ANNUAL REPORT
Making the World
Safer, Healthier, and
More Efficient
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Dear Fellow Stockholders,
In 2017, Leidos demonstrated the company’s strengths and its potential for future growth through strong financial and
operational performance. Our 31,000 employees achieved this noteworthy performance while successfully completing
the bulk of the integration activities that began in August 2016 after our acquisition of Lockheed Martin’s former
Information Systems and Global Solutions business.
At Leidos, we are driven by a sense of purpose and a mission that fuels our ambitions and energizes our employees.
Leidos makes the world safer, healthier, and more efficient through information technology, engineering, and science.
We have a passion for delivering innovative solutions to solve our customers’ most demanding challenges. We want to
make a difference to our nation and to our world.
We understand the importance of strategy at Leidos and we spend a significant amount of leadership time crafting it.
Last year we developed an overall strategic framework for growth, reviewed it with our Board, and shared it with our
employees. The framework includes executing on our commitments, differentiating Leidos from competitors, growing
the business, and energizing our talented team.
Over the past year we saw direct, tangible benefits affirming the strategic direction we chose in 2016. Operational
efficiencies emerged as we completed the integration of all major accounting and HR systems, as well as the overall IT
infrastructure and security environment. I am excited about new opportunities that demonstrate how Leidos can
differentiate from the competition. By working together across organizational boundaries, we are integrating capabilities
and creating intellectual property that gives Leidos technical discriminators and competitive advantages across
our markets.
To support strategic growth, we made significant improvements in our business development and proposal processes,
and we anticipate further investment to support expected growth through our increased pipeline and improved win
rates. We are increasing our investment in business development and technology research and development. Our scale
is helping us expand both our customer base and our technical core competencies. Our work in international markets is
maturing, particularly in Australia where we experienced significant growth this year.
I want to again highlight our employees. Their drive for performance and efficiency led to the more than half a billion
dollars in cash flow generated from operations for fiscal year 2017. Our continued success depends on their expertise,
their drive to make a difference in society, and their commitment to collaborate with each other and with our customers.
Foundational to all of our customer-focused efforts is our commitment to integrity and high ethical standards. In 2017,
Leidos participated in a thorough examination and review process with Ethisphere, a global leader in defining and
advancing the standards of ethical business practices. I’m proud to share that Leidos was recognized as one of the 2018
World’s Most Ethical Companies. This achievement speaks directly to the dedication of workforce that I am privileged to
I look forward to another year of working together to support our customers, employees, and communities and delivering
lead each day.
value back to you, our stockholders.
Roger Krone
Chairman and Chief
Executive Officer
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3/22/18 8:57 PM
Dear Fellow Stockholders,
In 2017, Leidos demonstrated the company’s strengths and its potential for future growth through strong financial and
operational performance. Our 31,000 employees achieved this noteworthy performance while successfully completing
the bulk of the integration activities that began in August 2016 after our acquisition of Lockheed Martin’s former
Information Systems and Global Solutions business.
At Leidos, we are driven by a sense of purpose and a mission that fuels our ambitions and energizes our employees.
Leidos makes the world safer, healthier, and more efficient through information technology, engineering, and science.
We have a passion for delivering innovative solutions to solve our customers’ most demanding challenges. We want to
make a difference to our nation and to our world.
We understand the importance of strategy at Leidos and we spend a significant amount of leadership time crafting it.
Last year we developed an overall strategic framework for growth, reviewed it with our Board, and shared it with our
employees. The framework includes executing on our commitments, differentiating Leidos from competitors, growing
the business, and energizing our talented team.
Over the past year we saw direct, tangible benefits affirming the strategic direction we chose in 2016. Operational
efficiencies emerged as we completed the integration of all major accounting and HR systems, as well as the overall IT
infrastructure and security environment. I am excited about new opportunities that demonstrate how Leidos can
differentiate from the competition. By working together across organizational boundaries, we are integrating capabilities
and creating intellectual property that gives Leidos technical discriminators and competitive advantages across
our markets.
To support strategic growth, we made significant improvements in our business development and proposal processes,
and we anticipate further investment to support expected growth through our increased pipeline and improved win
rates. We are increasing our investment in business development and technology research and development. Our scale
is helping us expand both our customer base and our technical core competencies. Our work in international markets is
maturing, particularly in Australia where we experienced significant growth this year.
I want to again highlight our employees. Their drive for performance and efficiency led to the more than half a billion
dollars in cash flow generated from operations for fiscal year 2017. Our continued success depends on their expertise,
their drive to make a difference in society, and their commitment to collaborate with each other and with our customers.
Foundational to all of our customer-focused efforts is our commitment to integrity and high ethical standards. In 2017,
Leidos participated in a thorough examination and review process with Ethisphere, a global leader in defining and
advancing the standards of ethical business practices. I’m proud to share that Leidos was recognized as one of the 2018
World’s Most Ethical Companies. This achievement speaks directly to the dedication of workforce that I am privileged to
lead each day.
I look forward to another year of working together to support our customers, employees, and communities and delivering
value back to you, our stockholders.
Roger Krone
Chairman and Chief
Executive Officer
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Our Team
We have a commitment to sustain a culture of innovation at all levels within Leidos, and the right
people are in the right places to make that possible. Nearly half of our staff have degrees in science,
technology, engineering, or math (STEM) fields, and there are more than 60 Technical Fellows in the
company. Technical Fellows are Leidos technical staff members with recognized stature in their chosen
fields as national, even world-class, experts. Our technical staff are key differentiators for Leidos.
ADVANCED DEGREES
960employees with
6,300
employees with
38%
employees with
PhDs
Master’s Degrees
STEM Degrees
CLEARED PROFESSIONALS
68%
12 K
32%
Top Secret and Above
Cleared Employees
Secret
20%
employees are
Military Veterans
60%
employees working at
Customer Sites
Singles.indd 4
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Our Team
We have a commitment to sustain a culture of innovation at all levels within Leidos, and the right
people are in the right places to make that possible. Nearly half of our staff have degrees in science,
technology, engineering, or math (STEM) fields, and there are more than 60 Technical Fellows in the
company. Technical Fellows are Leidos technical staff members with recognized stature in their chosen
fields as national, even world-class, experts. Our technical staff are key differentiators for Leidos.
ADVANCED DEGREES
960employees with
6,300
employees with
PhDs
Master’s Degrees
38%
employees with
STEM Degrees
CLEARED PROFESSIONALS
68%
12 K
32%
Top Secret and Above
Cleared Employees
Secret
20%
employees are
Military Veterans
60%
employees working at
Customer Sites
Singles.indd 5
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 2017
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)
Delaware
(State or other jurisdiction of incorporation or organization)
20-3562868
(I.R.S. Employer Identification No.)
11951 Freedom Drive, Reston, Virginia
(Address of principal executive offices)
20190
(Zip Code)
(571) 526-6000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Leidos Holdings, Inc. Common Stock, Par Value $.0001 Per Share
New York Stock Exchange
Title of each class
Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
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 and posted on its corporate website, if any, every Interactive Data File required to
be submitted and posted 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 and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in
Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
As of June 30, 2017, which was the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of Leidos
Holdings, Inc. common stock (based upon the closing price of the stock on the New York Stock Exchange) held by non-affiliates of the registrant was
$7,777,971,706.
The number of shares issued and outstanding of the registrant’s class of common stock as of February 13, 2018 was 151,459,401 shares ($.0001 par value
per share).
Portions of Leidos Holdings, Inc.'s definitive Proxy Statement for the 2018 Annual Meeting of Stockholders ("2018 Proxy Statement") are incorporated by
reference in Part III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
[THIS PAGE INTENTIONALLY LEFT BLANK]
LEIDOS HOLDINGS, INC.
FORM 10-K
TABLE OF CONTENTS
Part I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
Executive and Other Key Officers of the Registrant
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
Part IV
Item 15.
Exhibits, Financial Statement Schedules
Item 16.
Form 10-K Summary
Signatures
Page
1
10
23
23
24
24
25
27
29
31
49
51
103
104
106
107
107
107
108
108
109
113
114
[THIS PAGE INTENTIONALLY LEFT BLANK]
PART I
Item 1. Business
Our Company
Leidos Holdings, Inc., a Delaware corporation ("Leidos") is a holding company whose direct 100%-owned
subsidiaries and principal operating companies are Leidos, Inc. and Leidos Innovations Corporation ("Leidos
Innovations"). Leidos was formed in 1969 by a small group of scientists led by physicist Dr. Robert Beyster. Since
our founding 49 years ago, we have applied our expertise in science, research and engineering in rapidly evolving
technologies and markets to solve complex problems of national concern.
Leidos is a FORTUNE 500® science, engineering and information technology company that makes the world
healthier, safer and more efficient by providing services and solutions in the defense, intelligence, civil and health
markets. We bring domain-specific capability and cross-market innovations to customers in each of these markets
by leveraging seven core capabilities: cybersecurity; data analytics; enterprise IT modernization; operations and
logistics; sensors, collection and phenomenology; software development; and systems engineering. Applying our
technically advanced solutions to help solve our customers' most difficult problems has enabled us to build strong
relationships with key customers. Our domestic customers include the U.S. Department of Defense ("DoD"), the
U.S. Intelligence Community, the U.S. Department of Homeland Security ("DHS"), the Federal Aviation
Administration ("FAA"), the Department of Veterans Affairs ("VA"), several other U.S. Government civil agencies and
state and local government agencies. With a focus on delivering mission-critical solutions, Leidos generated 84% of
our total revenues from U.S. Government contracts for fiscal 2017.
Building on our foundation in offering innovative services and solutions to U.S. Government customers, Leidos is
expanding into international government and broader commercial markets. Our international customers include
foreign governments and their agencies, primarily located in the United Kingdom, the Middle East and Australia. By
leveraging expertise in multiple disciplines, tailoring our services and solutions to the particular needs of our
targeted markets and using advanced analytics, we work to securely deliver services and solutions that not only
meet customers' current goals, but also support their future endeavors.
For additional discussion and analysis related to recent business developments, see "Business Environment and
Trends" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of
this Annual Report on Form 10-K.
We use the terms "Company," "we," "us," and "our" to refer collectively to Leidos Holdings, Inc. and its consolidated
subsidiaries.
In March 2015, we changed our 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, we filed a Transition Report on Form 10-K for the 11-month period
which began on January 31, 2015, and ended on January 1, 2016.
Our Business Segments
During fiscal 2017, we completed a business reorganization, which resulted in the identification of new reportable
segments. We commenced operating and reporting under the new organization structure effective the beginning of
fiscal 2017. As a result of this change, prior year segment results and disclosures have been recast to reflect the
new reportable segments.
At December 29, 2017, our business is aligned into three reportable segments (Defense Solutions, Civil and
Health). Additionally, we separately present the costs associated with corporate functions as Corporate. Our
operations and reportable segments are organized around the markets served and the nature of the products and
services provided to customers in those markets. We provide a wide array of scientific, engineering and technical
services and solutions across these reportable segments. Less than 10% of our revenues and tangible long-lived
assets are generated by or owned by entities located outside of the United States.
Leidos Holdings, Inc. Annual Report - 1
PART I
Defense Solutions
Defense Solutions is focused on rapidly deploying agile, cost-effective solutions to meet the ever-changing missions
of our customers in the areas of intelligence surveillance and reconnaissance ("ISR"), enterprise information
technology ("IT") and integrated systems and cybersecurity and global services. We provide a diverse portfolio of
national security solutions and systems for air, land, sea, space and cyberspace for the U.S. Intelligence
Community, the DoD, military services, DHS, government agencies of U.S. allies abroad and other federal, civilian
and commercial customers in the national security industry. Our solutions deliver innovative technology, large-scale
intelligence systems, command and control, data analytics, logistics and cybersecurity solutions, as well as
intelligence analysis and operations support to critical missions around the world. Defense Solutions represented
49%, 55% and 64% of total revenues for fiscal 2017, fiscal 2016 and the 11-month period ended January 1, 2016,
respectively.
Our Defense Solutions business offers broad technology, development and integration capabilities and is
responsible for leading our efforts in surveillance and reconnaissance, integrated systems solutions and global
services for the U.S. Intelligence Community, military commands and other government and commercial customers.
•
•
Surveillance and Reconnaissance – We offer a wide range of technologies in multiple domains that address
the nation's most critical threats and deliver solutions to the U.S. Intelligence Community, DoD and military
services. A primary focus is on the DoD's technology organizations, which include the Defense Advanced
Research Projects Agency, Army Research Lab, Air Force Research Lab and Navy Research Lab. Our
market concentration is on airborne and ground ISR, maritime systems, sensor systems, autonomous
systems and command and control. We provide multi-spectral, airborne, ground and maritime ISR collection
and processing systems, advanced sensor design, command and control solutions and training systems.
Enterprise IT and Integrated Systems – We offer extensive software development capabilities for
intelligence and information systems and deliver mission and enterprise-level solutions to the U.S. and
allied Intelligence Community, DoD, military services, DHS and the Australian Department of Defense. Our
markets include cybersecurity, data analytics, enterprise IT and operations and logistics. Our cybersecurity
solutions detect and manage the most sophisticated cyber threats. We are highly skilled in data analytics,
and we design, develop, integrate, deploy and support information-centric software and enterprise IT
systems for complex, data-driven national security challenges. Our operations and logistics offerings
include enterprise platforms that speed the supply chain of highly complex systems.
• Global Services – We provide high-end services to the U.S. Intelligence Community, DoD and federal
civilian agencies. Operating around the world daily, we provide intelligence analysis, operational support,
security, linguistics and training. In addition, we deliver tailored IT services and solutions to our customers
across the globe.
Civil
Our Civil business is focused on seamlessly integrating and protecting physical, digital and data domains. By
applying leading science, effective technologies and business acumen, our forward thinkers are helping customers
maximize their performance and take on the connected world with data-driven insights, improved efficiencies and
technological advantages. Civil represented 33%, 29% and 24% of total revenues for fiscal 2017, fiscal 2016 and
the 11-month period ended January 1, 2016, respectively.
•
Aviation Solutions – Leidos is a trusted systems integrator serving Air Navigation Service Providers
including the FAA, the Transportation Security Administration ("TSA") and airport operators. Our work in
airport modernization helps stakeholders achieve stated objectives, including increased operational
efficiency and safety, a technology enhanced passenger experience, non-aeronautical revenue enablement
and state-of-the-art situational awareness and security. Leidos air traffic control systems are used in Air
Navigation Service Provider facilities that control more than 60 percent of the world's air traffic. We work
diligently to support the Federal Aviation Administration's NextGen program with government accepted
systems including En Route Automation Modernization, Advanced Technology Oceanic Procedures, Time
Based Flow Management and Terminal Flight Data Management. For the NATS system in the United
Kingdom, we offer the SkyLine Air Traffic Management suite to enhance safety, improve on-time
performance, and increase fuel efficiency.
Leidos Holdings, Inc. Annual Report - 2
PART I
•
•
•
•
Security Products – Our Vehicle and Cargo Inspection System ("VACIS") systems enable the rapid
scanning of vehicles and cargo using patented technology that produces a high-quality image using a low
radiation dose while using less space and processing higher volumes of cars and trucks than other
scanning systems. Our Reveal line of explosive detection systems for checked airline baggage pioneered
the "reduced size" segment of this market with small, flexible systems that can be installed at airport check-
in counters. We also have a line of radiation detection systems, which are used today at ports, border
crossings and industrial facilities around the world – including most ports and border crossings in the United
States.
Enterprise IT Services – We deliver secure, user-centric IT solutions in cloud computing, mobility,
application modernization, DevOps, data center and network modernization, asset management, help desk
operations and digital workplace enablement. We help our customers achieve their missions and business
goals by delivering purpose-built solutions, cybersecurity as a standard, efficient project delivery, and end-
user satisfaction. Leidos is modernizing enterprise IT for CONUS/OCONUS programs in classified and
unclassified environments, including programs with the General Services Administration, the Department of
Housing and Urban Development and the Department of Justice.
Federal Environment and Infrastructure – We are trusted by civilian and defense agencies with substantial
environmental and sustainability driven missions. Our pedigree across environmental management, nuclear
security, energy efficiency, infrastructure management, mission support, and IT modernization provides the
applicable expertise needed to transform operations while modernizing aging infrastructure and maintaining
environmental stewardship. We support several of the Department of Energy's largest nuclear production,
operations and remediation sites. At Hanford, we provide site-wide infrastructure management and
operation including oversight of land and logistics, public works, information technology, fleet transportation,
environmental sustainability and compliance, first responder services, and future project planning. Our
environmental engineers and scientists address all aspects of remediation for soil, groundwater, surface
water, and sediment, including removal, treatment, bioremediation, containment, resource management,
land use and institutional controls, air emission control and monitoring, and remedy performance monitoring
and reviews, including National Emergency Rapid Response.
Logistics – Leidos is a global leader in large-scale, complex operations and logistics. Our programs extend
from the bottom of the world on the Antarctic ice to the orbiting outpost that is the International Space
Station. Our expertise goes beyond supply sourcing, shipping, warehousing, and maintenance as we also
provide systems engineering, specialized product support, training and field readiness, base operations,
data analytics, and software development. We are helping our customers – including the United Kingdom
Ministry of Defence ("U.K. MoD"), the National Science Foundation ("NSF") and the National Aeronautics
and Space Administration ("NASA") – streamline logistics through data analytics so more of their budgets
can be applied to their mission activities.
Health
Our Health business is focused on delivering effective and affordable solutions to federal and commercial
customers that are responsible for the health and well-being of people worldwide including service members and
veterans. Our solutions enable customers to deliver on the health mission of providing high quality, cost effective
care and are accomplished through the integration of information technology, engineering, health and life sciences,
clinical insights and health policy. The capabilities we provide are principally encapsulated by four major areas of
activity: complex systems integration, managed health services, enterprise IT transformation and life sciences.
Health represented 18%, 16% and 12% of total revenues for fiscal 2017, fiscal 2016 and the 11-month period ended
January 1, 2016, respectively.
•
Complex Systems Integration – Leidos employs whole-systems thinking in fielding applied technology
solutions across the entire continuum of care. We are working as the lead systems integrator deploying the
next generation electronic health records system to DoD hospitals and treatment facilities worldwide,
responsible for architecture, cyber and complex systems integration. We provide information technology
solutions to the Department of Veterans Affairs, National Institutes of Health, DoD and other government
customers. Commercially, we are one of the largest systems integration and staff support firms for hospitals
deploying modern electronic health records, and combined with our federal work, Leidos has a significant
presence in electronic health record implementation, optimization and support. In addition, we provide
Leidos Holdings, Inc. Annual Report - 3
PART I
consulting services and operational support focused on addressing solutions to health care legislation, IT
strategy, revenue cycle management, accountable care transformation, risk management, technology
infrastructure and project management. Our teams are staffed with clinical subject matter experts who draw
upon their deep experience and knowledge of healthcare and IT systems.
• Managed Health Services – We deploy a national footprint of health clinics and health providers to support
care delivery services, including medical disability examinations for the Veterans Administration (including
behavioral assessments), as well as serving other independent medical exam markets. We have developed
unique capabilities in behavioral health management through many decades of experience with a special
emphasis on substance abuse services. Our managed health services activities leverage our IT and
mission enablement capabilities.
•
•
Enterprise IT Transformation – We manage the entire lifecycle of the IT journey for our customers. Our
expertise includes IT strategic planning, outsourcing and management of large scale data centers, agile
software development and system transformation, cloud migration and application modernization,
digitization and advanced analytics. Our customers include the Centers for Medicare & Medicaid Services,
Food and Drug Administration, Social Security Administration, VA and commercial customers. Leidos helps
customers transform our customer’s IT environment in support of their most critical missions. All of this is
accomplished in a highly secure manner by leveraging our cyber security capabilities.
Life Sciences – We provide life science research and development support to the National Institutes of
Health, Center for Disease Control, Army Medical Research community, commercial biotech companies and
the Frederick National Laboratory for Cancer Research, where we employ about 2,200 scientists,
technicians, administrators and support staff. Our professionals operate a wide range of leading-edge
research and development laboratories in the areas of genetics and genomics, proteins and proteomics,
advanced biomedical computing and information technology, biopharmaceutical development and
manufacturing, nanotechnology characterization and clinical trials management.
From the biomedical sciences to implementing and optimizing electronic health records to enabling providers to
perform care coordination and population health management, Leidos is pioneering the use of systems integration
principles, processes and technologies to transform the health industry’s evolution towards better quality, more cost
effective and safe care.
Corporate
Corporate includes the operations of various corporate activities, certain expense items that are not reimbursed by
our U.S. Government customers and certain other expense items excluded from a reportable segment's
performance.
Acquisitions and Divestitures
On August 16, 2016, a wholly-owned subsidiary of Leidos Holdings, Inc. merged with the Information Systems &
Global Solutions business (the "IS&GS Business") of Lockheed Martin Corporation in a Reverse Morris Trust
transaction (the "Transactions"). The acquired IS&GS Business was renamed Leidos Innovations Corporation. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations–Lockheed Martin
Transaction" and "Note 2—Acquisitions" for a further description of the Lockheed Martin Transaction.
During fiscal 2016 and the 11-month period ended January 1, 2016, we divested three businesses. One of these
non-strategic divestitures was reclassified as discontinued operations on a retrospective basis. For further
information, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations–
Divestitures" and "Note 3—Divestitures."
Key Customers
The majority of our revenues are generated in the United States. Our consolidated revenues are largely attributable
to prime contracts or to subcontracts with other contractors engaged in work for the U.S. Government, with the
remaining attributable to international customers, including the U.K. MoD and Australian Department of Defense,
and customers across a variety of commercial markets. Within the U.S. Government, our revenues are diversified
across many agencies, including various intelligence agencies, the U.S. Army, Navy and Air Force, DHS, FAA, TSA,
the Defense Health Agency, NASA, NSF, the Environmental Protection Agency and research agencies like the
Defense Advanced Research Projects Agency.
Leidos Holdings, Inc. Annual Report - 4
PART I
The percentage of total revenues for the U.S. Government, its agencies and other customers comprising more than
10% of consolidated revenues for the periods presented were as follows:
U.S. Government
U.S. DoD
U.S. Army
Maryland Procurement Office
12 Months Ended
11 Months Ended
December 29,
2017
December 30,
2016
January 1,
2016
84%
47%
13%
5%
81%
56%
14%
7%
76%
64%
14%
10%
These customers have a number of subsidiary agencies that have separate budgets and procurement functions.
Our contracts may be with the highest level of these agencies or with the subsidiary agencies of these customers.
Employees
As of December 29, 2017, we employed approximately 31,000 full and part-time employees in more than 28
countries worldwide. The experience and expertise of our employees makes Leidos capable of solving our
customers' most challenging technical problems. Approximately 39% of our employees have degrees in Science,
Technology, Engineering or Mathematics fields, nearly 1,000 employees have doctoral degrees, approximately 38%
of our employees possess security clearances and approximately 21% of our employees are military veterans.
Research and Development
We conduct research and development activities under customer-funded contracts and with company-funded
internal research and development ("IR&D") funds. IR&D efforts consist of projects involving basic research, applied
research, development and systems and other concept formulation studies. IR&D expenses are included in selling,
general and administrative expenses and are generally allocated to U.S. Government contracts. For fiscal 2017,
fiscal 2016 and the 11-month period ended January 1, 2016, our company-funded IR&D expense was $42 million,
$44 million and $29 million, respectively, which as a percentage of consolidated revenues was 0.4%, 0.6% and
0.6%, respectively. We charge expenses for research and development activities performed under customer
contracts directly to cost of revenues for those contracts.
Intellectual Property Rights
Our technical services and products are not generally dependent upon patent protection, although we do selectively
seek patent protection. We claim a proprietary interest in certain of our products, software programs, methodologies
and know-how. This proprietary information is protected in confidence as trade secrets, using non-disclosure
agreements, contracts and other definitive agreements. We selectively pursue opportunities to license or transfer
our technologies to third parties.
In connection with the performance of services and solutions, the U.S. Government has certain rights to inventions,
data, software codes and related material that we develop under U.S. Government-funded contracts and
subcontracts. Generally, the U.S. Government may disclose or license such information to third parties, including, in
some instances, our competitors. In the case of some subcontracts that we perform, the prime contractor generally
obtains rights to use the programs and products that we deliver under the subcontract to perform its prime contract
obligations.
Competition
Competition for contracts is intense, and we often compete against a large number of established multinational
corporations that may have greater name and brand recognition. We also compete against smaller, more
specialized companies that concentrate their resources on particular areas, as well as the U.S. Government’s own
capabilities and federal non-profit contract research centers. As a result of the diverse requirements of the U.S.
Government and our commercial customers, we frequently collaborate with other companies to compete for large
contracts and bid against these same companies in other situations. We believe that our principal competitors
currently include the following companies:
•
the engineering and technical services divisions of large defense contractors that provide U.S. Government
IT services in addition to other hardware systems and products, including companies such as The Boeing
Leidos Holdings, Inc. Annual Report - 5
PART I
Company, General Dynamics Corporation, Lockheed Martin Corporation, Northrop Grumman Corporation,
BAE Systems plc, L-3 Technologies Inc. and Raytheon Company;
contractors focused principally on technical services, including U.S. Government IT services, such as Booz
Allen Hamilton Inc., Engility Holdings, Inc., CACI International Inc., CSRA, Inc., ManTech International
Corporation, SAIC, Cubic, Jacobs, Vencore and KeyW;
diversified commercial and U.S. Government IT providers, such as Accenture plc, DXC Technology,
International Business Machines Corporation ("IBM"), Amazon Web Services, AT&T, RSA, Verizon and
Unisys Corporation;
contractors focused on supplying homeland security product solutions, including OSI Systems, Inc., L-3
Technologies Inc. and Smiths Group plc;
contractors providing supply chain management, other logistics services and major systems operations and
maintenance, including AAR, DynCorp, Parsons, PAE, Vectrus and Cubic;
companies focused on providing health solutions and services to the U.S. Government and hospitals,
including Accenture plc, Booz Allen Hamilton, CSRA, Inc., DXC Technology, IBM and Optum; and
diversified international federal government IT and technical services providers, including BAE Systems plc,
The Boeing Company, IBM, Accenture plc, Thales, Cubic and DXC Technology.
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We compete on various factors, including our technical expertise and qualified professional and/or security-cleared
personnel; our ability to deliver innovative cost-effective solutions in a timely manner; successful program execution;
our reputation and standing with customers; pricing; and the size and geographic presence of our company.
The U.S. Government has indicated that it intends to increase competition for future procurement of products and
services, which has led to fewer sole source awards and more emphasis on cost-competitiveness and affordability.
The U.S. Government is also committed to maintaining a socioeconomically diverse base of suppliers, which may
lead to contracts being set aside for smaller businesses. In addition, procurement initiatives to improve efficiency,
refocus priorities and enhance best practices could result in fewer new opportunities for our industry as a whole,
which would intensify competition within the industry as companies compete for a more limited set of new programs.
Contract Procurement
Our business is heavily regulated and we must comply with and are affected by laws and regulations relating to the
formation, administration and performance of U.S. Government and other contracts. The U.S. Government
procurement environment has evolved due to statutory and regulatory procurement reform initiatives. Today, U.S.
Government customers employ several contracting methods to purchase services and products. Budgetary
pressures and reforms in the procurement process have caused many U.S. Government customers to increasingly
purchase services and products using contracting methods that give them the ability to select multiple contract
winners or pre-qualify certain contractors to provide services or products on established general terms and
conditions rather than through single award contracts. The predominant contracting methods through which U.S.
Government agencies procure services and products include the following:
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Definitive Award Contracts. U.S. Government agencies may procure services and products through single
definitive award contracts which specify the scope of services or products purchased and identify the
contractor that will provide the specified services or products. When an agency has a requirement, the
agency will issue a solicitation or request for proposal to which interested contractors can submit a
proposal. The bidding and selection process can take a year or more to complete. For the contractor, this
method of contracting may provide greater certainty of the timing and amounts to be received at the time of
contract award because it generally results in the customer contracting for a specific scope of services or
products from the single definitive successful awardee.
Indefinite Delivery/Indefinite Quantity ("IDIQ") Contracts. The U.S. Government uses IDIQ contracts to
obtain commitments from contractors to provide certain services or products on pre-established terms and
conditions. The U.S. Government then issues task orders under the IDIQ contracts to purchase the specific
services or products it needs. IDIQ contracts are awarded to one or more contractors following a
competitive procurement process. Under a single-award IDIQ contract, all task orders under that contract
are awarded to one pre-established contractor. Under a multiple-award IDIQ contract, task orders can be
Leidos Holdings, Inc. Annual Report - 6
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awarded to any of the pre-established contractors, which can result in further limited competition for the
award of task orders. Multiple-award IDIQ contracts that are open for any government agency to use for
procurement are commonly referred to as "government-wide acquisition contracts." IDIQ contracts often
have multi-year terms and unfunded ceiling amounts, therefore enabling, but not committing, the U.S.
Government to purchase substantial amounts of services or products from one or more contractors. At the
time an IDIQ contract is awarded (prior to the award of any task orders), a contractor may have limited or no
visibility as to the ultimate amount of services or products that the U.S. Government will purchase under the
contract, and in the case of a multiple-award IDIQ, the contractor from which such purchases may be made.
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U.S. General Services Administration ("GSA") Schedule Contracts. The GSA maintains listings of approved
suppliers of services and products with agreed-upon prices for use throughout the U.S. Government. In
order for a company to provide services under a GSA Schedule contract, a company must be pre-qualified
and awarded a contract by the GSA. When an agency uses a GSA Schedule contract to meet its
requirements, the agency, or the GSA on behalf of the agency, conducts the procurement. The user agency,
or the GSA on its behalf, evaluates the user agency’s requirements and initiates a competition limited to
GSA Schedule qualified contractors. GSA Schedule contracts are designed to provide the user agency with
reduced procurement time and lower procurement costs. Similar to IDIQ contracts, at the time a GSA
Schedule contract is awarded, a contractor may have limited or no visibility as to the ultimate amount of
services or products that the U.S. Government will purchase under the contract.
We often partner with other companies, including our competitors, to submit bids for large U.S. Government
procurements or other opportunities where we believe that the combination of services and products that we can
provide as a team will help us win and perform the contract. Our relationships with our partners, including whether
we serve as the prime contractor or as a subcontractor, vary with each contract opportunity and typically depend on
the program, contract or customer requirements, as well as the relative size, qualifications, capabilities, customer
relationships and experience of our company and our partners.
Contracting with the U.S. Government also subjects us to substantial regulation and unique risks, including the U.S.
Government’s ability to cancel any contract at any time through a termination for the convenience of the U.S.
Government. Most of our contracts have cancellation terms that would permit us to recover all or a portion of our
incurred costs and fees for work performed where the U.S. Government issues a termination for convenience.
These regulations and risks are described in more detail below under "Business–Regulation" and "Risk Factors" in
this Annual Report on Form 10-K.
Contract Types
Generally, the type of contract for our services and products is determined by or negotiated with the U.S.
Government and may depend on certain factors, including the type and complexity of the work to be performed,
degree and timing of the responsibility to be assumed by the contractor for the costs of performance, the extent of
price competition and the amount and nature of the profit incentive offered to the contractor for achieving or
exceeding specified standards or goals. We generate revenues under several types of contracts, including the
following:
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Cost-reimbursement contracts include cost-plus-fixed-fee, award-fee and incentive-fee contracts. These
contracts provide for reimbursement of our direct contract costs and allocable indirect costs, plus a fee.
These contracts are generally used when uncertainties involved in contract performance do not permit costs
to be estimated with sufficient accuracy to use a fixed-price contract. Cost-reimbursement contracts
generally subject us to lower risk but generally require us to use our best efforts to accomplish the scope of
the work within a specified time and budget. Award and incentive fees are generally based on performance
criteria such as cost, schedule, quality and/or technical performance. Award fees are determined and
earned based on customer evaluation of the company's performance against contractual criteria. Incentive
fees that are based on cost provide for an initially negotiated fee to be adjusted later, typically using a
formula to measure performance against the associated criteria, based on the relationship of total allowable
costs to total target costs.
Fixed-price-incentive fee ("FP-IF") contracts are substantially similar to cost plus incentive fee contracts
except they require specified targets for cost and profit, price ceiling (but not a profit ceiling or floor) and
profit adjustment formula. Under a FP-IF contract, the allowable costs incurred are eligible for
reimbursement but are subject to a cost-share arrangement, which affects profitability. Generally, if our
Leidos Holdings, Inc. Annual Report - 7
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costs exceed the contract target cost or are not allowable under the applicable regulations, we may not be
able to obtain reimbursement for all costs and may have our fees reduced or eliminated.
Time-and-materials ("T&M") contracts typically provide for negotiated fixed hourly rates for specified
categories of direct labor plus reimbursement of other direct costs. This type of contract is generally used
when there is uncertainty about the extent or duration of the work to be performed by the contractor at the
time of contract award or it is not possible to anticipate costs with any reasonable degree of confidence. On
T&M contracts, we assume the risk of providing appropriately qualified staff to perform these contracts at
the hourly rates set forth in the contracts over the period of performance of the contracts.
Fixed-price-level-of-effort ("FP-LOE") contracts are substantially similar to T&M contracts except they
require a specified level of effort over a stated period of time on work that can be stated only in general
terms. This type of contract is generally used when the contractor is required to perform an investigation or
study in a specific research and development area and to provide a report showing the results achieved
based on the level of effort. Payment is based on the effort expended rather than the results achieved.
Firm-fixed-price ("FFP") contracts provide for a fixed price for specified products, systems and/or services.
This type of contract is generally used when the government acquires products and services on the basis of
reasonably definitive specifications and which have a determinable fair and reasonable price. These
contracts offer us potential increased profits if we can complete the work at lower costs than planned. While
FFP contracts allow us to benefit from cost savings, these contracts also increase our exposure to the risk
of cost overruns.
Our earnings and profitability may vary materially depending on changes in the proportionate amount of revenues
derived from each type of contract, the nature of services or products provided, as well as the achievement of
performance objectives and the stage of performance at which the right to receive fees, particularly under incentive
and award fee contracts, is finally determined. Cost-reimbursement and T&M contracts generally have lower
profitability than FFP contracts.
Backlog
Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts as work
is performed. Our backlog consists of funded backlog and negotiated unfunded backlog, each of which are
described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II of
this Annual Report on Form 10-K. We expect to recognize a substantial portion of our 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. Federal Government customers included in funded backlog may include
provisions that allow the customer to cancel at any time. Many of our contracts have cancellation terms that would
permit us to recover all or a portion of our incurred costs and fees for work performed. For additional discussion and
analysis of backlog, see "Results of Operations—Bookings and Backlog" in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part II of this Annual Report on Form 10-K.
Seasonality
The U.S. Government's fiscal year ends on September 30 of each year. While not certain, it is not uncommon for
U.S. Government agencies to award extra tasks or complete other contract actions in the timeframe leading up to
the end of its fiscal year in order to avoid the loss of unexpended fiscal year funds, which may favorably impact our
third fiscal quarter. In addition, our quarterly results may be impacted by the number of working days in a given
quarter. We tend to generate less revenue from our labor services during the fourth quarter as a result of the holiday
season. For selected quarterly financial data, see "Selected Quarterly Financial Data" in Part II of this Annual Report
on Form 10-K.
Regulation
We are heavily regulated in most of the fields in which we operate. We provide services and products to numerous
U.S. Government agencies and entities, including to the DoD, the U.S. Intelligence Community and the DHS. When
working with these and other U.S. Government agencies and entities, we must comply with various laws and
regulations relating to the formation, administration and performance of contracts. U.S. Government contracts
generally are subject to the Federal Acquisition Regulation ("FAR"), which sets forth policies, procedures and
Leidos Holdings, Inc. Annual Report - 8
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requirements for the acquisition of goods and services by the U.S. Government, agency-specific regulations that
implement or supplement the FAR, such as Department of Defense Federal Acquisition Regulation Supplement
("DFARS") and other applicable laws and regulations. These regulations impose a broad range of requirements,
many of which are unique to government contracting, including various procurement, import and export, security,
contract pricing and cost, contract termination and adjustment and audit requirements. Among other things, these
laws and regulations:
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require certification and disclosure of all cost and pricing data in connection with certain contract
negotiations;
define allowable and unallowable costs and otherwise govern our right to reimbursement under various
cost-type U.S. Government contracts;
require compliance with U.S. Government Cost Accounting Standards ("CAS");
require reviews by the Defense Contract Audit Agency ("DCAA"), Defense Contract Management Agency
("DCMA") and other U.S. Government agencies of compliance with government requirements for a
contractor’s business systems;
restrict the use and dissemination of unclassified contract-related information and information classified for
national security purposes and the export of certain products and technical data; and
require us not to compete for work if an actual or potential organizational conflict of interest, as defined by
these laws and regulations, related to such work exists and/or cannot be appropriately mitigated,
neutralized or avoided.
The U.S. Government may revise its procurement practices or adopt new contract rules and regulations at any time.
In order to help ensure compliance with these complex laws and regulations, all of our employees are required to
complete ethics and other compliance trainings relevant to their position.
Some of our operations and service offerings involve access to and use by us of personally identifiable information
and/or protected health information. These activities are regulated by extensive federal and state privacy and data
security laws requiring organizations to provide certain privacy protections and security safeguards for such
information.
Environmental Matters
Our operations are subject to various foreign, federal, state and local environmental protection and health and
safety laws and regulations. In addition, our operations may become subject to future laws and regulations,
including those related to climate change and environmental sustainability. See "Item 1A. Risk Factors" for further
details. Although we do not currently anticipate that the costs of complying with, or the liabilities associated with,
environmental laws will materially and adversely affect us, we cannot ensure that we will not incur material costs or
liabilities in the future.
Company Website and Information
Our website can be accessed at www.leidos.com. The website contains information about our company and
operations. Through a link on the Investor Relations section of our website, copies of each of our filings with the
U.S. Securities and Exchange Commission ("SEC") on Form 10-K, Form 10-Q and Form 8-K, and all amendments
to those reports, can be viewed and downloaded free of charge as soon as reasonably practicable after the reports
and amendments are electronically filed with or furnished to the SEC. The information on our website is not
incorporated by reference into and is not a part of this Annual Report on Form 10-K.
You may request a copy of the materials identified in the preceding paragraph, at no cost, by writing or telephoning
us at our corporate headquarters at the following:
Leidos Holdings, Inc.
11951 Freedom Drive
Reston, VA 20190
Attention: Corporate Secretary
Telephone: (571) 526-6000
Leidos Holdings, Inc. Annual Report - 9
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Item 1A. Risk Factors
In your evaluation of our company and business, you should carefully consider the risks and uncertainties described
below, together with information included elsewhere in this Annual Report on Form 10-K and other documents we
file with the SEC. The risks and uncertainties described below are those that we have identified as material but are
not the only risks and uncertainties facing us. If any of these risks or uncertainties actually occurs, our business,
financial condition or operating results could be materially harmed and the price of our stock could decline. Our
business is also subject to general risks and uncertainties that affect many other companies, such as our ability to
collect receivables, overall U.S. and global economic and industry conditions, geopolitical events, changes in laws
or accounting rules, fluctuations in interest and exchange rates, terrorism, international conflicts, major health
concerns, climate change or other disruptions of expected economic and business conditions. Additional risks and
uncertainties not currently known to us or that we currently believe are immaterial also may materially harm our
business, financial condition or operating results and result in a decline in the price of our stock.
Risks Relating to Our Business
We depend on government agencies as our primary customer and if our reputation or relationships with
these agencies were harmed, our future revenues and growth prospects would be adversely affected.
We generated 84%, 81% and 76% of our total revenues during fiscal 2017, fiscal 2016 and the 11-month period
ended January 1, 2016, respectively, from contracts with the U.S. Government (including all branches of the U.S.
military), either as a prime contractor or a subcontractor to other contractors engaged in work for the U.S.
Government. We generated more than 10% of our total revenues during fiscal 2017, fiscal 2016 and the 11-month
period ended January 1, 2016, from the U.S. Army. We expect to continue to derive most of our revenues from work
performed under U.S. Government contracts. Our reputation and relationship with the U.S. Government, and in
particular with the agencies of the DoD and the U.S. Intelligence Community, are key factors in maintaining and
growing our revenues. Negative press reports or publicity, which could pertain to employee or subcontractor
misconduct, conflicts of interest, poor contract performance, deficiencies in services, reports, products or other
deliverables, information security breaches or other aspects of our business, regardless of accuracy, could harm our
reputation, particularly with these agencies. If our reputation is negatively affected, or if we are suspended or
debarred from contracting with government agencies for any reason, the amount of business with government and
other customers would decrease and our future revenues and growth prospects would be adversely affected.
A decline in the U.S. Government budget, changes in spending or budgetary priorities or delays in contract
awards may significantly and adversely affect our future revenues and limit our growth prospects.
Revenues under contracts with the DoD, either as a prime contractor or subcontractor to other contractors,
represented approximately 47% of our total revenues for fiscal 2017. Levels of DoD spending are difficult to predict
and subject to significant risk. Our operating results could be adversely affected by spending caps or changes in the
budgetary priorities of the U.S. Government or the DoD, as well as delays in program starts or the award of
contracts or task orders under contracts. Current U.S. Government spending levels for defense-related programs
may not be sustained and future spending and program authorizations may not increase or may decrease or shift to
programs in areas in which we do not provide services or are less likely to be awarded contracts. Such changes in
spending authorizations and budgetary priorities may occur as a result of uncertainty surrounding the federal
budget, increasing political pressure and legislation, shifts in spending priorities from defense-related programs as a
result of competing demands for federal funds, the number and intensity of military conflicts or other factors.
The U.S. Government also conducts periodic reviews of U.S. defense strategies and priorities, which may shift DoD
budgetary priorities, reduce overall U.S. Government spending or delay contract or task order awards for defense-
related programs, including programs from which we expect to derive a significant portion of our future revenues. In
addition, changes to the DoD acquisition system and contracting models could affect whether and how we pursue
certain opportunities and the terms under which we are able to do so. A significant decline in overall U.S.
Government spending, including in the areas of national security, intelligence and homeland security, a significant
shift in its spending priorities, the substantial reduction or elimination of particular defense-related programs or
significant delays in contract or task order awards for large programs could adversely affect our future revenues and
limit our growth prospects.
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Because we depend on U.S. Government contracts, a delay in the completion of the U.S. Government's
budget process could delay procurement of the products, services and solutions we provide and have an
adverse effect on our future revenues.
The funding of U.S. Government programs is subject to an annual congressional budget authorization and
appropriation process. In years when the U.S. Government does not complete its budget process before the end of
its fiscal year on September 30, government operations are typically funded pursuant to a "continuing resolution,"
which allows federal government agencies to operate at spending levels approved in the previous budget cycle, but
does not authorize new spending initiatives. When the U.S. Government operates under a continuing resolution,
delays can occur in the procurement of the products, services and solutions that we provide and may result in new
initiatives being canceled. We have from time to time experienced a decline in revenues in our fourth quarter as a
result of this annual budget cycle, and we could experience similar declines in revenues from future delays in the
budget process. When the U.S. Government fails to complete its budget process or to provide for a continuing
resolution, a federal government shutdown may result. A federal government shutdown could, in turn, result in our
incurrence of substantial labor or other costs without reimbursement under customer contracts, the delay or
cancellation of key programs or the delay of contract payments, which could have a negative effect on our cash
flows and adversely affect our future results. In addition, when supplemental appropriations are required to operate
the U.S. Government or fund specific programs and passage of legislation needed to approve any supplemental
appropriation bill is delayed, the overall funding environment for our business could be adversely affected.
Our failure to comply with a variety of complex procurement rules and regulations could result in our being
liable for penalties, including termination of our U.S. Government contracts, disqualification from bidding
on future U.S. Government contracts and suspension or debarment from U.S. Government contracting.
We must comply with laws and regulations relating to the formation, administration and performance of U.S.
Government contracts, which affect how we do business with our customers and may impose added costs on our
business. Some significant statutes and regulations that affect us include:
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the FAR and supplements, which regulate the formation, administration and performance of U.S.
Government contracts;
the Truth in Negotiations Act, which requires certification and disclosure of cost and pricing data in
connection with certain contract negotiations;
the Procurement Integrity Act, which regulates access to competitor bid and proposal information and
government source selection information and our ability to provide compensation to certain former
government officials;
the Civil False Claims Act, which provides for substantial civil penalties for violations, including for
submission of a false or fraudulent claim to the U.S. Government for payment or approval; and
the U.S. Government Cost Accounting Standards, which impose accounting requirements that govern our
right to reimbursement under certain cost-based U.S. Government contracts.
The FAR and many of our U.S. Government contracts contain organizational conflict of interest clauses that may
limit our ability to compete for or perform certain other contracts or other types of services for particular customers.
Organizational conflicts of interest arise when we engage in activities that may make us unable to render impartial
assistance or advice to the U.S. Government, impair our objectivity in performing contract work or provide us with
an unfair competitive advantage. A conflict of interest issue that precludes our competition for or performance on a
significant program or contract could harm our prospects.
The U.S. Government may adopt new contract rules and regulations or revise its procurement practices in a
manner adverse to us at any time.
Our industry has experienced, and we expect it will continue to experience, significant changes to business
practices as a result of an increased focus on affordability, efficiencies and recovery of costs, among other items.
U.S. Government agencies may face restrictions or pressure regarding the type and amount of services that they
may obtain from private contractors. Legislation, regulations and initiatives dealing with procurement reform,
mitigation of potential conflicts of interest and environmental responsibility or sustainability, as well as any resulting
shifts in the buying practices of U.S. Government agencies, such as increased usage of fixed price contracts,
multiple award contracts and small business set-aside contracts, could have adverse effects on government
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contractors, including us. Any of these changes could impair our ability to obtain new contracts or renew our existing
contracts when those contracts are recompeted. Any new contracting requirements or procurement methods could
be costly or administratively difficult for us to implement and could adversely affect our future revenues, profitability
and prospects.
Our business is subject to reviews, audits and cost adjustments by the U.S. Government, which, if resolved
unfavorably to us, could adversely affect our profitability, cash position or growth prospects.
U.S. Government agencies, including the DCAA, DCMA and others, routinely audit and review a contractor's
performance on government contracts, indirect rates and pricing practices and compliance with applicable
contracting and procurement laws, regulations and standards. They also review the adequacy of the contractor’s
compliance with government standards for its business systems, including; a contractor's accounting system,
earned value management system, estimating system, materials management and accounting system, property
management system and purchasing system.
Both contractors and the U.S. Government agencies conducting these audits and reviews have come under
increased scrutiny. As a result, the current audits and reviews have become more rigorous and the standards to
which we are held are being more strictly interpreted, increasing the likelihood of an audit or review resulting in an
adverse outcome. During the course of its current audits, the DCAA is closely examining and questioning several of
our long established and disclosed practices that it had previously audited and accepted, increasing the uncertainty
as to the ultimate conclusion that will be reached.
A finding of significant control deficiencies in our system audits or other reviews can result in decremented billing
rates to our U.S. Government customers until the control deficiencies are corrected and our remediations are
accepted by DCMA. Government audits and reviews may conclude that our practices are not consistent with
applicable laws and regulations and result in adjustments to contract costs and mandatory customer refunds. Such
adjustments can be applied retroactively, which could result in significant customer refunds. Our receipt of adverse
audit findings or the failure to obtain an "approved" determination of our various business systems from the
responsible U.S. Government agency could significantly and adversely affect our business, including our ability to
bid on new contracts and our competitive position in the bidding process. A determination of non-compliance with
applicable contracting and procurement laws, regulations and standards could also result in the U.S. Government
imposing penalties and sanctions against us, including withholding of payments, suspension of payments and
increased government scrutiny that could delay or adversely affect our ability to invoice and receive timely payment
on contracts, perform contracts or compete for contracts with the U.S. Government.
Indirect cost audits by the DCAA remain open for fiscal 2012 and subsequent fiscal years for Leidos Inc., and fiscal
2011 and subsequent fiscal years for Leidos Innovations. Although we have recorded contract revenues based upon
our estimate of costs that we believe will be approved upon final audit or review, we cannot predict the outcome of
any ongoing or future audits or reviews and adjustments and, if future adjustments exceed our estimates, our
profitability may be adversely affected.
Our business is subject to governmental review and investigation which could adversely affect our
financial position, operating results and growth prospects.
We are routinely subject to governmental investigations relating to compliance with various laws and regulations
with respect to our role as a contractor to federal, state and local government customers and in connection with
performing services in countries outside the United States. If a review or investigation identifies improper or illegal
activities, we may be subject to civil or criminal penalties or administrative sanctions, including the termination of
contracts, forfeiture of profits, the triggering of price reduction clauses, suspension of payments, fines and
suspension or debarment from doing business with governmental agencies. We may suffer harm to our reputation if
allegations of impropriety are made against us, which would impair our ability to win new contract awards or receive
contract renewals. Penalties and sanctions are not uncommon in our industry. If we incur a material penalty or
administrative sanction or otherwise suffer harm to our reputation, our revenues, profitability, cash position and
future prospects could be adversely affected. More generally, increases in scrutiny and investigations from
government organizations, legislative bodies or agencies into business practices and into major programs
supported by contractors may lead to increased legal costs and may harm our reputation, revenues, profitability and
growth prospects.
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Misconduct of employees, subcontractors, agents and business partners could cause us to lose existing
contracts or customers and adversely affect our ability to obtain new contracts and customers and could
have a significant adverse impact on our business and reputation.
Misconduct could include fraud or other improper activities such as falsifying time or other records and violations of
laws, including the Anti-Kickback Act. Other examples could include the failure to comply with our policies and
procedures or with federal, state or local government procurement regulations, regulations regarding the use and
safeguarding of classified or other protected information, legislation regarding the pricing of labor and other costs in
government contracts, laws and regulations relating to environmental, health or safety matters, bribery of foreign
government officials, import-export control, lobbying or similar activities and any other applicable laws or
regulations. Any data loss or information security lapses resulting in the compromise of personal information or the
improper use or disclosure of sensitive or classified information could result in claims, remediation costs, regulatory
sanctions against us, loss of current and future contracts and serious harm to our reputation. Although we have
implemented policies, procedures and controls to prevent and detect these activities, these precautions may not
prevent all misconduct, and as a result, we could face unknown risks or losses. Our failure to comply with applicable
laws or regulations or misconduct by any of our employees, subcontractors, agents or business partners could
damage our reputation and subject us to fines and penalties, restitution or other damages, loss of security
clearance, loss of current and future customer contracts and suspension or debarment from contracting with
federal, state or local government agencies, any of which would adversely affect our business, reputation and our
future results.
Due to the competitive process to obtain contracts and the likelihood of bid protests, we may be unable to
achieve or sustain revenue growth and profitability.
We expect that a majority of the business that we seek in the foreseeable future will be awarded through a
competitive bidding process. The U.S. Government has increasingly relied on contracts that are subject to a
continuing competitive bidding process, including IDIQ, GSA Schedule and other multi-award contracts, which has
resulted in greater competition and increased pricing pressure. The competitive bidding process involves substantial
costs and a number of risks, including significant cost and managerial time to prepare bids and proposals for
contracts that may not be awarded to us, or that may be awarded but for which we do not receive meaningful task
orders, and to the risk of inaccurately estimating the resources and costs that will be required to fulfill any contract
we win. Following contract award, we may encounter significant expense, delay, contract modifications or even
contract loss as a result of our competitors protesting the award of contracts to us in competitive bidding. Any
resulting loss or delay of start-up and funding of work under protested contract awards may adversely affect our
revenues and/or profitability. In addition, multi-award contracts require that we make sustained post-award efforts to
obtain task orders under the contract. As a result, we may not be able to obtain these task orders or recognize
revenues under these multi-award contracts. Our failure to compete effectively in this procurement environment
would adversely affect our revenues and/or profitability.
The U.S. Government may terminate, cancel, modify or curtail our contracts at any time prior to their
completion and, if we do not replace them, this may adversely affect our future revenues and profitability.
Many of the U.S. Government programs in which we participate as a contractor or subcontractor extend for several
years and include one or more base years and one or more option years. These programs are normally funded on
an annual basis. Under our contracts, the U.S. Government generally has the right to not exercise options to extend
or expand our contracts and may otherwise terminate, cancel, modify or curtail our contracts at its convenience. Any
decisions by the U.S. Government to not exercise contract options or to terminate, cancel, modify or curtail our
major programs or contracts would adversely affect our revenues, revenue growth and profitability.
Leidos Holdings, Inc. Annual Report - 13
PART I
We have experienced and continue to experience periodic performance issues under certain of our contracts. Some
of our contracts involve the development of complex systems and products to achieve challenging customer goals
in a competitive procurement environment. As a result, we sometimes experience technological or other
performance difficulties, which have in the past and may in the future result in delays, cost overruns and failures in
our performance of these contracts. If a government customer terminates a contract for default, we may be exposed
to liability, including for excess costs incurred by the customer in procuring undelivered services and products from
another source. Depending on the nature and value of the contract, a performance issue or termination for default
could cause our actual results to differ from those anticipated and could harm our reputation.
We face aggressive competition that can impact our ability to obtain contracts and therefore affect our
future revenues and growth prospects.
Our business is highly competitive and we compete with larger companies that have greater name recognition,
financial resources and a larger technical staff. We also compete with smaller, more specialized companies that are
able to concentrate their resources on particular areas. Additionally, we compete with the U.S. Government’s own
capabilities and federal non-profit contract research centers.
The markets in which we operate are characterized by rapidly changing technology and the needs of our customers
change and evolve regularly. Accordingly, our success depends on our ability to develop services and products that
address these changing needs and to provide people and technology needed to deliver these services and
products. To remain competitive, we must consistently provide superior service, technology and performance on a
cost-effective basis to our customers. Our competitors may be able to provide our customers with different or
greater capabilities or technologies or better contract terms than we can provide, including technical qualifications,
past contract experience, geographic presence, price and the availability of qualified professional personnel. In
addition, our competitors may consolidate or establish teaming or other relationships among themselves or with
third parties to increase their ability to address customers’ needs. Accordingly, we anticipate that larger or new
competitors or alliances among competitors may emerge, which may adversely affect our ability to compete.
A failure to attract, train and retain skilled employees, including our management team, would adversely
affect our ability to execute our strategy and may disrupt our operations.
Our business involves the development of tailored services and solutions for our customers, a process that relies
heavily upon the expertise and services of our employees. Our continued success depends on our ability to recruit
and retain highly trained and skilled engineering, technical and professional personnel. Competition for skilled
personnel is intense and competitors aggressively recruit key employees. In addition, many U.S. Government
programs require contractors to have security clearances. Depending on the level of required clearance, security
clearances can be difficult and time-consuming to obtain and personnel with security clearances are in great
demand. Particularly in highly specialized areas, it has become more difficult to retain employees and meet all of
our needs for employees in a timely manner, which may affect our growth. Although we intend to continue to devote
significant resources to recruit, train and retain qualified employees, we may not be able to attract, effectively train
and retain these employees. Any failure to do so could impair our ability to perform our contractual obligations
efficiently and timely meet our customers’ needs and win new business, which could adversely affect our future
results.
In addition to attracting and retaining qualified engineering, technical and professional personnel, we believe that
our success will also depend on the continued employment of a highly qualified and experienced senior
management team and its ability to retain existing business and generate new business. Our senior management
team is important to our business because personal reputations and individual business relationships are a critical
element of retaining and obtaining customer contracts in our industry, particularly with agencies performing
classified operations. An inability to retain appropriately qualified and experienced senior executives could cause us
to lose customers or new business opportunities.
We may not realize as revenues the full amounts reflected in our backlog, which could adversely affect our
expected future revenues and growth prospects.
As of December 29, 2017, our total backlog was $17.5 billion, including $5.0 billion in funded backlog. Due to the
U.S. Government's ability to not exercise contract options or to terminate, modify or curtail our programs or
contracts and the rights of our non-U.S. Government customers to cancel contracts and purchase orders in certain
circumstances, we may realize less than expected or may never realize revenues from some of the contracts that
Leidos Holdings, Inc. Annual Report - 14
PART I
are included in our backlog. Our unfunded backlog, in particular, contains management’s estimate of amounts
expected to be realized on unfunded contract work that may never be realized as revenues. If we fail to realize as
revenues amounts included in our backlog, our future revenues, profitability and growth prospects could be
adversely affected.
Our earnings and profitability may vary based on the mix of our contracts and may be adversely affected by
our failure to accurately estimate and manage costs, time and resources.
We generate revenues under various types of contracts, which include cost-reimbursement, FP-IF, T&M, FP-LOE
and FFP contracts. Our earnings and profitability may vary materially depending on changes in the proportionate
amount of revenues derived from each type of contract, the nature of services or products provided, as well as the
achievement of performance objectives and the stage of performance at which the right to receive fees, particularly
under incentive and award fee contracts, is finally determined. Cost-reimbursement and T&M contracts are
generally less profitable than FFP contracts. Our operating results in any period may also be affected, positively or
negatively, by customers' variable purchasing patterns of our more profitable proprietary products.
Our profitability is adversely affected when we incur contract costs that we cannot bill to our customers. To varying
degrees, each of our contract types involves some risk that we could underestimate the costs and resources
necessary to fulfill the contract. While FFP contracts allow us to benefit from cost savings, these contracts also
increase our exposure to the risk of cost overruns. Revenues from FFP contracts represented approximately 28% of
our total revenues for fiscal 2017. When making proposals on these types of contracts, we rely heavily on our
estimates of costs and timing to complete the associated projects, as well as assumptions regarding technical
issues. In each case, our failure to accurately estimate costs or the resources and technology needed to perform
our contracts or to effectively manage and control our costs during performance could result, and in some instances
has resulted, in reduced profits or in losses. More generally, any increased or unexpected costs or unanticipated
delays in the performance of our contracts, including costs and delays caused by contractual disputes or other
factors outside of our control, such as performance failures of our subcontractors, natural disasters or other force
majeure events, could make our contracts less profitable than expected or unprofitable.
We use estimates in recognizing revenues, and if we make changes to estimates used in recognizing
revenues, our profitability may be adversely affected.
Revenues from our contracts are primarily recognized using the percentage-of-completion method or on the basis
of partial performance towards completion. These methodologies require estimates of total costs at completion, fees
earned on the contract, or both. This estimation process, particularly due to the technical nature of the services
performed and the long-term nature of certain contracts, is complex and involves significant judgment. Adjustments
to original estimates are often required as work progresses, experience is gained and additional information
becomes known, even though the scope of the work required under the contract may not change. Any adjustment
as a result of a change in estimate is recognized as events become known. Changes in the underlying
assumptions, circumstances or estimates could result in adjustments that may adversely affect our future financial
results.
Legal disputes could require us to pay potentially large damage awards and could be costly to defend,
which would adversely affect our cash balances and profitability, and could damage our reputation.
We are subject to a number of lawsuits and claims described in "Legal Proceedings" in Part I of this Annual Report
on Form 10-K, as may be updated in our future filings with the SEC, including our Quarterly Reports on Form 10-Q.
We are also subject to, and may become a party to, a variety of other litigation or claims and suits that arise from
time to time in the ordinary course of our business. Adverse judgments or settlements in some or all of these legal
disputes may result in significant monetary damages, penalties or injunctive relief against us. Any claims or litigation
could be costly to defend, and even if we are successful or if fully indemnified or insured, could damage our
reputation and make it more difficult to compete effectively or obtain adequate insurance in the future. Litigation and
other claims, including those described in "Legal Proceedings," are subject to inherent uncertainties and
management’s view of these matters may change in the future.
Leidos Holdings, Inc. Annual Report - 15
PART I
Our business and operations expose us to numerous legal and regulatory requirements, and any violation
of these requirements could harm our business.
We are subject to numerous federal, state and foreign legal requirements on matters as diverse as data privacy and
protection, employment and labor relations, immigration, taxation, anticorruption, import/export controls, trade
restrictions, internal and disclosure control obligations, securities regulation and anti-competition. Compliance with
diverse and changing legal requirements is costly, time-consuming and requires significant resources. We also
conduct business in certain identified growth areas, such as health information technology, energy and
environmental services, which are highly regulated and may expose us to increased compliance risk. Violations of
one or more of these diverse legal requirements in the conduct of our business could result in significant fines and
other damages, criminal sanctions against us or our officers, prohibitions on doing business and damage to our
reputation. Violations of these regulations or contractual obligations related to regulatory compliance in connection
with the performance of customer contracts could also result in liability for significant monetary damages, fines and/
or criminal prosecution, unfavorable publicity and other reputational damage, restrictions on our ability to compete
for certain work and allegations by our customers that we have not performed our contractual obligations.
Our business and financial results could be negatively affected by cyber or other security threats.
As a U.S. Government contractor and a provider of information technology services operating in multiple regulated
industries and geographies, we handle sensitive information. Therefore, we are continuously exposed to cyber
attacks and other security threats, including physical break-ins. Any electronic or physical break-in or other security
breach or compromise may jeopardize security of information stored or transmitted through our information
technology systems and networks. This could lead to disruptions in mission-critical systems, unauthorized release
of confidential or otherwise protected information and corruption of data. Although we have implemented policies,
procedures and controls to protect against, detect and mitigate these threats, we face advanced and persistent
attacks on our information systems and attempts by others to gain unauthorized access to our information
technology systems are becoming more sophisticated. These attempts include covertly introducing malware to our
computers and networks and impersonating authorized users, among others, and may be perpetrated by well-
funded organized crime or state sponsored efforts. We seek to detect and investigate all security incidents and to
prevent their occurrence or recurrence. We continue to invest in and improve our threat protection, detection and
mitigation policies, procedures and controls. In addition, we work with other companies in the industry and
government participants on increased awareness and enhanced protections against cybersecurity threats.
However, because of the evolving nature and sophistication of these security threats, which can be difficult to
detect, there can be no assurance that our policies, procedures and controls have or will detect or prevent any of
these threats and we cannot predict the full impact of any such past or future incident. We may experience similar
security threats to the information technology systems that we develop, install or maintain under customer
contracts. Although we work cooperatively with our customers and other business partners to seek to minimize the
impact of cyber and other security threats, we must rely on the safeguards put in place by those entities. Any
remedial costs or other liabilities related to cyber or other security threats may not be fully insured or indemnified by
other means. Occurrence of any of these security threats could expose us to claims, contract terminations and
damages and could adversely affect our reputation, ability to work on sensitive U.S. Government contracts,
business operations and financial results.
Internal system or service failures could disrupt our business and impair our ability to effectively provide
our services and products to our customers, which could damage our reputation and adversely affect our
revenues and profitability.
Any system or service disruptions, including those caused by ongoing projects to improve our information
technology systems and the delivery of services, whether through our shared services organization or outsourced
services, if not anticipated and appropriately mitigated, could have a material adverse effect on our business
including, among other things, an adverse effect on our ability to bill our customers for work performed on our
contracts, collect the amounts that have been billed and produce accurate financial statements in a timely manner.
We are also subject to systems failures, including network, software or hardware failures, whether caused by us,
third-party service providers, cybersecurity threats, natural disasters, power shortages, terrorist attacks or other
events, which could cause loss of data and interruptions or delays in our business, cause us to incur remediation
costs, subject us to claims and damage our reputation. In addition, the failure or disruption of our communications
could cause us to interrupt or suspend our operations or otherwise adversely affect our business. Our property and
Leidos Holdings, Inc. Annual Report - 16
PART I
business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of
any system or operational failure or disruption and, as a result, our future results could be adversely affected.
Customer systems failures could damage our reputation and adversely affect our revenues and profitability.
Many of the systems and networks that we develop, install and maintain for our customers involve managing and
protecting personal information and information relating to national security and other sensitive government
functions. While we have programs designed to comply with relevant privacy and security laws and restrictions, if a
system or network that we develop, install or maintain were to fail or experience a security breach or service
interruption, whether caused by us, third-party service providers, cybersecurity threats or other events, we may
experience loss of revenue, remediation costs or face claims for damages or contract termination. Any such event
could cause serious harm to our reputation and prevent us from having access to or being eligible for further work
on such systems and networks. Our errors and omissions liability insurance may be inadequate to compensate us
for all of the damages that we may incur and, as a result, our future results could be adversely affected.
Many of our contracts contain performance obligations that require innovative design capabilities, are
technologically complex, or are dependent upon factors not wholly within our control. Failure to meet these
obligations could adversely affect our profitability and future prospects.
We design and develop technologically advanced and innovative products and services applied by our customers in
a variety of environments. Problems and delays in development or delivery as a result of issues with respect to
design, technology, licensing and patent rights, labor, learning curve assumptions or materials and components
could prevent us from achieving contractual requirements.
In addition, our offerings cannot be tested and proven in all situations and are otherwise subject to unforeseen
problems that could negatively affect revenue and profitability such as problems with quality and workmanship,
country of origin, delivery of subcontractor components or services and unplanned degradation of product
performance. Among the factors that may affect revenue and profits could be unforeseen costs and expenses not
covered by insurance or indemnification from the customer, diversion of management focus in responding to
unforeseen problems, loss of follow-on work, and, in the case of certain contracts, repayment to the government
customer of contract cost and fee payments we previously received.
We have contracts with the U.S. Government that are classified, which may limit investor insight into
portions of our business.
We derive a portion of our revenues from programs with the U.S. Government that are subject to security
restrictions (classified programs), which preclude the dissemination of information that is classified for national
security purposes. We are limited in our ability to provide information about these classified programs, their risks or
any disputes or claims relating to such programs. As a result, investors have less insight into our classified
programs than our other businesses and therefore less ability to fully evaluate the risks related to our classified
business.
We have made and continue to make acquisitions, investments, joint ventures and divestitures that involve
numerous risks and uncertainties.
We selectively pursue strategic acquisitions, investments and joint ventures. These transactions require significant
investment of time and resources and may disrupt our business and distract our management from other
responsibilities. Even if successful, these transactions could reduce earnings for a number of reasons, including the
amortization of intangible assets, impairment charges, acquired operations that are not yet profitable or the payment
of additional consideration under earn-out arrangements if an acquisition performs better than expected.
Acquisitions, investments and joint ventures pose many other risks that could adversely affect our reputation,
operations or financial results, including:
•
•
we may not be able to identify, compete effectively for or complete suitable acquisitions and investments at
prices we consider attractive;
we may not be able to accurately estimate the financial effect of acquisitions and investments on our
business, and we may not realize anticipated synergies or acquisitions may not result in improved operating
performance;
Leidos Holdings, Inc. Annual Report - 17
PART I
•
•
•
•
•
•
•
we may encounter performance problems with acquired technologies, capabilities and products, particularly
with respect to those that are still in development when acquired;
we may have trouble retaining key employees and customers of an acquired business or otherwise
integrating such businesses, such as incompatible accounting, information management, or other control
systems, which could result in unforeseen difficulties;
we may assume material liabilities that were not identified as part of our due diligence or for which we are
unable to receive a purchase price adjustment or reimbursement through indemnification;
we may assume legal or regulatory risks, particularly with respect to smaller businesses that have immature
business processes and compliance programs;
acquired entities or joint ventures may not achieve expected business growth or operate profitably, which
could adversely affect our operating income or operating margins, and we may be unable to recover
investments in any such acquisitions;
acquisitions, investments and joint ventures may require us to spend a significant amount of cash or to
issue capital stock, resulting in dilution of ownership; and
we may not be able to effectively influence the operations of our joint ventures, or we may be exposed to
certain liabilities if our joint venture partners do not fulfill their obligations.
If our acquisitions, investments or joint ventures fail, perform poorly or their value is otherwise impaired for any
reason, including contractions in credit markets and global economic conditions, our business and financial results
could be adversely affected.
In addition, we periodically divest businesses, including businesses that are no longer a part of our ongoing
strategic plan. These divestitures similarly require significant investment of time and resources, may disrupt our
business, distract management from other responsibilities and may result in losses on disposal or continued
financial involvement in the divested business, including through indemnification, guarantee or other financial
arrangements, for a period of time following the transaction, which would adversely affect our financial results.
Goodwill and other intangible assets represent approximately 65% of our total assets and any impairment
of these assets could negatively impact our results of operations.
Intangible assets with indefinite lives, including goodwill, are tested for impairment at least annually or whenever
events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets with
finite lives are assessed for impairment whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Examples of events or changes in circumstances indicating that the carrying value of
intangible assets may not be recoverable could include a significant adverse change in legal factors or in the
business climate, an adverse action or assessment by a regulator, unanticipated competition, loss of key personnel,
or a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or
otherwise disposed. We face continued uncertainty in our business environment due to the substantial fiscal and
economic challenges facing the U.S. Government, our primary customer, as well as challenges in the commercial
healthcare industry, compounded by lower levels of U.S. Government reimbursements, including reductions in
Medicare reimbursements which in turn impact hospital IT spending. Adverse changes in fiscal and economic
conditions, such as the manner in which the budget cuts are implemented, including sequestration, and issues
related to the nation’s debt ceiling, could adversely impact our future revenues and profitability. These
circumstances could result in an impairment of goodwill and/or other intangibles. Also, adverse equity market
conditions that result in a decline in market multiples and our stock price could result in an impairment of goodwill
and/or other intangibles. Any future impairment of goodwill or other intangible assets would have a negative impact
on our profitability and financial results.
We depend on our teaming arrangements and relationships with other contractors and subcontractors. If
we are not able to maintain these relationships, or if these parties fail to satisfy their obligations to us or the
customer, our revenues, profitability and growth prospects could be adversely affected.
We rely on our teaming relationships with other prime contractors and subcontractors, who are also often our
competitors in other contexts, in order to submit bids for large procurements or other opportunities where we believe
the combination of services and products provided by us and the other companies will help us to win and perform
Leidos Holdings, Inc. Annual Report - 18
PART I
the contract. Our future revenues and growth prospects could be adversely affected if other contractors eliminate or
reduce their contract relationships with us, or if the U.S. Government terminates or reduces these other contractors’
programs, does not award them new contracts or refuses to pay under a contract. Companies that do not have
access to U.S. Government contracts may perform services as our subcontractor and that exposure could enhance
such companies’ prospect of securing a future position as a prime U.S. Government contractor which could
increase competition for future contracts and impair our ability to perform on contracts.
We may have disputes with our subcontractors arising from, among other things, the quality and timeliness of work
performed by the subcontractor, customer concerns about the subcontractor, our failure to extend existing task
orders or issue new task orders under a subcontract, our hiring of a subcontractor’s personnel or the
subcontractor’s failure to comply with applicable law. Uncertain economic conditions heighten the risk of financial
stress of our subcontractors, which could adversely impact their ability to meet their contractual requirements to us.
If any of our subcontractors fail to timely meet their contractual obligations or have regulatory compliance or other
problems, our ability to fulfill our obligations as a prime contractor or higher tier subcontractor may be jeopardized.
Significant losses could arise in future periods and subcontractor performance deficiencies could result in our
termination for default. A termination for default could eliminate a revenue source, expose us to liability and have an
adverse effect on our ability to compete for future contracts and task orders, especially if the customer is an agency
of the U.S. Government.
Our services and operations sometimes involve using, handling or disposing of hazardous substances,
which could expose us to potentially significant liabilities.
Some of our services and operations involve the assessment or remediation of environmental hazards, as well as
the use, handling or disposal of hazardous substances. These activities and our operations generally subject us to
extensive foreign, federal, state and local environmental protection and health and safety laws and regulations,
which, among other things, require us to incur costs to comply with these regulations and could impose liability on
us for handling or disposing of hazardous substances. Furthermore, failure to comply with these environmental
protection and health and safety laws and regulations could result in civil, criminal, regulatory, administrative or
contractual sanctions, including fines, penalties or suspension or debarment from contracting with the U.S.
Government. Our current and previous ownership and operation of real property also subjects us to environmental
protection laws, some of which hold current or previous owners or operators of businesses and real property liable
for hazardous substance releases, even if they did not know of and were not responsible for the releases. If we
have any violations of, or incur liabilities pursuant to these laws or regulations, our financial condition and operating
results could be adversely affected.
We could incur significant liabilities and suffer negative publicity if our inspection or detection systems fail
to detect bombs, explosives, weapons, contraband or other threats.
We design, develop, manufacture, sell, service and maintain various inspection systems that are designed to assist
in the detection of bombs, explosives, weapons, contraband or other threats. In some instances, we also train
operators of such systems. Many of these systems utilize software algorithms that are probabilistic in nature and
subject to significant technical limitations. Many of these systems are also dependent on the performance of their
operators. There are many factors, some of which are beyond our control, which could result in the failure of our
products to help detect the presence of bombs, explosives, weapons, contraband or other threats. Some of these
factors could include operator error, inherent limitations in our systems, and misuse or malfunction of our systems.
The failure of our systems to help detect the presence of any of these dangerous materials could lead to injury,
death and extensive property damage and may lead to product liability, professional liability, or other claims against
us. Further, if our systems fail to, or are perceived to have failed to help detect a threat, the negative publicity from
such incident could have a material adverse effect on our business.
Our insurance may be insufficient to protect us from product and other liability claims or losses.
We maintain insurance coverage with third-party insurers as part of our overall risk management strategy and
because some of our contracts require us to maintain specific insurance coverage limits. However, not every risk or
liability is or can be protected by insurance, and, for those risks we insure, the limits of coverage we purchase or
that are reasonably obtainable in the market may not be sufficient to cover all actual losses or liabilities incurred. If
any of our third-party insurers fail, cancel our coverage or otherwise are unable to provide us with adequate
insurance coverage, then our overall risk exposure and our operational expenses would increase and the
management of our business operations would be disrupted. Our insurance may be insufficient to protect us from
Leidos Holdings, Inc. Annual Report - 19
PART I
significant product and other liability claims or losses. Moreover, there is a risk that commercially available liability
insurance will not continue to be available to us at a reasonable cost, if at all. If liability claims or losses exceed our
current or available insurance coverage, our business, financial position, operating results and prospects may be
harmed. Regardless of the adequacy of our liability insurance coverages, any significant claim may have an
adverse effect on our industry and market reputation, leading to a substantial decrease in demand for our products
and services and reduced revenues.
We face risks associated with our international business.
Our international business operations may be subject to additional and different risks than our U.S. business.
Failure to comply with U.S. Government and foreign laws and regulations applicable to international business, such
as the Foreign Corrupt Practices Act or U.S. export control regulations, could have an adverse impact on our
business with the U.S. Government and could expose us to administrative, civil or criminal penalties. Additionally,
these risks relating to international operations may expose us to potentially significant contract losses.
In some countries, there is an increased chance for economic, legal or political changes that may adversely affect
the performance of our services, sale of our products or repatriation of our profits. International transactions can
also involve increased financial and legal risks arising from foreign exchange rate variability, imposition of tariffs or
additional taxes, restrictive trade policies, any delay or failure to collect amounts due to us and differing legal
systems. We provide services and products in support of U.S. Government customers in countries with
governments that may be or may become unstable, which increases the risk of an incident resulting in injury or loss
of life, or damage or destruction of property or inability to meet our contractual obligations. Although our
international operations have historically generated a small proportion of our revenues, we are seeking to grow our
international business, in which case these regulatory, geopolitical and other factors may have a greater impact on
our business in the future and could adversely affect our business.
We have only a limited ability to protect our intellectual property rights, which are important to our success.
Our failure to adequately protect our proprietary information and intellectual property rights could
adversely affect our competitive position.
We rely principally on trade secrets to protect much of our intellectual property in cases where we do not believe
that patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. Although our
employees are subject to confidentiality obligations, this protection may be inadequate to deter or prevent
misappropriation of our confidential information. We may be unable to detect unauthorized use of our intellectual
property or otherwise take appropriate steps to enforce our rights. Failure to obtain or maintain trade secret
protection could adversely affect our competitive business position. If we are unable to prevent third parties from
infringing or misappropriating our copyrights, trademarks or other proprietary information, our competitive position
could be adversely affected. In addition, in connection with the performance of services, the U.S. Government has
certain rights to inventions, data, software codes and related material that we develop under government-funded
contracts and subcontracts, which means that U.S. Government may disclose or license our information to third
parties, including, in some instances, our competitors.
In the course of conducting our business, we may inadvertently infringe the intellectual property rights of others,
resulting in claims against us or our customers. Our contracts generally indemnify our customers for third-party
claims for intellectual property infringement by the services and products we provide. The expense of defending
these claims may adversely affect our financial results.
Our financial results may vary significantly from period-to-period.
Our financial results may fluctuate as a result of a number of factors, many of which are outside of our control. For
these reasons, comparing our operating results on a period-to-period basis may not be meaningful, and you should
not rely on our past results as an indication of our future performance. Our financial results may be negatively
affected by any of the risk factors listed in this "Risk Factors" section and other matters described elsewhere in this
Annual Report on Form 10-K.
We use estimates in accounting for many of our programs and changes in our estimates could adversely
affect our future financial results.
Accounting for many of our programs requires judgment relative to assessing risks, including risks associated with
estimating directed delays and reductions in scheduled deliveries, unfavorable resolutions of claims and contractual
Leidos Holdings, Inc. Annual Report - 20
PART I
matters, judgments associated with estimating contract revenues and costs, and assumptions for schedule and
technical issues. Due to the size and nature of many of our contracts, the estimation of total revenues and cost at
completion is complicated and subject to many variables. For example, we must make assumptions regarding the
length of time to complete the contract because costs also include expected increases in wages and prices for
materials, consider whether the intent of entering into multiple contracts was effectively to enter into a single project
in order to determine whether such contracts should be combined or segmented, consider incentives or penalties
related to performance on contracts in estimating revenue and profit rates, and record them when there is sufficient
information for us to assess anticipated performance; and use estimates of award fees in estimating revenue and
profit rates based on actual and anticipated awards. Because of the significance of the judgments and estimation
processes involved in accounting for construction and production type contracts, materially different amounts could
be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in
underlying assumptions, circumstances or estimates may adversely affect our future results of operations and
financial condition.
We are required to abide by potentially significant restrictions which could limit our ability to undertake
certain corporate actions (such as the issuance of Leidos common stock or the undertaking of a merger or
consolidation) that otherwise could be advantageous.
The merger agreement and the tax matters agreement impose certain ongoing restrictions on us to ensure that
applicable statutory requirements under the Internal Revenue Code of 1986, as amended, and applicable Treasury
regulations are met so that the Transactions qualify as tax-free to Lockheed Martin and its shareholders. As a result
of these restrictions, our ability to engage in certain transactions may be limited.
If we take any actions that would cause the Transactions to become taxable, we generally will be required to bear
the cost of any resulting tax liability. If the Transactions became taxable, Lockheed Martin would be expected to
recognize a substantial amount of income, which would result in a material amount of taxes. Any such taxes
allocated to us would be expected to be material to us, and could cause our business, financial condition and
operating results to suffer. These restrictions may reduce our ability to engage in certain business transactions that
otherwise might be advantageous to us.
Risks Relating to Our Stock
We cannot assure you that we will continue to pay dividends on our common stock.
In March 2012, our Board of Directors approved the initiation of a quarterly dividend program. The timing,
declaration, amount and payment of any future dividends fall within the discretion of our Board of Directors and will
depend on many factors, including our available cash, estimated cash needs, earnings, financial condition,
operating results, capital requirements, as well as limitations in our contractual agreements, applicable law,
regulatory constraints, industry practice and other business considerations that our Board of Directors considers
relevant. A change in our dividend program could have an adverse effect on the market price of our common stock.
Provisions in our charter documents and under Delaware law could delay or prevent transactions that many
stockholders may favor.
Some provisions of our certificate of incorporation and bylaws may have the effect of delaying, discouraging or
preventing a merger or acquisition that our stockholders may consider favorable, including transactions in which
stockholders might receive a premium for their shares. These restrictions, which may also make it more difficult for
our stockholders to elect directors not endorsed by our current directors and management, include the following:
• Our certificate of incorporation provides that our bylaws and certain provisions of our certificate of
incorporation may be amended by only two-thirds or more voting power of all of the outstanding shares
entitled to vote. These supermajority voting requirements could impede our stockholders’ ability to make
changes to our certificate of incorporation and bylaws.
• Our certificate of incorporation contains certain supermajority voting provisions, which generally provide that
mergers and certain other business combinations between us and a related person be approved by the
holders of securities having at least 80% of our outstanding voting power, as well as by the holders of a
majority of the voting power of such securities that are not owned by the related person.
• Our stockholders may not act by written consent. As a result, a holder, or holders, controlling a majority of
our capital stock are limited in their ability to take certain actions other than in connection with its annual
Leidos Holdings, Inc. Annual Report - 21
PART I
stockholders' meeting or a special meeting called at the request of qualified stockholders as provided in our
certificate of incorporation and bylaws.
• Our Board of Directors may issue, without stockholder approval, shares of undesignated preferred stock.
The ability to authorize undesignated preferred stock makes it possible for our Board of Directors to issue
preferred stock with voting or other rights or preferences that could impede the success of any attempt to
acquire us.
As a Delaware corporation, we are also subject to certain restrictions on business combinations. Under Delaware
law, a corporation may not engage in a business combination with any holder of 15% or more of its capital stock
unless the holder has held the stock for three years, or among other things, our Board of Directors has approved
the business combination or the transaction pursuant to which such person became a 15% holder prior to the time
the person became a 15% holder.
Forward-Looking Statement Risks
You may not be able to rely on forward-looking statements.
This Annual Report on Form 10-K contains forward-looking statements that are based on our management’s belief
and assumptions about the future in light of information currently available to our management. In some cases, you
can identify forward-looking statements by words such as "may," "will," "should," "expects," "intends," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," "continue," and similar words or phrases or the negative
of these words or phrases. These statements relate to future events or our future financial performance, and involve
known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity,
performance or achievements to be materially different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. These statements may include statements
regarding the benefits and synergies of the Transactions and future opportunities for the combined company
following the transaction. Although we believe that the expectations reflected in the forward-looking statements are
reasonable when made, we cannot guarantee future results, levels of activity, performance or achievements. There
are a number of important factors that could cause our actual results to differ materially from those results
anticipated by our forward-looking statements, which include, but are not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
developments in the U.S. Government defense budget, including budget reductions, sequestration,
implementation of spending limits or changes in budgetary priorities, or delays in the U.S. Government
budget process or approval of raising the debt ceiling;
delays in the U.S. Government contract procurement process or the award of contracts and delays or loss
of contracts as a result of competitor protests;
changes in U.S. Government procurement rules, regulations, and practices;
our compliance with various U.S. Government and other government procurement rules and regulations;
governmental reviews, audits and investigations of our company;
our ability to effectively compete and win contracts with the U.S. Government and other customers;
our reliance on information technology spending by hospitals/health care organizations;
our reliance on infrastructure investments by industrial and natural resources organizations;
energy efficiency and alternative energy sourcing investments;
investments by U.S. Government and commercial organizations in environment impact and remediation
projects;
our ability to attract, train and retain skilled employees, including our management team, and to obtain
security clearances for our employees;
our ability to accurately estimate costs associated with our firm-fixed-price and other contracts;
resolution of legal and other disputes with our customers and others or legal or regulatory compliance
issues;
cybersecurity, data security or other security threats, system failures or other disruptions of our business;
Leidos Holdings, Inc. Annual Report - 22
PART I
•
•
•
•
•
•
•
•
•
•
our ability to effectively acquire businesses and make investments;
our ability to maintain relationships with prime contractors, subcontractors and joint venture partners;
our ability to manage performance and other risks related to customer contracts;
the failure of our inspection or detection systems to detect threats;
the adequacy of our insurance programs designed to protect us from significant product or other liability
claims;
our ability to manage risks associated with our international business;
exposure to lawsuits and contingencies associated with Lockheed Martin’s Information Systems & Global
Solutions business;
our ability to declare future dividends based on our earnings, financial condition, capital requirements and
other factors, including compliance with applicable law and our agreements;
our ability to grow our commercial health and infrastructure businesses, which could be negatively affected
by budgetary constraints faced by hospitals and by developers of energy and infrastructure projects; and
our ability to execute our business plan and long-term management initiatives effectively and to overcome
these and other known and unknown risks that we face.
We do not undertake any obligation to update or revise any of the forward-looking statements to reflect events,
circumstances, changes in expectations, or the occurrence of unanticipated events after the date of those
statements or to conform these statements to actual results.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 29, 2017, we conducted our operations in 348 offices located in 39 states, the District of Columbia
and various foreign countries. We occupy approximately 7.1 million square feet of floor space. Of this amount, we
own approximately 1.1 million square feet, and the remaining balance is leased. Our major locations are in the
Washington, D.C., metropolitan area, where we occupy a combination of leased and owned floor space of
approximately 3.4 million square feet. We also have employees working at customer sites throughout the United
States and in other countries.
As of December 29, 2017, we owned the following properties:
Location
Gaithersburg, Maryland
San Diego, California
Columbia, Maryland
Orlando, Florida
Oak Ridge, Tennessee
Reston, Virginia
Number of
buildings
Square
footage
Acreage
1
2
1
1
1
1
542,000
262,000
95,000
85,000
83,000
62,000
44.8
13.5
7.3
8.5
8.4
2.6
The nature of our business is such that there is no practicable way to relate occupied space to our reportable
segments. See "Note 18—Leases" of the notes to consolidated financial statements contained within this Annual
Report on Form 10-K for information regarding commitments under leases.
Leidos Holdings, Inc. Annual Report - 23
PART I
Item 3. Legal Proceedings
We have provided information about legal proceedings in which we are involved in "Note 21—Contingencies" of the
notes to the consolidated financial statements contained within this Annual Report on Form 10-K.
In addition, we are routinely subject to investigations and reviews relating to compliance with various laws and
regulations. Additional information regarding such investigations and reviews is set forth in "Note 21—
Contingencies” of the notes to the consolidated financial statements contained within this Annual Report on Form
10-K.
Item 4. Mine Safety Disclosures
Not applicable.
Leidos Holdings, Inc. Annual Report - 24
PART I
Executive Officers of the Registrant
The following is a list of the names and ages (as of February 23, 2018) of our executive officers, indicating all
positions and offices held by each such person and each such person’s business experience during at least the
past five years. All such persons have been elected to serve until their successors are elected and qualified or until
their earlier resignation or removal.
Name of officer
Roger A. Krone
Age
61
James C. Reagan
59
Ann M. Addison
56
Gerard A. Fasano
52
John J. Fratamico, Jr.
60
Angela L. Heise
Jerald S. Howe, Jr.
43
62
Position(s) with the company and prior business experience
Mr. Krone has served as Chief Executive Officer since July 2014. Mr. Krone
is also Chairman of the Board. He brings more than 36 years of operational,
strategic, and financial execution experience for some of the nation’s most
prominent names in aerospace. Mr. Krone has held senior program
management and finance positions at The Boeing Company, McDonnell
Douglas Corp., and General Dynamics. Mr. Krone is currently a member of
the Georgia Tech Foundation Board of Trustees. He is a long-time supporter
of the Urban League, and currently serves on the board of the Greater
Washington chapter. He is also a member of the Executive Council of the
Aerospace Industries Association (AIA) and a member of the AOPA
Foundation's Board of Visitors.
Mr. Reagan has served as Executive Vice President and Chief Financial
Officer since July 2015. Prior to joining Leidos, from 2012 to 2015, Mr.
Reagan was with Vencore, Inc. (formerly The SI Organization, Inc.), a
provider of information solutions, and engineering and analysis services to
the U.S. Intelligence Community, Department of Defense, and federal and
civilian agencies, where he served as Senior Vice President and Chief
Financial Officer. From 2011 to 2012, Mr. Reagan was Executive Vice
President and Chief Financial Officer of PAE, Inc., a provider of mission
support services to the U.S. Government. Mr. Reagan is a Certified Public
Accountant.
Ms. Addison has served as Executive Vice President and Chief Human
Resources Officer since August 2016 when she joined Leidos. Prior to
joining Leidos, Ms. Addison served Lockheed Martin Corporation in several
capacities, most recently as the Vice President of Human Resources for their
former Information Systems & Global Solutions business. Earlier in her
career she held positions with Global eXchange Services and General
Electric.
Mr. Fasano has served as Executive Vice President and Chief of Business
Development & Strategy since August 2016 when he joined Leidos. Prior to
joining Leidos, Mr. Fasano served Lockheed Martin Corporation over 30
years in several capacities, most recently as a Vice President and General
Manager in their former Information Systems & Global Solutions business.
Dr. Fratamico has served as Executive Vice President and Chief Technology
Officer since November 2016 and before that, as President, National
Security Solutions - Surveillance and Reconnaissance Group. Before joining
Leidos, Dr. Fratamico served as Chief Scientist at McDonnell Douglas
Technologies Incorporated.
Ms. Heise has served as President, Civil Group since August 2016 when she
joined Leidos. Prior to joining Leidos, Ms. Heise served as Vice President of
Enterprise Information Technology Solutions for Lockheed Martin
Corporation's former Information Systems & Global Solutions business.
Mr. Howe has served as Executive Vice President and General Counsel
since July 2017. Prior to joining Leidos, Mr. Howe was a partner at Fried,
Frank, Harris, Shriver & Jacobson LLP where he served in the firm’s
government contracts, mergers and acquisitions, and aerospace and
defense practices. Prior to joining Fried Frank, Mr. Howe held general
counsel positions at TASC, a leading aerospace and defense company, and
at Veridian Corporation, a publicly traded company that provided advanced
technology services and solutions to the intelligence community, military, and
homeland defense agencies.
Leidos Holdings, Inc. Annual Report - 25
Name of officer
Timothy J. Reardon
Age
53
Jonathan W. Scholl
56
PART I
Position(s) with the company and prior business experience
Mr. Reardon has served as President, Defense & Intelligence Group since
January 2017 and before that, as President, Intelligence & Homeland
Security Group. Prior to joining Leidos in August 2016, Mr. Reardon served
as a Vice President and General Manager of Lockheed Martin Corporation's
former Information Systems & Global Solutions business. Prior to joining
Lockheed Martin Corporation, Mr. Reardon served as an officer with the
Central Intelligence Agency for 10 years.
Mr. Scholl has served as President, Health Group since August 2016, and
before that, as President, Health and Infrastructure group. Prior to joining
Leidos, Mr. Scholl served for five years as the Chief Strategy Officer for
Texas Health Resources, one of the largest nonprofit health care delivery
systems in the country. Prior to that, he spent 15 years with The Boston
Consulting group and served as Head of their North American Healthcare
Provider Practice and leader of their Lean Six Sigma initiative for hospitals.
He also served as vice president for applications development for the
TenFold HealthCare Group in Dallas. Mr. Scholl served five years in the U.S.
Navy as a nuclear submarine officer and nuclear power plant instructor.
Leidos Holdings, Inc. Annual Report - 26
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Leidos’ common stock is listed on the New York Stock Exchange ("NYSE") under the ticker symbol "LDOS." The
range of high and low sales prices at closing of Leidos' common stock on the NYSE for the periods presented were
as follows:
Historical Stock Prices
1st quarter (December 31, 2016 to March 31, 2017)
2nd quarter (April 1, 2017 to June 30, 2017)
3rd quarter (July 1, 2017 to September 29, 2017)
4th quarter (September 30, 2017 to December 29, 2017)
1st quarter (January 2, 2016 to April 1, 2016)
2nd quarter (April 2, 2016 to July 1, 2016)
3rd quarter (July 2, 2016 to September 30, 2016)
4th quarter (October 1, 2016 to December 30, 2016)
Holders of Common Stock
Fiscal 2017
High
Low
54.87 $
56.37 $
59.43 $
65.22 $
48.31
49.95
51.19
59.92
Fiscal 2016
High
Low
56.19 $
52.32 $
52.33 $
52.38 $
40.79
45.71
38.50
41.18
$
$
$
$
$
$
$
$
As of February 13, 2018, there were approximately 22,135 holders of record of Leidos common stock. The number
of stockholders of record of Leidos common stock is not representative of the number of beneficial owners due to
the fact that many shares are held by depositories, brokers or nominees.
Dividend Policy
During fiscal 2017 and 2016, Leidos declared and paid quarterly dividends totaling $1.28 per share of Leidos
common stock. Leidos currently intends to continue paying dividends on a quarterly basis, although the declaration
of any future dividends will be determined by Leidos' Board of Directors and will depend on many factors, including
available cash, estimated cash needs, earnings, financial condition, operating results, and capital requirements, as
well as limitations in our contractual agreements, applicable law, regulatory constraints, industry practice and other
business considerations that the Board of Directors considers relevant. Our ability to declare and pay future
dividends on Leidos stock may be restricted by the provisions of Delaware law and covenants in our then-existing
indebtedness arrangements.
In connection with the Transactions (see "Note 2—Acquisitions" of the notes to the consolidated financial
statements contained within this Annual Report on Form 10-K), Leidos' Board of Directors declared a special
dividend of $13.64 per share of Leidos common stock. Consequently, on August 22, 2016, Leidos paid out $993
million to stockholders of record as of August 15, 2016, and accrued $29 million as dividend equivalents with
respect to outstanding unvested equity awards.
Leidos Holdings, Inc. Annual Report - 27
PART II
Stock Performance Graph
The following graph compares the total cumulative five-year return on Leidos common stock through December 29,
2017 to two indices: (i) the Standard & Poor's 400 Composite index and (ii) the Standard & Poor's 500 IT Services
Industry index. The graph assumes an initial investment of $100 on December 31, 2012, and that dividends, if any,
have been reinvested. On September 27, 2013, we completed the spin-off of New SAIC. Our stockholders received
one share of New SAIC common stock for every seven shares of our common stock held on the record date
(September 19, 2013). The effect of the spin-off is reflected in the cumulative total return as a reinvested dividend.
The comparisons in the graph are required by the SEC, based upon historical data and are not intended to forecast
or be indicative of possible future performance of Leidos common stock.
Purchases of Equity Securities
On February 16, 2018, the Company’s Board of Directors authorized a new share repurchase program of up to 20
million shares of the Company’s outstanding common stock. The shares may be repurchased from time to time in
one or more open market repurchases or privately negotiated transactions, including accelerated share repurchase
transactions. The actual timing, number and value of shares repurchased under the program will depend on a
number of factors, including the market price of the Company’s common stock, general market and economic
conditions, applicable legal requirements, compliance with the terms of the Company’s outstanding indebtedness
and other considerations. There is no assurance as to the number of shares that will be repurchased, and the
repurchase program may be suspended or discontinued at any time at the Company’s discretion. This share
repurchase authorization replaces the previous share repurchase authorization announced in December 2013.
Leidos Holdings, Inc. Annual Report - 28
The following table presents repurchases of Leidos common stock during the quarter ended December 29, 2017:
PART II
Period
September 30, 2017
October 1, 2017 - October 31, 2017
November 1, 2017 - November 30, 2017
December 1, 2017 - December 29, 2017
Total
(a)
Total Number
of Shares (or
Units)
Purchased(1)
(b)
Average Price
Paid per Share
(or Unit)
— $
5,993
6,571
2,993
15,557 $
—
60.88
62.34
63.61
62.02
(c)
Total Number of
Shares (or
Units) Purchased as
Part of Publicly
Announced
Repurchase
Plans or Programs
(d)
Maximum Number of
Shares
(or Units) that May
Yet Be Purchased
Under the
Plans or Programs
—
—
—
—
—
5,718,172
5,718,172
5,718,172
5,718,172
(1) The total number of shares purchased includes: (i) shares surrendered to satisfy statutory tax withholdings obligations related to vesting of
restricted stock units; and (ii) shares purchased upon surrender by stockholders of previously owned shares in payment of the exercise price
of non-qualified stock options and/or to satisfy statutory tax withholdings obligations.
Item 6. Selected Financial Data
The selected financial data for the five-year period set forth below is derived from our consolidated financial
statements for fiscal years 2017 and 2016, the 11-month period ended January 1, 2016, and for fiscal years 2015
and 2014.
This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Part II and our consolidated financial statements and the notes thereto contained
within this Annual Report on Form 10-K.
Leidos Holdings, Inc. Annual Report - 29
PART II
12 Months Ended(1)
11 Months
Ended(1)
12 Months Ended(1)
December 29,
2017(2)
December 30,
2016(3)
January 1,
2016(4)
January 30,
2015(5)
January 31,
2014(6)
(in millions, except for per share amounts)
$
10,170 $
7,043 $
4,712 $
5,063 $
5,755
559
364
—
364
(2)
417
246
—
246
2
320
243
(1)
242
—
(214)
(330)
7
(323)
—
163
84
80
164
—
366 $
244 $
242 $
(323) $
164
2.41 $
2.39 $
3.33 $
(4.46) $
0.98
—
—
(0.01)
0.10
0.96
2.41 $
2.39 $
3.32 $
(4.36) $
1.94
2.38 $
2.35 $
3.28 $
(4.46) $
0.98
—
—
(0.01)
0.10
2.38 $
2.35 $
3.27 $
(4.36) $
1.28 $
14.92 $
1.28 $
1.28 $
0.96
1.94
5.60
$
$
$
$
$
$
Consolidated Statement of Income
(Loss) Data:
Revenues
Operating income (loss)
Income (loss) from continuing operations
(Loss) income from discontinued
operations, net of taxes
Net income (loss)
Less: net (loss) income attributable to
non-controlling interest
Net income (loss) attributable to Leidos
Holdings, Inc.
Earnings (loss) per share:
Basic:
Income (loss) from continuing
operations attributable to Leidos
common stockholders
(Loss) income from discontinued
operations, net of taxes
Net income (loss) attributable to
Leidos common stockholders
Diluted:
Income (loss) from continuing
operations attributable to Leidos
common stockholders
(Loss) income from discontinued
operations, net of taxes
Net income (loss) attributable to
Leidos common stockholders
Cash dividend per common share
December 29,
2017
December 30,
2016
January 1,
2016
(in millions)
January 30,
2015
January 31,
2014
Consolidated Balance Sheet Data:
Total assets
Long-term debt, including current portion
Other long-term liabilities(7)
$
$
$
8,990 $
3,111 $
129 $
9,132 $
3,287 $
204 $
3,370 $
1,081 $
149 $
3,281 $
1,158 $
147 $
4,162
1,323
161
(1) References to financial data are to the Company's continuing operations, unless otherwise noted. During the year ended January 31, 2014,
the Company completed the spin-off of New SAIC. The operating results of New SAIC are included in discontinued operations.
(2) Fiscal 2017 includes acquisition and integration costs of $102 million and restructuring expenses of $37 million. For further information, see
"Note 2—Acquisitions" and "Note 4—Restructuring Expenses" of the notes to the consolidated financial statements contained within this
Annual Report on Form 10-K.
(3) Fiscal 2016 includes acquisition and integration costs of $90 million and restructuring expenses of $14 million. For further information, see
"Note 2—Acquisitions" and "Note 4—Restructuring Expenses" of the notes to the consolidated financial statements contained within this
Annual Report on Form 10-K.
(4) Reflects the 11-month period of January 31, 2015, through January 1, 2016, as a result of the change in our fiscal year end. For further
information see, "Note 1—Summary of Significant Accounting Policies–Reporting Periods" of the notes to the consolidated financial
Leidos Holdings, Inc. Annual Report - 30
PART II
statements contained within this Annual Report on Form 10-K. The 11-month period ended January 1, 2016, results include a gain on a real
estate sale of $82 million, tangible asset impairment charges of $29 million, intangible asset impairment charges of $4 million and bad debt
expense of $8 million. For further information, see "Note 18—Leases," "Note 3—Divestitures," and "Note 8—Receivables" of the notes to the
consolidated financial statements contained within this Annual Report on Form 10-K.
(5) Fiscal 2015 results include goodwill impairment charges of $486 million, intangible asset impairment charges of $41 million and a tangible
asset impairment charge of $40 million.
(6) Fiscal 2014 results include intangible asset impairment charges of $51 million, bad debt expense of $44 million, and separation transaction
and restructuring expenses of $65 million.
(7) For fiscal 2017 and fiscal 2016, the Company has separately disclosed "Deferred tax liabilities," which was previously aggregated within
"Other long-term liabilities" within the consolidated balance sheets. Deferred tax liabilities for fiscal 2017, fiscal 2016, the 11-month period
ended January 1, 2016, fiscal 2015 and fiscal 2014 were $220 million, $540 million, $34 million, $21 million and $66 million, respectively.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of Leidos Holdings, Inc.'s ("Leidos") financial condition, results of operations
and quantitative and qualitative disclosures about market risk should be read in conjunction with the consolidated
financial statements and related notes.
Unless indicated otherwise, references in this report to the “Company,” “we,” “us,” and “our” refer collectively to
Leidos and its consolidated subsidiaries.
All amounts in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" are
presented for our continuing operations.
On March 20, 2015, our Board of Directors approved the amendment and restatement of our bylaws to change
Leidos' year end from the Friday nearest the end of January to the Friday nearest the end of December. As a result
of this change, we filed a Transition Report on Form 10-K for the 11-month period which began on January 31,
2015, and ended on January 1, 2016.
The information presented in the Results of Operations compares fiscal 2017 (December 31, 2016 - December 29,
2017) to fiscal 2016 (January 2, 2016 - December 30, 2016) and compares fiscal 2016 to the 11-month transition
period ended January 1, 2016 (January 31, 2015 - January 1, 2016). As a result, fiscal 2016 includes an additional
month of activity as compared to the 11-month period ended January 1, 2016, which is a factor in the year-over-year
changes discussed.
The following discussion contains forward-looking statements, including statements regarding our intent, belief, or
current expectations with respect to, among other things, trends affecting our financial condition or results of
operations, backlog, our industry and government budgets and spending. Such statements are not guarantees of
future performance and involve risks and uncertainties, and actual results may differ materially from those in the
forward-looking statements as a result of various factors. See “Risk Factors—Forward-Looking Statement Risks” in
Part I of this Annual Report on Form 10-K. Factors that could cause or contribute to these differences include those
discussed below and elsewhere in this Annual Report on Form 10-K, particularly in “Risk Factors.” Due to such
uncertainties and risks, you are cautioned not to place undue reliance on such forward-looking statements, which
speak only as of the date hereof. We do not undertake any obligation to update these factors or to publicly
announce the results of any changes to our forward-looking statements due to future events or developments.
Leidos Holdings, Inc. Annual Report - 31
PART II
Overview
We are a FORTUNE 500® science, engineering and information technology company that makes the world
healthier, safer and more efficient by providing services and solutions in the defense, intelligence, civil and health
markets. We bring domain-specific capability and cross-market innovations to customers in each of these markets
by leveraging seven core capabilities: cybersecurity; data analytics; enterprise IT modernization; operations and
logistics; sensors, collection and phenomenology; software development; and systems engineering. Our domestic
customers include the U.S. Department of Defense ("DoD"), the U.S. Intelligence Community, the U.S. Department
of Homeland Security ("DHS"), the Federal Aviation Administration ("FAA"), the Department of Veterans Affairs
("VA"), several other U.S. Government civil agencies and state and local government agencies. Our international
customers include foreign governments and their agencies, primarily located in the United Kingdom, the Middle
East and Australia. Less than 10% of our revenues and tangible long-lived assets are generated by or owned by
entities located outside of the United States.
During fiscal 2017, we completed a business reorganization, which resulted in the identification of three reportable
segments (Defense Solutions, Civil and Health). Additionally, we separately present the costs associated with
corporate functions as Corporate. We commenced operating and reporting under the new organizational structure
effective the beginning of fiscal 2017. As a result of this change, prior year segment results and disclosures have
been recast to reflect the new reportable segments (see "Note 20—Business Segments").
For additional information regarding our reportable segments, see “Business” in Part I and "Note 20—Business
Segments" of the notes to consolidated financial statements contained within this Annual Report on Form 10-K.
Our significant initiatives include the following:
•
•
•
achieving internal, or non-acquisition related, annual revenue growth through internal collaboration and
better leveraging of key differentiators across our company and the deployment of resources and
investments into higher growth markets;
increasing the growth of our operating profits through improving the quality of our revenues and contract
profitability, continued improvement in our IT systems infrastructure and related business processes for
greater effectiveness and efficiency across all business functions; and
disciplined deployment of our cash resources and use of our capital structure to enhance shareholder value
while retaining an appropriate amount of financial leverage, through internal growth initiatives, stock
repurchases, dividends, strategic acquisitions, debt level management and other uses to achieve our goals.
Sales Trend. For fiscal 2017, revenues increased by $3.1 billion, or 44%, compared to fiscal 2016, primarily
attributable to the Information Systems & Global Solutions business (the "IS&GS Business") of Lockheed Martin
Corporation acquired during the third quarter of fiscal 2016 and growth in airborne programs. The increase was
partially offset by fiscal 2016 revenues from the divestiture of the heavy construction business, net volume
decreases and lower revenues from our international business.
For fiscal 2016, revenues increased by $2.3 billion, or 49%, compared to the 11-month period ended January 1,
2016, primarily attributable to the acquired IS&GS Business. The revenue increase is also due to revenues from our
international business and increases in fees resulting from the achievement of contract milestones and related profit
write-ups on certain contracts. See "Results of Operations" below for further discussion of our segment results.
Operating Expenses and Income Trend. For fiscal 2017, operating expenses increased by $3.0 billion, or 45%,
compared to fiscal 2016, primarily attributable to the acquired IS&GS Business. Operating margin for fiscal 2017
was 5.5% compared to 5.9% for fiscal 2016. The decrease in operating margin was primarily due to a contract write-
up in fiscal 2016 along with an increase in integration costs and restructuring expenses, partially offset by a
decrease in acquisition costs. For fiscal 2017, our operating income was $559 million, a $142 million increase
compared to fiscal 2016. The increase in operating income was primarily attributable to the operating results of the
acquired IS&GS Business.
For fiscal 2016, operating expenses increased by $2.2 billion, or 51%, compared to the 11-month period ended
January 1, 2016, primarily attributable to the acquired IS&GS Business. Operating margin for fiscal 2016 was 5.9%
compared to 6.8% for the 11-month period ended January 1, 2016. The decrease in operating margin was primarily
due to acquisition and integration costs incurred during fiscal 2016 related to the acquisition of the IS&GS Business.
For fiscal 2016, our operating income was $417 million, a $97 million increase compared to the 11-month period
Leidos Holdings, Inc. Annual Report - 32
PART II
ended January 1, 2016. The increase in operating income was primarily attributable to the operating results of the
acquired IS&GS Business.
From a macroeconomic perspective, our industry is under general competitive pressures due to spending from our
largest customer, the U.S. Government, and has required and will require a higher level of cost management focus
to allow us to remain competitive. Although the current Administration has indicated a desire to increase spending,
primarily in the defense and homeland security sectors, the likelihood, extent and duration of higher spending in
these areas remains unclear. We continue to review our cost structure against our anticipated sales and undertake
cost management actions and efficiency initiatives where necessary.
Lockheed Martin Transaction
On January 26, 2016, Leidos announced that it had entered into a definitive agreement (as amended, the "Merger
Agreement") with Lockheed Martin Corporation ("Lockheed Martin"); Abacus Innovations Corporation, a Delaware
corporation and a wholly owned subsidiary of Lockheed Martin ("Splitco"); and Lion Merger Co., a Delaware
corporation and, at the time of announcement, a wholly owned subsidiary of Leidos ("Merger Sub"), pursuant to
which Leidos would combine with Lockheed Martin’s realigned Information Systems & Global Solutions business in
a Reverse Morris Trust transaction. In connection with the Merger Agreement, Lockheed Martin and Splitco entered
into a Separation Agreement dated January 26, 2016 (as amended, the "Separation Agreement"), pursuant to which
Lockheed Martin would separate the IS&GS Business from Lockheed Martin and transfer the IS&GS Business to
Splitco. The transactions contemplated by the Merger Agreement and the Separation Agreement are referred to
herein as the "Transactions."
On August 16, 2016, the acquisition date, we completed the Transactions. In the Transactions, among other steps,
(i) Lockheed Martin transferred the IS&GS Business to Splitco; (ii) Lockheed Martin offered to Lockheed Martin
stockholders the right to exchange all or a portion of their shares of Lockheed Martin common stock for shares of
Splitco common stock by way of an exchange offer (the "Distribution"); and (iii) Merger Sub merged with and into
Splitco, with Splitco as the surviving corporation (the "Merger") and a wholly owned subsidiary of Leidos.
Additionally, on the closing date of the Transactions, Splitco's name was changed to Leidos Innovations
Corporation. Upon consummation of the Transactions, those Lockheed Martin stockholders who elected to
participate in the exchange offer received approximately 77 million shares of Leidos common stock, which
represented approximately 50.5% of the outstanding shares of Leidos common stock after consummation of the
Transactions. Holders of Leidos shares prior to the transaction held the remaining 49.5% of the outstanding shares
of Leidos common stock immediately after the closing.
Prior to the Distribution, Splitco incurred third-party debt financing in an aggregate principal amount of $1.8 billion
and immediately thereafter, Lockheed Martin transferred the IS&GS Business to Splitco and Splitco made a special
cash payment to Lockheed Martin of $1.8 billion.
In connection with the Transactions, Leidos incurred new indebtedness and assumed Splitco's indebtedness in the
form of term loans in an aggregate principal amount of $690 million and $1.8 billion, respectively, and entered into a
new $750 million senior secured revolving credit facility, which replaced its existing revolving credit facility. See
"Note 12—Debt" for further information regarding the new debt incurred and the new senior revolving credit facility.
In conjunction with the Transactions, Leidos' Board of Directors declared a special dividend of $13.64 per share of
Leidos common stock. Consequently, on August 22, 2016, we paid $993 million to stockholders of record as of
August 15, 2016, and accrued $29 million of dividend equivalents with respect to outstanding unvested equity
awards. See "Note 15—Stock Based Compensation" for further information regarding the modifications made to our
outstanding stock awards as a result of the special dividend.
We incurred $77 million and $46 million of integration costs during fiscal 2017 and fiscal 2016, respectively, and
expect to incur additional integration costs in connection with the Transactions through fiscal 2020.
After the acquisition of the IS&GS Business, we began an initiative to review our cost structure, which included
optimization of our real estate portfolio by vacating facilities that were not necessary for future requirements and
reducing headcount. For fiscal 2017 and 2016, we recognized $37 million and $12 million, respectively, of
restructuring expenses related to this program. The Company anticipates this restructuring program to last through
fiscal 2024 and expects to incur a total of approximately $85 million in connection with these restructuring activities.
Leidos Holdings, Inc. Annual Report - 33
PART II
Spin-off Transaction
In accordance with a distribution agreement, on September 27, 2013 (the "Distribution Date"), Leidos completed a
spin-off of its technical services and enterprise information technology services business into an independent,
publicly traded company named Science Application International Corporation ("New SAIC"). The spin-off was
effected through a tax-free distribution to Leidos' stockholders of 100% of the shares of New SAIC's common stock.
As a result of the spin-off, the results of operations and cash flows of New SAIC have been classified as
discontinued operations for all periods presented.
Divestitures
Discontinued Operations
In addition to the spin-off of New SAIC discussed above, in order to better align our business portfolio with our
strategy, we sold or committed to plans to dispose of certain non-strategic components of our business in fiscal
2015, which are reclassified as discontinued operations for all periods presented. The operating results through the
date of disposal of our discontinued operations and activities related to our distribution agreement with New SAIC
for the periods presented were as follows:
Revenues
Cost of revenues
Selling, general and administrative expenses
Operating loss
Non-operating income
Business Environment and Trends
U.S. Government Markets
12 Months Ended
December 29,
2017
December 30,
2016
(in millions)
11 Months
Ended
January 1,
2016
$
$
$
10 $
10
—
— $
— $
14 $
14
—
— $
— $
17
17
2
(2)
1
In fiscal 2017, we generated approximately 84% of our total revenues from contracts with the U.S. Government,
either as a prime contractor or a subcontractor to other contractors engaged in work for the U.S. Government.
Revenues under contracts with the DoD, including subcontracts under which the DoD is the ultimate purchaser,
represented approximately 47% of our total revenues for fiscal 2017. Accordingly, our business performance is
affected by the overall level of U.S. Government spending, especially national security, homeland security, and
intelligence spending, and the alignment of our service and product offerings and capabilities with current and future
budget priorities of the U.S. Government.
In May 2017, Congress approved an Omnibus Appropriation bill for the 2017 government fiscal year ("GFY"),
providing discretionary funding for the federal government for the remainder of the fiscal year ending September 30,
2017.
On February 9, 2018, Congress passed and the President signed a budget agreement that provides top line funding
for the federal government for the remainder of GFY 2018 and GFY 2019. Congress also extended the GFY 2018
continuing resolution to March 23, 2018, in order to provide Congress time to negotiate differences between the
House and Senate Appropriation bills. The legislation also suspends budget caps and includes a two-year budget
agreement that provides $300 billion in sequestration relief for defense and non-defense spending. Defense
programs will see additional funding of $80 billion and $85 billion in GFY 2018 and GFY 2019, respectively, and
non-defense spending will increase by $63 billion and $68 billion in GFY 2018 and GFY 2019, respectively, over the
caps established in the Budget Control Act of 2011. The legislation also suspends the debt ceiling until March 2019.
Trends in the U.S. Government contracting process, including a shift towards multiple-awards contracts (in which
certain contractors are preapproved using indefinite-delivery/indefinite-quantity ("IDIQ") and U.S. General Services
Administration ("GSA") contract vehicles) and awarding contracts on a low price, technically acceptable basis, have
increased competition for U.S. Government contracts, reduced backlogs by shortening periods of performance on
contracts, and increased pricing pressure. We expect that a majority of the business that we seek in the foreseeable
Leidos Holdings, Inc. Annual Report - 34
PART II
future will be awarded through a competitive bidding process. For more information on these risks and
uncertainties, see “Risk Factors” in Part I of this Annual Report on Form 10-K.
International Markets
Sales to customers in international markets represented 9% of total revenues for fiscal 2017 and fiscal 2016. Our
international customers include foreign governments and their agencies, primarily located in the United Kingdom,
the Middle East and Australia. Our international business increases our exposure to international markets and the
associated international regulatory and geopolitical risks.
Key Performance Measures
The primary financial performance measures we use to manage our business and monitor results of operations are
revenue, operating income, cash flows from operations and diluted EPS. Bookings and backlog are also useful
measures for management and investors to evaluate our performance and potential future revenues. In addition, we
consider business performance by contract type to be useful to management and investors when evaluating our
operating income and margin performance.
Leidos Holdings, Inc. Annual Report - 35
PART II
Results of Operations
Our results of operations for the periods presented were as follows:
12 Months Ended
12 Months
Ended
December 29,
2017
December 30,
2016
Dollar
change
Percent
change
December 30,
2016
11 Months
Ended
January 1,
2016
Dollar
change
Percent
change
(dollars in millions)
$ 10,170
$
8,923
7,043
6,191
$ 3,127
2,732
44 % $
44 %
7,043
6,191
$
4,712
4,146
$ 2,331
2,045
49 %
49 %
388
122
42
10
—
102
37
(13)
559
(166)
393
(29)
364
—
364
(2)
201
187
93 %
201
105
89
44
3
4
90
14
(10)
417
(99)
318
(72)
246
—
246
2
33
(2)
7
(4)
12
23
(3)
37 %
(5)%
NM
(100)%
13 %
164 %
30 %
142
(67)
34 %
68 %
75
24 %
43
118
—
118
(60)%
48 %
— %
48 %
(4)
(200)%
89
44
3
4
90
14
(10)
417
(99)
318
(72)
246
—
246
2
67
29
8
33
—
4
—
320
35
355
(112)
243
(1)
242
—
$
366
$
244
$ 122
50 % $
244
$
242
$
96
22
15
(5)
(29)
90
10
(10)
91 %
33 %
52 %
(63)%
(88)%
100 %
NM
100 %
97
(134)
30 %
NM
(37)
(10)%
40
3
1
4
2
2
(36)%
1 %
100 %
2 %
100 %
1 %
Revenues
Cost of revenues
Selling, general and
administrative
expenses:
General and
administrative
Bid and proposal
Internal research and
development
Bad debt expense
Asset impairment charges
Acquisition and integration
costs
Restructuring expenses
Equity earnings of non-
consolidated
subsidiaries
Operating income
Non-operating (expense)
income, net
Income from continuing
operations before
income taxes
Income tax expense
Income from continuing
operations
Loss from discontinued
operations, net of taxes
Net income
Less: net (loss) income
attributable to non-
controlling interest
Net income attributable to
Leidos Holdings, Inc.
Operating income margin
5.5%
5.9%
5.9%
6.8%
NM – Not meaningful
The consolidated results of operations include revenues attributable to the acquired IS&GS Business of $5.3 billion
and $2.0 billion and operating income of $308 million and $114 million for fiscal 2017 and fiscal 2016, respectively.
Leidos Holdings, Inc. Annual Report - 36
PART II
The increase in revenues in constant currency(1) for fiscal 2016 was 50%, as compared to an actual increase in
revenues of 49%. There was an adverse foreign currency impact attributable to our U.K. business in the Civil
segment as compared to the same period in the prior year. The difference in revenues in constant currency as
compared to the actual increase in revenues for fiscal 2017 was less than half a percent.
Segment and Corporate Results
Defense Solutions
December 29,
2017
December 30,
2016
Dollar
change
Percent
change
December 30,
2016
(dollars in millions)
12 Months Ended
12 Months
Ended
11 Months
Ended
January 1,
2016
Dollar
change
Percent
change
Revenues
Operating income
Operating income margin
$ 4,959
$ 3,843
$ 1,116
29 % $ 3,843
$ 3,009
$
834
307
6.2%
312
8.1%
(5)
(2)%
312
8.1%
260
8.6%
52
28%
20%
Defense Solutions revenues increased $1,116 million, or 29%, for fiscal 2017 as compared to fiscal 2016. The
revenue increase was primarily attributable to the acquired IS&GS Business of $1,146 million and growth in
airborne programs, partially offset by completion of certain contracts, net volume decreases and a contract write-up
in fiscal 2016.
Defense Solutions revenues increased $834 million, or 28%, for fiscal 2016 as compared to the 11-month period
ended January 1, 2016. The revenue increase was primarily attributable to the acquired IS&GS Business of $722
million, growth in certain airborne programs, and a contract-write up in fiscal 2016, partially offset by net volume
decreases and completion of certain contracts.
Defense Solutions operating income decreased $5 million, or 2%, for fiscal 2017 as compared to fiscal 2016. This
decrease in operating income was primarily attributable to a contract write-up in fiscal 2016 and completion of
certain contracts, partially offset by the acquired IS&GS Business of $23 million.
Defense Solutions operating income increased $52 million, or 20%, for fiscal 2016 as compared to the 11-month
period ended January 1, 2016. This increase in operating income was primarily attributable to the acquired IS&GS
Business of $25 million and a contract-write up in fiscal 2016.
Civil
December 29,
2017
December 30,
2016
Dollar
change
Percent
change
December 30,
2016
(dollars in millions)
12 Months Ended
12 Months
Ended
11 Months
Ended
January 1,
2016
Dollar
change
Percent
change
Revenues
Operating income
Operating income margin
NM - Not meaningful
$ 3,409
$ 2,082
$ 1,327
64% $ 2,082
$ 1,141
$
226
6.6%
146
7.0%
80
55%
146
7.0%
33
2.9%
941
113
82%
NM
Civil revenues increased $1,327 million, or 64%, for fiscal 2017 as compared to fiscal 2016. The revenue increase
was primarily attributable to the acquired IS&GS Business of $1,528 million, partially offset by fiscal 2016 revenues
from the divestiture of the heavy construction business, reduced volume on certain contracts and lower revenues
from our international business, including the adverse impact of foreign currency.
(1) The non-GAAP measure of constant currency revenues is used to assess the performance of revenue activity without the effect of foreign
currency exchange rate fluctuations. We calculate revenues on a constant currency basis by translating current period revenue using the
comparable period's foreign currency exchange rates. This calculation is performed for all subsidiaries where the functional currency is not the
U.S. dollar.
Leidos Holdings, Inc. Annual Report - 37
PART II
The adverse impact of foreign currency was primarily due to the movement of the exchange rate between the U.S.
dollar and the British pound.
Civil revenues increased $941 million, or 82%, for fiscal 2016 as compared to the 11-month period ended January
1, 2016. The revenue increase was primarily attributable to the acquired IS&GS Business of $891 million, revenues
from our international business and volume increases on certain contracts, partially offset by fiscal 2016 revenues
from the divestiture of the heavy construction business and the sale of the Plainfield plant, which closed in the
second quarter of the 11-month period ended January 1, 2016.
Civil operating income increased $80 million, or 55%, for fiscal 2017 as compared to fiscal 2016. This increase in
operating income was primarily attributable to the acquired IS&GS Business of $78 million.
Civil operating income increased $113 million for fiscal 2016 as compared to the 11-month period ended January 1,
2016. This increase in operating income was primarily attributable to the acquired IS&GS Business of $48 million,
asset impairments and operating losses associated with the Plainfield plant recorded in the 11-month period ended
January 1, 2016 and a decrease in bad debt expense.
Health
December 29,
2017
December 30,
2016
Dollar
change
Percent
change
December 30,
2016
12 Months Ended
12 Months
Ended
11 Months
Ended
January 1,
2016
Revenues
Operating income
Operating income margin
$ 1,802
$ 1,117
$
228
12.7%
110
9.8%
685
118
(dollars in millions)
61% $ 1,117
$
107%
110
9.8%
556
46
8.3%
Dollar
change
Percent
change
$
561
64
101%
139%
Health revenues increased $685 million, or 61%, for fiscal 2017 as compared to fiscal 2016. The revenue increase
is primarily attributable to the acquired IS&GS Business of $685 million and growth in our federal health business,
partially offset by lower volume in commercial health.
Health revenues increased $561 million, or 101%, for fiscal 2016 as compared to the 11-month period ended
January 1, 2016. The revenue increase is primarily attributable to the acquired IS&GS Business of $358 million and
growth in our federal and commercial health businesses due to new contracts and increased volume due to timing.
Health operating income increased $118 million, or 107%, for fiscal 2017 as compared to fiscal 2016. The increase
in operating income was primarily due to the acquired IS&GS Business of $132 million, partially offset by lower
volume in commercial health.
Health operating income increased $64 million, or 139% for fiscal 2016 as compared to the 11-month period ended
January 1, 2016. The increase in operating income was primarily due to the acquired IS&GS Business of $41
million, growth and higher margins in our federal health business, and lower operating expenses in our commercial
health business.
Corporate
December 29,
2017
December 30,
2016
Dollar
change
Percent
change
December 30,
2016
12 Months Ended
12 Months
Ended
11 Months
Ended
January 1,
2016
Dollar
change
Percent
change
Revenues
Operating loss
NM - Not meaningful
$
— $
1 $
(202)
(151)
(1)
(51)
(dollars in millions)
(100)% $
1 $
6 $
(5)
(83)%
34 %
(151)
(19)
(132)
NM
Corporate operating loss represents corporate costs that are not directly related to the operating performance of the
reportable segments.
Corporate operating loss increased $51 million for fiscal 2017 as compared to fiscal 2016, primarily due to
increases of $31 million of integration costs incurred related to the acquisition of the IS&GS Business and $23
million of restructuring expenses due to severance costs and lease termination expenses. This was partially offset
by a decrease of $19 million of acquisition costs incurred related to the IS&GS Business. The acquisition costs
Leidos Holdings, Inc. Annual Report - 38
PART II
incurred during fiscal 2017 were primarily attributable to a $24 million working capital adjustment recorded as a
result of the settlement agreement reached.
Corporate operating loss increased $132 million for fiscal 2016 as compared to the 11-month period ended January
1, 2016, primarily due to acquisition and integration costs incurred related to the acquisition of the IS&GS Business
of $90 million and an increase in restructuring expenses of $10 million. The increase in operating loss was also
attributable to a $12 million unfavorable change in real estate activity, a $6 million loss recognized on our U.K.
defined benefit pension plan and proceeds received during the 11-month period ended January 1, 2016, related to
the settlement of a litigation matter of $5 million.
Asset Impairment
In March 2015, we entered into a definitive Membership Interest Purchase Agreement (the "Agreement") to sell
100% of our equity membership interest in Plainfield Renewable Energy Holdings, LLC ("Plainfield"). We adjusted
the carrying values of Plainfield's assets to their fair values based on the estimated selling price of the business
pursuant to the terms of the agreement. In the second quarter of the 11-month period ended January 1, 2016,
further negotiations occurred related to the sale of Plainfield resulting in approximately $29 million of impairment
charges. We adjusted the carrying values of Plainfield's assets to their fair values based on the estimated selling
price of the business pursuant to the terms of the amended Agreement that was amended on July 17, 2015. On July
24, 2015, we completed the sale. See "Note 3—Divestitures" within our notes to the consolidated financial
statements for further information on the sale.
Equity earnings of non-consolidated subsidiaries
As a result of the Transactions, we received certain non-controlling ownership interests in equity method
investments. For fiscal 2017, we recorded earnings of $27 million from our equity method investments, partially
offset by amortization of equity method investments of $14 million. For fiscal 2016, we recorded earnings of $10
million from our equity method investments.
Non-Operating (Expense) Income
Non-operating expense increased $67 million for fiscal 2017 as compared to fiscal 2016, primarily due to interest
expense associated with our term loans secured in connection with the Transactions and a $33 million promissory
note impairment that occurred during fiscal 2017. The increase in non-operating expense was partially offset by
favorable year-over-year foreign currency exchange movements, mostly due to the movement of the exchange rate
between the U.S. dollar and the British pound.
Non-operating expense for fiscal 2016 was $99 million as compared to non-operating income of $35 million for the
11-month period ended January 1, 2016. This $134 million increase in non-operating expense was primarily
attributable to the following:
•
•
•
$82 million gain on sale of the remaining building, parcels of land that surround the building, and the multi-
level surface parking garage associated with our former headquarters during the 11-month period ended
January 1, 2016 that did not recur in fiscal 2016;
$35 million of higher interest expense recognized on the new $2.5 billion term loans secured in connection
with the Transactions; and
an $18 million increase in foreign currency exchange losses, mostly due to the movement in exchange
rates between the British pound and U.S. dollar.
Provision for Income Taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the
Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code,
including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring
companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally
eliminating U.S. federal income taxes on dividends from foreign subsidiaries; and (4) limiting the deductibility of
certain executive compensation. See “Note 16—Income Taxes” within our notes to the consolidated financial
statements for further information on the impacts of this legislation.
Leidos Holdings, Inc. Annual Report - 39
PART II
Our effective tax rate was 7.4%, 22.6% and 31.5% in fiscal 2017, fiscal 2016 and the 11-month period ended
January 1, 2016, respectively. The effective tax rate for fiscal 2017 was favorably impacted by the Tax Act’s
reduction of the federal corporate tax rate from 35% to 21% applied to our fiscal 2017 year-end deferred tax
balances, and excess tax benefits related to employee stock-based payment transactions, partially offset by the
impact of certain capitalized transaction costs.
The effective tax rate for fiscal 2016 was favorably impacted by the tax deductibility of the special cash dividend,
related to the Transactions on shares held by the Leidos retirement plan, the income tax benefits of the research tax
credit and the excess tax benefits related to employee share-based payments, partially offset by the impact of
certain capitalized transactions costs related to the Transactions.
The effective tax rate for the 11-month period ended January 1, 2016, was favorably impacted by the release of the
valuation allowance related to the utilization of a capital loss carryforward for capital gains recognized during the
current year as well as the favorable resolution of certain tax contingencies with the tax authorities.
Our valuation allowance for deferred tax assets was $83 million and $102 million as of December 29, 2017 and
December 30, 2016.
Non-controlling Interest
As a result of the Transactions, we received an interest in Mission Support Alliance, LLC ("MSA"), a joint venture
with Jacobs Engineering Group, Inc. and Centerra Group, LLC. We include the financial results for MSA into our
consolidated financial statements. Net loss attributable to non-controlling interest for fiscal 2017 was $2 million,
compared to net income attributable to non-controlling interest of $2 million for fiscal 2016.
Bookings and Backlog
We had net bookings of $9.7 billion and $6.9 billion during fiscal 2017 and fiscal 2016, respectively. Net bookings
represent the estimated amount of revenue to be earned in the future from funded and unfunded contract awards
that were received during the year, net of any adjustments to previously awarded backlog amounts. We calculate
net bookings as the year’s ending backlog, plus the year’s revenues, less the prior year’s ending backlog and any
impacts from foreign currency.
Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts. We
segregate our backlog 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 entities and commercial customers represents the estimated value
on contracts, which may cover multiple future years, under which we are obligated to perform, less
revenues previously recognized on the contracts.
Negotiated Unfunded Backlog. Negotiated unfunded backlog represents estimated amounts of revenue to
be earned in the future from contracts for which funding has not been appropriated and unexercised priced
contract options. Negotiated unfunded backlog does not include future potential task orders expected to be
awarded under IDIQ, GSA Schedule, or other master agreement contract vehicles, with the exception of
certain IDIQ contracts where task orders are not competitively awarded or separately priced but instead are
used as a funding mechanism, and where there is a basis for estimating future revenues and funding on
future task orders is anticipated.
Leidos Holdings, Inc. Annual Report - 40
The estimated value of our total backlog for the periods presented was as follows:
PART II
Defense Solutions:
Funded backlog
Negotiated unfunded backlog
Total Defense Solutions backlog
Civil:
Funded backlog
Negotiated unfunded backlog
Total Civil backlog
Health:
Funded backlog
Negotiated unfunded backlog
Total Health backlog
Total:
Funded backlog
Negotiated unfunded backlog
Total backlog
December 29,
2017
December 30,
2016
(in millions)
$
$
$
$
$
$
$
$
2,384 $
5,285
7,669 $
2,064 $
5,321
7,385 $
595 $
1,827
2,422 $
3,171
4,936
8,107
1,950
5,250
7,200
854
1,575
2,429
5,043 $
12,433
17,476 $
5,975
11,761
17,736
Total backlog at December 29, 2017 and December 30, 2016, included a favorable impact of $167 million and an
unfavorable impact of $638 million, respectively, due to the movements between the U.S. dollar and the British
pound.
Bookings and backlog fluctuate from period to period depending on our success rate in winning contracts and the
timing of contract awards, renewals, modifications and cancellations. Contract awards may be negatively impacted
by ongoing industry-wide delays in procurement decisions and budget cuts by the U.S. Government as discussed in
“Business Environment and Trends” in this Annual Report on Form 10-K.
We expect to recognize a substantial portion of our funded backlog 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. Federal Government customers
may include provisions that allow the customer to cancel at any time. Most of our contracts have cancellation terms
that would permit us to recover all or a portion of our incurred costs and fees for work performed.
Contract Types
Our earnings and profitability may vary materially depending on changes in the proportionate amount of revenues
derived from each type of contract. For a discussion of the types of contracts under which we generate revenue,
see “Business—Contract Types” in Part I of this Annual Report on Form 10-K. Revenues by contract type as a
percentage of our total revenue for the periods presented were as follows:
Cost-reimbursement and fixed price-incentive fee (FP-IF)
Firm-fixed-price (FFP)
Time and materials (T&M) and fixed-price-level-of-effort (FP-LOE)
Total
12 Months Ended
December 29,
2017
December 30,
2016
11 Months
Ended
January 1,
2016
56%
28
16
100%
51%
30
19
100%
51%
27
22
100%
Leidos Holdings, Inc. Annual Report - 41
PART II
Liquidity and Capital Resources
Overview of Liquidity
As of December 29, 2017, we had $390 million in cash and cash equivalents. In addition, in August 2016, we
entered into a secured revolving credit facility which can provide up to $750 million in secured borrowing capacity, if
required. This credit facility replaced the previous unsecured credit facility held that provided $500 million of
borrowing capacity. During fiscal 2017 and fiscal 2016, there were no borrowings outstanding under either of the
credit facilities and we were in compliance with the financial covenants.
In August 2016, our Board of Directors declared a special dividend of $13.64 per share of Leidos common stock.
Consequently, on August 22, 2016, we paid $993 million to stockholders of record as of August 15, 2016, and
accrued $29 million of dividend equivalents with respect to the outstanding unvested equity awards. In addition, we
paid dividends of $198 million, $142 million and $93 million for fiscal 2017, fiscal 2016 and the 11-month period
ended January 1, 2016, respectively.
At December 29, 2017 and December 30, 2016, we had outstanding debt of $3.1 billion and $3.3 billion,
respectively. The notes outstanding as of December 29, 2017, contain financial covenants and customary restrictive
covenants. We were in compliance with all covenants as of December 29, 2017.
In connection with the Transactions, Leidos incurred $2.5 billion of new indebtedness in the form of term loans (see
"Note 2—Acquisitions"). Of the $2.5 billion, $1.8 billion of the term loans was secured by Leidos Innovations prior to
being acquired and the funds were used to finance the special cash payment to Lockheed Martin. The remaining
$690 million of term loans was secured by Leidos to fund the special cash dividend. During fiscal 2017, we made
$76 million of required quarterly payments on our term loans. In addition to the required quarterly payments, we
prepaid $130 million and $275 million on our term loans during fiscal 2017 and fiscal 2016, respectively (see "Note
12—Debt").
In August 2017 and August 2016, we entered into interest rate swap agreements to hedge the cash flows with
respect to $300 million and $1.2 billion of the aggregate principal outstanding on our variable rate senior secured
notes (see "Note 11—Derivative Instruments"). The objective of these instruments is to reduce variability in the
forecasted interest payments of our variable rate secured notes.
We may from time to time seek to retire or purchase our outstanding debt through cash purchases in the open
market, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market
conditions, our liquidity requirements, contractual restrictions, and other factors. The amounts involved may be
material. In addition to the term loan prepayments noted above, we paid $36 million to repurchase and retire a
principal amount of $37 million of outstanding debt in the 11-month period ended January 1, 2016.
Stock repurchases of Leidos common stock may be made on the open market or in privately negotiated
transactions with third parties including through accelerated share repurchase agreements. Whether repurchases
are made and the timing and actual number of shares repurchased depends on a variety of factors including price,
corporate capital requirements, other market conditions and regulatory requirements. The repurchase program may
be accelerated, suspended, delayed or discontinued at any time. During fiscal 2017 and fiscal 2016, there were no
open market repurchases of our common stock.
In the 11-month period ended January 1, 2016, we entered into an Accelerated Share Repurchase ("ASR")
agreement with a financial institution to repurchase shares of our outstanding common stock for an aggregate
purchase price of $100 million, resulting in a delivery of 2.4 million shares, completed during the second quarter of
the 11-month period ended January 1, 2016.
For the next 12 months, we anticipate that we will be able to meet our liquidity needs, including servicing our debt,
through cash generated from operations, available cash balances and, if needed, borrowings from our revolving
credit facility.
Leidos Holdings, Inc. Annual Report - 42
PART II
Summary of Cash Flows
The following table summarizes cash flow information for the periods presented:
12 Months Ended
December 29,
2017
December 30,
2016
(in millions)
11 Months
Ended
January 1,
2016
Net cash provided by operating activities of continuing operations
$
526 $
449 $
382
Net cash (used in) provided by investing activities of continuing
operations
Net cash used in financing activities of continuing operations
Net decrease in cash, cash equivalents and restricted cash from
discontinued operations
Net increase (decrease) in cash, cash equivalents and restricted cash
$
(71)
(429)
26
(751)
—
26 $
(1)
(277) $
70
(251)
(1)
200
Net cash provided by operating activities increased $77 million for fiscal 2017 as compared to fiscal 2016. The
increase was primarily due to the favorable timing of working capital changes, partially offset by higher integration
and restructuring costs and higher payments for interest and taxes.
Net cash provided by operating activities increased $67 million for fiscal 2016 as compared to the 11-month period
ended January 1, 2016. The increase was primarily due to timing of collections of receivables and early funding for
employee benefit programs of $30 million in the 11-month period ended January 1, 2016, partially offset by
payments for acquisition and integration expenses, pre-funding IS&GS expenses in accordance with the transition
services agreement with Lockheed Martin and increased interest payments in fiscal 2016.
Net cash used in investing activities increased $97 million for fiscal 2017 as compared to fiscal 2016. The increase
was primarily due to cash acquired as part of the acquisition of the IS&GS Business in fiscal 2016, proceeds
received from the divestiture of the heavy construction business in fiscal 2016 and higher purchases of property,
plant and equipment.
Net cash provided by investing activities decreased by $44 million for fiscal 2016 as compared to the 11-month
period ended January 1, 2016. The decrease was primarily due to the sale of the remaining building, parcels of land
and the multi-level surface parking garage of our former headquarters of $70 million in the 11-month period ended
January 1, 2016. This was partially offset by cash acquired as part of the acquisition of the IS&GS Business of $25
million in fiscal 2016 and $13 million paid for income tax related matters in connection with a prior acquisition in the
11-month period ended January 1, 2016. We did not have cash flows from investing activities for the month of
January 2015.
Net cash used in financing activities decreased $322 million for fiscal 2017 as compared to fiscal 2016. The
decrease was primarily due to a special dividend cash payment in connection with the Transactions of $993 million
in fiscal 2016 and decreased payments of long-term debt of $68 million, partially offset by net proceeds from debt
issuance activity of $660 million in fiscal 2016 as well as higher dividend payments of $56 million and less proceeds
from issuances of stock of $12 million.
Net cash used in financing activities increased $500 million for fiscal 2016 as compared to the 11-month period
ended January 1, 2016. The increase was primarily due to a special cash dividend payment in connection with the
Transactions of $993 million, increased payments of long-term debt of $238 million and increased dividend
payments of $49 million, partially offset by net proceeds from debt issuance activity of $660 million, a decrease in
stock repurchases of $94 million primarily related to the May 2015 Accelerated Share Repurchase, and additional
proceeds from issuances of stock of $19 million.
Leidos Holdings, Inc. Annual Report - 43
PART II
Off-Balance Sheet Arrangements
We have outstanding performance guarantees and cross-indemnity agreements in connection with certain aspects
of our business. We also have letters of credit outstanding principally related to guarantees on contracts and surety
bonds outstanding principally related to performance and payment bonds as described in "Note 22—Commitments"
of the notes to consolidated financial statements contained within this Annual Report on Form 10-K. These
arrangements have not had, and management does not believe it is likely that they will in the future have, a material
effect on our liquidity, capital resources, operations or financial condition.
Contractual Obligations
The following table summarizes, as of December 29, 2017, our obligations to make future payments pursuant to
certain contracts or arrangements and provides an estimate of the fiscal years in which these obligations are
expected to be satisfied:
Contractual obligations (1):
Long-term debt (including current portion) (2)
Operating lease obligations
Capital lease obligations
Other long-term liabilities (3)
Total contractual obligations
Total
2018
2019
2020
2021
2022
2023 &
Thereafter
(in millions)
$4,245 $ 174 $ 194 $ 710 $ 212 $ 727 $ 2,228
495
6
67
140
3
5
107
3
15
78
—
6
53
—
6
39
—
6
78
—
29
$4,813 $ 322 $ 319 $ 794 $ 271 $ 772 $ 2,335
(1) We have excluded purchase orders for services or products to be delivered pursuant to U.S. Government contracts for which we are entitled
to full recourse under normal contract termination clauses.
(2) Includes total interest payments on our outstanding debt. Interest payments represent $122 million, $126 million, $128 million, $99 million and
$85 million of the balance for fiscal 2018, fiscal 2019, fiscal 2020, fiscal 2021 and fiscal 2022, respectively, and $535 million for fiscal 2023 and
thereafter. The total interest payments on our outstanding term loan debt are calculated based on the stated variable rates of the notes as of
December 29, 2017. The total interest payments on our outstanding senior fixed rate secured and unsecured notes are calculated based on
the stated fixed rates and do not reflect the variable interest component due to the interest rate swap agreements.
(3) Other long-term liabilities were allocated by fiscal year as follows: liabilities under deferred compensation arrangements are based upon the
average annual payments in prior years upon termination of employment by participants and other liabilities are based on the fiscal year that
the liabilities are expected to be realized. The table above does not include income tax liabilities for uncertain tax positions of $7 million and $2
million of additional tax liabilities, as we are not able to reasonably estimate the timing of payments in individual years due to uncertainties in
the timing of audit outcomes and when settlements will become due. There is no obligation included for our foreign defined benefit pension
plan, as the plan is overfunded by $9 million as of December 29, 2017. For a discussion of potential changes in these pension obligations, see
"Note 17—Retirement Plans" of the notes to consolidated financial statements contained within this Annual Report on Form 10-K.
Commitments and Contingencies
We are subject to a number of reviews, investigations, claims, lawsuits, other uncertainties and future obligations
related to our business. For a discussion of these items, see "Note 18—Leases," "Note 21—Contingencies" and
"Note 22—Commitments" of the notes to the consolidated financial statements contained within this Annual Report
on Form 10-K.
Leidos Holdings, Inc. Annual Report - 44
PART II
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated
financial statements, which are prepared in accordance with accounting principles generally accepted in the United
States of America ("GAAP"). The preparation of these financial statements in accordance 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. Our estimates and assumptions have been prepared by management on the basis of the most current and
best available information. The results of these estimates form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these
estimates under different assumptions and conditions.
We have identified the following accounting policies as critical because they require significant judgments and
assumptions about highly complex and inherently uncertain matters and the use of reasonably different estimates
and assumptions could have a material impact on our results of operations or financial condition.
•
•
Revenue Recognition
Business Combinations
• Goodwill Impairment
•
•
Intangible Assets Impairment
Income Taxes
Revenue Recognition
We generate our revenues from various types of contracts, which include firm-fixed-price, time-and-materials, fixed-
price-level-of-effort, cost-plus-fixed-fee, cost-plus-award-fee, cost-plus-incentive-fee and fixed-price-incentive fee
contracts.
Firm-fixed-price contracts—Revenues and fees on these contracts that are system integration or engineering in
nature are primarily recognized using the percentage-of-completion method of accounting utilizing the cost-to-cost
method. The completed contract method is utilized when reasonable and reliable cost estimates for a project cannot
be made.
Time-and-materials contracts—Revenue is recognized on time-and-materials contracts based on the hours
provided in performance under the contract multiplied by the negotiated contract billing rates, plus the negotiated
contract billing rate of any allowable material and subcontract costs and out-of-pocket expenses.
Fixed-price-level-of-effort contracts ("FP-LOE")—These contracts are substantially similar to time-and-materials
contracts except they require a specified level of effort over a stated period of time. Accordingly, we recognize
revenue on FP-LOE contracts with the U.S. Government in a manner similar to time-and-materials contracts in
which we measure progress toward completion based on the hours provided in performance under the contract
multiplied by the negotiated contract billing rates plus the negotiated contract billing rate of any allowable material
costs and out-of-pocket expenses.
Cost-plus-fixed-fee contracts—Revenue is recognized on cost-plus-fixed-fee contracts with the U.S. Government on
the basis of partial performance equal to costs incurred plus an estimate of applicable fees earned as we become
contractually entitled to reimbursement of costs and the applicable fees.
Cost-plus-award-fee/cost-plus-incentive fee contracts—Revenues and fees on these contracts with the U.S.
Government are recognized using the percentage-of-completion method of accounting using the cost-to-cost
method. We include an estimate of the ultimate incentive or award fee to be received on the contract in the estimate
of contract revenues for purposes of applying the percentage-of-completion method of accounting.
Fixed-price-incentive fee ("FP-IF") contracts—Contracts are substantially similar to cost-plus-incentive-fee contracts
recognized using the percentage-of-completion method of accounting except they require specified targets for cost
and profit, price ceiling (but not a profit ceiling or floor) and profit adjustment formula. Under an FP-IF contract, the
allowable costs incurred are eligible for reimbursement but are subject to a cost-share arrangement, which affects
Leidos Holdings, Inc. Annual Report - 45
PART II
profitability. Generally, if our costs exceed the contract target cost or are not allowable under the applicable
regulations, we may not be able to obtain reimbursement for all costs and may have our fees reduced or eliminated.
Revenues from services and maintenance contracts, notwithstanding contract type, are recognized over the term of
the respective contracts as the services are performed and revenue is earned. Revenues from unit-priced contracts
are recognized as transactions are processed based on objective measures of output. Revenues from the sale of
manufactured products are recorded upon passage of title and risk of loss to the customer, which is generally upon
delivery, provided that all other requirements for revenue recognition have been met.
We also use the efforts-expended method of percentage-of-completion using measures such as labor dollars for
measuring progress toward completion in situations in which this approach is more representative of the progress
on the contract. For example, the efforts-expended method is utilized when there are significant amounts of
materials or hardware procured for the contract that is not representative of progress on the contract. Additionally,
we utilize the units-of-delivery method under percentage-of-completion on contracts where separate units of output
are produced. Under the units-of-delivery method, revenue is generally recognized when the units are delivered to
the customer, provided that all other requirements for revenue recognition have been met.
We also evaluate contracts for multiple elements, and when appropriate, separate the contracts into separate units
of accounting for revenue recognition. Revenues generated from product sales do not represent a material amount
of our total revenues.
We generally provide for anticipated losses on contracts by recording an expense during the period in which the
losses are determined. Amounts billed and collected but not yet recognized as revenues under contracts are
deferred. Contract costs incurred for U.S. Government contracts, including indirect costs, are subject to audit and
adjustment through negotiations between us and government representatives. Our indirect cost audits by the
Defense Contract Audit Agency remain open for fiscal 2012 and subsequent fiscal years for Leidos, Inc. and for
fiscal 2011 and subsequent fiscal years for Leidos Innovations. Revenues on U.S. Government contracts have been
recorded in amounts that are expected to be realized upon final settlement.
Contract claims are unanticipated additional costs incurred but not provided for in the executed contract price that
we seek to recover from the customer. Such costs are expensed as incurred. Additional revenue related to contract
claims is recognized when the amounts are awarded by the customer. Un-priced change orders are included in
revenue when they are probable of recovery in an amount at least equal to the cost.
On certain contracts where we are not the primary obligor, such as the provision of administrative oversight and/or
management of government-owned facilities or support services related to other vendor's products, we recognize as
revenues the net management fee associated with the services and exclude from our income statement the gross
sales and costs associated with the facility or other vendor's products.
Changes in Estimates on Contracts
Changes in estimates related to long-term contracts accounted for using the percentage of completion 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 the acquisition of the IS&GS Business, where the
adjustment is for the period commencing from the date of acquisition. Changes in these estimates can occur over
the contract performance period for a variety of reasons, including changes in contract scope, contract cost
estimates and estimated incentive or award fees.
Changes in estimates on contracts for the periods presented were as follows:
Net favorable impact to income from continuing operations before
taxes
Impact on diluted EPS from continuing operations attributable to
Leidos common stockholders
12 Months Ended
December 29,
2017
December 30,
2016
11 Months
Ended
January 1,
2016
(in millions, except for per share amounts)
$
$
103 $
37 $
18
0.41 $
0.22 $
0.14
Leidos Holdings, Inc. Annual Report - 46
PART II
The impact on diluted EPS from continuing operations attributable to Leidos common stockholders is calculated
using our statutory tax rate.
Business Combinations
The accounting for business combinations requires management to make judgments and estimates of the fair value
of assets acquired, including the identification and valuation of intangible assets, as well as the liabilities and
contingencies assumed. Such judgments and estimates directly impact the amount of goodwill recognized in
connection with each acquisition.
Goodwill Impairment
Goodwill represents the excess of the fair value of consideration transferred, plus the fair value of any non-
controlling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the
acquisition date. Goodwill is not amortized, but instead is tested annually for impairment at the reporting unit level
and tested more frequently if events or circumstances indicate that the carrying value may not be recoverable.
During fiscal 2017, we had five reporting units for the purpose of testing goodwill for impairment. Our policy is to
perform our annual goodwill impairment evaluation as of the first day of the fourth quarter of our fiscal year.
In January 2017, a new accounting standard was issued related to the evaluation of goodwill impairment. Goodwill
was previously evaluated for impairment either using a qualitative assessment option, step zero, or a two-step
quantitative approach depending on the facts and circumstances of a reporting unit. The new standard eliminated
the second step from goodwill impairment testing. We adopted the new standard during the first quarter of 2017.
When performing a qualitative assessment, we consider factors including, but not limited to, current macroeconomic
conditions, industry and market conditions, cost factors, financial performance and other events relevant to the
entity or reporting unit under evaluation to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. If we determine that it is more likely than not that a reporting unit’s fair
value is less than its carrying amount, a quantitative goodwill impairment test is performed. We performed a
qualitative analysis for certain of our reporting units and a quantitative analysis for the remaining reporting units for
fiscal 2016. A quantitative analysis was performed for all reporting units for fiscal 2017.
Under previous guidance, when evaluating the first step of the two-step quantitative goodwill impairment test, the
estimated fair value of each reporting unit is compared to its carrying value. If the estimated fair value of a reporting
unit is more than its carrying value, no further analysis was required. If the estimated fair value of a reporting unit is
less than its carrying value, a second step is performed to compute the amount of the impairment by determining an
implied fair value of goodwill. The implied fair value of goodwill is the residual fair value derived by deducting the fair
value of a reporting unit’s identifiable assets and liabilities from its estimated fair value calculated in the first step. If
the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we record an impairment charge
equal to the difference.
Under the new guidance, goodwill is impaired for the amount by which a reporting unit's carrying value exceeds its
fair value, up to the carrying value of goodwill.
We estimate the fair value of each reporting unit using both market and income approaches when a quantitative
analysis is performed. To determine the fair value of the reporting units, the outputs from both methods are equally
weighted.
The market approach is a technique where the fair value is calculated based on fair values of publicly-traded
companies that provide a reasonable basis of comparison with the reporting unit. Valuation ratios are selected that
relate market prices to selected financial metrics from comparable companies. These ratios are applied after
consideration of adjustments and weightings related to financial position, growth, volatility, working capital
movement, and other factors. Due to the fact that stock prices of comparable companies represent minority
interests we also consider an acquisition control premium to reflect the impact of additional value associated with a
controlling interest.
The income approach is a technique where the fair value is calculated based on present value future cash flows
using risk-adjusted discount rates, which represent the weighted-average cost of capital ("WACC") for each
reporting unit. Determination of WACC includes assessing the cost of equity and debt as of the valuation date. In
addition, a terminal value is developed for forecasted future cash flows beyond the projection period discounted
Leidos Holdings, Inc. Annual Report - 47
PART II
back to the present value. The forecasts used in our estimation of fair value are developed by management based
on business and market considerations.
The goodwill impairment test process and valuation model is based upon certain key assumptions that require the
exercise of significant judgment and assumptions including the use of appropriate financial projections, economic
expectations, WACC, expected long-term growth rates, as well as using available market data. Significant changes
to these estimates and assumptions could adversely impact our conclusions and actual future results may differ
from the estimates. In addition, the identification of reporting units and the allocation of assets and liabilities to the
reporting units when determining the carrying value of each reporting unit also requires judgment.
Our annual goodwill impairment analysis for fiscal 2017 indicated the estimated fair values of all of our reporting
units exceeded their their carrying values.
By definition, assumptions used in estimating the fair value of a reporting unit are judgmental and inherently
uncertain. A significant change in the economic conditions of a reporting unit, such as declines in business
performance, changes in government fiscal policies, deterioration in market conditions, adverse estimates of
regulatory or legislative changes or increases in the estimated cost of equity, could cause the estimated fair values
of our reporting units to decline in the future, and increase the risk of a goodwill impairment charge to earnings in a
future period.
Intangible Assets Impairment
Intangible assets with finite lives are assessed for impairment whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Intangible assets with indefinite lives are not amortized but
are assessed for impairment at the beginning of the fourth quarter and whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Additionally, indefinite-lived intangible assets
are not being amortized until such time that the useful life is determined to no longer be indefinite.
In the 11-month period ended January 1, 2016, we recognized intangible asset impairment charges of $4 million.
There were no intangible asset impairment charges recognized in fiscal 2017 and fiscal 2016. The carrying value of
intangible assets as of December 29, 2017, was $856 million.
Income Taxes
We account for income taxes under the asset and liability method of accounting, which requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities. Under this method, changes in tax rates and laws are
recognized in income in the period such changes are enacted. The provision for federal, state, foreign and local
income taxes is calculated on income before income taxes based on current tax law and includes the cumulative
effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Such
provision differs from the amounts currently payable because certain items of income and expense are recognized
in different reporting periods for financial reporting purposes than for income tax purposes.
Recording our provision for income taxes requires management to make significant judgments and estimates for
matters whose ultimate resolution may not become known until the final resolution of an examination by the IRS or
state agencies. Additionally, recording liabilities for uncertain tax positions involves significant judgment in
evaluating our tax positions and developing our best estimate of the taxes ultimately expected to be paid.
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In
making such determination, we consider all available positive and negative evidence, including future reversals of
existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of
operations. If we were to determine that we would be able to realize our deferred income tax assets in the future in
excess of their net recorded amount or would no longer be able to realize our deferred income tax assets in the
future as currently recorded, we would make an adjustment to the valuation allowance which would decrease or
increase the provision for income taxes.
We also recognize liabilities for uncertain tax positions when it is more likely than not that a tax position will not be
sustained upon examination and settlement with various taxing authorities. Liabilities for uncertain tax positions are
measured based upon the largest amount of benefit that is greater than 50% likely to be realized upon ultimate
settlement. We have experienced years when liabilities for uncertain tax positions were settled for amounts different
Leidos Holdings, Inc. Annual Report - 48
PART II
from recorded amounts as described in "Note 16—Income Taxes" of the notes to the consolidated financial
statements contained within this Annual Report on Form 10-K.
Recently Adopted and Issued Accounting Pronouncements
For a discussion of these items, see "Note 1—Summary of Significant Accounting Policies" of the notes to the
consolidated financial statements contained with this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks in the normal course of business. Our current market risk exposures are
primarily related to interest rates and foreign currency fluctuations. The following information about our market
sensitive financial instruments contains forward-looking statements.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to long-term debt obligations and
derivatives. Our policy authorizes, with Board of Directors' approval, the limited use of derivative instruments to
hedge specific interest rate risks.
Debt and derivatives
At December 29, 2017, and December 30, 2016, we had $3.1 billion and $3.3 billion, respectively, of fixed and
variable rate debt. During fiscal 2016, in connection with the acquisition of the IS&GS Business, Leidos, Inc.
secured a new term loan of $690 million. As a result of the acquisition, Leidos assumed the IS&GS Business' term
loans of $1.8 billion, which were obtained by the IS&GS Business immediately prior to the Transactions. These
senior secured term loans have variable stated interest rates that are determined based on the LIBOR rate plus a
margin. As a result, we may experience fluctuations in interest expense.
During fiscal 2017 and fiscal 2016, we entered into interest rate swap agreements to hedge the cash flows with
respect to $300 million and $1.2 billion, respectively, of our variable rate senior secured term loans. Under the terms
of the interest rate swap agreements, which mature in August 2022 and December 2021, respectively, we will
receive variable interest payments based on the one-month LIBOR rate and will pay interest at a fixed rate of 1.66%
and 1.08%, respectively. The interest rate swap agreements effectively converted a portion of our variable rate
borrowings to fixed rate borrowings. As of December 29, 2017, and December 30, 2016, the fair value of our
interest rate swap agreements with respect to our variable rate senior secured loans was $37 million and $26
million, respectively.
Additionally, we have interest rate swap agreements with respect to all of the $450 million aggregate principal
outstanding on our fixed rate 4.45% notes maturing in December 2020. The interest rate swap agreements
effectively converted a portion of our fixed-rate debt to floating-rate debt tied to the changes in the six-month LIBOR
benchmark interest rate. As a result, we may experience fluctuations in interest expense. Under the terms of the
interest rate swap agreements, we will receive semi-annual interest payments at the coupon rate of 4.45% and will
pay variable interest based on the six-month LIBOR rate. As of December 29, 2017, and December 30, 2016, the
fair value of our interest rate swaps with respect to our fixed rate debt was an immaterial amount and $3 million,
respectively.
The counterparties to these agreements are financial institutions. We do not hold or issue derivative financial
instruments for trading or speculative purposes. We cannot predict future market fluctuations in interest rates and
their impact on our interest rate swaps. For fiscal 2017 and fiscal 2016, a hypothetical 10% movement in the six-
month LIBOR rate would have less than an $8 million and $6 million impact, respectively, on our annual interest
expense due to the interest rate swaps. For fiscal 2017 and fiscal 2016, a hypothetical 10% movement in the one-
month LIBOR rate would have less than an $11 million and $3 million impact on our annual interest expense due to
the interest rate swaps and variable rate debt. For additional information related to our interest rate swap
agreements and debt, see "Note 11—Derivative Instruments" and "Note 12—Debt," respectively, to the consolidated
financial statements contained in this Annual Report.
Leidos Holdings, Inc. Annual Report - 49
PART II
Cash and Cash Equivalents
As of December 29, 2017, and December 30, 2016, our cash and cash equivalents included investments in several
large institutional money market funds and bank deposits. For fiscal 2017 and fiscal 2016, a hypothetical 10%
interest rate movement would have less than a $2 million impact on the value of our holdings or on interest income
for both periods.
Foreign Currency Risk
Although the majority of our transactions are denominated in U.S. dollars, some of our transactions are
denominated in foreign currencies. Our foreign currency exchange rate risk relates to receipts from customers,
payments to suppliers and certain intercompany transactions denominated in currencies other than our (or one of
our subsidiaries') functional currency. Our foreign operations represented 9% of total revenues for both fiscal 2017
and fiscal 2016.
Leidos Holdings, Inc. Annual Report - 50
Item 8. Financial Statements and Supplementary Data
PART II
LEIDOS HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 29, 2017 and December 30, 2016
Consolidated Statements of Income for the fiscal years ended December 29, 2017 and December
30, 2016 and the 11-month period ended January 1, 2016
Consolidated Statements of Comprehensive Income for the fiscal years ended December 29, 2017
and December 30, 2016 and the 11-month period ended January 1, 2016
Consolidated Statements of Equity for the fiscal years ended December 29, 2017 and December 30,
2016 and the 11-month period ended January 1, 2016
Consolidated Statements of Cash Flows for the fiscal years ended December 29, 2017 and
December 30, 2016 and the 11-month period ended January 1, 2016
Notes to Consolidated Financial Statements
Page
52
53
54
55
56
57
59
Financial statement schedules are omitted because they are not applicable or the required information is presented
in the consolidated financial statements or the notes thereto.
Leidos Holdings, Inc. Annual Report - 51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Leidos Holdings, Inc.
Reston, Virginia
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Leidos Holdings, Inc. and subsidiaries (the
"Company") as of December 29, 2017 and December 30, 2016, the related consolidated statements of income,
comprehensive income, equity, and cash flows, for the fiscal years ended December 29, 2017 and December 30,
2016, and the 11-month period ended January 1, 2016 and the related notes (collectively referred to as the
"financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial
position of the Company as of December 29, 2017, December 30, 2016, and the results of its operations and its
cash flows for the fiscal years ended December 29, 2017 and December 30, 2016, and the 11-month period ended
January 1, 2016, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company's internal control over financial reporting as of December 29, 2017, based on
criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 23, 2018, expressed an unqualified
opinion on the Company's internal control over financial reporting.
Emphasis of Matter
As discussed in Note 1 to the consolidated financial statements, effective for the 11-month period ended January 1,
2016, the Company changed its 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 prior period was an 11-month transition period which began on
January 31, 2015 and ended on January 1, 2016.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
McLean, Virginia
February 23, 2018
We have served as the Company's auditor since fiscal 2000.
Leidos Holdings, Inc. Annual Report - 52
LEIDOS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets:
Cash and cash equivalents
Receivables, net
Inventory, prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Intangible assets, net
Goodwill
Deferred tax assets
Other assets
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued liabilities
Accrued payroll and employee benefits
Dividends payable
Income taxes payable
Long-term debt, current portion
Total current liabilities
Long-term debt, net of current portion
Deferred tax liabilities
Other long-term liabilities
Commitments and contingencies (Notes 18, 21 and 22)
Stockholders’ equity:
Preferred stock, $.0001 par value,10 million shares authorized and no shares issued
and outstanding at December 29, 2017, and December 30, 2016
Common stock, $.0001 par value, 500 million shares authorized, 151 million and
150 million shares issued and outstanding at December 29, 2017, and December
30, 2016, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income (loss)
Total Leidos stockholders’ equity
Non-controlling interest
Total equity
December 29,
2017
December 30,
2016
(in millions)
$
$
$
$
390 $
1,831
453
2,674
232
856
4,974
—
254
8,990 $
1,639 $
487
17
4
55
2,202
3,056
220
129
376
1,657
348
2,381
259
1,589
4,622
16
265
9,132
1,427
483
23
21
62
2,016
3,225
540
204
—
—
—
3,344
(7)
33
3,370
13
3,383
8,990 $
—
3,316
(177)
(4)
3,135
12
3,147
9,132
See accompanying notes to consolidated financial statements.
Leidos Holdings, Inc. Annual Report - 53
LEIDOS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
12 Months Ended
December 29,
2017
December 30,
2016
11 Months
Ended
January 1,
2016
(in millions, except per share amounts)
10,170 $
Revenues
Cost of revenues
Selling, general and administrative expenses
Bad debt expense
Acquisition and integration costs
Asset impairment charges
Restructuring expenses
Equity earnings of non-consolidated subsidiaries
Operating income
Interest income
Interest expense
Other (expense) income, net
Income from continuing operations before income taxes
Income tax expense
Income from continuing operations
Discontinued operations:
Loss from discontinued operations before income taxes
Loss from discontinued operations
Net income
Less: net (loss) income attributable to non-controlling interest
Net income attributable to Leidos common stockholders
Earnings per share:
Basic:
Income from continuing operations attributable to Leidos common
stockholders
Discontinued operations, net of taxes
Net income attributable to Leidos common stockholders
Diluted:
Income from continuing operations attributable to Leidos common
stockholders
Discontinued operations, net of taxes
Net income attributable to Leidos common stockholders
$
$
$
$
$
$
8,923
552
10
102
—
37
(13)
559
8
(148)
(26)
393
(29)
364
—
—
364
(2)
366 $
2.41 $
—
2.41 $
2.38 $
—
2.38 $
7,043 $
6,191
334
3
90
4
14
(10)
417
10
(96)
(13)
318
(72)
246
4,712
4,146
201
8
—
33
4
—
320
4
(53)
84
355
(112)
243
—
—
246
2
244 $
2.39 $
—
2.39 $
2.35 $
—
2.35 $
(1)
(1)
242
—
242
3.33
(0.01)
3.32
3.28
(0.01)
3.27
See accompanying notes to consolidated financial statements.
Leidos Holdings, Inc. Annual Report - 54
LEIDOS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
Other comprehensive income, net of taxes:
Foreign currency translation adjustments
Unrecognized gain on derivative instruments
Pension liability adjustments
Total other comprehensive income, net of taxes
Comprehensive income
Less: comprehensive (loss) income attributable to non-controlling
interest
Comprehensive income attributable to Leidos common stockholders
$
12 Months Ended
December 29,
2017
December 30,
2016
(in millions)
11 Months
Ended
January 1,
2016
$
364 $
246 $
242
24
4
9
37
401
(2)
403 $
(7)
14
(3)
4
250
2
248 $
(1)
1
3
3
245
—
245
See accompanying notes to consolidated financial statements.
Leidos Holdings, Inc. Annual Report - 55
LEIDOS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
Shares of
common
stock
Additional
paid-in
capital
Accumulated
deficit
Leidos
Accumulated
Holdings, Inc.
other
stockholders'
comprehensive
equity
income (loss)
(in millions, except for per share amounts)
Non-
controlling
interest
Total
74
—
—
1
(3)
—
—
—
72
—
—
1
—
—
1,433
—
—
7
(118)
—
1
30
1,353
—
—
36
(24)
—
— (1,022)
35
—
77
—
150
2,938
—
3,316
—
—
1
—
—
—
—
—
—
16
(31)
—
43
—
(424)
242
—
—
—
(95)
—
—
(277)
244
—
—
—
(144)
—
—
—
—
(177)
366
—
—
—
(196)
—
—
(11)
—
3
—
—
—
—
—
(8)
—
4
—
—
—
—
—
—
—
(4)
—
37
—
—
—
—
—
998
242
3
7
(118)
(95)
1
30
1,068
244
4
36
(24)
(144)
—
—
—
—
—
—
—
—
—
2
—
—
—
—
998
242
3
7
(118)
(95)
1
30
1,068
246
4
36
(24)
(144)
(1,022)
— (1,022)
35
2,938
—
3,135
366
37
16
(31)
(196)
43
—
—
—
10
12
(2)
—
—
—
—
—
3
35
2,938
10
3,147
364
37
16
(31)
(196)
43
3
151 $ 3,344 $
(7) $
33 $
3,370 $
13 $ 3,383
Balance at January 30, 2015
Net income
Other comprehensive income,
net of taxes
Issuances of stock (less
forfeitures)
Repurchases of stock and
other
Dividends of $1.28 per
common share
Adjustments for income tax
benefits from stock-based
compensation
Stock-based compensation
Balance at January 1, 2016
Net income
Other comprehensive income,
net of taxes
Issuances of stock (less
forfeitures)
Repurchases of stock and
other
Dividends of $1.28 per share
Special cash dividend of
$13.64 per share
Stock-based compensation
Stock issued for the IS&GS
Business acquisition
Equity interest acquired
Balance at December 30, 2016
Net income (loss)
Other comprehensive income,
net of taxes
Issuances of stock (less
forfeitures)
Repurchases of stock and
other
Dividends of $1.28 per share
Stock-based compensation
Adjustment to original
purchase price allocation
Balance at December 29,
2017
See accompanying notes to consolidated financial statements.
Leidos Holdings, Inc. Annual Report - 56
LEIDOS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operations:
Net income
Income from discontinued operations
Adjustments to reconcile net income to net cash provided by
continuing operations:
Depreciation and amortization
Amortization of equity method investments
Stock-based compensation
Asset impairment charges
Promissory note impairment
Gain on a real estate sale
Bad debt expense
Non-cash interest expense
Other
Change in assets and liabilities, net of effects of acquisitions and
dispositions:
Receivables
Inventory, prepaid expenses and other current assets
Accounts payable and accrued liabilities
Accrued payroll and employee benefits
Deferred income taxes and income taxes receivable/payable
Other long-term assets/liabilities
Net cash provided by operating activities of continuing operations
Cash flows from investing activities:
Payments for property, plant and equipment
Acquisitions of businesses
Payments on accrued purchase price related to prior acquisition
Net proceeds from sale of assets
Proceeds from disposition of business
Other
Net cash (used in) provided by investing activities of continuing
operations
12 Months Ended
December 29,
2017
December 30,
2016
(in millions)
11 Months
Ended
January 1,
2016
$
364 $
—
246 $
—
242
1
336
122
14
43
—
33
—
10
12
9
(191)
(76)
152
8
(151)
(37)
526
(81)
—
—
8
—
2
(71)
—
35
4
—
—
3
4
(7)
123
(98)
(25)
26
36
(20)
449
(29)
25
—
3
23
4
26
41
—
30
33
—
(82)
8
1
(3)
(19)
(14)
102
5
81
(44)
382
(27)
—
(13)
79
27
4
70
Leidos Holdings, Inc. Annual Report - 57
CONSOLIDATED STATEMENTS OF CASH FLOWS [CONTINUED]
LEIDOS HOLDINGS, INC.
12 Months Ended
December 29,
2017
December 30,
2016
(in millions)
11 Months
Ended
January 1,
2016
Cash flows from financing activities:
Payments of long-term debt
Payments on real estate financing transaction
Proceeds from debt issuance
Payments for debt issuance and modification costs
Proceeds from issuances of stock
Repurchases of stock and other
Special cash dividend payment
Dividend payments
Other
Net cash used in financing activities of continuing operations
Net increase (decrease) in cash, cash equivalents and restricted cash
from continuing operations
Cash flows from discontinued operations:
Net cash used in operating activities of discontinued operations
Net cash (used in) provided by investing activities of discontinued
operations
Net decrease in cash, cash equivalents and restricted cash from
discontinued operations
Net increase (decrease) in cash, cash equivalents and restricted cash
(209)
—
—
(4)
13
(31)
—
(198)
—
(429)
26
—
—
—
26
Cash, cash equivalents and restricted cash at beginning of year
Cash, cash equivalents and restricted cash at end of year
396
422 $
$
See accompanying notes to consolidated financial statements.
(277)
—
690
(30)
25
(24)
(993)
(142)
—
(751)
(276)
—
(1)
(1)
(277)
673
396 $
(39)
(8)
—
—
6
(118)
—
(93)
1
(251)
201
(7)
6
(1)
200
473
673
Leidos Holdings, Inc. Annual Report - 58
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Summary of Significant Accounting Policies
Nature of Operations and Basis of Presentation
Leidos Holdings, Inc., a Delaware corporation ("Leidos") is a holding company whose direct 100%-owned
subsidiaries and principal operating companies are Leidos, Inc. and Leidos Innovations Corporation ("Leidos
Innovations"). Leidos is a FORTUNE 500® science, engineering and information technology company that makes
the world healthier, safer and more efficient by providing services and solutions in the defense, intelligence, civil and
health markets. Leidos' domestic customers include the U.S. Department of Defense ("DoD"), the U.S. Intelligence
Community, the U.S. Department of Homeland Security ("DHS"), the Federal Aviation Administration, the
Department of Veterans Affairs, several other U.S. Government civil agencies and state and local government
agencies. Leidos' international customers include foreign governments and their agencies, primarily located in the
United Kingdom, the Middle East and Australia. Unless indicated otherwise, references to the "Company," "we," "us"
and "our" refer collectively to Leidos Holdings, Inc. and its consolidated subsidiaries.
On August 16, 2016, a wholly-owned subsidiary of Leidos Holdings, Inc. merged with the Information Systems &
Global Solutions business (the "IS&GS Business") of Lockheed Martin Corporation in a Reverse Morris Trust
transaction. The acquired IS&GS Business was renamed Leidos Innovations Corporation. See "Note 2—
Acquisitions" for further information. As a result of the Lockheed Martin transaction, the Company received a
controlling interest in Mission Support Alliance, LLC ("MSA"), a joint venture with Jacobs Engineering Group, Inc.
and Centerra Group, LLC. The Company has consolidated the financial results for MSA into its consolidated
financial statements. The consolidated financial statements 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 MSA, of which Leidos has a 47% interest, and the Company's
variable interest entity are not material to the Company's consolidated financial statements for the periods
presented. Intercompany accounts and transactions between consolidated companies have been eliminated in
consolidation.
During fiscal 2017, the Company completed its business reorganization, which resulted in identification of three
reportable segments (Defense Solutions, Civil and Health). Additionally, the Company separately presents the costs
associated with corporate functions as Corporate. The Company commenced operating and reporting under the
new organizational structure effective the beginning of fiscal 2017. As a result of this change, prior year segment
results and disclosures have been recast to reflect the new reportable segments (see "Note 20—Business
Segments").
In December 2017, the U.S. government enacted the Tax Cuts and Jobs Act ("Tax Act"). The Tax Act makes broad
and complex changes to the U.S. tax code. In January 2018, the SEC issued Staff Accounting Bulletin 118, Income
Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), which provides guidance on accounting for
the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year
from the Tax Act enactment date for companies to complete the accounting under Accounting Standard Codification
("ASC") 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the
Tax Act for which the accounting under ASC 740 is complete. To the extent that a company's accounting for certain
income tax effects of the Tax Act is not complete but it is able to determine a reasonable estimate, it must record a
provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be
included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax
laws that were in effect immediately before the enactment of the Tax Act (see "Note 16—Income Taxes").
Certain amounts in the prior year financial statements have been reclassified to conform to the current year
presentation. The Company separately disclosed "Bad debt expense" and "Non-cash interest expense" on the
consolidated statements of cash flows, which was previously aggregated in "Other" within operating cash flows.
Reporting Periods
On March 20, 2015, the Board of Directors approved the amendment and restatement of the bylaws of Leidos to
change Leidos' 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 Company filed a Transition Report on Form 10-K for the 11-month period which
began on January 31, 2015, and ended on January 1, 2016.
Leidos Holdings, Inc. Annual Report - 59
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America ("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, fair value and impairment of intangible
assets and goodwill, income taxes, pension benefits, 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.
Restructuring Expenses
Restructuring expenses are incurred in connection with programs aimed at reducing the Company's costs and
primarily include lease termination, vacancy costs and termination costs associated with headcount reduction.
The Company's restructuring actions include one-time involuntary termination benefits as well as certain contractual
termination benefits or employee terminations under ongoing benefit arrangements. One-time involuntary
termination benefits are recognized as a liability at estimated fair value when the plan of termination has been
communicated to employees and certain other criteria are met. Ongoing termination benefit arrangements are
recognized as a liability at estimated fair value when it is probable that amounts will be paid to employees and such
amounts are reasonably estimable. When the Company ceases using a facility but does not intend to or is unable to
terminate the operating lease, the Company records a liability for the present value of the remaining lease
payments, net of estimated sublease income, if any, that could be reasonably obtained for the property (even if the
Company does not intend to sublease the facility for the remaining term of the lease). Costs associated with exit or
disposal activities, including the related one-time and ongoing involuntary termination benefits, are reflected as
"Restructuring expenses" on the consolidated statements of income. See "Note 4—Restructuring Expenses" for
additional information about the Company's restructuring activities.
Operating Cycle
The Company's operating cycle for long-term contracts may be greater than one year and is measured by the
average time intervening between the inception and the completion of those contracts. Contract-related assets and
liabilities are therefore generally classified as current assets and current liabilities.
Business Combinations, Investments and Variable Interest Entities
Business Combinations
The accounting for business combinations requires the Company to make judgments and estimates related to the
fair value of assets acquired, including the identification and valuation of intangible assets, as well as liabilities and
contingencies assumed. Such judgments and estimates directly impact the amount of goodwill recognized in
connection with an acquisition.
Investments
Investments in entities and corporate joint ventures where the Company has a noncontrolling ownership interest
representing less than 50% and over which the Company has the ability to exercise significant influence, are
accounted for under the equity method of accounting whereby the Company recognizes its proportionate share of
the entities' net income or loss and does not consolidate the entities' assets and liabilities.
Equity investments in entities over which the Company does not have the ability to exercise significant influence
and whose securities do not have a readily determinable fair value are carried at cost or cost net of other-than-
temporary impairments.
Leidos Holdings, Inc. Annual Report - 60
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Variable Interest Entities
The Company occasionally forms joint ventures and/or enters into arrangements with special purpose limited
liability companies for the purpose of bidding and executing on specific projects. The Company analyzes each such
arrangement to determine whether it represents a VIE. If the arrangement is determined to be a VIE, the Company
assesses whether it is the primary beneficiary of the VIE and is consequently required to consolidate the VIE.
Revenue Recognition
The Company's revenues are generated primarily from contracts with the U.S. Government, commercial customers
and various international, state and local governments or from subcontracts with other contractors engaged in work
with such customers. The Company performs under various types of contracts, which include firm-fixed-price, time-
and-materials, fixed-price-level-of-effort, cost-plus-fixed-fee, cost-plus-award-fee, cost-plus-incentive-fee and fixed-
price-incentive fee contracts.
Firm-fixed-price contracts—Revenues and fees on these contracts that are system integration or engineering in
nature are primarily recognized using the percentage-of-completion method of accounting utilizing the cost-to-cost
method. The completed contract method is utilized when reasonable and reliable cost estimates for a project cannot
be made.
Time-and-materials contracts—Revenue is recognized on time-and-materials contracts based on the hours
provided in performance under the contract multiplied by the negotiated contract billing rates, plus the negotiated
contract billing rate of any allowable material and subcontract costs and out-of-pocket expenses.
Fixed-price-level-of-effort contracts ("FP-LOE")—These contracts are substantially similar to time-and-materials
contracts except they require a specified level of effort over a stated period of time. Accordingly, the Company
recognizes revenue on FP-LOE contracts with the U.S. Government in a manner similar to time-and-materials
contracts in which the Company measures progress toward completion based on the hours provided in
performance under the contract multiplied by the negotiated contract billing rates, plus the negotiated contract billing
rate of any allowable material costs and out-of-pocket expenses.
Cost-plus-fixed-fee contracts—Revenue is recognized on cost-plus-fixed-fee contracts with the U.S. Government on
the basis of partial performance equal to costs incurred, plus an estimate of applicable fees earned as the Company
becomes contractually entitled to reimbursement of costs and the applicable fees.
Cost-plus-award-fee/cost-plus-incentive fee contracts—Revenues and fees on these contracts with the U.S.
Government are recognized using the percentage-of-completion method of accounting using the cost-to-cost
method. The Company includes an estimate of the ultimate incentive or award fee to be received on the contract in
the estimate of contract revenues for purposes of applying the percentage-of-completion method of accounting.
Fixed-price-incentive fee contracts ("FP-IF")—These contracts are substantially similar to cost-plus-incentive fee
contracts recognized using the percentage-of-completion method of accounting except they require specified
targets for cost and profit, price ceiling (but not a profit ceiling or floor), and profit adjustment formula. Under a FP-IF
contract, the allowable costs incurred are eligible for reimbursement but are subject to a cost-share arrangement,
which affects profitability. Generally, if costs exceed the contract target cost or are not allowable under the
applicable regulations, the Company may not be able to obtain reimbursement for all costs and may have fees
reduced or eliminated.
Revenues from services and maintenance contracts, notwithstanding contract type, are recognized over the term of
the respective contracts as the services are performed and revenue is earned. Revenues from unit-priced contracts
are recognized as transactions are processed based on objective measures of output. Revenues from the sale of
manufactured products are recorded upon passage of title and risk of loss to the customer, which is generally upon
delivery, provided that all other requirements for revenue recognition have been met.
The Company also uses the efforts-expended method of percentage-of-completion using measures such as labor
dollars for measuring progress toward completion in situations in which this approach is more representative of the
progress on the contract. For example, the efforts-expended method is utilized when there are significant amounts
of materials or hardware procured for the contract that is not representative of progress on the contract. Additionally,
the Company utilizes the units-of-delivery method under percentage-of-completion on contracts where separate
units of output are produced. Under the units-of-delivery method, revenue is generally recognized when the units
are delivered to the customer, provided that all other requirements for revenue recognition have been met.
Leidos Holdings, Inc. Annual Report - 61
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company evaluates its contracts for multiple elements, and when appropriate, separates the contracts into
separate units of accounting for revenue recognition. Revenues generated from product sales do not represent a
material amount of the Company's total revenues.
The Company generally provides for anticipated losses on contracts by recording an expense during the period in
which the losses are determined. Amounts billed and collected but not yet recognized as revenues under contracts
are deferred. Contract costs incurred for U.S. Government contracts, including indirect costs, are subject to audit
and adjustment through negotiations between the Company and government representatives. The Company's
indirect cost audits by the Defense Contract Audit Agency remain open for fiscal 2012 and subsequent fiscal years
for Leidos, Inc. and for fiscal 2011 and subsequent fiscal years for Leidos Innovations. Revenues on U.S.
Government contracts have been recorded in amounts that are expected to be realized upon final settlement.
Contract claims are unanticipated additional costs incurred but not provided for in the executed contract price that
the Company seeks to recover from the customer. Such costs are expensed as incurred. Additional revenue related
to contract claims is recognized when the amounts are awarded by the customer. Un-priced change orders are
included in revenue when they are probable of recovery in an amount at least equal to the cost.
On certain contracts where the Company is not the primary obligor such as the provision of administrative oversight
and/or management of government-owned facilities or support services related to other vendors' products, the
Company recognizes as revenue the net management fee associated with the services and excludes from its
income statement the gross sales and costs associated with the facility or other vendors' products.
Changes in Estimates on Contracts
Changes in estimates related to long-term contracts accounted for using the percentage of completion 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 the acquisition of the IS&GS Business (see "Note 2—
Acquisitions"), where the adjustment is for the period commencing from the date of acquisition. Changes in these
estimates can occur over the contract performance period for a variety of reasons, including changes in contract
scope, contract cost estimates and estimated incentive or award fees.
Changes in estimates on contracts for the periods presented were as follows:
Net favorable impact to income from continuing operations before
taxes
Impact on diluted EPS from continuing operations attributable to
Leidos common stockholders
12 Months Ended
December 29,
2017
December 30,
2016
11 Months
Ended
January 1,
2016
(in millions, except for per share amounts)
$
$
103 $
37 $
18
0.41 $
0.22 $
0.14
The increase in the changes in estimates on contracts from fiscal 2016 to fiscal 2017 is primarily due to completion
of contracts or events which mitigated risk and due the finalization of award and incentive fees.
The impact on diluted EPS from continuing operations attributable to Leidos common stockholders is calculated
using the Company's statutory tax rate.
Divestitures
From time-to-time, the Company may dispose (or management may commit to plans to dispose) of strategic or non-
strategic components of the business. Divestitures representing a strategic shift in operations are classified as
discontinued operations for all periods presented. Non-strategic divestitures are not reclassified as discontinued
operations and remain in continuing operations.
Leidos Holdings, Inc. Annual Report - 62
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pre-contract and Transition Costs
Pre-contract Costs
Costs incurred on projects as pre-contract costs are deferred as assets ("Inventory, prepaid expenses and other
current assets") when the Company has been requested by the customer to begin work under a new arrangement
prior to contract execution and it is probable that the Company will recover the costs through the issuance of a
contract. When the formal contract has been executed, the costs are recorded to the contract and revenue is
recognized.
Transition Costs
Under certain services contracts, costs are incurred, usually at the beginning of the contract performance, to
transition the services, employees and equipment from the customer or prior contractor. These costs are capitalized
as deferred assets and amortized over the shorter of the contractual period of performance or expected period of
performance, if recoverability is deemed probable.
Fair Value Measurements
The accounting standard for fair value measurements establishes a three-level 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 for identical assets or liabilities 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 the Company to develop
its own assumptions (Level 3).
The accounting guidance for fair value measurements requires that the Company maximize the use of observable
inputs and minimize the use of unobservable inputs in determining fair value. The accounting guidance provides for
the irrevocable option to elect, on a contract-by-contract basis, to measure certain financial assets and liabilities at
fair value at inception of the contract and record any subsequent changes in fair value in earnings. The Company
has not made fair value option elections on any of its financial assets and liabilities.
The fair value of financial instruments is determined based on quoted market prices, if available, or management's
best estimate (see "Financial Instruments" below).
Management evaluates its investments for other-than-temporary impairment at each balance sheet date. When
testing long-term investments for recovery of carrying value, the fair value of long-term investments is determined
using various valuation techniques and factors such as, market prices of comparable companies (Level 2 input),
discounted cash flow models (Level 3 input) and recent capital transactions of the portfolio companies being valued
(Level 3 input). If management determines that an other-than-temporary decline in the fair value of an investment
has occurred, an impairment loss is recognized to reduce the investment to its estimated fair value.
The Company's non-financial instruments measured at fair value on a non-recurring basis include goodwill,
indefinite-lived intangible assets and long-lived tangible assets. The valuation methods used to determine fair value
require a significant degree of management judgment to determine the key assumptions. As such, the Company
generally classifies non-financial instruments as either Level 2 or Level 3 fair value measurements.
Financial Instruments
The Company is exposed to certain market risks which are inherent in certain transactions entered into during the
normal course of business. These transactions include sales or purchase contracts denominated in foreign
currencies, investments in equity securities and exposure to changing interest rates. The Company manages its risk
to changes in interest rates through the use of derivative instruments.
For fixed rate borrowings, the Company uses variable interest rate swaps, effectively converting fixed rate
borrowings to variable rate borrowings. These swaps are designated as fair value hedges. The fair value of these
interest rate swaps is determined based on observed values for underlying interest rates on the LIBOR yield curve
(Level 2).
For variable rate borrowings, the Company uses 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.
Leidos Holdings, Inc. Annual Report - 63
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of these interest rate swaps is determined based on observed values for the underlying interest rates
(Level 2).
The Company does not hold derivative instruments for trading or speculative purposes.
The Company's defined benefit plan assets consist of investments in pooled funds that contain investments with
values based on quoted market prices, but for which the pools are not valued on a daily quoted market basis (Level
2 inputs).
Cash and Cash Equivalents
The Company's cash equivalents were primarily comprised of investments in several large institutional money
market funds and bank deposits, with original maturity of three months or less. The Company includes outstanding
payments within "Cash and cash equivalents" and increases "Accounts payable and accrued liabilities" on the
consolidated balance sheets. At December 29, 2017, and December 30, 2016, the Company included $169 million
and $67 million, respectively, of outstanding payments within "Cash and cash equivalents."
Restricted Cash
The Company has restricted cash balances, primarily representing advances from customers that are restricted as
to use for expenditures related to that customer's contract. Restricted cash balances are included as "Inventory,
prepaid expenses and other current assets" in the Company's consolidated balance sheets.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of
accounts receivable. Since the Company's receivables are primarily with the U.S. Government, the Company does
not have exposure to a material credit risk. Additionally, the Company is subject to credit risk related to its
derivatives which is managed through the use of multiple counterparties with high credit standards.
Receivables
The Company's receivables include amounts billed and currently due from customers and amounts currently due
from customers but are unbilled. Amounts billable are recognized at estimated realizable value and consist of costs
and fees, substantially all of which are expected to be billed and collected generally within one year. Unbilled
amounts also include rate variances that are billable upon negotiation of final indirect rates with the U.S.
Government and, once billed, are subject to audit and approval by government representatives.
Contract retentions are billed upon contract completion, or the occurrence of a specified event, and when
negotiation of final indirect rates with the U.S. Government is complete. Consequently, the timing of collection of
retention balances is outside the Company's control. Based on the Company's historical experience, the majority of
retention balances are expected to be collected beyond one year and write-offs of retention balances have not been
significant. When events or conditions indicate that amounts outstanding from customers may become uncollectible,
an allowance is estimated and recorded.
Inventories
Inventories are valued at the lower of cost or estimated net realizable value. Raw material inventory is valued using
the average cost method. Work-in-process inventory includes raw material costs plus labor costs, including fringe
benefits and allocable overhead costs. The majority of finished goods inventory consists of security products and
baggage scanning equipment. The Company evaluates inventory against historical and planned usage to determine
appropriate provisions for obsolete inventory.
Property, Plant and Equipment
Purchases of property, plant and equipment as well as costs associated with major renewals and improvements are
capitalized. Maintenance, repairs and minor renewals and improvements are expensed as incurred.
Construction in Progress ("CIP") is used to accumulate all costs for projects that are not yet complete. CIP balances
are transferred to the appropriate asset account when the asset is capitalized and ready for its intended use.
Leidos Holdings, Inc. Annual Report - 64
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are
removed from the accounts and any resulting gain or loss is recognized. Depreciation is recognized using the
methods and estimated useful lives as follows:
Computers and other equipment
Straight-line or declining-balance
2-10
Depreciation method
Estimated useful lives (in years)
Buildings
Building improvements and leasehold
improvements
Straight-line
Straight-line
Not to exceed 40
Shorter of useful life of
asset or remaining lease
term
Office furniture and fixtures
Straight-line or declining-balance
6-9
The Company evaluates its long-lived assets for potential impairment whenever there is evidence that events or
changes in circumstances indicate that the carrying value may not be recoverable and the carrying amount of the
asset exceeds its estimated fair value.
Project Assets
Purchases of project assets are capitalized for specific contracts where delivery has not yet occurred or ownership
is maintained by the Company over the life of the contract. Project assets include enterprise software licenses,
computers and significant material purchases on contracts. These project assets are relieved from the balance
sheet based on different methodologies, including transfer of assets, amortization based on useful life and
percentage of completion utilizing efforts expended method of revenue recognition.
Goodwill
Goodwill represents the excess of the fair value of consideration transferred, plus the fair value of any non-
controlling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the
acquisition date. Goodwill is not amortized, but instead is tested annually for impairment at the reporting unit level
and tested more frequently if events or circumstances indicate that the carrying value may not be recoverable. The
Company's policy is to perform its annual goodwill impairment evaluation as of the first day of the fourth quarter of
its fiscal year. During fiscal 2017, the Company had five reporting units for the purpose of testing goodwill for
impairment.
Goodwill is evaluated for impairment either under a qualitative assessment option or a quantitative approach
depending on the facts and circumstances of a reporting unit, including consideration of the excess of fair value
over carrying amount in previous assessments and changes in business environment.
When performing a qualitative assessment, the Company considers factors including, but not limited to, current
macroeconomic conditions, industry and market conditions, cost factors, financial performance and other events
relevant to the entity or reporting unit under evaluation to determine whether it is more likely than not that the fair
value of a reporting unit is less than its carrying amount. If the Company determines that it is more likely than not
that a reporting unit's fair value is less than its carrying amount, a quantitative goodwill impairment test is performed.
When performing a quantitative goodwill impairment test, the reporting unit carrying value is compared to its fair
value. Goodwill is deemed impaired if, and the impairment loss is recognized for the amount by which, the reporting
unit carrying value exceeds its fair value.
The Company estimates the fair value of each reporting unit using both market and income approaches (Level 3)
when a quantitative analysis is performed. To determine the fair value of the reporting units, the outputs from both
methods are equally weighted.
The market approach is a technique where the fair value is calculated based on fair values of publicly-traded
companies that provide a reasonable basis of comparison with the reporting unit. Valuation ratios are selected that
relate market prices to selected financial metrics from comparable companies. These ratios are applied after
consideration of adjustments and weightings related to financial position, growth, volatility, working capital
movement and other factors. Due to the fact that stock prices of comparable companies represent minority
interests, the Company also considers an acquisition control premium to reflect the impact of additional value
associated with a controlling interest.
Leidos Holdings, Inc. Annual Report - 65
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income approach is a technique where the fair value is calculated based on present value of future cash flows
using risk-adjusted discount rates, which represent the weighted-average cost of capital ("WACC") for each
reporting unit. Determination of WACC includes assessing the cost of equity and debt as of the valuation date. In
addition, a terminal value is developed for forecasted future cash flows beyond the projection period discounted
back to the present value. The forecasts used in the Company’s estimation of fair value are developed by
management based on business and market considerations.
The goodwill impairment test process and valuation model is based upon certain key assumptions that require the
exercise of significant judgment and assumptions including the use of appropriate financial projections, economic
expectations, WACC, expected long-term growth rates, as well as using available market data. Significant changes
to these estimates and assumptions could adversely impact conclusions and actual future results may differ from
the estimates. In addition, the identification of reporting units and the allocation of assets and liabilities to the
reporting units when determining the carrying value of each reporting unit also requires judgment.
Intangible Assets
Acquired intangible assets with finite lives are amortized using the method that best reflects how their economic
benefits are utilized or, if a pattern of economic benefits cannot be reliably determined, on a straight-line basis over
their estimated useful lives. Intangible assets with finite lives are amortized over the following periods:
Program and contract intangibles
Backlog
Customer relationships
Software and technology
Estimated useful lives (in years)
6-11
1
8
4-15
Intangible assets with finite lives are assessed for impairment whenever events or changes in circumstances
indicate that the carrying value may not be recoverable.
Intangible assets with indefinite lives are not amortized but are assessed for impairment at the beginning of the
fourth quarter and whenever events or changes in circumstances indicate that the carrying value may not be
recoverable.
Selling, General and Administrative Expenses
The Company classifies indirect costs incurred within or allocated to its U.S. Government customers as overhead
(included in cost of revenues) or general and administrative expenses in the same manner as such costs are
defined in the Company's disclosure statements under U.S. Government Cost Accounting Standards.
Selling, general and administrative expenses include general and administrative, bid and proposal and internal
research and development ("IR&D") expenses.
The Company conducts research and development activities under customer-funded contracts and with company-
funded IR&D funds. For fiscal 2017, fiscal 2016 and the 11-month period ended January 1, 2016, company-funded
IR&D expense was $42 million, $44 million and $29 million, respectively. Expenses for research and development
activities performed under customer contracts are charged directly to cost of revenues for those contracts.
Income Taxes
The Company accounts for income taxes under the asset and liability method in accordance with the accounting
standard for income taxes. The asset and liability method requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax
bases of assets and liabilities. Under this method, changes in tax rates and laws are recognized in income in the
period such changes are enacted.
Leidos Holdings, Inc. Annual Report - 66
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company records net deferred tax assets to the extent that it believes these assets will more likely than not be
realized. In making such determination, the Company considers all available positive and negative evidence,
including future reversals of existing taxable temporary differences, projected future taxable income, tax planning
strategies and recent results of operations. If the Company were to determine that it would be able to realize its
deferred income tax assets in the future in excess of their net recorded amount or would no longer be able to realize
its deferred income tax assets in the future as currently recorded, the Company would make an adjustment to the
valuation allowance which would decrease or increase the provision for income taxes.
The provision for federal, state, foreign and local income taxes is calculated on income before income taxes based
on current tax law and includes the cumulative effect of any changes in tax rates from those used previously in
determining deferred tax assets and liabilities. Such provision differs from the amounts currently payable because
certain items of income and expense are recognized in different reporting periods for financial reporting purposes
than for income tax purposes.
The Company recognizes liabilities for uncertain tax positions when it is more likely than not that a tax position will
not be sustained upon examination and settlement with various taxing authorities. Liabilities for uncertain tax
positions are measured based upon the largest amount of benefit that is greater than 50% likely of being realized
upon ultimate settlement. The Company recognizes interest and penalties related to uncertain tax positions in its
income tax expense.
Stock-Based Compensation
The Company accounts for stock-based compensation at the grant date based on the fair value of the award and is
recognized as expense over the requisite service period, which is generally the vesting period, net of an estimated
forfeiture rate.
The fair value of restricted stock awards and performance-based stock awards is based on the closing price of the
Company's common stock on the date of grant.
The fair value of stock option awards granted is based on using the Black-Scholes-Merton option pricing model. The
estimation of stock option fair value requires management to make estimates and judgments about, among other
things, employee exercise behavior, forfeiture rates and the expected volatility of Leidos common stock over the
expected option term. These judgments directly affect the amount of compensation expense that will ultimately be
recognized.
Foreign Currency
The financial statements of consolidated international subsidiaries, for which the functional currency is not the U.S.
dollar, are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities
and a weighted average exchange rate over the reporting period for revenues, expenses, gains and losses.
Translation adjustments are recorded as accumulated other comprehensive income (loss) in stockholders' equity.
Gains and losses due to movements in foreign currency exchange rates, are recognized as "Other (expense)
income, net" in the Company's consolidated statements of income.
Accounting Standards Updates Adopted
During fiscal 2017, the Company adopted the following Accounting Standards Updates ("ASU"):
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test
for Goodwill Impairment. This ASU eliminates step two of the goodwill impairment test and simplifies how the
amount of an impairment loss is determined. The update is effective for public companies in the beginning of fiscal
year 2020 and shall be applied on a prospective basis. Early adoption is permitted for goodwill impairment tests
performed on testing dates after January 1, 2017. The Company adopted the provisions of ASU 2017-04
prospectively in the first quarter of fiscal 2017 and the standard did not have a material effect on the Company's
consolidated financial position, results of operations or cash flows.
Leidos Holdings, Inc. Annual Report - 67
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of
Modification Accounting. This ASU provides clarification on when to apply modification accounting for a stock-based
award to reduce diversity in practice. The update is effective for public companies in the beginning of fiscal year
2018 and shall be applied on a prospective basis. Early adoption is permitted for public business entities. The
Company adopted the provisions of ASU 2017-09 prospectively in the second quarter of fiscal 2017 and the
standard did not have a material effect on the Company's consolidated financial position, results of operations or
cash flows.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments. This ASU clarifies guidance in how certain cash receipts and cash payments
are presented and classified on the statement of cash flows to reduce diversity in practice. The update is effective
for public companies in the beginning of fiscal 2018. The amendments should be applied using a retrospective
transition method to each period presented. For items that are impractical to apply the amendments retrospectively,
they shall be applied prospectively as of the earliest date practicable. Early adoption is permitted. The Company
early adopted the provisions of ASU 2016-15 in the third quarter of fiscal 2017, and the adoption did not have a
material impact on the Company's consolidated statement of cash flows.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, a
revised guidance that requires restricted cash and restricted cash equivalents to be included within beginning and
ending total cash amounts reported in the consolidated statements of cash flows. The ASU requires disclosure of
the nature of the restrictions on cash balances along with a reconciliation of the amount of cash and cash
equivalents, as presented on the balance sheet, to the amount of cash, cash equivalents and restricted cash, as
presented on the statement of cash flows. The update is effective for public companies in the beginning of fiscal
year 2018, and should be applied on a retrospective basis. Early adoption is permitted. The Company early adopted
the provisions of ASU 2016-18 in the third quarter of fiscal 2017.
As a result of adoption of this ASU, changes in restricted cash, which had previously been presented as operating
activities, are now included within beginning and ending cash, cash equivalents and restricted cash balances on the
consolidated statements of cash flows. Consequently, operating cash flows for fiscal 2017 and fiscal 2016 increased
by $12 million and $3 million, respectively, with a corresponding increase in the total change in cash, cash
equivalents and restricted cash for the respective periods. Operating cash flows for the 11-month period ended
January 1, 2016, decreased $13 million, with a corresponding decrease in the total change in cash, cash
equivalents and restricted cash (see "Note 19—Supplementary Cash Flow Information and Restricted Cash" for the
disclosures required by this ASU).
Accounting Standards Updates Issued But Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606). This
ASU superseded all revenue recognition requirements in Topic 605 “Revenue Recognition” and industry-specific
guidance throughout the Industry Topics of the codification. The core principle of ASC 606 is that an entity should
recognize revenue to depict the transfer of control for promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In
applying this principle, an entity is required to identify the contract(s) with a customer, identify the performance
obligations in the contract(s), determine the transaction price, allocate the transaction price to the performance
obligations in the contract(s) and recognize revenue when (or as) the performance obligation is satisfied. The ASU
also requires expanded disclosures to enable users of financial statements to understand the amount, timing risks
and judgments related to revenue recognition and related cash flows, including how and when performance
obligations are satisfied and the relationship between revenue recognized and changes in contract balances during
a reporting period.
The Company will adopt this ASU in the beginning of fiscal 2018 using the modified retrospective method. This
method requires recording the cumulative effect of adoption of this ASU as an adjustment to the beginning balance
of retained earnings and not restating prior comparative periods, and also requires certain additional disclosures in
the initial year of adoption.
As of December 29, 2017, the Company has substantially completed its evaluation of the impact of adoption of this
ASU, including assessment of differences in the timing and/or method of revenue recognition for contracts, impact
on business processes, systems and controls and the required disclosures. The Company is currently completing its
Leidos Holdings, Inc. Annual Report - 68
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assessment of adoption of the ASU on the contract awards and modifications during the fourth quarter of fiscal
2017, and also finalizing system reports related to the new disclosures.
Based on the Company's current evaluation, Leidos does not expect the impact of adoption of ASC 606 to be
material. The Company believes the timing of and amount of revenue recognition will largely remain consistent
between the current revenue standard and ASC 606. For the majority of the Company's contracts, the Company will
continue to recognize revenue over time because of the continuous transfer of control to the customer, using an
input measure (e.g., cost incurred) to reflect progress. The Company currently expects that the impact of adoption
of ASC 606 will primarily occur within certain contracts as a result of the identification of new performance
obligations, and on contracts that currently use the units-of-delivery method of revenue recognition, which will
convert to an over-time model from the current point-in-time model.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU will supersede the current lease
guidance under ASC 840 and makes several changes, such as requiring an entity to recognize a right-of-use asset
and corresponding lease obligation in the balance sheet, classified as financing or operating, as appropriate. The
update is effective for public companies in the beginning of fiscal 2019 and should be adopted under the modified
retrospective approach. Early adoption is permitted. The Company is evaluating the provisions of ASU 2016-02 and
its impact on the Company's consolidated financial position, results of operations and cash flows.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of
Credit Losses on Financial Instruments. This ASU eliminates the requirement that a credit loss on a financial
instrument be "probable" prior to recognition. Instead, a valuation allowance will be recorded to reflect an entity's
current estimate of all expected credit losses, based on both historical and forecasted information related to an
instrument. The update is effective for public companies in the beginning of fiscal 2020 and should be adopted
using a modified-retrospective approach, which applies a cumulative-effect adjustment to retained earnings as of
the beginning of the first reporting period in which the guidance is effective. A prospective approach is required for
debt securities for which an other-than-temporary impairment had been recognized before the effective date and
loans and debt securities acquired with deteriorated credit quality. The guidance may be early-adopted for fiscal
2019. The Company is evaluating the provisions of ASU 2016-13 and its impact on the Company's consolidated
financial position, results of operations and cash flows.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to
Accounting for Hedge Activities. This ASU improves the financial reporting of hedging relationships to better portray
the economic results of an entity's risk management activities. The update is effective for public companies in the
beginning of fiscal 2019 and should be applied on a modified retrospective basis. Early adoption is permitted. The
Company is evaluating the provisions of ASU 2017-12 and its impact on the Company's consolidated financial
position, results of operations and cash flows.
Note 2—Acquisitions
The Company may acquire businesses as part of its growth strategy to provide new or enhance existing capabilities
and offerings to customers. During fiscal 2016, the Company completed the acquisition of Lockheed Martin's IS&GS
Business.
Lockheed Martin Transaction
On January 26, 2016, Leidos announced it had entered into a definitive agreement (as amended, the "Merger
Agreement") with Lockheed Martin Corporation ("Lockheed Martin"); Abacus Innovations Corporation, a Delaware
corporation and a wholly owned subsidiary of Lockheed Martin ("Splitco"); and Lion Merger Co., a Delaware
corporation and, at the time of announcement, a wholly owned subsidiary of Leidos ("Merger Sub"), pursuant to
which Leidos would combine with Lockheed Martin's realigned Information Systems & Global Solutions business in
a Reverse Morris Trust transaction. In connection with the Merger Agreement, Lockheed Martin and Splitco entered
into a Separation Agreement dated January 26, 2016 (as amended, the "Separation Agreement"), pursuant to which
Lockheed Martin would separate the IS&GS Business from Lockheed Martin and transfer the IS&GS Business to
Splitco. The transactions contemplated by the Merger Agreement and the Separation Agreement are referred to
herein as the "Transactions."
On August 16, 2016, the acquisition date, the Company completed the Transactions. In the Transactions, among
other steps, (i) Lockheed Martin transferred the IS&GS Business to Splitco; (ii) Lockheed Martin offered to
Lockheed Martin stockholders the right to exchange all or a portion of their shares of Lockheed Martin common
Leidos Holdings, Inc. Annual Report - 69
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
stock for shares of Splitco common stock by way of an exchange offer (the "Distribution"); and (iii) Merger Sub
merged with and into Splitco, with Splitco as the surviving corporation (the "Merger") and a wholly owned subsidiary
of Leidos. Additionally, on the closing date of the Transactions, Splitco's name was changed to Leidos Innovations
Corporation. Upon consummation of the Transactions, those Lockheed Martin stockholders who elected to
participate in the exchange offer received approximately 77 million shares of Leidos common stock, which
represented approximately 50.5% of the outstanding shares of Leidos common stock after consummation of the
Transactions. Holders of Leidos shares prior to the transaction held the remaining 49.5% of the outstanding shares
of Leidos common stock immediately after the closing.
Prior to the Distribution, Splitco incurred third-party debt financing in an aggregate principal amount of $1.8 billion
and immediately thereafter, Lockheed Martin transferred the IS&GS Business to Splitco and Splitco made a special
cash payment to Lockheed Martin of $1.8 billion.
In connection with the Transactions, Leidos incurred new indebtedness and assumed Splitco's indebtedness in the
form of term loans in an aggregate principal amount of $690 million and $1.8 billion, respectively, and entered into a
new $750 million senior secured revolving credit facility, which replaced its existing revolving credit facility. See
"Note 12—Debt" for further information regarding the new debt incurred and the new senior revolving credit facility.
In conjunction with the Transactions, Leidos' Board of Directors declared a special dividend of $13.64 per share of
Leidos common stock. Consequently, on August 22, 2016, the Company paid $993 million to stockholders of record
as of August 15, 2016, and accrued $29 million of dividend equivalents with respect to outstanding equity awards.
See "Note 15—Stock-Based Compensation" for further information regarding the modifications made to the
Company's outstanding stock awards as a result of the special dividend.
As a result of the Transactions, membership on the Leidos Board of Directors was increased to 12 directors, in
which three directors designated by Lockheed Martin were appointed to the board. A majority of the senior
management of Leidos immediately prior to the consummation of the Transactions remained Leidos executive
officers immediately after the Transactions. Leidos management determined that Leidos is the accounting acquirer
in the Transactions based on the facts and circumstances noted within this section and other relevant factors.
The acquisition adds large, complex information technology ("IT") system implementation and operation experience
and additional federal and international IT solutions and services work to the Leidos portfolio, providing more
venues to sell value added services such as cybersecurity and analytics. As a result, the Company is more
diversified in markets it serves and provides the Company the scale and access to markets intended to further
growth.
The final purchase consideration for the acquisition of the IS&GS Business was as follows (in millions):
Value of common stock issued to Lockheed Martin stockholders(1)
Equity consideration for replacement awards(2)
Working capital adjustments(3)
Purchase price
$
$
2,929
9
81
3,019
(1) Represents approximately 77 million new shares of Leidos common stock issued to those Lockheed Martin stockholders who elected to
participate in the exchange offer, based on the Company's August 16, 2016, closing share price of $51.69, less the Leidos special cash
dividend amount of $13.64, which the Lockheed Martin stockholders were not entitled to receive.
(2) Represents a portion of the $23 million total fair value of replacement equity-based awards attributable to the pre-Merger service period. The
remaining $12 million, net of estimated forfeitures, will be recognized as stock-based compensation expense over the remaining requisite
service period (see "Note 15—Stock-Based Compensation").
(3) In January 2018, the Company finalized its net working capital at $105 million. The additional $24 million was recorded as acquisition costs in
the consolidated statements of income.
Leidos Holdings, Inc. Annual Report - 70
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The final fair values of the assets acquired and liabilities assumed at the date of the Transactions were as follows
(in millions):
Cash
Receivables, net
Inventory, prepaid expenses and other current assets
Property, plant and equipment
Intangible assets
Other assets
Accounts payable and accrued liabilities
Accrued payroll and employee benefits
Long-term debt, current portion
Deferred tax liabilities
Long-term debt, net of current portion
Other long-term liabilities
Total identifiable net liabilities assumed
Non-controlling interest
Goodwill
Purchase price
$
$
25
938
73
87
1,194
58
(733)
(186)
(23)
(328)
(1,780)
(45)
(720)
(13)
3,752
3,019
During fiscal 2017, the Company recorded adjustments to finalize the fair value of acquired assets and liabilities
assumed which resulted in a $337 million increase in goodwill. Significant changes included intangible assets,
property, plant and equipment, deferred tax assets, other assets, accounts payable and accrued liabilities and
deferred tax liabilities.
During fiscal 2017, the Company recognized cumulative catch-up adjustments related to valuation adjustments for
equity method investments and property, plant, and equipment, which resulted in an increase of $7 million in
amortization expense and an increase $7 million of depreciation expense, respectively. The Company recorded the
cumulative catch-up adjustments to equity method investments within "Equity earnings of non-consolidated
subsidiaries" and adjustments to depreciation within "Costs of revenues" and "Selling, general and administrative
expenses" in the Company's consolidated statements of income.
Additionally, during fiscal 2017, the Company recorded a valuation adjustment to reflect the fair value of the non-
controlling interest acquired. The fair value of $13 million was determined by calculating the present value of future
cash flows for the non-controlling interest. Significant assumptions inherent in the valuation of the non-controlling
interest include the estimated after-tax cash flows expected to be received and an assessment of the appropriate
discount rate.
The goodwill represents intellectual capital and the acquired assembled work force, none of which qualify for
recognition as a separate intangible asset. The value of goodwill has been allocated to the reporting units on a
relative fair value approach (see "Note 6—Goodwill"). Of the total goodwill, $414 million is tax deductible.
Leidos Holdings, Inc. Annual Report - 71
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company identified $1.2 billion of intangible assets, representing program and contract intangibles, backlog
and software and technology. The fair value measurements were primarily based on significant inputs that are not
observable in the market and represent a Level 3 measurement (see "Note 5—Fair Value Measurements"). The
income approach was primarily used to value the intangible assets, consisting primarily of acquired program and
contract intangibles and backlog. The income approach indicates value for an asset based on the present value of
cash flow projected to be generated by the asset. Projected cash flow is discounted at a rate of return that reflects
the relative risk of achieving the cash flow and the time value of money.
The following table summarizes the fair value of intangible assets acquired at the date of acquisition and the related
weighted average amortization period:
Weighted
average
amortization
period
Fair value
(in years)
(in millions)
9.7 $
1,011
1.8
4.6
157
26
Program and contract intangibles(1)
Backlog
Software and technology(1)
Total
1,194
(1) The weighted average amortization period is estimated based on the projected economic benefits associated with these assets. Refer to "Note
8.6 $
7—Intangible Assets" for additional information.
The Company incurred the following expenses related to the acquisition and integration of the IS&GS Business:
Acquisition costs
Integration costs
Total acquisition and integration costs
12 Months Ended
December 29,
2017
December 30,
2016
(in millions)
25 $
77
102 $
44
46
90
$
$
On January 10, 2018, the final net working capital of the IS&GS Business as of the closing date of the Transactions
was finally determined through a binding arbitration proceeding in accordance with the Separation Agreement with
Lockheed Martin. As a result, $24 million was recorded as acquisition costs in the consolidated statements of
income for fiscal 2017. On January 18, 2018, the final working capital adjustment amount of $105 million was paid
to Lockheed Martin.
Leidos Holdings, Inc. Annual Report - 72
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Financial Information (unaudited)
The following pro forma financial information presents consolidated results of operations as if the acquisition had
occurred on January 31, 2015. The pro forma financial information was prepared based on historical financial
information and has been adjusted to give effect to the events that are directly attributable to the Transactions and
factually supportable. The pro forma results below do not reflect future events that have occurred or may occur after
the Transactions, including anticipated synergies or other expected benefits that may be realized from the
Transactions. The pro forma financial information is not intended to reflect the actual results of operations that
would have occurred if the acquisition had been completed on January 31, 2015, nor is it intended to be an
indication of future operating results.
(unaudited)
Revenues
Income from continuing operations
Income from continuing operations attributable to Leidos common stockholders
Earnings per share:
Basic
Diluted
12 Months
Ended
December 30,
2016
11 Months
Ended
January 1,
2016
(in millions, except for per share
amounts)
$
10,443 $
9,868
340
335
$
$
2.23 $
2.20 $
336
331
2.21
2.19
The unaudited pro forma financial information above excludes acquisition-related costs of $44 million for fiscal 2016
and includes these costs within the 11-month period ended January 1, 2016 as a nonrecurring significant
adjustment. This adjustment was made to account for certain costs incurred as if the Transactions had been
completed on January 31, 2015.
Note 3—Divestitures
In April 2016, the Company's Civil segment disposed of a business that was primarily focused on providing design,
build and heavy construction engineering services. The Company received cash proceeds of $23 million, resulting
in a preliminary pre-tax gain on sale of $3 million. The major classes of assets and liabilities sold included $73
million of accounts receivable, net; $3 million of non-current assets and $63 million of accounts payable and
accrued liabilities. In addition, the Company recorded a $6 million liability in connection with issuance of a
performance guarantee on a contract and guarantee of collection of the accounts receivables transferred. The
Company paid $1 million of selling costs related to the transaction. The Company recorded the pre-tax gain on sale
in "Other (expense) income, net" in the Company's consolidated statements of income.
Plainfield Renewable Energy Holdings LLC
Plainfield Renewable Energy Holdings LLC ("Plainfield") is a 37.5 megawatt biomass-fueled power plant in
Plainfield, Connecticut (the "plant"). In March 2015, the Company entered into a definitive Membership Interest
Purchase Agreement (the "Agreement") to sell 100% of its equity membership interest in Plainfield. During the
quarter ended July 3, 2015, further negotiations occurred related to the sale of Plainfield resulting in an approximate
$29 million impairment charge. The Company adjusted the carrying values of Plainfield's assets to their fair values
based on the estimated selling price of the business pursuant to the terms of the Agreement that was amended on
July 17, 2015 (Level 1). The Company recorded these tangible asset impairment charges in "Asset impairment
charges" in the Company's consolidated statements of income.
On July 24, 2015, the Company completed the sale of its equity interests in Plainfield for an aggregate
consideration of $102 million, subject to certain adjustments, and contingent earn-out payments. The consideration
received at closing consisted of a cash payment of $29 million (the "Closing Payment") and a secured promissory
note for $73 million (the "Note"). The sale resulted in an immaterial deferred gain. In addition to the Closing
Payment and the Note, the Company is eligible to receive certain contingent earn-out payments not to exceed $30
million. The Company will recognize any consideration for the contingent earn-out payments when received. In
conjunction with the sale of the plant, the Company paid $2 million of the purchase price contingent consideration
Leidos Holdings, Inc. Annual Report - 73
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accrued at January 30, 2015, based on the successful sale of the plant. The remaining accrued contingent
consideration was released and not paid as the selling price did not meet the qualifications for the payment of the
remaining contingent consideration.
The original maturity date of the Note is July 24, 2017 (the "Original Maturity Date"), with an option to extend the
maturity date for three consecutive one-year periods. The annual interest rate of 6% will increase to 8% if the
maturity date is extended beyond July 24, 2017, and will increase to 9% if extended beyond July 24, 2019. The first
payment of accrued and unpaid interest was due January 24, 2016, with subsequent payments occurring every six
months, including a portion of the principal balance. The note allows for a six-month deferral of certain payments
due in January 2016 and July 2016. In January 2016 and July 2016, the Company was notified by the buyer that the
interest payment due on January 24, 2016, would be deferred to the next payment date, and a portion of the
principal payment due on July 24, 2016, would be deferred to the next payment due date.
During the quarter ended June 30, 2017, Plainfield exercised the first of three one-year term extension options
available under the original credit agreement, thereby extending the maturity date of the Note to July 24, 2018.
Concurrent with this extension, the interest rate on the Note increased from 6% to 8%. Also, during the quarter
ended June 30, 2017, Leidos and Plainfield entered into an amendment to the Note allowing Plainfield to defer up to
$4 million of the interest and principal payments due in July 2017 and January 2018 until July 2018. In consideration
of this deferment, Leidos received certain concessions and releases from obligations under the original transaction
documents.
The Company collected $6 million of principal and interest each year during fiscal 2016 and fiscal 2017. Payments
under the Note are secured by a general security interest in the personal property of Plainfield, a pledge of the
membership interests of Plainfield and a first mortgage on the real property that comprises the plant.
Subsequent to fiscal 2017, the Company entered into negotiations with the equity owners of Plainfield LLC
regarding the Plainfield Recapitalization Plan ("Plan"). The proposed Plan envisions raising new equity combined
with reduction of Plainfield's debt and, consequently, would cause impairment of Leidos' note receivable.
The net realizable value of the Note, at December 29, 2017, is estimated to be approximately $40 million, compared
to its carrying value of $73 million, including accrued interest. As a result, the Company recorded a $33 million
impairment of its Note, which is presented within "Other (expense) income, net" in the Company's consolidated
statements of income.
Prior to the divestiture of Plainfield, the Company received a cash grant of $80 million from the U.S. Treasury
Department, which contains a recapture provision that could require the Company to repay funds to the Treasury in
certain circumstances. As outlined in the amended Agreement, the buyer represents to the Company that it meets
the definition of a qualified buyer in regards to the terms in the U.S. Treasury cash grant. During the remaining
recapture period, which ends in December 2018, the buyer and any following acquired companies, including any
transferred membership interests to these companies, is contractually obligated to remain a qualified buyer, and the
buyer shall cause any transferee of the plant permitted under the Agreement to enter into a written agreement to be
jointly liable for any recapture event. In addition, the buyer and any continuing membership interests to acquired
companies shall operate the plant as an "open-loop biomass" facility in accordance with Section 1603 of the cash
grant, timely file all reports related to Section 1603 and indemnify the Company for any liabilities incurred that may
arise if these obligations are breached. Based on the indemnification in the Agreement, and since the onus is on the
buyer to comply with the conditions of the grant, the Company has deemed a recapture event not probable;
therefore, has not recorded a liability associated with a potential recapture of the grant.
Separation of New SAIC
The Company completed the spin-off of New SAIC on September 27, 2013. The spin-off was made pursuant to the
terms of a Distribution Agreement and several other agreements entered into between the Company and New SAIC
on September 25, 2013. These agreements set forth, among other things, the principal actions needed to be taken
in connection with the separation and govern certain aspects of the relationship between the Company and New
SAIC following the separation. These agreements generally provide with certain exceptions, that each party is
responsible for its respective assets, liabilities and obligations, including employee benefits, insurance and tax
related assets and liabilities, whether accrued or contingent, except that unknown liabilities will be shared between
the parties in certain circumstances. The agreements also describe the party's commitments to provide each other
with certain services for a limited time to help ensure an orderly transition. The agreements also include the
Leidos Holdings, Inc. Annual Report - 74
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
treatment of existing contracts, proposals, and teaming arrangements where New SAIC will jointly perform work
after separation on Leidos contracts. While the Company is a party to the Distribution Agreement and the ancillary
agreements, the Company has determined that it does not have significant continuing involvement in the operations
of New SAIC, nor does the Company expect significant continuing cash flows from New SAIC.
The operating results of activities related to the Company's distribution agreement with New SAIC for the periods
presented were as follows:
Revenues
Cost of revenues
Operating income
12 Months Ended
December 29,
2017
December 30,
2016
(in millions)
11 Months
Ended
January 1,
2016
$
$
10 $
10
— $
14 $
14
— $
17
17
—
The operating results through the date of disposal of the Company's discontinued operations, excluding the spin-off
of New SAIC, for fiscal 2017, fiscal 2016 and the 11-month period ended January 1, 2016, were immaterial.
The major classes of assets and liabilities included in discontinued operations through the date of disposal for the
periods presented are immaterial for disclosure purposes.
Note 4—Restructuring Expenses
IS&GS Business Acquisition
After the acquisition of the IS&GS Business, the Company began an initiative to align its cost structure, which
includes optimization of its real estate portfolio by vacating certain facilities and consolidating others, and by
reducing headcount.
The restructuring expenses related to this program were as follows:
Severance costs
Lease termination expenses
Restructuring expenses related to the IS&GS Business in operating income
12 Months Ended
December 29,
2017
December 30,
2016
(in millions)
18 $
19
37 $
10
2
12
$
$
These restructuring expenses have been recorded within Corporate and presented separately within "Restructuring
expenses" on the consolidated statements of income.
Leidos Holdings, Inc. Annual Report - 75
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The related restructuring liability related to this program was as follows:
Balance as of January 1, 2016
Charges
Cash payments
Balance as of December 30, 2016
Charges
Cash payments
Severance
Costs
Lease
Termination
Expenses
(in millions)
$
— $
— $
Total
10
(3)
7
18
(20)
2
(1)
1
19
(16)
Balance as of December 29, 2017
$
5 $
4 $
The Company expects the remainder of the restructuring liability to be substantially settled within one year.
Note 5—Fair Value Measurements
The Company's financial assets measured on a recurring basis at fair value consisted of the following:
—
12
(4)
8
37
(36)
9
Derivatives
December 29, 2017
December 30, 2016
Carrying value
Fair value
Carrying value
Fair value
$
37 $
(in millions)
37 $
29 $
29
The Company's derivatives consisted of the fair value interest rate swaps on its $450 million fixed rate 4.45% senior
secured notes maturing in December 2020, and cash flow interest rate swaps on $1.5 billion of the Company's
variable rate senior secured term loans (see "Note 11—Derivative Instruments"). The fair value of the fair value
interest rate swaps and cash flow interest rate swaps is determined based on observed values for underlying
interest rates on the LIBOR yield curve and the underlying interest rate, respectively (Level 2 inputs).
The carrying amounts of the Company's financial instruments, other than derivatives, which include cash
equivalents, accounts receivable, accounts payable and accrued expenses, are reasonable estimates of their
related fair values. The carrying value of the Company's notes receivable (see "Note 3—Divestitures" and "Note 18
—Leases") of $63 million and $92 million as of December 29, 2017, and December 30, 2016, respectively,
approximates fair value as the stated interest rates within the agreements are consistent with the current market
rates used in notes with similar terms in the market (Level 2 inputs).
As of December 29, 2017, and December 30, 2016, the fair value of debt was $3.2 billion and $3.3 billion,
respectively, and the carrying amount was $3.1 billion and $3.3 billion, respectively (see "Note 12—Debt"). The fair
value of long-term debt is determined based on current interest rates available for debt with terms and maturities
similar to the Company's existing debt arrangements (Level 2 inputs).
At December 29, 2017, the Company did not have any assets or liabilities measured at fair value on a non-recurring
basis. At December 30, 2016, the Company had non-financial instruments measured at fair value on a non-
recurring basis in connection with the acquisition of Lockheed Martin's IS&GS Business. Refer to "Note 2—
Acquisitions" for the final fair values of the assets acquired and liabilities assumed.
Leidos Holdings, Inc. Annual Report - 76
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6—Goodwill
During fiscal 2017, the Company completed its business reorganization, which resulted in identification of three
reportable segments (Defense Solutions, Civil and Health). Additionally, the Company separately presents the costs
associated with corporate functions as Corporate. The Company commenced operating and reporting under the
new organizational structure effective the beginning of fiscal 2017 (see "Note 20—Business Segments").
Goodwill, including the amounts from the acquisition of the IS&GS Business, was allocated to the reporting units on
a relative fair value approach.
The following table presents changes in the carrying amount of goodwill by reportable segment:
Goodwill at January 1, 2016(1)
Acquisition of the IS&GS Business
Goodwill at December 30, 2016(1)
Adjustment to original purchase price allocation
Defense
Solutions
Civil
Health
Total
(in millions)
$
792 $
244 $
171 $
1,162
1,954
94
1,487
1,731
259
766
937
(16)
1,207
3,415
4,622
337
Foreign currency translation adjustments
Goodwill at December 29, 2017(1)
4,974
(1) Carrying amount includes accumulated impairment losses of $369 million and $117 million within the Health and Civil segments, respectively.
2,055 $
1,998 $
921 $
15
—
8
$
7
See "Note 2—Acquisitions" for the description of adjustments to the original purchase price allocation.
In conjunction with the change in reportable segments, the Company evaluated goodwill for impairment, both before
and after the segment change and determined that goodwill was not impaired.
Based on a qualitative analysis performed during the Company's annual impairment evaluation for fiscal 2016 and
the 11-month period ended January 1, 2016, for certain of its reporting units, it was determined that it is more likely
than not that the fair values of the reporting units were in excess of the individual reporting unit carrying values. In
fiscal 2017, the company performed a quantitative analysis, see "Note 1—Summary of Significant Accounting
Policies," for all reporting units. It was determined that the fair values of all individual reporting units exceeded their
carrying values. As a result, no goodwill impairments were identified as part of the annual goodwill impairment
evaluation for the periods mentioned above.
Note 7—Intangible Assets
Intangible assets consisted of the following:
December 29, 2017
December 30, 2016
Gross
carrying
value
Accumulated
amortization
Net
carrying
value
Gross
carrying
value
(in millions)
Accumulated
amortization
Net
carrying
value
Finite-lived intangible assets:
Program and contract
intangibles
Backlog
Software and technology
Customer relationships
Total finite-lived intangible assets
Indefinite-lived intangible assets:
Trade names
$
1,013 $
158
89
4
1,264
(187) $
(158)
(64)
(3)
(412)
4
—
826 $
—
25
1
852
4
1,450 $
(25) $
1,425
200
61
6
(54)
(48)
(5)
146
13
1
1,717
(132)
1,585
4
—
4
Total intangible assets
$
1,268 $
(412) $
856 $
1,721 $
(132) $
1,589
Leidos Holdings, Inc. Annual Report - 77
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amortization expense related to intangible assets, including those acquired through the Transactions, was $281
million, $84 million and $8 million for fiscal 2017, fiscal 2016 and the 11-month period ended January 1, 2016,
respectively.
The acquired program and contract, and software and technology 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. The acquired backlog intangible assets, as well as the Company's existing customer
relationships and software and technology intangible assets, are amortized on a straight-line basis over their
estimated useful lives.
The estimated annual amortization expense related to finite-lived intangible assets as of December 29, 2017, is as
follows:
Fiscal Year Ending
2018
2019
2020
2021
2022
2023 and thereafter
(in millions)
$
$
202
172
128
106
92
152
852
Actual amortization expense in future periods could differ from these estimates as a result of future acquisitions,
divestitures, impairments, the outcome and timing of completion of in-process research and development projects
and other factors.
Note 8—Receivables
The components of receivables, net consisted of the following:
Billed receivables
Unbilled receivables
Allowance for doubtful accounts
December 29,
2017
December 30,
2016
(in millions)
771 $
1,074
(14)
1,831 $
847
821
(11)
1,657
$
$
Leidos Holdings, Inc. Annual Report - 78
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9—Property, Plant and Equipment
Property, plant and equipment, net consisted of the following:
Computers and other equipment
Leasehold improvements
Buildings and improvements
Office furniture and fixtures
Land
Construction in progress
Less: accumulated depreciation and amortization
December 29,
2017
December 30,
2016
(in millions)
194 $
171
54
34
49
44
546
(314)
232 $
172
161
104
35
57
12
541
(282)
259
$
$
The change related to Buildings and improvements relates to valuation adjustments as a result of the acquisition of
the IS&GS Business, see "Note 2—Acquisitions".
Depreciation expense was $55 million, $38 million and $33 million for fiscal 2017, fiscal 2016 and the 11-month
period ended January 1, 2016, respectively.
During the 11-month period ended January 1, 2016, the Company amended its sale agreement entered into in 2013
and closed the sale of the remaining building, parcels of land that surround the building and the multi-level surface
parking garage associated with the Company's former headquarters. The sale resulted in a write-off of $40 million in
aggregate net book value of assets disposed, including $29 million for buildings and $10 million attributed to land.
See "Note 18—Leases" for further information regarding the sale of the Company's former headquarters.
Leidos Holdings, Inc. Annual Report - 79
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10—Composition of Certain Financial Statement Captions
Balance Sheet
December 29,
2017
December 30,
2016
Inventory, prepaid expenses and other current assets:
Prepaid expenses
Inventory
Pre-contract costs
Transition costs and project assets
Prepaid income taxes and tax refunds receivable
Short-term notes receivable
Restricted cash
Other
Other assets:
Investment in rabbi trust
Derivatives
Equity method investments(1)
Deferred costs
Long-term notes receivables
Other
Accounts payable and accrued liabilities:
Accrued liabilities
Accounts payable
Collections in excess of revenues and deferred revenue
Tax indemnity liability
Provision for loss contracts
Accrued payroll and employee benefits:
Salaries, bonuses and amounts withheld from employees’ compensation
Accrued vacation
Accrued contributions to employee benefit plans
Other long-term liabilities:
Deferred compensation
Lease related obligations
Deferred revenue
Liabilities for uncertain tax positions
Tax indemnity liability
Accrued pension liabilities
Other
$
$
$
$
$
$
$
$
$
(in millions)
90 $
76
64
59
54
40
32
38
90
67
33
62
13
3
20
60
453 $
348
58 $
37
37
24
23
75
48
29
20
31
89
48
254 $
265
747 $
557
293
23
19
1,639 $
245 $
236
6
487 $
56 $
33
17
7
1
—
15
493
591
246
—
97
1,427
211
244
28
483
48
37
20
5
31
6
57
(1) Net of $30 million and $10 million of dividends received during fiscal 2017 and fiscal 2016, respectively, that were recorded in cash flows
provided by operating activities of continuing operations on the consolidated statements of cash flows.
$
129 $
204
Leidos Holdings, Inc. Annual Report - 80
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Statement
Other (expense) income, net
Promissory note impairment
Gain (loss) on foreign currency
Gain on sale of former headquarters
Other income, net
Note 11—Derivative Instruments
Fair Value Hedges
12 Months Ended
December 29,
2017
December 30,
2016
(in millions)
11 Months
Ended
January 1,
2016
$
$
(33) $
5
—
2
(26) $
— $
(18)
—
5
(13) $
—
—
82
2
84
The Company has interest rate swap agreements to hedge the fair value of the $450 million fixed rate 4.45% senior
secured notes maturing in December 2020 (the "Notes"). The objective of these instruments is to hedge the Notes
against changes in fair value due to the variability in the six-month LIBOR rate (the benchmark interest rate). Under
the terms of the interest rate swap agreements, the Company will receive semi-annual interest payments at the
coupon rate of 4.45% and will pay variable interest based on the six-month LIBOR rate.
The interest rate swaps were accounted for as a fair value hedge of the Notes and qualified for the shortcut method
of hedge accounting, which allows for the assumption of no ineffectiveness reported in earnings. The resulting
changes in the fair value of the interest rate swaps are fully offset by the changes in the fair value of the underlying
debt (the hedged item).
The fair value of the Notes is stated at an amount that reflects changes in the six-month LIBOR rate subsequent to
the inception of the interest rate swaps through the reporting date.
Cash Flow Hedges
In August 2016, the Company entered into interest rate swap agreements to hedge the cash flows with respect to
$1.2 billion of the Company's variable rate senior secured term loans (the "Variable Rate Loans"). In September
2017, the Company entered into interest rate swap agreements to hedge the cash flows of an additional $300
million of its Variable Rate Loans. The objective of these instruments is to reduce variability in the forecasted
interest payments of the Company's Variable Rate Loans, which is based on the LIBOR rate. Under the terms of the
interest rate swap agreements, the Company 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 agreements on $1.2 billion and $300
million of the Company's Variable Rate Loans have a maturity date of December 2021 and August 2022,
respectively, and a fixed interest rate of 1.08% and 1.66%, respectively. The counterparties to these agreements are
financial institutions.
The interest rate swaps were accounted for as cash flow hedges of the Variable Rate Loans and qualified for hedge
accounting treatment through the application of the long-haul method, which involves the comparison of cumulative
changes in the fair value of the swap to the cumulative change in fair value of scheduled interest payments on the
notional value (the perfectly effective hypothetical or "PEH"). The effective portion of the gain/loss on the swap is
reported as a component of other comprehensive income/loss and will be reclassified into earnings on the dates the
interest payments impact earnings. The amount of ineffectiveness recorded in earnings is equal to the excess of the
cumulative change in fair value of the swap over the cumulative change in the fair value of the PEH.
The fair value of the interest rate swaps was as follows:
Balance sheet line item
December 29,
2017
December 30,
2016
Fair value interest rate swaps
Cash flow interest rate swaps
Other assets
Other assets
Leidos Holdings, Inc. Annual Report - 81
(in millions)
— $
37
37 $
3
26
29
$
$
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value adjustment to the fair value interest rate swap and the underlying debt was a decrease of $3 million
and $5 million for the year ended December 29, 2017, and December 30, 2016, respectively.
The effect of the Company's cash flow hedges on other comprehensive income and earnings for the periods
presented was as follows:
Effective portion recognized in other comprehensive income
Effective portion reclassified from accumulated other comprehensive income (loss) to
interest expense
Ineffective portion recognized in other (expense) income, net
12 Months Ended
December 29,
2017
December 30,
2016
(in millions)
10 $
$
—
1
22
2
2
The Company expects to reclassify gains of $8 million from accumulated other comprehensive income (loss) into
earnings during the next 12 months.
The cash flows associated with the interest rate swaps are classified as operating activities in the consolidated
statements of cash flows.
Note 12—Debt
The Company's debt consisted of the following:
Stated
interest rate
Effective
interest rate
December 29,
2017(1)
December 30,
2016(1)
(in millions)
Senior secured notes:
$450 million notes, due December 2020
$300 million notes, due December 2040
Senior secured term loans:
$400 million Term Loan A, due August 2019
$690 million Term Loan A, due August 2022
$310 million Term Loan A, due August 2022
$1,131 million Term Loan B, due August 2023
Senior unsecured notes:
$250 million notes, due July 2032
$300 million notes, due July 2033
Capital leases and notes payable due on various dates
through fiscal 2022
Total long-term debt
Less: current portion
Total long-term debt, net of current portion
4.45%
5.95%
—%
3.13%
3.13%
3.38%
7.13%
5.50%
451
216
123
676
304
4.53% $
6.03%
449 $
216
—%
3.61%
3.60%
3.74%
7.43%
5.88%
—
644
270
1,101
1,110
246
158
27
3,111
55
3,056 $
$
246
158
3
3,287
62
3,225
0%-5.55%
Various
(1) The carrying amounts of the senior secured term loans and notes and unsecured notes as of December 29, 2017, and December 30, 2016,
include the remaining principal outstanding of $3,129 million and $3,336 million, respectively, plus an immaterial amount and $3 million,
respectively, related to the fair value of the interest rate swaps (see "Note 11—Derivative Instruments"), less unamortized debt discounts of
$35 million and $46 million, respectively, less deferred debt issuance costs of $10 million and $9 million, respectively.
Senior Secured Notes
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, due December 2040.
Leidos Holdings, Inc. Annual Report - 82
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Senior Secured Term Loans
On August 16, 2016, in connection with the acquisition of the IS&GS Business, Leidos, Inc. secured a new term
loan of $690 million. In addition, as a result of the acquisition, Leidos assumed the IS&GS Business' term loans of
$1.8 billion, which were obtained by the IS&GS Business immediately prior to the Transactions (see "Note 2—
Acquisitions"). The outstanding obligations under the term loans are secured by a first priority lien on substantially
all of the assets of the Company, subject to certain exceptions set forth in the credit agreements and related
documentation.
In February 2017, Leidos amended the terms of its senior secured $1.1 billion Term Loan B, due August 2023. As a
result, the margin on Term Loan B was reduced by 50 basis points to 2.25% and the six month call provision was
extended an additional six months. The repricing of the term loan became effective on February 16, 2017.
In August 2017, Leidos amended its senior secured term loans and revolving credit facility agreements. These
amendments reduced the applicable margins for the revolving credit facility and Term Loans A and B each by 25
basis points. Additionally, the maturity date for the revolving credit facility, $690 million Term Loan A and $310 million
Term Loan A were each extended by one year to August 2022, and the scheduled increase in quarterly principal
payments for both of these term loans was delayed one year to March 2020. The amendments also include a
collateral suspension provision that will permit the secured credit agreements to become unsecured under certain
circumstances.
The interest rate on the Company's senior secured term loans is determined based on the LIBOR rate plus a
margin. The margin for the Term Loan A loans ranges from 1.50% to 2.00%, depending on the Company's senior
secured leverage ratio, and is computed on a quarterly basis. At December 29, 2017, the current margin on Term
Loan A was 1.75% and the margin on Term Loan B was 2.00%.
As part of the credit agreements, the Company is required to perform a calculation each quarter that determines the
incremental available amount of funds the Company is permitted to use towards investments relating to mergers
and acquisitions, investments in joint ventures, repayment of outstanding debt and restricted payments relating to
dividends and share repurchases. The incremental available amount is calculated as $35 million plus a portion of
certain cash proceeds, multiplied by a percentage tied to the Company's senior secured leverage, which is added to
an annual fixed amount of $250 million, as defined in the credit agreements. The constraints associated with use of
cash are reduced and/or eliminated based on the Company's total leverage ratio.
The Company is also required to perform an excess cash flow calculation annually that determines the additional
amount of debt prepayments the Company is required to make during the first quarter of the following fiscal year,
with the first payment occurring in 2018. The excess cash flow is calculated based on the Company's consolidated
net income as of the end of the fiscal year plus or minus adjustments for certain non-cash items and incurred and
expected cash payments, as defined in the credit agreements. The amount of the excess cash flow that the
Company is required to use to prepay the loans is based upon the Company's senior secured leverage ratio. The
required debt prepayment amount is equal to 50% of the excess cash flow calculated if the senior secured leverage
ratio is greater than 2.75 and is equal to 25% of the excess cash flow calculated if the ratio is between 2.75 and
2.00. No additional debt prepayment is required if the senior secured leverage ratio is less than 2.00.
During fiscal 2017, the Company made $76 million of required quarterly payments on its term loans. In addition to
the required quarterly payments, the Company prepaid $130 million and $275 million of its term loans during fiscal
2017 and fiscal 2016, respectively. Associated with these early repayments, $2 million and $5 million during fiscal
2017 and fiscal 2016, respectively, of unamortized debt discount and deferred financing costs were written off and
recorded to "Other (expense) income, net" in the Company's consolidated statements of income.
Leidos Holdings, Inc. Annual Report - 83
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Senior Unsecured Notes
During the 11-month period ended January 1, 2016, the Company repurchased in the open market and retired
principal amounts of $23 million on its $300 million 5.50% notes, due July 2033. The Company recorded a $1 million
gain on extinguishment of debt as part of the partial repayment of the notes. The gain represents the difference
between the repurchase price amounts of $22 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 on extinguishment of debt in "Other
(expense) income, net" in the Company's consolidated statements of income.
Principal payments are made quarterly on the Company's variable rate senior secured term loans, with the majority
of the principal due at maturity. Interest on the variable rate senior secured term loans is payable on a periodic
basis, which must be at least quarterly. Interest on the senior fixed rate secured notes and unsecured notes is
payable on a semi-annual basis with principal payments due at maturity.
In connection with the new senior secured term loans, the Company recognized $53 million of debt discount and
debt issuance costs, which were recorded as an offset against the carrying value of debt and will be amortized to
interest expense over the term of the term loans. The Company also recognized $15 million of origination costs
related to the new credit facility (see "Revolving Credit Facility" below), which were capitalized within "Other assets"
in the consolidated balance sheets. Amortization for the senior secured term loans and notes, unsecured notes and
revolving credit facility was $13 million, $6 million and $1 million for fiscal 2017, fiscal 2016 and the 11-month period
ended January 1, 2016, respectively.
The senior secured term loans and notes, unsecured notes and revolving credit facility are fully and unconditionally
guaranteed by intercompany guarantees. The senior secured term loans and notes and unsecured notes contain
certain 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 December 29, 2017.
Future minimum payments of debt are as follows:
Fiscal Year Ending
2018
2019
2020
2021
2022
2023 and thereafter
Total principal payments
Less: unamortized debt discount and issuance costs
Total long-term debt
Revolving Credit Facility
$
(in millions)
55
71
582
113
642
1,693
3,156
(45)
$
3,111
On August 16, 2016, Leidos, Inc. entered into a revolving credit facility providing up to $750 million in secured
borrowing capacity at interest rates determined based upon the LIBOR rate plus a margin that is subject to step-
down provisions based on the Company's senior secured leverage ratio. The new credit facility replaced the
previous $500 million credit facility that was set to expire in March 2018. The maturity date of the new credit facility
is August 2021. During fiscal 2017 and fiscal 2016, there were no borrowings under the new credit facility.
The credit agreements contain certain customary representations and warranties, as well as certain affirmative and
negative covenants. The financial covenants define the debt-to-EBITDA ratio that the Company needs to maintain at
the end of each quarter. The Company maintains a ratio of total senior secured debt, including borrowings under
this credit facility, to the trailing four quarters of EBITDA (adjusted for certain items as defined in the credit facility) of
not more than 4.75 prior to February 16, 2018, 4.25 from February 16, 2018, to February 16, 2019, and 3.75
thereafter. The Company was in compliance with these financial covenants as of December 29, 2017.
Leidos Holdings, Inc. Annual Report - 84
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Notes Payable
During fiscal 2017, the Company recognized $21 million of notes payable related to secured borrowings associated
with certain contracts within its commercial energy business.
Note 13—Accumulated Other Comprehensive Income (Loss)
Changes in the components of accumulated other comprehensive income (loss) were as follows:
Foreign
currency
translation
adjustments
Unrecognized
(loss) gain on
derivative
instruments
Pension
liability
adjustments
Total accumulated
other comprehensive
income (loss)
Balance at January 30, 2015
$
Other comprehensive (loss) income
1 $
(1)
Taxes
Balance at January 1, 2016
Other comprehensive (loss) income
Taxes
Reclassification from accumulated other
comprehensive income (loss)
Balance at December 30, 2016
Other comprehensive income
Taxes
—
—
(8)
1
—
(7)
36
(12)
(in millions)
(5) $
(7) $
1
—
(4)
26
(10)
(2)
10
10
(6)
5
(2)
(4)
1
2
(6)
(7)
9
—
Balance at December 29, 2017
$
17 $
14 $
2 $
(11)
5
(2)
(8)
19
(7)
(8)
(4)
55
(18)
33
Reclassifications for unrecognized (loss) gain on derivative instruments associated with outstanding debt are
recorded in "Interest expense" in the Company's consolidated statements of income.
Reclassifications for pension liability adjustments are recorded in "Selling, general and administrative expenses" in
the Company's consolidated statements of income.
Note 14—Earnings Per Share ("EPS")
Basic EPS is computed by dividing income attributable to Leidos stockholders by the basic weighted average
number of shares outstanding. Diluted EPS is computed similar to basic EPS, except the weighted average number
of shares outstanding is increased to include the dilutive effect of outstanding stock options and other stock-based
awards.
The Company issues unvested stock awards that have forfeitable rights to dividends or dividend equivalents. These
stock awards are dilutive common share equivalents subject to the treasury stock method.
Leidos Holdings, Inc. Annual Report - 85
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average number of shares used to compute basic and diluted EPS attributable to Leidos stockholders
were:
Basic weighted average number of shares outstanding
Dilutive common share equivalents—stock options and other stock
awards
Diluted weighted average number of shares outstanding
Share repurchases
12 Months Ended
December 29,
2017
December 30,
2016
(in millions)
11 Months
Ended
January 1,
2016
152
2
154
102
2
104
73
1
74
In the 11-month period ended January 1, 2016, the Company entered into an Accelerated Share Repurchase
("ASR") agreement with a financial institution to repurchase shares of its outstanding common stock for an
aggregate purchase price of $100 million. During the second quarter of the 11-month period ended January 1, 2016,
the Company paid $100 million to the financial institution and received a total delivery of 2.4 million shares of its
outstanding shares of common stock. The purchase was allocated between additional paid in capital and retained
earnings. All shares delivered were immediately retired. The total amount of shares delivered by the financial
institution was adjusted by the volume weighted average price of the Company's stock over the valuation period
specified in the ASR.
The delivery of 2.4 million shares of Leidos common stock related to ASR purchases for the 11-month period ended
January 1, 2016, reduced the Company's outstanding shares used to determine the weighted average shares
outstanding for purposes of calculating basic and diluted EPS. There were no open market repurchases during
fiscal 2017 and fiscal 2016.
Note 15—Stock-Based Compensation
Plan Summaries
As of December 29, 2017, the Company had stock-based compensation awards outstanding under the following
plans: the 2017 Omnibus Incentive Plan, 2006 Equity Incentive Plan, as amended, and the 2006 Employee Stock
Purchase Plan, as amended ("ESPP"). Leidos issues new shares upon the issuance of the vesting of stock units or
exercise of stock options under these plans.
In fiscal 2017, stockholders approved the 2017 Omnibus Incentive Plan which provides the Company and its
affiliates' employees, directors and consultants the opportunity to receive various types of stock-based
compensation and cash awards. As of December 29, 2017, the Company has issued stock options, restricted stock
units, performance-based awards and cash awards under this plan to employees and directors. Service-based
awards granted under the plan prior to fiscal 2015 generally vest or become exercisable 20% a year for the first
three years and 40% in the fourth year. In fiscal 2015, the Company began granting awards that generally vest or
become exercisable 25% a year over four years or cliff vest in three years. As of December 29, 2017, 5.3 million
shares of Leidos' stock were reserved for future issuance under the 2017 Omnibus Incentive Plan and the 2006
Equity Incentive Plan.
The Company has a Management Stock Compensation Plan and a Stock Compensation Plan, together referred to
as the Stock Compensation Plans. These plans provided for the issuance of restricted share units to eligible
employees. Benefits from these plans are payable in shares of Leidos' stock that are held in a trust for the purpose
of funding shares to the plans' participants. All awards under these plans are fully vested and awards have not been
issued under these plans since 2012. The Stock Compensation Plans do not provide for a maximum number of
shares available for future issuance.
In fiscal 2017, stockholders approved the amended ESPP which allows eligible employees to purchase shares of
Leidos' stock at a discount of up to 15% of the fair market value on the date of purchase. During fiscal 2017, fiscal
2016 and the 11-month period ended January 1, 2016, the discount was 5% of the fair market value on the date of
purchase, thereby resulting in the ESPP being non-compensatory. A total of 4.8 million shares remain available for
future issuance under the Company's Amended and Restated 2006 ESPP.
Leidos Holdings, Inc. Annual Report - 86
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-based compensation and related tax benefits recognized under all plans were as follows:
12 Months Ended
December 29,
2017
December 30,
2016
(in millions)
11 Months
Ended
January 1,
2016
Total stock-based compensation expense
Tax benefits recognized from stock-based compensation
$
$
43 $
17 $
35 $
14 $
30
12
Stock Options
Stock options are granted with exercise prices equal to the fair market value of Leidos' common stock on the date of
grant and for terms not greater than ten years. Beginning in fiscal 2012, stock options granted under the 2006
Equity Incentive Plan have a term of seven years and a vesting period of four years, except for stock options
granted to the Company's outside directors, which have a vesting period of the earlier of one year from grant date or
the next annual meeting of stockholders following grant date.
The fair value of the Company's stock option awards is estimated on the date of grant using the Black-Scholes-
Merton option-pricing model. The fair value of the Company's stock option awards is generally expensed on a
straight-line basis over the vesting period of four years, except for stock options granted to the Company's outside
directors, which is recognized over the vesting period of one year or less.
During the 11-month period ended January 1, 2016, the expected volatility was estimated using a blended volatility
method for a period consistent with the expected term, based more significantly on the weighted average historical
volatility of a group of publicly-traded peer companies and the weighted average implied volatility from traded
options on Leidos stock for a time period prior to the grant date.
During fiscal 2016, expected volatility was based on using a blended approach, which included weighted average
historical volatility of a group of publicly-traded peer companies, weighted average historical volatility of the
Company and the weighted average implied volatility. The expected volatility increased, from pre-acquisition to post-
acquisition of the IS&GS Business in fiscal 2016, due to a higher allocation of peer group volatility used post-
acquisition compared to a higher allocation of historical volatility used pre-acquisition. The post-acquisition volatility
reflected an updated peer group mix.
During fiscal 2017, the Company ceased the usage of peer group volatility, as an input into its blended approach to
measure expected volatility, and increased the reliance on historical volatility. The revised blended approach
includes the Company's weighted average historical and implied volatilities.
The risk-free rate is derived using the yield curve of a zero-coupon U.S. Treasury bond with a maturity equal to the
expected term of the stock option on the grant date. Leidos utilizes the simplified method for the expected term,
which represents an appropriate period of time that the options granted are expected to remain outstanding
between the weighted-average vesting period and end of the respective contractual term. The dividend yield
increased from pre-acquisition to post-acquisition due to historical stock price fluctuations. The Company uses
historical data to estimate forfeitures and was derived in the same manner as in the prior years presented.
Leidos Holdings, Inc. Annual Report - 87
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average grant-date fair value and assumptions used to determine fair value of stock options granted
for the periods presented were as follows:
12 Months Ended
December 30,
2016
(Grants after
acquisition)
December 30,
2016
(Grants before
acquisition)
11 Months
Ended
January 1,
2016
December 29,
2017
Weighted average grant-date fair value
$
11.53
$
10.33
$
Expected term (in years)
Expected volatility
Risk-free interest rate
Dividend yield
Special Dividend Adjustment
4.7
29.7%
1.9%
2.5%
4.7
37.9%
1.2%
2.7%
$
9.54
4.8
29.9%
1.3%
2.5%
6.72
4.7
24.5%
1.4%
2.9%
As a result of the payment of the special cash dividend to Leidos stockholders in August 2016, Leidos modified all
outstanding stock options to preserve their original grant date fair value. The modifications resulted in a reduction in
the strike prices of the outstanding stock options by a factor of 0.74 and an increase in the number of shares
issuable upon the exercise of each option by a factor of 1.35 between the pre-modification stock price and post-
modification stock price. These adjustments did not result in additional stock-based compensation expense, as the
fair value of the outstanding options immediately following the payment of the special cash dividend was equal to
the fair value immediately prior to such distribution. The modifications resulted in an increase in options outstanding
by 0.9 million. The special dividend declared was $993 million. As a result of the special dividend declaration, the
Company accrued $29 million of dividend equivalents with respect to outstanding equity awards. The transactions
associated with the special cash dividend were recorded to "Additional paid-in capital" in the consolidated balance
sheets.
Stock option activity for each of the periods presented was as follows:
Outstanding at January 30, 2015
Options granted
Options forfeited or expired
Options exercised
Outstanding at January 1, 2016
Options granted
Special dividend adjustments
Options forfeited or expired
Options exercised
Outstanding at December 30, 2016
Options granted
Options forfeited or expired
Options exercised
Outstanding at December 29, 2017
Exercisable at December 29, 2017
Vested and expected to vest in the future as of
December 29, 2017
Shares of
stock under
stock options
(in millions)
Weighted
average
exercise price
Weighted
average
remaining
contractual
term
Aggregate
intrinsic value
(in years)
(in millions)
3.6 $
0.6
(0.9)
(0.9)
2.4 $
0.6
0.9
(0.2)
(0.4)
3.3 $
0.5
(0.2)
(0.8)
2.8
1.6 $
38.50
42.64
42.03
38.53
38.21
43.56
34.98
34.11
29.77
53.51
35.72
27.23
34.38
29.13
2.7 $
33.98
4.0 $
4.5 $
4.1
3.9
2.7 $
3.8 $
14
9
43
5
70
23
86
56
83
As of December 29, 2017, there was $6 million of unrecognized compensation cost, net of estimated forfeitures,
related to stock options, which is expected to be recognized over a weighted-average period of 2.3 years.
Leidos Holdings, Inc. Annual Report - 88
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity related to exercises of stock options:
Tax benefits from stock options exercised
Fair value of stock surrendered in payment of the exercise price for stock
options exercised
Cash received from exercises of stock options
Restricted Stock Units and Awards
12 Months Ended
December 29,
2017
December 30,
2016
(in millions)
11 Months
Ended
January 1,
2016
$
$
$
7 $
2 $
2 $
1 $
4 $
— $
1
3
—
Compensation expense is measured at the grant date fair value and generally recognized over the vesting period of
four years based upon required service conditions and in some cases revenue-based performance conditions.
In connection with the Transactions (see "Note 2—Acquisitions"), the Company issued 0.6 million replacement
restricted stock units valued at $23 million, of which $9 million was allocated as purchase consideration attributed to
pre-acquisition service and the remaining $12 million represents the total remaining stock-based compensation
expense, net of estimated forfeitures. This remaining expense will be recognized over three years from the date of
acquisition.
Restricted stock units activity for each of the periods presented was as follows:
Unvested stock awards at January 30, 2015
Awards granted
Awards forfeited
Awards vested
Unvested stock awards at January 1, 2016
Awards granted
Awards forfeited
Awards vested
Unvested stock awards at December 30, 2016
Awards granted
Awards forfeited
Awards vested
Unvested stock awards at December 29, 2017
Shares of stock
under stock
awards
(in millions)
Weighted
average grant-
date fair value
3.0 $
0.5
(0.4)
(0.8)
2.3 $
1.5
(0.2)
(1.1)
2.5 $
0.8
(0.3)
(1.0)
2.0 $
38.51
42.95
40.10
40.05
38.97
41.45
40.88
38.91
40.39
53.91
45.89
41.02
44.96
As of December 29, 2017, there was $37 million of unrecognized compensation cost, net of estimated forfeitures,
related to restricted stock units, which is expected to be recognized over a weighted average period of 2.0 years.
The fair value of restricted stock units that vested in fiscal 2017, fiscal 2016 and the 11-month period ended January
1, 2016, was $33 million, $43 million and $29 million, respectively. In addition, the fair value of dividend equivalents
with respect to restricted stock units that vested in fiscal 2017, fiscal 2016 and the 11-month period ended January
1, 2016 was $13 million, $8 million and $2 million, respectively.
Leidos Holdings, Inc. Annual Report - 89
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Performance-Based Stock Awards
Historically, the Company granted performance-based stock awards to certain officers and key employees of the
Company under the 2006 Equity Incentive Plan. During fiscal 2017, upon stockholder approval, the Company
started granting performance-based stock awards to these individuals under the 2017 Omnibus Incentive Plan.
Under both plans, the Company's performance-based stock awards vest and the stock is issued at the end of a
three-year period based upon the achievement of specific performance criteria, with the number of shares ultimately
awarded, if any, ranging up to 150% of the specified target awards. If performance is below the threshold level of
performance, no shares will be issued.
For awards granted during fiscal 2017, fiscal 2016 and the 11-month period ended January 1, 2016, the target
number of shares of stock granted under the awards will vest and the stock will be issued at the end of a three-year
period based on a three-year cycle performance period and the actual number of shares to be issued will be based
upon the achievement of the three-year cycle's performance criteria. Also, during fiscal 2017, fiscal 2016 and the
11-month period ended January 1, 2016, the Company granted performance-based awards with market conditions.
These market conditions grants represent the target number of shares and the actual number of shares to be
awarded upon vesting may be higher or lower depending upon the achievement of the relevant market conditions.
The target number of shares granted under the market conditions grants will vest and the stock will be issued at the
end of a three-year period based on the attainment of certain total shareholder return performance measures and
the employee's continued service through the vest date.
Performance-based stock award activity for each of the periods presented was as follows:
Unvested at January 30, 2015
Awards granted
Awards forfeited
Unvested at January 1, 2016
Awards granted
Unvested at December 30, 2016
Awards granted
Awards vested
Unvested at December 29, 2017
Expected number
of shares of stock
to be issued under
performance-based
stock awards
(in millions)
Weighted
average grant-
date fair value
0.1 $
0.2
(0.1)
0.2 $
0.2
0.4 $
0.2
(0.1)
0.5 $
37.70
44.30
43.49
43.35
45.62
44.44
57.94
42.85
50.34
The weighted average grant date fair value for performance-based stock, excluding those with a market condition,
during fiscal 2017, fiscal 2016 and the 11-month period ended January 1, 2016 was $53.58, $45.83 and $43.78,
respectively. The weighted average grant date fair value for performance-based stock with market conditions that
were granted during fiscal 2017, fiscal 2016 and the 11-month period ended January 1, 2016, was $62.30, $45.80
and $45.00, respectively, and was calculated using the Monte Carlo simulation.
The Monte Carlo simulation assumptions used for the periods presented were as follows:
Expected volatility
Risk free rate of return
Weighted average grant date stock price
12 Months Ended
December 29,
2017
December 30,
2016
11 Months
Ended
January 1,
2016
27.19%
1.53%
31.73%
1.01%
27.67%
0.82%
$
53.73
$
46.54
$
42.61
As of December 29, 2017, there was $9 million of unrecognized compensation cost, net of estimated forfeitures,
related to performance-based stock awards granted under both the 2017 Omnibus Incentive Plan and 2006 Equity
Leidos Holdings, Inc. Annual Report - 90
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Incentive Plan, which is expected to be recognized over a weighted average period of 1.8 years. The fair value of
performance-based stock awards that vested in fiscal 2017 was $4 million. There were no performance-based
stock awards that vested in fiscal 2016 and the 11-month period ended January 1, 2016.
Note 16—Income Taxes
In December 2017, the U.S. government enacted the Tax Act which made broad and complex changes to the U.S.
tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2)
requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3)
generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; and (4) limiting the
deductibility of certain executive compensation.
As a result of the Company’s analysis of the impact of the Tax Act, a discrete net tax benefit of $115 million was
recorded in fiscal 2017, which primarily consists of a net benefit for the corporate rate reduction of $119 million.
This rate reduction resulted in a corresponding net decrease of deferred tax liabilities.
The Company's accounting for the following elements of the Tax Act is not complete: (1) deemed repatriation tax,
(2) cost recovery and (3) limitation on the deductibility of certain executive compensation. However, the Company
was able to make reasonable estimates and has recorded provisional amounts. The Company expects to finalize its
assessment of all provisional amounts within the maximum one year measurement period. There are no material
elements of the Tax Act for which the Company was unable to make a reasonable estimate.
Less than 10% of the Company's income from continuing operations before income taxes for fiscal 2017, fiscal
2016 and the 11-month period ended January 1, 2016, was earned outside of the United States. The provision for
income taxes related to continuing operations for the periods presented included the following:
Current:
Federal and foreign
State
Deferred:
Federal and foreign
State
Total
12 Months Ended
December 29,
2017
December 30,
2016
(in millions)
11 Months
Ended
January 1,
2016
$
130 $
30
(141)
10
29 $
$
88 $
16
(29)
(3)
72 $
71
14
20
7
112
Leidos Holdings, Inc. Annual Report - 91
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income
tax rate to income from continuing operations before income taxes for the periods presented was as follows:
12 Months Ended
December 29,
2017
December 30,
2016
(in millions)
11 Months
Ended
January 1,
2016
Amount computed at the statutory federal income tax rate (35%)
$
138
$
111
$
124
Change in statutory federal tax rate
State income taxes, net of federal tax benefit
Excess tax benefits from stock-based compensation
Capitalized transaction costs
Change in valuation allowance for deferred tax assets
Research and development credits
Dividends paid to employee stock ownership plan
Impact of foreign operations
Change in accruals for uncertain tax positions
Other
Total
Effective income tax rate
(125)
31
(12)
9
7
(7)
(4)
(4)
—
(4)
—
8
(8)
7
(8)
(4)
(38)
—
1
3
—
14
—
—
(21)
(4)
(3)
—
(4)
6
$
29
$
72
$
112
7.4%
22.6%
31.5%
The Company's effective tax rate for fiscal 2017 was favorably impacted by the Tax Act's reduction of the federal
corporate tax rate from 35% to 21% applied to the Company's fiscal 2017 year-end deferred tax balances and
excess tax benefits related to employee stock-based payment transactions.
The Company's effective tax rate for fiscal 2016 was favorably impacted by the tax deductibility of the special cash
dividend, related to the Transactions described in “Note 2—Acquisitions,” on shares held by the Leidos retirement
plan, the income tax benefits of the research tax credit and the excess tax benefits related to employee stock-based
payment transactions, partially offset by the impact of certain capitalized transactions costs related to the
Transactions.
The Company's effective tax rate for the 11-month period ended January 1, 2016, was favorably impacted by the
release of the valuation allowance related to the utilization of a capital loss carryforward for capital gains recognized
during the current year and the favorable resolution of certain tax contingencies with the tax authorities. In addition,
the Company's effective tax rate was favorably impacted by the research tax credit as well as the tax deduction for
dividends on shares held by the Leidos Retirement Plan (an employee stock ownership plan).
Deferred income taxes are recorded for differences in the basis of assets and liabilities for financial reporting
purposes and tax reporting purposes. Deferred tax assets (liabilities) were comprised of the following:
Leidos Holdings, Inc. Annual Report - 92
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reserves
Capital loss carryover
Accrued vacation and bonuses
Credits and net operating losses carryovers
Deferred compensation
Vesting stock awards
Deferred rent and tenant allowances
Investments
Employee benefit contributions
Other
Total deferred tax assets
Valuation allowance
Deferred tax assets, net of valuation allowance
Purchased intangible assets
Deferred revenue
Partnership interest
Accumulated other comprehensive income
Employee benefit contributions
Fixed asset basis differences
Other
Total deferred tax liabilities
Net deferred tax liabilities
Net deferred tax assets (liabilities) were as follows:
Net non-current deferred tax assets
Net non-current deferred tax liabilities
Total net deferred tax liabilities
December 29,
2017
December 30,
2016
$
(in millions)
62 $
60
54
33
22
17
10
2
—
18
278
(83)
195
103
81
89
35
38
23
16
3
3
17
408
(102)
306
(340)
(748)
(34)
(17)
(13)
(3)
—
(8)
(415)
(220) $
$
(42)
(14)
(8)
—
(11)
(7)
(830)
(524)
December 29,
2017
December 30,
2016
(in millions)
— $
(220)
(220) $
16
(540)
(524)
$
$
At December 29, 2017, the Company had $20 million of federal net operating loss ("NOL") carryforwards and $180
million of state net operating losses, which will begin to expire in fiscal 2018. The Company also has $13 million of
state tax credits, which will begin to expire in fiscal 2018. The Company expects to utilize $5 million and $71 million
of these state tax credits and state net operating losses, respectively. The company also had foreign net operating
losses of $35 million. The majority of the NOLs were acquired in the Transactions.
As of December 29, 2017, the Company had a capital loss carryforward of $234 million, $97 million of which will
begin to expire in fiscal 2018. The Company does not believe it will be able to generate capital gains to realize the
benefit from the capital loss carryforward. As a result, a full valuation allowance has been provided as of December
29, 2017.
Leidos Holdings, Inc. Annual Report - 93
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's unrecognized tax benefits are primarily related to certain recurring deductions customary for the
Company’s industry. The changes in the unrecognized tax benefits, excluding accrued interest and penalties, were
as follows:
Unrecognized tax benefits at beginning of year
Additions for tax positions related to current year
Additions for tax positions related to prior years
Reductions for tax positions related to prior years
Unrecognized tax benefits at end of year
Unrecognized tax benefits that, if recognized, would affect the effective
income tax rate
12 Months Ended
December 29,
2017
December 30,
2016
(in millions)
11 Months
Ended
January 1,
2016
$
$
$
9 $
2
2
(3)
10 $
7 $
11 $
1
4
(7)
9 $
4 $
17
5
4
(15)
11
7
At December 29, 2017, December 30, 2016, and January 1, 2016, accrued interest and penalties totaled $1 million.
A negligible amount of interest and penalties were recognized in the Company's consolidated statements of income
in fiscal 2017, fiscal 2016 and the 11-month period ended January 1, 2016.
At December 29, 2017, the balance of unrecognized tax benefits included liabilities for uncertain tax positions of $11
million, $7 million of which were classified as other long-term liabilities on the Company's consolidated balance
sheets. At December 30, 2016, the balance of unrecognized tax benefits included liabilities for uncertain tax
positions of $10 million, $5 million of which were classified as other long-term liabilities on the Company's
consolidated balance sheets. At January 1, 2016, the balance of unrecognized tax benefits included liabilities for
uncertain tax positions of $12 million, $5 million of which were classified as other long-term liabilities on the
Company's consolidated balance sheets.
The Company files income tax returns in the United States and various state and foreign jurisdictions. The
Company participates in the Internal Revenue Service (“IRS”) Compliance Assurance Process, a real-time audit of
the Company's consolidated federal corporate income tax return. The IRS has examined the Company's
consolidated federal income tax returns through the year ended December 30, 2016. With a few exceptions, as of
December 29, 2017, the Company is no longer subject to state, local, or foreign examinations by the tax authorities
for years before fiscal 2015.
During the next 12 months, it is reasonably possible that resolution of reviews by taxing authorities, both domestic
and international, could be reached with respect to $6 million of the Company's unrecognized tax benefits,
depending on the timing of ongoing examinations, any litigation and expiration of statute of limitations, either
because the Company's tax positions are sustained or because the Company agrees to their disallowance and pays
the related income tax. While the Company believes it has adequate accruals for uncertain tax positions, the tax
authorities may determine that the Company owes taxes in excess of recorded accruals or the recorded accruals
may be in excess of the final settlement amounts agreed to by tax authorities.
Note 17—Retirement Plans
Defined Contribution Plans
The Company sponsors several defined contribution plans, including the Leidos, Inc. Retirement Plan which is both
a 401(k) plan and an employee stock ownership plan, in which most employees are eligible to participate, and the
Leidos, Inc. Retirement Plan for Former IS&GS Employees. These plans allow eligible participants to contribute a
portion of their income through payroll deductions and the Company may also make discretionary contributions.
Company contributions were $94 million, $68 million and $56 million for fiscal 2017, fiscal 2016 and the 11-month
period ended January 1, 2016, respectively.
Leidos Holdings, Inc. Annual Report - 94
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred Compensation Plans
The Company maintains two deferred compensation plans, the Keystaff Deferral Plan ("KDP") and the Key
Executive Stock Deferral Plan ("KESDP"), for the benefit of certain management or highly compensated employees
or members of the Board of Directors. The deferred compensation plans allow eligible participants to elect to defer a
portion of their salary, and all or a portion of certain bonuses, including stock unit awards. Directors may also elect
to defer their director fees and retainers.
The Company makes no contributions to the KDP but maintains participant accounts for deferred amounts and
investments. The Company maintains a rabbi trust for the purpose of funding benefit payments to the KDP
participants. Participants may allocate deferred cash bonus amounts into a variety of designated investment
options, with gains and losses based on the elected investment option performance. Under the KESDP, eligible
participants may also elect to defer in share units all or a portion of certain cash bonuses and stock unit awards
granted under the 2006 Equity Incentive Plan and the 2017 Omnibus Incentive Plan (see "Note 15 Stock-Based
Compensation"). The Company makes no contributions to the accounts of KESDP participants. Benefits from the
KESDP are payable in shares of Leidos common stock held in a rabbi trust for the purpose of funding benefit
payments to KESDP participants. Deferred balances in the KDP and KESDP plans are paid in lump sum or
installments upon retirement, termination, or the elected specified date.
The Company sponsored a 401(k) Excess Deferral Plan ("Excess Plan") for the benefit of certain management or
highly compensated employees that allowed participants to elect to defer up to 20% of their eligible salary once the
participant has met the IRS contribution limit imposed on the Leidos, Inc. Retirement Plan. The Company made
matching contributions to participants who have received a reduced Company contribution in the Leidos, Inc.
Retirement Plan due to the participant's deferral of salary into the Excess Plan which were included in the
contributions expensed amount for defined contributions plans. This plan was frozen effective December 31, 2016.
Defined Benefit Plans
The Company sponsors a defined benefit pension plan in the United Kingdom for former employees on an expired
customer contract. While benefits under the plan are frozen, the Company has continuing defined benefit pension
obligations with respect to certain plan participants. In fiscal 2012, the Company sold certain components of its
business, including the component of its business that contained this pension and employed the pension plan
participants. Pursuant to the definitive sale agreement, the Company retained the assets and obligations of this
defined benefit pension plan. As a result of retaining the pension obligation, the remaining immaterial components
of ongoing pension expense, primarily interest costs and assumed return on plan assets subsequent to the sale, are
recorded in continuing operations.
The projected benefit obligation as of December 29, 2017, and December 30, 2016, was $120 million and $115
million, respectively. The increase in the projected benefit obligation was primarily due to the impact of a weaker
U.S. dollar, partially offset by a gain resulting from changes in assumptions used in the valuation.
The fair value of plan assets as of December 29, 2017, and December 30, 2016, was $129 million and $109 million,
respectively. The plan funding status was overfunded $9 million and underfunded $6 million as of December 29,
2017, and December 30, 2016, respectively.
Other
The Company also sponsors a defined benefit pension plan for employees working on one U.S. Government
contract. As part of the contractual agreement, the customer reimburses the Company for contributions made to the
plan that are allowable under government contract cost accounting requirements. If the Company were to cease
being the contractor as a result of a recompetition process, this defined benefit pension plan and related plan assets
and liabilities would transfer to the new contractor. If the contract expires or is terminated with no transfer of the plan
to a successor contractor, any amount by which plan liabilities exceed plan assets, as of that date, will be
reimbursed by the U.S. Government customer. Since the Company is not responsible for the current or future
funded status of this plan, no assets or liabilities arising from its funded status are recorded in the Company's
consolidated financial statements and no amounts associated with this plan are included in the defined benefit plan
disclosures above.
Leidos Holdings, Inc. Annual Report - 95
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18—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 for the periods
presented were as follows:
Gross rental expense
Less: sublease income
Net rental expense
12 Months Ended
December 29,
2017
December 30,
2016
(in millions)
$
$
181 $
(3)
178 $
107 $
(2)
105 $
11 Months
Ended
January 1,
2016
83
(8)
75
The increase in rental expense was primarily due to the acquisition of the IS&GS Business in fiscal 2016.
Future minimum lease commitments and sublease receipts, under non-cancelable operating leases in effect at
December 29, 2017, are as follows:
Fiscal Year Ending
2018
2019
2020
2021
2022
2023 and thereafter
Total
Operating
lease
commitment
Sublease
receipts
(in millions)
$
140 $
107
78
53
39
78
$
495 $
2
1
1
1
—
—
5
As of December 29, 2017, the Company had capital lease obligations of $6 million that are payable over the next
two years (see "Note 12—Debt").
Sale and Leaseback Agreement
On May 3, 2013, the Company entered into a purchase and sale agreement ("2013 Sale") 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 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 $95 million. The closing
consideration consisted of a cash payment of $75 million and a promissory note (the "Note") of $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 (expense) income, 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
Leidos Holdings, Inc. Annual Report - 96
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Note 19—Supplementary Cash Flow Information and Restricted Cash
Supplementary cash flow information, including non-cash activities, for the periods presented was as follows:
Supplementary cash flow information:
Cash paid for income taxes, net of refunds
Cash paid for interest
Non-cash investing activity:
Stock issued for acquisition of the IS&GS Business
Promissory note, net received for disposition of business
Promissory note, net received from a real estate sale
Non-cash financing activity:
Capital lease and notes payable obligations
Dividends declared and other
12 Months Ended
December 29,
2017
December 30,
2016
(in millions)
11 Months
Ended
January 1,
2016
$
$
$
214 $
133
47 $
90
— $
—
—
2,938 $
—
—
27 $
3
— $
21
31
50
—
72
20
6
2
The following is a reconciliation of cash and cash equivalents, as reported within the consolidated balance sheets,
to the total cash, cash equivalents and restricted cash, as reported within the consolidated statements of cash
flows, as required by the adoption of ASU 2016-18 (see "Note 1—Summary of Significant Accounting Policies"):
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash
December 29,
2017
December 30,
2016
(in millions)
390 $
32
422 $
376
20
396
$
$
The restricted cash is recorded within "Inventory, prepaid expenses and other current assets" in the Company's
consolidated balance sheets.
The restricted cash primarily comprises of advances from customers that are restricted as to use for certain
expenditures related to that customer's contract.
Leidos Holdings, Inc. Annual Report - 97
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20—Business Segments
The Company defines its reportable segments based on the way the chief operating decision maker ("CODM"),
currently its Chairman and Chief Executive Officer, manages the operations of the Company for purposes of
allocating resources and assessing performance.
During fiscal 2017, the Company completed its business reorganization, which resulted in identification of three
reportable segments (Defense Solutions, Civil and Health). Additionally, the Company separately presents the costs
associated with corporate functions as Corporate. The Company commenced operating and reporting under the
new organization structure effective the beginning of fiscal 2017. The segment information for prior periods has
been recast to reflect the Company's current reportable segments structure.
Defense Solutions is focused on rapidly deploying agile, cost-effective solutions to meet the ever-changing missions
of the Company's customers in areas of intelligence surveillance and reconnaissance, enterprise IT and integrated
systems and cybersecurity and global services. Defense Solutions provides a diverse portfolio of national security
solutions and systems for air, land, sea, space and cyberspace for the U.S. Intelligence Community, the DoD,
military services, DHS, government agencies of U.S. allies abroad and other federal, civilian and commercial
customers in the national security industry. The Company's solutions deliver innovative technology, large-scale
intelligence systems, command and control, data analytics, logistics and cybersecurity solutions, as well as
intelligence analysis and operations support to critical missions around the world.
The Civil business is focused on seamlessly integrating and protecting physical, digital and data domains. By
applying leading science, effective technologies and business acumen, the Company's forward thinkers are helping
customers maximize their performance and take on the connected world with data-driven insights, improved
efficiencies and technological advantages.
The Health business is focused on delivering effective and affordable solutions to federal and commercial
customers that are responsible for the health and wellbeing of people worldwide including service members and
veterans. These solutions enable customers to deliver on the health mission of providing high quality, cost effective
care and are accomplished through the integration of information technology, engineering, health & life sciences,
clinical insights and health policy. The capabilities the Health business provides are principally encapsulated by four
major areas of activity: complex systems integration, managed health services, enterprise IT transformation and life
sciences.
Corporate includes the operations of various corporate activities, certain corporate expense items that are not
reimbursed by the Company's U.S. Government customers and certain other expense items excluded from a
reportable segment's performance.
Leidos Holdings, Inc. Annual Report - 98
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes business segment information for the periods presented:
Revenues:
Defense Solutions
Civil
Health
Corporate
Total revenues
Operating income (loss):
Defense Solutions
Civil
Health
Corporate
Total operating income
Amortization of intangible assets:
Defense Solutions
Civil
Health
Total amortization of intangible assets
12 Months Ended
December 29,
2017
December 30,
2016
(in millions)
11 Months
Ended
January 1,
2016
$
$
$
$
$
$
4,959 $
3,409
1,802
—
10,170 $
3,843 $
2,082
1,117
1
7,043 $
3,009
1,141
556
6
4,712
307 $
226
228
(202)
559 $
108 $
132
41
281 $
312 $
146
110
(151)
417 $
17 $
39
28
84 $
260
33
46
(19)
320
—
6
2
8
The financial performance measures used to evaluate segment performance are revenues and operating income.
As a result, "Other (expense) income, net," "Interest income," "Interest expense" and "Income tax expense," as
reported in the consolidated financial statements are not allocated to the Company's segments. Under U.S.
Government Cost Accounting Standards, indirect costs including depreciation expense are collected in numerous
indirect cost pools, which are then collectively allocated out to the Company’s reportable segments based on a
representative causal or beneficial relationship of the costs in the pool to the costs in the base. While depreciation
expense is a component of the allocated costs, the allocation process precludes depreciation expense from being
specifically identified by the Company’s individual reportable segments. For this reason, depreciation expense by
reportable segment has not been reported above.
Asset information by segment is not a key measure of performance used by the CODM.
Less than 10% of the Company's revenues and tangible long-lived assets are generated by or owned by entities
outside of the United States. As such, the financial information by geographic location is not presented.
Leidos Holdings, Inc. Annual Report - 99
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's revenues are largely attributable to prime contracts with the U.S. Government or to subcontracts
with other contractors engaged in work for the U.S. Government. The percentages of total revenues for the U.S.
Government, its agencies and other customers comprising more than 10% of total revenues in any of the periods
for the periods presented were as follows:
U.S. Government
U.S. DoD
U.S. Army
Maryland Procurement Office
Note 21—Contingencies
Legal Proceedings
MSA Joint Venture
12 Months Ended
December 29,
2017
December 30,
2016
11 Months
Ended
January 1,
2016
84%
47%
13%
5%
81%
56%
14%
7%
76%
64%
14%
10%
On November 10, 2015, MSA received a final decision of the Department of Energy ("DoE") contracting officer for
the Mission Support Contract concluding that certain payments to MSA by DoE for the performance of IT services
by Lockheed Martin Services, Inc. (“LMSI”) under a subcontract to MSA constituted alleged affiliate fees in violation
of the Federal Acquisition Regulation (the "FAR"). Lockheed Martin Integrated Technology LLC (now known as
Leidos Integrated Technology LLC) is a member entity of MSA. Subsequent to the contracting officer's final
decision, MSA, LMSI and Lockheed Martin Corporation 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, LMSI and Lockheed Martin Corporation have produced information in
response to Civil Investigative Demands from the U.S. Attorney's Office. In addition, the U.S. Attorney's office has
advised that a parallel criminal investigation is open, although no subjects or targets of the investigation have been
identified.
Since this issue first was raised by the DoE, MSA has asserted that the IT services performed by LMSI under a
fixed price/fixed unit rate subcontract approved by the DoE 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, but has been stayed pending
resolution of the False Claims Act investigation. Subsequent to the filing of MSA's appeal, the contracting officer
demanded that MSA reimburse the DoE in the amount of $64 million, which was his estimate of the profits earned
during the period from 2010 to 2014 by LMSI. The DoE has deferred that demand, pending resolution of the appeal,
but to date the demand has not been rescinded. MSA and the other members of MSA have indicated they believe if
MSA incurs a liability in this matter, then Leidos Integrated Technology, LLC is responsible to MSA for the loss.
Under the terms of the Separation Agreement, Lockheed Martin has agreed to indemnify the Company for 100% of
any damages in excess of $38 million up to $64 million, and 50% of any damages in excess of $64 million, with
respect to claims asserted against MSA related to this matter. At December 29, 2017, the Company has a liability of
$39 million and an indemnification asset of $1 million recorded in the consolidated balance sheets.
Securities Litigation
Between February and April 2012, alleged stockholders filed three putative securities class actions against the
Company and several former executives relating to the Company's contract to develop and implement an
automated time and attendance and workforce management system for certain agencies of the City of New York
("CityTime"). One case was withdrawn and two cases were consolidated in the U.S. District Court for the Southern
District of New York in In Re: SAIC, Inc. Securities Litigation. The consolidated securities complaint asserted claims
under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on allegations that the Company and
individual defendants made misleading statements or omissions about the Company's revenues, operating income
and internal controls in connection with disclosures relating to the CityTime project. The plaintiffs sought to recover
from the Company and the individual defendants an unspecified amount of damages class members allegedly
incurred by buying Leidos' stock at an inflated price. The District Court dismissed the plaintiffs' claims with prejudice
Leidos Holdings, Inc. Annual Report - 100
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and without leave to replead. The plaintiffs then appealed to the United States Court of Appeals for the Second
Circuit, which issued an opinion affirming in part, and vacating in part, the District Court's ruling. The Company filed
a petition for a writ of certiorari in the U.S. Supreme Court, which was granted on March 27, 2017. The District Court
granted the Company's request to stay all proceedings, including discovery, pending the outcome at the Supreme
Court. In September 2017, the parties engaged in mediation resulting in an agreement to settle all remaining claims
for an immaterial amount to be paid by the Company's insurer. The parties executed the settlement agreement and
plaintiffs filed their motion for preliminary settlement approval at the District Court on December 13, 2017. The terms
of the settlement agreement remain subject to court approval, which is expected to occur in the first half of 2018.
Greek Government Contract
In 2003, the Company entered into a firm-fixed-price contract with the Hellenic Republic of Greece to provide a
Command, Control, Communications, Coordination and Integration System. The Greek government disputed the
contract balance owed to the Company and has not paid the Company's final invoice. In 2013, the Company
received an arbitral award by the International Chamber of Commerce for €39 million or $46 million, which has not
been satisfied. In January 2017, the U.S. District Court granted an order to enforce the arbitration award and
entered judgment in the Company's favor, converting the award to U.S. dollars in the amount of $63 million. The
U.S. Court of Appeals for the D.C. Circuit subsequently ruled that the district court judgment should instead reflect
the currency in which it was originally awarded. Separately, the Greek government sought to annul the award in the
Greek courts; however, on July 27, 2017, the Athens Court of Appeals issued a decision rejecting the government's
position. Based on the complex nature of this contractual situation and the difficulties encountered to date,
significant uncertainties exist and the Company is unable to reliably estimate the ultimate outcome.
Other
The Company is also involved in various claims and lawsuits arising in the normal conduct of its business, none of
which, in the opinion of the Company's management, based upon current information, will likely have a material
adverse effect on the Company's consolidated financial position, results of operations, or cash flows.
Other Contingencies
VirnetX, Inc.
On September 29, 2017, the federal trial court in the Eastern District of Texas entered a final judgment in the
VirnetX v. Apple case referred to as Apple I. In an opinion and order, unsealed by the court on October 13, 2017, the
court found that Apple willfully infringed the VirnetX patents at issue in the Apple I case and awarded enhanced
damages, bringing the total award against Apple to over $343 million in pre-interest damages. The court also
awarded costs, certain attorneys' fees, and certain interest, and directed VirnetX and Apple to meet and confer
regarding those amounts, resulting in a filing by VirnetX asking the court to grant VirnetX an additional sum of over
$96 million. This additional amount would bring the total award to VirnetX in the Apple I case to over $439 million.
Apple has filed an appeal of the judgment in the Apple I case with the U.S. Court of Appeals for the Federal Circuit.
A jury trial in an additional patent infringement case brought by VirnetX against Apple, referred to as the Apple II
case, has been scheduled by the District Court to begin on April 2, 2018. Under its agreements with VirnetX, Leidos
would receive 25% of the proceeds obtained by VirnetX after reduction for attorneys' fees and costs. However,
Apple has appealed the verdict and no assurances can be given when or if the Company will receive any proceeds
in connection with this jury award. In addition, if the Company receives any proceeds, the Company is required to
pay a royalty to the customer who paid for the development of the technology.
Leidos Holdings, Inc. Annual Report - 101
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company does not have any material assets or liabilities recorded in connection with this matter as of
December 29, 2017.
Government Investigations and Reviews
The Company is routinely subject to investigations and reviews relating to compliance with various laws and
regulations with respect to its role as a contractor to federal, state and local government customers and in
connection with performing services in countries outside of the United States. Adverse findings could have a
material effect on the Company's business, financial position, results of operations, and cash flows due to its
reliance on government contracts.
During fiscal 2017, pursuant to the resolution of certain government accounting matters, including audits by the
Defense Contract Audit Agency ("DCAA"), the Company recorded a net $24 million reduction to its accrued
liabilities.
Indirect cost audits by the DCAA remain open for fiscal 2012 and subsequent fiscal years for Leidos Inc. and fiscal
2011 and subsequent fiscal years for Leidos Innovations. Although the Company has recorded contract revenues
based upon an estimate of costs that the Company believes will be approved upon final audit or review, the
Company cannot predict the outcome of any ongoing or future audits or reviews and adjustments, and if future
adjustments exceed the Company's estimates, its profitability would be adversely affected. As of December 29,
2017, the Company believes it has adequately reserved for potential adjustments from audits or reviews of contract
costs.
In December 2017, Leidos submitted an external restructuring proposal ("XRP"), in accordance with provisions of
the Defense Federal Acquisition Regulation Supplement, which permits defense contractors to recover certain
specified external restructuring costs. The XRP proposal is subject to DCAA approval and audit, and any recovery
may be through the pricing of the Company's services to the U.S. government in the future periods with the impact
included in the reportable segments' results of operations. However, there is no certainty of the timing of approval of
the XRP proposal and the amounts that may be approved for recovery.
Note 22—Commitments
The Company has outstanding letters of credit of $93 million as of December 29, 2017, principally related to
performance guarantees on contracts. The Company also has outstanding surety bonds in the amount of $148
million as of December 29, 2017, principally related to performance and subcontractor payment bonds on the
Company's contracts. The outstanding letters of credit and surety bonds have various terms with the majority
expiring over the next four fiscal years.
Note 23—Subsequent Events
On January 10, 2018, the final amount of the net working capital of the IS&GS Business, as of the closing date of
the Transactions, was determined through a binding arbitration proceeding in accordance with the Separation
Agreement with Lockheed Martin. As a result, $24 million was recorded as acquisition costs in the consolidated
statements of income for fiscal 2017 (See "Note 2—Acquisitions"). On January 18, 2018, the final working capital
amount of $105 million was paid to Lockheed Martin.
On January 24, 2018, the Company entered into a lease agreement with its current lessor for office space in a
building to be constructed to function as the Company's new corporate headquarters in Reston, Virginia. The
Company will occupy the space for an initial term of 148 months and rent expense will be $11 million for the first
lease year, with an annual rent expense increase of 2.5%. The Company currently expects construction to be
completed and to take occupancy of the building by April 1, 2020, at which point the Company's lease agreements
for its current corporate headquarters will terminate.
On January 26, 2018, the Company entered into a Membership Interest Purchase Agreement with Jacobs
Engineering Group, Inc. ("Jacobs Group"), whereby the Company purchased 100% of Jacobs Group's 41%
outstanding membership interests in MSA. As a result, Leidos increased its ownership in MSA from 47% to 88%
effective January 26, 2018.
On February 14, 2018, Leidos and Plainfield entered into an amendment to the Note allowing Plainfield to defer the
principal and additional interest payment originally due on January 24, 2018 until February 28, 2018.
Leidos Holdings, Inc. Annual Report - 102
PART II
Selected Quarterly Financial Data (Unaudited)
Selected financial data (unaudited) for the periods presented was as follows:
Fiscal 2017(1)
Revenues
Operating income
Net income
Net income attributable to Leidos common stockholders
Basic earnings per share attributable to Leidos common
stockholders(4)
Diluted earnings per share attributable to Leidos
common stockholders
Fiscal 2016(2)
Revenues
Operating income
Net income(3)
Net income attributable to Leidos common stockholders
Basic earnings per share attributable to Leidos common
stockholders(4)
Diluted earnings per share attributable to Leidos
common stockholders(4)
Three Months Ended
March 31,
2017
June 30,
2017
September 29,
2017
December 29,
2017
(in millions, except per share amounts)
2,580 $
2,571 $
2,503 $
2,516
141 $
74 $
72 $
166 $
98 $
98 $
151 $
79 $
82 $
101
113
114
0.48 $
0.65 $
0.54 $
0.75
0.47 $
0.64 $
0.53 $
0.74
Three Months Ended
April 1,
2016
July 1,
2016
September 30,
2016
December 30,
2016
(in millions, except per share amounts)
1,312 $
1,288 $
1,868 $
89 $
53 $
53 $
75 $
41 $
41 $
101 $
92 $
91 $
2,575
152
60
59
0.74 $
0.56 $
0.81 $
0.39
0.72 $
0.55 $
0.80 $
0.39
$
$
$
$
$
$
$
$
$
$
$
$
(1) The fiscal 2017 quarterly results include acquisition and integration costs of $19 million, $16 million, $21 million, and $46 million in the first,
second, third and fourth quarter, respectively, and restructuring expenses of $13 million, $6 million, $6 million, and $12 million in the first,
second, third and fourth quarter, respectively. The fiscal 2017 fourth quarter results include a $33 million promissory note impairment charge.
(2) The fiscal 2016 quarterly results include acquisition and integration costs of $9 million, $15 million, $44 million, and $22 million in the first,
second, third, and fourth quarter, respectively, and restructuring expenses of $1 million, $5 million, and $8 million in the second, third, and
fourth quarter, respectively.
(3) Due to the adoption of ASU 2016-09 in the second quarter of fiscal 2016, the Company recognized a $4 million, $3 million and $1 million
discrete tax benefit for the first, second and third quarter, respectively, of fiscal 2016.
(4) Earnings per share are computed independently for each of the quarters presented and therefore may not sum to the totals for fiscal 2017 and
fiscal 2016.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Leidos Holdings, Inc. Annual Report - 103
PART II
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer (our Chairman and Chief Executive Officer)
and principal financial officer (our Executive Vice President and Chief Financial Officer), has evaluated the
effectiveness of Leidos' disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the
Securities Exchange Act of 1934) as of December 29, 2017. Based upon that evaluation, our principal executive
officer and principal financial officer have concluded that our disclosure controls and procedures are effective to
ensure that information required to be disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the
rules and forms of the U.S. Securities Exchange Commission ("SEC"). These disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required to be disclosed by
us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and
communicated to our management, including our principal executive officer and our principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes in Leidos' internal control over financial reporting that occurred in the fourth quarter of
the period ended December 29, 2017, covered by this Annual Report that materially affected, or are reasonably
likely to materially affect, Leidos' internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America.
Our management, with the participation of our principal executive officer and principal financial officer, has
evaluated the effectiveness of Leidos' internal control over financial reporting as of December 29, 2017, based on
criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Our management has assessed the effectiveness of our internal
control over financial reporting as of December 29, 2017, and has concluded that our internal control over financial
reporting as of that date was effective.
Deloitte & Touche LLP, an independent registered public accounting firm, audited our consolidated financial
statements included in this Annual Report on Form 10-K and our internal control over financial reporting, and that
firm’s report on our internal control over financial reporting is set forth below.
February 23, 2018
Leidos Holdings, Inc. Annual Report - 104
PART II
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Leidos Holdings, Inc.
Reston, Virginia
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Leidos Holdings, Inc. and subsidiaries (the "Company")
as of December 29, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 29, 2017, based
on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated financial statements as of and for the year ended December 29, 2017, of
the Company and our report dated February 23, 2018, expressed an unqualified opinion on those financial statements
and included an explanatory paragraph concerning the Company's change in fiscal year end from the Friday nearest
the end of January to the Friday nearest the end of December effective for the 11-month period ended January 1,
2016.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Annual
Report on Form 10-K. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
/s/ Deloitte & Touche LLP
McLean, Virginia
February 23, 2018
Leidos Holdings, Inc. Annual Report - 105
PART II
Item 9B. Other Information
None.
Leidos Holdings, Inc. Annual Report - 106
PART III
Item 10. Directors, Executive Officers and Corporate Governance
For certain information required by Item 10 with respect to executive officers, see "Executive and Other Key Officers
of the Registrant" at the end of Part I of this Annual Report on Form 10-K. For additional information required by
Item 10 with respect to executive officers and directors, including audit committee and audit committee financial
experts, procedures by which stockholders may recommend nominees to the Board of Directors, and compliance
with Section 16(a) of the Securities Exchange Act of 1934, see the information set forth under the captions
"Proposal 1–Election of Directors," "Corporate Governance" and "Other Information" appearing in the 2018 Proxy
Statement, which required information is incorporated by reference into this Annual Report on Form 10-K.
We have adopted a code of conduct that applies to our principal executive officer and our senior financial officers. A
copy of our code of conduct is available on the Investor Relations section of our website free of charge at
www.leidos.com by clicking on the links entitled "Investors" then "Corporate Governance" and then "Code of
Conduct." We intend to post on our website any material changes to or waivers from our code of business ethics.
The information on our website is not incorporated by reference into and is not a part of this Annual Report on Form
10-K.
Item 11. Executive Compensation
For information required by Item 11 with respect to executive compensation and director compensation, see the
information set forth under the captions "Compensation Discussion and Analysis," "Executive Compensation" and
"Corporate Governance" in the 2018 Proxy Statement, which is incorporated by reference into this Annual Report on
Form 10-K.
For information required by Item 11 with respect to compensation committee interlocks and insider participation, see
the information set forth under the caption "Corporate Governance" in the 2018 Proxy Statement, which is
incorporated by reference into this Annual Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
For information required by Item 12 with respect to the security ownership of certain beneficial owners and
management, see the information set forth under the caption "Other Information" in the 2018 Proxy Statement,
which is incorporated by reference into this Annual Report on Form 10-K.
Information with respect to our equity compensation plans as of December 29, 2017, is set forth below:
Plan Category
Equity compensation plans approved by security
holders (1)
Equity compensation plans not approved by
security holders (6)
Total
(a)
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(b)
Weighted-
average
exercise price of
outstanding
options, warrants
and rights
(c)
Number of securities
remaining available
for future issuance
under equity
compensation
plans (excluding
securities reflected
in column (a))
5,282,826 (2) $
34.38 (3)
14,455,526 (4)
—
5,282,826
$
—
34.38 (3)
— (5)
14,455,526
(1) The following equity compensation plans approved by security holders are included in this plan category: the 2017 Omnibus Incentive Plan,
the 2006 Equity Incentive Plan, as amended, and the 2006 Employee Stock Purchase Plan, as amended.
(2) Represents (i) 2,442,121 shares of Leidos common stock reserved for future issuance for service-based awards and performance and market-
based awards assuming achievement of the target level of performance for unearned performance and market-based awards (does not
include an additional 244,673 shares if the maximum level of performance is achieved) and other stock awards under the 2017 Omnibus
Incentive Plan and 2006 Equity Incentive Plan, (ii) 27,463 shares of Leidos common stock issuable pursuant to dividend equivalent rights and
(iii) 2,813,242 shares of Leidos common stock reserved for future issuance upon the exercise of outstanding options awarded under the 2017
Omnibus Incentive Plan and 2006 Equity Incentive Plan. Does not include shares to be issued pursuant to purchase rights under the 2006
Employee Stock Purchase Plan.
(3) Does not include shares to be issued for performance-based and other stock awards and shares of stock issuable pursuant to dividend
equivalent rights.
Leidos Holdings, Inc. Annual Report - 107
PART III
(4) Represents 7,365,495, 2,303,601 and 4,786,430 shares of Leidos common stock under the 2017 Omnibus Incentive Plan, 2006 Equity
Incentive Plan, and 2006 Employee Stock Purchase Plan, respectively. The maximum number of shares initially available for issuance under
the 2017 Omnibus Incentive Plan was 7.5 million. The 2006 Equity Incentive Plan was amended in June 2012 to provide that the maximum
number of shares available for issuance thereunder is 12.5 million. The 2006 Employee Stock Purchase Plan was amended in September
2016 to provide that the maximum number of shares available for issuance thereunder is 5.0 million. Those shares (i) that are issued under
the 2017 Omnibus Incentive Plan and 2006 Equity Incentive Plan that are forfeited or repurchased at the original purchase price or less or that
are issuable upon exercise of awards granted under the plan that expire or become unexercisable for any reason after their grant date without
having been exercised in full, (ii) that are withheld from an option or stock award pursuant to a Company-approved net exercise provision, or
(iii) that are not delivered to or are award shares surrendered by a holder in consideration for applicable tax withholding will continue to be
available for issuance under the 2017 Omnibus Incentive Plan.
(5) The Stock Compensation Plan and the Management Stock Compensation Plan have not been approved by security holders and are included
in this plan category. These plans do not provide for a maximum number of shares available for future issuance. For further information on
these plans, see "Note 15—Stock-Based Compensation" of the notes to the consolidated financial statements contained within this Annual
Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence
For information required by Item 13 with respect to certain relationships and related transactions and the
independence of directors and nominees, see the information set forth under the caption "Corporate Governance" in
the 2018 Proxy Statement, which is incorporated by reference into this Annual Report on Form 10-K.
Item 14. Principal Accounting Fees and Services
For information required by Item 14 with respect to principal accounting fees and services, see the information set
forth under the caption "Audit Matters" in the 2018 Proxy Statement, which is incorporated by reference into this
Annual Report on Form 10-K.
Leidos Holdings, Inc. Annual Report - 108
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of the report:
1. Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Financial statement schedules are omitted because they are not applicable or the required information is
shown in our consolidated financial statements or the notes thereto.
3. Exhibits
Exhibit
Number
2.1
2.2
2.3
2.4
2.5
3.1
3.2
4.1
4.2
4.3
Description of Exhibit
Distribution Agreement dated September 25, 2013. Incorporated by reference to Exhibit 2.1 to our
Current Report on Form 8-K filed with the SEC on October 1, 2013.
Agreement and Plan of Merger, dated January 26, 2016, among Leidos Holdings, Inc., Lockheed
Martin Corporation, Abacus Innovations Corporation, and Lion Merger Co. Incorporated by reference
to Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on January 28, 2016.
Separation Agreement, dated January 26, 2016, between Lockheed Martin Corporation and Abacus
Innovations Corporation. Incorporated by reference to Exhibit 2.2 to our Current Report on Form 8-K
filed with the SEC on January 28, 2016.
Amendment to Agreement and Plan of Merger, dated as of June 27, 2016, among Lockheed Martin
Corporation, Leidos Holdings, Inc., Abacus Innovations Corporation and Lion Merger Co. Incorporated
by reference to Exhibit 2.7 to our Registrant Statement on Form S-4 with the SEC on June 28, 2016.
Amendment to Separation Agreement, dated as of June 27, 2016, between Lockheed Martin
Corporation and Abacus Innovations Corporation. Incorporated by reference to Exhibit 2.8 to our
Registration Statement on Form S-4 filed with the SEC on June 29, 2016.
Amended and Restated Certificate of Incorporation of Leidos Holdings, Inc. Incorporated by reference
to Exhibit 3.1 to our Current Report on Form 8-K filed with the SEC on October 1, 2013.
Amended and Restated Bylaws of Leidos Holdings, Inc. Incorporated by reference to Exhibit 3.2 to our
Current Report on Form 8-K filed with the SEC on April 13, 2016.
Indenture dated June 28, 2002, between Leidos, Inc. and JPMorgan Chase Bank, as trustee.
Incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed with the SEC on July
3, 2002. (SEC File No. 000-12771)
First Supplemental Indenture, dated October 13, 2006, by and among Leidos, Inc., Leidos Holdings,
Inc. and The Bank of New York Trust Company, N.A., as successor trustee to JPMorgan Chase Bank,
N.A. Incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed with the SEC on
October 17, 2006. (SEC File No. 001-33072)
Indenture dated as of December 20, 2010, among Leidos Holdings, Inc., Leidos, Inc., and The Bank of
New York Mellon Trust Company, N.A. as Trustee. Incorporated by reference to Exhibit 4.1 to our
Current Report on Form 8-K with the SEC on December 22, 2010.
10.1*
Notice of Separation and Release of Claims dated January 19, 2017. Incorporated by reference to
Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on January 20, 2017.
Leidos Holdings, Inc. Annual Report - 109
Exhibit
Number
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
PART IV
Description of Exhibit
Retirement Agreement dated June 5, 2017, between Leidos Holdings, Inc. and Vincent A. Maffeo.
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on
June 9, 2017.
Leidos Holdings, Inc.’s 2006 Equity Incentive Plan. Incorporated by reference to Exhibit 10.1 to our
Annual Report on Form 10-K filed with the SEC on March 27, 2014.
Leidos Holdings, Inc.'s 2017 Omnibus Incentive Plan. Incorporated by reference to Exhibit 4.3 to our
Registration Statement on Form S-8 filed with the SEC on June 1, 2017.
Leidos, Inc. Stock Compensation Plan. Incorporated by reference to Exhibit 10.2 to our Annual Report
on Form 10-K filed with the SEC on March 27, 2014.
Leidos, Inc.’s Management Stock Compensation Plan. Incorporated by reference to Exhibit 10.3 to our
Annual Report on Form 10-K filed with the SEC on March 27, 2014.
Amended and Restated Leidos, Inc.'s Keystaff Deferral Plan. Incorporated by reference to Exhibit 10.4
to our Transition Report on Form 10-K filed with the SEC on February 26, 2016.
Amended and Restated Leidos, Inc.’s Key Executive Stock Deferral Plan. Incorporated by reference to
Exhibit 10.5 to our Transition Report on Form 10-K filed with the SEC on February 26, 2016.
Amended and Restated Leidos Holdings, Inc.’s 2006 Employee Stock Purchase Plan. Incorporated by
reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed with the SEC on August 4, 2017.
Leidos, Inc.’s 401(k) Excess Deferral Plan. Incorporated by reference to Exhibit 10.7 to our Annual
Report on Form 10-K filed with the SEC on March 27, 2014.
Form of Nonstatutory Stock Option Agreement of Leidos Holdings, Inc.’s 2006 Equity Incentive Plan.
Incorporated by reference to Exhibit 10.10 to our Annual Report on Form 10-K filed with the SEC on
March 27, 2014.
Form of Nonstatutory Stock Option Agreement (Non-Employee Directors) of Leidos Holdings, Inc.’s
2006 Equity Incentive Plan. Incorporated by reference to Exhibit 10.11 to our Annual Report on Form
10-K filed with the SEC on March 27, 2014.
Form of Restricted Stock Unit Award Agreement of Leidos Holdings, Inc.’s 2006 Equity Incentive Plan.
Incorporated by reference to Exhibit 10.14 to our Annual Report on Form 10-K filed with the SEC on
March 27, 2014.
Form of Restricted Unit Award Agreement (Management) of Leidos Holdings, Inc.’s 2006 Equity
Incentive Plan. Incorporated by reference to Exhibit 10.16 to our Annual Report on Form 10-K filed as
with the SEC on March 27, 2014.
Form of Indemnification Agreement. Incorporated by reference to Exhibit 10.19 to our Annual Report
on Form 10-K filed with the SEC on March 25, 2015.
Executive Severance Plan. Incorporated by reference to Exhibit 10.20 to our Annual Report on Form
10-K filed with the SEC on February 24, 2017.
Executive Employment Agreement dated June 30, 2014. Incorporated by reference to Exhibit 10.1 to
our Current Report on Form 8-K filed with the SEC on July, 2, 2014.
Form of Performance Share Award Agreement of Leidos Holdings, Inc.'s 2006 Equity Incentive Plan
(for Performance Share Award Agreements entered into on or after April 3, 2015). Incorporated by
reference to Exhibit 10.33 to our Annual Report on Form 10-K filed with the SEC on March 25, 2015.
Form of Restricted Stock Unit Award Agreement of Leidos Holdings, Inc.’s 2006 Equity Incentive Plan.
Incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q filed with the SEC on
May 5, 2017.
Form of Nonstatutory Stock Option Agreement of Leidos Holdings, Inc.’s 2006 Equity Incentive Plan
(for Nonstatutory Stock Option Agreements granted on March 3, 2017). Incorporated by reference to
Exhibit 10.4 to our Quarterly Report on Form 10-Q filed with the SEC on May 5, 2017.
Leidos Holdings, Inc. Annual Report - 110
Exhibit
Number
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
PART IV
Description of Exhibit
Form of Performance Share Award Agreement of Leidos Holdings, Inc.'s 2006 Equity Incentive Plan
(for Performance Share Award Agreements granted on March 3, 2017). Incorporated by reference to
Exhibit 10.5 to our Quarterly Report on Form 10-Q filed with the SEC on May 5, 2017.
Form of Notice of Grant of Options for Non-Employee Directors under the Leidos Holdings, Inc. 2017
Omnibus Plan.
Form of Notice of Grant of Options for Employees under the Leidos Holdings, Inc. 2017 Omnibus Plan.
Form of Notice of Grant of Restricted Stock Unit Awards (Performance-Vesting) for Employees under
the Leidos Holdings, Inc. 2017 Omnibus Plan.
Form of Notice of Grant of Performance Share Awards for employees under the Leidos Holdings, Inc.
2017 Omnibus Plan.
Form of Notice of Grant of Restricted Stock Unit Awards (Time-Vesting) for Employees under the
Leidos Holdings, Inc. 2017 Omnibus Plan.
Form of Notice of Grant of Restricted Stock Unit Awards (Time-Vesting) for Non-Employee Directors
under the Leidos Holdings, Inc. 2017 Omnibus Plan.
Agreement, dated October 11, 2013, by and among Leidos Renewable Energy, LLC, Plainfield
Renewable Energy Owner, LLC and Plainfield Renewable Energy Holdings, LLC. Incorporated by
reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q filed with the SEC on December 10,
2013.
Membership Interest Purchase Agreement by and among Leidos Engineering, LLC, Greenleaf Power
Consolidated, LLC and Plainfield Renewable Energy, LLC dated March 24, 2015. Incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on March 25, 2015.
Amendment to Membership Interest Purchase Agreement by and among Leidos Engineering, LLC,
Greenleaf Power Consolidated, LLC and Plainfield Renewable Energy, LLC dated July 17, 2015.
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on July
23, 2015.
Credit Agreement dated August 16, 2016, among Leidos Holdings, Inc., Leidos, Inc., as Borrower, the
lenders party thereto and Citibank, N.A., as administrative agent. Incorporated by reference to Exhibit
10.1 to our Quarterly Report on Form 10-Q filed with the SEC on November 4, 2016.
First Amendment, dated August 16, 2017, to the Credit Agreement dated August 16, 2016, by and
among Leidos, Inc., as borrower, Leidos Holdings, Inc., Citibank, N.A., as administrative agent and the
other lending institutions party to the amendment. Incorporated by reference to Exhibit 10.1 to our
Quarterly Report on Form 10-Q filed with the SEC on November 3, 2017.
Credit Agreement dated August 16, 2016, among Leidos Innovations Corporation (formerly Abacus
Innovations Corporation) as Borrower, the lenders party thereto, and Citibank, N.A., as administrative
agent. Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed with the
SEC on November 4, 2016.
First Amendment, dated February 16, 2017, to the Credit Agreement dated as of August 16, 2016, by
and among Leidos Innovations (f/k/a Abacus Innovations Corporation), as borrower, Leidos Holdings,
Inc., Citibank, N.A., as administrative agent and the other lending institutions party to the amendment.
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on
February 21, 2017.
Second Amendment, dated August 16, 2017, to the Credit Agreement dated as of August 16, 2016, by
and among Leidos Innovations Corporation (f/k/a Abacus Innovations Corporation), as borrower,
Leidos Holdings, Inc., Citibank, N.A., as administrative agent and the other lending institutions party to
the amendment. Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed
with the SEC on November 3, 2017.
Intellectual Property Matters Agreement, dated August 16, 2016, between Lockheed Martin
Corporation and Abacus Innovations Corporation. Incorporated by reference to Exhibit 10.3 to our
Quarterly Report on Form 10-Q filed with the SEC on November 4, 2016.
Leidos Holdings, Inc. Annual Report - 111
Exhibit
Number
10.37
10.38
10.39
10.40
10.41
10.42
21
23.1
31.1
31.2
32.1
32.2
99.1
99.2†
99.3
99.4
99.5
99.6
99.7†
PART IV
Description of Exhibit
Shared Contracts Agreement - Shared Contracts (Parent Companies), dated August 16, 2016,
between Lockheed Martin Corporation and Splitco. Incorporated by reference to Exhibit 10.4 to our
Quarterly Report on Form 10-Q filed with the SEC on November 4, 2016.
Shared Contracts Agreement - Shared Contracts (Splitco Companies), dated August 16, 2016,
between Lockheed Martin Corporation and Splitco. Incorporated by reference to Exhibit 10.5 to our
Quarterly Report on Form 10-Q filed with the SEC on November 4, 2016.
Subcontract Pending Novation and Consent (Parent to Splitco), dated August 16, 2016, between
Lockheed Martin Corporation and Splitco. Incorporated by reference to Exhibit 10.6 to our Quarterly
Report on Form 10-Q filed with the SEC on November 4, 2016.
Supply Agreement (Parent to Splitco), dated August 16, 2016, between Lockheed Martin Corporation
and Splitco. Incorporated by reference to Exhibit 10.7 to our Quarterly Report on Form 10-Q filed with
the SEC on November 4, 2016.
Supply Agreement (Splitco to Parent), dated August 16, 2016, between Lockheed Martin Corporation
and Splitco. Incorporated by reference to Exhibit 10.8 to our Quarterly Report on Form 10-Q filed with
the SEC on November 4, 2016.
Transition Services Agreement (Parent to Splitco), dated August 16, 2016, between Lockheed Martin
Corporation and Splitco. Incorporated by reference to Exhibit 10.9 to our Quarterly Report on Form 10-
Q filed with the SEC on November 4, 2016.
Subsidiaries of Registrants.
Consent of Independent Registered Public Accounting Firm, Deloitte & Touche LLP.
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Patent License and Assignment Agreement dated as of August 12, 2005, between Leidos, Inc. and
VirnetX, Inc. Incorporated by reference to Exhibit 99.1 to our Annual Report on Form 10-K filed with the
SEC on April 1, 2010.
Amendment No. 1 dated as of November 2, 2006, to Patent License and Assignment Agreement
between Leidos, Inc. and VirnetX, Inc. Incorporated by reference to Exhibit 99.2 to our Annual Report
on Form 10-K filed with the SEC on April 1, 2010.
Amendment No. 2 dated as of March 12, 2008, to Patent License and Assignment Agreement between
Leidos, Inc. and VirnetX, Inc. Incorporated by reference to Exhibit 99.3 to our Form 10-K filed with the
SEC on April 1, 2010.
Employee Matters Agreement, dated as of January 26, 2016, among Lockheed Martin Corporation,
Abacus Innovations Corporation and Leidos Holdings, Inc. Incorporated by reference to Exhibit 99.1 to
our Registration Statement on Form S-4 filed with the SEC on April 18, 2016.
Tax Matters Agreement, dated as of January 26, 2016, among Lockheed Martin Corporation, Abacus
Innovations Corporation and Leidos Holdings, Inc. Incorporated by reference to Exhibit 99.2 to our
Registration Statement on Form S-4 filed with the SEC on April 18, 2016.
First Amendment to Employee Matters Agreement, dated June 27, 2016, among Lockheed Martin
Corporation, Abacus Innovations Corporation and Leidos Holdings, Inc. Incorporated by reference to
Exhibit 99.13 to our Registration Statement on Form S-4 filed with the SEC on June 28, 2016.
Professional Services Contract effective September 7, 1999, between Leidos, Inc. and In-Q-Tel, Inc. (f/
k/a In-Q-It, Inc.). Incorporated by reference to Exhibit 99.4 to our Annual Report on Form 10-K filed
with the SEC on April 1, 2010.
Leidos Holdings, Inc. Annual Report - 112
Exhibit
Number
101
Interactive Data File.
PART IV
Description of Exhibit
* Executive Compensation Plans and Arrangements
† Confidential treatment has been granted with respect to certain portions of these exhibits
Item 16. Form 10-K Summary
None.
Leidos Holdings, Inc. Annual Report - 113
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Leidos Holdings, Inc.
By
/s/ James C. Reagan
James C. Reagan
Executive Vice President and Chief Financial Officer
Dated: February 23, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of Leidos Holdings, Inc., in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Roger A. Krone
Roger A. Krone
/s/ James C. Reagan
James C. Reagan
/s/ Ranjit S. Chadha
Ranjit S. Chadha
/s/ Gregory R. Dahlberg
Gregory R. Dahlberg
/s/ David G. Fubini
David G. Fubini
/s/ Miriam E. John
Miriam E. John
/s/ John P. Jumper
John P. Jumper
/s/ Frank Kendall III
Frank Kendall III
/s/ Harry M. J. Kraemer, Jr.
Harry M. J. Kraemer, Jr.
/s/ Gary S. May
Gary S. May
/s/ Surya N. Mohapatra
Surya N. Mohapatra
/s/ Lawrence C. Nussdorf
Lawrence C. Nussdorf
/s/ Robert S. Shapard
Robert S. Shapard
/s/ Susan M. Stalnecker
Susan M. Stalnecker
/s/ Noel B. Williams
Noel B. Williams
Principal Executive Officer
February 23, 2018
Principal Financial Officer
February 23, 2018
Principal Accounting Officer
February 23, 2018
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
Leidos Holdings, Inc. Annual Report - 114
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Stockholder Information
Board of Directors
Corporate Headquarters
Leidos Holdings, Inc.
11951 Freedom Drive
Reston, VA 20190
571-526-6000
www.leidos.com
Stock Listing
Leidos Holdings, Inc. common stock is
traded on the New York Stock Exchange
(NYSE) under the trading symbol LDOS.
Transfer Agent and Registrar
Computershare
480 Washington Boulevard
Jersey City, NJ 07310
855-894-5367 (US)
201-680-6961 (International)
www.computershare.com/leidos
Independent Registered
Public Accounting Firm
Deloitte & Touche LLP
7900 Tysons One Place, Suite 800,
McLean, VA 22102 USA
Certifications
The CEO/CFO certifications required to be filed with
the Securities and Exchange Commission pursuant to
Section 302 of the Sarbanes-Oxley Act are included
as Exhibits 31.1 and 31.2 to our Annual Report on
Form 10-K. In addition, an annual CEO certification
was submitted by the company’s CEO to the NYSE
on June 22, 2017, in accordance with the NYSE’s
listing standards.
Investor Relations
Questions from stockholders, analysts, and others
can be directed to:
Kelly Freeman
Director, Investor Relations
Leidos Holdings, Inc.
11951 Freedom Drive
Reston, VA 20190
571-526-6000
ir@leidos.com
www.leidos.com
Roger A. Krone
Chairman and
Chief Executive
Officer
Lawrence C. Nussdorf
Lead Director,
Chairman and Chief
Executive Officer,
Clark Enterprises, Inc.
Gregory R. Dahlberg
Former Senior Vice President,
Washington Operations,
Lockheed Martin
David G. Fubini
Director Emeritus,
McKinsey & Company, Inc.
Senior Lecturer,
26th Under Secretary of the Army
Harvard Business School
Miriam E. John
Former Vice President,
Sandia National
Laboratories
John P. Jumper
Retired General,
U.S. Air Force
Former Chief
Executive Officer Leidos
Frank Kendall
Former Under Secretary of
Defense for Acquisition,
Technology and Logistics
Former Vice President of
Engineering, Raytheon Company
Harry M.J. Kraemer, Jr.
Executive Partner,
Madison Dearborn
Partners LLC
Gary S. May
Chancellor,
University of
California at
Davis
©2018 Leidos, Inc. All Rights Reserved. Leidos and the Leidos logo are trademarks of
Leidos, Inc. in the United States and/or other countries.
Surya N. Mohapatra
Former Chairman, President
and Chief Executive Officer,
Robert S. Shapard
Chief Executive Officer,
Oncor Electric Delivery
Quest Diagnostics Incorporated
Company LLC
Susan M. Stalnecker
Former Vice President, and
Treasurer, E.I du Pont de
Nemours & Co.
Noel B. Williams
Former President,
HCA Information
Technology & Services, Inc.
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Stockholder Information
Board of Directors
Corporate Headquarters
Leidos Holdings, Inc.
11951 Freedom Drive
Reston, VA 20190
571-526-6000
www.leidos.com
Stock Listing
Leidos Holdings, Inc. common stock is
traded on the New York Stock Exchange
(NYSE) under the trading symbol LDOS.
Transfer Agent and Registrar
Computershare
480 Washington Boulevard
Jersey City, NJ 07310
855-894-5367 (US)
201-680-6961 (International)
www.computershare.com/leidos
Independent Registered
Public Accounting Firm
Deloitte & Touche LLP
7900 Tysons One Place, Suite 800,
McLean, VA 22102 USA
Certifications
The CEO/CFO certifications required to be filed with
the Securities and Exchange Commission pursuant to
Section 302 of the Sarbanes-Oxley Act are included
as Exhibits 31.1 and 31.2 to our Annual Report on
Form 10-K. In addition, an annual CEO certification
was submitted by the company’s CEO to the NYSE
on June 22, 2017, in accordance with the NYSE’s
listing standards.
Investor Relations
Questions from stockholders, analysts, and others
can be directed to:
Kelly Freeman
Director, Investor Relations
Leidos Holdings, Inc.
11951 Freedom Drive
Reston, VA 20190
571-526-6000
ir@leidos.com
www.leidos.com
Roger A. Krone
Chairman and
Chief Executive
Officer
Lawrence C. Nussdorf
Lead Director,
Chairman and Chief
Executive Officer,
Clark Enterprises, Inc.
Gregory R. Dahlberg
Former Senior Vice President,
Washington Operations,
Lockheed Martin
26th Under Secretary of the Army
David G. Fubini
Director Emeritus,
McKinsey & Company, Inc.
Senior Lecturer,
Harvard Business School
Miriam E. John
Former Vice President,
Sandia National
Laboratories
John P. Jumper
Retired General,
U.S. Air Force
Former Chief
Executive Officer Leidos
Frank Kendall
Former Under Secretary of
Defense for Acquisition,
Technology and Logistics
Former Vice President of
Engineering, Raytheon Company
Harry M.J. Kraemer, Jr.
Executive Partner,
Madison Dearborn
Partners LLC
Gary S. May
Chancellor,
University of
California at
Davis
©2018 Leidos, Inc. All Rights Reserved. Leidos and the Leidos logo are trademarks of
Leidos, Inc. in the United States and/or other countries.
Surya N. Mohapatra
Former Chairman, President
and Chief Executive Officer,
Quest Diagnostics Incorporated
Robert S. Shapard
Chief Executive Officer,
Oncor Electric Delivery
Company LLC
Susan M. Stalnecker
Former Vice President, and
Treasurer, E.I du Pont de
Nemours & Co.
Noel B. Williams
Former President,
HCA Information
Technology & Services, Inc.
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ANNUAL REPORT
Making the World
Safer, Healthier, and
More Efficient
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