What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-08-02 compared with 2022-05-03 · 166 added, 131 removed, 501 unchanged (37% of the section changed)

13 unchanged sentences

Operating lease right-of-use assets, net 614 612

Other assets 418 439

Other long-term assets 367 439

Total assets $ 12,887 $ 13,261

10 unchanged sentences

Stockholders’ equity:

Common stock, $ 0.0001 par value, 500 million shares authorized, 137 million and 140 million shares issued and outstanding at April 1, 2022, and December 31, 2021, respectively

Common stock, $ 0.0001 par value, 500 million shares authorized, 137 million and 140 million shares issued and outstanding at July 1, 2022, and December 31, 2021, respectively

Additional paid-in capital 1,955 2,423

Retained earnings 2,128 1,880

Accumulated other comprehensive income (loss) 20 ( 12 )

Accumulated other comprehensive loss ( 79 ) ( 12 )

Total Leidos stockholders’ equity 4,004 4,291

5 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended

2022 April 2,

Three Months Ended Six Months Ended

(in millions, except per share amounts)

2 unchanged sentences

Selling, general and administrative expenses 260 224 494 392

Bad debt expense and recoveries 2 ( 1 ) 4 ( 10 )

Acquisition, integration and restructuring costs 5 10 8 15

Equity loss (earnings) of non-consolidated subsidiaries 2 ( 5 )

Asset impairment charges 3 — 3 —

Equity earnings of non-consolidated subsidiaries ( 3 ) ( 4 ) ( 1 ) ( 9 )

Operating income 271 269 542 577

1 unchanged sentence

Interest expense, net ( 50 ) ( 46 ) ( 98 ) ( 91 )

Other expense, net ( 1 ) ( 1 )

Other income (expense), net 4 — 3 ( 1 )

Income before income taxes

225 223 447 485

Income tax expense

3 unchanged sentences

Net income attributable to Leidos common stockholders

$ 171 $ 169 $ 346 $ 374

Earnings per share:

$ 1.25 $ 1.20 $ 2.51 $ 2.65

1.24 1.18 2.49 2.62

See accompanying notes to condensed consolidated financial statements.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended

2022 April 2,

Three Months Ended Six Months Ended

(in millions)

1 unchanged sentence

Foreign currency translation adjustments

( 85 ) 21 ( 83 ) 17

Unrecognized gain on derivative instruments

Pension adjustments

Total other comprehensive income, net of taxes 32 9

( 21 ) — ( 20 ) —

Total other comprehensive (loss) income, net of taxes ( 99 ) 22 ( 67 ) 31

Comprehensive income 73 192 282 406

1 unchanged sentence

Comprehensive income attributable to Leidos common stockholders

$ 72 $ 191 $ 279 $ 405

See accompanying notes to condensed consolidated financial statements.

4 unchanged sentences

other comprehensive

income Leidos Holdings, Inc.

stockholders' equity Non-controlling interest Total

income (loss) Leidos stockholders' equity Non-controlling interest Total stockholders' equity

(in millions, except for per share amounts)

10 unchanged sentences

Balance at April 1, 2022 137 $ 1,928 $ 2,007 $ 20 $ 3,955 $ 53 $ 4,008

Net income — — 171 — 171 1 172

Other comprehensive loss, net of taxes — — — ( 99 ) ( 99 ) — ( 99 )

Issuances of stock — 10 — — 10 — 10

Repurchases of stock and other

— ( 2 ) — — ( 2 ) — ( 2 )

Dividends of $ 0.36 per share

— — ( 50 ) — ( 50 ) — ( 50 )

Stock-based compensation — 19 — — 19 — 19

Capital distributions to non-controlling interests — — — — — ( 1 ) ( 1 )

Balance at July 1, 2022 137 $ 1,955 $ 2,128 $ ( 79 ) $ 4,004 $ 53 $ 4,057

See accompanying notes to condensed consolidated financial statements.

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

Shares of common stock Additional

1 unchanged sentence

other comprehensive

loss Leidos Holdings, Inc.

stockholders' equity Non-controlling interest Total

income (loss) Leidos stockholders' equity Non-controlling interest Total stockholders' equity

(in millions, except for per share amounts)

10 unchanged sentences

Balance at April 2, 2021 141 $ 2,486 $ 1,484 $ ( 37 ) $ 3,933 $ 47 $ 3,980

Net income — — 169 — 169 1 170

Other comprehensive income, net of taxes — — — 22 22 — 22

Issuances of stock 1 9 — — 9 — 9

Repurchases of stock and other — ( 3 ) — — ( 3 ) — ( 3 )

Dividends of $ 0.34 per share

— — ( 48 ) — ( 48 ) — ( 48 )

Stock-based compensation — 17 — — 17 — 17

Capital contributions from non-controlling interests — — — — — 1 1

Balance at July 2, 2021 142 $ 2,509 $ 1,605 $ ( 15 ) $ 4,099 $ 49 $ 4,148

See accompanying notes to condensed consolidated financial statements.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three Months Ended

2022 April 2,

Six Months Ended

(in millions)

17 unchanged sentences

Payments for property, equipment and software ( 49 ) ( 47 )

Net proceeds from sale of assets 6 —

Net cash used in investing activities ( 29 ) ( 640 )

Cash flows from financing activities:

Proceeds from debt issuance 380 380

Net proceeds from commercial paper 150 —

Payments of long-term debt ( 27 ) ( 26 )

Repayments of borrowings ( 434 ) ( 53 )

Dividend payments ( 100 ) ( 98 )

Repurchases of stock and other ( 528 ) ( 126 )

Net capital (distribution to) contributions from non-controlling interests ( 2 ) 38

Net capital (distributions to) contributions from non-controlling interests ( 3 ) 39

Proceeds from issuances of stock 22 23

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

Net cash (used in) provided by financing activities ( 513 ) 165

Net decrease in cash, cash equivalents and restricted cash ( 409 ) ( 219 )

41 unchanged sentences

however, actual results could differ materially from those estimates.

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

We combined "Capital distributions to non-controlling interests" and "Capital contributions from non-controlling interests" into "Net capital (distributions to) contributions from non-controlling interests" on the condensed consolidated statements of cash flows.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which consist of normal recurring adjustments, necessary for a fair presentation thereof.

21 unchanged sentences

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.

Except for our new $ 380 million term loan entered into on May 6, 2022 (see "Note 6–Debt"), we currently use the one-month LIBOR for which the rate publication will cease in June 2023.

Changes in Estimates on Contracts

1 unchanged sentence

Changes in estimates on contracts were as follows:

Three Months Ended

2022 April 2,

Three Months Ended Six Months Ended

(in millions, except per share amounts)

8 unchanged sentences

Revenue Recognized from Prior Obligations

Revenue recognized from performance obligations satisfied in previous periods was $ 14 million and $ 9 million for the three months ended April 1, 2022, and April 2, 2021, respectively.

Revenue recognized from performance obligations satisfied in previous periods was $ 17 million and $ 34 million for the three and six months ended July 1, 2022, respectively, and $ 9 million and $ 18 million for the three and six months ended July 2, 2021, respectively.

The changes primarily related to revisions of variable consideration including award and incentive fees, and revisions to estimates at completion resulting from changes in contract scope, mitigation of contract risks or true-ups of contract estimates at the end of contract performance.

1 unchanged sentence

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

At April 1, 2022, and December 31, 2021, $ 176 million and $ 138 million, respectively, of outstanding payments were included within "Cash and cash equivalents" and "Accounts payable and accrued liabilities" correspondingly on the condensed consolidated balance sheets.

At July 1, 2022, and December 31, 2021, $ 195 million and $ 138 million, respectively, of outstanding payments were included within "Cash and cash equivalents" and "Accounts payable and accrued liabilities" correspondingly on the condensed consolidated balance sheets.

Restricted Cash

We have restricted cash balances, primarily representing advances from customers that are restricted for use on certain expenditures related to that customer's contract and cash collected from the sale of accounts receivable but

not yet remitted to the financial institution (see Note 9–Sale of Accounts Receivable).

We have restricted cash balances, primarily representing advances from customers that are restricted for use on certain expenditures related to that customer's contract.

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

Our restricted cash balances were $ 131 million and $ 148 million at April 1, 2022, and December 31, 2021, respectively.

Our restricted cash balances were $ 127 million and $ 148 million at July 1, 2022, and December 31, 2021, respectively.

Note 2–Revenues from Contracts with Customers

1 unchanged sentence

Remaining performance obligations ("RPO") represent the expected value of exercised contracts, both funded and unfunded, less revenue recognized to date.

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

As of April 1, 2022, we had $ 15.4 billion of RPO and expect to recognize approximately 55 % and 73 % over the next 12 months and 24 months, respectively, with the remainder to be recognized thereafter.

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

As of July 1, 2022, we had $ 15.1 billion of RPO and expect to recognize approximately 59 % and 76 % over the next 12 months and 24 months, respectively, with the remainder to be recognized thereafter.

Disaggregation of Revenues

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

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

LEIDOS HOLDINGS, INC.

1 unchanged sentence

Disaggregated revenues by customer-type were as follows:

Three Months Ended April 1, 2022

Defense Solutions Civil Health Total

Three Months Ended July 1, 2022 Six Months Ended July 1, 2022

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

(in millions)

6 unchanged sentences

Total $ 2,052 $ 828 $ 687 $ 3,567 $ 4,100 $ 1,608 $ 1,337 $ 7,045

Three Months Ended April 2, 2021

Defense Solutions Civil Health Total

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

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

(in millions)

9 unchanged sentences

Disaggregated revenues by contract-type were as follows:

Three Months Ended April 1, 2022

Defense Solutions Civil Health Total

Three Months Ended July 1, 2022 Six Months Ended July 1, 2022

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

(in millions)

5 unchanged sentences

Total $ 2,052 $ 828 $ 687 $ 3,567 $ 4,100 $ 1,608 $ 1,337 $ 7,045

Three Months Ended April 2, 2021

Defense Solutions Civil Health Total

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

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

(in millions)

8 unchanged sentences

Disaggregated revenues by geographic location were as follows:

Three Months Ended April 1, 2022

Defense Solutions Civil Health Total

Three Months Ended July 1, 2022 Six Months Ended July 1, 2022

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

(in millions)

2 unchanged sentences

International

263 39 — 302 501 78 — 579

Total $ 2,052 $ 828 $ 687 $ 3,567 $ 4,100 $ 1,608 $ 1,337 $ 7,045

Three Months Ended April 2, 2021

Defense Solutions Civil Health Total

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

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

(in millions)

2 unchanged sentences

International

257 41 — 298 501 80 — 581

Total $ 2,003 $ 769 $ 645 $ 3,417 $ 3,960 $ 1,512 $ 1,236 $ 6,708

Revenues by customer-type, contract-type and geographic location exclude lease income of $ 16 million and $ 24 million for the three months ended April 1, 2022 and April 2, 2021, respectively.

Revenues by customer-type, contract-type and geographic location exclude lease income of $ 30 million and $ 46 million for the three and six months ended July 1, 2022, respectively, and $ 31 million and $ 55 million for the three and six months ended July 2, 2021, respectively.

Contract Assets and Liabilities

6 unchanged sentences

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

Balance sheet line item April 1,

Balance sheet line item July 1,

2022 December 31,

9 unchanged sentences

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

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

Revenue recognized for the three months ended April 1, 2022, of $ 188 million was included as a contract liability at December 31, 2021.

Revenue recognized for the three months ended April 2, 2021, of $ 144 million was included as a contract liability at January 1, 2021.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Revenue recognized for the three and six months ended July 1, 2022, of $ 52 million and $ 240 million, respectively, was included as a contract liability at December 31, 2021.

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

Note 3–Acquisitions, Divestitures, Goodwill and Intangible Assets

Business Acquisitions

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.

As of April 1, 2022, we had completed the determination of fair values of the acquired assets and liabilities assumed.

The final 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

For the three months ended April 1, 2022, $ 27 million of revenues related to the Gibbs & Cox acquisition 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, we recognized an $ 8 million program intangible asset and preliminary goodwill of $ 25 million.

Business Acquisition

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

In connection with the transaction, we recognized an $ 8 million program intangible asset and goodwill of $ 25 million.

Aviation & Missile Solutions LLC ("AMS") Divestiture

On November 22, 2021, we signed a definitive agreement within our Defense Solutions segment to dispose of its AMS business in order to focus on leading-edge and technologically advanced services, solutions and products.

The net sales price is $ 15 million, and the divestiture was completed on April 29, 2022.

The net sales price was $ 15 million, and the divestiture was completed on April 29, 2022.

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

7 unchanged sentences

Goodwill at December 31, 2021 $ 3,681 $ 2,097 $ 966 $ 6,744

Acquisition of a business 1 — — 1

Divestiture of a business ( 6 ) — — ( 6 )

Foreign currency translation adjustments ( 32 ) ( 33 ) — ( 65 )

Goodwill at April 1, 2022

Goodwill at July 1, 2022

$ 3,643 $ 2,064 $ 966 $ 6,673

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, the estimated fair value of the Security Products reporting unit within the Civil reportable segment exceeded the carrying value by approximately 6 % as of the most recent assessment date.

In the event that there are significant unfavorable changes to 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.

During the three months ended April 1, 2022, and April 2, 2021, there were no impairments to goodwill.

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

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, the estimated fair value of the Security Enterprise Solutions reporting unit within the Civil reportable segment exceeded the carrying value by approximately 6 % as of the most recent assessment date.

In the event that there are significant unfavorable changes to forecasted cash flows of the reporting unit (including if the impact of COVID-19 on passenger travel levels is more prolonged or severe than what is incorporated into our forecast), terminal growth rates or the cost of capital used in the fair value estimates, we may be required to record a material impairment of goodwill at a future date.

We did not identify any qualitative factors that would trigger a quantitative goodwill impairment test during the six months ended July 1, 2022.

There were no impairments to goodwill during the six months ended July 1, 2022, and July 2, 2021.

LEIDOS HOLDINGS, INC.

2 unchanged sentences

Intangible assets, net consisted of the following:

April 1, 2022 December 31, 2021

July 1, 2022 December 31, 2021

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

11 unchanged sentences

Indefinite-lived intangible assets:

In-process research and development 92 — 92 92 — 92

In-process research and development ("IPR&D") (1)

92 — 92 92 — 92

Trade names 4 — 4 4 — 4

1 unchanged sentence

Total intangible assets $ 2,102 $ ( 1,064 ) $ 1,038 $ 2,184 $ ( 1,007 ) $ 1,177

Amortization expense was $ 59 million and $ 55 million for the three months ended April 1, 2022 and April 2, 2021, respectively.

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

Amortization expense was $ 57 million and $ 116 million for the three and six months ended July 1, 2022, respectively, and $ 55 million and $ 110 million for the three and six months ended July 2, 2021, respectively.

Program intangible assets are amortized over their respective estimated useful lives in proportion to the pattern of economic benefit based on expected future discounted cash flows.

Backlog and trade name intangible assets are amortized on a straight-line basis over their estimated useful lives.

Backlog and finite-lived trade name intangible assets are amortized on a straight-line basis over their estimated useful lives.

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

The estimated annual amortization expense as of April 1, 2022, was as follows:

The estimated annual amortization expense as of July 1, 2022, was as follows:

Fiscal year ending

10 unchanged sentences

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

April 1, 2022 December 31, 2021

July 1, 2022 December 31, 2021

Carrying value Fair value Carrying value Fair value

2 unchanged sentences

Derivatives $ 4 $ 4 $ 53 $ 53

As of April 1, 2022, 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 5–Derivative Instruments").

As of July 1, 2022, 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 5–Derivative Instruments").

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

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

As of April 1, 2022, and December 31, 2021, the fair value of debt was $ 5.1 billion and $ 5.4 billion, respectively, and the carrying amount was $ 5.1 billion and $ 5.1 billion, respectively (see "Note 6–Debt").

As of July 1, 2022, and December 31, 2021, the fair value of debt was $ 5.0 billion and $ 5.4 billion, respectively, and the carrying amount was $ 5.2 billion and $ 5.1 billion, respectively (see "Note 6–Debt").

The fair value of long-term debt is determined based on current interest rates available for debt with terms and maturities similar to our existing debt arrangements (Level 2 inputs).

1 unchanged sentence

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

As of April 1, 2022, we did not have any assets or liabilities measured at fair value on a non-recurring basis.

As of July 1, 2022, we did not have any assets or liabilities measured at fair value on a non-recurring basis.

LEIDOS HOLDINGS, INC.

5 unchanged sentences

These swaps are designated as cash flow hedges.

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

We transact business globally and are subject to risks associated with changing foreign currency exchange rates.

We enter into foreign currency forward contracts in order to mitigate fluctuations in our earnings and cash flows due to changing rates.

The foreign currency forward contracts are not designated as hedges and do not qualify for hedge accounting.

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

Liability derivatives

Balance sheet line item April 1,

Balance sheet line item July 1,

2022 December 31,

1 unchanged sentence

Cash flow interest rate swaps Other long-term liabilities $ 3 53

Foreign currency forward contracts Accounts payable and accrued liabilities 1 —

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

8 unchanged sentences

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

Three Months Ended

2022 April 2,

Three Months Ended Six Months Ended

(in millions)

Total interest expense, net presented in the condensed consolidated statements of income in which the effects of cash flow hedges are recorded

Amount recognized in other comprehensive income $ 32 $ 12

$ 50 $ 46 $ 98 $ 91

Amount recognized in other comprehensive income (loss) $ 4 $ ( 3 ) $ 36 $ 9

Amount reclassified from accumulated other comprehensive income (loss) to interest expense, net $ 5 $ 4 $ 11 $ 9

We expect to reclassify net losses of $ 15 million from accumulated other comprehensive income into earnings during the next 12 months.

LEIDOS HOLDINGS, INC.

1 unchanged sentence

Our debt consisted of the following:

Stated interest rate Effective interest rate April 1,

Stated interest rate Effective interest rate July 1,

(in millions)

5 unchanged sentences

1.54 % 1.64 % — 380

$ 380 million term loan, due May 2023

2.63 % 2.72 % 380 —

Total short-term debt $ 530 $ 380

25 unchanged sentences

$ 4,023 $ 4,593

(1) The carrying amounts of the senior unsecured term loans and notes as of April 1, 2022, and December 31, 2021, include the remaining principal outstanding of $ 5,041 million and $ 5,065 million, respectively, less total unamortized debt discounts and deferred debt issuances costs of $ 41 million and $ 43 million, respectively.

(1) The carrying amounts of the senior unsecured term loans and notes as of July 1, 2022, and December 31, 2021, include the remaining principal outstanding of $ 5,018 million and $ 5,065 million, respectively, less total unamortized debt discounts and deferred debt issuances costs of $ 39 million and $ 43 million, respectively.

Term Loans and Revolving Credit Facility

2 unchanged sentences

The Revolving Facility permits two additional one-year extensions subject to lender consent.

As of July 1, 2022, there were no borrowings outstanding under the Revolving Facility.

Borrowings under the Credit Agreement bear interest at a rate determined, at our option, based on either an alternate base rate or a LIBOR rate plus, in each case, an applicable margin that varies depending on our credit rating.

2 unchanged sentences

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

On May 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.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 May 6, 2022, we entered into a 364 -day term loan credit agreement ("Term Loan Agreement") with certain financial institutions, which provided for a senior unsecured term loan facility in an aggregate principal amount of $ 380 million.

The proceeds of the Term Loan Agreement were used to repay the $ 380 million senior unsecured term loan entered into on May 7, 2021.

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

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

Commercial Paper

3 unchanged sentences

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

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

As of July 1, 2022, we had $ 150 million of Commercial Paper Notes outstanding.

Principal Payments and Debt Issuance Costs

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.

As of April 1, 2022, and December 31, 2021, there were no borrowings outstanding under the Revolving Facility.

Amortization of debt discount and debt issuance costs was $ 3 million and $ 2 million for the three months ended April 1, 2022, and April 2, 2021, respectively.

The Credit Facilities, the 2021 Credit Agreement, Commercial Paper Notes, senior unsecured term loans and notes are fully and unconditionally guaranteed and contain certain customary restrictive covenants, including among other things, restrictions on our ability to create liens and enter into sale and leaseback transactions under certain circumstances.

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

We made principal payments on our long-term debt of $ 407 million and $ 434 million during the three and six months ended July 1, 2022, respectively, and $ 27 million and $ 53 million during the three and six months ended July 2, 2021, respectively.

This activity included required principal payments on our term loans of $ 404 million and $ 428 million for the three and six months ended July 1, 2022, and $ 24 million and $ 48 million for the three and six months ended July 2, 2021, respectively.

As of July 1, 2022, and December 31, 2021, there were no borrowings outstanding under the Revolving Facility.

Amortization of debt discount and debt issuance costs was $ 2 million and $ 5 million for the three and six months ended July 1, 2022, respectively, and $ 2 million and $ 4 million for the three and six months ended July 2, 2021, respectively.

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

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

Note 7–Accumulated Other Comprehensive Income (Loss)

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

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

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

Foreign currency translation adjustments Unrecognized gain (loss) on derivative instruments Pension adjustments Total AOCI

(in millions)

2 unchanged sentences

( 5 ) ( 8 ) ( 4 ) ( 17 )

Reclassification from accumulated other comprehensive income (loss)

Reclassification from AOCI

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

1 unchanged sentence

Taxes 17 ( 11 ) 6 12

Reclassification from accumulated other comprehensive income (loss) — 6 — 6

Balance at April 1, 2022 $ 24 $ ( 12 ) $ 8 $ 20

Reclassification from AOCI — 11 — 11

Balance at July 1, 2022 $ ( 61 ) $ ( 5 ) $ ( 13 ) $ ( 79 )

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

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

On May 20, 2022, the trustee of our defined benefit pension plan (the “Plan”) invested the assets of the Plan in a bulk purchase annuity policy to fully insure the benefits payable to the members of the Plan.

As the buy-in transaction insured the defined benefit obligation, we do not anticipate material future contributions.

The bulk purchase annuity policy is structured to enable the Plan to move to a full buy-out, at which time the insurer would become directly responsible for all pension payments and we would be relieved of our obligations under the Plan.

At this future date, a settlement loss will be recognized for an amount equal to any unamortized loss associated with the Plan recorded within AOCI and any remaining net plan assets of the Plan will be remitted to the Company.

As of July 1, 2022, the unamortized loss within AOCI related to the Plan was $ 21 million and the Plan had net assets of $ 7 million.

Note 8–Earnings Per Share

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

Three Months Ended

2022 April 2,

Three Months Ended Six Months Ended

(in millions)

3 unchanged sentences

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

The total outstanding stock options and vesting stock awards that were anti-dilutive were 1 million for both the three months ended April 1, 2022, and April 2, 2021.

The total outstanding stock options and vesting stock awards that were anti-dilutive were 1 million for both the three and six months ended July 1, 2022, and July 2, 2021.

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

During the quarter ended April 1, 2022, we paid $ 500 million to the financial institution and received an initial delivery of 4.5 million shares.

In May 2022, the financial institution elected to partially settle $ 125 million of the original $ 500 million prepayment under the ASR agreement based on the volume-weighted-average-price of $ 104.32 per share for the period February 17, 2022, to April 29, 2022, which resulted in an additional delivery of 0.1 million shares.

Subsequently, the financial Institution elected to fully settle the remaining $ 375 million of the original payment under the ASR agreement based upon a volume-weighted-average-price of $ 104.23 per share for the period February 17, 2022, to May 5, 2022, and delivered an additional 0.2 million shares.

The purchases were recorded to "Additional paid-in capital" in the condensed consolidated balance sheets.

All shares delivered were immediately retired.

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.

Note 9–Sale of Accounts Receivable

1 unchanged sentence

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

During the three months ended April 1, 2022, and April 2, 2021, we sold $ 209 million and $ 465 million, respectively, of accounts receivable under the agreements and received proceeds of $ 209 million and $ 464 million, respectively, which were classified as operating activities in the condensed consolidated statements of cash flows.

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

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

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

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

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

Sold receivables activity for the periods presented was as follows:

Three Months Ended

2022 April 2,

(in millions)

Sales of accounts receivable $ 209 $ 465

Cash collections on sold receivables remitted to financial institution ( 209 ) ( 371 )

Outstanding balance sold to financial institution — 94

Cash collected but not yet remitted to financial institution — ( 19 )

Sold receivables due from customers $ — $ 75

During the six months ended July 1, 2022, and July 2, 2021, we sold $ 209 million and $ 693 million, respectively, of accounts receivable under the agreements and received proceeds of $ 209 million and $ 693 million, respectively, which were classified as operating activities in the condensed consolidated statements of cash flows.

All proceeds received were remitted to the financial institution as of July 1, 2022, and July 2, 2021.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 10–Income Taxes

For the three months ended July 1, 2022, the effective tax rate was 23.6 % compared to 23.8 % for the three months ended July 2, 2021.

The decrease to the effective tax rate was primarily due to lower state taxes in current quarter offset by an increase in unrecognized tax benefits.

For the six months ended July 1, 2022, the effective tax rate was 21.9 % compared to 22.7 % for the six months ended July 2, 2021.

The decrease in the effective tax rate was primarily due to an increase in benefits related to employee stock-based compensation and an increase in research tax credits.

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

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

If the 2022 effective date remains in place, based on the law as currently enacted, our initial assessment is that our income taxes payable and net deferred tax assets will each increase by approximately $ 150 million in fiscal 2022.

The actual impact will depend on the amount of research and development costs the Company will incur, whether Congress modifies or repeals this provision and whether new guidance and interpretive rules are issued by the U.S.

Treasury, among other factors.

For the six months ended July 1, 2022, unrecognized tax benefits increased $ 55 million with a corresponding increase to net deferred tax assets as a result of uncertain tax positions arising from certain provisions of the TCJA becoming effective.

Note 11–Business Segments

1 unchanged sentence

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

During fiscal 2021, certain contracts were reassigned from the Defense Solutions reportable segment to the Civil reportable segment.

Impact on prior year segment results were determined to be immaterial and have not been recast to reflect this change.

The segment information for the periods presented was as follows:

Three Months Ended

2022 April 2,

Three Months Ended Six Months Ended

(in millions)

5 unchanged sentences

Defense Solutions $ 139 $ 137 $ 272 $ 289

Civil 38 55 81 129

Health 126 107 244 209

1 unchanged sentence

Total operating income $ 271 $ 269 $ 542 $ 577

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

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

Government Cost Accounting Standards, indirect costs including depreciation expense are collected in indirect cost pools, which are then collectively allocated to the reportable segments based on a representative causal or beneficial relationship of the costs in the pool to the costs in the base.

1 unchanged sentence

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

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 12–Commitments and Contingencies

26 unchanged sentences

Adverse findings could have a material effect on our business, financial position, results of operations and cash flows due to our reliance on government contracts.

As of April 1, 2022, active indirect cost audits by the Defense Contract Audit Agency remain open for fiscal 2016 and subsequent fiscal years.

Although we have recorded contract revenues based upon an estimate of costs that we believe will be approved upon final audit or review, we cannot predict the outcome of any ongoing or future audits or reviews and adjustments, and if future adjustments exceed estimates, our profitability may be adversely affected.

As of April 1, 2022, we believe we have adequately reserved for potential adjustments from audits or reviews of contract costs.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of July 1, 2022, active indirect cost audits by the Defense Contract Audit Agency remain open for fiscal 2020 and subsequent fiscal years.

As of July 1, 2022, we believe we have adequately reserved for potential adjustments from audits or reviews of contract costs.

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.

3 unchanged sentences

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 $ 51 million as of April 1, 2022, principally related to performance guarantees on contracts.

We also have outstanding surety bonds with a notional amount of $ 100 million, principally related to performance and subcontractor payment bonds on contracts.

As of July 1, 2022, we have outstanding letters of credit of $ 44 million, principally related to performance guarantees on contracts and outstanding surety bonds with a notional amount of $ 100 million, principally related to performance and subcontractor payment bonds on contracts.

The value of the surety bonds may vary due to changes in the underlying project status and/or contractual modifications.

As of April 1, 2022, the future expirations of the outstanding letters of credit and surety bonds were as follows:

We also have future lease commitments of $ 74 million for the use of certain aircrafts.

As of July 1, 2022, the future expirations of the outstanding letters of credit, surety bonds and future lease commitments were as follows:

Fiscal year ending

2 unchanged sentences

2027 and thereafter 24

Note 13–Subsequent Events

On July 29, 2022, we entered into a definitive agreement to acquire Cobham Aviation Services Australia’s Special Mission business for a preliminary purchase consideration of $ 310 million Australian dollars, approximately $ 215 million, subject to working capital adjustments.

LEIDOS HOLDINGS, INC.

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

What changed 10-Q

Item 1. Financial Statements