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Item 7. Management’s Discussion and Analysis

2026-02-17 compared with 2025-02-11 · 139 added, 169 removed, 224 unchanged (58% of the section changed)

4 unchanged sentences

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

In this section, we discuss our financial condition, changes in financial condition and results of our operations for the year ended January 2, 2026, compared to the year ended January 3, 2025.

For a discussion and analysis comparing our results for the year ended January 3, 2025, to the year ended December 29, 2023, see our Annual Report on Form 10-K for the year ended January 3, 2025, filed with the SEC on February 11, 2025, under Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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

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

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

Headquartered in Reston, Virginia, with 47,000 global employees, we pursue strategic growth across five pillars:

space and maritime;

energy infrastructure;

digital modernization and cyber;

mission software;

and managed health services.

Our customers include the U.S.

Department of Defense (“DoD”), the U.S.

Department of War (“DoW”), 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 (“NASA”) and many other U.S.

Department of Homeland Security, the Federal Aviation Administration, the Department of Veterans Affairs and many other U.S.

civilian, state and local government agencies, foreign government agencies and commercial businesses.

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

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

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

We now operate in the following reportable segments:

Our business is aligned into four reportable segments that are focused on specific, defined capability sets we bring to our customers.

We operate in the following reportable segments:

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

2 unchanged sentences

Our significant initiatives include the following:

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

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

u achieving annual revenue growth guided by our NorthStar 2030 strategy focusing on the growth pillars aligned with our customers’ priorities;

u continual improvements in the effectiveness and efficiency of our business processes driven by our enterprise transformation office leveraging artificial intelligence and automation;

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

Sales Trend .

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

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

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

For fiscal 2025, revenues increased $0.5 billion, or 3%, compared to fiscal 2024, the increase was primarily due to program wins and a net increase in volumes, partially offset by the completion of certain contracts.

Operating Expenses and Income Trend .

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

For fiscal 2025, operating expenses increased by $223 million, or 1%, compared to fiscal 2024.

Operating margin for fiscal 2025 was 12% compared to 11% for fiscal 2024.

Operating income was $2,109 million, a $282 million increase compared to fiscal 2024.

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

The increase in operating income was primarily attributable to a program wins and a net increase in volumes on certain programs, partially offset by an increase in general & administrative expenses and the completion of programs.

Leidos Holdings, Inc.

Annual Report

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

Operating margin for fiscal 2023 was 4.0% compared to 7.6% for fiscal 2022.

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

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

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

From a macroeconomic perspective, our industry is under general competitive pressures associated with spending from our largest customer, the U.S.

6 unchanged sentences

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

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

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

Revenues under contracts with the DoD and U.S.

Intelligence Community, including subcontracts under which the DoD or the U.S.

government in both fiscal 2025 and 2024, either as a prime contractor or a subcontractor to other contractors engaged in work for the U.S.

Revenues under contracts with the DoW and U.S.

Intelligence Community, including subcontracts under which the DoW or the U.S.

Intelligence Community is the ultimate purchaser, represented approximately 49% and 48% of our total revenues for fiscal 2025 and 2024, respectively.

1 unchanged sentence

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

On December 21, 2024, the U.S.

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

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

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

On February 3, 2026, the House of Representatives passed five of the six remaining appropriations bills to fund the federal government for fiscal year 2026.

On February 13, 2026, the Homeland Security bill was not passed and DHS was shutdown until another continuing resolution is agreed upon.

Trends in the U.S.

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INTERNATIONAL MARKETS

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

Sales to customers in international markets represented approximately 8% of total revenues for fiscal 2025 and 2024.

Our international customers include foreign governments and their agencies.

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

Year Ended 2024 to 2023 2023 to 2022

(dollars in millions)

2025 December 29,

2023 December 30,

change Percent

2026 January 3,

Revenues $ 17,174 $ 16,662 3 %

2 unchanged sentences

Acquisition, integration and restructuring costs 18 16 13 %

Goodwill impairment charges — 596 — NM NM

Asset impairment charges 5 11 (55) %

2 unchanged sentences

Non-operating expense, net (200) (188) (6) %

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

Income before income taxes 1,909 1,639 16 %

Income tax expense (447) (388) 15 %

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

net (loss) income attributable to non-controlling interest

Net income 1,462 1,251 17 %

net income (loss) attributable to non-controlling interest

14 (3) (567) %

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

Net income attributable to Leidos common stockholders $ 1,448 $ 1,254 15 %

Operating margin 12.3 % 11.0 %

NM - Not meaningful

SEGMENT AND CORPORATE RESULTS

Year Ended 2024 to 2023 2023 to 2022

National Security & Digital

(dollars in millions)

2025 December 29,

2023 December 30,

change Percent

2026 January 3,

Revenues $ 7,611 $ 7,365 3 %

1 unchanged sentence

Operating margin 10.0 % 9.8 %

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

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

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

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

Leidos Holdings, Inc.

Annual Report

Year Ended 2024 to 2023 2023 to 2022

The increase in revenues for fiscal 2025 as compared to fiscal 2024, was primarily attributable to program wins, a net increase in volumes and $60 million recognized from the acquisition of Kudu Dynamics, partially offset by program completions and a net decrease in contract write-ups in the current year.

The increase in operating income for fiscal 2025 as compared to fiscal 2024, was primarily attributable to program wins and a net increase in volumes, partially offset by program completions and a net decrease in contract write-ups in the current year.

Health & Civil

(dollars in millions)

2025 December 29,

2023 December 30,

2022 Percent change Percent change

2026 January 3,

2025 Percent change

Revenues $ 5,069 $ 5,015 1 %

2 unchanged sentences

Operating margin 23.7 % 21.8 %

The increase in revenues for fiscal 2024 as compared to fiscal 2023, was primarily attributable to a net increase in volumes and case complexity within the managed health services business, an increase in net write-ups on certain programs and program wins.

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

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

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

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

Year Ended 2024 to 2023 2023 to 2022

The increase in revenues for fiscal 2025 as compared to fiscal 2024, was primarily attributable to a net increase in write-ups on certain programs primarily within the managed health services business, partially offset by a net decrease in volumes.

The increase in operating income for fiscal 2025 as compared to fiscal 2024, was primarily due to operational efficiencies on certain programs and a net increase in write-ups primarily within the managed health services business, partially offset by increased general and administrative expenses.

Leidos Holdings, Inc.

Annual Report

Commercial & International

(dollars in millions)

2025 December 29,

2023 December 30,

2022 Percent change Percent change

2025 January 3,

2025 Percent change

Revenues $ 2,315 $ 2,252 3 %

Operating income (loss)

104 (560) 131 119 % NM

Operating income

Operating margin 7.2 % 4.6 %

NM - Not meaningful

The increase in revenues for fiscal 2024 as compared to fiscal 2023, was primarily attributable to program wins and a net increase in volumes on certain programs, partially offset by the impact of write-downs on certain programs within our UK operations for which cost and schedule were rebaselined as well as the completion of certain programs.

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

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

The increase in operating income for fiscal 2024 as compared to fiscal 2023, was primarily driven by impairment and restructuring charges of $689 million at the SES reporting unit in fiscal 2023, program wins and a net increase in volumes, partially offset by the impact of write-downs on certain programs within our UK operations for which cost and schedule were rebaselined as well as the completion of certain programs.

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

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

Year Ended 2024 to 2023 2023 to 2022

The increase in revenues for fiscal 2025 as compared to fiscal 2024, was primarily attributable to program wins, prior year write-downs on certain programs within our UK operations and a $13 million favorable impact from exchange rate movements, partially offset by completion of programs.

The increase in operating income for fiscal 2025 as compared to fiscal 2024, was primarily driven by prior year write-downs on certain programs within our UK operations, program wins and a net increase in volumes, partially offset by the completion of programs and increased in indirect expenses.

Defense Systems

(dollars in millions)

2025 December 29,

2023 December 30,

change Percent

2026 January 3,

Revenues $ 2,179 $ 2,030 7 %

1 unchanged sentence

Operating margin 7.2 % 4.6 %

Leidos Holdings, Inc.

Annual Report

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

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

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

Year Ended 2024 to 2023 2023 to 2022

The increase in revenues for fiscal 2025 as compared to fiscal 2024, was primarily attributable to program wins and a net increase in volumes, partially offset by the completion of programs.

The increase in operating income for fiscal 2025 as compared to fiscal 2024, was primarily attributable to a net increase in volumes, a prior year one-time write-down related to program assets, program wins and lower amortization expense.

The increase was partially offset by the completion of programs.

(dollars in millions)

2025 December 29,

2023 December 30,

change Percent

2026 January 3,

Operating loss $ (175) $ (186) 6 %

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

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

The decrease in operating loss for fiscal 2025 as compared to fiscal 2024, was primarily attributable to a decrease in legal costs, partially offset by an increase in research and development activities.

NON-OPERATING EXPENSE, NET

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

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

Non-operating expense, net increased by $12 million for fiscal 2025 as compared to fiscal 2024, primarily driven by a net increase in interest expense on borrowings, partially offset by a gain on an immaterial divested business that was not aligned to the Company's long term strategy.

PROVISION FOR INCOME TAXES

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

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

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

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

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

Our effective tax rate was 23.4% in fiscal 2025 compared to 23.7% in fiscal 2024.

The decrease to the effective tax rate was primarily due to a decrease in unrecognized tax benefits, partially offset by the impacts from cross-border taxes resulting from the H.R.1 Reconciliation Act, commonly referred to as the One Big Beautiful Bill Act (the “OBBBA”).

BOOKINGS AND BACKLOG

Effective 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.

Leidos Holdings, Inc.

Annual Report

We had net bookings of $17.5 billion and $23.2 billion during fiscal 2025 and 2024, respectively.

Net bookings represent the estimated amount of revenue to be earned in the future from funded and unfunded contract awards that were received during the year, net of any adjustments to previously awarded backlog amounts.

Net bookings represent the estimated amount of revenue to be earned in the future from funded and unfunded contract awards and modifications and unissued task orders on sole source IDIQ contracts that were received during the year, net of any adjustments to previously awarded backlog amounts.

We calculate net bookings as the year’s ending backlog, plus the year’s revenues, less the prior year’s ending backlog and any impacts from foreign currency or acquisitions and divestitures.

Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts.

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.

We segregate our backlog into two categories as follows:

4 unchanged sentences

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

Leidos Holdings, Inc.

Annual Report

u Negotiated Unfunded Backlog.

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

Negotiated unfunded backlog does not include unexercised option periods and future potential task orders expected to be awarded under IDIQ, GSA Schedule or other master agreement contract vehicles, with the exception of certain IDIQ contracts where task orders are not competitively awarded and separately priced but instead are used as a funding mechanism, and where there is a basis for estimating future revenues and funding on future anticipated task orders.

Negotiated unfunded backlog represents all remaining value on task orders that is not funded, including options, that we expect to recognize as well as expected future task orders under sole source IDIQ contracts.

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

January 3, 2025 December 29, 2023

January 2, 2026 January 3, 2025 (1)

(in millions)

5 unchanged sentences

Total $ 9,685 $ 39,347 $ 49,032 $ 8,409 $ 39,981 $ 48,390

(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 $4,836 million from our prior year annual report amounts.

Backlog at January 2, 2026, includes $149 million acquired through the acquisition of Kudu Dynamics within our National Security & Digital reportable segment.

Bookings and backlog fluctuate from period to period depending on our success rate in winning contracts and the timing of contract awards, renewals, modifications and cancellations, as well as foreign currency movements.

7 unchanged sentences

Most of our contracts have cancellation terms that would permit us to recover all or a portion of our incurred costs and fees for work performed.

Leidos Holdings, Inc.

Annual Report

CONTRACT TYPES

Our earnings and profitability may vary materially depending on changes in the proportionate amount of revenues derived from each type of contract.

For a discussion of the types of contracts under which we generate revenues, see “Business—Contract Types” in Part I of this Annual Report on Form 10-K.

For a discussion of the types of contracts under which we generate revenues, see “Business—Contract Payment Types” in Part I of this Annual Report on Form 10-K.

Revenues by contract type as a percentage of our total revenues for the periods presented were as follows:

2025 December 29,

2023 December 30,

2026 January 3,

Cost-reimbursement and fixed-price-incentive-fee 44 % 44 %

2 unchanged sentences

Total 100 % 100 %

Leidos Holdings, Inc.

Annual Report

LIQUIDITY AND CAPITAL RESOURCES

2 unchanged sentences

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

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

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

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

As of January 2, 2026, and January 3, 2025, there were no borrowings outstanding under any revolving credit facility.

We had outstanding debt of $4.6 billion and $4.7 billion at January 2, 2026, and January 3, 2025, respectively.

In fiscal 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.

In March 2023, we entered into a Credit Agreement with certain financial institutions, which provided for a senior unsecured term loan facility in an aggregate principal amount of $1.0 billion (the “Term Loan Facility”).

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

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

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

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 (“ASR”) agreement as discussed below.

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

As of January 3, 2025, and December 29, 2023, we did not have any commercial paper notes outstanding.

As of January 2, 2026, and January 3, 2025, we did not have any commercial paper notes outstanding.

We made principal payments, excluding the impacts of our Commercial Paper Notes, on our debt of $1,019 million, $18 million and $2,045 million during fiscal 2025, 2024 and 2023, respectively.

The activity for fiscal 2025 included a prepayment on our senior unsecured term loan of $450 million and a $500 million payment to discharge the $500 million notes due May 2025.

The activity for fiscal 2023 included a $1,210 million payment to discharge the $1.9 billion 5.77% senior unsecured term loan facility, a $498 million payment to discharge the $500 million 2.95% notes, due May 2023, and a principal repayment of $320 million to discharge the 364-day term loan credit agreement.

5 unchanged sentences

The amounts involved may be material.

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.

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.

During fiscal 2024 and 2023, we made open market repurchases of our common stock for an aggregate purchase price of $850 million and $225 million, respectively.

There were no open market share repurchases in fiscal 2022.

In fiscal 2022, we entered into an ASR with a financial institution to repurchase shares of our outstanding common stock.

We paid $500 million to the financial institution and received 4.8 million shares (see “Note 16—Earnings Per Share” of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K).

All shares delivered were immediately retired.

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.

During fiscal 2025, 2024, and 2023, we made open market repurchases of our common stock for an aggregate purchase price of $400 million, $850 million and $225 million, respectively.

Leidos Holdings, Inc.

Annual Report

In fiscal 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 3.6 million shares.

(see “Note 16—Earnings Per Share” of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K).

All shares delivered were immediately retired.

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 income tax payments will decrease by approximately $91 million in fiscal 2026, as compared to our estimates prior to the OBBBA enactment, 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.

On January 23, 2026, Leidos, Inc.

entered into a stock purchase agreement to acquire all of the shares of Entrust for a purchase price of $2.4 billion in cash, subject to customary adjustments for Entrust’s cash, debt, transaction expenses and net working capital.

In connection with the stock purchase agreement, we entered into an agreement with Citigroup Global Markets Inc., which provides for a senior unsecured 364-day bridge loan facility in an aggregate principal amount of $1.4 billion.

(See "Note 22—Subsequent Events" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K).

On February 12, 2026 (the “Closing Date”), we amended and restated our existing senior unsecured revolving credit facility to increase the borrowing capacity from $1.0 billion to $1.5 billion.

The amended revolving credit facility will mature five years from the Closing Date and permits two additional one-year extensions subject to lender consent.

Borrowings under the revolving credit facility will bear interest at a rate determined, at the Company's option, based on either an alternate base rate or term SOFR rate, plus an applicable margin.

SUMMARY OF CASH FLOWS

1 unchanged sentence

(in millions)

2025 December 29,

2026 January 3,

2025 December 29,

3 unchanged sentences

Net cash used in financing activities (1,145) (1,084) (715)

(1) Net cash provided by operating activities during the year ended December 30, 2022, was recast to present the effect of foreign exchange rate changes on cash, cash equivalents and restricted cash as a separate line in the consolidated statements of cash flows.

(1) Net cash provided by operating activities during the year ended January 3, 2025, and December 29, 2023, was recast to reflect a change in the accounting policy, see "Note 3—Summary of Significant Accounting Policies."

Net cash provided by operating activities increased $315 million for fiscal 2025 as compared to fiscal 2024.

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

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

Net cash provided by operating activities increased $248 million for fiscal 2024 as compared to fiscal 2023.

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

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

Net cash used in investing activities increased $263 million for fiscal 2025 as compared to fiscal 2024.

The increase was primarily due to $293 million of net cash paid in connection with the acquisition of Kudu Dynamics, partially offset by a $24 million decrease in capital expenditures and $9 million of proceeds received from sale of an immaterial business within the Commercial and International segment.

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

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

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

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

Leidos Holdings, Inc.

Annual Report

Net cash used in financing activities increased $61 million for fiscal 2025 as compared to fiscal 2024.

The increase was primarily due to a $50 million increase in stock repurchases, a $11 million increase in net payments made on debt activities, a $10 million increase in net capital distributions to our non-controlling interest, partially offset by a $12 million decrease in shares withheld for tax obligations.

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

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

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

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

OFF-BALANCE SHEET ARRANGEMENTS

10 unchanged sentences

For additional information, see “Note 18—Income Taxes” of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K.

Leidos Holdings, Inc.

Annual Report

GUARANTORS AND ISSUERS OF GUARANTEED SECURITIES

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$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

Leidos Holdings, Inc.

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$300 million 5.500% notes, due July 2033

Leidos Holdings, Inc.

Annual Report

Additionally, Leidos, Inc.

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BALANCE SHEET INFORMATION FOR THE GUARANTOR AND ISSUER OF REGISTERED NOTES

(in millions)

(in millions) January 2,

Total current assets $ 3,036

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Total liabilities $ 12,230

Leidos Holdings, Inc.

Annual Report

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

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Actual results could differ from these estimates under different assumptions and conditions.

Leidos Holdings, Inc.

Annual Report

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

u Revenue Recognition

REVENUE RECOGNITION

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

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

Under the cost-to-cost method, revenue is recognized based on the proportion of total costs incurred to estimated total costs-at-completion (“EAC”), which require us to use estimates of the revenue and cost associated with the design, manufacture and delivery of our offerings and services.

A performance obligation’s EAC includes all direct costs such as materials, labor, subcontract costs, overhead and a ratable portion of general and administrative costs.

If the estimated cost of a performance obligation whose associated revenue is recognized using the cost-to-cost method exceeds the estimated transaction price, the entire amount of the loss is recognized in operations in the period the loss is known.

Some of our cost-plus and fixed-price contracts contain award fees, incentive fees or other provisions that may either increase or decrease the transaction price.

These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion.

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

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

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

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

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

We perform work under various types of contracts, which include firm-fixed-price ("FFP"), time-and-materials ("T&M"), fixed- price-level-of-effort ("FPLOE"), cost-plus-fixed-fee ("CPFF"), cost-plus-award-fee ("CPAF"), cost-plus-incentive-fee ("CPIF") and fixed-price-incentive-fee ("FPIF").

For contracts which involve complex deliverables, such as system integration, we usually recognize revenue over time as the work is completed.

For contracts with an FFP component or variable fees, we measure progress using an input method, whereby revenue is recognized based on the percentage of costs incurred to date compared to total costs we anticipate by the end of the contract.

Commonly referred to as the “cost-to-cost” method.

To do this, we must estimate both the total revenue and total costs needed to design, build, and deliver our products and services.

These cost estimates include all direct costs, such as materials, labor, subcontractors, overhead and a ratable portion of general and administrative expenses.

If we determine that the total expected cost of completing a contract will be more than the total revenue we expect to receive, we record the entire expected loss when identified.

Some of our cost-plus and fixed-price contracts include award fees, incentive fees, or other terms that can either increase or decrease the total contract price.

These amounts are usually earned by meeting specific performance goals, reaching key milestones, staying within cost targets or based on customer judgment.

We estimate these variable amounts by determining the most likely amount we expect to earn.

This estimate is based on factors such as the contract-specific fee achievement metrics, the complexity and risk of the work, the level of customer discretion involved, our past experience with similar contracts and the risk that recognized revenue could later be reversed.

We allocate the total contract price to each of the performance obligations within the contract proportionally based upon their individual standalone selling prices.

We generally determine the standalone price by estimating the cost to perform the work and adding an expected profit margin.

For some product sales, we may instead use the standalone prices of similar products or apply a residual value method.

Nearly all of our contracts do not include a significant financing element, so we typically do not adjust the contract price for the timing of payments.

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

Goodwill is recognized when the transaction price for an acquired business is higher than the fair value of identifiable assets and liabilities acquired at the time of purchase.

Goodwill is an indefinite-lived asset which is tested for impairment once a year or more frequently if a triggering event occurs which indicates an impairment may exist.

The annual goodwill impairment test is performed at the start of the fourth quarter and includes an evaluation of whether the fair values of any of our reporting units are lower than their carrying values.

As of January 2, 2026, and January 3, 2025, goodwill represented 47% and 46% of our total assets, respectively.

When testing goodwill for impairment, we use either a qualitative or quantitative analysis.

The qualitative analysis considers factors such as overall economic conditions, industry and market trends, the financial performance of the business, and legal or other significant events that could affect the reporting unit.

When we perform a quantitative analysis, we estimate the fair value of a reporting unit using discounted future cash flows and market multiple models.

These models require us to make significant assumptions about future cash flows, discount rates, long-term growth, profit margins and in the identification of comparable public companies.

These assumptions take into account expected future sales and earnings after considering market conditions, customer spending, existing and expected orders, working capital needs, long-term business plans and recent performance.

Operations of the Security Enterprise Solutions (“SES”) reporting unit within the Commercial & International reportable segment rely heavily on the sales and servicing of security and detection products.

In fiscal 2023, SES restructured its portfolio by discontinuing select product offerings and ceasing operations in certain countries to better align with its strategic plan.

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

Leidos Holdings, Inc.

Annual Report

Goodwill represents the excess of the fair value of consideration transferred, plus the fair value of any non-controlling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.

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

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

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

Qualitative factors include macroeconomic, industry and market considerations, overall financial performance, industry, legal and other relevant events and factors affecting the reporting unit.

Our quantitative analysis utilizes discounted cash flow models and market multiple valuation methods to estimate reporting unit fair values.

Discounted cash flow analyses rely on significant judgment and assumptions about expected future cash flows, weighted-average cost of capital, discount rates, expected long-term growth rates and operating margins.

These assumptions are based on estimates of future sales and earnings after considering such factors as general market conditions, customer budgets, existing firm and future orders, changes in working capital, long term business plans and recent operating performance.

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

Operations of the Security Enterprise Solutions (“SES”) reporting unit rely heavily on the sales and servicing of security and detection products, which prior to fiscal 2024, have been negatively impacted due to delays in airline travel infrastructure projects as customer budgets recover from the pandemic.

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

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

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

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

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

In fiscal 2025 and 2024, we performed a quantitative analysis of our SES reporting unit, which holds goodwill in the amount of $311 million and $306 million as of January 2, 2026, and January 3, 2025, respectively.

The analysis resulted in the fair value of the reporting unit exceeding the carrying value for both periods.

In fiscal 2025 and 2024, we performed our annual test for impairment as of October 4, 2025, and September 28, 2024, respectively, which resulted in no impairments being identified.

COMMITMENTS AND CONTINGENCIES

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

Leidos Holdings, Inc.

Annual Report

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What changed 10-K

Item 7. Management’s Discussion and Analysis