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Item 7. Management’s Discussion and Analysis

2025-02-11 compared with 2024-02-13 · 147 added, 128 removed, 246 unchanged (53% of the section changed)

1 unchanged sentence

The following discussion and analysis of Leidos Holdings, Inc.’s (“Leidos”) financial condition, results of operations and quantitative and qualitative disclosures about business environment and trends and market risk should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties, including those described under the heading “Forward-Looking Statements.” You should also review the disclosure under Part I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

” You should also review the disclosure under Part I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Unless indicated otherwise, references in this report to “we,” “us” and “our” refer collectively to Leidos and its consolidated subsidiaries.

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

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

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

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

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

digital modernization, cyber operations, mission software systems, integrated systems and mission operations.

Leidos is an industry and technology leader serving government and commercial customers with smarter, more efficient digital and mission innovations.

Headquartered in Reston, Virginia, with 48,000, global employees, we bring domain-specific capabilities, technologies and insights to customers in each of these markets by leveraging seven technical core capabilities:

trusted mission artificial intelligence, cyber operations, digital modernization, mission software systems, integrated systems, mission operations, and rapid prototyping and manufacturing.

Our customers include the U.S.

4 unchanged sentences

Approximately 8% of our revenues are generated by entities located outside of the United States.

Our business has been aligned in three reportable segments:

Defense Solutions, Civil and Health.

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

Beginning in fiscal 2024, we realigned our business and operate in four reportable segments that are focused on specific, defined capability sets we bring to our customers.

As a result of this change, prior year segment results and disclosures have been recast to reflect the current reportable segment structure.

We now operate in the following reportable segments:

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

We also separately present the unallocated costs associated with corporate functions as Corporate.

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

Our significant initiatives include the following:

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

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

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

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

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

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

Sales Trend .

For fiscal 2024, revenues increased $1.2 billion, or 8%, compared to fiscal 2023, the increase was primarily due to a net increase in volumes on certain programs and program wins, partially offset by the completion of certain contracts.

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

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

Operating Expenses and Income Trend .

For fiscal 2024, operating expenses increased by $27 million, or less than 1%, compared to fiscal 2023.

Operating margin for fiscal 2024 was 11% compared to 4% for fiscal 2023.

Operating income was $1,827 million, a $1,206 million increase compared to fiscal 2023.

The increase in operating income was primarily attributable to the impairment and restructuring charges of $689 million at the SES reporting unit in fiscal 2023 as compared to $11 million of impairment charges for the facility rationalization effort in fiscal 2024 (see "Note 10—Leases" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K) and a net increase in volumes on certain programs.

Leidos Holdings, Inc.

Annual Report

Operating Expenses and Income Trend.

For fiscal 2023, operating expenses increased by $1.5 billion, or 11%, compared to fiscal 2022.

1 unchanged sentence

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

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

The decrease was primarily attributable to impairment and restructuring charges of $689 million at the SES reporting unit in fiscal 2023 (see “Note 8—Goodwill and Intangible Assets” of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K).

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

7 unchanged sentences

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

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

government in fiscal 2024 and 2023 as compared to 86% of our total revenues from contracts with the U.S.

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

4 unchanged sentences

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

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

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

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

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

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

On December 21, 2024, the U.S.

federal government avoided a shutdown by passing into law a continuing resolution that provides government funding through March 14, 2025.

The continuing resolution gives lawmakers additional time to consider the 12 appropriations bills for government fiscal year 2025.

Failure to pass the appropriations bills or another continuing resolution by March 14, 2025, will result in a partial or complete federal government shutdown.

Trends in the U.S.

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INTERNATIONAL MARKETS

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

Sales to customers in international markets represented approximately 8% of total revenues for fiscal 2024, as compared to 9% and 8% of total revenues for fiscal 2023 and 2022, respectively.

Our international customers include foreign governments and their agencies.

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Our results of operations for the periods presented were as follows:

Year Ended 2023 to 2022

2023 December 30,

2022 Dollar change Percent

Year Ended 2024 to 2023 2023 to 2022

(dollars in millions)

$ 15,438 $ 14,396 $ 1,042 7 %

2025 December 29,

2023 December 30,

change Percent

Revenues $ 16,662 $ 15,438 $ 14,396 8 % 7 %

Cost of revenues 13,864 13,194 12,312 5 % 7 %

1 unchanged sentence

Acquisition, integration and restructuring costs 16 24 17 (33) % 41 %

Goodwill impairment charges 596 — 596 NM

Goodwill impairment charges — 596 — NM NM

Asset impairment charges 11 91 40 (88) % 128 %

91 40 51 128 %

Equity earnings of non-consolidated subsidiaries (39) (30) (12) (30) % (150) %

(30) (12) (18) 150 %

Operating income 1,827 621 1,088 194 % (43) %

621 1,088 (467) (43) %

Non-operating expense, net (188) (218) (202) (14) % (8) %

(218) (202) (16) 8 %

Income before income taxes

403 886 (483) (55) %

Income before income taxes 1,639 403 886 NM (55) %

Income tax expense (388) (195) (193) 99 % 1 %

(195) (193) (2) 1 %

Net income 1,251 208 693 NM (70) %

net (loss) income attributable to non-controlling interest

(3) 9 8 (133) % 13 %

net income attributable to non-controlling interest 9 8 1 13 %

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

Net income attributable to Leidos common stockholders $ 1,254 $ 199 $ 685 NM (71) %

Operating margin 11.0 % 4.0 % 7.6 %

1 unchanged sentence

SEGMENT AND CORPORATE RESULTS

Year Ended 2023 to 2022

Defense Solutions December 29,

2023 December 30,

2022 Dollar change Percent

Year Ended 2024 to 2023 2023 to 2022

National Security & Digital

(dollars in millions)

2025 December 29,

2023 December 30,

change Percent

Revenues $ 7,365 $ 7,196 $ 6,745 2 % 7 %

1 unchanged sentence

Operating margin 9.8 % 9.3 % 9.0 %

The increase in revenues for fiscal 2023 as compared to fiscal 2022 was primarily attributable to program wins, a net increase in volumes on certain programs and a $94 million net increase in revenues related to our Cobham Special Mission acquisition made in the last quarter of fiscal 2022.

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

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

The increase in revenues for fiscal 2024 as compared to fiscal 2023, was primarily attributable to a net increase in volumes on certain programs, program wins and net write-ups, partially offset by the completion of certain contracts.

The increase in revenues for fiscal 2023 as compared to fiscal 2022, was primarily attributable to a net increase in volumes on certain programs and net write-ups, partially offset by the completion of certain contracts.

The increase in operating income for fiscal 2024 as compared to fiscal 2023, was primarily attributable to improved program execution on certain programs, a net increase in volumes and program wins, partially offset by the completion of certain contracts.

The increase in operating income for fiscal 2023 as compared to fiscal 2022, was primarily attributable to net write-ups on certain programs.

Leidos Holdings, Inc.

Annual Report

Year Ended 2023 to 2022

Civil December 29,

2023 December 30,

2022 Dollar change Percent change

Year Ended 2024 to 2023 2023 to 2022

Health & Civil

(dollars in millions)

2025 December 29,

2023 December 30,

2022 Percent change Percent change

Revenues $ 5,015 $ 4,238 $ 3,945 18 % 7 %

Operating (loss) income

Operating income

1,095 574 448 91 % 28 %

Operating margin 21.8 % 13.5 % 11.4 %

(11.3) % 6.8 %

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

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

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

Year Ended 2023 to 2022

Health December 29,

The increase in revenues for fiscal 2024 as compared to fiscal 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 revenues for fiscal 2023 as compared to fiscal 2022, was primarily attributable to a net increase in volumes on certain programs and increased earnings from incentive awards.

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

The increase in operating income for fiscal 2024 as compared to fiscal 2023, was primarily attributable to an increase in volumes and case complexity within the managed health services business.

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

Year Ended 2024 to 2023 2023 to 2022

Commercial & International

(dollars in millions)

2025 December 29,

2022 Dollar change Percent

2023 December 30,

2022 Percent change Percent change

Revenues $ 2,252 $ 2,126 $ 1,900 6 % 12 %

Operating income (loss)

104 (560) 131 119 % NM

Operating margin 4.6 % (26.3) % 6.9 %

NM - Not meaningful

The increase in revenues for fiscal 2024 as compared to fiscal 2023, was primarily attributable to program wins and a net increase in volumes on certain programs, 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.

The increase in revenues for fiscal 2023 as compared to fiscal 2022, was primarily attributable to a net increase in volumes on certain programs and a $94 million net increase in revenues related to our Cobham Special Mission acquisition made in the last quarter of fiscal 2022.

The increase was partially offset by write-downs on certain programs and the completion of certain contracts.

The increase in operating income for fiscal 2024 as compared to fiscal 2023, was primarily driven by impairment and restructuring charges of $689 million at the SES reporting unit in fiscal 2023, program wins and a net increase in volumes, 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.

The decrease in operating income for fiscal 2023 as compared to fiscal 2022, was primarily attributable to impairment and restructuring charges of $689 million at the SES reporting unit in fiscal 2023, and write-downs on certain programs.

The decrease was partially offset by an increase in volumes on certain programs.

Year Ended 2024 to 2023 2023 to 2022

Defense Systems

(dollars in millions)

2025 December 29,

2023 December 30,

change Percent

Revenues $ 2,030 $ 1,878 $ 1,806 8 % 4 %

1 unchanged sentence

Operating margin 4.6 % 3.5 % 0.6 %

17.4 % 15.7 %

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

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

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

Year Ended 2023 to 2022

Corporate December 29,

2023 December 30,

2022 Dollar change Percent

Leidos Holdings, Inc.

Annual Report

The increase in revenues for fiscal 2023 as compared to fiscal 2022, was primarily attributable to a net increase in volumes on certain programs and program wins, partially offset by the completion of certain contracts.

The increase in operating income for fiscal 2024 as compared to fiscal 2023, was primarily attributable to program wins and improved program execution on certain programs, partially offset by a one-time write-down related to program assets.

The increase in operating income for fiscal 2023 as compared to fiscal 2022, was primarily attributable a net increase in volumes on certain programs, partially offset by the completion of certain contracts.

Year Ended 2024 to 2023 2023 to 2022

(dollars in millions)

2025 December 29,

2023 December 30,

change Percent

Operating loss $ (186) $ (130) $ (108) (43) % (20) %

The increase in operating loss for fiscal 2024 as compared to fiscal 2023, was primarily attributable to an increase in research and development activities and general and administrative costs.

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

NON-OPERATING EXPENSE, NET

Non-operating expense, net decreased by $30 million for fiscal 2024 as compared to fiscal 2023, primarily due to higher interest income earned from higher cash balances.

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

1 unchanged sentence

Our effective tax rate was 23.7%, 48.4% and 21.8% in fiscal 2024, 2023 and 2022, respectively.

The effective tax rate for fiscal 2024 was favorably impacted primarily by federal research tax credits and lower state income taxes, partially offset by an increase in unrecognized tax benefits.

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

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

Leidos Holdings, Inc.

Annual Report - 55

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

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

Treasury, among other factors.

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

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

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

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

The Pillar Two legislation became effective for certain jurisdictions beginning in fiscal 2024.

We will continue to evaluate the impact of the rules as additional legislation gets enacted;

however, there is not a material impact from jurisdictions where Pillar Two rules are currently in effect.

BOOKINGS AND BACKLOG

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We segregate our backlog into two categories as follows:

• Funded Backlog.

u Funded Backlog.

Funded backlog for contracts with the U.S.

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government entities and commercial customers represents the estimated value on contracts, which may cover multiple future years, under which we are obligated to perform, less revenues previously recognized on the contracts.

• Negotiated Unfunded Backlog.

Leidos Holdings, Inc.

Annual Report

u Negotiated Unfunded Backlog.

Negotiated unfunded backlog represents estimated amounts of revenue to be earned in the future from contracts for which funding has not been appropriated and unexercised priced contract options.

Negotiated unfunded backlog does not include unexercised option periods and future potential task orders expected to be awarded under IDIQ, GSA 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.

The estimated value of our total backlog for the periods presented was as follows:

December 29, 2023 December 30, 2022

Segment Funded Unfunded Total Funded Unfunded Total

The estimated value of our segment backlog for the periods presented was as follows:

January 3, 2025 December 29, 2023

(in millions)

Defense Solutions $ 4,541 $ 14,783 $ 19,324 $ 4,442 $ 14,155 $ 18,597

Civil 2,182 9,475 11,657 1,876 8,790 10,666

Health 2,073 3,908 5,981 2,064 4,455 6,519

Funded Unfunded Total Funded Unfunded Total

National Security & Digital $ 2,881 $ 19,086 $ 21,967 $ 2,714 $ 15,113 $ 17,827

Health & Civil 1,456 10,568 12,024 2,334 9,044 11,378

Commercial & International 2,456 1,901 4,357 2,567 1,105 3,672

Defense Systems 1,616 3,590 5,206 1,181 2,904 4,085

Total $ 8,409 $ 35,145 $ 43,554 $ 8,796 $ 28,166 $ 36,962

2 unchanged sentences

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

Leidos Holdings, Inc.

Annual Report - 56

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

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Total 100 % 100 % 100 %

Leidos Holdings, Inc.

Annual Report

LIQUIDITY AND CAPITAL RESOURCES

OVERVIEW OF LIQUIDITY

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

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

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

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

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

As of January 3, 2025, we had $943 million in cash and cash equivalents.

We have a senior unsecured revolving credit facility which can provide up to $1.0 billion in additional borrowing, if required.

As of January 3, 2025, and December 29, 2023, there were no borrowings outstanding under any revolving credit facility.

We had outstanding debt of $4.7 billion at both January 3, 2025, and December 29, 2023.

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

2 unchanged sentences

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

As of December 29, 2023, borrowings under our Credit Agreement were based on a Term Secured Overnight Financing Rate (“SOFR”) with a 0.10% Term SOFR adjustment and an applicable margin range from 1.00% to 1.50%.

At December 29, 2023, the applicable margin for SOFR-denominated borrowings was 1.25%.

We have a commercial paper program in which we may issue short-term unsecured commercial paper notes ("Commercial Paper Notes") that have maturities of up to 397 days from the date of issuance (see "Note 13—Debt").

On May 26, 2023, we increased the size of the commercial paper program by $250 million, or not to exceed $1.0 billion.

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

As of January 3, 2025, borrowings under our Credit Agreement were based on a Term Secured Overnight Financing Rate (“SOFR”) with a 0.10% Term SOFR adjustment and an applicable margin range from 1.00% to 1.50%.

At January 3, 2025, the applicable margin for SOFR-denominated borrowings was 1.25%.

We have a commercial paper program in which we may issue short-term unsecured commercial paper notes (“Commercial Paper Notes”) that have maturities of up to 397 days from the date of issuance (see “Note 13—Debt” of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K).

As of January 3, 2025, 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 $18 million, $2,045 million and $545 million during fiscal 2024, 2023 and 2022, respectively.

The activity for fiscal 2023 included a $1,210 million payment to discharge the existing Term Loan Facility, a $498 million payment to discharge the $500 million 2.95% notes, due May 2023, and a principal repayment of $320 million to discharge the 364-day term loan credit agreement.

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

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

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

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Annual Report - 57

The activity for fiscal 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 principal repayment of $320 million to discharge the 364-day term loan credit agreement.

Our credit facility, term loan facility, commercial paper notes and notes outstanding as of January 3, 2025, contain financial covenants and customary restrictive covenants.

We were in compliance with all covenants as of January 3, 2025.

We paid dividends of $208 million, $201 million and $199 million for fiscal 2024, 2023 and 2022, respectively.

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

9 unchanged sentences

All shares delivered were immediately retired.

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

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

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

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

Treasury, among other factors.

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.

Leidos Holdings, Inc.

Annual Report

SUMMARY OF CASH FLOWS

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

2023 December 30,

(in millions)

2025 December 29,

2023 December 30,

Net cash provided by operating activities (1)

4 unchanged sentences

Net cash provided by operating activities increased $227 million for fiscal 2024 as compared to fiscal 2023.

The increase was primarily due to higher earnings and favorable timing of payroll and employee benefit accruals.

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

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

Net cash used in investing activities decreased $69 million for fiscal 2024 as compared to fiscal 2023.

The decrease was primarily due to lower capital expenditures of $58 million in the current year.

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

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

Net cash used in financing activities increased $369 million for fiscal 2024 as compared to fiscal 2023.

The increase was primarily due to a $625 million increase in stock repurchases, a $35 million increase in shares withheld for tax obligations, partially offset by a decrease of $291 million in net payments made on debt activities.

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

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

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Annual Report - 58

The decrease was primarily due a net decrease of $296 million in stock repurchases driven by the accelerated share repurchase agreement in the prior year and an increase of $1.4 billion in proceeds received from the issuance of debt in the current year, partially offset by an increase of $1.5 billion in payments of debt.

OFF-BALANCE SHEET ARRANGEMENTS

6 unchanged sentences

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

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

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

As of January 3, 2025, future scheduled interest payments on our outstanding debt and finance leases were $208 million, expected to be paid in fiscal 2025 and $1.1 billion expected to be paid thereafter.

As of January 3, 2025, future payments on our deferred compensation arrangements and purchase obligations for long-term purchases and service agreements were $65 million, expected to be paid in fiscal 2025, and $371 million expected to be paid thereafter.

Our future payments do not include $162 million of income tax liabilities, primarily as a result of uncertain tax positions, and the timing of such payments, if any, cannot be reasonably estimated.

7 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

45 unchanged sentences

We have identified the following accounting policies as critical because they require significant judgments and assumptions about highly complex and inherently uncertain matters and the use of reasonably different estimates and assumptions could have a material impact on our results of operations or financial condition.

• Revenue Recognition

• Goodwill and Intangible Assets

u Revenue Recognition

REVENUE RECOGNITION

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

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

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

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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.

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

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

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

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

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

For certain product sales, performance obligations may be allocated to a contract's transaction price based on prices observed in other standalone sales or the residual value method.

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

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

Leidos Holdings, Inc.

Annual Report

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

Goodwill and Intangible Assets

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.

We recognize purchased intangible assets in connection with our business acquisitions at fair value on the acquisition date.

Goodwill is not amortized, but instead is tested annually, at the beginning of the fourth quarter, for impairment at the reporting unit level and may be tested more frequently if events or 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.

Goodwill and intangible assets, net, collectively represent 53% and 59% of our total assets as of December 29, 2023, and December 30, 2022, respectively.

As of January 3, 2025, and December 29, 2023, goodwill represented 46% and 48% of our total assets, respectively.

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

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

Operations of the Security Enterprise Solutions ("SES") reporting unit rely heavily on the sales and servicing of security and detection products, which continue to be negatively impacted due to delays in airline travel infrastructure projects as customer budgets recover from the pandemic.

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

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, as well as cease operations in certain countries in order to align the operations of the reporting unit with its strategic business plan.

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

As a result, we conducted an interim quantitative goodwill impairment analysis and our estimates led us to determine that the carrying value of the SES reporting unit exceeded its estimated fair value (see “Note 11—Fair Value Measurements” of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K).

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

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

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

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

Leidos Holdings, Inc.

Annual Report - 62

The goodwill impairment resulted in a lower difference between the fair value and carrying value for the SES reporting unit and therefore, in fiscal 2024, we performed a quantitative impairment analysis for the SES reporting unit, which resulted in no further impairment.

In fiscal 2024, we performed our annual test for impairment as of September 28, 2024, which resulted in no impairments being identified.

COMMITMENTS AND CONTINGENCIES

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

Leidos Holdings, Inc.

Annual Report

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

What changed 10-K

Item 7. Management’s Discussion and Analysis