Leidos Holdings, Inc. 10-Q

Item 1. Financial Statements. LEIDOS HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS March 29, 2024 December 29, 2023 (unaudited; in millions, except share and per share data) Assets: Cash and cash equivalents $ 633 $ 777 Receivables, net 2,713 2,429 Inventory, net 318 310 Other current assets 486 489 Total current assets 4,150 4,005 Property, plant and equipment, net 972 961 Intangible assets, net 629 667 Goodwill 6,099 6,112 Operating lease right-of-use assets, net 493 512 Other long-term assets 474 438 Total assets $ 12,817 $ 12,695 Liabilities: Accounts payable and accrued liabilities $ 2,301 $ 2,277 Accrued payroll and employee benefits 740 695 Current portion of long-term debt 43 18 Total current liabilities 3,084 2,990 Long-term debt, net of current portion 4,636 4,664 Operating lease liabilities 495 516 Other long-term liabilities 289 267 Total liabilities 8,504 8,437 Commitments and contingencies (Note 11) Stockholders’ equity: Common stock, $ 0.0001 par value, 500,000,000 shares authorized, 135,097,654 and 135,766,419 shares issued and outstanding at March 29, 2024, and December 29, 2023, respectively — — Additional paid-in capital 1,735 1,885 Retained earnings 2,595 2,364 Accumulated other comprehensive loss ( 72 ) ( 48 ) Total Leidos stockholders’ equity 4,258 4,201 Non-controlling interest 55 57 Total stockholders' equity 4,313 4,258 Total liabilities and stockholders' equity $ 12,817 $ 12,695 See accompanying notes to condensed consolidated financial statements. 1 Table of Contents LEIDOS HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended March 29, 2024 March 31, 2023 (unaudited; in millions, except per share data) Revenues $ 3,975 $ 3,699 Cost of revenues 3,337 3,204 Selling, general and administrative expenses 226 233 Acquisition, integration and restructuring costs 4 3 Equity earnings of non-consolidated subsidiaries ( 7 ) ( 6 ) Operating income 415 265 Non-operating income (expense): Interest expense, net ( 49 ) ( 54 ) Other income (expense), net 2 ( 4 ) Income before income taxes 368 207 Income tax expense ( 85 ) ( 43 ) Net income $ 283 $ 164 Less: net (loss) income attributable to non-controlling interest ( 1 ) 2 Net income attributable to Leidos common stockholders $ 284 $ 162 Earnings per share: Basic $ 2.09 $ 1.18 Diluted 2.07 1.17 See accompanying notes to condensed consolidated financial statements. 2 Table of Contents LEIDOS HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three Months Ended March 29, 2024 March 31, 2023 (unaudited; in millions) Net income $ 283 $ 164 Foreign currency translation adjustments ( 27 ) 15 Unrecognized gain (loss) on derivative instruments 2 ( 5 ) Pension adjustments 1 ( 1 ) Total other comprehensive (loss) income, net of taxes ( 24 ) 9 Comprehensive income 259 173 Less: net (loss) income attributable to non-controlling interest ( 1 ) 2 Comprehensive income attributable to Leidos common stockholders $ 260 $ 171 See accompanying notes to condensed consolidated financial statements. 3 Table of Contents LEIDOS HOLDINGS, INC. CONDENSED 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 (unaudited; in millions, except per share data) Balance at December 29, 2023 136 $ 1,885 $ 2,364 $ ( 48 ) $ 4,201 $ 57 $ 4,258 Net income (loss) — — 284 — 284 ( 1 ) 283 Other comprehensive loss, net of taxes — — — ( 24 ) ( 24 ) — ( 24 ) Issuances of stock — 14 — — 14 — 14 Repurchases of stock and other ( 1 ) ( 184 ) — — ( 184 ) — ( 184 ) Dividends of $ 0.38 per share — ( 53 ) — ( 53 ) — ( 53 ) Stock-based compensation — 20 — — 20 — 20 Net capital distributions to non-controlling interest — — — — — ( 1 ) ( 1 ) Balance at March 29, 2024 135 $ 1,735 $ 2,595 $ ( 72 ) $ 4,258 $ 55 $ 4,313 Shares of common stock Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Leidos stockholders' equity Non-controlling interest Total stockholders' equity (unaudited; in millions, except per share data) Balance at December 30, 2022 137 $ 2,005 $ 2,367 $ ( 73 ) $ 4,299 $ 54 $ 4,353 Net income — — 162 — 162 2 164 Other comprehensive income, net of taxes — — — 9 9 — 9 Issuances of stock — 14 — — 14 — 14 Repurchases of stock and other — ( 43 ) — — ( 43 ) — ( 43 ) Dividends of $ 0.36 per share — — ( 50 ) — ( 50 ) — ( 50 ) Stock-based compensation — 18 — — 18 — 18 Net capital distributions to non-controlling interest — — — — — ( 1 ) ( 1 ) Balance at March 31, 2023 137 $ 1,994 $ 2,479 $ ( 64 ) $ 4,409 $ 55 $ 4,464 See accompanying notes to condensed consolidated financial statements. 4 Table of Contents LEIDOS HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 29, 2024 March 31, 2023 (unaudited; in millions) Cash flows from operations: Net income $ 283 $ 164 Adjustments to reconcile net income to net cash provided by (used in) operations: Depreciation and amortization 69 82 Stock-based compensation 20 18 Deferred income taxes ( 25 ) ( 43 ) Other ( 6 ) 5 Change in assets and liabilities: Receivables ( 281 ) ( 166 ) Other current assets and other long-term assets ( 35 ) ( 9 ) Accounts payable and accrued liabilities and other long-term liabilities ( 101 ) ( 97 ) Accrued payroll and employee benefits 48 13 Income taxes receivable/payable 91 ( 65 ) Net cash provided by (used in) operating activities 63 ( 98 ) Cash flows from investing activities: Payments for property, equipment and software ( 17 ) ( 39 ) Other 5 — Net cash used in investing activities ( 12 ) ( 39 ) Cash flows from financing activities: Proceeds from debt issuance — 1,743 Repayments of borrowings ( 4 ) ( 1,711 ) Payments for debt issuance costs — ( 7 ) Dividend payments ( 53 ) ( 50 ) Repurchases of stock and other ( 183 ) ( 43 ) Proceeds from issuances of stock 13 12 Net capital distributions to non-controlling interests ( 1 ) ( 1 ) Net cash used in financing activities ( 228 ) ( 57 ) Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash ( 4 ) 2 Net decrease in cash, cash equivalents and restricted cash ( 181 ) ( 192 ) Cash, cash equivalents and restricted cash at beginning of period 928 683 Cash, cash equivalents and restricted cash at end of period 747 491 Less: restricted cash at end of period 114 112 Cash and cash equivalents at end of period $ 633 $ 379 Supplementary cash flow information: Cash paid for income taxes, net of refunds $ 2 $ 135 Cash paid for interest 61 45 Non-cash investing activity: Property, plant and equipment additions $ 35 $ 1 Non-cash financing activity: Finance lease obligations $ — $ 65 See accompanying notes to condensed consolidated financial statements. 5 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1–Basis of Presentation and Summary of Significant Accounting Policies 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, National Aeronautics and Space Administration ("NASA") 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. During the quarter ended March 29, 2024, we completed a realignment of our segment and reporting structure, which resulted in the identification of four reportable segments: National Security and Digital, Health & Civil, Commercial & International and Defense Systems. We commenced operating and reporting under the new organizational structure effective the first day of fiscal 2024. In addition, we separately present the unallocable costs associated with corporate functions as Corporate. As a result of this change, prior year segment results and disclosures have been recast to reflect the current reportable segment structure. We have a controlling interest in Mission Support Alliance, LLC ("MSA"), a joint venture with Centerra Group, LLC. We also have a 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. The financial results for MSA and HMIS are consolidated into our unaudited condensed consolidated financial statements. The unaudited condensed 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 unaudited condensed consolidated financial statements for the periods presented. Intercompany accounts and transactions between consolidated companies have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules of the U.S. Securities and Exchange Commission and accounting principles generally accepted in the United States of America ("GAAP"). Certain disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules. The preparation of financial statements in conformity with 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 assets and lease liabilities, fair value and impairment of intangible assets and goodwill, income taxes, 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. Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. We combined "Deferred tax liabilities" into "Other long-term liabilities" on the condensed consolidated balance sheets. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which consist of normal recurring adjustments, necessary for a fair presentation thereof. The results reported in these unaudited condensed consolidated financial statements are not necessarily indicative of the results that may be expected for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K filed on February 13, 2024. 6 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 expands disclosure requirements for interim reporting. 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 for annual periods beginning after December 15, 2023, and interim periods beginning after December 15, 2024. The amendments should be adopted on a retrospective basis and early adoption is permitted. 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 2025. 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. Changes in estimates on contracts were as follows: Three Months Ended March 29, 2024 March 31, 2023 (in millions, except per share data) Favorable impact $ 25 $ 22 Unfavorable impact ( 25 ) ( 16 ) Net impact to income before income taxes $ — $ 6 Impact on diluted EPS attributable to Leidos common stockholders $ — $ 0.03 The impact on diluted earnings per share ("EPS") attributable to Leidos common stockholders is calculated using the statutory tax rate. Revenue Recognized from Prior Obligations We reduced revenue by $ 2 million and recognized revenue of $ 5 million from performance obligations satisfied in previous periods for the three months ended March 29, 2024, and March 31, 2023, respectively. The changes are primarily related to revisions of variable consideration including award and incentive fees, and revisions to estimates at completion resulting from changes in contract scope, mitigation of contract risks or true-ups of contract estimates at the end of contract performance. 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. At March 29, 2024, and December 29, 2023, $ 86 million and $ 136 million, respectively, of outstanding payments were included within "Cash and cash equivalents" and "Accounts payable and accrued liabilities" correspondingly on the condensed consolidated balance sheets. 7 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Restricted Cash We have restricted cash balances, primarily representing advances from customers that are restricted for use on certain expenditures related to that customer's contract. Restricted cash balances are included as "Other current assets" in the condensed consolidated balance sheets. Our restricted cash balances were $ 114 million and $ 151 million at March 29, 2024, and December 29, 2023, respectively. Note 2–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 indefinite delivery/indefinite quantity ("IDIQ") contracts, General Services Administration Schedule or other master agreement contract vehicles, with the exception of certain IDIQ contracts where task orders are not competitively awarded and separately priced but instead are used as a funding mechanism, and where there is a basis for estimating future revenues and funding on future anticipated task orders. As of March 29, 2024, we had $ 14.3 billion of RPO and expect to recognize approximately 62 % and 78 % over the next 12 months and 24 months, respectively, with the remainder to be recognized thereafter. Disaggregation of Revenues We disaggregate revenues by customer-type, contract-type and geographic location for each of our reportable segments. Disaggregated revenues by customer-type were as follows: Three Months Ended March 29, 2024 National Security and Digital Health & Civil Commercial & International Defense Systems Total (in millions) DoD and U.S. Intelligence Community $ 1,221 $ 257 $ 10 $ 425 $ 1,913 Other U.S. government agencies (1) 525 917 73 22 1,537 Commercial and non-U.S. customers 33 16 425 27 501 Total $ 1,779 $ 1,190 $ 508 $ 474 $ 3,951 Three Months Ended March 31, 2023 National Security and Digital Health & Civil Commercial & International Defense Systems Total (in millions) DoD and U.S. Intelligence Community $ 1,154 $ 272 $ 8 $ 390 $ 1,824 Other U.S. government agencies (1) 557 713 65 30 1,365 Commercial and non-U.S. customers 35 14 416 25 490 Total $ 1,746 $ 999 $ 489 $ 445 $ 3,679 (1) Includes federal government agencies other than the DoD and U.S. Intelligence Community, as well as state and local government agencies. 8 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Disaggregated revenues by contract-type were as follows: Three Months Ended March 29, 2024 National Security and Digital Health & Civil Commercial & International Defense Systems Total (in millions) Cost-reimbursement and fixed-price-incentive-fee $ 946 $ 447 $ 85 $ 301 $ 1,779 Firm-fixed-price 492 690 319 139 1,640 Time-and-materials and fixed-price-level-of-effort 341 53 104 34 532 Total $ 1,779 $ 1,190 $ 508 $ 474 $ 3,951 Three Months Ended March 31, 2023 National Security and Digital Health & Civil Commercial & International Defense Systems Total (in millions) Cost-reimbursement and fixed-price-incentive-fee $ 927 $ 553 $ 92 $ 272 $ 1,844 Firm-fixed-price 507 403 289 134 1,333 Time-and-materials and fixed-price-level-of-effort 312 43 108 39 502 Total $ 1,746 $ 999 $ 489 $ 445 $ 3,679 Disaggregated revenues by geographic location were as follows: Three Months Ended March 29, 2024 National Security and Digital Health & Civil Commercial & International Defense Systems Total (in millions) United States $ 1,770 $ 1,189 $ 208 $ 468 $ 3,635 International 9 1 300 6 316 Total $ 1,779 $ 1,190 $ 508 $ 474 $ 3,951 Three Months Ended March 31, 2023 National Security and Digital Health & Civil Commercial & International Defense Systems Total (in millions) United States $ 1,735 $ 998 $ 192 $ 441 $ 3,366 International 11 1 297 4 313 Total $ 1,746 $ 999 $ 489 $ 445 $ 3,679 Revenues by customer-type, contract-type and geographic location exclude lease income of $ 24 million and $ 20 million for the three months ended March 29, 2024, and March 31, 2023, respectively. 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. 9 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Contract assets consist of unbilled receivables, which is the amount of revenue recognized that exceeds the amount billed to the customer. Unbilled receivables exclude amounts billable where the right to consideration is solely subject to the passage of time. Contract liabilities consist of deferred revenue, which represents cash advances received prior to performance for programs and billings in excess of revenue recognized. The components of contract assets and contract liabilities consisted of the following: Balance sheet line item March 29, 2024 December 29, 2023 (in millions) Contract assets - current: Unbilled receivables Receivables, net $ 1,099 $ 1,041 Contract liabilities - current: Deferred revenue (1) Accounts payable and accrued liabilities $ 414 $ 442 Contract liabilities - non-current: Deferred revenue (1) Other long-term liabilities $ 18 $ 21 (1) Certain contracts record revenue net of cost of revenues, and therefore, the respective deferred revenue balance will not fully convert to revenue. The increase in unbilled receivables was primarily due to revenue recognized on certain contracts, partially offset by the timing of billings. The decrease in deferred revenue was primarily due to revenue recognized during the period, offset by the timing of advanced payments from customers. For the three months ended March 29, 2024, $ 157 million of revenue recognized was included as a contract liability at December 29, 2023. For the three months ended March 31, 2023, $ 155 million of revenue recognized was included as a contract liability at December 30, 2022. Note 3–Goodwill and Intangible Assets Goodwill During the quarter ended March 29, 2024, the Company completed a business realignment, which resulted in identification of new reportable segments. The Company commenced operating and reporting under the new organizational structure effective the first day of fiscal 2024 (see "Note 10–Business Segments). Goodwill was allocated to the new reportable segments based on a relative fair value approach. The following table presents changes in the carrying amount of goodwill by reportable segment: National Security and Digital Health & Civil Commercial & International Defense Systems Total (in millions) Goodwill at December 30, 2022 $ 2,755 $ 1,366 $ 1,389 $ 1,186 $ 6,696 Goodwill Impairment — — ( 596 ) — ( 596 ) Acquisitions of a business (1) — — ( 4 ) — ( 4 ) Foreign currency translation adjustments 3 — 11 2 16 Goodwill at December 29, 2023 (2) $ 2,758 $ 1,366 $ 800 $ 1,188 $ 6,112 Foreign currency translation adjustments — — ( 13 ) — ( 13 ) Goodwill at March 29, 2024 (2) $ 2,758 $ 1,366 $ 787 $ 1,188 $ 6,099 (1) Adjustment to goodwill resulting from a measurement period purchase accounting adjustment. (2) Carrying amount includes accumulated impairment loss of $ 596 million within the Commercial & International segment. 10 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) We evaluate qualitative factors that could cause us to believe the estimated fair value of each of our reporting units may be lower than the carrying value and trigger a quantitative assessment, including, but not limited to (i) macroeconomic conditions, (ii) industry and market considerations, (iii) our overall financial performance, including an analysis of our current and projected cash flows, revenues and earnings, (iv) a sustained decrease in share price and (v) other relevant entity-specific events including changes in management, strategy, partners or litigation. Operations of the Security Enterprise Solutions (“SES”) reporting unit rely heavily on the sales and servicing of security and detection products, which prior to fiscal 2024, have been negatively impacted due to delays in airline travel infrastructure projects as customer budgets recover from the pandemic. During 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. Accordingly, we recognized a non-cash goodwill impairment charge of $ 596 million at the SES reporting unit during the fiscal year ended December 29, 2023. The impairment was recorded within the Commercial & International reportable segment in the condensed consolidated statements of operations. In the event that there are significant unfavorable changes to the forecasted cash flows, forecasted revenue, terminal growth rates or the cost of capital used in the fair value estimates, we may be required to record an additional impairment of goodwill at a future date. In conjunction with the change in reportable segments in fiscal 2024, the Company evaluated goodwill for impairment both before and after the segment change and determined that goodwill was not impaired. Intangible Assets Intangible assets, net consisted of the following: March 29, 2024 December 29, 2023 Gross carrying value Accumulated amortization Net carrying value Gross carrying value Accumulated amortization Net carrying value (in millions) Finite-lived intangible assets: Programs $ 1,687 $ ( 1,204 ) $ 483 $ 1,689 $ ( 1,175 ) $ 514 Software and technology 262 ( 149 ) 113 263 ( 144 ) 119 Customer relationships 52 ( 23 ) 29 52 ( 22 ) 30 Total finite-lived intangible assets 2,001 ( 1,376 ) 625 2,004 ( 1,341 ) 663 Indefinite-lived intangible assets: Trade names 4 — 4 4 — 4 Total intangible assets $ 2,005 $ ( 1,376 ) $ 629 $ 2,008 $ ( 1,341 ) $ 667 Amortization expense was $ 37 million and $ 52 million for the three months ended March 29, 2024, and March 31, 2023, respectively. Program intangible assets are amortized over their respective estimated useful lives in proportion to the pattern of economic benefit based on expected future discounted cash flows. 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. 11 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The estimated annual amortization expense as of March 29, 2024, was as follows: Fiscal year ending (in millions) 2024 (remainder of year) $ 110 2025 120 2026 98 2027 72 2028 62 2029 and thereafter 163 $ 625 Note 4–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 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 market participant assumptions used in pricing the asset or liability (Level 3). The financial instruments measured at fair value on a recurring basis primarily consisted of the following: March 29, 2024 December 29, 2023 Carrying value Fair value Carrying value Fair value (in millions) Financial assets: Derivatives $ 13 $ 13 $ 11 $ 11 As of March 29, 2024, and December 29, 2023, our derivatives primarily consisted of the cash flow interest rate swaps on $ 500 million of the variable rate senior unsecured term loan (see "Note 5–Derivative Instruments"). The fair value of the cash flow interest rate swaps is determined based on observed values for underlying interest rates on the one-month Secured Overnight Financing Rate ("SOFR") rate (Level 2 inputs). The carrying amounts of our financial instruments, other than derivatives, which include cash equivalents, accounts receivable, accounts payable and accrued expenses, are reasonable estimates of their related fair values. As of March 29, 2024, and December 29, 2023, the fair value of debt was $ 4.5 billion and $ 4.6 billion, respectively, and the carrying amount was $ 4.7 billion for both periods (see "Note 6–Debt"). The fair value of long-term debt is determined based on current interest rates available for debt with terms and maturities similar to our existing debt arrangements (Level 2 inputs). As of March 29, 2024, we did not have any assets or liabilities measured at fair value on a non-recurring basis. 12 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 5–Derivative Instruments We manage our risk to changes in interest rates through the use of derivative instruments. We do not hold derivative instruments for trading or speculative purposes. 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 the interest rate swaps was as follows: Asset derivatives Balance sheet line item March 29, 2024 December 29, 2023 (in millions) Cash flow interest rate swaps Other long-term assets $ 13 $ 11 The cash flows associated with the interest rate swaps are classified as operating activities in the condensed 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. Under the terms of the interest rate swap agreements, we will receive monthly variable interest payments based on the one-month SOFR and will pay interest at a fixed rate. The interest rate swap transactions are accounted for as cash flow hedges. The gain/loss on the swaps is reported as a component of other comprehensive (loss) income and is reclassified into earnings when the interest payments on the underlying hedged items impact earnings. A qualitative assessment of hedge effectiveness is performed on a quarterly basis, unless facts and circumstances indicate the hedge may no longer be highly effective. The effect of the cash flow hedges on other comprehensive (loss) income and earnings for the periods presented was as follows: Three Months Ended March 29, 2024 March 31, 2023 (in millions) Total interest expense, net presented in the condensed consolidated statements of operations in which the effects of cash flow hedges are recorded $ 49 $ 54 Amount recognized in other comprehensive income (loss) $ 5 $ ( 2 ) Amount reclassified from accumulated other comprehensive loss to interest expense, net $ ( 3 ) $ ( 4 ) We expect to reclassify net gains of $ 10 million from accumulated other comprehensive loss into earnings during the next 12 months. 13 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 6–Debt Our debt consisted of the following: Stated interest rate Effective interest rate March 29, 2024 December 29, 2023 (in millions) Senior unsecured term loan: $ 1,000 million term loan, due March 2028 6.67 % 6.85 % $ 1,000 $ 1,000 Senior unsecured notes: $ 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 % 750 750 $ 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 % 86 91 Less: unamortized debt discounts and deferred debt issuance costs ( 36 ) ( 38 ) Total long-term debt 4,679 4,682 Less current portion ( 43 ) ( 18 ) Total long-term debt, net of current portion $ 4,636 $ 4,664 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 March 29, 2024, 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. 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 Credit Agreement require that we maintain, as of the last day of each fiscal quarter, a ratio of adjusted consolidated total debt to consolidated EBITDA of not more than 3.75 to 1.00, subject to increases to 4.50 to 1.00 for four fiscal quarters following a material acquisition, and a ratio of EBITDA to consolidated interest expense of not less than 3.50 to 1.00. 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 discount were recognized, which were recorded as an offset against the carrying value of debt. 14 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Commercial Paper We have a commercial paper program in which the Company may issue short-term unsecured commercial paper notes ("Commercial Paper Notes") not to exceed $ 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 either bear a stated or floating interest rate, if interest bearing, or will be sold at a discount from the face amount. As of March 29, 2024, and December 29, 2023, we did not have any Commercial Paper Notes outstanding. The Credit Facilities, Commercial Paper Notes and senior unsecured notes are fully and unconditionally guaranteed and contain certain customary restrictive covenants, including among other things, restrictions on our ability to create liens and enter into sale and leaseback transactions under certain circumstances. We were in compliance with all covenants as of March 29, 2024. Note 7–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 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 ) Other comprehensive income (loss) ( 31 ) 5 1 ( 25 ) Taxes 4 — — 4 Reclassification from AOCI — ( 3 ) — ( 3 ) Balance at March 29, 2024 $ ( 66 ) $ 7 $ ( 13 ) $ ( 72 ) Reclassifications from unrecognized gain (loss) on derivative instruments are recorded in "Interest expense, net" in the condensed consolidated statements of operations. Note 8–Earnings Per Share The following table provides a reconciliation of the weighted average number of shares outstanding used to compute basic and diluted EPS for the periods presented: Three Months Ended March 29, 2024 March 31, 2023 (in millions) Basic weighted average number of shares outstanding 136 137 Dilutive common share equivalents—stock options and other stock awards 1 1 Diluted weighted average number of shares outstanding 137 138 Anti-dilutive stock-based awards are excluded from the weighted average number of shares outstanding used to compute diluted EPS. For the three months ended March 29, 2024, and March 31, 2023, the total outstanding stock options and vesting stock awards that were anti-dilutive were 1 million for both periods. During the three months ended March 29, 2024, and March 31, 2023, we made open market repurchases of our common stock for an aggregate purchase price of $ 150 million and $ 25 million, respectively. All shares repurchased were immediately retired. 15 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 9–Income Taxes For the three months ended March 29, 2024, the effective tax rate was 23.1 % compared to 20.8 % for the three months ended March 31, 2023. The increase to the effective tax rate was primarily due to an increase in unrecognized tax benefits and a reduced benefit in federal research tax credits, partially offset by an increase in excess tax benefits related to employee stock-based payment transactions. Note 10–Business Segments Our operations and reportable segments are organized around the customers and markets we serve. We define our reportable segments based on the way the CODM, currently our Chief Executive Officer, manages operations for the purposes of allocating resources and assessing performance. Beginning in fiscal 2024, we realigned our business to report in six operating segments, which are aggregated into four reportable segments in accordance with the criteria established under ASC 280: National Security and Digital, Health & Civil, Commercial & International and Defense Systems. Our reportable segments are focused on specific, defined capability sets that we bring to our customers. Additionally, we separately present the unallocable costs associated with corporate functions as Corporate. As a result of this change, prior year segment results have been recast to reflect the current reportable segment structure. National Security and Digital provides technology enabled services and mission software capabilities for defense and intelligence customers in the areas of cyber, logistics, security operations and decision analytics, as well as IT operations and digital transformation programs across all U.S. federal government customers. Our advanced capabilities include the delivery of technology-enabled services, mission software capabilities and IT modernization services. Our capabilities allow us to provide innovative technology solutions in the following categories: software development, engineering & design, modeling & simulation, analytics, cyber security, intelligence analysis, linguistics and mission operations. Health & Civil provides services and solutions to federal and commercial customers in the areas of public health, care coordination, life and environmental sciences and transportation. We are dedicated to delivering effective and affordable solutions that are responsible for the health and well-being of people, including service members and veterans. Our core capabilities include health information management services, managed health services, systems and infrastructure modernization, and life sciences research and development. We help customers achieve their missions and take on the connected world with data-driven insights, improved efficiencies and technological advantages. Commercial & International provides technologically advanced services, solutions and products to commercial and international customers. Our key customers include United Kingdom and Australia government agencies, Transportation Security Administration, U.S. Customs and Border Protection, airports, and commercial utility providers. Our offerings include IT modernization, software solutions, mission support and logistics, Command, Control, Computers, Communications, Intelligence, Surveillance and Reconnaissance ("C4ISR") technologies and services, cloud services, power grid engineering, energy modernization and security products and services. Defense Systems develops and produces advanced space, aerial, surface, and sub-surface manned and un-manned defense systems for the U.S. Department of Defense, Army, Navy, Air Force, Marine Corps, United States Special Operations Command, NASA, Space Force, the Defense Intelligence Agency and International customers. Our solutions deliver innovative technology, systems engineering, integration and testing, rapid prototyping, software development, intelligence analysis, cybersecurity solutions and C4ISR technologies and services to support critical missions. 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. 16 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The segment information for the periods presented was as follows: Three Months Ended March 29, 2024 March 31, 2023 (in millions) Revenues: National Security and Digital $ 1,793 $ 1,757 Health & Civil 1,199 1,008 Commercial & International 509 489 Defense Systems 474 445 Total revenues $ 3,975 $ 3,699 Operating income (loss): National Security and Digital $ 175 $ 145 Health & Civil 222 113 Commercial & International 34 13 Defense Systems 21 23 Corporate ( 37 ) ( 29 ) Total operating income $ 415 $ 265 The income statement performance measures used to evaluate segment performance are revenues and operating income. As a result, "Interest expense, net," "Other income (expense), net" and "Income tax expense" as reported in the condensed consolidated statements of operations are not allocated to our segments. Under U.S. Government Cost Accounting Standards, indirect costs including depreciation expense are collected in indirect cost pools, which are then collectively allocated to the reportable segments based on a representative causal or beneficial relationship of the costs in the pool to the costs in the base. As such, depreciation expense is not separately disclosed on the condensed consolidated statements of operations. Asset information by segment is not a key measure of performance used by the CODM. Note 11–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. 17 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 above-described verdict in the Apple II case was subject to further proceedings and appeals, as set forth below. In addition, the patents at issue in these cases were subject to U.S. Patent and Trademark Office ("USPTO") post-grant inter partes review and/or reexamination proceedings and related appeals, which sought to have all or part of these patents invalidated or the claims of the patents 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. 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. On February 20, 2024, the Supreme Court of the United States denied VirnetX’s petition for a writ of certiorari, bringing the Apple II case to a close. Thus, no proceeds were received by Leidos in connection with the Apple II case. 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. 18 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Defense Contract Audit Agency As of March 29, 2024, active indirect cost audits by the Defense Contract Audit Agency remain open for fiscal 2021 and subsequent fiscal years. Although we have recorded contract revenues based upon an estimate of costs that we believe will be approved upon final audit or review, we cannot predict the outcome of any ongoing or future audits or reviews and adjustments, and if future adjustments exceed estimates, our profitability may be adversely affected. As of March 29, 2024, 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 March 29, 2024, we have outstanding letters of credit of $ 65 million, principally related to performance guarantees on contracts and outstanding surety bonds with a notional amount of $ 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 March 29, 2024, the future expirations of the outstanding letters of credit and surety bonds were as follows: Fiscal year ending (in millions) 2024 (remainder of year) $ 45 2025 91 2026 2 2027 14 2028 14 2029 and thereafter 3 $ 169 19 Table of Contents LEIDOS HOLDINGS, INC.