Intangible Assets and Goodwill

3 Months Ended

Apr. 02, 2016

Goodwill and Intangible Assets Disclosure [Abstract]

Acquisitions

During the year ended December 31, 2015 the Company completed the acquisitions of two providers of public safety software-based solutions for an aggregate purchase price of $50 million, recognizing an additional $31 million of goodwill, $22 million of identifiable intangible assets, and $3 million of acquired liabilities related to these acquisitions. The $22 million of identifiable intangible assets were classified as: (i) $11 million of completed technology, (ii) $8 million of customer-related, and (iii) $3 million of other intangibles. These intangible assets will be amortized over periods ranging from five to ten years. The results of operations for these acquisitions have been included in the Company’s condensed consolidated statements of operations subsequent to the acquisition date. The pro forma effects of these acquisitions are not significant individually or in the aggregate.

On February 19, 2016, the Company completed the acquisition of GDCL, a holding company of Airwave, the largest private operator of a public safety network in the world. All of the outstanding equity of GDCL was acquired for the sum of £1, after which the Company invested into GDCL £698 million, net of cash acquired, or approximately $1.0 billion, to settle all third party debt. The Company will make a deferred cash payment of £64 million on November 15, 2018.

The acquisition of GDCL enables the Company to geographically diversify its global Managed & Support services offerings within its Services segment, while offering a proven service delivery platform to build on for providing innovative, leading, mission-critical communications solutions and services to customers. During the three months ended April 2, 2016, the Company recorded $61 million within Net sales and $3 million within Net earnings from the operations of Airwave.

The acquisition of GDCL has been accounted for at fair value as of the acquisition date, based on the fair value of the total consideration transferred which has been attributed to all identifiable assets acquired and liabilities assumed and measured at fair value. The valuation of assets acquired and liabilities assumed in the acquisition has not yet been finalized as of April 2, 2016. As a result, the Company recorded preliminary estimates for the fair value of assets acquired and liabilities assumed as of the acquisition date. The final allocation could differ materially from the preliminary allocation. The final allocation may include: (i) changes in fair values of property, plant and equipment, (ii) changes in allocations to intangible assets such as trade names, customer relationships, and goodwill, and (iii) other changes to assets and liabilities.

The total consideration for the acquisition of GDCL was approximately $1.1 billion, consisting of cash payments of $1.0 billion, net of cash acquired, and deferred consideration valued at fair value based on its net present value on the date of the acquisition of $82 million. The net present value has been calculated using a discount rate of 4.2%, which is reflective of the credit standing of the combined entity. The following table summarizes preliminary fair values of assets acquired and liabilities assumed as of the February 19, 2016 acquisition date:



Cash	$	86
Accounts receivable, net	55
Other current assets	36
Property, plant and equipment, net	481
Deferred income taxes	79
Intangible assets	631
Accounts payable	(18		)
Accrued liabilities	(184		)
Other liabilities	(254		)
Goodwill	170
Total consideration	$	1,082
Net present value of deferred consideration payment to former owners	(82		)
Net cash consideration at purchase	$	1,000

Acquired intangible assets consist of $602 million of customer relationships and $29 million of trade names. All intangibles have a useful life of 7 years, over which amortization expense will be recognized on a straight line basis.

The fair values of trade names and customer relationships were estimated using the income approach. Customer relationships were valued under the excess earnings method which assumes that the value of an intangible asset is equal to the present value of the incremental after-tax cash flows attributable specifically to the intangible asset. Trade names were valued under the relief from royalty method, which assumes value to the extent that the acquired company is relieved of the obligation to pay royalties for the benefits received from them.

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from the other assets acquired that could not be individually identified and separately recognized. Goodwill is not deductible for tax purposes.

Pro Forma Financial Information

The following table presents the unaudited pro forma combined results of operations of the Company and GDCL for the three months ended April 2, 2016 and April 4, 2015 as if the acquisition of GDCL had occurred on January 1, 2016 and January 1, 2015, respectively, (in millions, except per share amounts):



	Three Months Ended
	April 2, 2016		April 4, 2015
Revenues	$	1,264	$	1,364
Earnings from continuing operations	41		100
Basic earnings per share	0.24		0.46
Diluted earnings per share	0.23		0.46

The pro forma results are based on estimates and assumptions, which the Company believes are reasonable. They are not necessarily indicative of its consolidated results of operations in future periods or the results that actually would have been realized had we been a combined company during the periods presented. The pro forma results include adjustments primarily related to amortization of acquired intangible assets, interest expense, and transaction costs expensed during the period.

Intangible Assets

Amortized intangible assets were comprised of the following:



	April 2, 2016				December 31, 2015
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Completed technology	$	60	$	33	$	60	$	32
Patents	8		5		8		5
Customer-related	629		21		23		10
Other intangibles	46		15		20		15
	$	743	$	74	$	111	$	62

Amortization expense on intangible assets was $13 million for the three months ended April 2, 2016 and $2 million for the three months ended April 4, 2015. The increase in amortization expense is due to the acquisition of GDCL. As of April 2, 2016, annual amortization expense is estimated to be $87 million in 2016, $98 million in 2017 and 2018, $97 million in 2019, and $94 million in 2020 and 2021.

Amortized intangible assets, excluding goodwill, were comprised of the following by segment:



	April 2, 2016				December 31, 2015
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Products	$	86	$	59	$	89	$	60
Services	657		15		22		2
	$	743	$	74	$	111	$	62

Goodwill

The following table displays a rollforward of the carrying amount of goodwill by segment from January 1, 2016 to April 2, 2016:



	Products		Services		Total
Balance as of January 1, 2016
Aggregate goodwill	$	270	$	150	$	420
Accumulated impairment losses	—		—		—
Goodwill, net of impairment losses	$	270	$	150	$	420
Goodwill acquired	—		170		170
Balance as of April 2, 2016
Aggregate goodwill	$	270	$	320	$	590
Accumulated impairment losses	—		—		—
Goodwill, net of impairment losses	$	270	$	320	$	590

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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