Leases

11 Months Ended

Jan. 01, 2016

Leases:

The Company occupies most of its facilities under operating leases. Most of the leases require the Company to pay maintenance and operating expenses such as taxes, insurance and utilities and also contain renewal options to extend the lease and provisions for periodic rate escalations to reflect inflationary increases. Certain equipment is leased under short-term or cancelable operating leases. Rental expense for facilities and equipment related to continuing operations for the 11-month period ended January 1, 2016, fiscal 2015, and fiscal 2014 were as follows:



	11 Months Ended			12 Months Ended
	January 1, 2016			January 30, 2015			January 31, 2014
	(in millions)
Gross rental expense	$	83		$	107		$	181
Less sublease income	(8		)	(9		)	(6		)
Net rental expense	$	75		$	98		$	175

The Company has continued its real estate optimization initiatives post spin-off to reduce future rental expense and exited additional facilities from those exited in connection with the spin-off activities and incurred lease termination costs. Rental expense in the table above for fiscal 2014 includes lease termination costs that were attributed to the spin-off transaction, whereby the Company took significant actions in order to align its cost structure post-separation to reduce its real estate footprint by vacating facilities that are not necessary for its future requirements.

Future minimum lease commitments and sublease receipts, under non-cancelable operating leases in effect at January 1, 2016, are as follows:



Fiscal Year Ending	Operating lease commitment		Sublease receipts
	(in millions)
2016	$	84	$	4
2017	69		2
2018	58		2
2019	45		1
2020	31		1
2021 and thereafter	62		2
Total	$	349	$	12

As of January 1, 2016, the Company had capital lease obligations of $6 million that are payable over the next four years (see Note 9).

Sale and Leaseback Agreement

On May 3, 2013, the Company entered into a purchase and sale agreement relating to the sale of approximately 18 acres of land in Fairfax County, Virginia, including four office buildings, a multi-level parking garage, surface parking lots, and other related improvements and structures, as well as tangible personal property and third-party leases. This sale agreement contemplated that sales would be completed in a series of transactions over a period of several years.

On July 26, 2013 ("2013 Sale"), the Company closed the first phase of the purchase and sale agreement and received proceeds of $83 million, net of selling costs. The Company leased back from the buyer three of the office buildings over varying lease terms. The sale of two of the office buildings was accounted for as a sale-leaseback transaction with proceeds from the sale of $40 million, a corresponding book value of $42 million resulting in a $2 million loss recorded in selling, general and administrative expenses. These leases were accounted for as operating leases over a six months term that ended on January 31, 2014. The sale of the third office building was accounted for as a financing transaction. The allocated consideration received of $38 million was recorded as a note payable to be paid over seven years with interest at the lessee’s incremental borrowing rate, estimated at 3.7%. The right of use for the multi-level parking garage and surface parking lots were allocated proceeds of $1 million and $4 million, respectively, and were accounted for as other long-term liabilities.

On August 31, 2015, the Company entered into an amendment to the original purchase and sale agreement and subsequently, in December 2015, closed the sale of the remaining building, parcels of land that surround the building and the multi-level surface parking garage for a net purchase consideration of approximately $95 million. The closing consideration consisted of a cash payment of approximately $75 million and a promissory note (the "Note") of approximately $20 million, net of discount of $5 million. The proceeds of $95 million resulted in a gain of $82 million due to 1) the write-off of the financing note payable of $35 million and other long-term liabilities of $5 million from the 2013 Sale; 2) offset by the write-off of $40 million in aggregate net book value of property disposed, which includes amounts related to the disposal of the third office building sold during the 2013 Sale; and 3) payments for a lease termination fee of $8 million to terminate the financing leaseback agreement and transaction and selling costs of $5 million. The gain was recorded in "Other income (expense), net" in the Company's consolidated statements of income.

The Note matures on December 17, 2019 ("Maturity Date"), and accrues interest at 30-day LIBOR subject to a floor of 0.25% per annum, plus 0.50% over a four-year period. Interest will accrue daily and is not compounded to the outstanding principal balance. The total accumulated interest and principal will be paid in a lump sum on the Maturity Date. If prepayments are made towards the outstanding principal and interest balance prior to the maturity date, the Company will credit 60% of the accrued interest against the outstanding balance; additionally, if all of the outstanding principal and interest balance is prepaid on or before December 17, 2018, the Company will credit 80% of the accrued interest due under the Note.

Leidos, Inc.

Leases

Leases:



	11 Months Ended			12 Months Ended
	January 1, 2016			January 30, 2015			January 31, 2014
	(in millions)
Gross rental expense	$	83		$	107		$	181
Less sublease income	(8		)	(9		)	(6		)
Net rental expense	$	75		$	98		$	175

Future minimum lease commitments and sublease receipts, under non-cancelable operating leases in effect at January 1, 2016, are as follows:



Fiscal Year Ending	Operating lease commitment		Sublease receipts
	(in millions)
2016	$	84	$	4
2017	69		2
2018	58		2
2019	45		1
2020	31		1
2021 and thereafter	62		2
Total	$	349	$	12

As of January 1, 2016, the Company had capital lease obligations of $6 million that are payable over the next four years (see Note 9).

Sale and Leaseback Agreement

- Definition

Tabular disclosure of a lessee's leasing arrangements including: (1) the basis on which contingent rental payments are determined, (2) the existence and terms of renewal or purchase options and escalation clauses, (3) restrictions imposed by lease arrangements, such as those concerning dividends, additional debt, and further leasing, (4) rent holidays, rent concessions, or leasehold improvement incentives and unusual provisions or conditions. Disclosure may also include the specific period used to amortize material leasehold improvements made at the inception of the lease or during the lease term. Additionally, for operating leases having initial or remaining noncancelable lease terms in excess of one year: (a) future minimum rental payments required as of the date of the latest balance sheet presented, in the aggregate and for each of the five succeeding fiscal years, (b) the total of minimum rentals to be received in the future under noncancelable subleases as of the date of the latest balance sheet presented, and (c) for all operating leases, rental expense for each period for which an income statement is presented, with separate amounts for minimum rentals, contingent rentals, and sublease rentals. Rental payments under leases with terms of a month or less that were not renewed need not be included.

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