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 ~~September 30, 2022~~March 31, 2023


☐			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~~April 25, ~~2022,~~2023, was ~~136,689,557~~137,167,264 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~~C ondensed C onsolidated Balance Sheets	1
	~~Condensed Consolidated~~C ondensed C onsolidated Statements of Income	2
	~~Condensed Consolidated~~C ondensed C onsolidated Statements of Comprehensive Income	3
	~~Condensed Consolidated~~C ondensed C onsolidated Statements of Equity	4
	~~Condensed Consolidated~~C ondensed C onsolidated Statements of Cash Flows	65
	Notes to Condensed Consolidated Financial Statements	76
	Note 1–Basis of Presentation and Summary of Significant Accounting Policies	76
	Note 2–Revenues ~~from Contracts with Customers~~	98
	Note 3–Acquisitions, Divestitures, Goodwill and Intangible Assets	1210
	Note 4–Fair Value Measurements	1413
	Note 5–Derivative Instruments	1514
	Note 6–Debt	1615
	Note 7–Accumulated Other Comprehensive Income (Loss)	1817
	Note 8–Earnings Per Share	17
	Note 9–Income Taxes	18
	Note 9 ~~–Income Taxes~~10–Business Segments	1918
	Note 1 0 ~~–Business Segments~~	19
	~~Note 1~~1 –11–Commitments and Contingencies	21
	~~Note 1~~2 ~~–Subsequent Events~~	2219
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2321
	Overview	2321
	Business Environment and Trends	2421
	Results of Operations	2422
	Bookings and Backlog	2724
	Liquidity and Capital Resources	2724
	Off-Balance Sheet Arrangements	2926
	Guarantor and Issuer of Guaranteed Securities	3027
	Contractual Obligations and Commitments	3028
	Critical Accounting Policies	3028
	Recently Adopted and Issued Accounting Standards	3128
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3129
Item 4.	Controls and Procedures	3129
Part II
Item 1.	Legal Proceedings	3230
Item 1A.	Risk Factors	3230
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3230
Item 3.	Defaults Upon Senior Securities	3230
Item 4.	Mine Safety Disclosures	3230
Item 5.	Other Information	3230
Item 6.	Exhibits	3331
Signatures		3432

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS ~~(UNAUDITED)~~(in millions, except par value)


		September 30, 2022		December 31, 2021			March 31, 2023		December 30, 2022
		(in millions)					(unaudited)
Assets:	Assets:					Assets:
Cash and cash equivalents	Cash and cash equivalents	$	807	$	727	Cash and cash equivalents	$	379	$	516
Receivables, net	Receivables, net	2,284		2,189		Receivables, net	2,518		2,350
Inventory, net	Inventory, net	286		274		Inventory, net	300		287
Other current assets	Other current assets	464		429		Other current assets	468		490
Total current assets	Total current assets	3,841		3,619		Total current assets	3,665		3,643
Property, plant and equipment, net	Property, plant and equipment, net	671		670		Property, plant and equipment, net	922		847
Intangible assets, net	Intangible assets, net	977		1,177		Intangible assets, net	902		952
Goodwill	Goodwill	6,618		6,744		Goodwill	6,703		6,696
Operating lease right-of-use assets, net	Operating lease right-of-use assets, net	593		612		Operating lease right-of-use assets, net	541		545
Other long-term assets	Other long-term assets	399		439		Other long-term assets	399		388
Total assets	Total assets	$	13,099	$	13,261	Total assets	$	13,132	$	13,071

Liabilities:	Liabilities:					Liabilities:
Accounts payable and accrued liabilities	Accounts payable and accrued liabilities	$	2,301	$	2,141	Accounts payable and accrued liabilities	$	2,110	$	2,254
Accrued payroll and employee benefits	Accrued payroll and employee benefits	813		605		Accrued payroll and employee benefits	712		701
Short-term debt and current portion of long-term debt	Short-term debt and current portion of long-term debt	1,027		483		Short-term debt and current portion of long-term debt	339		992
Total current liabilities	Total current liabilities	4,141		3,229		Total current liabilities	3,161		3,947
Long-term debt, net of current portion	Long-term debt, net of current portion	3,975		4,593		Long-term debt, net of current portion	4,675		3,928
Operating lease liabilities	Operating lease liabilities	591		589		Operating lease liabilities	562		570
Deferred tax liabilities	Deferred tax liabilities	24		239		Deferred tax liabilities	14		40
Other long-term liabilities	Other long-term liabilities	229		267		Other long-term liabilities	256		233
Total liabilities	Total liabilities	8,960		8,917		Total liabilities	8,668		8,718

Commitments and contingencies (Note 11)	Commitments and contingencies (Note 11)					Commitments and contingencies (Note 11)

Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Common stock, $0.0001 par value, 500 million shares authorized, 137 million and 140 million shares issued and outstanding at September 30, 2022, and December 31, 2021, respectively		—		—
Common stock, $0.0001 par value, 500 million shares authorized, 137 million and 137 million shares issued and outstanding at March 31, 2023, and December 30, 2022, respectively						Common stock, $0.0001 par value, 500 million shares authorized, 137 million and 137 million shares issued and outstanding at March 31, 2023, and December 30, 2022, respectively	—		—
Additional paid-in capital	Additional paid-in capital	1,982		2,423		Additional paid-in capital	1,994		2,005
Retained earnings	Retained earnings	2,239		1,880		Retained earnings	2,479		2,367
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(135)		(12)		Accumulated other comprehensive loss	(64)		(73)
Total Leidos stockholders’ equity	Total Leidos stockholders’ equity	4,086		4,291		Total Leidos stockholders’ equity	4,409		4,299
Non-controlling interest	Non-controlling interest	53		53		Non-controlling interest	55		54
Total stockholders' equity	Total stockholders' equity	4,139		4,344		Total stockholders' equity	4,464		4,353
Total liabilities and stockholders' equity	Total liabilities and stockholders' equity	$	13,099	$	13,261	Total liabilities and stockholders' equity	$	13,132	$	13,071

See accompanying notes to condensed consolidated financial statements.

Table of Contents

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME ~~(UNAUDITED)~~(in millions, except per share amounts)


		Three Months Ended				Nine Months Ended					Three Months Ended
		September 30, 2022		October 1, 2021		September 30, 2022		October 1, 2021			March 31, 2023		April 1, 2022
		(in millions, except per share amounts)									(unaudited)
Revenues	Revenues	$	3,608	$	3,483	$	10,699	$	10,246	Revenues	$	3,699	$	3,494
Cost of revenues	Cost of revenues	3,095		2,942		9,136		8,740		Cost of revenues	3,204		2,982
Selling, general and administrative expenses	Selling, general and administrative expenses	233		233		727		625		Selling, general and administrative expenses	233		236
Bad debt expense (recoveries)		(1)		(1)		3		(11)
Acquisition, integration and restructuring costs	Acquisition, integration and restructuring costs	4		6		12		21		Acquisition, integration and restructuring costs	3		3
Asset impairment charges		—		3		3		3
Equity earnings of non-consolidated subsidiaries		(4)		(5)		(5)		(14)

Equity (earnings) loss of non-consolidated subsidiaries										Equity (earnings) loss of non-consolidated subsidiaries	(6)		2
Operating income	Operating income	281		305		823		882		Operating income	265		271
Non-operating expense:	Non-operating expense:									Non-operating expense:
Interest expense, net	Interest expense, net	(50)		(47)		(148)		(138)		Interest expense, net	(54)		(48)
Other (expense) income, net		(10)		2		(7)		1
Other expense, net										Other expense, net	(4)		(1)
Income before income taxes	Income before income taxes	221		260		668		745		Income before income taxes	207		222
Income tax expense	Income tax expense	(57)		(52)		(155)		(162)		Income tax expense	(43)		(45)
Net income	Net income	$	164	$	208	$	513	$	583	Net income	$	164	$	177
Less: net income attributable to non-controlling interest	Less: net income attributable to non-controlling interest	2		3		5		4		Less: net income attributable to non-controlling interest	2		2
Net income attributable to Leidos common stockholders	Net income attributable to Leidos common stockholders	$	162	$	205	$	508	$	579	Net income attributable to Leidos common stockholders	$	162	$	175

Earnings per share:	Earnings per share:									Earnings per share:
Basic	Basic	$	1.18	$	1.45	$	3.71	$	4.11	Basic	$	1.18	$	1.26
Diluted	Diluted	1.17		1.43		3.68		4.05		Diluted	1.17		1.25

See accompanying notes to condensed consolidated financial statements.

Table of Contents

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ~~(UNAUDITED)~~(in millions)


		Three Months Ended				Nine Months Ended					Three Months Ended
		September 30, 2022		October 1, 2021		September 30, 2022		October 1, 2021					March 31, 2023		April 1, 2022
		(in millions)								(unaudited)
Net income	Net income	$	164	$	208	$	513	$	583			Net income	$	164	$	177
Foreign currency translation adjustments	Foreign currency translation adjustments	(75)		(29)		(158)		(12)				Foreign currency translation adjustments	15		2
Unrecognized gain on derivative instruments		18		4		54		18
Unrecognized (loss) gain on derivative instruments												Unrecognized (loss) gain on derivative instruments	(5)		29
Pension adjustments	Pension adjustments	1		—		(19)		—				Pension adjustments	(1)		1
Total other comprehensive (loss) income, net of taxes		(56)		(25)		(123)		6
Total other comprehensive income, net of taxes												Total other comprehensive income, net of taxes	9		32
Comprehensive income	Comprehensive income	108		183		390		589				Comprehensive income	173		209
Less: net income attributable to non-controlling interest	Less: net income attributable to non-controlling interest	2		3		5		4				Less: net income attributable to non-controlling interest	2		2
Comprehensive income attributable to Leidos common stockholders	Comprehensive income attributable to Leidos common stockholders	$	106	$	180	$	385	$	585			Comprehensive income attributable to Leidos common stockholders	$	171	$	207

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
income (loss) Leidos stockholders' equity Non-controlling interest Total stockholders' equity
(in millions, except for per share amounts)
Balance at December 31, 2021 140 $ 2,423 $ 1,880 $ (12) $ 4,291 $ 53 $ 4,344
Net income — — 175 — 175 2 177
Other comprehensive income, net of taxes — — — 32 32 — 32
Issuances of stock 1 15 — — 15 — 15
Repurchases of stock and other (4) (526) — — (526) — (526)
Dividends of $0.36 per share — — (48) — (48) — (48)
Stock-based compensation — 16 — — 16 — 16
Capital distributions to non-controlling interest — — — — — (2) (2)
Balance at April 1, 2022 137 $ 1,928 $ 2,007 $ 20 $ 3,955 $ 53 $ 4,008
Net income — — 171 — 171 1 172
Other comprehensive loss, net of taxes — — — (99) (99) — (99)
Issuances of stock — 10 — — 10 — 10
Repurchases of stock and other — (2) — — (2) — (2)
Dividends of $0.36 per share — — (50) — (50) — (50)
Stock-based compensation — 19 — — 19 — 19
Capital distributions to non-controlling interest — — — — — (1) (1)
Balance at July 1, 2022 137 $ 1,955 $ 2,128 $ (79) $ 4,004 $ 53 $ 4,057
Net income — — 162 — 162 2 164
Other comprehensive loss, net of taxes — — — (56) (56) — (56)
Issuances of stock — 13 — — 13 — 13
Repurchases of stock and other — (4) — — (4) — (4)
Dividends of $0.36 per share — — (51) — (51) — (51)
Stock-based compensation — 18 — — 18 — 18
Capital distributions to non-controlling interest — — — — — (2) (2)
Balance at September 30, 2022 137 $ 1,982 $ 2,239 $ (135) $ 4,086 $ 53 $ 4,139
(unaudited; in millions, except for per share amounts)


	Shares of common stock	Additional paid-in capital		Retained earnings		Accumulated other comprehensive income (loss)		Leidos stockholders' equity		Non-controlling interest		Total stockholders' equity
Balance at December 30, 2022	137	$	2,005	$	2,367	$	(73)	$	4,299	$	54	$	4,353
Net income	—	—		162		—		162		2		164
Other comprehensive income, net of taxes	—	—		—		9		9		—		9
Issuances of stock	—	14		—		—		14		—		14
Repurchases of stock and other	—	(43)		—		—		(43)		—		(43)
Dividends of $0.36 per share	—	—		(50)		—		(50)		—		(50)
Stock-based compensation	—	18		—		—		18		—		18
Net capital distributions to non-controlling interest	—	—		—		—		—		(1)		(1)
Balance at March 31, 2023	137	$	1,994	$	2,479	$	(64)	$	4,409	$	55	$	4,464


	Shares of common stock	Additional paid-in capital		Retained earnings		Accumulated other comprehensive income (loss)		Leidos stockholders' equity		Non-controlling interest		Total stockholders' equity
Balance at December 31, 2021	140	$	2,423	$	1,880	$	(12)	$	4,291	$	53	$	4,344
Net income	—	—		175		—		175		2		177
Other comprehensive income, net of taxes	—	—		—		32		32		—		32
Issuances of stock	1	15		—		—		15		—		15
Repurchases of stock and other	(4)	(526)		—		—		(526)		—		(526)
Dividends of $0.36 per share	—	—		(48)		—		(48)		—		(48)
Stock-based compensation	—	16		—		—		16		—		16
Net capital distributions to non-controlling interest	—	—		—		—		—		(2)		(2)
Balance at April 1, 2022	137	$	1,928	$	2,007	$	20	$	3,955	$	53	$	4,008

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
income (loss) Leidos stockholders' equity Non-controlling interest Total stockholders' equity
(in millions, except for per share amounts)
Balance at January 1, 2021 142 $ 2,580 $ 1,328 $ (46) $ 3,862 $ 9 $ 3,871
Net income — — 205 — 205 — 205
Other comprehensive income, net of taxes — — — 9 9 — 9
Issuances of stock — 14 — — 14 — 14
Repurchases of stock and other (1) (123) — — (123) — (123)
Dividends of $0.34 per share — — (49) — (49) — (49)
Stock-based compensation — 15 — — 15 — 15
Capital contributions from non-controlling interest — — — — — 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
Capital contributions from non-controlling interest — — — — — 1 1
Balance at July 2, 2021 142 $ 2,509 $ 1,605 $ (15) $ 4,099 $ 49 $ 4,148
Net income — — 205 — 205 3 208
Other comprehensive loss, net of taxes — — — (25) (25) — (25)
Issuances of stock — 11 — — 11 — 11
Repurchases of stock and other (2) (140) — — (140) — (140)
Dividends of $0.36 per share — — (52) — (52) — (52)
Stock-based compensation — 17 — — 17 — 17
Net capital distributions to non-controlling interest — — — — — (1) (1)
Balance at October 1, 2021 140 $ 2,397 $ 1,758 $ (40) $ 4,115 $ 51 $ 4,166

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

Table of Contents

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ~~(UNAUDITED)~~(in millions)


		Nine Months Ended					Three Months Ended
		September 30, 2022		October 1, 2021			March 31, 2023		April 1, 2022
		(in millions)					(unaudited)
Cash flows from operations:	Cash flows from operations:					Cash flows from operations:
Net income	Net income	$	513	$	583	Net income	$	164	$	177
Adjustments to reconcile net income to net cash provided by operations:
Adjustments to reconcile net income to net cash (used in) provided by operations:						Adjustments to reconcile net income to net cash (used in) provided by operations:
Depreciation and amortization	Depreciation and amortization	249		244		Depreciation and amortization	82		85
Stock-based compensation	Stock-based compensation	53		49		Stock-based compensation	18		16
Asset impairment charges		3		3

Deferred income taxes	Deferred income taxes	(221)		4		Deferred income taxes	(43)		(61)
Other	Other	21		(11)		Other	5		4
Change in assets and liabilities, net of effects of acquisitions:
Change in assets and liabilities, net of effects of acquisitions and dispositions:						Change in assets and liabilities, net of effects of acquisitions and dispositions:
Receivables	Receivables	(138)		(103)		Receivables	(166)		(232)
Other current assets and other long-term assets	Other current assets and other long-term assets	132		161		Other current assets and other long-term assets	(9)		(28)
Accounts payable and accrued liabilities and other long-term liabilities	Accounts payable and accrued liabilities and other long-term liabilities	(57)		(172)		Accounts payable and accrued liabilities and other long-term liabilities	(97)		(60)
Accrued payroll and employee benefits	Accrued payroll and employee benefits	217		83		Accrued payroll and employee benefits	13		124
Income taxes receivable/payable	Income taxes receivable/payable	109		(20)		Income taxes receivable/payable	(65)		68
Net cash provided by operating activities		881		821
Net cash (used in) provided by operating activities						Net cash (used in) provided by operating activities	(98)		93
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Acquisition of businesses, net of cash acquired		(2)		(622)
Acquisition of a business, net of cash acquired						Acquisition of a business, net of cash acquired	—		(2)
Divestiture of a business	Divestiture of a business	15		—		Divestiture of a business	—		9
Payments for property, equipment and software	Payments for property, equipment and software	(76)		(71)		Payments for property, equipment and software	(39)		(28)
Net proceeds from sale of assets		6		—
Other		2		—

Net cash used in investing activities	Net cash used in investing activities	(55)		(693)		Net cash used in investing activities	(39)		(21)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Proceeds from debt issuance	Proceeds from debt issuance	380		380		Proceeds from debt issuance	1,743		75

Repayments of borrowings	Repayments of borrowings	(459)		(80)		Repayments of borrowings	(1,711)		(27)
Payments for debt issuance costs						Payments for debt issuance costs	(7)		—
Dividend payments	Dividend payments	(149)		(149)		Dividend payments	(50)		(51)
Repurchases of stock and other	Repurchases of stock and other	(532)		(266)		Repurchases of stock and other	(43)		(526)
Net capital (distributions to) contributions from non-controlling interests		(5)		38
Proceeds from issuances of stock	Proceeds from issuances of stock	35		33		Proceeds from issuances of stock	12		12
Net capital distributions to non-controlling interests						Net capital distributions to non-controlling interests	(1)		(2)
Net cash used in financing activities	Net cash used in financing activities	(730)		(44)		Net cash used in financing activities	(57)		(519)
Net increase in cash, cash equivalents and restricted cash		96		84
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash						Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash	2		—
Net decrease in cash, cash equivalents and restricted cash						Net decrease in cash, cash equivalents and restricted cash	(192)		(447)
Cash, cash equivalents and restricted cash at beginning of period	Cash, cash equivalents and restricted cash at beginning of period	875		687		Cash, cash equivalents and restricted cash at beginning of period	683		875
Cash, cash equivalents and restricted cash at end of period	Cash, cash equivalents and restricted cash at end of period	971		771		Cash, cash equivalents and restricted cash at end of period	491		428
Less: restricted cash at end of period	Less: restricted cash at end of period	164		184		Less: restricted cash at end of period	112		131
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	807	$	587	Cash and cash equivalents at end of period	$	379	$	297

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	$	166	$	179	Cash paid for income taxes, net of refunds	$	135	$	8
Cash paid for interest	Cash paid for interest	136		128		Cash paid for interest	45		38
Non-cash investing activity:	Non-cash investing activity:					Non-cash investing activity:
Property, plant and equipment additions	Property, plant and equipment additions	$	7	$	1	Property, plant and equipment additions	$	1	$	2
Non-cash financing activity:	Non-cash financing activity:					Non-cash financing activity:
Finance lease obligations	Finance lease obligations	$	1	$	50	Finance lease obligations	$	65	$	—

See accompanying notes to condensed consolidated financial statements.

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Nature of Operations and Basis of Presentation

Leidos Holdings, Inc. ("Leidos"), a Delaware corporation, is a holding company whose direct 100%-owned subsidiary and principal operating company is Leidos, Inc. Leidos is a FORTUNE 500® technology, engineering, and 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, foreign government agencies and commercial businesses. Unless indicated otherwise, references to "we," "us" and "our" refer collectively to Leidos Holdings, Inc. and its consolidated subsidiaries. We operate in three 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~~have certain entities where the functional currency is not the U.S. dollar and have separately presented the effect of exchange rate changes on cash, cash equivalents and restricted cash held in foreign currencies as a separate line in the condensed consolidated statements of cash flows. Prior year financial information has been reclassified to ~~non-controlling interests" and "Capital contributions from non-controlling interests" into "Net capital (distributions to) contributions from non-controlling interests" on~~conform to our current presentation. For fiscal 2022, the effect of foreign exchange rate changes was not material to 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 ~~15, 2022.~~14, 2023.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Accounting Standards Updates ~~("ASU") Adopted~~

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

In October 2021, the FASB issued ASU 2021-08, which amends how contract assets and liabilities acquired in a business combination are measured. Current guidance requires contract assets and liabilities to be measured at fair value in accordance with ASC 805, Business Combinations. The amendments in this update remove the requirement to measure contract assets and liabilities at fair value and instead require that they be recognized in 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, 2022, including interim periods within those fiscal years, and must be applied prospectively. Early adoption is permitted.

We adopted the requirements of ASU 2021-08 using the prospective method effective the first day of fiscal 2022. For business combinations occurring after adoption, we will measure contract assets and liabilities acquired in accordance with ASC 606.

~~Accounting Standards Updates~~ Issued But Not Yet Adopted

ASU 2020-04, ASU 2021-01 and ASU ~~2021-01,~~2022-06, Reference Rate Reform (Topic 848)

In March 2020, the ~~FASB~~Financial Accounting Standards Board ("FASB") issued ~~ASU~~Accounting Standards Update ("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 from LIBOR through December 31, 2022. In ~~October~~December 2022, the FASB ~~affirmed a decision to defer~~issued ASU 2022-06 which extends the ~~expiration date~~deadline for application of ~~this optional relief until~~ASU 2021-01 through December 31, 2024. ~~We anticipate an ASU formalizing this decision to be approved and issued during the last quarter of fiscal 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. WeAs of March 31, 2023, our term loans are ~~currently evaluating the impacts of the reference~~based on a Secured Overnight Financing Rate (“SOFR”) rate ~~reform. Except for our new $380 million term loan entered into on May 6, 2022~~ (see "Note 6–Debt"),. The interest rate swap agreements, which currently reference LIBOR, are expected to be modified to reference SOFR in fiscal 2023. In accordance with ASC 848, we ~~currently use~~have elected the ~~one-month~~practical expedient to continue to apply hedge accounting without dedesignating the LIBOR ~~for which~~denominated interest rate swap and the ~~rate publication will cease in June 2023.~~practical expedient to qualitatively assess the effectiveness of the hedge during the transition period. We do not expect the standard to have a material impact on our consolidated financial statements once fully adopted.

Changes in Estimates on Contracts

Changes in estimates related to contracts accounted for using the cost-to-cost method of accounting are recognized in the period in which such changes are made for the inception-to-date effect of the changes, with the exception of contracts acquired through a business combination, where the adjustment is made for the period commencing from the date of acquisition.

Changes in estimates on contracts were as follows:


		Three Months Ended				Nine Months Ended					Three Months Ended
		September 30, 2022		October 1, 2021		September 30, 2022		October 1, 2021					March 31, 2023		April 1, 2022
		(in millions, except per share amounts)								(in millions, except per share amounts)
Favorable impact	Favorable impact	$	36	$	47	$	116	$	115			Favorable impact	$	22	$	41
Unfavorable impact	Unfavorable impact	(29)		(24)		(75)		(72)				Unfavorable impact	(16)		(26)
Net impact to income before income taxes	Net impact to income before income taxes	$	7	$	23	$	41	$	43			Net impact to income before income taxes	$	6	$	15

Impact on diluted EPS attributable to Leidos common stockholders	Impact on diluted EPS attributable to Leidos common stockholders	$	0.03	$	0.12	$	0.22	$	0.22			Impact on diluted EPS attributable to Leidos common stockholders	$	0.03	$	0.08

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 $6$5 million and ~~$38~~$14 million for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023, and April 1, 2022, ~~respectively, and $17 million and $35 million for the three and nine months ended October 1, 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 ~~September~~March 31, 2023, and December 30, 2022, ~~and December 31, 2021, $178~~$157 million and ~~$138~~$158 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.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 ~~$164~~$112 million and ~~$148~~$167 million at ~~September~~March 31, 2023, and December 30, 2022, ~~and 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. 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 ~~September 30, 2022,~~March 31, 2023, we had ~~$14.3~~$14.5 billion of RPO and expect to recognize approximately ~~60%~~59% and ~~77%~~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.

Disaggregated revenues by customer-type were as follows:


		Three Months Ended September 30, 2022								Nine Months Ended September 30, 2022									Three Months Ended March 31, 2023
		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	$	1,559	$	22	$	255	$	1,836	$	4,620	$	62	$	732	$	5,414			DoD and U.S. Intelligence Community	$	1,543	$	21	$	260	$	1,824
Other U.S. government agencies(1)	Other U.S. government agencies(1)	236		676		372		1,284		686		1,949		1,177		3,812				Other U.S. government agencies(1)	258		679		428		1,365
Commercial and non-U.S. customers	Commercial and non-U.S. customers	280		151		28		459		869		446		83		1,398				Commercial and non-U.S. customers	310		158		22		490
Total	Total	$	2,075	$	849	$	655	$	3,579	$	6,175	$	2,457	$	1,992	$	10,624			Total	$	2,111	$	858	$	710	$	3,679


	Three Months Ended April 1, 2022
	Defense Solutions		Civil		Health		Total
	(in millions)
DoD and U.S. Intelligence Community	$	1,539	$	20	$	238	$	1,797
Other U.S. government agencies(1)	222		613		385		1,220
Commercial and non-U.S. customers	287		147		27		461
Total	$	2,048	$	780	$	650	$	3,478

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

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Three Months Ended October 1, 2021 Nine Months Ended October 1, 2021
Defense Solutions Civil Health Total Defense Solutions Civil Health Total
(in millions)
DoD and U.S. Intelligence Community $ 1,513 $ 19 $ 203 $ 1,735 $ 4,386 $ 45 $ 545 $ 4,976
Other U.S. government agencies(1)
215 619 450 1,284 724 1,849 1,292 3,865
Commercial and non-U.S. customers 281 121 28 430 859 377 80 1,316
Total $ 2,009 $ 759 $ 681 $ 3,449 $ 5,969 $ 2,271 $ 1,917 $ 10,157

~~(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 September 30, 2022								Nine Months Ended September 30, 2022									Three Months Ended March 31, 2023
		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	$	1,166	$	442	$	200	$	1,808	$	3,493	$	1,293	$	534	$	5,320	Cost-reimbursement and fixed-price-incentive-fee	$	1,164	$	471	$	209	$	1,844
Firm-fixed-price	Firm-fixed-price	668		279		389		1,336		1,950		792		1,260		4,002		Firm-fixed-price	676		251		406		1,333
Time-and-materials and fixed-price-level-of-effort	Time-and-materials and fixed-price-level-of-effort	241		128		66		435		732		372		198		1,302		Time-and-materials and fixed-price-level-of-effort	271		136		95		502
Total	Total	$	2,075	$	849	$	655	$	3,579	$	6,175	$	2,457	$	1,992	$	10,624	Total	$	2,111	$	858	$	710	$	3,679


		Three Months Ended October 1, 2021								Nine Months Ended October 1, 2021									Three Months Ended April 1, 2022
		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	$	1,183	$	408	$	167	$	1,758
Firm-fixed-price	Firm-fixed-price	540		245		443		1,228		1,619		755		1,254		3,628		Firm-fixed-price	618		255		417		1,290
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	247		117		66		430
Total	Total	$	2,009	$	759	$	681	$	3,449	$	5,969	$	2,271	$	1,917	$	10,157	Total	$	2,048	$	780	$	650	$	3,478

Disaggregated revenues by geographic location were as follows:


		Three Months Ended September 30, 2022								Nine Months Ended September 30, 2022									Three Months Ended March 31, 2023
		Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total			Defense Solutions		Civil		Health		Total
		(in millions)																	(in millions)
United States	United States	$	1,830	$	810	$	655	$	3,295	$	5,429	$	2,340	$	1,992	$	9,761	United States	$	1,833	$	823	$	710	$	3,366
International	International	245		39		—		284		746		117		—		863		International	278		35		—		313
Total	Total	$	2,075	$	849	$	655	$	3,579	$	6,175	$	2,457	$	1,992	$	10,624	Total	$	2,111	$	858	$	710	$	3,679

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~~LEIDOS HOLDINGS, INC.~~

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


		Three Months Ended October 1, 2021								Nine Months Ended October 1, 2021									Three Months Ended April 1, 2022
		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	$	1,810	$	741	$	650	$	3,201
International	International	231		33		—		264		732		113		—		845		International	238		39		—		277
Total	Total	$	2,009	$	759	$	681	$	3,449	$	5,969	$	2,271	$	1,917	$	10,157	Total	$	2,048	$	780	$	650	$	3,478

Revenues by customer-type, contract-type and geographic location exclude lease income of ~~$29~~$20 million and ~~$75~~$16 million for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and April 1, 2022, ~~respectively, and $34 million and $89 million for the three and nine months ended October 1, 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 September 30,
2022 December 31,
2021
(in millions)
Contract assets - current:
Unbilled receivables Receivables, net $ 1,028 $ 1,022
Contract liabilities - current:
Deferred revenue (1)
Accounts payable and accrued liabilities $ 450 $ 364
Contract liabilities - non-current:
Deferred revenue (1)
Other long-term liabilities $ 26 $ 24

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

~~The increase in deferred revenue was primarily due to the timing of advanced payments from customers offset by revenue recognized during the period.~~

Revenue recognized for the three and nine months ended September 30, 2022, of $17 million and $257 million, respectively, was included as a contract liability at December 31, 2021. Revenue recognized for the three and nine months ended October 1, 2021, of $31 million and $253 million, respectively, was included as a contract liability at January 1, 2021.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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


	Balance sheet line item	March 31, 2023		December 30, 2022
		(in millions)
Contract assets - current:
Unbilled receivables	Receivables, net	$	997	$	1,010

Contract liabilities - current:
Deferred revenue (1)	Accounts payable and accrued liabilities	$	352	$	380

Contract liabilities - non-current:
Deferred revenue (1)	Other long-term liabilities	$	28	$	29

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

Revenue recognized for the three months ended March 31, 2023, of $155 million was included as a contract liability at December 30, 2022. Revenue recognized for the three months ended April 1, 2022, of $188 million was included as a contract liability at December 31, 2021.

Note 3–Acquisitions, Divestitures, Goodwill and Intangible Assets

Business ~~Acquisitions~~Acquisition

On ~~July 29,~~October 30, 2022 (the "Agreement Date"), we ~~entered into a definitive agreement to acquire Cobham Aviation Services Australia’s Special Mission business ("~~completed the acquisition of Cobham Special ~~Mission")~~Mission for a preliminary purchase consideration of ~~$310~~$296 million Australian dollars, net of $10 million of Australian dollars acquired, approximately $190 million United States dollars, net of $6 million of cash acquired, which is subject to working capital adjustments. Cobham Special Mission provides airborne border surveillance and search and rescue services to the Australian Federal Government.

~~On September 21, 2021, we completed an immaterial strategic business acquisition~~The preliminary goodwill recognized of $24 million represents intellectual capital and the acquired assembled workforce, neither of which qualify for ~~purchase consideration~~recognition as a separate intangible asset. None of ~~approximately $36 million.~~ the goodwill recognized is tax deductible.

In connection with this acquisition, we acquired preliminary fair value of property, plant and equipment of $148 million at the ~~transaction,~~Agreement Date. The following table summarizes the preliminary fair value of intangible assets acquired at the Agreement Date and the related weighted average amortization period:


	Weighted average amortization period	Fair value
	(in years)	(in millions)
Programs	11	$	19
Technology	10	5
Total	11	$	24

As of March 31, 2023, we had not finalized the determination of fair values allocated to assets and liabilities, including, but not limited to, property, plant and equipment, intangible assets, accounts receivables, accounts payable and accrued liabilities and other long-term liabilities.

For the three months ended March 31, 2023, $30 million of revenues related to the Cobham Special Mission acquisition were 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~~the Defense Solutions ~~segment to dispose~~reportable segment.

Table 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 the divestiture was completed on April 29, 2022.Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Goodwill

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


		Defense Solutions		Civil		Health		Total			Defense Solutions		Civil		Health		Total
		(in millions)									(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	Goodwill at December 31, 2021	$	3,681	$	2,097	$	966	$	6,744	Goodwill at December 31, 2021	$	3,681	$	2,097	$	966	$	6,744
Acquisition of businesses										Acquisition of businesses	26		—		—		26
Divestiture of a business	Divestiture of a business	(6)		—		—		(6)		Divestiture of a business	(6)		—		—		(6)
Foreign currency translation adjustments	Foreign currency translation adjustments	(62)		(58)		—		(120)		Foreign currency translation adjustments	(37)		(31)		—		(68)
Goodwill at September 30, 2022		$	3,613	$	2,039	$	966	$	6,618
Goodwill at December 30, 2022										Goodwill at December 30, 2022	$	3,664	$	2,066	$	966	$	6,696
Acquisition of a business(1)										Acquisition of a business(1)	(2)		—		—		(2)
Foreign currency translation adjustments										Foreign currency translation adjustments	—		9		—		9
Goodwill at March 31, 2023										Goodwill at March 31, 2023	$	3,662	$	2,075	$	966	$	6,703

(1) Adjustment to goodwill resulting from a measurement period purchase accounting adjustment.

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,~~30, 2022, the ~~estimated~~quantitative analysis for the Security Enterprise Solutions reporting unit showed that the fair value exceeded the carrying value by approximately 13% as of the most recent assessment date. Operations of the reporting unit rely heavily on the sales and servicing of security and detection products, which have been negatively impacted by COVID-19. The forecasts utilized to estimate the fair value of the Security Enterprise Solutions reporting unit ~~within~~assume continued global operations in all of our existing markets and a gradual improvement in the ~~Civil reportable segment exceeded the carrying value~~global aviation security product and related service sales, reaching pre-COVID-19 levels by ~~approximately 6% as of the most recent assessment date.~~fiscal 2025. 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 ~~nine~~three months ended ~~September 30, 2022. There~~March 31, 2023. During the three months ended March 31, 2023 and April 1, 2022, there were no impairments to ~~goodwill during the nine months ended September 30, 2022, and October 1, 2021.~~goodwill.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Intangible Assets

Intangible assets, net consisted of the following:


		September 30, 2022						December 31, 2021							March 31, 2023						December 30, 2022
		Gross carrying value		Accumulated amortization		Net carrying value		Gross carrying value		Accumulated amortization		Net carrying value			Gross carrying value		Accumulated amortization		Net carrying value		Gross carrying value		Accumulated amortization		Net carrying value
		(in millions)													(in millions)
Finite-lived intangible assets:	Finite-lived intangible assets:													Finite-lived intangible assets:
Programs	Programs	$	1,697	$	(967)	$	730	$	1,722	$	(830)	$	892	Programs	$	1,715	$	(1,054)	$	661	$	1,721	$	(1,016)	$	705
Software and technology	Software and technology	218		(130)		88		230		(121)		109		Software and technology	226		(141)		85		225		(136)		89
Customer relationships	Customer relationships	84		(21)		63		97		(18)		79		Customer relationships	89		(29)		60		87		(25)		62
Backlog		—		—		—		38		(37)		1
Trade names	Trade names	1		(1)		—		1		(1)		—		Trade names	1		(1)		—		1		(1)		—
Total finite-lived intangible assets	Total finite-lived intangible assets	2,000		(1,119)		881		2,088		(1,007)		1,081		Total finite-lived intangible assets	2,031		(1,225)		806		2,034		(1,178)		856
Indefinite-lived intangible assets:	Indefinite-lived intangible assets:													Indefinite-lived intangible assets:
In-process research and development ("IPR&D") (1)	In-process research and development ("IPR&D") (1)	92		—		92		92		—		92		In-process research and development ("IPR&D") (1)	92		—		92		92		—		92
Trade names	Trade names	4		—		4		4		—		4		Trade names	4		—		4		4		—		4
Total indefinite-lived intangible assets	Total indefinite-lived intangible assets	96		—		96		96		—		96		Total indefinite-lived intangible assets	96		—		96		96		—		96
Total intangible assets	Total intangible assets	$	2,096	$	(1,119)	$	977	$	2,184	$	(1,007)	$	1,177	Total intangible assets	$	2,127	$	(1,225)	$	902	$	2,130	$	(1,178)	$	952

(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.

Amortization expense was ~~$57~~$52 million and ~~$173~~$59 million for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and April 1, 2022, ~~respectively, and $63 million and $173 million for the three and nine months ended October 1, 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 ~~September 30, 2022,~~March 31, 2023, was as follows:


Fiscal year ending	Fiscal year ending			Fiscal year ending
		(in millions)			(in millions)
2022 (remainder of year)		$	56
2023		199
2023 (remainder of year)				2023 (remainder of year)	$	155
2024	2024	147		2024	152
2025	2025	119		2025	124
2026	2026	94		2026	99
2027 and thereafter		266
2027				2027	72
2028 and thereafter				2028 and thereafter	204
		$	881		$	806

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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:


		September 30, 2022				December 31, 2021					March 31, 2023				December 30, 2022
		Carrying value		Fair value		Carrying value		Fair value			Carrying value		Fair value		Carrying value		Fair value
		(in millions)									(in millions)
Financial assets:	Financial assets:									Financial assets:
Derivatives	Derivatives	$	20	$	20	$	—	$	—	Derivatives	$	14	$	14	$	20	$	20
Financial liabilities:
Derivatives		$	16	$	16	$	53	$	53

As of ~~September 30, 2022,~~March 31, 2023, our derivatives primarily consisted of the cash flow interest rate swaps on $1.0 billion of the variable rate senior unsecured term loan ~~and a foreign currency forward contract~~ (see "Note 5–Derivative Instruments"). The fair value of the cash flow interest rate swaps ~~and the foreign currency forward contract~~ is determined based on observed values for underlying interest rates on the LIBOR yield curve ~~the underlying interest rate and the underlying foreign exchange rates~~ (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.

As of ~~September~~March 31, 2023, and December 30, 2022, ~~and December 31, 2021,~~ the fair value of debt was ~~$4.6~~$4.8 billion and ~~$5.4~~$4.6 billion, respectively, and the carrying amount was $5.0 billion and ~~$5.1~~$4.9 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,~~October 30, 2022, non-financial instruments measured at fair value on a non-recurring basis were recorded in connection with the completed acquisitions of ~~Gibbs & Cox and 1901 Group, LLC.~~Cobham Special Mission. The fair values of the assets acquired and liabilities assumed were determined using Level 3 inputs. As of ~~September 30, 2022,~~March 31, 2023, we did not ~~have~~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:


	~~Balance sheet line item~~	September 30, 2022		December 31, 2021
		~~(in millions)~~
~~Asset derivatives:~~
~~Cash flow interest rate swaps~~	~~Other long-term assets~~	$	20	$	—
~~Liability derivatives:~~
~~Cash flow interest rate swaps~~	~~Other long-term liabilities~~	$	—	$	53
~~Foreign currency forward contracts~~	~~Accounts payable and accrued liabilities~~	16		—

During the three months ended September 30, 2022, we entered into a foreign currency forward contract to offset foreign currency fluctuations of the $310 million Australian dollar preliminary purchase price for the Cobham Special Mission acquisition against the U.S. dollar. As of September 30, 2022, we recorded a $16 million unrealized loss due to the exchange rate movements between the Australian dollar compared to the U.S. dollar. The loss was recorded within Corporate and presented in "Other (expense) income, net" on the condensed consolidated statements of income.

Asset derivatives

Balance sheet line item

March 31,
2023

December 30,
2022

(in millions)

Cash flow interest rate swaps

Other long-term assets

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 $1.0 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.~~Loan. 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
	March 31, 2023		April 1, 2022
	(in millions)
Total interest expense, net presented in the condensed consolidated statements of income in which the effects of cash flow hedges are recorded	$	54	$	48

Amount recognized in other comprehensive income (loss)	$	(2)	$	32
Amount reclassified from accumulated other comprehensive income (loss) to interest expense, net	$	(4)	$	6

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

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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	March 31, 2023		December 30, 2022
			(in millions)
Short-term debt and current portion of long-term debt:
Senior unsecured term loans:
$380 million term loan, due May 2023	5.91%	5.99%	$	320	$	320
Current portion of long-term debt			19		672
Total short-term debt and current portion of long-term debt			$	339	$	992

Long-term debt:
Senior unsecured term loans:
$1,925 million term loan, due January 2025	5.77%	6.09%	$	—	$	1,211
$1,000 million term loan, due March 2028	6.13%	6.30%	1,000		—
Senior unsecured notes:
$500 million notes, due May 2023	2.95%	3.17%	—		500
$500 million notes, due May 2025	3.63%	3.76%	500		500
$750 million notes due May 2030	4.38%	4.50%	750		750
$750 million notes due March 2033	5.75%	5.81%	750		—
$1,000 million notes, due February 2031	2.30%	2.38%	1,000		1,000
$250 million notes, due July 2032	7.13%	7.43%	250		250
$300 million notes, due July 2033	5.50%	5.88%	161		161
$300 million notes, due December 2040	5.95%	6.03%	218		218
Notes payable and finance leases due on various dates through fiscal 2032	Various	1.84%-6.31%	107		44
Less: unamortized debt discounts and deferred debt issuance costs			(42)		(34)
Total long-term debt			4,694		4,600
Less current portion			(19)		(672)
Total long-term debt, net of current portion			$	4,675	$	3,928

Term Loans and Revolving Credit Facility

On March 10, 2023 (the “Closing Date”), we entered into 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 $1.0 billion (the “Term Loan Facility”) and a $1.0 billion senior unsecured revolving facility (the “Revolving Facility” and, together with the Term Loan Facility, the “Credit Facilities”). The Credit Facilities will mature in March 2028. The Revolving Facility permits two additional one-year extensions subject to lender consent. As of March 31, 2023, there were no borrowings outstanding under the Revolving Facility.

The proceeds of the Term Loan Facility and cash on hand on the Closing Date were used to repay in full all indebtedness, terminate all commitments and discharge all guarantees existing in connection with the credit agreement related to the $1.9 billion senior unsecured term loan facility and $750 million senior unsecured revolving facility.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~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
September 30,
2022 October 1,
2021 September 30,
2022 October 1,
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 $ 47 $ 148 $ 138
Amount recognized in other comprehensive income (loss) $ 21 $ — $ 57 $ 9
Amount reclassified from accumulated other comprehensive income (loss) to interest expense, net $ 2 $ 5 $ 13 $ 14

~~We expect to reclassify net income of $13 million from accumulated other comprehensive loss into earnings during the next 12 months.~~

~~Note 6–Debt~~

~~Our debt consisted of the following:~~
Stated interest rate Effective interest rate
September 30,
2022(1)
December 31,
2021(1)
(in millions)
Short-term debt:
Senior unsecured term loans:
$380 million term loan, due May 2022 1.54% 1.64% $ — $ 380
$380 million term loan, due May 2023 4.13% 4.22% 380 —
Total short-term debt $ 380 $ 380
Long-term debt:
Senior unsecured term loans:
$1,925 million term loan, due January 2025 4.50% 4.81% $ 1,228 $ 1,298
Senior unsecured notes:
$500 million notes, due May 2023 2.95% 3.17% 499 498
$500 million notes, due May 2025 3.63% 3.76% 498 497
$750 million notes due May 2030 4.38% 4.50% 739 738
$1,000 million notes, due February 2031 2.30% 2.38% 991 990
$250 million notes, due July 2032 7.13% 7.43% 247 247
$300 million notes, due July 2033 5.50% 5.88% 159 158
$300 million notes, due December 2040 5.95% 6.03% 216 216
Notes payable and finance leases due on various dates through fiscal 2032

1.84%-4.30% Various 45 54
Total long-term debt 4,622 4,696
Less current portion (647) (103)
Total long-term debt, net of current portion

$ 3,975 $ 4,593

~~(1)~~ The carrying amounts of the senior unsecured term loans and notes as of September 30, 2022, and December 31, 2021, include the remaining principal outstanding of $4,994 million and $5,065 million, respectively, less total unamortized debt discounts and deferred debt issuances costs of $37 million and $43 million, respectively.

~~Table of Contents~~

~~LEIDOS HOLDINGS, INC.~~

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

~~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 two additional one-year extensions subject to lender consent. As of September 30, 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~~Term SOFR rate with a 0.10% per annum Term SOFR adjustment, plus, in each case, an applicable margin that varies depending on our credit rating. The applicable margin range for ~~LIBOR-denominated~~Term SOFR-denominated borrowings is from ~~1.13%~~1.00% to ~~1.75%~~1.50%. Based on our current ratings, the applicable margin for ~~LIBOR-denominated~~Term SOFR-denominated borrowings is ~~1.38%~~1.25%. Principal payments are made quarterly on the Term Loan Facility beginning in March 2025, with the majority of the principal due at maturity. Interest on the Term Loan Facility for Term SOFR-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 two increases to 4.50 to 1.00 for four fiscal quarters following a material acquisition, and a ratio of EBITDA to consolidated interest expense of not less than 3.50 to 1.00.

On May 6, 2022, we entered into a 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. The proceeds of the Term Loan Agreement were used to repay the $380 million senior unsecured term loan entered into on May 7, 2021.

Borrowings under the Term Loan Agreement bear interest at a rate based on ~~the Secured Overnight Financing Rate~~SOFR plus 1.10%, or an alternate base rate at our option.

The financial covenants in the 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.

Senior Notes

On February 28, 2023, we issued and sold $750 million aggregate principal amount of fixed-rate senior notes (the “Notes”) maturing in March 2033. The Notes are senior unsecured obligations issued by Leidos, Inc. and guaranteed by Leidos Holdings, Inc. The annual interest rate for the Notes is 5.75% and is payable on a semi-annual basis. In connection with the issuance of the Notes, $11 million of debt issuance costs and discount were recognized, which were recorded as an offset against the carrying value of debt. The proceeds from the Notes were used to repay all of the outstanding obligations in respect of principal, interest and fees on the $500 million 2.95% notes, due May 2023, the majority of which were retired on February 28, 2023. The remaining proceeds from the Notes were used to repay $210 million of the outstanding balance on the $1.9 billion senior unsecured term loan facility, due January 2025, and fund general corporate purposes.

Commercial Paper

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 are issued in minimum denominations of $0.25 million and have maturities of up to 397 days from the date of issuance. The Commercial Paper Notes either bear a stated or floating interest rate, if interest bearing, or will be sold at a discount from the face amount. As of ~~September 30, 2022,~~March 31, 2023, we had no Commercial Paper Notes outstanding.

~~Principal Payments and Debt Issuance Costs~~

We made principal payments on our long-term debt of $25 million and $459 million during the three and nine months ended September 30, 2022, respectively, and $27 million and $80 million during the three and nine months ended October 1, 2021, respectively. This activity included required principal payments on our term loans of $24 million and $452 million for the three and nine months ended September 30, 2022, and $24 million and $72 million for the three and nine months ended October 1, 2021, respectively. As of September 30, 2022, and December 31, 2021, there were no borrowings outstanding under the Revolving Facility.

Amortization of debt discount and debt issuance costs was $3 million and $8 million for the three and nine months ended September 30, 2022, respectively, and $3 million and $7 million for the three and nine months ended October 1, 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 ~~September~~March 31, 2023.

Finance Leases

In fiscal 2022, the Company entered into a Master Lease Agreement whereby we agreed to lease two aircraft from the time each aircraft is accepted through June 30, ~~2022.~~2027. In March 2023, we took possession of both aircraft at which time we recognized a $64 million finance lease obligation and a corresponding property, plant and equipment asset.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Principal Payments

Future minimum payments of debt are as follows:


Fiscal year ending
	(in millions)
2023 (remainder of year)	$	335
2024	19
2025	619
2026	120
2027	114
2028 and thereafter	3,849
Total principal payments	5,056
Less: unamortized debt discounts and deferred debt issuance costs	(42)
Total short-term and long-term debt	$	5,014

Note 7–Accumulated Other Comprehensive Income (Loss)

Changes in the components of Accumulated Other Comprehensive Income (Loss) ("AOCI") were as follows:


		Foreign currency translation adjustments		Unrecognized gain (loss) on derivative instruments		Pension adjustments		Total AOCI			Foreign currency translation adjustments		Unrecognized gain (loss) on derivative instruments		Pension adjustments		Total AOCI
		(in millions)									(in millions)
Balance at January 1, 2021		$	30	$	(70)	$	(6)	$	(46)
Other comprehensive income (loss)		(3)		18		17		32
Taxes		(5)		(8)		(4)		(17)
Reclassification from AOCI		—		19		—		19
Balance at December 31, 2021	Balance at December 31, 2021	22		(41)		7		(12)		Balance at December 31, 2021	$	22	$	(41)	$	7	$	(12)
Other comprehensive income (loss)	Other comprehensive income (loss)	(184)		57		(25)		(152)		Other comprehensive income (loss)	(108)		59		(27)		(76)
Taxes	Taxes	26		(16)		6		16		Taxes	13		(16)		7		4
Reclassification from AOCI	Reclassification from AOCI	—		13		—		13		Reclassification from AOCI	—		11		—		11
Balance at September 30, 2022		$	(136)	$	13	$	(12)	$	(135)
Balance at December 30, 2022										Balance at December 30, 2022	(73)		13		(13)		(73)
Other comprehensive income (loss)										Other comprehensive income (loss)	16		(2)		(1)		13
Taxes										Taxes	(1)		1		—		—
Reclassification from AOCI										Reclassification from AOCI	—		(4)		—		(4)
Balance at March 31, 2023										Balance at March 31, 2023	$	(58)	$	8	$	(14)	$	(64)

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

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 September 30, 2022, the unamortized loss within AOCI related to the Plan was $19 million and the Plan had net assets of $6 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
		September 30, 2022	October 1, 2021	September 30, 2022	October 1, 2021				March 31, 2023	April 1, 2022
		(in millions)				(in millions)
Basic weighted average number of shares outstanding	Basic weighted average number of shares outstanding	137	141	137	141			Basic weighted average number of shares outstanding	137	139
Dilutive common share equivalents—stock options and other stock awards	Dilutive common share equivalents—stock options and other stock awards	1	2	1	2			Dilutive common share equivalents—stock options and other stock awards	1	1
Diluted weighted average number of shares outstanding	Diluted weighted average number of shares outstanding	138	143	138	143			Diluted weighted average number of shares outstanding	138	140

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 of the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, and ~~October~~April 1, ~~2021.~~2022.

During the three months ended March 31, 2023, we made open market repurchases of our common stock for an aggregate purchase price of $25 million. All shares repurchased were immediately retired.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 quarter ended April 1, 2022, we paid $500 million to the financial institution and received an initial delivery of 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 additional delivery of 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 delivered an additional 0.2 million shares.

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

Note 9–Income Taxes

For the three months ended ~~September 30, 2022,~~March 31, 2023, the effective tax rate was ~~25.8%~~20.8% compared to ~~20.0%~~20.3% for the three months ended ~~October~~April 1, ~~2021.~~2022. The increase to the effective tax rate was primarily due to a ~~benefit from foreign operations recognized~~decrease in ~~the prior year and an increase~~excess tax benefits related to ~~state income taxes and an increase~~employee stock-based payment transactions, partially offset by a decrease in unrecognized tax benefits ~~in the current quarter.~~

~~For the nine months ended September 30, 2022, the effective tax rate was 23.2% compared~~and taxes related to ~~21.7% for the nine months ended October 1, 2021. The increase in the effective tax rate was primarily due to a benefit from~~ foreign ~~operations recognized in the prior year and an increase in unrecognized tax benefits in the current year.~~operations.

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 onBased upon our interpretation of the law as currently enacted, ~~our initial assessment is~~we estimate that the fiscal 2023 impact will result in increases of $112 million to both our income taxes payable and net deferred tax ~~assets will each~~assets.

We also estimate an increase ~~by approximately $150~~to our unrecognized tax benefits of $75 million ~~in fiscal 2022.~~with a corresponding increase to net deferred tax assets. 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 ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, unrecognized tax benefits increased ~~$95~~$16 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.~~capitalizing research and development costs.

Note 10–Business Segments

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

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.

~~Table of Contents~~

~~LEIDOS HOLDINGS, INC.~~

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

The segment information for the periods presented was as follows:


		Three Months Ended				Nine Months Ended					Three Months Ended
		September 30, 2022		October 1, 2021		September 30, 2022		October 1, 2021			March 31, 2023		April 1, 2022
		(in millions)									(in millions)
Revenues:	Revenues:									Revenues:
Defense Solutions	Defense Solutions	$	2,075	$	2,009	$	6,176	$	5,971	Defense Solutions	$	2,112	$	2,049
Civil	Civil	874		792		2,526		2,357		Civil	877		795
Health	Health	659		682		1,997		1,918		Health	710		650
Total revenues	Total revenues	$	3,608	$	3,483	$	10,699	$	10,246	Total revenues	$	3,699	$	3,494

Operating income (loss):	Operating income (loss):									Operating income (loss):
Defense Solutions	Defense Solutions	$	137��	$	140	$	409	$	429	Defense Solutions	$	147	$	133
Civil	Civil	79		58		160		187		Civil	40		43
Health	Health	91		130		335		339		Health	107		118
Corporate	Corporate	(26)		(23)		(81)		(73)		Corporate	(29)		(23)
Total operating income	Total operating income	$	281	$	305	$	823	$	882	Total operating income	$	265	$	271

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

2018

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 11–Commitments and Contingencies

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 two 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 two 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 ("USPTO") 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. On March 30, 2023, the U.S. Court of Appeals for the Federal Circuit issued a ruling affirming prior decisions of the USPTO’s Patent Trial and Appeal Board finding certain claims of the patents at issue in the Apple II case to be unpatentable. On March 31, 2023, the Federal Circuit issued a decision vacating the District Court’s judgment in the Apple II case and remanding it back to the District Court with instructions to dismiss the case as moot. These Federal Circuit decisions remain subject to potential motions and/or appeals by VirnetX, including potentially seeking rehearing or certiorari review.

Thus, no assurances can be given when or if we will receive any proceeds in connection with ~~these jury awards.~~the Apple II case. 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.

Defense Contract Audit Agency

As of ~~September 30, 2022,~~March 31, 2023, active indirect cost audits by the Defense Contract Audit Agency remain open for fiscal ~~2020~~2021 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 ~~September 30, 2022,~~March 31, 2023, we believe we have adequately reserved for potential adjustments from audits or reviews of contract costs.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Other Government Investigations and Reviews

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 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. In September 2022, the Company received a Federal Grand Jury Subpoena related to the criminal investigation by the U.S. Attorney’s Office for the Southern District of California, in conjunction with the U.S. Department of Justice’s Fraud Division. The subpoena requests documents relating to the conduct that is the subject of the Company’s internal investigation. The Company ishas responded to the subpoena. In February 2023, a former employee of the Company who was terminated at the outset of the investigation was indicted on wire fraud and other charges by a Federal Grand Jury in the ~~process~~U.S. District Court in the Southern District of ~~responding to the subpoena.~~California.

In August 2022, the Company received a Federal Grand Jury Subpoena in connection with a criminal investigation being conducted by the U.S. Department of Justice Antitrust ~~Division (“DOJ”).~~Division. The subpoena requests that the Company produce a broad range of documents related to three U.S. Government procurements associated with the Company’s Intelligence Group in 2021 and 2022. We intend to fully cooperate with the investigation, and we are conducting our own internal investigation with the assistance of outside counsel. It is not possible at this time to determine whether we will incur, or to reasonably estimate the amount of, any fines, penalties, or further liabilities in connection with the investigation pursuant to which the subpoena was issued.

Commitments

As of ~~September 30, 2022,~~March 31, 2023, we have outstanding letters of credit of ~~$44~~$65 million, principally related to performance guarantees on contracts and outstanding surety bonds with a notional amount of ~~$100~~$101 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 ~~September 30, 2022,~~March 31, 2023, the future expirations of the outstanding letters of credit and surety bonds ~~and future lease commitments~~ were as follows:
Fiscal year ending
(in millions)
2022 (remainder of year) $ 22
2023 26
2024 103
2025 22
2026 19
2027 and thereafter 26
$ 218

~~Note 12–Subsequent Events~~

On October 30, 2022, we completed the previously announced acquisition of Cobham Special Mission, for a preliminary purchase price of $305 million Australian dollars, approximately $196 million United States dollars, which is subject to working capital adjustments. Additionally, we realized a loss of $18 million resulting from the settlement of the foreign currency forward contract intended to offset currency fluctuations related to the preliminary purchase price.


Fiscal year ending
	(in millions)
2023 (remainder of year)	$	41
2024	7
2025	100
2026	2
2027	12
2028 and thereafter	4
	$	166

2220

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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. 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® technology, engineering, and 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, foreign government 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 months ended September 30, 2022, the COVID-19 pandemic did not have a material impact to revenues and operating income, other than the receipt of $28 million in recoveries for the nine months ended September 30, 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.

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 have our employees fully vaccinated 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 prepared to comply with the 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~~ months ended ~~September 30,~~March 31, 2023 and April 1, 2022, we generated approximately 87% 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.

President Biden released the annual President’s budget request for GFY 2024 on March 9, 2023. The President’s $6.9 trillion budget request includes $886.4 billion in defense spending and $809.1 billion in non-defense spending. The appropriations subcommittees in both chambers of Congress ~~continues to work~~began holding budget hearings on the 12President’s Budget Request after its release. In addition to working on the GFY 2024 appropriations bills, the Congress is also working towards an agreement to ~~fund~~raise or suspend the federal government in GFY 2023. The GFY 2023 began on October 1, 2022; however, the federal government is currently operating under a continuing resolution (“CR”). The CR funds the federal government at GFY 2022 levels until December 16, 2022, after that Congress will need to pass the full-year appropriation bills or an additional CR prior to December 16, 2022, in orderdebt limit to prevent ~~a federal government shutdown.~~the U.S. from defaulting on its debt.

International Markets

Sales to customers in international markets represented approximately 8% of total revenues for both of the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023, and April 1, 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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Results of Operations

The following table summarizes our condensed consolidated results of operations for the periods presented:
Three Months Ended Nine Months Ended
September 30,
2022 October 1,
2021 Dollar change Percent change September 30,
2022 October 1,
2021 Dollar change Percent change
(dollars in millions)
Revenues $ 3,608 $ 3,483 $ 125 3.6 % $ 10,699 $ 10,246 $ 453 4.4 %
Operating income 281 305 (24) (7.9) % 823 882 (59) (6.7) %
Non-operating expense, net (60) (45) (15) 33.3 % (155) (137) (18) 13.1 %
Income before income taxes 221 260 (39) (15.0) % 668 745 (77) (10.3) %
Income tax expense (57) (52) (5) 9.6 % (155) (162) 7 (4.3) %
Net income $ 164 $ 208 $ (44) (21.2) % $ 513 $ 583 $ (70) (12.0) %
Net income attributable to Leidos common stockholders $ 162 $ 205 $ (43) (21.0) % $ 508 $ 579 $ (71) (12.3) %
Operating margin 7.8 % 8.8 % 7.7 % 8.6 %

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~~LEIDOS HOLDINGS, INC.~~


	Three Months Ended
	March 31, 2023			April 1, 2022			Dollar change		Percent change
	(dollars in millions)
Revenues	$	3,699		$	3,494		$	205	5.9	%

Operating income	265			271			(6)		(2.2)	%
Non-operating expense, net	(58)			(49)			(9)		18.4	%
Income before income taxes	207			222			(15)		(6.8)	%
Income tax expense	(43)			(45)			2		(4.4)	%
Net income	$	164		$	177		$	(13)	(7.3)	%
Net income attributable to Leidos common stockholders	$	162		$	175		$	(13)	(7.4)	%
Operating margin	7.2		%	7.8		%

Segment and Corporate Results


		Three Months Ended										Nine Months Ended											Three Months Ended
Defense Solutions	Defense Solutions	September 30, 2022			October 1, 2021			Dollar change		Percent change		September 30, 2022			October 1, 2021			Dollar change		Percent change				Defense Solutions	March 31, 2023			April 1, 2022			Dollar change		Percent change
		(dollars in millions)																				(dollars in millions)
Revenues	Revenues	$	2,075		$	2,009		$	66	3.3	%	$	6,176		$	5,971		$	205	3.4	%			Revenues	$	2,112		$	2,049		$	63	3.1	%
Operating income	Operating income	137			140			(3)		(2.1)	%	409			429			(20)		(4.7)	%			Operating income	147			133			14		10.5	%
Operating margin	Operating margin	6.6		%	7.0		%					6.6		%	7.2		%							Operating margin	7.0		%	6.5		%

The increase in revenues for the three months ended ~~September 30, 2022,~~March 31, 2023, as compared to the three months ended ~~October~~April 1, 2021, was primarily attributable to program wins and a net increase in volumes on certain programs. The increase was partially offset by the completion of certain contracts, $28 million related to unfavorable exchange rate movements and net write-downs on certain contracts.

~~The increase in revenues for the nine months ended September 30,~~ 2022, ~~as compared to the nine months ended October 1, 2021,~~ was primarily attributable to program wins, a net increase in volumes on certain programs and a ~~$42~~$30 million ~~net~~ increase in ~~revenue~~revenues related to our ~~acquisitions~~Cobham Special Mission acquisition made in the ~~second and third quarters~~last quarter of ~~the prior year.~~fiscal 2022. The increase was partially offset by the completion of certain contracts ~~$63~~and $22 million related to unfavorable exchange rate ~~movements and contracts that were reassigned from Defense Solutions reportable segment~~movements.

The increase in operating income for the three months ended March 31, 2023, as compared to the ~~Civil reportable segment during~~three months ended April 1, 2022, was primarily attributable to program wins and operating income related to our Cobham Special Mission acquisition made in the ~~third~~last quarter of fiscal ~~2021.~~2022. The increase was partially offset by the completion of certain contracts.


	Three Months Ended
Civil	March 31, 2023			April 1, 2022			Dollar change		Percent change
	(dollars in millions)
Revenues	$	877		$	795		$	82	10.3	%
Operating income	40			43			(3)		(7.0)	%
Operating margin	4.6		%	5.4		%

The increase in revenues for the three months ended March 31, 2023, as compared to the three months ended April 1, 2022, was primarily attributable to program wins and a net increase in program volumes.

The decrease in operating income for the three months ended ~~September 30, 2022,~~March 31, 2023, as compared to the three months ended ~~October~~April 1, ~~2021,~~2022, was primarily ~~attributable to net write-downs, the completion of certain~~driven by reduced volume on higher margin contracts, temporary supply chain disruptions and ~~additional general~~investment in research and ~~administrative expenses. The decrease was partially offset by program wins and a net increase~~development in ~~volumes on certain programs.~~

The decrease in operating income for the nine months ended September 30, 2022, as compared to the nine months ended October 1, 2021, was primarily attributable to the completion of certain contracts, net write-downs, additional general and administrative expenses and increased amortization. The decrease was partially offset by program wins and a net increase in volumes on certain programs.

Three Months Ended Nine Months Ended
Civil September 30,
2022 October 1,
2021 Dollar change Percent change September 30,
2022 October 1,
2021 Dollar change Percent change
(dollars in millions)
Revenues $ 874 $ 792 $ 82 10.4 % $ 2,526 $ 2,357 $ 169 7.2 %
Operating income 79 58 21 36.2 % 160 187 (27) (14.4) %
Operating margin 9.0 % 7.3 % 6.3 % 7.9 %

The increase in revenues for the three months ended September 30, 2022, as compared to the three months ended October 1, 2021, was primarily attributable to a net increase in program volumes, partially offset by net write-downs on certain contracts and unfavorable exchange rate movements.

The increase in revenues for the nine months ended September 30, 2022, as compared to the nine months ended October 1, 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 unfavorable exchange rate movements and the completion of certain contracts.

The increase in operating income for the three months ended September 30, 2022, as compared to the three months ended October 1, 2021, was primarily due to a net increase in program volumes mainly within our ~~Security Enterprise Solutions reporting unit, partially offset by net write-downs on certain contracts.~~

The decrease in operating income for the nine months ended September 30, 2022, as compared to the nine months ended October 1, 2021, was primarily due to a $19 million increase in legal fees and settlement costs resulting from an adverse arbitration ruling related to the 2016 acquisition of the Information Systems & Global Solutions business (“IS&GS Business”) from Lockheed Martin, partially offset by a net increase in program volumes. Operating income for the nine months ended October 1, 2021, included a $26 million benefit from a legal reserve adjustment related to the Mission Support Alliance joint venture.security products business.

2522

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		Three Months Ended										Nine Months Ended											Three Months Ended
Health	Health	September 30, 2022			October 1, 2021			Dollar change		Percent change		September 30, 2022			October 1, 2021			Dollar change		Percent change				Health	March 31, 2023			April 1, 2022			Dollar change		Percent change
		(dollars in millions)																				(dollars in millions)
Revenues	Revenues	$	659		$	682		$	(23)	(3.4)	%	$	1,997		$	1,918		$	79	4.1	%			Revenues	$	710		$	650		$	60	9.2	%
Operating income	Operating income	91			130			(39)		(30.0)	%	335			339			(4)		(1.2)	%			Operating income	107			118			(11)		(9.3)	%
Operating margin	Operating margin	13.8		%	19.1		%					16.8		%	17.7		%							Operating margin	15.1		%	18.2		%

The ~~decrease~~increase in revenues for the three months ended ~~September 30, 2022,~~March 31, 2023, as compared to the three months ended ~~October~~April 1, ~~2021,~~2022, was primarily attributable to ~~the completion of certain contracts, partially offset by~~program wins, a net increase in ~~program volumes.~~

~~The increase in revenues for the nine months ended September 30, 2022, as compared to the nine months ended October 1, 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 decrease in operating income for the three months ended ~~September 30, 2022,~~March 31, 2023, as compared to the three months ended ~~October~~April 1, ~~2021,~~2022, was primarily attributable to ~~net decrease in~~increased labor resulting from the ~~volume of disability exams as the Company worked through a backlog of cases caused by COVID-19 during the three months ended October 1, 2021, and the completion of certain contracts.~~

~~The decrease in operating income for the nine months ended September 30, 2022, as compared to the nine months ended October 1, 2021, was primarily due to a net decrease in volumes~~ramp-up on ~~higher margin~~new programs and ~~the completion of~~ certain ~~contracts.~~disability examinations. The decrease was ~~partially offset by $28 million in recoveries related~~also attributable to ~~stop work orders~~non-recurring net profit write-ups on certain programs ~~as a result~~during the first quarter of ~~COVID-19 and an increase in net write-ups on certain programs.~~fiscal 2022, partially offset with program wins.


		Three Months Ended								Nine Months Ended									Three Months Ended
Corporate	Corporate	September 30, 2022		October 1, 2021		Dollar change		Percent change		September 30, 2022		October 1, 2021		Dollar change		Percent change				Corporate	March 31, 2023		April 1, 2022		Dollar change		Percent change
		(dollars in millions)																(dollars in millions)
Operating loss	Operating loss	$	(26)	$	(23)	$	(3)	13.0	%	$	(81)	$	(73)	$	(8)	11.0	%			Operating loss	$	(29)	$	(23)	$	(6)	26.1	%

The increase in operating loss for the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, as compared to the three ~~and nine~~ months ended ~~October~~April 1, ~~2021,~~2022, was primarily attributable to ~~an increase~~increased administrative costs and transaction fees in ~~legal costs, partially offset by lower acquisition~~connection with the issuance of the senior unsecured notes and ~~integration costs.~~Credit Agreement entered into during the first quarter of fiscal 2023, see "Note 6–Debt"for further information.

Non-Operating Expense, net

Non-operating expense, net for the three months ended ~~September 30, 2022,~~March 31, 2023, was ~~$60~~$58 million as compared to ~~$45~~$49 million for the three months ended ~~October~~April 1, ~~2021.~~2022. The increase was primarily due to ahigher net ~~unrealized loss in our foreign currency forward contract related to the Cobham Special Mission acquisition as a result of~~interest expense driven by increased interest rates and refinancing activities, and unfavorable exchange rate ~~movements and higher interest expenses driven by changes in interest rates.~~

Non-operating expense, net for the nine months ended September 30, 2022, was $155 million as compared to $137 million for the nine months ended October 1, 2021. The increase was primarily due to a net unrealized loss in our foreign currency forward contract related to the Cobham Special Mission acquisition as a result of unfavorable exchange rate movements and higher interest expenses driven by changes in interest rates.movements.

Provision for Income Taxes

For the three months ended ~~September 30, 2022,~~March 31, 2023, our effective tax rate was ~~25.8%~~20.8% compared to ~~20.0%~~20.3% for the three months ended ~~October~~April 1, ~~2021.~~2022. The increase to the effective tax rate was primarily due to a ~~benefit from foreign operations recognized~~decrease in ~~the prior year and an increase~~excess tax benefits related to ~~state income taxes and an increase~~employee stock-based payment transactions, partially offset by a decrease in unrecognized tax benefits ~~in the current quarter.~~

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operations.

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 ~~(“TCJA”~~("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 onBased upon our interpretation of the law as currently enacted, ~~our initial assessment is~~we estimate that the fiscal 2023 impact will result in increases of $112 million to both our income taxes payable and net deferred tax ~~assets will each~~assets. We also estimate an increase ~~by approximately $150~~to our unrecognized tax benefits of $75 million ~~in fiscal 2022, and the related impact~~with a corresponding increase to ~~cash from operations will be realized in fiscal 2023.~~net deferred tax assets. The actual impact ~~on cash from 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.

~~For the nine months ended September 30, 2022, unrecognized tax benefits increased $95 million with a corresponding increase to net deferred tax assets as a result~~

Table of ~~uncertain tax positions arising from certain provisions of the TCJA becoming effective.~~Contents

LEIDOS HOLDINGS, INC.

Bookings and Backlog

We recorded net bookings worth an estimated ~~$4.1 billion and $11.6~~$3.0 billion during the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, as compared to ~~$4.7 billion and $12.3~~$5.4 billion for the three ~~and nine~~ months ended ~~October~~April 1, ~~2021.~~2022.

The estimated value of our total backlog was as follows:


		September 30, 2022						October 1, 2021							March 31, 2023						April 1, 2022
Segment	Segment	Funded		Unfunded		Total		Funded		Unfunded		Total		Segment	Funded		Unfunded		Total		Funded		Unfunded		Total
		(in millions)													(in millions)
Defense Solutions	Defense Solutions	$	4,178	$	13,842	$	18,020	$	4,412	$	15,160	$	19,572	Defense Solutions	$	4,811	$	13,936	$	18,747	$	3,919	$	15,068	$	18,987
Civil	Civil	2,037		8,652		10,689		1,713		7,702		9,415		Civil	1,944		8,330		10,274		1,812		9,516		11,328
Health	Health	1,214		5,105		6,319		1,164		4,541		5,705		Health	1,548		4,517		6,065		1,360		4,670		6,030
Total	Total	$	7,429	$	27,599	$	35,028	$	7,289	$	27,403	$	34,692	Total	$	8,303	$	26,783	$	35,086	$	7,091	$	29,254	$	36,345

~~The increase in~~Total backlog as of ~~September 30, 2022,~~March 31, 2023, as compared to ~~October~~April 1, ~~2021,~~2022, includes ~~$43~~$610 million of backlog acquired through a business ~~combinations~~combination 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 ~~September 30, 2022,~~March 31, 2023, included a ~~negative~~positive impact of ~~$363~~$30 million when compared to total backlog at ~~October~~April 1, ~~2021,~~2022, primarily due to the exchange rate movements in the British pound and Australian dollar when compared to the U.S. dollar. Backlog estimates are subject to change and may be affected by factors including modifications of contracts and foreign currency movements.

Liquidity and Capital Resources

Overview

As of ~~September 30, 2022,~~March 31, 2023, we had ~~$807~~$379 million in cash and cash equivalents. ~~Additionally,~~In March 2023, we ~~have an~~entered into a senior unsecured revolving credit facility which can provide up to ~~$750 million~~$1 billion in additional borrowing, if required. This new credit facility replaced the previous senior unsecured revolving credit facility. As of ~~September 30, 2022,~~March 31, 2023, there were no borrowings outstanding under the revolving credit facility.

We had outstanding debt of $5.0 billion and ~~$5.1~~$4.9 billion at ~~September~~March 31, 2023, and December 30, 2022, ~~and December 31, 2021,~~ respectively. ~~On May 6, 2022,~~In February 2023, we entered into $750 million 5.75% fixed-rate senior notes. The annual interest rate is payable on a semi-annual basis. In March 2023, we entered into a ~~Term Loan~~Credit Agreement with certain financial institutions, which provided for a senior unsecured term loan facility in an aggregate principal amount of ~~$380 million.~~$1.0 billion (the “Term Loan Facility”). The proceeds of the Term Loan Facility and cash on hand were used to repay in full all indebtedness, terminate all commitments and discharge all existing guarantees related to the $1.9 billion senior unsecured term loan facility and $750 million senior unsecured revolving facility, due January 2025.

As of March 31, 2023, borrowings under our Credit Agreement were based on a Term Secured Overnight Financing Rate (“SOFR”) with a 0.10% Term SOFR adjustment and an applicable margin range from 1.00% to 1.50%. Borrowings under our terminated $1.9 billion senior unsecured term loan facility had an applicable London Interbank Offered Rate (“LIBOR”)-denominated margin range from 1.13% to 1.75%. At March 31, 2023, the applicable margin for SOFR-denominated borrowings was 1.25% based on our recent upgrade by Moody's credit rating, as compared to our LIBOR-denominated borrowings which had a 1.38% applicable margin at December 30, 2022.

We 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. As of ~~September 30, 2022,~~March 31, 2023, we did not have any commercial paper notes outstanding.

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LEIDOS HOLDINGS, INC.

We made principal payments on our ~~long-term~~ debt of ~~$25~~$1,711 million and ~~$459~~$27 million during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023, and April 1, 2022, ~~respectively,~~respectively. Current quarter's activities include a $1,210 million payment to discharge the existing Term Loan Facility and ~~$27~~a $498 million ~~and $80~~payment to discharge the $500 million ~~during the three and nine months ended October 1, 2021, respectively. This activity included~~2.95% notes, due May 2023, as compared to $24 million required principal payments on our ~~term loans of $24 million and $452 million during~~Term Loan Facility in the ~~three and nine months ended September 30, 2022, respectively, and $24 million and $72 million during the three and nine months ended October 1, 2021, respectively.~~prior year quarter. Our credit facilities, term loan agreement, commercial paper notes, senior unsecured term loans and notes outstanding as of ~~September 30, 2022,~~March 31, 2023, contain financial covenants and customary restrictive covenants. We were in compliance with all covenants as of ~~September 30, 2022.~~March 31, 2023.

~~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~~In December 2022, the FASB issued guidance which provides relief for entities with such LIBOR denominated credit instruments so that entities may continue to ~~facilitate the adoption by us and our lenders of an alternative benchmark rate~~account 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 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 disruptedcontract modifications as a ~~result~~continuation of the ~~replacement~~existing contract and the continuation of the hedge accounting arrangement through December 31, 2024. The interest rate swap agreements, which currently reference LIBOR, ~~or in the anticipation thereof, which could have an adverse impact on our ability~~are expected to ~~refinance, reprice, or amend our existing indebtedness or incur additional indebtedness on favorable terms.~~

be modified to reference SOFR during fiscal 2023. We paid dividends of ~~$49~~$50 million and ~~$149 million during the three and nine months ended September 30, 2022, respectively, and~~ $51 million ~~and $149 million during the three and nine months ended October 1, 2021, respectively.~~

During the nine months ended September 30, 2022, and October 1, 2021, we sold $209 million and $693 million, respectively, of accounts receivable under accounts receivable purchase agreements and received proceeds of $209 million and $693 million, respectively. We did not sell any accounts receivable during the three months ended ~~September 30,~~March 31, 2023, and April 1, 2022, ~~and October 1, 2021.~~respectively.

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.

During the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, we made open market repurchases of our common stock for an aggregate purchase price of $25 million.

Beginning in 2022, a ~~$25~~provision in the TCJA which eliminated the option to currently deduct research and development costs for tax purposes and requires taxpayers to capitalize and amortize the costs over five years became effective. We anticipate our tax cash payments to increase by $300 million ~~payment~~ in ~~connection with~~2023, primarily to cover both the ~~adverse arbitration ruling~~2022 and 2023 tax obligations related to this provision. The actual impact will depend on the ~~2016 acquisition~~amount of research and development costs the ~~IS&GS Business from Lockheed Martin, which occurred during the second quarter of fiscal 2022.~~

~~The uncertainty surrounding the TCJA~~Company incurs, whether Congress modifies or repeals this provision and whether new guidance and interpretive rules are issued by 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 tax legislation and pandemic evolve.U.S. Treasury, among other factors.

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

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LEIDOS HOLDINGS, INC.

Summary of Cash Flows

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


		Three Months Ended				Nine Months Ended					Three Months Ended
		September 30, 2022		October 1, 2021		September 30, 2022		October 1, 2021			March 31, 2023		April 1, 2022
		(in millions)									(in millions)
Net cash provided by operating activities		$	748	$	565	$	881	$	821
Net cash (used in) provided by operating activities										Net cash (used in) provided by operating activities	$	(98)	$	93
Net cash used in investing activities	Net cash used in investing activities	(26)		(53)		(55)		(693)		Net cash used in investing activities	(39)		(21)
Net cash used in financing activities	Net cash used in financing activities	(217)		(209)		(730)		(44)		Net cash used in financing activities	(57)		(519)
Net increase in cash, cash equivalents and restricted cash		$	505	$	303	$	96	$	84

Net cash ~~provided by~~used in operating activities increased ~~$183 million and $60~~$191 million during the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, respectively, when compared to the prior ~~year.~~year quarter. The changes were primarily due to ~~favorable working capital changes, partially offset with timing~~higher tax payments of ~~vendor payments,~~$127 million mainly in connection to the TCJA provision and a ~~$25~~$62 million payment ~~in connection with the adverse arbitration ruling~~for payroll taxes related to the ~~2016 acquisition of the IS&GS Business from Lockheed Martin and $23 million of payments for other legal and tax settlements.~~CARES Act.

Net cash used in investing activities ~~decreased $27~~increased $18 million for the three months ended ~~September 30, 2022,~~March 31, 2023, when compared to the prior year quarter, primarily due to ~~net cash paid used to acquire an immaterial strategic business~~higher capital expenditures in the ~~prior~~current year ~~quarter.~~

Net cash used in investing activities decreased $638 million for the nine months ended September 30, 2022, when compared to the prior year primarily due to $622 million of net cash paid related to our business acquisitions in the prior year and ~~$15 million of~~ proceeds received from the sale of Aviation & Missile Solutions LLC in the ~~current year.~~prior year quarter.

Net cash used in financing activities ~~increased $8~~decreased $462 million for the three months ended ~~September 30, 2022,~~March 31, 2023, when compared to the prior year quarter primarily due to a ~~$150 million repayment on our commercial paper program in the current quarter, partially offset by $136 million~~ net decrease of ~~open market stock repurchases.~~

~~Net cash~~$483 million used in financing activities increased $686 million for the nine months ended September 30, 2022, when compared to the prior year. The change was primarily due to a $380 million decrease in net cash inflows related to our short-term senior unsecured term loans, an increase of $266 million in stock repurchases primarily attributable to the ~~Accelerated Share Repurchase agreement and~~accelerated share repurchase activities from prior year quarter, partially offset by a ~~$43~~net decrease of $23 million ~~decrease~~ in ~~net capital contributions~~cash inflows from proceeds received from ~~our non-controlling interest.~~the issuance of debt, payments for borrowings and payments for debt issuance costs.

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

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LEIDOS HOLDINGS, INC.

Guarantor and Issuer of Guaranteed Securities

Leidos Holdings, Inc. (“Guarantor”) has fully and unconditionally guaranteed the debt securities of its subsidiary, Leidos, Inc. (“Issuer”), that were issued pursuant to transactions that were registered under the Securities Act of 1933, as amended (collectively, the “Registered Notes”). The following is a list of the Registered Notes guaranteed by Leidos Holdings, Inc.


Senior unsecured Registered Notes:
$500 million 3.625% notes, due May 2025
$750 million 4.375% notes, due May 2030
$1,000 million 2.300% notes, due February 2031
$750 million 5.750% notes, due May 2033

Leidos Holdings, Inc. has also fully and unconditionally guaranteed debt securities of Leidos, Inc. that were issued pursuant to transactions that were not registered under the Securities Act of 1933, as amended. The following is a list of unregistered debt securities guaranteed by Leidos Holdings, Inc.


Senior unsecured unregistered debt securities issued by Leidos, Inc.:
$250 million 7.125% notes, due July 2032
$300 million 5.500% notes, due July 2033

Additionally, Leidos, Inc. has fully and unconditionally guaranteed debt securities of Leidos Holding, Inc. that were issued pursuant to transactions that were not registered under the ~~obligations~~Securities Act of ~~its subsidiary,~~1933, as amended. The following is a list of unregistered debt securities guaranteed by Leidos, Inc.~~, under its $500 million notes due May 2023, $500 million notes due May 2025, $750 million notes due May 2030~~


Senior unsecured unregistered debt securities issued by Leidos Holdings, Inc.:
$300 million 5.950% notes, due December 2040

The following summarized financial information includes the assets, liabilities and ~~$1,000 million notes due February 2031 (collectively, "the Notes"). The underlying~~results of operations for the Guarantor and Issuer of the Registered Notes described above. Intercompany balances and transactions between the Issuer and Guarantor have been eliminated from the financial information below. Investments in the consolidated subsidiaries of ~~Leidos, Inc.~~the Issuer and Guarantor that do not guarantee ~~these obligations and~~the senior unsecured notes have been excluded from the financial ~~information presented below.~~

~~We have entered into registration rights agreements, pursuant~~information. Intercompany payables represent amounts due to ~~which we agreed to use reasonable best efforts to file registration statements to permit the exchange~~non-guarantor subsidiaries 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.Issuer.

~~The summarized balance sheets for Leidos Holdings, Inc. and Leidos, Inc., net of eliminations were as follows (in millions):~~

Balance Sheet

September 30,
2022 December 31,
2021
Total current assets $ 2,358 $ 2,229
Goodwill 5,811 4,171
Investments in consolidated subsidiaries 3,278 4,918
Other long-term assets 1,283 1,362
Total assets $ 12,730 $ 12,680
Total current liabilities $ 3,263 $ 2,400
Long-term debt, net of current portion 3,974 4,590
Intercompany payables 1,804 1,438
Other long-term liabilities 622 849
Total liabilities 9,663 9,277
Total stockholders' equity 3,067 3,403
Total liabilities and stockholders' equity $ 12,730 $ 12,680

~~The summarized statement of income for Leidos Holdings, Inc. and Leidos, Inc., net of eliminations,~~ Information for the ~~nine months ended September 30, 2022, was as follows (in millions):~~

Guarantor and Issuer of Registered Notes


	March 31, 2023		December 30, 2022
Total current assets	$	2,068	$	2,115
Goodwill	5,811		5,810
Other long-term assets	1,260		1,188
Total assets	$	9,139	$	9,113

Total current liabilities	$	2,278	$	2,922
Long-term debt, net of current portion	4,672		3,925
Intercompany payables	1,714		1,695
Other long-term liabilities	597		699
Total liabilities	$	9,261	$	9,241

Statements of Income

Information for the Guarantor and Issuer of Registered Notes

Three Months Ended

March 31,
2023

Revenues, net

~~7,265~~2,549

Operating income

~~495~~172

Net income attributable to Leidos common stockholders

~~165~~47

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LEIDOS HOLDINGS, INC.

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 11–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 December ~~31, 2021.~~30, 2022.

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~~LEIDOS HOLDINGS, INC.~~

Recently Adopted and Issued Accounting Standards

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

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LEIDOS HOLDINGS, INC.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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 December ~~31, 2021.~~30, 2022.

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 ~~September 30, 2022.~~March 31, 2023. 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

~~There~~On October 30, 2022, we completed the acquisition of Cobham Special Mission. In conducting our evaluation of the effectiveness of our internal control over financial reporting, we excluded Cobham Special Mission from our evaluation for the first quarter of fiscal 2023. We are in the process of integrating Cobham Special Mission 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 11–Commitments and Contingencies" of the notes to the condensed consolidated financial statements contained within this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors.

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 December ~~31, 2021.~~30, 2022.

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

(a)None

(b)None

(c)Purchases of Equity Securities by the Issuer

In February 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 1, 2022 - July 31, 2022 — $ — — 15,203,974
August 1, 2022 - August 31, 2022 — — — 15,203,974
September 1, 2022 - September 30, 2022 25,205 93.20 — 15,203,974
Total 25,205 $ 93.20 —


Period	Total Number of Shares (1) (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
December 31, 2022	—	$	—	—	15,203,974
January 1, 2023 - January 31, 2023	—	—		—	15,203,974
February 1, 2023 - February 28, 2023	—	—		—	15,203,974
March 1, 2023 - March 31, 2023	270,248	92.75		269,462	14,934,512
Total	270,248	$	92.75	269,462

(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
4.1						Officers' Certificate of Leidos, Inc., dated as of February 28, 2023. Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on February 28, 2023.
4.2						Form of Global Note representing Leidos, Inc.'s 5.750% Notes due 2033. Included in Exhibit 4.1 and incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed with the SEC on February 28, 2023.
10.1						Credit Agreement, dated March 10, 2023, by and among Leidos Holdings, Inc., Leidos, Inc., the guarantors party thereto, the lenders party thereto and Citibank, N.A., as administrative agent. Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on March 14, 2023.
10.2						Executive Employment Agreement, dated February 23, 2023, between Leidos Holdings, Inc. and Thomas A. Bell. Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on February 27, 2023.

10.3						Retirement Agreement, dated March 28, 2023, between Leidos Holdings, Inc. and Roger A. Krone. Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (Amendment No. 1) filed with the SEC on March 31, 2023.

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 1, 2022~~May 2, 2023


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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	Stated interest rate	Effective interest rate	September 30, 2022(1)		December 31, 2021(1)
			(in millions)
Short-term debt:
Senior unsecured term loans:
$380 million term loan, due May 2022	1.54%	1.64%	$	—	$	380
$380 million term loan, due May 2023	4.13%	4.22%	380		—
Total short-term debt			$	380	$	380

Long-term debt:
Senior unsecured term loans:
$1,925 million term loan, due January 2025	4.50%	4.81%	$	1,228	$	1,298
Senior unsecured notes:
$500 million notes, due May 2023	2.95%	3.17%	499		498
$500 million notes, due May 2025	3.63%	3.76%	498		497
$750 million notes due May 2030	4.38%	4.50%	739		738
$1,000 million notes, due February 2031	2.30%	2.38%	991		990
$250 million notes, due July 2032	7.13%	7.43%	247		247
$300 million notes, due July 2033	5.50%	5.88%	159		158
$300 million notes, due December 2040	5.95%	6.03%	216		216
Notes payable and finance leases due on various dates through fiscal 2032	1.84%-4.30%	Various	45		54
Total long-term debt			4,622		4,696
Less current portion			(647)		(103)
Total long-term debt, net of current portion			$	3,975	$	4,593


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 1, 2022 - July 31, 2022	—	$	—	—	15,203,974
August 1, 2022 - August 31, 2022	—	—		—	15,203,974
September 1, 2022 - September 30, 2022	25,205	93.20		—	15,203,974
Total	25,205	$	93.20	—