Goodwill and Other Intangible Assets

3 Months Ended

Apr. 03, 2020

Goodwill and Intangible Assets Disclosure [Abstract]

Note K — Goodwill and Other Intangible Assets

Goodwill. As discussed in Note V — Business Segment Information in these Notes, after the completion of the L3Harris Merger, we adjusted our segment reporting to reflect our new organizational structure effective for the quarter ended September

27, 2019. Because our accounting for the L3Harris Merger is still preliminary, we assigned goodwill acquired on a provisional basis. Immediately before and after our goodwill assignments, we completed an assessment of any potential goodwill impairment under our former and new segment reporting structure and determined that no impairment existed.

The assignment of goodwill by business segment, and changes in the carrying amount of goodwill for the quarter ended April 3, 2020, were as follows:



	Integrated Mission Systems			Space and Airborne Systems			Communication Systems			Aviation Systems			Total

	(In millions)
Balance at January 3, 2020	$	5,768		$	5,131		$	4,243		$	4,859		$	20,001
Decrease from reclassification to assets of disposal group held for sale⁽¹⁾	—			(2		)	(9		)	(588		)	(599		)
Impairment of goodwill	—			(5		)	—			(296		)	(301		)
Currency translation adjustments	(2		)	(9		)	(3		)	(10		)	(24		)
Other (including adjustments to previously estimated fair value of assets acquired and liabilities assumed)	22			55			38			73			188
Balance at April 3, 2020	$	5,788		$	5,170		$	4,269		$	4,038		$	19,265

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(1)	During the quarter ended April 3, 2020, we assigned $599 million of goodwill to “Assets of disposal groups held for sale” in our Condensed Consolidated Balance Sheet (Unaudited) associated with three pending divestitures. See Note C — Business Divestitures and Assets Sales in these Notes for additional information.

Impairment of Goodwill. Indications of potential impairment of goodwill related to our Commercial Aviation Solutions reporting unit (which is part of our Aviation Systems segment) were present at April 3, 2020 due to the COVID-19 pandemic and its impact on global air traffic and customer operations, which resulted in a decrease in the fiscal 2020 outlook for the reporting unit. Consequently, in connection with the preparation of our financial statements for the quarter ended April 3, 2020, we performed an interim goodwill impairment test. To test for potential impairment of goodwill related to our Commercial Aviation Solutions reporting unit, we prepared an estimate of the fair value of the reporting unit based on a combination of market-based valuation techniques, utilizing quoted market prices and comparable publicly reported transactions, and projected discounted cash flows. As a result of this impairment test, we concluded that goodwill related to our Commercial Aviation Solutions reporting unit was impaired as of April 3, 2020 and recorded a non-cash impairment charge of $296 million (including $28 million attributable to noncontrolling interests) in the “Impairment of goodwill and other assets” line item in our Condensed Consolidated Statement of Income (Unaudited) for the quarter ended April 3, 2020. The goodwill impairment charge is primarily not deductible for tax purposes.

Identifiable Intangible Assets. The most significant identifiable intangible asset that is separately recognized for our business combinations is customer relationships. Our customer relationships are established through written customer contracts (revenue arrangements). The fair value for a customer relationship is determined, as of the date of acquisition of such relationship, based on estimates and judgments regarding expectations for the estimated future after-tax earnings and cash flows arising from the follow-on sales expected from the customer relationship over its estimated life, including the probability of expected future contract renewals and sales, less a contributory asset charge, all of which is discounted to present value. We assess the recoverability of the carrying value of our finite-lived intangible assets whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. We assess the recoverability of the carrying value of indefinite-lived intangible assets annually, or under certain circumstances more frequently, such as when events and circumstances indicate there may be an impairment.

In conjunction with, and in advance of, the interim test of goodwill related to our Commercial Aviation Solutions reporting unit, we also performed a recoverability test of the long-lived assets of our Commercial Aviation Solutions reporting unit, including identifiable intangible assets and property, plant and equipment. To test these long-lived assets for recoverability, we compared the estimated future cash flows (on an undiscounted basis) to be generated from the use and eventual disposition of the asset group to its carrying value and concluded that the long-lived assets of our Commercial Aviation Solutions reporting unit were not impaired as of April 3, 2020.

Intangible assets are summarized below:



	April 3, 2020						January 3, 2020
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
	(In millions)
Customer relationships	$	6,454	$	769	$	5,685	$	6,518	$	653	$	5,865
Developed technologies	689		194		495		768		183		585
Trade names	139		36		103		165		35		130
Other	32		16		16		10		4		6
Total intangible assets subject to amortization	7,314		1,015		6,299		7,461		875		6,586
In process research and development	69		—		69		69		—		69
L3 trade name	1,803		—		1,803		1,803		—		1,803
Total intangibles assets	$	9,186	$	1,015	$	8,171	$	9,333	$	875	$	8,458

For the quarter ended April 3, 2020, amortization expense related to intangible assets was $158 million and primarily related to the L3Harris Merger. For the quarter ended March 29, 2019, amortization expense related to intangible assets was $29 million and primarily related to our acquisition of Exelis Inc. in the fourth quarter of fiscal 2015.

Future estimated amortization expense for intangible assets is as follows:



	(In millions)
Year 1	$	554
Year 2	622
Year 3	604
Year 4	580
Year 5	551
Thereafter	3,388
Total	$	6,299