Company Quick10K Filing
L3 Technologies
Price206.06 EPS13
Shares80 P/E16
MCap16,485 P/FCF30
Net Debt-1,084 EBIT1,225
TEV15,401 TEV/EBIT13
TTM 2019-03-29, in MM, except price, ratios
10-Q 2019-03-29 Filed 2019-05-01
10-K 2018-12-31 Filed 2019-02-21
10-Q 2018-09-28 Filed 2018-10-25
10-Q 2018-06-29 Filed 2018-07-26
10-Q 2018-03-30 Filed 2018-05-01
10-K 2017-12-31 Filed 2018-02-22
10-Q 2017-09-29 Filed 2017-10-26
10-Q 2017-07-20 Filed 2017-07-27
10-Q 2017-03-31 Filed 2017-04-27
10-K 2016-12-31 Filed 2017-02-23
10-Q 2016-09-23 Filed 2016-10-27
10-Q 2016-06-24 Filed 2016-07-28
10-Q 2016-03-25 Filed 2016-04-27
10-K 2015-12-31 Filed 2016-02-26
10-Q 2015-09-25 Filed 2015-11-02
10-Q 2015-06-26 Filed 2015-08-04
10-Q 2015-03-27 Filed 2015-04-30
10-K 2014-12-31 Filed 2015-02-26
10-Q 2014-09-26 Filed 2014-10-30
10-Q 2014-03-28 Filed 2014-05-01
10-Q 2013-12-31 Filed 2014-10-10
10-K 2013-12-31 Filed 2014-02-25
10-Q 2013-09-27 Filed 2013-10-29
10-Q 2013-06-28 Filed 2013-08-01
10-Q 2013-03-29 Filed 2013-05-07
10-K 2012-12-31 Filed 2013-02-27
10-Q 2012-09-28 Filed 2012-11-05
10-Q 2012-06-29 Filed 2012-08-03
10-Q 2012-03-30 Filed 2012-05-09
10-K 2011-12-31 Filed 2012-02-29
10-Q 2011-09-30 Filed 2011-11-02
10-Q 2011-07-01 Filed 2011-08-04
10-Q 2011-04-01 Filed 2011-05-05
10-K 2010-12-31 Filed 2011-02-24
10-Q 2010-09-24 Filed 2010-11-02
10-Q 2010-06-25 Filed 2010-08-02
10-Q 2010-03-26 Filed 2010-05-04
10-K 2009-12-31 Filed 2010-02-26
8-K 2019-06-28
8-K 2019-06-20
8-K 2019-06-13
8-K 2019-05-23
8-K 2019-05-01
8-K 2019-04-04
8-K 2019-03-13
8-K 2019-02-25
8-K 2019-01-29
8-K 2019-01-10
8-K 2018-12-14
8-K 2018-12-10
8-K 2018-11-13
8-K 2018-10-14
8-K 2018-10-12
8-K 2018-10-12
8-K 2018-09-28
8-K 2018-08-31
8-K 2018-08-02
8-K 2018-06-29
8-K 2018-06-29
8-K 2018-05-30
8-K 2018-05-30
8-K 2018-05-08
8-K 2018-05-07
8-K 2018-05-01
8-K 2018-03-30
8-K 2018-02-13
8-K 2017-12-31

LLL 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Item 2.
Item 3.
Item 4.
Part II - Other Information
Item 1.
Item 1A.
Item 2.
Item 6.
EX-10.1 lll-032919_exhibit101.htm
EX-31.1 lll-032919_exhibit311.htm
EX-31.2 lll-032919_exhibit312.htm
EX-32 lll-032919_exhibit32.htm

L3 Technologies Earnings 2019-03-29

Balance SheetIncome StatementCash Flow
151296302017201820192020
Assets, Equity
3.02.41.81.20.60.02017201820192020
Rev, G Profit, Net Income
0.50.30.0-0.2-0.5-0.72017201820192020
Ops, Inv, Fin

10-Q 1 lll-032919x10q.htm 10-Q Document

 

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 March 29, 2019
¨
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. x Yes  ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). x Yes ¨ 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
x
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
 
 
Emerging growth company
¨
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. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ¨ Yes  x No
There were 79,451,167 shares of the registrant’s common stock with a par value of $0.01 outstanding as of the close of business on April 26, 2019.
 



L3 TECHNOLOGIES, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended March 29, 2019

TABLE OF CONTENTS
 
 
Page
 No.
 
PART I — FINANCIAL INFORMATION
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
 
 
 
 
PART II — OTHER INFORMATION
 
 
 
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 6.



PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
L3 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
 
(Unaudited)
 
 
 
March 29,
2019
 
December 31,
2018
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
1,108

 
$
1,066

Billed receivables, net of allowances of $13 in 2019 and $12 in 2018
804

 
919

Contract assets
1,735

 
1,590

Inventories
896

 
879

Prepaid expenses and other current assets
362

 
356

Total current assets
4,905


4,810

Property, plant and equipment, net
1,178

 
1,169

Operating lease right-of-use assets
618

 

Goodwill
6,826

 
6,808

Identifiable intangible assets
378

 
390

Other assets
358

 
341

Total assets
$
14,263


$
13,518

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable, trade
$
672

 
$
699

Accrued employment costs
411

 
491

Accrued expenses
219

 
251

Contract liabilities
711

 
669

Income taxes payable
55

 
49

Other current liabilities
364

 
288

Total current liabilities
2,432


2,447

Pension and postretirement benefits
1,202

 
1,211

Deferred income taxes
205

 
196

Other liabilities
415

 
436

Operating lease liabilities
569

 

Long-term debt
3,322

 
3,321

Total liabilities
8,145


7,611

Commitments and contingencies (see Note 18)


 


Equity:
 
 
 
Shareholders’ equity:
 
 
 
Common stock: $.01 par value; 300,000,000 shares authorized, 79,397,240 shares outstanding at March 29, 2019 and 78,800,714 shares outstanding at December 31, 2018
6,904

 
6,866

Treasury stock (at cost), 84,999,711 shares at March 29, 2019 and December 31, 2018
(7,726
)
 
(7,726
)
Retained earnings
7,574

 
7,424

Accumulated other comprehensive loss
(701
)
 
(725
)
Total shareholders’ equity
6,051


5,839

Noncontrolling interests
67

 
68

Total equity
6,118


5,907

Total liabilities and equity
$
14,263


$
13,518


See notes to unaudited condensed consolidated financial statements.
1

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

 
First Quarter Ended
 
March 29,
2019
 
March 30,
2018
Net sales:
 
 
 
Products
$
1,932

 
$
1,646

Services
768

 
725

Total net sales
2,700


2,371

Operating costs and expenses:
 
 
 
Cost of sales — Products
(1,442
)
 
(1,191
)
Cost of sales — Services
(565
)
 
(532
)
General and administrative expenses
(382
)
 
(397
)
Total operating costs and expenses
(2,389
)
 
(2,120
)
Merger, acquisition and divestiture related expenses and losses
(18
)
 

Operating income
293

 
251

Interest expense
(37
)
 
(41
)
Interest and other income, net
4

 
6

Income from continuing operations before income taxes
260


216

Provision for income taxes
(37
)
 
(24
)
Income from continuing operations
223


192

Income from discontinued operations, net of income taxes

 
16

Net income
223


208

Net income from continuing operations attributable to noncontrolling interests
(6
)
 
(5
)
Net income attributable to L3
$
217


$
203

Basic earnings per share attributable to common shareholders:
 
 
 
Continuing operations
$
2.74

 
$
2.40

Discontinued operations

 
0.20

Basic earnings per share
$
2.74


$
2.60

Diluted earnings per share attributable to common shareholders:
 
 
 
Continuing operations
$
2.71

 
$
2.34

Discontinued operations

 
0.20

Diluted earnings per share
$
2.71


$
2.54

Cash dividends declared per common share
$
0.85

 
$
0.80

Weighted average common shares outstanding:
 
 
 
Basic
79.2

 
78.2

Diluted
80.0

 
79.9




See notes to unaudited condensed consolidated financial statements.
2

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

 
First Quarter Ended
 
March 29,
2019
 
March 30,
2018
Net income
$
223

 
$
208

Other comprehensive income:
 
 
 
Foreign currency translation adjustments
23

 
33

Unrealized losses on hedging instruments (1)
(6
)
 
(1
)
Pension and postretirement benefit plans:
 
 
 
Amortization of net loss and prior service cost previously recognized (2)
7

 
14

Total other comprehensive income
24

 
46

Comprehensive income
247


254

Comprehensive income attributable to noncontrolling interests
(6
)
 
(5
)
Comprehensive income attributable to L3
$
241


$
249

__________________
(1) 
Net of income tax benefits of $2 million for the quarterly period ended March 29, 2019.
(2) 
Net of income taxes of $2 million and $4 million for the quarterly periods ended March 29, 2019 and March 30, 2018, respectively.

See notes to unaudited condensed consolidated financial statements.
3

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 First Quarter Ended March 29, 2019:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at December 31, 2018
78.8

 
$
1

 
$
6,865

 
$
(7,726
)
 
$
7,424

 
$
(725
)
 
$
68

 
$
5,907

Net income
 
 
 
 
 
 
 
 
217

 
 
 
6

 
223

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
24

 
 
 
24

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
(7
)
 
(7
)
Cash dividends declared ($0.85 per share)
 
 
 
 
 
 
 
 
(67
)
 
 
 
 
 
(67
)
Shares issued:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee savings plans
0.2

 
 
 
30

 
 
 
 
 
 
 
 
 
30

Exercise of stock options
0.1

 
 
 
19

 
 
 
 
 
 
 
 
 
19

Employee stock purchase plan
0.1

 
 
 


 
 
 
 
 
 
 
 
 

Vesting of restricted stock and performance units
0.3

 
 
 
 
 
 
 
 
 
 
 
 
 


Repurchases of common stock to satisfy tax withholding obligations
(0.1
)
 
 
 
(22
)
 
 
 
 
 
 
 
 
 
(22
)
Stock-based compensation expense
 
 
 
 
12

 
 
 
 
 
 
 
 
 
12

Other
 
 
 
 
(1
)
 
 
 


 
 
 
 
 
(1
)
Balance at March 29, 2019
79.4


$
1


$
6,903


$
(7,726
)

$
7,574


$
(701
)

$
67


$
6,118

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the First Quarter Ended March 30, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017 - as reported
77.9

 
$
1

 
$
6,518

 
$
(7,404
)
 
$
6,659

 
$
(691
)
 
$
68

 
$
5,151

Cumulative effect adjustment of ASC 606 on January 1, 2018, net of taxes
 
 
 
 
 
 
 
 
13

 
 
 
 
 
13

Net income
 
 
 
 
 
 
 
 
203

 
 
 
5

 
208

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
46

 
 
 
46

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
(6
)
 
(6
)
Cash dividends declared ($0.80 per share)
 
 
 
 
 
 
 
 
(63
)
 
 
 
 
 
(63
)
Shares issued:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee savings plans
0.2

 
 
 
34

 
 
 
 
 
 
 
 
 
34

Exercise of stock options
0.6

 
 
 
55

 
 
 
 
 
 
 
 
 
55

Employee stock purchase plan
0.1

 
 
 

 
 
 
 
 
 
 
 
 

Vesting of restricted stock and performance units
0.3

 
 
 
 
 
 
 
 
 
 
 
 
 


Repurchases of common stock to satisfy tax withholding obligations
(0.1
)
 
 
 
(23
)
 
 
 
 
 
 
 
 
 
(23
)
Stock-based compensation expense
 
 
 
 
20

 
 
 
 
 
 
 
 
 
20

Treasury stock purchased
(0.6
)
 
 
 
 
 
(119
)
 
 
 
 
 
 
 
(119
)
Other
 
 
 
 
2

 
 
 
2

 
 
 
 
 
4

Balance at March 30, 2018
78.4


$
1


$
6,606


$
(7,523
)

$
6,814


$
(645
)

$
67


$
5,320



See notes to unaudited condensed consolidated financial statements.
4

L3 TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)

 
First Quarter Ended
 
March 29,
2019
 
March 30,
2018
Operating activities:
 
 
 
Net income
$
223

 
$
208

Less: income from discontinued operations, net of tax

 
(16
)
Income from continuing operations
223

 
192

Depreciation of property, plant and equipment
43

 
43

Amortization of intangibles and other assets
15

 
13

Deferred income tax provision
8

 
16

Stock-based employee compensation expense
12

 
20

Contributions to employee savings plans in common stock
30

 
32

Amortization of pension and postretirement benefit plans net loss and prior service cost
9

 
18

Other non-cash items
5

 
1

Changes in operating assets and liabilities, excluding amounts from acquisitions and divestitures, and discontinued operations:
 
 
 
Billed receivables
116

 
(73
)
Contract assets
(142
)
 
(145
)
Inventories
(20
)
 
(65
)
Prepaid expenses and other current assets
(31
)
 
(99
)
Accounts payable, trade
(32
)
 
56

Accrued employment costs
(70
)
 
(54
)
Accrued expenses
(31
)
 
(6
)
Contract liabilities
43

 
41

Income taxes
14

 
(11
)
All other operating activities
(18
)
 
(14
)
Net cash from (used in) operating activities from continuing operations
174

 
(35
)
 
 
 
 
Investing activities:
 
 
 
Proceeds from the sale of businesses, net of closing date cash balances
1

 

Working capital adjustment on prior divestitures
(20
)
 

Capital expenditures
(49
)
 
(56
)
Dispositions of property, plant and equipment
3

 
2

Other investing activities
(9
)
 
(29
)
Net cash used in investing activities from continuing operations
(74
)
 
(83
)
 
 
 
 
Financing activities:
 
 
 
Borrowings under revolving credit facility

 
207

Repayments of borrowings under revolving credit facility

 
(207
)
Common stock repurchased

 
(119
)
Dividends paid
(70
)
 
(65
)
Proceeds from exercises of stock options
19

 
55

Proceeds from employee stock purchase plan

 
8

Repurchases of common stock to satisfy tax withholding obligations
(22
)
 
(23
)
Other financing activities
(7
)
 
(2
)
Net cash used in financing activities from continuing operations
(80
)
 
(146
)
Effect of foreign currency exchange rate changes on cash and cash equivalents
3

 
6

Net cash from (used in) discontinued operations:
 
 
 
Operating activities
19

 
(29
)
Investing activities

 
(1
)
Net cash from (used in) discontinued operations
19

 
(30
)
Net increase (decrease) cash and cash equivalents
42

 
(288
)
Cash and cash equivalents, beginning of the period
1,066

 
662

Cash and cash equivalents, end of the period
$
1,108

 
$
374


See notes to unaudited condensed consolidated financial statements.
5

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 and fleet management of special mission aircraft), 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 foreign commercial customers. L3's structure consists of the following three reportable segments: (1) ISR Systems (ISRS), (2) Communications and Networked Systems (C&NS) and (3) Electronic Systems.
ISRS provides products and services for the global ISR and Command, Control and Communications (C3) markets, specializing in ISR mission solutions from seabed to space, signals intelligence (SIGINT) and multi-intelligence platforms, including engineering, modernization and sustainment solutions for military and various government aircraft, ground support equipment and other platforms. These strategic and tactical products and services provide warfighters with the ability to detect, collect, identify, analyze and disseminate information from command centers, communication nodes and air defense systems for real-time situational awareness and response. Other major capabilities and mission solutions include space avionics and imaging payloads, Counter Unmanned Aircraft Systems mission solutions, cyber and electronic warfare, special mission command & control, modeling & simulation and life cycle support. ISRS sells these products and services primarily to the DoD and select foreign governments. The ISRS sectors are Reconnaissance Mission Systems, Tactical Mission Systems, Integrated Land Systems, Space & Sensors, Surveillance & Strike Systems, Intelligence & Mission Systems, Advanced C2ISR Systems and Special Programs.
C&NS provides network and communication systems, secure communications products, radio frequency (RF) components, satellite communication terminals and space, microwave and telemetry products. These products include secure data links that are used to connect a variety of space, airborne, ground and sea-based communication systems and are used in transmission, processing, recording, monitoring and dissemination functions of these communication systems. Other major capabilities include integrated maritime mission solutions, directed energy, lightweight unmanned undersea vehicles and naval power delivery on submarines and surface ships. C&NS sells these products and services primarily to the DoD and select foreign governments. The C&NS sectors are Communications & Microwave Products, Integrated Maritime Systems and Broadband Communications.
Electronic Systems provides a broad range of products and services, including components, products, subsystems, systems and related services to military and commercial customers. These products and services serve markets, such as commercial and military aircraft simulation and training, cockpit avionics, airport security and precision weapons. Electronic Systems sells these products and services primarily to the DoD and select foreign governments. The Electronic Systems sectors are Commercial Aviation Solutions, Precision Engagement Systems and Defense Training Solutions.
Financial information with respect to each of the Company's segments is included in Note 22 to the unaudited condensed consolidated financial statements and Note 22 to the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
On June 29, 2018, the Company completed the sale of its Vertex Aerospace businesses for a sales price of $540 million subject to customary closing net working capital adjustments. In connection with the sale, the Company recognized: (1) a pre-tax gain from continuing operations of $42 million ($19 million after income taxes) related to the Crestview Aerospace and TCS businesses (the "Crestview & TCS Businesses") and (2) a pre-tax gain from discontinued operations of $234 million ($177 million after income taxes) related to the Vertex Aerospace business. The results of operations of the Vertex Aerospace business are reported as discontinued operations for all periods presented. During the first quarter of 2019, the Company finalized and paid a working capital adjustment of $20 million related to the sale. See Note 4 for additional information.
All references to financial data in this Quarterly Report on Form 10-Q are to the Company’s continuing operations, unless specifically noted.
Planned Merger with Harris Corporation
On October 14, 2018, L3 and Harris Corporation (“Harris”) announced an agreement to combine in an all stock merger of equals. Under the terms of the Agreement and Plan of Merger (the “Merger Agreement”) governing the proposed transaction,


6

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


which was unanimously approved by the boards of directors of both companies, L3 shareholders will receive a fixed exchange ratio of 1.30 shares of Harris common stock for each share of L3 common stock they hold. Upon completion of the merger, Harris shareholders will own approximately 54% and L3 shareholders will own approximately 46% of the combined company, which will be renamed L3 Harris Technologies, Inc. On April 4, 2019, Harris and L3 shareholders approved all shareholder proposals necessary to complete the merger of equals transaction to create L3 Harris Technologies, Inc. The merger is expected to close in the middle of 2019, subject to customary closing conditions, including the receipt of regulatory approvals.
2. Basis of Presentation
These unaudited condensed consolidated financial statements for the quarterly period ended March 29, 2019 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, 2018.
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 and variable interest entities (VIEs) if the Company is the primary beneficiary. The Company also holds interests in certain VIEs for which it was determined the Company is not the primary beneficiary. 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 certain current 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.

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, 2018 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 cost of sales during the reporting period. The most significant of these estimates and assumptions relate to sales, profit and loss recognition for performance obligations satisfied over time, fair values of assets acquired and liabilities assumed in business combinations and investments, market values for inventories reported at lower of cost or realizable value, pension and post-retirement benefit obligations, stock-based employee compensation expense, income taxes, including the valuations of deferred tax assets, litigation reserves, 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.
Revenue Recognition
A substantial majority of the Company’s consolidated net sales are generated from long-term contracts with customers that require it to design, develop, manufacture, modify, upgrade, test and integrate complex aerospace and electronic equipment and to provide engineering and technical services according to the customers’ specifications. These contracts are primarily with


7

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


agencies of, and prime system contractors to, the U.S. Government and foreign governments and are generally priced on a fixed-price, cost-plus or time-and-material type basis. The majority of the Company's sales are from performance obligations satisfied over time and are primarily with agencies of, and prime system contractors to, the U.S. Government and foreign governments. The Company also records sales from performance obligations satisfied at a point in time, which are typically for standard goods. See Note 22 for additional information regarding the composition of the Company’s net sales.
Revisions or adjustments to estimates of the transaction price, estimated costs at completion and estimated profit or loss of a performance obligation may be 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 or loss estimates 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 contract assets, and in some cases result in liabilities to complete contracts in a loss position. Net sales recognized from the Company's performance obligations partially satisfied in prior periods were $83 million for the quarterly period ended March 29, 2019 and relate to revisions in contract estimates. The aggregate impact of net changes in contract estimates is presented in the table below.
 
First Quarter Ended
 
March 29,
2019
 
March 30,
2018
 
(in millions, except per share data)
Operating income
$
66

 
$
50

Diluted earnings per share
$
0.63

 
$
0.48

The following table presents a summary of the Company’s net sales by revenue recognition method as a percentage of total net sales for the quarterly periods ended March 29, 2019 and March 30, 2018.
 
First Quarter Ended
 
March 29,
2019
 
March 30,
2018
 
 
 
 
Over time (cost-to-cost method)
76
%
 
76
%
Point in time
19
%
 
18
%
Output method
3
%
 
3
%
Billing method
2
%
 
3
%
Total
100
%
 
100
%
Remaining Performance Obligations
As of March 29, 2019, the Company had $12.0 billion of remaining performance obligations, which represents the transaction price of firm orders less inception to date sales recognized. Remaining performance obligations exclude unexercised contract options and potential orders under basic ordering agreements or master-type contracts (i.e., indefinite-delivery, indefinite-quantity). The Company expects to recognize sales relating to existing performance obligations of approximately $6.5 billion during the remainder of 2019, $3.4 billion in 2020, $1.1 billion in 2021 and $1.0 billion in the periods thereafter.
Leases
Effective January 1, 2019, the Company adopted ASU 2016-02 Leases, (ASC 842), using the optional transition method. In accordance with the optional transition method, the Company initially applied the new standard for existing leases as of January 1, 2019. In addition, in accordance with the optional transition method prior period amounts and disclosures are presented under ASC 840. The cumulative effect of applying ASC 842 was an increase of $640 million to the Company's assets and liabilities.
In accordance with ASC 842, the Company recognizes lease assets and liabilities on the balance sheet for operating and finance leases under which the Company is a lessee, except for equipment leases and, as permitted by a practical expedient under the standard, leases with a term of 12 months or less. Equipment leases were not material at January 1, 2019 or March 29, 2019 and therefore not recognized on the balance sheet for these periods. The Company recognizes a lease expense on a straight-line


8

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


basis over the lease term for equipment leases and leases with a term of 12 months or less. The Company classifies operating lease assets as operating lease right-of-use (ROU) assets and operating lease liabilities in other current liabilities for obligations due within 12 months, or operating lease liabilities for obligations due longer than 12 months. Finance lease assets are classified in property, plant and equipment. Finance lease liabilities are classified in other current liabilities or other liabilities depending on when the obligation is due.
Lease assets and liabilities are recognized based on the present value of future lease payments. Lease payments primarily include rent and insurance costs (lease components). The Company's leases also include non-lease components such as real estate taxes and common-area maintenance costs. The Company elected the practical expedient to account for lease and non-lease components as a single component. In certain of the Company's leases, the non-lease components are variable and in accordance with the standard are therefore excluded from lease payments to determine the lease asset. The present value of future lease payments is determined using the Company's incremental borrowing rate at lease commencement over the expected lease term. The Company uses its incremental borrowing rate because the Company's leases do not provide an implicit lease rate. The expected lease term represents the number of years the Company expects to lease the property, including options to extend or terminate the lease when it is reasonably certain that the Company will exercise such option.
For operating leases, the lease expense is recognized on a straight-line basis over the expected lease term on the statement of operations as an operating cost. For finance leases, the asset is amortized on a straight-line basis over the lease term, and interest on the lease liability is recognized in interest expense. The amortization of lease assets for the Company's finance leases and interest expense were not material for the three months ended March 29, 2019.
Lessor
The Company is a lessor for certain arrangements for flight simulators. These leases meet the criteria for operating lease classification. Lease income associated with these leases is not material.
General and Administrative Expenses
The Company accounts for the portion of their G&A, independent research and development (IRAD) and bids and proposal (B&P) costs that are allowable and reimbursable under U.S. Government procurement regulations on their U.S. Government contracts as contract costs which 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. G&A expenses for the Company's commercial businesses are expensed as incurred. The total research and development expenses incurred were $71 million and $75 million for the quarterly periods ended March 29, 2019 and March 30, 2018, respectively.
The Company capitalizes the incremental costs of obtaining a contract with foreign governments and foreign and domestic commercial customers (third-party sales commissions) if the Company expects to recover the costs under the contract. The Company expenses the costs to obtain a contract as incurred when the expected amortization period is one year or less. The Company classifies the portion of capitalized costs of obtaining a contract to be amortized over the next 12 months within prepaid expense and other current assets and classifies the remaining amount within other assets in its consolidated balance sheets.
3. New Accounting Standards Implemented
In February 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this update allow a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act (U.S. Tax Reform). The Company adopted ASU 2018-02 as of January 1, 2019 and elected not to reclassify amounts from AOCI for the stranded tax effects of U.S. Tax Reform. The adoption of ASU 2018-02 did not have any impact on the Company’s financial position, results of operations or cash flows.
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 the Company'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 the Company 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 the Company to separately reflect the amount by which the hedging instrument does not offset the hedged item, which is referred to as the ineffective


9

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


amount. The amendments in this update no longer require the Company 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. 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 adopted ASU 2017-12 effective January 1, 2019. The adoption of this standard did not have a material effect on the Company's financial position, results of operations or cash flows.
In February 2016, the FASB issued ASC 842 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 Company adopted the standard as of January 1, 2019. See Note 2 for additional information.
4. Acquisitions, Divestitures and Discontinued Operations
Business Acquisitions
The Company continually evaluates potential acquisitions that either strategically fit within the Company’s existing portfolio or expand the Company’s portfolio into new product lines or adjacent markets. The Company has completed a number of acquisitions that have been accounted for as business combinations and have resulted in the recognition of goodwill in the Company’s financial statements. This goodwill includes the know-how of the assembled workforce, the ability of the workforce to further improve technology and product offerings and the expected cash flows resulting from these efforts. Goodwill may also include expected synergies resulting from the complementary strategic fit these businesses bring to existing operations. The business acquisitions discussed below are included in the Company’s results of operations from their respective dates of acquisition.
The final purchase price for the 2018 acquisitions of ASV Global, L.L.C. (ASV Global), C.K. Industrial Engineers Limited (C.K. Industrial Engineers) and Azimuth Security and Linchpin Labs (Azimuth Security and Linchpin Labs) is subject to customary adjustments for final working capital. The final purchase price allocations for ASV Global and C.K. Industrial Engineers, which are expected to be completed in the second quarter of 2019, and Azimuth Security and Linchpin Labs, which is expected to be completed in the third quarter of 2019, 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.
See Note 3 to the audited consolidated financial statements for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K, for additional information about the Company’s 2018 business acquisitions.
Unaudited Pro Forma Statements of Operations Data
The following unaudited pro forma Statement of Operations data presents the combined results of the Company and its business acquisitions completed during the year ended December 31, 2018, assuming that the business acquisitions completed during 2018 had occurred on January 1, 2017. The unaudited pro forma Statement of Operations data below includes adjustments for additional amortization expense related to acquired intangible assets and depreciation assuming the 2018 acquisitions had occurred on January 1, 2017.
 
First Quarter Ended
 
March 30, 2018
 
(in millions, except per share data)
Pro forma net sales
$
2,404

Pro forma income from continuing operations attributable to L3
$
191

Pro forma net income attributable to L3
$
207

Pro forma diluted earnings per share from continuing operations
$
2.39

Pro forma diluted earnings per share
$
2.59



10

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


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.
Investments in Nonconsolidated Affiliates
Peak Nano Optics, LLC (Peak Nano). On February 6, 2018, the Company acquired a 25% interest in Peak Nano Optics, LLC, for a purchase price of $20 million. Peak Nano is a nanotechnology company, which allows for the design and manufacturing of polymer lenses for military, sporting and commercial optics applications using its nanolayer gradient refractive index technology. On March 6, 2019, the Company acquired an additional 10% interest in Peak Nano and warrants to acquire up to an additional 10% interest, in exchange for $20 million and conversion of a $5 million note receivable.
The Company determined Peak Nano is a VIE as it did not have sufficient equity at risk to finance its activities. The Company, however, is not the primary beneficiary because it does not have the power to direct the activities that are most significant to the economic performance of Peak Nano. Accordingly, Peak Nano is accounted for under the equity method of accounting.
Business Divestitures
2019 Divestitures
On February 5, 2019, the Company completed the sale of its L3 Mobile-Vision, Inc. business. The L3 Mobile-Vision, Inc. business, which was within the Company's ISRS segment, primarily provided in-car video systems, body-worn cameras and other law enforcement solutions. The sales price for the business was for $1 million, and the estimated loss on sale was $2 million. Mobile-Vision's results of operations were not material for the quarterly period ended March 29, 2019.
2018 Divestitures
As discussed in Note 1, on June 29, 2018, the Company completed the sale of its Crestview & TCS Businesses. The Crestview & TCS Businesses, which were within the Company’s ISRS segment, primarily provided aircraft fabrication and assembly of fixed and rotary wing aero structures as well as avionics hardware and software systems to address mission critical needs. The table below presents Crestview & TCS Businesses’ results of operations and is included in continuing operations.
 
First Quarter Ended
 
March 30, 2018
 
(in millions)
Net sales
$
33

Income from continuing operations before income taxes
$
1

Discontinued Operations
Vertex Aerospace. As discussed in Note 1, on June 29, 2018, the Company completed the sale of its Vertex Aerospace businesses. The table below presents the statements of operations data for Vertex Aerospace. The amounts presented in discontinued operations include allocated interest expenses for debt not directly attributable or related to L3’s other operations. Interest expense was allocated in accordance with the accounting standards for discontinued operations and were based on the ratio of Vertex Aerospace’s net assets to the sum of: (1) total L3 consolidated net assets and (2) L3 consolidated total debt.
 
First Quarter Ended
 
March 30, 2018
 
(in millions)
Net sales
$
371

Operating costs and expenses
(349
)
Operating income from discontinued operations
22

Interest expense allocated to discontinued operations
(1
)
Income from discontinued operations before income taxes
21

Income tax expense
(5
)
Income from discontinued operations, net of income taxes
$
16



11

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


5. Contract Assets and Contract Liabilities
The table below presents the components of net contract assets.
 
March 29,
2019
 
December 31,
2018
 
(in millions)
Contract assets
$
1,735

 
$
1,590

Contract liabilities — current
(711
)
 
(669
)
Contract liabilities — non-current
(28
)
 
(31
)
Net contract assets
$
996

 
$
890

Contract assets increased from December 31, 2018 to March 29, 2019 by $145 million primarily due to sales exceeding billings due to contractual billing terms on U.S. Government contracts across all business areas, with the largest increases from Reconnaissance Mission Systems, Integrated Maritime Systems, Surveillance & Strike Systems, Communications & Microwave Products and Precision Engagement Systems. Contract liabilities increased by $39 million primarily due to advances received by Defense Training Solutions and Special Programs.
The Company did not recognize any impairment losses on contract assets during the quarterly period ended March 29, 2019.
For the quarterly period ended March 29, 2019, the Company recognized sales of $270 million related to its contract liabilities at December 31, 2018.
The components of contract assets are presented in the table below.
 
March 29,
2019
 
December 31,
2018
 
(in millions)
Unbilled contract receivables, gross
$
3,035

 
$
2,716

Unliquidated progress payments and advances
(1,300
)
 
(1,126
)
Total contract assets
$
1,735

 
$
1,590

6. Inventories
Inventories at Lower of Cost or Realizable Value. The table below presents the components of inventories at the lower of cost (first-in, first-out or average cost) or realizable value.
 
March 29,
2019
 
December 31,
2018
 
(in millions)
Raw materials, components and sub-assemblies
$
372

 
$
351

Work in process
335

 
330

Finished goods
189

 
198

Total
$
896


$
879

Inventories at March 29, 2019 included G&A costs of $35 million. G&A costs incurred and recorded in inventories totaled $301 million during the quarterly period ended March 29, 2019, and G&A costs charged to expense from inventories totaled $295 million during the quarterly period ended March 29, 2019.


12

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


7. Goodwill and Identifiable Intangible Assets
Goodwill. In accordance with the accounting standards for business combinations, the Company records the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition (commonly referred to as the purchase price allocation). The table below presents the changes in goodwill allocated to the Company’s reporting units in each reportable segment.
 
ISRS
 
C&NS
 
Electronic Systems
 
Consolidated Total
 
(in millions)
Goodwill
$
2,660

 
$
2,004

 
$
2,248

 
$
6,912

Accumulated impairment losses
(46
)
 
(15
)
 
(43
)
 
(104
)
December 31, 2018
2,614


1,989


2,205


6,808

Business acquisitions (1)

 
2

 

 
2

Foreign currency translation adjustments
4

 
3

 
9

 
16

March 29, 2019
2,618


1,994


2,214


6,826

Goodwill
2,664

 
2,009

 
2,257

 
6,930

Accumulated impairment losses
(46
)
 
(15
)
 
(43
)
 
(104
)
 
$
2,618


$
1,994


$
2,214


$
6,826

__________________
(1) 
The increase for the C&NS segment was due to the purchase price allocation adjustment for the ASV Global business acquisition.
Identifiable Intangible Assets. The most significant identifiable intangible asset that is separately recognized for the Company’s business acquisitions is customer contractual relationships. All of the Company’s customer relationships are established through written customer contracts (revenue arrangements). The fair value for customer contractual relationships is determined, as of the date of acquisition, based on estimates and judgments regarding expectations for the estimated future after-tax earnings and cash flows (including cash flows for working capital) arising from the follow-on sales expected from the customer contractual relationships over their estimated lives, including the probability of expected future contract renewals and sales, less a contributory assets charge, all of which is discounted to present value. The Company’s indefinite-lived intangible assets include IPR&D.
The table below presents information for the Company’s identifiable intangible assets that are subject to amortization and indefinite-lived intangible assets.
 
 
 
March 29, 2019
 
December 31, 2018
 
Weighted Average Amortization Period
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
(in years)
 
(in millions)
Customer contractual relationships
17
 
$
468

 
$
295

 
$
173

 
$
468

 
$
288

 
$
180

Technology
10
 
245

 
137

 
108

 
245

 
132

 
113

Other
12
 
49

 
18

 
31

 
49

 
18

 
31

Total subject to amortization

 
762


450


312


762


438


324

IPR&D
indefinite
 
66

 

 
66

 
66

 

 
66

Total
 
 
$
828


$
450


$
378


$
828


$
438


$
390

The table below presents amortization expense recorded by the Company for its identifiable intangible assets.
 
First Quarter Ended
 
March 29,
2019
 
March 30,
2018
 
(in millions)
Amortization expense
$
12

 
$
11



13

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


Based on gross carrying amounts at March 29, 2019, the Company’s estimate of amortization expense for identifiable intangible assets for the years ending December 31, 2019 through 2023 is presented in the table below.
 
Year Ending December 31,
 
2019
 
2020
 
2021
 
2022
 
2023
 
(in millions)
Estimated amortization expense
$
51

 
$
47

 
$
42

 
$
37

 
$
28

8. Other Current Liabilities and Other Liabilities
The table below presents the components of other current liabilities.
 
March 29,
2019
 
December 31,
2018
 
(in millions)
Other current liabilities:
 

 
 

Operating lease liabilities
$
74

 
$

Accrued product warranty costs
61

 
66

Estimated costs in excess of estimated contract value to complete contracts in process in a loss position
46

 
40

Accrued interest
36

 
18

Estimated contingent purchase price payable for acquired businesses (see Note 14)
10

 
10

Other
137

 
154

Total other current liabilities
$
364


$
288

The table below presents the components of other liabilities.
 
March 29,
2019
 
December 31,
2018
 
(in millions)
Other liabilities:
 

 
 

Non-current income taxes payable (see Note 10)
$
159

 
$
161

Deferred compensation
54

 
53

Contract liabilities (see Note 5)
28

 
31

Notes payable and other debt
24

 
22

Accrued product warranty costs
21

 
22

Accrued workers' compensation
21

 
20

Estimated contingent purchase price payable for acquired businesses (see Note 14)
6

 
10

Other
102

 
117

Total other liabilities
$
415


$
436



14

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


The table below presents the changes in the Company’s accrued product warranty costs.
 
First Quarter Ended
 
March 29,
2019
 
March 30,
2018
 
(in millions)
Accrued product warranty costs:
 

 
 

Balance at January 1
$
88

 
$
99

Accruals for product warranties issued during the period
14

 
14

Changes to accruals for product warranties existing before January 1
(1
)
 
1

Settlements made during the period
(19
)
 
(14
)
Balance at end of period
$
82

 
$
100

9. Debt
The components of debt and a reconciliation to the carrying amount of long-term debt is presented in the table below.
 
March 29,
2019
 
December 31,
2018
 
(in millions)
Borrowings under Revolving Credit Facility (1)
$

 
$

4.95% Senior Notes due 2021
650

 
650

3.85% Senior Notes due 2023
800

 
800

3.95% Senior Notes due 2024
350

 
350

3.85% Senior Notes due 2026
550

 
550

4.40% Senior Notes due 2028
1,000

 
1,000

Principal amount of long-term debt (2)
3,350


3,350

Unamortized discounts
(7
)
 
(7
)
Deferred debt issue costs
(21
)
 
(22
)
Carrying amount of long-term debt
$
3,322

 
$
3,321

__________________
(1) 
During the quarterly period ended March 29, 2019, L3 had no borrowings or repayments under the Credit Facility. At March 29, 2019, L3 had the full availability of its $1 billion Credit Facility.
(2) 
With respect to the Company’s outstanding senior notes, upon the occurrence of both a “change in control” (as defined in the indentures governing the senior notes) along with a “change of control triggering event” (generally described as the applicable series of senior notes ceasing to be rated investment grade, as defined in the indentures governing the senior notes), each holder of the notes will have the right to require L3 to repurchase all or any part of such holder’s notes at an offer price in cash equal to 101% of the aggregate principal amount plus accrued and unpaid interest, if any, to the date of purchase.
10. Income Taxes
The Company and its subsidiaries file income tax returns in the U.S. Federal jurisdiction, which is the Company’s primary tax jurisdiction, and various state and foreign jurisdictions. At March 29, 2019, the statutes of limitations for the Company’s U.S. Federal income tax returns for the years ended December 31, 2012, 2013, 2015, 2016 and 2017 were open.
The effective income tax rate for the quarterly period ended March 29, 2019 increased to 14.2%, compared to 11.1% for the quarterly period ended March 30, 2018. The increase was driven by a reduction in tax benefits from equity compensation partially offset by an increased tax benefit on export sales.
At March 29, 2019, the Company anticipated that unrecognized tax benefits will decrease by approximately $30 million over the next 12 months due to the potential resolution of unrecognized tax benefits involving several jurisdictions and tax periods. The actual amount of the decrease over the next 12 months could vary significantly depending on the ultimate timing and nature of any settlements.


15

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


Current and non-current income taxes payable include accrued potential interest of $15 million ($11 million after income taxes) at March 29, 2019 and December 31, 2018, and potential penalties of $8 million at March 29, 2019 and $9 million at December 31, 2018.
11. Accumulated Other Comprehensive (Loss) Income (AOCI)
The changes in the AOCI balances, including amounts reclassified from AOCI into net income, are presented in the table below.
 
 
Foreign
currency
translation
 
Unrealized
(losses) gains
on hedging
instruments
 
Unrecognized
(losses) gains
and prior service
cost, net
 
Total
accumulated
other
comprehensive
loss
 
 
(in millions)
Balance at December 31, 2018
 
$
(136
)
 
$
(10
)
 
$
(579
)
 
$
(725
)
Other comprehensive income (loss) before reclassifications, net of tax
 
23

 
(5
)
 

 
18

Amounts reclassified from AOCI, net of tax
 

 
(1
)
 
7

 
6

Net current period other comprehensive income (loss)
 
23


(6
)

7


24

Balance at March 29, 2019
 
$
(113
)
 
$
(16
)
 
$
(572
)
 
$
(701
)
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
 
$
(54
)
 
$
9

 
$
(646
)
 
$
(691
)
Other comprehensive income before reclassifications, net of tax
 
33

 

 

 
33

Amounts reclassified from AOCI, net of tax
 

 
(1
)
 
14

 
13

Net current period other comprehensive income (loss)
 
33


(1
)

14


46

Balance at March 30, 2018
 
$
(21
)

$
8


$
(632
)

$
(645
)
Further details regarding the amounts reclassified from AOCI into net income are presented in the table below. ASU 2017-12 did not have an impact in the Company's presentation of the earnings effect of hedging instruments in the income statement.
 
 
Amount Reclassified from AOCI (a)
 
Affected Line Item in the
 Unaudited Condensed Consolidated
 Statements of Operations
 
 
First Quarter Ended
 
Details About AOCI Components
 
March 29,
2019
 
March 30,
2018
 
 
 
(in millions)
 
 
Gain on hedging instruments
 
$
1

 
$
1

 
Cost of sales - Products
 
 
1

 
1

 
Income from continuing operations before income taxes
 
 

 

 
Provision for income taxes
 
 
$
1


$
1

 
Income from continuing operations
 
 
 
 
 
 
 
Amortization of defined benefit pension and postretirement items:
 
 
 
 
 
 
Net loss (b)
 
$
(9
)
 
$
(18
)
 
Income from continuing operations before income taxes
 
 
2

 
4

 
Provision for income taxes
 
 
$
(7
)

$
(14
)
 
Income from continuing operations
Total reclassification for the period
 
$
(6
)
 
$
(13
)
 
Income from continuing operations
__________________
(a) 
Amounts in parenthesis indicate charges to the unaudited condensed consolidated statements of operations.
(b) 
Amounts related to pension and postretirement benefit plans were reclassified from AOCI and recorded as a component of net periodic benefit cost (see Note 19 for additional information).


16

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


12. Equity
On May 8, 2017, L3’s Board of Directors approved a share repurchase program that authorizes L3 to repurchase up to an additional $1.5 billion of its common stock. The program became effective on July 1, 2017 and has no set expiration date. Repurchases of L3’s common stock are made from time to time at management’s discretion in accordance with applicable U.S. Federal securities laws. The timing and actual number of shares to be repurchased in the future will depend on a variety of factors, including, but not limited to, the Company’s financial position, earnings, legal requirements, other investment opportunities (including acquisitions) and market conditions. All share repurchases of L3’s common stock have been recorded as treasury shares.
The Company did not repurchase any shares of common stock from September 29, 2018 through April 26, 2019. The last repurchase of shares was in July 2018. In connection with the planned merger with Harris Corporation (see Note 1), the Company suspended the share repurchase program.
On February 12, 2019, L3’s Board of Directors declared a quarterly cash dividend of $0.85 per share, paid on March 15, 2019 to shareholders of record at the close of business on March 1, 2019. During the quarterly period ended March 29, 2019, the Company paid $70 million of cash dividends, including $3 million net reduction of previously accrued dividends for employee-held stock awards.
13. L3’s Earnings Per Share
A reconciliation of basic and diluted Earnings Per Share (EPS) is presented in the table below.
 
First Quarter Ended
 
March 29,
2019
 
March 30,
2018
 
(in millions, except per share data)
Reconciliation of net income:
 
 
 
Net income
$
223

 
$
208

Net income from continuing operations attributable to noncontrolling interests
(6
)
 
(5
)
Net income attributable to L3’s common shareholders
$
217


$
203

Earnings attributable to L3’s common shareholders:
 
 
 
Continuing operations
$
217

 
$
187

Discontinued operations, net of income tax

 
16

Net income attributable to L3’s common shareholders
$
217


$
203

Earnings per share attributable to L3’s common shareholders:
 
 
 
Basic:
 
 
 
Weighted average common shares outstanding
79.2

 
78.2

Basic earnings per share:
 
 
 
Continuing operations
$
2.74

 
$
2.40

Discontinued operations, net of income tax

 
0.20

Net income
$
2.74


$
2.60

Diluted:
 
 
 
Common and potential common shares:
 
 
 
Weighted average common shares outstanding
79.2

 
78.2

Effect of dilutive securities
0.8

 
1.7

Common and potential common shares
80.0


79.9

Diluted earnings per share:
 
 
 
Continuing operations
$
2.71

 
$
2.34

Discontinued operations, net of income tax

 
0.20

Net income
$
2.71


$
2.54

The computation of diluted EPS excludes 0.5 million shares for the quarterly period ended March 29, 2019 and 0.3 million shares for the quarterly period ended March 30, 2018 for share-based payment awards as they were anti-dilutive.


17

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


14. Fair Value Measurements
Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants. The standards establish a fair value hierarchy that gives the highest priority to observable inputs and the lowest priority to unobservable inputs.
The following table presents the fair value hierarchy level for each of the Company’s assets and liabilities that are measured and recorded at fair value on a recurring basis.
 
 
March 29, 2019
 
December 31, 2018
Description
 
Level 1 (1)
 
Level 2 (2)
 
Level 3 (3)
 
Level 1 (1)
 
Level 2 (2)
 
Level 3 (3) 
 
 
(in millions)
Assets
 
 

 
 

 
 

 
 

 
 

 
 

Cash equivalents
 
$
756

 
$

 
$

 
$
660

 
$

 
$

Derivatives (foreign currency forward contracts)
 

 
3

 

 

 
1

 

Total assets
 
$
756


$
3


$


$
660


$
1


$

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

 
 

 
 

Derivatives (foreign currency forward contracts)
 
$

 
$
9

 
$

 
$

 
$
17

 
$

Derivatives (treasury lock contracts)(4)
 

 
16

 

 

 

 

Contingent consideration
 

 

 
16

 

 

 
20

Total liabilities
 
$


$
25


$
16


$


$
17


$
20

__________________
(1) 
Level 1 is based on quoted market prices available in active markets for identical assets or liabilities as of the reporting date. Cash equivalents are primarily held in registered money market funds, which are valued using quoted market prices.
(2) 
Level 2 is based on pricing inputs other than quoted prices in active markets, which are either directly or indirectly observable. The fair value is determined using a valuation model based on observable market inputs, including quoted foreign currency forward exchange rates, interest rates and consideration of non-performance risk.
(3) 
Level 3 is based on pricing inputs that are not observable and not corroborated by market data.
(4) 
See Note 16 for information regarding the treasury lock contracts.
The contingent consideration liabilities represent the future potential earn-out payments relating to the acquisitions of MacDonald Humfrey (Automation) Limited, renamed L3 MacDonald Humfrey (MacH), on November 22, 2016, Open Water Power, Inc., renamed L3 Open Water Power, Inc. (Open Water Power), on May 19, 2017 and Latitude Engineering, LLC, renamed L3 Latitude Engineering, Inc. (Latitude Engineering) on June 28, 2018. The fair value of the MacH contingent consideration liability and a portion of the Latitude Engineering contingent consideration liability is based on a Monte Carlo Simulation of the aggregate revenue of MacH for the three-year period ending December 31, 2019 and the aggregate revenue of Latitude Engineering as of each year within the four-year period ended December 31, 2021. The significant unobservable inputs used in calculating the fair value of the MacH contingent consideration and a portion of the Latitude Engineering contingent consideration include: (i) projected revenues of the acquired businesses, (ii) company specific risk premium, which is a component of the discount rate applied to the revenue projections and (iii) volatility. The fair value of the Open Water Power contingent consideration liability and a portion of the Latitude Engineering contingent consideration liability is based on the Scenario-Based Method of the income approach using post-acquisition milestone achievements of Open Water Power and Latitude Engineering through December 31, 2020. The significant unobservable inputs used in calculating the fair value of the Open Water Power contingent consideration and a portion of the Latitude Engineering contingent consideration include: (i) timing of achieving the milestones associated with the contingent consideration arrangement, (ii) probabilities of achieving each milestone and (iii) the discount rate. The fair value of the contingent consideration for potential earn-out payments is reassessed quarterly, including an analysis of the significant inputs used in the evaluation, as well as the accretion of the present value discount. Changes are reflected within cost of sales in the unaudited condensed consolidated statements of operations.


18

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


The table below presents the changes to contingent consideration obligations during the quarterly period ended March 29, 2019.
 
March 29, 2019
 
(in millions)
Balance at beginning of period
$
20

Changes in fair value of contingent consideration, net
(4
)
Balance at end of period
$
16

15. Financial Instruments
At March 29, 2019 and December 31, 2018, the Company’s financial instruments consisted primarily of cash and cash equivalents, billed receivables, trade accounts payable, senior notes, foreign currency forward contracts and treasury lock contracts. The carrying amounts of cash and cash equivalents, billed receivables and trade accounts payable are representative of their respective fair values because of the short-term maturities or the expected settlement dates of these instruments. The carrying amounts and estimated fair values of the Company’s other financial instruments are presented in the table below.
 
March 29, 2019
 
December 31, 2018
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
(in millions)
Senior notes (1)
$
3,322

 
$
3,451

 
$
3,321

 
$
3,355

Foreign currency forward contracts (2)
$
(6
)
 
$
(6
)
 
$
(16
)
 
$
(16
)
Treasury lock contracts (3)
$
(16
)
 
$
(16
)
 
$

 
$

__________________
(1) 
The Company measures the fair value of its senior notes using Level 2 inputs based primarily on current market yields for its existing debt traded in the secondary market.
(2) 
The Company measures the fair values of foreign currency forward contracts based on forward exchange rates. See Note 16 for additional disclosures regarding the notional amounts and fair values of foreign currency forward contracts.
(3) 
The Company measures the fair values of treasury lock contracts based on 10-year treasury rates. See Note 16 for additional disclosures regarding the notional amounts and fair values of treasury lock contracts.


19

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


16. Derivative Financial Instruments
The Company’s derivative financial instruments include foreign currency forward contracts and treasury lock contracts, which are entered into for risk management purposes.
Foreign Currency Forward Contracts. The Company’s U.S. and foreign businesses enter into contracts with customers, subcontractors or vendors that are denominated in currencies other than their functional currencies. To protect the functional currency equivalent cash flows associated with certain of these contracts, the Company enters into foreign currency forward contracts. The Company’s activities involving foreign currency forward contracts are designed to hedge the changes in the functional currency equivalent cash flows due to movements in foreign exchange rates compared to the functional currency. The foreign currencies hedged are primarily the U.S. dollar, the Canadian dollar, the Euro, the British pound, the United Arab Emirates dirham and the New Zealand dollar. The Company manages exposure to counterparty non-performance credit risk by entering into foreign currency forward contracts only with major financial institutions that are expected to fully perform under the terms of such contracts. Foreign currency forward contracts are recorded in the Company’s condensed consolidated balance sheets at fair value and are generally designated and accounted for as cash flow hedges in accordance with the accounting standards for derivative instruments and hedging activities. Gains and losses on designated foreign currency forward contracts that are highly effective in offsetting the corresponding change in the cash flows of the hedged transactions are recorded net of income taxes in AOCI and then recognized in income when the underlying hedged transaction affects income. Gains and losses on foreign currency forward contracts that do not meet hedge accounting criteria are recognized in income immediately. Notional amounts are used to measure the volume of foreign currency forward contracts and do not represent exposure to foreign currency losses. The table below presents the notional amounts of the Company’s outstanding foreign currency forward contracts by currency at March 29, 2019.
Currency
 
Notional Amounts
 
 
(in millions)
U.S. dollar
 
$
197

Canadian dollar
 
85

Euro
 
75

British pound
 
11

United Arab Emirates dirham
 
9

New Zealand dollar
 
9

Total
 
$
386

At March 29, 2019, the Company’s foreign currency forward contracts had maturities through 2023.
Treasury Lock Contracts. The Company uses treasury lock contracts principally to reduce its exposure to market risks from changes in interest rates. The Company does not enter into or hold interest rate swap contracts for speculative or trading purposes. The Company is exposed to the impact of interest rate changes primarily through its borrowing activities. The Company’s treasury lock contracts are designated for hedge accounting.
In January 2019, the Company entered into two treasury lock contracts to fix the treasury yield component of the interest cost of forecasted refinancing associated with the $650 million of 4.95% Senior Notes due 2021. The treasury lock contracts are scheduled to terminate on February 12, 2021.
The Company has designated these treasury lock contracts as cash flow hedges of an anticipated transaction. Any unrealized gains and losses associated with the treasury locks are recorded as a component of accumulated other comprehensive income. Unrealized gains occur when interest rates increase, conversely, any unrealized losses occur when interest rates decline. Upon termination of the treasury lock contracts, the Company will recognize any unrealized gains or losses over the life of the related financing arrangement. As of March 29, 2019 the Company recorded unrealized hedging losses of $12 million, net of taxes due to a decline in the 10-year treasury rate.


20

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


The table below presents the location of the Company’s derivative instruments recorded at fair value on the condensed consolidated balance sheets.