What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-15 compared with 2021-02-23 · 481 added, 587 removed, 1357 unchanged (44% of the section changed)

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CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of January 1, 2021 and January 3, 2020

Consolidated Statements of Income for the fiscal years ended January 1, 2021, January 3, 2020 and December 28, 2018

Consolidated Statements of Comprehensive Income for the fiscal years ended January 1, 2021, January 3, 2020 and December 28, 2018

Consolidated Statements of Equity for the fiscal years ended January 1, 2021, January 3, 2020 and December 28, 2018

Consolidated Statements of Cash Flows for the fiscal years ended January 1, 2021, January 3, 2020 and December 28, 2018

Report of Independent Registered Public Accounting Firm (PCAOB ID No.

Consolidated Balance Sheets as of December 31, 2021 and January 1, 2021

Consolidated Statements of Income for the fiscal years ended December 31, 2021, January 1, 2021 and January 3, 2020

Consolidated Statements of Comprehensive Income for the fiscal years ended December 31, 2021, January 1, 2021 and January 3, 2020

Consolidated Statements of Equity for the fiscal years ended December 31, 2021, January 1, 2021 and January 3, 2020

Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2021, January 1, 2021 and January 3, 2020

Notes to Consolidated Financial Statements

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We have audited the accompanying consolidated balance sheets of Leidos Holdings, Inc.

and subsidiaries (the "Company") as of January 1, 2021 and January 3, 2020, the related consolidated statements of income, comprehensive income, equity, and cash flows, for the fiscal years ended January 1, 2021, January 3, 2020, and December 28, 2018, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 1, 2021 and January 3, 2020, and the results of its operations and its cash flows for the fiscal years ended January 1, 2021, January 3, 2020, and December 28, 2018, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of January 1, 2021, based on criteria established in Internal Control — Integrated Framework (2013 ) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.

and subsidiaries (the "Company") as of December 31, 2021 and January 1, 2021, the related consolidated statements of income, comprehensive income, equity, and cash flows, for the fiscal years ended December 31, 2021, January 1, 2021, and January 3, 2020, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and January 1, 2021, and the results of its operations and its cash flows for the fiscal years ended December 31, 2021, January 1, 2021, and January 3, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013 ) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 15, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

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Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

Leidos Holdings, Inc.

Annual Report - 51

Goodwill Valuation – Security Products Reporting Unit - Refer to Note 3, Note 5 and Note 8 to the financial statements

Critical Audit Matter Description

The Company performed a quantitative impairment evaluation of the goodwill for the Security Products reporting unit by comparing the estimated fair value of the reporting unit to its carrying value.

Estimating the fair value of a reporting unit requires the exercise of significant judgment and assumptions including judgments about expected future cash flows, weighted-average cost of capital, discount rates and expected long-term growth rates.

Changes in these assumptions could have a significant impact on the fair value of the reporting unit, the amount of any goodwill impairment charge, or both.

The goodwill balance was $6,744 million as of December 31, 2021 of which $926 million related to the Security Products reporting unit.

The Company’s accounting policy is to test for impairment on the first day of the fourth quarter of each year.

As a result of the quantitative assessment, the Company concluded that the fair value of the reporting unit exceeded the carrying value by approximately 6%, which resulted in no impairment for the year ended December 31, 2021.

Given the significant judgments made by management to estimate the fair value of the Security Products reporting unit and the difference between its fair value and carrying value, performing audit procedures to develop an independent estimate of the fair value of the Security Products reporting unit, which included evaluating estimates and assumptions related to the cost of capital, forecasts of future cash flows, and terminal growth rates specifically due to the sensitivity of the operations to changes in global aviation security products and related services markets, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the selection of the discount rate, terminal growth rate and forecasts of future revenues and cash flows for the Security Products reporting unit included the following, among others:

• We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the selection of the discount rate, terminal growth rate and management’s development of forecasts of future revenues and cash flows.

• We developed an independent estimate of the fair value of the Security Products reporting unit using both the income as well as the market approach.

We utilized historical results of the reporting unit and inspected third-party industry reports for the global aviation security products and related services markets to develop projections.

Additionally, we developed the discount rate and terminal year growth rate with the assistance of our fair value specialists.

• The market approach analysis was performed by selecting guideline peer companies and developing enterprise value multiples of revenues and Earnings Before Interest, Taxes, Depreciation and Amortization.

We reconciled the results of the market approach with the discounted cash flow approach.

• We evaluated the carrying value of the reporting unit.

Revenues — Refer to Note 3 and Note 4 to the financial statements

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The Company recognizes revenue on service-based contracts primarily over time as there is continuous transfer of control to the customer over the duration of the contract as the Company performs the promised services.

The accounting conclusions for contracts involves judgment, particularly as it relates to determining whether multiple promises within a single contract are highly interrelated and represent a single performance obligation and whether or not the Company is acting as a principal in the fulfillment of the identified performance obligations on certain contracts.

The accounting conclusions for contracts involves judgment, particularly as it relates to determining whether multiple promises within a single contract are highly interrelated and represent a single performance obligation, and whether the Company is acting as a principal in the fulfillment of the identified performance obligations on certain contracts.

Leidos Holdings, Inc.

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▪ Evaluating the contract within the context of the five-step model prescribed by ASC 606 and that management’s conclusions were appropriate by evaluating the nature of the promises within the contract, the interrelationship of the promised services provided, the pattern by which obligations are fulfilled, the number of performance obligations identified, and which party is acting as principal in the fulfillment of the identified performance obligations.

▪ Involving industry experts in evaluating the appropriateness of management’s conclusions.

• Tested the mathematical accuracy of management’s calculation of revenue for the performance obligation.

• We analyzed cumulative adjustments recorded during the year and tested a sample to determine that the adjustments were the result of changes in facts and circumstances and not estimates that were previously inaccurate.

Leidos Holdings, Inc.

Annual Report - 58

Acquisitions – Valuation of Intangible Assets Acquired— Refer to Note 6 to the financial statements

Critical Audit Matter Description

As described in Note 6 of the consolidated financial statements, the Company completed two business acquisitions during the fiscal year ended January 1, 2021.

On January 31, 2020 the Company acquired Dynetics, Inc.

(“Dynetics”) for a purchase price of $1.6 billion, and on May 4, 2020, the Company acquired the Security Detection & Automation (“SD&A”) businesses from L3Harris Technologies for a purchase price of $1.0 billion.

The Company’s accounting for the acquisitions included determining the fair value of the intangible assets acquired, which primarily included $485 million of program-related intangible assets acquired in the Dynetics acquisition, as well as $141 million, $48 million, $73 million and $92 million of programs, customer relations, technology and in process research and development intangible assets, respectively, acquired in the SD&A acquisition.

The fair value of the intangible assets was determined based on estimates and judgments, including the amount and timing of expected future cash flows, long-term growth rates and discount rates.

In some cases, the Company used discounted cash flow analyses, which were based on estimates of future sales, earnings and cash flows after considering such factors as general market conditions, customer budgets, existing and future orders, changes in working capital, long term business plans and recent operating performance.

These estimates and judgments are forward-looking and could be affected by future economic and market conditions.

Given the judgments necessary to audit such accounting conclusions, the estimates required extensive audit effort due to the uncertainty associated with future events and a high degree of auditor judgment when performing audit procedures and evaluating the results of those procedures.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the valuation of intangible assets included the following, among others :

• We obtained and read the executed purchase agreements.

• We tested the effectiveness of controls over the management’s process for identifying and determining the fair value of the acquired intangible assets.

• We tested the completeness and accuracy of the underlying data used in the fair value models which included inspecting contractual documents, comparing projected cash flows to both historical actuals and industry data, and inquiring of program management.

• We involved our valuation specialists to assist with the evaluation of methodologies used by the Company and significant valuation assumptions included in the fair value estimates, including the discount rate and revenue growth rate applied to future cash flows.

• We performed a sensitivity analyses over assumptions used in the model, to evaluate the risk associated with a change in the fair value of the intangible assets resulting from changes in the assumptions.

• We compared the significant assumptions to current industry, market and economic trends, historical results of the acquired businesses, and to other relevant factors including benchmark data.

• We evaluated the adequacy of the Company’s disclosures related to these acquisitions.

• We analyzed cumulative adjustments recorded during the year and tested those with characteristics of audit interest to determine that the adjustments were the result of changes in facts and circumstances and not estimates that were previously inaccurate.

/s/ Deloitte & Touche LLP

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Other assets 439 458

$ 12,511 $ 9,367

LIABILITIES AND EQUITY

Total assets $ 13,261 $ 12,511

Accounts payable and accrued liabilities $ 2,141 $ 2,175

Accrued payroll and employee benefits 605 632

Long-term debt, current portion 100 61

Short-term debt and current portion of long-term debt 483 100

Total current liabilities 3,229 2,907

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Other long-term liabilities 267 291

Commitments and contingencies (Notes 12, 24 and 25)

Total liabilities $ 8,917 $ 8,640

Commitments and contingencies (Notes 21)

Stockholders’ equity:

Preferred stock, $ 0.0001 par value, 10 million shares authorized and no shares issued and outstanding at January 1, 2021 and January 3, 2020

Common stock, $ 0.0001 par value, 500 million shares authorized, 142 million and 141 million shares issued and outstanding at January 1, 2021 and January 3, 2020, respectively

Preferred stock, $ 0.0001 par value, 10 million shares authorized and no shares issued and outstanding at December 31, 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 December 31, 2021 and January 1, 2021, respectively

Additional paid-in capital 2,423 2,580

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Non-controlling interest 53 9

Total equity 3,871 3,417

$ 12,511 $ 9,367

Total stockholders' equity 4,344 3,871

Total liabilities and stockholders' equity $ 13,261 $ 12,511

See accompanying notes to consolidated financial statements.

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2021 January 1,

2020 December 28,

2021 January 3,

(in millions, except per share amounts)

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2021 January 1,

2020 December 28,

2021 January 3,

(in millions)

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Foreign currency translation adjustments ( 8 ) 63 8

Unrecognized loss on derivative instruments

( 37 ) ( 47 ) ( 10 )

Unrecognized gain (loss) on derivative instruments 29 ( 37 ) ( 47 )

Pension adjustments 13 ( 2 ) ( 1 )

( 2 ) ( 1 ) ( 1 )

Total other comprehensive income (loss), net of taxes 34 24 ( 40 )

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Comprehensive income attributable to Leidos common stockholders $ 787 $ 652 $ 627

$ 652 $ 627 $ 509

See accompanying notes to consolidated financial statements.

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Shares of common stock Additional

capital (Accumulated deficit) retained earnings Accumulated

capital Retained earnings Accumulated

comprehensive

income (loss) Leidos Holdings, Inc.

loss Leidos Holdings, Inc.

stockholders' equity Non-controlling interest Total

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Cumulative adjustments related to ASU adoptions — — 48 — 48 — 48

— — ( 8 ) 9 1 — 1

Balance at December 28, 2018 146 2,966 420 ( 30 ) 3,356 3 3,359

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— — — ( 40 ) ( 40 ) — ( 40 )

Issuances of stock (less forfeitures)

1 17 — — 17 — 17

Issuances of stock 1 28 — — 28 — 28

Repurchases of stock and other

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Stock-based compensation — 52 — — 52 — 52

Purchase of a noncontrolling interest

— ( 1 ) — — ( 1 ) ( 10 ) ( 11 )

Other — ( 1 ) — — ( 1 ) ( 2 ) ( 3 )

Balance at December 28, 2018 146 2,966 372 ( 30 ) 3,308 3 3,311

Balance at January 3, 2020 141 2,587 896 ( 70 ) 3,413 4 3,417

Cumulative adjustments related to ASU adoptions

— — ( 1 ) — ( 1 ) — ( 1 )

Balance at December 29, 2018 146 2,966 420 ( 30 ) 3,356 3 3,359

Balance at January 4, 2020 141 2,587 895 ( 70 ) 3,412 4 3,416

Net income — — 628 — 628 1 629

Other comprehensive loss, net of taxes

— — — ( 40 ) ( 40 ) — ( 40 )

Issuances of stock (less forfeitures)

Other comprehensive income, net of taxes

— — — 24 24 — 24

Issuances of stock 1 36 — — 36 — 36

Repurchases of stock and other

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Stock-based compensation — 62 — — 62 — 62

Other — ( 1 ) — — ( 1 ) ( 2 ) ( 3 )

Balance at January 3, 2020 141 2,587 896 ( 70 ) 3,413 4 3,417

Cumulative adjustments related to ASU adoptions

— — ( 1 ) — ( 1 ) — ( 1 )

Net capital contributions to non-controlling interest — — — — — 4 4

Balance at January 1, 2021 142 2,580 1,328 ( 46 ) 3,862 9 3,871

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— — — 34 34 — 34

Issuances of stock (less forfeitures)

1 36 — — 36 — 36

Issuances of stock 1 46 — — 46 — 46

Repurchases of stock and other

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Stock-based compensation — 67 — — 67 — 67

Capital contributions to non-controlling interest

— — — — — 4 4

Balance at January 1, 2021 142 $ 2,580 $ 1,328 $ ( 46 ) $ 3,862 $ 9 $ 3,871

Net capital contributions to non-controlling interest — — — — — 38 38

Balance at December 31, 2021 140 $ 2,423 $ 1,880 $ ( 12 ) $ 4,291 $ 53 $ 4,344

See accompanying notes to consolidated financial statements.

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2021 January 1,

2020 December 28,

2021 January 3,

(in millions)

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Depreciation and amortization 325 282 234

Gain on sale of businesses — ( 88 ) —

Stock-based compensation 67 62 52

Loss (gain) on sale of businesses 3 — ( 88 )

Loss on debt extinguishment — 36 —

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Deferred income taxes ( 26 ) ( 4 ) 18

Bad debt expense 13 12 —

Bad debt expense and recoveries ( 9 ) 13 12

Other ( 1 ) 1 3

Change in assets and liabilities, net of effects of acquisitions and dispositions:

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Other current assets and other long-term assets

104 41 ( 17 )

Accounts payable and accrued liabilities and other long-term liabilities

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Collections on promissory notes — 5 5

Other ( 4 ) 6 1

Net cash (used in) provided by investing activities ( 730 ) ( 2,815 ) 65

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Proceeds from issuances of stock 44 35 27

Payment of tax indemnification liability — — ( 23 )

Proceeds from real estate financing transaction — — 14

Capital distributions to non-controlling interests ( 3 ) — —

Capital contributions from non-controlling interests 41 4 —

Other — ( 5 ) —

Net cash provided by (used in) financing activities 1,451 ( 709 ) ( 707 )

Net cash (used in) provided by financing activities ( 113 ) 1,451 ( 709 )

Net increase (decrease) in cash, cash equivalents and restricted cash 188 ( 30 ) 348

Cash, cash equivalents and restricted cash at beginning of year 687 717 369

Cash, cash equivalents and restricted cash at end of year 875 687 717

Leidos Holdings, Inc.

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2021 January 1,

2020 December 28,

2021 January 3,

(in millions)

Net (decrease) increase in cash, cash equivalents and restricted cash ( 30 ) 348 ( 53 )

Cash, cash equivalents and restricted cash at beginning of year 717 369 422

Cash, cash equivalents and restricted cash at end of year $ 687 $ 717 $ 369

restricted cash at end of year 148 163 49

Cash and cash equivalents at end of year $ 727 $ 524 $ 668

Supplementary cash flow information:

Cash paid for interest $ 182 $ 161 $ 172

Cash paid for income taxes, net of refunds 221 140 142

Non-cash investing activity:

Property, plant and equipment additions $ 4 $ 18 $ 27

Non-cash financing activity:

Finance lease obligations $ 51 $ 12 $ —

See accompanying notes to consolidated financial statements.

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("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 ® science, engineering and information technology company that provides services and solutions in the defense, intelligence, homeland security, civil and health markets, both domestically and internationally.

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.

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Department of Homeland Security, the Federal Aviation Administration, the Department of Veterans Affairs and many other U.S.

civilian, state and local government agencies as well as foreign government agencies.

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.

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We have an 88 % controlling interest in Mission Support Alliance, LLC ("MSA"), a joint venture with Centerra Group, LLC, which includes 41 % purchased from Jacobs Group, LLC on January 26, 2018.

MSA's contract is anticipated to end in early fiscal 2021.

MSA’s contract ended on January 24, 2021.

We also have a 53 % 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.

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Intercompany accounts and transactions between consolidated companies have been eliminated in consolidation.

Effective the beginning of fiscal 2020, certain contracts were reassigned from the Civil reportable segment to the Defense Solutions reportable segment (see "Note 23—Business Segments").

Fiscal 2019 and 2018 segment results and disclosures have been recast to reflect this change.

Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation.

We disaggregated "Inventory, net" from "Other current assets" on the consolidated balance sheets.

We also disaggregated "Loss on debt extinguishment" from "Other" within operating activities and "Payments for debt issuance and modification costs" from "Other" within financing activities on the consolidated statements of cash flows.

Additionally, we combined "Other current assets" and "Other long-term assets" into "Other current assets and other long-term assets" and "Accounts payable and accrued liabilities" and "Other long-term liabilities" into "Accounts payable and accrued liabilities and other long-term liabilities" on the consolidated statements of cash flows.

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.

Effective the beginning of fiscal 2020, certain contracts were reassigned from the Civil reportable segment to the Defense Solutions reportable segment.

Fiscal 2019 segment results and disclosures have been recast to reflect this change.

Note 2—Accounting Standards

Accounting Standards Updates Adopted

ASU 2016-13, ASU 2018-19, ASU 2019-05 and ASU 2019-11, Financial Instruments – Credit Losses (Topic 326)

In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13 and subsequent updates, which eliminates the requirement that a credit loss on a financial instrument be "probable" prior to recognition.

Instead, a valuation allowance will be recorded to reflect an entity's current estimate of all expected credit losses, based on both historical and forecasted information related to an instrument.

The update is effective for public companies for annual and interim reporting periods beginning after December 15, 2019, and should be adopted using a modified retrospective approach, which applies a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.

A prospective approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date and loans and debt securities acquired with deteriorated credit quality.

Early adoption is permitted.

Effective January 4, 2020, we adopted the requirements of Topic 326 using the modified retrospective approach.

The adoption resulted in an immaterial impact to our financial assets and processes for determining the expected credit loss.

ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity's Own Equity (Subtopic 815-40)

In August 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-06 which simplifies the accounting for convertible debt and convertible preferred stock by removing the requirements to separate embedded conversion features from the host convertible instruments.

Additionally, the amendments in this update simplify the guidance in Subtopic 815-40 by removing certain criteria that must be satisfied in order to classify a contract as equity.

This update also improves the consistency of earnings per share calculations by requiring an entity to use the if-converted method of calculating diluted earnings per share rather than the treasury stock method for convertible instruments and also by requiring the inclusion of the potential effect of shares settled in cash or shares in the diluted earnings per share calculation.

The amendments in this update are effective for public entities for fiscal years beginning after December 15, 2021, and adopted using either a fully or modified retrospective approach.

Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020.

Entities should adopt the guidance as of the beginning of the fiscal year of adoption and cannot adopt the guidance in an interim reporting period.

Effective January 2, 2021, we adopted the requirements of ASU 2020-06 using the modified retrospective method.

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

Leidos Holdings, Inc.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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.

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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.

We are currently evaluating the impacts of the reference rate reform.

ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity's Own Equity (Subtopic 815-40)

In August 2020, the FASB issued ASU 2020-06 which simplifies the accounting for convertible debt and convertible preferred stock by removing the requirements to separate embedded conversion features from the host convertible instruments.

Additionally, the amendments in this update simplify the guidance in Subtopic 815-40 by removing certain criteria that must be satisfied in order to classify a contract as equity.

The amendments in this update are effective for public entities for fiscal years beginning after December 15, 2021, and can be adopted using either a fully or modified retrospective approach.

Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020.

Entities should adopt the guidance as of the beginning of the fiscal year of adoption and cannot adopt the guidance in an interim reporting period.

We plan to early adopt this update in the beginning of fiscal 2021, and expect the associated financial statement impacts to be immaterial.

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.

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 reference rate reform.

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

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 plan to adopt 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 ASC 606 .

Note 3—Summary of Significant Accounting Policies

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Leidos' fiscal year ends on the Friday nearest the end of December.

Fiscal 2020 ended January 1, 2021.

Fiscal 2021 ended December 31, 2021.

Fiscal 2021 and 2020 each included 52 weeks and fiscal 2019 included 53 weeks.

Leidos Holdings, Inc.

Annual Report - 61

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Use of Estimates

5 unchanged sentences

Our operating cycle for long-term contracts may be greater than one year and is measured by the average time intervening between the inception and the completion of those contracts.

Leidos Holdings, Inc.

Annual Report - 67

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Business Combinations, Investments and Variable Interest Entities

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Divestitures representing a strategic shift that has (or will have) a major effect in operations and financial results are classified as discontinued operations, whereas non-strategic divestitures remain in continuing operations.

Leidos Holdings, Inc.

Annual Report - 62

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restructuring Expenses

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We perform under various types of contracts, which include firm-fixed-price ("FFP"), time-and-materials ("T&M"), fixed-price-level-of-effort ("FP-LOE"), cost-plus-fixed-fee ("CPFF"), cost-plus-award-fee, cost-plus-incentive-fee and fixed-price-incentive-fee ("FP-IF") contracts.

Leidos Holdings, Inc.

Annual Report - 68

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

To determine the proper revenue recognition, we first evaluate whether we have a duly approved and enforceable contract with a customer, in which the rights of the parties and payment terms are identified, and collectability is probable.

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Contracts with the U.S.

government are subject to the Federal Acquisition Regulation ("FAR") and priced on estimated or actual costs of providing the goods or services.

government are subject to the FAR and priced on estimated or actual costs of providing the goods or services.

The FAR provides guidance on types of costs that are allowable in establishing prices for goods and services provided to the U.S.

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We estimate variable consideration at the most probable amount that we expect to be entitled to, based on the assessment of the contractual variable fee criteria, complexity of work and related risks, extent of customer discretion, amount of variable consideration received historically and the potential of significant reversal of revenue.

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LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We allocate the transaction price of a contract to its performance obligations in the proportion of its respective standalone selling prices.

7 unchanged sentences

Anticipated losses on service-based contracts are recognized when incurred (generally on a straight-line basis) over the contract term.

In certain product sales, where the products have an alternate use, revenue is recognized at a point in time when the customer takes control of the asset usually denoted by possession and legal title.

Leidos Holdings, Inc.

Annual Report - 69

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On FFP contracts requiring system integration and cost-plus contracts with variable consideration, revenue is recognized over time generally using a method that measures the extent of progress towards completion of a performance obligation, principally using a cost-input method (referred to as the cost-to-cost method).

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Contract costs incurred for U.S.

government contracts, including indirect costs, are subject to audit and adjustment by the Defense Contract Audit Agency ("DCAA") (see "Note 24—Contingencies").

government contracts, including indirect costs, are subject to audit and adjustment by the Defense Contract Audit Agency ("DCAA") (see "Note 21—Commitments and Contingencies").

Pre-contract Costs

4 unchanged sentences

These costs are generally capitalized as deferred assets and amortized on a straight-line basis over the anticipated term of the contract or a specified period of performance, including unexercised option periods that are reasonably certain of being exercised.

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Project Assets

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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.

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Changes in estimates on contracts for the periods presented were as follows:

2021 January 1,

2020 December 28,

2021 January 3,

(in millions, except for per share amounts)

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government customers as overhead (included in "Cost of revenues") or general and administrative expenses in the same manner as such costs are defined in our disclosure statements under U.S.

government Cost Accounting Standards ("CAS").

government Cost Accounting Standards.

Selling, general and administrative expenses include general and administrative, bid and proposal and company-funded research and development expenses.

5 unchanged sentences

Under this method, changes in tax rates and laws are recognized in income in the period such changes are enacted.

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We record net deferred tax assets to the extent we believe these assets will more likely than not be realized.

3 unchanged sentences

Such provision differs from the amounts currently payable because certain items of income and expense are recognized in different reporting periods for financial reporting purposes than for income tax purposes.

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We recognize liabilities for uncertain tax positions when it is more likely than not that a tax position will not be sustained upon examination and settlement with various taxing authorities.

4 unchanged sentences

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

At January 1, 2021, and January 3, 2020, $ 237 million and $ 169 million, respectively, of outstanding payments were included within "Cash and cash equivalents."

At December 31, 2021 and January 1, 2021, $ 138 million and $ 237 million, respectively, of outstanding payments were included within "Cash and cash equivalents."

Restricted Cash

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Restricted cash balances are included as "Other current assets" on the consolidated balance sheets.

Our restricted cash balances were $ 148 million and $ 163 million at December 31, 2021 and January 1, 2021, respectively.

Receivables include amounts billed and currently due from customers, amounts billable where the right to consideration is unconditional and amounts unbilled.

9 unchanged sentences

Amounts billed and collected on contracts but not yet recorded as revenue because we have not performed our obligation under the arrangement with a customer are deferred and included within "Accounts payable and accrued liabilities" or "Other long-term liabilities" on the consolidated balance sheets.

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Concentration of Credit Risk

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Inventory is evaluated against historical and planned usage to determine appropriate provisions for obsolete inventory.

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Goodwill represents the excess of the fair value of consideration transferred, plus the fair value of any non-controlling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.

1 unchanged sentence

Our policy is to perform our annual goodwill impairment evaluation as of the first day of the fourth quarter of our fiscal year.

During fiscal 2020 and 2019, we had seven and six reporting units, respectively, for the purpose of testing goodwill for impairment.

Goodwill is evaluated for impairment either under a qualitative assessment option or a quantitative approach depending on the facts and circumstances of a reporting unit, consideration of the excess of a reporting unit's fair value over its carrying amount in previous assessments and changes in business environment.

During both fiscal 2021 and 2020, we had seven reporting units for the purpose of testing goodwill for impairment.

Goodwill is evaluated for impairment either under a qualitative assessment option or a quantitative approach, which depends on the facts and circumstances of a reporting unit, consideration of the excess of a reporting unit's fair value over its carrying amount in previous assessments and changes in business environment.

When performing a qualitative assessment, we consider factors including, but not limited to, current macroeconomic conditions, industry and market conditions, cost factors, financial performance and other events relevant to the entity or reporting unit under evaluation to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

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We estimate the fair value of each reporting unit using Level 3 inputs when a quantitative analysis is performed.

These analyses rely on significant judgements and assumptions about expected future cash flows, weighted-average cost of capital, discount rates, expected long-term growth rates, operating margins and on the selection of guideline public companies.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Intangible Assets

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CIP balances are transferred to the appropriate asset account when the asset is capitalized and ready for its intended use.

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When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is recognized.

8 unchanged sentences

We have facilities and equipment lease arrangements.

An arrangement is determined to be a lease at inception if it conveys the right to control the use of identified property and equipment for a period of time in exchange for consideration.

ROU assets represent the right to use an underlying asset over the lease term and lease liabilities represent the obligation to make lease payments arising from the lease.

An arrangement is determined to be a lease at inception if it conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration.

Right-of-use ("ROU") assets represent the right to use an underlying asset over the lease term and lease liabilities represent the obligation to make lease payments arising from the lease.

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ROU assets and lease liabilities are recorded on the consolidated balance sheet at lease commencement date based on the present value of the future minimum lease payments over the lease term.

7 unchanged sentences

Variable lease payments that depend on an index or a rate are included in the determination of ROU assets and lease liabilities using the index or rate at the lease commencement date, whereas variable lease payments that do not depend on an index or rate are recorded as lease expense in the period incurred.

At January 1, 2021, we did not have any lease agreements with residual value guarantees.

At December 31, 2021, we did not have any lease agreements with residual value guarantees.

We use the practical expedient to not separate non-lease components from lease components and instead account for both components as a single lease.

The practical expedient is applied to all material classes of leased assets.

The practical expedient is applied to all material classes of leased assets except for aircrafts, for which we account for the lease component and non-lease component separately.

The related lease payments on short-term facilities and equipment leases are recognized as expense on a straight-line basis over the lease term.

1 unchanged sentence

This includes an establishment of a plan of abandonment, which occurs when we have committed to a plan to abandon the lease before the end of its previously estimated useful life and there is no expectation that we will re-enter or re-purpose the space, including the fact that it cannot be subleased or transferred to another program within Leidos.

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We are a lessor on certain equipment sales-type and operating lease arrangements with our customers.

8 unchanged sentences

If we account for an arrangement both as a lease and non-lease component, then the allocation of consideration for each component will be based the relative standalone sales price.

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Fair Value Measurements

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Management evaluates its investments for other-than-temporary impairment at each balance sheet date.

When testing long-term investments for recovery of carrying value, the fair value of long-term investments is determined using various valuation techniques and factors, such as market prices of comparable companies (Level 2 input), discounted cash flow models (Level 3 input) and recent capital transactions of the portfolio companies being valued (Level 3 input).

If management determines that an other-than-temporary decline in the fair value of an investment has occurred, an impairment loss is recognized to reduce the investment to its estimated fair value.

9 unchanged sentences

The fair value of these interest rate swaps is determined based on observed values for underlying interest rates on the LIBOR yield curve (Level 2).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

8 unchanged sentences

The fair value of restricted stock awards and performance-based stock awards is based on the closing price of Leidos common stock on the date of grant.

The fair value of performance-based stock awards with market conditions is based on using the Monte Carlo simulation.

The fair value of performance-based stock awards with market conditions is based on using a Monte Carlo simulation.

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The fair value of stock option awards granted is based on using the Black-Scholes-Merton option pricing model.

11 unchanged sentences

Remaining performance obligations do not include unexercised option periods and future potential task orders expected to be awarded under 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 January 1, 2021, we had $ 15.7 billion of remaining performance obligations, approximately 50 %, 16 % and 34 % of which are expected to be recognized as revenues in fiscal 2021, fiscal 2022 and fiscal 2023 and thereafter, respectively.

As of December 31, 2021, we had $ 15.6 billion of remaining performance obligations and expect to recognize approximately 53 % and 71 % over the next 12 months and 24 months, respectively, with the remaining to be recognized thereafter.

Disaggregation of Revenues

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These categories represent how the nature, timing and uncertainty of revenues and cash flows are affected.

Fiscal 2019 and 2018 amounts have been recast for the contracts that were reassigned from the Civil reportable segment to the Defense Solutions reportable segment (see "Note 23—Business Segments").

Fiscal 2019 amounts have been recast for certain contracts that were reassigned from the Civil reportable segment to the Defense Solutions reportable segment (see "Note 20—Business Segments").

Leidos Holdings, Inc.

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Disaggregated revenues by customer-type were as follows:

Year Ended January 1, 2021

Year Ended December 31, 2021

Defense Solutions Civil Health Total

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Total $ 7,339 $ 2,903 $ 1,955 $ 12,197

Year Ended December 28, 2018

Year Ended January 3, 2020

Defense Solutions Civil Health Total

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Disaggregated revenues by contract-type were as follows:

Year Ended January 1, 2021

Year Ended December 31, 2021

Defense Solutions Civil Health Total

7 unchanged sentences

Total $ 8,029 $ 3,044 $ 2,544 $ 13,617

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Year Ended January 1, 2021

8 unchanged sentences

Total $ 7,339 $ 2,903 $ 1,955 $ 12,197

Year Ended December 28, 2018

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Year Ended January 3, 2020

Defense Solutions Civil Health Total

11 unchanged sentences

Disaggregated revenues by geographic location were as follows:

Year Ended January 1, 2021

Year Ended December 31, 2021

Defense Solutions Civil Health Total

11 unchanged sentences

International

838 165 — 1,003

Total $ 7,339 $ 2,903 $ 1,955 $ 12,197

Year Ended December 28, 2018

Year Ended January 3, 2020

Defense Solutions Civil Health Total

3 unchanged sentences

International

815 114 — 929

Total $ 6,299 $ 2,703 $ 1,974 $ 10,976

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Our international business operations, primarily located in Australia and the U.K., are subject to additional and different risks than our U.S.

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International transactions can also involve increased financial and legal risks arising from foreign exchange variability, imposition of tariffs or additional taxes and restrictive trade policies and delays or failure to collect amounts due to differing legal systems.

Revenues by contract-type, customer-type and geographic location exclude lease income of $ 100 million and $ 118 million for fiscal 2020 and 2019, respectively (see "Note 12—Leases").

Note 5—Contract Assets and Liabilities

Revenues by contract-type, customer-type and geographic location exclude lease income of $ 120 million, $ 100 million and $ 118 million for fiscal 2021, 2020 and 2019, respectively (see "Note 10—Leases").

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Contract Assets and Liabilities

Performance obligations are satisfied either over time as work progresses or at a point in time.

FFP contracts are typically billed to the customer using milestone payments while cost-reimbursable and T&M 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.

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 just subject to the passage of time.

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.

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 January 1,

Balance sheet line item December 31,

2021 January 1,

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Contract liabilities - non-current:

Deferred revenue Other long-term liabilities $ 20 $ 9

The increases in unbilled receivables and deferred revenue were primarily due to the acquisitions of Dynetics, Inc.

and L3Harris Technologies' security detection and automation businesses.

The increase in deferred revenue was also attributable to advance payments received from customers offset by revenue recognized during the period.

Revenue recognized during fiscal 2020 and 2019 of $ 275 million and $ 207 million, respectively, was included as a contract liability at January 3, 2020 and December 28, 2018, respectively .

Deferred revenue (1)

Other long-term liabilities $ 24 $ 20

(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 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.

Revenue recognized during fiscal 2021 and 2020 of $ 340 million and $ 275 million, respectively, was included as a contract liability at January 1, 2021 and January 3, 2020, respectively.

There were no impairment losses recognized on contract assets during fiscal 2021, 2020 and 2019.

Note 6—Acquisitions

Note 5—Acquisitions and Divestitures

We may acquire businesses as part of our growth strategy to provide new or enhance existing capabilities and offerings to customers.

During fiscal 2020, we completed the acquisition of Dynetics, Inc.

("Dynetics") and L3Harris Technologies' security detection and automation businesses (the "SD&A Businesses").

During fiscal 2021, we completed the acquisitions of Gibbs & Cox, 1901 Group, LLC ("1901 Group"), and an immaterial strategic acquisition.

During fiscal 2020, we completed the acquisitions of L3Harris Technologies' security detection and automation businesses (the "SD&A Businesses") and Dynetics, Inc.

("Dynetics").

During fiscal 2019, we completed the acquisition of IMX Medical Management Services, Inc.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On December 10, 2020, we entered into a definitive agreement to acquire 1901 Group, LLC ("1901 Group"), a leading provider for managed IT services and cloud solutions in the private and public market.

On January 14, 2021, we completed the acquisition of 1901 Group (see "Note 26—Subsequent Events").

SD&A Businesses and Dynetics Acquisitions

Gibbs & Cox Acquisition

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.

The preliminary goodwill recognized of $ 276 million represents intellectual capital and the acquired assembled workforce, neither of which qualify for recognition as a separate intangible asset.

All of the goodwill recognized is tax deductible.

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

Weighted average amortization period Fair value

(in years) (in millions)

Programs 12 $ 89

As of December 31, 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.

1901 Group Acquisition

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.

As of December 31, 2021, we had completed the determination of fair values of the acquired assets and liabilities assumed.

The final goodwill recognized of $ 123 million represents intellectual capital and the acquired assembled workforce, none of which qualify for recognition as separate intangible assets.

Of the goodwill recognized, $ 118 million is tax deductible.

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

(in years) (in millions)

Technology 8 $ 43

Programs 10 37

For fiscal 2021, $ 145 million 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 immaterial strategic business acquisition for preliminary purchase consideration of approximately $ 36 million.

In connection with the transaction, the Company recognized an $ 8 million program intangible asset and preliminary goodwill of $ 24 million.

SD&A Businesses Acquisition

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The purchase consideration includes the initial cash payment of $ 1,015 million plus a $ 31 million payment for contractual net working capital acquired.

The net working capital payment has been reflected within investing activities in the consolidated statement of cash flows.

The SD&A Businesses provide airport and critical infrastructure screening products, automated tray return systems and other industrial automation products.

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

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

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

Receivables 128

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Purchase price $ 1,046

Due to the timing and complexity of the acquisition, the assets acquired and liabilities assumed were recorded at their preliminary estimated fair values.

As of January 1, 2021, we had not finalized the determination of fair values of the acquired assets and liabilities assumed, primarily including, but not limited to receivables, inventory, intangible assets, accounts payable and accrued liabilities and deferred taxes.

The purchase price allocation is subject to change as we complete our determination of the fair value of the acquired assets and liabilities assumed, the impact of which could be material.

As of May 4, 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.

Of the preliminary goodwill recognized, $ 425 million is deductible for tax purposes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

Weighted average amortization period Fair value

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(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 fiscal 2020, $ 243 million of revenues related to the SD&A Businesses were recognized within the Civil reportable segment.

For fiscal 2021 and fiscal 2020, $ 291 million and $ 243 million, respectively, of revenues related to the SD&A Businesses were recognized within the Civil reportable segment.

Dynetics Acquisition

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The addition of Dynetics will accelerate opportunities within our innovation engine that researches and develops new technologies and solutions to address the most challenging needs of our customers.

Dynetics was acquired for cash consideration of $ 1.64 billion, net of cash acquired.

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

All of the issued and outstanding shares of common stock of Dynetics were purchased for $ 1.64 billion, net of cash acquired.

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

Receivables 158

10 unchanged sentences

Purchase price $ 1,660

As of January 1, 2021, we had substantially completed the determination of fair values of the acquired assets and liabilities assumed.

The fair values not yet finalized primarily related to unbilled receivables.

As of January 31, 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.

All of the goodwill recognized is deductible for tax purposes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

Weighted average amortization period Fair value

3 unchanged sentences

Total 12 $ 528

For fiscal 2020, $ 937 million of revenues related to Dynetics were recognized within the Defense Solutions reportable segment.

Acquisition and Integration Costs

The following expenses were incurred related to the acquisitions of Dynetics and the SD&A Businesses:

(in millions)

Acquisition costs $ 23

Integration costs 12

Total acquisition and integration costs $ 35

These acquisition and integration costs have been primarily recorded within Corporate and presented in "Acquisition, integration and restructuring costs" on the consolidated statement of income.

Pro Forma Financial Information

The following unaudited pro forma financial information presents consolidated results of operations as if the acquisitions of Dynetics and the SD&A Businesses had occurred on December 29, 2018.

The pro forma financial information was prepared based on historical financial information and has been adjusted to give effect to the events that are directly attributable to the acquisitions of Dynetics and the SD&A Businesses and are factually supportable.

The unaudited pro forma results below do not reflect future events that have occurred or may occur after the acquisitions, including anticipated synergies or other expected benefits that may be realized from the acquisitions.

The pro forma information is not intended to reflect the actual results of operations that would have occurred if the acquisitions had been completed on December 29, 2018, nor is it intended to be an indication of future operating results.

2021 January 3,

(in millions, except per share amounts)

Revenues $ 12,553 $ 12,250

Net income 618 583

Net income attributable to Leidos common stockholders 617 580

Earnings per share:

Basic $ 4.35 $ 4.06

Diluted 4.28 4.00

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The unaudited pro forma financial information above includes the following nonrecurring significant adjustment made to account for certain costs incurred as if the acquisitions had been completed on December 29, 2018:

• Acquisition-related costs of $ 23 million were excluded within the pro forma financial information for fiscal 2020 and were included within the supplemental pro forma earnings for fiscal 2019.

For fiscal 2021 and fiscal 2020, $ 1,065 million and $ 937 million, respectively, of revenues related to Dynetics were recognized within the Defense Solutions reportable segment.

IMX Acquisition

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The amortization period for the customer relationships is 10 years.

Lockheed Martin Transaction

On August 16, 2016, a wholly-owned subsidiary of Leidos Holdings, Inc.

merged with Lockheed Martin's Information Systems and Global Solutions business (the "IS&GS Business") in a Reverse Morris Trust transaction (the "IS&GS Transactions").

On January 10, 2018, the final amount of the net working capital of the IS&GS Business was determined through a binding arbitration proceeding in accordance with the Separation Agreement with Lockheed Martin.

On January 18, 2018, the final working capital amount of $ 105 million was paid to Lockheed Martin, of which $ 24 million and $ 81 million was presented as cash flows from operating and investing activities, respectively, on the consolidated statements of cash flows.

Additionally, during fiscal 2018, a tax indemnification liability of $ 23 million was paid to Lockheed Martin in accordance with the Tax Matters Agreement, which was presented as cash flows from financing activities on the consolidated statements of cash flows.

During fiscal 2020, 2019 and 2018, we incurred $ 1 million, $ 3 million and $ 29 million, respectively, of integration costs related to the IS&GS Business.

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

Note 7—Divestitures

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Acquisition and Integration Costs

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

2021 January 1,

(in millions)

Acquisition costs $ 4 $ 23

Integration costs 20 12

Total acquisition and integration costs $ 24 $ 35

These acquisition and integration costs have been primarily recorded within Corporate and presented in "Acquisition, integration and restructuring costs" on the consolidated statement of income.

Aviation & Missile Solutions LLC ("AMS")

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 sales price will be approximately $ 18 million, subject to certain adjustments and is expected to be completed during fiscal year 2022.

Health Staff Augmentation Business

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$ 2,189 $ 2,137

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 fiscal 2021 and 2020, we sold $ 693 million and $ 1,866 million, respectively, of accounts receivable under the agreements and received proceeds of $ 693 million and $ 1,864 million, respectively.

These activities are classified as operating activities in the 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.

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 consolidated statements of income.

As of December 31, 2021 and January 1, 2021, all sold receivables had been remitted to the financial institution.

Note 7—Inventory

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Finished goods 93 99

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8—Goodwill and Intangible Assets

2 unchanged sentences

(in millions)

Goodwill at December 28, 2018 (1)

Goodwill at January 3, 2020 (1)

$ 2,039 $ 1,907 $ 966 $ 4,912

Goodwill re-allocation 429 ( 429 ) — —

Acquisition of IMX — — 50 50

Divestiture of health staff augmentation business — — ( 5 ) ( 5 )

Acquisitions of businesses 788 569 — 1,357

Foreign currency translation adjustments 44 — — 44

Adjustment to goodwill (2)

Goodwill at January 1, 2021 (1)

3,300 2,047 966 6,313

Acquisitions of businesses 425 5 — 430

Divestiture of a business ( 1 ) — — ( 1 )

Goodwill re-allocation ( 17 ) 17 — —

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

Foreign currency translation adjustments ( 26 ) 28 — 2

Goodwill at January 1, 2021 (1)

Goodwill at December 31, 2021 (1)

$ 3,681 $ 2,097 $ 966 $ 6,744

(1) Carrying amount includes accumulated impairment losses of $ 369 million and $ 117 million within the Health and Civil segments, respectively.

(2) Immaterial correction was recorded with respect to fair value of assets and liabilities acquired from the IS&GS Transactions.

Effective the beginning of fiscal 2020, certain contracts were reassigned from the Civil reportable segment to the Defense Solutions reportable segment (see "Note 20—Business Segments").

1 unchanged sentence

We evaluated goodwill for impairment for certain reporting units using either a quantitative step one analysis or qualitative analysis, both before and after the changes were made, and determined that goodwill was no t impaired.

In the fourth quarter of fiscal 2021, we performed a qualitative analysis for certain reporting units which determined that it was more likely than not that the fair values of these reporting units were in excess of the individual reporting units' carrying values.

For reporting units whose composition was affected by a reorganization, or those for which an indication of impairment exists, a quantitative assessment was performed.

The quantitative analysis for the Security Products reporting unit within the Civil reportable segment, which holds goodwill in the amount of $ 926 million as of December 31, 2021, showed that the fair value of the reporting unit exceeded the carrying value by approximately 6 %.

Operations of the reporting unit rely heavily on the sales and servicing of security and detection products, which have been negatively impacted by COVID-19.

The forecasts utilized to estimate the fair value of the Security Products reporting unit assume a gradual improvement in the global aviation security product and related service sales, reaching pre-COVID-19 levels by fiscal 2025.

In the event that there are significant unfavorable changes to the 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.

In the fourth quarter of fiscal 2020 and 2019, we performed a qualitative analysis for all reporting units and determined that it was more likely than not that the fair values of the reporting units were in excess of the individual reporting units carrying values, and as a result, a quantitative step one analysis was not necessary.

As a result, no goodwill impairments were identified as part of the annual goodwill impairment evaluation for the periods mentioned above.

Leidos Holdings, Inc.

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In fiscal 2018, we performed a qualitative and quantitative analysis on our reporting units.

Based on the qualitative analysis performed during our annual impairment evaluation for fiscal 2018 for certain of our reporting units, it was determined that it was more likely than not that the fair values of the reporting units were in excess of the individual reporting unit carrying values, and as a result, a quantitative step one analysis was not necessary.

Additionally, based on the results of the quantitative step one analysis for certain other of our reporting units, it was determined that the fair value was in excess of the individual reporting units carrying values.

As a result, no goodwill impairments were identified as part of the annual goodwill impairment evaluation for the periods mentioned above.

Intangible Assets

Intangible assets consisted of the following:

January 1, 2021 January 3, 2020

Intangible assets, net consisted of the following:

December 31, 2021 January 1, 2021

value Accumulated

16 unchanged sentences

Amortization expense related to intangible assets was $ 228 million, $ 198 million and $ 173 million for fiscal 2021, 2020 and 2019, respectively.

The estimated annual amortization expense related to finite-lived intangible assets as of January 1, 2021, is as follows:

The estimated annual amortization expense related to finite-lived intangible assets as of December 31, 2021, is as follows:

Fiscal Year Ending

1 unchanged sentence

2027 and thereafter 274

Actual amortization expense in future periods could differ from these estimates as a result of future acquisitions, divestitures, impairments, the outcome and timing of completion of in-process research and development projects and other factors.

In the fourth quarter of fiscal 2021, in connection with the annual goodwill assessment, we evaluated indefinite-lived intangibles for impairment and concluded that no impairment was necessary.

Leidos Holdings, Inc.

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We are monitoring the impacts of the coronavirus pandemic ("COVID-19") on the fair value of our intangible assets and goodwill.

While we currently do not anticipate any impairments to intangible assets and goodwill as a result of COVID-19, future changes in the expectations of the impact on our operations, financial performance and cash flows related to intangible assets and goodwill could cause these assets to be impaired.

Note 9—Property, Plant and Equipment

13 unchanged sentences

We received proceeds of $ 31 million, net of selling costs, for the property, which had a carrying value of $ 31 million.

During the quarter ended March 30, 2018, an impairment charge of $ 7 million associated with this property was recorded within Corporate.

The proceeds received in fiscal 2019 were recorded as investing activities on the consolidated statements of cash flows.

San Diego, CA Properties

11 unchanged sentences

ROU assets and lease liabilities consisted of the following:

Balance sheet line item January 1,

Balance sheet line item December 31,

2021 January 1,

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Current lease liabilities:

Finance leases Long-term debt, current portion $ 6 $ 5

Finance leases Short-term debt and current portion of long-term debt $ 9 $ 6

Operating leases Accounts payable and accrued liabilities 140 127

8 unchanged sentences

2021 January 1,

2021 January 3,

(in millions)

7 unchanged sentences

Total lease cost $ 270 $ 278 $ 272

(1) Includes ROU lease expense of $ 145 million and $ 136 million for fiscal 2020 and 2019, respectively.

(1) Includes ROU lease expense of $ 150 million, $ 145 million and $ 136 million for fiscal 2021, 2020 and 2019, respectively.

Lease costs and sublease income are included in "Cost of revenues" and "Selling, general and administrative expenses" within the consolidated statements of income.

5 unchanged sentences

2021 January 1,

2021 January 3,

Weighted-average remaining lease term (in years):

6 unchanged sentences

2021 January 1,

2021 January 3,

(in millions)

6 unchanged sentences

Operating lease liabilities 161 314 141

The change in ROU assets and lease liabilities are presented within cash flows from operations on the consolidated statements of cash flows.

Future minimum lease commitments of our finance and operating leases on an undiscounted basis, reconciled to the respective lease liability at January 1, 2021, were as follows:

The change in operating ROU assets and lease liabilities are presented within cash flows from operations on the consolidated statements of cash flows.

Future minimum lease commitments of our finance and operating leases on an undiscounted basis, reconciled to the respective lease liability at December 31, 2021, were as follows:

Fiscal Year Ending Finance lease commitments Operating lease commitments

4 unchanged sentences

imputed interest ( 6 ) ( 88 )

Lease liability as of January 1, 2021 $ 11 $ 691

Lease liability as of December 31, 2021 $ 52 $ 729

As of December 31, 2021 and January 1, 2021, we had a total net investment in sales-type leases, which relates to lease payment receivables, of $ 93 million and $ 64 million, respectively.

The current and non-current portions of net investment in sales-type leases are included within "Other current assets" and "Other assets", respectively, on the consolidated balance sheets.

Leidos Holdings, Inc.

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Disclosures related to the period prior to ASC 842

Rental expense for facilities and equipment for the period presented were as follows:

(in millions)

Gross rental expense $ 163

sublease income ( 1 )

Net rental expense $ 162

As of January 1, 2021 and January 3, 2020, we had a total net investment in sales-type leases, which relates to lease payment receivables, of $ 64 million and $ 57 million, respectively.

The current and non-current portions of net investment in sales-type leases are included within "Other current assets" and "Other assets", respectively, on the consolidated balance sheets.

The components of lease income were as follows:

Income statement line item January 1,

Income statement line item December 31,

2021 January 1,

2021 January 3,

(in millions)

6 unchanged sentences

Total lease income $ 60 $ 53 $ 32

As of January 1, 2021, undiscounted cash flows for sales-type and operating leases for the next five years are as follows:

As of December 31, 2021, undiscounted cash flows for sales-type and operating leases for the next five years are as follows:

Fiscal Year Ending Sales-type leases Operating leases

4 unchanged sentences

Difference between undiscounted cash flows and discounted cash flows $ 12

Leidos Holdings, Inc.

Annual Report - 89

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11—Fair Value Measurements

Financial instruments measured on a recurring basis at fair value consisted of the following:

January 1, 2021 January 3, 2020

December 31, 2021 January 1, 2021

Carrying value Fair value Carrying value Fair value

(in millions)

Financial assets:

Derivatives $ 1 $ 1 $ 2 $ 2

Financial liabilities:

Derivatives $ 53 $ 53 $ 103 $ 103

As of January 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 14—Derivative Instruments").

As of December 31, 2021, our derivatives primarily consisted of the cash flow interest rate swaps on $ 1.0 billion of the variable rate senior unsecured term loan (see "Note 12—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 (Level 2 inputs).

Financial instruments measured on a recurring basis at fair value also includes our defined benefit plan assets (Level 2 inputs).

Financial instruments measured on a recurring basis at fair value also include our defined benefit plan assets (Level 2 inputs).

See "Note 19—Retirement Plans" for further details on these investments.

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 and $ 20 million as of January 1, 2021 and January 3, 2020, respectively, approximates fair value as the stated interest rates within the agreements are consistent with the current market rates used in notes with similar terms in the market (Level 2 inputs).

As of January 1, 2021, and January 3, 2020, the fair value of debt was $ 5.2 billion and $ 3.1 billion, respectively, and the carrying amount was $ 4.7 billion and $ 3.0 billion, respectively (see "Note 15—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 4, 2020 and January 31, 2020, non-financial instruments measured at fair value on a non-recurring basis were recorded in connection with the acquisitions of the SD&A Businesses and Dynetics, respectively.

Additionally, on August 15, 2019, non-financial instruments measured at fair value on a non-recurring basis were recorded in connection with the acquisition of IMX.

The carrying value of our notes receivable of $ 15 million as of December 31, 2021 and January 1, 2021 approximates fair value as the stated interest rates within the agreements are consistent with the current market rates used in notes with similar terms in the market (Level 2 inputs).

Leidos Holdings, Inc.

Annual Report - 85

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2021 and January 1, 2021, the fair value of debt was $ 5.4 billion and $ 5.2 billion, respectively, and the carrying amount was $ 5.1 billion and $ 4.7 billion, respectively (see "Note 13—Debt").

The fair value of 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, January 14, 2021, May 4, 2020 and January 31, 2020, non-financial instruments measured at fair value on a non-recurring basis were recorded in connection with the acquisitions of Gibbs & Cox, 1901 Group, SD&A Businesses and Dynetics, respectively.

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

See "Note 6—Acquisitions" for further details on these acquisitions.

We also had real estate property measured at fair value (Level 2 inputs) on July 3, 2020 and March 30, 2018, which resulted in an impairment charge of $ 11 million and $ 7 million, respectively (see "Note 12—Leases" and "Note 11—Property, Plant and Equipment," respectively).

As of January 1, 2021, and January 3, 2020, we did not have any assets or liabilities measured at fair value on a non-recurring basis.

See "Note 5—Acquisitions and Divestitures" for further details on these acquisitions.

We also had real estate property measured at fair value, using Level 2 inputs, on July 3, 2020, which resulted in an impairment charge of $ 11 million (see "Note 10—Leases").

As of December 31, 2021 and January 1, 2021, we did not have any assets or liabilities measured at fair value on a non-recurring basis.

Note 12—Derivative Instruments

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

Asset derivatives

Balance sheet line item January 1,

2021 January 3,

(in millions)

Fair value interest rate swaps Other assets $ — $ 2

Foreign currency forward contracts Other current assets 1 —

The fair value of the interest rate swaps was as follows:

Liability derivatives

Balance sheet line item January 1,

Balance sheet line item December 31,

2021 January 1,

1 unchanged sentence

Cash flow interest rate swaps Other long-term liabilities $ 53 $ 103

Leidos Holdings, Inc.

Annual Report - 90

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Fair Value Hedges

We held interest rate swap agreements to hedge the fair value of the $ 450 million fixed rate 4.45 % senior unsecured notes maturing in December 2020 (the "2020 Notes").

The objective of these instruments was to hedge the 2020 Notes against changes in fair value due to the variability in the six-month LIBOR rate (the benchmark interest rate).

Under the terms of the interest rate swap agreements, we received semi-annual interest payments at the coupon rate of 4.45 % and paid variable interest based on the six-month LIBOR rate.

The interest rate swaps were accounted for as a fair value hedge of the 2020 Notes and qualified for the shortcut method of hedge accounting, which allows for the assumption of no ineffectiveness.

The resulting changes in the fair value of the interest rate swaps were fully offset by the changes in the fair value of the underlying debt (the hedged item).

The fair value of the 2020 Notes were stated at an amount that reflected changes in the six-month LIBOR rate subsequent to the inception of the interest rate swaps through the reporting date.

On September 1, 2020, we repaid the 2020 Notes in full (see "Note 15—Debt").

In conjunction with the retirement of the 2020 Notes, we terminated our fair value hedge and received a final settlement of $ 2 million.

Cash Flow Hedges

We have interest rate swap agreements to hedge the cash flows of a portion of our variable rate senior unsecured term loans (the "Variable Rate Loans").

The objective of these instruments is to reduce variability in the forecasted interest payments of the Variable Rate Loans, which is 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.

In February 2018, we entered into interest rate swap agreements to hedge the cash flows of an additional $ 250 million of our Variable Rate Loans.

The interest rate swap agreements on $ 1.1 billion of the Variable Rate Loans had a maturity date of December 2021 and a fixed interest rate of 1.08 %.

The interest rate swap agreements on $ 300 million and $ 250 million of the Variable Rate Loans both had a maturity date of August 2022 and fixed interest rates of 1.66 % and 2.59 %, respectively.

The counterparties to these agreements are financial institutions.

In September 2018, we terminated our existing interest rate swaps.

The net derivative gain of $ 60 million related to the discontinued cash flow hedge remained within accumulated other comprehensive loss and is being reclassified into earnings over the remaining life of the original hedge as the hedged variable rate debt impacts earnings.

Additionally, in September 2018, we entered into new interest rate swap agreements to hedge the cash flows of $ 1.5 billion of the Variable Rate Loans.

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 %.

As of January 1, 2021, the notional value of the interest rate swap agreements was $ 1.1 billion.

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.

1 unchanged sentence

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.

Leidos Holdings, Inc.

Annual Report - 91

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

2021 January 1,

2020 December 28,

2021 January 3,

(in millions)

3 unchanged sentences

Amount reclassified from accumulated other comprehensive loss to interest expense, net

14 ( 7 ) ( 6 )

We expect to reclassify losses of $ 26 million from accumulated other comprehensive loss into earnings during the next 12 months.

Leidos Holdings, Inc.

Annual Report - 86

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Debt consisted of the following:

interest rate Effective

interest rate January 1, 2021 (1)

interest rate December 31, 2021 (1)

January 1, 2021 (1)

(in millions)

Short-term debt:

Senior unsecured term loans:

$ 380 million term loan, due May 2022

1.24 % 1.34 % $ 380 $ —

Long-term debt:

Senior unsecured term loan:

1 unchanged sentence

1.49 % 1.75 % $ 1,298 $ 1,391

Senior secured term loans:

$ 690 million Term Loan A, due August 2023

3.31 % 3.74 % — 581

$ 310 million Term Loan A, due August 2023

3.31 % 3.76 % — 242

$ 1,131 million Term Loan B, due August 2025

3.56 % 3.91 % — 1,075

Senior unsecured notes:

$ 450 million notes, due December 2020

$ 500 million notes, due May 2023 (2)

2.95 % 3.17 % 498 497

5 unchanged sentences

2.30 % 2.38 % 990 989

$ 750 million notes, due May 2030

4.38 % 4.50 % 737 —

$ 250 million notes, due July 2032

10 unchanged sentences

$ 4,593 $ 4,644

(1) The carrying amounts of the senior term loans and notes as of January 1, 2021, and January 3, 2020, include the remaining principal outstanding of $ 4,782 million and $ 3,004 million, respectively, less total unamortized debt discounts and deferred debt issuance costs of $ 51 million and $ 35 million, respectively, and a $ 2 million asset as of January 3, 2020 related to the fair value of the interest rate swaps (see "Note 14—Derivative Instruments").

(1) The carrying amounts of the senior term loans and notes as of December 31, 2021 and January 1, 2021, include the remaining principal outstanding of $ 5,065 million and $ 4,782 million, respectively, less total unamortized debt discounts and deferred debt issuance costs of $ 43 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, which was declared effective on May 19, 2021.

Term Loans and Revolving Credit Facility

On May 7, 2021, we entered into a Credit Agreement (the "2021 Credit Agreement") with certain financial institutions, which provided for a senior unsecured term loan facility in an aggregate principal amount of $ 380 million with maturity 364 days after the 2021 Credit Agreement date.

The proceeds were used to fund the acquisition of Gibbs & Cox.

Borrowings under the 2021 Credit Agreement bear interest at a rate determined, at our option, based on either an alternate base rate plus 0.13 % or a LIBOR rate plus 1.13 %.

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.

On January 17, 2020 (the "Closing Date"), we entered into 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 five years from the Closing Date, with the Revolving Facility subject to two additional one year extensions.

Leidos Holdings, Inc.

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Notes Issuance

The proceeds of the Term Loan Facility and cash on hand on the Closing Date were used to repay in full all indebtedness, and terminate all commitments, under, and discharge and release all guarantees and liens existing in connection with the credit agreements entered into in August 2016 (the "Terminated Credit Agreements").

As a result of the termination of the liens under the Terminated Credit Agreements, the liens securing the $ 450 million notes due 2020 and $ 300 million notes due 2040 were also released and such notes became senior unsecured obligations.

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 October 8, 2020, we issued and sold $ 1.0 billion aggregate principal amount of fixed-rate senior notes maturing in February 2031 (the "2031 Notes").

2 unchanged sentences

The annual interest rate for the 2031 Notes is 2.30 %.

The 2031 Notes have not been registered under the Securities Act of 1933, as amended (the "Securities Act") and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

The proceeds from the 2031 Notes were used for general corporate purposes, including to repay all of the outstanding obligations in respect of principal, interest and fees under the 364 -day Term Loan and to repay a portion of the outstanding loans under the five-year Term Loan Facility.

Additionally, on May 12, 2020, we issued and sold $ 500 million senior notes maturing in May 2023 (the "2023 Notes"), $ 500 million senior notes maturing in May 2025 (the "2025 Notes") and $ 750 million senior notes maturing in May 2030 (the "2030 Notes", and together with the 2023 Notes and 2025 Notes, the "Notes").

The Notes are senior unsecured obligations issued by Leidos, Inc.

and guaranteed by Leidos Holdings, Inc.

The annual interest rate for the 2023 Notes, 2025 Notes and 2030 Notes is 2.95 %, 3.63 % and 4.38 %, respectively.

The Notes have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

The proceeds from the Notes were used to repay all of the outstanding obligations in respect of principal, interest and fees under the January 31, 2020 Bridge Facility and to repay a portion of the outstanding loans under the February 12, 2020 Facility.

On October 8, 2020 and May 12, 2020, we 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 2031 Notes and the Notes, respectively, and related guarantees for registered notes having terms substantially identical thereto, or in the alternative, the registered resale of the 2031 Notes and the Notes, respectively, and related guarantees, under certain circumstances.

Under both agreements, the registration statements are to be filed no later than 420 days after the original issuance of the securities.

If we fail to satisfy our obligations under either registration rights agreement, we will be required to pay additional annual interest equal to 0.25 % of the aggregate outstanding on the principal amount to holders of the respective notes.

Notes Retirement

On September 1, 2020, we retired our 2020 Notes.

Cash on hand was used to repay in full all indebtedness under, and discharge and release all guarantees existing in connection with these notes.

Term Loan Financing

On June 18, 2020 (the "Agreement Date"), we entered into a 364 -day Term Loan Credit Agreement, which provided for a senior unsecured term loan facility in an aggregate principal amount of $ 300 million (the "Term Loan"), with maturity 364 days after the Agreement Date.

The proceeds of the Term Loan and cash on hand on the Agreement Date were used to repay in full all indebtedness under, and discharge and release all guarantees existing in connection with the delayed-draw term loan facility.

Borrowings under the Term Loan 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.

During the period the Term Loan borrowing was outstanding, the applicable margin for LIBOR-denominated borrowings was 2.00 %.

On October 8, 2020, in connection with the issuance of the 2031 Notes, the outstanding principal on the Term Loan Credit Agreement was fully repaid.

Leidos Holdings, Inc.

Annual Report - 93

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Delayed-Draw Term Loan Facility

On February 12, 2020, we entered into a senior unsecured delayed-draw term loan facility providing for $ 1.0 billion of commitments from certain financial institutions in connection with the acquisition of the SD&A Businesses.

On May 4, 2020, we completed our acquisition of the SD&A Businesses and drew on the Facility in an aggregate principal amount of $ 1.0 billion (the "Facility").

The proceeds of the Facility and cash on hand were used to fund the purchase of the SD&A Businesses.

On May 12, 2020, in connection with the issuance of the $ 1.75 billion Notes, $ 500 million of the principal outstanding on the Facility was repaid.

During May and June 2020, we made $ 200 million of principal repayments on the Facility.

On June 18, 2020, in connection with the 364 -day Term Loan Credit Agreement, the remaining principal outstanding on the Facility was fully repaid.

Bridge Facility

On January 31, 2020, in connection with the acquisition of Dynetics, we entered into a Bridge Credit Agreement with certain financial institutions, which provided for a senior unsecured 364 -day bridge loan facility in an aggregate principal amount of $ 1.25 billion (the "Bridge Facility"), with maturity 364 days after the Acquisition Date.

The proceeds of the Bridge Facility and cash on hand on the Acquisition Date were used to fund the purchase of Dynetics.

Borrowings under the Bridge 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, subject to increases by 0.25 % every 90 days.

During the period the Bridge Facility borrowing was outstanding, the applicable margins for LIBOR-denominated borrowings were 1.38 % and 1.63 %.

Additionally, we paid to each lender under the Bridge Facility a duration fee equal to 0.50 % of the aggregate outstanding principal amount of the loans under the Bridge Facility 90 days after the Acquisition Date.

On May 12, 2020, in connection with the issuance of the Notes, the outstanding principal on the Bridge Credit Agreement was fully repaid.

Term Loans and Revolving Credit Facility Refinancing

The Credit Facilities will mature five years from the Closing Date, subject to two additional one year extensions.

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 %.

Leidos Holdings, Inc.

Annual Report - 94

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The proceeds from the Notes were used to repay all of the outstanding obligations in respect of principal, interest and fees under the January 31, 2020 Bridge Credit Agreement and to repay a portion of the outstanding loans under the February 12, 2020 Facility.

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 December 31, 2021, we did not have any Commercial Paper Notes outstanding.

Principal Payments and Debt Issuance Costs

In addition to the refinancing activity noted above, we made principal payments on our long-term debt of $ 731 million, $ 80 million, and $ 59 million during fiscal 2020, 2019 and 2018, respectively.

We made principal payments on our long-term debt of $ 106 million, $ 731 million, and $ 80 million during fiscal 2021, 2020 and 2019, respectively.

This activity included required principal payments on our term loans of $ 96 million, $ 72 million, and $ 69 million during fiscal 2021, 2020 and 2019, respectively.

In April 2018, we made a required debt prepayment of $ 10 million on our senior secured term loans.

The prepayment was a result of the annual excess cash flow calculation clause in our Terminated Credit Agreements.

During fiscal year 2020, we made $ 4,925 million of principal repayments for outstanding debt and retired the $ 450 million senior notes.

During fiscal 2021 and 2020, there were no borrowings under the credit facilities.

2 unchanged sentences

Interest on the senior fixed rate unsecured notes is payable on a semi-annual basis with principal payments due at maturity.

In connection with the financing activity noted above, $ 68 million of debt discount and debt issuance costs related to the debt and revolving credit facility were recognized, which were recorded as an offset against the carrying value of debt and capitalized within "Other assets" in the consolidated balance sheets, respectively.

Leidos Holdings, Inc.

Annual Report - 88

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In connection with the financing activity from prior year, $ 68 million of debt discount and debt issuance costs related to the debt and revolving credit facility were recognized, which were recorded as an offset against the carrying value of debt and capitalized within "Other assets" in the consolidated balance sheets, respectively.

For fiscal 2020, $ 36 million of debt discount and debt issuance costs were written off related to the Terminated Credit Agreements and loan facility repayments.

Amortization of debt discount and debt issuance costs was $ 16 million for fiscal 2020 and $ 10 million for fiscal 2019 and 2018.

The senior unsecured term loan, notes and revolving credit facility are fully and unconditionally guaranteed by intercompany guarantees 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 January 1, 2021.

Amortization of debt discount and debt issuance costs was $ 11 million, $ 16 million and $ 10 million for fiscal 2021, 2020 and 2019, respectively.

Our borrowings under the Credit Facilities, 2021 Credit Agreement, the Notes and the Commercial Paper Notes are fully and unconditionally guaranteed by intercompany guarantees.

In addition, the agreements governing debt outstanding under the Credit Facilities, 2021 Credit Agreement, and the Notes 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 December 31, 2021.

Future minimum payments of debt are as follows:

4 unchanged sentences

unamortized debt discount and issuance costs ( 43 )

Total long-term debt $ 4,744

Total short-term and long-term debt $ 5,076

Leidos Holdings, Inc.

4 unchanged sentences

Changes in the components of accumulated other comprehensive loss were as follows:

Foreign currency translation adjustments Unrecognized gain (loss) on derivative instruments Pension adjustments Total accumulated other comprehensive loss

Foreign currency translation adjustments Unrecognized loss on derivative instruments Pension adjustments Total accumulated other comprehensive loss

(in millions)

Balance at December 28, 2018 $ ( 41 ) $ 14 $ ( 3 ) $ ( 30 )

Cumulative adjustments related to ASU adoptions 3 10 ( 4 ) 9

Balance at December 30, 2017 20 24 ( 2 ) 42

Other comprehensive loss ( 65 ) ( 7 ) ( 1 ) ( 73 )

Other comprehensive income (loss) 5 ( 55 ) ( 1 ) ( 51 )

Taxes 3 15 — 18

Reclassification from accumulated other comprehensive loss — ( 7 ) — ( 7 )

Balance at December 28, 2018 ( 41 ) 14 ( 3 ) ( 30 )

Balance at January 3, 2020 ( 33 ) ( 33 ) ( 4 ) ( 70 )

Other comprehensive income (loss) 70 ( 61 ) ( 3 ) 6

5 unchanged sentences

Reclassification from accumulated other comprehensive loss — 19 — 19

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

Balance at December 31, 2021 $ 22 $ ( 41 ) $ 7 $ ( 12 )

Reclassifications for unrecognized gain (loss) on derivative instruments are associated with outstanding debt and are recorded in "Interest expense, net" on the consolidated statements of income.

23 unchanged sentences

Salaries, bonuses and amounts withheld from employees’ compensation 254 303

(1) During the year ended January 1, 2021 and January 3, 2020, $ 575 million and $ 417 million, respectively, of amortization was recognized related to transition costs and project assets.

(1) During the year ended December 31, 2021 and January 1, 2021, $ 428 million and $ 575 million, respectively, of amortization was recognized related to transition costs and project assets.

(2) Balance represents items that are not individually significant to disclose separately.

(3) During the year ended January 1, 2021, we disaggregated "Inventory, net" from "Other current assets" on the consolidated balance sheets.

As a result, the prior year activity has been reclassified to conform with the current year presentation.

(3) Balances are net of $ 16 million and $ 23 million of dividends received during fiscal 2021 and fiscal 2020, respectively, that were recorded in cash flows provided by operating activities of continuing operations on the consolidated statements of cash flows.

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2021 January 1,

2020 December 28,

2021 January 3,

(in millions)

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Loss on debt extinguishment $ — $ ( 36 ) $ —

Gain on sale of businesses

(Loss) gain on foreign currencies

( 4 ) ( 1 ) 2

Other income (expense), net 2 — ( 2 )

(Loss) gain on sale of businesses ( 3 ) — 88

Loss on foreign currencies ( 1 ) ( 4 ) ( 1 )

Other income, net 3 2 —

$ ( 1 ) $ ( 38 ) $ 87

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2021 January 1,

2020 December 28,

2021 January 3,

(in millions)

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Anti-dilutive stock-based awards are excluded from the weighted average number of shares outstanding used to compute diluted EPS.

For fiscal 2020 and 2019, there were no significant anti-diluted equity awards.

For fiscal 2021, there was 1 million of outstanding stock options and vesting stock awards that were anti-dilutive.

For fiscal 2020 and 2019, there were no significant anti-diluted equity awards.

Share Repurchases

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All shares repurchased were immediately retired.

In the third quarter of fiscal 2019, we entered into an Accelerated Share Repurchase ("ASR") agreement with a financial institution to repurchase shares of our outstanding common stock.

We paid $ 200 million to the financial institution and received 2.4 million shares.

The purchase was recorded to "Additional paid-in capital" in the consolidated balance sheets.

All shares delivered were immediately retired.

In the first quarter of fiscal 2019, we entered into an ASR agreement with a financial institution to repurchase shares of our outstanding common stock.

We paid $ 200 million to the financial institution and received an initial and final delivery of 2.6 million and 0.6 million shares, respectively.

The purchase was recorded to "Additional paid-in capital" in the consolidated balance sheets.

All shares delivered were immediately retired.

In the fourth quarter of fiscal 2018, we entered into an uncollared ASR agreement with a financial institution to repurchase shares of our outstanding common stock.

We paid $ 250 million to the financial institution and received an initial and final delivery of 3.3 million and 0.7 million shares, respectively.

In fiscal 2019, we entered into accelerated share repurchase agreements with two financial institutions to repurchase shares of our outstanding common stock.

We paid $ 400 million to the financial institutions and received 5.6 million shares.

The purchase was recorded to "Additional paid-in capital" in the consolidated balance sheets.

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Plan Summaries

As of January 1, 2021, we had stock-based compensation awards outstanding under the following plans:

As of December 31, 2021, we had stock-based compensation awards outstanding under the following plans:

the 2017 Omnibus Incentive Plan, the 2006 Equity Incentive Plan, as amended, and the 2006 Employee Stock Purchase Plan, as amended ("ESPP").

We issue new shares upon the issuance of the vesting of stock units or exercising of stock options under these plans.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We issue new shares upon the vesting of stock units or exercising of stock options under these plans.

The 2017 Omnibus Incentive Plan provides Leidos and its affiliates' employees, directors and consultants the opportunity to receive various types of stock-based compensation awards, such as stock options, restricted stock units and performance-based awards, as well as cash awards.

We grant service-based awards that generally vest or become exercisable 25 % a year over four years or cliff vest in three years .

As of January 1, 2021, 4.0 million shares of Leidos' stock were reserved for future issuance under the 2017 Omnibus Incentive Plan and the 2006 Equity Incentive Plan.

As of December 31, 2021, 3.9 million shares of Leidos' stock were reserved for future issuance under the 2017 Omnibus Incentive Plan and the 2006 Equity Incentive Plan.

We offer eligible employees the opportunity to defer restricted stock units into an equity-based deferred equity compensation plan, the Key Executive Stock Deferral Plan ("KESDP").

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All awards under the MSCP are fully vested and the plan does not provide for a maximum number of shares available for future issuance.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Our ESPP allows eligible employees to purchase shares of Leidos' stock at a discount of up to 15 % of the fair market value on the date of purchase.

During the first half of fiscal 2018, the discount was 5 % of the fair market value on the date of purchase, thereby resulting in the ESPP being non-compensatory.

Effective the second half of fiscal 2018, the discount was increased to 10 % of the fair market value on the date of purchase, resulting in the ESPP being compensatory.

During fiscal 2021, 2020 and 2019, the discount was 10 % of the fair market value on the date of purchase.

During fiscal 2021, 2020 and 2019, $ 39 million, $ 32 million and $ 25 million, respectively, was received from ESPP plan participants for the issuance of Leidos' stock.

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2021 January 1,

2020 December 28,

2021 January 3,

(in millions)

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Treasury bond with a maturity equal to the expected term of the stock option on the grant date.

During fiscal 2018, we utilized the simplified method for the expected term, which represented an appropriate period of time that the options granted were expected to remain outstanding between the weighted-average vesting period and end of the respective contractual term.

Upon re-examining our exercise history, the methodology used to calculate the expected term changed in fiscal 2019.

Based on actual historical settlement data, the midpoint scenario is utilized with a one-year grant date filter assumption for outstanding options.

We use historical data to estimate forfeitures and was derived in the same manner as in the prior years presented.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

To determine the expected term, we use the midpoint scenario with a one-year grant date filter assumption for outstanding options and we use historical data to estimate forfeitures.

The weighted average grant-date fair value and assumptions used to determine fair value of stock options granted for the periods presented were as follows:

2021 January 1,

2020 December 28,

2021 January 3,

Weighted average grant-date fair value $ 20.23 $ 19.64 $ 11.89

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Dividend yield 1.3 % 1.3 % 2.2 %

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock option activity for each of the periods presented was as follows:

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Options exercised ( 0.5 ) 30.86 21

Outstanding at December 28, 2018 2.4 $ 39.41 3.8 $ 36

Outstanding at January 3, 2020 2.4 $ 46.04 3.8 $ 128

Options granted 0.3 106.73

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Options exercised ( 0.4 ) 38.79 27

Outstanding at January 1, 2021 2.2 56.01 3.5 108

Exercisable at January 1, 2021 1.4 $ 42.85 2.5 $ 85

Vested and expected to vest in the future as of January 1, 2021

Outstanding at December 31, 2021 2.1 $ 65.18 3.5 $ 54

Exercisable at December 31, 2021 1.2 $ 51.47 2.3 $ 48

Vested and expected to vest in the future as of December 31, 2021

2.0 $ 64.91 3.4 $ 54

As of January 1, 2021, there was $ 5 million of unrecognized compensation cost, net of estimated forfeitures, related to stock options, which is expected to be recognized over a weighted-average period of 2.1 years.

As of December 31, 2021, there was $ 5 million of unrecognized compensation cost, net of estimated forfeitures, related to stock options, which is expected to be recognized over a weighted-average period of 2.1 years.

Tax benefits from stock options exercised for fiscal 2021, 2020 and 2019 were $ 6 million, $ 7 million and $ 5 million, respectively.

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Awards vested ( 1.1 ) 44.10

Unvested stock awards at December 28, 2018 2.0 $ 50.85

Unvested stock awards at January 3, 2020 1.4 $ 60.91

Awards granted 0.5 106.38

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Awards vested ( 0.5 ) 71.60

Unvested stock awards at January 1, 2021 1.3 $ 79.05

As of January 1, 2021, there was $ 43 million of unrecognized compensation cost, net of estimated forfeitures, related to restricted stock units, which is expected to be recognized over a weighted average period of 2.0 years.

Unvested stock awards at December 31, 2021 1.4 $ 88.89

As of December 31, 2021, there was $ 50 million of unrecognized compensation cost, net of estimated forfeitures, related to restricted stock units, which is expected to be recognized over a weighted average period of 2.0 years.

The fair value of restricted stock units that vested in fiscal 2021, 2020 and 2019 was $ 48 million, $ 58 million and $ 66 million, respectively.

In addition, the fair value of dividend equivalents with respect to restricted stock units that vested was immaterial for fiscal 2020 and $ 1 million for fiscal 2019 and 2018.

In addition, the fair value of dividend equivalents with respect to restricted stock units that vested in fiscal 2021, 2020 and 2019 was immaterial.

Performance-Based Stock Awards

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Awards vested ( 0.1 ) 45.83

Unvested at December 28, 2018 0.5 $ 57.36

Unvested at January 3, 2020 0.6 $ 63.66

Awards granted 0.2 103.34

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Awards vested ( 0.2 ) 65.30

Unvested at January 1, 2021 0.5 $ 80.20

Unvested at December 31, 2021 0.5 $ 88.72

The weighted average grant date fair value for performance-based stock, excluding those with a market condition, during fiscal 2021, 2020 and 2019 was $ 89.26 , $ 106.80 and $ 62.66 , respectively.

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2021 January 1,

2020 December 28,

2021 January 3,

Expected volatility 32.86 % 23.99 % 22.02 %

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Weighted average grant date stock price $ 90.85 $ 105.12 $ 62.66

As of January 1, 2021, there was $ 15 million of unrecognized compensation cost, net of estimated forfeitures, which is expected to be recognized over a weighted average period of 1.7 years.

As of December 31, 2021, there was $ 18 million of unrecognized compensation cost, net of estimated forfeitures, which is expected to be recognized over a weighted average period of 1.6 years.

The fair value of performance-based stock awards that vested in fiscal 2021, 2020 and 2019 was $ 19 million, $ 25 million, and $ 9 million, respectively.

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2021 January 1,

2020 December 28,

2021 January 3,

(in millions)

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2021 January 1,

2020 December 28,

2021 January 3,

(in millions)

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Excess tax benefits from stock-based compensation ( 11 ) ( 15 ) ( 11 )

Impact of foreign operations 11 2 —

Change in valuation allowance for deferred tax assets 5 ( 5 ) 6

Impact of foreign operations 4 11 2

Dividends paid to employee stock ownership plan ( 2 ) ( 2 ) ( 2 )

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Stock basis in subsidiary held for sale — — 5

Taxable conversion of a subsidiary — — ( 17 )

Change in statutory federal tax rate — — ( 10 )

Other ( 3 ) 4 ( 1 )

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Effective income tax rate 21.5 % 19.5 % 22.6 %

The effective tax rate for fiscal 2021 was favorably impacted primarily by federal research tax credits and excess tax benefits related to employee stock-based payment transactions.

The effective tax rate for fiscal 2020 was favorably impacted primarily by federal research tax credits and excess tax benefits related to employee stock-based payment transactions, partially offset by taxes related to foreign operations.

The effective tax rate for fiscal 2019 was favorably impacted primarily by excess tax benefits related to employee stock-based payment transactions and federal research tax credits, partially offset by an increase in valuation allowances arising from foreign withholding tax and an increase in taxes related to the sale of the commercial cybersecurity business.

The effective tax rate for fiscal 2018 was favorably impacted primarily by a decrease in valuation allowances arising from the taxable conversion of a subsidiary and the utilization of capital losses, an increase in deferred tax assets related to stock basis of a subsidiary held for sale, excess tax benefits related to employee stock-based payment transactions and federal research tax credits.

Leidos Holdings, Inc.

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Vesting stock awards 24 22

Deferred revenue 16 —

Accumulated other comprehensive loss — 16

Investments — 1

Deferred rent and tenant allowances — 4

Total deferred tax assets 439 424

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Property, plant and equipment ( 63 ) ( 63 )

Accumulated other comprehensive income ( 1 ) —

Employee benefit contributions — ( 7 )

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Net deferred tax liabilities $ ( 226 ) $ ( 225 )

At January 1, 2021, we had state net operating losses of $ 77 million and state tax credits of $ 5 million.

At December 31, 2021, we had state net operating losses of $ 90 million and state tax credits of $ 3 million.

Both will begin to expire in fiscal 2022;

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We expect to utilize $ 4 million of these foreign net operating losses.

Our valuation allowance for deferred tax assets was $ 16 million and $ 20 million as of January 1, 2021 and January 3, 2020, respectively.

The valuation allowance decreased by $ 4 million primarily due to releases related to foreign withholding taxes and capital investments, partially offset by an increase related to foreign attributes not expected to be utilized.

Our valuation allowance for deferred tax assets was $ 21 million and $ 16 million as of December 31, 2021 and January 1, 2021, respectively.

The valuation allowance increased by $ 5 million primarily due to an increase related to foreign tax credits partially offset by a decrease related to state attributes expected to be utilized.

Leidos Holdings, Inc.

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Unrecognized tax benefits are primarily related to certain recurring deductions customary for our industry.

The changes in the unrecognized tax benefits, excluding $ 1 million of accrued interest and penalties for fiscal 2018, were as follows:

The changes in the unrecognized tax benefits were as follows:

2021 January 1,

2020 December 28,

2021 January 3,

(in millions)

Unrecognized tax benefits at beginning of year $ 6 $ 5 $ 6

Additions for tax positions related to current year — — 3

Additions for tax positions related to prior years 2 1 11

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Settlements with taxing authorities ( 3 ) — ( 11 )

Lapse of statute of limitations ( 1 ) — —

Unrecognized tax benefits at end of year $ 2 $ 6 $ 5

Unrecognized tax benefits that, if recognized, would affect the effective income tax rate

At December 31, 2021, the balance of unrecognized tax benefits included liabilities for uncertain tax positions of $ 2 million, which were classified as other long-term liabilities on the consolidated balance sheets.

At January 1, 2021, the balance of unrecognized tax benefits included liabilities for uncertain tax positions of $ 6 million, $ 4 million of which were classified as other long-term liabilities on the consolidated balance sheets.

At January 3, 2020, the balance of unrecognized tax benefits included liabilities for uncertain tax positions of $ 5 million, $ 1 million of which were classified as other long-term liabilities on the consolidated balance sheets.

At December 28, 2018, the balance of unrecognized tax benefits included liabilities for uncertain tax positions of $ 7 million, $ 3 million of which were classified as other long-term liabilities on the consolidated balance sheets.

We file income tax returns in the United States and various state and foreign jurisdictions.

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The IRS has examined our consolidated federal income tax returns through the year ended January 3, 2020.

For the year ended January 1, 2021, we were selected to participate in the phase of CAP reserved for taxpayers whose risk of noncompliance does not warrant use of IRS resources.

For the years ended January 1, 2021 and December 31, 2021, we were selected to participate in the phase of CAP reserved for taxpayers whose risk of noncompliance does not warrant use of IRS resources.

We believe that participation in CAP should reduce tax-related uncertainties, if any.

Additionally, with a few exceptions, as of January 1, 2021, we are no longer subject to state, local, or foreign examinations by the tax authorities for fiscal years ending on or before December 30, 2016.

Additionally, with a few exceptions, as of December 31, 2021, we are no longer subject to state, local, or foreign examinations by the tax authorities for fiscal years ending on or before December 29, 2017.

During the next 12 months, it is reasonably possible that resolution of reviews by taxing authorities, both domestic and international, could be reached with respect to $ 2 million of our unrecognized tax benefits, depending on the timing of ongoing examinations, any litigation and expiration of statute of limitations, either because the tax positions are sustained or because we agree to their disallowance and pay the related income tax.

While we believe we have adequate accruals for uncertain tax positions, the tax authorities may determine that we owe taxes in excess of recorded accruals or the recorded accruals may be in excess of the final settlement amounts agreed to by tax authorities.

Leidos Holdings, Inc.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the next 12 months, it is reasonably possible that resolution of reviews by taxing authorities, both domestic and international, could be reached with respect to $ 4 million of our unrecognized tax benefits, depending on the timing of ongoing examinations, any litigation and expiration of statute of limitations, either because the tax positions are sustained or because we agree to their disallowance and pay the related income tax.

Note 19—Retirement Plans

Defined Contribution Plans

We sponsor a defined contribution plan, the Leidos, Inc.

Retirement Plan, which is both a 401(k) plan and an employee stock ownership plan in which most employees are eligible to participate.

This plan allows eligible participants to contribute a portion of their income through payroll deductions and Leidos may also make discretionary contributions.

We sponsor various defined contribution plans in which most employees are eligible to participate.

These plans allow eligible participants to contribute a portion of their income through payroll deductions and Leidos may also make discretionary contributions.

Company contributions were $ 131 million, $ 120 million and $ 105 million for fiscal 2021, 2020 and 2019, respectively.

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Defined Benefit Plans

We sponsor a defined benefit pension plan in the United Kingdom for former employees on an expired customer contract.

While benefits under the plan are frozen, we have continuing defined benefit pension obligations with respect to certain plan participants.

In fiscal 2012, we sold certain components of our business, including the component that contained this pension and employed the pension plan participants.

We sponsor two frozen defined benefit pension plans ("the Plans"), one in the United Kingdom ("UK") for former employees on an expired customer contract and another assumed as a result of the Gibbs & Cox acquisition.

We have continuing defined benefit pension obligations with respect to certain plan participants relating to the UK defined benefit pension plan.

In fiscal 2012, we sold certain components of our business, including the component that contained the UK pension and employed the pension plan participants.

Pursuant to the definitive sale agreement, we retained the assets and obligations of this defined benefit pension plan.

As a result of retaining the pension obligation, the remaining immaterial components of ongoing pension expense, primarily interest costs and assumed return on plan assets subsequent to the sale, are recorded in continuing operations.

The projected benefit obligation as of January 1, 2021, and January 3, 2020, was $ 138 million and $ 121 million, respectively.

The increase in the projected benefit obligation was primarily due to a loss resulting from changes in assumptions used in the valuation and adverse exchange rate movements in the British pound when compared to the U.S.

The fair value of plan assets as of January 1, 2021, and January 3, 2020, was $ 157 million and $ 139 million, respectively.

The plan funding status was overfunded $ 19 million and $ 18 million as of January 1, 2021, and January 3, 2020, respectively, and included within "Other assets" on the consolidated balance sheets.

The projected benefit obligation of the Plans as of December 31, 2021 and January 1, 2021, was $ 160 million and $ 138 million, respectively.

The increase in the projected benefit obligation was primarily due to the defined benefit pension plan assumed through the acquisition of Gibbs & Cox.

The fair value of the Plans assets as of December 31, 2021 and January 1, 2021, was $ 189 million and $ 157 million, respectively.

The UK defined benefit pension plan funding status was overfunded $ 37 million and $ 19 million as of December 31, 2021 and January 1, 2021, respectively, and included within "Other assets" on the consolidated balance sheets.

The Gibbs & Cox defined benefit pension plan funding status was underfunded $ 8 million as of December 31, 2021, and included within "Other long-term liabilities" on the consolidated balance sheets.

Leidos Holdings, Inc.

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Since we are not responsible for the current or future funded status of the pension plans, no assets or liabilities arising from their funded status are recorded in the consolidated financial statements and no amounts associated with these pension plans are included in the defined benefit plan disclosures above.

Note 22—Supplementary Cash Flow Information and Restricted Cash

Supplementary cash flow information, including non-cash activities, for the periods presented was as follows:

2021 January 3,

2020 December 28,

(in millions)

Supplementary cash flow information:

Cash paid for interest (1)

$ 161 $ 172 $ 133

Cash paid for income taxes, net of refunds 140 142 70

Non-cash investing activity:

Fixed asset additions $ 18 $ 27 $ —

Non-cash financing activity:

Real estate financing transaction $ — $ — $ 65

Notes payable and finance lease obligations 12 — —

(1) Includes net settlement of cash flow hedge and fair value hedge derivatives

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 fiscal 2020, we sold $ 1,866 million of accounts receivable under the agreements and received proceeds of $ 1,864 million, which were classified as operating activities in the consolidated statements of cash flows.

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 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.

As of January 1, 2021, all sold receivables had been remitted to the financial institution.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restricted Cash

The following is a reconciliation of cash and cash equivalents, as reported within the consolidated balance sheets, to the total cash, cash equivalents and restricted cash, as reported within the consolidated statements of cash flows:

2021 January 3,

(in millions)

Cash and cash equivalents $ 524 $ 668

Restricted cash 163 49

Total cash, cash equivalents and restricted cash $ 687 $ 717

The restricted cash is recorded within "Other current assets" in the consolidated balance sheets.

The restricted cash is primarily comprised of advances from customers that are restricted as to use for certain expenditures related to that customer's contract.

Note 20—Business Segments

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Additionally, we separately present the unallocable costs associated with corporate functions as Corporate.

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.

Effective the beginning of fiscal 2020, certain contracts were reassigned from the Civil reportable segment to the Defense Solutions reportable segment to better align operations within the reportable segments to the customers they serve.

Prior year segment results have been recast to reflect this change.

Fiscal 2019 segment results have been recast to reflect this change.

Defense Solutions provides leading-edge and technologically advanced services, solutions and products to a broad customer base.

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health information management services, managed health services, digital transformation and life sciences research and development.

Corporate includes the operations of various corporate activities, certain corporate expense items that are not reimbursed by our U.S.

government customers and certain other expense items excluded from a reportable segment's performance.

Leidos Holdings, Inc.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The results of Dynetics and the SD&A Businesses were included within the Defense Solutions and Civil reportable segments, respectively.

Corporate includes the operations of various corporate activities, certain corporate expense items that are not reimbursed by our U.S.

government customers and certain other expense items excluded from a reportable segment's performance.

The following table summarizes business segment information for the periods presented:

2021 January 1,

2020 December 28,

2021 January 3,

(in millions)

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

We generated approximately 87 % of our total revenues in fiscal 2020 and 2019 and 85 % of our total revenues in fiscal 2018 from contracts with the U.S.

We generated approximately 87 % of our total revenues in fiscal 2021, 2020 and 2019 from contracts with the U.S.

government, either as a prime contractor or a subcontractor to other contractors engaged in work for the U.S.

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Intelligence Community, including subcontracts under which the DoD or the U.S.

Intelligence Community is the ultimate purchaser, represented approximately 49 % of our total revenues for fiscal 2020 and 48 % for fiscal 2019 and 2018.

Less than 10% of the our revenues and tangible long-lived assets are generated by or owned by entities outside of the United States.

Intelligence Community is the ultimate purchaser, represented approximately 44 % of our total revenues for fiscal 2021, 49 % for fiscal 2020 and 48 % for fiscal 2019.

Approximately 8 % of our revenues and tangible long-lived assets are generated by or owned by entities outside of the United States.

As such, additional financial information by geographic location is not presented.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 24—Contingencies

Note 21—Commitments and Contingencies

Legal Proceedings

Class Action Lawsuit

On March 2, 2021, Leidos and certain current officers of Leidos were named as defendants in a putative class action securities lawsuit filed in the U.S.

District Court for the Southern District of New York.

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.

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 the FAR.

("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.

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

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

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.

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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.

At January 1, 2021, we had a liability of $ 42 million recorded in the consolidated balance sheets for this matter.

The amount of possible loss ultimately incurred, if any, is subject to a range of complex factors and potential outcomes that remain to be determined, including information gathered during the course of litigation, pretrial and trial rulings and other litigation-related developments.

We are also involved in various claims and lawsuits arising in the normal conduct of our business, none of which, in the opinion of management, based upon current information, will likely have a material adverse effect on our financial position, results of operations or cash flows.

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.

Leidos Holdings, Inc.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 December 31, 2021, we believe we have adequately reserved for any potential liabilities related to these disputes.

Other Contingencies

VirnetX, Inc.

On September 29, 2017, the federal trial court in the Eastern District of Texas entered a final judgment in the VirnetX v.

Apple case referred to as the Apple I case.

The court found that Apple willfully infringed the VirnetX patents at issue in the Apple I case and awarded enhanced damages, bringing the total award against Apple to over $ 343 million in pre-interest damages.

The court subsequently awarded an additional sum of over $ 96 million for costs, attorneys' fees and interest, bringing the total award to VirnetX in the Apple I case to over $ 439 million.

Apple appealed the judgment in the Apple I case with the U.S.

Court of Appeals for the Federal Circuit and on January 15, 2019, the court affirmed the $ 439 million judgment.

On August 1, 2019, the U.S.

Court of Appeals for the Federal Circuit denied Apple's petition for panel and en banc rehearing, but Apple subsequently filed motions to stay and vacate the judgment, and for leave to file a second petition for rehearing.

These motions were denied by the court on October 1, 2019.

On December 27, 2019, Apple filed a petition in the Apple I matter for a writ of certiorari with the United States Supreme Court, which was denied on February 24, 2020.

On February 20, 2020, Apple filed a Motion for Relief from Judgment in the U.S.

District Court for the Eastern District of Texas, further arguing that VirnetX should not be allowed to recover the large amount of damages awarded in this case.

On March 13, 2020, VirnetX announced that it had received payment from Apple of over $ 454 million, which represents the judgment with interest for the Apple I matter.

On May 22, 2020, Leidos received $ 85 million from VirnetX representing Leidos' current share of the proceeds resulting from the Apple I case.

A net gain of $ 81 million was recognized during fiscal 2020 and was presented in "Bad debt expense and recoveries" on the consolidated statements of income.

On July 23, 2020, Leidos paid a 4 % royalty on the proceeds received to the customer who paid for the development of the original technology.

Apple's Motion for Relief from Judgment was denied by the District Court on September 1, 2020.

Apple did not appeal the denial of this Motion;

therefore, the Apple I case is now concluded.

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.

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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 award 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 COVID-19 and started on October 26, 2020.

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.

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 expected appeal.

Under its agreements with VirnetX, Leidos would receive 25 % of the proceeds obtained by VirnetX after reduction for attorneys' fees and costs.

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.

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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 the jury award in the Apple II case.

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.

Leidos Holdings, Inc.

Annual Report - 111

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Government Investigations and Reviews

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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 January 1, 2021, indirect cost audits by the DCAA remain open for fiscal 2015 and subsequent fiscal years.

As of December 31, 2021, indirect cost audits by the DCAA 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 January 1, 2021, we believe we have adequately reserved for potential adjustments from audits or reviews of contract costs.

In February 2019, we executed an external restructuring advance agreement with the DoD in accordance with provisions of the Defense Federal Acquisition Regulation Supplement, which allows us to recover certain specified external restructuring costs.

Note 25—Commitments

We have outstanding letters of credit of $ 91 million as of January 1, 2021, principally related to performance guarantees on contracts.

We also have outstanding surety bonds with a notional amount of $ 129 million as of January 1, 2021, principally related to performance and subcontractor payment bonds on contracts.

As of December 31, 2021, we believe we have adequately reserved for potential adjustments from audits or reviews of contract costs.

Leidos Holdings, Inc.

Annual Report - 104

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

We have outstanding letters of credit of $ 55 million as of December 31, 2021, principally related to performance guarantees on contracts.

We also have outstanding surety bonds with a notional amount of $ 100 million as of December 31, 2021, 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 January 1, 2021, the future expirations of the outstanding letters of credit and surety bonds were as follows:

As of December 31, 2021, the future expirations of the outstanding letters of credit and surety bonds were as follows:

Fiscal year ending

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2027 and thereafter 14

Note 26—Subsequent Events

On January 14, 2021, we completed the acquisition of 1901 Group for preliminary purchase consideration of $ 214 million, subject to working capital adjustments.

In early fiscal 2021, we sold an additional $ 204 million of accounts receivable, of which the proceeds were partially used to fund the acquisition of 1901 Group.

On February 22, 2021, we entered into a definitive agreement to acquire Gibbs & Cox, Inc.

for preliminary purchase consideration of $ 380 million, subject to working capital adjustments.

The transaction is expected to close in the second quarter of fiscal 2021.

Leidos Holdings, Inc.

2 unchanged sentences

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-K

Item 8. Financial Statements and Supplementary Data