The Henry Fund Henry B. Tippie College of Business Megann Bohlken [[email protected]] LEIDOS HOLDINGS INC. (LDOS) September 13, 2020 Information Technology – Defense Contractor Stock Rating Buy Investment Thesis Target Price $120-128 Henry Fund DCF $123 We expect Leidos Holdings to have a strong year based on their recent Henry Fund DDM $130 contract wins, high percentage of funded backlog compared to peers, and Relative Multiple $59 positive recent capital structure changes. With these factors in mind, and a Price Data 37-47% upside for Leidos Holdings, we are recommending a buy rating. Current Price $87.17 52wk Range $68.00 – 125.84 Drivers of Thesis Consensus 1yr Target $117.92 • Leidos Holdings has been able to maintain semi-normal business Key Statistics functions through the midst of the COVID-19 pandemic and continue to Market Cap (B) $12.58 add new contracts to their portfolio boosting confidence in the Shares Outstanding (M) 143 company’s ability to remain agile.1 Institutional Ownership 78.63% Five Year Beta 1.11 • The company has the highest percentage of funded backlog compared to Dividend Yield 1.50% peers. This represents Leidos capitalizing on current contracts and Price/Earnings (TTM) 20.61 looking to exceed performance expectations for customers. Price/Earnings (FY1) 13.70 Price/Sales (TTM) 1.08 • Leidos has made positive capital structure movements by paying down Price/Book (mrq) 3.50 current debt and refinancing some future loans outstanding in order to maintain an investment grade credit rating. 1 Profitability Operating Margin 8.20% • Recent acquisitions of Dynetics and L3Harris’s security detection and Pretax Profit Margin 7.80% automation business add to the portfolio of offerings that Leidos Return on Assets (TTM) 5.65% presents to customers. 1 Return on Equity (TTM) 17.72% Source: Yahoo Fin & Bloomberg Risks to Thesis LDOS Industry (Median) • Leidos receives 87% of revenue from the U.S. government which could 25 prove to be an issue if defense related spending cuts began. 1 20 • 19.5 19.0 The upcoming presidential election will have a significant impact on 15 18.4 17.7 defense spending and could cause issues moving forward for the 16.5 company. 10 12.3 Earnings Estimates Source: Nasdaq.com 5 Year 2017 2018 2019 2020E 2021E 2022E EPS $2.41 $3.85 $4.66 $5.44 $6.28 $7.12 0 HF Est. X X X $6.21 $6.61 $7.05 P/E ROE EV/EBITDA growth 0.84% 59.75% 21.04% 33.34% 6.33% 6.65% 12 Month Performance Company Description

40% LDOS S&P 500 Leidos Holdings competes within the Defense Contractors industry which is a $121Bn industry. 20% The company competes through three major business segments: Defense Solutions, Civil 0% Solutions, and Health Solutions. Leidos receives 87% of total revenue from the United States government and 92% of total revenue within the -20% United States. The company competes with Source: Yahoo Finance cutting edge technology as a result of extensive -40% S O N D J F M A M J J A R&D expenditures.

Important disclosures appear on the last page of this report.

COMPANY DESCRIPTION Department of Defense (DoD) and Military services. Products related to airborne and ground ISR, maritime Leidos Holdings operates through three major business systems, electronic warfare systems, distributed segments including defense, civil, and health solutions.1 sensor systems, autonomous systems, and command These segments offer a wide array of scientific, control. engineering, and technical services which will be detailed • Digital Transformation and Integrated Systems offer below. software development capabilities for information systems. Customers in this area include the U.S. and 2019 Total Revenue allied intelligence community as well as the Australian department of defense. These products help to avoid cyber related threats. Health • The Global Services segment is the service side of 18% these products which includes operational support, security, linguistics, and training. Defense 48% Civil Solutions

Civil We forecast 2020 civil solutions to grow at 3%. Civil 34% solutions make up 34% of the company’s total revenue. Private sector industry growth is driving the projections for Leidos civil segment while there is still public government Data Source: LDOS 10-k 2019 exposure. Companies have started to pay external experts Only 8% of Leidos Holdings’ revenue is from outside the in the scientific research and development industry to United States. Outside of the U.S., Leidos recognizes 5.3% conduct research on their behalf. This could boost the civil of their revenue from the United Kingdom and 2.7% of solutions segment for Leidos if companies outsource their revenue from Australia. As a percentage of total research and development. This positive momentum is revenue, foreign revenue has declined from 2018 to 2019.2 partially offset by lower expected external spending by private companies in 2020 and likely 2021. 1

Defense Solutions The civil solutions segment includes aviation, security, We forecast 2020 defense solutions revenue to grow at digital transformation, federal environment and 5%. Defense solutions makes up 48% of total revenue for infrastructure, and logistics products. Leidos Holdings.1 The defense solutions segment is • In the aviation industry, Leidos serves the Air forecasted to recognize 5% growth in 2020 due to Navigation Service Providers including the FAA, the emphasis on defense spending during the Trump TSA, and airport operators. Leidos’ air traffic control administration. This is a key factor to monitor moving systems are used in Air Navigation Service Provider forward as the upcoming election will impact the outlook facilities that control a majority of the world’s air for the next four years regarding defense spending. The traffic. expectation of high growth in defense spending comes • The company also provides security products including into question if Joe Biden wins the presidency in vehicle and cargo inspection systems. Leidos boasts November as it is unknown what a new president would rapid scanning of vehicles providing a high-quality propose in terms of a defense budget. image using low radiation doses. This system also uses less space and processes higher volumes of vehicles According to the company’s most recent 10-k, the defense than other scanning systems. This technology is also solutions segment offers solutions used by the United used in airline baggage checking. States Intelligence Community, military commands, and • Digital transformation systems include cloud other government or commercial customers.1 computing, mobility, modernization, DevOps, help • Intelligence Surveillance and Reconnaissance (ISR) desk operations, and digital workplace enablement. products include technology that help the U.S. Customers for these products include the Army Corp

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of Engineers, National Aeronautics and Space Leidos’ wide range of research and development in Administration, and the Department of Justice. biomedical related subjects as well as information • Federal environment and infrastructure products are technology. related to the Department of Energy’s mission as well as civilian agencies. Cost Structure Analysis Health Solutions Research and development is a large part of what Leidos does but it is not a specified account on the income The health solutions segment is forecasted to grow at 6% statement for the company. This is because Leidos in 2020. Health Solutions makes up 18% of total income for includes these expenses in their cost of revenues. Leidos Holdings. Health Solutions is projected to have the Research and development is largely conducted through highest growth in the upcoming few years as a result of customer funded R&D funds. The cost of revenue is growing interest in new and innovative technology related projected to stay relatively close to the historical average to healthcare. IBIS World notes that close to half of federal of approximately 85% of total sales with the exception of government spending on research and development is 2020. COVID-19 related impacts are expected to reduce administered through the Department of Health and margins and temporarily hurt the overall business. This is Human Services. The aging population, and now COVID-19 shown in the Margin Analysis figure below. related research, will likely present research opportunities for technological investments in the future. This is driving Gross Margin the 6% projected growth for 2020. This projection would Margin Analysis have likely been higher but is being offset by expected Operating Margin 1 20.00% COVID-19 related cuts to federal spending this year. Net income Margin

15.00% The health solutions segment includes complex systems integration, managed health services, digital 10.00% transformation, and life sciences research and development. 5.00% • Complex Systems Integration involves deploying medical records systems to DoD hospitals and 0.00% treatment facilities worldwide. Leidos software integrates electronic health care records and dental records as well as archiving communications. The Data Source: HF Forecast systems are used by the VA National Institute of Health, the DoD, and other government customers ESG Analysis along with commercial grade customers as well. • Managed Health Services includes deploying care Leidos notes in their 10-k that the company has some delivery services including medical disability exams for operations that involve the use, handling, or disposal of the VA. hazardous substances. The company complies with • Digital transformation services involve Leidos federal, state, and local laws and regulations. 1 deploying IT strategic planning, outsourcing and management of large-scale data centers, software Leidos made a point to include a call to action against racial system transformation, cloud migration and injustices within the United States during their most recent modernization, and the digitization of medical earnings call along with posting similar messages on their records. social media platforms. The company is partnering with • The life sciences research and development segment the Equal Justice Initiative by donating and raising serves the National Institutes of Health, Center for awareness. The Equal Justice Initiative fights against racial Disease Control, Army Medical Research community, injustice and poverty and promotes equal treatment commercial biotech companies, and the Frederick within the criminal justice system. The company is National Laboratory for Cancer Research through launching a diversity and inclusion council internally as well. 3

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RECENT DEVELOPMENTS The company estimates that COVID-19 adversely impacted revenues for the three and six months ended July 3, 2020 July 30th Earnings Release by $132MM and $153MM, respectively. Similarly, this translated to operating income impacts of $68MM and Leidos had a very positive second quarter even through $73MM, respectively. While this is true, the company does the midst of the COVID-19 pandemic. Leidos reported not plan for major adverse impacts in the upcoming $1.55 EPS while the estimated quarterly EPS was $1.07 quarters and has increased recruiting and talent representing a surprise of almost 45%. This quarter’s acquisition activities representing growth of 8% compared earnings are up 34% over 2019 Q2 earnings. 3 to Q1 2020. This does not include M&A related workforce additions. 3 Leidos missed revenue expectations by 3.2% in the second quarter. Expected revenue was $3.0MM and the company The company has experienced delays on certain contracts came in at $2.4MM. 3 as a result of standby leave absences which has caused a portion of the contracts to be less profitable. Leidos is The company expects minimum overall impacts moving seeking equitable adjustments to the contract prices and forward as the fiscal year 2021 budget is already set under reimbursement of the costs. The U.S. government is the Bipartisan Budget Agreement. The DoD also has allowed, but not required, to reimburse contractors at the $125Bn in unobligated dollars which could theoretically be minimum applicable contract billing rate according to allocated to Leidos in the case that their budgets are cut. Section 3610 of the CARES Act. 3 This minimizes the negative impact of possible budget cuts to defense spending. 3 Recent Contracts

The company recently won contracts with Edenborough Leidos relies on winning contracts with the United States and Munich airports which will promote their business Government to gain revenue and market share in their within the airport solutions security industry and benefit industry. The company noted a few major contracts that 3 the civil solutions segment of the business. were won this quarter.

Revenue grew 6.8% but contracted 3% organically. The The first one was the Traveler Processing and Vetting recent acquisition of Dynetics, Inc. and L3Harris Software contract by the US Customs and Border Technologies security detection and automation business Protection. The company will provide software helped top line revenue but was partially offset by COVID- development services to support this mission. The 3 19 related contractions. contract has a one-year base period followed by four one- year option periods with a total estimated value of Current Henry Fund assumptions are more positive than $960MM. 3 company guidance and the street consensus. This is due to the bullish outlook on the company’s ability to grow The company also was awarded the Enterprise Standard organically and to continue to make strategic investments Architecture V (ESA V) to provide managed IT services for through acquisitions. The company has performed well the Department of Justice and the Bureau of Alcohol, through the pandemic and is expected to continue to Tobacco, Firearms, and Explosives. The single award maintain industry leading metrics related to their new hybrid task order has one 10-month, and two one-year technologies and funded backlog. base periods of performance followed by six one-year option periods. It includes a ceiling value not to exceed COVID-19 Impact $850 million, if all options are exercised.3

While it was a difficult quarter, the CFO notes that the Finally, the Dynetics subsidiary was awarded a sole-source company’s second quarter performance represents their contract for the production and sustainment of foreign agility as a company. Due to the critical nature of the work simulators known as the Laboratory Intelligence Validated that Leidos produces, all Leidos facilities have remained Emulator (LIVE) contract. This contract has an estimated open throughout the pandemic. The company has value of $356MM over the next ten years. 3 implemented safe workforce plans to protect the health of the returning workforce. 3

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MARKETS AND COMPETITION World is expecting steady growth in both industry revenue and research and development expenditure moving According to FactSet, Leidos Holdings receives 82.0% of forward through 2025.4 Again, these were expectations as revenue from the defense contractor’s industry. This is the of February 2020 and they do not include the impact of revenue received in the Defense and Civil segments. This COVID-19. We believe these forecasts are accurate with industry is $121Bn and LDOS holds approximately 7.5% of the exception of 2020 where we believe industry revenue it. The top five players in the industry hold 75.5% of the growth and potential contracts could be put on hold. industry.2 Peer Comparisons Leidos falls into the scientific research and development in the United States according to IBIS World. IBIS World Peers within Leidos’ industry include Booz Allen Hamilton, projects the industry to grow through 2025 based on Science Application, CACI International Inc, ManTech strong research and development funding. Industry International, and Perspecta. revenue is forecast to increase an annualized 4.9% over the next five years. Federal grants and contracts for Booz Allen Hamilton (BAH) defense research are expected to rise.4 IBIS World made Booz Allen Hamilton (BAH) is a management and this projection in February 2020 before the COVID-19 technology consulting firm. The company’s solutions pandemic was impacting the United States economy. We include analytics, digital solutions, engineering, and cyber believe the industry will likely experience a contraction in security related expertise. 5 available contracts and value of contracts funded for 2020 and potentially 2021. We do not believe this contraction According to FactSet, the company recognizes 52.2% of will adversely impact Leidos past 2021 as available their revenue from Government IT Services and 47.8% contracts will return to normal growth levels as previously from Defense Contracting. BAH holds 3.0% of the defense projected by IBIS World. contracting industry which is less than Leidos.2

IBIS World notes that there are high barriers to entry in the Like Leidos, BAH recognizes 96.5% of their total revenue scientific research and development due to the high from the United States. 2 research and development costs that are required from the companies. There is low revenue volatility, and it is a Science Application (SAIC) mature industry. 4 Science Application International Corp (SAIC) is a provider of technical, engineering, and enterprise information Scientific Research and Development Industry technology services. 6 10% According to FactSet, the company receives 100% of their 8% total revenue from Aerospace and Defense IT Services. 6% This is closely related to Leidos’ industry. The Aerospace and Defense IT Services industry is much smaller at only 4% $11.2Bn. This is compared to the Defense Contractor’s industry which is $121Bn. SAIC holds 57.0% of the 2% Aerospace and Defense IT Services industry. SAIC 2 0% recognizes 100% of their revenue in the United States. 2017 2018 2019 2020 2021 2022 2023 2024 2025 CACI International Inc (CACI) Revenue Research and development expenditure CACI International Inc (CACI) supports customers through Data Source: IBIS World information solutions and services in support of national security missions and government transformation for A key driver for the scientific research and development 7 industry is research and development expenditure intelligence, defense, and federal civilian customers. percentage growth which is shown in the figure above. IBIS

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The company receives 100% of their total revenue from Leidos is the largest competitor in this peer group with the the Government IT Services industry. CACI holds 36.1% of highest market capitalization. The company is also above this industry. This industry is closely related to the Defense the average price to earnings compared to the peer group. Contractors industry that Leidos is in, but it is much smaller The average is 18.5. Leidos is also slightly above the at only $15.8Bn. CACI recognizes 97.1% of revenue in the average price to sales ratio which is 0.88. These metrics United States. 2 indicate that the company is overpriced compared to peers. ManTech International (MANT) The company is slightly above the average when looking at ManTech International (MANT) offers information the enterprise value to EBITDA metric as well. The technology and technical services solutions. The company company also records the lowest gross margin in the peer also offers cyber security, software and systems group. This is likely due some companies in the peer group development, enterprise information technology, multi- recording research and development expenses separately disciplines intelligence, program protections and mission from their cost of revenue. This artificially inflates the assurance, system engineering, and related consulting gross margin when comparing. services. 8 Funded Backlog ManTech receives 100% of total revenue from the Aerospace and Defense IT services segment. ManTech holds 20.0% of this industry. MANT recognizes 99.0% of % Funded Backlog total revenue came from the United States. 2 25.00%

Perspecta (PRSP) 20.00%

Perspecta Inc, (PRSP) is an information technology services 15.00% company that mainly supports government customers at 10.00% the federal, state, and local level. Perspecta has similar business segments to Leidos: Defense and Intelligence, 5.00% and Civilian and Health Care segments. PRSP has only been 0.00% publicly traded since 2018. 9 LDOS BAH SAIC CACI MANT PRSP

Perspecta receives 100% of revenue from the Government Data Source: Company 10-k’s1,5,6,7,8,9 IT Services Industry. PRSP holds 28.3% of the industry. The company receives 100% of total revenue from the United Based on the peers most recent 10-k reports, Leidos States. 2 holdings has the highest funded backlog as a percentage of total backlog. In the defense contractors industry, this is Peer Analysis an extremely important metric to analyze. A backlog is the company’s estimate of the remaining future revenue from Mkt Cap P/E P/S EV/ Gross existing signed contracts assuming the exercise of all (Billions) EBITDA Margin options. The funded backlog is the portion of the backlog LDOS $12.8 20.0 0.9 12.9 13.0% for which funding is currently appropriated and allocated BAH $11.6 19.2 1.0 12.8 22.7% to the contract by the purchasing agency or otherwise SAIC $4.5 21.2 0.7 13.1 9.5% authorized for payment by the customer upon completion CACI $5.5 17.1 0.9 11.9 31.9% of a specified portion of work. MANT $2.8 24.4 1.1 13.0 14.2% PRSP $3.1 9.26 0.7 7.4 16.3% Leidos has the highest percentage of funded backlog Data Source: FactSet compared to peers. This represents Leidos being the best positioned within the peer group to receive payments on Important metrics are represented in the figure above their contracts outstanding. including market capitalization, price/earnings, price/sales, enterprise value/EBITDA, and gross margin.

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ECONOMIC OUTLOOK of the labor force collecting unemployment from the government. If the government supports too many people United States Treasury Yield for too long, there might be more future cuts to government spending. This could mean cuts to the The low interest rate environment due to extremely low defense budget, and thus, less available money for treasury yields contributes to higher spending on R&D. The contracts that Leidos could compete for. The opportunity cost of R&D spending is low enough that unemployment rate has since dropped to 8.4% as of companies are encouraged to take risks. This type of August 2020 representing the return to a more normal environment helps companies in Leidos’ industry. 4 level of unemployment. This is still far from the lowest unemployment which was 3.5% in February 2020. 10 The treasury yield curve is shown here below. The Henry Fund has no expectation of rising interest rates in the near future. VALUATION Revenue Assumptions

Shown below is the revenue assumptions from 2020 through 2029. Revenue is expected to grow for all segments in 2020 as the firm has been able to withstand the pandemic through acquisition related growth in 2020. Non-acquisition related growth is expected past 2021 as future delays are not currently expected within contracts that Leidos has.

Data Source: FactSet Forecasted Revenue Growth United States Unemployment 7.00% Defense 6.00% 5.00% Civil 4.00% Health 3.00% 2.00% 1.00% 0.00%

Data Source: HF Forecast

Below is the aggregate revenue growth. Both the segment specific and the aggregate growth forecasts mean reversion in the future to grow at the expected rate of the economy at 2% through the forecast horizon. See the company description for a more thorough explanation of Data Source: Bureau of Labor Statistics revenue forecasts. The United States unemployment rate reached a peak of

14.7% in April 2020. This has severe adverse impacts on the United States economy. This represents higher levels

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Total Revenue Growth Debt Outstanding & Capital Expenditures 5.00% 4.00% Debt Maturity Schedule 3.00% 3000 2500 2.00% 2000 1.00% 1500 0.00% 1000 500 0

Data Source: HF Forecast EPS and Dividends Data Source: FactSet The debt maturity schedule shown above includes loans EPS and Dividends and notes/bonds outstanding. The only maturity that is 10.00 impacted by loans is in 2025. This is primarily term loans outstanding due in 2025 with a few notes maturities that 8.00 year as well. The company held approximately 21% debt 6.00 and 79% equity at the end of 2019. The company has since 4.00 taken out slightly more debt during the second quarter of 2.00 2020 and paid down some current debt. - The company is looking to reduce net leverage to a target of 3.0x. At the end of the most recent quarter the company Earnings Per Share Dividends Per Share stood at 3.4x. The company refinanced $1.75Bn of loans associated with the acquisitions of Dynetics and L3Harris security and automation businesses. The company also Data Source: HF Forecast paid down approximately $226MM in debt. The company can adequately pay down debt that is outstanding and is Shown above is Leidos’ earnings per share and dividend looking to further reduce leverage. forecast. Earnings per share is expected to drop in 2020 due to higher expenses as a percentage of revenue due to Capital expenditure in 2019 was $121MM. We have COVID-19 related delays. Earnings per share is expected to forecast capital expenditure in 2020 to be $123MM begin rebounding in 2021 with steady growth moving growing slowly thereafter through the rest of the forecast forward. horizon. The dividend forecast is expected to remain relatively flat due to historical dividend behavior. The company does not Models raise their dividend often and they are not expected to Three models were completed in the analysis of Leidos start significantly increasing their dividend in the future. Holdings: a discounted cash flow model (DCF), dividend discount model (DDM), and a relative valuation model. The DCF and DDM models have the most weight in them as the relative valuation model was impacted by low earnings being forecasted in 2020 and 2021.

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Relative Valuation up every two years only to consider the fact that Leidos is a net share repurchaser and this would maintain more consistent dividend related cash flows for the company. Conclusion

The company has strong financials and is working on further deleveraging their balance sheet. The company can adequately cover expenses and interest payments in the event that contracts are further delayed. We do not forecast any future delays and expect the company to maintain their current contract schedule. The high percentage of funded backlog is encouraging to see as it represents expected revenue and boosts confidence in the

company’s near future ability to maintain their normal Data Source: HF Model functions. These positive factors contribute to the confidence we have in the model discussed above. The The implied relative value of the stock for 2020 is only most weight is on the discounted cash flow and dividend $59.37 due to the low earnings per share forecasts for the discount models. This contributes to the target price range next two years. This model does not have weight behind it of $120-128. as it does not consider earnings forecasts beyond two years from now and as a result, is artificially low. Earnings forecasts for the competitors listed above may not be fully updated to consider the impact of COVID-19 related KEYS TO MONITOR expenses contributing to lower earnings. The stock is currently trading at $87. Leidos Holdings received 87% of their total revenue from the US government in 2019. This is a high concentration of Discounted Cash Flow revenue to receive from one customer that has volatility as the fiscal budget is constantly changing based on the The discounted cash flow model for this company returns bipartisan review. The government’s budget is revisited a price of $123. The DCF model matches the economic every year where new cuts are made. This could eventually profit model as well. These models include a 5.98% mean cuts could be made to contracts that would be weighted average cost of capital and a 6.32% cost of available to Leidos. equity. The WACC is based on a 6.32% cost of equity which was calculated using the ten-year treasury as the risk-free The high percentage of revenue from the government is rate at 0.67%, a 1.26 beta, and an equity risk premium of also positive as the government does not have credit risk 5.15%. The equity risk premium is the Henry Fund and is not expected to default on their contracts as a result consensus. The cost of debt was pulled from FactSet based of being a AAA rated entity. It will be imperative to closely on an extrapolated company specific yield curve. The cost monitor future spending cuts by the government— of debt used was 4.74%. These models are able to drill especially defense related spending cuts as this could down to the intrinsic value of the stock using operating severely impact Leidos. profits and assets. These better represent sustainable parts of the business and are able to use only those to forecast the current stock price.

Dividend Discount Model

The dividend discount model yields a price of $130. This is based on the dividend shown in the section above that has a slow growth. The company does not have a history of dramatically raising their dividend. The dividend is stepped

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REFERENCES

1. LDOS 2019 10-k & 10-Q 2. FactSet 3. Motley Fool https://www.fool.com/earnings/call- transcripts/2020/08/04/leidos-holdings-inc-ldos-q2- 2020-earnings-call-tra.aspx 4. IBIS World (Industry 54171) 5. BAH 2019 10-k 6. SAIC 2019 10-k 7. CACI 2019 10-k 8. MANT 2019 10-k 9. PRSP 2019 10-k 10. Bureau of Labor Statistics https:/www.bls.gov/charts/employment- situation/civilian-unemployment-rate.htm

Data Sources

1. FactSet 2. Bloomberg 3. Nasdaq.com 4. Yahoo Finance 5. Mergent

IMPORTANT DISCLAIMER

Henry Fund reports are created by graduate students enrolled in the Applied Securities Management program at the University of Iowa’s Tippie College of Business. These reports provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of our students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold an investment position in the companies mentioned in this report.

Page 10 Leidos Holdings Inc Revenue Decomposition (in millions)

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E Defense 4,989 4,966 5,367 5,635 5,804 5,979 6,158 6,343 6,469 6,599 6,731 6,865 7,003 % of total revenue 49.06% 48.71% 48.38% 48.61% 48.35% 48.17% 48.15% 48.21% 48.12% 48.03% 48.03% 48.03% 48.03% % growth 29.82% -0.46% 8.07% 5.00% 3.00% 3.00% 3.00% 3.00% 2.00% 2.00% 2.00% 2.00% 2.00% Civil 3,379 3,411 3,729 3,841 3,956 4,075 4,156 4,239 4,324 4,411 4,499 4,589 4,681 % of total revenue 33.23% 33.46% 33.61% 33.13% 32.95% 32.83% 32.50% 32.22% 32.16% 32.10% 32.10% 32.10% 32.10% % growth 62.30% 0.95% 9.32% 3.00% 3.00% 3.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% Health 1,802 1,817 1,998 2,118 2,245 2,357 2,475 2,574 2,651 2,731 2,785 2,841 2,898 % of total revenue 17.72% 17.82% 18.01% 18.27% 18.70% 18.99% 19.35% 19.57% 19.72% 19.87% 19.87% 19.87% 19.87% % growth 61.32% 0.83% 9.96% 6.00% 6.00% 5.00% 5.00% 4.00% 3.00% 3.00% 2.00% 2.00% 2.00% Total 10,170 10,194 11,094 11,594 12,005 12,411 12,789 13,156 13,445 13,740 14,015 14,295 14,581 % growth 44.40% 0.24% 8.83% 4.51% 3.55% 3.37% 3.05% 2.87% 2.20% 2.20% 2.00% 2.00% 2.00% Leidos Holdings Inc Income Statement (in millions)

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E Revenues 10,170 10,194 11,094 11,594 12,005 12,411 12,789 13,156 13,445 13,740 14,015 14,295 14,581 Cost of revenues 8,587 8,433 9,312 10,087 10,325 10,425 10,743 11,051 11,294 11,542 11,773 12,008 12,248 Depreciation and amortization 336 257 234 75 88 100 113 126 139 152 166 179 193 Gross profit 1,247 1,504 1,548 1,432 1,593 1,885 1,933 1,979 2,012 2,046 2,077 2,108 2,140 Selling, general & administrative expenses 552 729 689 696 720 745 767 789 807 824 841 858 875 Bad debt expense 10 - (40) ------Acquisition, integration & restructuring costs 102 37 5 ------Goodwill impairment charges ------Asset impairment charges - 7 ------Restructuring expenses 37 ------Separation transaction expenses ------Equity earnings of non-consolidated subsidiaries (13) (18) (18) ------Operating income (loss) 559 749 912 736 873 1,141 1,166 1,190 1,206 1,222 1,236 1,250 1,265 Interest expense, net (140) (138) (133) (159) (162) (164) (164) (166) (166) (165) (163) (160) (156) Other income (expense), net (26) (1) 87 ------Income before income taxes 393 610 866 577 711 977 1,002 1,024 1,039 1,056 1,072 1,090 1,109 Income tax expense 29 28 196 127 156 215 220 225 229 232 236 240 244 Net income (loss) 364 582 670 450 554 762 781 799 811 824 837 850 865 Income (loss) from discontinued operations ------Less: net income (loss) attributable to non-controlling interest 2 (1) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) Net income attributable to common stockholders 366 581 667 447 551 759 778 796 808 821 834 847 862

Weighted average shares outstanding - basic 152 151 143 139 135 130 125 121 117 113 109 105 102 Net income (loss) per share - basic 2.41 3.85 4.66 3.22 4.09 5.84 6.21 6.58 6.92 7.28 7.65 8.04 8.46 Cash dividend per common share 1.28 1.28 1.32 1.36 1.36 1.38 1.38 1.40 1.40 1.42 1.42 1.44 1.44 Leidos Holdings Inc Balance Sheet (in millions)

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E Cash & cash equivalents 390 327 668 644 685 895 1,126 1,298 1,473 1,663 1,869 2,089 2,329 Receivables, net 1,831 1,877 1,734 1,855 1,921 1,986 2,046 2,105 2,151 2,198 2,242 2,287 2,333 Other current assets 453 543 410 464 480 496 512 526 538 550 561 572 583 Assets held for sale - 92 ------Assets of discontinued operations ------Total current assets 2,674 2,839 2,812 2,963 3,086 3,377 3,684 3,929 4,162 4,411 4,672 4,948 5,245 Property, plant & equipment, gross 546 586 630 753 877 1,003 1,130 1,259 1,390 1,522 1,656 1,792 1,930 Less: accumulated depreciation & amortization 314 349 343 418 506 606 719 845 984 1,136 1,302 1,481 1,674 Property, plant & equipment, net 232 237 287 334 371 396 411 414 406 386 354 311 256 Intangible assets, net 856 652 530 400 270 140 10 ------Goodwill 4,974 4,860 4,912 4,912 4,912 4,912 4,912 4,912 4,912 4,912 4,912 4,912 4,912 Operating lease right-of-use assets, net - - 400 466 517 552 572 577 565 538 494 434 357 Other assets 75 156 200 212 219 227 234 240 245 251 256 261 266 Total assets 8,990 8,770 9,367 9,287 9,375 9,604 9,823 10,072 10,290 10,498 10,688 10,866 11,036 Accrued liabilities 747 650 822 846 876 906 934 960 981 1,003 1,023 1,044 1,064 Accounts payable 557 547 592 697 721 746 768 791 808 826 842 859 876 Deferred revenue 293 276 400 406 420 434 448 460 471 481 491 500 510 Tax indemnity liability 23 ------Provision for loss contracts 19 ------Other accounts payable & accrued liabilities - 3 23 ------Accrued vacation 236 225 232 291 302 312 321 331 338 345 352 359 366 Salaries, bonuses & amounts withheld from employees' 245 compensation 248 203 232 240 248 256 263 269 275 280 286 292 Long-term debt, current portion 55 72 61 60 60 60 60 61 61 61 61 61 60 Liabilities held for sale - 23 ------Liabilities of discontinued operations ------Total current liabilities 2,202 2,059 2,333 2,532 2,620 2,706 2,787 2,866 2,928 2,991 3,049 3,109 3,169 Long-term debt 3,056 3,052 2,925 2,924 2,940 2,946 2,942 2,968 2,983 2,989 2,983 2,969 2,945 Operating lease liabilities - - 326 380 421 450 467 470 461 438 403 353 291 Deferred tax liabilities 220 170 184 ------Other long-term liabilities 15 178 182 186 192 199 205 210 215 220 224 229 233 Total Liabilities 5,607 5,459 5,950 6,021 6,173 6,301 6,400 6,515 6,587 6,638 6,660 6,660 6,639 Additional paid-in capital 3,344 2,966 2,587 2,587 2,587 2,587 2,587 2,587 2,587 2,587 2,587 2,587 2,587 Accumulated earnings (deficit) (7) 372 896 748 687 791 914 1,051 1,201 1,360 1,531 1,712 1,906 Accumulated other comprehensive income (loss) 33 (30) (70) (70) (70) (70) (70) (70) (70) (70) (70) (70) (70) Total Leidos Holdings, Inc. stockholders' equity 3,370 3,308 3,413 3,265 3,204 3,308 3,431 3,568 3,718 3,877 4,048 4,229 4,423 Non-controlling interest 13 3 4 1 (2) (5) (8) (11) (14) (17) (20) (23) (26) Total equity 3,383 3,311 3,417 3,266 3,202 3,303 3,423 3,557 3,704 3,860 4,028 4,206 4,397

Check ------Leidos Holdings Inc Historical Cash Flow Statement (in millions)

Fiscal Years Ending Dec. 31 2014 2015 2016 2017 2018 2019 Net income (loss) -323 242 246 364 582 670 Loss (gain) on sale of businesses ------88 Loss (income) from discontinued operations -7 1 - - - - Depreciation & amortization 62 41 122 336 257 234 Amortization of equity method investments - - - 14 10 11 Stock-based compensation 42 30 35 43 44 52 Goodwill impairment charges 486 - - - - - Asset impairment charges 81 33 4 - 7 - Promissory note impairment - - - 33 - - Restructuring charges, net 3 3 - - - - Loss (gain) on sale of real estate - -82 - - - - Bad debt expense 5 3 - 10 - 12 Non-cash interest expense (income) - - - 12 6 -10 Other adjustments - - - 9 2 2 Receivables 162 -19 123 -191 -58 116 Other current assets -12 3 -101 -76 -73 -44 Income taxes receivable/payable -87 55 - - - 34 Other long-term assets ------49 Deferred income taxes 56 26 - - - 18 Other assets 2 -46 - - - - Accounts payable & accrued liabilities -43 102 -25 152 -46 116 Accrued payroll & employee benefits -21 5 26 8 -12 -29 Deferred income taxes & income taxes receivable/payable 0 0 36 -151 -39 - Other long-term assets/liabilities - - - - 88 - Other long-term liabilities -10 2 -20 -37 - -53 Net cash flows from operating activities 396 399 446 526 768 992 Payments for property, equipment & software -29 -27 -29 -81 -73 -121 Acquisitions of businesses - -2 25 - -81 -94 Payments on accrued purchase price related to prior acquisition - -13 - - - - Net proceeds from sale of assets - 79 3 8 - 96 Proceeds from disposition of businesses - 27 23 - - 178 Collections on promissory notes - - 4 - 40 5 Proceeds from U.S. Treasury cash grant 80 - - - - - Other investing activities - - - 2 - 1 Net cash flows from investing activities 51 64 26 -71 -114 65 Payments of long-term debt -177 -39 -277 -209 -59 -80 Proceeds from (payments on) real estate financing transaction - -8 - - - - Proceeds from debt issuance - - 690 - - - Payments for debt issuance costs - - -30 - - - Payments for debt issuance & modification costs - - - -4 -8 - Proceeds from issuances of stock 7 6 25 13 14 27 Repurchases of stock -215 - - - - - Repurchases of stock & other - -118 -24 -31 -438 -458 Special cash dividend payment - - -993 - - - Dividend payments -95 -93 -142 -198 -198 -198 Payment of tax indemnification liability - - - - -23 - Proceeds from real estate financing transaction - - - - 14 - Payments for non-controlling interest acquired - - - - -8 - Other financing activities 2 3 - - -1 - Net cash flows from financing activities -478 -249 -751 -429 -707 -709 Increase (decrease) in cash & cash equivalents from continuing operations -31 214 -279 26 -53 348 Increase (decrease) in cash & cash equivalents from discontinued operations 44 -1 -1 - - - Increase (decrease) in cash & cash equivalents 13 213 -280 26 -53 348 Cash & cash equivalents at beginning of year 430 443 656 396 422 369 Cash & cash equivalents at end of year 443 656 376 422 369 717 Cash paid for interest 74 50 90 133 133 172 Cash paid for income taxes, net of refunds 55 31 47 214 70 142 Leidos Holdings Inc Forecasted Cash Flow Statement (in millions)

Fiscal Years Ending Dec. 31 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E Net Income 447 551 759 778 796 808 821 834 847 862 Depreciation 75 88 100 113 126 139 152 166 179 193 Change in Accts receivable -121 -66 -65 -61 -59 -46 -47 -44 -45 -46 Change in Other current assets -54 -16 -16 -15 -15 -12 -12 -11 -11 -11 Change in Deferred income taxes ------Change in Other assets -12 -8 -7 -7 -7 -5 -5 -5 -5 -5 Change in Accrued liabilities 24 30 30 28 27 21 22 20 20 21 Change in Accounts payable 105 25 24 23 22 17 18 17 17 17 Change in Deferred revenue 6 14 14 13 13 10 10 10 10 10 Change in Other accounts payable and accrued liabilities -23 0 0 0 0 0 0 0 0 0 Change in Accrued vacation 59 10 10 10 9 7 7 7 7 7 Change in Salaries, bonuses & amounts withheld from employees' compensation 29 8 8 8 7 6 6 5 6 6 Change in Deferred tax liabilities -184 0 0 0 0 0 0 0 0 0 Change in other long term liabilities 4 7 6 6 6 5 5 4 4 5 Net Cash Flows From Operating Activities 355 643 864 895 926 950 977 1002 1029 1058 Change in operating lease assets -66 -51 -36 -20 -4 11 28 44 60 77 Common stock dividends paid -189 -183 -179 -173 -169 -163 -160 -155 -152 -147 Common stock repurchased -464 -470 -476 -482 -489 -495 -501 -508 -514 -521 Common stock issued 58 41 0 0 0 0 0 0 0 0 Change in Long-term debt (current portion) -1 0 0 0 1 0 0 0 0 0 Change in Long-term debt -1 16 7 -4 26 15 6 -5 -14 -24 Change in Operating lease liabilities 54 41 29 16 4 -9 -22 -36 -49 -63 Net Cash Flows From Financing Activities -610 -605 -655 -663 -632 -641 -650 -660 -670 -678 Additions to PP&E -123 -124 -126 -127 -129 -131 -132 -134 -136 -138 Additions to intangible assets 130 130 130 130 10 0 0 0 0 0 Additions to goodwill 0 0 0 0 0 0 0 0 0 0 Change in transition costs and project assets 207 0 0 0 0 0 0 0 0 0 Change in non controlling interest -3 -3 -3 -3 -3 -3 -3 -3 -3 -3 Change in Equity method investments 19 0 0 0 0 0 0 0 0 0 Net Cash Flows from Investing Activities 230 3 1 0 -122 -134 -135 -137 -139 -141 Net change in cash and cash equivalents -24 41 210 232 172 175 191 205 221 240 Cash and cash equivalents, beginning of period 668 644 685 895 1126 1298 1473 1663 1869 2089 Cash and Cash Equivalents, end of period 644 685 895 1126 1298 1473 1663 1869 2089 2329 Leidos Holdings Inc Common Size Income Statement

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E Revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Cost of revenues 84.43% 82.73% 83.94% 87.00% 86.00% 84.00% 84.00% 84.00% 84.00% 84.00% 84.00% 84.00% 84.00% Depreciation and amortization 3.30% 2.52% 2.11% 0.65% 0.73% 0.81% 0.88% 0.96% 1.03% 1.11% 1.18% 1.25% 1.32% Gross profit 12.26% 14.75% 13.95% 12.35% 13.27% 15.19% 15.12% 15.04% 14.97% 14.89% 14.82% 14.75% 14.68% Selling, general & administrative expenses 5.43% 7.15% 6.21% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% Bad debt expense 0.10% 0.00% -0.36% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Acquisition, integration & restructuring costs 1.00% 0.36% 0.05% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Goodwill impairment charges 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Asset impairment charges 0.00% 0.07% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Restructuring expenses 0.36% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Separation transaction expenses 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Equity earnings of non-consolidated subsidiaries -0.13% -0.18% -0.16% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Operating income (loss) 5.50% 7.35% 8.22% 6.35% 7.27% 9.19% 9.12% 9.04% 8.97% 8.89% 8.82% 8.75% 8.68% Interest expense, net -1.38% -1.35% -1.20% -1.37% -1.35% -1.32% -1.29% -1.26% -1.24% -1.20% -1.17% -1.12% -1.07% Other income (expense), net -0.26% -0.01% 0.78% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Income before income taxes 3.86% 5.98% 7.81% 4.98% 5.92% 7.87% 7.83% 7.78% 7.73% 7.69% 7.65% 7.62% 7.60% Income tax expense 0.29% 0.27% 1.77% 1.09% 1.30% 1.73% 1.72% 1.71% 1.70% 1.69% 1.68% 1.68% 1.67% Net income (loss) 3.58% 5.71% 6.04% 3.88% 4.62% 6.14% 6.11% 6.07% 6.03% 6.00% 5.97% 5.95% 5.93% Income (loss) from discontinued operations 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Less: net income (loss) attributable to non-controlling interest 0.02% -0.01% -0.03% -0.03% -0.02% -0.02% -0.02% -0.02% -0.02% -0.02% -0.02% -0.02% -0.02% Net income attributable to common stockholders 3.60% 5.70% 6.01% 3.86% 4.59% 6.12% 6.08% 6.05% 6.01% 5.98% 5.95% 5.93% 5.91% Leidos Holdings Inc Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E Cash & cash equivalents 3.83% 3.21% 6.02% 5.55% 5.71% 7.21% 8.81% 9.87% 10.95% 12.11% 13.33% 14.62% 15.97% Receivables, net 18.00% 18.41% 15.63% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% Other current assets 4.45% 5.33% 3.70% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% Assets held for sale 0.00% 0.90% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Assets of discontinued operations 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total current assets 26.29% 27.85% 25.35% 25.55% 25.71% 27.21% 28.81% 29.87% 30.95% 32.11% 33.33% 34.62% 35.97% Property, plant & equipment, gross 5.37% 5.75% 5.68% 6.49% 7.30% 8.08% 8.84% 9.57% 10.34% 11.08% 11.82% 12.54% 13.24% Less: accumulated depreciation & amortization 3.09% 3.42% 3.09% 3.61% 4.21% 4.88% 5.62% 6.42% 7.32% 8.27% 9.29% 10.36% 11.48% Property, plant & equipment, net 2.28% 2.32% 2.59% 2.88% 3.09% 3.19% 3.21% 3.15% 3.02% 2.81% 2.53% 2.18% 1.75% Intangible assets, net 8.42% 6.40% 4.78% 3.45% 2.25% 1.13% 0.08% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Goodwill 48.91% 47.68% 44.28% 42.37% 40.91% 39.58% 38.41% 37.34% 36.53% 35.75% 35.05% 34.36% 33.69% Operating lease right-of-use assets, net 0.00% 0.00% 3.61% 4.02% 4.30% 4.45% 4.48% 4.39% 4.21% 3.91% 3.52% 3.03% 2.45% Other assets 0.74% 1.53% 1.80% 1.83% 1.83% 1.83% 1.83% 1.83% 1.83% 1.83% 1.83% 1.83% 1.83% Total assets 88.40% 86.03% 84.43% 80.10% 78.09% 77.39% 76.81% 76.56% 76.54% 76.40% 76.26% 76.01% 75.68% Accrued liabilities 7.35% 6.38% 7.41% 7.30% 7.30% 7.30% 7.30% 7.30% 7.30% 7.30% 7.30% 7.30% 7.30% Accounts payable 5.48% 5.37% 5.34% 6.01% 6.01% 6.01% 6.01% 6.01% 6.01% 6.01% 6.01% 6.01% 6.01% Deferred revenue 2.88% 2.71% 3.61% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% Tax indemnity liability 0.23% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Provision for loss contracts 0.19% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other accounts payable & accrued liabilities 0.00% 0.03% 0.21% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Accrued vacation 2.32% 2.21% 2.09% 2.51% 2.51% 2.51% 2.51% 2.51% 2.51% 2.51% 2.51% 2.51% 2.51% Salaries, bonuses & amounts withheld from employ 2.41% 2.43% 1.83% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% Long-term debt, current portion 0.54% 0.71% 0.55% 0.51% 0.50% 0.48% 0.47% 0.46% 0.45% 0.44% 0.43% 0.42% 0.41% Liabilities held for sale 0.00% 0.23% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Liabilities of discontinued operations 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total current liabilities 21.65% 20.20% 21.03% 21.84% 21.82% 21.81% 21.79% 21.78% 21.78% 21.77% 21.76% 21.75% 21.73% Long-term debt 30.05% 29.94% 26.37% 25.22% 24.49% 23.74% 23.00% 22.56% 22.19% 21.75% 21.29% 20.77% 20.20% Operating lease liabilities 0.00% 0.00% 2.94% 3.28% 3.51% 3.63% 3.65% 3.57% 3.43% 3.19% 2.87% 2.47% 1.99% Deferred tax liabilities 2.16% 1.67% 1.66% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other long-term liabilities 0.15% 1.75% 1.64% 1.60% 1.60% 1.60% 1.60% 1.60% 1.60% 1.60% 1.60% 1.60% 1.60% Total Liabilities 55.13% 53.55% 53.63% 51.93% 51.42% 50.77% 50.04% 49.52% 48.99% 48.31% 47.52% 46.59% 45.53% Additional paid-in capital 32.88% 29.10% 23.32% 22.31% 21.55% 20.85% 20.23% 19.66% 19.24% 18.83% 18.46% 18.10% 17.74% Accumulated earnings (deficit) -0.07% 3.65% 8.08% 6.45% 5.72% 6.37% 7.14% 7.99% 8.93% 9.90% 10.93% 11.98% 13.07% Accumulated other comprehensive income (loss) 0.32% -0.29% -0.63% -0.60% -0.58% -0.56% -0.55% -0.53% -0.52% -0.51% -0.50% -0.49% -0.48% Total Leidos Holdings, Inc. stockholders' equity 33.14% 32.45% 30.76% 28.16% 26.69% 26.65% 26.83% 27.12% 27.65% 28.22% 28.89% 29.58% 30.34% Non-controlling interest 0.13% 0.03% 0.04% 0.01% -0.02% -0.04% -0.06% -0.08% -0.10% -0.12% -0.14% -0.16% -0.18% Total equity 33.26% 32.48% 30.80% 28.17% 26.67% 26.61% 26.76% 27.04% 27.55% 28.10% 28.74% 29.42% 30.16% Leidos Holdings Inc Value Driver Estimation

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E

NOPLAT: EBITA Revenue 10,170 10,194 11,094 11,594 12,005 12,411 12,789 13,156 13,445 13,740 14,015 14,295 14,581 - Cost of sales excl D&A 8,587 8,433 9,312 10,087 10,325 10,425 10,743 11,051 11,294 11,542 11,773 12,008 12,248 - Depreciation and amortization 336 257 234 75 88 100 113 126 139 152 166 179 193 - Selling, general & administrative expense 552 729 689 696 720 745 767 789 807 824 841 858 875 + Implied interest on operating leases 21 20 28 22 24 26 27 27 27 25 23 21 17 EBITDA: 716 795 887 758 897 1,167 1,193 1,217 1,232 1,247 1,259 1,271 1,282 Less: Adjusted Taxes Provision for taxes 29 28 196 127 156 215 220 225 229 232 236 240 244 + tax on PV of operating leases interest 5 5 6 5 5 6 6 6 6 6 5 5 4 + Acquisition, integration, & restructuring costs 22 8 1 ------+ Goodwill impairment charges ------+ asset impairment charges - 2 ------+ Restructuring expenses 8 ------+ Separation transaction expenses ------+ Equity earnings on non-consolidated subsidiaries (3) (4) (4) ------+ Tax on other income (expense), net (6) (0) 19 ------Less Adjusted Taxes: 56 38 218 132 162 221 226 231 235 238 241 244 248 Plus Change in Deferred Taxes: (151) (39) (184) ------NOPLAT: 510 718 484 627 736 946 967 986 998 1,009 1,018 1,027 1,034

Invested Capital (IC): Net Operating Working Cap Operating Current Assets Normal cash (3.21% of sales) 326 327 356 372 385 398 410 422 431 441 450 459 468 Accounts receivable 1,831 1,877 1,734 1,855 1,921 1,986 2,046 2,105 2,151 2,198 2,242 2,287 2,333 Other current assets 453 543 410 464 480 496 512 526 538 550 561 572 583 Total: 2,610 2,747 2,500 2,691 2,786 2,880 2,968 3,053 3,120 3,189 3,253 3,318 3,384 Non-Interest Bearing Current Liabilities Accrued liabilities 747 650 822 846 876 906 934 960 981 1,003 1,023 1,044 1,064 Accounts payable 557 547 592 697 721 746 768 791 808 826 842 859 876 Deferred Revenue 293 276 400 406 420 434 448 460 471 481 491 500 510 Other accounts payable and accrued liabilities - 3 23 ------Accrued vacation 236 225 232 291 302 312 321 331 338 345 352 359 366 Salaries, bonuses & amounts withheld from employees' compensation 245 248 203 232 240 248 256 263 269 275 280 286 292 Accrued contributions to employee benefit plans 6 ------Dividends payable 17 12 ------Income taxes payable 4 3 ------Total: 2,105 1,964 2,272 2,472 2,560 2,646 2,727 2,805 2,867 2,930 2,988 3,048 3,109 Plus: Net PP&E 232 237 287 334 371 396 411 414 406 386 354 311 256 Plus: Net Other Operating Assets Intangible assets, net 856 652 530 400 270 140 10 ------Operating lease right-of-use assets, net 432 588 400 466 517 552 572 577 565 538 494 434 357 Other assets 75 156 200 212 219 227 234 240 245 251 256 261 266 Less: Net Other Operating Liabilities Deferred compensation 56 ------Lease related obligations 33 ------Deferred revenue 17 ------Liabilities for uncertain tax positions 7 ------Tax indemnity liability 1 ------Accrued pension liabilities ------Other long-term liabilities 15 178 182 186 192 199 205 210 215 220 224 229 233

Invested Capital: 1,971 2,238 1,463 1,445 1,411 1,351 1,263 1,269 1,255 1,214 1,144 1,047 920

Free Cash Flow (FCF): NOPLAT 510 718 484 627 736 946 967 986 998 1,009 1,018 1,027 1,034 Change in IC (548) 267 (776) (18) (34) (60) (87) 5 (14) (41) (70) (98) (126) FCF 1,058 451 1,260 644 769 1,007 1,054 980 1,011 1,050 1,088 1,124 1,161

Return on Invested Capital (ROIC): NOPLAT 510 718 484 627 736 946 967 986 998 1009 1018 1027 1034 Beg. IC 2,519 1,971 2,238 1,463 1,445 1,411 1,351 1,263 1,269 1,255 1,214 1,144 1,047 ROIC 20.24% 36.45% 21.64% 42.84% 50.90% 67.06% 71.57% 78.04% 78.65% 80.42% 83.88% 89.70% 98.83%

Economic Profit (EP): Beg. IC 2,519 1,971 2,238 1,463 1,445 1,411 1,351 1,263 1,269 1,255 1,214 1,144 1,047 x (ROIC - WACC) 14.25% 30.47% 15.66% 36.85% 44.92% 61.08% 65.59% 72.05% 72.67% 74.44% 77.89% 83.72% 92.84% EP 359 601 351 539 649 862 886 910 922 934 946 958 972 Leidos Holdings Inc Weighted Average Cost of Capital (WACC) Estimation

Cost of Equity: ASSUMPTIONS: Risk-Free Rate 0.67% 10-yr Beta 1.26 Bloomberg Equity Risk Premium 5.15% HF Cost of Equity 6.32%

Cost of Debt: After-Tax Cost of Debt 4.74% Factset

Market Value of Common Equity: MV Weights Total Shares Outstanding 143 Current Stock Price $87.17 MV of Equity 12,465.31 79.01%

Market Value of Debt: Current Portion of LTD 61 Long-Term Debt 2925 PV of Operating Leases 326 MV of Total Debt 3,312 20.99%

Market Value of the Firm 15,777.31 100.00%

Estimated WACC 5.98% Leidos Holdings Inc Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth of NOPLAT 1.50% CV Year ROIC 98.83% WACC 5.98% Cost of Equity 6.32%

Fiscal Years Ending Dec. 31 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028CV

DCF Model: Free Cash Flow (FCF) 644.5 769.5 1006.6 1054.2 980.5 1011.3 1050.4 1087.7 1124.3 Continuing Value (CV) 22715.7 PV of FCF 608.1 685.1 845.6 835.6 733.2 713.6 699.3 683.3 14129.5

Value of Operating Assets: 19933.1 Non-Operating Adjustments -2871.1 Non-Operating Assets Excess cash 312.1 Investment in Rabbi trust 207.0 Equity method investments 19.0 Non-Operating Liabilities Debt (current & LT) 2986.0 ESOP 97.2 PV of Operating leases 326.0

Value of Equity 17062.0 Shares Outstanding 143.0 Intrinsic Value of Last FYE $ 119.31 Implied Price as of Today $ 123.31

EP Model: Economic Profit (EP) 539.1 649.1 861.8 885.9 910.2 921.8 934.2 945.6 958.1 Continuing Value (CV) 21669.1 PV of EP 508.7 577.8 723.9 702.2 680.6 650.4 621.9 593.9 13410.7

Total PV of EP 18470.2 Invested Capital (last FYE) 1462.9 Value of Operating Assets: 19933.1 Non-Operating Adjustments -2871.1 Non-Operating Assets Excess cash 312.1 Investment in Rabbi trust 207.0 Equity method investments 19.0 Non-Operating Liabilities Debt (current & LT) 2986.0 ESOP 105.7 PV of Operating leases 326.0

Value of Equity 17062.0 Shares Outstanding 143.0 Intrinsic Value of Last FYE $ 119.31 Implied Price as of Today $ 123.31 Leidos Holdings Inc Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E

EPS $ 3.22 $ 4.09 $ 5.84 $ 6.21 $ 6.58 $ 6.92 $ 7.28 $ 7.65 $ 8.04

Key Assumptions CV growth of EPS 1.00% CV Year ROE 20.14% Cost of Equity 5.15%

Future Cash Flows P/E Multiple (CV Year) 22.90 EPS (CV Year) $ 8.04 Future Stock Price $ 184.11 Dividends Per Share 1.36 1.36 1.38 1.38 1.40 1.40 1.42 1.42 185.53 1.05 1.11 1.16 1.22 1.29 1.35 1.42 1.49 1.57 Discounted Cash Flows 1.29 1.23 1.19 1.13 1.09 1.04 1.00 0.95 118.07

Intrinsic Value as of Last FYE $ 126.98 Implied Price as of Today $ 130.21 Leidos Holdings Inc Relative Valuation Models

EPS EPS Ticker Company Price 2020E 2021E P/E 20 P/E 21 BAH Booz Allen Hamilton $84.02 $3.18 $3.65 26.42 23.01 SAIC Science Application $77.02 $5.66 $6.08 13.61 12.68 CACI CACI International Inc $222.09 $12.61 $14.09 17.61 15.77 MANT ManTech International C$73.82 $2.91 $3.17 25.37 23.29 PRSP Perspecta $20.00 $2.16 $1.98 9.26 10.11 Average 18.45 16.97

LDOS Leidos Holdings Inc $87.17 3.22 4.09 27.1 21.3

Implied Relative Value: P/E (EPS20) $ 59.37 P/E (EPS21) $ 69.42 Leidos Holdings Inc Key Management Ratios

Fiscal Years Ending Dec. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E

Liquidity Ratios: Current Ratio (CA/CL) 1.21 1.38 1.21 1.17 1.18 1.25 1.32 1.37 1.42 1.47 1.53 1.59 1.66 Quick Ratio ((Cash & St Investments + AR)/CL) 1.01 1.07 1.03 0.99 0.99 1.06 1.14 1.19 1.24 1.29 1.35 1.41 1.47 Cash Ratio ((Cash+ AR)/CL) 1.01 1.07 1.03 0.99 0.99 1.06 1.14 1.19 1.24 1.29 1.35 1.41 1.47

Asset-Management Ratios: Total Asset Turnover (Rev/Average TA) 1.12 1.15 1.22 1.24 1.29 1.31 1.32 1.32 1.32 1.32 1.32 1.33 1.33 Accounts Receivable Turnover (Rev/Average AR) 5.83 5.50 6.14 6.46 6.36 6.35 6.34 6.34 6.32 6.32 6.31 6.31 6.31

Financial Leverage Ratios: Debt Ratio (Total Debt/TA) 0.35 0.36 0.32 0.32 0.32 0.31 0.31 0.30 0.30 0.29 0.28 0.28 0.27 Debt to Equity Ratio (Long-Term Debt/total SE) 0.90 0.92 0.86 0.90 0.92 0.89 0.86 0.83 0.81 0.77 0.74 0.71 0.67 Equity Ratio (Total SE/TA) 0.38 0.38 0.36 0.35 0.34 0.34 0.35 0.35 0.36 0.37 0.38 0.39 0.40

Profitability Ratios: Gross Margin (Rev-COGS)/Rev) 15.57% 17.27% 16.06% 13.00% 14.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% Net Profit Margin (Net Income/Rev) 3.60% 5.70% 6.01% 3.86% 4.59% 6.12% 6.08% 6.05% 6.01% 5.98% 5.95% 5.93% 5.91% ROA (Net Income/TA) 4.07% 6.62% 7.12% 4.81% 5.88% 7.90% 7.92% 7.90% 7.85% 7.82% 7.80% 7.80% 7.81% ROE (Net Income/Total SE) 10.82% 17.55% 19.52% 13.69% 17.22% 22.98% 22.74% 22.36% 21.81% 21.27% 20.69% 20.14% 19.60%

Payout Policy Ratios: Dividend Payout Ratio (Dividend/EPS) 53.11% 33.25% 28.33% 42.27% 33.25% 23.62% 22.23% 21.28% 20.24% 19.51% 18.57% 17.91% 17.03% Total Payout Ratio ((Divs. + Repurchases)/NI) 62.57% 109.47% 98.35% 146.07% 118.50% 86.35% 84.20% 82.69% 81.51% 80.57% 79.49% 78.64% 77.49% Retention Ratio (1- payout ratio) 37.43% -9.47% 1.65% -46.07% -18.50% 13.65% 15.80% 17.31% 18.49% 19.43% 20.51% 21.36% 22.51% Leidos Holdings Inc Present Value of Operating Lease Obligations

Fiscal Years Ending Dec. 31 2014 2015 2016 2017 2018 2019 Year 1 95.0 84.0 142.0 140.0 144.0 66.7 Year 2 91.0 69.0 106.0 107.0 114.0 66.7 Year 3 76.0 58.0 83.0 78.0 83.0 66.7 Year 4 64.0 45.0 58.0 53.0 71.0 66.7 Year 5 53.0 31.0 41.0 39.0 55.0 66.7 Thereafter 109.0 62.0 92.0 78.0 246.0 66.7 Total Minimum Payments 488.0 349.0 522.0 495.0 713.0 400.0 Less: Cumulative Interest 72.4 47.5 69.1 63.2 124.5 58.8 PV of Minimum Payments 415.6 301.5 452.9 431.8 588.5 341.2

Implied Interest in Year 1 Payment 0.0 19.7 14.3 21.5 20.5 27.9

Pre-Tax Cost of Debt 4.74% 4.74% 4.74% 4.74% 4.74% 4.74% Years Implied by Year 6 Payment 2.1 2.0 2.2 2.0 4.5 1.0 Expected Obligation in Year 6 & Beyond 53 31 41 39 55 67

Present Value of Lease Payments PV of Year 1 90.7 80.2 135.6 133.7 137.5 63.6 PV of Year 2 82.9 62.9 96.6 97.5 103.9 60.8 PV of Year 3 66.1 50.5 72.2 67.9 72.2 58.0 PV of Year 4 53.2 37.4 48.2 44.0 59.0 55.4 PV of Year 5 42.0 24.6 32.5 30.9 43.6 52.9 PV of 6 & beyond 80.6 45.9 67.7 57.7 172.2 50.5 Capitalized PV of Payments 415.6 301.5 452.9 431.8 588.5 341.2 Leidos Holdings Inc Effects of ESOP Exercise and Share Repurchases on Common Stock Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 2.4 Average Time to Maturity (years): 1.90 Expected Annual Number of Options Exercised: 1

Current Average Strike Price: $ 45.80 Cost of Equity: 6.32% Current Stock Price: $87.17

Fiscal Years Ending Dec. 31 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E Increase in Shares Outstanding: 1 0.9 Average Strike Price: $ 45.80 $ 45.80 Increase in Common Stock Account: 58 41 ------

Change in Treasury Stock 464 470 476 482 489 495 501 508 514 521 Expected Price of Repurchased Shares: $87.17 $ 92.67 $ 98.53 $ 104.75 $ 111.36 $ 118.40 $ 125.87 $ 133.82 $ 142.27 $ 151.26 Number of Shares Repurchased: 5 5 5 5 4 4 4 4 4 3

Shares Outstanding (beginning of the year) 143 139 135 130 125 121 117 113 109 105 Plus: Shares Issued Through ESOP 1 1 0 0 0 0 0 0 0 0 Less: Shares Repurchased in Treasury 5 5 5 5 4 4 4 4 4 3 Shares Outstanding (end of the year) 139 135 130 125 121 117 113 109 105 102 Leidos Holdings Inc Valuation of Options Granted under ESOP

Current Stock Price $87.17 Risk Free Rate 0.67% Current Dividend Yield 1.50% Annualized St. Dev. of Stock Returns 32.50%

Average Average B-S Value Range of Number Exercise Remaining Option of Options Outstanding Options of Shares Price Life (yrs) Price Granted Range 1 2.4 45.80 1.90 $ 40.50 $ 97 Total 2.4 $ 45.80 1.90 $ 42.82 $ 97 Leidos Holdings Inc Sensitivity Tables

Beta Cost of Revenue (2020) 123.31 1.10 1.15 1.20 1.26 1.30 1.40 1.50 123.31 84.00% 85.00% 86.00% 87.00% 88.00% 89.00% 90.00% 4.40% 175.21 166.97 159.42 151.13 146.02 134.52 124.54 4.50% 148.89 148.27 147.65 147.04 146.42 145.80 145.19 4.65% 163.31 155.58 148.49 140.71 135.91 125.12 115.74 5.00% 140.98 140.36 139.74 139.13 138.51 137.89 137.28 4.90% 152.80 145.52 138.83 131.50 126.98 116.80 107.96 5.50% 133.07 132.45 131.83 131.22 130.60 129.98 129.37 5.15% 143.45 136.56 130.24 123.31 119.03 109.41 101.04 6.00% 125.16 124.54 123.92 123.31 122.69 122.07 121.46 ERP ERP 5.40% 135.08 128.54 122.55 115.97 111.91 102.78 94.84 (2020) 6.50% 117.25 116.63 116.01 115.40 114.78 114.16 113.55 5.65% 127.53 121.32 115.61 109.35 105.50 96.81 89.26 7.00% 109.34 108.72 108.10 107.49 106.87 106.25 105.64

5.90% 120.70 114.77 109.33 103.36 99.69 91.40 84.19 Sales Marketing and 7.50% 101.43 100.81 100.19 99.58 98.96 98.34 97.73

Risk Free Rate Accounts Rec (2020) 123.31 0.55% 0.60% 0.65% 0.67% 0.70% 0.75% 0.80% 123.31 14.50% 15.00% 15.50% 16.00% 16.50% 17.00% 17.50% 0.75% 109.41 109.66 109.91 110.01 110.16 110.41 110.67 2.46% 125.80 125.26 124.73 124.20 123.66 123.13 122.59 1.00% 113.36 113.62 113.89 114.00 114.16 114.43 114.71 2.71% 125.50 124.97 124.43 123.90 123.37 122.83 122.30 1.25% 117.71 118.00 118.29 118.41 118.59 118.88 119.18 2.96% 125.21 124.67 124.14 123.60 123.07 122.53 122.00 1.50% 122.55 122.87 123.19 123.31 123.50 123.82 124.15 3.21% 124.91 124.37 123.84 123.31 122.77 122.24 121.70

NOPLAT 1.75% 127.96 128.31 128.65 128.79 129.00 129.35 129.71 3.46% 124.61 124.08 123.54 123.01 122.48 121.94 121.41 Normal Cash CV Growth CVof Growth 2.00% 134.04 134.42 134.81 134.95 135.19 135.58 135.97 3.71% 124.32 123.78 123.25 122.71 122.18 121.64 121.11 2.25% 140.93 141.36 141.78 141.95 142.21 142.65 143.08 3.96% 124.02 123.48 122.95 122.42 121.88 121.35 120.81

Pre tax cost of debt 123.31 4.44% 4.54% 4.64% 4.74% 4.84% 4.94% 5.04% 19.00% 129.63 129.06 128.50 127.94 127.38 126.83 126.29 20.00% 128.05 127.49 126.94 126.39 125.85 125.31 124.78 21.00% 126.47 125.93 125.39 124.85 124.32 123.79 123.27 22.00% 124.89 124.36 123.83 123.31 122.79 122.27 121.76 23.00% 123.31 122.79 122.28 121.76 121.25 120.75 120.25 24.00% 121.74 121.23 120.72 120.22 119.72 119.23 118.74 Marginal Tax Rate 25.00% 120.16 119.66 119.16 118.67 118.19 117.71 117.24