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 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. 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. 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. 23 Table of Contents PART I—FINANCIAL INFORMATION INTERNATIONAL MARKETS 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. 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 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 Six Months Ended (dollars in millions) July 4, 2025 June 28, 2024 Percent change July 4, 2025 June 28, 2024 Percent change Revenues $ 4,253 $ 4,132 2.9 % $ 8,498 $ 8,107 4.8 % Operating income 571 475 20.2 % 1,101 890 23.7 % Non-operating expense, net (53) (49) 8.2 % (105) (96) 9.4 % Income before income taxes 518 426 21.6 % 996 794 25.4 % Income tax expense (125) (102) 22.5 % (238) (187) 27.3 % Net income 393 324 21.3 % 758 607 24.9 % Net income attributable to Leidos common stockholders $ 391 $ 322 21.4 % $ 754 $ 606 24.4 % Operating margin 13.4 % 11.5 % 13.0 % 11.0 % SEGMENT AND CORPORATE RESULTS Three Months Ended Six Months Ended National Security & Digital (dollars in millions) July 4, 2025 June 28, 2024 Percent change July 4, 2025 June 28, 2024 Percent change Revenues $ 1,872 $ 1,813 3.3 % $ 3,750 $ 3,606 4.0 % Operating income 188 183 2.7 % 373 358 4.2 % Operating margin 10.0 % 10.1 % 9.9 % 9.9 % 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. 24 Leidos Holdings, Inc. Table of Contents PART I—FINANCIAL INFORMATION Three Months Ended Six Months Ended Health & Civil (dollars in millions) July 4, 2025 June 28, 2024 Percent change July 4, 2025 June 28, 2024 Percent change Revenues $ 1,272 $ 1,263 0.7 % $ 2,563 $ 2,462 4.1 % Operating income 311 307 1.3 % 610 529 15.3 % Operating margin 24.4 % 24.3 % 23.8 % 21.5 % 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) July 4, 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 (loss) 40 (11) 463.6 % 77 23 234.8 % Operating margin 7.1 % (2.0 %) 6.8 % 2.1 % 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) July 4, 2025 June 28, 2024 Percent change July 4, 2025 June 28, 2024 Percent change Revenues $ 543 $ 495 9.7 % $ 1,051 $ 969 8.5 % Operating income 41 34 20.6 % 75 55 36.4 % Operating margin 7.6 % 6.9 % 7.1 % 5.7 % 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. 25 Table of Contents PART I—FINANCIAL INFORMATION Three Months Ended Six Months Ended Corporate (dollars in millions) July 4, 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 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 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 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”). 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 $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. 26 Leidos Holdings, Inc. Table of Contents PART I—FINANCIAL INFORMATION The estimated value of our total backlog was as follows: July 4, 2025 June 28, 2024 (1) (in millions) Funded Unfunded Total Funded Unfunded Total National Security & Digital $ 2,536 $ 22,325 $ 24,861 $ 2,681 $ 19,704 $ 22,385 Health & Civil 649 10,139 10,788 1,607 9,015 10,622 Commercial & International 2,589 2,510 5,099 2,699 1,886 4,585 Defense Systems 1,348 4,114 5,462 1,036 2,923 3,959 Total $ 7,122 $ 39,088 $ 46,210 $ 8,023 $ 33,528 $ 41,551 (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 $5,064 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. 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 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 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 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 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 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. 27 Table of Contents 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 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 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. SUMMARY OF CASH FLOWS The following table summarizes cash flow information for the periods presented: Three Months Ended Six Months Ended (in millions) July 4, 2025 June 28, 2024 July 4, 2025 June 28, 2024 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 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. 28 Leidos Holdings, Inc. Table of Contents PART I—FINANCIAL INFORMATION 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. 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. Leidos Holdings, Inc. 29 Table of Contents PART I—FINANCIAL INFORMATION BALANCE SHEET INFORMATION FOR THE GUARANTOR AND ISSUER OF REGISTERED NOTES (in millions) July 4, 2025 January 3, 2025 Total current assets $ 2,822 $ 2,550 Goodwill 5,673 5,673 Other long-term assets 1,307 1,498 Total assets $ 9,802 $ 9,721 Total current liabilities $ 2,025 $ 2,677 Long-term debt, net of current portion 4,985 4,052 Intercompany payables 3,828 3,319 Other long-term liabilities 798 820 Total liabilities $ 11,636 $ 10,868 STATEMENT OF OPERATIONS INFORMATION FOR THE GUARANTOR AND ISSUER OF REGISTERED NOTES Six Months Ended (in millions) July 4, 2025 Revenues, net $ 5,362 Operating income 495 Net income attributable to Leidos common stockholders 67 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. 30 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.