. Acquisitions, Divestitures and Discontinued Operations

Business Acquisitions

The Company continually evaluates potential acquisitions that either strategically fit within the Company’s existing portfolio or expand the Company’s portfolio into new product lines or adjacent markets. The Company has completed a number of acquisitions that have been accounted for as business combinations and have resulted in the recognition of goodwill in the Company’s financial statements. This goodwill includes the know-how of the assembled workforce, the ability of the workforce to further improve technology and product offerings, and the expected cash flows resulting from these efforts. Goodwill may also include expected synergies resulting from the complementary strategic fit these businesses bring to existing operations. The business acquisitions discussed below are included in the Company’s results of operations from their respective dates of acquisition.

The final purchase price for the 2017 acquisitions of Kigre, Inc. (Kigre), Escola De Aviacao Aerocondor, S.A. (G-Air) and Adaptive Methods, Inc. (Adaptive Methods) have been finalized as of the first quarter of 2018. The final purchase price for Doss Aviation, Inc. (Doss Aviation) is subject to customary adjustments for final working capital. The final purchase price allocations, which are expected to be completed in the second quarter of 2018, 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.

See Note 3 to the audited consolidated financial statements for the year ended December 31, 2017, included in the Company’s Annual Report on Form 10-K for additional information about the Company’s 2017 business acquisitions.

Unaudited Pro Forma Statements of Operations Data

The following unaudited pro forma Statement of Operations data presents the combined results of the Company and its business acquisitions completed during the year ended December 31, 2017, assuming that the business acquisitions completed during 2017 had occurred on January 1, 2016. The unaudited pro forma Statement of Operations data below includes adjustments for additional amortization expense related to acquired intangible assets and depreciation assuming the 2017 acquisitions had occurred on January 1, 2016.



	First Quarter Ended
	March 31, 2017
	(in millions, except per share data)
Pro forma net sales	$	2,345
Pro forma income from continuing operations attributable to L3	$	153
Pro forma net income attributable to L3	$	164
Pro forma diluted earnings per share from continuing operations	$	1.93
Pro forma diluted earnings per share	$	2.07

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.

Investments in Nonconsolidated Affiliates

Peak Nano Optics, LLC (Peak Nano). On February 6, 2018, the Company acquired a 25% interest in Peak Nano Optics, LLC, for a purchase price of $20 million. Peak Nano, a nanotechnology company, which allows for the design and manufacturing of polymer lenses for military, sporting and commercial optics applications using its nanolayer gradient refractive index (GRIN) technology. The purchase price is subject to a contingent payment of $30 million based upon Peak Nano meeting certain development milestones on or before August 5, 2018. The Company determined Peak Nano is a VIE as it did not have sufficient equity at risk to finance its activities. The Company, however, is not the primary beneficiary because it does not have the power to direct the activities that are most significant to the economic performance of Peak Nano. Accordingly, Peak Nano is accounted for under the equity method of accounting.

As of the acquisition date, the carrying amount of the investment was greater than the Company's equity in the underlying assets of Peak Nano due primarily to the difference in the carrying amount of the indefinite-lived amortizable intangible assets including goodwill and IPR&D. The basis difference attributable to goodwill and IPR&D is $11 million and $13 million, respectively.

Business Divestitures

2018 Divestitures

On May 1, 2018, the Company announced that it entered into a definitive agreement to sell its Vertex Aerospace, Crestview Aerospace and TCS businesses. The Company expects to complete the transaction in the summer of 2018, subject to customary closing conditions and regulatory approvals and record a gain on the sale of these businesses upon closing.

2017 Divestitures

During the quarterly period ended March 31, 2017, the Company completed the sales of the CTC Aviation Jet Services Limited (Aviation Jet Services) business, the L3 Coleman Aerospace (Coleman) business and the Display Product Line. The table below presents pre-tax (loss) gain recognized, the proceeds received and net sales included in continuing operations from these divestitures.



	First Quarter Ended March 31, 2017
	Pre-Tax (Loss) gain			Proceeds Received		Net Sales
	(in millions)
Aviation Jet Services divestiture	$	(5	)	$	1	$	1
Coleman divestiture	(3		)	17		9
Display Product Line divestiture	4			7		—
Total	$	(4	)	$	25	$	10

Aviation Jet Services Divestiture. On March 1, 2017, the Company divested its Aviation Jet Services business for a sales price of £1 million (approximately $1 million). Aviation Jet Services provided non-core aircraft management and operational services as part of commercial training solutions based in the United Kingdom and was included in the Electronic Systems segment.

Coleman Divestiture. On February 24, 2017, the Company divested its Coleman business for a sales price of $15 million. Coleman provided air-launch ballistic missile targets and was included in the Electronic Systems segment.

Display Product Line Divestiture. On February 23, 2017, the Company divested its Display Product Line for a sales price of $7 million. The Display Product Line provided cockpits to various military aircraft and was included in the Electronic Systems segment.

Net sales and income before income taxes for Aviation Jet Services, Coleman and the Display Product Line, 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.



	First Quarter Ended
	March 31, 2017
	(in millions)
Net sales	$	10
Income before income taxes	$	2

Discontinued Operations

Vertex Aerospace. As discussed in Note 1, on October 16, 2017, the Company’s Board of Directors approved a plan to explore strategic alternatives to sell or otherwise divest the Vertex Aerospace business. The assets and liabilities and results of operations of the Vertex Aerospace business are reported as discontinued operations for all periods presented.

The table below presents the statements of operations data for Vertex Aerospace. The amounts presented in discontinued operations include allocated interest expenses 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 were based on the ratio of Vertex Aerospace’s net assets to the sum of: (1) L3 consolidated total net assets and (2) L3 consolidated total debt.



	First Quarter Ended
	March 30, 2018			March 31, 2017
	(in millions)
Net sales	$	371		$	352
Operating costs and expenses	(349		)	(335		)
Operating income from discontinued operations	22			17
Interest expense allocated to discontinued operations	(1		)	—
Income from discontinued operations before income taxes	21			17
Income tax expense	(5		)	(6		)
Income from discontinued operations, net of income taxes	$	16		$	11

The major classes of assets and liabilities included in discontinued operations related to Vertex Aerospace are presented in the table below. These balances have been classified as current as the sale is expected to be completed within one year and the proceeds are not expected to be used to pay down long-term debt.



	March 30, 2018		December 31, 2017
	(in millions)
Assets
Current assets	$	265	$	284
Property, plant and equipment, net	14		13
Other intangible assets	7		7
Other assets	1		2
Total assets of discontinued operations	$	287	$	306

Liabilities
Accounts payable, trade	$	50	$	63
Other current liabilities	70		131
Current liabilities	120		194
Long-term liabilities	34		32
Total liabilities of discontinued operations	$	154	$	226

Assets Held for Sale

Aerostructures. The Aerostructures business is classified as held for sale. Aerostructures, which is within the Company’s Aerospace Segment, primarily provides aircraft fabrication and assembly of fixed and rotary wing aero structures as well as avionics hardware and software systems to address mission critical needs. The major classes of assets and liabilities included as held for sale related to Aerostructures are presented in the table below.



	March 30, 2018		December 31, 2017
	(in millions)
Assets
Billed receivables	$	13	$	14
Contract assets	33		—
Contracts in process	—		33
Prepaid expenses and other current assets	4		—
Total current assets	50		47
Property, plant and equipment, net	32		34
Goodwill	52		52
Identifiable intangible assets	2		2
Total assets classified as held for sale	$	136	$	135

Liabilities
Accounts payable, trade	$	7	$	3
Accrued employment costs	1		2
Accrued expenses	2		3
Other current liabilities	5		5
Total current liabilities	15		13
Deferred income taxes	4		4
Total liabilities classified as held for sale	$	19	$	17