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Item 7. Management’s Discussion and Analysis

2023-02-14 compared with 2022-02-15 · 154 added, 187 removed, 232 unchanged (60% of the section changed)

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

In this section, we discuss our financial condition, changes in financial condition and results of our operations for the year ended December 31, 2021 compared to the year ended January 1, 2021.

For a discussion and analysis comparing our results for the year ended January 1, 2021 to the year ended January 3, 2020, see our Annual Report on Form 10-K for the year ended January 1, 2021, filed with the SEC on February 23, 2021, under Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

In this section, we discuss our financial condition, changes in financial condition and results of our operations for the year ended December 30, 2022, compared to the year ended December 31, 2021.

For a discussion and analysis comparing our results for the year ended December 31, 2021, to the year ended January 1, 2021, see our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 15, 2022, under Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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 capabilities and innovations to customers in each of these markets by leveraging five technical capabilities:

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

digital modernization, cyber operations, mission software systems, integrated systems and mission operations.

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civilian, state and local government agencies, foreign government agencies and commercial businesses.

Less than 8% of our revenues and tangible long-lived assets are generated by or owned by entities located outside of the United States.

Approximately 8% of our revenues and tangible long-lived assets are generated by or owned by entities located outside of the United States.

We operate in three reportable segments:

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Effective July 3, 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.

Impact on the first half of fiscal 2021 segment results were determined to be immaterial and have not been recast to reflect this change.

For additional information regarding our reportable segments, see “Business” in Part I and "Note 20—Business Segments" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K.

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• disciplined deployment of our cash resources and use of our capital structure to enhance shareholder value while retaining an appropriate amount of financial leverage.

For fiscal 2021, revenues increased $1.4 billion, or 12%, compared to fiscal 2020, primarily due to program wins and a net increase in volumes on certain programs, partially offset with the completion of certain contracts.

In addition, revenue had a positive impact from business acquisitions in the Defense Solutions segment and a reduction of the negative impacts from COVID-19 experienced during the prior year.

For fiscal 2022, revenues increased $0.7 billion, or 5%, compared to fiscal 2021, primarily due to a net increase in volumes on certain programs, program wins and a net increase in revenues related to our business acquisitions.

We also received $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 and unfavorable exchange rate movements.

Leidos Holdings, Inc.

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Operating margin for fiscal 2022 was 7.6% compared to 8.4% for fiscal 2021.

Operating income was $1,152 million, a $154 million increase compared to fiscal 2020.

The increase in operating income was primarily attributable to a net increase in volumes on certain programs, a reduction of the negative impacts from COVID-19 experienced during the prior year and program wins, partially offset by the completion of certain contracts.

Operating income was $1,088 million, a $64 million decrease compared to fiscal 2021.

The decrease in operating income was primarily attributable to the completion of certain contracts, increase in legal fees and settlement costs and impairment charges of $37 million related to our ongoing facility rationalization efforts.

The decrease in operating income was partially offset by program wins and $28 million in recoveries related to stop work orders on certain programs as a result of COVID-19.

From a macroeconomic perspective, our industry is under general competitive pressures associated with spending from our largest customer, the U.S.

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We continue to review our cost structure against our anticipated sales and undertake cost management actions and efficiency initiatives where necessary.

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 fiscal 2021, while we continue to navigate impacts associated with COVID-19, primarily relating to supply chain matters, we believe that COVID-19 did not have a material impact to revenues and operating income as compared to prior year results.

For fiscal 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, within our Health segment related to stop work orders on certain programs.

The volume of global passenger air travel remains below pre-pandemic levels, which continues to impact the operations of our Security Enterprise Solutions reporting unit.

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

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

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

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

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

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

Business Environment and Trends

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

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

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

On December 2, 2021, Congress passed a second continuing resolution to fund the federal government at GFY 2021 levels until February 18, 2022.

The Senate plans to vote on a House-passed continuing resolution the week of February 14, 2022, that would extend government funding through March 11, 2022.

Congressional negotiations continue on defense and non-defense spending levels and controversial policy riders in the GFY 2022 appropriations bills.

President Biden is expected to release the GFY 2023 President’s Budget Request this spring.

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President Biden signed the $1.7 trillion GFY 2023 omnibus spending bill into law on December 29, 2022.

The omnibus spending bill funds the federal government through September 30, 2023.

The bill includes $772.5 billion in non-defense spending and $858.4 billion in defense spending.

The bill also includes $85 billion in emergency spending not included in the discretionary amount.

The new 118th Congress will begin to work on the GFY 2024 appropriations bills in the spring of 2023.

Trends in the U.S.

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

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Key Performance Measures

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Year Ended 2022 to 2021

2021 January 1,

2022 December 31,

2021 Dollar change Percent

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Selling, general and administrative expenses 950 860 90 10 %

Bad debt expense and recoveries

(9) (68) 59 (87) %

Credit losses (recoveries), net 1 (9) 10 (111) %

Acquisition, integration and restructuring costs

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Asset impairment charges

4 12 (8) (67) %

Equity earnings of non-consolidated subsidiaries

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Non-operating expense, net

(185) (217) 32 NM

(202) (185) (17) 9 %

Income before income taxes

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693 759 (66) (9) %

net income attributable to non-controlling interest 6 1 5 NM

net income attributable to non-controlling interest 8 6 2 33 %

Net income attributable to Leidos common stockholders $ 685 $ 753 $ (68) (9) %

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NM - Not meaningful

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Segment and Corporate Results

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Defense Solutions December 30,

2021 January 1,

2022 December 31,

2021 Dollar change Percent

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Operating income margin

The increase in revenues for fiscal 2021 as compared to fiscal 2020 was primarily attributable to program wins, a net increase in volumes on certain programs, $149 million of revenues from new business acquisitions and a reduction of the negative impacts from COVID-19 experienced during the prior year.

The increase was partially offset by the completion of certain contracts and contracts that were reassigned from the Defense Solutions reportable segment to the Civil reportable segment during the third quarter.

In addition, in fiscal 2021, there was a $67 million benefit in exchange rate movements.

The increase in operating income for fiscal 2021 as compared to fiscal 2020 was primarily attributable to program wins, a net increase in program volumes on certain contracts, $18 million of operating income from new business acquisitions and a reduction of the negative impacts from COVID-19 experienced during the prior year, partially offset by the completion of certain contracts and an increase in amortization expense.

The increase in revenues for fiscal 2022 as compared to fiscal 2021 was primarily attributable to program wins, a net increase in volumes on certain programs and a $63 million net increase in revenues related to our acquisitions made in the second and third quarters from the prior year and the Cobham Special Mission acquisition made in the current year.

The increase was partially offset by the completion of certain contracts, contracts that were reassigned from Defense Solutions reportable segment to the Civil reportable segment during the third quarter of fiscal 2021 and $95 million related to unfavorable exchange rate movements.

The decrease in operating income for fiscal 2022 as compared to fiscal 2021 was primarily attributable to the completion of certain contracts, net write-downs on certain contracts, increased amortization expense of $8 million and $6 million related to unfavorable exchange rate movements.

Fiscal 2022 also included impairment charges of $12 million related to our ongoing facility rationalization efforts (see "Note 10—Leases").

The decrease was partially offset by program wins and a net increase in volumes on certain programs.

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Year Ended 2022 to 2021

Civil December 30,

2021 January 1,

2022 December 31,

2021 Dollar change Percent change

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Operating income margin

The increase in revenues for fiscal 2021 as compared to fiscal 2020 was primarily attributable to a net increase of $48 million of revenues related to L3 Harris Technologies' security and detection businesses (the "SD&A Businesses") acquired in the prior year, a net increase in program volumes, program wins and a reduction of the negative impacts from COVID-19 experienced during the prior year.

The revenue growth was also attributable to certain contracts that were reassigned from the Defense Solutions reportable segment to the Civil reportable segment during the third quarter.

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

The increase in revenues for fiscal 2022 as compared to fiscal 2021 was primarily attributable to program wins, a net increase in program volumes 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 the completion of certain contracts and $12 million of unfavorable exchange rate movements.

The decrease in operating income for fiscal 2022 as compared to fiscal 2021 was primarily attributable 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 and impairment charges of $14 million related to our ongoing facility rationalization efforts (see "Note 10—Leases").

The decreases were partially offset by a net increase in program volumes.

Operating income for fiscal 2021 included a $26 million benefit from a legal reserve adjustment related to the Mission Support Alliance joint venture (see "Note 1—Nature of Operations and Basis of Presentation").

Year Ended 2022 to 2021

Health December 30,

2021 January 1,

2022 December 31,

2021 Dollar change Percent

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15.7 % 17.3 %

The increase in revenues for fiscal 2021 as compared to fiscal 2020 was primarily attributable to a net increase in volumes on certain programs, including a reduction of the negative impacts from COVID-19 experienced during the prior year and program wins, partially offset by the completion of certain contracts.

The increase in operating income for fiscal 2021 as compared to fiscal 2020 was primarily attributable to a net increase in volumes on higher margin programs, including a reduction of the negative impacts from COVID-19 experienced during the prior year, program wins and a net decrease in asset impairment charges.

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The increase in revenues for fiscal 2022 as compared to fiscal 2021 was primarily attributable to a net increase in program volumes, program wins 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 fiscal 2022 as compared to fiscal 2021 was primarily attributable 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 program wins.

Year Ended 2022 to 2021

Corporate December 30,

2021 January 1,

2022 December 31,

2021 Dollar change Percent

(dollars in millions)

Operating loss $ (107) $ (23) $ (84) NM

NM - Not Meaningful

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

legal matter and higher indirect expenses, partially offset by a decrease in acquisition, integration and restructuring costs.

Operating loss $ (108) $ (107) $ (1) 1 %

The increase in operating loss for fiscal 2022 as compared to fiscal 2021 was primarily attributable to an increase in legal costs partially offset by lower acquisition and integration costs.

Equity earnings of non-consolidated subsidiaries

We have certain non-controlling ownership interests in equity method investments.

For fiscal 2021 we recorded earnings of $20 million from our equity method investments.

For fiscal 2020 we recorded $16 million, partially offset by amortization of $2 million.

For fiscal 2022 and fiscal 2021 we recorded earnings of $12 million and $20 million, respectively, from our equity method investments.

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Non-Operating Expense, Net

Non-operating expense, net decreased $32 million for fiscal 2021 as compared to fiscal 2020, primarily due to $36 million of debt discount and deferred financing costs written off related to refinancing activities in the prior year, partially offset by higher interest expenses.

Non-operating expense, net increased $17 million for fiscal 2022 as compared to fiscal 2021, primarily due to higher interest expense driven by increased interest rates.

Provision for Income Taxes

Our effective tax rate was 21.8%, and 21.5% in fiscal 2022 and 2021, respectively.

The effective tax rate for fiscal 2021 was favorably impacted primarily by federal research tax credits and excess tax benefits related to employee stock-based payment transactions.

The effective tax rate for fiscal 2020 was favorably impacted primarily by federal research tax credits and excess tax benefits related to employee stock-based payment transactions, partially offset by taxes related to foreign operations.

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

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

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

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

Non-controlling Interest

We have an 88% controlling interest in Mission Support Alliance, LLC ("MSA"), a joint venture with Centerra Group, LLC, which includes 41% purchased from Jacobs Group, LLC on January 26, 2018.

MSA’s contract ended on January 24, 2021.

We also have a 53% controlling interest in Hanford Mission Integration Solutions, LLC ("HMIS"), the legal entity for the follow-on contract to MSA's contract and a joint venture with Centerra Group, LLC and Parsons Government Services, Inc.

We include the financial results for MSA and HMIS in our consolidated financial statements.

Net income attributable to non-controlling interest was $6 million and $1 million for fiscal 2021 and 2020, respectively.

The effective tax rate for fiscal 2022 and 2021 were both favorably impacted primarily by federal research tax credits and excess tax benefits related to employee stock-based payment transactions.

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.

Based upon our interpretation of the law as enacted, we recorded the estimated fiscal 2022 impact, resulting in increases of $130 million to both our income taxes payable and net deferred tax assets, and our fiscal 2022 unrecognized tax benefits increased by $91 million with a corresponding increase to net deferred tax assets.

We expect this TCJA provision to have a similar impact to income taxes payable, unrecognized tax benefits and net deferred tax assets during fiscal 2023.

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.

Bookings and Backlog

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We calculate net bookings as the year’s ending backlog, plus the year’s revenues, less the prior year’s ending backlog and any impacts from foreign currency or acquisitions and divestitures.

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Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts.

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The estimated value of our total backlog for the periods presented was as follows:

December 31, 2021 January 1, 2021

December 30, 2022 December 31, 2021

Segment Funded Unfunded Total Funded Unfunded Total

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Total $ 8,382 $ 27,400 $ 35,782 $ 7,449 $ 27,006 $ 34,455

The increase in backlog includes $800 million of backlog acquired in fiscal 2021 through business combinations in our Defense Solutions reportable segment.

Total backlog included an unfavorable impact of $52 million at December 31, 2021, and favorable impact of $119 million at January 1, 2021, primarily due to the movements in the British pound and Australian dollar when compared to the U.S dollar.

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Total backlog at December 30, 2022, and December 31, 2021, included $610 million and $800 million, respectively, of backlog acquired during the year through business combinations in our Defense Solutions reportable segment.

The increase in backlog as of December 30, 2022, as compared to December 31, 2021, included an unfavorable impact of $233 million due to the movements in the British pound and Australian dollar when compared to the U.S.

Bookings and backlog fluctuate from period to period depending on our success rate in winning contracts and the timing of contract awards, renewals, modifications and cancellations, as well as foreign currency movements.

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Most of our contracts have cancellation terms that would permit us to recover all or a portion of our incurred costs and fees for work performed.

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Contract Types

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Revenues by contract type as a percentage of our total revenues for the periods presented were as follows:

2021 January 1,

2022 December 31,

2021 January 1,

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

During fiscal 2021 and 2020, there were no borrowings outstanding under the credit facilities and we were in compliance with the related financial covenants.

At December 31, 2021 and January 1, 2021, we had outstanding debt of $5.1 billion and $4.7 billion, respectively.

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

Additionally, on July 12, 2021, Leidos, Inc.

established a commercial paper program in which we may issue short-term unsecured commercial paper notes not to exceed $750 million and have maturities of up to 397 days from the date of issuance (see "Note 13—Debt").

During fiscal 2022 and 2021, there were no borrowings outstanding under the credit facilities.

At December 30, 2022 and December 31, 2021, we had outstanding debt of $4.9 billion and $5.1 billion, 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 (see "Note 13—Debt").

As of December 30, 2022, we did not have any commercial paper notes outstanding.

We made principal payments on our long-term debt of $106 million, $731 million, and $80 million during fiscal 2021, 2020 and 2019, respectively.

We made principal payments on our debt of $545 million, $106 million and $731 million during fiscal 2022, 2021 and 2020, respectively.

This activity included required principal payments on our term loans of $476 million, $96 million and $72 million during fiscal 2022, 2021 and 2020, respectively.

During fiscal year 2020, we made $4,925 million of principal repayments for outstanding debt and retired the $450 million senior notes.The notes outstanding as of December 31, 2021, contain financial covenants and customary restrictive covenants.

During fiscal 2020, we made $4,925 million of principal repayments for outstanding debt and retired the $450 million senior notes.

The notes outstanding as of December 30, 2022, contain financial covenants and customary restrictive covenants.

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

Interest on our Credit Facilities and 2021 Credit Agreement are calculated based on the London Interbank Offered Rate (“LIBOR”).

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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 and the 2021 Credit Agreement 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 December 2022, the FASB issued guidance which provides relief for entities with such LIBOR denominated credit instruments so that entities may continue to account for contract modifications as a continuation of the existing contract and the continuation of the hedge accounting arrangement through December 31, 2024.

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 $199 million, $199 million and $196 million for fiscal 2022, 2021 and 2020, respectively.

During the first and second quarter of fiscal 2021, we sold $693 million of accounts receivable under accounts receivable purchase agreements and received proceeds of $693 million (see "Note 6—Receivables").

During fiscal 2022, we sold $209 million of accounts receivable under accounts receivable purchase agreements and received proceeds of $209 million (see "Note 6—Receivables").

There were no sales of accounts receivable in the second half of fiscal 2022.

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We may from time to time seek to retire or purchase our outstanding debt through cash purchases in the open market, privately negotiated transactions or otherwise.

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

During fiscal 2021, 2020 and 2019, we made open market repurchases of our common stock for an aggregate purchase price of $237 million, $67 million and $25 million, respectively.

Additionally, during fiscal 2019, we entered into ASR agreements with financial institutions, whereby we paid an aggregate of $400 million and received approximately 5.6 million shares of Leidos outstanding shares (see "Note 16—Earnings Per Share" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K).

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

During fiscal 2021 and 2020, we made open market repurchases of our common stock for an aggregate purchase price of $237 million and $67 million, respectively.

There were no open market share repurchases in fiscal 2022.

In fiscal 2022, we entered into an ASR with a financial institution to repurchase shares of our outstanding common stock.

We paid $500 million to the financial institution and received 4.8 million shares (see "Note 16—Earnings Per Share" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K).

All shares delivered were immediately retired.

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

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

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

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

During fiscal 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.

Beginning in 2022, a provision in the TCJA which eliminated the option to currently deduct research and development costs for tax purposes and requires taxpayers to capitalize and amortize the costs over five years became effective.

We anticipate our tax cash payments to increase by $300 million in 2023 primarily to cover both the 2022 and 2023 tax obligations related to this provision.

The actual impact will depend on the amount of research and development costs the Company will incur during fiscal 2023 and whether new guidance and interpretive rules are issued by the U.S.

Treasury, among other factors.

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.

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Summary of Cash Flows

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

2021 January 1,

2022 December 31,

(in millions)

1 unchanged sentence

Net cash used in investing activities (313) (730)

Net cash (used in) provided by financing activities (113) 1,451

Net increase (decrease) in cash, cash equivalents and restricted cash $ 188 $ (30)

Net cash used in financing activities (865) (113)

Net (decrease) increase in cash, cash equivalents and restricted cash $ (192) $ 188

Net cash provided by operating activities decreased $45 million for fiscal 2022 as compared to fiscal 2021.

The decrease was primarily due to the timing of customer advance payments, $62 million of deferral for employer payroll tax payments in the prior year and the receipt of $85 million of proceeds related to the VirnetX legal matter in the prior year, partially offset with improved collections on trade accounts receivable.

The decrease was primarily due to 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 occurred during the current year, partially offset by favorable working capital changes.

Net cash used in investing activities decreased $417 million for fiscal 2022 as compared to fiscal 2021.

The decrease was primarily due to larger acquisitions made in the prior year for Dynetics and the SD&A Businesses compared to our current year acquisitions (see "Note 5–Acquisitions and Divestitures") and lower capital expenditures in the current year.

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The decrease was primarily due to $430 million of less cash paid related to our business acquisitions in current year as compared to prior year and $15 million of proceeds received from the sale of Aviation & Missile Solutions LLC in the current year.

The decrease was partially offset by $25 million of higher capital expenditures in the current year.

Net cash used in financing activities increased $752 million for fiscal 2022 as compared to fiscal 2021.

The increase was primarily due to a decrease of approximately $1,444 million from the net change of proceeds received from the issuance of debt, principal payments and payments for debt issuance costs, an increase of $170 million of open market stock repurchases, partially offset by a net $34 million increase in capital contributions received from our non-controlling interest.

The increase was primarily due to $439 million increase in principal payments of our debt, an increase of $272 million in stock repurchases primarily attributable to the accelerated share repurchase agreement and a $45 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 21—Commitments and Contingencies" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K.

We have letters of credit outstanding principally related to performance guarantees on contracts and surety bonds outstanding principally related to performance and subcontractor payment bonds.

We also have future lease commitments for the use of certain aircraft as described in "Note 21—Commitments and Contingencies" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K.

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

Contractual Obligations

The following table summarizes our obligations to make future payments pursuant to certain contracts or arrangements as of December 31, 2021:

Total Due in FY22

(in millions)

Contractual obligations:

Long-term debt (including current portion) $ 5,067 $ 477

Interest payments 1,191 150

Operating lease obligations

Finance lease obligations 52 9

Other long-term liabilities and purchase obligations 308 35

Total contractual obligations $ 7,435 $ 833

The table above excludes purchase orders for services or products to be delivered pursuant to U.S.

government contracts for which we are entitled to full recourse under normal contract termination clauses.

Interest payments relate to our outstanding debt and finance leases.

The total interest payments on our outstanding term loan debt are calculated based on the stated variable rates of the notes as of December 31, 2021.

For more information on the Company’s debt and interest payments, see "Note 13—Debt " of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K.

For more information on our finance and operating lease commitments, see "Note 10—Leases" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K.

Other long-term liabilities include liabilities under deferred compensation arrangements and purchase obligations for long-term purchases and service agreements.

There is no obligation included for our foreign defined benefit pension plan, as the plan is overfunded as of December 31, 2021.

For a discussion of potential changes in these pension obligations, see "Note 19—Retirement Plans" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K.

Our future contractual obligations are related to debt, finance and operating leases, long-term liabilities under deferred compensation arrangements, purchase obligations for long-term purchases and service agreements and other liabilities.

For more information, see "Note 10—Leases", "Note 13—Debt", “Note 19—Retirement Plans” and "Note 21—Commitments and Contingencies" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K.

We have interest payments related to our outstanding debt and finance leases.

As of December 30, 2022, future scheduled interest payments on our outstanding debt and finance leases were $195 million, expected to be paid in fiscal 2023 and $946 million expected to be paid thereafter.

As of December 30, 2022, future payments on our deferred compensation arrangements and purchase obligations for long-term purchases and service agreements were $36 million, expected to be paid in fiscal 2023, and $120 million expected to be paid thereafter.

Our future payments do not include $92 million of income tax liabilities as a result of uncertain tax positions arising from certain provisions of the TCJA becoming effective in 2022, and the timing of such payments, if any, cannot be reasonably estimated.

For additional information, see "Note 18—Income Taxes" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K.

Leidos Holdings, Inc.

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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 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.

Summarized financial information for Leidos and Leidos Inc., net of eliminations, for the year ended December 31, 2021 was as follows (in millions):

Balance Sheet

( “ Guarantor ” ) has fully and unconditionally guaranteed the debt securities of its subsidiary, Leidos, Inc.

( “ Issuer ” ), that were issued pursuant to transactions that were registered under the Securities Act of 1933, as amended (collectively, the “Registered Notes”).

The following is a list of the Registered Notes guaranteed by Leidos Holdings, Inc.

Senior unsecured Registered Notes:

$500 million 2.950% notes, due May 2023

$500 million 3.625% notes, due May 2025

$750 million 4.375% notes, due May 2030

$1,000 million 2.300% notes, due February 2031

Leidos Holdings, Inc.

has also fully and unconditionally guaranteed debt securities of Leidos, Inc.

that were issued pursuant to transactions that were not registered under the Securities Act of 1933, as amended.

The following is a list of unregistered debt securities guaranteed by Leidos Holdings, Inc.

Senior unsecured unregistered debt securities issued by Leidos, Inc.:

$250 million 7.125% notes, due July 2032

$300 million 5.500% notes, due July 2033

Additionally, Leidos, Inc.

has fully and unconditionally guaranteed debt securities of Leidos Holding, Inc.

that were issued pursuant to transactions that were not registered under the Securities Act of 1933, as amended.

The following is a list of unregistered debt securities guaranteed by Leidos, Inc.

Senior unsecured unregistered debt securities issued by Leidos Holdings, Inc.:

$300 million 5.950% notes, due December 2040

The following summarized financial information includes the assets, liabilities and results of operations for the Guarantor and Issuer of the Registered Notes described above.

Intercompany balances and transactions between the Issuer and Guarantor have been eliminated from the financial information below.

Investments in the consolidated subsidiaries of the Issuer and Guarantor that do not guarantee the senior unsecured notes have been excluded from the financial information.

Intercompany payables represent amounts due to non-guarantor subsidiaries of the Issuer.

Balance Sheet Information for the Guarantor and Issuer of Registered Notes

(in millions)

Total current assets $ 2,115

Goodwill 5,810

Investments in consolidated subsidiaries 4,918

Other long-term assets 1,188

Total assets $ 9,113

Total current liabilities $ 2,922

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Total liabilities $ 9,241

Total equity 3,403

Income Statement

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Statement of Income Information for the Guarantor and Issuer of Registered Notes

(in millions)

Revenues, net $ 9,808

Operating income 698

Net income attributable to Leidos common stockholders 274

Net income 250

Commitments and Contingencies

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For a discussion of these items, see "Note 10—Leases" and "Note 21—Commitments and Contingencies" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K.

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Critical Accounting Policies

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").

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Revenue Recognition

We perform under various types of contracts, which include firm-fixed-price ("FFP"), time-and-materials ("T&M"), fixed-price-level-of-effort ("FP-LOE"), cost-plus-fixed-fee ("CPFF"), cost-plus-award-fee, cost-plus-incentive-fee and fixed-price-incentive-fee contracts.

To determine the proper revenue recognition, we first evaluate whether we have a duly approved and enforceable contract with a customer, in which the rights of the parties and payment terms are identified, and collectability is probable.

We perform work under various types of contracts, which include firm-fixed-price ("FFP"), time-and-materials ("T&M"), fixed-price-level-of-effort ("FP-LOE"), cost-plus-fixed-fee ("CPFF"), cost-plus-award-fee, cost-plus-incentive-fee and fixed-price-incentive-fee contracts.

Some of these contracts require us to use estimates of the revenue and cost associated with the design, manufacture and delivery of our products and services for the purposes of recognizing revenue.

We also evaluate whether two or more contracts should be combined and accounted for as a single contract, including the task orders issued under an IDIQ award.

In addition, we assess contract modifications to determine whether changes to existing contracts should be accounted for as part of the original contract or as a separate contract.

If contract modifications add distinct goods or services and increase the contract value by an amount that reflects the standalone selling price, those modifications are accounted for as separate contracts.

In cases where our contracts contain multiple promises, we assess if the multiple promises should be accounted for as separate performance obligations or combined into a single performance obligation.

We generally separate multiple promises in a contract as separate performance obligations if those promises are distinct, both individually and in the context of the contract.

If multiple promises in a contract are highly interrelated or require significant integration or customization within a group, they are combined and accounted for as a single performance obligation.

Our contracts with the U.S.

government often contain options to renew existing contracts for an additional period of time (generally a year at a time) under the same terms and conditions as the original contract, and generally do not provide the customer any material rights under the contract.

We account for renewal options as separate contracts when they include distinct goods or services at standalone selling prices.

Contracts with the U.S.

government are subject to the FAR and priced on estimated or actual costs of providing the goods or services.

The FAR provides guidance on types of costs that are allowable in establishing prices for goods and services provided to the U.S.

government and its agencies.

Each contract is competitively priced and bid separately.

Pricing for non-U.S.

government agencies and commercial customers is based on specific negotiations with each customer.

In circumstances where the standalone selling price is not directly observable, we estimate the standalone selling price using the expected cost-plus margin approach.

Any taxes collected or imposed when determining the transaction price are excluded.

Certain cost-plus and fixed-price contracts contain award fees, incentive fees or other provisions that may either increase or decrease the transaction price.

Some of our cost-plus and fixed-price contracts contain award fees, incentive fees or other provisions that may either increase or decrease the transaction price.

These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion.

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We allocate the transaction price of a contract to its performance obligations in the proportion of its respective standalone selling prices.

The standalone selling price of the performance obligations is generally based on an expected cost-plus margin approach, in accordance with the FAR.

For certain product sales, prices from other standalone sales are used.

We recognize revenue on our service-based contracts primarily over time as there is continuous transfer of control to the customer over the duration of the contract as the promised services are performed.

government contracts, continuous transfer of control to the customer is evidenced by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay for costs incurred plus a reasonable profit and take control of any work-in-process.

Similarly, for non-U.S.

government contracts, the customer typically controls the work-in-process as evidenced by rights to payment for work performed to date plus a reasonable profit to deliver products or services for which we do not have an alternate use.

Anticipated losses on service-based contracts are recognized when incurred (generally on a straight-line basis) over the contract term.

In certain product sales, where the products have an alternate use, revenue is recognized at a point in time when the customer takes control of the asset usually denoted by possession, transfer of legal title and acceptance by the customer.

On FFP contracts requiring system integration and cost-plus contracts with variable consideration, revenue is recognized over time generally using a method that measures the extent of progress towards completion of a performance obligation, principally using a cost-input method (referred to as the cost-to-cost method).

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In addition, an EAC of a performance obligation includes future losses estimated to be incurred on onerous contracts, as and when known.

On certain other contracts, principally T&M, FP-LOE and CPFF, revenue is recognized using the right-to-invoice practical expedient as we are contractually able to invoice the customer based on the control transferred to the customer.

Additionally, on maintenance (generally FFP) performance obligations, revenue is recognized over time using a straight-line method as the control of the services is provided to the customer evenly over the period of performance.

For certain performance obligations where we are not primarily responsible for fulfilling the promise to provide the goods or service to the customer, do not have inventory risk and do not have discretion in establishing the price for the goods or service, we recognize revenue on a net basis.

For the impacts of changes in estimates on our contracts, (see "Note 3—Summary of Significant Accounting Policies").

Goodwill and Intangible Assets

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We recognize purchased intangible assets in connection with our business acquisitions at fair value on the acquisition date.

Goodwill and intangible assets, net collectively represent 60% of our total assets as of December 31, 2021 and January 1, 2021.

Goodwill is not amortized, but instead is tested annually for impairment at the reporting unit level and tested more frequently if events or circumstances indicate that the carrying value may not be recoverable.

Our policy is to perform our annual goodwill impairment evaluation as of the first day of the fourth quarter of our fiscal year using either a qualitative or quantitative approach.

During both fiscal 2021 and 2020, we had seven reporting units.

In our qualitative assessment, we determine whether it is more likely than not that an impairment exists based on qualitative factors.

Qualitative factors include macroeconomic, industry and market considerations, overall financial performance, industry, legal and other relevant events and factors affecting the reporting unit.

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Additionally, as part of this assessment, we may perform a quantitative analysis to support the qualitative factors above by applying sensitivities to assumptions and inputs used in measuring a reporting unit’s fair value.

If the qualitative assessment indicates that it is more likely than not that an impairment exists, then a quantitative assessment is performed.

We use discounted cash flow analyses and market multiple analyses in order to estimate reporting unit fair values.

Goodwill is not amortized, but instead is tested annually, at the beginning of the fourth quarter, for impairment at the reporting unit level and may be tested more frequently if events or circumstances indicate that the carrying value may not be recoverable.

Intangible assets with indefinite lives are not amortized but are assessed for impairment at the beginning of the fourth quarter and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Goodwill and intangible assets, net, collectively represent 59% and 60% of our total assets as of December 30, 2022 and December 31, 2021, respectively.

We may perform qualitative or quantitative analysis to test for impairment.

Qualitative factors may include macroeconomic, industry and market considerations, overall financial performance, industry, legal and other relevant events and factors affecting the reporting unit.

For quantitative analysis, we use discounted cash flow models and market multiple analyses in order to estimate reporting unit fair values.

Discounted cash flow analyses rely on significant judgement and assumptions about expected future cash flows, weighted-average cost of capital, discount rates, expected long-term growth rates and operating margins.

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Market multiple analyses incorporate significant judgments and assumptions related to the selection of guideline public companies, our forecast earnings before interest, taxes, depreciation and amortization (“EBITDA”), forecast EBITDA of guideline public companies and control premium estimates.

A significant change to these estimates and assumptions could cause the estimated fair values of our reporting units and intangible assets to decline and increase the risk of an impairment charge to earnings.

Intangible assets with finite lives are assessed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

We performed our annual test for impairment as of October 1, 2022, which resulted in no impairments being identified.

However, through this analysis we determined that our Security Products reporting unit within the Civil reportable segment, which holds goodwill in the amount of $926 million as of December 31, 2021, was at risk of future impairment.

The estimated fair value of the Security Products reporting unit exceeded the carrying value by approximately 6%.

However, through this analysis we determined that our Security Enterprise Solutions reporting unit within the Civil reportable segment, which holds goodwill in the amount of $899 million as of December 30, 2022, was at risk of future impairment.

The estimated fair value of the Security Enterprise Solutions reporting unit exceeded the carrying value by approximately 13%.

Operations of the reporting unit rely heavily on the sales and servicing of security and detection products, which have been negatively impacted by COVID-19.

The forecasts utilized to estimate the fair value of the Security Products reporting unit assume a gradual improvement in the global aviation security product and related service sales, reaching pre-COVID-19 levels by fiscal 2025.

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.

Each quarter, we evaluate impairment indicators to determine whether there is a triggering event warranting a goodwill and intangible asset impairment analysis.

The forecasts utilized to estimate the fair value of the Security Enterprise Solutions reporting unit assume continued global operations in all of our existing markets and a gradual improvement in the global aviation security product and related service sales, reaching pre-COVID-19 levels by fiscal 2025.

The fair value of the reporting unit is also negatively impacted by rising interest rate factored into cost of capital.

Recently Adopted and Issued Accounting Pronouncements

For a discussion of these items, see "Note 2—Accounting Standards" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K.

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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-K

Item 7. Management’s Discussion and Analysis