Discontinued Operations

9 Months Ended

Sep. 27, 2015

Discontinued Operations and Disposal Groups [Abstract]

Discontinued Operations

Discontinued Operations

On August 21, 2015, the Company completed the sale of the U.S. and U.K. operations of its Electronic Products Division to Ultra Electronics Holdings plc (“Ultra”), a public limited company formed under the laws of England and Wales and traded on the London Stock Exchange, and Ultra Electronics Defense Inc. (the “Buyer”), a Delaware corporation ultimately owned by Ultra, (the “Transaction”). Pursuant to the terms of that certain Stock Purchase Agreement, dated May 31, 2015, by and among the Company, Ultra and the Buyer (the “Purchase Agreement”), the Company sold to the Buyer all of the issued and outstanding capital stock of its wholly owned subsidiary Herley Industries, Inc. (“Herley”) and certain of Herley’s subsidiaries, including Herley-CTI, Inc., EW Simulation Technology, Ltd. and Stapor Research, Inc. (collectively, the “Herley Entities”), for $260.0 million in cash plus up to $5.0 million for taxes incurred as part of the Transaction, less a $2.0 million escrow to satisfy any purchase price adjustments, and subject to a working capital adjustment of approximately $8.3 million which is expected to be finalized in the fourth quarter of 2015. The Purchase Agreement also contains certain non-compete and indemnification provisions. Under the Purchase Agreement, the Company entered into an agreement to indemnify the Buyer for any pre-acquisition tax liabilities.  As a result of this arrangement, the Company recorded amounts that have historically been classified as unrecognized tax benefits into other long term liabilities.  The Company also agreed to indemnify Ultra for pre-existing environmental conditions for a period of five years from the closing date and with a maximum indemnification payment of $34.0 million. The Company does not believe payments will be required under the indemnification provision, and the assessment of the fair value is immaterial. Under the terms of the Purchase Agreement, a joint 338(h)(10) election has been made for income tax purposes, providing a “step up” in tax basis to Ultra. The Company incurred approximately $11.3 million in transaction-related costs, and expects to incur approximately $8.9 million in federal and state income taxes on the sale. The gain on sale of $80.3 million is subject to changes in the working capital adjustment and indemnification obligations. In accordance with ASC 360-10-45-9, Property, Plant, and Equipment (Topic 360) and ASC 205-20-45-3 Presentation of Financial Statements (Topic 205), the Herley Entities were classified as discontinued operations in the accompanying condensed consolidated financial statements for all periods presented.

Immediately prior to the closing of the transaction, the outstanding shares of the capital stock of (i) General Microwave Corporation, a New York corporation, and its direct and indirect wholly owned subsidiaries General Microwave Israel Corporation, a Delaware corporation, General Microwave Israel (1987) Ltd., an Israeli company, and Herley GMI Eyal Ltd., an Israeli company, (ii) MSI Acquisition Corp., a Delaware corporation and its wholly owned subsidiary Micro Systems, Inc., a Florida corporation, and (iii) Herley-RSS, Inc., a Delaware corporation, were distributed as a dividend by Herley to the Company and will continue their current operations as wholly owned subsidiaries of the Company.

The following table presents the results of discontinued operations (in millions):

	Three Months Ended					Nine Months Ended
	September 28, 2014		September 27, 2015			September 28, 2014			September 27, 2015
Revenue	$	27.3	$	11.9		$	78.7		$	59.7
Cost of sales	16.7		9.0			51.0			40.6
Selling, general and administrative expenses	6.2		3.7			18.1			15.2
Interest expense, net	3.4		2.3			11.7			9.1
Other net expense items that are not major	0.6		0.2			0.2			0.1
Income (loss) from discontinued operations before income taxes	0.4		(3.3		)	(2.3		)	(5.3		)
Gain on disposal of discontinued operations before income taxes	—		80.3			—			80.3
Total gain (loss) on discontinued operations before income taxes	0.4		77.0			(2.3		)	75.0
Income tax expense	—		(26.2		)	(0.6		)	(25.0		)
Income (loss) from discontinued operations	$	0.4	$	50.8		$	(2.9	)	$	50.0

The results for the three and nine months ended September 27, 2015 are through the date of disposal of August 21, 2015.

Depreciation and amortization expense included in selling, general and administrative expenses was $1.6 million and $0.9 million for the three months ended September 28, 2014 and September 27, 2015, respectively, and $5.0 million and $4.2 million for the nine months ended September 28, 2014 and September 27, 2015, respectively.

Interest expense is included based on an allocation consistent with the redemption of $175.0 million of the Company's 7% Senior Secured Notes due 2019 (the “Notes”) and the repayment of $41.0 million in outstanding borrowings on that certain Credit and Security Agreement, dated May 14, 2014 (“the Credit Agreement”), by and among the Company, the lenders from time to time party thereto, SunTrust Bank, as Agent (the “Agent”), PNC Bank, National Association, as Joint Lead Arranger and Documentation Agent, and SunTrust Robinson Humphrey, Inc., as Joint Leader Arranger and Sole Book Runner, that was repaid upon the completion of the sale of the Herley Entities in accordance with the terms and conditions of the Indenture (as defined below) and the Credit Agreement, respectively. Refer to Note 8 for further discussion.

Intra-period tax allocation rules require the Company to allocate its provision for income taxes between continuing operations and other categories of earnings, such as discontinued operations. In periods in which there is a year-to-date pre-tax loss from continuing operations and pre-tax income in other categories of earnings, such as discontinued operations, the Company must allocate the tax provision to the other categories of earnings. A related tax benefit is then recorded in continuing operations. Due to the net book income in discontinued operations and the intra-period allocation rules, the Company recorded income tax expense of $26.2 million and $25.0 million in discontinued operations for the three and nine months ended September 27, 2015, respectively.

The following is a summary of the assets and liabilities of discontinued operations in the accompanying condensed consolidated balance sheets as of December 28, 2014 and September 27, 2015 (in millions):

	December 28, 2014		September 27, 2015
Cash and cash equivalents	$	1.2	$	—
Accounts receivable, net	30.7		—
Inventoried costs	20.6		—
Other current assets	1.3		—
Current assets of discontinued operations	$	53.8	$	—
Property, plant and equipment, net	$	21.0	$	—
Goodwill	113.0		—
Intangible assets, net	2.8		—
Other assets	0.2		—
Non-current assets of discontinued operations	$	137.0	$	—
Accounts payable	$	3.8	$	—
Accrued expenses	1.8		—
Accrued compensation	5.3		0.9
Billings in excess of cost and earnings on uncompleted contracts	2.5		—
Other current liabilities	1.2		0.6
Current liabilities of discontinued operations	$	14.6	$	1.5
Non-current liabilities of discontinued operations	$	0.5	$	4.2