Leidos, a giant provider of technology and services to U.S. government agencies, is buying two airport security and services units from L3Harris Technologies for $1 billion, deepening Leidos’s aerospace and defense business while marking the largest expected spinoff from the newly formed L3Harris.

L3Harris’ Security Detection and Automation businesses provide checkpoint computed tomography (CT) scanners, people scanners, comprehensive explosives trace detectors, checked-baggage screeners and automated tray return systems, as well as services. Headquartered in Tewksbury, Massachusetts, and Luton, England, respectively, the combined businesses count 1,200 employees with more than 20,000 systems deployed in more than 100 countries, including 16 of the top 20 airports.

“Sometimes you have to take the deals as they come, and this was an opportunity that really came out of the combination of L3 [Technologies] and Harris,” Leidos Chairman and CEO Roger Krone told a teleconference. “We had been thinking strategically about our security products business for a long time.”

Both he and Leidos CFO Jim Reagan said they wanted to better balance Leidos’s different divisions, which include health care and other end markets. “Fundamentally, this is a business that is and has always been very strategic for us,” Reagan said.

The L3Harris units—which make about $500 million in revenue annually—will provide access to airport customers in 75 more countries, boosting U.S.-centered Leidos international security products revenue sixfold and bringing foreign revenue to 13% of the total, Krone said. When added to Leidos’s existing border and port business, the deal secures Leidos’s footprint in a global security products market that is expected to grow faster than the U.S. budget.

“We’re also excited that a lot of other work that we do within Leidos on machine learning [and] artificial intelligence will be applicable to the L3 Harris business, but it’s a little premature for us to be able to identify that specifically,” Krone said. “But given the large amount of internal research and development [R&D] we do in these type of areas, we expect to see leverage and benefit in that area.”

The latest deal, announced early Feb. 4, comes just days after Leidos closed on its $1.65 billion acquisition of U.S. military prototype and advanced weaponry boutique Dynetics. Leidos will pay cash for L3Harris assets, using cash on hand and debt, and expects to close in the first half of this year, assuming nominal regulatory approvals.

Reagan said the L3Harris deal likely marks the largest acquisition that Leidos will do in the near term, and particularly coming on the heels of the Dynetics purchase.

In a separate teleconference, L3Harris Chairman and CEO Bill Brown said the sales probably will be the largest divestiture stemming from last summer’s merger of L3 and Harris. Proceeds will go to fund shareholder buybacks to offset dilution from the normal amount of new shares becoming available as part of regular business.

L3Harris continues to look at spinoffs from its portfolio—it sold a night vision business to Elbit Systems last year—and ultimately could divest 8-10% of the revenue that was the originally formed L3Harris, Brown said. “It has been a key priority of ours to take a fresh look at the combined portfolio of the company and think through what businesses we want to stay in, which ones are strategic, which ones have technology that could differentiate, where we can generate good returns and really win longer term,” he said. “There are several others that are in process or in detailed planning, and we’ll announce those transactions as we go through this year and into calendar 2021.”

Brown made the comments as L3Harris released financial results for 2019. “We ended the year on a high note, capping a strong second half with double-digit revenue growth, margin expansion in every segment and robust free cash flow while returning $1.8 billion to shareholders,” Brown said. The newly combined company’s revenue exceeded $18 billion while earnings per share (EPS) from continuing operations were $7.90.

L3Harris leaders said their company expects to generate between $2.6 billion and $2.7 billion of free cash flow for the year. Revenue should be up 5-7%, while EPS grows to $8.35 - $8.75.