What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-03 compared with 2021-11-02 · 96 added, 123 removed, 123 unchanged (64% of the section changed)

1 unchanged sentence

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

The following discussion contains forward-looking statements, including statements regarding our intent, belief or current expectations with respect to, among other things, trends affecting our financial condition or results of operations, backlog, our industry, the impact of our merger and acquisition activity, government budgets and spending, our business contingency plans, uncertainties in tax due to new tax legislation or other regulatory developments and our ability to recover certain costs through the Coronavirus Aid, Relief and Economic Security Act ("CARES Act").

The following discussion contains forward-looking statements, including statements regarding our intent, belief or current expectations with respect to, among other things, trends affecting our financial condition or results of operations, backlog, our industry, the impact of our merger and acquisition activity, government budgets and spending, our business contingency plans, interest rates and uncertainties in tax due to new tax legislation or other regulatory developments.

Such statements are not guarantees of future performance and involve risks and uncertainties, including uncertainties relating to the coronavirus pandemic ("COVID-19") and the actions taken by authorities and us to respond, and actual results may differ materially from those in the forward-looking statements as a result of various factors.

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

We are a FORTUNE 500 ® science, engineering and information technology company that provides services and solutions in the defense, intelligence, civil and health markets, both domestically and internationally.

We are a FORTUNE 500 ® technology, engineering, and science company that provides services and solutions in the defense, intelligence, civil and health markets, both domestically and internationally.

We bring domain-specific capability and cross-market innovations to customers in each of these markets by leveraging five technical core competencies:

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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.

We operate in three reportable segments:

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

For the three and nine months ended October 1, 2021, COVID-19 did not have a material impact to revenues and operating income.

The COVID-19 pandemic is affecting major economic and financial markets, and effectively all industries and governments are facing challenges, which has resulted in a period of business disruption, the length and severity of which cannot be predicted.

The pandemic has resulted in travel restrictions, government orders to “shelter-in-place”, quarantine restrictions and disruption of the financial markets.

We have acted to protect the health and safety of our employees, comply with workplace health and safety regulations and work with our customers to minimize disruptions.

For the three months ended April 1, 2022, the COVID-19 pandemic did not have a material impact to revenues and operating income.

The full extent of the impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute on programs in the expected timeframe, will depend on future developments, including the duration and spread of the pandemic and the distribution of vaccines, all of which are uncertain and cannot be predicted.

Section 3610 of the CARES Act, a $2 trillion coronavirus response bill providing widespread emergency relief, authorized the government to reimburse qualifying contractors for the cost of certain impacts of COVID-19.

While a portion of the recoveries that we have made are a result of Section 3610 of the CARES Act, the Act expired on September 30, 2021.

Effective October 1, 2021, we mandated a policy requiring all employees, vendors, subcontractors and visitors to be vaccinated or maintain proof of a negative COVID-19 test in order to enter a Leidos facility in the U.S.

or to attend company business events outside of our facilities.

On September 9, 2021, President Biden issued a series of executive orders to combat COVID-19, which requires us, as a federal contractor, to ensure that all of our employees are fully vaccinated by December 8, 2021, unless the employee is legally entitled to a religious or medical exemption.

We are currently assessing the impact our policy will have on our workforce and operations.

LEIDOS HOLDINGS, INC.

On September 9, 2021, President Biden issued a series of executive orders to combat COVID-19, one of which requires us, as a federal contractor, to have our employees fully vaccinated unless the employee is legally entitled to a religious or medical exemption.

This vaccine mandate is currently under a nationwide injunction, while courts adjudicate constitutional challenges to the executive order.

We are prepared to comply with the executive order in the event the injunction is lifted.

Business Environment and Trends

Government Markets

During the three and nine months ended October 1, 2021, we generated approximately 88% and 87%, respectively, of our total revenues from contracts with the U.S.

During the three months ended April 1, 2022, we generated approximately 87% of our total revenues from contracts with the U.S.

Accordingly, our business performance is affected by the overall level of U.S.

government spending, especially on national security, homeland security and intelligence, and the alignment of our service and product offerings and capabilities with current and future budget priorities of the U.S.

Congress received the GFY 2022 President’s Budget Request on May 28, 2021 and passed a Continuing Resolution ("CR") before the GFY deadline of September 30, 2021.

The CR will fully fund the federal government at current levels through December 3, 2021 and provides $28.6 billion in disaster relief and $6.3 billion to support Afghanistan evacuees.

The House and Senate also voted to extend the debt limit waiver through December 3, 2021.

LEIDOS HOLDINGS, INC.

On March 15, 2022, President Biden signed the 2022 Consolidated Appropriations Act into law, funding the federal government through the remainder of GFY 2022.

The Consolidated Appropriations Act includes $782 billion in defense spending and $730 billion in non-defense spending.

The legislation also includes the 2022 Ukraine Supplemental Appropriations Act, which provides $14 billion in humanitarian and military aid for Ukraine.

On March 28, 2022, Congress received the GFY 2023 President’s Budget Request totaling $5.8 trillion.

The request includes $813 billion in defense spending and $769 billion in non-defense spending for GFY 2023 beginning on October 1, 2022.

International Markets

Sales to customers in international markets represented approximately 8% of total revenues for the three and nine months ended October 1, 2021.

Sales to customers in international markets represented approximately 8% of total revenues for the three months ended April 1, 2022.

Our international customers include foreign governments and their agencies.

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While we evaluate the impact of higher tariffs, currently, we do not expect tariffs to have a significant impact to our business.

LEIDOS HOLDINGS, INC.

Results of Operations

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

Three Months Ended Nine Months Ended

2021 October 2,

2020 Dollar change Percent change October 1,

2021 October 2,

Three Months Ended

2022 April 2,

2021 Dollar change Percent change

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Segment and Corporate Results

Three Months Ended Nine Months Ended

Defense Solutions October 1,

2021 October 2,

2020 Dollar change Percent change October 1,

2021 October 2,

Three Months Ended

Defense Solutions April 1,

2022 April 2,

2021 Dollar change Percent change

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Operating margin 6.5 % 7.8 %

The increase in revenues for the three months ended October 1, 2021, as compared to the three months ended October 2, 2020, was primarily attributable to program wins and $47 million of revenues from the acquisitions of Gibbs & Cox and 1901 Group, partially offset by the completion of contracts and a net decrease in volumes on certain programs.

The increase in revenues for the nine months ended October 1, 2021, as compared to the nine months ended October 2, 2020, was primarily attributable to program wins, a net increase in volumes on certain programs and $97 million of revenues from the acquisitions of Gibbs & Cox and 1901 Group, partially offset by the completion of certain contracts.

In addition, for the nine months ended October 1, 2021, there was a $66 million benefit in exchange rate movements.

The decrease in operating income for the three months ended October 1, 2021, as compared to the three months ended October 2, 2020, was primarily attributable to a net decrease in volumes on certain programs and the completion of certain contracts, partially offset by program wins.

The increase in operating income for the nine months ended October 1, 2021, as compared to the nine months ended October 2, 2020, was primarily due to program wins, a net increase in program volumes on certain contracts and the acquisitions of Gibbs & Cox and 1901 Group, partially offset by the completion of certain contracts.

Three Months Ended Nine Months Ended

Civil October 1,

2021 October 2,

2020 Dollar change Percent change October 1,

2021 October 2,

The increase in revenues for the three months ended April 1, 2022, as compared to the three months ended April 2, 2021, was primarily attributable to program wins and $27 million of revenues from the Gibbs & Cox acquisition.

This was partially offset by the completion of contracts, a net decrease in volumes on certain programs, $11 million related to unfavorable exchange rate movements and contracts that were reassigned from the Defense Solutions reportable segment to the Civil reportable segment during the third quarter of fiscal 2021.

The decrease in operating income for the three months ended April 1, 2022, as compared to the three months ended April 2, 2021, was primarily attributable to the completion of certain contracts, net profit write-downs on certain programs, a net decrease in volumes and increased amortization expense.

The decrease was partially offset by program wins.

LEIDOS HOLDINGS, INC.

Three Months Ended

Civil April 1,

2022 April 2,

2021 Dollar change Percent change

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Operating margin 5.4 % 9.7 %

LEIDOS HOLDINGS, INC.

The increase in revenues for the three months ended October 1, 2021, as compared to the three months ended October 2, 2020, was primarily attributable to program wins and a reduction of the negative impacts from COVID-19 experienced during the prior year quarter, partially offset by a net decrease in program volumes.

The increase in revenues for the nine months ended October 1, 2021, as compared to the nine months ended October 2, 2020, was primarily attributable to a net increase of $62 million of revenues related to L3 Harris Technologies' security and detection businesses (the "SD&A Businesses") acquired in the prior year, a net increase in program volumes, program wins and a reduction of the negative impacts from COVID-19 experienced during the prior year.

The increase in operating income for the three months ended October 1, 2021, as compared to the three months ended October 2, 2020, was primarily due to improved performance on certain programs and lower amortization of intangible assets related to the acquisition of the SD&A Businesses, partially offset by fewer product deliveries on certain programs.

The decrease in operating income for the nine months ended October 1, 2021, as compared to the nine months ended October 2, 2020, was primarily attributable to a net decrease in volumes due to the timing of product deliveries on certain programs, partially offset by a $26 million benefit from an adjustment to legal reserves related to the Mission Support Alliance joint venture during the first quarter of fiscal 2021.

Three Months Ended Nine Months Ended

Health October 1,

2021 October 2,

2020 Dollar change Percent change October 1,

2021 October 2,

The increase in revenues for the three months ended April 1, 2022, as compared to the three months ended April 2, 2021, was primarily attributable to a net increase in program volumes and contracts that were reassigned from the Defense Solutions reportable segment to the Civil reportable segment during the third quarter of fiscal 2021.

The decrease in operating income for the three months ended April 1, 2022, as compared to the three months ended April 2, 2021, was primarily due to a $26 million benefit in the prior year from an adjustment to legal reserves related to the Mission Support Alliance joint venture.

Three Months Ended

Health April 1,

2022 April 2,

2021 Dollar change Percent change

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Operating margin 18.2 % 17.3 %

The increase in revenues for the three months ended October 1, 2021, as compared to the three months ended October 2, 2020, was primarily attributable to a net increase in volumes on certain programs and program wins.

The increase in revenues for the nine months ended October 1, 2021, as compared to the nine months ended October 2, 2020, was primarily attributable to a net increase in volumes on certain programs, program wins and an approximately $96 million reduction of the negative impacts of COVID-19 experienced during the prior year, partially offset by the completion of certain contracts.

The increase in operating income for the three months ended October 1, 2021, as compared to the three months ended October 2, 2020, was primarily due to increased volume on fixed unit price programs.

The increase in operating income for the nine months ended October 1, 2021, as compared to the nine months ended October 2, 2020, was primarily attributable to a net increase in volumes on higher margin programs, an approximately $63 million reduction of the negative impacts of COVID-19 experienced in the prior year and a net decrease in asset impairment charges of $8 million.

Three Months Ended Nine Months Ended

Corporate October 1,

2021 October 2,

2020 Dollar change Percent change October 1,

2021 October 2,

The increases in revenue and operating income for the three months ended April 1, 2022, as compared to the three months ended April 2, 2021, was primarily due to a net increase in volumes on higher margin programs and net profit write-ups on certain programs.

Three Months Ended

Corporate April 1,

2022 April 2,

2021 Dollar change Percent change

(dollars in millions)

Operating (loss) income $ (23) $ (16) $ (7) 43.8 % $ (73) $ — $ (73) NM

NM - Not Meaningful

The increase in operating loss for the nine months ended October 1, 2021, as compared to the nine months ended October 2, 2020, was primarily attributable to an $81 million net gain recognized during the second quarter of fiscal 2020 upon receipt of proceeds related to the VirnetX, Inc.

legal matter and a decrease in acquisition and integration costs.

LEIDOS HOLDINGS, INC.

Operating loss $ (23) $ (20) $ (3) 15.0 %

The increase in operating loss for the three months ended April 1, 2022, as compared to the three months ended April 2, 2021, was primarily attributable to an increase in legal costs.

Non-Operating Expense, net

Non-operating expense, net for the three months ended October 1, 2021 was $45 million, consistent with the three months ended October 2, 2020 of $44 million.

Non-operating expense, net for the nine months ended October 1, 2021 was $137 million as compared to $163 million for the nine months ended October 2, 2020.

The change was primarily due to $31 million of debt discount and deferred financing costs written off related to refinancing activities in the prior year.

Non-operating expense, net for the three months ended April 1, 2022, was $49 million as compared to $46 million for the three months ended April 2, 2021.

The increase was primarily due to higher interest expenses driven by changes in interest rates and the short-term senior unsecured term loan incurred in the second quarter of fiscal 2021 to fund the acquisition of Gibbs & Cox.

Provision for Income Taxes

For the three months ended October 1, 2021, our effective tax rate was 20.0% compared to 23.8% for the three months ended October 2, 2020.

The decrease in the effective tax rate was primarily due to a decrease in foreign taxes and an increase in research tax credits.

For the nine months ended October 1, 2021, our effective tax rate was 21.7% compared to 19.4% for the nine months ended October 2, 2020.

The increase in the effective tax rate was primarily due to a net decrease in benefits related to employee stock-based payments.

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminates the option to currently deduct research and development costs for tax purposes and requires taxpayers to amortize domestic and foreign research costs over five years and 15 years, respectively.

The House Ways and Means Committee has proposed tax legislation to delay the effective date of this change to 2026, but it is uncertain whether the proposed delay will ultimately be enacted into law.

If the 2022 effective date remains in place, our initial assessment is our cash from operations would materially decrease in 2022 and our net deferred tax assets would increase by a similar amount.

We are currently evaluating the potential impact on our cash flows from operations.

For the three months ended April 1, 2022, our effective tax rate was 20.3% compared to 21.8% for the three months ended April 2, 2021.

The decrease in the effective tax rate was primarily due to excess tax benefits related to employee stock-based payment transactions and federal research tax credits.

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminated the option to deduct research and development costs for tax purposes and requires taxpayers to capitalize and amortize research costs over five years.

Although it is possible that Congress may defer, modify, or repeal this provision, potentially with retroactive effect, we have no assurance that Congress will take any action with respect to this provision.

If the 2022 effective date remains in place, based on the law as currently enacted, our initial assessment is that our cash from operations will decrease by approximately $150 million in fiscal 2022 and our net deferred tax assets will increase by a similar amount.

The actual impact on fiscal 2022 cash from operations will depend on the amount of research and development costs we will incur, on whether Congress modifies or repeals this provision and on whether new guidance and interpretive rules are issued by the US Treasury, among other factors.

LEIDOS HOLDINGS, INC.

Bookings and Backlog

We recorded net bookings worth an estimated $4.7 billion and $12.3 billion during the three and nine months ended October 1, 2021, as compared to $4.3 billion and $14.5 billion for the three and nine months ended October 2, 2020.

We recorded net bookings worth an estimated $5.4 billion during the three months ended April 1, 2022, as compared to $3.8 billion for the three months ended April 2, 2021.

The estimated value of our total backlog was as follows:

October 1, 2021 October 2, 2020

April 1, 2022 April 2, 2021

Segment Funded Unfunded Total Funded Unfunded Total

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

Total backlog at October 1, 2021 included a positive impact of $103 million when compared to total backlog at October 2, 2020, primarily due to the exchange rate movement in the British pound when compared to the U.S.

Total backlog at April 1, 2022, included a negative impact of $33 million when compared to total backlog at April 2, 2021, primarily due to the exchange rate movements in the British pound and Australian dollar when compared to the U.S.

Backlog estimates are subject to change and may be affected by factors including modifications of contracts and foreign currency movements.

LEIDOS HOLDINGS, INC.

Liquidity and Capital Resources

As of October 1, 2021, we had $587 million in cash and cash equivalents.

As of April 1, 2022, we had $297 million in cash and cash equivalents.

Additionally, we have an unsecured revolving credit facility which can provide up to $750 million in additional borrowing, if required.

As of October 1, 2021, there were no borrowings outstanding under the revolving credit facility and we were in compliance with the related financial covenants.

At October 1, 2021, and January 1, 2021, we had outstanding debt of $5.1 billion and $4.7 billion, respectively.

On May 7, 2021, we entered into a Credit Agreement which provided for a senior unsecured term loan facility in an aggregate principal amount of $380 million.

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

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

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

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

The senior unsecured term loans and notes contain financial covenants and customary restrictive covenants.

We were in compliance with all covenants as of October 1, 2021.

On July 12, 2021, Leidos, Inc.

established a commercial paper program in which we may issue short-term unsecured commercial paper notes not to exceed $750 million and have maturities of up to 397 days from the date of issuance (see "Note 6–Debt" ).

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

We paid dividends of $51 million and $149 million during the three and nine months ended October 1, 2021, respectively, and $49 million and $148 million during the three and nine months ended October 2, 2020, respectively.

During the nine months ended October 1, 2021, we sold $693 million of accounts receivable under accounts receivable purchase agreements.

There were no sales of accounts receivable during the thee months ended October 1, 2021.

During the three and nine months ended October 2, 2020, we sold $753 million and $1,866 million of accounts receivable under accounts receivable purchase agreements and received proceeds of $752 million and $1,864 million, respectively.

As of April 1, 2022, there were no borrowings outstanding under the revolving credit facility.

We had outstanding debt of $5.1 billion at April 1, 2022, and December 31, 2021.

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

As of April 1, 2022, we had $75 million of Commercial Paper Notes outstanding.

We made principal payments on our long-term debt of $27 million and $26 million during the three months ended April 1, 2022, and April 2, 2021, respectively.

This activity included required principal payments on our term loans of $24 million for both the three months ended April 1, 2022, and April 2, 2021.

Our credit facilities, the 2021 credit agreement, commercial paper notes, senior unsecured term loans and notes outstanding as of April 1, 2022, contain financial covenants and customary restrictive covenants.

We were in compliance with all covenants as of April 1, 2022.

Interest on our Credit Facilities is calculated based on the London Interbank Offered Rate (“LIBOR”).

On July 27, 2017, the U.K.’s Financial Conduct Authority announced that LIBOR would be discontinued or become unavailable as a reference rate by the end of 2021 and LIBOR will be fully discontinued or become unavailable as a benchmark rate by June 2023.

Although our Credit Facilities include mechanics to facilitate the adoption by us and our lenders of an alternative benchmark rate for use in place of LIBOR, no assurance can be made that such alternative benchmark rate will perform in a manner similar to LIBOR or result in interest rates that are at least as favorable to us as those that would have resulted had LIBOR remained in effect, which could result in an increase in our interest expense and other debt service obligations.

In addition, the overall credit market may be disrupted as a result of the replacement of LIBOR or in the anticipation thereof, which could have an adverse impact on our ability to refinance, reprice, or amend our existing indebtedness or incur additional indebtedness on favorable terms.

LEIDOS HOLDINGS, INC.

We paid dividends of $51 million and $50 million during the three months ended April 1, 2022, and April 2, 2021, respectively.

During the three months ended April 1, 2022, we sold $209 million of accounts receivable under accounts receivable purchase agreements and received proceeds of $209 million.

During the three months ended April 2, 2021, we sold $465 million of accounts receivable under accounts receivable purchase agreements and received proceeds of $464 million (see "Note 9–Sale of Accounts Receivable").

Stock repurchases of Leidos common stock may be made on the open market or in privately negotiated transactions with third parties including through accelerated share repurchase agreements.

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The repurchase program may be accelerated, suspended, delayed or discontinued at any time.

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

The proposed legislation changes to the Tax Cuts and Jobs Act of 2017 and the potential for COVID-19 to affect the financial markets may impact our liquidity.

We will continue to assess our liquidity needs as the proposed tax legislation changes and pandemic evolve.

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

LEIDOS HOLDINGS, INC.

On February 16, 2022, we entered into an Accelerated Share Repurchase ("ASR") agreement with a financial institution to repurchase shares of our outstanding common stock.

We paid $500 million to the financial institution and received an initial delivery of 4.5 million shares at an average price of $88.72 per share.

The specific number of shares that we will ultimately receive under the ASR agreement will be based on the volume-weighted-average-price during the period February 17, 2022, to May 16, 2022.

Beginning in 2022, a provision in the Tax Cuts and Jobs Act of 2017 (“TCJA”) which eliminated the option to deduct research and development costs for tax purposes and requires taxpayers to capitalize and amortize the costs over five years became effective.

Congress may defer, modify or repeal the provision, but the ultimate outcome is uncertain.

The uncertainty surrounding the TCJA provision and the potential for COVID-19 to continue to affect the financial markets may impact our liquidity.

If the 2022 effective date of the TCJA research cost capitalization provision remains in place, our initial assessment indicates we will have a negative impact to cash of approximately $150 million in fiscal 2022 and our net deferred tax assets will increase by a similar amount.

We will continue to assess our liquidity needs as the tax legislation and pandemic evolve.

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

Summary of Cash Flows

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

Three Months Ended Nine Months Ended

2021 October 2,

2020 October 1,

2021 October 2,

Three Months Ended

2022 April 2,

(in millions)

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Net cash used in investing activities (21) (244)

Net cash (used in) provided by financing activities (209) (517) (44) 1,353

Net increase in cash, cash equivalents and restricted cash $ 303 $ 60 $ 84 $ 25

Net cash provided by operating activities decreased $27 million for the three months ended October 1, 2021, when compared to the prior year quarter.

The decrease was primarily due to the $92 million deferral of employer payroll taxes in the prior year and the timing of customer advance payments, partially offset by lower income tax payments of $34 million and other favorable working capital changes.

Net cash provided by operating activities decreased $565 million for the nine months ended October 1, 2021, when compared to the prior year.

The decrease was primarily due to lower sales of accounts receivable outstanding of $232 million, $92 million of deferral of employer payroll taxes in the prior year, higher income tax payments of $69 million, the receipt of $85 million of proceeds related to the VirnetX legal matter in the prior year and the timing of customer advance payments.

Net cash used in investing activities increased $38 million for the three months ended October 1, 2021, when compared to the prior year quarter primarily due to an additional inconsequential acquisition made during the current quarter (see "Note 3–Acquisitions, Goodwill and Intangible Assets").

Net cash used in investing activities decreased $2,021 million for the nine months ended October 1, 2021, when compared to the prior year, primarily due to larger acquisitions made in the prior year for Dynetics and the SD&A Businesses compared to our material current year acquisitions, 1901 Group and Gibbs & Cox (see "Note 3–Acquisitions, Goodwill and Intangible Assets") and lower capital expenditures in the current year.

Net cash used in financing activities decreased $308 million for the three months ended October 1, 2021 when compared to the prior year quarter.

The change was primarily due to the early repayment to retire our $450 million senior unsecured notes in the prior year quarter, partially offset by $137 million of open market stock repurchases in the current year quarter.

Net cash used in financing activities increased $1,397 million for the nine months ended October 1, 2021, when compared to the prior year.

The change was primarily due to a decrease of approximately $1,206 million from the net change of proceeds received from the issuance of debt, principal payments and payments for debt issuance

costs and by $237 million of open market stock repurchases in the current year, partially offset by a net $34 million

increase in capital contributions received from our non-controlling interest.

Net cash used in financing activities (519) (148)

Net decrease in cash, cash equivalents and restricted cash $ (447) $ (153)

Net cash provided by operating activities decreased $146 million for the three months ended April 1, 2022, when compared to the prior year quarter.

The decrease was primarily due to lower sale of accounts receivable and timing of customer and vendor payments in the current quarter as compared to the prior year quarter.

Net cash used in investing activities decreased $223 million for the three months ended April 1, 2022, when compared to the prior year quarter, primarily due to $214 million of net cash paid related to the acquisition of 1901 Group during the prior year quarter and proceeds received from the sale of Aviation & Missile Solutions LLC in the current quarter (see "Note 3–Acquisitions, Divestitures, Goodwill and Intangible Assets").

Net cash used in financing activities increased $371 million for the three months ended April 1, 2022, when compared to the prior year quarter.

The change was primarily due to the Accelerated Share Repurchase agreement entered into by the Company on February 16, 2022, which resulted in an increase of $403 million in stock repurchases during the current quarter and $38 million in capital contributions received from our non-controlling interest in the prior year quarter, partially offset by $75 million of net proceeds from our commercial paper program in the current quarter.

LEIDOS HOLDINGS, INC.

Off-Balance Sheet Arrangements

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These arrangements have not had, and management does not believe it is likely that they will in the future have, a material effect on our liquidity, capital resources, operations or financial condition.

LEIDOS HOLDINGS, INC.

Guarantor and Issuer of Guaranteed Securities

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The summarized balance sheet for Leidos Holdings, Inc.

and Leidos, Inc., net of eliminations, as of October 1, 2021 was as follows (in millions):

and Leidos, Inc., net of eliminations, as of April 1, 2022, was as follows (in millions):

Balance Sheet

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Total liabilities 9,440

Total equity 3,058

Total stockholders' equity 2,966

Total liabilities and stockholders' equity $ 12,406

The summarized statements of income for Leidos Holdings, Inc.

and Leidos, Inc., net of eliminations, for the three and nine months ended October 1, 2021 were as follows (in millions):

and Leidos, Inc., net of eliminations, for the three months ended April 1, 2022, were as follows (in millions):

Statements of Income

Three Months Ended Nine Months Ended

Revenues, net $ 2,374

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For a discussion of these items, see "Note 11–Commitments and Contingencies" of the notes to the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q.

Critical Accounting Policies

There were no material changes to our critical accounting policies, estimates or judgments during the period covered by this report from those discussed in our Annual Report on Form 10-K for the year ended January 1, 2021 except for the elimination of the Income Taxes critical accounting policy.

LEIDOS HOLDINGS, INC.

Critical Accounting Policies

Recently Adopted and Issued Accounting Standards

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Quantitative and Qualitative Disclosures About Market Risk.

There were no material changes in our market risk exposure from those discussed in our Annual Report on Form 10-K for the year ended January 1, 2021.

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis