Summary of Significant Accounting Policies | 9 Months Ended |
Nov. 01, 2013 |
Summary of Significant Accounting Policies | ' |
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. |
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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. |
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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: |
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| Three Months Ended | | | Nine Months Ended | | | |
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| November 1, 2013 | | November 1, 2013 | | |
| (in millions) | | |
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Strategic advisory services | $ | 5 | | | $ | 7 | | | |
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Legal and accounting services | 1 | | | 1 | | | |
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Lease termination and facility consolidation expenses | 17 | | | 40 | | | |
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Severance costs | 2 | | | 10 | | | |
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Separation transaction and restructuring expenses in operating income | 25 | | | 58 | | | |
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Less: income tax benefit | (10 | ) | | (23 | ) | | |
Separation transaction and restructuring expenses, net of tax | $ | 15 | | | $ | 35 | | | |
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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: |
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| Severance Costs | | Lease Termination and Facility Consolidation Expenses | | Total | |
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| (in millions) |
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Balance as of January 31, 2013 | $ | 8 | | $ | 2 | | $ | 10 | |
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Charges | 10 | | 36 | | 46 | |
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Cash payments | (14 | ) | (16 | ) | (30 | ) |
Balance as of November 1, 2013 | $ | 4 | | $ | 22 | | $ | 26 | |
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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 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. |
Supplementary Cash Flow Information |
Supplementary cash flow information, including non-cash investing and financing activities, for the periods presented was as follows: |
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| Nine Months Ended | | |
| November 1, | | October 31, | | |
2013 | 2012 | | |
| (in millions) | | |
Vested stock issued as settlement of annual bonus accruals | $ | 2 | | | $ | 2 | | | |
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Stock issued in lieu of cash dividend | $ | 17 | | | $ | 2 | | | |
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Fair value of assets acquired in acquisitions (See Note 3 - Acquisitions) | $ | 259 | | | $ | 541 | | | |
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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 | ) | | $ | — | | | |
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Liabilities assumed in acquisitions, including accrued acquisition payments | $ | (148 | ) | | $ | 63 | | | |
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Accrued liability for acquisition of business | $ | (5 | ) | | $ | — | | | |
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Cash paid for interest (including discontinued operations) | $ | 37 | | | $ | 53 | | | |
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Cash paid for income taxes (including discontinued operations) | $ | 62 | | | $ | 126 | | | |
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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, Inc. | ' |
Summary of Significant Accounting Policies | ' |
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. |
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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. |
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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: |
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| Three Months Ended | | | Nine Months Ended | | | |
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| November 1, 2013 | | November 1, 2013 | | |
| (in millions) | | |
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Strategic advisory services | $ | 5 | | | $ | 7 | | | |
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Legal and accounting services | 1 | | | 1 | | | |
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Lease termination and facility consolidation expenses | 17 | | | 40 | | | |
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Severance costs | 2 | | | 10 | | | |
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Separation transaction and restructuring expenses in operating income | 25 | | | 58 | | | |
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Less: income tax benefit | (10 | ) | | (23 | ) | | |
Separation transaction and restructuring expenses, net of tax | $ | 15 | | | $ | 35 | | | |
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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: |
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| Severance Costs | | Lease Termination and Facility Consolidation Expenses | | Total | |
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| (in millions) |
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Balance as of January 31, 2013 | $ | 8 | | $ | 2 | | $ | 10 | |
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Charges | 10 | | 36 | | 46 | |
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Cash payments | (14 | ) | (16 | ) | (30 | ) |
Balance as of November 1, 2013 | $ | 4 | | $ | 22 | | $ | 26 | |
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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 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. |
Supplementary Cash Flow Information |
Supplementary cash flow information, including non-cash investing and financing activities, for the periods presented was as follows: |
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| Nine Months Ended | | |
| November 1, | | October 31, | | |
2013 | 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 | | | |
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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 | ) | | $ | — | | | |
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Liabilities assumed in acquisitions, including accrued acquisition payments | $ | (148 | ) | | $ | 63 | | | |
| |
Accrued liability for acquisition of business | $ | (5 | ) | | $ | — | | | |
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Cash paid for interest (including discontinued operations) | $ | 37 | | | $ | 53 | | | |
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Cash paid for income taxes (including discontinued operations) | $ | 62 | | | $ | 126 | | | |
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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. |