425

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of The Securities Exchange Act of 1934

July 29, 2016

Date of Report (Date of Earliest Event Reported)

Leidos Holdings, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	001-33072	20-3562868
(State of Incorporation)	(Commission File Number)	( I.R.S. Employer Identification No.)

11951 Freedom Drive, Reston, Virginia 20190

(Address of Principal Executive Offices) (Zip Code)

(571) 526-6000

(Telephone Number)

Not applicable

(Former Name or Former Address, If Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

x Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 8.01 Other events.

As previously announced, Leidos Holdings, Inc. (“Leidos”) entered into a definitive agreement with Lockheed Martin Corporation (“Lockheed Martin”) pursuant to which Leidos will combine with Lockheed Martin’s Information Systems & Global Solutions (“IS&GS”) business segment in a Reverse Morris Trust transaction, pursuant to the Agreement and Plan of Merger dated January 26, 2016, as amended (the “Merger Agreement”), among Leidos, Lockheed Martin, Abacus Innovations Corporation, a Delaware corporation and a wholly owned subsidiary of Lockheed Martin (“Abacus” or “Splitco”), and Lion Merger Co., a Delaware corporation and a wholly owned subsidiary of Leidos (“Merger Sub”).

On July 11, 2016, Lockheed Martin commenced an exchange offer related to the proposed transactions contemplated by the Merger Agreement. The exchange offer provides Lockheed Martin stockholders with the opportunity to exchange their shares of Lockheed Martin common stock for shares of Abacus common stock, which will convert into shares of Leidos common stock upon completion of the merger. In connection with the exchange offer, (i) Abacus filed a Registration Statement on Form S-4 and Form S-1 with the Securities and Exchange Commission (“SEC”) that was declared effective on July 11, 2016 (Commission File No. 333-210797) (the “Abacus Registration Statement”) and (ii) Leidos filed a Registration Statement on Form S-4 with the SEC that also was declared effective on July 11, 2016 (Commission File No. 333-210796) (the “Leidos Registration Statement” and, together with the Abacus Registration Statement, the “Registration Statements”).

Leidos is filing this current report on Form 8-K to provide updated unaudited pro forma financial information, which gives effect to the Merger and the other transactions contemplated by the Merger Agreement as if they had been consummated, consisting of an:

• unaudited pro forma combined condensed consolidated balance sheet as of July 1, 2016;

• unaudited pro forma combined condensed consolidated statement of income for the six months ended July 1, 2016;

• unaudited pro forma combined consolidated statement of income for the eleven months ended January 1, 2016; and

• unaudited supplemental combined consolidated statement of income for the 12 months ended January 1, 2016.

All capitalized terms used in the unaudited pro forma financial information have the meanings specified in the Leidos Registration Statement.

Also included in this current report on Form 8-K are updates to certain additional financial information included in the Registration Statements (“Additional Financial Information”), including:

• certain non-GAAP financial measures that Leidos’ management uses to evaluate Leidos’ operating performance and will use to evaluate the combined business going forward;

• reconciliation of the non-GAAP measures to income from continuing operations attributable to the company, basic earnings per share (“EPS”) from continuing operations and diluted EPS from continuing operations, the most directly comparable GAAP measures; and

• the estimated value of backlog, which represents the estimated amount of future revenues to be recognized under negotiated contracts as work is performed.

The updated unaudited pro forma financial information and Additional Financial Information listed above are attached hereto as Exhibit 99.1 and are incorporated herein by reference. The Additional Financial Information will be incorporated by reference into the Abacus Registration Statement and the Leidos Registration Statement.

This Current Report on Form 8-K is also being filed to provide (i) the unaudited interim combined financial statements of the IS&GS business as of June 26, 2016 and for the six months ended June 26, 2016 and June 28, 2015, (ii) Management’s Discussion and Analysis of Financial Condition and Results of Operations of the IS&GS business for the six months ended June 26, 2016 and June 28, 2015, and (iii) the unaudited balance sheet of Abacus as of June 26, 2016, which are included as Exhibits 99.2, 99.3 and 99.4, respectively, to this Current Report on Form 8-K and incorporated herein by reference (collectively, the “IS&GS and Abacus Second Quarter Financial Information”). The IS&GS and Abacus Second Quarter Financial Information will also be incorporated by reference into the Abacus Registration Statement and the Leidos Registration Statement and has been provided to Leidos by Lockheed Martin.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits.

Exhibit No.	Description
15.1	Acknowledgement of Ernst & Young LLP related to the Information Systems & Global Solutions Business
15.2	Acknowledgement of Ernst & Young LLP related to Abacus Innovations Corporation
99.1	Leidos Holdings, Inc. Unaudited Pro Forma Combined Consolidated Financial Statements, Supplemental Combined Consolidated Statement of Income, and Additional Financial Information
99.2	Unaudited Interim Combined Financial Statements of the Information Systems & Global Solutions Business as of June 26, 2016 and for the Six Months Ended June 26, 2016 and June 28, 2015
99.3	Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Information Systems & Global Solutions Business for the Six Months Ended June 26, 2016 and June 28, 2015
99.4	Unaudited Balance Sheet of Abacus Innovations Corporation as of June 26, 2016

Cautionary Statement Regarding Forward Looking Statements

The forward looking statements contained in this document involve risks and uncertainties that may affect Leidos Holdings, Inc.’s (“Leidos”) operations, markets, products, services, prices and other factors as discussed in filings with the Securities and Exchange Commission (the “SEC”). These risks and uncertainties include, but are not limited to, economic, competitive, legal, governmental and technological factors. Accordingly, there is no assurance that the expectations of Leidos will be realized. This document also contains statements about the proposed business combination transaction between Leidos and Lockheed Martin Corporation (“Lockheed Martin”), in which Lockheed Martin will separate a substantial portion of its government information technology infrastructure services business and its technical services business, which have been realigned in the Information Systems & Global Solutions (IS&GS) business segment, and combine this business with Leidos in a Reverse Morris Trust transaction (the “Transaction”). Many factors could cause actual results to differ materially from these forward-looking statements with respect to the Transaction, including risks relating to the completion of the transaction on anticipated terms and timing, including obtaining stockholder and regulatory approvals, anticipated tax treatment, the dependency of any split-off transaction on market conditions and the value to be received in any split-off transaction, unforeseen liabilities, future capital expenditures, revenues, expenses, earnings, synergies, economic performance, indebtedness, financial condition, losses, future prospects, business and management strategies

for the management, expansion and growth of the new combined company’s operations, Leidos’ ability to integrate the businesses successfully and to achieve anticipated synergies, and the risk that disruptions from the Transaction will harm Leidos’ business. While the list of factors presented here is considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements. Consequences of material differences in results as compared with those anticipated in the forward-looking statements could include, among other things, business disruption, operational problems, financial loss, legal liability to third parties and similar risks, any of which could have a material adverse effect on Leidos’ consolidated financial condition, results of operations or liquidity. For a discussion identifying additional important factors that could cause actual results to vary materially from those anticipated in the forward-looking statements, see Leidos’ filings with the SEC, including the prospectus included in the registration statement on Form S-4, the prospectus filed by Leidos pursuant to Rule 424(b)(3), Leidos’ definitive proxy statement for its annual meeting of stockholders, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in Leidos’ annual report on Form 10-K for the period ended January 1, 2016, its Quarterly Reports filed on Form 10-Q, and such other filings that Leidos makes with the SEC from time to time, which are available at http://www.Leidos.com and at the SEC’s web site at http://www.sec.gov. Leidos assumes no obligation to provide revisions or updates to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws.

Additional Information and Where to Find It

In connection with the proposed transaction, Abacus Innovations Corporation, a wholly-owned subsidiary of Lockheed Martin created for the Transaction (“Splitco”), has filed with the SEC, and the SEC declared effective on July 11, 2016, a registration statement on Form S-4 and Form S-1 containing a prospectus, and Leidos has filed with the SEC, and the SEC declared effective on July 11, 2016, a registration statement on Form S-4 containing a prospectus, and Leidos has filed with the SEC a definitive proxy statement on Schedule 14A. INVESTORS AND SECURITY HOLDERS ARE ADVISED TO READ THE REGISTRATION STATEMENTS/PROSPECTUSES AND PROXY STATEMENT AS WELL AS ANY OTHER RELEVANT DOCUMENTS, BECAUSE THEY CONTAIN IMPORTANT INFORMATION ABOUT THE PARTIES AND THE PROPOSED TRANSACTION. Investors and security holders may obtain a free copy of the prospectuses and proxy statement and other documents filed with the SEC by Lockheed Martin, Splitco and Leidos at the SEC’s website at http://www.sec.gov. Free copies of these documents and each of the companies’ other filings with the SEC, also may be obtained from Leidos’ website at http://www.Leidos.com.

Non-Solicitation

This communication shall not constitute an offer to sell or the solicitation of an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, each Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	LEIDOS HOLDINGS, INC.
Date: July 29, 2016	By:	/s/ James C. Reagan
		James C. Reagan
	Its:	Executive Vice President and Chief Financial Officer

Exhibit Index

Exhibit No.	Description
15.1	Acknowledgement of Ernst & Young LLP related to the Information Systems & Global Solutions Business
15.2	Acknowledgement of Ernst & Young LLP related to Abacus Innovations Corporation
99.1	Leidos Holdings, Inc. Unaudited Pro Forma Combined Consolidated Financial Statements, Supplemental Combined Consolidated Statement of Income, and Additional Financial Information
99.2	Unaudited Interim Combined Financial Statements of the Information Systems & Global Solutions Business as of June 26, 2016 and for the Six Months Ended June 26, 2016 and June 28, 2015
99.3	Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Information Systems & Global Solutions Business for the Six Months Ended June 26, 2016 and June 28, 2015
99.4	Unaudited Balance Sheet of Abacus Innovations Corporation as of June 26, 2016

EX-15.1

Exhibit 15.1

Acknowledgment of Ernst & Young LLP,

Independent Registered Public Accounting Firm

Board of Directors

Leidos Holdings, Inc.

We are aware of the incorporation by reference of our report dated July 29, 2016, relating to the unaudited combined interim financial statements of the Information Systems & Global Solutions business of Lockheed Martin Corporation as of June 26, 2016 and for the six months ended June 26, 2016 and June 28, 2015 that is included in Leidos Holdings Inc.’s. Current Report on Form 8-K filed on July 29, 2016, in the following Registration Statements of Leidos Holdings Inc.:

• 333-138095 on Form S-8, dated October 19, 2006;

• 333-138095 on Form S-8 (Post-Effective Amendment No. 1) dated October 12, 2007;

• 333-153360 on Form S-8, dated September 8, 2008;

• 333-169693 on Form S-8, dated September 30, 2010; and

• 333-210796 on Form S-4, effective July 11, 2016.

/s/ Ernst & Young LLP

McLean, Virginia

July 29, 2016

EX-15.2

Exhibit 15.2

Acknowledgment of Ernst & Young LLP,

Independent Registered Public Accounting Firm

Board of Directors

Leidos Holdings, Inc.

We are aware of the incorporation by reference of our report dated July 29, 2016, relating to the unaudited balance sheet of Abacus Innovations Corporation as of June 26, 2016 that is included in Leidos Holdings Inc.’s Current Report on Form 8-K filed on July 29, 2016, in the following Registration Statements of Leidos Holdings Inc.:

• 333-138095 on Form S-8, dated October 19, 2006;

• 333-138095 on Form S-8 (Post-Effective Amendment No. 1) dated October 12, 2007;

• 333-153360 on Form S-8, dated September 8, 2008;

• 333-169693 on Form S-8, dated September 30, 2010; and

• 333-210796 on Form S-4, effective July 11, 2016.

/s/ Ernst & Young LLP

McLean, Virginia

July 29, 2016

EX-99.1

Exhibit 99.1

UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS AND

SUPPLEMENTAL COMBINED CONSOLIDATED STATEMENT OF INCOME

Unaudited Pro Forma Combined Consolidated Financial Statements as of and for the Six Months Ended July 1, 2016 and for the 11 Months Ended January 1, 2016

The following unaudited pro forma combined consolidated financial statements of Leidos (the “pro forma financial statements”) include the unaudited pro forma combined condensed consolidated balance sheet (the “pro forma balance sheet”) as of July 1, 2016 and the unaudited pro forma combined condensed consolidated statements of income for the six months ended July 1, 2016 (the “interim pro forma statement of income”) and the 11 months ended January 1, 2016 (the “11-month pro forma statement of income” and, together with the interim pro forma statement of income, the “pro forma statements of income”), after giving effect to the Merger and other Transactions.

The pro forma balance sheet combines the historical condensed consolidated balance sheet of Leidos as of July 1, 2016, and the historical combined balance sheet of the Information Systems & Global Solutions business segment of Lockheed Martin (the “Splitco Business”) as of June 26, 2016, giving effect to the Merger and other Transactions as if they had been consummated on July 1, 2016. The interim pro forma statement of income combines the historical condensed consolidated statement of income of Leidos for the six months ended July 1, 2016, and the historical combined statement of earnings of the Splitco Business for the six months ended June 26, 2016, giving effect to the Merger and other Transactions as if they had been consummated on January 31, 2015. The 11-month pro forma statement of income combines the historical consolidated statement of income of Leidos for the 11 months ended January 1, 2016, and the historical combined statement of earnings of the Splitco Business for the year ended December 31, 2015, as adjusted by one month to align the length of the period presented for the Splitco Business to that of Leidos, giving effect to the Merger and other Transactions as if they had been consummated on January 31, 2015.

The historical combined financial statements of the Splitco Business have been “carved-out” from Lockheed Martin’s consolidated financial statements and reflect assumptions and allocations made by Lockheed Martin. The Splitco Business’ historical combined financial statements include assets and liabilities specifically attributable to the Splitco Business, and certain assets and liabilities that are held by Lockheed Martin that are specifically identifiable or otherwise attributable to the Splitco Business. The Splitco Business’ historical combined financial statements include all revenues and costs directly attributable to the Splitco Business and an allocation of expenses related to certain Lockheed Martin corporate functions. The financial information in the Splitco Business historical combined financial statements does not necessarily include all expenses that would have been incurred by the Splitco Business had it been a separate, stand-alone entity. Actual costs that may have been incurred if the Splitco Business had been a stand-alone company would depend on a number of factors, including the chosen organizational structure and functions outsourced or performed by employees. As such, the Splitco Business’ historical combined financial statements do not necessarily reflect what the Splitco Business’ financial condition and results of operations would have been had the Splitco Business operated as a stand-alone company during the periods or as of the dates presented.

The pro forma financial statements have been prepared in accordance with Article 11 of Regulation S-X. The historical financial information has been adjusted in the pro forma financial statements to give effect to pro forma events that are (1) directly attributable to the Merger and other Transactions, (2) factually supportable, and (3) with respect to the statements of income, expected to have a continuing impact on the results of operations of the combined business.

The pro forma financial statements were prepared using the acquisition method of accounting with Leidos considered the accounting acquirer of the Splitco Business. Under the acquisition method of accounting, the purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair values, with any excess purchase price allocated to goodwill.

The Merger and the other Transactions have not been consummated. Accordingly, the pro forma purchase price allocation of the Splitco Business’ assets to be acquired and liabilities to be assumed is based on preliminary estimates of the fair values of the assets acquired and liabilities assumed, and the pro forma financial statements are based upon available information and certain assumptions that management of Leidos believes are factually supportable as of the date of this document. A final determination of the fair value of the Splitco Business’ assets acquired and liabilities assumed, including intangible assets, will be based on the actual net tangible and intangible assets and liabilities of the Splitco Business that exist as of the closing date of the Merger and, therefore, cannot be made prior to the completion of the Merger. As a result of the foregoing, the pro forma adjustments are preliminary and are subject to change as additional information becomes available and as additional analyses are performed. These potential changes to the purchase price allocation and related pro forma adjustments could be material.

The pro forma financial statements do not reflect the costs of integration activities or benefits that may result from realization of at least $120 million of anticipated annualized net cost synergies by the end of fiscal year 2018 or potential improved growth prospects. Leidos expects to incur significant, one-time costs, some of which will be capitalized, in connection with the Transactions, including approximately (1) $29 million of financing-related fees, (which, when added to the approximately $34 million that Splitco expects to incur, totals approximately $63 million), (2) $30 million of transaction-related costs including advisory, legal, accounting, and other professional fees (of which $12 million has been incurred through July 1, 2016), and (3) $150 million to $175 million of transition and integration-related costs (of which $12 million has been incurred through July 1, 2016), a portion of which will be incremental capital spending, which Leidos management believes are necessary to realize the anticipated synergies from the Transactions. The financing fees and transaction-related costs are expected to be incurred in 2016 and will primarily be funded through new term loans issued in connection with the Transactions. The transition and integration-related costs will be incurred primarily during the first three years following the consummation of the Transactions, and will primarily be funded through cash generated from operations. Leidos management expects to recover approximately $50 million to $70 million of the transition and integration-related costs as allowable costs through cost-type contracts over a five year period. No assurances of the timing or the amount of synergies able to be captured, or the costs necessary to achieve those cost synergies, can be provided.

The pro forma financial statements do not reflect any adjustments related to the agreements which Splitco and Lockheed Martin will enter into following the Distribution (as described in detail in the section titled “Other Agreements—Additional Agreements” in the Leidos Registration Statement), as these agreements are not expected to result in any material incremental recurring income or expenses to the combined company following the consummation of the Merger.

The adjustments included in the pro forma financial statements are based upon current available information and assumptions that Leidos believes to be reasonable. These adjustments and related assumptions are described in the accompanying notes presented on the following pages.

The pro forma financial statements are for informational purposes only and are not intended to represent or to be indicative of the actual results of operations or financial position that the combined Leidos and Splitco Business would have reported had the Merger and other Transactions been completed as of the dates set forth in the pro forma financial statements, and should not be taken as being indicative of Leidos’ future consolidated results of operations or financial position. The actual results may differ significantly from those reflected in the pro forma financial statements for a number of reasons, including differences between the assumptions used to prepare the pro forma financial statements and actual amounts.

The pro forma financial statements should be read in conjunction with:

• the accompanying notes to the pro forma financial statements;

• Leidos’ audited historical consolidated financial statements and related notes as of and for the 11 months ended January 1, 2016, included in Leidos’ Transition Report on Form 10-K;

• Leidos’ unaudited historical condensed consolidated financial statements and related notes as of and for the six-month period ended July 1, 2016, included in Leidos’ Quarterly Report on Form 10-Q;

• the Splitco Business’ audited historical combined financial statements and related notes as of and for the year ended December 31, 2015, included in the Leidos Registration Statement; and

• the Splitco Business’ unaudited interim combined financial statements and related notes as of June 26, 2016 and for the six months ended June 26, 2016 and June 28, 2015, included in Leidos’ Current Report on Form 8-K dated July 29, 2016.

UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET

AS OF JULY 1, 2016

	Historical
	Leidos as of July 1, 2016			Splitco Business as of June 26, 2016			Pro Forma Adjustments			Footnote Reference	Pro Forma Combined
	(in millions)
ASSETS
Current assets:
Cash and cash equivalents	$	670		$	35		$	(379	)	7.A	$	326
Receivables, net		924			841			(37	)	7.B		1,728
Inventory, prepaid expenses and other current assets		223			141			(14	)	7.C		350
Total current assets		1,817			1,017			(430	)			2,404
Property, plant and equipment, net		131			91			—				222
Goodwill		1,207			2,810			721		7.D		4,738
Intangible assets, net		21			109			1,541		7.E		1,671
Deferred income taxes		7			17			—				24
Other assets		218			53			57		7.F		328
	$	3,401		$	4,097		$	1,889			$	9,387
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	720		$	234		$	358		7.G	$	1,312
Accrued payroll and employee benefits		269			—			209		7.H		478
Notes payable and long-term debt, current portion		1			—			81		7.I		82
Customer advances and amounts in excess of costs incurred		—			255			(255	)	6		—
Salaries, benefits and payroll taxes		—			218			(218	)	6		—
Other current liabilities		—			262			(262	)	6		—
Total current liabilities		990			969			(87	)			1,872
Notes payable and long-term debt, net of current portion		1,092			—			2,402		7.J		3,494
Deferred income taxes		38			151			650		7.K		839
Other long-term liabilities		157			89			(15	)	7.L		231
Commitments and contingencies
Stockholders’ equity:
Preferred stock		—			—			—				—
Common stock		—			—			—				—
Additional paid-in capital		1,358			—			1,836		7.M		3,194
Accumulated deficit		(230	)		—			(19	)	7.M		(249	)
Net parent investment		—			2,926			(2,926	)	7.M		—
Accumulated other comprehensive loss		(4	)		(48	)		48		7.M		(4	)
Total stockholders’ equity		1,124			2,878			(1,061	)			2,941
Noncontrolling interest		—			10			—				10
Total equity		1,124			2,888			(1,061	)			2,951
	$	3,401		$	4,097		$	1,889			$	9,387

UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF INCOME

FOR THE SIX MONTHS ENDED JULY 1, 2016

	Historical
	Leidos for the Six Months Ended July 1, 2016			Splitco Business for the Six Months Ended June 26, 2016			Pro Forma Adjustments			Footnote Reference	Pro Forma Combined
	(in millions, except per share amounts)
Revenues	$	2,600		$	2,683		$	(23	)	8.N	$	5,260
Costs and expenses:
Cost of revenues		2,295			2,449			(167	)	8.O		4,577
Selling, general and administrative expenses		117			—			204		8.P		321
Acquisition and integration costs		24			—			(24	)	8.Q		—
Operating income		164			234			(36	)			362
Non-operating income (expense):
Interest expense, net		(24	)		—			(47	)	8.R		(71	)
Other (expense) income, net		(2	)		13			—				11
Income from continuing operations before income taxes		138			247			(83	)			302
Income tax expense		(44	)		(87	)		23		8.S		(108	)
Income from continuing operations		94			160			(60	)			194
Less: Net income attributable to noncontrolling interest		—			3			—				3
Income from continuing operations attributable to the company	$	94		$	157		$	(60	)		$	191
Earnings per share:
Basic	$	1.31									$	1.28
Diluted	$	1.27									$	1.26
Weighted-average common shares:
Basic		72						77		8.T		149
Diluted		74						77		8.T		151

UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF INCOME

FOR THE 11 MONTHS ENDED JANUARY 1, 2016

	Historical
	Leidos for the 11 Months Ended January 1, 2016			Splitco Business for the Year Ended December 31, 2015			Less: Splitco Business for the One Month Ended January 31, 2015			Pro Forma Adjustments			Footnote Reference	Pro Forma Combined
	(in millions, except per share amounts)
Revenues	$	4,712		$	5,626		$	(431	)	$	(38	)	8.N	$	9,869
Costs and expenses:
Cost of revenues		4,146			5,177			(393	)		(400	)	8.O		8,530
Selling, general and administrative expenses		201			—			—			423		8.P		624
Bad debt expense		8			—			—			—				8
Asset impairment charges		33			—			—			—				33
Separation transaction and restructuring expenses		4			—			—			—				4
Operating income		320			449			(38	)		(61	)			670
Non-operating income (expense):
Interest income		4			—			—			—				4
Interest expense		(53	)		—			—			(88	)	8.R		(141	)
Other income, net		84			22			(1	)		—				105
Income from continuing operations before income taxes		355			471			(39	)		(149	)			638
Income tax expense		(112	)		(162	)		10			43		8.S		(221	)
Income from continuing operations		243			309			(29	)		(106	)			417
Less: Net income attributable to noncontrolling interest		—			5			—			—				5
Income from continuing operations attributable to the company	$	243		$	304		$	(29	)	$	(106	)		$	412
Earnings per share:
Basic	$	3.33												$	2.75
Diluted	$	3.28												$	2.73
Weighted-average common shares:
Basic		73									77		8.T		150
Diluted		74									77		8.T		151

Unaudited Supplemental Combined Consolidated Statement of Income for the 12 Months Ended January 1, 2016

The following unaudited supplemental combined consolidated statement of income (the “supplemental 12-month statement of income”) combines the historical consolidated statement of income of Leidos for the 11 months ended January 1, 2016, the unaudited historical statement of income of Leidos for the one month ended January 30, 2015 and the historical combined statement of earnings of the Splitco Business for the year ended December 31, 2015, giving effect to the Merger and other Transactions as if they had been consummated on January 3, 2015.

The supplemental 12-month statement of income has been included to provide financial information about Leidos for a full-year period in light of the fact that the most recent Leidos audited consolidated financial statements reflect an 11-month transition period following Leidos’ change in its fiscal year-end in 2015, and provides information about the combined Leidos and Splitco Business for the full-year period. Leidos management believes that the supplemental 12-month statement of income is meaningful for a complete understanding of the Merger and other Transactions, but is not intended to, and does not, replace the pro forma financial statements prepared in accordance with Article 11 of Regulation S-X.

As is the case with the Article 11 pro forma financial statements, the supplemental 12-month statement of income was prepared using the historical combined financial statements of the Splitco Business and the acquisition method of accounting with Leidos considered the accounting acquirer of the Splitco Business. The adjustments included in the supplemental 12-month statement of income are based upon current available information and assumptions that Leidos believes to be reasonable. The adjustments and related assumptions are described in the accompanying notes and, except as described in those notes, are the same as those used in the preparation of the pro forma financial statements.

The supplemental 12-month statement of income does not reflect the costs of integration activities or benefits that may result from realization of at least $120 million of anticipated annualized net cost synergies by the end of fiscal year 2018 or potential improved growth prospects. Leidos expects to incur significant, one-time costs, some of which will be capitalized, in connection with the Transactions, including approximately (1) $29 million of financing-related fees, (which, when added to the approximately $34 million that Splitco expects to incur, totals approximately $63 million), (2) $30 million of transaction-related costs including advisory, legal, accounting, and other professional fees (of which $12 million has been incurred through July 1, 2016), and (3) $150 million to $175 million of transition and integration-related costs (of which $12 million has been incurred through July 1, 2016), a portion of which will be incremental capital spending, which Leidos management believes are necessary to realize the anticipated synergies from the Transactions. The financing fees and transaction-related costs are expected to be incurred in 2016 and will primarily be funded through new term loans issued in connection with the Transactions. The transition and integration-related costs will be incurred primarily during the first three years following the consummation of the Transactions, and will primarily be funded through cash generated from operations. Leidos management expects to recover approximately $50 million to $70 million of the transition and integration-related costs as allowable costs through its cost-type contracts over a five year period. No assurances of the timing or the amount of synergies able to be captured, or the costs necessary to achieve those cost synergies, can be provided.

The supplemental 12-month statement of income does not reflect any adjustments related to the agreements which Splitco and Lockheed Martin will enter into following the Distribution (as described in detail in the section titled “Other Agreements—Additional Agreements” in the Leidos Registration Statement), as these agreements are not expected to result in any material incremental recurring income or expenses to the combined company following the consummation of the Merger.

The supplemental 12-month statement of income is for informational purposes only and is not intended to represent or to be indicative of the actual results of operations or financial position that the combined Leidos and the Splitco Business would have reported had the Merger and other Transactions been completed as of January 3, 2015, and should not be taken as being indicative of Leidos’ future consolidated results of operations or financial position. The actual results may differ significantly from those reflected in the supplemental 12-month statement of income for a number of reasons, including differences between the assumptions used to prepare the supplemental 12-month statement of income and actual amounts.

The supplemental 12-month statement of income should be read in conjunction with:

• the accompanying notes to the supplemental 12-month statement of income;

• Leidos’ audited historical consolidated financial statements and related notes as of and for the 11 months ended January 1, 2016, included in Leidos’ Transition Report on Form 10-K; and

• the Splitco Business’ audited historical combined financial statements and related notes as of and for the year ended December 31, 2015, included in the Leidos Registration Statement.

UNAUDITED SUPPLEMENTAL COMBINED CONSOLIDATED STATEMENT OF INCOME

FOR THE 12 MONTHS ENDED JANUARY 1, 2016

	Historical
	Leidos for the 11 Months Ended January 1, 2016			Leidos for the One Month Ended January 30, 2015			Splitco Business for the Year Ended December 31, 2015			Adjustments			Footnote Reference	Supplemental Combined for the 12 Months Ended January 1, 2016
	(in millions, except per share amounts)
Revenues	$	4,712		$	374		$	5,626		$	(41	)	8.N	$	10,671
Costs and expenses:
Cost of revenues		4,146			322			5,177			(432	)	8.O		9,213
Selling, general and administrative expenses		201			31			—			458		8.P		690
Bad debt expense		8			1			—			—				9
Asset impairment charges		33			40			—			—				73
Separation transaction and restructuring expenses		4			2			—			—				6
Operating income (loss)		320			(22	)		449			(67	)			680
Non-operating income (expense):
Interest income		4			—			—			—				4
Interest expense		(53	)		(5	)		—			(95	)	8.R		(153	)
Other income, net		84			—			22			—				106
Income (loss) from continuing operations before income taxes		355			(27	)		471			(162	)			637
Income tax expense		(112	)		20			(162	)		47		8.S		(207	)
Income (loss) from continuing operations		243			(7	)		309			(115	)			430
Less: Net income attributable to noncontrolling interest		—			—			5			—				5
Income (loss) from continuing operations attributable to the company	$	243		$	(7	)	$	304		$	(115	)		$	425
Earnings per share:
Basic	$	3.33												$	2.83
Diluted	$	3.28												$	2.81
Weighted-average common shares
Basic		73									77		8.T		150
Diluted		74									77		8.T		151

Notes to the Unaudited Pro Forma Combined Consolidated Financial Statements and the Unaudited Supplemental Combined Consolidated Statement of Income

Note 1: Basis of Presentation

The accompanying pro forma financial statements were prepared in accordance with Article 11 of Regulation S-X and present the pro forma balance sheet and pro forma statements of income of Leidos based upon the historical financial statements of each of Leidos and the Splitco Business, after giving effect to the Merger and other Transactions and are intended to reflect the impact of the Merger and other Transactions on Leidos’ consolidated financial statements. The historical financial statements of Leidos and the Splitco Business have been adjusted in the accompanying pro forma financial statements to give effect to pro forma events that are (i) directly attributable to the Merger and other Transactions, (ii) factually supportable, and (iii) with respect to the statements of income, expected to have a continuing impact on the consolidated results of operations of the combined business.

The supplemental 12-month statement of income is also based upon the historical financial statements of each of Leidos and the Splitco Business, after giving effect to the Merger and other Transactions and is intended to reflect the full-year impact of the Merger and other Transactions on Leidos’ consolidated results of operations. The supplemental 12-month statement of income has been included to provide financial information about Leidos for a full-year period in light of the fact that the most recent Leidos audited consolidated financial statements reflect an 11-month transition period following Leidos’ change in its fiscal year-end in 2015, and provides information about the combined Leidos and Splitco Business for the full-year period. Leidos management believes that the supplemental 12-month statement of income is meaningful for a complete understanding of the Merger and other Transactions, but is not intended to, and does not, replace the pro forma financial statements prepared in accordance with Article 11 of Regulation S-X.

During 2015, the Board of Directors of Leidos approved a change to Leidos’ fiscal year-end from the Friday nearest the end of January to the Friday nearest the end of December. As a result of this change, the audited historical consolidated financial statements of Leidos included in Leidos’ Transition Report on Form 10-K and reflected within the 11-month pro forma statement of income and the supplemental 12-month statement of income, cover an 11-month period which began on January 31, 2015 and ended on January 1, 2016. The audited historical combined financial statements of the Splitco Business included in the Leidos Registration Statement and reflected within the 11-month pro forma statement of income and the supplemental 12-month statement of income cover a 12-month period which began on January 1, 2015 and ended on December 31, 2015. Accordingly, in the 11-month pro forma statement of income, an adjustment has been made to remove the results of operations of the Splitco Business for the one month ended January 31, 2015 to derive the results for the corresponding 11-month period ended December 31, 2015. In the supplemental 12-month statement of income, an adjustment has been made to add the unaudited results of operations of Leidos for the one month ended January 30, 2015 to derive the 12-month period ended January 1, 2016.

The accompanying pro forma financial statements and the supplemental 12-month statement of income are presented for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by Leidos if the Merger and other Transactions had been consummated for the periods presented or that will be achieved in the future. The pro forma financial statements and supplemental 12-month statement of income do not reflect the costs of any integration activities or benefits that may result from realization of revenue or net cost synergies expected to result from the Merger. In addition, throughout the period presented in the pro forma financial statements and the supplemental 12-month statement of income, the operations of the Splitco Business were conducted and accounted for as part of Lockheed Martin. The audited historical combined financial statements and unaudited historical combined financial statements of the Splitco Business have been derived from Lockheed Martin’s historical accounting records and reflect certain allocations of direct costs and expenses. All of the allocations and estimates in such financial statements are based on assumptions that the management of Lockheed Martin believes are reasonable. The historical combined financial statements of the Splitco Business do not necessarily represent the financial position or results of operations of the Splitco Business had it been operated as a stand-alone company during the periods or at the dates presented.

Note 2: Accounting Policies

Acquisition accounting rules require evaluation of certain assumptions and estimates, as well as determination of financial statement classifications that are completed during the measurement period, as defined in current accounting standards. For the purposes of preparing the pro forma financial statements and supplemental 12-month statement of income, Leidos management has conducted a preliminary analysis of the adjustments required to conform the Splitco Business’ financial statements to reflect the current accounting policies of Leidos. Leidos management’s assessment is ongoing and, at the time of preparing the pro forma financial statements and supplemental 12-month statement of income, other than the adjustments made herein, management is not aware of any other material differences. Upon consummation of the Merger, Leidos management will conduct an in-depth review of the Splitco Business’ accounting policies in an effort to determine if additional differences in accounting policies and/or financial statement classification exist that may require additional adjustments to or reclassification of the Splitco Business’ results of operations, assets or liabilities to conform to Leidos’ accounting policies and classifications. As a result of that review, Leidos management may identify differences that, when conformed, could have a material impact on the pro forma financial statements and supplemental 12-month statement of income.

As a result of the preliminary analysis, Leidos identified certain adjustments needed to conform the revenue recognition polices of the Splitco Business and Leidos related to the timing of recognition of revenues and cost of revenues for certain contracts with the U.S. Government.

Leidos generally records revenues and cost of revenues from contracts with the U.S. Government in accordance with Accounting Standards Codification (“ASC”) 605-35, Construction-type and production-type contracts, utilizing the percentage-of-completion methodology. However, for services (e.g., help desk) and maintenance contracts with the U.S. Government under firm-fixed-price arrangements, Leidos recognizes revenues over the term of the respective contracts (i.e., straight-line revenue recognition) as the services are performed and revenue is earned. Further, for certain types of flexibly-priced contracts performed on a best efforts basis (e.g., time-and-materials and fixed-price-level-of-effort contracts) with the U.S. Government, Leidos recognizes revenues based on a rate times hours incurred and cost of revenues as incurred.

The Splitco Business records revenues and cost of revenues from contracts with the U.S. Government, including services and maintenance contracts, in accordance with ASC 605-35 utilizing the percentage-of-completion methodology. This includes services and maintenance contracts with the U.S. Government under firm-fixed-price arrangements. For certain types of flexibly-priced contracts with the U.S. Government (e.g. time-and-materials and fixed-price-level-of-effort contracts), the Splitco Business recognizes revenue based on a rate times hours incurred; however, cost of revenues are recognized utilizing the percentage-of-completion methodology.

In order to conform revenues and cost of revenues recognized for these contracts in the Splitco Business’ financial statements to Leidos’ revenue recognition accounting policy, two adjustments were identified. First, a revenue adjustment was recorded for services and maintenance contracts to adjust from the percentage of completion methodology to a straight-line revenue recognition methodology. This adjustment resulted in an increase of $93 million in Receivables, net, an increase of $36 million in Deferred income taxes, and an increase of $57 million in Net parent investment as of July 1, 2016. This adjustment did not have a material impact on the interim pro forma statement of income.

Second, a cost of revenues adjustment was recorded for flexibly-priced arrangements to adjust from the percentage of completion methodology to recognizing cost of revenues as incurred. This adjustment resulted in a decrease of $46 million in Accounts payable and accrued liabilities, an increase of $18 million in Deferred income taxes, and an increase of $28 million in Net parent investment as of July 1, 2016, as well as an increase of $12 million in Cost of revenues for the six months ended July 1, 2016.

The impact of these adjustments on Revenues and Cost of revenues for the 11 and 12 months ended January 1, 2016 is not material and has not been reflected in the 11-month pro forma statement of income and supplemental 12-month statement of income.

Refer to Footnotes 7 and 8 for additional information on how the adjustments described above have been reflected in the pro forma balance sheet and interim pro forma statement of income.

Note 3: Purchase Price Allocation

The pro forma balance sheet has been adjusted to reflect the allocation of the preliminary estimated purchase price to identifiable assets to be acquired and liabilities to be assumed, with the excess recorded as goodwill. The final purchase price allocation may be different than that reflected in the pro forma purchase price allocation presented herein, and this difference may be material. The purchase price allocation in these pro forma financial statements is based upon an estimated purchase price of approximately $4,638 million. This amount was derived in accordance with the Merger Agreement, as described further below, based on the closing price of Leidos’ common stock on July 22, 2016, the Leidos Special Dividend of $13.64 per share and 76,958,918 shares of Leidos common stock being issued in the Merger, and is subject to adjustment based on the Splitco Business’ working capital in accordance with the terms of the Separation Agreement, as described in the section entitled “The Separation Agreement—Separation of the IS&GS Business—Cash and Working Capital Adjustment” in the Leidos Registration Statement.

The following table represents the preliminary estimate of the purchase price to be paid in the Merger, excluding an estimate for the working capital adjustment (in millions, except share and per share data):

New shares (par value $0.0001) issued to Lockheed Martin stockholders					76,958,918
Closing price of Leidos common stock on July 22, 2016	$	50.40
Less: Leidos Special Dividend per share		(13.64	)
Leidos share price after Leidos Special Dividend on July 22, 2016				$	36.76
Consideration to be transferred (i)				$	2,829
Preliminary fair value of Splitco new indebtedness assumed by Leidos					1,809
Total purchase price				$	4,638

(i) The total consideration paid by Leidos for the Splitco Business for purposes of preparing the pro forma financial statements was determined using the market price of Leidos’ common stock as of July 22, 2016 of $50.40 per share and adjusted for the Leidos Special Dividend of $13.64 per share. The Leidos Special Dividend will be paid to holders of Leidos common stock as of a record date prior to the Merger closing date. Because the payment of the Leidos Special Dividend is conditioned on the closing of the Merger, it is anticipated that the market value of Leidos common stock will decline as a result of the Leidos Special Dividend when Leidos common stock trades “ex-dividend” on the New York Stock Exchange (currently expected on the trading day immediately following the closing date).

The actual value of the Leidos common stock to be issued in the Merger will depend on the market price of shares of Leidos common stock at the closing date of the Merger, and therefore the actual purchase price will fluctuate with the market price of Leidos common stock until the Merger is consummated. As a result, the final purchase price could differ significantly from the current estimate, which could materially impact the pro forma financial statements. A 20% difference in Leidos’ stock price would change the purchase price by approximately $776 million, with a corresponding change in goodwill.

The preliminary estimated purchase price is allocated as follows (in millions):

Total current assets	$	940
Property, plant and equipment (i)		91
Intangible assets (ii)		1,650
Other assets		112
Total assets acquired		2,793
Total current liabilities		801
Long-term debt (iii)		1,809
Deferred income taxes (iv)		801
Other liabilities		74
Total liabilities assumed		3,485
Net identifiable assets acquired		(692	)
Add: Fair value of noncontrolling interest (v)		(10	)
Goodwill		3,531
Total consideration to be transferred	$	2,829

(i) For the purposes of the preliminary purchase price allocation, the carrying value of property, plant and equipment is assumed to approximate the preliminary fair value due to the limited availability of detailed data regarding the composition of property, plant and equipment prior to the consummation of the Merger and due to the fact that any step-up in the fair value of property, plant and equipment is not expected to be material. The final valuation may be different as more detailed information will become available after the consummation of the Merger.

(ii) The identifiable intangible asset fair value estimates are based on a preliminary valuation and may change. The identifiable intangible assets associated with the Merger consist of the programs / contracts intangible asset with a fair value of $1,650 million. The final valuation may be materially different and may result in the identification of additional intangible assets as more detailed information will become available after the consummation of the Merger. See Footnote 7(E) for further details on the intangible assets fair value adjustment.

(iii) On a consolidated basis, Leidos debt will include the debt incurred by Splitco to pay the Special Cash Payment of $1,800 million to Lockheed Martin and related expenses. See Footnote 4 for further details on this debt. As the debt is expected to be issued shortly before the consummation of the Merger, the preliminary fair value is calculated assuming that the terms of the debt approximate current market participant assumptions and that market participants would incur approximately the same amount of costs as Splitco to obtain the financing.

(iv) This balance includes the deferred tax liability resulting from the fair value adjustments for the identifiable intangible assets. This estimate of deferred tax liabilities was determined based on the book and tax basis differences attributable to the identifiable intangible assets acquired at a combined federal and state statutory tax rate of 39%. The combined federal and state statutory tax rate was based upon the jurisdictions in which the Splitco Business and Leidos operate. The goodwill recognized in the Merger is not expected to be deductible for income tax purposes. The final deferred tax liability may be materially different as more detailed information will become available after the consummation of the Merger.

(v) The preliminary fair value of noncontrolling interest is assumed to approximate carrying value due to the limited availability of detailed data prior to the consummation of the Merger and due to the fact that any step-up in the fair value of noncontrolling interest is not expected to be material. The final valuation may be different as more detailed information will become available after the consummation of the Merger.

For all other line items noted above, book value is assumed to approximate the preliminary fair value. The final valuation may be materially different as more detailed information will become available after the consummation of the Merger.

Refer to Footnote 7 for additional information on how the adjustments described above have been reflected in the pro forma balance sheet.

Note 4: Financing Adjustments

On or about the closing date of the Merger, Leidos, Inc. (a direct, wholly-owned subsidiary of Leidos) and Splitco expect to incur indebtedness of approximately $2,531 million in new term loans, of which $1,400 million will be in term loan A (“New Term Loan A”) and $1,131 million will be in term loan B (“New Term Loan B” collectively, the “New Term Loans”). Leidos, Inc. and Splitco will be the borrowers of $690 million and $710 million, respectively, of New Term Loan A, and Splitco will be the borrower of all of New Term Loan B. The New Term Loans are expected to bear interest at a blended rate of 3.15%. New Term Loan A will be separated into three tranches consisting of: (1) $400 million (“Tranche 1”) incurred by Splitco, (2) $310 million (“Tranche 2”) incurred by Splitco, and (3) $690 million (“Tranche 3”) incurred by Leidos, Inc. with maturities of three years, five years, and five years, respectively, provided that if any of Leidos’ 4.450% Notes due 2020 are outstanding on the date that is 91 days before their maturity, the New Term Loan A will mature on such date. New Term Loan B incurred by Splitco will have a maturity of seven years. Interest and principal amounts will be payable on a quarterly basis with amortization of the principal predominantly occurring in the year of maturity. The actual capital raised, including both the aggregate size and the individual tranche size, as well as interest rates, may change based on the market conditions and lender appetite for the specific issue at the time of syndication.

In addition to the New Term Loans, Leidos, Inc. will also enter into a revolving credit facility (the “Leidos Revolving Credit Facility”) providing for an aggregate principal amount of up to $750 million and term of five years to replace its existing revolving credit facility. Leidos does not expect to draw on the Leidos Revolving Credit Facility in connection with the Merger but will incur an annual fee of 0.375% on the unused portion of the total aggregate commitment.

Upon consummation of the Merger, on a consolidated basis, Leidos’ debt will include all of Splitco’s indebtedness, which, combined with the new debt of Leidos, Inc., will be used to (i) finance the Leidos Special Dividend, (ii) pay the Special Cash Payment by Splitco to Lockheed Martin, and (iii) pay for transaction expenses incurred by Leidos in connection with the Merger.

Notes payable and long-term debt, current portion was adjusted as follows (in millions):

	Increase (Decrease)
New Term Loan A (i)	$	70
New Term Loan B (ii)		11
Total pro forma adjustments to notes payable and long-term debt, current portion	$	81

(i) Represents the current portion of borrowings incurred by Splitco of $35 million and by Leidos, Inc. of $35 million under New Term Loan A.

(ii) Represents the current portion of borrowings incurred by Splitco under New Term Loan B.

Notes payable and long-term debt, net of current portion was adjusted as follows (in millions):

	Increase (Decrease)
New Term Loan A (i) (iii)	$	1,302
New Term Loan B (ii) (iii)		1,100
Total pro forma adjustments to notes payable and long-term debt, net of current portion	$	2,402

(i) Represents the long-term portion of borrowings incurred by Leidos, Inc., which is comprised of aggregate principal of $690 million, net of $14 million of debt issuance costs and $35 million of current portion of long-term debt, and the long-term portion of borrowings incurred by Splitco, which is comprised of aggregate principal of $710 million, net of $14 million of debt issuance costs and $35 million of current portion of long-term debt.

(ii) Represents the long-term portion of borrowings of Splitco, which is comprised of aggregate principal of $1,131 million, net of $20 million of debt issuance costs and $11 million of current portion of long-term debt.

(iii) Total debt issuance costs of $48 million for the New Term Loans consist of $32 million of underwriting fees, $15 million of other fees paid to the lenders, and $1 million of legal fees.

Other assets were adjusted to include debt issuance costs for the Leidos Revolving Credit Facility of $15 million, which consists of $9 million of underwriting fees and $6 million of other fees paid to the lenders.

The interim pro forma statement of income, 11-month pro forma statement of income and supplemental 12-month statement of income reflect adjustments to Interest expense of $47 million, $88 million and $95 million, respectively, which represent an estimate of interest expense calculated using the effective interest method on the additional indebtedness to be incurred in connection with the Merger. These adjustments were calculated as if the New Term Loans and Leidos Revolving Credit Facility were entered into on January 31, 2015, the beginning of the earliest period presented, for the pro forma statements of income and January 3, 2015 for the supplemental 12-month statement of income.

The adjustment to record interest expense for the six months ended July 1, 2016 and both the 11 and 12 months ended January 1, 2016 is based on the 3-month LIBOR of 0.71% as of July 22, 2016. For each 0.125% change in estimated interest rate for the New Term Loans, interest expense would increase or decrease by approximately $2 million for the six months ended July 1, 2016 and approximately $3 million for both the 11 and 12 months ended January 1, 2016.

Refer to Footnotes 7 and 8 for additional information on how the adjustments described above have been reflected in the pro forma financial statements and supplemental 12-month statement of income.

Note 5: Excluded Assets and Excluded Liabilities

In accordance with the Separation Agreement, at or near the consummation of the Merger and other Transactions, Lockheed Martin will transfer to Splitco all rights, title and interest in certain assets of the Splitco Business, with the exception of the Excluded Assets, as defined in the Separation Agreement. At the same time, Splitco will assume from Lockheed Martin all obligations to perform, timely pay and fulfill and comply with the liabilities and obligations of the Splitco Business, with the exception of the Excluded Liabilities, as defined in the Separation Agreement. See “The Separation Agreement—Separation of the IS&GS Business—Conveyance of Assets; Assumption and Discharge of Liabilities” in the Leidos Registration Statement for additional information. To the extent the Excluded Assets and Excluded Liabilities are reflected in the historical combined balance sheet of the Splitco Business and are material, a pro forma adjustment has been made to eliminate these assets and liabilities as if the Merger and other Transactions were consummated on July 1, 2016. The balance sheet adjustment related to the material Excluded Assets and Excluded Liabilities consists of the following (in millions):

	Increase (Decrease)
Cash and cash equivalents	$	(35	)
Receivables, net		(44	)
Inventory, prepaid expenses and other current assets		(16	)
Total assets	$	(95	)
Accounts payable and accrued liabilities		(71	)
Accrued payroll and employee benefits		(9	)
Deferred income taxes		(5	)
Other long-term liabilities		(15	)
Net parent investment		5
Total liabilities and net parent investment	$	(95	)

Refer to Footnote 7 for additional information on how the adjustments described above have been reflected in the pro forma balance sheet.

Note 6: Reclassifications

Certain reclassifications have been made relative to the historical financial statements of the Splitco Business to conform to the financial statement presentation of Leidos.

The reclassification adjustments related to the balance sheet of the Splitco Business as of June 26, 2016 include the following:

(i) combination of Inventories, net of $123 million and Other current assets of $18 million within Inventory, prepaid expenses and other current assets;

(ii) reclassification of $44 million of rate variances between Inventory, prepaid expenses and other current assets and Receivables, net;

(iii) reclassification of $42 million of contract assets from Inventory, prepaid expenses and other current assets to Other assets;

(iv) reclassification of Customer advances and amounts in excess of costs incurred of $255 million and Other current liabilities of $262 million to Accounts payable and accrued liabilities;

(v) netting of $42 million of customer advances on contracts (included in Accounts payable and accrued liabilities) against the related accounts receivable (included in Receivables, net); and

(vi) reclassification of Salaries, benefits and payroll taxes of $218 million to Accrued payroll and employee benefits.

The reclassification adjustments on the statements of earnings of the Splitco Business for the six months ended June 26, 2016 and the year ended December 31, 2015 pertain to the following:

(i) reclassification of $19 million and $20 million of severance charges for the six months ended June 26, 2016 and the year ended December 31, 2015 (of which $0 was incurred during the one month ended January 31, 2015), respectively, from Cost of revenues to Selling, general and administrative expenses;

(ii) reclassification of $121 million and $322 million of general and administrative expenses for the six months ended June 26, 2016 and the year ended December 31, 2015 (of which $25 million was incurred during the one month ended January 31, 2015), respectively, from Cost of revenues to Selling, general and administrative expenses; and

(iii) reclassification of $16 million and $26 million of state income taxes for the six months ended June 26, 2016 and the year ended December 31, 2015 (of which $2 million was incurred during the one month ended January 31, 2015), respectively, from Cost of revenues to Income tax expense.

Refer to Footnotes 7 and 8 for additional information on how the adjustments described above have been reflected in the pro forma financial statements and supplemental 12-month statement of income.

Note 7: Balance Sheet Adjustments

The pro forma balance sheet reflects the following adjustments (in millions):

(A) Cash and cash equivalents were adjusted as follows:

	Increase (Decrease)
Excluded Assets (i)	$	(35	)
Transaction costs (ii)		(19	)
Special Cash Payment to Lockheed Martin (iii)		(1,800	)
Payment of Leidos Special Dividend (iv)		(993	)
Proceeds from New Term Loan Facilities (v)		2,531
Debt issuance costs (vi)		(63	)
Total pro forma adjustment to Cash and cash equivalents	$	(379	)

(i) Represents balances included in the historical combined balance sheet of the Splitco Business which will not be transferred under the Separation Agreement. See Footnote 5 for further discussion.

(ii) Represents transaction costs related to the Merger and other Transactions. The total balance consists of approximately $2 million related to legal fees, $16 million related to advisory services, and $1 million related to accounting and other professional fees.

(iii) Represents the Special Cash Payment of $1,800 million to Lockheed Martin by Splitco as part of the Merger. See “This Exchange Offer—Terms of this Exchange Offer” in the Leidos Registration Statement for additional information.

(iv) Represents the Leidos Special Dividend of approximately $993 million paid to Leidos’ stockholders as part of the Merger. See “The Merger Agreement—Conditions to the Merger” in the Leidos Registration Statement for additional information. The estimated total amount of the Leidos Special Dividend was calculated by multiplying the per share dividend of $13.64 by the outstanding number of Leidos shares of approximately 72.8 million as of July 19, 2016. The Leidos Special Dividend will be paid to holders of Leidos common stock as of a record date prior to the Merger closing date, and the total amount of the Leidos Special Dividend will be based on the number of shares outstanding on such record date.

(v) Represents the proceeds from the New Term Loans obtained to finance the Merger and other Transactions. See Footnote 4 for further discussion.

(vi) Represents the debt issuance costs associated with the New Term Loans and Leidos Revolving Credit Facility obtained in connection with the Merger of $48 million and $15 million, respectively. See Footnote 4 for further discussion.

(B) Receivables, net were adjusted as follows:

	Increase (Decrease)
Policy alignments (i)	$	93
Excluded Assets (ii)		(44	)
Reclassifications (iii)		(86	)
Total pro forma adjustment to Receivables, net	$	(37	)

(i) Represents adjustment to conform the accounting policies of the Splitco Business to those of Leidos, as described in additional detail in Footnote 2.

(ii) Represents balances included in the historical combined balance sheet of the Splitco Business which will not be transferred under the Separation Agreement. See Footnote 5 for further discussion.

(iii) Represents adjustment to conform the Splitco Business’ financial statement presentation of ($42) million of customer advances on contracts netted against the related accounts receivable and ($44) million of rate variances to Leidos’ presentation, as described in additional detail in Footnote 6.

(C) Inventory, prepaid expenses and other current assets were adjusted as follows:

	Increase (Decrease)
Excluded Assets (i)	$	(16	)
Reclassifications (ii)		2
Total pro forma adjustment to Inventory, prepaid expenses and other current assets	$	(14	)

(i) Represents certain assets included in the historical combined balance sheet of the Splitco Business which will not be transferred under the Separation Agreement. See Footnote 5 for further discussion.

(ii) Represents adjustment to conform the Splitco Business’ financial statement presentation of ($42) million of contract assets and $44 million of rate variances to Leidos’ presentation, as described in additional detail in Footnote 6.

(D) Goodwill was adjusted as follows:

	Increase (Decrease)
Elimination of the Splitco Business historical goodwill	$	(2,810	)
Estimated transaction goodwill (i)		3,531
Total pro forma adjustment to Goodwill	$	721

(i) Reflects the preliminary value of goodwill associated with the Merger, as described in additional detail in Footnote 3. The adjustment is primarily due to the synergies expected to be achieved by combining the businesses of Leidos and the Splitco Business, expected future contract awards, as well as the acquired workforce. The cost-saving opportunities are expected to include improved operating efficiencies and asset optimization.

(E) Intangible assets, net were adjusted as follows:

	Increase (Decrease)
Elimination of the Splitco Business historical intangible assets	$	(109	)
Preliminary fair value of acquisition-related intangible asset (i)		1,650
Total pro forma adjustment to Intangible assets, net	$	1,541

(i) Of the total consideration, approximately $1,650 million is estimated to be the preliminary fair value of identified intangible assets, which consist entirely of the programs / contracts intangible asset with a preliminary estimated useful life of 10 years. Refer to Footnote 3 for additional information.

The fair value of identifiable intangible assets is determined primarily using the “income approach”, which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the more significant assumptions inherent in the development of the identifiable intangible asset valuation, from the perspective of a market participant, include the estimated after-tax cash flows that will be received for the intangible asset, the appropriate discount rate selected in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, and competitive trends impacting the asset and each cash flow stream. No assurances can be given that the underlying assumptions used to prepare the discounted cash flow analysis will not change. For these and other reasons, actual results may vary significantly from estimated results. In addition, the discount rate selected is a significant assumption utilized to value the intangible asset, which is based on market participant assumptions for rates of return for similar assets and reflects the risks inherent in the cash flow stream based on the nature of the asset.

The estimated fair value for this pro forma presentation for the programs / contracts intangible asset was measured using the multi-period excess earnings method. The principle behind the multi-period excess earnings method is that the value of an intangible is equal to the present value of the incremental after-tax cash flows attributable to the subject intangible asset, after taking charges for the use of other assets employed by the business. Significant assumptions required for this method are revenue growth rates, probabilities of renewal for existing contracts and related relationships, contributory asset charges and the asset discount rate.

(F) Other assets were increased as follows:

Leidos Revolving Credit Facility debt issuance costs (i)	$	15
Reclassifications (ii)		42
Total pro forma adjustment to Other assets	$	57

(i) Represents debt issuance costs related to the Leidos Revolving Credit Facility, as described in additional detail in Footnote 4.

(ii) Represents adjustment to conform the Splitco Business’ financial statement presentation of contract assets of $42 million to Leidos’ presentation, as described in additional detail in Footnote 6.

(G) Accounts payable and accrued liabilities were adjusted as follows:

	Increase (Decrease)
Policy alignments (i)	$	(46	)
Excluded Liabilities (ii)		(71	)
Reclassifications (iii)		475
Total pro forma adjustment to Accounts payable and accrued liabilities	$	358

(i) Represents adjustment to conform the accounting policies of the Splitco Business to those of Leidos, as described in additional detail in Footnote 2.

(ii) Represents certain liabilities included in the historical combined balance sheet of the Splitco Business which will not be assumed under the Separation Agreement. See Footnote 5 for further discussion.

(iii) Represents adjustment to conform the Splitco Business’ financial statement presentation of Customer advances and amounts in excess of costs incurred of $255 million, Other current liabilities of $262 million, and unbilled customer accounts receivable of ($42) million to Leidos’ presentation, as described in additional detail in Footnote 6.

(H) Accrued payroll and employee benefits were adjusted as follows:

	Increase (Decrease)
Excluded Liabilities (i)	$	(9	)
Reclassifications (ii)		218
Total pro forma adjustment to Accrued payroll and employee benefits	$	209

(i) Represents certain liabilities included in the historical combined balance sheet of the Splitco Business which will not be assumed under the Separation Agreement. See Footnote 5 for further discussion.

(ii) Represents adjustment to conform the Splitco Business’ financial statement presentation of Salaries, benefits and payroll taxes of $218 million to Leidos’ presentation, as described in additional detail in Footnote 6.

(I) Notes payable and long-term debt, current portion were adjusted as described in Footnote 4.

(J) Notes payable and long-term debt, net of current portion were adjusted as described in Footnote 4.

(K) Deferred income taxes were adjusted as follows:

	Increase (Decrease)
Identifiable intangible assets fair value adjustment	$	601
Excluded Assets and Excluded Liabilities		(5	)
Policy alignments		54
Total pro forma adjustment to Deferred income taxes (i)	$	650

(i) Reflects an adjustment to deferred tax liabilities representing a combined federal and state statutory rate of approximately 39% multiplied by (i) the preliminary fair value adjustments to the identifiable intangible assets (as described in Footnote 3), (ii) the pro forma adjustments related to assets and liabilities that will not be acquired/assumed by the combined company (as described in Footnote 5) and for which a difference exists between the book and tax basis, or (iii) the pro forma adjustments related to accounting policy alignments (as described in Footnote 2), as applicable. This rate does not reflect Leidos’ expected effective tax rate which will include other tax charges and benefits, and does not take into account any historical or possible future tax events that may impact the combined company following the consummation of the Merger.

(L) Other long-term liabilities were decreased as follows:

Excluded Liabilities (i) $ (15 ) 

(i) Represents certain liabilities included in the historical combined balance sheet of the Splitco Business which will not be assumed under the Separation Agreement. See Footnote 5 for further discussion.

(M) Stockholders’ equity was adjusted as follows:

	Increase (Decrease)
	Additional Paid- In Capital			Accumulated Deficit			Net Parent Investment			Accumulated Other Comprehensive Loss
Policy alignments (i)	$	—		$	—		$	85		$	—
Net impact of Excluded Assets and Excluded Liabilities (ii)		—			—			5			—
Special Cash Payment to Lockheed Martin (iii)		—			—			(1,800	)		—
Elimination of total Splitco Business net parent investment and accumulated other comprehensive loss (iv)		—			—			(1,216	)		48
Payment of Leidos Special Dividend (v)		(993	)		—			—			—
Issuance of shares of Leidos common stock (vi)		2,829			—			—			—
Transaction costs (vii)		—			(19	)		—			—
Total pro forma adjustment	$	1,836		$	(19	)	$	(2,926	)	$	48

(i) Represents adjustment to conform the accounting policies of the Splitco Business to those of Leidos, as described in additional detail in Footnote 2.

(ii) Represents adjustment to eliminate Excluded Assets and Excluded Liabilities, as described in additional detail in Footnote 5.

(iii) Represents the Special Cash Payment of $1,800 million from Splitco to Lockheed Martin as part of the Merger and other Transactions. See “This Exchange Offer—Terms of this Exchange Offer” in the Leidos Registration Statement for additional information.

(iv) Relates to the elimination of Splitco Business’ net parent investment of ($1,216) million and accumulated other comprehensive loss of $48 million.

(v) Represents the Leidos Special Dividend of approximately $993 million paid to Leidos’ stockholders as part of the Merger and other Transactions. See “The Merger Agreement—Conditions to the Merger” in the Leidos Registration Statement for additional information. The estimated total amount of the Leidos Special Dividend was calculated by multiplying the per share dividend of $13.64 by the outstanding number of Leidos shares of approximately 72.8 million as of July 19, 2016. The Leidos Special Dividend will be paid to holders of Leidos common stock as of a record date prior to the Merger closing date, and the total amount of the Leidos Special Dividend will be based on the number of shares outstanding on such record date.

(vi) Relates to the shares of Leidos common stock to be issued as purchase consideration, as described further in Footnote 3.

(vii) Reflects transaction costs related to the Merger and other Transactions. For information on the composition of these costs, refer to Footnote 7(A). This amount has not been tax effected as the tax deductibility of these items has not been determined.

Note 8: Statement of Income Adjustments

The pro forma statements of income and supplemental 12-month statement of income reflect the following adjustments (in millions):

(N) Revenues were decreased as follows:

	For the Six Months Ended July 1, 2016 (Pro Forma)			For the 11 Months Ended January 1, 2016 (Pro Forma)			For the 12 Months Ended January 1, 2016 (Supplemental)
Adjustment of revenues related to Lockheed Martin’s defined benefit pension plans (i)	$	(23	)	$	(38	)	$	(41	)

(i) The historical combined statements of earnings of the Splitco Business includes an allocation of expenses related to Lockheed Martin’s defined benefit pension plan in which the Splitco Business’ employees historically participated. Following the consummation of the Merger and other Transactions, the Splitco Business’ employees will no longer receive the defined benefit pension benefit from Lockheed Martin or Leidos on a recurring basis. Accordingly, there is an adjustment to Cost of revenues (as summarized in Footnote 8(O)), which represents the elimination of these employees’ defined benefit pension costs included within the historical combined statements of earnings of the Splitco Business. As a result of the defined benefit pension costs being reimbursable under certain customer contracts, there is a corresponding impact on Revenues.

(O) Cost of revenues were adjusted as follows:

	Increase (Decrease)
	For the Six Months Ended July 1, 2016 (Pro Forma)			For the 11 Months Ended January 1, 2016 (Pro Forma)			For the 12 Months Ended January 1, 2016 (Supplemental)
Policy alignments (i)	$	12		$	—		$	—
Adjustment of costs related to Lockheed Martin’s defined benefit pension plans (ii)		(23	)		(59	)		(64	)
Reclassifications (iii)		(156	)		(341	)		(368	)
Total adjustment to Cost of revenues	$	(167	)	$	(400	)	$	(432	)

(i) Represents adjustment to conform the accounting policies of the Splitco Business to those of Leidos, as described in additional detail in Footnote 2. The impact of this adjustments on Cost of revenues for the 11 and 12 months ended January 1, 2016 is not material and has not been reflected in the 11-month pro forma statement of income and supplemental 12-month statement of income.

(ii) Represents the adjustment to Cost of revenues to reflect the impact of the elimination of the Splitco Business’ employees’ defined benefit pension costs included within the historical combined statements of earnings of the Splitco Business, as described in Footnote 8(N) above.

(iii) Represents adjustments to conform the Splitco Business’ financial statement presentation of severance charges of $19 million for the six months ended July 1, 2016 and $20 million for both the 11 and 12 months ended January 1, 2016, general and administrative expenses of $121 million for the six months ended July 1, 2016 and $297 million and $322 million for the 11 and 12 months ended January 1, 2016, respectively, and state income taxes of $16 million for the six months ended July 1, 2016 and $24 million and $26 million for the 11 and 12 months ended January 1, 2016, respectively, to Leidos’ presentation, as described in additional detail in Footnote 6.

(P) Selling, general and administrative expenses were increased as follows:

	For the Six Months Ended July 1, 2016 (Pro Forma)		For the 11 Months Ended January 1, 2016 (Pro Forma)		For the 12 Months Ended January 1, 2016 (Supplemental)
Change in amortization expense associated with acquired intangible asset (i)	$	64	$	106	$	116
Reclassifications (ii)		140		317		342
Total adjustment to Selling, general and administrative expenses	$	204	$	423	$	458

(i) All amortization adjustments related to identified definite-lived intangible assets are recorded to Selling, general and administrative expenses. Historical amortization expense recorded in the combined statements of earnings of the Splitco Business of $19 million, $45 million, and $49 million for the six months ended June 26, 2016 and the 11 and 12 months ended December 31, 2015, respectively, was eliminated and replaced with the estimated amortization expense for the identified definite-lived intangible asset of $83 million, $151 million and $165 million for the six, 11 and 12 months, respectively. The estimated amortization expense was computed using the straight-line method and an estimated useful life of 10 years.

An increase (decrease) of 10% in the estimated fair value allocated to the programs / contracts intangible asset would result in an increase (decrease) in the six-month pro forma amortization expense of $8 million, an increase (decrease) in the 11-month pro forma amortization expense of $15 million, and an increase (decrease) in the 12-month amortization expense of $17 million. An increase in estimated useful life of the programs / contracts intangible asset of one year would result in a decrease in the six-month pro forma amortization expense of $8 million, a decrease in the 11-month pro forma amortization expense of $14 million, and a decrease in the 12- month amortization expense of $15 million, while a decrease in estimated useful life of one year would result in an increase in the six-month pro forma amortization expense, an increase in the 11-month pro forma amortization expense, and an increase in the 12-month amortization expense of $9 million, $17 million and $18 million, respectively.

(ii) Represents adjustments to reclassify severance charges of $19 million for the six months ended July 1, 2016 and $20 million for both the 11 and 12 months ended January 1, 2016 and general and administrative expenses of $121 million, $297 million and $322 million for the six months ended July 1, 2016 and the 11 and 12 months ended January 1, 2016, respectively, from Cost of revenues to Selling, general and administrative expenses to conform the financial statement presentation of the Splitco Business to Leidos’ presentation, as described in additional detail in Footnote 6.

(Q) Acquisition and integration costs were decreased by $24 million for six months ended July 1, 2016 to reflect the elimination of costs which are directly attributable to the Merger and other Transactions, but which are not expected to have a continuing impact on results of operations following the consummation of the Merger and other Transactions. The amount of such costs incurred during the 11 and 12 months ended January 1, 2016 was not material and, therefore, no adjustment is included in the 11-month pro forma statement of income and supplemental 12-month statement of income.

(R) Interest expense, net was adjusted as described in Footnote 4.

(S) Income tax expense was adjusted as follows:

	Increase (Decrease)
	For the Six Months Ended July 1, 2016 (Pro Forma)			For the 11 Months Ended January 1, 2016 (Pro Forma)			For the 12 Months Ended January 1, 2016 (Supplemental)
Reclassifications (i)	$	(16	)	$	(24	)	$	(26	)
Income tax impact of all other pro forma adjustments (ii)		39			67			73
Total adjustment to Income tax expense	$	23		$	43		$	47

(i) Represents adjustments to conform the Splitco Business’ financial statement presentation of state income taxes of $16 million for the six months ended July 1, 2016 and $24 million and $26 million for the 11 and 12 months ended January 1, 2016, respectively, to Leidos’ presentation, as described in additional detail in Footnote 6.

(ii) Represents the income tax impact of the pro forma adjustments, using the combined federal and state statutory tax rate of approximately 39%. This does not represent Leidos’ effective tax rate, which will include other tax charges and benefits, and does not take into account any historical or possible future tax events that may impact Leidos following the consummation of the Merger and other Transactions.

(T) The adjustment to weighted-average common shares outstanding for both basic and diluted EPS is to reflect 76,958,918 shares of Leidos common stock that will be issued as purchase consideration in the Merger.

ADDITIONAL FINANCIAL INFORMATION

Non-GAAP Measures

The following tables present certain non-GAAP financial measures that Leidos’ management uses to evaluate Leidos’ operating performance and will use to evaluate the combined business going forward. These non-GAAP measures are not computed in accordance with GAAP, and are not meant to be considered in isolation or as a substitute for the comparable GAAP measures. Accordingly, these non-GAAP measures should be read in conjunction with Leidos’ consolidated financial statements and the combined financial statements of the Splitco Business, both of which were prepared in accordance with GAAP.

Leidos management believes that these non-GAAP measures provide another measure of Leidos’ results of operations and financial condition, including Leidos’ ability to comply with financial covenants. These non-GAAP measures are frequently used by financial analysts covering Leidos and its peers. Leidos’ computation of its non-GAAP measures may not be comparable to similarly titled measures reported by other companies, thus limiting their use for comparability.

	Historical								Pro Forma Combined Consolidated Leidos and
	Leidos for the Six Months Ended July 1, 2016		Splitco Business for the Six Months Ended June 26, 2016			Adjustments (i)			Splitco Business for the Six Months Ended July 1, 2016
	(in millions, except per share amounts)
Non-GAAP operating income (1)	$	192	$	272		$	4		$	468
Adjusted EBITDA (2)	$	199	$	304		$	4		$	507
Non-GAAP income from continuing operations (3)	$	107	$	185		$	(36	)	$	256
Non-GAAP earnings per share (“EPS”) from continuing operations:
Basic	$	1.49		NA	(ii)		NA	(ii)	$	1.70
Diluted	$	1.45		NA	(ii)		NA	(ii)	$	1.67
	Historical								Supplemental(i) Combined Consolidated Leidos and
	Leidos for the 12 Months Ended January 1, 2016		Splitco Business for the Year Ended December 31, 2015			Adjustments(i)			Splitco Business for the 12 Months Ended January 1, 2016
	(in millions, except per share amounts)
Non-GAAP operating income (1)	$	386	$	518		$	49		$	953
Adjusted EBITDA (2)	$	423	$	584		$	49		$	1,056
Non-GAAP income from continuing operations (3)	$	219	$	354		$	(44	)	$	529
Non-GAAP EPS from continuing operations:
Basic	$	3.00		NA	(ii)		NA	(ii)	$	3.49
Diluted	$	2.96		NA	(ii)		NA	(ii)	$	3.47

(i) See “Unaudited Pro Forma Combined Consolidated Financial Statements and Supplemental Combined Consolidated Statement of Income” for the unaudited pro forma combined condensed consolidated statement of income for the six months ended July 1, 2016 (the “interim pro forma statement of income”), the unaudited supplemental combined consolidated statement of income for the 12 months ended January 1, 2016 (the “supplemental 12-month statement of income”), and the adjustments made to prepare the interim pro forma statement of income and the supplemental 12-month statement of income.

(ii) NA = not applicable.

(iv) Non-GAAP operating income is computed by excluding the following items from income from continuing operations: (i) other income (expense), net; (ii) interest expense; (iii) interest income; (iv) income tax (expense) benefit adjusted to reflect non-GAAP adjustments; and (v) the following discrete items:

• Acquisition and integration costs–Represents costs related to the Merger and integration of the Splitco Business.

• Asset impairment charges–Represents impairments of long-lived intangible and tangible assets.

• Separation transaction and restructuring expenses–Represents costs associated with lease termination and facility consolidation, including costs related to Leidos’ September 2013 spin-off of its former technical services and enterprise IT business.

• Severance charges–Represents the charges recognized for workforce reduction severance benefits that are provided to employees of the Splitco Business primarily under Lockheed Martin’s ongoing benefit arrangements.

• Gains and losses on disposal of assets and businesses–Represents the gains or losses on certain sales of real estate and businesses.

• Amortization of acquired intangible assets–Represents the amortization expense associated with intangible assets recognized by Leidos upon the acquisition of various businesses, including the Splitco Business.

(v) Adjusted EBITDA is computed by excluding the following items from income from continuing operations: (i) discrete items identified in footnote (1)(v) above; (ii) interest expense; (iii) interest income; (iv) depreciation expense; and (v) income tax (expense) benefit, adjusted to reflect non-GAAP adjustments.

(vi) Non-GAAP income from continuing operations is computed by excluding the discrete items described in footnote (1)(v) above from income from continuing operations and adjusting the income tax provision for the effect of such exclusions.

Reconciliation of Non-GAAP Measures

The following tables present the reconciliation of the non-GAAP measures identified above to income from continuing operations attributable to the company, basic EPS from continuing operations and diluted EPS from continuing operations, the most directly comparable GAAP measures.

	Historical									Pro Forma(*) Combined Consolidated Leidos and
	Leidos for the Six Months Ended July 1, 2016			Splitco Business for the Six Months Ended June 26, 2016			Adjustments(*)			Splitco Business for the Six Months Ended July 1, 2016
	(in millions)
Non-GAAP operating income	$	192		$	272		$	4		$	468
Adjustments:
Depreciation expense (1)		14			19			—			33
Other (expense) income, excluding gains and losses on disposal of assets and businesses (2)		(7	)		13			—			6
Adjusted EBITDA	$	199		$	304		$	4		$	507
Adjustments:
Depreciation expense (1)		(14	)		(19	)		—			(33	)
Interest expense, net (3)		(24	)		—			(47	)		(71	)
Income tax (expense) benefit, adjusted to reflect non-GAAP adjustments (below)		(54	)		(100	)		7			(147	)
Non-GAAP income from continuing operations	$	107		$	185		$	(36	)	$	256
Less: Net income attributable to noncontrolling interest		—			(3	)		—			(3	)
Non-GAAP income from continuing operations attributable to the company	$	107		$	182		$	(36	)	$	253
Adjustments:
Acquisition and integration costs		(24	)		—			24			—
Splitco Business severance charges		—			(19	)		—			(19	)
Amortization of acquired intangible assets (4)		(3	)		(19	)		(64	)		(86	)
Gains and losses on disposal of assets and businesses (5)		5			—			—			5
Restructuring expenses (6)		(1	)		—			—			(1	)
Total non-GAAP adjustments		(23	)		(38	)		(40	)		(101	)
Adjustments to income tax provision to reflect non-GAAP adjustments (7)		10			13			16			39
Income from continuing operations attributable to the company	$	94		$	157		$	(60	)	$	191

	Historical									Supplemental(*) Combined Consolidated
	Leidos for the 12 Months Ended January 1, 2016			Splitco Business for the Year Ended December 31, 2015			Adjustments(*)			Leidos and Splitco Business for the 12 Months Ended January 1, 2016
	(in millions)
Non-GAAP operating income	$	386		$	518		$	49		$	953
Adjustments:
Depreciation expense (1)		35			44			—			79
Other income, excluding gains and losses on disposal of assets and businesses (2)		2			22			—			24
Adjusted EBITDA	$	423		$	584		$	49		$	1,056
Adjustments:
Depreciation expense (1)		(35	)		(44	)		—			(79	)
Interest expense, net (3)		(54	)		—			(95	)		(149	)
Income tax (expense) benefit, adjusted to reflect non-GAAP adjustments (below)		(115	)		(186	)		2			(299	)
Non-GAAP income from continuing operations	$	219		$	354		$	(44	)	$	529
Less: Net income attributable to noncontrolling interest		—			(5	)		—			(5	)
Non-GAAP income from continuing operations attributable to the company	$	219		$	349		$	(44	)	$	524
Adjustments:
Asset impairment charges		(73	)		—			—			(73	)
Separation transaction and restructuring expenses		(6	)		—			—			(6	)
Splitco Business severance charges		—			(20	)		—			(20	)
Amortization of acquired intangible assets (4)		(9	)		(49	)		(116	)		(174	)
Gains and losses on disposal of assets and businesses (5)		82			—			—			82
Total non-GAAP adjustments		(6	)		(69	)		(116	)		(191	)
Adjustments to income tax provision to reflect non-GAAP adjustments (7)		23			24			45			92
Income from continuing operations attributable to the company	$	236		$	304		$	(115	)	$	425

(*) See “Unaudited Pro Forma Combined Consolidated Financial Statements and Supplemental Combined Consolidated Statement of Income” for the interim pro forma statement of income, the supplemental 12-month statement of income, and the adjustments made to prepare the interim pro forma statement of income and the supplemental 12-month statement of income.

(1) Depreciation expense is included within Cost of revenues and Selling, general and administrative expenses. Depreciation expense for the Splitco Business for the six months ended June 26, 2016 and the year ended December 31, 2015 includes depreciation expense related to corporate assets that has been allocated from Lockheed Martin and recorded within Cost of revenues in the historical combined statement of earnings of the Splitco Business.

(2) Other income is derived as total Other income (expense), net in the historical consolidated statement of income of Leidos, the interim pro forma statement of income and the supplemental 12-month statement of income less gains and losses on disposal of assets and businesses (described in footnote (5) below).

(3) Interest expense, net is calculated as the sum of Interest income and Interest expense, as shown in the historical consolidated statement of income of Leidos, the interim pro forma statement of income and the supplemental 12-month statement of income.

(4) Amortization of acquired intangible assets is included within Selling, general and administrative expenses.

(5) Gains and losses on disposal of assets and businesses are included within Other income (expense), net in the historical consolidated statement of income of Leidos, the interim pro forma statement of income and the supplemental 12-month statement of income.

(6) Restructuring expenses are included in Selling, general and administrative expenses in the historical condensed consolidated statement of income of Leidos for the six months ended July 1, 2016.

(7) The calculation of the adjustment to the income tax provision uses the applicable statutory income tax rates, adjusted for utilization of an existing capital loss carryforward for the taxable gain on disposal of assets and businesses.

(in millions, except per share amounts)	Pro Forma Combined Consolidated Leidos and Splitco Business for the Six Months Ended July 1, 2016			Supplemental Combined Consolidated Leidos and Splitco Business for the 12 Months Ended January 1, 2016
Non-GAAP basic EPS from continuing operations	$	1.70		$	3.49
Less: Total adjustments to non-GAAP income from continuing operations, including adjustment to income tax expense (above) (1)		(0.42	)		(0.66	)
Basic EPS from continuing operations	$	1.28		$	2.83
Non-GAAP diluted EPS from continuing operations	$	1.67		$	3.47
Less: Total adjustments to non-GAAP income from continuing operations, including adjustment to income tax expense (above) (1)		(0.41	)		(0.66	)
Diluted EPS from continuing operations	$	1.26		$	2.81
Weighted-average shares outstanding:
Basic		149			150
Diluted		151			151

(1) Calculated as the sum of total pre-tax non-GAAP adjustments of ($101) million and ($191) million for the six months ended July 1, 2016 and the 12 months ended January 1, 2016, respectively, and the related income tax effect of such non-GAAP adjustments of $39 million and $92 million for the six months ended July 1, 2016 and the 12 months ended January 1, 2016, respectively, divided by the weighted-average basic and diluted shares outstanding, as appropriate.

Backlog (Unaudited)

Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts as work is performed. In this section, backlog is calculated based on the methodology historically used by Leidos in its reports filed with the SEC.

Backlog is segregated into two categories as follows:

• Funded backlog: Funded backlog for contracts with the U.S. Government represents the value on contracts for which funding is appropriated, less revenues previously recognized on these contracts. Funded backlog for contracts with non-U.S. Government agencies and commercial customers represents the estimated value on contracts, which may cover multiple future years, under which Leidos or the Splitco Business is obligated to perform, less revenue previously recognized on the contracts.

• Negotiated unfunded backlog: Negotiated unfunded backlog represents estimated amounts of revenue to be earned in the future from (1) contracts for which funding has not been appropriated, and (2) unexercised priced contract options. Negotiated unfunded backlog does not include future potential task orders expected to be awarded under indefinite delivery/indefinite quantity, General Services Administration Schedule, or other master agreement contract vehicles.

The estimated value of backlog as of July 1, 2016 was as follows (in billions):

	Leidos		Splitco Business		Combined Leidos and Splitco Business
Funded backlog	$	2.4	$	3.1	$	5.5
Negotiated unfunded backlog		6.6		6.4		13.0
Total backlog	$	9.0	$	9.5	$	18.5

Leidos and the Splitco Business expect to recognize a substantial portion of their funded backlog from U.S. Government customers as revenues within the next 12 months. However, the U.S. Government may cancel any contract at any time through a termination for the convenience of the U.S. Government. In addition, certain contracts with commercial or non-U.S. Government customers included in funded backlog may include provisions that allow the customer to cancel at any time. Most of these contracts have cancellation terms that would permit the companies to recover all or a portion of the incurred costs and fees for work performed.

EX-99.2

Exhibit 99.2

UNAUDITED INTERIM COMBINED FINANCIAL STATEMENTS

OF THE INFORMATION SYSTEMS & GLOBAL SOLUTIONS BUSINESS

As of June 26, 2016

and for the Six Months Ended June 26, 2016 and June 28, 2015

	Page
Table of Contents
Review Report of Independent Registered Public Accounting Firm		1
Combined Statements of Earnings for the Six Months Ended June 26, 2016 and June 28, 2015		2
Combined Statements of Comprehensive Income for the Six Months Ended June 26, 2016 and June 28, 2015		3
Combined Balance Sheets as of June 26, 2016 and December 31, 2015		4
Combined Statements of Cash Flows for the Six Months Ended June 26, 2016 and June 28, 2015		5
Combined Statements of Equity for the Six Months Ended June 26, 2016 and June 28, 2015		6
Notes to Combined Financial Statements		7

Review Report of Independent Registered Public Accounting Firm

Board of Directors

Lockheed Martin Corporation

We have reviewed the Combined Balance Sheet of the Information Systems & Global Solutions business of Lockheed Martin Corporation (the Company) as of June 26, 2016, and the related Combined Statements of Earnings, Comprehensive Income, Cash Flows and Equity for the six months ended June 26, 2016 and June 28, 2015. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the combined financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Combined Balance Sheet of the Information Systems & Global Solutions business of Lockheed Martin Corporation as of December 31, 2015, and the related Combined Statements of Earnings, Comprehensive Income, Cash Flows and Equity for the year then ended (not presented herein), and we expressed an unqualified audit opinion on those combined financial statements in our report dated April 15, 2016. In our opinion, the accompanying Combined Balance Sheet as of December 31, 2015, is fairly stated, in all material respects, in relation to the Combined Balance Sheet from which it has been derived.

/s/ Ernst & Young LLP

McLean, Virginia

July 29, 2016

1

The Information Systems & Global Solutions Business

Combined Statements of Earnings

(unaudited; in millions)

	Six Months Ended
	June 26, 2016			June 28, 2015
Revenues	$	2,683		$	2,809
Cost of revenues
Cost of revenues		(2,430	)		(2,586	)
Severance charges		(19	)		—
Total cost of revenues		(2,449	)		(2,586	)
Gross profit		234			223
Other income, net		13			15
Earnings before income taxes		247			238
Income tax expense		(87	)		(83	)
Net earnings		160			155
Less: net earnings attributable to non-controlling interest		3			2
Net earnings attributable to parent	$	157		$	153

The accompanying notes are an integral part of these unaudited combined financial statements.

2

The Information Systems & Global Solutions Business

Combined Statements of Comprehensive Income

(unaudited; in millions)

	Six Months Ended
	June 26, 2016			June 28, 2015
Net earnings	$	160		$	155
Other comprehensive loss
Foreign currency translation adjustments		(12	)		(3	)
Total comprehensive income		148			152
Less: comprehensive income attributable to non-controlling interest		3			2
Comprehensive income attributable to parent	$	145		$	150

The accompanying notes are an integral part of these unaudited combined financial statements.

3

The Information Systems & Global Solutions Business

Combined Balance Sheets

(in millions)

	June 26, 2016			December 31, 2015
Assets		(unaudited)
Current assets
Cash	$	35		$	39
Receivables, net		841			840
Inventories, net		123			168
Other current assets		18			20
Total current assets		1,017			1,067
Fixed assets, net		91			97
Goodwill		2,810			2,823
Intangible assets, net		109			128
Deferred income taxes		17			10
Other noncurrent assets		53			55
Total assets	$	4,097		$	4,180
Liabilities and equity
Current liabilities
Accounts payable	$	234		$	236
Customer advances and amounts in excess of costs incurred		255			297
Salaries, benefits and payroll taxes		218			214
Other current liabilities		262			254
Total current liabilities		969			1,001
Deferred income taxes		151			150
Other noncurrent liabilities		89			88
Total liabilities		1,209			1,239
Equity
Net parent investment		2,926			2,970
Accumulated other comprehensive loss		(48	)		(36	)
Total parent investment		2,878			2,934
Non-controlling interest		10			7
Total equity		2,888			2,941
Total liabilities and equity	$	4,097		$	4,180

The accompanying notes are an integral part of these unaudited combined financial statements.

4

The Information Systems & Global Solutions Business

Combined Statements of Cash Flows

(unaudited; in millions)

	Six Months Ended
	June 26, 2016			June 28, 2015
Operating activities
Net earnings	$	160		$	155
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization		28			38
Stock-based compensation		5			6
Severance charges		19			—
Deferred income taxes		(6	)		(3	)
Changes in assets and liabilities
Receivables, net		(1	)		64
Inventories, net		45			14
Accounts payable		(2	)		23
Customer advances and amounts in excess of costs incurred		(42	)		31
Salaries, benefits and payroll taxes		(15	)		(30	)
Other, net		28			(28	)
Net cash provided by operating activities		219			270
Investing activities
Capital expenditures		(7	)		(5	)
Net cash used for investing activities		(7	)		(5	)
Financing activities
Net transfers to parent		(205	)		(257	)
Other, net		(12	)		(22	)
Net cash used for financing activities		(217	)		(279	)
Effect of foreign exchange rate changes on cash		1			(3	)
Net change in cash		(4	)		(17	)
Cash at beginning of period		39			61
Cash at end of period	$	35		$	44

The accompanying notes are an integral part of these unaudited combined financial statements.

5

The Information Systems & Global Solutions Business

Combined Statements of Equity

(unaudited; in millions)

	Net Parent Investment			Accumulated Other Comprehensive Loss			Non-Controlling Interest			Total Equity
Balances as of December 31, 2014	$	3,016		$	(17	)	$	6		$	3,005
Net earnings		153			—			2			155
Other comprehensive loss		—			(3	)		—			(3	)
Distribution to non-controlling interest		—			—			(4	)		(4	)
Net transfers to parent		(250	)		—			—			(250	)
Balances as of June 28, 2015	$	2,919		$	(20	)	$	4		$	2,903
Balances as of December 31, 2015	$	2,970		$	(36	)	$	7		$	2,941
Net earnings		157			—			3			160
Other comprehensive loss		—			(12	)		—			(12	)
Net transfers to parent		(201	)		—			—			(201	)
Balances as of June 26, 2016	$	2,926		$	(48	)	$	10		$	2,888

The accompanying notes are an integral part of these unaudited combined financial statements.

6

The Information Systems & Global Solutions Business

Notes to Combined Financial Statements (unaudited)

Note 1 – Business Overview and Basis of Presentation

The accompanying unaudited interim combined financial statements and notes present the combined results of operations, financial condition, and cash flows of the Information Systems & Global Solutions business (“IS&GS”) of Lockheed Martin Corporation (“Lockheed Martin”). IS&GS is a leading provider of information technology (“IT”), management and engineering services to civil, defense and intelligence agencies of the U.S. Government. IS&GS also provides services to agencies of allied foreign governments, state and local governments and commercial customers. IS&GS supports its customers by providing data analytics, systems engineering, large-scale agile software development, network-enabled situational awareness solutions, communications and command and control capability and global systems integration, to help customers gather, analyze and securely distribute intelligence data to address complex and pressing challenges, such as combating global terrorism, cybersecurity, air traffic management, energy demand management and transforming the healthcare system. IS&GS is also responsible for various classified systems and services in support of vital national security systems. Major U.S. Government customers include civil agencies such as the Department of Homeland Security, the Department of Health and Human Services and the Department of the Treasury; the Department of Defense (“DoD”) and all branches of the U.S. military; and the U.S. intelligence community. IS&GS’ international customers are primarily located in the United Kingdom, the Middle East and Australia. In the commercial sector, IS&GS serves clients primarily in the financial services, healthcare and energy industries.

On January 26, 2016, Lockheed Martin entered into definitive agreements to separate and combine IS&GS with Leidos Holdings, Inc. (“Leidos”) in a Reverse Morris Trust transaction. The transaction will be structured such that initially IS&GS will be contributed to a newly formed wholly owned subsidiary, Abacus Innovations Corporation (“Abacus”), and the common stock of Abacus will be distributed to Lockheed Martin stockholders either through a pro rata dividend in a spin-off transaction, an exchange offer pursuant to which Lockheed Martin shareholders will elect whether to exchange shares of Lockheed Martin common stock for shares of Abacus common stock in a split-off transaction, or a combination split-off and spin-off transaction. Following the distribution, Abacus will merge with a subsidiary of Leidos and each share of Abacus common stock held by Lockheed Martin stockholders will automatically convert into one share of Leidos common stock upon completing the merger. Immediately after the completion of the transactions, approximately 50.5% of the outstanding shares of Leidos common stock (approximately 77 million shares) are expected to be held by pre-merger Abacus (former Lockheed Martin) stockholders on a fully-diluted basis. Pre-merger Leidos stockholders are expected to hold approximately 49.5% of the outstanding shares of Leidos common stock on a fully diluted basis. Lockheed Martin will not receive or hold any shares of Leidos common stock. As part of the transaction, Lockheed Martin will also receive a one-time special cash payment of $1.8 billion.

On July 11, 2016 Lockheed Martin commenced an exchange offer in which Lockheed Martin stockholders have the opportunity, but are not required, to exchange shares of Lockheed Martin common stock for shares of Abacus common stock, which will automatically convert into shares of Leidos common stock upon completion of the merger. Only those stockholders that elect to participate in the exchange offer will receive shares of Leidos common stock in the merger transaction, provided that, if the exchange offer is not fully subscribed, Lockheed Martin will distribute the remaining shares pro rata in respect of all shares not tendered, and the shares distributed will also be converted into Leidos common stock in the merger. Lockheed Martin retains the right to distribute the shares of Abacus common stock by means of a spin-off or split-off transaction until the exchange offer is completed. Both the exchange and merger are expected to qualify as tax-free transactions to Lockheed Martin and its stockholders, except to the extent that cash is paid to Lockheed Martin stockholders in lieu of fractional shares.

The transactions remain subject to customary closing conditions, including approval by Leidos’ stockholders of the issuance of the Leidos shares in the merger, regulatory approvals, the absence of a material adverse change with respect to each of IS&GS and Leidos, and the receipt of solvency opinions and opinions of tax counsel. The antitrust and competition reviews in the U.S. and the U.K., which were each conditions to closing, have been completed. The transaction is expected to close in the third quarter of 2016.

Throughout the periods included in these unaudited combined financial statements, IS&GS operated as part of Lockheed Martin and consisted of several legal entities, acquired businesses, as well as businesses with no separate legal status. Separate financial statements have not historically been prepared for IS&GS. The unaudited combined financial statements have been derived from Lockheed Martin’s historical accounting records as if IS&GS’ operations had been conducted independently from Lockheed Martin and were prepared on a stand-alone basis in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim periods and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). In the opinion of IS&GS management, these unaudited combined financial statements reflect all adjustments that are of a normal recurring nature necessary for fair presentation of IS&GS’ results of operations, financial condition and cash flows for the interim periods presented. Certain information and note disclosures normally included in financial statements prepared annually in accordance with GAAP have been condensed or omitted pursuant to such SEC rules. These unaudited combined financial statements were prepared using the accounting

7

The Information Systems & Global Solutions Business

Notes to Combined Financial Statements (unaudited)

policies disclosed in and should be read in conjunction with the audited combined financial statements included in the Registration Statement on Form S-4 and Form S-1 of Abacus Innovations Corporation filed with the Securities and Exchange Commission and declared effective on July 11, 2016.

The unaudited combined financial statements include all revenues and costs directly attributable to IS&GS and an allocation of expenses related to certain Lockheed Martin corporate functions (Note 2). These expenses have been allocated to IS&GS based on direct usage or benefit where identifiable, with the remainder allocated pro rata based on an applicable measure of revenues, cost of revenues, headcount, fixed assets, number of transactions or other relevant measures. IS&GS considers these allocations to be a reasonable reflection of the utilization of services or the benefit received. However, the allocations may not be indicative of the actual expense that would have been incurred had IS&GS operated as an independent, stand-alone entity, nor are they indicative of IS&GS’ future expenses.

The unaudited combined financial statements include assets and liabilities specifically attributable to IS&GS and certain assets and liabilities that are held by Lockheed Martin that are specifically identifiable or otherwise attributable to IS&GS. Lockheed Martin’s cash has not been assigned to IS&GS for any of the periods presented because those cash balances are not directly attributable to IS&GS. Lockheed Martin uses a centralized approach for managing cash and financing operations with its segments and subsidiaries. Accordingly, a substantial portion of IS&GS’ cash accounts are regularly “swept” by Lockheed Martin at its discretion. Transfers of cash between IS&GS and Lockheed Martin are included within Net transfers to parent on the unaudited Combined Statements of Cash Flows and the Combined Statements of Equity. Lockheed Martin’s long-term debt and related interest expense have not been attributed to IS&GS for any of the periods presented because Lockheed Martin’s borrowings are neither directly attributable to IS&GS nor is IS&GS the legal obligor or a guarantor of such borrowings.

The unaudited combined financial statements and notes include subsidiaries, ventures and partnerships over which IS&GS has a controlling financial interest. IS&GS uses the equity method to account for investments in business entities that it does not control if it is otherwise able to exert significant influence over the entities’ operating and financial policies. IS&GS has consolidated the financial results for Mission Support Alliance, LLC (“MSA”), a venture with Jacobs Engineering Group, Inc. and Centerra Group, LLC. MSA manages the operations at the Department of Energy’s Hanford, Washington site and provides services including emergency response and training, environmental integration and land management, fleet and road maintenance, water and electric and utilities, cybersecurity and information management.

All intercompany transactions and balances within IS&GS have been eliminated. Transactions between IS&GS and Lockheed Martin have been included in these unaudited combined financial statements and substantially all have been effectively settled for cash at the time the transaction is recorded through Lockheed Martin’s centralized cash management system. Transactions between IS&GS and other businesses of Lockheed Martin are considered related party transactions (Note 2).

Management has concluded that IS&GS operates in one segment based upon the information used by the chief operating decision maker in evaluating the performance of IS&GS’ business and allocating resources and capital. IS&GS manages its business as a single profit center in order to promote collaboration and provide comprehensive functional service offerings across its entire customer base.

The historical results of operations, financial condition and cash flows of IS&GS presented in these unaudited combined financial statements may not be indicative of what they would have been had IS&GS actually been an independent stand-alone entity, nor are they necessarily indicative of IS&GS’ future results of operations, financial condition and cash flows. Also, the results of operations for the interim periods presented are not necessarily indicative of results to be expected for the full years.

IS&GS closed its books and records on the last Sunday of the calendar quarter, which was on June 26 for the first six months of 2016 and June 28 for the first six months of 2015, to align its financial closing with its business processes. The unaudited combined financial statements and tables of financial information included herein are labeled based on that convention. This practice only affects interim periods as IS&GS’ fiscal year ends on December 31.

The preparation of these unaudited combined financial statements in conformity with GAAP requires IS&GS to make estimates and assumptions that affect the amounts reported in the unaudited combined financial statements and accompanying notes. IS&GS bases these estimates on historical experience and on various other assumptions that IS&GS believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. IS&GS’ actual results may differ materially from these estimates. Significant estimates inherent in the preparation of these unaudited combined financial statements include but are not limited to accounting for revenue and cost recognition, allocation of expenses related to certain Lockheed Martin corporate functions, income taxes including deferred taxes, legal accruals and other contingencies.

8

The Information Systems & Global Solutions Business

Notes to Combined Financial Statements (unaudited)

Accounting for contracts using the percentage-of-completion method requires judgment relative to assessing risks, estimating contract revenues and costs (including estimating award and incentive fees and penalties related to performance) and making assumptions for schedule and technical issues. Due to the scope and nature of the work required to be performed on certain contracts, the estimation of total revenues and costs at completion is complicated and subject to many variables and, accordingly, is subject to change. When adjustments in estimated total contract revenues or estimated total costs are required, any changes from prior estimates are recognized in the current period for the inception-to-date effect of such changes. When estimates of total costs to be incurred on a contract exceed estimates of total revenues to be earned, a provision for the entire loss on the contract is recorded in the period in which the loss is determined.

The initial profit booking rate of each contract considers risks surrounding the ability to achieve the technical requirements, schedule and costs in the initial estimated total costs to complete the contract. Profit booking rates may increase during the performance of the contract if IS&GS successfully retires risks surrounding the technical, schedule and cost aspects of the contract that decreases the estimated total costs to complete the contract. Conversely, profit booking rates may decrease if the estimated total costs to complete the contract increase. Profit booking rates also may be impacted favorably or unfavorably by other items. Favorable items may include the positive resolution of contractual matters and cost recoveries on disputed charges. Unfavorable items may include the adverse resolution of contractual matters and reserves for disputes. All of the estimates are subject to change during the performance of the contract and may affect the profit booking rate. Therefore, comparability of IS&GS revenues, profit and margins may be impacted by changes in profit booking rates on IS&GS’ contracts accounted for using the percentage-of-completion method. IS&GS’ combined net adjustments not related to volume, including net profit booking rate adjustments, increased gross profit by $110 million and $85 million for the six months ended June 26, 2016 and June 28, 2015, respectively. These adjustments increased net earnings by $72 million and $55 million for the six months ended June 26, 2016 and June 28, 2015, respectively.

Note 2 – Corporate Allocations, Related Party Transactions and Net Parent Investment

Corporate Allocations

The unaudited combined financial statements reflect allocations of certain expenses from Lockheed Martin including, but not limited to, costs related to corporate functions such as senior management, legal, human resources, finance, accounting, treasury, tax, IT, benefits, communications and ethics and compliance, and other corporate expenses such as corporate employee benefits, incentives and stock-based compensation, shared services processing and depreciation for corporate fixed assets. Management of IS&GS considers these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided to, it. The allocation methods used include a pro rata basis of revenues, cost of revenues, headcount, fixed assets, number of transactions or other measures. Allocations for management costs and corporate support services provided to IS&GS totaled $105 million and $141 million for the six months ended June 26, 2016 and June 28, 2015, respectively.

The financial information in these unaudited combined financial statements does not necessarily include all the expenses that would have been incurred by IS&GS had it been a separate, stand-alone entity. Actual costs that may have been incurred if IS&GS had been a stand-alone company would depend on a number of factors, including the chosen organization structure and functions outsourced or performed by employees.

Related Party Transactions

Revenues in the unaudited Combined Statements of Earnings include sales to affiliates of Lockheed Martin of $17 million and $24 million for the six months ended June 26, 2016 and June 28, 2015, respectively. Costs of revenues in the unaudited Combined Statements of Earnings includes expenses for work performed for IS&GS by Lockheed Martin or its affiliates of $19 million and $31 million for the six months ended June 26, 2016 and June 28, 2015, respectively. There were no significant receivables or payables due from or due to Lockheed Martin or its affiliates as of June 26, 2016 and December 31, 2015.

9

The Information Systems & Global Solutions Business

Notes to Combined Financial Statements (unaudited)

Net Parent Investment

Net transfers to parent are included within Net parent investment on the unaudited Combined Statements of Equity. The components of the net transfers to parent consisted of the following (in millions):

	Six Months Ended
	June 26, 2016			June 28, 2015
Cash transactions
Cash pooling and general financing activities	$	(580	)	$	(661	)
IS&GS expenses incurred by parent		178			183
Corporate allocations		105			141
Current income taxes payable		92			80
Total cash transactions, net		(205	)		(257	)
Non-cash transactions
Other transfers with parent		4			7
Total net transfers to parent	$	(201	)	$	(250	)

Cash pooling and general financing activities include cash transferred from IS&GS to Lockheed Martin under cash pooling arrangements. IS&GS expenses incurred by parent include IS&GS employee fringe and pension expense. Corporate allocations include the items described above in the section titled “Corporate Allocations.” Current income taxes payable are deemed to have been settled with Lockheed Martin in each period.

Note 3 – Severance Charges

In the first quarter of 2016, IS&GS recorded severance charges of $19 million as a result of a review intended to reduce the costs of its services and solutions offerings. The charges consisted of severance costs associated with the planned elimination of certain positions through involuntary actions. Upon separation, terminated employees will receive lump-sum severance payments primarily based on years of service. As of June 26, 2016, IS&GS had paid approximately $4 million in severance payments associated with this action, with the remainder expected to be paid by the end of 2016.

In the third quarter of 2015, IS&GS recorded severance charges of $20 million as a result of a review intended to reduce the costs of its services and solutions offerings. The charges consisted of severance costs associated with the planned elimination of certain positions through either voluntary or involuntary actions. Upon separation, terminated employees received lump-sum severance payments primarily based on years of service. As of June 26, 2016, all of the severance had been paid, including approximately $6 million paid in the first six months of 2016.

Note 4 – Postretirement Plans

Certain IS&GS salaried employees participate in various defined benefit pension and other postemployment benefit (“OPEB”) plans administered and sponsored by Lockheed Martin. The OPEB plans provide certain health care and life insurance benefits to retired employees. The unaudited combined financial statements reflect periodic pension and post-retirement costs as if they were multi-employer plans. The net periodic pension and OPEB costs includes interest costs, recognized net actuarial losses and service costs that are determined based on actuarial valuations of individual participant data and projected returns on plan assets. Costs associated with the pension and OPEB plans were allocated to the unaudited combined financial statements based on IS&GS employees’ proportionate share of costs for the respective Lockheed Martin plans in which they participate. These costs are considered to have been settled with Lockheed Martin at the time of the allocation of these expenses. Pension and OPEB expense for IS&GS employees participating in plans sponsored by Lockheed Martin and various other multi-employer plans, excluding the Hanford Site Pension Plan (the “HSPP”) discussed below, was $40 million and $45 million for the six months ended June 26, 2016 and June 28, 2015, respectively.

In addition to the pension and OPEB plans administered and sponsored by Lockheed Martin, MSA is one of several sponsors to the HSPP, a multiemployer defined benefit pension plan that covers eligible employees of certain prime contractors and subcontractors of the Department of Energy, including employees of MSA. For the six months ended June 26, 2016 and June 28, 2015, expenses of $14 million and $13 million, respectively, were included in the unaudited combined financial statements for IS&GS’ share of HSPP contributions.

10

The Information Systems & Global Solutions Business

Notes to Combined Financial Statements (unaudited)

Note 5 – Income Taxes

Quarterly income tax expense is measured using an estimated annual effective income tax rate, adjusted for discrete items within the period. IS&GS’ effective income tax rate was 35.2% and 34.9% for the six months ended June 26, 2016 and June 28, 2015, respectively. The rates for the six months ended June 26, 2016 and June 28, 2015 varied from the federal statutory rate of 35% due to the favorable impact of the U.S. manufacturing deduction and net earnings attributable to non-controlling interest. These favorable impacts on the rate for the six months ended June 26, 2016 were more than offset by the unfavorable impact of adjustments for foreign activities. As of June 26, 2016 and December 31, 2015, liabilities associated with unrecognized tax benefits were not material.

State income taxes are included in Cost of revenues on the unaudited Combined Statements of Earnings because under U.S. Government contracting regulations such amounts are allowable costs in establishing prices for contracts with the U.S. Government. Accordingly, a substantial portion of state income taxes is also included in Revenues. IS&GS’ total net state income tax expense was $16 million in each of the six months ended June 26, 2016 and June 28, 2015.

Note 6 – Inventories, net

Inventories, net consisted of the following (in millions):

	June 26, 2016		December 31, 2015
Work-in-process, primarily related to long-term contracts and programs in progress	$	89	$	144
Other inventories		34		27
Less: customer advances and progress payments		—		(3	)
Total inventories, net	$	123	$	168

Note 7 – Goodwill and Intangible Assets, net

Changes in the carrying amount of goodwill were as follows (in millions):

	Total
Balance as of December 31, 2015	$	2,823
Foreign currency translation adjustments		(13	)
Balance as of June 26, 2016	$	2,810

Intangible assets, net consisted of the following (in millions):

	As of June 26, 2016							As of December 31, 2015
	Gross Amount		Accumulated Amortization			Net Amount		Gross Amount		Accumulated Amortization			Net Amount
Finite lived:
Customer relationships	$	176	$	(102	)	$	74	$	176	$	(90	)	$	86
Developed technology		37		(25	)		12		37		(22	)		15
Other		20		(15	)		5		20		(11	)		9
Total Finite lived:		233		(142	)		91		233		(123	)		110
Indefinite lived:
Tradename and trademark		18		—			18		18		—			18
Total intangibles assets	$	251	$	(142	)	$	109	$	251	$	(123	)	$	128

11

The Information Systems & Global Solutions Business

Notes to Combined Financial Statements (unaudited)

Note 8– Legal Proceedings and Contingencies

Legal Proceedings

IS&GS is a party to litigation and other proceedings that arise in the ordinary course of its business. These matters could result in fines, penalties, compensatory or treble damages or non-monetary sanctions or relief. IS&GS does not believe that the outcome of these matters, including the proceedings mentioned below, will have a material adverse effect on IS&GS, notwithstanding that the unfavorable resolution of any matter may have a material adverse effect on its net earnings in any particular interim reporting period. Among the factors that IS&GS considers in this assessment are the nature of existing legal proceedings and claims, the asserted or possible damages or loss contingency (if estimable), the progress of the case, existing law and precedent, the opinions or views of legal counsel and other advisors, its experience in similar cases and the experience of other companies, the facts available at the time of assessment and how IS&GS is responding or intends to respond to the proceeding or claim. IS&GS’ assessment of these factors may change over time as individual proceedings or claims progress.

On April 24, 2009, Lockheed Martin filed a declaratory judgment action against the New York Metropolitan Transportation Authority and its Capital Construction Company (collectively, the “MTA”) asking the U.S. District Court for the Southern District of New York to find that the MTA is in material breach of an agreement with Lockheed Martin (relating to IS&GS) based on the MTA’s failure to provide access to sites where work must be performed and the customer-furnished equipment necessary to complete the contract. The MTA filed an answer and counterclaim alleging that Lockheed Martin breached the contract and subsequently terminated the contract for alleged default. The primary damages sought by the MTA are the cost to complete the contract and potential re-procurement costs. While IS&GS is unable to estimate the cost of another contractor completing the contract and the costs of re-procurement, the contract with the MTA had a total value of $323 million, of which $241 million was paid to IS&GS, and the MTA is seeking damages of approximately $190 million. IS&GS disputes the MTA’s allegations and is defending against them. Additionally, following an investigation, Lockheed Martin’s sureties on a performance bond related to this matter, who were represented by independent counsel, concluded that the MTA’s termination of the contract was improper. Finally, Lockheed Martin’s declaratory judgment action was later amended to include claims for monetary damages against the MTA of approximately $95 million. This matter was taken under submission by the District Court in December 2014, after a five-week bench trial and the filing of post-trial pleadings by the parties. IS&GS expects a decision in 2016.

On November 10, 2015, MSA received a final decision of the Department of Energy contracting officer for MSA concluding that certain payments by MSA to IS&GS for the performance of IT services and management services under a subcontract to MSA constituted affiliate fees in violation of the Federal Acquisition Regulation (the “FAR”). At the same time, the contracting officer advised MSA that he would not approve certain provisional fee payments to MSA pending resolution of the matters set forth in his decision. Subsequent to the contracting officer’s final decision, MSA and Lockheed Martin received notice from the U.S. Attorney’s Office for the Eastern District of Washington that the U.S. Government had initiated a False Claims Act investigation into the facts surrounding this dispute, and each of MSA and Lockheed Martin have produced information in response to Civil Investigative Demands from the U.S. Attorney’s Office. Since this issue first was raised by the Department of Energy, MSA has asserted that the IT and management services being performed by IS&GS under a fixed price/fixed unit rate subcontract approved by the Department of Energy meet the definition of a “commercial item” under the FAR and any profits earned on that subcontract are permissible. MSA filed an appeal of the contracting officer’s decision with the Civilian Board of Contract Appeals and that appeal is pending. Subsequent to the filing of MSA’s appeal, the contracting officer demanded that MSA reimburse the Department of Energy in the amount of $64 million, which was his estimate of the profits earned during the period from 2010 to 2014 by IS&GS. MSA has requested that the Department of Energy defer that demand pending resolution of the appeal, but to date the demand has not been rescinded. MSA and the other members of MSA have advised Lockheed Martin that they believe that if MSA incurs liability in this matter, then Lockheed Martin is responsible to MSA for the loss.

Although IS&GS cannot predict the outcome of legal or other proceedings with certainty, GAAP requires IS&GS to record a liability if a loss is probable and the amount of the loss is reasonably estimable, and requires IS&GS to disclose an estimate of the reasonably possible loss or range of loss or make a statement that such an estimate cannot be made for contingencies where there is at least a reasonable possibility that a loss may have been incurred where the amount of that loss would be material to IS&GS. As of June 26, 2016, the aggregate amount of all liabilities in respect of legal and other proceedings (including the matters described above) recorded by IS&GS in its unaudited combined financial statements was approximately $63 million, and the range of reasonably possible additional losses was estimated by IS&GS to be from $0 to $200 million. IS&GS believes, after consultation with counsel and after taking into account its current litigation reserves that the currently pending legal and other proceedings should not have a material adverse effect on IS&GS’ financial condition or results of operations. In view of the inherent difficulty of predicting the outcome of legal proceedings, IS&GS cannot state with confidence what will be the eventual outcomes of the currently pending matters, the timing of their ultimate resolution or the eventual losses, fines, penalties or impact related to those matters. In light of the uncertainties involved in such proceedings, it is possible that accruals may need to be adjusted in the future and the outcome of a particular matter in a particular period could be material to IS&GS in that period.

12

The Information Systems & Global Solutions Business

Notes to Financial Statement (unaudited)

Letters of Credit, Surety Bonds and Third-Party Guarantees

In connection with the business of IS&GS, Lockheed Martin has standby letters of credit, surety bonds and third-party guarantees with financial institutions and other third parties primarily relating to advances received from customers and the guarantee of future performance on certain contracts. Letters of credit and surety bonds generally are available for draw down in the event IS&GS does not perform. In some cases, Lockheed Martin may guarantee the contractual performance of third parties such as ventures in which we participate or venture partners. IS&GS had total outstanding letters of credit, surety bonds and third-party guarantees aggregating to $437 million and $436 million as of June 26, 2016 and December 31, 2015, respectively. We do not consider guarantees of subsidiaries and other consolidated entities to be third-party guarantees and they are not included in these amounts.

As of June 26, 2016 and December 31, 2015, third-party guarantees totaled $127 million, all of which related to the guarantee of contractual performance of a venture to which IS&GS is currently a party. This amount represents the estimate of the maximum amount IS&GS would expect to incur upon the contractual non-performance of the venture partners.

Note 9 – Composition of Certain Financial Statement Captions

The following table presents financial information underlying the Combined Balance Sheets caption Other current liabilities (in millions):

	June 26, 2016		December 31, 2015
Customer contract accruals	$	154	$	124
Other current liabilities		108		130
Total other current liabilities	$	262	$	254

Note 10 – Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued a new standard that will change the way IS&GS recognizes revenue and significantly expand the disclosure requirements for revenue arrangements. On July 9, 2015, the FASB approved a one-year deferral of the effective date of the standard to 2018 for public companies, with an option that would permit companies to adopt the standard in 2017. Early adoption prior to 2017 is not permitted. The new standard may be adopted either retrospectively or on a modified retrospective basis whereby the new standard would be applied to new contracts and existing contracts with remaining performance obligations as of the effective date, with a cumulative catch-up adjustment recorded to beginning retained earnings at the effective date for existing contracts with remaining performance obligations. IS&GS is currently evaluating the methods of adoption allowed by the new standard and the effect the standard is expected to have on IS&GS’ combined financial statements and related disclosures. As the new standard will supersede substantially all existing revenue guidance affecting IS&GS under GAAP, it could impact revenue and cost recognition on thousands of contracts across the IS&GS business, in addition to IS&GS’ business processes and IT systems. As a result, IS&GS’ evaluation of the effect of the new standard will extend over future periods.

In September 2015, the FASB issued a new standard that simplifies the accounting for adjustments made to preliminary amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. Instead, adjustments will be recognized in the period in which the adjustments are determined, including the effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at the acquisition date. IS&GS adopted the standard on January 1, 2016 and will prospectively apply the standard to business combination adjustments identified after the date of adoption. The new standard had no impact on IS&GS’ results of operations, financial condition or cash flows for the six months ended June 26, 2016.

In February 2016, the FASB issued a new standard that increases transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet and the disclosure of key information about leasing arrangements. The standard is effective January 1, 2019 for public companies, with early adoption permitted. The standard will be applied using a modified retrospective approach to the beginning of the earliest period presented in the financial statements. IS&GS is currently evaluating when it will adopt the standard and the expected impact to the combined financial statements and related disclosures.

13

The Information Systems & Global Solutions Business

Notes to Financial Statement (unaudited)

Note 11– Subsequent Events

IS&GS has evaluated subsequent events through July 29, 2016, the date the unaudited combined financial statements were issued. No material subsequent events have occurred that should be recorded or disclosed in these unaudited combined financial statements except for commencement of the exchange offer in connection with the transaction with Leidos, as described in Note 1.

14

EX-99.3

Exhibit 99.3

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OF THE INFORMATION SYSTEMS & GLOBAL SOLUTIONS BUSINESS

FOR THE SIX MONTHS ENDED JUNE 26, 2016 AND JUNE 28, 2015

Business Overview

The Information Systems & Global Solutions business segment of Lockheed Martin Corporation (“IS&GS”) is a leading provider of information technology (“IT”), management and engineering services to civil, defense and intelligence agencies of the U.S. Government. IS&GS also provides services to agencies of allied foreign governments, state and local governments and commercial customers. IS&GS supports its customers by providing data analytics, systems engineering, large-scale agile software development, network-enabled situational awareness solutions, communications and command and control capability and global systems integration to help customers gather, analyze and securely distribute intelligence data to address complex and pressing challenges such as combating global terrorism, cybersecurity, air traffic management, energy demand management and transforming the healthcare system. IS&GS is also responsible for various classified systems and services in support of vital national security systems. Major U.S. Government customers include civil agencies such as the Department of Homeland Security, the Department of Health and Human Services and the Department of the Treasury; the Department of Defense (“DoD”) and all branches of the U.S. military; and the U.S. intelligence community. IS&GS’ international customers are located primarily in the United Kingdom, the Middle East and Australia. In the commercial sector, IS&GS serves clients primarily in the financial services, healthcare and energy industries. For the years ended December 31, 2015, 2014 and 2013, IS&GS derived 88%, 91% and 95%, respectively, of its revenues from the U.S. Government (including 26%, 30% and 35% from the DoD, respectively).

IS&GS operates and reports its financial results as a single operating segment. IS&GS manages its business as a single profit center in order to promote collaboration and provide comprehensive functional service offerings across its entire customer base. Although the business is managed and resources are allocated as a single operating segment, certain information regarding sectors and functional capabilities is presented below for purposes of providing an understanding of the IS&GS business.

Separation from Lockheed Martin and Combination with Leidos

On January 26, 2016, Lockheed Martin entered into definitive agreements to separate and combine IS&GS with Leidos Holdings, Inc. (“Leidos”) in a Reverse Morris Trust transaction. The transaction will be structured such that initially IS&GS will be contributed to a newly formed wholly owned subsidiary, Abacus Innovations Corporation (“Abacus”), and the common stock of Abacus will be distributed to Lockheed Martin stockholders either through a pro rata dividend in a spin-off transaction, an exchange offer pursuant to which Lockheed Martin shareholders will elect whether to exchange shares of Lockheed Martin common stock for shares of Abacus common stock in a split-off transaction, or a combination split-off and spin-off transaction. Following the distribution, Abacus will merge with a subsidiary of Leidos and each share of Abacus common stock held by Lockheed Martin stockholders will automatically convert into one share of Leidos common stock upon completing the merger. Immediately after the completion of the transactions, approximately 50.5% of the outstanding shares of Leidos common stock (approximately 77 million shares) are expected to be held by pre-merger Abacus (former Lockheed Martin) stockholders on a fully-diluted basis. Pre-merger Leidos stockholders are expected to hold approximately 49.5% of the outstanding shares of Leidos common stock on a fully diluted basis. Lockheed Martin will not receive or hold any shares of Leidos common stock. As part of the transaction, Lockheed Martin will also receive a one-time special cash payment of $1.8 billion.

On July 11, 2016 Lockheed Martin commenced an exchange offer in which Lockheed Martin stockholders have the opportunity, but are not required, to exchange shares of Lockheed Martin common stock for shares of Abacus common stock, which will automatically convert into shares of Leidos common stock upon completion of the merger. Only those stockholders that elect to participate in the exchange offer will receive shares of Leidos common stock in the merger transaction, provided that, if the exchange offer is not fully subscribed, Lockheed Martin will distribute the remaining shares pro rata in respect of all shares not tendered, and the shares distributed will also be converted into Leidos common stock in the merger. Lockheed Martin retains the right to distribute the shares of Abacus common stock by means of a spin-off or split-off transaction until the exchange offer is completed. Both the exchange and merger are expected to qualify as tax-free transactions to Lockheed Martin and its stockholders, except to the extent that cash is paid to Lockheed Martin stockholders in lieu of fractional shares.

1

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OF THE INFORMATION SYSTEMS & GLOBAL SOLUTIONS BUSINESS

FOR THE SIX MONTHS ENDED JUNE 26, 2016 AND JUNE 28, 2015

The transactions remain subject to customary closing conditions, including approval by Leidos’ stockholders of the issuance of the Leidos shares in the merger, regulatory approvals, the absence of a material adverse change with respect to each of IS&GS and Leidos, and the receipt of solvency opinions and opinions of tax counsel. The antitrust and competition reviews in the U.S. and the U.K., which were each conditions to closing, have been completed. The transaction is expected to close in the third quarter of 2016.

Results of Operations

Throughout the periods included in these combined financial statements, IS&GS operated as part of Lockheed Martin and consisted of several legal entities, acquired businesses, as well as businesses with no separate legal status. Separate financial statements have not historically been prepared for IS&GS. The combined financial results of IS&GS have been derived from Lockheed Martin’s historical accounting records as if IS&GS’ operations had been conducted independently from Lockheed Martin and were prepared on a stand-alone basis in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. The historical results of operations, financial condition and cash flows of IS&GS discussed in this document may not be indicative of what they would have been had IS&GS actually been an independent stand-alone entity, nor are they indicative of IS&GS’ future results of operations, financial condition and cash flows.

The results of operations include all revenues and costs directly attributable to IS&GS and an allocation of expenses related to certain Lockheed Martin corporate functions. These expenses have been allocated to IS&GS based on direct usage or benefit where identifiable, with the remainder allocated pro rata based on an applicable measure of revenues, cost of revenues, headcount, fixed assets, number of transactions or other relevant measures. IS&GS considers these allocations to be a reasonable reflection of the utilization of services or the benefit received. However, the allocations may not be indicative of the actual expense that would have been incurred had IS&GS operated as an independent, stand-alone entity, nor are they indicative of IS&GS’ future expenses.

IS&GS closes its books and records on the last Sunday of the calendar quarter, which was on June 26 for the first six months of 2016 and June 28 for the first six months of 2015, to align its financial closing with its business processes. The consolidated financial statements and tables of financial information included herein are labeled based on that convention. This practice only affects interim periods as IS&GS’ fiscal year ends on December 31.

The following table sets forth IS&GS’ combined statements of operations for the periods indicated (in millions):

	Six Months Ended
	June 26, 2016			June 28, 2015
Revenues	$	2,683		$	2,809
Cost of revenues
Cost of revenues		(2,430	)		(2,586	)
Severance charges		(19	)		—
Total cost of revenues		(2,449	)		(2,586	)
Gross profit		234			223
Other income, net		13			15
Earnings before income taxes		247			238
Income tax expense		(87	)		(83	)
Net earnings		160			155
Less: net earnings attributable to non-controlling interest		3			2
Net earnings attributable to parent	$	157		$	153

IS&GS’ revenues and earnings are primarily derived from contracts for services and solutions provided to the U.S. Government. IS&GS accounts for these contracts using the percentage-of-completion method of accounting, which requires judgment relative to assessing risks, estimating contract revenues and costs (including estimating award and incentive fees and penalties related to performance) and making assumptions for schedule and technical issues. Many of IS&GS’ contracts span multiple years and include complex technical requirements. At the outset of a contract, IS&GS identifies and monitors risks to the achievement of the technical, schedule and cost aspects of the contract and assesses the effects of those risks on its estimates of total costs to complete the contract.

2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OF THE INFORMATION SYSTEMS & GLOBAL SOLUTIONS BUSINESS

FOR THE SIX MONTHS ENDED JUNE 26, 2016 AND JUNE 28, 2015

The estimates consider the technical requirements (e.g., a newly-developed solution versus a mature solution), the schedule and associated tasks (e.g., the number and type of milestone events) and costs (e.g., material, labor, subcontractor and overhead).

Due to the scope and nature of the work required to be performed on certain contracts, the estimation of total revenues and costs at completion is complicated and is subject to change. The initial profit booking rate of each contract considers risks surrounding the ability to achieve the technical requirements, schedule and costs in the initial estimated total costs to complete the contract. Profit booking rates may increase during the performance of the contract if IS&GS successfully retires risks surrounding the technical, schedule and cost aspects of the contract which decreases the estimated total costs to complete the contract. Conversely, IS&GS’ profit booking rates may decrease if the estimated total costs to complete the contract increase. Profit booking rates also may be impacted favorably, or unfavorably, by other items. Favorable items may include the positive resolution of contractual matters and cost recoveries on disputed charges. Unfavorable items may include the adverse resolution of contractual matters and reserves for disputes. When estimates of total costs to be incurred exceed estimates of total revenues to be earned for a contract accounted for using the percentage-of-completion method of accounting, a provision for the entire loss on the contract is recorded in the period in which the loss is determined.

Changes in revenues and gross profit generally are expressed in terms of volume. Changes in volume refer to increases or decreases in sales or gross profit resulting from varying levels of services or solutions. Volume changes in gross profit are typically based on the current profit booking rate for a particular contract. In addition, comparability of revenues, gross profit and margins may be impacted favorably or unfavorably by changes in profit booking rates described in the preceding paragraph. Increases in the profit booking rates, typically referred to as risk retirements, usually relate to revisions in the estimated total costs that reflect improved conditions on a particular contract. Conversely, conditions on a particular contract may deteriorate resulting in an increase in the estimated total costs to complete and a reduction in the profit booking rate. IS&GS’ combined net adjustments not related to volume, including net profit booking rate adjustments, increased gross profit by $110 million and $85 million for the first six months of 2016 and 2015, respectively. These adjustments increased net earnings by $72 million and $55 million for the first six months of 2016 and 2015, respectively. The increase in combined net adjustments in the first six months of 2016 compared to the same period in 2015 is primarily attributable to higher profit adjustments of approximately $30 million resulting from contract close-out activities and completion of various programs, including a human resources outsourcing program with the Department of Homeland Security (the “HR Access program”), and, to a lesser extent, improved program performance; and approximately $20 million due to reserves recorded in the first six months of 2015 that were not repeated in the first six months of 2016 on various programs. These increases were partially offset by a negative profit adjustment resulting from development issues on a program to consolidate, modernize and operate data centers for the Australian Department of Defence Chief Information Officer Group (the “CIOG program”), caused by unanticipated challenges in application remediation and data center migration activities. A first quarter 2016 technical baseline review was conducted with the customer, which resulted in cost and schedule changes to the program. Accordingly, IS&GS recognized a change in estimate on this program resulting in the recognition of a $40 million negative profit adjustment in the first six months of 2016.

Cost of revenues consists of materials, labor, subcontracting costs, an allocation of indirect costs (overhead and general and administrative costs) and an allocation of certain expenses from Lockheed Martin including, but not limited to, costs related to corporate functions such as senior management, legal, human resources, finance, accounting, treasury, tax, IT, benefits, communications and ethics and compliance, and other corporate expenses such as corporate employee benefits, incentives and stock-based compensation, shared services processing and depreciation for corporate fixed assets. Management of IS&GS considers these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided to, it. Allocations for management costs and corporate support services provided to IS&GS totaled $105 million and $141 million for the first six months of 2016 and 2015, respectively. The nature and amount of costs are monitored at the contract level in forming the basis for estimating total costs to complete each contract.

The provision for income taxes represents income taxes paid or payable for the current period, plus the change in deferred taxes during the period. In general, the taxable income of the IS&GS business was included in Lockheed Martin’s combined U.S. federal tax returns, and, where applicable, in jurisdictions around the world. As a result, separate U.S. federal income tax returns were not prepared for most IS&GS entities. IS&GS’ current portion of U.S. and certain non-U.S. income taxes payable is deemed to have been remitted to Lockheed Martin in the period the related tax expense was recorded. Consequently, current income taxes payable are deemed to have been settled with Lockheed Martin in each period.

3

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OF THE INFORMATION SYSTEMS & GLOBAL SOLUTIONS BUSINESS

FOR THE SIX MONTHS ENDED JUNE 26, 2016 AND JUNE 28, 2015

Revenues

Revenues in the first six months of 2016 decreased $126 million, or 4 percent, compared to the same period in 2015. The decrease was primarily attributable to lower revenues of approximately $115 million as a result of the completion of certain programs to provide IT solutions such as hardware, integrated software systems and cybersecurity to U.S. defense and intelligence agencies (primarily the U.S. Army Corps of Engineers (“ACE”) IT program) and increased competition coupled with the fragmentation of existing large contracts into multiple smaller contracts that are awarded primarily on the basis of price when re-competed; and approximately $10 million due to lower volume, primarily as a result of schedule delays caused by the development issues on the CIOG program mentioned above.

Cost of Revenues

Cost of revenues in the first six months of 2016 decreased $156 million, or 6 percent, compared to the same period in 2015. The decrease was primarily attributable to lower cost of revenues of approximately $195 million driven by the reasons stated above for lower revenues on IT programs with U.S. defense and intelligence agencies (ACE IT) and improved program performance; risk retirements resulting from contract close-out activities; reserves recorded in the first six months of 2015 that were not repeated in the first six months of 2016; and decreases in various corporate expenses allocated from Lockheed Martin. These decreases were partially offset by approximately $40 million due to the negative profit adjustment for the development issues on the CIOG program mentioned above.

Severance Charges

During the first six months of 2016, IS&GS recorded severance charges of $19 million as a result of a review intended to reduce the costs of its services and solutions offerings. The charges consisted of severance costs associated with the planned elimination of certain positions through involuntary actions. Upon separation, terminated employees will receive lump-sum severance payments primarily based on years of service. As of June 26, 2016, IS&GS had paid approximately $4 million in severance payments associated with this action, with the remainder expected to be paid by the end of 2016.

Other Income, Net

Other income, net was $13 million in the first six months of 2016 and $15 million in the first six months of 2015 and is primarily comprised of IS&GS’ share of net earnings related to its equity method investees, which include Kwajalein Range Services, LLC and Consolidated Nuclear Services, LLC.

Earnings Before Income Taxes

Pretax earnings in the first six months of 2016 increased $9 million, or 4 percent, compared to the same period in 2015. Pretax earnings as a percentage of revenues was 9.2% in the six months of 2016, compared to 8.5% in the first six months of 2015. The increases were attributable to cost of revenues declining at a higher rate than revenues as a result of approximately $35 million due to decreases in various corporate expenses allocated from Lockheed Martin; $30 million from contract close-out activities and the completion of various programs and, to a lesser extent, improved program performance; and $20 million due to reserves recorded in the first six months of 2015 that were not repeated in the first six months of 2016. These increases were partially offset by approximately $40 million as a result of the development issues on the CIOG program mentioned above; approximately $19 million as a result of severance charges recognized in the first six months of 2016 that did not occur in the same period in 2015; and due to lower revenues.

Income Tax Expense

IS&GS’ effective income tax rate was 35.2% in the first six months of 2016, compared to 34.9% in the same period in 2015. The rates for both periods benefited from the favorable impact of tax deductions for U.S. manufacturing activities and net earnings attributable to non-controlling interest. These favorable impacts on the rate in the first six months of 2016 were more than offset by the unfavorable impact of adjustments for foreign activities.

4

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OF THE INFORMATION SYSTEMS & GLOBAL SOLUTIONS BUSINESS

FOR THE SIX MONTHS ENDED JUNE 26, 2016 AND JUNE 28, 2015

Liquidity and Cash Flows

As part of Lockheed Martin, IS&GS is dependent upon Lockheed Martin for all of its working capital and financing requirements as Lockheed Martin uses centralized cash management and financing programs. Financial transactions relating to the IS&GS business are accounted for through the net parent investment account of the IS&GS business. The cash reflected on the combined financial statements represents cash on hand at certain foreign and domestic entities that do not participate in Lockheed Martin’s centralized cash management program. During the first six months of 2016 and 2015, IS&GS generated sufficient cash from operating activities to fund its ongoing operations.

Lockheed Martin has been advised by Leidos that, following the consummation of the Transaction, Leidos expects to deploy its sources of liquidity and its capital resources to continue to provide the support to the IS&GS business that previously was provided by Lockheed Martin. Leidos also has advised Lockheed Martin that the funding of ongoing operations and potential business acquisitions subsequent to the Transaction was taken into account by Leidos when the cost savings and synergies expected to result from the Transaction were estimated. There can be no assurances that Leidos will provide this funding.

Cash received from customers, either from the payment of invoices for work performed or for advances in excess of costs incurred, is IS&GS’ primary source of cash. IS&GS generally does not begin work on contracts until funding is appropriated by the customer. However, IS&GS management may determine to fund customer programs pending government appropriations and has been doing so with increased frequency. If IS&GS incurs costs in excess of funds obligated on the contract, IS&GS is at risk for reimbursement of the excess costs.

At June 26, 2016, IS&GS held cash of $35 million, of which approximately $20 million was held outside of the U.S. by international subsidiaries. Although those balances are generally available to fund ordinary business operations without legal or other restrictions, a significant portion is not immediately available to fund U.S. operations unless repatriated. If this cash had been repatriated at June 26, 2016, the amount of additional U.S. federal income tax that would have been due after considering foreign tax credits would not be significant. In connection with the Transaction, Splitco expects to incur indebtedness of $1.84 billion.

The following table provides a summary of IS&GS’ cash flow information followed by a discussion of the key elements (in millions):

	Six Months Ended
	June 26, 2016			June 28, 2015
Cash at beginning of period	$	39		$	61
Operating activities
Net earnings		160			155
Non-cash adjustments		46			41
Changes in working capital		—			132
Other, net		13			(58	)
Net cash provided by operating activities		219			270
Net cash used for investing activities		(7	)		(5	)
Net cash used for financing activities		(217	)		(279	)
Effect of foreign exchange rate changes on cash		1			(3	)
Net change in cash		(4	)		(17	)
Cash at end of period	$	35		$	44

Operating Activities

Net cash provided by operating activities decreased $51 million in the first six months of 2016 as compared to the same period in 2015. The decrease was primarily attributable to a $132 million decline in cash flows generated from changes in working capital (defined as receivables and inventories less accounts payable and customer advances and amounts in excess of costs incurred). The net decrease in cash flows generated from working capital changes was due to the timing of billing cycles affecting customer advances and progress payments for various programs (primarily technical services programs and the Defense Information Systems Agency’s Global Information Grid Services Management Operations program) and the timing of customer payments on accounts receivable for certain programs (primarily Department of Energy contracts and the CIOG contract). These decreases were partially offset by a $71 million increase in net cash flows for various prepaid and other assets and liabilities.

5

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OF THE INFORMATION SYSTEMS & GLOBAL SOLUTIONS BUSINESS

FOR THE SIX MONTHS ENDED JUNE 26, 2016 AND JUNE 28, 2015

Investing Activities

IS&GS made capital expenditures of $7 million in the first six months of 2016 and $5 million in the same period in 2015. The majority of IS&GS’ capital expenditures were for equipment and facilities infrastructure that generally are incurred to support new and existing programs. IS&GS also incurs capital expenditures for information technology to support programs and general enterprise information technology infrastructure, inclusive of costs for the development or purchase of internal-use-software.

Financing Activities

Net cash used for financing activities was $217 million in the first six months of 2016, a decrease of $62 million from cash used for financing activities of $279 million in the same period in 2015. The decrease was primarily due to a decrease in net transfers from IS&GS to Lockheed Martin of $52 million under Lockheed Martin’s centralized cash management and financing programs.

6

EX-99.4

Exhibit 99.4

UNAUDITED BALANCE SHEET

OF ABACUS INNOVATIONS CORPORATION

As of June 26, 2016

Table of Contents
Review Report of Independent Registered Public Accounting Firm	1
Balance Sheet as of June 26, 2016	2
Notes to Financial Statement	3

Review Report of Independent Registered Public Accounting Firm

Board of Directors

Abacus Innovations Corporation

We have reviewed the accompanying Balance Sheet of Abacus Innovations Corporation (the Company) as of June 26, 2016. This Balance Sheet is the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the Balance Sheet referred to above for it to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Balance Sheet of Abacus Innovations Corporation as of January 25, 2016 (not presented herein), and we expressed an unqualified audit opinion on that balance sheet in our report dated April 15, 2016.

/s/ Ernst & Young LLP

McLean, Virginia

July 29, 2016

1

Abacus Innovations Corporation

Balance Sheet

(unaudited, in whole dollars)

	June 26, 2016
Assets
Cash	$	100
Total assets	$	100
Liabilities and equity
Common stock (authorized 80,000,000 shares of $.001 par value each; 100 shares issued)	$	—
Additional paid-in capital		100
Total liabilities and equity	$	100

The accompanying notes are an integral part of this unaudited financial statement.

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Abacus Innovations Corporation

Notes to Financial Statement (unaudited)

Note 1 – Business Overview

Abacus Innovations Corporation (“Abacus”) is a newly-formed Delaware corporation and wholly-owned subsidiary of Lockheed Martin Corporation (“Lockheed Martin”). Lockheed Martin caused Abacus to be formed on January 19, 2016, in order to facilitate separation of its Information Systems & Global Solutions business. Abacus issued 100 shares of common stock to Lockheed Martin for $100 on January 25, 2016. Abacus has engaged in no business operations to date and has no assets or liabilities, other than those incident to its formation.

The accompanying balance sheet includes the accounts of Abacus and was prepared in accordance with U.S. generally accepted accounting principles.

Abacus closes its books and records on the last Sunday of the calendar quarter, which was on June 26 for the first six months of 2016, to align its financial closing with Lockheed Martin’s financial closing period. The unaudited balance sheet included herein is labeled based on that convention. This practice only affects interim periods as Abacus’ fiscal year ends on December 31.

Abacus had no operations from January 19, 2016 through June 26, 2016, thus no statement of earnings is included with this financial statement.

Note 2 – Subsequent Events

Abacus has evaluated subsequent events through July 29, 2016. No material subsequent events have occurred that should be recorded or disclosed in this unaudited financial statement.

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