Leidos Holdings, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of Leidos Holdings, Inc.'s ("Leidos") financial condition, results of operations, and quantitative and qualitative discussion about business environment and trends should be read in conjunction with Leidos' condensed consolidated financial statements and related notes. The following discussion contains forward-looking statements, including statements regarding our intent, belief or current expectations with respect to, among other things, trends affecting our financial condition or results of operations, backlog, our industry, the impact of our merger and acquisition activity, government budgets and spending, our business contingency plans, interest rates and uncertainties in tax due to new tax legislation or other regulatory developments. In some cases, forward-looking statements can be identified by words such as “will,” “expect,” “estimate,” “plan,” “potential,” “continue” or similar expressions. Such statements are not guarantees of future performance and involve risks and uncertainties and actual results may differ materially from those in the forward-looking statements as a result of various factors. Some of these factors include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K, as updated by the risk factor in this report under Part II, Item 1A. "Risk Factors" and as may be further updated in subsequent filings with the U.S. Securities and Exchange Commission. Due to such uncertainties and risks, you are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. We do not undertake any obligation to update these factors or to publicly announce the results of any changes to our forward-looking statements due to future events or developments. Unless indicated otherwise, references in this report to "we," "us" and "our" refer collectively to Leidos and its consolidated subsidiaries. OVERVIEW Leidos is an industry and technology leader serving government and commercial customers with smarter, more efficient digital and mission innovations. Headquartered in Reston, Virginia, with 50,000 global employees, we pursue strategic growth across five pillars: space and maritime; energy infrastructure; digital modernization and cyber; mission software; and managed health services. Our customers include the U.S. Department of 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. Beginning in fiscal 2026, we realigned our business and operate in four reportable segments that are focused on specific, defined capability sets we bring to our customers. As a result of this change, prior year segment results and disclosures have been recast to reflect the current reportable segment structure. We now operate in the following reportable segments: Intelligence & Digital, Health, Homeland and Defense. We also separately present the unallocable costs associated with corporate functions as Corporate (see "Note 9–Business Segments"). BUSINESS ENVIRONMENT AND TRENDS U.S. GOVERNMENT MARKETS During the three months ended April 3, 2026, and April 4, 2025, we generated approximately 86% and 87% respectively, of total revenues from contracts with the U.S. government. Accordingly, our business performance is affected by the overall level of U.S. government spending, especially national security, homeland security and intelligence spending, and the alignment of our service and product offerings and capabilities with current and future budget priorities of the U.S. government. On April 30, 2026, Congress passed legislation to fund all non-immigration agencies and offices within the Department of Homeland Security agencies ending the government shutdown. Leidos Holdings, Inc. 21 Table of Contents PART I—FINANCIAL INFORMATION INTERNATIONAL MARKETS Sales to customers in international markets represented approximately 8% of total revenues for both the three months ended April 3, 2026, and April 4, 2025. Our international customers include foreign governments and their agencies. Our international business increases our exposure to international markets and the associated international regulatory, foreign currency exchange rate and geopolitical risks. Changes in international trade policies, including higher tariffs on imported goods and materials, may increase the cost of certain goods necessary to fulfill our contractual requirements and for internal purposes. We expect to recover certain portions of the increase to the cost of goods through contractual measures. While we continue to evaluate the tariff environment and potential impacts of higher tariffs, we currently do not expect them to have a significant effect on our business. RESULTS OF OPERATIONS The following table summarizes our condensed consolidated results of operations for the periods presented: Three Months Ended (dollars in millions) April 3, 2026 April 4, 2025 Percent change Revenues $ 4,400 $ 4,245 3.7 % Operating income 508 530 (4.2 %) Non-operating expense, net (79) (52) 51.9 % Income before income taxes 429 478 (10.3 %) Income tax expense (94) (113) (16.8 %) Net income 335 365 (8.2 %) Net income attributable to Leidos common stockholders $ 328 $ 363 (9.6 %) Operating margin 11.5 % 12.5 % SEGMENT AND CORPORATE RESULTS Three Months Ended Intelligence & Digital (dollars in millions) April 3, 2026 April 4, 2025 Percent change Revenues $ 1,513 $ 1,408 7.5 % Operating income 146 132 10.6 % Operating margin 9.6 % 9.4 % The increase in revenues for the three months ended April 3, 2026, as compared to the three months ended April 4, 2025, was primarily attributable to program wins and $22 million recognized from the acquisition of Kudu Dynamics, partially offset by the completion of programs and a net decrease in volumes. The increase in operating income for the three months ended April 3, 2026, as compared to the three months ended April 4, 2025, was primarily attributable to program wins and improved efficiencies, partially offset by a net decrease in volumes and the completion of programs. 22 Leidos Holdings, Inc. Table of Contents PART I—FINANCIAL INFORMATION Three Months Ended Health (dollars in millions) April 3, 2026 April 4, 2025 Percent change Revenues $ 1,188 $ 1,188 — % Operating income 284 288 (1.4 %) Operating margin 23.9 % 24.2 % Revenues remained consistent while operating income slightly decreased for the three months ended April 3, 2026, as compared to the three months ended April 4, 2025. This was primarily attributable to a net decrease in volumes, offset by net write-ups on certain programs within the managed health services business. Three Months Ended Homeland (dollars in millions) April 3, 2026 April 4, 2025 Percent change Revenues $ 816 $ 770 6.0 % Operating income 33 61 (45.9 %) Operating margin 4.0 % 7.9 % The increase in revenues for the three months ended April 3, 2026, as compared to the three months ended April 4, 2025, was primarily attributable to a net increase in volumes, $23 million favorable impact from exchange rate movements, program wins and $11 million recognized from the acquisition of Entrust. The increase was partially offset by net write-downs on certain programs. The decrease in operating income for the three months ended April 3, 2026, as compared to the three months ended April 4, 2025, was primarily attributable to an increase of $25 million in acquisition, integration and restructuring costs, driven by the Entrust transaction and net write-downs on certain programs. The decrease was partially offset by a net increase in volumes. Three Months Ended Defense (dollars in millions) April 3, 2026 April 4, 2025 Percent change Revenues $ 883 $ 879 0.5 % Operating income 62 74 (16.2 %) Operating margin 7.0 % 8.4 % The increase in revenues for the three months ended April 3, 2026, as compared to the three months ended April 4, 2025, was primarily attributable to program wins, partially offset by completion of certain contracts. The decrease in operating income for the three months ended April 3, 2026, as compared to the three months ended April 4, 2025, was primarily attributable to the completion of contracts and write-downs on certain programs in the current year, partially offset by program wins. Three Months Ended Corporate (dollars in millions) April 3, 2026 April 4, 2025 Percent change Operating loss $ (17) $ (25) (32.0 %) The decrease in operating loss for the three months ended April 3, 2026, as compared to the three months ended April 4, 2025, was primarily attributable to a $15 million insurance reimbursement for legal costs incurred prior to fiscal 2026, partially offset by an increase in acquisition and integration costs. NON-OPERATING EXPENSE, NET Non-operating expense, net for the three months ended April 3, 2026, was $79 million as compared to $52 million for the three months ended April 4, 2025. The increase was primarily driven by a $23 million settlement loss from the buy-out of our UK defined benefit pension plan and increased interest expense from the termination of our senior unsecured bridge loan facility and issuance of our $600 million and $800 million senior notes. Leidos Holdings, Inc. 23 Table of Contents PART I—FINANCIAL INFORMATION PROVISION FOR INCOME TAXES For the three months ended April 3, 2026, our effective tax rate was 21.9% compared to 23.6% for the three months ended April 4, 2025. The decrease to the effective tax rate was primarily due to an increase in net excess tax benefits related to employee stock-based payment transactions and a decrease in unrecognized tax benefits. BOOKINGS AND BACKLOG We recorded net bookings worth an estimated $3.3 billion during the three months ended April 3, 2026, as compared to $2.1 billion for the three months ended April 4, 2025. The estimated value of our total backlog was as follows: April 3, 2026 April 4, 2025 (in millions) Funded Unfunded Total Funded Unfunded Total Intelligence & Digital $ 1,882 $ 17,453 $ 19,335 $ 1,745 $ 15,603 $ 17,348 Health 1,760 4,800 6,560 832 7,431 8,263 Homeland 3,304 6,580 9,884 2,617 7,357 9,974 Defense 2,652 9,938 12,590 2,135 8,576 10,711 Total $ 9,598 $ 38,771 $ 48,369 $ 7,329 $ 38,967 $ 46,296 Backlog at April 3, 2026, includes $371 million acquired through the acquisition of Entrust within the Homeland reportable segment. Backlog represents the revenues we expect to recognize under negotiated contracts and unissued task orders on sole source IDIQ contracts, to the extent we believe their execution and funding to be probable. Backlog does not include potential task orders expected to be awarded under multiple award IDIQ contracts. Backlog estimates are subject to change and may be affected by factors including modifications of contracts and foreign currency movements. LIQUIDITY AND CAPITAL RESOURCES OVERVIEW OF LIQUIDITY As of April 3, 2026, we had $457 million in cash and cash equivalents. We have a senior unsecured revolving credit facility which can provide up to $1.5 billion in additional borrowing, if required. As of April 3, 2026, and January 2, 2026, there were no borrowings outstanding under the revolving credit facility. We had outstanding debt of $6.3 billion and $4.6 billion at April 3, 2026, and January 2, 2026 respectively. In March 2026, we issued and sold $600 million 4.10% and $800 million 5.00% senior unsecured notes maturing in March 2029 and March 2036, respectively. The annual interest rate is payable on a semi-annual basis. The proceeds from the notes were used to fund a portion of the consideration payable in connection with the acquisition of Entrust and for general corporate purposes. We have a commercial paper program in which we may issue short-term unsecured commercial paper notes ("Commercial Paper Notes") and have maturities of up to 397 days from the date of issuance. As of April 3, 2026, we had $300 million of Commercial Paper Notes outstanding. As of January 2, 2026, we did not have any Commercial Paper Notes outstanding. We made $5 million and $529 million principal payments on our long-term debt during the three months ended April 3, 2026 and April 4, 2025, respectively. The activity for the three months ended April 4, 2025, included a $500 million payment to discharge the $500 million notes due May 2025. Our senior unsecured revolving credit facility, Commercial Paper Notes, senior unsecured term loan and notes outstanding as of April 3, 2026, contain financial covenants and customary restrictive covenants. We were in compliance with all financial covenants as of April 3, 2026. We paid dividends of $55 million and $53 million during the three months ended April 3, 2026, and April 4, 2025, respectively. 24 Leidos Holdings, Inc. Table of Contents PART I—FINANCIAL INFORMATION We may from time to time seek to retire or purchase our outstanding debt through cash purchases in the open market, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Stock repurchases of Leidos common stock may be made on the open market or in privately negotiated transactions with third parties including through accelerated share repurchase agreements. Whether repurchases are made and the timing and actual number of shares repurchased depends on a variety of factors including price, corporate capital requirements, other market conditions and regulatory requirements. The repurchase program may be accelerated, suspended, delayed or discontinued at any time. We made open market repurchases of our common stock for an aggregate purchase price of $200 million during the three months ended April 3, 2026. During the three months ended April 4, 2025, we did not make any open market repurchases; however, we repurchased $500 million of shares under an accelerated share repurchase agreement. During the three months ended April 3, 2026, we invested $6 million in an investment fund as a limited partner, In connection with this investment, we have committed to invest an additional $94 million over the next five years. We expect to fund this investment with cash on hand and cash generated through our operations. For the next 12 months, we anticipate that we will be able to meet our liquidity needs, including servicing our debt, through cash generated from operations, available cash balances, borrowings from our commercial paper program and, if needed, sales of accounts receivable and borrowings from our revolving credit facility. SUMMARY OF CASH FLOWS The following table summarizes cash flow information for the periods presented: Three Months Ended (in millions) April 3, 2026 April 4, 2025 Net cash provided by operating activities $ 301 $ 58 Net cash used in investing activities (2,359) (22) Net cash provided by (used in) financing activities 1,393 (110) Net cash provided by operating activities increased $243 million during the three months ended April 3, 2026, when compared to the prior year quarter. The increase was primarily due to favorable changes in working capital. Net cash used in investing activities increased $2,337 million for the three months ended April 3, 2026, when compared to the prior year quarter. The increase was primarily due to $2,338 million of net cash paid in connection with the acquisition of Entrust. Net cash provided by financing activities increased $1,503 million for the three months ended April 3, 2026, when compared to the prior year quarter. The increase was primarily due a net increase of $1,216 million in cash inflows from debt activity, consisting of proceeds from debt issuances and payments for borrowings and debt issuance costs. The increase was also related to a $300 million net decrease in stock repurchases primarily attributable to the prior year accelerated share repurchase activities. OFF-BALANCE SHEET ARRANGEMENTS We have outstanding performance guarantees and cross-indemnity agreements in connection with certain aspects of our business and future commitments related to an investment fund. We also have letters of credit outstanding principally related to performance guarantees on contracts and surety bonds outstanding principally related to performance and subcontractor payment bonds as described in "Note 10–Commitments and Contingencies" of the notes to the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q. These arrangements have not had, and management does not believe it is likely that they will in the future have, a material effect on our liquidity, capital expenditures or capital resources, operations or financial condition. Leidos Holdings, Inc. 25 Table of Contents PART I—FINANCIAL INFORMATION GUARANTOR AND ISSUER OF GUARANTEED SECURITIES Leidos Holdings, Inc. (“Guarantor”) has fully and unconditionally guaranteed the debt securities of its subsidiary, Leidos, Inc. (“Issuer”), that were issued pursuant to transactions that were registered under the Securities Act of 1933, as amended (collectively, the “Registered Notes”). The following is a list of the Registered Notes guaranteed by Leidos Holdings, Inc. Senior unsecured Registered Notes issued by Leidos, Inc.: $600 million 4.100% notes, due March 2029 $750 million 4.375% notes, due May 2030 $1,000 million 2.300% notes, due February 2031 $500 million 5.400% notes, due March 2032 $750 million 5.750% notes, due March 2033 $500 million 5.500% notes, due March 2035 $800 million 5.000% notes, due March 2036 Leidos Holdings, Inc. has also fully and unconditionally guaranteed debt securities of Leidos, Inc. that were issued pursuant to transactions that were not registered under the Securities Act of 1933, as amended. The following is a list of unregistered debt securities guaranteed by Leidos Holdings, Inc. Senior unsecured unregistered debt securities issued by Leidos, Inc.: $250 million 7.125% notes, due July 2032 $300 million 5.500% notes, due July 2033 Additionally, Leidos, Inc. has fully and unconditionally guaranteed debt securities of Leidos Holding, Inc. that were issued pursuant to transactions that programs were not registered under the Securities Act of 1933, as amended. The following is a list of unregistered debt securities guaranteed by Leidos, Inc. Senior unsecured unregistered debt securities issued by Leidos Holdings, Inc.: $300 million 5.950% notes, due December 2040 The following summarized financial information includes the assets, liabilities and results of operations for the Guarantor and Issuer of the Registered Notes described above. Intercompany balances and transactions between the Issuer and Guarantor have been eliminated from the financial information below. Investments in the consolidated subsidiaries of the Issuer and Guarantor that do not guarantee the senior unsecured notes have been excluded from the financial information. Intercompany payables represent amounts due to non-guarantor subsidiaries of the Issuer. BALANCE SHEET INFORMATION FOR THE GUARANTOR AND ISSUER OF REGISTERED NOTES (in millions) April 3, 2026 January 2, 2026 Total current assets $ 2,348 $ 3,036 Goodwill 5,666 5,666 Other long-term assets 1,224 1,250 Total assets $ 9,238 $ 9,952 Total current liabilities $ 2,184 $ 1,954 Long-term debt, net of current portion 6,014 4,628 Intercompany payables 5,020 4,706 Other long-term liabilities 949 942 Total liabilities $ 14,167 $ 12,230 26 Leidos Holdings, Inc. Table of Contents PART I—FINANCIAL INFORMATION STATEMENT OF OPERATIONS INFORMATION FOR THE GUARANTOR AND ISSUER OF REGISTERED NOTES Three Months Ended (in millions) April 3, 2026 Revenues, net $ 2,702 Operating income 190 Net loss attributable to Leidos common stockholders (18) CONTRACTUAL OBLIGATIONS AND COMMITMENTS We are subject to a number of reviews, investigations, claims, lawsuits, other uncertainties and future obligations related to our business. For a discussion of these items, see "Note 10–Commitments and Contingencies" of the notes to the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q. CRITICAL ACCOUNTING POLICIES AND ESTIMATES There were no material changes to our critical accounting policies, estimates or judgments that would have a significant impact on earnings during the period covered by this report from those discussed in our Annual Report on Form 10-K for the year ended January 2, 2026. RECENTLY ADOPTED AND ISSUED ACCOUNTING STANDARDS For a discussion of these items, see "Note 1–Basis of Presentation and Summary of Significant Accounting Policies" of the notes to the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q. Leidos Holdings, Inc. 27 Table of Contents PART I—FINANCIAL INFORMATION Item 3. Quantitative and Qualitative Disclosures About Market Risk There were no material changes in our market risk exposure from those discussed in our Annual Report on Form 10-K for the year ended January 2, 2026.