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~~March 2829, ~~2018~~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 7879,~~697~~451,~~551~~167 shares of the registrant’s common stock with a par value of $0.01 outstanding as of the close of business on ~~October~~April 1926, ~~2018~~2019.

Table of Contents

L3 TECHNOLOGIES, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the quarterly period ended ~~September~~March 2829, ~~2018~~2019

TABLE OF CONTENTS

		Page No.
	PART I — FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 28, 2018 (Unaudited) and December 31, 2017	1
	Condensed Consolidated Balance Sheets as of March 29, 2019 (Unaudited) and December 31, 2018	1
	Unaudited Condensed Consolidated Statements of Operations for the Quarterly and Year-to-Date periods ended September 28, 2018 and September 29, 2017	2
	Unaudited Condensed Consolidated Statements of Operations for the Quarterly periods ended March 29, 2019 and March 30, 2018	2
	Unaudited Condensed Consolidated Statements of Comprehensive Income for the Quarterly and Year-to-Date periods ended September 28, 2018 and September 29, 2017	4
	Unaudited Condensed Consolidated Statements of Comprehensive Income for the Quarterly periods ended March 29, 2019 and March 30, 2018	3
	Unaudited Condensed Consolidated Statements of Equity for the Year-to-Date periods ended September 28, 2018 and September 29, 2017	5
	Unaudited Condensed Consolidated Statements of Equity for the Quarterly periods ended March 29, 2019 and March 30, 2018	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the Year-to-Date periods ended September 28, 2018 and September 29, 2017	6
	Unaudited Condensed Consolidated Statements of Cash Flows for the Quarterly periods ended March 29, 2019 and March 30, 2018	5
	Notes to Unaudited Condensed Consolidated Financial Statements	76
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5134
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	6947
ITEM 4.	Controls and Procedures	6947
	PART II — OTHER INFORMATION
ITEM 1.	Legal Proceedings	7048
ITEM 1A.	Risk Factors	7048
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7248
ITEM 6.	Exhibits	7248
Signature		7550

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 28, 2018			December 31, 2017
	March 29, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	~~507~~1,108		$	~~662~~1,066
Billed receivables, net of allowances of $12 in 2018 and $18 in 2017	900			723
Billed receivables, net of allowances of $13 in 2019 and $12 in 2018	804			919
Contract assets	1,~~707~~735			—1,590
Contracts in process	—			1,933
Inventories	896			879
Inventories	911			389
Prepaid expenses and other current assets	362			356
Prepaid expenses and other current assets	410			300
Total current assets	4,905			4,810
Assets held for sale	—			135
Property, plant and equipment, net	1,178			1,169
Assets of discontinued operations	—			306
Operating lease right-of-use assets	618			—
Total current assets	4,435			4,448
Goodwill	6,826			6,808
Property, plant and equipment, net	1,156			1,110
Identifiable intangible assets	378			390
Goodwill	6,834			6,615
Other assets	358			341
Identifiable intangible assets	414			292
Total assets	$	14,263		$	13,518
Other assets	345			264
Total assets	$	13,184		$	12,729
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable, trade	$	~~619~~672		$	~~531~~699
Accrued employment costs	~~482~~411			~~493~~491
Accrued expenses	~~268~~219			~~217~~251
Contract liabilities	~~578~~711			—669
Advance payments and billings in excess of costs incurred	—			509
Income taxes payable	55			49
Income taxes payable	14			19
Other current liabilities	364			288
Other current liabilities	299			367
Total current liabilities	2,432			2,447
Liabilities held for sale	—			17
Pension and postretirement benefits	1,202			1,211
Liabilities of discontinued operations	—			226
Deferred income taxes	205			196
Total current liabilities	2,260			2,379
Other liabilities	415			436
Pension and postretirement benefits	1,230			1,313
Operating lease liabilities	569			—
Deferred income taxes	221			158
Long-term debt	3,322			3,321
Other liabilities	442			398
Total liabilities	8,145			7,611
Long-term debt	3,320			3,330
Commitments and contingencies (see Note 18)
Total liabilities	7,473			7,578
Commitments and contingencies (see Note 19)
Equity:
Shareholders’ equity:
Common stock: $.01 par value; 300,000,000 shares authorized, 78,597,571 shares outstanding at September 28, 2018 and 77,876,687 shares outstanding at December 31, 2017	6,808			6,519
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 September 28, 2018 and 83,362,412 shares at December 31, 2017	(7,726		)	(7,404		)
Treasury stock (at cost), 84,999,711 shares at March 29, 2019 and December 31, 2018	(7,726		)	(7,726		)
Retained earnings	7,~~263~~574			67,~~659~~424
Accumulated other comprehensive loss	(~~703~~701		)	(~~691~~725		)
Total shareholders’ equity	56,~~642~~051			5,~~083~~839
Noncontrolling interests	6967			68
Total equity	56,~~711~~118			5,~~151~~907
Total liabilities and equity	$	1314,~~184~~263		$	1213,~~729~~518

See notes to unaudited condensed consolidated financial statements.

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L3 TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

	Third Quarter Ended
	First Quarter Ended
	September 28, 2018			September 29, 2017
	March 29, 2019			March 30, 2018
Net sales:
Products	$	1,~~736~~932		$	1,~~584~~646
Services	~~783~~768			~~709~~725
Total net sales	2,~~519~~700			2,~~293~~371
Operating costs and expenses:
Cost of sales — Products	(1,~~324~~442		)	(1,~~189~~191		)
Cost of sales — Services	(~~518~~565		)	(~~492~~532		)
General and administrative expenses	(~~396~~382		)	(~~380~~397		)
Total operating costs and expenses	(2,~~238~~389		)	(2,~~061~~120		)
Loss on sale of the Crestview Aerospace and TCS businesses	(4		)	—
Merger, acquisition and divestiture related expenses and losses	(18		)	—
Merger, acquisition and divestiture related expenses	(5		)	—
Operating income	293			251
Operating income	272			232
Interest expense	(37		)	(41		)
Interest expense	(40		)	(42		)
Interest and other income, net	4			6
Interest and other income, net	15			2
Income from continuing operations before income taxes	260			216
Debt retirement charge	(21		)	—
Provision for income taxes	(37		)	(24		)
Income from continuing operations before income taxes	226			192
Income from continuing operations	223			192
Provision for income taxes	(18		)	(46		)
Income from discontinued operations, net of income taxes	—			16
Income from continuing operations	208			146
Net income	223			208
Loss from discontinued operations, net of income taxes	—			(121		)
Net income from continuing operations attributable to noncontrolling interests	(6		)	(5		)
Net income	208			25
Net income attributable to L3	$	217		$	203
Net income from continuing operations attributable to noncontrolling interests	(6		)	(3		)
Basic earnings per share attributable to common shareholders:
Net income attributable to L3	$	202		$	22
Continuing operations	$	2.74		$	2.40
Basic earnings (loss) per share attributable to common shareholders:
Discontinued operations	—			0.20
Continuing operations	$	2.57		$	1.83
Basic earnings per share	$	2.74		$	2.60
Discontinued operations	—			(1.55		)
Diluted earnings per share attributable to common shareholders:
Basic earnings per share	$	2.57		$	0.28
Continuing operations	$	2.71		$	2.34
Diluted earnings (loss) per share attributable to common shareholders:
Discontinued operations	—			0.20
Continuing operations	$	2.54		$	1.79
Diluted earnings per share	$	2.71		$	2.54
Discontinued operations	—			(1.51		)
Cash dividends declared per common share	$	0.85		$	0.80
Diluted earnings per share	$	2.54		$	0.28
Cash dividends declared per common share	$	0.80		$	0.75
Weighted average common shares outstanding:
Basic	7879.52			78.2
Diluted	7980.40			79.89

See notes to unaudited condensed consolidated financial statements.

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L3 TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

	Year-to-Date Ended
	September 28, 2018			September 29, 2017
Net sales:
Products	$	5,168		$	4,868
Services	2,305			2,131
Total net sales	7,473			6,999
Operating costs and expenses:
Cost of sales — Products	(3,864		)	(3,630		)
Cost of sales — Services	(1,628		)	(1,509		)
General and administrative expenses	(1,176		)	(1,097		)
Total operating costs and expenses	(6,668		)	(6,236		)
Gain on sale of the Crestview Aerospace and TCS businesses	44			—
Merger, acquisition and divestiture related expenses	(5		)	—
Operating income	844			763
Interest expense	(125		)	(126		)
Interest and other income, net	29			8
Debt retirement charges	(69		)	—
Income from continuing operations before income taxes	679			645
Provision for income taxes	(90		)	(147		)
Income from continuing operations	589			498
Income (loss) from discontinued operations, net of income taxes	206			(98		)
Net income	795			400
Net income from continuing operations attributable to noncontrolling interests	(15		)	(12		)
Net income attributable to L3	$	780		$	388
Basic earnings (loss) per share attributable to common shareholders:
Continuing operations	$	7.32		$	6.23
Discontinued operations	2.63			(1.26		)
Basic earnings per share	$	9.95		$	4.97
Diluted earnings (loss) per share attributable to common shareholders:
Continuing operations	$	7.21		$	6.10
Discontinued operations	2.59			(1.23		)
Diluted earnings per share	$	9.80		$	4.87
Cash dividends declared per common share	$	2.40		$	2.25
Weighted average common shares outstanding:
Basic	78.4			78.0
Diluted	79.6			79.6

See notes to unaudited condensed consolidated financial statements.

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L3 TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

	Third Quarter Ended						Year-to-Date Ended
	First Quarter Ended
	September 28, 2018			September 29, 2017			September 28, 2018			September 29, 2017
	March 29, 2019			March 30, 2018
Net income	$	~~208~~223		$	25208		$	~~795~~		$	~~400~~
Other comprehensive income (loss):
Other comprehensive income:
Foreign currency translation adjustments	(323		)	4933			~~(42~~		)	~~120~~
Unrealized gains (losses) on hedging instruments (1)	2			6			(9		)	6
Unrealized losses on hedging instruments (1)	(6		)	(1		)
Pension and postretirement benefit plans:
Amortization of net loss and prior service cost previously recognized (2)	127			814			39			27
Total other comprehensive income (loss)	11			63			(12		)	153
Total other comprehensive income	24			46
Comprehensive income	~~219~~247			88254			~~783~~			~~553~~
Comprehensive income attributable to noncontrolling interests	(6		)	(35		)	~~(15~~		)	~~(12~~		)
Comprehensive income attributable to L3	$	~~213~~241		$	85249		$	~~768~~		$	~~541~~

__________________

(1) Net of income ~~taxes of $1 million and $2 million for the quarterly periods ended September 28, 2018 and September 29, 2017, respectively, and net of income~~ tax ~~benefit~~benefits of $2 million ~~and net of income taxes of $2 million~~ for the ~~year-to-date~~quarterly ~~periods~~period ended ~~September~~March ~~28, 2018 and September~~ 29, ~~2017, respectively~~2019.

(2) Net of income taxes of $42 million and $54 million for the quarterly periods ended ~~September~~March ~~28, 2018 and September~~ 29, ~~2017,~~2019 ~~respectively,~~ and ~~net~~March ~~of income taxes of $12 million and $16 million for the year-to-date periods ended September 28~~30, 2018 ~~and September 29~~, ~~2017,~~ respectively.

See notes to unaudited condensed consolidated financial statements.

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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 Ended September 28, 2018:
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											~~780~~203						155			~~795~~208
Other comprehensive loss														(12		)				(12		)
Other comprehensive income														46						46
Distributions to noncontrolling interests																	(146		)	(146		)
Cash dividends declared ($2.40 per share)											(189		)							(189		)
Cash dividends declared ($0.80 per share)											(63		)							(63		)
Shares issued:
Employee savings plans	0.52				9834															9834
Exercise of stock options	10.46				~~142~~55															~~142~~55
Employee stock purchase plan	0.21				17—															17—
Vesting of restricted stock and performance units	0.3																			—
Repurchases of common stock to satisfy tax withholding obligations	(0.1	)			(2423		)													(2423		)
Stock-based compensation expense					4720															4720
Treasury stock purchased	(10.6	)						(~~322~~119		)										(~~322~~119		)
Other					92						2									94
Balance at September 28, 2018	78.6		$	1	$	6,807		$	(7,726	)	$	7,263		$	(703	)	$	69		$	5,711
Balance at March 30, 2018	78.4		$	1	$	6,606		$	(7,523	)	$	6,814		$	(645	)	$	67		$	5,320
For the Year-to-Date 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

See notes to unaudited condensed consolidated financial statements.

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L3 TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

	Year-to-Date Ended
	First Quarter Ended
	September 28, 2018			September 29, 2017
	March 29, 2019			March 30, 2018
Operating activities:
Net income	$	~~795~~223		$	~~400~~208
Less: (income) loss from discontinued operations, net of tax	(206		)	98
Less: income from discontinued operations, net of tax	—			(16		)
Income from continuing operations	~~589~~223			~~498~~192
Depreciation of property, plant and equipment	~~132~~43			~~125~~43
Amortization of intangibles and other assets	3815			3613
Deferred income tax provision	268			3016
Stock-based employee compensation expense	4712			4320
Contributions to employee savings plans in common stock	9430			9032
Amortization of pension and postretirement benefit plans net loss and prior service cost	519			4318
Loss (gain) on sale of property, plant and equipment	1			(42		)
Other non-cash items	5			1
Gain on sale of the Crestview Aerospace and TCS businesses	(44		)	—
Debt retirement charges	69			—
Other non-cash items	5			9
Changes in operating assets and liabilities, excluding amounts from acquisitions and divestitures, and discontinued operations:
Billed receivables	~~(166~~116		)	3(73		)
Contract assets	(~~361~~142		)	—(145		)
Contracts in process	—			(183		)
Inventories	(20		)	(65		)
Inventories	28			(46		)
Prepaid expenses and other current assets	(31		)	(99		)
Prepaid expenses and other current assets	(127		)	(29		)
Accounts payable, trade	(32		)	56
Accounts payable, trade	57			47
Accrued employment costs	(70		)	(54		)
Accrued employment costs	(10		)	12
Accrued expenses	(31		)	(6		)
Accrued expenses	71			54
Contract liabilities	43			41
Contract liabilities	7			—
Income taxes	14			(11		)
Advance payments and billing in excess of costs incurred	—			(18		)
All other operating activities	(18		)	(14		)
Income taxes	(25		)	2
Net cash from (used in) operating activities from continuing operations	174			(35		)
All other operating activities	(140		)	(93		)
Net cash from operating activities from continuing operations	342			581
Investing activities:
Business acquisitions, net of cash acquired	(368		)	(291		)
Proceeds from the sale of businesses, net of closing date cash balances	1			—
Proceeds from the sale of businesses, net of closing date cash balances	535			18
Working capital adjustment on prior divestitures	(20		)	—
Capital expenditures	(~~167~~49		)	(~~151~~56		)
Dispositions of property, plant and equipment	23			672
Other investing activities	(289		)	(729		)
Net cash used in investing activities from continuing operations	(2674		)	(~~364~~83		)
Financing activities:
Proceeds from sale of senior notes	1,798			—
Borrowings under revolving credit facility	—			207
Repurchases and redemptions of senior notes	(1,865		)	—
Repayments of borrowings under revolving credit facility	—			(207		)
Borrowings under revolving credit facility	501			1,265
Common stock repurchased	—			(119		)
Repayments of borrowings under revolving credit facility	(501		)	(1,265		)
Dividends paid	(70		)	(65		)
Common stock repurchased	(322		)	(91		)
Proceeds from exercises of stock options	19			55
Dividends paid	(191		)	(178		)
Proceeds from employee stock purchase plan	—			8
Proceeds from exercises of stock options	142			36
Repurchases of common stock to satisfy tax withholding obligations	(22		)	(23		)
Proceeds from employee stock purchase plan	25			24
Other financing activities	(7		)	(2		)
Repurchases of common stock to satisfy tax withholding obligations	(24		)	(18		)
Net cash used in financing activities from continuing operations	(80		)	(146		)
Debt issue costs	(16		)	—
Effect of foreign currency exchange rate changes on cash and cash equivalents	3			6
Other financing activities	(16		)	(12		)
Net cash used in financing activities from continuing operations	(469		)	(239		)
Effect of foreign currency exchange rate changes on cash and cash equivalents	(9		)	16
Net cash from (used in) discontinued operations:
Operating activities	919			84(29		)
Investing activities	(2—		)	(21		)
Net cash from discontinued operations	7			82
Net cash from (used in) discontinued operations	19			(30		)
Net (decrease) increase cash and cash equivalents	(155		)	76
Net increase (decrease) cash and cash equivalents	42			(288		)
Cash and cash equivalents, beginning of the period	~~662~~1,066			~~363~~662
Cash and cash equivalents, end of the period	$	~~507~~1,108		$	~~439~~374

See notes to unaudited condensed consolidated financial statements.

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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 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 ~~Effective~~provides inproducts ~~the~~and ~~third~~services ~~quarter~~for ofthe ~~2018,~~global ~~the~~ISR ~~Company~~and ~~realigned~~Command, ~~its~~Control ~~reportable~~and ~~segments.~~Communications ~~Prior~~(C3) tomarkets, ~~the~~specializing ~~realignment~~in ~~the~~ISR ~~Company~~mission ~~had~~solutions ~~the~~from ~~following~~seabed ~~four~~to ~~reportable~~space, ~~segments:~~signals intelligence (1SIGINT) ~~Electronic~~and ~~Systems~~multi-intelligence platforms, ~~(2)~~including ~~Aerospace Systems~~engineering, ~~(3)~~modernization ~~Communication~~and ~~Systems~~sustainment solutions for military and ~~(4)~~various ~~Sensor~~government ~~Systems~~aircraft, ground support equipment and other platforms. ~~The~~These ~~realignment:~~strategic ~~(i)~~and ~~combined~~tactical ~~the~~products ~~Aerospace~~and ~~Systems~~services ~~segment~~provide warfighters with the ~~Sensor~~ability ~~Systems~~to ~~segment~~detect, tocollect, ~~form~~identify, aanalyze ~~new~~and ~~reportable~~disseminate ~~segment~~information ~~named~~from ~~the~~command ~~ISR~~centers, ~~Systems~~communication ~~(ISRS)~~nodes ~~segment,~~and ~~(ii)~~air ~~moved~~defense ~~the~~systems ~~Naval~~for ~~Power~~real-time ~~Systems~~situational ~~businesses~~awareness ~~from~~and ~~the~~response. ~~Electronic~~Other ~~Systems~~major ~~segment~~capabilities toand ~~the~~mission ~~Communication~~solutions ~~Systems~~include ~~segment~~space avionics and ~~changed~~imaging ~~the~~payloads, ~~name~~Counter ofUnmanned ~~the~~Aircraft ~~Communication~~ Systems ~~segment~~mission tosolutions, ~~the~~cyber ~~Communications~~and &electronic ~~Networked~~warfare, ~~Systems~~special (Cmission command &~~NS)~~ ~~segment~~control, ~~and~~modeling ~~(iii)~~& ~~moved~~simulation ~~the~~and ~~Maritime~~life ~~Sensor~~cycle ~~Systems~~support. ~~businesses~~ISRS ~~from~~sells ~~the~~these ~~former~~products ~~Sensor~~and ~~Systems~~services ~~segment~~primarily to the ~~C&NS~~DoD ~~segment~~and select foreign governments. ~~Accordingly~~The ISRS sectors are Reconnaissance Mission Systems, ~~the~~Tactical ~~Company's~~Mission ~~current~~Systems, ~~structure~~Integrated ~~consists~~Land ofSystems, ~~the~~Space ~~following~~& ~~three~~Sensors, ~~segments:~~Surveillance ~~(1)~~& ~~ISRS~~Strike Systems, ~~(2)~~Intelligence C&NS ~~and~~Mission ~~(3)~~Systems, ~~Electronic~~Advanced C2ISR Systems and Special Programs.

~~ISRS~~C&NS provides ~~products~~network and ~~services~~communication ~~for~~systems, ~~the~~secure ~~global~~communications ~~ISR and Command~~products, ~~Control~~radio ~~and~~frequency ~~Communications~~ (C3RF) ~~markets~~components, ~~specializing~~satellite incommunication ~~ISR~~terminals ~~mission~~and ~~solutions from seabed to~~ space, ~~signals~~microwave ~~intelligence~~and ~~(SIGINT)~~telemetry ~~and~~products. ~~multi-intelligence~~These ~~platforms,~~products ~~including~~include ~~engineering,~~secure ~~modernization~~data ~~and~~links ~~sustainment~~that ~~solutions~~are ~~for~~used ~~military~~to ~~and~~connect ~~various~~a ~~government~~variety ~~aircraft~~of space, airborne, ground ~~support equipment~~ and ~~other~~sea-based ~~platforms.~~communication ~~These~~systems ~~strategic~~ and ~~tactical~~are ~~products~~used ~~and~~in ~~services provide warfighters with the ability to detect~~transmission, ~~collect~~processing, ~~identify~~recording, ~~analyze~~monitoring and ~~disseminate~~dissemination ~~information~~functions ~~from~~of ~~command~~these ~~centers,~~ communication ~~nodes and air defense~~ systems ~~for real-time situational awareness and response~~. Other major capabilities ~~and mission solutions~~ include ~~space~~integrated ~~avionics~~maritime ~~and imaging payloads, Counter Unmanned Aircraft Systems~~ mission solutions, ~~cyber~~directed ~~and~~energy, ~~electronic~~lightweight ~~warfare,~~unmanned ~~special~~undersea ~~mission~~vehicles ~~command~~and &naval ~~control,~~power ~~modeling~~delivery &on ~~simulation~~submarines and ~~life~~surface ~~cycle support~~ships. ~~ISRS~~C&NS sells these products and services primarily to the DoD and select foreign governments. The ~~ISRS~~C&NS ~~business~~sectors ~~areas~~ are ~~ISR~~Communications ~~Systems, Aircraft Systems, Airborne Sensor Systems, Space~~ & ~~Sensor~~Microwave ~~Systems~~Products, ~~Warrior~~Integrated ~~Sensor~~Maritime Systems, ~~MAS, Advanced Programs~~ and ~~Intelligence~~Broadband ~~& Mission Systems~~Communications.

~~C&NS~~Electronic Systems provides ~~network~~a ~~and~~broad ~~communication~~range ~~systems,~~of ~~secure~~products ~~communications~~and ~~products~~services, ~~radio~~including ~~frequency (RF)~~ components, ~~satellite~~products, ~~communication~~subsystems, ~~terminals~~systems and ~~space,~~related ~~microwave~~services to military and ~~telemetry~~commercial ~~products~~customers. These products ~~include~~and ~~secure~~services ~~data~~serve ~~links that are used to connect a variety of space~~markets, ~~airborne,~~such ~~ground~~as ~~and~~commercial ~~sea-based communication systems~~ and ~~are~~military ~~used~~aircraft insimulation ~~transmission, processing, recording, monitoring~~ and ~~dissemination functions of these communication systems. Other major capabilities include integrated maritime mission solutions~~training, ~~directed~~cockpit ~~energy~~avionics, ~~lightweight~~airport ~~unmanned~~security ~~undersea vehicles~~ and ~~naval~~precision ~~power delivery on submarines and surface ships~~weapons. ~~C&NS~~Electronic Systems sells these products and services primarily to the DoD and select foreign governments. The ~~C&NS~~Electronic ~~business~~Systems ~~areas~~sectors are ~~Broadband~~Commercial ~~Communication~~Aviation ~~Systems~~Solutions, ~~Naval~~Precision ~~Power~~Engagement Systems, ~~Advanced Communications, Space & Power Systems~~ and ~~Maritime~~Defense ~~Sensor~~Training ~~Systems~~Solutions.

~~Electronic~~Financial ~~Systems~~information ~~provides~~with arespect ~~broad~~to ~~range~~each of ~~products~~the ~~and~~Company's ~~services,~~segments ~~including~~is ~~components,~~included ~~products,~~in ~~subsystems,~~Note ~~systems~~22 ~~and related services~~ to ~~military~~the ~~and~~unaudited ~~commercial~~condensed ~~customers.~~consolidated ~~These~~financial ~~products~~statements and ~~services~~Note ~~serve~~22 ~~niche~~to ~~markets,~~the ~~such~~audited asconsolidated ~~aircraft~~financial ~~simulation~~statements ~~and~~included ~~training,~~in ~~power~~the ~~and~~Company's ~~distribution,~~Annual ~~cockpit~~Report ~~avionics,~~on ~~airport~~Form ~~security~~10-K ~~and~~for ~~precision weapons. Electronic Systems sells these products and services primarily to~~ the ~~DoD~~year ~~and~~ended ~~select~~December ~~foreign governments. The Electronic Systems business areas are Commercial Aviation Solutions~~31, ~~Precision Engagement Systems, Link Training & Simulation and Security & Detection Systems~~2018.

~~Financial~~On ~~information~~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 ~~respect~~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’s ~~segments~~finalized isand ~~included~~paid ina ~~Note~~working 23capital adjustment of $20 million related to the ~~unaudited~~sale. ~~condensed~~See ~~consolidated~~Note ~~financial~~4 ~~statements~~for additional information.

OnAll ~~June~~references ~~29,~~to ~~2018,~~financial ~~the~~data ~~Company~~in ~~completed~~this ~~the~~Quarterly ~~sale~~Report ofon ~~its~~Form ~~Vertex~~10-Q ~~Aerospace~~are ~~businesses for a sale price of $540 million subject~~ to ~~customary closing net working capital adjustments. In connection with~~ the ~~sale, the~~ Company’s ~~recognized: (1) a pre-tax gain from~~ continuing operations, ofunless ~~$44~~specifically million ($22 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 $237 million ($180 million after income taxes) related to the Vertex Aerospace businessnoted. The divestiture of the Vertex Aerospace business represents a strategic shift by the Company to exit the logistics solution and maintenance services business for military aircraft where the Company does not provide complex ISR systems integration and modification. The Vertex Aerospace business generated sales of $1.4 billion

7Planned Merger with Harris Corporation

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FINANCIAL STATEMENTS — CONTINUED

~~for~~which was unanimously approved by the ~~year~~boards ~~ended~~of ~~December~~directors 31of both companies, ~~2017~~L3 shareholders will receive a fixed exchange ratio of 1.30 ~~The~~shares ~~assets~~of ~~and~~Harris ~~liabilities~~common ~~and~~stock ~~results~~for each share of ~~operations~~L3 common stock they hold. Upon completion of the ~~Vertex~~merger, ~~Aerospace~~Harris ~~business~~shareholders ~~are~~will ~~reported~~own asapproximately ~~discontinued~~54% ~~operations~~and ~~for~~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 ~~periods~~shareholder ~~presented~~proposals necessary to complete the merger of equals transaction to create L3 Harris Technologies, Inc. ~~See~~The ~~Note~~merger 5is ~~for~~expected ~~additional~~to ~~information~~close in the middle of 2019, subject to customary closing conditions, including the receipt of regulatory approvals.

All references made to financial data in this Quarterly Report on Form 10-Q are to the Company’s continuing operations, unless specifically noted.

2. Basis of Presentation

These unaudited condensed consolidated financial statements for the quarterly ~~and~~period ~~year-to-date periods~~ ended ~~September~~March 2829, ~~2018~~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, ~~2017~~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, ~~2017~~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 ~~costs~~cost of sales during the reporting period. The most significant of these estimates and assumptions ~~for L3~~ relate to sales, profit and loss recognition ~~related~~for to 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 ~~market~~realizable value, pension and ~~postretirement~~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

~~Effective~~A ~~January~~substantial 1,majority ~~2018,~~of the Company’s ~~adopted~~consolidated ~~Accounting~~net ~~Standards~~sales ~~Update~~are ~~(ASU)~~generated ~~2014-09, Revenue~~ from ~~Contracts~~long-term contracts with ~~Customers,~~customers asthat ~~amended~~require ~~(commonly~~it ~~referred~~ to asdesign, ~~ASC~~develop, ~~606)~~manufacture, ~~using~~modify, ~~the~~upgrade, ~~modified~~test ~~retrospective~~and ~~transition~~integrate ~~method.~~complex ~~The~~aerospace ~~cumulative~~and ~~effect~~electronic ofequipment ~~applying~~and ~~the~~to ~~standard~~provide ~~was~~engineering anand ~~increase~~technical ofservices ~~$13~~according ~~million~~ to ~~shareholders'~~the ~~equity~~customers’ ~~as of January 1, 2018~~specifications. ~~The~~These ~~Company’s~~contracts ~~statement~~are ofprimarily ~~operations~~with ~~for the quarterly and year-to-date periods ended September 28, 2018 and the Company’s balance sheet as~~

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L3 TECHNOLOGIES, INC.

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FINANCIAL STATEMENTS — CONTINUED

ofagencies ~~September 28~~of, ~~2018~~and ~~are~~prime ~~presented~~system ~~under~~contractors ~~ASC 606~~to, ~~while~~ the ~~Company’s~~U.S. ~~statement~~Government ofand ~~operations~~foreign ~~for~~governments ~~the~~and ~~quarterly~~are ~~and~~generally ~~year-to-date~~priced ~~periods~~on ~~ended~~a ~~September 29~~fixed-price, ~~2017~~cost-plus or time-and-material ~~the~~type ~~Company’s~~basis. ~~balance~~The ~~sheet~~majority as of ~~December~~the ~~31,~~Company's ~~2017~~sales are ~~presented~~from ~~under~~performance ~~ASC~~obligations ~~605,~~satisfied ~~Revenue~~over ~~Recognition.~~time ~~See~~and ~~Note~~are 3primarily ~~for~~with ~~disclosure~~agencies of, ~~the~~and ~~impact~~prime ofsystem contractors to, the ~~adoption~~U.S. ofGovernment ~~ASC~~and ~~606~~foreign ongovernments. ~~the~~The Company’s ~~statement~~also ofrecords ~~operations~~sales ~~for~~from ~~the~~performance ~~quarterly~~obligations ~~and~~satisfied ~~year-to-date~~at ~~periods~~a ~~ended~~point ~~September 28~~in time, ~~2018~~which ~~and~~are ~~balance~~typically ~~sheet~~for asstandard ofgoods. ~~September 28,~~See ~~2018~~Note ~~and~~22 ~~the~~for ~~effect~~additional ofinformation ~~changes~~regarding ~~made~~the tocomposition of the Company’s ~~consolidated~~net ~~balance sheet as of January 1, 2018~~sales.

ARevisions ~~substantial~~or ~~majority~~adjustments to estimates of the ~~Company’s~~transaction ~~consolidated~~price, ~~net~~estimated ~~sales~~costs ~~are~~at ~~generated~~completion ~~from~~and ~~long-term~~estimated ~~contracts~~profit ~~with~~or ~~customers~~loss ~~that~~of ~~require~~a itperformance toobligation ~~design,~~may ~~develop,~~be ~~manufacture,~~required ~~modify,~~as ~~upgrade,~~work ~~test~~progresses ~~and~~under ~~integrate~~a ~~complex~~contract, ~~aerospace~~as ~~and~~experience ~~electronic~~is ~~equipment~~gained, ~~and~~as tofacts ~~provide engineering~~ and ~~technical~~circumstances ~~services~~change ~~according~~and toas ~~the~~new ~~customers’~~information ~~specifications.~~is ~~These~~obtained, ~~contracts~~even ~~are~~though ~~primarily~~the ~~with~~scope ~~agencies~~ of, ~~and~~work ~~prime~~required ~~system~~under ~~contractors to,~~ the ~~U.S.~~contract ~~Government~~may ~~and~~not ~~foreign~~change. ~~governments~~Revisions ~~and~~or ~~are~~adjustments ~~generally~~may ~~priced~~also onbe arequired ~~fixed-price,~~if ~~cost-plus~~contract ormodifications ~~time-and-material type basis~~occur. ~~Substantially~~The ~~all~~impact of ~~the~~revisions ~~Company's~~in ~~cost-plus~~profit ~~and~~or ~~time-and-material~~loss ~~type~~estimates ~~contracts~~ are ~~with~~recognized ~~the~~on ~~U.S.~~a ~~Government,~~cumulative ~~primarily~~catch-up ~~the~~basis ~~DoD.~~in ~~Certain of~~ the ~~Company’s~~period ~~contracts~~in ~~with~~which the ~~U.S.~~revisions ~~Government~~ are ~~multi-year contracts incrementally funded by the customer~~made. The ~~transaction~~revisions ~~price~~in ~~on these incrementally funded contracts includes~~ contract ~~value~~estimates, ~~amounts~~if ~~not~~significant, ~~yet~~can ~~funded~~materially byaffect the ~~U.S. Government when the~~ Company’s ~~has~~results aof ~~firm~~operations ~~order for the goods or services~~ and ~~it is probable that the customer will fund such amounts. In assessing probability~~cash flows, ~~the~~as ~~Company~~well ~~considers,~~as ~~among~~reduce ~~other factors,~~ the ~~period~~valuations of ~~time before~~ contract ~~funding is expected~~assets, ~~communication~~and ~~from~~in ~~the~~some ~~customer~~cases ~~that~~result ~~indicates~~in ~~funding~~liabilities ~~will~~to becomplete ~~obtained~~contracts ~~and~~in ~~the~~a ~~Company's~~loss ~~history~~position. ofNet ~~receiving~~sales ~~funding~~recognized ~~under~~from the ~~current contract or previous similar contracts. The~~ Company's ~~also~~performance ~~generates~~obligations ~~sales~~partially tosatisfied ain ~~lesser~~prior ~~extent~~periods ~~from~~were ~~contracts~~$83 ~~with~~million ~~commercial and government customers~~ for ~~standard~~the ~~product~~quarterly ~~and~~period ~~service~~ended ~~offerings~~March 29, ~~which~~2019 ~~are~~and ~~priced~~relate onto arevisions ~~firm~~in ~~fixed~~contract ~~basis~~estimates. ~~See~~The ~~Note~~aggregate 23impact ~~for~~of ~~additional~~net ~~information~~changes ~~regarding~~in ~~the~~contract ~~composition~~estimates ofis ~~the~~presented ~~Company’s~~in ~~net~~the ~~sales~~table below.

The Company records sales for a contract when it has the approval and commitment of all parties, the contract identifies the rights of the parties and payment terms, the contract has commercial substance and collectability of the consideration is probable.



	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

ToThe ~~determine~~following ~~the~~table ~~proper~~presents ~~revenue recognition method, the Company first evaluates each of its contractual arrangements to identify its performance obligations. A performance obligation is~~ a ~~promise~~summary ~~in a contract to transfer a distinct good or service to the customer. The majority~~ of the Company’s ~~contracts~~net ~~have~~sales aby ~~single~~revenue ~~performance~~recognition ~~obligation~~method ~~because~~as the promise to transfer the individual good or service is not separately identifiable from other promises within the contract and is, therefore, not distinct. These contractual arrangements either require the use of a ~~highly~~percentage ~~specialized manufacturing process to provide goods according to customer specifications or represent a bundle~~ of ~~contracted~~total ~~goods~~net ~~and~~sales ~~services~~for ~~that are integrated and together represent a combined output, which may include~~ the ~~delivery~~quarterly ofperiods ~~multiple~~ended ~~units. Some of the Company's contracts have multiple performance obligations~~March 29, ~~primarily~~2019 (i) related to the provision of multiple goods or services that have alternative use to the Company or that are not substantially the same or (ii) due to the contract covering multiple phases of the product lifecycle (development and ~~engineering~~March 30, ~~production, maintenance and support)~~2018. For contracts with more than one performance obligation, the Company allocates the total transaction price in an amount based on the estimated relative standalone selling prices underlying each performance obligation. In cases where a contract requires a customized good or service, the primary method used to estimate standalone selling price is the expected cost plus a margin approach. In cases where the Company sells a standard product or service offering, the standalone selling price is based on an observable standalone selling price.

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. Sales are recognized over time when control is continuously transferred to the customer during the contract. For U.S. Government contracts, the continuous transfer of control to the customer is supported by contract clauses that provide for (i) progress or performance-based payments or (ii) the unilateral right of the customer to terminate the contract for its convenience, in which case the Company has the right to receive payment for costs incurred plus a reasonable profit for products and services that do not have alternative use to the Company. Foreign government and certain commercial contracts contain similar termination for convenience clauses, or the Company has a legally enforceable right to receive payment for costs incurred and a reasonable profit for products or services that do not have alternative use to the Company. Sales on fixed price and cost-plus type contracts that include performance obligations satisfied over time are generally recorded at amounts equal to the ratio of actual cumulative costs incurred divided by total estimated costs at completion, multiplied by (i) the transaction price, less (ii) the cumulative sales recognized in prior periods (cost-to-cost method).



	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	%

~~Accounting~~Remaining ~~for~~Performance the sales and profits on performance obligations for which progress is measured using the cost-to-cost method involves the preparation of estimates of: (1) transaction price and (2) total costs at completion, which is equal to the sum of the actual incurred costs to date on the contract and the estimated costs to complete the contract's statement of work. Incurred costs include labor, material, overhead and, for the Company's U.S. Government contractor businesses, general and administrative Obligations

9As 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

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L3 TECHNOLOGIES, INC.

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FINANCIAL STATEMENTS — CONTINUED

~~(G&A)~~basis ~~expenses.~~over ~~Incurred~~the ~~costs~~lease ~~represent~~term ~~work~~for ~~performed,~~equipment ~~which~~leases ~~corresponds with~~ and ~~thereby~~leases ~~represents~~with ~~the~~a ~~transfer~~term of ~~control~~12 tomonths ~~the~~or ~~customer~~less. The ~~estimated~~Company ~~profit~~classifies oroperating ~~loss~~lease atassets ~~completion~~as onoperating alease ~~contract~~right-of-use is(ROU) ~~equal~~assets ~~to the difference between the transaction price~~ and ~~the~~operating ~~total~~lease ~~estimated~~liabilities ~~cost~~in atother ~~completion.~~current Inliabilities ~~the case of a contract related to complex aerospace or electronic equipment~~ for ~~which~~obligations ~~the~~due ~~total~~within ~~estimated~~12 ~~costs exceed the total transaction price~~months, aor ~~loss~~operating ~~arises,~~lease ~~and~~liabilities ~~a provision~~ for ~~the~~obligations ~~entire~~due ~~loss~~longer isthan ~~recorded~~12 ~~in the period that the loss becomes evident~~months. ~~The~~Finance ~~unrecoverable~~lease ~~costs~~assets ~~on a loss contract that~~ are ~~expected~~classified ~~to be incurred~~ in ~~the~~property, ~~future~~plant ~~periods~~and ~~are~~equipment. ~~presented~~Finance onlease ~~the~~liabilities ~~balance~~are ~~sheet~~classified asin ~~a component of~~ other current liabilities ~~entitled~~or ~~"Estimated~~other ~~cost~~liabilities independing ~~excess~~on ofwhen ~~estimated~~the ~~contract~~obligation ~~value~~is ~~to complete contracts in process in a loss position~~due.~~" See Note 10 for additional information.~~

~~The~~Lease ~~Company’s~~assets ~~contracts~~and ~~give~~liabilities ~~rise~~are torecognized ~~variable~~based ~~consideration,~~on ~~including~~the ~~award~~present ~~and~~value ~~incentive~~of ~~fees,~~future aslease ~~well~~payments. asLease ~~amounts~~payments ~~incrementally~~primarily ~~funded~~include byrent ~~the~~and ~~U.S.~~insurance ~~Government,~~costs or(lease ~~other~~components). ~~provisions~~The ~~that~~Company's ~~can~~leases ~~either~~also ~~increase~~include ornon-lease ~~decrease~~components ~~the~~such ~~transaction~~as ~~price.~~real ~~Award~~estate ~~fees~~taxes ~~provide~~and ~~for~~common-area amaintenance ~~fee~~costs. ~~based~~The onCompany ~~actual~~elected ~~performance~~the ~~relative~~practical expedient to ~~contractually~~account ~~specified~~for ~~performance~~lease ~~criteria.~~and ~~Incentive~~non-lease ~~fees~~components ~~provide~~as ~~for~~ a ~~fee~~single ~~based~~component. onIn ~~the~~certain ~~relationship~~of ~~between~~the ~~total~~Company's ~~allowable~~leases, ~~costs~~the ~~and~~non-lease ~~target~~components ~~costs.~~are ~~Variable~~variable ~~consideration~~and ~~may~~in ~~require~~accordance with the ~~Company~~standard toare ~~exercise~~therefore ~~significant~~excluded ~~judgment~~from lease payments to determine the ~~total~~lease ~~transaction~~asset. ~~price~~The ofpresent ~~the~~value ~~contract.~~of ~~The~~future ~~Company~~lease ~~includes~~payments ~~variable~~is ~~consideration~~determined inusing the ~~transaction~~Company's ~~price~~incremental ~~when~~borrowing ~~there~~rate isat alease ~~basis~~commencement toover ~~reasonably~~the ~~estimate~~expected ~~the~~lease ~~variable~~term. ~~amount~~The itCompany ~~will~~uses beits ~~entitled~~incremental toborrowing ~~receive~~rate ~~and~~because itthe isCompany's ~~probable~~leases ~~that~~do anot ~~significant~~provide ~~reversal~~an inimplicit ~~revenue~~lease ~~recognized~~rate. ~~will~~The ~~not~~expected belease ~~required~~term ~~when~~represents the ~~uncertainty~~number isof ~~resolved.~~years ~~These~~the ~~estimates~~Company ~~are~~expects ~~based~~to onlease ~~historical~~the ~~experience~~property, ~~current~~including ~~and~~options ~~forecasted~~to ~~performance,~~extend ~~and~~or terminate the ~~Company’s~~lease ~~judgment~~when atit ~~the~~is ~~time~~reasonably ofcertain that the ~~evaluation~~Company will exercise such option.

~~Contract~~For ~~modifications~~operating ~~routinely~~leases, ~~occur~~the tolease ~~account~~expense ~~for~~is ~~changes~~recognized inon ~~contract~~a ~~specifications~~straight-line orbasis ~~requirements.~~over Inthe ~~most~~expected ~~cases,~~lease ~~contract~~term ~~modifications~~on ~~are~~the ~~for~~statement ~~goods~~of oroperations ~~services that are not distinct and, therefore, are accounted for~~ as ~~part~~an ofoperating ~~the existing contract~~cost. ~~Transaction~~For ~~price~~finance ~~estimates~~leases, ~~include additional consideration for submitted contract modifications or claims when~~ the ~~Company~~asset ~~believes~~is itamortized ~~has~~on ana ~~enforceable~~straight-line ~~right~~basis toover the ~~modification~~lease ~~or claim~~term, ~~the~~and ~~amount~~interest ~~can~~on bethe ~~reliably~~lease ~~estimated~~liability ~~and~~is ~~its~~recognized ~~realization~~in isinterest ~~reasonably assured~~expense. ~~Amounts~~The ~~representing~~amortization ~~modifications accounted for as part~~ of ~~the~~lease ~~existing~~assets ~~contract~~for ~~are included in~~ the ~~transaction~~Company's ~~price~~finance leases and ~~recognized~~interest asexpense anwere ~~adjustment~~not tomaterial ~~sales~~for onthe athree ~~cumulative~~months ~~catch-up~~ended ~~basis~~March 29, 2019.

The Company’s fixed-price type contracts with the U.S. Government typically allow for progress payments or performance-based payments. Progress payments are billed to the customer as contract costs are incurred at an amount generally equal to 80% of incurred costs. Performance based payments are billed to the customer upon the achievement of predetermined performance milestones at amounts not to exceed 90% of contract price. On contracts with progress or performance-based payments, the customer often retains a small portion of the contract price until satisfactory completion of the contractual statement of work. Since a small portion of the contract price is retained, the Company generally recognizes sales in excess of billings, which are presented as contract assets on the balance sheet. The portion of the contract price retained by the customer is a normal business practice to ensure satisfactory contract completion and, therefore, is not considered a significant financing component. Contract assets also arise from cost-plus type contracts, time-and-material type contracts and fixed-price services type contracts for revenue amounts that have not been billed by the end of the accounting period due to the timing of preparation of invoices to customers. For certain fixed-price contracts with foreign governments and commercial customers, the Company receives advance payments. Advanced payments are not considered a significant financing component because they are a negotiated contract term to ensure the customer meets its financial obligation, particularly when there are significant upfront working capital requirements. The Company records a liability for advance payments received in excess of sales recognized, which is presented as a contract liability on the balance sheet. Lessor

~~Revisions~~The orCompany adjustments to estimates of the transaction price, estimated costs at completion and estimated profit or loss of a performance obligation 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 or loss estimates are recognized on a ~~cumulative~~lessor ~~catch-up~~for ~~basis~~certain inarrangements ~~the~~for ~~period~~flight ~~in which the revisions are made~~simulators. ~~The~~These ~~revisions~~leases inmeet ~~contract estimates, if significant, can materially affect~~ the ~~Company’s~~criteria ~~results~~for ofoperating ~~operations~~lease ~~and cash flows, as well as reduce the valuations of contract assets and inventories, and in some cases result in liabilities to complete contracts in a loss position~~classification. ~~The~~Lease ~~aggregate~~income ~~impact~~associated ofwith ~~net~~these ~~changes~~leases ~~in contract estimates~~ is ~~presented~~not ~~in the table below~~material.

	Third Quarter Ended				Year-to-Date Ended
	September 28, 2018		September 29, 2017		September 28, 2018		September 29, 2017
	(in millions, except per share data)
Operating income	$	56	$	55	$	172	$	139
Diluted earnings per share	$	0.54	$	0.44	$	1.64	$	1.12

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L3 TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — CONTINUED

Net sales recognized from the Company's performance obligations partially satisfied in prior periods were $83 million and $213 million for the quarterly and year-to-date periods ended September 28, 2018, respectively, and relate to revisions in contract estimates.

Sales from performance obligations satisfied at a point in time are typically for standard goods and are recognized when the customer obtains control, which is generally upon delivery and acceptance. The Company also records sales for performance obligations relating to standard services (i.e., maintenance and extended warranties covering standard goods sold by the Company) over time by using output measures of time elapsed to measure progress toward satisfying the performance obligation.

Sales on time-and-material type contracts are generally recognized each period based on the amount billable to the customer, which is based on direct labor hours expended multiplied by the contractual fixed rate per hour, plus the actual costs of materials and other direct non-labor costs.

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 year-to-date period ended September 28, 2018.

	% of Total Net Sales
Cost to cost method	75	%
Point in time	18	%
Output method	4	%
Billing method	3	%
Total	100	%

Remaining Performance Obligations

On September 28, 2018, the Company had $11.0 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 $2.5 billion during the remainder of 2018, $5.4 billion in 2019, $1.7 billion in 2020 and $1.4 billion in the periods thereafter.

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 $8271 million and $~~243~~75 million for the quarterly ~~and year-to-date~~ periods ended ~~September~~March 2829, ~~2018,~~2019 ~~respectively. The total research~~ and ~~development expenses incurred were $75 million and $203 million for the quarterly and year-to-date periods ended September~~March 2930, ~~2017~~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.

Investments in and Loans to Nonconsolidated Affiliates

The Company’s investments in nonconsolidated affiliates are primarily accounted for using the equity method of accounting and are carried at cost, plus or minus the Company’s share of net earnings or losses of the investment, subject to certain other adjustments. The cost of equity method investments includes transaction costs of the acquisition. As required by U.S. GAAP, to the extent that there is a basis difference between the cost and the underlying equity in the net assets of an equity investment, the Company allocates such differences between tangible and intangible assets. The Company’s share of net earnings or losses of

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L3 TECHNOLOGIES, INC.

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FINANCIAL STATEMENTS — CONTINUED

the investment, inclusive of amortization expense for any basis difference associated with the investment, are presented in interest and other income, net, on the Company’s consolidated statements of operations. Dividends received from the investee reduce the carrying amount of the investment. Due to the timing of receiving financial information from its nonconsolidated affiliates, the Company may record its share of net earnings or losses of such affiliates on a three-month lag basis, with the exception of the amortization expense of any basis difference related to tangible and intangible assets which are recorded currently.

3. New Accounting Standards Implemented

~~Effective~~In ~~January~~February 1, 2018, the ~~Company adopted~~ Financial Accounting Standards Board (FASB) issued ASU ~~2017~~2018-0702, ~~Improving~~Reclassification ~~the Presentation~~ of ~~Net~~Certain ~~Periodic~~Tax ~~Pension~~Effects ~~Cost~~from ~~and~~Accumulated ~~Net~~Other ~~Periodic~~Comprehensive ~~Postretirement Benefit Cost~~Income. ~~Defined~~The ~~benefit~~amendments ~~pension~~in ~~and~~this ~~postretirement~~update ~~benefit~~allow ~~cost~~a ~~(net~~reclassification ~~benefit~~from ~~cost)~~accumulated ~~comprise~~other ~~several~~comprehensive ~~components~~income ~~that~~(AOCI) ~~reflect~~to ~~different~~retained ~~aspects~~earnings offor ~~the~~stranded ~~Company’s~~tax ~~financial~~effects ~~arrangements~~resulting asfrom ~~well as~~ the ~~cost of benefits provided to employees. Under previous~~ U.S. ~~GAAP,~~Tax ~~those~~Cuts ~~components were aggregated for reporting in the financial statements~~ and ~~presented~~Jobs ~~within~~Act ~~the operating section of the income statement or capitalized into assets~~ (~~inventories)~~U.S. ~~when~~Tax ~~appropriate~~Reform). The ~~amendments in this update require the~~ Company toadopted ~~report~~ASU ~~the~~2018-02 ~~service cost component in the same line item~~ as ~~other compensation costs arising from services rendered by the employees during the period. The other components~~ of ~~net~~January ~~benefit cost are required to be presented separately from the service cost component and below income from operations. Plan administrative expenses~~1, ~~which~~2019 ~~were previously included in service cost, are presented together with expected return on plan assets, as a component of Interest~~ and ~~other~~elected ~~income,~~not ~~net. The amendments in this update also allow only the service cost component~~ to bereclassify ~~eligible~~amounts ~~for~~from ~~capitalization~~AOCI ~~when applicable. The amendments in this update have been applied retrospectively~~ for the ~~presentation~~stranded oftax ~~the~~effects ~~components~~ of ~~net~~U.S. ~~benefit~~Tax ~~cost and prospectively for the capitalization of the service cost component of net benefit cost~~Reform. The adoption of ~~this~~ASU ~~standard decreased operating income and increased interest and other income, net, each by $4 million and $9 million for the quarterly and year-to-date periods ended September 28,~~ 2018~~, respectively, and increased operating income and decreased interest and other income, net, each by $3 million and $6 million for the quarterly and year~~-~~to-date~~02 ~~periods ended September 29, 2017, respectively. The adoption of this standard~~ did not ~~impact~~have ~~pre-tax~~any ~~income~~impact ~~for~~on the ~~quarterly~~Company’s ~~and~~financial ~~year-to-date~~position, ~~periods~~results ~~ended~~of ~~September 28,~~operations ~~2018~~or ~~and~~cash ~~September 29, 2017~~flows.

In ~~January~~August 2017, the FASB issued ASU 2017-0112, ~~Clarifying~~Targeted ~~the~~Improvements ~~Definition of a Business, which provides additional guidance~~ to ~~assist~~Accounting ~~entities~~for ~~with~~Hedging ~~evaluating~~Activities. ~~whether~~The ~~transactions~~amendments ~~should~~in bethis ~~accounted~~update ~~for~~intend asto ~~acquisitions~~better ~~(or~~align ~~disposals)~~the ofCompany's ~~assets~~risk ormanagement ~~businesses.~~activities ~~The~~and ~~amendments~~financial inreporting ~~this~~for ~~update~~hedging ~~provide~~relationships ~~new~~through ~~guidance~~changes to ~~determine~~both ~~when~~the andesignation ~~integrated set of assets~~ and ~~activities~~measurement ~~(collectively~~guidance ~~referred~~for toqualifying ashedge arelationships ~~‘‘set’’)~~and isthe ~~not~~presentation aof ~~business~~hedge results. The ~~new~~amendments ~~guidance~~in ~~requires~~this ~~that,~~update ~~when~~require ~~substantially~~the ~~all~~Company ofto present the ~~fair~~earnings ~~value~~effect of the ~~gross~~hedging ~~assets~~instrument ~~acquired~~in ~~(or~~the ~~disposed~~same ~~of)~~income isstatement ~~concentrated~~line in awhich ~~single~~the ~~identifiable~~earnings ~~asset~~effect ~~or a group~~ of ~~similar identifiable assets,~~ the ~~set~~hedged item is ~~not~~reported. aCurrent ~~business~~U.S. ~~The~~GAAP ~~new~~provides ~~guidance~~for ~~reduces~~hedge accounting only for the ~~number~~portion of ~~transactions~~the ~~that~~hedge ~~need~~deemed to be ~~evaluated~~highly aseffective aand ~~business.~~requires ~~The~~the Company ~~adopted~~to ~~this~~separately ~~amendment~~reflect asthe ofamount ~~January~~by 1,which ~~2018.~~the ~~The~~hedging ~~adoption~~instrument ofdoes ~~ASU 2017-01 did~~ not ~~have~~offset ~~a material impact on~~ the ~~Company's~~hedged ~~financial~~item, ~~statements~~which ~~for~~is ~~the~~referred ~~year-~~to~~-date~~ ~~period~~as ~~ended~~the ~~September 28,~~ineffective ~~2018.~~

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, as amended (commonly referred to as ASC 606), which replaces numerous requirements in U.S. GAAP, including industry-specific requirements, and provides companies with a single revenue recognition model for recognizing revenue from contracts with customers and significantly expanded the disclosure requirements for revenue arrangements. The new standard, as amended, was effective for the Company for interim and annual reporting periods beginning on January 1, 2018.9

As discussed in Note 2, the Company adopted ASC 606 using the modified retrospective transition method. Results for reporting periods beginning after December 31, 2017 are presented under ASC 606, while prior period comparative information has not been restated and continues to be reported in accordance with ASC 605, Revenue Recognition, the accounting standard in effect for periods ending prior to January 1, 2018. With the adoption of ASC 606, the Company recognizes sales over time by using the cost-to-cost method on most of its (i) contracts that were covered by the contract accounting standards under ASC 605 and (ii) fixed-price type contracts that require it to perform services that are not related to the production of tangible assets. Accordingly, the adoption of ASC 606 primarily impacted certain (i) contracts previously covered by contract accounting standards that recognized revenue using the units-of-delivery method and (ii) fixed-price type contracts for services that are not related to the production of tangible assets that recognized revenue on a straight-line basis over the contractual service period.

Based on contracts in process at December 31, 2017, the Company recorded, upon adoption of ASC 606, a net increase to retained earnings of $13 million, which includes the acceleration of net sales of approximately $380 million and the related cost of sales. The adjustment to retained earnings primarily relates to contracts previously accounted for under the units-of-delivery method, which is recognized under ASC 606 earlier in the performance period as costs are incurred, as opposed to when the units are delivered under ASC 605. In accordance with the modified retrospective transition provisions of ASC 606, the Company will

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L3 TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — CONTINUED

~~not~~amount. ~~recognize~~The ~~any~~amendments ofin this update no longer require the ~~accelerated~~Company ~~net~~to ~~sales~~separately measure and ~~related~~report ~~cost~~hedge ofineffectiveness. ~~sales~~The atnew standard is effective for the Company for interim and annual reporting periods beginning on January 1, ~~2018~~2019. inFor cash flow hedges existing at the date of adoption, the Company’s ~~statements~~is required to apply a cumulative effect adjustment relating to the separate measurement of ~~operations~~ineffectiveness ~~for~~to ~~any~~the ~~historical~~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 ~~future~~cash ~~period~~flows.

~~The~~In ~~Company~~February ~~made certain presentation changes to its consolidated balance sheet on January 1~~2016, ~~2018~~the toFASB ~~comply~~issued ~~with~~ ASC ~~606.~~842 ~~The~~which ~~components~~updates ofthe ~~contracts~~existing inguidance ~~process~~on asaccounting ~~reported~~for ~~under~~leases ~~ASC 605, which included unbilled contract receivables~~ and ~~inventoried~~requires ~~contract~~new ~~costs,~~qualitative ~~have been reclassified as contract assets~~ and ~~inventories,~~quantitative ~~respectively,~~disclosures ~~after~~about ~~certain~~the ~~adjustments~~Company’s ~~described~~leasing ~~below under ASC 606~~activities. The ~~adoption~~new ofstandard ~~ASC~~requires ~~606~~the ~~resulted~~Company ~~in an increase in unbilled contract receivables (referred~~ to asrecognize ~~contract~~lease assets ~~under~~and ~~ASC~~lease ~~606)~~liabilities ~~primarily~~on ~~from converting contracts previously applying~~ the ~~units-of-delivery~~balance ~~method~~sheet tofor ~~the~~all ~~cost-to-cost~~leases method with a corresponding reduction in inventoried contract costs. The remainder of inventoried contract costs, primarily related to work in process not controlled by the Company's customers, were reclassified to inventories. Additionally, under ~~ASC~~which ~~606,~~ the Company ~~capitalizes~~is ~~costs to fulfill a contract (i.e., non-recurring costs for contract-related activities that do not transfer a good or service to~~ the ~~customer) and costs to obtain a contract (i.e.~~lessee, ~~commissions~~including ~~paid~~those toclassified ~~third-party~~as ~~agents~~operating orleases ~~representatives)~~under toprevious ~~prepaid~~accounting ~~expense and other current assets or other assets (non-current)~~guidance. The Company ~~amortizes~~adopted ~~costs to obtain a contract and costs to fulfill a contract in a pattern similar to~~ the ~~recognition~~standard ~~of sales on the contracts that the capitalized costs relate to. The Company previously accounted for costs to fulfill a contract either~~ as ~~inventoried contract costs or expensed them as incurred. Costs to obtain a contract were generally expensed as incurred. Advance payments and billings in excess~~ of ~~costs~~January ~~and deferred revenue~~1, ~~previously~~2019. ~~classified~~See inNote ~~other~~2 ~~current~~for ~~liabilities,~~additional ~~have been combined and are presented as contract liabilities~~information.

134. Acquisitions, Divestitures and Discontinued Operations

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L3 TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — CONTINUED

The table below presents the cumulative effect of the changes made to the consolidated January 1, 2018 balance sheet due to the adoption of ASC 606.

BALANCE SHEET	December 31, 2017As ReportedUnder ASC 605		Adjustments Dueto ASC 606			January 1, 2018As AdjustedUnder ASC 606
			(in millions)
Assets
Current assets:
Contract assets	$	—	$	1,349		$	1,349
Contracts in process	1,933		(1,933		)	—
Inventories	389		537			926
Prepaid expenses and other current assets	300		17			317
Assets held for sale	135		3			138
Assets of discontinued operations	306		(21		)	285
Total current assets	4,448		(48		)	4,400
Other assets	264		49			313
Total assets	$	12,729	$	1		$	12,730
Liabilities
Current liabilities:
Accrued expenses	$	217	$	(13	)	$	204
Contract liabilities	—		565			565
Advance payments and billing in excess of costs incurred	509		(509		)	—
Other current liabilities	367		(49		)	318
Liabilities held for sale	17		(1		)	16
Liabilities of discontinued operations	226		(23		)	203
Total current liabilities	2,379		(30		)	2,349
Deferred income taxes	158		4			162
Other liabilities	398		14			412
Total liabilities	7,578		(12		)	7,566
Shareholders' Equity
Retained earnings	6,659		13			6,672
Total equity	$	5,151	$	13		$	5,164

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L3 TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — CONTINUED

The tables below present the impact of the adoption of ASC 606 on the Company's statement of operations.

	Third Quarter Ended September 28, 2018
STATEMENT OF OPERATIONS	Under ASC 605			Effect of ASC 606			As ReportedUnder ASC 606
				(in millions)
Net Sales:
Products	$	1,723		$	13		$	1,736
Services	772			11			783
Total	2,495			24			2,519
Operating costs and expenses:
Cost of sales — Products	$	(1,271	)	$	(53	)	$	(1,324	)
Cost of sales — Services	(540		)	22			(518		)
General and administrative expenses	(421		)	25			(396		)
Loss on sale of the Crestview & TCS Businesses	(4		)	—			(4		)
Merger, acquisition and divestiture related expenses	(5		)	—			(5		)
Operating income	254			18			272
Income from continuing operations before income taxes	208			18			226
Provision for income taxes	(14		)	(4		)	(18		)
Income from continuing operations	194			14			208
Income from discontinued operations, net of income taxes	2			(2		)	—
Net income	196			12			208
Net income attributable to L3	$	190		$	12		$	202
Basic earnings per share attributable to common shareholders:
Continuing operations	$	2.39		$	0.18		$	2.57
Discontinued operations	0.03			(0.03		)	—
Basic earnings per share	$	2.42		$	0.15		$	2.57
Diluted earnings per share attributable to common shareholders:
Continuing operations	$	2.37		$	0.17		$	2.54
Discontinued operations	0.02			(0.02		)	—
Diluted earnings per share	$	2.39		$	0.15		$	2.54

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FINANCIAL STATEMENTS — CONTINUED

	Year-to-Date Ended September 28, 2018
STATEMENT OF OPERATIONS	Under ASC 605			Effect of ASC 606			As ReportedUnder ASC 606
				(in millions)
Net Sales:
Products	$	5,038		$	130		$	5,168
Services	2,290			15			2,305
Total	7,328			145			7,473
Operating costs and expenses:
Cost of sales — Products	$	(3,732	)	$	(132	)	$	(3,864	)
Cost of sales — Services	(1,629		)	1			(1,628		)
General and administrative expenses	(1,198		)	22			(1,176		)
Gain on sale of the Crestview & TCS Businesses	43			1			44
Merger, acquisition and divestiture related expenses	(5		)	—			(5		)
Operating income	807			37			844
Income from continuing operations before income taxes	642			37			679
Provision for income taxes	(81		)	(9		)	(90		)
Income from continuing operations	561			28			589
Income from discontinued operations, net of income taxes	208			(2		)	206
Net income	769			26			795
Net income attributable to L3	$	754		$	26		$	780
Basic earnings per share attributable to common shareholders:
Continuing operations	$	6.96		$	0.36		$	7.32
Discontinued operations	2.66			(0.03		)	2.63
Basic earnings per share	$	9.62		$	0.33		$	9.95
Diluted earnings per share attributable to common shareholders:
Continuing operations	$	6.86		$	0.35		$	7.21
Discontinued operations	2.61			(0.02		)	2.59
Diluted earnings per share	$	9.47		$	0.33		$	9.80

The following table quantifies the impact of adopting ASC 606 on segment net sales and segment operating income for the quarterly and year-to-date periods ended September 28, 2018.

	Effect of ASC 606
	Third Quarter Ended September 28, 2018					Year-to-Date Ended September 28, 2018
	Sales			Operating Income		Sales		Operating Income
	(in millions)
ISRS	$	25		$	10	$	47	$	12
C&NS	(18		)	2		43		12
Electronic Systems	17			6		55		12
Segment totals	$	24		$	18	$	145	$	36

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The table below presents the impact of the adoption of ASC 606 on the Company's balance sheet.

	September 28, 2018
BALANCE SHEET	Under ASC 605		Effect of ASC 606			As ReportedUnder ASC 606
			(in millions)
Assets
Current assets:
Contract assets	$	—	$	1,707		$	1,707
Contracts in process	2,237		(2,237		)	—
Inventories	406		505			911
Prepaid expenses and other current assets	371		39			410
Total current assets	4,446		(11		)	4,435
Other assets	298		47			345
Total assets	$	13,148	$	36		$	13,184
Liabilities
Current liabilities:
Accrued expenses	$	288	$	(20	)	$	268
Contract liabilities	—		578			578
Advance payments and billings in excess of costs incurred	536		(536		)	—
Other current liabilities	351		(52		)	299
Total current liabilities	2,290		(30		)	2,260
Deferred income taxes	209		12			221
Other liabilities	427		15			442
Total liabilities	7,476		(3		)	7,473
Shareholders' Equity
Retained earnings	7,224		39			7,263
Total equity	$	5,672	$	39		$	5,711

4. Accounting Standards Issued and Not Yet Implemented

In February 2018, the 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 new standard is effective for the Company beginning on January 1, 2019, with early adoption permitted. The Company will adopt ASU 2018-02 effective January 1, 2019. The Company does not expect the adoption of this standard will have a material effect on its 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 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, 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 will adopt ASU 2017-12 effective January 1,

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2019. The Company does not expect the adoption of this standard to have a material effect on its financial position, results of operations or cash flows.

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 Company will measure leases commencing after the adoption date based on the present value of the lease payments due over the lease term (as defined in ASU 2016-02). The Company will measure and recognize its existing leases on the date of adoption based on the present value of the remaining minimum lease payments, as defined in existing guidance on accounting for leases. 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. The standard currently allows two transition methods whereby the Company may elect either to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with certain practical expedients available, or to initially apply the new leases standard at January 1, 2019 and recognize a cumulative-effect adjustment to the opening balance of retained earnings. The Company expects to adopt the standard as of January 1, 2019, by recognizing a cumulative-effect adjustment to the opening balance of retained earnings at January 1, 2019, in the Company’s Quarterly Report on Form 10-Q for the first quarter of 2019.

Progress implementing the new standard to date includes: (1) selecting a lease accounting system, (2) electing to apply the transition practical expedients that allows the Company to rely on historical assessments of whether its contracts contain a lease and to use the same lease classifications applied under existing accounting guidance and (3) accumulating the data required to measure existing leases and prepare required disclosures. While the Company will complete its determination of the impact of adopting this standard on its consolidated financial statements in the first quarter of 2019, the Company does not expect ASU 2016-02 will have a material impact on its results of operations or cash flows. See Note 18 to the audited consolidated financial statements for the year ended December 31, 2017, included in the Company’s Annual Report on Form 10-K for additional information about the Company’s leases, including the future minimum lease payments of the Company's operating leases at December 31, 2017. In addition, the Company is in the process of redrafting its accounting policies and internal controls over financial reporting relating to lease accounting, and drafting the expanded disclosures.

Other accounting standard updates effective for interim and annual periods beginning after December 31, 2018, are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

5. 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 ~~Business~~acquisitions ~~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.

~~ASV~~See ~~Global,~~Note ~~L.L.C.~~3 ~~(ASV~~to ~~Global). On September 20, 2018,~~ the ~~Company~~audited ~~acquired~~consolidated ~~ASV~~financial ~~Global,~~statements ~~L.L.C., renamed L3 ASV,~~ for athe ~~purchase~~year ~~price~~ended ~~of $94 million~~December 31, ~~which was financed with cash on hand. ASV Global is a leading unmanned surface vessel (USV) and autonomous vessel control systems company. The goodwill recognized for this business was $63 million~~2018, ofincluded ~~which~~in ~~$20 million is expected to be deductible for income tax purposes and was assigned to~~ the ~~C&NS segment. The~~ Company’s ~~also~~Annual ~~recognized~~Report aon ~~preliminary~~Form ~~estimate for technology intangible assets of $30 million~~10-K, ~~which is expected to be amortized over 15 years. The final purchase price is subject to customary adjustments~~ for ~~final~~additional ~~working~~information ~~capital.~~about ~~The final purchase price allocation, which is expected to be completed in~~ the ~~first quarter of 2019, will be based on final appraisals and other analysis of fair values of acquired assets and liabilities. The~~ Company’s ~~does~~2018 ~~not~~business ~~expect that differences between the preliminary and final purchase price allocation will have a material impact on its results of operations or financial position~~acquisitions.

18Unaudited 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

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C.K. Industrial Engineers Limited. (C.K. Industrial Engineers). On September 18, 2018, the Company acquired C.K. Industrial Engineers Limited, for a purchase price of £18 million (approximately $24 million), excluding adjustments for £3 million (approximately $4 million) of cash acquired, which was financed with cash on hand. C.K. Industrial Engineers is a U.K.-based provider of specialized tooling and equipment used primarily in robotic solutions for automotive manufacturing. The goodwill recognized for this business was $11 million, which was assigned to the Electronic Systems segment and is not 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 first 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 allocation will have a material impact on its results of operations or financial position.

Azimuth Security and Linchpin Labs. (Azimuth Security and Linchpin Labs). On August 31, 2018, the Company acquired Azimuth Security and Linchpin Labs, renamed L3 Trenchant, for a combined purchase price of AUD $249 million (approximately $185 million), net of cash acquired of AUD $21 million (approximately $15 million), which was financed with cash on hand. The purchase price is subject to an upward adjustment for contingent consideration of up to AUD $43 million (approximately $31 million), payable in a fixed number of shares of L3 common stock not to exceed 161,087 shares, based on L3 Trenchant's post-acquisition sales for each of the 12-month periods ending June 30, 2019, 2020 and 2021. Azimuth Security and Linchpin Labs are two information security businesses that significantly strengthen the Company's existing C6ISR (Command, Control, Communications, Computers, Cyber-Defense and Combat Systems, and Intelligence, Surveillance and Reconnaissance) capabilities and create synergies to drive future growth in cyber and international markets. The Company recorded a $6 million increase to equity for the preliminary acquisition date fair value of the contingent consideration . The goodwill recognized for this business was $108 million, of which $19 million is expected to be deductible for income tax purposes and was assigned to the ISRS segment. The Company also recognized a preliminary estimate for intangible assets of $98 million, primarily relating to technology and customer relationships. The technology and customer relationship intangibles are expected to be amortized over 5 years and 20 years, respectively. 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 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 allocation will have a material impact on its results of operations or financial position.

Applied Defense Solutions, Inc. (Applied Defense Solutions). On June 29, 2018, the Company acquired Applied Defense Solutions, Inc., renamed L3 ADS, Inc., for a purchase price of $53 million, excluding adjustments for approximately $1 million of cash acquired, which was financed with cash on hand. Applied Defense Solutions is a leading aerospace engineering, software development and space situational awareness company. The goodwill recognized for this business was $41 million, which was assigned to the ISRS segment, and is not 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 fourth 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.

Latitude Engineering, LLC (Latitude Engineering). On June 28, 2018, the Company acquired Latitude Engineering, LLC, renamed L3 Latitude Engineering, Inc., for a purchase price of $15 million, which was financed with cash on hand. The purchase price is subject to additional contingent consideration not to exceed $20 million, $15 million of which is based on Latitude Engineering’s post-acquisition financial performance for the four year period ending December 31, 2021, and the remaining $5 million is based on certain post-acquisition milestone achievements through December 31, 2020. Latitude Engineering is engaged in the design, manufacturing, integration, servicing, operation and support of hybrid quadrotor unmanned aerial systems. The Company recorded a $5 million liability as of the acquisition date for the fair value of the contingent consideration. The goodwill recognized for this business was $14 million, of which $9 million is expected to be deductible for income tax purposes and was assigned to the Electronic Systems segment. 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 fourth 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.

2017 Business Acquisitions

The final purchase price and final purchase price allocations for the 2017 acquisitions of Kigre, Inc. (Kigre), Escola De Aviacao Aerocondor, S.A. (G-Air), Doss Aviation, Inc. (Doss Aviation) and Adaptive Methods, Inc. (Adaptive Methods) have been finalized as of the third quarter of 2018. The final purchase price allocations resulted in a $7 million increase to goodwill.

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See Note 3 to the audited consolidated financial statements for the year ended December 31, 2017, included in the Company’s Annual Report on Form 10-K for additional information about the Company’s 2017 business acquisitions.

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 28, 2018 and the year ended December 31, 2017, assuming that the business acquisitions completed during 2018 and 2017 had occurred on January 1, 2017 and January 1, 2016, 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 2018 and 2017 acquisitions had occurred on January 1, 2017 and January 1, 2016, respectively.

	Third Quarter Ended				Year-to-Date Ended
	September 28, 2018		September 29, 2017		September 28, 2018		September 29, 2017
	(in millions, except per share data)
Pro forma net sales	$	2,536	$	2,338	$	7,553	$	7,134
Pro forma income from continuing operations attributable to L3	$	204	$	144	$	577	$	486
Pro forma net income attributable to L3	$	204	$	23	$	783	$	388
Pro forma diluted earnings per share from continuing operations	$	2.57	$	1.80	$	7.25	$	6.10
Pro forma diluted earnings per share	$	2.57	$	0.29	$	9.84	$	4.87

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. ~~The~~On ~~purchase~~March ~~price included a contingent payment of $30 million based upon Peak Nano meeting certain technical milestones on or before August 5, 2018. The Company recorded $~~6 ~~million for the fair value of the contingent consideration liability on the investment date. During the quarter ended September 28~~, ~~2018~~2019, the Company ~~reduced~~acquired ~~the~~an ~~fair~~additional ~~value~~10% ofinterest ~~the~~in ~~contingent consideration liability to zero as the technical milestones were not met by the deadline. Notwithstanding that~~ Peak Nano ~~missed~~and ~~the~~warrants ~~contractual deadline~~ to ~~meet~~acquire ~~certain~~up ~~technical~~to ~~milestones,~~an ~~based~~additional on10% ~~continued monitoring and interactions with Peak Nano~~interest, ~~the~~in ~~Company~~exchange ~~anticipates~~for ~~Peak~~$20 ~~Nano~~million ~~will~~and ~~achieve~~conversion ~~the~~of ~~technical~~a ~~milestones~~$5 bymillion ~~the~~note ~~end of 2018~~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.

As of the acquisition date, the carrying amount of the investment was greater than the Company's equity in the underlying assets of Peak Nano due primarily to the difference in the carrying amount of the indefinite-lived amortizable intangible assets including goodwill and in-process research and development (IPR&D). The basis difference attributable to goodwill and IPR&D is $11 million and $13 million, respectively.

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 ~~assets and liabilities of the~~ Crestview & TCS Businesses ~~are classified as held for sale in the Company’s audited consolidated balance sheet as of December 31~~, ~~2017. 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

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systems to address mission critical needs. The table below presents Crestview & TCS Businesses’ results of operations and is included in continuing operations.

	Year-to-Date Ended
	September 28, 2018
	(in millions)
Net Sales	$	64
Gain on sale of businesses	$	44
Income from continuing operations before income taxes	$	47

Crestview & TCS Businesses. The major classes of assets and liabilities included as held for sale related to the Crestview & TCS Businesses are presented in the table below.

	December 31, 2017
	(in millions)
Assets
Billed receivables	$	14
Contracts in process	33
Total current assets	47
Property, plant and equipment, net	34
Goodwill	52
Identifiable intangible assets	2
Total assets classified as held for sale	$	135
Liabilities
Accounts payable, trade	$	3
Accrued employment costs	2
Accrued expenses	3
Other current liabilities	5
Total current liabilities	13
Deferred income taxes	4
Total liabilities classified as held for sale	$	17

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Discontinued Operations

Vertex Aerospace. As discussed in Note 1, on June 29, 2018, the Company completed the sale of its Vertex Aerospace ~~business~~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 ~~total~~ net assets and (2) L3 consolidated total debt.

	Third Quarter Ended						Year-to-Date Ended
	First Quarter Ended
	September 28, 2018			September 29, 2017			September 28, 2018			September 29, 2017
	March 30, 2018
	(in millions)
Net sales	$	—371		$	~~357~~		$	~~597~~		$	~~1,060~~
Operating costs and expenses (1)	—			(524		)	(561		)	(1,191		)
Operating costs and expenses	(349		)
Operating (loss) income from discontinued operations	—			(167		)	36			(131		)
Operating income from discontinued operations	22
Interest expense allocated to discontinued operations	—(1		)	(1		)	(1		)	(1		)
Gain on sale of businesses	—			—			237			—
Income from discontinued operations before income taxes	21
(Loss) income from discontinued operations before income taxes	—			(168		)	272			(132		)
Income tax expense	(5		)
Income tax benefit (expense)	—			47			(66		)	34
Income from discontinued operations, net of income taxes	$	16
(Loss) income from discontinued operations, net of income taxes	$	—		$	(121	)	$	206		$	(98	)

~~__________________~~11

(1) The Company recognized $3 million and $1 million of trailing expenses related to the sale of National Security Solutions for the year-to-date periods ended September 28, 2018 and September 29, 2017, respectively.

The major classes of assets and liabilities that were included in discontinued operations related to Vertex Aerospace are presented in the table below. These balances were classified as current at December 31, 2017 as the sale was expected to be completed within one year and the proceeds are not expected to be used to pay down long-term debt.

	December 31, 2017
	(in millions)
Assets
Current assets	$	284
Property, plant and equipment, net	13
Other intangible assets	7
Other assets	2
Total assets of discontinued operations	$	306
Liabilities
Accounts payable, trade	$	63
Other current liabilities	131
Current liabilities	194
Long-term liabilities	32
Total liabilities of discontinued operations	$	226

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~~2017~~5. ~~Divestitures~~Contract Assets and Contract Liabilities

During the year-to-date period ended September 29, 2017, the Company completed the sales of the CTC Aviation Jet Services Limited (Aviation Jet Services) business, the L3 Coleman Aerospace (Coleman) business and the Display Product Line. The table below presents pre-tax (loss) gain recognized, the proceeds received and net sales included in continuing operations from these divestitures.

	Year-to-Date Ended September 29, 2017
	Pre-Tax (Loss) gain			Proceeds Received		Net Sales
	(in millions)
Aviation Jet Services divestiture	$	(5	)	$	1	$	1
Coleman divestiture	(3		)	17		9
Display Product Line divestiture	4			7		—
Total	$	(4	)	$	25	$	10

Aviation Jet Services Divestiture. On March 1, 2017, the Company divested its 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.

Coleman Divestiture. On February 24, 2017, the Company divested its Coleman business for a sales price of $15 million. Coleman provided air-launch ballistic missile targets and was included in the Electronic Systems segment.

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.

Net sales and income before income taxes for Aviation Jet Services, Coleman and the Display Product Line, included in L3’s consolidated statements of operations, are presented in the table below on an aggregate basis and are included in income from continuing operations for all periods presented.

	Year-to-Date Ended
	September 29, 2017
	(in millions)
Net sales	$	10
Income before income taxes	$	2

6. Contract Assets and Contract Liabilities

Contract assets represent accumulated incurred costs and earned profits on contracts with customers that have been recorded as sales but have not been billed to customers and are classified as current. Contract liabilities consist of advance payments, billings in excess of costs incurred and deferred revenue which represent amounts received in excess of sales recognized on contracts. The Company classifies advance payments and billings in excess of costs incurred as current, and deferred revenue as current or non-current based on the expected timing of sales recognition. Contract assets and contract liabilities are determined on a contract by contract basis at the end of each reporting period. The non-current portion of contract liabilities is included in other liabilities in the Company's consolidated balance sheets (see Note 10).

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The table below presents the components of net contract assets.

	September 28, 2018			January 1, 2018
	March 29, 2019			December 31, 2018
	(in millions)
Contract assets	$	1,~~707~~735		$	1,~~349~~590
Contract liabilities — current	(~~578~~711		)	(~~565~~669		)
Contract liabilities — non-current	(3128		)	(2831		)
Net contract assets	$	~~1,098~~996		$	~~756~~890

Contract assets increased from ~~January 1~~December 31, 2018 to ~~September~~March 2829, ~~2018~~2019 by $~~358~~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 ~~ISR~~ Reconnaissance Mission Systems, ~~Link~~Integrated ~~Training~~Maritime Systems, Surveillance & ~~Simulation~~Strike Systems, ~~Space~~Communications & ~~Power~~Microwave ~~Systems~~Products and ~~Aircraft~~Precision Engagement Systems. Contract liabilities increased by $1639 million primarily due to advances received by ~~ISR~~Defense Systems for aircraft procurements related to U.S. and foreign government contracts and performance obligations assumed in connection with the acquisition of Trenchant, partially offset by decreases due to the liquidation of advances received by Link Training &Solutions ~~Simulation~~ and ~~Advanced~~Special ~~Communications resulting from performance on customer contracts~~Programs.

The Company did not recognize any impairment losses on contract assets during the quarterly ~~and~~period ~~year-to-date periods~~ ended ~~September~~March 2829, ~~2018~~2019.

For the ~~year-to-date~~quarterly period ended ~~September~~March 2829, ~~2018~~2019, the Company recognized sales of $~~403~~270 million related to its contract liabilities at ~~January 1~~December 31, 2018.

The components of contract assets are presented in the table below.

	September 28, 2018			January 1, 2018
	March 29, 2019			December 31, 2018
	(in millions)
Unbilled contract receivables, gross	$	23,~~827~~035		$	2,~~232~~716
Unliquidated progress payments and advances	(1,~~120~~300		)	(~~883~~1,126		)
Total contract assets	$	1,~~707~~735		$	1,~~349~~590

76. ~~Contracts~~Inventories ~~in Process~~

Inventories at Lower of Cost or Realizable Value. The table below presents the components of ~~contracts~~inventories inat ~~process~~the ~~are~~lower ~~presented~~of cost (first-in, ~~the~~first-out ~~table~~or ~~below.~~average cost) or realizable value.

	December 31, 2017
	March 29, 2019			December 31, 2018
	(in millions)
Unbilled contract receivables, gross	$	1,874
Raw materials, components and sub-assemblies	$	372		$	351
Unliquidated progress payments	(761		)
Work in process	335			330
Unbilled contract receivables, net	1,113
Finished goods	189			198
Inventoried contract costs, gross	891
Total	$	896		$	879
Unliquidated progress payments	(71		)
Inventoried contract costs, net	820
Total contracts in process	$	1,933

24Inventories 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.

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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 operating costs and expenses by the Company’s U7.S. ~~Government~~Goodwill ~~contractor businesses for the quarterly~~ and ~~year-to-date~~Identifiable ~~periods~~Intangible ~~ended~~Assets ~~September 29, 2017.~~

	Third Quarter Ended			Year-to-Date Ended
	September 29, 2017			September 29, 2017
	(in millions)
Amounts included in inventoried contract costs at beginning of the period	$	174		$	173
Contract costs incurred:
IRAD and B&P	88			242
Other G&A	211			610
Total	299			852
Amounts charged to operating costs and expenses	(294		)	(846		)
Amounts included in inventoried contract costs at end of the period	$	179		$	179

8. 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. The Company's inventories at December 31, 2017 were comprised primarily of amounts related to standard products. In addition, the Company classified inventories related to contracts for complex aerospace and electronic equipment and engineering and technical services according to the customers' specifications as inventoried contract costs, which was a component of contracts in process on the consolidated balance sheet at December 31, 2017. See Note 7 for additional information. In accordance with ASC 606, all work in process that customers do not currently control are classified within inventories on the Company's consolidated balance sheet at September 28, 2018, without regard to whether the goods promised to the customer are standard or customized.

	September 28, 2018		December 31, 2017
	(in millions)
Raw materials, components and sub-assemblies	$	319	$	184
Work in process	404		98
Finished goods	188		107
Total	$	911	$	389

Inventories at September 28, 2018 included G&A costs of $53 million. G&A costs incurred and recorded in inventories totaled $887 million during the year-to-date period ended September 28, 2018, and G&A costs charged to expense from inventories totaled $891 million during the year-to-date period ended September 28, 2018. See Note 7 for information on G&A costs included in contracts in process for the quarterly and year-to-date periods ended September 29, 2017.

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L3 TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — CONTINUED

9. 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,~~504~~660		$	12,~~977~~004		$	2,~~238~~248		$	6,~~719~~912
Accumulated impairment losses	(46		)	(15		)	(43		)	(104		)
December 31, 2017	2,458			1,962			2,195			6,615
December 31, 2018	2,614			1,989			2,205			6,808
Business acquisitions (1)	~~150~~—			652			30—			~~245~~2
Foreign currency translation adjustments	(94		)	(43		)	~~(13~~9		)	~~(26~~16		)
September 28, 2018	2,599			2,023			2,212			6,834
March 29, 2019	2,618			1,994			2,214			6,826
Goodwill	2,~~645~~664			2,~~038~~009			2,~~255~~257			6,~~938~~930
Accumulated impairment losses	(46		)	(15		)	(43		)	(104		)
	$	2,~~599~~618		$	21,~~023~~994		$	2,~~212~~214		$	6,~~834~~826

__________________

(1) The increase for the ISRS segment was due to the acquisitions of the Azimuth Security, Linchpin Labs and Applied Defense Solutions businesses and the purchase price allocation adjustments for the Kigre business acquisition. The increase for the C&NS segment was due to the ~~acquisition of the ASV Global business and~~ purchase price allocation ~~adjustments~~adjustment for the ~~Adaptive~~ASV ~~Methods~~Global business acquisition. The increase for the Electronic Systems segment was due to the acquisitions of the Latitude Engineering and C.K. Industrial Engineers businesses and the purchase price allocation adjustments for the G-Air and Doss Aviation business acquisitions.

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 ~~on contract (revenue arrangement) renewals~~ 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.

September 28, 2018

December 31, 2017

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

1617

~~444~~468

~~280~~295

~~164~~173

~~393~~468

~~257~~288

~~136~~180

Technology

910

~~262~~245

~~124~~137

~~138~~108

~~189~~245

~~114~~132

75113

Other

1012

6149

1518

4631

2949

1418

1531

Total subject to amortization

~~767~~762

~~419~~450

~~348~~312

~~611~~762

~~385~~438

~~226~~324

IPR&D

indefinite

—

Total

~~833~~828

~~419~~450

~~414~~378

~~677~~828

~~385~~438

~~292~~390

26The 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

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L3 TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — CONTINUED

~~The~~Based ~~table~~on ~~below~~gross ~~presents~~carrying ~~amortization~~amounts ~~expense~~at ~~recorded~~March 29, by2019, the Company’s ~~for~~estimate ~~its~~of amortization expense for identifiable intangible assets for the years ending December 31, 2019 through 2023 is presented in the table below.

	Third Quarter Ended				Year-to-Date Ended
	Year Ending December 31,
	September 28, 2018		September 29, 2017		September 28, 2018		September 29, 2017
	2019		2020		2021			2022		2023
	(in millions)
Amortization expense	$	10	$	10	32		30
Estimated amortization expense	$	51	$	47	$	42		$	37	$	28

~~Based~~8. onOther ~~gross~~Current ~~carrying~~Liabilities ~~amounts~~and atOther ~~September 28,~~Liabilities ~~2018, the Company’s estimate of amortization expense for identifiable intangible assets for the years ending December 31, 2018 through 2022 is presented in the table below.~~

	Year Ending December 31,
	2018		2019		2020		2021		2022
	(in millions)
Estimated amortization expense	$	49	$	59	$	52	$	45	$	38

10. Other Current Liabilities and Other Liabilities

The table below presents the components of other current liabilities.

	September 28, 2018		December 31, 2017
	March 29, 2019		December 31, 2018
	(in millions)
Other Current Liabilities:
Other current liabilities:
Accrued product warranty costs	$	69	$	69
Operating lease liabilities	$	74	$	—
Estimated costs in excess of estimated contract value to complete contracts in process in a loss position	46		63
Accrued product warranty costs	61		66
Accrued interest	39		43
Estimated costs in excess of estimated contract value to complete contracts in process in a loss position	46		40
Estimated contingent purchase price payable for acquired businesses (see Note 16)	5		11
Accrued interest	36		18
Deferred revenues	—		38
Estimated contingent purchase price payable for acquired businesses (see Note 14)	10		10
Other	~~140~~137		~~143~~154
Total other current liabilities	$	~~299~~364	$	~~367~~288

The table below presents the components of other liabilities.

	September 28, 2018		December 31, 2017
	March 29, 2019		December 31, 2018
	(in millions)
Other Liabilities:
Other liabilities:
Non-current income taxes payable (see Note 12)	$	180	$	164
Non-current income taxes payable (see Note 10)	$	159	$	161
Deferred compensation	5354		4953
Notes payable and capital lease obligations	38		16
Contract liabilities (see Note 5)	28		31
Contract liabilities (see Note 6)	31		—
Notes payable and other debt	24		22
Accrued workers' compensation	24		23
Accrued product warranty costs	21		22
Accrued product warranty costs	22		30
Accrued workers' compensation	21		20
Estimated contingent purchase price payable for acquired businesses (see Note 16)	11		20
Estimated contingent purchase price payable for acquired businesses (see Note 14)	6		10
Deferred revenues	—		19
Other	102		117
Other	83		77
Total other liabilities	$	415	$	436
Total other liabilities	$	442	$	398

2714

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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.

	Year-to-Date Ended
	First Quarter Ended
	September 28, 2018			September 29, 2017
	March 29, 2019			March 30, 2018
	(in millions)
Accrued product warranty costs:
Balance at January 1	$	9988		$	~~109~~99
Acquisitions during the period	—			3
Accruals for product warranties issued during the period	14			14
Accruals for product warranties issued during the period	34			34
Changes to accruals for product warranties existing before January 1	(1		)	1
Changes to accruals for product warranties existing before January 1	(1		)	—
Settlements made during the period	(19		)	(14		)
Settlements made during the period	(41		)	(52		)
Balance at end of period	$	82		$	100
Foreign currency translation adjustments	—			1
Balance at end of period	$	91		$	95

119. Debt

The components of debt and a reconciliation to the carrying amount of long-term debt is presented in the table below.

	September 28, 2018			December 31, 2017
	March 29, 2019			December 31, 2018
	(in millions)
Borrowings under Revolving Credit Facility (1)	$	—		$	—
5.20% Senior Notes due 2019	—			1,000
4.75% Senior Notes due 2020	—			800
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	(2321		)	(1322		)
Carrying amount of long-term debt	$	3,~~320~~322		$	3,~~330~~321

__________________

(1) During the ~~year-to-date~~quarterly period ended ~~September~~March 2829, ~~2018~~2019, L3’s ~~aggregate~~had no borrowings ~~and~~or repayments under the Credit Facility ~~were $501 million~~. At ~~September~~March 2829, ~~2018~~2019, L3 had the full availability of its $1 billion Credit Facility.

(2) With respect to the Company’s outstanding senior notes, ~~including the senior notes issued on June 6, 2018,~~ 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.

2810. 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.

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L3 TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — CONTINUED

~~Issuance~~Current and non-current income taxes payable include accrued potential interest of ~~Senior~~$15 ~~Notes~~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.

~~On June 6, 2018, L3 issued two series of senior notes, which are unsecured senior obligations of L3~~11. ~~The~~Accumulated ~~terms~~Other ofComprehensive ~~each~~(Loss) ~~series~~Income of(AOCI) ~~senior notes are presented in the table below.~~

Note	Date of Issuance	AmountIssued		Discount(1)		Net CashProceeds(2)		EffectiveInterestRate		Redemptionat TreasuryRate(3)(4)
		(dollars in millions)
3.85% Senior Notes due June 15, 2023 (the 2023 Notes)	June 6, 2018	$	800	$	2	$	792	3.89	%	20 bps
4.40% Senior Notes due June 15, 2028 (the 2028 Notes)	June 6, 2018	$	1,000	$	1	$	990	4.41	%	25 bps

__________________

(1) Bond discounts are recorded as a reduction to the principal amount of the notes and are amortized as interest expense over the term of the notes.

(2) The net cash proceeds of $1,782 million (after deduction of the discount, underwriting expenses and commissions and other related expenses) plus cash on hand were used to fund the concurrent cash tender offers (the Tender Offers) for any and all of $1 billion aggregate principal amount of 5.20% Senior Notes due October 15, 2019 (the 2019 Notes) and $800 million aggregate principal amount of 4.75% Senior Notes due July 15, 2020 (the 2020 Notes) and any related redemption of notes not tendered in the Tender Offers.

(3) The 2023 Notes may be redeemed at any time prior to May 15, 2023 (one month prior to maturity), and the 2028 Notes may be redeemed at any time prior to March 15, 2028 (three months prior to maturity), at the option of L3, in whole or in part, at a redemption price equal to the greater of: (i) 100% of the principal amount, or (ii) the present value of the remaining principal and interest payments discounted to the date of redemption, on a semi-annual basis, at the Treasury Rate (as defined in the indentures governing the senior notes), plus the spread indicated in the table above. In addition, if the 2023 Notes and the 2028 Notes are redeemed at any time on or after May 15, 2023 and March 15, 2028, respectively, the redemption price would be equal to 100% of the principal amount.

(4) Upon the occurrence of 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.

Repurchases and Redemptions of Senior Notes

The table below summarizes the Tender Offers with respect to the 2019 Notes and the 2020 Notes.

Note	Settlement Type	Date Settled	AggregatePrincipal		PrincipalTendered		TenderPremium		CashTendered(1)		Interest		Total CashPayments		Debt RetirementCharge(2)
			(dollars in millions)
5.20% Senior Notes due 2019	Tender Offer	June 6, 2018	$	1,000	$	683	103.282	%	$	705	$	5	$	710	$	24
4.75% Senior Notes due 2020	Tender Offer	June 6, 2018	$	800	$	535	104.092	%	$	557	$	10	$	567	$	24

__________________

(1) Excludes $1 million of tender offer fees.

(2) The debt retirement charge includes $1 million of tender offer fees and $3 million which represents the non-cash retirement of associated unamortized debt issue costs and discounts.

On June 6, 2018, the Company initiated the redemption of the 2019 Notes and the 2020 Notes that remained outstanding subsequent to the expiration of the Tender Offers. On July 6, 2018, the Company completed the redemption of the 2019 Notes and the 2020 Notes. The terms of the 2019 Notes and the 2020 Notes redemption are presented in the table below.

Note	Settlement Type	Date Settled	PrincipalRedeemed		RedemptionPremium		CashPayments		Interest		Total CashPayments		Debt RetirementCharge(1)
			(dollars in millions)
5.20% Senior Notes due 2019	Redemption	July 6, 2018	$	317	103.048	%	$	327	$	4	$	331	$	10
4.75% Senior Notes due 2020	Redemption	July 6, 2018	$	265	103.818	%	$	275	$	6	$	281	$	11

__________________

(1) The debt retirement charge includes $1 million which represents the non-cash retirement of associated unamortized debt issue costs and discounts.

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L3 TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — CONTINUED

Guarantees. The borrowings under the Credit Facility are fully and unconditionally guaranteed by L3 and by substantially all of the material 100% owned domestic subsidiaries of L3 on an unsecured senior basis. The payment of principal and premium, if any, and interest on the senior notes is fully and unconditionally guaranteed, jointly and severally, by L3’s material 100% owned domestic subsidiaries that guarantee any of its other indebtedness. The guarantees of the Credit Facility and the senior notes rank pari passu with each other.

12. 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 September 28, 2018, the statutes of limitations for the Company’s U.S. Federal income tax returns for the years ended December 31, 2012, 2013, 2015 and 2016 were open.

The U.S. Internal Revenue Service (IRS) is auditing the Company’s U.S. Federal income tax returns for the years ended 2012 and 2013. The Company expects the audits to conclude within the next 12 months. The Company cannot predict the outcome of the audits at this time.

During the quarterly period ended September 28, 2018, the statutes of limitations for several of the Company's tax returns, including its 2014 U.S. Federal income tax return as well as certain foreign tax returns expired. As a result, the Company reduced its income tax provision by $14 million for the reversal of previously accrued amounts.

The U.S. Government enacted U.S. Tax Reform on December 22, 2017, which made significant changes to the U.S. tax system. Significant changes under U.S. Tax Reform included, among other things, the reduction of the U.S. corporate income tax rate from 35% to 21%, the implementation of a modified territorial tax system and the imposition of a one-time repatriation tax on deemed repatriated earnings and profits of U.S. owned foreign subsidiaries (Toll Charge). As a result, the Company recorded an estimated tax benefit (Preliminary Net Tax Benefit) of $79 million from U.S. Tax Reform in its consolidated financial statements for the year ended December 31, 2017. In accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), the Company increased the Preliminary Net Tax Benefit by $3 million during the quarterly and year-to-date periods ended September 28, 2018. The adjusted Preliminary Net Tax Benefit of $82 million includes a $100 million estimated tax benefit related to the remeasurement of deferred taxes partially offset by an estimated tax provision of $18 million related to the Toll Charge. SAB 118 allows for a measurement period of up to one year after the enactment date of U.S. Tax Reform to finalize the recording of the related tax impacts. As such, the Preliminary Net Tax Benefit ultimately recorded may differ in the future due principally to changes to the interpretations of U.S. Tax Reform and legislative action to clarify the interpretation of U.S. Tax Reform. Additionally, the Company is still evaluating the Global Intangible Low-Taxed Income (GILTI) provisions enacted under U.S. Tax Reform, and the associated election to record its effects as a period cost or as a component of deferred taxes.

The effective income tax rate for the quarterly period ended September 28, 2018 decreased to 8.0%, compared to 24.0% for the quarterly period ended September 29, 2017, due to the reversal of previously accrued amounts related to various U.S. Federal, foreign and state tax matters, tax benefits from U.S. Tax Reform and stock-based compensation expense.

The effective income tax rate for the year-to-date period ended September 28, 2018 decreased to 13.3%, compared to 22.8% for the same period last year, due to tax benefits of U.S. Tax Reform and stock-based compensation expense, partially offset by the related income tax impact of the sale of the Crestview & TCS Businesses.

At September 28, 2018, the Company anticipates that unrecognized tax benefits will decrease by approximately $32 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.

Current and non-current income taxes payable include accrued potential interest of $16 million ($12 million after income taxes) at September 28, 2018 and $15 million ($11 million after income taxes) at December 31, 2017, and potential penalties of $9 million at September 28, 2018 and $8 million at December 31, 2017.

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L3 TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — CONTINUED

13. 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.

	Foreigncurrencytranslation			~~Unrealizedgains~~ Unrealized(losses)on gainson hedginginstruments			Unrecognized(losses) gainsand prior servicecost, net			Totalaccumulatedothercomprehensiveloss
	(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 loss before reclassifications, net of tax	(42		)	(11		)	—			(53		)
Other comprehensive income before reclassifications, net of tax	33			—			—			33
Amounts reclassified from AOCI, net of tax	—			2(1		)	3914			4113
Net current period other comprehensive (loss) income	(42		)	(9		)	39			(12		)
Net current period other comprehensive income (loss)	33			(1		)	14			46
Balance at September 28, 2018	$	(96	)	$	—		$	(607	)	$	(703	)
Balance at March 30, 2018	$	(21	)	$	8		$	(632	)	$	(645	)
Balance at December 31, 2016	$	(178	)	$	6		$	(554	)	$	(726	)
Other comprehensive income before reclassifications, net of tax	120			8			—			128
Amounts reclassified from AOCI, net of tax	—			(2		)	27			25
Net current period other comprehensive income	120			6			27			153
Balance at September 29, 2017	$	(58	)	$	12		$	(527	)	$	(573	)

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						~~Affected Line Item in the Unaudited Condensed Consolidated Statements of Operations~~
	Third Quarter Ended						Year-to-Date Ended
	First Quarter Ended
Details About AOCI Components	~~September~~March 2829, ~~2018~~2019			~~September~~March 2930, ~~2017~~2018			~~September 28, 2018~~			~~September 29, 2017~~
	(in millions)
(Loss) gain on hedging instruments	$	(3	)	$	2		$	(2	)	$	3		Cost of sales-products
Gain on hedging instruments	$	1		$	1		Cost of sales - Products
	(3		)	2			(2		)	3			Income from continuing operations before income taxes
	1			1			Income from continuing operations before income taxes
	—			(1—		)	—Provision for income taxes			(1		)	~~Provision for income taxes~~
	$	(31	)	$	1		$Income from continuing operations	(2	)	$	2		~~Income from continuing operations~~
Amortization of defined benefit pension and postretirement items:
Net loss (b)	$	(169	)	$	(1318	)	$Income from continuing operations before income taxes	~~(51~~	)	$	~~(43~~	)	~~Income from continuing operations before income taxes~~
	4			5			12			16			Provision for income taxes
	2			4			Provision for income taxes
	$	(127	)	$	(814	)	$Income from continuing operations	~~(39~~	)	$	~~(27~~	)	~~Income from continuing operations~~
Total reclassification for the period	$	(156	)	$	(713	)	$Income from continuing operations	~~(41~~	)	$	~~(25~~	)	~~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 2019 for additional information).

~~14. Equity~~ 16

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. L3 repurchased 1,637,299 shares of its common stock at an average price of $196.64

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L3 TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — CONTINUED

~~per share for an aggregate amount of $322 million from January 1, 2018 through September 28, 2018~~12. ~~All~~Equity ~~share repurchases of L3’s common stock have been recorded as treasury shares.~~

~~The~~On ~~Company~~May ~~did~~8, ~~not~~2017, L3’s Board of Directors approved a share repurchase ~~any~~program ~~shares~~that authorizes L3 to repurchase up to an additional $1.5 billion of its common stock. ~~from~~The ~~September 29,~~program ~~2018~~became ~~through~~effective ~~October 19~~on July 1, ~~2018~~2017 and has no set expiration date. InRepurchases ~~connection~~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 ~~planned~~future ~~merger~~will ~~with~~depend ~~Harris~~on ~~Corporation~~a ~~(see~~variety ~~Note~~of ~~25)~~factors, including, but not limited to, the Company’s ~~suspended~~financial ~~future~~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.

OnThe ~~July 10,~~Company ~~2018,~~did ~~L3’s~~not ~~Board~~repurchase ofany ~~Directors~~shares ~~declared a quarterly cash dividend~~ of ~~$0.80~~common ~~per~~stock ~~share,~~from ~~paid on~~ September 1729, 2018 tothrough ~~shareholders~~April 26, of2019. ~~record~~The atlast ~~the~~repurchase ~~close~~ of ~~business~~shares onwas ~~August 17,~~in July 2018. ~~During~~In ~~the~~connection ~~year-to-date~~with ~~period ended September 28, 2018,~~ the ~~Company~~planned ~~paid~~merger ~~$191~~with ~~million~~Harris ofCorporation ~~cash~~(see ~~dividends~~Note 1), ~~including~~the aCompany $2suspended ~~million~~the ~~net~~share ~~reduction~~repurchase ~~of previously accrued dividends for employee-held stock awards~~program.

On ~~October~~February 2212, ~~2018~~2019, L3’s Board of Directors declared a quarterly cash dividend of $0.8085 per share, ~~payable~~paid on ~~December~~March 1715, ~~2018~~2019 to shareholders of record at the close of business on ~~November~~March 161, ~~2018~~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.

1513. L3’s Earnings Per Share

A reconciliation of basic and diluted Earnings Per Share (EPS) is presented in the table below.

	Third Quarter Ended						Year-to-Date Ended
	First Quarter Ended
	September 28, 2018			September 29, 2017			September 28, 2018			September 29, 2017
	March 29, 2019			March 30, 2018
	(in millions, except per share data)
Reconciliation of net income:
Net income	$	~~208~~223		$	25208		$	~~795~~		$	~~400~~
Net income from continuing operations attributable to noncontrolling interests	(6		)	(35		)	~~(15~~		)	~~(12~~		)
Net income attributable to L3’s common shareholders	$	~~202~~217		$	22203		$	~~780~~		$	~~388~~
Earnings (loss) attributable to L3’s common shareholders:
Earnings attributable to L3’s common shareholders:
Continuing operations	$	~~202~~217		$	~~143~~187		$	~~574~~		$	~~486~~
Discontinued operations, net of income tax	—			~~(121~~16		)	~~206~~			~~(98~~		)
Net income attributable to L3’s common shareholders	$	~~202~~217		$	22203		$	~~780~~		$	~~388~~
Earnings per share attributable to L3’s common shareholders:
Basic:
Weighted average common shares outstanding	7879.52			78.2			~~78.4~~			~~78.0~~
Basic earnings (loss) per share:
Basic earnings per share:
Continuing operations	$	2.5774		$	12.8340		$	~~7.32~~		$	~~6.23~~
Discontinued operations, net of income tax	—			(10.5520		)	~~2.63~~			~~(1.26~~		)
Net income	$	2.5774		$	02.2860		$	~~9.95~~		$	~~4.97~~
Diluted:
Common and potential common shares:
Weighted average common shares outstanding	7879.52			78.2			~~78.4~~			~~78.0~~
Effect of dilutive securities	0.98			1.67			~~1.2~~			~~1.6~~
Common and potential common shares	7980.40			79.89			~~79.6~~			~~79.6~~
Diluted earnings (loss) per share:
Diluted earnings per share:
Continuing operations	$	2.5471		$	12.7934		$	~~7.21~~		$	~~6.10~~
Discontinued operations, net of income tax	—			(10.5120		)	~~2.59~~			~~(1.23~~		)
Net income	$	2.5471		$	02.2854		$	~~9.80~~		$	~~4.87~~

32The 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.

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~~The computation of diluted EPS excludes 0~~14.3 ~~million~~Fair ~~shares~~Value ~~for~~Measurements each of the quarterly and year-to-date periods ended September 28, 2018 and 0.4 million shares and 0.3 million shares for the quarterly and year-to-date periods ended September 29, 2017, respectively, for share-based payment awards as they were anti-dilutive.

16. 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.

	September 28, 2018						December 31, 2017
	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	$	~~167~~756	$	—	$	—	$	~~310~~660	$	—	$	—
Derivatives (foreign currency forward contracts)	—		43		—		—		111		—
Total assets	$	~~167~~756	$	43	$	—	$	~~310~~660	$	111	$	—
Liabilities
Derivatives (foreign currency forward contracts)	$	—	$	69	$	—	$	—	$	117	$	—
Contingent consideration	—		—		16		—		—		31
Derivatives (treasury lock contracts)(4)	—		16		—		—		—		—
Total liabilities	$	—	$	6	$	16	$	—	$	1	$	31
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.

~~The contingent consideration liabilities represent the future potential earn-out payments relating to the acquisitions of MacDonald Humfrey~~ (~~Automation~~4) ~~Limited,~~See ~~renamed~~Note L316 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 and the Peak Nano investment. 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~~information ~~three-year~~regarding ~~period ending December 31, 2019, and~~ the ~~aggregate~~treasury ~~revenue~~lock ~~of Latitude Engineering as of each year within the four-year period ended December 31, 2021~~contracts. 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 operating costs and expenses in the unaudited condensed consolidated statements of operations.

The ~~Peak Nano~~ contingent consideration ~~liability~~liabilities ~~was~~represent ~~recorded~~the atfuture 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 onof the ~~acquisition~~MacH ~~date~~contingent consideration liability and a portion of the Latitude Engineering contingent consideration liability is based on a ~~probability~~Monte ~~assessment~~Carlo Simulation of the ~~likelihood~~aggregate revenue of ~~achieving~~MacH ~~certain~~for ~~technical~~the ~~milestones~~three-year onperiod orending ~~before~~December ~~August~~31, 52019 and the aggregate revenue of Latitude Engineering as of each year within the four-year period ended December 31, ~~2018~~2021. ~~During~~The significant unobservable inputs used in calculating the ~~quarter~~fair ~~ended~~value ~~September~~of 28the MacH contingent consideration and a portion of the Latitude Engineering contingent consideration include: (i) projected revenues of the acquired businesses, ~~2018~~(ii) company specific risk premium, which is a component of the ~~Company~~discount ~~reduced~~rate applied to the revenue projections and (iii) volatility. The fair value of the Open Water Power contingent consideration liability toand ~~zero~~a asportion of the ~~technical~~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.

3318

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~~were~~The ~~not~~table ~~met~~below bypresents the ~~deadline.~~changes ~~The~~to ~~fair value of the~~ contingent consideration ~~liability~~obligations ~~has~~during ~~been~~the ~~reassessed~~ quarterly, ~~and~~period ~~changes~~ended ~~reflected within interest and other income~~March 29, ~~net, in the unaudited condensed consolidated statements of operations~~2019.

The table below presents the changes to contingent consideration obligations during the year-to-date period ended September 28, 2018.



	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

	September 28, 2018
	(in millions)
Balance at beginning of period	$	31
Acquisitions and investments	10
Cash payments	(7		)
Changes in fair value of contingent consideration, net	(18		)
Balance at end of period	$	16

15. Financial Instruments

17At 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. ~~Financial~~The ~~Instruments~~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.

At September 28, 2018 and December 31, 2017, the Company’s financial instruments consisted primarily of cash and cash equivalents, billed receivables, trade accounts payable, senior notes and foreign currency forward 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	)	$	—		$	—

	September 28, 2018						December 31, 2017
	Carrying Amount			Estimated Fair Value			Carrying Amount		Estimated Fair Value
	(in millions)
Senior notes (1)	$	3,320		$	3,338		$	3,330	$	3,502
Foreign currency forward contracts (2)	$	(2	)	$	(2	)	$	10	$	10

__________________


⁽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 1816 for additional disclosures regarding the notional amounts and fair values of foreign currency forward contracts.

34(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.

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1816. 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 ~~Canadian~~U.S. dollar, the ~~U.S.~~Canadian dollar, the Euro, the British pound, the United Arab Emirates dirham, ~~the British pound~~ 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 ~~September~~March 2829, ~~2018~~2019.

Currency	Notional Amounts
	(in millions)
Canadian dollar	$	155
U.S. dollar	$	197
U.S. dollar	141
Canadian dollar	85
Euro	9775
United Arab Emirates dirham	12
British pound	11
British pound	10
United Arab Emirates dirham	9
New Zealand dollar	49
Total	$	~~419~~386

At ~~September~~March 2829, ~~2018~~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.

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

	September 28, 2018								December 31, 2017
	March 29, 2019								December 31, 2018
	OtherCurrentAssets		OtherAssets		OtherCurrentLiabilities		OtherLiabilities		OtherCurrentAssets		OtherAssets		OtherCurrentLiabilities		OtherLiabilities
	(in millions)
Derivatives designated as hedging instruments:
Foreign currency forward contracts (1)	$	3	$	1	$	5	$	1	$	11	$	—	$	1	$	—
Foreign currency forward contracts(1)	$	2	$	1	$	7	$	2	$	1	$	—	$	13	$	4
Total derivative instruments	$	3	$	1	$	5	$	1	$	11	$	—	$	1	$	—
Treasury lock contracts(1)	—		—		—		16		—		—		—		—
Total derivative instruments	$	2	$	1	$	7	$	18	$	1	$	—	$	13	$	4

__________________

(1) See Note 1614 for a description of the fair value hierarchy related to the Company’s foreign currency forward contracts and treasury lock contracts.

The effects from foreign currency forward contracts on the unaudited condensed consolidated statements of operations were a pre-tax ~~loss~~gain of $31 million ~~and~~for ~~pre-tax~~each ~~gain~~ of ~~$2 million for~~ the quarterly periods ended ~~September~~March ~~28, 2018 and September~~ 29, ~~2017,~~2019 ~~respectively,~~ and ~~a pre-tax loss of $2 million and pre-tax gain of $3 million for the year-to-date periods ended September~~March 2830, 2018 ~~and September 29, 2017, respectively~~. At ~~September~~March 2829, ~~2018~~2019, the estimated net amount of existing losses that are expected to be reclassified into income within the next 12 months was $35 million.

3517. Leases

As discussed in Note 2, effective January 1, 2019, the Company adopted ASC 842. The Company’s operating and finance leases at March 29, 2019 were for real estate such as office space, warehouses, manufacturing, research and development facilities, and land, and equipment. Finance leases were not material as of March 29, 2019 and were therefore not included in the disclosures below.

The components of the Company's lease expense are presented in the table below.



	First Quarter Ended
	March 29, 2019
	(in millions)
Operating lease cost	$	29
Short-term and equipment lease cost	1
Variable lease cost	4
Sublease income	(1		)
Net lease cost	$	33

Supplemental operating lease balance sheet information is presented in the table below.



	March 29, 2019
	(in millions)
Operating lease right-of-use assets	$	618

Other current liabilities	$	74
Operating lease liabilities	569
Total operating lease liabilities	$	643

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FINANCIAL STATEMENTS — CONTINUED

~~19.~~Other ~~Commitments~~supplemental ~~and~~information ~~Contingencies~~related to the Company's leases is presented in the table below.



	First Quarter Ended
(in millions, except lease term and discount rate)	March 29, 2019
Cash paid for amounts included in the measurement of operating lease liabilities	$	33
Right-of-use assets obtained in exchange for new operating lease liabilities	$	3



Weighted average remaining lease term - operating leases (in years)	10.9
Weighted average discount rate - operating leases	4.4	%

The following table presents future lease payments under non-cancelable leases as of March 29, 2019.



	Operating Leases
	March 29, 2019
	(in millions)
2019	$	76
2020	91
2021	81
2022	73
2023	64
Thereafter	437
Total future lease payments required	822
Less: imputed interest	179
Total	$	643

As of March 29, 2019, the Company had $115 million of additional operating leases for real estate facilities that have not yet commenced. These leases will commence between 2019 and 2020 with lease terms of 10 to 15 years.

As discussed in Note 2, the Company has adopted ASC 842 using the optional transition method presenting prior period amounts and disclosures under ASC 840. The following presents the Company's future minimum lease payments for operating leases under ASC 840 at December 31, 2018.



	Operating Leases
	December 31, 2018
	(in millions)
2019	$	115
2020	134
2021	82
2022	73
2023	65
Thereafter	506
Total minimum payments required	975
Sublease rentals under non-cancelable leases	(7		)
Net minimum payments required	$	968

Rent expense and sublease rental income were $105 million and $2 million, respectively, for the year ended December 31, 2018.

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18. Commitments and Contingencies

Procurement Regulations

A substantial majority of the Company’s revenues are generated from providing products and services under legally binding agreements or contracts with the U.S. Government, foreign government customers and state and local governments. U.S. Government contracts are subject to extensive legal and regulatory requirements, and, from time to time, agencies of the U.S. Government investigate whether such contracts were and are being conducted in accordance with these requirements. The Company is currently cooperating with the U.S. Government on several investigations from which civil, criminal or administrative proceedings have or could result and give rise to fines, penalties, compensatory and treble damages, restitution and/or forfeitures, including investigations into the pricing of certain contracts entered into by the C&NS segment. The Company does not currently anticipate that any of these investigations will have a material adverse effect, individually or in the aggregate, on its consolidated financial position, results of operations or cash flows. However, under U.S. Government regulations, an indictment of the Company by a federal grand jury, or an administrative finding against the Company as to its present responsibility to be a U.S. Government contractor or subcontractor, could result in the Company being suspended for a period of time from eligibility for awards of new government contracts or task orders or in a loss of export privileges. A conviction, or an administrative finding against the Company that satisfies the requisite level of seriousness, could result in debarment from contracting with the federal government for a specified term. In addition, all of the Company’s U.S. Government contracts: (1) are subject to audit and various pricing and cost controls, (2) include standard provisions for termination for the convenience of the U.S. Government or for default and (3) are subject to cancellation if funds for contracts become unavailable. Foreign government contracts generally include comparable provisions relating to terminations for convenience or default, as well as other procurement clauses relevant to the foreign government.

Litigation Matters

The Company is also subject to litigation, proceedings, claims or assessments and various contingent liabilities incidental to its businesses, including the matter specified below. Furthermore, in connection with certain business acquisitions, the Company has assumed some or all claims against, and liabilities of, such acquired businesses, including both asserted and unasserted claims and liabilities.

In accordance with the accounting standard for contingencies, the Company records a liability when management believes that it is both probable that a liability has been incurred and the Company can reasonably estimate the amount of the loss. Generally, the loss is recorded at the amount the Company expects to resolve the liability. Amounts recoverable from insurance contracts or third parties are recorded as assets when deemed probable. At ~~September~~March 2829, ~~2018~~2019, the Company did not record any amounts for recoveries from insurance contracts or third parties in connection with the amount of liabilities recorded for pending and threatened litigation. Legal defense costs are expensed as incurred. The Company believes it has recorded adequate provisions for its litigation matters. The Company reviews these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. While it is reasonably possible that an unfavorable outcome may occur in the matter set forth below, unless otherwise stated, the Company believes that it is not probable that a loss has been incurred in such matter. With respect to any litigation matter below for which it is reasonably possible that an unfavorable outcome may occur, an estimate of loss or range of loss is disclosed when such amount or amounts can be reasonably estimated. Although the Company believes that it has valid defenses with respect to legal matters and investigations pending against it, the results of litigation can be difficult to predict, particularly those involving jury trials. Therefore, it is possible that any of the following or other contingencies could have a material impact on the financial position, results of operations or cash flows of the Company in future periods.

HVC Alkmaar. On July 23, 2014, a notice of claim was received by the Company’s former JovyAtlas business unit. The notice relates to losses resulting from a fire that occurred at an HVC Alkmaar bio-energy plant on July 21, 2013. The notice states that the fire resulted from the failure of an uninterruptible power supply (UPS) to provide sufficient power to act as a back-up energy supply, alleges that JovyAtlas was the manufacturer and service provider for the UPS and claims €11 million in estimated property damages and €35 million in estimated business interruption damages. The Company's ~~has~~insurers ~~tendered~~have ~~the~~accepted ~~notice~~defense of ~~claim~~the tomatter ~~its~~and ~~insurance~~retained ~~carriers~~counsel.

36As previously disclosed, the four lawsuits challenging the merger of the Company and Harris were filed by purported L3 shareholders. These lawsuits have been dismissed by the plaintiffs. They were: (1) an individual action captioned Stein v. L3 Technologies, Inc., et al., in the Southern District of New York, naming L3 and the members of L3’s board of directors - Plaintiff voluntarily dismissed this matter with prejudice on March 18, 2019; (2) a putative class action captioned Raul v. L3 Technologies,

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20Inc., ~~Pension~~et al., in the Southern District of New York, naming L3 and ~~Other~~the ~~Postretirement~~members ~~Benefits~~of L3’s board of directors - Plaintiff voluntarily dismissed this matter with prejudice on March 12, 2019; (3) a putative class action captioned Gross v. L3 Technologies, Inc., et al., in the Southern District of New York, naming L3 and the members of L3’s board of directors - Plaintiff voluntarily dismissed this matter with prejudice on March 18, 2019; and (4) a putative class action captioned Kent v. L3 Technologies, Inc., et al., in the District of Delaware, naming L3, the members of L3’s board of directors, Harris and Merger Sub - Plaintiff voluntarily dismissed this matter with prejudice on March 18, 2019.

19. Pension and Other Postretirement Benefits

The following table summarizes the components of net periodic benefit cost for the Company’s pension and other postretirement benefit plans.

	Pension Plans						Postretirement Benefit Plans						~~Postretirement Benefit Plans~~
	Third Quarter Ended						Year-to-Date Ended						Third Quarter Ended						Year-to-Date Ended
	First Quarter Ended						First Quarter Ended
	September 28, 2018			September 29, 2017			September 28, 2018			September 29, 2017			September 28, 2018			September 29, 2017			September 28, 2018			September 29, 2017
	March 29, 2019			March 30, 2018			March 29, 2019			March 30, 2018
	(in millions)
Components of net periodic benefit cost:
Service cost	$	256		$	2226		$	771		$	72—		$	—		$	1		$	1		$	2
Interest cost	3640			3536			~~108~~1			~~106~~1			2			2			4			4
Expected return on plan assets	(5649		)	(4856		)	(~~168~~1		)	(~~146~~1		)	(2		)	(1		)	(4		)	(3		)
Amortization of prior service (credits) costs	(1		)	1			(1		)	1			(1		)	(1		)	(1		)	(1		)
Amortization of prior service credits	(1		)	—			—			—
Amortization of net loss (gains)	1811			1419			55(1		)	45(1		)	—			(1		)	(2		)	(2		)
Curtailment loss (1)	—2			2—			—			2—			—			—			—			—
Net periodic benefit cost	$	229		$	2625		$	71—		$	80(1	)	$	(1	)	$	—		$	(2	)	$	—

__________________

(1) During the quarterly period ended ~~September~~March 29, ~~2017~~2019, the Company recognized a $2 million pension curtailment loss related to severance and restructuring activities in the ~~ISRS~~C&NS segment.

The components of net periodic benefit cost other than the service cost component are included in interest and other income, net, in the unaudited condensed consolidated statements of operations. Service cost is included in operating costs and expenses in the unaudited condensed consolidated statements of operations.

Contributions. The Company contributed cash of $948 million to its pension plans and $41 million to its other postretirement benefit plans during the ~~year-to-date~~quarterly period ended ~~September~~March 2829, ~~2018~~2019. The Company expects to contribute an additional $672 million ~~each~~ to its pension plans and $7 million to its other postretirement benefit plans during the remainder of ~~2018~~2019.

2120. Stock-Based Compensation

During the ~~year-to-date~~quarterly period ended ~~September~~March 2829, ~~2018~~2019, the Company granted stock-based awards under the Amended and Restated 2008 Long Term Performance Plan in the form of ~~stock options,~~ restricted stock units ~~and performance units~~. The stock-based compensation awards granted during the ~~year-to-date~~quarterly period ended ~~September~~March 2829, ~~2018~~2019 are further discussed below.

Restricted Stock ~~Options~~Units. The Company granted ~~221~~272,~~886~~703 restricted stock ~~options~~units with a weighted average ~~exercise~~grant ~~price~~date fair value of $~~208~~206.9259 per ~~option~~share. Restricted stock units typically vest three years after the grant date for employees and one year after the grant date for non-employee directors, ~~which~~or ~~was~~if ~~equal~~earlier, toon the ~~closing~~date ~~price~~of the first annual stockholders meeting held after the grant date. The restricted stock units automatically convert into shares of L3’s common stock onupon ~~the~~vesting. The grant date fair value of ~~grant.~~the ~~Options~~restricted ~~expire~~stock 10unit ~~years~~awards ~~after~~is based on L3’s closing stock price at the date of grant and ~~vest~~is ~~ratably~~generally ~~over~~recognized as compensation expense on a straight-line basis over the vesting period. However, for employees who attain retirement eligibility status prior to the end of the three-year cliff vesting period onand ~~the~~who ~~annual~~have ~~anniversary~~provided at least one year of service after the date of grant., ~~The~~compensation ~~options~~expense ~~granted~~is recognized over the shorter period from the date of grant to the ~~Company’s~~retirement ~~Chairman,~~eligibility ~~Chief~~date. ~~Executive~~For ~~Officer~~grants ~~and~~of ~~President~~restricted ~~are~~stock ~~also~~units ~~subject~~made toduring ~~performance-based~~the ~~vesting~~quarterly ~~conditions.~~period ~~The~~ended ~~weighted~~March 29, ~~average~~2019, ~~grant~~retirement ~~date~~eligible ~~fair~~employees ~~value~~are ~~for~~those employees that either: (1) have attained the ~~options~~age of ~~$37.72~~60 ~~per~~and ~~option~~completed ~~was~~at ~~estimated~~least ~~using~~five ~~the~~years ~~Black-Scholes~~of ~~option-pricing~~service ~~model.~~(which ~~The~~service ~~weighted~~must ~~average~~be ~~assumptions~~continuous ~~used~~through in the ~~valuation~~date ~~model~~of termination except for ~~this~~a ~~grant~~single ~~are~~break ~~presented~~in service that does not exceed one year in length) or (2) have attained the ~~table~~age ~~below~~of 65 (without regard to their length of service at L3).

Expected holding period (in years)	5.2
Expected volatility	19.8	%
Expected dividend yield	1.8	%
Risk-free interest rate	2.7	%

Restricted Stock Units. The Company granted 250,105 restricted stock units with a weighted average grant date fair value of $210.12 per share. Restricted stock units typically vest three years after the grant date for employees and one year after the grant date for non-employee directors, or if earlier, on the date of the first annual stockholders meeting held after the grant date. The restricted stock units automatically convert into shares of L3’s common stock upon vesting. The grant date fair value of the restricted stock unit awards is based on L3’s closing stock price at the date of grant and is generally recognized as compensation expense on a straight-line basis over the vesting period. However, for employees who attain retirement eligibility status prior to the end of the three-year cliff vesting period and who have provided at least one year of service after the date of grant, compensation

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L321. ~~TECHNOLOGIES,~~Supplemental ~~INC.~~Cash Flow Information

NOTES TO UNAUDITED CONDENSED CONSOLIDATED



	First Quarter Ended
	March 29, 2019		March 30, 2018
	(in millions)
Interest paid	$	18	$	37
Income tax payments	$	20	$	21
Income tax refunds	$	5	$	2

~~FINANCIAL~~22. ~~STATEMENTS~~Segment —Information ~~CONTINUED~~and Disaggregation of Net Sales

~~expense~~The isCompany ~~recognized~~has ~~over~~three ~~the~~reportable ~~shorter~~segments, ~~period~~which ~~from~~are ~~the~~described ~~date~~in ofNote ~~grant~~1. toThe ~~the~~Company ~~retirement~~evaluates ~~eligibility~~the ~~date.~~performance ~~For grants~~ of ~~restricted~~its ~~stock~~operating ~~units~~segments ~~made~~and ~~during~~reportable ~~the~~segments ~~year-to-date~~based ~~period~~on ~~ended~~their ~~September 28~~sales, ~~2018,~~operating ~~retirement~~income ~~eligible~~and ~~employees~~operating ~~are~~margin. ~~those~~Corporate ~~employees~~expenses ~~that~~are ~~either:~~allocated ~~(1)~~to ~~have~~the ~~attained~~Company’s ~~the~~operating ~~age~~segments ofusing 60an ~~and~~allocation ~~completed~~methodology atprescribed ~~least~~by ~~five~~U.S. ~~years~~Government ofregulations ~~service~~for ~~(which~~government ~~service~~contractors. ~~must~~Accordingly, besegment ~~continuous~~results ~~through~~include ~~the~~all ~~date~~costs ofand ~~termination~~expenses, except for agoodwill ~~single~~impairment ~~break~~charges, inmerger ~~service~~and ~~that~~acquisition ~~does~~related ~~not~~expenses, ~~exceed~~gains ~~one~~or ~~year~~losses inrelated ~~length)~~to orbusiness ~~(2)~~divestitures ~~have~~and ~~attained~~certain ~~the~~other ~~age~~items ofthat 65are ~~(without~~excluded ~~regard~~by tomanagement ~~their~~for ~~length~~purposes of ~~service~~evaluating atthe ~~L3)~~operating performance of the Company’s business segments.

Performance Units. The Company granted 22,325 performance units with a weighted average grant date fair value per unit of $209.91. The final payout for these units is based on the achievement of pre-determined EPS goals established by the Compensation Committee of the Company’s Board of Directors for the three-year period ending December 31, 2020. Units earned can range from zero to 200% of the original number of units awarded, which are converted into shares of L3’s common stock.

22. Supplemental Cash Flow Information

	Year-to-Date Ended
	September 28, 2018		September 29, 2017
	(in millions)
Interest paid	$	125	$	120
Income tax payments	$	93	$	129
Income tax refunds	$	4	$	14

23. Segment Information and Disaggregation of Net Sales

The Company has three reportable segments, which are described in Note 1. The Company evaluates the performance of its operating segments and reportable segments based on their sales, operating income and operating margin. Corporate expenses are allocated to the Company’s operating segments using an allocation methodology prescribed by U.S. Government regulations for government contractors. Accordingly, segment results include all costs and expenses, except for goodwill impairment charges and certain other items that are excluded by management for purposes of evaluating the operating performance of the Company’s business segments.

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L3 TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — CONTINUED

The tables below present net sales, operating income, depreciation and amortization and total assets by reportable segment.

	Third Quarter Ended						Year-to-Date Ended
	First Quarter Ended
	September 28, 2018			September 29, 2017			September 28, 2018			September 29, 2017
	March 29, 2019			March 30, 2018
	(in millions)
Net Sales:
ISRS	$	1,~~099~~259		$	~~968~~1,018		$	~~3,250~~		$	~~2,940~~
C&NS	~~745~~793			~~759~~713			~~2,270~~			~~2,290~~
Electronic Systems	~~703~~670			~~584~~659			~~2,047~~			~~1,839~~
Elimination of intercompany sales	(2822		)	(1819		)	~~(94~~		)	~~(70~~		)
Consolidated total	$	2,~~519~~700		$	2,~~293~~371		$	~~7,473~~		$	~~6,999~~
Operating Income:
ISRS	$	~~121~~130		$	7393		$	~~321~~		$	~~256~~
C&NS	6984			8164			~~208~~			~~277~~
Electronic Systems	9197			7894			~~276~~			~~230~~
Segment total	~~281~~311			~~232~~251			~~805~~			~~763~~
(Loss) gain on sale of the Crestview & TCS Businesses	(4		)	—			44			—
Merger, acquisition and divestiture related expenses and losses	(18		)	—
Merger, acquisition and divestiture related expenses	(5		)	—			(5		)	—
Consolidated total	$	293		$	251
Consolidated total	$	272		$	232		$	844		$	763
Depreciation and amortization:
Depreciation and amortization:
ISRS	$	23		$	21
ISRS	$	20		$	21		$	64		$	63
C&NS	16			17
C&NS	15			17			48			49
Electronic Systems	19			18
Electronic Systems	19			17			58			49
Consolidated total	$	58		$	56
Consolidated total	$	54		$	55		$	170		$	161

	September 28, 2018		December 31, 2017
	March 29, 2019		December 31, 2018
	(in millions)
Total Assets:
ISRS	$	4,~~813~~823	$	4,~~164~~749
C&NS	3,~~722~~991		3,~~476~~641
Electronic Systems	4,~~159~~257		34,~~939~~128
Corporate	~~490~~1,192		~~709~~1,000
Assets held for sale	—		135
Consolidated total	$	14,263	$	13,518
Assets of discontinued operations	—		306
Consolidated total	$	13,184	$	12,729

Disaggregation of Total Net Sales. The Company disaggregates its sales from contracts with customers by end customer, contract type, deliverable type and revenue recognition method for each of its segments, as the Company believes these factors affect the nature, amount, timing and uncertainty of the Company’s revenue and cash flows.25

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L3 TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — CONTINUED

~~Sales~~Disaggregation byof ~~End~~Total ~~Customer~~Net Sales. ~~Direct~~The ~~sales~~Company todisaggregates ~~the~~its ~~end~~sales ~~customer~~from ~~represented~~contracts ~~approximately~~with ~~65%~~customers ofby: ~~the~~(1) ~~Company’s~~end ~~consolidated~~customer, ~~sales~~(2) ~~for~~contract ~~the~~type, ~~quarterly~~(3) ~~period~~deliverable ~~ended~~type ~~September 28, 2018,~~ and ~~indirect~~(4) ~~sales~~revenue asrecognition amethod ~~subcontractor~~for oreach ~~supplier~~of ~~represented~~its ~~the~~segments. ~~remaining~~The ~~35%.~~Company ~~Direct~~believes ~~sales~~these tofactors affect the ~~end~~nature, ~~customer~~amount, ~~represented~~timing ~~approximately~~and ~~64%~~uncertainty of the Company’s ~~consolidated~~revenue ~~sales for the year-to-date period ended September 28, 2018,~~ and ~~indirect~~cash ~~sales as a subcontractor or supplier represented the remaining 36%~~flows. ~~The tables below present total net sales disaggregated by end customer.~~

	Third Quarter Ended September 28, 2018
End Customer	ISRS		C&NS		Electronic Systems		Consolidated L3
	(in millions)
Total DoD	$	709	$	561	$	309	$	1,579
Other U.S. Government	48		21		55		124
Total U.S. Government	757		582		364		1,703
Foreign governments (1)	293		71		48		412
Commercial — foreign	8		25		170		203
Commercial — domestic	38		56		107		201
Total	$	1,096	$	734	$	689	$	2,519

Sales by End Customer. Direct sales to the end customer represented approximately 63% and 65% of the Company’s consolidated sales for the quarterly periods ended March 29, 2019 and March 30, 2018, respectively, and indirect sales as a subcontractor or supplier represented the remaining 37% and 35%, respectively. The tables below present total net sales disaggregated by end customer.

Year-to-Date Ended September 28, 2018

First Quarter Ended March 29, 2019

End Customer

ISRS

C&NS

Electronic Systems

Consolidated L3

(in millions)

Total DoD

~~2,227~~921

~~1,679~~593

~~968~~335

41,~~874~~849

Other U.S. Government

~~108~~26

7425

~~128~~28

~~310~~79

Total U.S. Government

~~2,335~~947

~~1,753~~618

~~1,096~~363

51,~~184~~928

Foreign governments (1)

~~733~~254

~~242~~86

~~140~~57

~~1,115~~397

Commercial — foreign

5120

8731

~~503~~160

~~641~~211

Commercial — domestic

~~102~~32

~~161~~50

~~270~~82

~~533~~164

Total

31,~~221~~253

~~2,243~~785

~~2,009~~662

72,~~473~~700



	First Quarter Ended March 30, 2018
End Customer	ISRS		C&NS		Electronic Systems		Consolidated L3
	(in millions)
Total DoD	$	726	$	516	$	320	$	1,562
Other U.S. Government	30		27		36		93
Total U.S. Government	756		543		356		1,655
Foreign governments ⁽¹⁾	205		83		43		331
Commercial — foreign	29		26		162		217
Commercial — domestic	26		55		87		168
Total	$	1,016	$	707	$	648	$	2,371

__________________


⁽¹⁾	Includes sales under foreign military sales agreements, which are made directly between the U.S. Government and foreign governments.

Sales by Contract Type. Generally, the sales price arrangements for the Company’s contracts are either fixed-price, cost-plus or time-and-material type. Fixed-price type contracts generally offer higher profit margin potential than cost-plus type or time-and-material type contracts due to the greater levels of risk assumed on a fixed-price type contract.

On a fixed-price type contract, the Company agrees to perform the contractual statement of work for a predetermined sales price. On a cost-plus type contract, the Company is paid its allowable incurred costs plus a profit which can be fixed or variable depending on the contract’s fee arrangement up to predetermined funding levels determined by the customer. Cost-plus type contracts with award and incentive fee provisions are the Company’s primary variable contract fee arrangement. On a time-and-material type contract, the Company is paid on the basis of direct labor hours expended at specified fixed-price hourly rates (that include wages, overhead, allowable general and administrative expenses and profit) and materials at cost.

4026

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L3 TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — CONTINUED

Substantially all of the Company’s cost-plus type contracts and time-and-material type contracts are with U.S. Government customers, while sales to foreign government and commercial customers are generally transacted under fixed-price sales arrangements and are included in the Company’s fixed-price contract type sales. The tables below present total net sales disaggregated by contract type.

Third Quarter Ended September 28, 2018

First Quarter Ended March 29, 2019

Contract Type

ISRS

C&NS

Electronic Systems

Consolidated L3

(in millions)

Fixed-price(1)

~~697~~908

~~519~~577

~~606~~545

12,~~822~~030

Cost-plus(2)

~~362~~295

~~195~~189

75107

~~632~~591

Time-and-material

3750

2019

810

6579

Total sales

1,~~096~~253

~~734~~785

~~689~~662

2,~~519~~700

Year-to-Date Ended September 28, 2018

First Quarter Ended March 30, 2018

Contract Type

ISRS

C&NS

Electronic Systems

Consolidated L3

(in millions)

Fixed-price(1)

~~2,046~~639

~~1,626~~506

~~1,715~~547

51,~~387~~692

Cost-plus(2)

~~1,031~~324

~~552~~179

~~270~~93

~~1,853~~596

Time-and-material

~~144~~53

6522

248

~~233~~83

Total sales

31,~~221~~016

~~2,243~~707

~~2,009~~648

72,~~473~~371

__________________

(1) Includes fixed-price incentive fee type contracts, which contributed approximately 1% and 2% to the Company's total net sales for the quarterly ~~and year-to-date~~ periods ended ~~September~~March 2829, 2019 and March 30, 2018, respectively.

(2) Includes cost-plus award and incentive fee type contracts, which contributed approximately 23% and 34% to the Company's total net sales for the quarterly ~~and year-to-date~~ periods ended ~~September~~March 2829, 2019 and March 30, 2018, respectively.

Sales by Deliverable Type: The tables below present total net sales disaggregated by the type of deliverable, which is determined by the Company at the performance obligation level.

Third Quarter Ended September 28, 2018

First Quarter Ended March 29, 2019

Sales by Deliverable Type

ISRS

C&NS

Electronic Systems

Consolidated L3

(in millions)

Products

~~712~~855

~~543~~606

~~481~~471

1,~~736~~932

Services

~~384~~398

~~191~~179

~~208~~191

~~783~~768

Total sales

1,~~096~~253

~~734~~785

~~689~~662

2,~~519~~700

Year-to-Date Ended September 28, 2018

First Quarter Ended March 30, 2018

Sales by Deliverable Type

ISRS

C&NS

Electronic Systems

Consolidated L3

(in millions)

Products

~~2,085~~655

~~1,668~~532

~~1,415~~459

51,~~168~~646

Services

~~1,136~~361

~~575~~175

~~594~~189

~~2,305~~725

Total sales

31,~~221~~016

~~2,243~~707

~~2,009~~648

72,~~473~~371

4127

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L3 TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — CONTINUED

Revenue Recognition Method: The tables below present total net sales disaggregated based on the revenue recognition method applied.

	Third Quarter Ended September 28, 2018
	First Quarter Ended March 29, 2019
Revenue Recognition Method	ISRS		C&NS		Electronic Systems		Consolidated L3
	(in millions)
Cost to cost method	$	813	$	678	$	374	$	1,865
Over time (cost-to-cost method)	$	981	$	647	$	417	$	2,045
Point in time	~~220~~225		38115		~~173~~163		~~431~~503
Output method	1824		45		~~130~~67		~~152~~96
Billing method	4523		1418		1215		7156
Total sales	$	1,~~096~~253	$	~~734~~785	$	~~689~~662	$	2,~~519~~700

	Year-to-Date Ended September 28, 2018
	First Quarter Ended March 30, 2018
Revenue Recognition Method	ISRS		C&NS		Electronic Systems		Consolidated L3
	(in millions)
Cost to cost method	$	2,456	$	1,932	$	1,221	$	5,609
Over time (cost-to-cost method)	$	807	$	576	$	419	$	1,802
Point in time	~~604~~157		~~238~~103		~~505~~172		~~1,347~~432
Output method	4716		177		~~250~~51		~~314~~74
Billing method	~~114~~36		5621		336		~~203~~63
Total sales	$	31,~~221~~016	$	~~2,243~~707	$	~~2,009~~648	$	72,~~473~~371

2423. Severance and Restructuring Related Costs

Consistent with the Company’s strategy to continuously improve its cost structure and right-size its businesses, L3 is completing employment reduction actions across several of its businesses to reduce both direct and indirect costs, including overhead and general and administrative costs. As a result of these initiatives, the Company recorded a total of $46 million ~~and $18 million~~ of severance and restructuring related costs with respect to approximately ~~500~~300 employees during the quarterly ~~and~~period ~~year-to-date periods~~ ended ~~September~~March 2829, ~~2018, respectively~~2019. During the year ended December 31, ~~2017~~2018, the Company recorded a total of $~~101~~26 million of severance and restructuring related costs with respect to approximately ~~1,500~~800 employees. Severance and restructuring related costs are reported within operating costs and expenses on the unaudited condensed consolidated statements of operations. Severance and restructuring related costs incurred by reportable segment are presented in the table below.

	Third Quarter Ended				Year-to-Date Ended
	First Quarter Ended
	September 28, 2018		September 29, 2017		September 28, 2018		September 29, 2017
	March 29, 2019		March 30, 2018
	(in millions)
Reportable Segment
ISRS(1)	$	2	$	15	$	4	$	17
ISRS	$	1	$	1
C&NS	—4		175		9		36
Electronic Systems	21		2		5		7
Consolidated	$	46	$	348	$	18	$	60

~~__________________~~28

(1) The severance and restructuring related costs incurred during the quarterly period ended September 29, 2017 includes $2 million of pension curtailment losses. See Note 20 for additional information.

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L3 TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — CONTINUED

The Company had severance and restructuring related liabilities of $139 million and $2314 million included in other current liabilities on the Company’s balance sheets at ~~September~~March 2829, ~~2018~~2019 and December 31, ~~2017~~2018, respectively. The remaining liability balance at ~~September~~March 2829, ~~2018~~2019 is expected to be paid primarily by the ~~third~~end ~~quarter~~ of 2019. The table below presents the change to the Company’s severance and restructuring related liability during the ~~year-to-date~~quarterly period ended ~~September~~March 2829, ~~2018~~2019.

	September 28, 2018
	March 29, 2019
	(in millions)
Balance at beginning of period	$	2314
Additional provisions	186
Cash payments	(2811		)
Balance at end of period	$	139

2524. ~~Subsequent~~Condensed ~~Event~~Combining Financial Information of L3 and Its Subsidiaries

OnThe ~~October~~debt ~~14,~~of ~~2018~~L3, L3including ~~and Harris Corporation (“Harris”) announced an agreement to combine in an all stock merger of equals. Under~~ the ~~terms~~senior ofnotes ~~the Agreement~~ and ~~Plan~~borrowings ofunder ~~Merger~~amounts ~~(the~~drawn ~~“Merger~~against ~~Agreement”) governing~~ the ~~proposed~~Credit ~~transaction~~Facility, ~~which~~is ~~was~~guaranteed, ~~unanimously~~on ~~approved~~a byjoint ~~the~~and ~~boards~~several, offull ~~directors~~and ofunconditional ~~both companies~~basis, L3by ~~shareholders~~certain ~~will receive a fixed exchange ratio~~ of ~~1.30~~its ~~shares~~100% ofowned ~~Harris~~domestic ~~common~~subsidiaries ~~stock~~(the ~~for~~Guarantor ~~each~~Subsidiaries). ~~share~~See ofNote L310 ~~common~~to ~~stock~~the ~~they~~audited ~~hold.~~consolidated ~~Upon~~financial ~~completion~~statements offor the ~~merger,~~year ~~Harris~~ended ~~shareholders~~December 31, ~~will~~2018 ~~own~~included ~~approximately~~in ~~54% and L3 shareholders will own approximately 46% of~~ the ~~combined~~Company’s ~~company,~~Annual ~~which~~Report ~~will~~on beForm ~~renamed~~10-K L3for ~~Harris~~additional ~~Technologies, Inc~~information. The ~~merger~~foreign issubsidiaries ~~expected~~and tocertain ~~close~~domestic insubsidiaries ~~the middle~~ of ~~2019,~~L3 ~~subject~~(the toNon-Guarantor ~~customary~~Subsidiaries) ~~closing~~do ~~conditions,~~not ~~including~~guarantee the ~~receipt~~debt of ~~regulatory~~L3. ~~approvals~~None ~~and~~of ~~approval by~~ the ~~shareholders~~debt of ~~both~~ L3 ~~and~~has ~~Harris.~~been issued by its subsidiaries.

43Under the terms of the indentures governing the senior notes, the guarantees of the senior notes will automatically and unconditionally be released and discharged: (1) upon the release of all guarantees of all other outstanding indebtedness of L3 or (2) upon the determination that such guarantor is no longer a “domestic subsidiary.” In addition, the guarantees of the senior notes will be automatically and unconditionally released and discharged in the event of a sale or other disposition of all of the assets of any guarantor, by way of merger, consolidation or otherwise, or a sale of all of the capital stock of such guarantor. There are no restrictions on the payment of dividends from the Guarantor Subsidiaries to L3.

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L3 TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — CONTINUED

26. Condensed Combining Financial Information of L3 and Its Subsidiaries

The debt of L3, including the senior notes and borrowings under amounts drawn against the Credit Facility, are guaranteed, on a joint and several, full and unconditional basis, by certain of its 100% owned domestic subsidiaries (the Guarantor Subsidiaries). See Note 9 to the audited consolidated financial statements for the year ended December 31, 2017, included in the Company’s Annual Report on Form 10-K for additional information. The foreign subsidiaries and certain domestic subsidiaries of L3 (the Non-Guarantor Subsidiaries) do not guarantee the debt of L3. None of the debt of L3 has been issued by its subsidiaries.

Under the terms of the indentures governing the senior notes, the guarantees of the senior notes will automatically and unconditionally be released and discharged: (1) upon the release of all guarantees of all other outstanding indebtedness of L3 or (2) upon the determination that such guarantor is no longer a “domestic subsidiary.” In addition, the guarantees of the senior notes will be automatically and unconditionally released and discharged in the event of a sale or other disposition of all of the assets of any guarantor, by way of merger, consolidation or otherwise, or a sale of all of the capital stock of such guarantor. There are no restrictions on the payment of dividends from the Guarantor Subsidiaries to L3.

The following unaudited condensed combining financial information presents the results of operations, financial position and cash flows of: (1) L3 excluding its consolidated subsidiaries (the Parent), (2) the Guarantor Subsidiaries, (3) the Non-Guarantor Subsidiaries and (4) the eliminations to arrive at the information for L3 on a consolidated basis.

Guarantor Subsidiaries

Non-Guarantor Subsidiaries

Eliminations

Consolidated L3

(in millions)

Condensed Combining Balance Sheets:

At September 28, 2018

At March 29, 2019

Current assets:

Cash and cash equivalents

~~258~~856

2119

~~251~~309

(2376

)

~~507~~1,108

Billed receivables, net

~~302~~230

~~322~~268

~~276~~306

—

~~900~~804

Contract assets

~~612~~580

~~878~~953

~~217~~202

—

1,~~707~~735

Inventories

~~382~~369

~~294~~268

~~235~~259

—

~~911~~896

Prepaid expenses and other current assets

~~133~~127

~~199~~180

7855

—

~~410~~362

Total current assets

12,~~687~~162

1,~~714~~688

1,~~057~~131

(2376

)

4,~~435~~905

Goodwill

2,124

3,~~011~~007

1,~~699~~695

—

6,~~834~~826

Other assets

~~695~~1,004

~~767~~954

~~453~~574

—

12,~~915~~532

Investment in and amounts due from consolidated subsidiaries

6,~~144~~049

6,~~695~~534

—

(12,~~839~~583

)

—

Total assets

1011,~~650~~339

12,~~187~~183

3,~~209~~400

(12,~~862~~659

)

1314,~~184~~263

Current liabilities

~~751~~797

~~900~~1,036

~~632~~675

(2376

)

2,~~260~~432

Amounts due to consolidated subsidiaries

—

~~444~~445

(~~444~~445

)

—

Other long-term liabilities

~~937~~1,169

~~791~~963

~~165~~259

—

12,~~893~~391

Long-term debt

3,~~320~~322

—

3,~~320~~322

Total liabilities

5,~~008~~288

1,~~691~~999

1,~~241~~379

(~~467~~521

)

78,~~473~~145

L3 shareholders’ equity

56,~~642~~051

10,~~496~~184

12,~~968~~021

(12,~~464~~205

)

56,~~642~~051

Noncontrolling interests

—

6967

Total equity

56,~~642~~051

10,~~496~~184

12,~~968~~021

(12,~~395~~138

)

56,~~711~~118

Total liabilities and equity

1011,~~650~~339

12,~~187~~183

3,~~209~~400

(12,~~862~~659

)

1314,~~184~~263

4430

Table of Contents

L3 TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — CONTINUED

	L3		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated L3
	(in millions)
At December 31, 2017
At December 31, 2018
Current assets:
Cash and cash equivalents	$	~~432~~756	$	1621	$	~~285~~306	$	(7117	)	$	~~662~~1,066
Billed receivables, net	~~266~~291		~~244~~341		~~213~~287		—			~~723~~919
Contracts in process	706		912		315		—			1,933
Contract assets	562		833		195		—			1,590
Prepaid expenses and other current assets	330		235		124		—			689
Inventories	378		258		243		—			879
Assets held for sale	—		135		—		—			135
Prepaid expenses and other current assets	127		166		63		—			356
Assets of discontinued operations	306		—		—		—			306
Total current assets	2,114		1,619		1,094		(17		)	4,810
Total current assets	2,040		1,542		937		(71		)	4,448
Goodwill	2,124		3,009		1,675		—			6,808
Goodwill	2,099		2,932		1,584		—			6,615
Other assets	690		765		445		—			1,900
Other assets	658		687		321		—			1,666
Investment in and amounts due from consolidated subsidiaries	5,931		6,912		—		(12,843		)	—
Investment in and amounts due from consolidated subsidiaries	5,662		6,310		—		(11,972		)	—
Total assets	$	10,859	$	12,305	$	3,214	$	(12,860	)	$	13,518
Total assets	$	10,459	$	11,471	$	2,842	$	(12,043	)	$	12,729
Current liabilities	$	821	$	955	$	688	$	(17	)	$	2,447
Current liabilities	$	811	$	832	$	564	$	(71	)	$	2,136
Amounts due to consolidated subsidiaries	—		—		417		(417		)	—
Liabilities held for sale	—		17		—		—			17
Other long-term liabilities	878		804		161		—			1,843
Liabilities of discontinued operations	226		—		—		—			226
Long-term debt	3,321		—		—		—			3,321
Amounts due to consolidated subsidiaries	—		—		391		(391		)	—
Total liabilities	5,020		1,759		1,266		(434		)	7,611
Other long-term liabilities	1,009		729		131		—			1,869
L3 shareholders’ equity	5,839		10,546		1,948		(12,494		)	5,839
Long-term debt	3,330		—		—		—			3,330
Total liabilities	5,376		1,578		1,086		(462		)	7,578
L3 shareholders’ equity	5,083		9,893		1,756		(11,649		)	5,083
Noncontrolling interests	—		—		—		68			68
Total equity	5,~~083~~839		910,~~893~~546		1,~~756~~948		(1112,~~581~~426		)	5,~~151~~907
Total liabilities and equity	$	10,~~459~~859	$	1112,~~471~~305	$	23,~~842~~214	$	(12,~~043~~860	)	$	1213,~~729~~518

4531

Table of Contents

L3 TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — CONTINUED

	L3			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated L3
	(in millions)
Condensed Combining Statements of Operations:
For the quarter ended September 28, 2018:
For the quarter ended March 29, 2019:
Total net sales	$	~~872~~904		$	1,~~274~~418		$	~~456~~462		$	(8384	)	$	2,~~519~~700
Total operating costs and expenses	(~~759~~785		)	(1,~~200~~312		)	(~~362~~376		)	8384			(2,~~238~~389		)
Loss on sale of the Crestview & TCS Businesses	—			(4		)	—			—			(4		)
Merger, acquisition and divestiture related expenses and losses	(18		)	—			—			—			(18		)
Merger, acquisition and divestiture related expenses	(5		)	—			—			—			(5		)
Operating income	101			106			86			—			293
Operating income	108			70			94			—			272
Interest expense	(37		)	—			—			—			(37		)
Interest expense	(40		)	—			—			—			(40		)
Interest and other income, net	3			1			—			—			4
Interest and other income, net	14			1			—			—			15
Income from continuing operations before income taxes	67			107			86			—			260
Debt retirement charge	(21		)	—			—			—			(21		)
Provision for income taxes	(10		)	(15		)	(12		)	—			(37		)
Income from continuing operations before income taxes	61			71			94			—			226
Equity in net income of consolidated subsidiaries	160			36			—			(196		)	—
Provision for income taxes	(6		)	(4		)	(8		)	—			(18		)
Net income	217			128			74			(196		)	223
Equity in net income of consolidated subsidiaries	147			48			—			(195		)	—
Net income	202			115			86			(195		)	208
Net income attributable to noncontrolling interests	—			—			—			(6		)	(6		)
Net income attributable to L3	$	~~202~~217		$	~~115~~128		$	8674		$	(~~201~~202	)	$	~~202~~217
Comprehensive income attributable to L3	$	~~213~~241		$	~~115~~158		$	83101		$	(~~198~~259	)	$	~~213~~241
For the quarter ended September 29, 2017:
For the quarter ended March 30, 2018:
Total net sales	$	~~836~~807		$	1,~~157~~239		$	~~386~~422		$	(8697	)	$	2,~~293~~371
Total operating costs and expenses	(~~747~~722		)	(1,~~081~~155		)	(~~319~~340		)	8697			(2,~~061~~120		)
Operating income	8985			7684			6782			—			~~232~~251
Interest expense	(41		)	—			(1—		)	—			(4241		)
Interest and other income, net	15			—			1			—			26
Income from continuing operations before income taxes	49			7684			6783			—			~~192~~216
Provision for income taxes	(116		)	(199		)	(169		)	—			(4624		)
Equity in net income of consolidated subsidiaries	~~105~~144			3447			—			(~~139~~191		)	—
Income from continuing operations	~~143~~187			91122			5174			(~~139~~191		)	~~146~~192
Income from discontinued operations, net of income taxes	~~(121~~16		)	—			—			—			~~(121~~16		)
Net income	22203			91122			5174			(~~139~~191		)	25208
Net income attributable to noncontrolling interests	—			—			—			(35		)	(35		)
Net income attributable to L3	$	22203		$	91122		$	5174		$	(~~142~~196	)	$	22203
Comprehensive income attributable to L3	$	85249		$	~~139~~153		$	~~101~~107		$	(~~240~~260	)	$	85249

4632

Table of Contents

L3 TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — CONTINUED

	L3			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated L3
	(in millions)
Condensed Combining Statements of Operations:
Condensed Combining Statements of Cash Flows
For the year-to-date period ended September 28, 2018:
For the quarter ended March 29, 2019:
Total net sales	$	2,598		$	3,841		$	1,309		$	(275	)	$	7,473
Operating activities:
Total operating costs and expenses	(2,300		)	(3,594		)	(1,049		)	275			(6,668		)
Net cash from operating activities from continuing operations	$	101		$	55		$	18		$	—		$	174
Gain on sale of the Crestview & TCS Businesses	—			44			—			—			44
Investing activities:
Merger, acquisition and divestiture related expenses	(5		)	—			—			—			(5		)
Proceeds from sale of businesses, net of closing date cash balances	1			—			—			—			1
Operating income	293			291			260			—			844
Other investing activities	(42		)	(19		)	(14		)	—			(75		)
Interest expense	(124		)	—			(1		)	—			(125		)
Net cash used in investing activities from continuing operations	(41		)	(19		)	(14		)	—			(74		)
Interest and other income, net	25			2			2			—			29
Financing activities:
Debt retirement charge	(69		)	—			—			—			(69		)
Dividends paid	(70		)	—			—			—			(70		)
Income from continuing operations before income taxes	125			293			261			—			679
Other financing activities	91			(38		)	(4		)	(59		)	(10		)
Provision for income taxes	(16		)	(39		)	(35		)	—			(90		)
Net cash from (used in) financing activities from continuing operations	21			(38		)	(4		)	(59		)	(80		)
Equity in net income of consolidated subsidiaries	465			141			—			(606		)	—
Effect of foreign currency exchange rate changes on cash	—			—			3			—			3
Income from continuing operations	574			395			226			(606		)	589
Net increase in cash and cash equivalents of discontinued operations	19			—			—			—			19
Income from discontinued operations, net of income tax	206			—			—			—			206
Net increase (decrease) in cash	100			(2		)	3			(59		)	42
Net income	780			395			226			(606		)	795
Cash and cash equivalents, beginning of the period	756			21			306			(17		)	1,066
Net income attributable to noncontrolling interests	—			—			—			(15		)	(15		)
Cash and cash equivalents, end of the period	$	856		$	19		$	309		$	(76	)	$	1,108
Net income attributable to L3	$	780		$	395		$	226		$	(621	)	$	780
Comprehensive income attributable to L3	$	768		$	353		$	180		$	(533	)	$	768
For the year-to-date period ended September 29, 2017:
Total net sales	$	2,580		$	3,546		$	1,136		$	(263	)	$	6,999
Total operating costs and expenses	(2,328		)	(3,226		)	(945		)	263			(6,236		)
Operating income	252			320			191			—			763
Interest expense	(125		)	—			(1		)	—			(126		)
Interest and other income, net	6			—			2			—			8
Income from continuing operations before income taxes	133			320			192			—			645
Provision for income taxes	(30		)	(73		)	(44		)	—			(147		)
Equity in net income of consolidated subsidiaries	383			92			—			(475		)	—
Income from continuing operations	486			339			148			(475		)	498
Income from discontinued operations, net of income tax	(98		)	—			—			—			(98		)
Net income	388			339			148			(475		)	400
Net income attributable to noncontrolling interests	—			—			—			(12		)	(12		)
Net income attributable to L3	$	388		$	339		$	148		$	(487	)	$	388
Comprehensive income attributable to L3	$	541		$	447		$	271		$	(718	)	$	541



For the quarter ended March 30, 2018:
Operating activities:
Net cash from (used in) operating activities from continuing operations	$	198		$	(204	)	$	(24	)	$	(5	)	$	(35	)
Investing activities:
Other investing activities	(62		)	(17		)	(4		)	—			(83		)
Net cash used in investing activities from continuing operations	(62		)	(17		)	(4		)	—			(83		)
Financing activities:
Common stock repurchased	(119		)	—			—			—			(119		)
Dividends paid	(65		)	—			—			—			(65		)
Other financing activities	(196		)	226			(50		)	58			38
Net cash (used in) from financing activities from continuing operations	(380		)	226			(50		)	58			(146		)
Effect of foreign currency exchange rate changes on cash	—			—			6			—			6
Net decrease in cash and cash equivalents of discontinued operations	(30		)	—			—			—			(30		)
Net (decrease) increase in cash	(274		)	5			(72		)	53			(288		)
Cash and cash equivalents, beginning of the period	432			14			287			(71		)	662
Cash and cash equivalents, end of the period	$	158		$	19		$	215		$	(18	)	$	374

Table of Contents

L3 TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — CONTINUED

	L3			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated L3
	(in millions)
Condensed Combining Statements of Cash Flows
For the year-to-date period ended September 28, 2018:
Operating activities:
Net cash from (used in) operating activities from continuing operations	$	248		$	(30	)	$	131		$	(7	)	$	342
Investing activities:
Business acquisitions, net of cash acquired	(192		)	—			(176		)	—			(368		)
Proceeds from sale of businesses, net of closing date cash balances	360			175			—			—			535
Other investing activities	(99		)	(59		)	(35		)	—			(193		)
Net cash from (used in) investing activities from continuing operations	69			116			(211		)	—			(26		)
Financing activities:
Proceeds from sale of senior notes	1,798			—			—			—			1,798
Repurchases and redemptions of senior notes	(1,865		)	—			—			—			(1,865		)
Common stock repurchased	(322		)	—			—			—			(322		)
Dividends paid	(191		)	—			—			—			(191		)
Other financing activities	82			(81		)	55			55			111
Net cash (used in) from financing activities from continuing operations	(498		)	(81		)	55			55			(469		)
Effect of foreign currency exchange rate changes on cash	—			—			(9		)	—			(9		)
Net increase in cash and cash equivalents of discontinued operations	7			—			—			—			7
Net (decrease) increase in cash	(174		)	5			(34		)	48			(155		)
Cash and cash equivalents, beginning of the period	432			16			285			(71		)	662
Cash and cash equivalents, end of the period	$	258		$	21		$	251		$	(23	)	$	507

For the year-to-date period ended September 29, 2017:
Operating activities:
Net cash from operating activities from continuing operations	$	248		$	187		$	187		$	(41	)	$	581
Investing activities:
Business acquisitions, net of cash acquired	(291		)	—			—			—			(291		)
Proceeds from sale of businesses, net of closing date cash balances	17			—			1			—			18
Other investing activities	(67		)	(5		)	(19		)	—			(91		)
Net cash used in investing activities from continuing operations	(341		)	(5		)	(18		)	—			(364		)
Financing activities:
Common stock repurchased	(91		)	—			—			—			(91		)
Dividends paid	(178		)	—			—			—			(178		)
Other financing activities	211			(174		)	(137		)	130			30
Net cash used in financing activities from continuing operations	(58		)	(174		)	(137		)	130			(239		)
Effect of foreign currency exchange rate changes on cash	—			—			16			—			16
Net increase in cash and cash equivalents of discontinued operations	82			—			—			—			82
Net (decrease) increase in cash	(69		)	8			48			89			76
Cash and cash equivalents, beginning of the period	262			5			203			(107		)	363
Cash and cash equivalents, end of the period	$	193		$	13		$	251		$	(18	)	$	439

Table of Contents

L3 TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — CONTINUED

The Company has revised the reported amounts for L3, Guarantor Subsidiaries, Non-Guarantor Subsidiaries and Eliminations in the Condensed Combining Statements of Operations for the quarterly period ended September 29, 2017 and for the year-to-date period ended September 29, 2017, to retrospectively reflect: (a) changes in Guarantor Subsidiaries resulting from the elimination of Vertex Aerospace as a guarantor due to its sale which occurred on June 29, 2018; (b) additional legal entities included as Guarantor Subsidiaries as the result of the Third Supplemental Indenture dated March 30, 2018; and (c) correction of an error related to the understatement of equity in net income of certain Guarantor Subsidiaries. As a result of the error identification discussed in (c) above, Equity in net income of consolidated subsidiaries and Net income of Guarantor Subsidiaries in the Condensed Combining Statements of Operations for the quarter ended September 29, 2017 and for the year-to-date period ended September 29, 2017 was understated by $34 million and $92 million respectively. The Company assessed the materiality of the error on previously issued financial statements in accordance with SEC Staff Accounting Bulleting No. 99 and No. 108, and concluded that the disclosure error is not material to the Company's previously issued financial statements taken as a whole. The impact of the items referred to above to the reported columnar amounts for L3, Guarantor Subsidiaries, Non-Guarantor Subsidiaries and Eliminations are enumerated below.

Condensed Combining Statement of Operations (Third Quarter Ended September 29, 2017)

	As Reported												Adjustment												As Adjusted
	L3			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			L3			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			L3			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations
	(in millions)
Total net sales	$	840		$	1,481		$	408		$	(83	)	$	(4	)	$	(324	)	$	(22	)	$	(3	)	$	836		$	1,157		$	386		$	(86	)
Total operating costs and expenses	(746		)	(1,390		)	(343		)	83			(1		)	309			24			3			(747		)	(1,081		)	(319		)	86
Goodwill impairment charge	—			(187		)	—			—			—			187			—			—			—			—			—			—
Operating income (loss)	94			(96		)	65			—			(5		)	172			2			—			89			76			67			—
Interest expense	(42		)	—			(1		)	—			1			—			—			—			(41		)	—			(1		)	—
Interest and other income (loss), net	7			—			(1		)	—			(6		)	—			2			—			1			—			1			—
Income (loss) from continuing operations before income taxes	59			(96		)	63			—			(10		)	172			4			—			49			76			67			—
(Provision) benefit for income taxes	(12		)	24			(12		)	—			1			(43		)	(4		)	—			(11		)	(19		)	(16		)	—
Equity in net (loss) income of consolidated subsidiaries	(24		)	—			—			24			129			34			—			(163		)	105			34			—			(139		)
Income (loss) from continuing operations	23			(72		)	51			24			120			163			—			(163		)	143			91			51			(139		)
Loss from discontinued operations, net of taxes	(1		)	—			—			—			(120		)	—			—			—			(121		)	—			—			—
Net income (loss)	22			(72		)	51			24			—			163			—			(163		)	22			91			51			(139		)
Net income attributable to noncontrolling interests	—			—			—			(3		)	—			—			—			—			—			—			—			(3		)
Net income (loss) attributable to L3	$	22		$	(72	)	$	51		$	21		$	—		$	163		$	—		$	(163	)	$	22		$	91		$	51		$	(142	)
Comprehensive income (loss) attributable to L3	$	85		$	(67	)	$	100		$	(33	)	$	—		$	206		$	1		$	(207	)	$	85		$	139		$	101		$	(240	)

Table of Contents

L3 TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — CONTINUED

Condensed Combining Statement of Operations (Year-to-Date Ended September 29, 2017)

	As Reported												Adjustment												As Adjusted
	L3			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			L3			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			L3			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations
				(in millions)
Total net sales	$	2,603		$	4,500		$	1,201		$	(257	)	$	(23	)	$	(954	)	$	(65	)	$	(6	)	$	2,580		$	3,546		$	1,136		$	(263	)
Total operating costs and expenses	(2,334		)	(4,146		)	(1,009		)	257			6			920			64			6			(2,328		)	(3,226		)	(945		)	263
Goodwill impairment charge	—			(187		)	—			—			—			187			—			—			—			—			—			—
Operating income	269			167			192			—			(17		)	153			(1		)	—			252			320			191			—
Interest expense	(126		)	(1		)	(1		)	—			1			1			—			—			(125		)	—			(1		)	—
Interest and other income, net	12			—			3			—			(6		)	—			(1		)	—			6			—			2			—
Income from continuing operations before income taxes	155			166			194			—			(22		)	154			(2		)	—			133			320			192			—
Provision for income taxes	(34		)	(37		)	(43		)	—			4			(36		)	(1		)	—			(30		)	(73		)	(44		)	—
Equity in net income of consolidated subsidiaries	268			—			—			(268		)	115			92			—			(207		)	383			92			—			(475		)
Income from continuing operations	389			129			151			(268		)	97			210			(3		)	(207		)	486			339			148			(475		)
Loss from discontinued operations, net of taxes	(1		)	—			—			—			(97		)	—			—			—			(98		)	—			—			—
Net income	388			129			151			(268		)	—			210			(3		)	(207		)	388			339			148			(475		)
Net income attributable to noncontrolling interests	—			—			—			(12		)	—			—			—			—			—			—			—			(12		)
Net income attributable to L3	$	388		$	129		$	151		$	(280	)	$	—		$	210		$	(3	)	$	(207	)	$	388		$	339		$	148		$	(487	)
Comprehensive income attributable to L3	$	541		$	134		$	273		$	(407	)	$	—		$	313		$	(2	)	$	(311	)	$	541		$	447		$	271		$	(718	)

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Overview and Outlook

L3’s Business

L3 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. Our 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 ~~Effective~~provides inproducts and services for the ~~third~~global ~~quarter~~ISR ofand ~~2018~~Command, weControl ~~realigned~~and ~~our~~Communications ~~reportable~~(C3) ~~segments.~~markets, ~~Prior~~specializing toin ~~the~~ISR ~~realignment~~mission wesolutions ~~had~~from ~~the~~seabed ~~following~~to ~~four~~space, ~~reportable~~signals ~~segments:~~intelligence (1SIGINT) ~~Electronic~~and ~~Systems~~multi-intelligence platforms, ~~(2)~~including ~~Aerospace Systems~~engineering, ~~(3)~~modernization ~~Communication~~and ~~Systems~~sustainment solutions for military and ~~(4)~~various ~~Sensor~~government ~~Systems~~aircraft, ground support equipment and other platforms. ~~The~~These ~~realignment:~~strategic ~~(i)~~and ~~combined~~tactical ~~the~~products ~~Aerospace~~and ~~Systems~~services ~~segment~~provide warfighters with the ~~Sensor~~ability ~~Systems~~to ~~segment~~detect, tocollect, ~~form~~identify, aanalyze ~~new~~and ~~reportable~~disseminate ~~segment~~information ~~named~~from ~~the~~command ~~ISR~~centers, ~~Systems~~communication ~~(ISRS)~~nodes ~~segment,~~and ~~(ii)~~air ~~moved~~defense ~~the~~systems ~~Naval~~for ~~Power~~real-time ~~Systems~~situational ~~businesses~~awareness ~~from~~and ~~the~~response. ~~Electronic~~Other ~~Systems~~major ~~segment~~capabilities toand ~~the~~mission ~~Communication~~solutions ~~Systems~~include ~~segment~~space avionics and ~~changed~~imaging ~~the~~payloads, ~~name~~Counter ofUnmanned ~~the~~Aircraft ~~Communication~~ Systems ~~segment~~mission tosolutions, ~~the~~cyber ~~Communications~~and &electronic ~~Networked~~warfare, ~~Systems~~special (Cmission command &~~NS)~~ ~~segment~~control, ~~and~~modeling ~~(iii)~~& ~~moved~~simulation ~~the~~and ~~Maritime~~life ~~Sensor~~cycle ~~Systems~~support. ~~businesses~~ISRS ~~from~~sells ~~the~~these ~~former~~products ~~Sensor~~and ~~Systems~~services ~~segment~~primarily to the ~~C&NS~~DoD ~~segment~~and select foreign governments. ~~Accordingly~~The ISRS sectors are Reconnaissance Mission Systems, ~~our~~Tactical ~~current~~Mission ~~structure~~Systems, ~~consists~~Integrated ofLand ~~the~~Systems, ~~following~~Space ~~three~~& ~~segments:~~Sensors, ~~(1)~~Surveillance ~~ISRS~~& Strike Systems, ~~(2)~~Intelligence C&NS ~~and~~Mission ~~(3)~~Systems, ~~Electronic~~Advanced C2ISR Systems and Special Programs.

~~Electronic~~Financial ~~Systems~~information ~~provides~~with arespect ~~broad~~to ~~range~~each of ~~products~~our ~~and~~segments ~~services,~~is ~~including~~included ~~components,~~in ~~products,~~Note ~~subsystems,~~22 ~~systems and related services~~ to ~~military~~our ~~and~~unaudited ~~commercial~~condensed ~~customers.~~consolidated ~~These~~financial ~~products~~statements and ~~services~~Note ~~serve~~22 ~~niche~~to ~~markets,~~our ~~such~~audited asconsolidated ~~aircraft~~financial ~~simulation~~statements ~~and~~included ~~training,~~in ~~power~~our ~~and~~Annual ~~distribution,~~Report ~~cockpit~~on ~~avionics,~~Form ~~airport~~10-K ~~security~~for ~~and precision weapons. Electronic Systems sells these products and services primarily to~~ the ~~DoD~~year ~~and~~ended ~~select~~December ~~foreign governments. The Electronic Systems business areas are Commercial Aviation Solutions~~31, ~~Precision Engagement Systems, Link Training & Simulation and Security & Detection Systems~~2018.

~~Financial information with respect to our segments is included in Results of Operations within this section, Note 23 to our unaudited condensed consolidated financial statements.~~34

We adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (commonly known as ASC 606), effective January 1, 2018 using the modified retrospective transition method. In accordance with the modified retrospective transition method, the quarter ended September 28, 2018 (2018 third quarter) and the year-to-date period ended September 28, 2018 (2018 year-to-date period) are presented under ASC 606, while the quarter ended September 29, 2017 (2017 third quarter) and the year-to-date period ended September 29, 2017 (2017 year-to-date period) are presented under ASC 605,

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~~Revenue~~For ~~Recognition~~the year ended December 31, ~~the~~2018, ~~accounting~~we ~~standard~~generated insales ~~effect~~of ~~for~~$10,244 ~~periods~~million, ~~ending~~and ~~prior~~our toprimary ~~January~~customer 1,was ~~2018~~the DoD. The ~~cumulative~~table ~~effect~~below presents a summary of ~~the~~our ~~change~~consolidated in2018 ~~accounting~~sales ~~for~~by ~~periods~~major ~~prior~~category toof ~~January~~end 1,customer ~~2018~~and ~~was~~the ~~recognized~~percent ~~through~~contributed ~~retained~~by ~~earnings~~each atto ~~the~~our ~~date~~consolidated of2018 ~~adoption~~sales.

Vertex Aerospace Divestiture: On June 29, 2018, we completed the sale of the Vertex Aerospace businesses for a sale price of $540 million subject to customary closing net working capital adjustments. In connection with the sale, we recognized: (1) a pre-tax gain from continuing operations of $44 million ($22 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 $237 million ($180 million after income taxes) related to the Vertex Aerospace business. The divestiture of the Vertex Aerospace business represents a strategic shift by us to exit the logistics solution and maintenance services business for military aircraft where we do not provide complex ISR systems integration and modification. The Vertex Aerospace business generated sales of $1.4 billion for the year ended December 31, 2017. The assets and liabilities and results of operations of the Vertex Aerospace business are reported as discontinued operations for all periods presented.



	2018 Sales		% of 2018 Sales
	(in millions)
DoD	$	6,721	66	%
Other U.S. Government	423		4
Total U.S. Government	7,144		70
Foreign governments	1,528		15
Commercial — foreign	873		8
Commercial — domestic	699		7
Total sales	$	10,244	100	%

~~All~~We ~~references~~currently ~~made~~expect tothe ~~financial~~composition ~~data~~of inour ~~this~~2019 ~~Quarterly~~consolidated ~~Report~~sales onto ~~Form~~the ~~10-Q~~U.S. ~~are~~Government and to ~~L3’s~~international ~~continuing~~and ~~operations,~~commercial ~~unless~~customers ~~specifically~~to ~~noted~~remain approximately the same as compared to 2018.

~~For~~Vertex ~~the~~Aerospace ~~year~~Divestiture: ~~ended~~On ~~December 31~~June 29, ~~2017~~2018, we ~~generated~~completed the sale of our Vertex Aerospace businesses for a sales price of $9540 million subject to customary closing net working capital adjustments. In connection with the sale,~~573~~ we recognized: (1) a pre-tax gain from continuing operations of $42 million ($19 million after income taxes) related to the Crestview Aerospace and ~~our~~TCS ~~primary~~businesses ~~end~~(the ~~customer~~"Crestview ~~was~~& TCS Businesses") and (2) a pre-tax gain from discontinued operations of $234 million ($177 million after income taxes) related to the ~~DoD~~Vertex Aerospace business. The ~~table~~results ~~below~~of ~~presents~~operations aof ~~summary~~the ofVertex ~~our~~Aerospace ~~consolidated~~business ~~2017~~are ~~sales~~reported byas ~~major~~discontinued ~~category~~operations for all periods presented. During the first quarter of ~~end~~2019, ~~customer~~we finalized and ~~the~~paid ~~percent~~a ~~contributed~~working bycapital ~~each~~adjustment toof ~~our~~$20 ~~consolidated~~million ~~2017~~related ~~sales~~to the sale.

	2017 Sales		% of 2017 Sales
	(in millions)
DoD	$	6,329	66	%
Other U.S. Government	368		4
Total U.S. Government	6,697		70
Foreign governments	1,420		15
Commercial — foreign	809		8
Commercial — domestic	647		7
Total sales	$	9,573	100	%

All references to financial data in this Quarterly Report on Form 10-Q are to L3’s continuing operations, unless specifically noted.

WePlanned ~~currently~~Merger ~~expect~~with ~~the~~Harris ~~composition of our 2018 consolidated sales to the U.S. Government and to international and commercial customers to remain approximately the same as compared to 2017.~~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, 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.

Business Environment

U.S. Government Markets. Sales to U.S. Government customers represented 70% of our ~~2017~~2018 sales and were primarily to DoD customers, which comprised 66% of our sales. Therefore, our annual sales are generally highly correlated to changes in U.S. Government spending levels, especially DoD budget levels.

The total DoD budget for FY ~~2016~~2017 was $~~581~~606 billion, an($523 ~~increase~~billion ~~of 4% compared to FY 2015. The increase was due to a higher~~ base budget ~~of $522 billion~~, ~~representing an increase of~~ $2583 billion ~~compared to FY 2015. The FY 2016~~ Overseas Contingency Operations (OCO) ~~budget declined slightly to $59 billion compared to $63 billion for FY 2015. The total DoD budget for FY 2017 was $606 billion ($523 billion base budget, $83 billion OCO~~), an increase of 4% compared to the appropriated FY 2016 DoD budget.

Because the FY 2018 DoD Appropriations bill was not enacted into law prior to start of fiscal year 2018 (October 1, 2017), the DoD’s FY 2018 funding was addressed through a series of Continuing Resolutions (CR). However, on February 9, 2018, President Trump signed into law the Bipartisan Budget Act of 2018 (BBA), a bipartisan two-year budget and debt ceiling agreement that provides a level of stability in the U.S. Government budget process over the next two fiscal years (FYs 2018 and 2019). The BBA included a short-term CR extension to March 23, 2018, to allow for completion of the FY 2018 appropriations process (including enactment of the FY 2018 DoD Appropriations bill). On March 23, 2018, Congress passed and President Trump signed into law the Consolidated Appropriations Act, 2018 (2018 Appropriations Act), a $1.3 trillion spending package that ~~funds~~funded the government through September 30, 2018. The 2018 Appropriations Act ~~includes~~included $665 billion for the DoD ($599 billion base ~~budget, $66 billion OCO). While 2018 BBA does raise the spending caps for FY 2018 and FY 2019 previously constrained by the~~

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budget, $66 billion OCO). While 2018 BBA raised the spending caps for FY 2018 and FY 2019 previously constrained by the Budget Control Act of 2011 (BCA) and temporarily ~~suspends~~suspended the statutory debt ceiling through March 1, 2019, it ~~does~~did not modify the BCA’s spending caps or sequestration mechanism beyond FY 2019.

On February 12, 2018, the Trump Administration submitted its FY 2019 DoD budget request to Congress, totaling $686 billion ($617 billion base budget, $69 billion OCO funding) and representing an increase of 3% compared to FY 2018 enacted levels. On May 24, 2018, the House passed its version of the FY 2019 National Defense Authorization Act (NDAA), and on June 18, 2018, the Senate passed its version of the FY19 NDAA. Both the House and Senate versions of the FY19 NDAA authorized a base DoD budget of $617 billion and $69 billion in OCO funding, consistent with the President’s FY 2019 budget request. The final versions of the FY19 NDAA were passed by the House and Senate on July 26 and August 1, 2018, respectively, and President Trump signed it into law on August 13, 2018.

On June 28, 2018, the House passed its version of the ~~Fiscal~~FY ~~Year~~ 2019 Defense Appropriations Bill, providing $674.4 billion for the Department of Defense and the Intelligence Community - funding levels aligned to those authorized in the NDAA. On August 23, 2018, the Senate passed its version of the ~~Fiscal~~FY ~~Year~~ 2019 Defense Appropriations Bill, consistent with the total funding level included in the House’s version. On September 13, 2018, House and Senate conferees announced a final conference agreement on the ~~Fiscal~~FY ~~Year~~ 2019 Defense Appropriations Bill, and on September 28, 2018, the President signed the conference agreement into law. The enactment of the annual Defense Appropriations bill prior to the beginning of the ~~Fiscal~~fiscal ~~Year~~year had not occurred in over a decade.

~~While~~On ~~the~~March ~~BBA~~11, ~~and~~2019, the ~~2018~~Trump ~~Appropriations~~Administration ~~Act~~submitted ~~provide~~its aFY ~~level~~2020 ~~of stability, future~~ DoD ~~budgets~~budget ~~and~~request ~~spending~~to ~~levels are determined by a number of factors beyond our control~~Congress, ~~including~~totaling ~~changes~~$718.3 tobillion U($544.S.5 ~~procurement~~billion ~~policies,~~base ~~current and future domestic and international~~ budget ~~conditions~~, ~~presidential~~$164.6 ~~administration~~billion ~~priorities~~in ~~and~~OCO ~~changing~~funding ~~national security~~ and ~~defense requirements~~$9.2 ~~Furthermore,~~billion ~~the~~in ~~U.S.~~emergency ~~Government’s~~funding) ~~overall~~and ~~fiscal~~representing ~~challenges~~an ~~remain,~~increase ~~including~~of ~~uncertainties~~4.9% ~~regarding~~compared ~~BCA~~to ~~sequestration cuts after~~ FY 2019, ~~and,~~enacted ~~therefore, future DoD budgets and spending~~ levels ~~are difficult to predict~~. ~~Although~~Congress ~~uncertainty~~is ~~exists,~~currently wein ~~believe~~the ~~that~~process ~~L3 will benefit from several~~ of reviewing the ~~DoD~~President’s ~~focus~~budget ~~areas~~request ~~such~~for asFY ~~ISR,~~2020 ~~unmanned~~with ~~systems,~~a ~~undersea~~target ~~warfare,~~date ~~precision~~for ~~strike,~~enactment ~~secure~~by ~~communications, missile defense and space programs, electronic warfare, aircraft readiness and~~ the ~~ability~~end toof ~~project power in denied environments. For more information on~~ the ~~risks~~government’s ~~and~~current ~~uncertainties~~fiscal ~~related to our U.S. Government contracts, see “Part I - Item 1A - Risk Factors” in our Annual Report on Form 10-K for the~~ year ~~ended~~(September ~~December 31~~30, ~~2017~~2019).

~~International~~While ~~and~~the ~~Commercial~~on-time ~~Markets.~~enactment ~~Sales~~of tothe ~~end~~FY ~~customers~~2019 ~~other~~Defense ~~than~~Appropriations ~~the~~Act ~~U.S.~~provides ~~Government~~a ~~represented~~level ~~30%~~ of ~~our~~near-term ~~2017~~stability, ~~sales.~~future ~~These~~DoD ~~sales~~budgets ~~are~~and ~~generally~~spending ~~affected~~levels byare ~~global~~determined ~~economic~~by ~~conditions,~~a ~~geopolitical~~number ~~and~~of ~~security~~factors ~~conditions~~beyond ~~and~~our ~~commodity prices~~control, asincluding ~~well~~changes asto ~~our~~U.S. ~~competitive~~procurement ~~success~~policies, incurrent ~~winning~~and ~~new~~future ~~business~~domestic and ~~increasing~~international ~~our~~budget ~~market~~conditions, ~~share.~~presidential Weadministration ~~believe~~priorities, ~~that~~congressional L3deliberations ~~will~~and ~~benefit~~changing ~~from~~national asecurity ~~large~~and ~~addressable~~defense ~~international~~requirements. ~~market~~Furthermore, ~~with~~the ~~sales~~U.S. ~~directly~~Government’s tooverall ~~foreign~~fiscal ~~allied~~challenges ~~governments~~remain ~~and~~significant, ~~under~~including ~~foreign~~uncertainties ~~military~~regarding ~~sales~~BCA ~~agreements~~sequestration ~~between~~cuts ~~the~~after ~~U.S.~~FY ~~Government~~2019, and, ~~foreign~~therefore, ~~governments.~~future ~~Although~~DoD ~~our~~budgets ~~international~~and ~~sales~~spending levels are ~~experiencing~~difficult ~~near-term~~to ~~softness~~predict. Although uncertainty exists, we believe ~~the~~that ~~focus~~L3 ofwill ~~our~~benefit ~~international~~from ~~markets~~several inof the DoD’s focus areas such as ~~ISR~~a renewed emphasis upon acquisition agility, ~~simulators~~ISR, ~~communication~~unmanned systems, ~~night~~undersea ~~vision~~warfare, ~~products~~precision strike, secure communications, missile defense and ~~sensors~~space ~~systems~~programs, ~~will~~electronic ~~benefit~~warfare, L3aircraft inreadiness and the ~~long~~ability ~~term~~to project power in denied environments. WeFor ~~also~~more ~~believe~~information ~~that~~on the ~~commercial~~risks ~~markets~~and inuncertainties ~~which~~related weto ~~participate~~our U.S. Government contracts, ~~such~~see as“Part ~~aviation~~I ~~products,~~- ~~security~~Item 1A ~~and~~- ~~screening,~~Risk ~~simulation~~Factors” ~~and~~in ~~training,~~our ~~and~~Annual RFReport ~~microwave~~on ~~and~~Form ~~power,~~10-K ~~have~~for ~~long~~the ~~term~~year ~~favorable~~ended ~~fundamentals~~December 31, 2018.

International and Commercial Markets. Sales to end customers other than the U.S. Government represented 30% of our 2018 sales. These sales are generally affected by global economic conditions, geopolitical and security conditions and commodity prices, as well as our competitive success in winning new business and increasing our market share. We believe that L3 will benefit from a large addressable international market with sales directly to foreign allied governments and under foreign military sales agreements between the U.S. Government and foreign governments. Although our international sales are experiencing near-term softness, we believe the focus of our international markets in areas such as ISR, simulators, communication systems, night vision products and sensors systems will benefit L3 in the long term. We also believe that the commercial markets in which we participate, such as aviation products, security and screening, simulation and training, and RF microwave and power, have long term favorable fundamentals.

Key Performance Measures

The primary financial performance measures that we use to manage our businesses and monitor results of operations are (i) sales, (ii) operating income and (iii) net cash from operating activities (Operating Cash Flow). Management believes that these financial performance measures are the primary growth drivers for our earnings per share ~~and cash flow per common share~~. Generally, in evaluating our businesses and contract performance, we focus on net sales, operating income, operating margin, which we define as operating income as a percentage of sales, and the financial performance measure of Operating Cash Flow, and not the type or amount of operating costs.

One of our primary business objectives is to increase sales organically and through select business acquisitions. We define organic sales as net sales excluding the sales impact of acquisitions and divestitures. Sales declines related to business divestitures are sales from divestitures that are included in our actual results for ~~the~~a twelve-month period prior to the divestitures. Sales increases related to acquired businesses are sales from acquisitions that are included in our actual results for less than a twelve-month period. We expect to supplement, strengthen and enhance our existing businesses by selectively acquiring businesses that: (1) add important new technologies and products, (2) provide access to select customers, programs and contracts and (3) provide attractive returns on investment. Another important financial performance measure that we use is operating margin, because sales growth combined with operating margin levels determine our operating income levels. Operating Cash Flow is also an important financial performance measure because Operating Cash Flow measures our ability to convert operating income into cash after paying income taxes and interest expenses and investing in working capital.

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~~Sales~~new ~~Trends. For~~technologies ~~the~~and ~~2018 third quarter~~products, ~~consolidated~~(2) ~~net~~provide ~~sales~~access ofto $2select customers,~~519~~ ~~million~~programs ~~increased~~and bycontracts ~~$226~~and ~~million,~~(3) orprovide ~~10%,~~attractive ~~compared~~returns toon ~~the~~investment. ~~2017~~Another ~~third~~important ~~quarter.~~financial ~~Organic~~performance ~~sales~~measure ~~increased~~that bywe ~~$236~~use ~~million,~~is oroperating ~~10%~~margin, tobecause ~~$2,494~~sales ~~million~~growth ~~for~~combined ~~the~~with ~~2018~~operating ~~third~~margin ~~quarter~~levels determine our operating income levels. ~~Organic~~Operating ~~sales~~Cash Flow ~~exclude~~is ~~$24~~also ~~million~~an ofimportant ~~sales~~financial ~~increases~~performance ~~related~~measure because Operating Cash Flow measures our ability to ~~business~~convert ~~acquisitions~~operating ~~and~~income ~~$34~~into ~~million~~cash ofafter ~~sales~~paying ~~declines~~income ~~related~~taxes toand ~~business~~interest ~~divestitures~~expenses and investing in working capital.

Sales Trends. For the ~~2018~~quarter ~~year-to-date~~ended ~~period~~March 29, 2019 (2019 first quarter), consolidated net sales of $72,~~473~~700 million increased by $~~474~~329 million, or 714%, compared to the ~~2017~~quarter ~~year-to-date~~ended ~~period~~March 30, 2018 (2018 first quarter). Organic sales increased by $~~452~~333 million, or 714%, to $72,~~407~~670 million for the ~~2018~~2019 ~~year-to-date~~first ~~period~~quarter. Organic sales exclude $6630 million of sales increases related to business acquisitions and $4434 million of sales declines related to business divestitures. See “Results of Operations”, including segment results below, for a further discussion of sales.

We derived approximately 66% of our ~~2017~~2018 sales from DoD customers; as a result, our sales are highly correlated to DoD budget levels. DoD budgets are a function of several factors and uncertainties beyond our control, including, but not limited to, changes in U.S. procurement policies, budget considerations, current and future economic conditions, presidential administration priorities, U.S. military engagements, changing national security and defense requirements, geo-political developments, actual fiscal year congressional appropriations for defense budgets, and sequestration and other DoD budget reductions. Any of these factors could result in a significant increase, decrease or redirection of DoD budgets and impact L3’s future results of operations, including our sales and operating income growth rates. Additionally, L3’s future results of operations will be affected by our ability to retain our existing business, including our revenue arrangements with DoD customers, and to successfully re-compete for existing business and compete for new business, which largely depends on: (1) our successful performance on existing contracts, (2) the effectiveness and innovation of our technologies and research and development activities, (3) our ability to offer better program performance than our competitors at an affordable cost and (4) our ability to retain our employees and hire new ones, particularly those employees who have U.S. Government security clearances and those with clearances of top-secret and above. We expect our ~~2018~~2019 consolidated and organic sales to increase by approximately 6% compared to ~~2017, including an organic sales increase of 5%~~2018. We expect organic sales to the DoD and U.S. Government to increase by approximately 5% and organic international sales to increase by approximately 17% . We expect organic commercial sales to increase by approximately 11% primarily for commercial aviation products.

Operating Income and Margin Trends. For the ~~2018~~2019 ~~third~~first quarter, our consolidated operating income was $~~272~~293 million, and our consolidated operating margin was 10.89%. Our consolidated operating income and consolidated operating margin for the ~~2018~~2019 ~~third~~first quarter were impacted by $18 million of merger, acquisition and divestiture related expenses ofand ~~$9 million, which are further discussed below~~losses. The merger, acquisition and divestiture related expenses and losses are excluded from segment operating income because they are excluded by management for purposes of evaluating the operating performance of our business segments. Our segment operating income was $~~281~~311 million for the ~~2018~~2019 ~~third~~first quarter, an increase of 2124% from $~~232~~251 million for the ~~2017~~2018 ~~third~~first quarter, and our segment operating income as a percentage of sales (segment operating margin) was 11.25% for the ~~2018~~2019 ~~third~~first quarter, an increase of ~~110~~90 basis points from 10.16% for the ~~2017~~2018 ~~third~~first quarter. See “Results of Operations”, including segment results below, for a further discussion of operating margin. In addition, general and administrative expenses as a percentage of sales was 1514.71% for the ~~2018~~2019 ~~third~~first quarter, compared to 16.67% for the ~~2017~~2018 ~~third~~first quarter. ~~The decrease was primarily due to general and administrative expenses increasing at a slower rate than sales increased.~~

~~For~~Our ~~the~~effective ~~2018~~management ~~year~~of labor, material, subcontractor and other direct costs is an important element of cost control and favorable contract performance. We believe that proactively re-sizing our businesses to~~-date~~ ~~period~~their anticipated sales, combined with continuous cost improvement, will enable us to increase our ~~consolidated~~cost ~~operating~~competitiveness. ~~income~~While ~~was~~we ~~$844~~continue ~~million~~to undertake cost management actions, ~~and~~such as reducing our ~~consolidated~~indirect ~~operating~~costs, ~~margin~~curtailing ~~was~~pension ~~11.3%.~~benefits ~~Our~~for ~~consolidated~~salaried ~~operating~~employees, ~~income~~resizing ~~and~~select ~~consolidated~~business ~~operating~~units ~~margin~~and ~~for~~improving ~~the~~our ~~2018~~productivity ~~year-to-date~~and ~~period~~contract ~~were~~performance ~~impacted~~in byan ~~the~~effort ~~gain~~to onmaintain ~~sale~~or ofincrease ~~the~~operating ~~Crestview~~margin, &these ~~TCS~~efforts ~~Businesses~~may ofnot ~~$44~~be ~~million~~successful and ~~merger~~may ~~and~~be ~~acquisition~~partially ~~related~~or ~~expenses~~fully ofoffset $5by ~~million~~other cost increases. ~~Our~~Furthermore, ~~segment~~as ~~operating~~a ~~income~~U.S. ~~was~~Government ~~$805~~contractor, ~~million~~we ~~for~~do not retain the ~~2018~~benefit ~~year-to-date~~of ~~period~~all cost management actions, anparticularly ~~increase~~on ofcost-plus 6%type ~~from~~contracts ~~$763~~or ~~million~~on ~~for~~contracts ~~the~~where ~~2017~~we ~~year~~are the sole-~~to-date~~source ~~period,~~provider. ~~and~~Although we expect our 2019 annual consolidated and segment operating margin ~~was~~to ~~10.8%~~increase ~~for~~as ~~the~~compared ~~2018 year-~~to~~-date~~ ~~period~~2018, achanges ~~decrease~~in ofthe 10competitive ~~basis~~environment ~~points~~and ~~from~~DoD ~~10.9%~~procurement ~~for~~practices ~~the~~and ~~2017~~changes ~~year-to-date~~in ~~period.~~annual ~~See~~pension ~~“Results of Operations”~~expense, including ~~segment~~related ~~results~~assumptions ~~below~~such as the benefit obligation discount rates, ~~for~~among aother ~~further~~factors, ~~discussion~~could ofresult in lower operating margin. InFurthermore, ~~addition~~select business acquisitions and new business, ~~general~~including contract renewals and ~~administrative~~new ~~expenses~~contracts, ascould ahave ~~percentage~~lower offuture ~~sales~~operating ~~was~~margins ~~15.7%~~compared ~~for~~to ~~the~~our ~~2018~~operating margins on existing contracts and ~~2017~~could ~~year-to-date~~reduce ~~periods~~future operating margins.

~~Our~~Operating ~~effective~~Cash Flow ~~management of labor, material, subcontractor and other direct costs is an important element of cost control and favorable contract performance~~Trends. We ~~believe~~generated ~~that~~$174 ~~proactively~~million ~~re-sizing~~of ~~our~~Operating ~~businesses~~Cash toFlow ~~their~~during ~~anticipated~~the ~~sales,~~2019 ~~combined~~first ~~with continuous cost improvement~~quarter, will enable us to increase our cost competitiveness. While we continue to undertake cost management actions, such as reducing our indirect costs, curtailing pension benefits for salaried employees, resizing select business units and improving our productivity and contract performance in an ~~effort to maintain or even~~ increase ~~operating margin, these efforts may not be successful and may be partially or fully offset by other cost increases. Furthermore, as a U.S. Government contractor, we do not retain the benefit~~ of ~~all~~$209 ~~cost~~million ~~management~~compared ~~actions,~~with ~~particularly~~$35 onmillion ~~cost-plus~~used ~~type~~during ~~contracts or on contracts where we are~~ the ~~sole-source~~2018 ~~provider~~first quarter. ~~Although~~The weincrease ~~expect~~in ~~our~~Operating ~~2018~~Cash ~~annual~~Flow ~~operating~~was ~~margin~~primarily todue ~~increase as compared~~ to ~~2017,~~higher ~~changes~~operating inincome ~~the competitive environment~~ and ~~DoD~~timing ~~procurement~~of ~~practices~~billings and ~~changes~~collections inacross ~~annual~~several ~~pension~~business ~~expense,~~areas ~~including related assumptions such as the benefit obligation discount rates, among other factors, could result~~ in ~~lower~~all ~~operating~~three ~~margin~~segments. ~~Furthermore, select~~

5437

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~~business~~Discontinued acquisitions and new business, including contract renewals and new contracts, could have lower future operating margins compared to our operating margins on existing contracts and could reduce future operating margins.Operations

~~Operating~~As ~~Cash Flow~~discussed ~~Trends. We~~in ~~generated~~Note ~~$342~~1 ~~million~~to ofour ~~Operating~~unaudited ~~Cash~~condensed ~~Flow~~consolidated ~~during~~financial ~~the~~statements, ~~2018~~on ~~year-to-date~~June ~~period~~29, a2018, ~~decrease~~we completed the sale of ~~$239~~the ~~million~~Vertex ~~compared~~Aerospace ~~with~~businesses. ~~$581~~The ~~million~~table ~~generated~~below ~~during~~presents the ~~2017~~statements ~~year-to-date~~of ~~period~~operations data for Vertex Aerospace. The ~~decrease~~amounts presented in ~~Operating~~discontinued ~~Cash~~operations ~~Flow~~include allocated interest expenses for debt not directly attributable or related to L3’s other operations. Interest expense was ~~primarily~~allocated ~~due~~in accordance with the accounting standards for discontinued operations and were based on the ratio of Vertex Aerospace’s net assets to ~~higher~~the ~~working~~sum ~~capital~~of: ~~requirements,~~(1) ~~primarily~~total ~~contract~~L3 consolidated net assets and ~~milestone~~(2) ~~payments~~L3 ~~for~~consolidated ~~aircraft~~total ~~procurements~~debt. ~~related~~See Note 4 to ~~U.S.~~the ~~and~~unaudited ~~foreign~~condensed ~~government~~consolidated ~~contracts~~financial statements for additional information.

Other Events



	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

Subsequent Event. 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, 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. The merger is expected to close in the middle of 2019, subject to customary closing conditions, including the receipt of regulatory approvals and approval by the shareholders of both L3 and Harris.

U.S. Tax Reform. The U.S. Government enacted the U.S. Tax Cuts and Jobs Act (U.S. Tax Reform) on December 22, 2017, which made significant changes to the U.S. tax system. Significant changes under U.S. Tax Reform included, among other things, the reduction of the U.S. corporate income tax rate from 35% to 21%, the implementation of a modified territorial tax system and the imposition of a one-time repatriation tax on deemed repatriated earnings and profits of U.S. owned foreign subsidiaries (Toll Charge). As a result, we recorded an estimated tax benefit (Preliminary Net Tax Benefit) of $79 million from U.S. Tax Reform in our consolidated financial statements for the year ended December 31, 2017. In accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), we increased the Preliminary Net Tax Benefit by $3 million during the 2018 third quarter and the 2018 year-to-date period. The adjusted Preliminary Net Tax Benefit of $82 million includes a $100 million estimated tax benefit related to the remeasurement of deferred taxes partially offset by an estimated tax provision of $18 million related to the Toll Charge. SAB 118 allows for a measurement period of up to one year after the enactment date of U.S. Tax Reform to finalize the recording of the related tax impacts. As such, the Preliminary Net Tax Benefit ultimately recorded may differ in the future due principally to changes to the interpretations of U.S. Tax Reform and legislative action to clarify the interpretation of U.S. Tax Reform. Additionally, we are still evaluating the Global Intangible Low-Taxed Income (GILTI) provisions enacted under U.S. Tax Reform, and the associated election to record its effects as a period cost or as a component of deferred taxes.

Discontinued Operations. As discussed in Note 1 to our unaudited condensed consolidated financial statements, on June 29, 2018, we completed the sale of the Vertex Aerospace business. 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) L3 consolidated total net assets and (2) L3 consolidated total debt. See Note 5 to the unaudited condensed consolidated financial statements for additional information.

	Third Quarter Ended					Year-to-Date Ended
	September 28, 2018		September 29, 2017			September 28, 2018			September 29, 2017
	(in millions)
Net sales	$	—	$	357		$	597		$	1,060
Operating costs and expenses (1)	—		(524		)	(561		)	(1,191		)
Operating (loss) income from discontinued operations	—		(167		)	36			(131		)
Interest expense allocated to discontinued operations	—		(1		)	(1		)	(1		)
Gain on sale of businesses	—		—			237			—
(Loss) income from discontinued operations before income taxes	—		(168		)	272			(132		)
Income tax benefit (expense)	—		47			(66		)	34
(Loss) income from discontinued operations, net of income taxes	$	—	$	(121	)	$	206		$	(98	)

__________________

(1) We recognized $3 million and $1 million of trailing expenses related to the sale of National Security Solutions for the year-to-date periods ended September 28, 2018 and September 29, 2017, respectively.

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Business Acquisitions and Divestitures

~~All~~Our ofAnnual ~~our~~Report on Form 10-K summarizes the business acquisitions ~~are~~and ~~included~~divestitures inthat ~~our~~we ~~consolidated~~completed ~~results~~during ofthe ~~operations~~three ~~from~~years ~~their~~ended ~~dates~~December of31, ~~acquisition~~2018. ~~The~~See ~~table~~Note ~~below~~4 ~~summarizes~~to ~~the~~our ~~acquisitions~~unaudited ~~that~~condensed weconsolidated ~~have~~financial ~~completed~~statements ~~during~~for ~~the~~additional ~~2018~~information ~~year-to-date~~regarding ~~period~~our acquisitions and divestitures.

Business Acquisitions	Date Acquired	Segment	Purchase Price(1)
			(in millions)
2018
Latitude Engineering, LLC	June 28, 2018	Electronic Systems	$	15	(2)
Applied Defense Solutions, Inc.	June 29, 2018	ISRS	53		(3)
Azimuth Security and Linchpin Labs	August 31, 2018	ISRS	200		(4)
C.K. Industrial Engineers Limited	September 18, 2018	Electronic Systems	24		(5)
ASV Global, L.L.C.	September 20, 2018	C&NS	94
Total 2018			$	386

__________________

(1) The purchase price represents the contractual consideration for the acquired business, excluding adjustments for net cash acquired and acquisition transaction costs.

(2) Excludes additional purchase price, not to exceed $20 million, $15 million of which is based on Latitude Engineering’s post-acquisition financial performance for the four-year period ending December 31, 2021, and the remaining $5 million is based on certain post-acquisition milestone achievements through December 31, 2020.

(3) The purchase price net of cash acquired of approximately $1 million was $52 million.

(4) The purchase price net of cash acquired of approximately $15 million was $185 million and excludes additional purchase price, not to exceed AUD $43 million (approximately $31 million), payable in L3 common stock, based on the combined company’s post-acquisition sales for each of the 12-month periods ending June 30, 2019, 2020, and 2021.

(5) The purchase price net of cash acquired of approximately $4 million was $20 million.

See Note 5 to our unaudited condensed consolidated financial statements for additional information regarding our acquisitions and divestitures.

Results of Operations

The following information should be read in conjunction with our unaudited condensed consolidated financial statements contained in this quarterly report. Our results of operations for the periods presented are affected by our business acquisitions and divestitures.

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Consolidated Results of Operations

The table below provides L3’s selected financial data, excluding discontinued operations, for the ~~2018~~2019 ~~third~~first quarter compared with the ~~2017 third quarter and the~~ 2018 ~~year-to-date~~first ~~period compared with the 2017 year-to-date period~~quarter.

	Third Quarter Ended								Year-to-Date Ended
	First Quarter Ended
(in millions, except per share data)	~~September~~March 2829, ~~2018~~2019			~~September~~March 2930, ~~2017~~2018			Increase/(decrease)		~~September 28, 2018~~			~~September 29, 2017~~			~~Increase/(decrease)~~
Net sales (1)	$	2,519		$	2,293		10	%	$	7,473		$	6,999		7	%
Net sales	$	2,700		$	2,371		14	%
Operating income (1)	272			232			17	%	844			763			11	%
Operating income	293			251			17	%
Loss (gain) on sale of the Crestview & TCS Businesses	4			—			nm		(44		)	—			nm
Plus: merger, acquisition and divestiture related expenses and losses	18			—			nm
Merger, acquisition and divestiture related expenses	5			—			nm		5			—			nm
Segment operating income	$	311		$	251		24	%
Segment operating income (2)	$	281		$	232		21	%	$	805		$	763		6	%
Operating margin	10.9		%	10.6		%	30	bpts
Operating margin	10.8		%	10.1		%	70	bpts	11.3		%	10.9		%	40	bpts
Segment operating margin	11.5		%	10.6		%	90	bpts
Segment operating margin	11.2		%	10.1		%	110	bpts	10.8		%	10.9		%	(10)	bpts
Interest expense	$	(37	)	$	(41	)	(10)	%
Interest expense and other	$	(25	)	$	(40	)	(38)	%	$	(96	)	$	(118	)	(19)	%
Interest income and other	$	4		$	6		nm
Debt retirement charges	$	(21	)	$	—		nm		$	(69	)	$	—		nm
Effective income tax rate (1)	14.2		%	11.1		%	nm
Effective income tax rate	8.0		%	24.0		%	nm		13.3		%	22.8		%	nm
Net income from continuing operations attributable to L3	$	217		$	187		16	%
Net income from continuing operations attributable to L3	$	202		$	143		41	%	$	574		$	486		18	%
Adjusted net income from continuing operations attributable to L3 (2)	$	231		$	187		24	%
Diluted earnings per share from continuing operations	$	2.5471		$	12.7934		4216	%	$	~~7.21~~		$	~~6.10~~		18	%
Adjusted diluted earnings per share from continuing operations (3)	$	2.85		$	1.79		59	%	$	7.64		$	6.10		25	%
Adjusted diluted earnings per share from continuing operations (2)	$	2.89		$	2.34		24	%
Diluted weighted average common shares outstanding	7980.40			79.89			~~(1)~~—	%	~~79.6~~			~~79.6~~			—	%
__________________
(1)___The adoption of ASC 606 resulted in net increases to sales and operating income of approximately $24 million and $18 million, respectively, for the 2018 third quarter and resulted in net increases to sales and operating income of approximately $145 million and $36 million, respectively, for the 2018 year-to-date period. Under ASC 606, sales from certain contracts previously accounted for under the units-of-delivery method are recognized earlier in the performance period as costs are incurred as opposed to when the units are delivered under ASC 605. See Note 3 to our unaudited condensed consolidated financial statements for additional information on the impact by segment.
(1)___The effective income tax rate corresponding to adjusted diluted EPS is 14.7% for the 2019 first quarter.
(2)___Results for the 2017 year-to-date period include the sale of the company's property in San Carlos, California, which resulted in a pre-tax gain of $42 million ($26 million after-tax or $0.33 per share) and $64 million of cash proceeds.
(2)___Income from continuing operations for the 2019 first quarter included merger, acquisition and divestiture related expenses and losses of $18 million ($14 million after income taxes), or $0.18 per diluted share. Excluding these items, adjusted net income from continuing operations attributable to L3 was $231 million, and adjusted diluted EPS from continuing operations was $2.89 for the 2019 first quarter. We believe that the merger, acquisition and divestiture related expenses and losses affect the comparability of the results of operations. We also believe that disclosing net income and diluted EPS excluding these items is useful to investors as it allows investors to more easily compare results. However, this non-GAAP financial measure may not be defined or calculated by other companies in the same manner.
(3)___For the 2018 third quarter, adjusted diluted EPS from continuing operations represents diluted EPS from continuing operations excluding: (i) a debt retirement charge of $0.21 per diluted share and (ii) merger, acquisition and divestiture related expenses of $0.10 per diluted share. For the 2018 year-to-date period, adjusted diluted EPS from continuing operations represents diluted EPS from continuing operations excluding: (i) the $0.29 gain related to the sale of the company's Crestview & TCS Businesses, (ii) $0.06 of merger and acquisition related expenses and (iii) $0.66 of debt retirement charges. Adjusted diluted EPS from continuing operations is not calculated in accordance with U.S. GAAP. We believe that the gain relating to the Crestview & TCS Businesses divestiture, merger and acquisition related expenses and the debt retirement charge affect the comparability of the results of operations and that disclosing diluted EPS from continuing operations excluding these items is useful to investors as it allows investors to more easily compare the 2018 results to the 2017 results. However, this non- GAAP financial measure may not be defined or calculated by other companies in the same manner.
nm - not meaningful
nm - not meaningful

Net Sales: For the ~~2018~~2019 ~~third~~first quarter, consolidated net sales of $2,~~519~~700 million increased $~~226~~329 million, or 1014%, compared to the ~~2017~~2018 ~~third~~first quarter. Organic sales increased by $~~236~~333 million, or 1014%, to $2,~~494~~670 million for the ~~2018~~2019 ~~third~~first quarter. Organic sales exclude $2430 million of sales increases related to business acquisitions and $34 million of sales declines related to business divestitures. For the ~~2018~~2019 ~~third~~first quarter, organic sales to the U.S. Government increased $~~108~~287 million, or 718%, to $1,~~686~~916 million, and organic sales to international and commercial customers increased $~~128~~46 million, or 196%, to $~~808~~754 million.

Sales from products increased by $~~152~~286 million to $1,~~736~~932 million for the ~~2018~~2019 ~~third~~first quarter, compared to $1,~~584~~646 million for the ~~2017~~2018 ~~third~~first quarter. Sales from products represented approximately 6972% of consolidated net sales for the ~~2018~~2019 ~~and~~first ~~2017~~quarter ~~third~~compared ~~quarters~~to 69% for the 2018 first quarter. The increase in sales from products iswas due to: (1) $44116 million for Surveillance & Strike Systems primarily due to ~~increased~~higher ~~deliveries~~volume related to procurement and ISR missionization of ~~airborne~~business ~~turret~~jet aircraft systems, ~~primarily~~for tothe ~~foreign~~U.S. ~~militaries~~Air Force (USAF) EC-37B Compass Call Recap aircraft, the Royal Australian Air Force (2RAAF) ~~$44~~MC-55A ~~million~~Peregrine ~~due~~aircraft toand ~~increased~~the ~~deliveries~~High ofAltitude ~~night~~Observatory ~~vision~~(HALO) ~~products~~aircraft for the U.S. Missile Defense Agency (MDA), (32) $4448 million ~~related~~for toReconnaissance ~~ISR~~Mission Systems ~~primarily~~ due to ~~higher~~procurement ~~volume~~and modification related to ~~missionization~~special ofmission ~~small ISR~~ aircraft ~~systems~~ for the U.S. ~~Air~~Government, ~~Force~~ (~~USAF~~3) ~~EC-37B~~$37 ~~aircraft~~million ~~and~~for aBroadband ~~foreign~~Communications ~~military~~due ~~customer,~~to ~~and~~higher ~~the~~production ~~Presidential~~volume ~~Aircraft~~for ~~Recap~~Unmanned ~~program~~Aerial Vehicle (UAV) communication systems for the DoD, (4) $3336 million for Integrated Land Systems primarily due to increased deliveries ~~for~~of ~~airport~~night ~~screening~~vision ~~devices~~products, (5) $34 million due to increased deliveries of airborne turret systems to U.S. and foreign militaries, (6) $29 million ~~increase~~primarily atfor ~~Maritime~~Communications ~~Sensor~~& ~~Systems~~Microwave Products due to increased ~~volume~~deliveries of mobile and ground-based SATCOM systems for ~~new~~the ~~commercial~~U.S. ~~contracts,~~Special Operations Command (6USSOCOM) and (7) $1525 million for Precision Engagement Systems due to new awards on classified programs and increased ~~deliveries~~volume offor ~~electronic~~fuzing ~~warfare~~and ~~countermeasures~~ordnance and guidance systems products primarily to the U.S. Army. These increases were partially offset by: (1) $20 million due to business acquisitions, net of divestitures, (72) $158 million for Commercial Aviation Solutions primarily due to ~~higher~~lower volume onfor commercial flight simulators ~~and~~as contracts near completion, (83) $107 million atfor ~~Precision~~Intelligence ~~Engagement~~& Mission Systems primarily due to ~~increased~~lower deliveries ~~and~~of ~~volume~~electronic onwarfare ~~fuzing~~countermeasures ~~and~~products ~~ordnance~~as contracts near completion and ~~guidance~~(4) ~~systems~~$4 ~~products~~million for Defense Training Solutions primarily due to the loss of the USAF C-17 contract recompetition last year and our incumbent contract ended in November 2018.

57Sales from services increased by $43 million to $768 million for the 2019 first quarter, compared to $725 million for the 2018 first quarter. Sales from services represented approximately 28% of consolidated net sales for the 2019 first quarter compared

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to 31% for the ~~U.S.~~2018 ~~Army~~first quarter. The ~~increases~~increase ~~were~~in ~~partially~~sales ~~offset~~for byservices was due to: (1) $5016 million ofdue ~~lower~~to ~~production~~business ~~volume~~acquisitions, ~~for~~net ~~Unmanned~~of ~~Aerial~~divestitures, ~~Vehicle~~ (~~UAV~~2) ~~communication~~$14 ~~systems~~million due to higher volume for ~~the~~mission ~~U.S.~~management ~~DoD~~systems, (23) $247 million for Advanced C2ISR Systems due to ~~business~~increased ~~acquisitions,~~task ~~net~~order ofvolume ~~divestitures~~on U.S. Government contracts and (34) $86 million ~~due to lower volume~~ for ~~Aircraft~~support ~~Systems~~services ~~related~~on toairport ~~international~~screening ~~aircraft~~devices. ~~modifications~~See ~~primarily~~reportable ~~the~~segment ~~Australian~~results ~~Defence~~below ~~Force~~for ~~C-27J~~additional ~~aircraft~~detail.

Cost of Sales: Cost of sales from ~~services~~products increased by $74251 million to $~~783~~1,442 million for the ~~2018~~2019 ~~third~~first quarter, compared to $~~709~~1,191 million for the ~~2017~~2018 ~~third~~first quarter. ~~Sales~~The ~~from~~increase ~~services~~was ~~represented~~primarily ~~approximately~~due ~~31%~~to ofhigher ~~consolidated~~products ~~net~~cost of sales ~~for~~of ~~the~~$120 ~~2018~~million ~~and~~at ~~2017~~Surveillance ~~third~~& ~~quarters.~~Strike ~~The~~Systems, ~~increase~~$45 inmillion ~~sales~~at ~~for~~Reconnaissance ~~services~~Mission isSystems, ~~due~~$30 ~~to:~~million ~~(1)~~at Integrated Maritime Systems, $3026 million at ~~Broadband~~Integrated ~~Communication~~Land Systems, ~~primarily~~$25 ~~due~~million toat ~~operational~~Tactical ~~and~~Mission ~~sustainment~~Systems ~~services~~and on$25 ~~U.S.~~million ~~Army~~at ~~satellite~~Communications ~~communication~~& ~~systems,~~Microwave ~~(2)~~Products. ~~$14~~These ~~million~~increases ~~due~~were topartially ~~business~~offset ~~acquisitions,~~by ~~net~~lower cost of ~~divestitures,~~sales ~~(3)~~from products of $1210 million due to ~~higher~~business ~~volume~~acquisitions, ~~related~~net toof ~~commercial training and simulation~~divestitures, ~~(4)~~ $127 million ~~for~~at ~~support~~Special ~~services~~Programs ~~on airport screening devices~~ and ~~(5)~~ $63 million ~~due~~at toIntelligence ~~higher~~& ~~volume~~Mission ~~for~~Systems. ~~mission~~These ~~management~~changes ~~systems.~~are ~~See~~consistent ~~reportable~~with ~~segment~~the ~~results~~change ~~below~~in ~~for~~sales ~~additional~~from ~~detail~~products described above.

Cost of ~~Sales: Cost of~~ sales from ~~products~~services increased by $~~135~~33 million to $~~1,324~~565 million for the ~~2018~~2019 ~~third~~first quarter, compared to $~~1,189~~532 million for the ~~2017~~2018 ~~third~~first quarter. The increase was primarily due to higher ~~products~~services cost of sales of $8538 million at ~~Warrior~~Broadband Communication Systems, $5927 million atdue ~~Security~~to &business ~~Detection~~acquisitions, ~~Systems~~net of divestitures and $4611 million at ~~ISR~~Reconnaissance Mission Systems. These increases were partially offset by lower cost of sales from services of $3421 million ~~primarily~~at Integrated Maritime Systems, $12 million at ~~Advanced~~Special ~~Communications~~Programs, and $2110 million ~~due~~at toDefense ~~business~~Training ~~acquisitions,~~Solutions. ~~net~~These ofchanges ~~divestitures,~~are consistent with the change in sales from ~~products~~services described above.

~~Cost~~Operating ofincome ~~sales~~and ~~from~~operating ~~services~~margin: Consolidated operating income for the 2019 first quarter increased by $2642 million, or 17%, compared to ~~$518~~the ~~million~~2018 first quarter. Segment operating income for the ~~2018~~2019 ~~third~~first quarter, ~~compared~~increased toby $~~492~~60 million, ~~for~~or 24%, compared to the ~~2017~~2018 ~~third~~first quarter. ~~The~~Segment ~~increase~~operating ~~was~~margin ~~primarily~~increased ~~due~~by 90 basis points to ~~higher~~11.5% ~~services~~for ~~cost~~the of2019 ~~sales~~first ofquarter, ~~$52~~compared ~~million~~to 10.6% for the 2018 first quarter. Favorable contract performance primarily at ~~Space~~Communications &and ~~Power~~Networked Systems (C&NS), ~~$30~~lower ~~million~~severance atand ~~Advanced~~general ~~Communications~~& administrative (G&A) expenses at C&NS and $9Electronic ~~million~~Systems ~~due~~segments toand ~~business~~lower ~~acquisitions,~~pension ~~net~~expense ofacross ~~divestitures.~~all ~~These~~three ~~increases~~segments were partially offset by ~~lower~~sales ~~cost~~mix ofchanges ~~sales~~at ~~from~~Electronic ~~services~~Systems, ofprimarily ~~$65~~Commercial ~~million~~Aviation atSolutions. ~~Broadband~~See ~~Communication~~the ~~Systems.~~reportable ~~These~~segment ~~changes~~results ~~are consistent~~below ~~with~~for ~~the~~additional ~~change~~discussion inof sales ~~from~~and ~~services~~operating ~~described~~margin ~~above~~trends.

~~Net~~Interest ~~Sales:~~expense ~~For~~and ~~the~~other: Interest ~~2018~~expense ~~year-to-date~~and ~~period,~~other ~~consolidated~~for ~~net sales of $7,473 million increased $474 million, or 7%, compared to~~ the ~~2017~~2019 ~~year-to-date~~first ~~period.~~quarter ~~Organic~~decreased ~~sales increased~~ by $~~452~~2 million, orprimarily ~~7%,~~due to ~~$7,407~~lower ~~million~~average ~~for~~interest ~~the~~rates ~~2018~~on ~~year-to-date~~outstanding ~~period~~debt. Organic sales exclude $66 million of sales increases related to business acquisitions and $44 million of sales declines related to business divestitures. For the 2018 year-to-date period, organic sales to the U.S. Government increased $283 million, or 6%, to $5,136 million, and organic sales to international and commercial customers increased $169 million, or 8%, to $2,271 million.

~~Sales~~Effective ~~from~~income ~~products~~tax ~~increased~~rate: byThe ~~$300~~effective ~~million~~tax torate ~~$5,168 million~~ for the ~~2018~~2019 ~~year-to-date~~first ~~period,~~quarter ~~compared~~increased to ~~$4,868 million for the 2017 year-to-date period~~14. ~~Sales from products represented approximately 69~~2% ~~of consolidated net sales for the 2018 year-to-date period~~ compared to 7011.1% for the ~~2017~~2018 ~~year-to-date~~first ~~period~~quarter. The increase inwas ~~sales~~driven ~~from~~by ~~products is due to: (1) the procurement and missionization of USAF EC-37B aircraft, higher volume related to missionization of small ISR aircraft for~~ a ~~foreign~~reduction ~~military~~in ~~customer~~tax ~~and~~benefits ~~the~~from ~~Presidential~~equity ~~Aircraft~~compensation Recap Program, (2) increased deliveries of night vision products, precision engagement systems, electronic warfare countermeasures, airborne turret systems and airport screening devices, and (3) higher volume of space products and systems and compact towed arrays. These increases were partially offset by ~~lower~~an ~~volume~~increased ~~for~~tax ~~UAV~~benefit ~~communication~~on ~~systems.~~export ~~See reportable segment results below for additional detail~~sales.

~~Sales~~Net income from ~~services~~continuing ~~increased~~operations byattributable ~~$174 million~~ to ~~$2,305~~L3 ~~million~~and ~~for~~diluted ~~the~~EPS ~~2018~~from ~~year-to-date~~continuing ~~period,~~operations: ~~compared~~Net toincome ~~$2,131~~from ~~million~~continuing ~~for~~operations ~~the~~attributable ~~2017 year-~~to~~-date~~ ~~period.~~L3 ~~Sales from services represented approximately 31% of consolidated net sales~~ for the ~~2018~~2019 ~~year-to-date~~first ~~period~~quarter ~~compared~~increased ~~to 30~~16% ~~for the 2017 year-~~to~~-date~~ ~~period. The increase in sales for services is due to: (1)~~ $70217 million ~~at Broadband Communication Systems primarily due to operational and sustainment services on U.S. Army satellite communication systems~~, ~~(2)~~compared ~~$38 million due~~ to ~~business acquisitions, net of divestitures, (3)~~ $24187 million ~~due~~for tothe ~~higher~~2018 ~~volume~~first ~~for~~quarter. ~~commercial~~Diluted ~~and~~EPS ~~military~~from ~~training~~continuing ~~and~~operations ~~simulation,~~was ~~(4)~~ $212.71 ~~million~~ for ~~support~~the ~~services~~2019 onfirst ~~airport~~quarter, ~~screening~~compared ~~devices~~to ~~and (5)~~ $212.34 ~~million increase due to higher volume~~ for ~~mission~~the ~~management~~2018 ~~systems.~~first ~~See reportable segment results below for additional detail~~quarter.

~~Cost~~Diluted ofweighted ~~Sales:~~average ~~Cost~~common ofshares ~~sales~~outstanding: ~~from~~Diluted ~~products~~weighted ~~increased~~average bycommon ~~$234~~shares ~~million~~outstanding ~~to $3,864 million~~ for the ~~2018~~2019 ~~year-to-date~~first ~~period,~~quarter increased slightly compared to ~~$3,630 million for~~ the ~~2017~~2018 ~~year-to-date~~first ~~period. The increase was primarily due to higher products cost of sales of $125 million at ISR Systems~~quarter, $90 million at Warrior Systems, $90 million at Security & Detection Systems and $83 million at Space & Power Systems. These increases were partially offset by $70 million at Aircraft Systems, $60 million at Broadband Communication Systems and $24 million due to ~~business acquisitions, net of divestitures. These~~ changes ~~are~~in ~~consistent with~~ the ~~change~~dilutive inimpact ~~sales~~of ~~from~~common ~~products~~share ~~described above~~equivalents.

Cost of sales from services increased by $119 million to $1,628 million for the 2018 year-to-date period, compared to $1,509 million for the 2017 year-to-date period. The increase was primarily due to higher services cost of sales of $37 million at 40

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MAS, $30 million due to business acquisitions, net of divestitures, $18 million at Link Training & Simulation, $18 million at Space & Power Systems, $17 million at Advanced Communications, $17 million at Advanced Programs and $13 million at Commercial Aviation Solutions. These increases were partially offset by lower cost of sales from services of $31 million at Broadband Communication Systems. These changes are consistent with the change in sales from services described above.

Operating income and operating margin: Consolidated operating income for the 2018 third quarter increased $40 million, or 17%, compared to the 2017 third quarter. Segment operating income increased by $49 million, or 21%, compared to the 2017 third quarter. Segment operating margin increased by 110 basis points to 11.2% for the 2018 third quarter, compared to 10.1% for the 2017 third quarter. Lower severance and restructuring costs, at C&NS and ISRS, and lower pension costs, primarily at ISRS, were partially offset by unfavorable contract performance adjustments, primarily at C&NS.

Consolidated operating income for the 2018 year-to-date period increased by $81 million, or 11%, compared to the 2017 year-to-date period. Segment operating income for the 2018 year-to-date period increased by $42 million, or 6%, compared to the 2017 year-to-date period. Segment operating margin decreased by 10 basis points to 10.8% for the 2018 year-to-date period from 10.9% for the 2017 year-to-date period. The 2017 year-to-date period included a pre-tax gain of $42 million ($26 million after-tax, or $0.33 per share) on the sale of the company’s property in San Carlos, California in connection with the consolidation of the EDD/ETI Traveling Wave Tube (TWT) businesses in the C&NS segment. Excluding this gain, segment operating margin would have been 10.3% for the 2017 year-to-date period. Lower severance and restructuring costs, primarily at C&NS, were partially offset by higher research and development costs, primarily at ISRS. See the reportable segment results below for additional discussion of sales and operating margin trends.

Effective income tax rate: The effective tax rate for the 2018 third quarter decreased to 8.0% compared to 24.0% for the 2017 third quarter, due to the reversal of previously accrued amounts related to various U.S. Federal, foreign and state tax matters, tax benefits from U.S. Tax Reform and stock-based compensation expense.

The effective tax rate for the 2018 year-to-date period decreased to 13.3% compared to 22.8% for the 2017 year-to-date period, due to tax benefits of U.S. Tax Reform and stock-based compensation expense, partially offset by the related income tax impact of the sale of the Crestview & TCS Businesses.

Net income from continuing operations attributable to L3 and diluted EPS from continuing operations: Net income from continuing operations attributable to L3 for the 2018 third quarter increased 41% to $202 million, compared to $143 million for the 2017 third quarter. Diluted EPS from continuing operations was $2.54 for the 2018 third quarter, compared to $1.79 for the 2017 third quarter. The 2018 third quarter includes: (1) a debt retirement charge of $0.21 per diluted share, and (2) merger, acquisition and divestiture related expenses of $0.10 per diluted share.

Net income from continuing operations attributable to L3 for the 2018 year-to-date period increased 18% to $574 million, compared to $486 million for the 2017 year-to-date period. Diluted EPS from continuing operations was $7.21 for the 2018 year-to-date period, compared to $6.10 for the 2017 year-to-date period. The 2018 year-to-date period includes: (1) merger, acquisition and divestiture related expenses of $0.23 per diluted share and (2) a debt retirement charge of $0.66 per diluted share. The 2017 year-to-date period includes a gain of $0.33 per diluted share in connection with the sale of the company's property in San Carlos, California.

Diluted weighted average common shares outstanding: Diluted weighted average common shares outstanding for the 2018 third quarter declined 1% compared to the 2017 third quarter due to changes in the dilutive impact of common share equivalents.

Diluted weighted average common shares outstanding for the 2018 year-to-date period remained unchanged compared to the 2017 year-to-date period.

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Reportable Segment Results of Operations

The table below presents selected data by reportable segment reconciled to consolidated totals. The results of operations of the Vertex Aerospace business are classified as discontinued operations for all periods presented. See Note 22 to our unaudited condensed consolidated financial statements for additional reportable segment data.

	Third Quarter Ended						Year-to-Date Ended
	First Quarter Ended
	September 28, 2018			September 29, 2017			September 28, 2018			September 29, 2017
	March 29, 2019			March 30, 2018
	(dollars in millions)
Net sales: (1)
ISRS	$	1,~~096~~253		$	~~963~~1,016		$	~~3,221~~		$	~~2,924~~
C&NS	~~734~~785			~~752~~707			~~2,243~~			~~2,271~~
Electronic Systems	~~689~~662			~~578~~648			~~2,009~~			~~1,804~~
Consolidated net sales	$	2,~~519~~700		$	2,~~293~~371		$	~~7,473~~		$	~~6,999~~
Operating income:
ISRS	$	~~121~~130		$	7393		$	~~321~~		$	~~256~~
C&NS	6984			8164			~~208~~			~~277~~
Electronic Systems	9197			7894			~~276~~			~~230~~
Total segment operating income	~~281~~311			~~232~~251			~~805~~			~~763~~
(Loss) gain on sale of the Crestview & TCS Businesses	(4		)	—			44			—
Merger, acquisition and divestiture related expenses and losses	(18		)	—
Merger, acquisition and divestiture related expenses	(5		)	—			(5		)	—
Consolidated operating income	$	293		$	251
Consolidated operating income	$	272		$	232		$	844		$	763
Operating margin:
Operating margin:
ISRS	10.4		%	9.2		%
ISRS	11.0		%	7.6		%	10.0		%	8.8		%
C&NS	10.7		%	9.1		%
C&NS	9.4		%	10.8		%	9.3		%	12.2		%
Electronic Systems	14.7		%	14.5		%
Electronic Systems	13.2		%	13.5		%	13.7		%	12.7		%
Total segment operating margin	11.5		%	10.6		%
Total segment operating margin	11.2		%	10.1		%	10.8		%	10.9		%
Merger, acquisition and divestiture related expenses and losses	(0.6		)%	—		%
(Loss) gain on sale of the Crestview & TCS Businesses	(0.2		)%	—			0.6		%	—
Consolidated operating margin	10.9		%	10.6		%
Merger, acquisition and divestiture related expenses	(0.2		)%	—			(0.1		)%	—
Consolidated operating margin	10.8		%	10.1		%	11.3		%	10.9		%

__________________


⁽¹⁾	Net sales after intercompany eliminations.

ISRS

	Third Quarter Ended								Year-to-Date Ended
	First Quarter Ended
	September 28, 2018			September 29, 2017			Increase		September 28, 2018			September 29, 2017			Increase
	March 29, 2019			March 30, 2018			Increase
	(dollars in millions)
Net sales	$	1,~~096~~253		$	~~963~~1,016		1423	%	$	~~3,221~~		$	~~2,924~~		10	%
Operating income	$	~~121~~130		$	7393		6640	%	$	~~321~~		$	~~256~~		25	%
Operating margin	1110.04		%	79.62		%	~~340~~120	bpts	~~10.0~~		%	~~8.8~~		%	~~120~~	~~bpts~~

ISRS net sales for the ~~2018~~2019 ~~third~~first quarter increased by $~~133~~237 million, or 1423%, compared to the ~~2017~~2018 ~~third~~first quarter. Organic sales increased by $~~158~~252 million, or 1725%, compared to the ~~2017~~2018 ~~third~~first quarter. Organic sales exclude $919 million of sales increases related to business acquisitions and $34 million of sales declines related to business divestitures. Organic sales increased by: (1) $51135 million for ~~ISR~~Surveillance & Strike Systems primarily due to higher volume related to procurement and ISR missionization of business jet aircraft systems for the U.S. Air Force (USAF) EC-37B Compass Call Recap aircraft, ~~and~~the aRoyal ~~foreign~~Australian ~~military~~Air ~~customer,~~Force (RAAF) MC-55A Peregrine aircraft and the ~~Presidential~~High ~~Aircraft~~Altitude ~~Recap~~Observatory ~~program~~(HALO) aircraft for the U.S. Missile Defense Agency (MDA), (2) $4453 million for ~~Warrior~~Reconnaissance Mission Systems due to ~~increased~~procurement ~~deliveries~~and ofmodification ~~night~~related ~~vision~~to ~~products,~~special ~~primarily~~mission toaircraft ~~foreign~~for ~~military~~the ~~customers~~U.S. Government, (3) $4236 million for Integrated Land Systems primarily due to increased deliveries atof ~~Airborne~~night ~~Sensor~~vision ~~Systems,~~products ~~primarily~~ to ~~foreign~~an ~~militaries,~~international customer and (4) $1635 million ~~for Intelligence & Mission Systems primarily~~ due to increased deliveries of ~~electronic~~airborne ~~warfare~~turret ~~countermeasures~~systems ~~products~~ to U.S. and foreign militaries. ~~and~~These ~~(5)~~increases were partially offset by $57 million for ~~Space~~Intelligence & Mission Systems primarily due to ~~higher~~fewer ~~volume~~deliveries ~~for~~of ~~optical~~electronic ~~systems,~~warfare ~~and~~countermeasures ~~space~~products ~~electronics~~as ~~and~~contracts ~~infrared~~near ~~detection products~~completion.

ISRS operating income for the 2018 third quarter increased by $48 million, or 66%, compared to the 2017 third quarter. Operating margin increased by 340 basis points to 11.0%. Operating margin increased by: (1) 180 basis points due to higher volume primarily at Airborne Sensor Systems and Warrior Sensor Systems, (2) 100 basis points due to lower severance and restructuring 41

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~~costs~~ISRS ofoperating income for the 2019 first quarter increased by $1137 million, ~~(3)~~or ~~100~~40%, ~~basis~~compared ~~points~~to ~~due~~the to2018 ~~lower~~first ~~pension~~quarter. ~~costs~~Operating ~~and~~margin ~~(4)~~increased 50by 120 basis points ~~related~~ to ~~business divestitures~~10.4% ~~These~~driven ~~increases~~by ~~were~~higher ~~partially~~sales ~~offset~~volume, bylower 90pension ~~basis~~expense, ~~points~~which ~~due~~increased tooperating ~~higher~~margin ~~research~~by ~~and~~60 ~~development~~basis ~~expenses~~points ofand ~~$12~~the ~~million,~~impact ~~primarily~~from ~~related~~divestiture toof ~~imaging~~lower ~~and~~margin ~~space growth investments~~businesses.

ISRS net sales for the 2018 year-to-date period increased by $297 million, or 10%, compared to the 2017 year-to-date period. Organic sales increased by $317 million, or 11%, compared to the 2017 year-to-date period. Organic sales exclude $14 million of sales increases related to business acquisitions and $34 million of sales declines related to business divestitures. Organic sales increased by: (1) $126 million for ISR Systems primarily due to the procurement and ISR missionization of business jet aircraft systems for the USAF EC-37B aircraft and for a foreign military customer, and the Presidential Aircraft Recap Program, (2) $85 million primarily due to increased deliveries of airborne turret systems, primarily to foreign militaries, (3) $78 million for Warrior Systems primarily due to increased deliveries of night vision products to foreign military customers, (4) $31 million for Intelligence & Mission Systems primarily due to increased deliveries of electronic warfare countermeasures products primarily to foreign militaries, (5) $27 million for Space Systems primarily due to higher volume for optical systems, and space electronics and infrared detection products to the U.S. military and (6) $20 million for Advanced Programs primarily due to higher volume for mission management systems. These increases were partially offset by lower volume of: (1) $50 million for Aircraft Systems related to international aircraft modifications primarily the Australian Defence Force C-27J aircraft.

ISRS operating income for the 2018 year-to-date period increased by $65 million, or 25%, compared to the 2017 year-to-date period. Operating margin increased by 120 basis points to 10.0% due to trends similar to the 2018 third quarter. Higher research and development expenses for $25 million reduced operating margin by 70 basis points.

C&NS

	Third Quarter Ended									Year-to-Date Ended
	First Quarter Ended
	September 28, 2018			September 29, 2017			Decrease			September 28, 2018			September 29, 2017			Decrease
	March 29, 2019			March 30, 2018			Increase
	(dollars in millions)
Net sales	$	~~734~~785		$	~~752~~707		(211	)	%	$	~~2,243~~		$	~~2,271~~		(1	)	%
Operating income	$	6984		$	8164		~~(15~~31	)	%	$	~~208~~		$	~~277~~		~~(25~~	)	%
Operating margin	910.47		%	109.81		%	~~(140~~160	)	bpts	~~9.3~~		%	~~12.2~~		%	~~(290~~	)	~~bpts~~

C&NS net sales for the ~~2018~~2019 ~~third~~first quarter ~~decreased~~increased by $1878 million, or 211%, compared to the ~~2017~~2018 ~~third~~first quarter. Organic sales ~~decreased~~increased by $2272 million, or 310%, compared to the ~~2017~~2018 ~~third~~first quarter. Organic sales exclude $46 million of sales increases related to business acquisitions. ~~Sales~~Organic ~~decreased~~sales increased by: (1) $2046 million for Broadband ~~Communication~~Communications ~~Systems~~ due to ~~lower~~higher production volume for Unmanned Aerial Vehicle (UAV) communication systems for the U.S. ~~DoD,~~Department of Defense (2DoD) ~~$17 million for Advanced Communications primarily due to lower volume for the F-35 Joint Strike Fighter~~ and (32) $1426 million primarily for ~~Naval~~Communications ~~Power~~& ~~Systems~~Microwave ~~primarily~~Products due to ~~lower~~increased ~~volume~~deliveries onof ~~the~~mobile ~~landing craft, air cushion (LCAC) service life extension program~~ and ~~lower~~ground-based ~~volume~~SATCOM ~~for power conversion~~ systems for the U.S. ~~Navy.~~Special ~~These~~Operations ~~decreases~~Command ~~were partially offset by $29 million for Maritime Sensor Systems due to increased volume for new commercial contracts~~(USSOCOM).

C&NS operating income for the ~~2018~~2019 ~~third~~first quarter ~~decreased~~increased by $1220 million, or 1531%, compared to the ~~2017~~2018 ~~third~~first quarter. Operating margin ~~decreased~~increased by ~~140~~160 basis points to 910.47%. Operating margin ~~decreased~~increased by: ~~240~~(1) 90 basis points primarily due to ~~lower~~favorable ~~manufacturing yields and unfavorable~~ contract performance, ~~at the recently consolidated traveling wave tube~~ (~~TWT~~2) ~~businesses~~40 ~~in Space & Power Systems, and 120~~ basis points ~~primarily~~ due to lower ~~volume at Broadband Communication Systems. This decrease was partially offset by lower~~ severance and ~~restructuring~~G&A ~~costs~~expenses ofand ~~$16~~(3) ~~million~~30 ~~for~~basis ~~the~~points ~~2018~~due ~~third quarter compared~~ to ~~the~~lower ~~2017~~pension ~~third quarter, primarily at Space & Power Systems, which increased operating margin by 220 basis points~~expenses.

C&NS net sales for the 2018 year-to-date period decreased by $28 million, or 1%, compared to the 2017 year-to-date period. Organic sales decreased by $44 million, or 2%, compared to the 2017 third quarter. Organic sales exclude $16 million of sales increases related to business acquisitions. Sales decreased by: (1) $84 million for Broadband Communication Systems due to lower production volume for UAV communication systems for the U.S. DoD, (2) $20 million for Advanced Communications primarily due to fewer deliveries of manpack satellite communication systems to the U.S. Special Operations Command and (3) $16 million primarily for Naval Power Systems due to lower volume on the LCAC service life extension program and lower volume for power conversion systems for the U.S. Navy. These decreases were partially offset by $47 million for Maritime Sensor Systems primarily due to increased volume for new commercial contracts and $29 million for Space & Power Systems due to higher volume on power devices for commercial and military satellites.

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C&NS operating income for the 2018 year-to-date period decreased by $69 million, or 25%, compared to the 2017 year-to-date period. Operating margin decreased by 290 basis points to 9.3%. Operating margin decreased by: (1) 190 basis points due to a pre-tax gain of $42 million related to the sale of the company’s property in San Carlos, California in connection with the consolidation of the EDD/ETI TWT businesses in the 2017 year-to-date period that did not recur, (2) 150 basis points due to lower manufacturing yields and unfavorable contract performance primarily at the TWT business in Space & Power Systems and (3) 70 basis points primarily due to lower volume at Broadband Communication Systems and Naval Power Systems. These decreases were partially offset by 120 basis points due to lower severance and restructuring costs of $26 million.

Electronic Systems

	Third Quarter Ended									Year-to-Date Ended
	First Quarter Ended
	September 28, 2018			September 29, 2017			Increase/ (decrease)			September 28, 2018			September 29, 2017			Increase
	March 29, 2019			March 30, 2018			Increase
	(dollars in millions)
Net sales	$	~~689~~662		$	~~578~~648		192		%	$	~~2,009~~		$	~~1,804~~		11	%
Operating income	$	9197		$	7894		173		%	$	~~276~~		$	~~230~~		20	%
Operating margin	1314.27		%	1314.5		%	~~(30~~20	)	bpts	~~13.7~~		%	~~12.7~~		%	~~100~~	~~bpts~~

Electronic Systems net sales for the ~~2018~~2019 ~~third~~first quarter increased by $~~111~~14 million, or 192%, compared to the ~~2017~~2018 ~~third~~first quarter. Organic sales increased by $~~100~~9 million, or 171%, compared to the ~~2017~~2018 ~~third~~first quarter. Organic sales exclude $115 million of sales increases related to business acquisitions. Organic sales increased by: ~~(1)~~ $4529 million for ~~Security~~Precision &Engagement ~~Detection~~ Systems due to ~~increased~~new ~~deliveries~~awards ~~for~~on ~~airport~~classified ~~screening~~programs ~~devices~~and ~~primarily~~increased tovolume ~~the~~for ~~U.S.~~fuzing ~~Transportation~~and ~~Security~~ordnance ~~Administration~~and ~~(TSA)~~guidance ~~and~~systems ~~higher~~products ~~volume~~primarily onto anthe ~~industrial~~U.S. ~~automation~~Army. ~~control~~These ~~contract~~increases ~~for~~were apartially ~~commercial~~offset ~~customer,~~by: (21) $2815 million ~~primarily~~ for ~~Precision~~Defense ~~Engagement~~Training ~~Systems~~Solutions primarily due to ~~increased~~the ~~deliveries~~loss ~~and~~of ~~volume~~the onUSAF ~~fuzing~~C-17 ~~and~~contract ~~ordnance~~recompetition ~~and~~last ~~guidance~~year ~~systems~~as ~~products~~our ~~primarily~~incumbent tocontract ~~the~~ended ~~U.S.~~in ~~Army~~November 2018 and (32) $275 million for Commercial Aviation Solutions primarily due to ~~higher~~lower volume onfor commercial flight simulators as certain contracts near completion.

Electronic Systems operating income for the ~~2018~~2019 ~~third~~first quarter increased by $133 million, or 173%, compared to the ~~2017~~2018 ~~third~~first quarter. Operating margin ~~decreased~~increased by 3020 basis points to 1314.27%. Operating margin ~~decreased~~increased by: ~~(1)~~140 70 basis points ~~primarily~~ due to ~~product~~lower ~~sales mix changes at Security~~ G&A ~~Detection~~expenses ~~Systems~~ and ~~Link~~30 ~~Training & Simulation and (2) 60~~ basis points due to ~~acquisitions~~lower pension expense. These ~~decreases~~increases were ~~partially~~ offset by ~~100~~150 basis points ~~primarily~~ due to ~~favorable~~sales ~~contract~~mix ~~performance~~changes ~~across~~primarily ~~all~~at ~~business~~Commercial ~~areas~~Aviation Solutions.

Electronic Systems net sales for the 2018 year-to-date period increased by $205 million, or 11%, compared to the 2017 year-to-date period. Organic sales increased by $179 million, or 10%, compared to the 2017 year-to-date period. Organic sales exclude $36 million of sales increases related to business acquisitions and $10 million of sales declines related to business divestitures. Organic sales increased by: (1) $78 million for Precision Engagement Systems due to increased deliveries and volume on fuzing and ordnance and guidance systems products primarily to the U.S. Army, (2) $66 million for Security & Detection Systems due to increased deliveries for airport screening devices primarily to the U.S. TSA and higher volume on an industrial automation control contract for a commercial customer, (3) $21 million for Commercial Aviation Solutions due to higher volume on commercial flight simulators and (4) $14 million primarily for Link Training & Simulation due to higher volume for training systems to the U.S. Air Force and U.S. Navy.

Electronic Systems operating income for the 2018 year-to-date period increased by $46 million, or 20%, compared to the 2017 year-to-date period. Operating margin increased by 100 basis points to 13.7%. Operating margin increased by; (1) 150 basis points primarily due to favorable contract performance across all business areas, (2) 30 basis points due to higher margins related to acquisitions and (3) 10 basis points due to lower severance costs. These increases were partially offset by 90 basis points primarily due to higher research and technology development expenses.

Liquidity and Capital Resources

Anticipated Sources and Uses of Cash Flow

At ~~September~~March 2829, ~~2018~~2019, we had total cash and cash equivalents of $~~507~~1,108 million as compared to $~~662~~1,066 million at December 31, ~~2017~~2018. While no amounts of the cash and cash equivalents are considered restricted, $~~252~~309 million of cash was held by our foreign subsidiaries at ~~September~~March 2829, ~~2018~~2019. The repatriation of cash held in non-U.S. jurisdictions is subject to local capital requirements. Our primary sources of liquidity are cash flow generated from operations, cash on hand and our five-year unsecured $1 billion revolving credit facility (Credit Facility), which we entered into on October 31, 2016. At ~~September~~March 2829, ~~2018~~2019, we had the full availability ~~of our Credit Facility. We generated $342 million of net cash from operating activities from continuing operations.~~

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Weof ~~currently believe that~~ our ~~cash from operating activities generated during the year, together with our cash on hand and available borrowings under our~~ Credit Facility,. ~~will~~We begenerated ~~adequate~~$174 ~~for~~million ~~the foreseeable future to meet our anticipated uses~~ of net cash ~~flow,~~from ~~including~~operating ~~working~~activities ~~capital,~~from ~~capital~~continuing ~~expenditures,~~operations ~~defined~~during ~~benefit plan contributions, commitments, contingencies, research and development expenditures, select business acquisitions (depending on~~ the ~~size),~~2019 ~~program~~first ~~and other discretionary investments, interest payments, income tax payments, L3 dividends and share repurchases~~quarter.

We currently believe that our cash from operating activities generated during the year, together with our cash on hand and available borrowings under our Credit Facility, will be adequate for the foreseeable future to meet our anticipated uses of cash flow, including working capital, capital expenditures, defined benefit plan contributions, commitments, contingencies, research and development expenditures, select business acquisitions (depending on the size), program and other discretionary investments, interest payments, income tax payments and L3 dividends.

Balance Sheet

WeBilled ~~made~~receivables ~~certain~~decreased ~~presentation~~by ~~changes~~$115 tomillion ~~our consolidated balance sheet on January 1, 2018~~ to ~~comply~~$804 ~~with~~million ~~ASC~~at ~~606. The components of contracts in process as reported under ASC 605~~March 29, ~~which included unbilled contract receivables and inventoried contract costs~~2019, ~~have~~from ~~been~~$919 ~~reclassified~~million toat ~~contract~~December ~~assets and inventories~~31, ~~respectively~~2018, ~~after certain adjustments described below under ASC 606. The adoption of ASC 606 resulted in an increase in unbilled contract receivables (referred to as contract assets under ASC 606)~~ primarily ~~from~~due ~~converting contracts previously applying the units-of-delivery method~~ to the ~~cost-to-cost~~timing ~~method with a corresponding reduction in inventoried contract costs. The remainder~~ of ~~inventoried~~billings ~~contract~~and ~~costs,~~collections ~~primarily~~for ~~related~~Defense toTraining ~~inventories not controlled by our customers~~Solutions, ~~were~~Surveillance ~~reclassified~~& toStrike ~~inventories. Additionally~~Systems, ~~under~~Reconnaissance ~~ASC~~Mission ~~606~~Systems, weCommercial ~~capitalize~~Aviation ~~costs~~Solutions ~~to fulfill a contract (i.e., non-recurring costs for contract-related activities that do not transfer a good or service to the customer)~~ and ~~costs~~Communications to& ~~obtain~~Microwave ~~a contract (i.e.~~Products, ~~commissions~~partially ~~paid~~offset toby ~~third-party~~an ~~agents~~increase orin ~~representatives)~~Tactical toMission ~~prepaid~~Systems ~~expense~~ and ~~other~~$3 ~~current~~million ~~assets or other assets (non-current). We previously accounted~~ for ~~costs~~foreign tocurrency ~~fulfill~~translation ~~a contract either as inventoried contract costs or expensed them as incurred~~adjustments. Costs to obtain a contract were generally expensed as incurred. Advance payments and billings in excess of costs and deferred revenue, previously classified in other current liabilities, have been combined and are presented as contract liabilities.

~~Billed~~Contract ~~receivables~~assets increased by $~~177~~145 million to $~~900~~1,735 million at ~~September~~March 2829, ~~2018~~2019, from $~~723~~1,590 million at December 31, ~~2017~~2018, primarily due to ~~the~~sales ~~timing~~exceeding of billings ~~and collections~~ for ~~Warrior~~Reconnaissance ~~Sensor~~Mission Systems, ~~Security~~Integrated &Maritime ~~Detection~~ Systems, ~~and~~Surveillance ~~Airborne~~& ~~Sensor~~Strike Systems, ~~and~~Communications ~~$12~~& ~~million~~Microwave ~~from~~Products, ~~acquisitions~~Precision Engagement Systems, partially offset by $63 million for foreign currency translation adjustments.

~~Contract~~Inventories ~~assets~~ increased by $~~358~~17 million to $~~1,707~~896 million at ~~September~~March 2829, ~~2018,~~2019 from $~~1,349~~879 million at ~~January~~December 131, 2018, primarily due to ~~sales~~Commercial ~~exceeding~~Aviation ~~billings~~Solutions ~~for~~to ~~ISR~~support ~~Systems,~~customer Link Training & Simulation, Space & Power Systems, Aircraft Systems, Precision Engagement Systems, Maritime Sensor Systems and Naval Power Systems, partially offset by $6 million for foreign currency translation adjustmentsdemand.

~~Inventories~~The ~~increased~~increase byin ~~$522~~prepaid ~~million~~expenses toand ~~$911~~other ~~million~~current atassets ~~September 28,~~was ~~2018~~primarily ~~from~~due ~~$389~~to ~~million~~milestone atpayments ~~December~~(deposits) ~~31,~~to ~~2017,~~Original ~~primarily~~Equipment ~~due~~Manufacturer's to(OEM's) ~~reclassifications~~for aircraft procurements related to ~~the~~U.S. ~~adoption~~and offoreign ~~ASC~~government ~~606~~contracts at Reconnaissance Mission Systems and annual prepaid insurance payments.

The increase in ~~prepaid~~property, ~~expenses~~plant and ~~other~~equipment, ~~current~~net, ~~assets~~ was primarily due to ~~milestone~~capital ~~payments~~expenditures, ~~for~~partially ~~aircraft~~offset ~~procurements~~by ~~related~~depreciation ~~to U~~expense.~~S. and foreign government contracts at ISR Systems.~~

~~The~~Goodwill ~~increase~~increased inby ~~net~~$18 ~~property,~~million ~~plant and equipment (PP&E) was primarily due~~ to ~~capital expenditures and~~ $146,826 million ofat ~~acquired~~March 29, ~~PP&E~~2019 from ~~completed business acquisitions~~$6,808 ~~primarily~~million ~~ASV~~at ~~Global~~December ~~and~~31, ~~fair~~2018. ~~value~~The ~~purchase~~table ~~price~~below ~~adjustments~~presents ~~for~~the ~~Doss~~changes ~~Aviation,~~in ~~partially~~goodwill ~~offset~~ by ~~depreciation expense~~segment.

Goodwill increased by $219 million to $6,834 million at September 28, 2018 from $6,615 million at December 31, 2017. The table below presents the changes in goodwill by segment.



	ISRS		C&NS		Electronic Systems		Consolidated Total
	(in millions)
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

	ISRS			C&NS			Electronic Systems			Consolidated Total
	(in millions)
December 31, 2017	$	2,458		$	1,962		$	2,195		$	6,615
Business acquisitions (1)	150			65			30			245
Foreign currency translation adjustments	(9		)	(4		)	(13		)	(26		)
September 28, 2018	$	2,599		$	2,023		$	2,212		$	6,834

__________________

63The decrease in identifiable intangible assets was primarily due to $12 million of amortization expense.

The increase in other assets was primarily due to investments in nonconsolidated affiliates made during the 2019 first quarter.

The decrease in accounts payable and accrued expenses was primarily due to the timing of when invoices for purchases from third party vendors and subcontractors were received and payments were made.

Accrued employment costs decreased primarily due to the payment of annual management incentive bonuses during the 2018 first quarter and lower accrued salaries and wages due to the timing of payroll dates at the end of the 2018 first quarter, partially offset by higher accrued payroll taxes due to the timing of remittances.

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~~The~~Contract ~~increase~~liabilities inincreased ~~identifiable~~by ~~intangible~~$39 ~~assets~~million ~~was~~ primarily due to ~~$156~~advances ~~million~~received ofby ~~intangible assets recognized for the Azimuth Security and Linchpin Labs, ASV Global, Applied~~ Defense Training Solutions, ~~C.K. Industrial Engineers~~ and ~~Latitude~~Special ~~Engineering business acquisitions and purchase price allocation adjustments for Doss Aviation, partially offset by amortization expense and by $2 million for foreign currency translation adjustments~~Programs.

The increase in other ~~assets~~current ~~from~~liabilities ~~January~~is ~~1, 2018 was~~ primarily due to ~~investments~~the incurrent ~~nonconsolidated~~portion ~~affiliates~~of ~~made~~operating ~~during~~and finance leases recognized with the ~~2018~~adoption ~~year-to-date~~of ~~period~~ASC 842.

~~The~~Deferred ~~increase~~income intaxes ~~accounts~~increased ~~payable and accrued expenses was~~ primarily due to the ~~timing~~amortization of ~~when~~certain ~~invoices~~goodwill ~~for purchases from third party vendors~~ and ~~subcontractors~~other ~~were~~identifiable ~~received~~assets ~~and~~for ~~payments~~tax ~~were made~~purposes.

Deferred income taxes increased primarily due to: (1) the amortization of certain goodwill and other identifiable assets for tax purposes, (2) U.S. Tax Reform and (3) equity compensation.

Statement of Cash Flows

~~2018~~2019 ~~year-to-date~~first ~~period~~quarter Compared with the ~~2017~~2018 ~~year-to-date~~first ~~period~~quarter

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