Acquisitions, Goodwill and Intangible Assets

Acquisitions

B/E Aerospace

On April 13, 2017, the Company completed the acquisition of B/E Aerospace, a leading manufacturer of aircraft cabin interior products and services, for $6.5 billion in cash and stock, plus the assumption of $2.0 billion of debt, net of cash acquired. The transaction combines the Company's capabilities in flight deck avionics, cabin electronics, mission communication and navigation, simulation and training and information management services with B/E Aerospace's range of cabin interior products, which include seating, food and beverage preparation and storage equipment, lighting and oxygen systems and modular galley and lavatory systems for commercial airliners and business jets. The acquisition advances the Company’s global growth strategy by expanding the Company's previous focus on cockpit, cabin management, communication and connectivity solutions, and diversifies the Company's product portfolio and customer mix. Results of the acquired business are reported in the Interior Systems and Government Systems business segments (see Note 1).

The $6.5 billion gross purchase price for the acquisition of B/E Aerospace includes the following:



(in millions)
Cash consideration	$	3,521
Value of common stock issued for B/E Aerospace common stock⁽¹⁾	3,015
Total purchase price	$	6,536

(1) 31.2 million shares of common stock issued to B/E Aerospace shareholders at the Company's April 13, 2017, closing share price of $96.63.

The cash consideration was financed through the issuance of $4.35 billion of senior unsecured notes and $1.5 billion borrowed under a senior unsecured syndicated term loan facility (see Note 7). The remaining proceeds of the debt offering were used to repay assumed B/E Aerospace debt and a portion of the Company's outstanding short-term commercial paper borrowings.

The following table, which is preliminary and subject to change, summarizes the estimated fair value of assets acquired and liabilities assumed at the acquisition date. The final determination of the fair value of assets and liabilities will be completed within the one year measurement period as allowed by FASB Accounting Standards Codification Topic 805, Business Combinations. As of December 31, 2017, the valuation studies necessary to determine the fair market value of the assets acquired and liabilities assumed are preliminary. The size and breadth of the B/E Aerospace acquisition necessitates use of the one-year measurement period to adequately analyze all the factors used in establishing the asset and liability fair values as of the acquisition date, including, but not limited to, intangible assets, acquired contract liabilities, inventory, real property, leases, deferred tax liabilities related to the unremitted earnings of foreign subsidiaries, certain reserves and the related tax impacts of any changes made. Any potential adjustments will be made retroactively and could be material to the preliminary values presented below.



(in millions)	April 13, 2017
Cash and cash equivalents	$	104
Receivables, net	485
Inventories, net ⁽¹⁾	545
Other current assets	56
Property	279
Intangible Assets	1,586
Other Assets	53
Total Identifiable Assets Acquired	3,108

Accounts payable	(234		)
Compensation and benefits	(75		)
Advance payments from customers	(62		)
Accrued customer incentives	(48		)
Product warranty costs	(117		)
Other current liabilities ⁽²⁾	(365		)
Long-term Debt, Net	(2,119		)
Retirement Benefits	(12		)
Deferred Income Tax Liability	(335		)
Other Liabilities ⁽²⁾	(431		)
Total Liabilities Assumed	(3,798		)
Net Identifiable Assets Acquired, excluding Goodwill	(690		)
Goodwill	7,226
Net Assets Acquired	$	6,536

(1) Inventories, net includes a $74 million adjustment to state Work in process and Finished goods inventories at their fair value as of the acquisition date. The inventory fair value adjustment was amortized as a non-cash increase to Cost of sales during the year ended September 30, 2017.

(2) As of the acquisition date, the Company made adjustments totaling $486 million related to acquired existing long-term contracts with terms less favorable than could be realized in market transactions as of the acquisition date. The adjustments were primarily recognized within Other current liabilities and Other Liabilities based upon estimates regarding the period in which the liabilities will be amortized to the Condensed Consolidated Statement of Operations as non-cash reductions to Cost of sales. $30 million of the acquired contract liabilities were recognized as a reduction to Cost of sales during the three months ended December 31, 2017.

During the three months ended December 31, 2017, revisions were made to the estimated acquisition-date fair value of assets acquired and liabilities assumed. The revisions were primarily due to a change in estimate with respect to the future repatriation of certain foreign earnings and recognition of a liability associated with the KLX Tax Sharing and Indemnification Agreement (see note 14). The measurement period adjustments resulted in a $41 million net increase to Goodwill and did not have a material impact on the financial results of prior periods.

The Intangible Assets included above consist of the following:



	Weighted Average Life (in years)	Fair Value (in millions)
Developed technology	9	$	435
Seating customer relationships	6	860
Other customer relationships	8	291
Total	7	$	1,586

The preliminary purchase price allocation resulted in the recognition of $7.226 billion of goodwill, none of which is expected to be deductible for tax purposes. The Company is in the process of allocating goodwill by segment, and as of December 31, 2017 the Company has preliminarily included the goodwill in the Interior Systems and Government Systems segments. The goodwill is a result of expected cost synergies from the consolidation of certain corporate and administrative functions, supply chain savings and low-cost manufacturing, expected revenue synergies from the integration of legacy products and technologies with those of B/E Aerospace and intangible assets that do not qualify for separate recognition, such as the assembled B/E Aerospace workforce.

B/E Aerospace's results of operations have been included in the Company's operating results for the periods subsequent to the completion of the acquisition on April 13, 2017. B/E Aerospace contributed sales of $716 million and net income of $76 million, excluding the discrete impacts of the Tax Cuts and Jobs Act (see Note 11), for the three months ended December 31, 2017.

Transaction, Integration and Financing Costs

The Company recorded total transaction, integration and financing costs related to the B/E Aerospace acquisition in the Condensed Consolidated Statement of Operations as follows:



	Three Months Ended
	December 31
(in millions)	2017		2016
Transaction and integration costs	$	17	$	11
Interest expense	—		3
Total Transaction, integration and financing costs	$	17	$	14

At December 31, 2017, $12 million of transaction, integration and financing costs were unpaid and included in Accounts payable on the Condensed Consolidated Statement of Financial Position.

Supplemental Pro Forma Data

The following unaudited supplemental pro forma data presents consolidated pro forma information as if the acquisition and related financing had been completed as of the beginning of the prior year, or on October 1, 2015.

The unaudited supplemental pro forma financial information does not reflect the potential realization of revenue synergies or cost savings, nor does it reflect other costs relating to the integration of the two companies. This pro forma data should not be considered indicative of the results that would have actually occurred if the acquisition and related financing been consummated on October 1, 2015, nor are they indicative of future results.

The unaudited supplemental pro forma financial information was calculated by combining the Company's results with the stand-alone results of B/E Aerospace for the pre-acquisition periods, which were adjusted to account for certain transactions and other costs that would have been incurred during this pre-acquisition period. The pro forma information included herein is preliminary and may be revised as additional information becomes available and as additional analysis is performed within the one year measurement period allowed by ASC 805. Any potential future adjustments could be material.



	Three Months Ended
	December 31
	2017		2016
(in millions, except per share amounts)	(as Reported)		(Pro forma)
Sales	$	2,011	$	1,923
Net income attributable to common shareowners	280		197
Basic earnings per share	1.71		1.22
Diluted earnings per share	1.69		1.21

The following significant adjustments were made to account for certain transactions and costs that would have occurred if the acquisition had been completed on October 1, 2015. These adjustments are net of any applicable tax impact and were included to arrive at the pro forma results above.



	Three Months Ended
	December 31
(in millions)	2017		2016
Increases / (decreases) to pro forma net income:
Net reduction to depreciation resulting from fixed asset adjustments ⁽¹⁾	$	—	$	5
Advisory, legal and accounting service fees ⁽²⁾	—		26
Amortization of acquired B/E Aerospace intangible assets, net ⁽³⁾	—		(38		)
Interest expense incurred on acquisition financing, net ⁽⁴⁾	—		(14		)
Long-term contract program adjustments ⁽⁵⁾	—		(11		)
Acquired contract liability amortization ⁽⁶⁾	—		21
Compensation adjustments ⁽⁷⁾	—		3

(1) Captures the net impact to depreciation expense resulting from various purchase accounting adjustments to fixed assets.

(2) Reflects the elimination of transaction-related fees incurred by B/E Aerospace and Rockwell Collins in connection with the acquisition and assumes all of the fees were incurred during the first quarter of 2016.

(3) Eliminates amortization of the historical B/E Aerospace intangible assets and replaces it with the new amortization for the acquired intangible assets.

(4) Reflects the addition of interest expense for the debt incurred by Rockwell Collins to finance the B/E Aerospace acquisition, net of interest expense that was eliminated on the historical B/E Aerospace debt that was repaid at the acquisition date. The adjustment also reflects the elimination of interest expense incurred by Rockwell Collins for bridge loan financing which was assumed to not be required for purposes of the pro forma periods presented.

(5) Eliminates B/E Aerospace capitalized development costs and deferred revenues on certain long-term contracts.

(6) Reflects amortization of liabilities recognized for acquired contracts with terms less favorable than could be realized in market transactions as of the acquisition date.

(7) Reflects reduction in compensation expense due to the vesting of B/E Aerospace stock awards upon the acquisition and the termination of certain B/E Aerospace executives and board members.

Pulse.aero

On December 20, 2016, the Company acquired 100 percent of the outstanding shares of Pulse.aero, a United Kingdom based company specializing in self-bag drop technologies used by airlines and airports. The purchase price, net of cash acquired, was $16 million, of which $14 million was paid during the year ended September 30, 2017 and $1 million was paid during the three months ended December 31, 2017. On the acquisition date, the Company recorded a $5 million liability for the fair value of post-closing consideration that may be paid, contingent upon the achievement of certain revenue targets and development milestones. The Company made contingent consideration payments of $2 million during the year ended September 30, 2017 and $1 million during the three months ended December 31, 2017. In the third quarter of 2017, the purchase price allocation was finalized, with $12 million allocated to goodwill and $6 million to intangible assets. The intangible assets have a weighted average life of approximately 9 years. None of the goodwill resulting from the acquisition is tax deductible. The excess purchase price over net assets acquired, including intangible assets, reflects the Company's view that this acquisition will expand the Company's airport passenger processing offerings.

The B/E Aerosapce acquisition is included in the Interior Systems and Government Systems segments (see Note 1) and the Pulse.aero acquisition is included in the Information Management Services segment. The results of operations for the acquisitions have been included in the Company's operating results for the periods subsequent to the acquisition dates. Pro forma results of operations have not been presented for Pulse.aero as the effect of the acquisition is not material to the Company's consolidated results of operations.

Goodwill

Changes in the carrying amount of goodwill are summarized as follows:



(in millions)	Interior Systems			Commercial Systems		Government Systems		Information Management Services		Total
Balance at September 30, 2017	$	7,223		$	325	$	506	$	1,104	$	9,158
B/E Aerospace acquisition adjustments	(344		)	—		385		—		41
Foreign currency translation adjustments	7			—		—		—		7
Balance at December 31, 2017	$	6,886		$	325	$	891	$	1,104	$	9,206

The reorganization of the B/E Aerospace thermal and electronic systems product lines (see Note 1) resulted in the reclassification of $385 million of Goodwill from Interior Systems to Government Systems.

The Company performs an annual impairment test of goodwill and indefinite-lived intangible assets during the fourth quarter of each fiscal year, or at any time there is an indication goodwill or indefinite-lived intangibles are more-likely-than-not impaired, commonly referred to as triggering events. There have been no such triggering events during any of the periods presented and the Company's fourth quarter 2017 impairment tests resulted in no impairment.

Intangible Assets

Intangible assets are summarized as follows:



	December 31, 2017							September 30, 2017
(in millions)	Gross		Accum Amort			Net		Gross		Accum Amort			Net
Intangible assets with finite lives:
Developed technology and patents	$	807	$	(274	)	$	533	$	806	$	(256	)	$	550
Backlog	6		(5		)	1		6		(5		)	1
Customer relationships:
Acquired	1,495		(263		)	1,232		1,495		(213		)	1,282
Up-front sales incentives	340		(97		)	243		336		(93		)	243
License agreements	16		(11		)	5		15		(10		)	5
Trademarks and tradenames	15		(14		)	1		15		(14		)	1
Intangible assets with indefinite lives:
Trademarks and tradenames	47		—			47		47		—			47
Intangible assets	$	2,726	$	(664	)	$	2,062	$	2,720	$	(591	)	$	2,129

The Company provides up-front sales incentives prior to delivering products or performing services to certain commercial customers in connection with sales contracts. Up-front sales incentives are recorded as a customer relationship intangible asset and are amortized using a units-of-delivery method over the period the Company has received a contractually enforceable right related to the incentives, up to 15 years after entry into service. Amortization is based on the Company's expectation of delivery rates on a program-by-program basis. Amortization begins when the Company starts recognizing revenue as the Company delivers equipment for the program.

Up-front sales incentives consisting of cash payments or customer account credits are amortized as a reduction of sales, whereas incentives consisting of free products are amortized as cost of sales. As of December 31, 2017, the weighted average amortization period remaining for up-front sales incentives was approximately 10 years.

Anticipated annual amortization expense for intangible assets is as follows:



(in millions)	2018		2019		2020		2021		2022		Thereafter
Anticipated amortization expense for up-front sales incentives	$	20	$	24	$	26	$	27	$	27	$	123
Anticipated amortization expense for all other intangible assets	268		266		265		265		262		515
Total	$	288	$	290	$	291	$	292	$	289	$	638

Amortization expense for intangible assets for the three months ended December 31, 2017 and 2016 was $73 million and $12 million, respectively.