Acquisitions, Goodwill and Intangible Assets (Tables)

3 Months Ended

Dec. 31, 2017

Business Combination, Goodwill and Intangible Assets Disclosure [Abstract]

Gross Purchase Price for the Acquisition of B/E Aerospace

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.

Summary of the Estimated Fair Value of Assets Acquired And Liabilities Assumed

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.

Intangible Assets Acquired

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

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

Pro Forma Results of Operations



	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

Significant Adjustments for Pro Forma Results

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.

Changes in the Carrying Amount of 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

Summary of 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

Anticipated Annual Amortization Expense for Intangible Assets

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