Leidos Holdings, Inc. 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to certain market risks in the normal course of business. Our current market risk exposures are primarily related to interest rates and foreign currency fluctuations. The following information about our market sensitive financial instruments contains forward-looking statements. Interest Rate Risk Our exposure to market risk for changes in interest rates relates primarily to long-term debt obligations and derivatives. Our policy authorizes, with Board of Directors' approval, the limited use of derivative instruments to hedge specific interest rate risks. Debt and derivatives At December 31, 2021 and January 1, 2021, we had $5.1 billion and $4.7 billion, respectively, of short-term and long-term debt, which included $1.7 billion and $1.4 billion, respectively, related to our senior unsecured term loans that have a variable stated interest rate that is determined based on the London Interbank Offered Rate ("LIBOR") rate plus a margin. As a result, we may experience fluctuations in interest expense. Leidos Holdings, Inc. Annual Report - 48 Table of Contents PART II We have interest rate swap agreements to hedge the cash flows of a portion of our variable rate senior unsecured term loan ("Variable Rate Loan"). Under the terms of the interest rate swap agreements, we receive variable interest payments based on the one-month LIBOR rate and pay interest at a fixed rate. As of December 31, 2021, the notional value of the interest rate swap agreements was $1.0 billion. The interest rate swap agreements effectively converted a portion of our variable rate borrowing to a fixed rate borrowing. As of December 31, 2021 and January 1, 2021, the fair value of our interest rate swap agreements with respect to our Variable Rate Loan was a liability of $53 million and $103 million, respectively. The counterparties to these agreements are financial institutions. We do not hold or issue derivative financial instruments for trading or speculative purposes. We cannot predict future market fluctuations in interest rates and their impact on our interest rate swaps. The net hypothetical 10% movement in the one-month LIBOR rate would not have a significant impact on our annual interest expense. For additional information related to our interest rate swap agreements and debt, see "Note 12—Derivative Instruments" and "Note 13—Debt," respectively, of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K. Cash and Cash Equivalents As of December 31, 2021 and January 1, 2021, our cash and cash equivalents included investments in several large institutional money market accounts. For fiscal 2021 and fiscal 2020, a hypothetical 10% interest rate movement would not have a significant impact on the value of our holdings or on interest income. Foreign Currency Risk Although the majority of our transactions are denominated in U.S. dollars, some of our transactions are denominated in foreign currencies. Our foreign currency exchange rate risk relates to receipts from customers, payments to suppliers and certain intercompany transactions denominated in currencies other than our (or one of our subsidiaries') functional currency. Our foreign operations represented 8% of total revenues for fiscal 2021, 2020 and 2019. Leidos Holdings, Inc. Annual Report - 49 Table of Contents PART II