Leidos 10Q 2024 Q1 Quarterly report

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 March 29, 2024


☐			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 April 23, 2024, was 135,211,535 shares of common stock ($.0001 par value per share).

LEIDOS HOLDINGS, INC.

FORM 10-Q

TABLE OF CONTENTS


Part I		Page
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Comprehensive Income	3
	Condensed Consolidated Statements of Equity	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
	Note 1–Basis of Presentation and Summary of Significant Accounting Policies	6
	Note 2–Revenues	8
	Note 3 –Goodwill and Intangible Assets	10
	Note 4–Fair Value Measurements	12
	Note 5–Derivative Instruments	13
	Note 6–Debt	14
	Note 7–Accumulated Other Comprehensive Income (Loss)	15
	Note 8–Earnings Per Share	15
	Note 9–Income Taxes	16
	Note 10–Business Segments	16
	Note 11–Commitments and Contingencies	17
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
	Overview	20
	Business Environment and Trends	20
	Results of Operations	21
	Bookings and Backlog	23
	Liquidity and Capital Resources	23
	Off-Balance Sheet Arrangements	24
	Guarantor and Issuer of Guaranteed Securities	25
	Contractual Obligations and Commitments	26
	Critical Accounting Policies	26
	Recently Adopted and Issued Accounting Standards	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27
Part II
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mine Safety Disclosures	28
Item 5.	Other Information	28
Item 6.	Exhibits	29
Signatures		30

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	March 29, 2024		December 29, 2023
	(unaudited; in millions, except share and per share data)
Assets:
Cash and cash equivalents	$	633	$	777
Receivables, net	2,713		2,429
Inventory, net	318		310
Other current assets	486		489
Total current assets	4,150		4,005
Property, plant and equipment, net	972		961
Intangible assets, net	629		667
Goodwill	6,099		6,112
Operating lease right-of-use assets, net	493		512
Other long-term assets	474		438
Total assets	$	12,817	$	12,695

Liabilities:
Accounts payable and accrued liabilities	$	2,301	$	2,277
Accrued payroll and employee benefits	740		695
Current portion of long-term debt	43		18
Total current liabilities	3,084		2,990
Long-term debt, net of current portion	4,636		4,664
Operating lease liabilities	495		516

Other long-term liabilities	289		267
Total liabilities	8,504		8,437

Commitments and contingencies (Note 11)

Stockholders’ equity:
Common stock, $0.0001 par value, 500,000,000 shares authorized,135,097,654 and 135,766,419 shares issued and outstanding at March 29, 2024, and December 29, 2023, respectively	—		—
Additional paid-in capital	1,735		1,885
Retained earnings	2,595		2,364
Accumulated other comprehensive loss	(72)		(48)
Total Leidos stockholders’ equity	4,258		4,201
Non-controlling interest	55		57
Total stockholders' equity	4,313		4,258
Total liabilities and stockholders' equity	$	12,817	$	12,695

See accompanying notes to condensed consolidated financial statements.

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LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended
	March 29, 2024		March 31, 2023
	(unaudited; in millions, except per share data)
Revenues	$	3,975	$	3,699
Cost of revenues	3,337		3,204
Selling, general and administrative expenses	226		233
Acquisition, integration and restructuring costs	4		3


Equity earnings of non-consolidated subsidiaries	(7)		(6)
Operating income	415		265
Non-operating income (expense):
Interest expense, net	(49)		(54)
Other income (expense), net	2		(4)
Income before income taxes	368		207
Income tax expense	(85)		(43)
Net income	$	283	$	164
Less: net (loss) income attributable to non-controlling interest	(1)		2
Net income attributable to Leidos common stockholders	$	284	$	162

Earnings per share:
Basic	$	2.09	$	1.18
Diluted	2.07		1.17

See accompanying notes to condensed consolidated financial statements.

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LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Three Months Ended
	March 29, 2024		March 31, 2023
	(unaudited; in millions)
Net income	$	283	$	164
Foreign currency translation adjustments	(27)		15
Unrecognized gain (loss) on derivative instruments	2		(5)
Pension adjustments	1		(1)
Total other comprehensive (loss) income, net of taxes	(24)		9
Comprehensive income	259		173
Less: net (loss) income attributable to non-controlling interest	(1)		2
Comprehensive income attributable to Leidos common stockholders	$	260	$	171

See accompanying notes to condensed consolidated financial statements.

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LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY


	Shares of common stock	Additional paid-in capital		Retained earnings		Accumulated other comprehensive income (loss)		Leidos stockholders' equity		Non-controlling interest		Total stockholders' equity
	(unaudited; in millions, except per share data)
Balance at December 29, 2023	136	$	1,885	$	2,364	$	(48)	$	4,201	$	57	$	4,258
Net income (loss)	—	—		284		—		284		(1)		283
Other comprehensive loss, net of taxes	—	—		—		(24)		(24)		—		(24)
Issuances of stock	—	14		—		—		14		—		14
Repurchases of stock and other	(1)	(184)		—		—		(184)		—		(184)
Dividends of $0.38 per share	—			(53)		—		(53)		—		(53)
Stock-based compensation	—	20		—		—		20		—		20
Net capital distributions to non-controlling interest	—	—		—		—		—		(1)		(1)
Balance at March 29, 2024	135	$	1,735	$	2,595	$	(72)	$	4,258	$	55	$	4,313


	Shares of common stock	Additional paid-in capital		Retained earnings		Accumulated other comprehensive income (loss)		Leidos stockholders' equity		Non-controlling interest		Total stockholders' equity
	(unaudited; in millions, except per share data)
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

See accompanying notes to condensed consolidated financial statements.

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LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Three Months Ended
	March 29, 2024		March 31, 2023
	(unaudited; in millions)
Cash flows from operations:
Net income	$	283	$	164
Adjustments to reconcile net income to net cash provided by (used in) operations:
Depreciation and amortization	69		82
Stock-based compensation	20		18
Deferred income taxes	(25)		(43)


Other	(6)		5
Change in assets and liabilities:
Receivables	(281)		(166)
Other current assets and other long-term assets	(35)		(9)
Accounts payable and accrued liabilities and other long-term liabilities	(101)		(97)
Accrued payroll and employee benefits	48		13
Income taxes receivable/payable	91		(65)
Net cash provided by (used in) operating activities	63		(98)
Cash flows from investing activities:


Payments for property, equipment and software	(17)		(39)

Other	5		—
Net cash used in investing activities	(12)		(39)
Cash flows from financing activities:
Proceeds from debt issuance	—		1,743

Repayments of borrowings	(4)		(1,711)
Payments for debt issuance costs	—		(7)
Dividend payments	(53)		(50)
Repurchases of stock and other	(183)		(43)
Proceeds from issuances of stock	13		12
Net capital distributions to non-controlling interests	(1)		(1)
Net cash used in financing activities	(228)		(57)
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash	(4)		2
Net decrease in cash, cash equivalents and restricted cash	(181)		(192)
Cash, cash equivalents and restricted cash at beginning of period	928		683
Cash, cash equivalents and restricted cash at end of period	747		491
Less: restricted cash at end of period	114		112
Cash and cash equivalents at end of period	$	633	$	379





Supplementary cash flow information:
Cash paid for income taxes, net of refunds	$	2	$	135
Cash paid for interest	61		45
Non-cash investing activity:
Property, plant and equipment additions	$	35	$	1
Non-cash financing activity:
Finance lease obligations	$	—	$	65

See accompanying notes to condensed consolidated financial statements.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Nature of Operations and Basis of Presentation

Leidos Holdings, Inc. ("Leidos"), a Delaware corporation, is a holding company whose direct 100%-owned subsidiary and principal operating company is Leidos, Inc. Leidos, recognized as a member of the Fortune 500®, is a dynamic innovation company that is at the forefront of addressing the world’s most challenging issues in national security and health sectors. With a global workforce of approximately 47,000, Leidos is committed to developing smarter technology solutions, particularly for customers in highly regulated industries. 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, National Aeronautics and Space Administration ("NASA") 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.

During the quarter ended March 29, 2024, we completed a realignment of our segment and reporting structure, which resulted in the identification of four reportable segments: National Security and Digital, Health & Civil, Commercial & International and Defense Systems. We commenced operating and reporting under the new organizational structure effective the first day of fiscal 2024. In addition, we separately present the unallocable costs associated with corporate functions as Corporate. As a result of this change, prior year segment results and disclosures have been recast to reflect the current reportable segment structure.

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 consolidated financial statements have 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 "Deferred tax liabilities" into "Other long-term liabilities" on the condensed consolidated balance sheets.

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 13, 2024.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Accounting Standards Updates Issued But Not Yet Adopted

ASU 2023-07 Segment Reporting

In November 2023, the FASB issued ASU 2023-07, to improve reportable segment disclosure requirements. This update requires companies to disclose significant segment expense categories that are regularly provided to the chief operating decision maker ("CODM") on an interim and annual basis and expands disclosure requirements for interim reporting. Companies must also disclose how segment measures of profit or loss are used by the CODM.

The amendments in this update are effective for public entities for annual periods beginning after December 15, 2023, and interim periods beginning after December 15, 2024. The amendments should be adopted on a retrospective basis and early adoption is permitted. We are evaluating the impact of the update and plan to adopt the amendments for annual disclosures in fiscal 2024.

ASU 2023-09 Income Taxes

In December 2023, the FASB issued ASU 2023-09, to enhance the transparency and usefulness of income tax disclosures. The update requires enhancements to the annual rate reconciliation, including disclosure of specific categories and additional information for reconciling items meeting a quantitative threshold. The update also requires disclosure of income taxes paid disaggregated by federal, state and foreign taxes, and individual jurisdictions meeting a quantitative threshold.

The amendments in this update are effective for public business entities for annual periods beginning after December 15, 2024, and may be adopted on a prospective or retrospective basis. Early adoption is permitted. We are currently evaluating the impacts of this update and plan to adopt these amendments using the prospective approach for annual disclosures in fiscal 2025.

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
	March 29, 2024		March 31, 2023
	(in millions, except per share data)
Favorable impact	$	25	$	22
Unfavorable impact	(25)		(16)
Net impact to income before income taxes	$	—	$	6

Impact on diluted EPS attributable to Leidos common stockholders	$	—	$	0.03

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

Revenue Recognized from Prior Obligations

We reduced revenue by $2 million and recognized revenue of $5 million from performance obligations satisfied in previous periods for the three months ended March 29, 2024, and March 31, 2023, respectively. The changes are 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 March 29, 2024, and December 29, 2023, $86 million and $136 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 $114 million and $151 million at March 29, 2024, and December 29, 2023, respectively.

Note 2–Revenues

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 March 29, 2024, we had $14.3 billion of RPO and expect to recognize approximately 62% and 78% 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 March 29, 2024
	National Security and Digital		Health & Civil		Commercial & International		Defense Systems		Total
	(in millions)
DoD and U.S. Intelligence Community	$	1,221	$	257	$	10	$	425	$	1,913
Other U.S. government agencies(1)	525		917		73		22		1,537
Commercial and non-U.S. customers	33		16		425		27		501
Total	$	1,779	$	1,190	$	508	$	474	$	3,951


	Three Months Ended March 31, 2023
	National Security and Digital		Health & Civil		Commercial & International		Defense Systems		Total
	(in millions)
DoD and U.S. Intelligence Community	$	1,154	$	272	$	8	$	390	$	1,824
Other U.S. government agencies(1)	557		713		65		30		1,365
Commercial and non-U.S. customers	35		14		416		25		490
Total	$	1,746	$	999	$	489	$	445	$	3,679

(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)

Disaggregated revenues by contract-type were as follows:


	Three Months Ended March 29, 2024
	National Security and Digital		Health & Civil		Commercial & International		Defense Systems		Total
	(in millions)
Cost-reimbursement and fixed-price-incentive-fee	$	946	$	447	$	85	$	301	$	1,779
Firm-fixed-price	492		690		319		139		1,640
Time-and-materials and fixed-price-level-of-effort	341		53		104		34		532
Total	$	1,779	$	1,190	$	508	$	474	$	3,951


	Three Months Ended March 31, 2023
	National Security and Digital		Health & Civil		Commercial & International		Defense Systems		Total
	(in millions)
Cost-reimbursement and fixed-price-incentive-fee	$	927	$	553	$	92	$	272	$	1,844
Firm-fixed-price	507		403		289		134		1,333
Time-and-materials and fixed-price-level-of-effort	312		43		108		39		502
Total	$	1,746	$	999	$	489	$	445	$	3,679

Disaggregated revenues by geographic location were as follows:


	Three Months Ended March 29, 2024
	National Security and Digital		Health & Civil		Commercial & International		Defense Systems		Total
	(in millions)
United States	$	1,770	$	1,189	$	208	$	468	$	3,635
International	9		1		300		6		316
Total	$	1,779	$	1,190	$	508	$	474	$	3,951


	Three Months Ended March 31, 2023
	National Security and Digital		Health & Civil		Commercial & International		Defense Systems		Total
	(in millions)
United States	$	1,735	$	998	$	192	$	441	$	3,366
International	11		1		297		4		313
Total	$	1,746	$	999	$	489	$	445	$	3,679

Revenues by customer-type, contract-type and geographic location exclude lease income of $24 million and $20 million for the three months ended March 29, 2024, and March 31, 2023, 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.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Contract assets consist of unbilled receivables, which is the amount of revenue recognized that exceeds the amount billed to the customer. Unbilled receivables exclude amounts billable where the right to consideration is solely subject to the passage of time. 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	March 29, 2024		December 29, 2023
		(in millions)
Contract assets - current:
Unbilled receivables	Receivables, net	$	1,099	$	1,041

Contract liabilities - current:
Deferred revenue(1)	Accounts payable and accrued liabilities	$	414	$	442

Contract liabilities - non-current:
Deferred revenue(1)	Other long-term liabilities	$	18	$	21

(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 unbilled receivables was primarily due to revenue recognized on certain contracts, partially offset by the timing of billings. The decrease in deferred revenue was primarily due to revenue recognized during the period, offset by the timing of advanced payments from customers.

For the three months ended March 29, 2024, $157 million of revenue recognized was included as a contract liability at December 29, 2023. For the three months ended March 31, 2023, $155 million of revenue recognized was included as a contract liability at December 30, 2022.

Note 3–Goodwill and Intangible Assets

Goodwill

During the quarter ended March 29, 2024, the Company completed a business realignment, which resulted in identification of new reportable segments. The Company commenced operating and reporting under the new organizational structure effective the first day of fiscal 2024 (see "Note 10–Business Segments).

Goodwill was allocated to the new reportable segments based on a relative fair value approach.

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


	National Security and Digital		Health & Civil		Commercial & International		Defense Systems		Total
	(in millions)
Goodwill at December 30, 2022	$	2,755	$	1,366	$	1,389	$	1,186	$	6,696
Goodwill Impairment	—		—		(596)		—		(596)
Acquisitions of a business(1)	—		—		(4)		—		(4)
Foreign currency translation adjustments	3		—		11		2		16
Goodwill at December 29, 2023(2)	$	2,758	$	1,366	$	800	$	1,188	$	6,112
Foreign currency translation adjustments	—		—		(13)		—		(13)
Goodwill at March 29, 2024(2)	$	2,758	$	1,366	$	787	$	1,188	$	6,099

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

(2) Carrying amount includes accumulated impairment loss of $596 million within the Commercial & International segment.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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.

Operations of the Security Enterprise Solutions (“SES”) reporting unit rely heavily on the sales and servicing of security and detection products, which prior to fiscal 2024, have been negatively impacted due to delays in airline travel infrastructure projects as customer budgets recover from the pandemic. During fiscal 2023, the SES reporting unit refined its portfolio and made strategic business decisions to exit certain product offerings, and cease operations in certain countries in order to align the operations of the reporting unit with its strategic business plan. These decisions, along with the delays in airline travel infrastructure projects and higher than anticipated servicing costs, contributed to a significant reduction in the reporting unit’s forecasted revenue and cash flows. Accordingly, we recognized a non-cash goodwill impairment charge of $596 million at the SES reporting unit during the fiscal year ended December 29, 2023. The impairment was recorded within the Commercial & International reportable segment in the condensed consolidated statements of operations. In the event that there are significant unfavorable changes to the forecasted cash flows, forecasted revenue, terminal growth rates or the cost of capital used in the fair value estimates, we may be required to record an additional impairment of goodwill at a future date.

In conjunction with the change in reportable segments in fiscal 2024, the Company evaluated goodwill for impairment both before and after the segment change and determined that goodwill was not impaired.

Intangible Assets

Intangible assets, net consisted of the following:


	March 29, 2024						December 29, 2023
	Gross carrying value		Accumulated amortization		Net carrying value		Gross carrying value		Accumulated amortization		Net carrying value
	(in millions)
Finite-lived intangible assets:
Programs	$	1,687	$	(1,204)	$	483	$	1,689	$	(1,175)	$	514
Software and technology	262		(149)		113		263		(144)		119
Customer relationships	52		(23)		29		52		(22)		30
Total finite-lived intangible assets	2,001		(1,376)		625		2,004		(1,341)		663
Indefinite-lived intangible assets:
Trade names	4		—		4		4		—		4
Total intangible assets	$	2,005	$	(1,376)	$	629	$	2,008	$	(1,341)	$	667

Amortization expense was $37 million and $52 million for the three months ended March 29, 2024, and March 31, 2023, 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. 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The estimated annual amortization expense as of March 29, 2024, was as follows:


Fiscal year ending
	(in millions)
2024 (remainder of year)	$	110
2025	120
2026	98
2027	72
2028	62
2029 and thereafter	163
	$	625

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 market participant assumptions used in pricing the asset or liability (Level 3).

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


	March 29, 2024				December 29, 2023
	Carrying value		Fair value		Carrying value		Fair value
	(in millions)
Financial assets:
Derivatives	$	13	$	13	$	11	$	11

As of March 29, 2024, and December 29, 2023, our derivatives primarily consisted of the cash flow interest rate swaps on $500 million of the variable rate senior unsecured term loan (see "Note 5–Derivative Instruments"). The fair value of the cash flow interest rate swaps is determined based on observed values for underlying interest rates on the one-month Secured Overnight Financing Rate ("SOFR") rate (Level 2 inputs).

The carrying amounts of our financial instruments, other than derivatives, which include cash equivalents, accounts receivable, accounts payable and accrued expenses, are reasonable estimates of their related fair values.

As of March 29, 2024, and December 29, 2023, the fair value of debt was $4.5 billion and $4.6 billion, respectively, and the carrying amount was $4.7 billion for both periods (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).

As of March 29, 2024, we did not have any assets or liabilities measured at fair value on a non-recurring basis.

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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.

The fair value of the interest rate swaps was as follows:

Asset derivatives

Balance sheet line item

March 29,
2024

December 29,
2023

(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 $500 million 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 2.96%. The objective of these instruments is to reduce variability in the forecasted interest payments of the Variable Rate Loan. Under the terms of the interest rate swap agreements, we will receive monthly variable interest payments based on the one-month SOFR and will pay interest at a fixed rate.

The interest rate swap transactions are accounted for as cash flow hedges. The gain/loss on the swaps is reported as a component of other comprehensive (loss) income 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 (loss) income and earnings for the periods presented was as follows:


	Three Months Ended
	March 29, 2024		March 31, 2023
	(in millions)
Total interest expense, net presented in the condensed consolidated statements of operations in which the effects of cash flow hedges are recorded	$	49	$	54

Amount recognized in other comprehensive income (loss)	$	5	$	(2)
Amount reclassified from accumulated other comprehensive loss to interest expense, net	$	(3)	$	(4)

We expect to reclassify net gains of $10 million from accumulated other comprehensive loss into earnings during the next 12 months.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 6–Debt

Our debt consisted of the following:


	Stated interest rate	Effective interest rate	March 29, 2024		December 29, 2023
			(in millions)
Senior unsecured term loan:
$1,000 million term loan, due March 2028	6.67%	6.85%	$	1,000	$	1,000
Senior unsecured notes:
$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		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
Finance leases due on various dates through fiscal 2032	Various	1.84%-6.31%	86		91
Less: unamortized debt discounts and deferred debt issuance costs			(36)		(38)
Total long-term debt			4,679		4,682
Less current portion			(43)		(18)
Total long-term debt, net of current portion			$	4,636	$	4,664

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 29, 2024, 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 a predecessor $1.9 billion senior unsecured term loan facility and a $750 million senior unsecured 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 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 Term SOFR-denominated borrowings is from 1.00% to 1.50%. Based on our current ratings, the applicable margin for Term SOFR-denominated borrowings is 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 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.

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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 $1.0 billion. 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 March 29, 2024, and December 29, 2023, we did not have any Commercial Paper Notes outstanding.

The Credit Facilities, Commercial Paper Notes and senior unsecured 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 March 29, 2024.

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
	(in millions)
Balance at December 30, 2022	$	(73)	$	13	$	(13)	$	(73)
Other comprehensive income (loss)	36		6		(1)		41
Taxes	(2)		1		—		(1)
Reclassification from AOCI	—		(15)		—		(15)
Balance at December 29, 2023	(39)		5		(14)		(48)
Other comprehensive income (loss)	(31)		5		1		(25)
Taxes	4		—		—		4
Reclassification from AOCI	—		(3)		—		(3)
Balance at March 29, 2024	$	(66)	$	7	$	(13)	$	(72)

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

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
	March 29, 2024	March 31, 2023
	(in millions)
Basic weighted average number of shares outstanding	136	137
Dilutive common share equivalents—stock options and other stock awards	1	1
Diluted weighted average number of shares outstanding	137	138

Anti-dilutive stock-based awards are excluded from the weighted average number of shares outstanding used to compute diluted EPS. For the three months ended March 29, 2024, and March 31, 2023, the total outstanding stock options and vesting stock awards that were anti-dilutive were 1 million for both periods.

During the three months ended March 29, 2024, and March 31, 2023, we made open market repurchases of our common stock for an aggregate purchase price of $150 million and $25 million, respectively. All shares repurchased were immediately retired.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 9–Income Taxes

For the three months ended March 29, 2024, the effective tax rate was 23.1% compared to 20.8% for the three months ended March 31, 2023. The increase to the effective tax rate was primarily due to an increase in unrecognized tax benefits and a reduced benefit in federal research tax credits, partially offset by an increase in excess tax benefits related to employee stock-based payment transactions.

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 CODM, currently our Chief Executive Officer, manages operations for the purposes of allocating resources and assessing performance.

Beginning in fiscal 2024, we realigned our business to report in six operating segments, which are aggregated into four reportable segments in accordance with the criteria established under ASC 280: National Security and Digital, Health & Civil, Commercial & International and Defense Systems. Our reportable segments are focused on specific, defined capability sets that we bring to our customers. Additionally, we separately present the unallocable costs associated with corporate functions as Corporate. As a result of this change, prior year segment results have been recast to reflect the current reportable segment structure.

National Security and Digital provides technology enabled services and mission software capabilities for defense and intelligence customers in the areas of cyber, logistics, security operations and decision analytics, as well as IT operations and digital transformation programs across all U.S. federal government customers. Our advanced capabilities include the delivery of technology-enabled services, mission software capabilities and IT modernization services. Our capabilities allow us to provide innovative technology solutions in the following categories: software development, engineering & design, modeling & simulation, analytics, cyber security, intelligence analysis, linguistics and mission operations.

Health & Civil provides services and solutions to federal and commercial customers in the areas of public health, care coordination, life and environmental sciences and transportation. We are dedicated to delivering effective and affordable solutions that are responsible for the health and well-being of people, including service members and veterans. Our core capabilities include health information management services, managed health services, systems and infrastructure modernization, and life sciences research and development. We help customers achieve their missions and take on the connected world with data-driven insights, improved efficiencies and technological advantages.

Commercial & International provides technologically advanced services, solutions and products to commercial and international customers. Our key customers include United Kingdom and Australia government agencies, Transportation Security Administration, U.S. Customs and Border Protection, airports, and commercial utility providers. Our offerings include IT modernization, software solutions, mission support and logistics, Command, Control, Computers, Communications, Intelligence, Surveillance and Reconnaissance ("C4ISR") technologies and services, cloud services, power grid engineering, energy modernization and security products and services.

Defense Systems develops and produces advanced space, aerial, surface, and sub-surface manned and un-manned defense systems for the U.S. Department of Defense, Army, Navy, Air Force, Marine Corps, United States Special Operations Command, NASA, Space Force, the Defense Intelligence Agency and International customers. Our solutions deliver innovative technology, systems engineering, integration and testing, rapid prototyping, software development, intelligence analysis, cybersecurity solutions and C4ISR technologies and services to support critical missions.

Corporate includes the operations of various corporate activities, certain corporate expense items that are not reimbursed by our U.S. government customers and certain other expense items excluded from a reportable segment's performance.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The segment information for the periods presented was as follows:


	Three Months Ended
	March 29, 2024		March 31, 2023
	(in millions)
Revenues:
National Security and Digital	$	1,793	$	1,757
Health & Civil	1,199		1,008
Commercial & International	509		489
Defense Systems	474		445
Total revenues	$	3,975	$	3,699

Operating income (loss):
National Security and Digital	$	175	$	145
Health & Civil	222		113
Commercial & International	34		13
Defense Systems	21		23
Corporate	(37)		(29)
Total operating income	$	415	$	265

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

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

Note 11–Commitments and Contingencies

Legal Proceedings

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 above-described verdict in the Apple II case was subject to further proceedings and appeals, as set forth below. In addition, the patents at issue in these cases were subject to U.S. Patent and Trademark Office ("USPTO") post-grant inter partes review and/or reexamination proceedings and related appeals, which sought to have all or part of these patents invalidated or the claims of the patents 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. On May 1, 2023, VirnetX filed a petition for panel rehearing on the Apple II litigation decision at the Federal Circuit, but this petition was denied by the Federal Circuit on June 27, 2023. On June 5, 2023, VirnetX filed a petition for panel rehearing on the Federal Circuit’s decision finding the patents at issue in the Apple II case to be unpatentable, but this petition was denied by the Federal Circuit on June 22, 2023. On September 20, 2023, VirnetX filed a petition for a writ of certiorari with the Supreme Court of the United States to review the Federal Circuit decisions. On February 20, 2024, the Supreme Court of the United States denied VirnetX’s petition for a writ of certiorari, bringing the Apple II case to a close.

Thus, no proceeds were received by Leidos in connection with the Apple II case.

Government Investigations and Reviews

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Defense Contract Audit Agency

As of March 29, 2024, active indirect cost audits by the Defense Contract Audit Agency remain open for fiscal 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 March 29, 2024, we believe we have adequately reserved for potential adjustments from audits or reviews of contract costs.

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 has 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 U.S. District Court in the Southern District of California. These charges were later dismissed as a result of the death of the former employee.

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. 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 are fully cooperating 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 March 29, 2024, we have outstanding letters of credit of $65 million, principally related to performance guarantees on contracts and outstanding surety bonds with a notional amount of $104 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.

As of March 29, 2024, the future expirations of the outstanding letters of credit and surety bonds were as follows:


Fiscal year ending
	(in millions)
2024 (remainder of year)	$	45
2025	91
2026	2
2027	14
2028	14
2029 and thereafter	3
	$	169

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

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

The following discussion contains forward-looking statements, including statements regarding our intent, belief or current expectations with respect to, among other things, trends affecting our financial condition or results of operations, backlog, our industry, the impact of our merger and acquisition activity, government budgets and spending, our business contingency plans, interest rates and uncertainties in tax due to new tax legislation or other regulatory developments. In some cases, forward-looking statements can be identified by words such as “will,” “expect,” “estimate,” “plan,” “potential,” “continue” or similar expressions. Such statements are not guarantees of future performance and involve risks and uncertainties and actual results may differ materially from those in the forward-looking statements as a result of various factors. Some of these factors include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K, as updated by the risk factor in this report under Part II, Item 1A. "Risk Factors" and as may be further updated in subsequent filings with the U.S. Securities and Exchange Commission. Due to such uncertainties and risks, you are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. We do not undertake any obligation to update these factors or to publicly announce the results of any changes to our forward-looking statements due to future events or developments.

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

Overview

Leidos, a member of the Fortune 500®, is a dynamic innovation company that is at the forefront of addressing the world’s most challenging issues in national security and health sectors. With a global workforce of approximately 47,000, Leidos is committed to developing smarter technology solutions, particularly for customers in highly regulated industries. We bring domain-specific capability and cross-market innovations to customers in each of these markets by leveraging five technical core capabilities: 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, National Aeronautics and Space Administration and many other U.S. civilian, state and local government agencies, foreign government agencies and commercial businesses.

Beginning in fiscal 2024, we realigned our business and operate in four reportable segments that are focused on specific, defined capability sets we bring to our customers. As a result of this change, prior year segment results and disclosures have been recast to reflect the current reportable segment structure. We now operate in the following reportable segments: National Security and Digital, Health & Civil, Commercial & International and Defense Systems. We also separately present the unallocable costs associated with corporate functions as Corporate (see "Note 10–Business Segments").

Business Environment and Trends

U.S. Government Markets

During both of the three months ended March 29, 2024, and March 31, 2023, we generated approximately 87% of total revenues from contracts with the U.S. government. Accordingly, our business performance is affected by the overall level of U.S. government spending, especially 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.

Congress avoided a government shutdown by passing two appropriations packages. The first package passed on March 8, 2024, included Agriculture-FDA, Energy-Water, Military Construction-VA, Transportation-HUD, Interior-Environment and Commerce-Justice-Science funding bills. The second package passed on March 23, 2024, included Defense, Financial Services, Homeland Security, Labor-HHS-Education, Legislative Branch, and State-Foreign Operations funding bills. In addition, the $7.3 trillion President’s budget was released on March 11, 2024, which is a 4.7% increase over the current budget and seeks to boost defense spending by 1% and non-defense discretionary spending by 2.4%. The spending complies with caps that House Republicans pushed in last year's Fiscal Responsibility Act in exchange for raising the debt limit. Congress will now focus on the government fiscal year ("GFY") 2025 appropriations bills before the GFY 2024 appropriations bills expire at the end of September 2024.

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International Markets

Sales to customers in international markets represented approximately 8% of total revenues for both of the three months ended March 29, 2024, and March 31, 2023. 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 the procurement cost of certain IT hardware used both on our contracts and internally. However, we expect to recover certain portions of these higher tariffs through our cost-plus contracts. We are currently evaluating the impact of higher tariffs, and do not expect the tariffs to have a significant impact to our business.

Results of Operations

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


	Three Months Ended
	March 29, 2024			March 31, 2023			Dollar change		Percent change
	(dollars in millions)
Revenues	$	3,975		$	3,699		$	276	7.5	%

Operating income	415			265			150		56.6	%
Non-operating expense, net	(47)			(58)			11		(19.0)	%
Income before income taxes	368			207			161		77.8	%
Income tax expense	(85)			(43)			(42)		97.7	%
Net income	$	283		$	164		$	119	72.6	%
Net income attributable to Leidos common stockholders	$	284		$	162		$	122	75.3	%
Operating margin	10.4		%	7.2		%

Segment and Corporate Results


	Three Months Ended
National Security and Digital	March 29, 2024			March 31, 2023			Dollar change		Percent change
	(dollars in millions)
Revenues	$	1,793		$	1,757		$	36	2.0	%
Operating income	175			145			30		20.7	%
Operating margin	9.8		%	8.3		%

The increase in revenues for the three months ended March 29, 2024, as compared to the three months ended March 31, 2023, was primarily attributable to a net increase in volumes on certain programs and program wins, partially offset by the completion of certain contracts.

The increase in operating income for the three months ended March 29, 2024, as compared to the three months ended March 31, 2023, was primarily attributable to a net increase in volumes on certain programs, partially offset by the completion of certain contracts.


	Three Months Ended
Health & Civil	March 29, 2024			March 31, 2023			Dollar change		Percent change
	(dollars in millions)
Revenues	$	1,199		$	1,008		$	191	18.9	%
Operating income	222			113			109		96.5	%
Operating margin	18.5		%	11.2		%

The increase in revenues for the three months ended March 29, 2024, as compared to the three months ended March 31, 2023, was primarily attributable to higher volumes in the managed health services business, ramp up on certain programs and program wins.

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The increase in operating income for the three months ended March 29, 2024, as compared to the three months ended March 31, 2023, was primarily driven by a net increase in volumes and favorable business mix in the managed health services business.


	Three Months Ended
Commercial & International	March 29, 2024			March 31, 2023			Dollar change		Percent change
	(dollars in millions)
Revenues	$	509		$	489		$	20	4.1	%
Operating income	34			13			21		161.5	%
Operating margin	6.7		%	2.7		%

The increase in revenues and operating income for the three months ended March 29, 2024, as compared to the three months ended March 31, 2023, was primarily attributable to a net increase in volumes driven by commercial product mix and improved cost control, partially offset by the completion of certain contracts.


	Three Months Ended
Defense Systems	March 29, 2024			March 31, 2023			Dollar change		Percent change
	(dollars in millions)
Revenues	$	474		$	445		$	29	6.5	%
Operating income	21			23			(2)		(8.7)	%
Operating margin	4.4		%	5.2		%

The increase in revenues for the three months ended March 29, 2024, as compared to the three months ended March 31, 2023, was primarily attributable to an increase in volumes on certain programs and program wins.

The decrease in operating income for the three months ended March 29, 2024, as compared to the three months ended March 31, 2023, was primarily attributable to changes in program mix, partially offset by program wins.


	Three Months Ended
Corporate	March 29, 2024		March 31, 2023		Dollar change		Percent change
	(dollars in millions)
Operating loss	$	(37)	$	(29)	$	(8)	27.6	%

The increase in operating loss for the three months ended March 29, 2024, as compared to the three months ended March 31, 2023, was primarily attributable to increased general and administrative expenses.

Non-Operating Expense, net

Non-operating expense, net for the three months ended March 29, 2024, was $47 million as compared to $58 million for the three months ended March 31, 2023. The decrease was primarily due to increased interest income on higher cash balances and favorable exchange rate movements.

Provision for Income Taxes

For the three months ended March 29, 2024, our effective tax rate was 23.1% compared to 20.8% for the three months ended March 31, 2023. The increase to the effective tax rate was primarily due to an increase in unrecognized tax benefits and a reduced benefit in federal research tax credits, partially offset by an increase in excess tax benefits related to employee stock-based payment transactions.

In December 2021, the Organization for Economic Cooperation and Development enacted model rules for a new 15% global minimum tax framework (“Pillar Two”). Many governments around the world have enacted or are in the process of enacting Pillar Two legislation. The Pillar Two legislation is effective for certain jurisdictions beginning in fiscal 2024. We will continue to evaluate the potential impact of the rules as additional legislation gets enacted but currently do not expect them to have a material impact.

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Bookings and Backlog

We recorded net bookings worth an estimated $3.7 billion during the three months ended March 29, 2024, as compared to $3.0 billion for the three months ended March 31, 2023.

The estimated value of our total backlog was as follows:


	March 29, 2024						March 31, 2023
Segment	Funded		Unfunded		Total		Funded		Unfunded		Total
	(in millions)
National Security and Digital	$	2,411	$	15,144	$	17,555	$	2,984	$	13,030	$	16,014
Health & Civil	1,953		8,767		10,720		1,740		9,572		11,312
Commercial & International	2,465		2,071		4,536		2,537		1,317		3,854
Defense Systems	1,136		2,624		3,760		1,042		2,864		3,906
Total	$	7,965	$	28,606	$	36,571	$	8,303	$	26,783	$	35,086

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.

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 March 29, 2024, we had $633 million in cash and cash equivalents. We have a senior unsecured revolving credit facility which can provide up to $1 billion in additional borrowing, if required. As of March 29, 2024, and December 29, 2023, there were no borrowings outstanding under the revolving credit facility.

We had outstanding debt of $4.7 billion at both March 29, 2024, and December 29, 2023.

We have a commercial paper program in which we may issue short-term unsecured commercial paper notes ("Commercial Paper Notes") and have maturities of up to 397 days from the date of issuance. As of March 29, 2024, and December 29, 2023, we did not have any Commercial Paper Notes outstanding.

We made principal payments, excluding the impacts of our Commercial Paper Notes, on our debt of $4 million and $1,711 million during the three months ended March 29, 2024, and March 31, 2023, respectively. The activity for the three months ended March 31, 2023, included a $1,210 million payment to discharge the $1.9 billion 5.77% senior unsecured term loan facility and a $498 million payment to discharge the $500 million 2.95% notes, due May 2023.

Our credit facilities, commercial paper notes and senior unsecured notes outstanding as of March 29, 2024, contain financial covenants and customary restrictive covenants. We were in compliance with all covenants as of March 29, 2024.

We paid dividends of $53 million and $50 million during the three months ended March 29, 2024, and March 31, 2023, 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 months ended March 29, 2024, and March 31, 2023, we made open market repurchases of our common stock for aggregate purchase price of $150 million and $25 million, respectively.

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

Summary of Cash Flows

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


	Three Months Ended
	March 29, 2024		March 31, 2023
	(in millions)
Net cash provided by (used in) operating activities	$	63	$	(98)
Net cash used in investing activities	(12)		(39)
Net cash used in financing activities	(228)		(57)

Net cash provided by operating activities increased $161 million during the three months ended March 29, 2024, when compared to the prior year quarter. The increase was primarily due to lower tax payments of $133 million mainly in connection with the Tax Cuts and Jobs Act provision requiring capitalization of research and development costs and a nonrecurring $62 million payment for payroll taxes related to the CARES Act in the prior year quarter, partially offset by a net increase in working capital.

Net cash used in investing activities decreased $27 million for the three months ended March 29, 2024, when compared to the prior year quarter, primarily due to lower capital expenditures in the current year quarter.

Net cash used in financing activities increased $171 million for the three months ended March 29, 2024, when compared to the prior year quarter, primarily due to a net increase of $140 million in stock repurchases and a decrease of $29 million in net proceeds received from borrowings in connection with the issuance of debt in the prior year quarter.

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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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 March 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 Securities Act of 1933, as amended. The following is a list of unregistered debt securities guaranteed by Leidos, Inc.


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

The following summarized financial information includes the assets, liabilities and results of operations for the Guarantor and Issuer of the Registered Notes described above. Intercompany balances and transactions between the Issuer and Guarantor have been eliminated from the financial information below. Investments in the consolidated subsidiaries of the Issuer and Guarantor that do not guarantee the senior unsecured notes have been excluded from the financial information. Intercompany payables represent amounts due to non-guarantor subsidiaries of the Issuer.

Balance Sheet Information for the Guarantor and Issuer of Registered Notes


	March 29, 2024		December 29, 2023
	(in millions)
Total current assets	$	2,451	$	2,464
Goodwill	5,673		5,517
Other long-term assets	1,289		1,241
Total assets	$	9,413	$	9,222

Total current liabilities	$	2,125	$	1,983
Long-term debt, net of current portion	4,636		4,663
Intercompany payables	2,518		2,523
Other long-term liabilities	611		599
Total liabilities	$	9,890	$	9,768

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Statement of Operations Information for the Guarantor and Issuer of Registered Notes


	Three Months Ended
	March 29, 2024
	(in millions)
Revenues, net	$	2,581
Operating income	202
Net income attributable to Leidos common stockholders	43

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 29, 2023.

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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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 29, 2023.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer (our 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 March 29, 2024. 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

As of March 29, 2024, we migrated and consolidated certain accounting and finance systems to create efficiencies. As a result of these changes, we updated certain internal controls over financial reporting to align with these migrations and consolidations.

Other than the foregoing, there have been no changes in our internal control over financial reporting during the quarter ended March 29, 2024, that have 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 29, 2023.

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

(a)None

(b)None

(c)Purchases of Equity Securities by the Issuer

The following table presents information related to the repurchases of our common stock during the quarter ended March 29, 2024.


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(2)	Maximum Number of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs(2)
December 30, 2023 - December 31, 2023	—	$	—	—	13,031,319
January 1, 2024 - January 31, 2024	—	—		—	13,031,319
February 1, 2024 - February 29, 2024	900,394	124.85		900,394	12,130,925
March 1, 2024 - March 29, 2024	293,299	128.14		293,299	11,837,626
Total	1,193,693	$	125.66	1,193,693

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

(2) 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.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Rule 10b5-1 trading arrangement

During the three months ended March 29, 2024, no director or officer of the Company adopted, modified or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

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Item 6. Exhibits.


Exhibit Number						Description of Exhibit
22						List of Guarantors and Subsidiary Issuers of Guaranteed Securities. Incorporated herein by reference to Exhibit 22 to our Annual Report on Form 10-K filed with the SEC on February 13, 2024.

31.1						Certification of 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 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: April 30, 2024


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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