Leidos Holdings, Inc. [LDOS] Filings

10-Q 1 ldos-20230929.htm 10-Q ldos-20230929

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 29, 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 24, 2023, was 137,506,428 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 (Loss)	3
	Condensed Consolidated Statements of Equity	4
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	8
	Note 1–Basis of Presentation and Summary of Significant Accounting Policies	8
	Note 2–Revenues	10
	Note 3–Acquisitions, Divestitures, Goodwill and Intangible Assets	12
	Note 4–Fair Value Measurements	15
	Note 5–Derivative Instruments	16
	Note 6–Debt	17
	Note 7–Accumulated Other Comprehensive Income (Loss)	19
	Note 8–Earnings Per Share	19
	Note 9–Income Taxes	20
	Note 10–Business Segments	20
	Note 11–Commitments and Contingencies	22
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
	Overview	24
	Business Environment and Trends	24
	Results of Operations	25
	Bookings and Backlog	28
	Liquidity and Capital Resources	28
	Off-Balance Sheet Arrangements	30
	Guarantor and Issuer of Guaranteed Securities	31
	Contractual Obligations and Commitments	32
	Critical Accounting Policies	32
	Recently Adopted and Issued Accounting Standards	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
Part II
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Mine Safety Disclosures	34
Item 5.	Other Information	34
Item 6.	Exhibits	35
Signatures		36

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 29, 2023		December 30, 2022
	(unaudited; in millions, except share and per share data)
Assets:
Cash and cash equivalents	$	750	$	516
Receivables, net	2,452		2,350
Inventory, net	295		287
Other current assets	494		490
Total current assets	3,991		3,643
Property, plant and equipment, net	935		847
Intangible assets, net	713		952
Goodwill	6,079		6,696
Operating lease right-of-use assets, net	512		545
Other long-term assets	527		388
Total assets	$	12,757	$	13,071

Liabilities:
Accounts payable and accrued liabilities	$	2,221	$	2,254
Accrued payroll and employee benefits	801		701
Short-term debt and current portion of long-term debt	18		992
Total current liabilities	3,040		3,947
Long-term debt, net of current portion	4,667		3,928
Operating lease liabilities	527		570
Deferred tax liabilities	6		40
Other long-term liabilities	314		233
Total liabilities	8,554		8,718

Commitments and contingencies (Note 11)

Stockholders’ equity:
Common stock, $0.0001 par value, 500,000,000 shares authorized,137,506,136 and 136,926,990 shares issued and outstanding at September 29, 2023, and December 30, 2022, respectively	—		—
Additional paid-in capital	2,055		2,005
Retained earnings	2,186		2,367
Accumulated other comprehensive loss	(95)		(73)
Total Leidos stockholders’ equity	4,146		4,299
Non-controlling interest	57		54
Total stockholders' equity	4,203		4,353
Total liabilities and stockholders' equity	$	12,757	$	13,071

See accompanying notes to condensed consolidated financial statements.

Table of Contents

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended				Nine Months Ended
	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
	(unaudited; in millions, except per share data)
Revenues	$	3,921	$	3,608	$	11,458	$	10,699
Cost of revenues	3,334		3,095		9,809		9,136
Selling, general and administrative expenses	239		232		709		730
Acquisition, integration and restructuring costs	5		4		14		12
Goodwill impairment charges	599		—		599		—
Asset impairment charges	88		—		88		3
Equity earnings of non-consolidated subsidiaries	(8)		(4)		(21)		(5)
Operating (loss) income	(336)		281		260		823
Non-operating income (expense):
Interest expense, net	(53)		(50)		(163)		(148)
Other income (expense), net	1		(10)		(4)		(7)
(Loss) income before income taxes	(388)		221		93		668
Income tax expense	(8)		(57)		(115)		(155)
Net (loss) income	$	(396)	$	164	$	(22)	$	513
Less: net income attributable to non-controlling interest	3		2		8		5
Net (loss) income attributable to Leidos common stockholders	$	(399)	$	162	$	(30)	$	508

Earnings per share:
Basic	$	(2.91)	$	1.18	$	(0.22)	$	3.71
Diluted	(2.91)		1.17		(0.22)		3.68

See accompanying notes to condensed consolidated financial statements.

Table of Contents

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


	Three Months Ended				Nine Months Ended
	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
	(unaudited; in millions)
Net (loss) income	$	(396)	$	164	$	(22)	$	513
Foreign currency translation adjustments	(31)		(75)		(19)		(158)
Unrecognized gain (loss) on derivative instruments	—		18		(1)		54
Pension adjustments	(1)		1		(2)		(19)
Total other comprehensive (loss) income, net of taxes	(32)		(56)		(22)		(123)
Comprehensive (loss) income	(428)		108		(44)		390
Less: net income attributable to non-controlling interest	3		2		8		5
Comprehensive (loss) income attributable to Leidos common stockholders	$	(431)	$	106	$	(52)	$	385

See accompanying notes to condensed consolidated financial statements.

Table of Contents

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 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
Net income	—	—		207		—		207		3		210
Other comprehensive income, net of taxes	—	—		—		1		1		—		1
Issuances of stock	—	14		—		—		14		—		14

Dividends of $0.36 per share	—	—		(50)		—		(50)		—		(50)
Stock-based compensation	—	19		—		—		19		—		19
Net capital distributions to non-controlling interest	—	(3)		—		—		(3)		(2)		(5)
Balance at June 30, 2023	137	$	2,024	$	2,636	$	(63)	$	4,597	$	56	$	4,653
Net (loss) income	—	—		(399)		—		(399)		3		(396)
Other comprehensive loss, net of taxes	—	—		—		(32)		(32)		—		(32)
Issuances of stock	1	12		—		—		12		—		12
Repurchases of stock and other	—	(1)		—		—		(1)		—		(1)
Dividends of $0.36 per share	—	—		(51)		—		(51)		—		(51)
Stock-based compensation	—	20		—		—		20		—		20
Net capital distributions to non-controlling interest	—	—		—		—		—		(2)		(2)
Balance at September 29, 2023	138	$	2,055	$	2,186	$	(95)	$	4,146	$	57	$	4,203

See accompanying notes to condensed consolidated financial statements.

Table of Contents

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 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
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
Net 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
Net capital distributions to non-controlling interest	—	—		—		—		—		(2)		(2)
Balance at September 30, 2022	137	$	1,982	$	2,239	$	(135)	$	4,086	$	53	$	4,139

See accompanying notes to condensed consolidated financial statements.

Table of Contents

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended
	September 29, 2023		September 30, 2022
	(unaudited; in millions)
Cash flows from operations:
Net (loss) income	$	(22)	$	513
Adjustments to reconcile net (loss) income to net cash provided by operations:
Depreciation and amortization	248		249
Stock-based compensation	57		53
Deferred income taxes	(192)		(221)
Goodwill impairment charges	599		—
Asset impairment charges	88		3
Other	25		21
Change in assets and liabilities, net of effects of acquisitions and dispositions:
Receivables	(109)		(139)
Other current assets and other long-term assets	141		132
Accounts payable and accrued liabilities and other long-term liabilities	22		(70)
Accrued payroll and employee benefits	105		217
Income taxes receivable/payable	(101)		109
Net cash provided by operating activities	861		867
Cash flows from investing activities:
Acquisition of a business, net of cash acquired	(6)		(2)
Divestiture of a business	—		15
Payments for property, equipment and software	(129)		(76)
Net proceeds from sale of assets	—		6
Other	—		2
Net cash used in investing activities	(135)		(55)
Cash flows from financing activities:
Proceeds from debt issuance	1,743		380

Repayments of borrowings	(2,041)		(459)
Payments for debt issuance costs	(7)		—
Dividend payments	(150)		(149)
Repurchases of stock and other	(44)		(532)
Proceeds from issuances of stock	37		35
Net capital distributions to non-controlling interests	(8)		(5)
Net cash used in financing activities	(470)		(730)
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash	—		14
Net increase in cash, cash equivalents and restricted cash	256		96
Cash, cash equivalents and restricted cash at beginning of period	683		875
Cash, cash equivalents and restricted cash at end of period	939		971
Less: restricted cash at end of period	189		164
Cash and cash equivalents at end of period	$	750	$	807

See accompanying notes to condensed consolidated financial statements.

Table of Contents

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended
	September 29, 2023		September 30, 2022
	(unaudited; in millions)
Supplementary cash flow information:
Cash paid for income taxes, net of refunds	$	325	$	166
Cash paid for interest	160		136
Non-cash investing activity:
Property, plant and equipment additions	$	2	$	7
Non-cash financing activity:
Finance lease obligations	$	65	$	1

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 consolidated financial statements 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 "Bad debt expense and recoveries" into "Selling, general and administrative expenses" on the condensed consolidated statements of operations. We 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.

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 14, 2023.

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Accounting Standards Updates Issued and Adopted

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

In March 2020, the Financial Accounting Standards Board ("FASB") issued 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 transition from LIBOR through December 31, 2022. In December 2022, the FASB issued ASU 2022-06 which extends the deadline for application of ASU 2021-01 through December 31, 2024. 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. In the first half of fiscal 2023, we adopted certain practical expedients available under ASC 848. Our term loans are based on a Secured Overnight Financing Rate (“SOFR”) rate (see "Note 6–Debt"). Additionally, we modified our interest rate swap agreements to reference SOFR (see "Note 5–Derivative Instruments") in conformity with the relief available under ASC 848. The standard did not have a material impact on our financial position, results of operations or earnings per share.

Changes in Estimates on Contracts

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

Changes in estimates on contracts were as follows:


	Three Months Ended				Nine Months Ended
	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
	(in millions, except per share data)
Favorable impact	$	40	$	36	$	102	$	116
Unfavorable impact	(24)		(29)		(62)		(75)
Net impact to (loss) income before income taxes	$	16	$	7	$	40	$	41

Impact on diluted EPS attributable to Leidos common stockholders	$	0.09	$	0.03	$	0.22	$	0.22

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

Revenue Recognized from Prior Obligations

Revenue recognized from performance obligations satisfied in previous periods was $13 million and $14 million for the three and nine months ended September 29, 2023, respectively, and $6 million and $38 million for the three and nine months ended September 30, 2022, 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 29, 2023, and December 30, 2022, $64 million and $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.

Table of Contents

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 $189 million and $167 million at September 29, 2023, and December 30, 2022, 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 September 29, 2023, we had $15.5 billion of RPO and expect to recognize approximately 63% and 79% 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 29, 2023								Nine Months Ended September 29, 2023
	Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total
	(in millions)
DoD and U.S. Intelligence Community	$	1,677	$	28	$	242	$	1,947	$	4,798	$	71	$	755	$	5,624
Other U.S. government agencies(1)	261		695		512		1,468		772		2,054		1,413		4,239
Commercial and non-U.S. customers	283		177		22		482		948		512		66		1,526
Total	$	2,221	$	900	$	776	$	3,897	$	6,518	$	2,637	$	2,234	$	11,389


	Three Months Ended September 30, 2022								Nine Months Ended September 30, 2022
	Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total
	(in millions)
DoD and U.S. Intelligence Community	$	1,559	$	22	$	255	$	1,836	$	4,620	$	62	$	732	$	5,414
Other U.S. government agencies(1)	236		676		372		1,284		686		1,949		1,177		3,812
Commercial and non-U.S. customers	280		151		28		459		869		446		83		1,398
Total	$	2,075	$	849	$	655	$	3,579	$	6,175	$	2,457	$	1,992	$	10,624

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

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Disaggregated revenues by contract-type were as follows:


	Three Months Ended September 29, 2023								Nine Months Ended September 29, 2023
	Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total
	(in millions)
Cost-reimbursement and fixed-price-incentive-fee	$	1,247	$	472	$	131	$	1,850	$	3,578	$	1,401	$	542	$	5,521
Firm-fixed-price	718		286		543		1,547		2,128		813		1,396		4,337
Time-and-materials and fixed-price-level-of-effort	256		142		102		500		812		423		296		1,531
Total	$	2,221	$	900	$	776	$	3,897	$	6,518	$	2,637	$	2,234	$	11,389


	Three Months Ended September 30, 2022								Nine Months Ended September 30, 2022
	Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total
	(in millions)
Cost-reimbursement and fixed-price-incentive-fee	$	1,166	$	442	$	200	$	1,808	$	3,493	$	1,293	$	534	$	5,320
Firm-fixed-price	668		279		389		1,336		1,950		792		1,260		4,002
Time-and-materials and fixed-price-level-of-effort	241		128		66		435		732		372		198		1,302
Total	$	2,075	$	849	$	655	$	3,579	$	6,175	$	2,457	$	1,992	$	10,624

Disaggregated revenues by geographic location were as follows:


	Three Months Ended September 29, 2023								Nine Months Ended September 29, 2023
	Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total
	(in millions)
United States	$	1,936	$	845	$	776	$	3,557	$	5,659	$	2,504	$	2,234	$	10,397
International	285		55		—		340		859		133		—		992
Total	$	2,221	$	900	$	776	$	3,897	$	6,518	$	2,637	$	2,234	$	11,389


	Three Months Ended September 30, 2022								Nine Months Ended September 30, 2022
	Defense Solutions		Civil		Health		Total		Defense Solutions		Civil		Health		Total
	(in millions)
United States	$	1,830	$	810	$	655	$	3,295	$	5,429	$	2,340	$	1,992	$	9,761
International	245		39		—		284		746		117		—		863
Total	$	2,075	$	849	$	655	$	3,579	$	6,175	$	2,457	$	1,992	$	10,624

Revenues by customer-type, contract-type and geographic location exclude lease income of $24 million and $69 million for the three and nine months ended September 29, 2023, respectively, and $29 million and $75 million for the three and nine months ended September 30, 2022, 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.

Table of Contents

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	September 29, 2023		December 30, 2022
		(in millions)
Contract assets - current:
Unbilled receivables	Receivables, net	$	1,047	$	1,010

Contract liabilities - current:
Deferred revenue(1)	Accounts payable and accrued liabilities	$	449	$	380

Contract liabilities - non-current:
Deferred revenue(1)	Other long-term liabilities	$	23	$	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 and nine months ended September 29, 2023, of $28 million and $215 million, respectively, was included as a contract liability at December 30, 2022. 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.

Note 3–Acquisitions, Divestitures, Goodwill and Intangible Assets

Business Acquisition

On October 30, 2022 (the "Agreement Date"), we completed the acquisition of Cobham Special Mission for purchase consideration of $298 million Australian dollars, net of $10 million of Australian dollars acquired, or $192 million United States dollars, net of $6 million of cash acquired. Cobham Special Mission provides airborne border surveillance and search and rescue services to the Australian Federal Government.

As of September 29, 2023, we completed the determination of fair values of the assets acquired and liabilities assumed.The final goodwill recognized of $22 million represents intellectual capital and the acquired assembled workforce, neither of which qualify for recognition as a separate intangible asset. None of the goodwill recognized is tax deductible.

In connection with this acquisition, we acquired property, plant and equipment with a fair value of $148 million at the Agreement Date. The following table summarizes the 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

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the three and nine months ended September 29, 2023, $28 million and $86 million of revenues related to the Cobham Special Mission acquisition were recognized within the Defense Solutions reportable segment.

Goodwill

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


	Defense Solutions		Civil		Health		Total
	(in millions)
Goodwill at December 31, 2021(1)	$	3,681	$	2,097	$	966	$	6,744
Acquisition of businesses	26		—		—		26
Divestiture of a business	(6)		—		—		(6)
Foreign currency translation adjustments	(37)		(31)		—		(68)
Goodwill at December 30, 2022(1)	$	3,664	$	2,066	$	966	$	6,696
Goodwill impairment	—		(599)		—		(599)
Acquisition of a business(2)	(4)		—		—		(4)
Foreign currency translation adjustments	(18)		4		—		(14)
Goodwill at September 29, 2023(3)	$	3,642	$	1,471	$	966	$	6,079

(1) Carrying amount includes accumulated impairment losses of $369 million and $117 million within the Health and Civil segments, respectively.

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

(3) Carrying amount includes accumulated impairment losses of $369 million and $716 million within the Health and Civil segments, respectively.

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 continue to be negatively impacted due to delays in airline travel infrastructure projects as customer budgetary restraints recover from reduced travel activity post-pandemic. During the third quarter of fiscal 2023, the SES reporting unit refined its portfolio and made strategic business decisions to exit certain product offerings, as well as 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.

As a result, we conducted an interim quantitative goodwill impairment analysis and our estimates led us to determine that the carrying value of the SES reporting unit exceeded its estimated fair value (see “Note 4–Fair Value Measurements”). Accordingly, we recognized a non-cash goodwill impairment charge of $599 million for the three and nine months ended September 29, 2023, leaving $303 million of goodwill at the SES reporting unit. The impairment was recorded within the Civil 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.

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Intangible Assets

Intangible assets, net consisted of the following:


	September 29, 2023						December 30, 2022
	Gross carrying value		Accumulated amortization		Net carrying value		Gross carrying value		Accumulated amortization		Net carrying value
	(in millions)
Finite-lived intangible assets:
Programs	$	1,686	$	(1,132)	$	554	$	1,721	$	(1,016)	$	705
Software and technology	203		(138)		65		225		(136)		89
Customer relationships	52		(21)		31		87		(25)		62
Trade names	1		(1)		—		1		(1)		—
Total finite-lived intangible assets	1,942		(1,292)		650		2,034		(1,178)		856
Indefinite-lived intangible assets:
In-process research and development ("IPR&D")(1)	59		—		59		92		—		92
Trade names	4		—		4		4		—		4
Total indefinite-lived intangible assets	63		—		63		96		—		96
Total intangible assets	$	2,005	$	(1,292)	$	713	$	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.

Our strategic decisions regarding SES’ product offerings and operating regions (see the goodwill discussion on page 13) caused certain technology and IPR&D intangible assets to be abandoned and the carrying values of certain program intangible assets to become unrecoverable. As a result, for the three and nine months ended September 29, 2023, we recognized intangible asset impairment charges of $79 million. The impairment was recorded to “Asset impairment charges” in the condensed consolidated statements of operations within the Civil reportable segment. In the event that we are required to make an additional impairment of goodwill at a future date for any of the reasons identified in our discussion of goodwill or if other events occur that negatively impact these intangible assets, we may also be required to record an additional impairment of intangible assets at that time.

Amortization expense was $50 million and $153 million for the three and nine months ended September 29, 2023, respectively and $57 million and $173 million for the three and nine months ended September 30, 2022, 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.

Table of Contents

LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The estimated annual amortization expense as of September 29, 2023, was as follows:


Fiscal year ending