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ACQUISITIONS AND DIVESTITURES | 6 Months Ended
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Jun. 28, 2024
Business Combination, Asset Acquisition, and Joint Venture Formation [Abstract] |
ACQUISITIONS AND DIVESTITURES | NOTE O: ACQUISITIONS AND DIVESTITURES Acquisition of AJRD On July 28, 2023, we acquired AJRD, a technology-based engineering and manufacturing company that develops and produces missile solutions and technologies for strategic defense, missile defense, and hypersonic and tactical systems, as well as space propulsion and power systems for national security space and exploration missions. The acquisition provides us access to a new market. We acquired 100% of AJRD for a total net purchase price of $4,715 million. The acquisition was financed through the issuance and sale of $3.25 billion aggregate principal amount of new long-term fixed-rate debt consisting of the 5.4% 2027 Notes, the 5.4% 2033 Notes and the 5.6% 2053 Notes (collectively, the “AJRD Notes”) and a draw down under the 2023 Credit Agreement. See Note 8: Debt and Credit Arrangements in our Fiscal 2023 Form 10-K for further information regarding the financing of the AJRD acquisition. Net assets and results of operations of AJRD are reflected in our financial results commencing on July 28, 2023, the acquisition date, and are reported in our AR segment, which is also the AR reporting unit, except for certain assets and liabilities recorded at corporate headquarters. We accounted for the acquisition of AJRD using the acquisition method of accounting, which required us to measure identifiable assets acquired and liabilities assumed in the acquiree at their fair values as of the acquisition date, with the excess of the consideration transferred over those fair values recorded as goodwill. Our preliminary fair value estimates and assumptions are subject to change as we obtain additional information over the measurement period and our measurement of certain assets and contingencies, such as intangible assets, property, plant and equipment, real estate held for development and leasing, loss contracts, environmental matters and related deferred tax impacts remain preliminary for completion of the related valuations. As of the acquisition date, the fair value of consideration transferred consisted of the following:
(In millions) | July 28, 2023
Cash consideration paid for AJRD outstanding common stock & equity awards | $ | 4,748 |
AJRD debt settled by L3Harris | 257 |
Cash consideration paid | 5,005 |
Less cash acquired | (290) |
Fair value of consideration transferred | $ | 4,715 |
The following table summarizes the preliminary allocation of the fair value of consideration transferred to assets acquired and liabilities assumed as of the acquisition date:
| July 28, 2023
(In millions) | Preliminary |  | Measurement Period Adjustments, Net(1) |  | Preliminary Adjusted
Receivables | $ | 156 |  |  | $ | — |  |  | $ | 156 |
Contract assets | 338 |  |  | (141) |  |  | 197 |
Inventories | 14 |  |  | — |  |  | 14 |
Other current assets | 117 |  |  | 22 |  |  | 139 |
Property, plant and equipment | 574 |  |  | 10 |  |  | 584 |
Goodwill | 2,348 |  |  | 513 |  |  | 2,861 |
Other intangible assets | 2,860 |  |  | — |  |  | 2,860 |
Other non-current assets | 609 |  |  | 66 |  |  | 675 |
Total assets acquired | $ | 7,016 |  |  | $ | 470 |  |  | $ | 7,486 |
Current portion of long-term debt, net | $ | 1 |  |  | $ | — |  |  | $ | 1 |
Accounts payable | 145 |  |  | — |  |  | 145 |
Contract liabilities | 310 |  |  | 152 |  |  | 462 |
Compensation and benefits | 116 |  |  | 1 |  |  | 117 |
Income taxes payable | 6 |  |  | (3) |  |  | 3 |
Other accrued items | 278 |  |  | 335 |  |  | 613 |
Long-term debt, net | 41 |  |  | — |  |  | 41 |
Deferred income taxes | 398 |  |  | (41) |  |  | 357 |
Other long-term liabilities | 1,006 |  |  | 26 |  |  | 1,032 |
Total liabilities assumed | $ | 2,301 |  |  | $ | 470 |  |  | $ | 2,771 |
Fair value of consideration transferred | $ | 4,715 |  |  | $ | — |  |  | $ | 4,715 |
_______________ (1)Fair value adjustments during the measurement period primarily related to EAC updates for circumstances existing at the acquisition date, including updates to the forward loss provision and off-market customer contract reserve described below, refinements to the fair value of fixed assets, as well as corresponding adjustments to the deferred tax liability account which was partially offset by the release of a portion of the uncertain tax position previously recorded by AJRD. We determined the fair value of assets acquired and liabilities assumed by using available market information and various valuation methods that require judgment related to estimates. Our accounting for the acquisition of AJRD remains preliminary. Amounts recorded associated with these assets and liabilities are based on calculations and estimates. Our estimates and assumptions are subject to change as we obtain additional information during the measurement period (up to one year from the acquisition date). Any potential adjustments made could be material in relation to the values presented above. Intangible Assets. All finite-lived intangible assets identified in the AJRD acquisition are subject to amortization. The preliminary fair value and weighted-average amortization period of identifiable intangible assets acquired as of the acquisition date are as follows:
| Total |  | Useful Lives
| (In millions) |  | (In Years)
Customer relationships: |  |  |
Backlog | $ | 355 |  |  | 3
Government programs | 2,385 |  |  | 15 - 20
Total customer relationships | 2,740 |  |  |
Trade names | 120 |  |  | 15
Total identifiable intangible assets acquired | $ | 2,860 |  |  |
The fair value of intangible assets is estimated using the relief from royalty method for the acquired trade names and the multi-period excess earnings method for the acquired customer relationships. Both of these level 3 fair value methods are income-based valuation approaches, which require judgment to estimate appropriate discount rates, royalty rates related to the trade names intangible assets, revenue growth attributable to the intangible assets and remaining useful lives. Forward Loss Provision. We have recorded a preliminary forward loss provision of $357 million which was included in the “Other accrued items” line item in our Condensed Consolidated Balance Sheet. Since the completion of the acquisition of AJRD, we have undertaken significant operational efforts to further understand the root cause of identified preexisting manufacturing and supply chain challenges resulting in delivery delays, primarily related to certain Missile Solutions programs. We have identified operational activities necessary to remedy these challenges and inefficiencies and the incremental costs required as compared to its initial estimates and actual costs incurred. The incremental forward loss provisions relate to the increased cost estimates of labor and material to remedy the underlying preexisting technical and supply chain challenges. These cost increases impacted both cost-plus and fixed-price contracts in proportions that are consistent with the ratio of the overall AJRD revenue by contract type. The forward loss provisions will be recognized as a reduction to cost of sales as we incur actual costs associated with these estimates in to satisfying the associated performance obligations. There will be no net impact on our Condensed Consolidated Statement of Operations. We recognized $47 million and $61 million of amortization related to the forward loss provision in the quarter and two quarters ended June 28, 2024, respectively. Off-market Customer Contracts. We have identified certain customer contractual obligations as of the acquisition date with economic returns that are higher or lower than could be realized in market transactions and have recorded assets or liabilities for the preliminary acquisition date fair value of the off-market components. The preliminary acquisition date fair value of the off-market components is a net liability of $194 million, consisting of $49 million and $145 million included in the “Other accrued items” and “Other long-term liabilities” line items in our Condensed Consolidated Balance Sheet, respectively, and excludes any amounts already recognized in forward loss provisions (see discussion in the preceding paragraph). Additional provisions to off-market customer contracts relate to labor and material cost increases primarily associated with supply chain and manufacturing challenges and inefficiencies. These cost increases impacted both cost-plus and fixed-price contracts in proportions that are consistent with the ratio of the overall AJRD revenue by contract type. We measured the fair value of these components as the amount by which the terms of the contract with the customer deviates from the terms that a market participant could have achieved at the acquisition date. The off-market components of these contracts will be recognized as an increase to revenue as we incur costs to satisfy the associated performance obligations. We recognized $22 million and $30 million of amortization related to off-market contract liabilities in the quarter and two quarters ended June 28, 2024, respectively. Goodwill. The $2,861 million of goodwill recognized is attributable to AJRD’s market presence as one of the two primary providers of advanced propulsion and power systems for nearly every major U.S. government space and missile program, the assembled workforce and established operating infrastructure. The acquired goodwill is not tax deductible. See Note E: Goodwill and Other Intangible Assets in these Notes for further information. Financial Results. See Note P: Business Segment Information in these Notes for the AR segment financial results for the quarter and two quarters ended June 28, 2024. Acquisition-Related Costs. Acquisition-related costs have been expensed as incurred and are included in the “General and administrative expenses” line item in our Condensed Consolidated Statement of Operations. In connection with the AJRD acquisition, we recorded transaction and integration costs of $16 million and $44 million for the quarter and two quarters ended June 28, 2024, respectively, and $13 million and $22 million for the quarter and two quarters ended June 30, 2023, respectively Pending Divestiture of Commercial Aviation Solutions (“CAS Disposal Group”) During the quarter ended December 29, 2023, we entered into a definitive agreement to sell our CAS Disposal Group for a cash purchase price of $700 million, with additional contingent consideration of up to $100 million, subject to customary purchase price adjustments and closing conditions as set forth in the agreement. As of June 28, 2024, the fair value less estimated costs to sell of the CAS Disposal Group was $875 million, inclusive of consideration related to noncontrolling interest and accumulated other comprehensive income. Income before income taxes for the quarter and two quarters ended June 28, 2024 was $23 million and $44 million, respectively, and for the quarter and two quarters ended June 30, 2023 was $15 million and $32 million, respectively. The CAS Disposal Group, which is part of our IMS segment, provides integrated aircraft avionics, pilot training and data analytics services for the commercial aviation industry. The transaction is expected to close in fiscal 2024. In connection with the preparation of our financial statements for fiscal 2023, we concluded that goodwill related to the CAS Disposal Group was impaired and we recorded a non-cash impairment charge of $296 million, which is included in the “Impairment of goodwill and other assets” line item in our Consolidated Statement of Operations in our Fiscal 2023 Form 10-K. See Note 6: Goodwill and Intangible Assets in our Fiscal 2023 Form 10-K. Additionally, we recognized a pre-tax loss of $77 million included in the “Asset group and business divestiture-related (losses) gains, net” line item in our Consolidated Statement of Operations in our Fiscal 2023 Form 10-K. During the quarter ended June 28, 2024, we recognized an additional pre-tax loss of $15 million, due to increases in the net assets of the disposal group and costs to sell, partially offset by an increase in the fair value of the disposal group. The loss is included in the General and administrative expenses” line item in our Condensed Consolidated Statement of Operations for the quarter and two quarters ended June 28, 2024. The carrying amounts of assets and liabilities of the CAS Disposal Group classified as held for sale in our Condensed Consolidated Balance Sheet were as follows:
(In millions) | June 28, 2024 |  | December 29, 2023 |  |
Receivables, net | $ | 96 |  |  | $ | 80 |  |  |
Contract assets | 41 |  |  | 43 |  |  |
Inventories | 165 |  |  | 145 |  |  |
Other current assets | 22 |  |  | 33 |  |  |
Property, plant and equipment, net | 42 |  |  | 41 |  |  |
Goodwill | 534 |  |  | 534 |  |  |
Other intangible assets, net | 262 |  |  | 263 |  |  |
Other non-current assets | 48 |  |  | 44 |  |  |
Valuation allowance | (83) |  |  | (77) |  |  |
Total assets held for sale | $ | 1,127 |  |  | $ | 1,106 |  |  |
Accounts payable | $ | 86 |  |  | $ | 111 |  |  |
Contract liabilities | 44 |  |  | 48 |  |  |
Compensation and benefits | 8 |  |  | 11 |  |  |
Other accrued items | 43 |  |  | 38 |  |  |
Other long-term liabilities | 62 |  |  | 64 |  |  |
Total liabilities held for sale | $ | 243 |  |  | $ | 272 |  |  |
Divestiture of Antenna Disposal Group On May 31, 2024, we completed the divestiture of our Antenna Disposal Group, which provides a variety of airborne and ground-based antennas and test equipment, to Kanders & Company, Inc. for net cash proceeds of $166 million (after selling costs and purchase price adjustments) and a $25 million note receivable, included in Other non-current assets line item in our Condensed Consolidated Balance Sheet at June 28, 2024. The carrying amounts of assets and liabilities included in the Antenna Disposal Group sale on May 31, 2024 were $265 million and $65 million, respectively. During the quarter ended June 28, 2024, $93 million of goodwill was assigned to the Antenna Disposal Group on a relative fair value basis. In connection with the preparation of our financial statements for the quarter ended June 28, 2024, we tested goodwill assigned to the Antenna Disposal Group and goodwill assigned to the retained businesses of the SAS reporting unit for impairment and concluded that goodwill related to the Antenna Disposal Group was impaired. As a result, we recorded a non-cash charge for impairment of $14 million included in the “General and administrative expenses” line item in our Condensed Consolidated Statement of Operations for the quarter and two quarters ended June 28, 2024. See Note E: Goodwill and Other Intangible Assets in these Notes for more information. In connection with the sale, we recognized a pre-tax loss of $9 million included in the “General and administrative expenses” line item in our Condensed Consolidated Statement of Operations for the quarter and two quarters ended June 28, 2024. Operating results of the Antenna Disposal Group reported in our SAS segment through the date of divestiture were not material for the quarter and two quarters ended June 28, 2024 or the quarter and two quarters ended June 30, 2023. Divestiture of Visual Information Solutions (“VIS”) On April 6, 2023, we completed the sale of VIS for a sale price of $70 million and recognized a pre-tax gain of $26 million included in the “General and administrative expenses” line item in our Consolidated Statement of Operations for the fiscal year ended December 29, 2023 in our Fiscal 2023 Form 10-K. After selling costs and purchase price adjustments, the net cash proceeds for the sale of VIS were $71 million. The operating results of VIS were reported in the SAS segment through the date of divestiture. The carrying amounts of the assets and liabilities of VIS were classified as held for sale in our Consolidated Balance Sheet as of December 30, 2022 in our Fiscal 2023 Form 10-K. Fair Value of Businesses and Goodwill Allocation For purposes of allocating goodwill to the disposal groups that represent a portion of a reporting unit, we determine the fair value of each disposal group based on the respective negotiated selling price, and the fair value of the retained businesses of the respective reporting unit based on a combination of market-based and income-based valuation techniques, utilizing quoted market prices, comparable publicly reported transactions and projected discounted cash flows. These fair value determinations are categorized as level 3 in the fair value hierarchy due to their use of internal projections and unobservable measurement inputs. See Note E: Goodwill and Other Intangible Assets and Note K: Fair Value Measurements in these Notes for additional information.

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- 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 Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 805 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/805/tableOfContent Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 205 -SubTopic 20 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/205-20/tableOfContent + Details
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