Acquisitions

On August 16, 2016, a wholly-owned subsidiary of Leidos Holdings, Inc. merged with the Information Systems & Global Solutions business (the "IS&GS Business") of Lockheed Martin Corporation in a Reverse Morris Trust transaction (the "Transactions"). The acquired IS&GS Business was renamed Leidos Innovations Corporation.

The preliminary purchase consideration for the acquisition of the IS&GS Business was as follows (in millions):



Value of common stock issued to Lockheed Martin stockholders⁽¹⁾	$	2,929
Equity consideration for replacement awards⁽²⁾	9
Preliminary working capital adjustments	56
Preliminary purchase price	$	2,994

⁽¹⁾ Represents approximately 77 million new shares of Leidos common stock issued to those Lockheed Martin stockholders who elected to participate in the exchange offer, based on the Company's August 16, 2016, closing share price of $51.69, less the Leidos special cash dividend amount of $13.64, which the Lockheed Martin stockholders were not entitled to receive.

⁽²⁾ The fair value of replacement equity-based awards attributable to pre-Merger service was recorded as part of the consideration transferred in the Merger.

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



Cash	$	25
Receivables	943
Inventory, prepaid expenses and other current assets	73
Property, plant and equipment	114
Deferred tax assets	12
Intangible assets	1,650
Other assets	104
Accounts payable	(286		)
Accrued liabilities	(446		)
Accrued payroll and employee benefits	(190		)
Long-term debt, current portion	(23		)
Deferred tax liabilities	(556		)
Long-term debt, net of current portion	(1,780		)
Other long-term liabilities	(50		)
Total identifiable net liabilities assumed	(410		)
Non-controlling interest	(8		)
Goodwill	3,412
Preliminary purchase price	$	2,994

Due to the timing and complexity of the Transactions, the Company recorded the assets acquired and liabilities assumed at their preliminary estimated fair values. As of March 31, 2017, the Company had not finalized the determination of fair values allocated to various assets and liabilities, including, but not limited to, receivables; property, plant and equipment; deferred income taxes; deferred revenue; intangible assets; accounts payable; accrued liabilities; contractual contingencies; loss contracts; non-controlling interest; the residual amount allocated to goodwill; and the allocation of goodwill to reporting units. The preliminary purchase price allocation is subject to change as the Company completes its analysis of the fair value at the date of the Transactions, which could have a material impact. During the quarter ended March 31, 2017, the Company recorded valuation adjustments to certain preliminary estimated fair values which resulted in a decrease of $23 million in property, plant, and equipment; an increase of $81 million in other assets related to equity-method investments; and increases of $19 million, $13 million and $24 million in accounts payable, accrued liabilities and deferred tax liabilities, respectively.

During the quarter ended March 31, 2017, the Company recorded a valuation adjustment to fair value the non-controlling interest acquired. The fair value of $8 million was determined by calculating the present value of future cash flows for the non-controlling interest. Significant assumptions inherent in the valuation of the non-controlling interest include the estimated after-tax cash flows expected to be received and an assessment of the appropriate discount rate.

The goodwill represents intellectual capital and the acquired assembled work force, none of which qualify for recognition as a separate intangible asset. The preliminary value of goodwill has been allocated to the new segments on a relative fair value approach (see "Note 6–Goodwill"). Of the total goodwill, $418 million is tax deductible.

The Company identified $1.7 billion of intangible assets, representing programs and contract intangibles and backlog. The following table summarizes the preliminary fair value of intangible assets acquired at the date of acquisition and the related weighted average amortization period:



	Weighted average amortization period	Fair value
	(in years)	(in millions)
Programs and contract intangibles⁽¹⁾	10.0	$	1,450
Backlog	1.4	200
Total	9.0	$	1,650

⁽¹⁾ The weighted average amortization period is estimated based on the projected economic benefits associated with these assets. Refer to "Note 7–Intangible Assets" for additional information.

The Company incurred the following expenses related to the acquisition and integration of the IS&GS Business:



	Three Months Ended
	March 31, 2017		April 1, 2016
	(in millions)
Acquisition costs	$	1	$	6
Integration costs	18		3
Total acquisition and integration costs	$	19	$	9

Pro Forma Financial Information (unaudited)

The following pro forma financial information presents condensed consolidated results of operations as if the acquisition had occurred on January 3, 2015. The pro forma financial information was prepared based on historical financial information and has been adjusted to give effect to the events that are directly attributable to the Transactions and factually supportable. The unaudited pro forma results below do not reflect future events that have occurred or may occur after the Transactions, including anticipated synergies or other expected benefits that may be realized from the Transactions. The pro forma financial information is not intended to reflect the actual results of operations that would have occurred if the acquisition had been completed on January 3, 2015, nor is it intended to be an indication of future operating results.



	Three Months Ended
(unaudited)	April 1, 2016
	(in millions, except per share amounts)
Revenues	$	2,637
Income from continuing operations	52
Income from continuing operations attributable to Leidos common stockholders	50
Earnings per share:
Basic	$	0.34
Diluted	0.33

The unaudited pro forma financial information above excludes acquisition-related costs of $6 million as a nonrecurring significant adjustment. This adjustment was made to account for certain costs incurred as if the Transactions had been completed on January 3, 2015.