What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-08-05 compared with 2025-05-06 · 112 added, 65 removed, 173 unchanged (51% of the section changed)

20 unchanged sentences

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.

During both the three and six months ended July 4, 2025, we generated approximately 87% of total revenues from contracts with the U.S.

government as compared to 86% and 87% for the three and six months ended June 28, 2024, respectively.

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

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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.

Congress is currently working to advance the fiscal year 2026 appropriations bills with the goal of completing them by the end of the fiscal year.

Leidos Holdings, Inc.

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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.

Sales to customers in international markets represented approximately 8% of total revenues for both the three and six months ended July 4, 2025, as compared to 9% and 8% for the three and six months ended June 28, 2024, respectively.

Our international customers include foreign governments and their agencies.

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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.

While we continue to evaluate the tariff environment and potential impacts of 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,

Three Months Ended Six Months Ended

(dollars in millions) July 4,

2025 June 28,

2024 Percent change July 4,

2025 June 28,

2024 Percent change

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SEGMENT AND CORPORATE RESULTS

Three Months Ended

Three Months Ended Six Months Ended

National Security & Digital

(dollars in millions)

2025 March 29,

2025 June 28,

2024 Percent change July 4,

2025 June 28,

2024 Percent change

2 unchanged sentences

Operating margin 10.0 % 10.1 % 9.9 % 9.9 %

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.

The increase in revenues for the three months ended July 4, 2025, as compared to the three months ended June 28, 2024, was primarily attributable to program wins and $12 million of revenues recognized from the acquisition of Savanna Industries, Inc.

("Kudu Dynamics"), partially offset by the completion of certain programs.

The increase in revenues for the six months ended July 4, 2025, as compared to the six months ended June 28, 2024, was primarily attributable to program wins, a net increase in volumes on certain programs and $12 million of revenues recognized from the acquisition of Kudu Dynamics, partially offset by the completion of certain programs.

The increase in operating income for the three months ended July 4, 2025, as compared to the three months ended June 28, 2024, was primarily attributable to program wins, partially offset by the completion of certain contracts.

The increase in operating income for the six months ended July 4, 2025, as compared to the six months ended June 28, 2024, was primarily attributable to program wins and a net increase in volumes.

Leidos Holdings, Inc.

PART I—FINANCIAL INFORMATION

Three Months Ended

Three Months Ended Six Months Ended

Health & Civil

(dollars in millions)

2025 March 29,

2025 June 28,

2024 Percent change July 4,

2025 June 28,

2024 Percent change

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Operating margin 24.4 % 24.3 % 23.8 % 21.5 %

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

The increase in revenues and operating income for the three months ended July 4, 2025, as compared to the three months ended June 28, 2024, was primarily attributable to increased volumes within the managed health services business as well as net write-ups on certain programs.

The increase in revenues and operating income for the six months ended July 4, 2025, as compared to the six months ended June 28, 2024, was primarily attributable to increased volumes and case complexity within the managed health services business as well as net write-ups on certain programs.

Three Months Ended Six Months Ended

Commercial & International

(dollars in millions)

2025 March 29,

2025 June 28,

2024 Percent change July 4,

2025 June 28,

2024 Percent change

Revenues $ 566 $ 561 0.9 % $ 1,134 $ 1,070 6.0 %

Operating income 37 34 8.8 %

Operating income (loss) 40 (11) 463.6 % 77 23 234.8 %

Operating margin 7.1 % (2.0 %) 6.8 % 2.1 %

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

The increase in revenues for the three months ended July 4, 2025, as compared to the three months ended June 28, 2024, was primarily attributable to program wins, prior year write-downs on certain programs within our UK operations and a $8 million favorable impact from exchange rate movements.

The increase was partially offset by lower material volumes and the completion of certain programs.

The increase in revenues for the six months ended July 4, 2025, as compared to the six months ended June 28, 2024, was primarily attributable to program wins, prior year write-downs on certain programs within our UK operations and a net increase in volumes.

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

The increase in operating income for the three months ended July 4, 2025, as compared to the three months ended June 28, 2024, was primarily attributable to program wins and prior year write-downs on certain programs within our UK operations, partially offset by the completion of certain programs.

The increase in operating income for the six months ended July 4, 2025, as compared to the six months ended June 28, 2024, was primarily attributable to program wins and prior year write-downs on certain programs within our UK operations, partially the completion of certain programs and increased indirect costs.

Three Months Ended Six Months Ended

Defense Systems

(dollars in millions)

2025 March 29,

2025 June 28,

2024 Percent change July 4,

2025 June 28,

2024 Percent change

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Operating margin 7.6 % 6.9 % 7.1 % 5.7 %

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

The increase in revenues for the three and six months ended July 4, 2025, as compared to the three and six months ended June 28, 2024, was primarily attributable to program wins and a net increase in volumes, partially offset by the completion of certain programs and program write-ups in the prior year that did not reoccur in the current year.

The increase in operating income for the three and six months ended July 4, 2025, as compared to the three and six months ended June 28, 2024, was primarily attributable to program wins, partially offset by program write-ups in the prior year that did not reoccur in the current year.

Leidos Holdings, Inc.

PART I—FINANCIAL INFORMATION

Three Months Ended Six Months Ended

(dollars in millions)

2025 March 29,

2025 June 28,

2024 Percent change July 4,

2025 June 28,

2024 Percent change

Operating loss $ (9) $ (38) (76.3 %) $ (34) $ (75) (54.7 %)

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.

The decrease in operating loss for the three and six months ended July 4, 2025, as compared to the three and six months ended June 28, 2024, was primarily attributable to the receipt of a $25 million insurance reimbursement for legal costs primarily incurred prior to fiscal year 2025, and decreased general and administrative expenses.

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.

Leidos Holdings, Inc.

PART I—FINANCIAL INFORMATION

Non-operating expense, net for the three months ended July 4, 2025, was $53 million as compared to $49 million for the three months ended June 28, 2024.

The increase was primarily driven by increased interest expense as a result of the two $500 million senior notes issued in February 2025.

Non-operating expense, net for the six months ended July 4, 2025, was $105 million as compared to $96 million for the six months ended June 28, 2024.

The increase was primarily driven by increased interest expense as a result of the two $500 million senior notes issued in February 2025 and unfavorable exchange rate movements.

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.

On July 4, 2025, tax legislation was enacted in H.R.1 Reconciliation Act, commonly referred to as the One Big Beautiful Bill Act (the “OBBBA”) implementing several corporate tax law changes, including but not limited to, (1) restoring the immediate expensing of U.S.

research and development costs;

(2) allowing certain taxpayers an election to deduct the unamortized balance of U.S.

research and development costs capitalized in prior years;

and (3) reinstating one hundred percent bonus depreciation for eligible property.

The enactment of the OBBBA resulted in a decrease of $150 million to income taxes payable and a decrease of $130 million to deferred tax assets as of July 4, 2025.

Based upon our interpretation of the law as currently enacted, we estimate that the fiscal 2025 impact will result in a decrease of approximately $280 million to income taxes payable and a decrease of $245 million to net deferred taxes.

For the three months ended July 4, 2025, our effective tax rate was 24.1% compared to 23.9% for the three months ended June 28, 2024.

The increase to the effective tax rate was primarily due to impacts from the OBBBA, partially offset by a decrease in unrecognized tax benefits.

For the six months ended July 4, 2025, our effective tax rate was 23.9% compared to 23.6% for the six months ended June 28, 2024.

The increase to the effective tax rate was primarily due to impacts from the OBBBA and a decrease in excess tax benefits related to employee stock-based payment transactions, partially offset by a decrease in unrecognized tax benefits.

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

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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.

We recorded net bookings worth an estimated $3.9 billion and $6.0 billion during the three and six months ended July 4, 2025, respectively, as compared to $4.0 billion and $7.8 billion for the three and six months ended June 28, 2024, respectively.

Leidos Holdings, Inc.

PART I—FINANCIAL INFORMATION

The estimated value of our total backlog was as follows:

April 4, 2025 March 29, 2024 (1)

July 4, 2025 June 28, 2024 (1)

(in millions) Funded Unfunded Total Funded Unfunded Total

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As a result, unfunded backlog increased $5,064 million.

Backlog at July 4, 2025, includes $149 million of backlog acquired through the acquisition of Kudu Dynamics within our National Security & Digital reportable segment.

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.

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OVERVIEW OF LIQUIDITY

As of April 4, 2025, we had $842 million in cash and cash equivalents.

As of July 4, 2025, we had $930 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.

As of July 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 July 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.

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 in an accelerated share repurchase agreement (“ASR”) as discussed below.

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.

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.

As of July 4, 2025, and January 3, 2025, we did not have any Commercial Paper Notes outstanding.

We made principal payments on our debt of $30 million and $559 million during the three and six months ended July 4, 2025, respectively, and $5 million and $9 million for the three and six months ended June 28, 2024, respectively.

The activity for the six months ended July 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.

We were in compliance with all financial covenants as of July 4, 2025.

We paid dividends of $52 million and $105 million during the three and six months ended July 4, 2025, respectively, and $51 million and $104 million during the three and six months ended June 28, 2024.

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

Leidos Holdings, Inc.

PART I—FINANCIAL INFORMATION

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.

We paid $500 million to the financial institution and received an initial delivery of 3 million shares at an average price of $131.50 per share.

In May 2025, we received the final delivery of 0.6 million shares related to the ASR agreement.

The total number of shares that we received under the ASR agreement was based on the volume-weighted-average-price of $138.44 per share, net of a discount, for the period February 20, 2025, to May 20, 2025.

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.

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.

There were no open market share repurchases during the three and six months ended July 4, 2025.

On July 4, 2025, tax legislation was enacted as part of the OBBBA, implementing several corporate tax law changes as described above within Results of Operations.

We anticipate our federal and state tax payments will decrease by approximately $150 million in fiscal 2025, primarily due to the decrease in our estimated 2025 taxable income related to these changes.

The actual decrease may be impacted by future guidance or interpretive rules issued by the U.S.

Treasury, among other factors.

We will continue to assess the effects on our liquidity as tax legislation evolves.

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.

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

Three Months Ended

(in millions) April 4,

2025 March 29,

Three Months Ended Six Months Ended

(in millions) July 4,

2025 June 28,

Net cash provided by operating activities (1)

$ 486 $ 381 $ 544 $ 494

Net cash used in investing activities (314) (21) (336) (33)

Net cash used in financing activities (83) (159) (193) (387)

(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.

(1) Net cash provided by operating activities for the three and six months ended June 28, 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 increased $105 million during the three months ended July 4, 2025, when compared to the prior year quarter.

The increase was primarily due to the timing of payroll and employee benefit payments, higher earnings and an increase in tax benefits from the impacts of the OBBBA legislation, partially offset by unfavorable changes in working capital.

Net cash provided by operating activities increased $50 million during the six months ended July 4, 2025, when compared to the prior year.

The increase was primarily due to higher earnings and an increase in tax benefits from the impacts of the OBBBA legislation, partially offset by unfavorable changes in working capital.

Net cash used in investing activities increased $293 million and $303 million for the three and six months ended July 4, 2025, respectively, when compared to the prior year.

The increases were primarily due to $285 million of net cash paid related to the acquisition of Kudu Dynamics and higher capital expenditures.

Net cash used in financing activities decreased $76 million for the three months ended July 4, 2025, when compared to the prior year quarter, primarily due to a $105 million decrease in stock repurchases in the current year quarter, partially offset by $25 million increase in payments made from debt activities in the current year quarter.

Net cash used in financing activities decreased $194 million for the six months ended July 4, 2025, when compared to the prior year primarily due to $440 million of cash inflows from proceeds received from the issuance of debt, net of payments for borrowings and debt issuance costs, partially offset by a $250 million net increase in stock repurchases, primarily attributable to the accelerated share repurchase activities in the current year.

Leidos Holdings, Inc.

PART I—FINANCIAL INFORMATION

OFF-BALANCE SHEET ARRANGEMENTS

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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.

Leidos Holdings, Inc.

PART I—FINANCIAL INFORMATION

GUARANTOR AND ISSUER OF GUARANTEED SECURITIES

28 unchanged sentences

Intercompany payables represent amounts due to non-guarantor subsidiaries of the Issuer.

Leidos Holdings, Inc.

PART I—FINANCIAL INFORMATION

BALANCE SHEET INFORMATION FOR THE GUARANTOR AND ISSUER OF REGISTERED NOTES

(in millions) April 4,

(in millions) July 4,

2025 January 3,

8 unchanged sentences

Total liabilities $ 11,636 $ 10,868

Leidos Holdings, Inc.

PART I—FINANCIAL INFORMATION

STATEMENT OF OPERATIONS INFORMATION FOR THE GUARANTOR AND ISSUER OF REGISTERED NOTES

Three Months Ended

(in millions) April 4,

Six Months Ended

(in millions) July 4,

Revenues, net $ 5,362

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