3. 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.

2016 Business Acquisitions

MacDonald Humfrey (Automation) Limited Acquisition. On November 22, 2016, the Company acquired MacDonald Humfrey (Automation) Limited, renamed L3 MacDonald Humfrey, for a purchase price of £263 million (approximately $327 million). The purchase price is subject to additional, contingent consideration not to exceed £30 million (approximately $38 million), and is based on L3 MacDonald Humfrey’s post-acquisition financial performance for the three-year period ending December 31, 2019. The Company recorded a £23 million (approximately $29 million) liability on the acquisition date for the fair value of the contingent consideration. The acquisition was funded from cash on hand and revolving credit borrowings that were repaid before the end of 2016. The final purchase price allocation, which is expected to be completed in the third quarter of 2017, 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. L3 MacDonald Humfrey is a globally recognized leader in the deployment of operationally effective and efficient aviation checkpoint security solutions, as well as in the development of state-of-the-art process automation and collaborative robotic capabilities supporting aviation and other adjacent markets. The goodwill recognized for this business was £205 million (approximately $252 million), which was assigned to the Electronics Systems reportable segment, and is not expected to be deductible for income tax purposes. The Company also recognized identifiable intangible assets of £43 million (approximately $53 million) in the aggregate, which consisted of £22 million (approximately $27 million) for technology and £21 million (approximately $26 million) for customer relationships. Identifiable intangible assets will be amortized over a weighted average useful life of 10 years.

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 $86 million, which was financed with cash on hand. The final purchase prices are subject to customary adjustments for final working capital. The final purchase price allocations, which are expected to be completed in the second quarter of 2017, 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. 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 L3 Commercial Training Solutions. The aggregate goodwill recognized for these businesses was $61 million, which was assigned to the Electronic Systems reportable segment, of which $6 million is expected to be deductible for income tax purposes.

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 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.

Net sales and income before income taxes for L3 MacDonald Humfrey, Micreo, Aerosim and ATM, included in L3’s consolidated statement of operations for the year ended December 31, 2016, are presented in the table below.

	Year Ended December 31, 2016
	(in millions)
Net sales	$	37
Income before income taxes	$	7

2015 Business Acquisitions

ForceX, Inc. Acquisition. On October 13, 2015, the Company acquired ForceX, Inc., renamed L3 ForceX, for a purchase price of $61 million, which was financed with cash on hand. The purchase price and purchase price allocation of L3 ForceX was finalized as of September 23, 2016, with no significant changes to preliminary amounts. L3 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. L3 ForceX’s proprietary processing, exploitation and dissemination capabilities provide an integrated tactical operational picture, allowing users to make critical decisions in real time. L3 ForceX also supports several key DoD ISR initiatives and classified programs. L3 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 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 L3 CTC Ltd. (L3 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 L3 CTC was finalized as of June 24, 2016, with no significant changes to preliminary amounts. L3 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. L3 CTC expands L3’s commercial aviation training business to encompass a growing portfolio of airline and third-party training company customers. The goodwill recognized for this business was £118 million (approximately $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 L3 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 L3 Narda-Miteq business provides products for the DoD, other U.S. Government agencies, prime contractors and commercial customers. The 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.

2014 Business Acquisition

Data Tactics Corporation Acquisition. On March 4, 2014, the Company acquired Data Tactics Corporation, renamed L3 Data Tactics, for a purchase price of $57 million, which was financed with cash on hand. The purchase price and purchase price allocation for L3 Data Tactics was finalized as of December 31, 2014, with no significant changes to preliminary amounts. L3 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 goodwill recognized for this business was $39 million, which was assigned to the former NSS reportable segment and is included in discontinued operations for the year ended December 31, 2015. On February 1, 2016, L3 Data Tactics was sold to CACI International Inc. in conjunction with the sale of the NSS business.

Business Acquisitions Completed After December 31, 2016

Implant Sciences Acquisition. On October 10, 2016, the Company entered into an asset purchase agreement (APA), to acquire certain assets of Implant, at which time Implant entered into Chapter 11 bankruptcy protection of the U.S. Bankruptcy Code. In December 2016, Implant received the U.S. Bankruptcy Court approval to consummate the APA. Implant’s ETD products have received approvals and certifications from several international regulatory agencies. Implant bolsters the Company’s leadership in efficient, scalable security solutions and greatly enhances its capabilities in the global aviation security and national security markets. On January 5, 2017, the Company completed the acquisition of the explosive trace detection (ETD) business of Implant Sciences Corporation (Implant), for a purchase price of $118 million, in addition to the assumption of specified liabilities, which was financed with cash on hand.

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 the 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 L3’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 L3 consolidated net assets and (2) L3 consolidated total debt.

	Year Ended December 31,
	2016			2015			2014
	(in millions)
Net sales	$	86		$	1,088		$	1,138
Cost of sales		(92	)		(1,040	)		(1,065	)
Gain related to business divestiture⁽¹⁾		64			—			—
Goodwill impairment charges		—			(571	)		—
Operating income (loss) from discontinued operations		58			(523	)		73
Interest expense allocated to discontinued operations		—			(20	)		(20	)
Income (loss) from discontinued operations before income taxes		58			(543	)		53
Income tax benefit (expense)		5			21			(21	)
Income (loss) from discontinued operations, net of income taxes	$	63		$	(522	)	$	32

⁽¹⁾

The year ended December 31, 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 L3 and NSS business sold.

Business Divestitures

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

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 ended December 31, 2015, related to the divestiture of MSI. The loss is comprised of: (1) $17 million for a 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.

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 $4 million ($6 million after income taxes) during the year ended December 31, 2015, 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) for the year ended December 31, 2015.

Klein Divestiture. On December 31, 2015, the Company divested its Klein business for a sales price of $10 million. Klein provided 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) for the year ended December 31, 2015.

Net sales and income (loss) before income taxes for MSI, BSI, the Tinsley Product Line and Klein, included in L3’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
	(in millions)
Net sales	$	209	$	596
Income before income taxes	$	—	$	27

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 years ended December 31, 2016 and 2015 assuming that the business acquisitions completed during 2016 and 2015 had occurred on January 1, 2015 and January 1, 2014, respectively. The unaudited pro forma Statements of Operations data below includes adjustment for additional amortization expense related to acquired intangible assets, depreciation and estimated reduction to interest income assuming the 2016 and 2015 acquisitions had occurred on January 1, 2015 and January 1, 2014, respectively.

	Year Ended December 31,
	2016		2015
	(in millions, except per share data)
Pro forma net sales	$	10,655	$	10,700
Pro forma income from continuing operations attributable to L3	$	660	$	307
Pro forma net income (loss) attributable to L3	$	723	$	(215	)
Pro forma diluted earnings per share from continuing operations	$	8.38	$	3.74
Pro forma diluted earnings (loss) per share	$	9.18	$	(2.63	)

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.