Leidos Annual Report 2019

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FY2019 Annual Report · Leidos

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 3, 2020
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)

11951 Freedom Drive,

Reston,

Virginia

(Address of principal executive offices)

20-3562868
(I.R.S. Employer Identification No.)

20190
(Zip Code)

(571) 526-6000
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Common stock, par value $.0001 per share

Trading symbol(s)
LDOS

Name of each exchange on which registered
New York Stock Exchange

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

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

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

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

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
Non-accelerated filer

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

As of June 28, 2019, 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
$11,356,349,856.

The number of shares issued and outstanding of the registrant’s class of common stock as of February 10, 2020 was 141,402,269 shares ($.0001 par value
per share).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Leidos Holdings, Inc.'s definitive Proxy Statement for the 2020 Annual Meeting of Stockholders ("2020 Proxy Statement") are incorporated by
reference in Part III of this Annual Report on Form 10-K.

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

Page

102

103

105

106

107

108

112

113

[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 51 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 innovations
to customers in each of these markets by leveraging seven core capabilities: cyber; digital modernization; integrated
systems; mission software systems; mission support; operations and logistics; and sensors, collection and
phenomenology. 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 87% of fiscal 2019 revenues from U.S. government contracts.

Building on our foundation of offering innovative services and solutions to U.S. government customers, Leidos
serves international government and select 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

At January 3, 2020, our business is aligned into three reportable segments (Defense Solutions, Civil and Health).
Additionally, we separately present the unallocable costs associated with corporate functions as Corporate. Our
operations and reportable segments are organized around the markets we serve. 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.

Effective the beginning of fiscal 2019, we changed the composition of our Defense Solutions reportable segment to
better align the operations within the reportable segment to the customers we serve. This resulted in the
identification of new operating segments within Defense Solutions. In addition, certain contracts were reassigned
between the Civil and Defense Solutions reportable segments. While this activity did not have a material impact on
our reportable segments, fiscal 2018 and 2017 segment results and disclosures have been recast to reflect this
change.

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, government agencies of U.S. allies abroad and other federal 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% of total revenues
for fiscal 2019 and 49% of total revenues for fiscal 2018 and 2017.

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.

• Digital Transformation 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 and the Australian Department of Defense. Our
markets include cybersecurity, data analytics, digital transformation 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 and DoD. 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% of total revenues for fiscal 2019 and 33% of total revenues for
fiscal 2018 and 2017.

• 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 a majority 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 are installed at airport check-in counters. We also have a line of
radiation detection systems, which are used today at ports, border crossings and critical infrastructure
facilities around the world – including most ports and border crossings in the United States.

Leidos Holdings, Inc. Annual Report - 2

PART I

• Digital Transformation 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 Army Corp of Engineers, National Aeronautics and
Space Administration ("NASA") 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. At the National Energy Technology
Laboratory, we actively perform and provide support for fundamental and applied research efforts, including
providing product and logistical support comprising of strategic business development, technology transfer
and agreements and education and outreach support for the effective and efficient conduct of research.

•

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 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 2019, 2018 and 2017.

• Complex Systems Integration – Leidos employs whole-systems thinking in fielding applied technology
solutions across the entire continuum of healthcare. We are working as the lead systems integrator
deploying the next generation medical records system to DoD hospitals and treatment facilities worldwide,
responsible for integrating software from the electronic healthcare record vendor and the dental record
vendor, as well as integrating picture archiving and communications software and more. We ensure the
integrated system is cyber secure. We provide enterprise information technology solutions to the VA,
National Institutes of Health, DoD and other government customers that help them operate mission critical
infrastructure reliably and at a reasonable cost. Commercially, we are taking these same Leidos-wide
capabilities to manage critical infrastructure to the largest health systems in the United States, launching
this service with a major hospital system earlier this year.

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 VA (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.

• Digital 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, Defense Health Agency 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 Research & Development– 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
efficient and effective 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

During fiscal 2019, we acquired IMX Medical Management Services and its affiliated businesses. In early fiscal
2020, we acquired Dynetics, Inc. and entered into a definitive agreement to acquire L3Harris Technologies' security
detection and automation businesses. See "Note 6—Acquisitions" and "Note 27—Subsequent Events" in Part II of
this Annual Report on Form 10-K for further information.

Additionally, during fiscal 2019, we divested of our commercial cybersecurity and health staff augmentation
businesses. 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

DoD and U.S. Intelligence Community

U.S. Army

January 3,
2020

Year Ended

December 28,
2018

December 29,
2017

87%

48%

11%

85%

48%

13%

84%

48%

13%

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 January 3, 2020, we employed approximately 34,000 full and part-time employees in more than 29 countries
worldwide. The experience and expertise of our employees makes Leidos capable of solving our customers' most
challenging technical problems. Approximately 40% of our employees have degrees in science, technology,
engineering or mathematics fields, over 1,000 employees have doctoral degrees, approximately 40% 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
research and development funds. Company-funded research and development includes independent research and
development ("IR&D") and commercial research and development. IR&D efforts consist of projects involving basic
research, applied research, systems development and other concept formulation studies. IR&D expenses are
generally allocated to U.S. government contracts. Commercial research and development efforts consist of projects
funded from commercial expenses and profits.

Company-funded research and development expenses are included in selling, general and administrative
expenses. Our company-funded research and development expense was $49 million, $46 million and $42 million
for fiscal 2019, 2018 and 2017, respectively, which as a percentage of consolidated revenues was 0.4%, 0.5% and
0.4% for fiscal 2019, 2018 and 2017, 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, L3Harris, 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, the size and geographic presence of our company and past
performance credentials.

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. General Services Administration ("GSA") Schedule Contracts. The GSA maintains listings of approved
suppliers of services and products with agreed-upon prices for use throughout the U.S. government. In
order for a company to provide services under a GSA Schedule contract, a company must be pre-qualified
and awarded a contract by the GSA. When an agency uses a GSA Schedule contract to meet its
requirements, the agency, or the GSA on behalf of the agency, conducts the procurement. The user agency,
or the GSA on its behalf, evaluates the user agency’s requirements and initiates a competition limited to
GSA Schedule qualified contractors. GSA Schedule contracts are designed to provide the user agency with
reduced procurement time and lower procurement costs. Similar to IDIQ contracts, at the time a GSA
Schedule contract is awarded, a contractor may have limited or no visibility as to the ultimate amount of
services or products that the U.S. government will purchase under the contract.

• Other Transaction Authority (“OTA”) agreements. Under certain circumstances, U.S. government agencies
can enter into OTA agreements instead of traditional contracts. These agreements are used for two primary
purposes: (1) to carry out basic, applied or advanced research projects that typically relate to technology
stimulation or research, and (2) to carry out prototype projects that are directly relevant to enhancing the
mission effectiveness of military personnel and the supporting platforms, systems, components or materials
proposed to be acquired or developed by the DoD, or to improve platforms, systems, components or
materials in use by DoD components and agencies. OTA agreements are generally exempt from federal
procurement regulations. These exemptions grant the U.S. government the flexibility to include, amend, or
exclude contract clauses and requirements that are mandatory in traditional procurements. OTA
agreements also grant more flexibility to structure agreements in numerous ways, including joint ventures,
partnerships, or multiple agencies joining together to fund an agreement encompassing multiple providers.

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.

Leidos Holdings, Inc. Annual Report - 7

PART I

• 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.

• 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:

•

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.

Leidos Holdings, Inc. Annual Report - 9

PART I

Company Website and Information

Our corporate headquarters is located at 11951 Freedom Drive, Reston, VA 20190 and our telephone number is
(571) 526-6000. 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 SEC also maintains a
website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC, including Leidos. 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 - 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 customers and if our reputation or relationships with
these agencies were harmed, our future revenues and growth prospects would be adversely affected.

We generated 87%, 85% and 84% of our total revenues during fiscal 2019, 2018 and 2017, 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 2019, 2018 and 2017 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 and U.S. Intelligence Community, either as a prime contractor or
subcontractor to other contractors, represented approximately 48% of our total revenues for fiscal 2019, 2018 and
2017. 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.

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:

•

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.

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 January 3, 2020, 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 for example 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 January 3, 2020, our total backlog was $24.1 billion, including $5.4 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 33% of
our total revenues for fiscal 2019. 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
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. We are also increasingly subject to customer-driven cybersecurity
certification requirements, which are expected to be necessary to win future contracts.

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.

Leidos Holdings, Inc. Annual Report - 17

PART I

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.

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.

Leidos Holdings, Inc. Annual Report - 18

PART I

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.

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;

•

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.

Leidos Holdings, Inc. Annual Report - 19

PART I

In addition, we periodically divest businesses, including businesses that are no longer a part of our ongoing
strategic plan. These divestitures similarly require significant investment of time and resources, may disrupt our
business, distract management from other responsibilities and may result in losses on disposal or continued
financial involvement in the divested business, including through indemnification, guarantee or other financial
arrangements, for a period of time following the transaction, which would adversely affect our financial results.

Goodwill and other intangible assets represent approximately 58% 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 and related integration and
automation 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.

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.

Leidos Holdings, Inc. Annual Report - 22

PART I

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:

•

developments in the U.S. government defense and non-defense budgets, 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;

Leidos Holdings, Inc. Annual Report - 23

PART I

•

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 Information Systems & Global
Solutions business;

our ability to declare future dividends based on our earnings, financial condition, capital requirements and
other factors, including compliance with applicable law and our agreements;

our ability to grow our commercial health and infrastructure businesses, which could be negatively affected
by budgetary constraints faced by hospitals and by developers of energy and infrastructure projects;

our ability to successfully integrate acquired businesses;

for acquisitions that we agree to but are unable for regulatory or other reasons to consummate, we will not
realize the expected benefits of such acquisitions and 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 January 3, 2020, we conducted our operations in 334 locations in 39 states, the District of Columbia and
various foreign countries. We occupy approximately 6.5 million square feet of floor space. Of this amount, we own
approximately 0.3 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 2.9 million square feet. We also have employees working at customer sites throughout the United
States and in other countries.

As of January 3, 2020, we owned the following properties:

Location
Columbia, Maryland

Orlando, Florida

Oak Ridge, Tennessee

Reston, Virginia

Number of
buildings

Square
footage

Acreage

95,000

85,000

83,000

62,000

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 13—Leases" in Part II of 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 18, 2020) 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
63

Position(s) with the company and prior business experience
Mr. Krone is Chairman and Chief Executive Officer of Leidos. He joined the
Company as CEO in July 2014. Mr. Krone has held leadership roles at some
of the most prominent organizations in aerospace for nearly 40 years,
including The Boeing Company, McDonnell Douglas Corp. and General
Dynamics. He is a member of the Georgia Tech Foundation Board of
Trustees, WETA Public Television and Radio in Washington board, the
Greater Washington Urban League chapter board, the Business Roundtable,
and the Aircraft Owners and Pilots Association Foundation’s Board of
Advisors. He serves as the chair of the Professional Services Council, and is
a member of the Executive Committee of the Aerospace Industries
Association.

Leidos Holdings, Inc. Annual Report - 25

Name of officer
James C. Reagan

Age
61

Christopher R. Cage

Paul O. Engola

Gerard A. Fasano

Jerald S. Howe, Jr.

David A. King

James R. Moos

Mary V. Schmanske

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 served as Senior Vice President and Chief Financial Officer of
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. 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. Cage has served as Senior Vice President, Chief Accounting Officer and
Corporate Controller since June 2019. He has served in several capacities
throughout his 20-year tenure with the Company, including Chief Financial
Officer for the Company's Health Group and, most recently, as Senior Vice
President for Financial Planning and Analysis.
Mr. Engola has served as Executive Vice President and 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 Group President for our 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.
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
litigation, 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.
Mr. King has served as Chief Executive Officer of Dynetics, Inc. since 2015.
In February 2020, following Leidos' acquisition of Dynetics, Mr. King was
elected as a Group President of Leidos with responsibility for the Dynetics
business. Mr. King previously served as the Executive Vice President for
special programs and President of Dynetics. Prior to joining Dynetics, he
spent 25 years with NASA, as Space Shuttle Launch Director and Director of
Shuttle Processing, and most recently as the Center Director of NASA
Marshall Space Flight Center.

Mr. Moos has served as Group President for our Civil Group since February
2020. He previously served as Senior Vice President and Acting Group
President for the Civil Group since October 2019, and before that, as Deputy
President and Chief Operations Officer for the Civil Group. Prior to that, Mr.
Moos has served Leidos for over 20 years in several capacities, including
Senior Vice President and General Manager of the Company's former
Engineering Solutions Group.

Ms. Schmanske has served as Group President for our Intelligence Group
since October 2018, and before that, as Chief Administrative Officer and
Deputy President and Chief Operations Officer for our 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.

Leidos Holdings, Inc. Annual Report - 26

Name of officer
Jonathan W. Scholl

Age
58

PART I

Position(s) with the company and prior business experience
Mr. Scholl has served as Group President for our Health Group since August
2016, and before that, as Group President for our former Health and
Infrastructure Group. Prior to joining Leidos, Mr. Scholl served for five years
as an executive at Texas Health Resources where he was in charge of
Strategy, Business Development and Strategic Marketing, and hospital
operations for physician joint venture hospitals. Prior to that, he spent 15
years with The Boston Consulting Group and served as head of its North
American Healthcare Provider Practice and leader of its 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 - 27

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 10, 2020, there were approximately 19,934 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 2019 and 2018, we declared and paid quarterly dividends totaling $1.32 and $1.28 per share,
respectively, 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.

Stock Performance Graph

The following graph compares the total cumulative five-year return on Leidos common stock through January 3,
2020 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, 2014, 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.

Leidos Holdings, Inc. Annual Report - 28

PART II

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.

The following table presents repurchases of Leidos common stock during the quarter ended January 3, 2020:

Period

September 28, 2019 - September 30, 2019
October 1, 2019 - October 31, 2019
November 1, 2019 - November 30, 2019
December 1, 2019 - December 31, 2019

January 1, 2020 - January 3, 2020
Total

Total Number
of Shares
Purchased(1)

Average Price
Paid per Share

— $

1,780
217,953
68,609

—

—
85.66
89.03
89.85

—

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

—
—
211,649
68,498

—

7,976,255
7,976,255
7,764,606
7,696,108

7,696,108

288,342 $

89.20

280,147

(1) The total number of shares purchased includes shares surrendered to satisfy statutory tax withholdings obligations related to vesting of

restricted stock units.

Leidos Holdings, Inc. Annual Report - 29

PART II

Item 6. Selected Financial Data

The selected financial data for the five-year period set forth below is derived from our consolidated financial
statements. 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.

Consolidated Statement of Income

Data:

Revenues

Operating income

Income from continuing operations

Loss from discontinued operations, net of

taxes

Net income

Less: net income (loss) attributable to

non-controlling interest

Net income attributable to Leidos

common stockholders

Earnings per share:

Basic:

Income from continuing operations
attributable to Leidos common
stockholders

Loss from discontinued operations,

net of taxes

Net income attributable to Leidos

common stockholders

Diluted:

Income from continuing operations
attributable to Leidos common
stockholders

Loss from discontinued operations,

net of taxes

Net income attributable to Leidos

common stockholders
Cash dividend per common share

Consolidated Balance Sheet Data:

Total assets
Long-term debt, including current portion
Other long-term liabilities(7)

12 Months Ended(1)

January 3,
2020(2)

December 28,
2018(3)

December 29,
2017(4)

December 30,

2016(5)

(in millions, except for per share amounts)

11 Months
Ended(1)

January 1,
2016(6)

11,094 $
912

670

—

670

10,194 $

10,170 $

7,043 $

4,712

749

582

—

582

559

364

—

364

(2)

417

246

—

246

320

243

(1)

242

—

667 $

581 $

366 $

244 $

242

4.66 $

3.85 $

2.41 $

2.39 $

3.33

—

(0.01)

4.66 $

3.85 $

2.41 $

2.39 $

3.32

4.60 $

3.80 $

2.38 $

2.35 $

3.28

—

(0.01)

4.60 $

1.32 $

3.80 $

1.28 $

2.38 $

2.35 $

1.28 $

14.92 $

3.27

1.28

January 3,
2020

December 28,
2018

December 29,
2017

December 30,
2016

January 1,
2016

(in millions)

9,367 $
2,986

182

8,770 $
3,124
178

8,990 $
3,111
129

9,132 $
3,287
204

3,370
1,081
149

(1) References to financial data are to the Company's continuing operations, unless otherwise noted.
(2) Fiscal 2019 reflects the effects from our December 29, 2018 adoption of ASC 842. Fiscal 2019 also includes an $88 million gain on sale

related to the divestiture of our commercial cybersecurity business, a $52 million net gain recognized upon the receipt of the Greek arbitration

Leidos Holdings, Inc. Annual Report - 30

PART II

award and bad debt expense of $12 million. For further information, see "Note 7—Divestitures" and "Note 25—Contingencies" of the notes to
the consolidated financial statements contained within this Annual Report on Form 10-K.

(3) 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.

(4) 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.

(5) Fiscal 2016 includes acquisition, integration and restructuring costs of $104 million.
(6) 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.

(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 were $34 million.

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 innovations
to customers in each of these markets by leveraging seven core capabilities: cyber; digital modernization; integrated
systems; mission software systems; mission support; operations and logistics; and sensors, collection and
phenomenology. 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. We operate in three reportable segments: Defense
Solutions, Civil and Health. Additionally, we separately present the unallocable costs associated with corporate
functions as Corporate.

Effective the beginning of fiscal 2019, we changed the composition of our Defense Solutions reportable segment to
better align the operations within the reportable segment to the customers we serve. This resulted in the
identification of new operating segments within Defense Solutions. In addition, certain contracts were reassigned
between the Civil and Defense Solutions reportable segments. While this activity did not have a material impact on
our reportable segments, prior year segment results have been recast to reflect this change.

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.

Leidos Holdings, Inc. Annual Report - 31

PART II

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

disciplined deployment of our cash resources and use of our capital structure to enhance shareholder value
while retaining an appropriate amount of financial leverage.

Sales Trend. For fiscal 2019, revenues increased $900 million, or 9% compared to fiscal 2018, primarily due to
program wins and a net increase in program volumes, partially offset by programs ended and the impact of the sale
of our commercial cybersecurity and health staff augmentation businesses. For fiscal 2018, revenues were $10.2
billion, consistent with fiscal 2017. See "Results of Operations" below for discussion of our individual segment
results.

Operating Expenses and Income Trend. For fiscal 2019, operating expenses increased by $737 million, or 8%,
compared to fiscal 2018. Operating margin for fiscal 2019 was 8.2% compared to 7.3% for fiscal 2018. Operating
income was $912 million, a $163 million increase compared to fiscal 2018. The increases in operating margin and
operating income were primarily attributable to the receipt of the Greek arbitration award, favorable program mix,
decreases in acquisition, integration and restructuring costs and lower amortization of intangible assets.

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.

From a macroeconomic perspective, our industry is under general competitive pressures associated with spending
from our largest customer, the U.S. government, and requires a high level of cost management focus to allow us to
remain competitive. Although the current Administration has not indicated a desire to reduce spending in the
defense and homeland security sectors, the likelihood, extent and duration of current spending levels 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.

Business Environment and Trends

U.S. Government Markets

In fiscal 2019, we generated approximately 87% 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 and U.S. Intelligence Community, including subcontracts under which the
DoD or the U.S. Intelligence Community is the ultimate purchaser, represented approximately 48% of our total
revenues for fiscal 2019. 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.

From December 21, 2018 until the passage of a new continuing resolution ("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.

On July 22, 2019, the White House and Congress reached a two-year budget deal to raise spending caps and
suspend the debt ceiling until July 2021. Allocations for national defense spending increased to $738 billion in GFY
2020 and $741 billion in GFY 2021. For non-defense programs, spending increased to $632 billion in GFY 2020 and
$635 billion in GFY 2021. Overall, the measure increased spending by $323 billion over the limits set under the
Bipartisan Budget Act of 2018.

Leidos Holdings, Inc. Annual Report - 32

PART II

On December 20, 2019, Congress passed and the President signed into law two consolidated appropriations bills,
thereby funding the federal government through the end of GFY 2020.

On February 10, 2020, the President submitted the GFY 2021 budget proposal to Congress, which included
discretionary spending levels for defense and non-defense programs of $741 billion and $590 billion, respectively.

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, 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.

International Markets

Sales to customers in international markets represented 8% of total revenues for fiscal 2019. Our international
customers include foreign governments and their agencies, primarily located in Australia and the U.K. 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 - 33

PART II

Results of Operations

Our results of operations for the periods presented were as follows:

Year Ended

2019 to 2018

2018 to 2017

January 3,
2020

December 28,
2018

December 29,
2017

Dollar
change

Percent
change

Dollar
change

Percent
change

11,094
9,546

10,194
8,690

(dollars in millions)
900
$
856

10,170
8,738

9 % $

10 %

24
(48)

— %
(1)%

496

144
49

(40)

—

547

136
46

—

(18)

912
(46)

866

(196)
670
3

749
(139)

610

(28)
582
1

573

122
42

139

—

(13)

559
(166)

393

(29)
364
(2)

8
3

(40)

(32)

(7)

—

163
93

256

(168)
88
2

(51)

(9)%

(26)

6 %
7 %

14
4

(5)%

11 %
10 %

(100)%

(10)

(100)%

(86)%

(102)

(73)%

(100)%

— %

22 %
(67)%

42 %

NM
15 %
200 %

(5)

190
27

217

1
218
3

100 %

38 %

34 %
(16)%

55 %

(3)%
60 %
(150)%

Revenues
Cost of revenues(1)
Selling, general and
administrative
expenses:

General and

administrative(1)
Bid and proposal
Company-funded
research and
development

Bad debt expense
and recoveries

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

667

581

366

15 % $

215

59 %

attributable to
Leidos Holdings,
Inc.

Operating income

margin

8.2%

7.3%

5.5%

NM - Not meaningful
(1) Effective the beginning of fiscal 2018, we established a new U.S. government Cost Accounting Standards structure and revised our disclosure
statements accordingly to reflect the related cost accounting practice changes. Consequently, $185 million was reclassified from "Cost of
revenues" to "Selling, general and administrative expenses" on the consolidated statements of income for fiscal 2017. 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 - 34

PART II

Segment and Corporate Results

Defense Solutions

January 3,
2020

December 28,
2018

December 29,
2017

Dollar
change

Percent
change

Dollar
change

Percent
change

Year Ended

2019 to 2018

2018 to 2017

Revenues

5,367

4,966

(dollars in millions)
401
$

4,989

Operating income

margin

407

7.6%

353

7.1%

312

6.3%

8% $

15%

(23)

— %

13 %

The increase in revenues for fiscal 2019 as compared to fiscal 2018 was primarily attributable to new awards and a
net increase in program volumes, partially offset by the completion of certain contracts and adverse exchange rate
movements in the Australian dollar when compared to the U.S. dollar.

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 movements between the U.S. dollar and
Australian dollar, partially offset by new awards.

The increase in operating income for fiscal 2019 as compared to fiscal 2018 was primarily attributable to new
awards, the release of a contract reserve and favorable program mix.

The increase in operating income for fiscal 2018 as compared to fiscal 2017 was primarily attributable to lower
amortization.

Civil

January 3,
2020

December 28,
2018

December 29,
2017

Dollar
change

Percent
change

Dollar
change

Percent
change

Year Ended

2019 to 2018

2018 to 2017

Revenues

3,729

3,411

(dollars in millions)
318
$

3,379

Operating income

margin

295

7.9%

284

8.3%

221

6.5%

9% $

29%

The increase in revenues for fiscal 2019 as compared to fiscal 2018 was primarily attributable to new awards and a
net increase in program volumes, partially offset by the impact of the sale of our commercial cybersecurity business
of $74 million, the completion of certain contracts, lower net profit write-ups in the current year and adverse
exchange rate movements in the British pound when compared to the U.S. dollar.

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 movements 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 operating income for fiscal 2019 as compared to fiscal 2018 was primarily attributable to lower
amortization of intangibles of $20 million, a net increase in program volumes, new awards and the impact of the
sale of our commercial cybersecurity business of $7 million, partially offset by lower net profit write-ups in the
current year and a net increase in bad debt expense on certain international contracts.

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 a net decrease in program volumes.

Leidos Holdings, Inc. Annual Report - 35

PART II

Health

January 3,
2020

December 28,
2018

December 29,
2017

Dollar
change

Percent
change

Dollar
change

Percent
change

Year Ended

2019 to 2018

2018 to 2017

Revenues

1,998

1,817

(dollars in millions)
181
$

1,802

Operating income

margin

242

12.1%

230

12.7%

228

12.7%

10% $

The increase in revenues for fiscal 2019 as compared to fiscal 2018 was primarily attributable to a net increase in
program volumes, new awards and $18 million from our acquisition of IMX Medical Management Services and its
affiliated businesses ("IMX"), partially offset by the completion of certain contracts and the impact of the sale of our
health staff augmentation business of $78 million.

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 operating income for fiscal 2019 as compared to fiscal 2018 was primarily attributable to a net
increase in program volumes, partially offset by reduced margins on awarded re-compete contracts.

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.

Corporate

January 3,
2020

December 28,
2018

December 29,
2017

Dollar
change

Percent
change

Dollar
change

Percent
change

Year Ended

2019 to 2018

2018 to 2017

Operating loss

(32)

(118)

(dollars in millions)
(202)
86

(73)%

(42)%

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 2019 as compared to fiscal 2018, was primarily attributable to the $52
million net gain recognized upon the receipt of the Greek arbitration award, lower acquisition, integration and
restructuring costs of $32 million and an asset impairment charge of $7 million in the prior year.

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.

Equity earnings of non-consolidated subsidiaries

We have certain non-controlling ownership interests in equity method investments. For fiscal 2019, 2018 and 2017,
we recorded earnings of $29 million, $28 million and $27 million, respectively, from our equity method investments,
partially offset by amortization of $11 million, $10 million and $14 million, respectively.

Non-Operating Expense, Net

Non-operating expense, net decreased $93 million for fiscal 2019 as compared to fiscal 2018, primarily due to the
$88 million gain recognized on the sale of our commercial cybersecurity business.

Non-operating expense, net 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 - 36

PART II

Provision for Income Taxes

Our effective tax rate was 22.6%, 4.6% and 7.4% in fiscal 2019, 2018 and 2017, respectively. The Company's
effective tax rate for fiscal 2019 was favorably impacted primarily by excess tax benefits related to employee stock-
based payment transactions and federal research tax credits, partially offset by an increase in valuation allowances
arising from foreign withholding tax and an increase in taxes related to the sale of the commercial cybersecurity
business.

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 Cuts and Jobs 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.

Non-controlling Interest

We have an 88% controlling interest in Mission Support Alliance, LLC ("MSA"), a joint venture with Centerra Group,
LLC, which includes 41% purchased from Jacobs Group, LLC on January 26, 2018. We include the financial results
for MSA in our consolidated financial statements. Net income attributable to non-controlling interest for fiscal 2019
and fiscal 2018 was $3 million and $1 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 $14.5 billion and $13.7 billion during fiscal 2019 and 2018, 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 or acquisitions and divestitures.

Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts. We
segregate our backlog into two categories as follows:

• Funded Backlog. Funded backlog for contracts with the U.S. government represents the value on contracts
for which funding is appropriated less revenues previously recognized on these contracts. Funded backlog
for contracts with non-U.S. government entities and commercial customers represents the estimated value
on contracts, which may cover multiple future years, under which we are obligated to perform, less
revenues previously recognized on the contracts.

• Negotiated Unfunded Backlog. Negotiated unfunded backlog represents estimated amounts of revenue to
be earned in the future from contracts for which funding has not been appropriated and unexercised priced
contract options. Negotiated unfunded backlog does not include future potential task orders expected to be
awarded under IDIQ, GSA Schedule or other master agreement contract vehicles, with the exception of
certain IDIQ contracts where task orders are not competitively awarded 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.

Leidos Holdings, Inc. Annual Report - 37

The estimated value of our total backlog for the periods presented was as follows:

PART II

Defense Solutions:

Funded backlog

Negotiated unfunded backlog

Total Defense Solutions backlog

Civil:

Funded backlog

Negotiated unfunded backlog

Total Civil backlog

Health:

Funded backlog

Negotiated unfunded backlog

Total Health backlog

Total:

Funded backlog

Negotiated unfunded backlog

Total backlog

January 3,
2020

December 28,
2018

(in millions)

2,417 $

9,150

11,567 $

1,913 $

5,802

7,715 $

1,083 $

3,725

4,808 $

2,821

6,925

9,746

2,304

5,045

7,349

1,254

2,483

3,737

5,413 $

18,677

24,090 $

6,379

14,453

20,832

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).

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.

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

Year Ended

January 3,
2020

December 28,
2018

December 29,
2017

54%

100%

54%

100%

56%

100%

Leidos Holdings, Inc. Annual Report - 38

PART II

Liquidity and Capital Resources

Overview of Liquidity

As of January 3, 2020, we had $668 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 2019 and
2018, there were no borrowings outstanding under the credit facility and we were in compliance with the financial
covenants.

At January 3, 2020 and December 28, 2018, we had outstanding debt of $3.0 billion and $3.1 billion, respectively.
The notes outstanding as of January 3, 2020, contain financial covenants and customary restrictive covenants. We
were in compliance with all covenants as of January 3, 2020. During fiscal 2019, 2018 and 2017, we made $80
million, $59 million, and $209 million of principal payments, respectively, on our long-term debt. This activity
included $69 million, $46 million and $76 million of principal payments on our senior secured term loans during
fiscal 2019, 2018 and 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 on our senior secured
term loans during fiscal 2017.

We paid dividends of $198 million for fiscal 2019, 2018 and 2017.

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.

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 2019 and 2018, we entered into ASR agreements with a financial institution, whereby we paid an
aggregate of $400 million and $250 million, respectively, and received approximately 6 million and 4 million shares,
respectively, of Leidos outstanding shares (see "Note 19—Earnings Per Share" of the notes to the consolidated
financial statements contained within this Annual Report on Form 10-K). The purchases were recorded to
"Additional paid-in capital" in the consolidated balance sheets. All shares delivered were immediately retired.

Additionally, during fiscal 2019 and 2018, we made open market repurchases of our common stock for an aggregate
purchase price of $25 million and $167 million, respectively. During fiscal 2017, 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.

On January 17, 2020 (the "Closing Date"), we entered into a Credit Agreement with certain financial institutions,
which provides for a senior unsecured term loan A facility in an aggregate principal amount of $1.9 billion (the "Term
Loan Facility") and a $750 million senior unsecured revolving facility. We used the proceeds of the Term Loan
Facility and cash on hand on the Closing Date to repay in full all indebtedness, and terminate all commitments,
under, and discharge and release all guarantees and liens existing in connection with the Credit Agreements
entered into in August 2016. Additionally, on January 31, 2020, in connection with the acquisition of Dynetics, Inc.
("Dynetics"), we entered into a Bridge Credit Agreement with certain financial institutions, which provides for a
senior unsecured 364-day bridge loan facility in an aggregate principal amount of $1.25 billion (the "Bridge Facility").
We used the proceeds of the Bridge Facility and cash on hand to fund the purchase of Dynetics and repay in full all
third party indebtedness of Dynetics, terminate all commitments thereunder and discharge and release all existing
guarantees and liens. See "Note 27—Subsequent Events" of the notes to the consolidated financial statements
contained within this Annual Report on Form 10-K for further details regarding these transactions.

Leidos Holdings, Inc. Annual Report - 39

PART II

Summary of Cash Flows

The following table summarizes cash flow information for the periods presented:

Net cash provided by operating activities

Net cash provided by (used in) investing activities

Net cash used in financing activities

Net increase (decrease) in cash, cash equivalents and restricted cash

Year Ended

January 3,
2020

December 28,
2018

December 29,
2017

(in millions)

992 $

768 $

(709)

(114)

(707)

348 $

(53) $

526

(71)

(429)

Net cash provided by operating activities increased $224 million for fiscal 2019 as compared to fiscal 2018. The
increase was primarily due to more favorable timing of working capital changes including higher advance payments
from customers, $59 million received for the Greek arbitration award and lower payments for integration and
restructuring costs. These activities were partially offset by higher tax payments, the timing of interest payments and
$60 million of proceeds received from the termination of interest rate swaps in the prior year.

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 Lockheed Martin's Information Systems & Global Solutions business ("IS&GS Business").

Net cash provided by investing activities increased $179 million for fiscal 2019 as compared to fiscal 2018. The
increase was primarily due to $178 million of proceeds received for the dispositions of our commercial cybersecurity
and health staff augmentation businesses, $96 million of proceeds received for the sale of real estate properties and
$81 million of cash paid in the prior year related to our 2016 acquisition. These activities were partially offset by $94
million of cash paid related to the acquisition of IMX, higher purchases of property, equipment and software and
lower proceeds from promissory notes.

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 financing activities increased $2 million for fiscal 2019 as compared to fiscal 2018. The increase
was primarily due to the timing of debt payments and higher stock repurchases, partially offset by $23 million of
cash paid related to a tax indemnification in the prior year and the timing of issuances of stock.

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.

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.

Leidos Holdings, Inc. Annual Report - 40

PART II

Contractual Obligations

The following table summarizes, as of January 3, 2020, 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

Finance lease obligations
Other long-term liabilities(3)
Total contractual obligations

Total

2020

2021

2022

2023

2024

2025 and
thereafter

(in millions)

$3,954 $ 627 $ 206 $ 203 $ 709 $ 102 $ 2,107

516
7

168

145

—

113

112

$4,645 $ 786 $ 321 $ 285 $ 772 $ 148 $ 2,333

(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 $113 million, $104 million, $101 million, $90 million and
$91 million of the balance for fiscal 2020, 2021, 2022, 2023 and 2024, respectively, and $441 million for fiscal 2025 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 January 3, 2020. 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 $1 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 January 3, 2020. For a discussion of potential changes in these pension obligations, see "Note 22—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 13—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.

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

• Goodwill and Intangible Assets Impairment

•

Income Taxes

Leidos Holdings, Inc. Annual Report - 41

PART II

Revenue Recognition

Our revenues from contracts with customers are from offerings including cyber; digital modernization; integrated
systems; mission software systems; mission support; operations and logistics; and sensors, collection and
phenomenology, 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 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.

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 its 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.

Leidos Holdings, Inc. Annual Report - 42

PART II

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 requiring system integration and cost-plus contracts with variable consideration, revenue is
recognized over time generally using 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-fixed-fee, 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 where 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, we recognize revenue on a net basis.

Goodwill and Intangible Assets Impairment

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 2019 and 2018, we had six and five reporting units, respectively, for the purpose of testing goodwill for
impairment.

Estimating the fair value of a reporting unit and intangibles requires the exercise of significant judgment and
assumptions including judgments about expected future cash flows, weighted-average cost of capital, discount
rates and expected long-term growth rates. A significant change to these estimates and assumptions could cause
the estimated fair values of our reporting units and intangible assets to decline and increase the risk of an
impairment charge to earnings. 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.

Leidos Holdings, Inc. Annual Report - 43

PART II

Income Taxes

We account 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.

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.

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.

We 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 of being realized upon ultimate
settlement. We recognize interest and penalties related to uncertain tax positions in our income tax expense.

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 January 3, 2020 and December 28, 2018, we had $3.0 billion and $3.1 billion, respectively, of long-term debt,
which included $1.9 billion and $2.0 billion, respectively, of senior secured term loans that 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. During fiscal 2018, we
terminated our existing 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 January 3, 2020, and December 28, 2018, the fair value of our interest rate swap agreements
with respect to our variable rate senior secured loans was a liability of $75 million and $32 million, respectively.

Leidos Holdings, Inc. Annual Report - 44

PART II

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 January 3, 2020, and December 28, 2018, the fair
value of our interest rate swaps with respect to our fixed rate debt was a $2 million asset and a $3 million liability,
respectively.

The counterparties to these agreements are financial institutions. We do not hold or issue derivative financial
instruments for trading or speculative purposes. We cannot predict future market fluctuations in interest rates and
their impact on our interest rate swaps. 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 15—Derivative Instruments" and "Note 16—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 January 3, 2020, and December 28, 2018, our cash and cash equivalents included investments in several
large institutional money market funds and bank deposits. For fiscal 2019 and fiscal 2018, 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 8% of total revenues for fiscal 2019 and
9% of total revenues for fiscal 2018 and 2017.

Leidos Holdings, Inc. Annual Report - 45

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 January 3, 2020 and December 28, 2018

Consolidated Statements of Income for the fiscal years ended January 3, 2020, December 28, 2018,
and December 29, 2017

Consolidated Statements of Comprehensive Income for the fiscal years ended January 3, 2020,
December 28, 2018, and December 29, 2017

Consolidated Statements of Equity for the fiscal years ended January 3, 2020, December 28, 2018,
and December 29, 2017

Consolidated Statements of Cash Flows for the fiscal years ended January 3, 2020, December 28,
2018, and December 29, 2017

Notes to Consolidated Financial Statements

Page

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 - 46

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 January 3, 2020 and December 28, 2018, the related consolidated statements of income,
comprehensive income, equity, and cash flows, for the fiscal years ended January 3, 2020, December 28, 2018,
and December 29, 2017, 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 January 3,
2020 and December 28, 2018, and the results of its operations and its cash flows for the fiscal years ended
January 3, 2020, December 28, 2018, and December 29, 2017, 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 January 3, 2020, 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 18, 2020, 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.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial
statements that was communicated or required to be communicated to the audit committee and that (1) relates to
accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenues - Refer to Note 3 and Note 4 to the financial statements

Critical Audit Matter Description

The Company recognizes revenue on 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. The
accounting conclusions for contracts involves judgment, particularly as it relates to determining whether multiple
promises within a single contract are highly interrelated and represent a single performance obligation and whether
or not the Company is acting as a principal in the fulfillment of the identified performance obligations on certain
contracts.

Leidos Holdings, Inc. Annual Report - 47

On firm-fixed-price (FFP) contracts requiring system integration, and cost-plus contracts with variable consideration,
revenue is recognized over time using 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. The accounting for these
contracts involves judgment, particularly as it relates to the process of estimating total costs for the performance
obligation.

Given the judgments necessary to determine whether multiple promises within a single contract represent a single
performance obligation, whether or not the Company is acting as principal in the fulfillment of the identified
performance obligations on certain contracts, and estimates of total costs for the performance obligations that
recognize revenue using the cost-to-cost method, auditing such accounting conclusions and estimates required
extensive audit effort due to the volume and complexity of these contracts and a high degree of auditor judgment
when performing audit procedures and evaluating the results of those procedures.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to management’s conclusions regarding whether multiple promises within a single
contract represent a single performance obligation, whether or not the Company is acting as a principal or an agent
in fulfilling identified performance obligations on certain contracts, and estimates of total costs for the performance
obligations that recognize revenue using the cost-to-cost method included the following, among others:

•

We tested the effectiveness of controls over contract revenue, including management’s controls over the
initial setup of new contract arrangements and the estimates of total costs for identified performance
obligations.

We tested recorded revenue using a combination of analytical procedures and detailed contract testing.

For a selection of contracts, including all new significant contracts, we performed elements of the following
for each contract:

Evaluated the terms and conditions of each contract and the appropriateness of the accounting

treatment in accordance with generally accepted accounting principles, by:

Inspecting the executed contract to verify that the facts on which management’s conclusions
were reached were consistent with the actual terms and conditions of the contract.

Evaluating the contract within the context of the five-step model prescribed by ASC 606 and
that management’s conclusions were appropriate by evaluating the nature of the promises
within the contract, the interrelationship of the promised services provided, the pattern by which
obligations are fulfilled, the number of performance obligations identified, and which party is
acting as principal in the fulfillment of the identified performance obligations.

Involving industry experts in evaluating the appropriateness of management’s conclusions.

Tested the mathematical accuracy of management’s calculation of revenue for the performance

obligation.

• We analyzed cumulative adjustments recorded during the year and tested a sample to determine that the
adjustments were the result of changes in facts and circumstances and not estimates that were previously
inaccurate.

/s/ Deloitte & Touche LLP

McLean, Virginia

February 18, 2020

We have served as the Company's auditor since fiscal 2000.

Leidos Holdings, Inc. Annual Report - 48

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
Operating lease right-of-use assets, net
Other assets

LIABILITIES AND EQUITY
Accounts payable and accrued liabilities
Accrued payroll and employee benefits
Long-term debt, current portion
Liabilities held for sale

Total current liabilities

Long-term debt, net of current portion
Operating lease liabilities
Deferred tax liabilities
Other long-term liabilities
Commitments and contingencies (Notes 13, 25 and 26)
Stockholders’ equity:

Preferred stock, $.0001 par value, 10 million shares authorized and no shares

issued and outstanding at January 3, 2020 and December 28, 2018

Common stock, $.0001 par value, 500 million shares authorized, 141 million and

146 million shares issued and outstanding at January 3, 2020 and December 28,
2018, respectively

Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total Leidos stockholders’ equity

Non-controlling interest

Total equity

January 3,
2020

December 28,
2018

(in millions)

668 $

1,734
410
—
2,812
287
530
4,912
400
426
9,367 $

1,837 $
435
61
—
2,333
2,925
326
184
182

327
1,877
543
92
2,839
237
652
4,860
—
182
8,770

1,491
473
72
23
2,059
3,052
—
170
178

—

—
2,587
896
(70)
3,413
4
3,417
9,367 $

—
2,966
372
(30)
3,308
3
3,311
8,770

See accompanying notes to consolidated financial statements.

Leidos Holdings, Inc. Annual Report - 49

LEIDOS HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF INCOME

Year Ended

January 3,
2020

December 28,
2018

December 29,
2017

Revenues

Cost of revenues
Selling, general and administrative expenses
Bad debt expense and recoveries
Acquisition, integration and restructuring costs

Asset impairment charges
Equity earnings of non-consolidated subsidiaries

Operating income
Non-operating expense:
Interest expense, net
Other income (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

(in millions, except per share amounts)
11,094 $

10,194 $

9,546
689
(40)
5
—
(18)
912

(133)
87
866
(196)
670
3

8,690
729
—
37
7
(18)
749

(138)
(1)
610
(28)
582
1

667 $

581 $

10,170
8,738
737
10
139
—
(13)
559

(140)
(26)
393
(29)
364
(2)

366

4.66 $

3.85 $

4.60

3.80

2.41

2.38

See accompanying notes to consolidated financial statements.

Leidos Holdings, Inc. Annual Report - 50

LEIDOS HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Year Ended

January 3,
2020

December 28,
2018

December 29,
2017

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

(in millions)

670 $

582 $

(47)

(1)

(40)

630

(61)

(10)

(1)

(72)

510

Comprehensive income attributable to Leidos common stockholders

627 $

509 $

364

401

(2)

403

See accompanying notes to consolidated financial statements.

Leidos Holdings, Inc. Annual Report - 51

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

Balance at December 30, 2016

150 $ 3,316 $

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 noncontrolling

interest

Other

Balance at December 28, 2018

Cumulative adjustments

related to ASU adoptions

Balance at December 29, 2018

Net income
Other comprehensive loss,

net of taxes

Issuances of stock (less

forfeitures)

Repurchases of stock and

other

Dividends of $1.32 per share

Stock-based compensation

Other

—

151

—

151

—

(6)
—

—

146

—

146

—

(6)
—
—
—

—

(31)
—
43

—
3,344

—

(438)
—
44

(1)
—
2,966

—
2,966

—

(458)
—
52
(1)

Balance at January 3, 2020

141 $ 2,587 $

(177) $
366

—

—
(196)
—

—

(7)

(8)

(15)

581

—

—
(194)
—

—

372

420

667

—

—
(191)
—
—
896 $

(4) $

3,135 $

12 $ 3,147

—

(72)

—

(30)

—

(30)

—

(40)

—

—
—
—
(70) $

366

(2)

364

(31)

(196)

—

3,370

3,371

581

(72)

(438)

(194)

(1)

—

3,308

3,356

667

(40)

(458)

(191)
52
(1)
3,413 $

—

(10)

(1)

—

(31)

(196)

3,383

3,384

582

(72)

(438)

(194)

(11)

(1)

3,311

3,359

670

(40)

(458)

(191)
—
52
—
(3)
(2)
4 $ 3,417

See accompanying notes to consolidated financial statements.

Leidos Holdings, Inc. Annual Report - 52

LEIDOS HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Cash flows from operations:

Net income

Adjustments to reconcile net income to net cash provided by

operations:

Gain on sale of businesses

Depreciation and amortization

Amortization of equity method investments

Stock-based compensation

Deferred income taxes

Bad debt expense

Non-cash interest (income) expense

Asset impairment charges

Promissory note impairment

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

Income taxes receivable/payable

Other long-term assets

Other long-term liabilities

Net cash provided by operating activities

Cash flows from investing activities:

Proceeds from disposition of businesses

Payments for property, equipment and software

Net proceeds from sale of assets

Acquisitions of businesses
Collections on promissory notes
Other

Net cash provided by (used in) investing activities
Cash flows from financing activities:
Repurchases of stock and other
Dividend payments
Payments of long-term debt
Proceeds from issuances of stock
Payment of tax indemnification liability

Proceeds from real estate financing transaction

Other

Net cash used in financing activities

Year Ended

January 3,
2020

December 28,
2018

December 29,
2017

(in millions)

670 $

582 $

364

(88)

234

(10)

—

116

(44)

116

(29)

(49)

(53)

992

178

(121)

(94)

(458)

(198)

(80)

—

257

(49)

—

(58)

(73)

(46)

(12)

768

—

(73)

—

(81)

—

336

132

—

(191)

(76)

152

(283)

(73)

526

—

(81)

—

(114)

(71)

(438)

(198)

(59)

(23)

(17)

(31)

(198)

(209)

—

(4)

(709)

(707)

(429)

Leidos Holdings, Inc. Annual Report - 53

CONSOLIDATED STATEMENTS OF CASH FLOWS [CONTINUED]

LEIDOS HOLDINGS, INC.

Year Ended

January 3,
2020

December 28,
2018

December 29,
2017

Net increase (decrease) in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash at beginning of year

(in millions)

(53)

422

348

369

Cash, cash equivalents and restricted cash at end of year

717 $

369 $

396

422

See accompanying notes to consolidated financial statements.

Leidos Holdings, Inc. Annual Report - 54

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. The Company
operates in three reportable segments: Defense Solutions, Civil and Health. Additionally, the Company separately
presents the unallocable costs associated with corporate functions as Corporate.

The Company has an 88% controlling interest in Mission Support Alliance, LLC ("MSA"), a joint venture with
Centerra Group, LLC, which includes 41% purchased from Jacobs Group, LLC on January 26, 2018. 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.

Effective December 29, 2018, the Company adopted the requirements of Accounting Standards Update ("ASU")
2016-02 using the modified retrospective approach (see "Note 2—Accounting Standards"). Comparative information
for the prior fiscal year has not been retrospectively adjusted.

Effective the beginning of fiscal 2019, certain contracts were reassigned between the Civil and Defense Solutions
reportable segments (see "Note 24—Business Segments"). While this activity did not have a material impact on the
Company's reportable segments, fiscal 2018 and 2017 segment results and disclosures have been recast to reflect
this change.

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 was
reclassified from "Cost of revenues" to "Selling, general and administrative expenses" on the consolidated
statements of income for fiscal 2017.

The Company combined "Dividends payable" and "Income taxes payable" with "Accounts payable and accrued
liabilities" on the consolidated balance sheets. Additionally, the Company separately disclosed "Deferred income
taxes" and "Income taxes receivable/payable", as well as "Other long-term assets" and "Other long-term liabilities",
within operating activities on the consolidated statements of cash flows. The Company also combined "Payments
for debt issuance and modification costs" and "Payments for non-controlling interest acquired" with "Other" within
financing activities on the consolidated statements of cash flows.

Leidos Holdings, Inc. Annual Report - 55

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2—Accounting Standards

Accounting Standards Updates Adopted

ASU 2016-02, ASU 2018-10, ASU 2018-11, ASU 2018-20, and ASU 2019-01, Leases (Topic 842)

In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02 ("ASC 842") and
subsequent updates, which supersedes the lease guidance under Leases (Topic 840) and requires 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.

Effective December 29, 2018, the Company adopted the requirements of ASC 842 using the modified retrospective
approach. Comparative information for the prior fiscal year has not been retrospectively adjusted.

As a result of the adoption of the new standard, the Company recorded $433 million and $486 million of ROU
assets and lease liabilities, respectively, primarily due to its operating leases, on the Company's consolidated
balance sheets. The standard did not have a material impact on the consolidated statements of income and
consolidated statements of cash flows. The Company also recorded a $48 million increase in retained earnings due
to the cumulative effect of recognizing the gain, net of taxes, related to the sale of the San Diego properties (see
"Note 12—Property, Plant and Equipment").

The Company has elected to adopt certain practical expedients provided under ASC 842, including the options to
not apply lease recognition for short-term leases, reassess whether expired or existing contracts contain leases,
reassess lease classification for expired or existing leases, reassess initial direct costs, and combine lease and non-
lease components in revenue arrangements when (i) the timing and pattern of revenue recognition for the
components are the same and (ii) the lease component if accounted for separately, would be classified as an
operating lease. The Company did not elect the hindsight practical expedient to determine the lease term for
existing leases and in assessing impairment for the ROU assets. The Company also applies a single discount rate
to a portfolio of leased assets with similar durations.

The cumulative effect of the changes made to the Company's consolidated balance sheet for the adoption of ASU
2016-02 was as follows:

Assets - non-current:

Property, plant and equipment, net

Operating lease right-of-use assets, net

Liabilities - current:

Accounts payable and accrued liabilities

Long-term debt, current portion

Liabilities - non-current:

Balance at
December 28,
2018

Adjustments
due to ASU
2016-02

(in millions)

Balance at
December 29,
2018

237 $

1 $

—

418

1,491 $

132 $

238

418

1,623

Long-term debt, net of current portion

3,052 $

(72) $

2,980

Operating lease liabilities

Deferred tax liabilities

Other long-term liabilities

Equity:

Retained earnings

—

170

178

320

(34)

320

187

144

372 $

48 $

420

Leidos Holdings, Inc. Annual Report - 56

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ASU 2018-13 Fair Value Measurement (Topic 820)

In August 2018, the FASB issued ASU 2018-13 "Fair Value Measurement (Topic 820) Disclosure Framework -
Changes to the Disclosure Requirements for Fair Value Measurement" to improve the effectiveness of disclosures
in the notes to the financial statements. During the quarter ended January 3, 2020, the Company early adopted the
provisions related to disclosure requirements that were removed from Topic 820, including the valuation processes
for Level 3 fair value measurements.

Accounting Standards Updates Issued But Not Yet Adopted

ASU 2016-13, ASU 2018-19, ASU 2019-05, and ASU 2019-11 Financial Instruments – Credit Losses (Topic 326)

In June 2016, the FASB issued ASU 2016-13 and subsequent updates, 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 expects the impacts that this standard update will have on certain financial assets, including trade
receivables, note receivables and receivables on sales-type leases and processes to be immaterial.

Note 3—Summary of Significant Accounting Policies

Reporting Periods

Leidos' fiscal year ends on the Friday nearest the end of December. The Company's fiscal 2019 ended January 3,
2020. Fiscal 2019 included 53 weeks and fiscal 2018 and 2017 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 measurements 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.

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. The Company recognizes its proportionate share of the entities' net income or loss and does
not consolidate the entities' assets and liabilities.

Leidos Holdings, Inc. Annual Report - 57

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 that has (or will have) a major effect
in operations and financial results are classified as discontinued operations, whereas non-strategic divestitures
remain in continuing operations.

Restructuring Expenses

Restructuring expenses are incurred in connection with programs aimed at reducing the Company's costs and
primarily include 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. 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 cyber; digital modernization;
integrated systems; mission software systems; mission support; operations and logistics; and sensors, collection
and phenomenology, 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.

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.

Leidos Holdings, Inc. Annual Report - 58

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 - 59

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On FFP contracts requiring system integration and cost-plus contracts with variable consideration, revenue is
recognized over time generally using 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-fixed-fee, revenue is generally
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 where 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, the Company recognizes revenue on a net basis.

Contract Costs

Contract costs generally include direct costs such as labor, materials, subcontract costs and indirect costs
identifiable with or allocable to a specific contract. Costs are expensed as incurred unless they qualify for deferral
and capitalization. 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, the Company's prior contract or prior
contractor. These costs are generally capitalized as deferred assets and amortized on a straight-line basis over the
anticipated term of the contract, including unexercised option periods that are reasonably certain of being exercised.

Project Assets

Purchases of project assets are capitalized for specific contracts where delivery to a customer 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, dedicated hardware, maintenance agreements and significant
material purchases and other costs incurred on contracts. Project assets are amortized from the balance sheet
using the straight-line method over the estimated useful life of the asset or over the expected term of the period of
performance, whichever is shorter.

Changes in Estimates on Contracts

Changes in estimates related to contracts accounted for using the cost-to-cost method of accounting are recognized
in the period in which such changes are made for the inception-to-date effect of the changes, with the exception of
contracts acquired through a business combination, where the adjustment is made for the period commencing from
the date of acquisition.

Leidos Holdings, Inc. Annual Report - 60

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in estimates on contracts for the periods presented were as follows:

Favorable impact

Unfavorable impact

Net favorable impact to income before income taxes

Impact on diluted EPS attributable to Leidos common stockholders

Year Ended

January 3,
2020

December 28,
2018

December 29,
2017

(in millions, except for per share amounts)

95 $

(52)

43 $

167 $

(62)

105 $

185

(82)

103

0.23 $

0.52 $

0.41

The impact on diluted EPS attributable to Leidos common stockholders is calculated using the Company's statutory
tax rate.

Revenue Recognized from Prior Obligations

During fiscal 2019 and 2018, revenue recognized from performance obligations satisfied in previous periods was
$56 million and $102 million, respectively. 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 company-
funded research and development expenses.

The Company conducts research and development activities under customer-funded contracts and with company-
funded research and development funds. Company-funded research and development expense was $49 million,
$46 million and $42 million for fiscal 2019, 2018 and 2017, 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.

Leidos Holdings, Inc. Annual Report - 61

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

Cash and Cash Equivalents

The Company's cash equivalents are primarily comprised of investments in several large institutional money market
accounts, 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 January 3, 2020, and December 28, 2018, the Company included $169 million and $56 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" on 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. 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 Company's cost-reimbursable and T&M contracts are generally billed 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 technology and 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 - 62

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 2019 and 2018, the Company had six and five reporting units, respectively, 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 Level 3 inputs when a quantitative analysis is
performed.

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. 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 trade name 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.

Intangible assets with finite lives are amortized over the following periods:

Program and contract intangibles

Software and technology
Customer relationships
Trade names

Estimated useful lives (in years)

6-11

4-15

8-10

Intangible assets with finite lives are assessed for impairment 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.

Leidos Holdings, Inc. Annual Report - 63

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

2-10

Depreciation method

Estimated useful lives (in years)

Buildings

Building improvements and leasehold

improvements

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.

Leases

Lessee

The Company has facilities and equipment lease arrangements. An arrangement is determined to be a lease at
inception if it conveys the right to control the use of identified property and equipment for a period of time in
exchange for consideration. ROU assets represent the Company’s right to use an underlying asset over the lease
term and lease liabilities represent its obligation to make lease payments arising from the lease.

ROU assets and lease liabilities are recorded on the consolidated balance sheet at lease commencement date
based on the present value of the future minimum lease payments over the lease term. As the Company generally
does not know the implicit rate for its leases, the discount rate used is the Company’s incremental borrowing rate
which is determined based on the rate of interest that the Company would have to pay to borrow an amount equal
to the lease payments on a collateralized basis over a similar term. An ROU asset is initially measured by the
present value of the remaining lease payments, plus initial direct costs and prepaid lease payments, less any lease
incentives received before commencement. The remaining lease cost is allocated over the remaining lease term on
a straight-line basis unless another systematic or rational basis is more representative of the pattern in which the
underlying asset is expected to be used. ROU assets are evaluated for impairment in a manner consistent with the
treatment of other long-lived assets.

Certain of the Company’s facility leases contain options to renew or extend the terms of the lease which are
included in the determination of the ROU assets and lease liabilities when it is reasonably certain that the Company
will exercise the option. The Company's leases may also include variable lease payments such as an escalation
clause based on consumer price index rates, maintenance costs and utilities. Variable lease payments that depend
on an index or a rate are included in the determination of ROU assets and lease liabilities using the index or rate at
the lease commencement date, whereas variable lease payments that do not depend on an index or rate are
recorded as lease expense in the period incurred. At January 3, 2020, the Company did not have any lease
agreements with residual value guarantees.

The Company elected the practical expedient to not separate non-lease components from lease components and
instead account for both components as a single lease. The practical expedient was applied to all material classes
of leased assets.

The related lease payments on the Company’s short-term facilities and equipment leases are recognized as
expense on a straight-line basis over the lease term.

Leidos Holdings, Inc. Annual Report - 64

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ROU assets are assessed for potential impairment whenever there is evidence that events or changes in
circumstances indicate that the carrying value of the asset may not be recoverable and the carrying amount of the
asset exceeds its estimated fair value. This includes an establishment of a plan of abandonment, which occurs
when the Company has committed to a plan to abandon the lease before the end of its previously estimated useful
life and there is no expectation that the Company will re-enter or re-purpose the space, including the fact that it
cannot be subleased or transferred to another program within the Company.

Lessor

The Company is a lessor on certain equipment sales-type and operating lease arrangements with its customers. To
be considered lease revenue, the contract must contain a specified asset, the Company must not have a
substantive substitution right, the customer must have the right to direct the use of the specified asset during the
period of use and the customer must have the right to obtain substantially all of the economic benefit of the
specified asset.

Certain arrangements may contain variable payments that depend on an index or rate and are measured using the
index or rate on the commencement date. Variable payments that are not included in the net investments are
recorded as revenue as incurred. Arrangements may also contain options to renew or extend the performance
period. Option periods are included in the lease term if the Company determines that it is reasonably certain the
customer will exercise an option.

The Company has arrangements that contain both lease and non-lease components. The Company will account for
them as one unit of account if the timing and pattern of transfer is identical for both the lease and the non-lease
components and the lease component would be classified as an operating lease if accounted for separately. If both
criteria are met and the predominant component is a lease, then the entire arrangement will be accounted for in
accordance with ASC 842. If the Company accounts for an arrangement both as a lease and non-lease component,
then the allocation of consideration for each component will be based the relative standalone sales price.

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).

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.

Leidos Holdings, Inc. Annual Report - 65

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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 income
(expense), net" on the consolidated statements of income.

Note 4—Revenues

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 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.

As of January 3, 2020, the Company had $10.9 billion of remaining performance obligations, which are expected to
be recognized as revenue in the amounts of $6.6 billion, $1.7 billion and $2.6 billion for fiscal 2020, fiscal 2021 and
fiscal 2022 and thereafter, respectively.

Leidos Holdings, Inc. Annual Report - 66

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

Fiscal 2018 amounts have been recast for the contracts that were reassigned between the Defense Solutions and
Civil reportable segments (see "Note 24—Business Segments").

Disaggregated revenues by customer-type were as follows:

DoD and U.S. Intelligence Community
Other government agencies(1)
Commercial and non-U.S. customers

Total

DoD and U.S. Intelligence Community(2)
Other government agencies(1)(2)
Commercial and non-U.S. customers

Total

Defense
Solutions

Year Ended January 3, 2020

Civil

Health

Total

(in millions)

4,660 $

174 $

491 $

295

411

2,681

781

1,332

151

5,325

4,308

1,343

5,366 $

3,636 $

1,974 $

10,976

Year Ended December 28, 2018

Defense
Solutions

Civil

Health

Total

(in millions)

4,359 $

128 $

386 $

185

422

2,380

903

1,276

155

4,873

3,841

1,480

4,966 $

3,411 $

1,817 $

10,194

(1) Includes federal government agencies other than the DoD and U.S. Intelligence Community, as well as state and local government agencies.
(2) The Company reclassified $41 million within the Defense Solutions segment from "Other government agencies" to "DoD and U.S. Intelligence

Community" to reflect the change in disaggregation of U.S. government customers in fiscal 2019.

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.

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

Defense
Solutions

Year Ended January 3, 2020

Civil

Health

Total

(in millions)

3,697 $

1,997 $

234 $

1,203

466

1,075

564

1,296

444

5,928

3,574

1,474

5,366 $

3,636 $

1,974 $

10,976

Leidos Holdings, Inc. Annual Report - 67

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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)

3,420 $

1,860 $

189 $

1,051

495

984

567

1,134

494

5,469

3,169

1,556

4,966 $

3,411 $

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

United States

International

Total

Defense
Solutions

Year Ended January 3, 2020

Civil

Health

Total

(in millions)

4,995 $

3,131 $

1,974 $

10,100

371

505

—

876

5,366 $

3,636 $

1,974 $

10,976

Year Ended December 28, 2018

Defense
Solutions

Civil

Health

Total

(in millions)

4,586 $

2,862 $

1,817 $

380

549

—

9,265

929

4,966 $

3,411 $

1,817 $

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.

For fiscal 2019, revenues by contract-type, customer-type and geographic location exclude $118 million recognized
under ASC 842 (see "Note 13—Leases").

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.

Leidos Holdings, Inc. Annual Report - 68

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The components of contract assets and contract liabilities consisted of the following:

Balance sheet line item

Contract assets - current:
Unbilled receivables(1)

Receivables, net

Contract liabilities - current:

Deferred revenue

Accounts payable and accrued liabilities

Contract liabilities - non-current:

Deferred revenue

Other long-term liabilities

January 3,
2020

December 28,
2018

(in millions)

735 $

818

400 $

276

9 $

(1) Balances exclude $572 million and $381 million determined to be billable at January 3, 2020, and December 28, 2018, respectively. These

amounts are included as billed and billable receivables (see "Note 9—Receivables").

The decrease in unbilled receivables was primarily due to the timing of billings and revenue recognized on certain
contracts. The increase in deferred revenue was primarily due to the timing of advance payments from customers
partially offset by revenue recognized during the period.

During fiscal 2019 and 2018, the Company recognized revenues of $207 million and $208 million, respectively,
relating to amounts that were included as a contract liability at December 28, 2018 and December 30, 2017 (date of
adoption).

The Company did not recognize any impairment losses on contract assets during fiscal 2019 and 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 2019, the Company completed the acquisition of IMX Medical
Management Services, Inc. and its affiliated businesses ("IMX"). During fiscal 2016, the Company completed the
acquisition of Lockheed Martin's Information Systems & Global Solutions business ("IS&GS Business").

On January 31, 2020, the Company completed the acquisition of Dynetics, Inc. ("Dynetics"), an industry-leading
applied research and national security solutions company. Additionally, on February 3, 2020, the Company entered
into a definitive agreement to acquire L3Harris Technologies' ("L3Harris") security detection and automation
businesses (see "Note 27—Subsequent Events").

IMX Acquisition

On August 15, 2019, the Company completed the acquisition of IMX for preliminary purchase consideration of $94
million, which included $90 million of cash paid and an additional $4 million paid to extinguish IMX's existing term
loans and credit facility balances. The acquisition extends the Company's independent medical evaluation coverage
area for commercial and federal customers.

The Company recorded $50 million of goodwill (which is deductible for tax purposes) and $42 million of intangible
assets. The intangible assets primarily consist of $41 million for customer relationships. The amortization period for
the customer relationships is 10 years.

At January 3, 2020, the Company had not finalized the determination of fair values allocated to assets and liabilities,
including, but not limited to, accounts receivable.

Lockheed Martin Transaction

On August 16, 2016, a wholly-owned subsidiary of Leidos Holdings, Inc. merged with the IS&GS Business in a
Reverse Morris Trust transaction (the "IS&GS Transactions").

Leidos Holdings, Inc. Annual Report - 69

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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
statements 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 statements
of cash flows.

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

January 3,
2020

December 28,
2018

December 29,
2017

(in millions)

— $

3 $

— $

29 $

102

These acquisition and integration costs have been recorded within Corporate and presented in "Acquisition,
integration and restructuring costs" on the consolidated statements of income.

Note 7—Divestitures

Health Staff Augmentation Business

On September 12, 2019, the Company's Health segment disposed of its health staff augmentation business that
was primarily focused on implementation and optimization services to hospital centers. During the quarter ended
January 3, 2020, working capital adjustments were finalized, resulting in a final sales price of $13 million. This
consideration included $12 million of cash proceeds and expenses the buyer paid on the Company's behalf. The
Company recorded an immaterial loss, net of assets divested of $12 million and transaction costs. The loss was
recorded in "Other income (expense), net" on the consolidated statements of income. This disposition did not meet
the criteria to be classified as a discontinued operation in the Company's financial statements.

Commercial Cybersecurity Business

On February 20, 2019, the Company's Civil segment disposed of its commercial cybersecurity business in order to
focus on providing solutions, including cybersecurity, to the Company's core markets of governments and highly
regulated industries. In February 2019, the Company received initial proceeds of $171 million. During the quarter
ended June 28, 2019, working capital adjustments were finalized, resulting in a final sales price of $166 million. On
September 30, 2019, the Company paid $5 million related to the finalization of net working capital. The Company
recorded a pre-tax gain on sale of $88 million, net of $68 million of assets divested and $10 million in transaction
related costs. The net assets divested included $14 million of receivables, $57 million of goodwill and $13 million of
accounts payable and accrued liabilities. The gain was recorded in "Other income (expense), net" on the
consolidated statements of income. This disposition did not meet the criteria to be classified as a discontinued
operation in the Company's financial statements.

Leidos Holdings, Inc. Annual Report - 70

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Plainfield Renewable Energy Holdings LLC

As part of the sale of its equity interest in Plainfield Renewable Energy Holdings LLC ("Plainfield") in 2015, the
Company received a cash payment of $29 million and a secured promissory note of $73 million (the "Note"). In
January 2018, the Company entered into negotiations with the equity owners of Plainfield regarding the Plainfield
Recapitalization Plan, which resulted in a $40 million net realizable value of the Note as of December 29, 2017. As
a result, the Company recorded a $33 million impairment of the Note in fiscal 2017, which was presented in "Other
income (expense), net" on the consolidated statements of income.

On August 23, 2018, the Company received proceeds of $40 million in full satisfaction of Plainfield's obligations
under the Note.

Note 8—Restructuring Expenses

After the acquisition of the IS&GS Business, the Company began an initiative to reduce its cost structure, which
included optimization of its real estate portfolio by vacating certain facilities and consolidating others, and by
reducing headcount.

The restructuring expenses related to the acquisition were as follows:

Severance costs

Lease termination expenses

Restructuring expenses related to the IS&GS Business

Year Ended

January 3,
2020

December 28,
2018

December 29,
2017

(in millions)

— $

1 $

2 $

8 $

As of January 3, 2020, the Company has recognized $58 million of restructuring expenses relating to the 2016
acquisition of the IS&GS Business. These restructuring expenses have been recorded within Corporate and
presented in "Acquisition, integration and restructuring costs" on the consolidated statements of income.

Note 9—Receivables

The components of receivables, net consisted of the following:

Billed and billable receivables

Unbilled receivables

Allowance for doubtful accounts

January 3,
2020

December 28,
2018

(in millions)

1,023 $

735

(24)

1,067

818

(8)

1,734 $

1,877

Leidos Holdings, Inc. Annual Report - 71

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10—Goodwill

The following table presents changes in the carrying amount of goodwill by reportable segment:

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)
Goodwill re-allocation

Acquisition of IMX

Divestiture of health staff augmentation business

Foreign currency translation adjustments

Adjustment to goodwill
Goodwill at January 3, 2020(1)

Defense
Solutions

Civil

Health

Total

(in millions)

2,055 $

1,998 $

921 $

4,974

(40)

—

—
2,015

—

(4)

(11)

(57)

(6)
1,924

(25)

—

—
921

—

(5)

—

(51)

(57)

(6)
4,860

—

(5)

2,039 $

1,907 $

966 $

4,912

(1) Carrying amount includes accumulated impairment losses of $369 million and $117 million within the Health and Civil segments, respectively.

Effective the beginning of fiscal 2019, the Company changed the composition of its Defense Solutions reportable
segment, which resulted in the identification of new operating segments and reporting units within Defense
Solutions. In addition, certain contracts were reassigned between the Civil and Defense Solutions reportable
segments (see "Note 24—Business Segments"). Consequently, the carrying amount of goodwill was re-allocated
among the reporting units for the purpose of testing goodwill for impairment.

In conjunction with the changes mentioned above, the Company evaluated goodwill for impairment using a
quantitative step one analysis, both before and after the changes were made, and determined that goodwill was not
impaired.

In fiscal 2019, the Company performed a qualitative analysis for all reporting units and determined that it was more
likely than not that the fair values of the reporting units were in excess of the individual reporting units carrying
values, and as a result, a quantitative step one analysis was not necessary.

In fiscal 2018, the Company performed a qualitative and quantitative analysis on its reporting units. Based on the
qualitative analysis performed during the Company's annual impairment evaluation for fiscal 2018 for certain of its
reporting units, it was determined that it was 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 January 3, 2020 and December 28, 2018, the Company recorded an immaterial correction of
$3 million and $6 million, respectively, with respect to fair value of assets and liabilities acquired from the IS&GS
Transactions.

Leidos Holdings, Inc. Annual Report - 72

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11—Intangible Assets

Intangible assets consisted of the following:

January 3, 2020

December 28, 2018

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
Trade names

Total finite-lived intangible assets

Indefinite-lived intangible assets:

Trade names

Total intangible assets

1,003 $
102
45
1
1,151

4
1,155 $

(536) $

467 $

1,003 $

(374) $

(83)
(6)
—
(625)

—

19
39
1
526

93
4
—
1,100

(74)
(4)
—
(452)

—

(625) $

530 $

1,104 $

(452) $

629

19
—
—
648

652

Amortization expense related to intangible assets was $173 million, $201 million and $281 million for fiscal 2019,
2018 and 2017, respectively.

The estimated annual amortization expense related to finite-lived intangible assets as of January 3, 2020, is as
follows:

Fiscal Year Ending

2020

2021

2022

2023

2024

2025 and thereafter

(in millions)

133

112

526

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.

Leidos Holdings, Inc. Annual Report - 73

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12—Property, Plant and Equipment

Property, plant and equipment, net consisted of the following:

Computers and other equipment

Leasehold improvements

Office furniture and fixtures

Buildings and improvements

Land

Construction in progress

Less: accumulated depreciation and amortization

January 3,
2020

December 28,
2018

(in millions)

259 $

203

104

630

(343)

287 $

233

206

586

(349)

237

Depreciation expense was $61 million, $56 million and $55 million for fiscal 2019, 2018 and 2017, respectively.

Sale and Leaseback Agreements

Gaithersburg, MD Property

On December 31, 2018, the Company closed the sale and leaseback agreement relating to its land and building in
Gaithersburg, MD. The Company received proceeds of $31 million, net of selling costs, for the property, which had a
carrying value of $31 million. The term of the lease is expected to end during fiscal 2020.

During the quarter ended March 30, 2018, an impairment charge of $7 million associated with this property was
recorded within Corporate.

San Diego, CA Properties

On December 28, 2018, the Company closed the sale and leaseback agreement relating to two buildings and the
adjacent land in San Diego, CA for consideration of $79 million, net of selling costs. The carrying value of the land
and buildings was $14 million. The Company received cash proceeds of $14 million upon closing, which were
recorded as financing activities on the consolidated statements of cash flows, and recognized a short-term
receivable for the remaining $65 million of consideration.

Prior to the adoption of ASC 842, the consideration of $79 million was accounted for as a financing transaction and
a note payable was recorded. Under ASC 842, the transaction qualified as a sale-leaseback and consequently the
debt of $79 million and the carrying value of the property of $14 million, net of the related tax impact of $17 million,
were reclassified into retained earnings as a cumulative effect adjustment. The proceeds of $65 million received in
fiscal 2019 were recorded as investing activities on the consolidated statements of cash flows.

Former Headquarters

On December 17, 2019, the Company modified the $25 million promissory note received in connection with the sale
of the former headquarters in fiscal 2015, thereby extending the maturity date to December 17, 2020, with an option
to extend for one additional year. In conjunction with the modification, the Company collected $5 million of principal
and $2 million of interest.

Leidos Holdings, Inc. Annual Report - 74

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13—Leases

Lessee

The Company's ROU assets and lease liabilities consisted of the following:

ROU assets:

Finance leases

Operating leases

Current lease liabilities:

Finance leases

Operating leases

Balance sheet line item

Property, plant and equipment, net

Operating lease right-of-use assets, net

Long-term debt, current portion

Accounts payable and accrued liabilities

Non-current lease liabilities:

Finance leases

Operating leases

Long-term debt, net of current portion

Operating lease liabilities

The Company's total lease cost for the periods presented consisted of the following:

Finance lease cost:

Amortization of ROU assets

Interest on lease liabilities

Operating lease cost(1)

Variable lease cost

Short-term lease cost

Less: Sublease income

Total lease cost

January 3,
2020

(in millions)

400

407

132

137

326

328

Year Ended

January 3,
2020

(in millions)

155

107

(6)

272

(1) Includes ROU lease expense of $136 million.

The Company's lease costs and sublease income are included in "Cost of revenues" and "Selling, general and
administrative expenses" within the consolidated statements of income.

Leidos Holdings, Inc. Annual Report - 75

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Lease terms and discount rates related to leases were as follows:

Weighted-average remaining lease term (in years):

Finance leases

Operating leases

Weighted-average discount rate:

Finance leases

Operating leases

Other information related to leases was as follows:

Cash paid for amounts included in measurement of lease liabilities:

Operating cash related to finance leases

Operating cash related to operating leases

Financing cash flows related to finance leases

Lease liabilities arising from obtaining ROU assets:

Operating lease liabilities

January 3,
2020

2.4

5.7

4.2%

4.1%

Year Ended

January 3,
2020

(in millions)

163

141

The change in ROU assets has been netted with the change in lease liabilities within cash flows from operations on
the consolidated statements of cash flows.

The Company's future minimum lease commitments of its finance and operating leases on an undiscounted basis,
reconciled to the respective lease liability at January 3, 2020, were as follows:

Fiscal Year Ending

2020

2021

2022

2023

2024

2025 and thereafter

Total undiscounted cash flows

Less: imputed interest

Lease liability as of January 3, 2020

Finance lease
commitments

Operating
lease
commitments

(in millions)

5 $

145

—

7 $

113

516

(58)

458

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, VA. The Company
will occupy the space for an initial term of 148 months and lease expense will be $11 million for the first lease year,
with an annual rent expense increase of 2.5%. The Company currently expects to take occupancy of the building in
March 2020, and terminate the lease agreements for its current corporate headquarters in the second quarter of
fiscal 2020.

Leidos Holdings, Inc. Annual Report - 76

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Disclosures related to periods prior to ASC 842

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

(in millions)

163 $

(1)

162 $

181

(3)

178

Future minimum lease commitments and sublease receipts, under non-cancelable operating leases in effect at
December 28, 2018, were as follows

Fiscal Year Ending

2019

2020

2021

2022

2023

2024 and thereafter

Total

Lessor

Capital lease
commitments

Operating
lease
commitments

(in millions)

Sublease
receipts

3 $

144 $

—

114

246

3 $

713 $

—

As of January 3, 2020, the Company had a total net investment in sales-type leases, which relates to lease
payment receivables, of $57 million. The current and non-current portions of net investment in sales-type leases are
included within "Other current assets" and "Other assets", respectively, on the Company's consolidated balance
sheets.

The components of lease income were as follows:

Income statement line item

Sales-type leases:

Selling price at lease commencement

Revenues

Cost of underlying asset

Cost of revenues

Operating loss

Interest income on lease receivables

Revenues

Operating lease income

Total lease income

Revenues

Leidos Holdings, Inc. Annual Report - 77

Year Ended

January 3,
2020

(in millions)

(2)

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of January 3, 2020, undiscounted cash flows for sales-type and operating leases for the next five years and
thereafter are as follows:

Fiscal Year Ending

2020

2021

2022

2023

2024

2025 and thereafter

Total undiscounted cash flows

Present value of lease payments as lease receivables

Difference between undiscounted cash flows and discounted cash flows

Note 14—Fair Value Measurements

Sales-type
leases

Operating
leases

(in millions)

35 $

—

65 $

110

The Company's financial instruments measured on a recurring basis at fair value consisted of the following:

Financial assets:

Derivatives

Financial liabilities:

Derivatives

January 3, 2020

December 28, 2018

Carrying value

Fair value

Carrying value

Fair value

(in millions)

2 $

— $

—

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 15—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 22—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 note receivable (see "Note 12
—Property, Plant and Equipment") of $20 million and $24 million as of January 3, 2020 and December 28, 2018,
respectively, approximates fair value as the stated interest rates within the agreements were consistent with the
current market rates used in notes with similar terms in the market (Level 2 inputs).

As of January 3, 2020, and December 28, 2018, the fair value of debt was $3.1 billion for both periods, and the
carrying amount was $3.0 billion and $3.1 billion, respectively (see "Note 16—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).

On August 15, 2019, the Company recorded non-financial instruments measured at fair value on a non-recurring
basis in connection with the acquisition of IMX (see "Note 6—Acquisitions"). The preliminary fair values of the
assets acquired and liabilities assumed were determined using Level 3 inputs. The Company also had a real estate
property measured at fair value (Level 2 inputs) on March 30, 2018, which resulted in an impairment charge of $7
million (see "Note 12—Property, Plant and Equipment"). As of January 3, 2020, and December 28, 2018, the
Company did not have any assets or liabilities measured at fair value on a non-recurring basis.

Leidos Holdings, Inc. Annual Report - 78

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15—Derivative Instruments

The fair value of the Company's interest rate swaps was as follows:

Balance sheet line item

Asset derivatives

January 3,
2020

December 28,
2018

(in millions)

Fair value interest rate swaps

Other assets

2 $

—

Liability derivatives

Balance sheet line item

January 3,
2020

December 28,
2018

Fair value interest rate swaps

Cash flow interest rate swaps

Other long-term liabilities

(in millions)

— $

75 $

The fair value adjustment to the fair value interest rate swap and the underlying debt was an increase of $5 million
and a decrease of $3 million for the year ended January 3, 2020, and December 28, 2018, respectively.

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 16—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

January 3,
2020

December 28,
2018

January 3,
2020

December 28,
2018

Long-term debt, net of current portion

452 $

(in millions)

447 $

2 $

(3)

Leidos Holdings, Inc. Annual Report - 79

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 February 2018, the Company entered into interest
rate swap agreements to hedge the cash flows of an additional $250 million of its Variable Rate Loans. 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 remained within accumulated other comprehensive loss and is being
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.

The effect of the Company's cash flow hedges on other comprehensive (loss) income and earnings for the periods
presented was as follows:

Total interest expense, net presented in the consolidated statements of

income in which the effects of cash flow hedges are recorded

Amount recognized in other comprehensive (loss) income

Amount reclassified from accumulated other comprehensive loss to

interest expense, net

Year Ended

January 3,
2020

December 28,
2018

December 29,
2017

(in millions)

133 $

138 $

140

(55) $

(7) $

(7)

(6)

—

The Company expects to reclassify gains of $1 million from accumulated other comprehensive loss into earnings
during the next 12 months.

Leidos Holdings, Inc. Annual Report - 80

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16—Debt

The Company's debt consisted of the following:

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

Stated
interest rate

Effective
interest rate

January 3,
2020(1)

December 28,
2018(1)

(in millions)

4.53% $

452 $

4.45%

5.95%

3.31%

3.56%

7.13%

5.50%

6.03%

3.74%

3.76%

3.91%

7.43%

5.88%

216

581

242

447

216

617

258

1,075

1,085

247

158

2,986

(61)

246

158

3,124

(72)

Notes payable and finance leases due on various

dates through fiscal 2022

2.85%-5.49%

Various

Total long-term debt

Less: current portion

Total long-term debt, net of current portion

2,925 $

3,052

(1) The carrying amounts of the senior secured term loans and notes and unsecured notes as of January 3, 2020, and December 28, 2018,
include the remaining principal outstanding of $3,004 million and $3,073 million, respectively, less total unamortized debt discounts and
deferred debt issuance costs of $35 million and $43 million, respectively, and a $2 million asset and a $3 million liability, respectively, related to
the fair value of the interest rate swaps (see "Note 15—Derivative Instruments").

Senior Term Loans and Notes

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%. 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. 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 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. During the periods presented, the margin for the Term Loan A loans ranged from 1.25% to 2.00%,
depending on the Company's senior secured leverage ratio, and is computed on a quarterly basis. At January 3,
2020, the current margin on Term Loan A was 1.50% and the margin on Term Loan B was 1.75%.

Leidos Holdings, Inc. Annual Report - 81

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During fiscal 2019, 2018 and 2017, the Company made $80 million, $59 million, and $209 million of principal
payments, respectively, on its long-term debt. This activity included $69 million, $46 million, and $76 million of
principal payments on its senior secured term loans during fiscal 2019, 2018 and 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 principal payments above,
the Company prepaid $130 million of its senior secured term loans during fiscal 2017.

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 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 as an offset against the carrying value of debt and capitalized within "Other assets" in the consolidated
balance sheets, respectively. Amortization for the senior secured term loans and notes, unsecured notes and
revolving credit facility was $10 million for fiscal 2019 and 2018 and $13 million for fiscal 2017.

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 January 3, 2020.

Future minimum payments of debt are as follows:

Fiscal Year Ending

2020

2021

2022

2023

2024

2025 and thereafter

Total principal payments

Less: unamortized debt discount and issuance costs

Total long-term debt

(in millions)

519

103

102

619

1,667

3,021

(35)

2,986

On December 17, 2019, the Company obtained debt financing commitments from various financial institutions in
connection with its entry into a Purchase Agreement with Dynetics. The lenders have provided commitments in an
amount up to $4.4 billion in the aggregate, consisting of a $1.65 billion senior unsecured 364-day bridge loan facility
to support the Dynetics acquisition (the "Dynetics Bridge Facility") and a $2.75 billion senior unsecured 364-day
bridge loan facility to support the refinancing of certain credit facilities (the "Refinancing Bridge Facility"). In January
2020, the Company entered into various debt transactions (see "Note 27—Subsequent Events").

As the Company has the ability to consummate and intends to refinance its existing debt, the carrying value of the
$450 million senior secured notes maturing in December 2020 has not been reclassified into the current portion of
long-term debt and was reflected within “Long-term debt, net of current portion” as of January 3, 2020.

Revolving Credit Facility

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 Company refinanced this credit facility during January 2020 (see
"Note 27—Subsequent Events"). During fiscal 2019 and 2018, there were no borrowings under the credit facility.

Leidos Holdings, Inc. Annual Report - 82

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 3.75
subsequent to February 16, 2019. The Company was in compliance with these financial covenants as of January 3,
2020.

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, CA properties (see "Note 12—Property, Plant and Equipment" for further
information). Upon adoption of ASC 842, the transaction qualified as a sale-leaseback and consequently the debt
was reclassified into retained earnings as a cumulative effect adjustment.

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 17—Accumulated Other Comprehensive Loss

Changes in the components of accumulated other comprehensive loss were as follows:

Foreign
currency
translation
adjustments

Unrecognized
gain (loss) on
derivative
instruments

Pension
adjustments

Total accumulated
other comprehensive
loss

Balance at December 30, 2016

Other comprehensive income

Taxes

Balance at December 29, 2017

Cumulative adjustments related to ASU

adoptions

Balance at December 30, 2017

Other comprehensive loss

Taxes

Reclassification from accumulated other

comprehensive loss

Balance at December 28, 2018

Other comprehensive income (loss)

Taxes

Reclassification from accumulated other

comprehensive loss

(7) $

10 $

(7) $

(in millions)

(12)

(65)
4

—

(41)
5

—

(6)

(7)

(6)

(55)

(7)

—

(4)

(2)

(1)

—

(3)

(1)

—

Balance at January 3, 2020

(33) $

(4) $

(4)

(18)

(73)

(6)

(30)

(51)

(7)

(70)

Reclassifications for unrecognized gain (loss) on derivative instruments are associated with outstanding debt and
are recorded in "Interest expense, net" on the consolidated statements of income. See "Note 15—Derivative
Instruments" for more information on the Company's interest rate swap agreements.

Leidos Holdings, Inc. Annual Report - 83

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Reclassifications for pension adjustments are recorded in "Selling, general and administrative expenses" on the
consolidated statements of income.

Note 18—Composition of Certain Financial Statement Captions

Balance Sheet

Other current assets:

Transition costs and project assets(1)
Pre-contract costs
Other(2)

Other assets:

Transition costs and project assets(1)
Equity method investments(3)
Other(2)

Accounts payable and accrued liabilities:

Accrued liabilities
Accounts payable
Deferred revenue
Other(2)(4)

Accrued payroll and employee benefits:

Accrued vacation
Salaries, bonuses and amounts withheld from employees’ compensation

January 3,
2020

December 28,
2018

(in millions)

98 $

6
306
410 $

207 $

19
200
426 $

822 $
592
400
23
1,837 $

232 $
203
435 $

145
41
357
543

22
26
134
182

650
547
276
18
1,491

225
248
473

(1) During the year ended January 3, 2020 and December 28, 2018, the Company recognized $417 million and $146 million, respectively, of

amortization related to its transition costs and project assets.

(2) Balance represents items that are not individually significant to disclose separately.
(3) Balances are net of $25 million and $29 million of dividends received during fiscal 2019 and fiscal 2018, respectively, that were recorded in

cash flows provided by operating activities of continuing operations on the consolidated statements of cash flows.

(4) During the year ended January 3, 2020, the Company combined "Dividends payable and "Income taxes payable" with "Accounts payable and
accrued liabilities" on the consolidated balance sheets. As a result, the prior year activity has been reclassified to conform with the current year
presentation.

Income Statement

Interest expense, net:

Interest expense

Interest income

Other income (expense), net

Gain on sale of businesses
Promissory note impairment

(Loss) gain on foreign currencies

Other (expense) income, net

Year Ended

January 3,
2020

December 28,
2018

December 29,
2017

(in millions)

(147) $

(145) $

(148)

(133) $

(138) $

(140)

88 $
—

(1)

—

— $
—

(3)

—
(33)

87 $

(1) $

(26)

Leidos Holdings, Inc. Annual Report - 84

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19—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

January 3,
2020

December 28,
2018

December 29,
2017

(in millions)

151

153

143

145

152

154

Anti-dilutive stock-based awards are excluded from the weighted average number of shares outstanding used to
compute diluted EPS. For fiscal 2019 and 2017, there were no significant anti-diluted equity awards. For fiscal
2018, there was 1 million of outstanding stock options and vesting stock awards that were anti-dilutive.

Share Repurchases

In the third quarter of fiscal 2019, the Company entered into an Accelerated Share Repurchase ("ASR") agreement
with a financial institution to repurchase shares of its outstanding common stock. During the quarter ended
September 27, 2019, the Company paid $200 million to the financial institution and received 2.4 million shares
related to the ASR agreement. The total number of shares that the Company received under the ASR agreement
was based on the volume-weighted-average-price of $84.25 per share for the period August 1, 2019 to September
25, 2019. The purchases were recorded to "Additional paid-in capital" in the consolidated balance sheets. All shares
delivered were immediately retired.

In the first quarter of fiscal 2019, the Company entered into an ASR agreement with a financial institution to
repurchase shares of its outstanding common stock. During the quarter ended March 29, 2019, the Company paid
$200 million to the financial institution and received an initial delivery of 2.6 million shares. In April 2019, the
Company received the final delivery of 0.6 million shares related to the ASR agreement. The total number of shares
that the Company received under the ASR agreement was based on the volume-weighted-average-price of $63.52
per share for the period February 21, 2019 to April 29, 2019. The purchases were recorded to "Additional paid-in
capital" in the consolidated balance sheets. All shares delivered were immediately retired.

In the fourth quarter of fiscal 2018, the Company entered into an uncollared 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.

During fiscal 2019 and 2018, the Company also made open market repurchases of its common stock for an
aggregate purchase price of $25 million and $167 million, respectively. All shares repurchased were immediately
retired. There were no open market repurchases during fiscal 2017.

Leidos Holdings, Inc. Annual Report - 85

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 20—Stock-Based Compensation

Plan Summaries

As of January 3, 2020, 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. The Company grants service-based awards that generally vest or become exercisable 25% a year over
four years or cliff vest in three years. As of January 3, 2020, 4.4 million shares of Leidos' stock were reserved for
future issuance under the 2017 Omnibus Incentive Plan and the 2006 Equity Incentive Plan.

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 and 2017, 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 2019, 2018 and 2017, $25 million, $11 million
and $10 million, respectively, was received from ESPP plan participants for the issuance of Leidos' stock. A total of
4.2 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

January 3,
2020

December 28,
2018

December 29,
2017

(in millions)

52 $

44 $

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 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 and fiscal 2019.

Leidos Holdings, Inc. Annual Report - 86

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. During fiscal 2017 and fiscal 2018, Leidos utilized the simplified
method for the expected term, which represented an appropriate period of time that the options granted were
expected to remain outstanding between the weighted-average vesting period and end of the respective contractual
term. Upon re-examining the Company's exercise history, the methodology used to calculate the expected term
changed in fiscal 2019. Based on actual historical settlement data, the midpoint scenario is utilized with a one-year
grant date filter assumption for outstanding options. The Company uses historical data to estimate forfeitures and
was derived in the same manner as in the prior years presented.

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:

Weighted average grant-date fair value

Expected term (in years)

Expected volatility

Risk-free interest rate

Dividend yield

Stock option activity for each of the periods presented was as follows:

Year Ended

January 3,
2020

December 28,
2018

December 29,
2017

11.89

13.85

11.53

4.4

24.3%

2.4%

2.2%

4.7

26.6%

2.6%

2.0%

4.7

29.7%

1.9%

2.5%

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

Options granted
Options forfeited or expired
Options exercised

Outstanding at January 3, 2020
Exercisable at January 3, 2020
Vested and expected to vest in the future as of January

3, 2020

Shares of
stock under
stock options

(in millions)

Weighted
average
exercise price

Weighted
average
remaining
contractual
term

Aggregate
intrinsic value

(in years)

(in millions)

3.3 $
0.5
(0.2)
(0.8)
2.8 $
0.4
(0.2)
(0.6)
2.4 $
0.5
—
(0.5)
2.4
1.4 $

29.77
53.51
35.72
27.23
34.38
63.75
49.65
30.40
39.41
63.61
58.08
30.86
46.04
37.04

2.4 $

45.80

4.1 $

3.9 $

3.8 $

3.8
2.7 $

3.8 $

23
86

24
36

21
128
89

126

As of January 3, 2020, 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 1.9 years. Tax benefits from
stock options exercised for fiscal 2019, 2018 and 2017 were $5 million, $6 million and $7 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.

Leidos Holdings, Inc. Annual Report - 87

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restricted stock units and awards activity for each of the periods presented was as follows:

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

Awards granted

Awards forfeited
Awards vested

Unvested stock awards at January 3, 2020

Shares of stock
under stock
awards

(in millions)

Weighted
average grant-
date fair value

2.5 $

0.8

(0.3)

(1.0)

2.0 $

0.6

(0.2)

(0.4)

2.0 $

0.6

(0.1)

(1.1)

1.4 $

40.39

53.91

45.89

41.02

44.96

64.05

42.67

44.60

50.85

64.70

60.20

44.10

60.91

As of January 3, 2020, 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 2019, 2018 and 2017, was $66 million, $22 million and
$33 million, respectively. In addition, the fair value of dividend equivalents with respect to restricted stock units that
vested in fiscal 2019 and 2018 was $1 million and in fiscal 2017 was $13 million.

Performance-Based Stock Awards

The Company's performance-based stock awards vest and the stock is issued at the end of a three-year period
based upon the achievement of specific performance criteria, with the number of shares ultimately awarded, if any,
ranging up to 150% of the specified target awards. If performance is below the threshold level of performance, no
shares will be issued.

For awards granted during fiscal 2019, 2018 and 2017, 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 2019, 2018 and 2017, 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.

Leidos Holdings, Inc. Annual Report - 88

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Performance-based stock award activity for each of the periods presented was as follows:

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

Awards granted

Awards forfeited

Awards vested

Unvested at January 3, 2020

Expected number
of shares of stock
to be issued under
performance-based
stock awards

(in millions)

Weighted
average grant-
date fair value

0.4 $

0.2

(0.1)

0.5 $

0.3

(0.1)

(0.2)

0.5 $

0.2

—

(0.1)

0.6 $

44.44

57.94

42.85

50.34

61.43

61.81

44.04

57.36

66.92

66.72

45.83

63.66

The weighted average grant date fair value for performance-based stock, excluding those with a market condition,
during fiscal 2019, 2018 and 2017 was $62.66, $63.76 and $53.58, respectively. The weighted average grant date
fair value for performance-based stock with market conditions that were granted during fiscal 2019, 2018 and 2017,
was $72.53, $71.50 and $62.30, 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

January 3,
2020

December 28,
2018

December 29,
2017

22.02%

2.39%

25.37%

2.35%

27.19%

1.53%

62.66

65.00

53.73

As of January 3, 2020, there was $12 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 2019, 2018 and 2017 was $9 million, $13 million, and $4 million, respectively.

Note 21—Income Taxes

In December 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax
Cuts and Jobs Act (“Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code. As a result, the
Company recorded a preliminary net tax benefit of $115 million in fiscal 2017, and in accordance with Staff
Accounting Bulletin No.118, the company decreased its preliminary net tax benefit estimate by $4 million during
fiscal 2018.

Leidos Holdings, Inc. Annual Report - 89

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Less than 10% of the Company's income before income taxes for fiscal 2019, 2018 and 2017 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

January 3,
2020

December 28,
2018

December 29,
2017

(in millions)

147 $

(3)

54 $

(39)

(10)

196 $

28 $

130

(141)

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

January 3,
2020

December 28,
2018

December 29,
2017

Amount computed at the statutory federal income tax rate

State income taxes, net of federal tax benefit

Excess tax benefits from stock-based compensation

Research and development credits

Change in valuation allowance for deferred tax assets

Stock basis in subsidiary held for sale

Change in accruals for uncertain tax positions

Dividends paid to employee stock ownership plan

Impact of foreign operations

Taxable conversion of a subsidiary

Change in statutory federal tax rate

Capitalized transaction costs

Other

Total
Effective income tax rate

182

(11)

(2)

—

(1)

(in millions)

128

138

(12)

(7)

—

(4)

—

(125)

(4)

(9)

(49)

(16)

(2)

—

(17)

(10)

—

196

22.6%

4.6%

7.4%

The Company's effective tax rate for fiscal 2019 was favorably impacted primarily by excess tax benefits related to
employee stock-based payment transactions and federal research tax credits, partially offset by an increase in
valuation allowances arising from foreign withholding tax and an increase in taxes related to the sale of the
commercial cybersecurity business.

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.

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.

Leidos Holdings, Inc. Annual Report - 90

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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:

Operating lease liabilities

Accrued vacation and bonuses

Reserves

Deferred compensation

Credits and net operating losses carryovers

Vesting stock awards

Accumulated other comprehensive loss

Deferred rent and tenant allowances

Investments

Deferred gain

Other

Total deferred tax assets

Valuation allowance

Deferred tax assets, net of valuation allowance

Purchased intangible assets

Operating lease right-of-use assets

Deferred revenue

Employee benefit contributions

Accumulated other comprehensive income

Partnership interest

Other

Total deferred tax liabilities

Net deferred tax liabilities

January 3,
2020

December 28,
2018

(in millions)

115 $

—

311

(20)

291

(339) $

(103)

(17)

(6)

—

(10)

(475)

(184) $

—

250

(28)

222

(326)

—

(40)

(4)

(6)

(2)

(14)

(392)

(170)

At January 3, 2020, the Company had state net operating losses of $77 million and state tax credits of $7 million.
Both will begin to expire in fiscal 2020; however, the Company expects to utilize $24 million and $7 million of these
state net operating losses and state tax credits, respectively. The Company also had foreign net operating losses of
$44 million, which do not expire. The Company expects to utilize $9 million of these foreign net operating losses.

Our valuation allowance for deferred tax assets was $20 million and $28 million as of January 3, 2020 and
December 28, 2018, respectively. The valuation allowance decreased by $8 million primarily due to the sale of the
commercial cybersecurity business and releases related to the expected utilization of certain carryover attributes,
partially offset by an increase related to foreign withholding taxes.

Leidos Holdings, Inc. Annual Report - 91

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:

Other current assets:

Prepaid income taxes and tax refunds receivable

Accounts payable and accrued liabilities:

Income taxes payable

Deferred tax liabilities

Other long-term liabilities:

Unrecognized tax benefits

January 3,
2020

December 28,
2018

(in millions)

24 $

19 $

184

170

1 $

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 fiscal 2018 and 2017, 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(1)
Settlements with taxing authorities(1)
Unrecognized tax benefits at end of year

Unrecognized tax benefits that, if recognized, would affect the effective

income tax rate

Year Ended

January 3,
2020

December 28,
2018

December 29,
2017

(in millions)

6 $

10 $

—

11
(1)

(11)

5 $

4 $

—
(5)

(2)

6 $

2
(2)

(1)

(1) Settlements with taxing authorities for fiscal 2018 and 2017 have been reclassified from "Reductions for tax positions related to prior years" to

"Settlements with taxing authorities" to reflect the current year change in presentation.

At January 3, 2020, the balance of unrecognized tax benefits included liabilities for uncertain tax positions of $5
million, $1 million of which were classified as other long-term liabilities on the Company's consolidated balance
sheets. 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.

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 29, 2017. With a few exceptions, as of
January 3, 2020, the Company is no longer subject to state, local, or foreign examinations by the tax authorities for
fiscal years ending on or before January 1, 2016.

Leidos Holdings, Inc. Annual Report - 92

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

Note 22—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 $105 million for fiscal 2019 and $94 million for fiscal 2018
and 2017.

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 cash compensation 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 salary and 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 20—Stock-Based Compensation"). Under the MSCP, restricted stock share
units 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.

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 January 3, 2020, and December 28, 2018, was $121 million and $103 million,
respectively. The increase in the projected benefit obligation was primarily due to a loss resulting from changes in
assumptions used in the valuation and adverse exchange rate movements in the British pound when compared to
the U.S. dollar.

The fair value of plan assets as of January 3, 2020, and December 28, 2018, was $139 million and $115 million,
respectively. The plan funding status was overfunded $18 million and $12 million as of January 3, 2020, and
December 28, 2018, respectively, and included within "Other assets" on the consolidated balance sheets.

Leidos Holdings, Inc. Annual Report - 93

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 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:

Fixed asset additions

Non-cash financing activity:

Real estate financing transaction

Notes payable and capital lease obligations

Year Ended

January 3,
2020

December 28,
2018

December 29,
2017

(in millions)

172 $

133 $

142

27 $

— $

—

65 $

—

133

214

—

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

January 3,
2020

December 28,
2018

(in millions)

668 $

717 $

327

369

The restricted cash is recorded within "Other current assets" in the Company's consolidated balance sheets.

The restricted cash is primarily comprised of advances from customers that are restricted as to use for certain
expenditures related to that customer's contract.

Leidos Holdings, Inc. Annual Report - 94

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 24—Business Segments

The Company's operations and reportable segments are organized around the customers and markets it serves.
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.

The Company's business is aligned into three reportable segments (Defense Solutions, Civil and Health).
Additionally, the Company separately presents the unallocable costs associated with corporate functions as
Corporate. Effective the beginning of fiscal 2019, the Company changed the composition of its Defense Solutions
reportable segment to better align the operations within the reportable segment to the customers it serves. This
resulted in the identification of new operating segments within Defense Solutions. In addition, certain contracts were
reassigned between the Civil and Defense Solutions reportable segments. While this activity did not have a material
impact on the Company's reportable segments, prior year segment results have been recast to reflect this change.

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, government agencies of U.S. allies abroad and other federal 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 well-being 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 - 95

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes business segment information for the periods presented:

Revenues:

Defense Solutions
Civil
Health

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

January 3,
2020

December 28,
2018

December 29,
2017

(in millions)

5,367 $
3,729
1,998

4,966 $
3,411
1,817

11,094 $

10,194 $

4,989
3,379
1,802
10,170

407 $
295
242
(32)
912 $

60 $
67
46

353 $
284
230
(118)
749 $

68 $
87
46

173 $

201 $

312
221
228
(202)
559

108
132
41
281

The financial performance measures used to evaluate segment performance are revenues and operating income.
As a result, "Interest expense, net," "Other income (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. 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

DoD and U.S. Intelligence Community

U.S. Army

Year Ended

January 3,
2020

December 28,
2018

December 29,
2017

87%
48%

11%

85%
48%

13%

84%
48%

13%

Leidos Holdings, Inc. Annual Report - 96

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 the 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. On February
8, 2019, the Department of Justice 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 ("Defendants"). The complaint alleges violations of the False Claims Act, the Anti-Kickback Act, breach of
contract with DoE, among other things. On January 13, 2020, the Defendants' motions to dismiss were granted in
part and denied in part. Litigation will proceed for the False Claims Act and other common law claims, although the
Anti-Kickback Act claim has been dismissed with prejudice. 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 ("CBCA"), which was stayed pending resolution of the False
Claims Act matter. 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. On
December 10, 2019, MSA received a second final decision by the DoE contracting officer, estimating approximately
$29 million in alleged unallowable profit and associated general and administrative costs during the period from
2015 to 2016 by LMSI. MSA filed an appeal of the second contracting officer's decision, which has been
consolidated with the prior proceeding before the CBCA and stayed pending resolution of the False Claims Act
matter. The DoE and MSA also executed an agreement to defer the entire amount of the disallowed costs from the
second contracting officer's final decision until the CBCA proceedings are finally resolved. The Company has
agreed to indemnify Jacobs Group, LLC 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 January 3, 2020, the Company had a liability of $39 million recorded in the consolidated balance sheets for this
matter. The amount of possible loss ultimately incurred, if any, is subject to a range of complex factors and potential
outcomes that remain to be determined, including information gathered during the course of litigation, pretrial and
trial rulings and other litigation-related developments.

Leidos Holdings, Inc. Annual Report - 97

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. On October 2, 2019, the court granted preliminary approval of
the proposed settlement. The amounts payable by the Company are covered by an insurance policy.

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 withheld payment. In 2013, the Company received an arbitral award by the
International Chamber of Commerce. In 2017, the U.S. District Court granted an order to enforce the arbitration
award and entered judgment in the Company's favor. The Company subsequently commenced enforcement
proceedings against the Greek government. On September 10, 2019, the Company received $59 million on behalf
of Leidos and its subcontractors, substantially, though not entirely, resolving the Company's claim.

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 IS&GS 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.

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. On August 1, 2019, the U.S. Court of Appeals for the Federal
Circuit denied Apple's petition for panel and en banc rehearing, but Apple subsequently filed motions to stay and
vacate the judgment, and for leave to file a second petition for rehearing. These motions were denied by the court
on October 1, 2019. On December 27, 2019, Apple filed a petition in the Apple I matter for a writ of certiorari with
the United States Supreme Court.

Leidos Holdings, Inc. Annual Report - 98

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 filed an appeal of the judgment in the Apple II case with the U.S. Court of Appeals
for the Federal Circuit, and on November 22, 2019, the Federal Circuit affirmed in part, reversed in part and
remanded the Apple II case back to the District Court. The Federal Circuit affirmed that Apple infringed two of the
patents at issue in the case, and ruled that Apple is precluded from making certain patent invalidity arguments.
However, the Federal Circuit reversed the judgment that Apple infringed two other patents at issue, vacated the
prior damages award in the Apple II case, and remanded the Apple II case back to the District Court for further
proceedings regarding damages.

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.

The Company does not have any assets or liabilities recorded in connection with this matter as of January 3, 2020.

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.

As of January 3, 2020, 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 January 3, 2020, the Company believes it has adequately reserved for potential
adjustments from audits or reviews of contract costs.

In February 2019, the Company executed an external restructuring advance agreement with the DoD in accordance
with provisions of the Defense Federal Acquisition Regulation Supplement, which allows the Company to recover
certain specified external restructuring costs.

Note 26—Commitments

The Company has outstanding letters of credit of $66 million as of January 3, 2020, principally related to
performance guarantees on contracts. The Company also has outstanding surety bonds with a notional amount of
$57 million as of January 3, 2020, principally related to performance and subcontractor payment bonds on the
Company's contracts. The value of the surety bonds may vary due to changes in the underlying project status and/
or contractual modifications. The outstanding letters of credit and surety bonds have various terms with the majority
expiring over the next three fiscal years.

Leidos Holdings, Inc. Annual Report - 99

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Reston, VA Lease Agreement

Gaithersburg, MD Lease Agreement

On December 31, 2018, the Company closed the sale and leaseback agreement relating to its land and building in
Gaithersburg, MD (see "Note 12—Property, Plant and Equipment").

San Diego, CA Lease Agreement

On December 28, 2018, the Company closed the sales and leaseback agreement relating to two buildings and the
adjacent land in San Diego, CA (see "Note 12—Property, Plant and Equipment").

Note 27—Subsequent Events

Debt Financing

On January 17, 2020 (the “Closing Date"), the Company entered into a Credit Agreement (the “Credit Agreement”)
with certain financial institutions, which provides for a senior unsecured term loan A facility in an aggregate principal
amount of $1.9 billion (the “Term Loan Facility”) and a $750 million senior unsecured revolving facility (the
“Revolving Facility” and, together with the Term Loan Facility, the “Credit Facilities”). As a result of the Credit
Agreement, the Refinancing Bridge Facility was terminated without being funded. The Credit Facilities will mature
five years from the Closing Date, subject to up to two additional one year extensions.

The Company used the proceeds of the Term Loan Facility and cash on hand on the Closing Date to repay in full all
indebtedness, and terminate all commitments, under, and discharge and release all guarantees and liens existing in
connection with the Credit Agreements entered into in August 2016 ("the Terminated Credit Agreements"). The
obligations under the Credit Agreement are guaranteed by intercompany guarantees. As a result of the termination
of the liens under the Terminated Credit Agreements, the liens securing the Company’s outstanding $450 million
notes due 2020 and $300 million notes due 2040 were also released and such notes are now the Company’s senior
unsecured obligations.

Borrowings under the Credit Agreement bear interest at a rate determined, at the Company's option, based on
either an alternate base rate or a LIBOR rate plus, in each case, an applicable margin that varies depending on the
credit rating of the Borrower.

Sale of Accounts Receivable

During 2019, the Company entered into a Master Accounts Receivable Purchase Agreement with a financial
institution which provides the Company the election to sell accounts receivable, at a discount, up to a maximum of
$200 million. This agreement is an uncommitted facility with no expiration date.

On January 28, 2020, the Company sold $200 million of accounts receivable under the agreement and received
proceeds of $200 million on January 30, 2020.

Dynetics Acquisition

On January 31, 2020 (the "Acquisition Date"), the Company completed the acquisition of Dynetics. The Company
purchased all of the issued and outstanding shares of common stock of Dynetics for $1.65 billion in cash.

In connection with the acquisition of Dynetics, the Company entered into a Bridge Credit Agreement with certain
financial institutions, which provides for a senior unsecured 364-day bridge loan facility in an aggregate principal
amount of $1.25 billion (the "Bridge Facility"). The Bridge Facility will mature 364 days after the Acquisition Date.

The Company used the proceeds of the Bridge Facility and cash on hand on the Acquisition Date to fund the
purchase of Dynetics and repay in full all third party indebtedness of Dynetics, terminate all commitments
thereunder and discharge and release all existing guarantees and liens.

Borrowings under the Bridge Credit Agreement bear interest at a rate determined, at the Company's option, based
on either an alternate base rate or a LIBOR rate plus, in each case, an applicable margin that varies depending on
the credit rating of the Borrower, subject to increases at 90, 180 and 270 days after the Acquisition Date.

Leidos Holdings, Inc. Annual Report - 100

LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

L3Harris Transaction

On February 3, 2020, the Company entered into a definitive agreement to acquire L3Harris' security detection and
automation businesses for cash consideration of $1.0 billion, subject to net working capital adjustments, if any.
L3Harris' security detection and automation businesses provide airport and critical infrastructure screening
products, automated tray return systems and other industrial automation products. The transaction is expected to
close by the end of the second quarter of fiscal 2020.

On February 12, 2020, the Company obtained a debt financing commitment of $1.0 billion from certain financial
institutions in connection with the L3Harris transaction. The maturity date will be two years from the funding date if
the Company draws on this commitment.

Leidos Holdings, Inc. Annual Report - 101

PART II

Selected Quarterly Financial Data (Unaudited)

Selected financial data (unaudited) for the periods presented was as follows:

Fiscal 2019(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 29,
2019

June 28,
2019

September 27,
2019

January 3,
2020

(in millions, except per share amounts)

2,577 $

2,728 $

2,835 $

2,954

192

189

210

138

136

249

162

161

261

181

1.30 $

0.94 $

1.13 $

1.27

1.29

0.93

1.11

1.26

Fiscal 2018(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 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

199

145

144

203

147

188

0.67 $

0.95 $

0.97 $

1.27

0.66

0.94

0.96

1.25

(1) The fiscal 2019 quarterly results include a preliminary gain on sale of $88 million in the first quarter related to the divestiture of the Company's
commercial cybersecurity business, a $54 million gain recognized upon the receipt of the Greek arbitration award and bad debt expense of
$19 million in the third quarter and $7 million of bad debt expense recoveries in the fourth quarter.

(2) 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.

(3) Earnings per share are computed independently for each of the quarters presented and therefore may not sum to the totals for fiscal 2019 and

2018.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Leidos Holdings, Inc. Annual Report - 102

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 January 3, 2020. 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 January 3, 2020, 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 January 3, 2020, 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 January 3, 2020, 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 18, 2020

Leidos Holdings, Inc. Annual Report - 103

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 January 3, 2020, 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 January 3, 2020, 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 January 3, 2020, of the
Company and our report dated February 18, 2020, 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
Management's Report on Internal Control Over Financial Reporting. 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 18, 2020

Leidos Holdings, Inc. Annual Report - 104

PART II

Item 9B. Other Information

None.

Leidos Holdings, Inc. Annual Report - 105

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 2020 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" then "Overview" 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 2020 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 2020 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 2020 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 January 3, 2020, 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))

4,379,641 (2) $

46.04 (3)

13,154,848 (4)

—

4,379,641 (2) $

—
46.04 (3)

— (5)
13,154,848

(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) 1,988,885 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 276,901 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) 6,766 shares of Leidos common stock issuable pursuant to dividend equivalent rights and
(iii) 2,383,990 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 - 106

PART III

(4) Represents 8,931,304 and 4,223,544 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 20—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 2020 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 2020 Proxy Statement, which is incorporated by reference into this
Annual Report on Form 10-K.

Leidos Holdings, Inc. Annual Report - 107

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

2.6

3.1

3.2

4.1**

4.2

4.3

4.4

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.

Stock Purchase Agreement, dated December 17, 2019, by and among Leidos Holdings, Inc., Leidos,
Inc., DYHC, Inc. and Dynetics, Inc. Employee Stock Ownership Trust, as amended (which is part of the
Dynetics, Inc. Employee Stock Ownership Plan). Incorporated by reference to Exhibit 2.1 to our
Current Report on Form 8-K filed with the SEC on December 18, 2019.

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.

Description of Common Stock.

Leidos Holdings, Inc. Annual Report - 108

Exhibit
Number

10.1*

10.2*

10.3*

10.4*

10.5*

10.6*

10.7*

10.8*

10.9*

10.10*

10.11*

10.12*

10.13*

10.14*

10.15*

10.16*

10.17*

10.18*

10.19*

PART IV

Description of Exhibit

Leidos Holdings, Inc.’s 2006 Equity Incentive Plan. Incorporated by reference to Exhibit 10.1 to our
Annual Report on Form 10-K filed with the SEC on March 27, 2014.

Leidos Holdings, Inc.'s 2017 Omnibus Incentive Plan. Incorporated by reference to Exhibit 4.3 to our
Registration Statement on Form S-8 filed with the SEC on June 1, 2017.

Leidos, Inc. Stock Compensation Plan. Incorporated by reference to Exhibit 10.2 to our Annual Report
on Form 10-K filed with the SEC on March 27, 2014.

Leidos, Inc.’s Management Stock Compensation Plan. Incorporated by reference to Exhibit 10.3 to our
Annual Report on Form 10-K filed with the SEC on March 27, 2014.

Amended and Restated Leidos, Inc.'s Keystaff Deferral Plan. Incorporated by reference to Exhibit 10.4
to our Transition Report on Form 10-K filed with the SEC on February 26, 2016.

Amended and Restated Leidos, Inc.’s Key Executive Stock Deferral Plan. Incorporated by reference to
Exhibit 10.5 to our Transition Report on Form 10-K filed with the SEC on February 26, 2016.

Amended and Restated Leidos Holdings, Inc.’s 2006 Employee Stock Purchase Plan. Incorporated by
reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed with the SEC on August 4, 2017.

Leidos, Inc.’s 401(k) Excess Deferral Plan. Incorporated by reference to Exhibit 10.7 to our Annual
Report on Form 10-K filed with the SEC on March 27, 2014.

Form of Nonstatutory Stock Option Agreement of Leidos Holdings, Inc.’s 2006 Equity Incentive Plan.
Incorporated by reference to Exhibit 10.10 to our Annual Report on Form 10-K filed with the SEC on
March 27, 2014.

Form of Nonstatutory Stock Option Agreement (Non-Employee Directors) of Leidos Holdings, Inc.’s
2006 Equity Incentive Plan. Incorporated by reference to Exhibit 10.11 to our Annual Report on Form
10-K filed with the SEC on March 27, 2014.

Form of Restricted Stock Unit Award Agreement of Leidos Holdings, Inc.’s 2006 Equity Incentive Plan.
Incorporated by reference to Exhibit 10.14 to our Annual Report on Form 10-K filed with the SEC on
March 27, 2014.

Form of Restricted Unit Award Agreement (Management) of Leidos Holdings, Inc.’s 2006 Equity
Incentive Plan. Incorporated by reference to Exhibit 10.16 to our Annual Report on Form 10-K filed as
with the SEC on March 27, 2014.

Form of Indemnification Agreement. Incorporated by reference to Exhibit 10.19 to our Annual Report
on Form 10-K filed with the SEC on March 25, 2015.

Amended and Restated Executive Severance Plan. Incorporated by reference to Exhibit 10.1 to our
Quarterly Report on Form 10-Q filed with the SEC on October 29, 2019.

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.

Leidos Holdings, Inc. Annual Report - 109

Exhibit
Number
10.20*

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

PART IV

Description of Exhibit

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.

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.

Leidos Holdings, Inc. Annual Report - 110

Exhibit
Number
10.34

10.35

10.36

10.37

10.38

10.39

10.40

10.41

10.42

10.43

10.44

23.1

31.1

31.2

32.1

PART IV

Description of Exhibit

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.

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.

Leidos Holdings, Inc. Annual Report - 111

PART IV

Description of Exhibit

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.

Patent License and Assignment Agreement dated as of August 12, 2005, between Leidos, Inc. and
VirnetX, Inc. Incorporated by reference to Exhibit 99.1 to our Annual Report on Form 10-K filed with the
SEC on April 1, 2010.

Amendment No. 1 dated as of November 2, 2006, to Patent License and Assignment Agreement
between Leidos, Inc. and VirnetX, Inc. Incorporated by reference to Exhibit 99.2 to our Annual Report
on Form 10-K filed with the SEC on April 1, 2010.

Amendment No. 2 dated as of March 12, 2008, to Patent License and Assignment Agreement between
Leidos, Inc. and VirnetX, Inc. Incorporated by reference to Exhibit 99.3 to our Form 10-K filed with the
SEC on April 1, 2010.

Employee Matters Agreement, dated as of January 26, 2016, among Lockheed Martin Corporation,
Abacus Innovations Corporation and Leidos Holdings, Inc. Incorporated by reference to Exhibit 99.1 to
our Registration Statement on Form S-4 filed with the SEC on April 18, 2016.

Tax Matters Agreement, dated as of January 26, 2016, among Lockheed Martin Corporation, Abacus
Innovations Corporation and Leidos Holdings, Inc. Incorporated by reference to Exhibit 99.2 to our
Registration Statement on Form S-4 filed with the SEC on April 18, 2016.

First Amendment to Employee Matters Agreement, dated June 27, 2016, among Lockheed Martin
Corporation, Abacus Innovations Corporation and Leidos Holdings, Inc. Incorporated by reference to
Exhibit 99.13 to our Registration Statement on Form S-4 filed with the SEC on June 28, 2016.

Professional Services Contract effective September 7, 1999, between Leidos, Inc. and In-Q-Tel, Inc. (f/
k/a In-Q-It, Inc.). Incorporated by reference to Exhibit 99.4 to our Annual Report on Form 10-K filed
with the SEC on April 1, 2010.

Interactive Data File.

Cover Page Interactive Data File. The cover page interactive data file does not appear in the
Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

Exhibit
Number
32.2

99.1

99.2†

99.3

99.4

99.5

99.6

99.7†

101

104

* 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 - 112

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.

/s/ James C. Reagan
James C. Reagan
Executive Vice President and Chief Financial Officer

Dated: February 18, 2020

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/ Christopher R. Cage
Christopher R. Cage

/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 18, 2020

Principal Financial Officer

February 18, 2020

Principal Accounting Officer

February 18, 2020

Director

February 18, 2020

Leidos Holdings, Inc. Annual Report - 113

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