3. Divestitures and Acquisitions

Business Divestitures

Discontinued Operations

As discussed in Note 1, the Company entered into a definitive agreement to sell its NSS business to CACI International Inc. on December 8, 2015. The transaction was completed on February 1, 2016 for a preliminary sale price of $561 million, subject to finalization based on customary adjustments for closing date net working capital.

The table below presents statement of operations data for NSS, which has been classified as discontinued operations and includes allocated interest expense for debt not directly attributable or related to L-3’s other operations. Interest expense was allocated in accordance with the accounting standards for discontinued operations and was based on the ratio of NSS’s net assets to the sum of: (1) total L-3 consolidated net assets and (2) L-3 consolidated total debt.


	Year Ended December 31,
	2015			2014			2013
	(in millions)
Product and service revenues	$	1,088		$	1,138		$	1,202

Operating (loss) income from discontinued operations⁽¹⁾		(523	)		73			95
Interest expense allocated to discontinued operations		(20	)		(20	)		(20	)

(Loss) income from discontinued operations before income taxes⁽¹⁾	$	(543	)	$	53		$	75
Income tax benefit (expense)		21			(21	)		(31	)

(Loss) income from discontinued operations, net of income taxes⁽¹⁾	$	(522	)	$	32		$	44

⁽¹⁾

The year ended December 31, 2015, includes a goodwill impairment charge of $571 million ($537 million after income taxes).

The major classes of assets and liabilities included in discontinued operations related to NSS are presented in the table below.


	December 31, 2015		December 31, 2014
	(in millions)
Assets
Current assets	$	201	$	198
Property, plant and equipment, net		25		27
Goodwill⁽¹⁾		390		989
Other assets		48		48

Total assets of discontinued operations	$	664	$	1,262

Liabilities
Accounts payable, trade	$	48	$	36
Other current liabilities		78		75

Current liabilities		126		111
Long-term liabilities		94		119

Total liabilities of discontinued operations	$	220	$	230

⁽¹⁾

The goodwill balance at December 31, 2014 is based on the total goodwill attributable to the NSS reporting unit, less the historical goodwill attributable to the business retained by L-3. The goodwill balance at December 31, 2015 is based on an allocation of the goodwill attributable to the NSS reporting unit to discontinued operations based on the relative fair value of the NSS business retained by L-3 and the NSS business sold.

2015 Business Divestitures

During the year ended December 31, 2015, the Company completed the sales of Marine Systems International (MSI), Broadcast Sports Inc. (BSI), the Tinsley Product Line and Klein Associates, Inc. (Klein). The adjustments recorded by the Company related to the business divestitures are included in the loss related to business divestitures caption on the audited consolidated statements of operations and discussed below. Additionally, these adjustments, the proceeds received, and net sales included in continuing operations related to the Company’s business divestitures, are summarized in the table below.


	Year Ended December 31, 2015
	Loss Related to Business Divestiture		Proceeds Received		Net Sales
	(in millions)
MSI divestiture	$	(17)	$	318	$	185
BSI divestiture		(4)		26		7
Tinsley Product Line divestiture		(8)		4		9
Klein divestiture		(2)		10		8

Total	$	(31)	$	358	$	209

NetMSI Divestiture. On May 29, 2015, the Company completed the sale of its MSI business to Wärtsilä Corporation for a preliminary sale price of €295 million (approximately $318 million), in addition to the assumption by Wärtsilä Corporation of approximately €60 million of MSI employee pension-related liabilities. The sale price is subject to finalization based on customary adjustments for closing date net working capital. MSI was a sector within the Company’s Electronic Systems segment, primarily selling to the commercial shipbuilding industry. In accordance with ASU 2014-08, MSI’s assets and liabilities are classified as held for sale in the Company’s audited consolidated balance sheet as of December 31, 2014 and MSI’s results of operations are included in income from continuing operations for all periods presented. During the year ended December 31, 2015, the Company recorded a pre-tax loss of $17 million ($6 million after income taxes) related to the divestiture of MSI. The loss is comprised of: (1) $17 million for non-cash impairment charge, (2) a loss of $4 million on a forward contract to sell Euro proceeds from the MSI divestiture and (3) a realized gain of $4 million upon completion of the sale of MSI, each of which is discussed below.

The accounting standards for long-lived assets to be disposed of by sale require the Company to 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 ($12 million after income taxes) was recorded during the quarterly period ended March 27, 2015.

In March 2015, L-3 entered into a forward contract to sell €285 million of the proceeds obtained from the divestiture of MSI at a rate of $1.0782. The Company accounted for this contract as an economic hedge and recorded a mark to market adjustment to earnings based on the fair value of the forward contract at March 27, 2015. Accordingly, the Company recorded an unrealized pre-tax loss of $5 million ($3 million after income taxes) during the quarterly period ended March 27, 2015. On May 29, 2015, upon settlement of the contract, the Company realized $4 million of the $5 million previously recorded pre-tax loss and recorded a $1 million pre-tax gain ($1 million after income taxes) in the quarterly period ended June 26, 2015.

During the quarterly period ended June 26, 2015, the Company realized a pre-tax gain of $4 million ($8 million after income tax benefits), based on the proceeds received on the date of sale.

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


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

Total current assets		288

Goodwill		231
Other assets		28

Total assets classified as held for sale	$	547

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

Total current liabilities		162

Pension and postretirement benefits		56
Other liabilities		19

Total liabilities classified as held for sale	$	237

BSI Divestiture. On April 24, 2015, the Company divested its BSI business for a sale price of $26 million. 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 divestiture resulted in a pre-tax loss of $4 million ($6 million after income taxes) during the year ended December 31, 2015. In accordance with ASU 2014-08, BSI’s assets and liabilities as of December 31, 2014, and results of operations for all periods presented are classified as held and used in the audited consolidated financial statements.

Tinsley Product Line Divestiture. On July 27, 2015, the Company divested its Tinsley Product Line for a sale price of $4 million. Tinsley is a provider of optical components, sub-assemblies and passive sub-systems and was included in the Sensor Systems sector of the Electronic Systems segment. The divestiture resulted in a pre-tax loss of $8 million ($6 million after income taxes) during the quarterly period ended September 25, 2015. In accordance with ASU 2014-08, Tinsley’s assets and liabilities as of December 31, 2014, and results of operations for all periods presented are classified as held and used in the audited consolidated financial statements.

Klein Divestiture. On December 31, 2015, the Company divested its Klein business for a sale price of $10 million. Klein is a provider of side scan sonar equipment and waterside security and surveillance systems, and was included in the Power & Propulsion Systems sector of the Electronic Systems segment. The divestiture resulted in a pre-tax loss of $2 million ($2 million after income taxes) during the quarterly period ended December 31, 2015. In accordance with ASU 2014-08, Klein’s assets and liabilities as of December 31, 2014, and results of operations for all periods presented are classified as held and used in the audited consolidated financial statements.

Net sales and income (loss) before income taxes for MSI, BSI, the Tinsley Product Line and Klein, included in L-3’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.


	Year Ended December 31,
	2015		2014		2013
	(in millions)
Net sales	$	209	$	596	$	569
Income (loss) before income taxes	$	—	$	27	$	(3)

Business Acquisitions

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

2015 Business Acquisitions

ForceX, Inc. Acquisition. On October 13, 2015, the Company acquired ForceX, Inc., renamed L-3 ForceX, for a purchase price of $61 million, which was financed with cash on hand. L-3 ForceX specializes in ISR mission management software and geospatial application technology programs, offering an array of advanced products, including cueing system software, hardware and video algorithms, and wide-area sensor integration solutions and software. L-3 ForceX’s proprietary processing, exploitation and dissemination capability provides an integrated tactical operational picture, allowing users to make critical decisions in real time. L-3 ForceX also supports several key DoD ISR initiatives and classified programs. L-3 ForceX’s customer base includes the U.S. Air Force, U.S. Special Operations Command, the Naval Surface Warfare Center and a variety of DoD agencies. The aggregate goodwill recognized for this business was $48 million, which was assigned to the Electronic Systems reportable segment, of which $47 million is expected to be deductible for income tax purposes. The final purchase price allocation, which is expected to be completed in the first quarter of 2016, 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 allocations will have a material impact on its results of operations or financial position.

CTC Aviation Group Acquisition. On May 27, 2015, the Company acquired CTC Aviation Group, renamed L-3 CTC Ltd. (L-3 CTC), for a purchase price of £153 million (approximately $236 million), which was financed with cash on hand. L-3 CTC is a global airline pilot training and crew resourcing specialist, based in the United Kingdom, which offers customized and innovative solutions to major airlines and flight training customers globally. L-3 CTC expands L-3’s commercial aviation training business to encompass a growing portfolio of airline and third-party training company customers. The aggregate goodwill recognized for this business was $185 million, which was assigned to the Electronic Systems reportable segment, and is not expected to be deductible for income tax purposes. The final purchase price allocation, which is expected to be completed in the first quarter of 2016, 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 allocations will have a material impact on its results of operations or financial position.

MITEQ, Inc. 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 and purchase price allocation of Miteq was finalized as of September 25, 2015, with no significant changes to preliminary amounts. 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. The aggregate goodwill recognized for this business was $11 million, of which $4 million is expected to be deductible for income tax purposes. The goodwill was assigned to the Communication Systems reportable segment.

Net sales and income before income taxes for L-3 ForceX, L-3 CTC and Miteq, included in L-3’s consolidated statement of operations for the year ended December 31, 2015, are presented in the table below.


	Year Ended December 31, 2015
	(in millions)
Net sales	$	103
Income before income taxes	$	5

2014 Business Acquisition

Data Tactics Corporation 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 former NSS reportable segment.

2013 Business Acquisition

On December 19, 2013, the Company acquired Mustang Technology Group, L.P. (Mustang) business for a purchase price of $54 million, which was financed with cash on hand. The purchase price and purchase price allocation for Mustang was finalized as of June 27, 2014, with no significant changes from preliminary amounts. Mustang develops and manufactures radar-based sensors and systems used in precision-guided weapons, electronic warfare, unmanned systems and other military applications. Based on the final purchase price allocation, the aggregate goodwill recognized for this business was $41 million, substantially all of which is expected to be deductible for income tax purposes. The goodwill was assigned to the Electronic Systems reportable segment.

Business Acquisitions Completed After December 31, 2015

On January 22, 2016, the Company acquired the assets of Advanced Technical Materials, Inc. (ATM) for a purchase price of $27 million (subject to customary adjustments), which was financed with cash on hand. ATM develops and manufactures a broad product line of passive microwave waveguides and specialized coaxial components.

Unaudited Pro Forma Statements of Operations Data

The following unaudited pro forma Statements of Operations data presents the combined results of the Company and its business acquisitions completed during the years ended December 31, 2015 and 2014 assuming that the business acquisitions completed during 2015 and 2014 had occurred on January 1, 2014.


	Year Ended December 31,
	2015		2014
	(in millions, except per share data)
Pro forma net sales	$	10,523	$	11,146
Pro forma income from continuing operations	$	302	$	657
Pro forma net (loss) income attributable to L-3	$	(235)	$	676
Pro forma diluted earnings per share from continuing operations	$	3.50	$	7.34
Pro forma diluted (loss) earnings per share	$	(2.87)	$	7.70

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.