What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-11-02 compared with 2021-08-03 · 148 added, 177 removed, 600 unchanged (35% of the section changed)

26 unchanged sentences

Stockholders’ equity:

Common stock, $ 0.0001 par value, 500 million shares authorized, 142 million shares issued and outstanding at July 2, 2021 and January 1, 2021

Common stock, $ 0.0001 par value, 500 million shares authorized, 140 million and 142 million shares issued and outstanding at October 1, 2021 and January 1, 2021, respectively

Additional paid-in capital 2,397 2,580

8 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended Six Months Ended

Three Months Ended Nine Months Ended

2021 October 2,

2020 October 1,

2021 October 2,

(in millions, except per share amounts)

5 unchanged sentences

Asset impairment charges 3 — 3 11

Equity earnings of non-consolidated subsidiaries ( 4 ) ( 7 ) ( 9 ) ( 13 )

Equity (earnings) loss of non-consolidated subsidiaries ( 5 ) 3 ( 14 ) ( 10 )

Operating income 305 258 882 699

1 unchanged sentence

Interest expense, net ( 47 ) ( 44 ) ( 138 ) ( 133 )

Other expense, net — ( 16 ) ( 1 ) ( 30 )

Other income (expense), net 2 — 1 ( 30 )

Income before income taxes

12 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended Six Months Ended

Three Months Ended Nine Months Ended

2021 October 2,

2020 October 1,

2021 October 2,

(in millions)

5 unchanged sentences

Pension adjustments

Total other comprehensive income (loss), net of taxes 22 58 31 ( 57 )

Total other comprehensive (loss) income, net of taxes ( 25 ) 29 6 ( 28 )

Comprehensive income 183 192 589 404

32 unchanged sentences

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 contributions 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.

30 unchanged sentences

Balance at July 3, 2020 142 2,600 1,065 ( 127 ) 3,538 9 3,547

Net income — — 163 — 163 — 163

Other comprehensive income, net of taxes — — — 29 29 — 29

Issuances of stock — 10 — — 10 — 10

Repurchases of stock and other

— ( 1 ) — — ( 1 ) — ( 1 )

Dividends of $ 0.34 per share

— — ( 48 ) — ( 48 ) — ( 48 )

Stock-based compensation — 15 — — 15 — 15

Balance at October 2, 2020 142 $ 2,624 $ 1,180 $ ( 98 ) $ 3,706 $ 9 $ 3,715

See accompanying notes to condensed consolidated financial statements.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Six Months Ended

Nine Months Ended

2021 October 2,

(in millions)

18 unchanged sentences

Payments for property, equipment and software ( 71 ) ( 120 )

Net proceeds from sale of assets — 10

Net cash used in investing activities ( 693 ) ( 2,714 )

8 unchanged sentences

Proceeds from issuances of stock 33 26

Net cash provided by financing activities 165 1,870

Net decrease in cash, cash equivalents and restricted cash ( 219 ) ( 35 )

Net cash (used in) provided by financing activities ( 44 ) 1,353

Net increase in cash, cash equivalents and restricted cash 84 25

Cash, cash equivalents and restricted cash at beginning of period 687 717

55 unchanged sentences

The adoption did not have an impact to our financial position, results of operations and earnings per share.

ASU 2021-05, Leases (Topic 842) Lessors—Certain Leases with Variable Lease Payments

In July 2021, the FASB issued ASU 2021-05, which amends lessor’s accounting for leases with variable lease payments classified as sales-type or direct financing leases.

The amendments in this update modify the lease classification requirements for lessors, whereby leases with variable lease payments that are not dependent on a reference index or a rate will be accounted for as operating leases if classification as a sales-type or direct financing lease would have resulted in a day-one loss.

The amendments in this update are effective for public entities for fiscal years beginning after December 15, 2021, as well as interim periods within those fiscal years, and can be adopted using either a prospective or retrospective approach.

Early adoption is also permitted.

Effective July 3, 2021, we adopted the requirements of ASU 2021-05 using the prospective method.

The adoption did not have an impact to our financial position, results of operations and earnings per share.

Accounting Standards Updates Issued But Not Yet Adopted

8 unchanged sentences

We currently use the one-month LIBOR for which the rate publication will cease in June 2023.

ASU 2021-05, Leases (Topic 842) Lessors—Certain Leases with Variable Lease Payments

In July 2021, the FASB issued ASU 2021-05, which amends lessor’s accounting for leases with variable lease payments classified as sales-type or direct financing leases.

Early adoption is also permitted.

We are currently evaluating the impact and adoption approach for this update.

Changes in Estimates on Contracts

3 unchanged sentences

Changes in estimates on contracts were as follows:

Three Months Ended Six Months Ended

Three Months Ended Nine Months Ended

2021 October 2,

2020 October 1,

2021 October 2,

(in millions, except per share amounts)

6 unchanged sentences

Revenue Recognized from Prior Obligations

Revenue recognized from performance obligations satisfied in previous periods was $ 9 million and $ 18 million for the three and six months ended July 2, 2021, respectively, and $ 12 million and $ 32 million for the three and six months ended July 3, 2020, respectively.

Revenue recognized from performance obligations satisfied in previous periods was $ 17 million and $ 35 million for the three and nine months ended October 1, 2021, respectively, and $ 10 million and $ 42 million for the three and nine months ended October 2, 2020, 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.

1 unchanged sentence

Our cash equivalents are primarily comprised of investments in several large institutional money market accounts, with original maturity of three months or less.

Outstanding payments are included within "Cash and cash equivalents" and "Accounts payable and accrued liabilities" correspondingly on the condensed consolidated balance sheets.

At July 2, 2021 and January 1, 2021, $ 196 million and $ 237 million, respectively, of outstanding payments were included within "Cash and cash equivalents."

At October 1, 2021 and January 1, 2021, $ 180 million and $ 237 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 as to use for certain expenditures related to that customer's contract and cash collected from the sale of accounts receivable but not yet remitted to the financial institution (see "Note 9–Sale of Accounts Receivable").

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 $ 130 million and $ 163 million at July 2, 2021 and January 1, 2021, respectively.

Our restricted cash balances were $ 184 million and $ 163 million at October 1, 2021 and January 1, 2021, respectively.

Note 2–Revenues from Contracts with Customers

2 unchanged sentences

Remaining performance obligations do 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 July 2, 2021, we had $ 14.6 billion of RPO and expect to recognize approximately 51 % and 81 % over the next 12 months and 24 months, respectively, with the remainder to be recognized thereafter.

As of October 1, 2021, we had $ 14.6 billion of RPO and expect to recognize approximately 54 % and 71 % over the next 12 months and 24 months, respectively, with the remainder to be recognized thereafter.

Disaggregation of Revenues

4 unchanged sentences

Disaggregated revenues by customer-type were as follows:

Three Months Ended July 2, 2021 Six Months Ended July 2, 2021

Three Months Ended October 1, 2021 Nine Months Ended October 1, 2021

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

7 unchanged sentences

Total $ 2,009 $ 759 $ 681 $ 3,449 $ 5,969 $ 2,271 $ 1,917 $ 10,157

Three Months Ended July 3, 2020 Six Months Ended July 3, 2020

Three Months Ended October 2, 2020 Nine Months Ended October 2, 2020

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

10 unchanged sentences

Disaggregated revenues by contract-type were as follows:

Three Months Ended July 2, 2021 Six Months Ended July 2, 2021

Three Months Ended October 1, 2021 Nine Months Ended October 1, 2021

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

6 unchanged sentences

Total $ 2,009 $ 759 $ 681 $ 3,449 $ 5,969 $ 2,271 $ 1,917 $ 10,157

Three Months Ended July 3, 2020 Six Months Ended July 3, 2020

Three Months Ended October 2, 2020 Nine Months Ended October 2, 2020

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

9 unchanged sentences

Disaggregated revenues by geographic location were as follows:

Three Months Ended July 2, 2021 Six Months Ended July 2, 2021

Three Months Ended October 1, 2021 Nine Months Ended October 1, 2021

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

5 unchanged sentences

Total $ 2,009 $ 759 $ 681 $ 3,449 $ 5,969 $ 2,271 $ 1,917 $ 10,157

Three Months Ended July 3, 2020 Six Months Ended July 3, 2020

Three Months Ended October 2, 2020 Nine Months Ended October 2, 2020

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

5 unchanged sentences

Total $ 1,951 $ 747 $ 520 $ 3,218 $ 5,412 $ 2,118 $ 1,444 $ 8,974

Revenues by customer-type, contract-type and geographic location exclude lease income of $ 31 million and $ 55 million for the three and six months ended July 2, 2021, respectively, and $ 22 million and $ 47 million for the three and six months ended July 3, 2020, respectively.

Revenues by customer-type, contract-type and geographic location exclude lease income of $ 34 million and $ 89 million for the three and nine months ended October 1, 2021, respectively, and $ 24 million and $ 71 million for the three and nine months ended October 2, 2020, respectively.

Contract Assets and Liabilities

6 unchanged sentences

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

Balance sheet line item July 2,

Balance sheet line item October 1,

2021 January 1,

9 unchanged sentences

(1) Certain contracts record revenue on a net contract basis, and therefore, the respective deferred revenue balance will not fully convert to revenue.

The increase in unbilled receivables was primarily due to the timing of billings and the acquisitions of Gibbs & Cox, Inc.

("Gibbs & Cox") and 1901 Group, LLC ("1901 Group"), partially offset by revenue recognized on certain contracts.

The increase in unbilled receivables was primarily due to revenue recognized on certain contracts partially offset by the timing of billings.

The decrease in deferred revenue was primarily due to the timing of advance payments and revenue recognized during the period.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Revenue recognized for the three and six months ended July 2, 2021 of $ 78 million and $ 222 million, respectively, was included as a contract liability at January 1, 2021.

Revenue recognized for the three and six months ended July 3, 2020 of $ 81 million and $ 226 million, respectively, was included as a contract liability at January 3, 2020.

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.

Revenue recognized for the three and nine months ended October 2, 2020 of $ 41 million and $ 267 million, respectively, was included as a contract liability at January 3, 2020.

Note 3–Acquisitions, Goodwill and Intangible Assets

Gibbs & Cox Acquisition

On May 7, 2021 (the "Purchase Date"), we completed the acquisition of Gibbs & Cox for preliminary purchase consideration of approximately $ 376 million, net of $ 1 million of cash acquired.

On May 7, 2021 (the "Purchase Date"), we completed the acquisition of Gibbs & Cox for purchase consideration of approximately $ 375 million, net of $ 1 million of cash acquired.

Gibbs & Cox is an independent engineering and design firm specializing in naval architecture, marine engineering, management support and engineering consulting.

5 unchanged sentences

Programs 11 $ 175

Technology 10 20

Trade names 5 4

Total 10 $ 125

The preliminary fair value and related weighted average amortization period of the intangible assets acquired were based on an industry benchmarking analysis surrounding recent and relevant industry transactions.

The difference between the benchmark estimate and ultimate fair value of intangible assets identified may be material.

As of July 2, 2021, we had not finalized the determination of fair values allocated to assets and liabilities, including, but not limited to, intangible assets, accounts receivables, accounts payable and accrued liabilities and other long-term liabilities.

As of October 1, 2021, we had not finalized the determination of fair values allocated to assets and liabilities, including, but not limited to, intangible assets, accounts receivables and accounts payable and accrued liabilities.

1901 Group Acquisition

On January 14, 2021 (the "Closing Date"), we completed the acquisition of 1901 Group for preliminary purchase consideration of $ 212 million, net of $ 2 million of cash acquired.

On January 14, 2021 (the "Closing Date"), we completed the acquisition of 1901 Group for purchase consideration of $ 212 million, net of $ 2 million of cash acquired.

The preliminary goodwill recognized of $ 122 million represents intellectual capital and the acquired assembled workforce, none of which qualify for recognition as separate intangible assets.

Of the goodwill recognized, $ 102 million is tax deductible.

The following table summarizes the preliminary fair value of intangible assets acquired at the Closing Date and the related weighted average amortization period:

The following table summarizes the fair value of intangible assets acquired at the Closing Date and the related weighted average amortization period:

Weighted average amortization period Fair value

2 unchanged sentences

Programs 10 37

As of July 2, 2021, we had not finalized the determination of fair values allocated to assets and liabilities, including, but not limited to intangible assets, accounts receivables, accounts payable and accrued liabilities.

As of October 1, 2021, we had not finalized the determination of fair values allocated to assets and liabilities, including, but not limited to accounts receivables and accounts payable and accrued liabilities.

For the three and nine months ended October 1, 2021, $ 47 million and $ 97 million, respectively, of revenues related to the Gibbs & Cox and 1901 Group acquisitions were recognized within the Defense Solutions reportable segmen t.

On September 21, 2021, we completed an inconsequential business acquisition for preliminary purchase consideration of approximately $ 36 million.

The preliminary goodwill and intangible assets recognized in connection with the acquisition were $ 21 million and $ 8 million, respectively.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three and six months ended July 2, 2021, $ 37 million and $ 50 million, respectively, of revenues related to the Gibbs & Cox and 1901 Group acquisitions were recognized within the Defense Solutions reportable segmen t.

SD&A Businesses Acquisition

4 unchanged sentences

The addition of the SD&A Businesses expands the scope and scale of our global security detection and automation offerings.

The final fair values of the assets acquired and liabilities assumed at the Transaction Date were as follows (in millions):

Receivables 128

Inventory 106

Other current assets 26

Operating lease right-of-use assets 35

Property, plant and equipment 32

Intangible assets 355

Accounts payable and accrued liabilities ( 132 )

Accrued payroll and employee benefits ( 8 )

Operating lease liabilities ( 32 )

Deferred tax liabilities ( 52 )

Other long-term liabilities ( 13 )

Total identifiable net assets acquired 472

Purchase price $ 1,046

As of July 2, 2021, we had completed the determination of fair values of the acquired assets and liabilities assumed.

The goodwill represents intellectual capital and the acquired assembled workforce.

The final goodwill of $ 574 million represents intellectual capital and the acquired assembled workforce.

Of the goodwill recognized, $ 432 million is deductible for tax purposes.

8 unchanged sentences

(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.

For the three and six months ended July 2, 2021, $ 74 million and $ 146 million, respectively, of revenues related to the SD&A Businesses were recognized within the Civil reportable segment.

For the three and six months ended July 3, 2020, $ 80 million of revenues related to the SD&A Businesses were recognized within the Civil reportable segment.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the nine months ended October 1, 2021 and October 2, 2020, $ 216 million and $ 154 million, respectively, of revenues related to the SD&A Businesses were recognized within the Civil reportable segment.

Dynetics Acquisition

10 unchanged sentences

Total 12 $ 528

For the six months ended July 2, 2021 and July 3, 2020, $ 567 million and $ 335 million, respectively, of revenues related to Dynetics were recognized within the Defense Solutions reportable segment.

For the nine months ended October 1, 2021 and October 2, 2020, $ 816 million and $ 637 million, respectively, of revenues related to Dynetics were recognized within the Defense Solutions reportable segment.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Acquisition and Integration Costs

The following expenses were incurred related to the acquisitions of Dynetics, the SD&A Businesses, 1901 Group and Gibbs & Cox:

Three Months Ended Six Months Ended

Three Months Ended Nine Months Ended

2021 October 2,

2020 October 1,

2021 October 2,

(in millions)

3 unchanged sentences

These acquisition and integration costs are recorded within Corporate and presented in "Acquisition, integration and restructuring costs" on the condensed consolidated statements of income.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

3 unchanged sentences

Goodwill re-allocation 429 ( 429 ) — —

Acquisitions of Dynetics and the SD&A Businesses 788 569 — 1,357

Acquisitions of businesses 788 569 — 1,357

Foreign currency translation adjustments 44 — — 44

Goodwill at January 1, 2021 3,300 2,047 966 6,313

Acquisitions of Dynetics, the SD&A Businesses, 1901 Group and Gibbs & Cox 368 5 — 373

Acquisitions of businesses 334 5 — 339

Goodwill re-allocation ( 17 ) 17 — —

Foreign currency translation adjustments ( 28 ) 26 — ( 2 )

Goodwill at July 2, 2021 $ 3,655 $ 2,086 $ 966 $ 6,707

There were no goodwill impairments during the six months ended July 2, 2021 and July 3, 2020.

Goodwill at October 1, 2021

$ 3,589 $ 2,095 $ 966 $ 6,650

There were no goodwill impairments during the nine months ended October 1, 2021 and October 2, 2020.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Intangible Assets

Intangible assets, net consisted of the following:

July 2, 2021 January 1, 2021

October 1, 2021 January 1, 2021

Gross carrying value Accumulated amortization Net carrying value Gross carrying value Accumulated amortization Net carrying value

15 unchanged sentences

Total intangible assets $ 2,315 $ ( 994 ) $ 1,321 $ 2,042 $ ( 826 ) $ 1,216

Amortization expense was $ 55 million and $ 110 million for the three and six months ended July 2, 2021, respectively, and $ 51 million and $ 94 million for the three and six months ended July 3, 2020, respectively.

Amortization expense was $ 63 million and $ 173 million for the three and nine months ended October 1, 2021, respectively, and $ 60 million and $ 154 million for the three and nine months ended October 2, 2020, 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.

1 unchanged sentence

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.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The estimated annual amortization expense as of July 2, 2021, was as follows:

The estimated annual amortization expense as of October 1, 2021, was as follows:

Fiscal year ending

2 unchanged sentences

2026 and thereafter 403

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 4–Fair Value Measurements

4 unchanged sentences

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

July 2, 2021 January 1, 2021

October 1, 2021 January 1, 2021

Carrying value Fair value Carrying value Fair value

2 unchanged sentences

Derivatives $ 70 $ 70 $ 103 $ 103

As of July 2, 2021, our derivatives primarily consisted of the cash flow interest rate swaps on $ 1.1 billion of the variable rate senior unsecured term loan (see "Note 5–Derivative Instruments").

As of October 1, 2021, our derivatives primarily consisted of the cash flow interest rate swaps on $ 1.1 billion of the variable rate senior unsecured term loan (see "Note 5–Derivative Instruments").

The fair value of the cash flow interest rate swaps is determined based on observed values for underlying interest rates on the LIBOR yield curve and the underlying interest rate (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.

The carrying value of our notes receivable of $ 15 million as of July 2, 2021, and January 1, 2021, approximates fair value as the stated interest rates within the agreements are consistent with current market rates used in notes with similar terms in the market (Level 2 inputs).

As of July 2, 2021, and January 1, 2021, the fair value of debt was $ 5.5 billion and $ 5.2 billion, respectively, and the carrying amount was $ 5.1 billion and $ 4.7 billion, respectively (see "Note 6–Debt").

The carrying value of our notes receivable of $ 15 million as of October 1, 2021, and January 1, 2021, approximates fair value as the stated interest rates within the agreements are consistent with current market rates used in notes with similar terms in the market (Level 2 inputs).

As of October 1, 2021, and January 1, 2021, the fair value of debt was $ 5.5 billion and $ 5.2 billion, respectively, and the carrying amount was $ 5.1 billion and $ 4.7 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).

1 unchanged sentence

The fair values of the assets acquired and liabilities assumed were determined using Level 3 inputs.

As of July 2, 2021, we did not have any assets or liabilities measured at fair value on a non-recurring basis.

As of October 1, 2021, we did not have any assets or liabilities measured at fair value on a non-recurring basis.

LEIDOS HOLDINGS, INC.

7 unchanged sentences

Liability derivatives

Balance sheet line item July 2,

Balance sheet line item October 1,

2021 January 1,

8 unchanged sentences

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 loss and is reclassified into earnings when the interest payments on the underlying hedged items impact earnings.

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.

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

Three Months Ended Six Months Ended

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

2021 October 2,

2020 October 1,

2021 October 2,

(in millions)

7 unchanged sentences

Our debt consisted of the following:

Stated interest rate Effective interest rate July 2,

Stated interest rate Effective interest rate October 1,

(in millions)

7 unchanged sentences

1.47 % 1.73 % $ 1,321 $ 1,391

Senior secured notes:

$ 500 million notes, due May 2023 (2)

2.95 % 3.17 % 498 —

$ 500 million notes, due May 2025 (2)

3.63 % 3.76 % 496 —

$ 750 million notes due May 2030 (2)

4.38 % 4.50 % 737 —

$ 1,000 million notes, due February 2031 (2)

2.30 % 2.38 % 989 —

Senior unsecured notes:

20 unchanged sentences

$ 4,616 $ 4,644

(1) The carrying amounts of the senior term loans and notes as of July 2, 2021, and January 1, 2021, include the remaining principal outstanding of $ 5,114 million and $ 4,782 million, respectively, less total unamortized debt discounts and deferred debt issuances costs of $ 48 million and $ 51 million, respectively.

(1) The carrying amounts of the senior term loans and notes as of October 1, 2021, and January 1, 2021, include the remaining principal outstanding of $ 5,090 million and $ 4,782 million, respectively, less total unamortized debt discounts and deferred debt issuances costs of $ 45 million and $ 51 million, respectively.

(2) We filed a Registration Statement on Form S-4 with the Securities and Exchange Commission on May 6, 2021, and was declared effective on May 19, 2021.

13 unchanged sentences

The financial covenants in the 2021 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 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.

The senior secured and unsecured term loans, notes and revolving credit facility 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 July 2, 2021.

The senior unsecured term loans, notes and revolving credit facility 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 October 1, 2021.

Commercial Paper

On July 12, 2021, we established 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 will be issued in minimum denominations of $ 0.25 million and will have maturities of up to 397 days from the date of issuance.

The Commercial Paper Notes will bear either a stated or floating interest rate, if interest bearing, or will be sold at a discount from the face amount.

As of October 1, 2021, we did not have any Commercial Paper Notes outstanding.

The Commercial Paper Notes will be fully and unconditionally guaranteed by an intercompany guarantee and contains certain customary restrictive covenants.

Principal Payments and Debt Issuance Costs

We made principal payments on our long-term debt of $ 27 million and $ 53 million during the three and six months ended July 2, 2021, respectively, and $ 226 million and $ 228 million during the three and six months ended July 3, 2020, respectively.

This activity included required principal payments on our term loans of $ 24 million and $ 48 million during the three and six months ended July 2, 2021, respectively, and $ 24 million for the three and six months ended July 3, 2020.

During the three and six months ended July 3, 2020 we made additional payments of $ 2,050 million and $ 3,975 million, respectively, related to our refinancing activities.

As of July 2, 2021 and January 1, 2021, there were no borrowings outstanding under the Revolving Facility.

For the three and six months ended July 3, 2020, $ 12 million and $ 31 million of debt discount and debt issuance costs were written off related to the prior year refinancing activities.

Amortization of debt discount and debt issuance costs was $ 2 million and $ 4 million for the three and six months ended July 2, 2021, respectively, and $ 5 million and $ 9 million for the three and six months ended July 3, 2020, respectively.

We made principal payments on our long-term debt of $ 27 million and $ 80 million during the three and nine months ended October 1, 2021, respectively, and $ 477 million and $ 705 million during the three and nine months ended October 2, 2020, respectively.

This activity included required principal payments on our term loans of $ 24 million and $ 72 million during the three and nine months ended October 1, 2021, respectively, and $ 24 million and $ 48 million for the three and nine months ended October 2, 2020, respectively.

During the nine months ended October 2, 2020, we made additional payments of $ 3,975 million, related to our refinancing activities.

Additionally, on September 1, 2020, we retired our $ 450 million senior unsecured notes due December 2020.

As of October 1, 2021 and January 1, 2021, there were no borrowings outstanding under the Revolving Facility.

For the nine months ended October 2, 2020, $ 31 million of debt discount and debt issuance costs were written off related to the prior year refinancing activities.

Amortization of debt discount and debt issuance costs was $ 3 million and $ 7 million for the three and nine months ended October 1, 2021, respectively, and $ 4 million and $ 13 million for the three and nine months ended October 2, 2020, respectively.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 7–Accumulated Other Comprehensive Loss

6 unchanged sentences

Balance at January 1, 2021 30 ( 70 ) ( 6 ) ( 46 )

Other comprehensive income 25 9 — 34

Other comprehensive income (loss) ( 8 ) 9 — 1

Taxes ( 4 ) ( 5 ) — ( 9 )

Reclassification from accumulated other comprehensive loss

Balance at July 2, 2021 $ 47 $ ( 56 ) $ ( 6 ) $ ( 15 )

Balance at October 1, 2021 $ 18 $ ( 52 ) $ ( 6 ) $ ( 40 )

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

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 Six Months Ended

Three Months Ended Nine Months Ended

2021 October 2,

2020 October 1,

2021 October 2,

(in millions)

3 unchanged sentences

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 six months ended July 2, 2021 and the three and six months July 3, 2020.

During the six months ended July 2, 2021, we made open market repurchases of our common stock for an aggregate purchase price of $ 100 million.

The total outstanding stock options and vesting stock awards that were anti-dilutive were 1 million for both the three and nine months ended October 1, 2021, and the three and nine months ended October 2, 2020.

During the three and nine months ended October 1, 2021, we made open market repurchases of our common stock for an aggregate purchase price of $ 137 million and $ 237 million, respectively.

All shares repurchased were immediately retired.

No share repurchases were made under the Company’s share repurchase program during the three months ended July 2, 2021.

Note 9–Sale of Accounts Receivable

We have entered into purchase agreements with a financial institution which provide us the election to sell accounts receivable at a discount.

The receivables sold are typically collectable from our customers within 30 days of the sale date.

During the six months ended July 2, 2021 and July 3, 2020, we sold $ 693 million and $ 1,113 million, respectively, of accounts receivable under the agreements and received proceeds of $ 693 million and $ 1,112 million, respectively, which were classified as operating activities in the condensed consolidated statements of cash flows.

These transfers have been recognized as a sale, as the receivables have been legally isolated from Leidos, the financial institution has the right to pledge or exchange the assets received and we do not maintain effective control over the transferred accounts receivable.

Our only continuing involvement with the transferred financial assets is as the collection and servicing agent.

As a result, the accounts receivable balance on the condensed consolidated balance sheets is presented net of the transferred amounts.

No servicing asset or liability was recognized for continued servicing of the sold receivables, as the servicing fee approximates fair value.

The difference between the carrying amount of the receivables sold and the net cash received was recognized as a loss on sale and was recorded within "Selling, general and administrative expenses" on the condensed consolidated statements of income.

Sold receivables activity for the periods presented was as follows:

Six Months Ended

(in millions)

Sales of accounts receivable $ 693 $ 1,113

Cash collections on sold receivables remitted to financial institution ( 693 ) ( 888 )

Outstanding balance sold to financial institution — 225

Cash collected but not yet remitted to financial institution — ( 14 )

Sold receivables due from customers $ — $ 211

LEIDOS HOLDINGS, INC.

3 unchanged sentences

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.

Effective July 3, 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.

The segment information for the periods presented was as follows:

Three Months Ended Six Months Ended

Three Months Ended Nine Months Ended

2021 October 2,

2020 October 1,

2021 October 2,

(in millions)

10 unchanged sentences

The income statement performance measures used to evaluate segment performance are revenues and operating income.

As a result, "Interest expense, net," "Other expense, net" and "Income tax expense" as reported in the condensed consolidated statements of income are not allocated to our segments.

As a result, "Interest expense, net," "Other income (expense), net" and "Income tax expense" as reported in the condensed consolidated statements of income are not allocated to our segments.

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.

3 unchanged sentences

Legal Proceedings

MSA Joint Venture

On November 10, 2015, MSA received a final decision by the Department of Energy ("DoE") contracting officer for the Mission Support Contract concluding that certain payments to MSA by the DoE for the performance of IT services by Lockheed Martin Services, Inc.

("LMSI") under a subcontract to MSA constituted alleged affiliate fees in violation of Federal Acquisition Regulations ("FAR").

Lockheed Martin Integrated Technology LLC (now known as Leidos Integrated Technology LLC) is a member entity of MSA.

Subsequent to the contracting officer's final decision, MSA, LMSI, and Lockheed Martin Corporation received notice from the U.S.

Attorney's Office for the Eastern District of Washington that the U.S.

government had initiated a False Claims Act investigation into the facts surrounding this dispute.

On February 8, 2019, the Department of Justice filed a complaint in the United States District Court for the Eastern District of Washington against MSA, Lockheed Martin Corporation, Lockheed Martin Services, Inc.

and a Lockheed Martin employee ("Defendants").

The complaint alleges violations of the False Claims Act, the Anti-Kickback Act and breach of contract with the DoE, among other things.

On January 13, 2020, the Defendants' motions to dismiss were granted in part and denied in part.

Litigation would proceed for the False Claims Act and other common law claims, although the Anti-Kickback Act claim has been dismissed with prejudice.

Attorney's office had previously advised that a parallel criminal investigation was open, although no subjects or targets of the investigation had been identified.

Attorney's office has informed MSA that it has closed the criminal investigation.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Since this issue first was raised by the DoE, MSA has asserted that the IT services performed by LMSI under a fixed-price/fixed-unit rate subcontract approved by the DoE meet the definition of a "commercial item" under the FAR and any profits earned on that subcontract are permissible.

MSA filed an appeal of the contracting officer's decision with the Civilian Board of Contract Appeals ("CBCA"), which was stayed pending resolution of the False Claims Act matter.

Subsequent to the filing of MSA's appeal, the contracting officer demanded that MSA reimburse the DoE in the amount of $ 64 million, which was his estimate of the profits earned during the period from 2010 to 2014 by LMSI.

The DoE has deferred collection of $ 32 million of that demand, pending resolution of the appeal and without prejudice to MSA's position that it is not liable for any of the DoE's $ 64 million reimbursement claim.

On December 10, 2019, MSA received a second final decision by the DoE contracting officer, estimating approximately $ 29 million in alleged unallowable profit and associated general and administrative costs during the period from 2015 to 2016 by LMSI.

MSA filed an appeal of the second contracting officer's decision, which has been consolidated with the prior proceeding before the CBCA and stayed pending resolution of the False Claims Act matter.

The DoE and MSA also executed an agreement to defer the entire amount of the disallowed costs from the second contracting officer's final decision until the CBCA proceedings are finally resolved.

Leidos has agreed to indemnify Jacobs Group, LLC and Centerra Group, LLC for any liability MSA incurs in this matter.

Under the terms of the Separation Agreement, Lockheed Martin agreed to indemnify Leidos for 100 % of any damages in excess of $ 38 million up to $ 64 million, and 50 % of any damages in excess of $ 64 million, with respect to claims asserted against MSA related to this matter.

On April 5, 2021, MSA finalized the settlement of the False Claims Act litigation in the Eastern District of Washington and the related contract claim at the CBCA.

Pursuant to the settlement agreement, DoE paid MSA approximately $ 37 million on April 19, 2021 and MSA paid the Department of Justice $ 3 million on April 22, 2021.

Accordingly, following joint motions by the parties, the CBCA dismissed the claim before the Board with prejudice on April 28, 2021 and the District Court dismissed the False Claims Act litigation with prejudice on April 30, 2021.

There remain other outstanding matters in dispute between DoE and MSA as the two parties work to close out the Mission Support Contract.

As of July 2, 2021, we believe we have adequately reserved for any potential liabilities related to these disputes.

Class Action Lawsuit

1 unchanged sentence

District Court for the Southern District of New York.

The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder relating to alleged misstatements or omissions in Leidos' public filings with the SEC and other public statements during the period from May 4, 2020 to February 23, 2021 relating, among other things, to Leidos' acquisition of the SD&A Businesses.

The plaintiff seeks to recover from the Company and the individual defendants an unspecified amount of damages at this time.

We believe the suit lacks merit and we intend to vigorously defend against it.

The complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder relating to alleged misstatements or omissions in Leidos' public filings with the SEC and other public statements during the period from May 4, 2020 to February 23, 2021 relating, among other things, to Leidos' acquisition of the SD&A Businesses.

The plaintiff sought to recover from the Company and the individual defendants an unspecified amount of damages at this time.

On July 30, 2021, the District Court appointed a lead plaintiff and lead counsel.

On September 28, 2021, the lead plaintiff voluntarily dismissed the action without prejudice.

LEIDOS HOLDINGS, INC.

15 unchanged sentences

On October 30, 2020, the jury awarded VirnetX $ 503 million in damages and specified a royalty rate of $ 0.84 per infringing device.

Apple is expected to appeal this decision.

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.

10 unchanged sentences

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.

As of July 2, 2021, indirect cost active audits by the Defense Contract Audit Agency remain open for fiscal 2016 and subsequent fiscal years.

As of October 1, 2021, indirect cost active audits by the Defense Contract Audit Agency remain open for fiscal 2016 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 July 2, 2021, we believe we have adequately reserved for potential adjustments from audits or reviews of contract costs.

As of October 1, 2021, we believe we have adequately reserved for potential adjustments from audits or reviews of contract costs.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

We have outstanding letters of credit of $ 75 million as of July 2, 2021, principally related to performance guarantees on contracts.

We have outstanding letters of credit of $ 68 million as of October 1, 2021, principally related to performance guarantees on contracts.

We also have outstanding surety bonds with a notional amount of $ 132 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.

As of July 2, 2021, the future expirations of the outstanding letters of credit and surety bonds were as follows:

As of October 1, 2021, the future expirations of the outstanding letters of credit and surety bonds were as follows:

Fiscal year ending

2 unchanged sentences

2026 and thereafter 16

Note 12–Subsequent Events

Commercial paper program

On July 12, 2021, Leidos, Inc.

established 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 Commercial Paper Notes will have maturities of up to 397 days from the date of issuance.

The net proceeds of the Commercial Paper Notes are expected to be used for general corporate purposes, including working capital, capital expenditures, acquisitions and share repurchases.

LEIDOS HOLDINGS, INC.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements