Intangible Assets and Goodwill

The Company accounts for acquisitions using purchase accounting with the results of operations for each acquiree included in the Company’s consolidated financial statements for the period subsequent to the date of acquisition.

Guardian Digital Communications Limited Acquisition

On February 19, 2016, the Company completed the acquisition of GDCL, a holding company of Airwave Solutions Limited ("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 year ended December 31, 2016, the Company recorded $462 million within Net sales and $57 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 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	82
Accounts payable	(18		)
Accrued liabilities	(181		)
Other liabilities	(289		)
Goodwill	191
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 seven 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 years ended December 31, 2016 and December 31, 2015 as if the acquisition of GDCL had occurred on January 1, 2016 and January 1, 2015, respectively, (in millions, except per share amounts):



Years ended December 31	2016		2015
Revenues	$	6,109	$	6,239
Earnings from continuing operations	586		(166		)
Basic earnings per share from continuing operations	3.46		(0.83		)
Diluted earnings per share from continuing operations	3.39		(0.82		)

The Company did not adjust the effects of an $884 million goodwill impairment charge reported in the historic results of GDCL for the year ended December 31, 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.

Other Acquisitions

On November 18, 2014, the Company completed the acquisition of an equipment provider for a purchase price of $22 million. During the year ended December 31, 2015, the Company completed the purchase accounting for this acquisition, recognizing $6 million of goodwill and $12 million of identifiable intangible assets. These identifiable intangible assets were classified as completed technology to be amortized over five years.

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 completed technology, (ii) $8 million customer-related intangibles, and (iii) $3 million of other intangibles. These intangible assets will be amortized over periods ranging from five to ten years.

On November 10, 2016, the Company completed the acquisition of Spillman Technologies, a provider of comprehensive law enforcement and public safety software solutions, for a gross purchase price of $217 million. As a result of the acquisition, the Company recognized $140 million of goodwill, $115 million of identifiable intangible assets, and $38 million of acquired liabilities. The identifiable intangible assets were classified as $49 million of completed technology, $59 million of customer-related intangibles, and $7 million of other intangibles and will be amortized over a period of seven to ten years. As of December 31, 2016, the purchase accounting is not yet complete. The final allocation may include: (i) changes in fair values of acquired goodwill and (ii) changes to assets and liabilities.

During the year ended December 31, 2016, the Company completed the acquisition of several software and service-based providers for a total of $30 million, recognizing $6 million of goodwill, $15 million of intangible assets, and $9 million of tangible net assets related to the these acquisitions. The $15 million of identifiable intangible assets were classified as: (i) $7 million of completed technology and (ii) $8 million of customer-related intangibles and will be amortized over a period of five years. As of December 31, 2016, the purchase accounting has not been completed for one acquisition which was purchased in late 2016. As such, an amount of $11 million has been recorded within Other Assets as of December 31, 2016. The purchase accounting is expected to be completed in the first quarter of 2017.

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.

Intangible Assets

Amortized intangible assets are comprised of the following:



	2016				2015
December 31	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Intangible assets:
Completed technology	$	116	$	38	$	60	$	32
Patents	8		6		8		5
Customer-related	810		101		23		10
Other intangibles	49		17		20		15
	$	983	$	162	$	111	$	62

Amortization expense on intangible assets, which is included within Other charges in the consolidated statements of operations, was $113 million, $8 million, and $4 million for the years ended December 31, 2016, 2015, and 2014, respectively. As of December 31, 2016, future amortization expense is estimated to be $132 million in 2017, $130 million in 2018, $129 million in 2019, $126 million in 2020, and $125 million in 2021.

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



	2016				2015
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Products	$	178	$	63	$	89	$	60
Services	805		99		22		2
	$	983	$	162	$	111	$	62

Goodwill

The following table displays a rollforward of the carrying amount of goodwill by segment from January 1, 2015 to December 31, 2016:



	Products		Services			Total
Balance as of January 1, 2015
Aggregate goodwill	$	264	$	119		$	383
Accumulated impairment losses	—		—			—
Goodwill, net of impairment losses	$	264	$	119		$	383
Goodwill acquired	6		31			37
Balance as of December 31, 2015
Aggregate goodwill	270		150			420
Accumulated impairment losses	—		—			—
Goodwill, net of impairment losses	$	270	$	150		$	420
Goodwill acquired	46		291			337
Foreign currency translation	—		(29		)	(29		)
Balance as of December 31, 2016
Aggregate goodwill	316		412			728
Accumulated impairment losses	—		—			—
Goodwill, net of impairment losses	$	316	$	412		$	728

The Company conducts its annual assessment of goodwill for impairment in the fourth quarter of each year. The goodwill impairment assessment is performed at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment. The Company has determined that the Products segment and Services segment each meet the definition of a reporting unit.

The Company performed a qualitative assessment to determine whether it was more-likely-than-not that the fair value of each reporting unit was less than its carrying amount for the fiscal years 2016, 2015, and 2014. In performing this qualitative assessment the Company assessed relevant events and circumstances including macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, changes in share price, and entity-specific events. For fiscal years 2016, 2015, and 2014, the Company concluded it was more-likely-than-not that the fair value of each reporting unit exceeded its carrying value. Therefore, the two-step goodwill impairment test was not required and there was no impairment of goodwill.