7. Goodwill and Identifiable Intangible Assets

Goodwill. In accordance with the accounting standards for business combinations, the Company records the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition (commonly referred to as the purchase price allocation). As part of the purchase price allocations for the Company’s business acquisitions, identifiable intangible assets are recognized as assets apart from goodwill if they arise from contractual or other legal rights, or if they are capable of being separated or divided from the acquired business and sold, transferred, licensed, rented or exchanged. However, the Company does not recognize any intangible assets apart from goodwill for the assembled workforces of its business acquisitions. At December 31, 2014, the Company had approximately 45,000 employees, and the substantial majority of the sales generated by the Company’s businesses were from the productive labor efforts of its employees, as compared to selling manufactured products or right-to-use technology.

Generally, the largest intangible assets from the businesses that the Company acquires are the assembled workforces, which includes the human capital of the management, administrative, marketing and business development, scientific, engineering and technical employees of the acquired businesses. The success of the Company’s businesses, including their ability to retain existing business (revenue arrangements) and to successfully compete for and win new business (revenue arrangements), is primarily dependent on the management, marketing and business development, contracting, engineering and technical skills and knowledge of its employees, rather than on productive capital (plant and equipment, and technology and intellectual property). Additionally, for a significant portion of its businesses, the Company’s ability to attract and retain employees who have U.S. Government security clearances, particularly those of top-secret and above, is critical to its success, and is often a prerequisite for retaining existing revenue arrangements and pursuing new ones. Generally, patents, trademarks and licenses are not material for the Company’s acquired businesses. Furthermore, the Company’s U.S. Government contracts (revenue arrangements) generally permit other companies to use the Company’s patents in most domestic work performed by such other companies for the U.S. Government. Therefore, because intangible assets for assembled workforces are part of goodwill in accordance with the accounting standards for business combinations, the substantial majority of the intangible assets for the Company’s business acquisitions is recognized as goodwill. Additionally, the value assigned to goodwill for the Company’s business acquisitions also includes the value that the Company expects to realize from cost reduction measures that it implements for its acquired businesses.

The table below presents the changes in goodwill allocated to the Company’s reporting units in each reportable segment.


	Electronic Systems		Aerospace Systems		Communication Systems		NSS		Consolidated Total
	(in millions)
Balance at December 31, 2012	$	4,046	$	1,770	$	992	$	968	$	7,776
Business acquisition⁽¹⁾		44		—		—		—		44
Business disposition		(2)		—		—		—		(2)
Foreign currency translation adjustments⁽²⁾		(3)		(19)		—		—		(22)

Balance at December 31, 2013	$	4,085	$	1,751	$	992	$	968	$	7,796
Business acquisitions⁽¹⁾		(3)		—		—		39		36
Business disposition		(1)		—		—		—		(1)
Foreign currency translation adjustments⁽²⁾		(77)		(21)		—		(1)		(99)
Assets held for sale⁽³⁾		(231)		—		—		—		(231)

Balance at December 31, 2014	$	3,773	$	1,730	$	992	$	1,006	$	7,501

⁽¹⁾

For the year ended December 31, 2014, the decrease in goodwill for the Electronic Systems segment was due to the final purchase price allocation for the Mustang business acquisition. The increase in goodwill for the NSS segment was due to the L-3 Data Tactics business acquisition. For the year ended December 31, 2013, the increase in goodwill for the Electronic Systems segment was due to the Mustang business acquisition.

⁽²⁾

During 2014, the decrease in goodwill presented in the Electronic Systems segment was primarily due to the strengthening of the U.S. dollar against the Euro, the Canadian dollar and the British pound. During 2014 and 2013, the decreases in goodwill presented in the Aerospace Systems segment were due to the strengthening of the U.S. dollar against the Canadian dollar. During 2013, the decrease in goodwill presented in the Electronic Systems segment was primarily due to the strengthening of the U.S. dollar against the Canadian dollar and Australian dollar, partially offset by the weakening of the U.S. dollar against the Euro and the British pound.

⁽³⁾

On December 16, 2014, the Company entered into a definitive agreement with Wärtsilä Corporation to sell its Marine Systems International business.

As discussed in Note 2, the carrying value of goodwill is tested for impairment annually as of November 30 and on an interim basis, using a two-step process, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

The first step of the November 30, 2014 and November 30, 2013 annual impairment tests did not indicate any impairments. The Company’s accumulated goodwill impairment losses were $58 million at December 31, 2014 and 2013, of which $43 million and $15 million were recorded in the Electronic Systems and Communication Systems segments, respectively.

Identifiable Intangible Assets. The most significant identifiable intangible asset that is separately recognized for the Company’s business acquisitions is customer contractual relationships. All of the Company’s customer relationships are established through written customer contracts (revenue arrangements). The fair value for customer contractual relationships is determined, as of the date of acquisition, based on estimates and judgments regarding expectations for the estimated future after-tax earnings and cash flows (including cash flows for working capital) arising from the follow-on sales on contract (revenue arrangement) renewals expected from the customer contractual relationships over their estimated lives, including the probability of expected future contract renewals and sales, less a contributory assets charge, all of which is discounted to present value.

Information on the Company’s identifiable intangible assets that are subject to amortization is presented in the table below.


	December 31, 2014							December 31, 2013
	Weighted Average Amortization Period	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
	(in years)	(in millions)
Customer contractual relationships⁽¹⁾	20	$	440	$	262	$	178	$	466	$	253	$	213
Technology⁽¹⁾	11		165		111		54		168		108		60
Other	18		27		16		11		27		15		12

Total	18	$	632	$	389	$	243	$	661	$	376	$	285

⁽¹⁾

Amounts reclassified to assets held for sale at December 31, 2014 relating to L-3 MSI include gross carrying amounts of $28 million and $7 million for customer contractual relationships and technology intangible assets, respectively, and accumulated amortization of $20 million and $6 million for customer contractual relationships and technology intangible assets, respectively.

Amortization expense recorded by the Company for its identifiable intangible assets is presented in the table below.


	Year Ended December 31,
	2014		2013		2012
	(in millions)
Amortization expense	$	43	$	39	$	47

Based on gross carrying amounts at December 31, 2014, excluding assets held for sale relating to L-3 MSI, the Company’s estimate of amortization expense for identifiable intangible assets for the years ending December 31, 2015 through 2019 is presented in the table below.


	Year Ending December 31,
	2015		2016		2017		2018		2019
	(in millions)
Estimated amortization expense	$	37	$	33	$	29	$	25	$	22