What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-10-29 compared with 2024-07-30 · 101 added, 95 removed, 162 unchanged (55% of the section changed)

22 unchanged sentences

We now operate in the following reportable segments:

National Security and Digital, Health & Civil, Commercial & International and Defense Systems.

National Security & Digital, Health & Civil, Commercial & International and Defense Systems.

We also separately present the unallocable costs associated with corporate functions as Corporate (see "Note 10–Business Segments").

1 unchanged sentence

Government Markets

During the three and six months ended June 28, 2024, we generated approximately 86% and 87%, respectively, of total revenues from contracts with the U.S.

government, as compared to 85% and 86% for the three and six months ended June 30, 2023, respectively.

During the three and nine months ended September 27, 2024, we generated approximately 87% of total revenues from contracts with the U.S.

government, as compared to 87% and 86% for the three and nine months ended September 29, 2023, respectively.

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

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

President Biden released the $7.3 trillion government fiscal year ("GFY") 2025 President’s Budget Request on March 11, 2024, which seeks to increase defense spending by 1% and non-defense discretionary spending by 2.4%.

Congress is currently working to pass the 12 appropriations bills that will fund the federal government in GFY 2025.

Failure to pass the appropriations bills or a continuing resolution by September 30, 2024, will result in a full or partial federal government shutdown.

On September 26, 2024, Congress avoided a federal government shutdown by passing a continuing resolution that provides government funding through December 20, 2024.

The continuing resolution gives lawmakers additional time after the November elections to consider the 12 appropriations bills for government fiscal year 2025, emergency supplemental funding for the recent hurricanes and wildfires, and organize new leadership of the House of Representatives and Senate.

Failure to pass the appropriation bills or another continuing resolution by December 20, 2024, will result in a partial or complete federal government shutdown.

LEIDOS HOLDINGS, INC.

International Markets

Sales to customers in international markets represented approximately 9% and 8% of total revenues for the three and six months ended June 28, 2024, respectively, as compared to 9% for both the three and six months ended June 30, 2023.

Sales to customers in international markets represented approximately 8% of total revenues for both the three and nine months ended September 27, 2024, as compared to 9% for both the three and nine months ended September 29, 2023.

Our international customers include foreign governments and their agencies.

5 unchanged sentences

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

Three Months Ended Six Months Ended

2024 June 30,

2023 Dollar change Percent change June 28,

2024 June 30,

Three Months Ended Nine Months Ended

September 27,

2024 September 29,

2023 Dollar change Percent change September 27,

2024 September 29,

2023 Dollar change Percent change

1 unchanged sentence

Revenues $ 4,190 $ 3,921 $ 269 6.9 % $ 12,297 $ 11,458 $ 839 7.3 %

Operating income 475 331 144 43.5 % 890 596 294 49.3 %

Operating income (loss) 516 (336) 852 NM 1,406 260 1,146 NM

Non-operating expense, net

(46) (52) 6 (11.5) % (142) (167) 25 (15.0) %

Income before income taxes

426 274 152 55.5 % 794 481 313 65.1 %

Income (loss) before income taxes

470 (388) 858 NM 1,264 93 1,171 NM

Income tax expense

(102) (64) (38) 59.4 % (187) (107) (80) 74.8 %

Net income 324 210 $ 114 54.3 % 607 374 233 62.3 %

Net income attributable to Leidos common stockholders

$ 322 $ 207 $ 115 55.6 % $ 606 $ 369 $ 237 64.2 %

(108) (8) (100) NM (295) (115) (180) 156.5 %

Net income (loss) 362 (396) 758 191.4 % 969 (22) 991 NM

Net income (loss) attributable to Leidos common stockholders

$ 364 $ (399) $ 763 191.2 % $ 970 $ (30) $ 1,000 NM

Operating margin 12.3 % (8.6) % 11.4 % 2.3 %

NM- Not Meaningful

Segment and Corporate Results

Three Months Ended Six Months Ended

National Security and Digital June 28,

2024 June 30,

2023 Dollar change Percent change June 28,

2024 June 30,

Three Months Ended Nine Months Ended

National Security & Digital September 27,

2024 September 29,

2023 Dollar change Percent change September 27,

2024 September 29,

2023 Dollar change Percent change

3 unchanged sentences

Operating margin 10.0 % 9.2 % 10.0 % 9.0 %

The increase in revenues for the three and six months ended June 28, 2024, as compared to the three and six months ended June 30, 2023, was primarily attributable to a net increase in volumes on certain programs and program wins, partially offset by the completion of certain contracts.

The increase in operating income for the three months ended June 28, 2024, as compared to the three months ended June 30, 2023, was primarily attributable to a net increase in volumes and efficiencies on certain programs, partially offset by the completion of certain contracts.

The increase in operating income for the six months ended June 28, 2024, as compared to the six months ended June 30, 2023, was primarily attributable to a net increase in volumes and efficiencies on certain programs, and program wins, partially offset by the completion of certain contracts.

The increase in revenues for the three and nine months ended September 27, 2024, as compared to the three and nine months ended September 29, 2023, was primarily attributable to program wins and a net increase in volumes on certain contracts, partially offset by the completion of certain contracts.

The increase in operating income for the three and nine months ended September 27, 2024, as compared to the three and nine months ended September 29, 2023, was primarily attributable to contract efficiencies, a net increase in volumes on certain contracts and program wins, partially offset by the completion of certain contracts.

LEIDOS HOLDINGS, INC.

Three Months Ended Six Months Ended

Health & Civil June 28,

2024 June 30,

2023 Dollar change Percent change June 28,

2024 June 30,

Three Months Ended Nine Months Ended

Health & Civil September 27,

2024 September 29,

2023 Dollar change Percent change September 27,

2024 September 29,

2023 Dollar change Percent change

3 unchanged sentences

Operating margin 23.4 % 15.6 % 22.1 % 13.3 %

The increase in revenues for the three and six months ended June 28, 2024, as compared to the three and six months ended June 30, 2023, was primarily attributable to higher volumes in the managed health services business, write-ups on certain programs and program wins.

The increase in operating income for the three and six months ended June 28, 2024, as compared to the three and six months ended June 30, 2023, was primarily driven by a net increase in volumes and favorable business mix in the managed health services business and write-ups on certain programs.

Three Months Ended Six Months Ended

Commercial & International June 28,

2024 June 30,

2023 Dollar change Percent change June 28,

2024 June 30,

The increase in revenues for the three and nine months ended September 27, 2024, as compared to the three and nine months ended September 29, 2023, was primarily attributable to a net increase in volumes and case complexity within the managed health services business, an increase in net write-ups on certain programs and program wins.

The increase in operating income for the three and nine months ended September 27, 2024, as compared to the three and nine months ended September 29, 2023, was primarily driven by an increase in volumes and case complexity within in the managed health services business and an increase in net write-ups on certain programs.

Three Months Ended Nine Months Ended

Commercial & International September 27,

2024 September 29,

2023 Dollar change Percent change September 27,

2024 September 29,

2023 Dollar change Percent change

3 unchanged sentences

Operating margin 7.1 % (117.0) % 3.9 % (37.7) %

The increase in revenues for the three and six months ended June 28, 2024, as compared to the three and six months ended June 30, 2023, was primarily attributable to higher material volumes within our Australia business and program wins.

The increase was partially offset by the impact of write-downs on certain programs within our UK operations for which cost and schedule were rebaselined.

The decrease in operating income for the three and six months ended June 28, 2024, as compared to the three and six months ended June 30, 2023, was primarily driven by the impact of write-downs on certain programs within our UK operations for which cost and schedule were rebaselined, and the completion of certain contracts.

The decrease was partially offset by higher material volumes and program wins.

Three Months Ended Six Months Ended

Defense Systems June 28,

2024 June 30,

2023 Dollar change Percent change June 28,

2024 June 30,

The increase in revenues for the three months ended September 27, 2024, as compared to the three months ended September 29, 2023, was primarily attributable to programs wins and a net increase in volumes, partially offset by the completion of certain programs.

The increase in revenues for the nine months ended September 27, 2024, as compared to the nine months ended September 29, 2023, was primarily attributable to a net increase in volumes and programs wins.

This was partially offset by the impact of write-downs on certain programs within our UK operations for which cost and schedule were rebaselined as well as the the completion of certain programs.

The increase in operating income for the three months ended September 27, 2024, as compared to the three months ended September 29, 2023, was primarily driven by impairment charges of $679 million recorded in the prior year.

The increase in operating income for the nine months ended September 27, 2024, as compared to the nine months ended September 29, 2023, was primarily driven by impairment charges of $679 million recorded in the prior year, programs wins and a net increase in volumes.

This was partially offset by the impact of write-downs on certain programs within our UK operations for which cost and schedule were rebaselined as well as the completion of certain programs.

Three Months Ended Nine Months Ended

Defense Systems September 27,

2024 September 29,

2023 Dollar change Percent change September 27,

2024 September 29,

2023 Dollar change Percent change

1 unchanged sentence

Revenues $ 522 $ 462 $ 60 13.0 % $ 1,491 $ 1,373 $ 118 8.6 %

Operating income 34 21 13 61.9 % 55 44 11 25.0 %

Operating income 37 3 34 NM 92 47 45 95.7 %

Operating margin 7.1 % 0.6 % 6.2 % 3.4 %

The increase in revenues for the three and six months ended June 28, 2024, as compared to the three and six months ended June 30, 2023, was primarily attributable to program wins, partially offset by the completion of certain contracts.

The increase in operating income for the three months ended June 28, 2024, as compared to the three months ended June 30, 2023, was primarily attributable to program wins and improved program execution on certain programs.

The increase in operating income for the six months ended June 28, 2024, as compared to the six months ended June 30, 2023, was primarily attributable to program wins.

NM- Not Meaningful

The increase in revenues for the three and nine months ended September 27, 2024, as compared to the three and nine months ended September 29, 2023, was primarily attributable to programs wins and a net increase in volumes, partially offset by the completion of certain contracts.

LEIDOS HOLDINGS, INC.

Three Months Ended Six Months Ended

Corporate June 28,

2024 June 30,

2023 Dollar change Percent change June 28,

2024 June 30,

The increase in operating income for the three months ended September 27, 2024, as compared to the three months ended September 29, 2023, was primarily attributable to program wins and improved program execution on certain programs.

The increase in operating income for the nine months ended September 27, 2024, as compared to the nine months ended September 29, 2023, was primarily attributable to programs wins, improved program execution and higher integration costs in the prior year.

Three Months Ended Nine Months Ended

Corporate September 27,

2024 September 29,

2023 Dollar change Percent change September 27,

2024 September 29,

2023 Dollar change Percent change

1 unchanged sentence

Operating loss $ (36) $ (28) $ (8) 28.6 % $ (111) $ (87) $ (24) 27.6 %

The increase in operating loss for the three months ended June 28, 2024, as compared to the three months ended June 30, 2023, was primarily attributable to increased general and administrative expenses.

The increase in operating loss for the six months ended June 28, 2024, as compared to the six months ended June 30, 2023, was primarily attributable to increased general and administrative expenses, partially offset by reduced legal fees.

The increase in operating loss for the three months ended September 27, 2024, as compared to the three months ended September 29, 2023, was primarily attributable to increased general and administrative expenses and legal fees.

The increase in operating loss for the nine months ended September 27, 2024, as compared to the nine months ended September 29, 2023, was primarily attributable to increased general and administrative expenses.

Non-Operating Expense, net

Non-operating expense, net for the three months ended June 28, 2024, was $49 million as compared to $57 million for the three months ended June 30, 2023.

The decrease was primarily driven by lower interest expense, as there were no commercial paper borrowings in the current year.

Non-operating expense, net for the six months ended June 28, 2024, was $96 million as compared to $115 million for the six months ended June 30, 2023.

The decrease was primarily driven by lower interest expense, as there were no commercial paper borrowings in the current year, increased interest income on higher cash balances and favorable exchange rate movements.

Non-operating expense, net for the three months ended September 27, 2024, was $46 million as compared to $52 million for the three months ended September 29, 2023.

The decrease was primarily driven by increased interest income due to higher cash balances.

Non-operating expense, net for the nine months ended September 27, 2024, was $142 million as compared to $167 million for the nine months ended September 29, 2023.

The decrease was primarily driven by increased interest income due to higher cash balances, lower interest expense driven by commercial paper borrowings in the prior year and favorable exchange rate movements.

Provision for Income Taxes

For the three months ended June 28, 2024, our effective tax rate was 23.9% compared to 23.4% for the three months ended June 30, 2023.

The increase to the effective tax rate was primarily due to a reduced benefit in federal research tax credits, partially offset by a reduction of taxes related to foreign operations.

In addition, our effective tax rate for the three months ended June 30, 2023, included a benefit from the release of an accrual for penalties.

For the six months ended June 28, 2024, our effective tax rate was 23.6% compared to 22.2% for the six months ended June 30, 2023.

The increase to the effective tax rate was primarily due to a reduced benefit in federal research tax credits and an increase in unrecognized tax benefits, partially offset by an increase in excess tax benefits related to employee stock-based payment transactions.

For the three months ended September 27, 2024, our effective tax rate was 23.0% compared to (2.1)% for the three months ended September 29, 2023.

The increase to the effective tax rate was primarily due to the tax impacts from non-deductible goodwill impairments for the three months ended September 29, 2023, and an increase in unrecognized tax benefits for the three months ended September 27, 2024.

For the nine months ended September 27, 2024, our effective tax rate was 23.3% compared to 123.7% for the nine months ended September 29, 2023.

The decrease to the effective tax rate was primarily due to the tax impacts from non-deductible goodwill impairments for the nine months ended September 29, 2023, partially offset by a reduced benefit in federal research tax credits for the nine months ended September 27, 2024.

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

4 unchanged sentences

Bookings and Backlog

We recorded net bookings worth an estimated $4.0 billion and $7.7 billion during the three and six months ended June 28, 2024, respectively, as compared to $2.9 billion and $5.9 billion for the three and six months ended June 30, 2023, respectively.

We recorded net bookings worth an estimated $8.1 billion and $15.8 billion during the three and nine months ended September 27, 2024, respectively, as compared to $7.9 billion and $13.8 billion for the three and nine months ended September 29, 2023, respectively.

The estimated value of our total backlog was as follows:

June 28, 2024 June 30, 2023

September 27, 2024 September 29, 2023

Segment Funded Unfunded Total Funded Unfunded Total

(in millions)

National Security and Digital $ 2,681 $ 15,268 $ 17,949 $ 2,806 $ 12,549 $ 15,355

National Security & Digital $ 3,323 $ 16,532 $ 19,855 $ 3,146 $ 14,802 $ 17,948

Health & Civil 1,536 9,835 11,371 2,022 10,141 12,163

6 unchanged sentences

Liquidity and Capital Resources

As of June 28, 2024, we had $823 million in cash and cash equivalents.

As of September 27, 2024, we had $1,185 million in cash and cash equivalents.

We have a senior unsecured revolving credit facility which can provide up to $1 billion in additional borrowing, if required.

As of June 28, 2024, and December 29, 2023, there were no borrowings outstanding under the revolving credit facility.

We had outstanding debt of $4.7 billion at both June 28, 2024, and December 29, 2023.

As of September 27, 2024, and December 29, 2023, there were no borrowings outstanding under the revolving credit facility.

We had outstanding debt of $4.7 billion at both September 27, 2024, and December 29, 2023.

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

As of June 28, 2024, and December 29, 2023, we did not have any Commercial Paper Notes outstanding.

We made principal payments, excluding the impacts of our Commercial Paper Notes, on our debt of $5 million and $9 million during the three and six months ended June 28, 2024, respectively, and $325 million and $2,036 million for the three and six months ended June 30, 2023, respectively.

The activity for the three months ended June 30, 2023, included a required principal payment of $320 million to discharge the 364-day term loan credit agreement.

The activity for the six months ended June 30, 2023, included a $1,210 million payment to discharge the $1.9 billion 5.77% senior unsecured term loan facility and a $498 million payment to discharge the $500 million 2.95% notes, due May 2023.

Our credit facilities, commercial paper notes and senior unsecured notes outstanding as of June 28, 2024, contain financial covenants and customary restrictive covenants.

We were in compliance with all covenants as of June 28, 2024.

We paid dividends of $51 million and $104 million during the three and six months ended June 28, 2024, respectively, and $50 million and $100 million during the three and six months ended June 30, 2023, respectively.

As of September 27, 2024, and December 29, 2023, we did not have any Commercial Paper Notes outstanding.

We made principal payments, excluding the impacts of our Commercial Paper Notes, on our debt of $5 million and $14 million during the three and nine months ended September 27, 2024, respectively, and $5 million and $2,041 million for the three and nine months ended September 29, 2023, respectively.

The activity for the nine months ended September 29, 2023, included a $1,210 million payment to discharge the $1.9 billion 5.77% senior unsecured term loan facility, a $498 million payment to discharge the $500 million 2.95% notes, due May 2023, and a required principal payment of $320 million to discharge the 364-day term loan credit agreement.

Our credit facilities, commercial paper notes and senior unsecured notes outstanding as of September 27, 2024, contain financial covenants and customary restrictive covenants.

We were in compliance with all covenants as of September 27, 2024.

We paid dividends of $51 million and $155 million during the three and nine months ended September 27, 2024, respectively, and $50 million and $150 million during the three and nine months ended September 29, 2023, respectively.

Stock repurchases of Leidos common stock may be made on the open market or in privately negotiated transactions with third parties including through accelerated share repurchase agreements.

2 unchanged sentences

LEIDOS HOLDINGS, INC.

During the three and six months ended June 28, 2024, we made open market repurchases of our common stock for an aggregate purchase price of $100 million and $250 million, respectively, and $25 million during the six months ended June 30, 2023.There were no share repurchases for the three months ended June 30, 2023.

During the three and nine months ended September 27, 2024, we made open market repurchases of our common stock for an aggregate purchase price of $200 million and $450 million, respectively, and $25 million during the nine months ended September 29, 2023.There were no share repurchases for the three months ended September 29, 2023.

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

1 unchanged sentence

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

Three Months Ended Six Months Ended

2024 June 30,

2023 June 28,

2024 June 30,

Three Months Ended Nine Months Ended

September 27,

2024 September 29,

2023 September 27,

2024 September 29,

(in millions)

4 unchanged sentences

(257) (249) (644) (470)

Net cash provided by operating activities increased $210 million during the three months ended June 28, 2024, when compared to the prior year quarter.

The increase was primarily due to higher earnings and a favorable change in working capital.

Net cash provided by operating activities increased $371 million during the six months ended June 28, 2024, when compared to the prior year.

The increase was primarily due to higher earnings and lower tax payments of $116 million mainly in connection with the Tax Cuts and Jobs Act provision requiring capitalization of research and development costs and a nonrecurring $62 million payment for payroll taxes related to the CARES Act in the prior year, partially offset by an unfavorable change in other working capital.

Net cash used in investing activities decreased $23 million and $50 million, respectively, for the three and six months ended June 28, 2024, when compared to the prior year quarter, primarily due to lower capital expenditures.

Net cash used in financing activities decreased $5 million for the three months ended June 28, 2024, when compared to the prior year quarter, primarily due to a decrease of $120 million in net payments made from debt activities, partially offset by a net increase of $114 million in stock repurchases.

Net cash used in financing activities increased $166 million for the six months ended June 28, 2024, when compared to the prior year.

The increase was primarily due to a net increase of $225 million in open market share repurchases and $29 million increase in shares withheld for tax obligations, partially offset by a decrease of $91 million in net payments made from debt activities.

Net cash provided by operating activities decreased $139 million during the three months ended September 27, 2024, when compared to the prior year quarter.

The decrease was primarily due to unfavorable changes in working capital, partially offset by higher earnings and the timing of payroll and employee benefit accruals.

Net cash provided by operating activities increased $232 million during the nine months ended September 27, 2024, when compared to the prior year.

The increase was primarily due to higher earnings and lower tax payments of $49 million primarily due to payments made in the prior year for the TCJA provision and payroll taxes related to the CARES act.

Net cash used in investing activities decreased $29 million and $79 million during the three and nine months ended September 27, 2024, respectively, when compared to the prior year.

The decreases were primarily due to lower capital expenditures of $27 million and $66 million for the three and nine months ended September 27, 2024, respectively.

Net cash used in financing activities increased $8 million for the three months ended September 27, 2024, when compared to the prior year quarter, primarily due to a $202 million increase in stock repurchases, partially offset by $200 million in commercial paper net proceeds received in the prior year.

Net cash used in financing activities increased $174 million for the nine months ended September 27, 2024, when compared to the prior year.

The increase was primarily due to a $425 million increase in stock repurchases, a $31 million increase in shares withheld for tax obligations, partially offset by a decrease of $291 million in net payments made on debt activities.

Off-Balance Sheet Arrangements

8 unchanged sentences

The following is a list of the Registered Notes guaranteed by Leidos Holdings, Inc.

Senior unsecured Registered Notes:

Senior unsecured Registered Notes issued by Leidos, Inc.:

$500 million 3.625% notes, due May 2025

20 unchanged sentences

Balance Sheet Information for the Guarantor and Issuer of Registered Notes

September 27,

2024 December 29,

11 unchanged sentences

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

Six Months Ended

Nine Months Ended

September 27,

(in millions)

13 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis