Investor Presentaiton
Description of the Matter
How We Addressed the Matter in
Our Audit
Valuation of Customer Relationships and Technology Intangible Assets in the
Acquisition of Mission Systems
As discussed in Note 2 to the consolidated financial statements, during June 2021, the
Company completed the acquisition of Mission Systems for a total purchase price of
$2.8 billion, net of cash received. The acquisition was accounted for using the
acquisition method of accounting. The consideration paid in the acquisition must be
allocated to the acquired assets and liabilities assumed generally based on their fair
value with the excess of the purchase price over those fair values allocated to goodwill.
The preliminary estimates of the fair value of intangible assets made as of the
acquisition date were revised during the measurement period in 2022 as third-party
valuations were received and finalized resulting in the recognition of customer
relationships and technology intangible assets of $764 million and $612 million,
respectively.
Auditing the Company's accounting for its acquisition of Mission Systems was complex
because the customer relationships and technology intangible assets recognized were
material to the consolidated financial statements and the estimates of fair value involved
subjectivity. The subjectivity was primarily due to the sensitivity of the respective fair
values to underlying assumptions about the future performance of the acquired business.
The Company used discounted cash flow models to measure the intangible assets. The
significant assumptions used to estimate the fair value of the intangible assets included
the discount rates and certain assumptions that form the basis of the forecasted results
(e.g., revenue growth rates and future EBITDA margins). These significant assumptions
are forward looking and could be affected by future economic and market conditions.
The fair value of technology intangible assets is also based on the selection of royalty
rates used in the valuation model.
We obtained an understanding, evaluated the design, and tested the operating
effectiveness of the Company's controls over its accounting for the acquisition of
Mission Systems, including recognition and measurement of the intangible assets
acquired. For example, we tested controls over the recognition and measurement of
customer relationships and technology intangible assets, including management's
review of the methods and significant assumptions used to develop the fair value
estimates.
To test the estimated fair values of the customer relationships and technology intangible
assets, we performed audit procedures that included, among others, evaluating the
Company's selection of the valuation methodology, evaluating the methods and
significant assumptions used by the Company's valuation specialist, and evaluating the
completeness and accuracy of the underlying data supporting the significant
assumptions and estimates. For example, when evaluating the assumptions related to the
revenue growth rates and future EBITDA margins, we compared the assumptions to the
past performance of Mission Systems and expected industry trends and considered
whether they were consistent with evidence obtained in other areas of the audit. We also
performed sensitivity analyses to evaluate the changes in the fair value of the customer
relationships and technology intangible assets that would result from changes in the
significant assumptions. We involved our EY valuation specialists to assist with our
evaluation of the methodology used by the Company and certain significant
assumptions included in the fair value estimates.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1923.
Cleveland, Ohio
February 23, 2023
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