Discontinued Operations

We entered into agreements relating to two significant divestitures during the three quarters ended March 31, 2017: the divestiture of IT Services and the divestiture of CapRock, which are described in more detail below. These divestitures individually and collectively represent a strategic shift away from non-core markets (for example, energy, maritime and government IT services). We believe this will sharpen our focus on core franchises where technology is a key differentiator and will have a major effect on our operations and financial results.

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

The major components of the discontinued operations in our Condensed Consolidated Statement of Income (Unaudited) include the following:



	Quarter Ended						Three Quarters Ended
	March 31, 2017			April 1, 2016			March 31, 2017			April 1, 2016

	(In millions)
Revenue from product sales and services	$	276		$	369		$	963		$	1,144
Cost of product sales and services	(236		)	(314		)	(806		)	(959		)
Engineering, selling and administrative expenses	(23		)	(36		)	(95		)	(118		)
Impairment of goodwill and other assets	(238		)	—			(240		)	(367		)
Non-operating income (loss) (1)	(4		)	(2		)	3			(2		)
Income (loss) before income taxes	(225		)	17			(175		)	(302		)
Gain (loss) on sale of discontinued operations, net (2)	5			—			(2		)	(21		)
Income tax (expense) benefit (3)	141			(8		)	127			18
Discontinued operations, net of income taxes	$	(79	)	$	9		$	(50	)	$	(305	)

(1) Non-operating income (loss) included losses of $1 million in the three quarters ended March 31, 2017, and $2 million in the quarter and three quarters ended April 1, 2016 related to Broadcast Communications.

(2) Gain (loss) on sale of discontinued operations, net included a $3 million reduction to the loss on sale of Broadcast Communications in the quarter and three quarters ended March 31, 2017, and an increase of $21 million to the loss on sale of Broadcast Communications in the three quarters ended April 1, 2016.

(3) Income tax (expense) benefit included a $4 million income tax benefit in the three quarters ended April 1, 2016 related to Broadcast Communications.

The carrying amounts of the major classes of assets and liabilities included in discontinued operations in our Condensed Consolidated Balance Sheet (Unaudited) as of March 31, 2017 and July 1, 2016, are as follows:



	March 31, 2017 (1)		July 1, 2016

	(In millions)
Assets
Receivables	$	159	$	263
Inventories	84		97
Property, plant and equipment	19		—
Goodwill	259		—
Other intangible assets	261		—
Other current assets	10		37
Current assets of discontinued operations	$	792	$	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	$	75	$	109
Advance payments and unearned income	25		25
Other current liabilities (2)	86		114
Current liabilities of discontinued operations	$	186	$	248
Non-current liabilities of discontinued operations (3)	$	6	$	45

(1) The assets and liabilities of IT Services held for sale were classified as current in our Condensed Consolidated Balance Sheet (Unaudited) as of March 31, 2017 because it was probable the sale would occur and proceeds would be collected within one year.

(2) Other current liabilities included $3 million and $30 million of liabilities related to Broadcast Communications as of March 31, 2017 and July 1, 2016, respectively.

(3) Non-current liabilities of discontinued operations included $6 million of liabilities related to Broadcast Communications as of March 31, 2017 and July 1, 2016.

Depreciation and amortization, capital expenditures, and significant noncash items of discontinued operations for all periods presented in our Condensed Consolidated Statement of Income (Unaudited) included the following:



	Quarter Ended				Three Quarters Ended
	March 31, 2017		April 1, 2016		March 31, 2017		April 1, 2016

	(In millions)
Depreciation and amortization	$	11	$	19	$	47	$	67
Capital expenditures	—		11		5		16
Significant noncash items:
Impairment of goodwill and other assets	238		—		240		367
Gain on sale of CapRock commercial business	23		—		23		—

IT Services

On January 26, 2017, we entered into a definitive agreement to sell IT Services to an affiliate of Veritas Capital Fund Management, L.L.C. (“Veritas”) for $690 million in cash, subject to customary purchase price adjustments as set forth in the agreement. IT Services, which was part of our former Critical Networks segment, primarily provided IT and engineering managed services to U.S. Government agencies. Our air traffic management business, primarily serving the FAA, and our PMRF program were not part of the transaction and remain part of the Company and are now operated within our Electronic Systems segment. On April 28, 2017, we completed the sale of IT Services. See Note S - Subsequent Events in these Notes for additional information. We are providing 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 quarter ended March 31, 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 N — Fair Value Measurements in these Notes 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, in connection with the preparation of our financial statements for the quarter ended March 31, 2017, 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 $238 million in discontinued operations, $228 million of which related to goodwill. The goodwill impairment charge is non-deductible for tax purposes. We do not expect to make any current or future cash expenditures as a result of the impairment, and we do not expect the impairment to impact our ongoing financial performance, although no assurances can be given.

The following table presents the key financial results of IT Services included in “Discontinued operations, net of income taxes” in our Condensed Consolidated Statement of Income (Unaudited) for the quarter and three quarters ended March 31, 2017 and the quarter and three quarters ended April 1, 2016:



	Quarter Ended						Three Quarters Ended
	March 31, 2017			April 1, 2016			March 31, 2017			April 1, 2016

	(In millions)
Revenue from product sales and services	$	276		$	284		$	819		$	863
Cost of product sales and services	(236		)	(244		)	(698		)	(735		)
Engineering, selling and administrative expenses	(23		)	(22		)	(72		)	(62		)
Impairment of goodwill and other assets	(238		)	—			(240		)	—
Non-operating loss	(4		)	—			(4		)	—
Income (loss) before income taxes	(225		)	18			(195		)	66
Loss on sale of discontinued operation	(21		)	—			(28		)	—
Income tax (expense) benefit	94			(7		)	84			(24		)
Discontinued operations, net of income taxes	$	(152	)	$	11		$	(139	)	$	42

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 Condensed Consolidated Balance Sheet (Unaudited) at March 31, 2017 and July 1, 2016:



	March 31, 2017 (1)		July 1, 2016

	(In millions)
Assets
Receivables	$	159	$	196
Inventories	84		83
Property, plant and equipment	19		—
Goodwill	259		—
Other intangible assets	261		—
Other current assets	10		6
Current assets of discontinued operations	$	792	$	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	$	75	$	98
Advance payments and unearned income	25		20
Other current liabilities	68		40
Current liabilities of discontinued operations	$	168	$	158
Non-current liabilities of discontinued operations	$	—	$	13

(1) The assets and liabilities of IT Services held for sale were classified as current in our Condensed Consolidated Balance Sheet (Unaudited) as of March 31, 2017 because it was probable the sale would occur and proceeds would be collected within one year.

CapRock

On November 1, 2016, we entered into a definitive agreement to sell CapRock to SpeedCast International Ltd. (“SpeedCast”) for $425 million in cash, subject to customary adjustments (including net cash and working capital adjustments). CapRock, which was part of our former Critical Networks segment, provided wireless, terrestrial and satellite communications services to energy and maritime customers. On January 1, 2017 (the second day of the third quarter of fiscal 2017), we completed the sale of CapRock for net cash proceeds of $375 million, after estimated transaction expenses and estimated adjustments in respect of net cash and working capital, and subject to post-closing finalization of those adjustments, and recognized a pre-tax gain of $23 million on the sale ($70 million after certain tax benefits related to the transaction, including reversal of valuation allowances on capital losses and net operating losses, or $.56 per diluted share). We are providing 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 Condensed Consolidated Statement of Income (Unaudited) for the quarter and three quarters ended March 31, 2017 and April 1, 2016:



	Quarter Ended					Three Quarters Ended
	March 31, 2017		April 1, 2016			March 31, 2017			April 1, 2016

	(In millions)
Revenue from product sales and services	$	—	$	85		$	144		$	281
Cost of product sales and services	—		(70		)	(108		)	(224		)
Engineering, selling and administrative expenses	—		(14		)	(23		)	(56		)
Impairment of goodwill and other assets	—		—			—			(367		)
Non-operating income	—		—			8			—
Income (loss) before income taxes	—		1			21			(366		)
Gain on sale of discontinued operation	23		—			23			—
Income tax (expense) benefit	47		(1		)	43			38
Discontinued operations, net of income taxes	$	70	$	—		$	87		$	(328	)

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 Condensed Consolidated Balance Sheet (Unaudited) at March 31, 2017 and July 1, 2016:



	March 31, 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	15		44
Current liabilities of discontinued operations	$	15	$	60
Non-current liabilities of discontinued operations	$	—	$	26

Broadcast Communications

On February 4, 2013, we completed the sale of Broadcast Communications 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).