What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-01 compared with 2023-05-02 · 90 added, 70 removed, 162 unchanged (50% of the section changed)

3 unchanged sentences

In some cases, forward-looking statements can be identified by words such as “will,” “expect,” “estimate,” “plan,” “potential,” “continue” or similar expressions.

Such statements are not guarantees of future performance and involve risks and uncertainties, including uncertainties relating to the coronavirus pandemic ("COVID-19") and the actions taken by authorities and us to respond, and actual results may differ materially from those in the forward-looking statements as a result of various factors.

Such statements are not guarantees of future performance and involve risks and uncertainties and actual results may differ materially from those in the forward-looking statements as a result of various factors.

Some of these factors include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K, as updated by the risk factor in this report under Part II, Item 1A.

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Government Markets

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.

During the three and six months ended June 30, 2023, we generated approximately 85% and 86%, respectively, of total revenues from contracts with the U.S.

government, as compared to 86% during both of the three and six months ended July 1, 2022.

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.

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.

Congress is currently working on the 12 appropriations bills that will fund the federal government in government fiscal year ("GFY") 2024.

The bills must presumably be within the agreed upon spending caps set by the debt ceiling bill that was signed by President Biden on June 3, 2023.

For GFY 2024, the total federal discretionary spending request is $1.59 trillion with $886 billion for defense spending and $703 billion for non-defense discretionary spending programs.

Failure to pass the appropriations bills or a continuing resolution by September 30, 2023, results in a partial or complete federal government shutdown.

International Markets

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.

Sales to customers in international markets represented approximately 9% of total revenues for both the three and six months ended June 30, 2023, as compared to 8% of total revenues for both the three and six months ended July 1, 2022.

Our international customers include foreign governments and their agencies.

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

Three Months Ended

2023 April 1,

Three Months Ended Six Months Ended

2022 Dollar change Percent change June 30,

2022 Dollar change Percent change

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Segment and Corporate Results

Three Months Ended

Defense Solutions March 31,

2023 April 1,

Three Months Ended Six Months Ended

Defense Solutions June 30,

2022 Dollar change Percent change June 30,

2022 Dollar change Percent change

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Operating margin 8.0 % 6.8 % 7.5 % 6.6 %

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 in revenues for the three months ended June 30, 2023, as compared to the three months ended July 1, 2022, was primarily attributable to programs wins, a net increase in volumes on certain programs and a $28 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 completion of certain contracts and a $11 million unfavorable impact from exchange rate movements.

The increase in revenues for the six months ended June 30, 2023, as compared to the six months ended July 1, 2022, was primarily attributable to program wins, a net increase in volumes on certain programs, net write-ups and a $58 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 completion of certain contracts and a $33 million unfavorable impact from exchange rate movements.

The increase in operating income for the three months ended June 30, 2023, as compared to the three months ended July 1, 2022, was primarily attributable to program wins and a net increase in volumes on certain programs, partially offset by the completion of certain contracts.

The increase in operating income for the six months ended June 30, 2023, as compared to the six months ended July 1, 2022, was primarily attributable to program wins, net write-ups and a net increase in volumes on certain programs.

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

Three Months Ended

Civil March 31,

2023 April 1,

Three Months Ended Six Months Ended

Civil June 30,

2022 Dollar change Percent change June 30,

2022 Dollar change Percent change

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Operating margin 7.1 % 4.4 % 5.8 % 4.9 %

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

Health March 31,

2023 April 1,

The increase in revenues for the three and six months ended June 30, 2023, as compared to the three and six months ended July 1, 2022, were primarily attributable to a net increase in program volumes on certain programs and programs wins, partially offset by the completion of certain contracts.

The increase in operating income for the three and six months ended June 30, 2023, as compared to the three and six months ended July 1, 2022, were primarily driven by a net increase in program volumes on certain programs and $17 million and $19 million in legal reserves and fees, respectively, resulting from an adverse arbitration ruling related to the 2016 acquisition of the Information Systems & Global Solutions business from Lockheed Martin in the prior year periods.

Three Months Ended Six Months Ended

Health June 30,

2022 Dollar change Percent change June 30,

2022 Dollar change Percent change

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Operating margin 16.3 % 18.3 % 15.7 % 18.2 %

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,

The increase in revenues for the three months ended June 30, 2023, as compared to the three months ended July 1, 2022, was primarily attributable to a net increase in volumes on certain programs, program wins and net write-ups, partially offset by the completion of certain contracts.

The three months ended July 1, 2022, included $28 million in recoveries related to stop work orders on certain programs as a result of COVID-19.

The increase in revenues for the six months ended June 30, 2023, as compared to the six months ended July 1, 2022, was primarily attributable to a net increase in volumes on certain programs and program wins.

The increase was partially offset by the completion of certain contracts, higher volume of net write-ups in the prior year and $28 million in recoveries in the prior year related to stop work orders on certain programs as a result of COVID-19.

The decrease in operating income for the three months ended June 30, 2023, as compared to the three months ended July 1, 2022, was primarily attributable to $28 million in recoveries related to stop work orders on certain programs as a result of COVID-19 in the prior year quarter, partially offset by net write-ups on certain programs and program wins.

The decrease in operating income for the six months ended June 30, 2023, as compared to the six months ended July 1, 2022, was primarily attributable to $28 million in recoveries related to stop work orders on certain programs as a result of COVID-19 in the prior year, higher volume of net write-ups in the prior year and increased labor costs, partially offset by programs wins.

Three Months Ended Six Months Ended

Corporate June 30,

2022 Dollar change Percent change June 30,

2022 Dollar change Percent change

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Operating loss $ (30) $ (32) $ 2 (6.3) % $ (59) $ (55) $ (4) 7.3 %

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.

The decrease in operating loss for the three months ended June 30, 2023, as compared to the three months ended July 1, 2022, was primarily attributable to reduced foreign payroll tax reserves in the current period.

The increase in operating loss for the six months ended June 30, 2023, as compared to the six months ended July 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.

The increase was partially offset by reduced foreign payroll tax reserves in the current year.

LEIDOS HOLDINGS, INC.

Non-Operating Expense, net

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.

Non-operating expense, net for the three months ended June 30, 2023, was $57 million as compared to $46 million for the three months ended July 1, 2022.

Non-operating expense, net for the six months ended June 30, 2023, was $115 million as compared to $95 million for the six months ended July 1, 2022.

The increases in non-operating expense for both periods 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 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.

For the three months ended June 30, 2023, our 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, our 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.

LEIDOS HOLDINGS, INC.

Bookings and Backlog

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.

We recorded net bookings worth an estimated $2.9 billion and $5.9 billion during the three and six months ended June 30, 2023, as compared to $2.2 billion and $7.6 billion for the three and six months ended July 1, 2022.

The estimated value of our total backlog was as follows:

March 31, 2023 April 1, 2022

June 30, 2023 July 1, 2022

Segment Funded Unfunded Total Funded Unfunded Total

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Total $ 8,271 $ 25,881 $ 34,152 $ 7,541 $ 27,181 $ 34,722

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.

Total backlog as of June 30, 2023, as compared to July 1, 2022, included $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 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.

LEIDOS HOLDINGS, INC.

Liquidity and Capital Resources

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

As of June 30, 2023, we had $329 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.

As of June 30, 2023, there were no borrowings outstanding under the revolving credit facility.

We had outstanding debt of $4.9 billion at both June 30, 2023, and December 30, 2022.

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

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

LEIDOS HOLDINGS, INC.

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.

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.

As of June 30, 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%.

At June 30, 2023, the applicable margin for SOFR-denominated borrowings was 1.25%.

We have a commercial paper program in which we may issue short-term unsecured commercial paper notes and have maturities of up to 397 days from the date of issuance.

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

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

We made principal payments on our debt of $325 million and $2,036 million during the three and six months ended June 30, 2023, respectively, and $407 million and $434 million during the three and six months ended July 1, 2022, respectively.

This activity included a required principal repayment of $320 million to discharge the 364-day term loan credit agreement ("Term Loan Agreement") for the three months ended June 30, 2023, as compared to required principal payments on our term loans of $404 million for the three months ended July 1, 2022.

The activity for the six months ended June 30, 2023, included a $1,210 million payment to discharge the existing Term Loan Facility, a $498 million payment to discharge the $500 million 2.95% notes, due May 2023, and a principal repayment of $320 million to discharge the Term Loan Agreement, as compared to $428 million required principal payments on our Term Loan Facility for the six months ended July 1, 2022.

Our credit facilities, commercial paper notes, senior unsecured term loans and notes outstanding as of June 30, 2023, contain financial covenants and customary restrictive covenants.

We were in compliance with all covenants as of June 30, 2023.

During the three months ended June 30, 2023, we modified our interest rate swap agreements to reference SOFR prior to the discontinuation of LIBOR.

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

Under the ASC 848 relief, we will continue to apply hedge accounting for the interest rate swap arrangement.

We paid dividends of $50 million and $100 million during the three and six months ended June 30, 2023, respectively, and $49 million and $100 million during the three and six months ended July 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.

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.

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

No share repurchases were made during the three months ended June 30, 2023.

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.

We anticipate our tax cash payments to increase by approximately $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.

Summary of Cash Flows

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

Three Months Ended

2023 April 1,

Three Months Ended Six Months Ended

2022 June 30,

(in millions)

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

Net cash provided by operating activities (1)

$ 164 $ 45 $ 66 $ 138

Net cash used in investing activities (44) (8) (83) (29)

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

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.

Net cash (used in) provided by financing activities (164) 6 (221) (513)

(1) Net cash provided by operating activities during the three and six months ended July 1, 2022, were recast to present the effect of foreign exchange rate changes on cash, cash equivalents and restricted cash as a separate line in the condensed consolidated statements of cash flows.

Net cash provided by operating activities increased $119 million during the three months ended June 30, 2023, when compared to the prior year quarter.

The changes were primarily due to strong collections on trade accounts receivable and favorable timing of customer advance payments, partially offset by higher tax payments.

Net cash provided by operating activities decreased $72 million during the six months ended June 30, 2023, when compared to the prior year.

The changes were primarily due to higher tax payments of $152 million mainly in connection to the TCJA provision and a $62 million payment for payroll taxes related to the CARES Act, partially offset by strong collections on trade accounts receivable and favorable timing of customer advance payments.

Net cash used in investing activities increased $36 million and $54 million, respectively, for the three and six months ended June 30, 2023, when compared to the prior year periods, primarily due to higher capital expenditures of $19 million and $30 million, respectively, and proceeds received from the sale of Aviation & Missile Solutions LLC in the prior year periods.

Net cash used in financing activities increased $170 million for the three months ended June 30, 2023, when compared to the prior year quarter primarily due to a decrease of $173 million in net proceeds received from debt activities.

Net cash used in financing activities decreased $292 million for the six months ended June 30, 2023, when compared to the prior year primarily due to a net decrease of $485 million used in stock repurchases

primarily attributable to the accelerated share repurchase activities from prior year, partially offset by a decrease of $189 million in net proceeds received from debt activities.

Off-Balance Sheet Arrangements

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2023 December 30,

(in millions)

Total current assets $ 2,017 $ 2,115

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Total liabilities $ 9,322 $ 9,241

LEIDOS HOLDINGS, INC.

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

Three Months Ended

Six Months Ended

(in millions)

Revenues, net $ 5,125

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Net income attributable to Leidos common stockholders 117

LEIDOS HOLDINGS, INC.

Contractual Obligations and Commitments

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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 2. Management’s Discussion and Analysis