LDOS 10-K & 10-Q changes, risk factors and insider trading

uOur failure to comply with various complex procurement rules and regulations could result in ourus 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.

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 bothfiscal fiscal2025, 2024 and 2023, and 86% in fiscal 2022.2023. 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 DoDDoW 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 presssustained or recurring media coverage, social media coverage,commentary, or other public communications that criticize our business practices, the nature of our products or services, or the defense industry more broadly, regardless of accuracy or completeness, and which could pertain to employee or subcontractor misconduct, conflicts of interest, poor contract performance, deficiencies in investment, prioritization, and production, 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.

Revenues under contracts with the DoDDoW and U.S. Intelligence Community, either as a prime contractor or subcontractor to other contractors, represented approximately 49% of our total revenues for fiscal 2025 and 2023, and 48% of our total revenues for fiscal 2024, 49% of our total revenues for fiscal 2023 and 44% of our total revenues for fiscal 2022.2024. U.S. government and DoDDoW 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 prioritiespriorities, including initiatives aimed at improving governmental efficiency, 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,Administration, 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 DoDDoW 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’sDoW’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 DoDDoW 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 DoDDoW 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.

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.

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. For example, as a result of the executive order titled "Prioritizing the Warfighter in Defense Contracting,” future contracts (including renewals) are expected to include provisions restricting stock buybacks and dividends during any period of underperformance, and restricting executive incentive compensation in a manner that is contingent on certain specified criteria, including on-time delivery of projects, increased production, and the facilitation of certain domestic investments and operating improvements.

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. In addition, if the Secretary of War were to determine that any such delays, cost overruns or failures in our performance constitutes underperformance on our contract, we would be required to submit a remediation plan approved by our board within 15 days of such determination, and if such plan is determined to be insufficient or we are not otherwise able to remediate any such underperformance we could be subject to remedies from the Secretary of War including certain enforcement actions. 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,DoW, 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.

Our failure to comply with various complex procurement rules and regulations could result in ourus 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.

Additionally, the DoDDoW 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.

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 DoDDoW 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 significantmaterial control deficienciesweakness 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 controlmaterial deficienciesweakness areis 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 3,2, 2025,2026, indirect cost audits by the DCAA remain open for fiscal 20222023 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.

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, sale, 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. The U.S. Congress has considered, and will likely in the future consider, additional data privacy and security legislation, to which we may become subject if passed.

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 are also subject to the CMMC requirements, which require successful assessment by a third party against specified cyber controls in order to be eligible for contract awards. To the extent we are unable to achieve or maintain certification at the level required for a particular contract award, we will be unable to bid on such contract awards or follow-on awards for existing work with the DoW, which could adversely impact our revenue and our profitability. We may also be subject to numerousadditional emerging and as yet unspecified cybersecurity requirements under the FAR and throughother 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.regulations. 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 exceed requirements, to the extent we do not, we will be unable to bid on such contract awards, which could adversely impact our revenue and our profitability.

While we have established policies, procedures, training programs, and other compliance controls designed to prevent and detect misconduct, individuals may circumvent these measures and we may not be effective,unable to prevent our employees, subcontractors, agents, suppliers, business partners or joint ventures and others working on our behalf from engaging in misconduct, fraud or other improper activities, 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. Shifts in public attitudes and policies toward immigration, as well as actual and proposed restrictions on employment-based visas, could impact our ability to attract, retain and develop skilled talent. 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. Further, as a result of the executive order titled "Prioritizing the Warfighter in Defense Contracting,” future contracts (including renewals) are expected to include provisions restricting executive incentive compensation in a manner that is contingent on certain specified criteria, including on-time delivery of projects, increased production, and the facilitation of certain domestic investments and operating improvements, which may result in employment by us not being as attractive to key employees than alternatives in businesses not impacted by this executive order. 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.

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 generallycould requiresrequire 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,Annual Report on Form 10-K, and “Note 3—Summary of Significant Accounting Policies” of the notes to the consolidated financial statements contained within this Annual Report on Form 10-K.

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. Increased frequency and severity of extreme weather events, which are widely associated with long-term climate change, could disrupt our operations, facilities and supply chain. 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. In addition, current and future reduction in government weather-monitoring or satellite data programs may diminish the predictability of extreme weather events and impair our ability to plan for and mitigation related operational risks. 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.

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. ForIn example,particular, several states, including Colorado and California, have passed or proposed laws and regulations that specifically address various facets and uses of AI. In Europe, the EU’s Artificial Intelligence Act (the “AI Act”),Act, which enteredbegan intophasing-in force on August 1, 2024,2025, 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.

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. Any such transactions will depend in part upon the continued availability of targets or potential partners on favorable terms. 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. In addition, significant acquisitions, investments and joint ventures can be complex, costly and time-consuming. Acquisitions, investments and joint ventures pose many other risks that could adversely affect our reputation, operations, or financial results, including that:

As of January 3,2, 2025,2026, goodwill was 46%47% 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 also 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 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. Compliance with the requirements of the recent executive order titled "Prioritizing the Warfighter in Defense Contracting” may be complex, costly and time-consuming, and our subcontractors may not have the necessary resources to ensure compliance. 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.

upolitical 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 that our employees may suffer injury or bodily harm, or be killed or kidnapped while providing such services or products, or 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;

uthe 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 uthe ongoing conflict in the Middle East, which continues to expand.East.

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 or other third parties 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,protect or enforce, and some courts inside and outside the United States may be less willing or unwilling to protect or enforce 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 claims or 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 or misappropriated their intellectual property rights or 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-party intellectual property rights, we are unable to prevail in the litigation, retain or obtain sufficient rights, develop non-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 generallytypically 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, requiringrequire 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 into 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.

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. In addition, as a result of the recent executive order titled "Prioritizing the Warfighter in Defense Contracting,” future contracts (including renewals) are expected to include provisions restricting stock buybacks and dividends during any period of underperformance. 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.

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 48,000,47,000 global employees, we bringpursue domain-specificstrategic capabilities,growth technologiesacross five pillars: space and insightsmaritime; toenergy customers in each of these markets by leveraging seven technical core capabilities: trusted mission artificial intelligence, cyber operations,infrastructure; digital modernization,modernization and cyber; mission software systems, integrated systems, mission operations,; and rapidmanaged prototypinghealth and manufacturing.services. Our customers include the U.S. Department of DefenseWar (“DoDDoW”), 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”)Affairs 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 ourOur business andis operatealigned ininto 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.

ucontinueducontinual improvementimprovements in our back-office infrastructure and related business processes for greaterthe effectiveness and efficiency acrossof allour business functionsprocesses driven by our enterprise transformation office leveraging artificial intelligence and automation; and udisciplined deployment of our cash resources and use of our capital structure to enhance shareholder value while retaining an appropriate amount of financial leverage.

Sales Trend. For fiscal 2024,2025, revenues increased $1.2$0.5 billion, or 8%,3%, compared to fiscal 2023,2024, the increase was primarily due to program wins and a net increase in volumes on certain programs and program wins,volumes, partially offset by the completion of certain contracts.

Operating Expenses and Income Trend. For fiscal 2024,2025, operating expenses increased by $27$223 million, or less than 1%, compared to fiscal 2023.2024. Operating margin for fiscal 20242025 was 11%12% compared to 4%11% for fiscal 2023.2024. Operating income was $1,827$2,109 million, a $1,206$282 million increase compared to fiscal 2023.2024. The increase in operating income was primarily attributable to thea impairmentprogram 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)wins and a net increase in volumes on certain programs, partially offset by an increase in general & administrative expenses and the completion of programs.

We generated approximately 87% of our total revenues from contracts with the U.S. government in both fiscal 20242025 and 2023 as compared to 86% of our total revenues from contracts with the U.S. government in fiscal 2022,2024, either as a prime contractor or a subcontractor to other contractors engaged in work for the U.S. government. Revenues under contracts with the DoDDoW and U.S. Intelligence Community, including subcontracts under which the DoDDoW or the U.S. Intelligence Community is the ultimate purchaser, represented approximately 48%, 49% and 44%48% of our total revenues for fiscal 2024, 20232025 and 2022,2024, 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.

Sales to customers in international markets represented approximately 8% of total revenues for fiscal 2024, as compared to 9%2025 and 8% of total revenues for fiscal 2023 and 2022, respectively.2024. 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.

The increase in revenues for fiscal 20242025 as compared to fiscal 2023,2024, was primarily attributable to program wins andwins, a net increase in volumes onand certain$60 programs,million recognized from the acquisition of Kudu Dynamics, partially offset by program completions and a net decrease in contract write-ups in the completioncurrent of certain contracts.year.

The increase in operating income for fiscal 20232025 as compared to fiscal 2022,2024, was primarily attributable to program wins and a net increase in volumes on certain programs,volumes, partially offset by program completions and a net decrease in contract write-ups in the completioncurrent of certain contracts.year.

The increase in operating lossrevenues for fiscal 20232025 as compared to fiscal 2022,2024, was primarily attributable to highera legalnet costs, increased expensesincrease in integrationwrite-ups andon restructuringcertain activities,programs primarily within the managed health services business, partially offset by thea impactnet ofdecrease foreignin payroll tax reserves.volumes.

Non-operating expense, net increased by $16$12 million for fiscal 20232025 as compared to fiscal 2022,2024, primarily duedriven toby a net increase in interest expense drivenon borrowings, partially offset by highera interestgain rateson andan refinancingimmaterial activities.divested business that was not aligned to the Company's long term strategy.

We had net bookings of $23.4$17.5 billion and $16.5$23.2 billion during fiscal 20242025 and 2023,2024, respectively. Net bookings represent the estimated amount of revenue to be earned in the future from funded and unfunded contract awards and modifications and unissued task orders on sole source IDIQ contracts that were received during the year, net of any adjustments to previously awarded backlog amounts. We calculate net bookings as the year’s ending backlog, plus the year’s revenues, less the prior year’s ending backlog and any impacts from foreign currency or acquisitions and divestitures.

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

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 Payment 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 3,2, 2025,2026, we had $943$1,108 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 2, 2026, and January 3, 2025, and December 29, 2023, there were no borrowings outstanding under any revolving credit facility.

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 2, 2026, and 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$1,019 million, $2,045$18 million and $545$2,045 million during fiscal 2024,2025, 20232024 and 2022,2023, respectively. The activity for fiscal 2025 included a prepayment on our senior unsecured term loan of $450 million and a $500 million payment to discharge the $500 million notes due May 2025. 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.

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 50,000 global employees, we pursue strategic growth across five pillars: spacedefense and maritimetech; energy infrastructure; digital modernization and cyber; mission softwareand digital solutions; and managed health services. Our customers include the U.S. Department of War (“DoW”), 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.

During the three and six months ended AprilJuly 3, 2026, and April 4, 2025, we generated approximately 86%83% and 87%85%, respectively, of total revenues from contracts with the U.S. government.government, as compared to 87% for both the three and six months ended July 4, 2025. 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.

Sales to customers in international markets represented approximately 9% and 8% of total revenues for the three and six months ended July 3, 2026, respectively, and as compared to 8% of total revenues for both the three and six months ended April 3, 2026, and AprilJuly 4, 2025. 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.

The increase in revenues and operating income for the three months ended AprilJuly 3, 2026, as compared to the three months ended AprilJuly 4, 2025, was primarily attributable to program wins, partially offset by the completion of certain contracts.

The decreaseincrease in operating lossrevenues for the threesix months ended AprilJuly 3, 2026, as compared to the threesix months ended AprilJuly 4, 2025, was primarily attributable to aprogram $15wins and $27 million insuranceof reimbursementincreased forrevenues legalrecognized costsfrom incurredthe prioracquisition toof fiscalSavanna 2026,Industries, Inc. ("Kudu Dynamics"), partially offset by anthe increasecompletion inof acquisitioncertain and integration costs.contracts.

Non-operating expense, net for the three months ended AprilJuly 3, 2026, was $79$63 million as compared to $52$53 million for the three months ended AprilJuly 4, 2025. The increase was primarily drivenattributable by a $23 million settlement loss from the buy-out of our UK defined benefit pension plan andto increased interest expense from the termination of our senior unsecured bridge loan facility and issuance of our $600 million and $800 million senior notes.

We recorded net bookings worth an estimated $3.3$4.9 billion and $8.2 billion during the three and six months ended AprilJuly 3, 2026, respectively, as compared to $2.1$3.9 billion and $6.0 billion for the three and six months ended AprilJuly 4, 2025.2025, respectively.

Backlog at AprilJuly 3, 2026, includes $371 millionamounts acquired throughas part of the Entrust transaction. As of March 27, 2026, the acquisition date, Entrust had $371 million of Entrustbacklog that was included within the Homeland reportable segment.

As of AprilJuly 3, 2026, we had $457$748 million in cash and cash equivalents. We have a senior unsecured revolving credit facility which can provide up to $1.5 billion in additional borrowing, if required.required, and a commercial paper program under which we may issue short-term unsecured commercial paper notes ("Commercial Paper Notes") not to exceed $1.5 billion, with maturities of up to 397 days from the date of issuance. As of AprilJuly 3, 2026, and January 2, 2026, there were no borrowings outstanding under the revolving credit facility.facility and no Commercial Paper Notes outstanding.

We had outstanding debt of $6.3$6.0 billion and $4.6 billion at AprilJuly 3, 2026, and January 2, 20262026, respectively. In March 2026, we issued and sold $600 million 4.10% and $800 million 5.00% senior unsecured notes maturing in March 2029 and March 2036, respectively. The annual interest rate is payable on a semi-annual basis. The proceeds from the notes were used to fund a portion of the consideration payable in connection with the acquisition of Entrust and for general corporate purposes.

We made $5 million and $529$10 million principal payments on our long-term debt during the three and six months ended AprilJuly 3, 20262026, respectively, and April$30 million and $559 million during the three and six months July 4, 2025, respectively. The activity for the threesix months ended AprilJuly 4, 2025, included a $500 million payment to discharge the $500 million notes due May 2025.

Our senior unsecured revolving credit facility, Commercial Paper Notes, senior unsecured term loan and notes outstanding as of AprilJuly 3, 2026, contain financial covenants and customary restrictive covenants. We were in compliance with all financial covenants as of AprilJuly 3, 2026.

We paid dividends of $55 million and $53$110 million during the three and six months ended AprilJuly 3, 2026, respectively, and April$52 million and $105 million for the three and six months ended July 4, 2025, respectively.

We made open market repurchases of our common stock for an aggregate purchase price of $200$66 million and $266 million during the three and six months ended AprilJuly 3, 2026.2026, respectively. During the three and six months ended AprilJuly 4, 2025, we did not make any open market repurchases; however, we repurchased $500 million of shares under an accelerated share repurchase agreement.agreement during the six months ended July 4, 2025.

During the three and six months ended AprilJuly 3, 2026, we invested $6$12 million and $18 million, respectively, in an investment fund as a limited partner,partner. In connection with this investment, we have committed to invest an additional $94$82 million over the next five years. We expect to fund this investment with cash on hand and cash generated through our operations.

Net cash provided by operating activities increased $243$307 million duringand $550 million for the three and six months ended AprilJuly 3, 2026, respectively when compared to the prior year quarter.year. The increaseincreases waswere primarily due to favorable changes in working capital.capital, excess tax payments made in the prior year and the timing of payroll and employee benefit payments.

Net cash used in investing activities increaseddecreased $2,337$276 million for the three months ended AprilJuly 3, 2026, when compared to the prior year quarter. The increase wasquarter primarily due to $2,338$285 million of net cash paid inrelated connection withto the acquisition of Entrust.Kudu Dynamics in the prior year quarter.

Net cash providedused byin financinginvesting activities increased $1,503$2,061 million for the threesix months ended AprilJuly 3, 2026, when compared to the prior year quarter.year. The increase was primarily due ato $2,338 million of cash paid in connection with the acquisition of Entrust, net increase of $1,216 million in cash inflows from debt activity, consisting of proceeds from debt issuances and payments for borrowings and debt issuance costs. The increase was also related to a $300 million net decrease in stock repurchases primarily attributable to the prior year accelerated share repurchase activities.acquired.

Additionally, Leidos, Inc. has fully and unconditionally guaranteed debt securities of Leidos Holding,Holdings, Inc. that were issued pursuant to transactions that programs were not registered under the Securities Act of 1933, as amended. The following is a list of unregistered debt securities guaranteed by Leidos, Inc.