Acquisitions

9 Months Ended

Oct. 02, 2020

Note 4–Acquisitions

L3Harris Transaction

On May 4, 2020 (the "Transaction Date"), we completed the acquisition of L3Harris' security detection and automation businesses for preliminary purchase consideration of $1,005 million, net of $30 million of cash acquired. 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.

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	20
Preliminary purchase price	$	1,035

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


Cash	$	30
Receivables	134
Inventory	104
Other current assets	23
Operating lease right-of-use assets	35
Property, plant and equipment	35
Intangible assets	430
Accounts payable and accrued liabilities	(124)
Accrued payroll and employee benefits	(8)
Operating lease liabilities	(32)
Deferred tax liabilities	(40)
Other long-term liabilities	(14)
Total identifiable net assets acquired	573
Goodwill	462
Purchase price	$	1,035

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 October 2, 2020, we had not finalized the determination of fair values for substantially all of the of the acquired assets and liabilities. 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. During the three months ended October 2, 2020, we recorded adjustments to certain preliminary estimated values, including a $150 million increase in intangible assets and a $17 million increase in deferred taxes liabilities.

The goodwill represents intellectual capital and the acquired assembled workforce, neither of which qualify for recognition as a separate intangible asset. Of the goodwill recognized, $289 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	13	$	150
Customer relationships	10	91
Technology	10	91
In-process research and development ("IPR&D")(1)		98
Total	11	$	430

(1) IPR&D assets are indefinite-lived at the acquisition date until placed into service, at which time such assets will be reclassified to a finite-lived amortizable intangible asset.

For the three and nine months ended October 2, 2020, $74 million and $154 million, respectively, of revenues related to the SD&A Businesses were recognized within the Civil reportable segment.

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.

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	178
Intangible assets	528
Other assets	8
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	884
Goodwill	776
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 October 2, 2020, we had not finalized the determination of fair values of the acquired assets and liabilities, primarily including, but not limited to 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 nine months ended October 2, 2020, we recorded adjustments to certain preliminary estimated values, including a $64 million increase in intangible assets.

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	13	$	485
Backlog	1	32
Technology	11	11
Total	12	$	528

For the three and nine months ended October 2, 2020, $302 million and $637 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		Nine Months Ended
	October 2, 2020		October 2, 2020
	(in millions)
Acquisition costs	$	—	$	23
Integration costs	4		7
Total acquisition and integration costs	$	4	$	30

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 of Dynetics and the SD&A Businesses 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				Nine Months Ended
	October 2, 2020		September 27, 2019		October 2, 2020		September 27, 2019
	(in millions, except per share amounts)
Revenues	$	3,242	$	3,125	$	9,301	$	8,984
Net income	161		151		423		401
Net income attributable to Leidos common stockholders	161		150		422		398

Earnings per share:
Basic	$	1.13	$	1.05	$	2.97	$	2.76
Diluted	1.12		1.03		2.93		2.73

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 $23 million for the nine months ended October 2, 2020 were excluded within the pro forma financial information for fiscal 2020 and were included within the supplemental pro forma earnings for fiscal 2019.