Leidos Holdings, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 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, interest rates and uncertainties in tax due to new tax legislation or other regulatory developments. In some cases, forward-looking statements can be identified by words such as “will,” “expect,” “estimate,” “plan,” “potential,” “continue” or similar expressions. 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. Some of these factors include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K, as updated by the risk factor in this report under Part II, Item 1A. "Risk Factors" and as may be further updated in subsequent filings with the U.S. Securities and Exchange Commission. Due to such uncertainties and risks, you are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. We do not undertake any obligation to update these factors or to publicly announce the results of any changes to our forward-looking statements due to future events or developments. Unless indicated otherwise, references in this report to "we," "us" and "our" refer collectively to Leidos and its consolidated subsidiaries. Overview 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: digital modernization, cyber operations, mission software systems, integrated systems and mission operations. Our customers include the U.S. Department of Defense ("DoD"), the U.S. Intelligence Community, the U.S. Department of Homeland Security, the Federal Aviation Administration, the Department of Veterans Affairs and many other U.S. civilian, state and local government agencies, foreign government agencies and commercial businesses. We operate in three reportable segments: Defense Solutions, Civil and Health. Additionally, we separately present the unallocable costs associated with corporate functions as Corporate. COVID-19 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 and nine months ended September 30, 2022, the COVID-19 pandemic did not have a material impact to revenues and operating income, other than the receipt of $28 million in recoveries for the nine months ended September 30, 2022, within our Health segment related to stop work orders on certain programs. 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. 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. 23 Table of Contents LEIDOS HOLDINGS, INC. Business Environment and Trends U.S. Government Markets During both of the three and nine months ended September 30, 2022, we generated approximately 87% of our total revenues from contracts with the U.S. government. 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. government. Congress continues to work on the 12 appropriations bills to fund the federal government in GFY 2023. The GFY 2023 began on October 1, 2022; however, the federal government is currently operating under a continuing resolution (“CR”). The CR funds the federal government at GFY 2022 levels until December 16, 2022, after that Congress will need to pass the full-year appropriation bills or an additional CR prior to December 16, 2022, in order to prevent a federal government shutdown. International Markets Sales to customers in international markets represented approximately 8% of total revenues for both of the three and nine months ended September 30, 2022. Our international customers include foreign governments and their agencies. Our international business increases our exposure to international markets and the associated international regulatory and geopolitical risks. Changes in international trade policies, including higher tariffs on imported goods and materials, may increase our procurement costs of certain IT hardware used both on our contracts and for internal use. However, we expect to recover certain portions of these higher tariffs through our cost-plus contracts. While we evaluate the impact of higher tariffs, currently, we do not expect tariffs to have a significant impact to our business. Results of Operations The following table summarizes our condensed consolidated results of operations for the periods presented: Three Months Ended Nine Months Ended September 30, 2022 October 1, 2021 Dollar change Percent change September 30, 2022 October 1, 2021 Dollar change Percent change (dollars in millions) Revenues $ 3,608 $ 3,483 $ 125 3.6 % $ 10,699 $ 10,246 $ 453 4.4 % Operating income 281 305 (24) (7.9) % 823 882 (59) (6.7) % Non-operating expense, net (60) (45) (15) 33.3 % (155) (137) (18) 13.1 % Income before income taxes 221 260 (39) (15.0) % 668 745 (77) (10.3) % Income tax expense (57) (52) (5) 9.6 % (155) (162) 7 (4.3) % Net income $ 164 $ 208 $ (44) (21.2) % $ 513 $ 583 $ (70) (12.0) % Net income attributable to Leidos common stockholders $ 162 $ 205 $ (43) (21.0) % $ 508 $ 579 $ (71) (12.3) % Operating margin 7.8 % 8.8 % 7.7 % 8.6 % 24 Table of Contents LEIDOS HOLDINGS, INC. Segment and Corporate Results Three Months Ended Nine Months Ended Defense Solutions September 30, 2022 October 1, 2021 Dollar change Percent change September 30, 2022 October 1, 2021 Dollar change Percent change (dollars in millions) Revenues $ 2,075 $ 2,009 $ 66 3.3 % $ 6,176 $ 5,971 $ 205 3.4 % Operating income 137 140 (3) (2.1) % 409 429 (20) (4.7) % Operating margin 6.6 % 7.0 % 6.6 % 7.2 % The increase in revenues for the three months ended September 30, 2022, as compared to the three months ended October 1, 2021, was primarily attributable to program wins and a net increase in volumes on certain programs. The increase was partially offset by the completion of certain contracts, $28 million related to unfavorable exchange rate movements and net write-downs on certain contracts. The increase in revenues for the nine months ended September 30, 2022, as compared to the nine months ended October 1, 2021, was primarily attributable to program wins, a net increase in volumes on certain programs and a $42 million net increase in revenue related to our acquisitions made in the second and third quarters of the prior year. The increase was partially offset by the completion of certain contracts, $63 million related to unfavorable exchange rate movements and contracts that were reassigned from 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 September 30, 2022, as compared to the three months ended October 1, 2021, was primarily attributable to net write-downs, the completion of certain contracts and additional general and administrative expenses. The decrease was partially offset by program wins and a net increase in volumes on certain programs. The decrease in operating income for the nine months ended September 30, 2022, as compared to the nine months ended October 1, 2021, was primarily attributable to the completion of certain contracts, net write-downs, additional general and administrative expenses and increased amortization. The decrease was partially offset by program wins and a net increase in volumes on certain programs. Three Months Ended Nine Months Ended Civil September 30, 2022 October 1, 2021 Dollar change Percent change September 30, 2022 October 1, 2021 Dollar change Percent change (dollars in millions) Revenues $ 874 $ 792 $ 82 10.4 % $ 2,526 $ 2,357 $ 169 7.2 % Operating income 79 58 21 36.2 % 160 187 (27) (14.4) % Operating margin 9.0 % 7.3 % 6.3 % 7.9 % The increase in revenues for the three months ended September 30, 2022, as compared to the three months ended October 1, 2021, was primarily attributable to a net increase in program volumes, partially offset by net write-downs on certain contracts and unfavorable exchange rate movements. The increase in revenues for the nine months ended September 30, 2022, as compared to the nine months ended October 1, 2021, was primarily attributable to a net increase in program volumes, program wins and contracts that were reassigned from Defense Solutions reportable segment to the Civil reportable segment during the third quarter of fiscal 2021. The increase was partially offset by unfavorable exchange rate movements and the completion of certain contracts. The increase in operating income for the three months ended September 30, 2022, as compared to the three months ended October 1, 2021, was primarily due to a net increase in program volumes mainly within our Security Enterprise Solutions reporting unit, partially offset by net write-downs on certain contracts. The decrease in operating income for the nine months ended September 30, 2022, as compared to the nine months ended October 1, 2021, was primarily due to a $19 million increase in legal fees and settlement costs resulting from an adverse arbitration ruling related to the 2016 acquisition of the Information Systems & Global Solutions business (“IS&GS Business”) from Lockheed Martin, partially offset by a net increase in program volumes. Operating income for the nine months ended October 1, 2021, included a $26 million benefit from a legal reserve adjustment related to the Mission Support Alliance joint venture. 25 Table of Contents LEIDOS HOLDINGS, INC. Three Months Ended Nine Months Ended Health September 30, 2022 October 1, 2021 Dollar change Percent change September 30, 2022 October 1, 2021 Dollar change Percent change (dollars in millions) Revenues $ 659 $ 682 $ (23) (3.4) % $ 1,997 $ 1,918 $ 79 4.1 % Operating income 91 130 (39) (30.0) % 335 339 (4) (1.2) % Operating margin 13.8 % 19.1 % 16.8 % 17.7 % The decrease in revenues for the three months ended September 30, 2022, as compared to the three months ended October 1, 2021, was primarily attributable to the completion of certain contracts, partially offset by a net increase in program volumes. The increase in revenues for the nine months ended September 30, 2022, as compared to the nine months ended October 1, 2021, was primarily attributable to a net increase in program volumes and $28 million in recoveries related to stop work orders on certain programs as a result of COVID-19. The increase was partially offset by the completion of certain contracts. The decrease in operating income for the three months ended September 30, 2022, as compared to the three months ended October 1, 2021, was primarily attributable to net decrease in the volume of disability exams as the Company worked through a backlog of cases caused by COVID-19 during the three months ended October 1, 2021, and the completion of certain contracts. The decrease in operating income for the nine months ended September 30, 2022, as compared to the nine months ended October 1, 2021, was primarily due to a net decrease in volumes on higher margin programs and the completion of certain contracts. The decrease was partially offset by $28 million in recoveries related to stop work orders on certain programs as a result of COVID-19 and an increase in net write-ups on certain programs. Three Months Ended Nine Months Ended Corporate September 30, 2022 October 1, 2021 Dollar change Percent change September 30, 2022 October 1, 2021 Dollar change Percent change (dollars in millions) Operating loss $ (26) $ (23) $ (3) 13.0 % $ (81) $ (73) $ (8) 11.0 % The increase in operating loss for the three and nine months ended September 30, 2022, as compared to the three and nine months ended October 1, 2021, was primarily attributable to an increase in legal costs, partially offset by lower acquisition and integration costs. Non-Operating Expense, net Non-operating expense, net for the three months ended September 30, 2022, was $60 million as compared to $45 million for the three months ended October 1, 2021. The increase was primarily due to a net unrealized loss in our foreign currency forward contract related to the Cobham Special Mission acquisition as a result of unfavorable exchange rate movements and higher interest expenses driven by changes in interest rates. Non-operating expense, net for the nine months ended September 30, 2022, was $155 million as compared to $137 million for the nine months ended October 1, 2021. The increase was primarily due to a net unrealized loss in our foreign currency forward contract related to the Cobham Special Mission acquisition as a result of unfavorable exchange rate movements and higher interest expenses driven by changes in interest rates. Provision for Income Taxes For the three months ended September 30, 2022, our 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. 26 Table of Contents LEIDOS HOLDINGS, INC. 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, and the related impact to cash from operations will be realized in fiscal 2023. The actual impact on cash from operations 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 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. Bookings and Backlog We recorded net bookings worth an estimated $4.1 billion and $11.6 billion during the three and nine months ended September 30, 2022, as compared to $4.7 billion and $12.3 billion for the three and nine months ended October 1, 2021. The estimated value of our total backlog was as follows: September 30, 2022 October 1, 2021 Segment Funded Unfunded Total Funded Unfunded Total (in millions) Defense Solutions $ 4,178 $ 13,842 $ 18,020 $ 4,412 $ 15,160 $ 19,572 Civil 2,037 8,652 10,689 1,713 7,702 9,415 Health 1,214 5,105 6,319 1,164 4,541 5,705 Total $ 7,429 $ 27,599 $ 35,028 $ 7,289 $ 27,403 $ 34,692 The increase in backlog as of September 30, 2022, as compared to October 1, 2021, includes $43 million of backlog acquired through business combinations in our Defense Solutions reportable segment. Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts, both funded and unfunded. 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 September 30, 2022, included a negative impact of $363 million when compared to total backlog at October 1, 2021, primarily due to the exchange rate movements in the British pound and Australian dollar when compared to the U.S. dollar. Backlog estimates are subject to change and may be affected by factors including modifications of contracts and foreign currency movements. Liquidity and Capital Resources Overview As of September 30, 2022, we had $807 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 September 30, 2022, there were no borrowings outstanding under the revolving credit facility. We had outstanding debt of $5.0 billion and $5.1 billion at September 30, 2022, and December 31, 2021, respectively. On May 6, 2022, we entered into a Term Loan Agreement which provided for a senior unsecured term loan facility in an aggregate principal amount of $380 million. 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 September 30, 2022, we did not have any commercial paper notes outstanding. 27 Table of Contents LEIDOS HOLDINGS, INC. 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 during the three and nine months ended September 30, 2022, respectively, and $24 million and $72 million during the three and nine months ended October 1, 2021, respectively. Our credit facilities, term loan agreement, commercial paper notes, senior unsecured term loans and notes outstanding as of September 30, 2022, contain financial covenants and customary restrictive covenants. We were in compliance with all covenants as of September 30, 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. We paid dividends of $49 million and $149 million during the three and nine months ended September 30, 2022, respectively, and $51 million and $149 million during the three and nine months ended October 1, 2021, respectively. During the nine months ended September 30, 2022, and October 1, 2021, we sold $209 million and $693 million, respectively, of accounts receivable under accounts receivable purchase agreements and received proceeds of $209 million and $693 million, respectively. We did not sell any accounts receivable during the three months ended September 30, 2022, and October 1, 2021. 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. Whether repurchases are made and the timing and actual number of shares repurchased depends on a variety of factors including price, corporate capital requirements, other market conditions and regulatory requirements. The repurchase program may be accelerated, suspended, delayed or discontinued at any time. 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. 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. During the three and nine months ended September 30, 2022, we made a $25 million payment in connection with the adverse arbitration ruling related to the 2016 acquisition of the IS&GS Business from Lockheed Martin, which occurred during the second quarter of fiscal 2022. 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 our income taxes payable and net deferred tax assets will each increase by approximately $150 million in fiscal 2022, and the related negative impact to cash will be realized in fiscal 2023. 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. 28 Table of Contents LEIDOS HOLDINGS, INC. Summary of Cash Flows The following table summarizes cash flow information for the periods presented: Three Months Ended Nine Months Ended September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 (in millions) Net cash provided by operating activities $ 748 $ 565 $ 881 $ 821 Net cash used in investing activities (26) (53) (55) (693) Net cash used in financing activities (217) (209) (730) (44) Net increase in cash, cash equivalents and restricted cash $ 505 $ 303 $ 96 $ 84 Net cash provided by operating activities increased $183 million and $60 million during the three and nine months ended September 30, 2022, respectively, when compared to the prior year. The changes were primarily due to favorable working capital changes, partially offset with timing of vendor payments, a $25 million payment in connection with the adverse arbitration ruling related to the 2016 acquisition of the IS&GS Business from Lockheed Martin and $23 million of payments for other legal and tax settlements. Net cash used in investing activities decreased $27 million for the three months ended September 30, 2022, when compared to the prior year quarter, primarily due to net cash paid used to acquire an immaterial strategic business in the prior year quarter. Net cash used in investing activities decreased $638 million for the nine months ended September 30, 2022, when compared to the prior year primarily due to $622 million of net cash paid related to our business acquisitions in the prior year and $15 million of proceeds received from the sale of Aviation & Missile Solutions LLC in the current year. Net cash used in financing activities increased $8 million for the three months ended September 30, 2022, when compared to the prior year quarter primarily due to a $150 million repayment on our commercial paper program in the current quarter, partially offset by $136 million net decrease of open market stock repurchases. Net cash used in financing activities increased $686 million for the nine months ended September 30, 2022, when compared to the prior year. The change was primarily due to a $380 million decrease in net cash inflows related to our short-term senior unsecured term loans, an increase of $266 million in stock repurchases primarily attributable to the Accelerated Share Repurchase agreement and a $43 million decrease in net capital contributions received from our non-controlling interest. Off-Balance Sheet Arrangements We have outstanding performance guarantees and cross-indemnity agreements in connection with certain aspects of our business. We also have letters of credit outstanding principally related to performance guarantees on contracts and surety bonds outstanding principally related to performance and subcontractor payment bonds as described in "Note 11–Commitments and Contingencies" of the notes to the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q. 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 expenditures or capital resources, operations or financial condition. 29 Table of Contents LEIDOS HOLDINGS, INC. Guarantor and Issuer of Guaranteed Securities Leidos Holdings, Inc. has fully and unconditionally guaranteed the obligations of its subsidiary, Leidos, Inc., under its $500 million notes due May 2023, $500 million notes due May 2025, $750 million notes due May 2030 and $1,000 million notes due February 2031 (collectively, "the Notes"). The underlying subsidiaries of Leidos, Inc. do not guarantee these obligations and have been excluded from the financial information presented below. We have entered into registration rights agreements, pursuant to which we agreed to use reasonable best efforts to file registration statements to permit the exchange of the Notes and related guarantees for registered notes having terms substantially identical thereto, or in the alternative, the registered resale of the Notes and related guarantees under certain circumstances. Pursuant to these registration rights agreements, we filed a Registration Statement on Form S-4 with the Securities and Exchange Commission on May 6, 2021, which was declared effective on May 19, 2021. The summarized balance sheets for Leidos Holdings, Inc. and Leidos, Inc., net of eliminations were as follows (in millions): Balance Sheet September 30, 2022 December 31, 2021 Total current assets $ 2,358 $ 2,229 Goodwill 5,811 4,171 Investments in consolidated subsidiaries 3,278 4,918 Other long-term assets 1,283 1,362 Total assets $ 12,730 $ 12,680 Total current liabilities $ 3,263 $ 2,400 Long-term debt, net of current portion 3,974 4,590 Intercompany payables 1,804 1,438 Other long-term liabilities 622 849 Total liabilities 9,663 9,277 Total stockholders' equity 3,067 3,403 Total liabilities and stockholders' equity $ 12,730 $ 12,680 The summarized statement of income for Leidos Holdings, Inc. and Leidos, Inc., net of eliminations, for the nine months ended September 30, 2022, was as follows (in millions): Statements of Income Revenues, net $ 7,265 Operating income 495 Net income attributable to Leidos common stockholders 165 Contractual Obligations and Commitments We are subject to a number of reviews, investigations, claims, lawsuits, other uncertainties and future obligations related to our business. 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 December 31, 2021. 30 Table of Contents LEIDOS HOLDINGS, INC. Recently Adopted and Issued Accounting Standards For a discussion of these items, see "Note 1–Basis of Presentation and Summary of Significant Accounting Policies" of the notes to the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q. Item 3. 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 December 31, 2021.