What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-02-14 compared with 2022-02-15 · 384 added, 460 removed, 1378 unchanged (38% of the section changed)

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Report of Independent Registered Public Accounting Firm (PCAOB ID No.

Consolidated Balance Sheets as of December 31, 2021 and January 1, 2021

Consolidated Statements of Income for the fiscal years ended December 31, 2021, January 1, 2021 and January 3, 2020

Consolidated Statements of Comprehensive Income for the fiscal years ended December 31, 2021, January 1, 2021 and January 3, 2020

Consolidated Statements of Equity for the fiscal years ended December 31, 2021, January 1, 2021 and January 3, 2020

Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2021, January 1, 2021 and January 3, 2020

Consolidated Balance Sheets as of December 30, 2022 and December 31, 2021

Consolidated Statements of Income for the fiscal years ended December 30, 2022, December 31, 2021, and January 1, 2021

Consolidated Statements of Comprehensive Income for the fiscal years ended December 30, 2022, December 31, 2021 , and January 1, 2021

Consolidated Statements of Equity for the fiscal years ended December 30, 2022, December 31, 2021, and January 1, 2021

Consolidated Statements of Cash Flows for the fiscal years ended December 30, 2022, December 31, 2021, and January 1, 2021

Notes to Consolidated Financial Statements

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We have audited the accompanying consolidated balance sheets of Leidos Holdings, Inc.

and subsidiaries (the "Company") as of December 31, 2021 and January 1, 2021, the related consolidated statements of income, comprehensive income, equity, and cash flows, for the fiscal years ended December 31, 2021, January 1, 2021, and January 3, 2020, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and January 1, 2021, and the results of its operations and its cash flows for the fiscal years ended December 31, 2021, January 1, 2021, and January 3, 2020, in conformity with accounting principles generally accepted in the United States of America.

and subsidiaries (the "Company") as of December 30, 2022 and December 31, 2021, the related consolidated statements of income, comprehensive income, equity, and cash flows, for the fiscal years ended December 30, 2022, December 31, 2021, and January 1, 2021, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 30, 2022 and December 31, 2021, and the results of its operations and its cash flows for the fiscal years ended December 30, 2022, December 31, 2021, and January 1, 2021, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 30, 2022, based on criteria established in Internal Control — Integrated Framework (2013 ) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 14, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.

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Annual Report - 57

Goodwill Valuation – Security Products Reporting Unit - Refer to Note 3, Note 5 and Note 8 to the financial statements

Goodwill Valuation – Security Enterprise Solutions Reporting Unit - Refer to Note 3 and Note 8 to the financial statements

Critical Audit Matter Description

The Company performed a quantitative impairment evaluation of the goodwill for the Security Products reporting unit by comparing the estimated fair value of the reporting unit to its carrying value.

The Company performed a quantitative impairment evaluation of the goodwill for the Security Enterprise Solutions reporting unit by comparing the estimated fair value of the reporting unit to its carrying value.

Estimating the fair value of a reporting unit requires the exercise of significant judgment and assumptions including judgments about expected future cash flows, weighted-average cost of capital, discount rates and expected long-term growth rates.

Changes in these assumptions could have a significant impact on the fair value of the reporting unit, the amount of any goodwill impairment charge, or both.

The goodwill balance was $6,744 million as of December 31, 2021 of which $926 million related to the Security Products reporting unit.

The Company’s accounting policy is to test for impairment on the first day of the fourth quarter of each year.

As a result of the quantitative assessment, the Company concluded that the fair value of the reporting unit exceeded the carrying value by approximately 6%, which resulted in no impairment for the year ended December 31, 2021.

Given the significant judgments made by management to estimate the fair value of the Security Products reporting unit and the difference between its fair value and carrying value, performing audit procedures to develop an independent estimate of the fair value of the Security Products reporting unit, which included evaluating estimates and assumptions related to the cost of capital, forecasts of future cash flows, and terminal growth rates specifically due to the sensitivity of the operations to changes in global aviation security products and related services markets, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.

The goodwill balance was $6,696 million as of December 30, 2022 of which $899 million related to the Security Enterprise Solutions reporting unit.

The Company’s accounting policy is to test for impairment on the first day of the fourth quarter of each year and more frequently if events or circumstances indicate that the carrying value may not be recoverable.

As a result of the quantitative assessment, the Company concluded that the fair value of the reporting unit exceeded the carrying value by $174 million, or 13%, which resulted in no impairment for the year ended December 30, 2022.

We identified goodwill for the Security Enterprise Solutions reporting unit as a critical audit matter due to the significant judgments made by management to estimate the fair value of the reporting unit and the difference between its fair value and carrying value.

Performing audit procedures to develop an independent estimate of the fair value of the Security Enterprise Solutions reporting unit, which included evaluating estimates and assumptions related to the cost of capital, forecasts of future cash flows, and terminal growth rates due to the sensitivity of the operations to changes in global aviation security products and related services markets, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the selection of the discount rate, terminal growth rate and forecasts of future revenues and cash flows for the Security Products reporting unit included the following, among others:

• We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the selection of the discount rate, terminal growth rate and management’s development of forecasts of future revenues and cash flows.

• We developed an independent estimate of the fair value of the Security Products reporting unit using both the income as well as the market approach.

Our audit procedures related to the selection of the discount rate, terminal growth rate and forecasts of future revenues and cash flows for the Security Enterprise Solutions reporting unit included the following, among others:

• We developed an independent estimate of the fair value of the Security Enterprise Solutions reporting unit using the income approach.

We utilized historical results of the reporting unit and inspected third-party industry reports for the global aviation security products and related services markets to develop projections.

Additionally, we developed the discount rate and terminal year growth rate with the assistance of our fair value specialists.

• The market approach analysis was performed by selecting guideline peer companies and developing enterprise value multiples of revenues and Earnings Before Interest, Taxes, Depreciation and Amortization.

We reconciled the results of the market approach with the discounted cash flow approach.

• We evaluated the carrying value of the reporting unit.

• We developed an independent estimate of the fair value of the Security Enterprise Solutions reporting unit using the market approach.

We selected guideline peer companies and developed enterprise value multiples of revenues and earnings before interest, taxes, depreciation and amortization.

• We calculated our independent expectation of the fair value of the reporting unit by weighting the results of the market and income approaches and compared the resulting fair value to the carrying value of the reporting unit.

Revenues — Refer to Note 3 and Note 4 to the financial statements

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Our audit procedures related to management’s conclusions regarding whether multiple promises within a single contract represent a single performance obligation, whether or not the Company is acting as a principal or an agent in fulfilling identified performance obligations on certain contracts, and estimates of total costs for the performance obligations that recognize revenue using the cost-to-cost method included the following, among others:

• We tested the effectiveness of controls over contract revenue, including management’s controls over the initial setup of new contract arrangements and the estimates of total costs for identified performance obligations.

• We tested recorded revenue using a combination of analytical procedures and detailed contract testing.

• For a selection of contracts, we performed elements of the following for each contract:

• For a selection of contracts, we performed the following for each contract:

◦ Evaluated the terms and conditions of each contract and the appropriateness of the accounting treatment in accordance with generally accepted accounting principles, by:

▪ Inspecting the executed contract to verify that the facts on which management’s conclusions were reached were consistent with the actual terms and conditions of the contract.

▪ Evaluating the contract within the context of the five-step model prescribed by ASC 606 and that management’s conclusions were appropriate by evaluating the nature of the promises within the contract, the interrelationship of the promised services provided, the pattern by which obligations are fulfilled, the number of performance obligations identified, and which party is acting as principal in the fulfillment of the identified performance obligations.

▪ Evaluating the contract within the context of the five-step model prescribed by accounting principles generally accepted in the United States of America and that management’s conclusions were appropriate by evaluating the nature of the promises within the contract, the interrelationship of the promised services provided, the pattern by which obligations are fulfilled, the number of performance obligations identified, and which party is acting as principal in the fulfillment of the identified performance obligations.

◦ Tested the mathematical accuracy of management’s calculation of revenue for the performance obligation.

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CONSOLIDATED BALANCE SHEETS

2021 January 1,

2022 December 31,

(in millions)

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Operating lease right-of-use assets, net 545 612

Other assets 439 458

Other long-term assets 388 439

Total assets $ 13,071 $ 13,261

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Total liabilities $ 8,718 $ 8,917

Commitments and contingencies (Notes 21)

Commitments and contingencies (Note 21)

Stockholders’ equity:

Preferred stock, $ 0.0001 par value, 10 million shares authorized and no shares issued and outstanding at December 31, 2021 and January 1, 2021

Common stock, $ 0.0001 par value, 500 million shares authorized, 140 million and 142 million shares issued and outstanding at December 31, 2021 and January 1, 2021, respectively

Preferred stock, $ 0.0001 par value, 10 million shares authorized and no shares issued and outstanding at December 30, 2022 and December 31, 2021

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

Additional paid-in capital 2,005 2,423

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CONSOLIDATED STATEMENTS OF INCOME

2021 January 1,

2022 December 31,

2021 January 1,

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Selling, general and administrative expenses 950 860 770

Bad debt expense and recoveries ( 9 ) ( 68 ) ( 40 )

Credit losses (recoveries), net 1 ( 9 ) ( 68 )

Acquisition, integration and restructuring costs 17 27 39

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Interest expense, net ( 199 ) ( 184 ) ( 179 )

Other (expense) income, net ( 1 ) ( 38 ) 87

Other expense, net ( 3 ) ( 1 ) ( 38 )

Income before income taxes

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

2021 January 1,

2022 December 31,

2021 January 1,

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Pension adjustments ( 20 ) 13 ( 2 )

Total other comprehensive income (loss), net of taxes 34 24 ( 40 )

Total other comprehensive (loss) income, net of taxes ( 61 ) 34 24

Comprehensive income 632 793 653

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comprehensive

loss Leidos Holdings, Inc.

stockholders' equity Non-controlling interest Total

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

(in millions, except for per share amounts)

Balance at December 28, 2018 146 $ 2,966 $ 372 $ ( 30 ) $ 3,308 $ 3 $ 3,311

Balance at January 3, 2020 141 $ 2,587 $ 896 $ ( 70 ) $ 3,413 $ 4 $ 3,417

Cumulative adjustments related to ASU adoptions — — ( 1 ) — ( 1 ) — ( 1 )

Balance at December 28, 2018 146 2,966 420 ( 30 ) 3,356 3 3,359

Balance at January 4, 2020 141 2,587 895 ( 70 ) 3,412 4 3,416

Net income — — 628 — 628 1 629

Other comprehensive loss, net of taxes

Other comprehensive income, net of taxes

— — — 24 24 — 24

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Stock-based compensation — 62 — — 62 — 62

Other — ( 1 ) — — ( 1 ) ( 2 ) ( 3 )

Balance at January 3, 2020 141 2,587 896 ( 70 ) 3,413 4 3,417

Cumulative adjustments related to ASU adoptions

— — ( 1 ) — ( 1 ) — ( 1 )

Net capital contributions from non-controlling interest — — — — — 4 4

Balance at January 1, 2021 142 2,580 1,328 ( 46 ) 3,862 9 3,871

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Stock-based compensation — 67 — — 67 — 67

Net capital contributions to non-controlling interest — — — — — 4 4

Balance at January 1, 2021 142 2,580 1,328 ( 46 ) 3,862 9 3,871

Net capital contributions from non-controlling interest — — — — — 38 38

Balance at December 31, 2021 140 2,423 1,880 ( 12 ) 4,291 53 4,344

Net income — — 685 — 685 8 693

Other comprehensive income, net of taxes

Other comprehensive loss, net of taxes

— — — ( 61 ) ( 61 ) — ( 61 )

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Stock-based compensation — 73 — — 73 — 73

Net capital contributions to non-controlling interest — — — — — 38 38

Net capital distributions to non-controlling interest — — — — — ( 7 ) ( 7 )

Balance at December 30, 2022 137 $ 2,005 $ 2,367 $ ( 73 ) $ 4,299 $ 54 $ 4,353

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CONSOLIDATED STATEMENTS OF CASH FLOWS

2021 January 1,

2022 December 31,

2021 January 1,

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Stock-based compensation 73 67 62

Loss (gain) on sale of businesses 3 — ( 88 )

Loss on debt extinguishment — — 36

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Deferred income taxes ( 211 ) ( 26 ) ( 4 )

Bad debt expense and recoveries ( 9 ) 13 12

Other 26 ( 7 ) 14

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Net proceeds from sale of assets 6 — 12

Collections on promissory notes — 5 5

Other ( 13 ) ( 4 ) 11

Net cash (used in) provided by investing activities ( 730 ) ( 2,815 ) 65

Net cash used in investing activities ( 313 ) ( 730 ) ( 2,815 )

Cash flows from financing activities:

Proceeds from debt issuance 380 380 7,225

Payments of long-term debt ( 106 ) ( 5,456 ) ( 80 )

Repayments of borrowings ( 545 ) ( 106 ) ( 5,456 )

Payments for debt issuance and modification costs — — ( 51 )

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Proceeds from issuances of stock 48 44 35

Capital distributions to non-controlling interests ( 3 ) — —

Capital contributions from non-controlling interests 41 4 —

Net capital (distributions to) contributions from non-controlling interests ( 7 ) 38 4

Other — — ( 5 )

Net cash (used in) provided by financing activities ( 865 ) ( 113 ) 1,451

Net increase (decrease) in cash, cash equivalents and restricted cash 188 ( 30 ) 348

Net (decrease) increase in cash, cash equivalents and restricted cash ( 192 ) 188 ( 30 )

Cash, cash equivalents and restricted cash at beginning of year 875 687 717

Cash, cash equivalents and restricted cash at end of year 683 875 687

restricted cash at end of year 167 148 163

Cash and cash equivalents at end of year $ 516 $ 727 $ 524

Leidos Holdings, Inc.

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CONSOLIDATED STATEMENTS OF CASH FLOWS [CONTINUED]

2021 January 1,

2022 December 31,

2021 January 1,

(in millions)

restricted cash at end of year 148 163 49

Cash and cash equivalents at end of year $ 727 $ 524 $ 668

Supplementary cash flow information:

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

Effective the beginning of fiscal 2020, certain contracts were reassigned from the Civil reportable segment to the Defense Solutions reportable segment.

Fiscal 2019 segment results and disclosures have been recast to reflect this change.

Note 2—Accounting Standards

Accounting Standards Updates Adopted

ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity's Own Equity (Subtopic 815-40)

In August 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-06 which simplifies the accounting for convertible debt and convertible preferred stock by removing the requirements to separate embedded conversion features from the host convertible instruments.

Additionally, the amendments in this update simplify the guidance in Subtopic 815-40 by removing certain criteria that must be satisfied in order to classify a contract as equity.

This update also improves the consistency of earnings per share calculations by requiring an entity to use the if-converted method of calculating diluted earnings per share rather than the treasury stock method for convertible instruments and also by requiring the inclusion of the potential effect of shares settled in cash or shares in the diluted earnings per share calculation.

The amendments in this update are effective for public entities for fiscal years beginning after December 15, 2021, and adopted using either a fully or modified retrospective approach.

Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020.

Entities should adopt the guidance as of the beginning of the fiscal year of adoption and cannot adopt the guidance in an interim reporting period.

Effective January 2, 2021, we adopted the requirements of ASU 2020-06 using the modified retrospective method.

The adoption did not have an impact to our financial position, results of operations and earnings per share.

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

We combined "Capital distributions to non-controlling interests" and "Capital contributions from non-controlling interests" into "Net capital (distributions to) contributions from non-controlling interests", "Collections on promissory notes" and "Bad debt expense and recoveries" into "Other" on the consolidated statements of cash flows.

Leidos Holdings, Inc.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ASU 2021-05, Leases (Topic 842) Lessors—Certain Leases with Variable Lease Payments

In July 2021, the FASB issued ASU 2021-05, which amends lessor’s accounting for leases with variable lease payments classified as sales-type or direct financing leases.

The amendments in this update modify the lease classification requirements for lessors, whereby leases with variable lease payments that are not dependent on a reference index or a rate will be accounted for as operating leases if classification as a sales-type or direct financing lease would have resulted in a day-one loss.

The amendments in this update are effective for public entities for fiscal years beginning after December 15, 2021, as well as interim periods within those fiscal years, and can be adopted using either a prospective or retrospective approach.

Early adoption is also permitted.

Effective July 3, 2021, we adopted the requirements of ASU 2021-05 using the prospective method.

The adoption did not have an impact to our financial position, results of operations and earnings per share.

Note 2—Accounting Standards

Accounting Standards Updates Adopted

ASU 2021-08, Business Combinations (Topic 805)

In October 2021, the FASB issued ASU 2021-08, which amends how contract assets and liabilities acquired in a business combination are measured.

Current guidance requires contract assets and liabilities to be measured at fair value in accordance with ASC 805, Business Combinations.

The amendments in this Update remove the requirement to measure contract assets and liabilities at fair value and instead require that they be recognized in accordance with ASC 606, Revenue from Contracts with Customers.

We adopted the requirements of ASU 2021-08 using the prospective method effective the first day of fiscal 2022.

For business combinations occurring after adoption, we measured contract assets and liabilities acquired in accordance ASC 606.

Accounting Standards Updates Issued But Not Yet Adopted

ASU 2020-04 and ASU 2021-01, Reference Rate Reform (Topic 848)

In March 2020, the FASB issued ASU 2020-04, which provides companies with optional expedients and exceptions to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued.

ASU 2020-04, ASU 2021-01, and ASU 2022-06 Reference Rate Reform In March 2020, the FASB issued ASU 2020-04, which provides companies with optional expedients and exceptions to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued.

This update provides optional expedients for applying accounting guidance to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of the reference rate reform.

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In January 2021, the FASB issued ASU 2021-01 which amends the scope of ASU 2020-04.

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.

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 December 2022, the FASB issued ASU 2022-06 which extends the deadline for application of ASU 2021-01 through December 31, 2024.

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 currently use the one-month LIBOR for which the rate publication will cease in June 2023.

ASU 2021-08, Business Combinations (Topic 805)

In October 2021, the FASB issued ASU 2021-08, which amends how contract assets and liabilities acquired in a business combination are measured.

Current guidance requires contract assets and liabilities to be measured at fair value in accordance with ASC 805, Business Combinations.

The amendments in this Update are effective for public business entities for the fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and must be applied prospectively.

Early adoption is permitted.

We plan to adopt the requirements of ASU 2021-08 using the prospective method effective the first day of Fiscal 2022.

For business combinations occurring after adoption, we will measure contract assets and liabilities acquired in accordance ASC 606 .

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 13—Debt"), we currently use the one-month LIBOR for which the rate publication will cease in June 2023.

Note 3—Summary of Significant Accounting Policies

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Fiscal 2022 ended December 30, 2022.

Fiscal 2021 and 2020 each included 52 weeks and fiscal 2019 included 53 weeks.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal 2022, 2021 and 2020 each included 52 weeks.

Use of Estimates

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Our operating cycle for long-term contracts may be greater than one year and is measured by the average time intervening between the inception and the completion of those contracts.

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LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Business Combinations, Investments and Variable Interest Entities

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Divestitures representing a strategic shift that has (or will have) a major effect in operations and financial results are classified as discontinued operations, whereas non-strategic divestitures remain in continuing operations.

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LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restructuring Expenses

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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 ("FP-IF") contracts.

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LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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Contracts with the U.S.

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

government are subject to the Federal Acquisition Regulation ("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.

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We estimate variable consideration at the most probable amount that we expect to be entitled to, based on the assessment of the contractual variable fee criteria, complexity of work and related risks, extent of customer discretion, amount of variable consideration received historically and the potential of significant reversal of revenue.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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Substantially all of our contracts do not contain a significant financing component, which would require an adjustment to the transaction price of the contract.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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Changes in estimates on contracts for the periods presented were as follows:

2021 January 1,

2022 December 31,

2021 January 1,

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government Cost Accounting Standards.

Selling, general and administrative expenses include general and administrative, bid and proposal and company-funded research and development expenses.

Selling, general and administrative expenses include general and administrative, bid and proposal, company-funded research and development expenses, and legal fees and settlements.

We conduct research and development activities under customer-funded contracts and with company-funded research and development funds.

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Such provision differs from the amounts currently payable because certain items of income and expense are recognized in different reporting periods for financial reporting purposes than for income tax purposes.

We recognize liabilities for uncertain tax positions when it is more likely than not that a tax position will not be sustained upon examination and settlement with various taxing authorities.

Liabilities for uncertain tax positions are measured based upon the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

We record liabilities for uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

We recognize interest and penalties related to uncertain tax positions in our income tax expense.

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Outstanding payments are included within "Cash and cash equivalents" and "Accounts payable and accrued liabilities" correspondingly on the consolidated balance sheets.

At December 31, 2021 and January 1, 2021, $ 138 million and $ 237 million, respectively, of outstanding payments were included within "Cash and cash equivalents."

At December 30, 2022, and December 31, 2021, $ 158 million and $ 138 million, respectively, of outstanding payments were included within "Cash and cash equivalents."

Restricted Cash

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

Our restricted cash balances were $ 148 million and $ 163 million at December 31, 2021 and January 1, 2021, respectively.

Our restricted cash balances were $ 167 million and $ 148 million at December 30, 2022, and December 31, 2021, respectively.

Receivables include amounts billed and currently due from customers, amounts billable where the right to consideration is unconditional and amounts unbilled.

Amounts billable and unbilled amounts are recognized at estimated realizable value and consist of costs and fees, substantially all of which are expected to be billed and collected generally within one year.

Unbilled amounts also include rate variances that are billable upon negotiation of final indirect rates with the DCAA.

Unbilled amounts also include rate variances that are billable upon negotiation of final indirect rates with the Defense Contract Management Agency.

Cost-reimbursable and T&M contracts are generally billed as costs are incurred.

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Generally, raw material inventory is valued using the average cost method.

Work-in-process inventory includes raw material costs plus labor costs, including fringe benefits and allocable overhead costs.

Work-in-process inventory may include material costs, labor and allocable overhead costs.

The majority of finished goods inventory consists of technology and security products, inspection systems, baggage scanning equipment and small glide munitions.

Inventory is evaluated against historical and planned usage to determine appropriate provisions for obsolete inventory.

Inventory is evaluated against historical or planned usage to determine appropriate provisions for obsolete inventory.

Goodwill represents the excess of the fair value of consideration transferred, plus the fair value of any non-controlling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.

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.

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Goodwill is evaluated for impairment either under a qualitative assessment option or a quantitative approach, which depends on the facts and circumstances of a reporting unit, consideration of the excess of a reporting unit's fair value over its carrying amount in previous assessments and changes in business environment.

When performing a qualitative assessment, we consider factors including, but not limited to, current macroeconomic conditions, industry and market conditions, cost factors, financial performance and other events relevant to the entity or reporting unit under evaluation to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

If we determine that it is more likely than not that a reporting unit's fair value is less than its carrying amount, a quantitative goodwill impairment test is performed.

If we determine that it is more likely than not that a reporting unit's fair value is less than its carrying value, a quantitative goodwill impairment test is performed.

When performing a quantitative goodwill impairment test, the reporting unit carrying value is compared to its fair value.

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These analyses rely on significant judgements and assumptions about expected future cash flows, weighted-average cost of capital, discount rates, expected long-term growth rates, operating margins and on the selection of guideline public companies.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Intangible Assets

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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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Intangible assets with finite lives are amortized over the following periods:

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Straight-line Shorter of useful life of asset or remaining lease term

Vehicles and transportation equipment Straight-line 2 - 15

Office furniture and fixtures Straight-line or declining-balance 6 - 9

We evaluate our long-lived assets for potential impairment whenever there is evidence that events or changes in circumstances indicate that the carrying value may not be recoverable and the carrying amount of the asset exceeds its estimated fair value.

We evaluate our long-lived assets for potential impairment whenever there is evidence that events or changes in circumstances indicate that the carrying value may not be recoverable and the carrying value of the asset exceeds its estimated fair value.

We have facilities and equipment lease arrangements.

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Right-of-use ("ROU") assets represent the right to use an underlying asset over the lease term and lease liabilities represent the obligation to make lease payments arising from the lease.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ROU assets and lease liabilities are recorded on the consolidated balance sheet at lease commencement date based on the present value of the future minimum lease payments over the lease term.

We generally do not know the implicit rate for our leases;

We generally do not know the discount rate implicit in our leases;

therefore, the discount rate used is our incremental borrowing rate which is determined based on the rate of interest that we would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term.

1 unchanged sentence

The remaining lease cost is allocated over the remaining lease term on a straight-line basis unless another systematic or rational basis is more representative of the pattern in which the underlying asset is expected to be used.

ROU assets are evaluated for impairment in a manner consistent with the treatment of other long-lived assets.

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LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Certain facility leases contain options to renew or extend the terms of the lease which are included in the determination of the ROU assets and lease liabilities when it is reasonably certain that we will exercise the option.

1 unchanged sentence

Variable lease payments that depend on an index or a rate are included in the determination of ROU assets and lease liabilities using the index or rate at the lease commencement date, whereas variable lease payments that do not depend on an index or rate are recorded as lease expense in the period incurred.

At December 31, 2021, we did not have any lease agreements with residual value guarantees.

At December 30, 2022, certain of the Company's equipment leases includ e residual value guarantees.

We use the practical expedient to not separate non-lease components from lease components and instead account for both components as a single lease.

The practical expedient is applied to all material classes of leased assets except for aircrafts, for which we account for the lease component and non-lease component separately.

The practical expedient is applied to all material classes of leased assets except for aircraft, for which we account for the lease component and non-lease component separately.

The related lease payments on short-term facilities and equipment leases are recognized as expense on a straight-line basis over the lease term.

ROU assets are evaluated for impairment in a manner consistent with the treatment of other long-lived assets.

ROU assets are assessed for potential impairment whenever there is evidence that events or changes in circumstances indicate that the carrying value of the asset may not be recoverable and the carrying amount of the asset exceeds its estimated fair value.

This includes an establishment of a plan of abandonment, which occurs when we have committed to a plan to abandon the lease before the end of its previously estimated useful life and there is no expectation that we will re-enter or re-purpose the space, including the fact that it cannot be subleased or transferred to another program within Leidos.

We are a lessor on certain equipment sales-type and operating lease arrangements with our customers.

7 unchanged sentences

If both criteria are met and the predominant component is a lease, then the entire arrangement will be accounted for in accordance with ASC 842.

If we account for an arrangement both as a lease and non-lease component, then the allocation of consideration for each component will be based the relative standalone sales price.

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LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

If we account for an arrangement both as a lease and non-lease component, then the allocation of consideration for each component will be based on the relative standalone sales price.

Fair Value Measurements

7 unchanged sentences

The fair value of financial instruments is determined based on quoted market prices, if available, or management's best estimate (see "Financial Instruments" below).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Management evaluates its investments for other-than-temporary impairment at each balance sheet date.

22 unchanged sentences

The fair value of performance-based stock awards with market conditions is based on using a Monte Carlo simulation.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The fair value of stock option awards granted is based on using the Black-Scholes-Merton option pricing model.

6 unchanged sentences

Translation adjustments are recorded as accumulated other comprehensive loss in stockholders' equity.

Gains and losses due to movements in foreign currency exchange rates are recognized as "Other (expense) income, net" on the consolidated statements of income.

Gains and losses due to movements in foreign currency exchange rates are recognized as "Other expense, net" on the consolidated statements of income.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4—Revenues

Remaining Performance Obligations

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

Remaining performance obligations do not include unexercised option periods and future potential task orders expected to be awarded under 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 December 31, 2021, we had $ 15.6 billion of remaining performance obligations and expect to recognize approximately 53 % and 71 % over the next 12 months and 24 months, respectively, with the remaining to be recognized thereafter.

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

RPO does not include unexercised option periods and future potential task orders expected to be awarded under 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 December 30, 2022, we had $ 15.4 billion of RPO and expect to recognize approximately 57 % and 74 % over the next 12 months and 24 months, respectively, with the remaining to be recognized thereafter.

Disaggregation of Revenues

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

Fiscal 2019 amounts have been recast for certain contracts that were reassigned from the Civil reportable segment to the Defense Solutions reportable segment (see "Note 20—Business Segments").

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Disaggregated revenues by customer-type were as follows:

4 unchanged sentences

$ 6,027 $ 84 $ 999 $ 7,110

Other government agencies (1)

government agencies (1)

1,004 2,660 1,576 5,240

2 unchanged sentences

Total $ 8,242 $ 3,362 $ 2,683 $ 14,287

Year Ended January 1, 2021

Year Ended December 31, 2021

Defense Solutions Civil Health Total

2 unchanged sentences

$ 5,939 $ 54 $ 756 $ 6,749

Other government agencies (1)

government agencies (1)

964 2,447 1,681 5,092

6 unchanged sentences

Intelligence Community $ 5,407 $ 59 $ 519 $ 5,985

Other government agencies (1)

government agencies (1)

995 2,418 1,329 4,742

9 unchanged sentences

government, as well as delays in program start dates or the award of a contract.

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LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Disaggregated revenues by contract-type were as follows:

9 unchanged sentences

Total $ 8,242 $ 3,362 $ 2,683 $ 14,287

Year Ended January 1, 2021

Year Ended December 31, 2021

Defense Solutions Civil Health Total

7 unchanged sentences

Total $ 8,029 $ 3,044 $ 2,544 $ 13,617

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Annual Report - 72

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year Ended January 1, 2021

11 unchanged sentences

FFP contracts offer the potential for higher profits while increasing the exposure to risk of cost overruns.

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LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Disaggregated revenues by geographic location were as follows:

7 unchanged sentences

Total $ 8,242 $ 3,362 $ 2,683 $ 14,287

Year Ended January 1, 2021

Year Ended December 31, 2021

Defense Solutions Civil Health Total

11 unchanged sentences

International

838 165 — 1,003

Total $ 7,339 $ 2,903 $ 1,955 $ 12,197

6 unchanged sentences

Revenues by contract-type, customer-type and geographic location exclude lease income of $ 109 million, $ 120 million and $ 100 million for fiscal 2022, 2021 and 2020, respectively (see "Note 10—Leases").

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Contract Assets and Liabilities

5 unchanged sentences

Contract liabilities consist of deferred revenue, which represents cash advances received prior to performance for programs and billings in excess of revenue recognized.

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LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Balance sheet line item December 30,

2021 January 1,

2022 December 31,

(in millions)

8 unchanged sentences

(1) Certain contracts record revenue on a net contract basis, and therefore, the respective deferred revenue balance will not fully convert to revenue.

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

The decrease in deferred revenue was primarily due to the timing of advance payments and revenue recognized during the period.

Revenue recognized during fiscal 2021 and 2020 of $ 340 million and $ 275 million, respectively, was included as a contract liability at January 1, 2021 and January 3, 2020, respectively.

Revenue recognized during fiscal 2022 and 2021 of $ 270 million and $ 340 million, respectively, was included as a contract liability at December 31, 2021, and January 1, 2021, respectively.

There were no impairment losses recognized on contract assets during fiscal 2022, 2021 and 2020.

1 unchanged sentence

We may acquire businesses as part of our growth strategy to provide new or enhance existing capabilities and offerings to customers.

During fiscal 2022, we completed the acquisition of Cobham Aviation Services Australia’s Special Mission business ("Cobham Special Mission").

During fiscal 2021, we completed the acquisitions of Gibbs & Cox, 1901 Group, LLC ("1901 Group"), and an immaterial strategic acquisition.

1 unchanged sentence

("Dynetics").

During fiscal 2019, we completed the acquisition of IMX Medical Management Services, Inc.

and its affiliated businesses ("IMX").

Cobham Special Mission Acquisition

On October 30, 2022 (the "Agreement Date"), we completed the acquisition of Cobham Special Mission for a preliminary purchase consideration of $ 295 million Australian dollars, net of $ 10 million of Australian dollars acquired, approximately $ 190 million United States dollars, net of $ 6 million of cash acquired, which is subject to working capital adjustments.

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

The preliminary goodwill recognized of $ 26 million represents intellectual capital and the acquired assembled workforce, neither of which qualify for recognition as a separate intangible asset.

None of the goodwill recognized is tax deductible.

In connection with this acquisition, we acquired preliminary fair value of property, plant and equipment of $ 147 million at the Agreement Date.

The following table summarizes the preliminary fair value of intangible assets acquired at the Agreement Date and the related weighted average amortization period:

Weighted average amortization period Fair value

(in years) (in millions)

Programs 7 $ 21

Technology 9 4

Leidos Holdings, Inc.

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 30, 2022, we had not finalized the determination of fair values allocated to assets and liabilities, including, but not limited to, property, plant and equipment, intangible assets, accounts receivables, accounts payable and accrued liabilities and other long-term liabilities.

For fiscal 2022, $ 21 million of revenues related to the Cobham Special Mission acquisition were recognized within the Defense Solutions reportable segmen t.

Gibbs & Cox Acquisition

1 unchanged sentence

Gibbs & Cox is an independent engineering and design firm specializing in naval architecture, marine engineering, management support and engineering consulting.

The preliminary goodwill recognized of $ 276 million represents intellectual capital and the acquired assembled workforce, neither of which qualify for recognition as a separate intangible asset.

The final goodwill recognized of $ 276 million represents intellectual capital and the acquired assembled workforce, neither of which qualify for recognition as a separate intangible asset.

All of the goodwill recognized is tax deductible.

3 unchanged sentences

Programs 12 $ 89

As of December 31, 2021, we had not finalized the determination of fair values allocated to assets and liabilities, including, but not limited to accounts receivables and accounts payable and accrued liabilities.

For fiscal 2022 and fiscal 2021, $ 114 million and $ 98 million, respectively, of revenues related to the Gibbs & Cox acquisition were recognized within the Defense Solutions reportable segment .

1901 Group Acquisition

8 unchanged sentences

Programs 10 37

For fiscal 2021, $ 145 million of revenues related to the Gibbs & Cox and 1901 Group acquisitions were recognized within the Defense Solutions reportable segmen t.

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

In connection with the transaction, the Company recognized an $ 8 million program intangible asset and preliminary goodwill of $ 24 million.

For fiscal 2022 and fiscal 2021, $ 40 million and $ 47 million, respectively, of revenues related to the 1901 Group acquisition were recognized within the Defense Solutions reportable segmen t.

Strategic Business Acquisition

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

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

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LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SD&A Businesses Acquisition

4 unchanged sentences

The addition of the SD&A Businesses will expand the scope and scale of our global security detection and automation offerings.

Leidos Holdings, Inc.

Annual Report - 75

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The final fair values of the assets acquired and liabilities assumed at the Transaction Date were as follows (in millions):

Receivables 128

Inventory 106

Other current assets 26

Operating lease right-of-use assets 35

Property, plant and equipment 32

Current assets $ 287

Intangible assets 355

Accounts payable and accrued liabilities ( 132 )

Accrued payroll and employee benefits ( 8 )

Operating lease liabilities ( 32 )

Deferred tax liabilities ( 52 )

Other long-term liabilities ( 13 )

Other assets 67

Current liabilities ( 140 )

Long-term liabilities ( 97 )

Total identifiable net assets acquired 472

12 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.

For fiscal 2021 and fiscal 2020, $ 291 million and $ 243 million, respectively, of revenues related to the SD&A Businesses were recognized within the Civil reportable segment.

For fiscal 2022, fiscal 2021 and fiscal 2020, $ 330 million, $ 291 million and $ 243 million, respectively, of revenues related to the SD&A Businesses were recognized within the Civil reportable segment.

Dynetics Acquisition

7 unchanged sentences

The final fair values of the assets acquired and liabilities assumed at the Acquisition Date were as follows (in millions):

Receivables 158

Other current assets 18

Operating lease right-of-use assets 25

Property, plant and equipment 172

Current assets $ 241

Intangible assets 528

Other assets 205

Accounts payable and accrued liabilities ( 50 )

Accrued payroll and employee benefits ( 29 )

Operating lease liabilities ( 20 )

Other long-term liabilities ( 4 )

Current liabilities ( 79 )

Long-term liabilities ( 24 )

Total identifiable net assets acquired 871

9 unchanged sentences

Total 12 $ 528

For fiscal 2021 and fiscal 2020, $ 1,065 million and $ 937 million, respectively, of revenues related to Dynetics were recognized within the Defense Solutions reportable segment.

IMX Acquisition

On August 15, 2019, we completed the acquisition of IMX for purchase consideration of $ 94 million.

The acquisition extends our independent medical evaluation coverage area for commercial and federal customers.

We recorded $ 50 million of goodwill, which is deductible for tax purposes, and $ 42 million of intangible assets.

The intangible assets primarily consist of $ 41 million for customer relationships.

The amortization period for the customer relationships is 10 years.

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LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For fiscal 2022, fiscal 2021 and fiscal 2020, $ 950 million, $ 1,065 million and $ 937 million, respectively, of revenues related to Dynetics were recognized within the Defense Solutions reportable segment.

Acquisition and Integration Costs

The following expenses were incurred related to the acquisitions of Dynetics, the SD&A Businesses, 1901 Group and Gibbs & Cox:

The following expenses were incurred related to the acquisitions of Dynetics, the SD&A Businesses, 1901 Group, Gibbs & Cox, Cobham Special Mission and our strategic business acquisition:

2022 December 31,

2021 January 1,

5 unchanged sentences

Aviation & Missile Solutions LLC ("AMS")

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

The sales price will be approximately $ 18 million, subject to certain adjustments and is expected to be completed during fiscal year 2022.

Health Staff Augmentation Business

On September 12, 2019, our Health segment disposed of its health staff augmentation business that was primarily focused on implementation and optimization services to hospital centers.

During the quarter ended January 3, 2020, working capital adjustments were finalized, resulting in a final sales price of $ 13 million.

This consideration included $ 12 million of cash proceeds and expenses the buyer paid on Leidos' behalf.

Net assets of $ 12 million were divested.

This disposition did not meet the criteria to be classified as a discontinued operation in the financial statements.

Commercial Cybersecurity Business

On February 20, 2019, our Civil segment disposed of its commercial cybersecurity business in order to focus on providing solutions, including cybersecurity, to our core markets of governments and highly regulated industries.

The commercial cybersecurity business was divested for a final sales price of $ 166 million.

A pre-tax gain on sale of $ 88 million was recorded, net of $ 68 million of assets divested and $ 10 million in transaction related costs.

The net assets divested included $ 14 million of receivables, $ 57 million of goodwill and $ 13 million of accounts payable and accrued liabilities.

The gain was recorded in "Other (expense) income, net" on the consolidated statements of income.

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

The divestiture was completed on April 29, 2022.

The net sales price was $ 15 million and net assets of $ 19 million were divested.

The loss was recorded in "Other expense, net" on the consolidated statements of income.

This disposition did not meet the criteria to be classified as a discontinued operation in the financial statements.

5 unchanged sentences

The components of receivables, net consisted of the following:

2021 January 1,

2022 December 31,

(in millions)

1 unchanged sentence

Unbilled receivables 1,010 1,022

Allowance for doubtful accounts ( 27 ) ( 39 )

Allowance for credit losses ( 28 ) ( 27 )

$ 2,350 $ 2,189

2 unchanged sentences

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

During fiscal 2021 and 2020, we sold $ 693 million and $ 1,866 million, respectively, of accounts receivable under the agreements and received proceeds of $ 693 million and $ 1,864 million, respectively.

During fiscal 2022, 2021 and 2020, we sold $ 209 million, $ 693 million and $ 1,866 million, respectively, of accounts receivable under the agreements and received proceeds of $ 209 million, $ 693 million and $ 1,864 million, respectively.

These activities are classified as operating activities in the consolidated statements of cash flows.

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

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

As of December 31, 2021 and January 1, 2021, all sold receivables had been remitted to the financial institution.

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

As of December 30, 2022, and December 31, 2021, all sold receivables had been remitted to the financial institution.

Note 7—Inventory

The components of inventory, net consisted of the following:

2021 January 1,

2022 December 31,

(in millions)

2 unchanged sentences

Finished goods 73 93

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Annual Report - 79

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8—Goodwill and Intangible Assets

4 unchanged sentences

$ 3,300 $ 2,047 $ 966 $ 6,313

Goodwill re-allocation 429 ( 429 ) — —

Acquisitions of businesses 425 5 — 430

Divestiture of a business ( 1 ) — — ( 1 )

Goodwill re-allocation ( 17 ) 17 — —

Foreign currency translation adjustments ( 26 ) 28 — 2

Goodwill at January 1, 2021 (1)

Goodwill at December 31, 2021 (1)

3,681 2,097 966 6,744

1 unchanged sentence

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

Goodwill re-allocation ( 17 ) 17 — —

Foreign currency translation adjustments ( 37 ) ( 31 ) — ( 68 )

2 unchanged sentences

(1) Carrying amount includes accumulated impairment losses of $ 369 million and $ 117 million within the Health and Civil segments, respectively.

Effective the beginning of fiscal 2020, certain contracts were reassigned from the Civil reportable segment to the Defense Solutions reportable segment (see "Note 20—Business Segments").

This change resulted in the reallocation of $ 429 million of goodwill between the reporting units within the two reportable segments.

We evaluated goodwill for impairment for certain reporting units using either a quantitative step one analysis or qualitative analysis, both before and after the changes were made, and determined that goodwill was no t impaired.

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LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In the fourth quarter of fiscal 2022, we performed a qualitative analysis for certain reporting units which determined that it was more likely than not that the fair values of these reporting units were in excess of the individual reporting units' carrying values.

For reporting units whose composition was affected by a reorganization, or those for which an indication of impairment exists, a quantitative assessment was performed.

The quantitative analysis for the Security Products reporting unit within the Civil reportable segment, which holds goodwill in the amount of $ 926 million as of December 31, 2021, showed that the fair value of the reporting unit exceeded the carrying value by approximately 6 %.

We performed a quantitative analysis for certain reporting units and concluded that these reporting units were not impaired as their fair values exceeded their carrying values.

The quantitative analysis for the Security Enterprise Solutions reporting unit, which holds goodwill of $ 899 million as of December 30, 2022, showed that fair value exceeded carrying value by 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.

In the fourth quarter of fiscal 2020 and 2019, we performed a qualitative analysis for all reporting units and determined that it was more likely than not that the fair values of the reporting units were in excess of the individual reporting units carrying values, and as a result, a quantitative step one analysis was not necessary.

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.

In the fourth quarter of fiscal 2021, we performed a qualitative analysis for certain reporting units which determined that it was more likely than not that the fair values of these reporting units were in excess of the individual reporting units' carrying values.

For reporting units whose composition was affected by a reorganization, or those for which an indication of impairment exists, a quantitative assessment was performed.

The quantitative analysis for the Security Enterprise Solutions reporting unit within the Civil reportable segment, which holds goodwill in the amount of $ 926 million as of December 31, 2021, showed that the fair value of the reporting unit exceeded the carrying value.

In the fourth quarter of fiscal 2020, we performed a qualitative analysis for all reporting units and determined that it was more likely than not that the fair values of the reporting units were in excess of the individual reporting units carrying values, and as a result, a quantitative step one analysis was not necessary.

As a result, no goodwill impairments were identified as part of the annual goodwill impairment evaluation for the periods mentioned above.

5 unchanged sentences

Intangible assets, net consisted of the following:

December 31, 2021 January 1, 2021

December 30, 2022 December 31, 2021

value Accumulated

12 unchanged sentences

In-process research and development (1)

92 — 92 92 — 92

Trade names 4 — 4 4 — 4

1 unchanged sentence

Total intangible assets $ 2,130 $ ( 1,178 ) $ 952 $ 2,184 $ ( 1,007 ) $ 1,177

(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 related to intangible assets was $ 230 million, $ 228 million and $ 198 million for fiscal 2022, 2021 and 2020, respectively.

4 unchanged sentences

Actual amortization expense in future periods could differ from these estimates as a result of future acquisitions, divestitures, impairments, the outcome and timing of completion of in-process research and development projects and other factors.

In the fourth quarter of fiscal 2021, in connection with the annual goodwill assessment, we evaluated indefinite-lived intangibles for impairment and concluded that no impairment was necessary.

In the fourth quarter of fiscal 2022, we evaluated indefinite-lived intangibles for impairment and concluded that no impairment was necessary.

Leidos Holdings, Inc.

4 unchanged sentences

Property, plant and equipment, net consisted of the following:

2021 January 1,

2022 December 31,

(in millions)

1 unchanged sentence

Leasehold improvements 404 367

Vehicles and transportation equipment 210 99

Buildings and improvements 138 140

3 unchanged sentences

Depreciation expense was $ 103 million, $ 97 million and $ 84 million for fiscal 2022, 2021 and 2020, respectively.

Sale and Leaseback Agreements

Gaithersburg, MD Property

On December 31, 2018, we closed the sale and leaseback agreement relating to our land and building in Gaithersburg, MD.

We received proceeds of $ 31 million, net of selling costs, for the property, which had a carrying value of $ 31 million.

The proceeds received in fiscal 2019 were recorded as investing activities on the consolidated statements of cash flows.

San Diego, CA Properties

On December 28, 2018, we closed the sale and leaseback agreement relating to two buildings and the adjacent land in San Diego, CA for consideration of $ 79 million, net of selling costs.

The carrying value of the land and buildings was $ 14 million.

We received cash proceeds of $ 14 million upon closing, which were recorded as financing activities on the consolidated statements of cash flows, and recognized a short-term receivable for the remaining $ 65 million of consideration.

Prior to the adoption of ASC 842, the consideration of $ 79 million was accounted for as a financing transaction and a note payable was recorded.

Under ASC 842, the transaction qualified as a sale-leaseback and consequently the debt of $ 79 million and the carrying value of the property of $ 14 million, net of the related tax impact of $ 17 million, were reclassified into retained earnings as a cumulative effect adjustment.

The proceeds of $ 65 million received in fiscal 2019 were recorded as investing activities on the consolidated statements of cash flows.

Leidos Holdings, Inc.

5 unchanged sentences

Balance sheet line item December 30,

2021 January 1,

2022 December 31,

(in millions)

7 unchanged sentences

Operating leases Operating lease liabilities 570 589

In March 2020, we took occupancy of our new corporate headquarters in Reston, VA.

As a result, we recorded $ 104 million of ROU assets and $ 132 million of lease liabilities.

During fiscal 2022, we reduced our leased space by exiting and consolidating underutilized buildings as part of an ongoing facility rationalization effort.

We used discounted cash flow models to estimate the fair values of the affected assets and as a result, we recorded impairments of ROU and other assets in the amount of $ 37 million.

The impairment charges were allocated across our reportable segments and to Corporate.

During fiscal 2020, we made a decision to vacate one of our facilities.

1 unchanged sentence

Total lease cost for the periods presented consisted of the following:

2021 January 1,

2022 December 31,

2021 January 1,

15 unchanged sentences

Lease terms and discount rates related to leases were as follows:

2021 January 1,

2022 December 31,

2021 January 1,

6 unchanged sentences

Other information related to leases was as follows:

2021 January 1,

2022 December 31,

2021 January 1,

4 unchanged sentences

Financing cash flows related to finance leases 9 11 9

Lease liabilities arising from obtaining ROU assets:

ROU assets obtained in exchange for lease liabilities:

Finance lease liabilities $ 1 $ 51 $ 12

9 unchanged sentences

Lease liability as of December 30, 2022 $ 44 $ 700

As of December 31, 2021 and January 1, 2021, we had a total net investment in sales-type leases, which relates to lease payment receivables, of $ 93 million and $ 64 million, respectively.

The current and non-current portions of net investment in sales-type leases are included within "Other current assets" and "Other assets", respectively, on the consolidated balance sheets.

As of December 30, 2022 and December 31, 2021, we had a total net investment in sales-type leases, which relates to lease payment receivables, of $ 103 million and $ 93 million, respectively.

The current and non-current portions of net investment in sales-type leases are included within "Other current assets" and "Other long-term assets", respectively, on the consolidated balance sheets.

Leidos Holdings, Inc.

4 unchanged sentences

Income statement line item December 30,

2021 January 1,

2022 December 31,

2021 January 1,

3 unchanged sentences

Cost of underlying asset Cost of revenues ( 52 ) ( 60 ) ( 47 )

Operating income (loss) 20 14 ( 2 )

Operating income 13 20 14

Interest income on lease receivables Revenues 9 8 8

5 unchanged sentences

2023 $ 42 $ 26

2028 and thereafter 4 —

Total undiscounted cash flows $ 114 $ 82

3 unchanged sentences

Financial instruments measured on a recurring basis at fair value consisted of the following:

December 31, 2021 January 1, 2021

December 30, 2022 December 31, 2021

Carrying value Fair value Carrying value Fair value

(in millions)

Financial assets:

Derivatives $ 20 $ 20 $ — $ —

Financial liabilities:

4 unchanged sentences

See "Note 19—Retirement Plans" for further details on these investments.

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.

The carrying value of our notes receivable of $ 15 million as of December 31, 2021 and January 1, 2021 approximates fair value as the stated interest rates within the agreements are consistent with the current market rates used in notes with similar terms in the market (Level 2 inputs).

Leidos Holdings, Inc.

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2021 and January 1, 2021, the fair value of debt was $ 5.4 billion and $ 5.2 billion, respectively, and the carrying amount was $ 5.1 billion and $ 4.7 billion, respectively (see "Note 13—Debt").

The carrying value of our notes receivable of $ 12 million and $ 15 million as of December 30, 2022 and December 31, 2021, respectively, approximates fair value as the stated interest rates within the agreements are consistent with the current market rates used in notes with similar terms in the market (Level 2 inputs).

As of December 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 $ 4.9 billion and $ 5.1 billion, respectively (see "Note 13—Debt").

The fair value of 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, January 14, 2021, May 4, 2020 and January 31, 2020, non-financial instruments measured at fair value on a non-recurring basis were recorded in connection with the acquisitions of Gibbs & Cox, 1901 Group, SD&A Businesses and Dynetics, respectively.

On October 30, 2022, 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 Cobham Special Mission, Gibbs & Cox and 1901 Group, respectively.

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

See "Note 5—Acquisitions and Divestitures" for further details on these acquisitions.

We also had real estate property measured at fair value, using Level 2 inputs, on July 3, 2020, which resulted in an impairment charge of $ 11 million (see "Note 10—Leases").

As of December 31, 2021 and January 1, 2021, we did not have any assets or liabilities measured at fair value on a non-recurring basis.

As of December 30, 2022 and December 31, 2021, we did not have any assets or liabilities measured at fair value on a non-recurring basis.

Note 12—Derivative Instruments

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

Liability derivatives

Balance sheet line item December 30,

2021 January 1,

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

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

During fiscal 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.

We realized a loss of $ 18 million resulting from the settlement of the foreign currency forward contract.

The loss was recorded within Corporate and presented in "Other expense, net" on the consolidated statements of income and the settlement associated with the foreign currency forward contract was classified as investing activities in the consolidated statements of cash flows.

Cash Flow Hedges

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The objective of these instruments is to reduce variability in the forecasted interest payments of the Variable Rate Loan, which are based on the LIBOR rate.

Under the terms of the interest rate swap agreements, we will receive monthly variable interest payments based on the one-month LIBOR rate and will pay interest at a fixed rate.

Under the terms of the interest rate swap agreements, we receive monthly variable interest payments based on the one-month LIBOR rate and pay interest at a fixed rate.

The interest rate swap transactions were accounted for as cash flow hedges.

1 unchanged sentence

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.

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LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

2021 January 1,

2022 December 31,

2021 January 1,

3 unchanged sentences

Amount recognized in other comprehensive income (loss) 59 18 ( 61 )

Amount reclassified from accumulated other comprehensive loss to interest expense, net

We expect to reclassify losses of $ 26 million from accumulated other comprehensive loss into earnings during the next 12 months.

Amount reclassified from accumulated other comprehensive income (loss) to interest expense, net 11 19 14

We expect to reclassify net gains of $ 14 million from accumulated other comprehensive loss into earnings during the next 12 months.

Leidos Holdings, Inc.

4 unchanged sentences

interest rate Effective

interest rate December 31, 2021 (1)

January 1, 2021 (1)

interest rate December 30, 2022 December 31, 2021

(in millions)

Short-term debt:

Short-term debt and current portion of long-term debt:

Senior unsecured term loans:

1 unchanged sentence

1.54 % 1.64 % $ — $ 380

$ 380 million term loan, due May 2023

5.42 % 5.51 % 320 —

Current portion of long-term debt 672 103

Total short-term debt and current portion of long-term debt $ 992 $ 483

Long-term debt:

19 unchanged sentences

Various 44 54

unamortized debt discounts and deferred debt issuance costs ( 34 ) ( 43 )

Total long-term debt 4,600 4,696

2 unchanged sentences

$ 3,928 $ 4,593

(1) The carrying amounts of the senior term loans and notes as of December 31, 2021 and January 1, 2021, include the remaining principal outstanding of $ 5,065 million and $ 4,782 million, respectively, less total unamortized debt discounts and deferred debt issuance costs of $ 43 million and $ 51 million, respectively.

(2) 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.

Term Loans and Revolving Credit Facility

On May 7, 2021, we entered into a Credit Agreement (the "2021 Credit Agreement") with certain financial institutions, which provided for a senior unsecured term loan facility in an aggregate principal amount of $ 380 million with maturity 364 days after the 2021 Credit Agreement date.

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

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

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

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

On May 7, 2021, we entered into a credit agreement with certain financial institutions, which provided for a senior unsecured term loan facility in an aggregate principal amount of $ 380 million with maturity 364 days after the credit agreement date.

The proceeds were used to fund the acquisition of Gibbs & Cox.

Borrowings under the 2021 Credit Agreement bear interest at a rate determined, at our option, based on either an alternate base rate plus 0.13 % or a LIBOR rate plus 1.13 %.

The financial covenants in the 2021 Credit Agreement require that we maintain, as of the last day of each fiscal quarter, a ratio of adjusted consolidated total debt to consolidated EBITDA of not more than 3.75 to 1.00, subject to increases to 4.50 to 1.00 following a material acquisition, and a ratio of EBITDA to consolidated interest expense of not less than 3.50 to 1.00.

On January 17, 2020 (the "Closing Date"), we entered into a Credit Agreement (the "Credit Agreement") with certain financial institutions, which provided for a senior unsecured term loan facility in an aggregate principal amount of $ 1.9 billion (the "Term Loan Facility") and a $ 750 million senior unsecured revolving facility (the "Revolving Facility" and, together with the Term Loan Facility, the "Credit Facilities").

The Credit Facilities will mature five years from the Closing Date, with the Revolving Facility subject to two additional one year extensions.

The term loan was repaid on May 6, 2022.

Leidos Holdings, Inc.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The proceeds of the Term Loan Facility and cash on hand on the Closing Date were used to repay in full all indebtedness, and terminate all commitments, under, and discharge and release all guarantees and liens existing in connection with the credit agreements entered into in August 2016 (the "Terminated Credit Agreements").

As a result of the termination of the liens under the Terminated Credit Agreements, the liens securing the $ 450 million notes due 2020 and $ 300 million notes due 2040 were also released and such notes became senior unsecured obligations.

We have a Credit Agreement (the "Credit Agreement") with certain financial institutions, which provided for a senior unsecured term loan facility in an aggregate principal amount of $ 1.9 billion (the "Term Loan Facility") and a $ 750 million senior unsecured revolving facility (the "Revolving Facility" and, together with the Term Loan Facility, the "Credit Facilities").

The Credit Facilities are scheduled to mature in January 2025, with the Revolving Facility subject to two additional one year extensions.

As of December 30, 2022, and December 31, 2021, there were no borrowings outstanding under the Revolving Facility.

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

2 unchanged sentences

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

On October 8, 2020, we issued and sold $ 1.0 billion aggregate principal amount of fixed-rate senior notes maturing in February 2031 (the "2031 Notes").

The 2031 Notes are senior unsecured obligations issued by Leidos, Inc.

and guaranteed by Leidos Holdings, Inc.

The annual interest rate for the 2031 Notes is 2.30 %.

The proceeds from the 2031 Notes were used for general corporate purposes, including to repay all of the outstanding obligations in respect of principal, interest and fees under the 364 -day Term Loan and to repay a portion of the outstanding loans under the five-year Term Loan Facility.

Additionally, on May 12, 2020, we issued and sold $ 500 million senior notes maturing in May 2023 (the "2023 Notes"), $ 500 million senior notes maturing in May 2025 (the "2025 Notes") and $ 750 million senior notes maturing in May 2030 (the "2030 Notes", and together with the 2023 Notes and 2025 Notes, the "Notes").

The annual interest rate for the 2023 Notes, 2025 Notes and 2030 Notes is 2.95 %, 3.63 % and 4.38 %, respectively.

The proceeds from the Notes were used to repay all of the outstanding obligations in respect of principal, interest and fees under the January 31, 2020 Bridge Credit Agreement and to repay a portion of the outstanding loans under the February 12, 2020 Facility.

Commercial Paper

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

As of December 31, 2021, we did not have any Commercial Paper Notes outstanding.

As of December 30, 2022, and December 31, 2021, we did not have any Commercial Paper Notes outstanding.

Principal Payments and Debt Issuance Costs

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.

During fiscal 2021 and 2020, there were no borrowings under the credit facilities.

Principal payments are made quarterly on our variable rate senior unsecured term loan, with the majority of the principal due at maturity.

Interest on the variable rate senior unsecured term loan is payable on a periodic basis, which must be at least quarterly.

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

Principal payments are made quarterly on our Term Loan Facility, with the majority of the principal due at maturity.

Interest on the Term Loan Facility is payable on a periodic basis, which must be at least quarterly.

Principal on the Term Loan Agreement is due at maturity and interest is paid monthly.

Interest on the senior fixed rate unsecured notes is payable on a semi-annual basis with principal payments due at maturity.

Amortization of debt discount and deferred financing costs was $ 11 million for both fiscal 2022 and 2021, and $ 16 million for fiscal 2020.

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 December 30, 2022.

Leidos Holdings, Inc.

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In connection with the financing activity from prior year, $ 68 million of debt discount and debt issuance costs related to the debt and revolving credit facility were recognized, which were recorded as an offset against the carrying value of debt and capitalized within "Other assets" in the consolidated balance sheets, respectively.

For fiscal 2020, $ 36 million of debt discount and debt issuance costs were written off related to the Terminated Credit Agreements and loan facility repayments.

Amortization of debt discount and debt issuance costs was $ 11 million, $ 16 million and $ 10 million for fiscal 2021, 2020 and 2019, respectively.

Our borrowings under the Credit Facilities, 2021 Credit Agreement, the Notes and the Commercial Paper Notes are fully and unconditionally guaranteed by intercompany guarantees.

In addition, the agreements governing debt outstanding under the Credit Facilities, 2021 Credit Agreement, and the Notes 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 December 31, 2021.

Future minimum payments of debt are as follows:

5 unchanged sentences

Total short-term and long-term debt $ 4,920

Leidos Holdings, Inc.

Annual Report - 89

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14—Accumulated Other Comprehensive Loss

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

Foreign currency translation adjustments Unrecognized loss on derivative instruments Pension adjustments Total accumulated other comprehensive loss

Note 14—Accumulated Other Comprehensive Income (Loss)

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

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

(in millions)

Balance at December 28, 2018 $ ( 41 ) $ 14 $ ( 3 ) $ ( 30 )

Balance at January 3, 2020 $ ( 33 ) $ ( 33 ) $ ( 4 ) $ ( 70 )

Other comprehensive income (loss) 70 ( 61 ) ( 3 ) 6

Taxes ( 7 ) 10 1 4

Reclassification from accumulated other comprehensive loss — ( 7 ) — ( 7 )

Reclassification from AOCI — 14 — 14

Balance at January 1, 2021 30 ( 70 ) ( 6 ) ( 46 )

1 unchanged sentence

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

Reclassification from accumulated other comprehensive loss — 14 — 14

Balance at January 1, 2021 30 ( 70 ) ( 6 ) ( 46 )

Reclassification from AOCI — 19 — 19

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

Other comprehensive income (loss) ( 108 ) 59 ( 27 ) ( 76 )

Taxes 13 ( 16 ) 7 4

Reclassification from accumulated other comprehensive loss — 19 — 19

Reclassification from AOCI — 11 — 11

Balance at December 30, 2022 $ ( 73 ) $ 13 $ ( 13 ) $ ( 73 )

6 unchanged sentences

Note 15—Composition of Certain Financial Statement Captions

Balance Sheet

2021 January 1,

Balance Sheets

2022 December 31,

(in millions)

2 unchanged sentences

Transition costs and project assets (1)

Pre-contract costs 5 7

Other assets:

Other long-term assets:

Transition costs and project assets (1)

8 unchanged sentences

Salaries, bonuses and amounts withheld from employees’ compensation 345 254

(1) During the year ended December 31, 2021 and January 1, 2021, $ 428 million and $ 575 million, respectively, of amortization was recognized related to transition costs and project assets.

(1) During the year ended December 30, 2022, and December 31, 2021, $ 489 million and $ 428 million, respectively, of amortization was recognized related to transition costs and project assets.

(2) Balance represents items that are not individually significant to disclose separately.

(3) Balances are net of $ 19 million and $ 16 million of dividends received during fiscal 2022 and fiscal 2021, respectively, that were recorded in cash flows provided by operating activities of continuing operations on the consolidated statements of cash flows.

Income Statement

2021 January 1,

(4) Certain accounts in accrued liabilities were reclassified in the prior year to other to conform to current year presentation.

Statements of Income

2022 December 31,

2021 January 1,

(in millions)

Interest expense, net:

Interest expense

$ ( 185 ) $ ( 182 ) $ ( 147 )

Interest income

$ ( 184 ) $ ( 179 ) $ ( 133 )

Other (expense) income, net:

Other expense, net:

Loss on debt extinguishment $ — $ — $ ( 36 )

(Loss) gain on sale of businesses ( 3 ) — 88

Loss on sale of businesses — ( 3 ) —

Loss on foreign currencies ( 3 ) ( 1 ) ( 4 )

1 unchanged sentence

$ ( 3 ) $ ( 1 ) $ ( 38 )

Leidos Holdings, Inc.

Annual Report - 91

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16—Earnings Per Share ("EPS")

2 unchanged sentences

The dilutive effect of outstanding equity-based compensation awards is reflected in diluted EPS by application of the treasury stock method, only in periods in which such effect would have been dilutive for the period.

Leidos Holdings, Inc.

Annual Report - 96

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We issue unvested stock awards that have forfeitable rights to dividends or dividend equivalents.

1 unchanged sentence

The weighted average number of shares used to compute basic and diluted EPS attributable to Leidos stockholders were:

2021 January 1,

2022 December 31,

2021 January 1,

4 unchanged sentences

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

For fiscal 2021, there was 1 million of outstanding stock options and vesting stock awards that were anti-dilutive.

For fiscal 2020 and 2019, there were no significant anti-diluted equity awards.

The total outstanding stock options and vesting stock awards that were anti-dilutive were 1 million for both fiscal 2022 and 2021.

There were no significant anti-diluted equity awards for fiscal 2020.

Share Repurchases

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.

All shares repurchased were immediately retired.

In fiscal 2019, we entered into accelerated share repurchase agreements with two financial institutions to repurchase shares of our outstanding common stock.

We paid $ 400 million to the financial institutions and received 5.6 million shares.

The purchase was 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 Accelerated Share Repurchase agreement 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.

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

All shares delivered were immediately retired.

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All awards under the MSCP are fully vested and the plan does not provide for a maximum number of shares available for future issuance.

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LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Our ESPP allows eligible employees to purchase shares of Leidos' stock at a discount of up to 15 % of the fair market value on the date of purchase.

2 unchanged sentences

A total of 2.9 million shares remain available for future issuance under the ESPP.

Leidos Holdings, Inc.

Annual Report - 97

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock-based compensation and related tax benefits recognized under all plans were as follows:

2021 January 1,

2022 December 31,

2021 January 1,

13 unchanged sentences

The weighted average grant-date fair value and assumptions used to determine fair value of stock options granted for the periods presented were as follows:

2021 January 1,

2022 December 31,

2021 January 1,

14 unchanged sentences

(in millions) (in years) (in millions)

Outstanding at December 28, 2018 2.4 $ 39.41 3.8 $ 36

Outstanding at January 3, 2020 2.4 $ 46.04 3.8 $ 128

Options granted 0.3 106.73

5 unchanged sentences

Options exercised ( 0.4 ) 38.79 27

Outstanding at January 1, 2021 2.2 $ 56.01 3.5 $ 108

Outstanding at December 31, 2021 2.1 $ 65.18 3.5 $ 54

Options granted 0.3 105.01

19 unchanged sentences

(in millions)

Unvested stock awards at December 28, 2018 2.0 $ 50.85

Unvested stock awards at January 3, 2020 1.4 $ 60.91

Awards granted 0.5 106.38

5 unchanged sentences

Awards vested ( 0.5 ) 71.60

Unvested stock awards at January 1, 2021 1.3 $ 79.05

Unvested stock awards at December 31, 2021 1.4 $ 88.89

Awards granted 0.5 104.78

25 unchanged sentences

(in millions)

Unvested at December 28, 2018 0.5 $ 57.36

Unvested at January 3, 2020 0.6 $ 63.66

Awards granted 0.2 103.34

5 unchanged sentences

Awards vested ( 0.2 ) 65.30

Unvested at January 1, 2021 0.5 $ 80.20

Unvested at December 31, 2021 0.5 $ 88.72

Awards granted 0.2 114.98

5 unchanged sentences

The Monte Carlo simulation assumptions used for the periods presented were as follows:

2021 January 1,

2022 December 31,

2021 January 1,

10 unchanged sentences

The provision for income taxes for the periods presented included the following:

2021 January 1,

2022 December 31,

2021 January 1,

8 unchanged sentences

A reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income tax rate to income before income taxes for the periods presented was as follows:

2021 January 1,

2022 December 31,

2021 January 1,

8 unchanged sentences

Change in accruals for uncertain tax positions ( 1 ) 1 1

Stock basis in subsidiary held for sale — — 5

Other 13 ( 3 ) 4

1 unchanged sentence

Effective income tax rate 21.8 % 21.5 % 19.5 %

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 rates for both fiscal 2022 and fiscal 2021 were 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.

The effective tax rate for fiscal 2019 was favorably impacted primarily by excess tax benefits related to employee stock-based payment transactions and federal research tax credits, partially offset by an increase in valuation allowances arising from foreign withholding tax and an increase in taxes related to the sale of the commercial cybersecurity business.

Leidos Holdings, Inc.

4 unchanged sentences

Deferred tax assets (liabilities) were comprised of the following:

2021 January 1,

2022 December 31,

(in millions)

Capitalized research and development $ 228 $ —

Operating lease liabilities 190 187

6 unchanged sentences

Accumulated other comprehensive loss 2 —

Investments — 1

Total deferred tax assets 651 439

5 unchanged sentences

Accumulated other comprehensive income — ( 1 )

Employee benefit contributions — ( 7 )

Deferred revenue ( 4 ) —

5 unchanged sentences

however, we expect to utilize $ 45 million and $ 2 million of these state net operating losses and state tax credits, respectively.

We had foreign tax credits of $ 18 million that will begin to expire in fiscal 2030.

We expect to utilize $ 7 million of these foreign tax credits.

We also had foreign net operating losses of $ 35 million, which do not expire.

We expect to utilize $ 2 million of these foreign net operating losses.

Our valuation allowance for deferred tax assets was $ 21 million and $ 16 million as of December 31, 2021 and January 1, 2021, respectively.

The valuation allowance increased by $ 5 million primarily due to an increase related to foreign tax credits partially offset by a decrease related to state attributes expected to be utilized.

Our valuation allowance for deferred tax assets was $ 24 million and $ 21 million as of December 30, 2022 and December 31, 2021, respectively.

Leidos Holdings, Inc.

3 unchanged sentences

Income tax balance sheet items are included in the accompanying consolidated balance sheets as follows:

2021 January 1,

2022 December 31,

(in millions)

1 unchanged sentence

Prepaid income taxes and tax refunds receivable $ 11 $ 6

Other assets:

Other long-term assets:

Deferred tax assets $ 28 $ 13

6 unchanged sentences

The changes in the unrecognized tax benefits were as follows:

2021 January 1,

2022 December 31,

2021 January 1,

1 unchanged sentence

Unrecognized tax benefits at beginning of year $ 2 $ 6 $ 5

Additions for tax positions related to current year 91 — —

Additions for tax positions related to prior years — 2 1

4 unchanged sentences

Unrecognized tax benefits that, if recognized, would affect the effective income tax rate

At December 31, 2021, the balance of unrecognized tax benefits included liabilities for uncertain tax positions of $ 2 million, which were classified as other long-term liabilities on the consolidated balance sheets.

At January 1, 2021, the balance of unrecognized tax benefits included liabilities for uncertain tax positions of $ 6 million, $ 4 million of which were classified as other long-term liabilities on the consolidated balance sheets.

At December 30, 2022, and December 31, 2021, the balance of unrecognized tax benefits included liabilities for uncertain tax positions of $ 92 million and $ 2 million, respectively, which were classified as other long-term liabilities on the consolidated balance sheets.

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 currently 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.

Our unrecognized tax benefits also increased by $ 91 million with a corresponding increase to net deferred tax assets.

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.

Leidos Holdings, Inc.

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LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We file income tax returns in the United States and various state and foreign jurisdictions.

We participate in the Internal Revenue Service (“IRS”) Compliance Assurance Process ("CAP"), a real-time audit of our consolidated federal corporate income tax return.

For the year ended December 30, 2022, we are participating in the Internal Revenue Service (“IRS”) Compliance Assurance Process ("CAP"), a real-time audit of our consolidated federal corporate income tax return.

The IRS has examined our consolidated federal income tax returns through the year ended January 3, 2020.

1 unchanged sentence

We believe that participation in CAP should reduce tax-related uncertainties, if any.

Additionally, with a few exceptions, as of December 31, 2021, we are no longer subject to state, local, or foreign examinations by the tax authorities for fiscal years ending on or before December 29, 2017.

During the next 12 months, it is reasonably possible that resolution of reviews by taxing authorities, both domestic and international, could be reached with respect to $ 2 million of our unrecognized tax benefits, depending on the timing of ongoing examinations, any litigation and expiration of statute of limitations, either because the tax positions are sustained or because we agree to their disallowance and pay the related income tax.

Additionally, with a few exceptions, as of December 30, 2022, we are no longer subject to state, local, or foreign examinations by the tax authorities for fiscal years ended on or before December 28, 2018.

During the next 12 months, we expect our balance of unrecognized tax benefits to decrease by $ 20 million related to capitalized research and development costs.

While we believe we have adequate accruals for uncertain tax positions, the tax authorities may determine that we owe taxes in excess of recorded accruals or the recorded accruals may be in excess of the final settlement amounts agreed to by tax authorities.

Leidos Holdings, Inc.

Annual Report - 99

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19—Retirement Plans

17 unchanged sentences

We sponsor two frozen defined benefit pension plans ("the Plans"), one in the United Kingdom ("UK") for former employees on an expired customer contract and another assumed as a result of the Gibbs & Cox acquisition.

We have continuing defined benefit pension obligations with respect to certain plan participants relating to the UK defined benefit pension plan.

In fiscal 2012, we sold certain components of our business, including the component that contained the UK pension and employed the pension plan participants.

Pursuant to the definitive sale agreement, we retained the assets and obligations of this defined benefit pension plan.

As a result of retaining the pension obligation, the remaining immaterial components of ongoing pension expense, primarily interest costs and assumed return on plan assets subsequent to the sale, are recorded in continuing operations.

The projected benefit obligation of the Plans as of December 31, 2021 and January 1, 2021, was $ 160 million and $ 138 million, respectively.

The increase in the projected benefit obligation was primarily due to the defined benefit pension plan assumed through the acquisition of Gibbs & Cox.

The fair value of the Plans assets as of December 31, 2021 and January 1, 2021, was $ 189 million and $ 157 million, respectively.

The UK defined benefit pension plan funding status was overfunded $ 37 million and $ 19 million as of December 31, 2021 and January 1, 2021, respectively, and included within "Other assets" on the consolidated balance sheets.

The Gibbs & Cox defined benefit pension plan funding status was underfunded $ 8 million as of December 31, 2021, and included within "Other long-term liabilities" on the consolidated balance sheets.

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

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

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

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

As of December 30, 2022, the unamortized loss within AOCI related to the Plan was $ 20 million and the Plan had net assets of $ 7 million.

Leidos Holdings, Inc.

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The projected benefit obligation of the Plans as of December 30, 2022 and December 31, 2021, was $ 101 million and $ 160 million, respectively.

The decrease in the projected benefit obligation was primarily due to assumption changes and an actuarial gain.

The fair value of the Plans assets as of December 30, 2022, and December 31, 2021, was $ 101 million and $ 189 million, respectively.

The decrease was primarily driven by assumption changes to reflect the fair value of the annuity contract and return on plan assets.

The UK Plan funding status was overfunded $ 7 million and $ 37 million as of December 30, 2022, and December 31, 2021, respectively.

The Gibbs & Cox defined benefit pension plan funding status was underfunded $ 7 million and $ 8 million as of December 30, 2022, and December 31, 2021, respectively.

The fair value of Plans assets has been included within "Other long-term liabilities" on the consolidated balance sheets.

We also sponsor multiemployer defined benefit pension plans and a defined contribution plan (a 401(k) plan) (the "Sponsored Plans") for employees working on two U.S.

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

Effective the beginning of fiscal 2020, certain contracts were reassigned from the Civil reportable segment to the Defense Solutions reportable segment to better align operations within the reportable segments to the customers they serve.

Fiscal 2019 segment results have been recast to reflect this change.

Defense Solutions provides leading-edge and technologically advanced services, solutions and products to a broad customer base.

Our ever-changing technologies and innovations cover a wide spectrum of markets with primary areas of concentration in digital modernization and integrated systems, Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance technologies and services, transformative software, analytics, intelligence analysis, mission support and logistics services, weapons systems and human space exploration.

Our ever-changing technologies and innovations cover a wide spectrum of markets with primary areas of concentration in digital modernization, mission systems and integration, Command, Control, Computers, Communications, Intelligence, Surveillance and Reconnaissance ("C4ISR") technologies and services, maritime solutions, transformative software, analytics, intelligence analysis, mission support and logistics services, weapons systems and space systems and solutions.

We are dedicated to delivering cost-effective solutions backed by innovation-generating research and development to meet the evolving missions of our customers.

We provide a diverse portfolio of national security solutions and systems for air, land, sea, space and cyberspace for the U.S.

Intelligence Community, the DoD, the National Aeronautics and Space Administration, military services, government agencies of U.S.

Intelligence Community, the DoD, the Space Development Agency, the National Aeronautics and Space Administration, Defense Information Systems Agency, military services, government agencies of U.S.

allies abroad and other federal and commercial customers in the national security industry.

We are heavily engaged in the top defense Research Development Test and Evaluation priorities that are driven by critical evolving threat-driven needs.

Our solutions deliver innovative technology, large-scale systems, command and control platforms, data analytics, logistics and cybersecurity solutions, as well as intelligence analysis and operations support to critical missions around the world.

Our Civil business is focused on modernizing infrastructure, systems and security for government and commercial customers both domestically and internationally.

By applying leading science, innovative technologies and business acumen, our talented employees help customers achieve their missions and take on the connected world with data-driven insights, improved efficiencies and technological advantages in the areas of transportation solutions, security detection and automation, digital transformation services and environment, energy and infrastructure.

Our Health business focuses on delivering effective and affordable solutions to federal and commercial customers that are responsible for the health and well-being of people worldwide, including service members and veterans.

Our solutions enable customers to deliver on the health mission of providing high-quality, cost-effective care, and are accomplished through the integration of information technology, engineering, life sciences, health services, clinical insights and health policy.

The capabilities we provide predominantly fall in four major areas of activity:

health information management services, managed health services, digital transformation and life sciences research and development.

Leidos Holdings, Inc.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Our Civil business is focused on modernizing infrastructure, systems and security for government and commercial customers both domestically and internationally.

By applying leading science, innovative technologies and business acumen, our talented employees help customers achieve their missions and take on the connected world with data-driven insights, improved efficiencies and technological advantages in the areas of digital modernization, energy infrastructure, integrated missions, transportation applications and security detection.

The capabilities we provide predominantly fall in four major areas of activity:

health information management services, managed health services, digital modernization and life sciences research and development.

Corporate includes the operations of various corporate activities, certain corporate expense items that are not reimbursed by our U.S.

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The following table summarizes business segment information for the periods presented:

2021 January 1,

2022 December 31,

2021 January 1,

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

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

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

As a result, "Interest expense, net," "Other expense, net," and "Income tax expense," as reported in the consolidated financial statements 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 out to the reportable segments based on a representative causal or beneficial relationship of the costs in the pool to the costs in the base.

While depreciation expense is a component of the allocated costs, the allocation process precludes depreciation expense from being specifically identified by the individual reportable segments.

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

We generated approximately 87 % of our total revenues in fiscal 2021, 2020 and 2019 from contracts with the U.S.

Leidos Holdings, Inc.

Annual Report - 107

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We generated approximately 86 % of our total revenues in fiscal 2022, and 87 % in fiscal 2021 and 2020 from contracts with the U.S.

government, either as a prime contractor or a subcontractor to other contractors engaged in work for the U.S.

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As such, additional financial information by geographic location is not presented.

Leidos Holdings, Inc.

Annual Report - 102

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 21—Commitments and Contingencies

Legal Proceedings

Class Action Lawsuit

On March 2, 2021, Leidos and certain current officers of Leidos were named as defendants in a putative class action securities lawsuit filed in the U.S.

District Court for the Southern District of New York.

The complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder relating to alleged misstatements or omissions in Leidos' public filings with the SEC and other public statements during the period from May 4, 2020 to February 23, 2021 relating, among other things, to Leidos' acquisition of the SD&A Businesses.

The plaintiff sought to recover from the Company and the individual defendants an unspecified amount of damages at this time.

On July 30, 2021, the District Court appointed a lead plaintiff and lead counsel.

On September 28, 2021, the lead plaintiff voluntarily dismissed the action without prejudice.

MSA Joint Venture

On November 10, 2015, MSA received a final decision by the Department of Energy ("DoE") contracting officer for the Mission Support Contract concluding that certain payments to MSA by the DoE for the performance of IT services by Lockheed Martin Services, Inc.

("LMSI") under a subcontract to MSA constituted alleged affiliate fees in violation of Federal Acquisition Regulations ("FAR").

Lockheed Martin Integrated Technology LLC (now known as Leidos Integrated Technology LLC) is a member entity of MSA.

Subsequent to the contracting officer's final decision, MSA, LMSI, and Lockheed Martin Corporation received notice from the U.S.

Attorney's Office for the Eastern District of Washington that the U.S.

government had initiated a False Claims Act investigation into the facts surrounding this dispute.

On February 8, 2019, the Department of Justice filed a complaint in the United States District Court for the Eastern District of Washington against MSA, Lockheed Martin Corporation, Lockheed Martin Services, Inc.

and a Lockheed Martin employee ("Defendants").

The complaint alleges violations of the False Claims Act, the Anti-Kickback Act and breach of contract with the DoE, among other things.

On January 13, 2020, the Defendants' motions to dismiss were granted in part and denied in part.

Litigation would proceed for the False Claims Act and other common law claims, although the Anti-Kickback Act claim has been dismissed with prejudice.

Attorney's office had previously advised that a parallel criminal investigation was open, although no subjects or targets of the investigation had been identified.

Attorney's office has informed MSA that it has closed the criminal investigation.

Since this issue first was raised by the DoE, MSA has asserted that the IT services performed by LMSI under a fixed-price/fixed-unit rate subcontract approved by the DoE meet the definition of a "commercial item" under the FAR and any profits earned on that subcontract are permissible.

MSA filed an appeal of the contracting officer's decision with the Civilian Board of Contract Appeals ("CBCA"), which was stayed pending resolution of the False Claims Act matter.

Subsequent to the filing of MSA's appeal, the contracting officer demanded that MSA reimburse the DoE in the amount of $ 64 million, which was his estimate of the profits earned during the period from 2010 to 2014 by LMSI.

The DoE has deferred collection of $ 32 million of that demand, pending resolution of the appeal and without prejudice to MSA's position that it is not liable for any of the DoE's $ 64 million reimbursement claim.

On December 10, 2019, MSA received a second final decision by the DoE contracting officer, estimating approximately $ 29 million in alleged unallowable profit and associated general and administrative costs during the period from 2015 to 2016 by LMSI.

MSA filed an appeal of the second contracting officer's decision, which has been consolidated with the prior proceeding before the CBCA and stayed pending resolution of the False Claims Act matter.

The DoE and MSA also executed an agreement to defer the entire amount of the disallowed costs from the second contracting officer's final decision until the CBCA proceedings are finally resolved.

Leidos has agreed to indemnify Jacobs Group, LLC and Centerra Group, LLC for any liability MSA incurs in this matter.

Under the terms of the Separation Agreement, Lockheed Martin agreed to indemnify Leidos for 100 % of any damages in excess of $ 38 million up to $ 64 million, and 50 % of any damages in excess of $ 64 million, with respect to claims asserted against MSA related to this matter.

On April 5, 2021, MSA finalized the settlement of the False Claims Act litigation in the Eastern District of Washington and the related contract claim at the CBCA.

Pursuant to the settlement agreement, DoE paid MSA approximately $ 37 million on April 19, 2021 and MSA paid the Department of Justice $ 3 million on April 22, 2021.

Accordingly, following joint motions by the parties, the CBCA dismissed the claim before the Board with prejudice on April 28, 2021 and the District Court dismissed the False Claims Act litigation with prejudice on April 30, 2021.

Leidos Holdings, Inc.

Annual Report - 103

LEIDOS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

There remain other outstanding matters in dispute between DoE and MSA as the two parties work to close out the Mission Support Contract.

As of December 31, 2021, we believe we have adequately reserved for any potential liabilities related to these disputes.

We are also involved in various claims and lawsuits arising in the normal conduct of our business, none of which, in the opinion of management, based upon current information, will likely have a material adverse effect on our financial position, results of operations or cash flows.

Other Contingencies

We are involved in various claims and lawsuits arising in the normal conduct of our business, none of which, in the opinion of management, based upon current information, will likely have a material adverse effect on our financial position, results of operations or cash flows.

Contingencies

VirnetX, Inc.

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

As of December 31, 2021, indirect cost audits by the DCAA remain open for fiscal 2016 and subsequent fiscal years.

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

As of December 31, 2021, we believe we have adequately reserved for potential adjustments from audits or reviews of contract costs.

Leidos Holdings, Inc.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Defense Contract Audit Agency

As of December 30, 2022, active indirect cost audits by the DCAA remain open for fiscal 2021 and subsequent fiscal years.

As of December 30, 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.

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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.

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 Section.

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.

We have outstanding letters of credit of $ 72 million as of December 30, 2022, principally related to performance guarantees on contracts.

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

As of December 31, 2021, the future expirations of the outstanding letters of credit and surety bonds were as follows:

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

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

Fiscal year ending

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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 8. Financial Statements and Supplementary Data