XML 22 R10.htm IDEA: XBRL DOCUMENT
v3.5.0.2

ACQUISITIONS AND DIVESTITURES | 9 Months Ended
--- | ---
Sep. 25, 2016
ACQUISITIONS AND DIVESTITURES | NOTE 3 – ACQUISITIONS AND DIVESTITURES Acquisition of Sikorsky Aircraft Corporation On November 6, 2015, we completed the acquisition of Sikorsky from United Technologies Corporation (UTC) for $9.0 billion, net of cash acquired. Sikorsky is a global company primarily engaged in the research, design, development, manufacture and support of military and commercial helicopters. Sikorsky’s products include military helicopters such as the H-60 Black Hawk, MH-60R Seahawk, CH-53K, H-92, and commercial helicopters such as the S-76 and S-92. The acquisition enables us to extend our core business into the military and commercial rotary wing segments, allowing us to strengthen our position in the aerospace and defense industry. Further, this acquisition expands our presence in commercial and international markets. Sikorsky has been aligned under our RMS business segment. To fund the $9.0 billion acquisition price, we utilized $6.0 billion of proceeds borrowed under our 364-day revolving credit facility (the 364-day Facility), $2.0 billion of cash on hand and $1.0 billion from the issuance of commercial paper. In the fourth quarter of 2015, we repaid all outstanding borrowings under the 364-day Facility with the proceeds from the issuance of $7.0 billion of fixed interest-rate long-term notes in a public offering (the November 2015 Notes). In the fourth quarter of 2015, we also repaid the $1.0 billion in commercial paper borrowings. Preliminary Allocation of Purchase Price to Assets Acquired and Liabilities Assumed We accounted for the acquisition of Sikorsky as a business combination, which requires us to record the assets acquired and liabilities assumed at fair value. The amount by which the purchase price exceeds the fair value of the net assets acquired is recorded as goodwill. We commenced the appraisals necessary to assess the fair values of the tangible and intangible assets acquired and liabilities assumed and the amount of goodwill to be recognized as of the acquisition date. The amounts recorded for certain assets and liabilities are preliminary in nature and are subject to adjustment as additional information is obtained about the facts and circumstances that existed as of the acquisition date. The final determination of the fair values of certain assets and liabilities will be completed within the measurement period of up to one year from the acquisition date, as permitted under GAAP. The size and breadth of the Sikorsky acquisition will necessitate the need to use the full one year measurement period to adequately analyze and assess a number of the factors used in establishing the asset and liability fair values as of the acquisition date including contractual and operational factors underlying the customer programs intangible assets, the trademarks intangible asset, customer contractual obligations, inventories, receivables and customer advances, and the assumptions underpinning certain program and legal reserves. The final values may also result in changes to amortization expense related to intangible assets. The refinements made during the quarter and nine months ended September 25, 2016 did not have a material effect on the acquired assets and liabilities assumed or on net earnings, however, any potential adjustments made could be material in relation to the values presented in the table below. The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date, including the refinements described in the previous paragraph (in millions):
Cash and cash equivalents |  | $ | 75 |
Receivables, net |  |  | 1,948 |
Inventories, net |  |  | 1,605 |
Other current assets |  |  | 25 |
Property, plant and equipment |  |  | 649 |
Goodwill |  |  | 2,853 |
Intangible assets: |  |  |  |
Customer programs |  |  | 3,204 |
Trademarks |  |  | 887 |
Other noncurrent assets |  |  | 507 |
Deferred income tax assets |  |  | 265 |
Total identifiable assets and goodwill |  | $ | 12,018 |
Accounts payable |  | $ | (565 | )
Customer advances and amounts in excess of costs incurred |  |  | (1,197 | )
Salaries, benefits and payroll taxes |  |  | (105 | )
Other current liabilities |  |  | (382 | )
Customer contractual obligations(a) |  |  | (507 | )
Other noncurrent liabilities |  |  | (156 | )
Deferred income tax liabilities(a) |  |  | (28 | )
Total liabilities assumed |  | $ | (2,940 | )
Total purchase price |  | $ | 9,078 |
(a) | Recorded in other noncurrent liabilities on the consolidated balance sheets. The refinements made during the quarter and nine months ended September 25, 2016 did not have a material effect on the acquired assets and liabilities assumed or on net earnings.
Intangible assets related to customer programs were recognized for each major helicopter and aftermarket program and represent the aggregate value associated with the customer relationships, contracts, technology and tradenames underlying the associated program. These intangible assets are being amortized on a straight-line basis over a weighted-average useful life of approximately 15 years. The useful life is based on the period of expected cash flows used to measure the fair value of each of the intangible assets. Customer contractual obligations represent liabilities on certain development programs where the expected costs exceed the expected sales under contract. We measured these liabilities based on the price to transfer the obligation to a market participant at the measurement date, assuming that the liability will remain outstanding in the marketplace. Based on the estimated net cash outflows of the developmental programs plus a reasonable contracting profit margin required to transfer the contracts to market participants, we recorded assumed liabilities of $507 million. These liabilities will be liquidated in accordance with the underlying economic pattern of the contractual obligations, as reflected by the estimated future net cash outflows incurred on the associated contracts. From the acquisition date through the period ended September 25, 2016, we recognized approximately $100 million in sales related to customer contractual obligations. Estimated liquidation of the customer contractual obligations is approximated as follows: $30 million remaining in 2016, $110 million in 2017, $70 million in 2018, $70 million in 2019, $60 million in 2020, $10 million in 2021 and $57 million thereafter. The fair values of the assets acquired and liabilities assumed were determined using income, market and cost valuation methodologies. The fair value measurements were estimated using significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in Accounting Standards Codification (ASC) 820, Fair Value Measurement. The income approach was primarily used to value the customer programs and trademarks intangible assets. The income approach indicates value for an asset or liability based on the present value of cash flows projected to be generated over the remaining economic life of the asset or liability being measured. Both the amount and the duration of the cash flows are considered from a market participant perspective. Our estimates of market participant net cash flows considered historical and projected pricing, remaining developmental effort, operational performance including company-specific synergies, aftermarket retention, product life cycles, material and labor pricing, and other relevant customer, contractual and market factors. Where appropriate, the net cash flows are adjusted to reflect the uncertainties associated with the underlying assumptions, as well as the risk profile of the net cash flows utilized in the valuation. The adjusted future cash flows are then discounted to present value using an appropriate discount rate. Projected cash flow is discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money. The market approach is a valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities, or a group of assets and liabilities. Valuation techniques consistent with the market approach often use market multiples derived from a set of comparables. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for property, plant and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost, less an allowance for loss in value due to depreciation. The preliminary purchase price allocation resulted in the recognition of $2.9 billion of goodwill, all of which is expected to be amortizable for tax purposes. All of the goodwill was assigned to our RMS business segment. The goodwill recognized is attributable to expected revenue synergies generated by the integration of our products and technologies with those of Sikorsky, cost synergies resulting from the consolidation or elimination of certain functions, and intangible assets that do not qualify for separate recognition, such as the assembled workforce of Sikorsky. Determining the fair value of assets acquired and liabilities assumed requires the exercise of significant judgments, including the amount and timing of expected future cash flows, long-term growth rates and discount rates. The cash flows employed in the discounted cash flow analyses are based on our best estimate of future sales, earnings and cash flows after considering factors such as general market conditions, customer budgets, existing firm orders, expected future orders, contracts with suppliers, labor agreements, changes in working capital, long-term business plans and recent operating performance. Use of different estimates and judgments could yield different results. Supplemental Pro Forma Financial Information (unaudited) Sikorsky’s financial results have been included in our consolidated financial results for the periods subsequent to the November 6, 2015 acquisition date. The following table presents summarized unaudited pro forma financial information as if Sikorsky had been included in our financial results for the quarter and nine months ended September 27, 2015 (in millions):
|  | Quarter Ended September 27, 2015 |  |  | Nine Months Ended September 27, 2015 |
Net sales |  | $ | 11,434 |  |  | $ | 33,289 |
Net earnings |  |  | 858 |  |  |  | 2,631 |
Basic earnings per common share |  |  | 2.78 |  |  |  | 8.44 |
Diluted earnings per common share |  |  | 2.74 |  |  |  | 8.32 |
The unaudited supplemental pro forma financial data above have been calculated after applying our accounting policies and adjusting the historical results of Sikorsky with pro forma adjustments, net of tax, that assume the acquisition occurred on January 1, 2014. Significant pro forma adjustments include the recognition of additional amortization expense related to acquired intangible assets (based on our preliminary purchase accounting estimates) and additional interest expense related to the debt used to finance the majority of the Sikorsky purchase price. These adjustments assume the Sikorsky acquisition and debt issued to finance most of the purchase price occurred on January 1, 2014. The adjustments include amortization expense of about $40 million and about $115 million (net of about $20 million and $60 million of tax expense) and interest expense of about $45 million and about $130 million (net of about $20 million and $65 million of tax expense) for the quarter and nine months ended September 27, 2015, respectively. The unaudited supplemental pro forma financial information does not reflect the realization of any expected ongoing revenue or cost synergies relating to the integration of the two companies. Further, the pro forma data should not be considered indicative of the results that would have occurred if the acquisition, related financing and the associated notes issuance and repayment of the 364-day credit facility had been consummated on January 1, 2014, nor are they indicative of future results. AWE Management Limited On August 24, 2016, our ownership interest in the AWE venture increased by 18% in exchange for our assuming a more significant role in managing the operations of the venture. AWE operates the United Kingdom’s nuclear deterrent program and generated sales of about $1.5 billion and net earnings of about $85 million in 2015. As a result of the increase in ownership, we now own a 51% interest in AWE and control its operations and board of directors. Consequently, we are required to consolidate AWE, which has been aligned under our Space Systems business segment. Previously, we accounted for our investment in AWE using the equity method of accounting. We accounted for this transaction as a “step acquisition” (as defined by U.S. GAAP), which requires us to consolidate and record the assets and liabilities of AWE at fair value. Accordingly, we recorded intangible assets of $243 million related to customer relationships, $32 million of net liabilities, and noncontrolling interests of $107 million. The intangible assets are being amortized over a period of eight years in accordance with the underlying pattern of economic benefit reflected by the future net cash flows. In the quarter ended September 25, 2016, we recognized a non cash net gain of $104 million associated with obtaining a controlling interest in AWE, which consisted of a $127 million pre tax gain recognized in the operating results of our Space Systems business segment and $23 million of tax related items at our corporate office. The gain represents the fair value of our 51% interest in AWE, less the carrying value of our previously held investment in AWE and deferred taxes. The gain was recorded in “other income, net” in the consolidated statements of earnings. The fair value of AWE, our controlling interest, and the noncontrolling interests were determined using the income approach. Divestiture of the Information Systems & Global Solutions Business Segment On August 16, 2016, we completed the previously announced divestiture of the IS&GS business segment, which merged with Leidos in a Reverse Morris Trust transaction (the “Transactions”). The Transactions were completed in a multi-step process pursuant to which, we initially contributed the IS&GS business to Abacus Innovations Corporation (Abacus), a wholly owned subsidiary of Lockheed Martin created to facilitate the Transactions, and the common stock of Abacus was distributed to participating Lockheed Martin stockholders through an exchange offer. Under the terms of the exchange offer, Lockheed Martin stockholders had the option to exchange all, some or none of their shares of Lockheed Martin common stock for shares of Abacus common stock. At the conclusion of the exchange offer, all 76,958,918 shares of Abacus common stock were exchanged for 9,369,694 shares of Lockheed Martin common stock held by Lockheed Martin stockholders that elected to participate in the exchange. The shares of Lockheed Martin common stock that were tendered and accepted in the exchange were retired and reduced the number of shares of our common stock outstanding by approximately three percent. Following the exchange offer, Abacus merged with a subsidiary of Leidos, with Abacus continuing as the surviving corporation and a wholly owned subsidiary of Leidos. As part of the merger, each share of Abacus common stock was automatically converted into one share of Leidos common stock. We did not receive any shares of Leidos common stock as part of the Transactions and do not hold any shares of Leidos or Abacus common stock following the Transactions. Both the exchange offer and merger qualified as tax-free transactions to Lockheed Martin and its stockholders, except to the extent that cash was paid to Lockheed Martin stockholders in lieu of fractional shares. In connection with the Transactions, Abacus borrowed an aggregate principal amount of approximately $1.84 billion under term loan facilities with third party financial institutions, the proceeds of which were used to make a one-time special cash payment of $1.80 billion to Lockheed Martin and to pay associated borrowing fees and expenses. The special cash payment must be used to repay debt, pay dividends or repurchase stock. The obligations under the term loan facilities were assumed by Leidos as part of the Transactions. As a result of the Transactions, we recognized a net gain of approximately $1.2 billion. The net gain represents the $2.5 billion fair value of the shares of Lockheed Martin common stock tendered and retired as part of the exchange offer, plus the $1.8 billion one-time special cash payment, less the net book value of the IS&GS business segment of about $3.0 billion at August 16, 2016 and other adjustments of about $100 million. The final gain is subject to certain post-closing adjustments, including final working capital and tax adjustments, which we expect to complete in the fourth quarter of 2016 or the first quarter of 2017. We classified the operating results of the IS&GS business segment as discontinued operations in our financial statements in accordance with GAAP, as the divestiture of this business represented a strategic shift that had a major effect on our operations and financial results. However, the cash flows of the IS&GS business segment have not been reclassified in our consolidated statements of cash flows as we retained this cash as part of the Transactions. The carrying amounts of major classes of the IS&GS business segment assets and liabilities that were classified as assets and liabilities of discontinued operations as of December 31, 2015 are as follows (in millions):
Receivables, net |  | $ | 807 |  |  |  |  |
Inventories, net |  |  | 143 |  |  |  |  |
Other current assets |  |  | 19 |  |  |  |  |
Property, plant and equipment, net |  |  | 101 |  |  |  |  |
Goodwill |  |  | 2,881 |  |  |  |  |
Intangible assets |  |  | 125 |  |  |  |  |
Other noncurrent assets |  |  | 54 |  |  |  |  |
Total assets of the disposal group |  | $ | 4,130 |  |  |  |  |
Accounts payable |  | $ | (229 | ) |  |  |  |
Customer advances and amounts in excess of costs incurred |  |  | (285 | ) |  |  |  |
Salaries, benefits and payroll taxes |  |  | (209 | ) |  |  |  |
Other current liabilities |  |  | (225 | ) |  |  |  |
Deferred income taxes |  |  | (145 | ) |  |  |  |
Other noncurrent liabilities |  |  | (60 | ) |  |  |  |
Total liabilities of the disposal group |  | $ | (1,153 | ) |  |  |  |
The operating results of IS&GS that have been reflected within net earnings from discontinued operations are as follows (in millions):
|  | Quarters Ended |  |  | Nine Months Ended |
|  | September 25, 2016(a) |  |  | September 27, 2015 |  |  | September 25, 2016(a) |  |  | September 27, 2015 |
Net sales |  | $ | 739 |  |  | $ | 1,401 |  |  | $ | 3,410 |  |  | $ | 4,199 |
Cost of sales |  |  | (635) |  |  |  | (1,222) |  |  |  | (2,953) |  |  |  | (3,644) |
Severance charges |  |  | — |  |  |  | (20) |  |  |  | (19) |  |  |  | (20) |
Gross profit |  |  | 104 |  |  |  | 159 |  |  |  | 438 |  |  |  | 535 |
Other income, net |  |  | 19 |  |  |  | 3 |  |  |  | 16 |  |  |  | 8 |
Operating profit |  |  | 123 |  |  |  | 162 |  |  |  | 454 |  |  |  | 543 |
Earnings from discontinued operations before income taxes |  |  | 123 |  |  |  | 162 |  |  |  | 454 |  |  |  | 543 |
Income tax expense |  |  | (51) |  |  |  | (53) |  |  |  | (168) |  |  |  | (180) |
Net gain on divestiture of discontinued operations |  |  | 1,234 |  |  |  | — |  |  |  | 1,234 |  |  |  | — |
Net earnings from discontinued operations |  | $ | 1,306 |  |  | $ | 109 |  |  | $ | 1,520 |  |  | $ | 363 |
(a) | Operating results for the quarter and nine months ended September 25, 2016 reflect operating results prior to the transaction date of August 16, 2016, not the full quarter or nine month period as shown for the prior period.
The selected financial information (such as, depreciation and amortization, capital expenditures, and other non-cash items) of IS&GS included in our consolidated statements of cash flows were not significant. The operating profit reflected above does not represent the IS&GS business segment historical operating profit, as the results reported within net earnings from discontinued operations only include certain costs that were directly attributable to IS&GS and exclude certain overhead costs that were previously allocated to IS&GS for each period. For instance, certain corporate overhead costs and certain defined benefit pension costs that were historically allocated to and included in the operating results of the IS&GS business segment have been reclassified and included in the results of our continuing operations because we will continue to incur these costs subsequent to the divestiture of the IS&GS business segment. Certain corporate overhead costs incurred by us and previously allocated to the IS&GS business segment were reclassified from the IS&GS business segment to other unallocated, net in our consolidated statement of earnings. These overhead costs related to expenses for senior management, legal, human resources, finance, accounting, treasury, tax, information technology, communications, ethics and compliance, corporate employee benefits, incentives and stock-based compensation, shared services processing and administration and depreciation for corporate fixed assets, and were not directly attributable to the IS&GS business segment. During the quarter and nine months ended September 25, 2016 we reclassified $17 million and $82 million of corporate overhead costs to other unallocated, net. During the quarter and nine months ended September 27, 2015 we reclassified $40 million and $133 million of corporate overhead costs to other unallocated, net. Additionally, we retained all assets and obligations related to the pension benefits earned by IS&GS employees who historically participated in our defined benefit pension plans. As a result, the non-service portion of pension costs (interest cost, actuarial gains and losses and expected return on plan assets) for these plans was reclassified from the operating results of the IS&GS business segment and reported as a reduction to the FAS/CAS pension adjustment. These net costs were $11 million and $54 million in the quarter and nine months ended September 25, 2016 and $17 million and $53 million in the quarter and nine months ended September 27, 2015. The service portion of pension costs related to IS&GS salaried employees that transferred to Leidos remains in the operating results of the IS&GS business segment classified as discontinued operations because such costs will no longer be incurred by us subsequent to the divestiture of IS&GS. These costs were not material for the quarter and nine months ended September 25, 2016 or for the quarter and nine months ended September 27, 2015. Significant severance charges related to the IS&GS business segment were historically recorded at the Lockheed Martin corporate office. These charges have been reclassified into the operating results of the IS&GS business segment, classified as discontinued operations, and excluded from the operating results of our continuing operations. The amount of severance charges reclassified were $19 million in the nine months ended September 25, 2016 and $20 million in the quarter and nine months ended September 27, 2015. Other Divestitures During the second quarter of 2016, we completed the sale of Lockheed Martin Commercial Flight Training (LMCFT), which was classified as held for sale in the fourth quarter of 2015. LMCFT’s financial results are not material and there was no significant impact on our consolidated financial results as a result of completing the sale of LMCFT. Accordingly, LMCFT’s financial results are not classified in discontinued operations.

X
- Definition The entire disclosure for business combinations, including leverage buyout transactions (as applicable), and divestitures. This may include a description of a business combination or divestiture (or series of individually immaterial business combinations or divestitures) completed during the period, including background, timing, and assets and liabilities recognized and reclassified or sold. This element does not include fixed asset sales and plant closings. + References No definition available. + Details
Name: | us-gaap_MergersAcquisitionsAndDispositionsDisclosuresTextBlock
Namespace Prefix: | us-gaap_
Data Type: | nonnum:textBlockItemType
Balance Type: | na
Period Type: | duration