Leidos Holdings, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of Leidos Holdings, Inc.'s ("Leidos") financial condition, results of operations, and quantitative and qualitative discussion about business environment and trends should be read in conjunction with Leidos' condensed consolidated financial statements and related notes. The following discussion contains forward-looking statements, including statements regarding our intent, belief or current expectations with respect to, among other things, trends affecting our financial condition or results of operations, backlog, our industry, the impact of our merger and acquisition activity, government budgets and spending, our business contingency plans, interest rates and uncertainties in tax due to new tax legislation or other regulatory developments. In some cases, forward-looking statements can be identified by words such as “will,” “expect,” “estimate,” “plan,” “potential,” “continue” or similar expressions. Such statements are not guarantees of future performance and involve risks and uncertainties and actual results may differ materially from those in the forward-looking statements as a result of various factors. Some of these factors include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K, as updated by the risk factor in this report under Part II, Item 1A. "Risk Factors" and as may be further updated in subsequent filings with the U.S. Securities and Exchange Commission. Due to such uncertainties and risks, you are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. We do not undertake any obligation to update these factors or to publicly announce the results of any changes to our forward-looking statements due to future events or developments. Unless indicated otherwise, references in this report to "we," "us" and "our" refer collectively to Leidos and its consolidated subsidiaries. OVERVIEW 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 47,000 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. 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 and many other U.S. civilian, state and local government agencies, foreign government agencies and commercial businesses. BUSINESS ENVIRONMENT AND TRENDS U.S. GOVERNMENT MARKETS During both of the three months ended April 4, 2025, and March 29, 2024, we generated approximately 87% of total revenues from contracts with the U.S. government. Accordingly, our business performance is affected by the overall level of U.S. government spending, especially national security, homeland security and intelligence spending, and the alignment of our service and product offerings and capabilities with current and future budget priorities of the U.S. government. The federal government is currently operating under a continuing resolution that runs through September 30, 2025. Key congressional and administrative initiatives under consideration include tax reform, energy policy measures and investments in defense and border security. The Department of Government Efficiency, established under the current administration aims to streamline federal operations and reduce expenditures which have resulted in contract cancellations, modifications and stop work orders. As a company, Leidos remains aligned with the administration's efforts to drive efficiency in government agencies and operations, while increasing the quality of mission outcomes. 20 Leidos Holdings, Inc. Table of Contents PART I—FINANCIAL INFORMATION INTERNATIONAL MARKETS Sales to customers in international markets represented approximately 8% of total revenues for both of the three months ended April 4, 2025, and March 29, 2024. Our international customers include foreign governments and their agencies. Our international business increases our exposure to international markets and the associated international regulatory, foreign currency exchange rate and geopolitical risks. Changes in international trade policies, including higher tariffs on imported goods and materials, may increase the cost of certain goods necessary to fulfill our contractual requirements and for internal purposes. We expect to recover certain portions of the increase to the cost of goods through contractual measures. While we continue to evaluate the impact of the higher tariffs, we currently do not expect them to have a significant effect on our business. RESULTS OF OPERATIONS The following table summarizes our condensed consolidated results of operations for the periods presented: Three Months Ended (dollars in millions) April 4, 2025 March 29, 2024 Percent change Revenues $ 4,245 $ 3,975 6.8 % Operating income 530 415 27.7 % Non-operating expense, net (52) (47) 10.6 % Income before income taxes 478 368 29.9 % Income tax expense (113) (85) 32.9 % Net income 365 283 29.0 % Net income attributable to Leidos common stockholders $ 363 $ 284 27.8 % Operating margin 12.5 % 10.4 % SEGMENT AND CORPORATE RESULTS Three Months Ended National Security & Digital (dollars in millions) April 4, 2025 March 29, 2024 Percent change Revenues $ 1,878 $ 1,793 4.7 % Operating income 185 175 5.7 % Operating margin 9.9 % 9.8 % The increase in revenues and operating income for the three months ended April 4, 2025, as compared to the three months ended March 29, 2024, was primarily attributable to a net increase in volumes on certain programs and program wins, partially offset by the completion of certain contracts. Leidos Holdings, Inc. 21 Table of Contents PART I—FINANCIAL INFORMATION Three Months Ended Health & Civil (dollars in millions) April 4, 2025 March 29, 2024 Percent change Revenues $ 1,291 $ 1,199 7.7 % Operating income 299 222 34.7 % Operating margin 23.2 % 18.5 % The increase in revenues and operating income for the three months ended April 4, 2025, as compared to the three months ended March 29, 2024, was primarily attributable to a net increase in volumes and case complexity within the managed health services business. Three Months Ended Commercial & International (dollars in millions) April 4, 2025 March 29, 2024 Percent change Revenues $ 568 $ 509 11.6 % Operating income 37 34 8.8 % Operating margin 6.5 % 6.7 % The increase in revenues and operating income for the three months ended April 4, 2025, as compared to the three months ended March 29, 2024, was primarily attributable to a net increase in volumes and program wins, partially offset by the completion of certain programs. Three Months Ended Defense Systems (dollars in millions) April 4, 2025 March 29, 2024 Percent change Revenues $ 508 $ 474 7.2 % Operating income 34 21 61.9 % Operating margin 6.7 % 4.4 % The increase in revenues for the three months ended April 4, 2025, as compared to the three months ended March 29, 2024, was primarily attributable to program wins, partially offset by the completion of certain contracts. The increase in operating income for the three months ended April 4, 2025, as compared to the three months ended March 29, 2024, was primarily attributable to program wins and a decrease in amortization expense. Three Months Ended Corporate (dollars in millions) April 4, 2025 March 29, 2024 Percent change Operating loss $ (25) $ (37) (32.4 %) The decrease in operating loss for the three months ended April 4, 2025, as compared to the three months ended March 29, 2024, was primarily attributable to decreased general and administrative expenses and legal fees. NON-OPERATING EXPENSE, NET Non-operating expense, net for the three months ended April 4, 2025, was $52 million as compared to $47 million for the three months ended March 29, 2024. The increase was primarily driven by unfavorable exchange rate movements. 22 Leidos Holdings, Inc. Table of Contents PART I—FINANCIAL INFORMATION PROVISION FOR INCOME TAXES For the three months ended April 4, 2025, our effective tax rate was 23.6% compared to 23.1% for the three months ended March 29, 2024. The increase to the effective tax rate was primarily due to a decrease in excess tax benefits related to employee stock-based payment transactions. 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. 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 has been no material impact from jurisdictions where Pillar Two rules are currently in effect. BOOKINGS AND BACKLOG Effective for the first quarter of fiscal 2025, we changed our backlog policy to include estimated future revenue on task orders expected to be awarded under sole source indefinite delivery/indefinite quantity ("IDIQ") contracts in our reported backlog. We believe this presentation provides enhanced visibility for investors and more accurately reflects the future revenues we expect to generate from our business. We recorded net bookings worth an estimated $2.1 billion during the three months ended April 4, 2025, as compared to $3.8 billion for the three months ended March 29, 2024. The estimated value of our total backlog was as follows: April 4, 2025 March 29, 2024 (1) (in millions) Funded Unfunded Total Funded Unfunded Total National Security & Digital $ 2,733 $ 21,601 $ 24,334 $ 2,411 $ 19,616 $ 22,027 Health & Civil 991 10,290 11,281 1,953 8,956 10,909 Commercial & International 2,267 2,847 5,114 2,465 2,071 4,536 Defense Systems 1,338 4,229 5,567 1,136 3,075 4,211 Total $ 7,329 $ 38,967 $ 46,296 $ 7,965 $ 33,718 $ 41,683 (1) Amounts have been recast to include estimated future revenue on task orders expected to be awarded under sole source IDIQ contracts. As a result, unfunded backlog increased $5,112 million. Backlog represents the revenues we expect to recognize under negotiated contracts and unissued task orders on sole source IDIQ contracts, to the extent we believe their execution and funding to be probable. Backlog does not include potential task orders expected to be awarded under multiple award IDIQ contracts. Backlog estimates are subject to change and may be affected by factors including modifications of contracts and foreign currency movements. LIQUIDITY AND CAPITAL RESOURCES OVERVIEW OF LIQUIDITY As of April 4, 2025, we had $842 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 April 4, 2025, and January 3, 2025, there were no borrowings outstanding under the revolving credit facility. We had outstanding debt of $5.1 billion and $4.7 billion at April 4, 2025, and January 3, 2025, respectively. In February 2025, we issued and sold $500 million 5.40% and $500 million 5.50% senior unsecured notes maturing in March 2032 and March 2035, respectively. The annual interest rate is payable on a semi-annual basis. The proceeds from the issuance of the notes were used to retire the $500 million senior unsecured notes due May 2025 and repurchase $500 million outstanding shares of common stock. 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 April 4, 2025, and January 3, 2025, we did not have any Commercial Paper Notes outstanding. Leidos Holdings, Inc. 23 Table of Contents PART I—FINANCIAL INFORMATION We made principal payments on our debt of $529 million and $4 million during the three months ended April 4, 2025, and March 29, 2024, respectively. The activity for the three months ended April 4, 2025, included a $500 million payment to discharge the $500 million notes due May 2025. Our senior unsecured term loan, senior unsecured notes and senior unsecured revolving facility contain financial covenants and customary restrictive covenants. We were in compliance with all financial covenants as of April 4, 2025. We paid dividends of $53 million during both of the three months ended April 4, 2025, and March 29, 2024. 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 ("ASR") agreements. Whether repurchases are made and the timing and actual number of shares repurchased depends on a variety of factors including price, corporate capital requirements, other market conditions and regulatory requirements. The repurchase program may be accelerated, suspended, delayed or discontinued at any time. On February 20, 2025, we entered into an ASR agreement with a financial institution to repurchase shares of our outstanding common stock. We paid $500 million to the financial institution and received an initial delivery of 3 million shares. The purchase was recorded to "Additional paid-in capital" in the condensed consolidated balance sheets (see "Note 8–Earnings Per Share"). All shares delivered were immediately retired. During the three months ended March 29, 2024, we made open market repurchases of our common stock for an aggregate purchase price of $150 million. There were no open market share repurchases during the three months ended April 4, 2025. For the next 12 months, we anticipate that we will be able to meet our liquidity needs, including servicing our debt, through cash generated from operations, available cash balances, borrowings from our commercial paper program and, if needed, sales of accounts receivable and borrowings from our revolving credit facility. SUMMARY OF CASH FLOWS The following table summarizes cash flow information for the periods presented: Three Months Ended (in millions) April 4, 2025 March 29, 2024 Net cash provided by operating activities (1) $ 58 $ 113 Net cash used in investing activities (22) (12) Net cash used in financing activities (110) (228) (1) Net cash provided by operating activities for the three months ended March 29, 2024, was recast to reflect a change in the accounting policy, see "Note 1–Basis of Presentation and Summary of Significant Accounting Policies." Net cash provided by operating activities decreased $55 million during the three months ended April 4, 2025, when compared to the prior year quarter. The decrease was primarily due to the timing of payroll and employee benefit payments, partially offset by higher earnings and favorable changes in working capital. Net cash used in investing activities increased $10 million during the three months ended April 4, 2025, when compared to the prior year quarter. The increase was primarily due to higher capital expenditures of $5 million in the current year quarter. Net cash used in financing activities decreased $118 million for the three months ended April 4, 2025, when compared to the prior year quarter, primarily due to a net increase of $465 million in cash inflows from proceeds received from the issuance of debt, payments for borrowings and payments for debt issuance costs, partially offset by a $350 million net increase in stock repurchases primarily attributable to the accelerated share repurchase activities in the current quarter. OFF-BALANCE SHEET ARRANGEMENTS We have outstanding performance guarantees and cross-indemnity agreements in connection with certain aspects of our business. We also have letters of credit outstanding principally related to performance guarantees on contracts and surety bonds outstanding principally related to performance and subcontractor payment bonds as described in "Note 11–Commitments and Contingencies" of the notes to the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q. These arrangements have not had, and management does not believe it is likely that they will in the future have, a material effect on our liquidity, capital expenditures or capital resources, operations or financial condition. 24 Leidos Holdings, Inc. Table of Contents PART I—FINANCIAL INFORMATION GUARANTOR AND ISSUER OF GUARANTEED SECURITIES Leidos Holdings, Inc. (“Guarantor”) has fully and unconditionally guaranteed the debt securities of its subsidiary, Leidos, Inc. (“Issuer”), that were issued pursuant to transactions that were registered under the Securities Act of 1933, as amended (collectively, the “Registered Notes”). The following is a list of the Registered Notes guaranteed by Leidos Holdings, Inc. Senior unsecured Registered Notes issued by Leidos, Inc.: $500 million 3.625% notes, due May 2025 (1) $750 million 4.375% notes, due May 2030 $1,000 million 2.300% notes, due February 2031 $500 million 5.400% notes, due March 2032 $750 million 5.750% notes, due March 2033 $500 million 5.500% notes, due March 2035 (1) The $500 million senior unsecured notes were discharged as of April 4, 2025. Leidos Holdings, Inc. has also fully and unconditionally guaranteed debt securities of Leidos, Inc. that were issued pursuant to transactions that were not registered under the Securities Act of 1933, as amended. The following is a list of unregistered debt securities guaranteed by Leidos Holdings, Inc. Senior unsecured unregistered debt securities issued by Leidos, Inc.: $250 million 7.125% notes, due July 2032 $300 million 5.500% notes, due July 2033 Additionally, Leidos, Inc. has fully and unconditionally guaranteed debt securities of Leidos Holding, Inc. that were issued pursuant to transactions that were not registered under the Securities Act of 1933, as amended. The following is a list of unregistered debt securities guaranteed by Leidos, Inc. Senior unsecured unregistered debt securities issued by Leidos Holdings, Inc.: $300 million 5.950% notes, due December 2040 The following summarized financial information includes the assets, liabilities and results of operations for the Guarantor and Issuer of the Registered Notes described above. Intercompany balances and transactions between the Issuer and Guarantor have been eliminated from the financial information below. Investments in the consolidated subsidiaries of the Issuer and Guarantor that do not guarantee the senior unsecured notes have been excluded from the financial information. Intercompany payables represent amounts due to non-guarantor subsidiaries of the Issuer. BALANCE SHEET INFORMATION FOR THE GUARANTOR AND ISSUER OF REGISTERED NOTES (in millions) April 4, 2025 January 3, 2025 Total current assets $ 2,639 $ 2,550 Goodwill 5,673 5,673 Other long-term assets 1,502 1,498 Total assets $ 9,814 $ 9,721 Total current liabilities $ 2,051 $ 2,677 Long-term debt, net of current portion 5,014 4,052 Intercompany payables 3,540 3,319 Other long-term liabilities 811 820 Total liabilities $ 11,416 $ 10,868 Leidos Holdings, Inc. 25 Table of Contents PART I—FINANCIAL INFORMATION STATEMENT OF OPERATIONS INFORMATION FOR THE GUARANTOR AND ISSUER OF REGISTERED NOTES Three Months Ended (in millions) April 4, 2025 Revenues, net $ 2,698 Operating income 235 Net income attributable to Leidos common stockholders 32 CONTRACTUAL OBLIGATIONS AND COMMITMENTS We are subject to a number of reviews, investigations, claims, lawsuits, other uncertainties and future obligations related to our business. For a discussion of these items, see "Note 11–Commitments and Contingencies" of the notes to the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q. CRITICAL ACCOUNTING POLICIES AND ESTIMATES There were no material changes to our critical accounting policies, estimates or judgments that would have a significant impact on earnings during the period covered by this report from those discussed in our Annual Report on Form 10-K for the year ended January 3, 2025. RECENTLY ADOPTED AND ISSUED ACCOUNTING STANDARDS For a discussion of these items, see "Note 1–Basis of Presentation and Summary of Significant Accounting Policies" of the notes to the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q. 26 Leidos Holdings, Inc. Table of Contents PART I—FINANCIAL INFORMATION Item 3. Quantitative and Qualitative Disclosures About Market Risk There were no material changes in our market risk exposure from those discussed in our Annual Report on Form 10-K for the year ended January 3, 2025.