5. Divestitures and Acquisitions

Discontinued Operations

As discussed in Note 1, on February 1, 2016, the Company completed the sale of its NSS business to CACI International Inc. for a sales price of $547 million. The sales price was finalized as of September 23, 2016, with no significant changes to preliminary amounts.

The table below presents statements of operations data for NSS, which was previously a reportable segment and has been classified as a discontinued operation 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.


	Third Quarter Ended					Year-to-Date Ended
	September 23, 2016		September 25, 2015			September 23, 2016			September 25, 2015
	(in millions)
Net sales	$	—	$	271		$	86		$	773
Cost of sales		—		(260	)		(92	)		(736	)
Gain related to business divestiture⁽¹⁾		—		—			64			—
Goodwill impairment charges		—		(456	)		—			(456	)

Operating (loss) income from discontinued operations		—		(445	)		58			(419	)
Interest expense allocated to discontinued operations		—		(4	)		—			(15	)

(Loss) income from discontinued operations before income taxes		—		(449	)		58			(434	)
Income tax benefit		—		25			5			18

(Loss) income from discontinued operations, net of income taxes	$	—	$	(424	)	$	63		$	(416	)

⁽¹⁾	The year-to-date period ended September 23, 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 Divestitures

Marine Systems International (MSI) Divestiture. On May 29, 2015, the Company completed the sale of its MSI business to Wärtsilä Corporation for a sales 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 sales price was finalized as of June 24, 2016, with no significant changes to preliminary amounts. MSI was a sector within the Company’s Electronic Systems segment, primarily selling to the commercial shipbuilding industry. The Company recorded a pre-tax loss of $17 million ($6 million after income taxes) for the year-to-date period ended September 25, 2015, related to the divestiture of MSI.

Broadcast Sports Inc. (BSI) Divestiture. On April 24, 2015, the Company divested its BSI business for a sales price of $26 million. BSI provided 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 recorded a pre-tax loss of $1 million (less than $1 million after income taxes) and $4 million ($6 million after income taxes) for the quarterly and year-to-date periods ended September 25, 2015, respectively, related to the divestiture of BSI.

Tinsley Product Line Divestiture. On July 27, 2015, the Company divested its Tinsley Product Line for a sales price of $4 million. Tinsley provided 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 and year-to-date periods ended September 25, 2015.

Business Acquisitions

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

2016 Business Acquisitions

Advanced Technical Materials, Inc. (ATM) Acquisition. On January 22, 2016, the Company acquired the assets of ATM for a purchase price of $27 million, which was financed with cash on hand. The purchase price and purchase price allocation of ATM was finalized as of September 23, 2016, with no significant changes to preliminary amounts. ATM develops and manufactures a broad product line of passive microwave waveguides and specialized coaxial components. The aggregate goodwill recognized for this business was $20 million, which was assigned to the Communication Systems reportable segment, all of which is expected to be deductible for income tax purposes.

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. The purchase price and purchase price allocation of L-3 ForceX was finalized as of September 23, 2016, with no significant changes to preliminary amounts. 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 $53 million, which was assigned to the Electronic Systems reportable segment, of which $52 million is expected to be deductible for income tax purposes.

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. The purchase price and purchase price allocation of L-3 CTC was finalized as of June 24, 2016, with no significant changes to preliminary amounts. 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 $182 million, which was assigned to the Electronic Systems reportable segment, and is not expected to be deductible for income tax purposes.

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 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 provides 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.

Business Acquisitions Completed or Agreements to Acquire Businesses Entered Into After September 23, 2016

Agreement to Acquire Certain Assets of Implant Sciences. On October 10, 2016, the Company entered into an asset purchase agreement (APA) to acquire the explosives trace detection (ETD) business of Implant Sciences Corporation (Implant) at a future date for a purchase price of $118 million, in addition to the assumption of specified liabilities. The Company intends to finance the asset purchase with cash on hand. Implant filed for bankruptcy protection pursuant to Chapter 11 of the U.S. Bankruptcy Code on October 10, 2016. Accordingly, the completion of this sale transaction is subject to approval by the U.S. Bankruptcy Court. Pursuant to the terms of the APA, the Company will be, subject to U.S. Bankruptcy Court approval, entitled to a breakup fee and expense reimbursement if it does not prevail as the successful bidder after concluding a bankruptcy auction process.

Micreo Limited and Aerosim Acquisitions. On September 30, 2016, the Company acquired Micreo Limited (Micreo) and Flight Training Acquisitions LLC (Aerosim), in separate transactions, for an aggregate purchase price of approximately $82 million, which was financed with cash on hand. The final purchase prices are subject to customary adjustments for final working capital. Micreo specializes in solutions that utilize high-performance microwave, millimeter wave and photonic technology that complements the Company’s wide range of sensor products and is expected to strengthen the development of the Company’s future products in the higher Electronic Warfare (EW) radio frequency (RF) bandwidth. Micreo currently supports a variety of airborne, land and security programs in Australia. Aerosim provides innovative, portable and flexible pilot and maintenance technician training products and provides a flight school for prospective airline pilots. Aerosim’s commercial training capabilities are complementary to those offered by L-3 Commercial Training Solutions.

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 year-to-date period ended September 23, 2016 and the year ended December 31, 2015, assuming that the business acquisitions completed during these periods had occurred on January 1, 2015.


	Third Quarter Ended					Year-to-Date Ended
	September 23, 2016		September 25, 2015			September 23, 2016		September 25, 2015
	(in millions, except per share data)
Pro forma net sales	$	2,505	$	2,577		$	7,522	$	7,661
Pro forma income from continuing operations attributable to L-3		148		127			458		350
Pro forma net income (loss) attributable to L-3		148		(297	)		521		(66	)
Pro forma diluted earnings per share from continuing operations		1.88		1.56			5.82		4.23
Pro forma diluted earnings (loss) per share		1.88		(3.66	)		6.62		(0.80	)

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.