What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-02 compared with 2022-11-01 · 107 added, 134 removed, 125 unchanged (66% of the section changed)

21 unchanged sentences

Additionally, we separately present the unallocable costs associated with corporate functions as Corporate.

The COVID-19 pandemic is affecting major economic and financial markets, and effectively all industries and governments are facing challenges, which has resulted in a period of business disruption, the length and severity of which cannot be predicted.

The pandemic has resulted in travel restrictions, government orders to “shelter-in-place”, quarantine restrictions and disruption of the financial markets.

We have acted to protect the health and safety of our employees, comply with workplace health and safety regulations and work with our customers to minimize disruptions.

For the three and nine months ended September 30, 2022, the COVID-19 pandemic did not have a material impact to revenues and operating income, other than the receipt of $28 million in recoveries for the nine months ended September 30, 2022, within our Health segment related to stop work orders on certain programs.

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

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

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

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

LEIDOS HOLDINGS, INC.

Business Environment and Trends

Government Markets

During both of the three and nine months ended September 30, 2022, we generated approximately 87% of our total revenues from contracts with the U.S.

During both of the three months ended March 31, 2023 and April 1, 2022, we generated approximately 87% of total revenues from contracts with the U.S.

Accordingly, our business performance is affected by the overall level of U.S.

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

Congress continues to work on the 12 appropriations bills to fund the federal government in GFY 2023.

The GFY 2023 began on October 1, 2022;

however, the federal government is currently operating under a continuing resolution (“CR”).

The CR funds the federal government at GFY 2022 levels until December 16, 2022, after that Congress will need to pass the full-year appropriation bills or an additional CR prior to December 16, 2022, in order to prevent a federal government shutdown.

President Biden released the annual President’s budget request for GFY 2024 on March 9, 2023.

The President’s $6.9 trillion budget request includes $886.4 billion in defense spending and $809.1 billion in non-defense spending.

The appropriations subcommittees in both chambers of Congress began holding budget hearings on the President’s Budget Request after its release.

In addition to working on the GFY 2024 appropriations bills, the Congress is also working towards an agreement to raise or suspend the debt limit to prevent the U.S.

from defaulting on its debt.

International Markets

Sales to customers in international markets represented approximately 8% of total revenues for both of the three and nine months ended September 30, 2022.

Sales to customers in international markets represented approximately 8% of total revenues for both the three months ended March 31, 2023, and April 1, 2022.

Our international customers include foreign governments and their agencies.

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

LEIDOS HOLDINGS, INC.

Results of Operations

The following table summarizes our condensed consolidated results of operations for the periods presented:

Three Months Ended Nine Months Ended

September 30,

2022 October 1,

2021 Dollar change Percent change September 30,

2022 October 1,

Three Months Ended

2023 April 1,

2022 Dollar change Percent change

12 unchanged sentences

Operating margin 7.2 % 7.8 %

LEIDOS HOLDINGS, INC.

Segment and Corporate Results

Three Months Ended Nine Months Ended

Defense Solutions September 30,

2022 October 1,

2021 Dollar change Percent change September 30,

2022 October 1,

Three Months Ended

Defense Solutions March 31,

2023 April 1,

2022 Dollar change Percent change

3 unchanged sentences

Operating margin 7.0 % 6.5 %

The increase in revenues for the three months ended September 30, 2022, as compared to the three months ended October 1, 2021, was primarily attributable to program wins and a net increase in volumes on certain programs.

The increase was partially offset by the completion of certain contracts, $28 million related to unfavorable exchange rate movements and net write-downs on certain contracts.

The increase in revenues for the nine months ended September 30, 2022, as compared to the nine months ended October 1, 2021, was primarily attributable to program wins, a net increase in volumes on certain programs and a $42 million net increase in revenue related to our acquisitions made in the second and third quarters of the prior year.

The increase was partially offset by the completion of certain contracts, $63 million related to unfavorable exchange rate movements and contracts that were reassigned from Defense Solutions reportable segment to the Civil reportable segment during the third quarter of fiscal 2021.

The decrease in operating income for the three months ended September 30, 2022, as compared to the three months ended October 1, 2021, was primarily attributable to net write-downs, the completion of certain contracts and additional general and administrative expenses.

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

The decrease in operating income for the nine months ended September 30, 2022, as compared to the nine months ended October 1, 2021, was primarily attributable to the completion of certain contracts, net write-downs, additional general and administrative expenses and increased amortization.

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

Three Months Ended Nine Months Ended

Civil September 30,

2022 October 1,

2021 Dollar change Percent change September 30,

2022 October 1,

The increase in revenues for the three months ended March 31, 2023, as compared to the three months ended April 1, 2022, was primarily attributable to program wins, a net increase in volumes on certain programs and a $30 million increase in revenues related to our Cobham Special Mission acquisition made in the last quarter of fiscal 2022.

The increase was partially offset by the completion of certain contracts and $22 million related to unfavorable exchange rate movements.

The increase in operating income for the three months ended March 31, 2023, as compared to the three months ended April 1, 2022, was primarily attributable to program wins and operating income related to our Cobham Special Mission acquisition made in the last quarter of fiscal 2022.

The increase was partially offset by the completion of certain contracts.

Three Months Ended

Civil March 31,

2023 April 1,

2022 Dollar change Percent change

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Operating margin 4.6 % 5.4 %

The increase in revenues for the three months ended September 30, 2022, as compared to the three months ended October 1, 2021, was primarily attributable to a net increase in program volumes, partially offset by net write-downs on certain contracts and unfavorable exchange rate movements.

The increase in revenues for the nine months ended September 30, 2022, as compared to the nine months ended October 1, 2021, was primarily attributable to a net increase in program volumes, program wins and contracts that were reassigned from Defense Solutions reportable segment to the Civil reportable segment during the third quarter of fiscal 2021.

The increase was partially offset by unfavorable exchange rate movements and the completion of certain contracts.

The increase in operating income for the three months ended September 30, 2022, as compared to the three months ended October 1, 2021, was primarily due to a net increase in program volumes mainly within our Security Enterprise Solutions reporting unit, partially offset by net write-downs on certain contracts.

The decrease in operating income for the nine months ended September 30, 2022, as compared to the nine months ended October 1, 2021, was primarily due to a $19 million increase in legal fees and settlement costs resulting from an adverse arbitration ruling related to the 2016 acquisition of the Information Systems & Global Solutions business (“IS&GS Business”) from Lockheed Martin, partially offset by a net increase in program volumes.

Operating income for the nine months ended October 1, 2021, included a $26 million benefit from a legal reserve adjustment related to the Mission Support Alliance joint venture.

The increase in revenues for the three months ended March 31, 2023, as compared to the three months ended April 1, 2022, was primarily attributable to program wins and a net increase in program volumes.

The decrease in operating income for the three months ended March 31, 2023, as compared to the three months ended April 1, 2022, was primarily driven by reduced volume on higher margin contracts, temporary supply chain disruptions and investment in research and development in our security products business.

LEIDOS HOLDINGS, INC.

Three Months Ended Nine Months Ended

Health September 30,

2022 October 1,

2021 Dollar change Percent change September 30,

2022 October 1,

Three Months Ended

Health March 31,

2023 April 1,

2022 Dollar change Percent change

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Operating margin 15.1 % 18.2 %

The decrease in revenues for the three months ended September 30, 2022, as compared to the three months ended October 1, 2021, was primarily attributable to the completion of certain contracts, partially offset by a net increase in program volumes.

The increase in revenues for the nine months ended September 30, 2022, as compared to the nine months ended October 1, 2021, was primarily attributable to a net increase in program volumes and $28 million in recoveries related to stop work orders on certain programs as a result of COVID-19.

The increase was partially offset by the completion of certain contracts.

The decrease in operating income for the three months ended September 30, 2022, as compared to the three months ended October 1, 2021, was primarily attributable to net decrease in the volume of disability exams as the Company worked through a backlog of cases caused by COVID-19 during the three months ended October 1, 2021, and the completion of certain contracts.

The decrease in operating income for the nine months ended September 30, 2022, as compared to the nine months ended October 1, 2021, was primarily due to a net decrease in volumes on higher margin programs and the completion of certain contracts.

The decrease was partially offset by $28 million in recoveries related to stop work orders on certain programs as a result of COVID-19 and an increase in net write-ups on certain programs.

Three Months Ended Nine Months Ended

Corporate September 30,

2022 October 1,

2021 Dollar change Percent change September 30,

2022 October 1,

The increase in revenues for the three months ended March 31, 2023, as compared to the three months ended April 1, 2022, was primarily attributable to program wins, a net increase in volumes on certain programs, partially offset by completion of certain contracts.

The decrease in operating income for the three months ended March 31, 2023, as compared to the three months ended April 1, 2022, was primarily attributable to increased labor resulting from the ramp-up on new programs and certain disability examinations.

The decrease was also attributable to non-recurring net profit write-ups on certain programs during the first quarter of fiscal 2022, partially offset with program wins.

Three Months Ended

Corporate March 31,

2023 April 1,

2022 Dollar change Percent change

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Operating loss $ (29) $ (23) $ (6) 26.1 %

The increase in operating loss for the three and nine months ended September 30, 2022, as compared to the three and nine months ended October 1, 2021, was primarily attributable to an increase in legal costs, partially offset by lower acquisition and integration costs.

The increase in operating loss for the three months ended March 31, 2023, as compared to the three months ended April 1, 2022, was primarily attributable to increased administrative costs and transaction fees in connection with the issuance of the senior unsecured notes and Credit Agreement entered into during the first quarter of fiscal 2023, see "Note 6–Debt" for further information.

Non-Operating Expense, net

Non-operating expense, net for the three months ended September 30, 2022, was $60 million as compared to $45 million for the three months ended October 1, 2021.

The increase was primarily due to a net unrealized loss in our foreign currency forward contract related to the Cobham Special Mission acquisition as a result of unfavorable exchange rate movements and higher interest expenses driven by changes in interest rates.

Non-operating expense, net for the nine months ended September 30, 2022, was $155 million as compared to $137 million for the nine months ended October 1, 2021.

Non-operating expense, net for the three months ended March 31, 2023, was $58 million as compared to $49 million for the three months ended April 1, 2022.

The increase was primarily due to higher net interest expense driven by increased interest rates and refinancing activities, and unfavorable exchange rate movements.

Provision for Income Taxes

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

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

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

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

LEIDOS HOLDINGS, INC.

For the three months ended March 31, 2023, our 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, and the related impact to cash from operations will be realized in fiscal 2023.

The actual impact on cash from operations will depend on the amount of research and development costs the Company will incur, whether Congress modifies or repeals this provision and whether new guidance and interpretive rules are issued by the U.S.

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.

LEIDOS HOLDINGS, INC.

Bookings and Backlog

We recorded net bookings worth an estimated $4.1 billion and $11.6 billion during the three and nine months ended September 30, 2022, as compared to $4.7 billion and $12.3 billion for the three and nine months ended October 1, 2021.

We recorded net bookings worth an estimated $3.0 billion during the three months ended March 31, 2023, as compared to $5.4 billion for the three months ended April 1, 2022.

The estimated value of our total backlog was as follows:

September 30, 2022 October 1, 2021

March 31, 2023 April 1, 2022

Segment Funded Unfunded Total Funded Unfunded Total

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Total $ 8,303 $ 26,783 $ 35,086 $ 7,091 $ 29,254 $ 36,345

The increase in backlog as of September 30, 2022, as compared to October 1, 2021, includes $43 million of backlog acquired through business combinations in our Defense Solutions reportable segment.

Total backlog as of March 31, 2023, as compared to April 1, 2022, includes $610 million of backlog acquired through a business combination in our Defense Solutions reportable segment.

Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts, both funded and unfunded.

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

Total backlog at September 30, 2022, included a negative impact of $363 million when compared to total backlog at October 1, 2021, primarily due to the exchange rate movements in the British pound and Australian dollar when compared to the U.S.

Total backlog at March 31, 2023, included a positive impact of $30 million when compared to total backlog at April 1, 2022, primarily due to the exchange rate movements in the British pound and Australian dollar when compared to the U.S.

Backlog estimates are subject to change and may be affected by factors including modifications of contracts and foreign currency movements.

Liquidity and Capital Resources

As of September 30, 2022, we had $807 million in cash and cash equivalents.

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

As of September 30, 2022, there were no borrowings outstanding under the revolving credit facility.

We had outstanding debt of $5.0 billion and $5.1 billion at September 30, 2022, and December 31, 2021, respectively.

On May 6, 2022, we entered into a Term Loan Agreement which provided for a senior unsecured term loan facility in an aggregate principal amount of $380 million.

As of March 31, 2023, we had $379 million in cash and cash equivalents.

In March 2023, we entered into a senior unsecured revolving credit facility which can provide up to $1 billion in additional borrowing, if required.

This new credit facility replaced the previous senior unsecured revolving credit facility.

As of March 31, 2023, there were no borrowings outstanding under the revolving credit facility.

We had outstanding debt of $5.0 billion and $4.9 billion at March 31, 2023, and December 30, 2022, respectively.

In February 2023, we entered into $750 million 5.75% fixed-rate senior notes.

The annual interest rate is payable on a semi-annual basis.

In March 2023, 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 $1.0 billion (the “Term Loan Facility”).

The proceeds of the Term Loan Facility and cash on hand were used to repay in full all indebtedness, terminate all commitments and discharge all existing guarantees related to the $1.9 billion senior unsecured term loan facility and $750 million senior unsecured revolving facility, due January 2025.

As of March 31, 2023, borrowings under our Credit Agreement were based on a Term Secured Overnight Financing Rate (“SOFR”) with a 0.10% Term SOFR adjustment and an applicable margin range from 1.00% to 1.50%.

Borrowings under our terminated $1.9 billion senior unsecured term loan facility had an applicable London Interbank Offered Rate (“LIBOR”)-denominated margin range from 1.13% to 1.75%.

At March 31, 2023, the applicable margin for SOFR-denominated borrowings was 1.25% based on our recent upgrade by Moody's credit rating, as compared to our LIBOR-denominated borrowings which had a 1.38% applicable margin at December 30, 2022.

We have a commercial paper program in which we may issue short-term unsecured commercial paper notes not to exceed $750 million and have maturities of up to 397 days from the date of issuance.

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

As of March 31, 2023, we did not have any commercial paper notes outstanding.

LEIDOS HOLDINGS, INC.

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

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

Our credit facilities, term loan agreement, commercial paper notes, senior unsecured term loans and notes outstanding as of September 30, 2022, contain financial covenants and customary restrictive covenants.

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

Interest on our Credit Facilities is calculated based on the London Interbank Offered Rate (“LIBOR”).

We made principal payments on our debt of $1,711 million and $27 million during the three months ended March 31, 2023, and April 1, 2022, respectively.

Current quarter's activities include a $1,210 million payment to discharge the existing Term Loan Facility and a $498 million payment to discharge the $500 million 2.95% notes, due May 2023, as compared to $24 million required principal payments on our Term Loan Facility in the prior year quarter.

Our credit facilities, term loan agreement, commercial paper notes, senior unsecured term loans and notes outstanding as of March 31, 2023, contain financial covenants and customary restrictive covenants.

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

On July 27, 2017, the U.K.’s Financial Conduct Authority announced that LIBOR would be discontinued or become unavailable as a reference rate by the end of 2021 and LIBOR will be fully discontinued or become unavailable as a benchmark rate by June 2023.

Although our Credit Facilities include mechanics to facilitate the adoption by us and our lenders of an alternative benchmark rate for use in place of LIBOR, no assurance can be made that such alternative benchmark rate will perform in a manner similar to LIBOR or result in interest rates that are at least as favorable to us as those that would have resulted had LIBOR remained in effect, which could result in an increase in our interest expense and other debt service obligations.

In addition, the overall credit market may be disrupted as a result of the replacement of LIBOR or in the anticipation thereof, which could have an adverse impact on our ability to refinance, reprice, or amend our existing indebtedness or incur additional indebtedness on favorable terms.

We paid dividends of $49 million and $149 million during the three and nine months ended September 30, 2022, respectively, and $51 million and $149 million during the three and nine months ended October 1, 2021, respectively.

During the nine months ended September 30, 2022, and October 1, 2021, we sold $209 million and $693 million, respectively, of accounts receivable under accounts receivable purchase agreements and received proceeds of $209 million and $693 million, respectively.

We did not sell any accounts receivable during the three months ended September 30, 2022, and October 1, 2021.

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

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

We paid dividends of $50 million and $51 million during the three months ended March 31, 2023, and April 1, 2022, respectively.

Stock repurchases of Leidos common stock may be made on the open market or in privately negotiated transactions with third parties including through accelerated share repurchase agreements.

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

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

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

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

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

During the three and nine months ended September 30, 2022, we made a $25 million payment in connection with the adverse arbitration ruling related to the 2016 acquisition of the IS&GS Business from Lockheed Martin, which occurred during the second quarter of fiscal 2022.

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

If the 2022 effective date of the TCJA research cost capitalization provision remains in place, our initial assessment indicates our income taxes payable and net deferred tax assets will each increase by approximately $150 million in fiscal 2022, and the related negative impact to cash will be realized in fiscal 2023.

We will continue to assess our liquidity needs as the tax legislation and pandemic evolve.

For the next 12 months, we anticipate that we will be able to meet our liquidity needs, including servicing our debt, through cash generated from operations, available cash balances, sales of accounts receivable and, if needed, borrowings from our revolving credit facility and commercial paper program.

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.

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

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

The actual impact will depend on the amount of research and development costs the Company incurs, 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 next 12 months, we anticipate that we will be able to meet our liquidity needs, including servicing our debt, through cash generated from operations, available cash balances, borrowings from our commercial paper program and, if needed, sales of accounts receivable and borrowings from our revolving credit facility.

LEIDOS HOLDINGS, INC.

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

Three Months Ended Nine Months Ended

September 30,

2022 October 1,

2021 September 30,

2022 October 1,

Three Months Ended

2023 April 1,

(in millions)

Net cash provided by operating activities $ 748 $ 565 $ 881 $ 821

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

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

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

Net increase in cash, cash equivalents and restricted cash $ 505 $ 303 $ 96 $ 84

Net cash provided by operating activities increased $183 million and $60 million during the three and nine months ended September 30, 2022, respectively, when compared to the prior year.

The changes were primarily due to favorable working capital changes, partially offset with timing of vendor payments, a $25 million payment in connection with the adverse arbitration ruling related to the 2016 acquisition of the IS&GS Business from Lockheed Martin and $23 million of payments for other legal and tax settlements.

Net cash used in investing activities decreased $27 million for the three months ended September 30, 2022, when compared to the prior year quarter, primarily due to net cash paid used to acquire an immaterial strategic business in the prior year quarter.

Net cash used in investing activities decreased $638 million for the nine months ended September 30, 2022, when compared to the prior year primarily due to $622 million of net cash paid related to our business acquisitions in the prior year and $15 million of proceeds received from the sale of Aviation & Missile Solutions LLC in the current year.

Net cash used in financing activities increased $8 million for the three months ended September 30, 2022, when compared to the prior year quarter primarily due to a $150 million repayment on our commercial paper program in the current quarter, partially offset by $136 million net decrease of open market stock repurchases.

Net cash used in financing activities increased $686 million for the nine months ended September 30, 2022, when compared to the prior year.

The change was primarily due to a $380 million decrease in net cash inflows related to our short-term senior unsecured term loans, an increase of $266 million in stock repurchases primarily attributable to the Accelerated Share Repurchase agreement and a $43 million decrease in net capital contributions received from our non-controlling interest.

Net cash used in operating activities increased $191 million during the three months ended March 31, 2023, respectively, when compared to the prior year quarter.

The changes were primarily due to higher tax payments of $127 million mainly in connection to the TCJA provision and a $62 million payment for payroll taxes related to the CARES Act.

Net cash used in investing activities increased $18 million for the three months ended March 31, 2023, when compared to the prior year quarter, primarily due to higher capital expenditures in the current year and proceeds received from the sale of Aviation & Missile Solutions LLC in the prior year quarter.

Net cash used in financing activities decreased $462 million for the three months ended March 31, 2023, when compared to the prior year quarter primarily due to a net decrease of $483 million used in stock repurchases primarily attributable to the accelerated share repurchase activities from prior year quarter, partially offset by a net decrease of $23 million in cash inflows from proceeds received from the issuance of debt, payments for borrowings and payments for debt issuance costs.

Off-Balance Sheet Arrangements

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Leidos Holdings, Inc.

has fully and unconditionally guaranteed the obligations of its subsidiary, Leidos, Inc., under its $500 million notes due May 2023, $500 million notes due May 2025, $750 million notes due May 2030 and $1,000 million notes due February 2031 (collectively, "the Notes").

The underlying subsidiaries of Leidos, Inc.

do not guarantee these obligations and have been excluded from the financial information presented below.

We have entered into registration rights agreements, pursuant to which we agreed to use reasonable best efforts to file registration statements to permit the exchange of the Notes and related guarantees for registered notes having terms substantially identical thereto, or in the alternative, the registered resale of the Notes and related guarantees under certain circumstances.

Pursuant to these registration rights agreements, we filed a Registration Statement on Form S-4 with the Securities and Exchange Commission on May 6, 2021, which was declared effective on May 19, 2021.

The summarized balance sheets for Leidos Holdings, Inc.

and Leidos, Inc., net of eliminations were as follows (in millions):

Balance Sheet

September 30,

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

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

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

Senior unsecured Registered Notes:

$500 million 3.625% notes, due May 2025

$750 million 4.375% notes, due May 2030

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

$750 million 5.750% notes, due May 2033

Leidos Holdings, Inc.

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

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

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

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

$250 million 7.125% notes, due July 2032

$300 million 5.500% notes, due July 2033

Additionally, Leidos, Inc.

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

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

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

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

$300 million 5.950% notes, due December 2040

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

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

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

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

Balance Sheet Information for the Guarantor and Issuer of Registered Notes

2023 December 30,

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Goodwill 5,811 5,810

Investments in consolidated subsidiaries 3,278 4,918

Other long-term assets 1,260 1,188

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Total liabilities $ 9,261 $ 9,241

Total stockholders' equity 3,067 3,403

Total liabilities and stockholders' equity $ 12,730 $ 12,680

The summarized statement of income for Leidos Holdings, Inc.

and Leidos, Inc., net of eliminations, for the nine months ended September 30, 2022, was as follows (in millions):

Statements of Income

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

Three Months Ended

Revenues, net $ 2,549

1 unchanged sentence

Net income attributable to Leidos common stockholders 47

LEIDOS HOLDINGS, INC.

Contractual Obligations and Commitments

3 unchanged sentences

There were no material changes to our critical accounting policies, estimates or judgments during the period covered by this report from those discussed in our Annual Report on Form 10-K for the year ended December 30, 2022.

LEIDOS HOLDINGS, INC.

Recently Adopted and Issued Accounting Standards

For a discussion of these items, see "Note 1–Basis of Presentation and Summary of Significant Accounting Policies" of the notes to the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q.

LEIDOS HOLDINGS, INC.

Quantitative and Qualitative Disclosures About Market Risk.

1 unchanged sentence

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 2. Management’s Discussion and Analysis