ANNUAL REPORT2018
Making the World
Safer, Healthier, and
More Efficient
Leidos Executive Leadership Team
Dear Fellow Shareholders,
On behalf of the entire Board of Leidos, I would like to thank you for your continued support. As a leader in
science, information technology, and engineering for 50 years, our experts are amongst the most trusted in the
world. Our 32,000 employees focused heavily in 2018 on leveraging our strengths to drive future growth by
winning new work that enabled strong bookings and record backlog. We maintained this focus despite the
pressures of a hyper-competitive market and the partial government shutdown.
We are fortunate that our ability to deliver financial sustainability is inextricably linked to our making the world
safer, healthier, and more efficient – it is the nature of our business and the potential, we believe, is significant.
We are in businesses that require us to be informed, nimble, creative and efficient. We therefore, from our
board and leadership team down throughout our entire employee base, spend a significant amount of time
crafting and implementing the right strategy. We further refined this in 2018, enabling our continued differenti-
ation from competitors.
Over the past year we saw direct, tangible benefits affirming the strategic direction we chose. We further
enhanced our efforts by targeting investments in key technical discriminator areas as embodied in our seven
Leidos technical core competencies.
Enterprise
Enterprise IT
Modernization
Modernization
Cyber
Cyber
Operations
Operations
Operations and
Logistics
Operations and
Logistics
Mission Software
Systems
Mission Software
Systems
Integrated
Systems
Integrated
Systems
Sensors and
Phenomenology
Sensors, Collection,
and Phenomenology
Mission
Support
Mission
Support
Leidos Technical Core Competencies (TCCs)
This year we continued our journey of supporting strategic growth by further enhancing our business develop-
ment and proposal processes to increase our pipeline and improve win rates. We also increased our investment
in technology research and development, which is a critical aspect of our long-term strategy.
I want to take a moment to recognize our employees who demonstrate their strong commitment to our purpose
as a company each day. Their service to our customers and drive for performance and efficiency led to the more
than three quarters of a billion dollars in cash flow generated from operations for fiscal year 2018. We were also
able to redeploy a significant amount of that cash back to shareholders, through dividends and share repurchas-
es. This is all made possible by our employees, their passion for the work they do, their expertise, their collabora-
tion as a team, and their drive to make a difference in society – and in our world.
Foundational to our success is integrity and our commitment to corporate responsibility and sustainability. High
ethical standards is the core of Leidos, and I am proud that we were once again recognized this year as one of
the 2019 World’s Most Ethical Companies® by the Ethisphere Institute. We are continuing to evolve our diversity
and inclusion efforts as part of our overall focus on our human capital. We have limited exposure to environmen-
tal risks compared to many sectors but we look for opportunities to protect our communities, the planet and
future generations where we can find them. I am privileged to work alongside my colleagues who make environ-
mental and social sustainability possible through their contributions.
I look forward to another year of working hard with the Leidos team to pursue our purpose as we support our
customers and communities and deliver value back to you, our shareholders.
Roger Krone
Chairman and Chief
Executive Officer
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 40% of our staff have
degrees in science, technology, engineering, or math (STEM)
fields. Our innovative technologies are developed and
applied through the efforts of our talented technical staff, of
which 750 hold PhDs, and more than 45 have achieved our
highest technical designation as Technical Fellows. 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
750employees with
PhDs
6,400
employees with
Master’s Degrees
38%
employees with
STEM Degrees
CLEARED PROFESSIONALS
13KCleared Employees
67%
of Cleared Employees have
Top Secret and Above
39%
of all employees have a
Security Clearance
22%
employees are
Military Veterans
55%
employees working at
Customer Sites
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 28, 2018
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 every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
No
Indicate by check mark 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 29, 2018, 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
$8,841,791,254.
The number of shares issued and outstanding of the registrant’s class of common stock as of February 11, 2019 was 146,160,889 shares ($.0001 par value
per share).
Portions of Leidos Holdings, Inc.'s definitive Proxy Statement for the 2019 Annual Meeting of Stockholders ("2019 Proxy Statement") are incorporated by
reference in Part III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
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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 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
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[THIS PAGE INTENTIONALLY LEFT BLANK]
PART I
Item 1. Business
Our Company
Leidos Holdings, Inc. ("Leidos"), a Delaware corporation, is a holding company whose direct 100%-owned
subsidiary and principal operating company is Leidos, Inc. Leidos was founded in 1969 by physicist Dr. Robert
Beyster. Since our founding 50 years ago, we have applied our expertise in science, research and engineering in
rapidly evolving technologies and markets to solve complex problems of global concern.
We use the terms "Company," "we," "us" and "our" to refer collectively to Leidos Holdings, Inc. and its consolidated
subsidiaries.
Leidos is a FORTUNE 500® science, engineering and information technology company that provides 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: enterprise modernization;
cyber operations; operations and logistics; mission software systems; integrated systems; sensors and
phenomenology; and mission support. 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")
and many other U.S. government civilian agencies, as well as state and local government agencies. With a focus on
delivering mission-critical solutions, Leidos generated 85% of fiscal 2018 revenues from U.S. government contracts.
Building on our foundation in offering innovative services and solutions to U.S. government customers, Leidos
serves international government and broader commercial markets. Our international customers include foreign
governments and their agencies, primarily located in Australia and the United Kingdom ("U.K."). 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 missions.
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.
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, fiscal 2016 segment results and disclosures have been recast to reflect the
new reportable segments.
At December 28, 2018, 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.
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"), integrated systems, 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 platforms, data analytics, logistics and cybersecurity solutions, as well as
intelligence analysis and operations support to critical missions around the world. Defense Solutions represented
48%, 49% and 55% of total revenues for fiscal 2018, 2017 and 2016, respectively.
Leidos Holdings, Inc. Annual Report - 1
PART I
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 Office of Naval Research. Our
market concentration is on airborne and ground ISR, maritime systems, electronic warfare systems,
distributed 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 offer innovative data analytics
capabilities, 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 talented employees help customers
maximize their performance and take on the connected world with data-driven insights, improved efficiencies and
technological advantages. Civil represented 34%, 33% and 29% of total revenues for fiscal 2018, 2017 and 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 FAA'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 National Air Traffic Services system in the U.K., we offer the
SkyLine Air Traffic Management suite to enhance safety, improve on-time performance and increase fuel
efficiency.
• Security Products – Our Vehicle and Cargo Inspection 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.
Leidos Holdings, Inc. Annual Report - 2
PART I
• 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 ("GSA"), 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% of total revenues for fiscal 2018 and 2017 and 16% of total revenues for fiscal 2016.
• 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 VA, 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 consulting, platform integration
services and support across a broad range of health operational activities including value based care
enablement solutions, 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.
Leidos Holdings, Inc. Annual Report - 3
PART I
• 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 which underpin solutions we offer to our customers across all of our served
markets.
• 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
transform our customers' IT environments in support of their most critical missions. All of this is
accomplished in a highly secure manner by leveraging our cybersecurity 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 approximately 2,300 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations–
Lockheed Martin Transaction" and "Note 6—Acquisitions" in Part II of this Annual Report on Form 10-K for a further
description of the Lockheed Martin Transaction.
During fiscal 2016, we divested of our heavy construction business. For further information, see "Note 7—
Divestitures" in Part II of this Annual Report on Form 10-K.
Key Customers
Substantially all 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, VA, Department of Health and Human Services, NASA, NSF, the
Environmental Protection Agency and research agencies such as 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
December 28,
2018
Year Ended
December 29,
2017
December 30,
2016
85%
47%
13%
84%
47%
13%
81%
56%
14%
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 28, 2018, we employed approximately 32,000 full and part-time employees in more than 30
countries worldwide. The experience and expertise of our employees makes Leidos capable of solving our
customers' most challenging technical problems. Approximately 38% of our employees have degrees in science,
technology, engineering or mathematics fields, nearly 1,000 employees have doctoral degrees, approximately 39%
of our employees possess security clearances and approximately 22% 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 2018,
2017 and 2016, our company-funded IR&D expense was $46 million, $42 million and $44 million, respectively,
which as a percentage of consolidated revenues was 0.5%, 0.4% 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 significant, and we often compete against a large number of well established
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.
Leidos Holdings, Inc. Annual Report - 5
PART I
We believe that our principal competitors currently include the following companies: BAE Systems plc, Booz Allen
Hamilton Inc., CACI International Inc., General Dynamics Corporation, L3 Technologies, Lockheed Martin
Corporation, ManTech International Corporation, Northrop Grumman Corporation, Perspecta Inc., Raytheon
Company and SAIC. These companies span across sectors that include engineering and technical services
divisions of large defense contractors, diversified U.S. and international IT providers and contractors focused solely
on technical services, supply chain management, other logistics services and major systems operations and
maintenance, homeland security and health solutions.
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:
• 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
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.
Leidos Holdings, Inc. Annual Report - 6
PART I
• U.S. 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:
• 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 an 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
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.
Leidos Holdings, Inc. Annual Report - 7
PART I
• 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 and 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-
fee 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. Backlog includes priced
option periods not yet exercised. 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.
Leidos Holdings, Inc. Annual Report - 8
PART I
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
requirements for the acquisition of goods and services by the U.S. government, agency-specific regulations that
implement or supplement the FAR, such as the Department of Defense Federal Acquisition Regulation Supplement,
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 and require the protection 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, state and international
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 "Risk Factors" in this Annual Report
on Form 10-K 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.
Leidos Holdings, Inc. Annual Report - 9
PART I
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 - 10
PART I
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 85%, 84% and 81% of our total revenues during fiscal 2018, 2017 and 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 2018, 2017 and 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 2018 and 2017 and 56% of our total revenues for
fiscal 2016. Levels of U.S. government and 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 or other 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 or other 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
or other budgetary priorities, reduce overall U.S. government spending or delay contract or task order awards for
defense-related or other programs, including programs from which we expect to derive a significant portion of our
future revenues. In addition, changes to the federal or 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.
Leidos Holdings, Inc. Annual Report - 11
PART I
Because we depend on U.S. government contracts, a delay in the completion of the U.S. government's
budget and appropriation 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
appropriations process. In years when the U.S. government does not complete its appropriations before the
beginning of the new fiscal year on October 1, government operations are typically funded pursuant to a "continuing
resolution," which allows federal government agencies to operate at spending levels approved in the previous
appropriations 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 appropriations cycle, and we could experience similar declines in
revenues from future delays in the appropriations process. When the U.S. government fails to complete its
appropriations process or to provide for a continuing resolution, a full or partial 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 appropriations bill is delayed, the overall funding
environment for our business could be adversely affected. For additional discussion and analysis of the potential of
an ongoing U.S. government shutdown, 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.
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 CAS, which imposes 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.
Leidos Holdings, Inc. Annual Report - 12
PART I
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
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.
As of December 28, 2018, indirect cost audits by the DCAA remain open for fiscal 2013 and subsequent fiscal
years. 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.
Leidos Holdings, Inc. Annual Report - 13
PART I
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.
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.
Leidos Holdings, Inc. Annual Report - 14
PART I
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.
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.
Leidos Holdings, Inc. Annual Report - 15
PART I
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 28, 2018, our total backlog was $20.8 billion, including $6.4 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
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-fee 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 31% of
our total revenues for fiscal 2018. 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.
We recognize revenue on our service based contracts primarily over time as there is continuous transfer of control
to the customer over the duration of the contract as we perform the promised services, which generally requires
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.
Leidos Holdings, Inc. Annual Report - 16
PART I
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.
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.
Information security incidents could negatively impact our business and financial results or cause harm to
our reputation or competitive position.
As a government contractor and a provider of information technology services operating in multiple regulated
industries and geographies, we and our suppliers and subcontractors process and/or store sensitive information,
including personally identifiable information, protected health information, personnel information, classified
information, contractor unclassified information and financial information, concerning our business, employees and
our customers. Therefore, we are continuously exposed to unauthorized attempts to compromise such sensitive
information through cyber-attacks, insider threats and other information security threats, including physical break-ins
and malicious insiders. 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 or systems.
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. Attempts by others to gain
unauthorized access to sensitive information are constantly evolving, increasingly sophisticated and increasingly
difficult to detect and successfully defend against. 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 information 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 information security and malicious insider 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 detected 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 be currently unaware of certain
vulnerabilities or lack the capability to detect them, which may allow them to persist in our IT environment over long
periods of time.
Leidos Holdings, Inc. Annual Report - 17
PART I
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, including our suppliers and subcontractors, 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 disrupt our systems or those of our customers, impair our ability to provide services to
our customers, result in product development delays, compromise confidential or technical business information
and, as a result, expose us to claims, contract terminations and damages and could adversely affect our reputation,
ability to win 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 perform on contracts, 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, malicious insiders, 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 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 costs and fee payments we previously received.
Leidos Holdings, Inc. Annual Report - 18
PART I
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;
• 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;
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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.
Leidos Holdings, Inc. Annual Report - 19
PART I
Goodwill and other intangible assets represent approximately 63% 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 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 other companies will help us to win and perform 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.
Leidos Holdings, Inc. Annual Report - 20
PART I
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
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.
Leidos Holdings, Inc. Annual Report - 21
PART I
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,
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 the 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
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, 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.
Leidos Holdings, Inc. Annual Report - 22
PART I
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 and 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
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. 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:
Leidos Holdings, Inc. Annual Report - 23
PART I
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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/healthcare 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 FFP 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;
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 IS&GS 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;
for acquisitions that we agree to but are unable for regulatory or other reasons to consummate, we may
incur break-up fees; 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.
Leidos Holdings, Inc. Annual Report - 24
PART I
Item 2. Properties
As of December 28, 2018, we conducted our operations in 334 offices located in 37 states, the District of Columbia
and various foreign countries. We occupy approximately 6.8 million square feet of floor space. Of this amount, we
own approximately 0.9 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 3.7 million square feet. We also have employees working at customer sites throughout the United
States and in other countries.
As of December 28, 2018, we owned the following properties:
Location
Gaithersburg, Maryland
Columbia, Maryland
Orlando, Florida
Oak Ridge, Tennessee
Reston, Virginia
Number of
buildings
Square
footage
542,000
95,000
85,000
83,000
62,000
1
1
1
1
1
Acreage
44.8
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 27—Subsequent Events" of the notes to the consolidated financial statements contained within this
Annual Report on Form 10-K for information regarding the sale of our Gaithersburg, Maryland property which
occurred on December 31, 2018. See "Note 22—Leases" of the notes to the consolidated financial statements
contained within this Annual Report on Form 10-K for information regarding commitments under leases.
Item 3. Legal Proceedings
We have provided information about legal proceedings in which we are involved in "Note 25—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 25—
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.
Executive Officers of the Registrant
The following is a list of the names and ages (as of February 19, 2019) 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
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 37 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 and a member of the AOPA Foundation's
Board of Visitors.
Leidos Holdings, Inc. Annual Report - 25
Name of officer
James C. Reagan
Age
60
Ranjit S. Chadha
48
Paul O. Engola
47
Gerard A. Fasano
53
Angela L. Heise
Jerald S. Howe, Jr.
44
63
Mary V. Schmanske
56
Jonathan W. Scholl
57
PART I
Position(s) with the company and prior business experience
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, DoD 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.
Mr. Chadha has served as Senior Vice President, Chief Accounting Officer
and Controller since April 2016, and before that, as Assistant Controller.
Prior to joining Leidos, Mr. Chadha spent six years at CSC (now DXC), and
during his tenure there held several roles with progressive responsibility,
most recently as an Assistant Controller at CSC. Prior to CSC, he spent 17
years at PwC, including two years in the firm's National Office Assurance
Quality Group. He is a Certified Public Accountant as well as a Chartered
Accountant from India.
Mr. Engola has served as Senior Vice President, Chief Human Resources
Officer and Head of Business Partnerships since January 2019, and before
that, as Chief Administrative Officer and Deputy President, Defense and
Intelligence Group. Prior to joining Leidos, Mr. Engola served Lockheed
Martin Corporation for more than 10 years, most recently as Vice President,
Transportation & Financial Solutions in their former Information Systems &
Global Solutions business.
Mr. Fasano has served as Executive Vice President and President, Defense
Group since October 2018, and before that, as Chief Business Development
Strategy Officer. Prior to joining Leidos, Mr. Fasano served Lockheed Martin
Corporation for over 30 years in several capacities, most recently as a Vice
President and General Manager in their former Information Systems &
Global Solutions business.
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
Commercial Cyber 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.
Ms. Schmanske has served as Senior Vice President and President,
Intelligence Group since October 2018, and before that, as Chief
Administrative Officer and Deputy President and Chief Operations Officer,
Health Group. Prior to joining Leidos, Ms. Schmanske served Lockheed
Martin Corporation in several capacities, most recently as Vice President of
Operations for programs under strategic review, Civil, Defense & Intelligence
Solutions.
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
Our common stock is listed on the New York Stock Exchange ("NYSE") under the ticker symbol "LDOS."
Holders of Common Stock
As of February 11, 2019, there were approximately 21,150 holders of record of Leidos common stock. The number
of stockholders of record of our 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 2018 and 2017, we declared and paid quarterly dividends totaling $1.28 per share of Leidos common
stock. We currently intend to continue paying dividends on a quarterly basis, although the declaration of any future
dividends will be determined by our 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.
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 28,
2018 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, 2013, and that dividends, if any,
have been reinvested.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, our Board of Directors authorized a new share repurchase program of up to 20 million
shares of Leidos 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 Leidos common stock, general market and economic conditions, applicable legal
requirements, compliance with the terms of our 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 our Board of Directors' discretion. This share repurchase authorization replaced the
previous share repurchase authorization announced in December 2013.
Leidos Holdings, Inc. Annual Report - 28
PART II
The following table presents repurchases of Leidos common stock during the quarter ended December 28, 2018:
Period
September 29, 2018 - September 30, 2018
October 1, 2018 - October 31, 2018(2)
November 1, 2018 - November 30, 2018
December 1, 2018 - December 28, 2018(2)
Total
Total Number
of Shares
Purchased(1)
Average Price
Paid per Share
— $
3,347,602
8,504
690,720
4,046,826 $
—
63.18
64.82
63.18
63.18
Total Number of
Shares Purchased as
Part of Publicly
Announced
Repurchase
Plans or Programs
Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or
Programs
—
3,345,876
—
690,674
4,036,550
17,535,284
14,189,408
14,189,408
13,498,734
(1) The total number of shares purchased includes shares surrendered to satisfy statutory tax withholdings obligations related to vesting of
restricted stock units.
(2) In October 2018, we entered into an Accelerated Share Repurchase agreement with a financial institution, whereby we paid an aggregate of
$250 million and received approximately 4.0 million shares of Leidos outstanding shares of common stock during the fourth quarter of fiscal
2018. All shares delivered were immediately retired. See "Note 18—Earnings Per Share" of the notes to the consolidated financial statements
contained within this Annual Report on Form 10-K for further information.
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 2018, 2017 and 2016, the 11-month period ended January 1, 2016, and fiscal 2015.
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 28,
2018(2)
December 29,
2017(3)
December 30,
2016(4)
January 1,
2016(5)
January 30,
2015(6)
(in millions, except for per share amounts)
$
10,194 $
749
582
—
582
1
10,170 $
7,043 $
4,712 $
5,063
559
364
—
364
(2)
417
246
—
246
2
320
243
(1)
242
—
(214)
(330)
7
(323)
—
$
$
$
$
$
$
581 $
366 $
244 $
242 $
(323)
3.85 $
2.41 $
2.39 $
3.33 $
(4.46)
—
—
—
(0.01)
0.10
3.85 $
2.41 $
2.39 $
3.32 $
(4.36)
3.80 $
2.38 $
2.35 $
3.28 $
(4.46)
—
—
—
(0.01)
0.10
3.80 $
1.28 $
2.38 $
2.35 $
3.27 $
(4.36)
1.28 $
14.92 $
1.28 $
1.28
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 income (loss) 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 28,
2018
December 29,
2017
December 30,
2016
January 1,
2016
January 30,
2015
(in millions)
Consolidated Balance Sheet Data:
Total assets
Long-term debt, including current portion
Other long-term liabilities(7)
$
8,770 $
3,124
178
8,990 $
9,132 $
3,370 $
3,111
129
3,287
204
1,081
149
3,281
1,158
147
(1) References to financial data are to the Company's continuing operations, unless otherwise noted.
(2) Fiscal 2018 reflects the effects from our December 30, 2017 adoption of ASC 606. Fiscal 2018 also includes acquisition, integration and
restructuring costs of $37 million and a tangible asset impairment charge of $7 million. For further information, see "Note 6—Acquisitions,"
"Note 8—Restructuring Expenses" and "Note 12—Property, Plant and Equipment" of the notes to the consolidated financial statements
contained within this Annual Report on Form 10-K.
(3) Fiscal 2017 includes acquisition, integration and restructuring costs of $139 million. For further information, see "Note 6—Acquisitions" and
"Note 8—Restructuring Expenses" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K.
(4) Fiscal 2016 includes acquisition, integration and restructuring costs of $104 million. For further detail regarding the acquisition of the IS&GS
Business, see "Note 6—Acquisitions" and "Note 8—Restructuring Expenses" of the notes to the consolidated financial statements contained
within this Annual Report on Form 10-K.
Leidos Holdings, Inc. Annual Report - 30
PART II
(5) Reflects the 11-month period of January 31, 2015, through January 1, 2016, as a result of the change in our fiscal year end. 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.
(6) 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.
(7) Beginning in 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 the 11-month period ended January 1, 2016 and fiscal 2015
were $34 million and $21 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.
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, initiatives, 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" and "Business Environment and Trends.” 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.
Overview
We are a FORTUNE 500® science, engineering and information technology company that provides 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: enterprise modernization;
cyber operations; operations and logistics; mission software systems; integrated systems; sensors and
phenomenology; and mission support. Our domestic customers include the U.S. Department of Defense ("DoD"),
the U.S. Intelligence Community, the U.S. Department of Homeland Security, the Federal Aviation Administration,
the Department of Veterans Affairs and many other U.S. government civilian agencies, as well as state and local
government agencies. Our international customers include foreign governments and their agencies, primarily
located in Australia and the United Kingdom ("U.K."). 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, fiscal 2016 segment results and disclosures have
been recast to reflect the new reportable segments.
For additional information regarding our reportable segments, see “Business” in Part I and "Note 24—Business
Segments" of the notes to the 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 headcount and internal direct labor content on our contract portfolio;
continued improvement in our back office infrastructure and related business processes for greater
effectiveness and efficiency across all business functions; and
Leidos Holdings, Inc. Annual Report - 31
PART II
•
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 2018, revenues were $10.2 billion, consistent with fiscal 2017. 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. See "Results of Operations" below for discussion of our individual segment results.
Operating Expenses and Income Trend. For fiscal 2018, operating expenses decreased by $161 million, or 2%,
compared to fiscal 2017. Operating margin for fiscal 2018 was 7.3% compared to 5.5% for fiscal 2017. Operating
income was $749 million for fiscal 2018, a $190 million increase compared to fiscal 2017. These changes were
primarily attributable to decreases in acquisition, integration and restructuring costs and lower amortization of
intangible assets.
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 acquisition, integration and restructuring 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.
From a macroeconomic perspective, our industry is under general competitive pressures associated with 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. 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.
Leidos Holdings, Inc. Annual Report - 32
PART II
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 15—Debt" of the notes to the consolidated financial statements contained within this Annual Report on Form
10-K for further information regarding the new debt incurred and the new senior revolving credit facility.
In conjunction with the Transactions, 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 outstanding unvested equity
awards. See "Note 19—Stock-Based Compensation" of the notes to the consolidated financial statements
contained within this Annual Report on Form 10-K for further information regarding the modifications made to our
outstanding stock awards as a result of the special dividend.
We incurred $29 million, $77 million and $46 million of integration costs during fiscal 2018, 2017 and 2016,
respectively.
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 2018, 2017 and 2016, we recognized $8 million, $37 million and $12 million,
respectively, of restructuring expenses related to this program.
Business Environment and Trends
U.S. Government Markets
In fiscal 2018, we generated approximately 85% 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 2018. 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 March 2018, Congress passed and the President signed into law the Omnibus Appropriations Bill, thereby
funding the federal government through the end of the 2018 government fiscal year ("GFY"). The appropriations
legislation passed earlier in the year suspended previously enacted budget caps and included a two-year budget
agreement that provided $300 billion in sequestration relief for defense and non-defense spending. Defense
programs saw additional funding of $80 billion and $85 billion in GFY 2018 and GFY 2019, respectively, and non-
defense funding increased 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 suspended the debt ceiling until March 2019.
In September 2018, Congress passed and the President signed a second consolidated appropriations bill funding
the Departments of Defense, Labor, and Health and Human Services for the full GFY 2019. Earlier in the year,
funding for the Departments of Veterans Affairs and Energy as well as funding for Congress were also enacted. All
were funded at increased levels from the previous year.
The remaining seven appropriations bills were operating under a continuing resolution ("CR") until it expired on
December 21, 2018. From the expiration of that CR until the passage of a new CR on January 25, 2019 there was a
partial U.S. government shutdown, which reduced or delayed work on existing contracts and caused delays in other
government contracting actions and payments. Prior to the expiration of the January CR, Congress passed
appropriations for the seven remaining appropriations bills, thereby completing funding for GFY 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
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.
Leidos Holdings, Inc. Annual Report - 33
PART II
International Markets
Sales to customers in international markets represented 9% of total revenues for fiscal 2018. Our international
customers include foreign governments and their agencies, primarily located in the U.K. and Australia. Our
international business increases our exposure to international markets and the associated international regulatory
and geopolitical risks.
Recent changes in international trade policies, including higher tariffs on imported goods and materials, may
increase our procurement costs of certain IT hardware used both on our contracts and for internal use. However, we
expect to recover certain portions of these higher tariffs through our cost-plus contracts. While we are still evaluating
the impact of higher tariffs, currently, we do not expect tariffs to have a significant impact to our business.
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 earnings per share. 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 - 34
PART II
Results of Operations
Our results of operations for the periods presented were as follows:
Year Ended
2018 to 2017
2017 to 2016
December 28,
2018
December 29,
2017
December 30,
2016
Dollar
change
Percent
change
Dollar
change
Percent
change
$
10,194
8,690
$
10,170
8,738
$
(dollars in millions)
24
$
(48)
7,043
6,103
— % $ 3,127
2,635
(1)%
547
136
46
—
37
7
(18)
749
(139)
610
(28)
582
1
573
122
42
10
139
—
(13)
559
(166)
393
(29)
364
(2)
289
89
44
3
104
4
(10)
417
(99)
318
(72)
246
2
(26)
(5)%
284
14
4
(10)
(102)
7
(5)
190
27
217
1
218
3
11 %
10 %
(100)%
(73)%
100 %
38 %
33
(2)
7
35
(4)
(3)
34 %
(16)%
142
(67)
55 %
75
(3)%
60 %
150 %
43
118
(4)
44 %
43 %
98 %
37 %
(5)%
NM
34 %
(100)%
30 %
34 %
68 %
24 %
(60)%
48 %
(200)%
Revenues
Cost of revenues(1)
Selling, general and
administrative
expenses:
General and
administrative(1)
Bid and proposal
Internal research
and development
Bad debt expense
Acquisition,
integration and
restructuring costs
Asset impairment
charges
Equity earnings of
non-consolidated
subsidiaries
Operating income
Non-operating
expense, net
Income before income
taxes
Income tax expense
Net income
Less: net income
(loss) attributable to
non-controlling
interest
Net income
$
581
$
366
$
244
$
215
59 % $
122
50 %
attributable to
Leidos Holdings,
Inc.
Operating income
margin
7.3%
5.5%
5.9%
NM – Not meaningful
(1) Effective the beginning of fiscal 2018, the Company established a new U.S. government Cost Accounting Standards structure and revised its
disclosure statements accordingly to reflect the related cost accounting practice changes. Consequently, $185 million and $88 million was
reclassified from "Cost of revenues" to "Selling, general and administrative expenses" on the consolidated statements of income for fiscal
2017 and 2016, respectively. For more information, see "Note 1—Nature of Operations and Basis of Presentation" of the notes to the
consolidated financial statements contained within this Annual Report on Form 10-K.
Leidos Holdings, Inc. Annual Report - 35
PART II
Segment and Corporate Results
Defense Solutions
December 28,
2018
December 29,
2017
December 30,
2016
Dollar
change
Percent
change
Dollar
change
Percent
change
Year Ended
2018 to 2017
2017 to 2016
Revenues
$
4,948
$
4,959
$
(dollars in millions)
$
(11)
3,843
— % $
1,116
Operating income
Operating income
margin
347
7.0%
307
6.2%
312
8.1%
40
13 %
(5)
29 %
(2)%
The decrease in revenues for fiscal 2018 as compared to fiscal 2017 was primarily attributable to the completion of
certain contracts and adverse impact of the foreign exchange rate movement between the U.S. dollar and
Australian dollar, partially offset by new awards.
The increase in revenues for fiscal 2017 as compared to fiscal 2016 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.
The increase in operating income for fiscal 2018 as compared to fiscal 2017 was primarily attributable to lower
amortization.
The decrease in operating income for fiscal 2017 as compared to fiscal 2016 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.
Civil
December 28,
2018
December 29,
2017
December 30,
2016
Dollar
change
Percent
change
Dollar
change
Percent
change
Year Ended
2018 to 2017
2017 to 2016
Revenues
$
3,429
$
3,409
$
(dollars in millions)
20
$
2,082
1% $
1,327
Operating income
Operating income
margin
290
8.5%
226
6.6%
146
7.0%
64
28%
80
64%
55%
The increase in revenues for fiscal 2018 as compared to fiscal 2017 was primarily attributable to new awards,
favorable impact of the foreign exchange rate movement between the U.S. dollar and British pound and a net
increase in program volumes, partially offset by the completion of certain contracts.
The increase in revenues for fiscal 2017 as compared to fiscal 2016 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 exchange rates due to the movement of the exchange rate between the U.S.
dollar and the British pound.
The increase in operating income for fiscal 2018 as compared to fiscal 2017 was primarily attributable to lower
amortization and indirect expenditures, partially offset by net decrease in program volumes.
The increase in operating income for fiscal 2017 as compared to fiscal 2016 was primarily attributable to the
acquired IS&GS Business of $78 million.
Leidos Holdings, Inc. Annual Report - 36
PART II
Health
December 28,
2018
December 29,
2017
December 30,
2016
Dollar
change
Percent
change
Dollar
change
Percent
change
Year Ended
2018 to 2017
2017 to 2016
Revenues
$
1,817
$
1,802
$
(dollars in millions)
15
$
1,117
Operating income
Operating income
margin
230
12.7%
228
12.7%
110
9.8%
2
1% $
1%
685
118
61%
107%
The increase in revenues for fiscal 2018 as compared to fiscal 2017 was primarily attributable to a net increase in
program volumes and new awards, partially offset by the completion of certain contracts and lower net profit write-
ups in the current year.
The increase in revenues for fiscal 2017 as compared to fiscal 2016 was 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.
The increase in operating income for fiscal 2018 as compared to fiscal 2017 was primarily due to a net increase in
program volumes, partially offset by the completion of certain contracts, higher investment costs and lower net profit
write-ups in the current year.
The increase in operating income for fiscal 2017 as compared to fiscal 2016 was primarily due to the acquired
IS&GS Business of $132 million, partially offset by lower volume in commercial health.
Year Ended
2018 to 2017
2017 to 2016
Corporate
December 28,
2018
December 29,
2017
December 30,
2016
Dollar
change
Percent
change
Dollar
change
Percent
change
Revenues
Operating loss
$
— $
— $
(dollars in millions)
—
1 $
— % $
(118)
(202)
(151)
84
(42)%
(1)
(51)
(100)%
34 %
Corporate operating loss represents corporate costs that are not directly related to the operating performance of the
reportable segments.
The decrease in operating loss for fiscal 2018 as compared to fiscal 2017, was primarily attributable to lower
acquisition, integration and restructuring costs of $102 million, partially offset by increased legal fees and an asset
impairment charge of $7 million.
The increase in operating loss for fiscal 2017 as compared to fiscal 2016, was primarily attributable 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 incurred
during fiscal 2017 were primarily attributable to a $24 million working capital adjustment recorded as a result of the
settlement agreement reached.
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 2018 and 2017, we recorded earnings of $28 million and $27 million, respectively, from our
equity method investments, partially offset by amortization of $10 million and $14 million, respectively. For fiscal
2016, we recorded earnings of $10 million from our equity method investments.
Non-Operating Expense
Non-operating expense decreased $27 million for fiscal 2018 as compared to fiscal 2017, primarily due to a $33
million promissory note impairment that occurred during fiscal 2017, partially offset by unfavorable fair value
changes on investments held in our benefit plans.
Leidos Holdings, Inc. Annual Report - 37
PART II
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.
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 20—Income Taxes” of the notes to the consolidated financial statements
contained within this Annual Report on Form 10-K for further information on the impacts of this legislation.
Our effective tax rate was 4.6%, 7.4% and 22.6% in fiscal 2018, 2017 and 2016, respectively. The effective tax rate
for fiscal 2018 was favorably impacted primarily by a decrease in valuation allowances arising from the taxable
conversion of a subsidiary and the utilization of capital losses, an increase in deferred tax assets related to the
stock basis of a subsidiary held for sale, excess tax benefits related to employee stock-based payment transactions
and federal research tax credits.
The effective tax rate for fiscal 2017 was favorably impacted primarily 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 primarily by the tax deductibility of the special cash
dividend, related to the Transactions described in “Note 6—Acquisitions” on shares held by the Leidos retirement
plan, excess tax benefits related to employee stock-based payment transactions and federal research tax credits,
partially offset by the impact of certain capitalized transaction costs related to the Transactions.
Non-controlling Interest
As a result of the Transactions, we received an interest in Mission Support Alliance, LLC ("MSA"), a joint venture
with Centerra Group, LLC. On January 26, 2018, we entered into a Membership Interest Purchase Agreement with
Jacobs Engineering Group, Inc. ("Jacobs Group"), whereby we purchased 100% of Jacobs Group's 41%
outstanding membership interest in MSA. As a result, we increased our controlling ownership in MSA from 47% to
88%. We include the financial results for MSA in our consolidated financial statements. Net income attributable to
non-controlling interest for fiscal 2018 and fiscal 2016 was $1 million and $2 million, respectively, compared to net
loss attributable to non-controlling interest of $2 million for fiscal 2017.
Bookings and Backlog
We had net bookings of $13.7 billion and $9.7 billion during fiscal 2018 and 2017, 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.
Leidos Holdings, Inc. Annual Report - 38
PART II
Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts, which
consists of remaining performance obligations (see "Note 4—Revenues" of the notes to the consolidated financial
statements contained within this Annual Report on Form 10-K) and unexercised option periods. 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 and separately priced but instead
are used as a funding mechanism, and where there is a basis for estimating future revenues and funding on
future task orders is anticipated.
The estimated value of our total backlog for the periods presented was as follows:
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 28,
2018
December 29,
2017
(in millions)
$
$
$
$
$
$
$
$
2,811 $
6,891
9,702 $
2,314 $
5,079
7,393 $
1,254 $
2,483
3,737 $
2,384
5,285
7,669
2,064
5,321
7,385
595
1,827
2,422
6,379 $
14,453
20,832 $
5,043
12,433
17,476
Total backlog at December 28, 2018 included an adverse impact of $171 million when compared to total backlog at
December 29, 2017, due to exchange rate movements in the British pound and Australian dollar when compared to
the U.S. dollar. Total backlog at December 28, 2018 included $165 million within our Civil segment attributable to
our held for sale commercial cybersecurity business. See "Note 7—Divestitures" of the notes to the consolidated
financial statements contained within this Annual Report on Form 10-K for more information on the expected sale.
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, as well as foreign currency movements.
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.
Leidos Holdings, Inc. Annual Report - 39
PART II
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. 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 revenues,
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 revenues for the periods presented were as follows:
Cost-reimbursement and fixed-price-incentive-fee
Firm-fixed-price
Time-and-materials and fixed-price-level-of-effort
Total
Liquidity and Capital Resources
Overview of Liquidity
Year Ended
December 28,
2018
December 29,
2017
December 30,
2016
54%
31
15
100%
56%
28
16
100%
51%
30
19
100%
As of December 28, 2018, we had $327 million in cash and cash equivalents. In addition, we have a secured
revolving credit facility which can provide up to $750 million in secured borrowing capacity, if required. During fiscal
2018 and 2017, there were no borrowings outstanding under the credit facility 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 for fiscal 2018 and 2017, and $142 million for fiscal 2016.
At December 28, 2018 and December 29, 2017, we had outstanding debt of $3.1 billion. The notes outstanding as
of December 28, 2018, contain financial covenants and customary restrictive covenants. We were in compliance
with all covenants as of December 28, 2018.
In connection with the Transactions, Leidos incurred $2.5 billion of new indebtedness in the form of term loans (see
"Note 6—Acquisitions" of the notes to the consolidated financial statements contained within this Annual Report on
Form 10-K). During fiscal 2018 and 2017, we made $59 million and $209 million of principal payments, respectively,
on our long-term debt, which was primarily related to our senior secured term loans. This activity included $46
million and $76 million of required quarterly payments on our term loans during fiscal 2018 and fiscal 2017,
respectively. In April 2018, we made a required debt prepayment of $10 million on our senior secured term loans.
The prepayment was a result of the annual excess cash flow calculation clause in our credit agreements. 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 15—Debt" of the notes to the consolidated financial statements contained
within this Annual Report on Form 10-K).
During fiscal 2018, 2017 and 2016, we entered into interest rate swap agreements to hedge the cash flows on our
variable rate senior secured term loans (see "Note 14—Derivative Instruments" of the notes to the consolidated
financial statements contained within this Annual Report on Form 10-K). As of December 28, 2018, we had cash
flow interest rate swaps on $1.5 billion of the Company's variable rate senior secured term loans. 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.
Leidos Holdings, Inc. Annual Report - 40
PART II
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 ("ASR") 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 2018, we entered into an ASR agreement with a financial institution, whereby we paid an aggregate of
$250 million and received approximately 4 million shares of Leidos outstanding shares of common stock during the
fourth quarter of fiscal 2018 (see "Note 18—Earnings Per Share" of the notes to the consolidated financial
statements contained within this Annual Report on Form 10-K). All shares delivered were immediately retired.
Additionally, during fiscal 2018, we made open market repurchases of our common stock for an aggregate purchase
price of $167 million. During fiscal 2017 and fiscal 2016, there were no open market repurchases of our common
stock.
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.
Summary of Cash Flows
The following table summarizes cash flow information for the periods presented:
Year Ended
December 28,
2018
December 29,
2017
December 30,
2016
(in millions)
Net cash provided by operating activities of continuing operations
$
768 $
526 $
449
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
(114)
(707)
—
Net (decrease) increase in cash, cash equivalents and restricted cash
$
(53) $
(71)
(429)
—
26 $
26
(751)
(1)
(277)
Net cash provided by operating activities increased $242 million for fiscal 2018 as compared to fiscal 2017. The
increase was primarily due to lower payments for taxes, integration and restructuring costs and proceeds received
from the termination of interest rate swaps. This was partially offset by $24 million of cash paid related to the 2016
acquisition of the IS&GS Business.
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 used in investing activities increased $43 million for fiscal 2018 as compared to fiscal 2017. The increase
was primarily due to $81 million of cash paid related to the 2016 acquisition of the IS&GS Business, partially offset
by $40 million of proceeds from the settlement of a promissory note.
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 used in financing activities increased $278 million for fiscal 2018 as compared to fiscal 2017. The increase
was primarily due to $250 million of stock repurchases under the ASR program, $167 million of open market stock
repurchases and $23 million of cash paid related to a tax indemnification liability. This was partially offset by $150
million of lower debt payments and $14 million of proceeds received from a real estate financing transaction.
Leidos Holdings, Inc. Annual Report - 41
PART II
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.
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 performance guarantees on
contracts and surety bonds outstanding principally related to performance and subcontractor payment bonds as
described in "Note 26—Commitments" of the notes to the 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 28, 2018, 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
2019
2020
2021
2022
2023
2024 and
thereafter
(in millions)
$4,318 $ 237 $ 634 $ 299 $ 212 $ 717 $ 2,219
713
3
91
144
3
7
114
—
10
83
—
7
71
—
7
55
—
7
246
—
53
$5,125 $ 391 $ 758 $ 389 $ 290 $ 779 $ 2,518
(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 $161 million, $125 million, $118 million, $110 million and
$98 million of the balance for fiscal 2019, 2020, 2021, 2022 and 2023, respectively, and $542 million for fiscal 2024 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 28, 2018.
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 $3 million and $4
million of other 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 as of December 28, 2018. For a discussion of potential changes in these pension obligations, see "Note 21—
Retirement Plans" of the notes to the 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 22—Leases," "Note 25—Contingencies" and
"Note 26—Commitments" of the notes to the consolidated financial statements contained within this Annual Report
on Form 10-K.
Leidos Holdings, Inc. Annual Report - 42
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
• Changes in Estimates on Contracts
• Goodwill Impairment
•
•
Intangible Assets Impairment
Income Taxes
Revenue Recognition
Our revenues from contracts with customers are from offerings including enterprise modernization; cyber
operations; operations and logistics; mission software systems; integrated systems; sensors and phenomenology;
and mission support, primarily with the U.S. government and its agencies. We also serve various state and local
governments, foreign governments and U.S. commercial customers.
We perform under various types of contracts, which include firm-fixed-price ("FFP"), time-and-materials ("T&M"),
fixed-price-level-of-effort ("FP-LOE"), cost-plus-fixed-fee, cost-plus-award-fee, cost-plus-incentive-fee and fixed-
price-incentive-fee contracts.
To determine the proper revenue recognition, we first evaluate whether we have a duly approved and enforceable
contract with a customer, in which the rights of the parties and payment terms are identified, and collectability is
probable. We also evaluate whether two or more contracts should be combined and accounted for as a single
contract, including the task orders issued under an IDIQ award. In addition, we assess contract modifications to
determine whether the changes to existing contracts should be accounted for as part of the original contract or as a
separate contract. Contract modifications for us generally relate to changes in contract specifications and
requirements and do not add distinct services, and therefore are accounted for as part of the original contract. If
contract modifications add distinct goods or services and increase the contract value by an amount that reflects the
standalone selling price, those modifications are accounted for as separate contracts.
Most of our contracts are comprised of multiple promises including the design and build of software-based systems,
integration of hardware and software solutions, running and maintaining of IT infrastructure and procurement
services. In all cases, we assess if the multiple promises should be accounted for as separate performance
obligations or combined into a single performance obligation. We generally separate multiple promises in a contract
as separate performance obligations if those promises are distinct, both individually and in the context of the
contract. If multiple promises in a contract are highly interrelated or require significant integration or customization
within a group, they are combined and accounted for as a single performance obligation.
Our contracts with the U.S. government often contain options to renew existing contracts for an additional period of
time (generally a year at a time) under the same terms and conditions as the original contract, and generally do not
provide the customer any material rights under the contract. We account for renewal options as separate contracts
when they include distinct goods or services at standalone selling prices.
Leidos Holdings, Inc. Annual Report - 43
PART II
Contracts with the U.S. government are subject to the Federal Acquisition Regulation ("FAR") and priced on
estimated or actual costs of providing the goods or services. The FAR provides guidance on types of costs that are
allowable in establishing prices for goods and services provided to the U.S. government and its agencies. Each
contract is competitively priced and bid separately. Pricing for non-U.S. government agencies and commercial
customers is based on specific negotiations with each customer. In circumstances where the standalone selling
price is not directly observable, we estimate the standalone selling price using the expected cost plus margin
approach. We exclude any taxes collected or imposed when determining the transaction price.
Certain of our cost-plus and fixed-price contracts contain award fees, incentive fees or other provisions that may
either increase or decrease the transaction price. These variable amounts generally are awarded upon achievement
of certain performance metrics, program milestones or cost targets and can be based upon customer discretion. We
estimate variable consideration at the most probable amount that we expect to be entitled to, based on the
assessment of the contractual variable fee criteria, complexity of work and related risks, extent of customer
discretion, amount of variable consideration received historically and the potential of significant reversal of revenue.
We allocate the transaction price of a contract to our performance obligations in the proportion of its respective
standalone selling prices. The standalone selling price of our performance obligations is generally based on an
expected cost-plus margin approach, in accordance with the FAR. For certain product sales, we use prices from
other standalone sales. Substantially all of our contracts do not contain a significant financing component, which
would require an adjustment to the transaction price of the contract.
We recognize revenue on our service based contracts primarily over time as there is continuous transfer of control
to the customer over the duration of the contract as we perform the promised services. For U.S. government
contracts, continuous transfer of control to the customer is evidenced by clauses in the contract that allow the
customer to unilaterally terminate the contract for convenience, pay for costs incurred plus a reasonable profit and
take control of any work-in-process. Similarly, for non-U.S. government contracts, the customer typically controls the
work-in-process as evidenced by rights to payment for work performed to date plus a reasonable profit to deliver
products or services that do not have an alternate use to us. Anticipated losses on service based contracts are
recognized when known. In certain product sales, where the products have an alternate use, we recognize revenue
at a point in time when the customer takes control of the asset usually denoted by possession and legal title.
On FFP contracts, revenue recognized over time generally uses a method that measures the extent of progress
towards completion of a performance obligation, principally using a cost-input method (referred to as the cost-to-
cost method). Under the cost-to-cost method, revenue is recognized based on the proportion of total costs incurred
to estimated total costs-at-completion ("EAC"). A performance obligation's EAC includes all direct costs such as
materials, labor, subcontract costs, overhead and a ratable portion of general and administrative costs. In addition,
we include in an EAC of a performance obligation future losses estimated to be incurred on onerous contracts, as
and when known. On certain other contracts, principally T&M, FP-LOE, and cost-plus, revenue is recognized using
the right-to-invoice practical expedient as we are contractually able to invoice the customer based on the control
transferred to the customer. Additionally, on maintenance (generally FFP) performance obligations, revenue is
recognized over time using a straight-line method as the control of the services is provided to the customer evenly
over the period of performance.
For certain performance obligations, we are not primarily responsible for fulfilling the promise to provide the goods
or service to the customer, do not have inventory risk and do not have discretion in establishing the price for the
goods or service. In such cases, we recognize revenue on a net basis.
Changes in Estimates on Contracts
Changes in estimates related to contracts accounted for using the cost-to-cost method of accounting are recognized
in the period in which such changes are made for the inception-to-date effect of the changes, with the exception of
contracts acquired through the acquisition of the IS&GS Business, where the adjustment is made for the period
commencing from the date of acquisition.
Leidos Holdings, Inc. Annual Report - 44
Changes in estimates on contracts for the periods presented were as follows:
PART II
Net favorable impact to income before income taxes
Impact on diluted EPS attributable to Leidos common stockholders
Year Ended
December 28,
2018
December 29,
2017
December 30,
2016
(in millions, except for per share amounts)
$
$
105 $
0.52 $
103 $
0.41 $
37
0.22
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 to the finalization of award and incentive fees.
The impact on diluted EPS attributable to Leidos common stockholders is calculated using our statutory tax rate.
During fiscal 2018, revenue recognized from performance obligations satisfied in previous periods was $102 million.
The changes primarily relate to revisions of variable consideration, including award fees, and revisions to estimates
at completion resulting from changes in contract scope, mitigation of contract risks or due to true-ups of contract
estimates at the end of contract performance.
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. Our
policy is to perform our annual goodwill impairment evaluation as of the first day of the fourth quarter of our fiscal
year. During fiscal 2018, we 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, consideration of the excess of a reporting unit's fair
value over its carrying amount in previous assessments and changes in business environment.
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.
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. For fiscal 2018, a qualitative analysis was performed for four of our
reporting units and a quantitative step one analysis was performed for one reporting unit. A quantitative analysis
was performed for all reporting units for fiscal 2017.
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 the multiples of comparable
publicly-traded companies that provide a reasonable basis of comparison with each of our reporting units. 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.
Leidos Holdings, Inc. Annual Report - 45
PART II
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
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 and 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.
Based on a qualitative analysis performed during our annual impairment evaluation for fiscal 2018 for certain of our
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, and as a result, a quantitative step one analysis was not
necessary. Additionally, based on the results of the quantitative step one analysis for one of our reporting units, it
was determined that the fair value significantly exceeded the reporting unit's carrying value. We did not recognize
any goodwill impairments during 2018, 2017 or 2016.
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.
There were no intangible asset impairment charges recognized in fiscal 2018, 2017 and 2016. The net carrying
value of intangible assets as of December 28, 2018, was $652 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.
Leidos Holdings, Inc. Annual Report - 46
PART II
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
from recorded amounts as described in "Note 20—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 2—Accounting Standards" of the notes to the consolidated financial
statements contained within 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 28, 2018 and December 29, 2017, we had $3.1 billion 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.
We have interest rate swap agreements to hedge the cash flows of a portion of our variable rate senior secured
term loans ("Variable Rate Loans"). Under the terms of the interest rate swap agreements, we receive variable
interest payments based on the one-month LIBOR rate and pay interest at a fixed rate. The interest rate swap
agreements on $1.1 billion of our Variable Rate Loans had a maturity date of December 2021 and a fixed interest
rate of 1.08%. The interest rate swap agreements on $300 million and $250 million of our Variable Rate Loans had
a maturity date of August 2022 and fixed interest rates of 1.66% and 2.59%, respectively. During fiscal 2018, we
terminated these interest rate swaps and entered into new interest rate swap agreements, which mature in August
2025 and have a fixed interest rate of 3.00%, to hedge the cash flows of $1.5 billion of our Variable Rate Loans. The
interest rate swap agreements effectively converted a portion of our variable rate borrowings to fixed rate
borrowings. As of December 28, 2018, and December 29, 2017, the fair value of our interest rate swap agreements
with respect to our variable rate senior secured loans was a $32 million liability and a $37 million asset, 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 28, 2018, and December 29, 2017, the
fair value of our interest rate swaps with respect to our fixed rate debt was a $3 million liability and an immaterial
amount, respectively.
Leidos Holdings, Inc. Annual Report - 47
PART II
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 2018 and fiscal 2017, a hypothetical 10% movement in the six-
month LIBOR rate would result in a $15 million and $8 million amount, respectively, related to our annual interest
expense due to the interest rate swaps. For fiscal 2018 and fiscal 2017, a hypothetical 10% movement in the one-
month LIBOR rate would result in a $12 million and $11 million amount, respectively, related to our annual interest
expense due to the interest rate swaps and variable rate debt. The net hypothetical 10% movement in the six-month
and one-month LIBOR rates would not have a significant impact on our annual interest expense. For additional
information related to our interest rate swap agreements and debt, see "Note 14—Derivative Instruments" and
"Note 15—Debt," respectively, of the notes to the consolidated financial statements contained within this Annual
Report on Form 10-K.
Cash and Cash Equivalents
As of December 28, 2018, and December 29, 2017, our cash and cash equivalents included investments in several
large institutional money market funds and bank deposits. For fiscal 2018 and fiscal 2017, a hypothetical 10%
interest rate movement would not have a significant impact on the value of our holdings or on interest income.
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 2018
and fiscal 2017.
Leidos Holdings, Inc. Annual Report - 48
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 28, 2018 and December 29, 2017
Consolidated Statements of Income for the fiscal years ended December 28, 2018, December 29,
2017 and December 30, 2016
Consolidated Statements of Comprehensive Income for the fiscal years ended December 28, 2018,
December 29, 2017 and December 30, 2016
Consolidated Statements of Equity for the fiscal years ended December 28, 2018, December 29,
2017 and December 30, 2016
Consolidated Statements of Cash Flows for the fiscal years ended December 28, 2018, December
29, 2017 and December 30, 2016
Notes to Consolidated Financial Statements
Page
50
51
52
53
54
55
57
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 - 49
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 28, 2018 and December 29, 2017, the related consolidated statements of income,
comprehensive income, equity, and cash flows, for the fiscal years ended December 28, 2018, December 29, 2017,
and December 30, 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 28, 2018, December 29, 2017, and the results of its operations and its cash flows for the fiscal years
ended December 28, 2018, December 29, 2017, and December 30, 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 28, 2018, 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 19, 2019, expressed an unqualified
opinion on the Company's internal control over financial reporting.
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 19, 2019
We have served as the Company's auditor since fiscal 2000.
Leidos Holdings, Inc. Annual Report - 50
LEIDOS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
Cash and cash equivalents
Receivables, net
Other current assets
Assets held for sale
Total current assets
Property, plant and equipment, net
Intangible assets, net
Goodwill
Other assets
LIABILITIES AND EQUITY
Accounts payable and accrued liabilities
Accrued payroll and employee benefits
Dividends payable
Income taxes payable
Long-term debt, current portion
Liabilities held for sale
Total current liabilities
Long-term debt, net of current portion
Deferred tax liabilities
Other long-term liabilities
Commitments and contingencies (Notes 22, 25 and 26)
Stockholders’ equity:
Preferred stock, $.0001 par value,10 million shares authorized and no shares issued
and outstanding at December 28, 2018, and December 29, 2017
Common stock, $.0001 par value, 500 million shares authorized, 146 million and
151 million shares issued and outstanding at December 28, 2018, and December
29, 2017, respectively
Additional paid-in capital
Accumulated earnings (deficit)
Accumulated other comprehensive (loss) income
Total Leidos stockholders’ equity
Non-controlling interest
Total equity
December 28,
2018
December 29,
2017
(in millions)
$
$
$
$
327 $
1,877
543
92
2,839
237
652
4,860
182
8,770 $
1,476 $
473
12
3
72
23
2,059
3,052
170
178
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
—
—
—
2,966
372
(30)
3,308
3
3,311
8,770 $
—
3,344
(7)
33
3,370
13
3,383
8,990
See accompanying notes to consolidated financial statements.
Leidos Holdings, Inc. Annual Report - 51
LEIDOS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended
December 28,
2018
December 29,
2017
December 30,
2016
(in millions, except per share amounts)
10,194 $
10,170 $
Revenues
Cost of revenues
Selling, general and administrative expenses
Bad debt expense
Acquisition, integration and restructuring costs
Asset impairment charges
Equity earnings of non-consolidated subsidiaries
Operating income
Non-operating expense:
Interest expense, net
Other expense, net
Income before income taxes
Income tax expense
Net income
Less: net income (loss) attributable to non-controlling interest
Net income attributable to Leidos common stockholders
Earnings per share:
Basic
Diluted
$
$
$
8,690
729
—
37
7
(18)
749
(138)
(1)
610
(28)
582
1
8,738
737
10
139
—
(13)
559
(140)
(26)
393
(29)
364
(2)
581 $
366 $
7,043
6,103
422
3
104
4
(10)
417
(86)
(13)
318
(72)
246
2
244
3.85 $
2.41 $
3.80
2.38
2.39
2.35
See accompanying notes to consolidated financial statements.
Leidos Holdings, Inc. Annual Report - 52
LEIDOS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended
December 28,
2018
December 29,
2017
December 30,
2016
(in millions)
$
582 $
364 $
246
(61)
(10)
(1)
(72)
510
1
24
4
9
37
401
(2)
(7)
14
(3)
4
250
2
248
Net income
Foreign currency translation adjustments
Unrecognized (loss) gain on derivative instruments
Pension adjustments
Total other comprehensive (loss) income, net of taxes
Comprehensive income
Less: comprehensive income (loss) attributable to non-controlling
interest
Comprehensive income attributable to Leidos common stockholders
$
509 $
403 $
See accompanying notes to consolidated financial statements.
Leidos Holdings, Inc. Annual Report - 53
LEIDOS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
Shares of
common
stock
Additional
paid-in
capital
Accumulated
earnings
(deficit)
Leidos
Accumulated
Holdings, Inc.
other
stockholders'
comprehensive
equity
(loss) income
(in millions, except for per share amounts)
Non-
controlling
interest
Total
72 $ 1,353 $
—
—
(277) $
244
—
1
—
—
—
36
(24)
—
— (1,022)
35
—
77
—
150
2,938
—
3,316
—
—
1
—
—
—
—
151
—
151
—
—
1
(6)
—
—
—
—
—
—
16
(31)
—
43
—
3,344
—
3,344
—
—
17
(438)
—
44
(1)
—
—
—
—
(144)
—
—
—
—
(177)
366
—
—
—
(196)
—
—
(7)
(8)
(15)
581
—
—
—
(194)
—
—
—
(8) $
1,068 $
— $ 1,068
—
4
—
—
—
—
—
—
—
(4)
—
37
—
—
—
—
—
33
9
42
—
(72)
—
—
—
—
—
—
244
4
36
(24)
(144)
2
—
—
—
—
246
4
36
(24)
(144)
(1,022)
— (1,022)
35
2,938
—
3,135
366
37
16
(31)
(196)
43
—
3,370
1
3,371
581
(72)
17
(438)
(194)
44
(1)
—
—
—
10
12
(2)
—
—
—
—
—
3
13
—
13
1
—
—
—
—
—
(10)
(1)
35
2,938
10
3,147
364
37
16
(31)
(196)
43
3
3,383
1
3,384
582
(72)
17
(438)
(194)
44
(11)
(1)
146 $ 2,966 $
372 $
(30) $
3,308 $
3 $ 3,311
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
Cumulative adjustments
related to ASU adoptions
Balance at December 30, 2017
Net income
Other comprehensive loss,
net of taxes
Issuances of stock (less
forfeitures)
Repurchases of stock and
other
Dividends of $1.28 per share
Stock-based compensation
Purchase of a non-controlling
interest
Other
Balance at December 28,
2018
See accompanying notes to consolidated financial statements.
Leidos Holdings, Inc. Annual Report - 54
LEIDOS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operations:
Net income
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
Non-cash interest expense
Promissory note impairment
Bad debt expense
Other
Change in assets and liabilities, net of effects of acquisitions and
dispositions:
Receivables
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
Collections on promissory note
Acquisitions of businesses
Net proceeds from sale of assets
Proceeds from disposition of business
Year Ended
December 28,
2018
December 29,
2017
December 30,
2016
(in millions)
$
582 $
364 $
246
257
336
122
10
44
7
6
—
—
2
(58)
(73)
(46)
(12)
(39)
88
768
(73)
40
(81)
—
—
14
43
—
12
33
10
9
(191)
(76)
152
8
(151)
(37)
526
(81)
2
—
8
—
—
35
4
4
—
3
(7)
123
(98)
(25)
26
36
(20)
449
(29)
4
25
3
23
26
Net cash (used in) provided by investing activities of continuing
operations
(114)
(71)
Leidos Holdings, Inc. Annual Report - 55
CONSOLIDATED STATEMENTS OF CASH FLOWS [CONTINUED]
LEIDOS HOLDINGS, INC.
Year Ended
December 28,
2018
December 29,
2017
December 30,
2016
(in millions)
Cash flows from financing activities:
Payments of long-term debt
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
Payment of tax indemnification liability
Proceeds from real estate financing transaction
Payments for non-controlling interest acquired
Other
(59)
—
(8)
14
(438)
—
(198)
(23)
14
(8)
(1)
(209)
—
(4)
13
(31)
—
(198)
—
—
—
—
Net cash used in financing activities of continuing operations
(707)
(429)
Net (decrease) increase in cash, cash equivalents and restricted cash
from continuing operations
Cash flows from discontinued operations:
Net cash used in investing activities of discontinued operations
Net decrease in cash, cash equivalents and restricted cash from
discontinued operations
Net (decrease) increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of year
(53)
—
—
(53)
422
26
—
—
26
396
Cash, cash equivalents and restricted cash at end of year
$
369 $
422 $
See accompanying notes to consolidated financial statements.
(277)
690
(30)
25
(24)
(993)
(142)
—
—
—
—
(751)
(276)
(1)
(1)
(277)
673
396
Leidos Holdings, Inc. Annual Report - 56
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Nature of Operations and Basis of Presentation
Nature of Operations and Basis of Presentation
Leidos Holdings, Inc. ("Leidos"), a Delaware corporation, is a holding company whose direct 100%-owned
subsidiary and principal operating company is Leidos, Inc. Leidos is a FORTUNE 500® science, engineering and
information technology company that provides 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 and many other U.S. government civilian agencies, as well as state and local
government agencies. Leidos' international customers include foreign governments and their agencies, primarily
located in Australia and the United Kingdom ("U.K."). 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 (see "Note 6—Acquisitions" for further information). The acquired IS&GS Business was renamed Leidos
Innovations Corporation. On December 28, 2018, Leidos Innovations Corporation was merged into Leidos, Inc. As a
result of the Lockheed Martin transaction, the Company received a controlling interest in Mission Support Alliance,
LLC ("MSA"), a joint venture with Centerra Group, LLC and Jacobs Engineering Group, Inc. ("Jacobs Group"). On
January 26, 2018, the Company entered into a Membership Interest Purchase Agreement with Jacobs Group,
whereby the Company purchased 100% of Jacobs Group's 41% outstanding membership interest in MSA. As a
result, Leidos increased its controlling ownership in MSA from 47% to 88%. The Company consolidates the financial
results for MSA into its consolidated financial statements.
The consolidated financial statements also include the balances of all voting interest entities in which Leidos has a
controlling voting interest ("subsidiaries") and a variable interest entity ("VIE") in which Leidos is the primary
beneficiary. The consolidated balances of the Company's VIE 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, fiscal 2016 segment
results and disclosures have been recast to reflect the new reportable segments (see "Note 24—Business
Segments").
Certain amounts in the prior year financial statements have been reclassified to conform to the current year
presentation. The Company classifies indirect costs incurred within or allocated to its U.S. government customers
as overhead (included in "Cost of revenues") or general administrative expenses in the same manner as such costs
are defined in the Company's disclosure statements under U.S. government Cost Accounting Standards ("CAS").
Effective the beginning of fiscal 2018, the Company established a new CAS structure and revised its disclosure
statements accordingly to reflect the related cost accounting practice changes. Consequently, $185 million and $88
million was reclassified from "Cost of revenues" to "Selling, general and administrative expenses" on the
consolidated statements of income for fiscal 2017 and 2016, respectively.
The Company aggregated "Acquisition and integration costs" and "Restructuring expenses" into "Acquisition,
integration and restructuring costs", and "Interest income" and "Interest expense" into "Interest expense, net" on the
consolidated statements of income. Additionally, the Company separately disclosed "Collections on promissory
note", which was previously included in "Other" within investing cash flows on the consolidated statements of cash
flows.
Leidos Holdings, Inc. Annual Report - 57
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2—Accounting Standards
Accounting Standards Updates Adopted
During fiscal 2018, the Company adopted the following Accounting Standards Updates ("ASU"):
ASU 2014-09, Revenue from Contracts with Customers (Topic 606)
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2014-09
("ASC 606") and related amendments, which superseded all prior revenue recognition methods and industry-
specific guidance. The core principle of ASC 606 is 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 the revenue principles, an entity is
required to identify the contract(s) with a customer, identify the performance obligations, determine the transaction
price, allocate the transaction price to the performance obligations and recognize revenue when the performance
obligation is satisfied (i.e., either over time or point in time). ASC 606 further requires that companies disclose
sufficient information to enable users of financial statements to understand the nature, amount, timing and
uncertainty of revenue and cash flows arising from contracts with customers.
ASC 606 provided companies an option of two transition methods, the full retrospective method, in which case the
standard would be applied to each prior reporting period presented and the cumulative effect of applying the
standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the
cumulative effect of applying the standard would be recognized at the date of initial application. The ASU was
effective for annual reporting periods beginning after December 15, 2017.
Effective December 30, 2017 (the beginning of fiscal 2018), the Company adopted the requirements of ASC 606
using the modified retrospective method. The guidance was not applied to contracts that were complete at
December 30, 2017, and the comparative information for the prior fiscal years have not been retrospectively
adjusted.
As a result of the adoption the Company recorded a $1 million decrease to its beginning accumulated deficit as the
cumulative impact of adoption of the new revenue standard. The primary impact was on certain units-of-delivery
contracts, as the Company previously recognized revenue at a point in time when the customer accepted delivery of
the product or service. Under ASC 606, revenues on certain units-of-delivery contracts are now recognized using an
over-time model. The adoption of ASC 606 did not have a significant impact on the Company's revenue recognition
policy as revenues on substantially all of the Company's contracts continue to be recognized over time.
In adopting ASC 606, the Company elected to use certain practical expedients permitted by the standard including
using the portfolio approach where contracts with similar characteristics were assessed collectively to evaluate risk
over the impact of ASC 606. The Company also elected to adopt the right-to-invoice practical expedient on certain
cost-reimbursable contracts where the Company recognizes revenues as it is contractually able to invoice the
customer based on the control transferred to the customer.
ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedge Activities
In August 2017, the FASB issued ASU 2017-12, which simplifies the application of hedge accounting and improves
the financial reporting of hedging relationships to better portray the economic results of an entity's risk management
activities. The ASU is effective for public companies for annual reporting periods beginning after December 15,
2018, and should be applied on a modified retrospective basis. Early adoption is permitted.
The Company early adopted the provisions of ASU 2017-12 using the modified retrospective method during the first
quarter of fiscal 2018, and recorded a $3 million increase to accumulated other comprehensive income and a
corresponding increase to beginning accumulated deficit for the cumulative ineffectiveness gains related to the cash
flow hedges.
Leidos Holdings, Inc. Annual Report - 58
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ASU 2018-02, Income Statement–Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax
Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU 2018-02, which allows a reclassification from accumulated other
comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act ("Tax
Act"). This ASU is effective for all entities for annual reporting periods beginning after December 15, 2018, and
should be applied either in the period of adoption or retrospectively to each period in which the effect of the change
in the U.S. federal corporate income tax rate due to the Tax Act is recognized. Early adoption is permitted.
The Company early adopted the provisions of ASU 2018-02 during the first quarter of fiscal 2018 (applied in the
period of adoption), and recorded a $6 million increase to accumulated other comprehensive income and a
corresponding increase to beginning accumulated deficit to reflect the changes in the U.S. federal corporate income
tax rate as a result of the Tax Act. As a result of the adoption of ASU 2018-02, the Company's policy to release
income tax effects in accumulated other comprehensive income is consistent with the underlying book method.
The cumulative effect of the changes made to the Company's consolidated balance sheet for the adoptions of the
ASUs above was as follows:
Balance at
December 29,
2017
Adjustments
due to ASU
2014-09
Adjustments
due to ASU
2017-12
(in millions)
Adjustments
due to ASU
2018-02
Balance at
December 30,
2017
Assets:
Receivables, net
Other current assets
Equity:
Accumulated deficit
Accumulated other comprehensive
income
$
$
1,831 $
453
4 $
(3)
— $
—
— $
—
1,835
450
(7) $
1 $
(3) $
(6) $
33
—
3
6
(15)
42
Accounting Standards Updates Issued But Not Yet Adopted
ASU 2016-02, ASU 2018-10, ASU 2018-11 and ASU 2018-20, Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02, which supersedes the current lease guidance under Leases
(Topic 840) and makes several changes, such as requiring an entity to recognize a right-of-use ("ROU") asset and
corresponding lease obligation on the balance sheet, classified as financing or operating, as appropriate. The
update is effective for public companies for annual and interim reporting periods beginning after December 15,
2018, and should be adopted under the modified retrospective approach.
In July 2018, the FASB issued ASU 2018-10 "Codification Improvements to Topic 842, Leases" to add clarity to
certain areas within ASU 2016-02 and ASU 2018-11 "Targeted Improvements", to add an additional and optional
transition method to adopt the new leases standard by allowing recognition of a cumulative-effect adjustment to the
opening balance of retained earnings in the period of adoption. In December 2018, the FASB issued ASU 2018-20
"Narrow-Scope Improvements for Lessors" to add clarity to lessors accounting for sales taxes and other similar
taxes collected from lessees, accounting for variable payments for contracts with lease and non-lease components,
and accounting for certain lessor costs. The effective date and transition requirements of these updates will be the
same as ASU 2016-02.
The Company plans to adopt the new lease accounting standards in fiscal 2019 using the optional transition
method. The Company has made progress in reviewing lease and other service based contracts, implementing a
new lease accounting and administration software solution, establishing new processes and internal controls. The
Company has elected to adopt certain practical expedients provided under ASC 842, including the option to not
apply lease recognition for short-term leases, reassessment of whether expired or existing contracts contain leases,
reassessment of lease classification for expired or existing leases, applying a single discount rate to a portfolio of
leased assets with similar durations, reassessing initial direct costs and combining lease and non-lease
components in revenue arrangements.
Leidos Holdings, Inc. Annual Report - 59
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company expects the adoption of the new standard will result in the recognition of at least $350 million and
$400 million of ROU assets and lease liabilities, respectively, primarily due to its operating leases, to the Company's
consolidated balance sheets, but will not have a material impact on the consolidated statements of income and
consolidated statements of cash flows. The Company's accounting for capital leases will remain substantially
unchanged. Additionally, the Company estimates a $65 million increase in retained earnings due to the cumulative
effect of recognizing a gain related to the sale and leaseback of the San Diego properties (see "Note 22—Leases").
ASU 2016-13, Financial Instruments – Credit Losses (Topic 326)
In June 2016, the FASB issued ASU 2016-13, which 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 for annual and interim reporting periods beginning after
December 15, 2019, 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.
Early adoption is permitted. 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.
ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement
(Subtopic 350-40)
In August 2018, the FASB issued ASU 2018-15, which aligns the capitalization requirements for implementation
costs incurred in a hosting arrangement that is a service contract with the existing capitalization requirements for
implementation costs associated with internal-use software. The update is effective for public companies for annual
and interim reporting periods beginning after December 15, 2019, and may be adopted either retrospectively or
prospectively. Early adoption is permitted. The Company is evaluating the provisions of ASU 2018-15 and its impact
on the Company’s consolidated financial position, results of operations and cash flows.
Note 3—Summary of Significant Accounting Policies
Reporting Periods
Leidos' fiscal year ends on the Friday nearest the end of December. Fiscal 2018, 2017 and 2016 each included 52
weeks.
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.
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.
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.
Leidos Holdings, Inc. Annual Report - 60
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investments
Investments in entities and corporate joint ventures where the Company has a non-controlling ownership interest
but 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.
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.
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.
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 included as
"Acquisition, integration and restructuring costs" on the consolidated statements of income. See "Note 8—
Restructuring Expenses" for additional information about the Company's restructuring activities.
Revenue Recognition
The Company's revenues from contracts with customers are from offerings including enterprise modernization;
cyber operations; operations and logistics; mission software systems; integrated systems; sensors and
phenomenology; and mission support, primarily with the U.S. government and its agencies. The Company also
serves various state and local governments, foreign governments and U.S. commercial customers.
The Company performs under various types of contracts, which include firm-fixed-price ("FFP"), time-and-materials
("T&M"), fixed-price-level-of-effort ("FP-LOE"), cost-plus-fixed-fee, cost-plus-award-fee, cost-plus-incentive-fee and
fixed-price-incentive-fee ("FP-IF") contracts.
Leidos Holdings, Inc. Annual Report - 61
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
To determine the proper revenue recognition, the Company first evaluates whether it has a duly approved and
enforceable contract with a customer, in which the rights of the parties and payment terms are identified, and
collectability is probable. The Company also evaluates whether two or more contracts should be combined and
accounted for as a single contract, including the task orders issued under an indefinite delivery/indefinite quantity
("IDIQ") award. In addition, the Company assesses contract modifications to determine whether changes to existing
contracts should be accounted for as part of the original contract or as a separate contract. Contract modifications
for the Company generally relate to changes in contract specifications and requirements and do not add distinct
services, and therefore are accounted for as part of the original contract. If contract modifications add distinct goods
or services and increase the contract value by an amount that reflects the standalone selling price, those
modifications are accounted for as separate contracts.
Most of the Company's contracts are comprised of multiple promises including the design and build of software-
based systems, integration of hardware and software solutions, running and maintaining of IT infrastructure and
procurement services. In all cases, the Company assesses if the multiple promises should be accounted for as
separate performance obligations or combined into a single performance obligation. The Company generally
separates multiple promises in a contract as separate performance obligations if those promises are distinct, both
individually and in the context of the contract. If multiple promises in a contract are highly interrelated or require
significant integration or customization within a group, they are combined and accounted for as a single
performance obligation.
The Company's contracts with the U.S. government often contain options to renew existing contracts for an
additional period of time (generally a year at a time) under the same terms and conditions as the original contract,
and generally do not provide the customer any material rights under the contract. The Company accounts for
renewal options as separate contracts when they include distinct goods or services at standalone selling prices.
Contracts with the U.S. government are subject to the Federal Acquisition Regulation ("FAR") and priced on
estimated or actual costs of providing the goods or services. The FAR provides guidance on types of costs that are
allowable in establishing prices for goods and services provided to the U.S. government and its agencies. Each
contract is competitively priced and bid separately. Pricing for non-U.S. government agencies and commercial
customers is based on specific negotiations with each customer. In circumstances where the standalone selling
price is not directly observable, we estimate the standalone selling price using the expected cost plus margin
approach. The Company excludes any taxes collected or imposed when determining the transaction price.
Certain of the Company's cost-plus and fixed-price contracts contain award fees, incentive fees or other provisions
that may either increase or decrease the transaction price. These variable amounts generally are awarded upon
achievement of certain performance metrics, program milestones or cost targets and can be based upon customer
discretion. The Company estimates variable consideration at the most probable amount that it expects to be entitled
to, based on the assessment of the contractual variable fee criteria, complexity of work and related risks, extent of
customer discretion, amount of variable consideration received historically and the potential of significant reversal of
revenue.
The Company allocates the transaction price of a contract to its performance obligations in the proportion of its
respective standalone selling prices. The standalone selling price of the Company's performance obligations is
generally based on an expected cost-plus margin approach, in accordance with the FAR. For certain product sales,
the Company uses prices from other standalone sales. Substantially all of the Company's contracts do not contain a
significant financing component, which would require an adjustment to the transaction price of the contract.
The Company recognizes revenue on its service based contracts primarily over time as there is continuous transfer
of control to the customer over the duration of the contract as the Company performs the promised services. For
U.S. government contracts, continuous transfer of control to the customer is evidenced by clauses in the contract
that allow the customer to unilaterally terminate the contract for convenience, pay for costs incurred plus a
reasonable profit and take control of any work-in-process. Similarly, for non-U.S. government contracts, the
customer typically controls the work-in-process as evidenced by rights to payment for work performed to date plus a
reasonable profit to deliver products or services that do not have an alternate use to the Company. Anticipated
losses on service based contracts are recognized when known. In certain product sales, where the products have
an alternate use, the Company recognizes revenue at a point in time when the customer takes control of the asset
usually denoted by possession and legal title.
Leidos Holdings, Inc. Annual Report - 62
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On FFP contracts, revenue recognized over time generally uses a method that measures the extent of progress
towards completion of a performance obligation, principally using a cost-input method (referred to as the cost-to-
cost method). Under the cost-to-cost method, revenue is recognized based on the proportion of total costs incurred
to estimated total costs-at-completion ("EAC"). A performance obligation's EAC includes all direct costs such as
materials, labor, subcontract costs, overhead, and a ratable portion of general and administrative costs. In addition,
the Company includes in an EAC of a performance obligation future losses estimated to be incurred on onerous
contracts, as and when known. On certain other contracts, principally T&M, FP-LOE, and cost-plus, revenue is
recognized using the right-to-invoice practical expedient as the Company is contractually able to invoice the
customer based on the control transferred to the customer. Additionally, on maintenance (generally FFP)
performance obligations, revenue is recognized over time using a straight-line method as the control of the services
is provided to the customer evenly over the period of performance.
For certain performance obligations, the Company is not primarily responsible for fulfilling the promise to provide the
goods or service to the customer, does not have inventory risk and does not have discretion in establishing the price
for the goods or service. In such cases, the Company recognizes revenue on a net basis.
Contract Costs
Contract costs generally include direct costs such as materials, labor, subcontract costs and indirect costs
identifiable with or allocable to a specific contract. Costs are expensed as incurred except for costs incurred to fulfill
a contract, which are capitalized and amortized on a straight-line basis over the expected period of performance.
The Company does not incur significant incremental costs to acquire contracts. Contract costs incurred for U.S.
government contracts, including indirect costs, are subject to audit and adjustment by the Defense Contract Audit
Agency ("DCAA") (see "Note 25—Contingencies").
Pre-contract Costs
Costs incurred on projects as pre-contract costs are deferred as 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 service contracts, costs are incurred, usually at the beginning of the contract performance, to
transition the services, employees and equipment to or from the customer or prior contractor. These costs are
generally capitalized as deferred assets and amortized over the contractual period of performance and unexercised
option periods.
Project Assets
Purchases of project assets are capitalized for specific contracts where delivery has not yet occurred, ownership is
maintained by the Company over the life of the contract or the benefit is received over a period of time. Project
assets include enterprise software licenses, hardware, maintenance agreements, computers and significant
material purchases and other costs incurred on contracts. Project assets are relieved from the balance sheet based
on different methodologies, including transfer of assets and amortization based on the estimated useful life of the
asset or using the straight-line method over the expected term of the performance obligation.
Changes in Estimates on Contracts
Changes in estimates related to contracts accounted for using the cost-to-cost method of accounting are recognized
in the period in which such changes are made for the inception-to-date effect of the changes, with the exception of
contracts acquired through the acquisition of the IS&GS Business (see "Note 6—Acquisitions"), where the
adjustment is for the period commencing from the date of acquisition.
Leidos Holdings, Inc. Annual Report - 63
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in estimates on contracts for the periods presented were as follows:
Net favorable impact to income before income taxes
Impact on diluted EPS attributable to Leidos common stockholders
Year Ended
December 28,
2018
December 29,
2017
December 30,
2016
(in millions, except for per share amounts)
$
$
105 $
0.52 $
103 $
0.41 $
37
0.22
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 to the finalization of award and incentive fees.
The impact on diluted EPS attributable to Leidos common stockholders is calculated using the Company's statutory
tax rate.
During fiscal 2018, revenue recognized from performance obligations satisfied in previous periods was $102 million.
The changes primarily relate to revisions of variable consideration, including award fees, and revisions to estimates
at completion resulting from changes in contract scope, mitigation of contract risks or due to true-ups of contract
estimates at the end of contract performance.
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 CAS.
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 2018, 2017 and 2016, company-funded IR&D expense was $46 million, $42 million
and $44 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.
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.
Leidos Holdings, Inc. Annual Report - 64
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 correspondingly increases "Accounts payable and accrued
liabilities" on the consolidated balance sheets. At December 28, 2018, and December 29, 2017, the Company
included $56 million and $169 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 certain expenditures related to that customer's contract. Restricted cash balances are included as "Other
current assets" in the consolidated balance sheets.
Receivables
The Company's receivables include amounts billed and currently due from customers, amounts billable where the
right to consideration is unconditional and amounts unbilled. As of fiscal 2018, amounts billable were classified as
billed receivables. These receivables were classified as unbilled receivables for fiscal 2017 (see "Note 9—
Receivables").
Amounts billable and unbilled amounts 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 DCAA.
The typical billing for the Company's cost-reimbursable and T&M contracts is as costs are incurred. FFP contracts
are billed either based on milestones, which are the achievement of specific events as defined in the contract, or
based on progress payments, which are interim payments up to a designated amount of costs incurred as work
progresses. On certain contracts, the customer withholds a certain percentage of the contract price (retainage).
These withheld amounts are included within the Company's unbilled receivables and 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. Based on the Company's historical experience, the 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.
Amounts billed and collected on contracts but not yet recorded as revenue because the Company has not
performed its obligation under the arrangement with a customer are deferred and included within "Accounts payable
and accrued liabilities" or "Other long-term liabilities" on the consolidated balance sheets.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of
accounts receivable and derivatives. Since the Company's receivables are primarily with the U.S. government, the
Company does not have exposure to a material credit risk. The Company manages its credit risk related to
derivatives through the use of multiple counterparties with high credit standards.
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,
inspection systems and baggage scanning equipment. The Company evaluates inventory against historical and
planned usage to determine appropriate provisions for obsolete inventory. Inventory balances are included as
"Other current assets" in the consolidated balance sheets.
Leidos Holdings, Inc. Annual Report - 65
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2018, 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, consideration of the excess of a reporting unit's fair
value over its 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 the multiples of comparable
publicly-traded companies that provide a reasonable basis of comparison with each of the Company's reporting
units. 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.
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 and 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.
Leidos Holdings, Inc. Annual Report - 66
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible Assets
Acquired intangible assets with finite lives and internally developed software 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.
Property, Plant and Equipment
Purchases of property, plant and equipment, including purchases of software and software licenses, 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.
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
3-10
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.
Fair Value Measurements
The accounting standard for fair value measurements establishes a three-level fair value hierarchy, which prioritizes
the inputs used in measuring fair value as follows: observable inputs such as quoted prices in active markets (Level
1); inputs other than quoted prices in active markets 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).
Leidos Holdings, Inc. Annual Report - 67
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
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).
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 performance-based stock awards with market
conditions is based on using the Monte Carlo simulation.
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.
Leidos Holdings, Inc. Annual Report - 68
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (loss) income in stockholders' equity.
Gains and losses due to movements in foreign currency exchange rates are recognized as "Other expense, net" on
the consolidated statements of income.
Note 4—Revenues
Dual Reporting
The effects to the consolidated financial statements at and as of December 28, 2018, as a result of applying ASC
606, rather than previous GAAP ("ASC 605"), were the following:
Balance Sheet
Receivables, net
Other current assets
Accumulated earnings (deficit)
Income Statement
Revenues
Cost of revenues
Operating income
As Reported
(ASC 606)
As Adjusted
(ASC 605)
(in millions)
$
1,877 $
1,872
543
372
545
369
Year Ended December 28, 2018
As Reported
(ASC 606)
As Adjusted
(ASC 605)
(in millions)
$
10,194 $
8,690
749
10,189
8,688
746
The changes reflected above were primarily due to the Company's units-of-delivery contracts, which were
recognized at a point in time under ASC 605 and are recognized using an over-time model under ASC 606.
Remaining Performance Obligations
Remaining performance obligations represent the expected value of exercised contracts, both funded and
unfunded, less revenue recognized to date. Remaining performance obligations do not include unexercised option
periods and future potential task orders expected to be awarded under IDIQ contracts.
As of December 28, 2018, the Company had $10.2 billion of remaining performance obligations, which are
expected to be recognized as revenue in the amounts of $7.3 billion, $1.1 billion and $1.8 billion for fiscal 2019,
fiscal 2020 and fiscal 2021 and thereafter, respectively.
Disaggregation of Revenues
The Company disaggregates revenues by customer-type, contract-type and geographic location for each of its
reportable segments. These categories represent how the nature, timing and uncertainty of revenues and cash
flows are affected by the U.S. government procurement environment.
Leidos Holdings, Inc. Annual Report - 69
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Disaggregated revenues by customer-type were as follows:
DoD
Other government agencies(1)
Commercial and non-U.S. customers
Total
Year Ended December 28, 2018
Defense
Solutions
4,318 $
194
436
Civil
Health
Total
(in millions)
128 $
386 $
2,412
889
1,276
155
4,832
3,882
1,480
4,948 $
3,429 $
1,817 $
10,194
$
$
(1) Includes non-DoD federal government agencies, state and local government agencies.
The majority of the Company's revenues are generated from U.S. government contracts, either as a prime
contractor or as a subcontractor to other contractors. Revenues from the U.S. government can be adversely
impacted by spending caps or changes in budgetary priorities of the U.S. government, as well as delays in program
start dates or the award of a contract. Government spending levels for the DoD may be impacted by spending
priorities as a result of competing demands for federal funds.
Disaggregated revenues by contract-type were as follows:
Cost-reimbursement and fixed-price-incentive-fee
Firm-fixed-price
Time-and-materials and fixed-price-level-of-effort
Total
Year Ended December 28, 2018
Defense
Solutions
Civil
Health
Total
(in millions)
$
$
3,417 $
1,863 $
189 $
1,031
500
1,004
562
1,134
494
5,469
3,169
1,556
4,948 $
3,429 $
1,817 $
10,194
Cost-reimbursement and FP-IF contracts are generally lower risk and have lower profits. T&M and FP-LOE
contracts are also low risk but profits may vary depending on actual labor costs compared to negotiated contract
billing rates. FFP contracts offer the potential for higher profits while increasing the Company’s exposure to risk of
cost overruns.
Disaggregated revenues by geographic location were as follows:
United States
International
Total
Year Ended December 28, 2018
Defense
Solutions
Civil
Health
Total
$
$
4,572 $
376
4,948 $
(in millions)
2,876 $
553
3,429 $
1,817 $
—
1,817 $
9,265
929
10,194
The Company's international business operations, primarily located in Australia and the U.K., are subject to
additional and different risks than its U.S. business. Failure to comply with U.S. government 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 the Company's business with the U.S. government.
In some countries, there is an increased chance for economic, legal or political changes that may adversely affect
the performance of the Company's services, sales of products or repatriation of profits. International transactions
can also involve increased financial and legal risks arising from foreign exchange variability, imposition of tariffs or
additional taxes and restrictive trade policies and delays or failure to collect amounts due to differing legal systems.
Leidos Holdings, Inc. Annual Report - 70
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5—Contract Assets and Liabilities
The Company’s performance obligations are satisfied either over time as work progresses or at a point in time. FFP
contracts are typically billed to the customer using milestone payments while cost-reimbursable and T&M contracts
are typically billed to the customer on a monthly or bi-weekly basis as indicated by the negotiated billing terms and
conditions of the contract. As a result, for each of the company’s contracts, the timing of revenue recognition,
customer billings and cash collections results in a net contract asset or liability at the end of each reporting period.
Contract assets include unbilled receivables, which is the amount of revenue recognized that exceeds the amount
billed to the customer, where right to payment is not just subject to the passage of time.
Contract liabilities consist of deferred revenue.
The components of contract assets and contract liabilities consisted of the following:
Balance sheet line item
Contract assets - current:
Unbilled receivables(2)
Receivables, net
Contract liabilities - current:
Deferred revenue
Accounts payable and accrued liabilities
Contract liabilities - non-current:
Deferred revenue
Other long-term liabilities
December 28,
2018
December 30,
2017(1)
(in millions)
$
$
$
818 $
844
276 $
293
10 $
17
(1) Includes the cumulative effect of the changes made to the Company's opening balance sheet at December 30, 2017, as a result of the
adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606).
(2) Balances exclude $381 million and $234 million determined to be billable at December 28, 2018, and December 30, 2017, respectively.
The decrease in unbilled receivables was primarily due to the timing of billings and revenue recognized on certain
contracts. The decrease in deferred revenue was primarily due to revenue recognized during the period partially
offset by the timing of advance payments from customers.
During fiscal 2018, the Company recognized revenues of $208 million relating to amounts that were included as a
contract liability at December 30, 2017.
The Company did not recognize any impairment losses on contract assets during fiscal 2018.
Note 6—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."
Leidos Holdings, Inc. Annual Report - 71
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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. 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 15—Debt" for further information regarding the debt incurred and the 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 19—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 19—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 - 72
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
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. 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 of $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" on the consolidated statement 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 10—Goodwill"). Of the total goodwill, $414 million is tax deductible.
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 13—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.
Leidos Holdings, Inc. Annual Report - 73
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the fair value of intangible assets acquired at the date of acquisition and the related
weighted average amortization period:
Program and contract intangibles(1)
Backlog
Software and technology(1)
Total
Weighted
average
amortization
period
Fair value
(in years)
(in millions)
9.7 $
1,011
1.8
4.6
157
26
8.6 $
1,194
(1) The weighted average amortization period is estimated based on the projected economic benefits associated with these assets.
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
Year Ended
December 28,
2018
December 29,
2017
December 30,
2016
$
$
(in millions)
— $
29
29 $
25 $
77
102 $
44
46
90
These acquisition and integration costs have been recorded within Corporate and presented in "Acquisition,
integration and restructuring costs" on the consolidated statements of income.
On January 10, 2018, the final amount of the net working capital of the IS&GS Business 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. On January 18,
2018, the final working capital amount of $105 million was paid to Lockheed Martin, of which $24 million and $81
million was presented as cash flows from operating and investing activities, respectively, on the consolidated
statement of cash flows.
During fiscal 2018, a tax indemnification liability of $23 million was paid to Lockheed Martin in accordance with the
Tax Matters Agreement, which was presented as cash flows from financing activities on the consolidated statement
of cash flows.
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.
Leidos Holdings, Inc. Annual Report - 74
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Revenues
Net income
Net income attributable to Leidos common stockholders
Earnings per share:
Basic
Diluted
Year Ended
December 30,
2016
(in millions,
except for per
share amounts)
$
10,443
340
335
2.23
2.20
$
The unaudited pro forma financial information above excludes acquisition-related costs of $44 million as a non-
recurring significant adjustment. This adjustment was made to account for certain costs incurred as if the
Transactions had been completed on January 31, 2015.
Note 7—Divestitures
Commercial Cybersecurity Business
On June 5, 2018, the Company entered into a Stock and Asset Purchase Agreement to sell the Company's
commercial cybersecurity business, included within the Company's Civil segment, in order to focus on providing
solutions, including cybersecurity, to the Company's core markets of governments and highly regulated industries.
The sale is expected to be completed in early fiscal 2019 and is not expected to result in a loss. The Company has
presented the associated assets and liabilities of the business as held for sale in the Company's consolidated
balance sheet as of December 28, 2018. The major classes of assets and liabilities classified as held for sale were
as follows:
Receivables, net
Other current assets
Property, plant and equipment, net
Intangible assets, net
Goodwill
Deferred tax assets
Total assets held for sale
Accounts payable and accrued liabilities
Accrued payroll and employee benefits
Other long-term liabilities
Total liabilities held for sale
December 28,
2018
(in millions)
$
$
$
$
16
5
3
5
57
6
92
16
4
3
23
Leidos Holdings, Inc. Annual Report - 75
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The planned disposition does not represent a strategic shift in operations that will have a material effect on the
Company's operations and financial results, and accordingly was not presented as discontinued operations.
Heavy Construction Business
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 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. The Company recorded the pre-tax gain on sale in "Other expense, net" on the consolidated statements
of income.
Plainfield Renewable Energy Holdings LLC
On July 24, 2015, the Company completed the sale of its equity interests in Plainfield Renewable Energy Holdings
LLC ("Plainfield"), a biomass-fueled power plant in Plainfield, Connecticut (the "plant"), for an aggregate
consideration of $102 million, subject to certain adjustments. The consideration received at closing consisted of a
cash payment of $29 million (the "Closing Payment") and a secured promissory note for $73 million, net of discount
(the "Note").
The original maturity date of the Note was 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% would increase to 8% if the
maturity date was extended beyond July 24, 2017, and would 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 allowed 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 were 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 comprised the plant.
In January 2018, the Company entered into negotiations with the equity owners of Plainfield LLC regarding the
Plainfield Recapitalization Plan ("Plan"). The Plan envisioned raising new equity combined with reduction of
Plainfield's debt. As a result, the Company recorded a $33 million impairment of its Note, which is presented in
"Other expense, net" on the consolidated statements of income. The net realizable value of the Note at December
29, 2017, was estimated to be approximately $40 million, compared to its carrying value of $73 million, including
accrued interest.
On July 12, 2018, Leidos and Plainfield entered into an additional amendment to the Note, allowing Plainfield to
defer the maturity of the Note until the earlier of August 24, 2018, or the date Plainfield successfully closed on a
refinancing agreement with a third party. Under the terms of the agreement, if Plainfield successfully refinanced the
Note prior to August 24, 2018, Leidos would allow Plainfield to settle the Note in full for $40 million plus 50% of
additional net proceeds obtained by Plainfield. On August 23, 2018, Leidos and Plainfield entered into an
agreement with respect to the final payoff of the Note. As a result, the Company received proceeds of $40 million in
full satisfaction of Plainfield's obligations under the Note.
Leidos Holdings, Inc. Annual Report - 76
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8—Restructuring Expenses
After the acquisition of the IS&GS Business, the Company began an initiative to reduce 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
Year Ended
December 28,
2018
December 29,
2017
December 30,
2016
$
$
(in millions)
2 $
6
8 $
18 $
19
37 $
10
2
12
As of December 28, 2018, the Company has recognized a total of $57 million of expense in connection with
restructuring activities. These restructuring expenses have been recorded within Corporate and presented in
"Acquisition, integration and restructuring costs" on the consolidated statements of income.
The related restructuring liability related to this program was as follows:
Balance at December 30, 2016
Charges
Cash payments
Balance at December 29, 2017
Charges
Cash payments
Severance
Costs
Lease
Termination
Expenses
(in millions)
$
7 $
1 $
Total
18
(20)
5
2
(7)
19
(16)
4
6
(8)
Balance at December 28, 2018
$
— $
2 $
Note 9—Receivables
The components of receivables, net consisted of the following:
8
37
(36)
9
8
(15)
2
Billed receivables(1)
Unbilled receivables
Allowance for doubtful accounts
December 28,
2018
December 29,
2017
(in millions)
1,067 $
818
(8)
1,877 $
771
1,074
(14)
1,831
$
$
(1) As a result of the adoption of ASC 606, $381 million of billable receivables were classified as billed receivables for fiscal 2018. $234 million of
billable receivables were classified as unbilled receivables for fiscal 2017.
Note 10—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 24—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.
Leidos Holdings, Inc. Annual Report - 77
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents changes in the carrying amount of goodwill by reportable segment:
Goodwill at December 30, 2016(1)
Adjustment to original purchase price allocation
Foreign currency translation adjustments
Goodwill at December 29, 2017(1)
Foreign currency translation adjustments
Transfers to assets held for sale
Adjustment to goodwill
Goodwill at December 28, 2018(1)
Defense
Solutions
Civil
Health
Total
(in millions)
$
1,954 $
1,731 $
937 $
4,622
94
7
2,055
(40)
—
—
259
8
1,998
(11)
(57)
(6)
(16)
—
921
—
—
—
337
15
4,974
(51)
(57)
(6)
$
2,015 $
1,924 $
921 $
4,860
(1) Carrying amount includes accumulated impairment losses of $369 million and $117 million within the Health and Civil segments, respectively.
See "Note 6—Acquisitions" for the description of adjustments to the original purchase price allocation.
In conjunction with the fiscal 2017 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 2018 and
fiscal 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, and as a result, a quantitative step
one analysis was not necessary. Additionally, based on the results of the quantitative step one analysis for certain
other of its reporting units, it was determined that the fair value was in excess of the individual reporting units
carrying values. In fiscal 2017, the company performed a quantitative analysis for all reporting units. It was
determined that the fair values of all 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.
During the year ended December 28, 2018, the Company recorded an immaterial correction of $6 million with
respect to fair value of liabilities acquired from the Transactions (see "Note 6—Acquisitions").
Note 11—Intangible Assets
Intangible assets consisted of the following:
December 28, 2018
December 29, 2017
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
Software and technology
Customer relationships
Backlog
Total finite-lived intangible assets
Indefinite-lived intangible assets:
Trade names
$
1,003 $
93
4
—
1,100
(74)
(4)
—
(452)
4
—
(374) $
629 $
1,013 $
(187) $
826
19
—
—
648
4
89
4
158
1,264
(64)
(3)
(158)
(412)
4
—
25
1
—
852
4
856
Total intangible assets
$
1,104 $
(452) $
652 $
1,268 $
(412) $
Amortization expense related to intangible assets, including those acquired through the Transactions, was $201
million, $281 million and $84 million for fiscal 2018, 2017 and 2016, respectively.
Leidos Holdings, Inc. Annual Report - 78
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Program and contract 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. Customer relationships and
backlog intangible assets are amortized on a straight-line basis over their estimated useful lives. Software and
technology intangible assets are amortized either on a straight-line basis over their estimated useful lives or over
their respective estimated useful lives in proportion to the pattern of economic benefit based on expected future
discounted cash flows, as deemed appropriate.
The estimated annual amortization expense related to finite-lived intangible assets as of December 28, 2018, is as
follows:
Fiscal Year Ending
2019
2020
2021
2022
2023
2024 and thereafter
(in millions)
$
$
171
126
106
92
73
80
648
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 12—Property, Plant and Equipment
Property, plant and equipment, net consisted of the following:
Computers and other equipment
Leasehold improvements
Buildings and improvements
Land
Office furniture and fixtures
Construction in progress
Less: accumulated depreciation and amortization
December 28,
2018
December 29,
2017
(in millions)
$
233 $
206
56
40
36
15
586
(349)
237 $
$
194
171
54
49
34
44
546
(314)
232
Depreciation expense was $56 million, $55 million and $38 million for fiscal 2018, 2017 and 2016, respectively.
During the quarter ended March 30, 2018, the Company determined that the carrying amount of a real estate
property may not be recoverable and as a result recorded an impairment charge of $7 million, which was recorded
within Corporate. On July 23, 2018, the Company entered into a Contract of Sale to sell and lease back the
property. The term of the lease is expected to end during fiscal 2020. See "Note 27—Subsequent Events" regarding
the completion of the sale.
Leidos Holdings, Inc. Annual Report - 79
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13—Fair Value Measurements
The Company's financial instruments measured on a recurring basis at fair value consisted of the following:
Financial assets:
Derivatives
Financial liabilities:
Derivatives
December 28, 2018
December 29, 2017
Carrying value
Fair value
Carrying value
Fair value
(in millions)
$
— $
— $
37 $
35
35
—
37
—
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 14—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 Company's financial instruments measured on a recurring basis at fair value also includes its defined benefit
plan assets (Level 2 inputs). See "Note 21—Retirement Plans" for further details on these investments.
The carrying amounts of the Company's financial instruments, other than derivatives, which include cash
equivalents, accounts receivable, other short-term 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 7
—Divestitures" and "Note 22—Leases") of $24 million and $63 million as of December 28, 2018, and December 29,
2017, 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 28, 2018, and December 29, 2017, the fair value of debt was $3.1 billion and $3.2 billion,
respectively, and the carrying amount was $3.1 billion for both periods (see "Note 15—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).
During fiscal 2018 and 2017, the Company did not have any assets or liabilities measured at fair value on a non-
recurring basis, other than a real estate property measured at fair value (Level 2) on March 30, 2018, which resulted
in an impairment charge of $7 million (see "Note 12—Property, Plant and Equipment").
Note 14—Derivative Instruments
The fair value of the Company's interest rate swaps was as follows:
Cash flow interest rate swaps
Other assets
$
(in millions)
— $
37
Asset derivatives
Balance sheet line item
December 28,
2018
December 29,
2017
Liability derivatives
Balance sheet line item
December 28,
2018
December 29,
2017
Fair value interest rate swaps
Cash flow interest rate swaps
Other long-term liabilities
Other long-term liabilities
(in millions)
3 $
32
35 $
—
—
—
$
$
The fair value adjustment to the fair value interest rate swap and the underlying debt was a decrease of $3 million
for both the year ended December 28, 2018, and December 29, 2017.
Leidos Holdings, Inc. Annual Report - 80
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The cash flows associated with the interest rate swaps are classified as operating activities in the consolidated
statements of cash flows.
Fair Value Hedges
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. 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)
(see "Note 15—Debt").
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.
The following amounts were recorded on the consolidated balance sheets related to cumulative basis adjustments
for fair value hedges:
Balance sheet line item of hedged item
Carrying amount of hedged item
Cumulative amount of fair value
adjustment included within the hedged
item
December 28,
2018
December 29,
2017
December 28,
2018
December 29,
2017
Long-term debt, net of current portion
$
447 $
(in millions)
449 $
(3) $
—
Cash Flow Hedges
The Company has interest rate swap agreements to hedge the cash flows of a portion of its variable rate senior
secured term loans (the "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. In August 2016, September 2017 and February
2018, the Company entered into interest rate swap agreements to hedge the cash flows of $1.1 billion, $300 million
and $250 million of its Variable Rate Loans, respectively. The interest rate swap agreements on $1.1 billion of the
Company's Variable Rate Loans had a maturity date of December 2021 and a fixed interest rate of 1.08%. The
interest rate swap agreements on $300 million and $250 million of the Company's Variable Rate Loans both had a
maturity date of August 2022 and fixed interest rates of 1.66% and 2.59%, respectively. The counterparties to these
agreements are financial institutions.
In September 2018, the Company terminated its existing interest rate swaps. The net derivative gain of $60 million
related to the discontinued cash flow hedge will continue to be reported within accumulated other comprehensive
(loss) income and will be reclassified into earnings over the remaining life of the original hedge as the hedged
variable rate debt impacts earnings.
Additionally, in September 2018, the Company entered into new interest rate swap agreements to hedge the cash
flows of $1.5 billion of the Company's Variable Rate Loans. These interest rate swap agreements have a maturity
date of August 2025 and a fixed interest rate of 3.00%.
The interest rate swap transactions were accounted for as cash flow hedges. The gain/loss on the swap is reported
as a component of other comprehensive income/loss and is reclassified into earnings when the interest payments
on the underlying hedged items impact earnings. A qualitative assessment of hedge effectiveness is performed on a
quarterly basis, unless facts and circumstances indicate the hedge may no longer be highly effective.
Leidos Holdings, Inc. Annual Report - 81
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effect of the Company's cash flow hedges on other comprehensive (loss) income and earnings for the periods
presented was as follows:
Year Ended
December 28,
2018
December 29,
2017
December 30,
2016
(in millions)
Total interest expense, net presented in the consolidated statements of
income in which the effects of cash flow hedges are recorded
$
138 $
140 $
Amount recognized in other comprehensive (loss) income
Amount reclassified from accumulated other comprehensive (loss)
income to interest expense, net
(7)
(6)
10
—
86
22
2
The Company expects to reclassify gains of $12 million from accumulated other comprehensive (loss) income into
earnings during the next 12 months.
Note 15—Debt
The Company's debt consisted of the following:
Stated
interest rate
Effective
interest rate
December 28,
2018(1)
December 29,
2017(1)
(in millions)
Senior secured notes:
$450 million notes, due December 2020
$300 million notes, due December 2040
Senior secured term loans:
$690 million Term Loan A, due August 2023
$310 million Term Loan A, due August 2023
$1,131 million Term Loan B, due August 2025
Senior unsecured notes:
$250 million notes, due July 2032
$300 million notes, due July 2033
Notes payable and capital leases 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%
3.88%
3.88%
4.13%
7.13%
5.50%
4.53% $
447 $
6.03%
4.31%
4.33%
4.48%
7.43%
5.88%
216
617
258
449
216
644
270
1,085
1,101
246
158
97
3,124
72
3,052 $
$
246
158
27
3,111
55
3,056
0%-5.55%
Various
(1) The carrying amounts of the senior secured term loans and notes and unsecured notes as of December 28, 2018, and December 29, 2017,
include the remaining principal outstanding of $3,073 million and $3,129 million, respectively, less total unamortized debt discounts and
deferred debt issuance costs of $43 million and $45 million, respectively, less $3 million related to the fair value of the interest rate swaps (see
"Note 14—Derivative Instruments") as of December 28, 2018.
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 6—
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. 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.
Leidos Holdings, Inc. Annual Report - 82
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
In March 2018, Leidos amended the terms of its senior secured $1.1 billion Term Loan B. As a result, the margin on
Term Loan B was reduced by 25 basis points to 1.75%. The repricing of the term loan became effective March 15,
2018.
In August 2018, Leidos amended its senior secured term loans and revolving credit facility agreements. These
amendments modified the margin range for the revolving credit facility and Term Loan A loans and extended their
maturity dates by one year to August 2023. The amendments also extended the maturity date of Term Loan B by
two years to August 2025 and delayed the scheduled increase in quarterly principal payments for Term Loan A by
one year to March 2021. Additionally, the senior secured leverage ratio calculation was amended and now excludes
the lesser of $350 million and the Company's unrestricted cash and cash equivalents.
In November 2018, Leidos amended the terms of its senior secured $310 million Term Loan A and $1.1 billion Term
Loan B. As a result, this transaction assigned the remaining Leidos Innovations Corporation term loan debts to
Leidos, Inc. No other terms of the original or amended Term Loan A or Term Loan B loan agreements were
changed.
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 1.25% to 2.00%, depending on the Company's senior
secured leverage ratio, and is computed on a quarterly basis. At December 28, 2018, the current margin on Term
Loan A was 1.50% and the margin on Term Loan B was 1.75%.
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 ratio, 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 due in fiscal 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 net leverage ratio.
The required debt prepayment amount is equal to 50% of the excess cash flow calculated. No additional debt
prepayment is required if the senior secured net leverage ratio is equal to or less than 2.00.
During fiscal 2018 and 2017, the Company made $59 million and $209 million of principal payments, respectively,
on its long-term debt, which was primarily related to its senior secured term loans. This activity included $46 million
and $76 million of required quarterly payments on its term loans during fiscal 2018 and fiscal 2017, respectively. In
April 2018, the Company made a required debt prepayment of $10 million on its senior secured term loans. The
prepayment was a result of the annual excess cash flow calculation for fiscal 2017. 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 of unamortized debt
discount and deferred financing costs were written off during fiscal 2017 and fiscal 2016, respectively, and recorded
to "Other expense, net" in the Company's consolidated statements of income.
Leidos Holdings, Inc. Annual Report - 83
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 senior secured term loans, the Company recognized $53 million of debt discount and debt
issuance costs in fiscal 2016, 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. In connection with the fiscal 2018 and fiscal 2017
amendments, the Company incurred $8 million and $4 million of debt issuance costs, respectively, related to the
senior secured term loans and revolving credit facility, which were recorded using the same methodology as the
original debt issuance costs discussed above. Amortization for the senior secured term loans and notes, unsecured
notes and revolving credit facility was $10 million, $13 million and $6 million for fiscal 2018, 2017 and 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 28, 2018.
Future minimum payments of debt are as follows:
Fiscal Year Ending
2019
2020
2021
2022
2023
2024 and thereafter
Total principal payments
Less: unamortized debt discount and issuance costs
Total long-term debt
Revolving Credit Facility
$
(in millions)
79
509
181
102
619
1,677
3,167
(43)
$
3,124
Leidos, Inc. has 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 maturity date of the credit facility is August 2023. During fiscal 2018
and 2017, there were no borrowings under the 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, minus the lesser of $350 million and the Company's unrestricted cash and cash equivalents, 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 28, 2018.
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 events, material monetary judgments, change of control events and the material inaccuracy of
the Company’s representations and warranties.
Notes Payable
During fiscal 2018, the Company recognized a $79 million note payable related to the sale and leaseback
arrangement of its San Diego, California properties (see "Note 22—Leases" for further information).
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 16—Accumulated Other Comprehensive (Loss) Income
Changes in the components of accumulated other comprehensive (loss) income were as follows:
Foreign
currency
translation
adjustments
Unrecognized
(loss) gain on
derivative
instruments
Pension
adjustments
Total accumulated
other comprehensive
(loss) income
(in millions)
Balance at January 1, 2016
$
— $
(4) $
(4) $
Other comprehensive (loss) income
Taxes
Reclassification from accumulated other
comprehensive (loss) income
Balance at December 30, 2016
Other comprehensive income
Taxes
Balance at December 29, 2017
Cumulative adjustments related to ASU
adoptions (Note 2)
Balance at December 30, 2017
Other comprehensive loss
Taxes
Reclassification from accumulated other
comprehensive (loss) income
(8)
1
—
(7)
36
(12)
17
3
20
(65)
4
—
26
(10)
(2)
10
10
(6)
14
10
24
(7)
3
(6)
1
2
(6)
(7)
9
—
2
(4)
(2)
(1)
—
—
Balance at December 28, 2018
$
(41) $
14 $
(3) $
(8)
19
(7)
(8)
(4)
55
(18)
33
9
42
(73)
7
(6)
(30)
The change in the foreign currency translation adjustments is due to the impact of the foreign exchange rate
movement between the U.S. dollar and British pound and Australian dollar.
Reclassifications for unrecognized (loss) gain on derivative instruments are associated with outstanding debt and
are recorded in "Interest expense, net" on the consolidated statements of income. The loss during fiscal 2018 is due
to a change in Company's interest rate swap agreements that hedge the Company's Variable Rate Loans. See
"Note 14—Derivative Instruments" for more information on the Company's interest rate swap agreements.
Reclassifications for pension adjustments are recorded in "Selling, general and administrative expenses" on the
consolidated statements of income.
Leidos Holdings, Inc. Annual Report - 85
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17—Composition of Certain Financial Statement Captions
Balance Sheet
Other current assets:
Transition costs and project assets(1)(2)
Pre-contract costs
Other(4)
Other assets:
Equity method investments(3)
Other(4)
Accounts payable and accrued liabilities:
Accrued liabilities
Accounts payable
Deferred revenue
Other
Accrued payroll and employee benefits:
Salaries, bonuses and amounts withheld from employees’ compensation
Accrued vacation
Other
December 28,
2018
December 29,
2017
(in millions)
$
$
$
$
$
$
$
$
145 $
41
357
543 $
26 $
156
182 $
650 $
547
276
3
87
64
302
453
37
217
254
747
557
293
42
1,476 $
1,639
248 $
225
—
473 $
245
236
6
487
(1) During the year ended December 28, 2018, the Company recognized $146 million of amortization related to its transition costs and project
assets. The total balance of transition costs and project assets on the Company's consolidated balance sheets at December 28, 2018 and
December 29, 2017, was $167 million and $100 million, respectively.
(2) As of December 29, 2017, the Company reclassified $28 million of "Prepaid expenses" to "Transition costs and project assets" for
comparability purposes.
(3) Balances are net of $29 million and $30 million of dividends received during fiscal 2018 and fiscal 2017, respectively, that were recorded in
cash flows provided by operating activities of continuing operations on the consolidated statements of cash flows.
(4) Balance represents items that are not individually significant to disclose separately.
Income Statement
Interest expense, net:
Interest expense
Interest income
Other expense, net
Promissory note impairment
Gain (loss) on foreign currencies
Other (expense) income, net
Year Ended
December 28,
2018
December 29,
2017
December 30,
2016
(in millions)
$
$
$
$
(145) $
(148) $
7
8
(138) $
(140) $
— $
(33) $
2
(3)
5
2
(1) $
(26) $
(96)
10
(86)
—
(18)
5
(13)
Leidos Holdings, Inc. Annual Report - 86
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18—Earnings Per Share ("EPS")
Basic EPS is computed by dividing net income attributable to Leidos common stockholders by the basic weighted
average number of shares outstanding. Diluted EPS is calculated to give effect to all potentially dilutive common
shares that were outstanding during the reporting period. The dilutive effect of outstanding equity-based
compensation awards is reflected in diluted EPS by application of the treasury stock method, only in periods in
which such effect would have been dilutive for the period.
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.
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
Year Ended
December 28,
2018
December 29,
2017
December 30,
2016
(in millions)
152
2
154
151
2
153
102
2
104
Anti-dilutive stock-based awards are excluded from the weighted average number of shares outstanding used to
compute diluted EPS. For the year ended December 28, 2018, there was a total of 1 million of outstanding stock
options and vesting stock awards that were anti-dilutive.
Share repurchases
In the fourth quarter of 2018, the Company entered into an uncollared Accelerated Share Repurchase ("ASR")
agreement with a financial institution to repurchase shares of its outstanding common stock. The Company paid
$250 million to the financial institution and received an initial and final delivery of 3.3 million and 0.7 million shares,
respectively. The purchase was recorded to "Additional paid-in capital" in the consolidated balance sheets. All
shares delivered were immediately retired.
The delivery of 4 million shares of Leidos common stock reduced the Company's outstanding shares used to
determine the weighted average shares outstanding for purposes of calculating basic and diluted EPS at December
28, 2018.
During fiscal 2018, the Company also made open market repurchases of its common stock for an aggregate
purchase price of $167 million. All shares repurchased were immediately retired.
There were no open market repurchases during fiscal 2017 and fiscal 2016.
Note 19—Stock-Based Compensation
Plan Summaries
As of December 28, 2018, 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
exercising 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 awards, such as stock options, restricted stock units and performance-based awards, as well as cash
awards. Service-based awards granted under the plan prior to fiscal 2015 generally vested or became 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 28, 2018, 5.0 million shares of Leidos' stock were reserved for future issuance under the 2017 Omnibus
Incentive Plan and the 2006 Equity Incentive Plan.
Leidos Holdings, Inc. Annual Report - 87
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company offers eligible employees the opportunity to defer restricted stock units into an equity-based deferred
equity compensation plan, the Key Executive Stock Deferral Plan ("KESDP"). Prior to 2013 the Company offered an
additional opportunity for deferrals into the Management Stock Compensation Plan ("MSCP"). 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. Restricted stock units deferred under the KESDP are counted against the total shares available for
future issuance under the 2017 Omnibus Incentive Plan. All awards under the MSCP are fully vested and the plan
does not provide for a maximum number of shares available for future issuance.
The Company's ESPP 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 the first half of fiscal 2018, fiscal 2017 and 2016, the discount
was 5% of the fair market value on the date of purchase, thereby resulting in the ESPP being non-compensatory.
Effective the second half of fiscal 2018, the Company increased the discount to 10% of the fair market value on the
date of purchase, resulting in the ESPP being compensatory. During fiscal 2018 and 2017, $11 million and $10
million, respectively, was received from ESPP plan participants for the issuance of Leidos' stock. A total of 4.6
million shares remain available for future issuance under the ESPP.
Stock-based compensation and related tax benefits recognized under all plans were as follows:
Total stock-based compensation expense
Tax benefits recognized from stock-based compensation
Stock Options
Year Ended
December 28,
2018
December 29,
2017
December 30,
2016
$
(in millions)
44 $
11
43 $
17
35
14
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. Stock options 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 to employees are 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 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. 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 Company continued the use of this
approach during fiscal 2018.
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 - 88
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:
Year Ended
December 28,
2018
December 29,
2017
December 30,
2016
(Grants after
acquisition)
December 30,
2016
(Grants before
acquisition)
Weighted average grant-date fair value
$
13.85
$
11.53
$
10.33
$
Expected term (in years)
Expected volatility
Risk-free interest rate
Dividend yield
Special Dividend Adjustment
4.7
26.6%
2.6%
2.0%
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%
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 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
Options granted
Options forfeited or expired
Options exercised
Outstanding at December 28, 2018
Exercisable at December 28, 2018
Vested and expected to vest in the future as of
December 28, 2018
Shares of
stock under
stock options
(in millions)
Weighted
average
exercise price
2.4 $
0.6
0.9
(0.2)
(0.4)
3.3 $
0.5
(0.2)
(0.8)
2.8 $
0.4
(0.2)
(0.6)
2.4
1.4 $
38.21
43.56
34.98
34.11
29.77
53.51
35.72
27.23
34.38
63.75
49.65
30.40
39.41
31.72
2.4 $
39.15
Weighted
average
remaining
contractual
term
Aggregate
intrinsic value
(in years)
(in millions)
4.5 $
43
4.1 $
3.9 $
3.8
2.8 $
3.7 $
5
70
23
86
24
36
29
36
Leidos Holdings, Inc. Annual Report - 89
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 28, 2018, 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 2.0 years. Tax
benefits from stock options exercised for fiscal 2018, 2017 and 2016 were $6 million, $7 million and $1 million
respectively.
Restricted Stock Units and Awards
Compensation expense is measured at the grant date fair value and generally recognized over the vesting period of
either three to four years based upon required service conditions and in some cases revenue or EPS-based
performance conditions.
In connection with the Transactions (see "Note 6—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 and awards activity for each of the periods presented was as follows:
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
Awards granted
Awards forfeited
Awards vested
Unvested stock awards at December 28, 2018
Shares of stock
under stock
awards
(in millions)
Weighted
average grant-
date fair value
2.3 $
1.5
(0.2)
(1.1)
2.5 $
0.8
(0.3)
(1.0)
2.0 $
0.6
(0.2)
(0.4)
2.0 $
38.97
41.45
40.88
38.91
40.39
53.91
45.89
41.02
44.96
64.05
42.67
44.60
50.85
As of December 28, 2018, 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 2018, 2017 and 2016, was $22 million, $33 million and
$43 million, respectively. In addition, the fair value of dividend equivalents with respect to restricted stock units that
vested in fiscal 2018, 2017 and 2016 was $1 million, $13 million and $8 million, respectively.
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.
Leidos Holdings, Inc. Annual Report - 90
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For awards granted during fiscal 2018, 2017 and 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 2018, 2017 and 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 1, 2016
Awards granted
Unvested at December 30, 2016
Awards granted
Awards vested
Unvested at December 29, 2017
Awards granted
Awards forfeited
Awards vested
Unvested at December 28, 2018
Expected number
of shares of stock
to be issued under
performance-based
stock awards
(in millions)
Weighted
average grant-
date fair value
0.2 $
0.2
0.4 $
0.2
(0.1)
0.5 $
0.3
(0.1)
(0.2)
0.5 $
43.35
45.62
44.44
57.94
42.85
50.34
61.43
61.81
44.04
57.36
The weighted average grant date fair value for performance-based stock, excluding those with a market condition,
during fiscal 2018, 2017 and 2016 was $63.76, $53.58 and $45.83, respectively. The weighted average grant date
fair value for performance-based stock with market conditions that were granted during fiscal 2018, 2017 and 2016,
was $71.50, $62.30 and $45.80, 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
Year Ended
December 28,
2018
December 29,
2017
December 30,
2016
25.37%
2.35%
27.19%
1.53%
31.73%
1.01%
$
65.00
$
53.73
$
46.54
As of December 28, 2018, there was $11 million of unrecognized compensation cost, net of estimated forfeitures,
which is expected to be recognized over a weighted average period of 1.7 years. The fair value of performance-
based stock awards that vested in fiscal 2018 and 2017 was $13 million and $4 million, respectively. There were no
performance-based stock awards that vested in fiscal 2016.
Note 20—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.
Leidos Holdings, Inc. Annual Report - 91
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of the Company’s preliminary analysis of the impact of the Tax Act, a discrete net tax benefit of $115
million was recorded in fiscal 2017, which primarily consisted 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. During fiscal
2018, the Company completed its assessment of the impact of the Tax Act during the one-year measurement
period. As a result, the Company increased its preliminary estimate of the deemed repatriation tax by $5 million and
decreased its preliminary estimate of the limitation on the deductibility of certain executive compensation by $1
million, resulting in a net increase of $4 million to fiscal 2018 income tax expense.
Less than 10% of the Company's income before income taxes for fiscal 2018, 2017 and 2016 was earned outside of
the United States. The provision for income taxes for the periods presented included the following:
Current:
Federal and foreign
State
Deferred:
Federal and foreign
State
Total
Year Ended
December 28,
2018
December 29,
2017
December 30,
2016
(in millions)
$
$
54 $
23
130 $
30
(39)
(10)
(141)
10
28 $
29 $
88
16
(29)
(3)
72
A reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income
tax rate to income before income taxes for the periods presented was as follows:
Year Ended
December 28,
2018
December 29,
2017
December 30,
2016
Amount computed at the statutory federal income tax rate
$
State income taxes, net of federal tax benefit
Change in valuation allowance for deferred tax assets
Taxable conversion of a subsidiary
Stock basis in subsidiary held for sale
Change in statutory federal tax rate
Excess tax benefits from stock-based compensation
Research and development credits
Dividends paid to employee stock ownership plan
Change in accruals for uncertain tax positions
Capitalized transaction costs
Impact of foreign operations
Other
Total
Effective income tax rate
$
(in millions)
$
138
$
111
31
7
—
—
(125)
(12)
(7)
(4)
—
9
(4)
(4)
$
29
$
8
(8)
—
—
—
(8)
(4)
(38)
1
7
—
3
72
128
10
(49)
(17)
(16)
(10)
(9)
(9)
(2)
1
—
—
1
28
4.6%
7.4%
22.6%
The Company's effective tax rate for fiscal 2018 was favorably impacted primarily by a decrease in valuation
allowances arising from the taxable conversion of a subsidiary and the utilization of capital losses, an increase in
deferred tax assets related to stock basis of a subsidiary held for sale, excess tax benefits related to employee
stock-based payment transactions and federal research tax credits.
Leidos Holdings, Inc. Annual Report - 92
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's effective tax rate for fiscal 2017 was favorably impacted primarily 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 primarily by the tax deductibility of the
special cash dividend, related to the Transactions described in “Note 6—Acquisitions,” on shares held by the Leidos
retirement plan, excess tax benefits related to employee stock-based payment transactions and federal research
tax credits, partially offset by the impact of certain capitalized transaction costs related to the Transactions.
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:
December 28,
2018
December 29,
2017
Reserves
Accrued vacation and bonuses
Credits and net operating losses carryovers
Deferred compensation
Vesting stock awards
Deferred gain
Deferred rent and tenant allowances
Investments
Capital loss carryover
Other
Total deferred tax assets
Valuation allowance
Deferred tax assets, net of valuation allowance
Purchased intangible assets
Deferred revenue
Accumulated other comprehensive (loss) income
Employee benefit contributions
Partnership interest
Other
Total deferred tax liabilities
Net deferred tax liabilities
(in millions)
57 $
$
48
31
25
20
20
18
18
—
13
250
(28)
222
(326)
(40)
(6)
(4)
(2)
(14)
(392)
$
(170) $
62
54
33
22
17
—
10
2
60
18
278
(83)
195
(340)
(34)
(13)
(3)
(17)
(8)
(415)
(220)
At December 28, 2018, the Company had state net operating losses of $131 million, which will begin to expire in
fiscal 2019. The Company had state tax credits of $9 million, which will begin to expire in fiscal 2019. The Company
expects to utilize $3 million and $18 million of these state tax credits and state net operating losses, respectively.
The Company also had foreign net operating losses of $69 million. The Company expects to utilize $8 million of
these foreign net operating losses.
Our valuation allowance for deferred tax assets was $28 million and $83 million as of December 28, 2018 and
December 29, 2017, respectively. The valuation allowance decreased by $55 million primarily due to the taxable
conversion of a subsidiary and the utilization of capital losses from the sale of the San Diego properties.
Leidos Holdings, Inc. Annual Report - 93
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's income tax balance sheet items are included in the accompanying consolidated balance sheets as
follows:
December 28,
2018
December 29,
2017
(in millions)
Other current assets:
Prepaid income taxes and tax refunds receivable
$
43 $
Income taxes payable
Deferred tax liabilities
Other long-term liabilities:
Unrecognized tax benefits
3
170
3
54
4
220
9
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 $1 million of accrued interest and
penalties for each respective period, 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
Year Ended
December 28,
2018
December 29,
2017
December 30,
2016
$
$
$
(in millions)
10 $
9 $
3
—
(7)
6 $
6 $
2
2
(3)
10 $
7 $
11
1
4
(7)
9
4
At December 28, 2018, the balance of unrecognized tax benefits included liabilities for uncertain tax positions of $7
million, $3 million of which were classified as other long-term liabilities on the Company's consolidated balance
sheets. 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.
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 28, 2018, the Company is no longer subject to state, local, or foreign examinations by the tax authorities
for fiscal years ending on or before January 30, 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 $3 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.
Leidos Holdings, Inc. Annual Report - 94
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21—Retirement Plans
Defined Contribution Plans
The Company sponsors a defined contribution plan, 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. This plan allows 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 for fiscal 2018 and 2017, and $68 million for
fiscal 2016.
Deferred Compensation Plans
The Company maintains three deferred compensation plans, the Keystaff Deferral Plan ("KDP"), the KESDP and
the MSCP (the "Plans"), 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 restricted stock unit awards. Directors may also elect to
defer their director fees and retainers in addition to their restricted stock unit awards. Deferred balances in the Plans
are paid in lump sum or installments upon retirement, termination or the elected specified date.
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 with the participant assuming
all risks related to future returns of their contributions.
Under the KESDP, eligible participants may also elect to defer in share units all or a portion of certain cash bonuses
and restricted stock unit awards granted under the previous 2006 Equity Incentive Plan and the current 2017
Omnibus Incentive Plan (see "Note 19—Stock-Based Compensation"). Under the MSCP, restricted stock share
units that are deferred are fully vested and no further deferrals into the plan are made. The Company makes no
contributions to the accounts of KESDP or MSCP participants. Benefits from the KESDP and MSCP are payable in
shares of Leidos common stock held in a rabbi trust for the purpose of funding benefit payments to KESDP and
MSCP participants.
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 had met the IRS contribution limit imposed on the Leidos, Inc. Retirement Plan. The Company made
matching contributions to participants who 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 28, 2018, and December 29, 2017, was $103 million and $120
million, respectively. The decrease in the projected benefit obligation was primarily due to the impact of a stronger
U.S. dollar, settlements during fiscal 2018 and a gain resulting from changes in assumptions used in the valuation.
The fair value of plan assets as of December 28, 2018, and December 29, 2017, was $115 million and $129 million,
respectively. The plan funding status was overfunded $12 million and $9 million as of December 28, 2018, and
December 29, 2017, respectively, and included in other assets.
Leidos Holdings, Inc. Annual Report - 95
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Note 22—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
Year Ended
December 28,
2018
December 29,
2017
December 30,
2016
(in millions)
163 $
181 $
(1)
(3)
162 $
178 $
$
$
107
(2)
105
The increase in rental expense from fiscal 2016 to fiscal 2017 was primarily due to the acquisition of the IS&GS
Business.
Future minimum lease commitments and sublease receipts, under non-cancelable operating leases in effect at
December 28, 2018, are as follows:
Fiscal Year Ending
2019
2020
2021
2022
2023
2024 and thereafter
Total
Operating
lease
commitment
Sublease
receipts
(in millions)
$
144 $
114
83
71
55
246
$
713 $
3
1
1
—
—
—
5
As of December 28, 2018, the Company had capital lease obligations of $3 million that are payable over the next
year (see "Note 15—Debt").
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.
Leidos Holdings, Inc. Annual Report - 96
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sale and Leaseback Agreements
Former Headquarters
On May 3, 2013, the Company entered into a purchase and sale agreement relating to the sale of approximately 18
acres of land in Fairfax County, Virginia, including four office buildings, a multi-level parking garage, surface parking
lots and other related improvements and structures, as well as tangible personal property and third-party leases.
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 Note matures on December 17, 2019 ("Maturity Date"), and accrues interest at 30-day LIBOR subject to a floor
of 0.25% per annum, plus 0.50% over a four-year period. Interest will accrue daily and is not compounded to the
outstanding principal balance. The total accumulated interest and principal will be paid in a lump sum on the
Maturity Date. If prepayments are made towards the outstanding principal and interest balance prior to the maturity
date, the Company will credit 60% of the accrued interest against the outstanding balance.
San Diego Properties
In December 2018, the Company entered into and closed on a sales and leaseback agreement relating to two
buildings and the adjacent land in San Diego, California for consideration of $79 million, net of selling costs. The
Company received cash proceeds of $14 million and recognized a short-term receivable for the remaining $65
million of consideration. The sale of the properties is being accounted for as a financing transaction. The net
consideration of $79 million was recorded as a note payable (see "Note 15—Debt") expected to be paid over the
next 3 years.
Leidos Holdings, Inc. Annual Report - 97
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 23—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 interest
Cash paid for income taxes, net of refunds
Non-cash investing activity:
Stock issued for acquisition of the IS&GS Business
Non-cash financing activity:
Real estate financing transaction
Dividends declared
Notes payable and capital lease obligations
Year Ended
December 28,
2018
December 29,
2017
December 30,
2016
(in millions)
$
$
$
133 $
133 $
70
214
90
47
— $
— $
2,938
65 $
— $
3
—
3
27
—
21
—
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:
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash
December 28,
2018
December 29,
2017
(in millions)
327 $
42
369 $
390
32
422
$
$
The restricted cash is recorded within "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 - 98
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 24—Business Segments
The Company's operations and reportable segments are organized around the markets served and the nature of
the products and services provided to customers in those markets. 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 fiscal 2016 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 the areas of intelligence surveillance and reconnaissance, enterprise IT, integrated
systems, 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 platforms, 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 talented employees help
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 and 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 - 99
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
Year Ended
December 28,
2018
December 29,
2017
December 30,
2016
(in millions)
$
$
$
$
$
$
4,948 $
3,429
1,817
—
10,194 $
4,959 $
3,409
1,802
—
10,170 $
3,843
2,082
1,117
1
7,043
347 $
290
230
(118)
749 $
68 $
87
46
201 $
307 $
226
228
(202)
559 $
108 $
132
41
281 $
312
146
110
(151)
417
17
39
28
84
The financial performance measures used to evaluate segment performance are revenues and operating income.
As a result, "Interest expense, net," "Other expense, net," and "Income tax expense," as reported in the
consolidated financial statements are not allocated to the Company's segments. Under U.S. government CAS,
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 (see "Note 4—Revenues" for international revenues by segment). As such, additional
financial information by geographic location is not presented.
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
Year Ended
December 28,
2018
December 29,
2017
December 30,
2016
85%
47%
13%
84%
47%
13%
81%
56%
14%
Leidos Holdings, Inc. Annual Report - 100
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 25—Contingencies
Legal Proceedings
MSA Joint Venture
On November 10, 2015, MSA received a final decision by 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 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. On February 8, 2019, the U.S. Attorney's office filed a complaint in the United States
District Court for the Eastern District of Washington against MSA, Lockheed Martin Corporation, Lockheed Martin
Services, Inc. and a Lockheed Martin employee. The complain alleges violations of the False Claims Act, the Anti-
Kickback Act, breach of contract with DoE, among other things. The U.S. Attorney's office had previously advised
that a parallel criminal investigation was open, although no subjects or targets of the investigation had been
identified. The U.S. Attorney's office has informed MSA that it has closed the criminal investigation.
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 collection of $32 million of that demand,
pending resolution of the appeal and without prejudice to MSA's position that it is not liable for any of the DOE's $64
million reimbursement claim. The Company has agreed to indemnify Jacobs Group and Centerra Group, LLC for
any liability MSA incurs in this matter. Under the terms of the Separation Agreement, Lockheed Martin 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 28, 2018, and 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
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. The amounts payable by the Company are covered by an
insurance policy. The terms of the proposed settlement remain subject to court approval.
Leidos Holdings, Inc. Annual Report - 101
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Greek Government Contract
In 2003, the Company entered into an FFP 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, 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. The Company has commenced enforcement proceedings against the Greek government in
several jurisdictions. Separately, the Greek government has sought to annul the award through separate litigation in
the Greek courts, and such a challenge is currently pending. 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.
Arbitration Proceeding
The Company is a party to an arbitration proceeding involving a claim by Lockheed Martin for indemnification for
$56 million in taxes attributable to deferred revenue recognized as a result of the Transactions. Based on the
arguments advanced to date, the Company believes that the claim appears to be without merit and intends to
vigorously defend itself in arbitration. The Company does not believe that a material loss is probable, and has
therefore not recorded any liability for this matter. We expect a final decision by the arbitration panel to be issued
during the first half of fiscal 2019.
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 the Apple I case. 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 subsequently awarded an additional sum of over $96 million for
costs, attorneys' fees and interest, bringing the total award to VirnetX in the Apple I case to over $439 million. Apple
appealed the judgment in the Apple I case with the U.S. Court of Appeals for the Federal Circuit and on January 15,
2019, the court affirmed the $439 million judgment. It is expected that Apple will appeal this decision.
On April 10, 2018, a jury trial concluded in an additional patent infringement case brought by VirnetX against Apple,
referred to as the Apple II case, in which the jury returned a verdict against Apple for infringement and awarded
VirnetX damages in the amount of over $502 million. On April 11, 2018, in a second phase of the Apple II trial, the
jury found Apple's infringement to be willful. On August 30, 2018, the federal trial court in the Eastern District of
Texas entered a final judgment and rulings on post-trial motions in the Apple II case. The court affirmed the jury’s
verdict of over $502 million and granted VirnetX’s motions for supplemental damages, a sunset royalty and royalty
rate of $1.20 per infringing device, along with pre-judgment and post-judgment interest and costs. The court denied
VirnetX’s motions for enhanced damages, attorneys’ fees and an injunction. The court also denied Apple’s motions
for judgment as a matter of law and for a new trial. An additional sum of over $93 million for costs and pre-judgment
interest was subsequently agreed upon pursuant to a court order, bringing the total award to VirnetX in the Apple II
case to over $595 million. Apple has filed an appeal of the judgment in the Apple II case with the U.S. Court of
Appeals for the Federal Circuit.
Under its agreements with VirnetX, the Company would receive 25% of the proceeds obtained by VirnetX after
reduction for attorneys' fees and costs. However, the verdicts in these cases remain subject to appeal. In addition,
the patents at issue in these cases are subject to U.S. Patent and Trademark Office post-grant inter partes review
and/or reexamination proceedings and related appeals, which may result in all or part of these patents being
invalidated or the claims of the patents being limited. Thus, no assurances can be given when or if the Company will
receive any proceeds in connection with these jury awards. 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 - 102
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company does not have any assets or liabilities recorded in connection with this matter as of December 28,
2018.
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 2018, pursuant to the resolution of certain government accounting matters, including audits by the
DCAA, the Company recorded a net reduction of $19 million to its accrued liabilities.
As of December 28, 2018, indirect cost audits by the DCAA remain open for fiscal 2013 and subsequent fiscal
years. 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 28, 2018, the Company believes it has adequately reserved for potential adjustments from audits
or reviews of contract costs.
Note 26—Commitments
The Company has outstanding letters of credit of $73 million as of December 28, 2018, principally related to
performance guarantees on contracts. The Company also has outstanding surety bonds with net exposure of $44
million as of December 28, 2018, 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 three years.
Note 27—Subsequent Events
On December 31, 2018, the Company closed the sales agreement relating to the sale and leaseback of the building
and land at its Gaithersburg, Maryland property. The Company received proceeds of $31 million, net of selling
costs, for the property, which had a carrying value of $31 million at closing.
Leidos Holdings, Inc. Annual Report - 103
PART II
Selected Quarterly Financial Data (Unaudited)
Selected financial data (unaudited) for the periods presented was as follows:
Fiscal 2018(1)
Revenues
Operating income
Net income
Net income attributable to Leidos common stockholders
Basic earnings per share attributable to Leidos common
stockholders(3)
$
Diluted earnings per share attributable to Leidos
common stockholders(3)
Three Months Ended
March 30,
2018
June 29,
2018
September 28,
2018
December 28,
2018
(in millions, except per share amounts)
$
2,443 $
2,529 $
2,575 $
2,647
159
102
102
199
145
144
203
147
147
188
188
188
0.67 $
0.95 $
0.97 $
1.27
0.66
0.94
0.96
1.25
Fiscal 2017(2)
Revenues
Operating income
Net income
Net income attributable to Leidos common stockholders
Basic earnings per share attributable to Leidos common
stockholders(3)
Diluted earnings per share attributable to Leidos
common stockholders(3)
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
(1) The fiscal 2018 quarterly results include acquisition, integration and restructuring costs of $17 million, $8 million, $7 million, and $5 million in
the first, second, third and fourth quarter, respectively. The fiscal 2018 first quarter results include a $7 million tangible asset impairment
charge.
(2) The fiscal 2017 quarterly results include acquisition, integration and restructuring costs of $32 million, $22 million, $27 million, and $58 million
in the first, second, third, and fourth quarter, respectively. The fiscal 2017 fourth quarter results include a $33 million promissory note
impairment charge.
(3) Earnings per share are computed independently for each of the quarters presented and therefore may not sum to the totals for fiscal 2018 and
2017.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Leidos Holdings, Inc. Annual Report - 104
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 our 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 28, 2018. 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. 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 our internal control over financial reporting that occurred in the fourth quarter of the
period ended December 28, 2018, covered by this Annual Report that materially affected, or are reasonably likely to
materially affect, our 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 our internal control over financial reporting as of December 28, 2018, 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 28, 2018, 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 19, 2019
Leidos Holdings, Inc. Annual Report - 105
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 28, 2018, 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 28, 2018, 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 28, 2018, of
the Company and our report dated February 19, 2019, expressed an unqualified opinion on those financial
statements.
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 19, 2019
Leidos Holdings, Inc. Annual Report - 106
PART II
Item 9B. Other Information
None.
Leidos Holdings, Inc. Annual Report - 107
PART III
Item 10. Directors, Executive Officers and Corporate Governance
For certain information required by Item 10 with respect to executive officers, see "Executive 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 2019 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 2019 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 2019 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 2019 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 28, 2018, is set forth below:
Plan Category
Equity compensation plans approved by security
holders (1)
Equity compensation plans not approved by
security holders (5)
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))
4,961,505 (2) $
39.41 (3)
14,031,561 (4)
—
4,961,505 (2) $
—
39.41 (3)
— (5)
14,031,561
(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) 2,493,594 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 244,927 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) 37,995 shares of Leidos common stock issuable pursuant to dividend equivalent rights for
deferred awards and (iii) 2,429,916 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 - 108
PART III
(4) Represents 9,433,178 and 4,598,383 shares of Leidos common stock under the 2017 Omnibus 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 Management Stock Compensation Plan has not been approved by security holders and is included in this plan category. This plan does
not provide for a maximum number of shares available for future issuance. For further information on this plan, see "Note 19—Stock-Based
Compensation" of the notes to the consolidated financial statements contained within Part II of 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 2019 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 2019 Proxy Statement, which is incorporated by reference into this
Annual Report on Form 10-K.
Leidos Holdings, Inc. Annual Report - 109
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
10.1*
10.2*
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 28, 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.
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 Holdings, Inc. Annual Report - 110
PART IV
Description of Exhibit
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.
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. Incorporated by reference to Exhibit 10.22 to our Annual Report on Form 10-K filed with
the SEC on February 23, 2018.
Exhibit
Number
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*
Leidos Holdings, Inc. Annual Report - 111
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
PART IV
Description of Exhibit
Form of Notice of Grant of Options for Employees under the Leidos Holdings, Inc. 2017 Omnibus Plan.
Incorporated by reference to Exhibit 10.23 to our Annual Report on Form 10-K filed with the SEC on
February 23, 2018.
Form of Notice of Grant of Restricted Stock Unit Awards (Performance-Vesting) for Employees under
the Leidos Holdings, Inc. 2017 Omnibus Plan. Incorporated by reference to Exhibit 10.24 to our Annual
Report on Form 10-K filed with the SEC on February 23, 2018.
Form of Notice of Grant of Performance Share Awards for Employees under the Leidos Holdings, Inc.
2017 Omnibus Plan. Incorporated by reference to Exhibit 10.25 to our Annual Report on Form 10-K
filed with the SEC on February 23, 2018.
Form of Notice of Grant of Restricted Stock Unit Awards (Time-Vesting) for Employees under the
Leidos Holdings, Inc. 2017 Omnibus Plan. Incorporated by reference to Exhibit 10.26 to our Annual
Report on Form 10-K filed with the SEC on February 23, 2018.
Form of Notice of Grant of Restricted Stock Unit Awards (Time-Vesting) for Non-Employee Directors
under the Leidos Holdings, Inc. 2017 Omnibus Plan. Incorporated by reference to Exhibit 10.27 to our
Annual Report on Form 10-K filed with the SEC on February 23, 2018.
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.
Second Amendment, dated August 22, 2018, to the Credit Agreement dated as of 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 10.2 to our
Current Report on Form 8-K filed with the SEC on August 28, 2018.
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.
Leidos Holdings, Inc. Annual Report - 112
PART IV
Description of Exhibit
Third Amendment, dated March 15, 2018, 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
March 20, 2018.
Fourth Amendment, dated August 22, 2018, 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
August 28, 2018.
Fifth Amendment, dated November 19, 2018, 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
November 20, 2018.
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.
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.
Exhibit
Number
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
21
23.1
31.1
31.2
32.1
32.2
99.1
Leidos Holdings, Inc. Annual Report - 113
PART IV
Description of Exhibit
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.
Exhibit
Number
99.2†
99.3
99.4
99.5
99.6
99.7†
101
Interactive Data File.
* Executive Compensation Plans and Arrangements
** Paper filing
† 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 - 114
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 19, 2019
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/ Frank Kendall III
Frank Kendall III
/s/ Robert C. Kovarik, Jr.
Robert C. Kovarik, Jr.
/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 19, 2019
Principal Financial Officer
February 19, 2019
Principal Accounting Officer
February 19, 2019
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
February 19, 2019
February 19, 2019
February 19, 2019
February 19, 2019
February 19, 2019
February 19, 2019
February 19, 2019
February 19, 2019
February 19, 2019
February 19, 2019
February 19, 2019
February 19, 2019
Leidos Holdings, Inc. Annual Report - 115
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Stockholder Information
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
McLean, VA 22102
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 8, 2018, in accordance with the NYSE’s
listing standards.
Investor Relations
Questions from stockholders, analysts, and others
can be directed to:
Kelly Hernandez
Sr. Vice President, Investor Relations
Leidos Holdings, Inc.
11951 Freedom Drive
Reston, VA 20190
571-526-6000
ir@leidos.com
www.leidos.com
©2019 Leidos, Inc. All Rights Reserved. Leidos and the Leidos logo are
trademarks of Leidos, Inc. in the United States and/or other countries.
Board of
Directors
Roger A. Krone
Chairman and Chief
Executive Officer
Robert S. Shapard
Lead Director
Chairman and Former CEO,
Oncor Electric Delivery
Company
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
Frank Kendall III
Former Under Secretary of
Defense for Acquisition,
Technology and Logistics.
Former Vice President of
Engineering, Raytheon Company
Robert C. Kovarik, Jr.
Former Partner,
Ernst & Young LLP
Harry M.J. Kraemer, Jr.
Executive Partner,
Madison Dearborn
Partners LLC
Gary S. May
Chancellor,
University of California
at Davis
Surya N. Mohapatra
Former Chairman, President
and Chief Executive Officer,
Quest Diagnostics Incorporated
Lawrence C. Nussdorf
Chairman and Chief
Executive Officer,
Clark Enterprises, Inc.
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.