)
Issuances of stock	—	11		—		—		11		—		11
Repurchases of stock and other	(2)	(140)		—		—		(140)		—		(140)
Dividends of $0.36 per share	—	—		(52)		—		(52)		—		(52)
Stock-based compensation	—	17		—		—		17		—		17
Net capital distributions to non-controlling interest	—	—		—		—		—		(1)		(1)
Balance at October 1, 2021	140	$	2,397	$	1,758	$	(40)	$	4,115	$	51	$	4,166

See accompanying notes to condensed consolidated financial statements.

Table of Contents

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine Months Ended
	September 30, 2022		October 1, 2021
	(in millions)
Cash flows from operations:
Net income	$	513	$	583
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization	249		244
Stock-based compensation	53		49
Asset impairment charges	3		3
Deferred income taxes	(221)		4
Other	21		(11)
Change in assets and liabilities, net of effects of acquisitions:
Receivables	(138)		(103)
Other current assets and other long-term assets	132		161
Accounts payable and accrued liabilities and other long-term liabilities	(57)		(172)
Accrued payroll and employee benefits	217		83
Income taxes receivable/payable	109		(20)
Net cash provided by operating activities	881		821
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired	(2)		(622)
Divestiture of a business	15		—
Payments for property, equipment and software	(76)		(71)
Net proceeds from sale of assets	6		—
Other	2		—
Net cash used in investing activities	(55)		(693)
Cash flows from financing activities:
Proceeds from debt issuance	380		380

Repayments of borrowings	(459)		(80)
Dividend payments	(149)		(149)
Repurchases of stock and other	(532)		(266)
Net capital (distributions to) contributions from non-controlling interests	(5)		38
Proceeds from issuances of stock	35		33
Net cash used in financing activities	(730)		(44)
Net increase in cash, cash equivalents and restricted cash	96		84
Cash, cash equivalents and restricted cash at beginning of period	875		687
Cash, cash equivalents and restricted cash at end of period	971		771
Less: restricted cash at end of period	164		184
Cash and cash equivalents at end of period	$	807	$	587

Supplementary cash flow information:
Cash paid for income taxes, net of refunds	$	166	$	179
Cash paid for interest	136		128
Non-cash investing activity:
Property, plant and equipment additions	$	7	$	1
Non-cash financing activity:
Finance lease obligations	$	1	$	50

See accompanying notes to condensed consolidated financial statements.

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1–Basis of Presentation and Summary of Significant Accounting Policies

Nature of Operations and Basis of Presentation

Leidos Holdings, Inc. ("Leidos"), a Delaware corporation, is a holding company whose direct 100%-owned subsidiary and principal operating company is Leidos, Inc. Leidos is a FORTUNE 500® technology, engineering, and science company that provides services and solutions in the defense, intelligence, civil and health markets, both domestically and internationally. Leidos' customers include the U.S. Department of Defense ("DoD"), the U.S. Intelligence Community, the U.S. Department of Homeland Security, the Federal Aviation Administration, the Department of Veterans Affairs and many other U.S. civilian, state and local government agencies, foreign government agencies and commercial businesses. Unless indicated otherwise, references to "we," "us" and "our" refer collectively to Leidos Holdings, Inc. and its consolidated subsidiaries. We operate in three reportable segments: Defense Solutions, Civil and Health. Additionally, we separately present the unallocable costs associated with corporate functions as Corporate.

We have a controlling interest in Mission Support Alliance, LLC ("MSA"), a joint venture with Centerra Group, LLC. We also have a controlling interest in Hanford Mission Integration Solutions, LLC ("HMIS"), the legal entity for the follow-on contract to MSA's contract and a joint venture with Centerra Group, LLC and Parsons Government Services, Inc. The financial results for MSA and HMIS are consolidated into our unaudited condensed consolidated financial statements. The unaudited condensed consolidated financial statements also include the balances of all voting interest entities in which Leidos has a controlling voting interest ("subsidiaries") and a variable interest entity ("VIE") in which Leidos is the primary beneficiary. The consolidated balances of the VIE are not material to the unaudited condensed consolidated financial statements for the periods presented. Intercompany accounts and transactions between consolidated companies have been eliminated in consolidation.

The accompanying unaudited condensed financial information has been prepared in accordance with the rules of the U.S. Securities and Exchange Commission and accounting principles generally accepted in the United States of America ("GAAP"). Certain disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Management evaluates these estimates and assumptions on an ongoing basis, including those relating to estimated profitability of long-term contracts, indirect billing rates, allowances for doubtful accounts, inventories, right-of-use assets and lease liabilities, fair value and impairment of intangible assets and goodwill, income taxes, stock-based compensation expense and contingencies. These estimates have been prepared by management on the basis of the most current and best available information; however, actual results could differ materially from those estimates.

Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. We combined "Capital distributions to non-controlling interests" and "Capital contributions from non-controlling interests" into "Net capital (distributions to) contributions from non-controlling interests" on the condensed consolidated statements of cash flows.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which consist of normal recurring adjustments, necessary for a fair presentation thereof. The results reported in these unaudited condensed consolidated financial statements are not necessarily indicative of the results that may be expected for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K filed on February 15, 2022.

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Accounting Standards Updates ("ASU") Adopted

ASU 2021-08, Business Combinations (Topic 805)

In October 2021, the FASB issued ASU 2021-08, which amends how contract assets and liabilities acquired in a business combination are measured. Current guidance requires contract assets and liabilities to be measured at fair value in accordance with ASC 805, Business Combinations. The amendments in this update remove the requirement to measure contract assets and liabilities at fair value and instead require that they be recognized in accordance with ASC 606, Revenue from Contracts with Customers. The amendments in this update are effective for public business entities for the fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and must be applied prospectively. Early adoption is permitted.

We adopted the requirements of ASU 2021-08 using the prospective method effective the first day of fiscal 2022. For business combinations occurring after adoption, we will measure contract assets and liabilities acquired in accordance with ASC 606.

Accounting Standards Updates Issued But Not Yet Adopted

ASU 2020-04 and ASU 2021-01, Reference Rate Reform (Topic 848)

In March 2020, the FASB issued ASU 2020-04 which provides companies with optional expedients and exceptions to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. This update provides optional expedients for applying accounting guidance to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of the reference rate reform. The amendments in this update are effective for all entities as of March 2020 and can be adopted using a prospective approach no later than December 31, 2022.

In January 2021, the FASB issued ASU 2021-01 which amends the scope of ASU 2020-04. The amendments in this update are elective and provide optional relief for entities with hedge accounting and contract modifications affected by the discounting transition through December 31, 2022. In October 2022, the FASB affirmed a decision to defer the expiration date of this optional relief until December 31, 2024. We anticipate an ASU formalizing this decision to be approved and issued during the last quarter of fiscal 2022. Under this relief, entities may continue to account for contract modifications as a continuation of the existing contract and the continuation of the hedge accounting arrangement. We are currently evaluating the impacts of the reference rate reform. Except for our new $380 million term loan entered into on May 6, 2022 (see "Note 6–Debt"), we currently use the one-month LIBOR for which the rate publication will cease in June 2023.

Changes in Estimates on Contracts

Changes in estimates related to contracts accounted for using the cost-to-cost method of accounting are recognized in the period in which such changes are made for the inception-to-date effect of the changes, with the exception of contracts acquired through a business combination, where the adjustment is made for the period commencing from the date of acquisition.

Changes in estimates on contracts were as follows:


	Three Months Ended				Nine Months Ended
	September 30, 2022		October 1, 2021		September 30, 2022		October 1, 2021
	(in millions, except per share amounts)
Favorable impact	$	36	$	47	$	116	$	115
Unfavorable impact	(29)		(24)		(75)		(72)
Net impact to income before income taxes	$	7	$	23	$	41	$	43

Impact on diluted EPS attributable to Leidos common stockholders	$	0.03	$	0.12	$	0.22	$	0.22

The impact on diluted earnings per share ("EPS") attributable to Leidos common stockholders is calculated using the statutory tax rate.

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Revenue Recognized from Prior Obligations

Revenue recognized from performance obligations satisfied in previous periods was $6 million and $38 million for the three and nine months ended September 30, 2022, respectively, and $17 million and $35 million for the three and nine months ended October 1, 2021, respectively. The changes primarily related to revisions of variable consideration including award and incentive fees, and revisions to estimates at completion resulting from changes in contract scope, mitigation of contract risks or true-ups of contract estimates at the end of contract performance.

Cash and Cash Equivalents

Our cash equivalents are primarily comprised of investments in several large institutional money market accounts, with original maturity of three months or less. At September 30, 2022, and December 31, 2021, $178 million and $138 million, respectively, of outstanding payments were included within "Cash and cash equivalents" and "Accounts payable and accrued liabilities" correspondingly on the condensed consolidated balance sheets.

Restricted Cash

We have restricted cash balances, primarily representing advances from customers that are restricted for use on certain expenditures related to that customer's contract. Restricted cash balances are included as "Other current assets" in the condensed consolidated balance sheets. Our restricted cash balances were $164 million and $148 million at September 30, 2022, and December 31, 2021, respectively.

Note 2–Revenues from Contracts with Customers

Remaining Performance Obligations

Remaining performance obligations ("RPO") represent the expected value of exercised contracts, both funded and unfunded, less revenue recognized to date. RPO does not include unexercised option periods and future potential task orders expected to be awarded under indefinite delivery/indefinite quantity ("IDIQ") contracts, General Services Administration Schedule or other master agreement contract vehicles, with the exception of certain IDIQ contracts where task orders are not competitively awarded and separately priced but instead are used as a funding mechanism, and where there is a basis for estimating future revenues and funding on future anticipated task orders.

As of September 30, 2022, we had $14.3 billion of RPO and expect to recognize approximately 60% and 77% over the next 12 months and 24 months, respectively, with the remainder to be recognized thereafter.

Disaggregation of Revenues

We disaggregate revenues by customer-type, contract-type and geographic location for each of our reportable segments.

Disaggregated revenues by customer-type were as follows:


	Three Months Ended September 30, 2022								Nine Months Ended September 30, 2022
	Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total
	(in millions)
DoD and U.S. Intelligence Community	$	1,559	$	22	$	255	$	1,836	$	4,620	$	62	$	732	$	5,414
Other U.S. government agencies(1)	236		676		372		1,284		686		1,949		1,177		3,812
Commercial and non-U.S. customers	280		151		28		459		869		446		83		1,398
Total	$	2,075	$	849	$	655	$	3,579	$	6,175	$	2,457	$	1,992	$	10,624

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


	Three Months Ended October 1, 2021								Nine Months Ended October 1, 2021
	Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total
	(in millions)
DoD and U.S. Intelligence Community	$	1,513	$	19	$	203	$	1,735	$	4,386	$	45	$	545	$	4,976
Other U.S. government agencies(1)	215		619		450		1,284		724		1,849		1,292		3,865
Commercial and non-U.S. customers	281		121		28		430		859		377		80		1,316
Total	$	2,009	$	759	$	681	$	3,449	$	5,969	$	2,271	$	1,917	$	10,157

(1) Includes federal government agencies other than the DoD and U.S. Intelligence Community, as well as state and local government agencies.

Disaggregated revenues by contract-type were as follows:


	Three Months Ended September 30, 2022								Nine Months Ended September 30, 2022
	Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total
	(in millions)
Cost-reimbursement and fixed-price-incentive-fee	$	1,166	$	442	$	200	$	1,808	$	3,493	$	1,293	$	534	$	5,320
Firm-fixed-price	668		279		389		1,336		1,950		792		1,260		4,002
Time-and-materials and fixed-price-level-of-effort	241		128		66		435		732		372		198		1,302
Total	$	2,075	$	849	$	655	$	3,579	$	6,175	$	2,457	$	1,992	$	10,624


	Three Months Ended October 1, 2021								Nine Months Ended October 1, 2021
	Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total
	(in millions)
Cost-reimbursement and fixed-price-incentive-fee	$	1,230	$	397	$	137	$	1,764	$	3,627	$	1,176	$	361	$	5,164
Firm-fixed-price	540		245		443		1,228		1,619		755		1,254		3,628
Time-and-materials and fixed-price-level-of-effort	239		117		101		457		723		340		302		1,365
Total	$	2,009	$	759	$	681	$	3,449	$	5,969	$	2,271	$	1,917	$	10,157

Disaggregated revenues by geographic location were as follows:


	Three Months Ended September 30, 2022								Nine Months Ended September 30, 2022
	Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total
	(in millions)
United States	$	1,830	$	810	$	655	$	3,295	$	5,429	$	2,340	$	1,992	$	9,761
International	245		39		—		284		746		117		—		863
Total	$	2,075	$	849	$	655	$	3,579	$	6,175	$	2,457	$	1,992	$	10,624

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


	Three Months Ended October 1, 2021								Nine Months Ended October 1, 2021
	Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total
	(in millions)
United States	$	1,778	$	726	$	681	$	3,185	$	5,237	$	2,158	$	1,917	$	9,312
International	231		33		—		264		732		113		—		845
Total	$	2,009	$	759	$	681	$	3,449	$	5,969	$	2,271	$	1,917	$	10,157

Revenues by customer-type, contract-type and geographic location exclude lease income of $29 million and $75 million for the three and nine months ended September 30, 2022, respectively, and $34 million and $89 million for the three and nine months ended October 1, 2021, respectively.

Contract Assets and Liabilities

Performance obligations are satisfied either over time as work progresses or at a point in time. Firm-fixed-price contracts are typically billed to the customer using milestone payments while cost-reimbursable and time and materials contracts are typically billed to the customer on a monthly or bi-weekly basis as indicated by the negotiated billing terms and conditions of the contract. As a result, the timing of revenue recognition, customer billings and cash collections for each contract results in a net contract asset or liability at the end of each reporting period.

Contract assets consist of unbilled receivables, which is the amount of revenue recognized that exceeds the amount billed to the customer, where right to payment is not solely subject to the passage of time. Unbilled receivables exclude amounts billable where the right to consideration is unconditional. Contract liabilities consist of deferred revenue, which represents cash advances received prior to performance for programs and billings in excess of revenue recognized.

The components of contract assets and contract liabilities consisted of the following:


	Balance sheet line item	September 30, 2022		December 31, 2021
		(in millions)
Contract assets - current:
Unbilled receivables	Receivables, net	$	1,028	$	1,022

Contract liabilities - current:
Deferred revenue (1)	Accounts payable and accrued liabilities	$	450	$	364

Contract liabilities - non-current:
Deferred revenue (1)	Other long-term liabilities	$	26	$	24

(1) Certain contracts record revenue net of cost of revenues, and therefore, the respective deferred revenue balance will not fully convert to revenue.

The increase in deferred revenue was primarily due to the timing of advanced payments from customers offset by revenue recognized during the period.

Revenue recognized for the three and nine months ended September 30, 2022, of $17 million and $257 million, respectively, was included as a contract liability at December 31, 2021. Revenue recognized for the three and nine months ended October 1, 2021, of $31 million and $253 million, respectively, was included as a contract liability at January 1, 2021.

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 3–Acquisitions, Divestitures, Goodwill and Intangible Assets

Business Acquisitions

On July 29, 2022, we entered into a definitive agreement to acquire Cobham Aviation Services Australia’s Special Mission business ("Cobham Special Mission") for a preliminary purchase consideration of $310 million Australian dollars, subject to working capital adjustments. Cobham Special Mission provides airborne border surveillance and search and rescue services to the Australian Federal Government.

On September 21, 2021, we completed an immaterial strategic business acquisition for purchase consideration of approximately $36 million. In connection with the transaction, we recognized an $8 million program intangible asset and goodwill of $25 million.

Aviation & Missile Solutions LLC ("AMS") Divestiture

On November 22, 2021, we signed a definitive agreement within our Defense Solutions segment to dispose of its AMS business in order to focus on leading-edge and technologically advanced services, solutions and products. The net sales price was $15 million, and the divestiture was completed on April 29, 2022.

Goodwill

The following table presents changes in the carrying amount of goodwill by reportable segment:


	Defense Solutions		Civil		Health		Total
	(in millions)
Goodwill at January 1, 2021	$	3,300	$	2,047	$	966	$	6,313
Acquisitions of businesses	425		5		—		430
Divestiture of a business	(1)		—		—		(1)
Goodwill re-allocation	(17)		17		—		—
Foreign currency translation adjustments	(26)		28		—		2
Goodwill at December 31, 2021	$	3,681	$	2,097	$	966	$	6,744
Divestiture of a business	(6)		—		—		(6)
Foreign currency translation adjustments	(62)		(58)		—		(120)
Goodwill at September 30, 2022	$	3,613	$	2,039	$	966	$	6,618

We evaluate qualitative factors that could cause us to believe the estimated fair value of each of our reporting units may be lower than the carrying value and trigger a quantitative assessment, including, but not limited to (i) macroeconomic conditions, (ii) industry and market considerations, (iii) our overall financial performance, including an analysis of our current and projected cash flows, revenues and earnings, (iv) a sustained decrease in share price and (v) other relevant entity-specific events including changes in management, strategy, partners or litigation.

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, the estimated fair value of the Security Enterprise Solutions reporting unit within the Civil reportable segment exceeded the carrying value by approximately 6% as of the most recent assessment date. In the event that there are significant unfavorable changes to forecasted cash flows of the reporting unit (including if the impact of COVID-19 on passenger travel levels is more prolonged or severe than what is incorporated into our forecast), terminal growth rates or the cost of capital used in the fair value estimates, we may be required to record a material impairment of goodwill at a future date. We did not identify any qualitative factors that would trigger a quantitative goodwill impairment test during the nine months ended September 30, 2022. There were no impairments to goodwill during the nine months ended September 30, 2022, and October 1, 2021.

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Intangible Assets

Intangible assets, net consisted of the following:


	September 30, 2022						December 31, 2021
	Gross carrying value		Accumulated amortization		Net carrying value		Gross carrying value		Accumulated amortization		Net carrying value
	(in millions)
Finite-lived intangible assets:
Programs	$	1,697	$	(967)	$	730	$	1,722	$	(830)	$	892
Software and technology	218		(130)		88		230		(121)		109
Customer relationships	84		(21)		63		97		(18)		79
Backlog	—		—		—		38		(37)		1
Trade names	1		(1)		—		1		(1)		—
Total finite-lived intangible assets	2,000		(1,119)		881		2,088		(1,007)		1,081
Indefinite-lived intangible assets:
In-process research and development ("IPR&D") (1)	92		—		92		92		—		92
Trade names	4		—		4		4		—		4
Total indefinite-lived intangible assets	96		—		96		96		—		96
Total intangible assets	$	2,096	$	(1,119)	$	977	$	2,184	$	(1,007)	$	1,177

(1) IPR&D assets are indefinite-lived at the acquisition date until placed into service, at which time such assets will be reclassified to a finite-lived amortizable intangible asset.

Amortization expense was $57 million and $173 million for the three and nine months ended September 30, 2022, respectively, and $63 million and $173 million for the three and nine months ended October 1, 2021, respectively.

Program intangible assets are amortized over their respective estimated useful lives in proportion to the pattern of economic benefit based on expected future discounted cash flows. Backlog and finite-lived trade name intangible assets are amortized on a straight-line basis over their estimated useful lives. Customer relationships and software and technology intangible assets are amortized either on a straight-line basis over their estimated useful lives or over their respective estimated useful lives in proportion to the pattern of economic benefit based on expected future discounted cash flows, as deemed appropriate.

The estimated annual amortization expense as of September 30, 2022, was as follows:


Fiscal year ending
	(in millions)
2022 (remainder of year)	$	56
2023	199
2024	147
2025	119
2026	94
2027 and thereafter	266
	$	881

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 4–Fair Value Measurements

The accounting standard for fair value measurements establishes a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: observable inputs such as quoted prices in active markets (Level 1); inputs other than quoted prices in active markets that are observable, either directly or indirectly, or quoted prices that are not active (Level 2); and unobservable inputs in which there is little or no market data (e.g., discounted cash flow and other similar pricing models), which requires us to develop our own assumptions about the assumptions that market participants would use in pricing the asset or liability (Level 3).

The financial instruments measured at fair value on a recurring basis primarily consisted of the following:


	September 30, 2022				December 31, 2021
	Carrying value		Fair value		Carrying value		Fair value
	(in millions)
Financial assets:
Derivatives	$	20	$	20	$	—	$	—
Financial liabilities:
Derivatives	$	16	$	16	$	53	$	53

As of September 30, 2022, our derivatives primarily consisted of the cash flow interest rate swaps on $1.0 billion of the variable rate senior unsecured term loan and a foreign currency forward contract (see "Note 5–Derivative Instruments"). The fair value of the cash flow interest rate swaps and the foreign currency forward contract is determined based on observed values for underlying interest rates on the LIBOR yield curve, the underlying interest rate and the underlying foreign exchange rates (Level 2 inputs).

The carrying amounts of our financial instruments, other than derivatives, which include cash equivalents, accounts receivable, accounts payable and accrued expenses, are reasonable estimates of their related fair values.

As of September 30, 2022, and December 31, 2021, the fair value of debt was $4.6 billion and $5.4 billion, respectively, and the carrying amount was $5.0 billion and $5.1 billion, respectively (see "Note 6–Debt"). The fair value of long-term debt is determined based on current interest rates available for debt with terms and maturities similar to our existing debt arrangements (Level 2 inputs).

On May 7, 2021, and January 14, 2021, non-financial instruments measured at fair value on a non-recurring basis were recorded in connection with the completed acquisitions of Gibbs & Cox and 1901 Group, LLC. The fair values of the assets acquired and liabilities assumed were determined using Level 3 inputs. As of September 30, 2022, we did not have any assets or liabilities measured at fair value on a non-recurring basis.

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 5–Derivative Instruments

We manage our risk to changes in interest rates through the use of derivative instruments. We do not hold derivative instruments for trading or speculative purposes. For variable rate borrowings, we use fixed interest rate swaps, effectively converting a portion of the variable interest rate payments to fixed interest rate payments. These swaps are designated as cash flow hedges. We transact business globally and are subject to risks associated with changing foreign currency exchange rates. We enter into foreign currency forward contracts in order to mitigate fluctuations in our earnings and cash flows due to changing rates. The foreign currency forward contracts are not designated as hedges and do not qualify for hedge accounting.

The fair value of the interest rate swaps and foreign currency forward contracts was as follows:


	Balance sheet line item	September 30, 2022		December 31, 2021
		(in millions)
Asset derivatives:
Cash flow interest rate swaps	Other long-term assets	$	20	$	—
Liability derivatives:
Cash flow interest rate swaps	Other long-term liabilities	$	—	$	53
Foreign currency forward contracts	Accounts payable and accrued liabilities	16		—

During the three months ended September 30, 2022, we entered into a foreign currency forward contract to offset foreign currency fluctuations of the $310 million Australian dollar preliminary purchase price for the Cobham Special Mission acquisition against the U.S. dollar. As of September 30, 2022, we recorded a $16 million unrealized loss due to the exchange rate movements between the Australian dollar compared to the U.S. dollar. The loss was recorded within Corporate and presented in "Other (expense) income, net" on the condensed consolidated statements of income.

The cash flows associated with the interest rate swaps are classified as operating activities in the condensed consolidated statements of cash flows.

Cash Flow Hedges

We have interest rate swap agreements to hedge the cash flows of $1.0 billion of the variable rate senior unsecured term loan (the "Variable Rate Loan"). These interest rate swap agreements have a maturity date of August 2025 and a fixed interest rate of 3.00%. The objective of these instruments is to reduce variability in the forecasted interest payments of the Variable Rate Loan, which are based on the LIBOR rate. Under the terms of the interest rate swap agreements, we will receive monthly variable interest payments based on the one-month LIBOR rate and will pay interest at a fixed rate.

The interest rate swap transactions were accounted for as cash flow hedges. The gain/loss on the swaps is reported as a component of other comprehensive income (loss) and is reclassified into earnings when the interest payments on the underlying hedged items impact earnings. A qualitative assessment of hedge effectiveness is performed on a quarterly basis, unless facts and circumstances indicate the hedge may no longer be highly effective.

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The effect of the cash flow hedges on other comprehensive income (loss) and earnings for the periods presented was as follows:


	Three Months Ended				Nine Months Ended
	September 30, 2022		October 1, 2021		September 30, 2022		October 1, 2021
	(in millions)
Total interest expense, net presented in the condensed consolidated statements of income in which the effects of cash flow hedges are recorded	$	50	$	47	$	148	$	138

Amount recognized in other comprehensive income (loss)	$	21	$	—	$	57	$	9
Amount reclassified from accumulated other comprehensive income (loss) to interest expense, net	$	2	$	5	$	13	$	14

We expect to reclassify net income of $13 million from accumulated other comprehensive loss into earnings during the next 12 months.

Note 6–Debt

Our debt consisted of the following:


	Stated interest rate	Effective interest rate	September 30, 2022(1)		December 31, 2021(1)
			(in millions)
Short-term debt:
Senior unsecured term loans:
$380 million term loan, due May 2022	1.54%	1.64%	$	—	$	380
$380 million term loan, due May 2023	4.13%	4.22%	380		—
Total short-term debt			$	380	$	380

Long-term debt:
Senior unsecured term loans:
$1,925 million term loan, due January 2025	4.50%	4.81%	$	1,228	$	1,298
Senior unsecured notes:
$500 million notes, due May 2023	2.95%	3.17%	499		498
$500 million notes, due May 2025	3.63%	3.76%	498		497
$750 million notes due May 2030	4.38%	4.50%	739		738
$1,000 million notes, due February 2031	2.30%	2.38%	991		990
$250 million notes, due July 2032	7.13%	7.43%	247		247
$300 million notes, due July 2033	5.50%	5.88%	159		158
$300 million notes, due December 2040	5.95%	6.03%	216		216
Notes payable and finance leases due on various dates through fiscal 2032	1.84%-4.30%	Various	45		54
Total long-term debt			4,622		4,696
Less current portion			(647)		(103)
Total long-term debt, net of current portion			$	3,975	$	4,593

(1) The carrying amounts of the senior unsecured term loans and notes as of September 30, 2022, and December 31, 2021, include the remaining principal outstanding of $4,994 million and $5,065 million, respectively, less total unamortized debt discounts and deferred debt issuances costs of $37 million and $43 million, respectively.

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Term Loans and Revolving Credit Facility

We have a Credit Agreement (the "Credit Agreement") with certain financial institutions, which provided for a senior unsecured term loan facility in an aggregate principal amount of $1.9 billion (the "Term Loan Facility") and a $750 million senior unsecured revolving facility (the "Revolving Facility" and, together with the Term Loan Facility, the "Credit Facilities"). The Credit Facilities will mature in January 2025. The Revolving Facility permits two additional one-year extensions subject to lender consent. As of September 30, 2022, there were no borrowings outstanding under the Revolving Facility.

Borrowings under the Credit Agreement bear interest at a rate determined, at our option, based on either an alternate base rate or a LIBOR rate plus, in each case, an applicable margin that varies depending on our credit rating. The applicable margin range for LIBOR-denominated borrowings is from 1.13% to 1.75%. Based on our current ratings, the applicable margin for LIBOR-denominated borrowings is 1.38%.

The financial covenants in the Credit Agreement require that we maintain, as of the last day of each fiscal quarter, a ratio of adjusted consolidated total debt to consolidated EBITDA of not more than 3.75 to 1.00, subject to two increases to 4.50 to 1.00 following a material acquisition, and a ratio of EBITDA to consolidated interest expense of not less than 3.50 to 1.00.

On May 6, 2022, we entered into a 364-day term loan credit agreement ("Term Loan Agreement") with certain financial institutions, which provided for a senior unsecured term loan facility in an aggregate principal amount of $380 million. The proceeds of the Term Loan Agreement were used to repay the $380 million senior unsecured term loan entered into on May 7, 2021.

Borrowings under the Term Loan Agreement bear interest at a rate based on the Secured Overnight Financing Rate plus 1.10%, or an alternate base rate at our option.

The financial covenants in the Term Loan Agreement require that we maintain, as of the last day of each fiscal quarter, a ratio of adjusted consolidated total debt to consolidated EBITDA of not more than 3.75 to 1.00, subject to increases to 4.50 to 1.00 following a material acquisition, and a ratio of EBITDA to consolidated interest expense of not less than 3.50 to 1.00.

Commercial Paper

We have a commercial paper program in which the Company may issue short-term unsecured commercial paper notes ("Commercial Paper Notes") not to exceed $750 million. The proceeds will be used for general corporate purposes, including working capital, capital expenditures, acquisitions and share repurchases.

The Commercial Paper Notes are issued in minimum denominations of $0.25 million and have maturities of up to 397 days from the date of issuance. The Commercial Paper Notes either bear a stated or floating interest rate, if interest bearing, or will be sold at a discount from the face amount. As of September 30, 2022, we had no Commercial Paper Notes outstanding.

Principal Payments and Debt Issuance Costs

We made principal payments on our long-term debt of $25 million and $459 million during the three and nine months ended September 30, 2022, respectively, and $27 million and $80 million during the three and nine months ended October 1, 2021, respectively. This activity included required principal payments on our term loans of $24 million and $452 million for the three and nine months ended September 30, 2022, and $24 million and $72 million for the three and nine months ended October 1, 2021, respectively. As of September 30, 2022, and December 31, 2021, there were no borrowings outstanding under the Revolving Facility.

Amortization of debt discount and debt issuance costs was $3 million and $8 million for the three and nine months ended September 30, 2022, respectively, and $3 million and $7 million for the three and nine months ended October 1, 2021, respectively.

The Credit Facilities, the Term Loan Agreement, Commercial Paper Notes, senior unsecured term loans and notes are fully and unconditionally guaranteed and contain certain customary restrictive covenants, including among other things, restrictions on our ability to create liens and enter into sale and leaseback transactions under certain circumstances. We were in compliance with all covenants as of September 30, 2022.

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 7–Accumulated Other Comprehensive Income (Loss)

Changes in the components of Accumulated Other Comprehensive Income (Loss) ("AOCI") were as follows:


	Foreign currency translation adjustments		Unrecognized gain (loss) on derivative instruments		Pension adjustments		Total AOCI
	(in millions)
Balance at January 1, 2021	$	30	$	(70)	$	(6)	$	(46)
Other comprehensive income (loss)	(3)		18		17		32
Taxes	(5)		(8)		(4)		(17)
Reclassification from AOCI	—		19		—		19
Balance at December 31, 2021	22		(41)		7		(12)
Other comprehensive income (loss)	(184)		57		(25)		(152)
Taxes	26		(16)		6		16
Reclassification from AOCI	—		13		—		13
Balance at September 30, 2022	$	(136)	$	13	$	(12)	$	(135)

Reclassifications from unrecognized loss on derivative instruments are recorded in "Interest expense, net" in the condensed consolidated statements of income.

We sponsor a frozen defined benefit pension plan in the United Kingdom for former employees on an expired customer contract. On May 20, 2022, the trustee of our defined benefit pension plan (the “Plan”) invested the assets of the Plan in a bulk purchase annuity policy to fully insure the benefits payable to the members of the Plan. As the buy-in transaction insured the defined benefit obligation, we do not anticipate material future contributions.

The bulk purchase annuity policy is structured to enable the Plan to move to a full buy-out, at which time the insurer would become directly responsible for all pension payments and we would be relieved of our obligations under the Plan. At this future date, a settlement loss will be recognized for an amount equal to any unamortized loss associated with the Plan recorded within AOCI and any remaining net plan assets of the Plan will be remitted to the Company. As of September 30, 2022, the unamortized loss within AOCI related to the Plan was $19 million and the Plan had net assets of $6 million.

Note 8–Earnings Per Share

The following table provides a reconciliation of the weighted average number of shares outstanding used to compute basic and diluted EPS for the periods presented:


	Three Months Ended		Nine Months Ended
	September 30, 2022	October 1, 2021	September 30, 2022	October 1, 2021
	(in millions)
Basic weighted average number of shares outstanding	137	141	137	141
Dilutive common share equivalents—stock options and other stock awards	1	2	1	2
Diluted weighted average number of shares outstanding	138	143	138	143

Anti-dilutive stock-based awards are excluded from the weighted average number of shares outstanding used to compute diluted EPS. The total outstanding stock options and vesting stock awards that were anti-dilutive were 1 million for both the three and nine months ended September 30, 2022, and October 1, 2021.

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

On February 16, 2022, we entered into an Accelerated Share Repurchase ("ASR") agreement with a financial institution to repurchase shares of our outstanding common stock. During the quarter ended April 1, 2022, we paid $500 million to the financial institution and received an initial delivery of 4.5 million shares. In May 2022, the financial institution elected to partially settle $125 million of the original $500 million prepayment under the ASR agreement based on the volume-weighted-average-price of $104.32 per share for the period February 17, 2022, to April 29, 2022, which resulted in an additional delivery of 0.1 million shares. Subsequently, the financial Institution elected to fully settle the remaining $375 million of the original payment under the ASR agreement based upon a volume-weighted-average-price of $104.23 per share for the period February 17, 2022, to May 5, 2022, and delivered an additional 0.2 million shares.

The repurchases were recorded to "Additional paid-in capital" in the condensed consolidated balance sheets. All shares delivered were immediately retired.

Note 9–Income Taxes

For the three months ended September 30, 2022, the effective tax rate was 25.8% compared to 20.0% for the three months ended October 1, 2021. The increase to the effective tax rate was primarily due to a benefit from foreign operations recognized in the prior year and an increase to state income taxes and an increase in unrecognized tax benefits in the current quarter.

For the nine months ended September 30, 2022, the effective tax rate was 23.2% compared to 21.7% for the nine months ended October 1, 2021. The increase in the effective tax rate was primarily due to a benefit from foreign operations recognized in the prior year and an increase in unrecognized tax benefits in the current year.

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 (“TCJA”) eliminated the option to currently deduct certain research and development costs for tax purposes and requires taxpayers to capitalize and amortize research costs over five years. Although it is possible that Congress may defer, modify, or repeal this provision, potentially with retroactive effect, we have no assurance that Congress will take any action with respect to this provision. If the 2022 effective date remains in place, based on the law as currently enacted, our initial assessment is that our income taxes payable and net deferred tax assets will each increase by approximately $150 million in fiscal 2022. The actual impact will depend on the amount of research and development costs the Company will incur, whether Congress modifies or repeals this provision and whether new guidance and interpretive rules are issued by the U.S. Treasury, among other factors.

For the nine months ended September 30, 2022, unrecognized tax benefits increased $95 million with a corresponding increase to net deferred tax assets as a result of uncertain tax positions arising from certain provisions of the TCJA becoming effective.

Note 10–Business Segments

Our operations and reportable segments are organized around the customers and markets we serve. We define our reportable segments based on the way the chief operating decision maker ("CODM"), currently our Chairman and Chief Executive Officer, manages operations for the purposes of allocating resources and assessing performance.

During fiscal 2021, certain contracts were reassigned from the Defense Solutions reportable segment to the Civil reportable segment. Impact on prior year segment results were determined to be immaterial and have not been recast to reflect this change.

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The segment information for the periods presented was as follows:


	Three Months Ended				Nine Months Ended
	September 30, 2022		October 1, 2021		September 30, 2022		October 1, 2021
	(in millions)
Revenues:
Defense Solutions	$	2,075	$	2,009	$	6,176	$	5,971
Civil	874		792		2,526		2,357
Health	659		682		1,997		1,918
Total revenues	$	3,608	$	3,483	$	10,699	$	10,246

Operating income (loss):
Defense Solutions	$	137	$	140	$	409	$	429
Civil	79		58		160		187
Health	91		130		335		339
Corporate	(26)		(23)		(81)		(73)
Total operating income	$	281	$	305	$	823	$	882

The income statement performance measures used to evaluate segment performance are revenues and operating income. As a result, "Interest expense, net," "Other (expense) income, net" and "Income tax expense" as reported in the condensed consolidated statements of income are not allocated to our segments. Under U.S. Government Cost Accounting Standards, indirect costs including depreciation expense are collected in indirect cost pools, which are then collectively allocated to the reportable segments based on a representative causal or beneficial relationship of the costs in the pool to the costs in the base. As such, depreciation expense is not separately disclosed on the condensed consolidated statements of income.

Asset information by segment is not a key measure of performance used by the CODM.

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 11–Commitments and Contingencies

Contingencies

VirnetX, Inc. ("VirnetX")

On April 10, 2018, a jury trial concluded in an additional patent infringement case brought by VirnetX against Apple, referred to as the Apple II case, in which the jury returned a verdict against Apple for infringement and awarded VirnetX damages in the amount of over $502 million. On April 11, 2018, in a second phase of the Apple II trial, the jury found Apple's infringement to be willful. On August 30, 2018, the federal trial court in the Eastern District of Texas entered a final judgment and rulings on post-trial motions in the Apple II case. The court affirmed the jury’s verdict of over $502 million and granted VirnetX’s motions for supplemental damages, a sunset royalty and royalty rate of $1.20 per infringing device, along with pre-judgment and post-judgment interest and costs. The court denied VirnetX’s motions for enhanced damages, attorneys’ fees and an injunction. The court also denied Apple’s motions for judgment as a matter of law and for a new trial. An additional sum of over $93 million for costs and pre-judgment interest was subsequently agreed upon pursuant to a court order, bringing the total award to VirnetX in the Apple II case to over $595 million. Apple filed an appeal of the judgment in the Apple II case with the U.S. Court of Appeals for the Federal Circuit, and on November 22, 2019, the Federal Circuit affirmed in part, reversed in part and remanded the Apple II case back to the District Court. The Federal Circuit affirmed that Apple infringed two of the patents at issue in the case, and ruled that Apple is precluded from making certain patent invalidity arguments. However, the Federal Circuit reversed the judgment that Apple infringed two other patents at issue, vacated the prior damages awarded in the Apple II case, and remanded the Apple II case back to the District Court for further proceedings regarding damages. On April 23, 2020, the District Court ordered a new trial on damages in the Apple II case, which was delayed by the coronavirus pandemic and started on October 26, 2020. On October 30, 2020, the jury awarded VirnetX $503 million in damages and specified a royalty rate of $0.84 per infringing device. In January 2021, the District Court entered final judgment affirming the jury award and the parties separately agreed on additional costs and interest of over $75 million, subject to Apple's appeal. On February 4, 2021, Apple filed a notice of appeal with the U.S. Court of Appeals for the Federal Circuit in the Apple II case.

Under our agreements with VirnetX, Leidos would receive 25% of the proceeds obtained by VirnetX after reduction for attorneys' fees and costs. However, the verdict in the Apple II case remains subject to the ongoing and potential future proceedings and appeals. In addition, the patents at issue in these cases are subject to U.S. Patent and Trademark Office post-grant inter partes review and/or reexamination proceedings and related appeals, which may result in all or part of these patents being invalidated or the claims of the patents being limited. Thus, no assurances can be given when or if we will receive any proceeds in connection with these jury awards. In addition, if Leidos receives any proceeds, we are required to pay a royalty to the customer who paid for the development of the technology.

Government Investigations and Reviews

We are routinely subject to investigations and reviews relating to compliance with various laws and regulations with respect to our role as a contractor to federal, state and local government customers and in connection with performing services in countries outside of the United States. Adverse findings could have a material effect on our business, financial position, results of operations and cash flows due to our reliance on government contracts.

Defense Contract Audit Agency

As of September 30, 2022, active indirect cost audits by the Defense Contract Audit Agency remain open for fiscal 2020 and subsequent fiscal years. Although we have recorded contract revenues based upon an estimate of costs that we believe will be approved upon final audit or review, we cannot predict the outcome of any ongoing or future audits or reviews and adjustments, and if future adjustments exceed estimates, our profitability may be adversely affected. As of September 30, 2022, we believe we have adequately reserved for potential adjustments from audits or reviews of contract costs.

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Other Government Investigations and Reviews

Through its internal processes, the Company discovered, in late 2021, activities by its employees, third party representatives and subcontractors, raising concerns related to a portion of our business that conducts international operations. The Company is conducting an internal investigation, overseen by an independent committee of the Board of Directors, with the assistance of external legal counsel, to determine whether the identified conduct may have violated the Company’s Code of Conduct and potentially applicable laws, including the U.S. Foreign Corrupt Practices Act ("FCPA"). The Company has voluntarily self-reported this investigation to the Department of Justice and the Securities and Exchange Commission and is cooperating with both agencies. Because the investigation is ongoing, the Company cannot anticipate the timing, outcome or possible impact of the investigation, although violations of the FCPA and other applicable laws may result in criminal and civil sanctions, including monetary penalties, and reputational damage. In September 2022, the Company received a Federal Grand Jury Subpoena related to the criminal investigation by the U.S. Attorney’s Office for the Southern District of California, in conjunction with the U.S. Department of Justice’s Fraud Division. The subpoena requests documents relating to the conduct that is the subject of the Company’s internal investigation. The Company is in the process of responding to the subpoena.

In August 2022, the Company received a Federal Grand Jury Subpoena in connection with a criminal investigation being conducted by the U.S. Department of Justice Antitrust Division (“DOJ”). The subpoena requests that the Company produce a broad range of documents related to three U.S. Government procurements associated with the Company’s Intelligence Group in 2021 and 2022. We intend to fully cooperate with the investigation, and we are conducting our own internal investigation with the assistance of outside counsel. It is not possible at this time to determine whether we will incur, or to reasonably estimate the amount of, any fines, penalties, or further liabilities in connection with the investigation pursuant to which the subpoena was issued.

Commitments

As of September 30, 2022, we have outstanding letters of credit of $44 million, principally related to performance guarantees on contracts and outstanding surety bonds with a notional amount of $100 million, principally related to performance and subcontractor payment bonds on contracts. The value of the surety bonds may vary due to changes in the underlying project status and/or contractual modifications. We also have future lease commitments of $74 million for the use of certain aircrafts.

As of September 30, 2022, the future expirations of the outstanding letters of credit, surety bonds and future lease commitments were as follows:


Fiscal year ending
	(in millions)
2022 (remainder of year)	$	22
2023	26
2024	103
2025	22
2026	19
2027 and thereafter	26
	$	218

Note 12–Subsequent Events

On October 30, 2022, we completed the previously announced acquisition of Cobham Special Mission, for a preliminary purchase price of $305 million Australian dollars, approximately $196 million United States dollars, which is subject to working capital adjustments. Additionally, we realized a loss of $18 million resulting from the settlement of the foreign currency forward contract intended to offset currency fluctuations related to the preliminary purchase price.

Table of Contents

LEIDOS HOLDINGS, INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of Leidos Holdings, Inc.'s ("Leidos") financial condition, results of operations, and quantitative and qualitative discussion about business environment and trends should be read in conjunction with Leidos' condensed consolidated financial statements and related notes.

The following discussion contains forward-looking statements, including statements regarding our intent, belief or current expectations with respect to, among other things, trends affecting our financial condition or results of operations, backlog, our industry, the impact of our merger and acquisition activity, government budgets and spending, our business contingency plans, interest rates and uncertainties in tax due to new tax legislation or other regulatory developments. In some cases, forward-looking statements can be identified by words such as “will,” “expect,” “estimate,” “plan,” “potential,” “continue” or similar expressions. Such statements are not guarantees of future performance and involve risks and uncertainties, including uncertainties relating to the coronavirus pandemic ("COVID-19") and the actions taken by authorities and us to respond, and actual results may differ materially from those in the forward-looking statements as a result of various factors. Some of these factors include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K, as updated by the risk factor in this report under Part II, Item 1A. "Risk Factors" and as may be further updated in subsequent filings with the U.S. Securities and Exchange Commission. Due to such uncertainties and risks, you are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. We do not undertake any obligation to update these factors or to publicly announce the results of any changes to our forward-looking statements due to future events or developments.

Unless indicated otherwise, references in this report to "we," "us" and "our" refer collectively to Leidos and its consolidated subsidiaries.

Overview

We are a FORTUNE 500® technology, engineering, and science company that provides services and solutions in the defense, intelligence, civil and health markets, both domestically and internationally. We bring domain-specific capability and cross-market innovations to customers in each of these markets by leveraging five technical core competencies: digital modernization, cyber operations, mission software systems, integrated systems and mission operations. Our customers include the U.S. Department of Defense ("DoD"), the U.S. Intelligence Community, the U.S. Department of Homeland Security, the Federal Aviation Administration, the Department of Veterans Affairs and many other U.S. civilian, state and local government agencies, foreign government agencies and commercial businesses. We operate in three reportable segments: Defense Solutions, Civil and Health. Additionally, we separately present the unallocable costs associated with corporate functions as Corporate.

COVID-19

The COVID-19 pandemic is affecting major economic and financial markets, and effectively all industries and governments are facing challenges, which has resulted in a period of business disruption, the length and severity of which cannot be predicted. The pandemic has resulted in travel restrictions, government orders to “shelter-in-place”, quarantine restrictions and disruption of the financial markets. We have acted to protect the health and safety of our employees, comply with workplace health and safety regulations and work with our customers to minimize disruptions.

For the three and nine months ended September 30, 2022, the COVID-19 pandemic did not have a material impact to revenues and operating income, other than the receipt of $28 million in recoveries for the nine months ended September 30, 2022, within our Health segment related to stop work orders on certain programs. The full extent of the impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute on programs in the expected timeframe, will depend on future developments, including the duration and spread of the pandemic and the distribution of vaccines, all of which are uncertain and cannot be predicted.

On September 9, 2021, President Biden issued a series of executive orders to combat COVID-19, one of which requires us, as a federal contractor, to have our employees fully vaccinated unless the employee is legally entitled to a religious or medical exemption. This vaccine mandate is currently under a nationwide injunction, while courts adjudicate constitutional challenges to the executive order. We are prepared to comply with the executive order in the event the injunction is lifted.

Table of Contents

LEIDOS HOLDINGS, INC.

Business Environment and Trends

U.S. Government Markets

During both of the three and nine months ended September 30, 2022, we generated approximately 87% of our total revenues from contracts with the U.S. government. Accordingly, our business performance is affected by the overall level of U.S. government spending, especially on national security, homeland security and intelligence, and the alignment of our service and product offerings and capabilities with current and future budget priorities of the U.S. government.

Congress continues to work on the 12 appropriations bills to fund the federal government in GFY 2023. The GFY 2023 began on October 1, 2022; however, the federal government is currently operating under a continuing resolution (“CR”). The CR funds the federal government at GFY 2022 levels until December 16, 2022, after that Congress will need to pass the full-year appropriation bills or an additional CR prior to December 16, 2022, in order to prevent a federal government shutdown.

International Markets

Sales to customers in international markets represented approximately 8% of total revenues for both of the three and nine months ended September 30, 2022. Our international customers include foreign governments and their agencies. Our international business increases our exposure to international markets and the associated international regulatory and geopolitical risks.

Changes in international trade policies, including higher tariffs on imported goods and materials, may increase our procurement costs of certain IT hardware used both on our contracts and for internal use. However, we expect to recover certain portions of these higher tariffs through our cost-plus contracts. While we evaluate the impact of higher tariffs, currently, we do not expect tariffs to have a significant impact to our business.

Results of Operations

The following table summarizes our condensed consolidated results of operations for the periods presented:


	Three Months Ended										Nine Months Ended
	September 30, 2022			October 1, 2021			Dollar change		Percent change		September 30, 2022			October 1, 2021			Dollar change		Percent change
	(dollars in millions)
Revenues	$	3,608		$	3,483		$	125	3.6	%	$	10,699		$	10,246		$	453	4.4	%

Operating income	281			305			(24)		(7.9)	%	823			882			(59)		(6.7)	%
Non-operating expense, net	(60)			(45)			(15)		33.3	%	(155)			(137)			(18)		13.1	%
Income before income taxes	221			260			(39)		(15.0)	%	668			745			(77)		(10.3)	%
Income tax expense	(57)			(52)			(5)		9.6	%	(155)			(162)			7		(4.3)	%
Net income	$	164		$	208		$	(44)	(21.2)	%	$	513		$	583		$	(70)	(12.0)	%
Net income attributable to Leidos common stockholders	$	162		$	205		$	(43)	(21.0)	%	$	508		$	579		$	(71)	(12.3)	%
Operating margin	7.8		%	8.8		%					7.7		%	8.6		%

Table of Contents

LEIDOS HOLDINGS, INC.

Segment and Corporate Results


	Three Months Ended										Nine Months Ended
Defense Solutions	September 30, 2022			October 1, 2021			Dollar change		Percent change		September 30, 2022			October 1, 2021			Dollar change		Percent change
	(dollars in millions)
Revenues	$	2,075		$	2,009		$	66	3.3	%	$	6,176		$	5,971		$	205	3.4	%
Operating income	137			140			(3)		(2.1)	%	409			429			(20)		(4.7)	%
Operating margin	6.6		%	7.0		%					6.6		%	7.2		%

The increase in revenues for the three months ended September 30, 2022, as compared to the three months ended October 1, 2021, was primarily attributable to program wins and a net increase in volumes on certain programs. The increase was partially offset by the completion of certain contracts, $28 million related to unfavorable exchange rate movements and net write-downs on certain contracts.

The increase in revenues for the nine months ended September 30, 2022, as compared to the nine months ended October 1, 2021, was primarily attributable to program wins, a net increase in volumes on certain programs and a $42 million net increase in revenue related to our acquisitions made in the second and third quarters of the prior year. The increase was partially offset by the completion of certain contracts, $63 million related to unfavorable exchange rate movements and contracts that were reassigned from Defense Solutions reportable segment to the Civil reportable segment during the third quarter of fiscal 2021.

The decrease in operating income for the three months ended September 30, 2022, as compared to the three months ended October 1, 2021, was primarily attributable to net write-downs, the completion of certain contracts and additional general and administrative expenses. The decrease was partially offset by program wins and a net increase in volumes on certain programs.

The decrease in operating income for the nine months ended September 30, 2022, as compared to the nine months ended October 1, 2021, was primarily attributable to the completion of certain contracts, net write-downs, additional general and administrative expenses and increased amortization. The decrease was partially offset by program wins and a net increase in volumes on certain programs.


	Three Months Ended										Nine Months Ended
Civil	September 30, 2022			October 1, 2021			Dollar change		Percent change		September 30, 2022			October 1, 2021			Dollar change		Percent change
	(dollars in millions)
Revenues	$	874		$	792		$	82	10.4	%	$	2,526		$	2,357		$	169	7.2	%
Operating income	79			58			21		36.2	%	160			187			(27)		(14.4)	%
Operating margin	9.0		%	7.3		%					6.3		%	7.9		%

The increase in revenues for the three months ended September 30, 2022, as compared to the three months ended October 1, 2021, was primarily attributable to a net increase in program volumes, partially offset by net write-downs on certain contracts and unfavorable exchange rate movements.

The increase in revenues for the nine months ended September 30, 2022, as compared to the nine months ended October 1, 2021, was primarily attributable to a net increase in program volumes, program wins and contracts that were reassigned from Defense Solutions reportable segment to the Civil reportable segment during the third quarter of fiscal 2021. The increase was partially offset by unfavorable exchange rate movements and the completion of certain contracts.

The increase in operating income for the three months ended September 30, 2022, as compared to the three months ended October 1, 2021, was primarily due to a net increase in program volumes mainly within our Security Enterprise Solutions reporting unit, partially offset by net write-downs on certain contracts.

The decrease in operating income for the nine months ended September 30, 2022, as compared to the nine months ended October 1, 2021, was primarily due to a $19 million increase in legal fees and settlement costs resulting from an adverse arbitration ruling related to the 2016 acquisition of the Information Systems & Global Solutions business (“IS&GS Business”) from Lockheed Martin, partially offset by a net increase in program volumes. Operating income for the nine months ended October 1, 2021, included a $26 million benefit from a legal reserve adjustment related to the Mission Support Alliance joint venture.

Table of Contents

LEIDOS HOLDINGS, INC.


	Three Months Ended										Nine Months Ended
Health	September 30, 2022			October 1, 2021			Dollar change		Percent change		September 30, 2022			October 1, 2021			Dollar change		Percent change
	(dollars in millions)
Revenues	$	659		$	682		$	(23)	(3.4)	%	$	1,997		$	1,918		$	79	4.1	%
Operating income	91			130			(39)		(30.0)	%	335			339			(4)		(1.2)	%
Operating margin	13.8		%	19.1		%					16.8		%	17.7		%

The decrease in revenues for the three months ended September 30, 2022, as compared to the three months ended October 1, 2021, was primarily attributable to the completion of certain contracts, partially offset by a net increase in program volumes.

The increase in revenues for the nine months ended September 30, 2022, as compared to the nine months ended October 1, 2021, was primarily attributable to a net increase in program volumes and $28 million in recoveries related to stop work orders on certain programs as a result of COVID-19. The increase was partially offset by the completion of certain contracts.

The decrease in operating income for the three months ended September 30, 2022, as compared to the three months ended October 1, 2021, was primarily attributable to net decrease in the volume of disability exams as the Company worked through a backlog of cases caused by COVID-19 during the three months ended October 1, 2021, and the completion of certain contracts.

The decrease in operating income for the nine months ended September 30, 2022, as compared to the nine months ended October 1, 2021, was primarily due to a net decrease in volumes on higher margin programs and the completion of certain contracts. The decrease was partially offset by $28 million in recoveries related to stop work orders on certain programs as a result of COVID-19 and an increase in net write-ups on certain programs.


	Three Months Ended								Nine Months Ended
Corporate	September 30, 2022		October 1, 2021		Dollar change		Percent change		September 30, 2022		October 1, 2021		Dollar change		Percent change
	(dollars in millions)
Operating loss	$	(26)	$	(23)	$	(3)	13.0	%	$	(81)	$	(73)	$	(8)	11.0	%

The increase in operating loss for the three and nine months ended September 30, 2022, as compared to the three and nine months ended October 1, 2021, was primarily attributable to an increase in legal costs, partially offset by lower acquisition and integration costs.

Non-Operating Expense, net

Non-operating expense, net for the three months ended September 30, 2022, was $60 million as compared to $45 million for the three months ended October 1, 2021. The increase was primarily due to a net unrealized loss in our foreign currency forward contract related to the Cobham Special Mission acquisition as a result of unfavorable exchange rate movements and higher interest expenses driven by changes in interest rates.

Non-operating expense, net for the nine months ended September 30, 2022, was $155 million as compared to $137 million for the nine months ended October 1, 2021. The increase was primarily due to a net unrealized loss in our foreign currency forward contract related to the Cobham Special Mission acquisition as a result of unfavorable exchange rate movements and higher interest expenses driven by changes in interest rates.

Provision for Income Taxes

For the three months ended September 30, 2022, our effective tax rate was 25.8% compared to 20.0% for the three months ended October 1, 2021. The increase to the effective tax rate was primarily due to a benefit from foreign operations recognized in the prior year and an increase to state income taxes and an increase in unrecognized tax benefits in the current quarter.

Table of Contents

LEIDOS HOLDINGS, INC.

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 (“TCJA”) eliminated the option to currently deduct certain research and development costs for tax purposes and requires taxpayers to capitalize and amortize research costs over five years. Although it is possible that Congress may defer, modify, or repeal this provision, potentially with retroactive effect, we have no assurance that Congress will take any action with respect to this provision. If the 2022 effective date remains in place, based on the law as currently enacted, our initial assessment is that our income taxes payable and net deferred tax assets will each increase by approximately $150 million in fiscal 2022, and the related impact to cash from operations will be realized in fiscal 2023. The actual impact on cash from operations will depend on the amount of research and development costs the Company will incur, whether Congress modifies or repeals this provision and whether new guidance and interpretive rules are issued by the U.S. Treasury, among other factors.

Bookings and Backlog

We recorded net bookings worth an estimated $4.1 billion and $11.6 billion during the three and nine months ended September 30, 2022, as compared to $4.7 billion and $12.3 billion for the three and nine months ended October 1, 2021.

The estimated value of our total backlog was as follows:


	September 30, 2022						October 1, 2021
Segment	Funded		Unfunded		Total		Funded		Unfunded		Total
	(in millions)
Defense Solutions	$	4,178	$	13,842	$	18,020	$	4,412	$	15,160	$	19,572
Civil	2,037		8,652		10,689		1,713		7,702		9,415
Health	1,214		5,105		6,319		1,164		4,541		5,705
Total	$	7,429	$	27,599	$	35,028	$	7,289	$	27,403	$	34,692

The increase in backlog as of September 30, 2022, as compared to October 1, 2021, includes $43 million of backlog acquired through business combinations in our Defense Solutions reportable segment.

Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts, both funded and unfunded. Backlog does not include unexercised option periods and future potential task orders expected to be awarded under indefinite delivery/indefinite quantity ("IDIQ") contracts, General Services Administration Schedule or other master agreement contract vehicles, with the exception of certain IDIQ contracts where task orders are not competitively awarded and separately priced but instead are used as a funding mechanism, and where there is a basis for estimating future revenues and funding on future anticipated task orders. Total backlog at September 30, 2022, included a negative impact of $363 million when compared to total backlog at October 1, 2021, primarily due to the exchange rate movements in the British pound and Australian dollar when compared to the U.S. dollar. Backlog estimates are subject to change and may be affected by factors including modifications of contracts and foreign currency movements.

Liquidity and Capital Resources

Overview

As of September 30, 2022, we had $807 million in cash and cash equivalents. Additionally, we have an unsecured revolving credit facility which can provide up to $750 million in additional borrowing, if required. As of September 30, 2022, there were no borrowings outstanding under the revolving credit facility.

We had outstanding debt of $5.0 billion and $5.1 billion at September 30, 2022, and December 31, 2021, respectively. On May 6, 2022, we entered into a Term Loan Agreement which provided for a senior unsecured term loan facility in an aggregate principal amount of $380 million.

We have a commercial paper program in which we may issue short-term unsecured commercial paper notes not to exceed $750 million and have maturities of up to 397 days from the date of issuance. As of September 30, 2022, we did not have any commercial paper notes outstanding.

Table of Contents

LEIDOS HOLDINGS, INC.

We made principal payments on our long-term debt of $25 million and $459 million during the three and nine months ended September 30, 2022, respectively, and $27 million and $80 million during the three and nine months ended October 1, 2021, respectively. This activity included required principal payments on our term loans of $24 million and $452 million during the three and nine months ended September 30, 2022, respectively, and $24 million and $72 million during the three and nine months ended October 1, 2021, respectively. Our credit facilities, term loan agreement, commercial paper notes, senior unsecured term loans and notes outstanding as of September 30, 2022, contain financial covenants and customary restrictive covenants. We were in compliance with all covenants as of September 30, 2022.

Interest on our Credit Facilities is calculated based on the London Interbank Offered Rate (“LIBOR”). On July 27, 2017, the U.K.’s Financial Conduct Authority announced that LIBOR would be discontinued or become unavailable as a reference rate by the end of 2021 and LIBOR will be fully discontinued or become unavailable as a benchmark rate by June 2023. Although our Credit Facilities include mechanics to facilitate the adoption by us and our lenders of an alternative benchmark rate for use in place of LIBOR, no assurance can be made that such alternative benchmark rate will perform in a manner similar to LIBOR or result in interest rates that are at least as favorable to us as those that would have resulted had LIBOR remained in effect, which could result in an increase in our interest expense and other debt service obligations. In addition, the overall credit market may be disrupted as a result of the replacement of LIBOR or in the anticipation thereof, which could have an adverse impact on our ability to refinance, reprice, or amend our existing indebtedness or incur additional indebtedness on favorable terms.

We paid dividends of $49 million and $149 million during the three and nine months ended September 30, 2022, respectively, and $51 million and $149 million during the three and nine months ended October 1, 2021, respectively.

During the nine months ended September 30, 2022, and October 1, 2021, we sold $209 million and $693 million, respectively, of accounts receivable under accounts receivable purchase agreements and received proceeds of $209 million and $693 million, respectively. We did not sell any accounts receivable during the three months ended September 30, 2022, and October 1, 2021.

Stock repurchases of Leidos common stock may be made on the open market or in privately negotiated transactions with third parties including through accelerated share repurchase agreements. Whether repurchases are made and the timing and actual number of shares repurchased depends on a variety of factors including price, corporate capital requirements, other market conditions and regulatory requirements. The repurchase program may be accelerated, suspended, delayed or discontinued at any time.

During the three and nine months ended September 30, 2022, we made a $25 million payment in connection with the adverse arbitration ruling related to the 2016 acquisition of the IS&GS Business from Lockheed Martin, which occurred during the second quarter of fiscal 2022.

The uncertainty surrounding the TCJA provision and the potential for COVID-19 to continue to affect the financial markets may impact our liquidity. If the 2022 effective date of the TCJA research cost capitalization provision remains in place, our initial assessment indicates our income taxes payable and net deferred tax assets will each increase by approximately $150 million in fiscal 2022, and the related negative impact to cash will be realized in fiscal 2023. We will continue to assess our liquidity needs as the tax legislation and pandemic evolve.

For the next 12 months, we anticipate that we will be able to meet our liquidity needs, including servicing our debt, through cash generated from operations, available cash balances, sales of accounts receivable and, if needed, borrowings from our revolving credit facility and commercial paper program.

Table of Contents

LEIDOS HOLDINGS, INC.

Summary of Cash Flows

The following table summarizes cash flow information for the periods presented:


	Three Months Ended				Nine Months Ended
	September 30, 2022		October 1, 2021		September 30, 2022		October 1, 2021
	(in millions)
Net cash provided by operating activities	$	748	$	565	$	881	$	821
Net cash used in investing activities	(26)		(53)		(55)		(693)
Net cash used in financing activities	(217)		(209)		(730)		(44)
Net increase in cash, cash equivalents and restricted cash	$	505	$	303	$	96	$	84

Net cash provided by operating activities increased $183 million and $60 million during the three and nine months ended September 30, 2022, respectively, when compared to the prior year. The changes were primarily due to favorable working capital changes, partially offset with timing of vendor payments, a $25 million payment in connection with the adverse arbitration ruling related to the 2016 acquisition of the IS&GS Business from Lockheed Martin and $23 million of payments for other legal and tax settlements.

Net cash used in investing activities decreased $27 million for the three months ended September 30, 2022, when compared to the prior year quarter, primarily due to net cash paid used to acquire an immaterial strategic business in the prior year quarter.

Net cash used in investing activities decreased $638 million for the nine months ended September 30, 2022, when compared to the prior year primarily due to $622 million of net cash paid related to our business acquisitions in the prior year and $15 million of proceeds received from the sale of Aviation & Missile Solutions LLC in the current year.

Net cash used in financing activities increased $8 million for the three months ended September 30, 2022, when compared to the prior year quarter primarily due to a $150 million repayment on our commercial paper program in the current quarter, partially offset by $136 million net decrease of open market stock repurchases.

Net cash used in financing activities increased $686 million for the nine months ended September 30, 2022, when compared to the prior year. The change was primarily due to a $380 million decrease in net cash inflows related to our short-term senior unsecured term loans, an increase of $266 million in stock repurchases primarily attributable to the Accelerated Share Repurchase agreement and a $43 million decrease in net capital contributions received from our non-controlling interest.

Off-Balance Sheet Arrangements

We have outstanding performance guarantees and cross-indemnity agreements in connection with certain aspects of our business. We also have letters of credit outstanding principally related to performance guarantees on contracts and surety bonds outstanding principally related to performance and subcontractor payment bonds as described in "Note 11–Commitments and Contingencies" of the notes to the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q. These arrangements have not had, and management does not believe it is likely that they will in the future have, a material effect on our liquidity, capital expenditures or capital resources, operations or financial condition.

Table of Contents

LEIDOS HOLDINGS, INC.

Guarantor and Issuer of Guaranteed Securities

Leidos Holdings, Inc. has fully and unconditionally guaranteed the obligations of its subsidiary, Leidos, Inc., under its $500 million notes due May 2023, $500 million notes due May 2025, $750 million notes due May 2030 and $1,000 million notes due February 2031 (collectively, "the Notes"). The underlying subsidiaries of Leidos, Inc. do not guarantee these obligations and have been excluded from the financial information presented below.

We have entered into registration rights agreements, pursuant to which we agreed to use reasonable best efforts to file registration statements to permit the exchange of the Notes and related guarantees for registered notes having terms substantially identical thereto, or in the alternative, the registered resale of the Notes and related guarantees under certain circumstances. Pursuant to these registration rights agreements, we filed a Registration Statement on Form S-4 with the Securities and Exchange Commission on May 6, 2021, which was declared effective on May 19, 2021.

The summarized balance sheets for Leidos Holdings, Inc. and Leidos, Inc., net of eliminations were as follows (in millions):

Balance Sheet


	September 30, 2022		December 31, 2021
Total current assets	$	2,358	$	2,229
Goodwill	5,811		4,171
Investments in consolidated subsidiaries	3,278		4,918
Other long-term assets	1,283		1,362
Total assets	$	12,730	$	12,680

Total current liabilities	$	3,263	$	2,400
Long-term debt, net of current portion	3,974		4,590
Intercompany payables	1,804		1,438
Other long-term liabilities	622		849
Total liabilities	9,663		9,277
Total stockholders' equity	3,067		3,403
Total liabilities and stockholders' equity	$	12,730	$	12,680

The summarized statement of income for Leidos Holdings, Inc. and Leidos, Inc., net of eliminations, for the nine months ended September 30, 2022, was as follows (in millions):

Statements of Income


Revenues, net	$	7,265
Operating income	495
Net income attributable to Leidos common stockholders	165

Contractual Obligations and Commitments

We are subject to a number of reviews, investigations, claims, lawsuits, other uncertainties and future obligations related to our business. For a discussion of these items, see "Note 11–Commitments and Contingencies" of the notes to the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q.

Critical Accounting Policies

There were no material changes to our critical accounting policies, estimates or judgments during the period covered by this report from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2021.

Table of Contents

LEIDOS HOLDINGS, INC.

Recently Adopted and Issued Accounting Standards

For a discussion of these items, see "Note 1–Basis of Presentation and Summary of Significant Accounting Policies" of the notes to the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There were no material changes in our market risk exposure from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2021.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer (our Chairman and Chief Executive Officer) and principal financial officer (our Executive Vice President and Chief Financial Officer), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2022. Based upon that evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred in the quarterly period covered by this report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

LEIDOS HOLDINGS, INC.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We have furnished information relating to legal proceedings, and any investigations and reviews that we are involved with in "Note 11–Commitments and Contingencies" of the notes to the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors.

There were no material changes to the risks described in Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a)None

(b)None

(c)Purchases of Equity Securities by the Issuer

In February 2022, our Board of Directors authorized a share repurchase program of up to 20 million shares of our outstanding common stock. The shares may be repurchased from time to time in one or more open market repurchases or privately negotiated transactions, including accelerated share repurchase transactions. The actual timing, number and value of shares repurchased under the program will depend on a number of factors, including the market price of our common stock, general market and economic conditions, applicable legal requirements, compliance with the terms of our outstanding indebtedness and other considerations. There is no assurance as to the number of shares that will be repurchased, and the repurchase program may be suspended or discontinued at any time at our Board of Directors' discretion. This share repurchase authorization replaces the previous share repurchase authorization announced in February 2018.


Period	Total Number of Shares (or Units) Purchased	Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Repurchase Plans or Programs	Maximum Number of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
July 1, 2022 - July 31, 2022	—	$	—	—	15,203,974
August 1, 2022 - August 31, 2022	—	—		—	15,203,974
September 1, 2022 - September 30, 2022	25,205	93.20		—	15,203,974
Total	25,205	$	93.20	—

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Table of Contents

LEIDOS HOLDINGS, INC.

Item 6. Exhibits.


Exhibit Number						Description of Exhibit
22						List of Guarantors and Subsidiary Issuers of Guaranteed Securities. Incorporated herein by reference from the Company's Registration Statement on Form S-4, filed with the U.S. Securities and Exchange Commission on May 6, 2021.

31.1						Certification of Chairman and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2						Certification of Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1						Certification of Chairman and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2						Certification of Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101						Interactive Data File. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

104						Cover Page Interactive Data File. The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

Table of Contents

LEIDOS HOLDINGS, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 1, 2022


Leidos Holdings, Inc.

/s/ Christopher R. Cage
Christopher R. Cage Executive Vice President and Chief Financial Officer and as a duly authorized officer