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 15, 2021, there were approximately 21,088 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 2020 and 2019, we declared and paid quarterly dividends totaling $1.36 and $1.32 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 1, 2021 to two indices: (i) the Standard & Poor's 500 Composite index and (ii) the Standard & Poor's 500 IT Services Industry index. The graph assumes an initial investment of $100 on December 31, 2015, 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 - 38
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 1, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total Number
of Shares Purchased(1)
|
|
Average Price
Paid per Share
|
|
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
|
October 3, 2020 - October 31, 2020
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
7,696,108
|
|
November 1, 2020 - November 30, 2020
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,696,108
|
|
December 1, 2020 - December 31, 2020
|
|
638,626
|
|
|
105.36
|
|
|
638,200
|
|
|
7,057,908
|
|
January 1, 2021
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,057,908
|
|
Total
|
|
638,626
|
|
|
$
|
105.36
|
|
|
638,200
|
|
|
|
(1)The total number of shares purchased includes shares surrendered to satisfy statutory tax withholdings obligations related to vesting of restricted stock units.
Item 6. Selected Financial Data
Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" for discussion of selected financial data included within this Annual Report on Form 10-K.
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 business environment and trends and market risk should be read in conjunction with the consolidated financial statements and related notes.
Unless indicated otherwise, references in this report to “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, the impact of our merger and acquisition activity, government budgets and spending, our business contingency plans and our ability to recover certain costs through the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"). Such statements are not guarantees of future performance and involve risks and uncertainties, including uncertainties relating to the coronavirus pandemic ("COVID-19") and the actions taken by authorities and us to respond, and actual results may differ materially from those in the forward-looking statements as a result of various factors (see “Forward-Looking Statement Risks” within 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.
Leidos Holdings, Inc. Annual Report - 39
Overview
We are a FORTUNE 500® science, engineering and information technology company that provides services and solutions in the defense, intelligence, homeland security, civil and health markets, both domestically and internationally. We bring domain-specific capabilities and innovations to customers in each of these markets by leveraging five technical core competencies: digital modernization, cyber operations, mission software systems, integrated systems and mission operations. Our customers include the U.S. Department of Defense ("DoD"), the U.S. Intelligence Community, the U.S. Department of Homeland Security, the Federal Aviation Administration, the Department of Veterans Affairs and many other U.S. civilian, state and local government agencies as well as foreign government agencies. 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 2020, certain contracts were reassigned from the Civil reportable segment to the Defense Solutions reportable segment. 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 23—Business Segments" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K.
Our significant initiatives include the following:
•achieving 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 2020, revenues increased $1.2 billion, or 11%, compared to fiscal 2019, primarily due to revenues related to the acquisitions of Dynetics, Inc. ("Dynetics") and L3Harris Technologies' security detection and automation businesses ("the SD&A Businesses"), program wins and a net increase in volumes on certain programs. This was partially offset by the completion of certain contracts, negative impacts on certain contracts due to COVID-19 and the impact of the sale of our commercial cybersecurity and health staff augmentation businesses in the prior year. 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. See "Results of Operations" below for discussion of our individual segment results.
Operating Expenses and Income Trend. For fiscal 2020, operating expenses increased by $1.1 billion, or 11%, compared to fiscal 2019. Operating margin for fiscal 2020 was 8.1% compared to 8.2% for fiscal 2019. Operating income was $998 million, an $86 million increase compared to fiscal 2019. The increase in operating income was primarily attributable to program wins, income related to the acquisitions of Dynetics and the SD&A Businesses and a net gain recognized upon the receipt of proceeds related to the VirnetX, Inc. ("VirnetX") legal matter. This was partially offset by negative impacts on certain contracts due to COVID-19, a net gain recognized in the prior year upon the receipt of the Greek arbitration award and increases in acquisition and integration costs and amortization expenses primarily associated with our current year acquisitions.
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.
Leidos Holdings, Inc. Annual Report - 40
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 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.
COVID-19
The COVID-19 pandemic is affecting major economic and financial markets, and effectively all industries and governments are facing challenges, which has resulted in a period of business disruption, the length and severity of which cannot be predicted. The pandemic has resulted in significant travel restrictions, government orders to “shelter-in-place”, quarantine restrictions and significant disruption of the financial markets. We have acted to protect the health and safety of our employees, comply with workplace health and safety regulations and work with our customers to minimize disruptions. The pandemic has impacted each of our groups, primarily in access to customer sites, travel restrictions, limitations of remote work and COVID-19 related costs.
Consistent with federal, state and local guidance, we perform work that is essential to support the critical infrastructure of the United States, the Defense Industrial Base and healthcare sector, and we continue to operate in support of our customers. We have taken steps to support increased teleworking and safe workplace environments. We have some minor business operations that are not designated as critical infrastructure and therefore have been required to operate in minimal conditions.
For fiscal 2020, COVID-19 adversely impacted revenues by approximately $198 million and impacted operating income by approximately $96 million as compared to prior year results. The full extent of the impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute on programs in the expected timeframe, will depend on future developments, including the duration and spread of the pandemic and the distribution and efficacy of vaccines, all of which are uncertain and cannot be predicted. While we have been able to make some recoveries, the ultimate timing and amount of recoveries remain uncertain as they will depend on a range of government actions, including each government agency and/or contracting officer's implementation of the authority granted in Section 3610 of the CARES Act, a $2 trillion coronavirus response bill providing widespread emergency relief, including the availability of funds. As a result of Congress passing government fiscal year ("GFY") 2021 appropriations, the relief from the CARES Act has been extended until March 31, 2021.
We have experienced delays, and expect to continue experiencing delays, on certain contracts as a result of standby leave absences, which has caused a portion of our contracts to be less profitable. Within our Health segment we saw recoveries in the fourth quarter of fiscal 2020 and continue to expect to see further recoveries in fiscal 2021. Our Defense Solutions reportable segment experienced less of a negative impact in the fourth quarter of fiscal 2020 than in previous quarters. We also experienced lower indirect expenditures for fiscal 2020 as a result of COVID-19 which partially offset the operating income impact on our programs. We are seeking reimbursement of some of the COVID-19 related costs under our U.S. government contracts through a combination of equitable adjustments to the contract prices and reimbursement of the costs under Section 3610, which allows, but does not require, federal agencies to reimburse contractors at the minimum applicable contract billing rate for costs arising from certain paid leave, including sick leave, a contractor provides to keep its employees or subcontractors in a ready state, including to protect the life and safety of government and contractor personnel. Reimbursement of any costs under Section 3610 increases sales, but does not include a profit or fee and has the effect of reducing our margins. Standby cost increases, including costs for employees whose jobs cannot be performed remotely, may not be fully recoverable under our contracts, particularly fixed-price contracts. We also have no assurance that Congress will appropriate funds to cover the reimbursement of defense contractors authorized by the CARES Act, which could reduce funds available for recovery of these costs or for other U.S. government defense priorities.
The CARES Act also enabled us to defer payment of the employer portion of social security taxes. As of January 1, 2021, we deferred $123 million of employer social security tax payments and received $12 million from the Employee Retention Credit.
We have taken measures to protect the health and well-being of our workforce and are working with our customers to minimize the delay and disruption of the award and performance on our contracts. Many of our employees continue to work remotely while our offices remain open with limited capacity.
Leidos Holdings, Inc. Annual Report - 41
Business Environment and Trends
U.S. Government Markets
In fiscal 2020, 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 49% of our total revenues for fiscal 2020. 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.
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. Shortly after the budget release, Congress and the Administration shifted their collective attention to mitigating the impact of COVID-19.
Prior to the beginning of GFY 2021, Congress passed a continuing resolution ("CR") that was enacted on October 1, 2020 to provide temporary funding for government operations at GFY 2020 enacted levels until December 11, 2020. A series of short-term CRs were subsequently passed to extend temporary funding until the passage of GFY 2021 appropriations. On December 20, 2020, Congress reached agreement on a comprehensive GFY 2021 Appropriations Package, and on December 27, 2020, the President signed the $1.4 trillion appropriations deal.
With the enactment of GFY 2021 spending levels, attention now turns to additional COVID-19 relief. Immediately following that effort will be submission of a GFY 2021 supplemental aimed at economic recovery. Completing action on these proposals may delay the President's GFY 2022 budget request, which is not expected to be submitted to Congress until late April or early May.
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 2020. Our international customers include foreign governments and their agencies. Our international business increases our exposure to international markets and the associated international regulatory, foreign currency exchange rate and geopolitical risks.
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 evaluate 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 - 42
Results of Operations
Our results of operations for the periods presented were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
2020 to 2019
|
|
2019 to 2018
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
December 28,
2018
|
|
Dollar change
|
|
Percent
change
|
|
Dollar change
|
|
Percent
change
|
|
|
(dollars in millions)
|
Revenues
|
|
$
|
12,297
|
|
|
$
|
11,094
|
|
|
$
|
10,194
|
|
|
$
|
1,203
|
|
|
11
|
%
|
|
$
|
900
|
|
|
9
|
%
|
Cost of revenues
|
|
10,560
|
|
|
9,546
|
|
|
8,690
|
|
|
1,014
|
|
|
11
|
%
|
|
856
|
|
|
10
|
%
|
Selling, general and administrative expenses
|
|
770
|
|
|
689
|
|
|
729
|
|
|
81
|
|
|
12
|
%
|
|
(40)
|
|
|
(5)
|
%
|
Bad debt expense and recoveries
|
|
(68)
|
|
|
(40)
|
|
|
—
|
|
|
(28)
|
|
|
70
|
%
|
|
(40)
|
|
|
(100)
|
%
|
Acquisition, integration and restructuring costs
|
|
39
|
|
|
5
|
|
|
37
|
|
|
34
|
|
|
NM
|
|
(32)
|
|
|
(86)
|
%
|
Asset impairment charges
|
|
12
|
|
|
—
|
|
|
7
|
|
|
12
|
|
|
100
|
%
|
|
(7)
|
|
|
(100)
|
%
|
Equity earnings of non-consolidated subsidiaries
|
|
(14)
|
|
|
(18)
|
|
|
(18)
|
|
|
4
|
|
|
(22)
|
%
|
|
—
|
|
|
—
|
%
|
Operating income
|
|
998
|
|
|
912
|
|
|
749
|
|
|
86
|
|
|
9
|
%
|
|
163
|
|
|
22
|
%
|
Non-operating expense, net
|
|
(217)
|
|
|
(46)
|
|
|
(139)
|
|
|
(171)
|
|
|
NM
|
|
93
|
|
|
(67)
|
%
|
Income before income taxes
|
|
781
|
|
|
866
|
|
|
610
|
|
|
(85)
|
|
|
(10)
|
%
|
|
256
|
|
|
42
|
%
|
Income tax expense
|
|
(152)
|
|
|
(196)
|
|
|
(28)
|
|
|
44
|
|
|
(22)
|
%
|
|
(168)
|
|
|
NM
|
Net income
|
|
629
|
|
|
670
|
|
|
582
|
|
|
(41)
|
|
|
(6)
|
%
|
|
88
|
|
|
15
|
%
|
Less: net income attributable to non-controlling interest
|
|
1
|
|
|
3
|
|
|
1
|
|
|
(2)
|
|
|
(67)
|
%
|
|
2
|
|
|
200
|
%
|
Net income attributable to Leidos common stockholders
|
|
$
|
628
|
|
|
$
|
667
|
|
|
$
|
581
|
|
|
$
|
(39)
|
|
|
(6)
|
%
|
|
$
|
86
|
|
|
15
|
%
|
Operating income margin
|
|
8.1
|
%
|
|
8.2
|
%
|
|
7.3
|
%
|
|
|
|
|
|
|
|
|
NM - Not meaningful
Segment and Corporate Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
2020 to 2019
|
|
2019 to 2018
|
Defense Solutions
|
|
January 1,
2021
|
|
January 3,
2020
|
|
December 28,
2018
|
|
Dollar change
|
|
Percent
change
|
|
Dollar change
|
|
Percent
change
|
|
|
(dollars in millions)
|
Revenues
|
|
$
|
7,341
|
|
|
$
|
6,300
|
|
|
$
|
5,778
|
|
|
$
|
1,041
|
|
|
17
|
%
|
|
$
|
522
|
|
|
9
|
%
|
Operating income
|
|
506
|
|
|
471
|
|
|
402
|
|
|
35
|
|
|
7
|
%
|
|
69
|
|
|
17
|
%
|
Operating income margin
|
|
6.9
|
%
|
|
7.5
|
%
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
The increase in revenues for fiscal 2020 as compared to fiscal 2019 was primarily attributable to $937 million of revenues related to the acquisition of Dynetics, program wins and a net increase in materials volume on certain programs. This was partially offset by the completion of certain contracts and approximately $51 million of negative impacts from reduced volume on certain contracts due to COVID-19.
Leidos Holdings, Inc. Annual Report - 43
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 and British pound when compared to the U.S. dollar.
The increase in operating income for fiscal 2020 as compared to fiscal 2019 was primarily attributable to income related to the acquisition of Dynetics, program wins and lower indirect expenditures. This was partially offset by a net decrease in volumes on certain programs, including approximately $28 million of negative impacts on certain contracts due to COVID-19, and higher amortization of intangible assets related to the acquisition of Dynetics.
The increase in operating income for fiscal 2019 as compared to fiscal 2018 was primarily attributable to new awards, favorable program mix and the release of a contract reserve.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
2020 to 2019
|
|
2019 to 2018
|
Civil
|
|
January 1,
2021
|
|
January 3,
2020
|
|
December 28,
2018
|
|
Dollar change
|
|
Percent change
|
|
Dollar change
|
|
Percent change
|
|
|
(dollars in millions)
|
Revenues
|
|
$
|
2,994
|
|
|
$
|
2,796
|
|
|
$
|
2,599
|
|
|
$
|
198
|
|
|
7
|
%
|
|
$
|
197
|
|
|
8
|
%
|
Operating income
|
|
280
|
|
|
231
|
|
|
235
|
|
|
49
|
|
|
21
|
%
|
|
(4)
|
|
|
(2)
|
%
|
Operating income margin
|
|
9.4
|
%
|
|
8.3
|
%
|
|
9.0
|
%
|
|
|
|
|
|
|
|
|
The increase in revenues for fiscal 2020 as compared to fiscal 2019 was primarily attributable to $243 million of revenues related to the acquisition of the SD&A Businesses and program wins. This was partially offset by the completion of certain contracts and approximately $65 million of negative impacts from reduced volume on certain contracts due to COVID-19.
The increase in revenues for fiscal 2019 as compared to fiscal 2018 was primarily attributable to a net increase in program volumes and new awards, partially offset by the impact of the sale of our commercial cybersecurity business of $74 million, the completion of certain contracts and lower net profit write-ups in the current year.
The increase in operating income for fiscal 2020 as compared to fiscal 2019 was primarily attributable to program wins, a decrease in bad debt expense and lower indirect expenditures, partially offset by the completion of certain contracts.
The decrease in operating income for fiscal 2019 as compared to fiscal 2018 was primarily attributable to lower net profit write-ups in fiscal 2019 and a net increase in bad debt expense on certain international contracts, partially offset by lower amortization of intangibles of $18 million, a net increase in program volumes and the impact of the sale of our commercial cybersecurity business of $7 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
2020 to 2019
|
|
2019 to 2018
|
Health
|
|
January 1,
2021
|
|
January 3,
2020
|
|
December 28,
2018
|
|
Dollar change
|
|
Percent
change
|
|
Dollar change
|
|
Percent
change
|
|
|
(dollars in millions)
|
Revenues
|
|
$
|
1,962
|
|
|
$
|
1,998
|
|
|
$
|
1,817
|
|
|
$
|
(36)
|
|
|
(2)
|
%
|
|
$
|
181
|
|
|
10
|
%
|
Operating income
|
|
235
|
|
|
242
|
|
|
230
|
|
|
(7)
|
|
|
(3)
|
%
|
|
12
|
|
|
5
|
%
|
Operating income margin
|
|
12.0
|
%
|
|
12.1
|
%
|
|
12.7
|
%
|
|
|
|
|
|
|
|
|
The decrease in revenues for fiscal 2020 as compared to fiscal 2019 was primarily attributable to approximately $82 million related to the timing of program execution due to COVID-19, a $73 million impact from the sale of our health staff augmentation business in the prior year and the completion of certain contracts. This was partially offset by a net increase in volumes on certain programs, program wins and a $21 million impact from our acquisition of IMX Medical Management Services, Inc. ("IMX") in the prior year.
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, partially offset by the completion of certain contracts and the impact of the sale of our health staff augmentation business of $78 million.
Leidos Holdings, Inc. Annual Report - 44
The decrease in operating income for fiscal 2020 as compared to fiscal 2019 was primarily attributable to approximately $67 million of negative impacts from reduced volume on certain managed service contracts with fixed cost infrastructures that were impacted by COVID-19. This was partially offset by a net increase in volumes on certain programs and a $9 million impact from the sale of our health staff augmentation business in the prior 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
2020 to 2019
|
|
2019 to 2018
|
Corporate
|
|
January 1,
2021
|
|
January 3,
2020
|
|
December 28,
2018
|
|
Dollar change
|
|
Percent
change
|
|
Dollar change
|
|
Percent
change
|
|
|
(dollars in millions)
|
Operating loss
|
|
$
|
(23)
|
|
|
$
|
(32)
|
|
|
$
|
(118)
|
|
|
$
|
9
|
|
|
(28)
|
%
|
|
$
|
86
|
|
|
(73)
|
%
|
The decrease in operating loss for fiscal 2020 as compared to fiscal 2019 was primarily attributable to an $81 million net gain recognized upon the receipt of proceeds related to the VirnetX legal matter and reduced indirect expenses due to COVID-19. This was partially offset by a $52 million net gain recognized in the prior year upon the receipt of the Greek arbitration award and a $29 million increase in acquisition, integration and restructuring costs primarily associated with the acquisitions of Dynetics and the SD&A Businesses.
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.
Equity earnings of non-consolidated subsidiaries
We have certain non-controlling ownership interests in equity method investments. For fiscal 2020, 2019 and 2018, we recorded earnings of $16 million, $29 million and $28 million, respectively, from our equity method investments, partially offset by amortization of $2 million, $11 million and $10 million, respectively.
Non-Operating Expense, Net
Non-operating expense, net increased $171 million for fiscal 2020 as compared to fiscal 2019, primarily due to the $88 million gain recognized on the sale of our commercial cybersecurity business in the prior year, $36 million of debt discount and deferred financing costs written off and higher interest expense associated with increases in our long-term debt related to the financing of the acquisitions of Dynetics and the SD&A Businesses.
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.
Provision for Income Taxes
Our effective tax rate was 19.5%, 22.6% and 4.6% in fiscal 2020, 2019 and 2018, respectively. The effective tax rate for fiscal 2020 was favorably impacted primarily by federal research tax credits and excess tax benefits related to employee stock-based payment transactions, partially offset by taxes related to foreign operations.
The 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.
Leidos Holdings, Inc. Annual Report - 45
Non-controlling Interest
We have an 88% controlling interest in Mission Support Alliance, LLC ("MSA"), a joint venture with Centerra Group, LLC, which is anticipated to end in early fiscal 2021. We also have a 53% controlling interest in Hanford Mission Integration Solutions, LLC ("HMIS"), the legal entity for the follow-on contract to MSA's contract and a joint venture with Centerra Group, LLC and Parsons Government Services, Inc. We include the financial results for MSA and HMIS in our consolidated financial statements. Net income attributable to non-controlling interest was $1 million for fiscal 2020 and 2018 and $3 million for fiscal 2019.
Bookings and Backlog
We had net bookings of $17.8 billion and $14.5 billion during fiscal 2020 and 2019, 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 unexercised option periods and 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 anticipated task orders.
The estimated value of our total backlog for the periods presented was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
|
(in millions)
|
Defense Solutions:
|
|
|
|
|
Funded backlog
|
|
$
|
3,710
|
|
|
$
|
3,063
|
|
Negotiated unfunded backlog
|
|
14,721
|
|
|
11,974
|
|
Total Defense Solutions backlog
|
|
$
|
18,431
|
|
|
$
|
15,037
|
|
Civil:
|
|
|
|
|
Funded backlog
|
|
$
|
1,398
|
|
|
$
|
1,267
|
|
Negotiated unfunded backlog
|
|
7,051
|
|
|
2,978
|
|
Total Civil backlog
|
|
$
|
8,449
|
|
|
$
|
4,245
|
|
Health:
|
|
|
|
|
Funded backlog
|
|
$
|
1,486
|
|
|
$
|
1,083
|
|
Negotiated unfunded backlog
|
|
3,546
|
|
|
3,725
|
|
Total Health backlog
|
|
$
|
5,032
|
|
|
$
|
4,808
|
|
Total:
|
|
|
|
|
Funded backlog
|
|
$
|
6,594
|
|
|
$
|
5,413
|
|
Negotiated unfunded backlog
|
|
25,318
|
|
|
18,677
|
|
Total backlog
|
|
$
|
31,912
|
|
|
$
|
24,090
|
|
Leidos Holdings, Inc. Annual Report - 46
The change in backlog for the Defense Solutions and Civil reportable segments reflect $1,632 million and $574 million, respectively, of backlog acquired as a result of the acquisitions of Dynetics and the SD&A Businesses, respectively. (see "Note 6—Acquisitions" 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
December 28,
2018
|
Cost-reimbursement and fixed-price-incentive-fee
|
|
51
|
%
|
|
54
|
%
|
|
54
|
%
|
Firm-fixed-price
|
|
36
|
%
|
|
33
|
%
|
|
31
|
%
|
Time-and-materials and fixed-price-level-of-effort
|
|
13
|
%
|
|
13
|
%
|
|
15
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Liquidity and Capital Resources
Overview of Liquidity
As of January 1, 2021, we had $524 million in cash and cash equivalents. In January 2020, we entered into an unsecured revolving credit facility which can provide up to $750 million in additional borrowing, if required. This new credit facility replaced the previous secured credit facility with the same borrowing capacity. During fiscal 2020 and 2019, there were no borrowings outstanding under the credit facilities and we were in compliance with the related financial covenants.
At January 1, 2021 and January 3, 2020, we had outstanding debt of $4.7 billion and $3.0 billion, respectively. In January 2020, we entered into a Credit Agreement with certain financial institutions, which provided for a senior unsecured term loan facility in an aggregate principal amount of $1.9 billion (the "Term Loan Facility"). We used the proceeds of the Term Loan Facility and cash on hand 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 17, 2020, we entered into a Bridge Credit Agreement with certain financial institutions, which provided for a senior unsecured 364-day bridge loan facility in an aggregate 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.
In February 12, 2020, we entered into a senior unsecured delayed-draw term loan facility (the "Facility") providing for $1.0 billion of commitments from certain financial institutions in connection with the acquisition of the SD&A Businesses. On May 4, 2020, we completed our acquisition of the SD&A Businesses and drew on the Facility in an aggregate principal amount of $1.0 billion. The proceeds of the Facility and cash on hand were used to fund the purchase of the SD&A Businesses.
Leidos Holdings, Inc. Annual Report - 47
On May 12, 2020, we issued and sold $500 million senior notes maturing in May 2023, $500 million senior notes maturing in May 2025 and $750 million senior notes maturing in May 2030 (collectively, the "Notes"). The proceeds from the Notes were used to repay all of the outstanding obligations in respect of principal, interest and fees under the Bridge Credit Agreement and to repay a portion of the outstanding loans under the Facility.
On June 18, 2020, we entered into a 364-day Term Loan Credit Agreement, which provided for a senior unsecured term loan facility in an aggregate principal amount of $300 million (the "Term Loan"). The proceeds of the Term Loan and cash on hand on were used to repay in full all indebtedness under, and discharge and release all guarantees existing in connection with the Facility.
On September 1, 2020, we retired our $450 million senior unsecured notes due December 2020. Cash on hand was used to repay in full all indebtedness under, and discharge and release all guarantees existing in connection with the notes.
On October 8, 2020, we issued and sold $1.0 billion aggregate principal amount of fixed-rate senior notes maturing in February 2031 (the "2031 Notes"). The proceeds from the 2031 Notes were used for general corporate purposes, including to repay all of the outstanding obligations in respect of principal, interest and fees under the 364-day Term Loan and to repay a portion of the outstanding loans under the five-year Term Loan Facility.
See "Note 15—Debt" for further details regarding the debt transactions noted above.
In addition to the refinancing activity noted above, we made principal payments on our long-term debt of $731 million, $80 million, and $59 million during fiscal 2020, 2019 and 2018, respectively. This activity included required principal payments on our term loans of $72 million, $69 million and $46 million during fiscal 2020, 2019 and 2018, 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 August 2016 credit agreements. The notes outstanding as of January 1, 2021, contain financial covenants and customary restrictive covenants. We were in compliance with all covenants as of January 1, 2021.
We paid dividends of $196 million for fiscal 2020 and $198 million for fiscal 2019 and 2018.
During fiscal 2020, we sold $1,866 million of accounts receivable under accounts receivable purchase agreements and received proceeds of $1,864 million (see "Note 22—Supplementary Cash Flow Information and Restricted Cash").
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 2020, 2019 and 2018, we made open market repurchases of our common stock for an aggregate purchase price of $67 million, $25 million and $167 million, respectively.
Additionally, 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 18—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.
COVID-19 has negatively impacted the financial markets and may impact our liquidity; we will continue to assess our liquidity needs as the pandemic and efforts to deploy vaccines evolve.
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, sales of accounts receivable and, if needed, borrowings from our revolving credit facility.
Leidos Holdings, Inc. Annual Report - 48
Summary of Cash Flows
The following table summarizes cash flow information for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
December 28,
2018
|
|
|
(in millions)
|
Net cash provided by operating activities
|
|
$
|
1,334
|
|
|
$
|
992
|
|
|
$
|
768
|
|
Net cash (used in) provided by investing activities
|
|
(2,815)
|
|
|
65
|
|
|
(114)
|
|
Net cash provided by (used in) financing activities
|
|
1,451
|
|
|
(709)
|
|
|
(707)
|
|
Net (decrease) increase in cash, cash equivalents and restricted cash
|
|
$
|
(30)
|
|
|
$
|
348
|
|
|
$
|
(53)
|
|
Net cash provided by operating activities increased $342 million for fiscal 2020 as compared to fiscal 2019. The increase was primarily due to the timing of payroll payments, including the deferral of $123 million of tax payments under the CARES Act, and the receipt of $85 million of proceeds related to the VirnetX legal matter.
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 used in investing activities increased $2,880 million for fiscal 2020 as compared to fiscal 2019. The increase was primarily due to $2,655 million of net cash paid related to the acquisitions of Dynetics and the SD&A Businesses, $178 million received in the prior year for the disposition of our commercial cybersecurity and health staff augmentation businesses, $96 million of proceeds received for the sale of real estate properties in the prior year and higher purchases of equipment and leasehold improvements associated with our new global headquarters. This was partially offset by $94 million of cash paid related to the acquisition of IMX in the prior year.
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 provided by financing activities increased $2,160 million for fiscal 2020 as compared to fiscal 2019. The increase was primarily due to $7,225 million of proceeds received related to the refinancing and the issuance of new debt and higher stock repurchases in the prior year. This was partially offset by $4,925 million of principal repayments of outstanding debt and the retirement of the $450 million senior notes in the current year.
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.
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 25—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 - 49
Contractual Obligations
The following table summarizes, as of January 1, 2021, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
2026 and thereafter
|
|
|
(in millions)
|
Contractual obligations(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (including current portion)(2)
|
|
$
|
6,115
|
|
|
$
|
244
|
|
|
$
|
245
|
|
|
$
|
807
|
|
|
$
|
335
|
|
|
$
|
1,454
|
|
|
$
|
3,030
|
|
Operating lease obligations
|
|
790
|
|
|
148
|
|
|
126
|
|
|
108
|
|
|
94
|
|
|
69
|
|
|
245
|
|
Finance lease obligations
|
|
11
|
|
|
6
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Other long-term liabilities(3)
|
|
262
|
|
|
9
|
|
|
71
|
|
|
9
|
|
|
9
|
|
|
110
|
|
|
54
|
|
Total contractual obligations
|
|
$
|
7,178
|
|
|
$
|
407
|
|
|
$
|
444
|
|
|
$
|
926
|
|
|
$
|
438
|
|
|
$
|
1,633
|
|
|
$
|
3,330
|
|
(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 $146 million, $148 million, $139 million, $142 million and $105 million of the balance for fiscal 2021, 2022, 2023, 2024 and 2025, respectively, and $651 million for fiscal 2026 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 1, 2021. The total interest payments on our outstanding senior unsecured notes are calculated based on the stated fixed rates.
(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 $4 million and $1 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 1, 2021. For a discussion of potential changes in these pension obligations, see "Note 21—Retirement Plans" of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K.
Guarantors and Issuers of Guaranteed Securities
Leidos, Inc. has fully and unconditionally guaranteed the obligations of Leidos under its $300 million notes due December 2040. Leidos has fully and unconditionally guaranteed the obligations of Leidos, Inc. under its $300 million notes due July 2033, $250 million notes due July 2032, the Notes and the 2031 Notes. The underlying subsidiaries of Leidos and Leidos Inc. do not guarantee these obligations.
We have entered into registration rights agreements, pursuant to which we agreed to use reasonable best efforts to file registration statements to permit the exchange of the Notes and the 2031 Notes and related guarantees for registered notes having terms substantially identical thereto, or in the alternative, the registered resale of the Notes and 2031 Notes and related guarantees under certain circumstances. See "Note 15—Debt" for further details.
Leidos Holdings, Inc. Annual Report - 50
Summarized financial information for Leidos and Leidos Inc., net of eliminations, for the year ended January 1, 2021 was as follows (in millions):
Balance Sheet
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
1,940
|
|
Goodwill
|
|
4,080
|
|
Investments in consolidated subsidiaries
|
|
4,254
|
|
Other long-term assets
|
|
1,419
|
|
|
|
$
|
11,693
|
|
|
|
|
Total current liabilities
|
|
$
|
2,001
|
|
Long-term debt, net of current portion
|
|
4,642
|
|
Intercompany payables
|
|
1,115
|
|
Other long-term liabilities
|
|
858
|
|
Total liabilities
|
|
8,616
|
|
Total equity
|
|
3,077
|
|
|
|
$
|
11,693
|
|
Income Statement
|
|
|
|
|
|
|
|
|
Revenues, net
|
|
$
|
8,736
|
|
Operating income
|
|
653
|
|
Net income
|
|
290
|
|
Net income attributable to Leidos common stockholders
|
|
290
|
|
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 12—Leases," "Note 24—Contingencies" and "Note 25—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
•Income Taxes
Leidos Holdings, Inc. Annual Report - 51
Revenue Recognition
Our revenues from contracts with customers are from offerings including digital modernization, cyber operations, mission software systems, integrated systems and mission operations, primarily with the U.S. government and its agencies. We also serve various state and local governments, foreign governments and 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 ("CPFF"), 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 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. Any taxes collected or imposed when determining the transaction price are excluded.
Certain 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 the performance obligations is generally based on an expected cost-plus margin approach, in accordance with the FAR. For certain product sales, prices from other standalone sales are used. 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 - 52
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 the promised services are performed. 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 for which we do not have an alternate use. Anticipated losses on service-based contracts are recognized when incurred (generally on a straight-line basis) over the contract term. In certain product sales, where the products have an alternate use, revenue is recognized 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, an EAC of a performance obligation includes future losses estimated to be incurred on onerous contracts, as and when known. On certain other contracts, principally T&M, FP-LOE and CPFF, 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
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. We recognize purchased intangible assets in connection with our business acquisitions at fair value on the acquisition date.
Goodwill and intangible assets, net collectively represent 60% and 58% of our total assets as of January 1, 2021 and January 3, 2020, respectively.
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 2020 and 2019, we had seven and six 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. In some cases, we use discounted cash flow analyses, which are based on estimates of future sales, earnings and cash flows after considering such factors as general market conditions, customer budgets, existing firm and future orders, changes in working capital, long term business plans and recent operating performance. 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 - 53
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 1, 2021 and January 3, 2020, we had $4.7 billion and $3.0 billion, respectively, of long-term debt, which included $1.4 billion and $1.9 billion, respectively, related to our senior unsecured term loans that have a variable stated interest rate that is determined based on the London Interbank Offered Rate ("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 unsecured term loan ("Variable Rate Loan"). 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 Loan. As of January 1, 2021, the notional value of the interest rate swap agreements was $1.1 billion. The interest rate swap agreements effectively converted a portion of our variable rate borrowing to a fixed rate borrowing. As of January 1, 2021, and January 3, 2020, the fair value of our interest rate swap agreements with respect to our Variable Rate Loan was a liability of $103 million and $75 million, respectively.
Leidos Holdings, Inc. Annual Report - 54
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 one-month LIBOR rate would not have a significant impact on our annual interest expense. For additional information related to our interest rate swap agreements and debt, see "Note 14—Derivative Instruments" and "Note 15—Debt," respectively, of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K.
Cash and Cash Equivalents
As of January 1, 2021, and January 3, 2020, our cash and cash equivalents included investments in several large institutional money market accounts. For fiscal 2020 and fiscal 2019, 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 2020 and 2019 and 9% of total revenues for fiscal 2018.
Leidos Holdings, Inc. Annual Report - 55
Item 8. Financial Statements and Supplementary Data
LEIDOS HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Page
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CONSOLIDATED FINANCIAL STATEMENTS
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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 - 56
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 1, 2021 and January 3, 2020, the related consolidated statements of income, comprehensive income, equity, and cash flows, for the fiscal years ended January 1, 2021, January 3, 2020, and December 28, 2018, 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 1, 2021 and January 3, 2020, and the results of its operations and its cash flows for the fiscal years ended January 1, 2021, January 3, 2020, and December 28, 2018, 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 1, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2021, 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 Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate 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 matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
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 - 57
On firm-fixed-price (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. 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 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.
Leidos Holdings, Inc. Annual Report - 58
Acquisitions – Valuation of Intangible Assets Acquired— Refer to Note 6 to the financial statements
Critical Audit Matter Description
As described in Note 6 of the consolidated financial statements, the Company completed two business acquisitions during the fiscal year ended January 1, 2021. On January 31, 2020 the Company acquired Dynetics, Inc. (“Dynetics”) for a purchase price of $1.6 billion, and on May 4, 2020, the Company acquired the Security Detection & Automation (“SD&A”) businesses from L3Harris Technologies for a purchase price of $1.0 billion. The Company’s accounting for the acquisitions included determining the fair value of the intangible assets acquired, which primarily included $485 million of program-related intangible assets acquired in the Dynetics acquisition, as well as $141 million, $48 million, $73 million and $92 million of programs, customer relations, technology and in process research and development intangible assets, respectively, acquired in the SD&A acquisition.
The fair value of the intangible assets was determined based on estimates and judgments, including the amount and timing of expected future cash flows, long-term growth rates and discount rates. In some cases, the Company used discounted cash flow analyses, which were based on estimates of future sales, earnings and cash flows after considering such factors as general market conditions, customer budgets, existing and future orders, changes in working capital, long term business plans and recent operating performance. These estimates and judgments are forward-looking and could be affected by future economic and market conditions. Given the judgments necessary to audit such accounting conclusions, the estimates required extensive audit effort due to the uncertainty associated with future events 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 the valuation of intangible assets included the following, among others:
•We obtained and read the executed purchase agreements.
•We tested the effectiveness of controls over the management’s process for identifying and determining the fair value of the acquired intangible assets.
•We tested the completeness and accuracy of the underlying data used in the fair value models which included inspecting contractual documents, comparing projected cash flows to both historical actuals and industry data, and inquiring of program management.
•We involved our valuation specialists to assist with the evaluation of methodologies used by the Company and significant valuation assumptions included in the fair value estimates, including the discount rate and revenue growth rate applied to future cash flows.
•We performed a sensitivity analyses over assumptions used in the model, to evaluate the risk associated with a change in the fair value of the intangible assets resulting from changes in the assumptions.
•We compared the significant assumptions to current industry, market and economic trends, historical results of the acquired businesses, and to other relevant factors including benchmark data.
•We evaluated the adequacy of the Company’s disclosures related to these acquisitions.
/s/ Deloitte & Touche LLP
McLean, Virginia
February 23, 2021
We have served as the Company's auditor since fiscal 2000.
Leidos Holdings, Inc. Annual Report - 59
LEIDOS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
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January 1,
2021
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January 3,
2020
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(in millions)
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ASSETS
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Cash and cash equivalents
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$
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524
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|
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$
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668
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Receivables, net
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2,137
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1,734
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Inventory, net
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|
276
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|
|
72
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Other current assets
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402
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|
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338
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Total current assets
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3,339
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2,812
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Property, plant and equipment, net
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604
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|
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287
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Intangible assets, net
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1,216
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|
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530
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Goodwill
|
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6,313
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|
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4,912
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Operating lease right-of-use assets, net
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581
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|
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400
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Other assets
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458
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|
|
426
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$
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12,511
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|
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$
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9,367
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LIABILITIES AND EQUITY
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Accounts payable and accrued liabilities
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$
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2,175
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|
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$
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1,837
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Accrued payroll and employee benefits
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632
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|
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435
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Long-term debt, current portion
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100
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|
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61
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Total current liabilities
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2,907
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|
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2,333
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Long-term debt, net of current portion
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4,644
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|
|
2,925
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Operating lease liabilities
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|
564
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|
|
326
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|
Deferred tax liabilities
|
|
234
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|
|
184
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|
Other long-term liabilities
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|
291
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|
|
182
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|
Commitments and contingencies (Notes 12, 24 and 25)
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Stockholders’ equity:
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Preferred stock, $0.0001 par value, 10 million shares authorized and no shares issued and outstanding at January 1, 2021 and January 3, 2020
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—
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|
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—
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Common stock, $0.0001 par value, 500 million shares authorized, 142 million and 141 million shares issued and outstanding at January 1, 2021 and January 3, 2020, respectively
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|
—
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|
|
—
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|
Additional paid-in capital
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|
2,580
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|
|
2,587
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|
Retained earnings
|
|
1,328
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|
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896
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Accumulated other comprehensive loss
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(46)
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(70)
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Total Leidos stockholders’ equity
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3,862
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|
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3,413
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Non-controlling interest
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|
9
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|
|
4
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|
Total equity
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3,871
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|
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3,417
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|
|
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$
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12,511
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|
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$
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9,367
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See accompanying notes to consolidated financial statements.
Leidos Holdings, Inc. Annual Report - 60
LEIDOS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
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Year Ended
|
|
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January 1,
2021
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January 3,
2020
|
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December 28,
2018
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(in millions, except per share amounts)
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Revenues
|
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$
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12,297
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|
|
$
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11,094
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|
|
$
|
10,194
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Cost of revenues
|
|
10,560
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|
|
9,546
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|
|
8,690
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Selling, general and administrative expenses
|
|
770
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|
|
689
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|
|
729
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Bad debt expense and recoveries
|
|
(68)
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|
|
(40)
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|
|
—
|
|
Acquisition, integration and restructuring costs
|
|
39
|
|
|
5
|
|
|
37
|
|
Asset impairment charges
|
|
12
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|
|
—
|
|
|
7
|
|
Equity earnings of non-consolidated subsidiaries
|
|
(14)
|
|
|
(18)
|
|
|
(18)
|
|
Operating income
|
|
998
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|
|
912
|
|
|
749
|
|
Non-operating expense:
|
|
|
|
|
|
|
Interest expense, net
|
|
(179)
|
|
|
(133)
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|
|
(138)
|
|
Other (expense) income, net
|
|
(38)
|
|
|
87
|
|
|
(1)
|
|
Income before income taxes
|
|
781
|
|
|
866
|
|
|
610
|
|
Income tax expense
|
|
(152)
|
|
|
(196)
|
|
|
(28)
|
|
Net income
|
|
629
|
|
|
670
|
|
|
582
|
|
Less: net income attributable to non-controlling interest
|
|
1
|
|
|
3
|
|
|
1
|
|
Net income attributable to Leidos common stockholders
|
|
$
|
628
|
|
|
$
|
667
|
|
|
$
|
581
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
Basic
|
|
$
|
4.42
|
|
|
$
|
4.66
|
|
|
$
|
3.85
|
|
Diluted
|
|
4.36
|
|
|
4.60
|
|
|
3.80
|
|
See accompanying notes to consolidated financial statements.
Leidos Holdings, Inc. Annual Report - 61
LEIDOS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
December 28,
2018
|
|
|
(in millions)
|
Net income
|
|
$
|
629
|
|
|
$
|
670
|
|
|
$
|
582
|
|
Foreign currency translation adjustments
|
|
63
|
|
|
8
|
|
|
(61)
|
|
Unrecognized loss on derivative instruments
|
|
(37)
|
|
|
(47)
|
|
|
(10)
|
|
Pension adjustments
|
|
(2)
|
|
|
(1)
|
|
|
(1)
|
|
Total other comprehensive income (loss), net of taxes
|
|
24
|
|
|
(40)
|
|
|
(72)
|
|
Comprehensive income
|
|
653
|
|
|
630
|
|
|
510
|
|
Less: comprehensive income attributable to non-controlling interest
|
|
1
|
|
|
3
|
|
|
1
|
|
Comprehensive income attributable to Leidos common stockholders
|
|
$
|
652
|
|
|
$
|
627
|
|
|
$
|
509
|
|
See accompanying notes to consolidated financial statements.
Leidos Holdings, Inc. Annual Report - 62
LEIDOS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock
|
|
Additional
paid-in
capital
|
|
(Accumulated deficit) retained earnings
|
|
Accumulated
other
comprehensive
income (loss)
|
|
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
|
|
—
|
|
|
—
|
|
|
581
|
|
|
—
|
|
|
581
|
|
|
1
|
|
|
582
|
|
Other comprehensive loss, net of taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(72)
|
|
|
(72)
|
|
|
—
|
|
|
(72)
|
|
Issuances of stock (less forfeitures)
|
|
1
|
|
|
17
|
|
|
—
|
|
|
—
|
|
|
17
|
|
|
—
|
|
|
17
|
|
Repurchases of stock and other
|
|
(6)
|
|
|
(438)
|
|
|
—
|
|
|
—
|
|
|
(438)
|
|
|
—
|
|
|
(438)
|
|
Dividends of $1.28 per share
|
|
—
|
|
|
—
|
|
|
(194)
|
|
|
—
|
|
|
(194)
|
|
|
—
|
|
|
(194)
|
|
Stock-based compensation
|
|
—
|
|
|
44
|
|
|
—
|
|
|
—
|
|
|
44
|
|
|
—
|
|
|
44
|
|
Purchase of a noncontrolling interest
|
|
—
|
|
|
(1)
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
(10)
|
|
|
(11)
|
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
(1)
|
|
Balance at December 28, 2018
|
|
146
|
|
|
2,966
|
|
|
372
|
|
|
(30)
|
|
|
3,308
|
|
|
3
|
|
|
3,311
|
|
Cumulative adjustments related to ASU adoptions
|
|
—
|
|
|
—
|
|
|
48
|
|
|
—
|
|
|
48
|
|
|
—
|
|
|
48
|
|
Balance at December 29, 2018
|
|
146
|
|
|
2,966
|
|
|
420
|
|
|
(30)
|
|
|
3,356
|
|
|
3
|
|
|
3,359
|
|
Net income
|
|
—
|
|
|
—
|
|
|
667
|
|
|
—
|
|
|
667
|
|
|
3
|
|
|
670
|
|
Other comprehensive loss, net of taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(40)
|
|
|
(40)
|
|
|
—
|
|
|
(40)
|
|
Issuances of stock (less forfeitures)
|
|
1
|
|
|
28
|
|
|
—
|
|
|
—
|
|
|
28
|
|
|
—
|
|
|
28
|
|
Repurchases of stock and other
|
|
(6)
|
|
|
(458)
|
|
|
—
|
|
|
—
|
|
|
(458)
|
|
|
—
|
|
|
(458)
|
|
Dividends of $1.32 per share
|
|
—
|
|
|
—
|
|
|
(191)
|
|
|
—
|
|
|
(191)
|
|
|
—
|
|
|
(191)
|
|
Stock-based compensation
|
|
—
|
|
|
52
|
|
|
—
|
|
|
—
|
|
|
52
|
|
|
—
|
|
|
52
|
|
Other
|
|
—
|
|
|
(1)
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
(2)
|
|
|
(3)
|
|
Balance at January 3, 2020
|
|
141
|
|
|
2,587
|
|
|
896
|
|
|
(70)
|
|
|
3,413
|
|
|
4
|
|
|
3,417
|
|
Cumulative adjustments related to ASU adoptions
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
—
|
|
|
(1)
|
|
|
—
|
|
|
(1)
|
|
Balance at January 4, 2020
|
|
141
|
|
|
2,587
|
|
|
895
|
|
|
(70)
|
|
|
3,412
|
|
|
4
|
|
|
3,416
|
|
Net income
|
|
—
|
|
|
—
|
|
|
628
|
|
|
—
|
|
|
628
|
|
|
1
|
|
|
629
|
|
Other comprehensive income, net of taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24
|
|
|
24
|
|
|
—
|
|
|
24
|
|
Issuances of stock (less forfeitures)
|
|
1
|
|
|
36
|
|
|
—
|
|
|
—
|
|
|
36
|
|
|
—
|
|
|
36
|
|
Repurchases of stock and other
|
|
—
|
|
|
(105)
|
|
|
—
|
|
|
—
|
|
|
(105)
|
|
|
—
|
|
|
(105)
|
|
Dividends of $1.36 per share
|
|
—
|
|
|
—
|
|
|
(195)
|
|
|
—
|
|
|
(195)
|
|
|
—
|
|
|
(195)
|
|
Stock-based compensation
|
|
—
|
|
|
62
|
|
|
—
|
|
|
—
|
|
|
62
|
|
|
—
|
|
|
62
|
|
Capital contributions to non-controlling interest
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
4
|
|
Balance at January 1, 2021
|
|
142
|
|
|
$
|
2,580
|
|
|
$
|
1,328
|
|
|
$
|
(46)
|
|
|
$
|
3,862
|
|
|
$
|
9
|
|
|
$
|
3,871
|
|
See accompanying notes to consolidated financial statements.
Leidos Holdings, Inc. Annual Report - 63
LEIDOS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
December 28,
2018
|
|
|
(in millions)
|
Cash flows from operations:
|
|
|
|
|
|
|
Net income
|
|
$
|
629
|
|
|
$
|
670
|
|
|
$
|
582
|
|
Adjustments to reconcile net income to net cash provided by operations:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
282
|
|
|
234
|
|
|
257
|
|
Gain on sale of businesses
|
|
—
|
|
|
(88)
|
|
|
—
|
|
Stock-based compensation
|
|
62
|
|
|
52
|
|
|
44
|
|
Loss on debt extinguishment
|
|
36
|
|
|
—
|
|
|
1
|
|
Asset impairment charges
|
|
12
|
|
|
—
|
|
|
7
|
|
Deferred income taxes
|
|
(4)
|
|
|
18
|
|
|
(49)
|
|
Bad debt expense
|
|
13
|
|
|
12
|
|
|
—
|
|
Other
|
|
1
|
|
|
3
|
|
|
17
|
|
Change in assets and liabilities, net of effects of acquisitions and dispositions:
|
|
|
|
|
|
|
Receivables
|
|
(127)
|
|
|
116
|
|
|
(58)
|
|
Other current assets and other long-term assets
|
|
104
|
|
|
41
|
|
|
(17)
|
|
Accounts payable and accrued liabilities and other long-term liabilities
|
|
151
|
|
|
(71)
|
|
|
(14)
|
|
Accrued payroll and employee benefits
|
|
161
|
|
|
(29)
|
|
|
(12)
|
|
Income taxes receivable/payable
|
|
14
|
|
|
34
|
|
|
10
|
|
Net cash provided by operating activities
|
|
1,334
|
|
|
992
|
|
|
768
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
Acquisitions of businesses, net of cash acquired
|
|
(2,655)
|
|
|
(94)
|
|
|
(81)
|
|
Payments for property, equipment and software
|
|
(183)
|
|
|
(121)
|
|
|
(73)
|
|
Proceeds from disposition of businesses
|
|
—
|
|
|
178
|
|
|
—
|
|
Net proceeds from sale of assets
|
|
12
|
|
|
96
|
|
|
—
|
|
Collections on promissory notes
|
|
5
|
|
|
5
|
|
|
40
|
|
Other
|
|
6
|
|
|
1
|
|
|
—
|
|
Net cash (used in) provided by investing activities
|
|
(2,815)
|
|
|
65
|
|
|
(114)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
Proceeds from debt issuance
|
|
7,225
|
|
|
—
|
|
|
—
|
|
Payments of long-term debt
|
|
(5,456)
|
|
|
(80)
|
|
|
(59)
|
|
Payments for debt issuance and modification costs
|
|
(51)
|
|
|
—
|
|
|
(8)
|
|
Dividend payments
|
|
(196)
|
|
|
(198)
|
|
|
(198)
|
|
Repurchases of stock and other
|
|
(105)
|
|
|
(458)
|
|
|
(438)
|
|
Proceeds from issuances of stock
|
|
35
|
|
|
27
|
|
|
14
|
|
Payment of tax indemnification liability
|
|
—
|
|
|
—
|
|
|
(23)
|
|
Proceeds from real estate financing transaction
|
|
—
|
|
|
—
|
|
|
14
|
|
Other
|
|
(1)
|
|
|
—
|
|
|
(9)
|
|
Net cash provided by (used in) financing activities
|
|
1,451
|
|
|
(709)
|
|
|
(707)
|
|
Leidos Holdings, Inc. Annual Report - 64
LEIDOS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS [CONTINUED]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
December 28,
2018
|
|
|
(in millions)
|
Net (decrease) increase in cash, cash equivalents and restricted cash
|
|
(30)
|
|
|
348
|
|
|
(53)
|
|
Cash, cash equivalents and restricted cash at beginning of year
|
|
717
|
|
|
369
|
|
|
422
|
|
Cash, cash equivalents and restricted cash at end of year
|
|
$
|
687
|
|
|
$
|
717
|
|
|
$
|
369
|
|
See accompanying notes to consolidated financial statements.
Leidos Holdings, Inc. Annual Report - 65
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, homeland security, civil and health markets, both domestically and internationally. Leidos' customers include the U.S. Department of Defense ("DoD"), the U.S. Intelligence Community, the U.S. Department of Homeland Security, the Federal Aviation Administration, the Department of Veterans Affairs and many other U.S. civilian, state and local government agencies as well as foreign government agencies. Unless indicated otherwise, references to "we," "us" and "our" refer collectively to Leidos Holdings, Inc. and its consolidated subsidiaries. We operate in three reportable segments: Defense Solutions, Civil and Health. Additionally, we separately present the unallocable costs associated with corporate functions as Corporate.
We have 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. MSA's contract is anticipated to end in early fiscal 2021. We also have a 53% controlling interest in Hanford Mission Integration Solutions, LLC ("HMIS"), the legal entity for the follow-on contract to MSA's contract and a joint venture with Centerra Group, LLC and Parsons Government Services, Inc. We consolidate the financial results for MSA and HMIS into our 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 VIE are not material to the consolidated financial statements for the periods presented. Intercompany accounts and transactions between consolidated companies have been eliminated in consolidation.
Effective the beginning of fiscal 2020, certain contracts were reassigned from the Civil reportable segment to the Defense Solutions reportable segment (see "Note 23—Business Segments"). Fiscal 2019 and 2018 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. We disaggregated "Inventory, net" from "Other current assets" on the consolidated balance sheets. We also disaggregated "Loss on debt extinguishment" from "Other" within operating activities and "Payments for debt issuance and modification costs" from "Other" within financing activities on the consolidated statements of cash flows. Additionally, we combined "Other current assets" and "Other long-term assets" into "Other current assets and other long-term assets" and "Accounts payable and accrued liabilities" and "Other long-term liabilities" into "Accounts payable and accrued liabilities and other long-term liabilities" on the consolidated statements of cash flows.
Note 2—Accounting Standards
Accounting Standards Updates Adopted
ASU 2016-13, ASU 2018-19, ASU 2019-05 and ASU 2019-11, Financial Instruments – Credit Losses (Topic 326)
In June 2016, the Financial Accounting Standards Board ("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.
Effective January 4, 2020, we adopted the requirements of Topic 326 using the modified retrospective approach. The adoption resulted in an immaterial impact to our financial assets and processes for determining the expected credit loss.
Leidos Holdings, Inc. Annual Report - 66
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting Standards Updates Issued But Not Yet Adopted
ASU 2020-04, Reference Rate Reform (Topic 848)
In March 2020, the FASB issued ASU 2020-04 which provides companies with optional expedients and exceptions to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. This update provides optional expedients for applying accounting guidance to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of the reference rate reform. The amendments in this update are effective for all entities as of March 2020 and can be adopted using a prospective approach no later than December 31, 2022. We are currently evaluating the impacts of the reference rate reform.
ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity's Own Equity (Subtopic 815-40)
In August 2020, the FASB issued ASU 2020-06 which simplifies the accounting for convertible debt and convertible preferred stock by removing the requirements to separate embedded conversion features from the host convertible instruments. Additionally, the amendments in this update simplify the guidance in Subtopic 815-40 by removing certain criteria that must be satisfied in order to classify a contract as equity. This update also improves the consistency of earnings per share calculations by requiring an entity to use the if-converted method of calculating diluted earnings per share rather than the treasury stock method for convertible instruments and also by requiring the inclusion of the potential effect of shares settled in cash or shares in the diluted earnings per share calculation. The amendments in this update are effective for public entities for fiscal years beginning after December 15, 2021, and can be adopted using either a fully or modified retrospective approach. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. Entities should adopt the guidance as of the beginning of the fiscal year of adoption and cannot adopt the guidance in an interim reporting period.
We plan to early adopt this update in the beginning of fiscal 2021, and expect the associated financial statement impacts to be immaterial.
Note 3—Summary of Significant Accounting Policies
Reporting Periods
Leidos' fiscal year ends on the Friday nearest the end of December. Fiscal 2020 ended January 1, 2021. Fiscal 2020 and 2018 each included 52 weeks and fiscal 2019 included 53 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, right-of-use ("ROU") assets and lease liabilities, fair value and impairment of intangible assets and goodwill, income taxes, pension benefits, stock-based compensation expense and contingencies. These estimates have been prepared by management on the basis of the most current and best available information; however, actual results could differ materially from those estimates.
Operating Cycle
Our 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.
Leidos Holdings, Inc. Annual Report - 67
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Business Combinations, Investments and Variable Interest Entities
Business Combinations
The accounting for business combinations requires management 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. Estimating the fair value of acquired assets and assumed liabilities, including intangibles, requires judgments about expected future cash flows, weighted-average cost of capital, discount rates and expected long-term growth rates.
Investments
Investments in entities and corporate joint ventures where we have a non-controlling ownership interest but over which we have the ability to exercise significant influence, are accounted for under the equity method of accounting. We recognize our proportionate share of the entities' net income or loss and do not consolidate the entities' assets and liabilities.
Equity investments in entities over which we do 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
We occasionally form joint ventures and/or enter into arrangements with special purpose limited liability companies for the purpose of bidding and executing on specific projects. We analyze each such arrangement to determine whether it represents a VIE. If the arrangement is determined to be a VIE, we assess whether we are the primary beneficiary of the VIE and are consequently required to consolidate the VIE.
Divestitures
From time-to-time, we 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 our costs. Restructuring costs may include one-time termination of benefits, costs to terminate contracts and other permanent exit costs to consolidate or close facilities directly related to the restructuring program.
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 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.
Revenue Recognition
Our revenues from contracts with customers are from offerings including digital modernization, cyber operations, mission software systems, integrated systems and mission operations, primarily with the U.S. government and its agencies. We also serve various state and local governments, foreign governments and 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 ("CPFF"), cost-plus-award-fee, cost-plus-incentive-fee and fixed-price-incentive-fee ("FP-IF") contracts.
Leidos Holdings, Inc. Annual Report - 68
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 indefinite delivery/indefinite quantity ("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 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. Any taxes collected or imposed when determining the transaction price are excluded.
Certain 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 the performance obligations is generally based on an expected cost-plus margin approach, in accordance with the FAR. For certain product sales, prices from other standalone sales are used. Substantially all of our contracts do not contain a significant financing component, which would require an adjustment to the transaction price of the contract.
We recognize revenue on our service-based contracts primarily over time as there is continuous transfer of control to the customer over the duration of the contract as the promised services are performed. 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 for which we do not have an alternate use. Anticipated losses on service-based contracts are recognized when incurred (generally on a straight-line basis) over the contract term. In certain product sales, where the products have an alternate use, revenue is recognized 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 - 69
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, an EAC of a performance obligation includes future losses estimated to be incurred on onerous contracts, as and when known. On certain other contracts, principally T&M, FP-LOE and CPFF, revenue is generally 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.
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. 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 24—Contingencies").
Pre-contract Costs
Costs incurred on projects as pre-contract costs are deferred as assets when we have been requested by the customer to begin work under a new arrangement prior to contract execution and it is probable that we will recover the costs through the issuance of a contract. Pre-contract costs are amortized over the contract period of performance or a specified period of performance.
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, a 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 or a specified period of performance, including unexercised option periods that are reasonably certain of being exercised.
Project Assets
Purchases of project assets are capitalized for specific contracts where we maintain ownership of the asset over the life of the contract and 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 - 70
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in estimates on contracts for the periods presented were as follows:
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Year Ended
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January 1,
2021
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January 3,
2020
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December 28,
2018
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(in millions, except for per share amounts)
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Favorable impact
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$
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137
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$
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95
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$
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167
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Unfavorable impact
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(61)
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(52)
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(62)
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|
Net favorable impact to income before income taxes
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$
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76
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$
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43
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$
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105
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Impact on diluted EPS attributable to Leidos common stockholders
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$
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0.39
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|
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$
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0.23
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|
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$
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0.52
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|
The impact on diluted earnings per share ("EPS") attributable to Leidos common stockholders is calculated using our statutory tax rate.
Revenue Recognized from Prior Obligations
During fiscal 2020, 2019 and 2018, revenue recognized from performance obligations satisfied in previous periods was $40 million, $56 million and $102 million, 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.
Selling, General and Administrative Expenses
We classify indirect costs incurred within or allocated to our 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 our disclosure statements under U.S. government Cost Accounting Standards ("CAS").
Selling, general and administrative expenses include general and administrative, bid and proposal and company-funded research and development expenses.
We conduct research and development activities under customer-funded contracts and with company-funded research and development funds. Company-funded research and development expense was $73 million, $49 million and $46 million for fiscal 2020, 2019 and 2018, respectively. Expenses for research and development activities performed under customer contracts are charged directly to cost of revenues for those contracts.
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.
Leidos Holdings, Inc. Annual Report - 71
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Cash and Cash Equivalents
Our cash equivalents are primarily comprised of investments in several large institutional money market accounts, with original maturity of three months or less. Outstanding payments are included within "Cash and cash equivalents" and "Accounts payable and accrued liabilities" correspondingly on the consolidated balance sheets. At January 1, 2021, and January 3, 2020, $237 million and $169 million, respectively, of outstanding payments were included within "Cash and cash equivalents."
Restricted Cash
We have 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
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.
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 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 our 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 we have not performed our 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 us to concentrations of credit risk primarily consist of accounts receivable and derivatives. Since our receivables are primarily with the U.S. government, we do not have exposure to a material credit risk. We manage our 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. Generally, 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, baggage scanning equipment and small glide munitions. Inventory is evaluated against historical and planned usage to determine appropriate provisions for obsolete inventory.
Leidos Holdings, Inc. Annual Report - 72
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. 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 2020 and 2019, we had seven and six 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, we consider factors including, but not limited to, current macroeconomic conditions, industry and market conditions, cost factors, financial performance and other events relevant to the entity or reporting unit under evaluation to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine that it is more likely than not that a reporting unit's fair value is less than its carrying amount, a quantitative goodwill impairment test is performed.
When performing a quantitative goodwill impairment test, the reporting unit carrying value is compared to its fair value. Goodwill is deemed impaired if, and the impairment loss is recognized for the amount by which, the reporting unit carrying value exceeds its fair value.
We estimate 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 intangible assets are amortized over their respective estimated useful lives in proportion to the pattern of economic benefit based on expected future discounted cash flows. Backlog and trade name intangible assets are amortized on a straight-line basis over their estimated useful lives. Customer relationships and software and technology intangible assets are amortized either on a straight-line basis over their estimated useful lives or over their respective estimated useful lives in proportion to the pattern of economic benefit based on expected future discounted cash flows, as deemed appropriate.
Intangible assets with finite lives are amortized over the following periods:
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Estimated useful lives (in years)
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Backlog
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1
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Customer relationships
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8-10
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Programs
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4-13
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Software and technology
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3-15
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Trade names
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3
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Intangible assets with finite lives are assessed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
Intangible assets with indefinite lives are not amortized but are assessed for impairment at the beginning of the fourth quarter and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
Property, Plant and Equipment
Purchases of property, plant and equipment, including purchases of software and software licenses, as well as costs associated with major renewals and improvements are capitalized. Maintenance, repairs and minor renewals and improvements are expensed as incurred.
Construction in Progress ("CIP") is used to accumulate all costs for projects that are not yet complete. CIP balances are transferred to the appropriate asset account when the asset is capitalized and ready for its intended use.
Leidos Holdings, Inc. Annual Report - 73
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is recognized. Depreciation is recognized using the methods and estimated useful lives as follows:
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Depreciation method
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Estimated useful lives (in years)
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Computers and other equipment
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Straight-line or declining-balance
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1-15
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Buildings
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Straight-line
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Not to exceed 40
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Building improvements and leasehold improvements
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Straight-line
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Shorter of useful life of asset or remaining lease term
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Office furniture and fixtures
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Straight-line or declining-balance
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6-9
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We evaluate our 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
We have 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 right to use an underlying asset over the lease term and lease liabilities represent the 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. We generally do not know the implicit rate for our leases; therefore, the discount rate used is our incremental borrowing rate which is determined based on the rate of interest that we 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 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 we will exercise the option. 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 1, 2021, we did not have any lease agreements with residual value guarantees.
We use 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 is applied to all material classes of leased assets.
The related lease payments on short-term facilities and equipment leases are recognized as expense on a straight-line basis over the lease term.
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 we have committed to a plan to abandon the lease before the end of its previously estimated useful life and there is no expectation that we will re-enter or re-purpose the space, including the fact that it cannot be subleased or transferred to another program within Leidos.
Leidos Holdings, Inc. Annual Report - 74
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lessor
We are a lessor on certain equipment sales-type and operating lease arrangements with our customers. To be considered lease revenue, the contract must contain a specified asset, we 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 we determine that it is reasonably certain the customer will exercise an option.
We have arrangements that contain both lease and non-lease components. We 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 we account 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 us to develop our own assumptions about the assumptions that market participants would use in pricing the asset or liability (Level 3).
The accounting guidance for fair value measurements requires that we 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. We have not made fair value option elections on any of our 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.
Our 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, we generally classify non-financial instruments as either Level 2 or Level 3 fair value measurements.
Financial Instruments
We are 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. We manage our risk to changes in interest rates and foreign currency exchange rates through the use of derivative instruments.
For fixed rate borrowings, we use 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).
Leidos Holdings, Inc. Annual Report - 75
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For variable rate borrowings, we use fixed interest rate swaps, effectively converting a portion of the variable interest rate payments to fixed interest rate payments. These swaps are designated as cash flow hedges. The fair value of these interest rate swaps is determined based on observed values for the underlying interest rates (Level 2).
We enter into foreign currency forward contracts in order to mitigate fluctuations in our earnings and cash flows due to changes in foreign currency exchange rates. The foreign currency forward contracts are not designated as hedges and hedge accounting does not apply. We do not hold derivative instruments for trading or speculative purposes.
Our 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
We account for stock-based compensation at the grant date based on the fair value of the award and recognize 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 Leidos 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 in stockholders' equity. Gains and losses due to movements in foreign currency exchange rates are recognized as "Other (expense) income, 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, General Services Administration Schedule or other master agreement contract vehicles, with the exception of certain IDIQ contracts where task orders are not competitively awarded and separately priced but instead are used as a funding mechanism, and where there is a basis for estimating future revenues and funding on future anticipated task orders.
As of January 1, 2021, we had $15.7 billion of remaining performance obligations, approximately 50%, 16% and 34% of which are expected to be recognized as revenues in fiscal 2021, fiscal 2022 and fiscal 2023 and thereafter, respectively.
Disaggregation of Revenues
We disaggregate revenues by customer-type, contract-type and geographic location for each of our reportable segments. These categories represent how the nature, timing and uncertainty of revenues and cash flows are affected.
Fiscal 2019 and 2018 amounts have been recast for the contracts that were reassigned from the Civil reportable segment to the Defense Solutions reportable segment (see "Note 23—Business Segments").
Leidos Holdings, Inc. Annual Report - 76
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Disaggregated revenues by customer-type were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 1, 2021
|
|
|
Defense Solutions
|
|
Civil
|
|
Health
|
|
Total
|
|
|
(in millions)
|
DoD and U.S. Intelligence Community
|
|
$
|
5,407
|
|
|
$
|
59
|
|
|
$
|
519
|
|
|
$
|
5,985
|
|
Other government agencies(1)
|
|
995
|
|
|
2,418
|
|
|
1,329
|
|
|
4,742
|
|
Commercial and non-U.S. customers
|
|
937
|
|
|
426
|
|
|
107
|
|
|
1,470
|
|
Total
|
|
$
|
7,339
|
|
|
$
|
2,903
|
|
|
$
|
1,955
|
|
|
$
|
12,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 3, 2020
|
|
|
Defense Solutions
|
|
Civil
|
|
Health
|
|
Total
|
|
|
(in millions)
|
DoD and U.S. Intelligence Community
|
|
$
|
4,767
|
|
|
$
|
67
|
|
|
$
|
491
|
|
|
$
|
5,325
|
|
Other government agencies(1)
|
|
685
|
|
|
2,291
|
|
|
1,332
|
|
|
4,308
|
|
Commercial and non-U.S. customers
|
|
847
|
|
|
345
|
|
|
151
|
|
|
1,343
|
|
Total
|
|
$
|
6,299
|
|
|
$
|
2,703
|
|
|
$
|
1,974
|
|
|
$
|
10,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 28, 2018
|
|
|
Defense Solutions
|
|
Civil
|
|
Health
|
|
Total
|
|
|
(in millions)
|
DoD and U.S. Intelligence Community
|
|
$
|
4,427
|
|
|
$
|
60
|
|
|
$
|
386
|
|
|
$
|
4,873
|
|
Other government agencies(1)
|
|
494
|
|
|
2,071
|
|
|
1,276
|
|
|
3,841
|
|
Commercial and non-U.S. customers
|
|
857
|
|
|
468
|
|
|
155
|
|
|
1,480
|
|
Total
|
|
$
|
5,778
|
|
|
$
|
2,599
|
|
|
$
|
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.
The majority of our 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 1, 2021
|
|
|
Defense Solutions
|
|
Civil
|
|
Health
|
|
Total
|
|
|
(in millions)
|
Cost-reimbursement and fixed-price-incentive-fee
|
|
$
|
4,504
|
|
|
$
|
1,411
|
|
|
$
|
280
|
|
|
$
|
6,195
|
|
Firm-fixed-price
|
|
2,067
|
|
|
1,061
|
|
|
1,303
|
|
|
4,431
|
|
Time-and-materials and fixed-price-level-of-effort
|
|
768
|
|
|
431
|
|
|
372
|
|
|
1,571
|
|
Total
|
|
$
|
7,339
|
|
|
$
|
2,903
|
|
|
$
|
1,955
|
|
|
$
|
12,197
|
|
Leidos Holdings, Inc. Annual Report - 77
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 3, 2020
|
|
|
Defense Solutions
|
|
Civil
|
|
Health
|
|
Total
|
|
|
(in millions)
|
Cost-reimbursement and fixed-price-incentive-fee
|
|
$
|
4,070
|
|
|
$
|
1,624
|
|
|
$
|
234
|
|
|
$
|
5,928
|
|
Firm-fixed-price
|
|
1,642
|
|
|
636
|
|
|
1,296
|
|
|
3,574
|
|
Time-and-materials and fixed-price-level-of-effort
|
|
587
|
|
|
443
|
|
|
444
|
|
|
1,474
|
|
Total
|
|
$
|
6,299
|
|
|
$
|
2,703
|
|
|
$
|
1,974
|
|
|
$
|
10,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 28, 2018
|
|
|
Defense Solutions
|
|
Civil
|
|
Health
|
|
Total
|
|
|
(in millions)
|
Cost-reimbursement and fixed-price-incentive-fee
|
|
$
|
3,747
|
|
|
$
|
1,533
|
|
|
$
|
189
|
|
|
$
|
5,469
|
|
Firm-fixed-price
|
|
1,434
|
|
|
601
|
|
|
1,134
|
|
|
3,169
|
|
Time-and-materials and fixed-price-level-of-effort
|
|
597
|
|
|
465
|
|
|
494
|
|
|
1,556
|
|
Total
|
|
$
|
5,778
|
|
|
$
|
2,599
|
|
|
$
|
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 lower 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 exposure to risk of cost overruns.
Disaggregated revenues by geographic location were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 1, 2021
|
|
|
Defense Solutions
|
|
Civil
|
|
Health
|
|
Total
|
|
|
(in millions)
|
United States
|
|
$
|
6,501
|
|
|
$
|
2,738
|
|
|
$
|
1,955
|
|
|
$
|
11,194
|
|
International
|
|
838
|
|
|
165
|
|
|
—
|
|
|
1,003
|
|
Total
|
|
$
|
7,339
|
|
|
$
|
2,903
|
|
|
$
|
1,955
|
|
|
$
|
12,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 3, 2020
|
|
|
Defense Solutions
|
|
Civil
|
|
Health
|
|
Total
|
|
|
(in millions)
|
United States
|
|
$
|
5,494
|
|
|
$
|
2,632
|
|
|
$
|
1,974
|
|
|
$
|
10,100
|
|
International
|
|
805
|
|
|
71
|
|
|
—
|
|
|
876
|
|
Total
|
|
$
|
6,299
|
|
|
$
|
2,703
|
|
|
$
|
1,974
|
|
|
$
|
10,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 28, 2018
|
|
|
Defense Solutions
|
|
Civil
|
|
Health
|
|
Total
|
|
|
(in millions)
|
United States
|
|
$
|
4,963
|
|
|
$
|
2,485
|
|
|
$
|
1,817
|
|
|
$
|
9,265
|
|
International
|
|
815
|
|
|
114
|
|
|
—
|
|
|
929
|
|
Total
|
|
$
|
5,778
|
|
|
$
|
2,599
|
|
|
$
|
1,817
|
|
|
$
|
10,194
|
|
Leidos Holdings, Inc. Annual Report - 78
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our international business operations, primarily located in Australia and the U.K., are subject to additional and different risks than our 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 our 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 our 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.
Revenues by contract-type, customer-type and geographic location exclude lease income of $100 million and $118 million for fiscal 2020 and 2019, respectively (see "Note 12—Leases").
Note 5—Contract Assets and Liabilities
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, the timing of revenue recognition, customer billings and cash collections for each contract results in a net contract asset or liability at the end of each reporting period.
Contract assets consist of unbilled receivables, which is the amount of revenue recognized that exceeds the amount billed to the customer, where right to payment is not just subject to the passage of time. Unbilled receivables exclude amounts billable where the right to consideration is unconditional. Contract liabilities consist of deferred revenue.
The components of contract assets and contract liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet line item
|
|
January 1,
2021
|
|
January 3,
2020
|
|
|
|
|
(in millions)
|
Contract assets - current:
|
|
|
|
|
|
|
Unbilled receivables
|
|
Receivables, net
|
|
$
|
906
|
|
|
$
|
735
|
|
|
|
|
|
|
|
|
Contract liabilities - current:
|
|
|
|
|
|
|
Deferred revenue
|
|
Accounts payable and accrued liabilities
|
|
$
|
481
|
|
|
$
|
400
|
|
|
|
|
|
|
|
|
Contract liabilities - non-current:
|
|
|
|
|
|
|
Deferred revenue
|
|
Other long-term liabilities
|
|
$
|
20
|
|
|
$
|
9
|
|
The increases in unbilled receivables and deferred revenue were primarily due to the acquisitions of Dynetics, Inc. and L3Harris Technologies' security detection and automation businesses. The increase in deferred revenue was also attributable to advance payments received from customers offset by revenue recognized during the period.
Revenue recognized during fiscal 2020 and 2019 of $275 million and $207 million, respectively, was included as a contract liability at January 3, 2020 and December 28, 2018, respectively.
There were no impairment losses recognized on contract assets during fiscal 2020, 2019 and 2018.
Note 6—Acquisitions
We may acquire businesses as part of our growth strategy to provide new or enhance existing capabilities and offerings to customers. During fiscal 2020, we completed the acquisition of Dynetics, Inc. ("Dynetics") and L3Harris Technologies' security detection and automation businesses (the "SD&A Businesses"). During fiscal 2019, we completed the acquisition of IMX Medical Management Services, Inc. and its affiliated businesses ("IMX").
Leidos Holdings, Inc. Annual Report - 79
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 10, 2020, we entered into a definitive agreement to acquire 1901 Group, LLC ("1901 Group"), a leading provider for managed IT services and cloud solutions in the private and public market. On January 14, 2021, we completed the acquisition of 1901 Group (see "Note 26—Subsequent Events").
SD&A Businesses and Dynetics Acquisitions
SD&A Businesses Acquisition
On May 4, 2020 (the "Transaction Date"), we completed the acquisition of the SD&A Businesses. The SD&A Businesses were acquired for cash consideration of $1,020 million, net of $26 million of cash acquired. The purchase consideration includes the initial cash payment of $1,015 million plus a $31 million payment for contractual net working capital acquired. The net working capital payment has been reflected within investing activities in the consolidated statement of cash flows. The SD&A Businesses provide airport and critical infrastructure screening products, automated tray return systems and other industrial automation products. The addition of the SD&A Businesses will expand the scope and scale of our global security detection and automation offerings.
The preliminary fair values of the assets acquired and liabilities assumed at the Transaction Date were as follows (in millions):
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
26
|
|
Receivables
|
|
135
|
|
Inventory
|
|
101
|
|
Other current assets
|
|
23
|
|
Operating lease right-of-use assets
|
|
35
|
|
Property, plant and equipment
|
|
33
|
|
Intangible assets
|
|
354
|
|
Accounts payable and accrued liabilities
|
|
(125)
|
|
Accrued payroll and employee benefits
|
|
(8)
|
|
Operating lease liabilities
|
|
(32)
|
|
Deferred tax liabilities
|
|
(52)
|
|
Other long-term liabilities
|
|
(13)
|
|
Total identifiable net assets acquired
|
|
477
|
|
Goodwill
|
|
569
|
|
Purchase price
|
|
$
|
1,046
|
|
Due to the timing and complexity of the acquisition, the assets acquired and liabilities assumed were recorded at their preliminary estimated fair values. As of January 1, 2021, we had not finalized the determination of fair values of the acquired assets and liabilities assumed, primarily including, but not limited to receivables, inventory, intangible assets, accounts payable and accrued liabilities and deferred taxes. The purchase price allocation is subject to change as we complete our determination of the fair value of the acquired assets and liabilities assumed, the impact of which could be material.
The goodwill represents intellectual capital and the acquired assembled workforce. Of the preliminary goodwill recognized, $425 million is deductible for tax purposes.
Leidos Holdings, Inc. Annual Report - 80
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the preliminary fair value of intangible assets acquired at the Transaction Date and the related weighted average amortization period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average amortization period
|
|
Fair value
|
|
|
(in years)
|
|
(in millions)
|
Programs
|
|
13
|
|
$
|
141
|
|
Customer relationships
|
|
10
|
|
48
|
|
Technology
|
|
10
|
|
73
|
|
In-process research and development ("IPR&D")(1)
|
|
|
|
92
|
|
Total
|
|
11
|
|
$
|
354
|
|
(1) IPR&D assets are indefinite-lived at the acquisition date until placed into service, at which time such assets will be reclassified to a finite-lived amortizable intangible asset.
For fiscal 2020, $243 million of revenues related to the SD&A Businesses were recognized within the Civil reportable segment.
Dynetics Acquisition
On January 31, 2020 (the "Acquisition Date"), we completed our acquisition of Dynetics, an industry-leading applied research and national security solutions company. The addition of Dynetics will accelerate opportunities within our innovation engine that researches and develops new technologies and solutions to address the most challenging needs of our customers. Dynetics was acquired for cash consideration of $1.64 billion, net of cash acquired.
The fair values of the assets acquired and liabilities assumed at the Acquisition Date were as follows (in millions):
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
18
|
|
Receivables
|
|
158
|
|
Inventory
|
|
47
|
|
Other current assets
|
|
18
|
|
Operating lease right-of-use assets
|
|
25
|
|
Property, plant and equipment
|
|
173
|
|
Intangible assets
|
|
528
|
|
Other assets
|
|
8
|
|
Accounts payable and accrued liabilities
|
|
(50)
|
|
Accrued payroll and employee benefits
|
|
(29)
|
|
Operating lease liabilities
|
|
(20)
|
|
Other long-term liabilities
|
|
(4)
|
|
Total identifiable net assets acquired
|
|
872
|
|
Goodwill
|
|
788
|
|
Purchase price
|
|
$
|
1,660
|
|
As of January 1, 2021, we had substantially completed the determination of fair values of the acquired assets and liabilities assumed. The fair values not yet finalized primarily related to unbilled receivables.
The goodwill represents intellectual capital and the acquired assembled workforce. All of the goodwill recognized is deductible for tax purposes.
Leidos Holdings, Inc. Annual Report - 81
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the fair value of intangible assets acquired at the Acquisition Date and the related weighted average amortization period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average amortization period
|
|
Fair value
|
|
|
(in years)
|
|
(in millions)
|
Programs
|
|
13
|
|
$
|
485
|
|
Backlog
|
|
1
|
|
32
|
|
Technology
|
|
11
|
|
11
|
|
Total
|
|
12
|
|
$
|
528
|
|
For fiscal 2020, $937 million of revenues related to Dynetics were recognized within the Defense Solutions reportable segment.
Acquisition and Integration Costs
The following expenses were incurred related to the acquisitions of Dynetics and the SD&A Businesses:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 1,
2021
|
|
|
(in millions)
|
Acquisition costs
|
|
$
|
23
|
|
Integration costs
|
|
12
|
|
Total acquisition and integration costs
|
|
$
|
35
|
|
These acquisition and integration costs have been primarily recorded within Corporate and presented in "Acquisition, integration and restructuring costs" on the consolidated statement of income.
Pro Forma Financial Information
The following unaudited pro forma financial information presents consolidated results of operations as if the acquisitions of Dynetics and the SD&A Businesses had occurred on December 29, 2018. The pro forma financial information was prepared based on historical financial information and has been adjusted to give effect to the events that are directly attributable to the acquisitions of Dynetics and the SD&A Businesses and are factually supportable. The unaudited pro forma results below do not reflect future events that have occurred or may occur after the acquisitions, including anticipated synergies or other expected benefits that may be realized from the acquisitions. The pro forma information is not intended to reflect the actual results of operations that would have occurred if the acquisitions had been completed on December 29, 2018, nor is it intended to be an indication of future operating results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
|
(in millions, except per share amounts)
|
Revenues
|
|
$
|
12,553
|
|
|
$
|
12,250
|
|
Net income
|
|
618
|
|
|
583
|
|
Net income attributable to Leidos common stockholders
|
|
617
|
|
|
580
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
Basic
|
|
$
|
4.35
|
|
|
$
|
4.06
|
|
Diluted
|
|
4.28
|
|
|
4.00
|
|
Leidos Holdings, Inc. Annual Report - 82
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma financial information above includes the following nonrecurring significant adjustment made to account for certain costs incurred as if the acquisitions had been completed on December 29, 2018:
•Acquisition-related costs of $23 million were excluded within the pro forma financial information for fiscal 2020 and were included within the supplemental pro forma earnings for fiscal 2019.
IMX Acquisition
On August 15, 2019, we completed the acquisition of IMX for purchase consideration of $94 million. The acquisition extends our independent medical evaluation coverage area for commercial and federal customers.
We 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.
Lockheed Martin Transaction
On August 16, 2016, a wholly-owned subsidiary of Leidos Holdings, Inc. merged with Lockheed Martin's Information Systems and Global Solutions business (the "IS&GS Business") in a Reverse Morris Trust transaction (the "IS&GS Transactions").
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. 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.
Additionally, 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.
During fiscal 2020, 2019 and 2018, we incurred $1 million, $3 million and $29 million, respectively, of integration costs related to the IS&GS Business. These 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, our 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 Leidos' behalf. Net assets of $12 million were divested. This disposition did not meet the criteria to be classified as a discontinued operation in the financial statements.
Commercial Cybersecurity Business
On February 20, 2019, our Civil segment disposed of its commercial cybersecurity business in order to focus on providing solutions, including cybersecurity, to our core markets of governments and highly regulated industries. The commercial cybersecurity business was divested for a final sales price of $166 million. A pre-tax gain on sale of $88 million was recorded, 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 (expense) income, net" on the consolidated statements of income. This disposition did not meet the criteria to be classified as a discontinued operation in the financial statements.
Leidos Holdings, Inc. Annual Report - 83
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8—Receivables
The components of receivables, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
|
(in millions)
|
Billed and billable receivables
|
|
$
|
1,270
|
|
|
$
|
1,023
|
|
Unbilled receivables
|
|
906
|
|
|
735
|
|
Allowance for doubtful accounts
|
|
(39)
|
|
|
(24)
|
|
|
|
$
|
2,137
|
|
|
$
|
1,734
|
|
Note 9 — Inventory
The components of inventory, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
|
(in millions)
|
Raw materials
|
|
$
|
136
|
|
|
$
|
46
|
|
Work in process
|
|
41
|
|
|
13
|
|
Finished goods
|
|
99
|
|
|
13
|
|
|
|
$
|
276
|
|
|
$
|
72
|
|
Note 10—Goodwill and Intangible Assets
Goodwill
The following table presents changes in the carrying amount of goodwill by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defense Solutions
|
|
Civil
|
|
Health
|
|
Total
|
|
|
(in millions)
|
Goodwill at December 28, 2018(1)
|
|
$
|
2,015
|
|
|
$
|
1,924
|
|
|
$
|
921
|
|
|
$
|
4,860
|
|
Goodwill re-allocation
|
|
25
|
|
|
(25)
|
|
|
—
|
|
|
—
|
|
Acquisition of IMX
|
|
—
|
|
|
—
|
|
|
50
|
|
|
50
|
|
Divestiture of health staff augmentation business
|
|
—
|
|
|
—
|
|
|
(5)
|
|
|
(5)
|
|
Foreign currency translation adjustments
|
|
(4)
|
|
|
8
|
|
|
—
|
|
|
4
|
|
Adjustment to goodwill(2)
|
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Goodwill at January 3, 2020(1)
|
|
2,039
|
|
|
1,907
|
|
|
966
|
|
|
4,912
|
|
Goodwill re-allocation
|
|
429
|
|
|
(429)
|
|
|
—
|
|
|
—
|
|
Acquisition of Dynetics and the SD&A Businesses
|
|
788
|
|
|
569
|
|
|
—
|
|
|
1,357
|
|
Foreign currency translation adjustments
|
|
44
|
|
|
—
|
|
|
—
|
|
|
44
|
|
Goodwill at January 1, 2021(1)
|
|
$
|
3,300
|
|
|
$
|
2,047
|
|
|
$
|
966
|
|
|
$
|
6,313
|
|
(1) Carrying amount includes accumulated impairment losses of $369 million and $117 million within the Health and Civil segments, respectively.
(2) Immaterial correction was recorded with respect to fair value of assets and liabilities acquired from the IS&GS Transactions.
Effective the beginning of fiscal 2020, certain contracts were reassigned from the Civil reportable segment to the Defense Solutions reportable segment (see "Note 23—Business Segments"). This change resulted in the reallocation of $429 million of goodwill between the reporting units within the two reportable segments. We evaluated goodwill for impairment for certain reporting units using either a quantitative step one analysis or qualitative analysis, both before and after the changes were made, and determined that goodwill was not impaired.
In the fourth quarter of fiscal 2020 and 2019, we 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.
Leidos Holdings, Inc. Annual Report - 84
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In fiscal 2018, we performed a qualitative and quantitative analysis on our reporting units. Based on the qualitative analysis performed during our annual impairment evaluation for fiscal 2018 for certain of our 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 our reporting units, it was determined that the fair value was in excess of the individual reporting units carrying values.
As a result, no goodwill impairments were identified as part of the annual goodwill impairment evaluation for the periods mentioned above.
Intangible Assets
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2021
|
|
January 3, 2020
|
|
|
Gross
carrying
value
|
|
Accumulated
amortization
|
|
Net
carrying
value
|
|
Gross
carrying
value
|
|
Accumulated
amortization
|
|
Net
carrying
value
|
|
|
(in millions)
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Programs
|
|
$
|
1,632
|
|
|
$
|
(687)
|
|
|
$
|
945
|
|
|
$
|
1,003
|
|
|
$
|
(536)
|
|
|
$
|
467
|
|
Software and technology
|
|
188
|
|
|
(100)
|
|
|
88
|
|
|
102
|
|
|
(83)
|
|
|
19
|
|
Customer relationships
|
|
93
|
|
|
(10)
|
|
|
83
|
|
|
45
|
|
|
(6)
|
|
|
39
|
|
Backlog
|
|
32
|
|
|
(29)
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Trade names
|
|
1
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Total finite-lived intangible assets
|
|
1,946
|
|
|
(826)
|
|
|
1,120
|
|
|
1,151
|
|
|
(625)
|
|
|
526
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development
|
|
92
|
|
|
—
|
|
|
92
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Trade names
|
|
4
|
|
|
—
|
|
|
4
|
|
|
4
|
|
|
—
|
|
|
4
|
|
Total indefinite-lived intangible assets
|
|
96
|
|
|
—
|
|
|
96
|
|
|
4
|
|
|
—
|
|
|
4
|
|
Total intangible assets
|
|
$
|
2,042
|
|
|
$
|
(826)
|
|
|
$
|
1,216
|
|
|
$
|
1,155
|
|
|
$
|
(625)
|
|
|
$
|
530
|
|
Amortization expense related to intangible assets was $198 million, $173 million and $201 million for fiscal 2020, 2019 and 2018, respectively.
The estimated annual amortization expense related to finite-lived intangible assets as of January 1, 2021, is as follows:
|
|
|
|
|
|
|
|
|
Fiscal Year Ending
|
|
|
|
|
(in millions)
|
2021
|
|
$
|
203
|
|
2022
|
|
198
|
|
2023
|
|
174
|
|
2024
|
|
126
|
|
2025
|
|
101
|
|
2026 and thereafter
|
|
318
|
|
|
|
$
|
1,120
|
|
Leidos Holdings, Inc. Annual Report - 85
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
We are monitoring the impacts of the coronavirus pandemic ("COVID-19") on the fair value of our intangible assets and goodwill. While we currently do not anticipate any impairments to intangible assets and goodwill as a result of COVID-19, future changes in the expectations of the impact on our operations, financial performance and cash flows related to intangible assets and goodwill could cause these assets to be impaired.
Note 11—Property, Plant and Equipment
Property, plant and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
|
(in millions)
|
Computers and other equipment
|
|
$
|
386
|
|
|
$
|
259
|
|
Leasehold improvements
|
|
321
|
|
|
203
|
|
Buildings and improvements
|
|
142
|
|
|
23
|
|
Office furniture and fixtures
|
|
60
|
|
|
37
|
|
Land
|
|
18
|
|
|
4
|
|
Construction in progress
|
|
72
|
|
|
104
|
|
|
|
999
|
|
|
630
|
|
Less: accumulated depreciation and amortization
|
|
(395)
|
|
|
(343)
|
|
|
|
$
|
604
|
|
|
$
|
287
|
|
Depreciation expense was $84 million, $61 million and $56 million for fiscal 2020, 2019 and 2018, respectively.
Sale and Leaseback Agreements
Gaithersburg, MD Property
On December 31, 2018, we closed the sale and leaseback agreement relating to our land and building in Gaithersburg, MD. We received proceeds of $31 million, net of selling costs, for the property, which had a carrying value of $31 million.
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, we 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. We 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.
Leidos Holdings, Inc. Annual Report - 86
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12—Leases
Lessee
ROU assets and lease liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet line item
|
|
January 1,
2021
|
|
January 3,
2020
|
|
|
|
|
(in millions)
|
ROU assets:
|
|
|
|
|
|
|
Finance leases
|
|
Property, plant and equipment, net
|
|
$
|
10
|
|
|
$
|
7
|
|
Operating leases
|
|
Operating lease right-of-use assets, net
|
|
581
|
|
|
400
|
|
|
|
|
|
$
|
591
|
|
|
$
|
407
|
|
Current lease liabilities:
|
|
|
|
|
|
|
Finance leases
|
|
Long-term debt, current portion
|
|
$
|
6
|
|
|
$
|
5
|
|
Operating leases
|
|
Accounts payable and accrued liabilities
|
|
127
|
|
|
132
|
|
|
|
|
|
$
|
133
|
|
|
$
|
137
|
|
Non-current lease liabilities:
|
|
|
|
|
|
|
Finance leases
|
|
Long-term debt, net of current portion
|
|
$
|
5
|
|
|
$
|
2
|
|
Operating leases
|
|
Operating lease liabilities
|
|
564
|
|
|
326
|
|
|
|
|
|
$
|
569
|
|
|
$
|
328
|
|
In March 2020, we took occupancy of our new corporate headquarters in Reston, VA. As a result we recorded $104 million of ROU assets and $132 million of lease liabilities.
During fiscal 2020, we made a decision to vacate one of our facilities. The carrying amount was determined to be less than the expected recovery from sublease income and as a result, we recorded an impairment charge of $11 million, which was recorded within our Health reportable segment.
Total lease cost for the periods presented consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
|
(in millions)
|
Finance lease cost:
|
|
|
|
|
Amortization of ROU assets
|
|
$
|
9
|
|
|
$
|
8
|
|
Interest on lease liabilities
|
|
—
|
|
|
1
|
|
|
|
9
|
|
|
9
|
|
|
|
|
|
|
Operating lease cost(1)
|
|
169
|
|
|
155
|
|
|
|
|
|
|
Variable lease cost
|
|
103
|
|
|
107
|
|
Short-term lease cost
|
|
8
|
|
|
7
|
|
Less: Sublease income
|
|
(11)
|
|
|
(6)
|
|
Total lease cost
|
|
$
|
278
|
|
|
$
|
272
|
|
(1) Includes ROU lease expense of $145 million and $136 million for fiscal 2020 and 2019, respectively.
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 - 87
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lease terms and discount rates related to leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
2021
|
|
January 3,
2020
|
Weighted-average remaining lease term (in years):
|
|
|
|
|
Finance leases
|
|
2.9
|
|
2.4
|
Operating leases
|
|
7.3
|
|
5.7
|
Weighted-average discount rate:
|
|
|
|
|
Finance leases
|
|
2.7
|
%
|
|
4.2
|
%
|
Operating leases
|
|
3.5
|
%
|
|
4.1
|
%
|
Other information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
|
(in millions)
|
Cash paid for amounts included in measurement of lease liabilities:
|
|
|
|
|
Operating cash related to finance leases
|
|
$
|
—
|
|
|
$
|
1
|
|
Operating cash related to operating leases
|
|
164
|
|
|
163
|
|
Financing cash flows related to finance leases
|
|
9
|
|
|
8
|
|
Lease liabilities arising from obtaining ROU assets:
|
|
|
|
|
Finance lease liabilities
|
|
$
|
12
|
|
|
$
|
—
|
|
Operating lease liabilities
|
|
314
|
|
|
141
|
|
The change in ROU assets and lease liabilities are presented within cash flows from operations on the consolidated statements of cash flows.
Future minimum lease commitments of our finance and operating leases on an undiscounted basis, reconciled to the respective lease liability at January 1, 2021, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ending
|
|
Finance lease commitments
|
|
Operating lease commitments
|
|
|
(in millions)
|
2021
|
|
$
|
6
|
|
|
$
|
148
|
|
2022
|
|
2
|
|
|
126
|
|
2023
|
|
2
|
|
|
108
|
|
2024
|
|
—
|
|
|
94
|
|
2025
|
|
—
|
|
|
69
|
|
2026 and thereafter
|
|
1
|
|
|
245
|
|
Total undiscounted cash flows
|
|
11
|
|
|
790
|
|
Less: imputed interest
|
|
—
|
|
|
(99)
|
|
Lease liability as of January 1, 2021
|
|
$
|
11
|
|
|
$
|
691
|
|
Leidos Holdings, Inc. Annual Report - 88
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Disclosures related to the period prior to ASC 842
Rental expense for facilities and equipment for the period presented were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
December 28,
2018
|
|
|
(in millions)
|
Gross rental expense
|
|
$
|
163
|
|
Less: sublease income
|
|
(1)
|
|
Net rental expense
|
|
$
|
162
|
|
Lessor
As of January 1, 2021 and January 3, 2020, we had a total net investment in sales-type leases, which relates to lease payment receivables, of $64 million and $57 million, respectively. 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 consolidated balance sheets.
The components of lease income were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Income statement line item
|
|
January 1,
2021
|
|
January 3,
2020
|
|
|
|
|
(in millions)
|
Sales-type leases:
|
|
|
|
|
|
|
Selling price at lease commencement
|
|
Revenues
|
|
$
|
61
|
|
|
$
|
84
|
|
Cost of underlying asset
|
|
Cost of revenues
|
|
(47)
|
|
|
(86)
|
|
Operating income (loss)
|
|
|
|
14
|
|
|
(2)
|
|
Interest income on lease receivables
|
|
Revenues
|
|
8
|
|
|
6
|
|
|
|
|
|
22
|
|
|
4
|
|
|
|
|
|
|
|
|
Operating lease income
|
|
Revenues
|
|
31
|
|
|
28
|
|
Total lease income
|
|
|
|
$
|
53
|
|
|
$
|
32
|
|
As of January 1, 2021, undiscounted cash flows for sales-type and operating leases for the next five years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ending
|
|
Sales-type leases
|
|
Operating leases
|
|
|
(in millions)
|
2021
|
|
$
|
35
|
|
|
$
|
27
|
|
2022
|
|
23
|
|
|
29
|
|
2023
|
|
10
|
|
|
29
|
|
2024
|
|
4
|
|
|
30
|
|
2025
|
|
2
|
|
|
—
|
|
Total undiscounted cash flows
|
|
$
|
74
|
|
|
$
|
115
|
|
Present value of lease payments as lease receivables
|
|
64
|
|
|
|
Difference between undiscounted cash flows and discounted cash flows
|
|
$
|
10
|
|
|
|
Leidos Holdings, Inc. Annual Report - 89
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13—Fair Value Measurements
Financial instruments measured on a recurring basis at fair value consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2021
|
|
January 3, 2020
|
|
|
Carrying value
|
|
Fair value
|
|
Carrying value
|
|
Fair value
|
|
|
(in millions)
|
Financial assets:
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
Derivatives
|
|
103
|
|
|
103
|
|
|
75
|
|
|
75
|
|
As of January 1, 2021, our derivatives primarily consisted of the cash flow interest rate swaps on $1.1 billion of the variable rate senior unsecured term loan (see "Note 14—Derivative Instruments"). The fair value of the cash flow interest rate swaps is determined based on observed values for underlying interest rates on the LIBOR yield curve (Level 2 inputs).
Financial instruments measured on a recurring basis at fair value also includes our defined benefit plan assets (Level 2 inputs). See "Note 21—Retirement Plans" for further details on these investments.
The carrying amounts of our financial instruments, other than derivatives, which include cash equivalents, accounts receivable, accounts payable and accrued expenses, are reasonable estimates of their related fair values. The carrying value of our notes receivable of $15 million and $20 million as of January 1, 2021 and January 3, 2020, respectively, approximates fair value as the stated interest rates within the agreements are consistent with the current market rates used in notes with similar terms in the market (Level 2 inputs).
As of January 1, 2021, and January 3, 2020, the fair value of debt was $5.2 billion and $3.1 billion, respectively, and the carrying amount was $4.7 billion and $3.0 billion, respectively (see "Note 15—Debt"). The fair value of long-term debt is determined based on current interest rates available for debt with terms and maturities similar to our existing debt arrangements (Level 2 inputs).
On May 4, 2020 and January 31, 2020, non-financial instruments measured at fair value on a non-recurring basis were recorded in connection with the acquisitions of the SD&A Businesses and Dynetics, respectively. Additionally, on August 15, 2019, non-financial instruments measured at fair value on a non-recurring basis were recorded in connection with the acquisition of IMX. The fair values of the assets acquired and liabilities assumed were determined using Level 3 inputs. See "Note 6—Acquisitions" for further details on these acquisitions. We also had real estate property measured at fair value (Level 2 inputs) on July 3, 2020 and March 30, 2018, which resulted in an impairment charge of $11 million and $7 million, respectively (see "Note 12—Leases" and "Note 11—Property, Plant and Equipment," respectively). As of January 1, 2021, and January 3, 2020, we did not have any assets or liabilities measured at fair value on a non-recurring basis.
Note 14—Derivative Instruments
The fair value of the interest rate swaps and foreign currency forward contracts was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset derivatives
|
|
|
Balance sheet line item
|
|
January 1,
2021
|
|
January 3,
2020
|
|
|
|
|
(in millions)
|
Fair value interest rate swaps
|
|
Other assets
|
|
$
|
—
|
|
|
$
|
2
|
|
Foreign currency forward contracts
|
|
Other current assets
|
|
1
|
|
|
—
|
|
|
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability derivatives
|
|
|
Balance sheet line item
|
|
January 1,
2021
|
|
January 3,
2020
|
|
|
|
|
(in millions)
|
Cash flow interest rate swaps
|
|
Other long-term liabilities
|
|
$
|
103
|
|
|
$
|
75
|
|
Leidos Holdings, Inc. Annual Report - 90
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The cash flows associated with the interest rate swaps are classified as operating activities in the consolidated statements of cash flows.
Fair Value Hedges
We held interest rate swap agreements to hedge the fair value of the $450 million fixed rate 4.45% senior unsecured notes maturing in December 2020 (the "2020 Notes"). The objective of these instruments was to hedge the 2020 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, we received semi-annual interest payments at the coupon rate of 4.45% and paid variable interest based on the six-month LIBOR rate.
The interest rate swaps were accounted for as a fair value hedge of the 2020 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 were fully offset by the changes in the fair value of the underlying debt (the hedged item).
The fair value of the 2020 Notes were stated at an amount that reflected changes in the six-month LIBOR rate subsequent to the inception of the interest rate swaps through the reporting date.
On September 1, 2020, we repaid the 2020 Notes in full (see "Note 15—Debt"). In conjunction with the retirement of the 2020 Notes, we terminated our fair value hedge and received a final settlement of $2 million.
Cash Flow Hedges
We have interest rate swap agreements to hedge the cash flows of a portion of our variable rate senior unsecured term loans (the "Variable Rate Loans"). The objective of these instruments is to reduce variability in the forecasted interest payments of the Variable Rate Loans, which is based on the LIBOR rate. Under the terms of the interest rate swap agreements, we will receive monthly variable interest payments based on the one-month LIBOR rate and will pay interest at a fixed rate. In February 2018, we entered into interest rate swap agreements to hedge the cash flows of an additional $250 million of our Variable Rate Loans. The interest rate swap agreements on $1.1 billion of the 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 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, we terminated our 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, we entered into new interest rate swap agreements to hedge the cash flows of $1.5 billion of the Variable Rate Loans. These interest rate swap agreements have a maturity date of August 2025 and a fixed interest rate of 3.00%. As of January 1, 2021, the notional value of the interest rate swap agreements was $1.1 billion.
The interest rate swap transactions were accounted for as cash flow hedges. The gain (loss) on the swap is reported as a component of other comprehensive income (loss) and is reclassified into earnings when the interest payments on the underlying hedged items impact earnings. A qualitative assessment of hedge effectiveness is performed on a quarterly basis, unless facts and circumstances indicate the hedge may no longer be highly effective.
Leidos Holdings, Inc. Annual Report - 91
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effect of the cash flow hedges on other comprehensive income (loss) and earnings for the periods presented was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
December 28,
2018
|
|
|
(in millions)
|
Total interest expense, net presented in the consolidated statements of income in which the effects of cash flow hedges are recorded
|
|
$
|
179
|
|
|
$
|
133
|
|
|
$
|
138
|
|
|
|
|
|
|
|
|
Amount recognized in other comprehensive income (loss)
|
|
$
|
(61)
|
|
|
$
|
(55)
|
|
|
$
|
(7)
|
|
Amount reclassified from accumulated other comprehensive loss to interest expense, net
|
|
14
|
|
|
(7)
|
|
|
(6)
|
|
We expect to reclassify losses of $16 million from accumulated other comprehensive loss into earnings during the next 12 months.
Note 15—Debt
Debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stated
interest rate
|
|
Effective
interest rate
|
|
January 1, 2021(1)
|
|
January 3, 2020(1)
|
|
|
|
|
|
|
(in millions)
|
Senior unsecured term loan:
|
|
|
|
|
|
|
|
|
$1,925 million Term Loan, due January 2025
|
|
1.53
|
%
|
|
1.79
|
%
|
|
$
|
1,391
|
|
|
$
|
—
|
|
Senior secured term loans:
|
|
|
|
|
|
|
|
|
$690 million Term Loan A, due August 2023
|
|
3.31
|
%
|
|
3.74
|
%
|
|
—
|
|
|
581
|
|
$310 million Term Loan A, due August 2023
|
|
3.31
|
%
|
|
3.76
|
%
|
|
—
|
|
|
242
|
|
$1,131 million Term Loan B, due August 2025
|
|
3.56
|
%
|
|
3.91
|
%
|
|
—
|
|
|
1,075
|
|
Senior unsecured notes:
|
|
|
|
|
|
|
|
|
$450 million notes, due December 2020
|
|
4.45
|
%
|
|
4.53
|
%
|
|
—
|
|
|
452
|
|
$500 million notes, due May 2023
|
|
2.95
|
%
|
|
3.17
|
%
|
|
497
|
|
|
—
|
|
$500 million notes, due May 2025
|
|
3.63
|
%
|
|
3.76
|
%
|
|
496
|
|
|
—
|
|
$1,000 million notes, due February 2031
|
|
2.30
|
%
|
|
2.38
|
%
|
|
989
|
|
|
—
|
|
$750 million notes, due May 2030
|
|
4.38
|
%
|
|
4.50
|
%
|
|
737
|
|
|
—
|
|
$250 million notes, due July 2032
|
|
7.13
|
%
|
|
7.43
|
%
|
|
247
|
|
|
247
|
|
$300 million notes, due July 2033
|
|
5.50
|
%
|
|
5.88
|
%
|
|
158
|
|
|
158
|
|
$300 million notes, due December 2040
|
|
5.95
|
%
|
|
6.03
|
%
|
|
216
|
|
|
216
|
|
Notes payable and finance leases due on various dates through fiscal 2030
|
|
2.15%-5.49%
|
|
Various
|
|
13
|
|
|
15
|
|
Total long-term debt
|
|
|
|
|
|
4,744
|
|
|
2,986
|
|
Less: current portion
|
|
|
|
|
|
(100)
|
|
|
(61)
|
|
Total long-term debt, net of current portion
|
|
|
|
|
|
$
|
4,644
|
|
|
$
|
2,925
|
|
(1)The carrying amounts of the senior term loans and notes as of January 1, 2021, and January 3, 2020, include the remaining principal outstanding of $4,782 million and $3,004 million, respectively, less total unamortized debt discounts and deferred debt issuance costs of $51 million and $35 million, respectively, and a $2 million asset as of January 3, 2020 related to the fair value of the interest rate swaps (see "Note 14—Derivative Instruments").
Leidos Holdings, Inc. Annual Report - 92
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Senior Notes
Notes Issuance
On October 8, 2020, we issued and sold $1.0 billion aggregate principal amount of fixed-rate senior notes maturing in February 2031 (the "2031 Notes"). The 2031 Notes are senior unsecured obligations issued by Leidos, Inc. and guaranteed by Leidos Holdings, Inc. The annual interest rate for the 2031 Notes is 2.30%. The 2031 Notes have not been registered under the Securities Act of 1933, as amended (the "Securities Act") and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
The proceeds from the 2031 Notes were used for general corporate purposes, including to repay all of the outstanding obligations in respect of principal, interest and fees under the 364-day Term Loan and to repay a portion of the outstanding loans under the five-year Term Loan Facility.
Additionally, on May 12, 2020, we issued and sold $500 million senior notes maturing in May 2023 (the "2023 Notes"), $500 million senior notes maturing in May 2025 (the "2025 Notes") and $750 million senior notes maturing in May 2030 (the "2030 Notes", and together with the 2023 Notes and 2025 Notes, the "Notes"). The Notes are senior unsecured obligations issued by Leidos, Inc. and guaranteed by Leidos Holdings, Inc. The annual interest rate for the 2023 Notes, 2025 Notes and 2030 Notes is 2.95%, 3.63% and 4.38%, respectively. The Notes have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
The proceeds from the Notes were used to repay all of the outstanding obligations in respect of principal, interest and fees under the January 31, 2020 Bridge Facility and to repay a portion of the outstanding loans under the February 12, 2020 Facility.
On October 8, 2020 and May 12, 2020, we entered into registration rights agreements, pursuant to which we agreed to use reasonable best efforts to file registration statements to permit the exchange of the 2031 Notes and the Notes, respectively, and related guarantees for registered notes having terms substantially identical thereto, or in the alternative, the registered resale of the 2031 Notes and the Notes, respectively, and related guarantees, under certain circumstances. Under both agreements, the registration statements are to be filed no later than 420 days after the original issuance of the securities. If we fail to satisfy our obligations under either registration rights agreement, we will be required to pay additional annual interest equal to 0.25% of the aggregate outstanding on the principal amount to holders of the respective notes.
Notes Retirement
On September 1, 2020, we retired our 2020 Notes. Cash on hand was used to repay in full all indebtedness under, and discharge and release all guarantees existing in connection with these notes.
Term Loan Financing
On June 18, 2020 (the "Agreement Date"), we entered into a 364-day Term Loan Credit Agreement, which provided for a senior unsecured term loan facility in an aggregate principal amount of $300 million (the "Term Loan"), with maturity 364 days after the Agreement Date.
The proceeds of the Term Loan and cash on hand on the Agreement Date were used to repay in full all indebtedness under, and discharge and release all guarantees existing in connection with the delayed-draw term loan facility.
Borrowings under the Term Loan Credit Agreement bear interest at a rate determined, at our option, based on either an alternate base rate or a LIBOR rate plus, in each case, an applicable margin that varies depending on our credit rating. During the period the Term Loan borrowing was outstanding, the applicable margin for LIBOR-denominated borrowings was 2.00%.
On October 8, 2020, in connection with the issuance of the 2031 Notes, the outstanding principal on the Term Loan Credit Agreement was fully repaid.
Leidos Holdings, Inc. Annual Report - 93
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Delayed-Draw Term Loan Facility
On February 12, 2020, we entered into a senior unsecured delayed-draw term loan facility providing for $1.0 billion of commitments from certain financial institutions in connection with the acquisition of the SD&A Businesses. On May 4, 2020, we completed our acquisition of the SD&A Businesses and drew on the Facility in an aggregate principal amount of $1.0 billion (the "Facility"). The proceeds of the Facility and cash on hand were used to fund the purchase of the SD&A Businesses.
On May 12, 2020, in connection with the issuance of the $1.75 billion Notes, $500 million of the principal outstanding on the Facility was repaid. During May and June 2020, we made $200 million of principal repayments on the Facility. On June 18, 2020, in connection with the 364-day Term Loan Credit Agreement, the remaining principal outstanding on the Facility was fully repaid.
Bridge Facility
On January 31, 2020, in connection with the acquisition of Dynetics, we entered into a Bridge Credit Agreement with certain financial institutions, which provided for a senior unsecured 364-day bridge loan facility in an aggregate principal amount of $1.25 billion (the "Bridge Facility"), with maturity 364 days after the Acquisition Date.
The proceeds of the Bridge Facility and cash on hand on the Acquisition Date were used to fund the purchase of Dynetics.
Borrowings under the Bridge Credit Agreement bear interest at a rate determined, at our option, based on either an alternate base rate or a LIBOR rate, plus, in each case, an applicable margin that varies depending on our credit rating, subject to increases by 0.25% every 90 days. During the period the Bridge Facility borrowing was outstanding, the applicable margins for LIBOR-denominated borrowings were 1.38% and 1.63%. Additionally, we paid to each lender under the Bridge Facility a duration fee equal to 0.50% of the aggregate outstanding principal amount of the loans under the Bridge Facility 90 days after the Acquisition Date.
On May 12, 2020, in connection with the issuance of the Notes, the outstanding principal on the Bridge Credit Agreement was fully repaid.
Term Loans and Revolving Credit Facility Refinancing
On January 17, 2020 (the "Closing Date"), we entered into a Credit Agreement (the "Credit Agreement") with certain financial institutions, which provided for a senior unsecured term loan 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"). The Credit Facilities will mature five years from the Closing Date, subject to two additional one year extensions.
The proceeds of the Term Loan Facility and cash on hand on the Closing Date were used 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"). As a result of the termination of the liens under the Terminated Credit Agreements, the liens securing the $450 million notes due 2020 and $300 million notes due 2040 were also released and such notes became senior unsecured obligations.
Borrowings under the Credit Agreement bear interest at a rate determined, at our option, based on either an alternate base rate or a LIBOR rate plus, in each case, an applicable margin that varies depending on our credit rating. The applicable margin range for LIBOR-denominated borrowings is from 1.13% to 1.75%. Based on our current ratings, the applicable margin for LIBOR-denominated borrowings is 1.38%.
The financial covenants in the Credit Agreement require that we maintain, as of the last day of each fiscal quarter, a ratio of adjusted consolidated total debt to consolidated EBITDA of not more than 3.75 to 1.00, subject to two increases to 4.50 to 1.00 following a material acquisition, and a ratio of EBITDA to consolidated interest expense of not less than 3.50 to 1.00.
Leidos Holdings, Inc. Annual Report - 94
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Principal Payments and Debt Issuance Costs
In addition to the refinancing activity noted above, we made principal payments on our long-term debt of $731 million, $80 million, and $59 million during fiscal 2020, 2019 and 2018, respectively. This activity included required principal payments on our term loans of $72 million, $69 million, and $46 million during fiscal 2020, 2019 and 2018, 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 Terminated Credit Agreements. During fiscal 2020 and 2019, there were no borrowings under the credit facilities.
Principal payments are made quarterly on our variable rate senior unsecured term loan, with the majority of the principal due at maturity. Interest on the variable rate senior unsecured term loan is payable on a periodic basis, which must be at least quarterly. Interest on the senior fixed rate unsecured notes is payable on a semi-annual basis with principal payments due at maturity.
In connection with the financing activity noted above, $68 million of debt discount and debt issuance costs related to the debt and revolving credit facility were recognized, which were recorded as an offset against the carrying value of debt and capitalized within "Other assets" in the consolidated balance sheets, respectively. For fiscal 2020, $36 million of debt discount and debt issuance costs were written off related to the Terminated Credit Agreements and loan facility repayments. Amortization of debt discount and debt issuance costs was $16 million for fiscal 2020 and $10 million for fiscal 2019 and 2018.
The senior unsecured term loan, notes and revolving credit facility are fully and unconditionally guaranteed by intercompany guarantees and contain certain customary restrictive covenants, including among other things, restrictions on our ability to create liens and enter into sale and leaseback transactions under certain circumstances. We were in compliance with all covenants as of January 1, 2021.
Future minimum payments of debt are as follows:
|
|
|
|
|
|
|
|
|
Fiscal Year Ending
|
|
|
|
|
(in millions)
|
2021
|
|
$
|
104
|
|
2022
|
|
99
|
|
2023
|
|
670
|
|
2024
|
|
193
|
|
2025
|
|
1,349
|
|
2026 and thereafter
|
|
2,380
|
|
Total principal payments
|
|
4,795
|
|
Less: unamortized debt discount and issuance costs
|
|
(51)
|
|
Total long-term debt
|
|
$
|
4,744
|
|
Leidos Holdings, Inc. Annual Report - 95
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16—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
|
|
|
(in millions)
|
Balance at December 29, 2017
|
|
$
|
17
|
|
|
$
|
14
|
|
|
$
|
2
|
|
|
$
|
33
|
|
Cumulative adjustments related to ASU adoptions
|
|
3
|
|
|
10
|
|
|
(4)
|
|
|
9
|
|
Balance at December 30, 2017
|
|
20
|
|
|
24
|
|
|
(2)
|
|
|
42
|
|
Other comprehensive loss
|
|
(65)
|
|
|
(7)
|
|
|
(1)
|
|
|
(73)
|
|
Taxes
|
|
4
|
|
|
3
|
|
|
—
|
|
|
7
|
|
Reclassification from accumulated other comprehensive loss
|
|
—
|
|
|
(6)
|
|
|
—
|
|
|
(6)
|
|
Balance at December 28, 2018
|
|
(41)
|
|
|
14
|
|
|
(3)
|
|
|
(30)
|
|
Other comprehensive income (loss)
|
|
5
|
|
|
(55)
|
|
|
(1)
|
|
|
(51)
|
|
Taxes
|
|
3
|
|
|
15
|
|
|
—
|
|
|
18
|
|
Reclassification from accumulated other comprehensive loss
|
|
—
|
|
|
(7)
|
|
|
—
|
|
|
(7)
|
|
Balance at January 3, 2020
|
|
(33)
|
|
|
(33)
|
|
|
(4)
|
|
|
(70)
|
|
Other comprehensive income (loss)
|
|
70
|
|
|
(61)
|
|
|
(3)
|
|
|
6
|
|
Taxes
|
|
(7)
|
|
|
10
|
|
|
1
|
|
|
4
|
|
Reclassification from accumulated other comprehensive loss
|
|
—
|
|
|
14
|
|
|
—
|
|
|
14
|
|
Balance at January 1, 2021
|
|
$
|
30
|
|
|
$
|
(70)
|
|
|
$
|
(6)
|
|
|
$
|
(46)
|
|
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 14—Derivative Instruments" for more information on our interest rate swap agreements.
Leidos Holdings, Inc. Annual Report - 96
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17—Composition of Certain Financial Statement Captions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
January 1,
2021
|
|
January 3,
2020
|
|
|
(in millions)
|
Other current assets:
|
|
|
|
|
Restricted cash
|
|
$
|
163
|
|
|
$
|
49
|
|
Transition costs and project assets(1)
|
|
104
|
|
|
98
|
|
Pre-contract costs
|
|
7
|
|
|
6
|
|
Other(2)(3)
|
|
128
|
|
|
185
|
|
|
|
$
|
402
|
|
|
$
|
338
|
|
Other assets:
|
|
|
|
|
Transition costs and project assets(1)
|
|
$
|
187
|
|
|
$
|
207
|
|
Equity method investments(4)
|
|
15
|
|
|
19
|
|
Other(2)
|
|
256
|
|
|
200
|
|
|
|
$
|
458
|
|
|
$
|
426
|
|
Accounts payable and accrued liabilities:
|
|
|
|
|
Accrued liabilities
|
|
$
|
939
|
|
|
$
|
822
|
|
Accounts payable
|
|
731
|
|
|
592
|
|
Deferred revenue
|
|
481
|
|
|
400
|
|
Other(2)
|
|
24
|
|
|
23
|
|
|
|
$
|
2,175
|
|
|
$
|
1,837
|
|
Accrued payroll and employee benefits:
|
|
|
|
|
Accrued vacation
|
|
$
|
329
|
|
|
$
|
232
|
|
Salaries, bonuses and amounts withheld from employees’ compensation
|
|
303
|
|
|
203
|
|
|
|
$
|
632
|
|
|
$
|
435
|
|
(1) During the year ended January 1, 2021 and January 3, 2020, $575 million and $417 million, respectively, of amortization was recognized related to transition costs and project assets.
(2) Balance represents items that are not individually significant to disclose separately.
(3) During the year ended January 1, 2021, we disaggregated "Inventory, net" from "Other current assets" on the consolidated balance sheets. As a result, the prior year activity has been reclassified to conform with the current year presentation.
(4) Balances are net of $23 million and $25 million of dividends received during fiscal 2020 and fiscal 2019, respectively, that were recorded in cash flows provided by operating activities of continuing operations on the consolidated statements of cash flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
Income Statement
|
|
January 1,
2021
|
|
January 3,
2020
|
|
December 28,
2018
|
|
|
(in millions)
|
Interest expense, net:
|
|
|
|
|
|
|
Interest expense
|
|
$
|
(182)
|
|
|
$
|
(147)
|
|
|
$
|
(145)
|
|
Interest income
|
|
3
|
|
|
14
|
|
|
7
|
|
|
|
$
|
(179)
|
|
|
$
|
(133)
|
|
|
$
|
(138)
|
|
Other (expense) income, net
|
|
|
|
|
|
|
Loss on debt extinguishment
|
|
$
|
(36)
|
|
|
$
|
—
|
|
|
$
|
(1)
|
|
Gain on sale of businesses
|
|
—
|
|
|
88
|
|
|
—
|
|
(Loss) gain on foreign currencies
|
|
(4)
|
|
|
(1)
|
|
|
2
|
|
Other income (expense), net
|
|
2
|
|
|
—
|
|
|
(2)
|
|
|
|
$
|
(38)
|
|
|
$
|
87
|
|
|
$
|
(1)
|
|
Leidos Holdings, Inc. Annual Report - 97
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18—Earnings Per Share ("EPS")
Basic EPS is computed by dividing net income attributable to Leidos common stockholders by the basic weighted average number of shares outstanding. Diluted EPS is calculated to give effect to all potentially dilutive common shares that were outstanding during the reporting period. The dilutive effect of outstanding equity-based compensation awards is reflected in diluted EPS by application of the treasury stock method, only in periods in which such effect would have been dilutive for the period.
We issue 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
December 28,
2018
|
|
|
(in millions)
|
Basic weighted average number of shares outstanding
|
|
142
|
|
|
143
|
|
|
151
|
|
Dilutive common share equivalents—stock options and other stock awards
|
|
2
|
|
|
2
|
|
|
2
|
|
Diluted weighted average number of shares outstanding
|
|
144
|
|
|
145
|
|
|
153
|
|
Anti-dilutive stock-based awards are excluded from the weighted average number of shares outstanding used to compute diluted EPS. For fiscal 2020 and 2019, 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
During fiscal 2020, 2019 and 2018, we made open market repurchases of our common stock for an aggregate purchase price of $67 million, $25 million and $167 million, respectively. All shares repurchased were immediately retired.
In the third quarter of fiscal 2019, we entered into an Accelerated Share Repurchase ("ASR") agreement with a financial institution to repurchase shares of our outstanding common stock. We paid $200 million to the financial institution and received 2.4 million shares. The purchase was recorded to "Additional paid-in capital" in the consolidated balance sheets. All shares delivered were immediately retired.
In the first quarter of fiscal 2019, we entered into an ASR agreement with a financial institution to repurchase shares of our outstanding common stock. We paid $200 million to the financial institution and received an initial and final delivery of 2.6 million and 0.6 million shares, respectively. The purchase was recorded to "Additional paid-in capital" in the consolidated balance sheets. All shares delivered were immediately retired.
In the fourth quarter of fiscal 2018, we entered into an uncollared ASR agreement with a financial institution to repurchase shares of our outstanding common stock. We 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.
Note 19—Stock-Based Compensation
Plan Summaries
As of January 1, 2021, we had stock-based compensation awards outstanding under the following plans: the 2017 Omnibus Incentive Plan, the 2006 Equity Incentive Plan, as amended, and the 2006 Employee Stock Purchase Plan, as amended ("ESPP"). We issue new shares upon the issuance of the vesting of stock units or exercising of stock options under these plans.
Leidos Holdings, Inc. Annual Report - 98
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 2017 Omnibus Incentive Plan provides Leidos 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. We grant service-based awards that generally vest or become exercisable 25% a year over four years or cliff vest in three years. As of January 1, 2021, 4.0 million shares of Leidos' stock were reserved for future issuance under the 2017 Omnibus Incentive Plan and the 2006 Equity Incentive Plan.
We offer 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, we 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.
Our 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, 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 discount was increased to 10% of the fair market value on the date of purchase, resulting in the ESPP being compensatory. During fiscal 2020, 2019 and 2018, $32 million, $25 million and $11 million, respectively, was received from ESPP plan participants for the issuance of Leidos' stock. A total of 3.8 million shares remain available for future issuance under the ESPP.
Stock-based compensation and related tax benefits recognized under all plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
December 28,
2018
|
|
|
(in millions)
|
Total stock-based compensation expense
|
|
$
|
62
|
|
|
$
|
52
|
|
|
$
|
44
|
|
Tax benefits recognized from stock-based compensation
|
|
15
|
|
|
13
|
|
|
11
|
|
Stock Options
Stock options are granted with exercise prices equal to the fair market value of Leidos' common stock on the date of grant and for terms not greater than ten years. Stock options have a term of seven years and a vesting period of four years, except for stock options granted to our 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 stock option awards is estimated on the date of grant using the Black-Scholes-Merton option-pricing model. The fair value of the 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 our outside directors, which is recognized over the vesting period of one year or less.
During fiscal 2020, 2019 and 2018, we used a blended approach to measure expected volatility that is based on our weighted average historical and implied volatilities.
The risk-free rate is derived using the yield curve of a zero-coupon U.S. Treasury bond with a maturity equal to the expected term of the stock option on the grant date. During fiscal 2018, we 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 our 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. We use historical data to estimate forfeitures and was derived in the same manner as in the prior years presented.
Leidos Holdings, Inc. Annual Report - 99
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average grant-date fair value and assumptions used to determine fair value of stock options granted for the periods presented were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
December 28,
2018
|
Weighted average grant-date fair value
|
|
$
|
19.64
|
|
|
$
|
11.89
|
|
|
$
|
13.85
|
|
Expected term (in years)
|
|
4.5
|
|
4.4
|
|
4.7
|
Expected volatility
|
|
25.0
|
%
|
|
24.3
|
%
|
|
26.6
|
%
|
Risk-free interest rate
|
|
0.6
|
%
|
|
2.4
|
%
|
|
2.6
|
%
|
Dividend yield
|
|
1.3
|
%
|
|
2.2
|
%
|
|
2.0
|
%
|
Stock option activity for each of the periods presented was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
stock under
stock options
|
|
Weighted
average
exercise price
|
|
Weighted
average
remaining
contractual
term
|
|
Aggregate
intrinsic value
|
|
|
(in millions)
|
|
|
|
(in years)
|
|
(in millions)
|
Outstanding at December 29, 2017
|
|
2.8
|
|
|
$
|
34.38
|
|
|
3.9
|
|
$
|
86
|
|
Options granted
|
|
0.4
|
|
|
63.75
|
|
|
|
|
|
Options forfeited or expired
|
|
(0.2)
|
|
|
49.65
|
|
|
|
|
|
Options exercised
|
|
(0.6)
|
|
|
30.40
|
|
|
|
|
24
|
|
Outstanding at December 28, 2018
|
|
2.4
|
|
|
$
|
39.41
|
|
|
3.8
|
|
$
|
36
|
|
Options granted
|
|
0.5
|
|
|
63.61
|
|
|
|
|
|
Options forfeited or expired
|
|
—
|
|
|
58.08
|
|
|
|
|
|
Options exercised
|
|
(0.5)
|
|
|
30.86
|
|
|
|
|
21
|
|
Outstanding at January 3, 2020
|
|
2.4
|
|
|
$
|
46.04
|
|
|
3.8
|
|
$
|
128
|
|
Options granted
|
|
0.3
|
|
|
106.73
|
|
|
|
|
|
Options forfeited or expired
|
|
(0.1)
|
|
|
66.84
|
|
|
|
|
|
Options exercised
|
|
(0.4)
|
|
|
35.94
|
|
|
|
|
29
|
|
Outstanding at January 1, 2021
|
|
2.2
|
|
|
56.01
|
|
|
3.5
|
|
108
|
|
Exercisable at January 1, 2021
|
|
1.4
|
|
|
$
|
42.85
|
|
|
2.5
|
|
$
|
85
|
|
Vested and expected to vest in the future as of January 1, 2021
|
|
2.2
|
|
|
$
|
55.67
|
|
|
3.5
|
|
$
|
108
|
|
As of January 1, 2021, there was $5 million of unrecognized compensation cost, net of estimated forfeitures, related to stock options, which is expected to be recognized over a weighted-average period of 2.1 years. Tax benefits from stock options exercised for fiscal 2020, 2019 and 2018 were $7 million, $5 million and $6 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 - 100
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted stock units and awards activity for each of the periods presented was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of stock
under stock
awards
|
|
Weighted
average grant-
date fair value
|
|
|
(in millions)
|
|
|
Unvested stock awards at December 29, 2017
|
|
2.0
|
|
|
$
|
44.96
|
|
Awards granted
|
|
0.6
|
|
|
64.05
|
|
Awards forfeited
|
|
(0.2)
|
|
|
42.67
|
|
Awards vested
|
|
(0.4)
|
|
|
44.60
|
|
Unvested stock awards at December 28, 2018
|
|
2.0
|
|
|
$
|
50.85
|
|
Awards granted
|
|
0.6
|
|
|
64.70
|
|
Awards forfeited
|
|
(0.1)
|
|
|
60.20
|
|
Awards vested
|
|
(1.1)
|
|
|
44.10
|
|
Unvested stock awards at January 3, 2020
|
|
1.4
|
|
|
$
|
60.91
|
|
Awards granted
|
|
0.5
|
|
|
106.38
|
|
Awards forfeited
|
|
(0.1)
|
|
|
79.61
|
|
Awards vested
|
|
(0.5)
|
|
|
56.36
|
|
Unvested stock awards at January 1, 2021
|
|
1.3
|
|
|
$
|
79.05
|
|
As of January 1, 2021, there was $43 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 2020, 2019 and 2018 was $58 million, $66 million and $22 million, respectively. In addition, the fair value of dividend equivalents with respect to restricted stock units that vested was immaterial for fiscal 2020 and $1 million for fiscal 2019 and 2018.
Performance-Based Stock Awards
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 2020, 2019 and 2018, 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 2020, 2019 and 2018, we 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 - 101
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Performance-based stock award activity for each of the periods presented was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected number
of shares of stock
to be issued under
performance-based
stock awards
|
|
Weighted
average grant-
date fair value
|
|
|
(in millions)
|
|
|
Unvested at December 29, 2017
|
|
0.5
|
|
|
$
|
50.34
|
|
Awards granted
|
|
0.3
|
|
|
61.43
|
|
Awards forfeited
|
|
(0.1)
|
|
|
61.81
|
|
Awards vested
|
|
(0.2)
|
|
|
44.04
|
|
Unvested at December 28, 2018
|
|
0.5
|
|
|
$
|
57.36
|
|
Awards granted
|
|
0.2
|
|
|
66.92
|
|
Awards forfeited
|
|
—
|
|
|
66.72
|
|
Awards vested
|
|
(0.1)
|
|
|
45.83
|
|
Unvested at January 3, 2020
|
|
0.6
|
|
|
$
|
63.66
|
|
Awards granted
|
|
0.2
|
|
|
103.34
|
|
Awards forfeited
|
|
(0.1)
|
|
|
72.96
|
|
Awards vested
|
|
(0.2)
|
|
|
58.61
|
|
Unvested at January 1, 2021
|
|
0.5
|
|
|
$
|
80.20
|
|
The weighted average grant date fair value for performance-based stock, excluding those with a market condition, during fiscal 2020, 2019 and 2018 was $106.80, $62.66 and $63.76, respectively. The weighted average grant date fair value for performance-based stock with market conditions that were granted during fiscal 2020, 2019 and 2018 was $127.92, $72.53 and $71.50, respectively, and was calculated using the Monte Carlo simulation.
The Monte Carlo simulation assumptions used for the periods presented were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
December 28,
2018
|
Expected volatility
|
|
23.99
|
%
|
|
22.02
|
%
|
|
25.37
|
%
|
Risk free rate of return
|
|
0.50
|
%
|
|
2.39
|
%
|
|
2.35
|
%
|
Weighted average grant date stock price
|
|
$
|
105.12
|
|
|
$
|
62.66
|
|
|
$
|
65.00
|
|
As of January 1, 2021, there was $15 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 2020, 2019 and 2018 was $25 million, $9 million, and $13 million, respectively.
Leidos Holdings, Inc. Annual Report - 102
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20—Income Taxes
The provision for income taxes for the periods presented included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
December 28,
2018
|
|
|
(in millions)
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
90
|
|
|
$
|
122
|
|
|
$
|
46
|
|
State
|
|
37
|
|
|
31
|
|
|
23
|
|
Foreign
|
|
28
|
|
|
25
|
|
|
8
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
13
|
|
|
26
|
|
|
(41)
|
|
State
|
|
(11)
|
|
|
(3)
|
|
|
(10)
|
|
Foreign
|
|
(5)
|
|
|
(5)
|
|
|
2
|
|
Total
|
|
$
|
152
|
|
|
$
|
196
|
|
|
$
|
28
|
|
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 1,
2021
|
|
January 3,
2020
|
|
December 28,
2018
|
|
|
(in millions)
|
Amount computed at the statutory federal income tax rate
|
|
$
|
164
|
|
|
$
|
182
|
|
|
$
|
128
|
|
State income taxes, net of federal tax benefit
|
|
20
|
|
|
22
|
|
|
10
|
|
Research and development credits
|
|
(26)
|
|
|
(11)
|
|
|
(9)
|
|
Excess tax benefits from stock-based compensation
|
|
(15)
|
|
|
(11)
|
|
|
(9)
|
|
Impact of foreign operations
|
|
11
|
|
|
2
|
|
|
—
|
|
Change in valuation allowance for deferred tax assets
|
|
(5)
|
|
|
6
|
|
|
(49)
|
|
Dividends paid to employee stock ownership plan
|
|
(2)
|
|
|
(2)
|
|
|
(2)
|
|
Change in accruals for uncertain tax positions
|
|
1
|
|
|
4
|
|
|
1
|
|
Stock basis in subsidiary held for sale
|
|
—
|
|
|
5
|
|
|
(16)
|
|
Taxable conversion of a subsidiary
|
|
—
|
|
|
—
|
|
|
(17)
|
|
Change in statutory federal tax rate
|
|
—
|
|
|
—
|
|
|
(10)
|
|
Other
|
|
4
|
|
|
(1)
|
|
|
1
|
|
Total
|
|
$
|
152
|
|
|
$
|
196
|
|
|
$
|
28
|
|
Effective income tax rate
|
|
19.5
|
%
|
|
22.6
|
%
|
|
4.6
|
%
|
The effective tax rate for fiscal 2020 was favorably impacted primarily by federal research tax credits and excess tax benefits related to employee stock-based payment transactions, partially offset by taxes related to foreign operations.
The 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 stock basis of a subsidiary held for sale, excess tax benefits related to employee stock-based payment transactions and federal research tax credits.
Leidos Holdings, Inc. Annual Report - 103
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
|
(in millions)
|
Operating lease liabilities
|
|
$
|
176
|
|
|
$
|
115
|
|
Accrued vacation and bonuses
|
|
87
|
|
|
54
|
|
Reserves
|
|
62
|
|
|
46
|
|
Deferred compensation
|
|
31
|
|
|
26
|
|
Credits and net operating losses carryovers
|
|
22
|
|
|
25
|
|
Vesting stock awards
|
|
22
|
|
|
18
|
|
Accumulated other comprehensive loss
|
|
16
|
|
|
12
|
|
Investments
|
|
1
|
|
|
2
|
|
Deferred rent and tenant allowances
|
|
—
|
|
|
4
|
|
Other
|
|
7
|
|
|
9
|
|
Total deferred tax assets
|
|
424
|
|
|
311
|
|
Valuation allowance
|
|
(16)
|
|
|
(20)
|
|
Deferred tax assets, net of valuation allowance
|
|
408
|
|
|
291
|
|
|
|
|
|
|
Purchased intangible assets
|
|
$
|
(409)
|
|
|
$
|
(339)
|
|
Operating lease right-of-use assets
|
|
(148)
|
|
|
(103)
|
|
Property, plant and equipment
|
|
(63)
|
|
|
(2)
|
|
Employee benefit contributions
|
|
(7)
|
|
|
(6)
|
|
Deferred revenue
|
|
(1)
|
|
|
(17)
|
|
Other
|
|
(5)
|
|
|
(8)
|
|
Total deferred tax liabilities
|
|
(633)
|
|
|
(475)
|
|
Net deferred tax liabilities
|
|
$
|
(225)
|
|
|
$
|
(184)
|
|
At January 1, 2021, we had state net operating losses of $77 million and state tax credits of $5 million. Both will begin to expire in fiscal 2021; however, we expect to utilize $37 million and $4 million of these state net operating losses and state tax credits, respectively. We also had foreign net operating losses of $46 million, which do not expire. We expect to utilize $4 million of these foreign net operating losses.
Our valuation allowance for deferred tax assets was $16 million and $20 million as of January 1, 2021 and January 3, 2020, respectively. The valuation allowance decreased by $4 million primarily due to releases related to foreign withholding taxes and capital investments, partially offset by an increase related to foreign attributes not expected to be utilized.
Leidos Holdings, Inc. Annual Report - 104
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax balance sheet items are included in the accompanying consolidated balance sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
|
(in millions)
|
Other current assets:
|
|
|
|
|
Prepaid income taxes and tax refunds receivable
|
|
$
|
12
|
|
|
$
|
24
|
|
Other assets:
|
|
|
|
|
Deferred tax assets
|
|
$
|
9
|
|
|
$
|
—
|
|
Accounts payable and accrued liabilities:
|
|
|
|
|
Income taxes payable
|
|
$
|
21
|
|
|
$
|
19
|
|
Deferred tax liabilities
|
|
234
|
|
|
184
|
|
Other long-term liabilities:
|
|
|
|
|
Unrecognized tax benefits
|
|
$
|
4
|
|
|
$
|
1
|
|
Unrecognized tax benefits are primarily related to certain recurring deductions customary for our industry. The changes in the unrecognized tax benefits, excluding $1 million of accrued interest and penalties for fiscal 2018, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
December 28,
2018
|
|
|
(in millions)
|
Unrecognized tax benefits at beginning of year
|
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
10
|
|
Additions for tax positions related to current year
|
|
—
|
|
|
—
|
|
|
3
|
|
Additions for tax positions related to prior years
|
|
1
|
|
|
11
|
|
|
—
|
|
Reductions for tax positions related to prior years
|
|
—
|
|
|
(1)
|
|
|
(5)
|
|
Settlements with taxing authorities
|
|
—
|
|
|
(11)
|
|
|
(2)
|
|
Unrecognized tax benefits at end of year
|
|
$
|
6
|
|
|
$
|
5
|
|
|
$
|
6
|
|
Unrecognized tax benefits that, if recognized, would affect the effective income tax rate
|
|
$
|
5
|
|
|
$
|
4
|
|
|
$
|
6
|
|
At January 1, 2021, the balance of unrecognized tax benefits included liabilities for uncertain tax positions of $6 million, $4 million of which were classified as other long-term liabilities on the consolidated balance sheets. 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 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 consolidated balance sheets.
We file income tax returns in the United States and various state and foreign jurisdictions. We participate in the Internal Revenue Service (“IRS”) Compliance Assurance Process ("CAP"), a real-time audit of our consolidated federal corporate income tax return. The IRS has examined our consolidated federal income tax returns through the year ended January 3, 2020. For the year ended January 1, 2021, we were selected to participate in the phase of CAP reserved for taxpayers whose risk of noncompliance does not warrant use of IRS resources. We believe that participation in CAP should reduce tax-related uncertainties, if any. Additionally, with a few exceptions, as of January 1, 2021, we are no longer subject to state, local, or foreign examinations by the tax authorities for fiscal years ending on or before December 30, 2016.
Leidos Holdings, Inc. Annual Report - 105
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 $4 million of our unrecognized tax benefits, depending on the timing of ongoing examinations, any litigation and expiration of statute of limitations, either because the tax positions are sustained or because we agree to their disallowance and pay the related income tax. While we believe we have adequate accruals for uncertain tax positions, the tax authorities may determine that we owe 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 21—Retirement Plans
Defined Contribution Plans
We sponsor 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 Leidos may also make discretionary contributions. Company contributions were $120 million, $105 million and $94 million for fiscal 2020, 2019 and 2018, respectively.
Deferred Compensation Plans
We maintain 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 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.
We do not make any contributions to the KDP but maintain participant accounts for deferred amounts and investments. We maintain 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 elect to defer in share units all or a portion of certain cash bonuses and restricted stock unit awards granted under the previous 2006 Equity Incentive Plan and the current 2017 Omnibus Incentive Plan (see "Note 19—Stock-Based Compensation"). Under the MSCP, restricted stock share units are fully vested and no further deferrals into the plan are made. We do not make any 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
We sponsor a defined benefit pension plan in the United Kingdom for former employees on an expired customer contract. While benefits under the plan are frozen, we have continuing defined benefit pension obligations with respect to certain plan participants. In fiscal 2012, we sold certain components of our business, including the component that contained this pension and employed the pension plan participants. Pursuant to the definitive sale agreement, we 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 1, 2021, and January 3, 2020, was $138 million and $121 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 1, 2021, and January 3, 2020, was $157 million and $139 million, respectively. The plan funding status was overfunded $19 million and $18 million as of January 1, 2021, and January 3, 2020, respectively, and included within "Other assets" on the consolidated balance sheets.
Leidos Holdings, Inc. Annual Report - 106
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other
We also sponsor multiemployer defined benefit pension plans and a defined contribution plan (a 401(k) plan) (the "Sponsored Plans") for employees working on two U.S. government contracts. As part of the contractual agreements, the customers reimburse Leidos for contributions made to these Sponsored Plans as these costs are allowable under government contract cost accounting requirements. If we were to cease being the contractor as a result of a recompetition process, the defined benefit pension plans and related plan assets and liabilities would transfer to the new contractor. If the contract expires or is terminated with no transfer of the pension plan to a successor contractor, any amount by which the plan liabilities exceed plan assets, as of that date, will be reimbursed by the U.S. government customer. Since we are not responsible for the current or future funded status of the pension plans, no assets or liabilities arising from their funded status are recorded in the consolidated financial statements and no amounts associated with these pension plans are included in the defined benefit plan disclosures above.
Note 22—Supplementary Cash Flow Information and Restricted Cash
Supplementary cash flow information, including non-cash activities, for the periods presented was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
December 28,
2018
|
|
|
(in millions)
|
Supplementary cash flow information:
|
|
|
|
|
|
|
Cash paid for interest(1)
|
|
$
|
161
|
|
|
$
|
172
|
|
|
$
|
133
|
|
Cash paid for income taxes, net of refunds
|
|
140
|
|
|
142
|
|
|
70
|
|
Non-cash investing activity:
|
|
|
|
|
|
|
Fixed asset additions
|
|
$
|
18
|
|
|
$
|
27
|
|
|
$
|
—
|
|
Non-cash financing activity:
|
|
|
|
|
|
|
Real estate financing transaction
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
65
|
|
Notes payable and finance lease obligations
|
|
12
|
|
|
—
|
|
|
—
|
|
(1) Includes net settlement of cash flow hedge and fair value hedge derivatives
Sale of Accounts Receivable
We have entered into purchase agreements with a financial institution which provide us the election to sell accounts receivable at a discount. The receivables sold are typically collectable from our customers within 30 days of the sale date. During fiscal 2020, we sold $1,866 million of accounts receivable under the agreements and received proceeds of $1,864 million, which were classified as operating activities in the consolidated statements of cash flows.
These transfers have been recognized as a sale, as the receivables have been legally isolated from Leidos, the financial institution has the right to pledge or exchange the assets received and we do not maintain effective control over the transferred accounts receivable. Our only continuing involvement with the transferred financial assets is as the collection and servicing agent. As a result, the accounts receivable balance on the consolidated balance sheets is presented net of the transferred amounts. No servicing asset or liability was recognized for continued servicing of the sold receivables, as the servicing fee approximates fair value. The difference between the carrying amount of the receivables sold and the net cash received was recognized as a loss on sale and was recorded within "Selling, general and administrative expenses" on the consolidated statements of income. As of January 1, 2021, all sold receivables had been remitted to the financial institution.
Leidos Holdings, Inc. Annual Report - 107
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Cash
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
|
(in millions)
|
Cash and cash equivalents
|
|
$
|
524
|
|
|
$
|
668
|
|
Restricted cash
|
|
163
|
|
|
49
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
687
|
|
|
$
|
717
|
|
The restricted cash is recorded within "Other current assets" in the 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.
Note 23—Business Segments
Our operations and reportable segments are organized around the customers and markets we serve. We define our reportable segments based on the way the chief operating decision maker ("CODM"), currently the Chairman and Chief Executive Officer, manages the operations for purposes of allocating resources and assessing performance.
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. Effective the beginning of fiscal 2020, certain contracts were reassigned from the Civil reportable segment to the Defense Solutions reportable segment to better align operations within the reportable segments to the customers they serve. Prior year segment results have been recast to reflect this change.
Defense Solutions provides leading-edge and technologically advanced services, solutions and products to a broad customer base. Our ever-changing technologies and innovations cover a wide spectrum of markets with primary areas of concentration in digital modernization and integrated systems, Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance technologies and services, transformative software, analytics, intelligence analysis, mission support and logistics services, weapons systems and human space exploration. We are dedicated to delivering cost-effective solutions backed by innovation-generating research and development to meet the evolving missions of our customers. 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, the National Aeronautics and Space Administration, 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 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.
Our Civil business is focused on modernizing infrastructure, systems and security for government and commercial customers both domestically and internationally. By applying leading science, innovative technologies and business acumen, our talented employees help customers achieve their missions and take on the connected world with data-driven insights, improved efficiencies and technological advantages in the areas of transportation solutions, security detection and automation, digital transformation services and environment, energy and infrastructure.
Our Health business focuses 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, life sciences, health services, clinical insights and health policy. The capabilities we provide predominantly fall in four major areas of activity: health information management services, managed health services, digital transformation and life sciences research and development.
Corporate includes the operations of various corporate activities, certain corporate expense items that are not reimbursed by our U.S. government customers and certain other expense items excluded from a reportable segment's performance.
Leidos Holdings, Inc. Annual Report - 108
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The results of Dynetics and the SD&A Businesses were included within the Defense Solutions and Civil reportable segments, respectively.
The following table summarizes business segment information for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 1,
2021
|
|
January 3,
2020
|
|
December 28,
2018
|
|
|
(in millions)
|
Revenues:
|
|
|
|
|
|
|
Defense Solutions
|
|
$
|
7,341
|
|
|
$
|
6,300
|
|
|
$
|
5,778
|
|
Civil
|
|
2,994
|
|
|
2,796
|
|
|
2,599
|
|
Health
|
|
1,962
|
|
|
1,998
|
|
|
1,817
|
|
Total revenues
|
|
$
|
12,297
|
|
|
$
|
11,094
|
|
|
$
|
10,194
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
Defense Solutions
|
|
$
|
506
|
|
|
$
|
471
|
|
|
$
|
402
|
|
Civil
|
|
280
|
|
|
231
|
|
|
235
|
|
Health
|
|
235
|
|
|
242
|
|
|
230
|
|
Corporate
|
|
(23)
|
|
|
(32)
|
|
|
(118)
|
|
Total operating income
|
|
$
|
998
|
|
|
$
|
912
|
|
|
$
|
749
|
|
|
|
|
|
|
|
|
Amortization of intangible assets:
|
|
|
|
|
|
|
Defense Solutions
|
|
$
|
92
|
|
|
$
|
64
|
|
|
$
|
74
|
|
Civil
|
|
66
|
|
|
63
|
|
|
81
|
|
Health
|
|
40
|
|
|
46
|
|
|
46
|
|
Total amortization of intangible assets
|
|
$
|
198
|
|
|
$
|
173
|
|
|
$
|
201
|
|
The income statement performance measures used to evaluate segment performance are revenues and operating income. As a result, "Interest expense, net," "Other (expense) income, net," and "Income tax expense," as reported in the consolidated financial statements are not allocated to our segments. Under U.S. government CAS, indirect costs including depreciation expense are collected in indirect cost pools, which are then collectively allocated out to the 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 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.
We generated approximately 87% of our total revenues in fiscal 2020 and 2019 and 85% of our total revenues in fiscal 2018 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 49% of our total revenues for fiscal 2020 and 48% for fiscal 2019 and 2018.
Less than 10% of the our 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.
Leidos Holdings, Inc. Annual Report - 109
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 24—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 and breach of contract with the 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. Leidos 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 Leidos 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 1, 2021, we had a liability of $42 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.
Other
We are also involved in various claims and lawsuits arising in the normal conduct of our business, none of which, in the opinion of management, based upon current information, will likely have a material adverse effect on our financial position, results of operations or cash flows.
Leidos Holdings, Inc. Annual Report - 110
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Contingencies
VirnetX, Inc. ("VirnetX")
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, which was denied on February 24, 2020. On February 20, 2020, Apple filed a Motion for Relief from Judgment in the U.S. District Court for the Eastern District of Texas, further arguing that VirnetX should not be allowed to recover the large amount of damages awarded in this case. On March 13, 2020, VirnetX announced that it had received payment from Apple of over $454 million, which represents the judgment with interest for the Apple I matter. On May 22, 2020, Leidos received $85 million from VirnetX representing Leidos' current share of the proceeds resulting from the Apple I case. A net gain of $81 million was recognized during fiscal 2020 and was presented in "Bad debt expense and recoveries" on the consolidated statements of income. On July 23, 2020, Leidos paid a 4% royalty on the proceeds received to the customer who paid for the development of the original technology. Apple's Motion for Relief from Judgment was denied by the District Court on September 1, 2020. Apple did not appeal the denial of this Motion; therefore, the Apple I case is now concluded.
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. On April 23, 2020, the District Court ordered a new trial on damages in the Apple II case, which was delayed by COVID-19 and started on October 26, 2020. On October 30, 2020, the jury awarded VirnetX $503 million in damages and specified a royalty rate of $0.84 per infringing device. Apple is expected to appeal this decision. In January 2021, the District Court entered final judgment affirming the jury award and the parties separately agreed on additional costs and interest of over $75 million, subject to Apple's expected appeal.
Under its agreements with VirnetX, Leidos would receive 25% of the proceeds obtained by VirnetX after reduction for attorneys' fees and costs. However, the verdict in the Apple II case remains subject to the ongoing and potential future proceedings and appeals. 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 we will receive any proceeds in connection with the jury award in the Apple II case. In addition, if Leidos receives any proceeds, we are required to pay a royalty to the customer who paid for the development of the technology.
Leidos Holdings, Inc. Annual Report - 111
LEIDOS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Government Investigations and Reviews
We are routinely subject to investigations and reviews 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 of the United States. Adverse findings could have a material effect on our business, financial position, results of operations and cash flows due to our reliance on government contracts.
As of January 1, 2021, indirect cost audits by the DCAA remain open for fiscal 2015 and subsequent fiscal years. Although we have recorded contract revenues based upon an 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 estimates, our profitability may be adversely affected. As of January 1, 2021, we believe we have adequately reserved for potential adjustments from audits or reviews of contract costs.
In February 2019, we executed an external restructuring advance agreement with the DoD in accordance with provisions of the Defense Federal Acquisition Regulation Supplement, which allows us to recover certain specified external restructuring costs.
Note 25—Commitments
We have outstanding letters of credit of $91 million as of January 1, 2021, principally related to performance guarantees on contracts. We also have outstanding surety bonds with a notional amount of $129 million as of January 1, 2021, principally related to performance and subcontractor payment bonds on contracts. The value of the surety bonds may vary due to changes in the underlying project status and/or contractual modifications.
As of January 1, 2021, the future expirations of the outstanding letters of credit and surety bonds were as follows:
|
|
|
|
|
|
|
|
|
Fiscal year ending
|
|
|
|
|
(in millions)
|
2021
|
|
$
|
112
|
|
2022
|
|
96
|
|
2023
|
|
2
|
|
2024
|
|
1
|
|
2025
|
|
2
|
|
2026 and thereafter
|
|
7
|
|
|
|
$
|
220
|
|
Note 26—Subsequent Events
On January 14, 2021, we completed the acquisition of 1901 Group for preliminary purchase consideration of $214 million, subject to working capital adjustments.
In early fiscal 2021, we sold an additional $204 million of accounts receivable, of which the proceeds were partially used to fund the acquisition of 1901 Group.
On February 22, 2021, we entered into a definitive agreement to acquire Gibbs & Cox, Inc. for preliminary purchase consideration of $380 million, subject to working capital adjustments. The transaction is expected to close in the second quarter of fiscal 2021.
Leidos Holdings, Inc. Annual Report - 112