What changed in this filing

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Item 1. Financial Statements

2023-08-01 compared with 2023-05-02 · 150 added, 108 removed, 545 unchanged (32% of the section changed)

25 unchanged sentences

Stockholders’ equity:

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

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

Additional paid-in capital 2,024 2,005

7 unchanged sentences

LEIDOS HOLDINGS, INC.

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

Three Months Ended

2023 April 1,

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended Six Months Ended

2022 June 30,

in millions, except per share amounts)

Revenues $ 3,838 $ 3,597 $ 7,537 $ 7,091

2 unchanged sentences

Acquisition, integration and restructuring costs 6 5 9 8

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

Asset impairment charges — 3 — 3

Equity earnings of non-consolidated subsidiaries ( 7 ) ( 3 ) ( 13 ) ( 1 )

Operating income 331 271 596 542

1 unchanged sentence

Interest expense, net ( 56 ) ( 50 ) ( 110 ) ( 98 )

Other expense, net ( 4 ) ( 1 )

Other (expense) income, net ( 1 ) 4 ( 5 ) 3

Income before income taxes

274 225 481 447

Income tax expense

3 unchanged sentences

Net income attributable to Leidos common stockholders

$ 207 $ 171 $ 369 $ 346

Earnings per share:

$ 1.51 $ 1.25 $ 2.69 $ 2.51

1.50 1.24 2.67 2.49

See accompanying notes to condensed consolidated financial statements.

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in millions)

Three Months Ended

2023 April 1,

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three Months Ended Six Months Ended

2022 June 30,

Net income $ 210 $ 172 $ 374 $ 349

Foreign currency translation adjustments

Unrecognized (loss) gain on derivative instruments

( 3 ) ( 85 ) 12 ( 83 )

Unrecognized gain (loss) on derivative instruments

Pension adjustments

Total other comprehensive income, net of taxes 9 32

— ( 21 ) ( 1 ) ( 20 )

Total other comprehensive income (loss), net of taxes 1 ( 99 ) 10 ( 67 )

Comprehensive income 211 73 384 282

1 unchanged sentence

Comprehensive income attributable to Leidos common stockholders

$ 208 $ 72 $ 379 $ 279

See accompanying notes to condensed consolidated financial statements.

17 unchanged sentences

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

Net income — — 207 — 207 3 210

Other comprehensive loss, net of taxes — — — 1 1 — 1

Issuances of stock — 14 — — 14 — 14

Dividends of $ 0.36 per share

— — ( 50 ) — ( 50 ) — ( 50 )

Stock-based compensation — 19 — — 19 — 19

Net capital distributions to non-controlling interest — ( 3 ) — — ( 3 ) ( 2 ) ( 5 )

Balance at June 30, 2023 137 $ 2,024 $ 2,636 $ ( 63 ) $ 4,597 $ 56 $ 4,653

See accompanying notes to condensed consolidated financial statements.

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

in millions, except for per share amounts)

Shares of common stock Additional

13 unchanged sentences

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

Net income — — 171 — 171 1 172

Other comprehensive income, 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

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

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

See accompanying notes to condensed consolidated financial statements.

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions)

Three Months Ended

2023 April 1,

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended

Cash flows from operations:

Net income $ 374 $ 349

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

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

Depreciation and amortization 166 168

7 unchanged sentences

Income taxes receivable/payable ( 125 ) 45

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

Net cash provided by operating activities 66 138

Cash flows from investing activities:

2 unchanged sentences

Payments for property, equipment and software ( 79 ) ( 49 )

Net proceeds from sale of assets — 6

Net cash used in investing activities ( 83 ) ( 29 )

1 unchanged sentence

Proceeds from debt issuance 1,743 380

Net proceeds from commercial paper 200 150

Repayments of borrowings ( 2,036 ) ( 434 )

11 unchanged sentences

Cash and cash equivalents at end of period $ 329 $ 339

See accompanying notes to condensed consolidated financial statements.

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended

Supplementary cash flow information:

29 unchanged sentences

Intercompany accounts and transactions between consolidated companies have been eliminated in consolidation.

The accompanying unaudited condensed financial information has been prepared in accordance with the rules of the U.S.

The accompanying unaudited condensed consolidated financial statements has been prepared in accordance with the rules of the U.S.

Securities and Exchange Commission and accounting principles generally accepted in the United States of America ("GAAP").

5 unchanged sentences

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

We combined "Bad debt expense and recoveries" into "Selling, general and administrative expenses" on the condensed consolidated statements of income.

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 Issued But Not Yet Adopted

ASU 2020-04, ASU 2021-01 and ASU 2022-06, Reference Rate Reform (Topic 848)

Accounting Standards Updates Issued and Adopted

ASU 2020-04, ASU 2021-01 and ASU 2022-06, Reference Rate Reform (ASC 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.

2 unchanged sentences

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 transition from LIBOR through December 31, 2022.

The amendments in this update are elective and provide optional relief for entities with hedge accounting and contract modifications affected by the 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.

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.

In the first half of fiscal 2023, we adopted certain practical expedients available under ASC 848.

Our term loans are based on a Secured Overnight Financing Rate (“SOFR”) rate (see "Note 6–Debt").

Additionally, during the three months ended June 30, 2023, we modified our interest rate swap agreements to reference SOFR (see "Note 5–Derivative Instruments") in conformity with the relief available under ASC 848.

The standard did not have a material impact on our financial position, results of operations or earnings per share.

Changes in Estimates on Contracts

1 unchanged sentence

Changes in estimates on contracts were as follows:

Three Months Ended

2023 April 1,

Three Months Ended Six Months Ended

2022 June 30,

(in millions, except per share amounts)

6 unchanged sentences

Revenue Recognized from Prior Obligations

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.

Revenue recognized from performance obligations satisfied in previous periods was $ 16 million and $ 15 million for the three and six months ended June 30, 2023, respectively, and $ 17 million and $ 34 million for the three and six months ended July 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 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.

At June 30, 2023, and December 30, 2022, $ 144 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.

3 unchanged sentences

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

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

Our restricted cash balances were $ 119 million and $ 167 million at June 30, 2023, and December 30, 2022, respectively.

Note 2–Revenues

2 unchanged sentences

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 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.

As of June 30, 2023, we had $ 13.9 billion of RPO and expect to recognize approximately 63 % and 78 % 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 March 31, 2023

Defense Solutions Civil Health Total

Three Months Ended June 30, 2023 Six Months Ended June 30, 2023

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

(in millions)

6 unchanged sentences

Total $ 2,186 $ 879 $ 748 $ 3,813 $ 4,297 $ 1,737 $ 1,458 $ 7,492

Three Months Ended April 1, 2022

Defense Solutions Civil Health Total

Three Months Ended July 1, 2022 Six Months Ended July 1, 2022

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

(in millions)

11 unchanged sentences

Disaggregated revenues by contract-type were as follows:

Three Months Ended March 31, 2023

Defense Solutions Civil Health Total

Three Months Ended June 30, 2023 Six Months Ended June 30, 2023

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

(in millions)

5 unchanged sentences

Total $ 2,186 $ 879 $ 748 $ 3,813 $ 4,297 $ 1,737 $ 1,458 $ 7,492

Three Months Ended April 1, 2022

Defense Solutions Civil Health Total

Three Months Ended July 1, 2022 Six Months Ended July 1, 2022

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

(in millions)

6 unchanged sentences

Disaggregated revenues by geographic location were as follows:

Three Months Ended March 31, 2023

Defense Solutions Civil Health Total

Three Months Ended June 30, 2023 Six Months Ended June 30, 2023

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

(in millions)

2 unchanged sentences

International

296 43 — 339 574 78 — 652

Total $ 2,186 $ 879 $ 748 $ 3,813 $ 4,297 $ 1,737 $ 1,458 $ 7,492

Three Months Ended April 1, 2022

Defense Solutions Civil Health Total

Three Months Ended July 1, 2022 Six Months Ended July 1, 2022

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

(in millions)

2 unchanged sentences

International

263 39 — 302 501 78 — 579

Total $ 2,052 $ 828 $ 687 $ 3,567 $ 4,100 $ 1,608 $ 1,337 $ 7,045

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.

Revenues by customer-type, contract-type and geographic location exclude lease income of $ 25 million and $ 45 million for the three and six months ended June 30, 2023, respectively, and $ 30 million and $ 46 million for the three and six months ended July 1, 2022, respectively.

Contract Assets and Liabilities

2 unchanged sentences

As a result, the timing of revenue recognition, customer billings and cash collections for each contract results in a net contract asset or liability at the end of each reporting period.

Contract assets consist of unbilled receivables, which is the amount of revenue recognized that exceeds the amount billed to the customer, where right to payment is not solely subject to the passage of time.

Unbilled receivables exclude amounts billable where the right to consideration is unconditional.

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)

Contract assets consist of unbilled receivables, which is the amount of revenue recognized that exceeds the amount billed to the customer.

Unbilled receivables exclude amounts billable where the right to consideration is solely subject to the passage of time.

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

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

Balance sheet line item March 31,

Balance sheet line item June 30,

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.

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.

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

Revenue recognized for the three and six months ended June 30, 2023, of $ 32 million and $ 187 million, respectively, was included as a contract liability at December 30, 2022.

Revenue recognized for the three and six months ended July 1, 2022, of $ 52 million and $ 240 million, respectively, was included as a contract liability at December 31, 2021.

Note 3–Acquisitions, Divestitures, Goodwill and Intangible Assets

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.

On October 30, 2022 (the "Agreement Date"), we completed the acquisition of Cobham Special Mission for purchase consideration of $ 298 million Australian dollars, net of $ 10 million of Australian dollars acquired, or $ 192 million United States dollars, net of $ 6 million of cash acquired.

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

1 unchanged sentence

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:

In connection with this acquisition, we acquired property, plant and equipment with a fair value of $ 148 million at the Agreement Date.

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

Weighted average amortization period Fair value

3 unchanged sentences

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.

As of June 30, 2023, we had not finalized the determination of fair values allocated to assets and liabilities, including, but not limited to accounts receivables, accounts payable and accrued liabilities.

For the three and six months ended June 30, 2023, $ 28 million and $ 58 million of revenues related to the Cobham Special Mission acquisition were recognized within the Defense Solutions reportable segmen t.

LEIDOS HOLDINGS, INC.

11 unchanged sentences

Foreign currency translation adjustments ( 4 ) 10 — 6

Goodwill at March 31, 2023

Goodwill at June 30, 2023

$ 3,659 $ 2,076 $ 966 $ 6,701

2 unchanged sentences

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.

Operations of the reporting unit rely heavily on the sales and servicing of security and detection products, which continue to be negatively impacted due to delays in airline travel infrastructure projects, particularly in international markets, as customer budgetary restraints recover from reduced travel activity post-pandemic.

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 three months ended March 31, 2023.

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

In the event that there are significant unfavorable changes to forecasted cash flows of the reporting unit, 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 six months ended June 30, 2023.

During the six months ended June 30, 2023, and July 1, 2022, there were no impairments to goodwill.

LEIDOS HOLDINGS, INC.

2 unchanged sentences

Intangible assets, net consisted of the following:

March 31, 2023 December 30, 2022

June 30, 2023 December 30, 2022

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

16 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 $ 52 million and $ 59 million for the three months ended March 31, 2023 and April 1, 2022, respectively.

Amortization expense was $ 51 million and $ 103 million for the three and six months ended June 30, 2023, respectively and $ 57 million and $ 116 million for the three and six months ended July 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 March 31, 2023, was as follows:

The estimated annual amortization expense as of June 30, 2023, was as follows:

Fiscal year ending

8 unchanged sentences

inputs other than quoted prices in active markets that are observable, either directly or indirectly, or quoted prices that are not active (Level 2);

and unobservable inputs in which there is little or no market data (e.g., discounted cash flow and other similar pricing models), which requires us to develop our own assumptions about the assumptions that market participants would use in pricing the asset or liability (Level 3).

and unobservable inputs in which there is little or no market data (e.g., discounted cash flow and other similar pricing models), which requires us to develop our own market participant assumptions used in pricing the asset or liability (Level 3).

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

March 31, 2023 December 30, 2022

June 30, 2023 December 30, 2022

Carrying value Fair value Carrying value Fair value

2 unchanged sentences

Derivatives $ 19 $ 19 $ 20 $ 20

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).

As of June 30, 2023, and December 30, 2022, our derivatives primarily consisted of the cash flow interest rate swaps on $ 900 million and $ 1.0 billion, respectively, 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 one-month SOFR rate as of June 30, 2023 and LIBOR yield curve as of December 30, 2022 (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 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").

As of June 30, 2023, and December 30, 2022, the fair value of debt for both periods was $ 4.6 billion, and the carrying amount for both periods was $ 4.9 billion (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).

1 unchanged sentence

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

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

As of June 30, 2023, we did not ha ve any assets or liabilities measured at fair value on a non-recurring basis.

LEIDOS HOLDINGS, INC.

7 unchanged sentences

Asset derivatives

Balance sheet line item March 31,

Balance sheet line item June 30,

2023 December 30,

3 unchanged sentences

Cash Flow Hedges

We have interest rate swap agreements to hedge the cash flows of $ 1.0 billion of the variable rate senior unsecured term loan (the "Variable Rate Loan").

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

We have interest rate swap agreements to hedge the cash flows of $ 900 million of the variable rate senior unsecured term loan (the "Variable Rate Loan").

These interest rate swap agreements reduce to $ 500 million in August 2023 and have a maturity date of August 2025 and a fixed interest rate of 2.96 %.

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.

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

During the three months ended June 30, 2023, we modified our interest rate swap agreements in accordance with ASC 848, which permits the continuation of hedge accounting for modifications required as a result of LIBOR being discontinued.

Under the revised terms, we will receive monthly variable interest payments based on the one-month SOFR rate and will pay interest at a fixed rate.

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

The gain/loss on the swaps is reported as a component of other comprehensive income (loss) and is reclassified into earnings when the interest payments on the underlying hedged items impact earnings.

1 unchanged sentence

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

Three Months Ended

2023 April 1,

Three Months Ended Six Months Ended

2022 June 30,

(in millions)

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

$ 56 $ 50 $ 110 $ 98

Amount recognized in other comprehensive income (loss) $ 10 $ 4 $ 8 $ 36

4 unchanged sentences

Our debt consisted of the following:

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

Stated interest rate Effective interest rate June 30, 2023 December 30, 2022

(in millions)

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

Commercial paper 5.95 % Various $ 200 $ —

Senior unsecured term loans:

37 unchanged sentences

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

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

As of June 30, 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.

7 unchanged sentences

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

6 unchanged sentences

Commercial Paper

We have a commercial paper program in which the Company may issue short-term unsecured commercial paper notes ("Commercial Paper Notes") not to exceed $ 750 million.

We have a commercial paper program in which the Company may issue short-term unsecured commercial paper notes ("Commercial Paper Notes").

On May 26, 2023, we increased the size of the commercial paper program by $ 250 million, or not to exceed $ 1.0 billion.

The proceeds will be used for general corporate purposes, including working capital, capital expenditures, acquisitions and share repurchases.

1 unchanged sentence

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 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 March 31, 2023.

As of June 30, 2023, we had $ 200 million Commercial Paper Notes outstanding.

The Credit Facilities, 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 June 30, 2023.

Finance Leases

24 unchanged sentences

Reclassification from AOCI — ( 9 ) — ( 9 )

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

Balance at June 30, 2023 $ ( 61 ) $ 12 $ ( 14 ) $ ( 63 )

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

1 unchanged sentence

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

2023 April 1,

Three Months Ended Six Months Ended

2022 June 30,

(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 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.

The total outstanding stock options and vesting stock awards that were anti-dilutive were 2 million for both the three and six months ended June 30, 2023, and 1 million for both the three and six months ended July 1, 2022.

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

During the six months ended June 30, 2023, we made open market repurchases of our common stock for an aggregate purchase price of $ 25 million.

All shares repurchased were immediately retired.

No share repurchases were made under the Company’s share repurchase program during the three months ended June 30, 2023.

Note 9–Income Taxes

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.

For the three months ended June 30, 2023, the effective tax rate was 23.4 % compared to 23.6 % for the three months ended July 1, 2022.

The decrease to the effective tax rate was primarily due to a decrease in underpayment penalties, offset by a decrease in excess tax benefits related to stock-based payment transactions and an increase in unrecognized tax benefits.

For the six months ended June 30, 2023, the effective tax rate was 22.2 % compared to 21.9 % for the six months ended July 1, 2022.

The increase to the effective tax rate was primarily due to a decrease in excess tax benefits related to stock-based payment transactions offset by a decrease in underpayment penalties.

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.

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Treasury, among other factors.

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.

For the six months ended June 30, 2023, unrecognized tax benefits increased $ 37 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

Our operations and reportable segments are organized around the customers and markets we serve.

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.

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

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The segment information for the periods presented was as follows:

Three Months Ended

2023 April 1,

Three Months Ended Six Months Ended

2022 June 30,

(in millions)

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Defense Solutions $ 175 $ 139 $ 322 $ 272

Civil 64 38 104 81

Health 122 126 229 244

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

As a result, "Interest expense, net," "Other expense, 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) income, 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.

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

On May 1, 2023, VirnetX filed a petition for panel rehearing on the Apple II litigation decision at the Federal Circuit, but this petition was denied by the Federal Circuit on June 27, 2023.

On June 5, 2023, VirnetX filed a petition for panel rehearing on the Federal Circuit’s decision finding the patents at issue in the Apple II case to be unpatentable, but this petition was denied by the Federal Circuit on June 22, 2023.

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

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

Defense Contract Audit Agency

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

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Defense Contract Audit Agency

As of June 30, 2023, active indirect cost audits by the Defense Contract Audit Agency remain open for fiscal 2021 and subsequent fiscal years.

As of June 30, 2023, we believe we have adequately reserved for potential adjustments from audits or reviews of contract costs.

Other Government Investigations and Reviews

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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 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.

As of June 30, 2023, we have outstanding letters of credit of $ 70 million, principally related to performance guarantees on contracts and outstanding surety bonds with a notional amount of $ 102 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.

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

As of June 30, 2023, the future expirations of the outstanding letters of credit and surety bonds were as follows:

Fiscal year ending

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

What changed 10-Q

Item 1. Financial Statements