UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________________________________

Form 10-Q

_____________________________________________________________

(Mark One)

xý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~October~~November 311, ~~2012~~2013



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number	Exact Name of Registrant as Specified in its Charter,Address of Principal Executive Offices and Telephone Number	State or otherjurisdiction ofincorporation ororganization		I.R.S. EmployerIdentificationNo.
001-33072	SAIC, Inc.		Delaware		20-3562868
	1710 SAIC Drive, McLean, Virginia 22102
	(703) 676-4300
000-12771	Science Applications International Corporation		Delaware		95-3630868
	1710 SAIC Drive, McLean, Virginia 22102
	(703) 676-4300

_____________________________________________________________



Commission File Number	Exact Name of Registrant as Specified in its Charter, Address of Principal Executive Offices and Telephone Number	State or other jurisdiction of incorporation or organization	I.R.S. Employer Identification No.
001-33072	Leidos Holdings, Inc.	Delaware	20-3562868
	11951 Freedom Drive, Reston, Virginia 20190
	(571) 526-6000
000-12771	Leidos, Inc.	Delaware	95-3630868
	11951 Freedom Drive, Reston, Virginia 20190
	(571) 526-6000

_____________________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

~~SAIC~~Leidos Holdings, Inc. Yes x No ¨o ~~Science~~Leidos, ~~Applications~~Inc. ~~International Corporation~~ Yes x No ¨o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

~~SAIC~~Leidos Holdings, Inc. Yes x No ¨o ~~Science~~Leidos, ~~Applications~~Inc. ~~International Corporation~~ Yes x No ¨o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

~~SAIC~~Leidos Holdings, Inc. Large accelerated filer xý Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨ ~~Science~~Leidos, ~~Applications~~Inc. ~~International Corporation~~ Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer xý Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

~~SAIC~~Leidos Holdings, Inc. Yes ¨o No x ~~Science~~Leidos, ~~Applications~~Inc. ~~International Corporation~~ Yes ¨o No x

The number of shares issued and outstanding of each issuer’s classes of common stock as of November 26, 2013 was as follows:

The number of shares issued and outstanding of each issuer’s classes of common stock as of November 16, 2012 was as follows:



Leidos Holdings, Inc.	85,627,012 shares of common stock ($.0001 par value per share)
Leidos, Inc.	5,000 shares of common stock ($.01 par value per share) held by Leidos Holdings, Inc.

SAIC, Inc.		341,871,438 shares of common stock ($.0001 par value per share)
Science Applications International Corporation		5,000 shares of common stock ($.01 par value per share) held by SAIC, Inc.

Explanatory Note

This Quarterly Report on Form 10-Q is a combined report being filed by ~~SAIC~~Leidos Holdings, Inc. (~~“SAIC”~~Leidos) and ~~Science~~Leidos, ~~Applications International Corporation (“Science Applications”)~~Inc. ~~SAIC~~Leidos is a holding company and ~~Science~~Leidos, ~~Applications~~Inc. is a direct, 100%-owned subsidiary of ~~SAIC~~Leidos. Each of ~~SAIC~~Leidos and ~~Science~~Leidos, ~~Applications~~Inc. is filing on its own behalf all of the information contained in this report that relates to such company. Where information or an explanation is provided that is substantially the same for each company, such information or explanation has been combined in this report. Where information or an explanation is not substantially the same for each company, separate information and explanation has been provided. In addition, separate condensed consolidated financial statements for each company, along with combined notes to the condensed consolidated financial statements, are included in this report. Unless indicated otherwise, references in this report to the “Company”, “we”, “us” and “our” refer collectively to ~~SAIC~~Leidos Holdings, ~~Science~~Inc., ~~Applications~~Leidos, Inc. and its consolidated subsidiaries.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

~~SAIC~~LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

		Three Months Ended October 31								Nine Months EndedOctober 31
	Three Months Ended								Nine Months Ended
		2012				2011				2012				2011
	November 1, 2013				October 31, 2012				November 1, 2013				October 31, 2012
	(in millions, except per share amounts)	~~(in millions, except per share amounts)~~
Revenues	$	$1,420	~~2,870~~		$	$1,673	~~2,790~~		$	$4,486	~~8,462~~		$	$4,899	~~8,026~~
Costs and expenses:
Cost of revenues	1,224		~~2,509~~		1,434		~~2,477~~		3,903		~~7,429~~		4,218		~~7,051~~
Selling, general and administrative expenses	116		~~157~~		139		~~333~~		360		~~429~~		367		~~562~~
Separation transaction expenses			11				—				15				—
Bad debt expense	43				—				45				—
Operating income (loss)			193				(20	)			589				413
Intangible asset impairment losses	19				—				51				—
Non-operating income (expense):
Separation transaction and restructuring expenses	25				—				58				—
Interest income			2				2				6				3
Operating (loss) income	(7		)		100				69				314
Interest expense			(20	)			(29	)			(73	)			(85	)
Non-operating income (expense):
Other income (expense), net			2				(2	)			8				3
Interest income	5				1				15				5
Income (loss) from continuing operations before income taxes			177				(49	)			530				334
Interest expense	(21		)		(20		)		(59		)		(73		)
Provision for income taxes			(65	)			(43	)			(193	)			(188	)
Other income, net	2				2				3				8
Income (loss) from continuing operations			112				(92	)			337				146
(Loss) income from continuing operations before income taxes	(21		)		83				28				254
Discontinued operations (Note 1):
Income tax benefit (expense)	12				(28		)		1				(89		)
Income from discontinued operations before income taxes			—				4				3				127
(Loss) income from continuing operations	(9		)		55				29				165
Provision for income taxes			—				(1	)			(1	)			(53	)
Discontinued operations (Note 2):
Income from discontinued operations			—				3				2				74
Income from discontinued operations before income taxes	21				94				158				279
Net income (loss)		$	112			$	(89	)		$	339			$	220
Income tax expense	(15		)		(37		)		(67		)		(105		)
Earnings per share (Note 2):
Income from discontinued operations	6				57				91				174
Basic:
Net (loss) income	$	(3	)		$	112			$	120			$	339
Income (loss) from continuing operations		$	.33			$	(.28	)		$	.99			$	.42
Earnings per share (Note 4):
Income from discontinued operations			—				.01				.01				.21
Basic:
		$	.33			$	(.27	)		$	1.00			$	.63
(Loss) income from continuing operations	$	(0.11	)		$	0.66			$	0.31			$	1.95
Diluted:
Income from discontinued operations	0.07				0.66				1.08				2.05
Income (loss) from continuing operations		$	.33			$	(.28	)		$	.99			$	.42
	$	(0.04	)		$	1.32			$	1.39			$	4.00
Income from discontinued operations			—				.01				.01				.21
Diluted:
		$	.33			$	(.27	)		$	1.00			$	.63
(Loss) income from continuing operations	$	(0.11	)		$	0.66			$	0.31			$	1.95
Cash dividends paid per share		$	.12			$	—			$	.36			$	—
Income from discontinued operations	0.07				0.66				1.08				2.05
	$	(0.04	)		$	1.32			$	1.39			$	4.00
Cash dividends declared per share	$	0.32			$	0.48			$	5.28			$	1.44

See accompanying combined notes to condensed consolidated financial statements.

~~SAIC~~LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ~~(LOSS)~~

(UNAUDITED)

		Three Months EndedOctober 31							Nine Months EndedOctober 31
	Three Months Ended							Nine Months Ended
		2012			2011				2012				2011
	November 1, 2013			October 31, 2012				November 1, 2013				October 31, 2012
	(in millions)	~~(in millions)~~
Net income (loss)		$	112		$	(89	)		$	339			$	220
Net (loss) income	$	(3	)	$	112			$	120			$	339
Other comprehensive income, net of tax:
Foreign currency translation adjustments	—		—	—		—		—		(1	)	(1		7)
Deferred taxes	—		—	—		—		—		1		1		(3	)
Foreign currency translation adjustments, net of tax	—		—	—		—		—		—		—		4
Reclassification of realized loss on settled derivative instruments to net income			—			1				—				1
Pension liability adjustments	—			—				—				16
Deferred taxes	—		—	—		(1	)	—		—		(6		(1)	)
Reclassification of realized loss on settled derivative instruments to net income, net of tax			—			—				—				—
Pension liability adjustments, net of tax	—			—				—				10
Pension liability adjustments			—			—				16				—
Total other comprehensive income, net of tax	—			—				—				10
Deferred taxes			—			—				(6	)			—
Comprehensive income	$	(3	)	$	112			$	120			$	349
Pension liability adjustments, net of tax			—			—				10				—
Total other comprehensive income, net of tax			—			—				10				4
Comprehensive income (loss)		$	112		$	(89	)		$	349			$	224

See accompanying combined notes to condensed consolidated financial statements.

~~SAIC~~LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

		October 31,2012				January 31,2012
	November 1, 2013				January 31,2013
	(in millions)	~~(in millions)~~
ASSETS
Current assets:
Cash and cash equivalents	$	$814	~~531~~		$	$735	~~1,592~~
Receivables, net	1,161		~~1,943~~		1,168		~~2,164~~
Inventory, prepaid expenses and other current assets	298		~~554~~		342		~~439~~
Assets of discontinued operations	13		34		1,371		36
Total current assets	2,286		~~3,062~~		3,616		~~4,231~~
Property, plant and equipment (less accumulated depreciation and amortization of $447 million and $424 million at October 31, 2012 and January 31, 2012, respectively)			319				348
Property, plant and equipment (less accumulated depreciation and amortization of $340 million and $391 million at November 1, 2013 and January 31, 2013, respectively)	473				288
Intangible assets, net	100		~~214~~		178		~~176~~
Goodwill	1,704		~~2,195~~		1,704		~~1,800~~
Deferred income taxes	10		—		12		37
Other assets	62		76		77		75
		$	5,866			$	6,667
	4,635				5,875
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	$782	~~1,291~~		$	$787	~~1,961~~
Accrued payroll and employee benefits	307		~~624~~		357		~~504~~
Income taxes payable			41				—
Notes payable and long-term debt, current portion	151				—
Notes payable and long-term debt, current portion			2				553
Liabilities of discontinued operations	—				648
Liabilities of discontinued operations			8				7
Total current liabilities	1,240				1,792
Total current liabilities			1,966				3,025
Notes payable and long-term debt, net of current portion	1,330				1,295
Notes payable and long-term debt, net of current portion			1,297				1,299
Other long-term liabilities	182				170
Other long-term liabilities			148				162
Commitments and contingencies (Notes 11 and 12)
Commitments and contingencies (Notes 10 and 11)
Stockholders’ equity:
Stockholders’ equity:
Common stock, $.0001 par value, 500 million shares authorized, 86 million shares issued and outstanding at November 1, 2013 and January 31, 2013, respectively	—				—
Common stock, $.0001 par value, 2 billion shares authorized, 342 million and 341 million shares issued and outstanding at October 31, 2012 and January 31, 2012, respectively			—				—
Additional paid-in capital	1,735				2,110
Additional paid-in capital			2,089				2,028
Retained earnings	150				510
Retained earnings			367				164
Accumulated other comprehensive loss	(2		)		(2		)
Accumulated other comprehensive loss			(1	)			(11	)
Total stockholders’ equity	1,883				2,618
Total stockholders’ equity			2,455				2,181
	$	4,635			$	5,875
		$	5,866			$	6,667

See accompanying combined notes to condensed consolidated financial statements.

~~SAIC~~LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

	Shares ofcommonstock	~~Shares ofcommonstock~~		Additionalpaid-incapital		~~Additionalpaid-incapital~~		Retainedearnings		~~Retainedearnings~~		Accumulatedothercomprehensiveloss		~~Accumulatedothercomprehensiveloss~~		Total		~~Total~~
		(in millions)
	(in millions, except for share amounts)
Balance at January 31, 2012			341			$	2,028			$	164			$	(11	)		$	2,181
Balance at January 31, 2013	86			$	2,110			$	510			$	(2	)		$	2,618
Net income	—		—	—			—	120			~~339~~	—			—	120			~~339~~
Other comprehensive income, net of tax	—		—	—			—	—			—	—			10	—			10
Issuances of stock	—		2	30			19	—			—	—			—	30			19
Repurchases of stock			(1	)			(10	)			(11	)			—				(21	)
Shares repurchased and retired or withheld for tax withholdings on vesting of restricted stock	—			(6		)		(11		)		—				(17		)
Quarterly cash dividends of $0.12 per share			—				—				(125	)			—				(125	)
Cash dividends of $1.28 per share	—			—				(113		)		—				(113		)
Adjustments for income tax benefits from stock-based compensation			—				(15	)			—				—				(15	)
Special cash dividend of $4.00 per share	—			—				(356		)		—				(356		)
Stock-based compensation			—				67				—				—				67
Adjustments for income tax benefits from stock-based compensation	—			(10		)		—				—				(10		)
Balance at October 31, 2012			342			$	2,089			$	367			$	(1	)		$	2,455
Stock-based compensation (including discontinued operations of $21 million)	—			64				—				—				64
Dividend received, net of contribution paid, from the separation of New SAIC	—			269				—				—				269
Separation of New SAIC	—			(722		)		—				—				(722		)
Balance at November 1, 2013	86			$	1,735			$	150			$	(2	)		$	1,883

See accompanying combined notes to condensed consolidated financial statements.

~~SAIC~~LEIDOS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

		Nine Months EndedOctober 31
	Nine Months Ended
		2012				2011
	November 1, 2013				October 31, 2012
	(in millions)	~~(in millions)~~
Cash flows from operating activities of continuing operations:
Cash flows from operations:
Net income	$	$120	~~339~~		$	$339	~~220~~
Income from discontinued operations	(91		(2)	)	(174		~~(74~~)	)
Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization	66		85		73		86
Stock-based compensation	43		67		42		64
Impairment losses			2				19
Intangible asset impairment losses	51				—
Net gain on sales and disposals of assets			(7	)			(32	)
Inventory write-down	3				—
Other			3				—
Bad debt expense	45				—
Increase (decrease) in cash and cash equivalents, net of acquisitions and divestitures, resulting from changes in:
Net gain on sales and disposals of assets	(9		)		(7		)
Receivables			271				(94	)
Other	3				3
Inventory, prepaid expenses and other current assets			(79	)			38
Increase (decrease) in cash and cash equivalents, net of effects of acquisitions and dispositions, resulting from changes in:
Deferred income taxes			(4	)			(11	)
Receivables	(139		)		211
Other assets			(1	)			(21	)
Inventory, prepaid expenses and other current assets	30				(73		)
Accounts payable and accrued liabilities			(697	)			322
Deferred income taxes	20				(4		)
Accrued payroll and employee benefits			118				104
Other assets	3				(2		)
Income taxes payable			35				10
Accounts payable and accrued liabilities	9				(671		)
Other long-term liabilities			4				(4	)
Accrued payroll and employee benefits	(48		)		74
Total cash flows provided by operating activities of continuing operations			134				627
Income taxes receivable/payable	(14		)		35
Cash flows from investing activities of continuing operations:
Other long-term liabilities	(14		)		3
Expenditures for property, plant and equipment			(43	)			(48	)
Total cash flows provided by (used in) operating activities of continuing operations	78				(151		)
Acquisitions of businesses, net of cash acquired of $9 million and $5 million in fiscal 2013 and 2012, respectively			(478	)			(216	)
Cash flows from investing activities:
Net receipts (payments) for purchase price adjustments related to prior year acquisitions			1				(4	)
Expenditures for property, plant and equipment	(31		)		(31		)
Proceeds from sale of assets			3				84
Acquisitions of businesses, net of cash acquired of $9 million in fiscal 2013	(1		)		(478		)
Other			—				(1	)
Proceeds from sale of assets	65				2
Total cash flows used in investing activities of continuing operations			(517	)			(185	)
Net proceeds (purchases) of cost method investments	12				—
Cash flows from financing activities of continuing operations:
Dividend received from the separation of New SAIC	295				—
Payments on notes payable and long-term debt			(553	)			(3	)
Contribution paid related to the separation of New SAIC	(26		)		—
Sales of stock and exercises of stock options			15				21
Other	(2		)		1
Repurchases of stock			(21	)			(470	)
Total cash flows provided by (used in) investing activities of continuing operations	312				(506		)
Dividend payments			(124	)			—
Cash flows from financing activities:
Other			—				(2	)
Payments on notes payable and long-term debt	(1		)		(550		)
Total cash flows used in financing activities of continuing operations			(683	)			(454	)
Payments for deferred financing costs	(5		)		—
Decrease in cash and cash equivalents from continuing operations			(1,066	)			(12	)
Payment from New SAIC for deferred financing costs	5				—
Cash flows from discontinued operations:
Proceeds from real estate financing transaction	38				—
Cash provided by (used in) operating activities of discontinued operations			5				(61	)
Proceeds from debt issuance	500				—
Cash provided by investing activities of discontinued operations			—				168
Distribution of debt to New SAIC	(500		)		—
Increase in cash and cash equivalents from discontinued operations			5				107
Sales of stock and exercises of stock options	11				15
Effect of foreign currency exchange rate changes on cash and cash equivalents			—				1
Repurchases of stock	(17		)		(21		)
Total increase (decrease) in cash and cash equivalents			(1,061	)			96
Dividend payments	(452		)		(124		)
Cash and cash equivalents at beginning of period			1,592				1,367
Other	2				—
Cash and cash equivalents at end of period		$	531			$	1,463
Total cash flows used in financing activities of continuing operations	(419		)		(680		)

See accompanying combined notes to condensed consolidated financial statements.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION



Decrease in cash and cash equivalents from continuing operations	(29		)	(1,337		)
Cash flows from discontinued operations:
Cash provided by operating activities of discontinued operations	125			285
Cash used in investing activities of discontinued operations	(17		)	(6		)
Cash used in financing activities of discontinued operations	—			(3		)
Increase in cash and cash equivalents from discontinued operations	108			276
Total increase (decrease) in cash and cash equivalents	79			(1,061		)
Cash and cash equivalents at beginning of period	735			1,592
Cash and cash equivalents at end of period	$	814		$	531

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

	Three Months EndedOctober 31						Nine Months EndedOctober 31
	2012			2011			2012			2011
	(in millions)
Revenues	$	2,870		$	2,790		$	8,462		$	8,026
Costs and expenses:
Cost of revenues		2,509			2,477			7,429			7,051
Selling, general and administrative expenses		157			333			429			562
Separation transaction expenses		11			—			15			—
Operating income (loss)		193			(20	)		589			413
Non-operating income (expense):
Interest income		2			2			6			3
Interest expense		(20	)		(30	)		(73	)		(90	)
Other income (expense), net		2			(2	)		8			3
Income (loss) from continuing operations before income taxes		177			(50	)		530			329
Provision for income taxes		(65	)		(44	)		(193	)		(186	)
Income (loss) from continuing operations		112			(94	)		337			143
Discontinued operations (Note 1):
Income from discontinued operations before income taxes		—			4			3			127
Provision for income taxes		—			(1	)		(1	)		(53	)
Income from discontinued operations		—			3			2			74
Net income (loss)	$	112		$	(91	)	$	339		$	217

See accompanying combined notes to condensed consolidated financial statements.

~~SCIENCE~~LEIDOS, ~~APPLICATIONS INTERNATIONAL CORPORATION~~ INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~COMPREHENSIVE~~ INCOME ~~(LOSS)~~

(UNAUDITED)

		Three Months EndedOctober 31							Nine Months EndedOctober 31
	Three Months Ended							Nine Months Ended
		2012			2011				2012				2011
	November 1, 2013			October 31, 2012				November 1, 2013				October 31, 2012
	(in millions)	~~(in millions)~~
Net income (loss)		$	112		$	(91	)		$	339			$	217
Revenues	$	1,420		$	1,673			$	4,486			$	4,899
Other comprehensive income, net of tax:
Costs and expenses:
Foreign currency translation adjustments			—			—				(1	)			7
Cost of revenues	1,224			1,434				3,903				4,218
Deferred taxes			—			—				1				(3	)
Selling, general and administrative expenses	116			139				360				367
Foreign currency translation adjustments, net of tax			—			—				—				4
Bad debt expense	43			—				45				—
Reclassification of realized loss on settled derivative instruments to net income			—			1				—				1
Intangible asset impairment losses	19			—				51				—
Deferred taxes			—			(1	)			—				(1	)
Separation transaction and restructuring expenses	25			—				58				—
Reclassification of realized loss on settled derivative instruments to net income, net of tax			—			—				—				—
Operating (loss) income	(7		)	100				69				314
Pension liability adjustments			—			—				16				—
Non-operating income (expense):
Deferred taxes			—			—				(6	)			—
Interest income	5			1				15				5
Pension liability adjustments, net of tax			—			—				10				—
Interest expense	(21		)	(20		)		(59		)		(73		)
Total other comprehensive income, net of tax			—			—				10				4
Other income, net	2			2				3				8
Comprehensive income (loss)		$	112		$	(91	)		$	349			$	221
(Loss) income from continuing operations before income taxes	(21		)	83				28				254
Income tax benefit (expense)	12			(28		)		1				(89		)
(Loss) income from continuing operations	(9		)	55				29				165
Discontinued operations (Note 2):
Income from discontinued operations before income taxes	21			94				158				279
Income tax expense	(15		)	(37		)		(67		)		(105		)
Income from discontinued operations	6			57				91				174
Net (loss) income	$	(3	)	$	112			$	120			$	339

See accompanying combined notes to condensed consolidated financial statements.

~~SCIENCE~~LEIDOS, ~~APPLICATIONS INTERNATIONAL CORPORATION~~ INC.

CONDENSED CONSOLIDATED ~~BALANCE~~STATEMENTS ~~SHEETS~~OF COMPREHENSIVE INCOME

(UNAUDITED)

		October 31,2012				January 31,2012
	Three Months Ended								Nine Months Ended
		(in millions)
	November 1, 2013				October 31, 2012				November 1, 2013		October 31, 2012
ASSETS
	(in millions)
Current assets:
Net (loss) income	$	(3	)		$	112			$	120	$	339
Cash and cash equivalents		$	331			$	1,592
Other comprehensive income, net of tax:
Receivables, net			1,943				2,164
Foreign currency translation adjustments	—				—				—		(1		)
Inventory, prepaid expenses and other current assets			554				439
Deferred taxes	—				—				—		1
Assets of discontinued operations			34				36
Foreign currency translation adjustments, net of tax	—				—				—		—
Total current assets			2,862				4,231
Pension liability adjustments	—				—				—		16
Property, plant and equipment (less accumulated depreciation and amortization of $447 million and $424 million at October 31, 2012 and January 31, 2012, respectively)			319				348
Deferred taxes	—				—				—		(6		)
Intangible assets, net			214				176
Pension liability adjustments, net of tax	—				—				—		10
Goodwill			2,195				1,800
Total other comprehensive income, net of tax	—				—				—		10
Deferred income taxes			—				37
Comprehensive income	$	(3	)		$	112			$	120	$	349
Other assets			76				75
Note receivable from SAIC, Inc. (Note 7)			155				—
		$	5,821			$	6,667
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	1,291			$	1,961
Accrued payroll and employee benefits			624				504
Income taxes payable			41				—
Notes payable and long-term debt, current portion			2				553
Liabilities of discontinued operations			8				7
Total current liabilities			1,966				3,025
Notes payable and long-term debt, net of current portion			1,297				1,299
Note payable to SAIC, Inc. (Note 7)			—				120
Other long-term liabilities			148				162
Commitments and contingencies (Notes 10 and 11)
Stockholder’s equity:
Common stock, $.01 par value, 10,000 shares authorized, 5,000 shares issued and outstanding at October 31, 2012 and January 31, 2012			—				—
Additional paid-in capital			233				233
Retained earnings			2,178				1,839
Accumulated other comprehensive loss			(1	)			(11	)
Total stockholders’ equity			2,410				2,061
		$	5,821			$	6,667

See accompanying combined notes to condensed consolidated financial statements.

~~SCIENCE~~LEIDOS, ~~APPLICATIONS INTERNATIONAL CORPORATION~~ INC.

CONDENSED CONSOLIDATED ~~STATEMENT~~BALANCE ~~OF STOCKHOLDER’S EQUITY~~ SHEETS

(UNAUDITED)

		Shares ofcommonstock			Additionalpaid-incapital		Retainedearnings		Accumulatedothercomprehensiveloss			Total
	November 1, 2013			January 31,2013
		(in millions, except for share amounts)
	(in millions)
Balance at January 31, 2012			5,000		$	233	$	1,839	$	(11	)	$	2,061
ASSETS
Net income			—			—		339		—			339
Current assets:
Other comprehensive income, net of tax			—			—		—		10			10
Cash and cash equivalents	$	546		$	735
Balance at October 31, 2012			5,000		$	233	$	2,178	$	(1	)	$	2,410
Receivables, net	1,161			1,168
Inventory, prepaid expenses and other current assets	298			342
Assets of discontinued operations	13			1,371
Total current assets	2,018			3,616
Property, plant and equipment (less accumulated depreciation and amortization of $340 million and $391 million at November 1, 2013 and January 31, 2013, respectively)	473			288
Intangible assets, net	100			178
Goodwill	1,704			1,704
Deferred income taxes	10			12
Other assets	62			77
Note receivable from Leidos Holdings, Inc. (Note 8)	1,075			—
	$	5,442		$	5,875
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	782		$	787
Accrued payroll and employee benefits	307			357
Notes payable and long-term debt, current portion	151			—
Liabilities of discontinued operations	—			648
Total current liabilities	1,240			1,792
Notes payable and long-term debt, net of current portion	1,330			1,295
Note payable to Leidos Holdings, Inc. (Note 8)	—			22
Other long-term liabilities	182			170
Commitments and contingencies (Notes 11 and 12)
Stockholders’ equity:
Common stock, $.01 par value, 10,000 shares authorized, 5,000 shares issued and outstanding at November 1, 2013 and January 31, 2013	—			—
Additional paid-in capital	207			233
Retained earnings	2,485			2,365
Accumulated other comprehensive loss	(2		)	(2		)
Total stockholders’ equity	2,690			2,596
	$	5,442		$	5,875

See accompanying combined notes to condensed consolidated financial statements.

~~SCIENCE~~LEIDOS, ~~APPLICATIONS INTERNATIONAL CORPORATION~~ INC.

CONDENSED CONSOLIDATED ~~STATEMENTS~~STATEMENT OF ~~CASH~~STOCKHOLDER’S ~~FLOWS~~ EQUITY

(UNAUDITED)

		Nine Months Ended October 31
	Shares ofcommonstock			Additionalpaid-incapital				Retainedearnings		Accumulatedothercomprehensiveloss			Total
		2012				2011
	(in millions, except for share amounts)
		(in millions)
Balance at January 31, 2013	5,000			$	233			$	2,365	$	(2	)	$	2,596
Cash flows from operating activities of continuing operations:
Net income	—			—				120		—			120
Net income		$	339			$	217
Contribution paid related to the separation of New SAIC	—			(26		)		—		—			(26		)
Income from discontinued operations			(2	)			(74	)
Other comprehensive income, net of tax	—			—				—		—			—
Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:
Balance at November 1, 2013	5,000			$	207			$	2,485	$	(2	)	$	2,690
Depreciation and amortization			85				86
Stock-based compensation			67				64
Impairment losses			2				19
Net gain on sales and disposals of assets			(7	)			(32	)
Other			3				—
Increase (decrease) in cash and cash equivalents, net of acquisitions and divestitures, resulting from changes in:
Receivables			271				(94	)
Inventory, prepaid expenses and other current assets			(79	)			38
Deferred income taxes			(4	)			(11	)
Other assets			(1	)			(21	)
Accounts payable and accrued liabilities			(697	)			322
Accrued payroll and employee benefits			118				104
Income taxes payable			35				10
Other long-term liabilities			4				(4	)
Total cash flows provided by operating activities of continuing operations			134				624
Cash flows from investing activities of continuing operations:
Expenditures for property, plant and equipment			(43	)			(48	)
Acquisitions of businesses, net of cash acquired of $9 million and $5 million in fiscal 2013 and 2012, respectively			(478	)			(216	)
Net receipts (payments) for purchase price adjustments related to prior year acquisitions			1				(4	)
Proceeds from sale of assets			3				84
Other			—				(1	)
Total cash flows used in investing activities of continuing operations			(517	)			(185	)
Cash flows from financing activities of continuing operations:
Proceeds from note payable to SAIC, Inc.			40				601
Payments on note payable to SAIC, Inc.			(369	)			(1,047	)
Payments on notes payable and long-term debt			(553	)			(3	)
Dividend payments			(1	)			—
Other			—				(2	)
Total cash flows used in financing activities of continuing operations			(883	)			(451	)
Decrease in cash and cash equivalents from continuing operations			(1,266	)			(12	)
Cash flows from discontinued operations:
Cash provided by (used in) operating activities of discontinued operations			5				(61	)
Cash provided by investing activities of discontinued operations			—				168
Increase in cash and cash equivalents from discontinued operations			5				107
Effect of foreign currency exchange rate changes on cash and cash equivalents			—				1
Total increase (decrease) in cash and cash equivalents			(1,261	)			96
Cash and cash equivalents at beginning of period			1,592				1,367
Cash and cash equivalents at end of period		$	331			$	1,463

See accompanying combined notes to condensed consolidated financial statements.

~~SAIC~~LEIDOS, INC.

~~SCIENCE~~CONDENSED ~~APPLICATIONS~~CONSOLIDATED ~~INTERNATIONAL~~STATEMENTS ~~CORPORATION~~OF CASH FLOWS

(UNAUDITED)



	Nine Months Ended
	November 1, 2013			October 31, 2012
	(in millions)
Cash flows from operations:
Net income	$	120		$	339
Income from discontinued operations	(91		)	(174		)
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization	66			73
Stock-based compensation	43			42
Intangible asset impairment losses	51			—
Inventory write-down	3			—
Bad debt expense	45			—
Net gain on sales and disposals of assets	(9		)	(7		)
Other	3			3
Increase (decrease) in cash and cash equivalents, net of effects of acquisitions and dispositions, resulting from changes in:
Receivables	(139		)	211
Inventory, prepaid expenses and other current assets	30			(73		)
Deferred income taxes	20			(4		)
Other assets	3			(2		)
Accounts payable and accrued liabilities	9			(671		)
Accrued payroll and employee benefits	(48		)	74
Income taxes receivable/payable	(14		)	35
Other long-term liabilities	(14		)	3
Total cash flows provided by (used in) operating activities of continuing operations	78			(151		)
Cash flows from investing activities:
Expenditures for property, plant and equipment	(31		)	(31		)
Acquisitions of businesses, net of cash acquired of $9 million in fiscal 2013	(1		)	(478		)
Proceeds from sale of assets	65			2
Net proceeds (purchases) of cost method investments	12			—
Contribution paid related to the separation of New SAIC	(26		)	—
Other	(2		)	1
Total cash flows provided by (used in) investing activities of continuing operations	17			(506		)
Cash flows from financing activities:
Proceeds from note payable to Leidos Holdings, Inc.	11			40
Payments on note payable to Leidos Holdings, Inc.	(442		)	(369		)
Payments on notes payable and long-term debt	(1		)	(550		)
Payments for deferred financing costs	(5		)	(1		)
Payment from New SAIC for deferred financing costs	5			—
Proceeds from real estate financing transaction	38			—
Other	2			—
Total cash flows used in financing activities of continuing operations	(392		)	(880		)

See accompanying combined notes to condensed consolidated financial statements.



Decrease in cash and cash equivalents from continuing operations	(297		)	(1,537		)
Cash flows from discontinued operations:
Cash provided by operating activities of discontinued operations	125			285
Cash used in investing activities of discontinued operations	(17		)	(6		)
Cash used in financing activities of discontinued operations	—			(3		)
Increase in cash and cash equivalents from discontinued operations	108			276
Total decrease in cash and cash equivalents	(189		)	(1,261		)
Cash and cash equivalents at beginning of period	735			1,592
Cash and cash equivalents at end of period	$	546		$	331

See accompanying combined notes to condensed consolidated financial statements.

LEIDOS HOLDINGS, INC.

LEIDOS, INC.

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1—Summary of Significant Accounting Policies:

Nature of Operations and Basis of Presentation

~~SAIC~~Leidos Holdings, Inc. (“"Leidos") (formerly known as SAIC”, Inc.) is a holding company whose direct 100%-owned subsidiary is ~~Science~~Leidos, ~~Applications~~Inc. ~~International~~(formerly ~~Corporation~~known (“as Science Applications” International Corporation), a ~~provider~~company offocused ~~scientific,~~on ~~engineering, systems~~delivering ~~integration~~science and ~~technical~~technology ~~services and~~ solutions primarily in the areas of ~~defense~~national security, health, ~~energy, infrastructure, intelligence, surveillance, reconnaissance~~ and ~~cybersecurity~~engineering to agencies of the U.S. Department of Defense (DoD), the intelligence community, the U.S. Department of Homeland Security, and other U.S. Government civil agencies, state and local government agencies, foreign governments and customers inacross ~~select~~a variety of commercial markets. Unless indicated otherwise, references to the "Company", "we", "us" and "our" refer collectively to Leidos Holdings, Inc., Leidos, Inc., and its consolidated subsidiaries.

~~The~~On ~~condensed~~September 27, ~~consolidated~~2013 ~~financial~~(the ~~statements~~"Distribution ofDate"), ~~SAIC~~Leidos ~~include~~completed the ~~accounts~~previously announced separation of its ~~majority-owned~~technical services and ~~100%-owned~~enterprise ~~subsidiaries~~information technology services business into an independent, ~~including~~publicly traded company named Science Applications. ~~The condensed~~International ~~consolidated~~Corporation ~~financial~~(“New ~~statements~~SAIC”) of(formerly ~~Science~~known ~~Applications~~as ~~include~~SAIC ~~the~~Gemini, ~~accounts~~Inc.). The ofseparation ~~its~~was ~~majority~~effected through a tax-~~owned~~free ~~and~~distribution to Leidos' stockholders of 100%~~-owned~~ ~~subsidiaries.~~of the shares of New SAIC's ~~does~~common ~~not~~stock. On ~~have~~the ~~separate~~Distribution ~~operations~~Date, ~~assets~~New orSAIC's ~~liabilities~~common ~~independent~~stock ofwas ~~Science Applications~~distributed, ~~except~~on ~~for~~ a ~~note~~pro ~~with~~rata ~~Science~~basis, ~~Applications~~to (Leidos' stockholders of record as of the ~~“related~~close ~~party~~of ~~note”),~~business on ~~which~~September ~~interest~~19, is2013, ~~recognized~~the record date. Each ~~From~~holder ~~time~~of toLeidos ~~time,~~common stock received one share of New SAIC ~~issues~~common stock tofor ~~employees~~every seven shares of ~~Science~~Leidos ~~Applications~~common ~~and~~stock ~~its~~held ~~subsidiaries,~~on ~~which~~the isrecord ~~reflected~~date. inPrior ~~SAIC’s~~to ~~Condensed Consolidated~~the ~~Statement~~Distribution ofDate, ~~Stockholders’~~Leidos ~~Equity~~Holdings, ~~and~~Inc. ~~results~~was innamed anSAIC, ~~increase~~Inc. toand ~~the~~Leidos, ~~related~~Inc. ~~party~~was ~~note~~named ~~(see~~Science ~~Note~~Applications 7)International Corporation. The ~~All~~companies' ~~intercompany~~names ~~transactions~~were changed as part of the separation, and ~~accounts~~New ~~have~~SAIC ~~been~~assumed ~~eliminated~~the inname ~~consolidation.~~Science Applications International Corporation.

~~These~~As ~~Combined~~a ~~Notes~~result toof ~~Condensed~~the ~~Consolidated~~separation, ~~Financial~~the ~~Statements~~assets, ~~apply~~liabilities, toresults ~~both~~of ~~SAIC~~operations and ~~Science~~cash ~~Applications.~~flows Asof New SAIC ~~consolidates~~have ~~Science~~been ~~Applications~~classified ~~for financial~~as ~~statement~~discontinued ~~purposes,~~operations ~~disclosures~~for ~~that~~all ~~relate~~periods topresented. ~~activities~~References ofto ~~Science~~financial ~~Applications~~data ~~also~~are ~~apply~~ to ~~SAIC. References to~~ the “Company”’s ~~refer~~continuing ~~collectively~~operations, tounless ~~SAIC,~~otherwise ~~Science~~noted. ~~Applications,~~See ~~and~~Note ~~its~~2-Discontinued ~~consolidated~~Operations ~~subsidiaries~~for ~~unless otherwise~~further ~~noted~~information.

~~The~~Immediately ~~accompanying~~following ~~financial~~the ~~information~~distribution, ~~has~~Leidos ~~been~~effectuated ~~prepared~~a byone-for-four ~~the~~reverse ~~Company~~stock ~~pursuant~~split toof ~~the~~its ~~rules~~shares ~~and regulations~~ of ~~the~~common ~~U.S.~~stock, ~~Securities and~~so ~~Exchange~~that ~~Commission~~every ~~(SEC).~~four ~~Certain~~shares ~~disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States~~ of ~~America~~Leidos ~~(GAAP)~~common ~~have~~stock ~~been~~issued ~~condensed or omitted pursuant to such rules~~ and ~~regulations.~~outstanding ~~These~~were ~~condensed~~combined ~~consolidated financial statements should be read in conjunction with the consolidated financial statements~~ and ~~combined~~converted ~~notes~~into ~~thereto~~one ~~included~~share inof ~~the~~Leidos ~~Company’s~~common ~~Annual Report on Form 10-K for the fiscal year ended January 31, 2012~~stock. ~~The~~Each ~~preparation~~reference ~~of financial statements in conformity with GAAP requires management~~ to ~~make estimates and assumptions that affect~~ the ~~reported~~number ~~amounts~~ of ~~assets~~shares ~~and~~outstanding ~~liabilities~~or ~~and~~per ~~the~~share ~~disclosure of contingencies at the date of the financial statements, as well as the reported~~ amounts ofhas ~~revenues and expenses during the reporting periods. Estimates have~~ been ~~prepared~~adjusted byto ~~management~~reflect on the ~~basis~~reverse ofstock ~~the~~split ~~most~~for ~~current~~all ~~and~~periods ~~best available information at the time of estimation and actual results could differ from those estimates~~presented.

InThe ~~the~~condensed ~~opinion~~consolidated financial statements of ~~management,~~Leidos include the ~~financial~~accounts ~~information~~of asits ofmajority-owned ~~October~~and 31100%-owned subsidiaries, ~~2012~~including ~~and~~Leidos, ~~for the~~Inc. ~~three~~The ~~and~~condensed ~~nine~~consolidated ~~months~~financial ~~ended~~statements ~~October~~of 31Leidos, ~~2012~~Inc. include the accounts of its majority-owned and ~~2011~~100%-owned ~~reflects~~subsidiaries. ~~all~~Leidos ~~adjustments~~does not have separate operations, ~~which~~assets ~~consist~~or ofliabilities ~~normal~~independent ~~recurring~~of ~~adjustments~~Leidos, ~~necessary~~Inc., except for a ~~fair~~note ~~presentation~~with ~~thereof~~Leidos, Inc. ~~Operating~~(the ~~results~~“related ~~for~~party ~~the~~note”), ~~three~~on ~~and~~which ~~nine~~interest ~~months~~is ~~ended October 31~~recognized, ~~2012 are~~and ~~not~~cash ~~necessarily~~from ~~indicative~~the ofdividend ~~the~~paid ~~results~~by New SAIC that ~~may~~is beheld ~~expected~~at Leidos for ~~the~~general ~~fiscal~~corporate ~~year~~purposes, ~~ending~~including ~~January 31~~dividend payments and share repurchases. From time to time, ~~2013~~Leidos issues stock to employees of Leidos, orInc. ~~any~~and ~~future~~its ~~period~~subsidiaries, which is reflected in Leidos’ Condensed Consolidated Statement of Stockholders’ Equity and results in an increase to the related party note (see Note 8). All intercompany transactions and accounts have been eliminated in consolidation.

~~Unless otherwise~~The ~~noted,~~accompanying ~~references~~financial information has been prepared by the Company pursuant to ~~years~~the ~~are~~rules ~~for~~and ~~fiscal~~regulations ~~years~~of ~~ended~~the ~~January 31~~U.S. ~~For~~Securities ~~example,~~and Exchange Commission (SEC) and accounting principles generally accepted in the United States of America (GAAP). Certain disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and combined notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ~~ending~~ended January 31, 2013. isThe ~~referred~~preparation toof asfinancial ~~“fiscal~~statements ~~2013”~~ in ~~these~~conformity ~~combined~~with ~~notes~~GAAP requires management to ~~condensed~~make ~~consolidated~~estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods.

~~Planned Separation transaction~~ 13

InEstimates ~~August~~have ~~2012,~~been ~~the~~prepared ~~Company~~by ~~announced that its board of directors authorized~~ management toon ~~pursue a plan to separate into two independent, publicly traded companies. The proposed separation transaction is intended to take~~ the ~~form~~basis of ~~a tax-free spin-off to SAIC stockholders of 100% of~~ the ~~shares~~most ofcurrent ~~a newly formed company focused on government technical~~ and ~~enterprise~~best available information ~~technology~~at ~~services. The separation is expected to occur in~~ the ~~latter~~time ~~half~~ of ~~calendar~~ ~~year~~estimation ~~2013, subject to final approval of the board of directors~~ and ~~certain~~actual ~~customary~~results ~~conditions,~~could ~~including~~differ ~~a ruling~~ from ~~the~~those ~~Internal Revenue Service (IRS) as to the tax-free nature of the transaction~~estimates. Although the Company expects that the separation of its businesses will be consummated, there can be no assurance that a separation will ultimately occur. Upon completion of the separation transaction, the operating results of the separated business will be included in discontinued operations.

11In the opinion of management, the financial information as of November 1, 2013 and for the three and nine months ended November 1, 2013 and October 31, 2012 reflects all adjustments, which consist of normal recurring adjustments, necessary for a fair presentation thereof. Operating results for the three and nine months ended November 1, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2014, or any future period.

~~SAIC,~~Reporting ~~INC.~~ Periods

~~SCIENCE~~Unless ~~APPLICATIONS~~otherwise ~~INTERNATIONAL~~noted, ~~CORPORATION~~references to fiscal years are to fiscal years ended January 31, for fiscal 2013 and earlier periods, or fiscal years ended the Friday closest to January 31, for fiscal 2014 or later periods. For fiscal 2013, the Company’s fiscal quarters ended on the last calendar day of each of April, July and October. Effective in fiscal 2014, the Company changed its fiscal year to a 52/53 week fiscal year ending on the Friday closest to January 31, with fiscal quarters typically consisting of 13 weeks. Fiscal 2014 began on February 1, 2013 and ends on January 31, 2014. The third quarter of fiscal 2014 ended on November 1, 2013. The Company does not believe that the change in its fiscal year has a material effect on the comparability of the periods presented.

Separation Transaction and Restructuring Expenses

In anticipation of the planned separation of New SAIC from the Company, the Company initiated an overall separation program to align the Company’s cost structure for post-separation. During the nine months ended November 1, 2013, the Company reduced headcount, which resulted in severance costs, and reduced its real estate footprint by vacating facilities that are not necessary for its future requirements, which resulted in lease termination and facility consolidation expenses, as reflected in the table below.

Separation transaction and restructuring expenses related to New SAIC, exclusive of any tax impacts, of $20 million and $55 million for the three months and nine months ended November 1, 2013, respectively, and $11 million and $15 million for the three and nine months ended October 31, 2012, respectively, were reclassified as discontinued operations. There were no separation transaction and restructuring expenses for continuing operations in fiscal year 2013 and the separation transaction and restructuring expenses for continuing operations for fiscal year 2014 were as follows:



	Three Months Ended			Nine Months Ended
	November 1, 2013			November 1, 2013
	(in millions)
Strategic advisory services	$	5		$	7
Legal and accounting services	1			1
Lease termination and facility consolidation expenses	17			40
Severance costs	2			10
Separation transaction and restructuring expenses in operating income	25			58
Less: income tax benefit	(10		)	(23		)
Separation transaction and restructuring expenses, net of tax	$	15		$	35

LEIDOS HOLDINGS, INC.

LEIDOS, INC.

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~During~~The following table represents the ~~three~~restructuring liability balance as of November 1, 2013, and ~~nine~~summarizes ~~months~~the ~~ended~~changes ~~October 31~~during the period attributable to costs incurred and charged to expense, ~~2012~~costs paid or otherwise settled, ~~separation transaction~~and ~~expenses~~any ~~were~~adjustments asto ~~follows:~~the liability:

		Three Months Ended October 31, 2012				Nine Months Ended October 31, 2012
	Severance Costs			Lease Termination and Facility Consolidation Expenses			Total
	(in millions)	~~(in millions)~~
Strategic advisory services		$	7			$	11
Balance as of January 31, 2013	$	8		$	2		$	10
Investment banking services			3				3
Charges	10			36			46
Legal and accounting services			1				1
Cash payments	(14		)	(16		)	(30		)
Separation transaction expenses in operating income			11				15
Balance as of November 1, 2013	$	4		$	22		$	26
Less: income tax benefit			(4	)			(6	)
Separation transaction expenses, net of tax		$	7			$	9

~~Consistent~~Variable ~~with~~Interest ~~the~~Entity ~~Company’s~~(VIE) policy for acquisitions, the Company has recognized a tax benefit for the separation transaction expenses. Certain of the separation transaction expenses will be capitalized for tax purposes if the separation transaction is completed, resulting in a reversal of tax benefits previously recognized.

In fiscal 2012, the Company entered into a fixed price agreement to provide engineering, procurement, and construction services to a special purpose limited liability company (Plainfield Renewable Energy LLC or "Plainfield") for a specific renewable energy project. The Company analyzed this arrangement and determined that Plainfield is a VIE. Prior to the third quarter of fiscal 2014, the VIE was not consolidated by the Company because the Company was not the primary beneficiary.

On October 11, 2013, the Company and Plainfield Renewable Energy Owner, LLC (“project owner”) entered into a consensual foreclosure agreement pursuant to which, the project owners agreed to transfer 100% of the equity interest of Plainfield Renewable Energy Holdings, LLC (“PRE Holdings”) to an indirect wholly owned subsidiary of Leidos in full satisfaction of certain secured obligations owed by the project owner to the Company. As a result of the entry into the foreclosure agreement, the Company determined that it has the power to direct the activities of the VIE and has the right to receive benefits from or the obligation to absorb the losses of the VIE. Accordingly, the Company was deemed the primary beneficiary of the VIE, resulting in the consolidation of Plainfield as of October 11, 2013. See Note 3 - Acquisitions, for further information.

Goodwill and Intangible Assets

The Company evaluates goodwill for potential impairment annually at the beginning of the fourth quarter, or whenever events or circumstances indicate that the carrying value of goodwill may not be recoverable. The goodwill impairment test is a two-step process performed at the reporting unit level. The first step consists of estimating the fair values of each of the reporting units based on a market approach and an income approach. Fair value computed using these two methods is determined using a number of factors, including projected future operating results and business plans, economic projections, anticipated future cash flows, comparable market data based on industry grouping, and the cost of capital. The estimated fair values are compared with the carrying values of the reporting units. If the fair value is less than the carrying value of a reporting unit, which includes the allocated goodwill, a second step is performed to compute the amount of the impairment by determining an implied fair value of goodwill. The implied fair value of goodwill is the residual fair value derived by deducting the fair value of a reporting unit’s identifiable assets and liabilities from its estimated fair value calculated in the first step. The impairment expense represents the excess of the carrying amount of the reporting units’ goodwill over the implied fair value of the reporting units’ goodwill. The Company faces continued uncertainty in its business environment due to the substantial fiscal and economic challenges facing the U.S. Government, its primary customer, as well as challenges in the commercial healthcare industry, compounded by lower levels of U.S. Government reimbursements, including reductions in Medicare reimbursements. Adverse changes in fiscal and economic conditions, such as the manner in which budget cuts are implemented, including sequestration, and issues related to the nation’s debt ceiling, could result in an impairment of goodwill.

Intangible assets with finite lives are amortized using the method that best reflects how their economic benefits are utilized or, if a pattern of economic benefits cannot be reliably determined, on a straight-line basis over their

LEIDOS HOLDINGS, INC.

LEIDOS, INC.

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

estimated useful lives. Intangible assets with finite lives are assessed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets with indefinite lives are not amortized but are assessed for impairment at the beginning of the fourth quarter and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Receivables

The Company’s accounts receivable include unbilled receivables, which consist of costs and fees billable upon contract completion or the occurrence of a specified event, ~~the~~substantially ~~majority~~all of which is expected to be billed and collected within one year. Unbilled receivables are stated at estimated realizable value. Since the Company’s receivables, other than those receivables with deferred payment terms, are primarily with the U.S. Government, the Company does not have a material credit risk exposure. Contract retentions are billed when the Company has negotiated final indirect rates with the U.S. Government and, once billed, are subject to audit and approval by government representatives. Consequently, the timing of collection of retention balances is outside the Company’s control. Based on the Company’s historical experience, the majority of retention balances are expected to be collected beyond one year. ~~The~~and ~~Company~~write-offs ~~has extended deferred payment terms with contractual maturities that may exceed one year to three commercial customers related to certain construction projects. As~~ of ~~October~~retention ~~31,~~balances ~~2012, the Company had outstanding receivables from these customers with deferred payment terms of $81 million, which are expected to be collected in calendar 2013 and 2014, when the customers~~ have ~~obtained~~not ~~financing.~~been ~~When events or conditions indicate that amounts outstanding from customers may become uncollectible, an allowance is estimated and recorded~~significant.

The Company has extended deferred payment terms with contractual maturities that may exceed one year to commercial customers related to certain construction projects. During the three months ended November 1, 2013, the Company received a $25 million payment from one construction project and recorded bad debt expense in the Company's condensed consolidated statements of income of $42 million related to two different construction projects. In addition, approximately $105 million of the outstanding deferred payment term receivables were used to acquire PRE Holdings. See Note 3 - Acquisitions, for further information. As of November 1, 2013, the Company had outstanding receivables with deferred payment terms of $30 million, which are expected to be collected in fiscal 2015, when the customers obtain financing.

When events or conditions indicate that amounts outstanding from customers may become uncollectible, an allowance is estimated and recorded.

Changes in Estimates on Contracts

Changes in estimates related to certain types of contracts accounted for using the percentage of completion method of accounting are recognized in the period in which such changes are made for the inception-to-date effect of the changes. Changes in these estimates can routinely occur over the contract performance period for a variety of reasons, including changes in contract scope, changes in contract cost estimates due to unanticipated cost growth or retirements of risk for amounts different than estimated, and changes in estimated incentive or award fees. Aggregate changes in contract estimates ~~increased~~resulted in a decrease to operating income byof $81 million ($0.01 per diluted share) and $929 million ($0.0122 per diluted share) for the three and nine months ended ~~October 31~~November 1, ~~2012~~2013, respectively. Aggregate changes in contract estimates ~~increased~~resulted in an increase to operating income byof $63 million ($0.0103 per diluted share) for the three months ended October 31, 2012 and an increase to operating income of $332 million ($0.0601 per diluted share) for the ~~three and~~ nine months ended October 31, ~~2011, respectively~~2012.

~~Discontinued Operations~~ 16

~~From time-to-time,~~LEIDOS ~~the Company may dispose (or management may commit to plans to dispose) of non-strategic components of the business~~HOLDINGS, ~~which are reclassified as discontinued operations for all periods presented~~INC.

~~In November 2012~~LEIDOS, the Company sold certain components of its business, which were historically included in the Company’s Health, Energy and Civil Solutions segment, primarily focused on providing operational test and evaluation servicesINC.

In fiscal 2012, the Company sold certain components of its business, which were historically included in the Company’s Health, Energy and Civil Solutions segment, primarily focused on providing information technology services to international oil and gas companies. The Company received net proceeds of $167 million resulting in a gain on sale before income taxes of $111 million related to this sale. Under the terms of the definitive agreement, the Company has retained the assets and obligations of its defined benefit pension plan in the United Kingdom. The Company has classified the operating results of these business components, including pension expense through the date of sale, as discontinued operations for all periods presented. Following the sale, as a result of retaining the pension obligation, the remaining components of ongoing pension expense, primarily interest costs and assumed return on plan assets, are recorded in continuing operations.

SAIC, INC.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The pre-sale operating results of these discontinued operations were as follows:

	Nine Months Ended October 31
	2012		2011
	(in millions)
Revenues	$	55	$	140
Costs and expenses:
Cost of revenues		48		114
Selling, general and administrative expenses		3		12
Operating income	$	4	$	14

Income from discontinued operations also includes other activity that is immaterial and not reflected in the table above.

Pension

During the fiscal quarter ended April 30, 2012, the Company transferred $46 million of pension plan assets to a successor contractor’s plan on behalf of certain participants in the Company’s defined benefit pension plan who previously transferred their employment to the successor contractor and settled $63 million of related pension plan obligations. As a result of the transfer, the Company recorded an immaterial settlement gain in selling, general and administrative expenses during the first quarter of fiscal 2013.

Supplementary Cash Flow Information

Supplementary cash flow information, including non-cash investing and financing activities, for the periods presented was as follows:

		Nine Months Ended October 31
	Nine Months Ended
		2012				2011
	November 1,2013				October 31,2012
	(in millions)	~~(in millions)~~
Stock exchanged at fair value upon exercises of stock options		$	—			$	14
Vested stock issued as settlement of annual bonus accruals	$	2			$	2
Vested stock issued as settlement of annual bonus accruals		$	2			$	3
Stock issued in lieu of cash dividend	$	17			$	2
Decrease in accrued stock repurchases		$	—			$	(7	)
Fair value of assets acquired in acquisitions (See Note 3 - Acquisitions)	$	259			$	541
Stock issued in lieu of cash dividend		$	2			$	—
Less: cash paid in acquisitions, net of cash acquired of $9 million in fiscal 2013	$	(1	)		$	(478	)
Fair value of assets acquired in acquisitions		$	541			$	239
Forgiveness of accounts receivable to acquire equity interest in business combination	$	(105	)		$	—
Less: cash paid in acquisitions, net of cash acquired of $9 million and $5 million in fiscal 2013 and 2012, respectively			(478	)			(216	)
Liabilities assumed in acquisitions, including accrued acquisition payments	$	(148	)		$	63
Liabilities assumed in acquisitions, including accrued acquisition payments		$	63			$	23
Accrued liability for acquisition of business	$	(5	)		$	—
Cash paid for interest (including discontinued operations)	$	$37	53		$	$53	53
Cash paid for income taxes (including discontinued operations)	$	$62	~~126~~		$	$126	~~194~~

~~Income~~Special ~~Tax~~Cash ~~Rate~~ Dividend

~~The~~In ~~Company’s~~March ~~effective~~2013, ~~tax~~Leidos' ~~rate~~board ~~for~~of ~~the~~directors ~~three~~declared ~~and~~a ~~nine~~special ~~months~~cash ~~ended~~dividend ~~October 31,~~of ~~2011~~$4.00 ~~significantly~~per ~~exceeded~~share ~~statutory~~of ~~tax~~Leidos ~~rates~~common ~~primarily~~stock ~~due~~and topaid ~~the~~an ~~estimated~~aggregate ~~non-deductible portion~~ of ~~the~~$342 ~~CityTime payment~~million ~~(see~~on ~~Notes~~June 28, 102013 ~~and~~to ~~11).~~stockholders ~~Subsequent~~of torecord ~~October~~on June 3114, ~~2012,~~2013. ~~the~~See ~~Company~~Note ~~entered~~5-Stock ~~into~~Based anCompensation, ~~issue~~for ~~resolution~~further ~~agreement~~information ~~with~~regarding the ~~IRS~~modifications ~~with~~made ~~respect~~ to the ~~tax~~Company’s ~~deductible~~outstanding ~~portion~~stock ofoptions ~~the~~resulting ~~CityTime~~from ~~payment.~~the ~~The~~special ~~resolution~~cash ofdividend. ~~this~~There ~~tax~~were ~~matter~~no ~~will~~modifications ~~result in~~made ato ~~$102 million reduction in~~ the Company’s ~~uncertain~~vesting ~~tax~~stock ~~positions~~awards and aperformance-based ~~$96~~stock ~~million~~awards ~~reduction~~as ina ~~income~~result ~~tax~~of ~~expense during~~ the ~~fourth~~special ~~quarter of fiscal year 2013~~dividend.

Sale and Leaseback Agreement

On May 3, 2013, the Company entered into a purchase and sale agreement relating to the sale of approximately 18 acres of land in Fairfax County, Virginia, including four office buildings, a multi-level parking garage, surface parking lots, and other related improvements and structures, as well as tangible personal property and third-party leases. This sale is expected to be completed in a series of transactions over approximately six years.

On July 26, 2013, the Company closed the first phase of the purchase and sale agreement and received proceeds of $83 million, net of selling costs. The Company leased back from the buyer three of the office buildings over varying lease terms. The sale of two of the office buildings will be accounted for as a sale-leaseback transaction with proceeds from the sale of $40 million, a corresponding book value of $42 million resulting in a $2 million loss recorded in selling, general and administrative expenses. These leases will be accounted for as operating leases over a six months term. The sale of the third office building will be accounted for as a financing transaction. The allocated consideration received of $38 million was recorded as a note payable to be paid over seven years with interest at the lessee’s incremental borrowing rate, estimated at 3.7%. The right of use for the multi-level parking garage and surface parking lots were allocated proceeds of $1 million and $4 million, respectively, and were accounted for as other long term liabilities.

Accounting Standards Updates Issued But Not Yet Adopted

Accounting standards and updates issued but not effective for the Company until after ~~October 31~~November 1, ~~2012~~2013 are not expected to have a material effect on the Company’s consolidated financial position or results of operations.

13 17

~~SAIC~~LEIDOS HOLDINGS, INC.

~~SCIENCE~~LEIDOS, ~~APPLICATIONS INTERNATIONAL CORPORATION~~ INC.

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 2—~~Earnings~~Discontinued ~~Per Share (EPS)~~Operations:

~~The~~Fiscal ~~Company~~Year is2014 required to allocate a portion of its earnings to its unvested stock awards containing nonforfeitable rights to dividends or dividend equivalents (participating securities) in calculating EPS using the two-class method. Dispositions:

~~Unvested~~Separation ~~stock awards granted prior to fiscal 2013 are participating securities requiring application~~ of ~~the~~New ~~two-class~~SAIC method. In fiscal 2013, the Company began issuing unvested stock awards that have forfeitable rights to dividends or dividend equivalents. These stock awards are not participating securities requiring application of the two-class method but are dilutive common share equivalents subject to the treasury stock method. Basic EPS is computed by dividing income less earnings allocable to participating securities by the basic weighted average number of shares outstanding. Diluted EPS is computed similar to basic EPS, except the weighted average number of shares outstanding is increased to include the dilutive effect of outstanding stock options and other stock-based awards.

As discussed in Note 1, the Company completed the separation of New SAIC on September 27, 2013. In anticipation of this separation, the Company entered into a credit agreement in June 2013 as a guarantor that consisted of a unsecured term credit facility of $500 million with New SAIC as the borrower. New SAIC was a subsidiary of Leidos prior to the separation date. On September 26, 2013, New SAIC borrowed $500 million under this term credit facility which was unconditionally guaranteed by the Company. The Company was released from its guaranty on September 27, 2013, the completion date of the separation transaction. At separation, New SAIC made a $295 million dividend payment to Leidos and reimbursed Leidos, Inc. $5 million for financing costs previously advanced to New SAIC to secure a revolving and term credit facility, and Leidos, Inc. made a $26 million capital contribution to New SAIC.

The separation was made pursuant to the terms of a Distribution Agreement and several other agreements entered into between the Company and New SAIC on September 25, 2013. These agreements set forth, among other things, the principal actions needed to be taken in connection with the separation and govern certain aspects of the relationship between the Company and New SAIC following the separation. These agreements generally provide that each party is responsible for its respective assets, liabilities and obligations, including employee benefits, insurance and tax related assets and liabilities, whether accrued or contingent, except that unknown liabilities will be shared between the parties in certain circumstances. The agreements also describe the party’s commitments to provide each other with certain services for a limited time to help ensure an orderly transition. While the Company is a party to the Distribution Agreement and the ancillary agreements, the Company has determined that it does not have significant continuing involvement in the operations of New SAIC, nor does the Company expect significant continuing cash flows from New SAIC. Brief descriptions of agreements associated with the separation are provided below.

Distribution Agreement

The Distribution Agreement provides for the allocation, transfer and assumption of assets and liabilities among New SAIC and Leidos. Pursuant to the agreement, subject to certain exceptions, the Company and New SAIC released the other from claims against each other that arise out of or relate to events, circumstances, or actions occurring or failing to occur or any conditions existing at or prior to the time of distribution. In addition, the Company and New SAIC agreed to indemnify each other against breaches of this agreement and certain liabilities in connection with their respective businesses.

Employee Matters Agreement

The Employee Matters Agreement contains agreements as to certain employment, compensation and benefits matters. The Employee Matters Agreement provides for the allocation and treatment of assets and liabilities and responsibilities with respect to certain employee compensation and benefit plans and programs, and certain other employment matters. Generally, New SAIC assumed or retained liabilities relating to New SAIC’s employees and the Company assumed or retained liabilities relating to the Company’s employees. The Employee Matters Agreement also provides for the adjustment of outstanding equity awards to reflect the separation and the one-for-four reverse stock split of the Company’s shares.

LEIDOS HOLDINGS, INC.

LEIDOS, INC.

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Tax Matters Agreement

The Tax Matters Agreement governs the respective rights, responsibilities and obligations of the Company and New SAIC after the separation with respect to tax liabilities and benefits, tax attributes, tax contests and other tax sharing regarding U.S. federal, state, local and foreign income taxes, other tax matters and related tax returns. As a former subsidiary of the Company, New SAIC has (and will continue to have following the separation) joint and several liability with the Company to the IRS for the consolidated U.S. federal income taxes of the Company consolidated group relating to the taxable periods in which New SAIC was part of that group. However, the Tax Matters Agreement specifies the portion, if any, of this tax liability for which New SAIC bears responsibility, and the Company agrees to indemnify New SAIC against any amounts for which New SAIC is not responsible.

Transition Services Agreement

Under the Transition Services Agreement, the Company or its affiliates will provide New SAIC, and New SAIC or its affiliates will provide the Company, with certain services for a limited time to help ensure an orderly transition following the distribution. Under the Transition Services Agreement, the Company and New SAIC will provide each other certain services, including information technology, financial, telecommunications, benefits support services and other specified services, on a transitional basis. The Company expects that these services will be provided at cost, and these services are planned to extend for a period of six to eighteen months in most circumstances.

Master Transitional Contracting Agreement

The legal transfer of government contracts to New SAIC will occur through a novation process and commercial, including state and local, contracts will be transferred by assignment to New SAIC. The Master Transitional Contracting Agreement governs the relationship between the Company and New SAIC pending novation and assignment of contracts to New SAIC and addresses the treatment of existing contracts, proposals, and teaming arrangements where both companies will jointly perform work after separation. Joint contracts entered into post separation will be treated as traditional prime and subcontractor relationships.

The operating results of New SAIC, which have been classified as discontinued operations, for the periods presented were as follows:



	Three Months Ended				Nine Months Ended
	November 1, 2013		October 31, 2012		November 1, 2013		October 31, 2012
	(in millions)
Revenues	$	598	$	1,195	$	2,712	$	3,558
Costs and expenses:
Cost of revenues	533		1,073		2,446		3,205
Selling, general and administrative expenses	22		14		42		52
Separation transaction and restructuring expenses	20		11		55		15
Operating income	$	23	$	97	$	169	$	286

Income from discontinued operations also includes other activity that is immaterial and not reflected in the table above.

LEIDOS HOLDINGS, INC.

LEIDOS, INC.

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The major classes of assets and liabilities included in discontinued operations through the Distribution Date related to the separation of New SAIC are presented in the table below:



	January 31, 2013
	(in millions)
Cash and cash equivalents	$	1
Receivables, net	717
Inventory, prepaid expenses and other current assets	101
Total current assets	819
Property, plant and equipment, net	29
Intangible assets, net	6
Goodwill	491
Deferred income taxes	2
Other assets	1
Total assets	1,348
Accounts payable and accrued liabilities	461
Accrued payroll and employee benefits	185
Notes payable and long-term debt	1
Total current liabilities	647
Non-current liabilities	—
Total liabilities	$	647

Other Fiscal Year 2014 Dispositions

From time-to-time, the Company may dispose (or management may commit to plans to dispose) of non-strategic components of the business, which are reclassified as discontinued operations for all periods presented.

During the three months ended November 1, 2013, in order to better align its business portfolio with its strategy, the Company sold a certain component of its business resulting in an insignificant gain, which were historically included in the Company’s National Security Solutions segment, focused on machine language translation.

During the three months ended August 2, 2013, in order to better align its business portfolio with its strategy, the Company committed to plans to dispose of certain components of its business, which were historically included in the Company’s National Security Solutions segment, focused on technology used to detect if an individual is concealing explosive devices or other hidden weapons.

LEIDOS HOLDINGS, INC.

LEIDOS, INC.

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Fiscal Year 2013 Dispositions:

The Company sold certain components of its business, which were historically included in the Company’s Health and Engineering segment, primarily focused on providing operational test and evaluation services to U.S. Government customers. The Company received net proceeds of $51 million resulting in a gain on sale before income taxes of $17 million related to this sale.

The pre-sale operating results and through the date of disposal of the Company’s discontinued operations discussed above for Other Fiscal Year 2014 Dispositions and Fiscal Year 2013 Dispositions, not including the separation of New SAIC, for the periods presented were as follows:



	Three Months Ended						Nine Months Ended
	November 1, 2013			October 31, 2012			November 1, 2013			October 31, 2012
	(in millions)
Revenues	$	1		$	19		$	3		$	60
Costs and expenses:
Cost of revenues	6			18			9			54
Selling, general and administrative expenses	(3		)	4			5			13
Operating income	$	(2	)	$	(3	)	$	(11	)	$	(7	)

Income from discontinued operations also includes other activity that is immaterial and not reflected in the table above.

The major classes of assets and liabilities included in discontinued operations through the date of disposal, not including the separation of New SAIC, are immaterial for disclosure purposes.

Note 3—Acquisitions:

Plainfield Renewable Energy Holdings LLC

As described in Note 1, the Company became the primary beneficiary of Plainfield on October 11, 2013 which required the consolidation of the VIE. The Company also determined that Plainfield met the definition of a business and as such is gaining control of 100% of PRE Holdings equity through the consensual foreclosure agreement which constituted a change in control accounted for as a business combination.

The Plainfield Renewable Energy Project involves the design, construction, and financing of a 37.5 megawatt biomass-fueled power plant in Plainfield, Connecticut (the plant). The plant is scheduled to be completed by the end of calendar year 2013. Connecticut Light & Power will purchase approximately 80% of the power produced by the plant based on a 15-year off-take agreement, utilizing the plant's status as a renewable power source. In addition, there are fuel supply agreements with initial terms of 5 to 15 years and minimum purchase requirements either at prevailing market prices or a set price plus a CPI index.

The project was partially financed by the Company’s provision of extended payment terms for certain of its services performed on the project and, at the time of this transaction, the Company had a receivable of $138 million due from Plainfield. The remainder of the project was financed by Carlyle Group with two secured notes aggregating $148 million, which these notes were assumed by the Company as part of consensual foreclosure. See Note 7 - Financial Instruments, for further information.

At the time the Company became the primary beneficiary of Plainfield, the Company measured the assets acquired and liabilities assumed at their fair values. This value also contemplates a plant placed into service prior to December 31, 2013, which will allow the Company to apply for a 1603 Treasury Grant for approximately $70 million. The settlement of the project with PRE Holdings resulted in a $33 million loss which was recorded as bad debt expense in the Company's condensed consolidated statements of income. In addition, there is contingent

LEIDOS HOLDINGS, INC.

LEIDOS, INC.

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

consideration of approximately $5 million as of November 1, 2013 which is to be paid based on various milestones: $2 million based on the earlier of January 2014 or the completion of the collateral transfer and $3 million based on the successful sale of the plant.

The aggregate purchase consideration that the Company exchanged for PRE Holdings is as follows (in millions):



Forgiveness of accounts receivable (net of $33 million bad debt expense)	$	105
Contingent consideration	6
Total preliminary purchase consideration	$	111

The preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition were as follows (in millions):



Property, plant and equipment	$	248
Other assets	8
Notes payable assumed (net of debt discount)	(148		)
Total identifiable net assets acquired	108
Intangible assets	3
Total preliminary purchase consideration	$	111

maxIT Healthcare Holdings, Inc.

In August 2012, the Company acquired 100% of the stock of maxIT Healthcare Holdings, Inc. (maxIT), a provider of clinical, business and information technology services primarily to commercial hospital groups and other medical delivery organizations. The purchase price of $505 million consists of cash payments and accrued acquisition payments of $13 million. This acquisition expands the Company’s commercial consulting practice in electronic health record (EHR) implementation and optimization and strengthens the Company’s capabilities to provide these services to its federal healthcare customers as those customers migrate to commercial off-the-shelf EHR applications. This acquisition was in the Health and Engineering segment and the results of maxIT have been included in the financial statements since the acquisition date.

The fair values of the assets acquired and liabilities assumed at the date of acquisition, including subsequent adjustments, were as follows (in millions):



Cash	$	9
Receivables	50
Other assets	24
Accounts payable, accrued liabilities and accrued payroll and employee benefits	(21		)
Deferred tax liabilities, net	(24		)
Total identifiable net assets acquired	38
Goodwill	395
Intangible assets	72
Total purchase price	$	505

Note 4—Earnings Per Share (EPS):

The Company is required to allocate a portion of its earnings to its unvested stock awards containing nonforfeitable rights to dividends or dividend equivalents (participating securities) in calculating EPS using the two-class method. Unvested stock awards granted prior to fiscal 2013 are participating securities requiring application of the two-class method. In fiscal 2013, the Company began issuing unvested stock awards that have forfeitable rights to dividends

LEIDOS HOLDINGS, INC.

LEIDOS, INC.

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

or dividend equivalents. These stock awards are not participating securities requiring application of the two-class method, but are dilutive common share equivalents subject to the treasury stock method. Basic EPS is computed by dividing income less earnings allocable to participating securities by the basic weighted average number of shares outstanding. Diluted EPS is computed similar to basic EPS, except the weighted average number of shares outstanding is increased to include the dilutive effect of outstanding stock options and other stock-based awards.

A reconciliation of the income used to compute basic and diluted EPS for the periods presented was as follows:

		Three Months Ended October 31								Nine Months Ended October 31
	Three Months Ended								Nine Months Ended
		2012				2011				2012				2011
	November 1,2013				October 31,2012				November 1,2013				October 31,2012
	(in millions)	~~(in millions)~~
Basic EPS:
Income from continuing operations, as reported		$	112			$	(92	)		$	337			$	146
(Loss) income from continuing operations, as reported	$	(9	)		$	55			$	29			$	165
Less: allocation of distributed and undistributed earnings to participating securities	—		(2	)	—		—		(3		(7)	)	(3		(5)	)
Income (loss) from continuing operations, for computing basic EPS		$	110			$	(92	)		$	330			$	141
(Loss) income from continuing operations, for computingbasic EPS	$	(9	)		$	55			$	26			$	162
Net income (loss), as reported		$	112			$	(89	)		$	339			$	220
Net income, as reported	$	(3	)		$	112			$	120			$	339
Less: allocation of distributed and undistributed earnings to participating securities	—		(2	)	(2		—)		(3		(7)	)	(7		(8)	)
Net income (loss), for computing basic EPS		$	110			$	(89	)		$	332			$	212
Net income, for computing basic EPS	$	(3	)		$	110			$	117			$	332
Diluted EPS:
Income (loss) from continuing operations, as reported		$	112			$	(92	)		$	337			$	146
(Loss) income from continuing operations, as reported	(9		)		55				29				165
Less: allocation of distributed and undistributed earnings to participating securities	—		(2	)	—		—		(3		(7)	)	(3		(5)	)
Income (loss) from continuing operations, for computing diluted EPS		$	110			$	(92	)		$	330			$	141
(Loss) income from continuing operations, for computingdiluted EPS	$	(9	)		$	55			$	26			$	162
Net income, as reported	$	$(3	~~112~~)		$	$112	~~(89~~	)	$	$120	~~339~~		$	$339	~~220~~
Less: allocation of distributed and undistributed earnings to participating securities	—		(2	)	(2		—)		(3		(7)	)	(7		(8)	)
Net income (loss), for computing diluted EPS		$	110			$	(89	)		$	332			$	212
Net income, for computing diluted EPS	$	(3	)		$	110			$	117			$	332

AThe following table provides a reconciliation of the weighted average number of shares outstanding used to compute basic and diluted EPS for the periods presented. ~~was~~The aspresentation ~~follows:~~gives effect to the one-for-four reverse stock split which occurred after market close on September 27, 2013.

		Three Months EndedOctober 31					Nine Months Ended October 31
	Three Months Ended					Nine Months Ended
		2012			2011		2012		2011
	November 1,2013			October 31,2012		November 1,2013	October 31,2012
	(in millions)	~~(in millions)~~
Basic weighted average number of shares outstanding	84		~~334~~	83		~~329~~84	83	~~333~~		~~338~~
Dilutive common share equivalents—stock options and other stock awards	—		—	—		—	—	—		1
Diluted weighted average number of shares outstanding	84		~~334~~	83		~~329~~84	83	~~333~~		~~339~~

14For the three months ended November 1, 2013, all outstanding common stock equivalents were excluded in the computation of diluted (loss) per share because their effect would have been anti-dilutive due to the net loss for the quarter. For the nine months ended November 1, 2013, the declared dividends exceeded current period earnings.

~~SAIC, INC.~~ 23

~~SCIENCE~~LEIDOS ~~APPLICATIONS~~HOLDINGS, ~~INTERNATIONAL CORPORATION~~ INC.

LEIDOS, INC.

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~Basic~~Therefore, ~~and~~we ~~diluted~~are ~~EPS~~in a loss position for computing diluted (loss) per share and all outstanding common stock equivalents were excluded in the ~~periods~~computation ~~presented~~because ~~was~~their aseffect ~~follows:~~would have been anti-dilutive.

	Three Months EndedOctober 31					Nine Months Ended October 31
	2012		2011			2012		2011
Basic:
Income (loss) from continuing operations	$	.33	$	(.28	)	$	.99	$	.42
Income from discontinued operations		—		.01			.01		.21
	$	.33	$	(.27	)	$	1.00	$	.63
Diluted:
Income (loss) from continuing operations	$	.33	$	(.28	)	$	.99	$	.42
Income from discontinued operations		—		.01			.01		.21
	$	.33	$	(.27	)	$	1.00	$	.63

The following anti-dilutive stock-based awards were excluded from the weighted average number of shares outstanding used to compute basic and diluted EPS for the periods presented:

The following stock-based awards were excluded from the weighted average number of shares outstanding used to compute basic and diluted EPS for the periods presented:



	Three Months Ended		Nine Months Ended
	November 1, 2013	October 31, 2012	November 1, 2013	October 31, 2012
	(in millions)
Stock options	5	5	5	5
Vesting stock awards	4	—	4	—

	Three Months EndedOctober 31				Nine Months Ended October 31
	2012		2011		2012		2011
	(in millions)
Antidilutive stock options excluded		20		21		20		21
Performance-based stock awards excluded		1		1		1		1

Note 5—Stock-Based Compensation:

Total Stock-Based Compensation. Total stock-based compensation expense for the periods presented was as follows:

Note 3—Stock-Based Compensation:



	Three Months Ended				Nine Months Ended
	November 1, 2013		October 31, 2012		November 1, 2013		October 31, 2012
	(in millions)
Stock options	$	4	$	1	$	9	$	5
Vesting stock awards	10		13		35		37
Total stock-based compensation expense	$	14	$	14	$	44	$	42

~~Total~~New ~~Stock-Based~~SAIC ~~Compensation~~Separation Adjustments. ~~Total~~As a result of the separation of New SAIC, effective September 27, 2013, all outstanding equity awards related to New SAIC employees were assumed by New SAIC. Also in connection with the separation, adjustments were made to the share amounts and exercise prices of all remaining outstanding Leidos stock options, and the share amounts for vesting stock awards and performance-based stock awards as of the Distribution Date such that the adjustments were generally made to preserve the aggregate intrinsic value at the distribution date pursuant to the terms of the stock based compensation ~~expense~~plans ~~for~~under which they were issued. Taking into account the ~~periods~~change ~~presented~~in ~~was~~the value of the Company’s common stock as ~~follows:~~a result of the distribution of the New SAIC shares, the conversion ratio applied to all outstanding equity awards at the distribution date was 1.4523. In addition, all outstanding equity awards reflected the Company’s one-for-four reverse stock split. Awards held by non-employee directors were modified so that the directors’ awards were bifurcated into awards in both companies in a manner intended to preserve the aggregate intrinsic value.

	Three Months EndedOctober 31					Nine Months Ended October 31
	2012		2011			2012		2011
	(in millions)
Stock options	$	2	$	3		$	9	$	13
Vesting stock awards		17		19			54		54
Performance-based stock awards		2		(1	)		4		(3	)
Total stock-based compensation expense	$	21	$	21		$	67	$	64

As a result of the separation adjustments, a modification was made on September 27, 2013 to Leidos and New SAIC stock options outstanding as of the distribution date by which additional stock-based compensation expense was recognized, as the fair value of the outstanding options immediately following the separation was greater than the fair value immediately prior to the separation. An increase of expense related to the modification of $3 million was recorded for awards that were fully vested on the modification date, and an additional $3 million of incremental fair value will be recorded in future periods for unvested awards that will continue to vest, resulting in a total additional stock compensation cost of $6 million with a weighted average modification fair value of $1.02 related to continuing Leidos stock options outstanding.

~~Stock~~Under ~~Options. Stock~~the ~~options~~terms ~~granted~~of ~~during~~the Employee Matters Agreement, the ~~nine~~performance ~~months~~period ~~ended~~for ~~October 31,~~certain ~~2012~~performance-based ~~and~~stock ~~2011~~awards ~~have~~was ~~terms~~deemed completed as of ~~seven~~the ~~years~~last ~~and~~fiscal aquarter ~~vesting~~prior ~~period~~to ofthe ~~four~~separation ~~years,~~with ~~except~~the target shares prorated for ~~stock~~the ~~options~~completed ~~granted~~period toearned based on actual performance as determined by the Company’s ~~outside~~compensation ~~directors,~~committee. ~~which~~For ~~have~~the aremaining ~~vesting~~target shares in the original award for which the performance period ofwas ~~one~~not ~~year.~~deemed completed, the performance condition was removed and the awards are subject to vesting based on continued

The fair value of the Company’s stock option awards is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average grant-date fair value and assumptions used to determine the fair value of stock options granted for the periods presented were as follows: 24

	Nine Months Ended October 31
	2012			2011
Weighted average grant-date fair value	$	1.81		$	4.21
Expected term (in years)		5.0			4.9
Expected volatility		24.5	%		23.4	%
Risk-free interest rate		1.0	%		2.2	%
Dividend yield		3.7	%		0	%

LEIDOS HOLDINGS, INC.

15LEIDOS, INC.

SAIC, INC.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~Stock~~employment ~~option~~through ~~activity~~the ~~for~~original ~~the~~performance ~~nine~~period. ~~months~~These ~~ended~~modifications ~~October 31,~~resulted ~~2012~~in ~~was~~approximately as$1 ~~follows:~~million of incremental fair value to be expensed in future periods over the remaining vesting period.

	Shares ofstock understockoptions			Weightedaverageexercise price		Weightedaverageremainingcontractualterm		Aggregateintrinsic value
	(in millions)					(in years)		(in millions)
Outstanding at January 31, 2012		20.8		$	17.90		2.5	$	—
Options granted		5.0			13.20
Options forfeited or expired		(5.7	)		17.48
Outstanding at October 31, 2012		20.1			16.85		3.2		—
Exercisable at October 31, 2012		9.3			18.33		1.4		—

The separation adjustments are reflected in the tables below.

~~Vesting~~ Stock ~~Awards~~Options. InStock ~~fiscal~~options ~~2013,~~granted during the ~~Company~~nine ~~began~~months ~~granting~~ended ~~restricted~~November ~~stock~~1, ~~units~~2013 ~~that have forfeitable dividend rights~~ and ~~no voting rights until the units vest and become included in shares of common stock outstanding. Prior to January~~October 31, 2012, ~~the Company granted restricted stock awards that~~ have ~~non-forfeitable~~terms ~~dividend~~of ~~rights~~seven years and ~~voting~~a ~~rights~~vesting ~~and~~period ~~are~~of ~~included~~four inyears ~~shares~~based ~~outstanding~~ upon ~~issuance~~required ~~(prior~~service toconditions, ~~vesting).~~except ~~Vesting~~for stock ~~award~~options ~~activity~~granted ~~for~~to the ~~nine~~Company’s ~~months ended~~outside ~~October 31~~directors, ~~2012~~which ~~was~~have asa ~~follows:~~vesting period of one year.

	Shares of stockunder stockawards			Weightedaverage grant-date fair value
	(in millions)
Unvested stock awards at January 31, 2012		12.0		$	17.50
Awards granted		6.5			13.18
Awards forfeited		(1.0	)		15.83
Awards vested		(4.7	)		17.86
Unvested stock awards at October 31, 2012		12.8			15.30

In connection with the special cash dividend, anti-dilutive adjustments were made to all outstanding stock options on the dividend record date to preserve their value following the special cash dividend, as required by the Company’s 2006 Equity Incentive Plan. The modifications were made to reduce the exercise prices of the outstanding stock options and to increase the number of shares issuable upon the exercise of each option such that the aggregate difference between the market price and exercise price times the number of shares issuable upon exercise was substantially the same immediately before and after the payment of the special dividend. To affect these modifications, on June 12, 2013, the Company increased the shares of stock subject to stock options by a factor of 1.0713, which is the ratio of the closing price of $59.48 on June 11, 2013, the last trading date prior to ex-dividend date, to the opening price of $55.52 on the ex-dividend date, June 12, 2013, and decreased the exercise price of each of the stock options by a factor of 0.9334, which is the ratio of the opening price on the ex-dividend date to the closing price on June 11, 2013. These adjustments did not result in additional share-based compensation expense, as the fair value of the outstanding options immediately following the payment of the special cash dividend was equal to the fair value immediately prior to such distribution. These adjustments are reflected in the “Special Dividend Adjustment” line in the stock option activity table below.

The fair value of ~~vesting~~the Company’s stock option awards ~~that~~is ~~vested~~estimated ~~during~~on the ~~nine~~date ~~months~~of ~~ended~~grant ~~October 31,~~using ~~2012~~the ~~and~~Black-Scholes ~~2011~~option-pricing ~~was~~model. ~~$64~~The ~~million~~weighted average grant date fair value and ~~$66~~ ~~million,~~assumptions ~~respectively.~~used to determine the fair value of stock options granted for the periods presented were as follows:

Performance-Based Stock Awards. The Company’s performance-based stock awards vest and the stock is issued at the end of a three-year period based upon the achievement of specific performance criteria, with the number of shares ultimately awarded ranging from zero to 150% of the specified target awards. For awards granted in fiscal 2013, one-third of the target number of shares of stock granted under the awards will be allocated to each fiscal year over the three-year performance period and the actual number of shares to be issued with respect to each fiscal year will be based upon the achievement of that fiscal year’s performance criteria. For performance-based stock awards granted prior to fiscal 2013, the number of shares of stock to be issued under the awards is determined based upon the achievement of the performance criteria measured over the entire three-year performance period. Performance-based stock award activity for the nine months ended October 31, 2012 was as follows:



	Nine Months Ended
	October 2013 Grants			2013 Grants Before Spin				October 31, 2012
Weighted average grant-date fair value**	$	9.48		$	6.96		**	$	6.75		**
Expected term (in years)	5.0			5.0				5.0
Expected volatility	30.0		%	25.0		%		24.5		%
Risk-free interest rate	1.4		%	0.8		%		1.0		%
Dividend yield	2.8		%	3.8		%		3.7		%

	Expected number of shares of stockto be issued underperformance-based stockawards		Weightedaverage grant-date fair value
	(in millions)
Outstanding at January 31, 2012		0.5	$	17.02
Awards granted		0.8		13.14
Outstanding at October 31, 2012		1.3		14.15

**Adjusted for additional awards granted for the $4.00 Special Dividend

~~Adjustments~~ Stock tooption ~~the~~activity ~~expected~~for ~~number of shares of stock to be issued may occur due to changes in~~ the ~~expected~~nine ~~level~~months ofended ~~achievement~~November ~~of the~~1, ~~performance~~2013 ~~goals~~was ~~over~~as ~~the life of the awards.~~ follows:

16 25

~~SAIC~~LEIDOS HOLDINGS, INC.

~~SCIENCE~~LEIDOS, ~~APPLICATIONS INTERNATIONAL CORPORATION~~ INC.

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 4—Acquisitions:



	Shares of stock under stock options		Weighted average exercise price		Weighted average remaining contractual term	Aggregate intrinsic value
	(in millions)				(in years)	(in millions)
Outstanding at January 31, 2013	4.9		$	67.24	3.0	$	—
Options granted	1.4		54.86
Special dividend adjustments	0.4
Options forfeited or expired	(1.3	)	71.80
Separation Adjustment	(1.9	)	57.85
Outstanding at September 27, 2013	3.5		59.25		3.9	24.0
Exercisable at September 27, 2013	1.5		64.17		2.0	4.0

maxIT Healthcare Holdings, Inc. In August 2012, the Company acquired 100% of the stock of maxIT Healthcare Holdings, Inc., a provider of clinical, business and information technology services primarily to commercial hospital groups and other medical delivery organizations, for a preliminary purchase price of $473 million paid in cash plus a $14 million cash payment for excess working capital delivered at closing, subject to adjustment. The Company will make an additional payment of up to $20 million after receipt of certain tax refunds. This acquisition expands the Company’s commercial consulting practice in electronic health record (EHR) implementation and optimization and strengthens the Company’s capabilities to provide these services to its federal healthcare customers as those customers migrate to commercial off-the-shelf EHR applications. The preliminary purchase price allocation resulted in goodwill of $395 million (none of which is tax deductible) and identifiable finite-lived intangible assets of $72 million (amortizable over a weighted average life of four years). This acquisition was in the Health, Energy and Civil Solutions segment.



	Shares of stock under stock options			Weighted average exercise price			Weighted average remaining contractual term	Aggregate intrinsic value
	(in millions)						(in years)	(in millions)
Outstanding at September 28, 2013	4.9		**	$	40.20	**	3.9	$	24.0
Options granted	0.1			46.19
Options forfeited or expired	(0.1	)		42.84
Outstanding at November 1, 2013	4.9			40.31			4.0	35.0
Exercisable at November 1, 2013	2.0			44.30			2.0	6.0

~~The~~** ~~preliminary~~Adjusted ~~estimated~~for ~~fair~~Conversion ~~values~~Ratio of ~~the~~1.4523 ~~assets acquired and liabilities assumed at the date of acquisition for this acquisition was as follows (in millions):~~

Cash	$	9
Receivables		50
Other assets		24
Accounts payable, accrued liabilities and accrued payroll and employee benefits		(20	)
Deferred tax liabilities, net		(26	)
Total identifiable net assets acquired		37
Goodwill		395
Intangible assets		72
Total preliminary purchase price (including accrued acquisition payments of $17 million)	$	504

Vesting Stock Awards. Vesting stock award activity for the nine months ended November 1, 2013 was as follows:

Since the date of acquisition of maxIT Healthcare Holdings, Inc. through October 31, 2012, the Company has recognized revenues of $68 million related to this acquisition.



	Shares of stock under stock awards		Weighted average grant- date fair value
	(in millions)
Unvested stock awards at January 31, 2013	3.1		$	60.78
Awards granted	2.1		53.51
Awards forfeited	(0.4	)	58.28
Awards vested	(0.9	)	64.76
Separation Adjustment	(1.5	)	57.04
Unvested stock awards at September 27, 2013	2.4		59.98

~~Note 5—Goodwill and Intangible Assets:~~ 26

~~The~~LEIDOS ~~changes in the carrying value of goodwill for Defense Solutions (DS)~~HOLDINGS, ~~Health, Energy and Civil Solutions (HECS) and Intelligence and Cybersecurity Solutions (ICS) were as follows:~~ INC.

	DS		HECS			ICS		Total
	(in millions)
Goodwill at January 31, 2012	$	410	$	759		$	631	$	1,800
Corporate reorganizations		—		(10	)		10		—
Acquisition of a business		—		395			—		395
Goodwill at October 31, 2012	$	410	$	1,144		$	641	$	2,195

LEIDOS, INC.

~~Corporate~~COMBINED ~~reorganizations~~NOTES inTO ~~fiscal~~CONDENSED ~~2013~~CONSOLIDATED ~~resulted~~FINANCIAL ~~from transfers of certain operations between the Company’s reportable segments. Additionally, prior year amounts have been adjusted for discontinued operations.~~ STATEMENTS

(UNAUDITED)



	Shares of stock under stock awards		Weighted average grant- date fair value
	(in millions)
Unvested stock awards at September 28, 2013	3.5	**	$	42.98	**
Awards granted	0.4	*	33.44		*
Unvested stock awards at November 1, 2013	3.9		42.37

* Includes Modified Performance-Based Stock Awards

** Adjusted for Conversion Ratio of 1.4523

Vesting stock awards generally vest over a four-year vesting period, or seven for certain stock awards, based upon required service conditions and in some cases performance conditions. The fair value of vesting stock awards that vested during each of the nine months ended November 1, 2013 and October 31, 2012 was $57 million and $64 million, respectively.

Performance-Based Stock Awards. The Company’s performance-based stock awards vest and the stock is issued at the end of a three-year period based upon the achievement of specific performance criteria, with the number of shares ultimately awarded, if any, ranging up to 150% of the specified target awards. If performance is below the threshold level of performance, no shares will be issued. As discussed above in New SAIC Separation Adjustments, the performance period for certain performance-based stock awards was deemed completed as of the last fiscal quarter prior to the separation with the target shares prorated for the completed period earned. For all of the remaining target shares in the original award, the performance condition was removed and the awards are subject to vesting based on continued employment through the original performance period and reflected in the vesting stock awards table above. In the table below, the outstanding awards represent the awards whose performance conditions were completed in the last fiscal quarter prior to the separation and continue to vest over the original service period of the award. Performance-based stock award activity for the nine months ended November 1, 2013 was as follows:



	Expected number of shares of stock to be issued under performance-based stock awards			Weighted average grant-date fair value
	(in millions)
Outstanding at January 31, 2013	0.3			$	52.96
Awards canceled	(0.2	)	*	53.23		*
Outstanding at November 1, 2013	0.1		**	36.59		**

* Includes Modified Performance-Based Stock Awards

** Adjusted for Conversion Ratio of 1.4523

Note 6—Goodwill and Intangible Assets:

The changes in the carrying value of goodwill for Health and Engineering (HES) and National Security Solutions (NSS) were as follows:

LEIDOS HOLDINGS, INC.

LEIDOS, INC.

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



	HES			NSS		Total
	(in millions)
Goodwill at January 31, 2013	$	985		$	719	$	1,704
Corporate reorganizations	(69		)	69		—
Goodwill at November 1, 2013	$	916		$	788	$	1,704

In the second and third quarter of fiscal 2014, the Company forecasted a significant decline in revenue and operating income related to the Health Solutions and Engineering reporting units within its HES reporting segment. The Company determined that this decline constituted a significant change in circumstances which could potentially reduce the fair value of the reporting units below their carrying value. As such, an interim goodwill impairment test was performed (see Note 1) and the Company determined that the estimated fair values of the Health Solutions and Engineering reporting units exceeded its book value and therefore no goodwill impairment charge was recorded.

There were no goodwill impairments during the nine months ended November 1, 2013 and October 31, 2012.

Intangible assets consisted of the following:

		October 31, 2012										January 31, 2012
	November 1, 2013										January 31, 2013
		Grosscarryingvalue			Accumulatedamortization				Netcarryingvalue			Grosscarryingvalue			Accumulatedamortization				Netcarryingvalue
	Gross carrying value			Accumulated amortization				Net carrying value			Gross carrying value			Accumulated amortization				Net carrying value
	(in millions)	~~(in millions)~~
Finite-lived intangible assets:
Customer relationships	$	$116	~~177~~	$	$(64	~~(66~~)	)	$	$52	~~111~~	$	$154	~~120~~	$	$(57	~~(62~~)	)	$	$97	58
Software and technology	66		~~145~~	(35		~~(60~~)	)	31		85	97		~~148~~	(30		~~(48~~)	)	67		~~100~~
Other	4		2	(1		(1)	)	3		1	1		2	(1		(1)	)	—		1
Total finite-lived intangible assets	186		~~324~~	(100		~~(127~~)	)	86		~~197~~	252		~~270~~	(88		~~(111~~)	)	164		~~159~~
Indefinite-lived intangible assets:
In-process research and development	10		13	—		—		10		13	10		13	—		—		10		13
Trade names	4		4	—		—		4		4	4		4	—		—		4		4
Total indefinite-lived intangible assets	14		17	—		—		14		17	14		17	—		—		14		17
Total intangible assets	$	$200	~~341~~	$	$(100	~~(127~~)	)	$	$100	~~214~~	$	$266	~~287~~	$	$(88	~~(111~~)	)	$	$178	~~176~~

17Amortization expense related to amortizable intangible assets was $8 million and $31 million for the three and nine months ended November 1, 2013, respectively, and $12 million and $30 million for the three and nine months ended October 31, 2012, respectively.

~~SAIC~~During the second quarter of fiscal 2014, ~~INC~~the Company determined that certain intangible assets consisting of software and technology, associated with the acquisition of Reveal Imaging Technologies, Inc. in fiscal 2011, were not recoverable due to lower projected revenue levels from the associated products and customers. As a result, the Health and Engineering reportable segment recognized an impairment loss within intangible asset impairment losses in the Company's condensed consolidated statements of income of $30 million to reduce the carrying value of these intangible assets to their estimated fair values. Fair value was estimated using the income approach based on management’s forecast of future cash flows to be derived from the assets’ use (Level 3 under the accounting standard for fair value measurement).

~~SCIENCE~~During ~~APPLICATIONS~~the ~~INTERNATIONAL~~three ~~CORPORATION~~months ended November 1, 2013, the Company determined that certain customer relationship intangible assets associated with the acquisitions of Vitalize and maxIT in fiscal 2012 and 2013, respectively, were not recoverable due to lower projected revenue levels from the associated services and customers. As a result, the

LEIDOS HOLDINGS, INC.

LEIDOS, INC.

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~Finite-lived~~Health ~~intangible~~and ~~assets~~Engineering ~~with~~reportable asegment ~~gross~~recognized ~~carrying~~an ~~value~~impairment ofloss ~~$16~~within ~~million~~intangible ~~became~~asset ~~fully~~impairment ~~amortized~~losses ~~during~~in the ~~nine months~~Company's ~~ended~~condensed ~~October~~consolidated ~~31,~~statements ~~2012~~of ~~and~~income ~~are~~of no$19 ~~longer~~million ~~reflected~~to inreduce the ~~gross~~ carrying value. ~~Amortization~~of ~~expense~~these ~~related~~intangible assets to ~~amortizable~~their ~~intangible~~estimated ~~assets~~fair ~~was~~values. Fair ~~$13~~value ~~million~~was ~~and~~estimated ~~$32~~using ~~million~~the ~~for~~income ~~the~~approach ~~three~~based ~~and~~on ~~nine~~management’s ~~months~~forecast ~~ended~~of ~~October~~future ~~31,~~cash ~~2012,~~flows ~~respectively, and~~to ~~$13~~be ~~million~~derived ~~and~~from ~~$35~~the ~~million~~assets’ ~~for~~use ~~the~~(Level ~~three~~3 ~~and~~under ~~nine~~the ~~months~~accounting ~~ended~~standard ~~October~~for ~~31,~~fair ~~2011,~~value ~~respectively~~measurement).

During the three and nine months ended ~~October 31~~ November 1, ~~2012~~2013, the Company recognized impairment losses for intangible assets of $119 million and $251 million, respectively., ~~During~~reported ~~the~~within ~~three~~intangible ~~and~~asset ~~nine~~impairment ~~months~~losses ~~ended~~in ~~October 31, 2011,~~ the Company's ~~recognized~~condensed anconsolidated ~~impairment~~statements ~~loss on intangible assets~~ of ~~$19 million~~income. ~~There~~During ~~were no goodwill impairment losses during~~ the three and nine months ended October 31, 2012, ~~and~~the ~~2011.~~Company did not recognize any impairment losses for intangible assets.

The estimated annual amortization expense related to finite-lived intangible assets as of ~~October 31~~November 1, ~~2012~~2013 was as follows:

Fiscal Year Ending January 31
	(in millions)	~~(in millions)~~
2013 (remainder of the fiscal year)		$	14
2014 (remainder of the fiscal year)	$	6
2014			48
2015	22
2015			39
2016	20
2016			34
2017	17
2017			28
2018	11
2018			18
2019 and thereafter	10
2019 and thereafter			16
	$	86
		$	197

Actual amortization expense in future periods could differ from these estimates as a result of future acquisitions, ~~divestitures~~dispositions, impairments, the outcome and timing of completion of in-process research and development projects (the assets of which will become amortizable upon completion and placement into service, or will be impaired if abandoned), adjustments to preliminary valuations of intangible assets and other factors.

Note 67—Financial Instruments:

InThe ~~addition to cash held in insured bank deposits, the~~ Company’s cash equivalents were primarily comprised of investments in several large institutional money market funds that invest primarily in bills, notes and bonds issued by the U.S. Treasury, U.S. Government guaranteed repurchase agreements fully collateralized by U.S. Treasury obligations, U.S. Government guaranteed securities and investment-grade corporate securities that have ~~original~~ maturities of three months or less, and bank deposits. There are no restrictions on the withdrawal of the Company’s cash and cash equivalents. The Company’s cash equivalents are recorded at historical cost, which equals fair value based on quoted market prices (Level 1 input as defined by the accounting standard for fair value measurements).

~~SAIC~~Leidos has a revolving credit facility, which is fully and unconditionally guaranteed by ~~Science~~Leidos, ~~Applications~~Inc., providing for up to $750 million in unsecured borrowing capacity at interest rates determined, at ~~SAIC~~Leidos’s option, based on either LIBOR plus a margin or a defined base rate ~~through fiscal 2017~~. During the ~~first~~three ~~quarter~~months ofended ~~fiscal~~May 3, 2013, the ~~Company extended the~~ maturity date of the ~~revolving~~ credit facility was extended for one additional year, to March ~~2016~~2017, as provided for in the terms of the ~~revolving~~ credit facility. As of ~~October 31~~November 1, ~~2012~~2013 and January 31, ~~2012~~2013, there were no borrowings outstanding under the ~~revolving~~ credit facility.

The ~~revolving~~ credit facility contains certain customary representations and warranties, as well as certain affirmative and negative covenants. ~~The~~During ~~financial covenants contained in~~ the ~~revolving~~three ~~credit~~months ~~facility~~ended ~~require that~~May 3, ~~for a period of four trailing fiscal quarters~~2013, the ~~Company~~financial ~~maintains~~covenants ain ~~ratio~~the ofcredit ~~consolidated~~facility ~~funded~~were ~~debt,~~amended ~~including~~to: ~~borrowings~~(i) permit ~~under~~in ~~this~~the ~~facility,~~calculation toof earnings before interest, taxes, depreciation and amortization (EBITDA) ~~adjusted~~the ~~for~~adding ~~other~~back ~~items~~of ascertain ~~defined~~expenses incurred in ~~the~~connection ~~credit~~with ~~facility~~the ~~of not~~Company’s ~~more~~planned ~~than~~separation ~~3.0~~transaction; to(ii) exclude ~~1.0~~the ~~and~~effect ~~a ratio~~ of ~~EBITDA~~debt ~~adjusted~~incurred ~~for~~in ~~other~~connection ~~items~~with ~~as defined in~~ the ~~credit~~separation ~~facility~~transaction tofor ~~interest~~purposes ~~expense~~ of ~~greater~~calculating ~~than~~consolidated ~~3.5~~funded todebt; ~~1.0.~~and ~~The~~(iii) change ~~Company~~the ~~was~~ratio inof ~~compliance~~consolidated ~~with~~funded ~~these~~debt ~~financial~~to ~~covenants~~EBITDA asthat ~~of October 31, 2012. A failure by~~ the Company is required to ~~meet~~maintain. ~~these~~The financial covenants contained in the ~~future~~credit ~~would~~facility ~~reduce~~require ~~and~~that, ~~could~~for ~~eliminate~~a ~~the~~period ~~Company’s~~of ~~borrowing~~four ~~capacity~~trailing ~~under the revolving credit facility.~~

Other covenants restrict certain of the Company’s activities, including among other things, its ability to create liens, dispose of certain assets and merge or consolidate with other entities. The revolving credit facility also contains certain customary events of default, including, among others, defaults based on certain bankruptcy and insolvency events, nonpayment, cross-defaults to other debt, breach of specified covenants, Employee Retirement Income Security Act (ERISA) events, material monetary judgments, change of control events and the material inaccuracy of the Company’s representations and warranties. 29

18LEIDOS HOLDINGS, INC.

~~SAIC~~LEIDOS, INC.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

fiscal quarters, the Company maintains a ratio of consolidated funded debt, including borrowings under this facility, to EBITDA adjusted for other items as defined in the credit facility of not more than 3.25 to 1.0 and a ratio of EBITDA adjusted for other items as defined in the credit facility to interest expense of greater than 3.5 to 1.0. The Company was in compliance with these financial covenants as of November 1, 2013. A failure by the Company to meet these financial covenants in the future would reduce and could eliminate the Company’s borrowing capacity under the credit facility.

Other covenants in the credit facility restrict certain of the Company’s activities, including among other things, its ability to create liens, dispose of certain assets and merge or consolidate with other entities. The credit facility also contains certain customary events of default, including, among others, defaults based on certain bankruptcy and insolvency events, nonpayment, cross-defaults to other debt, breach of specified covenants, Employee Retirement Income Security Act (ERISA) events, material monetary judgments, change of control events and the material inaccuracy of the Company’s representations and warranties.

The Plainfield Renewable Energy Project is being financed through two secured notes aggregating $149 million, net of debt discount, provided by affiliates of the Carlyle Group (“Carlyle”). Leidos assumed in the acquisition of Plainfield a Note Purchase Agreement between Plainfield and Carlyle, consisting of two secured notes, a Construction Note and a Cash Grant Note in the amount of $81 million and $68 million, respectively, as of November 1, 2013. The Construction Note has a 17.5% stated interest rate, consisting of 8% paid in cash and the remainder is accrued over the term of the note and paid at maturity. The Cash Grant Note has a 17.5% stated interest rate, consisting of 6% paid in cash and the remainder is accrued over the term of the note and paid at maturity. Once the commercial operation date has occurred in February 2014, the Construction Note can be converted into term notes based upon conditions set forth in the Note Purchase Agreement. The Company was in compliance with its covenants as of November 1, 2013. A failure by the Company to meet these covenants in the future would reduce and could eliminate the Company’s borrowing capacity under the notes.

On December 6, 2013, the Company entered into an Early Payoff Agreement (the "Agreement") between Plainfield and Carlyle, under which the Company agreed to pay off on December 16, 2013 its obligations under the Note Purchase Agreement to include principal and interest due under the Construction Note and Cash Grant Note, an additional interest payment as provided in Note Purchase Agreement and an early termination fee consisting of a make whole payment. In consideration of the early payment, the Agreement provided for a $6 million discount on the early termination fee and waived the covenants in Note Purchase Agreement. The Company will pay $149 million in principal, $10 million of interest, including the additional interest payment, and $6 million in an early termination fee, net of the discount, for a total amount of $165 million.

LEIDOS HOLDINGS, INC.

LEIDOS, INC.

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The Company’s notes payable and long-term debt consisted of the following:

		Statedinterest rate				Effectiveinterestrate			October 31,2012			January 31,2012
	Stated interest rate			Effective interest rate			November 1, 2013			January 31, 2013
	(dollars in millions)	~~(dollars in millions)~~
SAIC senior unsecured notes:
Leidos Holdings, Inc. senior unsecured notes:
$450 million notes issued in fiscal 2011, which mature in December 2020			4.45	%			4.53	%	$	449		$	449
$450 million notes, which mature in December 2020	4.45	%		4.53	%		$	449		$	449
$300 million notes issued in fiscal 2011, which mature in December 2040			5.95	%			6.03	%		300			300
$300 million notes, which mature in December 2040	5.95	%		6.03	%		300			300
Science Applications senior unsecured notes:
Leidos, Inc. senior unsecured notes:
$550 million notes issued in fiscal 2003, which matured in July 2012			6.25	%			6.50	%		—			550
$250 million notes, which mature in July 2032	7.13	%		7.43	%		248			248
$250 million notes issued in fiscal 2003, which mature in July 2032			7.13	%			7.43	%		248			248
$300 million notes, which mature in July 2033	5.5	%		5.78	%		296			296
$300 million notes issued in fiscal 2004, which mature in July 2033			5.50	%			5.78	%		296			296
Plainfield construction note, which matures February 2014	17.5	%		17.5	%		81			—
Capital leases and other notes payable due on various dates through fiscal 2018			0-2.5	%			Various			6			9
Plainfield cash grant note, which matures April 2014	17.5	%		17.5	%		68			—
Total notes payable and long-term debt										1,299			1,852
Capital leases and other notes payable due on various dates through fiscal 2021	0%-3.7%			Various			39			2
Less current portion										2			553
Total notes payable and long-term debt							1,481			1,295
Total notes payable and long-term debt, net of current portion									$	1,297		$	1,299
Less current portion							151			—
Fair value of notes payable and long-term debt									$	1,449		$	2,011
Total notes payable and long-term debt, net of current portion							$	1,330		$	1,295
Fair value of notes payable and long-term debt							$	1,469		$	1,390

The Company paid $550 million to settle the 6.25% notes at maturity in July 2012.

The fair value of long-term debt is determined based on current interest rates available for debt with terms and maturities similar to the Company’s existing debt arrangements (Level 2 and 3 inputs as defined by the accounting standard for fair value measurements).

The senior unsecured notes contain customary restrictive covenants, including, among other things, restrictions on the Company’s ability to create liens and enter into sale and leaseback transactions under certain circumstances. The Company was in compliance with all covenants as of ~~October 31~~November 1, ~~2012~~2013.

Note 78—Related Party Transactions:

~~Science~~Leidos, ~~Applications~~Inc. has fully and unconditionally guaranteed the obligations of ~~SAIC~~Leidos under its $450 million 4.45% notes and $300 million 5.95% notes. These notes have been reflected as debt of ~~Science~~Leidos, ~~Applications~~Inc. in these condensed consolidated financial statements. ~~Science~~Leidos, ~~Applications~~Inc. has fully and unconditionally guaranteed any borrowings under ~~SAIC~~Leidos’s amended and restated revolving credit facility maturing in fiscal ~~2017~~2018. ~~SAIC~~Leidos has fully and unconditionally guaranteed the obligations of ~~Science~~Leidos, ~~Applications~~Inc. under its $300 million 5.5% notes and $250 million 7.13% notes.

~~SAIC~~Prior ~~and~~to ~~Science Applications have a related party note in connection with a loan of cash between~~ the ~~entities,~~separation ~~issuances~~ of ~~stock~~New by SAIC, toLeidos ~~employees~~fully ~~of Science Applications~~ and ~~its~~unconditionally ~~subsidiaries~~guaranteed ~~and~~the ~~Science Applications’ payment of certain~~ obligations ~~on behalf~~ of New SAIC. ~~The~~under ~~related~~its ~~party~~$700 ~~note~~million ~~bears~~credit ~~interest~~agreement ~~based~~dated onJune 27, ~~LIBOR~~2013. ~~plus~~However, aupon ~~market-based~~completion ~~premium. Portions~~ of the ~~related~~separation ~~party~~transaction ~~note~~on ~~may~~September be27, ~~repaid at any time prior to its maturity date in November~~ 2013., ~~This~~the ~~maturity~~guarantee ~~date~~was ~~will~~released beand ~~automatically~~the ~~extended~~credit ~~for~~support ~~successive~~surrounding ~~one-year~~the ~~periods~~credit ~~unless~~agreement ~~either~~was ~~SAIC or Science Applications provides prior notice to the other party~~eliminated.

~~Note~~Leidos ~~8—Accumulated~~and ~~Other~~Leidos, ~~Comprehensive~~Inc. ~~Loss:~~have a related party note in connection with a loan of cash between the entities, which is adjusted to reflect issuances of stock by Leidos to employees of Leidos, Inc. and its subsidiaries and Leidos Inc.’s payment of certain obligations on behalf of Leidos. The related party note bears interest based on LIBOR plus a market-based premium. Portions of the related party note may be repaid at any time. The note automatically extends for successive one-year periods unless either Leidos or Leidos, Inc. provides prior notice to the other party. As of November 1, 2013, the related party note is a note receivable from Leidos Holdings, Inc. to Leidos, Inc. of $1.1 billion which changed from a note payable to Leidos Holdings, Inc. from Leidos, Inc. of $22 million as of January 31, 2013. This change in the related party note primarily represents the distribution of the assets and

~~The components of accumulated other comprehensive loss were as follows:~~ 31

	October 31, 2012			January 31, 2012
	(in millions)
Foreign currency translation adjustments, net of taxes of $(1) million and $(2) million as of October 31, 2012 and January 31, 2012, respectively	$	2		$	2
Unrecognized net loss on settled derivative instruments associated with outstanding debt, net of taxes of $3 million as of October 31, 2012 and January 31, 2012		(5	)		(5	)
Unrecognized net loss on defined benefit plan, net of taxes of ($1) million and $5 million, as of October 31, 2012 and January 31, 2012, respectively		2			(8	)
Total accumulated other comprehensive loss, net of taxes of $1 million and $6 million as of October 31, 2012 and January 31, 2012, respectively	$	(1	)	$	(11	)

LEIDOS HOLDINGS, INC.

19LEIDOS, INC.

liabilities of New SAIC of $722 million and the special cash dividend payment made by Leidos, ~~INC~~Inc. of approximately $356 million.

~~SCIENCE~~Note ~~APPLICATIONS~~9—Accumulated ~~INTERNATIONAL~~Other ~~CORPORATION~~Comprehensive Loss:

The components of accumulated other comprehensive loss was as follows:



	November 1, 2013			January 31, 2013
	(in millions)
Foreign currency translation adjustments, net of taxes of $(1) million as of November 1, 2013 and January 31, 2013	$	2		$	2
Unrecognized net loss on settled derivative instruments associated with outstanding debt, net of taxes of $3 million as of November 1, 2013 and January 31, 2013	(5		)	(5		)
Unrecognized net gain on defined benefit plan, net of taxes of $0 million as of November 1, 2013 and January 31, 2013	1			1
Total accumulated other comprehensive loss, net of taxes of $2 million as of November 1, 2013 and January 31, 2013	$	(2	)	$	(2	)

As of November 1, 2013, there is less than $1 million of the unrealized net loss on settled derivative instruments (pre-tax) that will be amortized and recognized as interest expense during the next 12 months.

Reclassifications from other comprehensive income to net income, relating to foreign currency translation adjustments, loss on settled derivative instruments and gain on defined benefit plan for the three and nine months ended November 1, 2013, were not material. Reclassifications for foreign currency translation adjustments and loss on settled derivative instruments are recorded in other income, net, and reclassifications for gain on defined benefit plan is recorded in selling, general and administrative expenses.

Note 10—Business Segment Information:

The Company defines its reportable segments based on the way the chief operating decision maker (CODM), currently its chief executive officer, manages the operations of the Company for purposes of allocating resources and assessing performance.

Effective February 1, 2013, the Company realigned certain business operations among its segments and renamed three of its reportable segments as follows: Health and Engineering; National Security Solutions; Technical Services and Information Technology; and Corporate and Other. In connection with the separation of New SAIC, discussed in Note 2, the Technical Services and Information Technology reportable segment was distributed to New SAIC and was included as part of the Company's discontinued operations.

LEIDOS HOLDINGS, INC.

LEIDOS, INC.

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

AsThe ofsegment ~~October 31,~~information ~~2012,~~for ~~there~~the isperiods ~~less~~presented, ~~than~~with $1the ~~million~~prior ofyear ~~the~~period ~~unrealized~~recast ~~net~~to ~~loss~~give oneffect ~~settled~~to ~~derivative instruments~~the ~~(pre-tax)~~above ~~that~~changes ~~will~~in bereportable ~~amortized~~segments, ~~and~~was ~~recognized~~ as ~~interest expense during the next 12 months.~~ follows:

Note 9—Business Segment Information:



	Three Months Ended						Nine Months Ended
	November 1, 2013			October 31, 2012			November 1, 2013			October 31, 2012
	(in millions)
Revenues:
Health and Engineering	$	408		$	508		$	1,380		$	1,341
National Security Solutions	1,014			1,166			3,117			3,563
Corporate and Other	(1		)	—			(8		)	(1		)
Intersegment elimination	(1		)	(1		)	(3		)	(4		)
Total revenues	$	1,420		$	1,673		$	4,486		$	4,899

Operating income (loss):
Health and Engineering	$	(30	)	$	46		$	2		$	107
National Security Solutions	63			79			195			260
Corporate and Other	(40		)	(25		)	(128		)	(53		)
Total operating income	$	(7	)	$	100		$	69		$	314

~~The~~Note ~~Company~~11—Legal defines its reportable segments based on the way the chief operating decision maker (CODM), currently its chief executive officer, manages the operations of the Company for purposes of allocating resources and assessing performance. Proceedings:

The segment information for the periods presented was as follows:

	Three Months Ended October 31						Nine Months Ended October 31
	2012			2011			2012			2011
	(in millions)
Revenues:
Defense Solutions	$	1,183		$	1,117		$	3,597		$	3,339
Health, Energy and Civil Solutions		743			726			2,077			1,997
Intelligence and Cybersecurity Solutions		945			947			2,792			2,691
Corporate and Other		—			1			—			2
Intersegment elimination		(1	)		(1	)		(4	)		(3	)
Total revenues	$	2,870		$	2,790		$	8,462		$	8,026
Operating income (loss):
Defense Solutions	$	91		$	(133	)	$	284		$	45
Health, Energy and Civil Solutions		69			77			168			187
Intelligence and Cybersecurity Solutions		68			54			203			215
Corporate and Other		(35	)		(18	)		(66	)		(34	)
Total operating income (loss)	$	193		$	(20	)	$	589		$	413

Prior to February 1, 2012, the Intelligence and Cybersecurity Solutions reportable segment represented the aggregation of the Cyber and Information Solutions business unit and the Intelligence, Surveillance and Reconnaissance group. Effective February 1, 2012, the Cyber and Information Solutions business unit, which previously reported directly to the CODM, commenced reporting to the Intelligence, Surveillance and Reconnaissance group. After this change the reportable segment name has remained Intelligence and Cybersecurity Solutions. Also effective February 1, 2012, certain operations were transferred between the Company’s reportable segments. Prior year amounts have been adjusted for consistency with the current year’s presentation.

Note 10—Legal Proceedings:

Timekeeping Contract with City of New York

In March 2012, the Company reached a settlement with the U.S. Attorney’s Office for the Southern District of New York and the City of New York (City) relating to investigations being conducted by the U.S. Attorney’s Office and the City with respect to the Company’s contract to develop and implement an automated time and attendance and workforce management system (CityTime) for certain agencies of the City. As part of this settlement, the Company entered into a deferred prosecution agreement with the U.S. Attorney’s Office, under which the Company paid approximately $500 million and the U.S. Attorney’s Office deferred prosecution of a single criminal count against the Company, which alleged that the Company, through the conduct of certain managerial employees and others, caused the City to significantly overpay for the CityTime system. If the Company complies with the terms of the deferred prosecution agreement, the U.S Attorney will dismiss the criminal count at the end of a three-year period. In August 2012, the Company entered into an administrative agreement with the U.S. Army, on behalf of all agencies of the U.S. Government that confirms the Company’s continuing eligibility to enter into and perform contracts with all agencies of the U.S. Government following the CityTime settlement. The Army has determined that the U.S. Government will have adequate assurances under the terms of the administrative agreement that initiation of suspension or debarment is not necessary to protect the U.S. Government’s interests following the CityTime settlement. Under the terms of the administrative agreement, the Company has agreed, among other things, to maintain a contractor responsibility program having the specific elements described in the administrative agreement, including retaining a monitor and providing certain reports to the U.S. Army. The administrative agreement will continue in effect for five years, provided that the Company may request earlier termination after three years.

20Data Privacy Litigation

The Company is a defendant in a putative class action, In Re: Science Applications International Corporation (SAIC) Backup Tape Data Theft Litigation, ~~INC~~a Multidistrict Litigation (MDL), in the U.S. District Court for the District of Columbia. The MDL action consolidates for pretrial proceedings the following seven individual putative class action lawsuits filed against the Company from October 2011 through March 2012: (1) Richardson, et al. v. TRICARE Management Activity, Science Applications International Corporation, United States Department of Defense, et al. in U.S. District Court for the District of Columbia; (2) Arellano, et al. v. SAIC, Inc. in U.S. District Court for the Western

~~SCIENCE APPLICATIONS INTERNATIONAL CORPORATION~~ 33

LEIDOS HOLDINGS, INC.

LEIDOS, INC.

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~Data~~District ~~Privacy~~of ~~Litigation~~Texas; (3) Biggerman, et al. v. TRICARE Management Activity, Science Applications International Corporation, United States Department of Defense, et al. in U.S. District Court for the District of Columbia; (4)Moskowitz, et al. v. TRICARE Management Activity, Science Applications International Corporation, United States Department of Defense, et al. in U.S. District Court for the District of Columbia; (5) Palmer, et al. v. TRICARE Management Activity, Science Applications International Corporation, United States Department of Defense, et al., in U.S. District Court for the District of Columbia; (6) Losack, et al. v. SAIC, Inc. in U.S. District Court for the Southern District of California; and (7) Deatrick v. Science Applications International Corporation in U.S. District Court for the Northern District of California. The lawsuits were filed following the theft of computer backup tapes from a vehicle of a Company employee. The employee was transporting the backup tapes between federal facilities under an IT services contract the Company was performing in support of TRICARE, the health care program for members of the military, retirees and their families. The tapes contained personally identifiable and protected health information of approximately five million military clinic and hospital patients. There is no evidence that any of the data on the backup tapes has actually been accessed or viewed by an unauthorized person. In order for an unauthorized person to access or view the data on the backup tapes, it would require knowledge of and access to specific hardware and software and knowledge of the system and data structure. The Company has notified potentially impacted persons by letter and has offered one year of credit monitoring services to those who request these services and in certain circumstances, one year of identity restoration services.

The Company is a defendant in a putative class action, In Re: Science Applications International Corporation (SAIC) Backup Tape Data Theft Litigation, a Multidistrict Litigation (MDL), in the U.S. District Court for the District of Columbia. The MDL action consolidates for pretrial proceedings the following seven individual putative class action lawsuits filed against the Company from October 2011 through March 2012: (1) Richardson, et al. v. TRICARE Management Activity, Science Applications International Corporation, United States Department of Defense, et al. in U.S. District Court for the District of Columbia; (2) Arellano, et al. v. SAIC, Inc. in U.S. District Court for the Western District of Texas; (3) Biggerman, et al. v. TRICARE Management Activity, Science Applications International Corporation, United States Department of Defense, et al. in U.S. District Court for the District of Columbia; (4) Moskowitz, et al. v. TRICARE Management Activity, Science Applications International Corporation, United States Department of Defense, et al. in U.S. District Court for the District of Columbia; (5) Palmer, et al. v. TRICARE Management Activity, Science Applications International Corporation, United States Department of Defense, et al., in U.S. District Court for the District of Columbia; (6) Losack, et al. v. SAIC, Inc. in U.S. District Court for the Southern District of California; and (7) Deatrick v. Science Applications International Corporation in U.S. District Court for the Northern District of California. The lawsuits were filed following the theft of computer backup tapes from a vehicle of a Company employee. The employee was transporting the backup tapes between federal facilities under an IT services contract the Company was performing in support of TRICARE, the health care program for members of the military, retirees and their families. The tapes contained personally identifiable and protected health information of approximately five million military clinic and hospital patients. There is no evidence that any of the data on the backup tapes has actually been accessed or viewed by an unauthorized person. In order for an unauthorized person to access or view the data on the backup tapes, it would require knowledge of and access to specific hardware and software and knowledge of the system and data structure. The Company has notified potentially impacted persons by letter and has offered one year of credit monitoring services to those who request these services and in certain circumstances, one year of identity restoration services.

In October 2012, plaintiffs filed a consolidated amended complaint in the MDL action, which supersedes all previously filed complaints in the individual lawsuits. The consolidated amended complaint includes allegations of negligence, breach of contract, breach of implied-in-fact contract, invasion of privacy by public disclosure of private facts and statutory violations of the Texas Deceptive Trade Practices Act, the California Confidentiality of Medical Information Act, California data breach notification requirements, the California Unfair Competition Law, various state consumer protection or deceptive practices statutes, state privacy statutes, the Fair Credit Reporting Act and the Privacy Act of 1974. The consolidated amended complaint seeks monetary relief, including unspecified actual damages, punitive damages, statutory damages of $1,000 for each class member and attorneys’ fees, as well as injunctive and declaratory relief.

The Company intends to vigorously defend itself against the claims made in the class action lawsuits. In November 2012, the Company filed a motion to dismiss all claims against the Company alleged in the consolidated amended complaint and all substantive briefing on the motion has concluded. The Company has insurance coverage against judgments or settlements relating to the claims being brought in these lawsuits, with a $10 million deductible. The insurance coverage also covers the Company’s defense costs, subject to the same deductible. As of ~~October 31~~November 1, ~~2012~~2013, the Company has recorded a loss provision of $10 million related to these lawsuits, representing the low end of the Company’s estimated gross loss. The Company believes that, if any loss is experienced by the Company in excess of its estimate, such a loss would not exceed the Company’s insurance coverage. As these lawsuits progress, many factors will affect the amount of the ultimate loss resulting from these claims being brought against the Company, including the outcome of any motions to dismiss, the results of any discovery, the outcome of any pretrial motions and the courts’ rulings on certain legal issues.

The Company has been informed that the Office for Civil Rights (OCR) of the Department of Health and Human Services (HHS) is investigating matters related to the incident. OCR is the division of HHS charged with enforcement of the Health Insurance Portability and Accountability Act of 1996, as amended (HIPAA) and the privacy, security and data breach rules which implement HIPAA. OCR may, among other things, require a corrective action plan and impose civil monetary penalties against the data owner (Department of Defense) and, in certain situations, against the data owners’ contractors, such as the Company. The Company is cooperating with TRICARE in responding to the OCR investigation.

~~Derivative and Securities Litigation~~ 34

~~Between~~LEIDOS ~~February and April 2012~~HOLDINGS, ~~six stockholder derivative lawsuits were filed, each purportedly on the Company’s behalf~~INC. One case has been withdrawn; one case, captioned Martin v. Havenstein et al., is pending in New York Supreme Court, New York County; and four cases were consolidated in the U.S. District Court for the Southern District of New York in In re SAIC, Inc. Derivative Litigation. Each complaint asserts claims against the Company’s directors and against varying groups of the Company’s current and former officers, including two former chief executive officers, the chief financial officer, the former manager of the CityTime program, and the former chief systems engineer of the CityTime program. The complaints

21LEIDOS, INC.

SAIC, INC.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~claim~~Derivative that the defendants breached their fiduciary duties to the Company with respect to the CityTime contract for various reasons, including failure to supervise the adequacy of the Company’s internal controls, allowing the Company to issue misleading financial statements, and failure to exercise their oversight responsibilities to ensure that the Company complied with applicable laws, rules and regulations. The consolidated derivative complaint further claims that the defendants are liable to the Company under theories of unjust enrichment, gross mismanagement, abuse of control, and violation of Section 14(a) of the Securities Exchange Act. The Martin complaint further claims that the defendants breached their oversight responsibilities related to the TRICARE matter described above. The Company has filed a motion to dismiss each of these complaints because the respective plaintiffs did not serve a pre-suit demand before filing the derivative complaints. The Company has also received two stockholder demand letters related to CityTime (one of which is also related to TRICARE), which an independent committee of the Company’s board of directors is currently reviewing. Litigation

Between February and April 2012, ~~alleged~~six ~~stockholders~~stockholder derivative lawsuits were filed, ~~three~~each ~~putative~~purportedly ~~securities~~on ~~class~~the ~~actions~~Company’s behalf. ~~One case~~Two ~~was~~cases have been withdrawn and ~~two~~the four remaining cases were consolidated in the U.S. District Court for the Southern District of New York in In re SAIC, Inc. ~~Securities~~Derivative Litigation. The consolidated ~~securities~~derivative complaint ~~names~~asserted asclaims ~~defendants~~against the Company’s directors and current and former officers, ~~its~~including the chief ~~financial~~ executive officer, two former chief executive officers, the chief financial officer, a former group president, ~~and~~ the former program manager onof the CityTime program, and ~~was~~the ~~filed~~former ~~purportedly~~chief onsystems ~~behalf~~engineer of ~~all~~the ~~purchasers~~CityTime ofprogram. ~~SAIC’s~~The ~~common~~consolidated ~~stock~~derivative ~~from~~complaint ~~April 11,~~claimed ~~2007 through~~that ~~September 1,~~the ~~2011.~~defendants ~~The~~breached ~~consolidated~~their ~~securities~~fiduciary ~~complaint~~duties ~~asserts~~to ~~claims~~the ~~under~~Company ~~Sections~~with ~~10(b)~~respect ~~and~~to ~~20(a)~~the ofCityTime ~~the~~contract ~~Securities~~for ~~Exchange~~various ~~Act~~reasons, ofincluding ~~1934~~failure ~~based~~to onsupervise ~~allegations~~the ~~that~~adequacy of the Company’s ~~and~~internal ~~individual~~controls, ~~defendants~~allowing ~~made~~the Company to issue misleading financial statements, ~~or omissions~~and ~~about~~failure to exercise their oversight responsibilities to ensure that the Company’s ~~revenues,~~complied ~~operating~~with ~~income~~applicable laws, rules and ~~internal~~regulations. ~~controls~~The incomplaint ~~connection~~further ~~with~~claimed ~~disclosures~~that ~~relating~~the defendants are liable to the ~~CityTime~~Company ~~project.~~under ~~The~~theories ~~plaintiffs~~of ~~seek~~unjust toenrichment, ~~recover~~gross ~~from~~mismanagement, ~~the~~abuse ~~Company~~of control, and ~~the~~violation ~~individual~~of ~~defendants~~Section 14(a) anof ~~unspecified~~the ~~amount of~~Securities ~~damages~~Exchange ~~class~~Act. ~~members~~On ~~allegedly~~June 10, ~~incurred~~2013, bythe ~~buying~~District ~~SAIC’s~~Court ~~stock~~dismissed atthe ancomplaint ~~inflated~~with ~~price~~prejudice. The ~~Company~~plaintiffs ~~intends~~have tofiled ~~vigorously~~an ~~defend~~appeal ~~against~~with ~~these~~the ~~claims~~United ~~and~~States ~~has~~Court ~~filed~~of aAppeals ~~motion~~for tothe ~~dismiss~~Second ~~the~~Circuit. ~~consolidated~~The ~~securities~~appeal ~~complaint.~~is pending.

The Company has also received three stockholder demand letters related to CityTime (one of which is also related to the TRICARE matter described above). An independent committee of the Company’s board of directors reviewed two of the demands and the Company’s lead director has notified both stockholders’ attorneys, on behalf of the board of directors, that the Company has decided not to pursue the claims outlined in their demand letters. The third demand is under review by the independent committee.

Between February and April 2012, alleged stockholders filed three putative securities class actions. One case was withdrawn and two cases were consolidated in the U.S. District Court for the Southern District of New York in In re SAIC, Inc. Securities Litigation. The consolidated securities complaint names as defendants the Company, its chief financial officer, two former chief executive officers, a former group president, and the former program manager on the CityTime program, and was filed purportedly on behalf of all purchasers of the Company's common stock from April 11, 2007 through September 1, 2011. The consolidated securities complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on allegations that the Company and individual defendants made misleading statements or omissions about the Company’s revenues, operating income, and internal controls in connection with disclosures relating to the CityTime project. The plaintiffs seek to recover from the Company and the individual defendants an unspecified amount of damages class members allegedly incurred by buying the Company's stock at an inflated price. On October 1, 2013, the district court dismissed many claims in the complaint with prejudice, granted the plaintiffs leave to amend some claims, and denied dismissal of limited claims. The Company intends to vigorously defend against these claims.

The Company currently believes that a loss relating to the above-described stockholder matters is reasonably possible, but the Company cannot reasonably estimate the range of loss in light of the fact that these matters are in their early stages.

Greek Government Contract

Background and Arbitration. In May 2003, the Company entered into a firm-fixed-price contract with the Hellenic Republic of Greece (the Customer) to provide a Command, Control, Communications, Coordination and Integration System (the System) to support the 2004 Athens Summer Olympic Games (the Olympics) and to serve as the security system for the Customer’s public order departments following completion of the Olympics.

In November 2008, the Customer accepted the System in writing pursuant to the requirements of the contract. At the time, the Customer determined that the System substantially complied with the terms of the contract and accepted the System with certain alleged minor omissions and deviations. Upon System acceptance, the Company invoiced the Customer for approximately $1819 million, representing the undisputed portion of the contract balance owed to the Company. The Customer has not paid this final invoice.

In June 2009, the Company initiated arbitration before the International Chamber of Commerce against the Customer seeking damages for breaches of contract by the Customer. The Company seeks (i) aggregate damages in excess of $89 million for payment of amounts owed and other claims and damages, (ii) recovery of advance payment and performance bond amounts totaling $24 million and (iii) costs and expenses associated with the arbitration. The Customer filed an answer to the complaint denying liability on various grounds and a supplementary answer asserting set-off claims against amounts sought by the Company. The arbitration hearing was held in May 2012, and the Company filed a final brief in July 2012. Due to the complex nature of the legal and factual issues involved, the outcome of the arbitration is uncertain. 35

~~Financial~~LEIDOS ~~Status and Contingencies. As a result of the significant uncertainties on this contract~~HOLDINGS, ~~the Company converted to the completed-contract method of accounting and ceased recognizing revenues for the System development portion of this contract in fiscal 2006~~INC. No profits or losses were recorded on the Greek contract during the nine months ended October 31, 2012 and 2011. As of October 31, 2012, the Company has recorded $123 million of losses under the Greek contract, reflecting the Company’s estimated total cost to complete the System, assuming the Greek contract value was limited to the cash received to date. Based on the complex nature of this contractual situation and the difficulties encountered to date, significant uncertainties exist and the Company is unable to reliably estimate the ultimate outcome. The Company may reverse a portion of the losses from the Greek contract if it receives future payments as required under the modified Greek contract.

~~As of October 31~~LEIDOS, 2012, the Company has $15 million of receivables relating to value added tax (VAT) that the Company has paid and believes it is entitled to recover either as a refund from the taxing authorities or as a payment under the Greek INC.

SAIC, INC.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~contract.~~In ~~The~~June 2009, the Company ~~has~~initiated ~~invoiced~~arbitration before the International Chamber of Commerce against the Customer seeking damages for ~~$32~~breaches ~~million~~of ~~for~~contract ~~VAT~~by ~~and~~the Customer. In July 2013, the Company received an arbitral award for approximately $53 million. The Customer has ~~failed~~yet to ~~make~~satisfy ~~payment~~the arbitral award. IfThe Company is pursuing an enforcement action in U.S. District Court for the ~~Customer~~District ~~fails~~of toColumbia. ~~pay~~In September 2013, the ~~outstanding~~Customer ~~VAT~~filed ~~amounts~~a orpetition in a Greek court seeking to nullify the ~~Company~~arbitral ~~is unable~~award and to ~~recover~~stay enforcement of the ~~amount~~award asin Greece until a ~~refund~~hearing ~~from~~can ~~the~~be ~~taxing~~held ~~authorities,~~on the ~~Company’~~Customer's ~~total~~annulment ~~losses~~petition. A hearing on the ~~Greek~~Customer's ~~contract~~nullification ~~could~~request ~~increase~~is scheduled in Greece for April 2014 although the Company is continuing to pursue its enforcement action in U.S. District Court. The outcome of the Company's pending enforcement action is uncertain.

~~The~~Financial ~~Company has~~Status ~~met~~and ~~certain~~Contingencies. ~~advance~~As ~~payment~~a ~~and~~result ~~performance~~of ~~bonding~~the ~~requirements~~significant ~~through~~uncertainties on this contract, the ~~issuance~~Company ofconverted ~~euro-denominated~~to ~~standby~~the ~~letters~~completed-contract method of ~~credit.~~accounting Asand ofceased ~~October 31,~~recognizing ~~2012,~~revenues ~~there~~for ~~were~~the $4System ~~million~~development portion of this contract in ~~standby~~fiscal ~~letters~~2006. ofNo ~~credit~~profits ~~outstanding~~or ~~relating~~losses towere recorded on the ~~support~~ ~~and~~Greek ~~maintenance~~contract ofduring the ~~System.~~nine ~~The~~months ~~Company~~ended isNovember ~~seeking~~1, ~~recovery~~2013 ofand ~~amounts~~October 31, ~~drawn~~2012. As byof ~~the~~November ~~Customer~~1, in2013, ~~fiscal~~the ~~2011~~Company onhas ~~the~~recorded ~~standby~~$123 ~~letters~~million of ~~credit~~losses inunder the ~~ongoing~~Greek ~~arbitration.~~contract, ~~The~~reflecting ~~principal~~the ~~subcontractor~~Company’s ~~has~~estimated ~~provided~~total cost to complete the ~~Company euro-denominated~~System, ~~standby~~assuming ~~letters~~the ofGreek ~~credit~~contract invalue was limited to the ~~amount~~cash ofreceived ~~$22~~to ~~million~~date. asBased ofon ~~October 31,~~the ~~2012,~~complex nature of ~~which~~this ~~$19~~contractual ~~million~~situation ~~relates~~and the difficulties encountered to ~~the~~date, ~~delivery~~significant ofuncertainties ~~the~~exist ~~System.~~and ~~The~~the Company ~~may~~is ~~draw~~unable onto ~~the~~reliably ~~subcontractor’s~~estimate ~~standby~~the ~~letters~~ultimate ofoutcome. ~~credit~~The ~~under~~Company ~~certain circumstances~~may byreverse ~~providing~~ a ~~statement~~portion toof the ~~responsible~~losses ~~bank~~from ~~that~~ the ~~subcontractor~~Greek ~~has~~contract ~~not~~if ~~fulfilled~~it ~~its~~receives ~~obligations~~payments ~~under~~as provided in the ~~subcontract.~~arbitral award.

As of November 1, 2013, the Company has $15 million of receivables relating to value added tax (VAT) that the Company has paid and believes it is entitled to recover either as a refund from the taxing authorities or as a payment under the Greek contract. The Company has invoiced the Customer for $34 million for VAT and the Customer has failed to make payment. If the Customer fails to pay the outstanding VAT amounts or the Company is unable to recover the amount as a refund from the taxing authorities, the Company’s total losses on the Greek contract could increase.

The Company has met certain advance payment and performance bonding requirements through the issuance of euro-denominated standby letters of credit. As of November 1, 2013, there were $3 million in standby letters of credit outstanding relating to the support and maintenance of the System. In the arbitration, the Company was awarded $26 million representing the amounts drawn by the Customer in fiscal 2011 on certain standby letters of credit as well as damages. The principal subcontractor has provided to the Company euro-denominated standby letters of credit in the amount of $22 million as of November 1, 2013, of which $20 million relates to the delivery of the System. The Company may draw on the subcontractor’s standby letters of credit under certain circumstances by providing a statement to the responsible bank that the subcontractor has not fulfilled its obligations under the subcontract.

Nuclear Regulatory Commission

The U.S. Department of Justice filed a lawsuit against the Company in September 2004 in U.S. District Court for the District of Columbia alleging civil False Claims Act violations and breach of contract by the Company on two contracts that the Company had with the Nuclear Regulatory Commission (NRC). The complaint alleges that the Company’s performance of several subcontracts on separate U.S. Department of Energy (DOE) programs, the participation of a Company employee in an industry trade association, and certain other alleged relationships created organizational conflicts of interest under the two NRC contracts. The Company disputes that the work performed on the DOE programs and the alleged relationships raised by the government created organizational conflicts of interest. In July 2008, the jury found in favor of the government on the breach of contract and two False Claims Act counts. The jury awarded a nominal amount of $78 in damages for breach of contract and $2 million in damages for the False Claims Act claims. The judge entered the judgment in October 2008, trebling the False Claims Act damages and awarding a total of $585,000 in civil penalties. The Company appealed to the U.S. Court of Appeals for the District of Columbia Circuit. In December 2010, the Court of Appeals affirmed the District Court’s judgment as to both liability and damages of $78 on the breach of contract count and rescinded the judgment on the False Claims Act counts, including the aggregate damages and penalties. The Court of Appeals sent the False Claims Act counts back to the District Court for further proceedings. The Company has recorded a liability for an ~~immaterial amount related to this matter as of October 31, 2012 based on its assessment of the likely outcome of this matter.~~

LEIDOS HOLDINGS, INC.

LEIDOS, INC.

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

immaterial amount related to this matter as of November 1, 2013 based on its assessment of the likely outcome of this matter.

Other

The Company is also involved in various claims and lawsuits arising in the normal conduct of its business, none of which, in the opinion of the Company’s management, based upon current information, will likely have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Note 1112—Other Commitments and Contingencies:

VirnetX, Inc.

In fiscal 2007, the Company transferred several patents to VirnetX Inc., a subsidiary of VirnetX Holding Corp. In consideration of this transfer, the Company received certain license rights and the right to receive a percentage of the consideration received in patent infringement or enforcement claims against third parties. ~~Subsequent~~In toNovember ~~October 31,~~ 2012, a jury found that Apple Corporation infringed two of the patents that the Company previously transferred to VirnetX and awarded approximately $368 million to VirnetX. Under its agreements with VirnetX, the Company would receive 25% of the proceeds obtained by VirnetX in this lawsuit against Apple after reduction for attorneys’ fees and costs incurred in litigating those claims. ~~However,~~Apple ~~the~~has ~~parties~~filed ~~have~~an ~~filed~~appeal ~~post-trial~~of ~~motions~~the onjury ~~which~~verdict with the ~~trial~~United ~~court~~States ~~must~~Court ~~rule~~of ~~and~~Appeals for the ~~verdict~~Federal ~~may~~Circuit bewhich ~~appealed~~remains pending. ~~Therefore,~~No no assurances can be given as to when or if the Company will receive any proceeds in connection with this jury award. In addition, if the Company receives any proceeds under its agreements with VirnetX, the Company is required to pay a royalty on the proceeds received to the customer who paid for the development of the technology. The Company does not have any assets or liabilities recorded in connection with this matter as of ~~October 31~~November 1, ~~2012~~2013.

DS&S Joint Venture

In March 2006, the Company sold its interest in DS&S, a joint venture in which the Company owned a 50% interest. As part of the sale, the Company agreed to indemnify the purchaser or DS&S for certain legal costs and expenses, including those related to a government investigation involving DS&S and any litigation resulting from that investigation. The Company had deferred the potential gain on this sale pending resolution of the government investigation involving DS&S. During the second quarter of fiscal 2013, the Company recorded a gain of $4 million in other income, net and during the third quarter of fiscal 2013, the Company paid DS&S $4 million in satisfaction of its indemnification obligation relating to the investigation matter.

SAIC, INC.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Variable Interest Entity (VIE)

In fiscal 2012, the Company entered into a fixed price agreement to provide engineering, procurement, and construction services to a special purpose limited liability company for a specific renewable energy project. The Company analyzed this arrangement and determined the special purpose limited liability company is a VIE. However, this VIE was not consolidated by the Company because the Company is not the primary beneficiary. The project is partially financed by the Company’s provision of extended payment terms in the amount of $100 million for certain of its services performed on the project. The arrangement also contemplates monetary penalties and project guarantees if the Company does not meet certain completion deadlines. The Company expects to bill a total of $216 million to complete the project. At October 31, 2012, the Company had a receivable of $27 million due from this VIE.

Government Investigations and Reviews

The Company is routinely subject to investigations and reviews relating to compliance with various laws and regulations with respect to its role as a contractor to federal, state and local government customers and in connection with performing services in countries outside of the United States. Adverse findings in these investigations or reviews can lead to criminal, civil or administrative proceedings and the Company could face penalties, fines, ~~repayments or~~ compensatory damages and suspension or debarment from doing business with governmental agencies. Adverse findings could also have a material adverse effect on the Company’s business, consolidated financial position, results of operations and cash flows due to its reliance on government contracts. During the first nine months of fiscal 2014, the Company paid approximately $18 million to the government to settle various investigations and reviews, including investigations arising under the Civil False Claims Act.

U.S. Government agencies, including the Defense Contract Audit Agency (DCAA), Defense Contract Management Agency (DCMA) and others, routinely audit and review a contractor’s performance on government contracts, indirect rates and pricing practices, and compliance with applicable contracting and procurement laws, regulations and standards. They also review the adequacy of the contractor’s compliance with government standards for its ~~accounting~~business ~~and management internal control~~ systems, including: ~~control~~a ~~environment~~contractor’s ~~and~~accounting ~~overall~~system, ~~accounting~~earned value management system, estimating system, ~~purchasing~~ materials management and accounting system, property management system and ~~earned~~purchasing ~~value management~~ system. Both contractors and the U.S. Government agencies conducting these audits and reviews have come under increased scrutiny. As a result, audits and reviews have become more rigorous and the standards to which the Company is held are being more strictly interpreted, increasing the likelihood of an audit or review resulting in an adverse outcome. During the course of its current audits, the DCAA is closely examining and questioning several of the Company’s long established and disclosed practices that it had previously audited and accepted, increasing the uncertainty as to the ultimate conclusion that will be reached.

The Company changed its indirect rate structure used in its indirect cost system and its direct labor bid structure used for its estimating system for fiscal 2011 and future years. The DCAA is performing reviews of these changes and the Company’s compliance with certain other U.S. Government Cost Accounting Standards. A finding of significant control deficiencies in the Company’s system audits or other reviews can result in decremented billing ~~rates to its U.S. Government customers until the control deficiencies are corrected and their remediation is accepted by the DCMA.~~

The Company’s indirect cost audits by the DCAA have not been completed for fiscal 2006 and subsequent fiscal years. Although the Company has recorded contract revenues subsequent to fiscal 2005 based upon an estimate of costs that the Company believes will be approved upon final audit or review, the Company does not know the outcome of any ongoing or future audits or reviews and adjustments, and if future adjustments exceed the Company’s estimates, its profitability would be adversely affected. As of October 31, 2012, the Company has recorded a liability of $35 million for its current best estimate of net amounts to be refunded to customers for potential adjustments from such audits or reviews of contract costs. 37

~~Tax~~LEIDOS ~~Audits~~HOLDINGS, ~~and Reviews~~ INC.

The Company files income tax returns in the United States and various state and foreign jurisdictions and is subject to routine compliance reviews by the IRS and other taxing authorities. The Company has effectively settled with the IRS for fiscal years prior to and including fiscal 2008. The Company also settled fiscal 2011 as a result of the Company’s participation in the IRS Compliance Assurance Process (CAP) beginning in fiscal 2011. As part of the CAPLEIDOS, the Company and the IRS endeavor to agree on the treatment of all tax positions prior to the tax return being filed, thereby greatly reducing the period of time between tax return submission and settlement with the IRSINC. ~~Future and ongoing reviews could have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.~~

As of October 31, 2012, the Company had liabilities for uncertain tax positions of $133 million, $31 million of which were classified as other long-term liabilities in the consolidated balance sheet. Subsequent to October 31, 2012, the Company entered into an issue resolution agreement with the IRS with respect to the tax deductible portion of the CityTime payment

SAIC, INC.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~described~~rates ~~in Note 10 of the combined notes~~ to ~~the~~its ~~condensed consolidated financial statements~~U.S. ~~The~~Government ~~resolution~~customers ofuntil ~~this tax matter will result in a $102 million reduction in~~ the ~~Company’s uncertain~~control ~~tax~~deficiencies ~~positions~~are corrected and atheir ~~$96~~remediation ~~million~~is ~~reduction~~accepted inby ~~income tax expense during~~ the ~~fourth quarter of fiscal year 2013~~DCMA.

~~During~~The Company’s indirect cost audits by the ~~next~~DCAA 12have ~~months,~~not ~~it is~~been ~~reasonably~~completed ~~possible~~for ~~that~~fiscal ~~resolution~~2006 and subsequent fiscal years. Although the Company has recorded contract revenues subsequent to fiscal 2005 based upon an estimate of ~~reviews~~costs bythat ~~taxing~~the ~~authorities~~Company believes will be approved upon final audit or review, ~~both~~the ~~domestic~~Company does not know the outcome of any ongoing or future audits or reviews and ~~international~~adjustments, ~~could~~and if future adjustments exceed the Company’s estimates, its profitability would be ~~reached~~adversely ~~with~~affected. ~~respect~~Pursuant to the Distribution Agreement with New SAIC and upon the separation date, the Company's liability of $~~118~~45 million for net amounts to be refunded to customers for potential adjustments from such audit or review of contract costs was allocated to New SAIC in the ~~Company’s~~amount ~~unrecognized~~of ~~tax~~$18 ~~benefits~~million ~~(including~~and the ~~CityTime~~Company ~~issue~~in ~~resolution referenced~~the ~~above)~~amount ~~including~~of $327 million. ofSubsequent ~~previously~~to ~~accrued~~the ~~interest~~separation date, ~~depending~~any onamounts owed in addition to the ~~timing~~$45 ofmillion ~~ongoing~~liability ~~examinations,~~for ~~any~~periods ~~litigation~~prior to the separation date will be proportioned between Leidos and ~~expiration~~New ofSAIC ~~statute~~in accordance with the Distribution Agreement. As of ~~limitations~~November 1, ~~either~~2013, ~~because~~ the Company’s ~~tax~~has ~~positions~~recorded ~~are~~a ~~sustained~~liability orof ~~because the~~$29 ~~Company~~million ~~agrees~~for its current best estimate of net amounts to ~~their~~be ~~disallowance~~refunded ~~and~~to ~~pays~~customers ~~the~~for ~~related~~potential ~~income~~adjustments ~~tax.~~from such audits or reviews of contract costs.

Tax Audits and Reviews

The Company files income tax returns in the United States and various state and foreign jurisdictions and is subject to routine compliance reviews by the IRS and other taxing authorities. The Company has effectively settled with the IRS for fiscal years prior to and including fiscal 2009, with fiscal 2010 subject to examination. The Company also settled fiscal 2011 and 2012 as a result of the Company’s participation in the IRS Compliance Assurance Process (CAP) beginning in fiscal 2011. As part of the CAP, the Company and the IRS endeavor to agree on the treatment of all tax positions prior to the tax return being filed, thereby greatly reducing the period of time between tax return submission and settlement with the IRS. Future and ongoing reviews could have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

As of November 1, 2013, the Company had liabilities for uncertain tax positions of $16 million, $11 million of which were classified as other long-term liabilities in the condensed consolidated balance sheet.

During the next 12 months, it is reasonably possible that resolution of reviews by taxing authorities, both domestic and international, could be reached with respect to $6 million of the Company’s uncertain tax positions, including $1 million of previously accrued interest, depending on the timing of ongoing examinations, any litigation and expiration of statute of limitations, either because the Company’s tax positions are sustained or because the Company agrees to their disallowance and pays the related income tax. The resolution of tax matters related to uncertain tax positions could result in a $3 million reduction in income tax expense during the third quarter of fiscal 2015.

While the Company believes it has adequate accruals for uncertain tax positions, the tax authorities may determine that the Company owes taxes in excess of recorded accruals or the recorded accruals may be in excess of the final settlement amounts agreed to by the tax authorities.

The Company is subject to periodic audits by government agencies for taxes other than income taxes. The Company does not believe that the outcome of any other such tax matters would have a material adverse effect on its consolidated financial position, results of operations, or cash flows.

Letters of Credit and Surety Bonds

The Company has outstanding letters of credit of $~~110~~98 million as of ~~October 31~~November 1, ~~2012~~2013, principally related to guarantees on contracts. The Company also has outstanding surety bonds in the amount of $~~302~~140 million, principally related to performance and payment bonds on the Company’s contracts.

~~Other~~ 38

~~The~~LEIDOS ~~Army Brigade Combat Team Modernization Engineering~~HOLDINGS, ~~Manufacturing and Development program was terminated for convenience by the DoD effective in September 2011~~INC. From October 2009 through termination, the Company and its prime contractor performed on this program under an undefinitized change order with a provisional billing rate that allowed the Company to receive a lesser amount of the projected fee than the estimated fee due until completion of the contract negotiations. The Company has recognized revenues of approximately $480 million, including estimated fee, from October 2009 through October 31, 2012 under the undefinitized change order. During the three months ended October 31, 2012, an agreement in principle was reached between the prime contractor and the DoD. The Company reduced the fees earned under the undefinitized change order by $2 million during the three months ended October 31, 2012 as a result of this development.

~~Note~~LEIDOS, ~~12—Subsequent Event:~~ INC.

~~Subsequent~~COMBINED toNOTES ~~October~~TO ~~31,~~CONDENSED ~~2012,~~CONSOLIDATED ~~the~~FINANCIAL Company’s management decided to eliminate approximately 700 positions in order to align its cost structure for greater competitiveness. This management decision will result in an estimated severance charge of approximately $15 million during the fourth quarter of fiscal year 2013. STATEMENTS

25 (UNAUDITED)

~~SAIC,~~Note ~~INC.~~13—Subsequent Events:

~~SCIENCE~~On ~~APPLICATIONS~~December ~~INTERNATIONAL~~6, ~~CORPORATION~~2013, the Company’s Board of Directors authorized the repurchase of up to 20 million shares of the Company’s outstanding common stock through one or more open market repurchases or privately negotiated transactions. This share repurchase authorization replaces the March 2012 share repurchase authorization.

On December 6, 2013, the Company’s Board of Directors declared a quarterly cash dividend of $0.32 per share payable on January 30, 2014 to stockholders of record as of the close of business on January 15, 2014.

LEIDOS HOLDINGS, INC.

LEIDOS, INC.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following combined discussion and analysis of ~~SAIC’~~Leidos Holdings, Inc.'s ("Leidos' ") and ~~Science~~Leidos, ~~Applications~~Inc.’s financial condition and results of operations and quantitative and qualitative disclosures about market risk should be read in conjunction with our condensed consolidated financial statements and related combined notes. As ~~SAIC~~Leidos is a holding company and consolidates ~~Science~~Leidos, ~~Applications~~Inc. for financial statement purposes, disclosures that relate to activities of ~~Science~~Leidos, ~~Applications~~Inc. also apply to ~~SAIC~~Leidos, unless otherwise noted. ~~Science~~Leidos, ~~Applications’~~Inc.'s revenues and operating expenses comprise 100% of ~~SAIC~~Leidos’s revenues and operating expenses. In addition, ~~Science~~Leidos, ~~Applications~~Inc. comprises approximately the entire balance of ~~SAIC~~Leidos’s assets, liabilities and operating cash flows. Therefore, the following discussion is applicable to both ~~SAIC~~Leidos and ~~Science~~Leidos, ~~Applications~~Inc., unless otherwise noted.

The following discussion contains forward-looking statements, including statements regarding our intent, belief, or current expectations with respect to, among other things, trends affecting our financial condition or results of operations, backlog, our industry, government budgets, spending, ~~and~~ the impact of competition, ~~our~~and ~~intent~~anticipated tocost ~~create~~savings ~~two~~association ~~independent~~with ~~public companies and our expectation that~~ the separation ~~transaction will be a tax-free spin-off~~. Such statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those in the forward-looking statements as a result of various factors. Some of these factors include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended January 31, ~~2012~~2013, as updated periodically through our subsequent quarterly reports on Form 10-Q. Due to such uncertainties and risks, you are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. We do not undertake any obligation to update these factors or to publicly announce the results of any changes to our forward-looking statements due to future events or developments.

Except with respect to “Results of Operations—Discontinued Operations” and “—Net Income,” and “—Diluted EPS,” all amounts in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are presented for our continuing operations.

We use the terms “Company”, “we”, “us” and “our” to refer to ~~SAIC~~Leidos, ~~Science~~Leidos, ~~Applications~~Inc. and its consolidated subsidiaries. Unless otherwise noted, references to fiscal years are ~~for~~to fiscal years ended January 31 (for fiscal 2013 and earlier periods) or fiscal years ending the Friday closest to January 31 (for fiscal 2014 and later periods). For example, we refer to the fiscal year ending January 31, ~~2013~~2014 as “fiscal ~~2013~~2014.” Effective in fiscal 2014, we changed our fiscal year to a 52/53 week fiscal year ending on the Friday closest to January 31, with fiscal quarters typically consisting of 13 weeks.

Overview

We ~~are~~deliver ascience ~~provider of scientific, engineering, systems integration~~ and ~~technical~~technology ~~services and~~ solutions primarily in the areas of ~~defense~~national security, health, ~~energy, infrastructure, intelligence, surveillance, reconnaissance~~ and ~~cybersecurity~~engineering to agencies of the U.S. Department of Defense (DoD), the intelligence community, the U.S. Department of Homeland Security and other U.S. Government civil agencies, state and local government agencies, foreign governments and customers inacross ~~select~~a variety of commercial markets. We operate in the following segments: Health and Engineering and National Security Solutions.

Our ~~business~~National isSecurity ~~focused~~Solutions onsegment ~~using~~provides ~~deep~~solutions ~~domain~~and ~~knowledge~~systems tofor ~~solve~~air, ~~problems~~land, ofsea, ~~vital~~space ~~importance to the nation~~ and ~~the~~cyberspace ~~world~~for in the ~~areas~~U.S. ofintelligence ~~national security~~community, ~~energy and~~ the ~~environment~~DoD, ~~critical~~the ~~infrastructure~~military services and ~~health~~the U.S. WeDepartment ~~are~~of ~~focusing~~Homeland ~~our~~Security. Our ~~investments~~solutions indeliver ~~our~~technology, ~~strategic~~large ~~growth~~scale ~~areas including:~~ intelligence systems, ~~surveillance~~data ~~and~~analytics, ~~reconnaissance;~~cyber ~~cybersecurity; logistics~~solutions, ~~readiness~~ and ~~sustainment;~~intelligence ~~energy~~analysis and ~~environment;~~ ~~and~~operations ~~health~~support ~~information~~to ~~technology.~~critical ~~Our~~missions ~~significant~~around ~~long-term~~the ~~management initiatives include:~~ world.

•Our ~~achieving~~Health ~~internal,~~and orEngineering ~~non-acquisition~~segment ~~related,~~provides ~~annual~~health ~~revenue~~systems ~~growth~~integration ~~through~~services ~~internal~~to ~~collaboration~~implement and ~~better~~optimize ~~leveraging~~the use of ~~key~~electronic ~~differentiators~~health ~~across~~records, ~~our~~apply ~~company~~data analytics and behavioral health research to help enable customers to improve healthcare quality and patient outcomes, detect and prevent diseases, enhance scientific discovery, and reduce costs to the ~~deployment~~healthcare ofsystem. We ~~resources~~are also provide engineering services and ~~investments~~solutions ~~into~~focused ~~higher~~on ~~growth~~solving ~~markets;~~energy, environmental and infrastructure challenges. These include solutions in energy generation, efficiency and management, environmental services, securing critical infrastructure, and designing and building construction projects.

• improving our operating income margin through strong contract execution and growth in higher-margin business areas and continued improvement in our information technology (IT) systems infrastructure and related business processes for greater effectiveness and efficiency across all business functions;40

•LEIDOS ~~disciplined deployment of our cash resources and use of our capital structure to enhance growth and stockholder value through internal growth initiatives~~HOLDINGS, ~~strategic acquisitions, stock repurchases, dividends and other uses as conditions warrant; and~~INC.

~~• investing in our people~~LEIDOS, ~~including enhanced training and career development programs, with a focus on retention and recruiting~~INC.

~~Key~~Our ~~financial~~business ~~highlights~~is focused on using deep domain knowledge to solve problems of vital importance to the nation and ~~events,~~the ~~including~~world ~~progress~~in ~~against~~the ~~management’s~~areas ~~initiatives~~of national security, ~~during~~cybersecurity, energy and the ~~three~~environment, ~~months~~and ~~ended~~health ~~October 31,~~information ~~2012~~technology. Our significant management initiatives include:

• ~~Revenues~~Achieving ~~for~~internal, ~~the~~or ~~three~~non-acquisition ~~months ended October 31~~related, ~~2012~~annual ~~increased~~revenue 3%growth ~~over~~through ~~the~~internal ~~same~~collaboration ~~period~~and inbetter ~~the~~leveraging ~~prior~~of ~~year,~~key ~~reflecting~~differentiators ~~internal~~across ~~revenue~~our ~~growth~~company ~~(as~~and ~~defined~~the indeployment ~~“Non-GAAP~~of ~~Financial~~resources ~~Measures”)~~and ofinvestments ~~1%.~~into ~~Internal~~higher ~~revenue~~ growth ~~was driven~~markets;

26• Increasing the growth of our operating profits through improving the quality of our revenues and contract profitability, continued improvement in our information technology (IT) systems infrastructure and related business processes for greater effectiveness and efficiency across all business functions; and

~~SAIC~~• Disciplined deployment of our cash resources and use of our capital structure to enhance shareholder value through internal growth initiatives, ~~INC.~~stock repurchases, dividends, strategic acquisitions and other uses as conditions warrant.

~~SCIENCE~~Key ~~APPLICATIONS~~financial ~~INTERNATIONAL~~results ~~CORPORATION~~during the three months ended November 1, 2013 include:

~~primarily~~• byRevenues ~~increased~~for ~~activity~~the three months ended November 1, 2013 decreased 15% over the corresponding period in ~~our~~the ~~Defense~~prior ~~Solutions~~year. ~~segment~~Revenue ~~partially~~contraction ~~offset~~for bythe ~~declines~~quarter would have been 14% without the negative impact of $21 million in ~~our~~revenues ~~Health,~~for ~~Energy~~the ~~and~~one ~~Civil~~less ~~Solutions~~working ~~and~~day ~~Intelligence~~as ~~and~~compared ~~Cybersecurity~~to ~~Solutions~~the ~~segments~~third quarter of fiscal 2013. ~~Revenues~~Revenue ~~for~~contraction was partially due to a decrease in our revenues from our National Security Solutions segment of $152 million due to the ~~three~~ramp ~~months~~down ~~ended~~of ~~October~~certain 31contracts, ~~2011~~drawdowns ~~were~~of ~~negatively~~overseas ~~impacted~~U.S. bymilitary and the ~~portion~~reduction of the ~~loss~~U.S. ~~provision~~Government ~~recorded~~budget ~~against~~and sequestration. There was also a decrease in our revenues (from our Health and Engineering segment of $52100 million) due to a decline in ~~connection~~engineering ~~with~~services ~~the~~primarily ~~CityTime~~related ~~matter~~to ~~described~~energy design-build construction programs, as well as a decline in ~~Note~~our 10health ofbusiness ~~the~~driven ~~combined~~by ~~notes~~program tocompletions, ~~the~~lower ~~condensed~~new ~~consolidated~~program ~~financial~~starts ~~statements~~and hospital budgets that have experienced reductions in reimbursements from U.S. Government funding, including reductions in Medicare reimbursements which in turn impact hospital IT spending trends.

• Operating ~~income~~loss ~~increased~~from ~~$213~~continuing ~~million~~operations tofor ~~$193~~the ~~million~~three ~~(6.7%~~months asended aNovember ~~percentage~~1, of2013 ~~revenues)~~was ~~for~~$7 ~~the~~million ~~three~~as ~~months~~compared ~~ended~~to ~~October~~operating ~~31,~~income ~~2012~~ from ancontinuing ~~operating~~operations ~~loss~~ of $20100 million (6% as a percentage of revenues) for the ~~same~~corresponding period in the prior year. The ~~increase~~decrease in operating income isfor ~~primarily due to~~ the ~~loss~~three ~~provision~~months ~~($232~~ended ~~million)~~November ~~recorded~~1, in2013, ~~the~~was ~~prior~~primarily ~~year~~attributable into ~~connection~~$43 ~~with~~million ~~the~~of ~~CityTime~~bad ~~matter~~debt ~~described~~expense inprimarily ~~Note~~related ~~10 of the combined notes~~ to ~~the~~receivables ~~condensed~~for ~~consolidated~~two ~~financial~~energy ~~statements.~~design-build Inconstruction ~~addition~~projects, ~~operating~~$25 ~~income~~million ~~for~~of ~~the~~separation ~~three~~transaction ~~months~~and ~~ended~~restructuring ~~October 31~~expenses, ~~2012 reflects increased indirect spending (~~$1519 million), ~~including~~for ~~charges~~an ~~associated~~intangible ~~with~~asset ~~the~~impairment ~~corporate~~charge ~~relocation~~ and ~~the~~$15 ~~announced~~million ~~separation~~related ~~transaction~~to ~~discussed~~the ~~below,~~reduction ~~partially~~in ~~offset by fees on increased~~ revenues.

• ~~Income~~Diluted loss per share from continuing operations for the three months ended ~~October~~November 311, ~~2012~~2013 ~~increased~~was $~~204~~0.11 ~~million~~ as compared to ~~the~~diluted ~~same~~income per share from continuing operations of $0.66 in corresponding period in the prior year primarily due to the ~~increase~~aforementioned in operating income, reductions which translated to a ~~decrease~~reduction in ~~interest~~income ~~expense~~from ~~and~~continuing aoperations ~~lower~~of ~~effective~~$64 ~~tax rate~~million.

• ~~Diluted~~Cash ~~earnings~~and ~~per~~cash ~~share~~equivalents ~~(EPS)~~increased ~~from~~$352 ~~continuing~~million ~~operations~~during ~~for~~ the three months ended ~~October~~November 311, ~~2012~~2013, ~~increased~~primarily ~~$0.61~~due ~~as compared~~ to ~~the~~a ~~same~~dividend ~~period~~received infrom ~~the~~New ~~prior~~SAIC ~~year~~of ~~primarily~~$269 ~~due~~million, tonet ~~the~~of ~~increase~~contribution inpaid, ~~income~~for ~~from~~the ~~continuing~~separation, ~~operations~~cash ~~partially~~flows ~~offset~~provided by anoperations ~~increase~~of in$49 ~~the~~million ~~diluted~~and ~~weighted~~cash ~~average~~provided ~~number~~by ofdiscontinued ~~shares~~operations ~~outstanding~~ of 5$52 million, orpartially 2%offset by dividend payments of $28 million.

• ~~Cash~~Net bookings (as defined in “Key Financial Metrics—Bookings and ~~cash~~Backlog”) ~~equivalents~~were ~~decreased~~approximately $~~225~~2.4 ~~million~~billion ~~during~~for the three months ended ~~October~~November 311, ~~2012~~2013. ~~primarily~~Total ~~due~~backlog towas ~~cash~~$10 ~~used~~billion toat ~~acquire~~November a1, ~~business~~2013 ~~for~~as ~~$478~~compared ~~million~~to ~~and dividend payments of~~ $419 ~~million~~billion ~~partially~~at ~~offset~~August by2, ~~cash generated from operations of $295 million~~2013.

• Net bookings (as defined in “Key Financial Metrics—Bookings and Backlog”) were approximately $4.8 billion for the three months ended October 31, 2012. Total backlog was $18.6 billion at October 31, 2012 as compared to $16.5 billion at July 31, 2012.41

~~Planned~~LEIDOS ~~Separation~~HOLDINGS, ~~Transaction~~ INC.

~~In August 2012~~LEIDOS, we announced that our board of directors authorized management to pursue a plan to separate into two independent, publicly traded companies: (i) a company focused on government technology and enterprise information technology services; and (ii) a company focused on delivering science and technology solutions primarily in the areas of national security, engineering and healthINC.

~~The~~Separation proposed separation is intended to take the form of a tax-free spin-off of the government technology and enterprise information technology services business. The separation transaction is expected to occur in the latter half of calendar year 2013, subject to final approval of the board of directors and certain other conditions. The separation transaction is not expected to require a vote of the stockholders of SAIC. Transaction

~~Management~~In ~~is continuing~~accordance towith ~~develop~~a ~~detailed~~distribution ~~plans~~agreement, on ~~capital structure~~September 27, ~~management,~~2013 ~~governance~~(the ~~and~~"Distribution ~~other~~Date"), ~~significant~~Leidos ~~matters.~~completed Inthe ~~addition,~~previously ~~the~~announced ~~completion~~separation of ~~any~~its ~~separation~~technical ~~transaction~~services ~~will~~and beenterprise ~~subject~~information totechnology ~~certain~~services ~~customary~~business ~~conditions~~into an independent, ~~including~~publicly ~~implementation~~traded ~~of intercompany~~company ~~agreements,~~named ~~filing~~Science ofApplication ~~required~~International ~~documents~~Corporation ~~with~~(“New ~~the~~SAIC”) U(formerly known as SAIC Gemini, Inc.S). The ~~Securities~~separation ~~and~~was ~~Exchange~~effected ~~Commission~~through ~~and~~a ~~receipt~~tax-free distribution to Leidos' stockholders of an100% ~~opinion~~of ~~from~~the ~~tax~~shares ~~counsel~~of ~~and~~New aSAIC's ~~ruling~~common ~~from~~stock. On the ~~Internal~~Distribution ~~Revenue~~Date, ~~Service~~New ~~(IRS)~~SAIC's ascommon stock was distributed, on a pro rata basis, to ~~the~~Leidos' ~~tax-free~~stockholders ~~nature~~of record as of ~~such~~the aclose ~~transaction. Although~~of webusiness ~~expect~~on ~~that~~September 19, 2013, the ~~separation~~record date. Each holder of ~~our~~Leidos ~~businesses,~~common ifstock ~~consummated,~~received ~~would~~one beshare ~~completed~~of inNew ~~the~~SAIC ~~latter~~common ~~half~~stock for every seven shares of ~~calendar~~Leidos ~~year~~common ~~2013~~stock held on the record date. Prior to the Distribution Date, ~~there~~Leidos ~~can~~Holdings, beInc. nowas ~~assurance~~named ~~that~~SAIC, aInc. ~~separation~~and ~~will~~Leidos, ~~ultimately~~Inc. ~~occur~~was named Science Applications International Corporation. The ~~Upon~~companies' ~~completion~~names were changed as part of the separation ~~transaction~~, ~~the~~ ~~operating~~and ~~results~~New ofSAIC assumed the ~~separated~~name ~~business~~Science ~~will~~Applications beInternational ~~included~~Corporation. inAs ~~discontinued~~a ~~operations.~~result ~~See~~of ~~“Part~~the IIseparation, ~~Item 1A—Risk~~the ~~Factors”~~assets, ~~contained~~liabilities, inresults ~~our~~of ~~Quarterly~~operations ~~Report~~and oncash ~~Form~~flows ~~10-Q~~of ~~for~~New ~~the~~SAIC ~~fiscal~~have ~~quarter~~been ~~ended~~classified ~~July 31,~~as ~~2012~~discontinued operations for ~~certain~~ ~~risk~~all ~~factors~~periods ~~relating~~presented. References to ~~the~~financial ~~proposed~~information ~~separation~~are ~~transaction.~~to our continuing operations, unless otherwise noted.

In connection with the separation transaction and in order to align our cost structure for post-separation, we took actions to reduce our real estate footprint by vacating facilities that are not necessary for our future requirements. We expect these actions will result in an aggregate of approximately $45 million in lease termination and facility consolidation costs over fiscal 2014, which is expected to generate annualized cost savings of approximately $30 million. During the first nine months of fiscal 2014, we incurred approximately $40 million of these lease termination and facility consolidation costs. In addition, during the first nine months of fiscal 2014, we incurred approximately $18 million of other separation transaction and restructuring expenses, besides the lease termination and facility consolidation costs discussed above, which included approximately $10 million of incremental severance costs related to organizational streamlining. We don't expect to incur significant additional other separation transaction and restructuring expenses through the remainder of fiscal 2014.

Discontinued Operations

From time to time, we may dispose (or management may commit to plans to dispose) of non-strategic components of the business, which are reclassified as discontinued operations for all periods presented.

Fiscal Year 2014 Dispositions

In addition to the separation of New SAIC discussed above, during the three months ended November 1, 2013, in order to better align our business portfolio with our strategy, we sold a certain component of our business resulting in an insignificant gain, which were historically included in our National Security Solutions segment, focused on machine language translation.

During the three months ended August 2, 2013, we committed to plans to dispose of certain components of our business, which were historically included in our National Security Solutions segment, primarily focused on technology used to detect if an individual is concealing explosive devices or other hidden weapons.

Fiscal Year 2013 Dispositions

We sold certain components of our business, which were historically included in our Health and Engineering segment, primarily focused on providing operational test and evaluation services to U.S. Government customers.

The operating results of our discontinued operations discussed above for the periods presented were as follows:



	Three Months Ended				Nine Months Ended
	November 1, 2013		October 31, 2012		November 1, 2013		October 31, 2012
	(in millions)
Revenues	$	599	$	1,214	$	2,715	$	3,618
Costs and expenses:
Cost of revenues	539		1,091		2,455		3,259
Selling, general and administrative expenses	19		18		47		65
Separation transaction and restructuring expenses	20		11		55		15
Operating income	$	21	$	94	$	158	$	279

Income from discontinued operations also includes other activity that is immaterial and not reflected in the amounts above.

Business Environment and Trends

~~In fiscal 2012, we generated over 90% of our total revenues from contracts with the~~ U.S. Government, either as a prime contractor or a subcontractor to other contractors engaged in work for the U.S. Government. Revenues under contracts with the DoD, including subcontracts under which the DoD is the ultimate purchaser, represented approximately 75% of our total revenues in fiscal 2012. Accordingly, our business performance is subject to changes in the overall level of U.S. Government spending, especially national security, including defense, 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. Markets

~~While~~For wethe ~~believe~~nine ~~that~~months ~~national~~ended ~~security,~~November ~~including defense~~1, ~~homeland security~~2013, ~~and~~we ~~intelligence~~generated ~~spending~~approximately ~~will~~77% ~~continue~~of toour betotal arevenues ~~priority,~~from contracts with the U.S. Government, ~~deficit~~either ~~and~~as ~~budget~~a ~~situation~~prime ~~has~~contractor ~~created~~or ~~increasing~~a ~~pressure~~subcontractor to ~~examine~~other ~~and~~contractors ~~reduce~~engaged ~~spending~~ in ~~these~~work ~~areas~~for the U.S. InGovernment. ~~August~~Revenues ~~2011~~under contracts with the DoD, ~~President~~including ~~Obama~~subcontracts ~~signed~~under ~~into~~which ~~law~~the DoD is the ~~Budget~~ ~~Control~~ultimate ~~Act~~purchaser, represented approximately 67% of ~~2011~~our total revenues for the nine months ended November 1, ~~which~~2013. ~~increased~~Accordingly, our business performance is affected by the overall level of U.S. Government’s ~~debt~~spending, ~~ceiling~~especially ~~and~~national ~~enacted~~security, ~~10-year~~including ~~discretionary~~defense, homeland security, and intelligence spending, ~~caps~~and ~~expected~~the alignment of our service and product offerings and capabilities with current and future budget priorities of the U.S. Government. As an example, we expect to ~~generate~~see ~~over~~a reduction in revenue of approximately $1235 ~~trillion~~million from fiscal 2013 to fiscal 2014 on our contract to provide logistics services for tactical mine resistant ambush protected vehicles largely as a result of the drawdown of forces in ~~savings~~the Middle East.

27While we believe that national security spending will continue to be a priority, U.S. Government budget deficits and the national debt has created increasing pressure to examine and reduce spending across all federal agencies. Baseline spending for the DoD for the next 9 years has been reduced and there may be further reductions. The Budget Control Act of 2011 increased the U.S. Government’s debt ceiling and enacted 10-year discretionary spending caps expected to generate over $1 trillion in savings for the U.S. Government. According to the Office of Management and Budget, these savings include $487 billion in DoD baseline spending reductions over 10 years. In addition, the Budget Control Act of 2011 provides for additional automatic spending cuts (referred to as sequestration) totaling $1.2 trillion over nine years, which began to be implemented in the U.S. Government fiscal year ended September 30, 2013 (GFY13). Those cuts have now been finalized, are being implemented, and will result in continued reductions to government outlays in GFY14. The implementation of sequestration spending cuts and associated government guidance and planning activities has impacted existing contracts and caused delays in other government contracting actions. In addition, automatic spending cuts (sequestration) could be implemented starting on January 15, 2014, causing further delays in contract awards and continued fiscal uncertainty. GFY14, which began on October 1, 2013, started with a partial U.S. Government shutdown. On October 16, 2013, the U.S. Congress passed a continuing resolution to fund government operations through January 2014, at which time the government could shutdown adversely impacting our business. All agencies and departments are funded under a continuing resolution with standard restrictions, including no new program starts and no program increases beyond current service levels, which could adversely impact our future revenues and growth prospects. We continue to evaluate the impact of budget cuts and sequestration on our business. The amount and nature of these federal budget spending reductions could adversely impact our operations, future revenues and growth prospects in those markets.

~~SAIC, INC.~~ 43

~~SCIENCE~~LEIDOS ~~APPLICATIONS~~HOLDINGS, ~~INTERNATIONAL CORPORATION~~ INC.

~~for the U.S. Government. According to the Office of Management and Budget~~LEIDOS, ~~these savings include $487 billion in DoD baseline spending reductions over the next 10 years~~INC. The Budget Control Act of 2011 also established a joint bipartisan committee of Congress responsible to recommend at least $1.2 trillion in additional savings by November 2011. The joint committee did not meet the deadline for proposing recommended legislation. Unless the Budget Control Act of 2011 is amended, additional automatic spending cuts (referred to as sequestration) totaling $1.2 trillion over nine years will be triggered. Assuming approximately $200 billion in reduced debt-service costs, these discretionary spending cuts are expected to be evenly split between defense and non-defense areas, reducing spending for each area by approximately $500 billion over a nine-year period, beginning in the government fiscal year ending September 30, 2013 (GFY13). In September 2012, the Office of Management and Budget delivered to Congress a report detailing how sequestration would be implemented. While the report included estimated GFY13 reductions by discretionary budget account, it failed to describe how reductions would occur at levels below the account level (i.e., at the project, program and activity level). As a result, there remains significant uncertainty about how the federal government would implement sequestration, currently set to begin in January 2013. Following the November 2012 elections, while the possibility of sequestration, as well as scheduled tax expirations, and other issues associated with the “fiscal cliff” continues to be the top priority for the Obama Administration and Congress, we cannot predict the outcome of any ongoing discussions to address these matters. We continue to evaluate the potential impact of possible sequestration on our business, and while the ultimate effect on our business is uncertain, the amount and nature of these federal budget spending reductions could adversely impact our operations, future revenues and growth prospects in those markets.

ATrends in the U.S. Government ~~budget~~contracting ~~for~~process, ~~GFY13~~including ~~has~~a ~~not~~shift ~~been~~towards ~~passed~~multiple-awards bycontracts ~~Congress.~~(in ~~Instead,~~which ~~Congress~~certain ~~passed,~~contractors ~~and~~are ~~the~~preapproved ~~President~~using ~~signed, a six~~indefinite-~~month~~delivery/indefinite-quantity ~~continuing~~(IDIQ) ~~resolution~~and ~~funding the~~ U.S. ~~Government~~General ~~through~~Services ~~March 31,~~Administration ~~2013. While~~(GSA) ~~the~~contract ~~continuing~~vehicles) ~~resolution averts a government shutdown~~ and ~~removes~~awarding ~~GFY13~~contracts ~~funding~~on as a ~~major~~low ~~issue~~price, totechnically beacceptable ~~solved~~basis, ~~during~~have ~~the~~increased ~~current~~competition ~~lame~~for ~~duck~~U.S. ~~session~~Government ofcontracts ~~Congress,~~and itincreased ~~also~~pricing ~~contains~~pressure. ~~standard~~We ~~restrictions,~~expect ~~including~~that noa ~~new~~majority ~~program~~of ~~starts~~the ~~and~~business ~~no program~~that ~~increases~~we ~~beyond~~seek ~~current~~in ~~service~~the ~~levels~~foreseeable ~~which~~future ~~could~~will ~~limit~~be ~~our~~awarded ~~ability~~through toa ~~grow~~competitive ~~our~~bidding ~~business~~process. WeFor ~~continue~~more toinformation ~~evaluate~~on ~~the~~these ~~ongoing~~risks ~~GFY13~~and ~~budget negotiations~~uncertainties, ~~including~~see ~~the~~“Risk ~~potential~~Factors” ~~deferral~~in orPart ~~prevention~~I of ~~sequestration,~~our ~~and~~Annual ~~the~~Report ~~possible impact~~ on ~~our~~Form 10-K ~~operations,~~for ~~future~~the ~~revenues~~fiscal ~~and~~year ~~growth~~ended ~~prospects.~~January 31, 2013.

~~Competition~~Commercial for contracts with the U.S. Government continues to be intense. The U.S. Government has increasingly used contracting processes that give it the ability to select multiple winners or pre-qualify certain contractors to provide various services or products at established general terms and ~~conditions.~~International Such processes include purchasing services and solutions using indefinite-delivery/indefinite-quantity (IDIQ) and U.S. General Services Administration (GSA) contract vehicles. This trend has served to increase competition for U.S. Government contracts. For more information on these risks and uncertainties, see “Risk Factors” in Part I of our Annual Report on Form 10-K for the fiscal year ended January 31, 2012, as updated through our subsequent quarterly reports on Form 10-Q. Markets

Sales to our customers in commercial and international markets are dependent on U.S. and global economic conditions, which continue to experience economic and fiscal challenges, including slow GDP growth and collateral impacts from reduced government spending. These economic and fiscal challenges could adversely impact our operations, future revenues and growth prospects in those markets.

Reportable Segments

~~Our~~Effective February 1, 2013, we realigned certain business isoperations ~~aligned into~~among ~~four~~our segments and renamed three of our reportable segments: ~~Defense~~as ~~Solutions;~~follows: Health, ~~Energy~~ and ~~Civil~~Engineering (HES); National Security Solutions (NSS); ~~Intelligence~~Technical Services and ~~Cybersecurity~~Information ~~Solutions~~Technology; and Corporate and Other. In connection with the separation of New SAIC on September 27, 2013, the Technical Services and Information Technology reportable segment was distributed to New SAIC and was included as part of our discontinued operations. The prior periods presented were recasted to give effect to these changes in our reportable segments. For additional information regarding our reportable segments, see Note 910 of the combined notes to the condensed consolidated financial statements for the three and nine months ended ~~October 31~~November 1, ~~2012~~2013 contained in this Quarterly Report on Form 10-Q, and “Business” in Part I and Note 15 of the combined notes to consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended January 31, ~~2012~~2013.

Key ~~Financial Metrics~~Performance Measures

~~Bookings~~The ~~and~~primary ~~Backlog.~~financial Weperformance ~~received~~measures ~~net~~we ~~bookings~~use ~~worth~~to anmanage ~~estimated~~our ~~$4.8 billion~~business and ~~$9.1 billion~~monitor ~~during~~results ~~the~~of ~~three~~operations ~~and~~are ~~nine~~revenue, ~~months~~operating ~~ended~~income ~~October 31,~~and ~~2012,~~cash ~~respectively.~~flows ~~Net~~from ~~bookings~~operations. ~~represent~~We ~~the~~also ~~estimated~~believe ~~amount~~that ~~of revenues~~bookings toand bebacklog ~~earned~~are inuseful ~~the~~measures ~~future~~for ~~from~~management ~~funded~~ and ~~unfunded~~investors ~~contract~~to ~~awards~~evaluate ~~that~~our ~~were~~potential ~~received~~future ~~during~~revenues. ~~the~~In ~~period~~addition, ~~net~~we ofconsider ~~any~~measures ~~adjustments~~such ~~to previously awarded backlog amounts. We calculate net bookings~~ as ~~the~~contract ~~period’s~~types ~~ending~~and ~~backlog~~revenue ~~plus~~mix ~~the period’s~~to ~~revenues~~be ~~less~~useful ~~the~~measures ~~prior~~to ~~period’s~~management ~~ending backlog~~ and ~~less~~investors ~~the~~evaluating ~~backlog~~our ~~obtained~~operating inincome ~~acquisitions~~and ~~during~~margin ~~the period~~performance.

Bookings and Backlog. We received net bookings worth an estimated $2.4 billion and $4.3 billion during the three and nine months ended November 1, 2013, respectively. Net bookings represent the estimated amount of revenues to be earned in the future from funded and unfunded contract awards that were received during the period, net of any adjustments to previously awarded backlog amounts. We calculate net bookings as the period’s ending backlog plus the period’s revenues less the prior period’s ending backlog and less the backlog obtained in acquisitions during the period.

Backlog represents the estimated amount of future revenues to be recognized under negotiated contracts as work is performed and excludes contract awards which have been protested by competitors. We segregate our backlog into two categories as follows:

•

Funded Backlog. Funded backlog for contracts with government agencies primarily represents contracts for which funding is appropriated less revenues previously recognized on these contracts, and does not include the unfunded portion of contracts where funding is incrementally appropriated or authorized on a quarterly or annual basis by the U.S. Government and other customers, even though the contract may call for performance over a number of years. Funded backlog for contracts with non-government agencies represents the estimated value on contracts, which may cover multiple future years, under which we are obligated to perform, less revenues previously recognized on these contracts.

28 44

~~SAIC~~LEIDOS HOLDINGS, INC.

~~SCIENCE~~LEIDOS, ~~APPLICATIONS INTERNATIONAL CORPORATION~~ INC.

•

Negotiated Unfunded Backlog. Negotiated unfunded backlog represents estimated amounts of revenues to be earned in the future from (1) negotiated contracts for which funding has not been appropriated or otherwise authorized and (2) unexercised priced contract options. Negotiated unfunded backlog does not include any estimate of future potential task orders expected to be awarded under IDIQ, GSA Schedule, or other master agreement contract vehicles.

The estimated value of our total backlog as of the dates presented, with the prior period recast for consistency with the current period’s presentation, was as follows:

		October 31,2012			July 31,2012			April 30, 2012			January 31,2012
	November 1,2013			August 2,2013			May 3,2013			January 31,2013
	(in millions)	~~(in millions)~~
Defense Solutions:
Health and Engineering:
Funded backlog	$	$1,040	~~2,174~~	$	$996	~~2,013~~	$	$1,094	~~2,026~~	$	$1,295	~~2,143~~
Negotiated unfunded backlog	816		~~4,563~~	669		~~4,309~~	664		~~4,605~~	676		~~4,961~~
Total Defense Solutions backlog		$	6,737		$	6,322		$	6,631		$	7,104
Total Health and Engineering backlog	$	1,856		$	1,665		$	1,758		$	1,971
Health, Energy and Civil Solutions:
National Security Solutions:
Funded backlog	$	$1,958	~~1,842~~	$	$1,900	~~1,858~~	$	$1,877	~~1,911~~	$	$2,119	~~2,057~~
Negotiated unfunded backlog	6,166		~~2,854~~	5,442		~~2,865~~	5,737		~~3,061~~	6,037		~~3,238~~
Total Health, Energy and Civil Solutions backlog		$	4,696		$	4,723		$	4,972		$	5,295
Total National Security Solutions backlog	$	8,124		$	7,342		$	7,614		$	8,156
Intelligence and Cybersecurity Solutions:
Total:
Funded backlog	$	$2,998	~~1,705~~	$	$2,896	~~1,615~~	$	$2,971	~~1,752~~	$	$3,414	~~1,317~~
Negotiated unfunded backlog	6,982		~~5,440~~	6,111		~~3,867~~	6,401		~~3,880~~	6,713		~~4,169~~
Total Intelligence and Cybersecurity Solutions backlog		$	7,145		$	5,482		$	5,632		$	5,486
Total backlog	$	9,980		$	9,007		$	9,372		$	10,127
Total:
Funded backlog		$	5,721		$	5,486		$	5,689		$	5,517
Negotiated unfunded backlog			12,857			11,041			11,546			12,368
Total backlog		$	18,578		$	16,527		$	17,235		$	17,885

~~Total~~Bookings and backlog ~~fluctuates~~fluctuate from period to period depending on our success rate in winning contracts and the timing of contract awards, renewals, modifications and cancellations. Contract awards continue to be negatively impacted by ~~on-going~~ongoing industry-wide delays in procurement decisions, which have resulted in an increase in the value of our submitted proposals awaiting decision. ~~Backlog~~Contract ~~may~~awards have also bebeen negatively impacted by ~~possible~~budget cuts, including sequestration, by the U.S. Government as discussed in “Business Environment and Trends” in this Quarterly Report on Form 10-Q.

We expect to recognize a substantial portion of our funded backlog as revenues within the next 12 months. However, the U.S. Government may cancel any contract at any time through a termination for the convenience of the U.S. Government. In addition, certain contracts with commercial customers include provisions that allow the customer to cancel at any time. Most of our contracts have cancellation terms that would permit us to recover all or a portion of our incurred costs and fees for work performed.

Contract Types. Our earnings and profitability may vary materially depending on changes in the proportionate amount of revenues derived from each type of contract. For additional information regarding the types of contracts under which we generate revenues, see “Business—Contract Types” in Part I of our Annual Report on Form 10-K for the fiscal year ended January 31, ~~2012~~2013. The following table summarizes revenues by contract type as a percentage of total revenues for the periods presented:

		Nine Months Ended October 31
	Nine Months Ended
		2012				2011
	November 1,2013			October 31,2012
Cost-reimbursement	47	%	42	%45	%		45	%
Time and materials (T&M) and fixed-price-level-of-effort (FP-LOE)	27		29	29			30
Firm-fixed price (FFP)	26		29	26			25
Total	100	%	~~100~~	%100	%		~~100~~	%

The increase in the percentage of revenues generated from FFP contracts during the nine months ended October 31, 2012 as compared to the same period of the prior year was primarily due to increased revenues from increased deliveries under certain logistics, readiness and sustainment contracts, increased design and construction services and increased activity on a program to operate and maintain the enterprise network IT infrastructure for the U.S. Department of State. 45

~~Revenue~~LEIDOS ~~Mix. We generate revenues under our contracts from (1) the efforts of our technical staff~~HOLDINGS, ~~which we refer to as labor-related revenues, and (2) the materials provided on a contract and efforts of our subcontractors, which we refer to as~~ INC.

29LEIDOS, INC.

~~SAIC~~Revenue Mix. We generate revenues under our contracts from (1) the efforts of our technical staff, ~~INC~~which we refer to as labor-related revenues, and (2) the materials provided on a contract and efforts of our subcontractors, which we refer to as M&S revenues. M&S revenues are generated primarily from large, multi-year systems integration contracts and contracts in our logistics, readiness and sustainment business area, as well as through sales of our proprietary products, such as our border, port and mobile security products and our checked baggage explosive detection systems. While our proprietary products are more profitable, these products represent a small percentage of our M&S revenues and the majority of our M&S revenues generally have lower margins than our labor-related revenues. The following table presents changes in labor-related revenues and M&S revenues for the periods presented:

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION



	Three Months Ended							Nine Months Ended
	November 1, 2013			Percent change	October 31 2012			November 1, 2013			Percent change	October 31, 2012
	(dollars in millions)
Labor-related revenues	$	867		(17)%	$	1,049		$	2,763		(8)%	$	3,014
As a percentage of revenues	61		%		63		%	62		%		62		%
M&S revenues	553			(11)%	624			1,723			(9)%	1,885
As a percentage of revenues	39		%		37		%	38		%		38		%

~~M&S~~Geographic ~~revenues~~Location. ~~M&S~~Substantially ~~revenues~~all ~~are generated primarily from large, multi-year systems integration contracts and contracts in our logistics, readiness and sustainment business area, as well as through sales~~ of our ~~proprietary~~revenues ~~products, such as our border, port~~ and ~~mobile~~tangible ~~security~~long-lived ~~products~~assets ~~and our checked baggage explosive detection systems. While our proprietary products~~ are ~~more~~generated ~~profitable,~~by ~~these~~or ~~products~~owned ~~represent~~by ~~a small~~entities ~~percentage~~located ofin ~~our M&S revenues and~~ the ~~majority~~United ~~of our M&S revenues generally have lower margins than our labor-related revenues~~States. ~~The following table presents changes in labor-related revenues and M&S revenues for the periods presented:~~

	Three Months Ended October 31									Nine Months Ended October 31
	2012			Percentchange			2011			2012			Percentchange			2011
	(dollars in millions)
Labor-related revenues	$	1,562			1	%	$	1,546		$	4,558			—	%	$	4,570
As a percentage of revenues		54	%					55	%		54	%					57	%
M&S revenues		1,308			5			1,244			3,904			13			3,456
As a percentage of revenues		46	%					45	%		46	%					43	%

InLEIDOS ~~recent years~~HOLDINGS, there have been increases in the relative proportion of M&S revenues as compared to labor-related revenues primarily due to increased activity as a prime contractor on large programs involving significant subcontracted efforts and increased volume of material deliveries under certain programs, primarily with DoD customersINC.

LEIDOS, INC.

Results of Operations

The following table summarizes our results of operations for the periods presented:

		Three Months Ended October 31												Nine Months Ended October 31
	Three Months Ended											Nine Months Ended
		2012				Percentchange				2011				2012				Percentchange				2011
	November 1, 2013				Percent change			October 31, 2012				November 1, 2013				Percent change			October 31, 2012
	(dollars in millions)	~~(dollars in millions)~~
Revenues	$	$1,420	~~2,870~~		(15	)%	3	%$	1,673	$	~~2,790~~	$	4,486	$	~~8,462~~	(8	)%		5$	%4,899		$	~~8,026~~
Cost of revenues	1,224		~~2,509~~		(15	)%	1	1,434			~~2,477~~	3,903			~~7,429~~	(7	)%		54,218				~~7,051~~
Selling, general and administrative expenses (SG&A):
Selling, general and administrative expenses:
General and administrative (G&A)			103				(62	)			269				248				(36	)			386
General and administrative	88				(10	)%		98				264				15	%		229
Bid and proposal (B&P)			37				(3	)			38				132				16				114
Bid and proposal	13				(48	)%		25				54				(41	)%		92
Internal research and development (IR&D)			17				(35	)			26				49				(21	)			62
Internal research and development	15				(6	)%		16				42				(9	)%		46
Separation transaction expenses			11				100				—				15				100				—
Bad debt expense	43				—			—				45				—			—
Operating income (loss)			193				1,065				(20	)			589				43				413
Intangible asset impairment losses	19				—			—				51				—			—
Operating income margin			6.7	%							(0.7	)%			7.0	%							5.1	%
Separation transaction and restructuring expenses	25				—			—				58				—			—
Non-operating expense, net			(16	)							(29	)			(59	)							(79	)
Operating (loss) income	(7		)		(107	)%		100				69				(78	)%		314
Income (loss) from continuing operations before income taxes			177				461				(49	)			530				59				334
Operating (loss) income margin	—							6		%		2		%					6		%
Provision for income taxes			(65	)			51				(43	)			(193	)			3				(188	)
Non-operating expense, net	(14		)					(17		)		(41		)					(60		)
Income (loss) from continuing operations			112				222				(92	)			337				131				146
(Loss) income from continuing operations before income taxes	(21		)		(125	)%		83				28				(89	)%		254
Income from discontinued operations, net of tax			—								3				2								74
Income tax benefit (expense)	12				(143	)%		(28		)		1				(101	)%		(89		)
Net income (loss)		$	112				226			$	(89	)		$	339				54			$	220
(Loss) income from continuing operations	(9		)		(116	)%		55				29				(82	)%		165
Income from discontinued operations, net of tax	6							57				91							174
Net income	$	(3	)		(103	)%		$	112			$	120			(65	)%		$	339

We classify indirect costs incurred within or allocated to our government customers as overhead (included in cost of revenues) and ~~G&A~~ general and administrative expenses in the same manner as such costs are defined in our disclosure statements under U.S. Government Cost Accounting Standards.

Changes in Estimates on Contracts. Changes in estimates related to certain types of contracts accounted for using the percentage of completion method of accounting are recognized in the period in which such changes are made for the inception-to-date effect of the changes. Changes in these estimates can routinely occur over the contract performance period for a variety of reasons, including changes in contract scope, changes in contract cost estimates due to unanticipated cost growth or retirements of risk for amounts different than estimated, and changes in estimated incentive or award fees. Aggregate changes in contract estimates ~~increased~~ resulted in a decrease to operating income byof $81 million ($0.01 per diluted share) and $929 million ($0.0122 per diluted share) for the three and nine months ended ~~October 31~~November 1, ~~2012~~2013, respectively., ~~Aggregate~~and ~~changes~~an inincrease ~~contract~~to ~~estimates increased~~ operating income by $63 million ($0.0103 per diluted share) for the three months ended October 31, 2012 and an increase to operating income by $332 million ($0.0601 per diluted share) for the ~~three and~~ nine months ended October 31, ~~2011, respectively~~2012.

Reportable Segment Results. Effective February 1, 2012, certain operations were transferred between the Company’s reportable segments. Prior year amounts have been adjusted for consistency with the current year’s presentation. 47

30LEIDOS HOLDINGS, INC.

~~SAIC~~LEIDOS, INC.

~~SCIENCE~~Goodwill ~~APPLICATIONS~~Interim ~~INTERNATIONAL~~Impairment ~~CORPORATION~~Evaluation. In the third quarter of fiscal 2014, we forecasted a significant decline in revenue and operating income related to our Health Solutions and Engineering reporting units within our Health and Engineering reporting segment. We determined that this decline constituted a significant change in circumstances which could potentially reduce the fair value of the reporting unit below its carrying value. As such, an interim goodwill impairment test was performed and we determined that the estimated fair value of the Engineering reporting unit substantially exceeded its book value for the quarter tested and for the Health Solutions reporting unit, the estimated fair value exceeded its book value by approximately 20% for the third quarter of fiscal 2013. Based on these results, no goodwill impairment charge was recorded. We used two methodologies to determine the estimated fair value of the Health Solutions reporting unit, a market approach and an income based. Each model is based upon certain key assumptions that requires the exercise of significant judgment including judgments for the use of appropriate financial projections, discount rates and weighted average cost of capital as well as using available market data. We face continued uncertainty in our business environment due to the substantial fiscal and economic challenges in the commercial healthcare industry, compounded by lower levels of Medicare reimbursements which in turn impact hospital IT spending. Adverse changes in fiscal and economic conditions, such as the manner in which budget cuts are implemented, including sequestration, could negatively affect the key assumptions used to determine fair value.

~~The~~Reportable ~~following~~Segment ~~table~~Results. Effective ~~summarizes~~February ~~changes~~1, in2013, ~~Defense~~we realigned certain business operations among our reportable segments as follows: Health and Engineering; National Security Solutions; ~~revenues~~Technical Services and ~~operating~~Information ~~income~~Technology; and Corporate and Other. In connection with the separation of New SAIC, the Technical Services and Information Technology reportable segment was distributed to New SAIC and was included as part of our discontinued operations. Prior year amounts have been recast for consistency with the ~~periods presented:~~current year’s presentation.

	Three Months Ended October 31									Nine Months Ended October 31
Defense Solutions	2012			Percentchange			2011			2012			Percentchange			2011
	(dollars in millions)
Revenues	$	1,183			6	%	$	1,117		$	3,597			8	%	$	3,339
Operating income (loss)		91			168			(133	)		284			531			45
Operating income (loss) margin		7.7	%					(11.9	)%		7.9	%					1.3	%

The following table summarizes changes in Health and Engineering revenues and operating income for the periods presented:

Defense Solutions revenues increased by $66 million, or 6%, all of which was internal revenue growth, for the three months ended October 31, 2012 as compared to the same period in the prior year. Revenues for the three months ended October 31, 2011 were negatively impacted by the portion of the loss provision recorded against revenues in connection with the CityTime matter ($52 million). See Note 10 of the combined notes to the condensed consolidated financial statements. Internal revenue growth for the three months ended October 31, 2012 was also attributable to increased activity on a number of programs, including the Vanguard program to operate and maintain the enterprise network IT infrastructure for the U.S. Department of State ($42 million) and the ramp up of a prime contract with the Defense Logistics Agency to provide supply chain management of military land and aircraft tires ($47 million). These increases were partially offset by reduced revenue from the U.S. Army Brigade Combat Team Modernization (BCTM) contract as a result of the program’s termination during the third quarter of fiscal 2012 ($34 million).



	Three Months Ended								Nine Months Ended
Health and Engineering	November 1, 2013			Percent change		October 31, 2012			November 1, 2013		Percent change		October 31, 2012
	(dollars in millions)
Revenues	$	408		(20	)%	$	508		$	1,380	3	%	$	1,341
Operating (loss) income	$	(30	)	(165	)%	$	46		$	2	(98	)%	$	107
Operating (loss) income margin	(7		)%			9		%	—				8		%

~~Defense~~Health ~~Solutions~~and Engineering revenues ~~increased~~decreased by $~~258~~100 million, or 8(20)%, ~~all of which was internal revenue growth,~~ for the ~~nine~~three months ended ~~October 31~~November 1, ~~2012~~2013 as compared to the ~~same~~corresponding period in the prior year. ~~Revenues~~Revenue ~~for~~contraction ~~the~~would ~~nine~~have ~~months~~been ~~ended~~19% ~~October 31,~~without ~~2011 were negatively impacted by~~ the ~~portion~~negative impact of ~~the~~one ~~loss~~less ~~provision~~working ~~recorded~~day ~~against~~as ~~revenues~~compared ~~in connection~~to ~~with~~ the ~~CityTime~~prior ~~matter~~year period ($52 5 million). ~~Internal~~Revenue ~~revenue~~contraction ~~growth~~reflects ~~for the nine months ended October 31, 2012 was also attributable to increased activity on~~ a ~~number~~decline ofin ~~programs,~~our ~~including~~health ~~the~~business ~~Vanguard~~driven ~~program~~by ~~to operate and maintain the enterprise network IT infrastructure for the U.S. Department of State ($121 million), the AMCOM Express systems and software development~~ program ~~for the U.S. Army ($117 million)~~completions, alower ~~systems~~new ~~integration and logistics~~ program ~~for tactical~~starts and ~~mine~~hospital ~~resistant~~budgets ~~ambush~~that ~~protected~~have ~~vehicles~~experienced ~~($48 million),~~reductions ~~and~~in ~~the~~Medicare ~~ramp~~reimbursements upwhich ofin aturn ~~prime~~impact ~~contract~~hospital ~~with~~IT ~~the~~spending ~~Defense~~trends ~~Logistics Agency to provide supply chain management of military land and aircraft tires~~ ($~~107~~40 million). There was also ~~one additional~~a ~~business~~decline ~~day~~in asengineering ~~compared~~services toprimarily ~~the~~related ~~same~~to ~~period~~energy indesign-build ~~the~~construction ~~prior~~programs ~~year~~nearing completion ($1844 million). ~~These~~and ~~increases~~declines ~~were~~in ~~partially~~timing ~~offset~~of byunit ~~reduced~~deliveries ~~revenue~~and ~~from~~related ~~the~~maintenance ~~BCTM contract as a result~~ of ~~the~~our ~~program’s~~non-intrusive ~~termination~~inspection ~~during~~engineering ~~the~~products ~~third quarter of fiscal 2012~~ ($~~144~~11 million).

~~Defense~~Health ~~Solutions~~and ~~operating~~Engineering ~~income~~revenues increased $~~224~~39 million, or 3%, for the ~~three~~nine months ended ~~October 31~~November 1, ~~2012~~2013 as compared to the ~~same~~ corresponding period in the prior year. ~~Operating~~This ~~income~~increase ~~for~~was ~~the~~driven ~~three~~by ~~months~~revenues ~~ended~~from ~~October~~the August 312012 acquisition of maxIT, ~~2011~~a ~~was~~provider ~~negatively~~of ~~impacted~~healthcare byIT ~~the~~consulting ~~loss~~services ~~provision~~to ~~recorded~~commercial inclients. ~~connection~~Internal ~~with~~revenue contracted 7% compared to the ~~CityTime~~corresponding ~~matter~~prior ~~($232 million)~~year period. ~~Additionally,~~Internal ~~operating~~revenue ~~income~~contraction ~~for~~reflects ~~the three~~a ~~months~~decline ~~ended~~in ~~October 31,~~our ~~2012~~health ~~benefitted~~business ~~from~~driven ~~the~~by ~~favorable~~program ~~changes~~completions, inlower ~~contract~~new ~~estimates~~program ~~($5 million)~~starts ~~offset~~and byhospital abudgets ~~gain~~that have experienced reductions in ~~the~~Medicare ~~prior~~reimbursements ~~year~~which ~~period~~in onturn ~~the~~impact ~~sale~~hospital ofIT ~~certain~~spending ~~assets~~trends ~~previously~~($83 million). ~~used~~There inwas ~~developing~~also ~~guidance~~lower ~~and~~volume ~~navigation control~~in ~~systems~~engineering services for ~~precision~~U.S. ~~munitions~~Government customers ($5 35 million)., partially offset

Defense Solutions operating income increased $239 million for the nine months ended October 31, 2012 as compared to the same period in the prior year. Operating income for the nine months ended October 31, 2011 was negatively impacted by the loss provision recorded in connection with the CityTime matter ($232 million). Additionally, operating income for the nine months ended October 31, 2012 increased due to fees on increased revenues ($16 million) partially offset by a gain in the prior year period on the sale of certain assets previously used in developing guidance and navigation control systems for precision munitions ($5 million) as well as a $4 million increase in B&P and IR&D spending in the current year. 48

~~The~~LEIDOS ~~following table summarizes changes in Health~~HOLDINGS, ~~Energy and Civil Solutions revenues and operating income for the periods presented:~~ INC.

	Three Months Ended October 31									Nine Months Ended October 31
Health, Energy and Civil Solutions	2012			Percentchange			2011			2012			Percentchange			2011
	(dollars in millions)
Revenues	$	743			2	%	$	726		$	2,077			4	%	$	1,997
Operating income		69			(10	)		77			168			(10	)		187
Operating income margin		9.3	%					10.6	%		8.1	%					9.4	%

LEIDOS, INC.

~~Health,~~by ~~Energy and Civil Solutions revenues~~ increased ~~$17~~unit ~~million,~~deliveries orand ~~2%,~~related ~~for~~maintenance ~~the~~of ~~three~~our ~~months~~non-intrusive ~~ended~~inspection ~~October 31,~~engineering ~~2012~~products ~~as compared~~($17 ~~to the same period in the prior year primarily due to the August 2012 acquisition of maxIT Healthcare Holdings, Inc~~million).

31Health and Engineering operating income decreased $76 million, or 165%, for the three months ended November 1, 2013 as compared to the corresponding period in the prior year. The decrease was primarily attributable to bad debt expense for certain receivables related to two energy design-build construction projects ($42 million), an impairment of intangible assets acquired in connection with the fiscal year 2012 and 2013 acquisitions of Vitalize Consulting Solutions, Inc. (Vitalize) and maxIT, providers of clinical, business and information technology services to healthcare enterprises, respectively ($19 million), and lower revenues ($9 million).

~~SAIC~~Health and Engineering operating income decreased $105 million, ~~INC~~or 98%, for the nine months ended November 1, 2013 as compared to the corresponding period in the prior year. The decrease was primarily attributable to bad debt expense for certain receivables related to two energy design-build construction projects ($42 million), an impairment of intangible assets acquired from the fiscal 2011 acquisition of Reveal Imaging Technologies ($30 million), a provider of threat detection products and services, and an impairment of intangible assets acquired in connection with the fiscal year 2012 and 2013 acquisitions of Vitalize and maxIT ($19 million). There was also lower operating income from the commercial health business primarily due to lower margins coupled with an increase in intangible asset amortization expense ($6 million) and an increase in net unfavorable change in contract estimates ($3 million) primarily related to increased expenses associated with a completion estimate for a power plant construction fixed price project.

~~SCIENCE~~The ~~APPLICATIONS~~following ~~INTERNATIONAL~~table ~~CORPORATION~~summarizes changes in National Security Solutions revenues and operating income for the periods presented:

and the August 2011 acquisition of Vitalize Consulting Solutions, Inc. Internal revenue contracted 4% reflecting declines in various federal civilian programs ($41 million) and program completions with federal health information technology customers, particularly with U.S. DoD military health system customers ($29 million). These declines were partially offset by an increase in healthcare IT consulting services with commercial clients ($58 million).



	Three Months Ended								Nine Months Ended
National Security Solutions	November 1, 2013			Percent change		October 31, 2012			November 1, 2013			Percent change		October 31, 2012
	(dollars in millions)
Revenues	$	1,014		(13	)%	$	1,166		$	3,117		(13	)%	$	3,563
Operating income	63			(20	)%	79			195			(25	)%	260
Operating income margin	6		%			7		%	6		%			7		%

~~Health,~~National ~~Energy~~Security ~~and Civil~~ Solutions revenues ~~increased~~decreased $80152 million, or 413%, all of which was internal revenue contraction, for the ~~nine~~three months ended ~~October~~November 311, ~~2012~~2013 as compared to the ~~same~~corresponding period in the prior year. Revenue ~~primarily~~contraction ~~due~~would tohave ~~the~~been ~~August~~12% ~~2012~~without ~~acquisition~~the negative impact of ~~maxIT~~one ~~Healthcare~~less ~~Holdings,~~working ~~Inc.~~day ~~and~~as compared to the ~~August~~prior ~~2011~~year ~~acquisition~~period of($16 ~~Vitalize~~million). ~~Consulting~~Revenue ~~Solutions,~~contraction ~~Inc.~~was ~~Internal~~primarily ~~revenue~~attributable ~~contracted~~to 2%the ~~reflecting~~ramp ~~declines~~down inof ~~various federal~~the ~~civilian~~JLI ~~programs~~program for tactical and mine resistant ambush protected vehicles ($7674 million) and ~~program~~the ~~completions~~completion ~~with~~of ~~federal~~several ~~health~~intelligence ~~information~~contracts ~~technology~~($41 ~~customers~~million), ~~particularly~~ with ~~U.S.~~the ~~DoD~~remainder ~~military~~of ~~health~~the ~~system~~decline ~~customers~~driven ~~($73~~by ~~million)~~the reduction of the U.S. ~~These~~Government ~~declines~~budget ~~were~~resulting ~~partially~~from ~~offset~~sequestration byand ~~increases~~drawdowns ~~in healthcare~~of IToverseas ~~consulting~~U.S. ~~services~~military ~~with~~forces. ~~commercial~~The ~~clients~~declines ~~($85~~were ~~million)~~partially ~~and~~offset by increased ~~design-build~~revenues ~~volume~~ related to ~~various~~several ~~power~~new ~~plant~~intelligence ~~construction~~analysis ~~projects~~contracts for classified customers ($2173 million). ~~There~~and ~~was~~two ~~also~~new ~~one~~intelligence ~~additional~~information ~~business~~processing, ~~day~~exploitation, asand ~~compared~~dissemination tocontracts ~~the same period in the prior year~~ ($1115 million).

~~Health,~~National ~~Energy~~Security ~~and Civil~~ Solutions ~~operating~~revenues ~~income~~ decreased $8446 million, or 1013%, all of which was internal revenue contraction, for the ~~three~~nine months ended ~~October 31~~ November 1, ~~2012~~2013 as compared to the ~~same~~corresponding period in the prior year. Revenue ~~The~~contraction ~~decline in operating income~~ was primarily ~~due~~attributable to athe ~~net~~ramp ~~unfavorable~~down ~~change~~of inthe ~~contract~~JLI ~~estimates~~program ~~($1~~for ~~million)~~tactical ~~compared~~and tomine aresistant ~~net~~ambush ~~positive~~protected ~~change~~vehicles ~~in contract estimates~~ ($3 213 million) inand the ~~prior~~completion ~~year~~of ~~period,~~several ~~increased~~intelligence ~~bid~~contracts ~~and proposal expense~~ ($3116 million), ~~increased~~with ~~amortization~~the ~~expense~~remainder ~~associated~~of ~~with~~the ~~acquired~~decline ~~intangible~~driven ~~assets~~by ~~($3~~the ~~million)~~reduction ~~and~~of ~~reduced~~the ~~volume~~U.S. inGovernment ~~our~~budget ~~higher~~resulting ~~margin~~from ~~non-intrusive~~sequestration ~~inspection business~~and drawdowns of overseas U.S. ~~These~~military ~~decreases~~forces. The declines were partially offset by ~~reduced~~increased ~~research~~revenues ~~and~~related ~~development~~to ~~expense~~several new intelligence analysis contracts for classified customers ($5204 million) ~~resulting~~and ~~from~~two ~~the~~new ~~advancement~~intelligence ~~through~~information ~~the~~processing, ~~product~~exploitation, ~~development~~and ~~lifecycle~~dissemination ofcontracts ~~new~~($59 ~~non-intrusive inspection system offerings~~million).

Health, Energy and Civil Solutions operating income decreased $19 million, or 10%, for the nine months ended October 31, 2012 as compared to the same period in the prior year. The decline in operating income was primarily due to a net unfavorable change in contract estimates ($9 million) primarily related to certain energy and construction projects compared to a net positive change in contract estimates ($11 million) in the prior year period, increased amortization expense associated with acquired intangible assets ($4 million), and a $2 million increase in bid and proposal expense. This decrease was partially offset by a $13 million reduction in research and development expense resulting from the advancement through the product development lifecycle of new non-intrusive inspection system offerings and fees on increased revenues ($6 million). 49

~~The~~LEIDOS ~~following~~HOLDINGS, ~~table summarizes changes in Intelligence and Cybersecurity Solutions revenues and operating income for the periods presented:~~ INC.

	Three Months Ended October 31									Nine Months Ended October 31
Intelligence and Cybersecurity Solutions	2012			Percentchange			2011			2012			Percentchange			2011
	(dollars in millions)
Revenues	$	945			—	%	$	947		$	2,792			4	%	$	2,691
Operating income		68			26			54			203			(6	)		215
Operating income margin		7.2	%					5.7	%		7.3	%					8.0	%

LEIDOS, INC.

~~Intelligence~~National ~~and~~Security ~~Cybersecurity~~ Solutions ~~revenues~~operating income decreased $216 million, ~~all~~or ~~of which was internal revenue contraction~~20%, for the three months ended ~~October 31~~November 1, ~~2012~~2013 as compared to the ~~same~~corresponding period in the prior year. ~~Internal~~This ~~revenue~~decrease ~~contraction~~ was primarily attributable to ~~reduced~~lower ~~activity~~revenues ~~on a processing, exploitation and dissemination program for the U.S. Army~~ ($47 10 million), ~~including~~and aadditional ~~non-recurring~~direct ~~material~~costs ~~delivery~~for ofwork ~~$38~~assumed ~~million~~to ~~under~~be ~~the~~at ~~program~~risk ~~in the prior year. These declines were partially offset by increased activity, primarily a significant materials purchase, on a geospatial intelligence program~~ ($~~28 million~~3M) ~~and increased activity on an airborne surveillance program ($15 million)~~.

~~Intelligence~~National ~~and~~Security ~~Cybersecurity~~ Solutions ~~revenues increased~~operating income decreased $~~101~~65 million, or 425%, ~~all of which was internal revenue growth,~~ for the nine months ended ~~October 31~~November 1, ~~2012~~2013 as compared to the ~~same~~corresponding period in the prior year. This ~~Internal~~decrease ~~revenue growth~~ was primarily attributable to ~~increased~~lower ~~activity~~revenues ~~on two airborne surveillance programs~~ ($87 33 million), ~~increased~~net ~~activity,~~unfavorable ~~including~~change ain ~~significant~~contract ~~materials~~estimates ~~purchase, on a geospatial intelligence program~~ ($4217 million), awhich ~~new~~is ~~intelligence~~primarily ~~systems~~attributable ~~integration~~to ~~program~~increased ~~for~~expenses ~~the~~on ~~U.S.~~two ~~Army~~international ~~($22~~fixed ~~million),~~price ~~and a~~development ~~new~~programs ~~intelligence~~for ~~and~~the ~~analysis~~nine ~~solution~~months ~~program~~ended ~~($25~~November ~~million).~~1, ~~There~~2013 ~~was also one additional business day~~ as compared to the ~~same period in the~~ prior year ~~($14 million).~~which ~~These~~had ~~increases were partially offset by reduced activity on~~ a ~~processing,~~ ~~exploitation~~net ~~and~~favorable ~~dissemination~~change ~~program~~in ~~for~~contract ~~the~~estimates ~~U.S. Army~~ ($6011 million), and anintangible ~~intelligence~~asset ~~analysis~~impairment ~~contract~~charges ~~that concluded in the current year~~ ($214 million).

Intelligence and Cybersecurity Solutions operating income increased $14 million, or 28%, for the three months ended October 31, 2012 as compared to the same period in the prior year. The increase in operating income was primarily

SAIC, INC.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

attributable to the prior year period $19 million impairment of acquired intangible assets as compared to $1 million in the current year period and an $8 million current year period reduction in indirect spending, primarily related to the timing of B&P and IR&D spending. The level of B&P activity fluctuates from period to period depending on the nature and timing of bidding opportunities. This was partially offset by reduced profitability on certain contracts due to increased subcontractor and material costs.

Intelligence and Cybersecurity Solutions operating income decreased $12 million, or 6%, for the nine months ended October 31, 2012 as compared to the same period in the prior year. The decrease in operating income was primarily attributable to lower profitability ($12 million) on certain contracts due to increased material and subcontractor costs and the completion of an intelligence gathering and analysis program, a $7 million increase in indirect spending, primarily related to the timing of B&P and IR&D spending, a decline in sales of our higher-margin proprietary products ($11 million), and a reduction in net positive changes in contract estimates ($3 million). The level of B&P activity fluctuates from period to period depending on the nature and timing of bidding opportunities. These decreases were partially offset by the prior year period $19 million impairment of acquired intangible assets as compared to $2 million in the current year period, decreased amortization of intangible assets acquired ($5 million) and fees on increased revenues ($7 million).

The following table summarizes changes in Corporate and Other revenues and operating loss for the periods presented:

		Three Months Ended October 31								Nine Months Ended October 31
	Three Months Ended								Nine Months Ended
Corporate and Other	November 1,2013	~~2012~~			October 31,2012	~~2011~~			November 1,2013	~~2012~~			October 31,2012	~~2011~~
		(dollars in millions)
	(in millions)
Revenues		$	—			$	1			$	—			$	2
Operating loss	$	(40	)		$	(25	)		$	(128	)		$	(53	)
Operating loss		$	(35	)		$	(18	)		$	(66	)		$	(34	)

Corporate and Other operating loss for the three and nine months ended ~~October~~November 311, ~~2012~~2013 represents corporate costs that are unallowable under U.S. Government Cost Accounting Standards and the net effect of various items that are not directly related to the operating performance of the reportable segments. Corporate and Other operating loss increased by $1715 million and $3275 million for the three and nine months ended ~~October 31~~November 1, ~~2012~~2013, respectively, as compared to the ~~same~~corresponding periods of the prior year. The ~~primarily~~primary ~~due~~drivers toof ~~relocation~~the ~~and~~increase ~~severance~~include ~~charges for~~ the ~~transition~~planned ofseparation ~~corporate~~transaction ~~functions to our McLean, Virginia headquarters~~ and ~~other~~restructuring ~~locations~~costs ($425 million and $13 58 million, ~~for~~respectively) ~~the three~~ and ~~nine~~costs ~~months~~to ~~ended~~establish ~~October 31,~~infrastructures ~~2012,~~for ~~respectively)~~Leidos inand ~~addition~~New toSAIC ~~costs~~as ~~associated~~separate ~~with~~stand ~~the~~alone ~~planned~~companies ~~separation transaction~~ ($11 million and $1532 million ~~for the three and nine months ended October 31~~, ~~2012,~~ respectively)~~. Corporate and Other operating loss for the nine months ended October 31~~, ~~2011~~partially ~~also~~offset ~~included~~by ~~gains~~costs onallocated ~~the~~to ~~sale~~HES ofand ~~real~~NSS ~~estate of~~ ($289 million ~~partially~~and ~~offset~~$9 bymillion, ~~charges related~~respectively) toas ~~the~~well ~~settlement~~as of a ~~litigation~~reduction ~~matter~~ of ~~$22 million and~~ other ~~recurring~~unallocable ~~items.~~corporate costs.

~~Interest~~Non-Operating Expense. ~~Interest~~Non-operating expense for the three ~~and nine~~ months ended ~~October 31~~November 1, ~~2012~~2013 decreased $93 million ~~and $12 million, respectively,~~ as compared to the ~~same~~corresponding ~~periods~~period of the prior year ~~primarily due to the payment of $550 million in July 2012 to settle the 6~~.~~25% notes at maturity.~~

~~Interest~~Non-operating expense for ~~Science~~the ~~Applications~~nine ~~decreased~~months ~~$10~~ended ~~million~~November ~~for~~1, ~~the~~2013 ~~three months~~decreased ~~ended~~$19 ~~October 31,~~million ~~2012~~ as compared to the ~~same~~corresponding period of the prior year,. ~~reflecting~~This ~~a $1 million~~ decrease inwas ~~interest~~primarily onattributable ~~its~~to ~~note with SAIC and~~ a ~~$9 million~~ decrease in interest onexpense ~~third-party~~of ~~debt~~$14 million, ~~which was~~ primarily due to the payment of ~~the~~ $550 million ~~notes~~in ~~discussed~~July ~~above. Interest expense for Science Applications decreased $17 million for the nine months ended October 31,~~ 2012 ~~as compared~~ to ~~the~~settle ~~same period of~~ the ~~prior year, reflecting a $5 million decrease in interest on its note with SAIC and a $12 million decrease in interest on third-party debt~~6.25% ~~Interest~~notes ~~expense~~at ~~related to Science Application’s note with SAIC may fluctuate significantly from year to year based on changes in the underlying note balance and interest rates throughout the fiscal year~~maturity.

~~Provision~~Interest ~~for~~expense ~~Income Taxes. The provision~~ for ~~income~~Leidos, ~~taxes~~Inc. increased $221 million toand decreased $6514 million ~~(36.7% as a percentage of income from continuing operations before income taxes)~~ for the three and nine months ended ~~October 31~~ November 1, ~~2012~~2013, respectively, as compared to the ~~same~~corresponding ~~period~~periods inof the prior year. The ~~prior~~decrease ~~year~~for ~~period~~the ~~provision~~nine ~~for~~months ~~income~~ending ~~taxes~~November ~~includes~~1, ~~the~~2013 ~~effect~~reflects ofa ~~the~~decrease ~~estimated~~in ~~non-deductible~~interest ~~portion~~on ofthird-party ~~the~~debt, ~~CityTime~~which ~~loss~~was ~~provision~~primarily ~~recorded~~due into the ~~prior~~payment ~~year~~of ~~quarter. The~~the ~~current~~$550 ~~year~~million ~~period~~notes ~~provision~~discussed ~~for~~above. ~~income~~There ~~taxes~~was ~~includes~~not ~~the~~a ~~deductibility~~material ofchange ~~quarterly~~in ~~dividends~~interest ~~paid~~expense onrelated ~~shares~~to ~~held~~Leidos, byInc.’s ~~the~~note ~~SAIC~~with ~~Retirement~~Leidos. ~~Plan~~This ~~(an~~note ~~employee~~may ~~stock~~fluctuate ~~ownership~~significantly ~~plan)~~from ~~partially~~year ~~offset~~to byyear abased ~~decrease~~on changes in the ~~domestic manufacturer’s~~underlying ~~deduction~~note ~~and~~balance ~~expiration of the federal research~~ and ~~development~~interest ~~tax~~rates ~~credit~~throughout onthe ~~December 31,~~fiscal ~~2011~~year.

The provision for income taxes as a percentage of income from continuing operations before income taxes was 36.4% and 56.3% for the nine months ended October 31, 2012 and 2011, respectively. The decrease in the provision for income taxes as a percentage of income from continuing operations was primarily attributable to the estimated non-deductible portion of the CityTime loss provision recorded in the prior year period, a change in the estimated deductible amount of a prior year legal settlement and the tax deductibility of quarterly dividends paid on shares held by the SAIC Retirement Plan (an employee stock ownership plan), partially offset by a decrease in the domestic manufacturer’s deduction and expiration of the federal research and development tax credit on December 31, 2011. 50

33LEIDOS HOLDINGS, INC.

~~SAIC~~LEIDOS, INC.

~~SCIENCE~~Provision ~~APPLICATIONS~~for ~~INTERNATIONAL~~Income ~~CORPORATION~~Taxes.

We ~~file~~recorded an income tax ~~returns~~benefit infrom ~~the~~continuing ~~United~~operations ~~States~~of ~~and~~$12 ~~various~~million ~~state~~for ~~and~~the ~~foreign~~three ~~jurisdictions~~months ~~and~~ended ~~have~~November ~~effectively settled~~1, ~~with~~2013, ~~the~~resulting ~~IRS~~in ~~for~~a ~~fiscal~~negative ~~years~~effective ~~prior~~tax rate, compared to ~~and~~an ~~including~~income ~~fiscal~~tax ~~2008.~~expense Weof ~~also~~$28 ~~settled~~million ~~fiscal~~for ~~2011~~the ascorresponding aperiod ~~result~~in ofthe ~~our~~prior ~~participation~~year, resulting in ~~the~~an ~~IRS~~effective ~~Compliance~~tax ~~Assurance~~rate ~~Process~~of ~~(CAP)~~33.7%. The ~~beginning~~decrease is primarily due to lower earnings in fiscal ~~2011~~2014. The Asincome ~~part~~tax benefit for the three months ended November 1, 2013 includes the tax deductibility of the ~~CAP~~special dividend, wewhich ~~endeavor~~was todeclared ~~agree with~~during the ~~IRS~~three months ended May 3, 2013, on shares held by the ~~treatment~~Leidos Retirement Plan (an employee stock ownership plan), the reinstatement of ~~all~~the ~~tax~~research ~~positions~~and ~~prior~~development totax credit in the ~~filing~~fourth quarter of fiscal 2013 and the resolution of certain tax ~~return,~~contingencies ~~thereby~~with ~~greatly~~the ~~reducing~~tax authorities resulting in the ~~period~~recognition of ~~time~~approximately ~~between~~$7 ~~return~~million ~~submission~~income ~~and~~tax ~~settlement~~benefit ~~with~~to continuing operations partially offset by a decrease in the ~~IRS.~~domestic manufacturer's deduction.

AsWe recorded an income tax benefit from continuing operations of ~~October 31~~$1 million for the nine months ended November 1, ~~2012~~2013, weresulting ~~had~~in ~~liabilities~~a ~~for~~negative ~~uncertain~~effective tax ~~positions~~rate, compared to an income tax expense of $~~133~~89 million for the corresponding period in the prior year, ~~$31~~resulting ~~million~~in an effective tax rate of ~~which~~35.0%. The ~~were~~decrease ~~classified~~is asprimarily ~~other~~due ~~long-term~~to ~~liabilities~~lower earnings in fiscal 2014, the ~~consolidated~~tax ~~balance~~deductibility ~~sheet.~~of ~~Subsequent~~the ~~to October 31~~special dividend, ~~2012~~which was declared during the three months ended May 3, we2013, ~~entered~~on ~~into~~shares held by the Leidos Retirement Plan (an ~~issue~~employee ~~resolution~~stock ~~agreement~~ownership ~~with~~plan), the ~~IRS~~reinstatement ~~with~~of ~~respect~~the toresearch ~~the~~and development tax ~~deductible~~credit ~~portion~~in the fourth quarter of ~~the~~fiscal ~~CityTime~~2013 ~~payment.~~and ~~The~~the resolution of ~~this~~certain tax ~~matter~~contingencies ~~will~~with ~~result~~the tax authorities resulting in athe ~~$102~~recognition ~~million~~of ~~reduction~~approximately in$7 ~~our~~million ~~uncertain~~income tax ~~positions~~ ~~and~~benefit ato ~~$96~~continuing ~~million~~operations ~~reduction~~partially inoffset ~~income~~by ~~tax~~the ~~expense~~estimated ~~during~~non-deductible ~~the~~portion ~~fourth~~of ~~quarter~~settlement of ~~our~~legal ~~fiscal~~and ~~year~~regulatory ~~2013.~~matters and a decrease in the domestic manufacturer's deduction.

~~Diluted~~We ~~Earnings~~file ~~per~~income ~~Share~~tax ~~(EPS)~~returns ~~from~~in ~~Continuing~~the ~~Operations.~~United ~~Diluted~~States ~~EPS~~and ~~from~~various ~~continuing operations~~state ~~increased~~and ~~$0.61~~foreign ~~per~~jurisdictions ~~share~~and tohave ~~$0.33~~effectively ~~per~~settled ~~share~~with ~~for~~ the ~~three~~IRS ~~months~~for ~~ended~~fiscal ~~October 31,~~years ~~2012~~prior ~~as compared~~ to ~~the~~and ~~same~~including ~~period~~fiscal in2009 ~~the~~with ~~prior~~fiscal ~~year~~2010 ~~primarily~~subject ~~due~~ to ~~the~~examination. ~~increase~~We inalso ~~income~~settled ~~from~~fiscal ~~continuing~~2011 ~~operations~~and ~~primarily~~2012 ~~attributable~~as ~~the impact~~a result of ~~the~~our ~~CityTime~~participation ~~loss provision~~ in the ~~prior~~IRS ~~year~~Compliance ~~period~~Assurance ~~partially~~Process ~~offset~~(CAP) bybeginning ~~a 5 million, or 2%, increase~~ in ~~the~~fiscal ~~diluted~~2011. ~~weighted~~As ~~average~~part ~~number~~ of ~~shares outstanding. Diluted EPS from continuing operations increased $0.57 per share to $0.99 per share for the nine months ended October 31~~CAP, ~~2012~~we asendeavor ~~compared~~ to ~~the~~agree ~~same~~with ~~period in~~ the ~~prior~~IRS ~~year~~on ~~due to~~ the ~~increase~~treatment inof ~~income~~all ~~from~~tax ~~continuing~~positions ~~operations~~prior ~~primarily attributable~~ to the ~~impact~~filing of the ~~CityTime~~tax ~~loss provision in the prior year period in addition to a 6 million~~return, orthereby ~~2%,~~greatly ~~decline~~reducing in the ~~diluted~~period ~~weighted average number~~ of ~~shares~~time ~~outstanding~~between ~~due~~return tosubmission ~~stock~~and ~~repurchases~~settlement inwith ~~previous~~the ~~quarters~~IRS.

~~Discontinued~~As ~~Operations.~~of ~~From~~November ~~time~~1, ~~to time~~2013, we ~~may dispose~~had ~~(or~~liabilities ~~management~~for ~~may~~uncertain ~~commit~~tax topositions ~~plans~~of to$16 ~~dispose)~~million, $11 million of ~~non~~which were classified as other long-~~strategic~~term ~~components~~liabilities in the condensed consolidated balance sheet. The resolution of certain of these tax matters could result in a $6 million reduction in our ~~business,~~uncertain ~~which~~tax ~~are~~positions ~~reclassified~~and asa ~~discontinued~~$3 ~~operations~~million ~~for~~reduction ~~all~~in ~~periods~~income ~~presented.~~tax expense during the third quarter of fiscal 2015.

InDiluted ~~November~~(Loss) ~~2012,~~Earnings weper ~~sold~~Share. ~~certain~~Diluted ~~components~~(loss) ofearnings ~~our~~per ~~business~~share from continuing operations decreased $0.77 per share to $(0.11) per share for the three months ended November 1, ~~which~~2013 ~~were~~as ~~historically~~compared ~~included~~to the corresponding period in the ~~Health,~~prior ~~Energy~~year primarily due to a decrease in income from continuing operations and ~~Civil~~an ~~Solutions~~increase ~~segment~~of 1 million, ~~primarily~~or ~~focused~~1%, onin ~~providing~~the ~~operational~~diluted ~~test~~weighted ~~and~~average ~~evaluation services.~~number of shares outstanding.

InDiluted ~~fiscal~~(Loss) ~~2012,~~Earnings inper order to better align our business portfolio with our strategy, we sold certain components of our business, which were historically included in the Health, Energy and Civil Solutions segment, primarily focused on providing information technology services to international oil and gas companiesShare. WeDiluted ~~received~~(loss) ~~net~~earnings ~~proceeds~~from ofcontinuing ~~$167~~operations ~~million~~decreased ~~resulting in a gain on sale before income taxes of~~ $~~111~~1.64 ~~million~~per ~~related~~share to ~~this sale~~$0.31 ~~Under~~per ~~terms~~share offor the ~~definitive~~nine ~~agreement,~~months weended ~~retained~~November ~~the~~1, ~~assets~~2013 ~~and~~as ~~obligations~~compared ofto ~~our~~the ~~defined~~same ~~benefit~~period ~~pension plan~~ in the ~~United~~prior ~~Kingdom.~~year Weprimarily ~~have~~due ~~classified~~to ~~the~~a ~~operating~~decrease ~~results~~in ofincome ~~these business~~from ~~components,~~continuing ~~including~~operations ~~pension~~and ~~expense~~an ~~through~~increase ~~the date~~ of ~~sale~~1 million, asor ~~discontinued operations. Following the asset sale~~1%, asin ~~a result of retaining~~ the ~~pension~~diluted ~~obligation,~~weighted ~~the~~average ~~remaining~~number ~~components~~ of ~~ongoing~~shares ~~pension expense, primarily interest costs and assumed return on plan assets, are recorded in continuing operations~~outstanding.

~~The pre-sale operating results of these discontinued operations were as follows:~~ 51

	Nine Months Ended October 31
	2012		2011
	(in millions)
Revenues	$	55	$	140
Costs and expenses:
Cost of revenues		48		114
Selling, general and administrative expenses		3		12
Operating income	$	4	$	14

Income from discontinued operations also includes other activity that is immaterial and not reflected in the amounts above.

Net Income. Net income increased $201 million and $119 million for the three and nine months ended October 31, 2012, respectively, as compared to the same periods in the prior year. The increases in net income for the three and nine months ended October 31, 2012 as compared to the same periods in the prior year are primarily due to an increase in income from continuing operations partially offset by a decrease in income from discontinued operations.

Net income for Science Applications increased $203 million and $122 million for the three and nine months ended October 31, 2012, respectively, as compared to the same periods in the prior year for the reasons described above.

Diluted EPS. Diluted EPS increased $0.60 per share to $0.33 per share and $0.37 per share to $1.00 per share for the three and nine months ended October 31, 2012, respectively, as compared to the same periods in the prior year primarily due to the reasons discussed above for diluted EPS from continuing operations.

SAIC, INC.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

Subsequent Event

Subsequent to October 31, 2012, our management decided to eliminate approximately 700 positions in order to align our cost structure for greater competitiveness. This management decision will result in an estimated severance charge of approximately $15 million during the fourth quarter of fiscal year 2013.

Liquidity and Capital Resources

We had $~~531~~814 million in cash and cash equivalents at ~~October~~November 311, ~~2012~~2013, which were primarily comprised of ~~cash~~investments held in ~~insured bank deposits and investments in~~ several large institutional money market funds that invest primarily in bills, notes and bonds issued by the U.S. Treasury, U.S. Government guaranteed repurchase agreements fully collateralized by U.S. Treasury obligations, U.S. Government guaranteed securities and investment-grade corporate securities that have ~~original~~ maturities of three months or less, and bank deposits. We anticipate our principal sources of liquidity for the next 12 months and beyond will be our existing cash and cash equivalents and cash flows from operations. We may also borrow under our $750 million revolving credit facility. Our revolving credit facility is backed by a number of financial institutions, matures in fiscal ~~2017~~2018 and, by its terms, can be accessed on a same-day basis. We anticipate our principal uses of cash for the next 12 months and beyond will be for operating expenses, ~~expenses~~capital ~~related~~expenditures, tostock ~~the~~repurchases, ~~planned~~dividends, ~~separation~~repayment ~~transaction,~~of ~~capital~~outstanding ~~expenditures,~~note ~~acquisitions~~commitments ofin ~~businesses,~~connection ~~stock repurchases~~with the Plainfield Renewable Energy Project and ~~dividends.~~acquisitions of businesses. We anticipate that our operating cash flows, existing cash and cash equivalents, which have no restrictions on withdrawal, and borrowing capacity under our revolving credit facility will be sufficient to meet our anticipated cash requirements for at least the next 12 months.

Historical Trends

Cash and cash equivalents was $~~531~~814 million and $~~1.592~~735 ~~billion~~million at ~~October 31~~November 1, ~~2012~~2013 and January 31, ~~2012~~2013, respectively. The following table summarizes cash flow information for the periods presented:

		Nine Months Ended October 31
	Nine Months Ended
		2012				2011
	November 1,2013				October 31,2012
	(in millions)	~~(in millions)~~
Total cash flows provided by operating activities of continuing operations		$	134			$	627
Cash provided by (used in) operating activities of continuing operations	$	78			$	(151	)
Total cash flows used in investing activities of continuing operations			(517	)			(185	)
Cash provided by (used in) investing activities of continuing operations	312				(506		)
Total cash flows used in financing activities of continuing operations			(683	)			(454	)
Cash used in financing activities of continuing operations	(419		)		(680		)
Increase in cash and cash equivalents from discontinued operations			5				107
Cash provided by operating activities of discontinued operations	125				285
Effect of foreign exchange rate changes on cash and cash equivalents			—				1
Cash used in investing activities of discontinued operations	(17		)		(6		)
Total increase (decrease) in cash and cash equivalents		$	(1,061	)		$	96
Cash used in financing activities of discontinued operations	—				(3		)
Total increase (decrease) in cash and cash equivalents	$	79			$	(1,061	)

Cash Provided by (Used in) Operating Activities of Continuing Operations. Cash flows ~~from~~provided by operating activities of continuing operations ~~decreased~~increased $~~493~~229 million for the nine months ended ~~October 31~~November 1, ~~2012~~2013 as compared to the ~~same~~corresponding period in the prior year. ~~Cash~~The ~~flows~~increase ~~from~~was ~~operating~~primarily ~~activities~~due to less cash used of ~~continuing~~$274 ~~operations~~million ~~were~~for changes in operating assets and liabilities primarily ~~impacted~~due byto athe $500 million cash settlement payment related to the CityTime ~~program~~Program ~~described~~(see in Note 1011 of the combined notes to the ~~condensed~~ consolidated financial statements) ~~and~~for anthe ~~additional~~nine ~~payroll~~months ~~payment~~ended ~~made~~October in31, ~~the~~2012 ~~current year period~~ partially offset by aan ~~reduction~~increase in the average time to collect ~~receivables~~accounts receivable as a result of a slowdown in payments from the U.S. Government impacted by the discontinuance of the U.S. Government’s accelerated payment initiative that encouraged agencies to more timely pay contractors, our system shutdown to effect the spin-off of New SAIC which caused delays in our customer invoicing, and our name change which was further impacted by the U.S. Government shutdown in October 2013. Days sales outstanding were 61 74 days for the three months ended ~~October 31~~November 1, ~~2012~~2013 compared to 71 64 days for the ~~same~~corresponding period in the prior year. There were also more non-cash expenses of $91 million primarily due the intangible impairment losses of $51 million and bad debt expense of $45 million. These increases were partially offset by lower income from continuing operations of $136 million.

~~Any~~Cash ~~differences~~Provided by (Used in) ~~cash~~Investing Activities of Continuing Operations. Cash flows ~~from~~provided ~~operating activities~~by investing activities of continuing operations ~~for~~increased ~~Science~~$818 ~~Applications~~million asduring ~~compared~~the tonine months ended November 1, 2013, which included a $295 million dividend from New SAIC, ~~are~~proceeds ~~primarily~~of ~~attributable~~$65 million from the sale of facilities, $12 million of proceeds from the sale of cost method investments, partially offset by a $26 million capital contribution to ~~changes~~New SAIC. We used $506 million of cash in ~~interest~~support ~~payments~~of ~~made~~investing onactivities of continuing operations during the ~~related~~nine ~~party~~months ~~note.~~ended October 31, 2012, including $478 million to acquire a business and $31 million to purchase property, plant and equipment.

Cash Used in Investing Activities of Continuing Operations. We used $517 million of cash in support of investing activities of continuing operations during the nine months ended October 31, 2012, including $478 million to acquire a business and $43 million to purchase property, plant and equipment. We used $185 million of cash in support of investing activities of continuing operations during the nine months ended October 31, 2011 including $216 million to acquire two businesses and $48 million to purchase property, plant and equipment, partially offset by $78 million of proceeds from the sale of real estate. 52

~~Cash~~LEIDOS ~~Used in Financing Activities of Continuing Operations. We used $683 million of cash in support of financing activities of continuing operations during the nine months ended October 31~~HOLDINGS, ~~2012, including $550 million to settle notes payable at maturity in July 2012, payment of dividends of $124 million and $21 million to repurchase shares of our stock~~INC. ~~We used $454 million of cash in support of financing activities of continuing operations during the nine months ended October 31, 2011, including $470 million to repurchase shares of our stock.~~

~~Science Applications used cash in financing activities of continuing operations of $883 million during the nine months ended October 31~~LEIDOS, 2012, including $550 million to settle notes payable at maturity in July 2012 and repayments on the related party note with SAIC of $369 million partially offset by proceeds from the related party note with SAIC of $40 millionINC. ~~Science~~

35Cash Used in Financing Activities of Continuing Operations. We used $419 million of cash in support of financing activities of continuing operations during the nine months ended November 1, 2013, including the payment of dividends of $452 million and $17 million to repurchase shares of our stock related to employee benefit compensation plans, offset by consideration received of $38 million related to the real estate financing transaction. New SAIC received proceeds from the issuance of debt of $500 million, prior to the separation, and retained the debt obligation after separation. We used $680 million of cash in support of financing activities of continuing operations during the nine months ended October 31, 2012, including the payment of $550 million to settle notes payable at maturity on July 2, 2012, payment of dividends of $124 million and $21 million to repurchase shares of our stock related to employee benefit compensation plans.

~~SAIC,~~Cash ~~INC~~Provided by Operating Activities of Discontinued Operations. Cash flows provided by operating activities of discontinued operations decreased $160 million for the nine months ended November 1, 2013, due to a decrease in net income of $83 million, a $17 million tax settlement on the gain from the sale of certain components of our business in fiscal 2013, and an increase in payments for separation transaction costs.

~~SCIENCE~~Cash ~~APPLICATIONS~~Used ~~INTERNATIONAL~~in ~~CORPORATION~~Investing Activities of Discontinued Operations. Cash flows used in investing activities of discontinued operations were $17 million for the nine months ended November 1, 2013, which included $17 million for the purchase of property, plant, and equipment.

~~Applications~~Cash ~~used~~Used ~~cash~~in ~~from~~Financing Activities of Discontinued Operations. Cash flows used in financing activities of ~~continuing~~discontinued operations ofwere $~~451~~ 3 million ~~during~~for the nine months ended October 31, ~~2011~~2012, ~~including~~from repayments ~~on the related party note with SAIC~~ of $1debt.~~047 billion partially offset by proceeds from the related party note with SAIC of $601 million.~~

Leidos, Inc.’s Cash Flows. ~~from~~Any ~~Discontinued~~differences ~~Operations.~~in ~~Cash~~cash flows from ~~discontinued~~operating ~~operations~~activities for ~~the~~Leidos, ~~nine months~~Inc. ~~ended~~as ~~October 31,~~compared ~~2011~~to ~~included~~Leidos ~~proceeds~~are ofprimarily ~~$168~~attributable ~~million~~to changes in interest payments (which reduce cash flow from ~~the~~operating ~~sale~~activities of ~~certain~~Leidos, ~~components~~Inc.) ofmade ~~our~~by ~~business~~Leidos, Inc. on its note to Leidos and changes in excess tax benefits related to stock-based compensation (which reduce cash flows from operating activities for Leidos).

~~Stock~~Leidos, ~~Repurchase~~Inc. ~~Program~~used cash in financing activities of $392 million during the nine months ended November 1, 2013, including repayments on its related party note with Leidos of $442 million partially offset by proceeds from the related party note with Leidos of $11 million and consideration received of $38 million related to the real estate financing transaction. Leidos, Inc. used cash in financing activities of $880 million during the nine months ended October 31, 2012, including $550 million to settle notes payable at maturity on July 2, 2012 and repayments on the related party note with Leidos of $369 million, partially offset by proceeds from the related party note with Leidos of $40 million.

InSpecial ~~March 2012,~~Cash our board of directors authorized a stock repurchase program under which we may repurchase up to 40 million shares of SAIC common stock. Stock repurchases may be made on the open market or in privately negotiated transactions with third-parties. Whether repurchases are made and the timing and actual number of shares repurchased depends on a variety of factors including price, corporate capital requirements, other market conditions and regulatory requirements. Dividend

In March 2013, Leidos’ board of directors declared a special cash dividend of $4.00 per share of Leidos common stock and paid an aggregate of $342 million on June 28, 2013 to stockholders of record on June 14, 2013. See Part I, Note 5 of the combined notes to condensed consolidated financial statements for further information regarding the modifications made to our outstanding stock options resulting from the special cash dividend.

LEIDOS HOLDINGS, INC.

LEIDOS, INC.

Outstanding Indebtedness

Notes Payable and Long-term Debt. Our outstanding notes payable and long-term debt consisted of the following:

		Statedinterest rate				Effectiveinterestrate			October 31,2012			January 31,2012
	Stated interest rate			Effective interest rate			November 1, 2013			January 31, 2013
	(dollars in millions)	~~(dollars in millions)~~
SAIC senior unsecured notes:
Leidos Holdings, Inc. senior unsecured notes:
$450 million notes issued in fiscal 2011, which mature in December 2020			4.45	%			4.53	%	$	449		$	449
$450 million notes, which mature in December 2020	4.45	%		4.53	%		$	449		$	449
$300 million notes issued in fiscal 2011, which mature in December 2040			5.95	%			6.03	%		300			300
$300 million notes, which mature in December 2040	5.95	%		6.03	%		300			300
Science Applications senior unsecured notes:
Leidos, Inc. senior unsecured notes:
$550 million notes issued in fiscal 2003, which matured in July 2012			6.25	%			6.50	%		—			550
$250 million notes, which mature in July 2032	7.13	%		7.43	%		248			248
$250 million notes issued in fiscal 2003, which mature in July 2032			7.13	%			7.43	%		248			248
$300 million notes, which mature in July 2033	5.5	%		5.78	%		296			296
$300 million notes issued in fiscal 2004, which mature in July 2033			5.50	%			5.78	%		296			296
Plainfield construction note, which matures February 2014	17.5	%		17.5	%		81			—
Capital leases and other notes payable due on various dates through fiscal 2018			0-2.5	%			Various			6			9
Plainfield cash grant note, which matures April 2014	17.5	%		17.5	%		68			—
Total notes payable and long-term debt										1,299			1,852
Capital leases and other notes payable due on various dates through fiscal 2021	0%-3.7%			Various			39			2
Less current portion										2			553
Total notes payable and long-term debt							1,481			1,295
Total notes payable and long-term debt, net of current portion									$	1,297		$	1,299
Less current portion							151			—
Fair value of notes payable and long-term debt									$	1,449		$	2,011
Total notes payable and long-term debt, net of current portion							$	1,330		$	1,295
Fair value of notes payable and long-term debt							$	1,469		$	1,390

WeThese ~~paid~~notes ~~$550~~contain ~~million~~financial covenants and customary restrictive covenants, including, among other things, restrictions on our ability to ~~settle~~create ~~the~~liens ~~6.25%~~and ~~notes~~enter atinto ~~maturity~~sale inand ~~July~~leaseback ~~2012~~transactions under certain circumstances. We were in compliance with all covenants as of November 1, 2013.

~~These~~The Plainfield Renewable Energy Project is being financed through two secured notes ~~contain~~aggregating ~~financial~~$149 ~~covenants~~million provided by affiliates of the Carlyle Group (“Carlyle”). In the acquisition of Plainfield, Leidos assumed a Note Purchase Agreement between Plainfield and ~~customary~~Carlyle, ~~restrictive~~consisting ~~covenants~~of two secured notes, ~~including~~a Construction Note and a Cash Grant Note in the amount of $81 million and $68 million, ~~among~~respectively, ~~other~~as ~~things~~of November 1, ~~restrictions~~2013. onThe ~~our~~Construction ~~ability~~Note tohas ~~create~~a ~~liens~~17.5% stated interest rate, consisting of 8% paid in cash and ~~enter~~the ~~into~~remainder ~~sale~~is accrued over the term of the note and ~~leaseback~~paid ~~transactions~~at maturity. The WeCash ~~were~~Grant Note has a 17.5% stated interest rate, consisting of 6% paid in cash and the remainder is accrued over the term of the note and paid at maturity. Once the commercial operation date of the plant has occurred in February 2014, the Construction Note can be converted into term notes based upon conditions set forth in the Note Purchase Agreement. The Company was in compliance with ~~all~~its covenants as of ~~October 31~~November 1, ~~2012~~2013. A failure by the Company to meet these covenants in the future would reduce and could eliminate the Company’s borrowing capacity under the notes.

~~Credit~~On ~~Facility.~~December ~~SAIC~~6, ~~has~~2013, awe ~~revolving~~entered ~~credit~~an ~~facility~~Early Payoff Agreement (the "Agreement") between Plainfield and Carlyle, under which iswe ~~fully~~agreed ~~and~~to ~~unconditionally~~pay ~~guaranteed~~off byon ~~Science~~December ~~Applications~~16, ~~providing~~2013 ~~for~~our upobligations tounder ~~$750~~the ~~million~~Note inPurchase ~~unsecured borrowing~~Agreement ~~capacity~~to atinclude principal and interest ~~rates~~due ~~determined,~~under atthe ~~SAIC’s~~Construction ~~option~~Note and Cash Grant Note, ~~based~~an onadditional ~~either~~interest ~~LIBOR~~payment ~~plus~~as aprovided ~~margin~~in orNote aPurchase ~~defined~~Agreement ~~base~~and ~~rate~~an ~~through~~early ~~March~~termination ~~2016.~~fee Asconsisting of ~~October 31,~~a ~~2012~~make ~~and~~whole ~~January 31,~~payment. ~~2012,~~In ~~there~~consideration ~~were~~of nothe ~~borrowings~~early ~~outstanding~~payment, ~~under~~ the ~~revolving~~Agreement ~~credit~~provided ~~facility.~~for ~~The~~a ~~revolving~~$6 ~~credit~~million ~~facility~~discount ~~contains~~on ~~financial~~the ~~covenants~~early termination fee and ~~customary~~waived ~~restrictive~~the covenants. ~~We were~~ in ~~compliance~~Note ~~with~~Purchase ~~all~~Agreement. ~~covenants~~We ~~under~~will ~~the~~pay ~~revolving~~$149 ~~credit~~million ~~facility~~in asprincipal, $10M of ~~October 31~~interest, ~~2012.~~including Athe ~~failure~~additional ~~to meet~~interest ~~the~~payment, ~~financial~~and ~~covenants~~$6 million in ~~the~~an ~~future~~early ~~would~~termination ~~reduce~~fee, ~~and~~net ~~could~~of ~~eliminate~~the ~~our~~discount, ~~borrowing~~for ~~capacity~~a ~~under~~total ~~the~~amount ~~revolving~~of ~~credit~~$165 ~~facility~~million.

LEIDOS HOLDINGS, INC.

LEIDOS, INC.

Credit Facility. Leidos has a revolving credit facility, which is fully and unconditionally guaranteed by Leidos, Inc., providing for up to $750 million in unsecured borrowing capacity at interest rates determined, at Leidos’ option, based on either LIBOR plus a margin or a defined base rate. During the three months ended May 3, 2013, the maturity date of the credit facility was extended for one additional year to March 2017. As of November 1, 2013 and January 31, 2013, there were no borrowings outstanding under the credit facility.

The credit facility contains certain customary representations and warranties, as well as certain affirmative and negative covenants. During the three months ended May 3, 2013, the financial covenants in the credit facility were amended to: (i) permit in the calculation of earnings before interest, taxes, depreciation and amortization (EBITDA) the adding back of certain expenses incurred in connection with our planned separation transaction; (ii) exclude the effect of debt incurred in connection with the separation transaction for purposes of calculating consolidated funded debt; and (iii) change the ratio of consolidated funded debt to EBITDA that we are required to maintain. The financial covenants contained in the credit facility require that, for a period of four trailing fiscal quarters, we maintain a ratio of consolidated funded debt, including borrowings under this facility, to EBITDA adjusted for other items as defined in the credit facility of not more than 3.25 to 1.0 and a ratio of EBITDA adjusted for other items as defined in the credit facility to interest expense of greater than 3.5 to 1.0. We were in compliance with these financial covenants as of November 1, 2013. A failure by us to meet these financial covenants in the future would reduce and could eliminate our borrowing capacity under the credit facility.

Off-Balance Sheet Arrangements

We have outstanding performance guarantees and cross-indemnity agreements in connection with certain of our unconsolidated joint venture investments. We also have letters of credit outstanding principally related to guarantees on contracts and surety bonds outstanding principally related to performance and payment bonds as described in Note 1112 of the combined notes to the condensed consolidated financial statements for the three ~~and nine~~ months ended ~~October~~November 311, ~~2012~~2013 contained within this Quarterly Report on Form 10-Q. These arrangements have not had, and management does not believe it is likely that they will in the future have, a material effect on our liquidity, capital resources, operations or financial condition. We have also entered into an agreement with a variable interest entity (VIE) in connection with a renewable energy project as described in Note 11 of the combined notes to the condensed consolidated financial statements for the three and nine months ended October 31, 2012 contained within this Quarterly Report on Form 10-Q.

SAIC, INC.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

Commitments and Contingencies

We are subject to a number of reviews, investigations, claims, lawsuits and other uncertainties related to our business. For a discussion of these items, see Notes 1011 and 1112 of the combined notes to the condensed consolidated financial statements for the three ~~and nine~~ months ended ~~October~~November 311, ~~2012~~2013 contained within this Quarterly Report on Form 10-Q.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Management evaluates these estimates and assumptions on an ongoing basis. Our estimates and assumptions have been prepared on the basis of the most current reasonably available information. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions and conditions.

We have several critical accounting policies, which were described in our Annual Report on Form 10-K for the fiscal year ended January 31, ~~2012~~2013, that are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments. Typically, the circumstances that make these judgments difficult, subjective and complex have to do with making estimates about ~~the effect of matters that are inherently uncertain. There were no material changes to our critical accounting policies during the nine months ended October 31, 2012.~~

the effect of matters that are inherently uncertain. There were no material changes to our critical accounting policies during the three months ended November 1, 2013.

Non-GAAP Financial Measures

In this Quarterly Report on Form 10-Q, we refer to internal revenue growth (contraction) percentage, which is a non-GAAP financial measure that we reconcile to the most directly comparable GAAP financial measure. We calculate our internal revenue growth (contraction) percentage by comparing our reported revenues for the current year period to the revenues for the prior year period adjusted to include the actual revenues of acquired businesses for the comparable prior year period before acquisition. This calculation has the effect of adding revenues for the acquired businesses for the comparable prior year period to our prior year period reported revenues.

We use internal revenue growth (contraction) percentage as an indicator of how successful we are at growing our base business and how successful we are at growing the revenues of the businesses that we acquire. Our integration of acquired businesses allows our current management to leverage business development capabilities, drive internal resource collaboration, utilize access to markets and qualifications, and refine strategies to realize synergies, which benefits both acquired and existing businesses. As a result, the performance of the combined enterprise post-acquisition is an important measurement. In addition, as a means of rewarding the successful integration and growth of acquired businesses, and not acquisitions themselves, incentive compensation for ~~our~~senior ~~executives~~management ~~and the broader employee population~~ is based, in part, on achievement of revenue targets linked to internal revenue growth.

37The limitation of this non-GAAP financial measure as compared to the most directly comparable GAAP financial measure is that internal revenue growth (contraction) percentage is one of two components of the total revenue growth (contraction) percentage, which is the most directly comparable GAAP financial measure. We address this limitation by presenting the total revenue growth (contraction) percentage next to or near disclosures of internal revenue growth (contraction) percentage. This financial measure is not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our condensed consolidated financial statements prepared in accordance with GAAP. The method that we use to calculate internal revenue growth (contraction) percentage is not necessarily comparable to similarly titled financial measures presented by other companies.

~~SAIC, INC.~~ 56

~~SCIENCE~~LEIDOS ~~APPLICATIONS~~HOLDINGS, ~~INTERNATIONAL CORPORATION~~ INC.

The limitation of this non-GAAP financial measure as compared to the most directly comparable GAAP financial measure is that internal revenue growth (contraction) percentage is one of two components of the total revenue growth (contraction) percentageLEIDOS, ~~which is the most directly comparable GAAP financial measure~~INC. We address this limitation by presenting the total revenue growth (contraction) percentage next to or near disclosures of internal revenue growth (contraction) percentage. This financial measure is not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our condensed consolidated financial statements prepared in accordance with GAAP. The method that we use to calculate internal revenue growth (contraction) percentage is not necessarily comparable to similarly titled financial measures presented by other companies. Internal revenue growth (contraction) percentages for the three and nine months ended October 31, 2012 were calculated as follows:

	Three Months EndedOctober 31, 2012			Nine Months Ended October 31, 2012
	(dollars in millions)
Defense Solutions:
Prior year period’s revenues, as reported	$	1,117		$	3,339
Revenues of acquired businesses for the comparable prior year period		—			—
Prior year period’s revenues, as adjusted	$	1,117		$	3,339
Current year period’s revenues, as reported		1,183			3,597
Internal revenue growth	$	66		$	258
Internal revenue growth percentage		6	%		8	%
Health, Energy and Civil Solutions:
Prior year period’s revenues, as reported	$	726		$	1,997
Revenues of acquired businesses for the comparable prior year period		46			127
Prior year period’s revenues, as adjusted	$	772		$	2,124
Current year period’s revenues, as reported		743			2,077
Internal revenue contraction	$	(29	)	$	(47	)
Internal revenue contraction percentage		(4	)%		(2	)%
Intelligence and Cybersecurity Solutions:
Prior year period’s revenues, as reported	$	947		$	2,691
Revenues of acquired businesses for the comparable prior year period		—			—
Prior year period’s revenues, as adjusted	$	947		$	2,691
Current year period’s revenues, as reported		945			2,792
Internal revenue growth (contraction)	$	(2	)	$	101
Internal revenue growth (contraction) percentage		—	%		4	%
Total*:
Prior year period’s revenues, as reported	$	2,790		$	8,026
Revenues of acquired businesses for the comparable prior year period		46			127
Prior year period’s revenues, as adjusted	$	2,836		$	8,153
Current year period’s revenues, as reported		2,870			8,462
Internal revenue growth	$	34		$	309
Internal revenue growth percentage		1	%		4	%

Internal revenue contraction percentages for the three and nine months ended November 1, 2013 were calculated as follows:

* Total revenues include amounts related to Corporate and Other and intersegment eliminations.



	Three Months Ended			Nine Months Ended
	November 1, 2013			November 1, 2013
	(dollars in millions)
Health and Engineering:
Prior year period’s revenues, as reported	$	508		$	1,341
Revenues of acquired businesses for the comparable prior year period	10			145
Prior year period’s revenues, as adjusted	$	518		$	1,486
Current year period’s revenues, as reported	408			1,380
Internal revenue contraction	$	(110	)	$	(106	)
Internal revenue contraction percentage	(21		)%	(7		)%

National Security Solutions:
Prior year period’s revenues, as reported	$	1,166		$	3,563
Revenues of acquired businesses for the comparable prior year period	—			—
Prior year period’s revenues, as adjusted	$	1,166		$	3,563
Current year period’s revenues, as reported	1,014			3,117
Internal revenue contraction	$	(152	)	$	(446	)
Internal revenue contraction percentage	(13		)%	(13		)%

Total*:
Prior year period’s revenues, as reported	$	1,673		$	4,899
Revenues of acquired businesses for the comparable prior year period	10			145
Prior year period’s revenues, as adjusted	$	1,683		$	5,044
Current year period’s revenues, as reported	1,420			4,486
Internal revenue contraction	$	(263	)	$	(558	)
Internal revenue contraction percentage	(16		)%	(11		)%

38*Total revenues include amounts related to Corporate and Other and intersegment eliminations.

SAIC, INC.

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

Effects of Inflation

Approximately 4047%~~-50%~~ of our revenues are derived from cost-reimbursement type contracts, which are ~~generally~~not ~~completed~~subject ~~within~~to ~~one~~the ~~year~~impacts of inflation. ~~Bids~~Contracts for ~~longer~~long-term FFP and T&M and FP-LOE contracts typically include sufficient provisions for labor and other cost escalations to cover anticipated cost increases over the period of performance. Consequently, revenues and costs have generally both ~~increased~~been ~~commensurate~~impacted ~~with~~similarly by inflation. As a result, net income as a percentage of total revenues has not been significantly impacted by inflation.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

During the ~~nine~~three months ended ~~October 31~~November 1, ~~2012~~2013, there were no material changes in our market risk exposure. For a discussion of our market risk associated with interest rate risk and foreign currency risk as of January 31, ~~2012~~2013, see “Quantitative and Qualitative Disclosures about Market Risk” in Part II of our Annual Report on Form 10-K for the fiscal year ended January 31, ~~2012~~2013.

LEIDOS HOLDINGS, INC.

LEIDOS, INC.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer (our President and Chief Executive Officer) and principal financial officer (our Executive Vice President and Chief Financial Officer), has evaluated the effectiveness of ~~SAIC~~Leidos’s and ~~Science~~Leidos, ~~Applications~~Inc.’

Filing Compare · Leidos, Inc.