What changed in this filing

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Item 1. Financial Statements

2022-11-01 compared with 2022-08-02 · 163 added, 96 removed, 571 unchanged (31% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

September 30,

2022 December 31,

22 unchanged sentences

Stockholders’ equity:

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

Common stock, $ 0.0001 par value, 500 million shares authorized, 137 million and 140 million shares issued and outstanding at September 30, 2022, and December 31, 2021, respectively

Additional paid-in capital 1,982 2,423

8 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended Six Months Ended

Three Months Ended Nine Months Ended

September 30,

2022 October 1,

2021 September 30,

2022 October 1,

(in millions, except per share amounts)

2 unchanged sentences

Selling, general and administrative expenses 233 233 727 625

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

Bad debt expense (recoveries) ( 1 ) ( 1 ) 3 ( 11 )

Acquisition, integration and restructuring costs 4 6 12 21

4 unchanged sentences

Interest expense, net ( 50 ) ( 47 ) ( 148 ) ( 138 )

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

Other (expense) income, net ( 10 ) 2 ( 7 ) 1

Income before income taxes

12 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended Six Months Ended

Three Months Ended Nine Months Ended

September 30,

2022 October 1,

2021 September 30,

2022 October 1,

(in millions)

4 unchanged sentences

Pension adjustments

( 21 ) — ( 20 ) —

Total other comprehensive (loss) income, net of taxes ( 56 ) ( 25 ) ( 123 ) 6

20 unchanged sentences

Stock-based compensation — 16 — — 16 — 16

Capital distributions to non-controlling interests — — — — — ( 2 ) ( 2 )

Capital distributions to non-controlling interest — — — — — ( 2 ) ( 2 )

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

7 unchanged sentences

Stock-based compensation — 19 — — 19 — 19

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

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

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

Net income — — 162 — 162 2 164

Other comprehensive loss, net of taxes — — — ( 56 ) ( 56 ) — ( 56 )

Issuances of stock — 13 — — 13 — 13

Repurchases of stock and other

— ( 4 ) — — ( 4 ) — ( 4 )

Dividends of $ 0.36 per share

— — ( 51 ) — ( 51 ) — ( 51 )

Stock-based compensation — 18 — — 18 — 18

Capital distributions to non-controlling interest — — — — — ( 2 ) ( 2 )

Balance at September 30, 2022 137 $ 1,982 $ 2,239 $ ( 135 ) $ 4,086 $ 53 $ 4,139

See accompanying notes to condensed consolidated financial statements.

24 unchanged sentences

Stock-based compensation — 17 — — 17 — 17

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

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

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

Net income — — 205 — 205 3 208

Other comprehensive loss, net of taxes — — — ( 25 ) ( 25 ) — ( 25 )

Issuances of stock — 11 — — 11 — 11

Repurchases of stock and other

( 2 ) ( 140 ) — — ( 140 ) — ( 140 )

Dividends of $ 0.36 per share

— — ( 52 ) — ( 52 ) — ( 52 )

Stock-based compensation — 17 — — 17 — 17

Net capital distributions to non-controlling interest — — — — — ( 1 ) ( 1 )

Balance at October 1, 2021 140 $ 2,397 $ 1,758 $ ( 40 ) $ 4,115 $ 51 $ 4,166

See accompanying notes to condensed consolidated financial statements.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Six Months Ended

Nine Months Ended

September 30,

2022 October 1,

(in millions)

4 unchanged sentences

Stock-based compensation 53 49

Asset impairment charges 3 3

Deferred income taxes ( 221 ) 4

15 unchanged sentences

Proceeds from debt issuance 380 380

Net proceeds from commercial paper 150 —

Repayments of borrowings ( 459 ) ( 80 )

3 unchanged sentences

Proceeds from issuances of stock 35 33

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

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

Net cash used in financing activities ( 730 ) ( 44 )

Net increase in cash, cash equivalents and restricted cash 96 84

Cash, cash equivalents and restricted cash at beginning of period 875 687

63 unchanged sentences

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.

In October 2022, the FASB affirmed a decision to defer the expiration date of this optional relief until December 31, 2024.

We anticipate an ASU formalizing this decision to be approved and issued during the last quarter of fiscal 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 are currently evaluating the impacts of the reference rate reform.

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.

2 unchanged sentences

Changes in estimates on contracts were as follows:

Three Months Ended Six Months Ended

Three Months Ended Nine Months Ended

September 30,

2022 October 1,

2021 September 30,

2022 October 1,

(in millions, except per share amounts)

8 unchanged sentences

Revenue Recognized from Prior Obligations

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.

Revenue recognized from performance obligations satisfied in previous periods was $ 6 million and $ 38 million for the three and nine months ended September 30, 2022, respectively, and $ 17 million and $ 35 million for the three and nine months ended October 1, 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 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.

At September 30, 2022, and December 31, 2021, $ 178 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

1 unchanged sentence

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

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

Our restricted cash balances were $ 164 million and $ 148 million at September 30, 2022, and December 31, 2021, respectively.

Note 2–Revenues from Contracts with Customers

2 unchanged sentences

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.

As of September 30, 2022, we had $ 14.3 billion of RPO and expect to recognize approximately 60 % and 77 % 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.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Disaggregated revenues by customer-type were as follows:

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

Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

2 unchanged sentences

$ 1,559 $ 22 $ 255 $ 1,836 $ 4,620 $ 62 $ 732 $ 5,414

Other government agencies (1)

government agencies (1)

236 676 372 1,284 686 1,949 1,177 3,812

2 unchanged sentences

Total $ 2,075 $ 849 $ 655 $ 3,579 $ 6,175 $ 2,457 $ 1,992 $ 10,624

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

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

2 unchanged sentences

$ 1,513 $ 19 $ 203 $ 1,735 $ 4,386 $ 45 $ 545 $ 4,976

Other government agencies (1)

government agencies (1)

215 619 450 1,284 724 1,849 1,292 3,865

5 unchanged sentences

Disaggregated revenues by contract-type were as follows:

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

Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

6 unchanged sentences

Total $ 2,075 $ 849 $ 655 $ 3,579 $ 6,175 $ 2,457 $ 1,992 $ 10,624

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

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

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

6 unchanged sentences

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

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Disaggregated revenues by geographic location were as follows:

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

Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

5 unchanged sentences

Total $ 2,075 $ 849 $ 655 $ 3,579 $ 6,175 $ 2,457 $ 1,992 $ 10,624

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

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

5 unchanged sentences

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

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.

Revenues by customer-type, contract-type and geographic location exclude lease income of $ 29 million and $ 75 million for the three and nine months ended September 30, 2022, respectively, and $ 34 million and $ 89 million for the three and nine months ended October 1, 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 July 1,

Balance sheet line item September 30,

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 deferred revenue was primarily due to the timing of advanced payments from customers offset by revenue recognized during the period.

Revenue recognized for the three and nine months ended September 30, 2022, of $ 17 million and $ 257 million, respectively, was included as a contract liability at December 31, 2021.

Revenue recognized for the three and nine months ended October 1, 2021, of $ 31 million and $ 253 million, respectively, was included as a contract liability at January 1, 2021.

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 Acquisition

Business Acquisitions

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

Cobham Special Mission provides airborne border surveillance and search and rescue services to the Australian Federal Government.

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

14 unchanged sentences

Foreign currency translation adjustments ( 62 ) ( 58 ) — ( 120 )

Goodwill at July 1, 2022

Goodwill at September 30, 2022

$ 3,613 $ 2,039 $ 966 $ 6,618

2 unchanged sentences

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.

We did not identify any qualitative factors that would trigger a quantitative goodwill impairment test during the nine months ended September 30, 2022.

There were no impairments to goodwill during the nine months ended September 30, 2022, and October 1, 2021.

LEIDOS HOLDINGS, INC.

2 unchanged sentences

Intangible assets, net consisted of the following:

July 1, 2022 December 31, 2021

September 30, 2022 December 31, 2021

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

17 unchanged sentences

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

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.

Amortization expense was $ 57 million and $ 173 million for the three and nine months ended September 30, 2022, respectively, and $ 63 million and $ 173 million for the three and nine months ended October 1, 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.

1 unchanged sentence

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

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

The estimated annual amortization expense as of September 30, 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:

July 1, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Carrying value Fair value Carrying value Fair value

(in millions)

Financial assets:

Derivatives $ 20 $ 20 $ — $ —

Financial liabilities:

Derivatives $ 16 $ 16 $ 53 $ 53

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).

As of September 30, 2022, our derivatives primarily consisted of the cash flow interest rate swaps on $ 1.0 billion of the variable rate senior unsecured term loan and a foreign currency forward contract (see "Note 5–Derivative Instruments").

The fair value of the cash flow interest rate swaps and the foreign currency forward contract is determined based on observed values for underlying interest rates on the LIBOR yield curve, the underlying interest rate and the underlying foreign exchange rates (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 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").

As of September 30, 2022, and December 31, 2021, the fair value of debt was $ 4.6 billion and $ 5.4 billion, respectively, and the carrying amount was $ 5.0 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).

On May 7, 2021, and January 14, 2021, non-financial instruments measured at fair value on a non-recurring basis were recorded in connection with the acquisitions of Gibbs & Cox and 1901 Group.

On May 7, 2021, and January 14, 2021, non-financial instruments measured at fair value on a non-recurring basis were recorded in connection with the completed acquisitions of Gibbs & Cox and 1901 Group, LLC.

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

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

As of September 30, 2022, we did not have any assets or liabilities measured at fair value on a non-recurring basis.

LEIDOS HOLDINGS, INC.

9 unchanged sentences

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

Liability derivatives

Balance sheet line item July 1,

Balance sheet line item September 30,

2022 December 31,

(in millions)

Asset derivatives:

Cash flow interest rate swaps Other long-term assets $ 20 $ —

Liability derivatives:

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

Foreign currency forward contracts Accounts payable and accrued liabilities 16 —

During the three months ended September 30, 2022, we entered into a foreign currency forward contract to offset foreign currency fluctuations of the $ 310 million Australian dollar preliminary purchase price for the Cobham Special Mission acquisition against the U.S.

As of September 30, 2022, we recorded a $ 16 million unrealized loss due to the exchange rate movements between the Australian dollar compared to the U.S.

The loss was recorded within Corporate and presented in "Other (expense) income, net" on the condensed consolidated statements of income.

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

7 unchanged sentences

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.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Three Months Ended Six Months Ended

Three Months Ended Nine Months Ended

September 30,

2022 October 1,

2021 September 30,

2022 October 1,

(in millions)

3 unchanged sentences

Amount reclassified from accumulated other comprehensive income (loss) to interest expense, net $ 2 $ 5 $ 13 $ 14

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

We expect to reclassify net income of $ 13 million from accumulated other comprehensive loss into earnings during the next 12 months.

Our debt consisted of the following:

Stated interest rate Effective interest rate July 1,

Stated interest rate Effective interest rate September 30,

(in millions)

Short-term debt:

Commercial paper 2.40 %- 2.55 %

Various $ 150 $ —

Senior unsecured term loans:

30 unchanged sentences

$ 3,975 $ 4,593

(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.

(1) The carrying amounts of the senior unsecured term loans and notes as of September 30, 2022, and December 31, 2021, include the remaining principal outstanding of $ 4,994 million and $ 5,065 million, respectively, less total unamortized debt discounts and deferred debt issuances costs of $ 37 million and $ 43 million, respectively.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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.

As of September 30, 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.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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.

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

As of September 30, 2022, we had no Commercial Paper Notes outstanding.

Principal Payments and Debt Issuance Costs

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.

We made principal payments on our long-term debt of $ 25 million and $ 459 million during the three and nine months ended September 30, 2022, respectively, and $ 27 million and $ 80 million during the three and nine months ended October 1, 2021, respectively.

This activity included required principal payments on our term loans of $ 24 million and $ 452 million for the three and nine months ended September 30, 2022, and $ 24 million and $ 72 million for the three and nine months ended October 1, 2021, respectively.

As of September 30, 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 $ 8 million for the three and nine months ended September 30, 2022, respectively, and $ 3 million and $ 7 million for the three and nine months ended October 1, 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.

We were in compliance with all covenants as of September 30, 2022.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 7–Accumulated Other Comprehensive Income (Loss)

10 unchanged sentences

Reclassification from AOCI — 13 — 13

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

Balance at September 30, 2022 $ ( 136 ) $ 13 $ ( 12 ) $ ( 135 )

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

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

3 unchanged sentences

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.

As of September 30, 2022, the unamortized loss within AOCI related to the Plan was $ 19 million and the Plan had net assets of $ 6 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 Six Months Ended

Three Months Ended Nine Months Ended

September 30,

2022 October 1,

2021 September 30,

2022 October 1,

(in millions)

3 unchanged sentences

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

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

The total outstanding stock options and vesting stock awards that were anti-dilutive were 1 million for both the three and nine months ended September 30, 2022, and October 1, 2021.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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.

2 unchanged sentences

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.

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

All shares delivered were immediately retired.

Note 9–Sale of Accounts Receivable

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

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

During the six months ended July 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 9–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.

For the three months ended September 30, 2022, the effective tax rate was 25.8 % compared to 20.0 % for the three months ended October 1, 2021.

The increase to the effective tax rate was primarily due to a benefit from foreign operations recognized in the prior year and an increase to state income taxes and an increase in unrecognized tax benefits in the current quarter.

For the nine months ended September 30, 2022, the effective tax rate was 23.2 % compared to 21.7 % for the nine months ended October 1, 2021.

The increase in the effective tax rate was primarily due to a benefit from foreign operations recognized in the prior year and an increase in unrecognized tax benefits in the current year.

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.

3 unchanged sentences

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.

For the nine months ended September 30, 2022, unrecognized tax benefits increased $ 95 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 10–Business Segments

3 unchanged sentences

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

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The segment information for the periods presented was as follows:

Three Months Ended Six Months Ended

Three Months Ended Nine Months Ended

September 30,

2022 October 1,

2021 September 30,

2022 October 1,

(in millions)

9 unchanged sentences

Total operating income $ 281 $ 305 $ 823 $ 882

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 income (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 (expense) income, 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 11–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.

Defense Contract Audit Agency

As of September 30, 2022, active indirect cost audits by the Defense Contract Audit Agency remain open for fiscal 2020 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 September 30, 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.

Other Government Investigations and Reviews

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.

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.

In September 2022, the Company received a Federal Grand Jury Subpoena related to the criminal investigation by the U.S.

Attorney’s Office for the Southern District of California, in conjunction with the U.S.

Department of Justice’s Fraud Division.

The subpoena requests documents relating to the conduct that is the subject of the Company’s internal investigation.

The Company is in the process of responding to the subpoena.

In August 2022, the Company received a Federal Grand Jury Subpoena in connection with a criminal investigation being conducted by the U.S.

Department of Justice Antitrust Division (“DOJ”).

The subpoena requests that the Company produce a broad range of documents related to three U.S.

Government procurements associated with the Company’s Intelligence Group in 2021 and 2022.

We intend to fully cooperate with the investigation, and we are conducting our own internal investigation with the assistance of outside counsel.

It is not possible at this time to determine whether we will incur, or to reasonably estimate the amount of, any fines, penalties, or further liabilities in connection with the investigation pursuant to which the subpoena was issued.

As of September 30, 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.

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:

As of September 30, 2022, the future expirations of the outstanding letters of credit, surety bonds and future lease commitments were as follows:

Fiscal year ending

3 unchanged sentences

Note 12–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.

On October 30, 2022, we completed the previously announced acquisition of Cobham Special Mission, for a preliminary purchase price of $ 305 million Australian dollars, approximately $ 196 million United States dollars, which is subject to working capital adjustments.

Additionally, we realized a loss of $ 18 million resulting from the settlement of the foreign currency forward contract intended to offset currency fluctuations related to the preliminary purchase price.

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