Quarterly Report (10-q)

Date : 10/26/2017 @ 3:25PM
Source : Edgar (US Regulatory)
Stock : L3 Technologies, Inc. (LLL)
Quote : 215.23  -3.0 (-1.37%) @ 4:04PM

Quarterly Report (10-q)

TABLE OF CONTENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 29, 2017

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-37975

L3 TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Delaware
13-3937436
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
   
 
600 Third Avenue, New York, NY
10016
(Address of principal executive offices)
(Zip Code)

(212) 697-1111
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on the corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒
Accelerated filer
o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company
o
 
Emerging growth company
o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ☒ No

There were 78,142,150 shares of the registrant’s common stock with a par value of $0.01 outstanding as of the close of business on October 20, 2017.

TABLE OF CONTENTS

L3 TECHNOLOGIES, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended September 29, 2017

 
 
Page
No.
 
PART I — FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
ITEM 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II — OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

L3 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)

 
(Unaudited)
September 29,
2017
December 31,
2016
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
$
439
 
$
363
 
Billed receivables, net of allowances of $11 in 2017 and $13 in 2016
 
776
 
 
731
 
Contracts in process
 
2,273
 
 
2,055
 
Inventories
 
392
 
 
330
 
Other current assets
 
219
 
 
218
 
Total current assets
 
4,099
 
 
3,697
 
Property, plant and equipment, net
 
1,145
 
 
1,121
 
Goodwill
 
6,652
 
 
6,560
 
Identifiable intangible assets
 
299
 
 
238
 
Other assets
 
273
 
 
249
 
Total assets
$
12,468
 
$
11,865
 
LIABILITIES AND EQUITY
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
Accounts payable, trade
$
425
 
$
299
 
Accrued employment costs
 
535
 
 
516
 
Accrued expenses
 
438
 
 
375
 
Advance payments and billings in excess of costs incurred
 
493
 
 
492
 
Income taxes payable
 
26
 
 
22
 
Other current liabilities
 
366
 
 
431
 
Total current liabilities
 
2,283
 
 
2,135
 
Pension and postretirement benefits
 
1,143
 
 
1,177
 
Deferred income taxes
 
259
 
 
236
 
Other liabilities
 
385
 
 
368
 
Long-term debt
 
3,329
 
 
3,325
 
Total liabilities
 
7,399
 
 
7,241
 
Commitments and contingencies (see Note 18)
 
 
 
 
 
 
Equity:
 
 
 
 
 
 
Shareholders’ equity:
 
 
 
 
 
 
Common stock: $.01 par value; 300,000,000 shares authorized, 78,075,652 shares outstanding at September 29, 2017 and 77,232,204 shares outstanding at December 31, 2016
 
6,458
 
 
6,285
 
Treasury stock (at cost), 82,901,120 shares at September 29, 2017 and 82,385,075 shares at December 31, 2016
 
(7,315
)
 
(7,224
)
Retained earnings
 
6,429
 
 
6,218
 
Accumulated other comprehensive loss
 
(573
)
 
(726
)
Total shareholders’ equity
 
4,999
 
 
4,553
 
Noncontrolling interests
 
70
 
 
71
 
Total equity
 
5,069
 
 
4,624
 
Total liabilities and equity
$
12,468
 
$
11,865
 

See notes to unaudited condensed consolidated financial statements.

1

TABLE OF CONTENTS

L3 TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)

 
Third Quarter Ended
 
September 29,
2017
September 23,
2016
Net sales:
 
 
 
 
 
 
Products
$
1,581
 
$
1,500
 
Services
 
1,065
 
 
1,005
 
Total net sales
 
2,646
 
 
2,505
 
Cost of sales:
 
 
 
 
 
 
Products
 
(1,446
)
 
(1,355
)
Services
 
(950
)
 
(935
)
Total cost of sales
 
(2,396
)
 
(2,290
)
Goodwill impairment charge
 
(187
)
 
 
Operating income
 
63
 
 
215
 
Interest expense
 
(43
)
 
(41
)
Interest and other income, net
 
6
 
 
6
 
Income from continuing operations before income taxes
 
26
 
 
180
 
Provision for income taxes
 
 
 
(29
)
Income from continuing operations
 
26
 
 
151
 
Loss from discontinued operations, net of income taxes
 
(1
)
 
 
Net income
 
25
 
 
151
 
Net income from continuing operations attributable to noncontrolling interests
 
(3
)
 
(3
)
Net income attributable to L3
$
22
 
$
148
 
Basic earnings (loss) per share attributable to common shareholders:
 
 
 
 
 
 
Continuing operations
$
0.29
 
$
1.91
 
Discontinued operations
 
(0.01
)
 
 
Basic earnings per share
$
0.28
 
$
1.91
 
Diluted earnings (loss) per share attributable to common shareholders:
 
 
 
 
 
 
Continuing operations
$
0.29
 
$
1.88
 
Discontinued operations
 
(0.01
)
 
 
Diluted earnings per share
$
0.28
 
$
1.88
 
Cash dividends declared per common share
$
0.75
 
$
0.70
 
Weighted average common shares outstanding:
 
 
 
 
 
 
Basic
 
78.2
 
 
77.3
 
Diluted
 
79.8
 
 
78.8
 

See notes to unaudited condensed consolidated financial statements.

2

TABLE OF CONTENTS

L3 TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)

 
Year-to-Date Ended
 
September 29,
2017
September 23,
2016
Net sales:
 
 
 
 
 
 
Products
$
4,859
 
$
4,561
 
Services
 
3,188
 
 
2,961
 
Total net sales
 
8,047
 
 
7,522
 
Cost of sales:
 
 
 
 
 
 
Products
 
(4,311
)
 
(4,095
)
Services
 
(2,921
)
 
(2,713
)
Total cost of sales
 
(7,232
)
 
(6,808
)
Goodwill impairment charge
 
(187
)
 
 
Operating income
 
628
 
 
714
 
Interest expense
 
(128
)
 
(125
)
Interest and other income, net
 
15
 
 
15
 
Debt retirement charge
 
 
 
(5
)
Income from continuing operations before income taxes
 
515
 
 
599
 
Provision for income taxes
 
(114
)
 
(130
)
Income from continuing operations
 
401
 
 
469
 
(Loss) income from discontinued operations, net of income taxes
 
(1
)
 
63
 
Net income
 
400
 
 
532
 
Net income from continuing operations attributable to noncontrolling interests
 
(12
)
 
(10
)
Net income attributable to L3
$
388
 
$
522
 
Basic earnings (loss) per share attributable to common shareholders:
 
 
 
 
 
 
Continuing operations
$
4.98
 
$
5.93
 
Discontinued operations
 
(0.01
)
 
0.81
 
Basic earnings per share
$
4.97
 
$
6.74
 
Diluted earnings (loss) per share attributable to common shareholders:
 
 
 
 
 
 
Continuing operations
$
4.88
 
$
5.83
 
Discontinued operations
 
(0.01
)
 
0.80
 
Diluted earnings per share
$
4.87
 
$
6.63
 
Cash dividends declared per common share
$
2.25
 
$
2.10
 
Weighted average common shares outstanding:
 
 
 
 
 
 
Basic
 
78.0
 
 
77.4
 
Diluted
 
79.6
 
 
78.7
 

See notes to unaudited condensed consolidated financial statements.

3

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L3 TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)

 
Third Quarter Ended
Year-to-Date Ended
 
September 29,
2017
September 23,
2016
September 29,
2017
September 23,
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
25
 
$
151
 
$
400
 
$
532
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
49
 
 
(31
)
 
120
 
 
(27
)
Unrealized gains on hedging instruments (1)
 
6
 
 
 
 
6
 
 
10
 
Pension and postretirement benefit plans:
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of net loss and prior service cost previously recognized (2)
 
8
 
 
8
 
 
27
 
 
24
 
Total other comprehensive income (loss)
 
63
 
 
(23
)
 
153
 
 
7
 
Comprehensive income
 
88
 
 
128
 
 
553
 
 
539
 
Comprehensive income attributable to noncontrolling interests
 
(3
)
 
(3
)
 
(12
)
 
(10
)
Comprehensive income attributable to L3
$
85
 
$
125
 
$
541
 
$
529
 
(1) Net of income taxes of $2 million for the quarterly period ended September 29, 2017, and net of income taxes of $2 million and $4 million for the year-to-date periods ended September 29, 2017 and September 23, 2016, respectively.
(2) Net of income taxes of $5 million and $4 million for the quarterly periods ended September 29, 2017 and September 23, 2016, respectively, and net of income taxes of $16 million and $13 million for the year-to-date periods ended September 29, 2017 and September 23, 2016, respectively.

See notes to unaudited condensed consolidated financial statements.

4

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L3 TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(in millions, except per share data)

 
Common Stock
Additional
Paid-in
Capital
Treasury
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Noncontrolling
Interests
Total
Equity
 
Shares
Outstanding
Par
Value
For the Year-to-Date Period Ended September 29, 2017:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
 
77.2
 
$
1
 
$
6,284
 
$
(7,224
)
$
6,218
 
$
(726
)
$
71
 
$
4,624
 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
388
 
 
 
 
 
12
 
 
400
 
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
153
 
 
 
 
 
153
 
Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(13
)
 
(13
)
Cash dividends declared ($2.25 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
(177
)
 
 
 
 
 
 
 
(177
)
Shares issued:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee savings plans
 
0.6
 
 
 
 
 
96
 
 
 
 
 
 
 
 
 
 
 
 
 
 
96
 
Exercise of stock options
 
0.4
 
 
 
 
 
36
 
 
 
 
 
 
 
 
 
 
 
 
 
 
36
 
Employee stock purchase plan
 
0.2
 
 
 
 
 
16
 
 
 
 
 
 
 
 
 
 
 
 
 
 
16
 
Vesting of restricted stock and performance units
 
0.3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Repurchases of common stock to satisfy tax withholding obligations
 
(0.1
)
 
 
 
 
(18
)
 
 
 
 
 
 
 
 
 
 
 
 
 
(18
)
Stock-based compensation expense
 
 
 
 
 
 
 
43
 
 
 
 
 
 
 
 
 
 
 
 
 
 
43
 
Treasury stock purchased
 
(0.5
)
 
 
 
 
 
 
 
(91
)
 
 
 
 
 
 
 
 
 
 
(91
)
Balance at September 29, 2017
 
78.1
 
$
1
 
$
6,457
 
$
(7,315
)
$
6,429
 
$
(573
)
$
70
 
$
5,069
 
For the Year-to-Date Period Ended September 23, 2016:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
 
78.1
 
$
1
 
$
6,051
 
$
(6,851
)
$
5,728
 
$
(574
)
$
74
 
$
4,429
 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
522
 
 
 
 
 
10
 
 
532
 
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7
 
 
 
 
 
7
 
Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(12
)
 
(12
)
Cash dividends declared ($2.10 per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
(165
)
 
 
 
 
 
 
 
(165
)
Shares issued:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee savings plans
 
0.7
 
 
 
 
 
94
 
 
 
 
 
 
 
 
 
 
 
 
 
 
94
 
Exercise of stock options
 
0.6
 
 
 
 
 
49
 
 
 
 
 
 
 
 
 
 
 
 
 
 
49
 
Employee stock purchase plan
 
0.4
 
 
 
 
 
16
 
 
 
 
 
 
 
 
 
 
 
 
 
 
16
 
Vesting of restricted stock and
performance units
 
0.5
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Repurchases of common stock to satisfy tax withholding obligations
 
(0.2
)
 
 
 
 
(20
)
 
 
 
 
 
 
 
 
 
 
 
 
 
(20
)
Stock-based compensation expense
 
 
 
 
 
 
 
34
 
 
 
 
 
 
 
 
 
 
 
 
 
 
34
 
Treasury stock purchased
 
(2.7
)
 
 
 
 
 
 
 
(326
)
 
 
 
 
 
 
 
 
 
 
(326
)
Other
 
 
 
 
 
 
 
 
 
 
 
 
 
2
 
 
 
 
 
 
 
 
2
 
Balance at September 23, 2016
 
77.4
 
$
1
 
$
6,224
 
$
(7,177
)
$
6,087
 
$
(567
)
$
72
 
$
4,640
 

See notes to unaudited condensed consolidated financial statements.

5

TABLE OF CONTENTS

L3 TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF Cash FlowS
(in millions)

 
Year-to-Date Ended
 
September 29,
2017
September 23,
2016
Operating activities:
 
 
 
 
 
 
Net income
$
400
 
$
532
 
Less: Loss (income) from discontinued operations, net of tax
 
1
 
 
(63
)
Income from continuing operations
 
401
 
 
469
 
Depreciation of property, plant and equipment
 
128
 
 
121
 
Amortization of intangibles and other assets
 
37
 
 
32
 
Deferred income tax (benefit) provision
 
(15
)
 
48
 
Stock-based employee compensation expense
 
43
 
 
34
 
Contributions to employee savings plans in common stock
 
96
 
 
92
 
Goodwill impairment charge
 
187
 
 
 
Amortization of pension and postretirement benefit plans net loss and prior service cost
 
43
 
 
37
 
Amortization of bond discounts and deferred debt issue costs (included in interest expense)
 
4
 
 
6
 
Gain on sale of property, plant and equipment
 
(42
)
 
(6
)
Other non-cash items
 
3
 
 
21
 
Changes in operating assets and liabilities, excluding amounts from acquisitions and divestitures, and discontinued operations:
 
 
 
 
 
 
Billed receivables
 
(29
)
 
(69
)
Contracts in process
 
(183
)
 
(193
)
Inventories
 
(72
)
 
(31
)
Other assets
 
(6
)
 
21
 
Accounts payable, trade
 
112
 
 
130
 
Accrued employment costs
 
4
 
 
8
 
Accrued expenses
 
64
 
 
3
 
Advance payments and billings in excess of costs incurred
 
(11
)
 
(102
)
Income taxes
 
13
 
 
 
Other current liabilities
 
(80
)
 
(3
)
Pension and postretirement benefits
 
(32
)
 
(19
)
All other operating activities
 
2
 
 
(13
)
Net cash from operating activities from continuing operations
 
667
 
 
586
 
Investing activities:
 
 
 
 
 
 
Business acquisitions, net of cash acquired
 
(291
)
 
(27
)
Proceeds from the sale of businesses, net of closing date cash balances
 
18
 
 
561
 
Capital expenditures
 
(154
)
 
(126
)
Dispositions of property, plant and equipment
 
67
 
 
15
 
Other investing activities
 
(6
)
 
7
 
Net cash (used in) from investing activities from continuing operations
 
(366
)
 
430
 
Financing activities:
 
 
 
 
 
 
Borrowings under revolving credit facility
 
1,265
 
 
335
 
Repayments of borrowings under revolving credit facility
 
(1,265
)
 
(335
)
Redemption of senior notes
 
 
 
(305
)
Common stock repurchased
 
(91
)
 
(326
)
Dividends paid
 
(178
)
 
(166
)
Proceeds from exercises of stock options
 
36
 
 
49
 
Proceeds from employee stock purchase plan
 
24
 
 
23
 
Repurchases of common stock to satisfy tax withholding obligations
 
(18
)
 
(20
)
Other financing activities
 
(12
)
 
(8
)
Net cash used in financing activities from continuing operations
 
(239
)
 
(753
)
Effect of foreign currency exchange rate changes on cash and cash equivalents
 
16
 
 
(3
)
Net cash used in operating activities from discontinued operations
 
(2
)
 
(56
)
Net increase in cash and cash equivalents
 
76
 
 
204
 
Cash and cash equivalents, beginning of the period
 
363
 
 
207
 
Cash and cash equivalents, end of the period
$
439
 
$
411
 

See notes to unaudited condensed consolidated financial statements.

6

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L3 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

1. Description of Business

L3 Technologies, Inc. (L3 Technologies Inc. and, together with its subsidiaries, referred to herein as L3 or the Company) is a prime contractor in Intelligence, Surveillance and Reconnaissance (ISR) systems, aircraft sustainment (including modifications, logistics and maintenance), simulation and training, night vision and image intensification equipment and security and detection systems. L3 is also a leading provider of a broad range of communication, electronic and sensor systems used on military, homeland security and commercial platforms. The Company’s customers include the United States (U.S.) Department of Defense (DoD) and its prime contractors, U.S. Government intelligence agencies, the U.S. Department of Homeland Security (DHS), foreign governments, and domestic and international commercial customers.

At December 31, 2016, the Company had the following three reportable segments: (1) Electronic Systems, (2) Aerospace Systems and (3) Communication Systems. Effective March 1, 2017, the Company realigned its Electronic Systems segment, which was separated into two segments named: (1) Electronic Systems and (2) Sensor Systems. Accordingly, the Company’s current structure consists of the following four segments: (1) Electronic Systems, (2) Aerospace Systems, (3) Communication Systems and (4) Sensor Systems. The Company has reported its segment results for all periods presented under the realigned business segments for the prior year to be consistent with the current presentation.

Electronic Systems provides a broad range of products and services for military and commercial customers in several niche markets across several business areas. The Electronic System business areas are Precision Engagement Systems, Power & Propulsion Systems, Aviation Products, Security & Detection Systems and Total Training Solutions.

Aerospace Systems delivers integrated solutions for the global ISR market and provides engineering, modernization, upgrade, sustainment, and maintenance and logistics support for a wide variety of aircraft and ground systems. Aerospace Systems sells these products and services primarily to the DoD and select foreign governments. During the third quarter of 2017, the Company restructured the businesses within its Aerospace Systems segment to streamline operations by consolidating most of the Aircraft Systems sector into the ISR Systems sector, which has been renamed Mission Integration. The restructured Aerospace Systems business areas are Advanced Systems, MAS, Mission Integration and Vertex Aerospace.

Communication Systems delivers products and services for the global communications market, specializing in strategic and tactical space, airborne, ground and sea-based communication systems. Communication Systems sells these products and services primarily to the DoD and select foreign governments. The Communications Systems business areas are Broadband Communication Systems, Advanced Communications and Space & Power Systems.

Sensor Systems provides diverse sensor technologies for the land, sea, air, space and cyber domains to military and commercial customers. During the third quarter of 2017, the Company realigned the business areas within its Sensor Systems segment. The realigned Sensor Systems business areas are Advanced Programs & BD, Space & Sensor Systems, Airborne Turrets, Intelligence & Mission Systems, Maritime Sensor Systems and Warrior Sensor Systems.

On December 7, 2015, the Company entered into a definitive agreement to sell its National Security Solutions (NSS) business to CACI International Inc. The transaction was completed on February 1, 2016. NSS provided cybersecurity solutions, high-performance computing, enterprise IT services, analytics and intelligence analysis to the DoD, U.S. Government intelligence agencies, federal civilian agencies and foreign governments. In accordance with Accounting Standards Update (ASU) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity , the results of operations of NSS are reported as discontinued operations for all periods presented. Accordingly, all references made to financial data in this Quarterly Report on Form 10-Q are to the Company’s continuing operations, unless specifically noted. See Note 5 for additional information.

Financial information with respect to the Company’s segments is included in Note 22 to the unaudited condensed consolidated financial statements and in Note 21 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

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L3 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  — CONTINUED

2. Basis of Presentation

These unaudited condensed consolidated financial statements for the quarterly and year-to-date periods ended September 29, 2017 should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Principles of Consolidation and Reporting

The accompanying financial statements comprise the consolidated financial statements of L3. The consolidated financial statements of the Company include all wholly-owned and majority-owned subsidiaries. All significant intercompany transactions are eliminated in consolidation. Investments in equity securities, joint ventures and limited liability corporations over which the Company has significant influence but does not have voting control are accounted for using the equity method. Investments over which the Company does not have significant influence are accounted for using the cost method. For the classification of contract related assets and liabilities, the Company uses the duration of the related contract or program as its operating cycle, which may be longer than one year, and classifies them as current. Certain reclassifications have been made to conform prior-year amounts to the current-year presentation.

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the disclosures required by U.S. GAAP for a complete set of annual audited financial statements. The December 31, 2016 condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair statement of the results for the interim periods presented have been included. The results of operations for the interim periods are not necessarily indicative of results for the full year.

It is generally the Company’s established practice to close its books for the quarters ending March, June and September on the Friday preceding the end of the calendar quarter. The interim unaudited condensed consolidated financial statements included herein have been prepared and are labeled based on that convention. The Company closes its books for annual periods on December 31 regardless of what day it falls on.

Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and costs of sales during the reporting period. The most significant of these estimates and assumptions for L3 relate to contract revenue, profit and loss recognition, fair values of assets acquired and liabilities assumed in business combinations, market values for inventories reported at lower of cost or market, pension and post-retirement benefit obligations, stock-based employee compensation expense, income taxes, including the valuations of deferred tax assets, litigation reserves and environmental obligations, accrued product warranty costs, useful lives and valuation of recorded amounts of long-lived assets, identifiable intangible assets and goodwill. Changes in estimates are reflected in the periods during which they become known. Actual amounts may differ from these estimates and could differ materially.

Revisions or adjustments to estimates for a contract’s revenue, estimated costs at completion and estimated profit or loss are often required as work progresses under a contract, as experience is gained, as facts and circumstances change and as new information is obtained, even though the scope of work required under the contract may not change. Revisions or adjustments may also be required if contract modifications occur. The impact of revisions in profit (loss) estimates for all types of contracts subject to percentage-of-completion (POC) accounting are recognized on a cumulative catch-up basis in the period in which the revisions are made. The revisions in contract estimates, if significant, can materially affect the Company’s results of operations and Cash Flows, as well as reduce the valuations of receivables and inventories, and in some cases result in liabilities to complete contracts in a loss position. Aggregate net changes in contract estimates amounted to increases of $69 million, or 28%, of segment

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operating income ($0.55 per diluted share) and $150 million, or 18%, of segment operating income ($1.21 per diluted share) for the quarterly and year-to-date periods ended September 29, 2017, respectively, and increases of $23 million, or 11%, of segment operating income ($0.19 per diluted share) and $123 million, or 17%, of segment operating income ($1.00 per diluted share) for the quarterly and year-to-date periods ended September 23, 2016, respectively.

Revenue Recognition

Substantially all of the Company’s sales are generated from written contractual (revenue) arrangements. The sales price for the Company’s revenue arrangements are either fixed-price, cost-plus or time-and-material type. Depending on the contractual scope of work, the Company utilizes either contract accounting standards or accounting standards for revenue arrangements with commercial customers to account for these contracts. Approximately 50% of the Company’s net sales in 2016 were accounted for under contract accounting standards, of which approximately 41% were fixed-price type contracts and approximately 9% were cost-plus type contracts. For contracts that are accounted for under contract accounting standards, sales and profits are recognized based on: (1) a POC method of accounting (fixed-price type contracts), (2) allowable costs incurred plus the estimated profit on those costs (cost-plus type contracts), or (3) direct labor hours expended multiplied by the contractual fixed rate per hour plus incurred costs for material (time-and-material type contracts).

Sales and profits on fixed-price type contracts that are covered by contract accounting standards are substantially recognized using POC methods of accounting. Sales and profits on fixed-price production contracts under which units are produced and delivered in a continuous or sequential process are recorded as units are delivered based on their contractual selling prices (the “units-of-delivery” method). Sales and profits on each fixed-price production contract under which units are not produced and delivered in a continuous or sequential process, or under which a relatively few number of units are produced, are recorded based on the ratio of actual cumulative costs incurred to the total estimated costs at completion of the contract, multiplied by the total estimated contract revenue, less cumulative sales recognized in prior periods (the “cost-to-cost” method). Under both POC methods of accounting, a single estimated total profit margin is used to recognize profit for each contract over its entire period of performance, which can exceed one year. Losses on contracts are recognized in the period in which they become evident. Amounts representing contract change orders or claims are included in sales only when they can be reliably estimated and their realization is reasonably assured. The impact of revisions of contract estimates, which may result from contract modifications, performance or other reasons, are recognized on a cumulative catch-up basis in the period in which the revisions are made.

Sales and profits on cost-plus type contracts that are covered by contract accounting standards are recognized as allowable costs are incurred on the contract, at an amount equal to the allowable costs plus the estimated profit on those costs. The estimated profit on a cost-plus type contract is fixed or variable based on the contractual fee arrangement types. Incentive and award fees are the primary variable fee contractual arrangement types for the Company. Incentive and award fees on cost-plus type contracts are included as an element of total estimated contract revenues and are recorded as sales when a basis exists for the reasonable prediction of performance in relation to established contractual targets and the Company is able to make reasonably dependable estimates for them.

Sales and profits on time-and-material type contracts are recognized on the basis of direct labor hours expended multiplied by the contractual fixed rate per hour, plus the actual costs of materials and other direct non-labor costs.

Sales on arrangements for (1) fixed-price type contracts that require the Company to perform services that are not related to the production of tangible assets (Fixed-Price Service Contracts) and (2) certain commercial customers are recognized in accordance with accounting standards for revenue arrangements with commercial customers. Sales for the Company’s businesses whose customers are primarily commercial business enterprises are substantially all generated from single element revenue arrangements. Sales are recognized when there is persuasive evidence of an arrangement, delivery has occurred or services have been performed, the selling price to the buyer is fixed or determinable and collectability is reasonably assured. Sales for Fixed-Price Service Contracts that do not contain measurable units of work performed are generally recognized on a straight-line basis over the contractual service period, unless evidence suggests that the revenue is earned, or obligations fulfilled, in a different manner. Sales for Fixed-Price Service Contracts that contain measurable units of work performed are generally recognized when the

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units of work are completed. Sales and profit on cost-plus and time-and-material type contracts within the scope of accounting standards for revenue arrangements with commercial customers are recognized in the same manner as those within the scope of contract accounting standards, except for incentive and award fees. Cost-based incentive fees are recognized when they are realizable in the amount that would be due under the contractual termination provisions as if the contract was terminated. Performance based incentive fees and award fees are recorded as sales when objective evidence exists that the fees have been earned.

For a more complete discussion of these estimates and assumptions, see the Annual Report on Form 10-K for the year ended December 31, 2016.

3. New Accounting Standards Implemented

In January 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-04, Simplifying the Test for Goodwill Impairment , which eliminates Step 2, the computation of the implied fair value of goodwill to determine the amount of impairment, from the goodwill impairment test. In computing the implied fair value of goodwill for Step 2 under current accounting standards, the Company calculates the fair value of its assets and liabilities (including unrecognized assets and liabilities) as if acquired or assumed in a business combination. Under the amendments in this update, the Company will determine the amount of goodwill impairment by comparing the Step 1 fair value of a reporting unit with its carrying amount. To the extent the carrying value of a reporting unit exceeds its Step 1 fair value, a goodwill impairment charge is recognized. The new standard is effective for the Company for annual and interim impairment tests beginning January 1, 2020 with early adoption permitted. The Company has elected to early adopt the new standard effective January 1, 2017, because the ASU significantly simplifies the evaluation of goodwill for impairment.

4. Accounting Standards Issued and Not Yet Implemented

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. The amendments in this update intend to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedge relationships and the presentation of hedge results. The amendments in this update require an entity to present the earnings effect of the hedging instrument in the same income statement line in which the earnings effect of the hedged item is reported. Current U.S. GAAP provides for hedge accounting only for the portion of the hedge deemed to be highly effective and requires an entity to separately reflect the amount by which the hedging instrument does not offset the hedged item, which is referred to as the ineffective amount. The amendments in this update no longer require entities to separately measure and report hedge ineffectiveness. The new standard is effective for the Company for interim and annual reporting periods beginning on January 1, 2019, with early adoption permitted. For Cash Flow hedges existing at the date of adoption, the Company is required to apply a cumulative effect adjustment relating to the separate measurement of ineffectiveness to the opening balance of retained earnings. The amended presentation and disclosure guidance is required only prospectively. The Company expects the adoption of this standard will not have a material effect on the Company’s financial position, results of operations or Cash Flows.

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost . Under current U.S. GAAP, defined benefit pension and postretirement benefit cost (net benefit cost) comprise several components that reflect different aspects of the Company’s financial arrangements as well as the cost of benefits provided to employees. Those components are aggregated for reporting in the financial statements, and current U.S. GAAP presents those costs within the operating section of the income statement or capitalized into assets when appropriate. The amendments in this update require the Company to report the service cost component in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented separately from the service cost component and below income from operations. The amendments in this update also allow only the service cost component to be eligible for capitalization when applicable. The amendments in this update will be effective for the Company for interim and annual periods beginning January 1, 2018. Upon adoption, the amendments in this update will be applied retrospectively for the presentation of the components of net benefit cost, and prospectively for the capitalization of the service cost component of net benefit cost. The adoption of this

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standard will not impact pre-tax income or earnings per share reported under current GAAP for the years ended December 31, 2017 and 2016 and is not expected to materially impact pre-tax income or earnings per share for the year ended December 31, 2018. The impacts to operating income from the re-classification of the other components of net benefit cost for the years ended December 31, 2017 and 2016 are immaterial. The impacts to operating income from the re-classification of the other components on net benefit cost for the year ended December 31, 2018 will be known when the Company measures its plan assets and benefit obligations as of December 31, 2017.

In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business , with the objective of providing additional guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update provide new guidance to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. The new guidance requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The new guidance reduces the number of transactions that need to be further evaluated. The new standard, as amended, will be effective for the Company prospectively for interim and annual reporting periods beginning on January 1, 2018, with early application permitted. The Company believes that the evaluation of whether transactions should be accounted for as acquisitions (or dispositions) of assets or businesses will be simplified under the new standard.

In February 2016, the FASB issued ASU 2016-02, Leases , which updates the existing guidance on accounting for leases and requires new qualitative and quantitative disclosures about the Company’s leasing activities. The new standard requires the Company to recognize lease assets and lease liabilities on the balance sheet for all leases under which the Company is the lessee, including those classified as operating leases under previous accounting guidance. The new standard allows the Company to make an accounting policy election not to recognize on the balance sheet lease assets and liabilities for leases with a term of 12 months or less. The accounting applied by a lessor is largely unchanged from previous guidance. The new standard, as amended, will be effective for the Company for interim and annual reporting periods beginning on January 1, 2019, with early adoption permitted. In the adoption year, the Company will be required to recognize and measure all leases using a modified retrospective approach, which requires the restatement of each prior reporting period presented, and permits a number of optional practical expedients that the Company may elect to apply. The optional practical expedients allow the Company to use: (i) its existing assessments under current accounting standards as to the classification of a lease as operating or financing, and whether any expired or existing contracts is or contains a lease, and (ii) hindsight to determine the term of existing leases, for the purpose of restating each prior reporting period presented. The Company is currently evaluating whether to elect the optional practical expedients and the expected impact of the adoption of this standard on its consolidated financial statements and disclosures related to leasing activities. The Company plans to adopt ASU 2016-02 effective January 1, 2019.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , which will replace numerous requirements in U.S. GAAP, including industry-specific requirements, provides companies with a single revenue recognition model for recognizing revenue from contracts with customers and significantly expands the disclosure requirements for revenue arrangements. The new standard, as amended, will be effective for the Company for interim and annual reporting periods beginning on January 1, 2018. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application with disclosure of results under the new and old standards for the first year of adoption.

The Company will adopt the standard as of January 1, 2018, using the modified retrospective transition method, and has evaluated the impact of the adoption on its consolidated financial statements and related disclosures. Under the modified retrospective transition method, the Company will calculate and record the cumulative effect of adopting the new standard as of January 1, 2018, in the Company’s Quarterly Report on Form 10-Q for the first quarter of 2018. Based on contracts in process as of September 29, 2017, the Company does not expect a significant impact to shareholders’ equity as result of the transition adjustment. The Company will finalize the actual amount of the transition adjustment during the first quarter of 2018 and disclose the amount in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

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The Company has evaluated the changes from adopting this new standard on its financial reporting, disclosures and its various revenue streams. The Company will recognize revenue over time on most of its contracts that are covered by current contract accounting standards by using cost inputs to measure progress toward the completion of its performance obligations, which is similar to the POC cost-to-cost method currently used on the majority of these contracts. Accordingly, adoption of this standard will primarily impact certain contracts currently covered by contract accounting standards that recognize revenue using the POC units-of-delivery method. The Company estimates that approximately 10% of the Company’s consolidated net sales, accounted for under the POC units-of-delivery method to recognize revenue in 2016, would have been recognized earlier in the performance period as costs were incurred, as opposed to when the units were delivered.

Additionally, the Company has redrafted its accounting policies affected by this standard, redesigned its internal controls over financial reporting related to the standard, and determined the extent of the expanded disclosure requirements. The Company has completed the evaluation of the impact of the accounting and disclosure changes on its business processes, controls and systems, and is implementing changes to such business processes, controls and systems over the remainder of 2017.

Other accounting standard updates effective for interim and annual periods beginning after December 31, 2017 are not expected to have a material impact on the Company’s financial position, results of operations or Cash Flows.

5. Acquisitions and Divestitures

Business Acquisitions

The business acquisitions discussed below are included in the Company’s results of operations from their respective dates of acquisition.

2017 Business Acquisitions

Doss Aviation, Inc. (Doss Aviation). On September 12, 2017, the Company acquired Doss Aviation, Inc., which has been renamed L3 Doss Aviation, Inc. Doss Aviation is the sole provider of initial flight training for U.S. Air Force pilots and offers curriculum coursework and flight training for both fixed-wing and unmanned aircraft pilots and weapons officers from its full-service, turnkey training facility. Doss Aviation also provides instructor pilots for rotary-wing aircraft for the U.S. Army, as well as global airfield service support activities at U.S. government bases, including aircraft and bulk refueling services and aircraft component repair and modification. The strength of Doss Aviation’s military training, combined with the Company’s existing training solutions, increases the Company’s position to support its customers’ growing demand for trained international military and commercial pilots. The acquisition was financed with cash on hand. The goodwill recognized for this business was $34 million, which was assigned to the Electronic Systems segment, of which $13 million is expected to be deductible for income tax purposes. The final purchase price is subject to customary adjustments for final working capital. The final purchase price allocation, which is expected to be completed in the second quarter of 2018, will be based on final appraisals and other analysis of fair values of acquired assets and liabilities. The Company does not expect that differences between the preliminary and final purchase price allocation will have a material impact on its results of operations or financial position.

Adaptive Methods, Inc. (Adaptive Methods). On September 8, 2017, the Company acquired Adaptive Methods, Inc., which has been renamed L3 Adaptive Methods, Inc. Adaptive Methods delivers Undersea Warfare (USW) and Anti-Submarine Warfare (ASW) capabilities for U.S. military customers, develops autonomy and sensor payload solutions for use by Unmanned Undersea Vehicles (UUVs) and provides tactical buoy systems for manned and unmanned platforms, as well as ASW sonar processing systems and displays and command and control/theatre ASW systems. The acquisition provides the Company with an innovative UUV autonomy technology that will broaden its capabilities in the dynamic and growing undersea market. The acquisition was financed with cash on hand. The goodwill recognized for this business was $27 million, which was assigned to the Sensor Systems segment, all of which is expected to be deductible for income tax purposes. The final purchase price is subject to customary adjustments for final working capital. The final purchase price allocation, which is expected to be completed in the second quarter of 2018, will be based on final appraisals and other analysis of fair values of acquired assets and

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liabilities. The Company does not expect that differences between the preliminary and final purchase price allocation will have a material impact on its results of operations or financial position.

Open Water Power, Inc. (Open Water Power) . On May 19, 2017, the Company acquired Open Water Power, Inc., which has been renamed L3 Open Water Power, Inc. Open Water Power develops safe and high-energy-density undersea power generation technologies for use by UUVs and other maritime platforms. The acquisition enhances the Company’s growing portfolio of innovative undersea capabilities. The acquisition was financed with cash on hand. The purchase price is subject to additional contingent consideration not to exceed $17 million and is based on Open Water Power’s post-acquisition milestone achievements for the four-year period ending December 31, 2021. The Company recorded a $14 million liability on the acquisition date for the fair value of the contingent consideration. The goodwill recognized for this business was $25 million, which was assigned to the Sensor Systems segment and is not expected to be deductible for income tax purposes. The Company also recognized indefinite-lived intangible assets of $65 million for in-process research and development (IPR&D) costs. The final purchase price allocation, which is expected to be completed in the fourth quarter of 2017, will be based on final appraisals and other analysis of fair values of acquired assets and liabilities. The Company does not expect that differences between the preliminary and final purchase price allocation will have a material impact on its results of operations or financial position.

OceanServer Technology, Inc. (OceanServer) . On March 17, 2017, the Company acquired OceanServer Technology, Inc., which has been renamed L3 OceanServer, Inc. OceanServer develops and manufactures autonomous, lightweight UUVs. OceanServer has established itself within a growing specialized market, providing highly capable UUVs to a wide array of military, commercial and international customers. The acquisition was financed with cash on hand. The goodwill recognized for this business was $17 million, which was assigned to the Sensor Systems segment, all of which is expected to be deductible for income tax purposes. The purchase price and purchase price allocation of OceanServer was finalized as of September 29, 2017, with no significant changes to preliminary amounts.

Explosive Trace Detection business of Implant Sciences . On October 10, 2016, the Company entered into an asset purchase agreement (APA) to acquire the explosive trace detection (ETD) business of Implant Sciences Corporation (Implant), at which time Implant entered into Chapter 11 bankruptcy protection of the U.S. Bankruptcy Code. In December 2016, Implant received U.S. Bankruptcy Court approval to consummate the APA. The ETD business bolsters the Company’s leadership in efficient, scalable security solutions and greatly enhances its capabilities in the global aviation security and national security markets. On January 5, 2017, the Company completed the acquisition of the ETD business for a purchase price of $118 million, in addition to the assumption of specified liabilities, which was financed with cash on hand. The goodwill recognized for this business was $90 million, which was assigned to the Electronic Systems segment, of which $87 million is expected to be deductible for income tax purposes. The final purchase price allocation, which is expected to be completed in the fourth quarter of 2017, will be based on final appraisals and other analysis of fair values of acquired assets and liabilities. The Company does not expect that differences between the preliminary and final purchase price allocation will have a material impact on its results of operations or financial position.

During the quarterly and year-to-date periods ended September 29, 2017, the Company used net cash of $100 million and $291 million, respectively, for business acquisitions.

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Net sales and income before income taxes for Doss Aviation, Adaptive Methods, Open Water Power, OceanServer and the ETD business, included in L3’s unaudited condensed consolidated statement of operations for the quarterly and year-to-date periods ended September 29, 2017, are presented in the table below.

 
Third Quarter Ended
Year-to-Date Ended
 
September 29,
2017
September 29,
2017
 
(in millions)
Net sales
$
17
 
$
53
 
Income before income taxes
$
1
 
$
4
 

2016 Business Acquisitions

MacDonald Humfrey (Automation) Limited . On November 22, 2016, the Company acquired MacDonald Humfrey (Automation) Limited, which has been renamed L3 MacDonald Humfrey (MacH), for a purchase price of £263 million (approximately $327 million). The purchase price is subject to additional, contingent consideration not to exceed £30 million (approximately $38 million) and is based on MacH’s post-acquisition financial performance for the three-year period ending December 31, 2019. The Company recorded a £21 million (approximately $26 million) liability on the acquisition date for the fair value of the contingent consideration. The acquisition was funded from cash on hand and revolving credit borrowings that were repaid before the end of 2016. The final purchase price allocation, which is expected to be completed in the fourth quarter of 2017, will be based on final appraisals and other analysis of fair values of acquired assets and liabilities. The Company does not expect that differences between the preliminary and final purchase price allocations will have a material impact on its results of operations or financial position. MacH is a globally recognized leader in the deployment of operationally effective and efficient aviation checkpoint security solutions, as well as in the development of state-of-the-art process automation and collaborative robotic capabilities supporting aviation and other adjacent markets. The goodwill recognized for this business was £206 million (approximately $258 million), which was assigned to the Electronics Systems reportable segment, and is not expected to be deductible for income tax purposes. The Company also recognized identifiable intangible assets of £43 million (approximately $53 million) in the aggregate, which consisted of £22 million (approximately $27 million) for technology and £21 million (approximately $26 million) for customer relationships. Identifiable intangible assets will be amortized over a weighted average useful life of 10 years.

Micreo Limited and Aerosim . On September 30, 2016, the Company acquired Micreo Limited (Micreo) and Flight Training Acquisitions LLC (Aerosim), in separate transactions, for an aggregate purchase price of approximately $86 million, which was financed with cash on hand. The purchase price and purchase price allocation of Micreo and Aersoim was finalized as of September 29, 2017, with no significant changes to preliminary amounts. Micreo specializes in solutions that utilize high-performance microwave, millimeter wave and photonic technology that complements the Company’s wide range of sensor products and is expected to strengthen the development of the Company’s future products in the higher Electronic Warfare (EW) radio frequency (RF) bandwidth. Micreo currently supports a variety of airborne, land and security programs in Australia. Aerosim provides innovative, portable and flexible pilot and maintenance technician training products and provides a flight school for prospective airline pilots. Aerosim’s commercial training capabilities are complementary to those offered by L3 Commercial Training Solutions. The aggregate goodwill recognized for these businesses was $59 million, which was assigned to the Electronic Systems and Sensor Systems reportable segments, of which $6 million is expected to be deductible for income tax purposes.

Advanced Technical Materials, Inc. (ATM) Acquisition . On January 22, 2016, the Company acquired the assets of ATM for a purchase price of $27 million, which was financed with cash on hand. The purchase price and purchase price allocation of ATM was finalized as of September 23, 2016, with no significant changes to preliminary amounts. ATM develops and manufactures a broad product line of passive microwave waveguides and specialized coaxial components. The goodwill recognized for this business was $20 million, which was assigned to the Communication Systems reportable segment, all of which is expected to be deductible for income tax purposes.

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Business Divestitures

2017 Divestitures

CTC Aviation Jet Services Limited Divestiture. On March 1, 2017, the Company divested its CTC Aviation Jet Services Limited (Aviation Jet Services) business for a sales price of £1 million (approximately $1 million). Aviation Jet Services provided non-core aircraft management and operational services as part of commercial training solutions based in the United Kingdom and was included in the Electronic Systems segment. The Company recorded a pre-tax loss of $5 million ($5 million after income taxes) in cost of sales during the year-to-date period ended September 29, 2017.

L3 Coleman Aerospace Divestiture. On February 24, 2017, the Company divested its L3 Coleman Aerospace (Coleman) business for a sales price of $15 million. Coleman provided air-launch ballistic missile targets and was included in the Electronic Systems segment. The Company recorded a pre-tax loss of $3 million ($2 million after income taxes) in cost of sales during the year-to-date period ended September 29, 2017.

Display Product Line Divestiture. On February 23, 2017, the Company divested its Display Product Line for a sales price of $7 million. The Display Product Line provided cockpits to various military aircraft and was included in the Electronic Systems segment. The divestiture resulted in a pre-tax gain of $4 million ($3 million after income taxes) in cost of sales during the year-to-date period ended September 29, 2017.

Discontinued Operations

As discussed in Note 1, on February 1, 2016, the Company completed the sale of its NSS business to CACI International Inc. for a sales price of $547 million. The sales price was finalized as of September 23, 2016, with no significant changes to preliminary amounts.

The table below presents the statement of operations data for NSS, which was previously a reportable segment and has been classified as a discontinued operation.

 
Year-to-Date Ended
 
September 23, 2016
 
(in millions)
Net sales
$
86
 
Cost of sales
 
(92
)
Gain related to business divestiture
 
64
 
Operating income from discontinued operations before income taxes
 
58
 
Income tax benefit
 
5
 
Income from discontinued operations, net of income taxes
$
63
 

The Company recognized $1 million of trailing expenses related to the sale of NSS during the quarterly period ended September 29, 2017.

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Unaudited Pro Forma Statements of Operations Data

The following unaudited pro forma Statements of Operations data present the combined results of the Company and its business acquisitions completed during the year-to-date period ended September 29, 2017 and the year ended December 31, 2016, assuming that the business acquisitions completed during 2017 and 2016 had occurred on January 1, 2016 and January 1, 2015, respectively. The unaudited pro forma Statements of Operations data below include adjustments for additional amortization expense related to acquired intangible assets and depreciation assuming the 2017 and 2016 acquisitions had occurred on January 1, 2016 and January 1, 2015, respectively.

 
Third Quarter Ended
Year-to-Date Ended
 
September 29,
2017
September 23,
2016
September 29,
2017
September 23,
2016
 
(in millions, except per share data)
Pro forma net sales
$
2,659
 
$
2,573
 
$
8,097
 
$
7,740
 
Pro forma income from continuing operations attributable to L3
$
23
 
$
148
 
$
388
 
$
462
 
Pro forma net income attributable to L3
$
22
 
$
148
 
$
387
 
$
525
 
Pro forma diluted earnings per share from continuing operations
$
0.29
 
$
1.88
 
$
4.87
 
$
5.87
 
Pro forma diluted earnings per share
$
0.28
 
$
1.88
 
$
4.86
 
$
6.67
 

The unaudited pro forma results disclosed in the table above are based on various assumptions and are not necessarily indicative of the results of operations that would have occurred had the Company completed these acquisitions on the dates indicated above.

6. Contracts in Process

The components of contracts in process are presented in the table below.

 
September 29,
2017
December 31,
2016
 
(in millions)
Unbilled contract receivables, gross
$
1,965
 
$
2,020
 
Unliquidated progress payments
 
(710
)
 
(827
)
Unbilled contract receivables, net
 
1,255
 
 
1,193
 
Inventoried contract costs, gross
 
1,101
 
 
1,065
 
Unliquidated progress payments
 
(83
)
 
(203
)
Inventoried contract costs, net
 
1,018
 
 
862
 
Total contracts in process
$
2,273
 
$
2,055
 

Inventoried Contract Costs. In accordance with contract accounting standards, the Company’s U.S. Government contractor businesses account for the portion of their general and administrative (G&A), independent research and development (IRAD) and bids and proposal (B&P) costs that are allowable and reimbursable indirect contract costs under U.S. Government procurement regulations on their U.S. Government contracts (revenue arrangements) as inventoried contract costs. G&A, IRAD and B&P costs are allocated to contracts for which the U.S. Government is the end customer and are charged to costs of sales when sales on the related contracts are recognized. The Company’s U.S. Government contractor businesses record the unallowable portion of their G&A, IRAD and B&P costs to expense as incurred, and do not include them in inventoried contract costs.

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The table below presents a summary of G&A, IRAD and B&P costs included in inventoried contract costs and the changes to them, including amounts charged to cost of sales by the Company’s U.S. Government contractor businesses for the periods presented.

 
Third Quarter Ended
Year-to-Date Ended
 
September 29,
2017
September 23,
2016
September 29,
2017
September 23,
2016
 
(in millions)
Amounts included in inventoried contract costs at beginning of the period
$
174
 
$
163
 
$
173
 
$
137
 
Contract costs incurred: