Leidos Holdings, Inc. 10-K

Item 8. Financial Statements and Supplementary Data LEIDOS HOLDINGS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 57 Consolidated Balance Sheets as of January 2 , 202 6 , and J anuary 3, 2025 59 Consolidated Statements of Operations for the fiscal years ended January 2 , 202 6 , January 3, 2025 , and December 2 9, 2023 60 Consolidated Statements of Comprehensive Income for the fiscal years ended January 2 , 202 6 , January 3, 2025 , and December 29, 2023 61 Consolidated Statements of Equity for the fiscal years ended January 2 , 202 6 , January 3, 2025 , and December 2 9, 2023 62 Consolidated Statements of Cash Flows for the fiscal years ended January 2 , 202 6 , January 3, 2025 , and December 29, 2023 63 Notes to Consolidated Financial Statements 65 Financial statement schedules are omitted because they are not applicable or the required information is presented in the consolidated financial statements or the notes thereto. 56 Leidos Holdings, Inc. Annual Report Table of Contents PART II REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Leidos Holdings, Inc. Reston, Virginia Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Leidos Holdings, Inc. and subsidiaries (the “Company”) as of January 2, 2026 and January 3, 2025, the related consolidated statements of operations, comprehensive income, equity, and cash flows, for each of the fiscal years ended January 2, 2026, January 3, 2025, and December 29, 2023 and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 2, 2026 and January 3, 2025, and the results of its operations and its cash flows for each of the fiscal years ended January 2, 2026, January 3, 2025, and December 29, 2023 in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of January 2, 2026, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 17, 2026, expressed an unqualified opinion on the Company’s internal control over financial reporting. Change in Accounting Principle As discussed in Note 3 to the financial statements, the Company has elected to change its method of accounting for cash in fiscal 2025. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which it relates. Revenues – Refer to Notes 3 and 4 to the Financial Statements Critical Audit Matter Description The Company recognizes revenue on certain contracts with customers 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). 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. In addition, an EAC of a performance obligation includes future losses estimated to be incurred on onerous contracts, as and when known. The accounting for Leidos Holdings, Inc. Annual Report 57 Table of Contents PART II these contracts involves judgment, particularly as it relates to the process of estimating total revenues and costs for the performance obligation. Given the judgments necessary to determine whether multiple promises within a single contract represent a single performance obligation, whether or not the Company is acting as principal in the fulfillment of the identified performance obligations on certain contracts, and estimates of total revenues and costs for the performance obligations that recognize revenue using the cost-to-cost method, auditing such accounting conclusions and estimates required extensive audit effort due to the volume and complexity of these contracts and a high degree of auditor judgment when performing audit procedures and evaluating the results of those procedures. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to management’s conclusions regarding the number of performance obligations within a single contract, the Company's position as an agent or principal for a performance obligation, and estimates of total revenues and costs for the performance obligations that recognize revenue using the cost-to-cost method included the following, among others: u We tested the effectiveness of controls over contract revenue, including management’s controls over evaluating the revenue recognition methodology, initial setup of new contract arrangements, and estimates of total costs and revenues for identified performance obligations. u We developed an expectation of revenue based on the Company’s historical margin performance and costs incurred in the current year, then compared it to the recorded balance. u For a selection of contracts, we performed audit procedures based on certain characteristics of audit interest, which included some of the following: u Evaluated the terms and conditions of selected contracts and the appropriateness of the accounting treatment in accordance with accounting principles generally accepted in the United States of America, by: u Inspection of the executed contract to assess that the facts on which management’s conclusions were reached were consistent with the actual terms and conditions of the contract. u Evaluation of the contract within the context of the revenue recognition model to assess whether management’s conclusions were appropriate. We evaluated the nature of the promises within the contract, the interrelationship of the promised services and/or products provided, the pattern by which obligations are fulfilled, the number of performance obligations identified, and whether or not the Company is acting as principal in the fulfillment of the identified performance obligations. u Evaluation of the appropriateness and consistency of the methods and assumptions used by management to develop estimates of future revenues that will be recognized and costs that will be incurred. u Evaluate the mathematical accuracy of management’s calculation of revenue for the performance obligation. u We analyzed impacts to income before income tax recorded during the year as a result of changes in estimates on contracts and tested those with characteristics of audit interest to determine that the adjustments were the result of changes in facts and circumstances and not estimates that were previously inaccurate. /s/ Deloitte & Touche LLP McLean, Virginia February 17, 2026 We have served as the Company’s auditor since fiscal 2000. 58 Leidos Holdings, Inc. Annual Report Table of Contents PART II LEIDOS HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (in millions, except share and par value data) January 2, 2026 January 3, 2025 Assets: Cash and cash equivalents $ 1,108 $ 849 Receivables, net 2,708 2,645 Inventory, net 342 315 Other current assets 656 525 Total current assets 4,814 4,334 Property, plant and equipment, net 961 991 Intangible assets, net 458 517 Goodwill 6,342 6,084 Operating lease right-of-use assets, net 526 560 Deferred tax assets 48 203 Other long-term assets 344 321 Total assets $ 13,493 $ 13,010 Liabilities: Accounts payable and accrued liabilities $ 1,988 $ 2,131 Accrued payroll and employee benefits 819 811 Current portion of long-term debt 20 618 Total current liabilities 2,827 3,560 Long-term debt, net of current portion 4,628 4,052 Operating lease liabilities 587 621 Deferred tax liabilities 221 2 Other long-term liabilities 268 315 Total liabilities $ 8,531 $ 8,550 Commitments and contingencies (Note 21) Stockholders’ equity: Preferred stock, $ 0.0001 par value, 10,000,000 shares authorized and no shares issued and outstanding at January 2, 2026 and January 3, 2025 — — Common stock, $ 0.0001 par value, 500,000,000 shares authorized, 126,380,657 and 131,163,899 shares issued and outstanding at January 2, 2026, and January 3, 2025, respectively — — Additional paid-in capital 319 1,112 Retained earnings 4,647 3,410 Accumulated other comprehensive loss ( 50 ) ( 110 ) Total Leidos stockholders’ equity 4,916 4,412 Non-controlling interest 46 48 Total stockholders’ equity 4,962 4,460 Total liabilities and stockholders’ equity $ 13,493 $ 13,010 See accompanying notes to consolidated financial statements. Leidos Holdings, Inc. Annual Report 59 Table of Contents PART II LEIDOS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended (in millions, except per share data) January 2, 2026 January 3, 2025 December 29, 2023 Revenues $ 17,174 $ 16,662 $ 15,438 Cost of revenues 14,075 13,864 13,194 Selling, general and administrative expenses 999 983 942 Acquisition, integration and restructuring costs 18 16 24 Goodwill impairment charges — — 596 Asset impairment charges 5 11 91 Equity earnings of non-consolidated subsidiaries ( 32 ) ( 39 ) ( 30 ) Operating income 2,109 1,827 621 Non-operating income (expense): Interest expense, net ( 203 ) ( 193 ) ( 212 ) Other income (expense), net 3 5 ( 6 ) Income before income taxes 1,909 1,639 403 Income tax expense ( 447 ) ( 388 ) ( 195 ) Net income 1,462 1,251 208 Less: net income (loss) attributable to non-controlling interest 14 ( 3 ) 9 Net income attributable to Leidos common stockholders $ 1,448 $ 1,254 $ 199 Earnings per share: Basic $ 11.31 $ 9.36 $ 1.45 Diluted 11.14 9.22 1.44 See accompanying notes to consolidated financial statements. 60 Leidos Holdings, Inc. Annual Report Table of Contents PART II LEIDOS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended (in millions) January 2, 2026 January 3, 2025 December 29, 2023 Net income $ 1,462 $ 1,251 $ 208 Foreign currency translation adjustments 66 ( 59 ) 34 Unrecognized loss on derivative instruments ( 4 ) ( 4 ) ( 8 ) Pension adjustments ( 2 ) 1 ( 1 ) Total other comprehensive income (loss), net of taxes 60 ( 62 ) 25 Comprehensive income 1,522 1,189 233 Less: net income (loss) attributable to non-controlling interest 14 ( 3 ) 9 Comprehensive income attributable to Leidos common stockholders $ 1,508 $ 1,192 $ 224 See accompanying notes to consolidated financial statements. Leidos Holdings, Inc. Annual Report 61 Table of Contents PART II LEIDOS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF EQUITY (in millions, except for per share data) Shares of common stock Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Leidos stockholders' equity Non-controlling interest Total stockholders' equity Balance at December 30, 2022 137 $ 2,005 $ 2,367 $ ( 73 ) $ 4,299 $ 54 $ 4,353 Net income — — 199 — 199 9 208 Other comprehensive income, net of taxes — — — 25 25 — 25 Issuances of stock 1 53 — — 53 — 53 Repurchases of stock and other ( 2 ) ( 247 ) — — ( 247 ) — ( 247 ) Dividends of $ 1.46 per share — — ( 202 ) — ( 202 ) — ( 202 ) Stock-based compensation — 77 — — 77 — 77 Net capital distributions to non-controlling interest — ( 3 ) — — ( 3 ) ( 6 ) ( 9 ) Balance at December 29, 2023 136 1,885 2,364 ( 48 ) 4,201 57 4,258 Net income (loss) — — 1,254 — 1,254 ( 3 ) 1,251 Other comprehensive loss, net of taxes — — — ( 62 ) ( 62 ) — ( 62 ) Issuances of stock 1 55 — — 55 — 55 Repurchases of stock and other ( 6 ) ( 913 ) — — ( 913 ) — ( 913 ) Dividends of $ 1.54 per share — — ( 208 ) — ( 208 ) — ( 208 ) Stock-based compensation — 85 — — 85 — 85 Net capital distributions to non-controlling interest — — — — — ( 6 ) ( 6 ) Balance at January 3, 2025 131 1,112 3,410 ( 110 ) 4,412 48 4,460 Net income — — 1,448 — 1,448 14 1,462 Other comprehensive income, net of taxes — — — 60 60 — 60 Issuances of stock 1 63 — — 63 — 63 Repurchases of stock and other ( 6 ) ( 951 ) — — ( 951 ) — ( 951 ) Dividends of $ 1.63 per share — — ( 211 ) — ( 211 ) — ( 211 ) Stock-based compensation — 95 — — 95 — 95 Net capital distributions to non-controlling interest — — — — — ( 16 ) ( 16 ) Balance at January 2, 2026 126 $ 319 $ 4,647 $ ( 50 ) $ 4,916 $ 46 $ 4,962 See accompanying notes to consolidated financial statements. 62 Leidos Holdings, Inc. Annual Report Table of Contents PART II LEIDOS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended (in millions) January 2, 2026 January 3, 2025 December 29, 2023 Cash flows from operations: Net income $ 1,462 $ 1,251 $ 208 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 290 290 331 Stock-based compensation 95 85 77 Goodwill impairment charges — — 596 Asset impairment charges 5 11 91 Deferred income taxes 369 ( 98 ) ( 109 ) Other 9 44 28 Change in assets and liabilities, net of effects of acquisitions and dispositions: Receivables ( 46 ) ( 220 ) ( 65 ) Other current assets and other long-term assets 19 96 140 Accounts payable and accrued liabilities and other long-term liabilities ( 308 ) ( 117 ) 53 Accrued payroll and employee benefits 1 121 ( 5 ) Income taxes receivable/payable ( 146 ) ( 28 ) ( 158 ) Net cash provided by operating activities 1,750 1,435 1,187 Cash flows from investing activities: Acquisitions of businesses, net of cash acquired ( 293 ) — ( 6 ) Payments for property, equipment and software ( 125 ) ( 149 ) ( 207 ) Proceeds from disposition of businesses 9 — 2 Other 4 7 — Net cash used in investing activities ( 405 ) ( 142 ) ( 211 ) Cash flows from financing activities: Proceeds from debt issuance 997 — 1,743 Repayments of borrowings ( 1,019 ) ( 18 ) ( 2,045 ) Payments for debt issuance and modification costs ( 7 ) — ( 7 ) Dividend payments ( 211 ) ( 208 ) ( 201 ) Repurchases of stock and other ( 944 ) ( 906 ) ( 246 ) Proceeds from issuances of stock 62 55 50 Net capital distributions to non-controlling interests ( 16 ) ( 6 ) ( 9 ) Other ( 7 ) ( 1 ) — Net cash used in financing activities ( 1,145 ) ( 1,084 ) ( 715 ) Effect of foreign exchange rate changes on cash and cash equivalents 13 ( 10 ) 6 Net increase in cash, cash equivalents and restricted cash 213 199 267 Cash, cash equivalents and restricted cash at beginning of year 991 792 525 Cash, cash equivalents and restricted cash at end of year 1,204 991 792 Less: restricted cash at end of year 96 142 151 Cash and cash equivalents at end of year $ 1,108 $ 849 $ 641 Leidos Holdings, Inc. Annual Report 63 Table of Contents PART II LEIDOS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Year Ended (in millions) January 2, 2026 January 3, 2025 December 29, 2023 Supplementary cash flow information: Cash paid for interest $ 220 $ 226 $ 207 Cash paid for income taxes, net of refunds 276 460 435 Non-cash investing activity: Property, plant and equipment additions $ 5 $ 72 $ 2 Non-cash financing activity: Finance lease obligations $ — $ — $ 65 See accompanying notes to consolidated financial statements. 64 Leidos Holdings, Inc. Annual Report Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1—Nature of Operations and Basis of Presentation NATURE OF OPERATIONS AND BASIS OF PRESENTATION Leidos Holdings, Inc. (“Leidos”), a Delaware corporation, is a holding company whose direct 100 %-owned subsidiary and principal operating company is Leidos, Inc. 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, Leidos’ customers include 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 and many other U.S. civilian, state and local government agencies, foreign government agencies and commercial businesses. Unless indicated otherwise, references to “we,” “us” and “our” refer collectively to Leidos Holdings, Inc. and its consolidated subsidiaries. Our business is aligned into four reportable segments: National Security & Digital, Health & Civil, Commercial & International and Defense Systems. Additionally, we separately present the unallocated costs associated with corporate functions as Corporate. We have a 53 % controlling interest in Hanford Mission Integration Solutions, LLC (“HMIS”), the legal entity for the follow-on contract to Mission Support Alliance, LLC's ("MSA") contract and a joint venture with Centerra Group, LLC and Parsons Government Services, Inc. In fiscal 2025, we dissolved our controlling interest in MSA. We consolidate the financial results for HMIS into our consolidated financial statements. The consolidated financial statements also include the balances of all voting interest entities in which Leidos has a controlling voting interest (“subsidiaries”) and a variable interest entity (“VIE”) in which Leidos is the primary beneficiary. The consolidated balances of the VIE are not material to the consolidated financial statements for the periods presented. Intercompany accounts and transactions between consolidated companies have been eliminated in consolidation. Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. We disaggregated "Deferred tax assets" from "Other long-term assets" and "Deferred tax liabilities" from "Other long-term liabilities" on the consolidated balance sheets. Additionally, we combined "Net proceeds from sale of assets" into "Other" within net cash used in investing activities on the consolidated statements of cash flows. We changed our Cash and Cash Equivalents policy to exclude outstanding payments from “Cash and cash equivalents” on the consolidated balance sheets. Prior year financial information has been updated to conform to our current presentation on the consolidated balance sheet and consolidated statement of cash flows (See "Note 3—Summary of Significant Accounting Policies"). Note 2—Accounting Standards ACCOUNTING STANDARDS UPDATES ADOPTED ASU 2023-09 Income Taxes In December 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-09, to enhance the transparency and usefulness of income tax disclosures. The update requires enhancements to the annual rate reconciliation, including disclosure of specific categories and additional information for reconciling items meeting a quantitative threshold. The update also requires disclosure of income taxes paid disaggregated by federal, state and foreign taxes, and individual jurisdictions meeting a quantitative threshold. The amendments in this update are effective for public business entities for annual periods beginning after December 15, 2024, and may be adopted on a prospective or retrospective basis. Effective fiscal 2025, we adopted the requirements of ASU 2023-09, using the prospective method (See "Note 18—Income Taxes"). The adoption did not have a material impact on our consolidated financial statements and related disclosures. Leidos Holdings, Inc. Annual Report 65 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ACCOUNTING STANDARDS UPDATES ISSUED BUT NOT YET ADOPTED ASU 2024-03 Disaggregation of Income Statement Expenses In November 2024, the FASB issued ASU 2024-03, to enhance the transparency of certain expense disclosures. The update requires disclosure of specific expense categories in the notes to the financial statements at interim and annual reporting periods. The update requires disaggregated information about certain prescribed expense categories underlying any relevant income statement expense caption. The amendments in this update are effective for public entities for annual periods beginning after December 15, 2026, and interim periods beginning after December 15, 2027. The amendments may be adopted either prospectively or retrospectively. Early adoption is permitted. We are currently evaluating the impacts of this update and plan to adopt these amendments for annual disclosures in fiscal 2027 and interim disclosures in fiscal 2028. ASU 2025-06 Intangibles - Goodwill and Other-Internal-Use Software In September 2025, the FASB issued ASU 2025-06, which amends certain aspects of the accounting and disclosure of Internal use software costs. Current guidance requires capitalization of internal-use software development costs depending on the nature of the costs and the project stage during which they occur. The amendments in this update remove references to prescriptive and sequential software development stages and require entities to start capitalizing software development costs when a) management authorizes and commits to funding the software project, and b) it is probable that the project will be completed, and the software will be used to perform the intended function. The amendments in this update are effective for public business entities for annual periods beginning after December 15, 2027, including interim periods within those annual reporting periods, and may be adopted on a prospective, modified or retrospective basis. Early adoption is permitted. We are currently evaluating the impacts of this update and plan to adopt these amendments using the prospective approach in fiscal 2026. We do not expect them to have a material impact on our consolidated financial statements and related disclosures. Note 3—Summary of Significant Accounting Policies REPORTING PERIODS Our fiscal year ends on the Friday nearest the end of December. Fiscal 2025 ended January 2, 2026, fiscal 2024 ended January 3, 2025, and fiscal 2023 ended December 29, 2023. Fiscal 2025 and 2023 both included 52 weeks and fiscal 2024 included 53 weeks. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Management evaluates these estimates and assumptions on an ongoing basis, including those relating to estimated profitability of long-term contracts, indirect billing rates, allowances for credit losses, inventories, right-of-use (“ROU”) assets and lease liabilities, fair value and impairment of intangible assets and goodwill, income taxes, pension benefits, stock-based compensation expense and contingencies. These estimates have been prepared by management on the basis of the most current and best available information; however, actual results could differ materially from those estimates. OPERATING CYCLE Our operating cycle for long-term contracts may be greater than one year and is measured by the average time intervening between the inception and the completion of those contracts. BUSINESS COMBINATIONS, INVESTMENTS AND VARIABLE INTEREST ENTITIES Business Combinations The accounting for business combinations requires management to make judgments and estimates related to the fair value of assets acquired, including the identification and valuation of intangible assets, as well as liabilities and contingencies assumed. Such judgments and estimates directly impact the amount of goodwill recognized in connection with an 66 Leidos Holdings, Inc. Annual Report Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS acquisition. Estimating the fair value of acquired assets and assumed liabilities, including intangibles, requires judgments about expected future cash flows, weighted-average cost of capital, discount rates and expected long-term growth rates. Investments Investments in entities and corporate joint ventures where we have a non-controlling ownership interest but over which we have the ability to exercise significant influence, are accounted for under the equity method of accounting. We recognize our proportionate share of the entities’ net income or loss and do not consolidate the entities’ assets and liabilities. Equity investments in entities over which we do not have the ability to exercise significant influence and whose securities do not have a readily determinable fair value are carried at cost or cost net of other-than-temporary impairments. Investments are assessed for impairment whenever events or change in circumstances indicate that the carrying value may not be recoverable. Variable Interest Entities We occasionally form joint ventures and/or enter into arrangements with special purpose limited liability companies for the purpose of bidding and executing on specific projects. We analyze each such arrangement to determine whether it represents a VIE. If the arrangement is determined to be a VIE, we assess whether we are the primary beneficiary of the VIE and are consequently required to consolidate the VIE. DIVESTITURES From time-to-time, we may dispose (or management may commit to plans to dispose) of strategic or non-strategic components of the business. Divestitures representing a strategic shift that has (or will have) a major effect in operations and financial results are classified as discontinued operations, whereas non-strategic divestitures remain in continuing operations. RESTRUCTURING EXPENSES Restructuring expenses represent costs associated with an exit or disposal activity which no longer provide on-going economic benefits to the Company. Restructuring costs may include employee severance benefits, costs to terminate contracts and other permanent exit costs to consolidate or close facilities directly related to the restructuring program. One-time involuntary termination benefits with a required service period of less than 60 days are recognized when the benefits have been communicated to employees and one-time termination benefits with a required service period in excess of 60 days are recognized over the requisite period. Ongoing termination benefit arrangements are recognized at estimated fair value when it is probable that they will be incurred and are reasonably estimable. Costs associated with exit or disposal activities, including the related one-time and ongoing involuntary termination benefits, are included as “Acquisition, integration and restructuring costs” on the consolidated statements of operations. REVENUES Our revenues from contracts with customers are from offerings including space and maritime; energy infrastructure; digital modernization and cyber; mission software; and managed health services, primarily with the U.S. government and its agencies. We also serve various state and local governments, foreign governments and commercial customers. We perform 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, cost-plus-incentive-fee ("CPIF") and fixed-price-incentive-fee (“FPIF”) contracts. To determine the proper revenue recognition, we first evaluate whether we have a duly approved and enforceable contract with a customer, in which the rights of the parties and payment terms are identified, and collectability is probable. We also evaluate whether two or more contracts should be combined and accounted for as a single contract, including the task orders issued under an indefinite delivery/indefinite quantity (“IDIQ”) award. In addition, we assess contract modifications to determine whether changes to existing contracts should be accounted for as part of the original performance obligation or as a separate performance obligation. Contract modifications generally relate to changes in contract specifications and requirements and do not add distinct services, and therefore are accounted for as part of the original performance obligation. Leidos Holdings, Inc. Annual Report 67 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS If contract modifications add distinct goods or services and increase the contract value by an amount that reflects the standalone selling price, those modifications are accounted for as separate performance obligations. Most of our contracts contain multiple promises including the design and build of software-based systems, integration of hardware and software solutions, running and maintaining of IT infrastructure and procurement services. In all cases, we assess if the multiple promises should be accounted for as separate performance obligations or combined into a single performance obligation. We generally separate multiple promises in a contract as separate performance obligations if those promises are distinct, both individually and in the context of the contract. If multiple promises in a contract are highly interrelated or require significant integration or customization within a group, they are combined and accounted for as a single performance obligation. Our contracts with the U.S. government often contain options to renew existing contracts for an additional period of time (generally a year at a time) under the same terms and conditions as the original contract, and generally do not provide the customer any material rights under the contract. We account for renewal options as separate performance obligations when they include distinct goods or services at standalone selling prices. Certain 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 likely 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. Contracts with the U.S. government are subject to the Federal Acquisition Regulation (“FAR”) and priced on estimated or actual costs of providing the goods or services. The FAR provides guidance on types of costs that are allowable in establishing prices for goods and services provided to the U.S. government and its agencies. Each contract is competitively priced and bid separately. Pricing for non-U.S. government agencies and commercial customers is based on specific negotiations with each customer. We allocate the transaction price of a contract to its performance obligations primarily based upon the proportional individual selling prices. The performance obligation’s standalone selling price 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 from 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. Any taxes collected or imposed when determining the transaction price are excluded. We recognize revenue on our service-based contracts primarily over time as there is continuous transfer of control to the customer over the duration of the performance period as the work is performed. For U.S. government contracts, continuous transfer of control to the customer is evidenced by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay for costs incurred plus a reasonable profit and take control of any work-in-process. Similarly, for non-U.S. government contracts, the customer typically controls the work-in-process as evidenced by rights to payment for work performed to date plus a reasonable profit to deliver products or services for which we do not have an alternate use. Anticipated losses on service-based revenue contracts are recognized when incurred over the period of performance while the full amount of anticipated losses on other contracts are recognized during the period in which the losses are determined. In certain product sales, where the products have an alternate use, revenue is recognized at a point in time when the customer takes control of the asset usually denoted by possession, transfer of legal title and acceptance by the customer. On performance obligations that require system integration and capability development efforts or contain variable consideration, revenue is recognized over time generally 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”). 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. In addition, an EAC of a performance obligation includes future losses estimated to be incurred on onerous contracts, as and when known. On certain other performance obligations, principally associated with T&M, FPLOE and CPFF contracts, revenue is generally recognized using the right-to-invoice practical expedient as we are contractually able to invoice the customer based on the control transferred to the customer. Additionally, on maintenance (generally FFP) performance obligations, revenue is recognized over time using a straight-line method as the control of the services is provided to the customer evenly over the period of performance. 68 Leidos Holdings, Inc. Annual Report Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For certain performance obligations where we are not primarily responsible for fulfilling the promise to provide the goods or service to the customer, do not have inventory risk and do not have discretion in establishing the price for the goods or service, we recognize revenue on a net basis. CONTRACT COSTS Contract costs generally include direct costs such as labor, materials, subcontract costs and indirect costs identifiable with or allocable to a specific contract. Costs are expensed as incurred unless they qualify for deferral and capitalization. Contract costs incurred for U.S. government contracts, including indirect costs, are subject to audit and adjustment by the Defense Contract Audit Agency (“DCAA”) (see “Note 21—Commitments and Contingencies”). Fulfillment Costs Contract fulfillment costs include costs incurred prior to the commencement of service to transition services, employees, and equipment to or from the customer or from a prior contractor. Eligible contract fulfillment costs are deferred and recognized on a straight-line basis over the anticipated term of the contract or specified period of performance. Project Assets Purchases of assets used to fulfill a specific contract with a customer that do not constitute other specific asset classes are capitalized as project assets when the costs are generally expected to be recovered, we maintain ownership of the asset and the benefit is received over a period of time. Project assets include prepaid services and maintenance agreements, certain material purchases and other costs incurred on contracts. Project assets are generally amortized using the straight-line method over the shorter of the estimated useful life of the asset or the expected contract period of performance. CHANGES IN ESTIMATES ON CONTRACTS Changes in estimates related to contracts accounted for using the cost-to-cost method of accounting are recognized in the period in which such changes are made for the inception-to-date effect of the changes, with the exception of contracts acquired through a business combination, where the adjustment is made for the period commencing from the date of acquisition. Changes in estimates on contracts for the periods presented were as follows: Year Ended (in millions, except for per share amounts) January 2, 2026 January 3, 2025 December 29, 2023 Favorable impact $ 198 $ 184 $ 140 Unfavorable impact ( 114 ) ( 153 ) ( 100 ) Net favorable impact to income before income taxes $ 84 $ 31 $ 40 Impact on diluted EPS attributable to Leidos common stockholders $ 0.49 $ 0.17 $ 0.22 The impact on diluted earnings per share (“EPS”) attributable to Leidos common stockholders is calculated using our statutory tax rate. Revenue Recognized from Prior Obligations During fiscal 2025, 2024 and 2023, revenue recognized from performance obligations satisfied in previous periods was $ 41 million, $ 13 million and $ 8 million, respectively. The changes primarily relate to revisions of variable consideration, including award and incentive fees, and revisions to estimates at completion resulting from changes in contract scope, mitigation of contract risks or true-ups of contract estimates at the end of contract performance. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES We classify indirect costs incurred within or allocated to our U.S. government customer contracts as overhead (included in “Cost of revenues”) or general and administrative expenses in the same manner as such costs are defined in our disclosure statements under U.S. government Cost Accounting Standards. Selling, general and administrative expenses include general and administrative, bid and proposal, company-funded research and development expenses, and legal fees and settlements. Leidos Holdings, Inc. Annual Report 69 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS We conduct research and development activities under customer-funded contracts and with company-funded research and development funds. Company-funded research and development expense was $ 187 million, $ 150 million and $ 128 million for fiscal 2025, 2024 and 2023, respectively. Expenses for research and development activities performed under customer contracts are charged directly to cost of revenues for those contracts. INCOME TAXES We account for income taxes under the asset and liability method in accordance with the accounting standard for income taxes. The asset and liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities. Under this method, changes in tax rates and laws are recognized in income in the period such changes are enacted. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations. If we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount or would no longer be able to realize our deferred income tax assets in the future as currently recorded, we would make an adjustment to the valuation allowance which would decrease or increase the provision for income taxes. The provision for federal, state, foreign and local income taxes is calculated on income before income taxes based on current tax law and includes the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Such provision differs from the amounts currently payable because certain items of income and expense are recognized in different reporting periods for financial reporting purposes than for income tax purposes. We record liabilities for uncertain tax positions in accordance with Accounting Standards Codification ("ASC") 740, Accounting for Income Taxes, on the basis of a two-step process in which we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. We recognize interest and penalties related to uncertain tax positions in our income tax expense. CASH AND CASH EQUIVALENTS Our cash equivalents are primarily comprised of investments in several large institutional money market accounts, with original maturity of three months or less. Effective fiscal 2025, we changed our policy to exclude outstanding payments from “Cash and cash equivalents” on the consolidated balance sheets. To reflect the change in accounting policy, we recast "Cash and cash equivalents" and "Accounts payable and accrued liabilities" on the consolidated balance sheet as of January 3, 2025, reducing both balances by $ 94 million from the previously reported amounts. The recast of the consolidated statement of cash flows for the year ended January 3, 2025, and December 29, 2023, resulted in an increase of $ 43 million and $ 22 million, respectively, to net cash provided by operations. We believe this presentation enhances the usefulness of financial reporting and enhances comparability to align with industry practice. There was no impact to our consolidated statements of operations, including EPS, consolidated statements of comprehensive income, or consolidated statements of equity. All periods presented have been adjusted. RESTRICTED CASH We have restricted cash balances, primarily representing advances from customers that are restricted as to use for certain expenditures related to that customer’s contract. Restricted cash balances are included within “Other current assets” on the consolidated balance sheets. Our restricted cash balances were $ 96 million and $ 142 million at January 2, 2026, and January 3, 2025, respectively. RECEIVABLES Receivables include amounts billed and currently due from customers, amounts billable where the right to consideration is unconditional and amounts unbilled. Billable and unbilled amounts are recognized at estimated realizable value and consist of costs and fees, most of which are expected to be billed and collected generally within one year. Unbilled amounts also include rate variances that are billable upon negotiation of final indirect rates with the Defense Contract Management Agency. Cost-reimbursable and T&M contracts are generally billed as costs are incurred. FFP contracts are billed either based on milestones, which are the achievement of specific events as defined in the contract, or based on progress payments, which 70 Leidos Holdings, Inc. Annual Report Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS are interim payments up to a designated amount of costs incurred as work progresses. On certain contracts, the customer withholds a certain percentage of the contract price (retainage). These withheld amounts are included within unbilled receivables and are billed upon contract completion or the occurrence of a specified event, typically after negotiation of final indirect rates with the U.S. government. Based on our historical experience, the write-offs of retention balances have not been significant. When events or conditions indicate that amounts outstanding from customers may become uncollectible, an allowance is estimated and recorded. This estimate is based on the age of outstanding receivables or specific identification of balances at risk of becoming uncollectible. Amounts billed and collected on contracts but not yet recorded as revenue because we have not performed our obligation under the arrangement with a customer are deferred and included within “Accounts payable and accrued liabilities” or “Other long-term liabilities” on the consolidated balance sheets. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject us to concentrations of credit risk primarily consist of accounts receivable and derivatives. Since our receivables are primarily with the U.S. government, we do not have exposure to material credit risk. We managed our credit risk related to derivatives through the use of multiple counterparties with high credit standards. INVENTORIES Inventories are valued at the lower of cost or estimated net realizable value. Generally, raw material inventory is valued using the moving average cost method. Work-in-process inventory may include material costs, labor and allocable overhead costs. The majority of finished goods inventory consists of technology and security products, inspection systems and baggage scanning equipment. Inventory is evaluated against historical or planned usage to determine appropriate provisions for obsolete inventory. GOODWILL 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 is tested for impairment at the reporting unit level on an annual basis and more frequently if events or circumstances indicate that the carrying value of the reporting unit may not be recoverable. Our policy is to perform our annual goodwill impairment evaluation as of the first day of the fourth quarter of our fiscal year. During fiscal 2025 and 2024, we had eight reporting units for the purpose of testing goodwill for impairment. Goodwill is evaluated for impairment either under a qualitative or a quantitative approach, depending on the facts and circumstances of a reporting unit, consideration of the excess of a reporting unit’s fair value over its carrying amount in previous assessments and changes in business environment. When performing a qualitative assessment, we consider factors including, but not limited to, current macroeconomic conditions, industry and market conditions, cost factors, financial performance and other relevant events to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If we determine that it is more likely than not that a reporting unit’s fair value is less than its carrying value, a quantitative goodwill impairment test is performed. When performing a quantitative goodwill impairment test, the reporting unit carrying value is compared to its fair value. Goodwill is deemed impaired if the reporting unit carrying value exceeds its fair value. The impairment loss is recognized for the amount by which the carrying value exceeds its fair value. We estimate the fair value of each reporting unit using Level 3 inputs when a quantitative analysis is performed. These analyses rely on significant judgments and assumptions including, but not limited to expected future cash flows, weighted-average cost of capital, discount rates, expected long-term growth rates, operating margins and selection of guideline public companies. INTANGIBLE ASSETS Acquired intangible assets with finite lives and internally developed software are amortized using the method that best reflects how their economic benefits are utilized or, if a pattern of economic benefits cannot be reliably determined, on a straight-line basis over their estimated useful lives. Program intangible assets are amortized over their respective estimated useful lives in proportion to the pattern of economic benefit based on expected future discounted cash flows. Leidos Holdings, Inc. Annual Report 71 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Customer relationships and software and technology intangible assets are amortized either on a straight-line basis over their estimated useful lives or over their respective estimated useful lives in proportion to the pattern of economic benefit based on expected future discounted cash flows, as deemed appropriate. Backlog intangible assets are amortized on a straight-line basis over their estimated useful lives. Intangible assets with finite lives are amortized over the following periods: Estimated useful lives (in years) Software and technology 3 - 15 Programs 6 - 13 Customer relationships 10 Backlog 1 Intangible assets with finite lives are assessed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets with indefinite lives are not amortized but are assessed for impairment at the beginning of the fourth quarter and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. PROPERTY, PLANT AND EQUIPMENT Purchases of property, plant and equipment, including purchases of software and software licenses, as well as costs associated with major renewals and improvements are capitalized. Maintenance, repairs and minor renewals and improvements are expensed as incurred. Construction-in-progress (“CIP”) is used to accumulate all costs for projects that are not yet complete. CIP balances are transferred to the appropriate asset account when the asset is ready for its intended use. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization is removed from the accounts and any resulting gain or loss is recognized. Depreciation is recognized using the methods and estimated useful lives as follows: Depreciation method Estimated useful lives (in years) Computers and other equipment Straight-line or declining-balance 2 - 15 Buildings Straight-line Not to exceed 40 Building improvements and leasehold improvements Straight-line Shorter of useful life of asset or remaining lease term Vehicles and transportation equipment Straight-line 3 - 15 Office furniture and fixtures Straight-line or declining-balance 6 - 9 We evaluate our long-lived assets for potential impairment whenever there is evidence that events or changes in circumstances indicate that the carrying value may not be recoverable and the carrying value of the asset exceeds its estimated fair value. LEASES Lessee We have facilities and equipment lease arrangements. An arrangement is determined to be a lease at inception if it conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. ROU assets represent the right to use an underlying asset over the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recorded on the consolidated balance sheet at the lease commencement date based on the present value of the future minimum lease payments over the lease term. We generally do not know the discount rate implicit in our leases; therefore, the discount rate used is our incremental borrowing rate which is determined based on the rate of interest that we would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. An ROU asset is initially measured by the present value of the remaining lease payments, plus initial direct costs and prepaid lease payments, less any lease incentives received before commencement. The remaining lease cost is allocated over the remaining lease term on a straight-line basis unless another systematic or rational basis is more representative of the pattern in which the underlying asset is expected to be used. 72 Leidos Holdings, Inc. Annual Report Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Certain facility leases contain options to renew or extend the terms of the lease which are included in the determination of the ROU assets and lease liabilities when it is reasonably certain that we will exercise the option. Leases may also include variable lease payments such as an escalation clause based on consumer price index rates, maintenance costs and utilities. Variable lease payments that depend on an index or a rate are included in the determination of ROU assets and lease liabilities using the index or rate at the lease commencement date, whereas variable lease payments that do not depend on an index or rate are recorded as lease expense in the period incurred. At January 2, 2026, some of the Company’s equipment leases include residual value guarantees. We use the practical expedient to account for lease and non-lease components together as a single lease. The practical expedient is applied to all material classes of leased assets except for aircraft, for which we account for the lease component and non-lease component separately. The related lease payments on short-term facility and equipment leases are recognized as expense on a straight-line basis over the lease term. ROU assets are evaluated for impairment in a manner consistent with the treatment of other long-lived assets. ROU assets are assessed for potential impairment whenever there is evidence that events or changes in circumstances indicate that the carrying value of the asset may not be recoverable and the carrying amount of the asset exceeds its estimated fair value. This includes an establishment of a plan of abandonment, which occurs when we have committed to a plan to abandon the lease before the end of its previously estimated useful life and there is no expectation that we will re-enter or re-purpose the space. Lessor We are a lessor on certain equipment sales-type and operating lease arrangements with our customers. To be considered lease revenue, the contract must contain a specified asset, we must not have a substantive substitution right, the customer must have the right to direct the use of the specified asset during the period of use and the customer must have the right to obtain substantially all of the economic benefit of the specified asset. Certain arrangements may contain variable payments that depend on an index or rate and are measured using the index or rate on the commencement date. Variable payments that are not included in the net investments are recorded as revenue as incurred. Arrangements may also contain options to renew or extend the performance period. Option periods are included in the lease term if we determine that it is reasonably certain the customer will exercise an option. We have arrangements that contain both lease and non-lease components. We account for them as one unit of account if the timing and pattern of transfer is identical for both the lease and the non-lease components and the lease component would be classified as an operating lease if accounted for separately. If both criteria are met and the predominant component is a lease, then the entire arrangement will be accounted for in accordance with ASC 842, Leases. If we account for an arrangement both as a lease and non-lease component, then the allocation of consideration for each component will be based on the relative standalone sales price. FAIR VALUE MEASUREMENTS The accounting standard for fair value measurements establishes a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: observable inputs such as quoted prices in active markets (Level 1); inputs other than quoted prices in active markets for identical or similar assets or liabilities that are observable either directly or indirectly or quoted prices that are not active (Level 2); and unobservable inputs in which there is little or no market data (e.g., discounted cash flow and other similar pricing models), which requires us to develop our own assumptions about the assumptions that market participants would use in pricing the asset or liability (Level 3). The accounting guidance for fair value measurements requires that we maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The accounting guidance provides for the irrevocable option to elect, on a contract-by-contract basis, to measure certain financial assets and liabilities at fair value at inception of the contract and record any subsequent changes in fair value in earnings. We have not made fair value option elections on any of our financial assets and liabilities. The fair value of financial instruments is determined based on quoted market prices, if available, or management’s best estimate (see “Financial Instruments” below). Leidos Holdings, Inc. Annual Report 73 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Management evaluates its investments for impairment at each balance sheet date. If management determines that an other-than-temporary decline in the fair value of an investment has occurred, an impairment loss is recognized to reduce the investment to its estimated fair value. The income approach, which generally includes Level 2 or Level 3 inputs, is applied to measure the fair value of financial instruments for which there is not an observable market. Our non-financial instruments measured at fair value on a non-recurring basis include goodwill, indefinite-lived intangible assets and long-lived tangible assets. The valuation methods used to determine fair value require a significant degree of management judgment to determine the key assumptions. As such, we generally classify non-financial instruments as either Level 2 or Level 3 fair value measurements. FINANCIAL INSTRUMENTS We are exposed to certain market risks which are inherent in certain transactions entered into during the normal course of business. These transactions include sales or purchase contracts denominated in foreign currencies and exposure to changing interest rates. We may elect to manage our risk to changes in interest rates and foreign currency exchange rates through the use of derivative instruments. For variable rate borrowings, we used fixed interest rate swaps, effectively converting a portion of the variable interest rate payments to fixed interest rate payments. These swaps were designated as cash flow hedges. The fair value of these interest rate swaps was determined based on observed values for the underlying interest rates (Level 2). Our defined benefit plan assets consist of investments in pooled funds that contain investments with values based on quoted market prices, but for which the pools are not valued on a daily quoted market basis (Level 2). STOCK-BASED COMPENSATION We account for stock-based compensation at the grant date based on the fair value of the award and recognize expense over the requisite service period, which is generally the vesting period, net of an estimated forfeiture rate. The fair value of restricted stock awards and performance-based stock awards is based on the closing price of Leidos common stock on the last business day prior to the grant date. The fair value of performance-based stock awards with market conditions is based on using a Monte Carlo simulation. The Black-Scholes-Merton option pricing model is used to estimate the fair value of stock option awards. The model requires management to make estimates about, among other things, employee exercise behavior, forfeiture rates and the expected volatility of Leidos common stock over the expected option term. These judgments directly affect the amount of compensation expense that will ultimately be recognized. FOREIGN CURRENCY The financial statements of consolidated international subsidiaries, for which the functional currency is not the U.S. dollar, are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted average exchange rate over the reporting period for revenues, expenses, gains and losses. Translation adjustments are recorded as accumulated other comprehensive loss in stockholders’ equity. Gains and losses due to movements in foreign currency exchange rates are recognized as “Other income (expense), net” on the consolidated statements of operations. Note 4—Revenues REMAINING PERFORMANCE OBLIGATIONS Remaining performance obligations (“RPO”) represent the expected value of exercised contracts, both funded and unfunded, less revenue recognized to date. RPO does not include unexercised option periods and future potential task orders expected to be awarded under IDIQ contracts, General Services Administration 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. As of January 2, 2026, we had $ 18.5 billion of RPO and expect to recognize approximately 65 % and 82 % over the next 12 months and 24 months, respectively, with the remaining to be recognized thereafter. 74 Leidos Holdings, Inc. Annual Report Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DISAGGREGATION OF REVENUES We disaggregate revenues by customer-type, contract-type and geographic location for each of our reportable segments. These categories represent how the nature, timing and uncertainty of revenues and cash flows are affected. Disaggregated revenues by customer-type were as follows: Year Ended January 2, 2026 (in millions) National Security & Digital Health & Civil Commercial & International Defense Systems Total DoW and U.S. Intelligence Community $ 5,457 $ 970 $ 27 $ 1,972 $ 8,426 Other U.S. government agencies (1) 1,985 4,003 388 82 6,458 Commercial and non-U.S. customers 121 80 1,897 125 2,223 Total $ 7,563 $ 5,053 $ 2,312 $ 2,179 $ 17,107 Year Ended January 3, 2025 (in millions) National Security & Digital Health & Civil Commercial & International Defense Systems Total DoW and U.S. Intelligence Community $ 5,074 $ 1,032 $ 44 $ 1,812 $ 7,962 Other U.S. government agencies (1) 2,115 3,899 379 95 6,488 Commercial and non-U.S. customers 115 63 1,825 123 2,126 Total $ 7,304 $ 4,994 $ 2,248 $ 2,030 $ 16,576 Year Ended December 29, 2023 (in millions) National Security & Digital Health & Civil Commercial & International Defense Systems Total DoW and U.S. Intelligence Community $ 4,799 $ 1,059 $ 35 $ 1,684 $ 7,577 Other U.S. government agencies (1) 2,212 3,082 319 121 5,734 Commercial and non-U.S. customers 131 61 1,762 74 2,028 Total $ 7,142 $ 4,202 $ 2,116 $ 1,879 $ 15,339 (1) Includes federal government agencies other than the DoW and U.S. Intelligence Community, as well as state and local government agencies. The majority of our revenues are generated from U.S. government contracts, either as a prime contractor or as a subcontractor to other contractors. Revenues from the U.S. government can be adversely impacted by spending caps or changes in budgetary priorities of the U.S. government, as well as delays in program start dates or the award of a contract. Disaggregated revenues by contract-type were as follows: Year Ended January 2, 2026 (in millions) National Security & Digital Health & Civil Commercial & International Defense Systems Total Cost-reimbursement and fixed-price-incentive-fee $ 4,127 $ 1,807 $ 380 $ 1,292 $ 7,606 Firm-fixed-price 2,109 3,057 1,442 739 7,347 Time-and-materials and fixed-price-level-of-effort 1,327 189 490 148 2,154 Total $ 7,563 $ 5,053 $ 2,312 $ 2,179 $ 17,107 Leidos Holdings, Inc. Annual Report 75 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended January 3, 2025 (in millions) National Security & Digital Health & Civil Commercial & International Defense Systems Total Cost-reimbursement and fixed-price-incentive-fee $ 3,870 $ 1,787 $ 358 $ 1,290 $ 7,305 Firm-fixed-price 2,023 2,990 1,454 587 7,054 Time-and-materials and fixed-price-level-of-effort 1,411 217 436 153 2,217 Total $ 7,304 $ 4,994 $ 2,248 $ 2,030 $ 16,576 Year Ended December 29, 2023 (in millions) National Security & Digital Health & Civil Commercial & International Defense Systems Total Cost-reimbursement and fixed-price-incentive-fee $ 3,808 $ 2,015 $ 345 $ 1,173 $ 7,341 Firm-fixed-price 2,040 2,006 1,351 567 5,964 Time-and-materials and fixed-price-level-of-effort 1,294 181 420 139 2,034 Total $ 7,142 $ 4,202 $ 2,116 $ 1,879 $ 15,339 Cost-reimbursement and FPIF contracts are generally lower risk and have lower profits. T&M and FPLOE contracts are also lower risk, but profits may vary depending on actual labor costs compared to negotiated contract billing rates. FFP contracts offer the potential for higher profits while increasing the exposure to risk of cost overruns. Disaggregated revenues by geographic location were as follows: Year Ended January 2, 2026 (in millions) National Security & Digital Health & Civil Commercial & International Defense Systems Total United States $ 7,520 $ 5,044 $ 993 $ 2,146 $ 15,703 International 43 9 1,319 33 1,404 Total $ 7,563 $ 5,053 $ 2,312 $ 2,179 $ 17,107 Year Ended January 3, 2025 (in millions) National Security & Digital Health & Civil Commercial & International Defense Systems Total United States $ 7,274 $ 4,989 $ 961 $ 1,982 $ 15,206 International 30 5 1,287 48 1,370 Total $ 7,304 $ 4,994 $ 2,248 $ 2,030 $ 16,576 Year Ended December 29, 2023 (in millions) National Security & Digital Health & Civil Commercial & International Defense Systems Total United States $ 7,105 $ 4,197 $ 852 $ 1,861 $ 14,015 International 37 5 1,264 18 1,324 Total $ 7,142 $ 4,202 $ 2,116 $ 1,879 $ 15,339 Our international business operations, primarily located in Australia and the UK, are subject to additional and different risks than our U.S. business. Failure to comply with U.S. government laws and regulations applicable to international business, such as the Foreign Corrupt Practices Act or U.S. export control regulations, could have an adverse impact on our business with the U.S. government. 76 Leidos Holdings, Inc. Annual Report Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In some countries, there is an increased chance for economic, legal or political changes that may adversely affect the performance of our services, sales of products or repatriation of profits. International transactions can also involve increased financial and legal risks arising from foreign exchange variability, imposition of tariffs or additional taxes and restrictive trade policies and delays or failure to collect amounts due to differing legal systems. Revenues by contract-type, customer-type and geographic location exclude lease income of $ 67 million, $ 86 million and $ 99 million for fiscal 2025, 2024 and 2023, respectively (see “Note 10—Leases”). CONTRACT ASSETS AND LIABILITIES Performance obligations are satisfied either over time as work progresses or at a point in time. Firm-fixed-price contracts are typically billed to the customer using milestone payments while cost-reimbursable and time and materials contracts are typically billed to the customer on a monthly or bi-weekly basis as indicated by the negotiated billing terms and conditions of the contract. As a result, the timing of revenue recognition, customer billings and cash collections for each contract results in a net contract asset or liability at the end of each reporting period. Contract assets consist of unbilled receivables, which is the amount of revenue recognized that exceeds the amount billed to the customer. Unbilled receivables exclude amounts billable where the right to consideration is unconditional and not billed. Contract liabilities consist of deferred revenue, which represents cash advances received prior to performance for programs and billings in excess of revenue recognized. The components of contract assets and contract liabilities consisted of the following: (in millions) Balance sheet line item January 2, 2026 January 3, 2025 Contract assets - current: Unbilled receivables Receivables, net $ 894 $ 842 Contract liabilities - current: Deferred revenue (1) Accounts payable and accrued liabilities $ 348 $ 333 Contract liabilities - non-current: Deferred revenue (1) Other long-term liabilities $ 6 $ 10 (1) Certain contracts record revenue on a net contract basis, and therefore, the respective deferred revenue balance will not fully convert to revenue. The increase in unbilled receivables was primarily due to revenue recognized on certain contracts, partially offset by the timing of billings on certain contracts. The increase in deferred revenue was primarily due to the timing of advanced payments from customers, offset by revenue recognized during the period. Revenue recognized during fiscal 2025 and 2024 of $ 233 million and $ 278 million, respectively, was included as a contract liability at January 3, 2025, and December 29, 2023, respectively. There were no impairment losses recognized on contract assets during fiscal 2025, 2024 and 2023. Note 5—Acquisitions and Divestitures ACQUISITIONS We may acquire businesses as part of our growth strategy to provide new or enhance existing capabilities and offerings to customers. During fiscal 2025, we completed the acquisition of Savanna Industries, Inc. ("Kudu Dynamics"). Kudu Dynamics Acquisition On May 23, 2025 (the "Purchase Date"), we completed the acquisition of Kudu Dynamics for a final purchase consideration of $ 293 million, net of $ 29 million of cash acquired. The Kudu Dynamics business provides artificial intelligence enabled cyber capabilities for defense, intelligence and homeland security customers. The preliminary goodwill recognized of $ 231 million represents intellectual capital and the acquired assembled workforce, neither of which qualify for recognition as a separate intangible asset. All of the goodwill recognized is tax deductible. Leidos Holdings, Inc. Annual Report 77 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the final fair value of intangible assets acquired at the Purchase Date and the related weighted average amortization period: Weighted Amortization Period Fair Value (in years) (in millions) Programs 7 $ 60 Backlog 1 12 Total $ 72 As of January 2, 2026 we had not finalized the determination of fair values allocated to assets and liabilities, including, but not limited to, accounts receivables, accounts payable and accrued liabilities and other long-term liabilities. For fiscal 2025, $ 60 million of revenues related to Kudu Dynamics were recognized within the National Security & Digital reportable segment. Integration Costs The following expenses were incurred related to the Company’s acquisitions: Year Ended (in millions) January 2, 2026 January 3, 2025 December 29, 2023 Integration costs $ 4 $ 10 $ 19 These integration costs have been recorded across our reportable segments and to Corporate and presented in “Acquisition, integration and restructuring costs” on the consolidated statement of operations. DIVESTITURES On October 31, 2025, the Company completed the divestiture of an immaterial business not aligned to the Company's long term strategy within the Commercial & International reportable segment. The final sales price was approximately $ 14 million and net assets of $ 9 million were divested as a result of the transaction. On October 20, 2023, we disposed of an immaterial business within our Defense Systems reportable segment. The final sales price was approximately $ 2 million and net assets of $ 7 million were divested as a result of the transaction. Note 6—Receivables The components of receivables, net consisted of the following: (in millions) January 2, 2026 January 3, 2025 Billed and billable receivables $ 1,828 $ 1,820 Unbilled receivables 894 842 Allowance for credit losses ( 14 ) ( 17 ) $ 2,708 $ 2,645 78 Leidos Holdings, Inc. Annual Report Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7—Inventory The components of inventory, net consisted of the following: (in millions) January 2, 2026 January 3, 2025 Raw materials $ 253 $ 217 Work-in-process 40 36 Finished goods 49 62 $ 342 $ 315 Note 8—Goodwill and Intangible Assets GOODWILL The following table presents changes in the carrying amount of goodwill by reportable segment: (in millions) National Security & Digital Health & Civil Commercial & International Defense Systems Total Goodwill at December 29, 2023 (1) $ 2,758 $ 1,366 $ 800 $ 1,188 $ 6,112 Foreign currency translation adjustments — — ( 28 ) — ( 28 ) Goodwill at January 3, 2025 (1) 2,758 1,366 772 1,188 6,084 Acquisition of a business 231 — — — 231 Divestiture of a business — — ( 7 ) — ( 7 ) Foreign currency translation adjustments — — 34 — 34 Goodwill at January 2, 2026 (1) $ 2,989 $ 1,366 $ 799 $ 1,188 $ 6,342 (1) Carrying amount includes accumulated impairment loss of $ 596 million within the Commercial & International segment. Operations of the Security Enterprise Solutions (“SES”) reporting unit 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. As a result, in fiscal 2023, we conducted a quantitative goodwill impairment analysis and our estimates led us to determine that the carrying value of the SES reporting unit exceeded its estimated fair value (see “Note 11—Fair Value Measurements”). We recorded a non-cash goodwill impairment charge of $ 596 million for the SES reporting unit as of fiscal 2023, within the Commercial & International reportable segment. In the fourth quarter of fiscal 2025 and 2024, we performed a quantitative analysis for the SES reporting unit and concluded that no further impairment was necessary as the fair value of the reporting unit exceeded the carrying value. In the fourth quarter of fiscal 2025, 2024 and 2023, we performed a qualitative analysis for certain reporting units which determined that it was more likely than not that the fair values of these reporting units were in excess of the individual reporting units’ carrying values. In the event that there are significant unfavorable changes to the forecasted cash flows, forecasted revenue, terminal growth rates or the cost of capital used in the fair value estimates, we may be required to record an additional impairment of goodwill at a future date. Leidos Holdings, Inc. Annual Report 79 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTANGIBLE ASSETS Intangible assets, net consisted of the following: January 2, 2026 January 3, 2025 (in millions) Gross carrying value Accumulated amortization Net carrying value Gross carrying value Accumulated amortization Net carrying value Finite-lived intangible assets: Programs $ 1,748 $ ( 1,391 ) $ 357 $ 1,686 $ ( 1,293 ) $ 393 Software and technology 264 ( 187 ) 77 261 ( 165 ) 96 Customer relationships 53 ( 34 ) 19 52 ( 28 ) 24 Backlog 12 ( 7 ) 5 — — — Total finite-lived intangible assets 2,077 ( 1,619 ) 458 1,999 ( 1,486 ) 513 Indefinite-lived intangible assets: Trade names — — — 4 — 4 Total intangible assets $ 2,077 $ ( 1,619 ) $ 458 $ 2,003 $ ( 1,486 ) $ 517 Our strategic decisions regarding SES’ product offerings and operating regions (see the goodwill discussion above) caused certain technology, customer relationships and in-process research and development ("IPR&D") intangible assets to be abandoned and the carrying values of certain program intangible assets to become unrecoverable. As a result, we recognized intangible asset impairment charges of $ 79 million for fiscal 2023, which included $ 33 million for IPR&D intangible assets. The impairment was recorded to “Asset impairment charges” in the consolidated statements of operations within the Commercial & International reportable segment. In the event that we are required to make an additional impairment of goodwill at a future date or if other events occur that negatively impact these intangible assets, we may also be required to record an additional impairment of intangible assets at that time. Amortization expense related to intangible assets was $ 130 million, $ 147 million and $ 202 million for fiscal 2025, 2024 and 2023, respectively. The estimated annual amortization expense related to finite-lived intangible assets as of January 2, 2026, is as follows: Fiscal year ending (in millions) 2026 $ 111 2027 85 2028 76 2029 63 2030 50 2031 and thereafter 73 $ 458 Actual amortization expense in future periods could differ from these estimates as a result of future acquisitions, divestitures, impairments and other factors. 80 Leidos Holdings, Inc. Annual Report Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9—Property, Plant and Equipment Property, plant and equipment, net consisted of the following: (in millions) January 2, 2026 January 3, 2025 Computers and other equipment $ 474 $ 473 Leasehold improvements 590 567 Vehicles and transportation equipment 400 321 Buildings and improvements 137 137 Office furniture and fixtures 79 78 Land 17 17 Construction-in-progress 84 107 1,781 1,700 Less: accumulated depreciation and amortization ( 820 ) ( 709 ) $ 961 $ 991 Depreciation expense was $ 160 million, $ 143 million and $ 129 million for fiscal 2025, 2024 and 2023, respectively. Note 10—Leases LESSEE ROU assets and lease liabilities consisted of the following: (in millions) Balance sheet line item January 2, 2026 January 3, 2025 ROU assets: Finance leases Property, plant and equipment, net $ 50 $ 69 Operating leases Operating lease right-of-use assets, net 526 560 $ 576 $ 629 Current lease liabilities: Finance leases Short-term debt and current portion of long-term debt $ 20 $ 19 Operating leases Accounts payable and accrued liabilities 107 123 $ 127 $ 142 Non-current lease liabilities: Finance leases Long-term debt, net of current portion $ 34 $ 54 Operating leases Operating lease liabilities 587 621 $ 621 $ 675 During fiscal 2025 and 2024, we reduced our leased space by exiting and consolidating underutilized buildings as part of an ongoing facility rationalization effort. We used discounted cash flow models to estimate the fair values of the affected assets and as a result, we recorded impairments of ROU and other assets in the amount of $ 5 million and $ 11 million for fiscal 2025 and 2024, respectively. The impairment charges were recorded across our reportable segments. In fiscal 2024, we took occupancy of our newly constructed facility in San Diego, CA. As a result we recorded $ 117 million of ROU assets and $ 169 million of lease liabilities. Leidos Holdings, Inc. Annual Report 81 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Total lease cost for the periods presented consisted of the following: Year Ended (in millions) January 2, 2026 January 3, 2025 December 29, 2023 Finance lease cost: Amortization of ROU assets $ 20 $ 20 $ 18 Interest on lease liabilities 3 4 4 23 24 22 Operating lease cost (1) 145 143 148 Variable lease cost 35 35 35 Short-term lease cost 2 4 2 Less: Sublease income ( 3 ) — — Total lease cost $ 202 $ 206 $ 207 (1) Includes ROU lease expense of $ 115 million, $ 119 million and $ 124 million for fiscal 2025, 2024 and 2023, respectively. Lease costs and sublease income are included in “Cost of revenues” and “Selling, general and administrative expenses” within the consolidated statements of operations. Lease terms and discount rates related to leases were as follows: Year Ended January 2, 2026 January 3, 2025 December 29, 2023 Weighted-average remaining lease term (in years): Finance leases 3.9 4.4 5.2 Operating leases 9.5 9.9 7.3 Weighted-average discount rate: Finance leases 4.3 % 4.7 % 4.8 % Operating leases 4.6 % 4.5 % 3.7 % Other information related to leases was as follows: Year Ended (in millions) January 2, 2026 January 3, 2025 December 29, 2023 Cash paid for amounts included in measurement of lease liabilities: Operating cash related to finance leases $ 3 $ 4 $ 4 Operating cash related to operating leases 165 163 167 Financing cash flows related to finance leases 19 18 17 ROU assets obtained in exchange for lease liabilities: Finance lease liabilities $ — $ — $ 63 Operating lease liabilities 69 236 97 82 Leidos Holdings, Inc. Annual Report Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Future minimum lease commitments of our finance and operating leases on an undiscounted basis, reconciled to the respective lease liability at January 2, 2026, were as follows: Fiscal Year Ending (in millions) Finance lease commitments Operating lease commitments 2026 $ 22 $ 134 2027 15 106 2028 5 102 2029 5 88 2030 5 80 2031 and thereafter 6 376 Total undiscounted cash flows 58 886 Less: imputed interest ( 4 ) ( 192 ) Lease liability as of January 2, 2026 $ 54 $ 694 LESSOR As of January 2, 2026, and January 3, 2025, we had a total net investment in sales-type leases, which relates to lease payment receivables, of $ 79 million and $ 94 million, respectively. The current and non-current portions of net investment in sales-type leases are included within “Other current assets” and “Other long-term assets”, respectively, on the consolidated balance sheets. The components of lease income were as follows: Year Ended (in millions) Statement of operations line item January 2, 2026 January 3, 2025 December 29, 2023 Sales-type leases: Selling price at lease commencement Revenues $ 44 $ 55 $ 51 Cost of underlying asset Cost of revenues ( 33 ) ( 40 ) ( 41 ) Operating income 11 15 10 Interest income on lease receivables Revenues 2 5 9 13 20 19 Operating lease income Revenues 21 26 39 Total lease income $ 34 $ 46 $ 58 As of January 2, 2026, undiscounted cash flows for sales-type and operating leases for the next five years are as follows: Fiscal Year Ending (in millions) Sales-type leases Operating-type leases 2026 $ 43 $ 2 2027 27 1 2028 10 1 2029 1 — Total undiscounted cash flows $ 81 $ 4 Present value of lease payments as lease receivables 79 Difference between undiscounted cash flows and discounted cash flows $ 2 Leidos Holdings, Inc. Annual Report 83 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11—Fair Value Measurements As of January 3, 2025, our derivatives primarily consisted of the cash flow interest rate swaps on $ 500 million of the variable rate senior unsecured term loan (see “Note 12—Derivative Instruments”). The carrying value and fair value of our cash flow interest rate swap was $ 4 million. The fair value of the cash flow interest rate swaps was determined based on observed values for underlying interest rates on the one-month Secured Overnight Financing Rate ("SOFR") rate as of January 3, 2025 (Level 2 inputs). The $ 500 million interest rate swaps matured in August 2025. Financial instruments measured on a recurring basis at fair value also include our defined benefit plan assets (Level 2 inputs). See “Note 19—Retirement Plans” for further details on these investments. The carrying amounts of our financial instruments, other than derivatives, which include cash equivalents, accounts receivable, accounts payable and accrued expenses, are reasonable estimates of their related fair values. The carrying value of our notes receivable of $ 15 million and $ 16 million as of January 2, 2026, and January 3, 2025, respectively, approximates fair value as the stated interest rates within the agreements are consistent with the current market rates used in notes with similar terms in the market (Level 2 inputs). Our notes receivable are included within “Other current assets” and "Other long-term assets" on the consolidated balance sheets. As of January 2, 2026, and January 3, 2025, the fair value of debt was $ 4.7 billion and $ 4.5 billion, respectively, and the carrying amount was $ 4.6 billion and $ 4.7 billion, respectively (see “Note 13—Debt”). The fair value of debt is determined based on current interest rates available for debt with terms and maturities similar to our existing debt arrangements (Level 2 inputs). In fiscal 2023, we recorded impairment charges of SES’ goodwill (see “Note 8—Goodwill and Intangible Assets”). The fair values of the assets and liabilities of the SES reporting unit were determined using a blended approach, including discounted cash flow models and market earnings multiples. The market approach estimates fair value based on profitability and valuation metrics for peer companies and applies a multiple to the reporting unit’s operating performance. The income approach estimates fair value by discounting the reporting unit’s estimated future cash flows using a weighted-average cost of capital reflecting current market conditions as well as the risk profile of the reporting unit. Future cash flows are based on estimates of economic and market assumptions made using the best judgment of management, including growth rates in revenue and margins, and future changes in tax rates and cash expenditures. Other significant assumptions and estimates include estimates of future capital expenditures, terminal value growth rates, and changes in future working capital requirements. The fair value of the SES reporting unit was determined using Level 3 inputs. On May 23, 2025, the assets and liabilities acquired in connection with the Kudu Dynamics acquisition were measured at fair value on a non-recurring basis using Level 3 inputs (see "Note 5—Acquisitions and Divestitures"). Note 12—Derivative Instruments The fair value of the interest rate swaps was as follows: (in millions) Balance sheet line item January 2, 2026 January 3, 2025 Cash flow interest rate swaps Other current assets $ — $ 4 The cash flows associated with the interest rate swaps are classified as operating activities in the consolidated statements of cash flows. CASH FLOW HEDGES As of January 3, 2025, we had 2.96 % fixed interest rate swap agreements to hedge the cash flows of $ 500 million of the variable rate senior unsecured term loan (the “Variable Rate Loan”). The objective of these instruments was to reduce variability in the forecasted interest payments of the Variable Rate Loan. Under the terms of the interest rate swap agreements, we received monthly variable interest payments based on the one-month SOFR and paid interest at a fixed rate. These interest rate swap agreements matured in August 2025. The interest rate swap transactions were accounted for as cash flow hedges. The gain/loss on the swaps was reported as a component of other comprehensive income (loss) and was reclassified into earnings when the interest payments on the underlying hedged items impacted earnings. A qualitative assessment of hedge effectiveness was performed on a quarterly basis. 84 Leidos Holdings, Inc. Annual Report Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The effect of the cash flow hedges on other comprehensive income (loss) and earnings for the periods presented was as follows: Year Ended (in millions) January 2, 2026 January 3, 2025 December 29, 2023 Total interest expense, net presented in the consolidated statements of operations in which the effects of cash flow hedges are recorded $ 203 $ 193 $ 212 Amount recognized in other comprehensive income 1 5 6 Amount reclassified from accumulated other comprehensive loss to interest expense, net ( 4 ) ( 11 ) ( 15 ) Note 13—Debt Debt consisted of the following: (in millions) Stated interest rate Effective interest rate January 2, 2026 January 3, 2025 Senior unsecured term loan: $ 1,000 million term loan, due March 2028 5.12 % 5.27 % $ 500 $ 1,000 Senior unsecured notes: $ 500 million notes, due May 2025 3.63 % 3.76 % — 500 $ 750 million notes, due May 2030 4.38 % 4.50 % 750 750 $ 1,000 million notes, due February 2031 2.30 % 2.38 % 1,000 1,000 $ 500 million notes, due March 2032 5.40 % 5.42 % 500 — $ 250 million notes, due July 2032 7.13 % 7.43 % 250 250 $ 750 million notes, due March 2033 5.75 % 5.81 % 750 750 $ 300 million notes, due July 2033 5.50 % 5.88 % 161 161 $ 500 million notes, due March 2035 5.50 % 5.55 % 500 — $ 300 million notes, due December 2040 5.95 % 6.03 % 218 218 Finance leases due on various dates through fiscal 2032 Various 2.28 %- 6.31 % 54 73 Less: unamortized debt discounts and deferred debt issuance costs ( 35 ) ( 32 ) Total long-term debt 4,648 4,670 Less current portion ( 20 ) ( 618 ) Total long-term debt, net of current portion $ 4,628 $ 4,052 REVOLVING CREDIT FACILITY We have a $ 1.0 billion senior unsecured revolving facility (the “Revolving Facility”). The Revolving Facility will mature in March 2028 and is subject to an annual commitment fee rate of 0.125 % on the unused credit availability and permits two additional one-year extensions subject to lender consent. Principal payments are made quarterly, with the majority of the principal due at maturity. As of January 2, 2026, and January 3, 2025, there were no borrowings outstanding under the Revolving Facility. SENIOR NOTES On February 20, 2025, we issued and sold $ 500 million senior notes maturing in March 2032 (the "2032 Notes") and $ 500 million senior notes maturing in March 2035 (the "2035 Notes", and together with the 2032 Notes, the "Notes"). The Notes are senior unsecured obligations issued by Leidos, Inc. and guaranteed by Leidos Holdings, Inc. The annual interest rates for the 2032 Notes and the 2035 Notes are 5.40 % and 5.50 %, respectively, and the interest is payable on a semi-annual basis. In connection with the issuance of the Notes, $ 10 million of debt issuance costs and discount were recognized, which were recorded as an offset against the carrying value of debt. The proceeds from the Notes were used to retire the $ 500 million Leidos Holdings, Inc. Annual Report 85 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS senior unsecured notes due May 2025 and repurchase $ 500 million outstanding shares of common stock in connection with the Accelerated Share Repurchase ("ASR") agreement (see "Note 16—Earnings Per Share"). COMMERCIAL PAPER We have a commercial paper program in which the Company may issue short-term unsecured commercial paper notes (“Commercial Paper Notes”). The proceeds will be used for general corporate purposes, including working capital, capital expenditures, acquisitions and share repurchases. The Commercial Paper Notes are issued in minimum denominations of $ 0.25 million and have maturities of up to 397 days from the date of issuance. The Commercial Paper Notes will bear either a stated or floating interest rate, if interest bearing, or will be sold at a discount from the face amount. As of January 2, 2026, and January 3, 2025, we did not have any Commercial Paper Notes outstanding. COVENANTS The senior unsecured term loan, senior unsecured notes and Revolving Facility are fully and unconditionally guaranteed and contain certain customary restrictive covenants, including among other things, restrictions on our ability to create liens and enter into sale and leaseback transactions under certain circumstances. The financial covenants in the Credit Agreement require that we maintain, as of the last day of each fiscal quarter, a ratio of adjusted consolidated total debt to consolidated EBITDA of not more than 3.75 to 1.00, subject to increases to 4.50 to 1.00 for four fiscal quarters following a material acquisition, and a ratio of EBITDA to consolidated interest expense of not less than 3.50 to 1.00. We were in compliance with all covenants as of January 2, 2026. PRINCIPAL PAYMENTS Future minimum payments of debt are as follows: Fiscal Year Ending (in millions) 2026 $ 20 2027 14 2028 504 2029 5 2030 755 2031 and thereafter 3,385 Total principal payments 4,683 Less: unamortized debt discount and issuance costs ( 35 ) Total long-term debt $ 4,648 86 Leidos Holdings, Inc. Annual Report Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 14—Accumulated Other Comprehensive Income (Loss) Changes in the components of Accumulated Other Comprehensive Income (Loss) (“AOCI”) were as follows: (in millions) Foreign currency translation adjustments Unrecognized gain (loss) on derivative instruments Pension adjustments Total AOCI Balance at December 30, 2022 $ ( 73 ) $ 13 $ ( 13 ) $ ( 73 ) Other comprehensive income (loss) 36 6 ( 1 ) 41 Taxes ( 2 ) 1 — ( 1 ) Reclassification from AOCI — ( 15 ) — ( 15 ) Balance at December 29, 2023 ( 39 ) 5 ( 14 ) ( 48 ) Other comprehensive income (loss) ( 64 ) 5 2 ( 57 ) Taxes 5 2 ( 1 ) 6 Reclassification from AOCI — ( 11 ) — ( 11 ) Balance at January 3, 2025 ( 98 ) 1 ( 13 ) ( 110 ) Other comprehensive income (loss) 74 1 ( 3 ) 72 Taxes ( 8 ) ( 1 ) 1 ( 8 ) Reclassification from AOCI — ( 4 ) — ( 4 ) Balance at January 2, 2026 $ ( 32 ) $ ( 3 ) $ ( 15 ) $ ( 50 ) Reclassifications for unrecognized gain (loss) on derivative instruments associated with outstanding debt are recorded in “Interest expense, net” on the consolidated statements of operations. See “Note 12—Derivative Instruments” for more information on our interest rate swap agreements. Leidos Holdings, Inc. Annual Report 87 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 15—Composition of Certain Financial Statement Captions Balance Sheets (in millions) January 2, 2026 January 3, 2025 Other current assets: Fulfillment costs and project assets (1) $ 83 $ 93 Other (2) 573 432 $ 656 $ 525 Other long-term assets: (3) Fulfillment costs and project assets (1) $ 30 $ 16 Other (2) 314 305 $ 344 $ 321 Accounts payable and accrued liabilities: (4) Accrued liabilities $ 734 $ 883 Accounts payable 627 611 Deferred revenue 348 333 Other (2) 279 304 $ 1,988 $ 2,131 Accrued payroll and employee benefits: Accrued vacation $ 358 $ 366 Accrued bonuses 177 164 Salaries and amounts withheld from employees’ compensation 284 281 $ 819 $ 811 (1) For the year ended January 2, 2026, and January 3, 2025, $ 346 million and $ 328 million, respectively, of amortization was recognized related to fulfillment costs and project assets. (2) Balance represents items that are not individually significant to disclose separately. (3) For the year ended January 2, 2026, we disaggregated "Deferred tax assets" from "Other long-term assets" on the consolidated balance sheets. As a result, the prior year activity has been reclassified to conform with the current year presentation. (4) For the year ended January 3, 2025, we recast "Accounts payable and accrued liabilities" on the consolidated balance sheets to reflect a change in accounting policy (see "Note 3—Summary of Significant Accounting Policies"). Note 16—Earnings Per Share Basic EPS is computed by dividing net income attributable to Leidos common stockholders by the basic weighted average number of shares outstanding. Diluted EPS is calculated to give effect to all potentially dilutive common shares that were outstanding during the reporting period. The dilutive effect of outstanding equity-based compensation awards is reflected in diluted EPS by application of the treasury stock method, only in periods in which such effect would have been dilutive for the period. We issue unvested stock awards that have forfeitable rights to dividends or dividend equivalents. These stock awards are dilutive common share equivalents subject to the treasury stock method. 88 Leidos Holdings, Inc. Annual Report Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The weighted average number of shares used to compute basic and diluted EPS attributable to Leidos stockholders were: Year Ended (in millions) January 2, 2026 January 3, 2025 December 29, 2023 Basic weighted average number of shares outstanding 128 134 137 Dilutive common share equivalents—stock options and other stock awards 2 2 1 Diluted weighted average number of shares outstanding 130 136 138 Anti-dilutive stock-based awards are excluded from the weighted average number of shares outstanding used to compute diluted EPS. The total number of outstanding stock options and vesting stock awards that were anti-dilutive was less than 0.5 million for both fiscal 2025 and 2024, and was 1 million for fiscal 2023. SHARE REPURCHASES 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. All repurchased shares were immediately retired. 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. The repurchases were recorded to “Additional paid-in capital” in the consolidated balance sheets. All shares delivered were immediately retired. Note 17—Stock-Based Compensation PLAN SUMMARIES As of January 2, 2026, we had stock-based compensation awards outstanding under the following plans: the 2017 Omnibus Incentive Plan and the 2006 Employee Stock Purchase Plan, as amended (“ESPP”). We issue new shares upon the vesting of stock units or exercising of stock options under these plans. The 2017 Omnibus Incentive Plan provides Leidos and its affiliates’ employees, directors and consultants the opportunity to receive various types of stock-based compensation awards, such as stock options, restricted stock units and performance-based awards, as well as cash awards. We grant service-based awards that generally vest or become exercisable 33 % a year over three years , 25 % a year over four years or cliff vest in three years . As of January 2, 2026, 2.7 million shares of Leidos’ stock were reserved for future issuance under the 2017 Omnibus Incentive Plan. We offer eligible employees the opportunity to defer restricted stock units into an equity-based deferred equity compensation plan, the Key Executive Stock Deferral Plan (“KESDP”). Prior to 2013, we offered an additional opportunity for deferrals into the Management Stock Compensation Plan (“MSCP”). Benefits from these plans are payable in shares of Leidos’ stock that are held in a trust for the purpose of funding shares to the plans’ participants. Restricted stock units deferred under the KESDP are counted against the total shares available for future issuance under the 2017 Omnibus Incentive Plan. All awards under the MSCP are fully vested and the plan does not provide for a maximum number of shares available for future issuance. Our ESPP allows eligible employees to purchase shares of Leidos’ stock at a discount on the date of purchase. During fiscal 2025, 2024 and 2023, the discount was 10 % of the fair market value on the date of purchase. During fiscal 2025, 2024 and 2023, $ 57 million, $ 52 million and $ 48 million, respectively, was received from ESPP plan participants for the issuance of Leidos’ stock. A total of 1.5 million shares remain available for future issuance under the ESPP. Leidos Holdings, Inc. Annual Report 89 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock-based compensation and related tax benefits recognized under all plans were as follows: Year Ended (in millions) January 2, 2026 January 3, 2025 December 29, 2023 Total stock-based compensation expense $ 95 $ 85 $ 77 Tax benefits recognized from stock-based compensation 18 17 17 STOCK OPTIONS Stock options are granted with exercise prices equal to the fair market value of Leidos’ common stock using the closing price on the business day prior to the grant date and for terms not greater than ten years . Stock options have a term of seven years and a vesting period of three or four years , except for stock options granted to our outside directors, which have a vesting period of the earlier of one year from grant date or the next annual meeting of stockholders following grant date. The fair value of the stock option awards is estimated on the date of grant using the Black-Scholes-Merton option-pricing model. The fair value of the stock option awards to employees are expensed on a straight-line basis over the vesting period of three or four years , except for stock options granted to our outside directors, which is recognized over the vesting period of one year or less. During fiscal 2025, 2024 and 2023, we used a blended approach to measure expected volatility that is based on our weighted average historical and implied volatility. The risk-free rate is derived using the yield curve of a zero-coupon U.S. Treasury bond with a maturity equal to the expected term of the stock option on the grant date. To determine the expected term, we use the midpoint scenario with a one-year grant date filter assumption for outstanding options and we use historical data to estimate forfeitures. The weighted average grant-date fair value and assumptions used to determine fair value of stock options granted for the periods presented were as follows: Year Ended January 2, 2026 January 3, 2025 December 29, 2023 Weighted average grant-date fair value $ 34.99 $ 35.45 $ 25.21 Expected term (in years) 4.3 4.5 4.7 Expected volatility 27.5 % 28.7 % 28.6 % Risk-free interest rate 4.0 % 4.1 % 4.0 % Dividend yield 1.1 % 1.3 % 1.4 % 90 Leidos Holdings, Inc. Annual Report Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock option activity for each of the periods presented was as follows: Shares of stock under stock options Weighted average exercise price Weighted average remaining contractual term Aggregate intrinsic value (in millions) (in years) (in millions) Outstanding at December 30, 2022 1.8 $ 81.45 3.9 $ 42 Options granted 0.3 92.71 Options forfeited or expired — 95.05 Options exercised ( 0.2 ) 53.78 9 Outstanding at December 29, 2023 1.9 $ 86.22 3.7 $ 41 Options granted 0.2 130.81 Options forfeited or expired ( 0.1 ) 106.09 Options exercised ( 0.8 ) 80.93 43 Outstanding at January 3, 2025 1.2 $ 97.53 3.9 $ 58 Options granted 0.3 134.00 Options forfeited or expired — 127.52 Options exercised ( 0.4 ) 85.97 23 Outstanding at January 2, 2026 1.1 $ 110.10 4.1 $ 77 Exercisable at January 2, 2026 0.5 $ 97.21 2.9 $ 46 Vested and expected to vest in the future as of January 2, 2026 1.0 $ 109.90 4 $ 77 As of January 2, 2026, there was $ 7 million of unrecognized compensation cost, net of estimated forfeitures, related to stock options, which is expected to be recognized over a weighted-average period of 1.5 years. Tax benefits from stock options exercised for fiscal 2025, 2024 and 2023 were $ 4 million, $ 7 million and $ 2 million, respectively. RESTRICTED STOCK UNITS AND AWARDS Compensation expense is measured at the grant date fair value and generally recognized over the vesting period of three or four years based upon required service conditions and in some cases revenue or EPS-based performance conditions. Leidos Holdings, Inc. Annual Report 91 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Restricted stock units and awards activity for each of the periods presented was as follows: Shares of stock under stock awards Weighted average grant- date fair value (in millions) Unvested stock awards at December 30, 2022 1.3 $ 98.52 Awards granted 0.6 95.82 Awards forfeited ( 0.1 ) 97.18 Awards vested ( 0.4 ) 97.65 Unvested stock awards at December 29, 2023 1.4 $ 97.71 Awards granted 0.5 133.06 Awards forfeited ( 0.1 ) 107.67 Awards vested ( 0.6 ) 94.94 Unvested stock awards at January 3, 2025 1.2 $ 111.43 Awards granted 0.6 139.50 Awards forfeited — 122.77 Awards vested ( 0.5 ) 106.56 Unvested stock awards at January 2, 2026 1.3 $ 126.60 As of January 2, 2026, there was $ 70 million of unrecognized compensation cost, net of estimated forfeitures, related to restricted stock units, which is expected to be recognized over a weighted average period of 1.7 years. The fair value of restricted stock units that vested in fiscal 2025, 2024 and 2023 was $ 72 million, $ 74 million and $ 40 million, respectively. PERFORMANCE-BASED STOCK AWARDS Performance-based stock awards vest and the stock is issued at the end of a three-year period based upon the achievement of specific performance criteria, with the number of shares ultimately awarded, if any, ranging up to 200 % of the specified target awards. If performance is below the threshold level of performance, no shares will be issued. For awards granted during fiscal 2025, 2024 and 2023, the target number of shares of stock granted under the awards will vest and the stock will be issued at the end of a three-year period based on a three-year cycle performance period and the actual number of shares to be issued will be based upon the achievement of the three-year cycle’s performance criteria. Also, during fiscal 2025, 2024 and 2023, we granted performance-based awards with market conditions. These market condition awards provide for a target number of shares, with the actual number of shares issued upon vesting determined based on the achievement of applicable market conditions. The awards vest at the end of a three-year performance period based on specified total shareholder return performance measures and the employees continued service through the vesting date. 92 Leidos Holdings, Inc. Annual Report Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Performance-based stock award activity for each of the periods presented was as follows: Expected number of shares of stock to be issued under performance-based stock awards Weighted average grant- date fair value (in millions) Unvested at December 30, 2022 0.5 $ 106.70 Awards granted 0.2 99.34 Awards forfeited — 104.90 Awards vested ( 0.1 ) 116.37 Unvested at December 29, 2023 0.6 $ 102.22 Awards granted 0.1 176.69 Awards forfeited ( 0.1 ) 117.15 Awards vested ( 0.2 ) 88.81 Unvested at January 3, 2025 0.4 $ 123.89 Awards granted 0.2 146.36 Awards forfeited — 141.83 Awards vested ( 0.2 ) 119.17 Unvested at January 2, 2026 0.4 $ 134.87 The weighted average grant date fair value for performance-based stock, excluding those with a market condition, during fiscal 2025, 2024 and 2023 was $ 133.06 , $ 130.15 and $ 93.90 , respectively. The weighted average grant date fair value for performance-based stock with market conditions that were granted during fiscal 2025, 2024 and 2023 was $ 166.24 , $ 186.81 and $ 108.38 , respectively, and was calculated using the Monte Carlo simulation. The Monte Carlo simulation assumptions used for the periods presented were as follows: Year Ended January 2, 2026 January 3, 2025 December 29, 2023 Expected volatility 26.08 % 24.86 % 26.35 % Risk free rate of return 3.93 % 4.20 % 4.33 % Weighted average grant date stock price $ 133.06 $ 130.15 $ 93.90 As of January 2, 2026, there was $ 27 million of unrecognized compensation cost, net of estimated forfeitures, which is expected to be recognized over a weighted average period of 1.7 years. The fair value of performance-based stock awards that vested in fiscal 2025, 2024 and 2023 was $ 24 million, $ 16 million, and $ 12 million, respectively. Leidos Holdings, Inc. Annual Report 93 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 18—Income Taxes The provision for income taxes for the periods presented included the following: Year Ended (in millions) January 2, 2026 January 3, 2025 December 29, 2023 Current: U.S. federal $ 5 $ 381 $ 212 State 53 84 68 Foreign 21 22 23 Deferred: U.S. federal 341 ( 77 ) ( 75 ) State 27 ( 13 ) ( 20 ) Foreign — ( 9 ) ( 13 ) Total $ 447 $ 388 $ 195 Below is the rate reconciliation pursuant to the disclosure requirements of ASU 2023-09, which represents the reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income tax rate to income before income taxes for the periods presented: Year Ended (dollars in millions) January 2, 2026 U.S. federal statutory tax rate $ 401 21.0 % State and local income taxes, net of federal income tax effect (1) 39 1.9 Foreign tax effects 5 0.3 Effect of cross-border tax laws 2 0.1 Tax credits: Research and development tax credits ( 22 ) ( 1.2 ) Other ( 1 ) — Changes in valuation allowances 3 0.2 Nontaxable or nondeductible items ( 2 ) ( 0.1 ) Changes in unrecognized tax benefits 25 1.3 Other adjustments ( 3 ) ( 0.1 ) Effective tax rate $ 447 23.4 % (1) State taxes in VA and MD made up the majority (greater than 50 percent) of the tax effect in this category. 94 Leidos Holdings, Inc. Annual Report Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The company has elected to adopt the provisions of ASU 2023-09 on a prospective basis beginning fiscal 2025 as shown above, the rate reconciliation for the periods prior to the adoption of ASU 2023-09, were as follows: (dollars in millions) January 3, 2025 December 29, 2023 Amount computed at the statutory federal income tax rate $ 344 $ 85 State income taxes, net of federal tax benefit 28 26 Goodwill — 104 Research and development credits ( 25 ) ( 19 ) Excess tax benefits from stock-based compensation ( 15 ) ( 2 ) Change in valuation allowance for deferred tax assets 4 3 Impact of foreign operations ( 5 ) ( 13 ) Dividends paid to employee stock ownership plan ( 2 ) ( 2 ) Change in accruals for uncertain tax positions 39 14 Other 20 ( 1 ) Total $ 388 $ 195 Effective income tax rate 23.7 % 48.4 % The decrease to the effective tax rate for fiscal 2025 compared to fiscal 2024 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 (“OBBBA”). The decrease in the effective tax rate for fiscal 2024 compared to fiscal 2023 was due to non tax deductible goodwill impairments unfavorably impacting fiscal 2023. Leidos Holdings, Inc. Annual Report 95 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Deferred income taxes are recorded for differences in the basis of assets and liabilities for financial reporting purposes and tax reporting purposes. Deferred tax assets (liabilities) were comprised of the following: (in millions) January 2, 2026 January 3, 2025 Capitalized research and development $ 39 $ 370 Operating lease liabilities 167 179 Accrued vacation and bonuses 72 85 Reserves 39 39 Deferred compensation 42 42 Credits and net operating losses carryovers 40 46 Vesting stock awards 34 30 Deferred revenue 5 9 Accumulated other comprehensive loss 3 6 Other 28 30 Total deferred tax assets 469 836 Valuation allowance ( 34 ) ( 31 ) Deferred tax assets, net of valuation allowance $ 435 $ 805 Purchased intangible assets $ ( 380 ) $ ( 361 ) Operating lease right-of-use assets ( 132 ) ( 138 ) Property, plant and equipment ( 84 ) ( 98 ) Other ( 12 ) ( 7 ) Total deferred tax liabilities ( 608 ) ( 604 ) Net deferred tax assets $ ( 173 ) $ 201 On July 4, 2025, the OBBBA implemented several corporate tax law changes, including but not limited to, (1) restoring the ability to immediately expense 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. Based upon our interpretation of the law as currently enacted, income taxes payable and net deferred taxes were $ 265 million and $ 230 million, respectively, lower at fiscal 2025, than our estimates prior to the OBBBA enactment. As of fiscal 2025, we had state net operating losses of $ 95 million, which we expect to utilize. The losses will begin to expire in fiscal 2034. We had foreign tax credits of $ 26 million that will begin to expire in fiscal 2030. We expect to utilize $ 3 million of the foreign tax credits. We also had foreign net operating losses of $ 32 million, which will not expire and expect to utilize $ 8 million of the foreign net operating losses. The income tax payments, net of refunds, by jurisdiction as of January 2, 2026 were as follows: (in millions) Income Tax Payments Income Tax Refunds Total U.S. federal $ 181 $ ( 2 ) $ 179 U.S. state & local: Virginia 32 — 32 Other state & local 59 ( 10 ) 49 Foreign: Australia 16 ( 1 ) 15 Other foreign 13 ( 12 ) 1 Total $ 301 $ ( 25 ) $ 276 96 Leidos Holdings, Inc. Annual Report Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The changes in the unrecognized tax benefits were as follows: Year Ended (in millions) January 2, 2026 January 3, 2025 December 29, 2023 Unrecognized tax benefits at beginning of year $ 173 $ 110 $ 92 Additions for tax positions related to current year 20 81 58 Additions for tax positions related to prior years 26 46 15 Reductions for tax positions related to current year ( 2 ) ( 1 ) ( 1 ) Reductions for tax positions related to prior years ( 116 ) ( 59 ) ( 54 ) Settlements with taxing authorities — ( 3 ) — Lapse of statute of limitations ( 2 ) ( 1 ) — Unrecognized tax benefits at end of year $ 99 $ 173 $ 110 Unrecognized tax benefits that, if recognized, would affect the effective income tax rate $ 90 $ 57 $ 15 As of fiscal 2025 and 2023, unrecognized tax benefits were included within "Other long-term liabilities" on the consolidated balance sheets. As of fiscal 2024, $ 17 million of unrecognized tax benefits were included within "Accounts payable and accrued liabilities," and $ 156 million was included within "Other long-term liabilities" on the consolidated balance sheets. For fiscal 2025, unrecognized tax benefits decreased $ 92 million for tax positions related to prior years, primarily as a result of uncertainty regarding capitalized research and development costs for the tax years ended fiscal 2023 and fiscal 2024, partially offset by an increase in uncertain state tax positions. In addition, unrecognized tax benefits increased $ 18 million for tax positions related to the current year, primarily as a result of uncertain state tax positions. We file income tax returns in the United States and various state and foreign jurisdictions. For the years ended fiscal 2025, 2024 and 2023, we are participating in the Internal Revenue Service (“IRS”) Compliance Assurance Process (“CAP”), a real-time audit of our consolidated federal corporate income tax returns. The IRS has completed their examination of our consolidated federal income tax returns through the year ended fiscal 2022. We believe that participation in CAP should reduce tax-related uncertainties, if any. As of fiscal 2025, we were no longer subject to state, local, or foreign examinations by the tax authorities for fiscal years ended on or before December 30, 2021, except in certain limited cases. While we believe we have adequate accruals for uncertain tax positions, the tax authorities may determine that we owe taxes in excess of recorded accruals or the recorded accruals may be in excess of the final settlement amounts agreed to by tax authorities. Note 19—Retirement Plans DEFINED CONTRIBUTION PLANS We sponsor various defined contribution plans in which most employees are eligible to participate. These plans allow eligible participants to contribute a portion of their income through payroll deductions and Leidos may also make discretionary contributions. Company contributions were $ 197 million, $ 159 million and $ 148 million for fiscal 2025, 2024 and 2023, respectively. DEFERRED COMPENSATION PLANS We maintain three deferred compensation plans, the Keystaff Deferral Plan (“KDP”), the KESDP and the MSCP (the “Deferred Compensation Plans”), for the benefit of certain management or highly compensated employees or members of the Board of Directors. The Deferred Compensation Plans allow eligible participants to elect to defer a portion of their salary, and all or a portion of certain bonuses, including restricted stock unit awards. Directors may also elect to defer their cash compensation in addition to their restricted stock unit awards. Balances in the Deferred Compensation Plans are paid in lump sum or installments upon retirement, termination or the elected specified date. We do not make any contributions to the KDP but maintain participant accounts for deferred amounts and investments. We maintain a rabbi trust for the purpose of funding benefit payments to the KDP participants. Participants may allocate deferred salary and cash bonus amounts into a variety of designated investment options, with gains and losses based on the elected investment option performance with the participant assuming all risks related to future returns of their contributions. Leidos Holdings, Inc. Annual Report 97 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Under the KESDP, eligible participants may elect to defer in share units all or a portion of certain cash bonuses and restricted stock unit awards granted under the current 2017 Omnibus Incentive Plan (see “Note 17—Stock-Based Compensation”). Under the MSCP, restricted stock share units are fully vested and no further deferrals into the plan are made. We do not make any contributions to the accounts of KESDP or MSCP participants. Benefits from the KESDP and MSCP are payable in shares of Leidos common stock held in a rabbi trust for the purpose of funding benefit payments to KESDP and MSCP participants. DEFINED BENEFIT PLANS We sponsor two frozen defined benefit pension plans (“the Defined Benefit Plans”), one in the United Kingdom (“UK”) and another in the United States ("U.S."). On May 20, 2022, the trustee of our UK defined benefit pension plan (the “Plan”) invested the assets of the Plan in a bulk purchase annuity policy to fully insure the benefits payable to the members of the Plan. As the buy-in transaction insured the defined benefit obligation, we do not anticipate material future contributions. The bulk purchase annuity policy is structured to enable the Plan to move to a full buy-out, at which time the insurer would become directly responsible for all pension payments and we would be relieved of our obligations under the Plan. As of January 2, 2026, and January 3, 2025, the unamortized loss within AOCI related to the Plan was $ 22 million and $ 20 million, respectively. As of January 2, 2026, and January 3, 2025, the Plan had net assets of $ 6 million and $ 7 million, respectively. On February 11, 2026, the Plan completed a full buy-out and recognized a settlement loss related to the unamortized loss previously recorded within AOCI. Any remaining net plan assets of the Plan will be remitted to the Company upon completion of the settlement process. The projected benefit obligation of the Defined Benefit Plans as of January 2, 2026, and January 3, 2025, was $ 89 million and $ 88 million, respectively. The fair value of the Defined Benefit Plans assets as of January 2, 2026, and January 3, 2025, was $ 94 million. The UK Plan funding status was overfunded by $ 6 million and $ 7 million as of January 2, 2026, and January 3, 2025, respectively, and the U.S. benefit pension plan was underfunded by $ 1 million as of January 2, 2026, and January 3, 2025. The underfunded and overfunded positions of the Defined Benefit Plans' assets have been included within “Other long-term liabilities” and "Other long-term assets," respectively, on the consolidated balance sheets. OTHER We also sponsor multiemployer defined benefit pension plans and defined contribution plans (401(k) plans) (the “Sponsored Plans”) for employees working on two U.S. government contracts. As part of the contractual agreements, the customers reimburse Leidos for contributions made to these Sponsored Plans as these costs are allowable under government contract cost accounting requirements. If we were to cease being the contractor as a result of a recompetition process, the defined benefit pension plans and related plan assets and liabilities would transfer to the new contractor. If the contract expires or is terminated with no transfer of the pension plan to a successor contractor, any amount by which the plan liabilities exceed plan assets, as of that date, will be reimbursed by the U.S. government customer. Since we are not responsible for the current or future funded status of the pension plans, no assets or liabilities arising from their funded status are recorded in the consolidated financial statements and no amounts associated with these pension plans are included in the defined benefit plan disclosures above. Note 20—Business Segments Our operations and reportable segments are organized around the customers and markets we serve. We define our reportable segments based on the way the chief operating decision maker ("CODM"), currently the Chief Executive Officer, manages the operations for purposes of allocating resources and assessing performance. The CODM considers segment revenue and operating income to assist with the evaluation of strategic business decisions, including potential acquisitions or divestitures, whether to invest in certain products or services, share repurchases and the declaration of dividends. Our business is aligned into six operating segments, which are aggregated into four reportable segments in accordance with the criteria established under ASC 280, Segment Reporting: National Security & Digital, Health & Civil, Commercial & International and Defense Systems. Our reportable segments are focused on specific, defined capability sets that we bring to our customers. Additionally, we separately present the unallocated costs associated with corporate functions as Corporate. Our National Security & Digital business provides leading-edge and technologically advanced services, solutions and products across substantially all U.S. federal government customers. Our advanced capabilities allow us to provide technology-enabled services, software capabilities and IT modernization. 98 Leidos Holdings, Inc. Annual Report Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Our Health & Civil business provides services and solutions to federal and commercial customers in the areas of public health, care coordination, life and environmental sciences and transportation. We are dedicated to delivering effective and affordable solutions that are responsible for the health and well-being of people, including service members and veterans. Our Commercial & International business delivers a portfolio of products, services, and solutions aimed at securing national assets, modernizing energy and critical infrastructure, and enhancing mission outcomes. Our key customers include Investor-Owned Utilities, government agencies in the United Kingdom and Australia, the Transportation Security Administration, U.S. Customs & Border Protection ("CBP"), as well as airports and ports and borders authorities. Our Defense Systems business addresses threats facing our nation by rapidly prototyping and delivering advanced hardware, software, and integrated systems solutions for the DoW, Army, Navy, Air Force, Space Force, Marine Corps, United States Special Operations Command, Defense Advanced Research Projects Agency and intelligence agencies. We are heavily engaged in the top defense Research Development Test and Evaluation priorities that are driven by evolving global threats. This business is dedicated to delivering cost-effective solutions and services in the space, airborne, land and maritime domains and supporting critical missions worldwide. Corporate includes the operations of various corporate activities, certain corporate expense items that are not reimbursed by our U.S. government customers and certain other expense items excluded from a reportable segment’s performance. The following table summarizes business segment information for the periods presented: Year Ended January 2, 2026 (in millions) National Security & Digital Health & Civil Commercial & International Defense Systems Total Revenues $ 7,611 $ 5,069 $ 2,315 $ 2,179 $ 17,174 Less: Direct labor 1,955 930 414 427 3,726 Amortization of intangible assets 29 24 28 49 130 Other segment expense 4,867 2,913 1,707 1,547 11,034 Segment operating income $ 760 $ 1,202 $ 166 $ 156 $ 2,284 Corporate expense 175 Total operating income $ 2,109 Year Ended January 3, 2025 (in millions) National Security & Digital Health & Civil Commercial & International Defense Systems Total Revenues $ 7,365 $ 5,015 $ 2,252 $ 2,030 $ 16,662 Less: Direct labor 1,934 951 407 407 3,699 Amortization of intangible assets 23 27 30 67 147 Other segment expense 4,688 2,942 1,711 1,462 10,803 Segment operating income $ 720 $ 1,095 $ 104 $ 94 $ 2,013 Corporate expense 186 Total operating income $ 1,827 Leidos Holdings, Inc. Annual Report 99 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 29, 2023 (in millions) National Security & Digital Health & Civil Commercial & International Defense Systems Total Revenues $ 7,196 $ 4,238 $ 2,126 $ 1,878 $ 15,438 Less: Direct labor 1,838 894 386 378 3,496 Amortization of intangible assets 47 40 37 78 202 Other segment expense 4,639 2,730 2,263 1,357 10,989 Segment operating income (loss) $ 672 $ 574 $ ( 560 ) $ 65 $ 751 Corporate expense 130 Total operating income $ 621 The statement of operations performance measures used to evaluate segment performance are revenues and operating income. As a result, “Interest expense, net,” “Other income (expense), net,” and “Income tax expense,” as reported in the consolidated financial statements are not allocated to our segments. Other segment expenses include direct program costs such as materials and subcontractor expenses, as well as allocable indirect costs such as depreciation and Corporate compensation expenses, but excludes direct labor which is separately presented above. The Health & Civil and Defense Systems segments also include equity earnings of non-consolidated subsidiaries within operating income. Under U.S. government Cost Accounting Standards, indirect costs including depreciation expense are collected in indirect cost pools, which are then collectively allocated out to the reportable segments based on a representative causal or beneficial relationship of the costs in the pool to the costs in the base. While depreciation expense is a component of the allocated costs, the allocation process precludes depreciation expense from being specifically identified by the individual reportable segments. For this reason, depreciation expense by reportable segment has not been reported above. Asset information by segment is not a key measure of performance used by the CODM. We generated approximately 87 % of our total revenues in fiscal 2025, 2024 and 2023 from contracts with the U.S. government, either as a prime contractor or a subcontractor to other contractors engaged in work for the U.S. government. 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 % of our total revenues for both fiscal 2025 and 2023, and 48 % for fiscal 2024. Revenues generated by entities outside of the United States were approximately 8 % in both fiscal 2025 and 2024, and 9 % in fiscal 2023. As such, additional financial information by geographic location is not presented. Note 21—Commitments and Contingencies LEGAL PROCEEDINGS We are involved in various claims and lawsuits arising in the normal conduct of our business, none of which, in the opinion of management, based upon current information, will likely have a material adverse effect on our financial position, results of operations or cash flows. CONTINGENCIES Government Investigations and Reviews We are routinely subject to investigations and reviews relating to compliance with various laws and regulations with respect to our role as a contractor to federal, state and local government customers and in connection with performing services in countries outside of the United States. Adverse findings could have a material effect on our business, financial position, results of operations and cash flows due to our reliance on government contracts. 100 Leidos Holdings, Inc. Annual Report Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Defense Contract Audit Agency As of January 2, 2026, active indirect cost audits by the DCAA remain open for fiscal 2023 and subsequent fiscal years. Although we have recorded contract revenues based upon an estimate of costs that we believe will be approved upon final audit or review, we cannot predict the outcome of any ongoing or future audits or reviews and adjustments and, if future adjustments exceed estimates, our profitability may be adversely affected. As of January 2, 2026, we believe we have adequately reserved for potential adjustments from audits or reviews of contract costs. Other Government Investigations and Reviews In August 2022, the Company received a Federal Grand Jury Subpoena in connection with a criminal investigation being conducted by the U.S. Department of Justice Antitrust Division. The subpoena requests that the Company produce a broad range of documents related to three U.S. Government procurements associated with the Company’s Intelligence Group in 2021 and 2022. We are fully cooperating with the investigation, and we are conducting our own internal investigation with the assistance of outside counsel. It is not possible at this time to determine whether we will incur, or to reasonably estimate the amount of, any fines, penalties, or further liabilities in connection with the investigation pursuant to which the subpoena was issued. Commitments As of January 2, 2026, we have outstanding letters of credit of $ 114 million, principally related to performance guarantees on contracts and outstanding surety bonds with a notional amount of $ 151 million, principally related to performance and subcontractor payment bonds on contracts. The value of the surety bonds may vary due to changes in the underlying project status and/or contractual modifications. As of January 2, 2026, the future expirations of the outstanding letters of credit and surety bonds were as follows: Fiscal year ending (in millions) 2026 $ 133 2027 46 2028 73 2029 8 2030 — 2031 and thereafter 5 $ 265 Note 22—Subsequent Events ACQUISITION On January 23, 2026, ("Signing Date"), Leidos, Inc. entered into a stock purchase agreement with KENE Holdings, L.P. and KENE Parent Inc. ("Entrust") 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. Entrust is a professional engineering company providing professional engineering and design, consulting, data analytics, project management and automation services. We believe this acquisition will strengthen our core competencies within the Commercial & International business segment. The transaction is expected to close in the first half of fiscal 2026, subject to the satisfaction or waiver of customary closing conditions. DEBT FINANCING In connection with the acquisition of Entrust, we entered into an agreement with Citigroup Global Markets Inc. ("Citi"), which provides for a senior unsecured 364 -day bridge loan facility in an aggregate principal amount of $ 1.4 billion (the "Bridge Facility"). The Bridge Facility will mature 364 days after the Signing Date. Borrowings under the Bridge Facility bear interest at a rate determined, at the Company's option, based on either an alternate base rate or an adjusted term SOFR rate, plus an applicable margin. Leidos Holdings, Inc. Annual Report 101 Table of Contents LEIDOS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REVOLVING CREDIT FACILITY 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. SEGMENT REALIGNMENT Beginning in fiscal 2026, we will operate in four reportable segments that are focused on specific, defined capability sets we bring to our customers. The four reportable segments will be Intelligence & Digital, Health, Homeland and Defense. We will also separately present the unallocable costs associated with corporate functions as Corporate. All historical segment financial information will be recast to conform to the new reportable segment structure in our financial statements and accompanying notes, beginning in the first quarter of fiscal 2026. 102 Leidos Holdings, Inc. Annual Report Table of Contents PART II Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.