Debt

11 Months Ended

Jan. 01, 2016

Debt:

Revolving Credit Facility

Leidos has a revolving credit facility, fully and unconditionally guaranteed by Leidos, Inc., which had provided for $750 million in unsecured borrowing capacity at interest rates determined, at Leidos' option, based on either LIBOR plus a margin or a defined base rate. During fiscal 2015, the Company amended the credit facility to, among other things, change the ratio of consolidated funded debt to EBITDA that the Company is required to maintain. In connection with the amendment to the credit facility, the Company exercised its right under the credit agreement to voluntarily reduce the combined commitments of the lenders from $750 million to $500 million. The original maturity date of the credit facility was March 2017. In January 2016, the Company amended the credit facility to extend the maturity date by one year to March 2018. As of January 1, 2016 and January 30, 2015, there were no borrowings outstanding under the credit facility.

The credit facility contains certain customary representations and warranties, as well as certain affirmative and negative covenants. The financial covenants contained in the amended credit facility require that, for a period of four trailing fiscal quarters, the Company maintains a ratio of consolidated funded debt, including borrowings under this credit facility, to EBITDA (adjusted for certain items as defined in the credit facility) of not more than 4.0 to 1.0 until January 29, 2016 and 3.75 to 1.0 thereafter, and a ratio of EBITDA (adjusted for certain items as defined in the credit facility) to interest expense of greater than 3.5 to 1.0. The Company was in compliance with these financial covenants as of January 1, 2016. A failure by the Company to meet these financial covenants in the future could eliminate the Company’s borrowing capacity under the credit facility.

The available borrowing capacity on the credit facility may vary each quarter based on the trailing four quarters of EBITDA. If the Company's trailing four quarters of EBITDA declines below a certain threshold in relation to outstanding debt, the borrowing capacity available under the credit facility is reduced. The available borrowing capacity based on the results of the Company's trailing four quarters of EBITDA as of January 1, 2016, is $500 million.

Other covenants in the credit facility restrict certain of the Company's activities, including, among other things, its ability to create liens, dispose of certain assets and merge or consolidate with other entities. The credit facility also contains certain customary events of default, including, among others, defaults based on certain bankruptcy and insolvency events, nonpayment, cross-defaults to other debt, breach of specified covenants, Employee Retirement Income Security Act (ERISA) events, material monetary judgments, change of control events, and the material inaccuracy of the Company’s representations and warranties. In addition, the Company's ability to declare and pay future dividends on Leidos stock may be restricted by the provisions of Delaware law and covenants in the revolving credit facility.

Notes Payable and Long-Term Debt

The Company’s notes payable and long-term debt consisted of the following for the years presented:



	Stated interest rate		Effective interest rate		January 1, 2016		January 30, 2015
	(dollars in millions)
Leidos Holdings, Inc. senior unsecured notes:
$450 million notes issued in fiscal 2011, which mature in December 2020 ⁽¹⁾	4.45	%	4.53	%	$	457	$	466
$300 million notes issued in fiscal 2011, which mature in December 2040	5.95	%	6.03	%	218		232
Leidos, Inc. senior unsecured notes:
$250 million notes issued in fiscal 2003, which mature in July 2032	7.13	%	7.43	%	248		248
$300 million notes issued in fiscal 2004, which mature in July 2033	5.50	%	5.88	%	159		182
Capital leases and other notes payable due on various dates through fiscal 2020	0%-5.55%		Various		6		38
Total notes payable and long-term debt					1,088		1,166
Less current portion					2		2
Total notes payable and long-term debt, net of current portion					$	1,086	$	1,164
Fair value of notes payable and long-term debt					$	1,060	$	1,152

⁽¹⁾ As a result of executing the interest rate swap agreements, the carrying values of $457 million and $466 million include fair value adjustments of $9 million and $17 million, respectively, attributable to changes in the benchmark interest rate, the six-month LIBOR rate, for the 11-month period ended January 1, 2016, and the fiscal year ended January 30, 2015, respectively.

The fair value of long-term debt is determined based on current interest rates available for debt with terms, maturities and credit risk similar to the Company's existing debt arrangements.

Interest is payable on the Company's senior unsecured notes on a semi-annual basis with principal payments due at maturity. The note discounts, deferred debt issuance costs, and the loss on the settlement of related treasury lock contracts are amortized to interest expense (approximately $1 million was amortized in the 11-month period ended January 1, 2016, and fiscal 2015), which results in an effective interest rate that is higher than the stated interest rate of the notes. The senior unsecured notes contain customary restrictive covenants, including, among other things, restrictions on the Company's ability to create liens and enter into sale and leaseback transactions under certain circumstances. The Company was in compliance with all covenants as of January 1, 2016.

During the 11-month period ended January 1, 2016, the Company repurchased in the open market and retired principal amounts of $14 million on its $300 million 5.95% notes issued by Leidos Holdings, Inc. maturing in December 2040 and $23 million on its $300 million 5.50% notes issued by Leidos, Inc. maturing in July 2033. The Company recorded an immaterial gain on extinguishment of debt for the Leidos Holdings, Inc. and Leidos, Inc. notes as part of the partial repayment of the respective notes. The total combined gain of $1 million represents the difference between the repurchase price of $36 million and the net carrying amount of the notes. The net carrying amount was reduced by the write-off of a portion of the unamortized debt discount and deferred financing costs on a pro-rata basis to the reduction of debt. The Company recorded the gain (loss) on extinguishment of debt in "Other income (expense), net" in the Company's consolidated statements of income.

During fiscal 2015, the Company repurchased in the open market and retired principal amounts of $67 million on its $300 million 5.95% notes issued by Leidos Holdings, Inc. maturing in December 2040 and $116 million on its $300 million 5.50% notes issued by Leidos, Inc. maturing in July 2033. The Company recorded a $3 million gain on extinguishment of debt for the Leidos Holdings, Inc. notes and a $2 million gain for the Leidos, Inc. notes as part of the partial repayment of the respective notes. The total combined gain of $5 million represents the difference between the repurchase price of $175 million and the net carrying amount of the notes repurchased. The net carrying amount was reduced by the write-off of a portion of the unamortized debt discount and deferred financing costs on a pro-rata basis to the reduction of debt. The Company recorded the gain (loss) on extinguishment of debt in "Other income (expense), net" in the Company's consolidated statements of income.

Maturities of notes payable and long-term debt are as follows:



Fiscal Year Ending
	(in millions)
2016	$	2
2017	2
2018	1
2019	1
2020	—
2021 and thereafter	1,087
Total principal payments	1,093
Less unamortized discount	5
	$	1,088

Leidos, Inc.

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