5. Divestitures and Acquisitions

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 7, 2015. The transaction was completed on February 1, 2016 for a 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 was previously a reportable segment and 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.


	First Quarter Ended
	March 25, 2016			March 27, 2015
	(in millions)
Net sales	$	86		$	238
Cost of sales		(92	)		(225	)
Gain related to business divestiture⁽¹⁾		64			—

Operating income from discontinued operations		58			13
Interest expense allocated to discontinued operations		—			(5	)

Income from discontinued operations before income taxes		58			8
Income tax benefit (expense)		5			(4	)

Income from discontinued operations, net of income taxes	$	63		$	4

⁽¹⁾	The first quarter ended March 25, 2016 includes a gain of $64 million (before and after income taxes) on the sale of the NSS business.

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


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

Total assets of discontinued operations	$	664

Liabilities
Accounts payable, trade	$	48
Other current liabilities		78

Current liabilities		126
Long-term liabilities		94

Total liabilities of discontinued operations	$	220

⁽¹⁾	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 NSS business sold.

Business Divestitures

2015 Business Divestiture

Marine Systems International (MSI) Divestiture. On May 29, 2015, the Company completed the sale of its MSI business to Wärtsilä Corporation for a 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. During the quarterly period ended March 27, 2015, the Company recorded a pre-tax loss of $22 million related to the divestiture of MSI.

Business Acquisitions

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

2016 Business Acquisition

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. The aggregate goodwill recognized for this business was $22 million, which was assigned to the Communication Systems reportable segment, all of which is expected to be deductible for income tax purposes. The final purchase price allocation, which is expected to be completed in the third 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.

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 second 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 second 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.

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 25, 2016 and the year ended December 31, 2015, assuming that the business acquisitions completed during these periods had occurred on January 1, 2015.


	First Quarter Ended
	March 25, 2016		March 27, 2015
	(in millions, except per share data)
Pro forma net sales	$	2,353	$	2,518
Pro forma income from continuing operations		167		108
Pro forma net income attributable to L-3		227		108
Pro forma diluted earnings per share from continuing operations		2.08		1.24
Pro forma diluted earnings per share		2.87		1.29

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, 2015.