L3harris Annual Report 2018

Plain-text annual report

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-K☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2018oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from toCommission file number 001-37975L3 TECHNOLOGIES, INC.(Exact name of registrant as specified in its charter)Delaware13-3937436(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.) 600 Third Avenue, New York, NY10016(Address of principal executive offices)(Zip Code)(212) 697-1111(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:Title of each class Name of each exchange on which registered:Common stock, par value $0.01 per share New York Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act:None.Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.☒ Yes o NoIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes ☒ NoIndicate 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 12months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes o NoIndicate 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 ofthis chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes o NoIndicate by check mark if disclosure of the delinquent filer pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. oIndicate 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. Seethe definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer ☒Accelerated filer oNon-accelerated filer oSmaller reporting company oEmerging growth company oIf 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 financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act. oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes ☒ NoThe aggregate market value of the registrant’s voting stock held by non-affiliates as of June 29, 2018, based upon the closing price of the stock on the New York Stock Exchange, wasapproximately $15.0 billion. For purposes of this calculation, the registrant has assumed that the directors and executive officers are affiliates.There were 79,368,345 shares of the registrant’s common stock with a par value of $0.01 outstanding as of the close of business on February 14, 2019.DOCUMENTS INCORPORATED BY REFERENCEThe information called for by Part III of this Form 10-K will be included in an amendment to this Form 10-K, which will be filed within 120 days after the registrant’s fiscal yearended December 31, 2018. Table of ContentsL3 TECHNOLOGIES, INC.ANNUAL REPORT ON FORM 10-KFor the Year Ended December 31, 2018TABLE OF CONTENTSPART I Item 1:Business1Item 1A:Risk Factors10Item 1B:Unresolved Staff Comments19Item 2:Properties20Item 3:Legal Proceedings20Item 4:Mine Safety Disclosures20PART II Item 5:Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities21Item 6:Selected Financial Data22Item 7:Management’s Discussion and Analysis of Financial Condition and Results of Operations23Item 7A:Quantitative and Qualitative Disclosures About Market Risk54Item 8:Financial Statements and Supplementary Data54Item 9:Changes in and Disagreements With Accountants on Accounting and Financial Disclosure54Item 9A:Controls and Procedures54Item 9B:Other Information55PART III Item 10:Directors, Executive Officers and Corporate Governance56Item 11:Executive Compensation56Item 12:Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters56Item 13:Certain Relationships and Related Transactions, and Director Independence56Item 14:Principal Accounting Fees and Services56PART IV Item 15:Exhibits, Financial Statement Schedules57Item 16:Form 10-K Summary57Signatures63Table of ContentsPART IFor convenience purposes in this filing on Form 10-K, references to “L3”, “Company”, “we”, “us” and “our” refer to L3 Technologies, Inc. and itssubsidiaries.Item 1. BusinessOverviewL3 Technologies, Inc. (L3 Technologies, Inc. and, together with our subsidiaries, referred to herein as L3) is a prime contractor in Intelligence,Surveillance and Reconnaissance (ISR) systems, aircraft sustainment (including modifications and fleet management of special mission aircraft), simulationand training, night vision and image intensification equipment, and security and detection systems. L3 is also a leading provider of a broad range ofcommunication, 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), foreigngovernments, and domestic and foreign commercial customers.In 2018, we embarked on a multi-year L3 3.0 transformation focused on integration, collaboration and innovation. Our goal is to leverage the best ofL3’s entrepreneurial culture with the scale and capabilities of a large enterprise. By integrating our technology capabilities and engineering talent, we seek tomove up the value chain to pursue larger opportunities and to become a non-traditional 6th prime (also referred to as a mission solutions prime), by bringingdisruptive technology to market faster and partnering more closely with our defense and commercial customers. L3 is a federation of business units across abroad scope of products and capabilities. Historically, our business units pursued individual strategies and were responsible solely for their own operationalperformance, emphasizing a de-centralized or holding company model. Recently, we have increased our collaboration across segments to bundle capabilitiesto better serve our customers. We are now pursuing an operational and cultural transformation to centralize and integrate our businesses, emphasizing anoperating company model. To that end, we began in 2018 to develop common processes and procedures across many key functional areas including businessdevelopment, information technology, human resources and engineering. We seek to drive higher growth and increased efficiencies through these initiatives,leveraging new tools including L365 continuous improvement and enterprise-wide customer relationship management (CRM) system.L3 is a leading defense technology company. We will continue to take portfolio shaping actions to better align our business with this technologyfocus, including acquisitions, technology partnerships and divestitures of non-strategic assets. We will also continue to invest in talent and R&D to developnext generation capabilities.We operate in a large and attractive core market in defense electronics, ISR and communications. We seek to extend our leadership by leveragingour strong customer relationship and differentiated technology. We expect to gain market share with innovative and affordable solutions and by building onthe trust that results from many years of demonstrated past performance. Financially, our emphasis is to grow sales, operating income, earnings per share andcash flow, as well as increase operating margins. We also intend to continue to seek new and existing routes for efficiencies and cost reduction in order tostreamline our organization. Although still early in our transformation, we believe our strategy will lead to faster growth, higher profitability and greater cashflow, which we intend to return to shareholders in a balanced and discipline manner.For the year ended December 31, 2018, we generated sales of $10,244 million, operating income of $1,120 million and cash from continuingoperations of $1,042 million. The table below presents a summary of our 2018 sales by major category of end customer. For a more detailed presentation ofour sales by end customer, see “Major Customers” within this Business section. 2018 Sales % of Total Sales (in millions) DoD $6,721 66%Other U.S. Government 423 4Total U.S. Government 7,144 70Foreign governments 1,528 15Commercial — foreign 873 8Commercial — domestic 699 7Total sales $10,244 100%1Table of ContentsIn the third quarter of 2018, we completed a realignment of our business segments to maximize growth and improve our integration andcollaboration across the enterprise. As a result of the realignment, 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. Financial information for our segments, including sales by geographic area,is included in “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 22 to our auditedconsolidated financial statements.Vertex Aerospace Divestiture: On June 29, 2018, we completed the sale of our Vertex Aerospace businesses for a sales price of $540 million subjectto customary closing net working capital adjustments. In connection with the sale, we recognized: (1) a pre-tax gain from continuing operations of $42million ($19 million after income taxes) related to the Crestview Aerospace and TCS businesses (the "Crestview & TCS Businesses") and (2) a pre-tax gainfrom discontinued operations of $234 million ($177 million after income taxes) related to the Vertex Aerospace business. The divestiture of the VertexAerospace business represents a strategic shift by us to exit the logistics solution and maintenance services business for military aircraft where we do notprovide complex ISR systems integration and modification. The Vertex Aerospace business generated sales of $0.6 billion in 2018, $1.4 billion in 2017 and$1.3 billion in 2016. The assets and liabilities and results of operations of the Vertex Aerospace business are reported as discontinued operations for allperiods presented.All references made to financial data in this Annual Report on Form 10-K are to L3’s continuing operations, unless otherwise specifically noted.Planned Merger with Harris CorporationOn October 14, 2018, L3 and Harris Corporation (“Harris”) announced an agreement to combine in an all stock merger of equals. Under the terms ofthe Agreement and Plan of Merger (the “Merger Agreement”) governing the proposed transaction, which was unanimously approved by the boards ofdirectors 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 stockthey hold. Upon completion of the merger, Harris shareholders will own approximately 54% and L3 shareholders will own approximately 46% of thecombined company, which will be renamed L3 Harris Technologies, Inc. The merger is expected to close in the middle of 2019, subject to customary closingconditions, including the receipt of regulatory approvals and approval by the shareholders of both L3 and Harris.Business Acquisitions and DivestituresDuring the years ended December 31, 2018, 2017 and 2016, we used net cash of $369 million, $316 million and $388 million for businessacquisitions, respectively. See “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — BusinessAcquisitions and Divestitures” for additional information regarding our business acquisitions and divestitures.Products and ServicesOur three reportable segments provide a wide range of products and services to various customers and are described below. See “Part II — Item 7 —Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Reportable Segment Results ofOperations” and Note 22 to our audited consolidated financial statements for financial information about each segment.2Table of ContentsISRS Reportable SegmentIn 2018, ISRS had net sales of $4,441 million, representing 43% of our total net sales. The businesses in this reportable segment provide productsand services for the global ISR mission solutions from seabed to space and Command, Control and Communications (C3) markets, specializing in signalsintelligence (SIGINT) and multi-intelligence platforms, including engineering, modernization and sustainment solutions for military and various governmentaircraft, ground support equipment and other platforms. These strategic and tactical products and services provide warfighters with the ability to detect,collect, identify, analyze and disseminate information from command centers, communication nodes and air defense systems for real-time situationalawareness and response. Other major capabilities and mission solutions include space avionics and imaging payloads, Counter Unmanned Aircraft Systems(CUAS) mission solutions, cyber and electronic warfare, special mission command & control, modeling & simulation and life cycle support. The table belowprovides a summary of the segment’s sectors and the percentage that each contributed to ISRS net sales in 2018.Sectors % of 2018Segment SalesISR Systems 51%Airborne Sensor Systems 11Warrior Sensor Systems 10Space & Sensor Systems 9Aircraft Systems 7Military Aviation Services 4Intelligence & Mission Systems 4Advanced Programs 4Total ISRS 100%ISR Systems is a systems integration organization specializing in complex ISR capabilities including fleet management support services, sensordevelopment, modifications and periodic depot maintenance for ISR and airborne systems. These products and services are critical elements for a substantialnumber of major C3 and intelligence gathering systems. Key customers include DoD and classified customers within the U.S. Government, U.K. Ministry ofDefence (MoD) and select foreign militaries.Airborne Sensor Systems provides multi-spectral and multi-intelligence ISR and targeting sensor systems designed for manned and unmannedplatforms for ISR military, law enforcement and government missions. Key customers include DoD, foreign ministries of defense, intelligence and securityagencies and law enforcement agencies.Warrior Sensor Systems provides multi-domain warfighter mission integration including networked augmented reality systems, advanced nightvision and electro-optical technology and systems, weapon sights, integrated information systems and rangefinding systems. Key customers include DoD,federal agencies, law enforcement agencies, foreign militaries, commercial hunting and professional shooting communities.Space & Sensor Systems provides avionics, payloads and exploitation systems for DoD, intelligence and commercial space exploration, includingspace launch vehicle avionics, space imaging and information systems, and tactical imaging systems. Key customers include National Aeronautics SpaceAdministration (NASA), DoD and commercial space companies.Aircraft Systems provides procurement, systems integration, modernization, modifications and maintenance for special mission aircraft systems. Keycustomers include U.S. Navy (USN), U.S. Air Force (USAF), select foreign militaries, commercial customers and aircraft Original Equipment Manufacturers(OEMs).Military Aviation Services (MAS) is a provider of modernization and life extension maintenance upgrade and support services for military aircraft,which include structural modifications and inspections, installation of mission equipment, navigation and avionics products and interior modifications. Keycustomers include the Canadian Department of National Defence, USN, USAF and select foreign militaries.Intelligence & Mission Systems provides solutions that gather and protect intelligence to deliver successful mission outcomes including cyber andelectronic warfare solutions, situational awareness for border security and maritime surveillance, and the protection of the most sensitive of information withleading edge, government grade cyber security. Key customers include U.K. MoD, Australian Defence Force, other international military and securityagencies and commercial customers.3Table of ContentsAdvanced Programs provides prime mission systems integration and sensor development for military ISR aircraft platforms and ground systems,advanced ISR and special mission capabilities, directed energy, special mission command and control, modeling & simulation, networked system of systemcapabilities, unmanned systems and CUAS, space situational awareness and geospatial application technology programs for cueing system software,hardware and wide-area sensor integration solutions. Key customers include USAF, U.S Special Operations Command (USSOCOM), USN and other DoDagencies.C&NS Reportable SegmentIn 2018, C&NS had net sales of $3,059 million, representing 30% of our total net sales. The businesses in this reportable segment provide networkand communication systems, secure communications products, radio frequency (RF) components, satellite communication terminals and space, microwaveand telemetry products. These products include secure data links that are used to connect a variety of space, airborne, ground and sea-based communicationsystems and are used in transmission, processing, recording, monitoring and dissemination functions of these communication systems. Other majorcapabilities include integrated maritime mission solutions, directed energy, lightweight unmanned undersea vehicles and naval power delivery onsubmarines and surface ships. The table below provides a summary of the segment’s sectors and the percentage that each contributed to C&NS net sales in2018.Sectors % of 2018Segment SalesBroadband Communication Systems 38%Naval Power Systems 17Advanced Communications 16Space & Power Systems 15Maritime Sensor Systems 14Total C&NS 100%Broadband Communication Systems is focused on the development, design, manufacturing and integration of secure networked communicationsequipment. Offerings include airborne, space and surface data link terminals, ground stations, and transportable tactical satellite communications (SATCOM)systems used on manned aircraft, unmanned aerial vehicles (UAVs) and naval ships. Key customers include DoD, USSOCOM, USAF, U.S. Army and U.S.intelligence agencies.Naval Power Systems (NPS) is a provider of maritime power and distribution solutions. Offerings include electric propulsion, conversion,distribution and protection for naval submarines, surface ships and aircraft carriers. In addition, NPS provides integrated bridge equipment includingCommand, Control, Communications, Computers and Navigation (C4N) systems. Key customers include the USN, the U.S. Coast Guard (USCG), U.S. Army,foreign navies and commercial ship owners.Advanced Communications is a provider of secure communications terminals and equipment, secure network encryption products, shipboardcommunications systems, advance radar antennas and radomes. Offerings include secure and non-secure voice, data and video communication for office,battlefield and secure internet protocol (IP) network applications, and surveillance and radar detection. In addition, Advanced Communications providesmanaged communications security (COMSEC) satellite networks and integrated remote very small aperture terminals (VSAT) satellite systems. Keycustomers include DoD, USSOCOM, USAF, U.S. Army, U.S. intelligence agencies, USN, USCG, foreign navies and commercial customers.Space & Power Systems is a provider of traveling wave tube amplifiers, telemetry and instrumentation systems, and low-power SATCOM products.Offerings include microwave vacuum electron devices and power modules for unmanned and manned platforms, including satellites, radar systems,communication systems, UAVs, various missile programs and commercial broadcast. Additional offerings include spacecraft telemetry tracking and controlencryption as well as high data rate transmitters and tactical intelligence receivers. Key customers include DoD, foreign militaries, commercial customers andaircraft and satellite OEMs.Maritime Sensor Systems provides integrated maritime mission solutions for surface and undersea acoustic, imaging and detection systems,including surface electro-optical/infrared systems for surface ships and submarines, dipping sonar systems, towed arrays, maritime command and controlsystems, undersea platforms and ranges, directed energy, cabled ocean systems, undersea warfare and anti-submarine systems, and integrated, multi-intelligence autonomous undersea vehicles. Key customers include USN, allied navies and other military customers.4Table of ContentsElectronic Systems Reportable SegmentIn 2018, Electronic Systems had net sales of $2,744 million, representing 27% of our total net sales. The businesses in this reportable segmentprovide a broad range of products and services, including components, products, subsystems, systems and related services to military and commercialcustomers. These products and services serve markets such as commercial and military aircraft simulation and training, cockpit avionics, airport security andprecision weapons. The table below provides a summary of the segment’s sectors and the percentage that each contributed to Electronic Systems’ net sales in2018.Sectors % of 2018Segment SalesCommercial Aviation Solutions 34%Precision Engagement Systems 27Link Training & Simulation 21Security & Detection Systems 18Total Electronic Systems 100%Commercial Aviation Solutions (CAS) is a provider of cockpit and mission displays, airborne traffic and collision avoidance systems, terrainawareness warning systems, advanced cockpit avionics, solid state voice and flight data recorders and flight training services for both rotary and fixed wingaircraft and support and maintenance services. In addition, CAS is a leading supplier of commercial aircraft flight simulators and advanced flight simulationtechnologies as well as pilot training services for commercial pilots and Ab-Initio instruction. Key customers include commercial airlines, aircraft OEMs andvarious commercial transport, business, regional and military aircraft manufacturers.Precision Engagement Systems (PES) is a prime and component provider of precision weapon systems including fuzing and ordinance systems,unmanned systems and radar-based sensors and systems. In addition, PES provides combat vehicle engines, transmissions and global positioning systemreceivers for guided projectiles and precision munitions as well as navigation systems for fire control systems. Key customers include DoD, U.S. Governmentand foreign militaries.Link Training & Simulation (Link) is a leading supplier of military aircraft flight simulators and advanced flight simulation technologies. Inaddition, Link provides flight training services for both rotary and fixed wing aircraft and support and maintenance services. Key customers include DoD,foreign militaries and aircraft OEMs.Security & Detection Systems (SDS) is a leading provider of integrated security solutions for airports, ports, border crossings and other criticalinfrastructure. Offerings include airport security screening solutions, explosive detection systems and whole body scanning systems as well as non-intrusivesystems for threat and contraband detection. In addition, SDS provides automation and integration services for airports, automotive manufacturing and otherindustries. Key customers include the U.S. Transportation Security Administration, domestic and international airports, the U.S. Customs and BorderProtection agency and international equivalents, automotive manufacturers and domestic and international port operators.Funded Backlog and OrdersWe define funded backlog as the value of funded orders received from customers, less the cumulative amount of sales recognized on such orders. Wedefine funded orders as the value of contract awards received from the U.S. Government, for which the U.S. Government has appropriated funds, plus thevalue of contract awards and orders received from customers other than the U.S. Government. The table below presents our funded backlog, percentage offunded backlog at December 31, 2018 expected to be recorded as sales in 2019 and funded orders for each of our reportable segments and on a consolidatedbasis. Funded Backlog atDecember 31, Percentage of FundedBacklog at December 31,2018 Expected to beRecorded as Sales in2019 Funded Orders 2018 2017 2018 2017 (in millions) (in millions)Reportable Segment: ISRS $4,150 $3,628 66% $5,121 $4,313C&NS 3,163 3,092 68% 3,364 3,096Electronic Systems 2,391 2,159 53% 3,096 2,587Consolidated $9,704 $8,879 63% $11,581 $9,9965Table of ContentsOur funded backlog does not include the full potential value of our contract awards, including those pertaining to multi-year, cost-plus typecontracts, which are generally funded on an annual basis. Funded backlog also excludes the potential future orders and related sales from unexercised pricedcontract options that may be exercised by customers under existing contracts and the potential future orders and related sales of purchase orders that we mayreceive in the future under indefinite quantity contracts or basic ordering agreements during the term of such agreements.Major CustomersThe table below presents a summary of our sales by end customer and the percent contributed by each to our total sales. For additional informationregarding domestic and international sales, see Note 22 to our audited consolidated financial statements. 2018 2017 Sales % of Total Sales Sales % of Total Sales (in millions) (in millions) Air Force $3,371 33% $3,173 33%Navy/Marines 1,441 14 1,324 14Army 1,123 11 1,071 11Other Defense 786 8 761 8Total DoD 6,721 66 6,329 66Other U.S. Government 423 4 368 4Total U.S. Government 7,144 70 6,697 70Foreign governments 1,528 15 1,420 15Commercial — foreign 873 8 809 8Commercial — domestic 699 7 647 7Total sales $10,244 100% $9,573 100%Direct sales to the end customer represented approximately 64% of our consolidated 2018 sales, and sales as a subcontractor or supplier representedthe remaining 36%.Our sales are predominantly derived from contracts with agencies of, and prime system contractors to, the U.S. Government. Various U.S.Government agencies and contracting entities exercise independent and individual purchasing decisions, subject to annual appropriations by the U.S.Congress. For the year ended December 31, 2018, our five largest contracts (revenue arrangements) generated 15% of our consolidated sales.With respect to our sales to foreign customers, we continue to evaluate the potential effect of the United Kingdom’s (UK) planned departure from theEuropean Union (EU) (commonly referred to as “Brexit”) on our business operations and financial results, including the impacts if the UK fails to reach anagreement with the EU on Brexit by the March 29, 2019 deadline. We anticipate that the most probable near-term effects are likely to reflect the pressureBrexit is placing on the UK government, which may influence the government’s ability to make decisions on programs of the type we perform and result involatility in foreign currencies. Brexit may also have adverse tax effects on movement of products or sustainment activities between the UK and EU.CompetitionWhile we believe that we are a major provider for many of the products and services we offer to our DoD, government and commercial customers, ourbusinesses generally encounter significant competition.Our ability to compete for existing and new business depends on a variety of factors, including:•the effectiveness and innovation of our technologies, systems and research and development programs;•our ability to offer superior program performance at an affordable and competitive cost;•historical, technical, cost and schedule performance;•our ability to attain supplier positions on contracts;6Table of Contents•our ability to maintain an effective supplier and vendor base;•our ability to retain our employees and hire new ones, particularly those who have U.S. Government security clearances;•the capabilities of our facilities, equipment and personnel to undertake the business for which we compete; and•our ability to quickly and flexibly meet customer requirements and priorities.L3 is an aerospace and defense contractor with a broad and diverse portfolio of products and services. We have prime contractor and subcontractorpositions. We supply our products and services to other prime system contractors. However, we also compete directly with other large prime systemcontractors for: (1) certain products, subsystems and systems, where they have vertically integrated businesses, and (2) niche areas where we are a primecontractor. We also compete with numerous other aerospace and defense contractors, which generally provide similar products, subsystems, systems orservices.In addition, our ability to compete for select contracts may require us to team with one or more of the other prime system contractors that bid andcompete for major platform programs, and our ability to team with them is often dependent upon the outcome of a competition for subcontracts they award.Patents and LicensesGenerally, we do not believe that our patents, trademarks and licenses are material to our operations. Furthermore, most of our U.S. Governmentcontracts generally permit us to use patents owned by other U.S. Government contractors. Similar provisions in U.S. Government contracts awarded to othercompanies prohibit us from preventing the use of our patents in most DoD work performed by other companies for the U.S. Government.Raw MaterialsAlthough we generated 70% of our 2018 sales from products and systems, our businesses are generally engaged in limited manufacturing activitiesand have minimal exposure to fluctuations in the supply of raw materials. For those businesses that manufacture and sell products and systems, most of thevalue that we provide is labor oriented, such as design, engineering, assembly and test activities. In manufacturing our products, we use our own productioncapabilities as well as a diverse base of third party suppliers and subcontractors. Although certain aspects of our manufacturing activities require relativelyscarce raw materials, we have not experienced difficulty in our ability to procure raw materials, components, sub-assemblies and other supplies required inour manufacturing processes.ContractsGenerally, the sales prices for our contracts are either fixed-price, cost-plus or time-and-material type. Fixed-price type contracts generally offerhigher profit margin potential than cost-plus type or time-and-material type contracts due to the greater levels of risk we assume on a fixed-price typecontract.On a fixed-price type contract (revenue arrangement), we agree to perform the contractual statement of work for a predetermined sales price.Although a fixed-price type contract generally permits us to retain profits if the total actual contract costs are less than the estimated contract costs, we bearthe risk that increased or unexpected costs may reduce our profit or cause us to sustain losses on the contract. Accounting for the sales on a fixed-price typecontract for which progress is measured using the cost-to-cost percentage of completion method involves the preparation of estimates of: (1) transaction priceand (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 thecontract’s statement of work. Adjustments to original estimates for a contract’s transaction price, estimated costs at completion and estimated total profit orloss may be required as work progresses under a contract, as experience is gained, as facts and circumstances change and as new information is obtained, eventhough the scope of work required under the contract may not change.On a cost-plus type contract (revenue arrangement), we are paid our allowable incurred costs plus a profit which can be fixed or variable dependingon the contract’s fee arrangement up to predetermined funding levels determined by our customers. Cost-plus type contracts with award and incentive feeprovisions are our primary variable contract fee arrangement. Award fees provide for a fee based on actual performance relative to contractually specifiedperformance criteria. Incentive fees provide for a fee based on the relationship which total allowable costs bear to target cost. Award and incentive fees earnedwere not material to our results of operations for 2018, 2017 and 2016.7Table of ContentsOn a time-and-material type contract (revenue arrangement), we are paid on the basis of direct labor hours expended at specified fixed-price hourlyrates (that include wages, overhead, allowable general and administrative expenses and profit) and materials at cost. Therefore, on cost-plus type and time-and-material type contracts, we do not bear the risks of unexpected cost overruns, provided that we do not incur costs that exceed the predetermined fundedamounts.Substantially all of our cost-plus type contracts and time-and-material type contracts are with U.S. Government customers, while sales to foreigngovernment and commercial customers are generally transacted under fixed-price sales arrangements and are included in our fixed-price contract type sales.The table below presents the percentage of our total sales generated from each contract type. Year Ended December 31,Contract Type 2018 2017 2016Fixed-price(1) 72% 73% 76%Cost-plus(2) 25 24 21Time-and-material 3 3 3Total sales 100% 100% 100%__________________(1) Includes fixed-price incentive fee type contracts, which contributed approximately 1% for the years ended December 31, 2018, 2017 and 2016.(2) Includes cost-plus award and incentive fee type contracts, which contributed approximately 4% to our total net sales for the year ended December 31, 2018 and 5% for each ofthe years ended December 31, 2017 and 2016.For additional information on total net sales disaggregated by contract type, see Note 22 to our audited consolidated financial statements.Regulatory EnvironmentMost of our revenue arrangements with agencies of the U.S. Government, including the DoD, are subject to unique procurement and administrativerules. These rules are based on both laws and regulations, including the U.S. Federal Acquisition Regulation, that: (1) impose various profit and cost controls,(2) regulate the allocations of costs, both direct and indirect, to contracts and (3) provide for the non-reimbursement of unallowable costs. Unallowable costsinclude, but are not limited to, lobbying expenses, interest expenses and certain costs related to business acquisitions, including, for example, theincremental depreciation and amortization expenses arising from fair value increases to the historical carrying values of acquired assets. Our contractadministration and cost accounting policies and practices are also subject to oversight by government inspectors, technical specialists and auditors. See “PartI — Item 1A — Risk Factors” for a discussion of certain additional business risks specific to our government contracts.Our U.S. Government contracts are subject to extensive legal and regulatory requirements and, from time to time, agencies of the U.S. Governmentinvestigate whether our operations are being conducted in accordance with these requirements. Investigations could result in administrative, civil or criminalliabilities, including repayments, disallowance of certain costs, or fines and penalties. As is common in the U.S. defense industry, we are subject to businessrisks, including changes in the U.S. Government’s procurement policies (such as greater emphasis on competitive procurement), governmentalappropriations, national defense policies or regulations, service modernization plans and availability of funds. A reduction in expenditures by the U.S.Government for products and services of the type we manufacture and provide, lower margins resulting from increasingly competitive procurement policies, areduction in the volume of contracts or subcontracts awarded to us or the incurrence of substantial contract cost overruns could materially adversely affectour business.In 2018, sales under foreign military sales (FMS) agreements, which are included in the international (foreign governments) category in the “MajorCustomers” table within this Business section, were $299 million, or 3% of our total consolidated sales. FMS agreements are made directly between the U.S.Government and foreign governments. In such cases, because we serve only as the supplier, we do not have unilateral control over the terms of theagreements. Certain of our sales are direct commercial sales to foreign governments. These sales are subject to U.S. Government approval and licensing underthe Arms Export Control Act. Legal restrictions on sales of sensitive U.S. technology also limit the extent to which we can sell our products to foreigngovernments or private parties.All of our U.S. Government contracts can be terminated by the U.S. Government either for its convenience or if we default by failing to performunder the contract. Termination for convenience provisions provide only for our recovery of costs incurred or committed settlement expenses and profit onthe work completed prior to termination. Termination for default provisions provide8Table of Contentsfor the contractor to be liable for excess costs incurred by the U.S. Government in procuring undelivered items from another source. Our contracts with foreigngovernments generally contain similar provisions relating to termination at the convenience of the customer.Environmental MattersOur operations are subject to various environmental laws and regulations relating to the discharge, storage, treatment, handling, disposal andremediation of certain materials, substances and wastes used in our operations. We continually assess our obligations and compliance with respect to theserequirements.We have also assessed the risk of environmental contamination for our various manufacturing facilities, including our acquired businesses and,where appropriate, have obtained indemnification, either from the sellers of those acquired businesses or through pollution liability insurance. We believethat our current operations are in substantial compliance with all existing applicable environmental laws and permits. We believe our current expenditureswill allow us to continue to be in compliance with applicable environmental laws and regulations. While it is difficult to determine the timing and ultimatecost to be incurred in order to comply with these laws, based upon available internal and external assessments, with respect to those environmental losscontingencies of which we are aware, we believe there are no environmental loss contingencies that, individually or in the aggregate, would be material toour consolidated results of operations, financial position or cash flows.EmployeesAt December 31, 2018, we employed approximately 31,000 full-time and part-time employees (excluding employees of discontinued operations),79% of whom were located in the United States. Of these employees, approximately 10% are covered by approximately 36 separate collective bargainingagreements with various labor unions. The success of our business is, to a large extent, dependent upon the knowledge of our employees and on themanagement, contracting, engineering and technical skills of our employees. In addition, our ability to grow our businesses, obtain additional orders for ourproducts and services and to satisfy contractual obligations under certain of our existing revenue arrangements is largely dependent upon our ability toattract and retain employees who have U.S. Government security clearances, particularly those with clearances of top-secret and above. Historically, we haverenegotiated labor agreements without significant disruptions to operating activities, and we believe that relations with our employees are positive.Available InformationWe are subject to the informational requirements of the Securities Exchange Act of 1934 and, in accordance therewith, file reports, including annual,quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission the (“SEC”). Such material may also beaccessed electronically by means of the SEC’s home page on the Internet at http://www.sec.gov.You may also obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxystatement for the annual shareholders’ meeting, as well as any amendments to those reports as soon as reasonably practicable after electronic filing with theSEC through our website on the Internet at http://www.L3T.com.We also have a Corporate Governance webpage. You can access our Corporate Governance Guidelines and charters for the audit and ethics,compensation and nominating and governance committees of our Board of Directors through our website, http://www.L3T.com, by clicking on the“Corporate Governance” link under the heading “Investor Relations.” You can access our Code of Ethics and Business Conduct by clicking on the “Code ofEthics and Business Conduct” link under the heading “Code of Ethics.” Our Code of Ethics and Business Conduct applies to all directors, officers andemployees, including our chairman, chief executive officer and president, our senior vice president and chief financial officer and our vice president,controller and principal accounting officer. We will post any amendments to the Code of Ethics and Business Conduct, and any waivers that are required tobe disclosed by the rules of either the SEC or the New York Stock Exchange, Inc. (NYSE), on our website within the required periods. The information on oraccessible through our website is not incorporated by reference into this report.To learn more about L3, please visit our website at http://www.L3T.com. From time to time, we use our website as a channel of distribution ofmaterial company information. Financial and other material information regarding L3 is routinely posted on our website and is readily accessible.9Table of ContentsItem 1A. Risk FactorsYou should carefully consider the following risk factors and other information contained in this Form 10-K, including “Part II — Item 7 —Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Any of these risks could materially affect our business and ourfinancial condition, results of operations and cash flows, which could in turn materially affect the price of our common stock.Risks and uncertainties associated with our planned merger with Harris.Completion of the proposed merger is subject to various conditions, and the proposed merger may not occur even if we obtain stockholder approval.The completion of the proposed merger is subject to certain conditions, including, among others, the (i) the adoption of the Merger Agreement byour stockholders; (ii) the approval of the issuance of Harris Common Stock pursuant to the Merger Agreement and adoption of an amendment of the charter ofHarris by the stockholders of Harris; (iii) the approval for listing on the NYSE of the shares of Harris Common Stock to be issued pursuant to the MergerAgreement; (iv) the expiration or earlier termination of any applicable waiting period, and the receipt of approvals under, domestic and certain foreignantitrust and competition laws and (v) the absence of governmental restraints or prohibitions preventing the consummation of the merger. The obligation ofeach of us and Harris to consummate the proposed merger is also conditioned on, among other things, the receipt of a tax representation letter from the otherparty the purpose of which is to permit each party’s counsel to render a tax opinion as to the tax-free nature of the merger, the absence of a material adverseeffect on the other party, the truth and correctness of the representations and warranties made by the other party on the date of the Merger Agreement and onthe closing date (subject to certain “materiality” and “material adverse effect” qualifiers), and the performance by the other party in all material respects of itsobligations under the Merger Agreement. We cannot provide any assurance that these conditions will be met or waived, or that we will be able to successfullyconsummate the proposed merger as provided for under the Merger Agreement, or at all.If the proposed merger is not completed, our stock price will likely fall to the extent that the current market price of our common stock reflects anassumption that a transaction will be completed. In addition, we may be required to pay a termination fee of $590 million if the Merger Agreement isterminated under circumstances specified in the Merger Agreement.In this regard, we face risks and uncertainties due both to the pendency of the proposed merger as well as the potential failure to consummate theproposed merger, including:•the occurrence of any event, series of events, change or other circumstances that could give us or Harris the right to terminate the MergerAgreement, including a termination of the Merger Agreement that could require us to pay a termination fee to Harris;•the ability to obtain regulatory approvals and satisfy other closing conditions to the proposed merger in a timely manner or at all, including therisk that regulatory approvals required for the proposed merger are not obtained or are obtained subject to conditions that are not anticipatedand that could reduce or eliminate the anticipated benefits of the proposed merger;•the risk that the announcement of the proposed transaction could have adverse effects on the market price of our common stock or Harris’common stock and the uncertainty as to the long-term value of the common stock of the combined company following the proposed merger oras a result of broader stock market movements;•the risk that we or Harris may not obtain the required stockholder approvals on the expected schedule or at all, including the failure of ourstockholders to adopt the Merger Agreement or of Harris stockholders to approve the share issuance or to adopt the Harris charter amendment;•the risk of failure to satisfy other conditions to the completion of the proposed merger;•delays in closing, or the failure to close, the proposed merger for any reason could negatively impact us;•business disruptions from the proposed merger that may harm our business or Harris’ business, including current plans and operations;•difficulties and delays in integrating our business with Harris’ business or fully realizing anticipated cost savings and other benefits expectedfrom the proposed merger;10Table of Contents•certain restrictions during the pendency of the proposed merger that may impact our ability or the ability of Harris to pursue certain businessopportunities or strategic transactions;•the outcome of any legal proceedings that may be instituted against us, Harris or our respective directors with respect to the proposed merger;•risks related to the diversion of the attention and time of Harris’ or our respective management teams from ongoing business concerns;•any announcement relating to the proposed transaction could have adverse effects on our ability or the ability of Harris to retain and hire keypersonnel or maintain relationships with suppliers, vendors, other partners and customers, including the U.S. government and othergovernments, or on our or Harris’ operating results and businesses generally;•the potential dilution of our stockholders’ and Harris stockholders’ ownership percentage of the combined company as a result of the proposedmerger;•the business, economic and political conditions in the markets in which Harris and we operate;•events beyond our and Harris’ control, such as acts of terrorism; and•the potential dilution of the combined company’s earnings per share as a result of the proposed merger.In addition, we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs,including potential impairments and charges, in connection with the proposed merger, and these fees and costs are payable by us regardless of whether theproposed merger is consummated. There are a number of risks and uncertainties associated with the proposed merger. For more information, see Item 1A. RiskFactors, “-Cautionary Information Regarding Forward-Looking Statements” below, and the Joint Proxy Statement/Prospectus.Litigation filed against L3, the L3 Board of Directors, Harris and Leopard Merger Sub, Inc. ("Merger Sub") could prevent or delay the consummation ofthe merger or result in the payment of damages following completion of the merger.In connection with the merger, purported stockholders of L3 have filed three putative class action lawsuits and one individual lawsuit against one ormore of L3, the members of L3’s Board of Directors, Harris and Merger Sub. Among other remedies, the plaintiffs in these lawsuits seek to enjoin the merger.The outcome of any such litigation is uncertain. If a dismissal is not granted or a settlement is not reached, these lawsuits could prevent or delay completionof the merger and result in substantial costs to L3 and Harris, including any costs associated with indemnification. Additional lawsuits in connection with themerger may be filed against L3, Harris, Merger Sub and/or their respective directors and officers, which additional lawsuits could also prevent or delay theconsummation of the merger and result in additional costs to L3 and Harris. The ultimate resolution of these lawsuits cannot be predicted with certainty, andan adverse ruling in any such lawsuit may cause the merger to be delayed or not to be completed, which could cause Harris and L3 not to realize some or allof the anticipated benefits of the merger. The defense or settlement of any lawsuit or claim that remains unresolved at the time the merger is consummatedmay adversely affect the combined company’s business, financial condition, results of operations and cash flows. L3 and Harris cannot currently predict theoutcome of or reasonably estimate the possible loss or range of loss from any these lawsuits or claims. For more information, see the Joint ProxyStatement/Prospectus.Our contracts (revenue arrangements) with U.S. Government customers entail certain risks.A decline in or a redirection of the U.S. defense budget could result in a material decrease in our sales, results of operations and cash flows.Our government contracts and sales are highly correlated and dependent upon the U.S. defense budget which is subject to the congressional budgetauthorization and appropriations process. Congress usually appropriates funds for a given program on a September 30 fiscal year basis, even though contractperiods of performance may extend over many years. Consequently, at the beginning of a major program, the contract is usually partially funded, andadditional funds are normally committed to the contract by the procuring agency only as appropriations are made by Congress in future fiscal years. DoDbudgets are determined by factors beyond our control, including, but not limited to, changes in U.S. procurement policies, budget considerations, current andfuture economic conditions, presidential administration priorities, changing national security and defense requirements, geopolitical developments andactual fiscal year congressional appropriations for defense budgets. Any of these factors could result11Table of Contentsin a significant decline in, or redirection of, current and future DoD budgets and impact our future results of operations, including our sales and operatingincome growth rates.The total DoD budget for FY 2017 was $606 billion ($523 billion base budget, $83 billion Overseas Contingency Operations (OCO)), an increase of4% 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 2018funding was addressed through a series of Continuing Resolutions (CR). However, on February 9, 2018, President Trump signed into law the BipartisanBudget 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 processover 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 2018appropriations process (including enactment of the FY 2018 DoD Appropriations bill). On March 23, 2018, Congress passed, and President Trump signedinto law, the Consolidated Appropriations Act, 2018 (2018 Appropriations Act), a $1.3 trillion spending package that funded the government throughSeptember 30, 2018. The 2018 Appropriations Act included $665 billion for the DoD ($599 billion base budget, $66 billion OCO). While 2018 BBA raisedthe spending caps for FY 2018 and FY 2019 previously constrained by the Budget Control Act of 2011 (BCA) and temporarily suspended the statutory debtceiling through March 1, 2019, it 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 basebudget, $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 ofthe FY 2019 National Defense Authorization Act (NDAA), and on June 18, 2018, the Senate passed its version of the FY19 NDAA. Both the House andSenate 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 2019budget request. The final versions of the FY19 NDAA were passed by the House and Senate on July 26 and August 1, 2018, respectively, and PresidentTrump signed it into law on August 13, 2018.On June 28, 2018, the House passed its version of the Fiscal Year 2019 Defense Appropriations Bill, providing $674.4 billion for the Department ofDefense and the Intelligence Community - funding levels aligned to those authorized in the NDAA. On August 23, 2018, the Senate passed its version of theFiscal Year 2019 Defense Appropriations Bill, consistent with the total funding level included in the House’s version. On September 13, 2018, House andSenate conferees announced a final conference agreement on the Fiscal Year 2019 Defense Appropriations Bill, and on September 28, 2018, the Presidentsigned the conference agreement into law. The enactment of the annual Defense Appropriations bill prior to the beginning of the fiscal year had not occurredin over a decade.Future DoD budgets and spending levels are difficult to predict as the U.S. Government’s overall fiscal challenges remain. A significant decline in orredirection of U.S. military expenditures in the future, or the loss or significant reduction in U.S. Government funding of a large program in which weparticipate, could have a material adverse effect on our financial position, results of operations and cash flows.We rely predominantly on sales to U.S. Government entities, and the loss or delay of a significant number of our contracts would have a material adverseeffect on our results of operations and cash flows.Our sales are predominantly derived from contracts (revenue arrangements) with agencies of, and prime system contractors to, the U.S. Government.The loss or delay of all or a substantial portion of our sales to the U.S. Government would have a material adverse effect on our results of operations and cashflows. Approximately 70%, or $7.1 billion, of our sales for the year ended December 31, 2018 were made directly or indirectly to U.S. Government agencies,including 66% to the DoD. Aggregate sales for our five largest contracts (revenue arrangements) amounted to approximately $1.5 billion, or 15% of ourconsolidated sales for the year ended December 31, 2018.A substantial majority of our total sales are for products and services under contracts with various agencies and procurement offices of the DoD orwith prime contractors to the DoD. Although these various agencies, procurement offices and prime contractors are subject to common budgetary pressuresand other factors, our customers exercise independent purchasing decisions. Because of this concentration of contracts, if a significant number of our DoDcontracts and subcontracts are simultaneously delayed or canceled for budgetary, performance or other reasons, it would have a material adverse effect on ourresults of operations and cash flows.12Table of ContentsIn addition to contract cancellations and declines in agency budgets, our backlog and future financial results may be adversely affected by:•curtailment of the U.S. Government’s use of technology or other services and product providers, including curtailment due to governmentbudget reductions and related fiscal matters;•geopolitical developments that affect demand for our products and services;•our ability to hire and retain personnel to meet demand for our services; and•technological developments that impact purchasing decisions or our competitive position.The DoD’s wide-ranging efficiency and better buying power initiatives, which target affordability and cost growth, could have a material effect on theprocurement process and may adversely affect our existing contracts and the award of new contracts.Since 2010, the DoD has implemented efficiency initiatives and other best practices for procurement that are intended to reduce prices, ensureadequate competition and control costs throughout the acquisition cycle. In addition, under the Better Buying Power 3.0 initiative, the DoD has focused ontechnology innovation, incentive-based cost-plus and fixed-price contracts and Company-sponsored independent research and development efforts. The U.S.Government may continue to implement changes to its procurement practices that change the way contracts are solicited, negotiated and managed, whichmay impact our future sales, earnings and cash flows, and could affect whether, and how we pursue opportunities to provide our products and services to theU.S. Government, including the terms and conditions under which we do so.Our government contracts contain unfavorable termination provisions and are subject to audit and modification. If a termination right is exercised by thegovernment, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.Companies engaged primarily in supplying defense-related equipment and services to U.S. Government agencies are subject to certain business risksunique to the defense industry. These risks include the ability of the U.S. Government to unilaterally:•suspend us from receiving new contracts pending resolution of alleged violations of procurement laws or regulations;•terminate existing contracts;•reduce the value of existing contracts; and•audit our contract-related costs and fees, including allocated indirect costs.All of our U.S. Government contracts can be terminated by the U.S. Government either for its convenience or if we default by failing to performunder the contract. Termination for convenience provisions provide only for our recovery of costs incurred or committed settlement expenses and profit onthe work completed prior to termination. Termination for default provisions provide for the contractor to be liable for excess costs incurred by the U.S.Government in procuring undelivered items from another source. Our contracts with foreign governments generally contain similar provisions relating totermination at the convenience of the customer.U.S. Government agencies, including the Defense Contract Audit Agency and various agency Inspectors General, routinely audit and investigate ourcosts and performance on contracts, as well as our accounting and general business practices. Based on the results of such audits, the U.S. Government hasadjusted, and may in the future adjust, our contract-related costs and fees, including allocated indirect costs. In addition, under U.S. Government purchasingregulations, some of our costs, including certain business acquisition costs, most financing costs, portions of research and development costs and certainmarketing expenses, may not be reimbursable under U.S. Government contracts.At December 31, 2018, we had a backlog of funded orders, primarily under contracts with the U.S. Government, totaling $9,704 million. Asdescribed above, the U.S. Government may unilaterally modify or terminate its contracts with us. Accordingly, most of our backlog could be modified orterminated by the U.S. Government, which would have a material adverse effect on our future sales, results of operations and cash flows.13Table of ContentsWe may not be able to win competitively awarded contracts or receive required licenses to export our products, which could have a material adverse effecton our business, financial condition, results of operations, cash flows and future prospects.Our government contracts are subject to competitive bidding. We obtain many of our U.S. Government contracts through a competitive biddingprocess. We may not be able to continue to win competitively awarded contracts. In addition, awarded contracts may not generate sales sufficient to result inour profitability. We are also subject to risks associated with the following:•the frequent need to bid on programs in advance of the completion of their design, which may result in unforeseen technological difficultiesand/or cost overruns;•the substantial time, effort and experience required to prepare bids and proposals for competitively awarded contracts that may not be awardedto us;•design complexity and rapid technological obsolescence; and•the constant need for design improvement.In addition to these risks, we are not permitted to export some of our products, and we are required to obtain licenses from U.S. Government agenciesto export many of our other products and systems. Failure to receive required licenses would eliminate our ability to sell our products and systems outside theUnited States.Intense competition and bid protests may adversely affect our sales, results of operations and cash flows.The defense and commercial industries in which our businesses operate are highly competitive. We expect that the DoD’s increased use ofcommercial off-the-shelf products and components in military equipment will continue to encourage new competitors to enter the market. We also expectincreased competition for our products and services from other providers due to the uncertainty of future U.S. defense budgets. Furthermore, the currentcompetitive environment has resulted in an increase of bid protests from unsuccessful bidders, which typically extends the time until work on a contract canbegin. For more information concerning the factors that affect our ability to compete, see “Part I — Item 1 — Business — Competition.”We are subject to government investigations, which could have a material adverse effect on our business, financial condition, results of operations, cashflows and future prospects.U.S. Government contracts are subject to extensive legal and regulatory requirements, and from time to time agencies of the U.S. Governmentinvestigate whether such contracts were and are being conducted in accordance with these requirements. As discussed in Note 19 to our audited consolidatedfinancial statements, we are currently cooperating with the U.S. Government on several investigations. Under U.S. Government regulations, an indictment ofL3 by a federal grand jury, or an administrative finding against us as to our present responsibility to be a U.S. Government contractor or subcontractor, couldresult in us 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, whichcould have a material adverse effect on our results of operations and cash flows. A conviction, or an administrative finding against us that satisfies therequisite level of seriousness, could result in debarment from contracting with the federal government for a specific term, which could have a material adverseeffect on our results of operations and cash flows.Our commercial aviation products and services businesses are affected by global demand and economic factors that could negatively impact ourfinancial results.The operating results of our commercial aviation products and services businesses may be adversely affected by downturns in the global demand forair travel which impacts new aircraft production and orders, and global flying hours, which impacts air transport, regional and business aircraft utilizationrates and pilot training needs. The aviation industry is highly cyclical, and the level of demand for air travel is correlated to the strength of the U.S. andinternational economies and is impacted by long-term trends in airline passenger and cargo traffic. The results of our commercial aviation business alsodepend on other factors, including general economic growth, political stability in both developed and emerging markets, pricing pressures, trends in capitalgoods markets and changes in OEM production rates.14Table of ContentsOur sales to certain international customers expose us to risks associated with operating internationally.For the year ended December 31, 2018, sales to international customers, excluding our international sales made under FMS agreements directlybetween the U.S. Government and foreign governments, represented approximately 20% of our consolidated sales. Consequently, our businesses are subjectto a variety of risks that are specific to international operations, including the following:•export regulations that could erode profit margins or restrict exports;•compliance with the U.S. Foreign Corrupt Practices Act and similar non-U.S. regulations;•the burden and cost of compliance with foreign laws, treaties and technical standards and changes in those regulations;•contract award and funding delays;•potential restrictions on transfers of funds;•currency fluctuations;•import and export duties and value added taxes;•transportation delays and interruptions;•uncertainties arising from international local business practices and cultural considerations;•sovereign government credit risk; and•potential military conflicts and political risks.Our international contracts may include industrial cooperation agreements requiring specific local purchases, manufacturing agreements or financialsupport obligations, known as offset obligations, and provide for penalties if we fail to meet such requirements. See “Part II — Item 7 — Management’sDiscussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations” for further discussion. While we have and willcontinue to adopt measures to reduce the potential impact of losses resulting from the risks of our international business, these measures may not be adequate.We cannot predict the consequences of future geo-political events, but they may adversely affect the markets in which we operate, our ability to insureagainst risks, our operations or our profitability.Ongoing instability and current conflicts in global markets, including in the Middle East and Asia, and the potential for other conflicts and futureterrorist activities and other recent geo-political events throughout the world, including new or increased tariffs and potential trade wars and the pendingvoluntary exit of the United Kingdom from the European Union (commonly referred to as “Brexit”), have created economic and political uncertainties andimpacts that could have a material adverse effect on our business, operations and profitability. These matters cause uncertainty in the world’s financial andinsurance markets and may significantly increase the political, economic and social instability in the geographic areas in which we operate. These mattersmay cause us to incur increased costs or experience difficulty with future borrowings under our credit facilities or in the debt markets, or otherwise withfinancing our operating, investing (including any future acquisitions) or financing activities. These matters also may cause our insurance coverages andperformance bonds to increase in cost, or in some cases, to be unavailable altogether.We continue to monitor Brexit and its potential impacts on our results of operations and financial condition. Volatility in foreign currencies isexpected to result as the United Kingdom exits from the European Union. If the United Kingdom's membership in the European Union terminates in March2019 without an agreement, there could be increased costs from re-imposition of tariffs on trade between the United Kingdom and European Union, shippingdelays because of the need for customs inspections and procedures and shortages of certain goods. The United Kingdom will also need to negotiate its owntax and trade treaties with countries all over the world, which could take years to complete. This potential scenario is usually referred to as a “hard Brexit.” Inthe case of a hard Brexit, our exposure to disruptions to our supply chain, the imposition of tariffs and currency devaluation in the United Kingdom couldhave an adverse impact to our consolidated revenue, earnings and cash flow. In 2018, we generated 6% of our net revenues in the United Kingdom.15Table of ContentsWe are subject to the risks of legal proceedings, which could have a material adverse effect on our business, financial condition, results of operations,cash flows and future prospects.At any given time, we are a defendant in various material legal proceedings and litigation matters arising in the ordinary course of business,including litigation, claims and assessments that have been asserted against acquired businesses, which we have assumed. Although we maintain insurancepolicies, these policies may not be adequate to protect us from all material judgments and expenses related to current or future claims and may not cover theconduct that is the subject of the litigation. Desired levels of insurance may not be available in the future at economical prices or at all. In addition, webelieve that while we have valid defenses with respect to legal matters pending against us, the results of litigation can be difficult to predict, including thoseinvolving jury trials. Accordingly, our current judgment as to the likelihood of our loss (or our current estimate as to the potential range of loss, if applicable)with respect to any particular litigation matter may be wrong. A significant judgment against us, arising out of any of our current or future legal proceedingsand litigation, could have a material adverse effect on our business, financial condition, results of operations, cash flows and future prospects. For adiscussion of material litigation to which we are currently a party, see Note 19 to our audited consolidated financial statements.If we are unable to keep pace with rapidly evolving products and service offerings and technological change, there could be a material adverse effect onour business, financial condition, results of operations, cash flows and future prospects.The rapid change of technology is a key feature of most of the markets in which our products, services and systems oriented businesses operate. Tosucceed in the future, we will need to continue to design, develop, manufacture, assemble, test, market and support new products and enhancements on atimely and cost-effective basis. Historically, our technology has been developed through customer-funded and internally funded research and developmentand through certain business acquisitions. We may not be able to continue to maintain comparable levels of research and development or successfullycomplete such acquisitions. In the past, we have allocated substantial funds to capital expenditures, programs and other investments. This practice willcontinue to be required in the future. Even so, we may not be able to successfully identify new opportunities and may not have the necessary financialresources to develop new products and systems in a timely or cost-effective manner. At the same time, products and technologies developed by others mayrender our products, services and systems obsolete or non-competitive.Goodwill represents a significant asset on our balance sheet and may become impaired.Goodwill represents the largest asset on our balance sheet, with an aggregate balance of $6,808 million at December 31, 2018. We review goodwilland intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverableand also review goodwill annually in accordance with the accounting standards for goodwill and intangible assets. A decline in the estimated fair value of areporting unit could result in a goodwill impairment and a related non-cash impairment charge against earnings if the estimated fair value for the reportingunit is less than the carrying value of the net assets of the reporting unit, including its goodwill.Our annual impairment tests at November 30, 2018 and 2017 did not result in impairments to goodwill. In addition, the fair value of all of ourreporting units exceeded the carrying value of the net assets of those reporting units by more than 50% as of the date of our last quantitative test at November30, 2017. A decline in the estimated fair value of one or more of our reporting units could potentially trigger goodwill impairment charges and a materialadverse effect on our results of operations. See “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations— Critical Accounting Policies — Goodwill and Identifiable Intangible Assets” for further discussion.Our results of operations and cash flows are substantially affected by our mix of fixed-price, cost-plus and time-and-material type contracts.Our sales are transacted using written revenue arrangements, or contracts, which are generally fixed-price, cost-plus or time-and-material. For adescription of our revenue recognition policies, see “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Critical Accounting Policies.” For information on the percentage of our total sales generated from each contract type, see “Item 1 —Business— Contracts.”Substantially all of our cost-plus type contracts and time-and-material type contracts are with U.S. Government customers, while sales to foreigngovernment and commercial customers are generally transacted under fixed-price sales arrangements and are included in our fixed-price contract type sales.On a fixed-price type contract (revenue arrangement), we agree to perform the contractual statement of work for a predetermined sales price.Although a fixed-price type contract generally permits us to retain profits if the total actual contract costs are less than the estimated contract costs, we bearthe risk that increased or unexpected costs may reduce our profit or cause us to sustain losses on the contract.16Table of ContentsOn a cost-plus type contract (revenue arrangement), we are paid our allowable incurred costs plus a profit, which can be fixed or variable dependingon the contract’s fee arrangement up to predetermined funding levels established by our customers. On a time-and-material type contract (revenuearrangement), we are paid on the basis of direct labor hours expended at specified fixed-price hourly rates (that include wages, overhead, allowable generaland administrative expenses and profit) and materials at cost. Therefore, on cost-plus and time-and-material type contracts, we do not bear the risks ofunexpected cost overruns, provided that we do not incur costs that exceed the predetermined funded amounts.Additionally, the impact of revisions in profit or loss estimates for all types of contracts subject to the cost-to-cost percentage of completion methodof accounting are recognized on a cumulative catch-up basis in the period in which the revisions are made. Provisions for anticipated losses on contracts arerecorded in the period in which they become evident. Amounts representing contract change orders or claims are included in sales only when we believe wehave an enforceable right to the change order or claim, the amount can be reliably estimated and its realization is reasonably assured. The revisions incontract estimates, if significant, can materially affect our results of operations and cash flows, as well as reduce the valuations of contract assets; and in somecases, result in liabilities to complete contracts in a loss position.Our business could be negatively impacted by cybersecurity threats and other disruptions.As a U.S. defense contractor, we have faced, and continue to face, various security threats, including, but not limited to, threats to the physicalsecurity of our facilities and employees, cybersecurity threats to our information technology infrastructure and attempts to gain access to our proprietary orclassified information as well as the proprietary or classified information of our customers.Although we utilize various procedures and controls to monitor, deter and mitigate these threats, these procedures and controls may not be sufficientto prevent disruptions in mission critical systems, the unauthorized release of confidential, sensitive or classified information and the corruption of data,systems or networks. Any significant operational delays, or any destruction, manipulation or improper use of our or our customers’ data, information systemsor networks, could materially and adversely affect our financial results, damage the reputation of our products and services and require significantmanagement attention and expense. In addition, our insurance coverage and/or indemnification arrangements that we enter into, if any, may not be adequateto cover all of the costs related to cybersecurity attacks or disruptions resulting from such events.To date, cyber attacks directed at us have not had a material impact on our financial results. Due to the evolving nature and increased frequency andsophistication of security threats, however, the impact of any future incident cannot be predicted. The threats we face are more advanced and persistent thanthose common to most industries, as highly organized adversaries target us because we operate in the defense industry and protect national securityinformation. If we are unable to protect sensitive information, our customers or governmental authorities could question the adequacy of our threat mitigationand detection processes and procedures, which could result in us having to spend a significant amount of money to upgrade our networks and systems andcould otherwise have a material adverse effect on our business, financial condition, results of operations and cash flows.In the current environment, there are also numerous and evolving risks to cybersecurity and privacy, including the use of viruses, worms or othermalicious software programs and threats involving criminal hackers, state-sponsored intrusions, terrorist attacks, industrial espionage, employee malfeasance,and human or technological error. As these risks develop and these attacks become more frequent and sophisticated, we may find it necessary to makesignificant further investments to protect data and infrastructure from cyber and other security attacks.We must also rely on the safeguards put in place by customers, suppliers, vendors, subcontractors, venture partners or other third parties to minimizethe impact of cyber threats, other security threats or business disruptions. These third parties may have varying levels of cybersecurity expertise andsafeguards, and their relationships with government contractors, such as L3, may increase the likelihood that they are targeted by the same cyber threats weface. In the event of a breach affecting these third parties, our business and financial results could suffer materially. With respect to our commercialarrangements with these third parties, we have processes designed to require that the third parties and their employees and agents agree to maintain certainstandards for the storage, protection and transfer of confidential, personal and proprietary information. However, we remain at risk of a data breach due to theintentional or unintentional non-compliance by a third party’s employee or agent, the breakdown of a third party’s data protection processes, which may notbe as sophisticated as ours, or a cyber attack on a third party’s information network and systems.17Table of ContentsPension expense and funding may fluctuate significantly because of changes in key estimates and assumptions, including discount rates and the assumedlong-term rate of return on plan assets, as well as our actual investment returns and regulatory actions, which could negatively impact our results ofoperations, cash flows and financial condition.Determining our pension expense requires significant judgment, particularly with respect to our discount rates, the assumed long-term rates of returnon plan assets and other actuarial assumptions. If our assumptions change significantly due to changes in economic, legislative, demographic experienceand/or circumstances, our pension expense, the funded status of our plans and our cash contributions to such plans would be impacted, which couldnegatively affect our results of operations, cash flows and financial condition. In addition, differences between our actual investment returns and our assumedlong-term rate of return on plan assets could also impact our pension expense, the funded status of our plans and our required cash contributions to the plans.Further, our pension expense and the funded status of our plans, including required cash contributions to the plans, may be impacted by regulatory actions inany given year.Additionally, pension plan cost recoveries under Cost Accounting Standards (CAS) for our U.S. Government contracts occur in different periodsfrom when pension expense is recognized under accounting principles generally accepted in the U.S. or when cash contributions are made. Although CAShas been revised to better align the minimum required contributions under the Employee Retirement Income Security Act of 1974 (ERISA), as amended bythe Pension Protection Act of 2006, with pension plan cost recoveries under CAS, timing differences could have a material adverse effect on our cash flow.If we are unable to attract and retain key management and personnel, we may become unable to operate our business effectively.Our future success depends to a significant degree upon the continued contributions of our management and our ability to attract and retain highlyqualified management and technical personnel, including employees who have U.S. Government security clearances, particularly clearances of top-secret andabove. We do not maintain any key person life insurance policies for members of our management. We face competition for management and technicalpersonnel from other companies and organizations. Failure to attract and retain such personnel would damage our future prospects.Environmental laws and regulations may subject us to significant liability.Our operations are subject to various U.S. federal, state and local as well as certain foreign environmental laws and regulations within the countriesin which we operate relating to the discharge, storage, treatment, handling, disposal and remediation of certain materials, substances and wastes used in ouroperations.New laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or theimposition of new clean-up requirements may require us to incur a significant amount of additional costs in the future and could decrease the amount of cashflow available to us for other purposes, including capital expenditures, research and development and other investments and could have a material adverseeffect on our business, financial condition, results of operations, cash flows and future prospects.Our business acquisition strategy involves risks, and we may not successfully implement our strategy.We opportunistically seek to acquire businesses that enhance our capabilities and add new technologies, products, services, programs, contracts andcustomers to our existing businesses. We may not be able to continue to identify acquisition candidates on commercially reasonable terms or at all. If wemake additional business acquisitions, we may not realize the benefits anticipated from these acquisitions, including sales growth, cost synergies and marginimprovement. Furthermore, we may not be able to obtain additional financing for business acquisitions, since such additional financing could be restricted orlimited by the terms of our debt agreements or due to unfavorable capital market conditions.The process of integrating the operations of acquired businesses into our existing operations may result in unforeseen difficulties and may requiresignificant financial and managerial resources that would otherwise be available for the ongoing development or expansion of our existing operations.Possible future business acquisitions could result in the incurrence of additional debt and related interest expense and contingent liabilities, each of whichcould result in an increase to our already significant level of outstanding debt, as well as more restrictive covenants. Furthermore, in certain of our businessacquisitions we have assumed all claims against and liabilities of the acquired business, including both asserted and unasserted claims and liabilities.18Table of ContentsOur spin-off of Engility could result in substantial tax liability to us and our shareholders.In connection with our spin-off of Engility in 2012, we received an Internal Revenue Service (IRS) Ruling stating that L3 and its shareholders wouldnot recognize any taxable income, gain or loss for U.S. federal income tax purposes as a result of the transaction. In addition, we received an opinion ofcounsel that the spin-off satisfied certain requirements for tax-free treatment that are not covered in the IRS Ruling; however, an opinion of counsel is notbinding on the IRS. Accordingly, the IRS or the courts may reach conclusions with respect to the spin-off that are different from the conclusions reached inthe opinion of counsel. Moreover, both the IRS Ruling and the opinion of counsel are based on certain factual statements and representations made by us,which, if incomplete or untrue in any material respect, could invalidate the IRS Ruling or opinion of counsel.If, notwithstanding receipt of the IRS Ruling and opinion of counsel, the spin-off and certain related transactions were determined to be taxable,then we would be subject to a substantial tax liability. In addition, if the spin-off were taxable, each holder of our common stock who received shares ofEngility would generally be treated as having received a taxable distribution of property in an amount equal to the fair market value of the shares of Engilityreceived.Item 1B. Unresolved Staff CommentsNone.19Table of ContentsItem 2. PropertiesAt December 31, 2018, we operated in 283 locations consisting of manufacturing facilities, administration, research and development and otherproperties throughout the United States and internationally. Of these, we owned 29 locations consisting of approximately 4.9 million square feet and leasedspace at 254 locations consisting of approximately 9.3 million square feet. Additionally, our ISRS segment utilized a facility consisting of approximately 3.3million square feet through a land lease expiring in 2031 with the city of Greenville, Texas.A summary of square footage by reportable segment at December 31, 2018, is presented below. Leased Owned Government-Owned Total (Square feet in millions)ISRS 2.0 1.9 3.3 7.2C&NS 4.4 0.9 — 5.3Electronic Systems 2.7 2.1 — 4.8Total 9.1 4.9 3.3 17.3Our reportable segments have major operations at the following locations:•ISRS — Tempe, Arizona; Orlando, Florida; Wilmington, Massachusetts; Londonderry, New Hampshire; Mason, Ohio; Pittsburgh, Pennsylvania;Greenville, Rockwall and Waco, Texas; Quebec and Ontario, Canada; and Tewkesbury, U.K.•C&NS — Anaheim, San Diego, San Leandro, Simi Valley, Sylmar and Torrance, California; Ayer and Northampton, Massachusetts; Camden,New Jersey; Hauppauge, New York; Tulsa, Oklahoma; Philadelphia and Williamsport, Pennsylvania; Salt Lake City, Utah; and Bologna, Italy.•Electronic Systems — Phoenix, Arizona; Anaheim, California; Pueblo, Colorado; Sanford, Sarasota and St. Petersburg, Florida; Tewksbury andWoburn, Massachusetts; Grand Rapids and Muskegon, Michigan; Mount Olive, New Jersey; Kirkwood, New York; Cincinnati, Ohio; Arlington,Grand Prairie and Plano, Texas; Hamilton, New Zealand; Tramaga, Portugal; and Bracknell, Crawley, Droitwich and Luton, U.K.Additionally, our Corporate staff occupies a total of 0.2 million square feet of office space in New York, New York and Arlington, Virginia.Management believes all of our properties have been well maintained, are in good condition and are adequate and suitable for our business as presentlyconducted.Item 3. Legal ProceedingsThe information required with respect to this item can be found in Note 19 to our audited consolidated financial statements and is incorporated byreference into this Item 3.Item 4. Mine Safety DisclosuresNone.20Table of ContentsPART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesThe common stock of L3 is traded on the New York Stock Exchange (NYSE) under the symbol “LLL.” On February 14, 2019, the number of holdersof L3’s common stock was approximately 200,573.Issuer Purchases of Equity SecuritiesOn 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 itscommon stock. The program became effective on July 1, 2017 and has no set expiration date. Repurchases are made from time to time at management’sdiscretion in accordance with applicable federal securities laws. All share repurchases of L3’s common stock have been recorded as treasury shares. L3repurchased 1.6 million shares of its common stock at an average price of $196.64 per share for an aggregate amount of $322 million from January 1, 2018through September 28, 2018. All share repurchases of L3’s common stock have been recorded as treasury shares.We did not repurchase any shares of common stock from September 29, 2018 through February 14, 2019. The last repurchase of shares was in July2018. In connection with the planned merger with Harris Corporation, we suspended our share repurchase program.The graph below compares the cumulative total returns of our common stock with the cumulative total return of the Standard & Poor’s 500Composite Stock Index and the Standard & Poor’s 1500 Aerospace & Defense Index, for the period from December 31, 2013 to December 31, 2018. Thesefigures assume that all dividends paid over the performance period were reinvested and that the starting value of each index and the investment in ourcommon stock was $100 on December 31, 2013.We are one of the companies included in the Standard & Poor’s 1500 Aerospace & Defense Index and the Standard & Poor’s 500 Composite StockIndex. The starting point for the measurement of our common stock cumulative total return was our closing stock price on the NYSE of $106.86 per share onDecember 31, 2013. The graph is not, and is not intended to be, indicative of future performance of our common stock.21Table of ContentsItem 6. Selected Financial DataThe selected financial data presented below is derived from our audited consolidated financial statements. The Company's selected financial data forthe year ended December 31, 2018 is presented under ASC 606 while the Company's selected financial data for the years ended December 31, 2017, 2016,2015 and 2014 are presented under ASC 605. Year Ended December 31, 2018(2) 2017(3) 2016(4) 2015(5) 2014 (in millions, except per share data)Statements of Operations Data: Net sales$10,244 $9,573 $9,210 $9,231 $9,691Operating income$1,120 $1,031 $958 $812 $984Goodwill impairment charge— — — 46 —(Gain) loss related to business divestitures(42) — — 31 —Merger and acquisition related expenses28 — — — —Segment operating income$1,106 $1,031 $958 $889 $984Operating margin10.9% 10.8% 10.4% 8.8% 10.2%Segment operating margin10.8% 10.8% 10.4% 9.6% 10.2%Interest expense$(164) $(169) $(164) $(162) $(147)Interest and other income (loss), net$37 $9 $17 $(10) $34Debt retirement charges$(69) $— $(7) $(1) $—Income from continuing operations before income taxes$924 $871 $804 $639 $871Provision for income taxes(103) (102) (171) (132) (225)Income from continuing operations821 769 633 507 646Net income from continuing operations attributable tononcontrolling interests(21) (16) (14) (15) (13)Net income from continuing operations attributable to L3$800 $753 $619 $492 $633Adjusted net income from continuing operationsattributable to L3(1)$856 $753 $623 $557 $633Earnings per share from continuing operations allocableto L3 common shareholders: Basic$10.19 $9.65 $7.99 $6.10 $7.41Diluted$10.05 $9.46 $7.86 $6.01 $7.21Adjusted Diluted(1)$10.75 $9.46 $7.91 $6.80 $7.21L3 weighted average common shares outstanding: Basic78.5 78.0 77.4 80.7 85.4Diluted79.6 79.6 78.8 81.9 87.8Cash dividends declared per common share$3.20 $3.00 $2.80 $2.60 $2.40__________________(1) Adjusted diluted EPS from continuing operations is diluted EPS from continuing operations excluding: (i) debt retirement charges, (ii) merger and acquisition related expenses,(iii) goodwill impairment charges and (iv) divestiture (gains) losses. We believe that the debt retirement charges, the merger and acquisition related expenses, goodwill impairmentcharges and divestiture (gains) losses affect the comparability of the results of operations. We also believe that disclosing diluted EPS excluding the debt retirement charges, themerger and acquisition related expenses, goodwill impairment charges and divestiture (gains) losses is useful to investors as it allows investors to more easily compare results.However, these non-GAAP financial measures may not be defined or calculated by other companies in the same manner.(2) Income from continuing operations for the year ended December 31, 2018 includes: (i) debt retirement charges of $69 million ($52 million after income taxes), or $0.66 perdiluted share, (ii) a pre-tax gain of $42 million ($19 million after income taxes), or $0.24 per diluted share, related to the divestiture of the Crestview Aerospace and TCSbusinesses and (iii) merger and acquisition related expenses of $28 million ($23 million after income taxes), or $0.28 per diluted share. Excluding these items, adjusted dilutedEPS from continuing operations would have been $10.75.(3) Provision for income taxes for the year ended December 31, 2017 includes estimated tax benefits of $79 million, or $0.99 per diluted share, related to the enactment of the U.S.Tax Cuts and Jobs Act (U.S. Tax Reform) in December 2017.(4) Income from continuing operations for the year ended December 31, 2016 includes debt retirement charges of $7 million ($4 million after income taxes), or $0.05 per dilutedshare. Excluding this item, adjusted diluted EPS from continuing operations would have been $7.91.(5) Income from continuing operations for the year ended December 31, 2015 includes: (i) non-cash goodwill impairment charge of $46 million ($44 million after income taxes), or$0.54 per diluted share, related to a business retained by L3 in connection with the sale of the National Security Solutions (NSS)22Table of Contentsbusiness and (ii) a pre-tax loss of $31 million ($20 million after income taxes), or $0.25 per diluted share, related to business divestitures. Excluding these items, adjusted dilutedEPS from continuing operations would have been $6.80. Year Ended December 31, 2018 2017 2016 2015 2014 (in millions)Balance Sheet Data (at year end): Working capital(1)$2,363 $1,871 $1,467 $797 $1,580Total assets13,518 12,729 11,865 12,069 13,692Long-term debt, including current portion3,321 3,330 3,325 3,626 3,916Equity5,907 5,151 4,624 4,429 5,360Cash Flow Data: Net cash from operating activities from continuingoperations$1,042 $985 $1,022 $1,035 $1,065Net cash used in investing activities fromcontinuing operations(91) (453) (10) (190) (218)Net cash used in financing activities fromcontinuing operations(520) (366) (856) (1,205) (893)__________________(1) Excludes net assets held for sale.Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsOverview and OutlookL3’s BusinessL3 is a prime contractor in Intelligence, Surveillance and Reconnaissance (ISR) systems, aircraft sustainment (including modifications and fleetmanagement of special mission aircraft), simulation and training, night vision and image intensification equipment, and security and detection systems. L3 isalso a leading provider of a broad range of communication, electronic and sensor systems used on military, homeland security and commercial platforms. Ourcustomers 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.In the third quarter of 2018, we completed a realignment of our business segments to maximize growth and improve our integration andcollaboration across the enterprise. As a result of the realignment, 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. Financial information for our segments is included in Note 22 to ouraudited consolidated financial statements.ISRS provides products and services for the global ISR and Command, Control and Communications (C3) markets, specializing in ISR missionsolutions from seabed to space, signals intelligence (SIGINT) and multi-intelligence platforms, including engineering, modernization and sustainmentsolutions for military and various government aircraft, ground support equipment and other platforms. These strategic and tactical products and servicesprovide warfighters with the ability to detect, collect, identify, analyze and disseminate information from command centers, communication nodes and airdefense systems for real-time situational awareness and response. Other major capabilities and mission solutions include space avionics and imagingpayloads, Counter Unmanned Aircraft Systems mission solutions, cyber and electronic warfare, special mission command & control, modeling & simulationand life cycle support. ISRS sells these products and services primarily to the DoD and select foreign governments. The ISRS sectors are ISR Systems,Airborne Sensor Systems, Warrior Sensor Systems, Space & Sensor Systems, Aircraft Systems, MAS, Intelligence & Mission Systems and Advanced Programs.C&NS provides network and communication systems, secure communications products, radio frequency (RF) components, satellite communicationterminals and space, microwave and telemetry products. These products include secure data links that are used to connect a variety of space, airborne, groundand sea-based communication systems and are used in transmission, processing, recording, monitoring and dissemination functions of these communicationsystems. Other major capabilities include integrated maritime mission solutions, directed energy, lightweight unmanned undersea vehicles and naval powerdelivery on submarines and surface ships. C&NS sells these products and services primarily to the DoD and select foreign governments. The C&NS sectors areBroadband Communication Systems, Naval Power Systems, Advanced Communications, Space & Power Systems and Maritime Sensor Systems.23Table of ContentsElectronic Systems provides a broad range of products and services, including components, products, subsystems, systems and related services tomilitary and commercial customers. These products and services serve markets, such as commercial and military aircraft simulation and training, cockpitavionics, airport security and precision weapons. Electronic Systems sells these products and services primarily to the DoD and select foreign governments.The Electronic Systems sectors are Commercial Aviation Solutions, Precision Engagement Systems, Link Training & Simulation and Security & DetectionSystems.We adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (commonly known as ASC 606), effectiveJanuary 1, 2018 using the modified retrospective transition method. In accordance with the modified retrospective transition method, the year endedDecember 31, 2018 is presented under ASC 606, while the years ended December 31, 2017 and 2016 are presented under ASC 605, Revenue Recognition, theaccounting standard in effect for periods ending prior to January 1, 2018. The cumulative effect of the change in accounting for periods prior to January 1,2018 was recognized through retained earnings at the date of adoption.Vertex Aerospace Divestiture: On June 29, 2018, we completed the sale of our Vertex Aerospace businesses for a sales price of $540 million subjectto customary closing net working capital adjustments. In connection with the sale, we recognized: (1) a pre-tax gain from continuing operations of $42million ($19 million after income taxes) related to the Crestview Aerospace and TCS businesses (the "Crestview & TCS Businesses") and (2) a pre-tax gainfrom discontinued operations of $234 million ($177 million after income taxes) related to the Vertex Aerospace business. The divestiture of the VertexAerospace business represents a strategic shift by us to exit the logistics solution and maintenance services business for military aircraft where we do notprovide complex ISR systems integration and modification. The Vertex Aerospace business generated sales of $0.6 billion in 2018, $1.4 billion in 2017 and$1.3 billion in 2016. The assets and liabilities and results of operations of the Vertex Aerospace business are reported as discontinued operations for allperiods presented.All references made to financial data in this Annual Report on Form 10-K are to L3’s continuing operations, unless specifically noted.We generated sales of $10,244 million and $9,573 million for the years ended December 31, 2018 and 2017, respectively, and our primary customerwas the DoD. See “Part I — Item 1 — Business — Major Customers” for additional information regarding a summary of our sales by end customer and thepercent contributed by each to our total sales.Most of our contracts (revenue arrangements) with the U.S. Government are subject to U.S. Defense Contract Audit Agency audits and various costand pricing regulations and include standard provisions for termination for the convenience of the U.S. Government. Multiyear U.S. Government contractsand related orders are subject to cancellation if funds for contract performance for any subsequent year become unavailable. Foreign government contractsgenerally include comparable provisions relating to termination for the convenience of the relevant foreign government.Planned Merger with Harris CorporationOn October 14, 2018, L3 and Harris Corporation (“Harris”) announced an agreement to combine in an all stock merger of equals. Under the terms ofthe Agreement and Plan of Merger (the “Merger Agreement”) governing the proposed transaction, which was unanimously approved by the boards ofdirectors 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 stockthey hold. Upon completion of the merger, Harris shareholders will own approximately 54% and L3 shareholders will own approximately 46% of thecombined company, which will be renamed L3 Harris Technologies, Inc. The merger is expected to close in the middle of 2019, subject to customary closingconditions, including the receipt of regulatory approvals and approval by the shareholders of both L3 and Harris.Business EnvironmentU.S. Government Markets. Sales to U.S. Government customers represented 70% of our 2018 sales and were primarily to DoD customers, whichcomprised 66% of our sales. Therefore, our annual sales are generally highly correlated to changes in U.S. Government spending levels, especially DoDbudget levels.The total DoD budget for FY 2017 was $606 billion ($523 billion base budget, $83 billion Overseas Contingency Operations (OCO)), an increase of4% 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 2018funding was addressed through a series of Continuing Resolutions (CR). However, on February 9, 2018, President Trump signed into law the BipartisanBudget 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 processover the next two fiscal years (FYs 2018 and24Table of Contents2019). The BBA included a short-term CR extension to March 23, 2018, to allow for completion of the FY 2018 appropriations process (including enactmentof 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 funded the government through September 30, 2018. The 2018 Appropriations Actincluded $665 billion for the DoD ($599 billion base budget, $66 billion OCO). While 2018 BBA raised the spending caps for FY 2018 and FY 2019previously constrained by the Budget Control Act of 2011 (BCA) and temporarily suspended the statutory debt ceiling through March 1, 2019, it did notmodify 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 basebudget, $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 ofthe FY 2019 National Defense Authorization Act (NDAA), and on June 18, 2018, the Senate passed its version of the FY19 NDAA. Both the House andSenate 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 2019budget request. The final versions of the FY19 NDAA were passed by the House and Senate on July 26 and August 1, 2018, respectively, and PresidentTrump signed it into law on August 13, 2018.On June 28, 2018, the House passed its version of the Fiscal Year 2019 Defense Appropriations Bill, providing $674.4 billion for the Department ofDefense and the Intelligence Community - funding levels aligned to those authorized in the NDAA. On August 23, 2018, the Senate passed its version of theFiscal Year 2019 Defense Appropriations Bill, consistent with the total funding level included in the House’s version. On September 13, 2018, House andSenate conferees announced a final conference agreement on the Fiscal Year 2019 Defense Appropriations Bill, and on September 28, 2018, the Presidentsigned the conference agreement into law. The enactment of the annual Defense Appropriations bill prior to the beginning of the fiscal year had not occurredin over a decade.The table below presents the FY 2012 through FY 2019 DoD enacted budgets and the FY 2019 DoD Future Years Defense Plan (FYDP), as proposedwithin the FY 2019 DoD Budget Request. Although the budgets below are presented through FY 2023, they are subject to change each year. DoD Budget Annual TotalBudget ChangeFiscal Year (Ending September 30) Base OCO Total (in billions) 2012 $530 $115 $645 -6 %2013 $496 $82 $578 -10 %2014 $496 $85 $581 +1 %2015 $497 $63 $560 -4 %2016 $522 $59 $581 +4 %2017 $524 $82 $606 +4 %2018 $529 $83 $612 +1 %2019 $606 $68 $674 +10 %2020 $681 $20 $701 +4 %2021 $694 $20 $714 +2 %2022 $707 $20 $727 +2 %2023 $722 $20 $742 +2 %__________________Source: United States Department of Defense FY 2019 Budget Request.While the BBA and the Fiscal Year 2019 Defense Appropriations Bill provide a level of stability, future DoD budgets and spending levels aredetermined by a number of factors beyond our control, including changes to U.S. procurement policies, current and future domestic and international budgetconditions, presidential administration priorities and changing national security and defense requirements. Furthermore, the U.S. Government’s overall fiscalchallenges remain, including uncertainties regarding BCA sequestration cuts after FY 2019, and, therefore, future DoD budgets and spending levels aredifficult to predict. Although uncertainty exists, we believe that L3 will benefit from several of the DoD’s focus areas such as ISR, unmanned systems,undersea warfare, precision strike, secure communications, missile defense and space programs, electronic warfare, aircraft readiness and the ability to projectpower in denied environments. For more information on the risks and uncertainties related to our U.S. Government contracts, see “Part I — Item 1A — RiskFactors” in this Annual Report on Form 10-K.25Table of ContentsInternational and Commercial Markets. Sales to end customers other than the U.S. Government represented 30% of our 2018 sales. We expect salesto international and commercial customers to represent approximately 30% of our consolidated 2019 sales. These sales are generally affected by globaleconomic conditions, geopolitical and security conditions and commodity prices, as well as our competitive success in winning new business and increasingour market share. We believe that L3 will benefit from a large addressable international market with sales directly to foreign allied governments and underforeign military sales agreements between the U.S. Government and foreign governments. Although our international sales are experiencing near-termsoftness, we believe the focus of our international markets in areas such as ISR, simulators, communication systems, night vision products and sensorssystems will benefit L3 in the long term. We also believe that the commercial markets in which we participate such as aviation products, security andscreening, simulation and training, and RF microwave and power have long-term favorable fundamentals.Key Performance MeasuresThe primary financial performance measures that we use to manage our businesses and monitor results of operations are (i) sales, (ii) operatingincome and (iii) net cash from operating activities (Operating Cash Flow). Management believes that these financial performance measures are the primarygrowth drivers for our earnings per 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 thetype 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 salesexcluding the sales impact of acquisitions and divestitures. Sales declines related to business divestitures are sales from divestitures that are included in ouractual results for a twelve-month period prior to the divestitures. Sales increases related to acquired businesses are sales from acquisitions that are included inour actual results for less than a twelve-month period. We expect to supplement, strengthen and enhance our existing businesses by selectively acquiringbusinesses that: (1) add important new technologies and products, (2) provide access to select customers, programs and contracts and (3) provide attractivereturns on investment. Another important financial performance measure that we use is operating margin, because sales growth combined with operatingmargin levels determine our operating income levels. Operating Cash Flow is also an important financial performance measure because Operating Cash Flowmeasures our ability to convert operating income into cash after paying income taxes and interest expenses and investing in working capital.Sales Trends. For the year ended December 31, 2018, consolidated net sales of $10,244 million increased by 7%, compared to the year endedDecember 31, 2017. Organic sales increased $635 million, or 7%, to $10,138 million, and net sales from business acquisitions was $106 million, or 1%.These increases were partially offset by divestitures of $70 million, or 1%. Our average annual sales increased for the five years ended December 31, 2018 byapproximately 1% primarily due to an increase in average annual organic sales of approximately 1%. See “Results of Operations,” including segment resultsbelow for a further discussion of sales.We derived approximately 66% of our 2018 sales from DoD customers; as a result, our sales are highly correlated to DoD budget levels. DoDbudgets are a function of several factors and uncertainties beyond our control, including, but not limited to, changes in U.S. procurement policies, budgetconsiderations, current and future economic conditions, presidential administration priorities, U.S. military engagements, changing national security anddefense requirements, geo-political developments, actual fiscal year congressional appropriations for defense budgets, and sequestration and other DoDbudget reductions. Any of these factors could result in a significant increase, decrease or redirection of DoD budgets and impact L3’s future results ofoperations, including our sales and operating income growth rates. Additionally, L3’s future results of operations will be affected by our ability to retain ourexisting business, including our revenue arrangements with DoD customers, and to successfully re-compete for existing business and compete for newbusiness, which largely depends on: (1) our successful performance on existing contracts, (2) the effectiveness and innovation of our technologies andresearch and development activities, (3) our ability to offer better program performance than our competitors at an affordable cost and (4) our ability to retainour employees and hire new ones, particularly those employees who have U.S. Government security clearances and those with clearances of top-secret andabove. We expect our 2019 consolidated and organic sales to increase by approximately 5% compared to 2018. We expect organic sales to the DoD and U.S.Government to increase by approximately 4% and organic international sales to increase by approximately 1%. We expect organic commercial sales toincrease by approximately 10% primarily for commercial aviation products.Operating Income and Margin Trends. For the year ended December 31, 2018, our consolidated operating income was $1,120 million, and ourconsolidated operating margin was 10.9%. Our consolidated operating income and consolidated operating margin for the year ended December 31, 2018were impacted by the gain on sale of the Crestview & TCS Businesses of $42 million and merger and acquisition related expenses of $28 million. The gainon sale of the Crestview & TCS Businesses and merger and acquisition related expenses are excluded from segment operating income because they areexcluded by management for purposes26Table of Contentsof evaluating the operating performance of our business segments. Our segment operating income was $1,106 million for the year ended December 31, 2018,an increase of 7% from $1,031 million for the year ended December 31, 2017, and our segment operating income as a percentage of sales (segment operatingmargin) was 10.8% for the years ended December 31, 2018 and 2017. See “Results of Operations”, including segment results below, for a further discussion ofoperating margin. In addition, general and administrative expenses as a percentage of sales was 15.6% for the year ended December 31, 2018, compared to15.9% for the year ended December 31, 2017.Our effective management of labor, material, subcontractor and other direct costs is an important element of cost control and favorable contractperformance. We believe that proactively re-sizing our businesses to their anticipated sales, combined with continuous cost improvement, will enable us toincrease our cost competitiveness. While we continue to undertake cost management actions, such as reducing our indirect costs, curtailing pension benefitsfor salaried employees, resizing select business units and improving our productivity and contract performance in an effort to maintain or increase operatingmargin, 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 donot retain the benefit of all cost management actions, particularly on cost-plus type contracts or on contracts where we are the sole-source provider. Althoughwe expect our 2019 annual consolidated and segment operating margin to increase as compared to 2018, changes in the competitive environment and DoDprocurement practices and changes in annual pension expense, including related assumptions such as the benefit obligation discount rates, among otherfactors, could result in lower operating margin. Furthermore, select business 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.Operating Cash Flow Trends. We generated $1,042 million of Operating Cash Flow during the year ended December 31, 2018, an increase of $57million compared with $985 million generated during the year ended December 31, 2017. The increase in Operating Cash Flow was primarily due to higheroperating income partially offset by higher working capital requirements, primarily contract assets and milestone payments for aircraft procurements relatedto U.S. and foreign government contracts.Discontinued OperationsVertex Aerospace. On June 29, 2018, we completed the sale of our Vertex Aerospace businesses for a sales price of $540 million subject tocustomary closing net working capital adjustments. In connection with the sale, we recognized: (1) a pre-tax gain from continuing operations of $42 million($19 million after income taxes) related to the Crestview & TCS Businesses and (2) a pre-tax gain from discontinued operations of $234 million ($177million after income taxes) related to the Vertex Aerospace business. The divestiture of the Vertex Aerospace business represents a strategic shift by us to exitthe logistics solution and maintenance services business for military aircraft where we do not provide complex ISR systems integration and modification. TheVertex Aerospace business generated sales of $0.6 billion in 2018, $1.4 billion in 2017 and $1.3 billion in 2016. The assets and liabilities and results ofoperations of the Vertex Aerospace business are reported as discontinued operations for all periods presented.National Security Solutions (NSS). On February 1, 2016, we completed the sale of our NSS segment to CACI International Inc. for a sales price of$547 million.See Note 3 to our audited consolidated financial statements for additional information.27Table of ContentsThe table below presents the statements of operations data for Vertex Aerospace and NSS. The amounts presented in discontinued operations includeallocated interest expenses for debt not directly attributable or related to L3’s other operations. Interest expense was allocated in accordance with theaccounting standards for discontinued operations and were based on the ratio of their net assets to the sum of: (1) total L3 consolidated net assets and (2) L3consolidated total debt. Year Ended December 31, 2018 2017 2016 (in millions)Net sales$597 $1,429 $1,402Operating costs and expenses(1)(561) (1,531) (1,357)Operating income (loss) from discontinued operations36 (102) 45Interest expense allocated to discontinued operations(1) (2) (5)Gain on sale of businesses234 — 64Income (loss) from discontinued operations before income taxes269 (104) 104Income tax (expense) benefit(64) 28 (13)Income (loss) from discontinued operations, net of income taxes$205 $(76) $91__________________(1) Due to a decline in estimated fair value, we recorded a goodwill impairment charge of $187 million during 2017 related to Vertex Aerospace.Business Acquisitions and DivestituresAs discussed above, one aspect of our strategy is to selectively acquire businesses that add new products and technologies or provide access to selectcustomers, programs and contracts. We intend to continue acquiring select businesses for reasonable valuations that will provide attractive returns to L3. Ourbusiness acquisitions, depending on their contract-type, sales mix or other factors, could reduce L3’s consolidated operating margin while still increasingL3’s operating income, earnings per share and net cash from operating activities. In addition, we may also dispose of certain businesses if we determine thatthey no longer fit into L3’s overall business strategy and we are able to receive an attractive price.Acquisitions. We regularly evaluate potential business acquisitions. The table below summarizes the acquisitions that we completed during theyears ended December 31, 2016, 2017 and 2018, referred to herein as business acquisitions. See Note 3 to our audited consolidated financial statements forfurther information regarding our business acquisitions. During the year ended December 31, 2018, we used net cash of $369 million for businessacquisitions.Business Acquisitions Date Acquired Segment Purchase Price(1) (in millions)2016 Advanced Technical Materials, Inc. (ATM) January 22, 2016 C&NS $27 Micreo Limited (Micreo) and Flight Training Acquisitions LLC(Aerosim) September 30, 2016 ISRS and Electronic Systems 86 MacDonald Humfrey (Automation) Limited (MacH) November 22, 2016 Electronic Systems 327(2) Total 2016 $440 2017 Explosive Trace Detection business of Implant Sciences (ETDbusiness) January 5, 2017 Electronic Systems $118 OceanServer Technology, Inc. (OceanServer), Open Water Power, Inc. (Open Water Power), and DossAviation, Inc. (Doss Aviation) March 17, 2017May 19, 2017 andSeptember 12, 2017 C&NS and Electronic Systems 147(3) Adaptive Methods, Inc. (Adaptive Methods) September 8, 2017 C&NS 33 Escola De Aviacao Aerocondor, S.A. (G-Air) October 27, 2017 Electronic Systems 13 Kigre, Inc. (Kigre) December 18, 2017 ISRS 13 Total 2017 $324 28Table of ContentsBusiness Acquisitions Date Acquired Segment Purchase Price(1) (in millions)2018 Latitude Engineering, LLC June 28, 2018 Electronic Systems $15(4)Applied Defense Solutions, Inc. June 29, 2018 ISRS 53(5)Azimuth Security and Linchpin Labs August 31, 2018 ISRS 200(6)C.K. Industrial Engineers Limited September 18, 2018 Electronic Systems 24(7)ASV Global, L.L.C. September 20, 2018 C&NS 94(8)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 £30 million (approximately $38 million), which is contingent upon the post-acquisition financial performance of MacH for thethree-year period ending December 31, 2019.(3) Excludes additional purchase price, not to exceed $17 million, which is contingent upon Open Water Power achieving certain post-acquisition milestones for the four-year periodending December 31, 2021.(4) 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-yearperiod ending December 31, 2021, and the remaining $5 million of which is based on Latitude Engineering achieving certain post-acquisition milestones through December 31,2020.(5) The purchase price net of cash acquired of approximately $1 million was $52 million.(6) 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.(7) The purchase price net of cash acquired of £4 million (approximately $5 million) was £14 million (approximately $19 million).(8) The purchase price net of cash acquired of approximately $1 million was $93 million.All of our business acquisitions are included in our consolidated results of operations from their dates of acquisition.Divestitures. We regularly evaluate potential business divestitures. Summarized below are the divestitures that we have completed during the yearsended December 31, 2018, 2017 and 2016. See Note 3 to our audited consolidated financial statements for further information regarding our businessdivestitures.2018 DivestituresAs discussed in Note 1 to our audited consolidated financial statements, on June 29, 2018, we completed the sale of our Crestview & TCSBusinesses. The assets and liabilities of the Crestview & TCS Businesses were classified as held for sale in our audited consolidated balance sheet atDecember 31, 2017. The Crestview & TCS Businesses, which were within our ISRS segment, primarily provided aircraft fabrication and assembly of fixed androtary wing aero structures as well as avionics hardware and software systems to address mission critical needs. The table below presents Crestview & TCSBusinesses’ results of operations and is included in continuing operations. Year EndedDecember 31, 2018 (in millions)Net sales$64Gain on sale of businesses$42Income from continuing operations before income taxes$4529Table of ContentsCrestview & TCS Businesses. The major classes of assets and liabilities included as held for sale related to the Crestview & TCS Businesses arepresented in the table below. December 31, 2017 (in millions)Assets Billed receivables$14Contracts in process33Total current assets47Property, plant and equipment, net34Goodwill52Identifiable intangible assets2Total assets classified as held for sale$135 Liabilities Accounts payable, trade$3Accrued employment costs2Accrued expenses3Other current liabilities5Total current liabilities13Deferred income taxes4Total liabilities classified as held for sale$17Vertex Aerospace. On June 29, 2018, we completed the sale of our Vertex Aerospace business. See "Discontinued Operations" above for furtherdiscussion of the divestiture and impact on our audited consolidated statements of operations.2017 DivestituresDuring the year ended December 31, 2017, we completed the sales of the CTC Aviation Jet Services Limited (Aviation Jet Services) business, the L3Coleman Aerospace (Coleman) business and the Display Product Line. The table below presents pre-tax (loss) gain recognized, the proceeds received and netsales included in continuing operations from these divestitures. Year Ended December 31, 2017 Pre-Tax (Loss) gain Proceeds Received Net Sales (in millions)Aviation Jet Services divestiture$(5) $1 $1Coleman divestiture(3) 17 9Display Product Line divestiture4 7 —Total$(4) $25 $10Aviation Jet Services Divestiture. On March 1, 2017, we divested our Aviation Jet Services business for a sales price of £1 million (approximately $1million). Aviation Jet Services provided non-core aircraft management and operational services as part of commercial training solutions based in the UnitedKingdom and was included in the Electronic Systems segment.Coleman Divestiture. On February 24, 2017, we divested our Coleman business for a sales price of $15 million. Coleman provided air-launchballistic missile targets and was included in the Electronic Systems segment.Display Product Line Divestiture. On February 23, 2017, we divested our Display Product Line for a sales price of $7 million. The Display ProductLine provided cockpits to various military aircraft and was included in the Electronic Systems segment.30Table of Contents2016 DivestituresNSS. On February 1, 2016, we completed the sale of our NSS segment to CACI International Inc. for a sales price of $547 million.Critical Accounting PoliciesOur significant accounting policies are described in Note 2 to our audited consolidated financial statements. The preparation of financial statementsin conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires us to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reportedamounts of sales and cost of sales during the reporting period. The most significant of these estimates and assumptions relate to sales, profit and lossrecognition for performance obligations satisfied over time, fair values of assets acquired and liabilities assumed in business combinations and investments,market values for inventories reported at lower of cost or market, pension and post-retirement benefit obligations, stock-based employee compensationexpense, 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 differfrom these estimates and could differ materially. We believe that our critical accounting estimates have the following attributes: (1) we are required to makeassumptions about matters that are uncertain and require judgment at the time of the estimate, (2) use of reasonably different assumptions could have changedour estimates, particularly with respect to estimates of contract transaction price and total costs at completion, and recoverability of assets, and (3) changes inthe estimate could have a material effect on our financial condition or results of operations. We believe the following critical accounting policies contain themore significant judgments and estimates used in the preparation of our financial statements.Revenue Recognition. Effective January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers, as amended (commonlyreferred to as ASC 606), using the modified retrospective transition method. The cumulative effect of applying the standard was an increase of $13 million toshareholders' equity as of January 1, 2018. Our statement of operations for the year ended December 31, 2018 and our balance sheet as of December 31, 2018are presented under ASC 606, while our statements of operations for the years ended December 31, 2017 and 2016 and our balance sheet as of December 31,2017 are presented under ASC 605, Revenue Recognition. See Note 2 to our audited consolidated financial statements for disclosure of the impact of theadoption of ASC 606 on our statement of operations for the year ended December 31, 2018 and balance sheet as of December 31, 2018 and the effect ofchanges made to our consolidated balance sheet as of January 1, 2018.A substantial majority of our consolidated net sales are generated from long-term contracts with customers that require us to design, develop,manufacture, modify, upgrade, test and integrate complex aerospace and electronic equipment and to provide engineering and technical services accordingto the customers’ specifications. These contracts are primarily with agencies of, and prime system contractors to, the U.S. Government and foreigngovernments and are generally priced on a fixed-price, cost-plus or time-and-material type basis. Substantially all of our cost-plus and time-and-material typecontracts are with the U.S. Government, primarily the DoD. Certain of our contracts with the U.S. Government are multi-year contracts incrementally fundedby the customer. The transaction price for these incrementally funded contracts includes contract value amounts not yet funded by the U.S. Government whenwe have a firm order for the goods or services and it is probable that the customer will fund such amounts. In assessing probability, we consider, among otherfactors, the period of time before contract funding is expected, communication from the customer that indicates funding will be obtained and our history ofreceiving funding under the current contract or previous similar contracts. We also generate sales to a lesser extent from contracts with commercial andgovernment customers for standard product and service offerings, which are priced on a firm fixed basis. See Note 22 to our audited consolidated financialstatements for additional information regarding the composition of our net sales.We record sales for a contract when we have the approval and commitment of all parties, the contract identifies the rights of the parties and paymentterms, the contract has commercial substance and collectability of the consideration is probable.To determine the proper revenue recognition method, we first evaluate each of our contractual arrangements to identify our performance obligations.A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. The majority of our contracts have a singleperformance obligation because the promise to transfer the individual good or service is not separately identifiable from other promises within the contractand is, therefore, not distinct. These contractual arrangements either require the use of a highly specialized manufacturing process to provide goods accordingto customer specifications or represent a bundle of contracted goods and services that are integrated and together represent a combined output, which mayinclude the delivery of multiple units. Some of our contracts have multiple performance obligations, primarily (i) related to the provision of multiple goodsor services that have alternative use to us or that are not substantially the same or (ii) due to the contract covering multiple phases of the product lifecycle(development and engineering, production, maintenance and31Table of Contentssupport). For contracts with more than one performance obligation, we allocate the total transaction price in an amount based on the estimated relativestandalone selling prices underlying each performance obligation. In cases where a contract requires a customized good or service, the primary method usedto estimate standalone selling price is the expected cost plus a margin approach. In cases where we sell a standard product or service offering, the standaloneselling price is based on an observable standalone selling price.The majority of our 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 orperformance-based payments or (ii) the unilateral right of the customer to terminate the contract for its convenience, in which case we have the right toreceive payment for costs incurred plus a reasonable profit for products and services that do not have alternative use to us. Foreign government and certaincommercial contracts contain similar termination for convenience clauses, or we have a legally enforceable right to receive payment for costs incurred and areasonable profit for products or services that do not have alternative use to us. Sales on fixed price and cost-plus type contracts that include performanceobligations satisfied over time are generally recorded at amounts equal to the ratio of actual cumulative costs incurred divided by total estimated costs atcompletion, multiplied by (i) the transaction price, less (ii) the cumulative sales recognized in prior periods (cost-to-cost method).Accounting for the sales and profits on performance obligations for which progress is measured using the cost-to-cost method involves thepreparation 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 contractand the estimated costs to complete the contract's statement of work. Incurred costs include labor, material, overhead and, for our U.S. Government contractorbusinesses, general and administrative (G&A) expenses. Incurred costs represent work performed, which corresponds with and thereby represents the transferof control to the customer. The estimated profit or loss at completion on a contract is equal to the difference between the transaction price and the totalestimated cost at completion. In the case of a contract related to complex aerospace or electronic equipment for which the total estimated costs exceed thetotal transaction price, a loss arises, and a provision for the entire loss is recorded in the period that the loss becomes evident. The unrecoverable costs on aloss contract that are expected to be incurred in future periods are presented on the balance sheet as a component of other current liabilities entitled"Estimated cost in excess of estimated contract value to complete contracts in process in a loss position." See Note 8 to our audited consolidated financialstatements for additional information.Our contracts give rise to variable consideration, including award and incentive fees, as well as amounts incrementally funded by the U.S.Government, or other provisions that can either increase or decrease the transaction price. Award fees provide for a fee based on actual performance relative tocontractually specified performance criteria. Incentive fees provide for a fee based on the relationship between total allowable costs and target costs. Variableconsideration may require us to exercise significant judgment to determine the total transaction price of the contract. We include variable consideration inthe transaction price when there is a basis to reasonably estimate the variable amount we will be entitled to receive and it is probable that a significantreversal in revenue recognized will not be required when the uncertainty is resolved. These estimates are based on historical experience, current andforecasted performance, and our judgment at the time of the evaluation.Contract modifications routinely occur to account for changes in contract specifications or requirements. In most cases, contract modifications arefor goods or services that are not distinct and, therefore, are accounted for as part of the existing contract. Transaction price estimates include additionalconsideration for submitted contract modifications or claims when we believe that we have an enforceable right to the modification or claim, the amount canbe reliably estimated and its realization is reasonably assured. Amounts representing modifications accounted for as part of the existing contract are includedin the transaction price and recognized as an adjustment to sales on a cumulative catch-up basis.Our fixed-price type contracts with the U.S. Government typically allow for progress payments or performance-based payments. Progress paymentsare 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 thecustomer upon the achievement of predetermined performance milestones at amounts not to exceed 90% of contract price. On contracts with progress orperformance-based payments, the customer often retains a small portion of the contract price until satisfactory completion of the contractual statement ofwork. Since a small portion of the contract price is retained, we generally recognize sales in excess of billings, which are presented as contract assets on thebalance 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 andfixed-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 ofinvoices to customers. For certain fixed-price contracts with foreign governments and commercial customers, we receive advance payments. Advancedpayments32Table of Contentsare 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. We record a liability for advance payments received in excess of salesrecognized, which is presented as a contract liability on the balance sheet.Revisions or adjustments to estimates of the transaction price, estimated costs at completion and estimated profit or loss of a performance obligationare often required as work progresses under a contract, as experience is gained, as facts and circumstances change and as new information is obtained, eventhough the scope of work required under the contract may not change. Revisions or adjustments may also be required if contract modifications occur. Theimpact of revisions in profit or loss estimates are recognized on a cumulative catch-up basis in the period in which the revisions are made. The revisions incontract estimates, if significant, can materially affect our results of operations and cash flows, as well as reduce the valuations of contract assets, and in somecases result in liabilities to complete contracts in a loss position. Net sales recognized from our performance obligations partially satisfied in prior periodswere $264 million for the year ended December 31, 2018 and relate to revisions in contract estimates. The aggregate impact of net changes in contractestimates is presented in the table below. Year Ended December 31, 2018 2017 2016 (in millions, except per share data)Operating income $213 $185 $149Diluted earnings per share $2.03 $1.49 $1.23Sales from performance obligations satisfied at a point in time are typically for standard goods and are recognized when the customer obtainscontrol, which is generally upon delivery and acceptance. We also record sales for performance obligations relating to standard services (i.e., maintenanceand extended warranties covering standard goods sold by L3) over time by using output measures of time elapsed to measure progress toward satisfying theperformance obligation.Sales on time-and-material type contracts are generally recognized each period based on the amount billable to the customer, which is based ondirect 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 our net sales by revenue recognition method as a percentage of total net sales for the year endedDecember 31, 2018. % of Total Net SalesOver time (cost-to-cost method)74%Point in time19%Output method4%Billing method3%Total100%Goodwill and Identifiable Intangible Assets. In accordance with the accounting standards for business combinations, we record the assets acquiredand liabilities assumed based on their estimated fair values at the date of acquisition (commonly referred to as the purchase price allocation). Identifiableintangible assets are recognized as assets apart from goodwill if they arise from contractual or other legal rights, or if they are capable of being separated ordivided from the acquired business and sold, transferred, licensed, rented or exchanged. However, we do not recognize separate intangible assets for theassembled workforces of our business acquisitions.Generally, the largest separately identifiable intangible asset from the businesses that we acquire is the value of their assembled workforces, whichincludes the human capital of the management, administrative, marketing and business development, scientific, engineering and technical employees of theacquired businesses. The success of our businesses, including their ability to retain existing business (revenue arrangements) and to successfully compete forand win new business (revenue arrangements), is primarily dependent on the management, marketing and business development, contracting, engineeringand technical skills and knowledge of our employees, rather than on productive capital (plant and equipment, and technology and intellectual property).Additionally, for a significant portion of our businesses, our ability to attract and retain employees who have U.S. Government security clearances,particularly those with top-secret and above clearances, is critical to our success and is often a prerequisite for retaining existing revenue arrangements andpursuing new ones. Generally, patents, trademarks and licenses are not material33Table of Contentsfor our acquired businesses. Furthermore, our U.S. Government contracts (revenue arrangements) generally permit other companies to use our patents in mostdomestic work performed by such other companies for the U.S. Government. Therefore, because intangible assets for assembled workforces are part ofgoodwill, the substantial majority of the intangible assets for our acquired business acquisitions are recognized as goodwill. Additionally, the value assignedto goodwill for our business acquisitions also includes the value that we expect to realize from growth expectations and cost reduction measures that weimplement for our acquired businesses. Goodwill equals the amount of the purchase price of the business acquired in excess of the sum of the fair value ofidentifiable acquired assets, both tangible and intangible, less the fair value of liabilities assumed. At December 31, 2018, we had goodwill of $6,808 millionand identifiable intangible assets of $390 million.The most significant identifiable intangible asset that is separately recognized in accordance with U.S. GAAP for our business acquisitions iscustomer contractual relationships. All of our customer relationships are established through written customer contracts (revenue arrangements). The fairvalue for customer contractual relationships is determined, as of the date of acquisition, based on estimates and judgments regarding expectations for theestimated future after-tax earnings and cash flows (including cash flows from working capital) arising from the follow-on sales on contract (revenuearrangement) renewals expected from customer contractual relationships over their estimated lives, including the probability of expected future contractrenewals and sales, less a contributory asset charge, all of which is discounted to present value. All identifiable intangible assets are amortized over theirestimated useful lives as the economic benefits are consumed. We review customer contractual relationships for impairment whenever events or changes incircumstances indicate that the carrying amount may not be recoverable in accordance with the accounting standards for long-lived assets. If any such eventor change in circumstances occurs, and, if our revised estimates of future after-tax cash flows are significantly lower than our estimates at the date we acquiredthe customer contractual relationships, we may be required to record an impairment charge to write-down these intangible assets to their realizable values. Wealso review and update our estimates of the duration of our customer contractual relationships, at least annually. If our current estimates indicate that theduration of our customer contractual relationships have decreased, then we adjust the remaining amortization period for our customer contractualrelationships to their remaining useful economic life.We review goodwill for impairment annually as of November 30 and whenever events or changes in circumstances indicate that the carrying amountmay not be recoverable. The accounting standards for goodwill allow for the assessment of qualitative factors, such as macroeconomic conditions, industryand market conditions and entity relevant events or circumstances, to determine whether it is more likely than not that the fair value of a reporting unit is lessthan its carrying amount. In our latest annual impairment evaluation that occurred as of November 30, 2018, we used the qualitative method of assessinggoodwill for all of our identified reporting units. In prior periods, we did not elect to use the qualitative approach to assessing goodwill, and we chose insteadto complete the quantitative testing process for each reporting unit.A reporting unit is an operating segment, as defined by the segment reporting accounting standards, or a component of an operating segment. Acomponent of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and isreviewed by operating segment management. Two or more components of an operating segment may be aggregated and deemed a single reporting unit forgoodwill impairment testing purposes if the components have similar economic characteristics.L3 had 13 reporting units at December 31, 2018 and at November 30, 2018 when our annual goodwill impairment assessment was completed. Ourannual impairment tests at November 30, 2018 and 2017 did not result in impairments to goodwill. In addition, the fair value of all of our reporting unitsexceeded the carrying value of the net assets of those reporting units by more than 50% as of the date of our last quantitative test at November 30, 2017.L3’s aggregate balance of goodwill from continuing operations increased by $193 million to $6,808 million at December 31, 2018 from $6,615million at December 31, 2017 due to increases of $247 million for business acquisitions, net of divestitures, partially offset by $54 million for foreigncurrency translation adjustments. The table below presents the number of reporting units and the associated goodwill at December 31, 2018 for each of ourreportable segments.Reportable Segment Number of Reporting Units Aggregate Goodwill (in millions)ISRS 6 $2,596C&NS 3 2,007Electronic Systems 4 2,205Total 13 $6,80834Table of Contents2018 Impairment TestAs noted above, in our latest annual impairment evaluation that occurred as of November 30, 2018, we used the qualitative method of assessinggoodwill for all of our identified reporting units. For each of the reporting units, we determined that it was not more likely than not that the fair values wereless than their net book values. In making this determination, we considered several factors, including but not limited to the following:•the amount by which the fair values of each reporting unit exceeded their carrying values as of the date of the most recent quantitativeimpairment analysis (November 30, 2017), which indicated there would need to be substantial negative developments in the markets in whichthese reporting units operate in order for there to be potential impairment;•the carrying values of these reporting units as of November 30, 2018 compared to the previously calculated fair values as of the date of the mostrecent quantitative impairment analysis;•the current forecasts as compared to the forecasts included in the most recent quantitative impairment analysis;•public information from competitors and other industry information to determine if there were any significant adverse trends in our competitors'businesses, such as significant declines in market capitalization or significant goodwill impairment charges that could be an indication that thegoodwill of our reporting units was potentially impaired;•changes related to U.S. Tax Reform;•changes in the value of major U.S. stock indices that could suggest declines in overall market stability that could impact the valuation of ourreporting units;•changes in our market capitalization and overall enterprise valuation to determine if there were any significant decreases that could be anindication that the valuation of our reporting units had significantly decreased; and•whether there had been any significant increases to the weighted-average cost of capital (WACC) rates for each reporting unit, which couldmaterially lower our prior valuation conclusions under a discounted cash flow approach.As discussed previously, in addition to the annual goodwill impairment assessment, we review goodwill for impairment whenever events or changesin circumstances indicate that the carrying amount of a reporting unit’s goodwill may not be recoverable. Accordingly, depending on their outcomes, certaincircumstances, such as the ability of the reporting units to: (1) achieve 2019 projected sales, operating income and cash flow and (2) win contract re-competitions and new business pursuits, may require us to review goodwill for impairment prior to the next annual assessment (November 30, 2019).2017 Impairment TestIn the November 30, 2017 quantitative assessment, to test goodwill for potential impairment, we compared the carrying value of each reporting unitto its fair value. To the extent the carrying value of a reporting unit exceeded its fair value, a goodwill impairment charge would have been recognized. Ourmethodology for determining the fair value of a reporting unit utilized a discounted cash flow (DCF) valuation approach, and was dependent on estimates forfuture sales, operating income, depreciation and amortization, income tax payments, working capital changes and capital expenditures, as well as expectedlong-term growth rates for cash flows. All of these factors are affected by economic conditions related to the industries in which we operate (predominantlythe U.S. defense industry), as well as conditions in the U.S. capital markets.The more significant assumptions used in our DCF valuations to determine the fair values of our reporting units in connection with the goodwillvaluation assessment at November 30, 2017 were: (1) detailed three-year cash flow projections for each of our reporting units, (2) the expected long-term cashflow growth rates for each of our reporting units (commonly known as Terminal Growth Rates), which approximate the expected long-term nominal growthrate for the U.S. DoD budget, the U.S. economy and the respective industries in which the reporting units operate, expected inflation rates, and specificcircumstances for each reporting unit, including contracts or programs ending and expected new business and (3) risk adjusted discount rates, which representthe WACC for each reporting unit and include the estimated risk-free rate of return that is used to discount future cash flow projections to their present values.The WACC for each reporting unit was comprised of: (1) an estimated required rate of return on equity, based on publicly traded companies withbusiness and economic risk characteristics comparable to each of L3’s reporting units (Market Participants),35Table of Contentsincluding a risk free rate of return of 2.65% on the 20-year U.S. Treasury Bond at November 30, 2017 and an equity risk premium of 6% at November 30,2017, and (2) an after-tax rate of return on Market Participants’ debt, which was derived from a selected corporate bond index having a Baa debt rating,consistent with the credit rating of the Market Participants. Each of the estimated required rate of return on equity and the after-tax rate of return on MarketParticipants’ debt is weighted by the relative market value percentages of the Market Participants’ equity and debt. The WACC assumptions for eachreporting unit are based on a number of market inputs that are outside of our control and are updated annually to reflect changes to such market inputs as ofthe date of our annual goodwill impairment assessments, including changes to: (1) the estimated required rate of return on equity based on historical returnson common stock of Market Participants and the Standard & Poor’s 500 Index over the prior five-year period, (2) the risk free rate of return based on theprevailing market yield on the 20 year U.S. Treasury Bond, (3) the rate of return on corporate bonds having a debt rating consistent with the credit rating ofthe Market Participants and (4) the relative market value percentages of Market Participants’ equity and debt.The annual cash flows generated by each of our reporting units vary from year to year, and, therefore, the annual cash flow growth rates do not resultin linear trends due to a number of factors, including, but not limited to: (1) variability of annual sales volume and sales growth rates, (2) increases anddecreases in working capital, including customer advance payments and billings on multi-year contracts (revenue arrangements) with long-term performanceperiods (exceeding one year), (3) the timing of invoicing and cash collections between fiscal years from receivables due from customers on multi-yearcontracts (revenue arrangements), (4) the timing of increases and decreases of select inventories procured and produced in anticipation of future product sales,which frequently overlap the ending and beginning of fiscal years, (5) the timing of the receipt of award fee and incentive fee payments from customers oncontracts (revenue arrangements), (6) variability in annual cash outlays for research and development costs, (7) changes in cash outlays for capitalexpenditures for property, plant and equipment and (8) increases in annual sales and costs and expense volumes of a reporting unit resulting from businessacquisitions. As a result of the factors discussed above and the varying sizes of our reporting units, the annual cash flow levels and growth rates at thereporting unit level tend to fluctuate significantly from year to year.We consider several factors to determine expected future annual cash flows for our reporting units, including historical multi-year average cash flowtrends by reporting unit and the expected future cash flow growth rates for each of our reporting units primarily based on our estimates of future sales,operating income and working capital changes. Furthermore, the substantial majority of our reporting units are primarily dependent upon the DoD budgetand spending. Sales from DoD customers generate a significant portion of our annual sales and have historically represented approximately 66% or more ofour total sales. Accordingly, to determine expected future annual cash flows for our reporting units we also consider: (1) the DoD budget and spendingpriorities, (2) expansion into new markets, (3) changing conditions in existing markets for our products, systems and services, (4) possible termination ofcertain government contracts, (5) expected success in new business competitions and re-competitions on existing business and (6) anticipated operatingmargins and working capital requirements, which vary significantly depending on the stage of completion (early, mature, ending) of contracts (revenuearrangements). We closely monitor changes in these factors and their impact on the expected cash flow of our reporting units.Additionally, our actual cash flows may be higher than our projections, and the DCF valuation does not reflect actions that we may take to increasethe profitability and cash flows of our reporting units. Actions we may take include consolidating and streamlining select business operations, creating futuresynergies with other L3 businesses or pursuing incremental targeted growth opportunities. Additionally, the DCF valuations do not assume future businessacquisitions or divestitures.A decline in the estimated fair value of a reporting unit could result in a goodwill impairment and a related non-cash impairment charge againstearnings if the estimated fair value for the reporting unit is less than the carrying value of the net assets of the reporting unit, including its goodwill. A largedecline in the estimated fair value of a reporting unit could result in an adverse effect on our financial condition and results of operations.Pension Plan and Postretirement Benefit Plan Obligations. The obligations for our pension plans and postretirement benefit plans and the relatedannual costs of employee benefits are calculated based on several long-term assumptions, including discount rates and expected mortality for employeebenefit liabilities, rates of return on plan assets, expected annual rates for salary increases for employee participants in the case of pension plans, and expectedannual increases in the costs of medical and other health care benefits in the case of postretirement benefit obligations. These long-term assumptions aresubject to revision based on changes in interest rates, financial market conditions, expected versus actual returns on plan assets, expected participantmortality and other actuarial assumptions, including future rates of salary increases, benefit formulas and levels, and rates of increase in the costs of benefits.Changes in the assumptions, if significant, could materially affect the amount of annual net periodic benefit costs recognized in our results of operations fromone year to the next, the liabilities for the pension plans and postretirement benefit plans, and our annual cash requirements to fund these plans.36Table of ContentsOur pension expense for 2019 is expected to decrease by $67 million to $29 million from $96 million in 2018. The expected decrease in our 2019pension expense is primarily due to the discontinuation or reduction of benefit accruals for future service covering all salaried participants in our domesticpension plans effective January 1, 2019. For pension plans with no benefit accruals for future service, we changed the amortization period for actuarial gainsand losses effective January 1, 2019 from the remaining expected service period to the remaining expected lifetime of the plan participants. Other changes inpension expense include a decrease due to an increase in the weighted average discount rate, offset by increases in pension expense due to lower thanexpected asset returns in 2018 and a 25 basis point decrease in the long-term assumption for returns on U.S. pension plan assets from 8.0% to 7.75%. Ourdiscount rate assumption increased from a weighted average rate of 3.78% at December 31, 2017 to 4.43% at December 31, 2018.We use a spot rate approach in the measurement of the service and interest cost components of expense for all of our pension and postretirementbenefit plans by applying specific spot rates along the yield curve to the relevant projected cash flows. The estimated weighted average discount rates used tomeasure pension service and interest costs were 3.84% and 3.45% in 2018, respectively, compared to 4.55% and 3.84% in 2017, respectively.Discount rates are used to determine the present value of our pension obligations and also affect the amount of pension expense in any given period.The discount rate assumptions used to determine our pension and postretirement benefit obligations at December 31, 2018 and 2017 were based on ahypothetical AA yield curve represented by a series of annualized individual discount rates. Each bond issue underlying the yield curve is required to have arating of AA or better by Moody’s Investors Service, Inc. and/or Standard & Poor’s. The resulting discount rate reflects the matching of plan liability cashflows to the yield curve. For a sensitivity analysis projecting the impact of a change in the discount rate on our projected benefit obligation and pensionexpense, see “— Liquidity and Capital Resources — Pension Plans.”Valuation of Deferred Income Tax Assets and Liabilities. At December 31, 2018, we had deferred tax assets of $492 million, a valuation allowanceof $14 million and deferred tax liabilities of $669 million. The deferred tax assets included $13 million for loss carryforwards and $4 million for tax creditcarryforwards which are subject to various limitations and will expire if unused within their respective carryforward periods. Deferred income taxes aredetermined separately for each of our tax-paying entities in each tax jurisdiction. The future realization of our deferred income tax assets ultimately dependson our ability to generate sufficient taxable income of the appropriate character (for example, ordinary income or capital gains) within the carryback andcarryforward periods available under the tax law and, to a lesser extent, our ability to execute successful tax planning strategies. Based on our estimates of theamounts and timing of future taxable income and tax planning strategies, we believe that we will be able to realize our deferred tax assets, except for certainU.S. Federal, foreign and state net operating losses. A change in the ability of our operations to continue to generate future taxable income, or our ability toimplement desired tax planning strategies, could affect our ability to realize the future tax deductions underlying our deferred tax assets, and require us toprovide a valuation allowance against our deferred tax assets. The recognition of a valuation allowance would result in a reduction to net income and, ifsignificant, could have a material impact on our effective tax rate, results of operations and financial position in any given period.Liabilities for Pending and Threatened Litigation. We are subject to litigation, government investigations, proceedings, claims or assessments andvarious contingent liabilities incidental to our business or assumed in connection with certain business acquisitions. In accordance with the accountingstandards for contingencies, we accrue a charge for a loss contingency when we believe it is both probable that a liability has been incurred and the amountof the loss can be reasonably estimated. If the loss is within a range of specified amounts, the most likely amount is accrued, and we accrue the minimumamount in the range if no amount within the range represents a better estimate. Generally, we record the loss contingency at the amount we expect to pay toresolve the contingency and the amount is generally not discounted to the present value. Amounts recoverable under insurance contracts are recorded asassets when recovery is deemed probable. Contingencies that might result in a gain are not recognized until realizable. Changes to the amount of theestimated loss or resolution of one or more contingencies could have a material impact on our results of operations, financial position and cash flows. SeeNote 19 to our audited consolidated financial statements for further discussion of our litigation matters.Valuation of Long-Lived Assets. In addition to goodwill and identifiable intangible assets recognized in connection with our business acquisitions,our long-lived assets also include property, plant and equipment, capitalized software development costs for software to be sold, leased or otherwisemarketed, and certain long-term investments. At December 31, 2018, the consolidated carrying values of our property, plant and equipment were $1,169million, capitalized software development costs were $54 million and certain long-term investments were $48 million. At December 31, 2018, the carryingvalue of our property, plant and equipment represented 9% of total assets, and the carrying value of our capitalized software development costs and certainlong-term investments each represented less than 1% of total assets. We review the valuation of our long-lived assets whenever events or changes incircumstances indicate that the carrying amount of these assets may not be recoverable. An impairment loss is recognized when the carrying amount of along-lived asset exceeds its fair value or net realizable value expected to result from the asset’s use37Table of Contentsand eventual disposition. We use a variety of factors to assess valuation, depending upon the asset. Long-lived assets are evaluated based upon the expectedperiod the asset will be utilized, and other factors depending on the asset, including estimated future sales, profits and related cash flows, estimated productacceptance and product life cycles, changes in technology and customer demand, and the performance of invested companies and joint ventures. Changes inestimates and judgments on any of these factors could have a material impact on our results of operations and financial position.Results of OperationsThe following information should be read in conjunction with our audited consolidated financial statements. Our results of operations for theperiods presented are affected by our business acquisitions. See Note 3 to our audited consolidated financial statements for a discussion of our businessacquisitions and dispositions.Consolidated Results of OperationsThe table below provides selected financial data, excluding discontinued operations, for the years ended December 31, 2018, 2017 and 2016. Year Ended December 31, Increase/(decrease) Year Ended December 31, Increase/(decrease) (in millions, except per share data)2018 2017 2017 2016 Net sales(1)$10,244 $9,573 7% $9,573 $9,210 4% Operating income(1)$1,120 $1,031 9% $1,031 $958 8% Less: Gain on sale of the Crestview & TCSbusinesses(42) — nm — — nm Plus: Merger and acquisition related expenses28 — nm — — nm Segment operating income$1,106 $1,031 7% $1,031 $958 8% Operating margin10.9% 10.8% 10bpts 10.8% 10.4% 40bpts Segment operating margin10.8% 10.8% —bpts 10.8% 10.4% 40bpts Interest expense$(164) $(169) (3)% $(169) $(164) 3% Interest and other income, net$37 $9 311% $9 $17 (47)% Debt retirement charges$(69) $— nm $— $(7) nm Effective income tax rate(2)11.1% 11.7% nm 11.7% 21.3% nm Net income from continuing operationsattributable to L3$800 $753 6% $753 $619 22% Adjusted net income from continuingoperations attributable to L3(3)$856 $753 14% $753 $623 21% Diluted earnings per share from continuingoperations$10.05 $9.46 6% $9.46 $7.86 20% Adjusted diluted earnings per share fromcontinuing operations(3)$10.75 $9.46 14% $9.46 $7.91 20% Diluted weighted average common sharesoutstanding79.6 79.6 —% 79.6 78.8 1% _________________ (1)___The adoption of ASC 606 resulted in net increases to sales and operating income of approximately $139 million and $27 million, respectively, for the year ended December31, 2018. Under ASC 606, sales from certain contracts previously accounted for under the units-of-delivery method are recognized earlier in the performance period as costsare incurred as opposed to when the units are delivered under ASC 605. See Note 2 to our audited consolidated financial statements for additional information on the impactby segment. (2)___The effective income tax rate corresponding to adjusted diluted EPS was 10.4% for the year ended December 31, 2018. (3)___Income from continuing operations for the year ended December 31, 2018 includes: (i) debt retirement charges of $69 million ($52 million after income taxes), or $0.66 perdiluted share, (ii) a pre-tax gain of $42 million ($19 million after income taxes), or $0.24 per diluted share, related to the divestiture of the Crestview Aerospace and TCSbusinesses and (iii) merger and acquisition related expenses of $28 million ($23 million after income taxes), or $0.28 per diluted share. Excluding these items, adjusteddiluted EPS from continuing operations would have been $10.75 for the year ended December 31, 2018. Income from continuing operations for the year ended December31, 2016 includes debt retirement charges of $7 million ($4 million after income taxes), or $0.05 per diluted share. Excluding this item, adjusted diluted EPS from continuingoperations would have been $7.91 for the year ended December 31, 2016. We believe that the debt retirement charges, the merger and acquisition related expenses anddivestiture gains affect the comparability of the results of operations. We also believe that disclosing diluted EPS excluding the debt retirement charges, the merger andacquisition related expenses and divestiture gains is useful to investors as it allows investors to more easily compare results. However, these non-GAAP financial measures maynot be defined or calculated by other companies in the same manner. nm – not meaningful 2018 Compared with 2017Net Sales: For the year ended December 31, 2018, consolidated net sales of $10,244 million increased $671 million, or 7%, compared to the yearended December 31, 2017. Organic sales increased by $635 million, or 7%, to $10,138 million for the38Table of Contentsyear ended December 31, 2018. Organic sales exclude $106 million of sales increases related to business acquisitions and $70 million of sales declinesrelated to business divestitures. For the year ended December 31, 2018, organic sales to the U.S. Government increased $428 million, or 6%, to $7,072million, and organic sales to international and commercial customers increased $207 million, or 7%, to $3,066 million.Sales from products increased by $432 million to $7,165 million for the year ended December 31, 2018, compared to $6,733 million for the yearended December 31, 2017. Product sales represented 70% of consolidated net sales for both of the years ended December 31, 2018 and 2017. The increase insales from products was due to: (1) $120 million due to increased deliveries of airborne turret systems, primarily to foreign militaries, (2) $118 million for ISRSystems primarily due to the procurement and ISR missionization of business jet aircraft systems for a foreign military customer, the U.S. Air Force (USAF)EC-37B aircraft and the U.S. Missile Defense Agency (MDA) High Altitude Observatory (HALO) aircraft, and higher volume related to special missionaircraft for the U.S. Government, (3) $111 million due to increased deliveries of night vision products, (4) $89 million at Precision Engagement Systems dueto increased deliveries and volume on fuzing and ordnance and guidance systems products primarily to the U.S. Army, (5) $84 million increase at MaritimeSensor Systems due to increased volume for new commercial contracts, (6) $47 million for Space Sensor Systems primarily due to higher volume for opticalsystems, and space electronics and infrared detection products to the U.S. military, (7) $45 million due to increased deliveries for airport screening devices,(8) $23 million due to increased deliveries of electronic warfare countermeasures products, (9) $13 million for Commercial Aviation Solutions due toincreased deliveries of air traffic collision avoidance systems and (10) $7 million for Advanced Programs due to increased task order volume on U.S.Government contracts. These increases were partially offset by $201 million of lower production volume for Unmanned Aerial Vehicle (UAV)communication systems for the U.S. DoD and $24 million due to business acquisitions, net of divestitures.Sales from services increased by $239 million to $3,079 million for the year ended December 31, 2018, compared to $2,840 million for the yearended December 31, 2017. Service sales represented 30% of consolidated net sales for both of the years ended December 31, 2018 and 2017. The increase insales for services was due to: (1) $69 million at Broadband Communication Systems primarily due to operational and sustainment services on U.S. Armysatellite communication systems, (2) $60 million due to business acquisitions, net of divestitures, (3) $32 million due to higher volume for missionmanagement systems, (4) $31 million for Advanced Programs due to increased task order volume on U.S. Government contracts, (5) $28 million for supportservices on airport screening devices and (6) $19 million due to higher volume related to commercial training and simulation. See reportable segment resultsbelow for additional detail.Cost of Sales: Cost of sales from products increased by $378 million to $5,345 million for the year ended December 31, 2018, compared to $4,967million for the year ended December 31, 2017. The increase was primarily due to higher products cost of sales of $113 million at Security & DetectionSystems, $108 million at ISR Systems, $80 million at Maritime Sensor Systems, $80 million at Precision Engagement Systems, $60 million at AirborneSensor Systems, $27 million at Space Sensor Systems $14 million at Intelligence & Mission Systems, $12 million at Naval Power Systems, $11 million atLink Training & Simulation, $10 million at Warrior Systems and $4 million at Advanced Programs. These increases were partially offset by $115 million atBroadband Communication Systems and $26 million due to business acquisitions, net of divestitures. These changes are consistent with the change in salesfrom products described above.Cost of sales from services increased by $137 million to $2,192 million for the year ended December 31, 2018, compared to $2,055 million for theyear ended December 31, 2017. The increase was primarily due to higher services cost of sales of $62 million due to business acquisitions, net of divestitures,$30 million at Commercial Aviation Solutions, $23 million at Advanced Programs, $19 million at Link Training & Simulation, $18 million at ISR Systemsand $10 million at Security & Detection Systems. These increases were partially offset by lower cost of sales from services of $25 million at BroadbandCommunication Systems. These changes are consistent with the change in sales from services described above.Operating income and operating margin: Consolidated operating income for the year ended December 31, 2018 increased by $89 million, or 9%,compared to the year ended December 31, 2017. Segment operating income for the year ended December 31, 2018 increased by $75 million, or 7%,compared to the year ended December 31, 2017. Segment operating margin was 10.8% for both of the years ended December 31, 2018 and 2017. Favorablecontract performance at Electronic Systems was offset by lower manufacturing yields, inventory provisions and unfavorable contract performance for theTraveling Wave Tube (TWT) business in C&NS and higher research and development costs, primarily at ISRS. See the reportable segment results below foradditional discussion of sales and operating margin trends.Interest expense, interest and other (income) expense, net: Interest expense and other for the year ended December 31, 2018 decreased by $33million, primarily due to lower non-service cost on pension and postretirement benefits.39Table of ContentsEffective income tax rate: The effective income tax rate for the year ended December 31, 2018 decreased to 11.1% compared to 11.7% for the sameperiod last year due to a lower U.S. federal statutory tax rate, higher tax benefits related to stock-based compensation and the reversal of previously accruedamounts related to various U.S. Federal, foreign and state tax matters.Net income from continuing operations attributable to L3 and diluted earnings per share (EPS) from continuing operations: Net income fromcontinuing operations attributable to L3 increased 6% to $800 million for the year ended December 31, 2018, compared to $753 million for the year endedDecember 31, 2017. Diluted EPS from continuing operations increased 6% to $10.05 for the year ended December 31, 2018, compared to $9.46 for the yearended December 31, 2017. Diluted EPS for the year ended December 31, 2018 included: (1) debt retirement charges of $0.66 per diluted share, (2) merger andacquisition related expenses of $0.28 per diluted share and (3) a gain of $0.24 per diluted share related to divestitures.Diluted weighted average common shares outstanding: Diluted weighted average common shares outstanding for the year ended December 31,2018 were substantially unchanged compared to the year ended December 31, 2017.2017 Compared with 2016Net Sales: For the year ended December 31, 2017, consolidated net sales of $9,573 million increased $363 million, or 4%, compared to the yearended December 31, 2016. Organic sales increased by $213 million, or 2%, to $9,369 million for the year ended December 31, 2017. Organic sales exclude$204 million of sales increases related to business acquisitions and $54 million of sales declines related to business divestitures. For the year endedDecember 31, 2017, organic sales to the U.S. Government increased $288 million, or 5%, to $6,642 million, and organic sales to international andcommercial customers decreased $75 million, or 3%, to $2,727 million.Sales from products increased by $280 million to $6,733 million for the year ended December 31, 2017, compared to $6,453 million for the yearended December 31, 2016. Product sales represented 70% of consolidated net sales for both of the years ended December 31, 2017 and 2016. Sales fromproducts increased by: (1) $147 million primarily driven by Broadband Communication Systems due to increased deliveries of secure networkedcommunication systems primarily for the U.S. DoD, (2) $120 million due to business acquisitions, net of divestitures, (3) $98 million for CommercialAviation Solutions primarily due to higher volume on commercial flight simulators and training systems for the USAF and (4) $73 million for PrecisionEngagement Systems primarily due to increased deliveries of fuzing and ordnance products and higher volume for guidance and control products to the U.S.Army and U.S. USAF. These increases were partially offset by decreases of (1) $90 million for Aircraft Systems due to lower volume for international aircraftmodifications, primarily international head-of-state aircraft and the procurement and delivery of two aircraft for a foreign military customer in 2016 comparedto one for the USAF Compass Call Recap in 2017, (2) $43 million due to reduced deliveries for UH-1Y aircraft cabin assemblies and (3) $25 million primarilydue to fewer deliveries of enhanced night vision goggle products to the U.S. Army as contracts near completion.Sales from services increased by $83 million to $2,840 million for the year ended December 31, 2017, compared to $2,757 million for the yearended December 31, 2016. Service sales represented 30% of consolidated net sales for both of the years ended December 31, 2017 and 2016. Sales fromservices increased primarily by: (1) $37 million for Commercial Aviation Solutions due to increased support services primarily to the USAF, (2) $31 milliondue to business acquisitions, net of divestitures and (3) $12 million due to higher volume of mission management software upgrades for the USAF. See thereportable segment results below for additional discussion of our segment sales trends.Cost of Sales: Cost of sales from products increased by $88 million to $4,967 million for the year ended December 31, 2017, compared to $4,879million for the year ended December 31, 2016. The increase was primarily due to higher products cost of sales of $122 million at Broadband CommunicationSystems, $112 million due to business acquisitions, net of divestitures, $58 million at Precision Engagement Systems and $32 million at Space SensorSystems. These increases were partially offset by $94 million at ISR Systems, $65 million at Security & Detection Systems, $38 million at Warrior Systems,$27 million at Aerostructures and $12 million at Airborne Systems. These changes are consistent with the change in sales from products described above.Cost of sales from services decreased by $31 million to $2,055 million for the year ended December 31, 2017, compared to $2,086 million for theyear ended December 31, 2016. The decrease was primarily due to lower services cost of sales of $46 million at ISR Systems, $13 million at BroadbandCommunication Systems and $8 million at Security & Detection Systems. These decreases were partially offset by higher cost of sales from services of $36million due to business acquisitions, net of divestitures. These changes are consistent with the change in sales from services described above.Operating income and operating margin: Operating income for the year ended December 31, 2017 increased by $73 million, or 8%, to $1,031million, compared to the year ended December 31, 2016. Operating margin increased by 40 basis points40Table of Contentsto 10.8% for the year ended December 31, 2017, compared to 10.4% for the year ended December 31, 2016. The increase in operating margin was driven by:(1) 70 basis points primarily due to improved contract performance for C&NS and (2) 30 basis points at ISRS for a settlement of the class action litigation andproduct return allowances recorded in 2016 that did not recur. These increases were partially offset by 60 basis points due to severance and restructuring costsof $59 million, including a $12 million non-cash loss on the sale of a building in ISRS and a $4 million pension curtailment charge in connection with thedecision to discontinue future service accruals for substantially all salaried employee defined benefit plans effective January 1, 2019 (Pension Curtailment).See the reportable segment results below for additional discussion of sales and operating margin trends.Interest expense, interest and other (income) expense, net: Interest expense and other for the year ended December 31, 2017 increased by $13million primarily due to higher non-service cost on pension and postretirement benefits and higher average interest rates on outstanding debt.Effective income tax rate: The effective income tax rate for the year ended December 31, 2017 decreased to 11.7% compared to 21.3% for the yearended December 31, 2016. The decrease was driven by: (1) $79 million of estimated tax benefits related to U.S. Tax Reform and (2) $30 million of taxbenefits from a realignment of foreign legal entities to conform with our segment reporting structure. These decreases were partially offset by $21 million forthe reversal of previously accrued amounts related to various U.S. Federal, foreign and state tax matters in 2016 that did not recur.Net income from continuing operations attributable to L3 and diluted EPS from continuing operations: Net income from continuing operationsattributable to L3 increased 22% to $753 million for the year ended December 31, 2017, compared to $619 million for the year ended December 31, 2016.Diluted EPS from continuing operations increased 20% to $9.46 for the year ended December 31, 2017, compared to $7.86 for the year ended December 31,2016. Diluted EPS for 2017 included $0.99 of estimated tax benefits related to U.S. Tax Reform.Diluted weighted average common shares outstanding: Diluted weighted average common shares outstanding for the year ended December 31,2017 increased by 1% compared to the year ended December 31, 2016, due to changes in the dilutive impact of common share equivalents, primarily causedby a higher L3 stock price.41Table of ContentsReportable Segment Results of OperationsThe table below presents selected data by reportable segment reconciled to consolidated totals. The results of operations of the Vertex Aerospacebusiness and the NSS segment sold to CACI International Inc. are classified as discontinued operations for all periods presented. See Note 22 to our auditedconsolidated financial statements for additional reportable segment data. Year Ended December 31, 2018 2017 2016 (dollars in millions)Net sales:(1) ISRS$4,441 $3,995 $4,101C&NS3,059 3,113 2,897Electronic Systems2,744 2,465 2,212Consolidated net sales$10,244 $9,573 $9,210 Operating income: ISRS$448 $348 $362C&NS282 362 298Electronic Systems376 321 298Total segment operating income1,106 1,031 958Gain on sale of the Crestview & TCS businesses42 — —Merger and acquisition related expenses(28) — —Consolidated operating income$1,120 $1,031 $958 Operating margin: ISRS10.1 % 8.7% 8.8%C&NS9.2 % 11.6% 10.3%Electronic Systems13.7 % 13.0% 13.5%Total segment operating margin10.8 % 10.8% 10.4%Gain on sale of the Crestview & TCS businesses0.4 % —% —%Merger and acquisition related expenses(0.3)% —% —%Consolidated operating margin10.9 % 10.8% 10.4%__________________(1) Net sales are after intercompany eliminations.ISRS Year Ended December 31, Increase Year Ended December 31, Decrease 2018 2017 2017 2016 (dollars in millions) Net sales$4,441 $3,995 11% $3,995 $4,101 (3)% Operating income$448 $348 29% $348 $362 (4)% Operating margin10.1% 8.7% 140bpts 8.7% 8.8% (10)bpts 2018 Compared with 2017ISRS net sales for the year ended December 31, 2018 increased by $446 million, or 11%, compared to the year ended December 31, 2017. Organicsales increased by $469 million, or 12%, compared to the year ended December 31, 2017. Organic sales exclude $37 million of sales increases related tobusiness acquisitions and $60 million of sales declines related to business divestitures. Organic sales increased by: (1) $222 million for ISR Systemsprimarily due to the procurement and ISR missionization of business jet aircraft systems for a foreign military customer, the USAF EC-37B aircraft and theMDA HALO aircraft, and higher volume related to special mission aircraft for the U.S. Government, (2) $111 million for Warrior Systems due to increaseddeliveries42Table of Contentsof night vision products, primarily to foreign military customers, (3) $104 million primarily due to increased deliveries of airborne turret systems, primarily toforeign militaries, (4) $38 million for Advanced Programs primarily due to increased task order volume on U.S. Government contracts, (5) $32 million forSpace Sensor Systems primarily due to higher volume for optical systems, and space electronics and infrared detection products to the U.S. military and (6)$27 million for Intelligence & Mission Systems primarily due to increased deliveries of electronic warfare countermeasures products primarily to foreignmilitaries. These increases were partially offset by lower volume related to international aircraft modifications primarily the Australian Defence Force (ADF)C-27J aircraft.ISRS operating income for the year ended December 31, 2018 increased by $100 million, or 29%, compared to the year ended December 31, 2017.Operating margin increased by 140 basis points to 10.1%. Operating margin increased by: (1) 120 basis points primarily due to higher volume at AirborneSensor Systems and Warrior Systems, (2) 40 basis points due to lower pension costs, (3) 40 basis points due to lower severance and restructuring costs, (4) 30basis points due to improved contract performance primarily at Space Sensor Systems and (5) 30 basis points due to a $12 million loss on the sale of abuilding during 2017 fourth quarter related to the consolidation of two focal plane array foundries. These increases were partially offset by 120 basis pointsprimarily due to higher research and development costs related to imaging and space investments growth expenses.2017 Compared with 2016ISRS net sales for the year ended December 31, 2017 decreased by $106 million, or 3%, compared to the year ended December 31, 2016. Organicsales decreased by $119 million, or 3%, compared to the year ended December 31, 2016. Organic sales exclude $13 million of sales increases related tobusiness acquisitions. Organic sales decreased by: (1) $71 million due to lower volume for large ISR aircraft systems for foreign military customers ascontracts near completion, (2) $67 million due to lower volume for international aircraft modifications, primarily international head-of-state aircraft and ADFC-27J aircraft, (3) $58 million due to the procurement and delivery of two aircraft to a foreign military customer in the 2016 second quarter compared to onefor the USAF Compass Call Recap in the 2017 fourth quarter and (4) $46 million due to reduced deliveries for UH-1Y aircraft cabin assemblies. Thesedecreases were partially offset by: (1) $79 million primarily due to higher volume for ISR systems to the U.S. Government, (2) $38 million for increased taskorder volume on U.S. Government contracts and (3) $6 million due to increased deliveries of airborne turret systems to the USAF.ISRS operating income for the year ended December 31, 2017 decreased by $14 million, or 4%, compared to the year ended December 31, 2016.Operating margin decreased by 10 basis points to 8.7%. Operating margin decreased by: (1) 60 basis points due to severance and restructuring costs of $24million, (2) 30 basis points due to a $12 million loss on the sale of a building during the 2017 fourth quarter in anticipation of consolidating two focal planearray foundries during 2018 and 2019 and (3) 20 basis points primarily due to unfavorable contract performance adjustments on international aircraftmodification contracts at Aircraft Systems. These decreases were partially offset by 70 basis points for a settlement of the class action litigation and productreturn allowances recorded in 2016 that did not recur at EoTech and 30 basis points due to reserves for excess and obsolete inventory recorded in 2016 thatdid not recur.C&NS Year Ended December 31, Decrease Year Ended December 31, Increase 2018 2017 2017 2016 (dollars in millions) Net sales$3,059 $3,113 (2)% $3,113 $2,897 7% Operating income$282 $362 (22)% $362 $298 21% Operating margin9.2% 11.6% (240)bpts 11.6% 10.3% 130bpts 2018 Compared with 2017C&NS net sales for the year ended December 31, 2018 decreased by $54 million, or 2%, compared to the year ended December 31, 2017. Organicsales decreased by $81 million, or 3%, compared to the year ended December 31, 2017. Organic sales exclude $27 million of sales increases related tobusiness acquisitions. Organic sales decreased by: (1) $132 million for Broadband Communication Systems primarily due to lower production volume forUAV communication systems for the U.S. DoD and (2) $26 million for Naval Power Systems primarily due to lower volume on the landing craft, air cushionservice life extension program. These decreases were partially offset by increased volume for new commercial contracts at Maritime Sensor Systems andhigher volume on TWTs for military satellites at Space & Power Systems.43Table of ContentsC&NS operating income for the year ended December 31, 2018 decreased by $80 million, or 22%, compared to the year ended December 31, 2017.Operating margin decreased by 240 basis points to 9.2%. Operating margin decreased by 210 basis points primarily due to lower manufacturing yields andunfavorable contract performance primarily at the TWT business in Space & Power Systems, which reduced operating income by $64 million, and 30 basispoints primarily due to a $10 million inventory charge in the 2018 fourth quarter for the TWT business.2017 Compared with 2016C&NS net sales for the year ended December 31, 2017 increased by $216 million, or 7%, compared to the year ended December 31, 2016. Organicsales increased by $202 million, or 7%, compared to the year ended December 31, 2016. Organic sales exclude $13 million of sales increases related tobusiness acquisitions. Organic sales increased by: (1) $175 million for Broadband Communication Systems due to increased deliveries of secure networkedcommunication systems primarily for the U.S. DoD and (2) $27 million primarily for Naval Power Systems due to higher volume for U.S. Navy powerconversion and distribution systems.C&NS operating income for the year ended December 31, 2017 increased by $64 million, or 21%, compared to the year ended December 31, 2016.Operating margin increased 130 basis points to 11.6%. Improved contract performance, primarily at Broadband Communication Systems and MaritimeSensor Systems, increased operating margin by 240 basis points. These increases were partially offset by 80 basis points due to sales mix changes primarilyfor Space & Power Systems. Consolidation activities primarily related to the TWT businesses further reduced operating margin by 30 basis points consistingof severance and restructuring costs of $48 million partially offset by a pre-tax gain of $42 million on the sale of the company’s property in San Carlos,California in the second quarter of 2017.Electronic Systems Year Ended December 31, Increase Year Ended December 31, Increase/(decrease) 2018 2017 2017 2016 (dollars in millions) Net sales$2,744 $2,465 11% $2,465 $2,212 11% Operating income$376 $321 17% $321 $298 8% Operating margin13.7% 13.0% 70bpts 13.0% 13.5% (50)bpts 2018 Compared with 2017Electronic Systems net sales for the year ended December 31, 2018 increased by $279 million, or 11%, compared to the year ended December 31,2017. Organic sales increased by $247 million, or 10%, compared to the year ended December 31, 2017. Organic sales exclude $42 million of sales increasesrelated to business acquisitions and $10 million of sales declines related to business divestitures. Organic sales increased by: (1) $114 million for PrecisionEngagement Systems due to increased deliveries and volume on fuzing and ordnance and guidance systems products primarily to the U.S. Army, (2) $68million for Security & Detection Systems due to increased deliveries for airport screening devices primarily to the U.S. Transportation SecurityAdministration (TSA) and higher volume on an industrial automation control contract for a commercial customer, (3) $35 million primarily for Link Training& Simulation due to higher volume for training systems to the USAF, and (4) $30 million for Commercial Aviation Solutions due to increased deliveries ofair traffic collision avoidance systems and higher volume for pilot training services.Electronic Systems operating income for the year ended December 31, 2018 increased by $55 million, or 17%, compared to the year endedDecember 31, 2017. Operating margin increased by 70 basis points to 13.7%. Operating margin increased by 180 basis points primarily due to favorablecontract performance across all business areas. This increase was partially offset by 110 basis points primarily due to product sales mix changes at Security &Detection Systems.2017 Compared with 2016Electronic Systems net sales for the year ended December 31, 2017 increased by $253 million, or 11%, compared to the year ended December 31,2016. Organic sales increased by $129 million, or 6%, compared to the year ended December 31, 2016. Organic sales exclude $178 million of sales increasesrelated to business acquisitions and $54 million of sales declines related to business divestitures. Organic sales increased by: (1) $135 million forCommercial Aviation Solutions primarily due to higher volume on commercial flight simulators and (2) $80 million for Precision Engagement Systemsprimarily due to increased deliveries of fuzing and ordnance products and higher volume for guidance and control products to the U.S. Army and USAF.These increases44Table of Contentswere partially offset by $87 million for Security & Detection due to fewer deliveries for airport screening devices to the U.S. TSA and foreign customers andfewer deliveries of cargo screening devices to foreign customers.Electronic Systems operating income for the year ended December 31, 2017 increased by $23 million, or 8%, compared to the year ended December31, 2016. Operating margin decreased by 50 basis points to 13.0%. Operating margin decreased by: (1) 90 basis points primarily due to lower margins relatedto acquisitions and (2) 50 basis points due to higher severance costs of $13 million. These decreases were partially offset by an increase of 90 basis points dueto higher sales volume and mix changes, primarily for Commercial Aviation Solutions and Precision Engagement Systems.Liquidity and Capital ResourcesAnticipated Sources and Uses of Cash FlowAt December 31, 2018, we had total cash and cash equivalents of $1,066 million. While no amounts of the cash and cash equivalents are consideredrestricted, $308 million of cash was held by our foreign subsidiaries at December 31, 2018. The repatriation of cash held in non-U.S. jurisdictions is subject tolocal capital requirements. Our primary sources of liquidity are cash flow generated from operations, cash on hand and our five-year unsecured $1 billionrevolving credit facility (Credit Facility), which we entered into on October 31, 2016. At December 31, 2018, we had the full availability of our CreditFacility. We generated $1,042 million of net cash from operating activities from continuing operations during the year ended December 31, 2018.We currently believe that our cash from operating activities generated during the year, together with our cash on hand and available borrowingsunder our Credit Facility, will be adequate for the foreseeable future to meet our anticipated uses of cash flow, including working capital, capitalexpenditures, 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 SheetWe made certain presentation changes to our consolidated balance sheet on January 1, 2018 to comply with ASC 606. The components of contractsin process as reported under ASC 605, which included unbilled contract receivables and inventoried contract costs, have been reclassified to contract assetsand inventories, respectively, after certain adjustments to comply with ASC 606 presentation requirements. Specifically, the adoption of ASC 606 resulted inan increase in unbilled contract receivables (referred to as contract assets under ASC 606) primarily from converting contracts previously applying the units-of-delivery method to the cost-to-cost method with a corresponding reduction in inventoried contract costs. The remainder of inventoried contract costs,primarily related to work in process not controlled by our customers, were classified to inventories. Additionally, under ASC 606, we capitalize costs to fulfilla 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.,commissions paid to third-party agents or representatives) to prepaid expense and other current assets or other assets (non-current). We previously accountedfor 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 and deferred revenue, previously classified in other current liabilities, have been combined and arepresented as contract liabilities.Billed receivables increased by $196 million to $919 million at December 31, 2018, from $723 million at December 31, 2017, primarily due to thetiming of billings and collections for Airborne Sensor Systems, Security & Detection Systems, Link Training & Simulation and ISR Systems, and $10 millionfrom acquisitions, partially offset by $11 million for foreign currency translation adjustments.Contract assets increased by $241 million to $1,590 million at December 31, 2018, from $1,349 million at January 1, 2018, primarily due to salesexceeding billings for Commercial Aviation Solutions, ISR Systems, Space & Power Systems, Warrior Sensor Systems and Space & Sensor Systems and $5million from acquisitions, partially offset by $10 million for foreign currency translation adjustments.Inventories increased by $490 million to $879 million at December 31, 2018 from $389 million at December 31, 2017, primarily due to $537million from reclassifications related to the adoption of ASC 606, partially offset by a $47 million decrease in inventories primarily due to inventoryprovisions and completed contracts for the TWT business.The increase in prepaid expenses and other current assets was primarily due to milestone payments (deposits) to OEM's for aircraft procurementsrelated to U.S. and foreign government contracts at ISR Systems.45Table of ContentsThe increase in net property, plant and equipment (PP&E) was primarily due to capital expenditures and $14 million of acquired PP&E fromcompleted business acquisitions, primarily ASV Global and fair value purchase price allocation adjustments for Doss Aviation, partially offset bydepreciation expense.Goodwill increased by $193 million to $6,808 million at December 31, 2018 from $6,615 million at December 31, 2017. The table below presentsthe changes in goodwill by segment. ISRS C&NS Electronic Systems Consolidated Total (in millions)December 31, 2017$2,458 $1,962 $2,195 $6,615Business acquisitions(1)158 56 33 247Foreign currency translation adjustments(20) (11) (23) (54)December 31, 2018$2,596 $2,007 $2,205 $6,808__________________(1) Business acquisitions for the ISRS segment included the acquisitions of the Azimuth Security and Linchpin Labs and Applied Defense Solutions businesses and the purchase priceallocation adjustments for the Kigre business acquisition. Business acquisitions for the C&NS segment included the acquisitions of the ASV Global business and purchase priceallocation adjustments for the Adaptive Methods business acquisition. Business acquisitions for the Electronic Systems segment included the acquisitions of the LatitudeEngineering and C.K. Industrial Engineers businesses and purchase price allocation adjustments for the G-Air and Doss Aviation business acquisitions.The increase in identifiable intangible assets was primarily due to $151 million of intangible assets recognized for the Azimuth Security andLinchpin Labs, ASV Global, Applied Defense Solutions, C.K. Industrial Engineers and Latitude Engineering business acquisitions and purchase priceallocation adjustments for Doss Aviation, partially offset by amortization expense and by $4 million for foreign currency translation adjustments.The increase in other assets from January 1, 2018 was primarily due to investments in nonconsolidated affiliates made during the year endedDecember 31, 2018.The increase in accounts payable and accrued expenses was primarily due to the timing of when invoices for purchases from third party vendors andsubcontractors were received and payments were made.Deferred income taxes increased primarily due to the amortization of certain goodwill and other identifiable assets for tax purposes.Pension PlansL3 maintains defined benefit pension plans covering approximately 22% of employees. At December 31, 2018, L3’s projected benefit obligation(PBO), which includes accumulated benefits plus the incremental benefits attributable to projected future salary increases for covered employees, was $3,937million and exceeded the fair value of L3’s pension plan assets of $2,840 million by $1,097 million. At December 31, 2017, L3’s PBO was $4,228 millionand exceeded the fair value of L3’s pension plan assets of $3,047 million by $1,181 million. The $84 million decrease in our unfunded status was primarilydue to the increase in our weighted average discount rate from 3.78% at December 31, 2017 to 4.43% at December 31, 2018, partially offset by an increase inour unfunded status due to a decrease in plan asset balances caused by negative asset returns.The expected long-term return on plan assets assumption represents the average rate that we expect to earn over the long-term on the assets of ourbenefit plans, including those from dividends, interest income and capital appreciation, net of investment management fees. We utilize a third partyconsultant to assist in the development of the expected long-term return on plan assets, which is based on expectations regarding future long-term rates ofreturn for the plans’ investment portfolio, with consideration given to the allocation of investments by asset class and historical and forward looking rates ofreturn for each individual asset class. With respect to the determination of our expected long-term return on plan assets assumption for the year endedDecember 31, 2018, we considered: (1) a 20-year forward looking return on plan assets as developed with the assistance of our third party consultant, which iscurrently 7.56% for our U.S. plans and 7.25% for our Canadian plans, and (2) our historical returns. While we review historical rates of return on our planassets, the substantial volatility in any one year can result in historical data that is less indicative of future returns. Accordingly, we give greater considerationtoward forward looking returns in developing our expected long-term return on plan assets assumption. In reviewing our historical returns, we noted that theaverage annual return on our U.S. pension plan assets over the period since L3’s formation in 1997 through 2017, net of investment management fees anddetermined on an arithmetic basis, was 7.42%. Arithmetic annual averages represent the simple average returns over independent46Table of Contentsannual periods. In addition, the actual annual returns have exceeded our long-term return on plan assets assumption in 13 of the past 21 years since L3’sformation. The long-term return on plan assets assumption of 8.00% for our U.S. plans and 7.25% for our Canadian plans did not change. Based on theforward looking and historical returns on our plan assets discussed above and an allotment for active management, we believe our weighted average long-term return on plan assets assumption in 2018 of 7.92% was within a reasonable range.We recorded net actuarial gains of $3 million in the year ended December 31, 2018, which is included in the accumulated other comprehensive losscomponent of shareholders' equity. Actuarial gains and losses in a period represent the difference between actual and actuarially assumed experience,primarily due to discount rates and pension plan asset returns. Actuarial gains and losses that our pension plans experience are not recognized in pensionexpense in the year incurred, but rather are recorded as a component of accumulated other comprehensive income (loss). The accumulated gains and losses inexcess of a corridor, defined as the greater of 10% of the fair value of a plan’s assets and 10% of its projected benefit obligation, are amortized to pensionexpense in future periods over the estimated average remaining service periods of the covered employees or the estimated remaining lifetime of the planparticipants. See Note 20 to our audited consolidated financial statements for additional information regarding our pension plans.Our pension expense for 2018 was $96 million. We currently expect pension expense for 2019 to decrease by $67 million to approximately $29million primarily due to the discontinuation or reduction of benefit accruals for future service covering all salaried participants in our domestic pension planseffective January 1, 2019. Other changes in pension expense include a decrease due to an increase in the weighted average discount rate, offset by increasesin pension expense due to lower than expected asset returns in 2018 and a 25 basis point decrease in the long-term assumption for returns on U.S. pensionplan assets from 8.0% to 7.75%.Our pension expense for 2019 may be different from our current expectations when finalized due to a number of factors, including the effect of anyfuture business acquisitions and divestitures for which we assume liabilities for pension benefits, changes in headcount at our businesses that sponsorpension plans, actual pension plan contributions and changes (if any) to our pension assumptions for 2019, including the discount rate, mortality rates,expected long-term return on plan assets and salary increases.Our cash pension contributions for 2018 were $96 million, and we currently expect to contribute approximately $80 million to our pension plans in2019. Actual 2019 pension contributions could be affected by changes in the funded status of our pension plans during 2019. A substantial portion of ourpension plan contributions for L3’s businesses that are U.S. Government contractors are recoverable as allowable indirect contract costs at amounts generallyequal to the annual pension contributions.Our projected benefit obligation and annual pension expense are significantly affected by, holding all other assumptions constant, certain actuarialassumptions. The following table illustrates the sensitivity of a change in certain assumptions for our pension plans and resulting increase (decrease) to the2019 expected pension expense and PBO at December 31, 2018. Effect on 2019Pension Expense Effect onDecember 31, 2018PBO (in millions)25 basis point decrease in discount rate$6 $13825 basis point increase in discount rate(6) (130)25 basis point decrease in expected return on assets7 N/A25 basis point increase in expected return on assets(7) N/AStatement of Cash FlowsThe table below provides a summary of our cash flows from (used in) operating, investing and financing activities for the periods indicated. Year Ended December 31, 2018 2017 2016 (in millions)Net cash from operating activities from continuing operations$1,042 $985 $1,022Net cash used in investing activities from continuing operations(91) (453) (10)Net cash used in financing activities from continuing operations(520) (366) (856)47Table of ContentsOperating Activities — Continuing Operations2018 Compared with 2017. We generated $1,042 million of cash from operating activities during the year ended December 31, 2018, an increase of$57 million compared with $985 million generated during the year ended December 31, 2017. The increase was primarily due to higher operating incomepartially offset by higher working capital requirements, primarily contract assets and milestone payments for aircraft procurements related to U.S. and foreigngovernment contracts. The net cash from changes in operating assets and liabilities is further discussed above under “Balance Sheet.”2017 Compared with 2016. We generated $985 million of cash from operating activities during the year ended December 31, 2017, a decrease of$37 million compared with $1,022 million generated during the year ended December 31, 2016. The decrease was primarily driven by higher income taxpayments.Interest Payments. Our cash from operating activities included interest payments on debt of $183 million for the year ended December 31, 2018,$165 million for the year ended December 31, 2017 and $162 million for the year ended December 31, 2016. Our interest expense also included amortizationof deferred debt issuance costs and bond discounts, which are non-cash items.Investing Activities — Continuing OperationsDuring 2018, we used $91 million of cash in investing activities, which included $535 million of cash received from the sale of Vertex Aerospaceand Crestview & TCS Businesses, partially offset by acquisitions of Azimuth Security and Linchpin Labs for $185 million (net of cash acquired), ASV Globalfor $93 million, Applied Defense Solutions for $52 million, C.K. Industrial Engineers for $24 million and Latitude Engineering for $15 million. Furthermore,we used cash of $232 million for capital expenditures and $30 million from investments in nonconsolidated affiliates, primarily Peak Nano.During 2017, we used $453 million of cash in investing activities, which included $316 million for business acquisitions discussed above under“Business Acquisitions and Divestitures” and $224 million for capital expenditures, partially offset by $74 million of cash generated primarily from the saleof the property in San Carlos, California and $18 million from business divestitures.During 2016, we used $10 million of cash in investing activities, which included $388 million for business acquisitions discussed above under“Business Acquisitions and Divestitures” and $210 million for capital expenditures, partially offset by $561 million of cash received from businessdivestitures (primarily NSS).Financing Activities — Continuing OperationsDebtAt December 31, 2018, total outstanding debt was $3,321 million, compared to $3,330 million at December 31, 2017, all of which was senior debt.The decrease was due to the completion of our tender offers for $1,215 million and our redemptions for $581 million in carrying value of the 2019 SeniorNotes and 2020 Senior Notes, partially offset by the issuance of $1,782 million of the 2023 Senior Notes and 2028 Senior Notes. See tables below foradditional details. At December 31, 2018, there were no borrowings or letters of credit outstanding under our Credit Facility. Accordingly, we had the fullavailability of our $1 billion facility for future borrowings. We also had $410 million of outstanding standby letters of credit with financial institutionscovering performance and financial guarantees per contractual requirements with certain customers at December 31, 2018. These standby letters of credit maybe drawn upon in the event that we do not perform on certain of our contractual requirements. At December 31, 2018, our outstanding debt matures betweenFebruary 15, 2021 and June 15, 2028. See Note 10 to our audited consolidated financial statements for the components of our debt at December 31, 2018.We consider our credit rating as an important element of our capital allocation strategy, and, while no assurances can be given, we intend tomaintain our investment grade credit rating. Effective October 16, 2018, our senior unsecured credit rating from both Standard and Poor’s and Fitch Ratingsof BBB- was placed on CreditWatch Positive. Our senior unsecured credit rating from Moody’s Investors Service remains at Baa3 with a stable outlook.48Table of ContentsIssuance of Senior NotesIn connection with debt refinancing, on June 6, 2018, L3 issued two series of senior notes, which are unsecured senior obligations of L3. The termsof each series of senior notes are presented in the table below.Note Date of Issuance AmountIssued Discount(1) NetCashProceeds(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 bps4.40% 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 tofund the concurrent cash tender offers (the Tender Offers) for any and all of $1 billion aggregate principal amount of the 2019 Notes and $800 million aggregate principalamount of 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 valueof 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 thesenior 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 theapplicable 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 torequire 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, Redemptions, and Maturities of Senior NotesThe repurchases, redemptions and maturities of senior notes are presented in the table below. See Note 10 to our audited consolidated financialstatements for additional information on the redemption provisions of our outstanding senior notes.Note Settlement Type Date Settled AggregateAmount Premium CashPayments Interest Total CashPayments Debt RetirementCharge (dollars in millions)5.20% Senior Notes due 2019(1) Redemption July 6, 2018 $317 103.048% $327 $4 $331 $104.75% Senior Notes due 2020(1) Redemption July 6, 2018 $265 103.818% $275 $6 $281 $115.20% Senior Notes due 2019(2) Tender Offer June 6, 2018 $683 103.282% $705 $5 $710 $244.75% Senior Notes due 2020(2) Tender Offer June 6, 2018 $535 104.092% $557 $10 $567 $241.50% Senior Notes due 2017 Redemption December 30, 2016 $350 100.323% $351 $1 $352 $23.95% Senior Notes due 2016 Maturity November 15, 2016 $200 100.000% $200 $— $200 $—3.95% Senior Notes due 2016 Redemption May 20, 2016 $300 101.475% $305 $— $305 $5__________________(1) The debt retirement charge includes $1 million which represents the non-cash retirement of associated unamortized debt issue costs and discounts.(2) Cash payments exclude $1 million of tender offer fees. The debt retirement charge includes $1 million of tender offer fees and $3 million which represents the non-cashretirement of associated unamortized debt issue costs and discounts.Debt Covenants and Other Provisions. The Credit Facility and senior notes contain financial and/or other restrictive covenants. See Note 10 to ouraudited consolidated financial statements for a description of our debt, related financial covenants and cross default provisions. We were in compliance withour financial and other restrictive covenants at December 31, 2018.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,49Table of Contentsif any, and interest on the senior notes is fully and unconditionally guaranteed, jointly and severally, by L3’s material 100% owned domestic subsidiariesthat guarantee any of its other indebtedness. The guarantees of the Credit Facility and the senior notes rank pari passu with each other.EquityDuring 2018 and 2017, L3’s Board of Directors authorized the following quarterly cash dividends:Date Declared Record Date Cash DividendPer Share Total Cash DividendsDeclared Date Paid (in millions) 2018 February 12 March 1 $0.80 $63(1) March 15May 8 May 18 $0.80 $63(1) June 15July 10 August 17 $0.80 $63(1) September 17October 22 November 16 $0.80 $64(1) December 17 2017 February 13 March 1 $0.75 $59(2) March 15May 9 May 19 $0.75 $59(2) June 15July 19 August 17 $0.75 $59(2) September 15October 17 November 17 $0.75 $59(2) December 15__________________(1) During the year ended December 31, 2018, we paid $254 million of cash dividends, offset by a $1 million net reduction of previously accrued dividends for employee-held stockawards.(2) During the year ended December 31, 2017, we paid $236 million of cash dividends. Payments of previously accrued dividends for employee held stock awards were offset byaccrued dividends to be paid in future periods.L3 repurchased $322 million, or 1.6 million shares, of its common stock during the year ended December 31, 2018, $180 million, or 1.0 millionshares, of its common stock during the year ended December 31, 2017 and $373 million, or 3.0 million shares, of its common stock during the year endedDecember 31, 2016.L3 did not repurchase any shares of common stock from September 29, 2018 through February 14, 2019. The last repurchase of shares was in July2018. In connection with the planned merger with Harris Corporation, L3 suspended the share repurchase program.On February 12, 2019, L3 announced that its Board of Directors increased L3’s regular quarterly cash dividend from $0.80 per share to $0.85 pershare, or 6%, payable on March 15, 2019, to shareholders of record at the close of business on March 1, 2019.On February 14, 2019, the number of holders of record of L3’s common stock was approximately 200,573 and the closing price of L3’s commonstock as reported by the NYSE was $209.04 per share.50Table of ContentsContractual ObligationsThe table below presents our estimated total contractual obligations from our continuing operations at December 31, 2018, including the amountsexpected to be paid or settled for each of the periods indicated below. Total Payments due by Period Less than 1 year 1 – 3 years 3 – 5 years More than 5 years (in millions)Contractual Obligations Debt(1)$3,350 $— $650 $800 $1,900Interest payments(2)883 142 268 204 269Non-cancelable operating leases(3)968 114 214(4) 136 504Notes payable and capital lease obligations44 4 3 7 30Purchase obligations(5)1,971 1,798 156 5 12Other long-term liabilities(6)215 88(7) 78 12 37Total(8)$7,431 $2,146 $1,369 $1,164 $2,752__________________(1) Represents principal amount of debt and only includes scheduled principal payments.(2) Represents expected interest payments on L3’s debt balance at December 31, 2018 using the stated interest rate on our fixed rate debt, assuming that current borrowings remainoutstanding to the contractual maturity date.(3) Non-cancelable operating leases are presented net of estimated sublease rental income.(4) Includes the residual value guarantee for three real estate lease agreements, expiring on August 31, 2020, that are accounted for as operating leases. We have the right to exerciseoptions under the lease agreements to renew the leases, to purchase the properties for $45 million or sell the properties on behalf of the lessor. If we elect to sell the properties, wemust pay the lessor a residual value guarantee of $39 million. See Note 19 to our audited consolidated financial statements for a further description of these leases.(5) Represents open purchase orders at December 31, 2018 for amounts expected to be paid for goods or services that are legally binding.(6) Other long-term liabilities primarily consist of workers compensation and deferred compensation for the years ending December 31, 2020 and thereafter and also include pensionand postretirement benefit plan contributions that we expect to pay in 2019.(7) Our pension and postretirement benefit plan funding policy is generally to contribute in accordance with cost accounting standards that affect government contractors, subject tothe Internal Revenue Code and regulations thereon. For 2019, we expect to contribute approximately $80 million to our pension plans and approximately $8 million to ourpostretirement benefit plans. Due to the current uncertainty of the amounts used to compute our expected pension and postretirement benefit plan funding, we believe it is notpracticable to reasonably estimate such future funding for periods in excess of one year, and we may decide or be required to contribute more than we expect to our pension andpostretirement benefit plans.(8) Excludes unrecognized tax benefits in connection with uncertain tax positions taken, or expected to be taken, on our income tax returns as of December 31, 2018 since we cannotdetermine the time period of future tax consequences. For additional information regarding income taxes, see Note 17 to our audited consolidated financial statements.We also may enter into industrial cooperation agreements, sometimes referred to as offset agreements, as a condition to obtaining orders for ourproducts and services from certain customers in foreign countries. These agreements are designed to enhance the social and economic environment of theforeign country by requiring the contractor to promote investment in the country. Offset agreements may be satisfied through activities that do not require usto use cash, including transferring technology, providing manufacturing and other consulting support to in-country projects and the purchase by third partiesof supplies from in-country vendors. These agreements also may be satisfied through our use of cash for such activities as purchasing supplies from in-country vendors, providing financial support for in-country projects, establishment of ventures with local companies and building or leasing facilities for in-country operations. We typically do not commit to offset agreements until orders for our products or services are definitive. The amounts ultimately appliedagainst our offset agreements are based on negotiations with the customer and typically require cash outlays that represent only a fraction of the originalamount in the offset agreement. The costs to satisfy our offset obligations are included in the estimates of our total costs to complete the contract and mayimpact our profitability and cash flows. The ability to recover investments that we make are generally dependent upon the successful operation of venturesthat we do not control and may involve products and services that are dissimilar to our business activities. At December 31, 2018, the remaining obligationsunder our outstanding offset agreements totaled $1.0 billion, which primarily relate to our ISRS segment, some of which extend through 2028. To the extentwe have entered into purchase obligations at December 31, 2018 that also satisfy offset agreements, those amounts are included in the preceding table. Offsetprograms usually extend over several years and may provide for penalties, estimated at approximately $84 million at December 31, 2018, in the event we failto perform in accordance with offset requirements. While historically we have not been required to pay material penalties, resolution of offset requirementsare often the result of negotiations and subjective judgments.51Table of ContentsOff Balance Sheet ArrangementsThe table below presents our estimated total contingent commitments and other guarantees at December 31, 2018, including the amounts expectedto be paid or settled for each of the periods indicated below. Total Commitment Expiration by Period 2019 2020 - 2021 2022 - 2023 2024 and thereafter (in millions)Contingent Commitments Other standby letters of credit(1)$410 $291 $99 $14 $6Total(2)(3)(4)$410 $291 $99 $14 $6__________________(1) Represents outstanding letters of credit with financial institutions covering performance and financial guarantees per contractual requirements with certain customers. These lettersof credit may be drawn upon in the event of L3’s nonperformance.(2) The total amount does not include residual value guarantees for three real estate lease agreements, expiring on August 31, 2020, that are accounted for as operating leases. Wehave the right to exercise options under the lease agreements to purchase both properties for $45 million on or before August 31, 2020. See Note 19 to our audited consolidatedfinancial statements for a further description of these leases.(3) The total amount does not include the fair value of the contingent consideration liability for the future potential earn-out payments related to the MacH, Open Water Power andLatitude Engineering acquisitions. See Note 13 to our audited consolidated financial statements for additional information on the fair value of the contingent consideration.(4) The total does not include future minimum payments under non-cancelable operating leases. See Note 19 to our audited consolidated financial statements for a further descriptionof these leases.Legal Proceedings and ContingenciesWe are engaged in providing products and services under contracts with the U.S. Government and, to a lesser degree, under foreign governmentcontracts, some of which are funded by the U.S. Government. All such contracts are subject to extensive legal and regulatory requirements, and, periodically,agencies of the U.S. Government investigate whether such contracts were and are being conducted in accordance with these requirements. Under U.S.Government procurement regulations, an indictment by a federal grand jury, or an administrative finding against us as to our present responsibility to be aU.S. Government contractor or subcontractor, could result in suspension for a period of time from eligibility for awards of new government contracts or taskorders or in a loss of export privileges, and could have a material adverse effect on our results of operations and cash flows. A conviction, or an administrativefinding that satisfies the requisite level of seriousness, could result in debarment from contracting with the federal government for a specified term and couldhave a material adverse effect on our results of operations and cash flows. We are currently cooperating with the U.S. Government on several investigations,none of which we anticipate will have a material adverse effect on our results of operations or cash flows. Also, we have been periodically subject tolitigation, government investigations, proceedings, claims or assessments and various contingent liabilities incidental to our business. We accrue for thesecontingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. For a description of our legalproceedings and contingencies, see Note 19 to our audited consolidated financial statements.We continually assess our obligations with respect to applicable environmental protection laws. While it is difficult to determine the timing andultimate cost that we will incur to comply with these laws, based upon available internal and external assessments, with respect to those environmental losscontingencies of which we are aware, we believe that even without considering potential insurance recoveries, if any, there are no environmental losscontingencies that, in the aggregate, would be material to our consolidated financial position, results of operations or cash flows.Derivative Financial Instruments and Other Market RiskIncluded in our derivative financial instruments are foreign currency forward contracts. All of our derivative financial instruments that are sensitiveto market risk are entered into for purposes other than trading.Interest Rate Risk. Our Credit Facility is subject to variable interest and is therefore sensitive to changes in interest rates. The interest rates on thesenior notes are fixed-rate and are not affected by changes in interest rates. Additional data on our debt obligations and our applicable borrowing spreadsincluded in the interest rates we would pay on borrowings under the Credit Facility, if any, are provided in Note 10 to our audited consolidated financialstatements.Foreign Currency Exchange Risk. Our U.S. and foreign businesses enter into contracts with customers, subcontractors or vendors that aredenominated in currencies other than their functional currencies. To protect the functional currency equivalent cash flows associated with certain of thesecontracts, we enter into foreign currency forward contracts, which are generally52Table of Contentsdesignated and accounted for as cash flow hedges. At December 31, 2018, our foreign currency forward contracts had maturities ranging through 2023, anotional value of $415 million and a corresponding net fair value that was a liability of $16 million.Accounting Standards Issued and Not Yet ImplementedFor a discussion of accounting standards issued and not yet implemented, see Note 2 to our audited consolidated financial statements.InflationThe effect of inflation on our sales and earnings has not been significant. Although a majority of our sales are made under long-term contracts(revenue arrangements), the selling prices of such contracts, established for deliveries in the future, generally reflect estimated costs to be incurred in thesefuture periods. In addition, some of our contracts provide for price adjustments through cost escalation clauses.Forward-Looking StatementsCertain of the matters discussed concerning our operations, cash flows, financial position, economic performance and financial condition, includingin particular, the likelihood of our success in developing and expanding our business and the realization of sales from backlog, include forward-lookingstatements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act.All statements other than historical facts may be forward-looking statements, such as “may,” “will,” “should,” “likely,” “projects,” “expects,”“anticipates,” “intends,” “plans,” “believes,” “estimates,” and similar expressions are used to identify forward-looking statements. We caution investors thatthese statements are subject to risks and uncertainties many of which are difficult to predict and generally beyond our control that could cause actual resultsto differ materially from those expressed in, or implied or projected by, the forward-looking information and statements. Some of the factors that could causeactual results to differ include, but are not limited to, the following: the occurrence of any event, change or other circumstances that could give us or Harristhe right to terminate the definitive merger agreement between us and Harris; the outcome of any legal proceedings that have been or may be institutedagainst us, Harris or our respective directors with respect to the merger; the risk that we or Harris may not obtain the required stockholder approvals on theexpected schedule or at all; the ability to obtain regulatory approvals and satisfy other closing conditions to the merger in a timely manner or at all,including the risk that regulatory approvals required for the merger are not obtained or are obtained subject to conditions that are not anticipated; delay inclosing the merger; difficulties and delays in integrating our business with Harris business or fully realizing anticipated cost savings and other benefits;business disruptions from the proposed merger that may harm our business or Harris business, including current plans and operations; any announcementrelating to the proposed transaction could have adverse effects on our ability or the ability of Harris to retain and hire key personnel or maintain relationshipswith suppliers and customers, including the U.S. government and other governments, or on our or Harris operating results and businesses generally; the riskthat the announcement of the proposed transaction could have adverse effects on the market price of our common stock or Harris common stock and theuncertainty as to the long-term value of the common stock of the combined company following the merger; certain restrictions during the pendency of themerger that may impact our ability or the ability of Harris to pursue certain business opportunities or strategic transactions; the business, economic andpolitical conditions in the markets in which we and Harris operate; our dependence on the defense industry; backlog processing and program slips resultingfrom delayed awards and/or funding from the DoD and other major customers; the U.S. Government fiscal situation; changes in DoD budget levels andspending priorities; our reliance on contracts with a limited number of customers and the possibility of termination of government contracts by unilateralgovernment action or for failure to perform; the extensive legal and regulatory requirements surrounding many of our contracts; our ability to retain ourexisting business and related contracts; our ability to successfully compete for and win new business, or, identify, acquire and integrate additionalbusinesses; our ability to maintain and improve our operating margin; the availability of government funding and changes in customer requirements for ourproducts and services; the consequences of geo-political events, including Brexit; the outcome of litigation matters; results of audits by U.S. Governmentagencies and of ongoing governmental investigations; our significant amount of debt and the restrictions contained in our debt agreements and actions takenby rating agencies that could result in a downgrade of our debt; our ability to continue to recruit, retain and train our employees; actual future interest rates,volatility and other assumptions used in the determination of pension benefits and equity based compensation, as well as the market performance of benefitplan assets; our collective bargaining agreements; our ability to successfully negotiate contracts with labor unions and our ability to favorably resolve labordisputes should they arise; the business, economic and political conditions in the markets in which we operate; the risk that our commercial aviationproducts and services businesses are affected by a downturn in global demand for air travel or a reduction in commercial aircraft Original EquipmentManufacturer (OEM) production rates; the DoD’s Better Buying Power and other efficiency initiatives; events beyond our control such as acts of terrorism;our ability to perform contracts on schedule; our international operations including currency risks and compliance with foreign laws; our extensive use53Table of Contentsof fixed-price type revenue arrangements; the rapid change of technology and high level of competition in which our businesses participate; risks relating totechnology and data security; our introduction of new products into commercial markets or our investments in civil and commercial products or companies;the impact on our business of improper conduct by our employees, agents or business partners; goodwill impairments and the fair values of our assets; and theultimate resolution of contingent matters, claims and investigations relating to acquired businesses, and the impact on the final purchase price allocations.In addition, for a discussion of other risks and uncertainties that could impair our results of operations or financial condition, see “Part I — Item 1A— Risk Factors” and Note 19 to our audited consolidated financial statements, in each case included in this Annual Report on Form 10-K for the year endedDecember 31, 2018 and any material updates to these factors contained in any of our future filings.Readers of this document are cautioned that our forward-looking statements are not guarantees of future performance and the actual results ordevelopments may differ materially from the expectations expressed in the forward-looking statements.As for the forward-looking statements that relate to future financial results and other projections, actual results will be different due to the inherentuncertainties of estimates, forecasts and projections and may be better or worse than projected and such differences could be material. Given theseuncertainties, you should not place any reliance on these forward-looking statements. These forward-looking statements also represent our estimates andassumptions only as of the date that they were made. We expressly disclaim a duty to provide updates to these forward-looking statements, and the estimatesand assumptions associated with them, after the date of this filing, to reflect events or changes in circumstances or changes in expectations or the occurrenceof anticipated events.Item 7A. Quantitative and Qualitative Disclosures About Market RiskFor data regarding quantitative and qualitative disclosures related to our market risk sensitive financial instruments, see “Part II — Item 7 —Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Derivative FinancialInstruments and Other Market Risk” and Note 14 to our audited consolidated financial statements. See Notes 13 and 15 to our audited consolidated financialstatements for the aggregate fair values and notional amounts of our foreign currency forward contracts at December 31, 2018.Item 8. Financial Statements and Supplementary DataSee our audited consolidated financial statements beginning on page F-1.Item 9. Changes in and Disagreements With Accountants on Accounting and Financial DisclosureNone.Item 9A. Controls and ProceduresConclusions Regarding Effectiveness of Disclosure Controls and ProceduresWe maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in ourreports that we file or submit under the Securities Exchange Act of 1934 related to L3 Technologies, Inc. is recorded, processed, summarized and reportedwithin the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including ourChairman, Chief Executive Officer and President and our Senior Vice President and Chief Financial Officer, to allow timely decisions regarding requireddisclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired controlobjectives. Our management, with the participation of our Chairman, Chief Executive Officer and President and our Senior Vice President and ChiefFinancial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2018. Based uponthat evaluation, our Chairman, Chief Executive Officer and President and our Senior Vice President and Chief Financial Officer concluded that, as ofDecember 31, 2018, the design and operation of our disclosure controls and procedures were effective to accomplish their objectives at the reasonableassurance level.Management’s Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control overfinancial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidatedfinancial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includesthose policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of L3 Technologies,54Table of ContentsInc., (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordancewith U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of ourmanagement and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition ofour assets that could have a material effect on the consolidated financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements in our consolidated financialstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies or procedures may deteriorate.Management assessed the effectiveness of L3 Technologies, Inc. internal control over financial reporting as of December 31, 2018. In making theseassessments, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework, issued in 2013. Based on our assessments and those criteria, management determined that L3 Technologies, Inc. maintainedeffective internal control over financial reporting as of December 31, 2018.The effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 has been audited by PricewaterhouseCoopersLLP, an independent registered public accounting firm, as stated in their report. See page F-2 to our audited consolidated financial statements for their report.Changes in Internal Control Over Financial ReportingThere were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2018 that havematerially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Item 9B. Other InformationNone.55Table of ContentsPART IIIItem 10. Directors, Executive Officers and Corporate GovernanceThe Company posts its Code of Ethics and Business Conduct on the Corporate Governance webpage of its website at http://www.L3T.com under thelink “Code of Ethics and Business Conduct.” The Company’s Code of Ethics and Business Conduct applies to all directors, officers and employees,including our chairman, chief executive officer and president, our senior vice president and chief financial officer, and our corporate controller and principalaccounting officer. We will post any amendments to the Code of Ethics and Business Conduct, and any waivers that are required to be disclosed by the rulesof either the SEC or the NYSE, on our website within the required periods.The remaining information called for by Item 10 will be included in an amendment to this Annual Report on Form 10-K in accordance with GeneralInstruction G(3) to Form 10-K.Item 11. Executive CompensationThe information required by this Item will be provided in an amendment to this Annual Report on Form 10-K in accordance with General InstructionG(3) to Form 10-K.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this Item will be provided in an amendment to this Annual Report on Form 10-K in accordance with General InstructionG(3) to Form 10-K.Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required by this Item will be provided in an amendment to this Annual Report on Form 10-K in accordance with General InstructionG(3) to Form 10-K.Item 14. Principal Accounting Fees and ServicesThe information required by this Item will be provided in an amendment to this Annual Report on Form 10-K in accordance with General InstructionG(3) to Form 10-K.56Table of ContentsPART IVItem 15. Exhibits, Financial Statement SchedulesThe agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other thanwith respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, anyrepresentations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement ordocument and may not describe the actual state of affairs as of the date they were made or at any other time.(a)(1) Financial statements filed as part of this report: Page NumberReport of Independent Registered Public Accounting Firm F-2Consolidated Balance Sheets as of December 31, 2018 and December 31, 2017 F-4Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016 F-5Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016 F-6Consolidated Statements of Equity for the years ended December 31, 2018, 2017 and 2016 F-7Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016 F-8Notes to Consolidated Financial Statements F-9(a)(2) Financial Statement SchedulesFinancial statement schedules are omitted since the required information is either not applicable or is included in our audited consolidated financialstatements.Item 16. Form 10-K SummaryNone.57Table of ContentsExhibitsExhibit No. Description of Exhibits2.1 Distribution Agreement between L-3 Communications Holdings, Inc. and Engility Holdings, Inc. dated as of July 16, 2012(incorporated by reference to Exhibit 2.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended September 28, 2012(File No. 333-46983)).**2.2 Stock Purchase Agreement, dated as of December 7, 2015, by and among L-3 Communications Corporation, CACI International Incand CACI, Inc.-Federal (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on December 11,2015 (File No. 333-46983)).**2.3 Stock and Asset Purchase Agreement, dated as of May 1, 2018, by and among L-3 Communications Integrated Systems L.P., L3Technologies, Inc. and 450 Madison Acquireco LLC (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report onForm 8-K filed on May 2, 2018 (File No. 001-37975)).**2.4 Agreement and Plan of Merger, dated as of October 12, 2018, by and among Harris Corporation, L3 Technologies, Inc. and LeopardMerger Sub Inc. (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on October 15, 2018(File No. 001-37975)).3.1 Restated Certificate of Incorporation of L3 Technologies, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s CurrentReport on Form 8-K filed on January 3, 2017 (File No. 001-37975)).3.2 Amended and Restated Bylaws of L3 Technologies, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Reporton Form 8-K filed on February 13, 2018 (File No. 333-46983)).4.1 Form of Common Stock Certificate of L3 Technologies, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s AnnualReport on Form 10-K for the fiscal year ended December 31, 2016 (File No. 001-37975)).4.2 Indenture, dated as of May 21, 2010, among L-3 Communications Corporation, the guarantors named therein and The Bank of NewYork Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-Kdated May 24, 2010 (File No. 333-46983)).4.3 Second Supplemental Indenture, dated as of February 7, 2011, among L-3 Communications Corporation, the guarantors named thereinand The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.2 to the Registrant’sCurrent Report on Form 8-K dated February 8, 2011 (File No. 333-46983)).4.4 Third Supplemental Indenture, dated as of November 22, 2011, among L-3 Communications Corporation, the guarantors namedtherein and The Bank of New York Mellon Trust Company, N.A, as Trustee (incorporated by reference to Exhibit 4.2 to theRegistrant’s Current Report on Form 8-K dated November 22, 2011 (File No. 333-46983)).4.5 Fourth Supplemental Indenture, dated as of February 3, 2012, among L-3 Communications Corporation, the guarantors named thereinand The Bank of New York Mellon Trust Company, N.A, as Trustee (incorporated by reference to Exhibit 4.12 to the Registrant’sAnnual Report on Form 10‑K for the fiscal year ended December 31, 2011 (File No. 333-46983)).4.6 Fifth Supplemental Indenture, dated as of May 28, 2014, among L-3 Communications Corporation, the guarantors named therein andThe Bank of New York Mellon Trust Company, N.A, as Trustee (incorporated by reference to Exhibit 4.2 to the Registrant’s CurrentReport on Form 8-K dated May 28, 2014 (File No. 333-46983)).4.7 Sixth Supplemental Indenture, dated as of June 21, 2016, among L-3 Communications Corporation, the guarantors named therein andThe Bank of New York Mellon Trust Company, N.A, as Trustee (incorporated by reference to Exhibit 4.2 to L-3 CommunicationsCorporation’s Registration Statement on Form S-3ASR filed on June 21, 2016 (File No. 333-212152)).4.8 Seventh Supplemental Indenture, dated as of October 31, 2016, among L-3 Communications Corporation, the guarantors namedtherein and The Bank of New York Mellon Trust Company, N.A, as Trustee (incorporated by reference to Exhibit 4.12 of theRegistrant’s Annual Report on Form 10‑K for the period ended December 31, 2016 (File No. 001-37975)).4.9 Eighth Supplemental Indenture, dated as of December 5, 2016, among L-3 Communications Corporation, the guarantors namedtherein and The Bank of New York Mellon Trust Company, N.A, as Trustee (incorporated by reference to Exhibit 4.6 to theRegistrant’s Current Report on Form 8-K dated December 5, 2016 (File No. 333-46983)).4.10 Ninth Supplemental Indenture, dated as of March 30, 2018 among L3 Technologies, Inc., The Bank of New York Mellon TrustCompany, N.A., as Trustee, and the guarantors named therein (incorporated by reference to Exhibit 4.15 to the Registrant’s QuarterlyReport on Form 10-Q for the period ended March 30. 2018 (File No. 001-37975)).4.11 Tenth Supplemental Indenture, dated as of June 6, 2018, among L3 Technologies, Inc., The Bank of New York Mellon TrustCompany, N.A., as Trustee, and the guarantors named therein (incorporated by reference to Exhibit 4.1 to the Registrant’s CurrentReport on Form 8-K filed on June 6, 2018 (File No. 001-37975)).58Table of ContentsExhibit No. Description of Exhibits4.12 Eleventh Supplemental Indenture, dated as of September 27, 2018, among L3 Technologies, Inc., The Bank of New York Mellon TrustCompany, N.A., as Trustee, and the guarantors named therein (incorporated by reference to Exhibit 4.12 to the Registrant’s QuarterlyReport on Form 10-Q for the period ended September 28, 2018 (File No. 001-37975)).10.1 Credit Agreement, dated as of October 31, 2016, among L-3 Communications Corporation, L-3 Communications Holdings, Inc. andcertain subsidiaries of the Registrant from time to time party thereto as guarantors, certain lenders from time to time party thereto, andBank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form8-K dated October 31, 2016 (File No. 333-46983)).10.2 Amendment to Credit Agreement, dated as of December 22, 2016, among L-3 Communications Corporation, certain subsidiaries of theRegistrant from time to time party thereto as guarantors, certain lenders from time to time party thereto, certain L/C issuers from time totime party thereto and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.2 to the Registrant’sAnnual Report on Form 10-K for the fiscal year ended December 31, 2016 (File No. 001-37975)).†10.3 L3 Technologies, Inc. Amended and Restated 2008 Long Term Performance Plan (incorporated by reference to Exhibit 10.7 of theRegistrant’s Annual Report on Form 10-K for the period ended December 31, 2016 (File No. 001-37975)).†10.4 Form of L-3 Communications Holdings, Inc. 2008 Long Term Performance Plan Nonqualified Stock Option Agreement (2009 Version)(incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the period ended June 26, 2009 (FileNo. 333-46983)).†10.5 Form of L-3 Communications Holdings, Inc. 2008 Long Term Performance Plan Nonqualified Stock Option Agreement (2011 Version)(incorporated by reference to Exhibit 10.12 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010(File No. 333-46983)).†10.6 Form of L-3 Communications Holdings, Inc. 2008 Long Term Performance Plan Nonqualified Stock Option Agreement (2014 Version)(incorporated by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for the period ended March 28, 2014(File No. 333-46983)).†10.7 Form of L3 Technologies, Inc. 2008 Long Term Performance Plan Nonqualified Stock Option Agreement (2017 Version) (incorporatedby reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2017 (File No. 001-37975)).†10.8 Form of L3 Technologies, Inc. 2008 Long Term Performance Plan Nonqualified Stock Option Agreement (2018 Version) (incorporatedby reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for the period ended March 30, 2018 (File No. 001-37975)).†10.9 Form of L3 Technologies, Inc. 2008 Long Term Performance Plan Nonqualified Stock Option Agreement (2017 CEO Version)(incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2017(File No. 001-37975)).†10.10 Form of L-3 Technologies, Inc. 2008 Long Term Performance Plan Nonqualified Stock Option Agreement (2018 CEO Version)(incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the period ended March 30, 2018(File No. 001-37975)).†10.11 Form of L-3 Communications Holdings, Inc. 2008 Long Term Performance Plan Restricted Stock Unit Agreement (2014 Version)(incorporated by reference to Exhibit 10.5 of the Registrant’s Quarterly Report on Form 10-Q for the period ended March 28, 2014(File No. 333-46983)).†10.12 Form of L3 Technologies, Inc. 2008 Long Term Performance Plan Restricted Stock Unit Agreement (2017 Version) (incorporated byreference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2017 (File No. 001-37975)).†10.13 Form of L3 Technologies, Inc. 2008 Long Term Performance Plan Restricted Stock Unit Agreement (2018 Version) (incorporated byreference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for the period ended March 30, 2018 (File No. 001-37975)).†10.14 Form of L3 Technologies, Inc. 2008 Long Term Performance Plan Restricted Stock Unit Agreement (2017 CEO Version) (incorporatedby reference to Exhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2017 (File No. 001-37975)).†10.15 Form of L-3 Communications Holdings, Inc. 2008 Long Term Performance Plan Restricted Stock Unit Agreement (2016 SeniorExecutive Version) (incorporated by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for the period endedMarch 25, 2016 (File No. 333-46983)).†10.16 Form of L3 Technologies, Inc. 2008 Long Term Performance Plan Restricted Stock Unit Agreement (2017 Senior Executive Version)(incorporated by reference to Exhibit 10.5 of the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2017(File No. 001-37975)).59Table of ContentsExhibit No. Description of Exhibits†10.17 Form of L3 Technologies, Inc. 2008 Long Term Performance Plan Restricted Stock Unit Agreement (2017-2 Senior Executive Version)(incorporated by reference to Exhibit 10.23 of the Registrant’s Annual Report on Form 10-K for the period ended December 31, 2017(File No. 001-37975)).†10.18 Form of L-3 Communications Holdings, Inc. 2008 Long Term Performance Plan Restricted Stock Unit Agreement (2013 Non-Employee Directors Version) (incorporated by reference to Exhibit 10.7 of the Registrant’s Quarterly Report on Form 10-Q for theperiod ended March 29, 2013 (File No. 333-46983)).†10.19 Form of L-3 Communications Holdings, Inc. 2008 Long Term Performance Plan Restricted Stock Unit Agreement (2014 Non-Employee Directors Annual Equity Award Version) (incorporated by reference to Exhibit 10.4 of the Registrant’s Quarterly Report onForm 10-Q for the period ended June 27, 2014 (File No. 333-46983)).†10.20 Form of L3 Technologies, Inc. 2008 Long Term Performance Plan Restricted Stock Unit Agreement (2017 Non-Employee DirectorsAnnual Equity Award Version) (incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for theperiod ended June 30, 2017 (File No. 001-37975)).†10.21 Form of L3 Technologies, Inc. 2008 Long Term Performance Plan Deferred Stock Unit Agreement (2018 Non-Employee DirectorsAnnual Equity Award Version) (incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q for theperiod ended June 29, 2018) (File No. 001-37975)).†10.22 Form of L-3 Communications Holdings, Inc. 2008 Long Term Performance Plan Restricted Stock Unit Agreement (2014 Non-Employee Directors Deferred Compensation Version) (incorporated by reference to Exhibit 10.5 of the Registrant’s Quarterly Reporton Form 10-Q for the period ended June 27, 2014 (File No. 333-46983)).†10.23 Form of L3 Technologies, Inc. 2008 Long Term Performance Plan Restricted Stock Unit Agreement (2017 Non-Employee DirectorsDeferred Compensation Version) (incorporated by reference to Exhibit 10.6 of the Registrant’s Quarterly Report on Form 10-Q for theperiod ended March 31, 2017 (File No. 001-37975)).†10.24 Form of L3 Technologies, Inc. 2008 Long Term Performance Plan Restricted Stock Unit Agreement (2018 Non-Employee DirectorsDeferred Compensation Version) (incorporated by reference to Exhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q for theperiod ended March 30, 2018 (File No. 001-37975)).†10.25 Form of L-3 Communications Holdings, Inc. 2008 Long Term Performance Plan Performance Unit Agreement (2014 Version)(incorporated by reference to Exhibit 10.8 of the Registrant’s Quarterly Report on Form 10-Q for the period ended March 28, 2014(File No. 333-46983)).†10.26 Form of L-3 Communications Holdings, Inc. 2008 Long Term Performance Plan Performance Unit Award Notice (2016 Version)(incorporated by reference to Exhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q for the period ended March 25, 2016(File No. 333-46983)).†10.27 Form of L3 Technologies, Inc. 2008 Long Term Performance Plan Performance Unit Agreement (2017 Version) (incorporated byreference to Exhibit 10.7 of the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2017 (File No. 001-37975)).†10.28 Form of L3 Technologies, Inc. 2008 Long Term Performance Plan Performance Unit Agreement (2018 Version) (incorporated byreference to Exhibit 10.5 of the Registrant’s Quarterly Report on Form 10-Q for the period ended March 30, 2018 (File No. 001-37975)).†10.29 L3 Technologies, Inc. Amended and Restated 2012 Cash Incentive Plan (incorporated by reference to Exhibit 10.8 of the Registrant’sQuarterly Report on Form 10-Q for the period ended March 31, 2017 (File No. 001-37975)).†10.30 Form of L-3 Communications Holdings, Inc. 2012 Cash Incentive Plan Performance Cash Award Agreement (2014 Version)(incorporated by reference to Exhibit 10.10 of the Registrant’s Quarterly Report on Form 10-Q for the period ended March 28, 2014(File No. 333-46983)).†10.31 Form of L-3 Communications Holdings, Inc. 2012 Cash Incentive Plan Performance Cash Award Notice (2016 Version) (incorporatedby reference to Exhibit 10.5 of the Registrant’s Quarterly Report on Form 10-Q for the period ended March 25, 2016 (File No. 333-46983)).†10.32 Form of L3 Technologies, Inc. 2012 Cash Incentive Plan Performance Cash Award Agreement (2017 Version) (incorporated byreference to Exhibit 10.9 of the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2017 (File No. 001-37975)).†10.33 Form of L3 Technologies, Inc. 2012 Cash Incentive Plan Performance Cash Award Agreement (2018 Version) (incorporated byreference to Exhibit 10.6 of the Registrant’s Quarterly Report on Form 10-Q for the period ended March 30, 2018 (File No. 001-37975)).†10.34 L3 Technologies, Inc. Amended and Restated 2008 Directors Stock Incentive Plan (incorporated by reference to Exhibit 10.34 of theRegistrant’s Annual Report on Form 10-K for the period ended December 31, 2016 (File No. 001-37975)).60Table of ContentsExhibit No. Description of Exhibits†10.35 Form of L-3 Communications Holdings, Inc. 2008 Directors Stock Incentive Plan Restricted Stock Unit Agreement (incorporated byreference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the period ended March 27, 2009 (File No. 333-46983)).†10.36 Global Spin-Off Amendment to Equity Award Agreements dated as of July 18, 2012 (incorporated by reference to Exhibit 10.26 of theRegistrant’s Annual Report on Form 10-K for the year ended December 31, 2012 (File No. 333-46983)).†10.37 Global Amendment to Non-Employee Director RSU Agreements dated as of April 30, 2013 (incorporated by reference to Exhibit 10.10of the Registrant’s Quarterly Report on Form 10-Q for the period ended March 29, 2013 (File No. 333-46983)).†10.38 Global Amendment to Equity-Based Award Agreements and Award Notices and Cash-Based Award Agreements and Award Noticesdated as of December 31, 2016 (incorporated by reference to Exhibit 10.38 of the Registrant’s Annual Report on Form 10-K for theperiod ended December 31, 2016 (File No. 001-37975)).†10.39 Global Amendment to Performance Unit Agreements dated as of July 25, 2018 (incorporated by reference to Exhibit 10.4 of theRegistrant’s Quarterly Report on Form 10-Q for the period ended June 29, 2018 (File No. 001-37975)).†10.40 Global Amendment to Performance Cash Award Agreements dated as of July 25, 2018 (incorporated by reference to Exhibit 10.5 of theRegistrant’s Quarterly Report on Form 10-Q for the period ended June 29, 2018 (File No. 001-37975)).†10.41 L3 Technologies, Inc. Amended and Restated Change in Control Severance Plan (incorporated by reference to Exhibit 10.3 of theRegistrant’s Quarterly Report on Form 10-Q for the period ended June 29, 2018 (File No. 001-37975)).†10.42 L3 Technologies, Inc. Executive Severance Plan (incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report onForm 10-Q for the period ended June 29, 2018 (File No. 001-37975)).†10.43 L3 Technologies, Inc. Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.40 of the Registrant’s AnnualReport on Form 10-K for the period ended December 31, 2016 (File No. 001-37975)).†10.44 L3 Technologies, Inc. Deferred Compensation Plan I (incorporated by reference to Exhibit 10.41 of the Registrant’s Annual Report onForm 10-K for the period ended December 31, 2016 (File No. 001-37975)).†10.45 L3 Technologies, Inc. Deferred Compensation Plan II (incorporated by reference to Exhibit 10.42 of the Registrant’s Annual Report onForm 10-K for the period ended December 31, 2016 (File No. 001-37975)).†10.46 L3 Technologies, Inc. Supplemental Savings Plan II (incorporated by reference to Exhibit 4.1 of the Registrant’s RegistrationStatement on Form S-8 filed on November 29, 2017 (File No. 333-221805)).†10.47 Offer Letter between L3 Technologies, Inc. and Christopher E. Kubasik (incorporated by reference to Exhibit 10.1 to the Registrant’sCurrent Report on Form 8-K/A dated October 31, 2017 (File No. 001-37975)).†10.48 L3 Technologies, Inc. 2008 Long Term Performance Plan Nonqualified Stock Option Agreement, effective as of December 20, 2017,between L3 Technologies, Inc. and Christopher E. Kubasik (incorporated by reference to Exhibit 10.49 of the Registrant’s AnnualReport on Form 10-K for the period ended December 31, 2017 (File No. 001-37975)).†10.49 L3 Technologies, Inc. 2008 Long Term Performance Plan Restricted Stock Unit Agreement, effective as of December 20, 2017,between L3 Technologies, Inc. and Christopher E. Kubasik (incorporated by reference to Exhibit 10.50 of the Registrant’s AnnualReport on Form 10-K for the period ended December 31, 2017 (File No. 001-37975)).*†10.50 Letter Agreement between L3 Technologies, Inc. and Christopher E. Kubasik dated November 5, 2018.†10.51 L3 Technologies, Inc. 2008 Long Term Performance Plan Restricted Stock Agreement, effective as of December 14, 2018, between L3Technologies, Inc. and Christopher E. Kubasik (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form8-K dated December 18, 2018 (File No. 001-37975)).*†10.52 Form of L3 Technologies, Inc. 2008 Long Term Performance Plan Restricted Stock Agreement.†10.53 Retirement Agreement and General Release between L3 Technologies, Inc. and Michael T. Strianese (incorporated by reference toExhibit 10.1 to the Registrant’s Current Report on Form 8-K dated November 8, 2017 (File No. 001-37975)).†10.54 Retirement Agreement and General Release between L3 Technologies, Inc. and Mark R. Von Schwarz (incorporated by reference toExhibit 10.1 to the Registrant’s Current Report on Form 8-K dated October 16, 2018 (File No. 001-37975)).†10.55 Form of Acknowledgment Letter Agreement Regarding Potential Repayment Obligations (incorporated by reference to Exhibit 10.2 tothe Registrant’s Current Report on Form 8-K dated December 18, 2018 (File No. 001-37975)).61Table of ContentsExhibit No. Description of Exhibits10.56 Tax Matters Agreement between L-3 Communications Holdings, Inc. and Engility Holdings, Inc. dated as of July 16, 2012(incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the period ended September 28, 2012(File No. 333-46983)).+10.57 Master Supply Agreement between L-3 Communications Corporation (as Seller) and Engility Corporation (as Buyer) dated as of July16, 2012 (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the period ended September28, 2012 (File No. 333-46983)).+10.58 Master Supply Agreement between L-3 Communications Corporation (as Buyer) and Engility Corporation (as Seller) dated as of July16, 2012 (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the period ended September28, 2012 (File No. 333-46983)).*21 Subsidiaries of the Registrant.*23 Consent of PricewaterhouseCoopers LLP.*31.1 Certification of Chairman, Chief Executive Officer and President pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the SecuritiesExchange Act of 1934, as amended.*31.2 Certification of Senior Vice President and Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the SecuritiesExchange Act of 1934, as amended.*32 Section 1350 Certification.***101.INS XBRL Instance Document***101.SCH XBRL Taxonomy Extension Schema Document***101.CAL XBRL Taxonomy Extension Calculation Linkbase Document***101.DEF XBRL Taxonomy Extension Definition Linkbase Document***101.LAB XBRL Taxonomy Extension Label Linkbase Document***101.PRE XBRL Taxonomy Extension Presentation Linkbase Document__________________*Filed herewith.**Certain schedules and exhibits to this agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. The descriptions of the omitted schedules and exhibitsare contained within the relevant agreement. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the SEC upon request.***Filed electronically with this report.†Represents management contract, compensatory plan or arrangement in which directors and/or executive officers are entitled to participate.+Pursuant to a request for confidential treatment, portions of these exhibits have been redacted from the publicly filed document and have been furnished separately to theSecurities and Exchange Commission as required by Rule 24b-2 under the Securities Exchange Act of 1934, as amended.The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than theterms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warrantiesmade by the Company in these agreements or other documents were made solely within the specific context of the relevant agreement or document and maynot describe the actual state of affairs at the date they were made or at any other time.62Table of ContentsSignaturesPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signedon their behalf by the undersigned, thereunto duly authorized. L3 TECHNOLOGIES, INC. By:/s/ Ralph G. D’Ambrosio Title:Senior Vice President and Chief Financial OfficerDate: February 21, 2019Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theRegistrant in the capacities indicated on February 21, 2019.Signature Title /s/ Christopher E. Kubasik Chairman, Chief Executive Officer and President (Principal Executive Officer) and DirectorChristopher E. Kubasik /s/ Ralph G. D’Ambrosio Senior Vice President and Chief Financial Officer (Principal Financial Officer)Ralph G. D’Ambrosio /s/ Dan Azmon Vice President, Controller and Principal Accounting OfficerDan Azmon /s/ Robert B. Millard Lead DirectorRobert B. Millard /s/ Claude R. Canizares DirectorClaude R. Canizares /s/ Thomas A. Corcoran DirectorThomas A. Corcoran /s/ Ann E. Dunwoody DirectorAnn E. Dunwoody /s/ Lewis Kramer DirectorLewis Kramer /s/ Rita S. Lane DirectorRita S. Lane /s/ Lloyd W. Newton DirectorLloyd W. Newton /s/ Vincent Pagano, Jr. DirectorVincent Pagano, Jr. /s/ H. Hugh Shelton DirectorH. Hugh Shelton 63Table of ContentsINDEX TO CONSOLIDATED FINANCIAL STATEMENTSConsolidated Financial Statements as of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016. PageNo.Report of Independent Registered Public Accounting Firm F-2Consolidated Balance Sheets as of December 31, 2018 and December 31, 2017 F-4Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016 F-5Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016 F-6Consolidated Statements of Equity for the years ended December 31, 2018, 2017 and 2016 F-7Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016 F-8Notes to Consolidated Financial Statements F-9F-1Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors and Shareholders of L3 Technologies, Inc.Opinions on the Financial Statements and Internal Control over Financial ReportingWe have audited the accompanying consolidated balance sheets of L3 Technologies, Inc. and its subsidiaries (the “Company”) as of December 31,2018 and 2017, and the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the three years in the periodended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited theCompany's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Companyas of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 inconformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework(2013) issued by the COSO.Change in Accounting PrincipleAs discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for revenue from contractswith customers in 2018.Basis for OpinionsThe Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financialreporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control overFinancial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on theCompany's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company AccountingOversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities lawsand the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whethereffective internal control over financial reporting was maintained in all material respects.Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a testbasis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principlesused and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit ofinternal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a materialweakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also includedperforming such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and (iii) provideF-2Table of Contentsreasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate./s/ PricewaterhouseCoopers LLP New York, New York February 21, 2019We have served as the Company’s auditor since 1997.F-3Table of ContentsL3 TECHNOLOGIES, INC.CONSOLIDATED BALANCE SHEETS(in millions, except share data) December 31, 2018 2017ASSETS Current assets: Cash and cash equivalents$1,066 $662Billed receivables, net of allowances of $12 in 2018 and $18 in 2017919 723Contract assets1,590 —Contracts in process— 1,933Inventories879 389Prepaid expenses and other current assets356 300Assets held for sale— 135Assets of discontinued operations— 306Total current assets4,810 4,448Property, plant and equipment, net1,169 1,110Goodwill6,808 6,615Identifiable intangible assets390 292Other assets341 264Total assets$13,518 $12,729 LIABILITIES AND EQUITY Current liabilities: Accounts payable, trade$699 $531Accrued employment costs491 493Accrued expenses251 217Contract liabilities669 —Advance payments and billings in excess of costs incurred— 509Income taxes payable49 19Other current liabilities288 367Liabilities held for sale— 17Liabilities of discontinued operations— 226Total current liabilities2,447 2,379Pension and postretirement benefits1,211 1,313Deferred income taxes196 158Other liabilities436 398Long-term debt3,321 3,330Total liabilities7,611 7,578 Commitments and contingencies (see Note 19) Equity: Shareholders’ equity: Common stock: $.01 par value; 300,000,000 shares authorized, 78,800,714 shares outstanding at December 31,2018 and 77,876,687 shares outstanding at December 31, 20176,866 6,519Treasury stock (at cost), 84,999,711 shares at December 31, 2018 and 83,362,412 shares at December 31, 2017(7,726) (7,404)Retained earnings7,424 6,659Accumulated other comprehensive loss(725) (691)Total shareholders’ equity5,839 5,083Noncontrolling interests68 68Total equity5,907 5,151Total liabilities and equity$13,518 $12,729See notes to consolidated financial statements.F-4Table of ContentsL3 TECHNOLOGIES, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(in millions, except per share data) Year ended December 31, 2018 2017 2016Net sales: Products$7,165 $6,733 $6,453Services3,079 2,840 2,757Total net sales10,244 9,573 9,210 Operating costs and expenses: Cost of sales — Products(5,345) (4,967) (4,879)Cost of sales — Services(2,192) (2,055) (2,086)General and administrative expenses(1,601) (1,520) (1,287)Total operating costs and expenses(9,138) (8,542) (8,252)Gain on sale of the Crestview Aerospace and TCS businesses42 — —Merger and acquisition related expenses(28) — —Operating income1,120 1,031 958Interest expense(164) (169) (164)Interest and other income, net37 9 17Debt retirement charges(69) — (7)Income from continuing operations before income taxes924 871 804Provision for income taxes(103) (102) (171)Income from continuing operations821 769 633Income (loss) from discontinued operations, net of income taxes205 (76) 91Net income1,026 693 724Net income from continuing operations attributable to noncontrolling interests(21) (16) (14)Net income attributable to L3$1,005 $677 $710 Basic earnings (loss) per share attributable to common shareholders: Continuing operations$10.19 $9.65 $7.99Discontinued operations2.61 (0.97) 1.18Basic earnings per share$12.80 $8.68 $9.17 Diluted earnings (loss) per share attributable to common shareholders: Continuing operations$10.05 $9.46 $7.86Discontinued operations2.58 (0.95) 1.15Diluted earnings per share$12.63 $8.51 $9.01Cash dividends declared per common share$3.20 $3.00 $2.80 Weighted average common shares outstanding: Basic78.5 78.0 77.4Diluted79.6 79.6 78.8See notes to consolidated financial statements.F-5Table of ContentsL3 TECHNOLOGIES, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in millions) Year Ended December 31, 2018 2017 2016Net income$1,026 $693 $724Other comprehensive income (loss): Foreign currency translation adjustments(82) 124 (77)Unrealized (losses) gains on hedging instruments(1)(19) 3 14Pension and postretirement benefit plans: Amortization of net loss and prior service cost previously recognized(2)53 45 30Net gain (loss) arising during the period(3)14 (137) (119)Net change in pension and postretirement benefit plans67 (92) (89)Total other comprehensive (loss) income(34) 35 (152)Comprehensive income992 728 572Comprehensive income attributable to noncontrolling interests(21) (16) (14)Comprehensive income attributable to L3$971 $712 $558__________________(1) Net of income tax benefits of $5 million in 2018, net of income taxes of $1 million in 2017 and $5 million in 2016.(2) Net of income taxes of $15 million in 2018, $14 million in 2017 and $18 million in 2016.(3) Net of income taxes of $4 million in 2018, net of income tax benefits of $42 million in 2017 and $69 million in 2016.See notes to consolidated financial statements.F-6Table of ContentsL3 TECHNOLOGIES, INC.CONSOLIDATED STATEMENTS OF EQUITY(in millions, except per share data) Common Stock Additional Paid-inCapital Treasury Stock Retained Earnings Accumulated OtherComprehensive Loss Noncontrolling Interests Total Equity SharesOutstanding Par Value Balance at December 31, 201578.1 $1 $6,051 $(6,851) $5,728 $(574) $74 $4,429Net income 710 14 724Other comprehensive loss (152) (152)Distributions to noncontrolling interests (17) (17)Cash dividends declared ($2.80 per share) (220) (220)Shares issued: Employee savings plans0.9 115 115Exercise of stock options0.6 53 53Employee stock purchase plan0.4 31 31Vesting of restricted stock and performance units0.5 Repurchases of common stock to satisfy taxwithholding obligations(0.3) (21) (21)Stock-based compensation expense 49 49Treasury stock purchased(3.0) (373) (373)Other 6 6Balance at December 31, 201677.2 1 6,284 (7,224) 6,218 (726) 71 4,624Net income 677 16 693Other comprehensive income 35 35Distributions to noncontrolling interests (19) (19)Cash dividends declared ($3.00 per share) (236) (236)Shares issued: Employee savings plans0.8 113 113Exercise of stock options0.5 46 46Employee stock purchase plan0.2 32 32Vesting of restricted stock and performance units0.3 Repurchases of common stock to satisfy taxwithholding obligations(0.1) (18) (18)Stock-based compensation expense 53 53Treasury stock purchased(1.0) (180) (180)Other 8 8Balance at December 31, 201777.9 1 6,518 (7,404) 6,659 (691) 68 5,151Cumulative effect adjustment of ASC 606 on January1, 2018, net of taxes 13 13Net income 1,005 21 1,026Other comprehensive loss (34) (34)Distributions to noncontrolling interests (21) (21)Cash dividends declared ($3.20 per share) (253) (253)Shares issued: Employee savings plans0.6 119 119Exercise of stock options1.5 149 149Employee stock purchase plan0.2 33 33Vesting of restricted stock and performance units0.3 Repurchases of common stock to satisfy taxwithholding obligations(0.1) (31) (31)Stock-based compensation expense 60 60Treasury stock purchased(1.6) (322) (322)Other 17 17Balance at December 31, 201878.8 $1 $6,865 $(7,726) $7,424 $(725) $68 $5,907See notes to consolidated financial statements.F-7Table of ContentsL3 TECHNOLOGIES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in millions) Year Ended December 31, 2018 2017 2016Operating activities: Net income$1,026 $693 $724Less: (income) loss from discontinued operations, net of tax(205) 76 (91)Income from continuing operations821 769 633Depreciation of property, plant and equipment182 172 156Amortization of intangibles and other assets59 53 42Deferred income tax (benefit) provision(7) (8) 27Stock-based employee compensation expense60 53 49Contributions to employee savings plans in common stock115 106 102Amortization of pension and postretirement benefit plans net loss and prior service cost68 59 48Loss (gain) on sale of property, plant and equipment4 (31) (5)Gain on sale of the Crestview Aerospace and TCS businesses(42) — —Debt retirement charges69 — 7Other non-cash items6 15 26Changes in operating assets and liabilities, excluding amounts from acquisitions, divestitures, and discontinued operations: Billed receivables(195) (18) 1Contract assets(246) — —Contracts in process— (70) 26Inventories57 (69) 22Prepaid expenses and other current assets(75) (58) (23)Accounts payable, trade158 99 (5)Accrued employment costs— 28 10Accrued expenses55 32 (6)Contract liabilities108 — —Advance payments and billings in excess of costs incurred— 13 (73)Income taxes9 (39) 33All other operating activities(164) (121) (48)Net cash from operating activities from continuing operations1,042 985 1,022 Investing activities: Business acquisitions, net of cash acquired(369) (316) (388)Proceeds from the sale of businesses, net of closing date cash balances535 18 561Capital expenditures(232) (224) (210)Dispositions of property, plant and equipment3 74 21Other investing activities(28) (5) 6Net cash used in investing activities from continuing operations(91) (453) (10) Financing activities: Proceeds from sale of senior notes1,798 — 547Repurchases, redemptions and maturities of senior notes(1,865) — (856)Borrowings under revolving credit facility501 1,328 819Repayments of borrowings under revolving credit facility(501) (1,328) (819)Common stock repurchased(322) (180) (373)Dividends paid(254) (236) (220)Proceeds from exercise of stock options149 46 53Proceeds from employee stock purchase plan33 32 31Repurchases of common stock to satisfy tax withholding obligations(31) (18) (21)Debt issue costs(15) — (10)Other financing activities(13) (10) (7)Net cash used in financing activities from continuing operations(520) (366) (856)Effect of foreign currency exchange rate changes on cash and cash equivalents(15) 20 (13)Net cash (used in) from discontinued operations: Operating activities(10) 117 19Investing activities(2) (4) (6)Net cash (used in) from discontinued operations(12) 113 13Net increase in cash and cash equivalents404 299 156Cash and cash equivalents, beginning of the year662 363 207Cash and cash equivalents, end of the year$1,066 $662 $363See notes to consolidated financial statements.F-8TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. Description of BusinessL3 Technologies, Inc. (L3 Technologies, Inc. and, together with its subsidiaries, referred to herein as L3 or the Company) is a prime contractor inIntelligence, 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 rangeof communication, electronic and sensor systems used on military, homeland security and commercial platforms. The Company’s customers include theUnited States (U.S.) Department of Defense (DoD) and its prime contractors, U.S. Government intelligence agencies, the U.S. Department of HomelandSecurity (DHS), foreign governments, and domestic and foreign commercial customers.In the third quarter of 2018, the Company completed a realignment of its business segments to maximize growth and improve its integration andcollaboration across the enterprise. As a result of the realignment, 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. Financial information with respect to each of its segments is included inNote 22.ISRS provides products and services for the global ISR and Command, Control and Communications (C3) markets, specializing in ISR missionsolutions from seabed to space, signals intelligence (SIGINT) and multi-intelligence platforms, including engineering, modernization and sustainmentsolutions for military and various government aircraft, ground support equipment and other platforms. These strategic and tactical products and servicesprovide warfighters with the ability to detect, collect, identify, analyze and disseminate information from command centers, communication nodes and airdefense systems for real-time situational awareness and response. Other major capabilities and mission solutions include space avionics and imagingpayloads, Counter Unmanned Aircraft Systems mission solutions, cyber and electronic warfare, special mission command & control, modeling & simulationand life cycle support. ISRS sells these products and services primarily to the DoD and select foreign governments. The ISRS sectors are ISR Systems,Airborne Sensor Systems, Warrior Sensor Systems, Space & Sensor Systems, Aircraft Systems, MAS, Intelligence & Mission Systems and Advanced Programs.C&NS provides network and communication systems, secure communications products, radio frequency (RF) components, satellite communicationterminals and space, microwave and telemetry products. These products include secure data links that are used to connect a variety of space, airborne, groundand sea-based communication systems and are used in transmission, processing, recording, monitoring and dissemination functions of these communicationsystems. Other major capabilities include integrated maritime mission solutions, directed energy, lightweight unmanned undersea vehicles and naval powerdelivery on submarines and surface ships. C&NS sells these products and services primarily to the DoD and select foreign governments. The C&NS sectors areBroadband Communication Systems, Naval Power Systems, Advanced Communications, Space & Power Systems and Maritime Sensor Systems.Electronic Systems provides a broad range of products and services, including components, products, subsystems, systems and related services tomilitary and commercial customers. These products and services serve markets, such as commercial and military aircraft simulation and training, cockpitavionics, airport security and precision weapons. Electronic Systems sells these products and services primarily to the DoD and select foreign governments.The Electronic Systems sectors are Commercial Aviation Solutions, Precision Engagement Systems, Link Training & Simulation and Security & DetectionSystems.On June 29, 2018, the Company completed the sale of its Vertex Aerospace businesses for a sales price of $540 million subject to customary closingnet working capital adjustments. In connection with the sale, the Company recognized: (1) a pre-tax gain from continuing operations of $42 million ($19million after income taxes) related to the Crestview Aerospace and TCS businesses (the "Crestview & TCS Businesses") and (2) a pre-tax gain fromdiscontinued operations of $234 million ($177 million after income taxes) related to the Vertex Aerospace business. The divestiture of the Vertex Aerospacebusiness represents a strategic shift by the Company to exit the logistics solution and maintenance services business for military aircraft where the Companydoes not provide complex ISR systems integration and modification. The Vertex Aerospace business generated sales of $0.6 billion in 2018, $1.4 billion in2017 and $1.3 billion in 2016. The assets and liabilities and results of operations of the Vertex Aerospace business are reported as discontinued operationsfor all periods presented. See Note 3 for additional information.All references made to financial data in this Annual Report on Form 10-K are to the Company’s continuing operations, unless specifically noted.F-9TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDPlanned Merger with Harris CorporationOn October 14, 2018, L3 and Harris Corporation (“Harris”) announced an agreement to combine in an all stock merger of equals. Under the terms ofthe Agreement and Plan of Merger (the “Merger Agreement”) governing the proposed transaction, which was unanimously approved by the boards ofdirectors 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 stockthey hold. Upon completion of the merger, Harris shareholders will own approximately 54% and L3 shareholders will own approximately 46% of thecombined company, which will be renamed L3 Harris Technologies, Inc. The merger is expected to close in the middle of 2019, subject to customary closingconditions, including the receipt of regulatory approvals and approval by the shareholders of both L3 and Harris.2. Summary of Significant Accounting PoliciesPrinciples of Consolidation: The accompanying financial statements comprise the consolidated financial statements of L3. The consolidatedfinancial statements of the Company include all wholly-owned and majority-owned subsidiaries and variable interest entities (VIEs) if the Company is theprimary beneficiary. The Company also holds interests in certain VIEs for which it was determined the Company is not the primary beneficiary. Allsignificant intercompany transactions are eliminated in consolidation. Investments in equity securities, joint ventures and limited liability corporations overwhich the Company has significant influence but does not have voting control are accounted for using the equity method. Investments over which theCompany does not have significant influence are accounted for using the cost method. For the classification of certain current assets and liabilities, theCompany 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.Accounting Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States ofAmerica (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements and the reported amounts of sales and cost of sales during the reporting period. Themost significant of these estimates and assumptions relate to sales, profit and loss recognition for performance obligations satisfied over time, fair values ofassets acquired and liabilities assumed in business combinations and investments, market values for inventories reported at lower of cost or market, pensionand 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 arereflected in the periods during which they become known. Actual amounts may differ from these estimates and could differ materially.Revenue Recognition: Effective January 1, 2018, the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contractswith Customers, as amended (commonly referred to as ASC 606), using the modified retrospective transition method. The cumulative effect of applying thestandard was an increase of $13 million to shareholders' equity as of January 1, 2018. The Company’s statement of operations for the year endedDecember 31, 2018 and the Company’s balance sheet as of December 31, 2018 are presented under ASC 606, while the Company’s statement of operationsfor the years ended December 31, 2017 and 2016 and the Company’s balance sheet as of December 31, 2017 are presented under ASC 605, RevenueRecognition.A substantial majority of the Company’s consolidated net sales are generated from long-term contracts with customers that require it to design,develop, manufacture, modify, upgrade, test and integrate complex aerospace and electronic equipment and to provide engineering and technical servicesaccording to the customers’ specifications. These contracts are primarily with agencies of, and prime system contractors to, the U.S. Government and foreigngovernments and are generally priced on a fixed-price, cost-plus or time-and-material type basis. Substantially all of the Company's cost-plus and time-and-material type contracts are with the U.S. Government, primarily the DoD. Certain of the Company’s contracts with the U.S. Government are multi-yearcontracts incrementally funded by the customer. The transaction price for these incrementally funded contracts includes contract value amounts not yetfunded by the U.S. Government when the Company has a firm order for the goods or services and it is probable that the customer will fund such amounts. Inassessing probability, the Company considers, among other factors, the period of time before contract funding is expected, communication from the customerthat indicates funding will be obtained and the Company's history of receiving funding under the current contract or previous similar contracts. TheCompany also generates sales to a lesser extent from contracts with commercial and government customers for standard product and service offerings, whichare priced on a firm fixed basis. See Note 22 for additional information regarding the composition of the Company’s net sales.F-10TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDThe Company records sales for a contract when it has the approval and commitment of all parties, the contract identifies the rights of the parties andpayment terms, the contract has commercial substance and collectability of the consideration is probable.To determine the proper revenue recognition method, the Company first evaluates each of its contractual arrangements to identify its performanceobligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. The majority of the Company’scontracts have a single performance obligation because the promise to transfer the individual good or service is not separately identifiable from otherpromises within the contract and is, therefore, not distinct. These contractual arrangements either require the use of a highly specialized manufacturingprocess to provide goods according to customer specifications or represent a bundle of contracted goods and services that are integrated and togetherrepresent a combined output, which may include the delivery of multiple units. Some of the Company's contracts have multiple performance obligations,primarily (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 tothe contract covering multiple phases of the product lifecycle (development and engineering, production, maintenance and support). For contracts with morethan one performance obligation, the Company allocates the total transaction price in an amount based on the estimated relative standalone selling pricesunderlying each performance obligation. In cases where a contract requires a customized good or service, the primary method used to estimate standaloneselling price is the expected cost plus a margin approach. In cases where the Company sells a standard product or service offering, the standalone selling priceis 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 systemcontractors to, the U.S. Government and foreign governments. Sales are recognized over time when control is continuously transferred to the customer duringthe contract. For U.S. Government contracts, the continuous transfer of control to the customer is supported by contract clauses that provide for (i) progress orperformance-based payments or (ii) the unilateral right of the customer to terminate the contract for its convenience, in which case the Company has the rightto receive payment for costs incurred plus a reasonable profit for products and services that do not have alternative use to the Company. Foreign governmentand certain commercial contracts contain similar termination for convenience clauses, or the Company has a legally enforceable right to receive payment forcosts 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 typecontracts that include performance obligations satisfied over time are generally recorded at amounts equal to the ratio of actual cumulative costs incurreddivided by total estimated costs at completion, multiplied by (i) the transaction price, less (ii) the cumulative sales recognized in prior periods (cost-to-costmethod).Accounting for the sales and profits on performance obligations for which progress is measured using the cost-to-cost method involves thepreparation 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 contractand the estimated costs to complete the contract's statement of work. Incurred costs include labor, material, overhead and, for the Company's U.S. Governmentcontractor businesses, general and administrative (G&A) expenses. Incurred costs represent work performed, which corresponds with and thereby representsthe transfer of control to the customer. The estimated profit or loss at completion on a contract is equal to the difference between the transaction price and thetotal estimated cost at completion. In the case of a contract related to complex aerospace or electronic equipment for which the total estimated costs exceedthe total transaction price, a loss arises, and a provision for the entire loss is recorded in the period that the loss becomes evident. The unrecoverable costs ona loss contract that are expected to be incurred in future periods are presented on the balance sheet as a component of other current liabilities entitled"Estimated cost in excess of estimated contract value to complete contracts in process in a loss position." See Note 8 for additional information.The Company’s contracts give rise to variable consideration, including award and incentive fees, as well as amounts incrementally funded by theU.S. Government, or other provisions that can either increase or decrease the transaction price. Award fees provide for a fee based on actual performancerelative to contractually specified performance criteria. Incentive fees provide for a fee based on the relationship between total allowable costs and targetcosts. Variable consideration may require the Company to exercise significant judgment to determine the total transaction price of the contract. TheCompany includes variable consideration in the transaction price when there is a basis to reasonably estimate the variable amount it will be entitled toreceive and it is probable that a significant reversal in revenue recognized will not be required when the uncertainty is resolved. These estimates are based onhistorical experience, current and forecasted performance, and the Company’s judgment at the time of the evaluation.Contract modifications routinely occur to account for changes in contract specifications or requirements. In most cases, contract modifications arefor goods or services that are not distinct and, therefore, are accounted for as part of the existing contract. Transaction price estimates include additionalconsideration for submitted contract modifications or claims when the Company believes it has an enforceable right to the modification or claim, the amountcan be reliably estimated and its realization is reasonablyF-11TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDassured. Amounts representing modifications accounted for as part of the existing contract are included in the transaction price and recognized as anadjustment to sales on a cumulative catch-up basis.The Company’s fixed-price type contracts with the U.S. Government typically allow for progress payments or performance-based payments. Progresspayments are billed to the customer as contract costs are incurred at an amount generally equal to 80% of incurred costs. Performance based payments arebilled to the customer upon the achievement of predetermined performance milestones at amounts not to exceed 90% of contract price. On contracts withprogress or performance-based payments, the customer often retains a small portion of the contract price until satisfactory completion of the contractualstatement of work. Since a small portion of the contract price is retained, the Company generally recognizes sales in excess of billings, which are presented ascontract assets on the balance sheet. The portion of the contract price retained by the customer is a normal business practice to ensure satisfactory contractcompletion and, therefore, is not considered a significant financing component. Contract assets also arise from cost-plus type contracts, time-and-materialtype 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 ofpreparation of invoices to customers. For certain fixed-price contracts with foreign governments and commercial customers, the Company receives advancepayments. Advanced payments are not considered a significant financing component because they are a negotiated contract term to ensure the customermeets its financial obligation, particularly when there are significant upfront working capital requirements. The Company records a liability for advancepayments received in excess of sales recognized, which is presented as a contract liability on the balance sheet.Revisions or adjustments to estimates of the transaction price, estimated costs at completion and estimated profit or loss of a performance obligationmay be required as work progresses under a contract, as experience is gained, as facts and circumstances change and as new information is obtained, eventhough the scope of work required under the contract may not change. Revisions or adjustments may also be required if contract modifications occur. Theimpact of revisions in profit or loss estimates are recognized on a cumulative catch-up basis in the period in which the revisions are made. The revisions incontract estimates, if significant, can materially affect the Company’s results of operations and cash flows, as well as reduce the valuations of contract assets,and in some cases result in liabilities to complete contracts in a loss position. Net sales recognized from the Company's performance obligations partiallysatisfied in prior periods were $264 million for the year ended December 31, 2018 and relate to revisions in contract estimates. The aggregate impact of netchanges in contract estimates is presented in the table below. Year Ended December 31, 2018 2017 2016 (in millions, except per share data)Operating income $213 $185 $149Diluted earnings per share $2.03 $1.49 $1.23Sales from performance obligations satisfied at a point in time are typically for standard goods and are recognized when the customer obtainscontrol, 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 measureprogress 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 ondirect 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 yearended December 31, 2018. % of Total Net SalesOver time (cost-to-cost method)74%Point in time19%Output method4%Billing method3%Total100%F-12TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDRemaining Performance Obligations: On December 31, 2018, the Company had $11.6 billion of remaining performance obligations, whichrepresents the transaction price of firm orders less inception to date sales recognized. Remaining performance obligations exclude unexercised contractoptions and potential orders under basic ordering agreements or master-type contracts (i.e., indefinite-delivery, indefinite-quantity). The Company expects torecognize sales relating to existing performance obligations of approximately $7.3 billion in 2019, $2.7 billion in 2020, $0.7 billion in 2021 and $0.9billion in the periods thereafter.Investments in and Loans to Nonconsolidated Affiliates: The Company’s investments in nonconsolidated affiliates are primarily accounted forusing 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 tocertain other adjustments. The cost of equity method investments includes transaction costs of the acquisition. As required by U.S. GAAP, to the extent thatthere is a basis difference between the cost and the underlying equity in the net assets of an equity investment, the Company allocates such differencesbetween tangible and intangible assets. The Company’s share of net earnings or losses of the investment, inclusive of amortization expense for any basisdifference 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 itsnonconsolidated affiliates, the Company may record its share of net earnings or losses of such affiliates on a three-month lag basis.Research and Development: Independent research and development (IRAD) costs sponsored by the Company and bid and proposal (B&P) costsrelate to both U.S. Government contracts and those for international and commercial customers. The IRAD and B&P costs for certain of the Company’sbusinesses that are U.S. Government contractors are recoverable indirect contract costs that are allocated to U.S. Government contracts in accordance withU.S. Government procurement regulations, and are specifically excluded from research and development accounting standards. The Company includes therecoverable IRAD and B&P costs allocated to U.S. Government contracts in inventoried contract costs, and charges them to general and administrativeexpenses when the related contract sales are recognized as revenue. Research and development costs that are not recoverable on U.S. Government contractsare accounted for in accordance with research and development accounting standards and are expensed to general and administrative expenses as incurred.The total research and development expenses incurred were $326 million, $287 million and $258 million for the years ended December 31, 2018, 2017 and2016, respectively.Customer-funded research and development costs are incurred pursuant to contracts (revenue arrangements) to perform research and developmentactivities according to customer specifications. These direct contract costs and are charged to cost of sales when the corresponding revenue is recognized,which is generally as the research and development services are performed. Customer-funded research and development costs are substantially all incurredunder cost-plus type contracts with the U.S. Government.Contract Costs: The Company capitalizes the incremental costs of obtaining a contract with foreign governments and foreign and domesticcommercial customers (third-party sales commissions) if the Company expects to recover the costs under the contract. The Company expenses the costs toobtain a contract as incurred when the expected amortization period is one year or less. The Company classifies the portion of capitalized costs of obtaining acontract to be amortized over the next 12 months within prepaid expense and other current assets and classifies the remaining amount within other assets inits consolidated balance sheets.Product Warranties: Product warranty costs are accrued when revenue is recognized for the covered products. Product warranty expense isrecognized based on the terms of the product warranty and the related estimated costs. Accrued warranty costs are reduced as product warranty costs areincurred or as warranty periods expire.F-13TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDThe table below presents the changes in the Company’s accrued product warranty costs. Year Ended December 31, 2018 2017 (in millions)Accrued product warranty costs(1): Balance at January 1$99 $109Acquisitions during the period— 3Accruals for product warranties issued during the period44 52Changes to accruals for product warranties existing before January 11 —Settlements made during the period(55) (66)Foreign currency translation adjustments(1) 1Balance at December 31$88 $99__________________(1) The balances above include both the current and non-current amounts.Deferred Debt Issue Costs: Costs to issue debt are capitalized and deferred when incurred, and subsequently amortized to interest expense over theterm of the related debt using the effective interest rate method. Deferred debt issuance costs, other than for line-of-credit arrangements, are presented in theCompany’s consolidated balance sheets as a direct deduction from the carrying amount of the associated debt liability. Deferred debt issue costs for line-of-credit arrangements are presented in the Company’s consolidated balance sheets in other assets.Pension Plan and Postretirement Benefit Plan Obligations: The Company maintains multiple pension plans, both contributory and non-contributory, covering employees at certain locations. Eligibility for participation in these plans varies and benefits are generally based on the participant’scompensation and/or years of service. The Company’s funding policy is generally to contribute in accordance with cost accounting standards that affectgovernment contractors, subject to the Internal Revenue Code and regulations thereon.The Company also provides postretirement medical and life insurance benefits for retired employees and dependents at certain locations.Participants are eligible for these benefits when they retire from active service and meet the eligibility requirements for the Company’s pension plans. Thesebenefits are funded primarily on a pay-as-you-go basis with the retiree generally paying a portion of the cost through contributions, deductibles andcoinsurance provisions.In accordance with accounting standards for employee pension and postretirement benefits, the Company recognizes on a plan-by-plan basis theunfunded status of its pension and postretirement benefit plans in the consolidated financial statements and measures its pension and postretirement benefitplan assets and benefit obligations at December 31.The obligation for the Company’s pension plans and postretirement benefit plans and the related annual costs of employee benefits are calculatedbased on several long-term assumptions, including discount rates and expected mortality for employee benefit liabilities, and rates of return on plan assets,and expected annual rates for salary increases for employee participants in the case of pension plans, and expected annual increases in the costs of medicaland other health care benefits in the case of postretirement benefit obligations. See Note 20, Pension and Other Postretirement Benefits for additionalinformation.Stock-Based Compensation: The Company follows the fair value based method of accounting for stock-based employee compensation, whichrequires the Company to expense all stock-based employee compensation. Stock-based employee compensation is primarily a non-cash expense because theCompany settles these obligations by issuing shares of L3 common stock instead of settling such obligations with cash payments.Compensation expense for restricted stock unit and stock option awards is generally recognized on a straight-line basis over the requisite serviceperiod for the entire award based on the grant date fair value. All of the stock options granted to employees by the Company are non-qualified stock optionsunder U.S. income tax regulations. Compensation expense for performance units payable in L3 common stock is based on the fair value of the units at thegrant date (measurement date), adjusted each reporting period for progress towards the target award, and recognized on a straight-line basis over the requisiteservice period. Stock-based compensation expense is recognized net of estimated forfeitures.F-14TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDIncome Taxes: The Company provides for income taxes using the liability method. Deferred income tax assets and liabilities reflect taxcarryforwards and the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income taxpurposes, as determined under enacted tax laws and rates. The effect of changes in tax laws or rates is accounted for in the period of enactment. Valuationallowances for deferred tax assets are provided when it is more likely than not that the assets will not be realized, considering, when appropriate, tax planningstrategies. Deferred income tax assets and liabilities are classified as noncurrent in the Company’s balance sheet.Income tax accounting standards prescribe: (1) a minimum recognition threshold that an income tax benefit arising from an uncertain income taxposition taken, or expected to be taken, on an income tax return is required to meet before being recognized in the financial statements and (2) themeasurement of the income tax benefits recognized from such positions. The Company’s accounting policy is to classify uncertain income tax positions thatare not expected to be resolved in one year as non-current income tax liabilities and to classify potential interest and penalties on uncertain income taxpositions as elements of the provision for income taxes in its financial statements.Cash and Cash Equivalents: Cash equivalents consist of highly liquid investments with an original maturity of three months or less at the time ofpurchase.Contract Assets and Contract Liabilities: Contract assets include unbilled contract receivables related to long-term contracts for which sales andprofits are recognized primarily using cost-to-cost method of accounting and are classified as current. Unbilled contract receivables are reduced by amountsof unliquidated progress or performance-based payments. Under the terms of certain revenue arrangements (contracts) with the U.S. Government, theCompany is entitled to receive progress payments as costs are incurred or performance-based payments upon the achievement of predetermined performancemilestones. Unliquidated progress or performance-based payments arise from fixed-price type contracts with the U.S. Government that contain progress orperformance-based payment clauses, and represent payments on invoices that have been collected in cash, but have not yet been liquidated. Progresspayment invoices are billed to the customer as contract costs are incurred at an amount generally equal to 80% of incurred costs. Performance based paymentsare billed to the customer upon the achievement of predetermined performance milestones at amounts not to exceed 90% of contract price. Unliquidatedprogress or performance-based payments are liquidated as deliveries or other contract performance milestones are completed, at an amount equal to apercentage of the contract sales price for the items delivered or work performed, based on a contractual liquidation rate. Contract liabilities include advancepayments, billings in excess of the revenue recognized and amounts received in excess of sales recognized on contracts (deferred revenue). Contract assetsand liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. Advance payments and billings in excess ofrevenue recognized are classified as current, and deferred revenue as current or noncurrent based on the timing of expected revenue recognition. Thenoncurrent portion of deferred revenue is included in other liabilities in the Company's consolidated balance sheets. Contracts in Process: Contracts in Process include unbilled contract receivables and inventoried contract costs for which sales and profits arerecognized primarily using a POC method of accounting under ASC 605. Unbilled Contract Receivables represent accumulated incurred costs and earnedprofits on contracts in process that have been recorded as sales, primarily using the cost-to-cost method, but have not been billed to customers. InventoriedContract Costs primarily represent incurred costs on contracts using the units-of-delivery method of accounting and include direct costs and indirect costs,including overhead costs, and materials acquired for U.S. Government service contracts. As discussed in Note 5, the Company’s inventoried contract costs forU.S. Government contracts, and contracts with prime contractors or subcontractors of the U.S. Government include allocated G&A, IRAD costs and B&Pcosts. Contracts in Process contain amounts relating to contracts and programs with long performance cycles, a portion of which may not be realized withinone year. For contracts in a loss position, the unrecoverable costs expected to be incurred in future periods are recorded in Estimated Costs in Excess ofEstimated Contract Value to Complete Contracts in Process in a Loss Position, which is a component of Other Current Liabilities. Under the terms of certainrevenue arrangements (contracts) with the U.S. Government, the Company is entitled to receive progress payments as costs are incurred or milestonepayments as work is performed. The U.S. Government has a security interest in the Unbilled Contract Receivables and Inventoried Contract Costs to whichprogress payments have been applied, and such progress payments are reflected as a reduction of the related amounts. Milestone payments that have beenreceived in excess of contract costs incurred and related estimated profits are reported on the Company’s balance sheet as Advance Payments and Billings inExcess of Costs Incurred.The Company values its acquired contracts in process in connection with business acquisitions on the date of acquisition at contract value less theCompany’s estimated costs to complete the contract and a reasonable profit allowance on the Company’s completion effort.F-15TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDInventories: Inventories, other than Inventoried Contract Costs, are stated at cost (first-in, first-out or average cost), but not in excess of realizablevalue. A provision for excess, obsolete or inactive inventory is recorded based upon an analysis that considers current inventory levels, historical usagepatterns and future sales expectations.Property, Plant and Equipment: Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is computed bygenerally applying the straight-line method to the estimated useful lives of the related assets. Useful lives generally range from 10 to 40 years for buildingsand improvements and three to 10 years for machinery, equipment, furniture and fixtures. Leasehold improvements are amortized over the shorter of the leaseterm or the estimated useful life of the improvements. When property, plant or equipment is retired or otherwise disposed of, the net book value of the asset isremoved from the Company’s balance sheet and the net gain or loss is included in the determination of operating income. Property, plant and equipmentacquired as part of a business acquisition is recorded at fair value.Goodwill and Indefinite-lived Intangible Assets: The carrying value of goodwill and indefinite-lived identifiable intangible assets are notamortized, but are tested for impairment annually as of November 30 and, additionally on an interim basis, whenever events or changes in circumstancesindicate that the carrying amount of these assets may not be recoverable. The accounting standards for goodwill allow for the assessment of qualitativefactors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company utilized aqualitative assessment approach for the November 30, 2018 goodwill impairment test for all of its identified reporting units. For each of the reporting units,the Company determined that it was not more likely than not that the fair values were less than their net book values. If the Company does not utilize aqualitative assessment approach, then the quantitative goodwill impairment test is utilized to identify potential impairments. The Company identifies anypotential impairment by comparing the carrying value of a reporting unit to its fair value. The Company determines the fair value of its reporting units usinga discounted cash flow valuation approach. If a potential impairment is identified, the Company will determine the amount of goodwill impairment bycomparing the fair value of a reporting unit with its carrying amount. To the extent the carrying value of a reporting unit exceeds its fair value, a goodwillimpairment charge is recognized. The annual impairment tests at November 30, 2018 and 2017 did not result in impairments to goodwill.Identifiable Intangible Assets: Identifiable intangible assets represent assets acquired as part of the Company’s business acquisitions and includecustomer contractual relationships, technology, in-process research and development (IPR&D), favorable leasehold interests and trade names. The initialmeasurement of these intangible assets is based on their fair values. Identifiable intangible assets are: (1) tested for impairment whenever events or changes incircumstances indicate that the carrying amount of these assets may not be recoverable and (2) amortized over their estimated useful lives as the economicbenefits are consumed. The Company reviews and updates its estimates of the duration of its customer contractual relationships. If the Company’s currentestimates indicate that the duration of its customer contractual relationships have decreased, then the Company adjusts the remaining amortization period forthose customer contractual relationships to their remaining useful economic life.Derivative Financial Instruments: The Company’s derivative financial instruments include foreign currency forward contracts, which are enteredinto for risk management purposes.The Company’s U.S. and foreign businesses enter into contracts with customers, subcontractors or vendors that are denominated in currencies otherthan their functional currencies. To protect the functional currency equivalent cash flows associated with certain of these contracts, the Company enters intoforeign currency forward contracts. The Company’s activities involving foreign currency forward contracts are designed to hedge the changes in thefunctional currency equivalent cash flows due to movements in foreign exchange rates compared to the functional currency. The foreign currencies hedgedare primarily the U.S. dollar, the Canadian dollar, the Euro, the United Arab Emirates dirham and the British pound. The Company manages exposure tocounterparty non-performance credit risk by entering into foreign currency forward contracts only with major financial institutions that are expected to fullyperform under the terms of such contracts. Foreign currency forward contracts are recorded in the Company’s balance sheets at fair value and are generallydesignated and accounted for as cash flow hedges in accordance with the accounting standards for derivative instruments and hedging activities. Gains andlosses on designated foreign currency forward contracts that are highly effective in offsetting the corresponding change in the cash flows of the hedgedtransactions are recorded net of income taxes in accumulated other comprehensive income (loss) (accumulated OCI) and then recognized in income when theunderlying hedged transaction affects income. Gains and losses on foreign currency forward contracts that do not meet hedge accounting criteria arerecognized in income immediately.Treasury Stock: The Company records treasury stock purchases at cost, which includes incremental direct transaction costs.F-16TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDTranslation of Foreign Currency and Foreign Currency Transactions: Transactions in foreign currencies are translated into the local (functional)currency of the respective business at the approximate prevailing rate at the time of the transaction. Foreign exchange transaction gains and losses in theyears ended December 31, 2018, 2017 and 2016 were not material to the Company’s results of operations. The operations of the Company’s foreignsubsidiaries are translated from the local (functional) currencies into U.S. dollars using weighted average rates of exchange during each reporting period. Therates of exchange at each balance sheet date are used for translating the assets and liabilities of the Company’s foreign subsidiaries. Gains or losses resultingfrom these translation adjustments are included in the balance sheets as a component of accumulated OCI and are only recognized in income when a foreignsubsidiary is divested.Accounting Standards Issued and Not Yet Implemented: In February 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-02,Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this update allow a reclassification fromaccumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act (U.S. TaxReform). 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 ofoperations or cash flows.In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. The amendments in this updateintend to better align the Company's risk management activities and financial reporting for hedging relationships through changes to both the designationand measurement guidance for qualifying hedge relationships and the presentation of hedge results. The amendments in this update require the Company topresent the earnings effect of the hedging instrument in the same income statement line in which the earnings effect of the hedged item is reported. CurrentU.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 theamount by which the hedging instrument does not offset the hedged item, which is referred to as the ineffective amount. The amendments in this update nolonger require the Company to separately measure and report hedge ineffectiveness. The new standard is effective for the Company for interim and annualreporting periods beginning on January 1, 2019, with early adoption permitted. For cash flow hedges existing at the date of adoption, the Company isrequired to apply a cumulative effect adjustment relating to the separate measurement of ineffectiveness to the opening balance of retained earnings. Theamended presentation and disclosure guidance is required only prospectively. The Company will adopt ASU 2017-12 effective January 1, 2019. TheCompany 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 qualitativeand quantitative disclosures about the Company’s leasing activities. The new standard requires the Company to recognize lease assets and lease liabilities onthe 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 inASU 2016-02). The Company will measure and recognize its existing leases on the date of adoption based on the present value of the remaining minimumlease payments, as defined in existing guidance on accounting for leases. The new standard, as amended, will be effective for the Company for interim andannual reporting periods beginning on January 1, 2019, with early adoption permitted. The Company elected to use a modified retrospective approach forleases that exist or were entered into after the beginning of the earliest comparative period in the financial statements, with certain practical expedientsavailable, and will recognize a cumulative-effect adjustment to the opening balance of retained earnings at January 1, 2019. The Company expects thestandard to result in an increase of approximately $650 million to the Company's assets and liabilities for right-of-use assets and lease liabilities, but does notexpect ASU 2016-02 to have an impact on its results of operations or cash flows. The Company does not expect the cumulative effect adjustment to theopening balance of retained earnings at January 1, 2019 to be material. See Note 19 for additional information about the Company’s leases, including thefuture minimum lease payments of the Company's operating leases at December 31, 2018.Other accounting standard updates effective for interim and annual periods beginning after December 31, 2018, are not expected to have a materialimpact on the Company's financial position, results of operations or cash flows.New Accounting Standards Implemented: Effective January 1, 2018, the Company adopted FASB ASU 2017-07, Improving the Presentation of NetPeriodic Pension Cost and Net Periodic Postretirement Benefit Cost. Defined benefit pension and postretirement benefit cost (net benefit cost) compriseseveral components that reflect different aspects of the Company’s financial arrangements as well as the cost of benefits provided to employees. Underprevious U.S. GAAP, those components wereF-17TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDaggregated for reporting in the financial statements and presented within the operating section of the income statement or capitalized into assets (inventories)when appropriate. The amendments in this update require the Company to report the service cost component in the same line item as other compensationcosts arising from services rendered by the employees during the period. The other components of net benefit cost are required to be presented separatelyfrom the service cost component and below income from operations. Plan administrative expenses, which were previously included in service cost, arepresented together with expected return on plan assets, as a component of Interest and other income, net. The amendments in this update also allow only theservice cost component to be eligible for capitalization when applicable. The amendments in this update have been applied retrospectively for thepresentation of the components of net benefit cost and prospectively for the capitalization of the service cost component of net benefit cost. The adoption ofthis standard decreased operating income and increased interest and other income, net, by $11 million for the year ended December 31, 2018 and increasedoperating income and decreased interest and other income, net, each by $11 million and $1 million for the years ended December 31, 2017 and 2016,respectively. The adoption of this standard did not impact pre-tax income for the years ended December 31, 2018, 2017 and 2016.In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, which provides additional guidance to assist entities withevaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update provide newguidance to determine when an integrated set of assets and activities (collectively referred to as a ‘‘set’’) is not a business. The new guidance requires that,when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similaridentifiable assets, the set is not a business. The new guidance reduces the number of transactions that need to be evaluated as a business. The Companyadopted this amendment as of January 1, 2018. The adoption of ASU 2017-01 did not have a material impact on the Company's financial statements for theyear ended December 31, 2018.In May 2014, the FASB issued ASU 2014-09 (ASC 606), which replaces numerous requirements in U.S. GAAP, including industry-specificrequirements, and provides companies with a single revenue recognition model for recognizing revenue from contracts with customers and significantlyexpanded the disclosure requirements for revenue arrangements. The new standard, as amended, was effective for the Company for interim and annualreporting periods beginning on January 1, 2018.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 ASC605, the accounting standard in effect for periods ending prior to January 1, 2018. Based on contracts in process at December 31, 2017, the Companyrecorded, upon adoption of ASC 606, a net increase to retained earnings of $13 million, which includes the acceleration of net sales of approximately $380million and the related cost of sales. The adjustment to retained earnings primarily relates to contracts previously accounted for under the units-of-deliverymethod, which is recognized under ASC 606 earlier in the performance period as costs are incurred, as opposed to when the units are delivered under ASC605. In accordance with the modified retrospective transition provisions of ASC 606, the Company will not recognize any of the accelerated net sales andrelated cost of sales at January 1, 2018 in the Company’s statements of operations for any historical or future period.The Company made certain presentation changes to its consolidated balance sheet on January 1, 2018 to comply with ASC 606. The components ofcontracts in process as reported under ASC 605, which included unbilled contract receivables and inventoried contract costs, have been reclassified ascontract assets and inventories, respectively, after certain adjustments to comply with ASC 606 presentation requirements. Specifically, the adoption of ASC606 resulted in an increase in unbilled contract receivables (referred to as contract assets under ASC 606) primarily from converting contracts previouslyapplying the units-of-delivery method to the cost-to-cost method with a corresponding reduction in inventoried contract costs. The remainder of inventoriedcontract costs, primarily related to work in process not controlled by the Company's customers, were reclassified to inventories. Additionally, under ASC 606,the Company capitalizes 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., commissions paid to third-party agents or representatives) to prepaid expense and other current assets or other assets (non-current). The Company amortizes costs to obtain a contract and costs to fulfill a contract in a pattern similar to the recognition of sales on the contracts thatthe capitalized costs relate to. The Company previously accounted for costs to fulfill a contract either as inventoried contract costs or expensed them asincurred. Costs to obtain a contract were generally expensed as incurred. Advance payments and billings in excess of costs and deferred revenue, previouslyclassified in other current liabilities, have been combined and are presented as contract liabilities.F-18TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDThe table below presents the cumulative effect of the changes made to the consolidated January 1, 2018 balance sheet due to the adoption of ASC606.BALANCE SHEETDecember 31, 2017As ReportedUnder ASC 605 Adjustments Dueto ASC 606 January 1, 2018 AsAdjusted UnderASC 606 (in millions)Assets Current assets: Contract assets$— $1,349 $1,349Contracts in process1,933 (1,933) —Inventories389 537 926Prepaid expenses and other current assets300 17 317Assets held for sale135 3 138Assets of discontinued operations306 (21) 285Total current assets4,448 (48) 4,400Other assets264 49 313Total assets$12,729 $1 $12,730 Liabilities Current liabilities: Accrued expenses$217 $(13) $204Contract liabilities— 565 565Advance payments and billing in excess of costs incurred509 (509) —Other current liabilities367 (49) 318Liabilities held for sale17 (1) 16Liabilities of discontinued operations226 (23) 203Total current liabilities2,379 (30) 2,349Deferred income taxes158 4 162Other liabilities398 14 412Total liabilities7,578 (12) 7,566Shareholders' Equity Retained earnings6,659 13 6,672Total equity$5,151 $13 $5,164F-19TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDThe table below presents the impact of the adoption of ASC 606 on the Company's statement of operations. Year Ended December 31, 2018STATEMENT OF OPERATIONSUnderASC 605 Effect ofASC 606 As ReportedUnder ASC 606 (in millions)Net Sales: Products$7,004 $161 $7,165Services3,101 (22) 3,079Total10,105 139 10,244 Operating costs and expenses: Cost of sales — Products$(5,235) $(110) $(5,345)Cost of sales — Services(2,193) 1 (2,192) General and administrative expenses(1,598) (3) (1,601) Gain on sale of the Crestview & TCS Businesses41 1 42 Merger and acquisition related expenses(28) — (28)Operating income1,092 28 1,120Income from continuing operations before income taxes896 28 924Provision for income taxes(96) (7) (103)Income from continuing operations800 21 821Income from discontinued operations, net of income taxes214 (9) 205Net income1,014 12 1,026Net income attributable to L3$993 $12 $1,005 Basic earnings per share attributable to common shareholders: Continuing operations$9.92 $0.27 $10.19Discontinued operations2.73 (0.12) 2.61Basic earnings per share$12.65 $0.15 $12.80Diluted earnings per share attributable to common shareholders: Continuing operations$9.79 $0.26 $10.05Discontinued operations2.69 (0.11) 2.58Diluted earnings per share$12.48 $0.15 $12.63The following table quantifies the impact of adopting ASC 606 on segment net sales and segment operating income. Effect of ASC 606 Year Ended December 31, 2018 Sales Operating Income (in millions)ISRS$21 $1C&NS68 12Electronic Systems50 14Segment totals$139 $27F-20TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDThe table below presents the impact of the adoption of ASC 606 on the Company's balance sheet. December 31, 2018BALANCE SHEETUnder ASC 605 Effect of ASC 606 As ReportedUnder ASC 606 (in millions)Assets Current assets: Contract assets$— $1,590 $1,590Contracts in process2,127 (2,127) —Inventories393 486 879Prepaid expenses and other current assets340 16 356Total current assets4,845 (35) 4,810Other assets295 46 341Total assets$13,507 $11 $13,518 Liabilities Current liabilities: Accrued expenses$275 $(24) $251Contract liabilities— 669 669Advance payments and billings in excess of costs incurred604 (604) —Income taxes payable53 (4) 49Other current liabilities364 (76) 288Total current liabilities2,486 (39) 2,447Deferred income taxes185 11 196Other liabilities422 14 436Total liabilities7,625 (14) 7,611Shareholders' Equity Retained earnings7,399 25 7,424Total equity$5,882 $25 $5,9073. Acquisitions, Divestitures and Discontinued OperationsBusiness AcquisitionsThe Company continually evaluates potential acquisitions that either strategically fit within the Company’s existing portfolio or expand theCompany’s portfolio into new product lines or adjacent markets. The Company has completed a number of acquisitions that have been accounted for asbusiness combinations and have resulted in the recognition of goodwill in the Company's financial statements. This goodwill includes the know-how of theassembled workforce, the ability of the workforce to further improve technology and product offerings, and the expected cash flows resulting from theseefforts. Goodwill may also include expected synergies resulting from the complementary strategic fit these businesses bring to existing operations. Thebusiness acquisitions discussed below are included in the Company’s results of operations from their respective dates of acquisition.2018 Business AcquisitionsASV Global, L.L.C. (ASV Global). On September 20, 2018, the Company acquired ASV Global, L.L.C., renamed L3 ASV, for a purchase price of $94million, excluding adjustments for approximately $1 million of cash acquired, which was financed with cash on hand. ASV Global is a leading unmannedsurface vessel (USV) and autonomous vessel control systems company. The goodwill recognized for this business was $54 million, of which $16 million isexpected to be deductible for income tax purposes and was assigned to the C&NS segment. The Company also recognized a preliminary estimate fortechnology intangible assets of $30 million. The final purchase price is subject to customary adjustments for final working capital. The final purchase priceallocation, 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 acquiredassets and liabilities. The Company does not expect that differences between the preliminary and final purchase price allocation will have a material impacton its results of operations or financial position.F-21TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDC.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 £4 million (approximately $5 million) of cash acquired, whichwas financed with cash on hand. C.K. Industrial Engineers is a U.K.-based provider of specialized tooling and equipment used primarily in robotic solutionsfor automotive manufacturing. The goodwill recognized for this business was $13 million, which was assigned to the Electronic Systems segment and is notexpected to be deductible for income tax purposes. The final purchase price is subject to customary adjustments for final working capital. The final purchaseprice 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 ofacquired assets and liabilities. The Company does not expect that differences between the preliminary and final purchase price allocation will have a materialimpact 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 andLinchpin Labs, renamed L3 Trenchant, for a combined purchase price of AUD $249 million (approximately $185 million), net of cash acquired of AUD $21million (approximately $15 million), which was financed with cash on hand. The purchase price is subject to an upward adjustment for contingentconsideration 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 Labsare 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 andinternational 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 $117 million, of which $20 million is expected to be deductible for income tax purposes and was assigned tothe ISRS segment. The Company also recognized a preliminary estimate for intangible assets of $90 million, primarily relating to technology and customerrelationships. The technology and customer relationship intangibles are expected to be amortized over 4 years and 20 years, respectively. The final purchaseprice is subject to customary adjustments for final working capital. The final purchase price allocation, which is expected to be completed in the third quarterof 2019, will be based on final appraisals and other analysis of fair values of acquired assets and liabilities. The Company does not expect that differencesbetween 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 L3ADS, 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 forthis business was $40 million, which was assigned to the ISRS segment, and is not expected to be deductible for income tax purposes. The final purchaseprice and purchase price allocation of L3 ADS was finalized as of December 31, 2018, with no significant changes to preliminary amounts.Latitude Engineering, LLC (Latitude Engineering). On June 28, 2018, the Company acquired Latitude Engineering, LLC, renamed L3 LatitudeEngineering, Inc., for a purchase price of $15 million, which was financed with cash on hand. The purchase price is subject to additional contingentconsideration not to exceed $20 million, $15 million of which is based on Latitude Engineering’s post-acquisition financial performance for the four-yearperiod 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 $6 million liability as of the acquisition date for the fair value of the contingent consideration. The goodwill recognized for thisbusiness was $15 million, all of which is expected to be deductible for income tax purposes and was assigned to the Electronic Systems segment. The finalpurchase price and purchase price allocation of Latitude Engineering was finalized as of December 31, 2018, with no significant changes to preliminaryamounts.Net sales and income before income taxes for ASV Global, C.K. Industrial Engineers, Azimuth Security, Linchpin Labs, Applied Defense Solutionsand Latitude Engineering, included in L3’s consolidated statement of operations for the year ended December 31, 2018, are presented in the table below. Year EndedDecember 31, 2018 (in millions)Net sales$46Loss before income taxes(1)$(7)__________________(1) Includes intangible amortization of $7 million and IRAD expense of $1 million.F-22TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED2017 Business AcquisitionsKigre, Inc. (Kigre). On December 18, 2017, the Company acquired Kigre, Inc., renamed L3 Kigre, Inc., for a purchase price of $13 million, which wasfinanced with cash on hand. Kigre designs, manufactures, markets and distributes laser glass, filter glass and laser transmitter solutions involving rare earthelements. The goodwill recognized for this business was $9 million, which was assigned to the ISRS segment, and is not expected to be deductible for incometax purposes. The purchase price and purchase price allocation of Kigre was finalized as of June 29, 2018, with no significant changes to preliminaryamounts.Escola De Aviacao Aerocondor, S.A. (G-Air). On October 27, 2017, the Company acquired Escola De Aviacao Aerocondor, S.A., renamed G-Air, Inc.,for a purchase price of $13 million, which was financed with cash on hand. G-Air is a European airplane and helicopter training academy located in Cascais,Portugal. The goodwill recognized for this business was$12 million, which was assigned to the Electronic Systems segment, and is not expected to bedeductible for income tax purposes. The purchase price and purchase price allocation of G-Air was finalized as of June 29, 2018, with no significant changesto preliminary amounts.Doss Aviation, Inc. (Doss Aviation). On September 12, 2017, the Company acquired Doss Aviation, Inc., which has been renamed L3 Doss Aviation,Inc. Doss Aviation is the sole provider of initial flight training for U.S. Air Force (USAF) pilots and offers curriculum coursework and flight training for bothfixed-wing and unmanned aircraft pilots and weapons officers from its full-service, turnkey training facility. Doss Aviation also provides instructor pilots forrotary-wing aircraft for the U.S. Army, as well as global airfield service support activities at U.S. government bases, including aircraft and bulk refuelingservices and aircraft component repair and modification. The strength of Doss Aviation’s military training, combined with the Company’s existing trainingsolutions, increases the Company’s position to support customers’ growing demand for trained international military and commercial pilots. The acquisitionwas financed with cash on hand. The goodwill recognized for this business was $37 million, which was assigned to the Electronic Systems segment, of which$13 million is expected to be deductible for income tax purposes. The purchase price and purchase price allocation of Doss Aviation was finalized as ofSeptember 28, 2018, with no significant changes to preliminary amounts.Adaptive Methods, Inc. (Adaptive Methods). On September 8, 2017, the Company acquired Adaptive Methods, Inc., renamed L3 Adaptive Methods,Inc., for a purchase price of $33 million, which was financed with cash on hand. Adaptive Methods delivers Undersea Warfare (USW) and Anti-SubmarineWarfare capabilities for U.S. military customers and develops autonomy and sensor payload solutions for use by Unmanned Undersea Vehicles (UUVs). Theacquisition provides the Company with an innovative UUV autonomy technology that will broaden its capabilities in the dynamic and growing underseamarket. The acquisition was financed with cash on hand. The goodwill recognized for this business was $28 million, which was assigned to the C&NSsegment, all of which is expected to be deductible for income tax purposes. The purchase price and purchase price allocation of Adaptive Methods wasfinalized as of June 29, 2018, with no significant changes to preliminary amounts.Open Water Power, Inc. (Open Water Power). On May 19, 2017, the Company acquired Open Water Power, Inc., which has been renamed L3 OpenWater Power, Inc. Open Water Power develops safe and high-energy-density undersea power generation technologies for use by UUVs and other maritimeplatforms. The acquisition enhances the Company’s growing portfolio of innovative undersea capabilities. The acquisition was financed with cash on hand.The purchase price is subject to additional contingent consideration not to exceed $17 million and is based on Open Water Power’s post-acquisitionmilestone achievements for the four-year period ending December 31, 2021. The Company recorded a $14 million liability on the acquisition date for the fairvalue of the contingent consideration. The goodwill recognized for this business was $25 million, which was assigned to the C&NS segment, and is notexpected to be deductible for income tax purposes. The Company also recognized indefinite-lived intangible assets of $65 million for IPR&D costs. Thepurchase price and purchase price allocation of Open Water Power was finalized as of December 31, 2017, with no significant changes to preliminaryamounts.OceanServer Technology, Inc. (OceanServer). On March 17, 2017, the Company acquired OceanServer Technology, Inc., which has been renamedL3 OceanServer, Inc. OceanServer develops and manufactures autonomous, lightweight UUVs. OceanServer provides highly capable UUVs to a wide array ofmilitary, commercial and international customers. The acquisition was financed with cash on hand. The goodwill recognized for this business was $19million, which was assigned to the C&NS segment, all of which is expected to be deductible for income tax purposes. The purchase price and purchase priceallocation of OceanServer was finalized as of September 29, 2017, with no significant changes to preliminary amounts.Explosive Trace Detection business of Implant Sciences. On October 10, 2016, the Company entered into an asset purchase agreement (APA) toacquire the explosive trace detection (ETD) business of Implant Sciences Corporation (Implant), at which time Implant entered into Chapter 11 bankruptcyprotection of the U.S. Bankruptcy Code. In December 2016, Implant received U.S. Bankruptcy Court approval to consummate the APA. The ETD businessbolsters the Company’s leadership in efficient, scalableF-23TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDsecurity solutions and greatly enhances its capabilities in the global aviation security and national security markets. On January 5, 2017, the Companycompleted the acquisition of the ETD business for a purchase price of $118 million, in addition to the assumption of specified liabilities, which was financedwith cash on hand. The goodwill recognized for this business was $80 million, which was assigned to the Electronic Systems segment, all of which isexpected to be deductible for income tax purposes. The purchase price and purchase price allocation of the ETD business was finalized as of December 31,2017, with no significant changes to preliminary amounts.2016 Business AcquisitionsMacDonald Humfrey (Automation) Limited. On November 22, 2016, the Company acquired MacDonald Humfrey (Automation) Limited, which hasbeen renamed L3 MacDonald Humfrey (MacH), for a purchase price of £263 million (approximately $327 million). The purchase price is subject toadditional, contingent consideration not to exceed £30 million (approximately $38 million) and is based on MacH’s post-acquisition financial performancefor the three-year period ending December 31, 2019. The Company recorded a £21 million (approximately $26 million) liability on the acquisition date forthe fair value of the contingent consideration. The acquisition was funded from cash on hand and revolving credit borrowings that were repaid before the endof 2016. The purchase price and purchase price allocation of MacH was finalized as of December 31, 2017, with no significant changes to preliminaryamounts. MacH is a globally recognized leader in the deployment of operationally effective and efficient aviation checkpoint security solutions, as well as inthe development of state-of-the-art process automation and collaborative robotic capabilities supporting aviation and other adjacent markets. The goodwillrecognized for this business was £204 million (approximately $255 million), which was assigned to the Electronics Systems reportable segment, and is notexpected to be deductible for income tax purposes. The Company also recognized identifiable intangible assets of £45 million (approximately $56 million)in the aggregate, which consisted of £6 million (approximately $8 million) for trade name, £10 million (approximately $12 million) for technology and £29million (approximately $36 million) for customer relationships. Identifiable intangible assets will be amortized over a weighted average useful life of 10years.Micreo Limited and Aerosim. On September 30, 2016, the Company acquired Micreo Limited (Micreo) and Flight Training Acquisitions LLC(Aerosim), in separate transactions, for an aggregate purchase price of approximately $86 million, which was financed with cash on hand. The purchase priceand purchase price allocation of Micreo and Aersoim was finalized as of September 29, 2017, with no significant changes to preliminary amounts. Micreospecializes in solutions that utilize high-performance microwave, millimeter wave and photonic technology that complements the Company’s wide range ofsensor products and is expected to strengthen the development of the Company’s future products in the higher Electronic Warfare (EW) radio frequency (RF)bandwidth. Micreo currently supports a variety of airborne, land and security programs in Australia. Aerosim provides innovative, portable and flexible pilotand maintenance technician training products and provides a flight school for prospective airline pilots. Aerosim’s commercial training capabilities arecomplementary to those offered by L3 Commercial Training Solutions. The aggregate goodwill recognized for these businesses was $59 million, which wasassigned to the Electronic Systems and ISRS reportable segments, of which $6 million is expected to be deductible for income tax purposes.Advanced Technical Materials, Inc. (ATM) Acquisition. On January 22, 2016, the Company acquired the assets of ATM for a purchase price of $27million, which was financed with cash on hand. The purchase price and purchase price allocation of ATM was finalized as of September 23, 2016, with nosignificant changes to preliminary amounts. ATM develops and manufactures a broad product line of passive microwave waveguides and specialized coaxialcomponents. The goodwill recognized for this business was $20 million, which was assigned to the C&NS reportable segment, all of which is expected to bedeductible for income tax purposes.F-24TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDUnaudited Pro Forma Statements of Operations DataThe following unaudited pro forma Statements of Operations data present the combined results of the Company and its business acquisitionscompleted during the years ended December 31, 2018 and 2017 assuming that the business acquisitions completed during 2018 and 2017 had occurred onJanuary 1, 2017 and January 1, 2016, respectively. The unaudited pro forma Statements of Operations data below include adjustments for additionalamortization expense related to acquired intangible assets and depreciation assuming the 2018 and 2017 acquisitions had occurred on January 1, 2017 andJanuary 1, 2016, respectively. Year Ended December 31, 2018 2017 (in millions, except per share data)Pro forma net sales$10,324 $9,741Pro forma income from continuing operations attributable to L3$805 $756Pro forma net income attributable to L3$1,010 $680Pro forma diluted earnings per share from continuing operations$10.11 $9.50Pro forma diluted earnings per share$12.69 $8.54The unaudited pro forma results disclosed in the table above are based on various assumptions and are not necessarily indicative of the results ofoperations that would have occurred had the Company completed these acquisitions on the dates indicated above.Investments in Nonconsolidated AffiliatesPeak 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 andcommercial optics applications using its nanolayer gradient refractive index technology.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 theprimary 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 dueprimarily to the difference in the carrying amount of the indefinite-lived amortizable intangible assets including goodwill and IPR&D. The basis differenceattributable to goodwill and IPR&D is $11 million and $13 million, respectively.Business Divestitures2018 DivestituresAs discussed in Note 1, on June 29, 2018, the Company completed the sale of its Crestview & TCS Businesses. The assets and liabilities of theCrestview & TCS Businesses were 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 aerostructures as well as avionics hardware and software systems to address mission critical needs. The table below presents Crestview & TCS Businesses’ resultsof operations, which is included in continuing operations. Year Ended December 31, 2018 2017 2016 (in millions)Net sales$64 $119 $166Gain on sale of businesses$42 $— $—Income from continuing operations before income taxes$45 $(2) $12F-25TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDCrestview & TCS Businesses. The major classes of assets and liabilities included as held for sale related to the Crestview & TCS Businesses arepresented in the table below. December 31, 2017 (in millions)Assets Billed receivables$14Contracts in process33Total current assets47Property, plant and equipment, net34Goodwill52Identifiable intangible assets2Total assets classified as held for sale$135 Liabilities Accounts payable, trade$3Accrued employment costs2Accrued expenses3Other current liabilities5Total current liabilities13Deferred income taxes4Total liabilities classified as held for sale$17Discontinued OperationsVertex Aerospace. As discussed in Note 1, on June 29, 2018, the Company completed the sale of its Vertex Aerospace businesses for a sales price of$540 million subject to customary closing net working capital adjustments. In connection with the sale, the Company recognized: (1) a pre-tax gain fromcontinuing operations of $42 million ($19 million after income taxes) related to the Crestview & TCS Businesses and (2) a pre-tax gain from discontinuedoperations of $234 million ($177 million after income taxes) related to the Vertex Aerospace business. The divestiture of the Vertex Aerospace businessrepresents a strategic shift by the Company to exit the logistics solution and maintenance services business for military aircraft where the Company does notprovide complex ISR systems integration and modification. The Vertex Aerospace business generated sales of $0.6 billion in 2018, $1.4 billion in 2017 and$1.3 billion in 2016. The assets and liabilities and results of operations of the Vertex Aerospace business are reported as discontinued operations for allperiods presented.NSS. On February 1, 2016, the Company completed the sale of its NSS segment to CACI International Inc. for a sales price of $547 million. Theresults of operations of NSS are reported as discontinued operations for all periods presented.F-26TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDThe table below presents the statements of operations data for Vertex Aerospace and NSS. The amounts presented in discontinued operations includeallocated interest expenses for debt not directly attributable or related to L3’s other operations. Interest expense was allocated in accordance with theaccounting standards for discontinued operations and were based on the ratio of their net assets to the sum of: (1) total L3 consolidated net assets and (2) L3consolidated total debt. Year Ended December 31, 2018 2017 2016 (in millions)Net sales$597 $1,429 $1,402Operating costs and expenses(1)(561) (1,531) (1,357)Operating income (loss) from discontinued operations36 (102) 45Interest expense allocated to discontinued operations(1) (2) (5)Gain on sale of businesses234 — 64Income (loss) from discontinued operations before income taxes269 (104) 104Income tax (expense) benefit(64) 28 (13)Income (loss) from discontinued operations, net of income taxes$205 $(76) $91__________________(1) Due to a decline in estimated fair value, the Company recorded a goodwill impairment charge of $187 million during 2017 related to Vertex Aerospace.The major classes of assets and liabilities included in discontinued operations related to Vertex Aerospace are presented in the table below. Thesebalances were classified as current at December 31, 2017 as the sale was expected to be completed within one year and the proceeds were not expected to beused to pay down long-term debt. As discussed above, since the sale of NSS was completed on February 1, 2016, the balances below exclude NSS. December 31, 2017 (in millions)Assets Current assets$284Property, plant and equipment, net13Other intangible assets7Other assets2Total assets of discontinued operations$306 Liabilities Accounts payable, trade$63Other current liabilities131Current liabilities194Long-term liabilities32Total liabilities of discontinued operations$226F-27TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED2017 DivestituresDuring the year ended December 31, 2017, the Company completed the sales of the CTC Aviation Jet Services Limited (Aviation Jet Services)business, the L3 Coleman Aerospace (Coleman) business and the Display Product Line. The table below presents pre-tax (loss) gain recognized, the proceedsreceived and net sales included in continuing operations from these divestitures. Year Ended December 31, 2017 Pre-Tax (Loss) gain ProceedsReceived Net Sales (in millions)Aviation Jet Services divestiture$(5) $1 $1Coleman divestiture(3) 17 9Display Product Line divestiture4 7 —Total$(4) $25 $10Aviation 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 solutionsbased 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 DisplayProduct Line provided cockpits to various military aircraft and was included in the Electronic Systems segment.2016 DivestituresNSS. On February 1, 2016, the Company completed the sale of its NSS segment to CACI International Inc. for a sales price of $547 million. SeeDiscontinued Operations above for additional information.Net sales and income before income taxes for Aviation Jet Services, Coleman and the Display Product Line, included in L3’s consolidatedstatements of operations, are presented in the table below on an aggregate basis, and are included in income from continuing operations for all periodspresented. Year Ended December 31, 2017 2016 (in millions)Net sales$10 $59Income before income taxes$2 $84. Contract Assets and Contract LiabilitiesThe table below presents the components of net contract assets. December 31, 2018 January 1, 2018 (in millions)Contract assets$1,590 $1,349Contract liabilities — current(669) (565)Contract liabilities — non-current(31) (28)Net contract assets$890 $756Contract assets increased from January 1, 2018 to December 31, 2018 by $241 million primarily due to sales exceeding billings due to contractualbilling terms on U.S. Government contracts across all business areas, with the largest increases from ISR Systems, Commercial Aviation Solutions, and Space& Power Systems. Contract liabilities increased by $107 million primarilyF-28TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDdue to advances received by ISR Systems, Commercial Aviation Solutions and Warrior Sensor Systems related to U.S. and foreign government contracts anddeferred revenue on software licensing and support services for Trenchant, which was acquired on August 31, 2018, partially offset by decreases due to theliquidation of advances received by Link Training & Simulation resulting from performance on customer contracts.The Company did not recognize any impairment losses on contract assets during the year ended December 31, 2018.For the year ended December 31, 2018, the Company recognized sales of $457 million related to its contract liabilities at January 1, 2018.The components of contract assets are presented in the table below. December 31, 2018 January 1, 2018 (in millions)Unbilled contract receivables, gross$2,716 $2,232Unliquidated progress payments and advances(1,126) (883)Total contract assets$1,590 $1,3495. Contracts in ProcessThe components of contracts in process are presented in the table below. The unbilled contract receivables, inventoried contract costs andunliquidated progress payments principally relate to contracts with the U.S. Government and prime contractors or subcontractors of the U.S. Government. December 31, 2017 (in millions)Unbilled contract receivables, gross$1,874Unliquidated progress payments(761)Unbilled contract receivables, net1,113Inventoried contract costs, gross891Unliquidated progress payments(71)Inventoried contract costs, net820Total contracts in process$1,933Unbilled Contract Receivables. Unbilled contract receivables represent accumulated incurred costs and earned profits on contracts (revenuearrangements), which have been recorded as sales, but have not yet been billed to customers. Unbilled contract receivables arise from the cost-to-cost methodof revenue recognition that is used to record sales on certain fixed-price contracts. Unbilled contract receivables from fixed-price type contracts are convertedto billed receivables when amounts are invoiced to customers according to contractual billing terms, which generally occur when deliveries or otherperformance milestones are completed. Unbilled contract receivables also arise from cost-plus type contracts, time-and-material type contracts and fixed-priceservice 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 tocustomers.Unliquidated Progress Payments. Unliquidated progress payments are a contra asset account, and are classified against unbilled contract receivablesif revenue for the underlying contract is recorded using the cost-to-cost method, and against inventoried contract costs if revenue is recorded using the units-of-delivery method.Inventoried Contract Costs. In accordance with contract accounting standards, the Company’s U.S. Government contractor businesses account forthe portion of their G&A, IRAD and B&P costs that are allowable and reimbursable indirect contract costs under U.S. Government procurement regulations ontheir U.S. Government contracts (revenue arrangements) as inventoried contract costs. G&A, IRAD and B&P costs are allocated to contracts for which the U.S.Government is the end customer and are charged to costs of sales when sales on the related contracts are recognized. The Company’s U.S. GovernmentcontractorF-29TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDbusinesses record the unallowable portion of their G&A, IRAD and B&P costs to expense as incurred, and do not include them in inventoried contract costs.The table below presents a summary of G&A, IRAD and B&P costs included in inventoried contract costs and the changes to them, includingamounts charged to operating costs and expenses by the Company’s U.S. Government contractor businesses for the periods presented. Year Ended December 31, 2017 2016 (in millions)Amounts included in inventoried contract costs at beginning of the year$173 $137Contract costs incurred: IRAD and B&P333 304Other G&A842 749Total1,175 1,053Amounts charged to operating costs and expenses(1,179) (1,017)Amounts included in inventoried contract costs at end of the year$169 $1736. InventoriesInventories at Lower of Cost or Realizable Value. The table below presents the components of inventories at the lower of cost (first-in, first-out oraverage cost) or realizable value. The Company's inventories at December 31, 2017 were comprised primarily of amounts related to standard products. Inaddition, the Company classified inventories related to contracts for complex aerospace and electronic equipment and engineering and technical servicesaccording to the customers' specifications as inventoried contract costs, which was a component of contracts in process on the consolidated balance sheet atDecember 31, 2017. See Note 5 for additional information. In accordance with ASC 606, all work in process relating to goods that customers do not currentlycontrol are classified within inventories on the Company's consolidated balance sheet at December 31, 2018, without regard to whether the goods arestandard or customized. December 31, 2018 2017 (in millions)Raw materials, components and sub-assemblies$351 $184Work in process330 98Finished goods198 107Total$879 $389Inventories at December 31, 2018 included G&A costs of $31 million. G&A costs incurred and recorded in inventories totaled $1,181 million duringthe year ended December 31, 2018, and G&A costs charged to expense from inventories totaled $1,221 million during the year ended December 31, 2018.See Note 5 for information on G&A costs included in contracts in process for the years ended December 31, 2017 and 2016.7. Goodwill and Identifiable Intangible AssetsGoodwill. In accordance with the accounting standards for business combinations, the Company records the assets acquired and liabilities assumedbased on their estimated fair values at the date of acquisition (commonly referred to as the purchase price allocation). Goodwill represents the purchase pricepaid in excess of the fair value of net tangible and intangible assets acquired. As part of the purchase price allocations for the Company’s businessacquisitions, identifiable intangible assets are recognized as assets apart from goodwill if they arise from contractual or other legal rights, or if they arecapable of being separated or divided from the acquired business and sold, transferred, licensed, rented or exchanged. However, the Company does notrecognize any intangible assets apart from goodwill for the assembled workforces of its business acquisitions. At December 31, 2018, the Company hadapproximately 31,000 employees, and the substantial majority of the sales generated by the Company’s businesses were from the productive labor efforts ofits employees, as compared to selling manufactured products or right-to-use technology.F-30TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDGenerally, the largest intangible assets from the businesses that the Company acquires are the assembled workforces, which includes the humancapital of the management, administrative, marketing and business development, scientific, engineering and technical employees of the acquired businesses.The success of the Company’s businesses, including their ability to retain existing business (revenue arrangements) and to successfully compete for and winnew business (revenue arrangements), is primarily dependent on the management, marketing and business development, contracting, engineering andtechnical skills and knowledge of its employees, rather than on productive capital (plant and equipment, and technology and intellectual property).Additionally, for a significant portion of its businesses, the Company’s ability to attract and retain employees who have U.S. Government security clearances,particularly those of top-secret and above, is critical to its success, and is often a prerequisite for retaining existing revenue arrangements and pursuing newones. Generally, patents, trademarks and licenses are not material for the Company’s acquired businesses. Furthermore, the Company’s U.S. Governmentcontracts (revenue arrangements) generally permit other companies to use the Company’s patents in most domestic work performed by such other companiesfor the U.S. Government. Therefore, because intangible assets for assembled workforces are part of goodwill in accordance with the accounting standards forbusiness combinations, the substantial majority of the intangible assets for the Company’s business acquisitions is recognized as goodwill. Additionally, thevalue assigned to goodwill for the Company’s business acquisitions also includes the value that the Company expects to realize from cost reductionmeasures that it implements for its acquired businesses.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)December 31, 2016 Goodwill$2,512 $1,883 $2,083 $6,478Accumulated impairment losses(46) (15) (43) (104) 2,466 1,868 2,040 6,374Business acquisitions(1)8 73 131 212Business divestitures(2)— — (12) (12)Foreign currency translation adjustments26 21 46 93Assets held for sale(3)(42) — (10) (52) December 31, 2017 Goodwill2,504 1,977 2,238 6,719Accumulated impairment losses(46) (15) (43) (104) 2,458 1,962 2,195 6,615Business acquisitions(1)158 56 33 247Foreign currency translation adjustments(20) (11) (23) (54) December 31, 2018 Goodwill2,634 2,022 2,248 6,904Accumulated impairment losses(46) (15) (43) (104) $2,596 $2,007 $2,205 $6,808__________________(1) For the year ended December 31, 2018, business acquisitions for the ISRS segment included the acquisitions of the Azimuth Security and Linchpin Labs and Applied DefenseSolutions businesses and the purchase price allocation adjustments for the Kigre business acquisition. Business acquisitions for the C&NS segment included the acquisitions of theASV Global business and purchase price allocation adjustments for the Adaptive Methods business acquisition. Business acquisitions for the Electronic Systems segment includedthe acquisitions of the Latitude Engineering and C.K. Industrial Engineers businesses and purchase price allocation adjustments for the G-Air and Doss Aviation businessacquisitions. For the year ended December 31, 2017, business acquisitions for the ISRS segment included primarily the Kigre business acquisition. Business acquisitions for theC&NS segment included primarily the Adaptive Methods, Open Water Power, and OceanServer business acquisitions. Business acquisitions for the Electronic Systems segmentincluded the acquisitions of the ETD, Doss Aviation and G-Air businesses and purchase price allocation adjustments for the MacH and Aerosim business acquisitions.(2) The decrease for the Electronic Systems segment was due to the divestitures of Coleman and Aviation Jet Services during the quarterly period ended March 31, 2017.(3) The Crestview & TCS businesses from the Company’s ISRS segment were classified as held for sale as of December 31, 2017.F-31TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDIdentifiable Intangible Assets. The most significant identifiable intangible asset that is separately recognized for the Company’s businessacquisitions is customer contractual relationships. All of the Company’s customer relationships are established through written customer contracts (revenuearrangements). The fair value for customer contractual relationships is determined, as of the date of acquisition, based on estimates and judgments regardingexpectations for the estimated future after-tax earnings and cash flows (including cash flows for working capital) arising from the follow-on sales expectedfrom the customer contractual relationships over their estimated lives, including the probability of expected future contract renewals and sales, less acontributory 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-livedintangible assets. December 31, 2018 December 31, 2017 WeightedAverage Amortization Period Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount (in years) (in millions)Customer contractual relationships16 $468 $288 $180 $393 $257 $136Technology9 245 132 113 189 114 75Other9 49 18 31 29 14 15Total subject to amortization 762 438 324 611 385 226IPR&Dindefinite 66 — 66 66 — 66Total $828 $438 $390 $677 $385 $292The table below presents amortization expense recorded by the Company for its identifiable intangible assets. Year Ended December 31, 2018 2017 2016 (in millions)Amortization expense$49 $43 $33Based on gross carrying amounts at December 31, 2018, the Company’s estimate of amortization expense for identifiable intangible assets for theyears ending December 31, 2019 through 2023 is presented in the table below. Year Ending December 31, 2019 2020 2021 2022 2023 (in millions)Estimated amortization expense$51 $47 $42 $37 $28F-32TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED8. Other Current Liabilities and Other LiabilitiesThe table below presents the components of other current liabilities. December 31, 2018 2017 (in millions)Other Current Liabilities: Accrued product warranty costs$66 $69Estimated costs in excess of estimated contract value to complete contracts in process in a loss position40 63Accrued interest18 43Estimated contingent purchase price payable for acquired businesses (see Note 13)10 11Deferred revenues— 38Other154 143Total other current liabilities$288 $367The table below presents the components of other liabilities. December 31, 2018 2017 (in millions)Other Liabilities: Non-current income taxes payable (see Note 17)$161 $164Deferred compensation53 49Notes payable and capital lease obligations40 16Contract liabilities (see Note 4)31 —Accrued product warranty costs22 30Accrued workers’ compensation20 23Estimated contingent purchase price payable for acquired businesses (see Note 13)10 20Deferred revenues— 19Other99 77Total other liabilities$436 $3989. Property, Plant and EquipmentThe table below presents the components of property, plant and equipment. December 31, 2018 2017 (in millions)Land$34 $34Buildings and improvements428 404Machinery, equipment, furniture and fixtures2,081 1,959Leasehold improvements407 376Gross property, plant and equipment2,950 2,773Accumulated depreciation and amortization(1,781) (1,663)Property, plant and equipment, net$1,169 $1,110F-33TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED10. DebtThe components of debt and a reconciliation to the carrying amount of long-term debt is presented in the table below. December 31, 2018 2017 (in millions)Borrowings under Revolving Credit Facility(1)$— $—5.20% Senior Notes due 2019— 1,0004.75% Senior Notes due 2020— 8004.95% Senior Notes due 2021650 6503.85% Senior Notes due 2023800 —3.95% Senior Notes due 2024350 3503.85% Senior Notes due 2026550 5504.40% Senior Notes due 20281,000 —Principal amount of long-term debt3,350 3,350Unamortized discounts(7) (7)Deferred debt issue costs(22) (13)Carrying amount of long-term debt$3,321 $3,330__________________(1) During 2018, L3's aggregate borrowings and repayments under the Credit Facility were $501 million. L3 had the full availability of its $1 billion Credit Facility at December 31,2018 and December 31, 2017.L3 Revolving Credit FacilityOn October 31, 2016, L3 entered into a new five-year unsecured revolving credit facility (Credit Facility), which replaced its amended and restatedrevolving credit agreement dated February 3, 2012. The Credit Facility provides for total aggregate borrowings of $1 billion and any outstanding borrowingsunder the Credit Facility are due and payable on October 31, 2021. Borrowings under the Credit Facility may consist of: (1) base rate loans, which shall bearinterest at a rate equal to the sum of the applicable rate (as defined in the Credit Facility), and the “base rate” (as defined in the Credit Facility) and/or (2)eurodollar loans, which shall bear interest at a rate equal to the sum of the applicable rate plus the “Eurodollar rate” (as defined in the Credit Facility). Theapplicable rate for base rate loans under the Credit Facility ranges from 0.125% to 1.000%, and the applicable rate for eurodollar loans ranges from 1.125% to2.000%, in each case based on the long-term debt rating of L3. In addition, the Credit Facility provides for uncommitted incremental revolving facilities andadditional term loan facilities in an aggregate principal amount of up to $600 million.L3 Senior NotesThe senior notes are unsecured senior obligations of L3. The terms of each outstanding senior note are presented in the table below.Note Date of Issuance Amount Issued Discount(1) NetCash Proceeds Effective InterestRate Redemption atTreasury Rate(2)(3) (dollars in millions)4.95% Senior Notes due February 15,2021 February 7, 2011 $650 $4 $639 5.02% 25 bps3.85% Senior Notes due June 15,2023 (4) June 6, 2018 $800 $2 $792 3.89% 20 bps3.95% Senior Notes due May 28,2024 (5) May 28, 2014 $650 $3 $641 4.02% 20 bps3.85% Senior Notes due December15, 2026 December 5, 2016 $550 $3 $542 3.91% 25 bps4.40% Senior Notes due June 15,2028 (4) June 6, 2018 $1,000 $1 $990 4.41% 25 bpsF-34TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED__________________(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 senior notes maturing in 2023 may be redeemed at any time prior to May 15, 2023 (one month prior to maturity) and the senior notes maturing in 2021, 2024, 2026 and2028 may be redeemed at any time prior to November 15, 2020, February 28, 2024, September 15, 2026 and March 15, 2028, respectively, (three months prior to theirmaturity) 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 remainingprincipal 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), plusthe spread indicated in the table above. In addition, if the senior notes maturing in 2021, 2023, 2024, 2026 and 2028 are redeemed at any time on or after November 15, 2020,May 15, 2023, February 28, 2024, September 15, 2026 and March 15, 2028, respectively, the redemption price would be equal to 100% of the principal amount.(3) 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 theapplicable 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 torequire 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.(4) 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 tofund 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.(5) On December 22, 2015, the Company repurchased $300 million of the 3.95% Senior Notes due May 28, 2024.Repurchases, Redemptions and Maturities of Senior NotesThe repurchases, redemptions and maturities of senior notes are presented in the table below.Note Settlement Type Date Settled AggregateAmount Premium CashPayments Interest Total CashPayments Debt RetirementCharge (dollars in millions)5.20% Senior Notes due 2019(1) Redemption July 6, 2018 $317 103.048% $327 $4 $331 $104.75% Senior Notes due 2020(1) Redemption July 6, 2018 $265 103.818% $275 $6 $281 $115.20% Senior Notes due 2019(2) Tender Offer June 6, 2018 $683 103.282% $705 $5 $710 $244.75% Senior Notes due 2020(2) Tender Offer June 6, 2018 $535 104.092% $557 $10 $567 $241.50% Senior Notes due 2017 Redemption December 30, 2016 $350 100.323% $351 $1 $352 $23.95% Senior Notes due 2016 Maturity November 15, 2016 $200 100.000% $200 $— $200 $—3.95% Senior Notes due 2016 Redemption May 20, 2016 $300 101.475% $305 $— $305 $5__________________(1) The debt retirement charge includes $1 million which represents the non-cash retirement of associated unamortized debt issue costs and discounts.(2) Cash payments exclude $1 million of tender offer fees. The debt retirement charge includes $1 million of tender offer fees and $3 million which represents the non-cashretirement of associated unamortized debt issue costs and discounts.GuaranteesThe borrowings under the Credit Facility are fully and unconditionally guaranteed by L3 and by substantially all of the material 100% owneddomestic subsidiaries of L3 on an unsecured senior basis. The payment of principal and premium, if any, and interest on the senior notes is fully andunconditionally guaranteed, jointly and severally, by L3’s material 100% owned domestic subsidiaries that guarantee any of its other indebtedness. See Note25.SubordinationThe guarantees of the Credit Facility and the senior notes rank pari passu with each other.CovenantsFinancial and other restrictive covenants. The Credit Facility contains financial and other restrictive covenants that limit, among other things, theability of the subsidiaries of L3 to borrow additional funds, and the ability of L3 and its subsidiaries to incur liens, make investments, merge or consolidate ordispose of assets. The Company’s Credit Facility contains covenants thatF-35TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDrequire that: (1) the Company’s consolidated interest coverage ratio be greater than or equal to 3.0 to 1.0, (2) the Company’s consolidated leverage ratio beless than or equal to 3.75 to 1.0, provided that the foregoing consolidated leverage ratio shall be increased to 4.0 to 1.0 as of the end of each of the four fiscalquarters immediately following a material acquisition (as defined in the Credit Facility). Calculations of the financial covenants are to exclude, among otherthings, certain items such as impairment losses on goodwill or other intangible assets, non-cash gains or losses from discontinued operations, gains or lossesin connection with asset dispositions, and gains or losses with respect to judgments or settlements in connection with litigation matters. At December 31,2018, the Company was in compliance with its financial and other restrictive covenants.The indentures governing the senior notes (Senior Indentures) contain covenants customary for investment grade notes, including covenants thatrestrict the ability of L3 and its 100% owned domestic subsidiaries to create, incur, assume or permit to exist any lien, except permitted liens (as defined inthe Senior Indentures) and restrict the ability of L3 and its subsidiaries to enter into certain sale and leaseback transactions (as defined in the SeniorIndentures).Cross default provisions. The Credit Facility contains cross default provisions that are triggered when a payment default occurs or certain otherdefaults occur that would allow the acceleration of indebtedness, swap contracts or guarantees of L3 or its subsidiaries, so long as the aggregate amount ofsuch indebtedness, swap contracts or guarantees is at least $75 million and such defaults (other than payment defaults and defaults that have resulted inacceleration) have not been cured within 10 days. The senior notes indenture contains a cross acceleration provision that is triggered when a default oracceleration occurs under any indenture or instrument of L3 or its subsidiaries or the payment of which is guaranteed by L3 or its subsidiaries in an aggregateamount of at least $100 million.11. Accumulated Other Comprehensive (Loss) Income (AOCI)The changes in the AOCI balances, including amounts reclassified from AOCI into net income, are presented in the table below. Foreign currencytranslation Unrealized (losses)gains onhedginginstruments Unrecognized (losses) gainsand prior service cost, net Total accumulatedothercomprehensive loss (in millions)Balance at December 31, 2015 $(101) $(8) $(465) $(574)Other comprehensive (loss) income before reclassifications, net of tax (77) 3 (119) (193)Amounts reclassified from AOCI, net of tax — 11 30 41Net current period other comprehensive (loss) income (77) 14 (89) (152)Balance at December 31, 2016 $(178) $6 $(554) $(726) Other comprehensive income (loss) before reclassifications, net of tax 124 7 (137) (6)Amounts reclassified from AOCI, net of tax — (4) 45 41Net current period other comprehensive income (loss) 124 3 (92) 35Balance at December 31, 2017 $(54) $9 $(646) $(691) Other comprehensive loss before reclassifications, net of tax (82) (17) 14 (85)Amounts reclassified from AOCI, net of tax — (2) 53 51Net current period other comprehensive (loss) income (82) (19) 67 (34)Balance at December 31, 2018 $(136) $(10) $(579) $(725)F-36TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDFurther details regarding the amounts reclassified from AOCI into net income are presented in the table below. Amount Reclassified from AOCI(a) Affected Line Item in the Audited ConsolidatedStatements of Operations Year Ended December 31, Details About AOCI Components 2018 2017 2016 (in millions) Gain (loss) on hedging instruments $3 $5 $(13) Cost of sales-products 3 5 (13) Income from continuing operations beforeincome taxes (1) (1) 2 Provision for income taxes $2 $4 $(11) Income from continuing operations Amortization of defined benefit pension andpostretirement items: Net loss(b) $(68) $(59) $(48) Income from continuing operations beforeincome taxes 15 14 18 Provision for income taxes $(53) $(45) $(30) Income from continuing operationsTotal reclassification for the period $(51) $(41) $(41) Income from continuing operations__________________(a) Amounts in parentheses indicate charges to the 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 20 for additionalinformation).12. EquityOn 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 itscommon 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 timeat management’s discretion in accordance with applicable U.S. Federal securities laws. The timing and actual number of shares to be repurchased in the futurewill depend on a variety of factors, including, but not limited to, the Company’s financial position, earnings, legal requirements, other investmentopportunities (including acquisitions) and market conditions. L3 repurchased 1.6 million shares of its common stock at an average price of $196.64 per sharefor an aggregate amount of $322 million from January 1, 2018 through September 28, 2018. All share repurchases of L3’s common stock have been recordedas treasury shares.The Company did not repurchase any shares of common stock from September 29, 2018 through February 14, 2019. The last repurchase of shareswas in July 2018. In connection with the planned merger with Harris Corporation (see Note 1), the Company suspended the share repurchase program.On February 12, 2019, L3’s Board of Directors declared a quarterly cash dividend of $0.85 per share, payable on March 15, 2019 to shareholders ofrecord at the close of business on March 1, 2019. During the year ended December 31, 2018, the Company paid $254 million of cash dividends, offset by a$1 million net reduction of previously accrued dividends for employee-held stock awards.13. Fair Value MeasurementsFair 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 mostadvantageous market in an orderly transaction between market participants. The standards establish a fair value hierarchy that gives the highest priority toobservable inputs and the lowest priority to unobservable inputs.F-37TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDThe following table presents the fair value hierarchy level for each of the Company’s assets and liabilities that are measured and recorded at fairvalue on a recurring basis. December 31, 2018 December 31, 2017Description Level 1(1) Level 2(2) Level 3(3) Level 1(1) Level 2(2) Level 3(3) (in millions)Assets Cash equivalents $660 $— $— $310 $— $—Derivatives (foreign currency forward contracts) — 1 — — 11 —Total assets $660 $1 $— $310 $11 $— Liabilities Derivatives (foreign currency forward contracts) $— $17 $— $— $1 $—Contingent consideration — — 20 — — 31Total liabilities $— $17 $20 $— $1 $31__________________(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 registeredmoney 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 valuationmodel based on observable market inputs, including quoted foreign currency forward exchange 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 MacH on November 22,2016, Open Water Power on May 19, 2017 and Latitude Engineering on June 28, 2018. The fair value of the MacH contingent consideration liability, and aportion of the Latitude Engineering contingent consideration liability is based on a Monte Carlo Simulation of the aggregate revenue of MacH for the three-year period ending December 31, 2019, and the aggregate revenue of Latitude Engineering as of each year within the four-year period ended December 31,2021. The significant unobservable inputs used in calculating the fair value of the MacH contingent consideration and a portion of the Latitude Engineeringcontingent consideration include: (i) projected revenues of the acquired businesses, (ii) company specific risk premium, which is a component of the discountrate applied to the revenue projections and (iii) volatility. The fair value of the Open Water Power contingent consideration liability and a portion of theLatitude Engineering contingent consideration liability is based on the Scenario-Based Method of the income approach using post-acquisition milestoneachievements of Open Water Power and Latitude Engineering through December 31, 2020. The significant unobservable inputs used in calculating the fairvalue of the Open Water Power contingent consideration and a portion of the Latitude Engineering contingent consideration include: (i) timing of achievingthe milestones associated with the contingent consideration arrangement, (ii) probabilities of achieving each milestone and (iii) the discount rate. The fairvalue of the contingent consideration for potential earn-out payments is reassessed quarterly, including an analysis of the significant inputs used in theevaluation, as well as the accretion of the present value discount. Changes are reflected within cost of sales in the consolidated statements of operations.The fair value of the contingent consideration liability has been reassessed quarterly. The table below presents the changes to contingentconsideration obligations during the year ended December 31, 2018. December 31, 2018 (in millions)Balance at beginning of period$31Acquisitions and investments11Cash payments(7)Changes in fair value of contingent consideration, net(15)Balance at end of period$20F-38TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED14. Financial InstrumentsAt December 31, 2018 and 2017, the Company’s financial instruments consisted primarily of cash and cash equivalents, billed receivables, tradeaccounts payable, senior notes and foreign currency forward contracts. The carrying amounts of cash and cash equivalents, billed receivables and tradeaccounts payable are representative of their respective fair values because of the short-term maturities or expected settlement dates of these instruments. Thecarrying amounts and estimated fair values of the Company’s other financial instruments are presented in the table below. December 31, 2018 December 31, 2017 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value (in millions)Senior notes(1)$3,321 $3,355 $3,330 $3,502Foreign currency forward contracts(2)$(16) $(16) $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 15 for additional disclosures regarding the notionalamounts and fair values of foreign currency forward contracts.15. Derivative Financial InstrumentsNotional 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 December 31, 2018.Currency Notional Amounts (in millions)U.S. dollar $204Canadian dollar 123Euro 67United Arab Emirates dirham 12British pound 9Total $415At December 31, 2018, the Company’s foreign currency forward contracts had maturities through 2023.The table below presents the location of the Company’s derivative instruments recorded at fair value on the consolidated balance sheets. December 31, 2018 December 31, 2017 Other Current Assets Other Assets Other Current Liabilities Other Liabilities Other Current Assets Other Assets Other Current Liabilities Other Liabilities (in millions)Derivatives designated as hedginginstruments: Foreign currency forward contracts(1)$1 $— $13 $4 $11 $— $1 $—Total derivative instruments$1 $— $13 $4 $11 $— $1 $—__________________(1) See Note 13 for a description of the fair value hierarchy related to the Company's foreign currency forward contracts.The effects from foreign currency forward contracts on the consolidated statements of operations were a pre-tax gain of $3 million for the year endedDecember 31, 2018, a pre-tax gain of $5 million for the year ended December 31, 2017, and a pre-tax loss of $13 million for the year ended December 31,2016. At December 31, 2018, the estimated net amount of existing losses that are expected to be reclassified into income within the next 12 months is $10million.F-39TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED16. L3’s Earnings Per ShareA reconciliation of basic and diluted Earnings Per Share (EPS) is presented in the table below. Year Ended December 31, 2018 2017 2016 (in millions, except per share data)Reconciliation of net income: Net income$1,026 $693 $724Net income from continuing operations attributable to noncontrolling interests(21) (16) (14)Net income attributable to L3’s common shareholders$1,005 $677 $710Earnings (loss) attributable to L3’s common shareholders: Continuing operations$800 $753 $619Discontinued operations, net of income tax205 (76) 91Net income attributable to L3’s common shareholders$1,005 $677 $710Earnings per share attributable to L3’s common shareholders: Basic: Weighted average common shares outstanding78.5 78.0 77.4Basic earnings (loss) per share: Continuing operations$10.19 $9.65 $7.99Discontinued operations, net of income tax2.61 (0.97) 1.18Net income$12.80 $8.68 $9.17Diluted: Common and potential common shares: Weighted average common shares outstanding78.5 78.0 77.4Effect of dilutive securities1.1 1.6 1.4Common and potential common shares79.6 79.6 78.8Diluted earnings (loss) per share: Continuing operations$10.05 $9.46 $7.86Discontinued operations, net of income tax2.58 (0.95) 1.15Net income$12.63 $8.51 $9.01The computation of diluted EPS excludes 0.3 million, 0.3 million and 0.4 million shares for the years ended December 31, 2018, 2017 and 2016,respectively, for share-based payment awards as they were anti-dilutive.17. Income TaxesThe U.S. Government enacted U.S. Tax Reform on December 22, 2017, which made significant changes to the U.S. tax system. Significant changesunder 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 modifiedterritorial tax system and the imposition of a one-time repatriation tax on deemed repatriated earnings and profits of U.S. owned foreign subsidiaries (TollCharge). The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and JobAct (SAB 118), which allowed companies to record provisional impacts of U.S. Tax Reform during a measurement period not extending beyond one yearfrom the enactment date. As a result, the Company recorded an estimated tax benefit (Preliminary Net Tax Benefit) of $79 million from U.S. Tax Reform in itsconsolidated financial statements for the year ended December 31, 2017. For the year ended December 31, 2018, the SAB 118 measurement period closedand the Company recorded an additional $1 million net tax benefit related to U.S. Tax Reform. The final cumulative benefit of $80 million includes a $98million estimated tax benefit related to the remeasurement of deferred taxes partially offset by an estimated tax provision of $18 million related to the TollCharge. The implementation of a modified territorial tax system under U.S. Tax Reform subjects the Company to tax on its Global Intangible Low-TaxedIncome (GILTI) starting with the year ended December 31, 2018. The FASB has permitted companies to make an accounting policy decision to either: (1)treat taxes due on future GILTI inclusions in U.S. taxable income as a current-periodF-40TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDexpense when incurred (“period cost method”) or (2) factor such amounts into the measurement of its deferred taxes (“deferred method”). The Company haselected to use the period cost method. As of December 31, 2018, the Company has completed the accounting for all impacts of U.S. Tax Reform.Income from continuing operations before income taxes is summarized in the table below. Year Ended December 31, 2018 2017 2016 (in millions)Domestic$630 $649 $608Foreign294 222 196Income from continuing operations before income taxes$924 $871 $804The components of the Company’s current and deferred portions of the provision for income taxes on continuing operations are presented in thetable below. Year Ended December 31, 2018 2017 2016 (in millions)Current income tax provision: Federal$30 $44 $88State and local18 10 8Foreign62 56 48Subtotal110 110 144 Deferred income tax provision/(benefit): Federal(7) (16) 25State and local— 6 2Foreign— 2 —Subtotal(7) (8) 27Total provision for income taxes$103 $102 $171A reconciliation of the statutory federal income tax rate to the effective income tax rate on continuing operations of the Company is presented in thetable below. Year Ended December 31, 2018 2017 2016Statutory federal income tax rate21.0 % 35.0 % 35.0 %State and local income taxes, net of federal income tax benefit2.6 2.0 2.0Foreign income taxes(0.9) (6.7) (3.0)Manufacturing benefits— (1.4) (2.2)Research and experimentation and other tax credits(5.2) (4.1) (4.6)Resolution of tax contingencies(3.8) (0.4) (3.1)Tax deductible dividends(0.5) (0.9) (1.0)Equity compensation - excess income tax benefits(4.0) (2.3) (2.1)Mergers, acquisitions and divestitures1.3 — —Tax reform(0.1) (9.1) —Other, net0.7 (0.4) 0.3Effective income tax rate on continuing operations11.1 % 11.7 % 21.3 %F-41TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDThe significant components of the Company’s net deferred tax assets and liabilities are presented in the table below. December 31, 2018 2017 (in millions)Deferred tax assets: Inventoried costs$47 $44Compensation and benefits90 94Pension and postretirement benefits271 281Loss carryforwards13 12Tax credit carryforwards4 5Other67 57Deferred tax assets492 493Less: valuation allowance(14) (10)Deferred tax assets, net of valuation allowance478 483Deferred tax liabilities: Goodwill and other intangible assets$(549) $(514)Income recognition on contracts in process(18) (24)Property, plant and equipment(66) (59)Other(36) (41)Deferred tax liabilities(669) (638)Total deferred tax liabilities, net of valuation allowance$(191) $(155)The classification of the Company’s deferred tax assets and liabilities are presented in the table below. December 31, 2018 2017 (in millions)Non-current deferred tax assets$5 $3Non-current deferred tax liabilities(196) (158)Total net deferred tax liabilities$(191) $(155)Non-current deferred tax assets are presented in other assets on the consolidated balance sheets.F-42TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDThe following table presents the Company’s loss and tax credit carryforwards at December 31, 2018 on a tax-return basis. The Company hasestablished a valuation allowance as indicated in those instances in which it does not believe that it is more likely than not it will generate sufficient taxableincome, of the appropriate character and in the applicable subsidiary, to utilize the carryforwards. Year Ended December 31, 2018 Carryforwards Valuation Allowances Gross Tax Effected Gross Tax Effected Expiration Periods (in millions) Federal net operating loss carryforwards$23 $5 $(5) $(1) 2026-2034Foreign net operating loss carryforwards18 4 (10) (3) IndefiniteState net operating loss carryforwards291 4 (131) (3) 2019-2038Total loss carryforwards $13 $(7) State tax credit carryforwards5 4 (4) (3) 2019-2033Total tax credit carryforwards $4 $(3) At December 31, 2018, the total amount of unrecognized tax benefits was $183 million, $150 million of which would reduce the effective incometax rate, if recognized. A reconciliation of the change in unrecognized income tax benefits, excluding potential interest and penalties, is presented in thetable below. 2018 2017 2016 (in millions)Balance at January 1$178 $110 $124Additions for tax positions related to the current year13 14 16Additions for tax positions related to prior years37 66 2Reductions for tax positions related to prior years(20) (4) (24)Reductions for tax positions related to settlements with taxing authorities(7) — (1)Reduction for tax positions related to prior years as a result of a lapse of statute of limitations(18) (8) (7)Balance at December 31$183 $178 $110At December 31, 2018, the Company anticipates that unrecognized tax benefits will decrease by approximately $27 million over the next 12 monthsdue to the potential resolution of unrecognized tax benefits involving several jurisdictions and tax periods. The actual amount of the decrease over the next12 months could vary significantly depending on the ultimate timing and nature of any settlements.The Company and its subsidiaries file income tax returns in the U.S. Federal jurisdiction, which is the Company’s primary tax jurisdiction, andvarious state and foreign jurisdictions. At December 31, 2018, the statutes of limitations for the Company’s U.S. Federal income tax returns for the yearsended December 31, 2012, 2013, 2015, 2016 and 2017 were open.During the year ended December 31, 2018, the Company reached an agreement with the U.S. Internal Revenue Service (IRS) relating to the audit ofthe Company’s 2012 and 2013 U.S. Federal income tax returns and extended the statute of limitations to September 2019. The Company also reachedagreement on several state and foreign audits. In addition, the statute of limitations expired for several of the Company’s tax returns, including theCompany’s 2014 U.S. Federal income tax return as well as certain state and foreign tax returns. As a result, the Company reduced its income tax provision by$35 million, including interest and penalties.During the years ended 2017 and 2016, the Company effectively settled various Federal, state and local and foreign audits. As a result of thesesettlements, the Company reversed previously accrued income tax expense of $4 million and $25 million, including interest and penalties.F-43TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDAt December 31, 2018 and 2017, current and non-current income taxes payable include accrued potential interest of $15 million ($11 million afterincome taxes) for each of the years, and potential penalties of $9 million and $8 million, respectively. With respect to the interest related items, theCompany’s income tax expense included expenses of $2 million and $5 million for the years ended December 31, 2018 and 2017, respectively.At December 31, 2018, the Company had not provided deferred income taxes and foreign withholding taxes for approximately $1 billion ofundistributed earnings by its non-U.S. subsidiaries as such earnings are intended to be reinvested indefinitely. Although U.S. Tax Reform imposed the TollCharge on accumulated earnings through December 31, 2017 and introduced a GILTI tax on foreign earnings beginning in 2018, undistributed earnings maystill be subject to additional taxes upon repatriation, including foreign withholding taxes. Quantification of additional taxes that may be payable ondistribution is not practicable.18. Stock-Based CompensationStock-Based Compensation Plans. The Company has adopted stock-based compensation plans in order to provide incentives to directors, officers,employees and other individuals providing services to or on behalf of the Company and its subsidiaries. The Company believes that its stock-basedcompensation awards encourage high levels of performance by individuals who contribute to the success of the Company and enable the Company to attract,retain and reward talented and experienced individuals. This is accomplished by providing eligible individuals with an opportunity to obtain or increase aproprietary interest in the Company and/or by providing eligible individuals with additional incentives to join or remain with the Company. The stock-basedcompensation plans serve to better align the interests of management and its employees with those of the Company’s shareholders. During the year endedDecember 31, 2018, the Company awarded stock-based compensation under its Amended and Restated 2008 Long Term Performance Plan (2008 LTPP).Awards under the 2008 LTPP may be granted to any officer or employee of the Company or any of its subsidiaries, non-employee directors, or to any otherindividual who provides services to or on behalf of the Company or any of its subsidiaries. To date, awards under the 2008 LTPP have been in the form ofL3’s restricted stock, restricted stock units, performance units and options to purchase L3’s common stock. The Company's share-based compensation awardstypically accelerate vesting upon a change in control.On May 3, 2016, the stockholders of L3 approved an amendment to the 2008 LTPP to increase the number of shares authorized for issuance by 6.8million shares to approximately 26.0 million shares. Each share of L3’s common stock issued under a full value award (that is, awards other than stockoptions and stock appreciation rights) granted on or after February 23, 2016 is counted as 4.26 shares for purposes of this share limit. Each share issued underfull value awards granted between February 26, 2013 and February 22, 2016 is counted as 3.69 shares for purposes of the share limit. At December 31, 2018,7.0 million shares of L3’s common stock remained available for future awards under the 2008 LTPP.The Company’s stock-based compensation expense by form of award, including stock-based compensation recorded in discontinued operationsrelated to Vertex Aerospace and NSS, is presented in the table below. Year Ended December 31, 2018 2017 2016 (in millions)Stock options$7 $7 $10Restricted stock units43 43 35Performance units10 7 4Total before income taxes60 57 49Income taxes(13) (12) (18)Total after income taxes47 45 31Less: Stock-based compensation recorded in discontinued operations, net of income taxes— 1 1Stock-based compensation recorded in continuing operations, net of income taxes$47 $44 $30Stock Options. The exercise price of stock options granted under the 2008 LTPP may not be less than the fair market value of L3’s common stock onthe date of grant. Options expire 10 years after the date of grant and vest ratably over a three-year period on the annual anniversary of the date of grant. Theoptions granted to the Company’s Chairman, Chief Executive OfficerF-44TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDand President are also subject to performance-based vesting conditions. All unvested options are subject to forfeiture upon termination of employment(subject to customary exceptions for death or disability). All of the stock option awards issued under the 2008 LTPP are non-qualified stock options for U.S.income tax regulations. The table below presents a summary of the Company’s stock option activity at December 31, 2018 and changes during the year thenended. Number ofOptions WeightedAverage ExercisePrice WeightedAverageRemainingContractual Term Aggregate IntrinsicValue (in thousands) (in years) (in millions)Number of shares under option: Outstanding at January 1, 20182,698.9 $113.67 5.7 $227Options granted221.9 208.92 Options exercised(1,533.4) 97.49 Options forfeited(175.7) 147.37 Outstanding at December 31, 20181,211.7 $146.70 6.4 $42Vested and expected to vest at December 31, 2018(1)1,205.6 $146.48 6.4 $42Exercisable at December 31, 2018666.1 $119.03 4.7 $37__________________(1) Represents outstanding options reduced by expected forfeitures for options not fully vested.The weighted average grant date fair value of the stock options awarded during 2018, 2017 and 2016 was $37.72, $28.35 and $15.90, respectively.The aggregate intrinsic value, disclosed in the table above, represents the difference between L3’s closing stock price on the last trading day for the period,and the exercise price, multiplied by the number of in-the-money stock options.The total intrinsic value of stock options exercised, based on the difference between the L3’s stock price at the time of exercise and the relatedexercise price, was $165 million, $44 million and $34 million for the years ended December 31, 2018, 2017 and 2016, respectively. At December 31, 2018,unrecognized compensation cost related to stock options was $8 million ($7 million after income taxes), which is expected to be recognized over a weightedaverage remaining period of 1.5 years.The actual income tax benefit realized related to compensation deductions arising from the exercise of stock options by the Company’s employeestotaled $40 million, $16 million and $12 million for the years ended December 31, 2018, 2017 and 2016, respectively.Stock Option Fair Value Estimation Assumptions. The Company estimates the fair value of its stock options at the date of grant using the Black-Scholes option-pricing valuation model. The Company’s valuation model is affected by L3’s stock price as well as weighted average assumptions for anumber of subjective variables described below.•Expected Holding Period. The expected holding period represents the period of time that granted stock options are expected to be outstandinguntil they are exercised. The Company uses historical stock option exercise data to estimate the expected holding period.•Expected Volatility. Expected volatility is based on L3’s historical share price volatility matching the expected holding period.•Expected Dividend Yield. Expected dividend yield is based on L3’s anticipated dividend payments and historical pattern of dividend increasesover the expected holding period.•Risk-Free Interest Rates. The risk-free interest rates for stock options are based on U.S. Treasuries for a maturity period matching the expectedholding period.F-45TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDChanges in assumptions can materially impact the estimated fair value of stock options. The weighted average assumptions used in the valuationmodel are presented in the table below. 2018 Grants 2017 Grants 2016 GrantsExpected holding period (in years)5.2 5.2 5.0Expected volatility19.8% 19.9% 21.3%Expected dividend yield1.8% 2.0% 2.8%Risk-free interest rate2.7% 2.0% 1.1%Restricted Stock Units. The Company awards restricted stock units that automatically convert into shares of L3’s common stock upon vesting (in thecase of awards granted to employees) or upon the date on which the recipient ceases to be a director (in the case of awards granted to directors). Restrictedstock 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 ofthe first annual stockholders meeting held after the grant date. The restricted stock units automatically convert into shares of L3’s common stock uponvesting. The weighted average grant date fair value of the restricted stock units awarded during 2018, 2017 and 2016 was $205.73, $169.23 and $116.72,respectively. 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 recognizedas compensation expense on a straight-line basis over the vesting period. However, for employees who attain retirement eligibility status prior to the end ofthe three-year cliff vesting period and who have provided at least one year of service after the date of grant, compensation expense is recognized over theshorter period from the date of grant to the retirement eligibility date. For grants of restricted stock units made during the year ended December 31, 2018,retirement eligible employees are those employees that either: (1) have attained the age of 60 and completed at least five years of service (which service mustbe continuous through the date of termination except for a single break in service that does not exceed one year in length) or (2) have attained the age of 65(without regard to their length of service at L3).The table below presents a summary of the Company’s nonvested restricted stock unit awards at December 31, 2018 and changes during the yearthen ended. Number of Shares Weighted AverageGrant Date FairValue (in thousands) Nonvested balance at January 1, 2018902.7 $137.12Granted317.9 205.73Vested(320.7) 137.00Forfeited(86.2) 142.21Nonvested balance at December 31, 2018813.7 $163.44At December 31, 2018, total unrecognized compensation costs related to nonvested restricted stock unit and restricted stock awards were $46million ($36 million after income taxes) and are expected to be recognized over a weighted average remaining period of 1.4 years. The total fair value ofrestricted stock unit and restricted stock awards vested during the years ended December 31, 2018, 2017 and 2016 as of their vesting dates was $67 million,$53 million and $57 million, respectively.Restricted Stock. The Company also awarded shares of restricted stock to certain employees having general vesting terms(including with respect to retirement eligibility) similar to the vesting terms described above for restricted stock units. Shares of restricted stock are issued toemployees immediately upon grant, but remain subject to potential forfeiture in the event of the employee’s termination of employment prior to thescheduled vesting date (other than in the case of retirement or certain other qualifying terminations of employment). The employees who received restrictedstock grants during 2018 made elections under Section 83(b) of the Internal Revenue Code to be taxed on the value of such awards at the time of grant and,accordingly, a portion of the shares initially awarded to them was withheld by the Company to satisfy tax withholding obligations (and therefore suchwithheld shares of restricted stock were no longer outstanding as of December 31, 2018).Performance Units. The Company grants performance unit awards, with each unit having a value at the time of grant equal to a share of L3’scommon stock. The number of units ultimately earned can range from zero to 200% of the original award based upon the level of performance achieved bythe Company over the associated performance period in relation to pre-determinedF-46TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDperformance goals. Units earned under the program are converted into shares of L3’s common stock, or are paid in cash based on the closing price of L3’scommon stock at the end of the performance period, as determined at the time of grant by the Compensation Committee of the Board of Directors.During the years ended December 31, 2018, 2017, and 2016, the Company granted performance unit awards with a weighted average grant date fairvalue per unit of $209.91, $168.80 and $116.20, respectively. All the awards granted in 2018, 2017, and 2016 have performance conditions based on L3’sdiluted EPS. The performance periods for the awards began on January 1 of the applicable grant year and end on December 31 of the year corresponding to athree-year performance period. Units earned under the awards are convertible into shares of L3’s common stock. At December 31, 2018, total unrecognizedcompensation costs related to the awards were $10 million ($10 million after income taxes) and are expected to be recognized over a weighted averageremaining period of 1.5 years.The table below presents a summary of the Company’s performance unit awards based on expected performance at December 31, 2018 and changesduring the year then ended. Payable in Shares (EPS) Number of Units Weighted Average Grant DateFair Value (in thousands) Outstanding at January 1, 2018132.1 $135.99Granted22.1 209.91Increase due to expected performance25.3 38.96Vested(57.5) 116.20Forfeited(27.0) 133.41Outstanding at December 31, 201895.0 $140.14The performance period for awards granted in 2016 ended on December 31, 2018. Based on L3’s cumulative diluted EPS during the performanceperiod, a total of 57,508 performance units having a fair market value of $11 million as of their vesting date were earned by the participants on December 31,2018.Employee Stock Purchase Plan. Effective July 1, 2009, the Company adopted the 2009 Employee Stock Purchase Plan (2009 ESPP). Under the 2009ESPP, eligible employees are offered options to purchase shares of L3’s common stock at the end of each six-month offering period at 95% of fair marketvalue based on the average of the highest and lowest sales prices for the stock on the purchase date. Eligible employees generally include all employees ofthe Company and each subsidiary or affiliate of the Company that has been designated to participate in the 2009 ESPP. Offering periods begin on the firsttrading day in January and July of each calendar year and end on the last trading day in June and December of each calendar year. Share purchases are fundedthrough payroll deductions of up to 10% of an employee’s eligible compensation for each payroll period, or $21,250 each calendar year.At December 31, 2018, 3.3 million shares were available for future issuance under the 2009 ESPP (i.e., excluding the effect of shares issued inJanuary 2019 as described below). In July 2018, the Company issued 0.1 million shares under the 2009 ESPP at an average price of $192.96 per share, whichcovered employee contributions for the six months ended June 29, 2018. In January 2019, the Company issued 0.1 million shares under the 2009 ESPP at anaverage price of $162.91 per share, which covered employee contributions for the six months ended December 31, 2018. The 5% discount is not recognizedas compensation expense in accordance with the accounting standard for share-based compensation expense.In anticipation of the merger with Harris, the Company has amended the 2009 ESPP to provide that the offering period that ended December 31,2018 will be the final offering period for the plan. At the effective time of the merger, the 2009 ESPP will terminate in its entirety.F-47TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED19. Commitments and ContingenciesNon-Cancelable Operating LeasesThe Company leases certain facilities and equipment under agreements expiring at various dates through 2046. Certain leases contain renewaloptions or escalation clauses providing for increased rental payments based upon maintenance, utility and tax increases. No lease agreement imposes arestriction on the Company’s ability to pay dividends, engage in debt or equity financing transactions, or enter into further lease agreements.The following table presents future minimum payments under non-cancelable operating leases with initial or remaining terms in excess of one yearat December 31, 2018. Real Estate Equipment Total (in millions)2019$111 $4 $1152020132 2 134202181 1 82202273 — 73202365 — 65Thereafter506 — 506Total minimum payments required968 7 975Sublease rentals under non-cancelable leases(7) — (7)Net minimum payments required$961 $7 $968Rent expense was $105 million for 2018, $103 million for 2017 and $97 million for 2016. Sublease rental income was $2 million for 2018, $1million for 2017 and $2 million for 2016.Letters of CreditThe Company enters into standby letters of credit with financial institutions covering performance and financial guarantees pursuant to contractualarrangements with certain customers. The Company had total outstanding letters of credit aggregating to $410 million and $416 million at December 31,2018 and 2017, respectively. The Company had the full availability of its $1 billion Credit Facility at December 31, 2018. These letters of credit may bedrawn upon in the event of the Company’s nonperformance.GuaranteesThe Company, from time to time, enters into contractual guarantees that arise in connection with its business acquisitions, dispositions, and othercontractual arrangements in the normal course of business.In connection with the spin-off of Engility in 2012, L3 entered into a Distribution Agreement and several other agreements that govern certainaspects of L3’s relationship with Engility, including employee matters, tax matters, transition services, and the future supplier/customer relationship betweenL3 and Engility. These agreements generally provide cross-indemnities that, except as otherwise provided, are principally designed to place the financialresponsibility for the obligations and liabilities of each entity with that respective entity. Engility has joint and several liability with L3 to the U.S. IRS forthe consolidated U.S. Federal income taxes of L3’s consolidated group for taxable periods in which Engility was a part of that group. However, the TaxMatters Agreement specifies the portion of this tax liability for which L3 and Engility will each bear responsibility, and L3 and Engility have agreed toindemnify each other against any amounts for which the other is not responsible. The Tax Matters Agreement also allocates responsibility between L3 andEngility for other taxes, including special rules for allocating tax liabilities in the event that the spin-off is determined not to be tax-free. Though valid asbetween the parties, the Tax Matters Agreement is not binding on the IRS.The Company has three existing real estate lease agreements, which include residual guarantee amounts, expiring on August 31, 2020 and areaccounted for as operating leases. On or before the lease expiration date, the Company can exercise options under the lease agreements to renew the leases,purchase the properties for $45 million, or sell the properties on behalf of the lessor (the “Sale Option”). If the Company elects the Sale Option, the Companymust pay the lessor a residual guarantee amount of $39 million for the properties, on or before the lease expiration date. In addition, at the time the propertiesare sold, the CompanyF-48TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDmust pay the lessor a supplemental rent payment equal to the gross sales proceeds in excess of the residual guarantee, provided that such amount shall notexceed $6 million. For these real estate lease agreements, if the gross sales proceeds are less than the sum of the residual guarantee amount and thesupplemental rent payment, the Company is required to pay a supplemental rent payment to the extent the reduction in the fair value of the properties isdemonstrated by an independent appraisal to have been caused by the Company’s failure to properly maintain the properties. The aggregate residualguarantee amounts equal $39 million and are included in the future minimum payments under non-cancelable real estate operating lease payments relating tothe expiration dates of such leases.Environmental MattersManagement continually assesses the Company’s obligations with respect to applicable environmental protection laws, including those obligationsassumed in connection with certain business acquisitions. While it is difficult to determine the timing and ultimate cost to be incurred by the Company inorder to comply with these laws, based upon available internal and external assessments, with respect to those environmental loss contingencies of whichmanagement is aware, the Company believes that there are no environmental loss contingencies that, individually or in the aggregate, would be material tothe Company’s consolidated results of operations. The Company accrues for these contingencies when it is probable that a liability has been incurred and theamount of the liability can be reasonably estimated.Procurement RegulationsA substantial majority of the Company’s revenues are generated from providing products and services under legally binding agreements or contractswith the U.S. Government, foreign government customers and state and local governments. U.S. Government contracts are subject to extensive legal andregulatory requirements, and, from time to time, agencies of the U.S. Government investigate whether such contracts were and are being conducted inaccordance with these requirements. The Company is currently cooperating with the U.S. Government on several investigations from which civil, criminal oradministrative proceedings have or could result and give rise to fines, penalties, compensatory and treble damages, restitution and/or forfeitures, includinginvestigations into the pricing of certain contracts entered into by the C&NS segment. The Company does not currently anticipate that any of theseinvestigations 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 toits present responsibility to be a U.S. Government contractor or subcontractor, could result in the Company being suspended for a period of time fromeligibility for awards of new government contracts or task orders or in a loss of export privileges. A conviction, or an administrative finding against theCompany that satisfies the requisite level of seriousness, could result in debarment from contracting with the federal government for a specified term. Inaddition, all of the Company’s U.S. Government contracts: (1) are subject to audit and various pricing and cost controls, (2) include standard provisions fortermination for the convenience of the U.S. Government or for default and (3) are subject to cancellation if funds for contracts become unavailable. Foreigngovernment contracts generally include comparable provisions relating to terminations for convenience or default, as well as other procurement clausesrelevant to the foreign government.Litigation MattersThe 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 probablethat 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 Companyexpects to resolve the liability. Amounts recoverable from insurance contracts or third parties are recorded as assets when deemed probable. At December 31,2018, the Company did not record any amounts for recoveries from insurance contracts or third parties in connection with the amount of liabilities recordedfor pending and threatened litigation. Legal defense costs are expensed as incurred. The Company believes it has recorded adequate provisions for itslitigation matters. The Company reviews these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and otherinformation 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 belowfor 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 canbe reasonably estimated. Although the Company believes that it has valid defenses with respect to legal matters and investigations pending against it, theresults ofF-49TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDlitigation can be difficult to predict, particularly those involving jury trials. Therefore, it is possible that any of the following or other contingencies couldhave 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 lossesresulting 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 anuninterruptible power supply (UPS) to provide sufficient power to act as a back-up energy supply, alleges that JovyAtlas was the manufacturer and serviceprovider for the UPS and claims €11 million in estimated property damages and €35 million in estimated business interruption damages. The Company hastendered the notice of claim to its insurance carriers.To date, four lawsuits challenging the merger of L3 Technologies, Inc, and the Harris Corporation have been filed by purported L3 stockholders: (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 ofdirectors; (2) a putative class action captioned Raul v. L3 Technologies, Inc., et al., in the Southern District of New York, naming L3 and the members of L3’sboard of directors; (3) a putative class action captioned Gross v. L3 Technologies, Inc., et al., in the Southern District of New York, naming L3 and themembers of L3’s board of directors; and (4) a putative class action captioned Kent v. L3 Technologies, Inc., et al., in the District of Delaware, naming L3, themembers of L3’s board of directors, Harris and Merger Sub. The lawsuits allege violations of Sections 14 and 20 of the Exchange Act in connection withdisclosure related to the merger in this joint proxy statement/prospectus. Among other remedies, the lawsuits seek injunctive relief enjoining the merger,damages and costs. L3, Harris, Merger Sub and the L3 board of directors believe these lawsuits are without merit and intend to defend against themvigorously.F-50TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED20. Pension and Other Postretirement BenefitsThe following table summarizes changes in the benefit obligations, the plan assets and funded status for all of the Company’s pension andpostretirement benefit plans, as well as the aggregate balance sheet impact. Pension Plans Postretirement Benefit Plans 2018 2017 2018 2017 (in millions)Change in benefit obligation: Benefit obligation at the beginning of the year$4,228 $3,758 $165 $177Service cost103 97 2 2Interest cost143 142 5 5Plan participants’ contributions2 2 5 5Amendments(13) — — —Actuarial (gain) loss(340) 391 (11) (13)Foreign currency exchange rate changes(27) 22 (2) 2Curtailments and special termination benefits— 2 — —Benefits paid(159) (186) (14) (13)Benefit obligation at the end of the year$3,937 $4,228 $150 $165Change in plan assets: Fair value of plan assets at the beginning of the year$3,047 $2,721 $67 $60Actual return on plan assets(119) 391 (3) 8Employer contributions96 97 6 7Plan participants’ contributions2 2 5 5Foreign currency exchange rate changes(27) 22 — —Benefits paid(159) (186) (14) (13)Fair value of plan assets at the end of the year$2,840 $3,047 $61 $67Unfunded status at the end of the year$(1,097) $(1,181) $(89) $(98) Assets and (liabilities) recognized on the consolidated balance sheetsconsist of: Non-current assets$40 $48 $— $—Current liabilities(8) (6) (7) (8)Non-current liabilities(1,129) (1,223) (82) (90) $(1,097) $(1,181) $(89) $(98)The table below summarizes the net loss and prior service cost balances at December 31, in the accumulated other comprehensive loss account,before related tax effects, for all of the Company’s pension and postretirement benefit plans. Pension Plans Postretirement Benefit Plans 2018 2017 2018 2017 (in millions)Net loss (gain)$958 $1,035 $(3) $(3)Prior service (credit) cost(1) 10 (25) (27)Total amount recognized$957 $1,045 $(28) $(30)F-51TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDThe aggregate accumulated benefit obligation (ABO) for all of the Company’s pension plans was $3,614 million at December 31, 2018 and $3,831million at December 31, 2017. The table below presents information for the pension plans with an ABO in excess of the fair value of plan assets atDecember 31, 2018 and 2017. Pension Plans 2018 2017 (in millions)Projected benefit obligation$3,681 $3,875Accumulated benefit obligation$3,367 $3,490Fair value of plan assets$2,547 $2,651The table below summarizes the weighted average assumptions used to determine the benefit obligations for the Company’s pension andpostretirement plans disclosed at December 31, 2018 and 2017. Pension Plans Postretirement Benefit Plans 2018 2017 2018 2017 Benefit obligations: Discount rate4.43%(1) 3.78%(1) 4.28%(2) 3.59%(2) Rate of compensation increase3.50%(3) 3.50%(3) __________________(1) The weighted average discount rate assumptions used at December 31, 2018 and 2017 were comprised of separate assumptions determined by country of 4.48% and 3.81% forthe U.S. based plans, respectively, and 3.88% and 3.39% for the Canadian based plans, respectively.(2) The weighted average discount rate assumptions used at December 31, 2018 and 2017 were comprised of separate assumptions determined by country of 4.34% and 3.63% forthe U.S. based plans, respectively, and 3.81% and 3.33% for the Canadian based plans, respectively.(3) The weighted average rate of compensation increase assumptions were comprised of separate assumptions determined by country of 3.5% for both the U.S. based plans andCanadian based plans at December 31, 2018 and 2017.The following table summarizes the components of net periodic benefit cost for the Company’s pension and postretirement benefit plans for theyears ended December 31, 2018, 2017 and 2016. Pension Plans Postretirement Benefit Plans 2018 2017 2016 2018 2017 2016 (in millions)Components of net periodic benefit cost: Service cost (1)$103 $97 $94 $2 $2 $2Interest cost143 142 135 5 5 6Expected return on plan assets (1)(223) (197) (186) (5) (4) (4)Amortization of prior service (credits) cost(2) 1 — (1) (1) (2)Amortization of net loss (gains)74 61 52 (3) (2) (2)Curtailment loss and special termination benefits (2)1 6 2 — — —Net periodic benefit cost$96 $110 $97 $(2) $— $—__________________(1) In connection with the adoption of ASU 2017-07, the Company reclassified pension plan administrative expenses amounting to $15 million and $14 million for the years endedDecember 31, 2017 and 2016, respectively, from the service cost component to the expected return on plan assets component of net periodic benefit cost. Including theaforementioned policy change in connection with the adoption of this standard, operating income increased by $11 million and $1 million for the years ended December 31,2017 and 2016, respectively, with a corresponding decrease of Interest and other income, net. The Company’s percentage assumptions for expected long-term return on planassets, which are disclosed further below, exclude expected plan administrative expenses.(2) During the year ended December 31, 2017, the curtailment loss and special termination benefits charge is primarily due to a pension curtailment charge in connection with thedecision to discontinue future service accruals for substantially all salaried employee defined benefit plans effective January 1, 2019.The Company uses a spot rate approach in the measurement of the service and interest cost components of benefit cost for all of the Company'spension and postretirement benefit plans by applying specific spot rates along that yield curve to the relevant projected cash flows.F-52TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDThe following table summarizes the other changes in plan assets and benefit obligations recognized in other comprehensive income for theCompany’s pension and postretirement benefit plans for the years ended December 31, 2018, 2017 and 2016. Pension Plans Postretirement Benefit Plans 2018 2017 2016 2018 2017 2016 (in millions)Other changes in plan assets and benefit obligationsrecognized in other comprehensive income (loss): Net (gain) loss$(3) $200 $179 $(2) $(17) $(4)Prior service (cost) credit(13) (4) 15 — — (2)Amortization of net (loss) gain(74) (61) (52) 3 2 2Amortization of prior service credit (cost)2 (1) — 1 1 2Total recognized in other comprehensive (loss) income(88) 134 142 2 (14) (2)Total recognized in net periodic benefit cost and othercomprehensive income (loss)$8 $244 $239 $— $(14) $(2)The following table summarizes the amounts expected to be amortized from accumulated OCI and recognized as components of net periodic benefitcosts during 2019. Pension Plans Postretirement BenefitPlans Total (in millions)Net loss (gain)$44 $(3) $41Prior service credit(2) — (2) $42 $(3) $39The table below summarizes the weighted average assumptions used to determine the net periodic benefit cost for the years ended December 31,2018, 2017 and 2016. Pension Plans Postretirement Benefit Plans 2018 2017 2016 2018 2017 2016 Discount rates: Benefit obligation3.78%(1) 4.40%(1) 4.67%(1) 3.59%(4) 4.05%(4) 4.22%(4) Service cost3.84% 4.55% 4.83% 3.64% 4.21% 4.37% Interest cost3.45% 3.84% 3.95% 3.07% 3.26% 3.26% Expected long-term return onplan assets7.92%(2) 7.92%(2) 7.92%(2) 8.00% 7.43% 7.42% Rate of compensation increase3.50%(3) 3.50%(3) 3.50%(3) __________________(1) The weighted average discount rate assumptions used for the years ended December 31, 2018, 2017, and 2016 were comprised of separate assumptions determined by country of3.81%, 4.45% and 4.73% for the U.S. based plans and 3.39%, 3.79% and 3.93% for the Canadian based plans, respectively.(2) The weighted average expected long-term return on plan assets assumptions used were comprised of separate assumptions determined by country of 8.00% for the years endedDecember 31, 2018, 2017 and 2016 for the U.S. based plans and 7.25% for the Canadian based plans for the years ended December 31, 2018, 2017 and 2016.(3) The weighted average rate of compensation increase assumptions used for the years ended December 31, 2018, 2017 and 2016 were comprised of separate assumptionsdetermined by country of 3.50% for both the U.S and Canadian based plans.(4) The weighted average discount rate assumptions used for the years ended December 31, 2018, 2017 and 2016 were comprised of separate assumptions determined by country of3.63%, 4.11% and 4.28% for the U.S. based plans and 3.33%, 3.64% and 3.74% for the Canadian based plans, respectively.The expected long-term return on plan assets assumption represents the average rate that the Company expects to earn over the long-term on theassets of the Company’s benefit plans, including those from dividends, interest income and capital appreciation, net of investment management expenses.The Company utilizes a third-party consultant to assist in the development of the expected long-term return on plan assets, which is based on expectationsregarding future long-term rates of return for theF-53TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDplans’ investment portfolio, with consideration given to the allocation of investments by asset class and historical rates of return for each individual assetclass. The Company utilizes a building block methodology that utilizes historical and forward looking rates of return for each asset class and takes intoaccount expected returns above inflation and risk premium. These long-term rates of return are then applied to the target portfolio allocations that aregenerally aligned with the actual asset allocations of the Company’s plans to develop the expected long-term rate of return.The annual increase in cost of benefits (health care cost trend rate) for the Company’s U.S. based plans covering retirees under 65 years of age isassumed to be an average of 6.75% in 2019 and is assumed to gradually decrease to a rate of 4.5% in 2028 and thereafter. The health care cost trend rate forthe Company’s U.S. based plans covering retirees over 65 years of age is assumed to be an average of 7.75% in 2019 and is assumed to gradually decrease toa rate of 4.5% in 2032 and thereafter. The health care cost trend rate for the Company’s Canadian based plans is assumed to be an average of 7.0% in 2019and is assumed to stay flat for four years and reduce to 5.0% for ten years thereafter. Health care cost trend assumptions are based on (1) observed or expectedshort term rates of increase for different types of health models based on actual claims experience and benchmarking, and (2) a reasonable estimate of anappropriate, sustainable level of health care cost trend in the future, weighting the factors that primarily influence trends, which are price inflation and costleveraging benefit plan features. Assumed health care cost trend rates can have a significant effect on amounts reported for postretirement medical benefitplans. A one percentage point change in the assumed health care cost trend rates would have the following effects: 1 percentage point Increase Decrease (in millions)Effect on total service and interest cost$— $—Effect on postretirement benefit obligations$4 $(4)Plan Assets. The Company’s Benefit Plan Committee (Committee) has the responsibility to formulate the investment policies and strategies for theplans’ assets. The Committee structures the investment of plan assets to achieve the following goals: (1) maximize the plans’ long-term rate of return on assetsfor an acceptable level of risk; and (2) limit the volatility of investment returns and consequent impact on the plans’ assets. In the pursuit of these goals, theCommittee has formulated the following investment policies and objectives: (1) invest assets of the plans in a manner consistent with the fiduciary standardsof the Employee Retirement Income Security Act of 1974 (ERISA); (2) preserve the plans’ assets; (3) maintain sufficient liquidity to fund benefit paymentsand pay plan expenses; (4) evaluate the performance of investment managers; and (5) achieve, on average, a minimum total rate of return equal to theestablished benchmarks for each asset category.The Committee retains a professional investment consultant to advise the Committee and help ensure that the above policies and strategies are met.The Committee does not actively manage the day to day operations and selection process of individual securities and investments, as it retains theprofessional services of qualified investment management organizations to fulfill those tasks. Qualified investment management organizations are evaluatedon several criteria for selection, with a focus on the investment management organizations’ demonstrated capability to achieve results that will meet orexceed the investment objectives they have been assigned and conform to the policies established by the Committee. While the investment managementorganizations have investment discretion over the assets placed under their management, the Committee provides each investment manager with specificinvestment guidelines relevant to its asset class.The Committee has established the allowable range that the plans’ assets may be invested in for each major asset category. In addition, theCommittee has established guidelines regarding diversification within asset categories to limit risk and exposure to a single or limited number of securities.The investments of the plans’ include a diversified portfolio of both equity and fixed income investments. Equity investments are further diversified acrossU.S. and non-U.S. stocks, small to large capitalization stocks, and growth and value stocks. Fixed income assets are diversified across U.S. and non-U.S.issuers, corporate and governmental issuers, and credit quality. The plan also invests in real estate through publicly traded real estate securities. Derivativesmay be used only for hedging purposes or to create synthetic long positions. The plans are prohibited from directly owning commodities, unregisteredsecurities, restricted stock, private placements, or interests in oil, gas, mineral exploration, or other development programs. Further, short selling or utilizingmargin buying for investment purposes is prohibited.F-54TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDThe table below presents the allowable range for each major category of the plans’ assets at December 31, 2018 and the Company’s pension plan andpostretirement benefit plan weighted-average asset allocations at December 31, 2018 and 2017, by asset category. U.S. CanadaAsset Category Range 2018 2017 Range 2018 2017Domestic equity(1) 30%-60% 47% 47% —% 13% 15%International equity(2) 10%-20% 10 11 — 52 47Total equities 45%-75% 57 58 40%-80% 65 62Fixed income securities 20%-40% 30 28 — 28 25Other, primarily cash and cash equivalents 0%-15% 6 7 — 7 13Total fixed income securities and cash and cashequivalents NA NA NA 20%-60% 35 38Real estate securities 0%-15% 7 7 — — —Total 100% 100% 100% 100%__________________(1) Domestic equities for Canadian plans refers to equities of Canadian companies.(2) International equities for Canadian plans includes equities of U.S. companies.NA - Not applicable. The Company’s Master Pension Trust Investment Policy does not provide an allocation percentage range to fixed income securities and cash and cash equivalents.The Committee regularly monitors the investment of the plans’ assets to ensure that the actual investment allocation remains within the establishedrange. The Committee also regularly measures and monitors investment risk through ongoing performance reporting and investment manager reviews.Investment manager reviews include assessing the managers’ performance versus the appropriate benchmark index both in the short and long-term period,performance versus peers, and an examination of the risk the managers assumed in order to achieve rates of return.The table below presents the fair value of the Company’s pension plans’ assets by asset category segregated by level within the fair value hierarchy,as described below. U.S. Pension Plans’ Assets Canadian Pension Plans’ Assets Fair Value Measured At December 31, 2018 Fair Value Measured At December 31, 2018Asset Category Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total (in millions)Equity securities(1): U.S. Equity $1,205 $— $— $1,205 $64 $— $— $64International Equity 90 — — 90 95 — — 95Fixed Income — Investment Grade(2) 313 160 — 473 — — — —Fixed Income — High Yield(3) — 271 — 271 — — — —Real Estate Investment Trusts(4) 185 — — 185 — — — —Other(5) — 146 — 146 4 16 — 20Total assets at fair value $1,793 $577 $— $2,370 $163 $16 $— $179Liabilities for unsettled trades, net (9) —Other investments measured at net asset value(6)(7) 176 124Total $2,537 $303F-55TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED U.S. Pension Plans’ Assets Canadian Pension Plans’ Assets Fair Value Measured At December 31, 2017 Fair Value Measured At December 31, 2017Asset Category Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total (in millions)Equity securities(1): U.S. Equity $1,297 $— $— $1,297 $71 $— $— $71International Equity 87 — — 87 105 — — 105Fixed Income — Investment Grade(2) 329 205 — 534 — — — —Fixed Income — High Yield(3) — 219 — 219 — — — —Real Estate Investment Trusts(4) 196 — — 196 — — — —Other(5) — 198 — 198 8 37 — 45Total assets at fair value $1,909 $622 $— $2,531 $184 $37 $— $221Liabilities for unsettled trades, net (30) —Other investments measured at net asset value(6)(7) 203 122Total $2,704 $343__________________(1) Equity securities consist of investments in common stock of U.S. and international companies. The fair value of equity securities is based on quoted market prices available inactive markets at the close of a trading day, primarily the New York Stock Exchange (NYSE), National Association of Securities Dealers Automated Quotations (NASDAQ), andvarious international exchanges.(2) Approximately 66% and 62% at December 31, 2018 and 2017, respectively, of U.S. plan assets that are invested in the Fixed Income — Investment Grade asset category consistof a mutual fund offered by a registered investment company (the Fund) and fixed income securities. The Fund invests in investment grade fixed income securities, mortgaged-backed securities, U.S. treasury and agency bonds and corporate bonds. These investments are classified by the Company as a Level 1 measurement within the fair valuehierarchy, as the mutual fund trades on an active market and daily, quoted prices are available. The remaining 34% and 38% at December 31, 2018 and 2017, respectively, ofU.S. plan assets are fixed income securities, primarily investment grade corporate bonds from various industries held directly by the plan. The fair values of these investments arebased on yields currently available on comparable bonds of issuers with similar credit ratings, quoted prices of similar bonds in an active market, or cash flows based onobservable inputs and are classified as Level 2.(3) Fixed Income — High Yield consists of investments in corporate high-yield bonds from various industries. The fair values of these investments are based on yields currentlyavailable on comparable bonds of issuers with similar credit ratings, quoted prices of similar bonds in an active market, or cash flows based on observable inputs.(4) Real Estate Investment Trusts (REITs) consist of securities that trade on the major exchanges and invest directly in real estate, either through properties or mortgages.(5) Other consists primarily of: (1) money market accounts, which invest primarily in short-term, high quality money market securities such as government obligations, commercialpaper, time deposits and certificates of deposit, and are classified as Level 2, and (2) cash, which is classified as Level 1.(6) In accordance with ASU 2015-07, certain investments that are measured at fair value using the net asset value (NAV) per share (or its equivalent) practical expedient have notbeen classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presentedin the statements of financial position.(7) All of the U.S. plans other investments measured using NAV at December 31, 2018 and 2017 and approximately 30% and 31% at December 31, 2018 and 2017, respectively, ofthe Canadian plans other investments measured using NAV consist of a regulated commingled equity trust fund, for which fair value is based on the NAV at the end of eachmonth. The NAV is calculated by the fund manager based on the fair value of the fund’s holdings, primarily equity securities traded in active markets, determined as of the end ofeach month as a practical expedient to estimating fair value. This practical expedient is not used when it is determined to be probable that the fund will sell the investment for anamount different than the reported NAV. Withdrawals are permitted, with notice by the 20th day of each month, based on NAV. Approximately 70% and 69% at December 31,2018 and 2017, respectively, of the Canadian plans other investments measured using NAV are invested in regulated commingled bond funds (the “Bond Funds”). As these BondFunds do not trade in an active market, the fair value is based on NAVs calculated by fund managers based on yields currently available on comparable bonds of issuers withsimilar credit ratings, quoted prices of similar bonds in an active market, or cash flows based on observable inputs as a practical expedient to estimating fair value and classified asLevel 2. Withdrawals are permitted monthly, with notice between 0 and 3 days of the transaction date, based on NAV.F-56TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDThe table below presents the fair value of the Company’s postretirement benefit plans’ assets by asset category segregated by level within the fairvalue hierarchy, as described below. Postretirement Benefit Plans’ Assets Fair Value Measured At December 31, 2018 Fair Value Measured At December 31, 2017Asset Category Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total (in millions)Equity securities(1): U.S. Equity $35 $— $— $35 $38 $— $— $38International Equity 1 — — 1 2 — — 2Fixed Income — Investment Grade(2) 9 2 — 11 10 3 — 13Fixed Income — High Yield(3) — 4 — 4 — 3 — 3Real Estate Investment Trusts(4) 3 — — 3 3 — — 3Other(5) — 4 — 4 — 5 — 5Total assets at fair value $48 $10 $— $58 $53 $11 $— $64Other investments measured at net asset value(6)(7) 3 3Total $61 $67__________________(1) Equity securities consist of investments in common stock of U.S. and international companies. The fair value of equity securities is based on quoted market prices available inactive markets at the close of a trading day, primarily the NYSE, NASDAQ, and various international exchanges.(2) Approximately 82% and 77% at December 31, 2018 and 2017, respectively, of the postretirement benefit plan assets that are invested in the Fixed Income — Investment Gradeasset category consist of the Fund and fixed income securities. The Fund invests in investment grade fixed income securities, mortgaged-backed securities, U.S. treasury andagency bonds and corporate bonds. These investments are classified by the Company as a Level 1 measurement within the fair value hierarchy as the mutual fund trades on anactive market and daily, quoted prices are available. The remaining 18% and 23% at December 31, 2018 and 2017, respectively, of the postretirement benefit plan assets are fixedincome securities, primarily investment grade corporate bonds from various industries held directly by the plan. The fair values of these investments are based on yields currentlyavailable on comparable bonds of issuers with similar credit ratings, quoted prices of similar bonds in an active market, or cash flows based on observable inputs and are classifiedas Level 2.(3) Fixed Income — High Yield consists of investments in corporate high-yield bonds from various industries. The fair values of these investments are based on yields currentlyavailable on comparable bonds of issuers with similar credit ratings, quoted prices of similar bonds in an active market, or cash flows based on observable inputs.(4) REITs consist of securities that trade on the major exchanges and invest directly, either through properties or mortgages.(5) Other consists primarily of money market accounts, which invest primarily in short-term, high quality money market securities such as government obligations, commercialpaper, time deposits and certificates of deposit.(6) In accordance with ASU 2015-07, certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in thefair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statements offinancial position.(7) All of the postretirement benefit plans other investments measured using NAV at December 31, 2018 and 2017 consist of a regulated commingled equity trust fund, which fairvalue is based on NAV at the end of each month. The NAV is calculated by the fund manager based on the fair value of the fund’s holdings, primarily equity securities traded inactive markets, determined as of the end of each month as a practical expedient to estimating fair value. This practical expedient is not used when it is determined to be probablethat the fund will sell the investment for an amount different than the reported NAV. Withdrawals are permitted, with notice by the 20th day of each month, based on NAV.Contributions. The funding policy for the Company’s pension and postretirement benefit plans is to contribute at least the minimum required byapplicable laws and regulations or to directly make benefit payments where appropriate. The Company makes voluntary, additional contributions to thepension plans depending on a number of factors, including operating cash flow levels, alternative uses for excess cash and the plans’ funded status. AtDecember 31, 2018, all legal funding requirements had been met. For the year ending December 31, 2019, the Company currently expects to contributeapproximately $80 million to its pension plans, and approximately $8 million to its postretirement benefit plans.F-57TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDEstimated Future Benefit Payments. The following table presents expected pension and postretirement benefit payments and expectedpostretirement subsidies due to the Medicare Prescription Drug Improvement and Modernization Act of 2003, which reflect expected future service, asappropriate. Postretirement Benefits Pension Benefits Benefit Payments Subsidy Receipts (in millions)2019$168 $12 $—2020176 12 —2021184 12 —2022194 12 —2023201 12 —Years 2024 - 20281,150 53 1Employee Savings Plans. Under its various employee savings plans, the Company matches the contributions of participating employees up to adesignated level. The extent of the match, vesting terms and the form of the matching contributions vary among the plans. Under these plans, the Company’smatching contributions in L3’s common stock and cash were $118 million for 2018, $115 million for 2017 and $118 million for 2016. These matchingcontributions include amounts attributable to discontinued operations of $2 million for 2018, $8 million for 2017 and $12 million for 2016.Multiemployer Benefit Plans. Certain of the Company’s businesses participate in multiemployer defined benefit pension plans. The Company makescash contributions to these plans under the terms of collective-bargaining agreements that cover its union employees based on a fixed rate per hour of serviceworked by the covered employees. The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects:(1) assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers, (2) if aparticipating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers and (3) ifthe Company chooses to stop participating in some of its multiemployer plans, the Company may be required to pay those plans an amount based on theunderfunded status of the plan, referred to as a withdrawal liability. In connection with the sale of the Vertex Aerospace business, the Company no longerparticipates in the majority of its multiemployer plans. Under the Company's remaining multiemployer plans, cash contributed and expenses recorded for theyear ended December 31, 2018 were less than $1 million.21. Supplemental Cash Flow Information Year Ended December 31, 2018 2017 2016 (in millions)Interest paid$183 $165 $162Income tax payments$108 $163 $120Income tax refunds$7 $16 $822. Segment Information and Disaggregation of Net SalesIn the third quarter of 2018, the Company completed a realignment of its business segments to maximize growth and improve its integration andcollaboration across the enterprise. As a result of the realignment, L3 has the following three reportable segments: (1) ISRS, (2) C&NS and (3) ElectronicSystems.The Company evaluates the performance of its operating segments and reportable segments based on their sales, operating income and operatingmargin. Corporate expenses are allocated to the Company’s operating segments using an allocation methodology prescribed by U.S. Government regulationsfor government contractors. Accordingly, segment results include all costs and expenses, except for goodwill impairment charges, gains or losses related tobusiness divestitures, and certain other items that are excluded by management for purposes of evaluating the operating performance of the Company’sbusiness segments. Certain Corporate and segment expenses of $15 million the year ended December 31, 2018, $32 million for the year endedF-58TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDDecember 31, 2017 and $29 million for the year ended December 31, 2016, that had previously been allocated to the Vertex Aerospace and NSS businesseswere retained by the Company and were allocated to L3’s three reportable segments.The tables below present net sales, operating income, depreciation and amortization, capital expenditures and total assets by reportable segment. Year Ended December 31, 2018 2017 2016 (in millions)Net Sales Products ISRS$2,907 $2,540 $2,662C&NS2,307 2,424 2,238Electronic Systems2,007 1,814 1,617Elimination of intercompany sales(56) (45) (64)Total products sales7,165 6,733 6,453 Services ISRS$1,549 $1,463 $1,450C&NS787 717 678Electronic Systems789 695 653Elimination of intercompany sales(46) (35) (24)Total services sales3,079 2,840 2,757Consolidated total$10,244 $9,573 $9,210 Operating income ISRS$448 $348 $362C&NS282 362 298Electronic Systems376 321 298Segment total1,106 1,031 958Gain on sale of the Crestview & TCS businesses42 — —Merger and acquisition related expenses(28) — —Consolidated total$1,120 $1,031 $958 Depreciation and amortization ISRS$92 $87 $80C&NS69 66 63Electronic Systems80 72 55Consolidated total$241 $225 $198 Capital Expenditures ISRS$57 $74 $83C&NS50 76 51Electronic Systems108 52 66Corporate17 22 10Consolidated total$232 $224 $210 F-59TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED Year Ended December 31, 2018 2017 2016 (in millions)Total Assets ISRS$4,720 $4,135 $4,117C&NS3,670 3,505 3,258Electronic Systems4,128 3,939 3,542Corporate1,000 709 467Assets held for sale— 135 —Assets of discontinued operations— 306 481Consolidated total$13,518 $12,729 $11,865The table below presents property, plant and equipment, net by geographic area. Year Ended December 31, 2018 2017 (in millions)United States$973 $936All other196 174Total$1,169 $1,110The Company’s sales attributable to U.S. and international customers, based on location of the customer, are summarized in the table below. Year Ended December 31, 2018 2017 2016 (in millions)U.S.$7,843 $7,344 $6,947International: Canada312 280 297United Kingdom309 335 331Australia219 268 254China156 167 67Japan145 125 81Saudi Arabia128 58 159Turkey113 61 61Other1,019 935 1,013Total international2,401 2,229 2,263Consolidated$10,244 $9,573 $9,210Net sales to principal customers are summarized in the table below. Year Ended December 31, 2018 2017 2016 (in millions)U.S. Government agencies(1)$7,144 6,697 $6,399Commercial1,572 1,456 1,280Foreign governments(1)1,528 1,420 1,531Consolidated$10,244 9,573 $9,210__________________(1) Includes sales for which the Company is the prime contractor as well as sales based on the ultimate end customer for which the Company is a subcontractor.F-60TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDCorporate assets not allocated to the reportable segments primarily include cash and cash equivalents, corporate office fixed assets, and deferredincome tax assets.Disaggregation of Total Net Sales. The Company disaggregates its sales from contracts with customers by: (1) end customer, (2) contract type, (3)deliverable type and (4) revenue recognition method for each of its segments. The Company believes these factors affect the nature, amount, timing anduncertainty of the Company’s revenue and cash flows.Sales by End Customer. Direct sales to the end customer represented approximately 64% of the Company’s consolidated sales for the year endedDecember 31, 2018 and indirect sales as a subcontractor or supplier represented the remaining 36%. The table below present total net sales disaggregated byend customer. Year Ended December 31, 2018End Customer ISRS C&NS Electronic Systems Consolidated L3 (in millions)Total DoD $3,081 $2,291 $1,349 $6,721Other U.S. Government 150 95 178 423Total U.S. Government 3,231 2,386 1,527 7,144Foreign governments (1) 1,006 327 195 1,528Commercial — foreign 75 123 675 873Commercial — domestic 129 223 347 699Total $4,441 $3,059 $2,744 $10,244__________________(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-materialtype. Fixed-price type contracts generally offer higher profit margin potential than cost-plus type or time-and-material type contracts due to the greater levelsof 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 typecontract, 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 topredetermined funding levels determined by the customer. Cost-plus type contracts with award and incentive fee provisions are the Company’s primaryvariable 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.Substantially all of the Company’s cost-plus type contracts and time-and-material type contracts are with U.S. Government customers, while sales toforeign government and commercial customers are generally transacted under fixed-price sales arrangements and are included in the Company’s fixed-pricecontract type sales. The table below present total net sales disaggregated by contract type. Year Ended December 31, 2018Contract Type ISRS C&NS Electronic Systems Consolidated L3 (in millions)Fixed-price(1) $2,839 $2,202 $2,317 $7,358Cost-plus(2) 1,393 768 410 2,571Time-and-material 209 89 17 315Total sales $4,441 $3,059 $2,744 $10,244__________________(1) Includes fixed-price incentive fee type contracts, which contributed approximately 1% to the Company's total net sales for the year ended December 31, 2018.(2) Includes cost-plus award and incentive fee type contracts, which contributed approximately 4% to the Company's total net sales for the year ended December 31, 2018.F-61TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDSales by Deliverable Type: The table below present total net sales disaggregated by the type of deliverable, which is determined by the Company atthe performance obligation level. Year Ended December 31, 2018Sales by Deliverable Type ISRS C&NS Electronic Systems Consolidated L3 (in millions)Products $2,907 $2,299 $1,959 $7,165Services 1,534 760 785 3,079Total sales $4,441 $3,059 $2,744 $10,244Revenue Recognition Method: The table below present total net sales disaggregated based on the revenue recognition method applied. Year Ended December 31, 2018Revenue Recognition Method ISRS C&NS Electronic Systems Consolidated L3 (in millions)Over time (cost-to-cost method) $3,352 $2,603 $1,649 $7,604Point in time 866 359 705 1,930Output method 74 23 343 440Billing method 149 74 47 270Total sales $4,441 $3,059 $2,744 $10,24423. Severance and Restructuring Related CostsConsistent with the Company’s strategy to continuously improve its cost structure and right-size its businesses, L3 is completing employmentreduction actions across several of its businesses to reduce both direct and indirect costs, including overhead and general and administrative costs. As a resultof these initiatives, the Company recorded severance and restructuring related costs of $26 million with respect to approximately 800 employees during theyear ended December 31, 2018, $101 million with respect to approximately 1,500 employees during the year ended December 31, 2017 and $17 million withrespect to approximately 700 employees during the year ended December 31, 2016. Severance and restructuring related costs are reported within operatingcosts and expenses on the consolidated statements of operations. Severance and restructuring related costs incurred by reportable segment are presented inthe table below. Year Ended December 31, 2018 2017 2016 (in millions) ISRS(1)(2)$7 $38 $5C&NS(3)11 52 8Electronic Systems(2)8 11 4Consolidated$26 $101 $17__________________(1) The severance and restructuring related costs incurred during the year ended December 31, 2017 include a $12 million loss on the sale of a building in Garland, Texas in thefourth quarter of 2017.(2) The severance and restructuring related costs incurred during the year ended December 31, 2017 include $1 million and $5 million of salaried employee pension plan curtailmentlosses for Electronic Systems and ISRS segments, respectively. See Note 20 for additional information.(3) The severance and restructuring related costs incurred during the year ended December 31, 2017 exclude a pre-tax gain of $42 million on the sale of the Company's property inSan Carlos, California in the second quarter of 2017.F-62TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDThe Company had severance and restructuring related liabilities of $14 million and $23 million included in other current liabilities on theCompany’s balance sheets at December 31, 2018 and 2017, respectively. The remaining liability balance at December 31, 2018 is expected to be paid in2019. The table below presents the change to the Company’s severance and restructuring related liability during the year ended December 31, 2018. December 31, 2018 (in millions)Balance at beginning of period$23Additional provisions26Cash payments(35)Balance at end of period$1424. Unaudited Quarterly Financial DataUnaudited summarized financial data by quarter for the years ended December 31, 2018 and 2017 is presented in the tables below. The Company’sunaudited quarterly results of operations are affected, significantly in some periods, by the Company’s business acquisitions and divestitures. See Note 3 foradditional information. First Quarter Second Quarter(1) ThirdQuarter(2) FourthQuarter(3) (in millions, except per share data)2018 Sales$2,371 $2,583 $2,519 $2,771Operating income251 321 272 276Income from continuing operations192 189 208 232Net income208 379 208 231Net income attributable to L3203 375 202 225Basic EPS from continuing operations(4)2.40 2.36 2.57 2.87Basic EPS(4)2.60 4.78 2.57 2.86Diluted EPS from continuing operations(4)2.34 2.33 2.54 2.83Diluted EPS(4)2.54 4.72 2.54 2.82__________________(1) Income from continuing operations includes debt retirement charges of $48 million ($36 million after income taxes), or $0.45 per diluted share and a pre-tax gain of $48 million($25 million after income taxes), or $0.31 per diluted share, related to the divestiture of the Crestview Aerospace and TCS businesses. The Company recorded a pre-tax gain of$237 million ($180 million after income taxes, or $2.27 per diluted share) related to the divestiture of the Vertex Aerospace business, which is reported in discontinuedoperations.(2) Income from continuing operations includes debt retirement charges of $21 million ($16 million after income taxes), or $0.21 per diluted share, merger and acquisition relatedexpenses of $5 million ($4 million after income taxes), or $0.06 per diluted share and adjustments to divestiture gains of $4 million ($4 million after income taxes), or $0.04 perdiluted share, related to the sale of the Crestview Aerospace and TCS businesses.(3) Income from continuing operations includes merger and acquisition related expenses of $23 million ($19 million after income taxes), or $0.24 per diluted share and adjustmentsto divestiture gains of $2 million ($2 million after income taxes), or $0.03 per diluted share, related to the sale of the Crestview Aerospace and TCS businesses.(4) EPS in each quarter is computed using the weighted-average number of shares outstanding during that quarter, while EPS for the full year is computed using the weighted-average number of shares outstanding during the year. Therefore, the sum of the four quarters’ EPS may not equal the full year computed EPS.F-63TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED First Quarter Second Quarter ThirdQuarter(1) FourthQuarter(2) (in millions, except per share data)2017 Sales$2,321 $2,385 $2,293 $2,574Operating income237 294 232 268Income from continuing operations157 195 146 271Net income168 207 25 293Net income attributable to L3164 202 22 289Basic EPS from continuing operations(3)1.97 2.44 1.83 3.42Basic EPS(3)2.11 2.59 0.28 3.70Diluted EPS from continuing operations(3)1.93 2.39 1.79 3.34Diluted EPS(3)2.07 2.54 0.28 3.62__________________(1) The Company recorded a goodwill impairment charge of $187 million or $1.67 per diluted share for the Vertex Aerospace reporting unit in 2017, which is reported indiscontinued operations.(2) Provision for income taxes for the fourth quarter of 2017, includes estimated tax benefits of $79 million or $0.99 per diluted share, related to the enactment of the U.S. TaxReform in December 2017.(3) EPS in each quarter is computed using the weighted-average number of shares outstanding during that quarter, while EPS for the full year is computed using the weighted-average number of shares outstanding during the year. Therefore, the sum of the four quarters’ EPS may not equal the full year computed EPS.25. Financial Information of L3 and Its SubsidiariesThe debt of L3, including the senior notes and borrowings under amounts drawn against the Credit Facility, is guaranteed, on a joint and several, fulland unconditional basis, by certain of its 100% owned domestic subsidiaries (the Guarantor Subsidiaries). See Note 10 for additional information. Theforeign subsidiaries and certain domestic subsidiaries of L3 (the Non-Guarantor Subsidiaries) do not guarantee the debt of L3. None of the debt of L3 hasbeen 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 releasedand discharged: (1) upon the release of all guarantees of all other outstanding indebtedness of L3, or (2) upon the determination that such guarantor is nolonger a “domestic subsidiary.” In addition, the guarantees of the senior notes will be automatically and unconditionally released and discharged in the eventof 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 suchguarantor. There are no restrictions on the payment of dividends from the Guarantor Subsidiaries to L3.In lieu of providing separate audited financial statements for the Guarantor Subsidiaries, the Company has included the accompanying condensedcombining financial statements based on Rule 3-10 of SEC Regulation S-X. The Company does not believe that separate financial statements of theGuarantor Subsidiaries are material to users of the financial statements.F-64TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUEDThe following condensed combining financial information presents the results of operations, financial position and cash flows of: (1) L3 excludingits consolidated subsidiaries (the Parent), (2) the Guarantor Subsidiaries, (3) the Non-Guarantor Subsidiaries and (4) the eliminations to arrive at theinformation for L3 on a consolidated basis. L3 Guarantor Subsidiaries Non- GuarantorSubsidiaries Eliminations Consolidated L3 (in millions)Condensed Combining Balance Sheets: At December 31, 2018: Current assets: Cash and cash equivalents$756 $21 $306 $(17) $1,066Billed receivables, net291 341 287 — 919Contract assets562 833 195 — 1,590Inventories378 258 243 — 879Prepaid expenses and other current assets127 166 63 — 356Total current assets2,114 1,619 1,094 (17) 4,810Goodwill2,124 3,009 1,675 — 6,808Other assets690 765 445 — 1,900Investment in and amounts due from consolidated subsidiaries5,931 6,912 — (12,843) —Total assets$10,859 $12,305 $3,214 $(12,860) $13,518Current liabilities$821 $955 $688 $(17) $2,447Amounts due to consolidated subsidiaries— — 417 (417) —Other long-term liabilities878 804 161 — 1,843Long-term debt3,321 — — — 3,321Total liabilities5,020 1,759 1,266 (434) 7,611L3 shareholders’ equity5,839 10,546 1,948 (12,494) 5,839Noncontrolling interests— — — 68 68Total equity5,839 10,546 1,948 (12,426) 5,907Total liabilities and equity$10,859 $12,305 $3,214 $(12,860) $13,518F-65TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED L3 Guarantor Subsidiaries Non- GuarantorSubsidiaries Eliminations Consolidated L3 (in millions)At December 31, 2017: Current assets: Cash and cash equivalents$432 $16 $285 $(71) $662Billed receivables, net266 244 213 — 723Contracts in process706 912 315 — 1,933Prepaid expenses and other current assets330 235 124 — 689Assets held for sale— 135 — — 135Assets of discontinued operations306 — — — 306Total current assets2,040 1,542 937 (71) 4,448Goodwill2,099 2,932 1,584 — 6,615Other assets658 687 321 — 1,666Investment in and amounts due from consolidated subsidiaries5,662 6,310 — (11,972) —Total assets$10,459 $11,471 $2,842 $(12,043) $12,729Current liabilities$811 $832 $564 $(71) $2,136Liabilities held for sale— 17 — — 17Liabilities of discontinued operations226 — — — 226Amounts due to consolidated subsidiaries— — 391 (391) —Other long-term liabilities1,009 729 131 — 1,869Long-term debt3,330 — — — 3,330Total liabilities5,376 1,578 1,086 (462) 7,578L3 shareholders’ equity5,083 9,893 1,756 (11,649) 5,083Noncontrolling interests— — — 68 68Total equity5,083 9,893 1,756 (11,581) 5,151Total liabilities and equity$10,459 $11,471 $2,842 $(12,043) $12,729F-66TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED L3 Guarantor Subsidiaries Non- GuarantorSubsidiaries Eliminations Consolidated L3 (in millions)Condensed Combining Statements of Operations: For the year ended December 31, 2018: Total net sales$3,626 $5,259 $1,806 $(447) $10,244Total operating costs and expenses(3,180) (4,943) (1,462) 447 (9,138)Gain on sale of Crestview & TCS Businesses— 42 — — 42Merger and acquisition related expenses(28) — — — (28)Operating income418 358 344 — 1,120Interest expense(163) — (1) — (164)Interest and other income, net31 3 3 — 37Debt retirement charges(69) — — — (69)Income from continuing operations before income taxes217 361 346 — 924Provision for income taxes(24) (40) (39) — (103)Equity in net income of consolidated subsidiaries607 184 — (791) —Income from continuing operations800 505 307 (791) 821Income from discontinued operations, net of income tax205 — — — 205Net income1,005 505 307 (791) 1,026Net income attributable to noncontrolling interests— — — (21) (21)Net income attributable to L3$1,005 $505 $307 $(812) $1,005Comprehensive income attributable to L3$971 $427 $226 $(653) $971 For the year ended December 31, 2017: Total net sales$3,520 $4,852 $1,581 $(380) $9,573Total operating costs and expenses(3,169) (4,446) (1,307) 380 (8,542)Operating income351 406 274 — 1,031Interest expense(168) — (1) — (169)Interest and other income (loss), net6 (8) 11 — 9Income from continuing operations before income taxes189 398 284 — 871Provision for income taxes(22) (47) (33) — (102)Equity in net income of consolidated subsidiaries586 144 — (730) —Income from continuing operations753 495 251 (730) 769Loss from discontinued operations, net of income tax(76) — — — (76)Net income677 495 251 (730) 693Net income attributable to noncontrolling interests— — — (16) (16)Net income attributable to L3$677 $495 $251 $(746) $677Comprehensive income attributable to L3$712 $604 $378 $(982) $712 For the year ended December 31, 2016: Total net sales$3,351 $4,842 $1,348 $(331) $9,210Total operating costs and expenses(3,064) (4,406) (1,113) 331 (8,252)Operating income287 436 235 — 958Interest expense(164) — — — (164)Interest and other income (loss), net9 (3) 11 — 17Debt retirement charges(7) — — — (7)Income from continuing operations before income taxes125 433 246 — 804Provision for income taxes(26) (92) (53) — (171)Equity in net income of consolidated subsidiaries520 130 — (650) —Income from continuing operations619 471 193 (650) 633Income from discontinued operations, net of income tax91 — — — 91Net income710 471 193 (650) 724Net income attributable to noncontrolling interests— — — (14) (14)Net income attributable to L3$710 $471 $193 $(664) $710Comprehensive income attributable to L3$558 $409 $116 $(525) $558F-67TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED L3 Guarantor Subsidiaries Non- GuarantorSubsidiaries Eliminations Consolidated L3 (in millions)Condensed Combining Statements of Cash Flows: For the year ended December 31, 2018: Operating activities: Net cash from operating activities from continuing operations$555 $238 $256 $(7) $1,042Investing activities: Business acquisitions, net of cash acquired(193) — (176) — (369)Proceeds from sale of businesses, net of closing date cash balances360 175 — — 535Other investing activities(119) (90) (48) — (257)Net cash from (used in) investing activities from continuingoperations48 85 (224) — (91)Financing activities: Proceeds from sale of senior notes1,798 — — — 1,798Repurchases and redemptions of senior notes(1,865) — — — (1,865)Common stock repurchased(322) — — — (322)Dividends paid(254) — — — (254)Other financing activities376 (318) 4 61 123Net cash (used in) from financing activities from continuingoperations(267) (318) 4 61 (520)Effect of foreign currency exchange rate changes on cash— — (15) — (15)Net decrease in cash and cash equivalents of discontinued operations(12) — — — (12)Net increase in cash324 5 21 54 404Cash and cash equivalents, beginning of the year432 16 285 (71) 662Cash and cash equivalents, end of the year$756 $21 $306 $(17) $1,066 For the year ended December 31, 2017: Operating activities: Net cash from operating activities from continuing operations$374 $426 $263 $(78) $985Investing activities: Business acquisitions, net of cash acquired(316) — — — (316)Proceeds from sale of businesses, net of closing date cash balances17 — 1 — 18Other investing activities(92) (38) (25) — (155)Net cash used in investing activities from continuing operations(391) (38) (24) — (453)Financing activities: Common stock repurchased(180) — — — (180)Dividends paid(236) — — — (236)Other financing activities490 (377) (177) 114 50Net cash from (used in) financing activities from continuingoperations74 (377) (177) 114 (366)Effect of foreign currency exchange rate changes on cash— — 20 — 20Net increase in cash and cash equivalents of discontinued operations113 — — — 113Net increase in cash170 11 82 36 299Cash and cash equivalents, beginning of the year262 5 203 (107) 363Cash and cash equivalents, end of the year$432 $16 $285 $(71) $662 F-68TABLE OF CONTENTSL3 TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − CONTINUED L3 Guarantor Subsidiaries Non- GuarantorSubsidiaries Eliminations Consolidated L3 (in millions)For the year ended December 31, 2016: Operating activities: Net cash from operating activities from continuing operations$440 $509 $259 $(186) $1,022Investing activities: Business acquisitions, net of cash acquired(388) — — — (388)Proceeds from sale of businesses, net of closing date cash balances563 — (2) — 561Other investing activities(63) (77) (43) — (183)Net cash from (used in) investing activities from continuingoperations112 (77) (45) — (10)Financing activities: Proceeds from sale of senior notes547 — — — 547Redemption of senior notes(856) — — — (856)Common stock repurchased(373) — — — (373)Dividends paid(220) — — — (220)Other financing activities490 (427) (163) 146 46Net cash used in financing activities from continuing operations(412) (427) (163) 146 (856)Effect of foreign currency exchange rate changes on cash— — (13) — (13)Net increase in cash and cash equivalents of discontinued operations13 — — — 13Net increase in cash153 5 38 (40) 156Cash and cash equivalents, beginning of the year109 — 165 (67) 207Cash and cash equivalents, end of the year$262 $5 $203 $(107) $363F-69November 5, 2018Mr. Christopher E. Kubasikc/o L3 Technologies, Inc. 600 Third Ave. New York, NY 10016Dear Chris:This letter memorializes our recent discussions regarding the terms of your employment with L3 Technologies, Inc. (“L3”)following the completion of the merger (the “Merger”) contemplated by the Agreement and Plan of Merger among L3, HarrisCorporation (“Harris”) and Leopard Merger Sub Inc., dated as of October 12, 2018 (the “Merger Agreement”). References in thisletter to the “Company” will be deemed to refer to L3 before the Closing and to the Combined Company (as defined in the MergerAgreement) after the Closing. Except as modified herein, the terms of the L3 Technologies, Inc. Amended and Restated Change inControl Severance Plan, as amended and restated through July 25, 2018 (the “CIC Plan”), will remain in full force and effect.Capitalized terms not defined herein have the meanings ascribed to them in the Merger Agreement. In the event that (i) youremployment with the Company terminates for any reason prior to the Closing Date or (ii) the Merger Agreement is terminated prior tothe closing of the Merger, this letter will automatically terminate and be of no further force or effect and neither of the parties will haveany obligations hereunder. This agreement supersedes in its entirety the letter agreement and the Term Sheet attached thereto, datedOctober 12, 2018, between you and L3.1.Position.For the period commencing on the Closing Date and ending on the second anniversary of the Closing Date, or if earlier, thedate when William Brown ceases to serve as the Chief Executive Officer of the Company for any reason (the “Initial Period”), youwill serve as the President and Chief Operating Officer of the Company and report directly to the Chief Executive Officer of theCompany; provided that your performance evaluation shall be conducted by the independent members of the Company’s Board ofDirectors (the “Board”). Commencing on the Closing Date, you will also serve as the Vice Chairman of the Board. During the InitialPeriod, (i) you will be responsible for oversight of operational functions and the presidents of each operating segment,1business development, supply chain, manufacturing and other operating functions will report directly to you and (ii) you and the ChiefExecutive Officer will (x) establish and co-chair an integration steering committee to be composed of executives and other employeesto be mutually selected by you and the Chief Executive Officer of the Company and (y) have joint responsibility for overseeing theofficer of the Company that is responsible for leading the integration process of the businesses of Harris and L3 following the ClosingDate.Commencing immediately after the Initial Period, you will become the Chief Executive Officer of the Company and you willcontinue to serve as President of the Company and Vice Chairman of the Board and report directly to the Board. As President andChief Executive Officer, your duties and responsibilities will be determined by the Board in good faith in consultation with you andwill be consistent with your position.On the third anniversary of the Closing Date, you will also assume the position of Chairman of the Board.2.Compensation.During the Protection Period (as defined below), your annual base salary will be $1,450,000, your target annual cash bonusaward will be $2,500,000, the target value of your annual long-term incentive awards will be $10,250,000 and in no case will yourannual base salary, annual bonus target, annual bonus payment, target value of your annual long-term incentive award or annual long-term incentive award be less than that paid or granted by the Company to William Brown (assuming you remain employed for the fullfiscal year in respect of which such bonus or award is earned). To the extent that normal annual compensation review cycles occurprior to Closing, the Company may (but is not required to) adjust your compensation elements to amounts not exceeding thecontemplated levels in the preceding sentence.Notwithstanding the foregoing, the Compensation Committee of the Board (the “Compensation Committee”) will retaindiscretion to increase, but not decrease, the amount of your annual base salary, annual bonus target, annual bonus payment, targetvalue of your annual long-term incentive award and your annual long-term incentive award at any time during the Protection Period,provided that any adjustment applied to such amounts will be equally applied to William Brown’s annual base salary, annual bonustarget, annual bonus payment, target value of his annual long-term incentive award and his annual long-term incentive award, asapplicable. Commencing January 1, 2020, you will be eligible for benefits and perquisites at levels no less favorable than thoseprovided to William Brown.No later than 30 days following the Closing Date (or, if that date occurs within a “quiet period” under the Company’s equitygrant policy, the first trading date following the end of such “quiet period”), you will receive a one-time integration award comprised of(i) performance stock units with a target value of $2,500,000 (the “Integration PSUs”) and (ii) performance-based non-qualified stockoptions with a grant date value of $5,000,000 and a 10-year term (the “Integration Options” and collectively, with the IntegrationPSUs, the “Integration Award”). Both components of the Integration Award will be subject to three-year cliff-vesting, provided, that ifthe continued service condition applicable to William Brown’s Integration Award is deemed satisfied upon his2retirement on the third anniversary of the Closing Date, the continued service condition applicable to your Integration Award will alsobe deemed satisfied at that time. The Integration PSUs will be subject to a 0 to 2 times target payout for the achievement of costsynergy goals from the Closing Date through December 31, 2021 and a separate 0.5 to 2 times modifier of any such earned payouts forachievement of a cumulative earnings per share goal over the same period, in each case as established by the Compensation Committeein good faith in consultation with you and communicated to you at the time of grant. The actual earned value of the Integration PSUswill be determined by the Compensation Committee based on its assessment of the achievement of the applicable performanceobjectives. The Integration PSUs will accrue dividends in an amount equal to the cash dividends or other distributions, if any, whichare paid during the performance period and will be paid upon settlement of the earned Integration PSUs. The Integration Options willbe subject to a performance-vesting condition such that the award will vest and become exercisable only if 80% of the cost synergygoal is achieved. The Integration Award will be in addition to the long-term incentive award opportunity in the preceding paragraphsand the Integration Award will be on terms and conditions determined by the Compensation Committee that are the same as the equity-based integration awards granted to other senior executives of the Company generally.You will receive a cash payment of up to $1,250,000 to be utilized for any relocation-related expenses incurred by you withinthree years following the Closing Date as determined by you, with gross-up of any amounts taxed as ordinary income (the “RelocationPayments”). To the extent permitted under the Merger Agreement and the Disclosure Letter thereunder, the Company may acceleratethe Relocation Payments into December 2018, subject to your obligation to repay the after-tax value of such amounts to the Companyin the event the Closing does not occur, or to the extent that you fail to incur such expenses within three years following the ClosingDate.3.Termination of Employment.You will continue to be covered by the CIC Plan with a “Severance Multiple” (as defined under the CIC Plan) of three andwith other benefit levels as provided under the CIC Plan, with the protection period during which you will be considered an “EligibleEmployee” as defined in the CIC Plan (in the event your employment is terminated by the Company other than for “Cause” or youterminate employment for “Good Reason,” as these terms are defined under the CIC Plan and modified by this letter) extended untilthe fourth anniversary of the Closing Date (the “Protection Period”).If, during the first two years following the Closing Date, your employment is terminated by the Company other than for Causeor you terminate employment for Good Reason, a portion of the Integration Award (one-third of the Integration Award if the date oftermination occurs during the first year following the Closing Date and two-thirds of the Integration Award if the date of terminationoccurs during the second year following the Closing Date) will remain outstanding and eligible to vest (with the remaining portionforfeited) for the remainder of the applicable performance period based on the attainment of the applicable performance goals andoption exercisability for the life of the award for any Integration Options that satisfy the performance-vesting condition.If, during the third year following the Closing Date, your employment is terminated by the Company other than for Cause oryou terminate employment for Good Reason, the Integration3Award will remain outstanding and eligible to vest for the remainder of the applicable performance period based on the greater oftarget performance and actual attainment of the applicable performance goals, with the Integration Options being exercisable for the lifeof the award.If, during the Protection Period, your employment is terminated by the Company other than for Cause or you terminateemployment for Good Reason, you will be entitled to the following treatment of your outstanding equity-based awards other than theIntegration Award:A.each stock option will become fully vested and exercisable immediately prior to the termination of your employment,and each option (whether it became vested immediately prior to termination or was previously vested) will remainexercisable for the life of the award;B.each restricted stock unit shall become fully vested and promptly issuable for one share of the Company’s commonstock pursuant to its terms; andC.each performance share unit or performance restricted stock unit will remain outstanding and (A) if your terminationoccurs prior to the end of the applicable performance period, the units will remain outstanding and eligible to vest forthe remainder of the applicable performance period based on the attainment of the applicable performance goals (andany requirement for you to remain employed will be waived); and (B) if your termination occurs after the end of theapplicable performance period and there is a requirement for you to remain employed for a subsequent vesting period,such requirement shall be waived and the number of shares earned with respect to such performance period shallbecome fully vested.Release RequirementAll separation payments and benefits in this Paragraph 3 will be subject to your execution and non-revocation of a release ofclaims in favor of the Company and its affiliates, consistent in substance with the releases of claims used at the time by the Company inconnection with separations of senior corporate executives. The Company shall deliver to you the form of release of claims within fivebusiness days of the date of your termination. For avoidance of doubt, such release of claims shall be limited to a release of claimsarising in connection with your employment or service (or the termination thereof) and such release of claims shall not include anyrestrictive covenants or otherwise impose any additional obligations on you following your termination (other than as set forth in theCIC Plan, as modified by this letter).4.Acknowledgments.You acknowledge and agree that you will not have “Good Reason” under the CIC Plan solely as a result of (i) yourcontemplated relocation to Florida, (ii) any across the board changes in employee benefits (as long as your benefits are the same asthose provided to William Brown) or (iii) the Closing of the Merger, the assignment to the Chief Executive Officer of the duties andresponsibilities specified in Section 4.1(f) of the Merger Agreement or your transition to the role of Vice-Chairman of the Board,President and Chief Operating Officer of the Company at Closing, and subsequently to the roles of President and Chief ExecutiveOfficer of the Company and Chairman4of the Board at times contemplated as described above. Such waiver of your “Good Reason” rights will be negated if your transition tothe various positions described in this letter does not occur as and when agreed.For the avoidance of doubt, you shall retain the right to terminate your employment with the Company for “Good Reason”under the CIC Plan for the duration of the Protection Period other than as specified above. Additionally, the following shall alsoconstitute “Good Reason” triggers under the CIC Plan: (a) the Company’s failure to promote you to your contemplated new roles uponand following Closing as described in this letter and in the Merger Agreement; (b) the failure of William Brown to permanently ceaseserving as an officer, employee and member of the Board on or prior to the third anniversary of the Closing Date or (c) the Company’smaterial breach of this letter (which remains uncured within 15 days following your notice to the Company thereof).In addition, the definition of “Cause” contained in the CIC Plan will include as a clause thereof, “an independent third-partyinvestigator mutually agreed to by you and the Company determines that you have engaged in an act of personal misconduct that (1) isa willful and substantial violation of the Company’s Corporate Policy on Equal Employment Opportunity, Anti-Harassment and Non-Retaliation (or any successors thereto) and there is a material risk that such action could cause meaningful harm to the Company(reputationally or otherwise) or (2) gives rise to a material risk of meaningful harm to the Company (reputationally or otherwise) underfederal or applicable state law for discrimination or sexual harassment to subordinate employees”. The Company will not be able toterminate you for “Cause” based on the new provision described in this paragraph unless and until the Company has delivered to you acopy of a resolution duly adopted by three-quarters of the entire Board at a meeting of the Board called and held for such purpose(after 30 days’ notice to you and an opportunity for you, together with counsel, to be heard before the Board), finding that in the goodfaith opinion of the Board an event set forth in this new provision has occurred and specifying the particulars thereof in detail. TheCompany must notify you of the event constituting Cause under this provision within 90 days following the Company’s knowledge ofits existence or such event shall not constitute Cause hereunder.Further, you agree that if the Board reasonably believes that facts exist that may justify a termination of your employment for“Cause” under the CIC Plan, the Board retains the right to place you on a paid leave of absence for up to 10 calendar days pending itsinvestigation of your conduct and the Board’s decision to place you on paid leave will not constitute grounds for you to terminate youremployment for “Good Reason” under the CIC Plan; provided, that nothing shall alter the Company’s obligations under this letter orthe CIC Plan, as applicable, and you shall continue to vest in any outstanding equity awards and other benefits during such period ofpaid leave.You acknowledge and agree that Exhibit A of the CIC Plan (Confidentiality and Non-Competition Restrictive Covenants) ishereby modified with respect to you to provide that the period of time after termination of your employment set forth in Section II ofsuch Exhibit A as to which the non-competition and non-solicitation covenants will apply as a condition of your right to receiveseverance benefits under the CIC Plan will be extended to 24 months following your termination5of employment with the Company. All other provisions of such Exhibit A will remain in full force and effect with respect to you.5.Miscellaneous.This letter will be governed and construed in accordance with the laws of the State of New York, without regard to conflicts oflaws principles thereof; provided that all matters relating to your non-competition and non-solicitation covenants under Exhibit A of theCIC Plan (as modified in this letter) will be governed and construed in accordance with the laws of the State of Florida. This letter maynot be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors andlegal representatives. The invalidity or unenforceability of any provision of this letter will not affect the validity or enforceability of anyother provision hereof, and this letter will be construed as if such invalid or unenforceable provision were omitted (but only to theextent that such provision cannot be appropriately reformed or modified). Upon the expiration or other termination of this letter, therespective rights and obligations of the parties hereto will survive such expiration or other termination to the extent necessary to carryout the intentions of the parties under this letter. This letter may be executed in separate counterparts, each of which is deemed to be anoriginal and all of which taken together constitute one and the same agreement. Prior to the Closing Date the parties agree not to amendthis letter without the consent of Harris. Following the Closing Date, the parties agree that this letter may be assigned to and assumedby the Combined Company.[Signature Page Follows]6We thank you for your past service and are looking forward to your continued leadership. Sincerely, L3 TECHNOLOGIES, INC. By: /s/ Thomas A. Corcoran Name: Thomas A. CorcoranTitle: Director and Compensation Committee MemberI agree with and accept the terms and conditions of this letter:/s/ Christopher E. Kubasik Name: Christopher E. KubasikDate: 5 November 2018L3 TECHNOLOGIES, INC.AMENDED AND RESTATED2008 LONG TERM PERFORMANCE PLANRESTRICTED STOCK AGREEMENT(Version 0001)This Restricted Stock Agreement (this “Agreement”), effective as of the Grant Date (as defined below), is between L3Technologies, Inc., a Delaware corporation (the “Corporation”), and the Participant (as defined below).1. Definitions. The following terms shall have the following meanings for purposes of this Agreement:(a) “Award Letter” shall mean the letter to the Participant attached hereto as Exhibit A. (b) “CIC Plan” shall mean the Corporation’s Amended and Restated Change in Control Severance Plan.(c) “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.(d) “Fair Market Value” shall have the meaning assigned to such term under the Plan.(e) “Good Reason” shall have the meaning assigned to such term under the CIC Plan.(f) “Grant Date” shall mean the “Grant Date” listed in the Award Letter.(g) “Participant” shall mean the “Participant” listed in the Award Letter.(h) “Restricted Shares” shall mean that number of Restricted Shares listed in the Award Letter as “Awards Granted.”(i) “Section 409A Change in Control Event” shall mean a change in ownership or effective control of the Corporation,or in the ownership of a substantial portion of the assets of the Corporation, within the meaning of Section 409A(a)(2)(A)(v) of theCode.(j) “Shares” shall mean a number of shares of the Corporation’s Common Stock, par value $0.01 per share, equal tothe number of Restricted Shares.2. Grant of Restricted Shares. The Corporation hereby grants the Restricted Shares to the Participant, each of which remainssubject to vesting and transfer restrictions until the expiration or termination of the Restricted Period (as defined below), subject to theterms, conditions and restrictions set forth in the L3 Technologies, Inc. Amended and Restated 2008 Long Term Performance Plan (the“Plan”) and this Agreement.052054-0169-11254-Active.28298657.43. Legend for Restrictions. The Restricted Shares shall be registered on the Corporation’s books and records in theParticipant’s name as of the Grant Date. The Corporation may issue stock certificates or evidence the Participant’s interest by using abook entry account in accordance with Section 27. Physical possession or custody of any stock certificates that are issued may beretained by the Corporation until such time as the Restricted Shares are vested in accordance with this Agreement. The Corporationreserves the right to place a legend on such stock certificate(s) restricting the transferability of such certificates and referring to the termsand conditions (including forfeiture) of this Agreement and the Plan.4. Restricted Period. Except as otherwise provided in Sections 6 and 7 hereof, the “Restricted Period” shall mean the periodbeginning on the Grant Date and expiring on the third anniversary of the Grant Date. Upon the expiration or termination of theRestricted Period, the restrictions applicable to the Shares shall be released in accordance with Section 13.5. Nonalienation of Benefits. No Participant or beneficiary shall have the power or right to transfer, anticipate, or otherwiseencumber the Participant’s interest under this Agreement. The provisions of this Agreement shall inure to the benefit of the Participantand the Participant’s beneficiaries, heirs, executors, administrators or successors in interest.6. Termination of Employment Following Change in Control During Restricted Period. Upon the occurrence of theParticipant’s termination of employment without Cause or termination for Good Reason occurring within two years following a “changein control” that constitutes a Section 409A Change in Control Event, the Restricted Period shall automatically terminate and therestrictions applicable to the Shares shall be released in accordance with Section 13. In the event of the Participant’s termination ofemployment without Cause or termination for Good Reason occurring within two years following a “change in control” that does notconstitute a Section 409 Change in Control Event, the Restricted Period shall not be immediately affected, but shall subsequentlyterminate (and the restrictions applicable to the Shares shall thereafter be released in accordance with Section 13) upon the earliest tooccur of: (a) a Section 409A Change in Control Event, (b) the Participant’s death, (c) the Participant’s “disability” (as defined in Section7(c) hereof) or (d) the third anniversary of the Grant Date. For purposes of this Agreement, a “change in control” means:(a) The acquisition by any person or group (including a group within the meaning of Section 13(d)(3) or 14(d)(2) ofthe Exchange Act), other than the Corporation or any of its subsidiaries, of beneficial ownership (within the meaning of Rule 13d-3promulgated under the Exchange Act) of a majority of the combined voting power of the Corporation’s then outstanding votingsecurities, other than by any employee benefit plan maintained by the Corporation;(b) The sale of all or substantially all the assets of the Corporation and its subsidiaries taken as a whole;(c) The consummation of a merger, combination, consolidation, recapitalization or other reorganization of theCorporation with one or more other entities that are not subsidiaries if, as a result of the consummation of the merger, combination,consolidation, recapitalization or other reorganization, less than 50 percent of the outstanding voting securities of the surviving orresulting corporation shall immediately after the event be beneficially owned in the aggregate by the stockholders of the Corporationimmediately prior to the event; or2052054-0169-11254-Active.28298657.4(d) The election, including the filling of vacancies, during any period of 24 months or less, of 50% or more of themembers of the Board of Directors, without the approval of Continuing Directors, as constituted at the beginning of such period."Continuing Directors" shall mean any director of the Corporation who either (i) is a member of the Board of Directors on the GrantDate, or (ii) is nominated for election to the Board of Directors by a majority of the Board which is comprised of directors who were, atthe time of such nomination, Continuing Directors.7. Termination of Employment or Disability During Restricted Period. (a) In the event that the Participant’s employment with the Corporation and its subsidiaries is terminated (other than byreason of death, “retirement” or “disability,” as defined below) prior to the expiration or termination of the Restricted Period and otherthan as described in Section 6, the Participant shall forfeit the Restricted Shares and all of the Participant’s rights hereunder shall cease(unless otherwise provided for by the Committee in accordance with the Plan). The Participant’s rights to the Restricted Shares shall notbe affected by any change in the nature of the Participant’s employment so long as the Participant continues to be an employee of theCorporation or any of its subsidiaries.(b) In the event the Participant terminates employment with the Corporation and its subsidiaries because of“retirement” prior to the expiration or termination of the Restricted Period (as defined in Section 4), the Restricted Period shall not beaffected and shall expire with the passage of time in accordance with Section 4, except that (i) in the event that the Participant diesfollowing retirement but prior to the expiration of the Restricted Period or (ii) in the event that such retirement occurs within two yearsfollowing a Section 409A Change in Control Event, the Restricted Period shall automatically terminate and the Shares shall thereafter bereleased from restrictions in accordance with Section 13. For purposes of this Agreement, retirement means the Participant (A)terminates employment with the Corporation and its subsidiaries other than for Cause (and is not subject to termination for Cause at thetime of such termination) more than one year after the Grant Date, (B) is available for consultation with the Corporation or itssubsidiaries at the reasonable request of the Corporation or its subsidiaries and (C) terminates employment either (i) on or after attainingage 60 and completing at least five years of service in the aggregate with the Corporation and its subsidiaries (which service must becontinuous through the date of termination except for a single break in service that does not exceed one year in length), or (ii) on orafter attaining age 65. For purposes of this Agreement, “Cause” means the Participant’s (1) intentional failure to perform reasonablyassigned duties, (2) dishonesty or willful misconduct in the performance of duties, (3) engaging in a transaction in connection with theperformance of duties to the Corporation or its subsidiaries which transaction is adverse to the interests of the Corporation and isengaged in for personal profit or (4) willful violation of any law, rule or regulation in connection with the performance of duties (otherthan traffic violations or similar offenses). For purposes of the “Cause” definition, an act, or failure to act, on the Participant’s part shallbe deemed “willful” if done, or omitted to be done, by the Participant in bad faith and without reasonable belief that the Participant’saction or omission was in the best interest of the Corporation.(c) Upon Participant’s death or “disability” (as defined below), the Restricted Period shall automatically terminate andthe Shares shall thereafter be released from restrictions in accordance with Section 13. For purposes of this Agreement, disability meansthe Participant, (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mentalimpairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months; or(ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can beexpected to last for a continuous period of not less than 123052054-0169-11254-Active.28298657.4months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan coveringemployees of the Participant's employer.(d) Whether (and the circumstances under which) employment has been terminated and the determination of thetermination date for the purposes of this Agreement (or whether, and the date upon which, the Participant has suffered a disability underSection 7(c)) shall be determined by the Committee or (with respect to any employee other than an “Executive Officer” as definedunder the Plan) its designee (who, at the date of this Agreement, shall be the Corporation’s Vice President of Human Resources), whosegood faith determination shall be final, binding and conclusive; provided, that such designee may not make any such determinationwith respect to his or her own employment.8. Dividends. If the Corporation pays a cash dividend on its common stock, the dividends that would otherwise be payable inrespect of the Restricted Shares shall be held back and credited to a Dividend Account (as defined below) as of the record date for thedividend. The Corporation shall cause an account (the “Dividend Account”) to be established and maintained as part of the records ofthe Corporation to evidence the aggregate cash dividends accrued by the Participant from time to time under this Section. No interestshall accrue on any amounts reflected in the Dividend Account. The Participant’s interest in the amounts reflected in the DividendAccount shall be that of a general, unsecured creditor of the Corporation. Subject to, and as promptly as practicable following, therelease of restrictions applicable to the Shares pursuant to Section 13 hereunder, the Corporation shall pay an amount in cash (withoutinterest and subject to applicable withholding taxes) to the Participant (or his or her beneficiaries, heirs, executors, administrators orsuccessors in interest) equal to the aggregate cash dividends accrued in the Participant’s Dividend Account and the Participant’sDividend Account shall be eliminated at that time. In the event that the Participant forfeits his or her rights to the Restricted Shares, theParticipant also shall be deemed to have forfeited his or her rights to any cash dividends accrued in the Participant’s Dividend Accountand the Participant’s Dividend Account shall be eliminated at that time.9. No Right to Continued Employment. Nothing in this Agreement or the Plan shall be interpreted or construed to confer uponthe Participant any right to continue employment by the Corporation or any of its subsidiaries, nor shall this Agreement or the Planinterfere in any way with the right of the Corporation or any of its subsidiaries to terminate the Participant’s employment at any time forany reason whatsoever, whether or not with cause.10. Rights as a Stockholder. The Participant shall have the rights of a stockholder of the Corporation with respect to theRestricted Shares from and after the Grant Date, subject to restrictions set forth herein during the Restricted Period with respect totransfer and forfeiture restrictions and the restrictions applicable to dividends pursuant to Section 8.11. Adjustments Upon Change in Capitalization. In the event of any reorganization, merger, consolidation, recapitalization,reclassification, stock split, stock dividend or similar capital adjustment, as a result of which shares of any class shall be issued inrespect of outstanding shares of the Corporation’s Common Stock or shares of Corporation’s Common Stock shall be changed into adifferent number of shares or into another class or classes or into other property or cash, the Restricted Shares shall be adjusted toreflect such event so as to preserve (without enlarging) the value of the award hereunder, with the manner of such adjustment to bedetermined by the Committee in its sole discretion. This paragraph shall also apply with respect to any extraordinary dividend or otherextraordinary distribution in respect of the Corporation’s Common Stock (whether in the form of cash or other property).4052054-0169-11254-Active.28298657.412. General Restrictions. Notwithstanding anything in this Agreement to the contrary, the Corporation shall have noobligation to release the transfer restrictions applicable to the Shares as contemplated by this Agreement unless and until such releaseshall comply with all relevant provisions of law and the requirements of any stock exchange on which the Corporation's shares arelisted for trading.13. Release of Restrictions. Upon the expiration or termination of the Restricted Period and payment by the Participant of anyapplicable taxes pursuant to Section 14 of this Agreement, the Corporation shall, as soon as reasonably practicable (and in any eventwithin 75 days of the termination or expiration of the Restricted Period), but subject to any delay necessary to comply with Section 12hereof, release the Shares from all transfer and forfeiture restrictions. The Corporation shall not be required to release any fractionalShares, but shall pay, in lieu thereof, the Fair Market Value of such fractional Shares as of the date the remaining Shares are deemedreleased from restriction. The Corporation shall pay any costs incurred in connection with releasing the Shares. Notwithstanding theprovisions of this Section, in the event of the death of the Participant prior to the release of the restrictions applicable to the Sharesunder this Section 13, the release of restrictions and any payment in lieu of fractional Shares shall be made to the Participant’sbeneficiaries, heirs, executors, administrators or successors in interest as the case may be. Upon release of restrictions in accordancewith this Section 13, any legend previously affixed to the Shares reflecting the restrictions applicable under this Agreement shall beremoved.14. Section 83(b) Election; Tax Withholding. The Participant hereby commits to file a timely election under Section 83(b) ofthe Code with respect to the grant of Restricted Shares under this Agreement. Accordingly, the Corporation will satisfy the applicableFederal, state, local or foreign withholding tax requirements, if any (“Withholding Taxes”) resulting from such Code Section 83(b)election with respect to the Restricted Shares by reduction in the number of Shares otherwise issuable to the Participant pursuant to thisAgreement. The value of any Shares delivered or withheld as payment in respect of withholding tax requirements shall be determinedby reference to the Fair Market Value of such Shares as of the date of such deemed withholding or delivery. In the event thatWithholding Taxes are satisfied by withholding a portion of the Shares otherwise issuable or deliverable to the Participant pursuant tothis Agreement, the Corporation shall withhold Shares based on the Participant’s actual estimated marginal applicable tax rate asdetermined by the Corporation (but in no event at a rate in excess of the maximum statutory withholding rate(s) in such Participant’srelevant tax jurisdictions).15. Subsidiary. As used herein, the term “subsidiary” shall mean, as to any person, any corporation, association, partnership,joint venture or other business entity of which 50% or more of the voting stock or other equity interests (in the case of entities otherthan corporations), is owned or controlled (directly or indirectly) by that entity, or by one or more of the Subsidiaries of that entity, orby a combination thereof.16. Plan Governs. The Participant hereby acknowledges receipt of a copy of the Plan and agrees to be bound by its terms, allof which are incorporated herein by reference. The Plan shall govern in the event of any conflict between this Agreement and the Plan.17. Modification of Agreement. This Agreement may be not be modified, amended, suspended or terminated, and any termsor conditions may not be waived, without the approval of the Committee. The Committee reserves the right to amend or modify thisAgreement at any time without prior notice to any Participant or other interested party; provided, that except as expressly providedhereunder, any such amendment or modification may not adversely affect in any material respect the Participant’s rights or benefitshereunder except for such amendments or modifications as are required by law.5052054-0169-11254-Active.28298657.418. Severability. Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable orinvalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full forcein accordance with their terms.19. Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by thelaws of the State of New York without giving effect to the conflicts of laws principles thereof. If the Participant has received a copy ofthis Agreement (or the Plan or any other document related hereto or thereto) translated into a language other than English, suchtranslated copy is qualified in its entirety by reference to the English version thereof, and in the event of any conflict the English versionwill govern.20. Successors in Interest. This Agreement shall inure to the benefit of and be binding upon any successor to theCorporation. This Agreement shall inure to the benefit of the Participant or the Participant’s legal representatives. All obligationsimposed upon the Participant and all rights granted to the Corporation under this Agreement shall be final, binding and conclusive uponthe Participant’s heirs, executors, administrators and successors.21. Administration. The Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules forthe administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. Allactions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Participant, theCorporation and all other interested persons. No member of the Committee shall be personally liable for any action determination orinterpretation made in good faith with respect to the Plan or the Restricted Shares. In its absolute discretion, the Board of Directors mayat any time and from time to time exercise any and all rights and duties of the Committee under the Plan and this Agreement.22. Resolution of Disputes. Any dispute or disagreement which may arise under, or as a result of, or in any way related to,the interpretation, construction or application of this Agreement shall be determined by the Committee. Any determination madehereunder shall be final, binding and conclusive on the Participant and Corporation for all purposes.23. Data Privacy Consent. As a condition of the grant of the Restricted Shares, the Participant hereby consents to thecollection, use and transfer of personal data as described in this paragraph. The Participant understands that the Corporation and itssubsidiaries hold certain personal information about the Participant, including name, home address and telephone number, date of birth,social security number, salary, nationality, job title, ownership interests or directorships held in the Corporation or its subsidiaries, anddetails of all Restricted Shares or other equity awards or other entitlements to shares of common stock awarded, cancelled, exercised,vested or unvested (“Data”). The Participant further understands that the Corporation and its subsidiaries will transfer Data amongthemselves as necessary for the purposes of implementation, administration and management of the Participant’s participation in thePlan, and that the Corporation and any of its subsidiaries may each further transfer Data to any third parties assisting the Corporation inthe implementation, administration and management of the Plan. The Participant understands that these recipients may be located in theEuropean Economic Area or elsewhere, such as the United States. The Participant hereby authorizes them to receive, possess, use,retain and transfer such Data as may be required for the administration of the Plan or the subsequent holding of shares of common stockon the Participant’s behalf, in electronic or other form, for the purposes of implementing, administering and managing the Participant’sparticipation in the Plan, including any requisite transfer to a broker or other third party with whom the Participant may6052054-0169-11254-Active.28298657.4elect to deposit any shares of common stock acquired under the Plan. The Participant may, at any time, view such Data or require anynecessary amendments to it.24. Limitation on Rights; No Right to Future Grants; Extraordinary Item of Compensation. By accepting this Agreement andthe grant of the Restricted Shares contemplated hereunder, the Participant expressly acknowledges that (a) the Plan is discretionary innature and may be suspended or terminated by the Corporation at any time; (b) the grant of Restricted Shares is a one-time benefit thatdoes not create any contractual or other right to receive future grants of Restricted Shares, or benefits in lieu of Restricted Shares; (c) alldeterminations with respect to future grants of Restricted Shares, if any, including the grant date, the number of Shares granted and therestricted period, will be at the sole discretion of the Corporation; (d) the Participant’s participation in the Plan is voluntary; (e) the valueof the Restricted Shares is an extraordinary item of compensation that is outside the scope of the Participant’s employment contract, ifany, and nothing can or must automatically be inferred from such employment contract or its consequences; (f) grants of RestrictedShares are not part of normal or expected compensation for any purpose and are not to be used for calculating any severance,resignation, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments,and the Participant waives any claim on such basis; and (g) the future value of the underlying Shares is unknown and cannot bepredicted with certainty. In addition, the Participant understands, acknowledges and agrees that the Participant will have no rights tocompensation or damages related to Restricted Share proceeds in consequence of the termination of the Participant’s employment forany reason whatsoever and whether or not in breach of contract.25. Award Administrator. The Corporation may from time to time to designate a third party (an “Award Administrator”) toassist the Corporation in the implementation, administration and management of the Plan and any Restricted Shares granted thereunder,including by sending Award Letters on behalf of the Corporation to Participants, and by facilitating through electronic meansacceptance of Restricted Stock Agreements by Participants.26. Section 409A. This Agreement is intended to comply with the provisions of Section 409A of the Code and the regulationspromulgated thereunder. Without limiting the foregoing, the Committee shall have the right to amend the terms and conditions of thisAgreement in any respect as may be necessary or appropriate to comply with Section 409A of the Code or any regulations promulgatedthereunder, including without limitation by delaying the issuance of the Shares contemplated hereunder.27. Book Entry Delivery of Shares. Whenever reference in this Agreement is made to the issuance or delivery of certificatesrepresenting one or more Shares, the Corporation may elect to issue or deliver such Shares in book entry form in lieu of certificates.7052054-0169-11254-Active.28298657.428. Acceptance. This Agreement shall not be enforceable until it has been executed by the Participant. In the event theCorporation has designated an Award Administrator, the acceptance (including through electronic means) of the Restricted Sharescontemplated by this Agreement in accordance with the procedures established from time to time by the Award Administrator shall bedeemed to constitute the Participant’s acknowledgment and agreement to the terms and conditions of this Agreement and shall have thesame legal effect in all respects of the Participant having executed this Agreement by hand. By: L3 TECHNOLOGIES, INC._______ ————————————————————Ann D. Davidson______________________Senior Vice President, General Counsel and_Corporate Secretary__________________Acknowledged and Agreedas of the date first written above:Participant ES______________________________Participant Signature8052054-0169-11254-Active.28298657.4Exhibit AL3 Technologies, Inc.Restricted Stock Award Notification LetterParticipant: Participant NameGrant Date: Grant DateAwards Granted: # Shares Restricted Shares 9052054-0169-11254-Active.28298657.4Exhibit 21L3 Technologies, Inc. and SubsidiariesAs of December 31, 2018Name JurisdictionAeroElite Limited United KingdomAerosim Academy, Inc. FloridaAerosim Bangkok Company Limited ThailandAerosim Technologies, Inc. MinnesotaAerosim Thai Company Limited ThailandAirline Placement Limited United KingdomAirline Recruitment Limited United KingdomApplied Defense Solutions, Inc. DelawareAsian Aviation Training Centre Ltd. ThailandASV Global, L.L.C. LouisianaAutonomous Surface Vehicles Limited United KingdomAutonomous Surface Vehicles, LLC LouisianaAviation Communication & Surveillance Systems, LLC DelawareAzimuth Security Pty Ltd. AustraliaAzimuth Security Trust AustraliaAzimuth Security, LLC FloridaBeijing MAPPS-SERI Technology Company Ltd.* ChinaCalzoni S.r.l. ItalyC.K. Industrial Engineers Limited United KingdomCombat Advanced Propulsion, LLC* DelawareCTC Aviation Group Limited United KingdomCTC Aviation Holdings Limited United KingdomCTC Aviation International Limited United KingdomCTC Aviation Services Limited United KingdomCTC Aviation Training (UK) Limited. United KingdomDMRAC - Aviation Corporation-SGPS, Unipessoal Lda PortugalEAA - Escola de Aviação Aerocondor, S.A. PortugalElectrodynamics, Inc. ArizonaESSCO Collins Limited IrelandExmac Automation Limited United KingdomFAST Holdings Limited* United KingdomFAST Training Services Limited* United KingdomFlight Training Acquisitions LLC DelawareForceX, Inc. TennesseeG4U - Gestão de Activos Aeronáuticos, Sociedade, Lda PortugalG Air Advanced Training, Lda PortugalG Air II Maintenance, Lda PortugalHoneywell TCAS Inc.* DelawareInterstate Electronics Corporation CaliforniaL3 Adaptive Methods, Inc. DelawareL-3 Afghanistan, LLC DelawareL3 Applied Technologies, Inc. DelawareL3 Australia Group Pty Ltd AustraliaL3 Aviation Products, Inc. DelawareL-3 Brasil Importação, Exportação e Comércio Ltda. BrazilL-3 Centaur, LLC DelawareName JurisdictionL3 Chesapeake Sciences Corporation MarylandL3 Cincinnati Electronics Corporation OhioL3 Commercial Training Solutions Limited United KingdomL-3 Communications AIS GP Corporation DelawareL-3 Communications ASA Limited United KingdomL-3 Communications Australia Pty Ltd AustraliaL-3 Communications Flight Capital LLC DelawareL-3 Communications Holding GmbH GermanyL-3 Communications Hong Kong Limited Hong KongL-3 Communications India Private Limited IndiaL-3 Communications Integrated Systems L.P. DelawareL-3 Communications Investments Inc. DelawareL-3 Communications Korea Co., Ltd. South KoreaL-3 Communications Limited United KingdomL-3 Communications Link Simulation and Training UK (Overseas) Limited United KingdomL-3 Communications Singapore Pte. Ltd. SingaporeL-3 Communications U.K. Ltd. United KingdomL3 CTS Airline Academy (NZ) Limited New ZealandL3 CTS Airline and Academy Training Limited United KingdomL-3 Domestic Holdings, Inc. DelawareL3 Doss Aviation, Inc. TexasL3 Electron Devices, Inc. DelawareL3 ESSCO, Inc. DelawareL3 Foreign Holdings, Inc. DelawareL3 Fuzing and Ordnance Systems, Inc. DelawareL-3 Global Holding UK Ltd. United KingdomL3 International Australia Pty Ltd. United KingdomL-3 International UK Ltd United KingdomL3 Investments UK Holdings Ltd. United KingdomL3 Investments, LLC DelawareL3 Kenya Ltd KenyaL3 Kigre, Inc. OhioL3 Latitude, LLC ArizonaL3 Magnet-Motor GmbH GermanyL3 MAPPS Inc. CanadaL3 MAPPS Limited United KingdomL3 MAPPS Sdn. Bhd. MalaysiaL3 MariPro, Inc. CaliforniaL3 Mobile-Vision, Inc. New JerseyL3 Open Water Power, Inc. DelawareL3 OceanServer, Inc. MassachusettsL3 Oceania Pty Limited, Inc. AustraliaL-3 Saudi Arabia LLC Saudi ArabiaL3 Security & Detection Systems, Inc. DelawareL-3 Security Equipment Trading (Beijing) Co., Ltd.* ChinaL-3 Societa Srl. ItalyL3 Technologies Australia Group Pty Ltd AustraliaL3 Technologies Canada Group Inc. CanadaL3 Technologies Canada Inc. CanadaName JurisdictionL3 Technologies ESS Inc. CanadaL3 Technologies Investments Limited CyprusL3 Technologies MAS Inc. CanadaL3 Technologies UK Group Ltd United KingdomL-3 Technology & Services UK Ltd United KingdomL3 Unidyne, Inc. DelawareL3 Unmanned Systems, Inc. TexasL3 Westwood Corporation NevadaLinchpin Labs Inc. CanadaLinchpin Labs Inc. DelawareLinchpin Labs Limited New ZealandLinchpin Labs Limited United KingdomLinchpin Labs Pty Limited AustraliaL-Tres Comunicaciones Costa Rica, S.A. Costa RicaMacDonald Humfrey (Automation) India Private Limited IndiaMacDonald Humfrey (Automation) Limited United KingdomMacDonald Humfrey (Automation) SEA PTE. Ltd. SingaporeMacDonald Humfrey Automation Middle East Control Systems LLC United Arab EmiratesMustang Technology Group, L.P. TexasNarda Safety Test Solutions GmbH GermanyNarda Safety Test Solutions S.r.l. ItalyPower Paragon, Inc. DelawareSPD Electrical Systems, Inc. DelawareTRL Electronics Limited United KingdomTRL Technology Limited United KingdomWescam Inc. CanadaWescam USA, Inc. Florida__________________*Represents a non-wholly owned subsidiary.Exhibit 23CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-212152) and Form S-8 (Nos. 333-183353,333-168467, 333-160359, 333-144135, 333-103752, 333-64389, 333-212151, 333-188450, 333-168466, 333-151964, 333-123424, 333-120393, 333-78317, 333-216192 and 333-221805) of L3 Technologies, Inc. of our report dated February 21, 2019 relating to the financial statements and theeffectiveness of internal control over financial reporting, which appears in this Form 10-K./s/ PricewaterhouseCoopers LLPNew York, New YorkFebruary 21, 2019Exhibit 31.1CERTIFICATIONI, Christopher E. Kubasik, certify that:1.I have reviewed this report on Form 10-K for the year ended December 31, 2018 of L3 Technologies, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting. Date: February 21, 2019/s/ Christopher E. Kubasik Christopher E. Kubasik Chairman, Chief Executive Officer and President Exhibit 31.2CERTIFICATIONI, Ralph G. D’Ambrosio, certify that:1.I have reviewed this report on Form 10-K for the year ended December 31, 2018 of L3 Technologies, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles;c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.Date: February 21, 2019/s/ Ralph G. D’Ambrosio Ralph G. D’Ambrosio Senior Vice President and Chief Financial Officer Exhibit 32CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of L3 Technologies, Inc. (“L3”) on Form 10-K for the year ended December 31, 2018 as filed with the Securitiesand Exchange Commission on the date hereof (the “Report”), Christopher E. Kubasik, Chairman, Chief Executive Officer and President and Ralph G.D’Ambrosio, Senior Vice President and Chief Financial Officer, of L3, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002, that:(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of L3.Date: February 21, 2019/s/ Christopher E. Kubasik /s/ Ralph G. D’AmbrosioChristopher E. Kubasik Ralph G. D’AmbrosioChairman, Chief Executive Officer and President Senior Vice President and Chief Financial Officer

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