UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


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

For the quarterly period ended ~~October~~July 2, ~~2020~~2021


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

For the transition period from to

Commission file number 001-33072


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

Delaware

20-3562868

(State or other jurisdiction of incorporation or organization)

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

1750 Presidents Street,

Reston,

Virginia

20190

(Address of principal executive offices)

(Zip Code)

(571) 526-6000

(Registrant's telephone number, including area code)

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.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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~~July 26, ~~2020,~~2021, was ~~142,320,981~~141,565,183 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	6
	Notes to Condensed Consolidated Financial Statements	7
	Note 1–Basis of Presentation and Summary of Significant Accounting Policies	7
	Note 2–Revenues from Contracts with Customers	9
	Note 3–~~Contract~~Acquisitions, Goodwill and Intangible Assets ~~and Liabilities~~	11
	~~Note 4–Acquisitions~~	12
	Note ~~5–Inventory~~4–Fair Value Measurements	16
	Note ~~6–Goodwill and Intangible Assets~~	16
	~~Note 7–Leases~~5–Derivative Instruments	17
	Note ~~8–Fair Value Measurements~~6–Debt	18
	Note ~~9–Derivative Instruments~~7–Accumulated Other Comprehensive Loss	19
	Note 8–Earnings Per Share	20
	Note 9–Sale of Accounts Receivable	20
	Note 10–~~Debt~~Business Segments	21
	Note 11–~~Accumulated Other Comprehensive Loss~~Commitments and Contingencies	2421
	Note 12–~~Earnings Per Share~~	24
	~~Note 13–Supplementary Cash Flow Information and Restricted Cash~~	25
	~~Note 14–Business Segments~~	26
	~~Note 15–Contingencies~~	27
	~~Note 16–Commitments~~	29
	~~Note 17–~~Subsequent Events	3024
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3125
	Overview	3125
	Business Environment and Trends	3225
	Results of Operations	3326
	Bookings and Backlog	3528
	Liquidity and Capital Resources	3628
	Off-Balance Sheet Arrangements	3830
	~~Commitments~~Guarantor and ~~Contingencies~~Issuer of Guaranteed Securities	3831
	Contractual Obligations and Commitments	31
	Critical Accounting Policies	3931
	Recently Adopted and Issued Accounting Standards	3931
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3932
Item 4.	Controls and Procedures	3932
Part II
Item 1.	Legal Proceedings	4033
Item 1A.	Risk Factors	4033
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4033
Item 3.	Defaults Upon Senior Securities	4133
Item 4.	Mine Safety Disclosures	4133
Item 5.	Other Information	4133
Item 6.	Exhibits	4234
Signatures		4335

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

October 2,
2020 January 3,
2020
(in millions)
ASSETS
Cash and cash equivalents $ 512 $ 668
Receivables, net 1,872 1,734
Inventory, net 292 72
Other current assets 523 338
Total current assets 3,199 2,812
Property, plant and equipment, net 577 287
Intangible assets, net 1,335 530
Goodwill 6,158 4,912
Operating lease right-of-use assets, net 581 400
Other assets 435 426
$ 12,285 $ 9,367
LIABILITIES AND EQUITY
Accounts payable and accrued liabilities $ 2,279 $ 1,837
Accrued payroll and employee benefits 718 435
Long-term debt, current portion 401 61
Total current liabilities 3,398 2,333
Long-term debt, net of current portion 4,125 2,925
Operating lease liabilities 549 326
Deferred tax liabilities 216 184
Other long-term liabilities 282 182
Commitments and contingencies (Notes 15 and 16)
Stockholders’ equity:
Common stock, $0.0001 par value, 500 million shares authorized, 142 million and 141 million shares issued and outstanding at October 2, 2020 and January 3, 2020, respectively 0 0
Additional paid-in capital 2,624 2,587
Retained earnings 1,180 896
Accumulated other comprehensive loss (98) (70)
Total Leidos stockholders’ equity 3,706 3,413
Non-controlling interest 9 4
Total equity 3,715 3,417
$ 12,285 $ 9,367


	July 2, 2021		January 1, 2021
	(in millions)
Assets:
Cash and cash equivalents	$	338	$	524
Receivables, net	2,271		2,137
Inventory, net	251		276
Other current assets	403		402
Total current assets	3,263		3,339
Property, plant and equipment, net	654		604
Intangible assets, net	1,329		1,216
Goodwill	6,707		6,313
Operating lease right-of-use assets, net	634		581
Other assets	448		458
Total assets	$	13,035	$	12,511

Liabilities:
Accounts payable and accrued liabilities	$	1,944	$	2,175
Accrued payroll and employee benefits	683		632
Short-term debt and current portion of long-term debt	481		100
Total current liabilities	3,108		2,907
Long-term debt, net of current portion	4,639		4,644
Operating lease liabilities	600		564
Deferred tax liabilities	255		234
Other long-term liabilities	285		291
Total liabilities	8,887		8,640

Commitments and contingencies (Note 11)	0		0

Stockholders’ equity:
Common stock, $0.0001 par value, 500 million shares authorized, 142 million shares issued and outstanding at July 2, 2021 and January 1, 2021	0		0
Additional paid-in capital	2,509		2,580
Retained earnings	1,605		1,328
Accumulated other comprehensive loss	(15)		(46)
Total Leidos stockholders’ equity	4,099		3,862
Non-controlling interest	49		9
Total stockholders' equity	4,148		3,871
Total liabilities and stockholders' equity	$	13,035	$	12,511

See accompanying notes to condensed consolidated financial statements.

Table of Contents

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended Nine Months Ended
October 2,
2020 September 27,
2019 October 2,
2020 September 27,
2019
(in millions, except per share amounts)
Revenues $ 3,242 $ 2,835 $ 9,045 $ 8,140
Cost of revenues 2,774 2,450 7,799 7,019
Selling, general and administrative expenses 200 177 583 518
Bad debt expense and recoveries 2 (35) (70) (35)
Acquisition, integration and restructuring costs 5 0 33 3
Asset impairment charges 0 0 11 0
Equity loss (earnings) of non-consolidated subsidiaries 3 (6) (10) (16)
Operating income 258 249 699 651
Non-operating (expense) income:
Interest expense, net (44) (28) (133) (99)
Other (expense) income, net 0 (7) (30) 87
Income before income taxes 214 214 536 639
Income tax expense (51) (52) (104) (150)
Net income 163 162 432 489
Less: net income attributable to non-controlling interest 0 1 1 3
Net income attributable to Leidos common stockholders $ 163 $ 161 $ 431 $ 486
Earnings per share:
Basic $ 1.15 $ 1.13 $ 3.04 $ 3.38
Diluted 1.13 1.11 2.99 3.33


	Three Months Ended				Six Months Ended
	July 2, 2021		July 3, 2020		July 2, 2021		July 3, 2020
	(in millions, except per share amounts)
Revenues	$	3,448	$	2,914	$	6,763	$	5,803
Cost of revenues	2,950		2,531		5,798		5,025
Selling, general and administrative expenses	224		195		392		383
Bad debt expense and recoveries	(1)		(81)		(10)		(72)
Acquisition, integration and restructuring costs	10		16		15		28
Asset impairment charges	0		11		0		11
Equity earnings of non-consolidated subsidiaries	(4)		(7)		(9)		(13)
Operating income	269		249		577		441
Non-operating expense:
Interest expense, net	(46)		(41)		(91)		(89)
Other expense, net	0		(16)		(1)		(30)
Income before income taxes	223		192		485		322
Income tax expense	(53)		(38)		(110)		(53)
Net income	$	170	$	154	$	375	$	269
Less: net income attributable to non-controlling interest	1		1		1		1
Net income attributable to Leidos common stockholders	$	169	$	153	$	374	$	268

Earnings per share:
Basic	$	1.20	$	1.08	$	2.65	$	1.89
Diluted	1.18		1.06		2.62		1.86

See accompanying notes to condensed consolidated financial statements.

Table of Contents

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


		Three Months Ended				Nine Months Ended					Three Months Ended				Six Months Ended
		October 2, 2020		September 27, 2019		October 2, 2020		September 27, 2019			July 2, 2021		July 3, 2020		July 2, 2021		July 3, 2020
		(in millions)									(in millions)
Net income	Net income	$	163	$	162	$	432	$	489	Net income	$	170	$	154	$	375	$	269
Foreign currency translation adjustments	Foreign currency translation adjustments	26		(24)		13		(26)		Foreign currency translation adjustments	21		61		17		(13)
Unrecognized gain (loss) on derivative instruments	Unrecognized gain (loss) on derivative instruments	4		(11)		(41)		(52)		Unrecognized gain (loss) on derivative instruments	1		(3)		14		(45)
Pension adjustments	Pension adjustments	(1)		0		0		0		Pension adjustments	0		0		0		1
Total other comprehensive income (loss), net of taxes	Total other comprehensive income (loss), net of taxes	29		(35)		(28)		(78)		Total other comprehensive income (loss), net of taxes	22		58		31		(57)
Comprehensive income	Comprehensive income	192		127		404		411		Comprehensive income	192		212		406		212
Less: comprehensive income attributable to non-controlling interest		0		1		1		3
Less: net income attributable to non-controlling interest										Less: net income attributable to non-controlling interest	1		1		1		1
Comprehensive income attributable to Leidos common stockholders	Comprehensive income attributable to Leidos common stockholders	$	192	$	126	$	403	$	408	Comprehensive income attributable to Leidos common stockholders	$	191	$	211	$	405	$	211

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 1, 2021	142	$	2,580	$	1,328	$	(46)	$	3,862	$	9	$	3,871
Net income	—	—		205		—		205		—		205
Other comprehensive income, net of taxes	—	—		—		9		9		—		9
Issuances of stock	—	14		—		—		14		—		14
Repurchases of stock and other	(1)	(123)		—		—		(123)		—		(123)
Dividends of $0.34 per share	—	—		(49)		—		(49)		—		(49)
Stock-based compensation	—	15		—		—		15		—		15
Capital contributions from non-controlling interests	—	—		—		—		—		38		38
Balance at April 2, 2021	141	2,486		1,484		(37)		3,933		47		3,980
Net income	—	$	—	$	169	$	—	$	169	$	1	$	170
Other comprehensive income, net of taxes	—	—		—		22		22		—		22
Issuances of stock	1	9		—		—		9		—		9
Repurchases of stock and other	—	(3)		—		—		(3)		—		(3)
Dividends of $0.34 per share	—	—		(48)		—		(48)		—		(48)
Stock-based compensation	—	17		—		—		17		—		17
Net capital contributions from non-controlling interests	—	—		—		—		—		1		1
Balance at July 2, 2021	142	$	2,509	$	1,605	$	(15)	$	4,099	$	49	$	4,148

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
Net income — — 153 — 153 1 154
Other comprehensive income, net of taxes — — — 58 58 — 58
Issuances of stock — 8 — — 8 — 8
Repurchases of stock and other — (2) — — (2) — (2)
Dividends of $0.34 per share — — (49) — (49) — (49)
Stock-based compensation — 15 — — 15 — 15
Capital contributions to non-controlling interest — — — — — 4 4
Balance at July 3, 2020 142 2,600 1,065 (127) 3,538 9 3,547
Net income — — 163 — 163 — 163
Other comprehensive income, net of taxes — — — 29 29 — 29
Issuances of stock — 10 — — 10 — 10
Repurchases of stock and other — (1) — — (1) — (1)
Dividends of $0.34 per share — — (48) — (48) — (48)
Stock-based compensation — 15 — — 15 — 15
Balance at October 2, 2020 142 $ 2,624 $ 1,180 $ (98) $ 3,706 $ 9 $ 3,715

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		Retained earnings		Accumulated other comprehensive loss		Leidos Holdings, Inc. stockholders' equity		Non-controlling interest		Total			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)														(in millions, except for per share amounts)
Balance at December 28, 2018		146	$	2,966	$	372	$	(30)	$	3,308	$	3	$	3,311
Balance at January 3, 2020															Balance at January 3, 2020	141	$	2,587	$	896	$	(70)	$	3,413	$	4	$	3,417
Cumulative adjustments related to ASU adoption	Cumulative adjustments related to ASU adoption	—	—		48		—		48		—		48		Cumulative adjustments related to ASU adoption	—	—		(1)		—		(1)		—		(1)
Balance at December 29, 2018		146	2,966		420		(30)		3,356		3		3,359
Balance at January 4, 2020															Balance at January 4, 2020	141	2,587		895		(70)		3,412		4		3,416
Net income	Net income	—	—		189		—		189		—		189		Net income	—	—		115		—		115		—		115
Other comprehensive loss, net of taxes	Other comprehensive loss, net of taxes	—	—		—		(5)		(5)		—		(5)		Other comprehensive loss, net of taxes	—	—		—		(115)		(115)		—		(115)
Issuances of stock	Issuances of stock	1	11		—		—		11		—		11		Issuances of stock	1	9		—		—		9		—		9
Repurchases of stock and other	Repurchases of stock and other	(3)	(222)		—		—		(222)		—		(222)		Repurchases of stock and other	—	(32)		—		—		(32)		—		(32)
Dividends of $0.32 per share		—	—		(47)		—		(47)		—		(47)
Dividends of $0.34 per share															Dividends of $0.34 per share	—	—		(49)		—		(49)		—		(49)
Stock-based compensation	Stock-based compensation	—	12		—		—		12		—		12		Stock-based compensation	—	15		—		—		15		—		15
Balance at March 29, 2019		144	2,767		562		(35)		3,294		3		3,297
Balance at April 3, 2020															Balance at April 3, 2020	142	2,579		961		(185)		3,355		4		3,359
Net income	Net income	—	—		136		—		136		2		138		Net income	—	—		153		—		153		1		154
Other comprehensive loss, net of taxes	Other comprehensive loss, net of taxes	—	—		—		(38)		(38)		—		(38)		Other comprehensive loss, net of taxes	—	—		—		58		58		—		58
Issuances of stock	Issuances of stock	—	6		—		—		6		—		6		Issuances of stock	—	8		—		—		8		—		8
Repurchases of stock and other	Repurchases of stock and other	—	(5)		—		—		(5)		—		(5)		Repurchases of stock and other	—	(2)		—		—		(2)		—		(2)
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	Dividends of $0.34 per share	—	—		(49)		—		(49)		—		(49)		Dividends of $0.34 per share	—	—		(49)		—		(49)		—		(49)
Stock-based compensation	Stock-based compensation	—	13		—		—		13		—		13		Stock-based compensation	—	15		—		—		15		—		15
Balance at September 27, 2019		141	$	2,590	$	764	$	(108)	$	3,246	$	4	$	3,250
Capital contributions from non-controlling interests															Capital contributions from non-controlling interests	—	—		—		—		—		4		4
Balance at July 3, 2020															Balance at July 3, 2020	142	$	2,600	$	1,065	$	(127)	$	3,538	$	9	$	3,547

See accompanying notes to condensed consolidated financial statements.

Table of Contents

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Nine Months Ended
October 2,
2020 September 27,
2019
(in millions)
Cash flows from operations:
Net income $ 432 $ 489
Adjustments to reconcile net income to net cash provided by operations:
Gain on sale of business 0 (87)
Depreciation and amortization 214 174
Stock-based compensation 45 38
Loss on debt extinguishment 31 0
Asset impairment charges 11 0
Deferred income taxes (2) 29
Bad debt expense 11 19
Other 4 3
Change in assets and liabilities, net of effects of acquisitions and dispositions:
Receivables 140 68
Other current assets and other long-term assets 49 34
Accounts payable and accrued liabilities and other long-term liabilities 211 93
Accrued payroll and employee benefits 247 (17)
Income taxes receivable/payable (7) (20)
Net cash provided by operating activities 1,386 823
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (2,610) (94)
Payments for property, equipment and software (120) (67)
Proceeds from disposition of businesses 0 183
Net proceeds from sale of assets 10 96
Other 6 1
Net cash (used in) provided by investing activities (2,714) 119
Cash flows from financing activities:
Proceeds from debt issuance 6,225 0
Payments of long-term debt (4,680) (50)
Payments for debt issuance costs (39) 0
Dividend payments (148) (101)
Repurchases of stock and other (35) (430)
Proceeds from issuances of stock 26 16
Other 4 0
Net cash provided by (used in) financing activities 1,353 (565)
Net increase in cash, cash equivalents and restricted cash 25 377
Cash, cash equivalents and restricted cash at beginning of period 717 369
Cash, cash equivalents and restricted cash at end of period $ 742 $ 746


	Six Months Ended
	July 2, 2021		July 3, 2020
	(in millions)
Cash flows from operations:
Net income	$	375	$	269
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization	157		132
Stock-based compensation	32		30
Loss on debt extinguishment	0		31
Asset impairment charges	0		11
Deferred income taxes	3		(1)
Other	(11)		11
Change in assets and liabilities, net of effects of acquisitions:
Receivables	(89)		226
Other current assets and other long-term assets	91		15
Accounts payable and accrued liabilities and other long-term liabilities	(347)		(44)
Accrued payroll and employee benefits	46		70
Income taxes receivable/payable	(1)		44
Net cash provided by operating activities	256		794
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired	(593)		(2,610)
Payments for property, equipment and software	(47)		(90)
Other	0		1
Net cash used in investing activities	(640)		(2,699)
Cash flows from financing activities:
Proceeds from debt issuance	380		6,225
Payments of long-term debt	(53)		(4,203)
Payments for debt issuance costs	0		(39)
Dividend payments	(98)		(99)
Repurchases of stock and other	(126)		(34)
Capital distributions to non-controlling interests	(3)		0
Capital contributions from non-controlling interests	42		4
Proceeds from issuances of stock	23		16
Net cash provided by financing activities	165		1,870
Net decrease in cash, cash equivalents and restricted cash	(219)		(35)
Cash, cash equivalents and restricted cash at beginning of period	687		717
Cash, cash equivalents and restricted cash at end of period	468		682
Less: restricted cash at end of period	130		94
Cash and cash equivalents at end of period	$	338	$	588

Supplementary cash flow information:
Cash paid for income taxes, net of refunds	$	110	$	7
Cash paid for interest	102		82
Non-cash investing activity:
Property, plant and equipment additions	$	0	$	15
Non-cash financing activity:
Finance lease obligations	$	45	$	12

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, both domestically and internationally. Leidos' 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,~~ state and local government agencies ~~and~~as well as foreign government agencies. Unless indicated otherwise, references to "we," "us" and "our" refer collectively to Leidos Holdings, Inc. and its consolidated subsidiaries. We operate in 3 reportable segments: Defense Solutions, Civil and Health. Additionally, we separately present the unallocable costs associated with corporate functions as Corporate.

We have a controlling interest in Mission Support Alliance, LLC ("MSA"), a joint venture with Centerra Group, ~~LLC, which is anticipated to end in early fiscal 2021.~~LLC. We also have a controlling interest in Hanford Mission Integration Solutions, LLC ("HMIS"), the legal entity for the follow-on contract to MSA's contract and a joint venture with Centerra Group, LLC and Parsons Government Services, Inc. The financial results for MSA and HMIS are consolidated into 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 VIE are not material to the 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~~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 the beginning of fiscal 2020, certain contracts were reassigned from the Civil reportable segment to the Defense Solutions reportable segment. Prior year segment results have been recast to reflect this change (see "Note 14–Business Segments").

Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. We disaggregated "Inventory, net" from "Other current assets" on the condensed consolidated balance sheets. We separately disclosed "Deferred income taxes" and "Income taxes receivable/payable" within operating activities on the condensed consolidated statements of cash flows. 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 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 Annual Report on Form 10-K filed on February ~~18, 2020.~~23, 2021.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Accounting Standards Updates ("ASU") Adopted

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

In June 2016, the 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 March 2020, the FASB issued ASU 2020-04 which provides companies with optional expedients and exceptions to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. This update provides optional expedients for applying accounting guidance to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of the reference rate reform. The amendments in this update are effective for all entities as of March 2020 and can be adopted using a prospective approach no later than December 31, 2022. We are currently evaluating the impacts of the reference rate reform.

ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity's Own Equity (Subtopic 815-40)

In August 2020, the ~~FASB~~Financial Accounting Standards Board ("FASB") issued ASU 2020-06 which simplifies the accounting for convertible debt and convertible preferred stock by removing the requirements to ~~separately present certain~~separate embedded conversion features ~~in equity.~~from the host convertible instruments. Additionally, the amendments in this update simplify the guidance in Subtopic 815-40 by removing certain criteria that must be satisfied in order to classify a contract as equity. This update also improves the consistency of earnings per share calculations by requiring an entity to use the if-converted method of calculating diluted earnings per share rather than the treasury stock method for convertible instruments and also by requiring the inclusion of the potential effect of shares settled in cash or shares in the diluted earnings per share calculation. The amendments in this update are effective for public entities for fiscal years beginning after December 15, 2021, and adopted using either a fully or modified retrospective approach. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. Entities should adopt the guidance as of the beginning of the fiscal year of adoption and cannot adopt the guidance in an interim reporting period.

Effective January 2, 2021, we adopted the requirements of ASU 2020-06 using the modified retrospective method. The adoption did not have an impact to our financial position, results of operations and earnings per share.

Accounting Standards Updates Issued But Not Yet Adopted

ASU 2020-04 and ASU 2021-01, Reference Rate Reform (Topic 848)

In January 2021, the FASB issued ASU 2021-01 which amends the scope of ASU 2020-04. The amendments in this update are elective and provide optional relief for entities with hedge accounting and contract modifications affected by the discounting transition through December 31, 2022. Under this relief, entities may continue to account for contract modifications as a continuation of the existing contract and the continuation of the hedge accounting arrangement. We are currently evaluating the impacts of reference rate reform. We currently use the one-month LIBOR for which the rate publication will cease in June 2023.

ASU 2021-05, Leases (Topic 842) Lessors—Certain Leases with Variable Lease Payments

In July 2021, the FASB issued ASU 2021-05, which amends lessor’s accounting for leases with variable lease payments classified as sales-type or direct financing leases. The amendments in this update modify the lease classification requirements for lessors, whereby leases with variable lease payments that are not dependent on a reference index or a rate will be accounted for as operating leases if classification as a sales-type or direct financing lease would have resulted in a day-one loss. The amendments in this update are effective for public entities for fiscal years beginning after December 15, 2021, as well as interim periods within those fiscal years, and can be adopted using either a prospective or retrospective approach. Early adoption is also permitted. We are currently evaluating the impact and adoption approach for this update.

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.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Changes in estimates on contracts were as follows:

Three Months Ended Nine Months Ended
October 2,
2020 September 27,
2019 October 2,
2020 September 27,
2019
(in millions, except per share amounts)
Favorable impact $ 34 $ 23 $ 86 $ 69
Unfavorable impact (19) (11) (45) (40)
Net impact to income before income taxes $ 15 $ 12 $ 41 $ 29
Impact on diluted EPS attributable to Leidos common stockholders $ 0.07 $ 0.06 $ 0.21 $ 0.15


	Three Months Ended				Six Months Ended
	July 2, 2021		July 3, 2020		July 2, 2021		July 3, 2020
	(in millions, except per share amounts)
Favorable impact	$	37	28		$	68	$	52
Unfavorable impact	(29)		(19)		(48)		(26)
Net impact to income before income taxes	$	8	$	9	$	20	$	26

Impact on diluted EPS attributable to Leidos common stockholders	$	0.04	$	0.05	$	0.11	$	0.14

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

Revenue Recognized from Prior Obligations

Revenue recognized from performance obligations satisfied in previous periods was ~~$10~~$9 million and ~~$42~~$18 million for the three and ~~nine~~six months ended ~~October~~July 2, ~~2020,~~2021, respectively, and ~~$17~~$12 million and ~~$36~~$32 million for the three and ~~nine~~six months ended ~~September 27, 2019,~~July 3, 2020, respectively. The changes primarily ~~relate~~related 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.

Cash and Cash Equivalents

Our cash equivalents are primarily comprised of investments in several large institutional money market accounts, with original maturity of three months or less. Outstanding payments are included within "Cash and cash equivalents" and "Accounts payable and accrued liabilities" correspondingly on the condensed consolidated balance sheets. At ~~October~~July 2, ~~2020~~2021 and January ~~3, 2020, $166~~1, 2021, $196 million and ~~$169~~$237 million, respectively, of outstanding payments were included within "Cash and cash equivalents."

Restricted Cash

We have restricted cash balances, primarily representing advances from customers that are restricted as to use for certain expenditures related to that customer's contract and cash collected from the sale of accounts receivable but not yet remitted to the financial institution (see "Note 9–Sale of Accounts Receivable"). Restricted cash balances are included as "Other current assets" in the condensed consolidated balance sheets. Our restricted cash balances were $130 million and $163 million at July 2, 2021 and January 1, 2021, respectively.

Note 2–Revenues from Contracts with Customers

Remaining Performance Obligations

Remaining performance obligations ("RPO") 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 anticipated task ~~orders is anticipated.~~orders.

As of ~~October~~July 2, ~~2020,~~2021, we had ~~$15.3~~$14.6 billion of ~~remaining performance obligations, which are expected~~RPO and expect to recognize approximately 51% and 81% over the next 12 months and 24 months, respectively, with the remainder to be recognized ~~as revenues in the amounts of $3.3 billion, $5.7 billion and $6.3 billion for the remainder of fiscal 2020, fiscal 2021 and fiscal 2022 and thereafter, respectively.~~thereafter.

Disaggregation of Revenues

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

~~Prior year segment results have been recast for the contracts that were reassigned from the Civil reportable segment to the Defense Solutions reportable segment.~~

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Disaggregated revenues by customer-type were as follows:


	Three Months Ended July 2, 2021								Six Months Ended July 2, 2021
	Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total
	(in millions)
DoD and U.S. Intelligence Community	$	1,466	$	13	$	184	$	1,663	$	2,873	$	26	$	342	$	3,241
Other government agencies(1)	237		625		435		1,297		509		1,230		842		2,581
Commercial and non-U.S. customers	300		131		26		457		578		256		52		886
Total	$	2,003	$	769	$	645	$	3,417	$	3,960	$	1,512	$	1,236	$	6,708

Three Months Ended October 2, 2020 Nine Months Ended October 2, 2020
Defense Solutions Civil Health Total Defense Solutions Civil Health Total
(in millions)
DoD and U.S. Intelligence Community $ 1,411 $ 14 $ 137 $ 1,562 $ 4,058 $ 43 $ 384 $ 4,485
Other government agencies(1)
292 628 358 1,278 675 1,787 980 3,442
Commercial and non-U.S. customers 248 105 25 378 679 288 80 1,047
Total $ 1,951 $ 747 $ 520 $ 3,218 $ 5,412 $ 2,118 $ 1,444 $ 8,974


		Three Months Ended September 27, 2019								Nine Months Ended September 27, 2019									Three Months Ended July 3, 2020								Six Months Ended July 3, 2020
		Defense Solutions		Civil		Health		Total		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	DoD and U.S. Intelligence Community	$	1,215	$	13	$	123	$	1,351	$	3,542	$	47	$	360	$	3,949	DoD and U.S. Intelligence Community	$	1,362	$	12	$	123	$	1,497	$	2,647	$	29	$	247	$	2,923
Other government agencies(1)	Other government agencies(1)	177		577		337		1,091		487		1,652		982		3,121		Other government agencies(1)	175		615		247		1,037		383		1,159		622		2,164
Commercial and non-U.S. customers	Commercial and non-U.S. customers	202		88		45		335		615		255		112		982		Commercial and non-U.S. customers	219		112		27		358		431		183		55		669
Total	Total	$	1,594	$	678	$	505	$	2,777	$	4,644	$	1,954	$	1,454	$	8,052	Total	$	1,756	$	739	$	397	$	2,892	$	3,461	$	1,371	$	924	$	5,756

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

The majority of our revenues are generated from U.S. government contracts, either as a prime contractor or as a subcontractor. 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:


	Three Months Ended July 2, 2021								Six Months Ended July 2, 2021
	Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total
	(in millions)
Cost-reimbursement and fixed-price-incentive-fee	$	1,234	$	405	$	125	$	1,764	$	2,397	$	779	$	224	$	3,400
Firm-fixed-price	526		248		419		1,193		1,079		510		811		2,400
Time-and-materials and fixed-price-level-of-effort	243		116		101		460		484		223		201		908
Total	$	2,003	$	769	$	645	$	3,417	$	3,960	$	1,512	$	1,236	$	6,708

Three Months Ended October 2, 2020 Nine Months Ended October 2, 2020
Defense Solutions Civil Health Total Defense Solutions Civil Health Total
(in millions)
Cost-reimbursement and fixed-price-incentive-fee $ 1,160 $ 363 $ 77 $ 1,600 $ 3,359 $ 1,052 $ 206 $ 4,617
Firm-fixed-price 597 278 348 1,223 1,499 740 958 3,197
Time-and-materials and fixed-price-level-of-effort 194 106 95 395 554 326 280 1,160
Total $ 1,951 $ 747 $ 520 $ 3,218 $ 5,412 $ 2,118 $ 1,444 $ 8,974


		Three Months Ended September 27, 2019								Nine Months Ended September 27, 2019									Three Months Ended July 3, 2020								Six Months Ended July 3, 2020
		Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total			Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total
		(in millions)																	(in millions)
Cost-reimbursement and fixed-price-incentive-fee	Cost-reimbursement and fixed-price-incentive-fee	$	1,038	$	409	$	57	$	1,504	$	3,025	$	1,177	$	173	$	4,375	Cost-reimbursement and fixed-price-incentive-fee	$	1,105	$	343	$	64	$	1,512	$	2,199	$	689	$	129	$	3,017
Firm-fixed-price	Firm-fixed-price	406		161		333		900		1,181		452		930		2,563		Firm-fixed-price	462		289		237		988		902		462		610		1,974
Time-and-materials and fixed-price-level-of-effort	Time-and-materials and fixed-price-level-of-effort	150		108		115		373		438		325		351		1,114		Time-and-materials and fixed-price-level-of-effort	189		107		96		392		360		220		185		765
Total	Total	$	1,594	$	678	$	505	$	2,777	$	4,644	$	1,954	$	1,454	$	8,052	Total	$	1,756	$	739	$	397	$	2,892	$	3,461	$	1,371	$	924	$	5,756

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 exposure to risk of cost overruns.

Disaggregated revenues by geographic location were as follows:


	Three Months Ended July 2, 2021								Six Months Ended July 2, 2021
	Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total
	(in millions)
United States	$	1,746	$	728	$	645	$	3,119	$	3,459	$	1,432	$	1,236	$	6,127
International	257		41		0		298		501		80		0		581
Total	$	2,003	$	769	$	645	$	3,417	$	3,960	$	1,512	$	1,236	$	6,708

Three Months Ended October 2, 2020 Nine Months Ended October 2, 2020
Defense Solutions Civil Health Total Defense Solutions Civil Health Total
(in millions)
United States $ 1,731 $ 708 $ 520 $ 2,959 $ 4,804 $ 2,018 $ 1,444 $ 8,266
International 220 39 0 259 608 100 0 708
Total $ 1,951 $ 747 $ 520 $ 3,218 $ 5,412 $ 2,118 $ 1,444 $ 8,974

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 $ 1,388 $ 663 $ 505 $ 2,556 $ 4,053 $ 1,909 $ 1,454 $ 7,416
International 206 15 0 221 591 45 0 636
Total $ 1,594 $ 678 $ 505 $ 2,777 $ 4,644 $ 1,954 $ 1,454 $ 8,052

Our international business operations, primarily located in Australia and the U.K., are subject to additional and different risks than our U.S. business. Failure to comply with U.S. government laws and regulations applicable to international business, such as the Foreign Corrupt Practices Act or U.S. export control regulations, could have an adverse impact on our business with the U.S. government.

In some countries, there is an increased chance for economic, legal or political changes that may adversely affect the performance of our services, sales of products or repatriation of profits. International transactions can also involve increased financial and legal risks arising from foreign exchange variability, imposition of tariffs or additional taxes and restrictive trade policies and delays or failure to collect amounts due to differing legal systems.


	Three Months Ended July 3, 2020								Six Months Ended July 3, 2020
	Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total
	(in millions)
United States	$	1,560	$	691	$	397	$	2,648	$	3,073	$	1,310	$	924	$	5,307
International	196		48		0		244		388		61		0		449
Total	$	1,756	$	739	$	397	$	2,892	$	3,461	$	1,371	$	924	$	5,756

Revenues by customer-type, contract-type and geographic location exclude lease income of ~~$24~~$31 million and ~~$71~~$55 million for the three and ~~nine~~six months ended ~~October~~July 2, ~~2020,~~2021, respectively, and ~~$58~~$22 million and ~~$88~~$47 million for the three and ~~nine~~six months ended ~~September 27, 2019, respectively (see "Note 7–Leases").~~July 3, 2020, respectively.

~~Note 3–~~Contract Assets and Liabilities

Performance obligations are satisfied either over time as work progresses or at a point in time. ~~FFP~~Firm-fixed-price contracts are typically billed to the customer using milestone payments while cost-reimbursable and ~~T&M~~time and materials contracts are typically billed to the customer on a monthly or bi-weekly basis as indicated by the negotiated billing terms and conditions of the contract. As a result, the timing of revenue recognition, customer billings and cash collections for each contract results in a net contract asset or liability at the end of each reporting period.

Contract assets consist of unbilled receivables, which is the amount of revenue recognized that exceeds the amount billed to the customer, where right to payment is not ~~just~~solely subject to the passage of time. Unbilled receivables exclude amounts billable where the right to consideration is unconditional. Contract liabilities consist of deferred revenue, which represents cash advances received prior to performance for programs and billings in excess of revenue recognized.

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


	Balance sheet line item	July 2, 2021		January 1, 2021
		(in millions)
Contract assets - current:
Unbilled receivables	Receivables, net	$	1,029	$	906

Contract liabilities - current:
Deferred revenue (1)	Accounts payable and accrued liabilities	$	320	$	481

Contract liabilities - non-current:
Deferred revenue (1)	Other long-term liabilities	$	18	$	20

(1) Certain contracts record revenue on a net contract basis, and therefore, the respective deferred revenue balance will not fully convert to revenue.

The increase in unbilled receivables was primarily due to the timing of billings and the acquisitions of Gibbs & Cox, Inc. ("Gibbs & Cox") and 1901 Group, LLC ("1901 Group"), partially offset by revenue recognized on certain contracts. The decrease in deferred revenue was primarily due to the timing of advance payments and revenue recognized during the period.

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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:~~

Balance sheet line item October 2,
2020 January 3,
2020
(in millions)
Contract assets - current:
Unbilled receivables Receivables, net $ 829 $ 735
Contract liabilities - current:
Deferred revenue Accounts payable and accrued liabilities $ 578 $ 400
Contract liabilities - non-current:
Deferred revenue Other long-term liabilities $ 21 $ 9

The increase in unbilled receivables was primarily due the acquisitions of L3Harris Technologies' ("L3Harris") security detection and automation businesses (the "SD&A Businesses") and Dynetics, Inc ("Dynetics").

Revenue recognized for the three and ~~nine~~six months ended ~~October~~July 2, 2021 of $78 million and $222 million, respectively, was included as a contract liability at January 1, 2021. Revenue recognized for the three and six months ended July 3, 2020 of ~~$41~~$81 million and ~~$267~~$226 million, respectively, was included as a contract liability at January 3, 2020. ~~Revenue~~

Note 3–Acquisitions, Goodwill and Intangible Assets

Gibbs & Cox Acquisition

On May 7, 2021 (the "Purchase Date"), we completed the acquisition of Gibbs & Cox for preliminary purchase consideration of approximately $376 million, net of $1 million of cash acquired. Gibbs & Cox is an independent engineering and design firm specializing in naval architecture, marine engineering, management support and engineering consulting.

The preliminary goodwill recognized of$244 million represents intellectual capital and the acquired assembled workforce, neither of which qualify for recognition as a separate intangible asset. All of the goodwill recognized is tax deductible.

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


	Weighted average amortization period	Fair value
	(in years)	(in millions)
Programs	10	$	101
Technology	10	20
Trade names	5	4
Total	10	$	125

The preliminary fair value and related weighted average amortization period of the intangible assets acquired were based on an industry benchmarking analysis surrounding recent and relevant industry transactions. The difference between the benchmark estimate and ultimate fair value of intangible assets identified may be material.

As of July 2, 2021, we had not finalized the determination of fair values allocated to assets and liabilities, including, but not limited to, intangible assets, accounts receivables, accounts payable and accrued liabilities and other long-term liabilities.

1901 Group Acquisition

On January 14, 2021 (the "Closing Date"), we completed the acquisition of 1901 Group for preliminary purchase consideration of $212 million, net of $2 million of cash acquired.

The preliminary goodwill recognized of$123 millionrepresents intellectual capital and the acquired assembled workforce, none of which qualify for recognition as separate intangible assets. Of the goodwill recognized, $103 million is tax deductible.

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


	Weighted average amortization period	Fair value
	(in years)	(in millions)
Technology	8	$	43
Programs	10	37
Backlog	1	5
Total	8	$	85

As of July 2, 2021, we had not finalized the determination of fair values allocated to assets and liabilities, including, but not limited to intangible assets, accounts receivables, accounts payable and accrued liabilities.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three and ~~nine~~six months ended ~~September 27, 2019 of $11~~July 2, 2021, $37 million and ~~$200~~$50 million, respectively, ~~was included as a contract liability at December 28, 2018.~~of revenues related to the Gibbs & Cox and 1901 Group acquisitions were recognized within the Defense Solutions reportable segment.

~~Note 4–Acquisitions~~

~~L3Harris Transaction~~SD&A Businesses Acquisition

On May 4, 2020 (the "Transaction Date"), we completed the acquisition of ~~L3Harris'~~L3Harris Technologies' security detection and automation businesses (the "SD&A Businesses"). The SD&A Businesses were acquired for ~~preliminary purchase~~cash consideration of ~~$1,005~~$1,019 million, net of ~~$30~~$27 million of cash acquired. The purchase consideration includes the initial cash payment of $1,015 million, plus a $31 million payment for contractual net working capital acquired. The SD&A Businesses provide airport and critical infrastructure screening products, automated tray return systems and other industrial automation products. The addition of the SD&A Businesses ~~will expand~~expands the scope and scale of our global security detection and automation offerings.

The ~~preliminary purchase consideration for the acquisition of the SD&A Businesses was as follows (in millions):~~


~~Cash paid at closing~~	$	~~1,015~~
~~Preliminary working capital adjustments~~	20
~~Preliminary purchase price~~	$	~~1,035~~

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~~LEIDOS HOLDINGS, INC.~~

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

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


Cash	$	3027
Receivables	~~134~~128
Inventory	~~104~~106
Other current assets	2326
Operating lease right-of-use assets	35
Property, plant and equipment	3532
Intangible assets	~~430~~355
Accounts payable and accrued liabilities	~~(124)~~(132)
Accrued payroll and employee benefits	(8)
Operating lease liabilities	(32)
Deferred tax liabilities	~~(40)~~(52)
Other long-term liabilities	~~(14)~~(13)
Total identifiable net assets acquired	~~573~~472
Goodwill	~~462~~574
Purchase price	$	~~1,035~~1,046

~~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 ~~October~~July 2, ~~2020,~~2021, we had ~~not finalized~~completed the determination of fair values for substantially all of the of the acquired assets and liabilities. The preliminary purchase price allocation is subject to change as we complete our determination of the final working capital and the fair value of the acquired assets and liabilities assumed, the impact of which could be material. During the three months ended October 2, 2020, we recorded adjustments to certain preliminary estimated values, including a $150 million increase in intangible assets and a $17 million increase in deferred taxes liabilities.

assumed. The goodwill represents intellectual capital and the acquired assembled ~~workforce, neither of which qualify for recognition as a separate intangible asset.~~workforce. Of the goodwill recognized, ~~$289~~$432 million is deductible for tax purposes.

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

Weighted average amortization period Fair value
(in years) (in millions)
Programs 13 $ 150
Customer relationships 10 91
Technology 10 91
In-process research and development ("IPR&D")(1)
98
Total 11 $ 430


	Weighted average amortization period	Fair value
	(in years)	(in millions)
Programs	13	$	141
Customer relationships	10	49
Technology	10	73
In-process research and development ("IPR&D")(1)		92
Total	11	$	355

(1) IPR&D assets are indefinite-lived at the acquisition date until placed into service, at which time such assets will be reclassified to a finite-lived amortizable intangible asset.

For the three and ~~nine~~six months ended ~~October~~July 2, ~~2020,~~2021, $74 million and ~~$154~~$146 million, respectively, of revenues related to the SD&A Businesses were recognized within the Civil reportable segment. For the three and six months ended July 3, 2020, $80 million of revenues related to the SD&A Businesses were recognized within the Civil reportable segment.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Dynetics Acquisition

On January 31, 2020 (the "Acquisition Date"), we completed our acquisition of Dynetics, an industry-leading applied research and national security solutions company. The 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. All of the issued and outstanding shares of common stock of Dynetics were purchased for $1.64 billion, net of cash acquired.

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


$789 million~~Cash~~	$	18
~~Receivables~~	~~159~~
~~Inventory~~	47
~~Other current assets~~	22
~~Operating lease right-of-use assets~~	25
~~Property, plant and equipment~~	~~178~~
~~Intangible assets~~	~~528~~
~~Other assets~~	8
~~Accounts payable and accrued liabilities~~	~~(48)~~
~~Accrued payroll and employee benefits~~	~~(29)~~
~~Operating lease liabilities~~	~~(20)~~
~~Other long-term liabilities~~	~~(4)~~
~~Total identifiable net assets acquired~~	~~884~~
~~Goodwill~~	~~776~~
~~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 October 2, 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. The purchase price allocation is subject to change as we complete our determination of the fair value of the acquired assets and liabilities assumed, the impact of which could be material. During the nine months ended October 2, 2020, we recorded adjustments to certain preliminary estimated values, including a $64 million increase in intangible assets.

~~The goodwill~~ represents intellectual capital and the acquired assembled ~~workforce, neither~~workforce. All of ~~which qualify for recognition as a separate intangible asset. Of~~ the goodwill recognized ~~$766 million~~ is deductible for tax purposes.

The following table summarizes the ~~preliminary~~final 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)
Programs	13	$	485
Backlog	1	32
Technology	11	11
Total	12	$	528

For the ~~three and nine~~six months ended ~~October~~July 2, 2021 and July 3, 2020, ~~$302~~$567 million and ~~$637~~$335 million, respectively, of revenues related to Dynetics were recognized within the Defense Solutions reportable segment.

Acquisition and Integration Costs

The following expenses were incurred related to the acquisitions of Dynetics, the SD&A Businesses, 1901 Group and Gibbs & Cox:


	Three Months Ended				Six Months Ended
	July 2, 2021		July 3, 2020		July 2, 2021		July 3, 2020
	(in millions)
Acquisition costs	$	4	$	12	$	4	$	23
Integration costs	4		3		9		3
Total acquisition and integration costs	$	8	$	15	$	13	$	26

These acquisition and integration costs are recorded within Corporate and presented in "Acquisition, integration and restructuring costs" on the condensed consolidated statements of income.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~Acquisition and Integration Costs~~

~~The following expenses were incurred related to the acquisitions of Dynetics and the SD&A Businesses:~~

Three Months Ended Nine Months Ended
October 2,
2020 October 2,
2020
(in millions)
Acquisition costs $ 0 $ 23
Integration costs 4 7
Total acquisition and integration costs $ 4 $ 30

These acquisition and integration costs have been primarily recorded within Corporate and presented in "Acquisition, integration and restructuring costs" on the condensed consolidated statements of income.

~~Pro Forma Financial Information~~

The following unaudited pro forma financial information presents consolidated results of operations as if the acquisitions of Dynetics and the SD&A Businesses 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 acquisitions of Dynetics and the SD&A Businesses and are factually supportable. The unaudited pro forma results below do not reflect future events that have occurred or may occur after the acquisitions, including anticipated synergies or other expected benefits that may be realized from the acquisitions. The pro forma information is not intended to reflect the actual results of operations that would have occurred if the acquisitions had been completed on December 29, 2018, nor is it intended to be an indication of future operating results.

Three Months Ended Nine Months Ended
October 2,
2020 September 27,
2019 October 2,
2020 September 27,
2019
(in millions, except per share amounts)
Revenues $ 3,242 $ 3,125 $ 9,301 $ 8,984
Net income 161 151 423 401
Net income attributable to Leidos common stockholders 161 150 422 398
Earnings per share:
Basic $ 1.13 $ 1.05 $ 2.97 $ 2.76
Diluted 1.12 1.03 2.93 2.73

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

•Acquisition-related costs of $23 million for the nine months ended October 2, 2020 were excluded within the pro forma financial information for fiscal 2020 and were included within the supplemental pro forma earnings for fiscal 2019.

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~~LEIDOS HOLDINGS, INC.~~

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

~~Note 5–Inventory~~

~~The components of inventory, net consisted of the following:~~

October 2,
2020 January 3,
2020
(in millions)
Raw materials $ 148 $ 46
Work in process 79 13
Finished goods 65 13
$ 292 $ 72

~~Note 6–Goodwill and Intangible Assets~~

~~Goodwill~~

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

Defense Solutions Civil Health Total
(in millions)
Goodwill at December 28, 2018 $ 2,015 $ 1,924 $ 921 $ 4,860
Goodwill re-allocation 25 (25) 0 0
Acquisition of IMX Medical Management Services, Inc. 0 0 50 50
Divestiture of health staff augmentation business 0 0 (5) (5)
Foreign currency translation adjustments (4) 8 0 4
Adjustment to goodwill 3 0 0 3
Goodwill at January 3, 2020 2,039 1,907 966 4,912
Goodwill re-allocation 429 (429) 0 0
Acquisition of Dynetics and the SD&A Businesses 776 462 0 1,238
Foreign currency translation adjustments 8 0 0 8
Goodwill at October 2, 2020 $ 3,252 $ 1,940 $ 966 $ 6,158

Effective the beginning of fiscal 2020, certain contracts were reassigned from the Civil reportable segment to the Defense Solutions reportable segment. This change resulted in the reallocation of $429 million of goodwill between the reporting units within the 2 reportable segments. We evaluated goodwill for impairment for certain 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 0t impaired.


	Defense Solutions		Civil		Health		Total
	(in millions)
Goodwill at January 3, 2020	$	2,039	$	1,907	$	966	$	4,912
Goodwill re-allocation	429		(429)		0		0
Acquisitions of Dynetics and the SD&A Businesses	788		569		0		1,357
Foreign currency translation adjustments	44		0		0		44
Goodwill at January 1, 2021	3,300		2,047		966		6,313
Acquisitions of Dynetics, the SD&A Businesses, 1901 Group and Gibbs & Cox	368		5		0		373
Foreign currency translation adjustments	(13)		34		0		21
Goodwill at July 2, 2021	$	3,655	$	2,086	$	966	$	6,707

There were 0 goodwill impairments during the ~~nine~~six months ended ~~October~~July 2, ~~2020~~2021 and ~~September 27, 2019.~~

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~~LEIDOS HOLDINGS, INC.~~

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

July 3, 2020.

Intangible Assets

Intangible assets, net consisted of the following:

October 2, 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:
Programs $ 1,638 $ (647) $ 991 $ 1,003 $ (536) $ 467
Software and technology 205 (96) 109 102 (83) 19
Customer relationships 136 (15) 121 45 (6) 39
Backlog 32 (21) 11 0 0 0
Trade names 1 0 1 1 0 1
Total finite-lived intangible assets 2,012 (779) 1,233 1,151 (625) 526
Indefinite-lived intangible assets:
In-process research and development 98 — 98 — — —
Trade names 4 — 4 4 — 4
Total intangible assets $ 2,114 $ (779) $ 1,335 $ 1,155 $ (625) $ 530


	July 2, 2021						January 1, 2021
	Gross carrying value		Accumulated amortization		Net carrying value		Gross carrying value		Accumulated amortization		Net carrying value
	(in millions)
Finite-lived intangible assets:
Programs	$	1,774	$	(775)	$	999	$	1,632	$	(687)	$	945
Software and technology	255		(112)		143		188		(100)		88
Customer relationships	98		(14)		84		93		(10)		83
Backlog	37		(34)		3		32		(29)		3
Trade names	5		(1)		4		1		0		1
Total finite-lived intangible assets	2,169		(936)		1,233		1,946		(826)		1,120
Indefinite-lived intangible assets:
In-process research and development	92		—		92		92		—		92
Trade names	4		—		4		4		—		4
Total indefinite-lived intangible assets	96		—		96		96		—		96
Total intangible assets	$	2,265	$	(936)	$	1,329	$	2,042	$	(826)	$	1,216

Amortization expense was ~~$60~~$55 million and ~~$154~~$110 million for the three and ~~nine~~six months ended ~~October~~July 2, ~~2020,~~2021, respectively, and ~~$43~~$51 million and ~~$129~~$94 million for the three and ~~nine~~six months ended ~~September 27, 2019,~~July 3, 2020, respectively.

Program intangible assets are amortized over their respective estimated useful lives in proportion to the pattern of economic benefit based on expected future discounted cash flows. Backlog and trade name intangible assets are amortized on a straight-line basis over their estimated useful lives. Customer relationships and software and technology intangible assets are amortized either on a straight-line basis over their estimated useful lives or over their respective estimated useful lives in proportion to the pattern of economic benefit based on expected future discounted cash flows, as deemed appropriate.

~~The estimated annual amortization expense as of October 2, 2020, was as follows:~~

Fiscal year ending
(in millions)
2020 (remainder of year) $ 58
2021 219
2022 208
2023 182
2024 133
2025 and thereafter 433
$ 1,233

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 intangible assets and goodwill could cause these assets to be impaired.

~~Note 7–Leases~~

~~Lessee~~

~~In March 2020, we took occupancy of our new corporate headquarters in Reston, VA. As a result, we recorded $104 million of right-of-use assets and $132 million of lease liabilities.~~

1715

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~During the three months ended~~The estimated annual amortization expense as of July ~~3, 2020, we made a decision to vacate one of our facilities. The carrying amount~~2, 2021, was ~~determined to be less than the expected recovery from sublease income and as a result, we recorded an impairment charge of $11 million, which was recorded within our Health reportable segment.~~

~~Lessor~~

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

Three Months Ended Nine Months Ended
Income statement line item October 2,
2020 September 27,
2019 October 2,
2020 September 27,
2019
(in millions)
Sales-type leases:
Selling price at lease commencement Revenues $ 16 $ 53 $ 44 $ 68
Cost of underlying asset Cost of revenues (12) (56) (35) (70)
Operating income (loss) 4 (3) 9 (2)
Interest income on lease receivables Revenues 2 1 6 1
6 (2) 15 (1)
Operating lease income Revenues 6 4 21 19
Total lease income $ 12 $ 2 $ 36 $ 18


Fiscal year ending
	(in millions)
2021 (remainder of year)	$	113
2022	230
2023	204
2024	152
2025	125
2026 and thereafter	409
	$	1,233

Note 8–4–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 us to develop our own assumptions about the assumptions that market participants would use in pricing the asset or liability (Level 3).

The accounting guidance for fair value measurements requires that we maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The accounting guidance provides for the irrevocable option to elect, on a contract-by-contract basis, to measure certain financial assets and liabilities at fair value at inception of the contract and record any subsequent changes in fair value in earnings. We have not made fair value option elections for any of our financial assets and liabilities.

The financial instruments measured at fair value on a recurring basis primarily consisted of the following:

October 2, 2020 January 3, 2020
Carrying value Fair value Carrying value Fair value
(in millions)
Financial assets:
Derivatives $ 0 $ 0 $ 2 $ 2
Financial liabilities:
Derivatives $ 115 $ 115 $ 75 $ 75


	July 2, 2021				January 1, 2021
	Carrying value		Fair value		Carrying value		Fair value
	(in millions)
Financial liabilities:
Derivatives	$	78	$	78	$	103	$	103

As of ~~October~~July 2, ~~2020,~~2021, our derivatives primarily consisted of the cash flow interest rate swaps on ~~$1.4~~$1.1 billion of the variable rate senior unsecured term loan (see "Note 9–5–Derivative Instruments"). The fair value of the 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 (Level 2 inputs).

~~Table of Contents~~

~~LEIDOS HOLDINGS, INC.~~

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

The carrying amounts of our financial instruments, other than derivatives, which include cash equivalents, accounts receivable, accounts payable and accrued expenses, are reasonable estimates of their related fair values. The carrying value of our notes receivable of ~~$20~~$15 million as of ~~October~~July 2, ~~2020,~~2021, and January ~~3, 2020,~~1, 2021, approximates fair value as the stated interest rates within the agreements are consistent with current market rates used in notes with similar terms in the market (Level 2 inputs).

As of ~~October~~July 2, ~~2020,~~2021, and January ~~3, 2020,~~1, 2021, the fair value of debt was ~~$4.9~~$5.5 billion and ~~$3.1~~$5.2 billion, respectively, and the carrying amount was ~~$4.5~~$5.1 billionand ~~$3.0~~$4.7 billion, respectively (see "Note ~~10–~~6–Debt"). The fair value of long-term debt is determined based on current interest rates available for debt with terms and maturities similar to our existing debt arrangements (Level 2inputs).

On May 7, 2021, January ~~31,~~14, 2021, May 4, 2020 and ~~May 4,~~January 31, 2020, non-financial instruments measured at fair value on a non-recurring basis were recorded in connection with the acquisitions of ~~Dynetics and the~~Gibbs & Cox, 1901 Group, SD&A Businesses and Dynetics, respectively (see "Note ~~4–Acquisitions"~~3–Acquisitions, Goodwill and Intangible Assets"). The ~~preliminary~~ fair values of the assets acquired and liabilities assumed were determined using Level 3 inputs. ~~Additionally, on July 3, 2020, we had a real estate property measured at fair value (Level 2), which resulted in an impairment charge of $11 million (see "Note 7–Leases").~~ As of ~~October~~July 2, ~~2020,~~2021, we did not have any assets or liabilities measured at fair value on a non-recurring basis.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 9–5–Derivative Instruments

We manage our risk to changes in interest ~~rates and foreign currency exchange~~ rates through the use of derivative instruments. We do not hold derivative instruments for trading or speculative purposes. ~~For fixed rate borrowings, 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, 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 hedge accounting does not apply.

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

Asset derivatives
Balance sheet line item October 2,
2020 January 3,
2020
(in millions)
Fair value interest rate swaps Other assets $ 0 $ 2
Liability derivatives
Balance sheet line item October 2,
2020 January 3,
2020
(in millions)
Cash flow interest rate swaps Other long-term liabilities $ 114 $ 75
Foreign currency forward contracts Accounts payable and accrued liabilities 1 0

Liability derivatives

Balance sheet line item

July 2,
2021

January 1,
2021

(in millions)

Cash flow interest rate swaps

Other long-term liabilities

103

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~~

We held interest rate swap agreements to hedge the fair value of the $450 million fixed rate 4.45% senior unsecured notes maturing in December 2020 (the "2020 Notes"). The objective of these instruments was to hedge the 2020 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, we received semi-annual interest payments at the coupon rate of 4.45% and paid variable interest based on the six-month LIBOR rate.

On September 1, 2020, we repaid the 2020 Notes in full (see "Note 10–Debt"). In conjunction with the retirement of the 2020 Notes, we terminated our fair value hedge and received a final settlement of $2 million.

~~Table of Contents~~

~~LEIDOS HOLDINGS, INC.~~

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

Cash Flow Hedges

We have interest rate swap agreements to hedge the cash flows of ~~$1.4~~$1.1 billion of the variable rate senior unsecured term loan (the "Variable Rate 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 Variable Rate Loan, which are based on the LIBOR rate. Under the terms of the interest rate swap agreements, we will receive monthly variable interest payments based on the one-month LIBOR rate and will pay interest at a fixed rate.

The interest rate swap transactions were accounted for as cash flow hedges. The gain/loss on the swaps is reported as a component of other comprehensive ~~income (loss)~~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.

The effect of the cash flow hedges on other comprehensive ~~income (loss)~~loss and earnings for the periods presented was as follows:

Three Months Ended Nine Months Ended
October 2,
2020 September 27,
2019 October 2,
2020 September 27,
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 $ 44 $ 28 $ 133 $ 99
Amount recognized in other comprehensive income (loss) $ 0 $ (13) $ (62) $ (62)
Amount reclassified from accumulated other comprehensive loss to interest expense, net 5 (2) 9 (6)


	Three Months Ended				Six Months Ended
	July 2, 2021		July 3, 2020		July 2, 2021		July 3, 2020
	(in millions)
Total interest expense, net presented in the condensed consolidated statements of income in which the effects of cash flow hedges are recorded	$	46	$	41	$	91	$	89

Amount recognized in other comprehensive income (loss)	$	(3)	$	(7)	$	9	$	(62)
Amount reclassified from accumulated other comprehensive income (loss) to interest expense, net	$	4	$	4	$	9	$	4

We expect to reclassify net losses of ~~$16~~$21 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.

2017

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note ~~10–~~6–Debt

Our debt consisted of the following:

Stated interest rate Effective interest rate
October 2,
2020(1)
January 3,
2020(1)
(in millions)
Senior unsecured term loans:
$300 million Term Loan, due June 2021 2.15% 2.41% $ 299 $ 0
$1,925 million Term Loan, due January 2025 1.53% 1.78% 1,860 0
Senior secured term loans:
$690 million Term Loan A, due August 2023 3.31% 3.74% 0 581
$310 million Term Loan A, due August 2023 3.31% 3.76% 0 242
$1,131 million Term Loan B, due August 2025 3.56% 3.91% 0 1,075
Senior unsecured notes:
$450 million notes, due December 2020 4.45% 4.53% 0 452
$500 million notes, due May 2023 2.95% 3.17% 497 0
$500 million notes, due May 2025 3.63% 3.76% 496 0
$750 million notes due May 2030 4.38% 4.50% 736 0
$250 million notes, due July 2032 7.13% 7.43% 247 247
$300 million notes, due July 2033 5.50% 5.88% 158 158
$300 million notes, due December 2040 5.95% 6.03% 216 216
Notes payable and finance leases due on various dates through fiscal 2030

2.15%-5.49% Various 17 15
Total long-term debt 4,526 2,986
Less: current portion (401) (61)
Total long-term debt, net of current portion

$ 4,125 $ 2,925


	Stated interest rate	Effective interest rate	July 2, 2021(1)		January 1, 2021(1)
			(in millions)
Short-term debt:
Senior unsecured term loans:
$380 million term loan, due May 2022	1.24%	1.34%	$	380	$	0

Long-term debt:
Senior unsecured term loans:
$1,925 million term loan, due January 2025	1.49%	1.75%	1,345		1,391
Senior secured notes:
$500 million notes, due May 2023(2)	2.95%	3.17%	498		0
$500 million notes, due May 2025(2)	3.63%	3.76%	496		0
$750 million notes due May 2030(2)	4.38%	4.50%	737		0
$1,000 million notes, due February 2031(2)	2.30%	2.38%	989		0
Senior unsecured notes:
$500 million notes, due May 2023(2)	2.95%	3.17%	0		497
$500 million notes, due May 2025(2)	3.63%	3.76%	0		496
$750 million notes due May 2030(2)	4.38%	4.50%	0		737
$1,000 million notes, due February 2031(2)	2.30%	2.38%	0		989
$250 million notes, due July 2032	7.13%	7.43%	247		247
$300 million notes, due July 2033	5.50%	5.88%	158		158
$300 million notes, due December 2040	5.95%	6.03%	216		216
Notes payable and finance leases due on various dates through fiscal 2032	1.56%-5.49%	Various	54		13
Total long-term debt			4,740		4,744
Less current portion			(101)		(100)
Total long-term debt, net of current portion			$	4,639	$	4,644

(1) The carrying amounts of the senior term loans and notes as of ~~October~~July 2, ~~2020,~~2021, and January ~~3, 2020,~~1, 2021, include the remaining principal outstanding of ~~$4,556~~$5,114 million and ~~$3,004~~$4,782 million, respectively, less total unamortized debt discounts and deferred debt issuances costs of ~~$47~~$48 million and ~~$35~~$51 million, ~~respectively, and~~respectively.

(2) We filed a ~~$2 million asset as of January 3, 2020 related to the fair value interest rate swaps (see "Note 9–Derivative Instruments").~~

~~Senior Notes~~

~~Notes Retirement~~

~~On September 1, 2020, we retired our $450 million senior unsecured notes due December 2020. Cash~~Registration Statement on ~~hand was used to repay in full all indebtedness under, and discharge and release all guarantees existing in connection with these notes.~~

~~Notes Issuance~~

On May 12, 2020, we issued and sold $500 million senior notes maturing in May 2023 (the "2023 Notes"), $500 million senior notes maturing in May 2025 (the "2025 Notes") and $750 million senior notes maturing in May 2030 (the "2030 Notes", and togetherForm S-4 with the ~~2023 Notes~~Securities and 2025 Notes, the "Notes"). The Notes are senior unsecured obligations issued by Leidos, Inc. and guaranteed by Leidos Holdings, Inc. The Notes have not been registered under the Securities Act of 1933, as amended (the "Securities Act") and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

The proceeds from the Notes were used to repay all of the outstanding obligations in respect of principal, interest, fees and other amounts under the January 31, 2020 Bridge Facility and to repay a portion of the outstanding loans under the February 12, 2020 Facility.

Interest on the Notes is payable on a semi-annual basis with principal payments due at maturity. The annual interest rate for the 2023 Notes, 2025 Notes and 2030 Notes is 2.95%, 3.63% and 4.38%, respectively.

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~~LEIDOS HOLDINGS, INC.~~

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

~~Additionally,~~Exchange Commission on May ~~12, 2020, we entered into a registration rights agreement, pursuant to which we agreed to use reasonable best efforts to file a registration statement to permit the exchange of the Notes~~6, 2021, and related guarantees for registered notes having terms substantially identical thereto, or in the alternative, the registered resale of the Notes and related guarantees, under certain circumstances. Under the agreement, the registration statement is to be filed no later than 420 days after the original issuance of the securities. If we fail to satisfy our obligations under the registration rights agreement, we will be required to pay additional annual interest equal to 0.25% of the aggregate outstandingwas declared effective on ~~the principal amount to holders of the Notes.~~

~~Term Loan Financing~~

On June 18, 2020 (the "Agreement Date"), we entered into a 364-day Term Loan Credit Agreement, which provided for a senior unsecured term loan facility in an aggregate principal amount of $300 million (the "Term Loan"), with maturity 364 days after the Agreement Date.

The proceeds of the Term Loan and cash on hand on the Agreement Date were used to repay in full all indebtedness under, and discharge and release all guarantees existing in connection with the delayed-draw term loan facility.

Borrowings under the Term Loan 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 applicable margin range for LIBOR-denominated borrowings is from 1.75% to 2.25%. Based on our current ratings, the applicable margin for LIBOR-denominated borrowings is 2.00%.

The financial covenants in the Term Loan Credit Agreement require that we maintain, as of the last day of each fiscal quarter, a ratio of adjusted consolidated total debt to consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") of not more than 4.50 to 1.00 and a ratio of EBITDA to consolidated interest expense of not less than 3.50 to 1.00.

~~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 the SD&A Businesses. On May 4, 2020, we completed our acquisition of the SD&A Businesses and drew on the Facility in an aggregate principal amount of $1.0 billion (the "Facility"). The proceeds of the Facility and cash on hand were used to fund the purchase of the SD&A Businesses.

On May 12, 2020, in connection with the issuance of the $1.75 billion Notes, $500 million of the principal outstanding on the Facility was repaid. During May and June 2020, we made $200 million of principal repayments on the Facility. On June 18, 2020, in connection with the 364-day Term Loan Credit Agreement, the remaining principal outstanding on the Facility was fully repaid.

~~Bridge Facility~~

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"), with maturity 364 days after the Acquisition Date.

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.

Borrowings under the Bridge 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, subject to increases by 0.25% every 90 days. During the period the Bridge Facility borrowing was outstanding, the applicable margins for LIBOR-denominated borrowings were 1.38% and 1.63%. Additionally, we paid to each lender under the Bridge Facility a duration fee equal to 0.50% of the aggregate outstanding principal amount of the loans under the Bridge Facility 90 days after the Acquisition Date.

~~On May 12, 2020, in connection with the issuance of the Notes, the outstanding principal on the Bridge Credit Agreement was fully repaid.~~

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~~LEIDOS HOLDINGS, INC.~~

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

Term Loans and Revolving Credit Facility ~~Refinancing~~

~~On January 17, 2020 (the "Closing Date"), we entered into~~We have a Credit Agreement (the "Credit Agreement") with certain financial institutions, which provided for a senior unsecured term loan 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 Facility, the "Credit Facilities"~~). ~~The Credit Facilities will mature five years from the Closing Date, subject to 2 additional one year extensions.~~

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 $450 million notes due 2020 and $300 million notes due 2040 were also released and such notes became 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 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, 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.

~~Principal Payments and Debt Issuance Costs~~

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

On May 7, 2021, we entered into a Credit Agreement (the "2021 Credit Agreement") with certain financial institutions, which provided for a senior unsecured term loan facility in an aggregate principal amount of $380 million with maturity 364 days after the 2021 Credit Agreement date. The proceeds were used to fund the ~~refinancing activity noted above, we made principal payments on our long-term debt~~acquisition of $477 million and $705 million during the three and nine months ended October 2, 2020, respectively, and $2 million and $50 million during the three and nine months ended September 27, 2019, respectively. This activity included required principal payments on our term loans of $24 million and $48 million during the three and nine months ended October 2, 2020, respectively and $41 million during the nine months ended September 27, 2019. As of October 2, 2020, and January 3, 2020, there were 0 borrowings outstandingGibbs & Cox.

Borrowings under the ~~unsecured and secured credit facility, respectively.~~2021 Credit Agreement bear interest at a rate determined, at our option, based on either an alternate base rate plus 0.13% or a LIBOR rate plus 1.13%.

In connection with the financing activity noted above, $56 million of debt discount and debt issuance costs related to the debt and revolving credit facility were recognized, which were recorded as an offset against the carrying value of debt and capitalized within "Other assets"The financial covenants in the ~~condensed~~2021 Credit Agreement require that we maintain, as of the last day of each fiscal quarter, a ratio of adjusted consolidated ~~balance sheets, respectively. For the nine months ended October 2, 2020, $31 million~~total debt to consolidated EBITDA of ~~debt discount~~not more than 3.75 to 1.00, subject to increases to 4.50 to 1.00 following a material acquisition, and ~~debt issuance costs were written off related~~a ratio of EBITDA to ~~the Terminated Credit Agreements and loan facility repayments. Amortization~~consolidated interest expense of debt discount and debt issuance costs was $4 million and $13 million for the three and nine months ended October 2, 2020, respectively, and $2 million and $7 million for the three and nine months ended September 27, 2019, respectively.not less than 3.50 to 1.00.

The senior secured and unsecured term loans, notes and revolving credit facility are fully and unconditionally guaranteed and contain certain customary restrictive covenants, including among other things, restrictions on our ability to create liens and enter into sale and leaseback transactions under certain circumstances. We were in compliance with all covenants as of ~~October~~July 2, ~~2020.~~2021.

Principal Payments and Debt Issuance Costs

We made principal payments on our long-term debt of $27 million and $53 million during the three and six months ended July 2, 2021, respectively, and $226 million and $228 million during the three and six months ended July 3, 2020, respectively. This activity included required principal payments on our term loans of $24 million and $48 million during the three and six months ended July 2, 2021, respectively, and $24 million for the three and six months ended July 3, 2020. During the three and six months ended July 3, 2020 we made additional payments of $2,050 million and $3,975 million, respectively, related to our refinancing activities.

23As of July 2, 2021 and January 1, 2021, there were 0 borrowings outstanding under the Revolving Facility.

For the three and six months ended July 3, 2020, $12 million and $31 million of debt discount and debt issuance costs were written off related to the prior year refinancing activities. Amortization of debt discount and debt issuance costs was $2 million and $4 million for the three and six months ended July 2, 2021, respectively, and $5 million and $9 million for the three and six months ended July 3, 2020, respectively.

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~~LEIDOS HOLDINGS, INC.~~

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

Note ~~11–~~7–Accumulated Other Comprehensive Loss

Changes in the components of accumulated other comprehensive loss were as follows:

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 0 18
Reclassification from accumulated other comprehensive loss 0 (7) 0 (7)
Balance at January 3, 2020 (33) (33) (4) (70)
Other comprehensive income (loss) 13 (62) 0 (49)
Taxes 0 12 0 12
Reclassification from accumulated other comprehensive loss 0 9 0 9
Balance at October 2, 2020 $ (20) $ (74) $ (4) $ (98)


	Foreign currency translation adjustments		Unrecognized gain (loss) on derivative instruments		Pension adjustments		Total accumulated other comprehensive loss
	(in millions)
Balance at January 3, 2020	$	(33)	$	(33)	$	(4)	$	(70)
Other comprehensive income (loss)	70		(61)		(3)		6
Taxes	(7)		10		1		4
Reclassification from accumulated other comprehensive loss	—		14		—		14
Balance at January 1, 2021	30		(70)		(6)		(46)
Other comprehensive income	25		9		0		34
Taxes	(8)		(4)		0		(12)
Reclassification from accumulated other comprehensive loss	—		9		—		9
Balance at July 2, 2021	$	47	$	(56)	$	(6)	$	(15)

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

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note ~~12–~~8–Earnings Per Share

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
October 2,
2020 September 27,
2019 October 2,
2020 September 27,
2019
(in millions)
Basic weighted average number of shares outstanding 142 143 142 144
Dilutive common share equivalents—stock options and other stock awards 2 2 2 2
Diluted weighted average number of shares outstanding 144 145 144 146


	Three Months Ended		Six Months Ended
	July 2, 2021	July 3, 2020	July 2, 2021	July 3, 2020
	(in millions)
Basic weighted average number of shares outstanding	141	142	141	142
Dilutive common share equivalents—stock options and other stock awards	2	2	2	2
Diluted weighted average number of shares outstanding	143	144	143	144

Anti-dilutive stock-based awards are excluded from the weighted average number of shares outstanding used to compute diluted EPS. The total outstanding stock options and vesting stock awards that were anti-dilutive were 1 million for both the three and ~~nine~~six months ended ~~October~~July 2, 2021 and the three and six months July 3, 2020.

During the six months ended July 2, 2021, we made open market repurchases of our common stock for an aggregate purchase price of $100 million. All shares repurchased were immediately retired. NaN share repurchases were made under the Company’s share repurchase program during the three months ended July 2, 2021.

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~~LEIDOS HOLDINGS, INC.~~

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

Note ~~13–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
October 2,
2020 September 27,
2019
(in millions)
Supplementary cash flow information:
Cash paid for income taxes, net of refunds $ 110 $ 142
Cash paid for interest(1)
104 112
Non-cash investing activity:
Fixed asset additions $ 16 $ 9
Non-cash financing activity:
Finance lease obligations $ 12 $ 0

~~(1)~~ ~~Includes net settlement of cash flow hedge and fair value hedge derivatives~~

9–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 from our customers within 30 days of the sale date. During the ~~nine~~six months ended ~~October~~July 2, 2021 and July 3, 2020, we sold ~~$1,866~~$693 million and $1,113 million, respectively, of accounts receivable under the agreements and received proceeds of ~~$1,864~~$693 million and $1,112 million, respectively, 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~~periods presented was as follows:


	~~Nine Months Ended~~
	October 2, 2020
	~~(in millions)~~
~~Sales of accounts receivable~~	$	~~1,866~~
~~Cash collections on sold receivables remitted to financial institution~~	~~(1,634)~~
~~Outstanding balance sold to financial institution~~	~~232~~
~~Cash collected but not yet remitted to financial institution~~	~~(28)~~
~~Sold receivables due from customers~~	$	~~204~~


	Six Months Ended
	July 2, 2021		July 3, 2020
	(in millions)
Sales of accounts receivable	$	693	$	1,113
Cash collections on sold receivables remitted to financial institution	(693)		(888)
Outstanding balance sold to financial institution	0		225
Cash collected but not yet remitted to financial institution	0		(14)
Sold receivables due from customers	$	0	$	211

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~Restricted Cash~~

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:

October 2,
2020 January 3,
2020
(in millions)
Cash and cash equivalents $ 512 $ 668
Restricted cash 230 49
Total cash, cash equivalents and restricted cash $ 742 $ 717

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

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

Note ~~14–~~10–Business Segments

Our operations and reportable segments are organized around the customers and markets we serve. We define our reportable segments based on the way the chief operating decision maker ("CODM"), currently our Chairman and Chief Executive Officer, manages operations for the purposes of allocating resources and assessing performance.

Effective the beginning of fiscal 2020, certain contracts were reassigned from the Civil reportable segment to the Defense Solutions reportable segment to better align operations within the reportable segments to the customers they serve. Prior year segment results have been recast to reflect this change.

~~The results of Dynetics and the SD&A Businesses were included within the Defense Solutions and Civil reportable segments, respectively.~~

The segment information for the periods presented was as follows:

Three Months Ended Nine Months Ended
October 2,
2020 September 27,
2019 October 2,
2020 September 27,
2019
(in millions)
Revenues:
Defense Solutions $ 1,951 $ 1,594 $ 5,413 $ 4,645
Civil 771 733 2,183 2,023
Health 520 508 1,449 1,472
Total revenues $ 3,242 $ 2,835 $ 9,045 $ 8,140
Operating income (loss):
Defense Solutions $ 145 $ 107 $ 359 $ 324
Civil 54 43 191 157
Health 75 63 149 169
Corporate (16) 36 0 1
Total operating income $ 258 $ 249 $ 699 $ 651


	Three Months Ended				Six Months Ended
	July 2, 2021		July 3, 2020		July 2, 2021		July 3, 2020
	(in millions)
Revenues:
Defense Solutions	$	2,004	$	1,757	$	3,962	$	3,462
Civil	799		758		1,565		1,412
Health	645		399		1,236		929
Total revenues	$	3,448	$	2,914	$	6,763	$	5,803

Operating income (loss):
Defense Solutions	$	137	$	119	$	289	$	214
Civil	55		78		129		137
Health	107		1		209		74
Corporate	(30)		51		(50)		16
Total operating income	$	269	$	249��	$	577	$	441

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

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~~LEIDOS HOLDINGS, INC.~~

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

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

Note ~~15–~~11–Commitments and Contingencies

Legal Proceedings

MSA Joint Venture

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. On February 8, 2019, the 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 ("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~~would 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 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 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 October 2, 2020, we had a liability~~On April 5, 2021, MSA finalized the settlement of ~~$42 million recorded~~the False Claims Act litigation in the ~~condensed consolidated balance sheets~~Eastern District of Washington and the related contract claim at the CBCA. Pursuant to the settlement agreement, DoE paid MSA approximately $37 million on April 19, 2021 and MSA paid the Department of Justice $3 million on April 22, 2021. Accordingly, following joint motions by the parties, the CBCA dismissed the claim before the Board with prejudice on April 28, 2021 and the District Court dismissed the False Claims Act litigation with prejudice on April 30, 2021.

There remain other outstanding matters in dispute between DoE and MSA as the two parties work to close out the Mission Support Contract. As of July 2, 2021, we believe we have adequately reserved for ~~this matter.~~any potential liabilities related to these disputes.

Class Action Lawsuit

On March 2, 2021, Leidos and certain current officers of Leidos were named as defendants in a putative class action securities lawsuit filed in the U.S. District Court for the Southern District of New York. The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder relating to alleged misstatements or omissions in Leidos' public filings with the SEC and other public statements during the period from May 4, 2020 to February 23, 2021 relating, among other things, to Leidos' acquisition of the SD&A Businesses. The plaintiff seeks to recover from the Company and the individual defendants an unspecified amount of ~~possible loss ultimately incurred, if any, is subject~~damages at this time. We believe the suit lacks merit and we intend 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.vigorously defend against it.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~Securities Litigation~~

Between February and April 2012, alleged stockholders filed 3 putative securities class actions against Leidos and several former executives relating to 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 Leidos and individual defendants made misleading statements or omissions about revenues, operating income and internal controls in connection with disclosures relating to the CityTime project. The plaintiffs sought to recover from 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. 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 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 Leidos. On October 2, 2019, the court granted preliminary approval of the proposed settlement and on June 29, 2020, the court granted final approval effective July 30, 2020. The settlement payment was disbursed during the three months ended October 2, 2020. The payment by Leidos was covered by an insurance policy.

~~Arbitration Proceeding~~

Leidos was 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 acquisition of Lockheed Martin's Information Systems & Global Solutions business. On July 16, 2020, the arbitrators issued a final opinion rejecting Lockheed Martin’s claims.

~~Other~~

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

Other Contingencies

VirnetX, Inc. ("VirnetX")

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 court on October 1, 2019. On December 27, 2019, Apple 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 large amount of damages awarded in 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 matter. On May 22, 2020, Leidos received $85 million from VirnetX representing Leidos' current share of the proceeds resulting from the Apple I case. A net gain of $81 million was recognized during the three months ended July 3, 2020 and was presented in "Bad debt expense and recoveries" on the condensed consolidated statements of income. On July 23, 2020, Leidos paid a 4% royalty on the proceeds received to the customer who paid for the development of the original technology. Apple's Motion for Relief from Judgment was denied by the District Court on September 1, 2020. Apple is expected to appeal the denial of this Motion.

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~~LEIDOS HOLDINGS, INC.~~

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

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 filed an appeal of the judgment in the Apple II case with the U.S. Court of Appeals for the Federal 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. On April 23, 2020, the District Court ordered a new trial on damages in the Apple II case, which was delayed by ~~COVID-19~~the coronavirus pandemic and started on October 26, 2020. On October 30, 2020, the jury awarded VirnetX $503 million in ~~damages.~~damages and specified a royalty rate of $0.84 per infringing device. Apple is expected to appeal this decision. In January 2021, the District Court entered final judgment affirming the jury award and the parties separately agreed on additional costs and interest of over $75 million, subject to Apple's appeal. On February 4, 2021, Apple filed a notice of appeal with the U.S. Court of Appeals for the Federal Circuit in the Apple II case.

Under our agreements with VirnetX, Leidos would receive 25% of the proceeds obtained by VirnetX after reduction for attorneys' fees and costs. However, the ~~verdicts~~verdict in ~~these cases remain~~the Apple II case remains subject to 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 we will receive any proceeds in connection with these jury awards. In addition, if Leidos receives any proceeds, we are required to pay a royalty to the customer who paid for the development of the technology.

Government Investigations and Reviews

We are routinely subject to investigations and reviews relating to compliance with various laws and regulations with respect to our role as a contractor to federal, state and local government customers and in connection with performing services in countries outside of the United States. Adverse findings could have a material effect on our business, financial position, results of operations and cash flows due to our reliance on government contracts.

As of ~~October~~July 2, ~~2020,~~2021, indirect cost active audits by the Defense Contract Audit Agency remain open for fiscal ~~2015~~2016 and subsequent fiscal years. Although we have recorded contract revenues based upon an estimate of costs that we believe will be approved upon final audit or review, we cannot predict the outcome of any ongoing or future audits or reviews and adjustments, and if future adjustments exceed estimates, our profitability may be adversely affected. As of ~~October~~July 2, ~~2020,~~2021, we believe we have adequately reserved for potential adjustments from audits or reviews of contract costs.

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~~Note 16–~~

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Commitments

We have outstanding letters of credit of ~~$94~~$75 million as of ~~October~~July 2, ~~2020,~~2021, principally related to performance guarantees on contracts. We also have outstanding surety bonds with a notional amount of ~~$128~~$131 million, principally related to performance and subcontractor payment bonds on contracts. The value of the surety bonds may vary due to changes in the underlying project status and/or contractual modifications.

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~~LEIDOS HOLDINGS, INC.~~

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

As of ~~October~~July 2, ~~2020,~~2021, the future expirations of the outstanding letters of credit and surety bonds were as follows:

Fiscal year ending
(in millions)
2020 (remainder of year) $ 39
2021 78
2022 94
2023 2
2024 1
2025 and thereafter 8
$ 222


Fiscal year ending
	(in millions)
2021 (remainder of year)	$	79
2022	103
2023	4
2024	2
2025	2
2026 and thereafter	16
	$	206

Note ~~17–~~12–Subsequent Events

~~Notes Issuance~~Commercial paper program

On ~~October 8, 2020, we issued and sold $1.0 billion aggregate principal amount~~July 12, 2021, Leidos, Inc. established a commercial paper program in which the Company may issue short-term unsecured commercial paper notes ("Commercial Paper Notes") not to exceed $750 million. The Commercial Paper Notes will have maturities of ~~fixed-rate senior notes maturing in February 2031 (the "2031 Notes").~~up to 397 days from the date of issuance. The ~~2031~~net proceeds of the Commercial Paper Notes are ~~senior unsecured obligations issued by Leidos, Inc. and guaranteed by Leidos Holdings, Inc. The 2031 Notes have not been registered under the Securities Act and may not~~expected to be ~~offered or sold in the United States absent registration or an applicable exemption from registration requirements.~~

~~The proceeds from the 2031 Notes were~~ used for general corporate purposes, including ~~to repay all of the outstanding obligations in respect of principal, interest, fees~~working capital, capital expenditures, acquisitions and ~~other amounts under the 364-day Term Loan and to repay a portion of the outstanding loans under the~~ ~~five-year Term Loan Facility.~~

~~Interest on the 2031 Notes is payable on a semi-annual basis with principal payments due at maturity. The annual interest rate for the 2031 Notes is 2.30%.~~share repurchases.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of Leidos Holdings, Inc.'s ("Leidos") financial condition, results of operations, and quantitative and qualitative discussion about business environment and trends should be read in conjunction with Leidos' condensed consolidated financial statements and related notes.

The following discussion contains forward-looking statements, including statements regarding our intent, belief or current expectations with respect to, among other things, trends affecting our financial condition or results of operations, backlog, our industry, the impact of our merger and acquisition activity, government budgets and spending, our business contingency plans and our ability to recover certain costs through the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"). Such statements are not guarantees of future performance and involve risks and uncertainties, including uncertainties relating to the coronavirus ~~outbreak~~pandemic ("COVID-19") and the actions taken by authorities and us to respond, and actual results may differ materially from those in the forward-looking statements as a result of various factors. Some of these factors include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K, as updated by the risk factor in this report under Part II, Item 1A. "Risk Factors" and as may be further updated in subsequent filings with the U.S. Securities and Exchange Commission. Due to such uncertainties and risks, you are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. We do not undertake any obligation to update these factors or to publicly announce the results of any changes to our forward-looking statements due to future events or developments.

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

Overview

We are a FORTUNE 500® science, engineering and information technology company that provides services and solutions in the defense, intelligence, civil and health markets, both domestically and internationally. We bring domain-specific capability and cross-market innovations to customers in each of these markets by leveraging ~~seven~~five technical core ~~capabilities: cyber;~~competencies: digital ~~modernization; integrated systems;~~modernization, cyber operations, mission software ~~systems;~~systems, integrated systems and mission ~~support; operations and logistics; and sensors, collection and phenomenology.~~operations. Our 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,~~ state and local government agencies ~~and~~as well as foreign government agencies. We operate in three reportable segments: Defense Solutions, Civil and Health. Additionally, we separately present the unallocable costs associated with corporate functions as Corporate.

COVID-19

The COVID-19 outbreak is affecting major economic and financial markets, and effectively all industries and governments are facing challenges, which has resulted in a period of business disruption, the length and severity of which cannot be predicted. The outbreak has resulted in significant travel restrictions, government orders to “shelter-in-place”, quarantine restrictions and significant disruption of the financial markets. We have acted to protect the health and safety of our employees, comply with workplace health and safety regulations and work with our customers to minimize disruptions. The outbreak has impacted each of our groups, primarily in access to customer sites, travel restrictions, limitations of remote work and COVID-19 related costs.

Consistent with federal, state and local guidance, we perform work that is essential to support the critical infrastructure of the United States, the Defense Industrial Base and healthcare sector and we continue to operate in support of our customers. We have taken steps to support increased teleworking and safe workplace environments. We have some minor business operations that are not designated as critical infrastructure and therefore have been required to operate in minimal conditions.

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~~LEIDOS HOLDINGS, INC.~~

For the three and ~~nine~~six months ended ~~October~~July 2, ~~2020,~~2021, COVID-19 ~~adversely impacted~~did not have a material impact to revenues ~~by approximately $40 million~~ and ~~$200 million, respectively, and impacted~~ operating ~~income for the three and nine months ended October 2, 2020 by an immaterial amount and approximately $79 million, respectively, as compared to prior year results.~~income. The full extent of the impact of the COVID-19 ~~outbreak~~pandemic on our operational and financial performance, including our ability to execute on programs in the expected timeframe, will depend on future developments, including the duration and spread of the ~~outbreak~~pandemic and ~~related actions taken by~~ the ~~U.S. government, state and local government officials and international governments to prevent disease spread,~~distribution of vaccines, all of which are uncertain and cannot be predicted. While we have been able to make some recoveries, the ultimate timing and amount of recoveries remain uncertain as they will depend on a range of government actions, including each government agency and/or contracting officer's implementation of the authority granted in Section 3610 of the CARES Act, a $2 trillion coronavirus response bill providing widespread emergency relief, including the availability of funds. As a result of Congress passing ~~a continuing resolution,~~government fiscal year ("GFY") 2021 appropriations, the relief from the CARES Act has been extended until ~~December 11, 2020.~~

We have experienced delays, and expect to continue experiencing delays, on certain contracts as a result of standby leave absences, which has caused a portion of our contracts to be less profitable. Within our Health segment we did not experience any negative COVID impacts for the three months ended October 2, 2020 and anticipate to see recoveries in the fourth quarter of our fiscal year. We are seeking reimbursement of some of the COVID-19 related costs under our U.S. government contracts through a combination of equitable adjustments to the contract prices and reimbursement of the costs under Section 3610, which allows, but does not require, federal agencies to reimburse contractors at the minimum applicable contract billing rate for costs arising from certain paid leave, including sick leave, a contractor provides to keep its employees or subcontractors in a ready state, including to protect the life and safety of government and contractor personnel. Reimbursement of any costs under Section 3610 increases sales, but is not expected to include a profit or fee and so would have the effect of reducing our margins in future periods. Standby cost increases, including costs for employees whose jobs cannot be performed remotely, may not be fully recoverable under our contracts, particularly fixed-price contracts, or adequately covered by insurance. We also have no assurance that Congress will appropriate funds to cover the reimbursement of defense contractors authorized by the CARES Act, which could reduce funds available for recovery of these costs or for other U.S. government defense priorities.

The CARES Act also enabled us to defer our federal and some state income tax payments from the second quarter of fiscal 2020 to the third quarter of fiscal 2020 and also to defer payment of the employer portion of social security taxes for the balance of fiscal 2020. For the three and nine months ended October 2, 2020, we deferred $92 million of employer social security tax payments and received $10 million from the Employee Retention Credit.

We have taken measures to protect the health and well-being of our workforce and are working with our customers to minimize the delay and disruption of the award and performance on our contracts. Many of our employees continue to work remotely while our offices remain open with limited capacity.September 30, 2021.

Business Environment and Trends

U.S. Government Markets

During the three and ~~nine~~six months ended ~~October~~July 2, ~~2020,~~2021, we generated approximately ~~88%~~86% and 87%, respectively, of our total revenues from contracts with the U.S. government. Accordingly, our business performance is affected by the overall level of U.S. government spending, especially on national security, homeland security and intelligence, and the alignment of our service and product offerings and capabilities with current and future budget priorities of the U.S. government.

~~On February 10, 2020,~~Congress received the President submitted the government fiscal year ("GFY") 2021 budget proposal to Congress, which included discretionary spending levels for defense and non-defense programs of $741 billion and $590 billion, respectively. Since then, Congress and the Administration have shifted their collective attention to mitigating the impact of COVID-19.

GFY 2022 President’s Budget Request on May 28, 2021. Congress is ~~currently addressing~~working through the ~~passage~~appropriations process before the end of ~~appropriations bills for~~the GFY ~~2021. Prior to the beginning of GFY 2021, Congress passed~~on September 30; however, a continuing resolution ~~that was enacted on October 1, 2020 to provide temporary funding for government operations at GFY 2020 enacted levels until December 11, 2020.~~is likely. Other potential spending packages include an infrastructure package and a budget reconciliation package.

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International Markets

Sales to customers in international markets represented approximately 8%9% of total revenues for the three and ~~nine~~six months ended ~~October~~July 2, ~~2020.~~2021. Our international customers include foreign governments and their agencies. Our international business increases our exposure to international markets and the associated international regulatory and geopolitical risks.

Changes in international trade policies, including higher tariffs on imported goods and materials, may increase our procurement costs of certain IT hardware used both on our contracts and for internal use. However, we expect to recover certain portions of these higher tariffs through our cost-plus contracts. While we evaluate the impact of higher tariffs, currently, we do not expect tariffs to have a significant impact to our business.

Results of Operations

The following table summarizes our condensed consolidated results of operations for the periods presented:


	Three Months Ended										Six Months Ended
	July 2, 2021			July 3, 2020			Dollar change		Percent change		July 2, 2021			July 3, 2020			Dollar change		Percent change
	(dollars in millions)
Revenues	$	3,448		$	2,914		$	534	18.3	%	$	6,763		$	5,803		$	960	16.5	%

Operating income	269			249			20		8.0	%	577			441			136		30.8	%
Non-operating expense, net	(46)			(57)			11		(19.3)	%	(92)			(119)			27		(22.7)	%
Income before income taxes	223			192			31		16.1	%	485			322			163		50.6	%
Income tax expense	(53)			(38)			(15)		39.5	%	(110)			(53)			(57)		107.5	%
Net income	$	170		$	154		$	16			$	375		$	269		$	106
Net income attributable to Leidos common stockholders	$	169		$	153		$	16	10.5	%	$	374		$	268		$	106	39.6	%
Operating margin	7.8		%	8.5		%					8.5		%	7.6		%

Three Months Ended Nine Months Ended
October 2,
2020 September 27,
2019 Dollar change Percent change October 2,
2020 September 27,
2019 Dollar change Percent change
(dollars in millions)
Revenues $ 3,242 $ 2,835 $ 407 14.4 % $ 9,045 $ 8,140 $ 905 11.1 %
Operating income 258 249 9 3.6 % 699 651 48 7.4 %
Non-operating expense, net (44) (35) (9) 25.7 % (163) (12) (151) NM
Income before income taxes 214 214 — — % 536 639 (103) (16.1) %
Income tax expense (51) (52) 1 (1.9) % (104) (150) 46 (30.7) %
Net income 163 162 1 0.6 % 432 489 (57) (11.7) %
Net income attributable to Leidos common stockholders $ 163 $ 161 $ 2 1.2 % $ 431 $ 486 $ (55) (11.3) %
Operating margin 8.0 % 8.8 % 7.7 % 8.0 %

~~NM - Not meaningful~~

Segment and Corporate Results

Three Months Ended Nine Months Ended
Defense Solutions October 2,
2020 September 27,
2019 Dollar change Percent change October 2,
2020 September 27,
2019 Dollar change Percent change
(dollars in millions)
Revenues $ 1,951 $ 1,594 $ 357 22.4 % $ 5,413 $ 4,645 $ 768 16.5 %
Operating income 145 107 38 35.5 % 359 324 35 10.8 %
Operating margin 7.4 % 6.7 % 6.6 % 7.0 %


	Three Months Ended										Six Months Ended
Defense Solutions	July 2, 2021			July 3, 2020			Dollar change		Percent change		July 2, 2021			July 3, 2020			Dollar change		Percent change
	(dollars in millions)
Revenues	$	2,004		$	1,757		$	247	14.1	%	$	3,962		$	3,462		$	500	14.4	%
Operating income	137			119			18		15.1	%	289			214			75		35.0	%
Operating margin	6.8		%	6.8		%					7.3		%	6.2		%

The increase in revenues for the three and six months ended ~~October~~July 2, ~~2020,~~2021, as compared to the three and six months ended ~~September 27, 2019,~~July 3, 2020, was primarily attributable to ~~$302~~program wins, a net increase in volumes on certain programs and total of $37 million and $50 million, respectively, of revenues ~~related to~~from the ~~acquisition~~acquisitions of ~~Dynetics, Inc. ("Dynetics"), program wins~~Gibbs & Cox and ~~favorable exchange rate movements, primarily related to changes in the Australian dollar when compared to the U.S. dollar. This was~~1901 Group, partially offset by the completion of certain ~~contracts~~contracts. In addition, for the three and ~~approximately $26~~six months ended July 2, 2021, there was a $29 million ~~of negative impacts from reduced volume on certain contracts due to COVID-19.~~and $53 million benefit, respectively, in exchange rate movements.

The increase in ~~revenues~~operating income for the ~~nine~~three and six months ended ~~October~~July 2, ~~2020,~~2021, as compared to the ~~nine~~three and six months ended ~~September 27, 2019,~~July 3, 2020, was primarily ~~attributable~~due to ~~$637 million of revenues related to the acquisition of Dynetics,~~ program wins and a net increase in volumes on certain ~~programs. This was~~programs, partially offset by the completion of certain ~~contracts and approximately $59 million of negative impacts from reduced volume on certain contracts due to COVID-19.~~contracts.

The increase in operating income for the three months ended October 2, 2020, as compared to the three months ended September 27, 2019, was primarily due to program wins, lower indirect expenditures and income related to the acquisition of Dynetics. This was partially offset by a net decrease in volumes on certain programs.

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The increase in operating income for the nine months ended October 2, 2020, as compared to the nine months ended September 27, 2019, was primarily due to program wins, lower indirect expenditures and income related to the acquisition of Dynetics. This was partially offset by a net decrease in volumes on certain programs, including approximately $24 million of negative impacts from reduced volume on certain contracts due to COVID-19, and higher amortization of intangible assets related to the acquisition of Dynetics.


		Three Months Ended										Nine Months Ended											Three Months Ended										Six Months Ended
Civil	Civil	October 2, 2020			September 27, 2019			Dollar change		Percent change		October 2, 2020			September 27, 2019			Dollar change		Percent change		Civil	July 2, 2021			July 3, 2020			Dollar change		Percent change		July 2, 2021			July 3, 2020			Dollar change		Percent change
		(dollars in millions)																					(dollars in millions)
Revenues	Revenues	$	771		$	733		$	38	5.2	%	$	2,183		$	2,023		$	160	7.9	%	Revenues	$	799		$	758		$	41	5.4	%	$	1,565		$	1,412		$	153	10.8	%
Operating income	Operating income	54			43			11		25.6	%	191			157			34		21.7	%	Operating income	55			78			(23)		(29.5)	%	129			137			(8)		(5.8)	%
Operating margin	Operating margin	7.0		%	5.9		%					8.7		%	7.8		%					Operating margin	6.9		%	10.3		%					8.2		%	9.7		%

The increase in revenues for the three months ended ~~October~~July 2, ~~2020,~~2021, as compared to the three months ended ~~September 27, 2019,~~July 3, 2020, was primarily attributable to ~~$74 million of revenues related to the acquisition of L3Harris Technologies' security detection and automation businesses (the "SD&A Businesses") and~~a net increase in program volumes, program wins ~~partially offset by~~and a reduction of the ~~completion of certain contracts, prior year upfront lease revenue recognized on certain programs and approximately $14 million of~~ negative impacts from ~~reduced volume on certain contracts due to COVID-19.~~COVID-19 experienced during the prior year quarter.

The increase in revenues for the ~~nine~~six months ended ~~October~~July 2, ~~2020,~~2021, as compared to the ~~nine~~six months ended ~~September 27, 2019,~~July 3, 2020, was primarily attributable to ~~program wins, $154~~a net increase of $66 million of revenues related to L3 Harris Technologies' security and detection businesses (the "SD&A Businesses") acquired in the ~~acquisition of the SD&A Businesses and~~prior year quarter, a net increase in program volumes, ~~on certain programs. This was partially offset by~~program wins and a reduction of the ~~completion of certain contracts, approximately $45 million of~~ negative impacts from ~~reduced volume on certain contracts due to~~ COVID-19 ~~and an $11 million impact from~~experienced during the ~~sale of our commercial cybersecurity business in the first quarter of fiscal 2019.~~prior year quarter.

The ~~increase~~decrease in operating income for the three months ended ~~October~~July 2, ~~2020,~~2021, as compared to the three months ended ~~September 27, 2019,~~July 3, 2020, was primarily due to a net decrease in volumes due to the timing of product deliveries on certain programs.

The decrease in operating income for the six months ended July 2, 2021, as compared to the six months ended July 3, 2020, was primarily attributable to a net decrease in volumes due to the timing of product deliveries on certain programs and increased amortization reflecting one additional month in the current quarter related to intangible assets from the acquisition of the SD&A Businesses, partially offset by a $26 million benefit from an adjustment to legal reserves related to the Mission Support Alliance joint venture during the first quarter of fiscal 2021 and on-contract growth in certain programs.


	Three Months Ended										Six Months Ended
Health	July 2, 2021			July 3, 2020			Dollar change		Percent change		July 2, 2021			July 3, 2020			Dollar change		Percent change
	(dollars in millions)
Revenues	$	645		$	399		$	246	61.7	%	$	1,236		$	929		$	307	33.0	%
Operating income	107			1			106		NM		209			74			135		182.4	%
Operating margin	16.6		%	0.3		%					16.9		%	8.0		%

The increase in revenues for the three and six months ended July 2, 2021, as compared to the three and six months ended July 3, 2020, was primarily attributable to a net increase in volumes on certain programs, program wins and ~~a decrease in bad debt expense. This was partially offset by higher amortization of intangible assets related to the acquisition of the SD&A Businesses and the completion of certain contracts.~~

The increase in operating income for the nine months ended October 2, 2020, as compared to the nine months ended September 27, 2019, was primarily attributable to program wins and a decrease in bad debt expense, partially offset by higher amortization of intangible assets related to the acquisition of the SD&A Businesses and the completion of certain contracts.

Three Months Ended Nine Months Ended
Health October 2,
2020 September 27,
2019 Dollar change Percent change October 2,
2020 September 27,
2019 Dollar change Percent change
(dollars in millions)
Revenues $ 520 $ 508 $ 12 2.4 % $ 1,449 $ 1,472 $ (23) (1.6) %
Operating income 75 63 12 19.0 % 149 169 (20) (11.8) %
Operating margin 14.4 % 12.4 % 10.3 % 11.5 %

The increase in revenues for the three months ended October 2, 2020, as compared to the three months ended September 27, 2019, was primarily attributable to a net increase in volumes on certain programs and program wins. This was partially offset by a $22 million impact from the sale of our health staff augmentation business in the third quarter of fiscal 2019.

~~The decrease in revenues for the nine months ended October 2, 2020, as compared to the nine months ended September 27, 2019, was primarily attributable to~~an approximately $96 million ~~related to timing~~reduction of ~~program execution due to~~the negative impacts of COVID-19 ~~a $73 million impact from~~experienced during the sale of our health staff augmentation business in the third quarter of fiscal 2019 and the completion of certain contracts. This was partially offset by a net increase in volumes on certain programs, program wins and a $23 million impact from our acquisition of IMX Medical Management Services, Inc. ("IMX") in the third quarter of fiscal 2019.prior year quarter.

The increase in operating income for the three and six months ended ~~October~~July 2, ~~2020,~~2021, as compared to the three and six months ended ~~September 27, 2019,~~July 3, 2020, was primarily due to ~~lower expenditures~~a net increase in volumes on ~~certain programs.~~higher margin programs, an approximately $57 million reduction of the negative impacts of COVID-19 experienced during both the prior year quarter and prior year and an $11 million asset impairment charge in the prior year quarter.


	Three Months Ended								Six Months Ended
Corporate	July 2, 2021		July 3, 2020		Dollar change		Percent change		July 2, 2021		July 3, 2020		Dollar change		Percent change
	(dollars in millions)
Operating (loss) income	$	(30)	$	51	$	(81)	(158.8)	%	$	(50)	$	16	$	(66)	NM

NM - Not Meaningful

The increase in operating loss for the three and six months ended July 2, 2021, as compared to the three and six months ended July 3, 2020, was primarily attributable to an $81 million net gain recognized during the second quarter of fiscal 2020 upon receipt of proceeds related to the VirnetX, Inc. ("VirnetX") legal matter and a decrease in acquisition and integration costs.

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The decrease in operating income for the nine months ended October 2, 2020, as compared to the nine months ended September 27, 2019, was primarily attributable to approximately $56 million of negative impacts from reduced volume on certain managed service contracts with fixed cost infrastructures that were impacted by COVID-19, partially offset by a net increase in volumes on certain programs.

Three Months Ended Nine Months Ended
Corporate October 2,
2020 September 27,
2019 Dollar change Percent change October 2,
2020 September 27,
2019 Dollar change Percent change
(dollars in millions)
Operating (loss) income $ (16) $ 36 $ (52) NM $ — $ 1 $ (1) (100.0) %

~~NM - Not meaningful~~

The increase in operating loss for the three months ended October 2, 2020, as compared to the three months ended September 27, 2019, was primarily attributable to a $54 million recovery recognized in the prior year quarter related to the receipt of the Greek arbitration award.

The decrease in operating income for the nine months ended October 2, 2020, as compared to the nine months ended September 27, 2019, was primarily attributable to a $54 million recovery recognized in the prior year quarter related to the receipt of the Greek arbitration award, a $26 million increase in acquisition and integration costs and higher litigation costs. This was partially offset by an $81 million net gain recognized upon the receipt of proceeds related to the VirnetX, Inc. ("VirnetX") legal matter.

Non-Operating Expense, net

Non-operating expense, net for the three months ended ~~October~~July 2, ~~2020~~2021 was ~~$44~~$46 million as compared to ~~$35~~$57 million for the three months ended ~~September 27, 2019.~~July 3, 2020. The change was primarily due to ~~higher interest expense associated with increases~~$12 million of debt discount and deferred financing costs written off related to refinancing activities in ~~our long-term debt.~~the prior year.

Non-operating expense, net for the ~~nine~~six months ended ~~October~~July 2, ~~2020~~2021 was ~~$163~~$92 million as compared to ~~$12~~$119 million for the ~~nine~~six months ended ~~September 27, 2019.~~July 3, 2020. The change was primarily due to ~~the $87 million gain recognized on the sale of our commercial cybersecurity business in the prior year,~~ $31 million of debt discount and deferred financing costs written off related to refinancing activities in the ~~refinancing of our term loans and bridge facilities and higher interest expense associated with increases in our long-term debt.~~prior year.

Provision for Income Taxes

For the three months ended ~~October~~July 2, ~~2020,~~2021, our effective tax rate was 23.8% compared to ~~24.3%~~19.8% for the three months ended ~~September 27, 2019.~~July 3, 2020. The ~~decrease in the effective tax rate was primarily due to a net decrease in valuation allowance related to foreign taxes compared to the prior year quarter, partially offset by an~~ increase ~~in current period foreign taxes.~~

~~For the nine months ended October 2, 2020, our effective tax rate was 19.4% compared to 23.5% for the nine months ended September 27, 2019. The decrease~~ in the effective tax rate was primarily due to an increase to state income taxes and the one-time effects of the increase to the UK tax rate.

For the six months ended July 2, 2021, our effective tax rate was 22.7% compared to 16.5% for the six months ended July 3, 2020. The increase in the effective tax rate was primarily due to a decrease in benefits related to employee stock-based payments, ~~federal research tax credits~~an increase to state income taxes and ~~higher~~a prior period ~~unrecognized~~release of a valuation allowance related to foreign tax ~~benefits.~~credits.

Bookings and Backlog

We recorded net bookings worth an estimated ~~$4.3~~$3.8 billion and ~~$14.5~~$7.6 billion during the three and ~~nine~~six months ended ~~October~~July 2, ~~2020, respectively,~~2021, as compared to ~~$5.2~~$4.6 billion and ~~$11.5~~$10.2 billion for the three and ~~nine~~six months ended ~~September 27, 2019, respectively.~~

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~~LEIDOS HOLDINGS, INC.~~

July 3, 2020.

The estimated value of our total backlog was as follows:

October 2,
2020 January 3,
2020
(in millions)
Defense Solutions:
Funded backlog $ 4,115 $ 3,063
Negotiated unfunded backlog 13,746 11,974
Total Defense Solutions backlog $ 17,861 $ 15,037
Civil:
Funded backlog $ 1,521 $ 1,267
Negotiated unfunded backlog 7,028 2,978
Total Civil backlog $ 8,549 $ 4,245
Health:
Funded backlog $ 1,208 $ 1,083
Negotiated unfunded backlog 4,101 3,725
Total Health backlog $ 5,309 $ 4,808
Total:
Funded backlog $ 6,844 $ 5,413
Negotiated unfunded backlog 24,875 18,677
Total backlog $ 31,719 $ 24,090


	July 2, 2021						July 3, 2020
Segment	Funded		Unfunded		Total		Funded		Unfunded		Total
	(in millions)
Defense Solutions	$	4,293	$	14,154	$	18,447	$	4,275	$	13,779	$	18,054
Civil	1,608		7,493		9,101		1,695		6,634		8,329
Health	1,255		4,720		5,975		1,074		3,204		4,278
Total	$	7,156	$	26,367	$	33,523	$	7,044	$	23,617	$	30,661

The change in backlog for the Defense Solutions ~~and Civil~~ reportable ~~segments reflect $1,632~~segment reflects $751 million ~~and $574 million, respectively,~~ of backlog acquired as a result of the acquisitions of ~~Dynetics~~1901 Group and ~~the SD&A Businesses, respectively.~~Gibbs & Cox.

Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts, both funded and unfunded. Backlog does 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 anticipated task ~~orders is anticipated.~~orders. Total backlog at ~~October~~July 2, ~~2020~~2021 included ~~an adverse~~a positive impact of ~~$44~~$244 million when compared to total backlog at ~~January~~July 3, 2020, due to exchange rate movements in the British pound and Australian dollar when compared to the U.S. dollar. Backlog estimates are subject to change and may be affected by factors including modifications of contracts and foreign currency movements.

Liquidity and Capital Resources

Overview

As of ~~October~~July 2, ~~2020,~~2021, we had ~~$512~~$338 million in cash and cash equivalents. ~~In January 2020,~~Additionally, we ~~entered into~~have an unsecured revolving credit facility which can provide up to $750 million in additional borrowing, if required. ~~This new credit facility replaced the previous secured credit facility with the same borrowing capacity.~~ As of ~~October~~July 2, ~~2020,~~2021, there were no borrowings outstanding under the credit facility and we were in compliance with the related financial covenants.

At ~~October~~July 2, ~~2020,~~2021, and January ~~3, 2020,~~1, 2021, we had outstanding debt of ~~$4.5~~$5.1 billion and ~~$3.0~~$4.7 billion, respectively. ~~In January 2020,~~On May 7, 2021, we entered into a Credit Agreement with certain financial institutions, which provided for a senior unsecured term loan facility in an aggregate principal amount of $1.9 billion (the "Term Loan Facility"). We used the proceeds of the Term Loan Facility and cash on hand 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.

Additionally, on January 17, 2020, 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 amount of $1.25 billion (the "Bridge Facility"). We used the proceeds of the Bridge Facility and cash on hand 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.

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~~LEIDOS HOLDINGS, INC.~~

In February 12, 2020, we entered into a senior unsecured delayed-draw term loan facility (the "Facility") providing for $1.0 billion of commitments from certain financial institutions in connection with the acquisition of the SD&A Businesses. On May 4, 2020, we completed our acquisition of the SD&A Businesses and drew on the Facility in an aggregate principal amount of $1.0 billion. The proceeds of the Facility and cash on hand were used to fund the purchase of the SD&A Businesses.

On May 12, 2020, we issued and sold $500 million senior notes maturing in May 2023, $500 million senior notes maturing in May 2025 and $750 million senior notes maturing in May 2030 (collectively, the "Notes"). The proceeds from the Notes were used to repay all of the outstanding obligations in respect of principal, interest, fees and other amounts under the Bridge Credit Agreement and to repay a portion of the outstanding loans under the Facility.

~~On June 18, 2020, we entered into a 364-day Term Loan~~ Credit Agreement which provided for a senior unsecured term loan facility in an aggregate principal amount of ~~$300 million (the "Term Loan"). The proceeds~~$380 million.

Table of ~~the Term Loan and cash on hand on were used to repay in full all indebtedness under, and discharge and release all guarantees existing in connection with the Facility.~~Contents

On September 1, 2020, we retired our $450 million senior unsecured notes due December 2020. Cash on hand was used to repay in full all indebtedness under, and discharge and release all guarantees existing in connection with the notes.LEIDOS HOLDINGS, INC.

On October 8, 2020, we issued and sold $1.0 billion aggregate principal amount of fixed-rate senior notes maturing in February 2031 (the "2031 Notes"). The proceeds from the 2031 Notes were used for general corporate purposes, including to repay all of the outstanding obligations in respect of principal, interest, fees and other amounts under the 364-day Term Loan and to repay a portion of the outstanding loans under the five-year Term Loan Facility.

~~See "Note 10–Debt" and "Note 17–Subsequent Events" for further details regarding the debt transactions noted above.~~

~~In addition to the refinancing activity noted above, we~~We made principal payments on our long-term debt of ~~$477~~$27 million and ~~$705~~$53 million during the three and ~~nine~~six months ended ~~October~~July 2, ~~2020,~~2021, respectively, and $2$226 million and ~~$50~~$228 million during the three and ~~nine~~six months ended ~~September 27, 2019,~~July 3, 2020, respectively. This activity included required principal payments on our term loans of $24 million and $48 million during the three and ~~nine~~six months ended ~~October~~July 2, ~~2020, respectively,~~2021, and ~~$41~~$24 million during the ~~nine~~three and six months ended ~~September 27, 2019.~~July 3, 2020. During the three and six months ended July 3, 2020 we made additional payments of $2,050 million and $3,975 million, respectively, related to our refinancing activities. The senior unsecured term loans and notes contain financial covenants and customary restrictive covenants. We were in compliance with all covenants as of ~~October~~July 2, ~~2020.~~2021.

On July 12, 2021, Leidos, Inc. established a commercial paper program in which we may issue short-term unsecured commercial paper notes not to exceed $750 million and have maturities of up to 397 days from the date of issuance (see "Note 12–Subsequent Events" ).

We paid dividends of ~~$49~~$48 million and ~~$148~~$98 million during the three and ~~nine~~six months ended ~~October~~July 2, ~~2020,~~2021, respectively, and ~~$101~~$48 million and $99 million during the ~~nine~~three and six months ended ~~September 27, 2019.~~July 3, 2020, respectively.

During the three and ~~nine~~six months ended ~~October~~July 2, ~~2020,~~2021, we sold ~~$753~~$228 million and ~~$1,866~~$693 million, respectively, of accounts receivable under accounts receivable purchase agreements and received proceeds of ~~$752~~$229 million and ~~$1,864~~$693 million, respectively. During the three and six months ended July 3, 2020, we sold $549 million and $1,113 million of accounts receivable under accounts receivable purchase agreements and received proceeds of $549 million and $1,112 million, respectively (see "Note ~~13–Supplementary Cash Flow Information~~9–Sale of Accounts Receivable").

Stock repurchases of Leidos common stock may be made on the open market or in privately negotiated transactions with third parties including through accelerated share repurchase agreements. Whether repurchases are made and ~~Restricted Cash").~~the timing and actual number of shares repurchased depends on a variety of factors including price, corporate capital requirements, other market conditions and regulatory requirements. The repurchase program may be accelerated, suspended, delayed or discontinued at any time.

During the six months ended July 2, 2021, we made open market repurchases of our common stock for an aggregate purchase price of $100 million. There were no share repurchases made under the Company’s share repurchase program during the second quarter ended July 2, 2021.

COVID-19 has negatively impacted the financial markets and may impact our liquidity; we will continue to assess our liquidity needs as the ~~outbreak~~pandemic evolves.

For the next 12 months, we anticipate that we will be able to meet our liquidity needs, including servicing our debt, through cash generated from operations, available cash balances, sales of accounts receivable and, if needed, borrowings under our revolving credit facility.

Summary of Cash Flows

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


	Three Months Ended				Six Months Ended
	July 2, 2021		July 3, 2020		July 2, 2021		July 3, 2020
	(in millions)
Net cash provided by operating activities	$	17	$	422	$	256	$	794
Net cash used in investing activities	(396)		(1,014)		(640)		(2,699)
Net cash provided by financing activities	313		709		165		1,870
Net (decrease) increase in cash, cash equivalents and restricted cash	$	(66)	$	117	$	(219)	$	(35)

Net cash provided by operating activities decreased $405 million for the three months ended July 2, 2021, when compared to the prior year quarter. The decrease was primarily due to lower sale of accounts receivable of $122 million, higher tax payments of $95 million, timing of customer advance payments of $94 million and the receipt of $85 million of proceeds related to the VirnetX legal matter in the prior year quarter.

Net cash provided by operating activities decreased $538 million for the six months ended July 2, 2021, when compared to the prior year. The decrease was primarily due to lower sale of accounts receivable of $225 million, higher tax payments of $103 million, timing of customer advance payments of $162 million, and the receipt of $85 million of proceeds related to the VirnetX legal matter in the prior year.

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LEIDOS HOLDINGS, INC.

~~Summary of Cash Flows~~

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

Three Months Ended Nine Months Ended
October 2,
2020 September 27,
2019 October 2,
2020 September 27,
2019
(in millions)
Net cash provided by operating activities $ 592 $ 349 $ 1,386 $ 823
Net cash (used in) provided by investing activities (15) (102) (2,714) 119
Net cash (used in) provided by financing activities (517) (204) 1,353 (565)
Net increase in cash, cash equivalents and restricted cash $ 60 $ 43 $ 25 $ 377

Net cash provided by operating activities increased $243 million for the three months ended October 2, 2020, when compared to the prior year quarter. The increase was primarily due to the timing of payroll payments and higher advance payments from customers in the current year quarter.

Net cash provided by operating activities increased $563 million for the nine months ended October 2, 2020, when compared to the prior year. The increase was primarily due to the timing of payroll payments, $204 million from the sale of accounts receivable in the last month of the quarter and the receipt of $85 million of proceeds related to the VirnetX legal matter.

Net cash used in investing activities decreased ~~$87~~$618 million for the three months ended ~~October~~July 2, 2020, when compared to the prior year quarter, primarily due to $94 million of cash paid related to the acquisition of IMX in the prior year quarter, partially offset by $12 million of net proceeds received for the divestiture of our health staff augmentation business in the prior year quarter.

Net cash used in investing activities increased $2,833 million for the nine months ended October 2, 2020, when compared to the prior year, primarily due to $2,610 million of net cash paid related to the acquisitions of Dynetics and the SD&A Businesses, $183 million received in the prior year for the disposition of our commercial cybersecurity and health staff augmentation businesses, $96 million of proceeds received for the sale of real estate properties in the prior year and higher purchases of equipment and leasehold improvements associated with our new global headquarters. This was partially offset by $94 million of cash paid related to the acquisition of IMX in the prior year quarter.

~~Net cash used in financing activities increased $313 million for the three months ended October 2, 2020,~~2021, when compared to the prior year quarter primarily due to the ~~early repayment of our $450 million senior unsecured notes in the current quarter and the timing of dividend payments, partially offset by $200 million of stock repurchases~~larger acquisition made in the prior year quarter for the SD&A Businesses compared to our current quarter acquisition of Gibbs & Cox (see "Note 3–Acquisitions, Goodwill and Intangible Assets") and lower capital expenditures in the current quarter.

Net cash ~~provided by financing~~used in investing activities ~~increased $1,918~~decreased $2,059 million for the ~~nine~~six months ended ~~October~~July 2, ~~2020,~~2021, when compared to the prior year, primarily due to ~~$6,225~~larger acquisitions made in the prior year for Dynetics and SD&A Businesses compared to our current year acquisitions of 1901 Group and Gibbs & Cox (see "Note 3–Acquisitions, Goodwill and Intangible Assets") and lower capital expenditures in the current year.

Net cash provided by financing activities decreased $396 million for the three months ended July 2, 2021 when compared to the prior year quarter. The change was primarily due to a decrease of approximately $394 million from the net change of proceeds received ~~related to~~from the issuance of debt, principal payments and ~~$400~~payments for debt issuance costs.

Net cash provided by financing activities decreased $1,705 million for the six months ended July 2, 2021, when compared to the prior year. The change was primarily due to a decrease of approximately $1,656 million from the net change of proceeds received from the issuance of debt, principal payments and payments for debt issuance costs and by $100 million of open market stock repurchases in the ~~prior year. This was~~current year, partially offset by ~~$3,975~~a $38 million ~~of principal repayments related to refinancing of outstanding debt, $650 million of additional principal repayments on~~increase in capital contributions received from our ~~outstanding debt in the current year and the timing of dividend payments.~~non-controlling interest.

Off-Balance Sheet Arrangements

We have outstanding performance guarantees and cross-indemnity agreements in connection with certain aspects of our business. We also have letters of credit outstanding principally related to performance guarantees on contracts and surety bonds outstanding principally related to performance and subcontractor payment bonds as described in "Note ~~16–Commitments"~~11–Commitments and Contingencies" of the notes to the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q. These arrangements have not had, and management does not believe it is likely that they will in the future have, a material effect on our liquidity, capital resources, operations or financial condition.

~~Commitments~~

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LEIDOS HOLDINGS, INC.

Guarantor and ~~Contingencies~~Issuer of Guaranteed Securities

Leidos Holdings, Inc. has fully and unconditionally guaranteed the obligations of its subsidiary, Leidos, Inc., under its $500 million notes due May 2023, $500 million notes due May 2025, $750 million due May 2030 and $1,000 million notes due February 2031 (collectively, "the Notes"). The underlying subsidiaries of Leidos, Inc. do not guarantee these obligations and have been excluded from the financial information presented below.

We have entered into registration rights agreements, pursuant to which we agreed to use reasonable best efforts to file registration statements to permit the exchange of the Notes and related guarantees for registered notes having terms substantially identical thereto, or in the alternative, the registered resale of the Notes and related guarantees under certain circumstances. Pursuant to these registration rights agreements, we filed a Registration Statement on Form S-4 with the Securities and Exchange Commission on May 6, 2021 which was declared effective on May 19, 2021.

The summarized balance sheet for Leidos Holdings, Inc. and Leidos, Inc., net of eliminations, as of July 2, 2021 was as follows (in millions):

Balance Sheet


Total current assets	$	1,791
Goodwill	4,142
Investments in consolidated subsidiaries	4,861
Other long-term assets	1,442
Total assets	$	12,236

Total current liabilities	$	2,308
Long-term debt, net of current portion	4,637
Intercompany payables	1,287
Other long-term liabilities	888
Total liabilities	9,120
Total equity	3,116
Total liabilities and stockholders' equity	$	12,236

The summarized statements of income for Leidos Holdings, Inc. and Leidos, Inc., net of eliminations, for the three and six months ended July 2, 2021 were as follows (in millions):

Statements of Income


	Three Months Ended		Six Months Ended
Revenues, net	$	2,296	$	4,516
Operating income	149		346
Net income attributable to Leidos common stockholders	48		144

Contractual Obligations and Commitments

We are subject to a number of reviews, investigations, claims, lawsuits, other uncertainties and future obligations related to our business. For a discussion of these items, see "Note ~~15–Contingencies"~~11–Commitments and ~~"Note 16–Commitments"~~Contingencies" of the notes to the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q.

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~~LEIDOS HOLDINGS, INC.~~

Critical Accounting Policies

There were no material changes to our critical accounting policies, estimates or judgments during the period covered by this report from those discussed in our Annual Report on Form 10-K for the year ended January ~~3, 2020.~~1, 2021 except for the elimination of the Income Taxes critical accounting policy.

Recently Adopted and Issued Accounting Standards

For a discussion of these items, see "Note 1–Basis of Presentation and Summary of Significant Accounting Policies" of the notes to the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q.

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LEIDOS HOLDINGS, INC.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

~~The broad effects of the COVID-19 outbreak have resulted in negative impacts on the global economy and financial markets and may affect our interest rates and cause foreign currency fluctuations.~~

~~Except as noted above, there~~There were no material changes in our market risk exposure from those discussed in our Annual Report on Form 10-K for the year ended January ~~3, 2020.~~1, 2021.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer (our Chairman and Chief Executive Officer) and principal financial officer (our Executive Vice President and Chief Financial Officer), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of ~~October~~July 2, ~~2020.~~2021. Based upon that evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission. These disclosure controls and procedures include, without

limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

On May 7, 2021 and January ~~31, 2020 and May 4, 2020,~~14, 2021, we completed the acquisitions of ~~Dynetics~~Gibbs & Cox and ~~the SD&A Businesses,~~1901 Group, respectively. In conducting our evaluation of the effectiveness of our internal control over financial reporting, we excluded ~~Dynetics~~Gibbs & Cox and ~~the SD&A Businesses~~1901 Group from our evaluation for the ~~third~~second quarter of fiscal ~~2020. We are in~~2021. As of July 2, 2021, we completed the ~~process~~integration of ~~integrating Dynetics and~~ the SD&A Businesses into our ~~system of internal control~~controls over financial reporting.

Other than the foregoing, there have been no changes in our internal control over financial reporting that occurred in the quarterly period covered by this report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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LEIDOS HOLDINGS, INC.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We have furnished information relating to legal proceedings, and any investigations and reviews that we are involved with in "Note ~~15–~~11–Commitments and Contingencies" of the notes to the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors.

~~Other than as described below, there have been~~There were no material changes to the risks described in Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended January 3, 2020 and Part II, Item 1A “Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended July 3, 2020. If any risks and uncertainties described below actually occur, our business, financial condition or operating results could be materially harmed and the price of our stock could decline. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may materially harm our business.

~~The extent to which our business will be adversely affected by the recent COVID-19 outbreak or other health epidemics, pandemics and similar outbreaks is highly uncertain and cannot be predicted.~~

The recent outbreak and global spread of COVID-19, and the preventative or protective actions that governments, corporations, individuals and we are taking and may continue to take in an effort to limit the impact of COVID-19, have resulted in a period of business disruption and increased economic uncertainty. The spread of COVID-19 has caused us to modify our business practices (including employee travel, access to customer sites, employee and contractor remote work and cancellation of physical participation in meetings, events and conferences), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by COVID-19 or otherwise be satisfactory to government authorities. If significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, facility closures or other restrictions due to COVID-19, our operations and results will likely be impacted.

Government agencies are our primary customers and the long-term impact of increased government spending in response to COVID-19 is uncertain. For example, the U.S. government fiscal year 2021 budget cycle is delayed as the U.S. government focuses its attention on mitigating the impact of COVID-19, and a continuing resolution was enacted on October 1, 2020 to provide temporary funding for government operations through December 11, 2020. This could result in a re-evaluation of U.S. government spending levels and priorities, which could impact our business performance. Even after COVID-19 has subsided, we may experience materially adverse impacts on our business as a result of the outbreak's global economic impact, including any recession that is occurring or may occur in the future. New contract awards have been and may continue to be delayed and our ability to perform on our existing contracts has been and may continue to be delayed or impaired, which will negatively impact our revenues. In addition, our costs have increased and may continue to increase as a result of COVID-19, and these cost increases may not be fully recoverable or adequately covered by insurance, or equitable adjustments to contract prices or reimbursement of costs under Section 3610 of the CARES Act, which could impact our profitability. The continued spread of COVID-19 has had and may continue to have similar negative impacts on our customers, subcontractors and suppliers, causing delay or limiting their ability to perform, including in making timely payments to us. Any resulting financial impact cannot be reasonably estimated at this time but may materially and adversely affect our business, financial condition, results of operations and cash flows. The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity and duration of COVID-19 and actions to contain it or treat its impact, among others. In addition, to the extent COVID-19 or any worsening of the global business and economic environment as a result adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described under Part I, Item 1A "Risk Factors" of our most recent Annual Report on Form 10-K.2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a)None

(b)None

(c)Purchases of Equity Securities by the Issuer

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~~LEIDOS HOLDINGS, INC.~~

On February 16, 2018, our Board of Directors authorized a ~~new~~ share repurchase program of up to 20 million shares of our outstanding common stock. The shares may be repurchased from time to time in one or more open market repurchases or privately negotiated transactions, including accelerated share repurchase transactions. The actual timing, number and value of shares repurchased under the program will depend on a number of factors, including the market price of our common stock, general market and economic conditions, applicable legal requirements, compliance with the terms of our outstanding indebtedness and other considerations. There is no assurance as to the number of shares that will be repurchased, and the repurchase program may be suspended or discontinued at any time at our Board of Directors' discretion.

~~The following table presents repurchases of Leidos common stock during the quarter ended October 2, 2020:~~

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
July 4, 2020 - July 31, 2020 — $ — — 7,696,108
August 1, 2020 - August 31, 2020 — — — 7,696,108
September 1, 2020 - September 30, 2020 4,177 88.43 — 7,696,108
October 1, 2020 - October 2, 2020 — — — 7,696,108
Total 4,177 $ 88.43 —


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
April 3, 2021 - April 30, 2021	—	$	—	—	5,962,565
May 1, 2021 - May 31, 2021	—	—		—	5,962,565
June 1, 2021 - June 30, 2021	—	—		—	5,962,565
July 1, 2021 - July 2, 2021	3,259	103.54		—	5,962,565
Total	3,259	$	103.54	—

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

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.


Exhibit Number						Description of Exhibit
10.1*						Consulting Employee Agreement , dated May 3 , 2021 , between the Company and James C.Reagan . Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on May 4, 2021.
22						List of Guarantors and Subsidiary Issuers of Guaranteed Securities. Incorporated herein by reference from the Company's Registration Statement on Form S-4, filed with the Commission on May 6, 2021.

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.

101						Interactive Data File. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

104						Cover Page Interactive Data File. The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

* Executive Compensation Plans and Arrangements

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: ~~November 2, 2020~~August 3, 2021


Leidos Holdings, Inc.

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

4335


	October 2, 2020		January 3, 2020
	(in millions)
ASSETS
Cash and cash equivalents	$	512	$	668
Receivables, net	1,872		1,734
Inventory, net	292		72
Other current assets	523		338
Total current assets	3,199		2,812
Property, plant and equipment, net	577		287
Intangible assets, net	1,335		530
Goodwill	6,158		4,912
Operating lease right-of-use assets, net	581		400
Other assets	435		426
	$	12,285	$	9,367
LIABILITIES AND EQUITY
Accounts payable and accrued liabilities	$	2,279	$	1,837
Accrued payroll and employee benefits	718		435
Long-term debt, current portion	401		61
Total current liabilities	3,398		2,333
Long-term debt, net of current portion	4,125		2,925
Operating lease liabilities	549		326
Deferred tax liabilities	216		184
Other long-term liabilities	282		182
Commitments and contingencies (Notes 15 and 16)
Stockholders’ equity:
Common stock, $0.0001 par value, 500 million shares authorized, 142 million and 141 million shares issued and outstanding at October 2, 2020 and January 3, 2020, respectively	0		0
Additional paid-in capital	2,624		2,587
Retained earnings	1,180		896
Accumulated other comprehensive loss	(98)		(70)
Total Leidos stockholders’ equity	3,706		3,413
Non-controlling interest	9		4
Total equity	3,715		3,417
	$	12,285	$	9,367


	Three Months Ended October 2, 2020								Nine Months Ended October 2, 2020
	Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total
	(in millions)
DoD and U.S. Intelligence Community	$	1,411	$	14	$	137	$	1,562	$	4,058	$	43	$	384	$	4,485
Other government agencies(1)	292		628		358		1,278		675		1,787		980		3,442
Commercial and non-U.S. customers	248		105		25		378		679		288		80		1,047
Total	$	1,951	$	747	$	520	$	3,218	$	5,412	$	2,118	$	1,444	$	8,974


	October 2, 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:
Programs	$	1,638	$	(647)	$	991	$	1,003	$	(536)	$	467
Software and technology	205		(96)		109		102		(83)		19
Customer relationships	136		(15)		121		45		(6)		39
Backlog	32		(21)		11		0		0		0
Trade names	1		0		1		1		0		1
Total finite-lived intangible assets	2,012		(779)		1,233		1,151		(625)		526
Indefinite-lived intangible assets:
In-process research and development	98		—		98		—		—		—
Trade names	4		—		4		4		—		4
Total intangible assets	$	2,114	$	(779)	$	1,335	$	1,155	$	(625)	$	530


Fiscal year ending
	(in millions)
2020 (remainder of year)	$	58
2021	219
2022	208
2023	182
2024	133
2025 and thereafter	433
	$	1,233


		Three Months Ended				Nine Months Ended
	Income statement line item	October 2, 2020		September 27, 2019		October 2, 2020		September 27, 2019
		(in millions)
Sales-type leases:
Selling price at lease commencement	Revenues	$	16	$	53	$	44	$	68
Cost of underlying asset	Cost of revenues	(12)		(56)		(35)		(70)
Operating income (loss)		4		(3)		9		(2)
Interest income on lease receivables	Revenues	2		1		6		1
		6		(2)		15		(1)

Operating lease income	Revenues	6		4		21		19
Total lease income		$	12	$	2	$	36	$	18


	Stated interest rate	Effective interest rate	October 2, 2020(1)		January 3, 2020(1)
			(in millions)
Senior unsecured term loans:
$300 million Term Loan, due June 2021	2.15%	2.41%	$	299	$	0
$1,925 million Term Loan, due January 2025	1.53%	1.78%	1,860		0
Senior secured term loans:
$690 million Term Loan A, due August 2023	3.31%	3.74%	0		581
$310 million Term Loan A, due August 2023	3.31%	3.76%	0		242
$1,131 million Term Loan B, due August 2025	3.56%	3.91%	0		1,075
Senior unsecured notes:
$450 million notes, due December 2020	4.45%	4.53%	0		452
$500 million notes, due May 2023	2.95%	3.17%	497		0
$500 million notes, due May 2025	3.63%	3.76%	496		0
$750 million notes due May 2030	4.38%	4.50%	736		0
$250 million notes, due July 2032	7.13%	7.43%	247		247
$300 million notes, due July 2033	5.50%	5.88%	158		158
$300 million notes, due December 2040	5.95%	6.03%	216		216
Notes payable and finance leases due on various dates through fiscal 2030	2.15%-5.49%	Various	17		15
Total long-term debt			4,526		2,986
Less: current portion			(401)		(61)
Total long-term debt, net of current portion			$	4,125	$	2,925