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Business Combination
3 Months Ended
Sep. 27, 2019
Business Combinations [Abstract]  
Business Combination
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, the first day of the quarter ended September 27, 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. L3 generated calendar 2018 revenue of approximately $10 billion.
As a result of the L3Harris Merger, L3Harris is an agile global aerospace and defense technology innovator, delivering end-to-end solutions that meet customers’ mission-critical needs, with approximately 50,000 employees and customers in 130 countries. We provide advanced defense and commercial technologies across air, land, sea, space and cyber domain.
Approximately 104 million shares of L3Harris common stock were issued to L3 shareholders following the completion of the L3Harris Merger. The trading price of L3Harris common stock was $189.13 per share as of the Closing Date. In addition, 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. Due to the timing of the L3Harris Merger relative to its size and complexity, our accounting for the L3Harris Merger is preliminary. The acquisition-date fair value estimates for consideration transferred, identifiable assets acquired, liabilities assumed and noncontrolling interests 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).
Our preliminary calculation of estimated consideration transferred is summarized below:
 
(In millions, except exchange ratio and per share amounts)
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 nonconrolling interests is summarized below:
 
(In millions)
Receivables
$
849

Contract assets
1,708

Inventories
1,056

Other current assets
517

Property, plant and equipment
1,176

Operating lease right-of-use assets
704

Goodwill
15,423

Other intangible assets
6,768

Other non-current assets
327

Total assets acquired
$
28,528

 
 
Accounts payable
$
898

Contract liabilities
722

Other current liabilities
772

Operating lease liabilities
715

Defined benefit plans
1,411

Long-term debt, net
3,548

Other long-term liabilities
1,661

Total liabilities assumed
9,727

Net assets acquired
18,801

Noncontrolling interests
(151
)
Total net consideration transferred
$
18,650


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. As described in more detail in Note X — Business Segment Information in these Notes, we adjusted our segment reporting to reflect our new organizational structure commencing with the quarter ended September 27, 2019. Under the revised reporting structure, our Integrated Mission Systems segment is comprised almost entirely of L3 operating businesses, as of the acquisition date, whereas our other segments are comprised of both L3 and Harris operating businesses.
See Note K — Goodwill and Other Intangible Assets in these Notes for more information regarding the preliminary allocation of goodwill by reportable business segment under the revised reporting structure.
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
 
$
3,549

Customer relationships (Commercial)
16
 
561

Trade names — Divisions
10
 
162

Developed technology
8
 
630

Total identifiable intangible assets subject to amortization

14
 
4,902

Trade names — Corporate
indefinite
 
1,803

In-process research and development
n/a
 
63

Total identifiable intangible assets
 
 
$
6,768


During the quarter ended September 27, 2019, we recorded $373 million of L3Harris Merger-related charges, consisting of restructuring, integration, transaction and other costs as follows:
$74 million of transaction costs, recognized as incurred;
$35 million of integration costs, recognized as incurred;
$61 million of equity award acceleration charges, recognized upon change in control;
$92 million of additional cost of sales related to the fair value step-up in inventory sold; and
$111 million of restructuring costs as discussed in Note E — Restructuring and Other Exit Costs in these Notes.
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. All of the costs above were recorded in the “Engineering, selling and administrative expenses” line item in our Condensed Consolidated Statement of Income (Unaudited), except for the $92 million of additional cost of sales related to the fair value step-up in inventory sold, which is included in the “Cost of product sales and services” 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 September 28, 2018 as if the L3Harris Merger had been completed as of the beginning of the quarter ended September 28, 2018, 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 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.
 
September 28, 2018
 
 
 
(In millions)
Revenue from product sales and services — as reported
$
1,542

Revenue from product sales and services — pro forma

$
4,018

Income from continuing operations — as reported
$
216

Income from continuing operations — pro forma
$
373


For the quarter ended September 27, 2019, our Condensed Consolidated Statement of Income (Unaudited) includes the results of L3 operating businesses from the Closing Date, with total revenue of approximately $2.67 billion (net of intercompany sales between L3 operating businesses) and income from continuing operations before income taxes of approximately $0.19 billion (including $92 million of additional cost of sales related to the fair value step-up in inventory sold and $101 million of restructuring charges for workforce reductions associated with the L3Harris Merger).