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Item 7. Management’s Discussion and Analysis

2024-02-13 compared with 2023-02-14 · 116 added, 128 removed, 258 unchanged (49% of the section changed)

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In this section, we discuss our financial condition, changes in financial condition and results of our operations for the year ended December 29, 2023, compared to the year ended December 30, 2022.

For a discussion and analysis comparing our results for the year ended December 31, 2021, to the year ended January 1, 2021, see our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 15, 2022, under Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We are a FORTUNE 500 ® technology, engineering, and science company that provides services and solutions in the defense, intelligence, civil and health markets, both domestically and internationally.

For a discussion and analysis comparing our results for the year ended December 30, 2022, to the year ended December 31, 2021, see our Annual Report on Form 10-K for the year ended December 30, 2022, filed with the SEC on February 14, 2023, under Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Leidos, recognized as a member of the Fortune 500®, is a dynamic innovation company that is at the forefront of addressing the world’s most challenging issues in national security and health sectors.

With a global workforce of approximately 47,000, Leidos is committed to developing smarter technology solutions, particularly for customers in highly regulated industries.

We bring domain-specific capabilities and innovations to customers in each of these markets by leveraging five technical core capabilities:

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Intelligence Community, the U.S.

Department of Homeland Security, the Federal Aviation Administration, the Department of Veterans Affairs and many other U.S.

Department of Homeland Security, the Federal Aviation Administration, the Department of Veterans Affairs, National Aeronautics and Space Administration ("NASA") and many other U.S.

civilian, state and local government agencies, foreign government agencies and commercial businesses.

Approximately 8% of our revenues and tangible long-lived assets are generated by or owned by entities located outside of the United States.

We operate in three reportable segments:

Approximately 9% of our revenues are generated by entities located outside of the United States.

Our business has been aligned in three reportable segments:

Defense Solutions, Civil and Health.

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

Effective July 3, 2021, certain contracts were reassigned from the Defense Solutions reportable segment to the Civil reportable segment.

Impact on the first half of fiscal 2021 segment results were determined to be immaterial and have not been recast to reflect this change.

For additional information regarding our reportable segments, see “Business” in Part I and "Note 20—Business Segments" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K.

Our significant initiatives include the following:

• achieving annual revenue growth through internal collaboration and better leveraging of key differentiators across our company and the deployment of resources and investments into higher growth markets;

• increasing headcount and internal direct labor content on our contract portfolio;

• continued improvement in our back-office infrastructure and related business processes for greater effectiveness and efficiency across all business functions;

• disciplined deployment of our cash resources and use of our capital structure to enhance shareholder value while retaining an appropriate amount of financial leverage.

For fiscal 2022, revenues increased $0.7 billion, or 5%, compared to fiscal 2021, primarily due to a net increase in volumes on certain programs, program wins and a net increase in revenues related to our business acquisitions.

We also received $28 million in recoveries related to stop work orders on certain programs as a result of COVID-19.

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

For fiscal 2023, revenues increased $1.0 billion, or 7%, compared to fiscal 2022, primarily due to program wins, a net increase in volumes on certain programs and a net increase in revenues attributable to our business acquisitions.

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

Leidos Holdings, Inc.

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Operating income was $621 million, a $467 million decrease compared to fiscal 2022.

The decrease in operating income was primarily attributable to the completion of certain contracts, increase in legal fees and settlement costs and impairment charges of $37 million related to our ongoing facility rationalization efforts.

The decrease in operating income was partially offset by program wins and $28 million in recoveries related to stop work orders on certain programs as a result of COVID-19.

The decrease was primarily attributable to a net increase in impairment charges of $647 million mainly in our SES reporting unit (see "Note 8—Goodwill and Intangible Assets" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K).

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

From a macroeconomic perspective, our industry is under general competitive pressures associated with spending from our largest customer, the U.S.

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We continue to review our cost structure against our anticipated sales and undertake cost management actions and efficiency initiatives where necessary.

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

The volume of global passenger air travel remains below pre-pandemic levels, which continues to impact the operations of our Security Enterprise Solutions reporting unit.

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

Business Environment and Trends

Government Markets

In fiscal 2022, we generated approximately 86% of our total revenues from contracts with the U.S.

government, either as a prime contractor or a subcontractor to other contractors engaged in work for the U.S.

We generated approximately 87% of our total revenues from contracts with the U.S.

government in fiscal 2023, as compared to 86% of our total revenues from contracts with the U.S.

government in fiscal 2022, either as a prime contractor or a subcontractor to other contractors engaged in work for the U.S.

Revenues under contracts with the DoD and U.S.

Intelligence Community, including subcontracts under which the DoD or the U.S.

Intelligence Community is the ultimate purchaser, represented approximately 44% of our total revenues for fiscal 2022.

Intelligence Community is the ultimate purchaser, represented approximately 49% and 44% of our total revenues for fiscal 2023 and 2022, respectively.

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

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

President Biden signed the $1.7 trillion GFY 2023 omnibus spending bill into law on December 29, 2022.

The omnibus spending bill funds the federal government through September 30, 2023.

The bill includes $772.5 billion in non-defense spending and $858.4 billion in defense spending.

The bill also includes $85 billion in emergency spending not included in the discretionary amount.

The new 118th Congress will begin to work on the GFY 2024 appropriations bills in the spring of 2023.

On January 18, 2024, Congress passed a third continuing resolution (“CR”) to avoid a federal government shutdown.

The resolution is structured in two tiers with the first deadline being March 1, 2024, for Military Construction-VA, Agriculture, Energy-Water, and Transportation-HUD funding bills.

The eight remaining bills have a March 8, 2024, deadline.

The CR gives lawmakers extra time to consider the appropriations bills for government fiscal year (“GFY”) 2024.

Failure to pass the appropriations bills or another CR by March 1 and March 8, 2024, will result in a partial or complete federal government shutdown.

Trends in the U.S.

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International Markets

Sales to customers in international markets represented approximately 8% of total revenues for fiscal 2022.

Sales to customers in international markets represented approximately 9% of total revenues for fiscal 2023, as compared to 8% of total revenues for fiscal 2022.

Our international customers include foreign governments and their agencies.

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

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Key Performance Measures

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In addition, we consider business performance by contract type to be useful to management and investors when evaluating our operating income and margin performance.

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Results of Operations

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Selling, general and administrative expenses 942 951 (9) (1) %

Credit losses (recoveries), net 1 (9) 10 (111) %

Acquisition, integration and restructuring costs

17 27 (10) (37) %

Goodwill impairment charges 596 — 596 NM

Asset impairment charges

91 40 51 128 %

Equity earnings of non-consolidated subsidiaries

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Net income attributable to Leidos common stockholders $ 199 $ 685 $ (486) (71) %

Operating income margin

Operating margin

NM - Not meaningful

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Operating income 636 541 95 18 %

Operating income margin

The increase in revenues for fiscal 2022 as compared to fiscal 2021 was primarily attributable to program wins, a net increase in volumes on certain programs and a $63 million net increase in revenues related to our acquisitions made in the second and third quarters from the prior year and the Cobham Special Mission acquisition made in the current year.

The increase was partially offset by the completion of certain contracts, contracts that were reassigned from Defense Solutions reportable segment to the Civil reportable segment during the third quarter of fiscal 2021 and $95 million related to unfavorable exchange rate movements.

The decrease in operating income for fiscal 2022 as compared to fiscal 2021 was primarily attributable to the completion of certain contracts, net write-downs on certain contracts, increased amortization expense of $8 million and $6 million related to unfavorable exchange rate movements.

Fiscal 2022 also included impairment charges of $12 million related to our ongoing facility rationalization efforts (see "Note 10—Leases").

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

Operating margin

The increase in revenues for fiscal 2023 as compared to fiscal 2022 was primarily attributable to program wins, a net increase in volumes on certain programs and a $94 million net 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 an unfavorable net impact from exchange rate movements.

The increase in operating income for fiscal 2023 as compared to fiscal 2022 was primarily attributable to program wins, a net increase in volumes, improved cost control and net write-ups on certain contracts, partially offset by the completion of certain contracts.

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Revenues $ 3,664 $ 3,464 $ 200 6 %

Operating income 234 248 (14) (6) %

Operating income margin

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

The increase was partially offset by the completion of certain contracts and $12 million of unfavorable exchange rate movements.

The decrease in operating income for fiscal 2022 as compared to fiscal 2021 was primarily attributable to a $19 million increase in legal fees and settlement costs resulting from an adverse arbitration ruling related to the 2016 acquisition of the Information Systems & Global Solutions business (“IS&GS Business”) from Lockheed Martin and impairment charges of $14 million related to our ongoing facility rationalization efforts (see "Note 10—Leases").

The decreases were partially offset by a net increase in program volumes.

Operating income for fiscal 2021 included a $26 million benefit from a legal reserve adjustment related to the Mission Support Alliance joint venture (see "Note 1—Nature of Operations and Basis of Presentation").

Operating (loss) income

(413) 234 (647) (276) %

Operating margin

(11.3) % 6.8 %

The increase in revenues for fiscal 2023 as compared to fiscal 2022 was primarily attributable to a net increase in volumes on certain programs and program wins.

The decrease in operating income for fiscal 2023 as compared to fiscal 2022 was primarily attributable to a net increase in impairment charges of $665 million, restructuring charges of $10 million and higher margin offerings on certain programs in the prior year.

The decrease was partially offset by $19 million in legal reserves and fees resulting from an adverse arbitration ruling in the prior year.

Year Ended 2023 to 2022

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Operating income 528 421 107 25 %

Operating income margin

Operating margin

17.4 % 15.7 %

The increase in revenues for fiscal 2022 as compared to fiscal 2021 was primarily attributable to a net increase in program volumes, program wins and $28 million in recoveries related to stop work orders on certain programs as a result of COVID-19.

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

The decrease in operating income for fiscal 2022 as compared to fiscal 2021 was primarily attributable to a net decrease in volumes on higher margin programs and the completion of certain contracts.

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

The increase in revenues for fiscal 2023 as compared to fiscal 2022 was primarily attributable to a net increase in volumes on certain programs, program wins and increased earnings from incentive awards.

The increase was partially offset by completion of certain contracts and a net decrease in the recovery of expenditures in the medical examination business.

The increase in operating income for fiscal 2023 as compared to fiscal 2022 was primarily attributable to increased earnings from incentive awards and a net increase in volumes on certain programs, partially offset by a net decrease in the recovery of expenditures in the medical examination business.

Year Ended 2023 to 2022

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Operating loss $ (130) $ (108) $ (22) 20 %

The increase in operating loss for fiscal 2022 as compared to fiscal 2021 was primarily attributable to an increase in legal costs partially offset by lower acquisition and integration costs.

Equity earnings of non-consolidated subsidiaries

We have certain non-controlling ownership interests in equity method investments.

For fiscal 2022 and fiscal 2021 we recorded earnings of $12 million and $20 million, respectively, from our equity method investments.

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The increase in operating loss for fiscal 2023 as compared to fiscal 2022 was primarily attributable to higher legal costs, increased expenses in integration and restructuring activities, partially offset by the impact of foreign payroll tax reserves.

Non-Operating Expense, Net

Non-operating expense, net increased $17 million for fiscal 2022 as compared to fiscal 2021, primarily due to higher interest expense driven by increased interest rates.

Non-operating expense, net increased by $16 million for fiscal 2023 as compared to fiscal 2022, primarily due to a net increase in interest expense driven by higher interest rates and refinancing activities.

Provision for Income Taxes

Our effective tax rate was 48.4% and 21.8% in fiscal 2023 and 2022, respectively.

The effective tax rate for fiscal 2022 and 2021 were both favorably impacted primarily by federal research tax credits and excess tax benefits related to employee stock-based payment transactions.

The effective tax rate for fiscal 2023 was unfavorably impacted primarily by non tax deductible goodwill impairments.

The effective tax rate for fiscal 2022 was favorably impacted primarily by federal research tax credits and excess tax benefits related to employee stock-based payment transactions.

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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 enacted, we recorded the estimated fiscal 2022 impact, resulting in increases of $130 million to both our income taxes payable and net deferred tax assets, and our fiscal 2022 unrecognized tax benefits increased by $91 million with a corresponding increase to net deferred tax assets.

We expect this TCJA provision to have a similar impact to income taxes payable, unrecognized tax benefits and net deferred tax assets during fiscal 2023.

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

Treasury, among other factors.

In December 2021, the Organization for Economic Cooperation and Development (“OECD”) enacted model rules for a new 15% global minimum tax framework (“Pillar Two”).

Many governments around the world have enacted or are in the process of enacting Pillar Two legislation.

We are evaluating the potential impact of the rules but currently do not expect them to have a material impact.

Bookings and Backlog

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Total $ 8,796 $ 28,166 $ 36,962 $ 8,382 $ 27,400 $ 35,782

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Total backlog at December 30, 2022, and December 31, 2021, included $610 million and $800 million, respectively, of backlog acquired during the year through business combinations in our Defense Solutions reportable segment.

The increase in backlog as of December 30, 2022, as compared to December 31, 2021, included an unfavorable impact of $233 million due to the movements in the British pound and Australian dollar when compared to the U.S.

Bookings and backlog fluctuate from period to period depending on our success rate in winning contracts and the timing of contract awards, renewals, modifications and cancellations, as well as foreign currency movements.

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government as discussed in “Business Environment and Trends” in this Annual Report on Form 10-K.

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We expect to recognize a substantial portion of our funded backlog as revenues within the next 12 months.

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2023 December 30,

2021 January 1,

2022 December 31,

Cost-reimbursement and fixed-price-incentive-fee 48 % 50 % 50 %

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As of December 29, 2023, we had $777 million in cash and cash equivalents.

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

During fiscal 2022 and 2021, there were no borrowings outstanding under the credit facilities.

In March 2023, we entered into a senior unsecured revolving credit facility which can provide up to $1.0 billion in additional borrowing, if required.

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

As of December 29, 2023, and December 30, 2022, there were no borrowings outstanding under any revolving credit facility.

At December 29, 2023, and December 30, 2022, we had outstanding debt of $4.7 billion and $4.9 billion, respectively.

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

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 (see "Note 13—Debt").

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

We made principal payments on our debt of $545 million, $106 million and $731 million during fiscal 2022, 2021 and 2020, respectively.

This activity included required principal payments on our term loans of $476 million, $96 million and $72 million during fiscal 2022, 2021 and 2020, respectively.

During fiscal 2020, we made $4,925 million of principal repayments for outstanding debt and retired the $450 million senior notes.

The notes outstanding as of December 30, 2022, contain financial covenants and customary restrictive covenants.

In February 2023, we issued and sold $750 million 5.75% fixed-rate senior notes.

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

In March 2023, we entered into a Credit Agreement with certain financial institutions, which provided for a senior unsecured term loan facility in an aggregate principal amount of $1.0 billion (the “Term Loan Facility”).

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

As of December 29, 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 December 29, 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 ("Commercial Paper Notes") that have maturities of up to 397 days from the date of issuance (see "Note 13—Debt").

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 December 29, 2023, and December 30, 2022, we did not have any commercial paper notes outstanding.

We made principal payments, excluding the impacts of our Commercial Paper Notes, on our debt of $2,045 million, $545 million and $106 million during fiscal 2023, 2022 and 2021, respectively.

The activity for fiscal 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 364-day term loan credit agreement.

Our credit facility, term loan facility, commercial paper notes and notes outstanding as of December 29, 2023, contain financial covenants and customary restrictive covenants.

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

We paid dividends of $201 million for fiscal 2023 and $199 million for both fiscal 2022 and 2021.

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

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.

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

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

We paid dividends of $199 million, $199 million and $196 million for fiscal 2022, 2021 and 2020, respectively.

During fiscal 2022, we sold $209 million of accounts receivable under accounts receivable purchase agreements and received proceeds of $209 million (see "Note 6—Receivables").

There were no sales of accounts receivable in the second half of fiscal 2022.

We may from time to time seek to retire or purchase our outstanding debt through cash purchases in the open market, privately negotiated transactions or otherwise.

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All shares delivered were immediately retired.

During fiscal 2022, we made a $25 million payment in connection with the adverse arbitration ruling related to the 2016 acquisition of the IS&GS Business from Lockheed Martin.

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

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

The actual impact will depend on the amount of research and development costs the Company will incur during fiscal 2023 and whether new guidance and interpretive rules are issued by the U.S.

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

Our tax cash payments increased by approximately $260 million in fiscal 2023, primarily

to cover both the fiscal 2022 and 2023 tax obligations related to this provision and we anticipate an increase of approximately $60 million in the fiscal year ending January 3, 2025, ("fiscal 2024").

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.

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

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

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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.

Summary of Cash Flows

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Net cash provided by operating activities (1)

$ 1,165 $ 992

Net cash used in investing activities (211) (313)

Net cash used in financing activities (715) (865)

Net (decrease) increase in cash, cash equivalents and restricted cash $ (192) $ 188

Net cash provided by operating activities decreased $45 million for fiscal 2022 as compared to fiscal 2021.

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

(1) Net cash provided by operating activities during the year ended December 30, 2022, was recast to present the effect of foreign exchange rate changes on cash, cash equivalents and restricted cash as a separate line in the consolidated statements of cash flows.

Net cash provided by operating activities increased $173 million for fiscal 2023 as compared to fiscal 2022.

The increase was primarily due to faster collections on receivables and favorable timing of customer advance payments, partially offset by higher tax payments of $260 million mainly in connection with the TCJA provision.

Net cash used in investing activities decreased $102 million for fiscal 2023 as compared to fiscal 2022.

The decrease was primarily due to $430 million of less cash paid related to our business acquisitions in current year as compared to prior year and $15 million of proceeds received from the sale of Aviation & Missile Solutions LLC in the current year.

The decrease was partially offset by $25 million of higher capital expenditures in the current year.

Net cash used in financing activities increased $752 million for fiscal 2022 as compared to fiscal 2021.

The increase was primarily due to $439 million increase in principal payments of our debt, an increase of $272 million in stock repurchases primarily attributable to the accelerated share repurchase agreement and a $45 million decrease in net capital contributions received from our non-controlling interest.

The decrease was primarily due to $190 million of cash paid in connection with our Cobham Special Mission acquisition from the prior year, partially offset with higher capital expenditures of $78 million in the current year.

Net cash used in financing activities decreased $150 million for fiscal 2023 as compared to fiscal 2022.

The decrease was primarily due a net decrease of $296 million in stock repurchases driven by the accelerated share repurchase agreement in the prior year and an increase of $1.4 billion in proceeds received from

the issuance of debt in the current year, partially offset by an increase of $1.5 billion in payments of debt.

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Off-Balance Sheet Arrangements

We have outstanding performance guarantees and cross-indemnity agreements in connection with certain aspects of our business.

We have letters of credit outstanding principally related to performance guarantees on contracts and surety bonds outstanding principally related to performance and subcontractor payment bonds.

We also have future lease commitments for the use of certain aircraft as described in "Note 21—Commitments and Contingencies" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K.

We have letters of credit outstanding principally related to performance guarantees on contracts and surety bonds outstanding principally related to performance and subcontractor payment bonds as described in "Note 21—Commitments and Contingencies" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K.

These arrangements have not had, and management does not believe it is likely that they will in the future have, a material effect on our liquidity, capital resources, operations or financial condition.

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We have interest payments related to our outstanding debt and finance leases.

As of December 30, 2022, future scheduled interest payments on our outstanding debt and finance leases were $195 million, expected to be paid in fiscal 2023 and $946 million expected to be paid thereafter.

As of December 29, 2023, future scheduled interest payments on our outstanding debt and finance leases were $242 million, expected to be paid in fiscal 2024 and $1.3 billion expected to be paid thereafter.

As of December 29, 2023, future payments on our deferred compensation arrangements and purchase obligations for long-term purchases and service agreements were $51 million, expected to be paid in fiscal 2024, and $157 million expected to be paid thereafter.

Our future payments do not include $92 million of income tax liabilities as a result of uncertain tax positions arising from certain provisions of the TCJA becoming effective in 2022, and the timing of such payments, if any, cannot be reasonably estimated.

Our future payments do not include $114 million of income tax liabilities, primarily as a result of uncertain tax positions, and the timing of such payments, if any, cannot be reasonably estimated.

For additional information, see "Note 18—Income Taxes" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K.

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$750 million 4.375% notes, due May 2030

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

$750 million 5.750% notes, due March 2033

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

Statement of Operations Information for the Guarantor and Issuer of Registered Notes

(in millions)

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Operating income 538

Net income 250

Commitments and Contingencies

We are subject to a number of reviews, investigations, claims, lawsuits, other uncertainties and future obligations related to our business.

For a discussion of these items, see "Note 10—Leases" and "Note 21—Commitments and Contingencies" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K.

Net income attributable to Leidos common stockholders

Critical Accounting Estimates

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Revenue Recognition

We perform work under various types of contracts, which include firm-fixed-price ("FFP"), time-and-materials ("T&M"), fixed-price-level-of-effort ("FP-LOE"), cost-plus-fixed-fee ("CPFF"), cost-plus-award-fee, cost-plus-incentive-fee and fixed-price-incentive-fee contracts.

Some of these contracts require us to use estimates of the revenue and cost associated with the design, manufacture and delivery of our products and services for the purposes of recognizing revenue.

We also evaluate whether two or more contracts should be combined and accounted for as a single contract, including the task orders issued under an IDIQ award.

In addition, we assess contract modifications to determine whether changes to existing contracts should be accounted for as part of the original contract or as a separate contract.

We perform work under various types of contracts, which include FFP, T&M, FP-LOE, cost-plus-fixed-fee, cost-plus-award-fee, cost-plus-incentive-fee and fixed-price-incentive-fee contracts.

On FFP contracts requiring system integration and cost-plus contracts with variable consideration, revenue is generally recognized over time using a method that measures the extent of progress towards completion of a performance obligation, principally using a cost-input method (referred to as the cost-to-cost method).

Under the cost-to-cost method, revenue is recognized based on the proportion of total costs incurred to estimated total costs-at-completion ("EAC"), which require us to use estimates of the revenue and cost associated with the design, manufacture and delivery of our offerings and services.

A performance obligation's EAC includes all direct costs such as materials, labor, subcontract costs, overhead and a ratable portion of general and administrative costs.

If the estimated cost of a performance obligation whose associated revenue is recognized using the cost-to-cost method exceeds the estimated transaction price, the entire amount of the loss is recognized in operations in the period the loss is known.

Some of our cost-plus and fixed-price contracts contain award fees, incentive fees or other provisions that may either increase or decrease the transaction price.

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We estimate variable consideration at the most probable amount that we expect to be entitled to, based on the assessment of the contractual variable fee criteria, complexity of work and related risks, extent of customer discretion, amount of variable consideration received historically and the potential of significant reversal of revenue.

We allocate the transaction price of a contract to its performance obligations proportionately based upon the individual selling prices.

The standalone selling price of the performance obligations is generally based on an expected cost-plus margin approach.

For certain product sales, prices from other standalone sales are used.

Substantially all of our contracts do not contain a significant financing component, which would require an adjustment to the transaction price of the contract.

Leidos Holdings, Inc.

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On FFP contracts requiring system integration and cost-plus contracts with variable consideration, revenue is recognized over time generally using a method that measures the extent of progress towards completion of a performance obligation, principally using a cost-input method (referred to as the cost-to-cost method).

Under the cost-to-cost method, revenue is recognized based on the proportion of total costs incurred to estimated total costs-at-completion ("EAC").

A performance obligation's EAC includes all direct costs such as materials, labor, subcontract costs, overhead and a ratable portion of general and administrative costs.

In addition, an EAC of a performance obligation includes future losses estimated to be incurred on onerous contracts, as and when known.

For the impacts of changes in estimates on our contracts, (see "Note 3—Summary of Significant Accounting Policies").

For the impacts of changes in estimates on our contracts, see "Note 3—Summary of Significant Accounting Policies" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K.

Goodwill and Intangible Assets

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We may perform qualitative or quantitative analysis to test for impairment.

Qualitative factors may include macroeconomic, industry and market considerations, overall financial performance, industry, legal and other relevant events and factors affecting the reporting unit.

For quantitative analysis, we use discounted cash flow models and market multiple analyses in order to estimate reporting unit fair values.

Discounted cash flow analyses rely on significant judgement and assumptions about expected future cash flows, weighted-average cost of capital, discount rates, expected long-term growth rates and operating margins.

Qualitative factors include macroeconomic, industry and market considerations, overall financial performance, industry, legal and other relevant events and factors affecting the reporting unit.

Our quantitative analysis utilizes discounted cash flow models and market multiple valuation methods to estimate reporting unit fair values.

Discounted cash flow analyses rely on significant judgment and assumptions about expected future cash flows, weighted-average cost of capital, discount rates, expected long-term growth rates and operating margins.

These assumptions are based on estimates of future sales and earnings after considering such factors as general market conditions, customer budgets, existing firm and future orders, changes in working capital, long term business plans and recent operating performance.

Market multiple analyses incorporate significant judgments and assumptions related to the selection of guideline public companies, our forecast earnings before interest, taxes, depreciation and amortization (“EBITDA”), forecast EBITDA of guideline public companies and control premium estimates.

We performed our annual test for impairment as of October 1, 2022, which resulted in no impairments being identified.

However, through this analysis we determined that our Security Enterprise Solutions reporting unit within the Civil reportable segment, which holds goodwill in the amount of $899 million as of December 30, 2022, was at risk of future impairment.

The estimated fair value of the Security Enterprise Solutions reporting unit exceeded the carrying value by approximately 13%.

Operations of the reporting unit rely heavily on the sales and servicing of security and detection products, which have been negatively impacted by COVID-19.

The forecasts utilized to estimate the fair value of the Security Enterprise Solutions reporting unit assume continued global operations in all of our existing markets and a gradual improvement in the global aviation security product and related service sales, reaching pre-COVID-19 levels by fiscal 2025.

The fair value of the reporting unit is also negatively impacted by rising interest rate factored into cost of capital.

In the event that there are significant unfavorable changes to the 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 or intangible assets at a future date.

Recently Adopted and Issued Accounting Pronouncements

For a discussion of these items, see "Note 2—Accounting Standards" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K.

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 budgets recover from the 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 11—Fair Value Measurements” of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K).

Accordingly, we recognized a non-cash goodwill impairment charge of $596 million for fiscal 2023 (see “Note 8—Goodwill and Intangible Assets” of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K).

We performed our annual test for impairment as of September 30, 2023, which resulted in no further impairments being identified.

Our strategic decisions regarding SES’ product offerings and operating regions caused certain technology and In-process research and development intangible assets to be abandoned and the carrying values of certain program intangible assets to become unrecoverable.

As a result, we recognized intangible asset impairment charges of $79 million for fiscal 2023 (see “Note 8—Goodwill and Intangible Assets” of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K).

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Commitments and Contingencies

We are subject to a number of reviews, investigations, claims, lawsuits, other uncertainties and future obligations related to our business.

Recently Adopted and Issued Accounting Pronouncements

For a discussion of these items, see "Note 2—Accounting Standards" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K.

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-K

Item 7. Management’s Discussion and Analysis