DISCONTINUED OPERATIONS AND DIVESTITURES

Discontinued Operations

We completed two significant divestitures during fiscal 2017, the divestiture of our government information technology (“IT”) services business (“IT Services”) and the divestiture of our Harris CapRock Communications commercial business (“CapRock”), which are described in more detail below. These divestitures individually and collectively represented a strategic shift away from non-core markets (for example, energy, maritime and government IT services). The decision to divest these businesses was part of our strategy to simplify our operating model to focus on technology-differentiated, high-margin businesses, and will have a major effect on our operations and financial results.

As a result, CapRock and IT Services are reported as discontinued operations in the Consolidated Financial Statements and these Notes, and our historical financial results have been restated to account for CapRock and IT Services as discontinued operations for all periods presented in the Consolidated Financial Statements and these Notes. Except for disclosures related to our cash flows, or unless otherwise specified, disclosures in the accompanying Consolidated Financial Statements and these Notes relate solely to our continuing operations.

The major components of the discontinued operations in our Consolidated Statement of Income include the following:



	2017			2016			2015

	(In millions)
Revenue from product sales and services	$	1,039		$	1,529		$	1,245
Cost of product sales and services	(885		)	(1,286		)	(1,025		)
Engineering, selling and administrative expenses	(91		)	(150		)	(123		)
Impairment of goodwill and other assets	(240		)	(367		)	(16		)
Non-operating loss, net ⁽¹⁾	(7		)	(4		)	—
Income (loss) before income taxes	(184		)	(278		)	81
Loss on sale of discontinued operations, net ⁽²⁾	(11		)	(21		)	—
Income tax benefit (expense), net ⁽³⁾	110			12			(34		)
Discontinued operations, net of income taxes	$	(85	)	$	(287	)	$	47

(1) “Non-operating loss, net” included losses of $2 million in fiscal 2017 and $4 million in fiscal 2016 related to our former broadcast communications business (“Broadcast Communications”), which was divested in fiscal 2013.

(2) “Loss on sale of discontinued operations, net” included a $3 million decrease and $21 million increase to the loss on the sale of Broadcast Communications in fiscal 2017 and 2016, respectively.

(3) “Income tax benefit (expense), net” included a $4 million income tax benefit in fiscal 2016 related to Broadcast Communications.

The carrying amounts of the major classes of assets and liabilities included in discontinued operations in our Consolidated Balance Sheet are as follows:



	June 30, 2017		July 1, 2016

	(In millions)
Assets
Receivables	$	—	$	263
Inventories	—		97
Other current assets	—		37
Current assets of discontinued operations	$	—	$	397
Property, plant and equipment	$	—	$	91
Goodwill	—		623
Non-current deferred income taxes	—		47
Other intangible assets	—		311
Other non-current assets	—		5
Non-current assets of discontinued operations	$	—	$	1,077
Liabilities
Accounts payable	$	—	$	109
Advance payments and unearned income	—		25
Other current liabilities ⁽¹⁾	12		114
Current liabilities of discontinued operations	$	12	$	248
Non-current liabilities of discontinued operations ⁽²⁾	$	21	$	45

(1) “Other current liabilities” included $4 million and $30 million of liabilities related to Broadcast Communications as of June 30, 2017 and July 1, 2016, respectively.

(2) “Non-current liabilities of discontinued operations” included $7 million and $6 million of liabilities related to Broadcast Communications as of June 30, 2017 and July 1, 2016, respectively.

Depreciation and amortization, capital expenditures, and significant noncash items of discontinued operations included the following:



	Fiscal Years Ended
	2017			2016			2015

	(In millions)
Depreciation and amortization	$	39		$	78		$	84
Capital expenditures	4			19			34
Significant noncash items:
Impairment of goodwill and other assets	(240		)	(367		)	(16		)
Loss on sale of discontinued operations, net	(11		)	(21		)	—

IT Services

On April 28, 2017, we completed the divestiture to an affiliate of Veritas Capital Fund Management, L.L.C. (“Veritas”) of IT Services, which primarily provided IT and engineering managed services to U.S. Government customers, for net cash proceeds of $646 million, after estimated transaction expenses and estimated purchase price adjustments in respect of net cash and working capital, and subject to post-closing finalization of those adjustments as set forth in the definitive sales agreement entered into January 26, 2017. We recognized a pre-tax loss of $28 million on the sale of IT Services (and an after-tax gain of $55 million or $.44 per diluted share). The decision to divest IT Services was part of our strategy to simplify our operating model to focus on technology-differentiated, high-margin businesses. IT Services was part of our former Critical Networks segment and in connection with the definitive agreement to sell IT Services, as described above, the other remaining operations that had been apart of the Critical Networks segment, including our air traffic management (“ATM”) business, primarily serving the Federal Aviation Administration (“FAA”), and our Pacific Missile Range Facility (“PMRF”) program were integrated with our Electronic Systems segment effective for the third quarter of fiscal 2017, and our Critical Networks segment was eliminated. We agreed to provide various transition services to Veritas for a period of up to 18 months following the closing of the transaction pursuant to a separate agreement.

Because the then-pending divestiture of IT Services represented the disposal of a portion of a reporting unit within our former Critical Networks segment, we assigned $487 million of goodwill to the IT Services disposal group on a relative fair value basis during the third quarter of fiscal 2017, when the held for sale criteria were met. The fair value of the IT Services disposal group was determined based on the negotiated selling price, and the fair value of the retained businesses (which comprised the remaining portion of the reporting unit) was determined based on a combination of market-based valuation techniques, utilizing quoted market prices and comparable publicly reported transactions, and projected discounted cash flows. These fair value determinations are categorized as Level 3 in the fair value hierarchy due to their use of internal projections and unobservable measurement inputs. See Note 1: Significant Accounting Policies for additional information regarding the fair value hierarchy.

In conjunction with the allocation, we tested goodwill assigned to the disposal group and goodwill allocated to the retained businesses for impairment. As a result, we concluded that goodwill and other assets related to IT Services were impaired as of March 31, 2017, and we recorded a non-cash impairment charge of $240 million in discontinued operations, $228 million of which related to goodwill. The goodwill impairment charge is non-deductible for tax purposes.

The following table presents the key financial results of IT Services included in “Discontinued operations, net of income taxes” in our Consolidated Statement of Income:



	Fiscal Years Ended
	2017			2016			2015

	(In millions)
Revenue from product sales and services	$	895		$	1,168		$	781
Cost of product sales and services	(777		)	(1,002		)	(665		)
Engineering, selling and administrative expenses	(68		)	(84		)	(64		)
Impairment of goodwill and other assets	(240		)	—			(2		)
Non-operating loss	(9		)	—			—
Income (loss) before income taxes	(199		)	82			50
Loss on sale of discontinued operation	(28		)	—			—
Income tax benefit (expense)	69			(30		)	(16		)
Discontinued operations, net of income taxes	$	(158	)	$	52		$	34

The following table presents assets and liabilities related to IT Services included in “Current assets of discontinued operations,” “Non-current assets of discontinued operations,” “Current liabilities of discontinued operations” and “Non-current liabilities of discontinued operations” in our Consolidated Balance Sheet:



	June 30, 2017		July 1, 2016

	(In millions)
Assets
Receivables	$	—	$	196
Inventories	—		83
Other current assets	—		6
Current assets of discontinued operations	$	—	$	285
Property, plant and equipment	$	—	$	18
Goodwill	—		487
Other intangible assets	—		287
Non-current deferred income taxes	—		4
Other non-current assets	—		2
Non-current assets of discontinued operations	$	—	$	798
Liabilities
Accounts payable	$	—	$	98
Advance payments and unearned income	—		20
Other current liabilities	2		40
Current liabilities of discontinued operations	$	2	$	158
Non-current liabilities of discontinued operations	$	—	$	13

CapRock

On January 1, 2017, we completed the divestiture to SpeedCast International Ltd. (“SpeedCast”) of CapRock, which provided wireless, terrestrial and satellite communications services to energy and maritime customers, for net cash proceeds of $370 million, after transaction expenses and purchase price adjustments in respect of net cash and working capital as set forth in the definitive sales agreement. We recognized a pre-tax gain of $14 million on the sale of CapRock ($61 million after certain tax benefits related to the transaction, including reversal of valuation allowances on capital losses and net operating losses, or $.49 per diluted share). We agreed to provide various transition services to SpeedCast for a period of up to 12 months following the closing of the transaction pursuant to a separate agreement.

The following table presents the key financial results of CapRock included in “Discontinued operations, net of income taxes” included in our Consolidated Statement of Income:



	Fiscal Years Ended
	2017			2016			2015

	(In millions)
Revenue from product sales and services	$	144		$	361		$	464
Cost of product sales and services	(108		)	(284		)	(360		)
Engineering, selling and administrative expenses	(23		)	(66		)	(59		)
Impairment of goodwill and other assets	—			(367		)	(14		)
Non-operating income	4			—			—
Income (loss) before income taxes	17			(356		)	31
Gain on sale of discontinued operation	14			—			—
Income tax benefit (expense)	41			38			(18		)
Discontinued operations, net of income taxes	$	72		$	(318	)	$	13

Indications of potential impairment of goodwill related to CapRock (which was part of our former Critical Networks segment) were present at the end of the second quarter of fiscal 2016 due to the downturn in the energy market and its impact on customer operations, which also resulted in a decrease in the fiscal 2016 outlook for CapRock. Consequently, in connection with the preparation of our financial statements for the second quarter of fiscal 2016, we performed an interim test of CapRock’s goodwill for impairment as of the end of the second quarter of fiscal 2016.

To test for potential impairment of goodwill related to CapRock, we prepared an estimate of the fair value of the reporting unit based on projected discounted cash flows. The current carrying value of the CapRock reporting unit exceeded its estimated fair value, and accordingly, we allocated the estimated fair value to the assets and liabilities of the CapRock reporting unit to estimate the implied fair value of goodwill.

In conjunction with the above-described impairment test, we also conducted a test for impairment of other assets related to CapRock, including amortizable intangible assets and fixed assets, and impairment of these assets was considered prior to the conclusion of the goodwill impairment test. The estimated fair value of these other assets related to CapRock was determined based, in part, on an analysis of projected cash flows.

As a result of these impairment tests, we concluded that goodwill and other assets related to CapRock were impaired as of January 1, 2016, and we recorded an estimated non-cash impairment charge of $367 million, of which $290 million related to goodwill, which is included in the “Discontinued operations, net of income taxes” line item in our Consolidated Statement of Income for fiscal 2016. Most of the $367 million impairment charge is not deductible for tax purposes.

The following table presents assets and liabilities related to CapRock included in “Current assets of discontinued operations,” “Non-current assets of discontinued operations,” “Current liabilities of discontinued operations” and “Non-current liabilities of discontinued operations” in our Consolidated Balance Sheet:



	June 30, 2017		July 1, 2016

	(In millions)
Assets
Receivables	$	—	$	67
Inventories	—		14
Other current assets	—		31
Current assets of discontinued operations	$	—	$	112
Property, plant and equipment	$	—	$	73
Goodwill	—		136
Other intangible assets	—		24
Non-current deferred income taxes	—		43
Other non-current assets	—		3
Non-current assets of discontinued operations	$	—	$	279
Liabilities
Accounts payable	$	—	$	11
Advance payments and unearned income	—		5
Other current liabilities	6		44
Current liabilities of discontinued operations	$	6	$	60
Non-current liabilities of discontinued operations	$	14	$	26

Broadcast Communications

On February 4, 2013, we completed the divestiture of Broadcast Communications, which provided digital media management solutions in support of broadcast customers, to an affiliate of The Gores Group, LLC (“Gores”) pursuant to a definitive Asset Sale Agreement entered into December 5, 2012 for $225 million, including $160 million in cash, subject to customary adjustments (including a post-closing working capital adjustment), a $15 million subordinated promissory note (which was collected in fiscal 2014) and an earnout of up to $50 million based on future performance. Broadcast Communications was recorded as discontinued operations in connection with the sale.

Based on a dispute between us and Gores over the amount of the post-closing working capital adjustment, we and Gores previously appointed a nationally recognized accounting firm to render a final determination of such dispute. On January 29, 2016, the accounting firm rendered its final determination as to the disputed items, in which it concluded substantially in our favor and partly in Gores’ favor. As a result of such determination, we recorded a loss in the second quarter of fiscal 2016 of $21 million ($17 million after-tax or $.14 per diluted share).

Cyber Integrated Solutions

Pursuant to a plan approved by our Board of Directors to exit our cyber integrated solutions business (“CIS”), which provided remote cloud hosting, and to dispose of the related assets, we completed the sale of the remaining assets in the first quarter of fiscal 2014 for $35 million, including $28 million in cash and a $7 million subordinated promissory note, which we collected in the first quarter of fiscal 2015.

Divestitures

Aerostructures

On April 8, 2016, we completed the divestiture of our composite aerostructures business (“Aerostructures”), which designed and manufactured technically advanced, lightweight composite aerospace assembly structures, sub-assemblies and components for defense and commercial industries, for $187 million in cash at closing and the assumption of a $23 million capitalized lease. The operating results of Aerostructures through the date of divestiture are reported as part of our Electronic Systems segment. We recognized a net gain of $10 million on the sale, which is included in the “Non-operating income (loss)” line item in our Consolidated Statement of Income. Summarized financial information for Aerostructures is as follows:



	Fiscal Years Ended
	2016		2015

	(In millions)
Revenue from product sales and services	$	60	$	8
Income before income taxes	5		—
Net gain on sale of business	10		—

Commercial Healthcare Solutions

On July 1, 2015, we completed the divestiture of our commercial healthcare solutions business (“HCS”). The operating results of HCS through the date of divestiture were part of our former Integrated Network Solutions segment, but are included as part of corporate in these Notes.