Acquisitions

6 Months Ended

Jul. 03, 2020

Business Combinations [Abstract]

Acquisitions

Note 4–Acquisitions

L3Harris Technologies ("L3Harris") Transaction

On May 4, 2020 (the "Transaction Date"), we completed the acquisition of L3Harris' security detection and automation businesses (the "SD&A Businesses") for preliminary cash consideration of $968 million, net of cash acquired, subject to working capital adjustments. The SD&A Businesses provide airport and critical infrastructure screening products, automated tray return systems and other industrial automation products. The addition of the SD&A Businesses will expand the scope and scale of our global security detection and automation offerings.

In connection with the acquisition, we drew on our senior unsecured delayed-draw term loan facility in an aggregate principal amount of $1.0 billion (the "Facility"). See "Note 10–Debt" for further details. The proceeds of the Facility and cash on hand were used to fund the purchase of the SD&A Businesses.

The preliminary purchase consideration for the acquisition of the SD&A Businesses was as follows (in millions):

Cash paid at closing	$	1,015
Preliminary working capital adjustments	21
Preliminary purchase price	$	1,036

The preliminary fair values of total net assets acquired at the Transaction Date was $1,036 million, which included the following (in millions):

Receivables	$	134
Inventory	101
Intangible assets	280
Goodwill	599

Due to the timing and complexity of the acquisition, the assets acquired and liabilities assumed were recorded at their preliminary estimated fair values. As of July 3, 2020, we had not finalized the determination of fair values of the acquired assets and liabilities, primarily including, but not limited to accounts receivable, inventory, intangible assets, accrued liabilities and deferred taxes. The preliminary purchase price allocation is subject to change as we complete our determination of the final working capital and the fair value of the acquired assets and liabilities assumed, the impact of which could be material.

The goodwill represents intellectual capital and the acquired assembled workforce, none of which qualify for recognition as a separate intangible asset. Of the goodwill recognized, $368 million is deductible for tax purposes.

The following table summarizes the preliminary fair value of intangible assets acquired at the Transaction Date and the related weighted average amortization period:

	Weighted average amortization period	Fair value
	(in years)	(in millions)
Programs	7	$	117
Software and technology	10	140
Trade name	5	23
Total	8	$	280

The preliminary fair value and related weighted average amortization period of the intangible assets acquired were based on an industry benchmarking analysis surrounding recent and relevant industry transactions. The difference between the benchmark estimate and ultimate fair value of intangible assets identified may be material.

For the three and six months ended July 3, 2020, $80 million of revenues related to the SD&A Businesses were recognized within the Civil reportable segment.

Dynetics, Inc. ("Dynetics") Acquisition

On January 31, 2020 (the "Acquisition Date"), we completed our acquisition of Dynetics, an industry-leading applied research and national security solutions company. The addition of Dynetics will accelerate opportunities within our innovation engine that researches and develops new technologies and solutions to address the most challenging needs of our customers. All of the issued and outstanding shares of common stock of Dynetics were purchased for $1.64 billion, net of cash acquired.

In connection with the acquisition, we entered into a Bridge Credit Agreement with certain financial institutions, which provided for a senior unsecured 364-day bridge loan facility in an aggregate principal amount of $1.25 billion (the "Bridge Facility"). See "Note 10–Debt" for further details.

The proceeds of the Bridge Facility and cash on hand on the Acquisition Date were used to fund the purchase of Dynetics and repay in full all third party indebtedness of Dynetics, terminate all commitments thereunder and discharge and release all existing guarantees and liens.

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

Cash	$	18
Receivables	159
Inventory	47
Other current assets	22
Operating lease right-of-use assets	25
Property, plant and equipment	173
Intangible assets	544
Other assets	9
Accounts payable and accrued liabilities	(48)
Accrued payroll and employee benefits	(29)
Operating lease liabilities	(20)
Other long-term liabilities	(4)
Total identifiable net assets acquired	896
Goodwill	764
Purchase price	$	1,660

Due to the timing and complexity of the acquisition, the assets acquired and liabilities assumed were recorded at their preliminary estimated fair values. As of July 3, 2020, we had not finalized the determination of fair values of the acquired assets and liabilities, primarily including, but not limited to inventory, intangible assets and property, plant and equipment. The purchase price allocation is subject to change as we complete our determination of the fair value of the acquired assets and liabilities assumed, the impact of which could be material. During the three months ended July 3, 2020, we recorded adjustments to certain preliminary estimated values, including an $80 million increase in intangible assets.

The goodwill represents intellectual capital and the acquired assembled workforce, none of which qualify for recognition as a separate intangible asset. For tax purposes, $768 million of goodwill is deductible.

The following table summarizes the preliminary fair value of intangible assets acquired at the Acquisition Date and the related weighted average amortization period:

	Weighted average amortization period	Fair value
	(in years)	(in millions)
Programs	15	$	500
Backlog	1	33
Technology	11	11
Total	14	$	544

For the three and six months ended July 3, 2020, $206 million and $335 million, respectively, of revenues related to Dynetics were recognized within the Defense Solutions reportable segment.

Acquisition and Integration Costs

The following expenses were incurred related to the acquisitions of Dynetics and the SD&A Businesses:

	Three Months Ended		Six Months Ended
	July 3, 2020		July 3, 2020
	(in millions)
Acquisition costs	$	12	$	23
Integration costs	3		3
Total acquisition and integration costs	$	15	$	26

These acquisition and integration costs have been primarily recorded within Corporate and presented in "Acquisition, integration and restructuring costs" on the condensed consolidated statements of income.

Pro Forma Financial Information

The following unaudited pro forma financial information presents consolidated results of operations as if the acquisitions had occurred on December 29, 2018. 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 acquisitions of Dynetics and the SD&A Businesses and are factually supportable. The unaudited pro forma results below do not reflect future events that have occurred or may occur after the acquisitions, including anticipated synergies or other expected benefits that may be realized from the acquisitions. The pro forma information is not intended to reflect the actual results of operations that would have occurred if the acquisitions had been completed on December 29, 2018, nor is it intended to be an indication of future operating results.

	Three Months Ended				Six Months Ended
	July 3, 2020		June 28, 2019		July 3, 2020		June 28, 2019
	(in millions, except per share amounts)
Revenues	$	2,984	$	3,027	$	6,060	$	5,854
Net income	147		107		271		254
Net income attributable to Leidos common stockholders	146		105		270		252
Earnings per share:
Basic	$	1.03	$	0.73	$	1.90	$	1.75
Diluted	1.01		0.72		1.88		1.73

The unaudited pro forma financial information above includes the following nonrecurring significant adjustment made to account for certain costs incurred as if the acquisitions had been completed on December 29, 2018:

•Acquisition-related costs of $12 million and $23 million for the three and six months ended July 3, 2020, respectively, were excluded within the pro forma financial information for fiscal 2020 and were included within the supplemental pro forma earnings for fiscal 2019.