Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2019
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
 
20-3562868
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
11951 Freedom Drive,
Reston,
Virginia
 
20190
(Address of principal executive office)
 
(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
 
Trading symbol(s)
 
Name of each exchange on which registered
Common stock, par value $.0001 per share
 
LDOS
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes     No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes     No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
 
 
 
Accelerated filer
 
 
Non-accelerated filer
 
 
Smaller reporting company
 
 
 
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No    
The number of shares issued and outstanding of each of the issuer’s classes of common stock as of July 22, 2019, was 143,807,816 shares of common stock ($.0001 par value per share).



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


Table of Contents



PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.
LEIDOS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
 
June 28,
2019
 
December 28,
2018
 
 
(in millions)
ASSETS
 
 
 
 
Cash and cash equivalents
 
$
660

 
$
327

Receivables, net
 
1,842

 
1,877

Other current assets
 
412

 
543

Assets held for sale
 

 
92

Total current assets
 
2,914

 
2,839

Property, plant and equipment, net
 
216

 
237

Intangible assets, net
 
571

 
652

Goodwill
 
4,861

 
4,860

Operating lease right-of-use assets, net
 
383

 

Other assets
 
382

 
182

 
 
$
9,327

 
$
8,770

LIABILITIES AND EQUITY
 
 
 
 
Accounts payable and accrued liabilities
 
$
1,710

 
$
1,491

Accrued payroll and employee benefits
 
471

 
473

Long-term debt, current portion
 
65

 
72

Liabilities held for sale
 

 
23

Total current liabilities
 
2,246

 
2,059

Long-term debt, net of current portion
 
2,954

 
3,052

Operating lease liabilities
 
285

 

Deferred tax liabilities
 
185

 
170

Other long-term liabilities
 
295

 
178

Commitments and contingencies (Notes 19 and 20)
 

 

Stockholders’ equity:
 
 
 
 
Common stock, $.0001 par value, 500 million shares authorized, 144 million and 146 million shares issued and outstanding at June 28, 2019 and December 28, 2018, respectively
 

 

Additional paid-in capital
 
2,780

 
2,966

Retained earnings
 
652

 
372

Accumulated other comprehensive loss
 
(73
)
 
(30
)
Total Leidos stockholders’ equity
 
3,359

 
3,308

Non-controlling interest
 
3

 
3

Total equity
 
3,362

 
3,311

 
 
$
9,327

 
$
8,770


See accompanying notes to condensed consolidated financial statements.

1

Table of Contents



LEIDOS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
 
 
(in millions)
Revenues
 
$
2,728

 
$
2,529

 
$
5,305

 
$
4,972

Cost of revenues
 
2,348

 
2,152

 
4,569

 
4,238

Selling, general and administrative expenses
 
175

 
174

 
341

 
352

Integration and restructuring costs
 
1

 
8

 
3

 
25

Asset impairment charges
 

 

 

 
7

Equity earnings of non-consolidated subsidiaries
 
(6
)
 
(4
)
 
(10
)
 
(8
)
Operating income
 
210

 
199

 
402

 
358

Non-operating (expense) income:
 
 
 
 
 
 
 
 
Interest expense, net
 
(33
)
 
(35
)
 
(71
)
 
(69
)
Other income, net
 
2

 
1

 
94

 
1

Income before income taxes
 
179

 
165

 
425

 
290

Income tax expense
 
(41
)
 
(20
)
 
(98
)
 
(43
)
Net income
 
138

 
145

 
327

 
247

Less: net income attributable to non-controlling interest
 
2

 
1

 
2

 
1

Net income attributable to Leidos common stockholders
 
$
136

 
$
144

 
$
325

 
$
246

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.94

 
$
0.95

 
$
2.26

 
$
1.62

Diluted
 
0.93

 
0.94

 
2.23

 
1.60


See accompanying notes to condensed consolidated financial statements.

2

Table of Contents



LEIDOS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 
 
Three Months Ended
 
Six Months Ended
 
 
June 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
 
 
(in millions)
Net income
 
$
138

 
$
145

 
$
327

 
$
247

Foreign currency translation adjustments
 
(12
)
 
(37
)
 
(2
)
 
(33
)
Unrecognized (loss) gain on derivative instruments
 
(26
)
 
4

 
(41
)
 
14

Total other comprehensive loss, net of taxes
 
(38
)
 
(33
)
 
(43
)
 
(19
)
Comprehensive income
 
100

 
112

 
284

 
228

Less: comprehensive income attributable to non-controlling interest
 
2

 
1

 
2

 
1

Comprehensive income attributable to Leidos common stockholders
 
$
98

 
$
111

 
$
282

 
$
227



See accompanying notes to condensed consolidated financial statements.

3

Table of Contents



LEIDOS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

 
 
Shares of common stock
 
Additional
paid-in
capital
 
Retained earnings
 
Accumulated
other comprehensive
loss
 
Leidos Holdings, Inc. stockholders' equity
 
Non-controlling interest
 
Total
 
 
(in millions, except for per share amounts)
Balance at December 28, 2018
 
146

 
$
2,966

 
$
372

 
$
(30
)
 
$
3,308

 
$
3

 
$
3,311

Cumulative adjustments related to ASU adoption
 

 

 
48

 

 
48

 

 
48

Balance at December 29, 2018
 
146

 
2,966

 
420

 
(30
)
 
3,356

 
3

 
3,359

Net income
 

 

 
189

 

 
189

 

 
189

Other comprehensive loss, net of taxes
 

 

 

 
(5
)
 
(5
)
 

 
(5
)
Issuances of stock
 
1

 
11

 

 

 
11

 

 
11

Repurchases of stock and other
 
(3
)
 
(222
)
 

 

 
(222
)
 

 
(222
)
Dividends of $0.32 per share
 

 

 
(47
)
 

 
(47
)
 

 
(47
)
Stock-based compensation
 

 
12

 

 

 
12

 

 
12

Balance at March 29, 2019
 
144

 
2,767

 
562

 
(35
)
 
3,294

 
3

 
3,297

Net income
 

 

 
136

 

 
136

 
2

 
138

Other comprehensive loss, net of taxes
 

 

 

 
(38
)
 
(38
)
 

 
(38
)
Issuances of stock
 

 
6

 

 

 
6

 

 
6

Repurchases of stock and other
 

 
(5
)
 

 

 
(5
)
 

 
(5
)
Dividends of $0.32 per share
 

 

 
(46
)
 

 
(46
)
 

 
(46
)
Stock-based compensation
 

 
13

 

 

 
13

 

 
13

Other
 

 
(1
)
 

 

 
(1
)
 
(2
)
 
(3
)
Balance at June 28, 2019
 
144

 
$
2,780

 
$
652

 
$
(73
)
 
$
3,359

 
$
3

 
$
3,362


See accompanying notes to condensed consolidated financial statements.

4

Table of Contents



LEIDOS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED) [CONTINUED]

 
 
Shares of common stock
 
Additional
paid-in
capital
 
(Accumulated deficit) retained earnings
 
Accumulated
other comprehensive
income
 
Leidos Holdings, Inc. stockholders' equity
 
Non-controlling interest
 
Total
 
 
(in millions, except for per share amounts)
Balance at December 29, 2017
 
151

 
$
3,344

 
$
(7
)
 
$
33

 
$
3,370

 
$
13

 
$
3,383

Cumulative adjustments related to ASU adoptions
 

 

 
(8
)
 
9

 
1

 

 
1

Balance at December 30, 2017
 
151

 
3,344

 
(15
)
 
42

 
3,371

 
13

 
3,384

Net income
 

 

 
102

 

 
102

 

 
102

Other comprehensive income, net of taxes
 

 

 

 
14

 
14

 

 
14

Issuances of stock
 
1

 
5

 

 

 
5

 

 
5

Repurchases of stock and other
 

 
(22
)
 

 

 
(22
)
 

 
(22
)
Dividends of $0.32 per share
 

 

 
(50
)
 

 
(50
)
 

 
(50
)
Stock-based compensation
 

 
11

 

 

 
11

 

 
11

Purchase of a non-controlling interest
 

 

 

 

 

 
(10
)
 
(10
)
Balance at March 30, 2018
 
152

 
3,338

 
37

 
56

 
3,431

 
3

 
3,434

Net income
 

 

 
144

 

 
144

 
1

 
145

Other comprehensive loss, net of taxes
 

 

 

 
(33
)
 
(33
)
 

 
(33
)
Issuances of stock
 

 
4

 

 

 
4

 

 
4

Repurchases of stock and other
 
(2
)
 
(94
)
 

 

 
(94
)
 

 
(94
)
Dividends of $0.32 per share
 

 

 
(48
)
 

 
(48
)
 

 
(48
)
Stock-based compensation
 

 
12

 

 

 
12

 

 
12

Other
 

 

 

 

 

 
(2
)
 
(2
)
Balance at June 29, 2018
 
150

 
$
3,260

 
$
133

 
$
23

 
$
3,416

 
$
2

 
$
3,418



See accompanying notes to condensed consolidated financial statements.

5

Table of Contents

LEIDOS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 
 
Six Months Ended
 
 
June 28,
2019
 
June 29,
2018
 
 
(in millions)
Cash flows from operations:
 
 
 
 
Net income
 
$
327

 
$
247

Adjustments to reconcile net income to net cash provided by operations:
 
 
 
 
Gain on sale of business
 
(87
)
 

Depreciation and amortization
 
115

 
129

Stock-based compensation
 
25

 
23

Asset impairment charges
 

 
7

Other
 
3

 
10

Change in assets and liabilities, net of effects of dispositions:
 
 
 
 
Receivables
 
32

 
36

Other current assets
 
(16
)
 
(33
)
Accounts payable and accrued liabilities
 
64

 
(67
)
Accrued payroll and employee benefits
 

 
(35
)
Deferred income taxes and income taxes receivable/payable
 
8

 
(10
)
Other long-term assets/liabilities
 
3

 
(14
)
Net cash provided by operating activities
 
474

 
293

Cash flows from investing activities:
 
 
 
 
Proceeds from disposition of business
 
171

 

Net proceeds from sale of assets
 
96

 

Payments for property, equipment and software
 
(46
)
 
(28
)
Acquisitions of businesses
 

 
(81
)
Net cash provided by (used in) investing activities
 
221

 
(109
)
Cash flows from financing activities:
 
 
 
 
Repurchases of stock and other
 
(227
)
 
(116
)
Dividend payments
 
(101
)
 
(103
)
Payments of long-term debt
 
(48
)
 
(44
)
Proceeds from issuances of stock
 
15

 
8

Payment of tax indemnification liability
 

 
(23
)
Other
 

 
(5
)
Net cash used in financing activities
 
(361
)
 
(283
)
Net increase (decrease) in cash, cash equivalents and restricted cash
 
334

 
(99
)
Cash, cash equivalents and restricted cash at beginning of period
 
369

 
422

Cash, cash equivalents and restricted cash at end of period
 
$
703

 
$
323


See accompanying notes to condensed consolidated financial statements.

6

Table of Contents

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


Note 1–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, 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 costs associated with corporate functions as Corporate.
The Company has a controlling interest in Mission Support Alliance, LLC ("MSA"), a joint venture with Centerra Group, LLC. On January 26, 2018, the Company entered into a Membership Interest Purchase Agreement with Jacobs Engineering Group, Inc. ("Jacobs Group"), whereby the Company purchased 100% of Jacobs Group's 41% outstanding membership interest in MSA. As a result, Leidos increased its controlling ownership in MSA from 47% to 88%. The Company consolidates the financial results for MSA into its unaudited condensed consolidated financial statements.
The unaudited condensed consolidated financial statements also include the balances of all voting interest entities in which Leidos has a controlling voting interest ("subsidiaries") and a variable interest entity ("VIE") in which Leidos is the primary beneficiary. The consolidated balances of the Company’s VIE are not material to the Company’s unaudited condensed consolidated financial statements for the periods presented. Intercompany accounts and transactions between consolidated companies have been eliminated in consolidation.
The accompanying unaudited condensed financial information has been prepared in accordance with the rules of the U.S. Securities and Exchange Commission and accounting principles generally accepted in the United States of America ("GAAP"). Certain disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Management evaluates these estimates and assumptions on an ongoing basis, including those relating to estimated profitability of long-term contracts, indirect billing rates, allowances for doubtful accounts, inventories, fair value and impairment of intangible assets and goodwill, income taxes, stock-based compensation expense and contingencies. These estimates have been prepared by management on the basis of the most current and best available information; however, actual results could differ materially from those estimates.
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 18–Business 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.
Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. The Company combined "Dividends payable" and "Income taxes payable" with "Accounts payable and accrued liabilities" on the condensed consolidated balance sheets.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which consist of normal recurring adjustments, necessary for a fair presentation thereof. The results reported in these unaudited condensed consolidated financial statements are not necessarily indicative of the results that may be expected for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K filed on February 19, 2019.

7

Table of Contents

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

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"), which supersedes the current lease guidance under Leases (Topic 840) and makes several changes, such as requiring an entity to recognize a right-of-use ("ROU") asset and corresponding lease obligation on the balance sheet, classified as financing or operating, as appropriate. The update is effective for public companies for annual and interim reporting periods beginning after December 15, 2018, and should be adopted under the modified retrospective approach.
In July 2018, the FASB issued ASU 2018-10 "Codification Improvements to Topic 842, Leases" to add clarity to certain areas within ASU 2016-02, and ASU 2018-11 "Targeted Improvements", to add an additional and optional transition method to adopt the new leases standard by allowing recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The ASU also provided lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease components, similar to the expedient provided for lessees. In December 2018, the FASB issued ASU 2018-20 "Narrow-Scope Improvements for Lessors" to add clarity to lessors accounting for sales taxes and other similar taxes collected from lessees, accounting for variable payments for contracts with lease and non-lease components and accounting for certain lessor costs. In March 2019, the FASB issued ASU 2019-01 "Codification Improvements" to Leases (Topic 842) to clarify the codification more generally and/or to correct unintended application of guidance. The effective date and transition requirements of these updates are the same as ASU 2016-02.
The Company has elected to adopt certain practical expedients provided under ASC 842, including the option to not apply lease recognition for short-term leases, reassessment of whether expired or existing contracts contain leases, reassessment of lease classification for expired or existing leases, applying a single discount rate to a portfolio of leased assets with similar durations, reassessing initial direct costs and combining lease and non-lease components in revenue arrangements. 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.
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, to 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 10–Property, Plant and Equipment").


8

Table of Contents

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

The cumulative effect of the changes made to the Company's condensed consolidated balance sheet for the adoption of ASU 2016-02 was as follows:
 
 
Balance at December 28, 2018
 
Adjustments due to ASU 2016-02
 
Balance at December 29, 2018
 
 
(in millions)
Assets - non-current:
 
 
 
 
 
 
Property, plant and equipment, net
 
$
237

 
$
1

 
$
238

Operating lease right-of-use assets, net
 

 
418

 
418

 
 
 
 
 
 
 
Liabilities - current:
 
 
 
 
 
 
Accounts payable and accrued liabilities
 
$
1,491

 
$
132

 
$
1,623

Long-term debt, current portion
 
72

 
8

 
80

 
 
 
 
 
 
 
Liabilities - non-current:
 
 
 
 
 
 
Long-term debt, net of current portion
 
$
3,052

 
$
(72
)
 
$
2,980

Operating lease liabilities
 

 
320

 
320

Deferred tax liabilities
 
170

 
17

 
187

Other long-term liabilities
 
178

 
(34
)
 
144

 
 
 
 
 
 
 
Equity:
 
 
 
 
 
 
Retained earnings
 
$
372

 
$
48

 
$
420


Accounting Standards Updates Issued But Not Yet Adopted
ASU 2016-13, ASU 2018-19, ASU 2019-05, Financial Instruments – Credit Losses (Topic 326)
In June 2016, the FASB issued ASU 2016-13, which eliminates the requirement that a credit loss on a financial instrument be "probable" prior to recognition. Instead, a valuation allowance will be recorded to reflect an entity's current estimate of all expected credit losses, based on both historical and forecasted information related to an instrument. The update is effective for public companies for annual and interim reporting periods beginning after December 15, 2019, and should be adopted using a modified retrospective approach, which applies a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. A prospective approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date and loans and debt securities acquired with deteriorated credit quality. Early adoption is permitted.
In November 2018, the FASB issued ASU 2018-19 "Codification Improvements to Topic 326, Financial Instruments - Credit Losses" to add clarity to certain areas within ASU 2016-13. In May 2019, the FASB issued ASU 2019-05 "Financial Instruments - Credit Losses (Topic 326), Target Transition Relief" which provided transition relief for entities adopting ASU 2016-13 by allowing the election of the fair value option on certain financial instruments. The effective date and the transition methodology for the amendments in these updates are the same as in ASU 2016-13.
The Company is evaluating the provisions of ASU 2016-13, in conjunction with ASU 2018-19 and ASU 2019-05, and their impact on the Company's consolidated financial position, results of operations and cash flows.
Note 3–Significant Accounting Policies
Leases
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.

9

Table of Contents

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

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. When the lease does not include an implicit rate, the discount rate used is the Company’s incremental borrowing rate based on information available at the commencement date. 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 June 28, 2019, the Company did not have any lease agreements with residual value guarantees.
As a result of the adoption of ASC 842, the Company elected to not separate non-lease components from lease components and instead account for both components as a single lease, combining lease and non-lease components in revenue arrangements.
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.
The Company's lessor arrangements with its customers are immaterial to the results of operations and cash flows.
Changes in Estimates on Contracts
Changes in estimates related to contracts accounted for using the cost-to-cost method of accounting are recognized in the period in which such changes are made for the inception-to-date effect of the changes, with the exception of contracts acquired through a business combination, where the adjustment is made for the period commencing from the date of acquisition.
Changes in estimates on contracts were as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
 
 
(in millions, except per share amounts)
Favorable impact
 
$
23

 
$
51

 
$
46

 
$
101

Unfavorable impact
 
(10
)
 
(17
)
 
(29
)
 
(32
)
Net impact to income before income taxes
 
$
13

 
$
34

 
$
17

 
$
69

 
 
 
 
 
 
 
 
 
Impact on diluted EPS attributable to Leidos common stockholders
 
$
0.07

 
$
0.17

 
$
0.09

 
$
0.34


The impact on diluted earnings per share ("EPS") attributable to Leidos common stockholders is calculated using the Company's statutory tax rate.
Revenue recognized from performance obligations satisfied in previous periods was $15 million and $19 million for the quarter and six months ended June 28, 2019, respectively and $32 million and $66 million for the quarter and six months ended June 29, 2018, respectively. The changes primarily relate to revisions of variable consideration, including award and incentive fees, and revisions to estimates at completion resulting from changes in contract scope, mitigation of contract risks or due to true-ups of contract estimates at the end of contract performance.

10

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

Cash and Cash Equivalents
The Company's cash equivalents are primarily comprised of investments in several large institutional money market funds and bank deposits, with original maturity of three months or less. The Company includes outstanding payments within "Cash and cash equivalents" and correspondingly increases "Accounts payable and accrued liabilities" on the condensed consolidated balance sheets. At June 28, 2019 and December 28, 2018, the Company included $62 million and $56 million, respectively, of outstanding payments within "Cash and cash equivalents."
Note 4–Leases
The Company's ROU assets and lease liabilities consisted of the following:
 
 
Balance sheet line item
 
June 28,
2019
 
 
 
 
(in millions)
ROU assets:
 
 
 
 
Finance leases
 
Property, plant and equipment, net
 
$
11

Operating leases
 
Operating lease right-of-use assets, net
 
383

 
 
 
 
$
394

Current lease liabilities:
 
 
 
 
Finance leases
 
Long-term debt, current portion
 
$
8

Operating leases
 
Accounts payable and accrued liabilities
 
138

 
 
 
 
$
146

Non-current lease liabilities:
 
 
 
 
Finance leases
 
Long-term debt, net of current portion
 
$
3

Operating leases
 
Operating lease liabilities
 
285

 
 
 
 
$
288


The Company's total lease cost for the periods presented consisted of the following:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 28,
2019
 
June 28,
2019
 
 
(in millions)
Finance lease cost:
 
 
 
 
Amortization of ROU assets
 
$
2

 
$
4

 
 
 
 
 
Operating lease cost
 
42

 
82

 
 
 
 
 
Variable lease cost
 
25

 
51

Short-term lease cost
 
1

 
3

Less: Sublease income
 
(1
)
 
(1
)
Total lease cost
 
$
69

 
$
139


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

11

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

Lease terms and discount rates related to leases were as follows:
 
 
June 28,
2019
Weighted-average remaining lease term (in years):
 
 
Finance leases
 
2.3

Operating leases
 
4.6

Weighted-average discount rate:
 
 
Finance leases
 
4.15
%
Operating leases
 
4.10
%
Other information related to leases was as follows:
 
 
Six Months Ended
 
 
June 28,
2019
 
 
(in millions)
Cash paid for amounts included in measurement of lease liabilities:
 
 
Operating cash flows from operating leases
 
$
86

Financing cash flows from finance leases
 
4

Lease liabilities arising from obtaining ROU assets:
 
 
Operating lease liabilities
 
$
34


The Company's future minimum lease commitments of its finance and operating leases on an undiscounted basis, reconciled to the respective lease liability at June 28, 2019, were as follows:
Fiscal Year Ending
 
Finance lease commitments
 
Operating lease commitments
 
 
(in millions)
2019 (remainder of year)
 
$
4

 
$
81

2020
 
5

 
129

2021
 
1

 
80

2022
 
2

 
59

2023
 

 
40

2024 and thereafter
 

 
77

Total undiscounted cash flows
 
12

 
466

Less: imputed interest
 
(1
)
 
(43
)
Lease liability as of June 28, 2019
 
$
11

 
$
423


On January 24, 2018, the Company entered into a lease agreement with its current lessor for office space in a building to be constructed to function as the Company's new corporate headquarters in Reston, Virginia. The Company will occupy the space for an initial term of 148 months and rent expense will be $11 million for the first lease year, with an annual rent expense increase of 2.5%. The Company currently expects construction to be completed and to take occupancy of the building by April 1, 2020, at which point the Company's lease agreements for its current corporate headquarters will terminate.
Disclosures related to periods prior to adoption of ASC 842
During the quarter and six months ended June 29, 2018, the Company had $38 million and $80 million of net rental expense, respectively.

12

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

Future minimum lease commitments and sublease receipts, under non-cancelable operating leases in effect at December 28, 2018, were as follows:
Fiscal Year Ending
 
Capital lease commitments
 
Operating lease commitments
 
Sublease receipts
 
 
(in millions)
2019
 
$
3

 
$
144

 
$
3

2020
 

 
114

 
1

2021
 

 
83

 
1

2022
 

 
71

 

2023
 

 
55

 

2024 and thereafter
 

 
246

 

Total
 
$
3

 
$
713

 
$
5


Note 5–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 indefinite delivery/indefinite quantity ("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 June 28, 2019, the Company had $10.6 billion of remaining performance obligations, which are expected to be recognized as revenue in the amounts of $5.4 billion, $2.4 billion and $2.8 billion for the remainder of fiscal 2019, fiscal 2020 and fiscal 2021 and thereafter, respectively.
Disaggregation of Revenues
The Company disaggregates revenues by customer-type, contract-type and geographic location for each of its reportable segments. These categories represent how the nature, timing and uncertainty of revenues and cash flows are affected.
Prior year amounts have been recast for the contracts that were reassigned between the Defense Solutions and Civil reportable segments (see "Note 18–Business Segments").
Disaggregated revenues by customer-type were as follows:
 
 
Three Months Ended June 28, 2019
 
Six Months Ended June 28, 2019
 
 
Defense Solutions
 
Civil
 
Health
 
Total
 
Defense Solutions
 
Civil
 
Health
 
Total
 
 
(in millions)
DoD and U.S. Intelligence Community(1)
 
$
1,158

 
$
45

 
$
113

 
$
1,316

 
$
2,274

 
$
88

 
$
237

 
$
2,599

Other government agencies(1)(2)
 
66

 
664

 
349

 
1,079

 
128

 
1,271

 
660

 
2,059

Commercial and non-U.S. customers
 
122

 
172

 
39

 
333

 
211

 
369

 
67

 
647

Total
 
$
1,346

 
$
881

 
$
501

 
$
2,728

 
$
2,613

 
$
1,728

 
$
964

 
$
5,305


13

Table of Contents

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

 
 
Three Months Ended June 29, 2018
 
Six Months Ended June 29, 2018
 
 
Defense Solutions
 
Civil
 
Health
 
Total
 
Defense Solutions
 
Civil
 
Health
 
Total
 
 
(in millions)
DoD and U.S. Intelligence Community(3)
 
$
1,112

 
$
26

 
$
82

 
$
1,220

 
$
2,156

 
$
49

 
$
174

 
$
2,379

Other government agencies(2)(3)
 
46

 
565

 
327

 
938

 
92

 
1,141

 
625

 
1,858

Commercial and non-U.S. customers
 
104

 
225

 
42

 
371

 
203

 
455

 
77

 
735

Total
 
$
1,262

 
$
816

 
$
451

 
$
2,529

 
$
2,451

 
$
1,645

 
$
876

 
$
4,972


(1) For the six months ended June 28, 2019, the Company reclassified $6 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 the current period.
(2) Includes federal government agencies other than the DoD and U.S. Intelligence Community, as well as state and local government agencies.
(3) For the quarter and six months ended June 29, 2018, the Company reclassified $13 million and $25 million, respectively, 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 the current period.
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:
 
 
Three Months Ended June 28, 2019
 
Six Months Ended June 28, 2019
 
 
Defense Solutions
 
Civil
 
Health
 
Total
 
Defense Solutions
 
Civil
 
Health
 
Total
 
 
(in millions)
Cost-reimbursement and fixed-price-incentive-fee
 
$
916

 
$
492

 
$
47

 
$
1,455

 
$
1,814

 
$
956

 
$
116

 
$
2,886

Firm-fixed-price
 
313

 
247

 
334

 
894

 
571

 
495

 
612

 
1,678

Time-and-materials and fixed-price-level-of-effort
 
117

 
142

 
120

 
379

 
228

 
277

 
236

 
741

Total
 
$
1,346

 
$
881

 
$
501

 
$
2,728

 
$
2,613

 
$
1,728

 
$
964

 
$
5,305

 
 
Three Months Ended June 29, 2018
 
Six Months Ended June 29, 2018
 
 
Defense Solutions
 
Civil
 
Health
 
Total
 
Defense Solutions
 
Civil
 
Health
 
Total
 
 
(in millions)
Cost-reimbursement and fixed-price-incentive-fee
 
$
861

 
$
474

 
$
42

 
$
1,377

 
$
1,632

 
$
913

 
$
92

 
$
2,637

Firm-fixed-price
 
265

 
197

 
284

 
746

 
558

 
443

 
537

 
1,538

Time-and-materials and fixed-price-level-of-effort
 
136

 
145

 
125

 
406

 
261

 
289

 
247

 
797

Total
 
$
1,262

 
$
816

 
$
451

 
$
2,529

 
$
2,451

 
$
1,645

 
$
876

 
$
4,972


Cost-reimbursement and fixed-price-incentive-fee contracts are generally lower risk and have lower profits. Time-and-materials ("T&M") and fixed-price-level-of-effort contracts are also lower risk but profits may vary depending on actual labor costs compared to negotiated contract billing rates. Firm-fixed-price ("FFP") contracts offer the potential for higher profits while increasing the Company’s exposure to risk of cost overruns.

14

Table of Contents

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

Disaggregated revenues by geographic location were as follows:
 
 
Three Months Ended June 28, 2019
 
Six Months Ended June 28, 2019
 
 
Defense Solutions
 
Civil
 
Health
 
Total
 
Defense Solutions
 
Civil
 
Health
 
Total
 
 
(in millions)
United States
 
$
1,238

 
$
775

 
$
501

 
$
2,514

 
$
2,428

 
$
1,497

 
$
964

 
$
4,889

International
 
108

 
106

 

 
214

 
185

 
231