4. Acquisitions and Divestitures

Business Acquisitions

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

2015 Business Acquisition

On January 21, 2015, the Company acquired the assets of MITEQ, Inc. (Miteq) for a purchase price of $41 million, which was financed with cash on hand. The purchase price is subject to adjustment based on closing date net working capital. Miteq was combined with the Company’s Narda Microwave-East business and the new organization was re-named L-3 Narda-Miteq. Miteq offers a broad product line of active and passive radio frequency (RF) microwave components and low-power satellite communications (SATCOM) products for space and military applications that complement the existing Narda Microwave East product line. The combined L-3 Narda-Miteq business will provide products for the DoD, other U.S. Government agencies, prime contractors and commercial customers. Based on the preliminary purchase price, the aggregate goodwill recognized for this business was $10 million, of which $3 million is expected to be deductible for income tax purposes. The goodwill was assigned to the Communications Systems reportable segment. The final purchase price allocation, which is expected to be completed in the fourth quarter of 2015, will be based on the final purchase price and 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 will have a material impact on its results of operations or financial position.

2014 Business Acquisition

On March 4, 2014, the Company acquired Data Tactics Corporation, renamed L-3 Data Tactics, for a purchase price of $57 million, which was financed with cash on hand. The purchase price and purchase price allocation for L-3 Data Tactics was finalized as of December 31, 2014 with no significant changes to preliminary amounts. L-3 Data Tactics is a specialized provider of large-scale data analytics, cybersecurity and cloud computing solution services, primarily to the DoD. Based on the final purchase price allocation, the aggregate goodwill recognized for this business was $39 million, substantially all of which is expected to be deductible for income tax purposes. The goodwill was assigned to the NSS reportable segment.

Business Divestitures

On April 24, 2015, the Company divested its Broadcast Sports Inc., (BSI) business for a sales price of $27 million, subject to customary adjustments. BSI is a provider of wireless technology and communications systems services for use in the field of sports television broadcasting, and was included in the Sensor Systems sector of the Electronic Systems segment. The Company will record the divestiture of BSI in the second quarter of 2015, and does not expect the gain or loss on the divestiture to be material to the Company’s unaudited condensed consolidated statement of operations. In accordance with ASC 360, Property, Plant and Equipment, the Company classified the assets and liabilities and results of operations of BSI as held and used in the condensed consolidated financial statements for all periods presented.

On December 16, 2014, the Company entered into a definitive agreement with Wärtsilä Corporation to sell its Marine Systems International (MSI) business for a base purchase price of €285 million, subject to customary adjustments and an estimated reduction of €60 million for MSI employee pension-related liabilities to be assumed by Wärtsilä Corporation. MSI is a sector within the Company’s Electronic Systems segment, primarily selling to the commercial shipbuilding industry. MSI is a turnkey supplier of complete electrical systems, as well as integrated navigation, automation, communications and power and propulsion systems for all types of ships, including cruise liners, ferries and offshore and specialty vessels. The transaction is anticipated to be completed on May 29, 2015. All required regulatory approvals to complete the MSI divestiture have been received. Therefore, in accordance with ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, MSI’s assets and liabilities are classified as held for sale in the Company’s unaudited condensed consolidated balance sheet as of March 27, 2015 and audited consolidated balance sheet as of December 31, 2014. Also, in accordance with ASU 2014-08, MSI’s results of operations are included in income from continuing operations for all periods presented and are not classified within discontinued operations.

The accounting standards for long-lived assets to be disposed of by sale require that the Company measure assets and liabilities of a disposal group, classified as held for sale, at the lower of its carrying amount or fair value less costs to sell, at the end of each reporting period. As a result of the decline in the estimated U.S. dollar equivalent divestiture proceeds due to the weakening of the Euro against the U.S. dollar, the carrying value of the MSI disposal group exceeded its fair value at March 27, 2015. Accordingly, a pre-tax non-cash impairment charge of $17 million was recorded during the quarterly period ended March 27, 2015, and is included in the loss related to business divestiture caption on the unaudited condensed consolidated statements of operations. Upon the completion of the MSI divestiture, the Company will record an adjustment to the loss related to business divestiture, based on the actual divestiture proceeds received.

During the quarterly period ended March 27, 2015, L-3 entered a forward contract to sell the estimated Euro proceeds of €285 million to be obtained from the divestiture of MSI at a rate of $1.0782. The Company is accounting for this contract as an economic hedge and records a mark to market adjustment to earnings based on the fair value of the forward contract at the end of each reporting period. Accordingly, the Company recorded an unrealized pre-tax loss of $5 million as of March 27, 2015. This loss is included in the loss related to business divestiture caption on the unaudited condensed consolidated statements of operations.

The major classes of assets and liabilities included as held for sale related to MSI are presented in the table below:


	March 27, 2015			December 31, 2014
	(in millions)
Assets
Cash and cash equivalents	$	60		$	61
Billed receivables, net of allowances of $6 in 2015 and 2014		77			77
Contracts in process		70			70
Inventories		64			70
Other current assets		2			10

Total current assets		273			288

Goodwill		206			231
Other assets		34			28
Carrying value write-down⁽¹⁾		(17	)		—

Total assets classified as held for sale	$	496		$	547

Liabilities
Accounts payable, trade	$	28		$	31
Accrued employment costs		26			22
Accrued expenses		28			33
Advance payments and billings in excess of costs incurred		56			55
Other current liabilities		14			21

Total current liabilities		152			162

Pension and postretirement benefits		53			56
Other liabilities		20			19

Total liabilities classified as held for sale	$	225		$	237

⁽¹⁾

At March 27, 2015, the carrying value of the MSI disposal group exceeded its fair value and, as a result, a $17 million loss was recorded which was not allocated to the major classes of assets and liabilities of the MSI disposal group in accordance with ASC 205, Presentation of Financial Statements.

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 quarterly period ended March 27, 2015 and the year ended December 31, 2014, in each case assuming that the business acquisitions completed during these periods had occurred on January 1, 2014.


	First Quarter Ended
	March 27, 2015		March 28, 2014
	(in millions, except per share data)
Pro forma net sales	$	2,715	$	2,977
Pro forma net income attributable to L-3	$	104	$	168
Pro forma diluted earnings per share	$	1.24	$	1.88

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, 2014.