Acquisitions, Divestitures and Discontinued Operations

Business Acquisitions

The Company continually evaluates potential acquisitions that either strategically fit within the Company’s existing portfolio or expand the Company’s portfolio into new product lines or adjacent markets. The Company has completed a number of acquisitions that have been accounted for as business combinations and have resulted in the recognition of goodwill in the Company’s financial statements. This goodwill includes the know-how of the assembled workforce, the ability of the workforce to further improve technology and product offerings and the expected cash flows resulting from these efforts. Goodwill may also include expected synergies resulting from the complementary strategic fit these businesses bring to existing operations. The business acquisitions discussed below are included in the Company’s results of operations from their respective dates of acquisition.

2018 Business Acquisitions

Applied Defense Solutions, Inc. (Applied Defense Solutions). On June 29, 2018, the Company acquired Applied Defense Solutions, Inc., renamed L3 ADS, Inc., for a purchase price of $53 million, which was financed with cash on hand. Applied Defense Solutions is a leading aerospace engineering, software development and space situational awareness company. The goodwill recognized for this business was $40 million, which was assigned to the Sensor Systems segment, and is not expected to be deductible for income tax purposes. The final purchase price is subject to customary adjustments for final working capital. The final purchase price allocation, which is expected to be completed in the fourth quarter of 2018, will be based on final appraisals and other analysis of fair values of acquired assets and liabilities. The Company does not expect that differences between the preliminary and final purchase price allocation will have a material impact on its results of operations or financial position.

Latitude Engineering, LLC (Latitude Engineering). On June 28, 2018, the Company acquired Latitude Engineering, LLC, renamed L3 Latitude Engineering, Inc., for a purchase price of $15 million, which was financed with cash on hand. The purchase price is subject to additional contingent consideration not to exceed $20 million, $15 million of which is based on Latitude Engineering’s post-acquisition financial performance for the four year period ended December 31, 2021, and the remaining $5 million is based on certain post-acquisition milestone achievements through December 31, 2020. Latitude Engineering is engaged in the design, manufacturing, integration, servicing, operation and support of hybrid quadrotor unmanned aerial systems. The Company recorded a $4 million liability on the acquisition date for the fair value of the contingent consideration. The goodwill recognized for this business was $14 million, which was assigned to the Electronic Systems segment and is expected to be deductible for income tax purposes. The final purchase price is subject to customary adjustments for final working capital. The final purchase price allocation, which is expected to be completed in the fourth quarter of 2018, will be based on final appraisals and other analysis of fair values of acquired assets and liabilities. The Company does not expect that differences between the preliminary and final purchase price allocation will have a material impact on its results of operations or financial position.

2017 Business Acquisitions

The final purchase price and final purchase price allocations for the 2017 acquisitions of Kigre, Inc. (Kigre), Escola De Aviacao Aerocondor, S.A. (G-Air) and Adaptive Methods, Inc. (Adaptive Methods) have been finalized as of the second quarter of 2018. The final purchase price allocations resulted in a $3 million increase to goodwill. The final purchase price for Doss Aviation, Inc. (Doss Aviation) is subject to customary adjustments for final working capital. The final purchase price allocation for Doss Aviation, which is expected to be completed in the third quarter of 2018, will be based on final analysis of fair values of acquired contracts and customer relationship intangible assets. The Company does not expect that differences between the preliminary and final purchase price allocation will have a material impact on its results of operations or financial position.

Business Acquisitions Announced After June 29, 2018

Azimuth Security and Linchpin Labs. On July 11, 2018, the Company entered into a definitive agreement to acquire Azimuth Security and Linchpin Labs, two information security businesses that significantly strengthen the Company's existing C⁶ISR (Command, Control, Communications, Computers, Cyber-Defense and Combat Systems, and Intelligence, Surveillance and Reconnaissance) capabilities and create synergies to drive future growth in cyber and international markets. The combined purchase price for the two businesses was approximately AUD $270 million (approximately $200 million). The purchase price is subject to an upward adjustment of up to AUD $43 million (approximately $32 million), payable in L3 common stock, based on the combined company’s post-acquisition sales for each of the 12-month periods ending June 30, 2019 to 2021, which would be payable in 2019 to 2021. This transaction is anticipated to be completed during the second half of 2018, subject to customary closing conditions and regulatory approvals.

See Note 3 to the audited consolidated financial statements for the year ended December 31, 2017, included in the Company’s Annual Report on Form 10-K for additional information about the Company’s 2017 business acquisitions.

Unaudited Pro Forma Statements of Operations Data

The following unaudited pro forma Statements of Operations data present the combined results of the Company and its business acquisitions completed during the first half period ended June 29, 2018 and the year ended December 31, 2017, assuming that the business acquisitions completed during 2018 and 2017 had occurred on January 1, 2017 and January 1, 2016, respectively. The unaudited pro forma Statements of Operations data below include adjustments for additional amortization expense related to acquired intangible assets and depreciation assuming the 2018 and 2017 acquisitions had occurred on January 1, 2017 and January 1, 2016, respectively.



	Second Quarter Ended				First Half Ended
	June 29, 2018		June 30, 2017		June 29, 2018		June 30, 2017
	(in millions, except per share data)
Pro forma net sales	$	2,592	$	2,413	$	4,973	$	4,765
Pro forma income from continuing operations attributable to L3	$	187	$	189	$	375	$	343
Pro forma net income attributable to L3	$	377	$	201	$	581	$	366
Pro forma diluted earnings per share from continuing operations	$	2.36	$	2.38	$	4.71	$	4.32
Pro forma diluted earnings per share	$	4.75	$	2.53	$	7.30	$	4.61

The unaudited pro forma results disclosed in the table above are based on various assumptions and are not necessarily indicative of the results of operations that would have occurred had the Company completed these acquisitions on the dates indicated above.

Investments in Nonconsolidated Affiliates

Peak Nano Optics, LLC (Peak Nano). On February 6, 2018, the Company acquired a 25% interest in Peak Nano Optics, LLC, for a purchase price of $20 million. Peak Nano is a nanotechnology company, which allows for the design and manufacturing of polymer lenses for military, sporting and commercial optics applications using its nanolayer gradient refractive index (GRIN) technology. The purchase price is subject to a contingent payment of $30 million based upon Peak Nano meeting certain development milestones on or before August 5, 2018. The $6 million fair value of the contingent consideration liability was recorded on the investment date (See Note 16). The Company determined Peak Nano is a VIE as it did not have sufficient equity at risk to finance its activities. The Company, however, is not the primary beneficiary because it does not have the power to direct the activities that are most significant to the economic performance of Peak Nano. Accordingly, Peak Nano is accounted for under the equity method of accounting.

As of the acquisition date, the carrying amount of the investment was greater than the Company's equity in the underlying assets of Peak Nano due primarily to the difference in the carrying amount of the indefinite-lived amortizable intangible assets including goodwill and in-process research and development (IPR&D). The basis difference attributable to goodwill and IPR&D is $11 million and $13 million, respectively.

Additionally, the Company has a $5 million loan receivable from Peak Nano.

Business Divestitures

2018 Divestitures

As discussed in Note 1, on June 29, 2018, the Company completed the sale of its Crestview & TCS Businesses. The assets and liabilities of the Crestview & TCS Businesses are classified as held for sale in the Company’s audited consolidated balance sheet as of December 31, 2017. The Crestview & TCS Businesses, which were within the Company’s Aerospace Segment, primarily provided aircraft fabrication and assembly of fixed and rotary wing aero structures as well as avionics hardware and software systems to address mission critical needs. The table below presents Crestview & TCS Businesses’ results of operations and is included in continuing operations.



	First Half Ended
	June 29, 2018
	(in millions)
Net Sales	$	64
Gain on sale of businesses	$	48
Income from continuing operations before income taxes	$	3

Crestview & TCS Businesses. The major classes of assets and liabilities included as held for sale related to the Crestview & TCS Businesses are presented in the table below.



	December 31, 2017
	(in millions)
Assets
Billed receivables	$	14
Contracts in process	33
Total current assets	47
Property, plant and equipment, net	34
Goodwill	52
Identifiable intangible assets	2
Total assets classified as held for sale	$	135

Liabilities
Accounts payable, trade	$	3
Accrued employment costs	2
Accrued expenses	3
Other current liabilities	5
Total current liabilities	13
Deferred income taxes	4
Total liabilities classified as held for sale	$	17

Discontinued Operations

Vertex Aerospace. As discussed in Note 1, on June 29, 2018, the Company completed the sale of its Vertex Aerospace business. The table below presents the statements of operations data for Vertex Aerospace. The amounts presented in discontinued operations include allocated interest expenses for debt not directly attributable or related to L3’s other operations. Interest expense was allocated in accordance with the accounting standards for discontinued operations and were based on the ratio of Vertex Aerospace’s net assets to the sum of: (1) L3 consolidated total net assets and (2) L3 consolidated total debt.



	Second Quarter Ended						First Half Ended
	June 29, 2018			June 30, 2017			June 29, 2018			June 30, 2017
	(in millions)
Net sales	$	226		$	351		$	597		$	703
Operating costs and expenses ⁽¹⁾	(212		)	(332		)	(561		)	(667		)
Operating income from discontinued operations	14			19			36			36
Interest expense allocated to discontinued operations	—			—			(1		)	(1		)
Gain on sale of businesses	237			—			237			—
Income from discontinued operations before income taxes	251			19			272			35
Income tax expense	(61		)	(7		)	(66		)	(12		)
Income from discontinued operations, net of income taxes	$	190		$	12		$	206		$	23

__________________


⁽¹⁾	For the quarterly and first half periods ended June 29, 2018, the Company recognized $3 million of trailing expenses related to the sale of NSS.

The major classes of assets and liabilities that were included in discontinued operations related to Vertex Aerospace are presented in the table below. These balances were classified as current at December 31, 2017 as the sale was expected to be completed within one year and the proceeds are not expected to be used to pay down long-term debt.



	December 31, 2017
	(in millions)
Assets
Current assets	$	284
Property, plant and equipment, net	13
Other intangible assets	7
Other assets	2
Total assets of discontinued operations	$	306

Liabilities
Accounts payable, trade	$	63
Other current liabilities	131
Current liabilities	194
Long-term liabilities	32
Total liabilities of discontinued operations	$	226

2017 Divestitures

During the first half period ended June 30, 2017, the Company completed the sales of the CTC Aviation Jet Services Limited (Aviation Jet Services) business, the L3 Coleman Aerospace (Coleman) business and the Display Product Line. The table below presents pre-tax (loss) gain recognized, the proceeds received and net sales included in continuing operations from these divestitures.



	First Half Ended June 30, 2017
	Pre-Tax (Loss) gain			Proceeds Received		Net Sales
	(in millions)
Aviation Jet Services divestiture	$	(5	)	$	1	$	1
Coleman divestiture	(3		)	17		9
Display Product Line divestiture	4			7		—
Total	$	(4	)	$	25	$	10

Aviation Jet Services Divestiture. On March 1, 2017, the Company divested its Aviation Jet Services business for a sales price of £1 million (approximately $1 million). Aviation Jet Services provided non-core aircraft management and operational services as part of commercial training solutions based in the United Kingdom and was included in the Electronic Systems segment.

Coleman Divestiture. On February 24, 2017, the Company divested its Coleman business for a sales price of $15 million. Coleman provided air-launch ballistic missile targets and was included in the Electronic Systems segment.

Display Product Line Divestiture. On February 23, 2017, the Company divested its Display Product Line for a sales price of $7 million. The Display Product Line provided cockpits to various military aircraft and was included in the Electronic Systems segment.

Net sales and income before income taxes for Aviation Jet Services, Coleman and the Display Product Line, included in L3’s consolidated statements of operations, are presented in the table below on an aggregate basis and are included in income from continuing operations for all periods presented.



	First Half Ended
	June 30, 2017
	(in millions)
Net sales	$	10
Income before income taxes	$	2