Intangible Assets and Goodwill

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, while offering a proven service delivery platform to build on for providing innovative, leading, mission-critical communications solutions and services to customers. During the six months ended July 2, 2016, the Company recorded $207 million within Net sales and $45 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. During the three months ended July 2, 2016, the Company finalized its valuation of acquired Property, plant and equipment, recording an adjustment of $236 million to record acquired network-related assets at fair value. As a result, the Company has recorded additional purchase accounting adjustments during the three months ended July 2, 2016, primarily related to the fair value of acquired intangibles and goodwill.

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 on the date of the acquisition of $82 million. The fair value of deferred consideration has been determined based on its net present value, calculated using a discount rate of 4.2%, which is reflective of the credit standing of the combined entity. The following table summarizes 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	245
Deferred income taxes	78
Accounts payable	(18		)
Accrued liabilities	(181		)
Other liabilities	(283		)
Goodwill	189
Intangible assets	875
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 $846 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.

The fair value of acquired Property, plant and equipment, primarily network-related assets, was valued under the replacement cost method, which determines fair value based on the replacement cost of new property with similar capacity, adjusted for physical deterioration over the remaining useful life.

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 and six months ended July 2, 2016 and July 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					Six Months Ended
	July 2, 2016		July 4, 2015			July 2, 2016		July 4, 2015
Revenues	$	1,430	$	1,515		$	2,694	$	2,880
Earnings from continuing operations	104		(727		)	148		(616		)
Basic earnings per share	0.62		(3.49		)	0.86		(2.91		)
Diluted earnings per share	0.61		(3.49		)	0.84		(2.88		)

The Company did not adjust the effects of an $884 million goodwill impairment charge reported in the historic results of GDCL for the three and six months ended July 4, 2015 on the basis that the goodwill impairment charge was not directly attributable to the acquisition of GDCL by the Company. However, this goodwill impairment charge should be highlighted as unusual and non-recurring.

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, depreciation, interest expense, and transaction costs expensed during the period.

Intangible Assets

Amortized intangible assets were comprised of the following:



	July 2, 2016				December 31, 2015
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Completed technology	$	60	$	35	$	60	$	32
Patents	8		6		8		5
Customer-related	821		53		23		10
Other intangibles	44		15		20		15
	$	933	$	109	$	111	$	62

Amortization expense on intangible assets was $38 million for the three months ended July 2, 2016 and $52 million for the six months ended July 2, 2016. Amortization expense on intangible assets was $3 million for the three months ended July 4, 2015 and $4 million for the six months ended July 4, 2015. The increase in amortization expense is due to the acquisition of GDCL, including a cumulative adjustment during the six months ended July 2, 2016 to record incremental intangible amortization expense associated with the final fair value adjustment of intangible assets under purchase accounting. As of July 2, 2016, annual amortization expense is estimated to be $112 million in 2016, $126 million in 2017 and 2018, $125 million in 2019, and $122 million in 2020 and 2021.

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



	July 2, 2016				December 31, 2015
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Products	$	86	$	61	$	89	$	60
Services	847		48		22		2
	$	933	$	109	$	111	$	62

Goodwill

The following table displays a rollforward of the carrying amount of goodwill by segment from January 1, 2016 to July 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
Purchase accounting adjustments	—		19			19
Foreign currency	—		(12		)	(12		)
Balance as of July 2, 2016
Aggregate goodwill	$	270	$	327		$	597
Accumulated impairment losses	—		—			—
Goodwill, net of impairment losses	$	270	$	327		$	597