Leidos Holdings, Inc. [LDOS] Filings

10-Q 1 ldos-20240628.htm 10-Q ldos-20240628

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 June 28, 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 July 23, 2024, was 134,713,696 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	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–Goodwill and Intangible Assets	14
	Note 4–Fair Value Measurements	16
	Note 5–Derivative Instruments	17
	Note 6–Debt	18
	Note 7–Accumulated Other Comprehensive Income (Loss)	19
	Note 8–Earnings Per Share	20
	Note 9–Income Taxes	20
	Note 10–Business Segments	21
	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	29
	Guarantor and Issuer of Guaranteed Securities	30
	Contractual Obligations and Commitments	31
	Critical Accounting Policies	31
	Recently Adopted and Issued Accounting Standards	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	32
Part II
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Mine Safety Disclosures	33
Item 5.	Other Information	33
Item 6.	Exhibits	34
Signatures		35

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	June 28, 2024		December 29, 2023
	(unaudited; in millions, except share and per share data)
Assets:
Cash and cash equivalents	$	823	$	777
Receivables, net	2,615		2,429
Inventory, net	333		310
Other current assets	458		489
Total current assets	4,229		4,005
Property, plant and equipment, net	984		961
Intangible assets, net	592		667
Goodwill	6,102		6,112
Operating lease right-of-use assets, net	480		512
Other long-term assets	522		438
Total assets	$	12,909	$	12,695

Liabilities:
Accounts payable and accrued liabilities	$	2,235	$	2,277
Accrued payroll and employee benefits	703		695
Current portion of long-term debt	567		18
Total current liabilities	3,505		2,990
Long-term debt, net of current portion	4,109		4,664
Operating lease liabilities	486		516
Other long-term liabilities	299		267
Total liabilities	8,399		8,437

Commitments and contingencies (Note 11)

Stockholders’ equity:
Common stock, $0.0001 par value, 500,000,000 shares authorized,134,709,785 and 135,766,419 shares issued and outstanding at June 28, 2024, and December 29, 2023, respectively	—		—
Additional paid-in capital	1,654		1,885
Retained earnings	2,866		2,364
Accumulated other comprehensive loss	(65)		(48)
Total Leidos stockholders’ equity	4,455		4,201
Non-controlling interest	55		57
Total stockholders' equity	4,510		4,258
Total liabilities and stockholders' equity	$	12,909	$	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				Six Months Ended
	June 28, 2024		June 30, 2023		June 28, 2024		June 30, 2023
	(unaudited; in millions, except per share data)
Revenues	$	4,132	$	3,838	$	8,107	$	7,537
Cost of revenues	3,427		3,271		6,764		6,475
Selling, general and administrative expenses	231		237		457		470
Acquisition, integration and restructuring costs	7		6		11		9
Equity earnings of non-consolidated subsidiaries	(8)		(7)		(15)		(13)
Operating income	475		331		890		596
Non-operating income (expense):
Interest expense, net	(51)		(56)		(100)		(110)
Other income (expense), net	2		(1)		4		(5)
Income before income taxes	426		274		794		481
Income tax expense	(102)		(64)		(187)		(107)
Net income	$	324	$	210	$	607	$	374
Less: net income attributable to non-controlling interest	2		3		1		5
Net income attributable to Leidos common stockholders	$	322	$	207	$	606	$	369

Earnings per share:
Basic	$	2.39	$	1.51	$	4.49	$	2.69
Diluted	2.37		1.50		4.42		2.67

See accompanying notes to condensed consolidated financial statements.

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LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Three Months Ended				Six Months Ended
	June 28, 2024		June 30, 2023		June 28, 2024		June 30, 2023
	(unaudited; in millions)
Net income	$	324	$	210	$	607	$	374
Foreign currency translation adjustments	8		(3)		(19)		12
Unrecognized (loss) gain on derivative instruments	(1)		4		1		(1)
Pension adjustments	—		—		1		(1)
Total other comprehensive income (loss), net of taxes	7		1		(17)		10
Comprehensive income	331		211		590		384
Less: net income attributable to non-controlling interest	2		3		1		5
Comprehensive income attributable to Leidos common stockholders	$	329	$	208	$	589	$	379

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
Net income	—	—		322		—		322		2		324
Other comprehensive income, net of taxes	—	—		—		7		7		—		7
Issuances of stock	1	14		—		—		14		—		14
Repurchases of stock and other	(1)	(115)		—		—		(115)		—		(115)
Dividends of $0.38 per share	—	—		(51)		—		(51)		—		(51)
Stock-based compensation	—	20		—		—		20		—		20
Net capital distributions to non-controlling interest	—	—		—		—		—		(2)		(2)
Balance at June 28, 2024	135	$	1,654	$	2,866	$	(65)	$	4,455	$	55	$	4,510

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 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

See accompanying notes to condensed consolidated financial statements.

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LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended
	June 28, 2024		June 30, 2023
	(unaudited; in millions)
Cash flows from operations:
Net income	$	607	$	374
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization	140		166
Stock-based compensation	40		37
Deferred income taxes	(67)		(88)


Other	2		6
Change in assets and liabilities, net of effects of acquisitions:
Receivables	(185)		(123)
Other current assets and other long-term assets	7		49
Accounts payable and accrued liabilities and other long-term liabilities	(174)		(198)
Accrued payroll and employee benefits	10		(32)
Income taxes receivable/payable	57		(125)
Net cash provided by operating activities	437		66
Cash flows from investing activities:
Acquisition of a business, net of cash acquired	—		(4)

Payments for property, equipment and software	(40)		(79)
Net proceeds from sale of assets	2		—
Other	5		—
Net cash used in investing activities	(33)		(83)
Cash flows from financing activities:
Proceeds from debt issuance	—		1,743
Net proceeds from commercial paper	—		200
Repayments of borrowings	(9)		(2,036)
Payments for debt issuance costs	—		(7)
Dividend payments	(104)		(100)
Repurchases of stock and other	(297)		(43)
Proceeds from issuances of stock	26		25
Net capital distributions to non-controlling interests	(3)		(3)
Net cash used in financing activities	(387)		(221)
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash	(4)		3
Net increase (decrease) in cash, cash equivalents and restricted cash	13		(235)
Cash, cash equivalents and restricted cash at beginning of period	928		683
Cash, cash equivalents and restricted cash at end of period	941		448
Less: restricted cash at end of period	118		119
Cash and cash equivalents at end of period	$	823	$	329

See accompanying notes to condensed consolidated financial statements.

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LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS [CONTINUED]





	Six Months Ended
	June 28, 2024		June 30, 2023
	(unaudited; in millions)
Supplementary cash flow information:
Cash paid for income taxes, net of refunds	$	163	$	279
Cash paid for interest	107		96
Non-cash investing activity:
Property, plant and equipment additions	$	57	$	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, 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 48,000, 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 will 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				Six Months Ended
	June 28, 2024		June 30, 2023		June 28, 2024		June 30, 2023
	(in millions, except per share data)
Favorable impact	$	42	$	40	$	67	$	62
Unfavorable impact	(54)		(22)		(79)		(38)
Net impact to income before income taxes	$	(12)	$	18	$	(12)	$	24

Impact on diluted EPS attributable to Leidos common stockholders	$	(0.07)	$	0.10	$	(0.06)	$	0.13

The unfavorable impact for the three and six months ended June 28, 2024, included $39 million and $40 million, respectively, in write-downs on programs within our UK operations related to cost increases and schedule delays.

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 from performance obligations satisfied in previous periods by $16 million and $21 million for the three and six months ended June 28, 2024, respectively, and recognized revenue of $16 million and $15 million for the three and six months ended June 30, 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.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 June 28, 2024, and December 29, 2023, $88 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.

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 $118 million and $151 million at June 28, 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 June 28, 2024, we had $13.8 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 June 28, 2024
	National Security and Digital		Health & Civil		Commercial & International		Defense Systems		Total
	(in millions)
DoD and U.S. Intelligence Community	$	1,247	$	255	$	4	$	441	$	1,947
Other U.S. government agencies(1)	520		986		81		24		1,611
Commercial and non-U.S. customers	28		16		475		30		549
Total	$	1,795	$	1,257	$	560	$	495	$	4,107


	Three Months Ended June 30, 2023
	National Security and Digital		Health & Civil		Commercial & International		Defense Systems		Total
	(in millions)
DoD and U.S. Intelligence Community	$	1,193	$	268	$	7	$	385	$	1,853
Other U.S. government agencies(1)	555		741		80		30		1,406
Commercial and non-U.S. customers	31		15		457		51		554
Total	$	1,779	$	1,024	$	544	$	466	$	3,813

(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)


	Six Months Ended June 28, 2024
	National Security and Digital		Health & Civil		Commercial & International		Defense Systems		Total
	(in millions)
DoD and U.S. Intelligence Community	$	2,468	$	512	$	14	$	866	$	3,860
Other U.S. government agencies(1)	1,045		1,903		154		46		3,148
Commercial and non-U.S. customers	61		32		900		57		1,050
Total	$	3,574	$	2,447	$	1,068	$	969	$	8,058


	Six Months Ended June 30, 2023
	National Security and Digital		Health & Civil		Commercial & International		Defense Systems		Total
	(in millions)
DoD and U.S. Intelligence Community	$	2,347	$	540	$	15	$	775	$	3,677
Other U.S. government agencies(1)	1,112		1,454		145		60		2,771
Commercial and non-U.S. customers	66		29		873		76		1,044
Total	$	3,525	$	2,023	$	1,033	$	911	$	7,492

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

Disaggregated revenues by contract-type were as follows:


	Three Months Ended June 28, 2024
	National Security and Digital		Health & Civil		Commercial & International		Defense Systems		Total
	(in millions)
Cost-reimbursement and fixed-price-incentive-fee	$	948	$	451	$	90	$	313	$	1,802
Firm-fixed-price	494		749		352		143		1,738
Time-and-materials and fixed-price-level-of-effort	353		57		118		39		567
Total	$	1,795	$	1,257	$	560	$	495	$	4,107


	Three Months Ended June 30, 2023
	National Security and Digital		Health & Civil		Commercial & International		Defense Systems		Total
	(in millions)
Cost-reimbursement and fixed-price-incentive-fee	$	956	$	522	$	82	$	267	$	1,827
Firm-fixed-price	497		454		349		157		1,457
Time-and-materials and fixed-price-level-of-effort	326		48		113		42		529
Total	$	1,779	$	1,024	$	544	$	466	$	3,813

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


	Six Months Ended June 28, 2024
	National Security and Digital		Health & Civil		Commercial & International		Defense Systems		Total
	(in millions)
Cost-reimbursement and fixed-price-incentive-fee	$	1,894	$	898	$	175	$	614	$	3,581
Firm-fixed-price	986		1,439		671		282		3,378
Time-and-materials and fixed-price-level-of-effort	694		110		222		73		1,099
Total	$	3,574	$	2,447	$	1,068	$	969	$	8,058


	Six Months Ended June 30, 2023
	National Security and Digital		Health & Civil		Commercial & International		Defense Systems		Total
	(in millions)
Cost-reimbursement and fixed-price-incentive-fee	$	1,883	$	1,075	$	174	$	539	$	3,671
Firm-fixed-price	1,004		857		638		291		2,790
Time-and-materials and fixed-price-level-of-effort	638		91		221		81		1,031
Total	$	3,525	$	2,023	$	1,033	$	911	$	7,492

Disaggregated revenues by geographic location were as follows:


	Three Months Ended June 28, 2024
	National Security and Digital		Health & Civil		Commercial & International		Defense Systems		Total
	(in millions)
United States	$	1,788	$	1,255	$	227	$	479	$	3,749
International	7		2		333		16		358
Total	$	1,795	$	1,257	$	560	$	495	$	4,107


	Three Months Ended June 30, 2023
	National Security and Digital		Health & Civil		Commercial & International		Defense Systems		Total
	(in millions)
United States	$	1,770	$	1,024	$	217	$	463	$	3,474
International	9		—		327		3		339
Total	$	1,779	$	1,024	$	544	$	466	$	3,813


	Six Months Ended June 28, 2024
	National Security and Digital		Health & Civil		Commercial & International		Defense Systems		Total
	(in millions)
United States	$	3,558	$	2,444	$	435	$	947	$	7,384
International	16		3		633		22		674
Total	$	3,574	$	2,447	$	1,068	$	969	$	8,058

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


	Six Months Ended June 30, 2023
	National Security and Digital		Health & Civil		Commercial & International		Defense Systems		Total
	(in millions)
United States	$	3,505	$	2,022	$	409	$	904	$	6,840
International	20		1		624		7		652
Total	$	3,525	$	2,023	$	1,033	$	911	$	7,492

Revenues by customer-type, contract-type and geographic location exclude lease income of $25 million and $49 million for the three and six months ended June 28, 2024, respectively, and $25 million and $45 million for the three and six months ended June 30, 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.

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	June 28, 2024		December 29, 2023
		(in millions)
Contract assets - current:
Unbilled receivables	Receivables, net	$	1,136	$	1,041

Contract liabilities - current:
Deferred revenue(1)	Accounts payable and accrued liabilities	$	296	$	442

Contract liabilities - non-current:
Deferred revenue(1)	Other long-term liabilities	$	16	$	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 and six months ended June 28, 2024, $54 million and $211 million, respectively, of revenue recognized was included as a contract liability at December 29, 2023. For the three and six months ended June 30, 2023, $32 million and $187 million, respectively, of revenue recognized was included as a contract liability at December 30, 2022.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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	—		—		(10)		—		(10)
Goodwill at June 28, 2024(2)	$	2,758	$	1,366	$	790	$	1,188	$	6,102

(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.

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.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Intangible Assets

Intangible assets, net consisted of the following:


	June 28, 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	$	(1,233)	$	454	$	1,689	$	(1,175)	$	514
Software and technology	262		(155)		107		263		(144)		119
Customer relationships	52		(25)		27		52		(22)		30
Total finite-lived intangible assets	2,001		(1,413)		588		2,004		(1,341)		663
Indefinite-lived intangible assets:
Trade names	4		—		4		4		—		4
Total intangible assets	$	2,005	$	(1,413)	$	592	$	2,008	$	(1,341)	$	667

Amortization expense was $36 million and $73 million for the three and six months ended June 28, 2024, respectively and $51 million and $103 million for the three and six months ended June 30, 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.

The estimated annual amortization expense as of June 28, 2024, was as follows:


Fiscal year ending
	(in millions)
2024 (remainder of year)	$	74
2025	120
2026	98
2027	72
2028	62
2029 and thereafter	162
	$	588

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 4–Fair Value Measurements

The accounting standard for fair value measurements establishes a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: observable inputs such as quoted prices in active markets (Level 1); inputs other than quoted prices in active markets that are observable, either directly or indirectly, or quoted prices that are not active (Level 2); and unobservable inputs in which there is little or no market data (e.g., discounted cash flow and other similar pricing models), which requires us to develop our own 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:


	June 28, 2024				December 29, 2023
	Carrying value		Fair value		Carrying value		Fair value
	(in millions)
Financial assets:
Derivatives	$	11	$	11	$	11	$	11

As of June 28, 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 June 28, 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 and our credit rating (Level 2 inputs).

As of June 28, 2024, we did not have any assets or liabilities measured at fair value on a non-recurring basis.

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LEIDOS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 5–Derivative Instruments

We manage our risk to changes in interest rates through the use of derivative instruments. We do not hold derivative instruments for trading or speculative purposes. For variable rate borrowings, we use fixed interest rate swaps, effectively converting a portion of the variable interest rate payments to fixed interest rate payments. These swaps are designated as cash flow hedges.

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

Asset derivatives

Balance sheet line item

June 28,
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				Six Months Ended
	June 28, 2024		June 30, 2023		June 28, 2024		June 30, 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	$	51	$	56	$	100	$	110

Amount recognized in other comprehensive income	$	2	$	1