ACQUISITIONS AND DIVESTITURES, GOODWILL, AND INTANGIBLE ASSETS

CSRA Acquisition

On April 3, 2018, we acquired 100% of the outstanding shares of CSRA Inc. (CSRA) for $41.25 per share in cash. CSRA has been combined with General Dynamics Information Technology (GDIT) to create a premier provider of IT solutions to the defense, intelligence and federal civilian markets. Except where otherwise noted in the Notes to Unaudited Consolidated Financial Statements, changes in balances and activity were generally driven by the CSRA acquisition.

Purchase Price and Fair Value of Net Assets Acquired. The cash purchase price totaled $9.7 billion and consisted of the following:



CSRA shares outstanding (in millions)	165.4
Cash consideration per CSRA share	$	41.25
Cash paid to purchase outstanding CSRA shares	$	6,825
Cash paid to extinguish CSRA debt	2,846
Cash settlement of outstanding CSRA stock options and restricted stock units	78
Total purchase price	$	9,749

The following table summarizes the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the acquisition date, with the excess recorded as goodwill:



Cash and equivalents	$	45
Accounts receivable	145
Unbilled receivables	718
Other current assets	290
Property, plant and equipment, net	684
Intangible assets, net	2,069
Goodwill	7,792
Other noncurrent assets	20
Total assets	$	11,763
Account payable	$	(136	)
Customer advances and deposits	(151		)
Current capital lease obligation	(51		)
Other current liabilities	(540		)
Noncurrent capital lease obligation	(207		)
Noncurrent deferred tax liability	(406		)
Other noncurrent liabilities	(523		)
Total liabilities	$	(2,014	)
Net assets acquired	$	9,749

During the quarter ended September 30, 2018, we continued to obtain information to refine the estimated fair values. The additional information obtained during the quarter did not result in any material adjustments. However, these provisional amounts are subject to change as we complete the valuations throughout the measurement period, which will extend throughout 2018.

The $2.1 billion of estimated acquired intangible assets consists of acquired backlog and probable follow-on work and associated customer relationships (contract and program intangible assets), with a weighted-average life of 17 years. The intangible assets will be amortized using an accelerated method, which approximates the pattern of how the economic benefit is expected to be used. Under this method, approximately 50% of the aggregate value of the intangible assets will be amortized within six years. We expect to record amortization expense associated with these intangible assets over the next five years as follows:



2018 (9 months post-acquisition)	$	188
2019	204
2020	195
2021	154
2022	136

Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets acquired, and is attributable primarily to expected synergies, economies of scale and the assembled workforce of CSRA. Approximately $490 of this goodwill is pre-acquisition goodwill deductible for income tax purposes over its remaining tax life.

CSRA’s operating results have been included with our reported results since the acquisition date. As we immediately began integrating CSRA with GDIT following the acquisition, it is becoming increasingly difficult to separate the results of legacy CSRA from those of the combined entity. Approximately $1.2 billion and $2.5 billion of revenue, $130 and $265 of operating earnings, and $140 and $285 of pretax earnings from legacy CSRA were included in our unaudited Consolidated Statement of Earnings for the three- and nine-month periods ended September 30, 2018, respectively. These amounts exclude amortization of intangible assets and acquisition financing.

In addition, we have recognized approximately $75 of one-time, acquisition-related costs, reported in operating costs and expenses and other income (expense) in the unaudited Consolidated Statement of Earnings.

Pro Forma Information. The following pro forma information presents our consolidated revenue and earnings from continuing operations as if the acquisition of CSRA and the related financing transactions had occurred on January 1, 2017:



	Three Months Ended				Nine Months Ended
	September 30, 2018		October 1, 2017		September 30, 2018		October 1, 2017
Revenue	$	9,094	$	8,799	$	27,156	$	26,296
Earnings from continuing operations	872		776		2,470		2,213
Diluted earnings per share from continuing operations	$	2.92	$	2.55	$	8.23	$	7.24

The pro forma information was prepared by combining our reported historical results with the historical results of CSRA for the pre-acquisition periods. In addition, the reported historical amounts were adjusted for the following items, net of associated tax effects:


•	The impact of acquisition financing.


•	The removal of certain CSRA operations we were required by a government customer to dispose of to address an organizational conflict of interest with respect to services provided to the customer. We completed the sale of these operations in the third quarter of 2018.


•	The removal of CSRA’s historical pre-acquisition intangible asset amortization expense and debt-related interest expense.


•	The impact of intangible asset amortization expense assuming our current estimate of fair value was applied on January 1, 2017.


•	The payment of acquisition-related costs assuming they were incurred on January 1, 2017.

The pro forma information is based on the preliminary amounts allocated to the estimated fair value of net assets acquired and may be revised as the provisional amounts change. The pro forma information does not reflect the realization of expected cost savings or synergies from the acquisition, and does not reflect what our combined results of operations would have been had the acquisition occurred on January 1, 2017.

Other Acquisitions and Divestitures

In addition to the acquisition of CSRA, we acquired two businesses in the first nine months of 2018 for an aggregate of $335: Hawker Pacific, a leading provider of integrated aviation solutions across Asia Pacific and the Middle East, in our Aerospace segment, and a provider of specialized transmitters and receivers in our Mission Systems segment. In 2017, we acquired four businesses for an aggregate of $399: a fixed-base operation (FBO) in our Aerospace segment; a provider of mission-critical support services in our Information Technology segment; and a manufacturer of electronics and communications products and a manufacturer of signal distribution products in our Mission Systems segment.

The operating results of these acquisitions have been included with our reported results since the respective closing dates. The purchase prices of the acquisitions have been allocated to the estimated fair value of net tangible and intangible assets acquired, with any excess purchase price recorded as goodwill.

In the first nine months of 2018, we completed the sale of a commercial health products business in our Information Technology segment and the sale of certain CSRA operations we were required by a government customer to dispose of to address an organizational conflict of interest with respect to services provided to the customer. The proceeds from the sales are included in other investing activities in the unaudited Consolidated Statement of Cash Flows.

Goodwill

The changes in the carrying amount of goodwill by reporting unit were as follows:



	Aerospace			Combat Systems			Information Systems and Technology			Information Technology			Mission Systems			Marine Systems		Total Goodwill
December 31, 2017 (a)	$	2,638		$	2,677		$	6,302		$	—		$	—		$	297	$	11,914
Acquisitions/ divestitures (b)	—			—			16			—			—			—		16
Other (c)	40			(14		)	(1		)	—			—			—		25
April 1, 2018 (a)	2,678			2,663			6,317			—			—			297		11,955
Change in reporting unit composition (d)	—			—			(6,317		)	2,076			4,241			—		—
Acquisitions/ divestitures (b)	148			—			—			7,796			1			—		7,945
Other (c)	(37		)	(21		)	—			(347		)	(9		)	—		(414		)
September 30, 2018 (e)	$	2,789		$	2,642		$	—		$	9,525		$	4,233		$	297	$	19,486

(a)Goodwill in the Information Systems and Technology reporting unit is net of $1.9 billion of accumulated impairment losses.

(b)Includes adjustments during the purchase price allocation period. Activity in the first quarter of 2018 also includes an allocation of goodwill associated with the sale of the commercial health products business discussed above.

(c)Consists primarily of adjustments for foreign currency translation. Activity in the six-month period ended September 30, 2018, also includes an allocation of goodwill in our Information Technology reporting unit associated with the operations classified as held for sale on the unaudited Consolidated Balance Sheet on September 30, 2018.

(d)Concurrent with the acquisition of CSRA, we reorganized our Information Systems and Technology operating segment into the Information Technology and Mission Systems segments. See Note A for further discussion of the segment reorganization. This reorganization similarly changed the composition of our reporting units. Accordingly, goodwill of the Information Systems and Technology reporting unit was reassigned to the Information Technology and Mission Systems reporting units using a relative fair value allocation approach as of the date of the reorganization.

(e)Goodwill in the Information Technology and Mission Systems reporting units is net of $526 and $1.3 billion of accumulated impairment losses, respectively.

Intangible Assets

Intangible assets consisted of the following:



	Gross Carrying Amount (a)		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount (a)		Accumulated Amortization			Net Carrying Amount
	September 30, 2018							December 31, 2017
Contract and program intangible assets (b)	$	3,792	$	(1,473	)	$	2,319	$	1,684	$	(1,320	)	$	364
Trade names and trademarks	468		(173		)	295		465		(160		)	305
Technology and software	167		(115		)	52		137		(105		)	32
Other intangible assets	155		(154		)	1		155		(154		)	1
Total intangible assets	$	4,582	$	(1,915	)	$	2,667	$	2,441	$	(1,739	)	$	702


(a)	Change in gross carrying amounts consists primarily of adjustments for acquired intangible assets and foreign currency translation.


(b)	Consists of acquired backlog and probable follow-on work and associated customer relationships.

Amortization expense was $86 and $190 for the three- and nine-month periods ended September 30, 2018, and $19 and $57 for the three- and nine-month periods ended October 1, 2017.