LDOS-Q3-11/1/2013
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________
Form 10-Q
_____________________________________________________________
(Mark One)
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 1, 2013
or
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
_____________________________________________________________
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| | | | | | |
Commission File Number | | Exact Name of Registrant as Specified in its Charter, Address of Principal Executive Offices and Telephone Number | | State or other jurisdiction of incorporation or organization | | I.R.S. Employer Identification No. |
001-33072 | | Leidos Holdings, Inc. | | Delaware | | 20-3562868 |
| | 11951 Freedom Drive, Reston, Virginia 20190 | | | | |
| | (571) 526-6000 | | | | |
000-12771 | | Leidos, Inc. | | Delaware | | 95-3630868 |
| | 11951 Freedom Drive, Reston, Virginia 20190 | | | | |
| | (571) 526-6000 | | | | |
_____________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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Leidos Holdings, Inc. | Yes x No o |
Leidos, Inc. | Yes x No o |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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Leidos Holdings, Inc. | Yes x No o |
Leidos, Inc. | Yes x No o |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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| | | | | | | | |
Leidos Holdings, Inc. | Large accelerated filer | ý | Accelerated filer | ¨ | Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
| | | | | | | | |
Leidos, Inc. | Large accelerated filer | ¨ | Accelerated filer | ¨ | Non-accelerated filer | ý | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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Leidos Holdings, Inc. | Yes o No x |
Leidos, Inc. | Yes o No x |
The number of shares issued and outstanding of each issuer’s classes of common stock as of November 26, 2013 was as follows: |
| |
Leidos Holdings, Inc. | 85,627,012 shares of common stock ($.0001 par value per share) |
Leidos, Inc. | 5,000 shares of common stock ($.01 par value per share) held by Leidos Holdings, Inc. |
Explanatory Note
This Quarterly Report on Form 10-Q is a combined report being filed by Leidos Holdings, Inc. (Leidos) and Leidos, Inc. Leidos is a holding company and Leidos, Inc. is a direct, 100%-owned subsidiary of Leidos. Each of Leidos and Leidos, Inc. is filing on its own behalf all of the information contained in this report that relates to such company. Where information or an explanation is provided that is substantially the same for each company, such information or explanation has been combined in this report. Where information or an explanation is not substantially the same for each company, separate information and explanation has been provided. In addition, separate condensed consolidated financial statements for each company, along with combined notes to the condensed consolidated financial statements, are included in this report. Unless indicated otherwise, references in this report to the “Company”, “we”, “us” and “our” refer collectively to Leidos Holdings, Inc., Leidos, Inc. and its consolidated subsidiaries.
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
LEIDOS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| November 1, 2013 | | October 31, 2012 | | November 1, 2013 | | October 31, 2012 |
| (in millions, except per share amounts) |
Revenues | $ | 1,420 |
| | $ | 1,673 |
| | $ | 4,486 |
| | $ | 4,899 |
|
Costs and expenses: | | | | | | | |
Cost of revenues | 1,224 |
| | 1,434 |
| | 3,903 |
| | 4,218 |
|
Selling, general and administrative expenses | 116 |
| | 139 |
| | 360 |
| | 367 |
|
Bad debt expense | 43 |
|
| — |
|
| 45 |
|
| — |
|
Intangible asset impairment losses | 19 |
| | — |
| | 51 |
| | — |
|
Separation transaction and restructuring expenses | 25 |
| | — |
| | 58 |
| | — |
|
Operating (loss) income | (7 | ) | | 100 |
| | 69 |
| | 314 |
|
Non-operating income (expense): | | | | | | | |
Interest income | 5 |
| | 1 |
| | 15 |
| | 5 |
|
Interest expense | (21 | ) | | (20 | ) | | (59 | ) | | (73 | ) |
Other income, net | 2 |
| | 2 |
| | 3 |
| | 8 |
|
(Loss) income from continuing operations before income taxes | (21 | ) | | 83 |
| | 28 |
| | 254 |
|
Income tax benefit (expense) | 12 |
| | (28 | ) | | 1 |
| | (89 | ) |
(Loss) income from continuing operations | (9 | ) | | 55 |
| | 29 |
| | 165 |
|
Discontinued operations (Note 2): | | | | | | | |
Income from discontinued operations before income taxes | 21 |
| | 94 |
| | 158 |
| | 279 |
|
Income tax expense | (15 | ) | | (37 | ) | | (67 | ) | | (105 | ) |
Income from discontinued operations | 6 |
| | 57 |
| | 91 |
| | 174 |
|
Net (loss) income | $ | (3 | ) | | $ | 112 |
| | $ | 120 |
| | $ | 339 |
|
Earnings per share (Note 4): | | | | | | | |
Basic: | | | | | | | |
(Loss) income from continuing operations | $ | (0.11 | ) | | $ | 0.66 |
| | $ | 0.31 |
| | $ | 1.95 |
|
Income from discontinued operations | 0.07 |
| | 0.66 |
| | 1.08 |
| | 2.05 |
|
| $ | (0.04 | ) | | $ | 1.32 |
| | $ | 1.39 |
| | $ | 4.00 |
|
Diluted: | | | | | | | |
(Loss) income from continuing operations | $ | (0.11 | ) | | $ | 0.66 |
| | $ | 0.31 |
| | $ | 1.95 |
|
Income from discontinued operations | 0.07 |
| | 0.66 |
| | 1.08 |
| | 2.05 |
|
| $ | (0.04 | ) | | $ | 1.32 |
| | $ | 1.39 |
| | $ | 4.00 |
|
Cash dividends declared per share | $ | 0.32 |
| | $ | 0.48 |
| | $ | 5.28 |
| | $ | 1.44 |
|
See accompanying combined notes to condensed consolidated financial statements.
1
LEIDOS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| November 1, 2013 | | October 31, 2012 | | November 1, 2013 | | October 31, 2012 |
| (in millions) |
Net (loss) income | $ | (3 | ) | | $ | 112 |
| | $ | 120 |
| | $ | 339 |
|
Other comprehensive income, net of tax: | | | | | | | |
Foreign currency translation adjustments | — |
| | — |
| | — |
| | (1 | ) |
Deferred taxes | — |
| | — |
| | — |
| | 1 |
|
Foreign currency translation adjustments, net of tax | — |
| | — |
| | — |
| | — |
|
Pension liability adjustments | — |
| | — |
| | — |
| | 16 |
|
Deferred taxes | — |
| | — |
| | — |
| | (6 | ) |
Pension liability adjustments, net of tax | — |
| | — |
| | — |
| | 10 |
|
Total other comprehensive income, net of tax | — |
| | — |
| | — |
| | 10 |
|
Comprehensive income | $ | (3 | ) | | $ | 112 |
| | $ | 120 |
| | $ | 349 |
|
See accompanying combined notes to condensed consolidated financial statements.
2
LEIDOS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
| | | | | | | |
| November 1, 2013 | | January 31, 2013 |
| (in millions) |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 814 |
| | $ | 735 |
|
Receivables, net | 1,161 |
| | 1,168 |
|
Inventory, prepaid expenses and other current assets | 298 |
| | 342 |
|
Assets of discontinued operations | 13 |
| | 1,371 |
|
Total current assets | 2,286 |
| | 3,616 |
|
Property, plant and equipment (less accumulated depreciation and amortization of $340 million and $391 million at November 1, 2013 and January 31, 2013, respectively) | 473 |
| | 288 |
|
Intangible assets, net | 100 |
| | 178 |
|
Goodwill | 1,704 |
| | 1,704 |
|
Deferred income taxes | 10 |
| | 12 |
|
Other assets | 62 |
| | 77 |
|
| 4,635 |
| | 5,875 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable and accrued liabilities | $ | 782 |
| | $ | 787 |
|
Accrued payroll and employee benefits | 307 |
| | 357 |
|
Notes payable and long-term debt, current portion | 151 |
| | — |
|
Liabilities of discontinued operations | — |
| | 648 |
|
Total current liabilities | 1,240 |
| | 1,792 |
|
Notes payable and long-term debt, net of current portion | 1,330 |
| | 1,295 |
|
Other long-term liabilities | 182 |
| | 170 |
|
Commitments and contingencies (Notes 11 and 12) |
| |
|
Stockholders’ equity: | | | |
Common stock, $.0001 par value, 500 million shares authorized, 86 million shares issued and outstanding at November 1, 2013 and January 31, 2013, respectively | — |
| | — |
|
Additional paid-in capital | 1,735 |
| | 2,110 |
|
Retained earnings | 150 |
| | 510 |
|
Accumulated other comprehensive loss | (2 | ) | | (2 | ) |
Total stockholders’ equity | 1,883 |
| | 2,618 |
|
| $ | 4,635 |
| | $ | 5,875 |
|
See accompanying combined notes to condensed consolidated financial statements.
3
LEIDOS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | |
| Shares of common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Total |
| (in millions, except for share amounts) |
Balance at January 31, 2013 | 86 |
| | $ | 2,110 |
| | $ | 510 |
| | $ | (2 | ) | | $ | 2,618 |
|
Net income | — |
| | — |
| | 120 |
| | — |
| | 120 |
|
Other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | — |
|
Issuances of stock | — |
| | 30 |
| | — |
| | — |
| | 30 |
|
Shares repurchased and retired or withheld for tax withholdings on vesting of restricted stock | — |
| | (6 | ) | | (11 | ) | | — |
| | (17 | ) |
Cash dividends of $1.28 per share | — |
| | — |
| | (113 | ) | | — |
| | (113 | ) |
Special cash dividend of $4.00 per share | — |
| | — |
| | (356 | ) | | — |
| | (356 | ) |
Adjustments for income tax benefits from stock-based compensation | — |
| | (10 | ) | | — |
| | — |
| | (10 | ) |
Stock-based compensation (including discontinued operations of $21 million) | — |
| | 64 |
| | — |
| | — |
| | 64 |
|
Dividend received, net of contribution paid, from the separation of New SAIC | — |
| | 269 |
| | — |
| | — |
| | 269 |
|
Separation of New SAIC | — |
| | (722 | ) | | — |
| | — |
| | (722 | ) |
Balance at November 1, 2013 | 86 |
| | $ | 1,735 |
| | $ | 150 |
| | $ | (2 | ) | | $ | 1,883 |
|
See accompanying combined notes to condensed consolidated financial statements.
4
LEIDOS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
| | | | | | | |
| Nine Months Ended |
| November 1, 2013 | | October 31, 2012 |
| (in millions) |
Cash flows from operations: | | | |
Net income | $ | 120 |
| | $ | 339 |
|
Income from discontinued operations | (91 | ) | | (174 | ) |
Adjustments to reconcile net income to net cash provided by operations: | | | |
|
Depreciation and amortization | 66 |
| | 73 |
|
Stock-based compensation | 43 |
| | 42 |
|
Intangible asset impairment losses | 51 |
| | — |
|
Inventory write-down | 3 |
| | — |
|
Bad debt expense | 45 |
| | — |
|
Net gain on sales and disposals of assets | (9 | ) | | (7 | ) |
Other | 3 |
| | 3 |
|
Increase (decrease) in cash and cash equivalents, net of effects of acquisitions and dispositions, resulting from changes in: | |
| | |
|
Receivables | (139 | ) | | 211 |
|
Inventory, prepaid expenses and other current assets | 30 |
| | (73 | ) |
Deferred income taxes | 20 |
| | (4 | ) |
Other assets | 3 |
| | (2 | ) |
Accounts payable and accrued liabilities | 9 |
| | (671 | ) |
Accrued payroll and employee benefits | (48 | ) | | 74 |
|
Income taxes receivable/payable | (14 | ) | | 35 |
|
Other long-term liabilities | (14 | ) | | 3 |
|
Total cash flows provided by (used in) operating activities of continuing operations | 78 |
| | (151 | ) |
Cash flows from investing activities: | |
| | |
|
Expenditures for property, plant and equipment | (31 | ) | | (31 | ) |
Acquisitions of businesses, net of cash acquired of $9 million in fiscal 2013 | (1 | ) | | (478 | ) |
Proceeds from sale of assets | 65 |
| | 2 |
|
Net proceeds (purchases) of cost method investments | 12 |
| | — |
|
Dividend received from the separation of New SAIC | 295 |
| | — |
|
Contribution paid related to the separation of New SAIC | (26 | ) | | — |
|
Other | (2 | ) | | 1 |
|
Total cash flows provided by (used in) investing activities of continuing operations | 312 |
| | (506 | ) |
Cash flows from financing activities: | |
| | |
|
Payments on notes payable and long-term debt | (1 | ) | | (550 | ) |
Payments for deferred financing costs | (5 | ) | | — |
|
Payment from New SAIC for deferred financing costs | 5 |
| | — |
|
Proceeds from real estate financing transaction | 38 |
| | — |
|
Proceeds from debt issuance | 500 |
| | — |
|
Distribution of debt to New SAIC | (500 | ) | | — |
|
Sales of stock and exercises of stock options | 11 |
| | 15 |
|
Repurchases of stock | (17 | ) | | (21 | ) |
Dividend payments | (452 | ) | | (124 | ) |
Other | 2 |
| | — |
|
Total cash flows used in financing activities of continuing operations | (419 | ) | | (680 | ) |
See accompanying combined notes to condensed consolidated financial statements.
5
|
| | | | | | | |
Decrease in cash and cash equivalents from continuing operations | (29 | ) | | (1,337 | ) |
Cash flows from discontinued operations: | |
| | |
|
Cash provided by operating activities of discontinued operations | 125 |
| | 285 |
|
Cash used in investing activities of discontinued operations | (17 | ) | | (6 | ) |
Cash used in financing activities of discontinued operations | — |
| | (3 | ) |
Increase in cash and cash equivalents from discontinued operations | 108 |
| | 276 |
|
Total increase (decrease) in cash and cash equivalents | 79 |
| | (1,061 | ) |
Cash and cash equivalents at beginning of period | 735 |
| | 1,592 |
|
Cash and cash equivalents at end of period | $ | 814 |
| | $ | 531 |
|
See accompanying combined notes to condensed consolidated financial statements.
6
LEIDOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| November 1, 2013 | | October 31, 2012 | | November 1, 2013 | | October 31, 2012 |
| (in millions) |
Revenues | $ | 1,420 |
| | $ | 1,673 |
| | $ | 4,486 |
| | $ | 4,899 |
|
Costs and expenses: | | | | | | | |
Cost of revenues | 1,224 |
| | 1,434 |
| | 3,903 |
| | 4,218 |
|
Selling, general and administrative expenses | 116 |
| | 139 |
| | 360 |
| | 367 |
|
Bad debt expense | 43 |
| | — |
| | 45 |
| | — |
|
Intangible asset impairment losses | 19 |
| | — |
| | 51 |
| | — |
|
Separation transaction and restructuring expenses | 25 |
| | — |
| | 58 |
| | — |
|
Operating (loss) income | (7 | ) | | 100 |
| | 69 |
| | 314 |
|
Non-operating income (expense): | | | | | | | |
Interest income | 5 |
| | 1 |
| | 15 |
| | 5 |
|
Interest expense | (21 | ) | | (20 | ) | | (59 | ) | | (73 | ) |
Other income, net | 2 |
| | 2 |
| | 3 |
| | 8 |
|
(Loss) income from continuing operations before income taxes | (21 | ) | | 83 |
| | 28 |
| | 254 |
|
Income tax benefit (expense) | 12 |
| | (28 | ) | | 1 |
| | (89 | ) |
(Loss) income from continuing operations | (9 | ) | | 55 |
| | 29 |
| | 165 |
|
Discontinued operations (Note 2): | | | | | | | |
Income from discontinued operations before income taxes | 21 |
| | 94 |
| | 158 |
| | 279 |
|
Income tax expense | (15 | ) | | (37 | ) | | (67 | ) | | (105 | ) |
Income from discontinued operations | 6 |
| | 57 |
| | 91 |
| | 174 |
|
Net (loss) income | $ | (3 | ) | | $ | 112 |
| | $ | 120 |
| | $ | 339 |
|
See accompanying combined notes to condensed consolidated financial statements.
7
LEIDOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| November 1, 2013 | | October 31, 2012 | | November 1, 2013 | | October 31, 2012 |
| (in millions) |
Net (loss) income | $ | (3 | ) | | $ | 112 |
| | $ | 120 |
| | $ | 339 |
|
Other comprehensive income, net of tax: | | | | | | | |
Foreign currency translation adjustments | — |
| | — |
| | — |
| | (1 | ) |
Deferred taxes | — |
| | — |
| | — |
| | 1 |
|
Foreign currency translation adjustments, net of tax | — |
| | — |
| | — |
| | — |
|
Pension liability adjustments | — |
| | — |
| | — |
| | 16 |
|
Deferred taxes | — |
| | — |
| | — |
| | (6 | ) |
Pension liability adjustments, net of tax | — |
| | — |
| | — |
| | 10 |
|
Total other comprehensive income, net of tax | — |
| | — |
| | — |
| | 10 |
|
Comprehensive income | $ | (3 | ) | | $ | 112 |
| | $ | 120 |
| | $ | 349 |
|
See accompanying combined notes to condensed consolidated financial statements.
8
LEIDOS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
| | | | | | | |
| November 1, 2013 | | January 31, 2013 |
| (in millions) |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 546 |
| | $ | 735 |
|
Receivables, net | 1,161 |
| | 1,168 |
|
Inventory, prepaid expenses and other current assets | 298 |
| | 342 |
|
Assets of discontinued operations | 13 |
| | 1,371 |
|
Total current assets | 2,018 |
| | 3,616 |
|
Property, plant and equipment (less accumulated depreciation and amortization of $340 million and $391 million at November 1, 2013 and January 31, 2013, respectively) | 473 |
| | 288 |
|
Intangible assets, net | 100 |
| | 178 |
|
Goodwill | 1,704 |
| | 1,704 |
|
Deferred income taxes | 10 |
| | 12 |
|
Other assets | 62 |
| | 77 |
|
Note receivable from Leidos Holdings, Inc. (Note 8) | 1,075 |
| | — |
|
| $ | 5,442 |
| | $ | 5,875 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable and accrued liabilities | $ | 782 |
| | $ | 787 |
|
Accrued payroll and employee benefits | 307 |
| | 357 |
|
Notes payable and long-term debt, current portion | 151 |
| | — |
|
Liabilities of discontinued operations | — |
| | 648 |
|
Total current liabilities | 1,240 |
| | 1,792 |
|
Notes payable and long-term debt, net of current portion | 1,330 |
| | 1,295 |
|
Note payable to Leidos Holdings, Inc. (Note 8) | — |
| | 22 |
|
Other long-term liabilities | 182 |
| | 170 |
|
Commitments and contingencies (Notes 11 and 12) |
| |
|
Stockholders’ equity: | | | |
Common stock, $.01 par value, 10,000 shares authorized, 5,000 shares issued and outstanding at November 1, 2013 and January 31, 2013 | — |
| | — |
|
Additional paid-in capital | 207 |
| | 233 |
|
Retained earnings | 2,485 |
| | 2,365 |
|
Accumulated other comprehensive loss | (2 | ) | | (2 | ) |
Total stockholders’ equity | 2,690 |
| | 2,596 |
|
| $ | 5,442 |
| | $ | 5,875 |
|
See accompanying combined notes to condensed consolidated financial statements.
9
LEIDOS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | |
| Shares of common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Total |
| (in millions, except for share amounts) |
Balance at January 31, 2013 | 5,000 |
| | $ | 233 |
| | $ | 2,365 |
| | $ | (2 | ) | | $ | 2,596 |
|
Net income | — |
| | — |
| | 120 |
| | — |
| | 120 |
|
Contribution paid related to the separation of New SAIC | — |
| | (26 | ) | | — |
| | — |
| | (26 | ) |
Other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | — |
|
Balance at November 1, 2013 | 5,000 |
| | $ | 207 |
| | $ | 2,485 |
| | $ | (2 | ) | | $ | 2,690 |
|
See accompanying combined notes to condensed consolidated financial statements.
10
LEIDOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
| | | | | | | |
| Nine Months Ended |
| November 1, 2013 | | October 31, 2012 |
| (in millions) |
Cash flows from operations: | | | |
Net income | $ | 120 |
| | $ | 339 |
|
Income from discontinued operations | (91 | ) | | (174 | ) |
Adjustments to reconcile net income to net cash provided by operations: | | | |
Depreciation and amortization | 66 |
| | 73 |
|
Stock-based compensation | 43 |
| | 42 |
|
Intangible asset impairment losses | 51 |
| | — |
|
Inventory write-down | 3 |
| | — |
|
Bad debt expense | 45 |
| | — |
|
Net gain on sales and disposals of assets | (9 | ) | | (7 | ) |
Other | 3 |
| | 3 |
|
Increase (decrease) in cash and cash equivalents, net of effects of acquisitions and dispositions, resulting from changes in: | | | |
Receivables | (139 | ) | | 211 |
|
Inventory, prepaid expenses and other current assets | 30 |
| | (73 | ) |
Deferred income taxes | 20 |
| | (4 | ) |
Other assets | 3 |
| | (2 | ) |
Accounts payable and accrued liabilities | 9 |
| | (671 | ) |
Accrued payroll and employee benefits | (48 | ) | | 74 |
|
Income taxes receivable/payable | (14 | ) | | 35 |
|
Other long-term liabilities | (14 | ) | | 3 |
|
Total cash flows provided by (used in) operating activities of continuing operations | 78 |
| | (151 | ) |
Cash flows from investing activities: | | | |
Expenditures for property, plant and equipment | (31 | ) | | (31 | ) |
Acquisitions of businesses, net of cash acquired of $9 million in fiscal 2013 | (1 | ) | | (478 | ) |
Proceeds from sale of assets | 65 |
| | 2 |
|
Net proceeds (purchases) of cost method investments | 12 |
| | — |
|
Contribution paid related to the separation of New SAIC | (26 | ) | | — |
|
Other | (2 | ) | | 1 |
|
Total cash flows provided by (used in) investing activities of continuing operations | 17 |
| | (506 | ) |
Cash flows from financing activities: | | | |
Proceeds from note payable to Leidos Holdings, Inc. | 11 |
| | 40 |
|
Payments on note payable to Leidos Holdings, Inc. | (442 | ) | | (369 | ) |
Payments on notes payable and long-term debt | (1 | ) | | (550 | ) |
Payments for deferred financing costs | (5 | ) | | (1 | ) |
Payment from New SAIC for deferred financing costs | 5 |
| | — |
|
Proceeds from real estate financing transaction | 38 |
| | — |
|
Other | 2 |
| | — |
|
Total cash flows used in financing activities of continuing operations | (392 | ) | | (880 | ) |
See accompanying combined notes to condensed consolidated financial statements.
11
|
| | | | | | | |
Decrease in cash and cash equivalents from continuing operations | (297 | ) | | (1,537 | ) |
Cash flows from discontinued operations: | | | |
Cash provided by operating activities of discontinued operations | 125 |
| | 285 |
|
Cash used in investing activities of discontinued operations | (17 | ) | | (6 | ) |
Cash used in financing activities of discontinued operations | — |
| | (3 | ) |
Increase in cash and cash equivalents from discontinued operations | 108 |
| | 276 |
|
Total decrease in cash and cash equivalents | (189 | ) | | (1,261 | ) |
Cash and cash equivalents at beginning of period | 735 |
| | 1,592 |
|
Cash and cash equivalents at end of period | $ | 546 |
| | $ | 331 |
|
| | | |
See accompanying combined notes to condensed consolidated financial statements.
12
LEIDOS HOLDINGS, INC.
LEIDOS, INC.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1—Summary of Significant Accounting Policies:
Nature of Operations and Basis of Presentation
Leidos Holdings, Inc. ("Leidos") (formerly known as SAIC, Inc.) is a holding company whose direct 100%-owned subsidiary is Leidos, Inc. (formerly known as Science Applications International Corporation), a company focused on delivering science and technology solutions primarily in the areas of national security, health and engineering to agencies of the U.S. Department of Defense (DoD), the intelligence community, the U.S. Department of Homeland Security, and other U.S. Government civil agencies, state and local government agencies, foreign governments and customers across a variety of commercial markets. Unless indicated otherwise, references to the "Company", "we", "us" and "our" refer collectively to Leidos Holdings, Inc., Leidos, Inc., and its consolidated subsidiaries.
On September 27, 2013 (the "Distribution Date"), Leidos completed the previously announced separation of its technical services and enterprise information technology services business into an independent, publicly traded company named Science Applications International Corporation (“New SAIC”) (formerly known as SAIC Gemini, Inc.). The separation was effected through a tax-free distribution to Leidos' stockholders of 100% of the shares of New SAIC's common stock. On the Distribution Date, New SAIC's common stock was distributed, on a pro rata basis, to Leidos' stockholders of record as of the close of business on September 19, 2013, the record date. Each holder of Leidos common stock received one share of New SAIC common stock for every seven shares of Leidos common stock held on the record date. Prior to the Distribution Date, Leidos Holdings, Inc. was named SAIC, Inc. and Leidos, Inc. was named Science Applications International Corporation. The companies' names were changed as part of the separation, and New SAIC assumed the name Science Applications International Corporation.
As a result of the separation, the assets, liabilities, results of operations and cash flows of New SAIC have been classified as discontinued operations for all periods presented. References to financial data are to the Company’s continuing operations, unless otherwise noted. See Note 2-Discontinued Operations for further information.
Immediately following the distribution, Leidos effectuated a one-for-four reverse stock split of its shares of common stock, so that every four shares of Leidos common stock issued and outstanding were combined and converted into one share of Leidos common stock. Each reference to the number of shares outstanding or per share amounts has been adjusted to reflect the reverse stock split for all periods presented.
The condensed consolidated financial statements of Leidos include the accounts of its majority-owned and 100%-owned subsidiaries, including Leidos, Inc. The condensed consolidated financial statements of Leidos, Inc. include the accounts of its majority-owned and 100%-owned subsidiaries. Leidos does not have separate operations, assets or liabilities independent of Leidos, Inc., except for a note with Leidos, Inc. (the “related party note”), on which interest is recognized, and cash from the dividend paid by New SAIC that is held at Leidos for general corporate purposes, including dividend payments and share repurchases. From time to time, Leidos issues stock to employees of Leidos, Inc. and its subsidiaries, which is reflected in Leidos’ Condensed Consolidated Statement of Stockholders’ Equity and results in an increase to the related party note (see Note 8). All intercompany transactions and accounts have been eliminated in consolidation.
The accompanying financial information has been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and accounting principles generally accepted in the United States of America (GAAP). Certain disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and combined notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2013. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods.
Estimates have been prepared by management on the basis of the most current and best available information at the time of estimation and actual results could differ from those estimates.
In the opinion of management, the financial information as of November 1, 2013 and for the three and nine months ended November 1, 2013 and October 31, 2012 reflects all adjustments, which consist of normal recurring adjustments, necessary for a fair presentation thereof. Operating results for the three and nine months ended November 1, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2014, or any future period.
Reporting Periods
Unless otherwise noted, references to fiscal years are to fiscal years ended January 31, for fiscal 2013 and earlier periods, or fiscal years ended the Friday closest to January 31, for fiscal 2014 or later periods. For fiscal 2013, the Company’s fiscal quarters ended on the last calendar day of each of April, July and October. Effective in fiscal 2014, the Company changed its fiscal year to a 52/53 week fiscal year ending on the Friday closest to January 31, with fiscal quarters typically consisting of 13 weeks. Fiscal 2014 began on February 1, 2013 and ends on January 31, 2014. The third quarter of fiscal 2014 ended on November 1, 2013. The Company does not believe that the change in its fiscal year has a material effect on the comparability of the periods presented.
Separation Transaction and Restructuring Expenses
In anticipation of the planned separation of New SAIC from the Company, the Company initiated an overall separation program to align the Company’s cost structure for post-separation. During the nine months ended November 1, 2013, the Company reduced headcount, which resulted in severance costs, and reduced its real estate footprint by vacating facilities that are not necessary for its future requirements, which resulted in lease termination and facility consolidation expenses, as reflected in the table below.
Separation transaction and restructuring expenses related to New SAIC, exclusive of any tax impacts, of $20 million and $55 million for the three months and nine months ended November 1, 2013, respectively, and $11 million and $15 million for the three and nine months ended October 31, 2012, respectively, were reclassified as discontinued operations. There were no separation transaction and restructuring expenses for continuing operations in fiscal year 2013 and the separation transaction and restructuring expenses for continuing operations for fiscal year 2014 were as follows:
|
| | | | | | | |
| Three Months Ended |
| | Nine Months Ended |
|
| November 1, 2013 | | November 1, 2013 |
| (in millions) |
Strategic advisory services | $ | 5 |
| | $ | 7 |
|
Legal and accounting services | 1 |
| | 1 |
|
Lease termination and facility consolidation expenses | 17 |
| | 40 |
|
Severance costs | 2 |
| | 10 |
|
Separation transaction and restructuring expenses in operating income | 25 |
| | 58 |
|
Less: income tax benefit | (10 | ) | | (23 | ) |
Separation transaction and restructuring expenses, net of tax | $ | 15 |
| | $ | 35 |
|
LEIDOS HOLDINGS, INC.
LEIDOS, INC.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table represents the restructuring liability balance as of November 1, 2013, and summarizes the changes during the period attributable to costs incurred and charged to expense, costs paid or otherwise settled, and any adjustments to the liability:
|
| | | | | | | | | |
| Severance Costs |
| Lease Termination and Facility Consolidation Expenses |
| Total |
|
| (in millions) |
Balance as of January 31, 2013 | $ | 8 |
| $ | 2 |
| $ | 10 |
|
Charges | 10 |
| 36 |
| 46 |
|
Cash payments | (14 | ) | (16 | ) | (30 | ) |
Balance as of November 1, 2013 | $ | 4 |
| $ | 22 |
| $ | 26 |
|
Variable Interest Entity (VIE)
In fiscal 2012, the Company entered into a fixed price agreement to provide engineering, procurement, and construction services to a special purpose limited liability company (Plainfield Renewable Energy LLC or "Plainfield") for a specific renewable energy project. The Company analyzed this arrangement and determined that Plainfield is a VIE. Prior to the third quarter of fiscal 2014, the VIE was not consolidated by the Company because the Company was not the primary beneficiary.
On October 11, 2013, the Company and Plainfield Renewable Energy Owner, LLC (“project owner”) entered into a consensual foreclosure agreement pursuant to which, the project owners agreed to transfer 100% of the equity interest of Plainfield Renewable Energy Holdings, LLC (“PRE Holdings”) to an indirect wholly owned subsidiary of Leidos in full satisfaction of certain secured obligations owed by the project owner to the Company. As a result of the entry into the foreclosure agreement, the Company determined that it has the power to direct the activities of the VIE and has the right to receive benefits from or the obligation to absorb the losses of the VIE. Accordingly, the Company was deemed the primary beneficiary of the VIE, resulting in the consolidation of Plainfield as of October 11, 2013. See Note 3 - Acquisitions, for further information.
Goodwill and Intangible Assets
The Company evaluates goodwill for potential impairment annually at the beginning of the fourth quarter, or whenever events or circumstances indicate that the carrying value of goodwill may not be recoverable. The goodwill impairment test is a two-step process performed at the reporting unit level. The first step consists of estimating the fair values of each of the reporting units based on a market approach and an income approach. Fair value computed using these two methods is determined using a number of factors, including projected future operating results and business plans, economic projections, anticipated future cash flows, comparable market data based on industry grouping, and the cost of capital. The estimated fair values are compared with the carrying values of the reporting units. If the fair value is less than the carrying value of a reporting unit, which includes the allocated goodwill, a second step is performed to compute the amount of the impairment by determining an implied fair value of goodwill. The implied fair value of goodwill is the residual fair value derived by deducting the fair value of a reporting unit’s identifiable assets and liabilities from its estimated fair value calculated in the first step. The impairment expense represents the excess of the carrying amount of the reporting units’ goodwill over the implied fair value of the reporting units’ goodwill. The Company faces continued uncertainty in its business environment due to the substantial fiscal and economic challenges facing the U.S. Government, its primary customer, as well as challenges in the commercial healthcare industry, compounded by lower levels of U.S. Government reimbursements, including reductions in Medicare reimbursements. Adverse changes in fiscal and economic conditions, such as the manner in which budget cuts are implemented, including sequestration, and issues related to the nation’s debt ceiling, could result in an impairment of goodwill.
Intangible assets with finite lives are amortized using the method that best reflects how their economic benefits are utilized or, if a pattern of economic benefits cannot be reliably determined, on a straight-line basis over their
LEIDOS HOLDINGS, INC.
LEIDOS, INC.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
estimated useful lives. Intangible assets with finite lives are assessed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets with indefinite lives are not amortized but are assessed for impairment at the beginning of the fourth quarter and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
Receivables
The Company’s accounts receivable include unbilled receivables, which consist of costs and fees billable upon contract completion or the occurrence of a specified event, substantially all of which is expected to be billed and collected within one year. Unbilled receivables are stated at estimated realizable value. Since the Company’s receivables, other than those receivables with deferred payment terms, are primarily with the U.S. Government, the Company does not have a material credit risk exposure. Contract retentions are billed when the Company has negotiated final indirect rates with the U.S. Government and, once billed, are subject to audit and approval by government representatives. Consequently, the timing of collection of retention balances is outside the Company’s control. Based on the Company’s historical experience, the majority of retention balances are expected to be collected beyond one year and write-offs of retention balances have not been significant.
The Company has extended deferred payment terms with contractual maturities that may exceed one year to commercial customers related to certain construction projects. During the three months ended November 1, 2013, the Company received a $25 million payment from one construction project and recorded bad debt expense in the Company's condensed consolidated statements of income of $42 million related to two different construction projects. In addition, approximately $105 million of the outstanding deferred payment term receivables were used to acquire PRE Holdings. See Note 3 - Acquisitions, for further information. As of November 1, 2013, the Company had outstanding receivables with deferred payment terms of $30 million, which are expected to be collected in fiscal 2015, when the customers obtain financing.
When events or conditions indicate that amounts outstanding from customers may become uncollectible, an allowance is estimated and recorded.
Changes in Estimates on Contracts
Changes in estimates related to certain types of contracts accounted for using the percentage of completion method of accounting are recognized in the period in which such changes are made for the inception-to-date effect of the changes. Changes in these estimates can routinely occur over the contract performance period for a variety of reasons, including changes in contract scope, changes in contract cost estimates due to unanticipated cost growth or retirements of risk for amounts different than estimated, and changes in estimated incentive or award fees. Aggregate changes in contract estimates resulted in a decrease to operating income of $1 million ($0.01 per diluted share) and $29 million ($0.22 per diluted share) for the three and nine months ended November 1, 2013, respectively. Aggregate changes in contract estimates resulted in an increase to operating income of $3 million ($0.03 per diluted share) for the three months ended October 31, 2012 and an increase to operating income of $2 million ($0.01 per diluted share) for the nine months ended October 31, 2012.
LEIDOS HOLDINGS, INC.
LEIDOS, INC.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Supplementary Cash Flow Information
Supplementary cash flow information, including non-cash investing and financing activities, for the periods presented was as follows:
|
| | | | | | | |
| Nine Months Ended |
| November 1, 2013 | | October 31, 2012 |
| (in millions) |
Vested stock issued as settlement of annual bonus accruals | $ | 2 |
| | $ | 2 |
|
Stock issued in lieu of cash dividend | $ | 17 |
| | $ | 2 |
|
Fair value of assets acquired in acquisitions (See Note 3 - Acquisitions) | $ | 259 |
| | $ | 541 |
|
Less: cash paid in acquisitions, net of cash acquired of $9 million in fiscal 2013 | $ | (1 | ) | | $ | (478 | ) |
Forgiveness of accounts receivable to acquire equity interest in business combination | $ | (105 | ) | | $ | — |
|
Liabilities assumed in acquisitions, including accrued acquisition payments | $ | (148 | ) | | $ | 63 |
|
Accrued liability for acquisition of business | $ | (5 | ) | | $ | — |
|
Cash paid for interest (including discontinued operations) | $ | 37 |
| | $ | 53 |
|
Cash paid for income taxes (including discontinued operations) | $ | 62 |
| | $ | 126 |
|
Special Cash Dividend
In March 2013, Leidos' board of directors declared a special cash dividend of $4.00 per share of Leidos common stock and paid an aggregate of $342 million on June 28, 2013 to stockholders of record on June 14, 2013. See Note 5-Stock Based Compensation, for further information regarding the modifications made to the Company’s outstanding stock options resulting from the special cash dividend. There were no modifications made to the Company’s vesting stock awards and performance-based stock awards as a result of the special dividend.
Sale and Leaseback Agreement
On May 3, 2013, the Company entered into a purchase and sale agreement relating to the sale of approximately 18 acres of land in Fairfax County, Virginia, including four office buildings, a multi-level parking garage, surface parking lots, and other related improvements and structures, as well as tangible personal property and third-party leases. This sale is expected to be completed in a series of transactions over approximately six years.
On July 26, 2013, the Company closed the first phase of the purchase and sale agreement and received proceeds of $83 million, net of selling costs. The Company leased back from the buyer three of the office buildings over varying lease terms. The sale of two of the office buildings will be accounted for as a sale-leaseback transaction with proceeds from the sale of $40 million, a corresponding book value of $42 million resulting in a $2 million loss recorded in selling, general and administrative expenses. These leases will be accounted for as operating leases over a six months term. The sale of the third office building will be accounted for as a financing transaction. The allocated consideration received of $38 million was recorded as a note payable to be paid over seven years with interest at the lessee’s incremental borrowing rate, estimated at 3.7%. The right of use for the multi-level parking garage and surface parking lots were allocated proceeds of $1 million and $4 million, respectively, and were accounted for as other long term liabilities.
Accounting Standards Updates Issued But Not Yet Adopted
Accounting standards and updates issued but not effective for the Company until after November 1, 2013 are not expected to have a material effect on the Company’s consolidated financial position or results of operations.
LEIDOS HOLDINGS, INC.
LEIDOS, INC.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2—Discontinued Operations:
Fiscal Year 2014 Dispositions:
Separation of New SAIC
As discussed in Note 1, the Company completed the separation of New SAIC on September 27, 2013. In anticipation of this separation, the Company entered into a credit agreement in June 2013 as a guarantor that consisted of a unsecured term credit facility of $500 million with New SAIC as the borrower. New SAIC was a subsidiary of Leidos prior to the separation date. On September 26, 2013, New SAIC borrowed $500 million under this term credit facility which was unconditionally guaranteed by the Company. The Company was released from its guaranty on September 27, 2013, the completion date of the separation transaction. At separation, New SAIC made a $295 million dividend payment to Leidos and reimbursed Leidos, Inc. $5 million for financing costs previously advanced to New SAIC to secure a revolving and term credit facility, and Leidos, Inc. made a $26 million capital contribution to New SAIC.
The separation was made pursuant to the terms of a Distribution Agreement and several other agreements entered into between the Company and New SAIC on September 25, 2013. These agreements set forth, among other things, the principal actions needed to be taken in connection with the separation and govern certain aspects of the relationship between the Company and New SAIC following the separation. These agreements generally provide that each party is responsible for its respective assets, liabilities and obligations, including employee benefits, insurance and tax related assets and liabilities, whether accrued or contingent, except that unknown liabilities will be shared between the parties in certain circumstances. The agreements also describe the party’s commitments to provide each other with certain services for a limited time to help ensure an orderly transition. While the Company is a party to the Distribution Agreement and the ancillary agreements, the Company has determined that it does not have significant continuing involvement in the operations of New SAIC, nor does the Company expect significant continuing cash flows from New SAIC. Brief descriptions of agreements associated with the separation are provided below.
Distribution Agreement
The Distribution Agreement provides for the allocation, transfer and assumption of assets and liabilities among New SAIC and Leidos. Pursuant to the agreement, subject to certain exceptions, the Company and New SAIC released the other from claims against each other that arise out of or relate to events, circumstances, or actions occurring or failing to occur or any conditions existing at or prior to the time of distribution. In addition, the Company and New SAIC agreed to indemnify each other against breaches of this agreement and certain liabilities in connection with their respective businesses.
Employee Matters Agreement
The Employee Matters Agreement contains agreements as to certain employment, compensation and benefits matters. The Employee Matters Agreement provides for the allocation and treatment of assets and liabilities and responsibilities with respect to certain employee compensation and benefit plans and programs, and certain other employment matters. Generally, New SAIC assumed or retained liabilities relating to New SAIC’s employees and the Company assumed or retained liabilities relating to the Company’s employees. The Employee Matters Agreement also provides for the adjustment of outstanding equity awards to reflect the separation and the one-for-four reverse stock split of the Company’s shares.
LEIDOS HOLDINGS, INC.
LEIDOS, INC.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Tax Matters Agreement
The Tax Matters Agreement governs the respective rights, responsibilities and obligations of the Company and New SAIC after the separation with respect to tax liabilities and benefits, tax attributes, tax contests and other tax sharing regarding U.S. federal, state, local and foreign income taxes, other tax matters and related tax returns. As a former subsidiary of the Company, New SAIC has (and will continue to have following the separation) joint and several liability with the Company to the IRS for the consolidated U.S. federal income taxes of the Company consolidated group relating to the taxable periods in which New SAIC was part of that group. However, the Tax Matters Agreement specifies the portion, if any, of this tax liability for which New SAIC bears responsibility, and the Company agrees to indemnify New SAIC against any amounts for which New SAIC is not responsible.
Transition Services Agreement
Under the Transition Services Agreement, the Company or its affiliates will provide New SAIC, and New SAIC or its affiliates will provide the Company, with certain services for a limited time to help ensure an orderly transition following the distribution. Under the Transition Services Agreement, the Company and New SAIC will provide each other certain services, including information technology, financial, telecommunications, benefits support services and other specified services, on a transitional basis. The Company expects that these services will be provided at cost, and these services are planned to extend for a period of six to eighteen months in most circumstances.
Master Transitional Contracting Agreement
The legal transfer of government contracts to New SAIC will occur through a novation process and commercial, including state and local, contracts will be transferred by assignment to New SAIC. The Master Transitional Contracting Agreement governs the relationship between the Company and New SAIC pending novation and assignment of contracts to New SAIC and addresses the treatment of existing contracts, proposals, and teaming arrangements where both companies will jointly perform work after separation. Joint contracts entered into post separation will be treated as traditional prime and subcontractor relationships.
The operating results of New SAIC, which have been classified as discontinued operations, for the periods presented were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| November 1, 2013 | | October 31, 2012 | | November 1, 2013 | | October 31, 2012 |
| (in millions) |
Revenues | $ | 598 |
| | $ | 1,195 |
| | $ | 2,712 |
| | $ | 3,558 |
|
Costs and expenses: |
|
| |
|
| |
|
| |
|
|
Cost of revenues | 533 |
| | 1,073 |
| | 2,446 |
| | 3,205 |
|
Selling, general and administrative expenses | 22 |
| | 14 |
| | 42 |
| | 52 |
|
Separation transaction and restructuring expenses | 20 |
| | 11 |
| | 55 |
| | 15 |
|
Operating income | $ | 23 |
| | $ | 97 |
| | $ | 169 |
| | $ | 286 |
|
Income from discontinued operations also includes other activity that is immaterial and not reflected in the table above.
LEIDOS HOLDINGS, INC.
LEIDOS, INC.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The major classes of assets and liabilities included in discontinued operations through the Distribution Date related to the separation of New SAIC are presented in the table below:
|
| | | |
| January 31, 2013 |
| (in millions) |
Cash and cash equivalents | $ | 1 |
|
Receivables, net | 717 |
|
Inventory, prepaid expenses and other current assets | 101 |
|
Total current assets | 819 |
|
Property, plant and equipment, net | 29 |
|
Intangible assets, net | 6 |
|
Goodwill | 491 |
|
Deferred income taxes | 2 |
|
Other assets | 1 |
|
Total assets | 1,348 |
|
Accounts payable and accrued liabilities | 461 |
|
Accrued payroll and employee benefits | 185 |
|
Notes payable and long-term debt | 1 |
|
Total current liabilities | 647 |
|
Non-current liabilities | — |
|
Total liabilities | $ | 647 |
|
Other Fiscal Year 2014 Dispositions
From time-to-time, the Company may dispose (or management may commit to plans to dispose) of non-strategic components of the business, which are reclassified as discontinued operations for all periods presented.
During the three months ended November 1, 2013, in order to better align its business portfolio with its strategy, the Company sold a certain component of its business resulting in an insignificant gain, which were historically included in the Company’s National Security Solutions segment, focused on machine language translation.
During the three months ended August 2, 2013, in order to better align its business portfolio with its strategy, the Company committed to plans to dispose of certain components of its business, which were historically included in the Company’s National Security Solutions segment, focused on technology used to detect if an individual is concealing explosive devices or other hidden weapons.
LEIDOS HOLDINGS, INC.
LEIDOS, INC.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Fiscal Year 2013 Dispositions:
The Company sold certain components of its business, which were historically included in the Company’s Health and Engineering segment, primarily focused on providing operational test and evaluation services to U.S. Government customers. The Company received net proceeds of $51 million resulting in a gain on sale before income taxes of $17 million related to this sale.
The pre-sale operating results and through the date of disposal of the Company’s discontinued operations discussed above for Other Fiscal Year 2014 Dispositions and Fiscal Year 2013 Dispositions, not including the separation of New SAIC, for the periods presented were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended |
| Nine Months Ended |
| November 1, 2013 |
| October 31, 2012 |
| November 1, 2013 |
| October 31, 2012 |
| (in millions) |
Revenues | $ | 1 |
|
| $ | 19 |
|
| $ | 3 |
|
| $ | 60 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues | 6 |
|
| 18 |
|
| 9 |
|
| 54 |
|
Selling, general and administrative expenses | (3 | ) |
| 4 |
|
| 5 |
|
| 13 |
|
Operating income | $ | (2 | ) |
| $ | (3 | ) |
| $ | (11 | ) |
| $ | (7 | ) |
Income from discontinued operations also includes other activity that is immaterial and not reflected in the table above.
The major classes of assets and liabilities included in discontinued operations through the date of disposal, not including the separation of New SAIC, are immaterial for disclosure purposes.
Note 3—Acquisitions:
Plainfield Renewable Energy Holdings LLC
As described in Note 1, the Company became the primary beneficiary of Plainfield on October 11, 2013 which required the consolidation of the VIE. The Company also determined that Plainfield met the definition of a business and as such is gaining control of 100% of PRE Holdings equity through the consensual foreclosure agreement which constituted a change in control accounted for as a business combination.
The Plainfield Renewable Energy Project involves the design, construction, and financing of a 37.5 megawatt biomass-fueled power plant in Plainfield, Connecticut (the plant). The plant is scheduled to be completed by the end of calendar year 2013. Connecticut Light & Power will purchase approximately 80% of the power produced by the plant based on a 15-year off-take agreement, utilizing the plant's status as a renewable power source. In addition, there are fuel supply agreements with initial terms of 5 to 15 years and minimum purchase requirements either at prevailing market prices or a set price plus a CPI index.
The project was partially financed by the Company’s provision of extended payment terms for certain of its services performed on the project and, at the time of this transaction, the Company had a receivable of $138 million due from Plainfield. The remainder of the project was financed by Carlyle Group with two secured notes aggregating $148 million, which these notes were assumed by the Company as part of consensual foreclosure. See Note 7 - Financial Instruments, for further information.
At the time the Company became the primary beneficiary of Plainfield, the Company measured the assets acquired and liabilities assumed at their fair values. This value also contemplates a plant placed into service prior to December 31, 2013, which will allow the Company to apply for a 1603 Treasury Grant for approximately $70 million. The settlement of the project with PRE Holdings resulted in a $33 million loss which was recorded as bad debt expense in the Company's condensed consolidated statements of income. In addition, there is contingent
LEIDOS HOLDINGS, INC.
LEIDOS, INC.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
consideration of approximately $5 million as of November 1, 2013 which is to be paid based on various milestones: $2 million based on the earlier of January 2014 or the completion of the collateral transfer and $3 million based on the successful sale of the plant.
The aggregate purchase consideration that the Company exchanged for PRE Holdings is as follows (in millions):
|
| | | |
Forgiveness of accounts receivable (net of $33 million bad debt expense) | $ | 105 |
|
Contingent consideration | 6 |
|
Total preliminary purchase consideration | $ | 111 |
|
The preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition were as follows (in millions):
|
| | | |
Property, plant and equipment | $ | 248 |
|
Other assets | 8 |
|
Notes payable assumed (net of debt discount) | (148 | ) |
Total identifiable net assets acquired | 108 |
|
Intangible assets | 3 |
|
Total preliminary purchase consideration | $ | 111 |
|
maxIT Healthcare Holdings, Inc.
In August 2012, the Company acquired 100% of the stock of maxIT Healthcare Holdings, Inc. (maxIT), a provider of clinical, business and information technology services primarily to commercial hospital groups and other medical delivery organizations. The purchase price of $505 million consists of cash payments and accrued acquisition payments of $13 million. This acquisition expands the Company’s commercial consulting practice in electronic health record (EHR) implementation and optimization and strengthens the Company’s capabilities to provide these services to its federal healthcare customers as those customers migrate to commercial off-the-shelf EHR applications. This acquisition was in the Health and Engineering segment and the results of maxIT have been included in the financial statements since the acquisition date.
The fair values of the assets acquired and liabilities assumed at the date of acquisition, including subsequent adjustments, were as follows (in millions):
|
| | | |
Cash | $ | 9 |
|
Receivables | 50 |
|
Other assets | 24 |
|
Accounts payable, accrued liabilities and accrued payroll and employee benefits | (21 | ) |
Deferred tax liabilities, net | (24 | ) |
Total identifiable net assets acquired | 38 |
|
Goodwill | 395 |
|
Intangible assets | 72 |
|
Total purchase price | $ | 505 |
|
Note 4—Earnings Per Share (EPS):
The Company is required to allocate a portion of its earnings to its unvested stock awards containing nonforfeitable rights to dividends or dividend equivalents (participating securities) in calculating EPS using the two-class method. Unvested stock awards granted prior to fiscal 2013 are participating securities requiring application of the two-class method. In fiscal 2013, the Company began issuing unvested stock awards that have forfeitable rights to dividends
LEIDOS HOLDINGS, INC.
LEIDOS, INC.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
or dividend equivalents. These stock awards are not participating securities requiring application of the two-class method, but are dilutive common share equivalents subject to the treasury stock method. Basic EPS is computed by dividing income less earnings allocable to participating securities by the basic weighted average number of shares outstanding. Diluted EPS is computed similar to basic EPS, except the weighted average number of shares outstanding is increased to include the dilutive effect of outstanding stock options and other stock-based awards.
A reconciliation of the income used to compute basic and diluted EPS for the periods presented was as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| November 1, 2013 | | October 31, 2012 | | November 1, 2013 | | October 31, 2012 |
| (in millions) |
Basic EPS: |
| |
| |
| |
|
(Loss) income from continuing operations, as reported | $ | (9 | ) | | $ | 55 |
| | $ | 29 |
| | $ | 165 |
|
Less: allocation of distributed and undistributed earnings to participating securities | — |
| | — |
| | (3 | ) | | (3 | ) |
(Loss) income from continuing operations, for computing basic EPS | $ | (9 | ) | | $ | 55 |
| | $ | 26 |
| | $ | 162 |
|
Net income, as reported | $ | (3 | ) | | $ | 112 |
| | $ | 120 |
| | $ | 339 |
|
Less: allocation of distributed and undistributed earnings to participating securities | — |
| | (2 | ) | | (3 | ) | | (7 | ) |
Net income, for computing basic EPS | $ | (3 | ) | | $ | 110 |
| | $ | 117 |
| | $ | 332 |
|
Diluted EPS: |
|
| |
|
| |
|
| |
|
|
(Loss) income from continuing operations, as reported | (9 | ) | | 55 |
| | 29 |
| | 165 |
|
Less: allocation of distributed and undistributed earnings to participating securities | — |
| | — |
| | (3 | ) | | (3 | ) |
(Loss) income from continuing operations, for computing diluted EPS | $ | (9 | ) | | $ | 55 |
| | $ | 26 |
| | $ | 162 |
|
Net income, as reported | $ | (3 | ) | | $ | 112 |
| | $ | 120 |
| | $ | 339 |
|
Less: allocation of distributed and undistributed earnings to participating securities | — |
| | (2 | ) | | (3 | ) | | (7 | ) |
Net income, for computing diluted EPS | $ | (3 | ) | | $ | 110 |
| | $ | 117 |
| | $ | 332 |
|
The following table provides a reconciliation of the weighted average number of shares outstanding used to compute basic and diluted EPS for the periods presented. The presentation gives effect to the one-for-four reverse stock split which occurred after market close on September 27, 2013.
|
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| November 1, 2013 | | October 31, 2012 | | November 1, 2013 | | October 31, 2012 |
| (in millions) |
Basic weighted average number of shares outstanding | 84 |
| | 83 |
| | 84 |
| | 83 |
|
Dilutive common share equivalents—stock options and other stock awards | — |
| | — |
| | — |
| | — |
|
Diluted weighted average number of shares outstanding | 84 |
| | 83 |
| | 84 |
| | 83 |
|
For the three months ended November 1, 2013, all outstanding common stock equivalents were excluded in the computation of diluted (loss) per share because their effect would have been anti-dilutive due to the net loss for the quarter. For the nine months ended November 1, 2013, the declared dividends exceeded current period earnings.
LEIDOS HOLDINGS, INC.
LEIDOS, INC.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Therefore, we are in a loss position for computing diluted (loss) per share and all outstanding common stock equivalents were excluded in the computation because their effect would have been anti-dilutive.
The following anti-dilutive stock-based awards were excluded from the weighted average number of shares outstanding used to compute basic and diluted EPS for the periods presented:
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| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| November 1, 2013 | | October 31, 2012 | | November 1, 2013 | | October 31, 2012 |
| (in millions) |
Stock options | 5 |
| | 5 |
| | 5 |
| | 5 |
|
Vesting stock awards | 4 |
| | — |
| | 4 |
| | — |
|
Note 5—Stock-Based Compensation:
Total Stock-Based Compensation. Total stock-based compensation expense for the periods presented was as follows: |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| November 1, 2013 | | October 31, 2012 | | November 1, 2013 | | October 31, 2012 |
| (in millions) |
Stock options | $ | 4 |
| | $ | 1 |
| | $ | 9 |
| | $ | 5 |
|
Vesting stock awards | 10 |
| | 13 |
| | 35 |
| | 37 |
|
Total stock-based compensation expense | $ | 14 |
| | $ | 14 |
| | $ | 44 |
| | $ | 42 |
|
New SAIC Separation Adjustments. As a result of the separation of New SAIC, effective September 27, 2013, all outstanding equity awards related to New SAIC employees were assumed by New SAIC. Also in connection with the separation, adjustments were made to the share amounts and exercise prices of all remaining outstanding Leidos stock options, and the share amounts for vesting stock awards and performance-based stock awards as of the Distribution Date such that the adjustments were generally made to preserve the aggregate intrinsic value at the distribution date pursuant to the terms of the stock based compensation plans under which they were issued. Taking into account the change in the value of the Company’s common stock as a result of the distribution of the New SAIC shares, the conversion ratio applied to all outstanding equity awards at the distribution date was 1.4523. In addition, all outstanding equity awards reflected the Company’s one-for-four reverse stock split. Awards held by non-employee directors were modified so that the directors’ awards were bifurcated into awards in both companies in a manner intended to preserve the aggregate intrinsic value.
As a result of the separation adjustments, a modification was made on September 27, 2013 to Leidos and New SAIC stock options outstanding as of the distribution date by which additional stock-based compensation expense was recognized, as the fair value of the outstanding options immediately following the separation was greater than the fair value immediately prior to the separation. An increase of expense related to the modification of $3 million was recorded for awards that were fully vested on the modification date, and an additional $3 million of incremental fair value will be recorded in future periods for unvested awards that will continue to vest, resulting in a total additional stock compensation cost of $6 million with a weighted average modification fair value of $1.02 related to continuing Leidos stock options outstanding.
Under the terms of the Employee Matters Agreement, the performance period for certain performance-based stock awards was deemed completed as of the last fiscal quarter prior to the separation with the target shares prorated for the completed period earned based on actual performance as determined by the Company’s compensation committee. For the remaining target shares in the original award for which the performance period was not deemed completed, the performance condition was removed and the awards are subject to vesting based on continued
LEIDOS HOLDINGS, INC.
LEIDOS, INC.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
employment through the original performance period. These modifications resulted in approximately $1 million of incremental fair value to be expensed in future periods over the remaining vesting period.
The separation adjustments are reflected in the tables below.
Stock Options. Stock options granted during the nine months ended November 1, 2013 and October 31, 2012 have terms of seven years and a vesting period of four years based upon required service conditions, except for stock options granted to the Company’s outside directors, which have a vesting period of one year.
In connection with the special cash dividend, anti-dilutive adjustments were made to all outstanding stock options on the dividend record date to preserve their value following the special cash dividend, as required by the Company’s 2006 Equity Incentive Plan. The modifications were made to reduce the exercise prices of the outstanding stock options and to increase the number of shares issuable upon the exercise of each option such that the aggregate difference between the market price and exercise price times the number of shares issuable upon exercise was substantially the same immediately before and after the payment of the special dividend. To affect these modifications, on June 12, 2013, the Company increased the shares of stock subject to stock options by a factor of 1.0713, which is the ratio of the closing price of $59.48 on June 11, 2013, the last trading date prior to ex-dividend date, to the opening price of $55.52 on the ex-dividend date, June 12, 2013, and decreased the exercise price of each of the stock options by a factor of 0.9334, which is the ratio of the opening price on the ex-dividend date to the closing price on June 11, 2013. These adjustments did not result in additional share-based compensation expense, as the fair value of the outstanding options immediately following the payment of the special cash dividend was equal to the fair value immediately prior to such distribution. These adjustments are reflected in the “Special Dividend Adjustment” line in the stock option activity table below.
The fair value of the Company’s stock option awards is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average grant date fair value and assumptions used to determine the fair value of stock options granted for the periods presented were as follows:
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| | | | | | | | | | | | |
| Nine Months Ended | |
| October 2013 Grants | | 2013 Grants Before Spin
| | October 31, 2012 | |
Weighted average grant-date fair value** | $ | 9.48 |
| | $ | 6.96 |
| ** | $ | 6.75 |
| ** |
Expected term (in years) | 5.0 |
| | 5.0 |
| | 5.0 |
| |
Expected volatility | 30.0 | % | | 25.0 | % | | 24.5 | % | |
Risk-free interest rate | 1.4 | % | | 0.8 | % | | 1.0 | % | |
Dividend yield | 2.8 | % | | 3.8 | % | | 3.7 | % | |
**Adjusted for additional awards granted for the $4.00 Special Dividend
Stock option activity for the nine months ended November 1, 2013 was as follows:
LEIDOS HOLDINGS, INC.
LEIDOS, INC.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | |
| Shares of stock under stock options | | Weighted average exercise price | | Weighted average remaining contractual term | | Aggregate intrinsic value |
| (in millions) | | | | (in years) | | (in millions) |
Outstanding at January 31, 2013 | 4.9 |
| | $ | 67.24 |
| | 3.0 | | $ | — |
|
Options granted | 1.4 |
| | 54.86 |
| |
| |
|
|
Special dividend adjustments | 0.4 |
| |
|
| |
| |
|
|
Options forfeited or expired | (1.3 | ) | | 71.80 |
| |
| |
|
|
Separation Adjustment | (1.9 | ) | | 57.85 |
| |
| |
|
|
Outstanding at September 27, 2013 | 3.5 |
| | 59.25 |
| | 3.9 | | 24.0 |
|
Exercisable at September 27, 2013 | 1.5 |
| | 64.17 |
| | 2.0 | | 4.0 |
|
|
| | | | | | | | | | | | |
| Shares of stock under stock options | | Weighted average exercise price | | Weighted average remaining contractual term | | Aggregate intrinsic value |
| (in millions) | | | | (in years) | | (in millions) |
Outstanding at September 28, 2013 | 4.9 |
| ** | $ | 40.20 |
| ** | 3.9 | | $ | 24.0 |
|
Options granted | 0.1 |
| | 46.19 |
| |
| |
|
|
Options forfeited or expired | (0.1 | ) | | 42.84 |
| |
| |
|
|
Outstanding at November 1, 2013 | 4.9 |
| | 40.31 |
| | 4.0 | | 35.0 |
|
Exercisable at November 1, 2013 | 2.0 |
| | 44.30 |
| | 2.0 | | 6.0 |
|
** Adjusted for Conversion Ratio of 1.4523
Vesting Stock Awards. Vesting stock award activity for the nine months ended November 1, 2013 was as follows:
|
| | | | | | |
| Shares of stock under stock awards |
| Weighted average grant- date fair value |
| (in millions) |
|
|
Unvested stock awards at January 31, 2013 | 3.1 |
|
| $ | 60.78 |
|
Awards granted | 2.1 |
|
| 53.51 |
|
Awards forfeited | (0.4 | ) |
| 58.28 |
|
Awards vested | (0.9 | ) |
| 64.76 |
|
Separation Adjustment | (1.5 | ) |
| 57.04 |
|
Unvested stock awards at September 27, 2013 | 2.4 |
|
| 59.98 |
|
LEIDOS HOLDINGS, INC.
LEIDOS, INC.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | |
| Shares of stock under stock awards | | Weighted average grant- date fair value | |
| (in millions) |
|
|
|
Unvested stock awards at September 28, 2013 | 3.5 |
| ** | $ | 42.98 |
| ** |
Awards granted | 0.4 |
| * | 33.44 |
| * |
Unvested stock awards at November 1, 2013 | 3.9 |
|
| 42.37 |
|
|
* Includes Modified Performance-Based Stock Awards
** Adjusted for Conversion Ratio of 1.4523
Vesting stock awards generally vest over a four-year vesting period, or seven for certain stock awards, based upon required service conditions and in some cases performance conditions. The fair value of vesting stock awards that vested during each of the nine months ended November 1, 2013 and October 31, 2012 was $57 million and $64 million, respectively.
Performance-Based Stock Awards. The Company’s performance-based stock awards vest and the stock is issued at the end of a three-year period based upon the achievement of specific performance criteria, with the number of shares ultimately awarded, if any, ranging up to 150% of the specified target awards. If performance is below the threshold level of performance, no shares will be issued. As discussed above in New SAIC Separation Adjustments, the performance period for certain performance-based stock awards was deemed completed as of the last fiscal quarter prior to the separation with the target shares prorated for the completed period earned. For all of the remaining target shares in the original award, the performance condition was removed and the awards are subject to vesting based on continued employment through the original performance period and reflected in the vesting stock awards table above. In the table below, the outstanding awards represent the awards whose performance conditions were completed in the last fiscal quarter prior to the separation and continue to vest over the original service period of the award. Performance-based stock award activity for the nine months ended November 1, 2013 was as follows:
|
| | | | | | | |
| Expected number of shares of stock to be issued under performance-based stock awards | | Weighted average grant-date fair value | |
| (in millions) | |
| |
Outstanding at January 31, 2013 | 0.3 |
| | $ | 52.96 |
| |
Awards canceled | (0.2 | ) | * | 53.23 |
| * |
Outstanding at November 1, 2013 | 0.1 |
| ** | 36.59 |
| ** |
* Includes Modified Performance-Based Stock Awards
** Adjusted for Conversion Ratio of 1.4523
Note 6—Goodwill and Intangible Assets:
The changes in the carrying value of goodwill for Health and Engineering (HES) and National Security Solutions (NSS) were as follows:
LEIDOS HOLDINGS, INC.
LEIDOS, INC.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | |
| HES | | NSS | | Total |
| (in millions) |
Goodwill at January 31, 2013 | $ | 985 |
| | $ | 719 |
| | $ | 1,704 |
|
Corporate reorganizations | (69 | ) | | 69 |
| | — |
|
Goodwill at November 1, 2013 | $ | 916 |
| | $ | 788 |
| | $ | 1,704 |
|
In the second and third quarter of fiscal 2014, the Company forecasted a significant decline in revenue and operating income related to the Health Solutions and Engineering reporting units within its HES reporting segment. The Company determined that this decline constituted a significant change in circumstances which could potentially reduce the fair value of the reporting units below their carrying value. As such, an interim goodwill impairment test was performed (see Note 1) and the Company determined that the estimated fair values of the Health Solutions and Engineering reporting units exceeded its book value and therefore no goodwill impairment charge was recorded.
There were no goodwill impairments during the nine months ended November 1, 2013 and October 31, 2012.
Intangible assets consisted of the following:
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| | | | | | | | | | | | | | | | | | | | | | | |
| November 1, 2013 | | January 31, 2013 |
| Gross carrying value | | Accumulated amortization | | Net carrying value | | Gross carrying value | | Accumulated amortization | | Net carrying value |
| (in millions) |
Finite-lived intangible assets: |
| |
| |
| |
| |
| |
|
Customer relationships | $ | 116 |
| | $ | (64 | ) | | $ | 52 |
| | $ | 154 |
| | $ | (57 | ) | | $ | 97 |
|
Software and technology | 66 |
| | (35 | ) | | 31 |
| | 97 |
| | (30 | ) | | 67 |
|
Other | 4 |
| | (1 | ) | | 3 |
| | 1 |
| | (1 | ) | | — |
|
Total finite-lived intangible assets | 186 |
| | (100 | ) | | 86 |
| | 252 |
| | (88 | ) | | 164 |
|
Indefinite-lived intangible assets: |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
In-process research and development | 10 |
| | — |
| | 10 |
| | 10 |
| | — |
| | 10 |
|
Trade names | 4 |
| | — |
| | 4 |
| | 4 |
| | — |
| | 4 |
|
Total indefinite-lived intangible assets | 14 |
| | — |
| | 14 |
| | 14 |
| | — |
| | 14 |
|
Total intangible assets | $ | 200 |
| | $ | (100 | ) | | $ | 100 |
| | $ | 266 |
| | $ | (88 | ) | | $ | 178 |
|
Amortization expense related to amortizable intangible assets was $8 million and $31 million for the three and nine months ended November 1, 2013, respectively, and $12 million and $30 million for the three and nine months ended October 31, 2012, respectively.
During the second quarter of fiscal 2014, the Company determined that certain intangible assets consisting of software and technology, associated with the acquisition of Reveal Imaging Technologies, Inc. in fiscal 2011, were not recoverable due to lower projected revenue levels from the associated products and customers. As a result, the Health and Engineering reportable segment recognized an impairment loss within intangible asset impairment losses in the Company's condensed consolidated statements of income of $30 million to reduce the carrying value of these intangible assets to their estimated fair values. Fair value was estimated using the income approach based on management’s forecast of future cash flows to be derived from the assets’ use (Level 3 under the accounting standard for fair value measurement).
During the three months ended November 1, 2013, the Company determined that certain customer relationship intangible assets associated with the acquisitions of Vitalize and maxIT in fiscal 2012 and 2013, respectively, were not recoverable due to lower projected revenue levels from the associated services and customers. As a result, the
LEIDOS HOLDINGS, INC.
LEIDOS, INC.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Health and Engineering reportable segment recognized an impairment loss within intangible asset impairment losses in the Company's condensed consolidated statements of income of $19 million to reduce the carrying value of these intangible assets to their estimated fair values. Fair value was estimated using the income approach based on management’s forecast of future cash flows to be derived from the assets’ use (Level 3 under the accounting standard for fair value measurement).
During the three and nine months ended November 1, 2013, the Company recognized impairment losses for intangible assets of $19 million and $51 million, respectively, reported within intangible asset impairment losses in the Company's condensed consolidated statements of income. During the three and nine months ended October 31, 2012, the Company did not recognize any impairment losses for intangible assets.
The estimated annual amortization expense related to finite-lived intangible assets as of November 1, 2013 was as follows:
|
| | | |
Fiscal Year Ending January 31 |
|
| (in millions) |
2014 (remainder of the fiscal year) | $ | 6 |
|
2015 | 22 |
|
2016 | 20 |
|
2017 | 17 |
|
2018 | 11 |
|
2019 and thereafter | 10 |
|
| $ | 86 |
|
Actual amortization expense in future periods could differ from these estimates as a result of future acquisitions, dispositions, impairments, the outcome and timing of completion of in-process research and development projects (the assets of which will become amortizable upon completion and placement into service, or will be impaired if abandoned), adjustments to preliminary valuations of intangible assets and other factors.
Note 7—Financial Instruments:
The Company’s cash equivalents were primarily comprised of investments in several large institutional money market funds that invest primarily in bills, notes and bonds issued by the U.S. Treasury, U.S. Government guaranteed repurchase agreements fully collateralized by U.S. Treasury obligations, U.S. Government guaranteed securities and investment-grade corporate securities that have maturities of three months or less, and bank deposits. There are no restrictions on the withdrawal of the Company’s cash and cash equivalents. The Company’s cash equivalents are recorded at historical cost, which equals fair value based on quoted market prices (Level 1 input as defined by the accounting standard for fair value measurements).
Leidos has a revolving credit facility, which is fully and unconditionally guaranteed by Leidos, Inc., providing for up to $750 million in unsecured borrowing capacity at interest rates determined, at Leidos’ option, based on either LIBOR plus a margin or a defined base rate. During the three months ended May 3, 2013, the maturity date of the credit facility was extended for one additional year to March 2017, as provided for in the terms of the credit facility. As of November 1, 2013 and January 31, 2013, there were no borrowings outstanding under the credit facility.
The credit facility contains certain customary representations and warranties, as well as certain affirmative and negative covenants. During the three months ended May 3, 2013, the financial covenants in the credit facility were amended to: (i) permit in the calculation of earnings before interest, taxes, depreciation and amortization (EBITDA) the adding back of certain expenses incurred in connection with the Company’s planned separation transaction; (ii) exclude the effect of debt incurred in connection with the separation transaction for purposes of calculating consolidated funded debt; and (iii) change the ratio of consolidated funded debt to EBITDA that the Company is required to maintain. The financial covenants contained in the credit facility require that, for a period of four trailing
LEIDOS HOLDINGS, INC.
LEIDOS, INC.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
fiscal quarters, the Company maintains a ratio of consolidated funded debt, including borrowings under this facility, to EBITDA adjusted for other items as defined in the credit facility of not more than 3.25 to 1.0 and a ratio of EBITDA adjusted for other items as defined in the credit facility to interest expense of greater than 3.5 to 1.0. The Company was in compliance with these financial covenants as of November 1, 2013. A failure by the Company to meet these financial covenants in the future would reduce and could eliminate the Company’s borrowing capacity under the credit facility.
Other covenants in the credit facility restrict certain of the Company’s activities, including among other things, its ability to create liens, dispose of certain assets and merge or consolidate with other entities. The credit facility also contains certain customary events of default, including, among others, defaults based on certain bankruptcy and insolvency events, nonpayment, cross-defaults to other debt, breach of specified covenants, Employee Retirement Income Security Act (ERISA) events, material monetary judgments, change of control events and the material inaccuracy of the Company’s representations and warranties.
The Plainfield Renewable Energy Project is being financed through two secured notes aggregating $149 million, net of debt discount, provided by affiliates of the Carlyle Group (“Carlyle”). Leidos assumed in the acquisition of Plainfield a Note Purchase Agreement between Plainfield and Carlyle, consisting of two secured notes, a Construction Note and a Cash Grant Note in the amount of $81 million and $68 million, respectively, as of November 1, 2013. The Construction Note has a 17.5% stated interest rate, consisting of 8% paid in cash and the remainder is accrued over the term of the note and paid at maturity. The Cash Grant Note has a 17.5% stated interest rate, consisting of 6% paid in cash and the remainder is accrued over the term of the note and paid at maturity. Once the commercial operation date has occurred in February 2014, the Construction Note can be converted into term notes based upon conditions set forth in the Note Purchase Agreement. The Company was in compliance with its covenants as of November 1, 2013. A failure by the Company to meet these covenants in the future would reduce and could eliminate the Company’s borrowing capacity under the notes.
On December 6, 2013, the Company entered into an Early Payoff Agreement (the "Agreement") between Plainfield and Carlyle, under which the Company agreed to pay off on December 16, 2013 its obligations under the Note Purchase Agreement to include principal and interest due under the Construction Note and Cash Grant Note, an additional interest payment as provided in Note Purchase Agreement and an early termination fee consisting of a make whole payment. In consideration of the early payment, the Agreement provided for a $6 million discount on the early termination fee and waived the covenants in Note Purchase Agreement. The Company will pay $149 million in principal, $10 million of interest, including the additional interest payment, and $6 million in an early termination fee, net of the discount, for a total amount of $165 million.
LEIDOS HOLDINGS, INC.
LEIDOS, INC.
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company’s notes payable and long-term debt consisted of the following:
|
| | | | | | | | | | | | | |
| Stated interest rate | | Effective interest rate | | November 1, 2013 | | January 31, 2013 |
| (dollars in millions) |
Leidos Holdings, Inc. senior unsecured notes: | | | | | | | |
$450 million notes, which mature in December 2020 | 4.45 | % | | 4.53 | % | | $ | 449 |
| | $ | 449 |
|
$300 million notes, which mature in December 2040 | 5.95 | % | | 6.03 | % | | 300 |
| | 300 |
|
Leidos, Inc. senior unsecured notes: |
| |
| |
|
| |
|
|
$250 million notes, which mature in July 2032 | 7.13 | % | | 7.43 | % | | 248 |
| | 248 |
|
$300 million notes, which mature in July 2033 | 5.5 | % | | 5.78 | % | | 296 |
| | 296 |
|
Plainfield construction note, which matures February 2014 | 17.5 | % | | 17.5 | % | | 81 |
|
| — |
|
Plainfield cash grant note, which matures April 2014 | 17.5 | % | | 17.5 | % | | 68 |
|
| — |
|
Capital leases and other notes payable due on |