What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2023-05-02 compared with 2022-11-01 · 189 added, 270 removed, 464 unchanged (50% of the section changed)

1 unchanged sentence

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

September 30,

CONDENSED CONSOLIDATED BALANCE SHEETS (in millions, except par value)

2023 December 30,

(in millions)

Cash and cash equivalents $ 379 $ 516

20 unchanged sentences

Stockholders’ equity:

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

Common stock, $ 0.0001 par value, 500 million shares authorized, 137 million and 137 million shares issued and outstanding at March 31, 2023, and December 30, 2022, respectively

Additional paid-in capital 1,994 2,005

7 unchanged sentences

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended Nine Months Ended

September 30,

2022 October 1,

2021 September 30,

2022 October 1,

(in millions, except per share amounts)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in millions, except per share amounts)

Three Months Ended

2023 April 1,

Revenues $ 3,699 $ 3,494

1 unchanged sentence

Selling, general and administrative expenses 233 236

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

Acquisition, integration and restructuring costs 3 3

Asset impairment charges — 3 3 3

Equity earnings of non-consolidated subsidiaries ( 4 ) ( 5 ) ( 5 ) ( 14 )

Equity (earnings) loss of non-consolidated subsidiaries ( 6 ) 2

Operating income 265 271

1 unchanged sentence

Interest expense, net ( 54 ) ( 48 )

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

Other expense, net ( 4 ) ( 1 )

Income before income taxes

221 260 668 745

Income tax expense

3 unchanged sentences

Net income attributable to Leidos common stockholders

$ 162 $ 205 $ 508 $ 579

Earnings per share:

$ 1.18 $ 1.26

1.17 1.43 3.68 4.05

See accompanying notes to condensed consolidated financial statements.

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended Nine Months Ended

September 30,

2022 October 1,

2021 September 30,

2022 October 1,

(in millions)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in millions)

Three Months Ended

2023 April 1,

Net income $ 164 $ 177

Foreign currency translation adjustments

( 75 ) ( 29 ) ( 158 ) ( 12 )

Unrecognized gain on derivative instruments

Unrecognized (loss) gain on derivative instruments

Pension adjustments

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

Total other comprehensive income, net of taxes 9 32

Comprehensive income 173 209

1 unchanged sentence

Comprehensive income attributable to Leidos common stockholders

$ 106 $ 180 $ 385 $ 585

See accompanying notes to condensed consolidated financial statements.

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

in millions, except for per share amounts)

Shares of common stock Additional

2 unchanged sentences

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

(in millions, except for per share amounts)

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

7 unchanged sentences

Stock-based compensation — 18 — — 18 — 18

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

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

Net income — — 171 — 171 1 172

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

Issuances of stock — 10 — — 10 — 10

Repurchases of stock and other

— ( 2 ) — — ( 2 ) — ( 2 )

Dividends of $ 0.36 per share

— — ( 50 ) — ( 50 ) — ( 50 )

Stock-based compensation — 19 — — 19 — 19

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

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

Net income — — 162 — 162 2 164

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

Issuances of stock — 13 — — 13 — 13

Repurchases of stock and other

— ( 4 ) — — ( 4 ) — ( 4 )

Dividends of $ 0.36 per share

— — ( 51 ) — ( 51 ) — ( 51 )

Stock-based compensation — 18 — — 18 — 18

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

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

See accompanying notes to condensed consolidated financial statements.

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

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

Balance at March 31, 2023 137 $ 1,994 $ 2,479 $ ( 64 ) $ 4,409 $ 55 $ 4,464

Shares of common stock Additional

2 unchanged sentences

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

(in millions, except for per share amounts)

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

Net income — — 205 — 205 — 205

Other comprehensive income, net of taxes — — — 9 9 — 9

Issuances of stock — 14 — — 14 — 14

Repurchases of stock and other

( 1 ) ( 123 ) — — ( 123 ) — ( 123 )

Dividends of $ 0.34 per share

— — ( 49 ) — ( 49 ) — ( 49 )

Stock-based compensation — 15 — — 15 — 15

Capital contributions from non-controlling interest — — — — — 38 38

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

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

Net income — — 175 — 175 2 177

2 unchanged sentences

Repurchases of stock and other

Dividends of $ 0.34 per share

( 4 ) ( 526 ) — — ( 526 ) — ( 526 )

Stock-based compensation — 17 — — 17 — 17

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

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

Net income — — 205 — 205 3 208

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

Issuances of stock — 11 — — 11 — 11

Repurchases of stock and other

( 2 ) ( 140 ) — — ( 140 ) — ( 140 )

Dividends of $ 0.36 per share

2 unchanged sentences

Net capital distributions to non-controlling interest — — — — — ( 2 ) ( 2 )

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

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

See accompanying notes to condensed consolidated financial statements.

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Nine Months Ended

September 30,

2022 October 1,

(in millions)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions)

Three Months Ended

2023 April 1,

Cash flows from operations:

Net income $ 164 $ 177

Adjustments to reconcile net income to net cash provided by operations:

Adjustments to reconcile net income to net cash (used in) provided by operations:

Depreciation and amortization 82 85

Stock-based compensation 18 16

Asset impairment charges 3 3

Deferred income taxes ( 43 ) ( 61 )

Other 21 ( 11 )

Change in assets and liabilities, net of effects of acquisitions:

Change in assets and liabilities, net of effects of acquisitions and dispositions:

Receivables ( 166 ) ( 232 )

3 unchanged sentences

Income taxes receivable/payable ( 65 ) 68

Net cash provided by operating activities 881 821

Net cash (used in) provided by operating activities ( 98 ) 93

Cash flows from investing activities:

Acquisition of businesses, net of cash acquired ( 2 ) ( 622 )

Acquisition of a business, net of cash acquired — ( 2 )

Divestiture of a business

Payments for property, equipment and software ( 39 ) ( 28 )

Net proceeds from sale of assets 6 —

Net cash used in investing activities ( 39 ) ( 21 )

2 unchanged sentences

Repayments of borrowings ( 1,711 ) ( 27 )

Payments for debt issuance costs ( 7 ) —

Dividend payments ( 50 ) ( 51 )

Repurchases of stock and other ( 43 ) ( 526 )

Net capital (distributions to) contributions from non-controlling interests ( 5 ) 38

Proceeds from issuances of stock 12 12

Net capital distributions to non-controlling interests ( 1 ) ( 2 )

Net cash used in financing activities ( 57 ) ( 519 )

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

Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash 2 —

Net decrease in cash, cash equivalents and restricted cash ( 192 ) ( 447 )

Cash, cash equivalents and restricted cash at beginning of period 683 875

41 unchanged sentences

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

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

We have certain entities where the functional currency is not the U.S.

dollar and have separately presented the effect of exchange rate changes on cash, cash equivalents and restricted cash held in foreign currencies as a separate line in the condensed consolidated statements of cash flows.

Prior year financial information has been reclassified to conform to our current presentation.

For fiscal 2022, the effect of foreign exchange rate changes was not material to the condensed consolidated statements of cash flows.

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

3 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Accounting Standards Updates ("ASU") 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.

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 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 will measure contract assets and liabilities acquired in accordance with 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 (Topic 848)

In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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.

1 unchanged sentence

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.

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

We anticipate an ASU formalizing this decision to be approved and issued during the last quarter of fiscal 2022.

The amendments in this

update are elective and provide optional relief for entities with hedge accounting and contract modifications affected

by the transition from LIBOR 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 the reference rate reform.

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

As of March 31, 2023, our term loans are based on a Secured Overnight Financing Rate (“SOFR”) rate (see "Note 6–Debt").

The interest rate swap agreements, which currently reference LIBOR, are expected to be modified to reference SOFR in fiscal 2023.

In accordance with ASC 848, we have elected the practical expedient to continue to apply hedge accounting without dedesignating the LIBOR denominated interest rate swap and the practical expedient to qualitatively assess the effectiveness of the hedge during the transition period.

We do not expect the standard to have a material impact on our consolidated financial statements once fully adopted.

Changes in Estimates on Contracts

1 unchanged sentence

Changes in estimates on contracts were as follows:

Three Months Ended Nine Months Ended

September 30,

2022 October 1,

2021 September 30,

2022 October 1,

Three Months Ended

2023 April 1,

(in millions, except per share amounts)

5 unchanged sentences

The impact on diluted earnings per share ("EPS") attributable to Leidos common stockholders is calculated using the statutory tax rate.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Revenue Recognized from Prior Obligations

Revenue recognized from performance obligations satisfied in previous periods was $ 6 million and $ 38 million for the three and nine months ended September 30, 2022, respectively, and $ 17 million and $ 35 million for the three and nine months ended October 1, 2021, respectively.

Revenue recognized from performance obligations satisfied in previous periods was $ 5 million and $ 14 million for the three months ended March 31, 2023, and April 1, 2022, respectively.

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

1 unchanged sentence

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

At September 30, 2022, and December 31, 2021, $ 178 million and $ 138 million, respectively, of outstanding payments were included within "Cash and cash equivalents" and "Accounts payable and accrued liabilities" correspondingly on the condensed consolidated balance sheets.

At March 31, 2023, and December 30, 2022, $ 157 million and $ 158 million, respectively, of outstanding payments were included within "Cash and cash equivalents" and "Accounts payable and accrued liabilities" correspondingly on the condensed consolidated balance sheets.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Restricted Cash

1 unchanged sentence

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

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

Note 2–Revenues from Contracts with Customers

Our restricted cash balances were $ 112 million and $ 167 million at March 31, 2023, and December 30, 2022, respectively.

Note 2–Revenues

Remaining Performance Obligations

1 unchanged sentence

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

As of September 30, 2022, we had $ 14.3 billion of RPO and expect to recognize approximately 60 % and 77 % over the next 12 months and 24 months, respectively, with the remainder to be recognized thereafter.

As of March 31, 2023, we had $ 14.5 billion of RPO and expect to recognize approximately 59 % and 76 % over the next 12 months and 24 months, respectively, with the remainder to be recognized thereafter.

Disaggregation of Revenues

1 unchanged sentence

Disaggregated revenues by customer-type were as follows:

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

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

Three Months Ended March 31, 2023

Defense Solutions Civil Health Total

(in millions)

6 unchanged sentences

Total $ 2,111 $ 858 $ 710 $ 3,679

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

Three Months Ended April 1, 2022

Defense Solutions Civil Health Total

(in millions)

8 unchanged sentences

Intelligence Community, as well as state and local government agencies.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Disaggregated revenues by contract-type were as follows:

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

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

Three Months Ended March 31, 2023

Defense Solutions Civil Health Total

(in millions)

5 unchanged sentences

Total $ 2,111 $ 858 $ 710 $ 3,679

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

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

Three Months Ended April 1, 2022

Defense Solutions Civil Health Total

(in millions)

6 unchanged sentences

Disaggregated revenues by geographic location were as follows:

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

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

Three Months Ended March 31, 2023

Defense Solutions Civil Health Total

(in millions)

2 unchanged sentences

International

245 39 — 284 746 117 — 863

Total $ 2,111 $ 858 $ 710 $ 3,679

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

Three Months Ended April 1, 2022

Defense Solutions Civil Health Total

(in millions)

2 unchanged sentences

International

231 33 — 264 732 113 — 845

Total $ 2,048 $ 780 $ 650 $ 3,478

Revenues by customer-type, contract-type and geographic location exclude lease income of $ 29 million and $ 75 million for the three and nine months ended September 30, 2022, respectively, and $ 34 million and $ 89 million for the three and nine months ended October 1, 2021, respectively.

Revenues by customer-type, contract-type and geographic location exclude lease income of $ 20 million and $ 16 million for the three months ended March 31, 2023 and April 1, 2022, respectively.

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.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Balance sheet line item September 30,

Balance sheet line item March 31,

2023 December 30,

9 unchanged sentences

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

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

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

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

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Revenue recognized for the three months ended March 31, 2023, of $ 155 million was included as a contract liability at December 30, 2022.

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

Note 3–Acquisitions, Divestitures, Goodwill and Intangible Assets

Business Acquisitions

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

Business Acquisition

On October 30, 2022 (the "Agreement Date"), we completed the acquisition of Cobham Special Mission for a preliminary purchase consideration of $ 296 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.

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

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

Aviation & Missile Solutions LLC ("AMS") Divestiture

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

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

The preliminary goodwill recognized of $ 24 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 $ 148 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 11 $ 19

Technology 10 5

Total 11 $ 24

As of March 31, 2023, 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 the three months ended March 31, 2023, $ 30 million of revenues related to the Cobham Special Mission acquisition were recognized within the Defense Solutions reportable segmen t.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

1 unchanged sentence

(in millions)

Goodwill at January 1, 2021 $ 3,300 $ 2,047 $ 966 $ 6,313

Acquisitions of businesses 425 5 — 430

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

Acquisition of businesses 26 — — 26

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

Goodwill re-allocation ( 17 ) 17 — —

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

Goodwill at December 30, 2022 $ 3,664 $ 2,066 $ 966 $ 6,696

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

Acquisition of a business (1)

( 2 ) — — ( 2 )

Foreign currency translation adjustments — 9 — 9

Goodwill at September 30, 2022

Goodwill at March 31, 2023

$ 3,662 $ 2,075 $ 966 $ 6,703

(1) Adjustment to goodwill resulting from a measurement period purchase accounting adjustment.

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

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

As previously disclosed in our Annual Report on Form 10-K for the year ended December 30, 2022, the quantitative analysis for the Security Enterprise Solutions reporting unit showed that the fair value exceeded the carrying value by approximately 13 % as of the most recent assessment date.

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

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

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

We did not identify any qualitative factors that would trigger a quantitative goodwill impairment test during the three months ended March 31, 2023.

During the three months ended March 31, 2023 and April 1, 2022, there were no impairments to goodwill.

LEIDOS HOLDINGS, INC.

2 unchanged sentences

Intangible assets, net consisted of the following:

September 30, 2022 December 31, 2021

March 31, 2023 December 30, 2022

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

7 unchanged sentences

1 ( 1 ) — 1 ( 1 ) —

Total finite-lived intangible assets

7 unchanged sentences

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

Amortization expense was $ 57 million and $ 173 million for the three and nine months ended September 30, 2022, respectively, and $ 63 million and $ 173 million for the three and nine months ended October 1, 2021, respectively.

Amortization expense was $ 52 million and $ 59 million for the three months ended March 31, 2023 and April 1, 2022, respectively.

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

1 unchanged sentence

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

The estimated annual amortization expense as of September 30, 2022, was as follows:

The estimated annual amortization expense as of March 31, 2023, was as follows:

Fiscal year ending

10 unchanged sentences

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

September 30, 2022 December 31, 2021

March 31, 2023 December 30, 2022

Carrying value Fair value Carrying value Fair value

2 unchanged sentences

Derivatives $ 14 $ 14 $ 20 $ 20

Financial liabilities:

Derivatives $ 16 $ 16 $ 53 $ 53

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

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

As of March 31, 2023, our derivatives primarily consisted of the cash flow interest rate swaps on $ 1.0 billion of the variable rate senior unsecured term loan (see "Note 5–Derivative Instruments").

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

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

As of September 30, 2022, and December 31, 2021, the fair value of debt was $ 4.6 billion and $ 5.4 billion, respectively, and the carrying amount was $ 5.0 billion and $ 5.1 billion, respectively (see "Note 6–Debt").

As of March 31, 2023, and December 30, 2022, the fair value of debt was $ 4.8 billion and $ 4.6 billion, respectively, and the carrying amount was $ 5.0 billion and $ 4.9 billion, respectively (see "Note 6–Debt").

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

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

On October 30, 2022, non-financial instruments measured at fair value on a non-recurring basis were recorded in connection with the completed acquisitions of Cobham Special Mission.

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

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

As of March 31, 2023, we did not ha ve any assets or liabilities measured at fair value on a non-recurring basis.

LEIDOS HOLDINGS, INC.

5 unchanged sentences

These swaps are designated as cash flow hedges.

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

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

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

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

Balance sheet line item September 30,

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

Asset derivatives

Balance sheet line item March 31,

2023 December 30,

(in millions)

Asset derivatives:

Cash flow interest rate swaps Other long-term assets $ 14 $ 20

Liability derivatives:

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

Foreign currency forward contracts Accounts payable and accrued liabilities 16 —

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

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

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

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

2 unchanged sentences

These interest rate swap agreements have a maturity date of August 2025 and a fixed interest rate of 3.00 %.

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.

The objective of these instruments is to reduce variability in the forecasted interest payments of the Variable Rate Loan.

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.

2 unchanged sentences

A qualitative assessment of hedge effectiveness is performed on a quarterly basis, unless facts and circumstances indicate the hedge may no longer be highly effective.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Three Months Ended Nine Months Ended

September 30,

2022 October 1,

2021 September 30,

2022 October 1,

Three Months Ended

2023 April 1,

(in millions)

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

$ 50 $ 47 $ 148 $ 138

Amount recognized in other comprehensive income (loss) $ ( 2 ) $ 32

Amount reclassified from accumulated other comprehensive income (loss) to interest expense, net $ ( 4 ) $ 6

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

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

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Our debt consisted of the following:

Stated interest rate Effective interest rate September 30,

Stated interest rate Effective interest rate March 31, 2023 December 30, 2022

(in millions)

Short-term debt:

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

Senior unsecured term loans:

1 unchanged sentence

5.91 % 5.99 % $ 320 $ 320

$ 380 million term loan, due May 2023

4.13 % 4.22 % 380 —

Total short-term debt $ 380 $ 380

Current portion of long-term debt 19 672

Total short-term debt and current portion of long-term debt $ 339 $ 992

Long-term debt:

2 unchanged sentences

5.77 % 6.09 % $ — $ 1,211

$ 1,000 million term loan, due March 2028

6.13 % 6.30 % 1,000 —

Senior unsecured notes:

5 unchanged sentences

4.38 % 4.50 % 750 750

$ 750 million notes due March 2033

5.75 % 5.81 % 750 —

$ 1,000 million notes, due February 2031

7 unchanged sentences

Notes payable and finance leases due on various dates through fiscal 2032

1.84 %- 4.30 %

Various 1.84 %- 6.31 %

unamortized debt discounts and deferred debt issuance costs ( 42 ) ( 34 )

Total long-term debt 4,694 4,600

2 unchanged sentences

$ 4,675 $ 3,928

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

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Term Loans and Revolving Credit Facility

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 will mature in January 2025.

On March 10, 2023 (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 $ 1.0 billion (the “Term Loan Facility”) and a $ 1.0 billion senior unsecured revolving facility (the “Revolving Facility” and, together with the Term Loan Facility, the “Credit Facilities”).

The Credit Facilities will mature in March 2028.

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

As of September 30, 2022, there were no borrowings outstanding under the Revolving Facility.

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

The applicable margin range for LIBOR-denominated borrowings is from 1.13 % to 1.75 %.

Based on our current ratings, the applicable margin for LIBOR-denominated borrowings is 1.38 %.

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.

As of March 31, 2023, there were no borrowings outstanding under the Revolving Facility.

The proceeds of the Term Loan Facility and cash on hand on the Closing Date were used to repay in full all indebtedness, terminate all commitments and discharge all guarantees existing in connection with the credit agreement related to the $ 1.9 billion senior unsecured term loan facility and $ 750 million senior unsecured revolving facility.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Borrowings under the Credit Agreement bear interest at a rate determined, at our option, based on either an alternate base rate or a Term SOFR rate with a 0.10 % per annum Term SOFR adjustment, plus, in each case, an applicable margin that varies depending on our credit rating.

The applicable margin range for Term SOFR-denominated borrowings is from 1.00 % to 1.50 %.

Based on our current ratings, the applicable margin for Term SOFR-denominated borrowings is 1.25 %.

Principal payments are made quarterly on the Term Loan Facility beginning in March 2025, with the majority of the principal due at maturity.

Interest on the Term Loan Facility for Term SOFR-denominated borrowings is payable on a periodic basis, which must be at least quarterly.

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 for four fiscal quarters following a material acquisition, and a ratio of EBITDA to consolidated interest expense of not less than 3.50 to 1.00.

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

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

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

Borrowings under the Term Loan Agreement bear interest at a rate based on SOFR 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 February 28, 2023, we issued and sold $ 750 million aggregate principal amount of fixed-rate senior notes (the “Notes”) maturing in March 2033.

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

and guaranteed by Leidos Holdings, Inc.

The annual interest rate for the Notes is 5.75 % and is payable on a semi-annual basis.

In connection with the issuance of the Notes, $ 11 million of debt issuance costs and discount were recognized, which were recorded as an offset against the carrying value of debt.

The proceeds from the Notes were used to repay all of the outstanding obligations in respect of principal, interest and fees on the $ 500 million 2.95 % notes, due May 2023, the majority of which were retired on February 28, 2023.

The remaining proceeds from the Notes were used to repay $ 210 million of the outstanding balance on the $ 1.9 billion senior unsecured term loan facility, due January 2025, and fund general corporate purposes.

Commercial Paper

3 unchanged sentences

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

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

Principal Payments and Debt Issuance Costs

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

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

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

Amortization of debt discount and debt issuance costs was $ 3 million and $ 8 million for the three and nine months ended September 30, 2022, respectively, and $ 3 million and $ 7 million for the three and nine months ended October 1, 2021, respectively.

As of March 31, 2023, we had no Commercial Paper Notes outstanding.

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 September 30, 2022.

We were in compliance with all covenants as of March 31, 2023.

Finance Leases

In fiscal 2022, the Company entered into a Master Lease Agreement whereby we agreed to lease two aircraft from the time each aircraft is accepted through June 30, 2027.

In March 2023, we took possession of both aircraft at which time we recognized a $ 64 million finance lease obligation and a corresponding property, plant and equipment asset.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Principal Payments

Future minimum payments of debt are as follows:

Fiscal year ending

(in millions)

2023 (remainder of year) $ 335

2028 and thereafter 3,849

Total principal payments 5,056

unamortized debt discounts and deferred debt issuance costs ( 42 )

Total short-term and long-term debt $ 5,014

Note 7–Accumulated Other Comprehensive Income (Loss)

2 unchanged sentences

(in millions)

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

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

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

5 unchanged sentences

Reclassification from AOCI — ( 4 ) — ( 4 )

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

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

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

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

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

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

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

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

Balance at March 31, 2023 $ ( 58 ) $ 8 $ ( 14 ) $ ( 64 )

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

Note 8–Earnings Per Share

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

Three Months Ended Nine Months Ended

September 30,

2022 October 1,

2021 September 30,

2022 October 1,

Three Months Ended

2023 April 1,

(in millions)

3 unchanged sentences

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

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

The total outstanding stock options and vesting stock awards that were anti-dilutive were 1 million for both of the three months ended March 31, 2023, and April 1, 2022.

During the three months ended March 31, 2023, we made open market repurchases of our common stock for an aggregate purchase price of $ 25 million.

All shares repurchased were immediately retired.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

On February 16, 2022, we entered into an Accelerated Share Repurchase ("ASR") agreement with a financial institution to repurchase shares of our outstanding common stock.

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

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

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

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

All shares delivered were immediately retired.

Note 9–Income Taxes

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

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

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

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

For the three months ended March 31, 2023, the effective tax rate was 20.8 % compared to 20.3 % for the three months ended April 1, 2022.

The increase to the effective tax rate was primarily due to a decrease in excess tax benefits related to employee stock-based payment transactions, partially offset by a decrease in unrecognized tax benefits and taxes related to foreign operations.

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

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

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

Based upon our interpretation of the law as currently enacted, we estimate that the fiscal 2023 impact will result in increases of $ 112 million to both our income taxes payable and net deferred tax assets.

We also estimate an increase to our unrecognized tax benefits of $ 75 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.

For the nine months ended September 30, 2022, unrecognized tax benefits increased $ 95 million with a corresponding increase to net deferred tax assets as a result of uncertain tax positions arising from certain provisions of the TCJA becoming effective.

For the three months ended March 31, 2023, unrecognized tax benefits increased $ 16 million with a corresponding increase to net deferred tax assets as a result of uncertain tax positions arising from capitalizing research and development costs.

Note 10–Business Segments

1 unchanged sentence

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

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

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

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The segment information for the periods presented was as follows:

Three Months Ended Nine Months Ended

September 30,

2022 October 1,

2021 September 30,

2022 October 1,

Three Months Ended

2023 April 1,

(in millions)

5 unchanged sentences

Defense Solutions $ 147 $ 133

Civil 79 58 160 187

Health 107 118

2 unchanged sentences

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 condensed consolidated statements of income are not allocated to our segments.

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

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

25 unchanged sentences

In addition, the patents at issue in these cases are subject to U.S.

Patent and Trademark Office post-grant inter partes review and/or reexamination proceedings and related appeals, which may result in all or part of these patents being invalidated or the claims of the patents being limited.

Thus, no assurances can be given when or if we will receive any proceeds in connection with these jury awards.

Patent and Trademark Office ("USPTO") post-grant inter partes review and/or reexamination proceedings and related appeals, which may result in all or part of these patents being invalidated or the claims of the patents being limited.

On March 30, 2023, the U.S.

Court of Appeals for the Federal Circuit issued a ruling affirming prior decisions of the USPTO’s Patent Trial and Appeal Board finding certain claims of the patents at issue in the Apple II case to be unpatentable.

On March 31, 2023, the Federal Circuit issued a decision vacating the District Court’s judgment in the Apple II case and remanding it back to the District Court with instructions to dismiss the case as moot.

These Federal Circuit decisions remain subject to potential motions and/or appeals by VirnetX, including potentially seeking rehearing or certiorari review.

Thus, no assurances can be given when or if we will receive any proceeds in connection with the Apple II case.

In addition, if Leidos receives any proceeds, we are required to pay a royalty to the customer who paid for the development of the technology.

3 unchanged sentences

Defense Contract Audit Agency

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

As of March 31, 2023, active indirect cost audits by the Defense Contract Audit Agency remain open for fiscal 2021 and subsequent fiscal years.

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

As of September 30, 2022, we believe we have adequately reserved for potential adjustments from audits or reviews of contract costs.

As of March 31, 2023, we believe we have adequately reserved for potential adjustments from audits or reviews of contract costs.

LEIDOS HOLDINGS, INC.

10 unchanged sentences

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.

The Company has responded to the subpoena.

In February 2023, a former employee of the Company who was terminated at the outset of the investigation was indicted on wire fraud and other charges by a Federal Grand Jury in the U.S.

District Court in the Southern District of California.

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”).

Department of Justice Antitrust Division.

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

2 unchanged sentences

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

As of September 30, 2022, we have outstanding letters of credit of $ 44 million, principally related to performance guarantees on contracts and outstanding surety bonds with a notional amount of $ 100 million, principally related to performance and subcontractor payment bonds on contracts.

As of March 31, 2023, we have outstanding letters of credit of $ 65 million, principally related to performance guarantees on contracts and outstanding surety bonds with a notional amount of $ 101 million, principally related to performance and subcontractor payment bonds on contracts.

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

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

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

As of March 31, 2023, the future expirations of the outstanding letters of credit and surety bonds were as follows:

Fiscal year ending

2 unchanged sentences

2028 and thereafter 4

Note 12–Subsequent Events

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

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

LEIDOS HOLDINGS, INC.

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

What changed 10-Q

Item 1. Financial Statements