4. Dispositions and Acquisitions

Spin-off of Engility

As discussed in Note 1, the Company completed the spin-off of its subsidiary, Engility, on July 17, 2012. In connection with the spin-off, Engility made a cash distribution of $335 million to L-3. L-3 used a portion of the proceeds to redeem $250 million of its 6 ³/₈% Senior Subordinated Notes due 2015 (2015 Notes) on July 26, 2012. See Note 9 for additional information on the redemption of the 2015 Notes. There was no gain or loss recognized by us as a result of the spin-off transaction.

Prior to the completion of the spin-off, L-3 and Engility entered into a Distribution Agreement dated July 16, 2012 and several other agreements that govern certain aspects of L-3’s current relationship with Engility. These agreements generally provide that each party is responsible for its respective assets, liabilities and obligations, including employee benefits, insurance and tax related assets and liabilities, whether accrued or contingent. The agreements also describe L-3’s commitments to provide Engility with certain services for a period of two to eighteen months in most circumstances.

L-3 incurred transaction expenses in connection with the spin-off of $19 million ($14 million after income taxes) for the year-to-date period ended September 28, 2012 and $4 million ($3 million after income taxes) for the year-to-date period ended September 30, 2011, respectively, which have been included in discontinued operations. In addition, L-3 allocated interest expense for debt not directly attributable or related to L-3’s other operations of $14 million and $24 million for the year-to-date periods ended September 28, 2012 and September 30, 2011, respectively. Interest expense was allocated in accordance with the accounting standards for discontinued operations and was based on the ratio of Engility net assets to the sum of: (1) total L-3 consolidated net assets and (2) L-3 consolidated total debt.

Statement of operations data classified as discontinued operations related to Engility is provided in the table below:


	Third Quarter Ended					Year-to-Date Ended
	September 28, 2012			September 30, 2011		September 28, 2012		September 30, 2011
	(in millions)
Product and service revenues	$	68		$	486	$	911	$	1,539

Operating income from discontinued operations before income taxes		2			47		68		155
Interest expense allocated to discontinued operations		1			7		14		24

Income from discontinued operations before income taxes	$	1		$	40	$	54	$	131
Income tax expense		2			16		22		50

Income (loss) from discontinued operations, net of income tax	$	(1	)	$	24	$	32	$	81
Net income from discontinued operations attributable to noncontrolling interests		—			1		4		3

Net income (loss) from discontinued operations attributable to L-3	$	(1	)	$	23	$	28	$	78

In connection with the spin-off of Engility, L-3 was required to allocate the goodwill of the former Government Services reporting unit between Engility and NSS based on the relative fair values of each business at the spin-off date in accordance with the accounting standards for goodwill. As a result, based on the relative fair value, L-3 allocated $1,225 million to Engility.

The major classes of assets and liabilities included in discontinued operations for Engility are presented in the table below:


	December 31, 2011
	(in millions)
Assets
Current assets	$	386
Property, plant and equipment, net		13
Goodwill		1,225
Other assets		105

Total assets of discontinued operations	$	1,729
Liabilities
Accounts payable, trade	$	37
Other current liabilities		187

Current liabilities		224
Long-term liabilities		127

Total liabilities of discontinued operations	$	351

All of the business acquisitions discussed below are included in the Company’s results of operations from their respective dates of acquisition.

2012 Business Acquisitions

On February 6, 2012, the Company acquired the Kollmorgen Electro-Optical (KEO) business for a purchase price of $205 million, which was financed with cash on hand. KEO develops and manufactures specialized equipment, including submarine photonics systems and periscopes, ship fire control systems, visual landing aids, ground electro-optical and sensor-cueing systems for the U.S. military and allied foreign governments. Based on preliminary purchase price allocations, goodwill of $137 million was recognized, of which $69 million is expected to be deductible for income tax purposes. The goodwill was assigned to the Electronic Systems segment. In addition, the Company recognized customer contractual relationships and technology intangibles of $32 million in the aggregate, with estimated weighted average useful lives of 10 years. The final purchase price, which is expected to be completed by the fourth quarter of 2012, is subject to adjustment based on the closing date net working capital. In addition, the final purchase price allocation is also expected to be completed in the fourth quarter of 2012 and will be based on the final purchase price, final appraisals and other analysis of fair values of acquired assets and liabilities. The Company does not expect differences between the preliminary and final purchase price allocation to have a material impact on its results of operations or financial position.

On April 13, 2012, the Company acquired the assets and liabilities of MAVCO, Inc. (MAVCO) for $10 million, with cash on hand. MAVCO is an audio, video, lighting and broadcast systems integration business primarily for cruise lines. Based on a preliminary purchase price allocation, goodwill of $8 million was recognized, all of which is expected to be deductible for income tax purposes. The goodwill was assigned to the Electronics Systems segment. In addition, the Company recognized customer relationships and technology intangibles of $1 million in the aggregate, with estimated weighted average useful lives of 7 years. The final purchase price allocation is expected to be completed in the fourth quarter of 2012 and will be based on the final purchase price, 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 to have a material impact on its results of operations or financial position.

Effective August 6, 2012, the Company acquired the commercial aircraft simulation business from Thales Group. L-3 renamed the business Link Simulation & Training U.K Limited (Link U.K.). The purchase price of $134 million was financed with cash on hand. Link U.K. is a leading manufacturer of flight simulation systems for the commercial aviation market. Based on preliminary purchase price allocations, goodwill of $65 million was recognized, of which $59 million is expected to be deductible for income tax purposes. The goodwill was assigned to the Electronic Systems segment. In addition, the Company recognized customer contractual relationships and technology intangibles of $20 million in the aggregate, with estimated weighted average useful lives of 10 years. The final purchase price, which is expected to be completed in the second quarter of 2013, is subject to adjustment based on the closing date net working capital. In addition, the final purchase price allocation is also expected to be completed in the second quarter of 2013 and will be based on the final purchase price, 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 allocations for this acquisition will have a material impact on its results of operations or financial position.

2011 Business Acquisitions and Disposition

During the year ended December 31, 2011, in separate transactions, the Company acquired: (1) the communications and engineering business of ComHouse Wireless L.P. (ComHouse), which provides the Company with cellular wave form modulation technology, and (2) the cargo radiation screening business of Detector Networks International LLL (DNI) for an aggregate purchase price of $18 million. Both business acquisitions were financed with cash on hand. Based on the purchase price allocations, which were finalized as of June 29, 2012, the aggregate goodwill recognized for the two acquired businesses was $19 million, of which $14 million is expected to be deductible for income tax purposes. The goodwill recognized for these businesses was assigned to the Electronic Systems segment.

In February 2011, the Company divested the Microdyne Corporation business, which was within the Electronic Systems segment. See Note 4 to the audited consolidated financial statements for the year ended December 31, 2011, included in the Company’s Annual Report on Form 10-K for additional information regarding these business acquisitions and the disposition.

Unaudited Pro Forma Statements of Operations Data

The following unaudited pro forma Statement of Operations data presents the combined results of the Company and its business acquisitions completed during the year-to-date period ended September 28, 2012 and the year ended December 31, 2011, in each case assuming that the business acquisitions completed during the year-to-date period ended September 28, 2012 and the year ended December 31, 2011 had occurred on January 1, 2011.


	Third Quarter Ended				Year-to-Date Ended
	September 28, 2012		September 30, 2011		September 28, 2012		September 30, 2011
Pro forma net sales	$	3,295	$	3,377	$	9,688	$	9,824
Pro forma income from continuing operations		195		218		574		620
Pro forma net income attributable to L-3		192		239		599		692
Pro forma diluted earnings per share from continuing operations		1.98		2.06		5.79		5.71
Pro forma diluted earnings per share		1.97		2.28		6.07		6.44

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 January 1, 2011.