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 1, ~~2021~~2022


☐			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 25, 2021,~~July 26, 2022, was ~~140,339,356~~136,540,637 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–Acquisitions, Divestitures, Goodwill and Intangible Assets	12
	Note 4–Fair Value Measurements	1614
	Note 5–Derivative Instruments	1715
	Note 6–Debt	1816
	Note 7–Accumulated Other Comprehensive ~~Loss~~Income (Loss)	2017
	Note 8–Earnings Per Share	18
	Note 9–Sale of Accounts Receivable	18
	Note 10–Income Taxes	19
	Note 11–Business Segments	19
	Note 12–Commitments and Contingencies	20
	Note 9 ~~–Business Segments~~	21
	~~Note 1~~0 ~~–Commitments and Contingencies~~13–Subsequent Events	21
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2422
	Overview	2422
	Business Environment and Trends	2523
	Results of Operations	2623
	Bookings and Backlog	2826
	Liquidity and Capital Resources	2926
	Off-Balance Sheet Arrangements	3028
	Guarantor and Issuer of Guaranteed Securities	3129
	Contractual Obligations and Commitments	3129
	Critical Accounting Policies	3129
	Recently Adopted and Issued Accounting Standards	3230
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3230
Item 4.	Controls and Procedures	3230
Part II
Item 1.	Legal Proceedings	3331
Item 1A.	Risk Factors	3331
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3431
Item 3.	Defaults Upon Senior Securities	3431
Item 4.	Mine Safety Disclosures	3431
Item 5.	Other Information	3431
Item 6.	Exhibits	3532
Signatures		3633

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


		October 1, 2021		January 1, 2021			July 1, 2022		December 31, 2021
		(in millions)					(in millions)
Assets:	Assets:					Assets:
Cash and cash equivalents	Cash and cash equivalents	$	587	$	524	Cash and cash equivalents	$	339	$	727
Receivables, net	Receivables, net	2,288		2,137		Receivables, net	2,423		2,189
Inventory, net	Inventory, net	268		276		Inventory, net	286		274
Other current assets	Other current assets	426		402		Other current assets	478		429
Total current assets	Total current assets	3,569		3,339		Total current assets	3,526		3,619
Property, plant and equipment, net	Property, plant and equipment, net	662		604		Property, plant and equipment, net	669		670
Intangible assets, net	Intangible assets, net	1,321		1,216		Intangible assets, net	1,038		1,177
Goodwill	Goodwill	6,650		6,313		Goodwill	6,673		6,744
Operating lease right-of-use assets, net	Operating lease right-of-use assets, net	638		581		Operating lease right-of-use assets, net	614		612
Other assets		441		458
Other long-term assets						Other long-term assets	367		439
Total assets	Total assets	$	13,281	$	12,511	Total assets	$	12,887	$	13,261

Liabilities:	Liabilities:					Liabilities:
Accounts payable and accrued liabilities	Accounts payable and accrued liabilities	$	2,142	$	2,175	Accounts payable and accrued liabilities	$	2,052	$	2,141
Accrued payroll and employee benefits	Accrued payroll and employee benefits	721		632		Accrued payroll and employee benefits	701		605
Short-term debt and current portion of long-term debt	Short-term debt and current portion of long-term debt	484		100		Short-term debt and current portion of long-term debt	1,153		483
Total current liabilities	Total current liabilities	3,347		2,907		Total current liabilities	3,906		3,229
Long-term debt, net of current portion	Long-term debt, net of current portion	4,616		4,644		Long-term debt, net of current portion	4,023		4,593
Operating lease liabilities	Operating lease liabilities	615		564		Operating lease liabilities	614		589
Deferred tax liabilities	Deferred tax liabilities	254		234		Deferred tax liabilities	89		239
Other long-term liabilities	Other long-term liabilities	283		291		Other long-term liabilities	198		267
Total liabilities	Total liabilities	9,115		8,640		Total liabilities	8,830		8,917

Commitments and contingencies (Note 10)		0		0
Commitments and contingencies (Note 12)						Commitments and contingencies (Note 12)	0		0

Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Common stock, $0.0001 par value, 500 million shares authorized, 140 million and 142 million shares issued and outstanding at October 1, 2021 and January 1, 2021, respectively		—		—
Common stock, $0.0001 par value, 500 million shares authorized, 137 million and 140 million shares issued and outstanding at July 1, 2022, and December 31, 2021, respectively						Common stock, $0.0001 par value, 500 million shares authorized, 137 million and 140 million shares issued and outstanding at July 1, 2022, and December 31, 2021, respectively	—		—
Additional paid-in capital	Additional paid-in capital	2,397		2,580		Additional paid-in capital	1,955		2,423
Retained earnings	Retained earnings	1,758		1,328		Retained earnings	2,128		1,880
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(40)		(46)		Accumulated other comprehensive loss	(79)		(12)
Total Leidos stockholders’ equity	Total Leidos stockholders’ equity	4,115		3,862		Total Leidos stockholders’ equity	4,004		4,291
Non-controlling interest	Non-controlling interest	51		9		Non-controlling interest	53		53
Total stockholders' equity	Total stockholders' equity	4,166		3,871		Total stockholders' equity	4,057		4,344
Total liabilities and stockholders' equity	Total liabilities and stockholders' equity	$	13,281	$	12,511	Total liabilities and stockholders' equity	$	12,887	$	13,261

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					Three Months Ended				Six Months Ended
		October 1, 2021		October 2, 2020		October 1, 2021		October 2, 2020			July 1, 2022		July 2, 2021		July 1, 2022		July 2, 2021
		(in millions, except per share amounts)									(in millions, except per share amounts)
Revenues	Revenues	$	3,483	$	3,242	$	10,246	$	9,045	Revenues	$	3,597	$	3,448	$	7,091	$	6,763
Cost of revenues	Cost of revenues	2,942		2,774		8,740		7,799		Cost of revenues	3,059		2,950		6,041		5,798
Selling, general and administrative expenses	Selling, general and administrative expenses	233		200		625		583		Selling, general and administrative expenses	260		224		494		392
Bad debt expense and recoveries	Bad debt expense and recoveries	(1)		2		(11)		(70)		Bad debt expense and recoveries	2		(1)		4		(10)
Acquisition, integration and restructuring costs	Acquisition, integration and restructuring costs	6		5		21		33		Acquisition, integration and restructuring costs	5		10		8		15
Asset impairment charges	Asset impairment charges	3		—		3		11		Asset impairment charges	3		—		3		—
Equity (earnings) loss of non-consolidated subsidiaries		(5)		3		(14)		(10)
Equity earnings of non-consolidated subsidiaries										Equity earnings of non-consolidated subsidiaries	(3)		(4)		(1)		(9)
Operating income	Operating income	305		258		882		699		Operating income	271		269		542		577
Non-operating expense:	Non-operating expense:									Non-operating expense:
Interest expense, net	Interest expense, net	(47)		(44)		(138)		(133)		Interest expense, net	(50)		(46)		(98)		(91)
Other income (expense), net	Other income (expense), net	2		—		1		(30)		Other income (expense), net	4		—		3		(1)
Income before income taxes	Income before income taxes	260		214		745		536		Income before income taxes	225		223		447		485
Income tax expense	Income tax expense	(52)		(51)		(162)		(104)		Income tax expense	(53)		(53)		(98)		(110)
Net income	Net income	$	208	$	163	$	583	$	432	Net income	$	172	$	170	$	349	$	375
Less: net income attributable to non-controlling interest	Less: net income attributable to non-controlling interest	3		—		4		1		Less: net income attributable to non-controlling interest	1		1		3		1
Net income attributable to Leidos common stockholders	Net income attributable to Leidos common stockholders	$	205	$	163	$	579	$	431	Net income attributable to Leidos common stockholders	$	171	$	169	$	346	$	374

Earnings per share:	Earnings per share:									Earnings per share:
Basic	Basic	$	1.45	$	1.15	$	4.11	$	3.04	Basic	$	1.25	$	1.20	$	2.51	$	2.65
Diluted	Diluted	1.43		1.13		4.05		2.99		Diluted	1.24		1.18		2.49		2.62

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 1, 2021		October 2, 2020		October 1, 2021		October 2, 2020			July 1, 2022		July 2, 2021		July 1, 2022		July 2, 2021
		(in millions)									(in millions)
Net income	Net income	$	208	$	163	$	583	$	432	Net income	$	172	$	170	$	349	$	375
Foreign currency translation adjustments	Foreign currency translation adjustments	(29)		26		(12)		13		Foreign currency translation adjustments	(85)		21		(83)		17
Unrecognized gain (loss) on derivative instruments		4		4		18		(41)
Unrecognized gain on derivative instruments										Unrecognized gain on derivative instruments	7		1		36		14
Pension adjustments	Pension adjustments	—		(1)		—		—		Pension adjustments	(21)		—		(20)		—
Total other comprehensive (loss) income, net of taxes	Total other comprehensive (loss) income, net of taxes	(25)		29		6		(28)		Total other comprehensive (loss) income, net of taxes	(99)		22		(67)		31
Comprehensive income	Comprehensive income	183		192		589		404		Comprehensive income	73		192		282		406
Less: net income attributable to non-controlling interest	Less: net income attributable to non-controlling interest	3		—		4		1		Less: net income attributable to non-controlling interest	1		1		3		1
Comprehensive income attributable to Leidos common stockholders	Comprehensive income attributable to Leidos common stockholders	$	180	$	192	$	585	$	403	Comprehensive income attributable to Leidos common stockholders	$	72	$	191	$	279	$	405

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			Shares of common stock	Additional paid-in capital		Retained earnings		Accumulated other comprehensive income (loss)		Leidos stockholders' equity		Non-controlling interest		Total stockholders' equity
		(in millions, except for per share amounts)														(in millions, except for per share amounts)
Balance at January 1, 2021		142	$	2,580	$	1,328	$	(46)	$	3,862	$	9	$	3,871
Balance at December 31, 2021															Balance at December 31, 2021	140	$	2,423	$	1,880	$	(12)	$	4,291	$	53	$	4,344
Net income	Net income	—	—		205		—		205		—		205		Net income	—	—		175		—		175		2		177
Other comprehensive income, net of taxes	Other comprehensive income, net of taxes	—	—		—		9		9		—		9		Other comprehensive income, net of taxes	—	—		—		32		32		—		32
Issuances of stock	Issuances of stock	—	14		—		—		14		—		14		Issuances of stock	1	15		—		—		15		—		15
Repurchases of stock and other	Repurchases of stock and other	(1)	(123)		—		—		(123)		—		(123)		Repurchases of stock and other	(4)	(526)		—		—		(526)		—		(526)
Dividends of $0.34 per share		—	—		(49)		—		(49)		—		(49)
Dividends of $0.36 per share															Dividends of $0.36 per share	—	—		(48)		—		(48)		—		(48)
Stock-based compensation	Stock-based compensation	—	15		—		—		15		—		15		Stock-based compensation	—	16		—		—		16		—		16
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
Capital distributions to non-controlling interests															Capital distributions to non-controlling interests	—	—		—		—		—		(2)		(2)
Balance at April 1, 2022															Balance at April 1, 2022	137	$	1,928	$	2,007	$	20	$	3,955	$	53	$	4,008
Net income	Net income	—	—		205		—		205		3		208		Net income	—	—		171		—		171		1		172
Other comprehensive loss, net of taxes	Other comprehensive loss, net of taxes	—	—		—		(25)		(25)		—		(25)		Other comprehensive loss, net of taxes	—	—		—		(99)		(99)		—		(99)
Issuances of stock	Issuances of stock	—	11		—		—		11		—		11		Issuances of stock	—	10		—		—		10		—		10
Repurchases of stock and other	Repurchases of stock and other	(2)	(140)		—		—		(140)		—		(140)		Repurchases of stock and other	—	(2)		—		—		(2)		—		(2)
Dividends of $0.36 per share	Dividends of $0.36 per share	—	—		(52)		—		(52)		—		(52)		Dividends of $0.36 per share	—	—		(50)		—		(50)		—		(50)
Stock-based compensation	Stock-based compensation	—	17		—		—		17		—		17		Stock-based compensation	—	19		—		—		19		—		19
Net capital contributions to non-controlling interest		—	—		—		—		—		(1)		(1)
Balance at October 1, 2021		140	$	2,397	$	1,758	$	(40)	$	4,115	$	51	$	4,166
Capital distributions to non-controlling interests															Capital distributions to non-controlling interests	—	—		—		—		—		(1)		(1)
Balance at July 1, 2022															Balance at July 1, 2022	137	$	1,955	$	2,128	$	(79)	$	4,004	$	53	$	4,057

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			Shares of common stock	Additional paid-in capital		Retained earnings		Accumulated other comprehensive income (loss)		Leidos stockholders' equity		Non-controlling interest		Total stockholders' equity
		(in millions, except for per share amounts)														(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 loss, 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 from non-controlling interests		—	—		—		—		—		4		4
Balance at July 3, 2020		142	2,600		1,065		(127)		3,538		9		3,547
Balance at January 1, 2021															Balance at January 1, 2021	142	$	2,580	$	1,328	$	(46)	$	3,862	$	9	$	3,871
Net income	Net income	—	—		163		—		163		—		163		Net income	—	—		205		—		205		—		205
Other comprehensive income, net of taxes	Other comprehensive income, net of taxes	—	—		—		29		29		—		29		Other comprehensive income, net of taxes	—	—		—		9		9		—		9
Issuances of stock	Issuances of stock	—	10		—		—		10		—		10		Issuances of stock	—	14		—		—		14		—		14
Repurchases of stock and other	Repurchases of stock and other	—	(1)		—		—		(1)		—		(1)		Repurchases of stock and other	(1)	(123)		—		—		(123)		—		(123)
Dividends of $0.34 per share	Dividends of $0.34 per share	—	—		(48)		—		(48)		—		(48)		Dividends of $0.34 per share	—	—		(49)		—		(49)		—		(49)
Stock-based compensation	Stock-based compensation	—	15		—		—		15		—		15		Stock-based compensation	—	15		—		—		15		—		15
Balance at October 2, 2020		142	$	2,624	$	1,180	$	(98)	$	3,706	$	9	$	3,715
Capital contributions from non-controlling interest															Capital contributions from non-controlling interest	—	—		—		—		—		38		38
Balance at April 2, 2021															Balance at April 2, 2021	141	$	2,486	$	1,484	$	(37)	$	3,933	$	47	$	3,980
Net income															Net income	—	—		169		—		169		1		170
Other comprehensive income, net of taxes															Other comprehensive income, net of taxes	—	—		—		22		22		—		22
Issuances of stock															Issuances of stock	1	9		—		—		9		—		9
Repurchases of stock and other															Repurchases of stock and other	—	(3)		—		—		(3)		—		(3)
Dividends of $0.34 per share															Dividends of $0.34 per share	—	—		(48)		—		(48)		—		(48)
Stock-based compensation															Stock-based compensation	—	17		—		—		17		—		17
Capital contributions from non-controlling interests															Capital contributions from non-controlling interests	—	—		—		—		—		1		1
Balance at July 2, 2021															Balance at July 2, 2021	142	$	2,509	$	1,605	$	(15)	$	4,099	$	49	$	4,148

See accompanying notes to condensed consolidated financial statements.

Table of Contents

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


		Nine Months Ended					Six Months Ended
		October 1, 2021		October 2, 2020			July 1, 2022		July 2, 2021
		(in millions)					(in millions)
Cash flows from operations:	Cash flows from operations:					Cash flows from operations:
Net income	Net income	$	583	$	432	Net income	$	349	$	375
Adjustments to reconcile net income to net cash provided by operations:	Adjustments to reconcile net income to net cash provided by operations:					Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization	Depreciation and amortization	244		214		Depreciation and amortization	168		157
Stock-based compensation	Stock-based compensation	49		45		Stock-based compensation	35		32
Loss on debt extinguishment		—		31
Asset impairment charges		3		11

Deferred income taxes	Deferred income taxes	4		(2)		Deferred income taxes	(136)		3
Other	Other	(11)		15		Other	7		(11)
Change in assets and liabilities, net of effects of acquisitions:	Change in assets and liabilities, net of effects of acquisitions:					Change in assets and liabilities, net of effects of acquisitions:
Receivables	Receivables	(103)		140		Receivables	(238)		(89)
Other current assets and other long-term assets	Other current assets and other long-term assets	161		49		Other current assets and other long-term assets	73		91
Accounts payable and accrued liabilities and other long-term liabilities	Accounts payable and accrued liabilities and other long-term liabilities	(172)		211		Accounts payable and accrued liabilities and other long-term liabilities	(271)		(347)
Accrued payroll and employee benefits	Accrued payroll and employee benefits	83		247		Accrued payroll and employee benefits	101		46
Income taxes receivable/payable	Income taxes receivable/payable	(20)		(7)		Income taxes receivable/payable	45		(1)
Net cash provided by operating activities	Net cash provided by operating activities	821		1,386		Net cash provided by operating activities	133		256
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Acquisition of businesses, net of cash acquired	Acquisition of businesses, net of cash acquired	(622)		(2,610)		Acquisition of businesses, net of cash acquired	(2)		(593)
Divestiture of a business						Divestiture of a business	15		—
Payments for property, equipment and software	Payments for property, equipment and software	(71)		(120)		Payments for property, equipment and software	(49)		(47)
Net proceeds from sale of assets	Net proceeds from sale of assets	—		10		Net proceeds from sale of assets	6		—
Other	Other	—		6		Other	1		—
Net cash used in investing activities	Net cash used in investing activities	(693)		(2,714)		Net cash used in investing activities	(29)		(640)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Proceeds from debt issuance	Proceeds from debt issuance	380		6,225		Proceeds from debt issuance	380		380
Payments of long-term debt		(80)		(4,680)
Payments for debt issuance costs		—		(39)
Net proceeds from commercial paper						Net proceeds from commercial paper	150		—

Repayments of borrowings						Repayments of borrowings	(434)		(53)
Dividend payments	Dividend payments	(149)		(148)		Dividend payments	(100)		(98)
Repurchases of stock and other	Repurchases of stock and other	(266)		(35)		Repurchases of stock and other	(528)		(126)
Capital distributions to non-controlling interests		(3)		—
Capital contributions from non-controlling interests		41		4
Net capital (distributions to) contributions from non-controlling interests						Net capital (distributions to) contributions from non-controlling interests	(3)		39

Proceeds from issuances of stock	Proceeds from issuances of stock	33		26		Proceeds from issuances of stock	22		23
Net cash (used in) provided by financing activities	Net cash (used in) provided by financing activities	(44)		1,353		Net cash (used in) provided by financing activities	(513)		165
Net increase in cash, cash equivalents and restricted cash		84		25
Net decrease in cash, cash equivalents and restricted cash						Net decrease in cash, cash equivalents and restricted cash	(409)		(219)
Cash, cash equivalents and restricted cash at beginning of period	Cash, cash equivalents and restricted cash at beginning of period	687		717		Cash, cash equivalents and restricted cash at beginning of period	875		687
Cash, cash equivalents and restricted cash at end of period	Cash, cash equivalents and restricted cash at end of period	771		742		Cash, cash equivalents and restricted cash at end of period	466		468
Less: restricted cash at end of period	Less: restricted cash at end of period	184		230		Less: restricted cash at end of period	127		130
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	587	$	512	Cash and cash equivalents at end of period	$	339	$	338

Supplementary cash flow information:	Supplementary cash flow information:					Supplementary cash flow information:
Cash paid for income taxes, net of refunds	Cash paid for income taxes, net of refunds	$	179	$	110	Cash paid for income taxes, net of refunds	$	127	$	110
Cash paid for interest	Cash paid for interest	128		104		Cash paid for interest	107		102
Non-cash investing activity:	Non-cash investing activity:					Non-cash investing activity:
Property, plant and equipment additions	Property, plant and equipment additions	$	1	$	16	Property, plant and equipment additions	$	5	$	—
Non-cash financing activity:	Non-cash financing activity:					Non-cash financing activity:
Finance lease obligations	Finance lease obligations	$	50	$	12	Finance lease obligations	$	1	$	45

See accompanying notes to condensed consolidated financial statements.

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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,~~technology, engineering, and ~~information technology~~science 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. civilian, state and local government agencies, ~~as well as~~ foreign government ~~agencies.~~agencies and commercial businesses. 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. 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 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.

Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. We combined "Capital distributions to non-controlling interests" and "Capital contributions from non-controlling interests" into "Net capital (distributions to) contributions from non-controlling interests" 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 ~~23, 2021.~~15, 2022.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Accounting Standards Updates ("ASU") Adopted

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)~~2021-08, Business Combinations (Topic 805)

In ~~August 2020,~~October 2021, the ~~Financial Accounting Standards Board ("FASB")~~FASB issued ASU ~~2020-06~~2021-08, which ~~simplifies the accounting for convertible debt~~amends how contract assets and ~~convertible preferred stock by removing the requirements~~liabilities acquired in a business combination are measured. Current guidance requires contract assets and liabilities to ~~separate embedded conversion features from the host convertible instruments. Additionally, the~~be measured at fair value in accordance with ASC 805, Business Combinations. The amendments in this update ~~simplify~~remove the ~~guidance~~requirement to measure contract assets and liabilities at fair value and instead require that they be recognized 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.accordance with ASC 606, Revenue from Contracts with Customers. The amendments in this update are effective for public business entities for the 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.

~~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 as2022, including interim periods within those fiscal years, and ~~can~~must be ~~adopted using either a prospective or retrospective approach.~~applied prospectively. Early adoption is ~~also~~ permitted.

~~Effective July 3, 2021, we~~We adopted the requirements of ASU ~~2021-05~~2021-08 using the prospective ~~method. The~~method effective the first day of fiscal 2022. For business combinations occurring after adoption, ~~did not have an impact to our financial position, results of operations~~we will measure contract assets and ~~earnings per share.~~liabilities acquired in accordance with ASC 606.

Accounting Standards Updates Issued But Not Yet Adopted

ASU 2020-04 and ASU 2021-01, 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.

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. WeExcept for our new $380 million term loan entered into on May 6, 2022 (see "Note 6–Debt"), we currently use the one-month LIBOR for which the rate publication will cease in June 2023.

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.

~~Table of Contents~~

~~LEIDOS HOLDINGS, INC.~~

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

Changes in estimates on contracts were as follows:


		Three Months Ended				Nine Months Ended					Three Months Ended				Six Months Ended
		October 1, 2021		October 2, 2020		October 1, 2021		October 2, 2020			July 1, 2022		July 2, 2021		July 1, 2022		July 2, 2021
		(in millions, except per share amounts)									(in millions, except per share amounts)
Favorable impact	Favorable impact	$	47	34		$	115	$	86	Favorable impact	$	39	$	37	$	80	$	68
Unfavorable impact	Unfavorable impact	(24)		(19)		(72)		(45)		Unfavorable impact	(20)		(29)		(46)		(48)
Net impact to income before income taxes	Net impact to income before income taxes	$	23	$	15	$	43	$	41	Net impact to income before income taxes	$	19	$	8	$	34	$	20

Impact on diluted EPS attributable to Leidos common stockholders	Impact on diluted EPS attributable to Leidos common stockholders	$	0.12	$	0.07	$	0.22	$	0.21	Impact on diluted EPS attributable to Leidos common stockholders	$	0.10	$	0.04	$	0.18	$	0.11

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

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Revenue Recognized from Prior Obligations

Revenue recognized from performance obligations satisfied in previous periods was $17 million and ~~$35~~$34 million for the three and ~~nine~~six months ended ~~October~~July 1, ~~2021,~~2022, respectively, and ~~$10~~$9 million and ~~$42~~$18 million for the three and ~~nine~~six months ended ~~October~~July 2, ~~2020,~~2021, respectively. The changes primarily 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 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. At ~~October~~July 1, 2022, and December 31, 2021, ~~and January 1, 2021, $180~~$195 million and ~~$237~~$138 million, respectively, of outstanding payments were included within "Cash and cash equivalents" and "Accounts payable and accrued liabilities" correspondingly on the condensed consolidated balance sheets.

Restricted Cash

We have restricted cash balances, primarily representing advances from customers that are restricted for use on certain expenditures related to that customer's contract. Restricted cash balances are included as "Other current assets" in the condensed consolidated balance sheets. Our restricted cash balances were ~~$184~~$127 million and ~~$163~~$148 million at ~~October~~July 1, ~~2021~~2022, and ~~January 1,~~December 31, 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~~RPO 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.

As of ~~October~~July 1, ~~2021,~~2022, we had ~~$14.6~~$15.1 billion of RPO and expect to recognize approximately ~~54%~~59% and ~~71%~~76% over the next 12 months and 24 months, respectively, with the remainder to be recognized 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.~~

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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 October 1, 2021								Nine Months Ended October 1, 2021								Three Months Ended July 1, 2022								Six Months Ended July 1, 2022
		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	$	1,513	$	19	$	203	$	1,735	$	4,386	$	45	$	545	$	4,976		DoD and U.S. Intelligence Community	$	1,522	$	20	$	239	$	1,781	$	3,061	$	40	$	477	$	3,578
Other government agencies(1)	Other government agencies(1)	215		619		450		1,284		724		1,849		1,292		3,865			Other government agencies(1)	228		660		420		1,308		450		1,273		805		2,528
Commercial and non-U.S. customers	Commercial and non-U.S. customers	281		121		28		430		859		377		80		1,316			Commercial and non-U.S. customers	302		148		28		478		589		295		55		939
Total	Total	$	2,009	$	759	$	681	$	3,449	$	5,969	$	2,271	$	1,917	$	10,157		Total	$	2,052	$	828	$	687	$	3,567	$	4,100	$	1,608	$	1,337	$	7,045


		Three Months Ended October 2, 2020								Nine Months Ended October 2, 2020									Three Months Ended July 2, 2021								Six Months Ended July 2, 2021
		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	$	1,411	$	14	$	137	$	1,562	$	4,058	$	43	$	384	$	4,485	DoD and U.S. Intelligence Community	$	1,466	$	13	$	184	$	1,663	$	2,873	$	26	$	342	$	3,241
Other government agencies(1)	Other government agencies(1)	292		628		358		1,278		675		1,787		980		3,442		Other government agencies(1)	237		625		435		1,297		509		1,230		842		2,581
Commercial and non-U.S. customers	Commercial and non-U.S. customers	248		105		25		378		679		288		80		1,047		Commercial and non-U.S. customers	300		131		26		457		578		256		52		886
Total	Total	$	1,951	$	747	$	520	$	3,218	$	5,412	$	2,118	$	1,444	$	8,974	Total	$	2,003	$	769	$	645	$	3,417	$	3,960	$	1,512	$	1,236	$	6,708

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

Disaggregated revenues by contract-type were as follows:


		Three Months Ended October 1, 2021								Nine Months Ended October 1, 2021								Three Months Ended July 1, 2022								Six Months Ended July 1, 2022
		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	$	1,230	$	397	$	137	$	1,764	$	3,627	$	1,176	$	361	$	5,164		Cost-reimbursement and fixed-price-incentive-fee	$	1,144	$	443	$	167	$	1,754	$	2,327	$	851	$	334	$	3,512
Firm-fixed-price	Firm-fixed-price	540		245		443		1,228		1,619		755		1,254		3,628			Firm-fixed-price	664		258		454		1,376		1,282		513		871		2,666
Time-and-materials and fixed-price-level-of-effort	Time-and-materials and fixed-price-level-of-effort	239		117		101		457		723		340		302		1,365			Time-and-materials and fixed-price-level-of-effort	244		127		66		437		491		244		132		867
Total	Total	$	2,009	$	759	$	681	$	3,449	$	5,969	$	2,271	$	1,917	$	10,157		Total	$	2,052	$	828	$	687	$	3,567	$	4,100	$	1,608	$	1,337	$	7,045


		Three Months Ended October 2, 2020								Nine Months Ended October 2, 2020									Three Months Ended July 2, 2021								Six Months Ended July 2, 2021
		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	$	1,160	$	363	$	77	$	1,600	$	3,359	$	1,052	$	206	$	4,617	Cost-reimbursement and fixed-price-incentive-fee	$	1,234	$	405	$	125	$	1,764	$	2,397	$	779	$	224	$	3,400
Firm-fixed-price	Firm-fixed-price	597		278		348		1,223		1,499		740		958		3,197		Firm-fixed-price	526		248		419		1,193		1,079		510		811		2,400
Time-and-materials and fixed-price-level-of-effort	Time-and-materials and fixed-price-level-of-effort	194		106		95		395		554		326		280		1,160		Time-and-materials and fixed-price-level-of-effort	243		116		101		460		484		223		201		908
Total	Total	$	1,951	$	747	$	520	$	3,218	$	5,412	$	2,118	$	1,444	$	8,974	Total	$	2,003	$	769	$	645	$	3,417	$	3,960	$	1,512	$	1,236	$	6,708

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Disaggregated revenues by geographic location were as follows:


		Three Months Ended October 1, 2021								Nine Months Ended October 1, 2021								Three Months Ended July 1, 2022								Six Months Ended July 1, 2022
		Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total				Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total
		(in millions)																(in millions)
United States	United States	$	1,778	$	726	$	681	$	3,185	$	5,237	$	2,158	$	1,917	$	9,312		United States	$	1,789	$	789	$	687	$	3,265	$	3,599	$	1,530	$	1,337	$	6,466
International	International	231		33		—		264		732		113		—		845			International	263		39		—		302		501		78		—		579
Total	Total	$	2,009	$	759	$	681	$	3,449	$	5,969	$	2,271	$	1,917	$	10,157		Total	$	2,052	$	828	$	687	$	3,567	$	4,100	$	1,608	$	1,337	$	7,045


		Three Months Ended October 2, 2020								Nine Months Ended October 2, 2020									Three Months Ended July 2, 2021								Six Months Ended July 2, 2021
		Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total			Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total
		(in millions)																	(in millions)
United States	United States	$	1,731	$	708	$	520	$	2,959	$	4,804	$	2,018	$	1,444	$	8,266	United States	$	1,746	$	728	$	645	$	3,119	$	3,459	$	1,432	$	1,236	$	6,127
International	International	220		39		—		259		608		100		—		708		International	257		41		—		298		501		80		—		581
Total	Total	$	1,951	$	747	$	520	$	3,218	$	5,412	$	2,118	$	1,444	$	8,974	Total	$	2,003	$	769	$	645	$	3,417	$	3,960	$	1,512	$	1,236	$	6,708

Revenues by customer-type, contract-type and geographic location exclude lease income of ~~$34~~$30 million and ~~$89~~$46 million for the three and ~~nine~~six months ended ~~October~~July 1, ~~2021,~~2022, respectively, and ~~$24~~$31 million and ~~$71~~$55 million for the three and ~~nine~~six months ended ~~October~~July 2, ~~2020,~~2021, respectively.

Contract Assets and Liabilities

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

Contract assets consist of unbilled receivables, which is the amount of revenue recognized that exceeds the amount billed to the customer, where right to payment is not 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	October 1, 2021		January 1, 2021			Balance sheet line item	July 1, 2022		December 31, 2021
			(in millions)						(in millions)
Contract assets - current:	Contract assets - current:						Contract assets - current:
Unbilled receivables	Unbilled receivables	Receivables, net	$	1,028	$	906	Unbilled receivables	Receivables, net	$	944	$	1,022

Contract liabilities - current:	Contract liabilities - current:						Contract liabilities - current:
Deferred revenue (1)	Deferred revenue (1)	Accounts payable and accrued liabilities	$	413	$	481	Deferred revenue (1)	Accounts payable and accrued liabilities	$	312	$	364

Contract liabilities - non-current:	Contract liabilities - non-current:						Contract liabilities - non-current:
Deferred revenue (1)	Deferred revenue (1)	Other long-term liabilities	$	21	$	20	Deferred revenue (1)	Other long-term liabilities	$	24	$	24

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

The increase in unbilled receivables was primarily due to revenue recognized on certain contracts partially offset by the timing of billings. 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 decrease in unbilled receivables was primarily due to the timing of billings partially offset by revenue recognized on certain programs.

Revenue recognized for the three and ~~nine~~six months ended ~~October~~July 1, 2022, of $52 million and $240 million, respectively, was included as a contract liability at December 31, 2021. Revenue recognized for the three and six months ended July 2, 2021, of ~~$31~~$78 million and ~~$253~~$222 million, respectively, was included as a contract liability at January 1, 2021. ~~Revenue recognized for the three and nine months ended October 2, 2020 of $41 million and $267 million, respectively, was included as a contract liability at January 3, 2020.~~

Note 3–Acquisitions, Divestitures, Goodwill and Intangible Assets

~~Gibbs & Cox~~Business Acquisition

On May 7, 2021 (the "Purchase Date"), we completed the acquisition of Gibbs & Cox for purchase consideration of approximately $375 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 $190 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 11 $ 175

As of October 1, 2021, we had not finalized the determination of fair values allocated to assets and liabilities, including, but not limited to, intangible assets, accounts receivables and accounts payable and accrued liabilities.

~~1901 Group Acquisition~~

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

~~The preliminary goodwill recognized of$122 millionrepresents intellectual capital and the acquired assembled workforce, none of which qualify for recognition as separate intangible assets. Of the goodwill recognized, $102 million is tax deductible.~~

~~The following table summarizes the 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 6
Total 8 $ 86

As of October 1, 2021, we had not finalized the determination of fair values allocated to assets and liabilities, including, but not limited to accounts receivables and accounts payable and accrued liabilities.

For the three and nine months ended October 1, 2021, $47 million and $97 million, respectively, of revenues related to the Gibbs & Cox and 1901 Group acquisitions were recognized within the Defense Solutions reportable segment.

On September 21, 2021, we completed an ~~inconsequential~~immaterial strategic business acquisition for ~~preliminary~~ purchase consideration of approximately $36 million. ~~The preliminary goodwill and intangible assets recognized in~~In connection with the ~~acquisition were $21~~transaction, we recognized an $8 million program intangible asset and goodwill of $25 million.

Aviation & Missile Solutions LLC ("AMS") Divestiture

On November 22, 2021, we signed a definitive agreement within our Defense Solutions segment to dispose of its AMS business in order to focus on leading-edge and technologically advanced services, solutions and products. The net sales price was $15 million, and ~~$8 million, respectively.~~the divestiture was completed on April 29, 2022.

Goodwill

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


	Defense Solutions		Civil		Health		Total
	(in millions)
Goodwill at January 1, 2021	$	3,300	$	2,047	$	966	$	6,313
Acquisitions of businesses	425		5		—		430
Divestiture of a business	(1)		—		—		(1)
Goodwill re-allocation	(17)		17		—		—
Foreign currency translation adjustments	(26)		28		—		2
Goodwill at December 31, 2021	$	3,681	$	2,097	$	966	$	6,744
Divestiture of a business	(6)		—		—		(6)
Foreign currency translation adjustments	(32)		(33)		—		(65)
Goodwill at July 1, 2022	$	3,643	$	2,064	$	966	$	6,673

We evaluate qualitative factors that could cause us to believe the estimated fair value of each of our reporting units may be lower than the carrying value and trigger a quantitative assessment, including, but not limited to (i) macroeconomic conditions, (ii) industry and market considerations, (iii) our overall financial performance, including an analysis of our current and projected cash flows, revenues and earnings, (iv) a sustained decrease in share price and (v) other relevant entity-specific events including changes in management, strategy, partners or litigation.

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, the estimated fair value of the Security Enterprise Solutions reporting unit within the Civil reportable segment exceeded the carrying value by approximately 6% as of the most recent assessment date. In the event that there are significant unfavorable changes to forecasted cash flows of the reporting unit (including if the impact of COVID-19 on passenger travel levels is more prolonged or severe than what is incorporated into our forecast), terminal growth rates or the cost of capital used in the fair value estimates, we may be required to record a material impairment of goodwill at a future date. We did not identify any qualitative factors that would trigger a quantitative goodwill impairment test during the six months ended July 1, 2022. There were no impairments to goodwill during the six months ended July 1, 2022, and July 2, 2021.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~SD&A Businesses Acquisition~~

On May 4, 2020 (the "Transaction Date"), we completed the acquisition of L3Harris Technologies' security detection and automation businesses (the "SD&A Businesses"). The SD&A Businesses were acquired for cash consideration of $1,019 million,

Intangible Assets

Intangible assets, net of $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 additionconsisted of the ~~SD&A Businesses expands the scope and scale of our global security detection and automation offerings.~~

~~0The final goodwill of $574 million represents intellectual capital and the acquired assembled workforce. Of the goodwill recognized, $432 million is deductible for tax purposes.~~

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


	July 1, 2022						December 31, 2021
	Gross carrying value		Accumulated amortization		Net carrying value		Gross carrying value		Accumulated amortization		Net carrying value
	(in millions)
Finite-lived intangible assets:
Programs	$	1,693	$	(913)	$	780	$	1,722	$	(830)	$	892
Software and technology	218		(125)		93		230		(121)		109
Customer relationships	88		(19)		69		97		(18)		79
Backlog	6		(6)		—		38		(37)		1
Trade names	1		(1)		—		1		(1)		—
Total finite-lived intangible assets	2,006		(1,064)		942		2,088		(1,007)		1,081
Indefinite-lived intangible assets:
In-process research and development ("IPR&D") (1)	92		—		92		92		—		92
Trade names	4		—		4		4		—		4
Total indefinite-lived intangible assets	96		—		96		96		—		96
Total intangible assets	$	2,102	$	(1,064)	$	1,038	$	2,184	$	(1,007)	$	1,177

(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 nine months ended October 1, 2021 and October 2, 2020, $216 million and $154 million, respectively, of revenues related to the SD&A Businesses were recognized within the Civil reportable segment.

~~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 final goodwill recognized of$789 millionrepresents intellectual capital and the acquired assembled workforce. All of the goodwill recognized is deductible for tax purposes.~~

~~The following table summarizes the 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 nine months ended October 1, 2021 and October 2, 2020, $816 million and $637 million, respectively, of revenues related to Dynetics were recognized within the Defense Solutions reportable segment.

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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, the SD&A Businesses, 1901 Group and Gibbs & Cox:~~
Three Months Ended Nine Months Ended
October 1,
2021 October 2,
2020 October 1,
2021 October 2,
2020
(in millions)
Acquisition costs $ — $ — $ 4 $ 23
Integration costs 5 4 14 7
Total acquisition and integration costs $ 5 $ 4 $ 18 $ 30

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

~~Goodwill~~

~~The following table presents changes in the carrying amount of goodwill by reportable segment:~~
Defense Solutions Civil Health Total
(in millions)
Goodwill at January 3, 2020 $ 2,039 $ 1,907 $ 966 $ 4,912
Goodwill re-allocation 429 (429) — —
Acquisitions of businesses 788 569 — 1,357
Foreign currency translation adjustments 44 — — 44
Goodwill at January 1, 2021 3,300 2,047 966 6,313
Acquisitions of businesses 334 5 — 339
Goodwill re-allocation (17) 17 — —
Foreign currency translation adjustments (28) 26 — (2)
Goodwill at October 1, 2021 $ 3,589 $ 2,095 $ 966 $ 6,650

~~There were no goodwill impairments during the nine months ended October 1, 2021 and October 2, 2020.~~

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~~LEIDOS HOLDINGS, INC.~~

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

~~Intangible Assets~~

~~Intangible assets, net consisted of the following:~~
October 1, 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 $ 1,853 $ (826) $ 1,027 $ 1,632 $ (687) $ 945
Software and technology 230 (115) 115 188 (100) 88
Customer relationships 97 (16) 81 93 (10) 83
Backlog 38 (36) 2 32 (29) 3
Trade names 1 (1) — 1 — 1
Total finite-lived intangible assets 2,219 (994) 1,225 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 $ 2,315 $ (994) $ 1,321 $ 2,042 $ (826) $ 1,216

Amortization expense was ~~$63~~$57 million and ~~$173~~$116 million for the three and ~~nine~~six months ended ~~October~~July 1, ~~2021,~~2022, respectively, and ~~$60~~$55 million and ~~$154~~$110 million for the three and ~~nine~~six months ended ~~October~~July 2, ~~2020,~~2021, 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 finite-lived 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~~July 1, ~~2021,~~2022, was as follows:


Fiscal year ending	Fiscal year ending			Fiscal year ending
		(in millions)			(in millions)
2021 (remainder of year)		$	60
2022		244
2022 (remainder of year)				2022 (remainder of year)	$	114
2023	2023	217		2023	200
2024	2024	165		2024	148
2025	2025	136		2025	119
2026 and thereafter		403
2026				2026	95
2027 and thereafter				2027 and thereafter	266
		$	1,225		$	942

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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


		October 1, 2021				January 1, 2021					July 1, 2022				December 31, 2021
		Carrying value		Fair value		Carrying value		Fair value			Carrying value		Fair value		Carrying value		Fair value
		(in millions)									(in millions)
Financial liabilities:	Financial liabilities:									Financial liabilities:
Derivatives	Derivatives	$	70	$	70	$	103	$	103	Derivatives	$	4	$	4	$	53	$	53

As of ~~October~~July 1, ~~2021,~~2022, our derivatives primarily consisted of the cash flow interest rate swaps on ~~$1.1~~$1.0 billion of the variable rate senior unsecured term loan (see "Note 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).

The carrying amounts of our financial instruments, other than derivatives, which include cash equivalents, accounts receivable, accounts payable and accrued expenses, are reasonable estimates of their related fair values. The carrying value of our notes receivable of $15 million as of October 1, 2021, and January 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 1, ~~2021,~~2022, and ~~January 1,~~December 31, 2021, the fair value of debt was ~~$5.5~~$5.0 billion and ~~$5.2~~$5.4 billion, respectively, and the carrying amount was ~~$5.1~~$5.2 billion and ~~$4.7~~$5.1 billion, respectively (see "Note 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 2 inputs).

On May 7, 2021, and January 14, 2021, ~~May 4, 2020 and January 31, 2020,~~ non-financial instruments measured at fair value on a non-recurring basis were recorded in connection with the acquisitions of Gibbs & Cox and 1901 ~~Group, SD&A Businesses and Dynetics, respectively (see "Note 3–Acquisitions, Goodwill and Intangible Assets").~~Group. The fair values of the assets acquired and liabilities assumed were determined using Level 3 inputs. As of ~~October~~July 1, ~~2021,~~2022, 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 5–Derivative Instruments

We manage our risk to changes in interest rates through the use of derivative instruments. We do not hold derivative instruments for trading or speculative purposes. 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 changing rates. The foreign currency forward contracts are not designated as hedges and do not qualify for hedge accounting.

The fair value of the interest rate swaps and foreign currency forward contracts was as follows:
Liability derivatives
Balance sheet line item October 1,
2021 January 1,
2021
(in millions)
Cash flow interest rate swaps Other long-term liabilities $ 70 $ 103


	Liability derivatives
	Balance sheet line item	July 1, 2022		December 31, 2021
		(in millions)
Cash flow interest rate swaps	Other long-term liabilities	$	3	53
Foreign currency forward contracts	Accounts payable and accrued liabilities	1		—
		$	4	53

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

Cash Flow Hedges

We have interest rate swap agreements to hedge the cash flows of ~~$1.1~~$1.0 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) 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) and earnings for the periods presented was as follows:
Three Months Ended Nine Months Ended
October 1,
2021 October 2,
2020 October 1,
2021 October 2,
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 $ 47 $ 44 $ 138 $ 133
Amount recognized in other comprehensive income (loss) $ — $ — $ 9 $ (62)
Amount reclassified from accumulated other comprehensive income (loss) to interest expense, net $ 5 $ 5 $ 14 $ 9

~~We expect to reclassify net losses of $23 million from accumulated other comprehensive loss into earnings during the next 12 months.~~


	Three Months Ended				Six Months Ended
	July 1, 2022		July 2, 2021		July 1, 2022		July 2, 2021
	(in millions)
Total interest expense, net presented in the condensed consolidated statements of income in which the effects of cash flow hedges are recorded	$	50	$	46	$	98	$	91

Amount recognized in other comprehensive income (loss)	$	4	$	(3)	$	36	$	9
Amount reclassified from accumulated other comprehensive income (loss) to interest expense, net	$	5	$	4	$	11	$	9

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 6–Debt

Our debt consisted of the following:


		Stated interest rate	Effective interest rate	October 1, 2021(1)		January 1, 2021(1)			Stated interest rate	Effective interest rate	July 1, 2022(1)		December 31, 2021(1)
				(in millions)							(in millions)
Short-term debt:	Short-term debt:							Short-term debt:
Commercial paper								Commercial paper	2.40%-2.55%	Various	$	150	$	—
Senior unsecured term loans:	Senior unsecured term loans:							Senior unsecured term loans:
$380 million term loan, due May 2022	$380 million term loan, due May 2022	1.22%	1.32%	$	380	$	—	$380 million term loan, due May 2022	1.54%	1.64%	—		380
$380 million term loan, due May 2023								$380 million term loan, due May 2023	2.63%	2.72%	380		—
Total short-term debt								Total short-term debt			$	530	$	380

Long-term debt:	Long-term debt:							Long-term debt:
Senior unsecured term loans:	Senior unsecured term loans:							Senior unsecured term loans:
$1,925 million term loan, due January 2025	$1,925 million term loan, due January 2025	1.47%	1.73%	$	1,321	$	1,391	$1,925 million term loan, due January 2025	3.05%	3.34%	$	1,252	$	1,298
Senior unsecured notes:	Senior unsecured notes:							Senior unsecured notes:
$500 million notes, due May 2023(2)		2.95%	3.17%	498		497
$500 million notes, due May 2025(2)		3.63%	3.76%	497		496
$750 million notes due May 2030(2)		4.38%	4.50%	738		737
$1,000 million notes, due February 2031(2)		2.30%	2.38%	990		989
$500 million notes, due May 2023								$500 million notes, due May 2023	2.95%	3.17%	499		498
$500 million notes, due May 2025								$500 million notes, due May 2025	3.63%	3.76%	497		497
$750 million notes due May 2030								$750 million notes due May 2030	4.38%	4.50%	739		738
$1,000 million notes, due February 2031								$1,000 million notes, due February 2031	2.30%	2.38%	991		990
$250 million notes, due July 2032	$250 million notes, due July 2032	7.13%	7.43%	247		247		$250 million notes, due July 2032	7.13%	7.43%	247		247
$300 million notes, due July 2033	$300 million notes, due July 2033	5.50%	5.88%	158		158		$300 million notes, due July 2033	5.50%	5.88%	158		158
$300 million notes, due December 2040	$300 million notes, due December 2040	5.95%	6.03%	216		216		$300 million notes, due December 2040	5.95%	6.03%	216		216
Notes payable and finance leases due on various dates through fiscal 2032	Notes payable and finance leases due on various dates through fiscal 2032	1.56%-4.18%	Various	55		13		Notes payable and finance leases due on various dates through fiscal 2032	1.84%-4.18%	Various	47		54
Total long-term debt	Total long-term debt			4,720		4,744		Total long-term debt			4,646		4,696
Less current portion	Less current portion			(104)		(100)		Less current portion			(623)		(103)
Total long-term debt, net of current portion	Total long-term debt, net of current portion			$	4,616	$	4,644	Total long-term debt, net of current portion			$	4,023	$	4,593

(1) The carrying amounts of the senior unsecured term loans and notes as of ~~October~~July 1, ~~2021,~~2022, and ~~January 1,~~December 31, 2021, include the remaining principal outstanding of ~~$5,090~~$5,018 million and ~~$4,782~~$5,065 million, respectively, less total unamortized debt discounts and deferred debt issuances costs of ~~$45~~$39 million and ~~$51~~$43 million, respectively.

~~(2)~~ ~~We filed a Registration Statement on Form S-4 with the Securities and Exchange Commission on May 6, 2021, and was declared effective on May 19, 2021.~~

Term Loans and Revolving Credit Facility

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 in January 2025. The Revolving Facility permits 2 additional one-year extensions subject to lender consent. As of July 1, 2022, there were no borrowings outstanding under the Revolving Facility.

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.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

On May ~~7, 2021,~~6, 2022, we entered into a ~~Credit Agreement (the "2021 Credit~~364-day term loan credit agreement ("Term Loan 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~~million. The proceeds of the ~~2021 Credit~~Term Loan Agreement ~~date. The proceeds~~ were used to ~~fund~~repay the ~~acquisition of Gibbs & Cox.~~$380 million senior unsecured term loan entered into on May 7, 2021.

Borrowings under the ~~2021 Credit~~Term Loan Agreement bear interest at a rate ~~determined, at our option,~~ based on ~~either~~the Secured Overnight Financing Rate plus 1.10%, or an alternate base rate ~~plus 0.13% or a LIBOR rate plus 1.13%.~~at our option.

The financial covenants in the ~~2021 Credit~~Term Loan Agreement require that we maintain, as of the last day of each fiscal quarter, a ratio of adjusted consolidated total debt to consolidated EBITDA of not more than 3.75 to 1.00, subject to increases to 4.50 to 1.00 following a material acquisition, and a ratio of EBITDA to consolidated interest expense of not less than 3.50 to 1.00.

The senior 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 1, 2021.

Commercial Paper

~~On July 12, 2021, we established~~We have 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 proceeds will be used for general corporate purposes, including working capital, capital expenditures, acquisitions and share repurchases.

The Commercial Paper Notes ~~will be~~are issued in minimum denominations of $0.25 million and ~~will~~ have maturities of up to 397 days from the date of issuance. The Commercial Paper Notes ~~will~~either bear ~~either~~ a stated or floating interest rate, if interest bearing, or will be sold at a discount from the face amount. As of ~~October~~July 1, ~~2021,~~2022, we ~~did not have any~~had $150 million of Commercial Paper Notes outstanding.

~~The Commercial Paper Notes will be fully and unconditionally guaranteed by an intercompany guarantee and contains certain customary restrictive covenants.~~

Principal Payments and Debt Issuance Costs

We made principal payments on our long-term debt of ~~$27~~$407 million and ~~$80~~$434 million during the three and ~~nine~~six months ended ~~October~~July 1, ~~2021,~~2022, respectively, and ~~$477~~$27 million and ~~$705~~$53 million during the three and ~~nine~~six months ended ~~October~~July 2, ~~2020,~~2021, respectively. This activity included required principal payments on our term loans of ~~$24~~$404 million and ~~$72~~$428 million ~~during~~for the three and ~~nine~~six months ended ~~October~~July 1, ~~2021, respectively,~~2022, and $24 million and $48 million for the three and ~~nine~~six months ended ~~October~~July 2, ~~2020,~~2021, respectively. During the nine months ended October 2, 2020, we made additional payments of $3,975 million, related to our refinancing activities. Additionally, on September 1, 2020, we retired our $450 million senior unsecured notes due December 2020.

As of ~~October~~July 1, ~~2021~~2022, and ~~January 1,~~December 31, 2021, there were no borrowings outstanding under the Revolving Facility.

~~For the nine months ended October 2, 2020, $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 $3$2 million and $7$5 million for the three and ~~nine~~six months ended ~~October~~July 1, ~~2021,~~2022, respectively, and $4$2 million and ~~$13~~$4 million for the three and ~~nine~~six months ended ~~October~~July 2, ~~2020,~~2021, respectively.

The Credit Facilities, the Term Loan Agreement, Commercial Paper Notes, senior unsecured term loans and notes 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 July 1, 2022.

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~~LEIDOS HOLDINGS, INC.~~

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

Note 7–Accumulated Other Comprehensive ~~Loss~~Income (Loss)

Changes in the components of ~~accumulated other comprehensive loss~~Accumulated Other Comprehensive Income (Loss) ("AOCI") were as follows:


		Foreign currency translation adjustments		Unrecognized gain (loss) on derivative instruments		Pension adjustments		Total accumulated other comprehensive loss			Foreign currency translation adjustments		Unrecognized gain (loss) on derivative instruments		Pension adjustments		Total AOCI
		(in millions)									(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	Balance at January 1, 2021	30		(70)		(6)		(46)		Balance at January 1, 2021	$	30	$	(70)	$	(6)	$	(46)
Other comprehensive income (loss)	Other comprehensive income (loss)	(8)		9		—		1		Other comprehensive income (loss)	(3)		18		17		32
Taxes	Taxes	(4)		(5)		—		(9)		Taxes	(5)		(8)		(4)		(17)
Reclassification from accumulated other comprehensive loss		—		14		—		14
Balance at October 1, 2021		$	18	$	(52)	$	(6)	$	(40)
Reclassification from AOCI										Reclassification from AOCI	—		19		—		19
Balance at December 31, 2021										Balance at December 31, 2021	22		(41)		7		(12)
Other comprehensive income (loss)										Other comprehensive income (loss)	(100)		36		(26)		(90)
Taxes										Taxes	17		(11)		6		12
Reclassification from AOCI										Reclassification from AOCI	—		11		—		11
Balance at July 1, 2022										Balance at July 1, 2022	$	(61)	$	(5)	$	(13)	$	(79)

Reclassifications from unrecognized 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)

We sponsor a frozen defined benefit pension plan in the United Kingdom for former employees on an expired customer contract. On May 20, 2022, the trustee of our defined benefit pension plan (the “Plan”) invested the assets of the Plan in a bulk purchase annuity policy to fully insure the benefits payable to the members of the Plan. As the buy-in transaction insured the defined benefit obligation, we do not anticipate material future contributions.

The bulk purchase annuity policy is structured to enable the Plan to move to a full buy-out, at which time the insurer would become directly responsible for all pension payments and we would be relieved of our obligations under the Plan. At this future date, a settlement loss will be recognized for an amount equal to any unamortized loss associated with the Plan recorded within AOCI and any remaining net plan assets of the Plan will be remitted to the Company. As of July 1, 2022, the unamortized loss within AOCI related to the Plan was $21 million and the Plan had net assets of $7 million.

Note 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			Three Months Ended		Six Months Ended
		October 1, 2021	October 2, 2020	October 1, 2021	October 2, 2020		July 1, 2022	July 2, 2021	July 1, 2022	July 2, 2021
		(in millions)					(in millions)
Basic weighted average number of shares outstanding	Basic weighted average number of shares outstanding	141	142	141	142	Basic weighted average number of shares outstanding	137	141	138	141
Dilutive common share equivalents—stock options and other stock awards	Dilutive common share equivalents—stock options and other stock awards	2	2	2	2	Dilutive common share equivalents—stock options and other stock awards	1	2	1	2
Diluted weighted average number of shares outstanding	Diluted weighted average number of shares outstanding	143	144	143	144	Diluted weighted average number of shares outstanding	138	143	139	143

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 1, ~~2021,~~2022, and ~~the three and nine months ended October~~July 2, ~~2020.~~2021.

On February 16, 2022, we entered into an Accelerated Share Repurchase ("ASR") agreement with a financial institution to repurchase shares of our outstanding common stock. During the ~~three~~quarter ended April 1, 2022, we paid $500 million to the financial institution and ~~nine months ended October 1, 2021, we made open market repurchases~~received an initial delivery of ~~our common stock~~4.5 million shares. In May 2022, the financial institution elected to partially settle $125 million of the original $500 million prepayment under the ASR agreement based on the volume-weighted-average-price of $104.32 per share for the period February 17, 2022, to April 29, 2022, which resulted in an ~~aggregate purchase price~~additional delivery of ~~$137~~0.1 million shares. Subsequently, the financial Institution elected to fully settle the remaining $375 million of the original payment under the ASR agreement based upon a volume-weighted-average-price of $104.23 per share for the period February 17, 2022, to May 5, 2022, and ~~$237~~delivered an additional 0.2 million ~~respectively.~~shares.

The purchases were recorded to "Additional paid-in capital" in the condensed consolidated balance sheets. All shares ~~repurchased~~delivered were immediately retired.

Note 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 six months ended July 1, 2022, and July 2, 2021, we sold $209 million and $693 million, respectively, of accounts receivable under the agreements and received proceeds of $209 million and $693 million, respectively, which were classified as operating activities in the condensed consolidated statements of cash flows. All proceeds received were remitted to the financial institution as of July 1, 2022, and July 2, 2021.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 10–Income Taxes

For the three months ended July 1, 2022, the effective tax rate was 23.6% compared to 23.8% for the three months ended July 2, 2021. The decrease to the effective tax rate was primarily due to lower state taxes in current quarter offset by an increase in unrecognized tax benefits.

For the six months ended July 1, 2022, the effective tax rate was 21.9% compared to 22.7% for the six months ended July 2, 2021. The decrease in the effective tax rate was primarily due to an increase in benefits related to employee stock-based compensation and an increase in research tax credits.

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 (“TCJA”) eliminated the option to currently deduct certain research and development costs for tax purposes and requires taxpayers to capitalize and amortize research costs over five years. Although it is possible that Congress may defer, modify, or repeal this provision, potentially with retroactive effect, we have no assurance that Congress will take any action with respect to this provision. If the 2022 effective date remains in place, based on the law as currently enacted, our initial assessment is that our income taxes payable and net deferred tax assets will each increase by approximately $150 million in fiscal 2022. The actual impact will depend on the amount of research and development costs the Company will incur, whether Congress modifies or repeals this provision and whether new guidance and interpretive rules are issued by the U.S. Treasury, among other factors.

For the six months ended July 1, 2022, unrecognized tax benefits increased $55 million with a corresponding increase to net deferred tax assets as a result of uncertain tax positions arising from certain provisions of the TCJA becoming effective.

Note 9–11–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 July 3,~~During fiscal 2021, certain contracts were reassigned from the Defense Solutions reportable segment to the Civil reportable segment. Impact on prior year segment results were determined to be immaterial and have not been recast to reflect this change.

The segment information for the periods presented was as follows:


		Three Months Ended				Nine Months Ended					Three Months Ended				Six Months Ended
		October 1, 2021		October 2, 2020		October 1, 2021		October 2, 2020			July 1, 2022		July 2, 2021		July 1, 2022		July 2, 2021
		(in millions)									(in millions)
Revenues:	Revenues:									Revenues:
Defense Solutions	Defense Solutions	$	2,009	$	1,951	$	5,971	$	5,413	Defense Solutions	$	2,052	$	2,004	$	4,101	$	3,962
Civil	Civil	792		771		2,357		2,183		Civil	857		799		1,652		1,565
Health	Health	682		520		1,918		1,449		Health	688		645		1,338		1,236
Total revenues	Total revenues	$	3,483	$	3,242	$	10,246	$	9,045	Total revenues	$	3,597	$	3,448	$	7,091	$	6,763

Operating income (loss):	Operating income (loss):									Operating income (loss):
Defense Solutions	Defense Solutions	$	140	$	145	$	429	$	359	Defense Solutions	$	139	$	137	$	272	$	289
Civil	Civil	58		54		187		191		Civil	38		55		81		129
Health	Health	130		75		339		149		Health	126		107		244		209
Corporate	Corporate	(23)		(16)		(73)		—		Corporate	(32)		(30)		(55)		(50)
Total operating income	Total operating income	$	305	$	258	$	882	$	699	Total operating income	$	271	$	269	$	542	$	577

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The income statement performance measures used to evaluate segment performance are revenues and operating income. As a result, "Interest expense, net," "Other income (expense), net" and "Income tax expense" as reported in the condensed consolidated 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.

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

Note ~~10–~~12–Commitments and Contingencies

~~Legal Proceedings~~

~~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 alleged 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 sought to recover from the Company and the individual defendants an unspecified amount of damages at this time. On July 30, 2021, the District Court appointed a lead plaintiff and lead counsel. On September 28, 2021, the lead plaintiff voluntarily dismissed the action without prejudice.

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~~LEIDOS HOLDINGS, INC.~~

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

~~Other~~ Contingencies

VirnetX, Inc. ("VirnetX")

On April 10, 2018, a jury trial concluded in an additional patent infringement case brought by VirnetX against Apple, referred to as the Apple II case, in which the jury returned a verdict against Apple for infringement and awarded VirnetX damages in the amount of over $502 million. On April 11, 2018, in a second phase of the Apple II trial, the jury found Apple's infringement to be willful. On August 30, 2018, the federal trial court in the Eastern District of Texas entered a final judgment and rulings on post-trial motions in the Apple II case. The court affirmed the jury’s verdict of over $502 million and granted VirnetX’s motions for supplemental damages, a sunset royalty and royalty rate of $1.20 per infringing device, along with pre-judgment and post-judgment interest and costs. The court denied VirnetX’s motions for enhanced damages, attorneys’ fees and an injunction. The court also denied Apple’s motions for judgment as a matter of law and for a new trial. An additional sum of over $93 million for costs and pre-judgment interest was subsequently agreed upon pursuant to a court order, bringing the total award to VirnetX in the Apple II case to over $595 million. Apple 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 the coronavirus pandemic and started on October 26, 2020. On October 30, 2020, the jury awarded VirnetX $503 million in damages and specified a royalty rate of $0.84 per infringing device. 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 verdict in 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.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of ~~October~~July 1, ~~2021,~~2022, active indirect cost ~~active~~ audits by the Defense Contract Audit Agency remain open for fiscal ~~2016~~2020 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 1, ~~2021,~~2022, we believe we have adequately reserved for potential adjustments from audits or reviews of contract costs.

~~Table~~Through its internal processes, the Company discovered, in late 2021, activities by its employees, third party representatives and subcontractors, raising concerns related to a portion of ~~Contents~~

~~LEIDOS HOLDINGS, INC.~~

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

our business that conducts international operations. The Company is conducting an internal investigation, overseen by an independent committee of the Board of Directors, with the assistance of external legal counsel, to determine whether the identified conduct may have violated the Company’s Code of Conduct and potentially applicable laws, including the U.S. Foreign Corrupt Practices Act ("FCPA"). The Company has voluntarily self-reported this investigation to the Department of Justice and the Securities and Exchange Commission and is cooperating with both agencies. Because the investigation is ongoing, the Company cannot anticipate the timing, outcome or possible impact of the investigation, although violations of the FCPA and other applicable laws may result in criminal and civil sanctions, including monetary penalties, and reputational damage.

Commitments

WeAs of July 1, 2022, we have outstanding letters of credit of ~~$68~~$44 million, ~~as of October 1, 2021,~~ principally related to performance guarantees on ~~contracts. We also have~~contracts and outstanding surety bonds with a notional amount of ~~$132~~$100 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. We also have future lease commitments of $74 million for the use of certain aircrafts.

As of ~~October~~July 1, ~~2021,~~2022, the future expirations of the outstanding letters of credit, ~~and~~ surety bonds and future lease commitments were as follows:


Fiscal year ending	Fiscal year ending			Fiscal year ending
		(in millions)			(in millions)
2021 (remainder of year)		$	62
2022		114
2022 (remainder of year)				2022 (remainder of year)	$	30
2023	2023	4		2023	24
2024	2024	2		2024	98
2025	2025	2		2025	23
2026 and thereafter		16
2026				2026	19
2027 and thereafter				2027 and thereafter	24
		$	200		$	218

Note 13–Subsequent Events

On July 29, 2022, we entered into a definitive agreement to acquire Cobham Aviation Services Australia’s Special Mission business for a preliminary purchase consideration of $310 million Australian dollars, approximately $215 million, subject to working capital adjustments.

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LEIDOS HOLDINGS, INC.

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

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

The following discussion contains forward-looking statements, including statements regarding our intent, belief or current expectations with respect to, among other things, trends affecting our financial condition or results of operations, backlog, our industry, the impact of our merger and acquisition activity, government budgets and spending, our business contingency plans, interest rates and uncertainties in tax due to new tax legislation or other regulatory ~~developments and our ability to recover certain costs through the Coronavirus Aid, Relief and Economic Security Act ("CARES Act").~~developments. In some cases, forward-looking statements can be identified by words such as “will,” “expect,” “estimate,” “plan,” “potential,” “continue” or similar expressions. Such statements are not guarantees of future performance and involve risks and uncertainties, including uncertainties relating to the coronavirus 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,~~technology, engineering, and ~~information technology~~science 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 five technical core competencies: digital modernization, cyber operations, mission software systems, integrated systems and mission 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. civilian, state and local government agencies, ~~as well as~~ foreign government ~~agencies.~~agencies and commercial businesses. 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 pandemic 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 pandemic has resulted in travel restrictions, government orders to “shelter-in-place”, quarantine restrictions and 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.

For the three and ~~nine~~six months ended ~~October~~July 1, ~~2021,~~2022, the COVID-19 pandemic did not have a material impact to revenues and operating ~~income.~~income, other than the receipt of $28 million in recoveries for the three months ended July 1, 2022, within our Health segment related to stop work orders on certain programs. The full extent of the impact of the COVID-19 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 pandemic and the distribution of vaccines, all of which are uncertain and cannot be predicted.

Section 3610 of the CARES Act, a $2 trillion coronavirus response bill providing widespread emergency relief, authorized the government to reimburse qualifying contractors for the cost of certain impacts of COVID-19. While a portion of the recoveries that we have made are a result of Section 3610 of the CARES Act, the Act expired on September 30, 2021.

Effective October 1, 2021, we mandated a policy requiring all employees, vendors, subcontractors and visitors to be vaccinated or maintain proof of a negative COVID-19 test in order to enter a Leidos facility in the U.S. or to attend company business events outside of our facilities.

On September 9, 2021, President Biden issued a series of executive orders to combat COVID-19, one of which requires us, as a federal contractor, to ~~ensure that all of~~have our employees ~~are~~ fully vaccinated ~~by December 8, 2021,~~ unless the employee is legally entitled to a religious or medical exemption. This vaccine mandate is currently under a nationwide injunction, while courts adjudicate constitutional challenges to the executive order. We are ~~currently assessing~~prepared to comply with the ~~impact our policy will have on our workforce and operations.~~executive order in the event the injunction is lifted.

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Business Environment and Trends

U.S. Government Markets

During both of the three and ~~nine~~six months ended ~~October~~July 1, ~~2021,~~2022, we generated approximately ~~88% and 87%~~86%, ~~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 March 28, 2022, Congress received the GFY ~~2022~~2023 President’s Budget Request totaling $5.8 trillion. The request includes $813 billion in defense spending and $769 billion in non-defense spending for GFY 2023 beginning on ~~May 28, 2021 and passed a Continuing Resolution ("CR") before~~October 1, 2022. Congress is currently working on the ~~GFY deadline of September 30, 2021. The CR~~12 appropriations bills that will ~~fully~~ fund the federal government in GFY 2023. Failure to pass the appropriations bills before October 1, 2022, will require a continuing resolution to avoid a federal government shut down. The length of any continuing resolution will be determined at current levels through December 3, 2021 and provides $28.6 billion in disaster relief and $6.3 billion to support Afghanistan evacuees. The House and Senate also voted to extend the debt limit waiver through December 3, 2021.a later date.

International Markets

Sales to customers in international markets represented approximately 8% of total revenues for both of the three and ~~nine~~six months ended ~~October~~July 1, ~~2021.~~2022. 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.

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~~LEIDOS HOLDINGS, INC.~~

Results of Operations

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


		Three Months Ended										Nine Months Ended											Three Months Ended										Six Months Ended
		October 1, 2021			October 2, 2020			Dollar change		Percent change		October 1, 2021			October 2, 2020			Dollar change		Percent change			July 1, 2022			July 2, 2021			Dollar change		Percent change		July 1, 2022			July 2, 2021			Dollar change		Percent change
		(dollars in millions)																					(dollars in millions)
Revenues	Revenues	$	3,483		$	3,242		$	241	7.4	%	$	10,246		$	9,045		$	1,201	13.3	%	Revenues	$	3,597		$	3,448		$	149	4.3	%	$	7,091		$	6,763		$	328	4.8	%

Operating income	Operating income	305			258			47		18.2	%	882			699			183		26.2	%	Operating income	271			269			2		0.7	%	542			577			(35)		(6.1)	%
Non-operating expense, net	Non-operating expense, net	(45)			(44)			(1)		2.3	%	(137)			(163)			26		(16.0)	%	Non-operating expense, net	(46)			(46)			—		—	%	(95)			(92)			(3)		3.3	%
Income before income taxes	Income before income taxes	260			214			46		21.5	%	745			536			209		39.0	%	Income before income taxes	225			223			2		0.9	%	447			485			(38)		(7.8)	%
Income tax expense	Income tax expense	(52)			(51)			(1)		2.0	%	(162)			(104)			(58)		55.8	%	Income tax expense	(53)			(53)			—		—	%	(98)			(110)			12		(10.9)	%
Net income	Net income	$	208		$	163		$	45			$	583		$	432		$	151			Net income	$	172		$	170		$	2	1.2	%	$	349		$	375		$	(26)	(6.9)	%
Net income attributable to Leidos common stockholders	Net income attributable to Leidos common stockholders	$	205		$	163		$	42	25.8	%	$	579		$	431		$	148	34.3	%	Net income attributable to Leidos common stockholders	$	171		$	169		$	2	1.2	%	$	346		$	374		$	(28)	(7.5)	%
Operating margin	Operating margin	8.8		%	8.0		%					8.6		%	7.7		%					Operating margin	7.5		%	7.8		%					7.6		%	8.5		%

Segment and Corporate Results


		Three Months Ended										Nine Months Ended											Three Months Ended										Six Months Ended
Defense Solutions	Defense Solutions	October 1, 2021			October 2, 2020			Dollar change		Percent change		October 1, 2021			October 2, 2020			Dollar change		Percent change		Defense Solutions	July 1, 2022			July 2, 2021			Dollar change		Percent change		July 1, 2022			July 2, 2021			Dollar change		Percent change
		(dollars in millions)																					(dollars in millions)
Revenues	Revenues	$	2,009		$	1,951		$	58	3.0	%	$	5,971		$	5,413		$	558	10.3	%	Revenues	$	2,052		$	2,004		$	48	2.4	%	$	4,101		$	3,962		$	139	3.5	%
Operating income	Operating income	140			145			(5)		(3.4)	%	429			359			70		19.5	%	Operating income	139			137			2		1.5	%	272			289			(17)		(5.9)	%
Operating margin	Operating margin	7.0		%	7.4		%					7.2		%	6.6		%					Operating margin	6.8		%	6.8		%					6.6		%	7.3		%

The increase in revenues for the three months ended ~~October~~July 1, ~~2021,~~2022, as compared to the three months ended ~~October~~July 2, 2020, was primarily attributable to program wins and $47 million of revenues from the acquisitions of Gibbs & Cox and 1901 Group, partially offset by the completion of contracts and a net decrease in volumes on certain programs.

~~The increase in revenues for the nine months ended October 1,~~ 2021, ~~as compared to the nine months ended October 2, 2020,~~ was primarily attributable to program wins, a net increase in volumes on certain programs and ~~$97~~a $14 million net increase in revenue related to our acquisitions made in the second and third quarter of ~~revenues from~~ the ~~acquisitions of Gibbs & Cox and 1901 Group,~~prior year. The increase was partially offset by the completion of certain ~~contracts. In addition, for the nine months ended October 1, 2021, there was a $66~~contracts, $24 million ~~benefit in~~related to unfavorable exchange rate ~~movements.~~

~~The decrease in operating income for the three months ended October 1, 2021, as compared~~movements and contracts that were reassigned from Defense Solutions reportable segment to the ~~three months ended October 2, 2020, was primarily attributable to a net decrease in volumes on certain programs and~~Civil reportable segment during the ~~completion~~third quarter of ~~certain contracts, partially offset by program wins.~~

The increase in operating income for the nine months ended October 1, 2021, as compared to the nine months ended October 2, 2020, was primarily due to program wins, a net increase in program volumes on certain contracts and the acquisitions of Gibbs & Cox and 1901 Group, partially offset by the completion of certain contracts.

Three Months Ended Nine Months Ended
Civil October 1,
2021 October 2,
2020 Dollar change Percent change October 1,
2021 October 2,
2020 Dollar change Percent change
(dollars in millions)
Revenues $ 792 $ 771 $ 21 2.7 % $ 2,357 $ 2,183 $ 174 8.0 %
Operating income 58 54 4 7.4 % 187 191 (4) (2.1) %
Operating margin 7.3 % 7.0 % 7.9 % 8.7 %
fiscal 2021.

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The increase in revenues for the ~~three~~six months ended ~~October~~July 1, ~~2021,~~2022, as compared to the ~~three~~six months ended ~~October~~July 2, ~~2020, was primarily attributable to program wins and a reduction of the negative impacts from COVID-19 experienced during the prior year quarter, partially offset by a net decrease in program volumes.~~

~~The increase in revenues for the nine months ended October 1,~~ 2021, as compared to the nine months ended October 2, 2020, was primarily attributable to a net increase of $62 million of revenues related to L3 Harris Technologies' security and detection businesses (the "SD&A Businesses") acquired in the prior year, a net increase in program volumes, program wins and a reduction of the negative impacts from COVID-19 experienced during the prior year.

The increase in operating income for the three months ended October 1, 2021, as compared to the three months ended October 2, 2020, was primarily due to improved performance on certain programs and lower amortization of intangible assets related to the acquisition of the SD&A Businesses, partially offset by fewer product deliveries on certain programs.

The decrease in operating income for the nine months ended October 1, 2021, as compared to the nine months ended October 2, 2020, was primarily attributable to a net decrease in volumes due to the timing of product deliveries on certain programs, 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.

Three Months Ended Nine Months Ended
Health October 1,
2021 October 2,
2020 Dollar change Percent change October 1,
2021 October 2,
2020 Dollar change Percent change
(dollars in millions)
Revenues $ 682 $ 520 $ 162 31.2 % $ 1,918 $ 1,449 $ 469 32.4 %
Operating income 130 75 55 73.3 % 339 149 190 127.5 %
Operating margin 19.1 % 14.4 % 17.7 % 10.3 %

The increase in revenues for the three months ended October 1, 2021, as compared to the three months ended October 2, 2020, was primarily attributable to a net increase in volumes on certain programs and program wins.

~~The increase in revenues for the nine months ended October 1, 2021, as compared to the nine months ended October 2, 2020,~~ was primarily attributable to a net increase in volumes on certain programs, program wins and ~~an approximately $96~~a $47 million ~~reduction~~net increase in revenue related to our acquisitions made in the second and third quarter of the ~~negative impacts~~prior year. The increase was partially offset by the completion of ~~COVID-19 experienced~~certain contracts, $34 million related to unfavorable exchange rate movements and contracts that were reassigned from Defense Solutions reportable segment to the Civil reportable segment during the ~~prior~~third quarter of fiscal 2021.

The increase in operating income for the three months ended July 1, 2022, as compared to the three months ended July 2, 2021, was primarily attributable to program wins and a net increase in volumes on certain programs, partially offset by the completion of certain contracts and unfavorable exchange rate movements.

The decrease in operating income for the six months ended July 1, 2022, as compared to the six months ended July 2, 2021, was primarily attributable to the completion of certain contracts and increased amortization expense, partially offset by program wins and a net increase in volumes on certain programs.


	Three Months Ended										Six Months Ended
Civil	July 1, 2022			July 2, 2021			Dollar change		Percent change		July 1, 2022			July 2, 2021			Dollar change		Percent change
	(dollars in millions)
Revenues	$	857		$	799		$	58	7.3	%	$	1,652		$	1,565		$	87	5.6	%
Operating income	38			55			(17)		(30.9)	%	81			129			(48)		(37.2)	%
Operating margin	4.4		%	6.9		%					4.9		%	8.2		%

The increase in revenues for the three and six months ended July 1, 2022, as compared to the three and six months ended July 2, 2021, was primarily attributable to a net increase in program volumes, program wins and contracts that were reassigned from Defense Solutions reportable segment to the Civil reportable segment during the third quarter of fiscal 2021. The increase was partially offset by the completion of certain contracts.

The decrease in operating income for the three and six months ended July 1, 2022, as compared to the three and six months ended July 2, 2021, was primarily due to a $17 million and $19 million increase in legal reserves and fees, respectively, resulting from an adverse arbitration ruling related to the 2016 acquisition of the Information Systems & Global Solutions business (“IS&GS Business”) from Lockheed Martin, during the current year periods. Operating income for the six months ended July 2, 2021 included a $26 million benefit from a legal reserve adjustment related to the Mission Support Alliance joint venture.


	Three Months Ended										Six Months Ended
Health	July 1, 2022			July 2, 2021			Dollar change		Percent change		July 1, 2022			July 2, 2021			Dollar change		Percent change
	(dollars in millions)
Revenues	$	688		$	645		$	43	6.7	%	$	1,338		$	1,236		$	102	8.3	%
Operating income	126			107			19		17.8	%	244			209			35		16.7	%
Operating margin	18.3		%	16.6		%					18.2		%	16.9		%

The increase in revenues for the three and six months ended July 1, 2022, as compared to the three and six months ended July 2, 2021, was primarily attributable to a net increase in program volumes and $28 million in recoveries related to stop work orders on certain programs as a result of COVID-19. The increase was partially offset by the completion of certain contracts.

The increase in operating income for the three months ended ~~October~~July 1, ~~2021,~~2022, as compared to the three months ended ~~October~~July 2, ~~2020,~~2021, was primarily due to ~~increased volume~~$28 million in recoveries related to stop work orders on ~~fixed unit price programs.~~certain programs as a result of COVID-19. The increase was partially offset by the completion of certain contracts.

The increase in operating income for the ~~nine~~six months ended ~~October~~July 1, ~~2021,~~2022, as compared to the ~~nine~~six months ended ~~October~~July 2, ~~2020,~~2021, was primarily ~~attributable~~due to $28 million in recoveries related to stop work orders on certain programs as a ~~net~~result of COVID-19 and an increase in ~~volumes~~net profit write-ups on ~~higher margin programs, an approximately $63 million reduction of the negative impacts of COVID-19 experienced in the prior year and a net decrease in asset impairment charges of $8 million.~~

Three Months Ended Nine Months Ended
Corporate October 1,
2021 October 2,
2020 Dollar change Percent change October 1,
2021 October 2,
2020 Dollar change Percent change
(dollars in millions)
Operating (loss) income $ (23) $ (16) $ (7) 43.8 % $ (73) $ — $ (73) NM

~~NM - Not Meaningful~~

certain programs. The increase ~~in operating loss for~~was partially offset by the ~~nine months ended October 1, 2021, as compared to the nine months ended October 2, 2020, was primarily attributable to an $81 million net gain recognized during the second quarter~~completion of ~~fiscal 2020 upon receipt of proceeds related to the VirnetX, Inc. legal matter and a decrease in acquisition and integration costs.~~certain contracts.

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	Three Months Ended								Six Months Ended
Corporate	July 1, 2022		July 2, 2021		Dollar change		Percent change		July 1, 2022		July 2, 2021		Dollar change		Percent change
	(dollars in millions)
Operating loss	$	(32)	$	(30)	$	(2)	6.7	%	$	(55)	$	(50)	$	(5)	10.0	%

The increase in operating loss for the three and six months ended July 1, 2022, as compared to the three and six months ended July 2, 2021, was primarily attributable to an increase in legal costs, offset by lower acquisition and integration costs.

Non-Operating Expense, net

Non-operating expense, net for the three months ended ~~October~~July 1, ~~2021~~2022, was ~~$45~~$46 million, ~~consistent with~~and remained unchanged as compared to the three months ended ~~October~~July 2, ~~2020 of $44 million.~~2021.

Non-operating expense, net for the ~~nine~~six months ended ~~October~~July 1, ~~2021~~2022, was ~~$137~~$95 million as compared to ~~$163~~$92 million for the ~~nine~~six months ended ~~October~~July 2, ~~2020.~~2021. The ~~change~~increase was primarily due to ~~$31 million of debt discount and deferred financing costs written off related to refinancing activities~~higher interest expenses driven by changes in ~~the prior year.~~interest rates, partially offset by exchange rate movements.

Provision for Income Taxes

For the three months ended ~~October~~July 1, ~~2021,~~2022, our effective tax rate was ~~20.0%~~23.6% compared to 23.8% for the three months ended ~~October~~July 2, ~~2020.~~2021. The decrease to the effective tax rate was primarily due to lower state taxes in current quarter offset by an increase in unrecognized tax benefits.

For the six months ended July 1, 2022, the effective tax rate was 21.9% compared to 22.7% for the six months ended July 2, 2021. The decrease in the effective tax rate was primarily due to ~~a decrease~~an increase in ~~foreign taxes~~benefits related to employee stock-based compensation and an increase in research tax credits.

For the nine months ended October 1, 2021, our effective tax rate was 21.7% compared to 19.4% for the nine months ended October 2, 2020. The increase in the effective tax rate was primarily due to a net decrease in benefits related to employee stock-based payments.

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 ~~eliminates~~(“TCJA”) eliminated the option to currently deduct certain research and development costs for tax purposes and requires taxpayers to ~~amortize domestic~~capitalize and ~~foreign~~amortize research costs over five ~~years and 15 years, respectively. The House Ways and Means Committee has proposed tax legislation to delay the effective date of this change to 2026, but~~years. Although it is ~~uncertain whether the proposed delay~~possible that Congress may defer, modify, or repeal this provision, potentially with retroactive effect, we have no assurance that Congress will ~~ultimately be enacted into law.~~take any action with respect to this provision. If the 2022 effective date remains in place, based on the law as currently enacted, our initial assessment is that our ~~cash from operations would materially decrease in 2022~~income taxes payable and ~~our~~ net deferred tax assets ~~would~~will each increase by ~~a similar amount. We are currently evaluating~~approximately $150 million in fiscal 2022, and the ~~potential~~related impact to cash from operations will be realized in fiscal 2023. The actual impact on ~~our~~ cash ~~flows~~ from ~~operations.~~operations will depend on the amount of research and development costs the Company will incur, whether Congress modifies or repeals this provision and whether new guidance and interpretive rules are issued by the U.S. Treasury, among other factors.

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LEIDOS HOLDINGS, INC.

Bookings and Backlog

We recorded net bookings worth an estimated ~~$4.7~~$2.2 billion and ~~$12.3~~$7.6 billion during the three and ~~nine~~six months ended ~~October~~July 1, ~~2021,~~2022, as compared to ~~$4.3~~$3.8 billion and ~~$14.5~~$7.6 billion for the three and ~~nine~~six months ended ~~October~~July 2, ~~2020.~~2021.

The estimated value of our total backlog was as follows:


		October 1, 2021						October 2, 2020							July 1, 2022						July 2, 2021
Segment	Segment	Funded		Unfunded		Total		Funded		Unfunded		Total		Segment	Funded		Unfunded		Total		Funded		Unfunded		Total
		(in millions)													(in millions)
Defense Solutions	Defense Solutions	$	4,412	$	15,160	$	19,572	$	4,115	$	13,746	$	17,861	Defense Solutions	$	4,351	$	13,668	$	18,019	$	4,293	$	14,154	$	18,447
Civil	Civil	1,713		7,702		9,415		1,521		7,028		8,549		Civil	2,051		8,846		10,897		1,608		7,493		9,101
Health	Health	1,164		4,541		5,705		1,208		4,101		5,309		Health	1,139		4,667		5,806		1,255		4,720		5,975
Total	Total	$	7,289	$	27,403	$	34,692	$	6,844	$	24,875	$	31,719	Total	$	7,541	$	27,181	$	34,722	$	7,156	$	26,367	$	33,523

The increase in backlog includes ~~$757~~$49 million of backlog acquired through business combinations in our Defense Solutions reportable segment.

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. Total backlog at ~~October~~July 1, ~~2021~~2022, included a ~~positive~~negative impact of ~~$103~~$268 million when compared to total backlog at ~~October~~July 2, ~~2020,~~2021, primarily due to the exchange rate ~~movement~~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.

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~~LEIDOS HOLDINGS, INC.~~

Liquidity and Capital Resources

Overview

As of ~~October~~July 1, ~~2021,~~2022, we had ~~$587~~$339 million in cash and cash equivalents. Additionally, we have an unsecured revolving credit facility which can provide up to $750 million in additional borrowing, if required. As of ~~October~~July 1, ~~2021,~~2022, there were no borrowings outstanding under the revolving credit ~~facility and we were in compliance with the related financial covenants.~~facility.

~~At October 1, 2021, and January 1, 2021, we~~We had outstanding debt of $5.2 billion and $5.1 billion at July 1, 2022, and ~~$4.7 billion,~~December 31, 2021, respectively. On May ~~7, 2021,~~6, 2022, we entered into a ~~Credit~~Term Loan Agreement which provided for a senior unsecured term loan facility in an aggregate principal amount of $380 million.

We made principal payments on our long-term debt of $27 million and $80 million during the three and nine months ended October 1, 2021, respectively, and $477 million and $705 million during the three and nine months ended October 2, 2020, respectively. This activity included required principal payments on our term loans of $24 million and $72 million during the three and nine months ended October 1, 2021, and $24 million and $48 million during the three and nine months ended October 2, 2020. During the nine months ended October 2, 2020, we made additional payments of $3,975 million, related to our refinancing activities. On September 1, 2020, we retired our $450 million senior unsecured notes due December 2020.

~~The senior unsecured term loans and notes contain financial covenants and customary restrictive covenants. We were in compliance with all covenants as of October 1, 2021.~~

~~On July 12, 2021, Leidos, Inc. established~~have 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 6–Debt" ).~~issuance. As of ~~October~~July 1, 2022, we had $150 million of commercial paper notes outstanding.

We made principal payments on our long-term debt of $407 million and $434 million during the three and six months ended July 1, 2022, respectively, and $27 million and $53 million during the three and six months ended July 2, 2021, ~~we did not~~respectively. This activity included required principal payments on our term loans of $404 million and $428 million during the three and six months ended July 1, 2022, respectively, and $24 million and $48 million during the three and six months ended July 2, 2021, respectively. Our credit facilities, term loan agreement, commercial paper notes, senior unsecured term loans and notes outstanding as of July 1, 2022, contain financial covenants and customary restrictive covenants. We were in compliance with all covenants as of July 1, 2022.

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LEIDOS HOLDINGS, INC.

Interest on our Credit Facilities is calculated based on the London Interbank Offered Rate (“LIBOR”). On July 27, 2017, the U.K.’s Financial Conduct Authority announced that LIBOR would be discontinued or become unavailable as a reference rate by the end of 2021 and LIBOR will be fully discontinued or become unavailable as a benchmark rate by June 2023. Although our Credit Facilities include mechanics to facilitate the adoption by us and our lenders of an alternative benchmark rate for use in place of LIBOR, no assurance can be made that such alternative benchmark rate will perform in a manner similar to LIBOR or result in interest rates that are at least as favorable to us as those that would have ~~any Commercial Paper Notes outstanding.~~resulted had LIBOR remained in effect, which could result in an increase in our interest expense and other debt service obligations. In addition, the overall credit market may be disrupted as a result of the replacement of LIBOR or in the anticipation thereof, which could have an adverse impact on our ability to refinance, reprice, or amend our existing indebtedness or incur additional indebtedness on favorable terms.

We paid dividends of ~~$51~~$49 million and ~~$149~~$100 million during the three and ~~nine~~six months ended ~~October~~July 1, ~~2021,~~2022, respectively, and ~~$49~~$48 million and ~~$148~~$98 million during the three and ~~nine~~six months ended ~~October~~July 2, ~~2020,~~2021, respectively.

During the ~~nine~~six months ended ~~October~~July 1, ~~2021,~~2022, we sold $693 million of accounts receivable under accounts receivable purchase agreements. There were no sales of accounts receivable during the thee months ended October 1, 2021. During the three and nine months ended October 2, 2020, we sold $753 million and $1,866$209 million of accounts receivable under accounts receivable purchase agreements and received proceeds of ~~$752~~$209 million. We did not sell any accounts receivable during the three months ended July 1, 2022. During the three and six months ended July 2, 2021, we sold $228 million and ~~$1,864~~$693 million, ~~respectively.~~respectively, of accounts receivable under accounts receivable purchase agreements and received proceeds of $229 million and $693 million, respectively (see "Note 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 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.

On February 16, 2022, we entered into an Accelerated Share Repurchase ("ASR") agreement with a financial institution to repurchase shares of our outstanding common stock. During the ~~three~~quarter ended April 1, 2022, we paid $500 million to the financial institution and ~~nine months ended October 1, 2021, we made open market repurchases~~received an initial delivery of ~~our common stock,~~4.5 million shares. In May 2022, the financial institution elected to partially settle $125 million of the original $500 million prepayment under the ~~Company's~~ASR agreement based on the volume-weighted-average-price of $104.32 per share ~~repurchase program,~~ for the period February 17, 2022, to April 29, 2022, which resulted in an ~~aggregate purchase price~~additional delivery of ~~$137~~0.1 million shares. Subsequently, the financial Institution elected to fully settle the remaining $375 million of the original payment under the ASR agreement based upon a volume-weighted-average-price of $104.23 per share for the period February 17, 2022, to May 5, 2022, and ~~$237~~delivered an additional 0.2 million ~~respectively.~~shares.

During the third quarter of fiscal 2022, we anticipate making a $25 million payment in connection with the adverse arbitration ruling related to the 2016 acquisition of the IS&GS Business from Lockheed Martin, which occurred during the current quarter.

The ~~proposed legislation changes to~~uncertainty surrounding the ~~Tax Cuts and Jobs Act of 2017~~TCJA provision and the potential for COVID-19 to continue to affect the financial markets may impact our liquidity. If the 2022 effective date of the TCJA research cost capitalization provision remains in place, our initial assessment indicates our income taxes payable and net deferred tax assets will each increase by approximately $150 million in fiscal 2022, and the related negative impact to cash will be realized in fiscal 2023. We will continue to assess our liquidity needs as the ~~proposed~~ tax legislation ~~changes~~ and pandemic evolve.

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~~from our revolving credit facility and commercial paper program.

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Summary of Cash Flows

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


		Three Months Ended				Nine Months Ended					Three Months Ended						Six Months Ended
		October 1, 2021		October 2, 2020		October 1, 2021		October 2, 2020			July 1, 2022		July 2, 2021		Dollar Change		July 1, 2022		July 2, 2021		Dollar Change
		(in millions)									(in millions)
Net cash provided by operating activities	Net cash provided by operating activities	$	565	$	592	$	821	$	1,386	Net cash provided by operating activities	$	40	$	17	$	23	$	133	$	256	$	(123)
Net cash used in investing activities	Net cash used in investing activities	(53)		(15)		(693)		(2,714)		Net cash used in investing activities	(8)		(396)		388		(29)		(640)		611
Net cash (used in) provided by financing activities		(209)		(517)		(44)		1,353
Net increase in cash, cash equivalents and restricted cash		$	303	$	60	$	84	$	25
Net cash provided by (used in) financing activities										Net cash provided by (used in) financing activities	6		313		(307)		(513)		165		(678)
Net increase (decrease) in cash, cash equivalents and restricted cash										Net increase (decrease) in cash, cash equivalents and restricted cash	$	38	$	(66)	$	104	$	(409)	$	(219)	$	(190)

Net cash provided by operating activities ~~decreased $27 million for~~increased during the three months ended ~~October~~July 1, 2021, when compared to the prior year quarter. The decrease was primarily due to the $92 million deferral of employer payroll taxes in the prior year and the timing of customer advance payments, partially offset by lower income tax payments of $34 million and other favorable working capital changes.

Net cash provided by operating activities decreased $565 million for the nine months ended October 1, 2021, when compared to the prior year. The decrease was primarily due to lower sales of accounts receivable outstanding of $232 million, $92 million of deferral of employer payroll taxes in the prior year, higher income tax payments of $69 million, the receipt of $85 million of proceeds related to the VirnetX legal matter in the prior year and the timing of customer advance payments.

Net cash used in investing activities increased $38 million for the three months ended October 1, 2021, when compared to the prior year quarter primarily due to an additional inconsequential acquisition made during the current quarter (see "Note 3–Acquisitions, Goodwill and Intangible Assets").

Net cash used in investing activities decreased $2,021 million for the nine months ended October 1, 2021, when compared to the prior year, primarily due to larger acquisitions made in the prior year for Dynetics and the SD&A Businesses compared to our material current year acquisitions, 1901 Group and Gibbs & Cox (see "Note 3–Acquisitions, Goodwill and Intangible Assets") and lower capital expenditures in the current year.

~~Net cash used in financing activities decreased $308 million for the three months ended October 1, 2021~~2022, when compared to the prior year quarter. The change was primarily due to favorable timing of customer payments partially offset by less favorable timing of working capital changes.

Net cash provided by operating activities decreased for the ~~early repayment~~six months ended July 1, 2022, when compared to ~~retire~~the prior year primarily due to unfavorable timing of customer payments, higher tax and interest payments of $22 million and less favorable timing of working capital changes in the current year.

Net cash used in investing activities decreased for the three months ended July 1, 2022, when compared to the prior year quarter, primarily due to $375 million of net cash paid related to the acquisition of Gibbs & Cox from the prior year quarter.

Net cash used in investing activities decreased for the six months ended July 1, 2022, when compared to the prior year primarily due to $593 million of net cash paid related to our ~~$450 million senior unsecured notes~~business acquisitions in the prior year and $15 million of proceeds received from the sale of Aviation & Missile Solutions LLC in the current year.

Net cash provided by financing activities decreased for the three months ended July 1, 2022, when compared to the prior year quarter primarily due to a $380 million decrease in net cash inflows related to our short-term senior unsecured term loans, partially offset by ~~$137~~$75 million ~~of open market stock repurchases~~net proceeds received from our commercial paper program in the current ~~year~~ quarter.

Net cash used in financing activities increased ~~$1,397 million~~ for the ~~nine~~six months ended ~~October~~July 1, ~~2021,~~2022, when compared to the prior year. The change was primarily due to ~~a decrease~~an increase of ~~approximately $1,206~~$402 million ~~from the net change of proceeds received from the issuance of debt, principal payments and payments for debt issuance~~

~~costs and by $237 million of open market~~in stock repurchases primarily attributable to the Accelerated Share Repurchase agreement, a $380 million decrease in ~~the current year, partially offset by~~net cash inflows related to our short-term senior unsecured term loans and a $42 million decrease in net ~~$34 million~~

~~increase in~~ capital contributions received from our non-controlling ~~interest.~~interest, partially offset by $150 million in net proceeds received from our commercial paper program.

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 ~~10–~~12–Commitments and Contingencies" of the notes to the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q. These arrangements have not had, and management does not believe it is likely that they will in the future have, a material effect on our liquidity, capital expenditures or capital resources, operations or financial condition.

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LEIDOS HOLDINGS, INC.

Guarantor and 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 ~~October~~July 1, ~~2021~~2022, was as follows (in millions):

Balance Sheet


Total current assets	$	~~2,050~~2,021
Goodwill	~~4,142~~5,811
Investments in consolidated subsidiaries	~~4,912~~3,276
Other long-term assets	~~1,414~~1,283
Total assets	$	~~12,518~~12,391

Total current liabilities	$	~~2,496~~3,075
Long-term debt, net of current portion	~~4,614~~4,021
Intercompany payables	~~1,451~~1,621
Other long-term liabilities	~~899~~670
Total liabilities	~~9,460~~9,387
Total stockholders' equity	~~3,058~~3,004
Total liabilities and stockholders' equity	$	~~12,518~~12,391

The summarized statements of income for Leidos Holdings, Inc. and Leidos, Inc., net of eliminations, for the three and ~~nine~~six months ended ~~October~~July 1, ~~2021~~2022, were as follows (in millions):

Statements of Income
Three Months Ended Nine Months Ended
Revenues, net $ 2,369 $ 6,885
Operating income 171 517
Net income attributable to Leidos common stockholders 74 218


	Three Months Ended		Six Months Ended
Revenues, net	$	2,402	$	4,776
Operating income	138		306
Net income attributable to Leidos common stockholders	34		108

Contractual Obligations and Commitments

We are subject to a number of reviews, investigations, claims, lawsuits, other uncertainties and future obligations related to our business. For a discussion of these items, see "Note ~~10–~~12–Commitments and Contingencies" of the notes to the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q.

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 1, 2021 except for the elimination of the Income Taxes critical accounting policy.~~December 31, 2021.

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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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There were no material changes in our market risk exposure from those discussed in our Annual Report on Form 10-K for the year ended ~~January 1,~~December 31, 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 1, ~~2021.~~2022. 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 14, 2021,~~As of July 1, 2022, we completed the ~~acquisitions~~integration of Gibbs & Cox, ~~and 1901 Group, respectively ("the Acquired Businesses"). In conducting~~that we acquired on May 7, 2021, into our ~~evaluation of the effectiveness of our internal control~~controls over financial reporting, we excluded the Acquired Businesses from our evaluation for the third quarter of fiscal 2021. We are in the process of integrating the Acquired Businesses into our system of internal control 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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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 ~~10–~~12–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~~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 1,~~December 31, 2021.

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

The 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 vaccination and testing requirements, employee travel, access to customer sites, employee and contractor remote work and restrictions to physical participation in meetings, events and conferences. We may take further actions that we determine are in the best interests of our employees, customers and business partners or may be required by government authorities. For example, on September 9, 2021, President Biden issued a series of executive orders to combat COVID-19, which requires us, as a federal contractor, to have our employees fully vaccinated by December 8, 2021, unless the employee is legally entitled to a religious or medical exemption. Effective October 1, 2021, we mandated a policy requiring all employees, vendors, subcontractors and visitors to be vaccinated or maintain proof of a negative COVID-19 test in order to enter a Leidos facility in the U.S. or to attend company business events outside of our facilities. On December 8, 2021, in order to comply with the executive orders, we will no longer allow proof of a negative COVID-19 test and all U.S. employees will be required to be vaccinated unless legally entitled to a religious or medical exemption. There is no certainty that such measures will be sufficient to mitigate the risks posed by COVID-19. If significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, increased employee attrition, facility closures or other restrictions due to COVID-19, or do not comply with our vaccination mandate, our business and results of operations could be materially and adversely impacted.

Government agencies are our primary customers and the long-term impact of increased government spending in response to COVID-19 is uncertain. This could result in a re-evaluation of U.S. government spending levels and priorities, which could impact our business performance. The situation surrounding COVID-19 remains fluid and the likelihood of an impact on us that could be material increases the longer the virus impacts activity levels in the locations in which we operate. In particular, the emergence of new and more transmissible COVID-19 variants, including the efficacy of vaccines against such variants, booster vaccinations, or a lack of public acceptance of vaccines and low vaccination rates in certain parts of the U.S., may lead to delays in economic recovery. Further, even if vaccines are widely distributed and accepted, there can be no assurance that vaccines will ultimately be successful in limiting or stopping the spread of COVID-19.

Even after COVID-19 has subsided, we may experience materially adverse impacts on our business as a result of the pandemic's global economic impact, including any recession that is occurring or may occur in the future. For example, the global spread of COVID-19 has resulted in a substantial decline in demand for air travel, which has adversely impacted the demand for products and services related to our airport security detection and automation business. We are not able to predict whether COVID-19 will result in permanent changes to air travel behaviors, including a permanent reduction in business travel as a result of the increased use of teleconferencing products and, more broadly, a general reluctance to travel by consumers, each of which has, and could continue to, impact our business. Further, 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 program costs have increased 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, which could impact our profitability. The continued spread of COVID-19 has had and may continue to have similar negative impacts on our customers and third parties on which we rely, including subcontractors, service providers, suppliers and other business partners, 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

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~~LEIDOS HOLDINGS, INC.~~

~~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 herein.~~

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

(a)None

(b)None

(c)Purchases of Equity Securities by the Issuer

OnIn February ~~16, 2018,~~2022, our Board of Directors authorized a 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. This share repurchase authorization replaces the previous share repurchase authorization announced in February 2018.

Period Total Number of Shares
(or Units)
Purchased 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 3, 2021 - July 31, 2021 — $ — — 5,962,565
August 1, 2021 - August 31, 2021 586,046 97.19 586,046 5,376,519
September 1, 2021 - September 30, 2021 822,173 97.67 822,173 4,554,346
October 1, 2021 — — — 4,554,346
Total 1,408,219 $ 97.47 1,408,219


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 2, 2022 - April 30, 2022	—	$	—	—	15,491,434
May 1, 2022 - May 31, 2022	287,460	104.25		287,460	15,203,974
June 1, 2022 - June 30, 2022	600	101.69		—	15,203,974
July 1, 2022	—	—		—	15,203,974
Total	288,060	$	104.25	287,460

(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~~						Form of Commercial Paper Dealer Agreement, dated July 12, 2021, between Leidos, Inc., as issuer, the Company, as guarantor, and the applicable Dealer party thereto. Incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the U.S. Securities and Exchange Commission on July 12, 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 U.S. Securities and Exchange 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.

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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~~August 2, ~~2021~~2022


Leidos Holdings, Inc.

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

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	Weighted average amortization period	Fair value
	(in years)	(in millions)
Technology	8	$	43
Programs	10	37
Backlog	1	6
Total	8	$	86