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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to  
Commission file number 001-33072
Leidos Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware20-3562868
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
1750 Presidents Street,Reston,Virginia20190
(Address of principal executive offices)(Zip Code)
(571) 526-6000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common stock, par value $.0001 per shareLDOSNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes     No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes     No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No    
The number of shares issued and outstanding of each of the issuer’s classes of common stock as of April 25, 2023, was 137,167,264 shares of common stock ($.0001 par value per share).



LEIDOS HOLDINGS, INC.
FORM 10-Q
TABLE OF CONTENTS
Part IPage
Item 1.
Item 2.
Item 3.
Item 4.
Part II
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.
LEIDOS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (in millions, except par value)
March 31,
2023
December 30,
2022
 (unaudited)
Assets:  
Cash and cash equivalents$379 $516 
Receivables, net2,518 2,350 
Inventory, net300 287 
Other current assets468 490 
Total current assets3,665 3,643 
Property, plant and equipment, net922 847 
Intangible assets, net902 952 
Goodwill6,703 6,696 
Operating lease right-of-use assets, net541 545 
Other long-term assets399 388 
Total assets$13,132 $13,071 
Liabilities:  
Accounts payable and accrued liabilities$2,110 $2,254 
Accrued payroll and employee benefits712 701 
Short-term debt and current portion of long-term debt339 992 
Total current liabilities3,161 3,947 
Long-term debt, net of current portion4,675 3,928 
Operating lease liabilities562 570 
Deferred tax liabilities14 40 
Other long-term liabilities256 233 
Total liabilities8,668 8,718 
Commitments and contingencies (Note 11)
Stockholders’ equity:  
Common stock, $0.0001 par value, 500 million shares authorized, 137 million and 137 million shares issued and outstanding at March 31, 2023, and December 30, 2022, respectively
  
Additional paid-in capital1,994 2,005 
Retained earnings2,479 2,367 
Accumulated other comprehensive loss(64)(73)
Total Leidos stockholders’ equity4,409 4,299 
Non-controlling interest55 54 
Total stockholders' equity4,464 4,353 
Total liabilities and stockholders' equity$13,132 $13,071 

See accompanying notes to condensed consolidated financial statements.

1


LEIDOS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in millions, except per share amounts)
Three Months Ended
 March 31,
2023
April 1,
2022
 (unaudited)
Revenues$3,699 $3,494 
Cost of revenues3,204 2,982 
Selling, general and administrative expenses233 236 
Acquisition, integration and restructuring costs3 3 
Equity (earnings) loss of non-consolidated subsidiaries(6)2 
Operating income265 271 
Non-operating expense:
Interest expense, net(54)(48)
Other expense, net(4)(1)
Income before income taxes
207 222 
Income tax expense
(43)(45)
Net income$164 $177 
Less: net income attributable to non-controlling interest2 2 
Net income attributable to Leidos common stockholders
$162 $175 
Earnings per share:
Basic
$1.18 $1.26 
Diluted
1.17 1.25 

See accompanying notes to condensed consolidated financial statements.

2

LEIDOS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in millions)
Three Months Ended
 March 31,
2023
April 1,
2022
 (unaudited)
Net income$164 $177 
Foreign currency translation adjustments
15 2 
Unrecognized (loss) gain on derivative instruments
(5)29 
Pension adjustments
(1)1 
Total other comprehensive income, net of taxes9 32 
Comprehensive income173 209 
Less: net income attributable to non-controlling interest2 2 
Comprehensive income attributable to Leidos common stockholders
$171 $207 

See accompanying notes to condensed consolidated financial statements.

3

LEIDOS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited; in millions, except for per share amounts)
 Shares of common stockAdditional
paid-in
capital
Retained earningsAccumulated
other comprehensive
income (loss)
Leidos stockholders' equityNon-controlling interestTotal stockholders' equity
Balance at December 30, 2022137 $2,005 $2,367 $(73)$4,299 $54 $4,353 
Net income— — 162 — 162 2 164 
Other comprehensive income, net of taxes— — — 9 9 — 9 
Issuances of stock— 14 — — 14 — 14 
Repurchases of stock and other
— (43)— — (43)— (43)
Dividends of $0.36 per share
— — (50)— (50)— (50)
Stock-based compensation— 18 — — 18 — 18 
Net capital distributions to non-controlling interest— — — — — (1)(1)
Balance at March 31, 2023137 $1,994 $2,479 $(64)$4,409 $55 $4,464 

 Shares of common stockAdditional
paid-in
capital
Retained earningsAccumulated
other comprehensive
income (loss)
Leidos stockholders' equityNon-controlling interestTotal stockholders' equity
Balance at December 31, 2021140 $2,423 $1,880 $(12)$4,291 $53 $4,344 
Net income— — 175 — 175 2 177 
Other comprehensive income, net of taxes— — — 32 32 — 32 
Issuances of stock1 15 — — 15 — 15 
Repurchases of stock and other
(4)(526)— — (526)— (526)
Dividends of $0.36 per share
— — (48)— (48)— (48)
Stock-based compensation— 16 — — 16 — 16 
Net capital distributions to non-controlling interest— — — — — (2)(2)
Balance at April 1, 2022137 $1,928 $2,007 $20 $3,955 $53 $4,008 
See accompanying notes to condensed consolidated financial statements.

4


LEIDOS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions)
Three Months Ended
 March 31,
2023
April 1,
2022
 (unaudited)
Cash flows from operations:  
Net income$164 $177 
Adjustments to reconcile net income to net cash (used in) provided by operations:
Depreciation and amortization82 85 
Stock-based compensation18 16 
Deferred income taxes(43)(61)
Other5 4 
Change in assets and liabilities, net of effects of acquisitions and dispositions:
Receivables(166)(232)
Other current assets and other long-term assets(9)(28)
Accounts payable and accrued liabilities and other long-term liabilities(97)(60)
Accrued payroll and employee benefits13 124 
Income taxes receivable/payable(65)68 
Net cash (used in) provided by operating activities(98)93 
Cash flows from investing activities:
Acquisition of a business, net of cash acquired (2)
Divestiture of a business
 9 
Payments for property, equipment and software(39)(28)
Net cash used in investing activities(39)(21)
Cash flows from financing activities:
Proceeds from debt issuance1,743 75 
Repayments of borrowings(1,711)(27)
Payments for debt issuance costs(7) 
Dividend payments(50)(51)
Repurchases of stock and other(43)(526)
Proceeds from issuances of stock12 12 
Net capital distributions to non-controlling interests(1)(2)
Net cash used in financing activities(57)(519)
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash2  
Net decrease in cash, cash equivalents and restricted cash(192)(447)
Cash, cash equivalents and restricted cash at beginning of period683 875 
Cash, cash equivalents and restricted cash at end of period491 428 
Less: restricted cash at end of period112 131 
Cash and cash equivalents at end of period$379 $297 
Supplementary cash flow information:
Cash paid for income taxes, net of refunds$135 $8 
Cash paid for interest45 38 
Non-cash investing activity:
Property, plant and equipment additions$1 $2 
Non-cash financing activity:
Finance lease obligations$65 $ 
See accompanying notes to condensed consolidated financial statements.

5


LEIDOS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)









Note 1–Basis of Presentation and Summary of Significant Accounting Policies
Nature of Operations and Basis of Presentation
Leidos Holdings, Inc. ("Leidos"), a Delaware corporation, is a holding company whose direct 100%-owned subsidiary and principal operating company is Leidos, Inc. Leidos is a FORTUNE 500® technology, engineering, and science company that provides services and solutions in the defense, intelligence, civil and health markets, both domestically and internationally. Leidos' customers include the U.S. Department of Defense ("DoD"), the U.S. Intelligence Community, the U.S. Department of Homeland Security, the Federal Aviation Administration, the Department of Veterans Affairs and many other U.S. civilian, state and local government agencies, foreign government agencies and commercial businesses. Unless indicated otherwise, references to "we," "us" and "our" refer collectively to Leidos Holdings, Inc. and its consolidated subsidiaries. We operate in three reportable segments: Defense Solutions, Civil and Health. Additionally, we separately present the unallocable costs associated with corporate functions as Corporate.
We have a controlling interest in Mission Support Alliance, LLC ("MSA"), a joint venture with Centerra Group, LLC. We also have a controlling interest in Hanford Mission Integration Solutions, LLC ("HMIS"), the legal entity for the follow-on contract to MSA's contract and a joint venture with Centerra Group, LLC and Parsons Government Services, Inc. The financial results for MSA and HMIS are consolidated into our unaudited condensed consolidated financial statements. The unaudited condensed consolidated financial statements also include the balances of all voting interest entities in which Leidos has a controlling voting interest ("subsidiaries") and a variable interest entity ("VIE") in which Leidos is the primary beneficiary. The consolidated balances of the VIE are not material to the unaudited condensed consolidated financial statements for the periods presented. Intercompany accounts and transactions between consolidated companies have been eliminated in consolidation.
The accompanying unaudited condensed financial information has been prepared in accordance with the rules of the U.S. Securities and Exchange Commission and accounting principles generally accepted in the United States of America ("GAAP"). Certain disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Management evaluates these estimates and assumptions on an ongoing basis, including those relating to estimated profitability of long-term contracts, indirect billing rates, allowances for doubtful accounts, inventories, right-of-use assets and lease liabilities, fair value and impairment of intangible assets and goodwill, income taxes, stock-based compensation expense and contingencies. These estimates have been prepared by management on the basis of the most current and best available information; however, actual results could differ materially from those estimates.
Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. We have certain entities where the functional currency is not the U.S. dollar and have separately presented the effect of exchange rate changes on cash, cash equivalents and restricted cash held in foreign currencies as a separate line in the condensed consolidated statements of cash flows. Prior year financial information has been reclassified to conform to our current presentation. For fiscal 2022, the effect of foreign exchange rate changes was not material to the condensed consolidated statements of cash flows.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which consist of normal recurring adjustments, necessary for a fair presentation thereof. The results reported in these unaudited condensed consolidated financial statements are not necessarily indicative of the results that may be expected for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K filed on February 14, 2023.
6


LEIDOS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)








Accounting Standards Updates Issued But Not Yet Adopted
ASU 2020-04, ASU 2021-01 and ASU 2022-06, Reference Rate Reform (Topic 848)
In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, which provides companies with optional expedients and exceptions to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. This update provides optional expedients for applying accounting guidance to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of the reference rate reform. The amendments in this update are effective for all entities as of March 2020 and can be adopted using a prospective approach no later than December 31, 2022.
In January 2021, the FASB issued ASU 2021-01 which amends the scope of ASU 2020-04. The amendments in this
update are elective and provide optional relief for entities with hedge accounting and contract modifications affected
by the transition from LIBOR through December 31, 2022. In December 2022, the FASB issued ASU 2022-06 which extends the deadline for application of ASU 2021-01 through December 31, 2024. Under this relief, entities may continue to account for contract modifications as a continuation of the existing contract and the continuation of the hedge accounting arrangement. As of March 31, 2023, our term loans are based on a Secured Overnight Financing Rate (“SOFR”) rate (see "Note 6–Debt"). The interest rate swap agreements, which currently reference LIBOR, are expected to be modified to reference SOFR in fiscal 2023. In accordance with ASC 848, we have elected the practical expedient to continue to apply hedge accounting without dedesignating the LIBOR denominated interest rate swap and the practical expedient to qualitatively assess the effectiveness of the hedge during the transition period. We do not expect the standard to have a material impact on our consolidated financial statements once fully adopted.
Changes in Estimates on Contracts
Changes in estimates related to contracts accounted for using the cost-to-cost method of accounting are recognized in the period in which such changes are made for the inception-to-date effect of the changes, with the exception of contracts acquired through a business combination, where the adjustment is made for the period commencing from the date of acquisition.
Changes in estimates on contracts were as follows:
Three Months Ended
March 31,
2023
April 1,
2022
(in millions, except per share amounts)
Favorable impact$22 $41 
Unfavorable impact(16)(26)
Net impact to income before income taxes$6 $15 
Impact on diluted EPS attributable to Leidos common stockholders
$0.03 $0.08 
The impact on diluted earnings per share ("EPS") attributable to Leidos common stockholders is calculated using the statutory tax rate.
Revenue Recognized from Prior Obligations
Revenue recognized from performance obligations satisfied in previous periods was $5 million and $14 million for the three months ended March 31, 2023, and April 1, 2022, respectively. The changes primarily related to revisions of variable consideration including award and incentive fees, and revisions to estimates at completion resulting from changes in contract scope, mitigation of contract risks or true-ups of contract estimates at the end of contract performance.
Cash and Cash Equivalents
Our cash equivalents are primarily comprised of investments in several large institutional money market accounts, with original maturity of three months or less. At March 31, 2023, and December 30, 2022, $157 million and $158 million, respectively, of outstanding payments were included within "Cash and cash equivalents" and "Accounts payable and accrued liabilities" correspondingly on the condensed consolidated balance sheets.
7


LEIDOS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)








Restricted Cash
We have restricted cash balances, primarily representing advances from customers that are restricted for use on certain expenditures related to that customer's contract. Restricted cash balances are included as "Other current assets" in the condensed consolidated balance sheets. Our restricted cash balances were $112 million and $167 million at March 31, 2023, and December 30, 2022, respectively.
Note 2–Revenues
Remaining Performance Obligations
Remaining performance obligations ("RPO") represent the expected value of exercised contracts, both funded and unfunded, less revenue recognized to date. RPO does not include unexercised option periods and future potential task orders expected to be awarded under indefinite delivery/indefinite quantity ("IDIQ") contracts, General Services Administration Schedule or other master agreement contract vehicles, with the exception of certain IDIQ contracts where task orders are not competitively awarded and separately priced but instead are used as a funding mechanism, and where there is a basis for estimating future revenues and funding on future anticipated task orders.
As of March 31, 2023, we had $14.5 billion of RPO and expect to recognize approximately 59% and 76% over the next 12 months and 24 months, respectively, with the remainder to be recognized thereafter.
Disaggregation of Revenues
We disaggregate revenues by customer-type, contract-type and geographic location for each of our reportable segments.
Disaggregated revenues by customer-type were as follows:
Three Months Ended March 31, 2023
Defense SolutionsCivilHealthTotal
(in millions)
DoD and U.S. Intelligence Community
$1,543 $21 $260 $1,824 
Other U.S. government agencies(1)
258 679 428 1,365 
Commercial and non-U.S. customers
310 158 22 490 
Total$2,111 $858 $710 $3,679 
Three Months Ended April 1, 2022
Defense SolutionsCivilHealthTotal
(in millions)
DoD and U.S. Intelligence Community
$1,539 $20 $238 $1,797 
Other U.S. government agencies(1)
222 613 385 1,220 
Commercial and non-U.S. customers
287 147 27 461 
Total$2,048 $780 $650 $3,478 
(1) Includes federal government agencies other than the DoD and U.S. Intelligence Community, as well as state and local government agencies.
8


LEIDOS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)








Disaggregated revenues by contract-type were as follows:
Three Months Ended March 31, 2023
Defense SolutionsCivilHealthTotal
(in millions)
Cost-reimbursement and fixed-price-incentive-fee
$1,164 $471 $209 $1,844 
Firm-fixed-price676 251 406 1,333 
Time-and-materials and fixed-price-level-of-effort
271 136 95 502 
Total$2,111 $858 $710 $3,679 
Three Months Ended April 1, 2022
Defense SolutionsCivilHealthTotal
(in millions)
Cost-reimbursement and fixed-price-incentive-fee
$1,183 $408 $167 $1,758 
Firm-fixed-price618 255 417 1,290 
Time-and-materials and fixed-price-level-of-effort
247 117 66 430 
Total$2,048 $780 $650 $3,478 
Disaggregated revenues by geographic location were as follows:
Three Months Ended March 31, 2023
Defense SolutionsCivilHealthTotal
(in millions)
United States
$1,833 $823 $710 $3,366 
International
278 35  313 
Total$2,111 $858 $710 $3,679 
Three Months Ended April 1, 2022
Defense SolutionsCivilHealthTotal
(in millions)
United States
$1,810 $741 $650 $3,201 
International
238 39  277 
Total$2,048 $780 $650 $3,478 
Revenues by customer-type, contract-type and geographic location exclude lease income of $20 million and $16 million for the three months ended March 31, 2023 and April 1, 2022, respectively.
Contract Assets and Liabilities
Performance obligations are satisfied either over time as work progresses or at a point in time. Firm-fixed-price contracts are typically billed to the customer using milestone payments while cost-reimbursable and time and materials contracts are typically billed to the customer on a monthly or bi-weekly basis as indicated by the negotiated billing terms and conditions of the contract. As a result, the timing of revenue recognition, customer billings and cash collections for each contract results in a net contract asset or liability at the end of each reporting period.
Contract assets consist of unbilled receivables, which is the amount of revenue recognized that exceeds the amount billed to the customer, where right to payment is not solely subject to the passage of time. Unbilled receivables exclude amounts billable where the right to consideration is unconditional. Contract liabilities consist of deferred revenue, which represents cash advances received prior to performance for programs and billings in excess of revenue recognized.
9


LEIDOS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)








The components of contract assets and contract liabilities consisted of the following:
Balance sheet line itemMarch 31,
2023
December 30,
2022
(in millions)
Contract assets - current:
Unbilled receivablesReceivables, net$997 $1,010 
Contract liabilities - current:
Deferred revenue (1)
Accounts payable and accrued liabilities$352 $380 
Contract liabilities - non-current:
Deferred revenue (1)
Other long-term liabilities$28 $29 
(1) Certain contracts record revenue net of cost of revenues, and therefore, the respective deferred revenue balance will not fully convert to revenue.
Revenue recognized for the three months ended March 31, 2023, of $155 million was included as a contract liability at December 30, 2022. Revenue recognized for the three months ended April 1, 2022, of $188 million was included as a contract liability at December 31, 2021.
Note 3–Acquisitions, Divestitures, Goodwill and Intangible Assets
Business Acquisition
On October 30, 2022 (the "Agreement Date"), we completed the acquisition of Cobham Special Mission for a preliminary purchase consideration of $296 million Australian dollars, net of $10 million of Australian dollars acquired, approximately $190 million United States dollars, net of $6 million of cash acquired, which is subject to working capital adjustments. Cobham Special Mission provides airborne border surveillance and search and rescue services to the Australian Federal Government.
The preliminary goodwill recognized of $24 million represents intellectual capital and the acquired assembled workforce, neither of which qualify for recognition as a separate intangible asset. None of the goodwill recognized is tax deductible.
In connection with this acquisition, we acquired preliminary fair value of property, plant and equipment of $148 million at the Agreement Date. The following table summarizes the preliminary fair value of intangible assets acquired at the Agreement Date and the related weighted average amortization period:
Weighted average amortization periodFair value
(in years)(in millions)
Programs11$19 
Technology105
Total11$24 
As of March 31, 2023, we had not finalized the determination of fair values allocated to assets and liabilities, including, but not limited to, property, plant and equipment, intangible assets, accounts receivables, accounts payable and accrued liabilities and other long-term liabilities.
For the three months ended March 31, 2023, $30 million of revenues related to the Cobham Special Mission acquisition were recognized within the Defense Solutions reportable segment.
10


LEIDOS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)








Goodwill
The following table presents changes in the carrying amount of goodwill by reportable segment:
Defense SolutionsCivilHealthTotal
(in millions)
Goodwill at December 31, 2021$3,681 $2,097 $966 $6,744 
Acquisition of businesses26   26 
Divestiture of a business(6)  (6)
Foreign currency translation adjustments(37)(31) (68)
Goodwill at December 30, 2022$3,664 $2,066 $966 $6,696 
Acquisition of a business(1)
(2)  (2)
Foreign currency translation adjustments 9  9 
Goodwill at March 31, 2023
$3,662 $2,075 $966 $6,703 
(1) Adjustment to goodwill resulting from a measurement period purchase accounting adjustment.
We evaluate qualitative factors that could cause us to believe the estimated fair value of each of our reporting units may be lower than the carrying value and trigger a quantitative assessment, including, but not limited to (i) macroeconomic conditions, (ii) industry and market considerations, (iii) our overall financial performance, including an analysis of our current and projected cash flows, revenues and earnings, (iv) a sustained decrease in share price and (v) other relevant entity-specific events including changes in management, strategy, partners or litigation.
As previously disclosed in our Annual Report on Form 10-K for the year ended December 30, 2022, the quantitative analysis for the Security Enterprise Solutions reporting unit showed that the fair value exceeded the carrying value by approximately 13% as of the most recent assessment date. Operations of the reporting unit rely heavily on the sales and servicing of security and detection products, which have been negatively impacted by COVID-19. The forecasts utilized to estimate the fair value of the Security Enterprise Solutions reporting unit assume continued global operations in all of our existing markets and a gradual improvement in the global aviation security product and related service sales, reaching pre-COVID-19 levels by fiscal 2025. In the event that there are significant unfavorable changes to forecasted cash flows of the reporting unit (including if the impact of COVID-19 on passenger travel levels is more prolonged or severe than what is incorporated into our forecast), terminal growth rates or the cost of capital used in the fair value estimates, we may be required to record a material impairment of goodwill at a future date. We did not identify any qualitative factors that would trigger a quantitative goodwill impairment test during the three months ended March 31, 2023. During the three months ended March 31, 2023 and April 1, 2022, there were no impairments to goodwill.
11


LEIDOS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)








Intangible Assets
Intangible assets, net consisted of the following:
March 31, 2023December 30, 2022
Gross carrying value Accumulated amortizationNet carrying valueGross carrying valueAccumulated amortizationNet carrying value
(in millions)
Finite-lived intangible assets:
Programs
$1,715 $(1,054)$661 $1,721 $(1,016)$705 
Software and technology
226 (141)85 225 (136)89 
Customer relationships
89 (29)60 87 (25)62 
Trade names
1 (1) 1 (1) 
Total finite-lived intangible assets
2,031 (1,225)806 2,034 (1,178)856 
Indefinite-lived intangible assets:
In-process research and development ("IPR&D") (1)
92  92 92 — 92 
Trade names4  4 4 — 4 
Total indefinite-lived intangible assets96  96 96  96 
Total intangible assets$2,127 $(1,225)$902 $2,130 $(1,178)$952 
(1) IPR&D assets are indefinite-lived at the acquisition date until placed into service, at which time such assets will be reclassified to a finite-lived amortizable intangible asset.
Amortization expense was $52 million and $59 million for the three months ended March 31, 2023 and April 1, 2022, respectively.
Program intangible assets are amortized over their respective estimated useful lives in proportion to the pattern of economic benefit based on expected future discounted cash flows. Backlog and finite-lived trade name intangible assets are amortized on a straight-line basis over their estimated useful lives. Customer relationships and software and technology intangible assets are amortized either on a straight-line basis over their estimated useful lives or over their respective estimated useful lives in proportion to the pattern of economic benefit based on expected future discounted cash flows, as deemed appropriate.
The estimated annual amortization expense as of March 31, 2023, was as follows:
Fiscal year ending
(in millions)
2023 (remainder of year)$155 
2024152 
2025124 
202699 
202772 
2028 and thereafter204 
$806 

12


LEIDOS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)








Note 4–Fair Value Measurements
The accounting standard for fair value measurements establishes a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: observable inputs such as quoted prices in active markets (Level 1); inputs other than quoted prices in active markets that are observable, either directly or indirectly, or quoted prices that are not active (Level 2); and unobservable inputs in which there is little or no market data (e.g., discounted cash flow and other similar pricing models), which requires us to develop our own assumptions about the assumptions that market participants would use in pricing the asset or liability (Level 3).
The financial instruments measured at fair value on a recurring basis primarily consisted of the following:
March 31, 2023December 30, 2022
Carrying valueFair valueCarrying valueFair value
(in millions)
Financial assets:
Derivatives$14 $14 $20 $20 
As of March 31, 2023, our derivatives primarily consisted of the cash flow interest rate swaps on $1.0 billion of the variable rate senior unsecured term loan (see "Note 5–Derivative Instruments"). The fair value of the cash flow interest rate swaps is determined based on observed values for underlying interest rates on the LIBOR yield curve (Level 2 inputs).
The carrying amounts of our financial instruments, other than derivatives, which include cash equivalents, accounts receivable, accounts payable and accrued expenses, are reasonable estimates of their related fair values.
As of March 31, 2023, and December 30, 2022, the fair value of debt was $4.8 billion and $4.6 billion, respectively, and the carrying amount was $5.0 billion and $4.9 billion, respectively (see "Note 6–Debt"). The fair value of long-term debt is determined based on current interest rates available for debt with terms and maturities similar to our existing debt arrangements (Level 2 inputs).
On October 30, 2022, non-financial instruments measured at fair value on a non-recurring basis were recorded in connection with the completed acquisitions of Cobham Special Mission. The fair values of the assets acquired and liabilities assumed were determined using Level 3 inputs. As of March 31, 2023, we did not have any assets or liabilities measured at fair value on a non-recurring basis.
13


LEIDOS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)








Note 5–Derivative Instruments
We manage our risk to changes in interest rates through the use of derivative instruments. We do not hold derivative instruments for trading or speculative purposes. For variable rate borrowings, we use fixed interest rate swaps, effectively converting a portion of the variable interest rate payments to fixed interest rate payments. These swaps are designated as cash flow hedges.
The fair value of the interest rate swaps was as follows:
Asset derivatives
Balance sheet line itemMarch 31,
2023
December 30,
2022
(in millions)
Cash flow interest rate swapsOther long-term assets$14 $20 
The cash flows associated with the interest rate swaps are classified as operating activities in the condensed consolidated statements of cash flows.
Cash Flow Hedges
We have interest rate swap agreements to hedge the cash flows of $1.0 billion of the variable rate senior unsecured term loan (the "Variable Rate Loan"). These interest rate swap agreements have a maturity date of August 2025 and a fixed interest rate of 3.00%. The objective of these instruments is to reduce variability in the forecasted interest payments of the Variable Rate Loan. Under the terms of the interest rate swap agreements, we will receive monthly variable interest payments based on the one-month LIBOR rate and will pay interest at a fixed rate.
The interest rate swap transactions were accounted for as cash flow hedges. The gain/loss on the swaps is reported as a component of other comprehensive income (loss) and is reclassified into earnings when the interest payments on the underlying hedged items impact earnings. A qualitative assessment of hedge effectiveness is performed on a quarterly basis, unless facts and circumstances indicate the hedge may no longer be highly effective.
The effect of the cash flow hedges on other comprehensive income (loss) and earnings for the periods presented was as follows:
Three Months Ended
March 31,
2023
April 1,
2022
(in millions)
Total interest expense, net presented in the condensed consolidated statements of income in which the effects of cash flow hedges are recorded
$54 $48 
Amount recognized in other comprehensive income (loss)$(2)$32 
Amount reclassified from accumulated other comprehensive income (loss) to interest expense, net$(4)$6 
We expect to reclassify net gains of $12 million from accumulated other comprehensive loss into earnings during the next 12 months.
14


LEIDOS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)








Note 6–Debt
Our debt consisted of the following:
Stated interest rateEffective interest rateMarch 31, 2023December 30, 2022
(in millions)
Short-term debt and current portion of long-term debt:
Senior unsecured term loans:
$380 million term loan, due May 2023
5.91%5.99%$320 $320 
Current portion of long-term debt19 672 
Total short-term debt and current portion of long-term debt$339 $992 
Long-term debt:
Senior unsecured term loans:
$1,925 million term loan, due January 2025
5.77%6.09%$ $1,211 
$1,000 million term loan, due March 2028
6.13%6.30%1,000  
Senior unsecured notes:
$500 million notes, due May 2023
2.95%3.17% 500 
$500 million notes, due May 2025
3.63%3.76%500 500 
$750 million notes due May 2030
4.38%4.50%750 750 
$750 million notes due March 2033
5.75%5.81%750  
$1,000 million notes, due February 2031
2.30%2.38%1,000 1,000 
$250 million notes, due July 2032
7.13%7.43%250 250 
$300 million notes, due July 2033
5.50%5.88%161 161 
$300 million notes, due December 2040
5.95%6.03%218 218 
Notes payable and finance leases due on various dates through fiscal 2032

Various
1.84%-