Leidos Holdings, Inc. 10-K

Item 8. Financial Statements and Supplementary Data LEIDOS HOLDINGS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 65 Consolidated Balance Sheets as of December 29, 2023 and December 30, 2022 68 Consolidated Statements of Operations for the fiscal years ended December 29, 2023, December 30, 2022 and December 31, 2021 69 Consolidated Statements of Comprehensive Income for the fiscal years ended December 29, 2023, December 30, 2022 and December 31, 2021, 70 Consolidated Statements of Equity for the fiscal years ended December 29, 2023, December 30, 2022 and December 31, 2021 71 Consolidated Statements of Cash Flows for the fiscal years ended December 29, 2023, December 30, 2022 and December 31, 2021 72 Notes to Consolidated Financial Statements 74 Financial statement schedules are omitted because they are not applicable or the required information is presented in the consolidated financial statements or the notes thereto. Leidos Holdings, Inc. Annual Report - 64 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Leidos Holdings, Inc. Reston, Virginia Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Leidos Holdings, Inc. and subsidiaries (the "Company") as of December 29, 2023 and December 30, 2022, the related consolidated statements of operations, comprehensive income, equity, and cash flows, for the fiscal years ended December 29, 2023, December 30, 2022, and December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 29, 2023 and December 30, 2022, and the results of its operations and its cash flows for the fiscal years ended December 29, 2023, December 30, 2022, and December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 29, 2023, based on criteria established in Internal Control — Integrated Framework (2013 ) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 13, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. Leidos Holdings, Inc. Annual Report - 65 Table of Contents Goodwill Valuation – Security Enterprise Solutions Reporting Unit - Refer to Note 3 and Note 8 to the financial statements Critical Audit Matter Description The Company’s accounting policy is to test goodwill for impairment on the first day of the fourth quarter of each year and more frequently if events or circumstances indicate that the carrying value may not be recoverable. During the third quarter of fiscal year 2023, the Security Enterprise Solutions (“SES”) reporting unit refined its business 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 continued 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, the Company performed an interim quantitative impairment analysis of goodwill for the SES reporting unit by comparing the estimated fair value of the reporting unit to its carrying value. The Company’s determination of the estimated fair value of the reporting unit was based on a blended approach, including discounted cash flow-models and market earnings multiple. Estimating the fair value of a reporting unit requires the exercise of significant judgment and assumptions including judgments about expected future cash flows, weighted-average cost of capital, and growth rates in revenue and margins. Changes in these assumptions could have a significant impact on the fair value of the reporting unit, the amount of any goodwill impairment charge, or both. As a result of the quantitative assessment, the Company concluded that the carrying value of the reporting unit exceeded the fair value and recognized a goodwill impairment charge of $596 million for the year ended December 29, 2023. We identified goodwill for the SES reporting unit as a critical audit matter due to the significant judgments made by management to estimate the fair value of the reporting unit and the sensitivity of the fair value to changes in these estimates. Performing audit procedures to evaluate the reasonableness of management’s estimate required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the selection of the discount rate, terminal growth rate and forecasts of future revenues and cash flows for the Security Enterprise Solutions reporting unit included the following, among others: • We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the selection of the discount, and terminal growth rates and management’s development of forecasted revenues and cash flows, including the completeness, accuracy and reasonableness of the forecasted amounts. • We performed a sensitivity analysis of the forecasts of future revenue, earnings before interest, taxes, depreciation and amortization (“EBITDA”) and capital expenditures, which included their impact on the fair value of the SES reporting unit. • We evaluated management’s ability to accurately forecast future SES reporting unit revenue and operating income, comparing actual results to management’s historical forecasts. • We evaluated the reasonableness of management’s SES reporting unit revenue growth rates, EBITDA projections and timing of future cash flows by comparing the forecasts to: ◦ Historical results and current performance. ◦ Internal communications to management and the Board of Directors. ◦ Forecasted information included in industry reports considering macroeconomic factors. • With the assistance of our fair value specialists, we evaluated (1) the valuation methodology utilized, including testing mathematical accuracy of calculations and (2) the projections of future revenue growth rates, the discount rate and the determination of market multiples by either testing the underlying source information, or by developing a range of independent estimates and comparing those to the rate selected by management. Leidos Holdings, Inc. Annual Report - 66 Table of Contents Revenues — Refer to Note 3 and Note 4 to the financial statements Critical Audit Matter Description The Company recognized certain customer contract revenue 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). 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. The accounting for these contracts involves judgment, particularly as it relates to the process of estimating total costs for the performance obligation. In addition, an EAC of a performance obligation includes future losses estimated to be incurred on onerous contracts, as and when known. Given the judgments necessary to determine whether multiple promises within a single contract represent a single performance obligation, whether or not the Company is acting as principal in the fulfillment of the identified performance obligations on certain contracts, and estimates of total costs for the performance obligations that recognize revenue using the cost-to-cost method, auditing such accounting conclusions and estimates required extensive audit effort due to the volume and complexity of these contracts and a high degree of auditor judgment when performing audit procedures and evaluating the results of those procedures. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to management’s conclusions regarding whether multiple promises within a single contract represent a single performance obligation, whether the Company is acting as a principal or an agent in fulfilling identified performance obligations on certain contracts, and estimates of total costs for the performance obligations that recognize revenue using the cost-to-cost method included the following, among others: • We tested the effectiveness of controls over contract revenue, including management’s controls over the initial setup of new contract arrangements and the estimates of total costs and revenues for identified performance obligations. • We developed an expectation of revenue and compared it to the recorded balance. • For a selection of contracts, we performed the following for each contract: ◦ Evaluated the terms and conditions of each contract and the appropriateness of the accounting treatment in accordance with accounting principles generally accepted in the United States of America, by: ▪ Inspecting the executed contract to verify that the facts on which management’s conclusions were reached were consistent with the actual terms and conditions of the contract. ▪ Evaluating the contract within the context of the five-step model and that management’s conclusions were appropriate by evaluating the nature of the promises within the contract, the interrelationship of the promised services and/or products provided, the pattern by which obligations are fulfilled, the number of performance obligations identified, and which party is acting as principal in the fulfillment of the identified performance obligations. ▪ Evaluating the appropriateness and consistency of the methods and assumptions used by management to develop estimates of future revenues that will be recognized and costs that will be incurred. ▪ Tested the mathematical accuracy of management’s calculation of revenue for the performance obligation. • We analyzed cumulative adjustments recorded during the year and tested those with characteristics of audit interest to determine that the adjustments were the result of changes in facts and circumstances and not estimates that were previously inaccurate. /s/ Deloitte & Touche LLP McLean, Virginia February 13, 2024 We have served as the Company's auditor since fiscal 2000. Leidos Holdings, Inc. Annual Report - 67 Table of Contents LEIDOS HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS December 29, 2023 December 30, 2022 (in millions, except share and per share data) Assets: Cash and cash equivalents $ 777 $ 516 Receivables, net 2,429 2,350 Inventory, net 310 287 Other current assets 489 490 Total current assets 4,005 3,643 Property, plant and equipment, net 961 847 Intangible assets, net 667 952 Goodwill 6,112 6,696 Operating lease right-of-use assets, net 512 545 Other long-term assets 438 388 Total assets $ 12,695 $ 13,071 Liabilities: Accounts payable and accrued liabilities $ 2,277 $ 2,254 Accrued payroll and employee benefits 695 701 Short-term debt and current portion of long-term debt 18 992 Total current liabilities 2,990 3,947 Long-term debt, net of current portion 4,664 3,928 Operating lease liabilities 516 570 Deferred tax liabilities 3 40 Other long-term liabilities 264 233 Total liabilities $ 8,437 $ 8,718 Commitments and contingencies (Note 21) Stockholders’ equity: Preferred stock, $ 0.0001 par value, 10,000,000 shares authorized and no shares issued and outstanding at December 29, 2023 and December 30, 2022 — — Common stock, $ 0.0001 par value, 500,000,000 shares authorized, 135,766,419 and 136,926,990 shares issued and outstanding at December 29, 2023, and December 30, 2022, respectively — — Additional paid-in capital 1,885 2,005 Retained earnings 2,364 2,367 Accumulated other comprehensive loss ( 48 ) ( 73 ) Total Leidos stockholders’ equity 4,201 4,299 Non-controlling interest 57 54 Total stockholders' equity 4,258 4,353 Total liabilities and stockholders' equity $ 12,695 $ 13,071 See accompanying notes to consolidated financial statements. Leidos Holdings, Inc. Annual Report - 68 Table of Contents LEIDOS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 29, 2023 December 30, 2022 December 31, 2021 (in millions, except per share data) Revenues $ 15,438 $ 14,396 $ 13,737 Cost of revenues 13,194 12,312 11,723 Selling, general and administrative expenses 942 951 851 Acquisition, integration and restructuring costs 24 17 27 Goodwill impairment charges 596 — — Asset impairment charges 91 40 4 Equity earnings of non-consolidated subsidiaries ( 30 ) ( 12 ) ( 20 ) Operating income 621 1,088 1,152 Non-operating expense: Interest expense, net ( 212 ) ( 199 ) ( 184 ) Other expense, net ( 6 ) ( 3 ) ( 1 ) Income before income taxes 403 886 967 Income tax expense ( 195 ) ( 193 ) ( 208 ) Net income 208 693 759 Less: net income attributable to non-controlling interest 9 8 6 Net income attributable to Leidos common stockholders $ 199 $ 685 $ 753 Earnings per share: Basic $ 1.45 $ 5.00 $ 5.34 Diluted 1.44 4.96 5.27 See accompanying notes to consolidated financial statements. Leidos Holdings, Inc. Annual Report - 69 Table of Contents LEIDOS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 29, 2023 December 30, 2022 December 31, 2021 (in millions) Net income $ 208 $ 693 $ 759 Foreign currency translation adjustments 34 ( 95 ) ( 8 ) Unrecognized (loss) gain on derivative instruments ( 8 ) 54 29 Pension adjustments ( 1 ) ( 20 ) 13 Total other comprehensive income (loss), net of taxes 25 ( 61 ) 34 Comprehensive income 233 632 793 Less: net income attributable to non-controlling interest 9 8 6 Comprehensive income attributable to Leidos common stockholders $ 224 $ 624 $ 787 See accompanying notes to consolidated financial statements. Leidos Holdings, Inc. Annual Report - 70 Table of Contents LEIDOS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF EQUITY Shares of common stock Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Leidos stockholders' equity Non-controlling interest Total stockholders' equity (in millions, except for per share data) Balance at January 1, 2021 142 $ 2,580 $ 1,328 $ ( 46 ) $ 3,862 $ 9 $ 3,871 Net income — — 753 — 753 6 759 Other comprehensive income, net of taxes — — — 34 34 — 34 Issuances of stock 1 46 — — 46 — 46 Repurchases of stock and other ( 3 ) ( 270 ) — — ( 270 ) — ( 270 ) Dividends of $ 1.40 per share — — ( 201 ) — ( 201 ) — ( 201 ) Stock-based compensation — 67 — — 67 — 67 Net capital contributions from non-controlling interest — — — — — 38 38 Balance at December 31, 2021 140 2,423 1,880 ( 12 ) 4,291 53 4,344 Net income — — 685 — 685 8 693 Other comprehensive loss, net of taxes — — — ( 61 ) ( 61 ) — ( 61 ) Issuances of stock 1 51 — — 51 — 51 Repurchases of stock and other ( 4 ) ( 542 ) — — ( 542 ) — ( 542 ) Dividends of $ 1.44 per share — — ( 198 ) — ( 198 ) — ( 198 ) Stock-based compensation — 73 — — 73 — 73 Net capital distributions to non-controlling interest — — — — — ( 7 ) ( 7 ) Balance at December 30, 2022 137 2,005 2,367 ( 73 ) 4,299 54 4,353 Net income — — 199 — 199 9 208 Other comprehensive income, net of taxes — — — 25 25 — 25 Issuances of stock 1 53 — — 53 — 53 Repurchases of stock and other ( 2 ) ( 247 ) — — ( 247 ) — ( 247 ) Dividends of $ 1.46 per share — — ( 202 ) — ( 202 ) — ( 202 ) Stock-based compensation — 77 — — 77 — 77 Net capital distributions to non-controlling interest — ( 3 ) — — ( 3 ) ( 6 ) ( 9 ) Balance at December 29, 2023 136 $ 1,885 $ 2,364 $ ( 48 ) $ 4,201 $ 57 $ 4,258 See accompanying notes to consolidated financial statements. Leidos Holdings, Inc. Annual Report - 71 Table of Contents LEIDOS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 29, 2023 December 30, 2022 December 31, 2021 (in millions) Cash flows from operations: Net income $ 208 $ 693 $ 759 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 331 333 325 Stock-based compensation 77 73 67 Goodwill impairment charges 596 — — Asset impairment charges 91 40 4 Deferred income taxes ( 109 ) ( 211 ) ( 26 ) Other 28 26 ( 7 ) Change in assets and liabilities, net of effects of acquisitions and dispositions: Receivables ( 65 ) ( 174 ) ( 5 ) Other current assets and other long-term assets 140 160 143 Accounts payable and accrued liabilities and other long-term liabilities 31 ( 143 ) ( 210 ) Accrued payroll and employee benefits ( 5 ) 98 ( 32 ) Income taxes receivable/payable ( 158 ) 97 15 Net cash provided by operating activities 1,165 992 1,033 Cash flows from investing activities: Acquisitions of businesses, net of cash acquired ( 6 ) ( 192 ) ( 622 ) Payments for property, equipment and software ( 207 ) ( 129 ) ( 104 ) Proceeds from disposition of businesses 2 15 — Net proceeds from sale of assets — 6 — Other — ( 13 ) ( 4 ) Net cash used in investing activities ( 211 ) ( 313 ) ( 730 ) Cash flows from financing activities: Proceeds from debt issuance 1,743 380 380 Repayments of borrowings ( 2,045 ) ( 545 ) ( 106 ) Payments for debt issuance and modification costs ( 7 ) — — Dividend payments ( 201 ) ( 199 ) ( 199 ) Repurchases of stock and other ( 246 ) ( 542 ) ( 270 ) Proceeds from issuances of stock 50 48 44 Net capital (distributions to) contributions from non-controlling interests ( 9 ) ( 7 ) 38 Net cash used in financing activities ( 715 ) ( 865 ) ( 113 ) Effect of foreign exchange rate changes on cash and cash equivalents 6 ( 6 ) ( 2 ) Net increase (decrease) in cash, cash equivalents and restricted cash 245 ( 192 ) 188 Cash, cash equivalents and restricted cash at beginning of year 683 875 687 Cash, cash equivalents and restricted cash at end of year 928 683 875 Less: restricted cash at end of year 151 167 148 Cash and cash equivalents at end of year $ 777 $ 516 $ 727 Leidos Holdings, Inc. Annual Report - 72 Table of Contents LEIDOS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS [CONTINUED] Year Ended December 29, 2023 December 30, 2022 December 31, 2021 (in millions) Supplementary cash flow information: Cash paid for interest $ 207 $ 195 $ 182 Cash paid for income taxes, net of refunds 435 217 221 Non-cash investing activity: Property, plant and equipment additions $ 2 $ 7 $ 4 Non-cash financing activity: Finance lease obligations $ 65 $ 1 $ 51 See accompanying notes to consolidated financial statements. Leidos Holdings, Inc. Annual Report - 73 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1—Nature of Operations and Basis of Presentation Nature of Operations and Basis of Presentation Leidos Holdings, Inc. ("Leidos"), a Delaware corporation, is a holding company whose direct 100%-owned subsidiary and principal operating company is Leidos, Inc. 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. Leidos' customers include the U.S. Department of Defense ("DoD"), the U.S. Intelligence Community, the U.S. Department of Homeland Security, the Federal Aviation Administration, the Department of Veterans Affairs and many other U.S. civilian, state and local government agencies, foreign government agencies and commercial businesses. Unless indicated otherwise, references to "we," "us" and "our" refer collectively to Leidos Holdings, Inc. and its consolidated subsidiaries. Our business has been aligned into three reportable segments: Defense Solutions, Civil and Health. Additionally, we separately present the unallocable costs associated with corporate functions as Corporate. We have an 88 % controlling interest in Mission Support Alliance, LLC ("MSA"), a joint venture with Centerra Group, LLC, which includes 41 % purchased from Jacobs Group, LLC on January 26, 2018. MSA’s contract ended on January 24, 2021. We also have a 53 % controlling interest in Hanford Mission Integration Solutions, LLC ("HMIS"), the legal entity for the follow-on contract to MSA's contract and a joint venture with Centerra Group, LLC and Parsons Government Services, Inc. We consolidate the financial results for MSA and HMIS into our consolidated financial statements. The consolidated financial statements also include the balances of all voting interest entities in which Leidos has a controlling voting interest ("subsidiaries") and a variable interest entity ("VIE") in which Leidos is the primary beneficiary. The consolidated balances of the VIE are not material to the consolidated financial statements for the periods presented. Intercompany accounts and transactions between consolidated companies have been eliminated in consolidation. Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. We combined "Credit losses (recoveries), net" into "Selling, general and administrative expenses" on the consolidated statements of operations. We have certain entities where the functional currency is not the U.S. dollar and have separately presented the effect of exchange rate changes on cash, cash equivalents and restricted cash held in foreign currencies as a separate line in the consolidated statements of cash flows. Note 2—Accounting Standards Accounting Standards Updates Adopted Accounting Standards Updates ("ASU") 2020-04, ASU 2021-01, and ASU 2022-06 Reference Rate Reform In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-04, which provides companies with optional expedients and exceptions to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. This update provides optional expedients for applying accounting guidance to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of the reference rate reform. The amendments in this update are effective for all entities as of March 2020 and can be adopted using a prospective approach no later than December 31, 2022. In January 2021, the FASB issued ASU 2021-01 which amends the scope of ASU 2020-04. The amendments in this update are elective and provide optional relief for entities with hedge accounting and contract modifications affected by the transition from LIBOR through December 31, 2022. In December 2022, the FASB issued ASU 2022-06 which extend the deadline for application of ASU 2021-01 through December 31, 2024. Under this relief, entities may continue to account for contract modifications as a continuation of the existing contract and the continuation of the hedge accounting arrangement. In the first half of fiscal 2023, we adopted certain practical expedients available under Accounting Standards Codification ("ASC") 848. Our term loans are based on a Secured Overnight Financing Rate (“SOFR”) rate (see "Note 13—Debt"). In fiscal 2023, we modified our interest rate swap agreements to reference SOFR (see "Note 12—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. Leidos Holdings, Inc. Annual Report - 74 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Accounting Standards Updates Issued But Not Yet Adopted ASU 2023-07 Segment Reporting In November 2023, the FASB issued ASU 2023-07, to improve reportable segment disclosure requirements. This update requires companies to disclose significant segment expense categories that are regularly provided to the chief operating decision maker ("CODM") on an interim and annual basis and disclosures about a reportable segment’s profit or loss and assets that are currently required annually on an interim basis. Companies must also disclose how segment measures of profit or loss are used by the CODM. The amendments in this update are effective for public entities as of November 2023 and should be adopted retrospectively for annual periods beginning after December 15, 2023, and interim periods beginning after December 15, 2024. We are evaluating the impact of the update and plan to adopt the amendments for annual disclosures in fiscal 2024. ASU 2023-09 Income Taxes In December 2023, the FASB issued ASU 2023-09, to enhance the transparency and usefulness of income tax disclosures. The update requires enhancements to the annual rate reconciliation, including disclosure of specific categories and additional information for reconciling items meeting a quantitative threshold. The update also requires disclosure of income taxes paid disaggregated by federal, state and foreign taxes, and individual jurisdictions meeting a quantitative threshold. The amendments in this update are effective for public business entities for annual periods beginning after December 15, 2024, and may be adopted on a prospective or retrospective basis. Early adoption is permitted. We are currently evaluating the impacts of this update and plan to adopt these amendments using the prospective approach for annual disclosures in fiscal year 2025. Note 3—Summary of Significant Accounting Policies Reporting Periods Leidos' fiscal year ends on the Friday nearest the end of December. Fiscal 2023 ended December 29, 2023, fiscal 2022 ended December 30, 2022, and fiscal 2021 ended December 31, 2021. Each fiscal year included 52 weeks. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Management evaluates these estimates and assumptions on an ongoing basis, including those relating to estimated profitability of long-term contracts, indirect billing rates, allowances for doubtful accounts, inventories, right-of-use ("ROU") assets and lease liabilities, fair value and impairment of intangible assets and goodwill, income taxes, pension benefits, stock-based compensation expense and contingencies. These estimates have been prepared by management on the basis of the most current and best available information; however, actual results could differ materially from those estimates. Operating Cycle Our operating cycle for long-term contracts may be greater than one year and is measured by the average time intervening between the inception and the completion of those contracts. Business Combinations, Investments and Variable Interest Entities Business Combinations The accounting for business combinations requires management to make judgments and estimates related to the fair value of assets acquired, including the identification and valuation of intangible assets, as well as liabilities and contingencies assumed. Such judgments and estimates directly impact the amount of goodwill recognized in connection with an acquisition. Estimating the fair value of acquired assets and assumed liabilities, including intangibles, requires judgments about expected future cash flows, weighted-average cost of capital, discount rates and expected long-term growth rates. Leidos Holdings, Inc. Annual Report - 75 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Investments Investments in entities and corporate joint ventures where we have a non-controlling ownership interest but over which we have the ability to exercise significant influence, are accounted for under the equity method of accounting. We recognize our proportionate share of the entities' net income or loss and do not consolidate the entities' assets and liabilities. Equity investments in entities over which we do not have the ability to exercise significant influence and whose securities do not have a readily determinable fair value are carried at cost or cost net of other-than-temporary impairments. Variable Interest Entities We occasionally form joint ventures and/or enter into arrangements with special purpose limited liability companies for the purpose of bidding and executing on specific projects. We analyze each such arrangement to determine whether it represents a VIE. If the arrangement is determined to be a VIE, we assess whether we are the primary beneficiary of the VIE and are consequently required to consolidate the VIE. Divestitures From time-to-time, we may dispose (or management may commit to plans to dispose) of strategic or non-strategic components of the business. Divestitures representing a strategic shift that has (or will have) a major effect in operations and financial results are classified as discontinued operations, whereas non-strategic divestitures remain in continuing operations. Restructuring Expenses Restructuring expenses are incurred in connection with programs aimed at reducing our costs. Restructuring costs may include employee severance benefits, costs to terminate contracts and other permanent exit costs to consolidate or close facilities directly related to the restructuring program. One-time involuntary termination benefits with a required service period of less than 60 days are recognized when the benefits have been communicated to employees and one-time termination benefits with a required service period in excess of 60 days are recognized over the requisite period. Ongoing termination benefit arrangements are recognized at estimated fair value when it is probable that they will be incurred and are reasonably estimable. Costs associated with exit or disposal activities, including the related one-time and ongoing involuntary termination benefits, are included as "Acquisition, integration and restructuring costs" on the consolidated statements of operations. Revenue Recognition Our revenues from contracts with customers are from offerings including digital modernization, cyber operations, mission software systems, integrated systems and mission operations, primarily with the U.S. government and its agencies. We also serve various state and local governments, foreign governments and commercial customers. We perform 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 ("FP-IF") contracts. To determine the proper revenue recognition, we first evaluate whether we have a duly approved and enforceable contract with a customer, in which the rights of the parties and payment terms are identified, and collectability is probable. 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 indefinite delivery/indefinite quantity ("IDIQ") award. In addition, we assess contract modifications to determine whether changes to existing contracts should be accounted for as part of the original performance obligation or as a separate performance obligation. Contract modifications generally relate to changes in contract specifications and requirements and do not add distinct services, and therefore are accounted for as part of the original performance obligation. If contract modifications add distinct goods or services and increase the contract value by an amount that reflects the standalone selling price, those modifications are accounted for as separate contracts. Leidos Holdings, Inc. Annual Report - 76 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Most of our contracts contain multiple promises including the design and build of software-based systems, integration of hardware and software solutions, running and maintaining of IT infrastructure and procurement services. In all cases, we assess if the multiple promises should be accounted for as separate performance obligations or combined into a single performance obligation. We generally separate multiple promises in a contract as separate performance obligations if those promises are distinct, both individually and in the context of the contract. If multiple promises in a contract are highly interrelated or require significant integration or customization within a group, they are combined and accounted for as a single performance obligation. Our contracts with the U.S. government often contain options to renew existing contracts for an additional period of time (generally a year at a time) under the same terms and conditions as the original contract, and generally do not provide the customer any material rights under the contract. We account for renewal options as separate performance obligations when they include distinct goods or services at standalone selling prices. Certain cost-plus and fixed-price contracts contain award fees, incentive fees or other provisions that may either increase or decrease the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion. 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. Contracts with the U.S. government are subject to the Federal Acquisition Regulation ("FAR") and priced on estimated or actual costs of providing the goods or services. The FAR provides guidance on types of costs that are allowable in establishing prices for goods and services provided to the U.S. government and its agencies. Each contract is competitively priced and bid separately. Pricing for non-U.S. government agencies and commercial customers is based on specific negotiations with each customer. We allocate the transaction price of a contract to its performance obligations based on their respective standalone selling prices. The performance obligation's standalone selling price 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. Any taxes collected or imposed when determining the transaction price are excluded. We recognize revenue on our service-based contracts primarily over time as there is continuous transfer of control to the customer over the duration of the performance period as the work is performed. For U.S. government contracts, continuous transfer of control to the customer is evidenced by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay for costs incurred plus a reasonable profit and take control of any work-in-process. Similarly, for non-U.S. government contracts, the customer typically controls the work-in-process as evidenced by rights to payment for work performed to date plus a reasonable profit to deliver products or services for which we do not have an alternate use. Anticipated losses on service-based revenue contracts are recognized when incurred over the contract term while the full amount of anticipated losses on other contracts are recognized during the period in which the losses are determined. In certain product sales, where the products have an alternate use, revenue is recognized at a point in time when the customer takes control of the asset usually denoted by possession, transfer of legal title and acceptance by the customer. Leidos Holdings, Inc. Annual Report - 77 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On performance obligations that require system integration and capability development efforts or contain 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. On certain other performance obligations, principally associated with T&M, FP-LOE and CPFF contracts, revenue is generally recognized using the right-to-invoice practical expedient as we are contractually able to invoice the customer based on the control transferred to the customer. Additionally, on maintenance (generally FFP) performance obligations, revenue is recognized over time using a straight-line method as the control of the services is provided to the customer evenly over the period of performance. For certain performance obligations where we are not primarily responsible for fulfilling the promise to provide the goods or service to the customer, do not have inventory risk and do not have discretion in establishing the price for the goods or service, we recognize revenue on a net basis. Contract Costs Contract costs generally include direct costs such as labor, materials, subcontract costs and indirect costs identifiable with or allocable to a specific contract. Costs are expensed as incurred unless they qualify for deferral and capitalization. Contract costs incurred for U.S. government contracts, including indirect costs, are subject to audit and adjustment by the Defense Contract Audit Agency ("DCAA") (see "Note 21—Commitments and Contingencies"). Pre-contract Costs Certain eligible costs incurred prior to the start of a project are deferred as assets when we are required to incur costs prior to contract execution in order to be able to perform on the contract and it is probable that we will recover the costs when the contract is issued. Pre-contract costs are amortized over the requisite service period for which the cost relates. Transition Costs Under certain service contracts, costs are incurred at the beginning of the contract to transition services, employees, and equipment to or from the customer or from a prior contractor. These costs are generally capitalized as deferred assets and amortized on a straight-line basis over the anticipated term of the contract or a specified period of performance, including unexercised option periods that are reasonably certain of being exercised. Project Assets Purchases of assets used to fulfill a specific contract with a customer that do not constitute other specific asset classes are capitalized as project assets when the costs are generally expected to be recovered, we maintain ownership of the asset and the benefit is received over a period of time. Project assets include prepaid services and maintenance agreements, certain material purchases and other costs incurred on contracts. Project assets are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the expected contract period of performance. Changes in Estimates on Contracts Changes in estimates related to contracts accounted for using the cost-to-cost method of accounting are recognized in the period in which such changes are made for the inception-to-date effect of the changes, with the exception of contracts acquired through a business combination, where the adjustment is made for the period commencing from the date of acquisition. Leidos Holdings, Inc. Annual Report - 78 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Changes in estimates on contracts for the periods presented were as follows: Year Ended December 29, 2023 December 30, 2022 December 31, 2021 (in millions, except for per share amounts) Favorable impact $ 140 $ 146 $ 149 Unfavorable impact ( 100 ) ( 113 ) ( 102 ) Net favorable impact to income before income taxes $ 40 $ 33 $ 47 Impact on diluted EPS attributable to Leidos common stockholders $ 0.22 $ 0.17 $ 0.25 The impact on diluted earnings per share ("EPS") attributable to Leidos common stockholders is calculated using our statutory tax rate. Revenue Recognized from Prior Obligations During fiscal 2023, 2022 and 2021, revenue recognized from performance obligations satisfied in previous periods was $ 8 million, $ 9 million and $ 26 million, respectively. The changes primarily relate 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 due to true-ups of contract estimates at the end of contract performance. Selling, General and Administrative Expenses We classify indirect costs incurred within or allocated to our U.S. government customers as overhead (included in "Cost of revenues") or general and administrative expenses in the same manner as such costs are defined in our disclosure statements under U.S. government Cost Accounting Standards. Selling, general and administrative expenses include general and administrative, bid and proposal, company-funded research and development expenses, and legal fees and settlements. We conduct research and development activities under customer-funded contracts and with company-funded research and development funds. Company-funded research and development expense was $ 128 million, $ 116 million and $ 109 million for fiscal 2023, 2022 and 2021, respectively. Expenses for research and development activities performed under customer contracts are charged directly to cost of revenues for those contracts. Income Taxes We account for income taxes under the asset and liability method in accordance with the accounting standard for income taxes. The asset and liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities. Under this method, changes in tax rates and laws are recognized in income in the period such changes are enacted. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations. If we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount or would no longer be able to realize our deferred income tax assets in the future as currently recorded, we would make an adjustment to the valuation allowance which would decrease or increase the provision for income taxes. The provision for federal, state, foreign and local income taxes is calculated on income before income taxes based on current tax law and includes the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Such provision differs from the amounts currently payable because certain items of income and expense are recognized in different reporting periods for financial reporting purposes than for income tax purposes. Leidos Holdings, Inc. Annual Report - 79 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS We record liabilities for uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. We recognize interest and penalties related to uncertain tax positions in our income tax expense. Cash and Cash Equivalents Our cash equivalents are primarily comprised of investments in several large institutional money market accounts, with original maturity of three months or less. Outstanding payments are included within "Cash and cash equivalents" and "Accounts payable and accrued liabilities" correspondingly on the consolidated balance sheets. At December 29, 2023, and December 30, 2022, $ 136 million and $ 158 million, respectively, of outstanding payments were included within "Cash and cash equivalents." Restricted Cash We have restricted cash balances, primarily representing advances from customers that are restricted as to use for certain expenditures related to that customer's contract. Restricted cash balances are included within "Other current assets" on the consolidated balance sheets. Our restricted cash balances were $ 151 million and $ 167 million at December 29, 2023, and December 30, 2022, respectively. Receivables Receivables include amounts billed and currently due from customers, amounts billable where the right to consideration is unconditional and amounts unbilled. Billable and unbilled amounts are recognized at estimated realizable value and consist of costs and fees, most of which are expected to be billed and collected generally within one year. Unbilled amounts also include rate variances that are billable upon negotiation of final indirect rates with the Defense Contract Management Agency. Cost-reimbursable and T&M contracts are generally billed as costs are incurred. FFP contracts are billed either based on milestones, which are the achievement of specific events as defined in the contract, or based on progress payments, which are interim payments up to a designated amount of costs incurred as work progresses. On certain contracts, the customer withholds a certain percentage of the contract price (retainage). These withheld amounts are included within unbilled receivables and are billed upon contract completion or the occurrence of a specified event, typically after negotiation of final indirect rates with the U.S. government. Based on our historical experience, the write-offs of retention balances have not been significant. When events or conditions indicate that amounts outstanding from customers may become uncollectible, an allowance is estimated and recorded. This estimate is based on the age of outstanding receivables or specific identification of balances at risk of becoming uncollectible. Amounts billed and collected on contracts but not yet recorded as revenue because we have not performed our obligation under the arrangement with a customer are deferred and included within "Accounts payable and accrued liabilities" or "Other long-term liabilities" on the consolidated balance sheets. Concentration of Credit Risk Financial instruments that potentially subject us to concentrations of credit risk primarily consist of accounts receivable and derivatives. Since our receivables are primarily with the U.S. government, we do not have exposure to material credit risk. We manage our credit risk related to derivatives through the use of multiple counterparties with high credit standards. Inventories Inventories are valued at the lower of cost or estimated net realizable value. Generally, raw material inventory is valued using the moving average cost method. Work-in-process inventory may include material costs, labor and allocable overhead costs. The majority of finished goods inventory consists of technology and security products, inspection systems, baggage scanning equipment and small glide munitions. Inventory is evaluated against historical or planned usage to determine appropriate provisions for obsolete inventory. Leidos Holdings, Inc. Annual Report - 80 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Goodwill Goodwill represents the excess of the fair value of consideration transferred, plus the fair value of any non-controlling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is not amortized, but is tested for impairment at the reporting unit level on an annual basis and more frequently if events or circumstances indicate that the carrying value of the reporting unit may not be recoverable. Our policy is to perform our annual goodwill impairment evaluation as of the first day of the fourth quarter of our fiscal year. During both fiscal 2023 and 2022, we had seven reporting units for the purpose of testing goodwill for impairment. Goodwill is evaluated for impairment either under a qualitative assessment option or a quantitative approach, which depends on the facts and circumstances of a reporting unit, consideration of the excess of a reporting unit's fair value over its carrying amount in previous assessments and changes in business environment. When performing a qualitative assessment, we consider factors including, but not limited to, current macroeconomic conditions, industry and market conditions, cost factors, financial performance and other relevant events to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If we determine that it is more likely than not that a reporting unit's fair value is less than its carrying value, a quantitative goodwill impairment test is performed. When performing a quantitative goodwill impairment test, the reporting unit carrying value is compared to its fair value. Goodwill is deemed impaired if, and the impairment loss is recognized for the amount by which, the reporting unit carrying value exceeds its fair value. We estimate the fair value of each reporting unit using Level 3 inputs when a quantitative analysis is performed. These analyses rely on significant judgments and assumptions about expected future cash flows, weighted-average cost of capital, discount rates, expected long-term growth rates, operating margins and on the selection of guideline public companies. Intangible Assets Acquired intangible assets with finite lives and internally developed software are amortized using the method that best reflects how their economic benefits are utilized or, if a pattern of economic benefits cannot be reliably determined, on a straight-line basis over their estimated useful lives. 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. Backlog and trade name intangible assets are amortized on a straight-line basis over their estimated useful lives. 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. Intangible assets with finite lives are amortized over the following periods: Estimated useful lives (in years) Backlog 1 Customer relationships 8 - 10 Programs 4 - 13 Software and technology 3 - 15 Trade names 3 Intangible assets with finite lives are assessed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets with indefinite lives are not amortized but are assessed for impairment at the beginning of the fourth quarter and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Property, Plant and Equipment Purchases of property, plant and equipment, including purchases of software and software licenses, as well as costs associated with major renewals and improvements are capitalized. Maintenance, repairs and minor renewals and improvements are expensed as incurred. Leidos Holdings, Inc. Annual Report - 81 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Construction-in-progress ("CIP") is used to accumulate all costs for projects that are not yet complete. CIP balances are transferred to the appropriate asset account when the asset is capitalized and ready for its intended use. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization is removed from the accounts and any resulting gain or loss is recognized. Depreciation is recognized using the methods and estimated useful lives as follows: Depreciation method Estimated useful lives (in years) Computers and other equipment Straight-line or declining-balance 2 - 15 Buildings Straight-line Not to exceed 40 Building improvements and leasehold improvements Straight-line Shorter of useful life of asset or remaining lease term Vehicles and transportation equipment Straight-line 3 - 15 Office furniture and fixtures Straight-line or declining-balance 6 - 9 We evaluate our long-lived assets for potential impairment whenever there is evidence that events or changes in circumstances indicate that the carrying value may not be recoverable and the carrying value of the asset exceeds its estimated fair value. Leases Lessee We have facilities and equipment lease arrangements. An arrangement is determined to be a lease at inception if it conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Right-of-use ("ROU") assets represent the right to use an underlying asset over the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recorded on the consolidated balance sheet at lease commencement date based on the present value of the future minimum lease payments over the lease term. We generally do not know the discount rate implicit in our leases; therefore, the discount rate used is our incremental borrowing rate which is determined based on the rate of interest that we would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. A ROU asset is initially measured by the present value of the remaining lease payments, plus initial direct costs and prepaid lease payments, less any lease incentives received before commencement. The remaining lease cost is allocated over the remaining lease term on a straight-line basis unless another systematic or rational basis is more representative of the pattern in which the underlying asset is expected to be used. Certain facility leases contain options to renew or extend the terms of the lease which are included in the determination of the ROU assets and lease liabilities when it is reasonably certain that we will exercise the option. Leases may also include variable lease payments such as an escalation clause based on consumer price index rates, maintenance costs and utilities. Variable lease payments that depend on an index or a rate are included in the determination of ROU assets and lease liabilities using the index or rate at the lease commencement date, whereas variable lease payments that do not depend on an index or rate are recorded as lease expense in the period incurred. At December 29, 2023, certain of the Company's equipment leases include residual value guarantees. We use the practical expedient to not separate non-lease components from lease components and instead account for both components as a single lease. The practical expedient is applied to all material classes of leased assets except for aircraft, for which we account for the lease component and non-lease component separately. The related lease payments on short-term facility and equipment leases are recognized as expense on a straight-line basis over the lease term. ROU assets are evaluated for impairment in a manner consistent with the treatment of other long-lived assets. ROU assets are assessed for potential impairment whenever there is evidence that events or changes in circumstances indicate that the carrying value of the asset may not be recoverable and the carrying amount of the asset exceeds its estimated fair value. This includes an establishment of a plan of abandonment, which occurs when we have committed to a plan to abandon the lease before the end of its previously estimated useful life and there is no expectation that we will re-enter or re-purpose the space. Leidos Holdings, Inc. Annual Report - 82 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lessor We are a lessor on certain equipment sales-type and operating lease arrangements with our customers. To be considered lease revenue, the contract must contain a specified asset, we must not have a substantive substitution right, the customer must have the right to direct the use of the specified asset during the period of use and the customer must have the right to obtain substantially all of the economic benefit of the specified asset. Certain arrangements may contain variable payments that depend on an index or rate and are measured using the index or rate on the commencement date. Variable payments that are not included in the net investments are recorded as revenue as incurred. Arrangements may also contain options to renew or extend the performance period. Option periods are included in the lease term if we determine that it is reasonably certain the customer will exercise an option. We have arrangements that contain both lease and non-lease components. We account for them as one unit of account if the timing and pattern of transfer is identical for both the lease and the non-lease components and the lease component would be classified as an operating lease if accounted for separately. If both criteria are met and the predominant component is a lease, then the entire arrangement will be accounted for in accordance with ASC 842. If we account for an arrangement both as a lease and non-lease component, then the allocation of consideration for each component will be based on the relative standalone sales price. Fair Value Measurements The accounting standard for fair value measurements establishes a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: observable inputs such as quoted prices in active markets (Level 1); inputs other than quoted prices in active markets for identical assets or liabilities that are observable either directly or indirectly or quoted prices that are not active (Level 2); and unobservable inputs in which there is little or no market data (e.g., discounted cash flow and other similar pricing models), which requires us to develop our own assumptions about the assumptions that market participants would use in pricing the asset or liability (Level 3). The accounting guidance for fair value measurements requires that we maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The accounting guidance provides for the irrevocable option to elect, on a contract-by-contract basis, to measure certain financial assets and liabilities at fair value at inception of the contract and record any subsequent changes in fair value in earnings. We have not made fair value option elections on any of our financial assets and liabilities. The fair value of financial instruments is determined based on quoted market prices, if available, or management's best estimate (see "Financial Instruments" below). Management evaluates its investments for impairment at each balance sheet date. When testing long-term investments for recovery of carrying value, the fair value of long-term investments is determined using various valuation techniques and factors, such as market prices of comparable companies (Level 2 input) and discounted cash flow models (Level 3 input). If management determines that an other-than-temporary decline in the fair value of an investment has occurred, an impairment loss is recognized to reduce the investment to its estimated fair value. Our non-financial instruments measured at fair value on a non-recurring basis include goodwill, indefinite-lived intangible assets and long-lived tangible assets. The valuation methods used to determine fair value require a significant degree of management judgment to determine the key assumptions. As such, we generally classify non-financial instruments as either Level 2 or Level 3 fair value measurements. Financial Instruments We are exposed to certain market risks which are inherent in certain transactions entered into during the normal course of business. These transactions include sales or purchase contracts denominated in foreign currencies and exposure to changing interest rates. We manage our risk to changes in interest rates and foreign currency exchange rates through the use of derivative instruments. For variable rate borrowings, we use fixed interest rate swaps, effectively converting a portion of the variable interest rate payments to fixed interest rate payments. These swaps are designated as cash flow hedges. The fair value of these interest rate swaps is determined based on observed values for the underlying interest rates (Level 2). Leidos Holdings, Inc. Annual Report - 83 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS We enter into foreign currency forward contracts in order to mitigate fluctuations in our earnings and cash flows due to changes in foreign currency exchange rates. The foreign currency forward contracts are not designated as hedges and hedge accounting does not apply. We do not hold derivative instruments for trading or speculative purposes. Our defined benefit plan assets consist of investments in pooled funds that contain investments with values based on quoted market prices, but for which the pools are not valued on a daily quoted market basis (Level 2). Stock-Based Compensation We account for stock-based compensation at the grant date based on the fair value of the award and recognize expense over the requisite service period, which is generally the vesting period, net of an estimated forfeiture rate. The fair value of restricted stock awards and performance-based stock awards is based on the closing price of Leidos common stock on the last business day prior to the grant date. The fair value of performance-based stock awards with market conditions is based on using a Monte Carlo simulation. The fair value of stock option awards granted is based on using the Black-Scholes-Merton option pricing model. The estimation of stock option fair value requires management to make estimates and judgments about, among other things, employee exercise behavior, forfeiture rates and the expected volatility of Leidos common stock over the expected option term. These judgments directly affect the amount of compensation expense that will ultimately be recognized. Foreign Currency The financial statements of consolidated international subsidiaries, for which the functional currency is not the U.S. dollar, are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted average exchange rate over the reporting period for revenues, expenses, gains and losses. Translation adjustments are recorded as accumulated other comprehensive loss in stockholders' equity. Gains and losses due to movements in foreign currency exchange rates are recognized as "Other expense, net" on the consolidated statements of operations. Note 4—Revenues Remaining Performance Obligations Remaining performance obligations ("RPO") represent the expected value of exercised contracts, both funded and unfunded, less revenue recognized to date. RPO does not include unexercised option periods and future potential task orders expected to be awarded under 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 December 29, 2023, we had $ 15.4 billion of RPO and expect to recognize approximately 62 % and 79 % over the next 12 months and 24 months, respectively, with the remaining to be recognized thereafter. Disaggregation of Revenues We disaggregate revenues by customer-type, contract-type and geographic location for each of our reportable segments. These categories represent how the nature, timing and uncertainty of revenues and cash flows are affected. Disaggregated revenues by customer-type were as follows: Year Ended December 29, 2023 Defense Solutions Civil Health Total (in millions) DoD and U.S. Intelligence Community $ 6,480 $ 97 $ 1,000 $ 7,577 Other U.S. government agencies (1) 1,009 2,773 1,952 5,734 Commercial and non-U.S. customers 1,239 701 88 2,028 Total $ 8,728 $ 3,571 $ 3,040 $ 15,339 Leidos Holdings, Inc. Annual Report - 84 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 30, 2022 Defense Solutions Civil Health Total (in millions) DoD and U.S. Intelligence Community $ 6,027 $ 84 $ 999 $ 7,110 Other U.S. government agencies (1) 1,004 2,660 1,576 5,240 Commercial and non-U.S. customers 1,211 618 108 1,937 Total $ 8,242 $ 3,362 $ 2,683 $ 14,287 Year Ended December 31, 2021 Defense Solutions Civil Health Total (in millions) DoD and U.S. Intelligence Community $ 5,939 $ 54 $ 756 $ 6,749 Other U.S. government agencies (1) 964 2,447 1,681 5,092 Commercial and non-U.S. customers 1,126 543 107 1,776 Total $ 8,029 $ 3,044 $ 2,544 $ 13,617 (1) Includes federal government agencies other than the DoD and U.S. Intelligence Community, as well as state and local government agencies. The majority of our revenues are generated from U.S. government contracts, either as a prime contractor or as a subcontractor to other contractors. Revenues from the U.S. government can be adversely impacted by spending caps or changes in budgetary priorities of the U.S. government, as well as delays in program start dates or the award of a contract. Disaggregated revenues by contract-type were as follows: Year Ended December 29, 2023 Defense Solutions Civil Health Total (in millions) Cost-reimbursement and fixed-price-incentive-fee $ 4,793 $ 1,900 $ 648 $ 7,341 Firm-fixed-price 2,855 1,105 2,004 5,964 Time-and-materials and fixed-price-level-of-effort 1,080 566 388 2,034 Total $ 8,728 $ 3,571 $ 3,040 $ 15,339 Year Ended December 30, 2022 Defense Solutions Civil Health Total (in millions) Cost-reimbursement and fixed-price-incentive-fee $ 4,620 $ 1,781 $ 712 $ 7,113 Firm-fixed-price 2,642 1,077 1,683 5,402 Time-and-materials and fixed-price-level-of-effort 980 504 288 1,772 Total $ 8,242 $ 3,362 $ 2,683 $ 14,287 Year Ended December 31, 2021 Defense Solutions Civil Health Total (in millions) Cost-reimbursement and fixed-price-incentive-fee $ 4,792 $ 1,576 $ 508 $ 6,876 Firm-fixed-price 2,290 1,020 1,661 4,971 Time-and-materials and fixed-price-level-of-effort 947 448 375 1,770 Total $ 8,029 $ 3,044 $ 2,544 $ 13,617 Leidos Holdings, Inc. Annual Report - 85 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Cost-reimbursement and FP-IF contracts are generally lower risk and have lower profits. T&M and FP-LOE contracts are also lower risk, but profits may vary depending on actual labor costs compared to negotiated contract billing rates. FFP contracts offer the potential for higher profits while increasing the exposure to risk of cost overruns. Disaggregated revenues by geographic location were as follows: Year Ended December 29, 2023 Defense Solutions Civil Health Total (in millions) United States $ 7,594 $ 3,381 $ 3,040 $ 14,015 International 1,134 190 — 1,324 Total $ 8,728 $ 3,571 $ 3,040 $ 15,339 Year Ended December 30, 2022 Defense Solutions Civil Health Total (in millions) United States $ 7,212 $ 3,203 $ 2,683 $ 13,098 International 1,030 159 — 1,189 Total $ 8,242 $ 3,362 $ 2,683 $ 14,287 Year Ended December 31, 2021 Defense Solutions Civil Health Total (in millions) United States $ 7,045 $ 2,880 $ 2,544 $ 12,469 International 984 164 — 1,148 Total $ 8,029 $ 3,044 $ 2,544 $ 13,617 Our international business operations, primarily located in Australia and the U.K., are subject to additional and different risks than our U.S. business. Failure to comply with U.S. government laws and regulations applicable to international business, such as the Foreign Corrupt Practices Act or U.S. export control regulations, could have an adverse impact on our business with the U.S. government. In some countries, there is an increased chance for economic, legal or political changes that may adversely affect the performance of our services, sales of products or repatriation of profits. International transactions can also involve increased financial and legal risks arising from foreign exchange variability, imposition of tariffs or additional taxes and restrictive trade policies and delays or failure to collect amounts due to differing legal systems. Revenues by contract-type, customer-type and geographic location exclude lease income of $ 99 million, $ 109 million and $ 120 million for fiscal 2023, 2022 and 2021, respectively (see "Note 10—Leases"). Contract Assets and Liabilities Performance obligations are satisfied either over time as work progresses or at a point in time. Firm-fixed-price contracts are typically billed to the customer using milestone payments while cost-reimbursable and time and materials contracts are typically billed to the customer on a monthly or bi-weekly basis as indicated by the negotiated billing terms and conditions of the contract. As a result, the timing of revenue recognition, customer billings and cash collections for each contract results in a net contract asset or liability at the end of each reporting period. Contract assets consist of unbilled receivables, which is the amount of revenue recognized that exceeds the amount billed to the customer. Unbilled receivables exclude amounts billable where the right to consideration is solely subject to the passage of time. Contract liabilities consist of deferred revenue, which represents cash advances received prior to performance for programs and billings in excess of revenue recognized. Leidos Holdings, Inc. Annual Report - 86 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of contract assets and contract liabilities consisted of the following: Balance sheet line item December 29, 2023 December 30, 2022 (in millions) Contract assets - current: Unbilled receivables Receivables, net $ 1,041 $ 1,010 Contract liabilities - current: Deferred revenue (1) Accounts payable and accrued liabilities $ 442 $ 380 Contract liabilities - non-current: Deferred revenue (1) Other long-term liabilities $ 21 $ 29 (1) Certain contracts record revenue on a net contract basis, and therefore, the respective deferred revenue balance will not fully convert to revenue. The increase in deferred revenue was primarily due to the timing of advanced payments from customers, offset by revenue recognized during the period. Revenue recognized during fiscal 2023 and 2022 of $ 232 million and $ 270 million, respectively, was included as a contract liability at December 30, 2022, and December 31, 2021, respectively. There were no impairment losses recognized on contract assets during fiscal 2023, 2022 and 2021. Note 5—Acquisitions and Divestitures Acquisitions We may acquire businesses as part of our growth strategy to provide new or enhance existing capabilities and offerings to customers. During fiscal 2022, we completed the acquisition of Cobham Aviation Services Australia’s Special Mission business ("Cobham Special Mission"). During fiscal 2021, we completed the acquisitions of Gibbs & Cox, 1901 Group, LLC ("1901 Group") and an immaterial strategic acquisition. Cobham Special Mission Acquisition On October 30, 2022 (the "Agreement Date"), we completed the acquisition of Cobham Special Mission for purchase consideration of $ 298 million Australian dollars, net of $ 10 million of Australian dollars acquired, or $ 192 million United States dollars, net of $ 6 million of cash acquired. Cobham Special Mission provides airborne border surveillance and search and rescue services to the Australian Federal Government. In the third quarter of fiscal 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. In connection with this acquisition, we acquired property, plant and equipment with a fair value of $ 148 million at the Agreement Date. The following table summarizes the fair value of intangible assets acquired at the Agreement Date and the related weighted average amortization period: Weighted average amortization period Fair value (in years) (in millions) Programs 11 $ 19 Technology 10 5 Total 11 $ 24 Leidos Holdings, Inc. Annual Report - 87 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For fiscal 2023 and 2022, $ 115 million and $ 21 million, respectively, of revenues related to the Cobham Special Mission acquisition were recognized within the Defense Solutions reportable segmen t. Gibbs & Cox Acquisition On May 7, 2021 (the "Purchase Date"), we completed the acquisition of Gibbs & Cox for purchase consideration of approximately $ 375 million, net of $ 1 million of cash acquired. Gibbs & Cox is an independent engineering and design firm specializing in naval architecture, marine engineering, management support and engineering consulting. The final goodwill recognized of $ 276 million represents intellectual capital and the acquired assembled workforce, neither of which qualify for recognition as a separate intangible asset. All of the goodwill recognized is tax deductible. The following table summarizes the fair value of intangible assets acquired at the Purchase Date and the related weighted average amortization period: Weighted average amortization period Fair value (in years) (in millions) Programs 12 $ 89 For fiscal 2023, 2022 and 2021, $ 129 million, $ 114 million and $ 98 million, respectively, of revenues related to the Gibbs & Cox acquisition were recognized within the Defense Solutions reportable segment . 1901 Group Acquisition On January 14, 2021 (the "Closing Date"), we completed the acquisition of 1901 Group for purchase consideration of $ 212 million, net of $ 2 million of cash acquired. The final goodwill recognized of $ 123 million represents intellectual capital and the acquired assembled workforce, none of which qualify for recognition as separate intangible assets. Of the goodwill recognized, $ 118 million is tax deductible. The following table summarizes the fair value of intangible assets acquired at the Closing Date and the related weighted average amortization period: Weighted average amortization period Fair value (in years) (in millions) Technology 8 $ 43 Programs 10 37 Backlog 1 6 Total 8 $ 86 For fiscal 2023, 2022 and 2021, $ 46 million, $ 40 million and $ 47 million, respectively, of revenues related to the 1901 Group acquisition were recognized within the Defense Solutions reportable segmen t. Strategic Business Acquisition On September 21, 2021, we completed an immaterial strategic business acquisition for purchase consideration of approximately $ 36 million. In connection with the transaction, the Company recognized an $ 8 million program intangible asset and goodwill of $ 25 million. Leidos Holdings, Inc. Annual Report - 88 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Acquisition and Integration Costs The following expenses were incurred related to the Company's acquisitions: Year Ended December 29, 2023 December 30, 2022 December 31, 2021 (in millions) Acquisition costs $ — $ — $ 4 Integration costs 19 16 20 Total acquisition and integration costs $ 19 $ 16 $ 24 These acquisition and integration costs have been primarily recorded within Corporate and presented in "Acquisition, integration and restructuring costs" on the consolidated statement of operations. Divestitures Immaterial Divestiture On October 20, 2023, we disposed of an immaterial business within our Defense Solutions reportable segment. The preliminary sales price was approximately $ 2 million and net assets of $ 7 million were divested as a result of the transaction. Aviation & Missile Solutions LLC ("AMS") On November 22, 2021, our Defense Solutions reportable segment signed a definitive agreement to dispose of its AMS business in order to focus on leading-edge and technologically advanced services, solutions and products. The divestiture was completed on April 29, 2022. The net sales price was $ 15 million and net assets of $ 19 million were divested. The loss was recorded within "Other expense, net" on the consolidated statements of operations. This disposition did not meet the criteria to be classified as a discontinued operation in the financial statements. Note 6—Receivables The components of receivables, net consisted of the following: December 29, 2023 December 30, 2022 (in millions) Billed and billable receivables $ 1,416 $ 1,368 Unbilled receivables 1,041 1,010 Allowance for credit losses ( 28 ) ( 28 ) $ 2,429 $ 2,350 Sale of Accounts Receivable We have entered into purchase agreements with a financial institution which provide us the election to sell accounts receivable at a discount. The receivables sold are typically collectable from our customers within 30 days of the sale date. During fiscal 2022 and 2021, we sold $ 209 million and $ 693 million, respectively, of accounts receivable under the agreements and received proceeds of $ 209 million and $ 693 million, respectively. These activities are classified as operating activities in the consolidated statements of cash flows. There were no sales of accounts receivable during fiscal 2023. These transfers have been recognized as a sale, as the receivables had been legally isolated from Leidos, the financial institution had the right to pledge or exchange the assets received and we did not maintain effective control over the transferred accounts receivable. As of December 30, 2022, and December 31, 2021, all sold receivables had been remitted to the financial institution. Leidos Holdings, Inc. Annual Report - 89 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7—Inventory The components of inventory, net consisted of the following: December 29, 2023 December 30, 2022 (in millions) Raw materials $ 190 $ 180 Work-in-process 48 34 Finished goods 72 73 $ 310 $ 287 Note 8—Goodwill and Intangible Assets Goodwill The following table presents changes in the carrying amount of goodwill by reportable segment: Defense Solutions Civil Health Total (in millions) Goodwill at December 31, 2021 (1) $ 3,681 $ 2,097 $ 966 $ 6,744 Acquisitions of businesses 26 — — 26 Divestiture of a business ( 6 ) — — ( 6 ) Foreign currency translation adjustments ( 37 ) ( 31 ) — ( 68 ) Goodwill at December 30, 2022 (1) 3,664 2,066 966 6,696 Goodwill impairment — ( 596 ) — ( 596 ) Acquisitions of a business (2) ( 4 ) — — ( 4 ) Foreign currency translation adjustments 9 7 — 16 Goodwill at December 29, 2023 (3) $ 3,669 $ 1,477 $ 966 $ 6,112 (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 $ 713 million within the Health and Civil segments, respectively. 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, and 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, in fiscal 2023, we conducted a 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”). Accordingly, we recognized a non-cash goodwill impairment charge of $ 596 million and had $ 308 million of goodwill remaining at the SES reporting unit as of December 29, 2023. The impairment was recorded within the Civil reportable segment in the consolidated statements of operations. In the fourth quarter of fiscal 2023, we performed a qualitative analysis for certain reporting units which determined that it was more likely than not that the fair values of these reporting units were in excess of the individual reporting units' carrying values. We performed a second quantitative analysis for the SES reporting unit and concluded that no incremental impairment was necessary as the fair value of the reporting unit exceeded the carrying value as of the fourth quarter of fiscal 2023. 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. Annual Report - 90 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In the fourth quarter of fiscal 2022 and 2021, we performed a qualitative analysis for certain reporting units which determined that it was more likely than not that the fair values of these reporting units were in excess of the individual reporting units' carrying values. We performed a quantitative analysis for certain reporting units and concluded that these reporting units were not impaired as their fair values exceeded their carrying values. Intangible Assets Intangible assets, net consisted of the following: December 29, 2023 December 30, 2022 Gross carrying value Accumulated amortization Net carrying value Gross carrying value Accumulated amortization Net carrying value (in millions) Finite-lived intangible assets: Programs $ 1,689 $ ( 1,175 ) $ 514 $ 1,721 $ ( 1,016 ) $ 705 Software and technology 263 ( 144 ) 119 225 ( 136 ) 89 Customer relationships 52 ( 22 ) 30 87 ( 25 ) 62 Trade names — — — 1 ( 1 ) — Total finite-lived intangible assets 2,004 ( 1,341 ) 663 2,034 ( 1,178 ) 856 Indefinite-lived intangible assets: In-process research and development (1) — — — 92 — 92 Trade names 4 — 4 4 — 4 Total indefinite-lived intangible assets 4 — 4 96 — 96 Total intangible assets $ 2,008 $ ( 1,341 ) $ 667 $ 2,130 $ ( 1,178 ) $ 952 (1) IPR&D intangible 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. During fiscal 2023, $ 59 million was placed into service and reclassified to software and technology intangible assets. Our strategic decisions regarding SES’ product offerings and operating regions (see the goodwill discussion above) caused certain technology, customer relationships and IPR&D 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, which included $ 33 million for IPR&D intangible assets. The impairment was recorded to “Asset impairment charges” in the 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 related to intangible assets was $ 202 million, $ 230 million and $ 228 million for fiscal 2023, 2022 and 2021, respectively. Leidos Holdings, Inc. Annual Report - 91 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The estimated annual amortization expense related to finite-lived intangible assets as of December 29, 2023, is as follows: Fiscal Year Ending (in millions) 2024 $ 148 2025 120 2026 99 2027 72 2028 62 2029 and thereafter 162 $ 663 Actual amortization expense in future periods could differ from these estimates as a result of future acquisitions, divestitures, impairments and other factors. Note 9—Property, Plant and Equipment Property, plant and equipment, net consisted of the following: December 29, 2023 December 30, 2022 (in millions) Computers and other equipment $ 455 $ 399 Leasehold improvements 455 404 Vehicles and transportation equipment 277 210 Buildings and improvements 137 138 Office furniture and fixtures 66 64 Land 17 17 Construction-in-progress 172 147 1,579 1,379 Less: accumulated depreciation and amortization ( 618 ) ( 532 ) $ 961 $ 847 Depreciation expense was $ 129 million, $ 103 million and $ 97 million for fiscal 2023, 2022 and 2021, respectively. Leidos Holdings, Inc. Annual Report - 92 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10—Leases Lessee ROU assets and lease liabilities consisted of the following: Balance sheet line item December 29, 2023 December 30, 2022 (in millions) ROU assets: Finance leases Property, plant and equipment, net $ 89 $ 43 Operating leases Operating lease right-of-use assets, net 512 545 $ 601 $ 588 Current lease liabilities: Finance leases Short-term debt and current portion of long-term debt $ 18 $ 6 Operating leases Accounts payable and accrued liabilities 136 130 $ 154 $ 136 Non-current lease liabilities: Finance leases Long-term debt, net of current portion $ 73 $ 38 Operating leases Operating lease liabilities 516 570 $ 589 $ 608 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 and recognized a $ 64 million finance lease obligation and a corresponding ROU asset. During fiscal 2022, we reduced our leased space by exiting and consolidating underutilized buildings as part of an ongoing facility rationalization effort. We used discounted cash flow models to estimate the fair values of the affected assets and as a result, we recorded impairments of ROU and other assets in the amount of $ 37 million. The impairment charges were allocated across our reportable segments and to Corporate. Total lease cost for the periods presented consisted of the following: Year Ended December 29, 2023 December 30, 2022 December 31, 2021 (in millions) Finance lease cost: Amortization of ROU assets $ 18 $ 9 $ 11 Interest on lease liabilities 4 1 1 22 10 12 Operating lease cost (1) 148 161 172 Variable lease cost 35 42 90 Short-term lease cost 2 3 4 Less: Sublease income — ( 6 ) ( 8 ) Total lease cost $ 207 $ 210 $ 270 (1) Includes ROU lease expense of $ 124 million, $ 134 million and $ 150 million for fiscal 2023, 2022 and 2021, respectively. Lease costs and sublease income are included in "Cost of revenues" and "Selling, general and administrative expenses" within the consolidated statements of operations. Leidos Holdings, Inc. Annual Report - 93 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lease terms and discount rates related to leases were as follows: Year Ended December 29, 2023 December 30, 2022 December 31, 2021 Weighted-average remaining lease term (in years): Finance leases 5.2 8.2 8.4 Operating leases 7.3 7.5 6.8 Weighted-average discount rate: Finance leases 4.8 % 2.6 % 2.5 % Operating leases 3.7 % 3.3 % 3.2 % Other information related to leases was as follows: Year Ended December 29, 2023 December 30, 2022 December 31, 2021 (in millions) Cash paid for amounts included in measurement of lease liabilities: Operating cash related to finance leases $ 4 $ 1 $ 1 Operating cash related to operating leases 167 168 174 Financing cash flows related to finance leases 17 9 11 ROU assets obtained in exchange for lease liabilities: Finance lease liabilities $ 63 $ 1 $ 51 Operating lease liabilities 97 122 161 The change in operating ROU assets and lease liabilities are presented within cash flows from operations on the consolidated statements of cash flows. Future minimum lease commitments of our finance and operating leases on an undiscounted basis, reconciled to the respective lease liability at December 29, 2023, were as follows: Fiscal Year Ending Finance lease commitments Operating lease commitments (in millions) 2024 $ 22 $ 158 2025 22 119 2026 22 95 2027 15 70 2028 5 68 2029 and thereafter 15 237 Total undiscounted cash flows 101 747 Less: imputed interest ( 10 ) ( 95 ) Lease liability as of December 29, 2023 $ 91 $ 652 As of December 29, 2023, we have approximately $ 195 million of facility lease commitments that have not yet commenced. The leases are expected to commence in fiscal 2024 with lease terms ranging from 12 to 16 years. Lessor As of December 29, 2023 and December 30, 2022, we had a total net investment in sales-type leases, which relates to lease payment receivables, of $ 100 million and $ 103 million, respectively. The current and non-current portions of net investment in sales-type leases are included within "Other current assets" and "Other long-term assets", respectively, on the consolidated balance sheets. Leidos Holdings, Inc. Annual Report - 94 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of lease income were as follows: Year Ended Statement of operations line item December 29, 2023 December 30, 2022 December 31, 2021 (in millions) Sales-type leases: Selling price at lease commencement Revenues $ 51 $ 65 $ 80 Cost of underlying asset Cost of revenues ( 41 ) ( 52 ) ( 60 ) Operating income 10 13 20 Interest income on lease receivables Revenues 9 9 8 19 22 28 Operating lease income Revenues 39 35 32 Total lease income $ 58 $ 57 $ 60 As of December 29, 2023, undiscounted cash flows for sales-type and operating leases for the next five years are as follows: Fiscal Year Ending Sales-type leases Operating leases (in millions) 2024 $ 44 $ 20 2025 32 5 2026 18 — 2027 8 — 2028 5 — Total undiscounted cash flows $ 107 $ 25 Present value of lease payments as lease receivables 100 Difference between undiscounted cash flows and discounted cash flows $ 7 Note 11—Fair Value Measurements Financial instruments measured on a recurring basis at fair value consisted of the following: December 29, 2023 December 30, 2022 Carrying value Fair value Carrying value Fair value (in millions) Financial assets: Derivatives $ 11 $ 11 $ 20 $ 20 As of December 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 12—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 December 29, 2023 and the LIBOR yield curve as of December 30, 2022 (Level 2 inputs). Financial instruments measured on a recurring basis at fair value also include our defined benefit plan assets (Level 2 inputs). See "Note 19—Retirement Plans" for further details on these investments. Leidos Holdings, Inc. Annual Report - 95 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The carrying value of our notes receivable of $ 12 million as of both December 29, 2023, and December 30, 2022, approximates fair value as the stated interest rates within the agreements are consistent with the current market rates used in notes with similar terms in the market (Level 2 inputs). As of December 29, 2023, and December 30, 2022, the fair value of debt was $ 4.6 billion for both periods, and the carrying amount was $ 4.7 billion and $ 4.9 billion, respectively (see "Note 13—Debt"). The fair value of debt is determined based on current interest rates available for debt with terms and maturities similar to our existing debt arrangements (Level 2 inputs). In fiscal 2023, we recorded impairment charges of SES' goodwill (see "Note 8—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 acquisition of Cobham Special Mission. The fair values of the assets acquired and liabilities assumed were determined using Level 3 inputs. See "Note 5—Acquisitions and Divestitures" for further details on this acquisition. As of December 29, 2023, and December 30, 2022, we did not have any assets or liabilities measured at fair value on a non-recurring basis. Note 12—Derivative Instruments The fair value of the interest rate swaps was as follows: Balance sheet line item December 29, 2023 December 30, 2022 (in millions) Cash flow interest rate swaps Other long-term assets $ 11 $ 20 The cash flows associated with the interest rate swaps are classified as operating activities in the consolidated statements of cash flows. Cash Flow Hedges 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 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 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 we 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. 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. Leidos Holdings, Inc. Annual Report - 96 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The effect of the cash flow hedges on other comprehensive income (loss) and earnings for the periods presented was as follows: Year Ended December 29, 2023 December 30, 2022 December 31, 2021 (in millions) Total interest expense, net presented in the consolidated statements of operations in which the effects of cash flow hedges are recorded $ 212 $ 199 $ 184 Amount recognized in other comprehensive income 6 59 18 Amount reclassified from accumulated other comprehensive income (loss) to interest expense, net ( 15 ) 11 19 We expect to reclassify net gains of $ 10 million from accumulated other comprehensive loss into earnings during the next 12 months. Leidos Holdings, Inc. Annual Report - 97 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 13—Debt Debt consisted of the following: Stated interest rate Effective interest rate December 29, 2023 December 30, 2022 (in millions) Short-term debt and current portion of long-term debt: Senior unsecured term loans: $ 380 million term loan, due May 2023 6.08 % 6.17 % $ — $ 320 Current portion of long-term debt 18 672 Total short-term debt and current portion of long-term debt $ 18 $ 992 Long-term debt: Senior unsecured term loans: $ 1,925 million term loan, due January 2025 5.77 % 6.09 % $ — $ 1,211 $ 1,000 million term loan, due March 2028 6.71 % 6.89 % 1,000 — Senior unsecured notes: $ 500 million notes, due May 2023 2.95 % 3.17 % — 500 $ 500 million notes, due May 2025 3.63 % 3.76 % 500 500 $ 750 million notes, due May 2030 4.38 % 4.50 % 750 750 $ 750 million notes, due March 2033 5.75 % 5.81 % 750 — $ 1,000 million notes, due February 2031 2.30 % 2.38 % 1,000 1,000 $ 250 million notes, due July 2032 7.13 % 7.43 % 250 250 $ 300 million notes, due July 2033 5.50 % 5.88 % 161 161 $ 300 million notes, due December 2040 5.95 % 6.03 % 218 218 Finance leases due on various dates through fiscal 2032 Various 1.84 %- 6.31 % 91 44 Less: unamortized debt discounts and deferred debt issuance costs ( 38 ) ( 34 ) Total long-term debt 4,682 4,600 Less: current portion ( 18 ) ( 672 ) Total long-term debt, net of current portion $ 4,664 $ 3,928 Term Loans and Revolving Credit Facility On March 10, 2023 (the “Closing Date”), we entered into a Credit Agreement (the “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”) and a $ 1.0 billion senior unsecured revolving facility (the “Revolving Facility” and, together with the Term Loan Facility, the “Credit Facilities”). The Credit Facilities will mature in March 2028. The Revolving Facility permits two additional one-year extensions subject to lender consent. As of December 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 a predecessor $ 1.9 billion senior unsecured term loan facility and a $ 750 million senior unsecured revolving facility. As of December 30, 2022, there were no borrowings outstanding under the predecessor senior unsecured revolving facility. Leidos Holdings, Inc. Annual Report - 98 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Borrowings under the Credit Agreement bear interest at a rate determined, at our option, based on either an alternate base rate or a Term SOFR rate with a 0.10 %, per annum Term SOFR adjustment, plus, in each case, an applicable margin that varies depending on our credit rating. The applicable margin range for Term SOFR-denominated borrowings is from 1.00 % to 1.50 %. Based on our current ratings, the applicable margin for Term SOFR-denominated borrowings is 1.25 %. Principal payments are made quarterly on the Term Loan Facility beginning in March 2025, with the majority of the principal due at maturity. Interest on the Term Loan Facility for Term SOFR-denominated borrowings is payable on a periodic basis, which must be at least quarterly. The financial covenants in the Term Loan Agreement require that we maintain, as of the last day of each fiscal quarter, a ratio of adjusted consolidated total debt to consolidated EBITDA of not more than 3.75 to 1.00, subject to increases to 4.50 to 1.00 following a material acquisition, and a ratio of EBITDA to consolidated interest expense of not less than 3.50 to 1.00. On May 6, 2022, we entered into a 364 -day term loan credit agreement with certain financial institutions, which provided for a senior unsecured term loan facility in an aggregate principal amount of $ 380 million, and was repaid in fiscal 2023. The proceeds of the term loan were used to repay the $ 380 million senior unsecured term loan entered into on May 7, 2021. Senior Notes On February 28, 2023, we issued and sold $ 750 million aggregate principal amount of fixed-rate senior notes (the “Notes”) maturing in March 2033. The Notes are senior unsecured obligations issued by Leidos, Inc. and guaranteed by Leidos Holdings, Inc. The annual interest rate for the Notes is 5.75 % and is payable on a semi-annual basis. In connection with the issuance of the Notes, $ 11 million of debt issuance costs and debt discounts were recognized, which were recorded as an offset against the carrying value of debt. The proceeds from the Notes were used to repay all of the outstanding obligations in respect of principal, interest and fees on the $ 500 million 2.95 % notes, due May 2023, the majority of which were retired on February 28, 2023. The remaining proceeds from the Notes were used to repay $ 210 million of the outstanding balance on the predecessor $ 1.9 billion senior unsecured term loan facility, due January 2025, and fund general corporate purposes. Commercial Paper We have a commercial paper program in which the Company may issue short-term unsecured commercial paper notes ("Commercial Paper Notes"). On May 26, 2023, we increased the size of the commercial paper program by $ 250 million, or not to exceed $ 1.0 billion. The proceeds will be used for general corporate purposes, including working capital, capital expenditures, acquisitions and share repurchases. The Commercial Paper Notes are issued in minimum denominations of $ 0.25 million and have maturities of up to 397 days from the date of issuance. The Commercial Paper Notes will bear either a stated or floating interest rate, if interest bearing, or will be sold at a discount from the face amount. As of December 29, 2023, and December 30, 2022, 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 December 29, 2023. Leidos Holdings, Inc. Annual Report - 99 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Principal Payments Future minimum payments of debt are as follows: Fiscal Year Ending (in millions) 2024 $ 18 2025 619 2026 120 2027 114 2028 705 2029 and thereafter 3,144 Total principal payments 4,720 Less: unamortized debt discount and issuance costs ( 38 ) Total short-term and long-term debt $ 4,682 Note 14—Accumulated Other Comprehensive Income (Loss) Changes in the components of Accumulated Other Comprehensive Income (Loss) ("AOCI") were as follows: Foreign currency translation adjustments Unrecognized gain (loss) on derivative instruments Pension adjustments Total AOCI (in millions) Balance at January 1, 2021 $ 30 $ ( 70 ) $ ( 6 ) $ ( 46 ) Other comprehensive income (loss) ( 3 ) 18 17 32 Taxes ( 5 ) ( 8 ) ( 4 ) ( 17 ) Reclassification from AOCI — 19 — 19 Balance at December 31, 2021 22 ( 41 ) 7 ( 12 ) Other comprehensive income (loss) ( 108 ) 59 ( 27 ) ( 76 ) Taxes 13 ( 16 ) 7 4 Reclassification from AOCI — 11 — 11 Balance at December 30, 2022 ( 73 ) 13 ( 13 ) ( 73 ) Other comprehensive income (loss) 36 6 ( 1 ) 41 Taxes ( 2 ) 1 — ( 1 ) Reclassification from AOCI — ( 15 ) — ( 15 ) Balance at December 29, 2023 $ ( 39 ) $ 5 $ ( 14 ) $ ( 48 ) Reclassifications for unrecognized gain (loss) on derivative instruments are associated with outstanding debt are recorded in "Interest expense, net" on the consolidated statements of operations. See "Note 12—Derivative Instruments" for more information on our interest rate swap agreements. Leidos Holdings, Inc. Annual Report - 100 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 15—Composition of Certain Financial Statement Captions Balance Sheets December 29, 2023 December 30, 2022 (in millions) Other current assets: Transition costs and project assets (1) $ 101 $ 132 Other (2) 388 358 $ 489 $ 490 Other long-term assets: Transition costs and project assets (1) $ 37 $ 74 Long-term deferred tax assets 102 28 Other (2) 299 286 $ 438 $ 388 Accounts payable and accrued liabilities: Accrued liabilities $ 826 $ 772 Accounts payable 736 733 Deferred revenue 442 380 Other (2) 273 369 $ 2,277 $ 2,254 Accrued payroll and employee benefits: Accrued vacation $ 380 $ 356 Salaries, bonuses and amounts withheld from employees’ compensation 315 345 $ 695 $ 701 (1) During the year ended December 29, 2023, and December 30, 2022, $ 417 million and $ 489 million, respectively, of amortization was recognized related to transition costs and project assets. (2) Balance represents items that are not individually significant to disclose separately. Note 16—Earnings Per Share ("EPS") Basic EPS is computed by dividing net income attributable to Leidos common stockholders by the basic weighted average number of shares outstanding. Diluted EPS is calculated to give effect to all potentially dilutive common shares that were outstanding during the reporting period. The dilutive effect of outstanding equity-based compensation awards is reflected in diluted EPS by application of the treasury stock method, only in periods in which such effect would have been dilutive for the period. We issue unvested stock awards that have forfeitable rights to dividends or dividend equivalents. These stock awards are dilutive common share equivalents subject to the treasury stock method. Leidos Holdings, Inc. Annual Report - 101 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The weighted average number of shares used to compute basic and diluted EPS attributable to Leidos stockholders were: Year Ended December 29, 2023 December 30, 2022 December 31, 2021 (in millions) Basic weighted average number of shares outstanding 137 137 141 Dilutive common share equivalents—stock options and other stock awards 1 1 2 Diluted weighted average number of shares outstanding 138 138 143 Anti-dilutive stock-based awards are excluded from the weighted average number of shares outstanding used to compute diluted EPS. The total outstanding stock options and vesting stock awards that were anti-dilutive were 1 million for each of the periods presented above. Share Repurchases During fiscal 2023 and 2021, we made open market repurchases of our common stock for an aggregate purchase price of $ 225 million and $ 237 million, respectively. There were no open market share repurchases in fiscal 2022. In fiscal 2022, we entered into Accelerated Share Repurchase agreement with a financial institution to repurchase shares of our outstanding common stock. We paid $ 500 million to the financial institution and received 4.8 million shares. The repurchases were recorded to "Additional paid-in capital" in the consolidated balance sheets. All shares delivered were immediately retired. Note 17—Stock-Based Compensation Plan Summaries As of December 29, 2023, we had stock-based compensation awards outstanding under the following plans: the 2017 Omnibus Incentive Plan, the 2006 Equity Incentive Plan, as amended, and the 2006 Employee Stock Purchase Plan, as amended ("ESPP"). We issue new shares upon the vesting of stock units or exercising of stock options under these plans. The 2017 Omnibus Incentive Plan provides Leidos and its affiliates' employees, directors and consultants the opportunity to receive various types of stock-based compensation awards, such as stock options, restricted stock units and performance-based awards, as well as cash awards. We grant service-based awards that generally vest or become exercisable 33 % a year over three years , 25 % a year over four years or cliff vest in three years . As of December 29, 2023, 3.8 million shares of Leidos' stock were reserved for future issuance under the 2017 Omnibus Incentive Plan and the 2006 Equity Incentive Plan. We offer eligible employees the opportunity to defer restricted stock units into an equity-based deferred equity compensation plan, the Key Executive Stock Deferral Plan ("KESDP"). Prior to 2013, we offered an additional opportunity for deferrals into the Management Stock Compensation Plan ("MSCP"). Benefits from these plans are payable in shares of Leidos' stock that are held in a trust for the purpose of funding shares to the plans' participants. Restricted stock units deferred under the KESDP are counted against the total shares available for future issuance under the 2017 Omnibus Incentive Plan. All awards under the MSCP are fully vested and the plan does not provide for a maximum number of shares available for future issuance. Our ESPP allows eligible employees to purchase shares of Leidos' stock at a discount of up to 15 % of the fair market value on the date of purchase. During fiscal 2023, 2022 and 2021, the discount was 10 % of the fair market value on the date of purchase. During fiscal 2023, 2022 and 2021, $ 48 million, $ 45 million and $ 39 million, respectively, was received from ESPP plan participants for the issuance of Leidos' stock. A total of 2.3 million shares remain available for future issuance under the ESPP. Leidos Holdings, Inc. Annual Report - 102 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock-based compensation and related tax benefits recognized under all plans were as follows: Year Ended December 29, 2023 December 30, 2022 December 31, 2021 (in millions) Total stock-based compensation expense $ 77 $ 73 $ 67 Tax benefits recognized from stock-based compensation 17 16 17 Stock Options Stock options are granted with exercise prices equal to the fair market value of Leidos' common stock using the closing price on the business day prior to the grant date and for terms not greater than ten years . Stock options have a term of seven years and a vesting period of three or four years , except for stock options granted to our outside directors, which have a vesting period of the earlier of one year from grant date or the next annual meeting of stockholders following grant date. The fair value of the stock option awards is estimated on the date of grant using the Black-Scholes-Merton option-pricing model. The fair value of the stock option awards to employees are expensed on a straight-line basis over the vesting period of three or four years , except for stock options granted to our outside directors, which is recognized over the vesting period of one year or less. During fiscal 2023, 2022 and 2021, we used a blended approach to measure expected volatility that is based on our weighted average historical and implied volatilities. The risk-free rate is derived using the yield curve of a zero-coupon U.S. Treasury bond with a maturity equal to the expected term of the stock option on the grant date. To determine the expected term, we use the midpoint scenario with a one-year grant date filter assumption for outstanding options and we use historical data to estimate forfeitures. The weighted average grant-date fair value and assumptions used to determine fair value of stock options granted for the periods presented were as follows: Year Ended December 29, 2023 December 30, 2022 December 31, 2021 Weighted average grant-date fair value $ 25.21 $ 24.67 $ 20.23 Expected term (in years) 4.7 4.7 4.6 Expected volatility 28.6 % 29.5 % 29.6 % Risk-free interest rate 4.0 % 1.6 % 0.7 % Dividend yield 1.4 % 1.6 % 1.3 % Leidos Holdings, Inc. Annual Report - 103 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock option activity for each of the periods presented was as follows: Shares of stock under stock options Weighted average exercise price Weighted average remaining contractual term Aggregate intrinsic value (in millions) (in years) (in millions) Outstanding at January 1, 2021 2.2 $ 56.01 3.5 $ 108 Options granted 0.3 90.25 Options forfeited or expired — 85.42 Options exercised ( 0.4 ) 38.79 27 Outstanding at December 31, 2021 2.1 $ 65.18 3.5 $ 54 Options granted 0.3 105.01 Options forfeited or expired — 92.10 Options exercised ( 0.6 ) 39.26 41 Outstanding at December 30, 2022 1.8 $ 81.45 3.9 $ 42 Options granted 0.3 92.71 Options forfeited or expired — 95.05 Options exercised ( 0.2 ) 53.78 9 Outstanding at December 29, 2023 1.9 $ 86.22 3.7 $ 41 Exercisable at December 29, 2023 1.1 $ 78.73 2.6 $ 32 Vested and expected to vest in the future as of December 29, 2023 1.8 $ 86.14 3.7 $ 41 As of December 29, 2023, there was $ 7 million of unrecognized compensation cost, net of estimated forfeitures, related to stock options, which is expected to be recognized over a weighted-average period of 1.8 years. Tax benefits from stock options exercised for fiscal 2023, 2022 and 2021 were $ 2 million, $ 9 million and $ 6 million, respectively. Restricted Stock Units and Awards Compensation expense is measured at the grant date fair value and generally recognized over the vesting period of three or four years based upon required service conditions and in some cases revenue or EPS-based performance conditions. Leidos Holdings, Inc. Annual Report - 104 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Restricted stock units and awards activity for each of the periods presented was as follows: Shares of stock under stock awards Weighted average grant- date fair value (in millions) Unvested stock awards at January 1, 2021 1.3 $ 79.05 Awards granted 0.7 91.09 Awards forfeited ( 0.1 ) 89.56 Awards vested ( 0.5 ) 71.60 Unvested stock awards at December 31, 2021 1.4 $ 88.89 Awards granted 0.5 104.78 Awards forfeited ( 0.1 ) 99.38 Awards vested ( 0.5 ) 74.20 Unvested stock awards at December 30, 2022 1.3 $ 98.52 Awards granted 0.6 95.82 Awards forfeited ( 0.1 ) 97.18 Awards vested ( 0.4 ) 97.65 Unvested stock awards at December 29, 2023 1.4 $ 97.71 As of December 29, 2023, there was $ 57 million of unrecognized compensation cost, net of estimated forfeitures, related to restricted stock units, which is expected to be recognized over a weighted average period of 1.8 years. The fair value of restricted stock units that vested in fiscal 2023, 2022 and 2021 was $ 40 million, $ 52 million and $ 48 million, respectively. Performance-Based Stock Awards Performance-based stock awards vest and the stock is issued at the end of a three-year period based upon the achievement of specific performance criteria, with the number of shares ultimately awarded, if any, ranging up to 200 % of the specified target awards. If performance is below the threshold level of performance, no shares will be issued. For awards granted during fiscal 2023, 2022 and 2021, the target number of shares of stock granted under the awards will vest and the stock will be issued at the end of a three-year period based on a three-year cycle performance period and the actual number of shares to be issued will be based upon the achievement of the three-year cycle's performance criteria. Also, during fiscal 2023, 2022 and 2021, we granted performance-based awards with market conditions. These market conditions grants represent the target number of shares and the actual number of shares to be awarded upon vesting may be higher or lower depending upon the achievement of the relevant market conditions. The target number of shares granted under the market conditions grants will vest and the stock will be issued at the end of a three-year period based on the attainment of certain total shareholder return performance measures and the employee's continued service through the vest date. Leidos Holdings, Inc. Annual Report - 105 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Performance-based stock award activity for each of the periods presented was as follows: Expected number of shares of stock to be issued under performance-based stock awards Weighted average grant- date fair value (in millions) Unvested at January 1, 2021 0.5 $ 80.20 Awards granted 0.2 86.88 Awards forfeited — 89.65 Awards vested ( 0.2 ) 65.30 Unvested at December 31, 2021 0.5 $ 88.72 Awards granted 0.2 114.98 Awards forfeited — 103.06 Awards vested ( 0.2 ) 67.79 Unvested at December 30, 2022 0.5 $ 106.70 Awards granted 0.2 99.34 Awards forfeited — 104.90 Awards vested ( 0.1 ) 116.37 Unvested at December 29, 2023 0.6 $ 102.22 The weighted average grant date fair value for performance-based stock, excluding those with a market condition, during fiscal 2023, 2022 and 2021 was $ 93.90 , $ 105.07 and $ 89.26 , respectively. The weighted average grant date fair value for performance-based stock with market conditions that were granted during fiscal 2023, 2022 and 2021 was $ 108.38 , $ 129.42 and $ 88.21 , respectively, and was calculated using the Monte Carlo simulation. The Monte Carlo simulation assumptions used for the periods presented were as follows: Year Ended December 29, 2023 December 30, 2022 December 31, 2021 Expected volatility 26.35 % 33.18 % 32.86 % Risk free rate of return 4.33 % 1.61 % 0.29 % Weighted average grant date stock price $ 93.90 $ 107.67 $ 90.85 As of December 29, 2023, there was $ 18 million of unrecognized compensation cost, net of estimated forfeitures, which is expected to be recognized over a weighted average period of 1.6 years. The fair value of performance-based stock awards that vested in fiscal 2023, 2022 and 2021 was $ 12 million, $ 17 million, and $ 19 million, respectively. Leidos Holdings, Inc. Annual Report - 106 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 18—Income Taxes The provision for income taxes for the periods presented included the following: Year Ended December 29, 2023 December 30, 2022 December 31, 2021 (in millions) Current: Federal $ 212 $ 290 $ 156 State 68 80 49 Foreign 23 33 29 Deferred: Federal ( 75 ) ( 169 ) ( 20 ) State ( 20 ) ( 36 ) ( 3 ) Foreign ( 13 ) ( 5 ) ( 3 ) Total $ 195 $ 193 $ 208 A reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income tax rate to income before income taxes for the periods presented was as follows: Year Ended December 29, 2023 December 30, 2022 December 31, 2021 (in millions) Amount computed at the statutory federal income tax rate $ 85 $ 186 $ 203 State income taxes, net of federal tax benefit 26 36 34 Goodwill 104 — — Research and development credits ( 19 ) ( 31 ) ( 23 ) Excess tax benefits from stock-based compensation ( 2 ) ( 13 ) ( 11 ) Change in valuation allowance for deferred tax assets 3 3 5 Impact of foreign operations ( 13 ) 2 4 Dividends paid to employee stock ownership plan ( 2 ) ( 2 ) ( 2 ) Change in accruals for uncertain tax positions 14 ( 1 ) 1 Other ( 1 ) 13 ( 3 ) Total $ 195 $ 193 $ 208 Effective income tax rate 48.4 % 21.8 % 21.5 % The effective tax rate for fiscal 2023 was unfavorably impacted primarily by non tax deductible goodwill impairments. The effective tax rates for both fiscal 2022 and fiscal 2021 were favorably impacted primarily by federal research tax credits and excess tax benefits related to employee stock-based payment transactions. Leidos Holdings, Inc. Annual Report - 107 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Deferred income taxes are recorded for differences in the basis of assets and liabilities for financial reporting purposes and tax reporting purposes. Deferred tax assets (liabilities) were comprised of the following: December 29, 2023 December 30, 2022 (in millions) Capitalized research and development $ 290 $ 228 Operating lease liabilities 156 190 Accrued vacation and bonuses 95 87 Reserves 33 40 Deferred compensation 39 32 Credits and net operating losses carryovers 36 32 Vesting stock awards 29 27 Accumulated other comprehensive loss — 2 Other 18 13 Total deferred tax assets 696 651 Valuation allowance ( 27 ) ( 24 ) Deferred tax assets, net of valuation allowance $ 669 $ 627 Purchased intangible assets $ ( 347 ) $ ( 415 ) Operating lease right-of-use assets ( 126 ) ( 140 ) Property, plant and equipment ( 90 ) ( 75 ) Deferred revenue ( 3 ) ( 4 ) Other ( 4 ) ( 5 ) Total deferred tax liabilities ( 570 ) ( 639 ) Net deferred tax assets (liabilities) $ 99 $ ( 12 ) At December 29, 2023, we had state net operating losses of $ 92 million. These will begin to expire in fiscal 2023, however, we expect to utilize $ 76 million of these state net operating losses. We had foreign tax credits of $ 21 million that will begin to expire in fiscal 2030. We expect to utilize $ 6 million of these foreign tax credits. We also had foreign net operating losses of $ 34 million, which do not expire. We expect to utilize $ 2 million of these foreign net operating losses. Leidos Holdings, Inc. Annual Report - 108 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Income tax balance sheet items are included in the accompanying consolidated balance sheets as follows: December 29, 2023 December 30, 2022 (in millions) Other current assets: Prepaid income taxes and tax refunds receivable $ 40 $ 11 Other long-term assets: Deferred tax assets $ 102 $ 28 Accounts payable and accrued liabilities: Income taxes payable $ 3 $ 135 Deferred tax liabilities $ 3 $ 40 Other long-term liabilities: Unrecognized tax benefits $ 114 $ 92 Unrecognized tax benefits are primarily related to certain recurring deductions customary for our industry. The changes in the unrecognized tax benefits were as follows: Year Ended December 29, 2023 December 30, 2022 December 31, 2021 (in millions) Unrecognized tax benefits at beginning of year $ 92 $ 2 $ 6 Additions for tax positions related to current year 58 91 — Additions for tax positions related to prior years 15 — 2 Reductions for tax positions related to current year ( 1 ) — — Reductions for tax positions related to prior years ( 54 ) — ( 2 ) Settlements with taxing authorities — — ( 3 ) Lapse of statute of limitations — ( 1 ) ( 1 ) Unrecognized tax benefits at end of year $ 110 $ 92 $ 2 Unrecognized tax benefits that, if recognized, would affect the effective income tax rate $ 15 $ — $ 2 At December 29, 2023, December 30, 2022, and December 31, 2021, the balance of unrecognized tax benefits included liabilities for uncertain tax positions of $ 110 million, $ 92 million and $ 2 million, respectively, which were classified as other long-term liabilities on the consolidated balance sheets. For fiscal 2023, unrecognized tax benefits decreased $ 54 million for tax positions related to prior years, primarily as a result of completing a detailed study of our capitalized research and development costs and considering recent guidance issued by the Internal Revenue Service. In addition, unrecognized tax benefits increased $ 58 million for tax positions related to the current year, primarily as a result of capitalized research and development costs. At December 29, 2023, accrued interest and penalties totaled $ 4 million. At December 30, 2022, and December 31, 2021, accrued interest and penalties were immaterial. For fiscal 2023, $ 4 million of interest and penalties were recognized in the Company's consolidated statements of operations. For fiscal 2022 and 2021, the amount of interest and penalties was immaterial . Leidos Holdings, Inc. Annual Report - 109 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS We file income tax returns in the United States and various state and foreign jurisdictions. For the years ended December 30, 2022, and December 29, 2023, we are participating in the Internal Revenue Service (“IRS”) Compliance Assurance Process ("CAP"), a real-time audit of our consolidated federal corporate income tax returns. The IRS has examined our consolidated federal income tax returns through the year ended January 3, 2020. For the years ended January 1, 2021, and December 31, 2021, we were selected to participate in the phase of CAP reserved for taxpayers whose risk of noncompliance does not warrant use of IRS resources. We believe that participation in CAP should reduce tax-related uncertainties, if any. Additionally, with a few exceptions, as of December 29, 2023, we were no longer subject to state, local, or foreign examinations by the tax authorities for fiscal years ended on or before January 3, 2020. During the next 12 months, we expect our balance of unrecognized tax benefits to decrease by $ 22 million related to capitalized research and development costs. While we believe we have adequate accruals for uncertain tax positions, the tax authorities may determine that we owe taxes in excess of recorded accruals or the recorded accruals may be in excess of the final settlement amounts agreed to by tax authorities. Note 19—Retirement Plans Defined Contribution Plans We sponsor various defined contribution plans in which most employees are eligible to participate. These plans allow eligible participants to contribute a portion of their income through payroll deductions and Leidos may also make discretionary contributions. Company contributions were $ 148 million, $ 145 million and $ 131 million for fiscal 2023, 2022 and 2021, respectively. Deferred Compensation Plans We maintain three deferred compensation plans, the Keystaff Deferral Plan ("KDP"), the KESDP and the MSCP (the "Deferred Compensation Plans"), for the benefit of certain management or highly compensated employees or members of the Board of Directors. The Deferred Compensation Plans allow eligible participants to elect to defer a portion of their salary, and all or a portion of certain bonuses, including restricted stock unit awards. Directors may also elect to defer their cash compensation in addition to their restricted stock unit awards. Balances in the Deferred Compensation Plans are paid in lump sum or installments upon retirement, termination or the elected specified date. We do not make any contributions to the KDP but maintain participant accounts for deferred amounts and investments. We maintain a rabbi trust for the purpose of funding benefit payments to the KDP participants. Participants may allocate deferred salary and cash bonus amounts into a variety of designated investment options, with gains and losses based on the elected investment option performance with the participant assuming all risks related to future returns of their contributions. Under the KESDP, eligible participants may elect to defer in share units all or a portion of certain cash bonuses and restricted stock unit awards granted under the previous 2006 Equity Incentive Plan and the current 2017 Omnibus Incentive Plan (see "Note 17—Stock-Based Compensation"). Under the MSCP, restricted stock share units are fully vested and no further deferrals into the plan are made. We do not make any contributions to the accounts of KESDP or MSCP participants. Benefits from the KESDP and MSCP are payable in shares of Leidos common stock held in a rabbi trust for the purpose of funding benefit payments to KESDP and MSCP participants. Defined Benefit Plans We sponsor two frozen defined benefit pension plans ("the Defined Benefit Plans"), one in the United Kingdom ("UK") for former employees on an expired customer contract and another assumed as a result of the Gibbs & Cox acquisition. Leidos Holdings, Inc. Annual Report - 110 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On May 20, 2022, the trustee of our UK defined benefit pension plan (the “Plan”) invested the assets of the Plan in a bulk purchase annuity policy to fully insure the benefits payable to the members of the Plan. As the buy-in transaction insured the defined benefit obligation, we do not anticipate material future contributions. The bulk purchase annuity policy is structured to enable the Plan to move to a full buy-out, at which time the insurer would become directly responsible for all pension payments and we would be relieved of our obligations under the Plan. At this future date, a settlement loss will be recognized for an amount equal to any unamortized loss associated with the Plan recorded within AOCI and any remaining net plan assets of the Plan will be remitted to the Company. As of December 29, 2023, and December 30, 2022, the unamortized loss within AOCI related to the Plan was $ 21 million and $ 20 million, respectively. As of December 29, 2023, and December 30, 2022, the Plan had net assets of $ 8 million and $ 7 million, respectively. The projected benefit obligation of the Defined Benefit Plans as of December 29, 2023, and December 30, 2022, was $ 99 million and $ 101 million, respectively. The decrease in the projected benefit obligation was primarily due to assumption changes, offset by exchange rate movements. The fair value of the Defined Benefit Plans assets as of December 29, 2023, and December 30, 2022, was $ 103 million and $ 101 million, respectively. The decrease was primarily driven by assumption changes to reflect the fair value of the annuity contract and return on plan assets. The UK Plan funding status was overfunded $ 8 million and $ 7 million as of December 29, 2023, and December 30, 2022, respectively. The Gibbs & Cox defined benefit pension plan funding status was underfunded $ 4 million and $ 7 million as of December 29, 2023, and December 30, 2022, respectively. The fair value of Plans assets has been included within "Other long-term liabilities" on the consolidated balance sheets. Other We also sponsor multiemployer defined benefit pension plans and defined contribution plans (401(k) plans) (the "Sponsored Plans") for employees working on two U.S. government contracts. As part of the contractual agreements, the customers reimburse Leidos for contributions made to these Sponsored Plans as these costs are allowable under government contract cost accounting requirements. If we were to cease being the contractor as a result of a recompetition process, the defined benefit pension plans and related plan assets and liabilities would transfer to the new contractor. If the contract expires or is terminated with no transfer of the pension plan to a successor contractor, any amount by which the plan liabilities exceed plan assets, as of that date, will be reimbursed by the U.S. government customer. Since we are not responsible for the current or future funded status of the pension plans, no assets or liabilities arising from their funded status are recorded in the consolidated financial statements and no amounts associated with these pension plans are included in the defined benefit plan disclosures above. Leidos Holdings, Inc. Annual Report - 111 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 20—Business Segments Our operations and reportable segments are organized around the customers and markets we serve. We define our reportable segments based on the way the CODM, currently the Chief Executive Officer, manages the operations for purposes of allocating resources and assessing performance. Our business has been aligned into three reportable segments (Defense Solutions, Civil and Health). Additionally, we separately present the unallocable costs associated with corporate functions as Corporate. Defense Solutions has provided leading-edge and technologically advanced services, solutions and products to a broad customer base. Our ever-changing technologies and innovations cover a wide spectrum of markets with primary areas of concentration in digital modernization, mission systems and integration, Command, Control, Computers, Communications, Intelligence, Surveillance and Reconnaissance ("C4ISR") technologies and services, maritime solutions, transformative software, analytics, intelligence analysis, mission support and logistics services, weapons systems and space systems and solutions. We are dedicated to delivering cost-effective solutions backed by innovation-generating research and development to meet the evolving missions of our customers. We provide a diverse portfolio of national security solutions and systems for air, land, sea, space and cyberspace for the U.S. Intelligence Community, the DoD, the Space Development Agency, the National Aeronautics and Space Administration, Defense Information Systems Agency, military services, government agencies of U.S. allies abroad and other federal and commercial customers in the national security industry. We are heavily engaged in the top defense Research Development Test and Evaluation priorities that are driven by critical evolving threat-driven needs. Our solutions deliver innovative technology, large-scale systems, command and control platforms, data analytics, logistics and cybersecurity solutions, as well as intelligence analysis and operations support to critical missions around the world. Our Civil business has been focused on modernizing infrastructure, systems and security for government and commercial customers both domestically and internationally. By applying leading science, innovative technologies and business acumen, our talented employees help customers achieve their missions and take on the connected world with data-driven insights, improved efficiencies and technological advantages in the areas of digital modernization, energy infrastructure, integrated missions, transportation applications and security detection. Our Health business has been focused on delivering effective and affordable solutions to federal and commercial customers that are responsible for the health and well-being of people worldwide, including service members and veterans. Our solutions enable customers to deliver on the health mission of providing high-quality, cost-effective care, and are accomplished through the integration of information technology, engineering, life sciences, health services, clinical insights and health policy. The capabilities we provide predominantly fall in four major areas of activity: health information management services, managed health services, digital modernization and life sciences research and development. Corporate includes the operations of various corporate activities, certain corporate expense items that are not reimbursed by our U.S. government customers and certain other expense items excluded from a reportable segment's performance. Leidos Holdings, Inc. Annual Report - 112 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes business segment information for the periods presented: Year Ended December 29, 2023 December 30, 2022 December 31, 2021 (in millions) Revenues: Defense Solutions $ 8,732 $ 8,244 $ 8,032 Civil 3,664 3,464 3,157 Health 3,042 2,688 2,548 Total revenues $ 15,438 $ 14,396 $ 13,737 Operating income (loss): Defense Solutions $ 636 $ 541 $ 569 Civil ( 413 ) 234 248 Health 528 421 442 Corporate ( 130 ) ( 108 ) ( 107 ) Total operating income $ 621 $ 1,088 $ 1,152 Amortization of intangible assets: Defense Solutions $ 117 $ 130 $ 121 Civil 62 70 73 Health 23 30 34 Total amortization of intangible assets $ 202 $ 230 $ 228 The statement of operations performance measures used to evaluate segment performance are revenues and operating income. As a result, "Interest expense, net," "Other expense, net," and "Income tax expense," as reported in the consolidated financial statements are not allocated to our segments. Under U.S. government Cost Accounting Standards, indirect costs including depreciation expense are collected in indirect cost pools, which are then collectively allocated out to the reportable segments based on a representative causal or beneficial relationship of the costs in the pool to the costs in the base. While depreciation expense is a component of the allocated costs, the allocation process precludes depreciation expense from being specifically identified by the individual reportable segments. For this reason, depreciation expense by reportable segment has not been reported above. Asset information by segment is not a key measure of performance used by the CODM. We generated approximately 87 % of our total revenues in fiscal 2023, 86 % in fiscal 2022 and 87 % in fiscal 2021 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. government. 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 49 % of our total revenues for fiscal 2023 and 44 % of total revenues for both fiscal 2022 and 2021. Approximately 9 % of our revenues in fiscal 2023, and 8 % in both fiscal 2022 and 2021, are generated by entities outside of the United States. As such, additional financial information by geographic location is not presented. Note 21—Commitments and Contingencies Legal Proceedings We are involved in various claims and lawsuits arising in the normal conduct of our business, none of which, in the opinion of management, based upon current information, will likely have a material adverse effect on our financial position, results of operations or cash flows. Leidos Holdings, Inc. Annual Report - 113 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Contingencies VirnetX, Inc. ("VirnetX") On April 10, 2018, a jury trial concluded in an additional patent infringement case brought by VirnetX against Apple, referred to as the Apple II case, in which the jury returned a verdict against Apple for infringement and awarded VirnetX damages in the amount of over $ 502 million. On April 11, 2018, in a second phase of the Apple II trial, the jury found Apple's infringement to be willful. On August 30, 2018, the federal trial court in the Eastern District of Texas entered a final judgment and rulings on post-trial motions in the Apple II case. The court affirmed the jury’s verdict of over $ 502 million and granted VirnetX’s motions for supplemental damages, a sunset royalty and royalty rate of $ 1.20 per infringing device, along with pre-judgment and post-judgment interest and costs. The court denied VirnetX’s motions for enhanced damages, attorneys’ fees and an injunction. The court also denied Apple’s motions for judgment as a matter of law and for a new trial. An additional sum of over $ 93 million for costs and pre-judgment interest was subsequently agreed upon pursuant to a court order, bringing the total award to VirnetX in the Apple II case to over $ 595 million. Apple filed an appeal of the judgment in the Apple II case with the U.S. Court of Appeals for the Federal Circuit, and on November 22, 2019, the Federal Circuit affirmed in part, reversed in part and remanded the Apple II case back to the District Court. The Federal Circuit affirmed that Apple infringed two of the patents at issue in the case, and ruled that Apple is precluded from making certain patent invalidity arguments. However, the Federal Circuit reversed the judgment that Apple infringed two other patents at issue, vacated the prior damages awarded in the Apple II case, and remanded the Apple II case back to the District Court for further proceedings regarding damages. On April 23, 2020, the District Court ordered a new trial on damages in the Apple II case, which was delayed by the coronavirus pandemic and started on October 26, 2020. On October 30, 2020, the jury awarded VirnetX $ 503 million in damages and specified a royalty rate of $ 0.84 per infringing device. In January 2021, the District Court entered final judgment affirming the jury award and the parties separately agreed on additional costs and interest of over $ 75 million, subject to Apple's appeal. On February 4, 2021, Apple filed a notice of appeal with the U.S. Court of Appeals for the Federal Circuit in the Apple II case. Under our agreements with VirnetX, Leidos would receive 25 % of the proceeds obtained by VirnetX after reduction for attorneys' fees and costs. However, the verdict in the Apple II case remains subject to the ongoing and potential future proceedings and appeals. In addition, the patents at issue in these cases are subject to U.S. Patent and Trademark Office ("USPTO") post-grant inter partes review and/or reexamination proceedings and related appeals, which may result in all or part of these patents being invalidated or the claims of the patents being limited. On March 30, 2023, the U.S. Court of Appeals for the Federal Circuit issued a ruling affirming prior decisions of the USPTO’s Patent Trial and Appeal Board finding certain claims of the patents at issue in the Apple II case to be unpatentable. On March 31, 2023, the Federal Circuit issued a decision vacating the District Court’s judgment in the Apple II case and remanding it back to the District Court with instructions to dismiss the case as moot. These Federal Circuit decisions remain subject to potential motions and/or appeals by VirnetX, including potentially seeking rehearing or certiorari review. On May 1, 2023, VirnetX filed a petition for panel rehearing on the Apple II litigation decision at the Federal Circuit, but this petition was denied by the Federal Circuit on June 27, 2023. On June 5, 2023, VirnetX filed a petition for panel rehearing on the Federal Circuit’s decision finding the patents at issue in the Apple II case to be unpatentable, but this petition was denied by the Federal Circuit on June 22, 2023. 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. In addition, if Leidos receives any proceeds, we are required to pay a royalty to the customer who paid for the development of the technology. Government Investigations and Reviews We are routinely subject to investigations and reviews relating to compliance with various laws and regulations with respect to our role as a contractor to federal, state and local government customers and in connection with performing services in countries outside of the United States. Adverse findings could have a material effect on our business, financial position, results of operations and cash flows due to our reliance on government contracts. Leidos Holdings, Inc. Annual Report - 114 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Defense Contract Audit Agency As of December 29, 2023, active indirect cost audits by the DCAA 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 December 29, 2023, we believe we have adequately reserved for potential adjustments from audits or reviews of contract costs. Other Government Investigations and Reviews Through its internal processes, the Company discovered, in late 2021, activities by its employees, third party representatives and subcontractors, raising concerns related to a portion of our business that conducts international operations. The Company is conducting an internal investigation, overseen by an independent committee of the Board of Directors, with the assistance of external legal counsel, to determine whether the identified conduct may have violated the Company’s Code of Conduct and potentially applicable laws, including the U.S. Foreign Corrupt Practices Act ("FCPA"). The Company has voluntarily self-reported this investigation to the Department of Justice and the Securities and Exchange Commission and is cooperating with both agencies. Because the investigation is ongoing, the Company cannot anticipate the timing, outcome or possible impact of the investigation, although violations of the FCPA and other applicable laws may result in criminal and civil sanctions, including monetary penalties, and reputational damage. In September 2022, the Company received a Federal Grand Jury Subpoena related to the criminal investigation by the U.S. Attorney’s Office for the Southern District of California, in conjunction with the U.S. Department of Justice’s Fraud Division. The subpoena requests documents relating to the conduct that is the subject of the Company’s internal investigation. The Company has responded to the subpoena. In February 2023, a former employee of the Company who was terminated at the outset of the investigation was indicted on wire fraud and other charges by a Federal Grand Jury in the U.S. District Court in the Southern District of California. These charges were later dismissed as a result of the death of the former employee. In August 2022, the Company received a Federal Grand Jury Subpoena in connection with a criminal investigation being conducted by the U.S. Department of Justice Antitrust Division. The subpoena requests that the Company produce a broad range of documents related to three U.S. Government procurements associated with the Company’s Intelligence Group in 2021 and 2022. 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. Commitments As of December 29, 2023, we have outstanding letters of credit of $ 64 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 December 29, 2023, the future expirations of the outstanding letters of credit and surety bonds were as follows: Fiscal year ending (in millions) 2024 $ 46 2025 103 2026 2 2027 14 2028 1 2029 and thereafter 2 $ 168 Leidos Holdings, Inc. Annual Report - 115 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 22—Subsequent Events Segment Realignment Beginning in fiscal 2024, we will operate in four reportable segments that are focused on specific, defined capability sets we bring to our customers. The four reportable segments will be National Security and Digital, Health & Civil, Commercial & International and Defense Systems. We will also separately present the unallocable costs associated with corporate functions as Corporate. All historical segment financial information will be recast to conform to the new reportable segment structure in our financial statements and accompanying notes, beginning in the first quarter of fiscal 2024. Leidos Holdings, Inc. Annual Report - 116 Table of Contents PART II Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.