SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Delaware

20-3562868

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

~~Delaware~~1750 Presidents Street,

Reston,

~~20-3562868~~Virginia

20190

~~(State or other jurisdiction of incorporation or organization)~~

~~(I.R.S. Employer Identification No.)~~

~~11951 Freedom Drive,~~

~~Reston,~~

~~Virginia~~

~~20190~~

(Address of principal executive office)

(Zip Code)

(~~571~~) (571) 526-6000

(Registrant's telephone number, including area code)

11951 Freedom Drive, Reston, Virginia 20190

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock, par value $.0001 per share

LDOS

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares issued and outstanding of each of the issuer’s classes of common stock as of ~~October 21, 2019,~~April 27, 2020, was ~~141,563,826~~142,043,769 shares of common stock ($.0001 par value per share).

LEIDOS HOLDINGS, INC.

FORM 10-Q

TABLE OF CONTENTS



Part I					Page
Item 1.			Financial Statements (Unaudited)		1
			Condensed Consolidated Balance Sheets		1
			Condensed Consolidated Statements of Income		2
			Condensed Consolidated Statements of Comprehensive Income		3
			Condensed Consolidated Statements of Equity		4
			Condensed Consolidated Statements of Cash Flows		65
			Notes to Condensed Consolidated Financial Statements		76
			Note 1–~~Nature of Operations and~~ Basis of Presentation and Summary of Significant Accounting Policies		76
			Note 2–~~Accounting Standards~~Revenues		8
			Note 3–~~Significant Accounting Policies~~		10
	~~Note 4–Leases~~	12
	~~Note 5–Revenues~~	14
	~~Note 6–~~Contract Assets and Liabilities	1610
			Note 7–4–Acquisitions		1710
			Note ~~8–Divestitures~~5–Goodwill and Intangible Assets		1712
			Note ~~9–Goodwill~~6–Leases		1813
			Note ~~10–Intangible Assets~~7–Fair Value Measurements		1914
			Note ~~11–Property, Plant and Equipment~~8–Derivative Instruments		2015
			Note ~~12–Fair Value Measurements~~9–Debt		2017
			Note ~~13–Derivative Instruments~~		21
	~~Note 14–Debt~~	23
	~~Note 15–~~10–Accumulated Other Comprehensive Loss	2419
			Note ~~16–~~11–Earnings Per Share		2519
			Note ~~17–~~12–Supplementary Cash Flow Information and Restricted Cash		2519
			Note ~~18–Income Taxes~~13–Business Segments		2620
			Note ~~19–Business Segments~~14–Contingencies		2621
			Note ~~20–Contingencies~~15–Commitments		2724
			Note ~~21–Commitments~~16–Subsequent Events		3024
			~~Note 22–Subsequent Events~~		30

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations			3125
			Overview		3125
			Business Environment and Trends		3125
			Results of Operations		3226
			Bookings and Backlog		3427
			Liquidity and Capital Resources		3528
			Off-Balance Sheet Arrangements		3630
			Commitments and Contingencies		3730
			Critical Accounting Policies		3730
			Recently Adopted and Issued Accounting Standards		3730
Item 3.			Quantitative and Qualitative Disclosures About Market Risk		3730
Item 4.			Controls and Procedures		3730

Part II
Item 1.			Legal Proceedings		3831
Item 1A.			Risk Factors		3831
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds		3831
Item 3.			Defaults Upon Senior Securities		3832
Item 4.			Mine Safety Disclosures		3832
Item 5.			Other Information		3832
Item 6.			Exhibits		3933
Signatures					4034

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	April 3, 2020		January 3, 2020
	(in millions)
ASSETS
Cash and cash equivalents	$	445	$	668
Receivables, net	1,793		1,734
Other current assets	630		410
Total current assets	2,868		2,812
Property, plant and equipment, net	490		287
Intangible assets, net	950		530
Goodwill	5,719		4,912
Operating lease right-of-use assets, net	539		400
Other assets	422		426
	$	10,988	$	9,367
LIABILITIES AND EQUITY
Accounts payable and accrued liabilities	$	1,966	$	1,837
Accrued payroll and employee benefits	531		435
Long-term debt, current portion	1,793		61
Total current liabilities	4,290		2,333
Long-term debt, net of current portion	2,444		2,925
Operating lease liabilities	500		326
Deferred tax liabilities	176		184
Other long-term liabilities	219		182
Commitments and contingencies (Notes 14 and 15)
Stockholders’ equity:
Common stock, $0.0001 par value, 500 million shares authorized, 142 million and 141 million shares issued and outstanding at April 3, 2020 and January 3, 2020, respectively	—		—
Additional paid-in capital	2,579		2,587
Retained earnings	961		896
Accumulated other comprehensive loss	(185)		(70)
Total Leidos stockholders’ equity	3,355		3,413
Non-controlling interest	4		4
Total equity	3,359		3,417
	$	10,988	$	9,367

September 27,
2019 December 28,
2018
(in millions)
ASSETS
Cash and cash equivalents $ 635
$ 327
Receivables, net 1,775
1,877
Other current assets 514
543
Assets held for sale —
92
Total current assets 2,924
2,839
Property, plant and equipment, net 228
237
Intangible assets, net 571
652
Goodwill 4,889
4,860
Operating lease right-of-use assets, net 394
—
Other assets 404
182
$ 9,410
$ 8,770
LIABILITIES AND EQUITY
Accounts payable and accrued liabilities $ 2,004
$ 1,491
Accrued payroll and employee benefits 446
473
Long-term debt, current portion 77
72
Liabilities held for sale —
23
Total current liabilities 2,527
2,059
Long-term debt, net of current portion 2,939
3,052
Operating lease liabilities 295
—
Deferred tax liabilities 196
170
Other long-term liabilities 203
178
Commitments and contingencies (Notes 20 and 21)

Stockholders’ equity:
Common stock, $.0001 par value, 500 million shares authorized, 141 million and 146 million shares issued and outstanding at September 27, 2019 and December 28, 2018, respectively —
—
Additional paid-in capital 2,590
2,966
Retained earnings 764
372
Accumulated other comprehensive loss (108 ) (30 )
Total Leidos stockholders’ equity 3,246
3,308
Non-controlling interest 4
3
Total equity 3,250
3,311
$ 9,410
$ 8,770

See accompanying notes to condensed consolidated financial statements.

Table of Contents

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Three Months Ended
	April 3, 2020		March 29, 2019
	(in millions, except per share amounts)
Revenues	$	2,889	$	2,577
Cost of revenues	2,494		2,221
Selling, general and administrative expenses	197		166
Acquisition, integration and restructuring costs	12		2
Equity earnings of non-consolidated subsidiaries	(6)		(4)
Operating income	192		192
Non-operating (expense) income:
Interest expense, net	(48)		(38)
Other (expense) income, net	(14)		92
Income before income taxes	130		246
Income tax expense	(15)		(57)
Net income attributable to Leidos common stockholders	$	115	$	189

Earnings per share:
Basic	$	0.81	$	1.30
Diluted	0.80		1.29

Three Months Ended Nine Months Ended
September 27,
2019 September 28,
2018 September 27,
2019 September 28,
2018
(in millions, except per share amounts)
Revenues $ 2,835
$ 2,575
$ 8,140
$ 7,547
Cost of revenues 2,450
2,174
7,019
6,412
Selling, general and administrative expenses 177
194
518
547
Bad debt expense and recoveries (35 ) 1
(35 ) —
Integration and restructuring costs —
7
3
32
Asset impairment charges —
—
—
7
Equity earnings of non-consolidated subsidiaries (6 ) (4 ) (16 ) (12 )
Operating income 249
203
651
561
Non-operating (expense) income:
Interest expense, net (28 ) (35 ) (99 ) (104 )
Other (expense) income, net (7 ) 2
87
3
Income before income taxes 214
170
639
460
Income tax expense (52 ) (23 ) (150 ) (66 )
Net income 162
147
489
394
Less: net income attributable to non-controlling interest 1
—
3
1
Net income attributable to Leidos common stockholders $ 161
$ 147
$ 486
$ 393

Earnings per share:
Basic $ 1.13
$ 0.97
$ 3.38
$ 2.59
Diluted 1.11
0.96
3.33
2.55

See accompanying notes to condensed consolidated financial statements.

Table of Contents

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	Three Months Ended
	April 3, 2020		March 29, 2019
	(in millions)
Net income	$	115	$	189
Foreign currency translation adjustments	(74)		10
Unrecognized loss on derivative instruments	(42)		(15)
Pension adjustments	1		—
Total other comprehensive loss, net of taxes	(115)		(5)
Comprehensive income attributable to Leidos common stockholders	$	—	$	184

Three Months Ended Nine Months Ended
September 27,
2019 September 28,
2018 September 27,
2019 September 28,
2018
(in millions)
Net income $ 162
$ 147
$ 489
$ 394
Foreign currency translation adjustments (24 ) (8 ) (26 ) (41 )
Unrecognized (loss) gain on derivative instruments (11 ) (2 ) (52 ) 12
Total other comprehensive loss, net of taxes (35 ) (10 ) (78 ) (29 )
Comprehensive income 127
137
411
365
Less: comprehensive income attributable to non-controlling interest 1
—
3
1
Comprehensive income attributable to Leidos common stockholders $ 126
$ 137
$ 408
$ 364

See accompanying notes to condensed consolidated financial statements.

Table of Contents

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)


	Shares of common stock	Additional paid-in capital		Retained earnings		Accumulated other comprehensive loss		Leidos Holdings, Inc. stockholders' equity		Non-controlling interest		Total
	(in millions, except for per share amounts)
Balance at January 3, 2020	141	$	2,587	$	896	$	(70)	$	3,413	$	4	$	3,417
Cumulative adjustments related to ASU adoption				(1)				(1)				(1)
Balance at January 4, 2020	141	2,587		895		(70)		3,412		4		3,416
Net income	—	—		115		—		115		—		115
Other comprehensive loss, net of taxes	—	—		—		(115)		(115)		—		(115)
Issuances of stock	1	9		—		—		9		—		9
Repurchases of stock and other	—	(32)		—		—		(32)		—		(32)
Dividends of $0.34 per share	—	—		(49)		—		(49)		—		(49)
Stock-based compensation	—	15		—		—		15		—		15
Balance at April 3, 2020	142	$	2,579	$	961	$	(185)	$	3,355	$	4	$	3,359

Shares of common stock Additional
paid-in
capital Retained earnings Accumulated
other comprehensive
loss Leidos Holdings, Inc. stockholders' equity Non-controlling interest Total
(in millions, except for per share amounts)
Balance at December 28, 2018 146
$ 2,966
$ 372
$ (30 ) $ 3,308
$ 3
$ 3,311
Cumulative adjustments related to ASU adoption —
—
48
—
48
—
48
Balance at December 29, 2018 146
2,966
420
(30 ) 3,356
3
3,359
Net income —
—
189
—
189
—
189
Other comprehensive loss, net of taxes —
—
—
(5 ) (5 ) —
(5 )
Issuances of stock 1
11
—
—
11
—
11
Repurchases of stock and other (3 ) (222 ) —
—
(222 ) —
(222 )
Dividends of $0.32 per share —
—
(47 ) —
(47 ) —
(47 )
Stock-based compensation —
12
—
—
12
—
12
Balance at March 29, 2019 144
2,767
562
(35 ) 3,294
3
3,297
Net income —
—
136
—
136
2
138
Other comprehensive loss, net of taxes —
—
—
(38 ) (38 ) —
(38 )
Issuances of stock —
6
—
—
6
—
6
Repurchases of stock and other —
(5 ) —
—
(5 ) —
(5 )
Dividends of $0.32 per share —
—
(46 ) —
(46 ) —
(46 )
Stock-based compensation —
13
—
—
13
—
13
Other —
(1 ) —
—
(1 ) (2 ) (3 )
Balance at June 28, 2019 144
2,780
652
(73 ) 3,359
3
3,362
Net income —
—
161
—
161
1
162
Other comprehensive loss, net of taxes —
—
—
(35 ) (35 ) —
(35 )
Repurchases of stock and other (3 ) (203 ) —
—
(203 ) —
(203 )
Dividends of $0.34 per share —
—
(49 ) —
(49 ) —
(49 )
Stock-based compensation —
13
—
—
13
—
13
Balance at September 27, 2019 141
$ 2,590
$ 764
$ (108 ) $ 3,246
$ 4
$ 3,250


	Shares of common stock	Additional paid-in capital		Retained earnings		Accumulated other comprehensive loss		Leidos Holdings, Inc. stockholders' equity		Non-controlling interest		Total
	(in millions, except for per share amounts)
Balance at December 28, 2018	146	$	2,966	$	372	$	(30)	$	3,308	$	3	$	3,311
Cumulative adjustments related to ASU adoption	—	—		48		—		48		—		48
Balance at December 29, 2018	146	2,966		420		(30)		3,356		3		3,359
Net income	—	—		189		—		189		—		189
Other comprehensive loss, net of taxes	—	—		—		(5)		(5)		—		(5)
Issuances of stock	1	11		—		—		11		—		11
Repurchases of stock and other	(3)	(222)		—		—		(222)		—		(222)
Dividends of $0.32 per share	—	—		(47)		—		(47)		—		(47)
Stock-based compensation	—	12		—		—		12		—		12
Balance at March 29, 2019	144	$	2,767	$	562	$	(35)	$	3,294	$	3	$	3,297

See accompanying notes to condensed consolidated financial statements.

Table of Contents

~~LEIDOS HOLDINGS, INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED) [CONTINUED]~~

Shares of common stock Additional
paid-in
capital (Accumulated deficit) retained earnings Accumulated
other comprehensive
income Leidos Holdings, Inc. stockholders' equity Non-controlling interest Total
(in millions, except for per share amounts)
Balance at December 29, 2017 151
$ 3,344
$ (7 ) $ 33
$ 3,370
$ 13
$ 3,383
Cumulative adjustments related to ASU adoptions —
—
(8 ) 9
1
—
1
Balance at December 30, 2017 151
3,344
(15 ) 42
3,371
13
3,384
Net income —
—
102
—
102
—
102
Other comprehensive income, net of taxes —
—
—
14
14
—
14
Issuances of stock 1
5
—
—
5
—
5
Repurchases of stock and other —
(22 ) —
—
(22 ) —
(22 )
Dividends of $0.32 per share —
—
(50 ) —
(50 ) —
(50 )
Stock-based compensation —
11
—
—
11
—
11
Purchase of a non-controlling interest —
—
—
—
—
(10 ) (10 )
Balance at March 30, 2018 152
3,338
37
56
3,431
3
3,434
Net income —
—
144
—
144
1
145
Other comprehensive loss, net of taxes —
—
—
(33 ) (33 ) —
(33 )
Issuances of stock —
4
—
—
4
—
4
Repurchases of stock and other (2 ) (94 ) —
—
(94 ) —
(94 )
Dividends of $0.32 per share —
—
(48 ) —
(48 ) —
(48 )
Stock-based compensation —
12
—
—
12
—
12
Other —
—
—
—
—
(2 ) (2 )
Balance at June 29, 2018 150
3,260
133
23
3,416
2
3,418
Net income —
—
147
—
147
—
147
Other comprehensive loss, net of taxes —
—
—
(10 ) (10 ) —
(10 )
Issuances of stock —
7
—
—
7
—
7
Repurchases of stock and other —
(66 ) —
—
(66 ) —
(66 )
Dividends of $0.32 per share —
—
(49 ) —
(49 ) —
(49 )
Stock-based compensation —
10
—
—
10
—
10
Purchase of a non-controlling interest —
(1 ) —
—
(1 ) —
(1 )
Other —
—
—
—
—
1
1
Balance at September 28, 2018 150
$ 3,210
$ 231
$ 13
$ 3,454
$ 3
$ 3,457

~~See accompanying notes to condensed consolidated financial statements.~~

~~Table of Contents~~

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Three Months Ended
	April 3, 2020		March 29, 2019
	(in millions)
Cash flows from operations:
Net income	$	115	$	189
Adjustments to reconcile net income to net cash provided by operations:
Gain on sale of business	—		(88)
Depreciation and amortization	61		58
Stock-based compensation	15		12
Deferred income taxes	2		13
Other	28		3
Change in assets and liabilities, net of effects of acquisitions and dispositions:
Receivables	89		(21)
Other current assets and other long-term assets	(43)		(25)
Accounts payable and accrued liabilities and other long-term liabilities	25		214
Accrued payroll and employee benefits	68		(108)
Income taxes receivable/payable	12		41
Net cash provided by operating activities	372		288
Cash flows from investing activities:
Acquisition of business, net of cash acquired	(1,642)		—
Payments for property, equipment and software	(44)		(30)
Proceeds from disposition of business	—		171
Net proceeds from sale of assets	—		96
Other	1		—
Net cash (used in) provided by investing activities	(1,685)		237
Cash flows from financing activities:
Proceeds from debt issuance	3,175		—
Payments of long-term debt	(1,927)		(31)
Payments for debt issuance costs	(12)		—
Dividend payments	(51)		(54)
Repurchases of stock and other	(32)		(222)
Proceeds from issuances of stock	8		10
Net cash provided by (used in) financing activities	1,161		(297)
Net (decrease) increase in cash, cash equivalents and restricted cash	(152)		228
Cash, cash equivalents and restricted cash at beginning of period	717		369
Cash, cash equivalents and restricted cash at end of period	$	565	$	597

Nine Months Ended
September 27,
2019 September 28,
2018
(in millions)
Cash flows from operations:
Net income $ 489
$ 394
Adjustments to reconcile net income to net cash provided by operations:
Gain on sale of businesses (87 ) —
Depreciation and amortization 174
193
Stock-based compensation 38
33
Asset impairment charges —
7
Bad debt expense 19
—
Other 3
17
Change in assets and liabilities, net of effects of acquisitions and dispositions:
Receivables 68
2
Other current assets (49 ) (24 )
Accounts payable and accrued liabilities 253
61
Accrued payroll and employee benefits (17 ) (71 )
Deferred income taxes and income taxes receivable/payable 9
3
Other long-term assets/liabilities (77 ) 49
Net cash provided by operating activities 823
664
Cash flows from investing activities:
Proceeds from disposition of businesses 183
—
Net proceeds from sale of assets 96
—
Acquisitions of businesses (94 ) (81 )
Payments for property, equipment and software (67 ) (53 )
Collections on promissory note —
40
Other 1
—
Net cash provided by (used in) investing activities 119
(94 )
Cash flows from financing activities:
Repurchases of stock and other (430 ) (182 )
Dividend payments (101 ) (151 )
Payments of long-term debt (50 ) (59 )
Proceeds from issuances of stock 16
13
Payment of tax indemnification liability —
(23 )
Payments for non-controlling interest acquired —
(8 )
Payments for debt issuance and modification costs —
(6 )
Other —
(1 )
Net cash used in financing activities (565 ) (417 )
Net increase in cash, cash equivalents and restricted cash 377
153
Cash, cash equivalents and restricted cash at beginning of period 369
422
Cash, cash equivalents and restricted cash at end of period $ 746
$ 575

See accompanying notes to condensed consolidated financial statements.

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1–Basis of Presentation and Summary of Significant Accounting Policies

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 a FORTUNE 500^® science, engineering and information technology company that provides services and solutions in the defense, intelligence, civil and health ~~markets~~.markets. Leidos' domestic customers include the U.S. Department of Defense ("DoD"), the U.S. Intelligence Community, the U.S. Department of Homeland Security, the Federal Aviation Administration, the Department of Veterans Affairs and many other U.S. government civilian agencies, as well as state and local government ~~agencies~~.agencies. Leidos' international customers include foreign governments and their agencies, primarily located in Australia and the United Kingdom ("U.K."). Unless indicated otherwise, references to ~~the "Company,"~~ "we," "us" and "our" refer collectively to Leidos Holdings, Inc. and its consolidated subsidiaries. ~~The Company operates~~We operate in 3 reportable segments: Defense Solutions, Civil and Health. Additionally, we separately present the ~~Company separately presents the~~unallocable costs associated with corporate functions as Corporate.

~~The Company has~~We have a controlling interest in Mission Support Alliance, LLC ("MSA"), a joint venture with Centerra Group, LLC. On January 26, 2018, the Company entered into a Membership Interest Purchase Agreement with Jacobs Engineering Group, Inc. ("Jacobs Group"), whereby the Company purchased 100% of Jacobs Group's 41% outstanding membership interest in MSA. As a result, Leidos increased its controlling ownership in MSA from 47% to 88%. The ~~Company consolidates the~~ financial results for MSA are consolidated into ~~its~~our unaudited condensed consolidated financial statements.

The unaudited condensed 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 ~~Company’s~~ VIE are not material to the ~~Company’s~~ unaudited condensed consolidated financial statements for the periods presented. Intercompany accounts and transactions between consolidated companies have been eliminated in consolidation.

The accompanying unaudited condensed financial information has been prepared in accordance with the rules of the U.S. Securities and Exchange Commission and accounting principles generally accepted in the United States of America ("GAAP"). Certain disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules. The preparation of financial statements in conformity with 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 doubtful accounts, inventories, right of use assets and lease liabilities, fair value and impairment of intangible assets and goodwill, income taxes, 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.

~~Effective December 29, 2018, the Company adopted the requirements of Accounting Standards Update ("ASU") 2016-02 using the modified retrospective approach (see "Note 2–Accounting Standards"). Comparative information for the prior fiscal year has not been retrospectively adjusted.~~

Effective the beginning of fiscal ~~2019,~~2020, certain contracts were reassigned ~~between~~from the Civil ~~and~~reportable segment to the Defense Solutions reportable ~~segments (see "Note 19–Business Segments"). While this activity did not have a material impact on the Company's reportable segments, prior~~segment. Prior year segment results have been recast to reflect this ~~change.~~change (see "Note 13–Business Segments").

Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. ~~The Company combined "Dividends payable"~~We separately disclosed "Deferred income taxes" and "Income taxes receivable/payable" with "Accounts payable and accrued liabilities" on the condensed consolidated balance sheets. Additionally, the Company reclassified bad debt expense from "Selling, general and administrative expenses" to "Bad debt expense and recoveries" on the condensed consolidated statement of income. The Company also separately disclosed "Bad debt expense"within operating activities on the condensed consolidated statements of cash flows.

~~Table~~ Additionally, we combined "Other current assets" and "Other long-term assets" into "Other current assets and other long-term assets" and "Accounts payable and accrued liabilities" and "Other long-term liabilities" into "Accounts payable and accrued liabilities and other long-term liabilities" on the condensed consolidated statements of ~~Contents~~

~~LEIDOS HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

cash flows.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which consist of normal recurring adjustments, necessary for a fair presentation thereof. The results reported in these unaudited condensed consolidated financial statements are not necessarily indicative of the results that may be expected for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the ~~Company's~~ Annual Report on Form 10-K filed on February ~~19, 2019.~~

~~Note 2–Accounting Standards~~

~~Accounting Standards Updates Adopted~~

~~ASU 2016-02, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01,~~ ~~Leases(Topic 842)~~

~~In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02 ("ASC 842"), which supersedes the lease guidance under~~ ~~Leases (Topic 840)~~ and makes several changes, such as requiring an entity to recognize a right-of-use ("ROU") asset and corresponding lease obligation on the balance sheet, classified as financing or operating, as appropriate. The update is effective for public companies for annual and interim reporting periods beginning after December 15, 2018, and should be adopted under the modified retrospective approach.

In July 2018, the FASB issued ASU 2018-10 "Codification Improvements to Topic 842, Leases" to add clarity to certain areas within ASU 2016-02, and ASU 2018-11 "Targeted Improvements", to add an additional and optional transition method to adopt the new leases standard by allowing recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The ASU also provided lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease components, similar to the expedient provided for lessees. In December 2018, the FASB issued ASU 2018-20 "Narrow-Scope Improvements for Lessors" to add clarity to lessors accounting for sales taxes and other similar taxes collected from lessees, accounting for variable payments for contracts with lease and non-lease components and accounting for certain lessor costs. In March 2019, the FASB issued ASU 2019-01 "Codification Improvements" to ~~Leases (Topic 842)~~ ~~to clarify the codification more generally and/or to correct unintended application of guidance. The effective date and transition requirements of these updates are the same as ASU 2016-02.~~

The Company has elected to adopt certain practical expedients provided under ASC 842, including the options to not apply lease recognition for short-term leases, reassess whether expired or existing contracts contain leases, reassess lease classification for expired or existing leases, reassess initial direct costs, and combine lease and non-lease components in revenue arrangements when (i) the timing and pattern of revenue recognition for the components are the same and (ii) the lease component if accounted for separately, would be classified as an operating lease. The Company did not elect the hindsight practical expedient to determine the lease term for existing leases and in assessing impairment for the ROU assets. The Company also applies a single discount rate to a portfolio of leased assets with similar durations.

Effective December 29, 2018, the Company adopted the requirements of ASC 842 using the modified retrospective approach. Comparative information for the prior fiscal year has not been retrospectively adjusted.

As a result of the adoption of the new standard, the Company recorded $433 million and $486 million of ROU assets and lease liabilities, respectively, primarily due to its operating leases, to the Company's consolidated balance sheets. The standard did not have a material impact on the consolidated statements of income and consolidated statements of cash flows. The Company also recorded a $48 million increase in retained earnings due to the cumulative effect of recognizing the gain, net of taxes, related to the sale of the San Diego properties (see "~~Note 11–Property, Plant and Equipment").~~

18, 2020.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~The cumulative effect of the changes made to the Company's condensed consolidated balance sheet for the adoption of ASU 2016-02 was as follows:~~

Balance at December 28, 2018 Adjustments due to ASU 2016-02 Balance at December 29, 2018
(in millions)
Assets - non-current:
Property, plant and equipment, net $ 237
$ 1
$ 238
Operating lease right-of-use assets, net —
418
418

Liabilities - current:
Accounts payable and accrued liabilities $ 1,491
$ 132
$ 1,623
Long-term debt, current portion 72
8
80

Liabilities - non-current:
Long-term debt, net of current portion $ 3,052
$ (72 ) $ 2,980
Operating lease liabilities —
320
320
Deferred tax liabilities 170
17
187
Other long-term liabilities 178
(34 ) 144

Equity:
Retained earnings $ 372
$ 48
$ 420

Accounting Standards Updates ~~Issued But Not Yet~~("ASU") Adopted

ASU 2016-13, ASU 2018-19, ASU 2019-05 and ASU ~~2019-05,~~2019-11, Financial Instruments – Credit Losses (Topic 326)

In June 2016, the ~~FASB~~Financial Accounting Standards Board ("FASB") issued ASU 2016-13 and subsequent updates, which eliminates the requirement that a credit loss on a financial instrument be "probable" prior to recognition. Instead, a valuation allowance will be recorded to reflect an entity's current estimate of all expected credit losses, based on both historical and forecasted information related to an instrument. The update is effective for public companies for annual and interim reporting periods beginning after December 15, 2019, and should be adopted using a modified retrospective approach, which applies a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. A prospective approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date and loans and debt securities acquired with deteriorated credit quality. Early adoption is permitted.

Effective January 4, 2020, we adopted the requirements of Topic 326 using the modified retrospective approach. The adoption resulted in an immaterial impact to our financial assets and processes for determining the expected credit loss.

Accounting Standards Updates Issued But Not Yet Adopted

ASU 2020-04, Reference Rate Reform (Topic 848)

In ~~November 2018,~~March 2020, the FASB issued ASU ~~2018-19 "Codification Improvements~~2020-04 which provides companies with optional expedients and exceptions to ~~Topic 326, Financial Instruments - Credit Losses"~~ease the potential accounting burden associated with transitioning away from reference rates that are expected to ~~add clarity~~be discontinued. This update provides optional expedients for applying accounting guidance to ~~certain areas within ASU 2016-13. In May 2019,~~contracts, hedging relationships and other transactions that reference the ~~FASB issued ASU 2019-05 "Financial Instruments - Credit Losses (Topic 326), Target Transition Relief" which provided transition relief for entities adopting ASU 2016-13 by allowing the election~~London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of the ~~fair value option on certain financial instruments.~~reference rate reform. The ~~effective date and the transition methodology for the~~ amendments in ~~these updates~~this update are ~~the same~~effective for all entities as ~~in ASU 2016-13.~~

~~The Company is~~of March 2020 and can be adopted using a prospective approach no later than December 31, 2022. We are currently evaluating the impacts that this standard update will have on certain financial assets, including trade receivables, note receivables and receivables on sales-type leases. The Company is in the process of determining the potential impacts to processes, including allowance estimation models and internal controls in order to meet the standard update's accounting and reporting requirements.

~~Table of Contents~~

~~LEIDOS HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

~~Note 3–Significant Accounting Policies~~

~~Leases~~

~~Lessee~~

The Company has 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 and equipment for a period of time in exchange for consideration. ROU assets represent the Company’s right to use an underlying asset over the lease term and lease liabilities represent its obligation to make lease payments arising from the lease.

~~ROU assets and lease liabilities are recorded on the consolidated balance sheet at lease commencement date based on the present value~~ of the ~~future minimum lease payments over the lease term. As the Company generally does not know the implicit~~reference rate for its leases, the discount rate used is the Company’s incremental borrowing rate which is determined based on the rate of interest that the Company 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. ROU assets are evaluated for impairment in a manner consistent with the treatment of other long-lived assets.

Certain of the Company’s 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 the Company will exercise the option. The Company's 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 September 27, 2019, the Company did not have any lease agreements with residual value guarantees.

~~As a result of the adoption of ASC 842, the Company elected to not separate non-lease components from lease components and instead account for both components as a single lease.~~

~~The related lease payments on the Company’s short-term facilities and equipment leases are recognized as expense on a straight-line basis over the lease term.~~

~~Lessor~~

The Company is a lessor on certain equipment sales-type and operating lease arrangements with its customers. To be considered lease revenue, the contract must contain a specified asset, the Company 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. Arrangements may also contain options to renew or extend the performance period. Option periods are included in the lease term if the Company determines that it is reasonably certain the customer will exercise an option.

The Company has arrangements that contain both lease and non-lease components. The Company will 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. If the Company accounts for an arrangement both as a lease and non-lease component, then the allocation of consideration for each component will be based the relative standalone sales price.

~~Table of Contents~~

~~LEIDOS HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

reform.

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 were as follows:

Three Months Ended Nine Months Ended
September 27,
2019 September 28,
2018 September 27,
2019 September 28,
2018
(in millions, except per share amounts)
Favorable impact $ 23
$ 34
$ 69
$ 135
Unfavorable impact (11 ) (17 ) (40 ) (49 )
Net impact to income before income taxes $ 12
$ 17
$ 29
$ 86

Impact on diluted EPS attributable to Leidos common stockholders $ 0.06
$ 0.07
$ 0.15
$ 0.41


	Three Months Ended
	April 3, 2020		March 29, 2019
	(in millions, except per share amounts)
Favorable impact	$	24	$	23
Unfavorable impact	(7)		(19)
Net impact to income before income taxes	$	17	$	4

Impact on diluted EPS attributable to Leidos common stockholders	$	0.09	$	0.02

The impact on diluted earnings per share ("EPS") attributable to Leidos common stockholders is calculated using the ~~Company's~~ statutory tax rate.

Revenue Recognized from Prior Obligations

Revenue recognized from performance obligations satisfied in previous periods was ~~$17~~$20 million and ~~$36~~$7 million for the ~~quarter and nine~~three months ended ~~September 27,~~April 3, 2020 and March 29, 2019, ~~respectively and $18 million and $84 million for the quarter and nine months ended September 28, 2018,~~ 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 due to true-ups of contract estimates at the end of contract performance.

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Cash and Cash Equivalents

~~The Company's~~Our cash equivalents are primarily comprised of investments in several large institutional money market accounts, with original maturity of three months or less. ~~The Company includes outstanding~~Outstanding payments are included within "Cash and cash equivalents" and ~~correspondingly increases~~ "Accounts payable and accrued liabilities" correspondingly on the condensed consolidated balance sheets. At ~~September 27, 2019~~April 3, 2020 and ~~December 28, 2018, the Company included $33~~January 3, 2020, $200 million and ~~$56~~$169 million, respectively, of outstanding payments were included within "Cash and cash equivalents."

~~Table of Contents~~

~~LEIDOS HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

Note ~~4–Leases~~

~~Lessee~~

~~The Company's ROU assets and lease liabilities consisted of the following:~~

Balance sheet line item September 27,
2019
(in millions)
ROU assets:
Finance leases Property, plant and equipment, net $ 9
Operating leases Operating lease right-of-use assets, net 394
$ 403
Current lease liabilities:
Finance leases Long-term debt, current portion $ 7
Operating leases Accounts payable and accrued liabilities 141
$ 148
Non-current lease liabilities:
Finance leases Long-term debt, net of current portion $ 2
Operating leases Operating lease liabilities 295
$ 297

~~The Company's total lease cost for the periods presented consisted of the following:~~

Three Months Ended Nine Months Ended
September 27,
2019 September 27,
2019
(in millions)
Finance lease cost:
Amortization of ROU assets $ 2
$ 6

Operating lease cost 34
116

Variable lease cost 28
79
Short-term lease cost 2
5
Less: Sublease income (3 ) (4 )
Total lease cost $ 63
$ 202

~~The Company's lease costs are included in "Cost of revenues" and "Selling, general and administrative expenses" within the condensed consolidated statements of income.~~

~~Lease terms and discount rates related to leases were as follows:~~



	September 27, 2019
~~Weighted-average remaining lease term (in years):~~
~~Finance leases~~	~~2.2~~
~~Operating leases~~	~~5.0~~
~~Weighted-average discount rate:~~
~~Finance leases~~	~~4.15~~	%
~~Operating leases~~	~~4.11~~	%

~~Table of Contents~~

~~LEIDOS HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

~~Other information related to leases was as follows:~~

Nine Months Ended
September 27,
2019
(in millions)
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases $ 111
Financing cash flows from finance leases 6
Lease liabilities arising from obtaining ROU assets:
Operating lease liabilities $ 81

~~The Company's future minimum lease commitments of its finance and operating leases on an undiscounted basis, reconciled to the respective lease liability at September 27, 2019, were as follows:~~

Fiscal Year Ending Finance lease commitments Operating lease commitments
(in millions)
2019 (remainder of year) $ 2
$ 49
2020 5
136
2021 1
86
2022 1
65
2023 —
46
2024 and thereafter —
102
Total undiscounted cash flows 9
484
Less: imputed interest —
(48 )
Lease liability as of September 27, 2019 $ 9
$ 436

On January 24, 2018, the Company entered into a lease agreement with its current lessor for office space in a building to be constructed to function as the Company's new corporate headquarters in Reston, Virginia. The Company will occupy the space for an initial term of 148 months and rent expense will be $11 million for the first lease year, with an annual rent expense increase of 2.5%. The Company currently expects construction to be completed and to take occupancy of the building by April 1, 2020, at which point the Company's lease agreements for its current corporate headquarters will terminate.

~~Disclosures related to periods prior to adoption of ASC 842~~

~~During the quarter and nine months ended September 28, 2018, the Company had $40 million and $120 million of net rental expense, respectively.~~

~~Future minimum lease commitments and sublease receipts, under non-cancelable operating leases in effect at December 28, 2018, were as follows:~~

Fiscal Year Ending Capital lease commitments Operating lease commitments Sublease receipts
(in millions)
2019 $ 3
$ 144
$ 3
2020 —
114
1
2021 —
83
1
2022 —
71
—
2023 —
55
—
2024 and thereafter —
246
—
Total $ 3
$ 713
$ 5

~~Table of Contents~~

~~LEIDOS HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

~~Lessor~~

As of September 27, 2019, the Company had a total net investment in sales-type leases, which relates to lease payment receivables, of $56 million. The current and non-current portions of net investment in sales-type leases are included within "Other current assets" and "Other assets", respectively, on the Company's consolidated balance sheets.

~~The components of lease income were as follows:~~

Three Months Ended Nine Months Ended
Income statement line item September 27,
2019 September 27,
2019
(in millions)
Sales-type leases:
Selling price at lease commencement Revenues $ 53
$ 68
Cost of underlying asset Cost of revenues 56
70
Operating loss (3 ) (2 )
Interest income on lease receivables Revenues 1
1
$ (2 ) $ (1 )

Operating lease income Revenues $ 4
$ 19
Total lease income $ 2
$ 18

~~As of September 27, 2019, undiscounted cash flows for sales-type and operating leases for the next five years and thereafter are as follows:~~

Fiscal Year Ending Sales-type leases Operating leases
(in millions)
2019 (remainder of year) $ 11
$ 6
2020 31
22
2021 16
22
2022 5
22
2023 1
22
2024 and thereafter —
22
Total undiscounted cash flows $ 64
$ 116
Present value of lease payments as lease receivables 56

Difference between undiscounted cash flows and discounted cash flows $ 8

~~Note 5–~~2–Revenues

Remaining Performance Obligations

Remaining performance obligations represent the expected value of exercised contracts, both funded and unfunded, less revenue recognized to date. Remaining performance obligations do not include unexercised option periods and future potential task orders expected to be awarded under indefinite delivery/indefinite quantity ("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 task orders is anticipated.

As of ~~September 27, 2019, the Company~~April 3, 2020, we had ~~$10.8~~$13.8 billion of remaining performance obligations, which are expected to be recognized as ~~revenue~~revenues in the amounts of ~~$2.7~~$6.5 billion, ~~$5.0~~$2.5 billion and ~~$3.1~~$4.8 billion for the remainder of fiscal ~~2019, fiscal~~ 2020, ~~and~~ fiscal 2021 and fiscal 2022 and thereafter, respectively.

~~Table of Contents~~

~~LEIDOS HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

Disaggregation of Revenues

~~The Company disaggregates~~We disaggregate revenues by customer-type, contract-type and geographic location for each of ~~its~~our reportable segments. These categories represent how the nature, timing and uncertainty of revenues and cash flows are affected.

Prior year ~~amounts~~segment results have been recast for the contracts that were reassigned ~~between~~from the Civil reportable segment to the Defense Solutions ~~and Civil~~ reportable ~~segments (see "Note 19–Business Segments").~~segment.

Disaggregated revenues by customer-type were as follows:


																		Three Months Ended April 3, 2020
	Three Months Ended September 27, 2019								Nine Months Ended September 27, 2019									Defense Solutions		Civil		Health		Total
	Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total			(in millions)
	(in millions)
DoD and U.S. Intelligence Community⁽¹⁾	$	1,191	$	37	$	123	$	1,351	$	3,464	$	125	$	360	$	3,949
Other government agencies⁽¹⁾⁽²⁾	75		679		337		1,091		203		1,936		982		3,121
DoD and U.S. Intelligence Community																	DoD and U.S. Intelligence Community	$	1,285	$	17	$	124	$	1,426
Other government agencies⁽¹⁾																	Other government agencies⁽¹⁾	208		544		375		1,127
Commercial and non-U.S. customers	88		202		45		335		299		571		112		982		Commercial and non-U.S. customers	212		71		28		311
Total	$	1,354	$	918	$	505	$	2,777	$	3,966	$	2,632	$	1,454	$	8,052	Total	$	1,705	$	632	$	527	$	2,864

Three Months Ended September 28, 2018 Nine Months Ended September 28, 2018
Defense Solutions Civil Health Total Defense Solutions Civil Health Total
(in millions)
DoD and U.S. Intelligence Community⁽³⁾
$ 1,100
$ 40
$ 88
$ 1,228
$ 3,256
$ 89
$ 262
$ 3,607
Other government agencies⁽²⁾⁽³⁾
45
605
312
962
137
1,746
937
2,820
Commercial and non-U.S. customers 105
236
44
385
308
691
121
1,120
Total $ 1,250
$ 881
$ 444
$ 2,575
$ 3,701
$ 2,526
$ 1,320
$ 7,547


	Three Months Ended March 29, 2019
	Defense Solutions		Civil		Health		Total
	(in millions)
DoD and U.S. Intelligence Community	$	1,135	$	17	$	124	$	1,276
Other government agencies⁽¹⁾	156		511		302		969
Commercial and non-U.S. customers	199		87		28		314
Total	$	1,490	$	615	$	454	$	2,559

⁽¹⁾For the nine months ended September 27, 2019, the Company reclassified $6 million within the Defense Solutions segment from "Other government agencies" to "DoD and U.S. Intelligence Community" to reflect the change in disaggregation of U.S. government customers in the current period.

⁽²⁾Includes federal government agencies other than the DoD and U.S. Intelligence Community, as well as state and local government agencies.

⁽³⁾ For the quarter and nine months ended September 28, 2018, the Company reclassified $9 million and $34 million, respectively, within the Defense Solutions segment from "Other government agencies" to "DoD and U.S. Intelligence Community" to reflect the change in disaggregation of U.S. government customers in the current period.

The majority of ~~the Company's~~our revenues are generated from U.S. government contracts, either as a prime contractor or as a ~~subcontractor to other contractors.~~subcontractor. 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:~~

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Disaggregated revenues by contract-type were as follows:

Three Months Ended September 28, 2018 Nine Months Ended September 28, 2018
Defense Solutions Civil Health Total Defense Solutions Civil Health Total
(in millions)
Cost-reimbursement and fixed-price-incentive-fee $ 920
$ 464
$ 42
$ 1,426
$ 2,552
$ 1,377
$ 134
$ 4,063
Firm-fixed-price 214
276
277
767
772
719
814
2,305
Time-and-materials and fixed-price-level-of-effort 116
141
125
382
377
430
372
1,179
Total $ 1,250
$ 881
$ 444
$ 2,575
$ 3,701
$ 2,526
$ 1,320
$ 7,547


	Three Months Ended March 29, 2019
	Defense Solutions		Civil		Health		Total
	(in millions)
Cost-reimbursement and fixed-price-incentive-fee	$	986	$	367	$	69	$	1,422
Firm-fixed-price	364		142		269		775
Time-and-materials and fixed-price-level-of-effort	140		106		116		362
Total	$	1,490	$	615	$	454	$	2,559

Cost-reimbursement and fixed-price-incentive-fee contracts are generally lower risk and have lower profits. Time-and-materials ("T&M") and fixed-price-level-of-effort contracts are also lower risk but profits may vary depending on actual labor costs compared to negotiated contract billing rates. Firm-fixed-price ("FFP") contracts offer the potential for higher profits while increasing the ~~Company’s~~ exposure to risk of cost overruns.

Disaggregated revenues by geographic location were as follows:

Three Months Ended September 27, 2019 Nine Months Ended September 27, 2019
Defense Solutions Civil Health Total Defense Solutions Civil Health Total
(in millions)
United States $ 1,261
$ 790
$ 505
$ 2,556
$ 3,689
$ 2,273
$ 1,454
$ 7,416
International 93
128
—
221
277
359
—
636
Total $ 1,354
$ 918
$ 505
$ 2,777
$ 3,966
$ 2,632
$ 1,454
$ 8,052


	Three Months Ended September 28, 2018								Nine Months Ended September 28, 2018									Three Months Ended April 3, 2020
	Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total			Defense Solutions		Civil		Health		Total
	(in millions)																	(in millions)
United States	$	1,156	$	739	$	444	$	2,339	$	3,424	$	2,112	$	1,320	$	6,856	United States	$	1,513	$	619	$	527	$	2,659
International	94		142		—		236		277		414		—		691		International	192		13		—		205
Total	$	1,250	$	881	$	444	$	2,575	$	3,701	$	2,526	$	1,320	$	7,547	Total	$	1,705	$	632	$	527	$	2,864


	Three Months Ended March 29, 2019
	Defense Solutions		Civil		Health		Total
	(in millions)
United States	$	1,304	$	599	$	454	$	2,357
International	186		16		—		202
Total	$	1,490	$	615	$	454	$	2,559

Our international business operations, primarily located in Australia and the U.K., are subject to additional and different risks than ~~its~~our U.S. business. Failure to comply with ~~U.S~~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 ~~the Company's~~our business with the U.S. government.

In some countries, there is an increased chance for economic, legal or political changes that may adversely affect the performance of ~~the Company's~~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.

~~For~~Revenues by customer-type, contract-type and geographic location exclude $25 million and $18 million of lease income for the ~~quarter and nine~~three months ended ~~September 27,~~April 3, 2020 and March 29, 2019, ~~revenues exclude $58 million and $88 million,~~ respectively ~~recognized under ASC 842. See "~~(see "Note 6–Leases").

~~Note 4–Leases" for additional information regarding revenues recognized under ASC 842.~~Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 6–3–Contract Assets and Liabilities

~~The Company’s performance~~Performance obligations are satisfied either over time as work progresses or at a point in time. FFP contracts are typically billed to the customer using milestone payments while cost-reimbursable and T&M 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, ~~for each of the Company’s contracts,~~ 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, where right to payment is not just subject to the passage of time. Contract liabilities consist of deferred revenue.

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~~LEIDOS HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

The components of contract assets and contract liabilities consisted of the following:

Unbilled receivables⁽¹⁾

⁽¹⁾ Balances exclude ~~$460 million and $381~~$572 million determined to be billable at ~~September 27, 2019,~~April 3, 2020, and ~~December 28, 2018, respectively.~~January 3, 2020.

The decrease in unbilled receivables was primarily due to the timing of revenue recognized on certain contracts. The increase in deferred revenue was primarily due to the timing of advance payments from customers offset by revenue recognized during the period.

Revenue recognized for the ~~quarter and nine~~three months ended ~~September 27,~~April 3, 2020 of $145 million was included as a contract liability at January 3, 2020. Revenue recognized for the three months ended March 29, 2019 of ~~$11~~$113 million ~~and $200 million, respectively,~~ was included as a contract liability at December 28, 2018. Revenue recognized for the quarter and nine months ended September 28, 2018 of $37 million and $164 million, respectively, was included as a contract liability at December 30, 2017 (date of adoption).

Note 7–4–Acquisitions

L3Harris Technologies ("L3Harris") Transaction

On ~~August 15, 2019, the Company completed the acquisition of IMX Medical Management Services, Inc.~~February 3, 2020, we entered into a definitive agreement to acquire L3Harris' security detection and ~~its affiliated~~automation businesses ~~("IMX")~~ for ~~preliminary purchase~~cash consideration of ~~$95 million, which primarily included $90 million of cash paid and an additional $4 million paid~~$1.0 billion, subject to ~~extinguish IMX's existing term loans and credit facility balances. The acquisition extends the Company's independent medical evaluation coverage area for commercial and federal customers.~~

The Company recorded $51 million of goodwill (which is deductible for tax purposes) and $42 million of intangible assets. The intangible assets primarily consist of $41 million for customer relationships. The amortization period for the customer relationships is 10 years.

At September 27, 2019, the Company had not finalized the determination of fair values allocated to assets and liabilities, including, but not limited to, intangible assets and accounts payable and accrued liabilities.

~~Note 8–Divestitures~~

~~Health Staff Augmentation Business~~

On September 12, 2019, the Company's Health segment disposed of its health staff augmentation business that was primarily focused on implementation and optimization services to hospital customers. The Company recorded an immaterial loss, which is primarily comprised of the $15 million sales price less the $12 million carrying value of net assets divested, preliminary net working capital adjustments, if any. L3Harris' security detection and automation businesses provide airport and critical infrastructure screening products, automated tray return systems and other industrial automation products.

Additionally, on February 12, 2020, we entered into a senior unsecured delayed-draw term loan facility providing for $1.0 billion of commitments from certain financial institutions in connection with the L3Harris transaction ~~related costs. This disposition did not meet~~(see "Note 9–Debt").

On May 4, 2020, we completed our acquisition of L3Harris' security detection and automation businesses and drew on our senior unsecured delayed-draw term loan facility (see "Note 16–Subsequent Events").

Dynetics Acquisition

On January 31, 2020 (the "Acquisition Date"), we completed our acquisition of Dynetics, Inc. ("Dynetics"), an industry-leading applied research and national security solutions company. All of the ~~criteria to be classified as a discontinued operation in the Company's financial statements.~~

~~Commercial Cybersecurity Business~~

~~On February 20, 2019, the Company's Civil segment disposed~~issued and outstanding shares of ~~its commercial cybersecurity business in order to focus on providing solutions, including cybersecurity, to the Company's core markets~~common stock of ~~governments and highly regulated industries. In February 2019, the Company received initial proceeds of $171 million. During the quarter ended June 28, 2019, working capital adjustments~~Dynetics were ~~finalized, resulting in a final sales price of $166 million. The Company recorded a pre-tax gain on sale of $87 million,~~purchased for $1.64 billion, net of ~~assets divested~~cash acquired.

In connection with the acquisition, we entered into a Bridge Credit Agreement with certain financial institutions, which provided for a senior unsecured 364-day bridge loan facility in an aggregate principal amount of ~~$69 million and $10 million in transaction related costs. The gain was recorded in "Other (expense) income, net" on the condensed consolidated statements of income. This disposition did not meet the criteria to be classified as a discontinued operation in the Company's financial statements.~~

$1.25 billion (the "Bridge Facility"). See "Note 9–Debt" for further details.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The proceeds of the Bridge Facility and cash on hand on the Acquisition Date were used to fund the purchase of Dynetics and repay in full all third party indebtedness of Dynetics, terminate all commitments thereunder and discharge and release all existing guarantees and liens.

The ~~major classes~~addition of Dynetics will accelerate opportunities within our innovation engine that researches and develops new technologies and solutions to address the most challenging needs of our customers.

The preliminary fair values of the assets acquired and liabilities ~~divested~~assumed at the Acquisition Date were as follows (in millions):


Cash	$	18
Receivables	159
Other current assets	64
Operating lease right-of-use assets	25
Property, plant and equipment	161
Intangible assets	464
Accounts payable and accrued liabilities	(45)
Accrued payroll and employee benefits	(29)
Operating lease liabilities	(20)
Total identifiable net assets acquired	797
Goodwill	863
Preliminary purchase price	$	1,660

Due to the timing and complexity of the acquisition, the assets acquired and liabilities assumed were recorded at their preliminary estimated fair values. As of April 3, 2020, we had not finalized the determination of fair values of the acquired assets and liabilities, primarily including, but not limited to: property, plant and equipment and intangible assets. The preliminary purchase price allocation is subject to change as we complete our determination of the fair value of the acquired assets and liabilities, the impact of which could be material.

The goodwill represents intellectual capital and the acquired assembled workforce, none of which qualify for recognition as a separate intangible asset. For tax purposes, $867 million of goodwill is deductible.

The following table summarizes the preliminary fair value of intangible assets acquired at the Acquisition Date and the related weighted average amortization period:


	Weighted average amortization period	Fair value
	(in years)	(in millions)
Program intangibles	10	$	430
Backlog intangibles	1	34
Total	9	$	464

The following expenses were incurred related to the acquisition of Dynetics:


	Three Months Ended
	April 3, 2020
	(in millions)
Acquisition costs	$	8
Integration costs	1
Total acquisition and integration costs	$	9

For the three months ended April 3, 2020, $129 million of revenues related to Dynetics were recognized within the Defense Solutions reportable segment.

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Receivables, net $ 14
Other current assets 5
Property, plant and equipment, net 3
Intangible assets, net 5
Goodwill 57
Deferred tax assets 6
Total assets divested $ 90

Accounts payable and accrued liabilities $ (13 )
Accrued payroll and employee benefits (5 )
Other long-term liabilities (3 )
Total liabilities divested $ (21 )

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Pro Forma Financial Information

The following unaudited pro forma financial information presents consolidated results of operations as if the acquisition had occurred on December 29, 2018. The pro forma financial information was prepared based on historical financial information and has been adjusted to give effect to the events that are directly attributable to the acquisition of Dynetics and factually supportable. The unaudited pro forma results below do not reflect future events that have occurred or may occur after the acquisition, including anticipated synergies or other expected benefits that may be realized from the acquisition. The pro forma information is not intended to reflect the actual results of operations that would have occurred if the acquisition had been completed on December 29, 2018, nor is it intended to be an indication of future operating results.


	Three Months Ended
	April 3, 2020		March 29, 2019
	(in millions, except per share amounts)
Revenues	$	2,952	$	2,722
Net income attributable to Leidos common stockholders	130		158
Earnings per share:
Basic	$	0.92	$	1.09
Diluted	0.90		1.07

The unaudited pro forma financial information above includes the following nonrecurring significant adjustment made to account for certain costs incurred as if the acquisition had been completed on December 29, 2018:

~~Note 9–Goodwill~~•Acquisition-related costs of $8 million were excluded within the pro forma financial information for fiscal 2020 and were included within the supplemental pro forma earnings for fiscal 2019.

Note 5–Goodwill and Intangible Assets

The following table presents changes in the carrying amount of goodwill by reportable segment:

Defense Solutions Civil Health Total
(in millions)
Goodwill at December 29, 2017 $ 2,055
$ 1,998
$ 921
$ 4,974
Foreign currency translation adjustments (40 ) (11 ) —
(51 )
Transfers to assets held for sale —
(57 ) —
(57 )
Adjustment to goodwill —
(6 ) —
(6 )
Goodwill at December 28, 2018 2,015
1,924
921
4,860
Goodwill re-allocation 25
(25 ) —
—
Acquisition of IMX —
—
51
51
Divestiture of health staff augmentation business —
—
(5 ) (5 )
Foreign currency translation adjustments (16 ) (4 ) —
(20 )
Adjustment to goodwill 3
—
—
3
Goodwill at September 27, 2019 $ 2,027
$ 1,895
$ 967
$ 4,889

The goodwill balances at September 27, 2019, December 28, 2018, and December 29, 2017 included accumulated goodwill impairment losses of $369 million and $117 million within the Health and Civil segments, respectively.


	Defense Solutions		Civil		Health		Total
	(in millions)
Goodwill at December 28, 2018	$	2,015	$	1,924	$	921	$	4,860
Goodwill re-allocation	25		(25)		—		—
Acquisition of IMX Medical Management Services, Inc.	—		—		50		50
Divestiture of health staff augmentation business	—		—		(5)		(5)
Foreign currency translation adjustments	(4)		8		—		4
Adjustment to goodwill	3		—		—		3
Goodwill at January 3, 2020	2,039		1,907		966		4,912
Goodwill re-allocation	429		(429)		—		—
Acquisition of Dynetics	863		—		—		863
Foreign currency translation adjustments	(56)		—		—		(56)
Goodwill at April 3, 2020	$	3,275	$	1,478	$	966	$	5,719

Effective the beginning of fiscal 2019, the Company changed the composition of its Defense Solutions reportable segment, which resulted in the identification of new operating segments and reporting units within Defense Solutions. In addition,2020, certain contracts were reassigned ~~between~~from the Civil ~~and~~reportable segment to the Defense ~~solutions~~Solutions reportable ~~segments (see "Note 19–Business Segments"). Consequently,~~segment. This change resulted in the ~~carrying amount~~reallocation of $429 million of goodwill ~~was re-allocated among~~between the reporting units ~~for~~within the ~~purpose of testing goodwill for impairment.~~

~~In conjunction with the changes mentioned above, the Company~~two reportable segments. We evaluated goodwill for impairment for certain of our reporting units using either a quantitative step one analysis or qualitative analysis, both before and after the changes were made, and determined that goodwill was ~~not~~0t impaired. ~~There were 0 goodwill impairments during the nine months ended September 27, 2019 and September 28, 2018.~~

During the quarter ended March 29, 2019, the Company recorded an immaterial correction of $3 million with respect to the fair value of assets acquired from Lockheed Martin's Information Systems & Global Solutions business ("the Transactions").

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~Note 10–~~Intangible Assets

Intangible assets consisted of the following:

September 27, 2019 December 28, 2018
Gross carrying value Accumulated amortization Net carrying value Gross carrying value Accumulated amortization Net carrying value
(in millions)
Finite-lived intangible assets:
Program and contract intangibles $ 1,001
$ (494 ) $ 507
$ 1,003
$ (374 ) $ 629
Software and technology 100
(81 ) 19
93
(74 ) 19
Customer relationships 45
(5 ) 40
4
(4 ) —
Trade names 1
—
1
—
—
—
Total finite-lived intangible assets 1,147
(580 ) 567
1,100
(452 ) 648
Indefinite-lived intangible assets:
Trade names 4
—
4
4
—
4
Total intangible assets $ 1,151
$ (580 ) $ 571
$ 1,104
$ (452 ) $ 652


	April 3, 2020										January 3, 2020
	Gross carrying value		Accumulated amortization		Net carrying value		Gross carrying value		Accumulated amortization		Net carrying value
	(in millions)
Finite-lived intangible assets:
Program intangibles	$	1,427	$	(566)	$	861	$	1,003	$	(536)	$	467
Software and technology	102		(84)		18		102		(83)		19
Customer relationships	45		(7)		38		45		(6)		39
Backlog	34		(6)		28		—		—		—
Trade names	1		—		1		1		—		1
Total finite-lived intangible assets	1,609		(663)		946		1,151		(625)		526
Indefinite-lived intangible assets:
Trade names	4		—		4		4		—		4
Total intangible assets	$	1,613	$	(663)	$	950	$	1,155	$	(625)	$	530

Amortization expense was $43 million ~~and $129 million,~~ for both the ~~quarter and nine~~three months ended ~~September 27, 2019, respectively,~~April 3, 2020 and ~~$50 million and $151 million for the quarter and nine months ended September 28, 2018, respectively.~~March 29, 2019.

Program intangibles and ~~contract~~backlog 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. Customer relationships and trade name intangible assets are amortized on a straight-line basis over their estimated useful lives. 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.

The estimated annual amortization expense as of ~~September 27, 2019,~~April 3, 2020, was as follows:

Fiscal year ending
(in millions)
2019 (remainder of year) $ 43
2020 131
2021 110
2022 97
2023 77
2024 and thereafter 109
$ 567


Fiscal year ending
	(in millions)
2020 (remainder of year)	$	142
2021	171
2022	166
2023	144
2024	100
2025 and thereafter	223
	$	946

We are monitoring the impacts of the coronavirus outbreak ("COVID-19") on the fair value of our intangible assets and goodwill. While we currently do not anticipate any impairments to intangible assets and goodwill as a result of COVID-19, future changes in the expectations of the impact on our operations, financial performance and cash flows related to the intangible assets and goodwill could cause these assets to be impaired.

On January 24, 2018, we entered into a lease agreement with our current lessor for office space in a building to be constructed to function as our new corporate headquarters in Reston, VA. We will occupy the space for an initial term of 148 months and lease expense will be $11 million for the first lease year, with an annual rent expense increase of 2.5%.

In March 2020, we took occupancy of our new corporate headquarters in Reston, VA. As a result, we recorded $105 million of right-of-use assets and $133 million of lease liabilities.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Lessor

~~Note 11–Property, Plant and Equipment~~The components of lease income were as follows:

~~Property, plant and equipment, net consisted of the following:~~


		Three Months Ended
	Income statement line item	April 3, 2020		March 29, 2019
		(in millions)
Sales-type leases:
Selling price at lease commencement	Revenues	$	16	$	10
Cost of underlying asset	Cost of revenues	(13)		(9)
Operating income		3		1
Interest income on lease receivables	Revenues	2		—
		5		1

Operating lease income	Revenues	7		8
Total lease income		$	12	$	9

September 27,
2019 December 28,
2018
(in millions)
Computers and other equipment $ 248
$ 233
Leasehold improvements 187
206
Office furniture and fixtures 34
36
Buildings and improvements 23
56
Land 4
40
Construction in progress 58
15
554
586
Less: accumulated depreciation (326 ) (349 )
$ 228
$ 237

~~Depreciation expense was $16 million and $45 million for the quarter and nine months ended September 27, 2019, respectively, and~~ ~~$14 million~~ ~~and $42 million for the quarter and nine months ended September 28, 2018, respectively.~~

~~Sale and Leaseback Agreements~~

~~Gaithersburg, MD Property~~

On December 31, 2018, the Company closed the sale and leaseback agreement relating to its land and building in Gaithersburg, MD. The Company received proceeds of $31 million, net of selling costs for the property, which had a carrying value of $31 million. The term of the lease is expected to end during fiscal 2020.

~~During the quarter ended March 30, 2018, an impairment charge of $7 million associated with this property was recorded within Corporate.~~

~~San Diego, CA Properties~~

On December 28, 2018, the Company closed the sale and leaseback agreement relating to 2 buildings and the adjacent land in San Diego, CA for consideration of $79 million, net of selling costs. The carrying value of the land and buildings was $14 million. The Company received cash proceeds of $14 million upon closing in December 2018, and received the remaining $65 million cash proceeds in January 2019. The term of the lease is expected to end during fiscal 2036.

Prior to the adoption of ASC 842, the consideration of $79 million was recorded as a financing transaction. Under ASC 842, the transaction qualified as a sale-leaseback and consequently the debt of $79 million and the carrying value of the property of $14 million, net of the related tax impact of $17 million, were reclassified into retained earnings as a cumulative effect adjustment. The proceeds received in fiscal 2019 were recorded as investing activities on the condensed consolidated statements of cash flows.

Note ~~12–~~7–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 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 ~~the Company~~us to develop ~~its~~our own assumptions (Level 3).

The accounting guidance for fair value measurements requires that ~~the Company~~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. ~~The Company has~~We have not made fair value option elections on any of ~~its~~our financial assets and liabilities.

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~~LEIDOS HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

The ~~Company's~~ financial instruments measured at fair value on a recurring basis consisted of the following:

September 27, 2019 December 28, 2018
Carrying value Fair value Carrying value Fair value
(in millions)
Financial assets:
Derivatives $ 3
$ 3
$ —
$ —
Financial liabilities:
Derivatives $ 88
$ 88
$ 35
$ 35

~~The Company's~~


	April 3, 2020						January 3, 2020
	Carrying value		Fair value		Carrying value		Fair value
	(in millions)
Financial assets:
Derivatives	$	5	$	5	$	2	$	2
Financial liabilities:
Derivatives	$	125	$	125	$	75	$	75

Our derivatives primarily consisted of the fair value interest rate swaps on ~~its~~the $450 million, fixed rate 4.45% senior ~~secured~~unsecured notes maturing in December 2020 and cash flow interest rate swaps on $1.5 billion of the ~~Company's~~ variable rate senior ~~secured~~unsecured term ~~loans~~loan (see "~~Note 13–~~"Note 8–Derivative ~~Instruments~~"Instruments"). The fair value of the fair value interest rate swaps and cash flow interest rate swaps is determined based on observed values for underlying interest rates on the LIBOR yield curve and the underlying interest rate, respectively (Level 2 inputs).

The carrying amounts of ~~the Company's~~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 ~~the Company's note~~our notes receivable of ~~$25~~$21 million and ~~$24~~$20 million as of ~~September 27, 2019,~~April 3, 2020, and ~~December 28, 2018,~~January 3, 2020, respectively, approximates fair value as the stated interest ~~rate~~rates within the ~~agreement is~~agreements are consistent with current market rates used in notes with similar terms in the market (Level 2 inputs).

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of ~~September 27, 2019,~~April 3, 2020, and ~~December 28, 2018,~~January 3, 2020, the fair value of debt was $4.3 billion and $3.1 billion, respectively, and the carrying amount was ~~$3.0~~$4.2 billion and ~~$3.1~~$3.0 billion, respectively (see "~~Note 14–Debt~~""Note 9–Debt"). The fair value of long-term debt is determined based on current interest rates available for debt with terms and maturities similar to ~~the Company’s~~our existing debt arrangements (Level 2 inputs).

On ~~August 15, 2019, the Company recorded~~January 31, 2020, non-financial instruments measured at fair value on a non-recurring basis were recorded in connection with the acquisition of ~~IMX~~Dynetics (see "~~Note 7–Acquisitions~~""Note 4–Acquisitions"). The preliminary fair values of the assets acquired and liabilities assumed were determined using Level 3 inputs. As of ~~September 27, 2019, the Company~~April 3, 2020, we did not have any assets or liabilities measured at fair value on a non-recurring basis.

Note ~~13–~~8–Derivative Instruments

~~The Company manages its~~We manage our risk to changes in interest rates and foreign currency exchange rates through the use of derivative instruments. ~~The Company does~~We do not hold derivative instruments for trading or speculative purposes. For fixed rate borrowings, ~~the Company uses~~we use variable interest rate swaps, effectively converting fixed rate borrowings to variable rate borrowings. These swaps are designated as fair value hedges. For variable rate borrowings, ~~the Company uses~~we use fixed interest rate swaps, effectively converting a portion of the variable interest rate payments to fixed interest rate payments. These swaps are designated as cash flow hedges. We transact business globally and are subject to risks associated with changing foreign currency exchange rates. We enter into foreign currency forward contracts in order to mitigate fluctuations in our earnings and cash flows due to changes in foreign currency exchange rates. The foreign currency forward contracts are not designated as hedges and do not qualify for hedge accounting.

The fair value of the ~~Company's~~ interest rate swaps and foreign currency forward contracts was as follows:

Asset derivatives
Balance sheet line item September 27,
2019 December 28,
2018
(in millions)
Fair value interest rate swaps Other assets $ 3
$ —

Liability derivatives
Balance sheet line item September 27,
2019 December 28,
2018
(in millions)
Fair value interest rate swaps Other long-term liabilities $ —
$ 3
Cash flow interest rate swaps Other long-term liabilities 88
32
$ 88
$ 35

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~~LEIDOS HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~


	Asset derivatives
	Balance sheet line item	April 3, 2020		January 3, 2020
		(in millions)
Fair value interest rate swaps	Other current assets⁽¹⁾	$	4	$	2
Foreign currency forward contracts	Other current assets	1		—
		$	5	$	2
⁽¹⁾The carrying amount of the fair value interest rate swaps were recorded within "Other assets" as of January 3, 2020.

	Liability derivatives
	Balance sheet line item	April 3, 2020		January 3, 2020
		(in millions)
Cash flow interest rate swaps	Other long-term liabilities	$	125	$	75

The cash flows associated with the interest rate swaps are classified as operating activities in the condensed consolidated statements of cash flows.

Fair Value Hedge

~~The Company has~~We have interest rate swap agreements to hedge the fair value of the $450 million fixed rate 4.45% senior ~~secured~~unsecured notes maturing in December 2020 (the "Notes"). The objective of these instruments is to hedge the Notes against changes in fair value due to the variability in the six-month LIBOR rate (the benchmark interest rate). Under the terms of the interest rate swap agreements, ~~the Company~~we will receive semi-annual interest payments at the coupon rate of 4.45% and will pay variable interest based on the six-month LIBOR rate.

The interest rate swaps were accounted for as a fair value hedge of the Notes and qualified for the shortcut method of hedge accounting, which allows for the assumption of no ineffectiveness. The resulting changes in the fair value of the interest rate swaps are fully offset by the changes in the fair value of the underlying debt (the hedged item) (See "~~Note 14–Debt~~""Note 9–Debt").

The fair value of the Notes is stated at an amount that reflects changes in the six-month LIBOR rate subsequent to the inception of the interest rate swaps through the reporting date.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following amounts were recorded on the condensed consolidated balance sheets related to cumulative basis adjustments for fair value hedges:


	Carrying amount of hedged item				Cumulative amount of fair value adjustment included within the hedged item						Carrying amount of hedged item						Cumulative amount of fair value adjustment included within the hedged item
Balance sheet line item of hedged item	September 27, 2019		December 28, 2018		September 27, 2019		December 28, 2018			Balance sheet line item of hedged item	April 3, 2020		January 3, 2020		April 3, 2020		January 3, 2020
	(in millions)										(in millions)
Long-term debt, net of current portion	$	453	$	447	$	3	$	(3	)
Long-term debt, current portion⁽¹⁾										Long-term debt, current portion⁽¹⁾	$	454	$	452	$	4	$	2

⁽¹⁾
The carrying amount of the hedged item and cumulative amount of fair value adjustments were recorded within "Long-term debt, net of current portion" as of January 3, 2020.

~~The Company has~~We have interest rate swap agreements to hedge the cash flows of ~~a portion~~$1.5 billion of ~~its~~the variable rate senior ~~secured~~unsecured term ~~loans~~loan (the "Variable Rate ~~Loans"~~Loan"). These interest rate swap agreements have a maturity date of August 2025 and a fixed interest rate of 3.00%. The objective of these instruments is to reduce variability in the forecasted interest payments of the ~~Company's~~ Variable Rate ~~Loans,~~Loan, which are based on the LIBOR rate. Under the terms of the interest rate swap agreements, ~~the Company~~we will receive monthly variable interest payments based on the one-month LIBOR rate and will pay interest at a fixed rate. In February 2018, the Company entered into interest rate swap agreements to hedge the cash flows of an additional $250 million of its Variable Rate Loans. The interest rate swap agreements on $1.1 billion of the Company's Variable Rate Loans had a maturity date of December 2021 and a fixed interest rate of 1.08%. The interest rate swap agreements on $300 million and $250 million of the Company's Variable Rate Loans both had a maturity date of August 2022 and fixed interest rates of 1.66% and 2.59%, respectively.

In September 2018, the Company terminated its existing interest rate swaps. The net derivative gain of $60 million related to the discontinued cash flow hedges remained within accumulated other comprehensive loss and is being reclassified into earnings over the remaining life of the original hedges as the hedged variable rate debt impacts earnings.

Additionally, in September 2018, the Company entered into new interest rate swap agreements to hedge the cash flows of $1.5 billion of the Company's Variable Rate Loans. These interest rate swap agreements have a maturity date of August 2025 and a fixed interest rate of 3.00%. The interest rate swap transactions were accounted for as cash flow hedges. The gain/loss on the swap is reported as a component of other comprehensive income (loss) and is reclassified into earnings when the interest payments on the underlying hedged items impact earnings. A qualitative assessment of hedge effectiveness is performed on a quarterly basis, unless facts and circumstances indicate the hedge may no longer be highly effective.

~~Table of Contents~~

~~LEIDOS HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

The effect of the ~~Company's~~ cash flow hedges on other comprehensive loss and earnings for the periods presented was as follows:

Three Months Ended Nine Months Ended
September 27,
2019 September 28,
2018 September 27,
2019 September 28,
2018
(in millions)
Total interest expense, net presented in the condensed consolidated statements of income in which the effects of cash flow hedges are recorded $ 28
$ 35
$ 99
$ 104

Amount recognized in other comprehensive loss $ (13 ) $ 1
$ (62 ) $ 22
Amount reclassified from accumulated other comprehensive loss to interest expense, net (2 ) (3 ) (6 ) (6 )

~~The Company expects~~


	Three Months Ended
	April 3, 2020		March 29, 2019
	(in millions)
Total interest expense, net presented in the condensed consolidated statements of income in which the effects of cash flow hedges are recorded	$	48	$	38

Amount recognized in other comprehensive loss	$	(55)	$	(18)
Amount reclassified from accumulated other comprehensive loss to interest expense, net	—		(2)

We expect to reclassify net ~~gains~~losses of $2$8 million from accumulated other comprehensive loss into earnings during the next 12 months.

We terminated interest rate swaps in September 2018. The net derivative gain of $60 million related to the discontinued cash flow hedges remained in accumulated other comprehensive loss and is being reclassified into earnings over the remaining life of the original hedges as the hedged variable rate debt impacts earnings.

~~Note 14–Debt~~Table of Contents

~~The Company's~~

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Our debt consisted of the following:

Stated interest rate Effective interest rate
September 27,
2019⁽¹⁾

December 28, 2018⁽¹⁾
(in millions)
Senior secured notes:

$450 million notes, due December 2020
4.45% 4.53% $ 453
$ 447
$300 million notes, due December 2040
5.95% 6.03% 216
216
Senior secured term loans:

$690 million Term Loan A, due August 2023
3.56% 3.99% 596
617
$310 million Term Loan A, due August 2023
3.56% 4.01% 249
258
$1,131 million Term Loan B, due August 2025
3.81% 4.16% 1,079
1,085
Senior unsecured notes:

$250 million notes, due July 2032
7.13% 7.43% 247
246
$300 million notes, due July 2033
5.50% 5.88% 158
158
Notes payable and finance leases due on various dates through fiscal 2022 (see Note 2)
2.85%-5.49% Various 18
97
Total long-term debt
3,016
3,124
Less: current portion
77
72
Total long-term debt, net of current portion
$ 2,939
$ 3,052


	Stated interest rate	Effective interest rate	April 3, 2020⁽¹⁾		January 3, 2020⁽¹⁾
			(in millions)
Senior unsecured bridge loan:
$1,250 million bridge loan, due January 2021	2.37%	4.00%	$	1,238	$	—
Senior unsecured term loan:
$1,925 million Term Loan A, due January 2025	2.37%	2.64%	1,906		—
Senior secured term loans:
$690 million Term Loan A, due August 2023	3.31%	3.74%	—		581
$310 million Term Loan A, due August 2023	3.31%	3.76%	—		242
$1,131 million Term Loan B, due August 2025	3.56%	3.91%	—		1,075
Senior unsecured notes:
$450 million notes, due December 2020	4.45%	4.53%	454		452
$300 million notes, due December 2040	5.95%	6.03%	216		216
$250 million notes, due July 2032	7.13%	7.43%	247		247
$300 million notes, due July 2033	5.50%	5.88%	158		158
Notes payable and finance leases due on various dates through fiscal 2030	2.85%-5.49%	Various	18		15
Total long-term debt			4,237		2,986
Less: current portion			(1,793)		(61)
Total long-term debt, net of current portion			$	2,444	$	2,925

⁽¹⁾The carrying amounts of the senior ~~secured~~ term loans, ~~and~~ notes and ~~unsecured notes~~bridge loan as of ~~September 27, 2019,~~April 3, 2020, and ~~December 28, 2018,~~January 3, 2020, include the remaining principal outstanding of ~~$3,032~~$4,254 million and ~~$3,073~~$3,004 million, respectively, less total unamortized debt discounts and deferred debt issuances costs of ~~$37~~$39 million and ~~$43~~$35 million, respectively, and a $3$4 million and $2 million asset, ~~and $3 million liability~~respectively, related to the fair value interest rate swaps (see "~~Note 13–~~"Note 8–Derivative ~~Instruments~~"Instruments")~~, respectively.~~.

On January 31, 2020, in connection with the acquisition of Dynetics, we entered into a Bridge Credit Agreement with certain financial institutions, which provided for a senior unsecured 364-day bridge loan facility in an aggregate principal amount of $1.25 billion. The Bridge Facility will mature 364 days after the Acquisition Date.

Borrowings under the Bridge Credit Agreement bear interest at a rate ~~on the Company's senior secured term loans is~~ determined, at our option, based on ~~the~~either an alternate base rate or a LIBOR rate, plus, ~~a margin. The~~in each case, an applicable margin that may range from 1.25% to 2.38% depending on our credit rating, subject to increases by 0.25% at 90, 180 and 270 days after the Acquisition Date. Based on our current ratings, the applicable margin for LIBOR-denominated borrowings is 1.38%. Additionally, we will pay to each lender under the Bridge Facility a duration fee equal to 0.50%, 0.75% and 1.00% of the aggregate outstanding principal amount of the loans under the Bridge Facility at 90, 180, and 270 days after the Acquisition Date, respectively.

The financial covenants in the Bridge Credit Agreement require that we maintain, as of the last day of each fiscal quarter (beginning with the second fiscal quarter of 2020), a ratio of adjusted consolidated total debt to consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") of not more than 3.75 to 1.00, subject to increases to 4.50 to 1.00 following a material acquisition.

Term Loans and Revolving Credit Facility

On January 17, 2020 (the "Closing Date"), we entered into a Credit Agreement (the "Credit Agreement") with certain financial institutions, which provided for a senior unsecured term loan A facility in an aggregate principal amount of $1.9 billion (the "Term Loan Facility") and a $750 million senior unsecured revolving facility (the "Revolving Facility" and, together with the Term Loan ~~A loans ranges~~Facility, the "Credit Facilities"). The Credit Facilities will mature five years from ~~1.25%~~the Closing Date, subject to 2.00%, depending on the Company's senior secured leverage ratio, and is computed on a quarterly basis. At September 27, 2019, the current margin on Term Loan A was 1.50% and the margin on Term Loan B was 1.75%.

up to 2 additional one year extensions.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The proceeds of the Term Loan Facility and cash on hand on the Closing Date were used to repay in full all indebtedness, and terminate all commitments, under, and discharge and release all guarantees and liens existing in connection with the credit agreements entered into in August 2016 (the "Terminated Credit Agreements"). As a result of the termination of the liens under the Terminated Credit Agreements, the liens securing the outstanding $450 million notes due 2020 and $300 million notes due 2040 were also released and such notes are now senior unsecured obligations.

Borrowings under the Credit Agreement bear interest at a rate determined, at our option, based on either an alternate base rate or a LIBOR rate plus, in each case, an applicable margin that varies depending on our credit rating. The ~~Company~~applicable margin range for LIBOR-denominated borrowings is from 1.13% to 1.75%. Based on our current ratings, the applicable margin for LIBOR-denominated borrowings is 1.38%. Principal payments are made quarterly on the Term Loan Facility, with the majority of the principal due at maturity. Interest on the Term Loan Facility for LIBOR-denominated borrowings is payable on a periodic basis, which must be at least quarterly.

The financial covenants in the Credit Agreement require that we maintain, as of the last day of each fiscal quarter (beginning with the second fiscal quarter of 2020), a ratio of adjusted consolidated total debt to consolidated EBITDA of not more than 3.75 to 1.00, subject to 2 increases to 4.50 to 1.00 following a material acquisition, and a ratio of EBITDA to consolidated interest expense of not less than 3.50 to 1.00.

In addition to the refinancing activity noted above, we made principal payments on ~~its~~our long-term debt of $2 millionand ~~$50~~$31 million during the ~~quarter and nine~~three months ended ~~September 27,~~April 3, 2020 and March 29, 2019, ~~respectively, and $15 million and $59 million during the quarter and nine months ended September 28, 2018,~~ respectively. This activity included principal payments on ~~its senior secured~~our term loans of ~~$41~~$27 million during the ~~nine~~three months ended September 27, 2019 and $15 million and $46 million during the quarter and nine months ended September 28, 2018, respectively. There were 0 principal payments on the Company's senior secured term loans for the quarter ended September 27,March 29, 2019. In April 2018, the Company made a required debt prepayment of $10 million on its senior secured term loans. The prepayment was a result of the annual excess cash flow calculation clause in the Company's credit agreements.

The Company has a revolving credit facility providing up to $750 million in secured borrowing capacity at interest rates determined based upon the LIBOR rate plus a margin that is subject to step-down provisions based on the Company's senior secured leverage ratio. The maturity date of this credit facility is August 2023. As of ~~September 27, 2019,~~April 3, 2020, and ~~December 28, 2018,~~January 3, 2020, there were 0 borrowings outstanding under the unsecured and secured credit ~~facility.~~facility, respectively.

~~Amortization~~In connection with the Credit Facilities and Bridge Facility, $29 million of ~~the debt discount and deferred~~ debt issuance costs that were related to the ~~senior secured term loans and notes, unsecured notes~~loan facilities and revolving credit facility ~~was $2~~were recognized, which were recorded as an offset against the carrying value of debt and capitalized within "Other assets" in the condensed consolidated balance sheets, respectively. Additionally, $19 million of debt discount and debt issuance costs were written off related to the Terminated Credit Agreements. Amortization of debt discount and debt issuance costs for the three months ended April 3, 2020 and March 29, 2019 were $4 million and $7$3 million, ~~for~~respectively.

As of January 3, 2020, the ~~quarter~~carrying value of the $450 million senior notes maturing in December 2020 was reflected within “Long-term debt, net of current portion” as we had the ability to consummate and ~~nine~~intention to refinance the existing debt.

During the three months ended ~~September 27, 2019, respectively, and $2~~April 3, 2020, we determined that it was more beneficial to repay our $450 million ~~and $8 million for~~senior notes maturing in December 2020 as contractually obligated rather than to refinance the ~~quarter and nine months ended September 28, 2018, respectively.~~debt based on current financial market conditions. As a result, the carrying value has been reclassified into the current portion of long-term debt as of April 3, 2020.

The senior ~~secured~~unsecured term loans, ~~and~~ notes, ~~unsecured notes and~~ revolving credit facility and the bridge loan are fully and unconditionally guaranteed and contain certain customary restrictive covenants, including among other things, restrictions on ~~the Company's~~our ability to create liens and enter into sale and leaseback transactions under certain circumstances. ~~The Company was~~We were in compliance with all covenants as of ~~September 27, 2019.~~April 3, 2020.

Delayed-draw Term Loan Facility

On February 12, 2020, we entered into a senior unsecured delayed-draw term loan facility providing for $1.0 billion of commitments from certain financial institutions in connection with the acquisition of L3Harris' security detection and automation businesses. The maturity date will be two years from the funding date if we draw on this commitment. As of April 3, 2020, we have 0t drawn any funds under the delayed-draw term loan facility.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note ~~15–~~10–Accumulated Other Comprehensive Loss

Changes in the components of accumulated other comprehensive ~~income (loss)~~loss were as follows:

Foreign currency translation adjustments Unrecognized gain (loss) on derivative instruments Pension adjustments Total accumulated other comprehensive income (loss)
(in millions)
Balance at December 29, 2017 $ 17
$ 14
$ 2
$ 33
Cumulative adjustments related to ASU adoptions 3
10
(4 ) 9
Balance at December 30, 2017 20
24
(2 ) 42
Other comprehensive loss (65 ) (7 ) (1 ) (73 )
Taxes 4
3
—
7
Reclassification from accumulated other comprehensive loss —
(6 ) —
(6 )
Balance at December 28, 2018 (41 ) 14
(3 ) (30 )
Other comprehensive loss (27 ) (62 ) —
(89 )
Taxes 1
16
—
17
Reclassification from accumulated other comprehensive loss —
(6 ) —
(6 )
Balance at September 27, 2019 $ (67 ) $ (38 ) $ (3 ) $ (108 )


	Foreign currency translation adjustments		Unrecognized gain (loss) on derivative instruments		Pension adjustments		Total accumulated other comprehensive loss
	(in millions)
Balance at December 28, 2018	$	(41)	$	14	$	(3)	$	(30)
Other comprehensive income (loss)	5		(55)		(1)		(51)
Taxes	3		15		—		18
Reclassification from accumulated other comprehensive loss	—		(7)		—		(7)
Balance at January 3, 2020	(33)		(33)		(4)		(70)
Other comprehensive (loss) income	(76)		(55)		1		(130)
Taxes	2		13		—		15
Balance at April 3, 2020	$	(107)	$	(75)	$	(3)	$	(185)

Reclassifications from unrecognized gain (loss) on derivative instruments are recorded in "Interest expense, net" in the ~~Company's~~ condensed consolidated statements of income.

~~Table of Contents~~

~~LEIDOS HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

Note ~~16–~~11–Earnings Per Share ~~("EPS")~~

The following table provides a reconciliation of the weighted average number of shares outstanding used to compute basic and diluted EPS for the periods presented:

Three Months Ended Nine Months Ended
September 27,
2019 September 28,
2018 September 27,
2019 September 28,
2018
(in millions)
Basic weighted average number of shares outstanding 143
151
144
152
Dilutive common share equivalents—stock options and other stock awards 2
2
2
2
Diluted weighted average number of shares outstanding 145
153
146
154

Anti-dilutive stock-based awards are excluded from the weighted average number of shares outstanding used to compute diluted EPS.

~~On February 21, 2019,~~ For the ~~Company entered into an Accelerated Share Repurchase ("ASR") agreement with a financial institution to repurchase shares of its outstanding common stock. During the quarter~~three months ended April 3, 2020 and March 29, 2019, the Company paid $200 million to the financial institution and received an initial delivery of 2.6 million shares. In April 2019, the Company received the final delivery of 0.6 million shares related to the ASR agreement. The total number of shares that the Company received under the ASR agreement was based on the volume-weighted-average-price of $63.52 per share for the period February 21, 2019 to April 29, 2019. The purchasesthere were ~~recorded to "Additional paid-in capital" in the condensed consolidated balance sheets. All shares delivered were immediately retired.~~

~~On August~~ 1 2019, the Company entered into an ASR agreement with a financial institution to repurchase shares of its outstanding common stock. During the quarter ended September 27, 2019, the Company paid $200 million to the financial institution and received 2.4 million shares related to the ASR agreement. The total number of shares that the Company received under the ASR agreement was based on the volume-weighted-average-price of $84.25 per share for the period August 1, 2019 to September 25, 2019. The purchases were recorded to "Additional paid-in capital" in the condensed consolidated balance sheets. All shares delivered were immediately retired.

~~During the quarter and nine months ended September 28, 2018, the Company made open market repurchases of its common stock for an aggregate purchase price of $62~~ million and ~~$162~~2 million, ~~respectively. All shares repurchased~~respectively, of outstanding stock options and vesting stock awards that were ~~immediately retired.~~anti-dilutive.

Note ~~17–~~12–Supplementary Cash Flow Information and Restricted Cash

Supplementary cash flow information, and non-cash activities, for the periods presented was as follows:

Nine Months Ended
September 27,
2019 September 28,
2018
(in millions)
Supplementary cash flow information:
Cash paid for income taxes, net of refunds $ 142
$ 68
Cash paid for interest 112
101
Non-cash investing activity:
Fixed asset additions $ 9
$ —

~~See "Note 4–Leases" for additional supplementary cash flow information related to the Company's leases.~~


	Three Months Ended
	April 3, 2020		March 29, 2019
	(in millions)
Supplementary cash flow information:
Cash paid for interest	$	27	$	43
Cash paid for income taxes, net of refunds	—		3
Non-cash investing activity:
Fixed asset additions	$	13	$	—
Non-cash financing activity:
Finance lease obligations	$	6	$	—

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Sale of Accounts Receivable

We have entered into purchase agreements with a financial institution which provide us the election to sell accounts receivable at a discount. The receivables sold are typically collectable within 30 days of the sale date. During the three months ended April 3, 2020, we sold $564 million of accounts receivable under the agreements and received proceeds of $563 million, which were classified as operating activities in the condensed consolidated statements of cash flows.

These transfers have been recognized as a sale, as the receivables have been legally isolated from Leidos, the financial institution has the right to pledge or exchange the assets received and we do not maintain effective control over the transferred accounts receivable. Our only continuing involvement with the transferred financial assets is as the collection and servicing agent. As a result, the accounts receivable balance on the condensed consolidated balance sheets is presented net of the transferred amounts. No servicing asset or liability was recognized for continued servicing of the sold receivables, as the servicing fee approximates fair value. The difference between the carrying amount of the receivables sold and the net cash received was recognized as a loss on sale and was recorded within "Selling, general and administrative expenses" on the condensed consolidated statements of income.

Sold receivables activity for the period was as follows:


	Three Months Ended
	April 3, 2020
	(in millions)
Sales of accounts receivable	$	564
Cash collections on sold receivables remitted to financial institution	(367)
Outstanding balance sold to financial institution	197
Cash collected but not yet remitted to financial institution	(60)
Sold receivables due from customers	$	137

The following is a reconciliation of cash and cash equivalents, as reported within the condensed consolidated balance sheets, to the total cash, cash equivalents and restricted cash, as reported within the condensed consolidated statements of cash flows:

September 27,
2019 December 28,
2018
(in millions)
Cash and cash equivalents $ 635
$ 327
Restricted cash 111
42
Total cash, cash equivalents and restricted cash $ 746
$ 369

~~The restricted~~


	April 3, 2020		January 3, 2020
	(in millions)
Cash and cash equivalents	$	445	$	668
Restricted cash	120		49
Total cash, cash equivalents and restricted cash	$	565	$	717

Restricted cash is recorded within "Other current assets" in the ~~Company's~~ condensed consolidated balance sheets.

The restricted cash is primarily comprised of collections on sold receivables to be remitted to the financial institution and advances from customers that are restricted as to use for certain expenditures related to that customer's contract.

~~Note 18–Income Taxes~~

For the quarter ended September 27, 2019, the effective tax rate was 24.3% compared to 13.5% for the quarter ended September 28, 2018. The increase in the effective tax rate was primarily due to the recording of a valuation allowance related to foreign tax credits in the current quarter and a release of a valuation allowance related to the utilization of a capital loss carryforward in the prior year quarter.

For the nine months ended September 27, 2019, the effective tax rate was 23.5% compared to 14.3% for the nine months ended September 28, 2018. The increase in the effective tax rate was primarily due to the recording of a valuation allowance related to foreign tax credits and an increase in unrecognized tax benefits in the current year. Additionally, during the prior year, tax benefits were recognized related to the anticipated sale of the Company's commercial cybersecurity business and the release of a valuation allowance related to the utilization of a capital loss carryforward.

Note ~~19–~~13–Business Segments

~~The Company's~~Our operations and reportable segments are organized around the customers and markets ~~served and the nature of the products and services provided to customers in those markets. The Company defines its~~we serve. We define our reportable segments based on the way the chief operating decision maker ("CODM"), currently ~~its~~our Chairman and Chief Executive Officer, manages ~~the~~ operations offor the ~~Company for~~ purposes of allocating resources and assessing performance.

Effective the beginning of fiscal ~~2019,~~2020, certain contracts were reassigned from the ~~Company changed~~Civil reportable segment to the ~~composition of its~~ Defense Solutions reportable segment to better align ~~the~~ operations within the reportable ~~segment~~segments to the customers it serves. This resulted in the identification of new operating segments within Defense Solutions. In addition, certain contracts were reassigned between the Civil and Defense Solutions reportable segments. While this activity did not have a material impact on the Company's reportable segments, priorthey serve. Prior year ~~segments~~segment results have been recast to reflect this change.

Additionally, the results of Dynetics were included within the Defense Solutions reportable segment.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The segment information for the periods presented was as follows:

Three Months Ended Nine Months Ended
September 27,
2019 September 28,
2018 September 27,
2019 September 28,
2018
(in millions)
Revenues:
Defense Solutions $ 1,354
$ 1,250
$ 3,967
$ 3,701
Civil 973
881
2,701
2,526
Health 508
444
1,472
1,320
Total revenues $ 2,835
$ 2,575
$ 8,140
$ 7,547

Operating income (loss):
Defense Solutions $ 93
$ 89
$ 283
$ 273
Civil 57
92
198
221
Health 63
52
169
162
Corporate 36
(30 ) 1
(95 )
Total operating income $ 249
$ 203
$ 651
$ 561


	Three Months Ended
	April 3, 2020		March 29, 2019
	(in millions)
Revenues:
Defense Solutions	$	1,705	$	1,491
Civil	654		623
Health	530		463
Total revenues	$	2,889	$	2,577

Operating income (loss):
Defense Solutions	$	95	$	104
Civil	59		58
Health	73		45
Corporate	(35)		(15)
Total operating income	$	192	$	192

The ~~financial~~income statement performance measures used to evaluate segment performance are revenues and operating income. As a result, "~~Interest~~"Interest expense, net,," "~~Other~~"Other (expense) income, ~~net~~"net" and "~~Income~~"Income tax ~~expense~~"expense" as reported in the condensed consolidated financial statements are not allocated to ~~the Company's~~our segments. Under U.S. Government Cost Accounting Standards, indirect costs including depreciation expense are collected in ~~numerous~~ indirect cost pools, which are then collectively allocated to the ~~Company’s~~ reportable segments based on a representative causal or beneficial relationship of the costs in the pool to the costs in the base. As such, ~~the company does~~depreciation expense is not separately ~~disclose depreciation expense~~disclosed on the condensed consolidated statements of income.

Asset information by segment is not a key measure of performance used by the CODM.

Note ~~20–~~14–Contingencies

On November 10, 2015, MSA received a final decision by the Department of Energy ("DoE") contracting officer for the Mission Support Contract concluding that certain payments to MSA by the DoE for the performance of IT services by Lockheed Martin Services, Inc. ("LMSI") under a subcontract to MSA constituted alleged affiliate fees in violation of Federal Acquisition Regulations ("FAR"). Lockheed Martin Integrated Technology LLC (now known as Leidos Integrated Technology LLC) is a member entity of MSA. Subsequent to the contracting officer's final decision, MSA, LMSI, and Lockheed Martin Corporation received notice from the U.S. Attorney's Office for the Eastern District of Washington that the U.S. government had initiated a False Claims Act investigation into the facts surrounding this ~~dispute, and each of MSA, LMSI and Lockheed Martin Corporation have produced information in response to Civil Investigative Demands from the U.S. Attorney's Office.~~dispute. On February 8, 2019, the ~~U.S. Attorney's office~~Department of Justice filed a complaint in the United States District Court for the Eastern District of Washington against MSA, Lockheed Martin Corporation, Lockheed Martin Services, Inc. and a Lockheed Martin ~~employee.~~employee ("Defendants"). The complaint alleges violations of the False Claims Act, the Anti-Kickback Act and breach of contract with the DoE, among other things. On January 13, 2020, the Defendants' motions to dismiss were granted in part and denied in part. Litigation will proceed for the False Claims Act and other common law claims, although the Anti-Kickback Act claim has been dismissed with prejudice. The U.S. Attorney's office had previously advised that a parallel criminal investigation was open, although no subjects or targets of the investigation had been identified. The U.S. Attorney's office has informed MSA that it has closed the criminal investigation.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Since this issue first was raised by the DoE, MSA has asserted that the IT services performed by LMSI under a fixed-price/fixed-unit rate subcontract approved by the DoE meet the definition of a "commercial item" under the FAR and any profits earned on that subcontract are permissible. MSA filed an appeal of the contracting officer's decision with the Civilian Board of Contract Appeals ("CBCA"), which was stayed pending resolution of the False Claims Act matter. Subsequent to the filing of MSA's appeal, the contracting officer demanded that MSA reimburse the DoE in the amount of $64 million, which was his estimate of the profits earned during the period from 2010 to 2014 by LMSI. The DoE has deferred collection of $32 million of that demand, pending resolution of the appeal and without prejudice to MSA's position that it is not liable for any of the DOE's $64 million reimbursement claim. On December 10, 2019, MSA received a second final decision by the DoE contracting officer, estimating approximately $29 million in alleged unallowable profit and associated general and administrative costs during the period from 2015 to 2016 by LMSI. MSA filed an appeal of the second contracting officer's decision, which has been consolidated with the prior proceeding before the CBCA and stayed pending resolution of the False Claims Act matter. The ~~Company~~DoE and MSA also executed an agreement to defer the entire amount of the disallowed costs from the second contracting officer's final decision until the CBCA proceedings are finally resolved. Leidos has agreed to indemnify Jacobs Group, LLC and Centerra Group, LLC for any liability MSA incurs in this matter. Under the terms of the Separation Agreement, Lockheed Martin agreed to indemnify ~~the Company~~Leidos for 100% of any damages in excess of $38 million up to $64 million, and 50% of any damages in excess of $64 million, with respect to claims asserted against MSA related to this matter.

At ~~September 27, 2019, the Company~~April 3, 2020, we had a liability of ~~$39~~$42 million recorded in the condensed consolidated balance ~~sheets.~~sheets for this matter. The amount of possible loss ultimately incurred, if any, is subject to a range of complex factors and potential outcomes that remain to be determined, including information gathered during the course of litigation, pretrial and trial rulings and other litigation-related developments.

Securities Litigation

Between February and April 2012, alleged stockholders filed 3 putative securities class actions against ~~the Company~~Leidos and several former executives relating to ~~the Company's~~a contract to develop and implement an automated time and attendance and workforce management system for certain agencies of the City of New York ("CityTime"). NaN case was withdrawn and 2 cases were consolidated in the U.S. District Court for the Southern District of New York in In Re: SAIC, Inc. Securities Litigation. The consolidated securities complaint asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on allegations that ~~the Company~~Leidos and individual defendants made misleading statements or omissions about ~~the Company's~~ revenues, operating income and internal controls in connection with disclosures relating to the CityTime project. The plaintiffs sought to recover from ~~the Company~~Leidos and the individual defendants an unspecified amount of damages class members allegedly incurred by buying Leidos' stock at an inflated price. The District Court dismissed the plaintiffs' claims with prejudice and without leave to replead. The plaintiffs then appealed to the United States Court of Appeals for the Second Circuit, which issued an opinion affirming in part, and vacating in part, the District Court's ruling. ~~The Company~~Leidos filed a petition for a writ of certiorari in the U.S. Supreme Court, which was granted on March 27, 2017. The District Court granted ~~the Company's~~Leidos' request to stay all proceedings, including discovery, pending the outcome at the Supreme Court. In September 2017, the parties engaged in mediation resulting in an agreement to settle all remaining claims for an immaterial amount to be paid by ~~the Company.~~Leidos. On October 2, 2019, the court ~~issued an order preliminarily approving~~granted preliminary approval of the proposed settlement. The amounts payable by ~~the Company~~Leidos are covered by an insurance policy.

~~Greek Government Contract~~

In 2003, the Company entered into an FFP contract with the Hellenic Republic of Greece to provide a Command, Control, Communications, Coordination and Integration System. The Greek government disputed the contract balance owed to the Company and withheld payment. In 2013, the Company received an arbitral award by the International Chamber of Commerce. In 2017, the U.S. District Court granted an order to enforce the arbitration award and entered judgment in the Company's favor. The Company subsequently commenced enforcement proceedings against the Greek government. On September 10, 2019, the Company received $59 million on behalf of Leidos and its subcontractors, substantially, though not entirely, resolving the Company’s claim.

Arbitration Proceeding

~~The Company~~Leidos is a party to an arbitration proceeding involving a claim by Lockheed Martin for indemnification for $56 million in taxes attributable to deferred revenue recognized as a result of the ~~Transactions.~~acquisition of Lockheed Martin's Information Systems & Global Solutions business. Based on the arguments advanced to date, ~~the Company~~Leidos believes that the claim appears to be without merit and intends to vigorously defend itself in arbitration. ~~The Company does~~We do not believe that a material loss is probable, and ~~has~~have therefore not recorded any liability for this matter.

~~The Company is~~We are also involved in various claims and lawsuits arising in the normal conduct of ~~its~~our business, none of which, in the opinion of ~~the Company's~~ management, based upon current information, will likely have a material adverse effect on ~~the Company's condensed consolidated~~our financial position, results of operations or cash flows.

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

On September 29, 2017, the federal trial court in the Eastern District of Texas entered a final judgment in the VirnetX v. Apple case referred to as the Apple I case. The court found that Apple willfully infringed the VirnetX patents at issue in the Apple I case and awarded enhanced damages, bringing the total award against Apple to over $343 million in pre-interest damages. The court subsequently awarded an additional sum of over $96 million for costs, attorneys' fees, and interest, bringing the total award to VirnetX in the Apple I case to over $439 million. Apple appealed the judgment in the Apple I case with the U.S. Court of Appeals for the Federal Circuit and on January 15, 2019, the court affirmed the $439 million judgment. On August 1, 2019, the U.S. Court of Appeals for the Federal Circuit denied Apple’s petition for panel and en banc rehearing, but Apple subsequently filed motions to stay and vacate the judgment, and for leave to file a second petition for rehearing. These motions were denied by the ~~U.S. Court of Appeals for the Federal Circuit~~court on October 1, 2019. ~~It is expected that~~On December 27, 2019, Apple ~~will file~~filed a petition in the Apple I matter for a writ of certiorari with the United States Supreme Court, which was denied on February 24, 2020. On February 20, 2020, Apple filed a Motion for Relief from Judgment in the U.S. District Court for the Eastern District of Texas, further arguing that VirnetX should not be allowed to recover the ~~United States~~large amount of damages awarded in ~~connection~~this case. On March 13, 2020, VirnetX announced that it had received payment from Apple of over $454 million, which represents the judgment with interest for the Apple I ~~case.~~matter. However, the Motion remains pending, with Apple indicating it may seek restitution of its payment to VirnetX.

On April 10, 2018, a jury trial concluded in an additional patent infringement case brought by VirnetX against Apple, referred to as the Apple II case, in which the jury returned a verdict against Apple for infringement and awarded VirnetX damages in the amount of over $502 million. On April 11, 2018, in a second phase of the Apple II trial, the jury found Apple's infringement to be willful. On August 30, 2018, the federal trial court in the Eastern District of Texas entered a final judgment and rulings on post-trial motions in the Apple II case. The court affirmed the jury’s verdict of over $502 million and granted VirnetX’s motions for supplemental damages, a sunset royalty and royalty rate of $1.20 per infringing device, along with pre-judgment and post-judgment interest and costs. The court denied VirnetX’s motions for enhanced damages, attorneys’ fees and an injunction. The court also denied Apple’s motions for judgment as a matter of law and for a new trial. An additional sum of over $93 million for costs and pre-judgment interest was subsequently agreed upon pursuant to a court order, bringing the total award to VirnetX in the Apple II case to over $595 million. Apple ~~has~~ filed an appeal of the judgment in the Apple II case with the U.S. Court of Appeals for the Federal ~~Circuit.~~Circuit, and on November 22, 2019, the Federal Circuit affirmed in part, reversed in part and remanded the Apple II case back to the District Court. The Federal Circuit affirmed that Apple infringed 2 of the patents at issue in the case, and ruled that Apple is precluded from making certain patent invalidity arguments. However, the Federal Circuit reversed the judgment that Apple infringed 2 other patents at issue, vacated the prior damages awarded in the Apple II case, and remanded the Apple II case back to the District Court for further proceedings regarding damages.

Under ~~its~~our agreements with VirnetX, ~~the Company~~Leidos would receive 25% of the proceeds obtained by VirnetX after reduction for attorneys' fees and costs. However, the verdicts in these cases remain subject to ~~appeal.~~the ongoing and potential future proceedings and appeals. In addition, the patents at issue in these cases are subject to U.S. Patent and Trademark Office post-grant inter partes review and/or reexamination proceedings and related appeals, which may result in all or part of these patents being invalidated or the claims of the patents being limited. Thus, no assurances can be given when or if ~~the Company~~we will receive any proceeds in connection with these jury awards. In addition, if ~~the Company~~Leidos receives any proceeds, ~~the Company is~~we are required to pay a royalty to the customer who paid for the development of the technology.

~~The Company does~~We do not have any assets or liabilities recorded in connection with this matter as of ~~September 27, 2019.~~April 3, 2020.

Government Investigations and Reviews

~~The Company is~~We are routinely subject to investigations and reviews relating to compliance with various laws and regulations with respect to ~~its~~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 ~~the Company's~~our business, financial position, results of operations and cash flows due to ~~its~~our reliance on government contracts.

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of ~~September 27, 2019,~~April 3, 2020, indirect cost audits by the Defense Contract Audit Agency remain open for fiscal 2013 and subsequent fiscal years. Although ~~the Company has~~we have recorded contract revenues based upon an estimate of costs that ~~the Company believes~~we believe will be approved upon final audit or review, ~~the Company~~we cannot predict the outcome of any ongoing or future audits or reviews and adjustments, and if future adjustments exceed ~~the Company's~~ estimates, ~~its~~our profitability may be adversely affected. As of ~~September 27, 2019, the Company believes it has~~April 3, 2020, we believe we have adequately reserved for potential adjustments from audits or reviews of contract costs.

In February 2019, the Company executed an external restructuring advance agreement with the DoD in accordance with provisions of the Defense Federal Acquisition Regulation Supplement, which allows the Company to recover certain specified external restructuring costs.

~~Table of Contents~~

~~LEIDOS HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

Note 15–Commitments

~~Note 21–Commitments~~

~~The Company has~~We have outstanding letters of credit of ~~$65~~$63 million as of ~~September 27, 2019,~~April 3, 2020, principally related to performance guarantees on contracts. ~~The Company~~We also ~~has~~have outstanding surety bonds with a notional amount of ~~$52~~$49 million, principally related to performance and subcontractor payment bonds on ~~the Company's~~ contracts. The value of the surety bonds may vary due to changes in the underlying project status and/or contractual modifications. The outstanding letters of credit and surety bonds have various terms with the majority expiring over the remainder of the current fiscal year and the next two fiscal years.

~~Reston, VA Lease Agreement~~

~~Gaithersburg, MD Lease Agreement~~

~~On December 31, 2018, the Company closed the sale and leaseback agreement relating to its land and building in Gaithersburg, MD. (see "Note 11–Property, Plant and Equipment").~~

~~San Diego, CA Lease Agreement~~

~~On December 28, 2018, the Company closed the sales and leaseback agreement relating to 2 buildings and the adjacent land in San Diego, CA (see "Note 11–Property, Plant and Equipment").~~

Note ~~22–~~16–Subsequent Events



☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



			Leidos Holdings, Inc.
						(Exact name of registrant as specified in its charter)



	Three Months Ended						Nine Months Ended
	September 27, 2019			September 28, 2018			September 27, 2019			September 28, 2018
	(in millions, except per share amounts)
Revenues	$	2,835		$	2,575		$	8,140		$	7,547
Cost of revenues	2,450			2,174			7,019			6,412
Selling, general and administrative expenses	177			194			518			547
Bad debt expense and recoveries	(35		)	1			(35		)	—
Integration and restructuring costs	—			7			3			32
Asset impairment charges	—			—			—			7
Equity earnings of non-consolidated subsidiaries	(6		)	(4		)	(16		)	(12		)
Operating income	249			203			651			561
Non-operating (expense) income:
Interest expense, net	(28		)	(35		)	(99		)	(104		)
Other (expense) income, net	(7		)	2			87			3
Income before income taxes	214			170			639			460
Income tax expense	(52		)	(23		)	(150		)	(66		)
Net income	162			147			489			394
Less: net income attributable to non-controlling interest	1			—			3			1
Net income attributable to Leidos common stockholders	$	161		$	147		$	486		$	393

Earnings per share:
Basic	$	1.13		$	0.97		$	3.38		$	2.59
Diluted	1.11			0.96			3.33			2.55



	Shares of common stock		Additional paid-in capital			(Accumulated deficit) retained earnings			Accumulated other comprehensive income			Leidos Holdings, Inc. stockholders' equity			Non-controlling interest			Total
	(in millions, except for per share amounts)
Balance at December 29, 2017	151		$	3,344		$	(7	)	$	33		$	3,370		$	13		$	3,383
Cumulative adjustments related to ASU adoptions	—		—			(8		)	9			1			—			1
Balance at December 30, 2017	151		3,344			(15		)	42			3,371			13			3,384
Net income	—		—			102			—			102			—			102
Other comprehensive income, net of taxes	—		—			—			14			14			—			14
Issuances of stock	1		5			—			—			5			—			5
Repurchases of stock and other	—		(22		)	—			—			(22		)	—			(22		)
Dividends of $0.32 per share	—		—			(50		)	—			(50		)	—			(50		)
Stock-based compensation	—		11			—			—			11			—			11
Purchase of a non-controlling interest	—		—			—			—			—			(10		)	(10		)
Balance at March 30, 2018	152		3,338			37			56			3,431			3			3,434
Net income	—		—			144			—			144			1			145
Other comprehensive loss, net of taxes	—		—			—			(33		)	(33		)	—			(33		)
Issuances of stock	—		4			—			—			4			—			4
Repurchases of stock and other	(2	)	(94		)	—			—			(94		)	—			(94		)
Dividends of $0.32 per share	—		—			(48		)	—			(48		)	—			(48		)
Stock-based compensation	—		12			—			—			12			—			12
Other	—		—			—			—			—			(2		)	(2		)
Balance at June 29, 2018	150		3,260			133			23			3,416			2			3,418
Net income	—		—			147			—			147			—			147
Other comprehensive loss, net of taxes	—		—			—			(10		)	(10		)	—			(10		)
Issuances of stock	—		7			—			—			7			—			7
Repurchases of stock and other	—		(66		)	—			—			(66		)	—			(66		)
Dividends of $0.32 per share	—		—			(49		)	—			(49		)	—			(49		)
Stock-based compensation	—		10			—			—			10			—			10
Purchase of a non-controlling interest	—		(1		)	—			—			(1		)	—			(1		)
Other	—		—			—			—			—			1			1
Balance at September 28, 2018	150		$	3,210		$	231		$	13		$	3,454		$	3		$	3,457



	Balance at December 28, 2018		Adjustments due to ASU 2016-02			Balance at December 29, 2018
	(in millions)
Assets - non-current:
Property, plant and equipment, net	$	237	$	1		$	238
Operating lease right-of-use assets, net	—		418			418

Liabilities - current:
Accounts payable and accrued liabilities	$	1,491	$	132		$	1,623
Long-term debt, current portion	72		8			80

Liabilities - non-current:
Long-term debt, net of current portion	$	3,052	$	(72	)	$	2,980
Operating lease liabilities	—		320			320
Deferred tax liabilities	170		17			187
Other long-term liabilities	178		(34		)	144

Equity:
Retained earnings	$	372	$	48		$	420



Fiscal Year Ending	Finance lease commitments		Operating lease commitments
	(in millions)
2019 (remainder of year)	$	2	$	49
2020	5		136
2021	1		86
2022	1		65
2023	—		46
2024 and thereafter	—		102
Total undiscounted cash flows	9		484
Less: imputed interest	—		(48		)
Lease liability as of September 27, 2019	$	9	$	436



Fiscal Year Ending	Capital lease commitments		Operating lease commitments		Sublease receipts
	(in millions)
2019	$	3	$	144	$	3
2020	—		114		1
2021	—		83		1
2022	—		71		—
2023	—		55		—
2024 and thereafter	—		246		—
Total	$	3	$	713	$	5



Fiscal Year Ending	Sales-type leases		Operating leases
	(in millions)
2019 (remainder of year)	$	11	$	6
2020	31		22
2021	16		22
2022	5		22
2023	1		22
2024 and thereafter	—		22
Total undiscounted cash flows	$	64	$	116
Present value of lease payments as lease receivables	56
Difference between undiscounted cash flows and discounted cash flows	$	8



	September 27, 2019							December 28, 2018
	Gross carrying value		Accumulated amortization			Net carrying value		Gross carrying value		Accumulated amortization			Net carrying value
	(in millions)
Finite-lived intangible assets:
Program and contract intangibles	$	1,001	$	(494	)	$	507	$	1,003	$	(374	)	$	629
Software and technology	100		(81		)	19		93		(74		)	19
Customer relationships	45		(5		)	40		4		(4		)	—
Trade names	1		—			1		—		—			—
Total finite-lived intangible assets	1,147		(580		)	567		1,100		(452		)	648
Indefinite-lived intangible assets:
Trade names	4		—			4		4		—			4
Total intangible assets	$	1,151	$	(580	)	$	571	$	1,104	$	(452	)	$	652



	Stated interest rate	Effective interest rate	September 27, 2019⁽¹⁾		December 28, 2018⁽¹⁾
			(in millions)
Senior secured notes:
$450 million notes, due December 2020	4.45%	4.53%	$	453	$	447
$300 million notes, due December 2040	5.95%	6.03%	216		216
Senior secured term loans:
$690 million Term Loan A, due August 2023	3.56%	3.99%	596		617
$310 million Term Loan A, due August 2023	3.56%	4.01%	249		258
$1,131 million Term Loan B, due August 2025	3.81%	4.16%	1,079		1,085
Senior unsecured notes:
$250 million notes, due July 2032	7.13%	7.43%	247		246
$300 million notes, due July 2033	5.50%	5.88%	158		158
Notes payable and finance leases due on various dates through fiscal 2022 (see Note 2)	2.85%-5.49%	Various	18		97
Total long-term debt			3,016		3,124
Less: current portion			77		72
Total long-term debt, net of current portion			$	2,939	$	3,052


Period	Total Number of Shares (or Units) Purchased ⁽¹⁾	Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Repurchase Plans or Programs	Maximum Number of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
January 4, 2020 - January 31, 2020	4,703	$	97.70	—	7,696,108
February 1, 2020 - February 29, 2020	—	—		—	7,696,108
March 1, 2020 - March 31, 2020	228	72.51		—	7,696,108
April 1, 2020 - April 3, 2020	—	—		—	7,696,108
Total	4,931	$	96.54	—


⁽¹⁾	~~The total number of shares purchased includes shares surrendered to satisfy statutory tax withholdings obligations related to vesting of restricted stock units.~~


Exhibit Number			Description of Exhibit
10.1			Sale Agreement dated as of February 3, 2020, by and among L3 Harris Technologies, Inc., Leidos Inc. and Leidos Holdings Inc. Incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on February 4, 2020.

Exhibit Number10.2		~~Description of Exhibit~~
~~10.1~~	~~Amended~~Credit Agreement dated as of January 17, 2020, among Leidos Holdings, Inc., Leidos Inc. and ~~Restated Executive Severance Plan.~~Citibank, N.A. Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on January 17, 2020.

~~31.1~~10.3			Bridge Credit Agreement dated as of January 31, 2020, among Leidos Holdings, Inc., Leidos Inc. and Citibank, N.A. Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on January 31, 2020.

10.4			Term Loan Credit Agreement dated as of February 12, 2020, among Leidos Holdings, Inc., Leidos, Inc. and Citibank, N.A. Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on February 14, 2020.

31.1			Certification of Chairman and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2			Certification of Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1			Certification of Chairman and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2			Certification of Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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Leidos Holdings, Inc.

~~Leidos Holdings, Inc.~~

/s/ James C. Reagan
James C. Reagan Executive Vice President and Chief Financial Officer and as a duly authorized officer