What changed in this filing

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Item 1. Financial Statements

2023-10-31 compared with 2023-08-01 · 185 added, 115 removed, 580 unchanged (34% of the section changed)

1 unchanged sentence

LEIDOS HOLDINGS, INC.

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

CONDENSED CONSOLIDATED BALANCE SHEETS

September 29,

2023 December 30,

in millions, except share and per share data)

Cash and cash equivalents $ 750 $ 516

20 unchanged sentences

Stockholders’ equity:

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

Common stock, $ 0.0001 par value, 500,000,000 shares authorized, 137,506,136 and 136,926,990 shares issued and outstanding at September 29, 2023, and December 30, 2022, respectively

Additional paid-in capital 2,055 2,005

7 unchanged sentences

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended Six Months Ended

2022 June 30,

in millions, except per share amounts)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended Nine Months Ended

September 29,

2023 September 30,

2022 September 29,

2023 September 30,

in millions, except per share data)

Revenues $ 3,921 $ 3,608 $ 11,458 $ 10,699

2 unchanged sentences

Acquisition, integration and restructuring costs 5 4 14 12

Goodwill impairment charges 599 — 599 —

Asset impairment charges 88 — 88 3

Equity earnings of non-consolidated subsidiaries ( 8 ) ( 4 ) ( 21 ) ( 5 )

Operating income 331 271 596 542

Non-operating expense:

Operating (loss) income

( 336 ) 281 260 823

Non-operating income (expense):

Interest expense, net ( 53 ) ( 50 ) ( 163 ) ( 148 )

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

Income before income taxes

Other income (expense), net

1 ( 10 ) ( 4 ) ( 7 )

(Loss) income before income taxes

( 388 ) 221 93 668

Income tax expense

( 8 ) ( 57 ) ( 115 ) ( 155 )

Net income $ 210 $ 172 $ 374 $ 349

Net (loss) income

$ ( 396 ) $ 164 $ ( 22 ) $ 513

net income attributable to non-controlling interest 3 2 8 5

Net income attributable to Leidos common stockholders

Net (loss) income attributable to Leidos common stockholders

$ ( 399 ) $ 162 $ ( 30 ) $ 508

4 unchanged sentences

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three Months Ended Six Months Ended

2022 June 30,

Net income $ 210 $ 172 $ 374 $ 349

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three Months Ended Nine Months Ended

September 29,

2023 September 30,

2022 September 29,

2023 September 30,

Net (loss) income

$ ( 396 ) $ 164 $ ( 22 ) $ 513

Foreign currency translation adjustments

1 unchanged sentence

Unrecognized gain (loss) on derivative instruments

— 18 ( 1 ) 54

Pension adjustments

( 1 ) 1 ( 2 ) ( 19 )

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

Comprehensive income 211 73 384 282

Total other comprehensive (loss) income, net of taxes

( 32 ) ( 56 ) ( 22 ) ( 123 )

Comprehensive (loss) income

( 428 ) 108 ( 44 ) 390

net income attributable to non-controlling interest 3 2 8 5

Comprehensive income attributable to Leidos common stockholders

Comprehensive (loss) income attributable to Leidos common stockholders

$ ( 431 ) $ 106 $ ( 52 ) $ 385

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

in millions, except for per share amounts)

Shares of common stock Additional

2 unchanged sentences

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

in millions, except per share data)

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

10 unchanged sentences

Net income — — 207 — 207 3 210

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

Other comprehensive income, net of taxes

— — — 1 1 — 1

Issuances of stock — 14 — — 14 — 14

4 unchanged sentences

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

Net (loss) income — — ( 399 ) — ( 399 ) 3 ( 396 )

Other comprehensive loss, net of taxes — — — ( 32 ) ( 32 ) — ( 32 )

Issuances of stock 1 12 — — 12 — 12

Repurchases of stock and other

— ( 1 ) — — ( 1 ) — ( 1 )

Dividends of $ 0.36 per share

— — ( 51 ) — ( 51 ) — ( 51 )

Stock-based compensation — 20 — — 20 — 20

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

Balance at September 29, 2023 138 $ 2,055 $ 2,186 $ ( 95 ) $ 4,146 $ 57 $ 4,203

See accompanying notes to condensed consolidated financial statements.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

in millions, except for per share amounts)

Shares of common stock Additional

2 unchanged sentences

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

in millions, except per share data)

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

10 unchanged sentences

Net income — — 171 — 171 1 172

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

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

Issuances of stock — 10 — — 10 — 10

Repurchases of stock and other

— ( 2 ) — — ( 2 ) — ( 2 )

Dividends of $ 0.36 per share

3 unchanged sentences

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

Net income — — 162 — 162 2 164

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

Issuances of stock — 13 — — 13 — 13

Repurchases of stock and other

— ( 4 ) — — ( 4 ) — ( 4 )

Dividends of $ 0.36 per share

— — ( 51 ) — ( 51 ) — ( 51 )

Stock-based compensation — 18 — — 18 — 18

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

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

See accompanying notes to condensed consolidated financial statements.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended

Nine Months Ended

September 29,

2023 September 30,

Cash flows from operations:

Net income $ 374 $ 349

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

Net (loss) income $ ( 22 ) $ 513

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

Depreciation and amortization 248 249

1 unchanged sentence

Deferred income taxes ( 192 ) ( 221 )

Goodwill impairment charges 599 —

Asset impairment charges 88 3

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

13 unchanged sentences

Proceeds from debt issuance 1,743 380

Net proceeds from commercial paper 200 150

Repayments of borrowings ( 2,041 ) ( 459 )

6 unchanged sentences

Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash — 14

Net decrease in cash, cash equivalents and restricted cash ( 235 ) ( 409 )

Net increase in cash, cash equivalents and restricted cash

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

5 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended

Nine Months Ended

September 29,

2023 September 30,

Supplementary cash flow information:

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

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

16 unchanged sentences

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.

Additionally, 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.

2 unchanged sentences

Changes in estimates on contracts were as follows:

Three Months Ended Six Months Ended

2022 June 30,

(in millions, except per share amounts)

Three Months Ended Nine Months Ended

September 29,

2023 September 30,

2022 September 29,

2023 September 30,

(in millions, except per share data)

Favorable impact $ 40 $ 36 $ 102 $ 116

Unfavorable impact ( 24 ) ( 29 ) ( 62 ) ( 75 )

Net impact to income before income taxes $ 18 $ 19 $ 24 $ 34

Net impact to (loss) income before income taxes $ 16 $ 7 $ 40 $ 41

Impact on diluted EPS attributable to Leidos common stockholders

2 unchanged sentences

Revenue Recognized from Prior Obligations

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.

Revenue recognized from performance obligations satisfied in previous periods was $ 13 million and $ 14 million for the three and nine months ended September 29, 2023, respectively, and $ 6 million and $ 38 million for the three and nine months ended September 30, 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 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.

At September 29, 2023, and December 30, 2022, $ 64 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 $ 119 million and $ 167 million at June 30, 2023, and December 30, 2022, respectively.

Our restricted cash balances were $ 189 million and $ 167 million at September 29, 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 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.

As of September 29, 2023, we had $ 15.5 billion of RPO and expect to recognize approximately 63 % and 79 % 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 June 30, 2023 Six Months Ended June 30, 2023

Three Months Ended September 29, 2023 Nine Months Ended September 29, 2023

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

7 unchanged sentences

Total $ 2,221 $ 900 $ 776 $ 3,897 $ 6,518 $ 2,637 $ 2,234 $ 11,389

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

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

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

12 unchanged sentences

Disaggregated revenues by contract-type were as follows:

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

Three Months Ended September 29, 2023 Nine Months Ended September 29, 2023

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

6 unchanged sentences

Total $ 2,221 $ 900 $ 776 $ 3,897 $ 6,518 $ 2,637 $ 2,234 $ 11,389

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

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

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

7 unchanged sentences

Disaggregated revenues by geographic location were as follows:

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

Three Months Ended September 29, 2023 Nine Months Ended September 29, 2023

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

5 unchanged sentences

Total $ 2,221 $ 900 $ 776 $ 3,897 $ 6,518 $ 2,637 $ 2,234 $ 11,389

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

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

Defense Solutions Civil Health Total Defense Solutions Civil Health Total

5 unchanged sentences

Total $ 2,075 $ 849 $ 655 $ 3,579 $ 6,175 $ 2,457 $ 1,992 $ 10,624

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.

Revenues by customer-type, contract-type and geographic location exclude lease income of $ 24 million and $ 69 million for the three and nine months ended September 29, 2023, respectively, and $ 29 million and $ 75 million for the three and nine months ended September 30, 2022, respectively.

Contract Assets and Liabilities

8 unchanged sentences

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

Balance sheet line item June 30,

Balance sheet line item September 29,

2023 December 30,

9 unchanged sentences

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

The 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.

Revenue recognized for the three and nine months ended September 29, 2023, of $ 28 million and $ 215 million, respectively, was included as a contract liability at December 30, 2022.

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

Note 3–Acquisitions, Divestitures, Goodwill and Intangible Assets

2 unchanged sentences

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

The preliminary goodwill recognized of $ 25 million represents intellectual capital and the acquired assembled workforce, neither of which qualify for recognition as a separate intangible asset.

As of September 29, 2023, we completed the determination of fair values of the assets acquired and liabilities assumed.The final goodwill recognized of $ 22 million represents intellectual capital and the acquired assembled workforce, neither of which qualify for recognition as a separate intangible asset.

None of the goodwill recognized is tax deductible.

6 unchanged sentences

Total 11 $ 24

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.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three and nine months ended September 29, 2023, $ 28 million and $ 86 million of revenues related to the Cobham Special Mission acquisition were recognized within the Defense Solutions reportable segmen t.

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

2 unchanged sentences

Goodwill at December 31, 2021 (1)

$ 3,681 $ 2,097 $ 966 $ 6,744

Acquisition of businesses 26 — — 26

2 unchanged sentences

Goodwill at December 30, 2022 (1)

$ 3,664 $ 2,066 $ 966 $ 6,696

Goodwill impairment — ( 599 ) — ( 599 )

Acquisition of a business (2)

1 unchanged sentence

Foreign currency translation adjustments ( 18 ) 4 — ( 14 )

Goodwill at June 30, 2023

Goodwill at September 29, 2023 (3)

$ 3,642 $ 1,471 $ 966 $ 6,079

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

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

(3) Carrying amount includes accumulated impairment losses of $ 369 million and $ 716 million within the Health and Civil segments, respectively.

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

As previously disclosed in our Annual Report on Form 10-K for the year ended December 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 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, 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.

Operations of the Security Enterprise Solutions (“SES”) 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 as customer budgetary restraints recover from reduced travel activity post-pandemic.

During the third quarter of fiscal 2023, the SES reporting unit refined its portfolio and made strategic business decisions to exit certain product offerings, as well as cease operations in certain countries in order to align the operations of the reporting unit with its strategic business plan.

These decisions, along with the delays in airline travel infrastructure projects and higher than anticipated servicing costs, contributed to a significant reduction in the reporting unit’s forecasted revenue and cash flows.

As a result, we conducted an interim quantitative goodwill impairment analysis and our estimates led us to determine that the carrying value of the SES reporting unit exceeded its estimated fair value (see “Note 4–Fair Value Measurements”).

Accordingly, we recognized a non-cash goodwill impairment charge of $ 599 million for the three and nine months ended September 29, 2023, leaving $ 303 million of goodwill at the SES reporting unit.

The impairment was recorded within the Civil reportable segment in the condensed consolidated statements of operations.

In the event that there are significant unfavorable changes to the forecasted cash flows, forecasted revenue, terminal growth rates or the cost of capital used in the fair value estimates, we may be required to record an additional impairment of goodwill at a future date.

LEIDOS HOLDINGS, INC.

2 unchanged sentences

Intangible assets, net consisted of the following:

June 30, 2023 December 30, 2022

September 29, 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 $ 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.

Our strategic decisions regarding SES’ product offerings and operating regions (see the goodwill discussion on page 13) caused certain technology and IPR&D intangible assets to be abandoned and the carrying values of certain program intangible assets to become unrecoverable.

As a result, for the three and nine months ended September 29, 2023, we recognized intangible asset impairment charges of $ 79 million.

The impairment was recorded to “Asset impairment charges” in the condensed consolidated statements of operations within the Civil reportable segment.

In the event that we are required to make an additional impairment of goodwill at a future date for any of the reasons identified in our discussion of goodwill or if other events occur that negatively impact these intangible assets, we may also be required to record an additional impairment of intangible assets at that time.

Amortization expense was $ 50 million and $ 153 million for the three and nine months ended September 29, 2023, respectively and $ 57 million and $ 173 million for the three and nine months ended September 30, 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 June 30, 2023, was as follows:

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The estimated annual amortization expense as of September 29, 2023, was as follows:

Fiscal year ending

2 unchanged sentences

2028 and thereafter 190

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 4–Fair Value Measurements

4 unchanged sentences

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

June 30, 2023 December 30, 2022

September 29, 2023 December 30, 2022

Carrying value Fair value Carrying value Fair value

2 unchanged sentences

Derivatives $ 19 $ 19 $ 20 $ 20

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).

As of September 29, 2023, and December 30, 2022, our derivatives primarily consisted of the cash flow interest rate swaps on $ 500 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 September 29, 2023 and the 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 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").

As of September 29, 2023, and December 30, 2022, the fair value of debt was $ 4.3 billion and $ 4.6 billion, respectively, and the carrying amount was $ 4.7 billion and $ 4.9 billion, respectively (see "Note 6–Debt").

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

During the three months ended September 29, 2023, we recorded impairment charges of SES' goodwill (see "Note 3–Acquisitions, Divestitures, Goodwill and Intangible Assets").

The fair values of the assets and liabilities of the SES reporting unit were determined using a blended approach, including discounted cash flow models and market earnings multiples.

The market approach estimates fair value based on profitability and valuation metrics for peer companies and applies a multiple to the reporting unit's operating performance.

The income approach estimates fair value by discounting the reporting unit's estimated future cash flows using a weighted-average cost of capital reflecting current market conditions as well as the risk profile of the reporting unit.

Future cash flows are based on estimates of economic and market assumptions made using the best judgment of management, including growth rates in revenue and margins, and future changes in tax rates and cash expenditures.

Other significant assumptions and estimates include estimates of future capital expenditures, terminal value growth rates, and changes in future working capital requirements.

The fair value of the SES reporting unit was determined using Level 3 inputs.

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

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

As of 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 June 30,

Balance sheet line item September 29,

2023 December 30,

4 unchanged sentences

We have interest rate swap agreements to hedge the cash flows of $ 500 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 %.

These interest rate swap agreements 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.

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.

During fiscal 2023, we modified our interest rate swap agreements to receive monthly variable interest payments based on the one-month SOFR rate, as compared to LIBOR, and will continue to pay interest at a fixed rate.

We applied the guidance of ASC 848 which permits the continuation of hedge accounting for such modification.

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.

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

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

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

Three Months Ended Six Months Ended

2022 June 30,

Three Months Ended Nine Months Ended

September 29,

2023 September 30,

2022 September 29,

2023 September 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

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

$ 53 $ 50 $ 163 $ 148

5 unchanged sentences

Our debt consisted of the following:

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

Stated interest rate Effective interest rate September 29,

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:

26 unchanged sentences

5.95 % 6.03 % 218 218

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

Finance leases due on various dates through fiscal 2032

Various 1.84 %- 6.31 %

8 unchanged sentences

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

As of June 30, 2023, there were no borrowings outstanding under the Revolving Facility.

As of September 29, 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.

20 unchanged sentences

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

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

As of September 29, 2023, we did not have any 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.

We were in compliance with all covenants as of September 29, 2023.

Finance Leases

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

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

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

LEIDOS HOLDINGS, INC.

21 unchanged sentences

Reclassification from AOCI — ( 12 ) — ( 12 )

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.

Balance at September 29, 2023 $ ( 92 ) $ 12 $ ( 15 ) $ ( 95 )

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

Note 8–Earnings Per Share

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

Three Months Ended Six Months Ended

2022 June 30,

Three Months Ended Nine Months Ended

September 29, 2023 (1)

September 30,

2022 September 29, 2023 (1)

September 30,

(in millions)

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Diluted weighted average number of shares outstanding 137 138 137 138

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 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.

(1) Dilutive common share equivalents did not include the impact of 1 million potentially dilutive equity awards because the result would have been anti-dilutive due to the net losses.

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.

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

For the three and nine months ended September 29, 2023, and September 30, 2022, the total outstanding stock options and vesting stock awards that were anti-dilutive were 2 million and 1 million, respectively.

During the nine months ended September 29, 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.

No share repurchases were made under the Company’s share repurchase program during the three months ended September 29, 2023.

Note 9–Income Taxes

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.

For the three months ended September 29, 2023, the effective tax rate was ( 2.1 )% compared to 25.8 % for the three months ended September 30, 2022.

The decrease to the effective tax rate was primarily due to the tax impacts of non-deductible goodwill impairments, see "Note 3–Acquisitions, Divestitures, Goodwill and Intangible Assets" for further information.

For the nine months ended September 29, 2023, the effective tax rate was 123.7 % compared to 23.2 % for the nine months ended September 30, 2022.

The increase to the effective tax rate was primarily due to the tax impacts of non-deductible goodwill impairments, see "Note 3–Acquisitions, Divestitures, Goodwill and Intangible Assets" for further information.

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

Based upon our interpretation of the law as currently enacted, we estimate that the fiscal 2023 impact will result in increases of $ 110 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.

TCJA increased both our income taxes payable and net deferred tax assets since the beginning of 2022.

For the nine months ended September 29, 2023, unrecognized tax benefits increased $ 71 million with a corresponding increase to net deferred tax assets as a result of uncertain tax positions arising from capitalizing research and development costs.

Future impacts of TCJA 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 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

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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 Six Months Ended

2022 June 30,

Three Months Ended Nine Months Ended

September 29,

2023 September 30,

2022 September 29,

2023 September 30,

(in millions)

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Total revenues $ 3,921 $ 3,608 $ 11,458 $ 10,699

Operating income (loss):

Operating (loss) income:

Defense Solutions $ 147 $ 137 $ 469 $ 409

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Corporate ( 28 ) ( 26 ) ( 87 ) ( 81 )

Total operating income $ 331 $ 271 $ 596 $ 542

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

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

Total operating (loss) income $ ( 336 ) $ 281 $ 260 $ 823

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

As a result, "Interest expense, net," "Other income (expense), net" and "Income tax expense" as reported in the condensed consolidated statements of operations 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.

As such, depreciation expense is not separately disclosed on the condensed consolidated statements of income.

As such, depreciation expense is not separately disclosed on the condensed consolidated statements of operations.

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

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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.

On September 20, 2023, VirnetX filed a petition for a writ of certiorari with the Supreme Court of the United States to review the Federal Circuit decisions.

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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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 September 29, 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 June 30, 2023, we believe we have adequately reserved for potential adjustments from audits or reviews of contract costs.

As of September 29, 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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Government procurements associated with the Company’s Intelligence Group in 2021 and 2022.

We intend to fully cooperate with the investigation, and we are conducting our own internal investigation with the assistance of outside counsel.

We are fully cooperating with the investigation, and we are conducting our own internal investigation with the assistance of outside counsel.

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

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.

As of September 29, 2023, we have outstanding letters of credit of $ 60 million , principally related to performance guarantees on contracts and outstanding surety bonds with a notional amount of $ 104 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 June 30, 2023, the future expirations of the outstanding letters of credit and surety bonds were as follows:

As of September 29, 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