Business Divestitures and Assets Sales

6 Months Ended

Jul. 03, 2020

Discontinued Operations and Disposal Groups [Abstract]

Business Divestitures and Assets Sales

Note C — Business Divestitures and Assets Sales

Airport security and automation business. On May 4, 2020, we completed the divestiture of our airport security and automation business to Leidos, Inc. for $1 billion (net cash proceeds of $951 million after selling costs and estimated purchase price adjustments), subject to final customary purchase price adjustments as set forth in the definitive sale agreement, and recognized a pre-tax loss of $26 million, which is included in the “Engineering, selling and administrative expenses” line item in our Condensed Consolidated Statement of Income (Unaudited). The airport security and automation business provides solutions used by the aviation and transportation industries, regulatory and customs authorities, government and law enforcement agencies and commercial and other high-security facilities. The operating results of the airport security and automation business through the date of divestiture are reported as part of our Aviation Systems segment. The airport security and automation business had a net loss before income taxes of $3 million for the quarter ended July 3, 2020 and net income before income taxes of $9 million for the two quarters ended July 3, 2020.

Because the then-pending divestiture of the airport security and automation business would represent the disposal of a portion of a reporting unit within our Aviation Systems segment, we assigned $531 million of goodwill to the airport security and automation business disposal group on a relative fair value basis. In connection with the preparation of our financial statements for the quarter ended April 3, 2020, we tested goodwill assigned to the disposal group and goodwill assigned to the retained businesses of the reporting unit for impairment and concluded that no goodwill impairment existed at the time the held for sale criteria were met in late January 2020. However, indicators of potential impairment of goodwill related to the retained businesses of the reporting unit were present at April 3, 2020 and July 3, 2020 due to the downturn in the commercial aviation market that resulted from the novel COVID-19 strain of coronavirus (“COVID-19”) pandemic and its impact on global air traffic and customer demand. See Note K — Goodwill and Other Intangible Assets in these Notes for additional information regarding goodwill impairment.

Applied Kilovolts and Analytical Instrumentation business. On May 15, 2020, we completed the divestiture of our Applied Kilovolts and Analytical Instrumentation business for net cash proceeds of $12 million, after selling costs and estimated purchase price adjustments, subject to final customary purchase price adjustments as set forth in the definitive sale agreement. The operating results of the Applied Kilovolts and Analytical Instrumentation business through the date of divestiture are reported as part of our Space and Airborne Systems segment. Income before income taxes for the Applied Kilovolts and Analytical Instrumentation business was not material for the quarter or two quarters ended July 3, 2020.

In connection with the preparation of our financial statements for the quarter ended April 3, 2020, we tested goodwill assigned to the Applied Kilovolts and Analytical Instrumentation business disposal group and goodwill assigned to the retained businesses of the reporting unit for impairment and concluded that goodwill related to the disposal group was impaired. As a result, we recorded a non-cash impairment charge of $5 million, which is included in the “Impairment of goodwill and other assets” line item in our Condensed Consolidated Statement of Income (Unaudited) for the two quarters ended July 3, 2020.

EOTech business. On March 20, 2020, we entered into a definitive agreement to sell our EOTech business for $42 million, subject to customary purchase price adjustments and customary closing conditions as set forth in the definitive agreement. The EOTech business, which is reported as part of our Communication Systems segment, manufactures holographic sighting systems, magnified field optics and accessories for military, law enforcement and commercial markets around the world. The assets and liabilities of the EOTech business disposal group were classified as held for sale in our Condensed Consolidated Balance Sheet (Unaudited) at July 3, 2020.

In connection with the preparation of our financial statements for the quarter ended April 3, 2020, we tested goodwill assigned to the EOTech business disposal group and goodwill assigned to the retained businesses of the reporting unit for impairment and concluded that no goodwill impairment existed at the time the held for sale criteria were met. The carrying amounts of assets and liabilities of the EOTech business disposal group that were classified as held for sale in our Condensed Consolidated Balance Sheet (Unaudited) at July 3, 2020 were $46 million and $7 million, respectively. We completed the sale of the EOTech business on July 31, 2020.

Other AS Disposal Group. During the quarter ended July 3, 2020, we determined the criteria to be classified as held for sale were met with respect to another business within our Aviation Systems segment – the other AS disposal group. The income before income taxes of the other AS disposal group were not material for the quarter and two quarters ended July 3, 2020.

Because the potential divestiture of the other AS disposal group would represent the disposal of a portion of a reporting unit 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 recognized a $28 million loss to reduce the assets of the other AS disposal group to fair value, which included a non-cash goodwill impairment charge of $14 million (based on the excess of the carrying value of the business over estimated net cash proceeds, after estimated purchase price adjustments) and a $14 million non-cash remeasurement loss to reduce the remaining assets to fair value. These charges are included in the “Impairment of goodwill and other assets” and “Engineering, selling and administrative expenses” line items in our Condensed

Consolidated Statement of Income (Unaudited) for the quarter ended July 3, 2020. The carrying amounts of assets and liabilities of the other AS disposal group that were classified as held for sale in our Condensed Consolidated Balance Sheet (Unaudited) at July 3, 2020 were $42 million and $14 million, respectively. We expect to complete the sale of the other AS disposal group by the end of 2020.

Harris Night Vision. On September 13, 2019, we completed the sale of the Harris Night Vision business, a global supplier of high-performance, vision-enhancing products for U.S. and allied military and security forces and commercial customers, for $350 million (net cash proceeds of $343 million after selling costs and purchase price adjustments), subject to final customary purchase price adjustments pursuant to a definitive agreement we entered into on April 4, 2019 as part of the regulatory process in connection with the L3Harris Merger, and recognized a pre-tax gain of $229 million. During the quarter ended July 3, 2020, we finalized the purchase price adjustments and recognized a non-cash adjustment of $12 million related to working capital, which decreased the gain initially recognized.

Through fiscal 2019, the Harris Night Vision business was reported as part of our former Communication Systems segment. As a result of the then-pending divestiture, the Harris Night Vision business was not included in any of our new business segments and, consequently, the operating results of the business are included in “Other non-reportable business segments” for the quarter and two quarters ended June 28, 2019 in this Report. Income before income taxes for the Harris Night Vision business was $8 million and $14 million for the quarter and two quarters ended June 28, 2019, respectively.

For purposes of allocating goodwill to the disposal groups above, we determined the fair value of each disposal group based on the respective negotiated selling price (or estimated net cash proceeds, in the case of no negotiated selling price), and the fair value of the retained businesses of the respective 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. 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 1: “Significant Accounting Policies” in the Notes to Consolidated Financial Statements in our Fiscal Transition Period Form 10-KT for additional information regarding the fair value hierarchy.