Business Context and Reporting Period
This Form 8-K, dated August 16, 2016, reports the completion of a Reverse Morris Trust transaction between Leidos Holdings, Inc. ("Leidos") and the Information Systems & Global Solutions (IS&GS) business of Lockheed Martin Corporation. On the Closing Date, Abacus Innovations Corporation ("Splitco"), holding the IS&GS business, became a wholly-owned subsidiary of Leidos. Post-merger ownership is approximately 50.5% held by former Splitco shareholders and 49.5% by pre-merger Leidos shareholders.
Key Financial Metrics and Capital Structure
The filing details significant new debt facilities established to fund the transaction and a special dividend. Specific revenue, profit, or cash flow figures for the combined entity are not provided in this text but are referenced in prior filings.
- Splitco Credit Facilities (Total Principal: $1.841 Billion):
- Three-Year Senior Secured Term A Loan: $400,000,000
- Five-Year Senior Secured Term A Loan: $310,000,000
- Seven-Year Senior Secured Term B Loan: $1,131,450,000
- Leidos Credit Facilities (Total Principal: $1.44 Billion):
- Senior Secured Term A Loan: $690,000,000
- Senior Secured Revolving Facility: $750,000,000 (No borrowings on Closing Date)
- Use of Proceeds:
- Splitco: $1.8 billion cash payment to Lockheed Martin and transaction expenses.
- Leidos: $1,029,210,261 special dividend to shareholders, repayment of prior credit agreement, and transaction expenses.
- Interest Rate Management: On August 19, 2016, interest rate swaps were entered to fix the LIBOR component of a portion of floating rate debt at approximately 1% for five years.
Material Changes and Covenants
The transaction fundamentally altered Leidos's capital structure and corporate governance.
- Debt Covenants: New credit agreements impose a Senior Secured Leverage Ratio (secured consolidated funded debt to EBITDA) cap of 4.75:1.00 until February 16, 2018; 4.25:1.00 until February 16, 2019; and 3.75:1.00 thereafter.
- Restrictive Covenants: Agreements restrict liens, asset dispositions, mergers, investments, dividends, stock repurchases, and the incurrence of additional debt.
- Corporate Governance: The Board of Directors expanded to 12 members, adding three Lockheed Martin designees: Gregory R. Dahlberg, Dr. Surya N. Mohapatra, and Susan M. Stalnecker.
Management Commentary and Risks
Management has secured financing to facilitate the separation from Lockheed Martin and the merger. Key risks include compliance with the new financial covenants, specifically the leverage ratios, and the ability to refinance existing 4.450% notes due in 2020 to avoid early maturity of the new term loans. The filing notes that the Splitco Credit Agreement contains customary events of default, including bankruptcy, nonpayment, and cross-defaults.
Investor Verification Checklist
- Verify the pro forma financial statements (Exhibit 99.1) referenced in the filing to assess the combined entity's revenue and EBITDA.
- Confirm the specific terms of the interest rate swaps entered on August 19, 2016, to understand the fixed cost of debt.
- Review the "Senior Secured Leverage Ratio" definition in the credit agreements to monitor covenant compliance.
- Check the status of Leidos's 4.450% notes due 2020, as failure to refinance them could trigger early maturity of the new Term A loans.
- Examine the Transition Services Agreement and Shared Contracts Agreements for potential ongoing dependencies on Lockheed Martin.