Business Combination

3 Months Ended

Apr. 03, 2020

Note B — Business Combination

On October 12, 2018, Harris entered into the Merger Agreement with L3 and Merger Sub, pursuant to which Harris and L3 agreed to combine their respective businesses in an all-stock merger, at the closing of which Merger Sub would merge with and into L3, with L3 continuing as the surviving corporation and a direct wholly owned subsidiary of Harris.

The closing of the L3Harris Merger occurred on June 29, 2019. Upon completion of the L3Harris Merger, Harris was renamed “L3Harris Technologies, Inc.” and each share of L3 common stock converted into the right to receive 1.30 shares of L3Harris common stock. L3Harris was owned on a fully diluted basis approximately 54 percent by Harris shareholders and 46 percent by L3 shareholders immediately following the completion of the L3Harris Merger.

L3 was a prime contractor in intelligence, surveillance and reconnaissance (“ISR”) systems, aircraft sustainment (including modifications and fleet management of special mission aircraft), simulation and training, night vision and image intensification equipment, and security and detection systems. L3 also was a leading provider of a broad range of communication, electronic and sensor systems used on military, homeland security and commercial platforms. L3 employed approximately 31,000 employees and its customers included the U.S. Department of Defense and its prime contractors, the U.S.

Intelligence Community, the U.S. Department of Homeland Security, foreign governments and domestic and foreign commercial customers.

Following the completion of the L3Harris Merger, we issued 104 million shares of L3Harris common stock to L3 shareholders. The trading price of L3Harris common stock was $189.13 per share as of the Closing Date. In addition to shares of our common stock issued to L3 shareholders, replacement L3Harris share-based awards were issued for certain outstanding L3 share-based awards.

We are accounting for the L3Harris Merger under the acquisition method of accounting. Under the acquisition method of accounting, we are required to measure identifiable assets acquired, liabilities assumed and any noncontrolling interests in the acquiree at their fair values as of the Closing Date.

Our preliminary calculation of estimated consideration transferred is summarized below:



(In millions, except exchange ratio and per share amounts)	June 29, 2019
Outstanding shares of L3 common stock as of June 28, 2019	79.63
L3 restricted stock unit awards settled in shares of L3Harris common stock	0.41
L3 performance unit awards settled in shares of L3Harris common stock	0.04
	80.08
Exchange Ratio	1.30
Shares of L3Harris common stock issued for L3 outstanding common stock	104.10
Price per share of L3Harris common stock as of June 28, 2019	$	189.13
Fair value of L3Harris common stock issued for L3 outstanding common stock	$	19,689
Fair value of replacement RSUs attributable to merger consideration	10
Fair value of L3Harris stock options issued for L3 outstanding stock options	101
Withholding tax liability incurred for converted L3 share-based awards	45
Fair value of replacement award consideration	156
Fair value of total consideration	19,845
Less cash acquired	(1,195		)
Total net consideration transferred	$	18,650

Our preliminary measurement of assets acquired, liabilities assumed and noncontrolling interests as of the Closing Date and measurement period adjustments recorded since the Closing Date through April 3, 2020, are as follows:



	Preliminary Fair Value			Measurement Period Adjustments			Adjusted Fair Value
	(In millions)
Receivables	$	849		$	(20	)	$	829
Contract assets	1,708			(56		)	1,652
Inventories	1,056			(74		)	982
Other current assets	517			(26		)	491
Property, plant and equipment	1,176			42			1,218
Operating lease right-of-use assets	704			—			704
Goodwill	15,423			(585		)	14,838
Other intangible assets	6,768			1,206			7,974
Other non-current assets	327			(9		)	318
Total assets acquired	$	28,528		$	478		$	29,006

Accounts payable	$	898		$	(17	)	$	881
Contract liabilities	722			2			724
Other current liabilities	772			199			971
Operating lease liabilities	715			—			715
Defined benefit plans	1,411			—			1,411
Long-term debt, net	3,548			—			3,548
Other long-term liabilities	1,661			290			1,951
Total liabilities assumed	9,727			474			10,201
Net assets acquired	18,801			4			18,805
Noncontrolling interests	(151		)	(4		)	(155		)
Total net consideration transferred	$	18,650		$	—		$	18,650

Due to the timing of the L3Harris Merger relative to its size and complexity, certain aspects of our accounting for the L3Harris Merger remain preliminary, including the acquisition-date fair value of identifiable intangible assets, certain tangible assets, liabilities assumed (including environmental reserves), and tax-related items. Amounts recorded associated with these assets and liabilities are based on preliminary calculations and our estimates and assumptions are subject to change as we obtain additional information during the measurement period (up to one year from the Closing Date). As of April 3, 2020, we have completed our determination of the fair value of consideration transferred, property, plant and equipment, defined benefit plan liabilities and long-term debt assumed.

Additionally, we acquired certain off-market customer contracts in connection with the L3Harris Merger, and have recorded liabilities as well as separate identifiable intangible assets for the acquisition-date fair value of the off-market components of these customer contracts. In aggregate, the estimated acquisition-date fair value of the off-market components is a net liability of $103 million. We measured the fair value of these components as the present value of the amount by which the terms of the contract with the customer deviate from the terms that a market participant could have achieved on the Closing Date. The off-market components of these contracts will be recognized as an increase to, or reduction of, revenue as we incur costs to satisfy the associated performance obligations. We recognized $23 million of revenue in the quarter ended April 3, 2020 for amortization of net off-market contract liabilities (including the cumulative effect of amortization that would have been recognized in the Fiscal Transition Period). Future estimated revenue from the amortization of net off-market contract liabilities (based on the estimated pattern of cash flows to be incurred to satisfy associated performance obligations) is as follows: $28 million in the remainder of 2020, $12 million in 2021, $9 million in 2022, $7 million in 2023 and $5 million in 2024.

The goodwill resulting from the L3Harris Merger was primarily associated with L3’s market presence and leading positions, growth opportunities in the markets in which L3 businesses operate, experienced work force and established operating infrastructures. Most of the goodwill related to the L3Harris Merger is nondeductible for tax purposes.

See Note K — Goodwill and Other Intangible Assets in these Notes for more information regarding the preliminary allocation of goodwill by business segment.

The following table provides further detail of the fair value and weighted-average amortization period of identified intangible assets acquired by major intangible asset class:



	Weighted Average Amortization Period	Total

	(In years)	(In millions)
Identifiable intangible assets acquired:
Customer relationships (Government)	15	$	4,769
Customer relationships (Commercial)	15	648
Trade names — Divisions	9	123
Developed technology	7	562
Total identifiable intangible assets subject to amortization	14	6,102
Trade names — Corporate	indefinite	1,803
In-process research and development	n/a	69
Total identifiable intangible assets		$	7,974

During the quarter ended April 3, 2020, we recorded $46 million of L3Harris Merger-related charges, consisting of integration and other costs as follows:


•	$15 million of additional cost of sales related to the fair value step-up in inventory sold; and


•	$31 million of integration costs, recognized as incurred.

Because the L3Harris Merger benefited the entire Company as opposed to any individual business segment, the above costs were not allocated to any business segment. Integration costs were recorded in the “Engineering, selling and administrative expenses” line item in our Condensed Consolidated Statement of Income (Unaudited).

Pro Forma Results

The following summary, prepared on a pro forma basis, presents our unaudited consolidated results of operations for the quarter ended March 29, 2019 as if the L3Harris Merger had been completed as of June 30, 2018, the first day of Harris’ fiscal 2019, after including any post-acquisition adjustments directly attributable to the acquisition, such as the sale of Harris’ Night Vision business, and after including the impact of pro forma adjustments such as amortization of intangible assets as well as the related income tax effects. This pro forma presentation does not include any impact of transaction synergies. The pro forma results are not necessarily indicative of our results of operations that actually would have been obtained had the combination of Harris and L3 been completed on the assumed date or for the period presented, or which may be realized in the future.



	March 29, 2019

	(In millions)
Revenue from product sales and services — as reported	$	1,728
Revenue from product sales and services — pro forma	$	4,386
Income from continuing operations — as reported	$	243
Income from continuing operations — pro forma	$	400