FinanceLooker

Excrept from filing document 2025-01-03

As of June 28 2024 which was the last business day of the registrant s most recently completed second fiscal quarter the aggregate market value of Leidos Holdings Inc common stock based upon the closing price of the stock on the New York Stock Exchange held by non affiliates of the registrant was 19 549 744 128
Portions of Leidos Holdings Inc s definitive Proxy Statement for the 2024 Annual Meeting of Stockholders 2025 Proxy Statement are incorporated by reference in Part III of this Annual Report on Form 10 K
This Annual Report on Form 10 K contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our management s belief and assumptions about the future in light of information currently available to our management In some cases you can identify forward looking statements by words such as may will should expects intends plans anticipates believes estimates predicts potential continue and similar words or phrases or the negative of these words or phrases These statements relate to future events or our future financial performance and involve known and unknown risks uncertainties and other factors that may cause our actual results levels of activity performance or achievements to be materially different from any future results levels of activity performance or achievements expressed or implied by these forward looking statements Although we believe that the expectations reflected in the forward looking statements are reasonable when made we cannot guarantee future results levels of activity performance or achievements There are a number of important factors that could cause our actual results to differ materially from those results anticipated by our forward looking statements which include but are not limited to
developments in the U S government defense and non defense budgets including budget reductions sequestration implementation of spending limits or changes in budgetary priorities delays in the U S government budget process or a government shutdown or the U S government s failure to raise the debt ceiling which increases the possibility of a default by the U S government on its debt obligations related credit rating downgrades or an economic recession
our compliance with international federal state and local laws and regulations regarding privacy data security protection storage retention transfer disposal and other processing technology protection and personal information
the adequacy of our insurance programs customer indemnifications or other liability protections designed to protect us from significant product or other liability claims including cybersecurity attacks
our ability to grow our commercial health and infrastructure businesses which could be negatively affected by budgetary constraints faced by hospitals and by developers of energy and infrastructure projects
We do not undertake any obligation to update or revise any of the forward looking statements to reflect events circumstances changes in expectations or the occurrence of unanticipated events after the date of those statements or to conform these statements to actual results
Leidos Holdings Inc Leidos a Delaware corporation is a holding company whose direct 100 owned subsidiary and principal operating company is Leidos Inc Leidos was founded in 1969 by physicist Dr Robert Beyster Since our founding 56 years ago we have applied our expertise in science research and engineering in rapidly evolving technologies and markets to solve complex problems of global concern
We use the terms we us and our to refer collectively to Leidos Holdings Inc and its consolidated subsidiaries Leidos is an industry and technology leader serving government and commercial customers with smarter more efficient digital and mission innovations Headquartered in Reston Virginia with 48 000 global employees we bring domain specific capabilities technologies and insights to customers in each of these markets by leveraging seven technical core capabilities trusted mission artificial intelligence cyber operations digital modernization mission software systems integrated systems mission operations and rapid prototyping and manufacturing Applying our technically advanced solutions to help solve our customers most difficult problems has enabled us to build strong relationships with key customers Our customers include the U S Department of Defense DoD the U S Intelligence Community the U S Department of Homeland Security DHS the Federal Aviation Administration FAA the Department of Veterans Affairs VA National Aeronautics and Space Administration NASA and many other U S civilian state and local government agencies foreign government agencies and commercial businesses With a focus on delivering mission critical solutions Leidos generated 87 of revenues for the fiscal year ended January 3 2025 fiscal 2024 from U S government contracts either as a prime contractor or a subcontractor to other contractors engaged in work for the U S government Approximately 8 of our revenues are generated by entities located outside of the United States
By leveraging expertise in multiple disciplines tailoring our services and solutions to the particular needs of our targeted markets and using advanced analytics we work to securely deliver services and solutions that not only meet customers current goals but also support their future missions
For additional discussion and analysis related to recent business developments see Business Environment and Trends in Management s Discussion and Analysis of Financial Condition and Results of Operations in Part II of this Annual Report on Form 10 K
Beginning in fiscal 2024 we realigned our business and operate in four reportable segments that are focused on specific defined capability sets we bring to our customers As a result of this change prior year segment results and disclosures have been recast to reflect the current reportable segment structure We now operate in the following reportable segments National Security Digital Health Civil Commercial International and Defense Systems We also separately present the unallocated costs associated with corporate functions as Corporate
Our National Security Digital business provides leading edge and technologically advanced services solutions and products as well as mission software capabilities for defense and intelligence customers in the areas of cyber logistics security operations and decision analytics We also deliver IT operations and digital transformation programs across all U S federal government customers Our advanced capabilities include the delivery of technology enabled services mission software capabilities and IT modernization services Our capabilities allow us to provide innovative technology solutions in software development engineering design modeling simulation analytics cyber security intelligence analysis linguistics and mission operations
Mission Software We deliver trusted national security software for defense intelligence and homeland security customers Our mission software aims to provide the decision advantage for protecting the homeland securing critical infrastructure enabling logistics and conducting multi domain operations The core of this capability offering is our Secure Development Operations approach that is designed to ensure our code is secure and assured from the start enabling our mission partners to focus on execution
Multi Domain Solutions We provide services by using artificial intelligence and machine learning to coordinate sea ground air and space rapidly and securely helping our warfighters have the right information at the right time to take action with decision advantage We apply an open architecture approach to digitally connect the joint force across air land sea cyber and space domains in support of the DoD s multi domain operations through innovative solutions essential services and enriched data management tools facilitating critical decision making
Cyber Operations We offer full spectrum cyber solutions to include offensive defensive and physical cyber operations We drive new advances for our customers in the areas of Zero Trust Cognitive Cyber Quantum Cryptography Identity Credential and Access Management We deliver global scale cryptographic management solutions to protect our customers most critical information and assets
Intelligence Analysis Mission Support and Global Logistics Services We provide intelligence analysis operational support logistics operations security linguistics force production biometrics Chemical Biological Radiological Nuclear and Explosives energetics and training In addition we deliver tailored IT services and solutions to our customers We offer product support and lifecycle sustainment services to our customers including planning and managing the cost and performance across the product s lifecycle We offer reverse engineering classified manufacturing and design and threat exploitation services to U S Intelligence Community customers We use predictive analytics and AI to securely deliver transformational logistics to our customers We provide a wide range of integrated logistics systems including rapid procurement inventory and facility management and distribution systems
Digital Modernization We provide worldwide digital support for our nation s largest and most critical infrastructure We design develop implement and maintain IT environments to provide stability and flexibility to mission needs Our capabilities support offerings including cybersecurity data analytics and operations and logistics Our cybersecurity solutions help detect and manage the most sophisticated cyber threats
Digital Transformation We deliver secure user centric IT solutions in cloud computing mobility application modernization DevOps data center and network modernization asset management help desk operations and digital workplace enablement We help our customers achieve their missions and business goals by delivering purpose built solutions cybersecurity as a standard efficient project delivery and end user satisfaction We accelerate enterprise transformation using customizable roadmaps and repeatable processes enabling customers to effectively use their resources and advance their objectives Using our cyber expertise we continually enhance our techniques and processes to build systems that operate resiliently in the face of evolving cyber threats Leidos is modernizing enterprise IT in classified and unclassified environments including programs with the FAA NASA U S Department of Justice Internal Revenue Service U S MINT U S Department of Commerce U S Federal Trade Commission and U S Department of Housing and Urban Development
National Security Digital represented 44 of total revenues for fiscal 2024 47 of total revenues for both the fiscal year ended December 29 2023 fiscal 2023 and the fiscal year ended December 30 2022 fiscal 2022
Our Health Civil business provides services and solutions to federal and commercial customers in the areas of public health care coordination life and environmental sciences and transportation We are dedicated to delivering effective and affordable solutions that are responsible for the health and well being of people including service members and veterans Our core capabilities include health information management services managed health services systems and infrastructure modernization and life sciences research and development We help customers achieve their missions and take on the connected world with data driven insights improved efficiencies and technological advantages Health Civil represented 30 of total revenues for fiscal 2024 and 27 of total revenues for both fiscal 2023 and fiscal 2022
Transportation Solutions Leidos is a trusted systems developer service provider and integrator serving Air Navigation Service Providers around the world including the FAA We provide air traffic control systems that help manage the world s most complex airspace We deliver many of the FAA s key automation systems and services including the En Route Automation Modernization ERAM Advanced Technologies and Oceanic Procedures ATOP Time Based Flow Management Terminal Flight Data Manager Enterprise Information Display System Geo 7 and Future Flight Services Leidos received 10 plus year extensions to the ERAM and ATOP contracts for continued delivery of the evolving National Airspace System needs In addition under the Mode S Beacon Replacement Systems contract Leidos is supporting the replacement of the FAA s Mode S Beacon Systems which are secondary surveillance radar capable of providing surveillance and specific aircraft information necessary to support Air Traffic Control automation in all traffic environments We also provide key air traffic control systems around the world including New Zealand and South Korea
Leidos employs holistic systems used for fielding applied technology solutions across the entire continuum of healthcare We deliver a single common electronic health record to both DoD and VA hospitals and treatment facilities worldwide Our responsibilities range from integrating software for the electronic healthcare record vendor and dental record vendors to integrating picture archiving and communications software and more We support cybersecurity across all integrated systems We also provide enterprise IT solutions to the VA National Institutes of Health NIH DoD and other federal health customers to help operate mission critical infrastructure reliably and at a reasonable cost
Managed Health Services We deploy a national footprint of health clinics and health providers to support care delivery services including medical disability and behavioral health examinations for the VA as well as serving other independent medical exam markets We have developed unique capabilities in behavioral health management through many decades of experience with a special emphasis on substance abuse services and non medical counseling We believe that these capabilities can be expanded into other clinical adjacencies Our managed health services activities leverage our IT and mission enablement capabilities which underpin solutions we offer to our customers across all of our served markets
Climate Energy and Environment We believe that we are trusted by government agencies with substantial environmental and sustainability driven missions We strive to ensure that our reputation across climate science environmental management and operations nuclear security infrastructure management mission support and IT modernization provides the applicable expertise needed to transform operations while modernizing aging infrastructure and maintaining environmental stewardship We support the critical missions of the Department of Energy DoE National Nuclear Security Administration and National Science Foundation At the DoE Hanford site we provide site wide infrastructure management and operation including oversight of land and logistics public works information technology fleet transportation environmental sustainability and compliance first responder services and future project planning At the National Energy Technology Laboratory we actively conduct and support fundamental and applied research efforts including providing product and logistical support comprising strategic business development technology transfer and agreements and education and outreach support for the effective and efficient execution of research programs
Life Sciences Research Development We provide life science research and development support to the NIH Center for Disease Control Army Medical Research community and commercial biotech companies Most notably on behalf of the U S government and the public trust we operate the Frederick National Laboratory for Cancer Research where we employ thousands of scientists technicians administrators and support staff Our professionals operate a wide range of leading edge research and development laboratories in the areas of genetics and genomics proteins and proteomics advanced biomedical computing and information technology biopharmaceutical development and manufacturing nanotechnology characterization and clinical trials management
From the biomedical sciences to implementing and optimizing electronic health records and enabling providers to perform care coordination and population health management Leidos is pioneering the use of the depth and breadth of systems integration principles processes and technologies to transform the health industry s evolution towards better quality and more efficient and effective care
Commercial International delivers a portfolio of products services and solutions aimed at securing national assets modernizing energy and critical infrastructure and enhancing mission outcomes Our key customers include Investor Owned Utilities government agencies in the United Kingdom and Australia the Transportation Security Administration U S Customs Border Protection CBP as well as airports and ports and borders authorities We offer a broad range of capabilities including design and engineering services security products and solutions digital modernization mission software logistics and airborne solutions Commercial International represented 14 of total revenues for both fiscal 2024 and 2023 and 13 of total revenues for fiscal 2022
Energy Infrastructure Leidos partners with utilities seeking reliable energy modernization solutions demonstrated by our strong relationships and collaboration with over 75 investor owned utilities Our project portfolio spans large scale energy initiatives across the United States serving electric utilities generation owners and industrial clients We support utilities and industrial customers in modernizing power delivery systems for enhanced reliability implementing energy management strategies advancing vehicle electrification transforming digital infrastructure and optimizing operational efficiency to meet evolving energy demands and market expectations Our expertise spans power grid engineering and design grid modernization utility planning and consulting energy management and efficiency technical and financial consulting and technology driven innovation including software and application development
Global Security Products and Services Leidos is a global leader in fully integrated security detection solutions enhancing the safety of screening and checkpoints for aviation ports borders and critical infrastructure worldwide With over 30 000 products deployed across more than 120 countries we lead the aviation screening equipment sector including people scanners computed tomography carry on baggage scanners checked baggage scanners and explosive trace detectors Leidos is also the primary supplier of mobile non intrusive inspection systems to CBP and other international customers Our Ports Borders solutions secure the flow of travel and trade by effectively detecting and mitigating threats across cargo vehicles and individuals Our digital solution features a secure and scalable open architecture platform that transforms airport security by integrating disparate devices and technologies into a unified management system This holistic approach provides real time data and automated controls improving throughput and operational efficiency
International Leidos delivers a wide range of mission focused services across multiple domains to address critical threats and provide innovative solutions to government agencies in the UK and Australia Our core areas of expertise include Digital Modernization Mission Software Logistics and Airborne Solutions In the UK we are a trusted partner of the Ministry of Defense delivering logistics and transformation solutions developing advanced biometric and smart border protection systems to enhance national security and leading IT service management and transformation programs In Australia we provide secure resilient and innovative technology solutions that support the Defense sector s modern warfighting capabilities We also conduct aerial border surveillance and search and rescue operations covering Australia s exclusive economic zone and search and rescue region
Defense Systems addresses threats facing our nation by rapidly prototyping and delivering advanced hardware software and integrated systems solutions for the U S Department of Defense Army Navy Air Force Space Force Marine Corps United States Special Operations Command NASA Defense Advanced Research Projects Agency intelligence agencies and international customers We are heavily engaged in the top defense Research Development Test and Evaluation priorities that are driven by critical evolving threat driven needs Defense Systems provides services in the air land sea space and cyberspace environments The Defense Systems business is dedicated to delivering cost effective solutions in the space airborne land maritime and cyber domains and supporting critical missions worldwide Defense Systems represented 12 of total revenues for both fiscal 2024 and 2023 and 13 of total revenues for fiscal 2022
Airborne Systems Leidos develops and integrates mission enhancing airborne solutions equipping government and Leidos owned fixed wing rotary wing and unmanned aircraft with advanced sensors and processing systems We execute airborne training intelligence surveillance and reconnaissance missions as a service for the DoD the U S Intelligence Community and military services worldwide Our key served markets include aircraft integration and operations sensor and autonomous systems and Multi Domain Operation enablers addressing diverse missions such as target identification border security and counter narcotics operations We design and integrate open architecture sensing systems powered by advanced sensors algorithms and processing capabilities to meet complex mission requirements Beyond integration we deliver high end solutions and services globally providing intelligence analysis operational support and logistics Leidos airborne also designs and manufactures low cost high impact airborne effectors including guided munitions e g GBU 69 cruise missiles e g Black Arrow and components for air to air and air to ground missions In the realm of autonomous systems we develop innovative software and hardware solutions for unmanned aerial systems and autonomous platforms Our unique autonomy algorithms enhance system capabilities decision making alleviate the burden on warfighters and enable seamless coordination between manned and autonomous platforms ensuring mission success in dynamic environments
Land Systems We develop Integrated Air and Missile Defense systems including the US Army Enduring Indirect Fire Protection Capability and AirShield systems Enduring Shield is a ground based mobile system that defends against cruise missiles and unmanned aircraft systems The system protects and defends critical civilian and military infrastructure bridging the gap between tactical short range air defense and strategic systems We are delivering systems for Initial Operational Test Evaluation and we are under contract to deliver systems in support of Guam Defense AirShield delivers robust air defense while on the move providing capabilities among the most advanced in the industry The system employs advanced threat assessment along with kinetic and non kinetic effectors that is designed to provide air defense against unmanned aerial vehicles particularly in dynamic operational environments We design and manufacture persistent surveillance radar systems advanced sensors and radio frequency seekers including the associated advanced algorithms that accompany them We use this expertise to provide military sensor and electronic system R D services for our customers
Maritime Systems On and under the sea we offer a wide range of capabilities We continue to enhance our surface and subsurface autonomous and unmanned technologies to help make maritime operations safer and more efficient for government and industry by providing innovative platforms software solutions for vessel control and autonomous behaviors leading sensor systems signal processing communications hardware and software to support these vital missions We are a market leader in submarine data collection technologies and anti submarine warfare system installation and maintenance and are expanding our capabilities in these areas to meet market demand for this growing threat We also provide prototyping and research and development support services to a wide variety of DoD customers from concept analysis to classified manufacturing Our naval architecture services span the entire ship s lifetime from early stage concept designs through detailed design shipyard construction support full lifecycle and sustainment support ship alterations service life extensions and disposal Our marine engineering involves a wide range of activities beginning with concept and feasibility design and continues through land based test sites cyber and shock hardening of key components detailed design construction support life cycle support and into ship alt design for service life extensions
Aerospace Systems We provide expertise in the design manufacturing and integration of space based electro optic infrared system multi hyperspectral electronic warfare and signals intelligence and communications payloads In space we provide sensor algorithm development and integrated payload capabilities to identify and track threats and cue defensive systems We have developed and delivered full integrated small satellite systems and are under contract for payload deliveries on the Space Development Agency Wide Field of View Tranches 0 1 and 2 programs We manufacture structures and thermal protection systems for hypersonic boost glide missiles and we provide testing services for hypersonic vehicles
Cyber and Threat Systems We offer reverse engineering classified manufacturing and design and threat exploitation services to a wide breadth of U S Intelligence Community customers We model simulate and analyze cyber and electro magnetic threats develop threat emulators for range testing and develop cyber physical solutions
Corporate includes the operations of various corporate activities certain expense items that are not reimbursed by our U S government customers and certain other expense items excluded from a reportable segment s performance
During fiscal 2022 we completed the acquisition of Cobham Aviation Services Australia s Special Mission business See Note 5 Acquisitions and Divestitures in Part II of this Annual Report on Form 10 K for further information
During fiscal 2023 we completed an immaterial disposition of a business within our Defense Solutions segment During fiscal 2022 we completed the disposition of Aviation Missile Solutions LLC within our Defense Solutions segment For further information see Note 5 Acquisitions and Divestitures in Part II of this Annual Report on Form 10 K
The majority of our revenues are generated in the United States Our consolidated revenues are largely attributable to prime contracts or to subcontracts with other contractors engaged in work for the U S government with the remaining attributable to international customers including the UK Ministry of Defence and Australian Department of Defence and customers across a variety of commercial markets Within the U S government our revenues are diversified across many agencies including various intelligence agencies the U S Army Navy and Air Force U S Space Force DHS Defense Information Security Agency FAA Transportation Security Administration CBP Defense Health Agency VA Department of Health and Human Services NASA National Science Foundation DoE the Environmental Protection Agency and research agencies such as Defense Advanced Research Projects Agency
These customers have a number of subsidiary agencies that have separate budgets and procurement functions Our contracts may be with the highest level of these agencies or with the subsidiary agencies of these customers
As of January 3 2025 we employed approximately 48 000 full and part time employees of whom approximately 42 600 are located in the United States and the remainder of which are located in approximately 50 countries worldwide Approximately 37 of our employees have degrees in science technology engineering or mathematics fields approximately 24 of our employees have advanced degrees 52 of our employees possess U S security clearances and approximately 19 of our employees are military veterans
Leidos has adopted six values that help define its culture integrity inclusion innovation agility collaboration and commitment These values provide a roadmap for our workplace behavior and help guide our business decisions They are a key component of our corporate culture and are part of our employees annual performance assessments Our values are based on our commitment to do the right thing for our customers our employees and our communities Our values are demonstrated by our employees as they help our customers execute important missions in the world s most complex markets
Our policies procedures training and communications form a comprehensive program that promotes a culture of integrity as a foundation for employee conduct For the seventh consecutive year the Ethisphere Institute named Leidos one of the World s Most Ethical Companies in 2024
Our approach to workplace culture and employee development focuses on education and best practices for leaders and employees Leidos has programs designed to promote our corporate values throughout the enterprise and with our senior leadership Leaders managers and employees of the Company are required to take annual training to reinforce our corporate values
We continue to grow and expand our learning and upskilling tools to develop and enhance our employees technical and leadership skills to actively maintain our workplace culture Company councils continue to champion and integrate Leidos values across the enterprise and are comprised of employees across our business areas and functions with oversight and guidance from executive leadership
Leidos is committed to promoting hiring practices that are designed and executed to recruit hire train and retain best in class talent including building a deep and broad pipeline of candidates We leverage college campuses military veteran resources industry associations and other sources to expand our outreach Each year we also attend and sponsor national conferences and local career fairs that target our key market segments and talent
Our military veteran outreach program attracts retains and supports current veterans transitioning service members and military spouses Our college campus outreach engages talent from multiple university sources
We have a strong focus on our employees career flexibility and well being We embrace what makes Leidos great by advancing a culture that helps every employee achieve personal and professional success This is part of our broader Employee Value Proposition to break limits and a commitment to make Leidos an even better place to work Leidos empowers and challenges employees to continuously seek share and apply new knowledge skills and behaviors We recognize the value of a high performing workforce where every member of the team has an opportunity to feel motivated valued and fulfilled and have a purposeful and long career at Leidos We provide resources development and experiential learning to enable employees to grow including a talent marketplace where employees can fill temporary roles to develop skills or provide additional assistance We provide leaders with the knowledge skills and resources needed to coach employees and enable employees career development
We value and develop a future ready workforce to meet customer needs and stay ahead of emerging technologies We have a strong technical upskilling and reskilling program to develop mobilize and retain talent We offer formal programs to help employees earn many industry standard professional and technical certifications Additionally we offer tuition reimbursement and certification exam reimbursement to full time employees at accredited universities
Our Internal Mobility Program has a dedicated team that proactively focuses on the mobilization of our employees We teach employees how to use the tools and resources available to them and help them gain visibility across the enterprise We assist managers and recruiters in identifying internal candidates for their programs
We invest in our current and future leaders in several ways We provide a variety of leadership development programs targeted for each level of leader and numerous resources for leader development Annually we host a two day Leadership Summit for approximately 350 of our most senior leaders to align our growth strategy and transformation initiatives
Through our ongoing talent planning processes we identify and develop high potential employees for future roles We create succession plans for all executive level positions as well as for other roles throughout the organization considered vital to our success In addition we establish development and engagement plans for top talent that may include formal training mentoring coaching sponsorship and experiential learning opportunities
Our primary focus is on the health and safety of our employees with the physical and mental well being of our employees being top priority To support the physical and mental well being of our employees we provide many well being and mental health benefits to all employees including access to our Employee Assistance Program Headspace Personify Health and meQuilibrium resources These partners provide a multitude of free resources to assist employees with their mental financial and physical health
We are a leader in the field of occupational health and safety OH S and place a strong emphasis on these activities both internally and on behalf of our customers Internally we emphasize direct management responsibility corporate policies and procedures OH S program implementation employee training and compliance assessments Our corporate policies and procedures support compliance with OH S regulations at work locations We have a proactive compliance program of employee education training auditing and reporting that through employee awareness and integration into our business operations supports our commitment to a safe and healthy work environment
Our operations are subject to various foreign federal state and local environmental protection and health and safety laws and regulations In addition our operations may become subject to future laws and regulations including those related to climate change and environmental sustainability See Risk Factors in this Annual Report on Form 10 K for further details Although we do not currently anticipate that the costs of complying with or the liabilities associated with environmental laws will materially and adversely affect us we cannot ensure that we will not incur material costs or liabilities in the future
We conduct research and development activities under customer funded contracts and with company funded research and development funds Company funded research and development includes independent research and development IR D and commercial and international research and development Company funded research and development expenses are included in selling general and administrative expenses Our company funded research and development expense was 150 million 128 million and 116 million for fiscal 2024 2023 and 2022 respectively which as a percentage of consolidated revenues was 0 9 for fiscal 2024 and 0 8 for both fiscal 2023 and 2022 We charge expenses for research and development activities performed under customer contracts directly to those contracts
Our technical services and products are not generally dependent upon patent protection although we do selectively seek patent protection We claim a proprietary interest in certain of our products software programs methodologies and know
how This proprietary information is protected in confidence as trade secrets using non disclosure and other definitive agreements We selectively pursue opportunities to license or transfer our technologies to third parties
In connection with the performance of services and solutions the U S government has certain rights to inventions data software codes and related material that we develop under U S government funded contracts and subcontracts Generally the U S government may disclose or license such information to third parties including in some instances our competitors In the case of some subcontracts that we perform the prime contractor generally obtains rights to use the programs and products that we deliver under the subcontract to perform its prime contract obligations
Competition for contracts is significant and we often compete against many well established corporations with strong name and brand recognition We also compete against smaller more specialized companies that concentrate their resources in particular areas the U S government s own capabilities and federal non profit contract research centers Due to the diverse requirements of the U S government and our commercial customers we frequently collaborate with other companies to compete for large contracts and bid against these same companies in other situations
Our principal competitors currently include the following companies Accenture Federal Systems Amentum Services Inc BAE Systems Booz Allen Hamilton Inc CACI International Inc Deloitte General Dynamics Corporation GovCIO IBM KBR Inc L3Harris Lockheed Martin Corporation ManTech Northrop Grumman Corporation Optum Parsons Corp Peraton Raytheon Technologies Corporation and SAIC These companies span across sectors that include systems development and integration engineering and technical services divisions of large defense contractors diversified U S and international IT providers and contractors focused solely on technical services supply chain management other logistics services and major systems operations and maintenance homeland security and health solutions
We compete on various factors including our technical expertise and qualified professional and or security cleared personnel our ability to deliver innovative high value solutions in a timely manner successful program execution our understanding of our customers missions the size and scale of our company and past performance credentials
Our business is heavily regulated and we must comply with and are affected by laws and regulations relating to the formation administration and performance of U S government and other contracts The U S government procurement environment has evolved due to statutory and regulatory procurement reform initiatives Today U S government customers employ several contracting methods to purchase services and products Budgetary pressures and reforms in the procurement process have caused many U S government customers to increasingly purchase services and products using contracting methods that give them the ability to select multiple contract winners or pre qualify certain contractors to provide services or products on established general terms and conditions rather than through single award contracts The predominant contracting methods through which U S government agencies procure services and products include the following
Definitive Award Contracts U S government agencies may procure services and products through single definitive award contracts which specify the scope of services or products purchased and identify the contractor that will provide the specified services or products When an agency has a requirement the agency will issue a solicitation or request for proposal to which interested contractors can submit a proposal The bidding and selection process can take a year or more to complete For the contractor this method of contracting may provide greater certainty of the timing and amounts to be received at the time of contract award because it generally results in the customer contracting for a specific scope of services or products from the single definitive successful awardee
The U S government uses IDIQ contracts to obtain commitments from contractors to provide certain services or products on pre established terms and conditions The U S government then issues task orders under the IDIQ contracts to purchase specific services or products IDIQ contracts are awarded to one or more contractors following a competitive procurement process Under a single award IDIQ contract all task orders under that contract are issued to the one contractor awarded the IDIQ Under a multiple award IDIQ contract task orders are competitively bid by the contractors awarded the IDIQ Multiple award IDIQ contracts that are open for any government agency to use for procurement are commonly referred to as government wide acquisition contracts IDIQ contracts often have multi
year terms and unfunded ceiling amounts therefore enabling but not committing the U S government to purchase substantial amounts of services or products from one or more contractors At the time an IDIQ contract is awarded prior to the award of any task orders a contractor may have limited or no visibility as to the ultimate amount of services or products that the U S government will purchase under the contract and in the case of a multiple award IDIQ contracts the contractor from which such purchases may be made
U S General Services Administration GSA Schedule Contracts The GSA maintains listings of approved suppliers of services and products with agreed upon prices for use throughout the U S government In order for a company to provide services under a GSA Schedule contract a company must be pre qualified and awarded a contract by the GSA When an agency uses a GSA Schedule contract to meet its requirements the agency or the GSA on behalf of the agency conducts the procurement The user agency or the GSA on its behalf evaluates the user agency s requirements and initiates a competition limited to GSA Schedule qualified contractors GSA Schedule contracts are designed to provide the user agency with reduced procurement time and lower procurement costs Similar to IDIQ contracts at the time a GSA Schedule contract is awarded a contractor may have limited or no visibility as to the ultimate amount of services or products that the U S government will purchase under the contract
Other Transaction Authority OTA agreements Under certain circumstances U S government agencies can enter into OTA agreements instead of traditional contracts Agencies are explicitly authorized by Congress for specific uses limitations or restrictions in the use of OTAs In the case of DoD the department is authorized to use OTAs to carry out basic applied or advanced research projects prototype development projects or follow on production to initial prototype projects OTA agreements are generally exempt from federal procurement regulations These exemptions grant the U S government the flexibility to include amend or exclude contract clauses and requirements that are mandatory in traditional procurements OTA agreements also grant more flexibility to structure agreements in numerous ways including joint ventures partnerships or multiple agencies joining together to fund an agreement encompassing multiple providers
We often team together with other companies to submit bids for large U S government procurements or other opportunities where we believe that the combination of services and products that we can provide as a team will help us win and perform the contract Our relationships with our teammates including whether we serve as the prime contractor or as a subcontractor vary with each contract opportunity and typically depend on the program contract or customer requirements as well as the relative size qualifications capabilities customer relationships and experience of our company and our teammates
Contracting with the U S government also subjects us to substantial regulation and unique risks including the U S government s ability to cancel any contract at any time through a termination for the convenience 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 prior to U S government termination for convenience These regulations and risks are described in more detail below under Business Regulation and Risk Factors in this Annual Report on Form 10 K
Generally the type of contract for our services and products is determined by or negotiated with the U S government and may depend on certain factors including the type and complexity of the work to be performed degree and timing of the responsibility to be assumed by the contractor for the costs of performance the extent of price competition and the amount and nature of the profit incentive offered to the contractor for achieving or exceeding specified standards or goals We generate revenues under several types of contracts including the following
Cost reimbursement contracts include cost plus fixed fee award fee and incentive fee contracts These contracts provide for reimbursement of our direct contract costs and allocable indirect costs plus a fee These contracts are typically used when uncertainties involved in contract performance do not permit costs to be estimated with sufficient accuracy to use a fixed price contract Cost reimbursement contracts generally subject us to lower risk but require us to use our best efforts to accomplish the scope of the work within a specified time and budget Award and incentive fees are generally based on performance criteria such as cost schedule quality and or technical performance Award fees are determined and earned based on customer evaluation of the Company s performance against contractual criteria Incentive fees that are based on cost provide for an initially negotiated fee to be adjusted later typically using a formula to measure performance against the associated criteria based on the relationship of total allowable costs to total target costs
Fixed price incentive fee FPIF contracts are substantially similar to cost plus incentive fee contracts except they establish specified targets for cost and profit a price ceiling but not a profit ceiling or floor and a profit adjustment formula Under an FPIF contract the allowable costs incurred are eligible for reimbursement but are subject to a cost share arrangement which affects profitability Generally if our costs exceed the contract target cost or are not allowable under the applicable regulations we may not be able to obtain reimbursement for all costs and may have our fees reduced or eliminated
Time and materials T M contracts typically provide for negotiated fixed hourly rates for specified categories of direct labor plus reimbursement of other direct costs This type of contract is generally used when there is uncertainty about the extent or duration of the work to be performed by the contractor at the time of contract award or it is not possible to anticipate costs with any reasonable degree of confidence On T M contracts we assume the risk of providing appropriately qualified staff to perform these contracts at the hourly rates set forth in the contracts over the period of performance of the contracts
Fixed price level of effort FPLOE contracts are substantially similar to T M contracts except they require a specified level of effort over a stated period of time on work that can be stated only in general terms This type of contract is generally used when the contractor is required to perform an investigation or study in a specific research and development area and to provide a report showing the results achieved based on the level of effort Payment is based on the effort expended rather than the results achieved
Firm Fixed Price FFP contracts provide for a fixed price for specified products systems and or services This type of contract is typically used when the customer acquires products and services on the basis of reasonably definitive specifications that allow parties to develop an estimate of the costs to complete the work The price for a FFP contract is often determined through competitive bidding by multiple contractors vying for award of the contract but the price may also be determined through price negotiations with the customer These contracts offer us potential increased profits if we can complete the work at lower costs than planned but FFP contracts increase our exposure to the risk of cost overruns
Our earnings and profitability may vary materially depending on changes in the proportionate amount of revenues derived from each type of contract the nature of services or products provided as well as the achievement of performance objectives and the stage of performance at which the right to receive fees particularly under incentive fee and award fee contracts is finally determined Cost reimbursement and T M contracts generally have lower profitability than FFP contracts
The U S government s fiscal year ends on September 30 of each year While not certain it is not uncommon for U S government agencies to award extra tasks or complete other contract actions in the timeframe leading up to the end of its fiscal year in order to avoid the loss of unexpended fiscal year funds which may favorably impact our third fiscal quarter In addition our quarterly results may be impacted by the number of working days in a given quarter We tend to generate less revenue from our labor services during the fourth quarter as a result of the holiday season
We are heavily regulated in most of the fields in which we operate We provide services and products to numerous U S government agencies and entities including to the DoD the U S Intelligence Community and the DHS When working with these and other U S government agencies and entities we must comply with various laws and regulations relating to the formation administration and performance of contracts Some significant laws and regulations that affect us include
the Federal Acquisition Regulation FAR and supplements including the DoD Federal Acquisition Regulation Supplement DFARS which regulate the formation administration and performance of U S government contracts
the Procurement Integrity Act which regulates access to competitor bid and proposal information and government source selection information and our ability to provide compensation to certain former government officials
The International Trade in Arms Regulation ITAR which governs the manufacture export and temporary import of defense articles the furnishing of defense services and brokering activities involving items described on the U S munitions list
These regulations impose a broad range of requirements many of which are unique to government contracting including various procurement import and export security contract pricing and cost contract termination and adjustment and audit requirements Among other things these laws and regulations
require reviews by the Defense Contract Audit Agency DCAA Defense Contract Management Agency DCMA and other U S government agencies of compliance with government requirements for a contractor s business systems
restrict the use and dissemination of and require the protection of unclassified contract related information and information classified for national security purposes and the export of certain products and technical data and
require us not to compete for work if an actual or potential organizational conflict of interest as defined by these laws and regulations related to such work exists and or cannot be appropriately mitigated neutralized or avoided
The U S government may revise its procurement practices or adopt new contract rules and regulations at any time In order to help ensure compliance with these complex laws and regulations all of our employees are required to complete ethics and other compliance trainings relevant to their position
Some of our operations and service offerings involve access to and use by us of personal information and or protected health information These activities are regulated by extensive federal state and international data privacy and security laws requiring organizations to among other things provide certain privacy protections and security safeguards for such information For example among others
the European Union s EU s General Data Protection Regulation GDPR which imposes compliance obligations for companies that process personal data of EU data subjects necessitating investment into ongoing data protection activities and documentation requirements and creates the potential for significant fines for noncompliance
the United Kingdom s UK s General Data Protection Regulation U K GDPR which creates similar compliance obligations for companies that process personal data of UK data subjects as are imposed by the GDPR
the California Consumer Privacy Act as amended by the California Privacy Rights Act collectively CCPA which broadly defines personal information and provides expanded consumer privacy rights to natural persons residing in California such as affording them the right to access and request deletion of their information and to opt out of certain sharing and sales of personal information and
the Health Insurance Portability and Accountability Act as amended by the Health Information Technology for Economic and Clinical Health Act which establishes privacy and security compliance obligations with respect to the processing of protected health information by covered entities and business associates necessitating investment in technical and organizational compliance measures and creates the potential for substantial fines for noncompliance
Our corporate headquarters is located at 1750 Presidents Street Reston VA 20190 and our telephone number is 571 526 6000 Our website can be accessed at www leidos com The website contains information about our company and operations Through a link on the Investor Relations section of our website copies of each of our filings with the U S Securities and Exchange Commission SEC on Form 10 K Form 10 Q and Form 8 K and all amendments to those reports can be viewed and downloaded free of charge as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC The SEC also maintains a website www sec gov that contains reports proxy and information statements and other information regarding issuers that file electronically with the SEC including Leidos The information on our website is not incorporated by reference into and is not a part of this Annual Report on Form 10 K
In your evaluation of our company and business you should carefully consider the risks and uncertainties described below together with information disclosed elsewhere in this Annual Report on Form 10 K including our consolidated financial statements and the related notes and Management s Discussion and Analysis of Financial Condition and Results of Operations in Part II of this Annual Report and other documents we file with the SEC The risks and uncertainties described below are those that we have identified as material but are not the only risks and uncertainties facing us If any of these risks or uncertainties actually occurs our business financial condition or operating results could be materially harmed and our stock price could decline Our business is also subject to general risks and uncertainties that affect many other companies such as our ability to collect receivables overall U S and global economic and industry conditions geopolitical events changes in laws or accounting rules fluctuations in interest exchange rates and inflation terrorism international conflicts major health concerns climate change or other disruptions of expected economic and business conditions Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may materially harm our business financial condition or operating results In that event the trading price of our stock could decline and you could lose part or all of your investment
This risk factor summary contains a high level summary of risks associated with our business It does not contain all of the information that may be important to you and you should read this risk factor summary together with the more detailed discussion of risks and uncertainties set forth following this summary A summary of our risks includes but is not limited to the following
A decline in the U S government budget changes in spending or budgetary priorities or delays in contract awards may significantly and adversely affect our future revenues and limit our growth prospects
Because we depend on U S government contracts a delay in the completion of the U S government s budget and appropriations process could delay procurement of the products services and solutions we provide and adversely affect our future revenues
The U S government may terminate cancel modify renew on less favorable terms or curtail our contracts at any time prior to their completion and if we do not replace them this may adversely affect our future revenues and profitability
Global supply chain issues and inflationary pressures have disrupted supply and increased the prices of goods and services which could raise the costs associated with providing our services diminish our ability to compete for new contracts or task orders and reduce customer buying power
Our failure to comply with various complex procurement rules and regulations could result in our being liable for penalties including termination of our U S government contracts disqualification from bidding on future U S government contracts and suspension or debarment from U S government contracting
Application of the U S government s organizational conflict of interest OCI rules could limit our ability to successfully compete for new contracts or task orders which would adversely affect our results of operations
As a U S government contractor our partners and we are subject to reviews audits and cost adjustments by the U S government which could adversely affect our profitability cash position or growth prospects if resolved unfavorably to us
Investigations audits claims disputes enforcement actions litigation arbitration or other legal proceedings could require us to pay potentially large damage awards or penalties and could be costly to defend which would adversely affect our cash balances and profitability and could damage our reputation
Our business is subject to complex and evolving laws and regulations regarding data privacy and security which could subject us to investigations claims or monetary penalties against us require us to change our business practices or otherwise adversely affect our revenues and profitability
Misconduct of employees subcontractors agents suppliers business partners or joint ventures and others working on our behalf could cause us to lose existing contracts or customers and adversely affect our ability to obtain new contracts and could have a material adverse impact on our business reputation and future results
Cybersecurity breaches and other information security incidents could negatively impact our business and financial results impair our ability to effectively provide our services to our customers and cause harm to our reputation or competitive position
Internal system or service failures or failures in the systems or services of third parties on which we rely could disrupt our business and impair our ability to effectively provide our services and products to our customers which could damage our reputation and adversely affect our revenues and profitability
We utilize artificial intelligence which could expose us to liability or adversely affect our business especially if we are unable to compete effectively with others in adopting artificial intelligence
We depend on our teaming arrangements and relationships with other contractors and subcontractors If we are not able to maintain these relationships or if these parties fail to satisfy their obligations to us or the customer our revenues profitability and growth prospects could be adversely affected
Our revenues from contracts with the U S government including all branches of the U S military either as a prime contractor or a subcontractor to other contractors engaged in work for the U S government generated approximately 87 of our total revenue in both fiscal 2024 and 2023 and 86 in fiscal 2022 We expect to continue to derive most of our revenues from work performed under U S government contracts Our reputation and relationships with the U S government particularly with the agencies of the DoD and the U S Intelligence Community are key factors in maintaining and growing our revenues and enable us to provide informal input and advice to government entities and agencies prior to the development of a formal bid In addition negative publicity including reports from the press or social media coverage regardless of accuracy or completeness and which could pertain to employee or subcontractor misconduct conflicts of interest poor contract performance deficiencies in services reports products or other deliverables security breaches or other security incidents or other aspects of our business could harm our reputation with these agencies and with certain non U S customers Due to the sensitive nature of our work and our confidentiality obligations to our customers and despite our ongoing efforts to provide transparency we may be unable to or limited in our ability to respond to such negative publicity which could also harm our reputation and our business If our reputation is negatively affected or if we are unable to successfully maintain our relationships with government entities and agencies certain customers could cease to do business with us and our ability to bid successfully for new business may be adversely affected which could cause our actual results to differ materially and adversely from those anticipated In addition our ability to hire or retain employees and our standing in professional communities to which we contribute and receive expert knowledge could be diminished If any of the foregoing occurs the amount of business with the U S government and other customers could decrease and our business future revenues financial condition and growth prospects could be adversely affected
A decline in the U S government budget changes in spending or budgetary priorities or delays in contract awards may significantly and adversely affect our future revenues and limit our growth prospects
Revenues under contracts with the DoD and U S Intelligence Community either as a prime contractor or subcontractor to other contractors represented approximately 48 of our total revenues for fiscal 2024 49 of our total revenues for fiscal 2023 and 44 of our total revenues for fiscal 2022 U S government and DoD spending levels are difficult to predict and subject to significant risk Laws and plans adopted by the U S government relating to along with pressures on and uncertainty surrounding the U S federal budget potential changes in budgetary priorities and defense spending levels the appropriations process and the permissible federal debt limit could adversely affect the funding for individual programs and delay purchasing or payment decisions by our customers Considerable uncertainty exists regarding how future budget and program decisions will unfold including the defense spending priorities of the U S Presidential Administration and Congress and what challenges potential budget reductions will present for us and our industry generally
Current U S government spending levels for defense related or other programs may not be sustained Future spending and program authorizations may not increase or may decrease or shift to programs in areas where we do not provide services or are less likely to be awarded contracts Such changes in spending authorizations and budgetary priorities may occur as a result of uncertainty surrounding the federal budget and the federal government s ability to meet its debt obligations changes in the priorities of the U S Presidential Administration as a result of the recent election cycle increasing political pressure and legislation shifts in spending priorities from defense related or other programs as a result of competing demands for federal funds the number and intensity of military conflicts or other factors For example the conflicts between Russia and Ukraine and in the Middle East have resulted in increased security assistance to each of Ukraine and Israel to help preserve their territorial integrity secure their borders and with respect to the Russia Ukraine conflict improve interoperability with NATO Changes in the priorities of the U S Presidential Administration in respect thereto could have an adverse impact on our results In addition if government funding relating to our contracts with the U S government or DoD becomes unavailable or is reduced or delayed or planned orders are reduced our contracts or subcontracts under such programs may be terminated or adjusted by the U S government or the prime contractor Our operating results could also be adversely affected by spending caps or changes in the U S government or the DoD s budgetary priorities as well as delays in program starts or the award of contracts or task orders under contracts
The U S government also conducts periodic reviews of U S defense strategies and priorities which may shift DoD or other budgetary priorities reduce overall U S government spending or delay contract or task order awards for defense related or other programs from which we would otherwise expect to derive a significant portion of our future revenues In addition changes to the federal or DoD acquisition system and contracting models could affect whether and how we pursue certain opportunities and the terms under which we are able to do so A significant decline in overall U S government spending including in the areas of national security intelligence homeland security and health and civilian services a significant shift in its spending priorities the substantial reduction or elimination of particular defense related programs or significant delays in contract or task order awards for large programs could adversely affect our future revenues and results of operations and limit our growth prospects In addition our ability to grow in advanced technology areas such as hypersonics programs space systems maritime and undersea systems and classified programs will also be affected by the overall budget environment whether development programs transition to production and the timing of such transition all of which are dependent on U S Government authorization and funding
Because we depend on U S government contracts a delay in the completion of the U S government s budget and appropriations process could delay procurement of the products services and solutions we provide and adversely affect our future revenues
The funding of U S government programs is subject to an annual congressional budget authorization and appropriations process In years when the U S government does not complete its appropriations before the beginning of the new fiscal year on October 1 government operations are typically funded pursuant to a continuing resolution which allows federal government agencies to operate at spending levels approved in the previous appropriations cycle but does not authorize new spending initiatives When the U S government operates under a continuing resolution delays can occur in the procurement of the products services and solutions that we provide and may result in new initiatives being canceled From time to time we have experienced a decline in revenues in our fourth quarter as a result of this annual appropriations cycle and we could experience similar declines in revenues from future delays in the appropriations process When the U S government fails to complete its appropriations process or provide for a continuing resolution a full or partial federal government shutdown may result A federal government shutdown could in turn result in our incurrence of substantial labor or other costs without reimbursement under customer contracts the delay or cancellation of key programs or the delay or cancellation of contract payments which could have a negative effect on our cash flows and adversely affect our future results of operations Congress appropriates funds on an annual fiscal year basis for many programs even though the program performance period may extend over several years Consequently programs are often partially funded initially and additional funds are committed only as Congress makes further appropriations If we incur costs in excess of funds obligated on a contract we may be at risk for reimbursement of those costs unless or until additional funds are obligated to the contract In addition if and when supplemental appropriations are required to operate the U S government or fund specific programs and passage of legislation needed to approve any supplemental appropriations bill is delayed the overall funding environment for our business could be adversely affected
We expect that a majority of the business that we seek in the foreseeable future will be awarded through a competitive bidding process The U S government has increasingly relied on contracts that are subject to a continuing competitive bidding process including GSA Schedule and other multi award contracts which has resulted in greater competition and increased pricing pressure The competitive bidding process involves substantial costs including labor cost and managerial time to prepare bids and proposals for contracts that may not be awarded to us may be split among competitors or that may be awarded but for which we do not receive meaningful task orders and several risks including the risk of inaccurately estimating the resources and costs that will be required to fulfill any contract we win Following contract award we may encounter significant expense delay contract modifications or even cancellation of the contract award as a result of our competitors protesting the award of contracts to us Any resulting loss or delay of start up and funding of work under protested contract awards may adversely affect our revenues and profitability In addition multiple award contracts require that we make sustained post award efforts to obtain task orders under the contract As a result we may not be able to obtain these task orders or recognize revenues under these multiple award contracts We are also experiencing increased competition which impacts our ability to obtain contracts see the risk factor We face intense competition that can impact our ability to obtain contracts and therefore affect our future revenues and growth prospects Our failure to compete effectively in this procurement environment would adversely affect our revenues and profitability
The U S government may terminate cancel modify renew on less favorable terms or curtail our contracts at any time prior to their completion and if we do not replace them this may adversely affect our future revenues and profitability
Many of the U S government programs in which we participate as a contractor or subcontractor extend for several years and include one or more base years and one or more option years These programs are typically funded on an annual basis Under our contracts the U S government generally has the right not to exercise options to extend or expand our contracts and may otherwise terminate cancel modify or curtail our contracts at its convenience Any decisions by the U S government to not exercise contract options or to terminate cancel modify renew on less favorable terms or curtail our major programs or contracts would adversely affect our revenues revenue growth and profitability
In addition we have experienced performance issues under certain of our contracts Some of our contracts involve developing complex systems and products to achieve challenging customer goals in a competitive procurement environment As a result we sometimes experience technological schedule or other performance difficulties which have in the past and may in the future result in delays cost overruns and failures in our performance of these contracts If a government customer terminates a contract for default we may be exposed to liability including for excess costs incurred by the customer in procuring undelivered services and products from another source Depending on the nature and value of the contract a performance issue or termination for default could cause our actual results to differ from those anticipated and could harm our reputation
Our business is highly competitive and we compete with larger companies with greater name recognition financial resources and a larger technical staff We also compete with smaller more specialized companies that can concentrate their resources on particular areas Additionally we compete with the U S government s own capabilities and federal non profit contract research centers For example some customers including the DoD are turning to commercial contractors rather than traditional defense contractors for some products and services and may utilize small business contractors or source work internally rather than hiring a contractor The markets in which we operate are characterized by rapidly changing customer needs and technology and our success depends on our ability to invest in and develop products and services that address such needs To remain competitive we must consistently provide high value differentiated solutions to our customers that incorporate technology superior service and performance to our customers on a cost effective basis while understanding customer priorities and maintaining customer relationships Our competitors may be able to provide our customers with different or greater capabilities or technologies or better contract terms than we can provide including technical qualifications past contract experience geographic presence price and the availability of qualified professional personnel or be willing to accept more risk or lower profitability in competing for contracts
Some of our competitors have made or could make acquisitions of businesses or establish teaming or other agreements among themselves or third parties which could allow them to offer more competitive and comprehensive solutions As a result of such acquisitions or arrangements our current or potential competitors may be able to accelerate the adoption of new technologies that better address customer needs devote more significant resources to bring these products and services to market initiate or withstand substantial price competition develop and expand their product and service offerings more quickly than we do or limit our access to certain suppliers These competitive pressures in our market or our failure to compete effectively may result in fewer orders reduced revenue and margins and loss of market share Further industry consolidation may also impact customers perceptions of the viability of smaller or even mid size software firms and consequently customers willingness to purchase from such firms
Volatile negative or uncertain economic conditions an increase in the likelihood of a recession or concerns about these or other similar risks may negatively impact our customers ability and willingness to fund their projects For example declines in state and local tax revenues as well as other economic declines may result in lower government spending Our customers reducing postponing or canceling spending on projects in respect of which we provide services may reduce demand for our services quickly and with little warning which could have a material adverse effect on our business results of operations and financial condition
Moreover instability in the credit or capital markets in the U S and related market wide reduction in liquidity or concerns or rumors about events of these kinds or similar risks could affect the availability of credit or our credit ratings making it relatively difficult or expensive to obtain additional capital at competitive rates on commercially reasonable terms or in sufficient amounts or at all thus making it more difficult or expensive for us to access funds or refinance our existing indebtedness or obtain financing for strategic projects and acquisitions Such instability could also cause counterparties including vendors suppliers and subcontractors to be unable to perform their obligations or to breach their obligations to us under our contracts with them In addition instability in the credit or capital markets could negatively impact our customers ability to fund their projects and therefore utilize our services which could have a material adverse effect on our business results of operations and financial condition
Ongoing instability and current conflicts in global markets including in Eastern Europe the Middle East and Asia and the potential for other conflicts and future terrorist activities and other recent geopolitical events throughout the world including the ongoing conflict between Russia and Ukraine the ongoing conflict in the Middle East which continues to expand and increased tensions in Asia have created and may continue to create economic and political uncertainties and impacts that could have a material adverse effect on our business operations and profitability These types of matters cause uncertainty in financial markets and may significantly increase the political economic and social instability in the geographic areas in which we operate
In addition in connection with the current status of international relations with Russia particularly in light of the conflict between Russia and Ukraine the U S government has imposed enhanced export controls on certain products and sanctions on certain industry sectors and parties in Russia The governments of other jurisdictions in which we operate such as the European Union and Canada may also implement sanctions or other restrictive measures These potential sanctions and export controls as well as any responses from Russia could adversely affect us and or our supply chain business partners or customers
Global supply chain issues and inflationary pressures have disrupted supply and increased the prices of goods and services which could raise the costs associated with providing our services diminish our ability to compete for new contracts or task orders and reduce customer buying power
For a variety of reasons the global economy in which we operate has faced and may continue to face heightened inflationary pressure impacting the cost of doing business in both supply and labor markets Although inflation has moderated somewhat in 2024 these inflationary pressures have been and could continue to be exacerbated by geopolitical turmoil and economic policy actions We generate revenue through various fixed price and multi year government contracts our primary customer being the U S government which has traditionally been viewed as less affected by inflationary pressures However our approach to include modest annual price escalations in our bids for multi year work may be insufficient to account for and mitigate inflationary cost pressures which may result in cost overruns on contracts This could result in reduced profits or even losses if inflation increases particularly for fixed priced contracts and our longer term multi year contracts as contractual prices become less favorable to us over time In the competitive environment in which we operate as a government contractor the lack of pricing leverage and power to renegotiate long term multi year contracts coupled with reduced customer buying power as a result of inflation could reduce our profits disrupt our business or otherwise materially adversely affect our results of operations
Our failure to comply with various complex procurement rules and regulations could result in our being liable for penalties including termination of our U S government contracts disqualification from bidding on future U S government contracts and suspension or debarment from U S government contracting
We must comply with laws and regulations relating to the formation administration and performance of U S government contracts which affect how we do business with our customers Such laws and regulations may impose added costs on our business and our failure to comply with them may lead to civil or criminal penalties termination of our U S government contracts or suspension or debarment from contracting with federal agencies For additional background on the regulations that apply to our business and the related compliance risks see Regulation within Item 1 of this Annual Report on Form 10 K and the risk factor Our business is subject to governmental review and investigation which could adversely affect our financial position operating results and growth prospects
Government contract laws and regulations can impose terms or obligations that are different than those typically found in commercial transactions One of the significant differences is that the U S Government may terminate any of our government contracts not only for default based on our performance but also at its convenience Generally prime contractors have a similar right under subcontracts related to government contracts If a contract is terminated for convenience we typically would be entitled to receive payments for our allowable costs incurred and the proportionate share of fees or earnings for the work performed but we would receive no payment or other consideration for the loss of revenue or profit associated with the future work that was cancelled If a contract is terminated for default the U S Government could seek the return of any amounts previously paid to us under the contract and also seek to recover from us any added costs for having another contractor complete the work exposing us to liability and adversely affecting our ability to compete for future contracts and orders In addition the U S Government could terminate a prime contract under which we are a subcontractor notwithstanding the fact that our performance and the quality of the products or services we delivered were consistent with our contractual obligations as a subcontractor Similarly the U S Government could indirectly terminate a program or contract by not funding it or by reducing the amount of funding previously obligated to the program or contract The decision to terminate programs or contracts for convenience or default could adversely affect our business and future financial performance
Our industry has experienced and we expect it will continue to experience significant changes to business practices as a result of an increased focus on affordability efficiencies and recovery of costs among other items From time to time new laws and regulations are enacted and government agencies adopt new interpretations and enforcement priorities relative to laws and regulations already in effect U S government agencies may face restrictions or pressure regarding the type and amount of services that they may obtain from private contractors Legislation regulations and initiatives dealing with procurement reform mitigation of potential conflicts of interest and environmental responsibility or sustainability as well as any resulting shifts in the buying practices of U S government agencies such as increased usage of fixed price contracts multiple award contracts and small business set aside contracts could have adverse effects on government contractors including us Any of these changes could impair our ability to obtain new contracts or renew our existing contracts when customers recompete those contracts Any new contracting requirements or procurement methods could be costly or administratively difficult to implement and could adversely affect our future revenues profitability and prospects
Additionally the DoD and other customers are increasingly pursuing rapid acquisition pathways and procedures for new technologies including through so called other transaction authority agreements OTAs OTAs are exempt from many traditional procurement laws including the FAR and an OTA award may be subject in certain cases to the condition that a significant portion of the work under the OTA is performed by a non traditional defense contractor or that a portion of the cost of the prototype project is funded by non governmental sources If we cannot successfully adapt to our customers rapid acquisition processes then we may lose strategic new business opportunities in high growth areas and our future performance and results could be adversely affected
Application of the U S government s organizational conflict of interest OCI rules could limit our ability to successfully compete for new contracts or task orders which would adversely affect our results of operations
U S federal contacting rules require that government contracting officers identify analyze and address potential OCIs for each acquisition they conduct The rules specify a number of methods contracting officers may use to address OCIs and each contracting officer has significant discretion in deciding whether an OCI exists and if so how it should be addressed As a result it may be difficult for us to predict whether a given contracting opportunity will be found to pose an actual or potential OCI whether such an OCI will be determined to be disqualifying and if not disqualifying what steps we would be required to take in order to be found eligible to compete for and perform the work
Similarly OCIs remain an active area of bid protest litigation increasing the likelihood that competitors may leverage such arguments in an attempt to overturn agency award decisions To the extent that the U S government s OCI laws regulations and rules or interpretations thereof limit our ability to successfully compete for new contracts or task orders with the U S government either because of OCI issues arising from our business or because companies with which we are affiliated or with which we otherwise conduct business create OCI interest issues for us our financial metrics and results of operations could be materially and adversely affected
As a U S government contractor our partners and we are subject to reviews audits and cost adjustments by the U S government which could adversely affect our profitability cash position or growth prospects if resolved unfavorably to us
U S government contractors including their subcontractors and others with whom they do business operate in a highly regulated environment and are routinely audited and reviewed by the U S government and its agencies including the DCAA DCMA the DoD Inspector General and others These agencies review a contractor s performance on government contracts cost structure indirect rates and pricing practices compliance with applicable contracting and procurement laws regulations terms and standards and the adequacy of our systems and processes in meeting government requirements They also review the adequacy of the contractor s compliance with government standards for its business systems including a contractor s accounting system earned value management system estimating system materials management and accounting system property management system and purchasing system
As a result of increased scrutiny on contractors and U S government agencies audits and reviews are conducted rigorously and the applicable standards are strictly interpreted increasing the likelihood of an audit or review resulting in an adverse outcome A finding of significant control deficiencies in our business system audits or other reviews can result in the suspension of payments or lower billing rates to our U S government customers until the control deficiencies are corrected and the DCMA accepts our remediations Government audits and reviews may conclude that our practices are not consistent with applicable laws and regulations and result in adjustments to contract costs and mandatory customer refunds Such adjustments can be applied retroactively which could result in significant customer refunds Our receipt of adverse audit findings or the failure to obtain an approved determination of our various business systems from the responsible U S government agency could significantly and adversely affect our business including our ability to bid on new contracts and our competitive position in the bidding process A determination of noncompliance could also result in the U S government imposing penalties and sanctions against us including reductions of the value of contracts contract modifications reflecting less favorable terms or termination withholding of payments the loss of export import privileges administrative or civil judgments and liabilities criminal judgments or convictions liabilities and consent or other voluntary decrees or agreements other sanctions the assessment of penalties fines or compensatory treble or other damages or non monetary relief or actions suspension or debarment suspension of payments and increased government scrutiny that could negatively impact our reputation delay or adversely affect our ability to invoice and receive timely payment on contracts perform contracts or compete for contracts with the U S government As of January 3 2025 indirect cost audits by the DCAA remain open for fiscal 2022 and subsequent fiscal years Although we have recorded contract revenues based upon our estimate of costs that we believe will be approved upon final audit or review we cannot predict the outcome of any ongoing or future audits or reviews and adjustments and if future adjustments exceed our estimates our profitability may be adversely affected
We are routinely subject to governmental investigations relating to compliance with various laws and regulations with respect to our role as a contractor to federal state and local government customers and in connection with performing services in countries outside the United States If a review or investigation identifies improper or unlawful activities we may be subject to disgorgement of profits fines damages litigation civil or criminal penalties exclusion from sales channels or sales opportunities injunctions or administrative sanctions including the termination of contracts the triggering of price reduction clauses suspension of payments suspension or debarment from doing business with governmental agencies or other consequences We may suffer harm to our reputation if allegations of impropriety are made against us which would impair our ability to win new contract awards or receive contract renewals Penalties and sanctions are not uncommon in our industry If we incur a material penalty or administrative sanction or otherwise suffer harm to our reputation our revenues profitability cash position and future prospects could be adversely affected More generally increases in scrutiny and investigations into business practices and major programs supported by contractors from government organizations legislative bodies or agencies may lead to increased legal costs and may harm our reputation revenues profitability and growth prospects For a description of our current legal proceedings see Item 3 Legal Proceedings along with Note 21 Commitments and Contingencies of the notes to the consolidated financial statements contained within this Annual Report on Form 10 K
Investigations audits claims disputes enforcement actions litigation arbitration or other legal proceedings could require us to pay potentially large damage awards or penalties and could be costly to defend which would adversely affect our cash balances and profitability and could damage our reputation
We are subject to and may become a party to various other litigation claims investigations audits enforcement actions arbitrations or other legal proceedings that arise from time to time in the ordinary course of our business Adverse judgments or settlements in some or all of these legal disputes may result in significant monetary damages penalties or injunctive relief against us Any claims or litigation could be costly to defend and even if we are successful or fully indemnified or insured they could damage our reputation and make it more difficult to compete effectively or obtain adequate insurance in the future and responding to any action may result in a significant diversion of management s attention and resources Litigation and other claims are subject to inherent uncertainties and management s view of these matters may change in the future For a description of our current legal proceedings see Item 3 Legal Proceedings along with Note 21 Commitments and Contingencies of the notes to the consolidated financial statements contained within this Annual Report on Form 10 K
We are subject to numerous state federal and international laws and directives and regulations in the U S and abroad that involve matters central to our business including but not limited to data privacy and security employment and labor relations immigration taxation anti corruption anti bribery import export controls trade restrictions internal and disclosure control obligations securities regulation and anti competition restrictions Compliance with legal requirements is costly time consuming and requires significant resources We also conduct business in certain identified growth areas such as health information technology energy and environmental services which are highly regulated and may expose us to increased compliance risk Violations of one or more of these legal requirements in the conduct of our business could result in significant fines and other damages criminal sanctions against us or our officers prohibitions on doing business and damage to our reputation Violations of these regulations or contractual obligations related to regulatory compliance in connection with the performance of customer contracts could also result in liability for significant monetary damages fines and criminal prosecution unfavorable publicity and other reputational damage restrictions on our ability to compete for certain work and allegations by our customers that we have not performed our contractual obligations
Our business is subject to complex and evolving laws and regulations regarding data privacy and security which could subject us to investigations claims or monetary penalties against us require us to change our business practices or otherwise adversely affect our revenues and profitability
We are subject to various laws and regulations in the U S and globally relating to data privacy and security These laws and regulations are complex constantly evolving and may be subject to significant change in the future In addition the application interpretation and enforcement of these laws and regulations are often uncertain particularly in new and rapidly evolving areas of technology and may differ in material respects among jurisdictions interpreted and applied inconsistently among jurisdictions or in a manner that is inconsistent with our current policies and practices all of which can make compliance challenging and costly and expose us to related risks and liabilities
In the U S numerous federal state and local data privacy and security laws and regulations govern the collection sharing use retention disclosure security storage transfer and other processing of personal information including protected health information Numerous other states also are enacting or considering comprehensive state level data privacy and security laws
As a contractor supporting defense health care and national security customers we are also subject to additional specific regulatory compliance requirements relating to data privacy and security Under DFARS and other federal regulations we are required to implement the security and privacy controls in National Institute of Standards and Technology Special Publications on certain of our networks and information technology systems To the extent that we do not comply with applicable security and control requirements and there is unauthorized access or disclosure of sensitive information including personal information this could potentially result in a contract termination or loss of intellectual property which could materially and adversely affect our business and financial results and lead to reputational harm We will also be subject to numerous emerging and as yet unspecified cybersecurity requirements under the FAR and through federal regulation to include the DOD Cybersecurity Maturity Model Certification CMMC program which once implemented will require successful assessment by a third party against specified cyber controls Should we or our supply chain fail to implement these new requirements this may adversely affect our ability to receive awards or execute on relevant government programs We are in the process of evaluating our readiness against these new requirements and while we have confidence we will meet or
The overarching complexity of data privacy and security laws and regulations around the world poses a compliance challenge that could manifest in costs damages or liability in other forms as a result of failure to implement proper programmatic controls failure to adhere to those controls or the breach of applicable data privacy and security requirements by us our employees our business partners including our service providers suppliers or subcontractors or our customers We also expect that there will continue to be new proposed laws regulations and industry standards concerning data privacy and security and we cannot yet determine the impact such future laws regulations and standards or amendments to or re
interpretations of existing laws regulations or standards may have on our business Any failure or perceived failure by us our service providers suppliers subcontractors or other business partners to comply with applicable laws regulations our public privacy policies and other public statements about data privacy and security and other obligations in these areas could result in regulatory or government actions lawsuits against us including civil claims such as representative actions and other class action type litigation legal liability monetary penalties fines sanctions damages and other costs orders to cease or change our processing of data changes to our business practices diversion of internal resources and harm to our reputation all of which could adversely affect our business financial condition and results of operations We may also incur substantial expenses in implementing and maintaining compliance with such laws regulations and other obligations For additional background on the data privacy and security laws that apply to our business and the related compliance risks see Regulation within Item 1 of this Annual Report on Form 10 K
Environmental matters including unforeseen costs associated with compliance and remediation efforts and government and third party claims could have a material adverse effect on our reputation and our financial position results of operations and cash flows
Our operations are subject to and affected by various federal state local and foreign environmental laws and regulations as they may be expanded changed or enforced differently over time Compliance with these existing and evolving environmental laws and regulations requires and is expected to continue to require significant operating and capital costs We may be subject to substantial administrative civil or criminal fines penalties or other sanctions including suspension and debarment for violations If we are found to be in violation of the Federal Clean Air Act or the Clean Water Act the facility or facilities involved in the violation could be placed by the Environmental Protection Agency on a list of facilities that generally cannot be used in performing on U S government contracts until the violation is corrected
Stricter or different remediation standards or enforcement of existing laws and regulations new requirements including regulation of new substances discovery of previously unknown contamination or new contaminants imposition of fines penalties or damages including natural resource damages a determination that certain remediation or other costs are unallowable rulings on allocation or insurance coverage and or the insolvency inability or unwillingness of other parties to pay their share could require us to incur material additional costs in excess of those anticipated
We may become a party to legal proceedings and disputes involving government and private parties including individual and class actions relating to alleged impacts from pollutants released into the environment including bodily injury and property damage These matters could result in material compensatory or other damages remediation costs penalties non
The impact of these factors is difficult to predict but one or more of them could harm our reputation and business and have a material adverse effect on our financial position results of operations and cash flows
Increasing attention and changing expectations from governmental authorities customers and our employees with respect to our ESG related practices may impose additional costs on us or expose us to new or additional risks
There is increased attention from governmental organizations customers employees and other stakeholders globally on companies environmental social and governance ESG practices and disclosures such as diversity equity and inclusion workplace culture community investment environmental management climate impact and information security We may be expected to expend resources to monitor report on and adopt policies and practices that we believe will improve alignment with our evolving ESG strategy and goals as well as ESG related standards and expectations of legal regimes and stakeholders such as customers investors stockholders raters employees and business partners
If our practices and disclosures do not meet evolving rules and regulations or our stakeholder expectations and standards or if we are viewed negatively based on positions we do or do not take or work we do or do not perform or cannot publicly disclose for certain customers and industries then our reputation our ability to attract or retain leading experts employees and other professionals and our ability to attract new business and customers could be negatively impacted as could our attractiveness as an investment service provider employer or business partner Similarly our failure or perceived failure in our efforts to execute our ESG strategy or to satisfy various reporting standards within the timelines expected by us and stakeholders or at all could also result in similar negative impacts Organizations that provide information to investors on corporate governance and related matters have developed rating processes for evaluating companies on their approach to ESG matters and unfavorable ratings of our ESG efforts may lead to negative investor sentiment diversion of investment to other companies and difficulty in hiring skilled employees In addition complying or failing to comply with existing or future federal state local and foreign ESG legislation and regulations applicable to our business and operations which may conflict with one another including those related to greenhouse gas emissions climate change or other matters could cause us to incur additional compliance and operational costs or actions and suffer reputational harm which could adversely affect our business In addition our share price and demand for our securities could be adversely affected
Any epidemics pandemics or similar outbreaks have in the past created as in the case of COVID 19 and its variants and could again create economic uncertainty and disruptions to the global economy that could adversely affect our businesses or could lead to operational difficulties including travel limitations that could impair our ability to manage or conduct our business Any future epidemic pandemic or similar outbreak may have similar impacts and we cannot currently anticipate the potential impact on our business and results of operations
Misconduct of employees subcontractors agents suppliers business partners or joint ventures and others working on our behalf could cause us to lose existing contracts or customers and adversely affect our ability to obtain new contracts and could have a material adverse impact on our business reputation and future results
Misconduct encompasses a wide range of improper activities that could pose risks to our business This includes fraud falsifying time records or other documentation and violations of laws such as the Anti Kickback Act Non compliance with our internal policies and procedures as well as failure to adhere to federal state or local government procurement regulations including those related to the use and protection of classified or sensitive information also constitute misconduct Examples include failure to comply with legislation on labor pricing and costs in government contracts violating environmental health or safety laws engaging in bribery of foreign government officials breaching import export controls and participating in improper lobbying or similar activities
Any incidents of data loss or information security lapses that compromise personal information or lead to the improper use or disclosure of sensitive or classified data could negatively impact us We could face legal claims incur remediation costs and be subjected to regulatory investigations or sanctions Such events might corrupt or disrupt our systems or those of our customers impair our ability to provide services result in the loss of existing and future contracts and impose indemnity obligations The damage to our reputation could be significant leading to other potential liabilities See also the risk factor Cybersecurity breaches and other information security incidents could negatively impact our business and financial results impair our ability to effectively provide our services to our customers and cause harm to our reputation or competitive position
While we have established policies procedures training programs and other compliance controls designed to prevent and detect misconduct these measures may not be effective exposing us to unforeseen risks or losses This risk may increase as we continue to grow and engage with new partners In our regular business operations we form and participate in joint ventures joint efforts or business arrangements of various types which can introduce additional compliance complexities Failure to comply with applicable laws or regulations could damage our reputation and subject us to administrative civil or criminal investigations and enforcement actions Potential repercussions include fines and penalties restitution or other damages and the loss of security clearances We might also face the loss of current and future customer contracts revocation of privileges and other sanctions such as suspension or debarment from contracting with federal state or local government agencies Any of these outcomes would adversely affect our business reputation and future results
Our continued success and ability to compete in a highly competitive environment depends on our ability to attract retain and develop highly trained and skilled technical and professional talent Competition for skilled talent is intense and the costs associated with attracting and retaining them are high and made even more competitive as a result of the external environment including increasing rates of job transition and low unemployment In addition many U S government programs require contractors to have security clearances some of which can be difficult and time consuming to obtain and talent with such security clearances are in great demand As a result it is difficult to retain employees and meet all of our needs for employees in a timely manner which may affect our growth Although we intend to continue to devote significant resources to attracting retaining and developing qualified employees we may not be able to attract retain and effectively develop these employees Any failure to do so could impair our ability to perform our contractual obligations efficiently and on schedule to meet our customers needs and win new business which could adversely affect our future results We believe our success will also depend on the continued employment of a highly qualified and experienced senior leadership team and its ability to retain existing business generate new business execute our business plans in an efficient and effective manner and our ability to adequately plan for the succession of our senior leadership team and continually develop new members of senior leadership An inability to retain appropriately qualified and experienced senior executives our failure to do adequately succession planning or our failure to continue to develop new leaders could cause us to lose customers or new business
As of January 3 2025 our total backlog was 43 6 billion including 8 4 billion in funded backlog Due to the U S government s ability to not exercise contract options or to terminate modify or curtail our programs or contracts and the rights of our non U S government customers to terminate contracts and purchase orders in certain circumstances we may realize less than expected revenues or may never realize revenues from some of the contracts that are included in our backlog Our unfunded backlog in particular contains management s estimate of amounts expected to be realized on unfunded contract work that may never be realized as revenues If we fail to realize as revenues amounts included in our backlog our future revenues profitability and growth prospects could be adversely affected
We generate revenues under various types of contracts including cost reimbursement FPIF T M FPLOE and FFP contracts Our earnings and profitability may vary materially depending on changes in the proportionate amount of revenues derived from each type of contract the nature of services or products provided the achievement of performance objectives and the stage of performance at which the right to receive fees particularly under incentive fee and award fee contracts is finally determined Cost reimbursement and T M contracts are generally less profitable than FFP contracts Our operating results in any period may also be affected positively or negatively by customers variable purchasing patterns of our more profitable proprietary products
Our profitability is adversely affected when we incur contract costs that we cannot bill to our customers To varying degrees each of our contract types involves some risk of underestimating the costs and resources necessary to fulfill the contract While FFP contracts allow us to benefit from cost savings these contracts also increase our exposure to the risk of cost overruns Revenues from FFP contracts represented approximately 43 of our total revenues for fiscal 2024 When making proposals on these types of contracts we rely heavily on our estimates of costs and timing to complete the associated projects as well as assumptions regarding technical issues In each case our failure to accurately estimate costs or the resources and technology needed to perform our contracts or to effectively manage and control our costs during performance could result and in some instances has resulted in reduced profits or losses More generally any increased or unexpected costs or unanticipated delays in the performance of our contracts including costs and delays caused by contractual disputes or other factors outside of our control such as performance failures of our subcontractors rising inflationary pressures and fluctuations in interest rates natural disasters or other force majeure events could make our contracts less profitable than expected or unprofitable
We recognize revenue on our service based contracts primarily over time as there is a continuous transfer of control to the customer throughout the contract as we perform the promised services which generally requires estimates of total costs at completion fees earned on the contract or both This estimation process particularly due to the technical nature of the services performed and the long term nature of certain contracts is complex and involves significant judgment Adjustments to original estimates are often required as work progresses experience is gained and additional information becomes known even though the scope of the work required under the contract may not change Any adjustment as a result of a change in estimate is recognized as events become known Changes in the underlying assumptions circumstances or estimates could result in adjustments that may adversely affect our future financial results For a discussion of our use of estimates in the preparation of our consolidated financial statements see Critical Accounting Estimates in Item 7 Management s Discussion and Analysis of Financial Condition and Results of Operations of this Report Note 3 Summary of Significant Accounting Policies of the notes to the consolidated financial statements contained within this Annual Report on Form 10 K
Cybersecurity breaches and other information security incidents could negatively impact our business and financial results impair our ability to effectively provide our services to our customers and cause harm to our reputation or competitive position
As a government contractor and a provider of information technology services operating in multiple regulated industries and geographies we and our service providers suppliers and subcontractors collect store transmit and otherwise process personal confidential proprietary and sensitive information including protected health information personnel information personal information classified information controlled unclassified information intellectual property and financial information concerning our business employees and customers Therefore we are continuously exposed to unauthorized attempts to compromise access release or otherwise compromise such information through cyber attacks and other information security threats including among other things physical break ins theft denial of service attacks worms computer viruses software bugs malicious or destructive code social engineering phishing attacks and impersonating authorized users credential stuffing account takeovers insider threats malfeasance or improper access by employees or service providers human error fraud use of AI bots or other automation software or other similar disruptions We are also exposed to hackers who have requested ransom in exchange for not disclosing information or restoring access to information or systems These techniques may be perpetrated by internal bad actors such as employees or contractors or by third parties including traditional computer hackers persons involved with well funded organized crime or state sponsored actors Any electronic or physical break in or other security breach or compromise of our information technology systems and networks or facilities or those of our service providers suppliers joint ventures or subcontractors may jeopardize the confidentiality integrity or availability of information including personal confidential proprietary or sensitive information stored or transmitted through these systems and networks or stored in those facilities This could lead to disruptions in mission
critical systems unauthorized access to or release of personal confidential proprietary sensitive or otherwise protected information and corruption of data or systems We could also be subject to operational downtimes delays and other detrimental impacts on our operations or ability to provide products and services to our customers We are also increasingly subject to customer driven cybersecurity certification requirements including but not limited to CMMC which are expected to be necessary to win future contracts Security incidents could also result in liability trigger other obligations under such contracts or increase the difficulty of winning future contracts Many statutory requirements both in the U S and abroad also include different obligations for companies to provide notice of information security incidents involving certain types of information including obligations to notify affected individuals and regulators in the event of cybersecurity breaches involving certain personal information which could result from breaches of our service providers our suppliers or subcontractors
Although we have implemented policies procedures and controls designed to protect against detect and mitigate these threats and attacks we and our service providers suppliers joint ventures and subcontractors have faced and continue to face advanced and persistent attacks on our and their information systems We cannot guarantee that future incidents will not occur and if an incident does occur our incident response planning may not prove fully adequate We may also not be able to mitigate its impacts successfully Techniques used by others to gain unauthorized access to personal confidential proprietary or sensitive information or disrupt systems and networks for economic or strategic gain are constantly evolving increasingly sophisticated increasingly difficult to detect and successfully defend against and may see their frequency increased and effectiveness enhanced by the use of AI Further cybersecurity risks may be heightened as a result of ongoing global conflicts such as the military conflict between Russia and Ukraine and the related sanctions imposed by the United States and other countries or the ongoing conflict in the Middle East which continues to expand
We do not control our service providers and our ability to monitor their cybersecurity is limited so we cannot ensure the cybersecurity measures they take will be sufficient to protect any information we share with them Due to applicable laws and regulations or contractual obligations we may be held accountable for cybersecurity breaches or other information security incidents attributed to our service providers as they relate to the information we share with them
We seek to detect and investigate all information security incidents and to prevent their occurrence prolongation or recurrence We continue to invest in and improve our threat protection detection and mitigation policies procedures and controls In addition we work with other companies in the industry and government participants on increased awareness and enhanced protections against information security and malicious insider threats However because of the evolving nature and sophistication of these security threats which can be difficult to detect there can be no assurance that our policies procedures and controls or those of our service providers suppliers or subcontractors have protected against detected mitigated or will detect prevent or mitigate any of these threats and we cannot predict the full impact of any such past or future incident We may be currently unaware of certain vulnerabilities or lack the capability to detect them which may allow them to persist in our information technology environment over long periods and even if discovered it could take considerable time for us to obtain full and reliable information about the extent amount and type of information compromised and our remediation efforts may not be completely successful As cybersecurity threats continue to evolve we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate or remediate any information security vulnerabilities cybersecurity breaches or other information security incidents
We may also experience similar security threats to the information technology systems we develop install or maintain under customer contracts Although we work cooperatively with our customers and other business partners including our service providers suppliers and subcontractors to seek to minimize the potential for and impact of cyber attacks and other security threats we must rely on the safeguards put in place by those entities See also the risk factor Internal system or service failures or failures in the systems or services of third parties on which we rely could disrupt our business and impair our ability to effectively provide our services and products to our customers which could damage our reputation and adversely affect our revenues and profitability
The occurrence of any unauthorized access to attacks on cybersecurity breaches of other information security threats to our or our service providers suppliers or subcontractors information technology infrastructure systems or networks or data or our failure to make adequate or timely disclosure to the public regulators or law enforcement agencies following any such event could disrupt our infrastructure systems or networks or those of our customers impair our ability to provide services to our customers and may jeopardize the security of data collected stored transmitted or otherwise processed through our information technology infrastructure systems and networks As a result we could be exposed to claims fines penalties loss of revenues product development delays compromise corruption or loss of confidential proprietary or sensitive information including personal information or technical business information contract terminations and damages remediation costs and other costs and expenses regulatory investigations or sanctions indemnity obligations and other potential liabilities Any of the foregoing could adversely affect our reputation ability to win work on sensitive contracts or loss of current and future contracts including sensitive U S government contracts business operations and financial results While we have insurance against some cyber risks and attacks our insurer may deny coverage as to any future claim our insurance coverage may not be sufficient to offset the impact of a material loss event and such insurance may increase in cost or cease to be available on commercial terms in the future
Internal system or service failures or failures in the systems or services of third parties on which we rely could disrupt our business and impair our ability to effectively provide our services and products to our customers which could damage our reputation and adversely affect our revenues and profitability
Any system or service disruptions including those caused by ongoing projects to improve our information technology systems and networks and the delivery of services whether through our shared services organization or outsourced services if not anticipated and appropriately mitigated could materially and adversely affect our business including among other things an adverse effect on our ability to perform on contracts bill our customers for work performed on our contracts collect the amounts that have been billed and produce accurate financial statements in a timely manner We and the service providers suppliers and subcontractors on which we rely are also subject to systems failures including network software or hardware failures whether caused by us third party service providers cybersecurity threats malicious insiders software bugs or errors natural disasters power shortages terrorist attacks pandemics or other events which could cause loss of data and interruptions or delays in our business cause us to incur remediation costs subject us to claims and damage our reputation In addition the failure or disruption of our communications or those of our service providers suppliers or subcontractors could cause us to interrupt or suspend our operations or otherwise adversely affect our business Our property and business
We have significant operations including infrastructure information technology systems research facilities and centers of excellence located in regions that may be exposed to physical risks such as hurricanes earthquakes other damaging storms water levels wildfires and other natural disasters including places such as Alabama Florida California and Texas Our subcontractors and suppliers are also subject to physical risks that could affect their ability to deliver or perform under a contract including as a result of disruptions to their workforce and critical industrial infrastructure needed for normal business operations Although we maintain crisis management and disaster response plans such events could make it difficult or impossible for us to deliver our services to our customers could decrease demand for our services could make existing customers unable or unwilling to fulfill their contractual requirements to us including their payment obligations and could cause us to incur substantial expense including expenses or liabilities arising from potential litigation If insurance or other risk transfer mechanisms are unavailable or insufficient to recover all costs or if we experience a significant disruption to our business due to a natural disaster it could adversely affect our financial position results of operations and cash flows
There are also concerns over the risks of climate change and related environmental sustainability matters In addition to physical risks climate change risks include longer term shifts in climate patterns such as extreme heat rising sea levels and more frequent and prolonged drought Such events could disrupt certain of our operations or those of our customers or third parties on which we rely including direct damage to assets and indirect impacts from supply chain disruption and market volatility We could also incur significant costs to improve the climate resiliency of our infrastructure and supply chain and otherwise prepare for respond to and mitigate the effects of climate change Additionally transitioning to a low carbon economy may entail extensive policy legal technology and market initiatives Such changes could result in laws regulations or policies that significantly increase our direct and indirect operational and compliance burdens which could adversely affect our financial condition and results of operations We monitor developments in climate change related laws regulations and policies for their potential effect on us However we currently are not able to accurately predict the materiality of any potential costs associated with such developments
In addition our reputation and customer relationships may be negatively impacted as a result of our practices and policies actual or perceived related to climate change including our involvement or our customers involvement in certain industries or projects associated with causing or exacerbating climate change as well as any decisions we make to continue to conduct or change our activities in response to considerations relating to climate change
Many of the systems and networks that we develop install and maintain for our customers involve managing and protecting personal information and information relating to national security and other sensitive government functions While we have programs designed to comply with relevant data privacy and security laws and restrictions if a system or network that we develop install or maintain were to fail or experience a security breach or service interruption whether caused by us third
party service providers cybersecurity threats or other events we may experience loss of revenue remediation costs or face claims for damages or contract termination Any such event could cause serious harm to our reputation and prevent us from having access to or being eligible for further work on such systems and networks Our errors and omissions liability insurance may be inadequate to compensate us for all of the damages that we may incur and as a result our future results could be adversely affected
We design and develop technologically advanced and innovative products and services applied by our customers in various environments The needs of our customers change and evolve regularly particularly driven by complex and rapidly evolving technologies Our success depends upon our ability to identify emerging technological trends develop technologically advanced innovative and cost effective products and services and market these products and services to our customers Our success also depends on our continued access to suppliers of important technologies and components Many of our contracts contain performance obligations that require innovative design capabilities are technologically complex or depend on factors not wholly within our control Problems and delays in development or delivery as a result of issues with respect to design technology licensing and patent rights labor learning curve assumptions or materials and components could prevent us from achieving such contractual requirements Failure to meet these obligations could adversely affect our profitability and future prospects In addition our offerings cannot be tested and proven in all situations and are otherwise subject to unforeseen problems that could negatively affect revenue and profitability such as problems with quality and
workmanship country of origin delivery of subcontractor components or services unplanned degradation of product performance and unauthorized use or modifications of our products and services Among the factors that may affect revenue and profits could be unforeseen costs and expenses not covered by insurance or indemnification from the customer diversion of management focus in responding to unforeseen problems loss of follow on work and in the case of certain contracts repayment to the government customer of contract costs and fee payments we previously received
We utilize artificial intelligence which could expose us to liability or adversely affect our business especially if we are unable to compete effectively with others in adopting artificial intelligence
We utilize artificial intelligence including generative artificial intelligence machine learning and similar tools and technologies that collect aggregate analyze or generate data or other materials or content collectively AI in connection with our business There are significant risks involved in using AI and no assurance can be provided that our use of AI will enhance our products or services produce the intended results or keep pace with our competitors For example AI algorithms may be flawed insufficient of poor quality rely upon incorrect or inaccurate data reflect unwanted forms of bias or contain other errors or inadequacies any of which may not be easily detectable AI has been known to produce false or hallucinatory inferences or outputs our use of AI can present ethical issues and may subject us to new or heightened legal regulatory ethical or other challenges and inappropriate or controversial data practices by developers and end users or other factors adversely affecting public opinion of AI could impair the acceptance of AI solutions including those incorporated in our products and services If the AI tools that we use are deficient inaccurate or controversial we could incur operational inefficiencies competitive harm legal liability brand or reputational harm or other adverse impacts on our business and financial results If we do not have sufficient rights to use the data or other material or content on which the AI tools we use rely we also may incur liability through the violation of applicable laws and regulations third party intellectual property data privacy or other rights or contracts to which we are a party
In addition AI regulation is rapidly evolving worldwide as legislators and regulators increasingly focus on these powerful emerging technologies The technologies underlying AI and its uses are subject to a variety of laws and regulations including intellectual property data privacy and security consumer protection competition and equal opportunity laws and are expected to be subject to increased regulation and new laws or new applications of existing laws and regulations AI is the subject of ongoing review by various U S governmental and regulatory agencies and various U S states and other foreign jurisdictions are applying or are considering applying their platform moderation data privacy and security laws and regulations to AI or are considering general legal frameworks for AI For example the EU s Artificial Intelligence Act the AI Act which entered into force on August 1 2024 establishes among other things a risk based governance framework for regulating AI systems operating in the EU We may not be able to anticipate how to respond to these rapidly evolving frameworks and we may need to expend resources to adjust our operations or offerings in certain jurisdictions if the legal frameworks are inconsistent across jurisdictions Furthermore because AI technology itself is highly complex and rapidly developing it is not possible to predict all of the legal operational or technological risks that may arise relating to the use of AI
We derive a portion of our revenues from programs with the U S government and its agencies that are subject to security restrictions e g contracts involving classified information and classified programs which preclude the dissemination of information and technology that is classified for national security purposes under applicable law and regulation In general access to classified information technology facilities or programs requires appropriate personnel security clearances is subject to additional contract oversight and potential liability and may also require appropriate facility clearances and other specialized infrastructure In the event of a security incident involving classified information technology facilities programs or personnel holding clearances we may be subject to legal financial operational and reputational harm We are limited in our ability to provide information about these classified programs their risks or any disputes or claims relating to such programs As a result investors have less insight into our classified business or our business overall However historically the business risks associated with our work on classified programs have not differed materially from those of our other government contracts
From time to time we pursue strategic acquisitions investments and joint ventures We also may enter into relationships with other businesses to expand our products or our ability to provide services These transactions require a significant investment of time and resources and may disrupt our business and distract our management from other responsibilities Even if successful these transactions could result in unfavorable public perception or reduce earnings for a number of reasons including the amortization of intangible assets impairment charges adverse tax consequences acquired operations that are not yet profitable or the payment of additional consideration under earn out arrangements if an acquisition performs better than expected Acquisitions investments and joint ventures pose many other risks that could adversely affect our reputation operations or financial results including that
we may not be able to accurately estimate the financial effect of acquisitions and investments on our business or realize anticipated synergies business growth or profitability and may be unable to recover investments in any such acquisitions and investments
we may not be able to manage the integration process for acquisitions successfully and the integration process may divert management time and focus from operating our business including as a result of incompatible accounting information management or other control systems
acquired technologies capabilities products and service offerings particularly those that are still in development when acquired may not perform as expected may have defects or may not be integrated into our business as expected
we may need to implement or improve controls procedures and policies at a business that prior to the acquisition may have lacked sufficiently effective controls procedures and policies including those relating to financial reporting revenue recognition or other financial or control deficiencies
we may assume legal or regulatory risks particularly with respect to smaller businesses that have immature business processes and compliance programs or may be required to comply with additional laws and regulations or to engage in remediation efforts to cause the acquired company to comply with applicable laws and regulations or result in liabilities resulting from the acquired company s failure to comply with applicable laws or regulations
we may face litigation or material liabilities that were not identified or were underestimated as part of our due diligence or for which we are unable to receive a purchase price adjustment or reimbursement through indemnification including intellectual property claims and disputes or claims from terminated employees customers former stockholders or other third parties or there may be other unanticipated write offs or charges
we may be required to spend a significant amount of cash or to incur debt resulting in limitations on other potential uses for cash increased fixed payment obligations or covenants or other restrictions on us or issue shares of our common stock or convertible debt resulting in dilution of ownership
if our acquisitions investments or joint ventures fail perform poorly or their value is otherwise impaired for any reason including contractions in credit markets and global economic conditions our business and financial results could be adversely affected
In addition we periodically divest businesses including businesses that are no longer a part of our ongoing strategic plan These divestitures similarly require a significant investment of time and resources may disrupt our business distract management from other responsibilities and may result in losses on disposal or continued financial involvement in the divested business including through indemnification guarantee or other financial arrangements for a period of time following the transaction which would adversely affect our financial results
As of January 3 2025 goodwill was 46 of our total assets The amount of our goodwill may substantially increase in the future as a result of any acquisitions that we make Goodwill is tested for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable and at least annually The impairment test is based on several factors requiring judgment Examples of events could include a significant adverse change in legal factors or in the business climate an adverse action or assessment by a regulator unanticipated competition adverse contract acquisition performance loss of key personnel or a more likely than not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed Adverse changes in fiscal and economic conditions such as those related to federal budget cuts and the nation s debt ceiling deteriorating market conditions for companies in our industry and unfavorable changes in discount rates could result in an impairment of goodwill For example during fiscal 2023 the SES reporting unit refined its portfolio and made strategic business decisions to exit certain product offerings and cease operations in certain countries in order to align the operations of the reporting unit with its strategic business plan These decisions along with the delays in airline travel infrastructure projects and higher than anticipated costs of servicing contributed to a significant reduction in the reporting unit s forecasted revenue and cash flows As a result we conducted a quantitative goodwill impairment analysis and our estimates led us to determine that the carrying value of the SES reporting unit exceeded its estimated fair value Accordingly we recognized a non cash goodwill impairment charge of 596 million in fiscal 2023 Any future impairment of goodwill could have a negative impact on our results of operations and shareholders equity in the period in which they are recognized For additional information on our accounting policies related to impairment of goodwill see our discussion under Critical Accounting Estimates in Item 7 Management s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10 K Note 3 Summary of Significant Accounting Policies and Note 8 Goodwill and Intangible Assets of the notes to the consolidated financial statements contained within this Annual Report on Form 10 K
We depend on our teaming arrangements and relationships with other contractors and subcontractors If we are not able to maintain these relationships or if these parties fail to satisfy their obligations to us or the customer our revenues profitability and growth prospects could be adversely affected
We rely on our teaming relationships with other prime contractors and subcontractors who are also often our competitors in other contexts to submit bids for large procurements or other opportunities where we believe the combination of services and products provided by us and other companies will help us to win and perform the contract Our future revenues and growth prospects could be adversely affected if other contractors eliminate or reduce their contract relationships with us or if the U S government terminates or reduces these other contractors programs does not award them new contracts or refuses to pay under a contract Companies that do not have access to U S government contracts may perform services as our subcontractor and that experience could enhance such companies prospect of securing a future position as a prime U S government contractor which could increase competition for future contracts and impair our ability to perform on contracts We may have disputes with our subcontractors arising from among other things the quality and timeliness of work performed by the subcontractor customer concerns about the subcontractor our failure to extend existing task orders or issue new task orders under a subcontract our hiring of a subcontractor s personnel or the subcontractor s failure to comply with applicable law If any of our subcontractors fail to meet their contractual obligations in a timely manner or have regulatory compliance or other problems our ability to fulfill our obligations as a prime contractor or higher tier subcontractor may be jeopardized Significant losses could arise in future periods and subcontractor performance deficiencies could result in our termination for default A termination for default could eliminate a revenue source expose us to liability and have an adverse effect on our ability to compete for future contracts and task orders especially if the customer is an agency of the U S government
Our services and operations which sometimes involve using handling or disposing of hazardous substances are subject to numerous environmental health and safety laws and regulations pursuant to which we could face potentially significant liabilities costs or obligations
Our services are subject to numerous environmental health and safety laws and regulations Some of our services and operations involve using handling or disposing of hazardous substances including explosive chemical biological or radioactive materials These activities and our operations generally subject us to complex and stringent foreign federal state and local environmental health and safety laws and regulations which have tended to become more stringent over time Among other things these laws and regulations require us to incur costs to comply and could impose liability on us for handling or disposing of hazardous substances For example we provide infrastructure and site services necessary to accomplish critical waste management and the continued environmental cleanup of the Hanford Site in southeastern Washington In addition some of our work sites put our employees and others in close proximity with mechanized
equipment moving vehicles chemical and manufacturing processes and highly regulated materials On some work sites we may be responsible for safety and have an obligation to implement effective safety procedures If we fail to implement these procedures or if the procedures we implement are ineffective we may suffer the loss of or injury to our employees as well as expose ourselves to possible litigation
Failure to comply with these environmental health and safety laws and regulations could result in civil criminal regulatory administrative or contractual sanctions including fines penalties suspension or debarment from contracting with the U S government or reputational harm In addition our failure to maintain adequate safety standards and equipment could result in reduced profitability and loss of work or customers Our current and previous ownership leasing and operation of real property and disposal of hazardous substances also subject us to environmental laws and regulations some of which hold current or previous owners or operators of businesses and real property jointly and severally liable for hazardous substance releases even if they did not know of and were not responsible for the releases Past business practices at companies that we have acquired may also expose us to future unknown environmental liabilities Liabilities related to environmental contamination human exposure to hazardous substances or violations of these laws or regulations could result in substantial costs to us including cleanup costs fines civil or criminal sanctions and third party claims for property loss or damage or personal injury Our continuing work in the areas governed by these laws and regulations exposes us to the risk of substantial liability and may adversely affect our financial condition and operating results
We design develop manufacture sell service and maintain various inspection systems and related integration and automation systems designed to assist in detecting bombs explosives weapons contraband or other threats In some instances we also train operators of such systems Such systems utilize detection technology and software algorithms to interpret data produced by the system and signal to the operator when a dangerous object or substance may be present Such algorithms are probabilistic in nature and are generally designed to meet requirements established by regulatory agencies Many of these systems require that an operator interpret an image of suspicious items within a bag parcel container vehicle or other vessel Others signal to the operator that further investigation is required and the training reliability and competence of the customer s operator are crucial to the detection of suspicious items Nevertheless if such a system were to fail to signal to an operator when an explosive or other contraband was in fact present resulting in significant damage we could become the subject of significant product liability claims There are many factors some of which are beyond our control that could result in the failure of our products to help detect the presence of bombs explosives weapons contraband or other threats Some of these factors could include inherent limitations in our systems and misuse or malfunction of our systems The failure of our systems to help detect the presence of any of these dangerous materials could lead to injury death and extensive property damage and may lead to product liability professional liability or other claims against us Further if our security and inspection systems fail to or are perceived to have failed to help detect a threat we could experience negative publicity and reputational harm which could reduce demand for our inspection or detection systems and adversely affect our business
Not every risk or liability we face is or can be protected by insurance and for those risks we insure the limits of coverage that are reasonably obtainable may not be sufficient to cover all actual losses or liabilities incurred We are limited in the amount of insurance we can obtain to cover certain risks such as cybersecurity risks and natural hazards including earthquakes fires and extreme weather conditions some of which can be worsened by climate change and pandemics If any of our third party insurers fail become insolvent cancel our coverage or otherwise are unable to provide us with adequate insurance coverage or renew our insurance coverage on favorable terms then our overall risk exposure and our operational expenses would increase and the management of our business operations would be disrupted Our insurance may be insufficient to protect us from significant product and other liability claims or losses Moreover there is a risk that commercially available liability insurance will not continue to be available to us at a reasonable cost if at all In some circumstances we are entitled to certain legal protections or indemnifications from our customers through contractual provisions laws regulations or otherwise However these protections are not always available can be difficult to obtain are typically subject to certain terms or limitations including the availability of funds and may not be sufficient to cover all losses or liabilities incurred If liability claims or losses exceed our current or available insurance coverage customer indemnifications or other legal protections our business financial position operating results and prospects may be harmed Any significant claim may have an adverse effect on our industry and market reputation leading to a substantial decrease in demand for our products and services and reduced revenues making it more difficult for us to compete effectively and could affect the cost and availability of insurance coverage at adequate levels in the future
During fiscal 2024 revenue attributable to our services provided outside of the United States to non U S customers was approximately 8 of our total revenue Our international business operations may be subject to additional and different risks than our U S business These risks and challenges include
failure to comply with U S government and foreign laws and regulations applicable to international business including without limitation those related to employment data privacy and security taxes technology transfer information security environment data transfer import and export controls including the International Traffic in Arms Regulations ITAR administered by the U S Department of State and the anti boycott provisions of the Export Administration Regulations EAR administered by the U S Department of Commerce s Bureau of Industry and Security sanctions and other administrative legislative or regulatory actions that could materially interfere with our ability to offer our products or services in certain countries or have an adverse impact on our business with the U S government and expose us to risks and costs of noncompliance with such laws and regulations in addition to administrative civil or criminal penalties
increased financial and legal risks arising for example from foreign exchange rate variability imposition of tariffs or additional taxes inflation restrictive trade policies longer payment cycles delays or failures to collect amounts due to us and differing legal systems and which may adversely affect the performance of our services sale of our products or repatriation of our profits
political or economic instability international security concerns and geopolitical conflict in countries where we provide services and products in support of the U S government and other customers in countries which increases the risk of an incident resulting in injury or loss of life damage or destruction of property inability to meet our contractual obligations or retaliatory measures taken in respect thereof
the ongoing conflict between Russia and Ukraine which has resulted in the imposition by the U S and other nations of restrictive actions against Russia Belarus and certain banks companies and individuals and
We are also subject to the U S Foreign Corrupt Practices Act FCPA the U K Bribery Act of 2010 the U K Bribery Act and other anti corruption and anti bribery laws and regulations in jurisdictions where we do business These laws and regulations generally prohibit improper payments or offers of improper payments to government officials political parties or commercial partners to obtain or retain business or secure an improper business advantage We have operations and deal with and make sales to governmental or quasi governmental entities in non U S countries including those known to experience corruption and further expansion of our non U S sales efforts may involve additional regions In many countries particularly countries with developing economies it may be common for businesses to engage in practices prohibited by the FCPA or other applicable laws and regulations Our activities in these countries pose a heightened risk of unauthorized payments or offers of payments by one of our employees or third party business partners representatives and agents that could violate various laws including the FCPA The FCPA U K Bribery Act and other applicable anti bribery and anti
corruption laws may also hold us liable for acts of corruption and bribery committed by our third party business partners representatives and agents We and our third party business partners representatives and agents may have direct or indirect interactions with officials and employees of government agencies or state owned or affiliated entities and we may be held liable for the corrupt or other illegal activities of our employees or such third parties even if we do not explicitly authorize such activities The FCPA or other applicable laws and regulations also require that we keep accurate books and records and maintain internal controls and compliance procedures designed to prevent any such actions While we have implemented policies and procedures to address compliance with such laws we cannot assure you that our employees or other third parties working on our behalf have not engaged or will not engage in conduct in violation of our policies or applicable law for which we might ultimately be held responsible
Violations of any of these laws or regulations including the FCPA and the U K Bribery Act may result in whistleblower complaints negative media coverage investigations imposition of significant legal fees loss of export privileges as well as severe criminal or civil sanctions including suspension or debarment from U S government contracting We may also be subject to other liabilities and adverse effects on our reputation which could negatively affect our business results of operations financial condition and growth prospects In addition responding to any enforcement action may result in a significant diversion of management s attention and resources and significant defense costs and other professional fees Although our international operations have historically generated a small proportion of our revenues we are seeking to grow our international business Our exposure for violating these laws will increase as our non U S presence expands and as we increase sales and operations in foreign jurisdictions
For additional information regarding government investigations and reviews we are subject to see Government Investigations and Reviews in Note 21 Commitments and Contingencies of the notes to the consolidated financial statements contained within this Annual Report on Form 10 K
We have only a limited ability to protect or exploit intellectual property rights which are important to our success Our failure to adequately obtain maintain protect defend and enforce our proprietary information and intellectual property rights could adversely affect our competitive position
We rely on a combination of confidentiality intellectual property and other contractual arrangements including licenses and copyright trademark and trade secret law to protect much of our proprietary information and intellectual property in cases where we do not believe patent protection is appropriate or obtainable Despite our efforts to protect our intellectual property and other proprietary rights third parties may attempt to obtain copy use or disclose our intellectual property or other proprietary information or technology without our authorization In addition to protection under the law and contractual arrangements with our corporate and joint venture partners employees consultants advisors service providers suppliers subcontractors and customers we generally attempt to limit access to and distribution of our proprietary information Although our employees and contractors are subject to confidentiality obligations and use restrictions this protection may be inadequate to deter or prevent them from infringing misappropriating or otherwise violating our confidential information technology or other intellectual property or proprietary rights and can be difficult to enforce In addition trade secrets are generally difficult to protect and some courts inside and outside the United States may be less willing or unwilling to protect trade secrets
We may be unable to detect unauthorized use of our intellectual property or otherwise take appropriate steps to enforce our rights Our intellectual property rights may be challenged by others invalidated narrowed in scope or held unenforceable through administrative process or litigation in the United States or foreign jurisdictions We may be required to expend significant resources and efforts to monitor and protect our intellectual property and other proprietary rights and we may conclude that in at least some instances the benefits of protecting our intellectual property or other proprietary rights may be outweighed by the expense or distraction to our management We may initiate claims or litigation against third parties for infringement misappropriation or other violations of our intellectual property or other proprietary rights or to establish the validity of our intellectual property or other proprietary rights but outcomes in any such litigation can be difficult to predict and could be time consuming result in significant expense to us and divert the efforts of our technical and management personnel Additionally because of the substantial amount of discovery required in connection with intellectual property litigation there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation If we are unable to detect or prevent third parties from infringing misappropriating or otherwise violating our rights in our patents copyrights trademarks trade secrets or other proprietary rights or information our competitive position could be adversely affected Also in connection with our performance of services for the U S government the U S government has certain rights to inventions data software codes and related material and intellectual property that we develop under government funded contracts and subcontracts which means that the U S government may disclose or license our information and intellectual property to third parties including in some instances our competitors Any exercise of such rights by the U S government could adversely affect our competitive position business financial condition results of operations and prospects We also may be limited in our ability to disclose or license such information and intellectual property to third parties and the U S government may also decline to make the intellectual property of others available to us under acceptable terms
Third parties may also from time to time claim that we have infringed the intellectual property rights of others resulting in claims against our customers or us or we may face allegations that we or our service providers suppliers subcontractors or customers have violated the intellectual property rights of others Even if we believe that intellectual property related claims are without merit litigation may be necessary to determine the scope and validity of intellectual property or proprietary rights of others or to protect or enforce our intellectual property rights If with respect to any claim against us for violation of third
infringing solutions or otherwise alter our business practices on a timely or cost efficient basis our business and competitive position may be adversely affected Such claims could also subject us to injunctions and significant liability for damages potentially including treble damages if we are found to have willfully infringed a third party s intellectual property rights In addition our contracts generally indemnify our customers for third party claims for intellectual property infringement by our services and products Besides the expense and time to defend such claims and the cost of any large indemnity payments any dispute with a customer with respect to such obligations could also have adverse effects on our relationship with that customer and other existing and new customers requiring us to pay substantial royalty or licensing fees and divert management s attention any of which could harm our business financial condition and results of operations
We are subject to income taxes in the U S and numerous foreign jurisdictions Changes in U S federal or state or foreign tax laws and regulations or their interpretation and application including those with retroactive effect could result in increases in our tax expense and adversely affect our financial results See Liquidity and Capital Resources in Item 7 Management s Discussion and Analysis of Financial Condition and Results of Operations contained within this Annual Report on Form 10 K for additional information on the impact of this change
Significant judgment is required in determining our worldwide provision for income taxes In the ordinary course of our business there are many transactions and calculations where the ultimate tax determination is uncertain We are regularly under audit by tax authorities Although we believe that our tax estimates and tax positions are reasonable they could be materially affected by many factors including the final outcome of tax audits and related litigation the introduction of new tax accounting standards legislation regulations and related interpretations our global mix of earnings the realizability of deferred tax assets and changes in uncertain tax positions An increase or decrease in our effective tax rate or an ultimate determination that we owe more taxes than the amounts previously accrued could have a material adverse impact on our financial condition and results of operations
As a result of the Small Business Administration set aside program the U S government may decide to restrict certain procurements only to bidders that qualify as minority owned small or small disadvantaged businesses As a result we would not be eligible to perform as a prime contractor on those programs and would be restricted to a maximum of 49 of the work as a subcontractor on those programs An increase in the number of procurements under the Small Business Administration set aside program may impact our ability to bid on new procurements as a prime contractor or restrict our ability to re compete on incumbent work that is placed in the set aside program
We conduct our business in various currencies including the U S dollar the British pound and the Australian dollar Changes in foreign currency exchange rates could reduce our revenues increase our costs or otherwise adversely affect our financial results reported in U S dollars We may from time to time enter into foreign currency contracts foreign currency borrowings or other techniques intended to hedge a portion of our foreign currency exchange rate risks These hedging activities may not completely offset the adverse financial effects of unfavorable movements in foreign currency exchange rates during the time hedges are in place Any of these risks might have an adverse impact on our business operations and our financial position results of operations or cash flows
The timing declaration amount and payment of any future dividends fall within the discretion of our Board and depend on many factors including our available cash estimated cash needs cash deployment alternatives earnings financial condition operating results and capital requirements as well as limitations in our contractual agreements applicable law regulatory constraints industry practice and other business considerations that our Board considers relevant Decreases in asset values or increases in liabilities including liabilities associated with employee benefit plans and assets and liabilities associated with taxes can reduce cash net earnings and stockholders equity In addition the timing and amount of share repurchases under Board approved share repurchase plans are within the discretion of management and will depend on many factors including our ability to generate sufficient cash flows from operations in the future or to borrow money from available financing sources results of operations capital requirements general business conditions and applicable law Our payment of dividends and share repurchases could vary from historical practices or our stated expectations A change in our dividend or share repurchase programs could have an adverse effect on the market price of our common stock
Some provisions of our certificate of incorporation and bylaws may delay discourage or prevent a merger or acquisition that our stockholders may consider favorable including transactions in which stockholders might receive a premium for their shares These restrictions which may also make it more difficult for our stockholders to elect directors not endorsed by our current directors and management include mergers and certain other business combinations between a related person and
us requiring approval by the holders of a majority of the voting power of such securities that are not owned by the related person unless approved by a majority of continuing directors or certain other exceptions our stockholders may not act by written consent our Board may issue without stockholder approval shares of undesignated preferred stock the terms of which may be determined by the Board and we are also subject to certain restrictions on business combinations under Section 203 of the Delaware General Corporation Law which imposes additional requirements for business combinations and may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context
Cybersecurity risk management is an integral part of our digital posture and enterprise risk management strategy Cybersecurity is critical to maintaining the trust of our customers and business partners and we are committed to protecting our and their confidential and sensitive information including personal information and mitigating cybersecurity risks that impact our systems and networks We maintain technologies programs and processes designed to assess identify manage and mitigate cybersecurity risks Our efforts include regular monitoring of Leidos managed systems and networks for internal and external cybersecurity threats providing cybersecurity training to our employees during the onboarding process and annually and continually reviewing and refining formal policies and procedures designed to deter identify and remediate cybersecurity incidents We regularly perform evaluations of our cybersecurity program and continue to invest in our capabilities to keep our customers partners suppliers and information assets in our possession safe Although we employ service provider due diligence and onboarding procedures to identify potential cybersecurity risk our ability to monitor the cybersecurity practices of our service providers is limited and there can be no assurance that we can prevent or mitigate the risk of any compromise or failure in the information system software networks and other assets owned or controlled by our vendors
Our Chief Information Security Officer leads our Cybersecurity Intelligence and Response Team CSIRT whose function is to stay apprised of existing and emerging cyber threats and monitor our global enterprise and proactively identify and protect against cybersecurity risk The CSIRT uses intelligence collected from various sources fused with intelligence collected from analysis and response actions to proactively search for and address adversary activity against the Leidos network The CSIRT possesses in depth knowledge of network endpoint perimeter security systems identity data protection threat intelligence forensics penetration testing and malware reverse engineering as well as the functioning of specific applications or underlying information technology infrastructure
Leidos CSIRT owns the incident response process and provides direction and guidance to users of Leidos computing resources when responding to cybersecurity incidents Leidos CSIRT also provides intrusion monitoring of networks and information systems and continuously monitors the Leidos computing environments and performs triage and analysis of events to identify potential incidents
We employ multiple security and monitoring systems and applications throughout the Company to identify alert report and log authorized and unauthorized access to the Leidos systems and networks We use an application that collects correlates and notifies CSIRT analysts regarding any item meeting an electronic intrusion event We categorize anomalous cyber events into discrete levels in which cybersecurity matters are escalated to certain levels of management as well as our Board based on the severity of the incident as appropriate Sharing cyber threat information at these levels supports the Company s ability to integrate cybersecurity considerations into its overarching risk management system and processes
We also conduct periodic internal and third party assessments to test our cybersecurity controls perform cyber simulations and exercises and continually evaluate our internal governing policies and procedures to help detect and respond to cybersecurity events in order to reduce harms or impacts from breaches and other information security incidents
Our global information security program is led by our corporate Chief Information Security Officer who works closely with key corporate functional and line of business stakeholders The Chief Information Security Officer partners with these functions for the purpose of identifying considering and assessing material cybersecurity risks on an ongoing basis establishing processes to ensure that such potential cybersecurity risks are monitored implementing appropriate mitigation measures reporting cybersecurity breaches and other information security incidents and maintaining our cybersecurity program The team of senior management officers who support our information security program have expertise with cybersecurity as demonstrated qualifications such as by prior work experience possession of a cybersecurity certification degree or other cybersecurity experience Our management team receives regular updates on our cybersecurity posture and reviews detailed information about our cybersecurity preparedness Additionally we have a Leidos Security Council that is co chaired by the Chief Information Security Officer and the Chief Security Officer to address all security hazards across our global enterprise to ensure cohesion and effectiveness of our combined security governance and risk mitigations
We have a Technology and Information Security Committee comprised of six board members with relevant backgrounds and experience that oversees and advises the Board and management on matters involving the Company s overall strategic direction and significant business risks and opportunities in the areas of technology and information security
At least quarterly management provides our Board and the Technology and Information Security Committee with updates about our cybersecurity and related risk exposures our policies and procedures to mitigate such exposures and the status of projects to strengthen our information security infrastructure and program maturity and defend against and respond to cybersecurity threats In addition we use a risk based escalation process to notify the Board and the Technology and Information Security Committee outside of the regular reporting cycle should we identify a significant emerging risk or potentially material issue that should be brought to their attention
To date we have not identified any cybersecurity threats that have materially affected or are reasonably likely to materially affect our business strategy results of our operations or our financial condition However despite our efforts to identify and respond to cybersecurity threats we cannot eliminate all risks from cybersecurity threats or provide assurances that we have not experienced an undetected cybersecurity incident For more information about these risks please see Risk Factors Cybersecurity breaches and other information security incidents could negatively impact our business and financial results impair our ability to effectively provide our services to our customers and cause harm to our reputation or competitive position in this Annual Report on Form 10 K
As of January 3 2025 we conducted our operations in 412 locations in 44 states the District of Columbia and various foreign countries We occupy approximately 8 4 million square feet of floor space Of this amount we own approximately 1 1 million square feet and the remaining balance is leased Our major locations are in the Washington D C metropolitan area where we occupy a combination of leased and owned floor space of approximately 1 8 million square feet We also have employees working at customer sites throughout the United States and in other countries
We have provided information about legal proceedings in which we are involved in Note 21 Commitments and Contingencies of the notes to the consolidated financial statements contained within this Annual Report on Form 10 K
In addition we are routinely subject to investigations and reviews relating to compliance with various laws and regulations Additional information regarding such investigations and reviews is set forth in Note 21 Commitments and Contingencies of the notes to the consolidated financial statements contained within this Annual Report on Form 10
The following is a list of the names and ages as of February 11 2025 of our executive officers indicating all positions and offices held by each such person and each such person s business experience during at least the past five years All such persons have been elected to serve until their successors are elected and qualified or until their earlier resignation or removal
Mr Bell serves as the Chief Executive Officer of Leidos He joined Leidos as CEO on May 3 2023 Mr Bell has held leadership roles as President Defense Rolls Royce plc Chairman and CEO Rolls Royce North America Rolls Royce since February 2018 Prior to that Mr Bell was Senior Vice President of global sales and marketing for defense space and security at The Boeing Company Boeing from 2015 Before joining Boeing in 2015 Mr Bell was President of Rolls Royce Defense Aerospace having joined as President Customer Business North America in mid 2012
Mr Cage has served as Executive Vice President and Chief Financial Officer since July 2021 He has served in several capacities throughout his 25 year tenure with Leidos including Senior Vice President Chief Accounting Officer and Corporate Controller Senior Vice President for Financial Planning and Analysis and Chief Financial Officer for the Health Group
Mr Atkinson has served as the Senior Vice President Chief Accounting Officer and Corporate Controller since 2024 Previously he served as the Company s Assistant Corporate Controller since June 2021 Prior to joining Leidos Mr Atkinson was Director of Technical Accounting and Revenue Recognition at Booz Allen Hamilton from April 2018 until June 2021 He also held key leadership roles within the controller s organization at CSRA Inc from October 2016 to April 2018
Mr Fasano has served as Executive Vice President Chief Growth Officer since January 2024 Previously he served as President for our Defense Group since October 2018 Mr Fasano also served as the Company s Chief of Business Development and Strategy Officer and led the separation from the Lockheed Martin Corporation and the integration of the Information Systems Global Solutions Business into Leidos Prior to joining Leidos Mr Fasano served Lockheed Martin Corporation for over 30 years
Mr Antal has served as Executive Vice President and General Counsel since April 2024 He rejoined Leidos in April 2024 after serving as General Counsel for Rolls Royce Defense and North America since January 2021 Prior to joining Leidos Mr Antal served as U S senior counsel for a Canadian based A E firm and previously spent 10 years with MWH Global He held a variety of leadership roles at MWH including as Associate General Counsel Director of Risk Management for the Middle East and completed a two year assignment in the UK in operational capacity where he led the integration of a strategic acquisition and assumed the role of International Managing Director
Ms Porter has served as President for the Health and Civil Sector since January 2024 Previously she served as President for our Health Group since August 2020 and before that as Acting Group President for the Health Group since March 2020 Ms Porter also served as Senior Vice President and Operation Manager for Leidos Federal Energy and Environment business Prior to that role Ms Porter served as the Department of Defense Information Networks Mission Partner Program Director Prior to joining Leidos Ms Porter served Lockheed Martin Corporation in several capacities most recently as Director of Energy Initiatives Corporate Engineering and Technology
Mr Stevens has served as President for the National Security Sector since January 2024 Previously he served as President for our Intelligence Group since July 2021 and before that as Chief of Business Development and Strategy Prior to joining Leidos Mr Stevens served Lockheed Martin Corporation in a variety of executive level positions for over 20 years most recently as Vice President of Global Solutions under the Information Systems Global Solutions business and has also been integral to the merger and acquisition of several companies during his career He serves on the Board of Directors for the Intelligence and National Security Alliance and Cornerstones as well as the Advisory Board for the Center for a New American Security
Mr Sanglier has served as Senior Vice President and Chief Audit Executive since July 2022 Prior to joining Leidos Mr Sanglier served as Senior Director Internal Audit with Raytheon Technologies from November 2016 to June 2022 and as a Partner with Ernst Young s Advisory practice serving private and public organizations in the technology manufacturing and professional services industries during June 2008 to December 2010 He previously served as Chair of the North American Board and a member of the Global Board of the Institute of Internal Auditors IIA from April 2022 to March 2023 He has been involved as a volunteer leader with the IIA since becoming a member in 2011 Mr Sanglier has also served as a member of The IIA s Audit Committee Guidance Development Committee North American Publications Advisory Committee and multiple task forces
Ms Fautsch has served as Chief Human Resources Officer of Leidos since October 2024 Ms Fautsch has held several key leadership roles at Leidos including Senior Vice President for Human Resources Operations and Total Rewards Vice President of Human Resources Strategic Operations and Vice President of Human Resources for corporate and enterprise functions Prior to joining Leidos in 2011 she held senior leadership roles in Human Resources management employee relations and ethics at Northrop Grumman
Mr Carlini has served as Chief Technology Officer of Leidos since June 2019 Prior to joining Leidos Mr Carlini founded and operated a national security consultancy from May 2006 to October 2018 Previously Mr Carlini served at Northrop Grumman Electronic Systems from July 2002 to May 2006 with his last position being Vice President of Advanced Development Programs He also served at the Defense Advanced Research Projects Agency DARPA for six years with his last position being Director of the Special Projects Office Mr Carlini is a former member of the United States Army Science Board and the United States Air Force Scientific Advisory Board He is currently a member of the Department of Defense s Defense Science Board
Ms Schmanske has served as the President of the Commercial and International Sector since January 2024 Previously she served as the Executive Vice President of Leidos Corporate Operations since July 2021 and before that as President for the Intelligence Group Ms Schmanske has also served as the Leidos Chief Administrative Officer and Deputy President and Chief Operations Officer for the Health Group Prior to joining Leidos Ms Schmanske served Lockheed Martin Corporation for over 30 years most recently as Vice President for Operations IS GS She serves on multiple outside boards to include the University of Virginia School of Data Science Advisory Board the Virginia Engineering Foundation Board of Directors and The Women s Center
Ms Gruensfelder has served as the President of the Defense Systems Sector since January 2024 Ms Gruensfelder has extensive Aerospace and Defense leadership expertise serving for more than 30 years in a variety of leadership roles at Boeing and its heritage company McDonnell Douglas She served as Vice President and General Manager of the Missile and Weapon Systems MWS division of Boeing Defense Space Security from April 2021 to November 2022 and prior to that role as Vice President of Weapons for the MWS division from October 2018 to April 2021
Mr Hull has served as the President for the Digital Modernization Sector since January 2024 Previously he served as Executive Vice President and Operations Manager for Enterprise and Cyber Solutions at Leidos from March 2022 through December 2023 and Chief Information Officer CIO at Leidos from August 2016 through March 2022 Prior to joining Leidos Mr Hull served as the CIO of the Lockheed Martin Corporation s Information Systems Global Solutions business area from January 2013 through August 2016 ensuring operations and security of IT systems for over 20 000 employees Mr Hull has over 30 years of experience in the IT field
As of February 4 2025 there were approximately 16 202 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
During fiscal 2024 and 2023 we declared and paid quarterly dividends totaling 1 54 and 1 46 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
This stock performance graph shall not be deemed soliciting material or to be filed with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934 as amended or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of Leidos under the Securities Act of 1933 as amended or the Securities Exchange Act of 1934 as amended
The following graph compares the total cumulative five year return on Leidos common stock through January 3 2025 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 January 3 2020 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
In February 2022 our Board of Directors authorized a share repurchase program of up to 20 million shares of our 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 our common stock general market and economic conditions applicable legal requirements compliance with the terms of our outstanding indebtedness and other considerations There is no assurance as to the number of shares that will be repurchased and the repurchase program may be suspended or discontinued at any time at our Board of Directors discretion This share repurchase authorization replaces the previous share repurchase authorization announced in February 2018
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 included elsewhere in this Annual Report on Form 10 K Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10 K including information with respect to our plans and strategy for our business includes forward looking statements that involve risks and uncertainties including those described under the heading Forward Looking Statements
You should also review the disclosure under Part I Item 1A Risk Factors in this Annual Report on Form 10 K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward looking statements contained in the following discussion and analysis
Leidos is an industry and technology leader serving government and commercial customers with smarter more efficient digital and mission innovations Headquartered in Reston Virginia with 48 000 global employees we bring domain specific capabilities technologies and insights to customers in each of these markets by leveraging seven technical core capabilities trusted mission artificial intelligence cyber operations digital modernization mission software systems integrated systems mission operations and rapid prototyping and manufacturing 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 National Aeronautics and Space Administration NASA and many other U S civilian state and local government agencies foreign government agencies and commercial businesses Approximately 8 of our revenues are generated by entities located outside of the United States
Beginning in fiscal 2024 we realigned our business and operate in four reportable segments that are focused on specific defined capability sets we bring to our customers As a result of this change prior year segment results and disclosures have been recast to reflect the current reportable segment structure We now operate in the following reportable segments National Security Digital Health Civil Commercial International and Defense Systems We also separately present the unallocated costs associated with corporate functions as Corporate
For additional information regarding our reportable segments see Business in Part I and Note 20 Business Segments of the notes to the consolidated financial statements contained within this Annual Report on Form 10 K
achieving annual revenue growth through internal collaboration and better leveraging of key differentiators across our company and the deployment of resources and investments into profitable growth markets
For fiscal 2024 revenues increased 1 2 billion or 8 compared to fiscal 2023 the increase was primarily due to a net increase in volumes on certain programs and program wins partially offset by the completion of certain contracts
For fiscal 2023 revenues increased 1 0 billion or 7 compared to fiscal 2022 primarily due to program wins a net increase in volumes on certain programs and a net increase in revenues attributable to our business acquisitions The increase was partially offset by the completion of certain contracts
For fiscal 2024 operating expenses increased by 27 million or less than 1 compared to fiscal 2023 Operating margin for fiscal 2024 was 11 compared to 4 for fiscal 2023 Operating income was 1 827 million a 1 206 million increase compared to fiscal 2023 The increase in operating income was primarily attributable to the impairment and restructuring charges of 689 million at the SES reporting unit in fiscal 2023 as compared to 11 million of impairment charges for the facility rationalization effort in fiscal 2024 see Note 10 Leases of the notes to the consolidated financial statements contained within this Annual Report on Form 10 K and a net increase in volumes on certain programs
For fiscal 2023 operating expenses increased by 1 5 billion or 11 compared to fiscal 2022 Operating margin for fiscal 2023 was 4 0 compared to 7 6 for fiscal 2022 Operating income was 621 million a 467 million decrease compared to fiscal 2022 The decrease was primarily attributable to impairment and restructuring charges of 689 million at the SES reporting unit in fiscal 2023 see Note 8 Goodwill and Intangible Assets of the notes to the consolidated financial statements contained within this Annual Report on Form 10 K The decrease was partially offset by program wins a net increase in volumes on certain programs and lower amortization expenses
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 U S Presidential 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
We generated approximately 87 of our total revenues from contracts with the U S government in fiscal 2024 and 2023 as compared to 86 of our total revenues from contracts with the U S government in fiscal 2022 either as a prime contractor or a subcontractor to other contractors engaged in work for the U S government Revenues under contracts with the DoD and U S Intelligence Community including subcontracts under which the DoD or the U S Intelligence Community is the ultimate purchaser represented approximately 48 49 and 44 of our total revenues for fiscal 2024 2023 and 2022 respectively 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 December 21 2024 the U S federal government avoided a shutdown by passing into law a continuing resolution that provides government funding through March 14 2025 The continuing resolution gives lawmakers additional time to consider the 12 appropriations bills for government fiscal year 2025 Failure to pass the appropriations bills or another continuing resolution by March 14 2025 will result in a partial or complete federal government shutdown
Trends in the U S government contracting process including a shift towards multiple awards contracts in which certain contractors are preapproved using 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
Sales to customers in international markets represented approximately 8 of total revenues for fiscal 2024 as compared to 9 and 8 of total revenues for fiscal 2023 and 2022 respectively 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
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
The increase in revenues for fiscal 2024 as compared to fiscal 2023 was primarily attributable to a net increase in volumes on certain programs program wins and net write ups partially offset by the completion of certain contracts
The increase in revenues for fiscal 2023 as compared to fiscal 2022 was primarily attributable to a net increase in volumes on certain programs and net write ups partially offset by the completion of certain contracts
The increase in operating income for fiscal 2024 as compared to fiscal 2023 was primarily attributable to improved program execution on certain programs a net increase in volumes and program wins partially offset by the completion of certain contracts
The increase in revenues for fiscal 2024 as compared to fiscal 2023 was primarily attributable to a net increase in volumes and case complexity within the managed health services business an increase in net write ups on certain programs and program wins
The increase in revenues for fiscal 2023 as compared to fiscal 2022 was primarily attributable to a net increase in volumes on certain programs and increased earnings from incentive awards The increase was partially offset by a net decrease in the recovery of expenditures in the medical examination business and the completion of certain contracts
The increase in operating income for fiscal 2023 as compared to fiscal 2022 was primarily attributable to a net increase in earnings from incentive awards and a net increase in volumes on certain programs partially offset by a net decrease in the recovery of expenditures in the medical examination business and the completion of certain contracts
The increase in revenues for fiscal 2024 as compared to fiscal 2023 was primarily attributable to program wins and a net increase in volumes on certain programs partially offset by the impact of write downs on certain programs within our UK operations for which cost and schedule were rebaselined as well as the completion of certain programs
The increase in revenues for fiscal 2023 as compared to fiscal 2022 was primarily attributable to a net increase in volumes on certain programs and a 94 million net increase in revenues related to our Cobham Special Mission acquisition made in the last quarter of fiscal 2022 The increase was partially offset by write downs on certain programs and the completion of certain contracts
The increase in operating income for fiscal 2024 as compared to fiscal 2023 was primarily driven by impairment and restructuring charges of 689 million at the SES reporting unit in fiscal 2023 program wins and a net increase in volumes partially offset by the impact of write downs on certain programs within our UK operations for which cost and schedule were rebaselined as well as the completion of certain programs
The decrease in operating income for fiscal 2023 as compared to fiscal 2022 was primarily attributable to impairment and restructuring charges of 689 million at the SES reporting unit in fiscal 2023 and write downs on certain programs The decrease was partially offset by an increase in volumes on certain programs
The increase in revenues for fiscal 2024 as compared to fiscal 2023 was primarily attributable to program wins and a net increase in volumes on certain programs partially offset by the completion of certain contracts
The increase in revenues for fiscal 2023 as compared to fiscal 2022 was primarily attributable to a net increase in volumes on certain programs and program wins partially offset by the completion of certain contracts
The increase in operating income for fiscal 2024 as compared to fiscal 2023 was primarily attributable to program wins and improved program execution on certain programs partially offset by a one time write down related to program assets
The increase in operating income for fiscal 2023 as compared to fiscal 2022 was primarily attributable a net increase in volumes on certain programs partially offset by the completion of certain contracts
The increase in operating loss for fiscal 2023 as compared to fiscal 2022 was primarily attributable to higher legal costs increased expenses in integration and restructuring activities partially offset by the impact of foreign payroll tax reserves
Non operating expense net increased by 16 million for fiscal 2023 as compared to fiscal 2022 primarily due to a net increase in interest expense driven by higher interest rates and refinancing activities
Our effective tax rate was 23 7 48 4 and 21 8 in fiscal 2024 2023 and 2022 respectively The effective tax rate for fiscal 2024 was favorably impacted primarily by federal research tax credits and lower state income taxes partially offset by an increase in unrecognized tax benefits The effective tax rate for fiscal 2023 was unfavorably impacted primarily by non tax deductible goodwill impairments The effective tax rate for fiscal 2022 was favorably impacted primarily by federal research tax credits and excess tax benefits related to employee stock based payment transactions
In December 2021 the Organization for Economic Cooperation and Development enacted model rules for a new 15 global minimum tax framework Pillar Two Many governments around the world have enacted or are in the process of enacting Pillar Two legislation The Pillar Two legislation became effective for certain jurisdictions beginning in fiscal 2024 We will continue to evaluate the impact of the rules as additional legislation gets enacted however there is not a material impact from jurisdictions where Pillar Two rules are currently in effect
We had net bookings of 23 4 billion and 16 5 billion during fiscal 2024 and 2023 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
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
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
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
As of January 3 2025 we had 943 million in cash and cash equivalents We have a senior unsecured revolving credit facility which can provide up to 1 0 billion in additional borrowing if required As of January 3 2025 and December 29 2023 there were no borrowings outstanding under any revolving credit facility
We had outstanding debt of 4 7 billion at both January 3 2025 and December 29 2023 In February 2023 we issued and sold 750 million 5 75 fixed rate senior notes The annual interest rate is payable on a semi annual basis In March 2023 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 0 billion the Term Loan Facility The proceeds of the Term Loan Facility and cash on hand were used to repay in full all indebtedness terminate all commitments and discharge all guarantees existing in connection with a predecessor 1 9 billion senior unsecured term loan facility and a senior unsecured revolving facility
As of January 3 2025 borrowings under our Credit Agreement were based on a Term Secured Overnight Financing Rate SOFR with a 0 10 Term SOFR adjustment and an applicable margin range from 1 00 to 1 50 At January 3 2025 the applicable margin for SOFR denominated borrowings was 1 25
We have a commercial paper program in which we may issue short term unsecured commercial paper notes Commercial Paper Notes that have maturities of up to 397 days from the date of issuance see Note 13 Debt of the notes to the consolidated financial statements contained within this Annual Report on Form 10 K As of January 3 2025 and December 29 2023 we did not have any commercial paper notes outstanding
We made principal payments excluding the impacts of our Commercial Paper Notes on our debt of 18 million 2 045 million and 545 million during fiscal 2024 2023 and 2022 respectively The activity for fiscal 2023 included a 1 210 million payment to discharge the 1 9 billion 5 77 senior unsecured term loan facility a 498 million payment to discharge the 500 million 2 95 notes due May 2023 and a principal repayment of 320 million to discharge the 364 day term loan credit agreement
Our credit facility term loan facility commercial paper notes and notes outstanding as of January 3 2025 contain financial covenants and customary restrictive covenants We were in compliance with all covenants as of January 3 2025
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 2024 and 2023 we made open market repurchases of our common stock for an aggregate purchase price of 850 million and 225 million respectively There were no open market share repurchases in fiscal 2022
In fiscal 2022 we entered into an ASR with a financial institution to repurchase shares of our outstanding common stock We paid 500 million to the financial institution and received 4 8 million shares see Note 16 Earnings Per Share of the notes to the consolidated financial statements contained within this Annual Report on Form 10 K All shares delivered were immediately retired
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 borrowings from our commercial paper program and if needed sales of accounts receivable and borrowings from our revolving credit facility
Net cash provided by operating activities during the year ended December 30 2022 was recast to present the effect of foreign exchange rate changes on cash cash equivalents and restricted cash as a separate line in the consolidated statements of cash flows
Net cash provided by operating activities increased 227 million for fiscal 2024 as compared to fiscal 2023 The increase was primarily due to higher earnings and favorable timing of payroll and employee benefit accruals
Net cash provided by operating activities increased 173 million for fiscal 2023 as compared to fiscal 2022 The increase was primarily due to faster collections on receivables and favorable timing of customer advance payments partially offset by higher tax payments of 260 million mainly in connection with the TCJA provision
Net cash used in investing activities decreased 102 million for fiscal 2023 as compared to fiscal 2022 The decrease was primarily due to 190 million of cash paid in connection with our Cobham Special Mission acquisition from the prior year partially offset with higher capital expenditures of 78 million in the current year
Net cash used in financing activities increased 369 million for fiscal 2024 as compared to fiscal 2023 The increase was primarily due to a 625 million increase in stock repurchases a 35 million increase in shares withheld for tax obligations partially offset by a decrease of 291 million in net payments made on debt activities
Net cash used in financing activities decreased 150 million for fiscal 2023 as compared to fiscal 2022 The decrease was primarily due a net decrease of 296 million in stock repurchases driven by the accelerated share repurchase agreement in the prior year and an increase of 1 4 billion in proceeds received from the issuance of debt in the current year partially offset by an increase of 1 5 billion in payments of debt
We have outstanding performance guarantees and cross indemnity agreements in connection with certain aspects of our business We 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 21 Commitments and Contingencies 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
Our future contractual obligations are related to debt finance and operating leases long term liabilities under deferred compensation arrangements purchase obligations for long term purchases and service agreements and other liabilities For more information see Note 10 Leases Note 13 Debt Note 19 Retirement Plans and Note 21 Commitments and Contingencies of the notes to the consolidated financial statements contained within this Annual Report on Form 10 K
We have interest payments related to our outstanding debt and finance leases As of January 3 2025 future scheduled interest payments on our outstanding debt and finance leases were 208 million expected to be paid in fiscal 2025 and 1 1 billion expected to be paid thereafter
As of January 3 2025 future payments on our deferred compensation arrangements and purchase obligations for long term purchases and service agreements were 65 million expected to be paid in fiscal 2025 and 371 million expected to be paid thereafter Our future payments do not include 162 million of income tax liabilities primarily as a result of uncertain tax positions and the timing of such payments if any cannot be reasonably estimated For additional information see Note 18 Income Taxes of the notes to the consolidated financial statements contained within this Annual Report on Form 10 K
Leidos Holdings Inc Guarantor has fully and unconditionally guaranteed the debt securities of its subsidiary Leidos Inc Issuer that were issued pursuant to transactions that were registered under the Securities Act of 1933 as amended collectively the Registered Notes The following is a list of the Registered Notes guaranteed by Leidos Holdings Inc
Leidos Holdings Inc has also fully and unconditionally guaranteed debt securities of Leidos Inc that were issued pursuant to transactions that were not registered under the Securities Act of 1933 as amended The following is a list of unregistered debt securities guaranteed by Leidos Holdings Inc
Additionally Leidos Inc has fully and unconditionally guaranteed debt securities of Leidos Holding Inc that were issued pursuant to transactions that were not registered under the Securities Act of 1933 as amended The following is a list of unregistered debt securities guaranteed by Leidos Inc
The following summarized financial information includes the assets liabilities and results of operations for the Guarantor and Issuer of the Registered Notes described above Intercompany balances and transactions between the Issuer and Guarantor have been eliminated from the financial information below Investments in the consolidated subsidiaries of the Issuer and Guarantor that do not guarantee the senior unsecured notes have been excluded from the financial information Intercompany payables represent amounts due to non guarantor subsidiaries of the Issuer
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
On FFP contracts requiring system integration and cost plus contracts with variable consideration revenue is generally recognized over time using a method that measures the extent of progress towards completion of a performance obligation principally using a cost input method referred to as the cost to cost method Under the cost to cost method revenue is recognized based on the proportion of total costs incurred to estimated total costs at completion EAC which require us to use estimates of the revenue and cost associated with the design manufacture and delivery of our offerings and services 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 If the estimated cost of a performance obligation whose associated revenue is recognized using the cost to cost method exceeds the estimated transaction price the entire amount of the loss is recognized in operations in the period the loss is known
Some of our cost plus and fixed price contracts contain award fees incentive fees or other provisions that may either increase or decrease the transaction price These variable amounts generally are awarded upon achievement of certain performance metrics program milestones or cost targets and can be based upon customer discretion We estimate variable consideration at the most probable amount that we expect to be entitled to based on the assessment of the contract specific 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 primarily based upon the proportional individual selling prices The standalone selling price of the performance obligations is generally based on an expected cost plus margin approach For certain product sales performance obligations may be allocated to a contract s transaction price based on prices observed in other standalone sales or the residual value method Substantially all of our contracts do not contain a significant financing component which would require an adjustment to the transaction price of the contract
For the impacts of changes in estimates on our contracts see Note 3 Summary of Significant Accounting Policies of the notes to the consolidated financial statements contained within this Annual Report on Form 10 K
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 at the beginning of the fourth quarter for impairment at the reporting unit level and may be tested more frequently if events or circumstances indicate that the carrying value may not be recoverable As of January 3 2025 and December 29 2023 goodwill represented 46 and 48 of our total assets respectively
We may perform qualitative or quantitative analysis to test for impairment Qualitative factors include macroeconomic industry and market considerations overall financial performance industry legal and other relevant events and factors affecting the reporting unit
Our quantitative analysis utilizes discounted cash flow models and market multiple valuation methods to estimate reporting unit fair values Discounted cash flow analyses rely on significant judgment and assumptions about expected future cash flows weighted average cost of capital discount rates expected long term growth rates and operating margins These assumptions are based on estimates of future sales and earnings 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 Market multiple analyses incorporate significant judgments and assumptions related to the selection of guideline public companies our forecast earnings before interest taxes depreciation and amortization EBITDA forecast EBITDA of guideline public companies and control premium estimates
Operations of the Security Enterprise Solutions SES reporting unit rely heavily on the sales and servicing of security and detection products which prior to fiscal 2024 have been negatively impacted due to delays in airline travel infrastructure projects as customer budgets recover from the pandemic
During fiscal 2023 the SES reporting unit refined its portfolio and made strategic business decisions to exit certain product offerings as well as cease operations in certain countries in order to align the operations of the reporting unit with its strategic business plan These decisions along with the delays in airline travel infrastructure projects and higher than anticipated servicing costs contributed to a significant reduction in the reporting unit s forecasted revenue and cash flows
Accordingly we recognized a non cash goodwill impairment charge of 596 million for fiscal 2023 see Note 8 Goodwill and Intangible Assets of the notes to the consolidated financial statements contained within this Annual Report on Form
K The goodwill impairment resulted in a lower difference between the fair value and carrying value for the SES reporting unit and therefore in fiscal 2024 we performed a quantitative impairment analysis for the SES reporting unit which resulted in no further impairment
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 10 Leases and Note 21 Commitments and Contingencies of the notes to the consolidated financial statements contained within this Annual Report on Form 10 K
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
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
At January 3 2025 and December 29 2023 we had 4 7 billion of debt which included 1 0 billion related to our senior unsecured term loans that have a variable stated interest rate that is determined based on the Secured Overnight Financing Rate SOFR 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 monthly variable interest payments based on the one month SOFR rate and pay interest at a fixed rate As of January 3 2025 the notional value of the interest rate swap agreements was 500 million The interest rate swap agreements effectively converted a portion of our variable rate borrowing to a fixed rate borrowing The fair value of our interest rate swap agreements with respect to our Variable Rate Loan was an asset of 4 million and 11 million as of January 3 2025 and December 29 2023 respectively
The counterparties to these agreements are financial institutions We do not hold or issue derivative financial instruments for trading or speculative purposes We cannot predict future market fluctuations in interest rates and their impact on our interest rate swaps A net hypothetical 10 movement in the one month SOFR 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 12 Derivative Instruments and Note 13 Debt respectively of the notes to the consolidated financial statements contained within this Annual Report on Form 10 K
As of January 3 2025 and December 29 2023 our cash and cash equivalents included investments in several large institutional money market accounts For fiscal 2024 and fiscal 2023 a hypothetical 10 interest rate movement would not have a significant impact on the value of our holdings or on interest income
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 9 and 8 of total revenues for fiscal 2024 2023 and 2022 respectively
We have audited the accompanying consolidated balance sheets of Leidos Holdings Inc and subsidiaries the Company as of January 3 2025 and December 29 2023 the related consolidated statements of operations comprehensive income equity and cash flows for the fiscal years ended January 3 2025 December 29 2023 and December 30 2022 and the related notes collectively referred to as the financial statements In our opinion the financial statements present fairly in all material respects the financial position of the Company as of January 3 2025 and December 29 2023 and the results of its operations and its cash flows for the fiscal years ended January 3 2025 December 29 2023 and December 30 2022 in conformity with accounting principles generally accepted in the United States of America
We have also audited in accordance with the standards of the Public Company Accounting Oversight Board United States PCAOB the Company s internal control over financial reporting as of January 3 2025 based on criteria established in
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 11 2025 expressed an unqualified opinion on the Company s internal control over financial reporting
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
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
The Company performed a quantitative impairment evaluation of the goodwill for the Security Enterprise Solutions reporting unit by comparing the estimated fair value of the reporting unit to its carrying value Estimating the fair value of a reporting unit requires the exercise of significant judgment and assumptions including judgments about expected future cash flows weighted average cost of capital discount rates expected long term growth rates and operating margins as well as changes in the business environment Changes in these assumptions could have a significant impact on the fair value of the reporting unit the amount of any goodwill impairment charge or both The Company s accounting policy is to test for impairment on the first day of the fourth quarter of each fiscal year and more frequently if events or circumstances indicate that the carrying value may not be recoverable As a result of the quantitative assessment the Company concluded that the fair value of the Security Enterprise Solutions reporting unit exceeded the carrying value which resulted in no impairment for the fiscal year ended January 3 2025
We identified goodwill for the Security Enterprise Solutions reporting unit as a critical audit matter due to the significant judgments made by management to estimate the fair value of the reporting unit and the difference between its fair value and carrying value Performing audit procedures to evaluate management s estimate of the Security Enterprise Solutions reporting unit fair value required a high degree of auditor judgment and an increased extent of effort including the need to involve our fair value specialists
Our audit procedures related to the selection of the discount rate terminal growth rate and forecasts of future revenues and cash flows for the Security Enterprise Solutions reporting unit included the following among others
We tested the effectiveness of controls over management s goodwill impairment evaluation including those over the selection of the discount rate terminal growth rate and management s development of forecasted revenues operating margins and cash flows
We developed an independent estimate of the Security Enterprise Solutions reporting unit fair value using the income approach We utilized the historical results of the reporting unit and inspected third party industry reports for the global aviation maritime and border security products and related services markets to develop projections Additionally we developed the discount rate and terminal year growth rate with the assistance of our fair value specialists
We developed an independent estimate of the Security Enterprise Solutions reporting unit fair value using the market approach We selected guideline peer companies and developed enterprise value multiples of revenues and earnings before interest taxes depreciation and amortization with the assistance of our fair value specialists
We calculated our independent expectation of the fair value of the reporting unit by weighting the results of the market and income approaches and compared the resulting fair value to the carrying value of the Security Enterprise Solutions reporting unit
The Company recognized certain customer contract revenue over time using a method that measures the extent of progress towards completion of a performance obligation principally using a cost input method referred to as the cost to cost method Under the cost to cost method revenue is recognized based on the proportion of total costs incurred to estimated total costs at completion EAC A performance obligation s EAC includes all direct costs such as materials labor subcontract costs overhead and a ratable portion of general and administrative costs In addition an EAC of a performance obligation includes future losses estimated to be incurred on onerous contracts as and when known The accounting for these contracts involves judgment particularly as it relates to the process of estimating total revenues and 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 revenues and 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
Our audit procedures related to management s conclusions regarding whether multiple promises within a single contract represent a single performance obligation whether 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 evaluating the revenue recognition methodology initial setup of new contract arrangements and estimates of total costs and revenues for identified performance obligations
Evaluated the terms and conditions of selected contracts and the appropriateness of the accounting treatment in accordance with accounting principles generally accepted in the United States of America by
Evaluation of the contract within the context of the revenue recognition model and that management s conclusions were appropriate by evaluating the nature of the promises within the contract the interrelationship of the promised services and or products 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
We analyzed impacts to income before income tax recorded during the year as a result of changes in estimates on contracts and tested those with characteristics of audit interest to determine that the adjustments were the result of changes in facts and circumstances and not estimates that were previously inaccurate
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 an industry and technology leader serving government and commercial customers with smarter more efficient digital and mission innovations Headquartered in Reston Virginia with 48 000 global employees 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 foreign government agencies and commercial businesses Unless indicated otherwise references to we us and our refer collectively to Leidos Holdings Inc and its consolidated subsidiaries
During fiscal 2024 we completed a realignment of our segment and reporting structure which resulted in the identification of four reportable segments National Security Digital Health Civil Commercial International and Defense Systems We commenced operating and reporting under the new organizational structure effective the first day of fiscal 2024 In addition we separately present the unallocated costs associated with corporate functions as Corporate As a result of this change prior year segment results and disclosures have been recast to reflect the current reportable segment structure
We have an 88 controlling interest in Mission Support Alliance LLC MSA a joint venture with Centerra Group LLC MSA s contract ended on January 24 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
Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation We combined Deferred tax liabilities into Other long term liabilities on the consolidated balance sheets
In November 2023 the FASB issued ASU 2023 07 to improve reportable segment disclosure requirements This update requires companies to disclose significant segment expense categories that are regularly provided to the chief operating decision maker CODM on an interim and annual basis and requires disclosures about a reportable segment s profit or loss and assets that are currently required annually to be made on an interim basis Companies must also disclose how segment measures of profit or loss are used by the CODM
The amendments in this update are effective for public entities on a retrospective basis for annual periods beginning after December 15 2023 and interim periods beginning after December 15 2024 Effective fiscal 2024 we adopted the requirements of ASU 2023 07 using the retrospective method See Note 20 Business Segments The adoption did not have an impact to our financial position results of operations and earnings per share
In December 2023 the FASB issued ASU 2023 09 to enhance the transparency and usefulness of income tax disclosures The update requires enhancements to the annual rate reconciliation including disclosure of specific categories and additional information for reconciling items meeting a quantitative threshold The update also requires disclosure of income taxes paid disaggregated by federal state and foreign taxes and individual jurisdictions meeting a quantitative threshold
The amendments in this update are effective for public business entities for annual periods beginning after December 15 2024 and may be adopted on a prospective or retrospective basis Early adoption is permitted We are currently evaluating the impacts of this update and plan to adopt these amendments using the prospective approach for annual disclosures in fiscal 2025
In November 2024 the FASB issued ASU 2024 03 to enhance the transparency of certain expense disclosures The update requires disclosure of specific expense categories in the notes to the financial statements at interim and annual reporting periods The update requires disaggregated information about certain prescribed expense categories underlying any relevant income statement expense caption
The amendments in this update are effective for public entities for annual periods beginning after December 15 2026 and interim periods beginning after December 15 2027 The amendments may be adopted either prospectively or retrospectively Early adoption is permitted We are currently evaluating the impacts of this update and plan to adopt these amendments for annual disclosures in fiscal 2027 and interim disclosures in fiscal 2028
Leidos fiscal year ends on the Friday nearest the end of December Fiscal 2024 ended January 3 2025 fiscal 2023 ended December 29 2023 and fiscal 2022 ended December 30 2022 Fiscal 2024 included 53 weeks fiscal 2023 and 2022 both included 52 weeks
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
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 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
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
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 represent costs associated with an exit or disposal activity which no longer provide on going economic benefits to the Company Restructuring costs may include employee severance 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 with a required service period of less than 60 days are recognized when the benefits have been communicated to employees and one time termination benefits with a required service period in excess of 60 days are recognized over the requisite period Ongoing termination benefit arrangements are recognized at estimated fair value when it is probable that they will be incurred and 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 operations
Our revenues from contracts with customers are from offerings including trusted mission artificial intelligence cyber operations digital modernization mission software systems integrated systems mission operations and rapid prototyping and manufacturing 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 FPLOE cost plus fixed fee CPFF cost plus award fee cost plus incentive fee and fixed price incentive fee FPIF 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 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 performance obligation or as a separate performance obligation 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 performance obligation
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 contain 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 performance obligations when they include distinct goods or services at standalone selling prices
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 likely amount that we expect to be entitled to based on the assessment of the contract specific 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
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 We allocate the transaction price of a contract to its performance obligations primarily based upon the proportional individual selling prices The performance obligation s standalone selling price is generally based on an expected cost plus margin approach For certain product sales performance obligations may be allocated to a contract s transaction price based on prices from other standalone sales or the residual value method Substantially all of our contracts do not contain a significant financing component which would require an adjustment to the transaction price of the contract Any taxes collected or imposed when determining the transaction price are excluded
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 performance period as the work is 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 revenue contracts are recognized when incurred over the contract term while the full amount of anticipated losses on other contracts are recognized during the period in which the losses are determined 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 transfer of legal title and acceptance by the customer
On performance obligations that require system integration and capability development efforts or contain 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 performance obligations principally associated with T M FPLOE and CPFF contracts 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 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 21 Commitments and Contingencies
Certain eligible costs incurred prior to the start of a project are deferred as assets when we are required to incur costs prior to contract execution in order to be able to perform on the contract and it is probable that we will recover the costs when the contract is issued Pre contract costs are amortized over the requisite service period for which the cost relates
Under certain service contracts costs are incurred at the beginning of the contract to transition services employees and equipment to or from the customer or from a 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
Purchases of assets used to fulfill a specific contract with a customer that do not constitute other specific asset classes are capitalized as project assets when the costs are generally expected to be recovered we maintain ownership of the asset and the benefit is received over a period of time Project assets include prepaid services and maintenance agreements certain material purchases and other costs incurred on contracts Project assets are generally amortized using the straight line method over the shorter of the estimated useful life of the asset or the expected contract period of performance
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
During fiscal 2024 2023 and 2022 revenue recognized from performance obligations satisfied in previous periods was 13 million 8 million and 9 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
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
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 150 million 128 million and 116 million for fiscal 2024 2023 and 2022 respectively Expenses for research and development activities performed under customer contracts are charged directly to cost of revenues for those contracts
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 record liabilities for uncertain tax positions in accordance with ASC 740 on the basis of a two step process in which we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and for those tax positions that meet the more likely than not recognition threshold we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority We recognize interest and penalties related to uncertain tax positions in our income tax expense
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 3 2025 and December 29 2023 94 million and 136 million respectively of outstanding payments were included within Cash and cash equivalents
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 within Other current assets on the consolidated balance sheets Our restricted cash balances were 141 million and 151 million at January 3 2025 and December 29 2023 respectively
Receivables include amounts billed and currently due from customers amounts billable where the right to consideration is unconditional and amounts unbilled Billable and unbilled amounts are recognized at estimated realizable value and consist of costs and fees most 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 Defense Contract Management Agency
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 typically after negotiation of final indirect rates with the U S government 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 This estimate is based on the age of outstanding receivables or specific identification of balances at risk of becoming uncollectible
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
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 material credit risk We manage our credit risk related to derivatives through the use of multiple counterparties with high credit standards
Inventories are valued at the lower of cost or estimated net realizable value Generally raw material inventory is valued using the moving average cost method Work in process inventory may include material costs labor 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 or planned usage to determine appropriate provisions for obsolete inventory
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 is tested for impairment at the reporting unit level on an annual basis and more frequently if events or circumstances indicate that the carrying value of the reporting unit 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 2024 and 2023 we had eight and seven 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 which depends 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 relevant events to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value If we determine that it is more likely than not that a reporting unit s fair value is less than its carrying value 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 the reporting unit carrying value exceeds its fair value The impairment loss is recognized for the amount by which the 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 These analyses rely on significant judgments and assumptions about expected future cash flows weighted average cost of capital discount rates expected long term growth rates operating margins and selection of guideline public companies
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
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
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
Purchases of property plant and equipment including purchases of software and software licenses as well as costs associated with major renewals and improvements are capitalized Maintenance repairs and minor renewals and improvements are expensed as incurred
Construction in progress CIP is used to accumulate all costs for projects that are not yet complete CIP balances are transferred to the appropriate asset account when the asset is capitalized and ready for its intended use
When assets are sold or otherwise disposed of the cost and related accumulated depreciation or amortization is removed from the accounts and any resulting gain or loss is recognized Depreciation is recognized using the methods and estimated useful lives as follows
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 value of the asset exceeds its estimated fair value
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 plant or equipment for a period of time in exchange for consideration Right of use 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 discount rate implicit in 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 A 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
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 3 2025 certain of the Company s equipment leases include 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 except for aircraft for which we account for the lease component and non lease component separately
ROU assets are evaluated for impairment in a manner consistent with the treatment of other long lived assets 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
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 on the relative standalone sales price
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
Management evaluates its investments for 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 and discounted cash flow models 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
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 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
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 last business day prior to the grant date The fair value of performance based stock awards with market conditions is based on using a 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
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 income expense net on the consolidated statements of operations
Remaining performance obligations RPO represent the expected value of exercised contracts both funded and unfunded less revenue recognized to date RPO does 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
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
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
Cost reimbursement and FPIF contracts are generally lower risk and have lower profits T M and FPLOE 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
Our international business operations primarily located in Australia and the UK 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
Performance obligations are satisfied either over time as work progresses or at a point in time Firm fixed price contracts are typically billed to the customer using milestone payments while cost reimbursable and time and materials 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 Unbilled receivables exclude amounts billable where the right to consideration is solely subject to the passage of time Contract liabilities consist of deferred revenue which represents cash advances received prior to performance for programs and billings in excess of revenue recognized
The decrease in unbilled receivables was primarily due to the timing of billings partially offset by revenue recognized on certain contracts during the period The decrease in deferred revenue was primarily due to the timing of advanced payments and revenue recognized during the period
We may acquire businesses as part of our growth strategy to provide new or enhance existing capabilities and offerings to customers During fiscal 2022 we completed the acquisition of Cobham Aviation Services Australia s Special Mission business Cobham Special Mission
On October 30 2022 the Agreement Date we completed the acquisition of Cobham Special Mission for purchase consideration of 298 million Australian dollars net of 10 million of Australian dollars acquired or 192 million United States dollars net of 6 million of cash acquired Cobham Special Mission provides airborne border surveillance and search and rescue services to the Australian Federal Government
For fiscal 2024 2023 and 2022 128 million 115 million and 21 million respectively of revenues related to the Cobham Special Mission acquisition were recognized within the Commercial International reportable segmen
On October 20 2023 we disposed of an immaterial business within our Defense Solutions reportable segment The final sales price was approximately 2 million and net assets of 7 million were divested as a result of the transaction
During fiscal 2024 the Company completed a business realignment which resulted in identification of new reportable segments The Company commenced operating and reporting under the new organizational structure effective the first day of fiscal 2024 see Note 20 Business Segments
Operations of the Security Enterprise Solutions SES reporting unit rely heavily on the sales and servicing of security and detection products which prior to fiscal 2024 have been negatively impacted due to delays in airline travel infrastructure projects as customer budgets recover from the pandemic During fiscal 2023 the SES reporting unit refined its portfolio and made strategic business decisions to exit certain product offerings and cease operations in certain countries in order to align the operations of the reporting unit with its strategic business plan These decisions along with the delays in airline travel infrastructure projects and higher than anticipated servicing costs contributed to a significant reduction in the reporting unit s forecasted revenue and cash flows As a result in fiscal 2023 we conducted a quantitative goodwill impairment analysis and our estimates led us to determine that the carrying value of the SES reporting unit exceeded its estimated fair value see Note 11 Fair Value Measurements Accordingly we recognized a non cash goodwill impairment charge of 596 million at the SES reporting unit as of December 29 2023 The impairment was recorded within the Commercial International reportable segment in the consolidated statements of operations In the fourth quarter of fiscal 2023 we performed a second quantitative analysis for the SES reporting unit and concluded that no incremental impairment was necessary as the fair value of the reporting unit exceeded the carrying value
In the fourth quarter of fiscal 2024 we performed a quantitative analysis for the SES reporting unit and concluded that no further impairment was necessary as the fair value of the reporting unit exceeded the carrying value
In the fourth quarter of fiscal 2024 2023 and 2022 we performed a qualitative analysis for certain reporting units which determined that it was more likely than not that the fair values of these reporting units were in excess of the individual reporting units carrying values In the event that there are significant unfavorable changes to the forecasted cash flows forecasted revenue terminal growth rates or the cost of capital used in the fair value estimates we may be required to record an additional impairment of goodwill at a future date
Our strategic decisions regarding SES product offerings and operating regions see the goodwill discussion above caused certain technology customer relationships and in process research and development IPR D intangible assets to be abandoned and the carrying values of certain program intangible assets to become unrecoverable As a result we recognized intangible asset impairment charges of 79 million for fiscal 2023 which included 33 million for IPR D intangible assets The impairment was recorded to Asset impairment charges in the consolidated statements of operations within the Commercial International reportable segment In the event that we are required to make an additional impairment of goodwill at a future date or if other events occur that negatively impact these intangible assets we may also be required to record an additional impairment of intangible assets at that time
During fiscal 2024 and 2022 we reduced our leased space by exiting and consolidating underutilized buildings as part of an ongoing facility rationalization effort We used discounted cash flow models to estimate the fair values of the affected assets and as a result we recorded impairments of ROU and other assets in the amount of 11 million and 37 million for fiscal 2024 and 2022 respectively The impairment charges were allocated across our reportable segments and to Corporate
In fiscal 2022 the Company entered into a Master Lease Agreement whereby we agreed to lease two aircraft from the time each aircraft is accepted through June 30 2027 In March 2023 we took possession of both aircraft and recognized a 64 million finance lease obligation and a corresponding ROU asset
As of January 3 2025 and December 29 2023 we had a total net investment in sales type leases which relates to lease payment receivables of 94 million and 100 million respectively The current and non current portions of net investment in sales type leases are included within Other current assets and Other long term assets respectively on the consolidated balance sheets
As of January 3 2025 and December 29 2023 our derivatives primarily consisted of the cash flow interest rate swaps on 500 million of the variable rate senior unsecured term loan see Note 12 Derivative Instruments The fair value of the cash flow interest rate swaps is determined based on observed values for underlying interest rates on the one month Secured Overnight Financing Rate SOFR rate as of January 3 2025 and December 29 2023 Level 2 inputs
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 16 million and 12 million as of January 3 2025 and December 29 2023 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 Our notes receivable are included within Other current assets and Other long term assets on the consolidated balance sheets
As of January 3 2025 and December 29 2023 the fair value of debt was 4 5 billion and 4 6 billion respectively and the carrying amount was 4 7 billion for both periods see Note 13 Debt The fair value of debt is determined based on current interest rates available for debt with terms and maturities similar to our existing debt arrangements Level 2 inputs
In fiscal 2023 we recorded impairment charges of SES goodwill see Note 8 Goodwill and Intangible Assets The fair values of the assets and liabilities of the SES reporting unit were determined using a blended approach including discounted cash flow models and market earnings multiples The market approach estimates fair value based on profitability and valuation metrics for peer companies and applies a multiple to the reporting unit s operating performance The income approach estimates fair value by discounting the reporting unit s estimated future cash flows using a weighted average cost of capital reflecting current market conditions as well as the risk profile of the reporting unit Future cash flows are based on estimates of economic and market assumptions made using the best judgment of management including growth rates in revenue and margins and future changes in tax rates and cash expenditures Other significant assumptions and estimates include estimates of future capital expenditures terminal value growth rates and changes in future working capital requirements The fair value of the SES reporting unit was determined using Level 3 inputs
We have interest rate swap agreements to hedge the cash flows of 500 million of the variable rate senior unsecured term loan the Variable Rate Loan These interest rate swap agreements have a maturity date of August 2025 and a fixed interest rate of 2 96 The objective of these instruments is to reduce variability in the forecasted interest payments of the Variable Rate Loan
The interest rate swap transactions are accounted for as cash flow hedges The gain loss on the swaps 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
On March 10 2023 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 0 billion the Term Loan Facility and a 1 0 billion senior unsecured revolving facility the Revolving Facility and together with the Term Loan Facility the Credit Facilities The Credit Facilities will mature in March 2028 The Revolving Facility permits two additional one year extensions subject to lender consent As of January 3 2025 and December 29 2023 there were no borrowings outstanding under the Revolving Facility
The proceeds of the Term Loan Facility and cash on hand on the Closing Date were used to repay in full all indebtedness terminate all commitments and discharge all guarantees existing in connection with a predecessor 1 9 billion senior unsecured term loan facility and a 750 million senior unsecured revolving facility
Borrowings under the Credit Agreement bear interest at a rate determined at our option based on either an alternate base rate or a Term SOFR rate with a 0 10 per annum Term SOFR adjustment plus in each case an applicable margin that varies depending on our credit rating The applicable margin range for Term SOFR denominated borrowings is from 1 00 to 1 50 Based on our current ratings the applicable margin for Term SOFR denominated borrowings is 1 25 Principal payments are made quarterly on the Term Loan Facility beginning in March 2025 with the majority of the principal due at maturity Interest on the Term Loan Facility for Term SOFR denominated borrowings is payable on a periodic basis which must be at least quarterly
In fiscal 2023 we issued and sold 750 million aggregate principal amount of fixed rate senior notes the Notes maturing in March 2033 The Notes are senior unsecured obligations issued by Leidos Inc and guaranteed by Leidos Holdings Inc The annual interest rate for the Notes is 5 75 and is payable on a semi annual basis In connection with the issuance of the Notes 11 million of debt issuance costs and debt discounts were recognized which were recorded as an offset against the carrying value of debt The proceeds from the Notes were used to repay all of the outstanding obligations in respect of principal interest and fees on the 500 million 2 95 notes due May 2023 and repay 210 million of the outstanding balance on the predecessor 1 9 billion senior unsecured term loan facility due January 2025 and fund general corporate purposes
We have a commercial paper program in which the Company may issue short term unsecured commercial paper notes Commercial Paper Notes not to exceed 1 0 billion The proceeds will be used for general corporate purposes including working capital capital expenditures acquisitions and share repurchases
The Commercial Paper Notes are issued in minimum denominations of 0 25 million and have maturities of up to 397 days from the date of issuance The Commercial Paper Notes will bear either a stated or floating interest rate if interest bearing or will be sold at a discount from the face amount As of January 3 2025 and December 29 2023 we did not have any Commercial Paper Notes outstanding
The Credit Facilities Commercial Paper Notes senior unsecured notes are fully and unconditionally guaranteed 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
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 increases to 4 50 to 1 00 for four fiscal quarters following a material acquisition and a ratio of EBITDA to consolidated interest expense of not less than 3 50 to 1 00
Reclassifications for unrecognized gain loss on derivative instruments associated with outstanding debt are recorded in Interest expense net on the consolidated statements of operations See Note 12 Derivative Instruments for more information on our interest rate swap agreements
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
Anti dilutive stock based awards are excluded from the weighted average number of shares outstanding used to compute diluted EPS The total number of outstanding stock options and vesting stock awards that were anti dilutive was less than 0 5 million for fiscal 2024 and 1 million for both fiscal 2023 and 2022
During fiscal 2024 and 2023 we made open market repurchases of our common stock for an aggregate purchase price of 850 million and 225 million respectively There were no open market share repurchases in fiscal 2022
In fiscal 2022 we entered into an Accelerated Share Repurchase agreement with a financial institution to repurchase shares of our outstanding common stock We paid 500 million to the financial institution and received 4 8 million shares
As of January 3 2025 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 vesting of stock units or exercising of stock options under these plans
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 33 a year over three years 25 a year over four years or cliff vest in three years As of January 3 2025 2 9 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 fiscal 2024 2023 and 2022 the discount was 10 of the fair market value on the date of purchase During fiscal 2024 2023 and 2022 52 million 48 million and 45 million respectively was received from ESPP plan participants for the issuance of Leidos stock A total of 1 9 million shares remain available for future issuance under the ESPP
Stock options are granted with exercise prices equal to the fair market value of Leidos common stock using the closing price on the business day prior to the grant date and for terms not greater than ten years Stock options have a term of seven years and a vesting period of three or 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 three or four years except for stock options granted to our outside directors which is recognized over the vesting period of one year or less
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 To determine the expected term we use the midpoint scenario with a one year grant date filter assumption for outstanding options and we use historical data to estimate forfeitures 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
As of January 3 2025 there was 6 million of unrecognized compensation cost net of estimated forfeitures related to stock options which is expected to be recognized over a weighted average period of 1 6 years Tax benefits from stock options exercised for fiscal 2024 2023 and 2022 were 7 million 2 million and 9 million respectively
Compensation expense is measured at the grant date fair value and generally recognized over the vesting period of three or four years based upon required service conditions and in some cases revenue or EPS based performance conditions
As of January 3 2025 there was 56 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 1 7 years The fair value of restricted stock units that vested in fiscal 2024 2023 and 2022 was 74 million 40 million and 52 million respectively
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 200 of the specified target awards If performance is below the threshold level of performance no shares will be issued
For awards granted during fiscal 2024 2023 and 2022 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 2024 2023 and 2022 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
The weighted average grant date fair value for performance based stock excluding those with a market condition during fiscal 2024 2023 and 2022 was 130 15 93 90 and 105 07 respectively The weighted average grant date fair value for performance based stock with market conditions that were granted during fiscal 2024 2023 and 2022 was 186 81 108 38 and 129 42 respectively and was calculated using the Monte Carlo simulation
As of January 3 2025 there was 24 million of unrecognized compensation cost net of estimated forfeitures which is expected to be recognized over a weighted average period of 1 8 years The fair value of performance based stock awards that vested in fiscal 2024 2023 and 2022 was 16 million 12 million and 17 million respectively
The effective tax rate for fiscal 2024 was favorably impacted primarily by federal research tax credits and lower state income taxes partially offset by an increase in unrecognized tax benefits The effective tax rate for fiscal 2023 was unfavorably impacted primarily by non tax deductible goodwill impairments and fiscal 2022 was favorably impacted primarily by federal research tax credits and excess tax benefits related to employee stock based payment transactions
Deferred income taxes are recorded for differences in the basis of assets and liabilities for financial reporting purposes and tax reporting purposes Deferred tax assets liabilities were comprised of the following
At January 3 2025 we had state net operating losses of 70 million which we expect to utilize The losses will begin to expire in fiscal 2029 We had foreign tax credits of 24 million that will begin to expire in fiscal 2030 We expect to utilize 4 million of the foreign tax credits We also had foreign net operating losses of 57 million which do not expire We expect to utilize 30 million of the foreign net operating losses
At January 3 2025 December 29 2023 and December 30 2022 the balance of unrecognized tax benefits included liabilities for uncertain tax positions of 173 million 110 million and 92 million respectively At January 3 2025 17 million of the balance of unrecognized tax benefits was classified as accounts payable and accrued liabilities and 156 million was classified as other long term liabilities on the consolidated balance sheets At December 29 2023 and December 30 2022 the balance of the unrecognized tax benefits were classified as other long term liabilities on the consolidated balance sheets
For fiscal 2024 unrecognized tax benefits decreased 16 million for tax positions related to prior years primarily as a result of resolving uncertainty regarding capitalized research and development costs with the IRS for the tax year ended December 30 2022 partially offset by an increase in uncertain state tax positions In addition unrecognized tax benefits increased 80 million for tax positions related to the current year primarily as a result of capitalized research and development costs
At January 3 2025 and December 29 2023 accrued interest and penalties totaled 7 million and 4 million respectively At December 30 2022 accrued interest and penalties were immaterial For fiscal 2024 and 2023 7 million and 4 million respectively of interest and penalties were recognized in the Company s consolidated statements of operations
We file income tax returns in the United States and various state and foreign jurisdictions For the years ended December 30 2022 December 29 2023 and January 3 2025 we are participating in the Internal Revenue Service IRS Compliance Assurance Process CAP a real time audit of our consolidated federal corporate income tax returns The IRS has completed their examination of our consolidated federal income tax returns through the year ended December 31 2021 For the years ended January 1 2021 and December 31 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 3 2025 we were no longer subject to state local or foreign examinations by the tax authorities for fiscal years ended on or before January 1 2021
During the next 12 months we expect our balance of unrecognized tax benefits to decrease by 73 million primarily related to capitalized research and development costs 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
We sponsor various defined contribution plans in which most employees are eligible to participate These plans allow eligible participants to contribute a portion of their income through payroll deductions and Leidos may also make discretionary contributions Company contributions were 159 million 148 million and 145 million for fiscal 2024 2023 and 2022 respectively
We maintain three deferred compensation plans the Keystaff Deferral Plan KDP the KESDP and the MSCP the Deferred Compensation Plans for the benefit of certain management or highly compensated employees or members of the Board of Directors The Deferred Compensation Plans allow eligible participants to elect to defer a portion of their salary and all or a portion of certain bonuses including restricted stock unit awards Directors may also elect to defer their cash compensation in addition to their restricted stock unit awards Balances in the Deferred Compensation 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 17 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
We sponsor two frozen defined benefit pension plans the Defined Benefit Plans one in the United Kingdom UK for former employees on an expired customer contract and another assumed as a result of the Gibbs Cox acquisition
On May 20 2022 the trustee of our UK defined benefit pension plan the Plan invested the assets of the Plan in a bulk purchase annuity policy to fully insure the benefits payable to the members of the Plan As the buy in transaction insured the defined benefit obligation we do not anticipate material future contributions The bulk purchase annuity policy is structured to enable the Plan to move to a full buy out at which time the insurer would become directly responsible for all pension payments and we would be relieved of our obligations under the Plan At this future date a settlement loss will be recognized for an amount equal to any unamortized loss associated with the Plan recorded within AOCI and any remaining net plan assets of the Plan will be remitted to the Company As of January 3 2025 and December 29 2023 the unamortized loss within AOCI related to the Plan was 20 million and 21 million respectively As of January 3 2025 and December 29 2023 the Plan had net assets of 7 million and 8 million respectively
The projected benefit obligation of the Defined Benefit Plans as of January 3 2025 and December 29 2023 was 88 million and 99 million respectively The decrease in the projected benefit obligation was primarily due to assumption changes
The fair value of the Defined Benefit Plans assets as of January 3 2025 and December 29 2023 was 94 million and 103 million respectively The decrease was primarily driven by assumption changes to reflect the fair value of the annuity contract The UK Plan funding status was overfunded 7 million and 8 million as of January 3 2025 and December 29 2023 respectively The Gibbs Cox defined benefit pension plan funding status was underfunded 1 million and 4 million as of January 3 2025 and December 29 2023 respectively The fair value of the the Defined Benefit Plans assets has been included within Other long term liabilities and Other long term assets on the consolidated balance sheets
We also sponsor multiemployer defined benefit pension plans and defined contribution plans 401 k plans 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
Our operations and reportable segments are organized around the customers and markets we serve We define our reportable segments based on the way the CODM currently the Chief Executive Officer manages the operations for purposes of allocating resources and assessing performance The CODM considers segment revenue and operating income to assist with the evaluation of strategic business decisions including potential acquisitions or divestitures whether to invest in certain products or services share repurchases and the declaration of dividends
Beginning in fiscal 2024 we realigned our business to report in six operating segments which are aggregated into four reportable segments in accordance with the criteria established under ASC 280 National Security Digital Health Civil Commercial International and Defense Systems Our reportable segments are focused on specific defined capability sets that we bring to our customers Additionally we separately present the unallocated costs associated with corporate functions as Corporate As a result of this change prior year segment results have been recast to reflect the current reportable segment structure
Our National Security Digital business provides leading edge and technologically advanced services solutions and products as well as mission software capabilities for defense and intelligence customers in the areas of cyber logistics security operations and decision analytics We also deliver IT operations and digital transformation programs across all U S federal government customers Our advanced capabilities include the delivery of technology enabled services mission software capabilities and IT modernization services Our capabilities allow us to provide innovative technology solutions in software development engineering design modeling simulation analytics cyber security intelligence analysis linguistics and mission operations
Our Health Civil business provides services and solutions to federal and commercial customers in the areas of public health care coordination life and environmental sciences and transportation We are dedicated to delivering effective and affordable solutions that are responsible for the health and well being of people including service members and veterans Our core capabilities include health information management services managed health services systems and infrastructure modernization and life sciences research and development We help customers achieve their missions and take on the connected world with data driven insights improved efficiencies and technological advantages
Our Commercial International business delivers a portfolio of products services and solutions aimed at securing national assets modernizing energy and critical infrastructure and enhancing mission outcomes Our key customers include Investor Owned Utilities government agencies in the United Kingdom and Australia the Transportation Security Administration U S Customs Border Protection as well as airports and ports and borders authorities We offer a broad range of capabilities including design and engineering services security products and solutions digital modernization mission software logistics and airborne solutions
Our Defense Systems business addresses threats facing our nation by rapidly prototyping and delivering advanced hardware software and integrated systems solutions for the U S Department of Defense Army Navy Air Force Space Force Marine Corps United States Special Operations Command NASA Defense Advanced Research Projects Agency intelligence agencies and international customers We are heavily engaged in the top defense Research Development Test and Evaluation priorities that are driven by critical evolving threat driven needs Defense Systems provides services in the air land sea space and cyberspace environments The Defense Systems business is dedicated to delivering cost effective solutions in the space airborne land maritime and cyber domains and supporting critical missions worldwide
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
The statement of operations performance measures used to evaluate segment performance are revenues and operating income As a result Interest expense net Other income expense net and Income tax expense as reported in the consolidated financial statements are not allocated to our segments
Other segment expenses include direct program costs such as materials and subcontractor expenses as well as allocable indirect costs such as depreciation and Corporate compensation expenses but excludes direct labor which is separately presented above The Health Civil and Defense Systems segments also include equity earnings of non consolidated subsidiaries within operating income
Under U S government Cost Accounting Standards 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
We generated approximately 87 of our total revenues in both fiscal 2024 and 2023 and 86 in fiscal 2022 from contracts with the U S government either as a prime contractor or a subcontractor to other contractors engaged in work for the U S government Revenues under contracts with the DoD and U S Intelligence Community including subcontracts under which the DoD or the U S Intelligence Community is the ultimate purchaser represented approximately 48 of our total revenues for fiscal 2024 and 49 of total revenues for fiscal 2023 and 44 of total revenues for fiscal 2022
Revenues generated by entities outside of the United States were approximately 8 in both fiscal 2024 and 2022 and 9 in fiscal 2023 As such additional financial information by geographic location is not presented
We are 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
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 3 2025 active indirect cost audits by the DCAA remain open for fiscal 2022 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 3 2025 we believe we have adequately reserved for potential adjustments from audits or reviews of contract costs
Through its internal processes the Company discovered in late 2021 activities by its employees third party representatives and subcontractors raising concerns related to a portion of our business that conducts international operations The Company conducted an internal investigation overseen by an independent committee of the Board of Directors with the assistance of external legal counsel to determine whether the identified conduct may have violated the Company s Code of Conduct and potentially applicable laws including the U S Foreign Corrupt Practices Act The Company voluntarily self reported this investigation to the Department of Justice and the Securities and Exchange Commission and cooperated with both agencies In December 2024 the Company received notification from the U S Department of Justice that it had closed its inquiry While the Company has engaged with the SEC the Company cannot anticipate the timing outcome or possible impact of an SEC investigation although violations of applicable laws may result in civil sanctions including monetary penalties and reputational damage
In February 2023 a former employee of the Company who was terminated at the outset of the investigation was indicted on wire fraud and other charges by a Federal Grand Jury in the U S District Court in the Southern District of California These charges were later dismissed as a result of the death of the former employee
In August 2022 the Company received a Federal Grand Jury Subpoena in connection with a criminal investigation being conducted by the U S Department of Justice Antitrust Division The subpoena requests that the Company produce a broad range of documents related to three U S Government procurements associated with the Company s Intelligence Group in 2021 and 2022 We are fully cooperating with the investigation and we are conducting our own internal investigation with the assistance of outside counsel It is not possible at this time to determine whether we will incur or to reasonably estimate the amount of any fines penalties or further liabilities in connection with the investigation pursuant to which the subpoena was issued
As of January 3 2025 we have outstanding letters of credit of 61 million principally related to performance guarantees on contracts and outstanding surety bonds with a notional amount of 121 million 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
Our management with the participation of our principal executive officer our Chief Executive Officer and principal financial officer our Executive Vice President and Chief Financial Officer has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a 15 e or 15d 15 e under the Securities Exchange Act of 1934 as amended as of January 3 2025 Based upon that evaluation our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 as amended is recorded processed summarized and reported within the time periods specified in the rules and forms of the U S Securities and Exchange Commission SEC These disclosure controls and procedures include without limitation controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 as amended is accumulated and communicated to our management including our principal executive officer and our principal financial officer as appropriate to allow timely decisions regarding required disclosure
There have been no changes in our internal control over financial reporting that occurred in the fourth quarter of the period ended January 3 2025 covered by this Annual Report that materially affected or are reasonably likely to materially affect our internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America
Our management with the participation of our principal executive officer and principal financial officer has evaluated the effectiveness of our internal control over financial reporting as of January 3 2025 based on criteria established in
issued by the Committee of Sponsoring Organizations of the Treadway Commission Our management has assessed the effectiveness of our internal control over financial reporting as of January 3 2025 and has concluded that our internal control over financial reporting as of that date was effective
Deloitte Touche LLP an independent registered public accounting firm audited our consolidated financial statements included in this Annual Report on Form 10 K and our internal control over financial reporting and that firm s report on our internal control over financial reporting is set forth below
We have audited the internal control over financial reporting of Leidos Holdings Inc and subsidiaries the Company as of January 3 2025 based on criteria established in Internal Control Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission COSO In our opinion the Company maintained in all material respects effective internal control over financial reporting as of January 3 2025 based on criteria established in Internal Control Integrated Framework 2013 issued by COSO
We have also audited in accordance with the standards of the Public Company Accounting Oversight Board United States PCAOB the consolidated financial statements as of and for the year ended January 3 2025 of the Company and our report dated February 11 2025 expressed an unqualified opinion on those financial statements
The Company s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management s Report on Internal Control Over Financial Reporting Our responsibility is to express an opinion on the Company s internal control over financial reporting based on our audit We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB
We conducted our audit in accordance with the standards of the PCAOB Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects Our audit included obtaining an understanding of internal control over financial reporting assessing the risk that a material weakness exists testing and evaluating the design and operating effectiveness of internal control based on the assessed risk and performing such other procedures as we considered necessary in the circumstances We believe that our audit provides a reasonable basis for our opinion
A company s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles A company s internal control over financial reporting includes those policies and procedures that 1 pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company 2 provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company and 3 provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition use or disposition of the company s assets that could have a material effect on the financial statements
Because of its inherent limitations internal control over financial reporting may not prevent or detect misstatements Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate
During the three months ended January 3 2025 no director or officer of the Company adopted modified or terminated a Rule 10b5 1 trading arrangement or non Rule 10b5 1 trading arrangement as each term is defined in Item 408 a of Regulation S K
For certain information required by Item 10 with respect to executive officers see Executive Officers of the Registrant at the end of Part I of this Annual Report on Form 10 K For additional information required by Item 10 with respect to executive officers and directors including audit committee and audit committee financial experts procedures by which stockholders may recommend nominees to the Board of Directors and compliance with Section 16 a of the Securities Exchange Act of 1934 see the information set forth under the captions Proposal 1 Election of Directors Corporate Governance and Other Information appearing in the 2025 Proxy Statement to be filed with the SEC within 120 days of the fiscal year ended January 3 2025 which required information is incorporated by reference into this Annual Report on Form 10 K
We have a code of conduct that applies to our principal executive officer and our senior financial officers A copy of our code of conduct is available on the Investor Relations section of our website free of charge at
by clicking on the links entitled Investors then Governance then Documents Charters and then Code of Conduct Documents available under Governance in the Investor Relations section of our website also include our Certificate of Incorporation Bylaws Corporate Governance Guidelines and charters for the Audit and Finance Committee Human Resources and Compensation Committee Corporate Governance and Ethics Committee and Technology and Information Security Committee of the Board of Directors
We intend to satisfy the disclosure requirement under Item 5 05 of Form 8 K regarding amendment to or waiver from a provision of our code of business ethics by posting such information on our website The information on our website is not incorporated by reference into and is not a part of this Annual Report on Form 10 K
Our Insider Trading Policy the Insider Trading Policy sets forth the general rules that our directors executive officers and employees must follow with respect to transactions in our securities to promote compliance with insider trading laws rules and regulations This description of the Insider Trading Policy is qualified in its entirety by reference to the full text of the Insider Trading Policy which is filed hereto as Exhibit 19
For information required by Item 11 with respect to executive compensation and director compensation see the information set forth under the captions Compensation Discussion and Analysis Executive Compensation and Corporate Governance in the 2025 Proxy Statement to be filed with the SEC within 120 days of the fiscal year ended January 3 2025 which required information is incorporated by reference into this Annual Report on Form 10 K
For information required by Item 11 with respect to compensation committee interlocks and insider participation see the information set forth under the caption Corporate Governance in the 2025 Proxy Statement to be filed with the SEC within 120 days of the fiscal year ended January 3 2025 which required information is incorporated by reference into this Annual Report on Form 10 K
For information required by Item 12 with respect to the security ownership of certain beneficial owners and management see the information set forth under the caption Other Information in the 2025 Proxy Statement to be filed with the SEC within 120 days of the fiscal year ended January 3 2025 which required information is incorporated by reference into this Annual Report on Form 10 K
The following equity compensation plans approved by security holders are included in this plan category the 2017 Omnibus Incentive Plan the 2006 Equity Incentive Plan as amended and the 2006 Employee Stock Purchase Plan as amended
Represents i 1 693 633 shares of Leidos common stock reserved for future issuance for service based awards and performance and market based awards assuming achievement of the target level of performance for unearned performance and market based awards does not include an additional 364 885 shares if the maximum level of performance is achieved and other stock awards under the 2017 Omnibus Incentive Plan and 2006 Equity Incentive Plan ii 3 723 shares of Leidos common stock issuable pursuant to dividend equivalent rights and iii 1 169 070 shares of Leidos common stock reserved for future issuance upon the exercise of outstanding options awarded under the 2017 Omnibus Incentive Plan and 2006 Equity Incentive Plan Does not include shares to be issued pursuant to purchase rights under the 2006 Employee Stock Purchase Plan
Represents 6 061 764 and 1 934 703 shares of Leidos common stock under the 2017 Omnibus Incentive Plan and 2006 Employee Stock Purchase Plan respectively The maximum number of shares initially available for issuance under the 2017 Omnibus Incentive Plan was 7 5 million The 2006 Equity Incentive Plan was amended in June 2012 to provide that the maximum number of shares available for issuance thereunder is 12 5 million The 2006 Employee Stock Purchase Plan was amended in September 2016 to provide that the maximum number of shares available for issuance thereunder is 5 0 million Those shares that are issued under the 2017 Omnibus Incentive Plan and 2006 Equity Incentive Plan that are forfeited or repurchased at the original purchase price or less or that are issuable upon exercise of awards granted under the plan that expire or become unexercisable for any reason after their grant date without having been exercised in full
The Management Stock Compensation Plan has not been approved by security holders and is included in this plan category This plan does not provide for a maximum number of shares available for future issuance For further information on this plan see Note 17 Stock Based Compensation of the notes to the consolidated financial statements contained within Part II of this Annual Report on Form 10 K
For information required by Item 13 with respect to certain relationships and related transactions and the independence of directors and nominees see the information set forth under the caption Corporate Governance in the 2025 Proxy Statement to be filed with the SEC within 120 days of the fiscal year ended January 3 2025 which required information is incorporated by reference into this Annual Report on Form 10 K
For information required by Item 14 with respect to principal accounting fees and services see the information set forth under the caption Audit Matters in the 2025 Proxy Statement to be filed with the SEC within 120 days of the fiscal year ended January 3 2025 which required information is incorporated by reference into this Annual Report on Form 10 K
Indenture dated June 28 2002 between Leidos Inc and JPMorgan Chase Bank as trustee Incorporated by reference to Exhibit 4 2 to our Current Report on Form 8 K filed with the SEC on July 3 2002 SEC File No 000 12771
First Supplemental Indenture dated October 13 2006 by and among Leidos Inc Leidos Holdings Inc and The Bank of New York Trust Company N A as successor trustee to JPMorgan Chase Bank N A Incorporated by reference to Exhibit 4 2 to our Current Report on Form 8 K filed with the SEC on October 17 2006 SEC File No 001 33072
Indenture dated as of December 20 2010 among Leidos Holdings Inc Leidos Inc and The Bank of New York Mellon Trust Company N A as Trustee Incorporated by reference to Exhibit 4 1 to our Current Report on Form 8 K with the SEC on December 22 2010
Indenture relating to the 2 950 Senior Notes due 2023 3 625 Senior Notes due 2025 and the 4 375 Senior Notes due 2030 dated as of May 12 2020 by and among Leidos Inc as issuer Leidos Holdings Inc as guarantor and Citibank N A as trustee Incorporated by reference to Exhibit 4 1 to our Current Report on Form 8 K filed with the SEC on May 12 2020
Indenture relating to the 2 300 Senior Notes due 2031 dated as of October 8 2020 among Leidos Inc Leidos Holdings Inc as guarantor and Citibank N A as trustee Incorporated by reference to Exhibit 4 1 to our Current Report on Form 8 K filed with the SEC on October 9 2020
Form of Global Note representing Leidos Inc s 5 750 Notes due 2033 Included in Exhibit 4 11 and incorporated by reference to Exhibit 4 2 to our Current Report on Form 8 K filed with the SEC on February 28 2023
Form of Nonstatutory Stock Option Agreement of Leidos Holdings Inc s 2006 Equity Incentive Plan Incorporated by reference to Exhibit 10 10 to our Annual Report on Form 10 K filed with the SEC on March 27 2014
Form of Nonstatutory Stock Option Agreement Non Employee Directors of Leidos Holdings Inc s 2006 Equity Incentive Plan Incorporated by reference to Exhibit 10 11 to our Annual Report on Form 10 K filed with the SEC on March 27 2014
Form of Restricted Stock Unit Award Agreement of Leidos Holdings Inc s 2006 Equity Incentive Plan Incorporated by reference to Exhibit 10 14 to our Annual Report on Form 10 K filed with the SEC on March 27 2014
Form of Restricted Unit Award Agreement Management of Leidos Holdings Inc s 2006 Equity Incentive Plan Incorporated by reference to Exhibit 10 16 to our Annual Report on Form 10 K filed as with the SEC on March 27 2014
Form of Performance Share Award Agreement of Leidos Holdings Inc s 2006 Equity Incentive Plan for Performance Share Award Agreements entered into on or after April 3 2015 Incorporated by reference to Exhibit 10 33 to our Annual Report on Form 10 K filed with the SEC on March 25 2015
Form of Restricted Stock Unit Award Agreement of Leidos Holdings Inc s 2006 Equity Incentive Plan Incorporated by reference to Exhibit 10 3 to our Quarterly Report on Form 10 Q filed with the SEC on May 5 2017
Form of Nonstatutory Stock Option Agreement of Leidos Holdings Inc s 2006 Equity Incentive Plan for Nonstatutory Stock Option Agreements granted on March 3 2017 Incorporated by reference to Exhibit 10 4 to our Quarterly Report on Form 10 Q filed with the SEC on May 5 2017
Form of Performance Share Award Agreement of Leidos Holdings Inc s 2006 Equity Incentive Plan for Performance Share Award Agreements granted on March 3 2017 Incorporated by reference to Exhibit 10 5 to our Quarterly Report on Form 10 Q filed with the SEC on May 5 2017
Form of Notice of Grant of Options for Non Employee Directors under the Leidos Holdings Inc Amended and Restated 2017 Omnibus Incentive Plan Incorporated by reference to Exhibit 10 22 to our Annual Report on Form 10 K filed with the SEC on February 23 2018
Form of Notice of Grant of Options for Employees under the Leidos Holdings Inc Amended and Restated 2017 Omnibus Incentive Plan Incorporated by reference to Exhibit 10 19 to our Annual Report on Form 10 K filed with the SEC on February 13 2024
Form of Notice of Grant of Restricted Stock Unit Awards Performance Vesting for Employees under the Leidos Holdings Inc Amended and Restated 2017 Omnibus Incentive Plan Incorporated by reference to Exhibit 10 20 to our Annual Report on Form 10 K filed with the SEC on February 13 2024
Form of Notice of Grant of Performance Share Awards for Employees under the Leidos Holdings Inc Amended and Restated 2017 Omnibus Incentive Plan Incorporated by reference to Exhibit 10 21 to our Annual Report on Form 10 K filed with the SEC on February 13 2024
Form of Notice of Grant of Restricted Stock Unit Awards Time Vesting for Employees under the Leidos Holdings Inc Amended and Restated 2017 Omnibus Incentive Plan Incorporated by reference to Exhibit 10 22 to our Annual Report on Form 10 K filed with the SEC on February 13 2024
Form of Notice of Grant of Restricted Stock Unit Awards for Non Employee Directors under the Leidos Holdings Inc Amended and Restated 2017 Omnibus Incentive Plan Incorporated by reference to Exhibit 10 27 to our Annual Report on Form 10 K filed with the SEC on February 23 2018
Intellectual Property Matters Agreement dated August 16 2016 between Lockheed Martin Corporation and Abacus Innovations Corporation Incorporated by reference to Exhibit 10 3 to our Quarterly Report on Form 10 Q filed with the SEC on November 4 2016
Credit Agreement dated as of March 10 2023 by and among Leidos Holdings Inc Leidos Inc the guarantors party thereto the lenders party thereto and Citibank N A as administrative agent Incorporated by reference to Exhibit 10 1 to our Current Report on Form 8 K filed with the SEC on March 14 2023
Form of Commercial Paper Dealer Agreement dated July 12 2021 between Leidos Inc as issuer the Company as guarantor and the applicable Dealer party thereto Incorporated by reference to Exhibit 10 1 to our Form 8 K filed with the U S Securities and Exchange Commission on July 12 2021
Executive Employment Agreement dated February 23 2023 between Leidos Holdings Inc and Thomas A Bell Incorporated by reference to Exhibit 10 1 to our Current Report on Form 8 K filed with the SEC on February 27 2023
Consulting Employee Agreement dated January 17 2024 between Leidos Holdings Inc and Jerald S Howe Jr Incorporated by reference to Exhibit 10 1 to our Current Report on Form 8 K filed with the SEC on January 17 2024
Pursuant to the requirements of Section 13 or 15 d of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized
Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed below by the following persons on behalf of Leidos Holdings Inc in the capacities and on the dates indicated

Company Name	Leidos Holdings, Inc. Vist SEC web-site
Category	SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN
Trading Symbol	LDOS