Goodwill and Other Intangible Assets

6 Months Ended

Jul. 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. 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, by business segment, for the two quarters ended July 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
Goodwill decrease from divestitures⁽¹⁾	—		(2)		—		(531)		(533)
Decrease from reclassification to assets of disposal group held for sale⁽²⁾	—		—		(9)		—		(9)
Impairment of goodwill	—		(5)		—		(364)		(369)
Currency translation adjustments	3		(7)		(2)		(5)		(11)
Other (including adjustments to previously estimated fair value of assets acquired and liabilities assumed)⁽³⁾	740		124		(81)		(847)		(64)
Balance at July 3, 2020	$	6,511	$	5,241	$	4,151	$	3,112	$	19,015

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(1)During the quarter ended July 3, 2020, we completed the divestitures of our airport security and automation business and our Applied Kilovolts and Analytical Instrumentation business and derecognized $533 million of goodwill as the part of determining the gain or loss on the sale of these businesses. See Note C — Business Divestitures and Assets Sales in these Notes for additional information.

(2)In connection with the then-pending divestiture of our EOTech business, we assigned $9 million of goodwill to “Assets of disposal groups held for sale” in our Condensed Consolidated Balance Sheet (Unaudited) as of July 3, 2020. See Note C — Business Divestitures and Assets Sales in these Notes for additional information.

(3)See Note B — Business Combination in these Notes for additional information regarding adjustments to previously estimated fair values of assets acquired and liabilities assumed.

Commercial Aviation Solutions Impairment

Quarter Ended April 3, 2020: 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 COVID-19 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 a quantitative impairment test on an interim basis. 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 we 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.

Quarter Ended July 3, 2020: 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 July 3, 2020. Although our cash flow projections for the Commercial Aviation Solutions reporting unit did not change significantly compared with the projected cash flows used in our analysis as of April 3, 2020, we determined it was more-likely-than-not that the fair value of our Commercial Aviation Solutions reporting unit was less than its carrying amount as of July 3, 2020 due the amount by which the fair value of the Commercial Aviation Solutions reporting unit exceeded its carrying amount as of April 3, 2020 and heightened uncertainty regarding the timing of expected recovery for the overall commercial aviation market. Consequently, in connection with the preparation of our financial statements for the quarter ended July 3, 2020, we performed a quantitative test on an interim basis. 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 July 3, 2020, primarily due to a significant increase in the weighted-average cost of capital (“WACC”) rate used to discount the projected cash flows of our Commercial Aviation Solutions reporting unit to their present values, and we recorded a non-cash impairment charge of $54 million (including $8 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 July 3, 2020. The goodwill impairment charge is primarily not deductible for tax purposes.

Other AS Disposal Group Impairment

During the quarter ended July 3, 2020, we determined the criteria to be classified as held for sale were met with respect to the other AS disposal group within our Aviation Systems segment. We assigned $14 million of goodwill to the other AS disposal group on a relative fair value basis during the quarter ended July 3, 2020, when the held for sale criteria were met. In connection with the preparation of our financial statements for the quarter ended July 3, 2020, we concluded that goodwill related to the other AS disposal group was impaired and recorded a non-cash impairment charge of $14 million, which is included in the “Impairment of goodwill and other assets” line item in our Condensed Consolidated Statement of Income (Unaudited) for the quarter ended July 3, 2020.

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 tests of goodwill related to our Commercial Aviation Solutions reporting unit, we also performed recoverability tests 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 hypothetical 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 or July 3, 2020.

Intangible assets are summarized below:


	July 3, 2020										January 3, 2020
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount⁽¹⁾		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
	(In millions)
Customer relationships	$	6,911	$	950	$	5,961	$	6,518	$	653	$	5,865
Developed technologies	667		222		445		768		183		585
Contract backlog	19		13		6		—		—		—
Trade names — divisions	138		40		98		165		35		130
Other	4		2		2		10		4		6
Total intangible assets subject to amortization	7,739		1,227		6,512		7,461		875		6,586
In-process research and development	21		—		21		69		—		69
L3 trade name	1,803		—		1,803		1,803		—		1,803
Total intangibles assets	$	9,563	$	1,227	$	8,336	$	9,333	$	875	$	8,458

(1)During the quarter ended July 3, 2020, we completed the divestitures of the airport security and automation business and Applied Kilovolts and Analytical Instrumentation business and derecognized $286 million of intangibles as part of the gain or loss on the sale of these businesses. Additionally, in connection with two pending divestitures, we reclassified $15 million of intangibles to “Assets of disposal groups held for sale” in our Condensed Consolidated Balance Sheet (Unaudited) as of July 3, 2020. See Note C — Business Divestitures and Assets Sales in these Notes for additional information regarding divestitures.

For the quarter and two quarters ended July 3, 2020, amortization expense related to intangible assets was $209 million and $367 million, respectively, and primarily related to the L3Harris Merger. For the quarter and two quarters ended June 28, 2019, amortization expense related to intangible assets was $27 million and $56 million, respectively, and primarily related to our acquisition of Exelis Inc. in the fourth quarter of fiscal 2015.

Future estimated amortization expense for amortizable intangible assets is as follows:


	(In millions)
Year 1	$	441
Year 2	684
Year 3	679
Year 4	657
Year 5	611
Thereafter	3,440
Total	$	6,512