What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-11-04 compared with 2025-08-05 · 90 added, 91 removed, 194 unchanged (48% of the section changed)

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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.

During both the three and nine months ended October 3, 2025, and September 27, 2024, we generated approximately 87%, of total revenues from contracts with the U.S.

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.

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.

On October 1, 2025, the federal government shutdown following the expiration of a continuing resolution.

Congress is currently working to reopen the federal government and is engaged in ongoing negotiations.

As a result of the government shutdown, we may experience reduced or delayed work on existing contracts and there may be delays in other government contracting actions and payments.

Once the government reopens, Congress will resume consideration of the Fiscal Year 2026 appropriations bills, with the goal of completing them by the end of the current calendar year.

Leidos Holdings, Inc.

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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.

Sales to customers in international markets represented approximately 8% of total revenues for both the three and nine months ended October 3, 2025, and September 27, 2024.

Our international customers include foreign governments and their agencies.

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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,

Three Months Ended Nine Months Ended

(dollars in millions) October 3,

2025 September 27,

2024 Percent change October 3,

2025 September 27,

2024 Percent change

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SEGMENT AND CORPORATE RESULTS

Three Months Ended Six Months Ended

Three Months Ended Nine Months Ended

National Security & Digital

(dollars in millions)

2025 June 28,

2024 Percent change July 4,

2025 June 28,

2025 September 27,

2024 Percent change October 3,

2025 September 27,

2024 Percent change

2 unchanged sentences

Operating margin 9.5 % 10.0 % 9.8 % 10.0 %

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.

The increase in revenues for the three months ended October 3, 2025, as compared to the three months ended September 27, 2024, was primarily attributable to program wins, a net increase in volumes and $26 million of revenues recognized from the acquisition of Savanna Industries, Inc.

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

The increase in revenues for the nine months ended October 3, 2025, as compared to the nine months ended September 27, 2024, was primarily attributable to program wins, a net increase in volumes on certain programs and $38 million of revenues recognized from the acquisition of Kudu Dynamics, partially offset by the completion of certain contracts.

The increase in operating income for the three months ended October 3, 2025, as compared to the three months ended September 27, 2024, was primarily attributable to program wins.

The increase in operating income for the nine months ended October 3, 2025, as compared to the nine months ended September 27, 2024, was primarily attributable to program wins and a net increase in volumes, partially offset by the completion of certain contracts.

Leidos Holdings, Inc.

PART I—FINANCIAL INFORMATION

Three Months Ended Six Months Ended

Three Months Ended Nine Months Ended

Health & Civil

(dollars in millions)

2025 June 28,

2024 Percent change July 4,

2025 June 28,

2025 September 27,

2024 Percent change October 3,

2025 September 27,

2024 Percent change

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Operating margin 25.2 % 23.4 % 24.3 % 22.1 %

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

The increase in revenues and operating income for the three and nine months ended October 3, 2025, as compared to the three and nine months ended September 27, 2024, was primarily attributable to increased volumes and net write-ups on certain programs within the managed health services business.

Three Months Ended Nine Months Ended

Commercial & International

(dollars in millions)

2025 June 28,

2024 Percent change July 4,

2025 June 28,

2025 September 27,

2024 Percent change October 3,

2025 September 27,

2024 Percent change

Revenues $ 571 $ 578 (1.2 %) $ 1,705 $ 1,648 3.5 %

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

Operating income 38 41 (7.3 %) 115 64 79.7 %

Operating margin 6.7 % 7.1 % 6.7 % 3.9 %

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, 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

The decrease in revenues for the three months ended October 3, 2025, as compared to the three months ended September 27, 2024, was primarily attributable to the completion of certain contracts, partially offset by program wins.

The increase in revenues for the nine months ended October 3, 2025, as compared to the nine months ended September 27, 2024, was primarily attributable to program wins and prior year write-downs on certain programs within our UK operations, partially offset by completion of certain programs and a net decrease in volumes.

The decrease in operating income for the three months ended October 3, 2025, as compared to the three months ended September 27, 2024, was primarily attributable to an increase in technological investments and operating costs, partially offset by a net increase in volumes, net write-ups on certain programs and product mix.

The increase in operating income for the nine months ended October 3, 2025, as compared to the nine months ended September 27, 2024, was primarily attributable prior year write-downs on certain programs within our UK operations, program wins and product mix, partially offset by completion of certain contracts and an increase in technological investments and operating costs.

Three Months Ended Nine Months Ended

Defense Systems

(dollars in millions)

2025 June 28,

2024 Percent change July 4,

2025 June 28,

2025 September 27,

2024 Percent change October 3,

2025 September 27,

2024 Percent change

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Operating margin 6.4 % 7.1 % 6.9 % 6.2 %

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.

The increase in revenues for the three months ended October 3, 2025, as compared to the three months ended September 27, 2024, was primarily attributable to a net increase in volumes and program wins, partially offset by the completion of certain contracts.

The increase in revenues for the nine months ended October 3, 2025, as compared to the nine months ended September 27, 2024, was primarily attributable to program wins and a net increase in volumes, partially offset by the completion of certain contracts.

While revenues increased for the three months ended October 3, 2025, as compared to the three months ended September 27, 2024, operating income remained consistent.

This was primarily attributable to higher material costs for production programs in their initial phases.

The increase in operating income for the nine months ended October 3, 2025, as compared to the nine months ended September 27, 2024, was primarily attributable to program wins and a decrease in amortization expense in the current year.

Leidos Holdings, Inc.

PART I—FINANCIAL INFORMATION

Three Months Ended Six Months Ended

Three Months Ended Nine Months Ended

(dollars in millions)

2025 June 28,

2024 Percent change July 4,

2025 June 28,

2025 September 27,

2024 Percent change October 3,

2025 September 27,

2024 Percent change

Operating loss $ (59) $ (36) 63.9 % $ (93) $ (111) (16.2 %)

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.

The increase in operating loss for the three months ended October 3, 2025, as compared to the three months ended September 27, 2024, was primarily attributable to a $24 million increase in legal reserves and general and administrative expenses.

The decrease in operating loss for the nine months ended October 3, 2025, as compared to the nine months ended September 27, 2024, was primarily attributable to decreased legal fees, a $25 million insurance reimbursement for legal costs primarily incurred prior to fiscal year 2025 and lower acquisition and integration costs.

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.

Non-operating expense, net for the three months ended October 3, 2025, was $51 million as compared to $46 million for the three months ended September 27, 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.

Non-operating expense, net for the nine months ended October 3, 2025, was $156 million as compared to $142 million for the nine months ended September 27, 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.

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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.

Based upon our interpretation of the law as currently enacted, we estimate that income taxes payable and net deferred taxes will be $270 million and $235 million, respectively, lower at January 2, 2026, than our estimates prior to the OBBBA enactment.

For the three months ended October 3, 2025, our effective tax rate was 23.8% compared to 23.0% for the three months ended September 27, 2024.

The increase to the effective tax rate was primarily due to impacts from the OBBBA, partially offset by a decrease in valuation allowance compared to the prior year quarter.

For the nine months ended October 3, 2025, our effective tax rate was 23.9% compared to 23.3% for the nine months ended September 27, 2024.

The increase to the effective tax rate was primarily due to impacts from the OBBBA.

BOOKINGS AND BACKLOG

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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 $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.

We recorded net bookings worth an estimated $5.9 billion and $11.9 billion during the three and nine months ended October 3, 2025, respectively, as compared to $8.0 billion and $15.8 billion for the three and nine months ended September 27, 2024, respectively.

Leidos Holdings, Inc.

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The estimated value of our total backlog was as follows:

July 4, 2025 June 28, 2024 (1)

October 3, 2025 September 27, 2024 (1)

(in millions) Funded Unfunded Total Funded Unfunded Total

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As a result, unfunded backlog increased $4,952 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 at October 3, 2025, includes $149 million 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 July 4, 2025, we had $930 million in cash and cash equivalents.

As of October 3, 2025, we had $974 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.

As of October 3, 2025, and January 3, 2025, there were no borrowings outstanding under the revolving credit facility.

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

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.

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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.

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

We made principal payments on our debt of $455 million and $1,014 million during the three and nine months ended October 3, 2025, respectively, and $5 million and $14 million for the three and nine months ended September 27, 2024, respectively.

The activity for the three months ended October 3, 2025, included a prepayment on our senior unsecured term loan of $450 million and the activity for the nine months ended October 3, 2025, also 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.

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

We paid dividends of $51 million and $156 million during the three and nine months ended October 3, 2025, respectively, and $51 million and $155 million during the three and nine months ended September 27, 2024, respectively.

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.

Repurchases may be accelerated, suspended, delayed or discontinued at any time.

Leidos Holdings, Inc.

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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.

We made open market repurchases of our common stock for an aggregate purchase price of $100 million during both the three and nine months ended October 3, 2025, and $200 million and $450 million during the three and nine months ended September 27, 2024, respectively.

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.

We anticipate our federal and state tax payments will decrease by approximately $150 million in fiscal 2025, as compared to our estimates prior to the OBBBA enactment, 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.

4 unchanged sentences

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

Three Months Ended Six Months Ended

(in millions) July 4,

2025 June 28,

Three Months Ended Nine Months Ended

(in millions) October 3,

2025 September 27,

2024 October 3,

2025 September 27,

Net cash provided by operating activities (1)

2 unchanged sentences

Net cash used in financing activities (595) (257) (788) (644)

(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.

(1) Net cash provided by operating activities for the three and nine months ended September 27, 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 $64 million during the three months ended October 3, 2025, when compared to the prior year quarter.

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

Net cash provided by operating activities increased $114 million during the nine months ended October 3, 2025, when compared to the prior year.

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

Net cash used in investing activities increased $13 million for the three months ended October 3, 2025, when compared to the prior year quarter.

The increase was primarily due to higher capital expenditures and a $7 million payment related to the acquisition of Kudu Dynamics.

Net cash used in investing activities increased $316 million for the nine months ended October 3, 2025, when compared to the prior year.

The increase was primarily due to $292 million of net cash paid related to the acquisition of Kudu Dynamics and higher capital expenditures.

Net cash used in financing activities increased $338 million for the three months ended October 3, 2025, when compared to the prior year quarter.

The increase was primarily due to a $450 million prepayment on our senior unsecured term loan, partially offset by a $100 million decrease in stock repurchases in the current year quarter.

Net cash used in financing activities increased $144 million for the nine months ended October 3, 2025, when compared to the prior year primarily due to a $150 million increase in stock repurchases, a $10 million increase in payments for debt activities, partially offset by a $11 million decrease in shares withheld for tax obligations.

Leidos Holdings, Inc.

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BALANCE SHEET INFORMATION FOR THE GUARANTOR AND ISSUER OF REGISTERED NOTES

(in millions) July 4,

(in millions) October 3,

2025 January 3,

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

Six Months Ended

(in millions) July 4,

Nine Months Ended

(in millions) October 3,

Revenues, net $ 8,130

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