Table of Contents

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2018
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-37975
L3 TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
13-3937436
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
600 Third Avenue, New York, NY
10016
(Address of principal executive offices)
(Zip Code)
(212) 697-1111
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes  ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on the corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes  ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer
¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ¨ Yes  x No
There were 78,479,349 shares of the registrant’s common stock with a par value of $0.01 outstanding as of the close of business on April 27, 2018 .
 

Table of Contents

L3 TECHNOLOGIES, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended March 30, 2018

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

Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
L3 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
 
 
(Unaudited)
 
 
 
 
March 30,
2018
 
December 31,
2017
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
374

 
$
662

Billed receivables, net of allowances of $18 in 2018 and 2017
 
798

 
723

Contract assets
 
1,499

 
—

Contracts in process
 
—

 
1,933

Inventories
 
994

 
389

Prepaid expenses and other current assets
 
392

 
300

Assets held for sale
 
136

 
135

Assets of discontinued operations
 
287

 
306

Total current assets
 
4,480


4,448

Property, plant and equipment, net
 
1,131

 
1,110

Goodwill
 
6,632

 
6,615

Identifiable intangible assets
 
284

 
292

Other assets
 
346

 
264

Total assets
 
$
12,873


$
12,729

LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable, trade
 
$
587

 
$
531

Accrued employment costs
 
446

 
493

Accrued expenses
 
197

 
217

Contract liabilities
 
607

 
—

Advance payments and billings in excess of costs incurred
 
—

 
509

Income taxes payable
 
6

 
19

Other current liabilities
 
319

 
367

Liabilities held for sale
 
19

 
17

Liabilities of discontinued operations
 
154

 
226

Total current liabilities
 
2,335


2,379

Pension and postretirement benefits
 
1,313

 
1,313

Deferred income taxes
 
177

 
158

Other liabilities
 
397

 
398

Long-term debt
 
3,331

 
3,330

Total liabilities
 
7,553


7,578

Commitments and contingencies (see Note 19)
 


 


Equity:
 
 
 
 
Shareholders’ equity:
 
 
 
 
Common stock: $.01 par value; 300,000,000 shares authorized, 78,387,750 shares outstanding at March 30, 2018 and 77,876,687 shares outstanding at December 31, 2017
 
6,607

 
6,519

Treasury stock (at cost), 83,943,641 shares at March 30, 2018 and 83,362,412 shares at December 31, 2017
 
(7,523
)
 
(7,404
)
Retained earnings
 
6,814

 
6,659

Accumulated other comprehensive loss
 
(645
)
 
(691
)
Total shareholders’ equity
 
5,253


5,083

Noncontrolling interests
 
67

 
68

Total equity
 
5,320


5,151

Total liabilities and equity
 
$
12,873


$
12,729


See notes to unaudited condensed consolidated financial statements.
1
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L3 TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)

 
First Quarter Ended
 
March 30,
2018
 
March 31,
2017
Net sales:
 
 
 
Products
$
1,646

 
$
1,604

Services
725

 
717

Total net sales
2,371


2,321

Operating costs and expenses:
 
 
 
Cost of sales — Products
(1,191
)
 
(1,188
)
Cost of sales — Services
(532
)
 
(538
)
General and administrative expenses
(397
)
 
(358
)
Operating income
251

 
237

Interest expense
(41
)
 
(42
)
Interest and other income, net
6

 
4

Income from continuing operations before income taxes
216


199

Provision for income taxes
(24
)
 
(42
)
Income from continuing operations
192


157

Income from discontinued operations, net of income taxes
16

 
11

Net income
208


168

Net income from continuing operations attributable to noncontrolling interests
(5
)
 
(4
)
Net income attributable to L3
$
203


$
164

Basic earnings per share attributable to common shareholders:
 
 
 
Continuing operations
$
2.40

 
$
1.97

Discontinued operations
0.20

 
0.14

Basic earnings per share
$
2.60


$
2.11

Diluted earnings per share attributable to common shareholders:
 
 
 
Continuing operations
$
2.34

 
$
1.93

Discontinued operations
0.20

 
0.14

Diluted earnings per share
$
2.54


$
2.07

Cash dividends declared per common share
$
0.80

 
$
0.75

Weighted average common shares outstanding:
 
 
 
Basic
78.2

 
77.7

Diluted
79.9

 
79.3




See notes to unaudited condensed consolidated financial statements.
2
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L3 TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)

 
First Quarter Ended
 
March 30,
2018
 
March 31,
2017
Net income
$
208

 
$
168

Other comprehensive income:
 
 
 
Foreign currency translation adjustments
33

 
19

Unrealized gains on hedging instruments
(1
)
 
—

Pension and postretirement benefit plans:
 
 
 
Amortization of net loss and prior service cost previously recognized (1)
14

 
9

Total other comprehensive income
46

 
28

Comprehensive income
254


196

Comprehensive income attributable to noncontrolling interests
(5
)
 
(4
)
Comprehensive income attributable to L3
$
249


$
192

__________________
(1)  
Net of income taxes of $4 million and $6 million for the quarterly periods ended March 30, 2018 and March 31, 2017 , respectively.


See notes to unaudited condensed consolidated financial statements.
3
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L3 TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(in millions, except per share data)

 
Common Stock
 
Additional Paid-in Capital
 
Treasury Stock
 
Retained   Earnings
 
Accumulated Other Comprehensive Loss
 
Noncontrolling Interests
 
Total Equity
 
Shares   Outstanding
 
Par Value
 
For the Quarter Ended March 30, 2018:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at December 31, 2017 - as reported
77.9

 
$
1

 
$
6,518

 
$
(7,404
)
 
$
6,659

 
$
(691
)
 
$
68

 
$
5,151

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

 
 
 
 
 
13

Net income
 
 
 
 
 
 
 
 
203

 
 
 
5

 
208

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
46

 
 
 
46

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

 
 
 
34

 
 
 
 
 
 
 
 
 
34

Exercise of stock options
0.6

 
 
 
55

 
 
 
 
 
 
 
 
 
55

Employee stock purchase plan
0.1

 
 
 
—

 
 
 
 
 
 
 
 
 
—

Vesting of restricted stock and performance units
0.3

 
 
 
 
 
 
 
 
 
 
 
 
 
—

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

 
 
 
 
 
 
 
 
 
20

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

 
 
 
2

 
 
 
 
 
4

Balance at March 30, 2018
78.4


$
1


$
6,606


$
(7,523
)

$
6,814


$
(645
)

$
67


$
5,320

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Quarter Ended March 31, 2017:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
77.2

 
$
1

 
$
6,284

 
$
(7,224
)
 
$
6,218

 
$
(726
)
 
$
71

 
$
4,624

Net income
 
 
 
 
 
 
 
 
164

 
 
 
4

 
168

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
28

 
 
 
28

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
(4
)
 
(4
)
Cash dividends declared ($0.75 per share)
 
 
 
 
 
 
 
 
(59
)
 
 
 
 
 
(59
)
Shares issued:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee savings plans
0.2

 
 
 
36

 
 
 
 
 
 
 
 
 
36

Exercise of stock options
0.2

 
 
 
13

 
 
 
 
 
 
 
 
 
13

Employee stock purchase plan
0.1

 
 
 
—

 
 
 
 
 
 
 
 
 
—

Vesting of restricted stock and performance units
0.3

 
 
 
 
 
 
 
 
 
 
 
 
 
—

Repurchases of common stock to satisfy tax withholding obligations
(0.1
)
 
 
 
(18
)
 
 
 
 
 
 
 
 
 
(18
)
Stock-based compensation expense
 
 
 
 
14

 
 
 
 
 
 
 
 
 
14

Balance at March 31, 2017
77.9


$
1


$
6,329


$
(7,224
)

$
6,323


$
(698
)

$
71


$
4,802



See notes to unaudited condensed consolidated financial statements.
4
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L3 TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)

 
First Quarter Ended
 
March 30,
2018
 
March 31,
2017
Operating activities:
 
 
 
Net income
$
208

 
$
168

Less: income from discontinued operations, net of tax
(16
)
 
(11
)
Income from continuing operations
192

 
157

Depreciation of property, plant and equipment
43

 
40

Amortization of intangibles and other assets
13

 
12

Deferred income tax provision
16

 
15

Stock-based employee compensation expense
20

 
14

Contributions to employee savings plans in L3's common stock
32

 
34

Amortization of pension and postretirement benefit plans net loss and prior service cost
18

 
15

Other non-cash items
1

 
5

Changes in operating assets and liabilities, excluding amounts from acquisitions and divestitures, and discontinued operations:
 
 
 
Billed receivables
(73
)
 
(48
)
Contract assets
(145
)
 
—

Contracts in process
—

 
(180
)
Inventories
(65
)
 
(9
)
Prepaid expenses and other current assets
(99
)
 
(24
)
Accounts payable, trade
56

 
91

Accrued employment costs
(54
)
 
(68
)
Accrued expenses
(6
)
 
23

Contract liabilities
41

 
—

Advance payments and billing in excess of costs incurred
—

 
(9
)
Income taxes
(11
)
 
12

All other operating activities
(14
)
 
6

Net cash (used in) from operating activities from continuing operations
(35
)
 
86

 
 
 
 
Investing activities:
 
 
 
Business acquisitions, net of cash acquired
—

 
(139
)
Proceeds from the sale of businesses, net of closing date cash balances
—

 
16

Capital expenditures
(56
)
 
(41
)
Dispositions of property, plant and equipment
2

 
1

Other investing activities
(29
)
 
5

Net cash used in investing activities from continuing operations
(83
)
 
(158
)
 
 
 
 
Financing activities:
 
 
 
Borrowings under revolving credit facility
207

 
664

Repayments of borrowings under revolving credit facility
(207
)
 
(664
)
Common stock repurchased
(119
)
 
—

Dividends paid
(65
)
 
(61
)
Proceeds from exercises of stock options
55

 
12

Proceeds from employee stock purchase plan
8

 
8

Repurchases of common stock to satisfy tax withholding obligations
(23
)
 
(18
)
Other financing activities
(2
)
 
(4
)
Net cash used in financing activities from continuing operations
(146
)
 
(63
)
Effect of foreign currency exchange rate changes on cash and cash equivalents
6

 
4

Net cash used in discontinued operations:
 
 
 
Operating activities
(29
)
 
(1
)
Investing activities
(1
)
 
(1
)
Net cash used in discontinued operations
(30
)
 
(2
)
Net decrease cash and cash equivalents
(288
)
 
(133
)
Cash and cash equivalents, beginning of the period
662

 
363

Cash and cash equivalents, end of the period
$
374

 
$
230



See notes to unaudited condensed consolidated financial statements.
5
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L3 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

1 . Description of Business
L3 Technologies, Inc. (L3 Technologies, Inc. and, together with its subsidiaries, referred to herein as L3 or the Company) is a prime contractor in Intelligence, Surveillance and Reconnaissance (ISR) systems, aircraft sustainment (including modifications and fleet management of special mission aircraft), simulation and training, night vision and image intensification equipment and security and detection systems. L3 is also a leading provider of a broad range of communication, electronic and sensor systems used on military, homeland security and commercial platforms. The Company’s customers include the United States (U.S.) Department of Defense (DoD) and its prime contractors, U.S. Government intelligence agencies, the U.S. Department of Homeland Security (DHS), foreign governments, and domestic and foreign commercial customers.
The Company has the following four reportable segments: (1) Electronic Systems, (2) Aerospace Systems, (3) Communication Systems and (4) Sensor Systems.
Electronic Systems provides a broad range of products and services, including components, products, subsystems, systems and related services to military and commercial customers. These products and services serve niche markets, such as, aircraft simulation and training, power and distribution, cockpit avionics, airport security and precision weapons. Electronic Systems sells these products and services primarily to the DoD and select foreign governments. The Electronic Systems business areas are Link Training & Simulation, Power & Propulsion Systems, Commercial Aviation Solutions, Precision Engagement Systems and Security & Detection Systems.
Aerospace Systems provides products and services for the global ISR and Command, Control and Communications (C 3 ) markets, specializing in signals intelligence (SIGINT) and multi-intelligence platforms, including engineering, modernization and sustainment solutions for military and various government aircraft, ground support equipment and other platforms. These strategic and tactical products and services provide warfighters with the ability to detect, collect, identify, analyze and disseminate information from command centers, communication nodes and air defense systems for real-time situational awareness and response. Aerospace Systems sells these products and services primarily to the DoD and select foreign governments. The Aerospace Systems business areas are Mission Integration, MAS, Aerostructures and Advanced Systems.
Communication Systems provides network and communication systems, secure communications products, radio frequency (RF) components, satellite communication terminals and space, microwave and telemetry products. These products include secure data links that are used to connect a variety of space, airborne, ground and sea-based communication systems and are used in transmission, processing, recording, monitoring and dissemination functions of these communication systems. Communication Systems sells these products and services primarily to the DoD and select foreign governments. The Communications Systems business areas are Broadband Communication Systems, Space & Power Systems and Advanced Communications.
Sensor Systems provides a broad range of multi-domain ISR mission solutions from seabed to space for DoD, intelligence community, international, federal, civil and commercial customers. Major capabilities and mission solutions include networked warfighter systems, integrated ISR and targeting systems, space avionics and imaging payloads, Counter Unmanned Aircraft Systems mission solutions, integrated maritime mission solutions, directed energy, cyber and electronic warfare, special mission command & control, lightweight unmanned undersea vehicles, modeling & simulation and life cycle support. Sensor Systems sells these products and services primarily to the DoD and select foreign governments. The Sensor Systems business areas are Space & Sensor Systems, Airborne Sensor Systems, Warrior Sensor Systems, Maritime Sensor Systems, Intelligence & Mission Systems and Advanced Programs.
Financial information with respect to the Company’s segments is included in Note 23 to the unaudited condensed consolidated financial statements and in Note 21 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 .
On October 16, 2017, the Company’s Board of Directors approved a plan to explore strategic alternatives to sell or otherwise divest the Vertex Aerospace business. On May 1, 2018, the Company announced that it entered into a definitive agreement to sell its Vertex Aerospace, Crestview Aerospace and TCS businesses. The Company expects to complete the transaction in the summer of 2018, subject to customary closing conditions and regulatory approvals and record a gain on the sale of these businesses upon closing. The divestiture of the Vertex Aerospace business represents a strategic shift by the Company to exit the logistics


6
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L3 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — CONTINUED


solution and maintenance services business for military aircraft where the Company does not provide complex ISR systems integration and modification. The Vertex Aerospace business generated sales of $1.4 billion for the year ended December 31, 2017. The assets and liabilities and results of operations of the Vertex Aerospace business are reported as discontinued operations for all periods presented.
All references made to financial data in this Quarterly Report on Form 10-Q are to the Company’s continuing operations, unless specifically noted. See Note 5 for additional information.
2 . Basis of Presentation
These unaudited condensed consolidated financial statements for the quarterly period ended March 30, 2018 should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 .
Principles of Consolidation and Reporting
The accompanying financial statements comprise the consolidated financial statements of L3. The consolidated financial statements of the Company include all wholly-owned and majority-owned subsidiaries and variable interest entities (VIEs) if the Company is the primary beneficiary. The Company holds interests in certain VIEs for which it was determined the Company is not the primary beneficiary. All significant intercompany transactions are eliminated in consolidation. Investments in equity securities, joint ventures and limited liability corporations over which the Company has significant influence but does not have control are accounted for using the equity method. Investments over which the Company does not have significant influence are accounted for using the cost method. For the classification of certain current assets and liabilities, the Company uses the duration of the related contract or program as its operating cycle, which may be longer than one year.

Certain reclassifications have been made to conform prior-year amounts to the current-year presentation.
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the disclosures required by U.S. GAAP for a complete set of annual audited financial statements. The December 31, 2017 condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair statement of the results for the interim periods presented have been included. The results of operations for the interim periods are not necessarily indicative of results for the full year.
It is generally the Company’s established practice to close its books for the quarters ending March, June and September on the Friday preceding the end of the calendar quarter. The interim unaudited condensed consolidated financial statements included herein have been prepared and are labeled based on that convention. The Company closes its books for annual periods on December 31 regardless of what day it falls on.
Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and costs of sales during the reporting period. The most significant of these estimates and assumptions for L3 relate to sales, profit and loss recognition related to performance obligations satisfied over time, fair values of assets acquired and liabilities assumed in business combinations and investments, market values for inventories reported at lower of cost or market, pension and postretirement benefit obligations, stock-based employee compensation expense, income taxes, including the valuations of deferred tax assets, litigation reserves, useful lives and valuation of recorded amounts of long-lived assets, identifiable intangible assets and goodwill. Changes in estimates are reflected in the periods during which they become known. Actual amounts may differ from these estimates and could differ materially.
Revenue Recognition
Effective January 1, 2018, the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, as amended (commonly referred to as ASC 606) using the modified retrospective transition method. The cumulative


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


effect of applying the standard was an increase of $13 million to shareholders' equity as of January 1, 2018. The Company’s statement of operations for the quarterly period ended March 30, 2018 and the Company’s balance sheet as of March 30, 2018 are presented under ASC 606, while the Company’s statement of operations for the quarterly period ended March 31, 2017 and the Company’s balance sheet as of December 31, 2017 are presented under ASC 605, Revenue Recognition . See Note 3 for disclosure of the impact of the adoption of ASC 606 on the Company’s statement of operations and balance sheet for the quarterly period ended March 30, 2018 , and the effect of changes made to the Company’s consolidated balance sheet as of January 1, 2018.
A substantial majority of the Company’s consolidated net sales are generated from long-term contracts with customers that require it to design, develop, manufacture, modify, upgrade, test and integrate complex aerospace and electronic equipment and to provide engineering and technical services according to the customers’ specifications. These contracts are primarily with agencies of, and prime system contractors to, the U.S. Government and foreign governments and are generally priced on a fixed-price, cost-plus or time-and-material type basis. 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-year contracts that are incrementally funded by the customer, and sales on these multi-year contracts are based on amounts appropriated (funded) by the U.S. Government. The Company also generates sales to a lesser extent from contracts with commercial and government customers for standard product and service offerings, which are priced on a firm fixed basis. See Note 23 for additional information regarding the composition of the Company’s net sales.
The Company records sales for a contract when it has the approval and commitment of all parties, the contract identifies the rights of the parties and payment terms, the contract has commercial substance and collectibility of the consideration is probable.
To determine the proper revenue recognition method, the Company first evaluates each of its contractual arrangements to identify its performance obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. The majority of the Company’s contracts have a single performance obligation because the promise to transfer the individual good or service is not separately identifiable from other promises within the contract and is, therefore, not distinct. These contractual arrangements either require the use of a highly specialized manufacturing process to provide goods according to customer specifications or represent a bundle of contracted goods and services that are integrated and together represent 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 to the contract covering multiple phases of the product lifecycle (development and engineering, production, maintenance and support). For contracts with more than one performance obligation, the Company allocates the total transaction price in an amount based on the estimated relative standalone selling prices underlying each performance obligation. In cases where a contract requires a customized good or service, the primary method used to estimate standalone selling price is the expected cost plus a margin approach. In cases where the Company sells a standard product or service offering, the standalone selling price is based on an observable standalone selling price.
The majority of the Company's sales are from performance obligations satisfied over time and are primarily with agencies of, and prime system contractors to, the U.S. Government and foreign governments. Sales are recognized over time when control is continuously transferred to the customer during the contract. For U.S. Government contracts, the continuous transfer of control to the customer is supported by contract clauses that provide for (i) progress or performance-based payments or (ii) the unilateral right of the customer to terminate the contract for its convenience, in which case the Company has the right to receive payment for costs incurred plus a reasonable profit for products and services that do not have alternative use to the Company. Foreign government and certain commercial contracts contain similar termination for convenience clauses, or the Company has a legally enforceable right to receive payment for costs incurred and a reasonable profit for products or services that do not have alternative use to the Company. Sales on fixed price and cost-plus type contracts that include performance obligations satisfied over time are generally recorded at amounts equal to the ratio of actual cumulative costs incurred divided by total estimated costs at completion, multiplied by (i) the transaction price, less (ii) the cumulative sales recognized in prior periods (cost-to-cost method).
Accounting for the sales and profits on performance obligations for which progress is measured using the cost-to-cost method involves the preparation of estimates of: (1) transaction price and (2) total costs at completion, which is equal to the sum of the actual incurred costs to date on the contract and the estimated costs to complete the contract's statement of work. Incurred costs include labor, material, overhead and, for the Company's U.S. Government contractor businesses, general and administrative (G&A) expenses. Incurred costs represent work performed, which corresponds with and thereby represents the 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 the total estimated cost at completion. In the case of a contract related to complex aerospace or electronic equipment for which


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


the total estimated costs exceed the 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 on a loss contract that are expected to be incurred in the 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 10 for additional information.
The Company’s contracts give rise to variable consideration, including award and incentive fees, or other provisions that can either increase or decrease the transaction price. Award fees provide for a fee based on actual performance relative to contractually specified performance criteria. Incentive fees provide for a fee based on the relationship between total allowable costs and target costs. Variable consideration may require the Company to exercise significant judgment to determine the total transaction price of the contract. The Company includes variable consideration in the transaction price when there is a basis to reasonably estimate the variable amount it will be entitled to receive and it is probable that a significant reversal in revenue recognized will not be required when the uncertainty is resolved. These estimates are based on historical 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 are for goods or services that are not distinct and, therefore, are accounted for as part of the existing contract. Transaction price estimates include additional consideration for submitted contract modifications or claims when the Company believes it has an enforceable right to the modification or claim, the amount can be reliably estimated and its realization is reasonably assured. Amounts representing modifications accounted for as part of the existing contract are included in the transaction price and recognized as an adjustment 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. Progress payments are billed to the customer as contract costs are incurred at an amount generally equal to 80% of incurred costs. Performance based payments are billed to the customer upon the achievement of predetermined performance milestones at amounts not to exceed 90% of contract price. On contracts with progress or performance-based payments, the customer often retains a small portion of the contract price until satisfactory completion of the contractual statement of work. Since a small portion of the contract price is retained, the Company generally recognizes sales in excess of billings, which are presented as contract assets on the balance sheet. The portion of the contract price retained by the customer is a normal business practice to ensure satisfactory contract completion and, therefore, is not considered a significant financing component. Contract assets also arise from cost-plus type contracts, time-and-material type contracts and fixed-price services type contracts for revenue amounts that have not been billed by the end of the accounting period due to the timing of preparation of invoices to customers. For certain fixed-price contracts with foreign governments and commercial customers, the Company receives advance payments. Advanced payments are not considered a significant financing component because they are a negotiated contract term to ensure the customer meets its financial obligation, particularly when there are significant upfront working capital requirements. The Company records a liability for advance payments received in excess of sales recognized, which is presented as a contract liability on the balance sheet.
Revisions or adjustments to estimates of the transaction price, estimated costs at completion and estimated profit or loss of a performance obligation are often required as work progresses under a contract, as experience is gained, as facts and circumstances change and as new information is obtained, even though the scope of work required under the contract may not change. Revisions or adjustments may also be required if contract modifications occur. The impact of revisions in profit or loss estimates are recognized on a cumulative catch-up basis in the period in which the revisions are made. The revisions in contract estimates, if significant, can materially affect the Company’s results of operations and cash flows, as well as reduce the valuations of contract assets and inventories, and in some cases result in liabilities to complete contracts in a loss position. The aggregate impact of net changes in contract estimates are presented in the table below.
 
First Quarter Ended
 
March 30,
2018
 
March 31,
2017
 
(in millions)
Operating income
$
65

 
$
39

Diluted earnings per share
$
0.63

 
$
0.31

Additionally, net sales recognized from the Company's performance obligations satisfied in prior periods were $71 million for the quarterly period ended March 30, 2018 and relate to revisions in contract estimates.


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NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — CONTINUED


Sales from performance obligations satisfied at a point in time are typically for standard goods and are recognized when the customer obtains control, which is generally upon delivery and acceptance. The Company also records sales for performance obligations relating to standard services (i.e., maintenance and extended warranties covering standard goods sold by the Company) over time by using output measures of time elapsed to measure progress toward satisfying the performance obligation.
Sales on time-and-material type contracts are generally recognized each period based on the amount billable to the customer, which is based on direct labor hours expended multiplied by the contractual fixed rate per hour, plus the actual costs of materials and other direct non-labor costs.
The following table presents a summary of the Company’s net sales by revenue recognition method as a percentage of total net sales for the quarterly period ended March 30, 2018 .
 
% of Total Net Sales
Cost to cost method
76
%
Point in time
18
%
Output method
3
%
Billing method
3
%
Total
100
%
Remaining Performance Obligations
On March 30, 2018 , the Company had $10.3 billion of remaining performance obligations, which represents the transaction price of firm orders less inception to date sales recognized. Remaining performance obligations exclude unexercised contract options and potential orders under basic ordering agreements or master-type contracts (i.e., indefinite-delivery, indefinite-quantity (IDIQ)). The Company expects to recognize sales relating to existing performance obligations of approximately $6.1 billion during the remainder of 2018, $2.8 billion in 2019, $0.8 billion in 2020 and $0.6 billion in the periods thereafter.
General and Administrative Expenses
The Company’s U.S. Government contractor businesses account for the portion of their G&A, independent research and development (IRAD) and bids and proposal (B&P) costs that are allowable and reimbursable indirect contract costs under U.S. Government procurement regulations on their U.S. Government contracts as inventory. G&A, IRAD and B&P costs are allocated to contracts for which the U.S. Government is the end customer and are charged to costs of sales when sales on the related contracts are recognized. The Company’s U.S. Government contractor businesses record the unallowable portion of their G&A, IRAD and B&P costs to expense as incurred, and does not include them in inventory. G&A expenses for the Company's commercial businesses are expensed as incurred.
Investments in and Loans to Nonconsolidated Affiliates
The Company’s investments in nonconsolidated affiliates are primarily accounted for using the equity method of accounting and are carried at cost, plus or minus the Company’s share of net earnings or losses of the investment, subject to certain other adjustments. The cost of equity method investments includes transaction costs of the acquisition. As required by U.S. GAAP, to the extent that there is a basis difference between the cost and the underlying equity in the net assets of an equity investment, the Company allocates such differences between tangible and intangible assets. The Company’s share of net earnings or losses of the investment, inclusive of amortization expense for any basis difference associated with the investment, are presented in interest and other income, net, on the Company’s consolidated statements of operations. Dividends received from the investee reduce the carrying amount of the investment. Due to the timing of receiving financial information from its nonconsolidated affiliates, the Company may record its share of net earnings or losses of such affiliates on a three -month lag basis, with the exception of the amortization expense of any basis difference related to tangible and intangible assets which are recorded currently.
3 . New Accounting Standards Implemented
Effective January 1, 2018, the Company adopted Financial Accounting Standards Board (FASB) ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost . Defined benefit pension and postretirement benefit cost (net benefit cost) comprise several components that reflect different aspects of the Company’s financial


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arrangements as well as the cost of benefits provided to employees. Under previous U.S. GAAP, those components were aggregated 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 compensation costs arising from services rendered by the employees during the period. The other components of net benefit cost are required to be presented separately from the service cost component and below income from operations. Plan administrative expenses, which were previously included in service cost, are presented together with expected return on plan assets, as a component of Interest and other income, net. The amendments in this update also allow only the service cost component to be eligible for capitalization when applicable. The amendments in this update have been applied retrospectively for the presentation of the components of net benefit cost and prospectively for the capitalization of the service cost component of net benefit cost. The adoption of this standard decreased operating income and increased interest and other income, net, each by $2 million for the quarterly period ended March 30, 2018 and increased operating income and decreased interest and other income, net, each by $1 million for the quarterly period ended March 31, 2017. The adoption of this standard did not impact pre-tax income for the quarterly periods ended March 30, 2018 and March 31, 2017.
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business , which provides additional guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update provide new guidance to determine when an integrated set of assets and activities (collectively referred to as a ‘‘set’’) is not a business. The new guidance requires that, when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The new guidance reduces the number of transactions that need to be evaluated as a business. The Company adopted 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 the quarterly period ended March 30, 2018.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , as amended (commonly referred to as ASC 606), which replaces numerous requirements in U.S. GAAP, including industry-specific requirements, and provides companies with a single revenue recognition model for recognizing revenue from contracts with customers and significantly expanded the disclosure requirements for revenue arrangements. The new standard, as amended, was effective for the Company for interim and annual reporting periods beginning on January 1, 2018.
As discussed in Note 2 , the Company adopted ASC 606 using the modified retrospective transition method. Results for reporting periods beginning after December 31, 2017 are presented under ASC 606, while prior period comparative information has not been restated and continues to be reported in accordance with ASC 605, Revenue Recognition, the accounting standard in effect for periods ending prior to January 1, 2018. With the adoption of ASC 606, the Company recognizes sales over time by using the cost-to-cost method on most of its (i) contracts that were covered by the contract accounting standards under ASC 605 and (ii) fixed-price type contracts that require it to perform services that are not related to the production of tangible assets. Accordingly, the adoption of ASC 606 primarily impacted certain (i) contracts previously covered by contract accounting standards that recognized revenue using the units-of-delivery method and (ii) fixed-price type contracts for services that are not related to the production of tangible assets that recognized revenue on a straight-line basis over the contractual service period.
    
Based on contracts in process at December 31, 2017, the Company recorded, upon adoption of ASC 606, a net increase to retained earnings of $13 million , which includes the acceleration of net sales of approximately $380 million and the related cost of sales. The adjustment to retained earnings primarily relates to contracts previously accounted for under the units-of-delivery method, which is recognized under ASC 606 earlier in the performance period as costs are incurred, as opposed to when the units are delivered under ASC 605. In accordance with the modified retrospective transition provisions of ASC 606, the Company will not recognize any of the accelerated net sales and related 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 of contracts in process as reported under ASC 605, which included unbilled contract receivables and inventoried contract costs, have been reclassified as contract assets and inventories, respectively, after certain adjustments described below under ASC 606. The adoption of ASC 606 resulted in an increase in unbilled contract receivables (referred to as contract assets under ASC 606) primarily from 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 inventories 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


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FINANCIAL STATEMENTS — CONTINUED


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 that the capitalized costs relate to. The Company previously accounted for costs to fulfill a contract either as inventoried contract costs or expensed them as incurred. Costs to obtain a contract were generally expensed as incurred. Advance payments and billings in excess of costs and deferred revenue, previously classified in other current liabilities, have been combined and are presented as contract liabilities.
The table below presents the cumulative effect of the changes made to the consolidated January 1, 2018 balance sheet due to the adoption of ASC 606.
BALANCE SHEET
December 31, 2017 As Reported Under ASC 605
 
Adjustments Due to ASC 606
 
January 1, 2018 As Adjusted Under ASC 606
 
 
 
(in millions)
 
 
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Contract assets
$
—

 
$
1,349

 
$
1,349

Contracts in process
1,933

 
(1,933
)
 
—

Inventories
389

 
537

 
926

Prepaid expenses and other current assets
300

 
17

 
317

Assets held for sale
135

 
3

 
138

Assets of discontinued operations
306

 
(21
)
 
285

Total current assets
4,448

 
(48
)
 
4,400

Other assets
264

 
49

 
313

Total assets
$
12,729

 
$
1

 
$
12,730

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accrued expenses
$
217

 
$
(13
)
 
$
204

Contract liabilities
—

 
565

 
565

Advance payments and billing in excess of costs incurred
509

 
(509
)
 
—

Other current liabilities
367

 
(49
)
 
318

Liabilities held for sale
17

 
(1
)
 
16

Liabilities of discontinued operations
226

 
(23
)
 
203

Total current liabilities
2,379

 
(30
)
 
2,349

Deferred income taxes
158

 
4

 
162

Other liabilities
398

 
14

 
412

Total liabilities
7,578

 
(12
)
 
7,566

Shareholders' Equity
 
 
 
 
 
Retained earnings
6,659

 
13

 
6,672

Total equity
$
5,151

 
$
13

 
$
5,164



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NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — CONTINUED


The table below presents the impact of the adoption of ASC 606 on the Company's statement of operations.
 
First Quarter Ended March 30, 2018
STATEMENT OF OPERATIONS
Under
ASC 605
 
Effect of
ASC 606
 
As Reported Under ASC 606
 
 
 
(in millions)
 
 
Net Sales:
 
 
 
 
 
Products
$
1,574

 
$
72

 
$
1,646

Services
721

 
4

 
725

Total
2,295

 
76

 
2,371

 
 
 
 
 
 
Operating costs and expenses:
 
 
 
 
 
Cost of sales — Products
$
(1,145
)
 
$
(46
)
 
$
(1,191
)
Cost of sales — Services
(528
)
 
(4
)
 
(532
)
 General and administrative expenses
(390
)
 
(7
)
 
(397
)
Operating income
$
232

 
$
19

 
$
251

Income from continuing operations before income taxes
197

 
19

 
216

Provision for income taxes
(19
)
 
(5
)
 
(24
)
Income from continuing operations
178

 
14

 
192

Income from discontinued operations, net of income taxes
15

 
1

 
16

Net income
193

 
15

 
208

Net income attributable to L3
$
188

 
$
15

 
$
203

 
 
 
 
 
 
Basic earnings per share attributable to common shareholders:
 
 
 
 
 
Continuing operations
$
2.21

 
$
0.19

 
$
2.40

Discontinued operations
0.19

 
0.01

 
0.20

Basic earnings per share
$
2.40

 
$
0.20

 
$
2.60

Diluted earnings per share attributable to common shareholders:
 
 
 
 
 
Continuing operations
$
2.16

 
$
0.18

 
$
2.34

Discontinued operations
0.19

 
0.01

 
0.20

Diluted earnings per share
$
2.35

 
$
0.19

 
$
2.54

The following table quantifies the impact of adopting ASC 606 on segment net sales and operating income for the quarterly period ended March 30, 2018 .
 
Effect of ASC 606
 
Sales
 
Operating Income
 
(in millions)
Electronic Systems
$
30

 
$
3

Aerospace Systems
4

 
1

Communication Systems
20

 
4

Sensor Systems
22

 
11

Consolidated
$
76

 
$
19



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NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — CONTINUED


The table below presents the impact of the adoption of ASC 606 on the Company's balance sheet.
 
March 30, 2018
BALANCE SHEET
Under
ASC 605
 
Effect of
ASC 606
 
As Reported Under ASC 606
 
 
 
(in millions)
 
 
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Contract assets
$
—

 
$
1,499

 
$
1,499

Contracts in process
2,124

 
(2,124
)
 
—

Inventories
424

 
570

 
994

Prepaid expenses and other current assets
377

 
15

 
392

Assets of discontinued operations
312

 
(25
)
 
287

Total current assets
4,545

 
(65
)
 
4,480

Other assets
296

 
50

 
346

Total assets
$
12,888

 
$
(15
)
 
$
12,873

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accrued expenses
$
218

 
$
(21
)
 
$
197

Contract liabilities
—

 
607

 
607

Advance payments and billings in excess of costs incurred
576

 
(576
)
 
—

Other current liabilities
367

 
(48
)
 
319

Liabilities held for sale
20

 
(1
)
 
19

Liabilities of discontinued operations
181

 
(27
)
 
154

Total current liabilities
2,401

 
(66
)
 
2,335

Deferred income taxes
169

 
8

 
177

Other liabilities
382

 
15

 
397

Total liabilities
7,596

 
(43
)
 
7,553

Shareholders' Equity
 
 
 
 
 
Retained earnings
6,786

 
28

 
6,814

Total equity
$
5,292

 
$
28

 
$
5,320

4 . Accounting Standards Issued and Not Yet Implemented
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income . The amendments in this update allow a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act (U.S. Tax Reform). The new standard is effective for the Company beginning on January 1, 2019, with early adoption permitted. The Company will adopt ASU 2018-02 effective January 1, 2019. The Company does not expect the adoption of this standard will have a material effect on its financial position, results of operations or cash flows.
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities . The amendments in this update intend to better align the Company risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedge relationships and the presentation of hedge results. The amendments in this update require the Company to present the earnings effect of the hedging instrument in the same income statement line in which the earnings effect of the hedged item is reported. Current U.S. GAAP provides for hedge accounting only for the portion of the hedge deemed to be highly effective and requires the Company to separately reflect the amount by which the hedging instrument does not offset the hedged item, which is referred to as the ineffective amount. The amendments in this update no longer require the Company to separately measure and report hedge ineffectiveness. The new standard is effective for the Company for interim and annual reporting periods beginning on January 1, 2019, with early adoption permitted. For cash flow hedges existing at the date of adoption, the Company is required to apply a cumulative effect


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adjustment relating to the separate measurement of ineffectiveness to the opening balance of retained earnings. The amended presentation and disclosure guidance is required only prospectively. The Company will adopt ASU 2017-12 effective January 1, 2019. The Company does not expect the adoption of this standard to have a material effect on its financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases , which updates the existing guidance on accounting for leases and requires new qualitative and quantitative disclosures about the Company’s leasing activities. The new standard requires the Company to recognize lease assets and lease liabilities on the balance sheet for all leases under which the Company is the lessee, including those classified as operating leases under previous accounting guidance. The Company will measure leases commencing after the adoption date based on the present value of the lease payments due over the lease term (as defined in ASU 2016-02), after applying the separation and allocation guidance of the new standard. The new standard allows the Company to make an accounting policy election not to recognize on the balance sheet lease assets and liabilities for leases with a term of 12 months or less. The accounting applied by a lessor is largely unchanged from previous guidance. The new standard, as amended, will be effective for the Company for interim and annual reporting periods beginning on January 1, 2019, with early adoption permitted. In the adoption year, the Company will be required to (i) measure and recognize its existing leases based on the present value of the remaining minimum lease payments, as defined in existing guidance on accounting for leases, and (ii) restate each prior reporting period presented. The Company is currently evaluating the expected impact of the adoption of this standard on its consolidated financial statements and disclosures related to leasing activities. The Company plans to adopt ASU 2016-02 effective January 1, 2019. See Note 18 to the audited consolidated financial statements for the year ended December 31, 2017 , included in the Company’s Annual Report on Form 10-K for additional information about the Company’s leases, including the future minimum lease payments of the Company's operating leases at December 31, 2017 .
Other accounting standard updates effective for interim and annual periods beginning after December 31, 2018 are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
5 . Acquisitions, Divestitures and Discontinued Operations
Business Acquisitions
The Company continually evaluates potential acquisitions that either strategically fit within the Company’s existing portfolio or expand the Company’s portfolio into new product lines or adjacent markets. The Company has completed a number of acquisitions that have been accounted for as business combinations and have resulted in the recognition of goodwill in the Company’s financial statements. This goodwill includes the know-how of the assembled workforce, the ability of the workforce to further improve technology and product offerings, and the expected cash flows resulting from these efforts. Goodwill may also include expected synergies resulting from the complementary strategic fit these businesses bring to existing operations. The business acquisitions discussed below are included in the Company’s results of operations from their respective dates of acquisition.
The final purchase price for the 2017 acquisitions of Kigre, Inc. (Kigre), Escola De Aviacao Aerocondor, S.A. (G-Air) and Adaptive Methods, Inc. (Adaptive Methods) have been finalized as of the first quarter of 2018. The final purchase price for Doss Aviation, Inc. (Doss Aviation) is subject to customary adjustments for final working capital. The final purchase price allocations, which are expected to be completed in the second quarter of 2018 , will be based on final appraisals and other analysis of fair values of acquired assets and liabilities. The Company does not expect that differences between the preliminary and final purchase price allocations will have a material impact on its results of operations or financial position.
See Note 3 to the audited consolidated financial statements for the year ended December 31, 2017 , included in the Company’s Annual Report on Form 10-K for additional information about the Company’s 2017 business acquisitions.


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FINANCIAL STATEMENTS — CONTINUED


Unaudited Pro Forma Statements of Operations Data
The following unaudited pro forma Statement of Operations data presents the combined results of the Company and its business acquisitions completed during the year ended December 31, 2017 , assuming that the business acquisitions completed during 2017 had occurred on January 1, 2016 . The unaudited pro forma Statement of Operations data below includes adjustments for additional amortization expense related to acquired intangible assets and depreciation assuming the 2017 acquisitions had occurred on January 1, 2016 .
 
First Quarter Ended
 
March 31, 2017
 
(in millions, except per share data)
Pro forma net sales
$
2,345

Pro forma income from continuing operations attributable to L3
$
153

Pro forma net income attributable to L3
$
164

Pro forma diluted earnings per share from continuing operations
$
1.93

Pro forma diluted earnings per share
$
2.07

The unaudited pro forma results disclosed in the table above are based on various assumptions and are not necessarily indicative of the results of operations that would have occurred had the Company completed these acquisitions on the dates indicated above.
Investments in Nonconsolidated Affiliates
Peak Nano Optics, LLC (Peak Nano). On February 6, 2018, the Company acquired a 25% interest in Peak Nano Optics, LLC, for a purchase price of $20 million . Peak Nano, a nanotechnology company, which allows for the design and manufacturing of polymer lenses for military, sporting and commercial optics applications using its nanolayer gradient refractive index (GRIN) technology. The purchase price is subject to a contingent payment of $30 million based upon Peak Nano meeting certain development milestones on or before August 5, 2018. The Company determined Peak Nano is a VIE as it did not have sufficient equity at risk to finance its activities. The Company, however, is not the primary beneficiary because it does not have the power to direct the activities that are most significant to the economic performance of Peak Nano. Accordingly, Peak Nano is accounted for under the equity method of accounting.
As of the acquisition date, the carrying amount of the investment was greater than the Company's equity in the underlying assets of Peak Nano due primarily to the difference in the carrying amount of the indefinite-lived amortizable intangible assets including goodwill and IPR&D. The basis difference attributable to goodwill and IPR&D is $11 million and $13 million , respectively.
Business Divestitures
2018 Divestitures
On May 1, 2018, the Company announced that it entered into a definitive agreement to sell its Vertex Aerospace, Crestview Aerospace and TCS businesses. The Company expects to complete the transaction in the summer of 2018, subject to customary closing conditions and regulatory approvals and record a gain on the sale of these businesses upon closing.


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FINANCIAL STATEMENTS — CONTINUED


2017 Divestitures
During the quarterly period ended March 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 proceeds received and net sales included in continuing operations from these divestitures.
 
First Quarter Ended March 31, 2017
 
Pre-Tax (Loss) gain
 
Proceeds Received
 
Net Sales
 
(in millions)
Aviation Jet Services divestiture
$
(5
)
 
$
1

 
$
1

Coleman divestiture
(3
)
 
17

 
9

Display Product Line divestiture
4

 
7

 
—

Total
$
(4
)
 
$
25

 
$
10

Aviation Jet Services Divestiture.  On March 1, 2017, the Company divested its Aviation Jet Services business for a sales price of £1 million (approximately $1 million ). Aviation Jet Services provided non-core aircraft management and operational services as part of commercial training solutions based in the United Kingdom and was included in the Electronic Systems segment.
Coleman Divestiture.  On February 24, 2017, the Company divested its Coleman business for a sales price of $15 million . Coleman provided air-launch ballistic missile targets and was included in the Electronic Systems segment.
Display Product Line Divestiture.  On February 23, 2017, the Company divested its Display Product Line for a sales price of $7 million . The Display Product Line provided cockpits to various military aircraft and was included in the Electronic Systems segment.
Net sales and income before income taxes for Aviation Jet Services, Coleman and the Display Product Line, included in L3’s consolidated statements of operations, are presented in the table below on an aggregate basis and are included in income from continuing operations for all periods presented.
 
First Quarter Ended
 
March 31, 2017
 
(in millions)
Net sales
$
10

Income before income taxes
$
2

Discontinued Operations
Vertex Aerospace. As discussed in Note 1 , on October 16, 2017, the Company’s Board of Directors approved a plan to explore strategic alternatives to sell or otherwise divest the Vertex Aerospace business. The assets and liabilities and results of operations of the Vertex Aerospace business are reported as discontinued operations for all periods presented.


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The table below presents the statements of operations data for Vertex Aerospace. The amounts presented in discontinued operations include allocated interest expenses for debt not directly attributable or related to L3’s other operations. Interest expense was allocated in accordance with the accounting standards for discontinued operations and were based on the ratio of Vertex Aerospace’s net assets to the sum of: (1) L3 consolidated total net assets and (2) L3 consolidated total debt.
 
First Quarter Ended
 
March 30,
2018
 
March 31,
2017
 
(in millions)
Net sales
$
371

 
$
352

Operating costs and expenses
(349
)
 
(335
)
Operating income from discontinued operations
22

 
17

Interest expense allocated to discontinued operations
(1
)
 
—

Income from discontinued operations before income taxes
21

 
17

Income tax expense
(5
)
 
(6
)
Income from discontinued operations, net of income taxes
$
16

 
$
11

The major classes of assets and liabilities included in discontinued operations related to Vertex Aerospace are presented in the table below. These balances have been classified as current as the sale is expected to be completed within one year and the proceeds are not expected to be used to pay down long-term debt.
 
March 30,
2018
 
December 31,
2017
 
(in millions)
Assets
 
 
 
Current assets
$
265

 
$
284

Property, plant and equipment, net
14

 
13

Other intangible assets
7

 
7

Other assets
1

 
2

Total assets of discontinued operations
$
287

 
$
306

 
 
 
 
Liabilities
 
 
 
Accounts payable, trade
$
50

 
$
63

Other current liabilities
70

 
131

Current liabilities
120

 
194

Long-term liabilities
34

 
32

Total liabilities of discontinued operations
$
154

 
$
226



18
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L3 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — CONTINUED


Assets Held for Sale
Aerostructures . The Aerostructures business is classified as held for sale. Aerostructures, which is within the Company’s Aerospace Segment, primarily provides aircraft fabrication and assembly of fixed and rotary wing aero structures as well as avionics hardware and software systems to address mission critical needs. The major classes of assets and liabilities included as held for sale related to Aerostructures are presented in the table below.
 
March 30,
2018
 
December 31,
2017
 
(in millions)
Assets
 
 
 
Billed receivables
$
13

 
$
14

Contract assets
33

 
—

Contracts in process
—

 
33

Prepaid expenses and other current assets
4

 
—

Total current assets
50

 
47

Property, plant and equipment, net
32

 
34

Goodwill
52

 
52

Identifiable intangible assets
2

 
2

Total assets classified as held for sale
$
136

 
$
135

 
 
 
 
Liabilities
 
 
 
Accounts payable, trade
$
7

 
$
3

Accrued employment costs
1

 
2

Accrued expenses
2

 
3

Other current liabilities
5

 
5

Total current liabilities
15

 
13

Deferred income taxes
4

 
4

Total liabilities classified as held for sale
$
19

 
$
17

6 . Contract Assets and Contract Liabilities
Contract assets represent accumulated incurred costs and earned profits on contracts with customers that have been recorded as sales but have not been billed to customers and are classified as current. Contract liabilities consist of advance payments and billings in excess of costs incurred and deferred revenue, and represent amounts received in excess of sales recognized on contracts. The Company classifies advance payments and billings in excess of costs incurred as current, and deferred revenue as current or non-current based on the expected timing of sales recognition. Contract assets and contract liabilities are determined on a contract by contract basis at the end of each reporting period. The non-current portion of contract liabilities is included in other liabilities in the Company's consolidated balance sheets (see Note 10 ).
The table below presents the components of net contract assets (liabilities).
 
March 30,
2018
 
January 1,
2018
 
(in millions)
Contract assets
$
1,499

 
$
1,349

Contract liabilities — current
(607
)
 
(565
)
Contract liabilities — non-current
(30
)
 
(28
)
Net contract assets (liabilities)
$
862

 
$
756

Net contract assets (liabilities) increased from January 1, 2018 to March 30, 2018 , primarily due to sales exceeding billings due to contractual billing terms on U.S. Government contracts related to Advanced Communications, Mission Integration, Link Training & Simulation and Space & Power Systems, partially offset by a decrease for Security & Detection Systems primarily


19
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L3 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — CONTINUED


due to higher billings related to product shipments. Contract assets increased by $150 million primarily due to the same factors as discussed above, in addition to sales exceeding billings due to contractual billings terms on U.S. Government contracts related to Mission Integration. Contract liabilities increased by $44 million primarily due to advances received by Mission Integration for aircraft procurements related to U.S. and foreign government contracts during the quarterly period ended March 30, 2018 .
The Company did not recognize any impairment losses on contract assets during the quarterly period ended March 30, 2018 .
For the quarterly period ended March 30, 2018 , the Company recognized sales of $243 million related to its contract liabilities at January 1, 2018.
The components of contract assets are presented in the table below.
 
March 30,
2018
 
January 1,
2018
 
(in millions)
Unbilled contract receivables, gross
$
2,481

 
$
2,232

Unliquidated progress payments and advances
(982
)
 
(883
)
Total contract assets
$
1,499

 
$
1,349

7 . Contracts in Process
The components of contracts in process are presented in the table below.
 
December 31,
2017
 
(in millions)
Unbilled contract receivables, gross
$
1,874

Unliquidated progress payments
(761
)
Unbilled contract receivables, net
1,113

Inventoried contract costs, gross
891

Unliquidated progress payments
(71
)
Inventoried contract costs, net
820

Total contracts in process
$
1,933

The table below presents a summary of G&A, IRAD and B&P costs included in inventoried contract costs and the changes to them, including amounts charged to operating costs and expenses by the Company’s U.S. Government contractor businesses for the quarter ended March 31, 2017 .
 
First Quarter Ended
 
March 31, 2017
 
(in millions)
Amounts included in inventoried contract costs at beginning of the period
$
173

Contract costs incurred:
 
IRAD and B&P
76

Other G&A
200

Total
276

Amounts charged to operating costs and expenses
(272
)
Amounts included in inventoried contract costs at end of the period
$
177



20
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L3 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — CONTINUED


8 . Inventories
Inventories at Lower of Cost or Realizable Value.  The table below presents the components of inventories at the lower of cost (first-in, first-out or average cost) or realizable value. The Company's inventories at December 31, 2017 were comprised primarily of amounts related to standard products. In addition, the Company classified inventories related to contracts for complex aerospace and electronic equipment and engineering and technical services according to the customers' specifications as inventoried contract costs, which was a component of contracts in process on the consolidated balance sheet at December 31, 2017. See Note 7 for additional information. In accordance with ASC 606, all inventories that customers do not currently control are classified within inventories on the Company's consolidated balance sheet at March 30, 2018 , without regard to whether the goods promised to the customer are standard or customized.
 
March 30,
2018
 
December 31,
2017
 
(in millions)
Raw materials, components and sub-assemblies
$
349

 
$
184

Work in process
457

 
98

Finished goods
188

 
107

Total
$
994


$
389

Inventories at March 30, 2018 included G&A costs of $62 million . G&A costs incurred and recorded in inventories totaled $310 million during the quarter ended March 30, 2018 , and G&A costs charged to cost of sales from inventories totaled $302 million during the quarter ended March 30, 2018 . See Note 7 for information on G&A costs included in contracts in process for the quarter ended March 31, 2017 .
9 . Goodwill and Identifiable Intangible Assets
Goodwill.  In accordance with the accounting standards for business combinations, the Company records the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition (commonly referred to as the purchase price allocation). The table below presents the changes in goodwill allocated to the Company’s reporting units in each reportable segment.
 
Electronic Systems
 
Aerospace Systems
 
Communication Systems
 
Sensor Systems
 
Consolidated Total
 
(in millions)
Goodwill
$
2,856

 
$
1,146

 
$
1,058

 
$
1,659

 
$
6,719

Accumulated impairment losses
(43
)
 
—

 
(35
)
 
(26
)
 
(104
)
December 31, 2017
2,813


1,146


1,023


1,633


6,615

Foreign currency translation adjustments
14

 
(2
)
 
—

 
5

 
17

March 30, 2018
2,827


1,144


1,023


1,638


6,632

Goodwill
2,870

 
1,144

 
1,058

 
1,664

 
6,736

Accumulated impairment losses
(43
)
 
—

 
(35
)
 
(26
)
 
(104
)
 
$
2,827


$
1,144


$
1,023


$
1,638


$
6,632

Identifiable Intangible Assets.  The most significant identifiable intangible asset that is separately recognized for the Company’s business acquisitions is customer contractual relationships. All of the Company’s customer relationships are established through written customer contracts (revenue arrangements). The fair value for customer contractual relationships is determined, as of the date of acquisition, based on estimates and judgments regarding expectations for the estimated future after-tax earnings and cash flows (including cash flows for working capital) arising from the follow-on sales on contract (revenue arrangement) renewals expected from the customer contractual relationships over their estimated lives, including the probability of expected future contract renewals and sales, less a contributory assets charge, all of which is discounted to present value. The Company’s indefinite-lived intangible assets include IPR&D.


21
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L3 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — CONTINUED


The table below presents information for the Company’s identifiable intangible assets that are subject to amortization and indefinite-lived intangible assets.
 
 
 
March 30, 2018
 
December 31, 2017
 
Weighted Average   Amortization Period
 
Gross   Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
(in years)
 
(in millions)
Customer contractual relationships
14
 
$
393

 
$
263

 
$
130

 
$
393

 
$
257

 
$
136

Technology
10
 
189

 
116

 
73

 
189

 
114

 
75

Other
15
 
29

 
14

 
15

 
29

 
14

 
15

Total subject to amortization

 
611


393


218


611


385


226

IPR&D
indefinite
 
66

 
—

 
66

 
66

 
—

 
66

Total
 
 
$
677


$
393


$
284


$
677


$
385


$
292

The table below presents amortization expense recorded by the Company for its identifiable intangible assets.
 
First Quarter Ended
 
March 30,
2018
 
March 31,
2017
 
(in millions)
Amortization expense
$
11

 
$
10

Based on gross carrying amounts at March 30, 2018 , the Company’s estimate of amortization expense for identifiable intangible assets for the years ending December 31, 2018 through 2022 is presented in the table below.
 
Year Ending December 31,
 
2018
 
2019
 
2020
 
2021
 
2022
 
(in millions)
Estimated amortization expense
$
44

 
$
39

 
$
31

 
$
25

 
$
21

10 . Other Current Liabilities and Other Liabilities
The table below presents the components of other current liabilities.
 
March 30,
2018
 
December 31,
2017
 
(in millions)
Other Current Liabilities:
 

 
 

Accrued product warranty costs
$
75

 
$
69

Estimated costs in excess of estimated contract value to complete contracts in process in a loss position
49

 
63

Accrued interest
46

 
43

Estimated contingent purchase price payable for acquired businesses and other investments (see Note 16)
15

 
11

Deferred revenues
—

 
38

Other
134

 
143

Total other current liabilities
$
319


$
367



22
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L3 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — CONTINUED


The table below presents the components of other liabilities.
 
March 30,
2018
 
December 31,
2017
 
(in millions)
Other Liabilities:
 

 
 

Non-current income taxes payable (see Note 12)
$
159

 
$
164

Deferred compensation
53

 
49

Contract liabilities (see Note 6)
30

 
—

Accrued product warranty costs
25

 
30

Accrued workers’ compensation
24

 
23

Estimated contingent purchase price payable for acquired businesses (see Note 16)
19

 
20

Notes payable and capital lease obligations
18

 
16

Deferred revenues
—

 
19

Other
69

 
77

Total other liabilities
$
397


$
398

The table below presents the changes in the Company’s accrued product warranty costs.
 
First Quarter Ended
 
March 30,
2018
 
March 31,
2017
 
(in millions)
Accrued product warranty costs:
 

 
 

Balance at January 1
$
99

 
$
109

Acquisitions during the period
—

 
3

Accruals for product warranties issued during the period
14

 
16

Changes to accruals for product warranties existing before January 1
1

 
—

Settlements made during the period
(14
)
 
(12
)
Balance at end of period
$
100

 
$
116

11 . Debt
The components of debt and a reconciliation to the carrying amount of long-term debt is presented in the table below.
 
March 30,
2018
 
December 31,
2017
 
(in millions)
Borrowings under Revolving Credit Facility (1)
$
—

 
$
—

5.20% Senior Notes due 2019
1,000

 
1,000

4.75% Senior Notes due 2020
800

 
800

4.95% Senior Notes due 2021
650

 
650

3.95% Senior Notes due 2024
350

 
350

3.85% Senior Notes due 2026
550

 
550

Principal amount of long-term debt
3,350


3,350

Unamortized discounts
(6
)
 
(7
)
Deferred debt issue costs
(13
)
 
(13
)
Carrying amount of long-term debt
$
3,331

 
$
3,330

__________________
(1)  
During the quarterly period ended March 30, 2018 , L3’s aggregate borrowings and repayments under the Credit Facility were $207 million . At March 30, 2018 , L3 had the full availability of its $1 billion Credit Facility.


23
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L3 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — CONTINUED


12 . Income Taxes
The Company and its subsidiaries file income tax returns in the U.S. Federal jurisdiction, which is the Company’s primary tax jurisdiction, and various state and foreign jurisdictions. At March 30, 2018 , the statutes of limitations for the Company’s U.S. Federal income tax returns for the years ended December 31, 2012 through 2016 were open. The U.S. Internal Revenue Service (IRS) is auditing the Company’s U.S. Federal income tax returns for the years ended 2012 and 2013. The Company cannot predict the outcome of the audits at this time.
The U.S. Government enacted the U.S. Tax Reform on December 22, 2017, which made significant changes to the U.S. tax system. Significant changes under U.S. Tax Reform included, among other things, the reduction of the U.S. corporate income tax rate from 35% to 21%, the implementation of a modified territorial tax system, and the imposition of a one-time repatriation tax on deemed repatriated earnings and profits of U.S. owned foreign subsidiaries (Toll Charge). As a result, the Company recorded an estimated tax benefit (Preliminary Net Tax Benefit) from U.S. Tax Reform in its consolidated financial statements for the year ended December 31, 2017. The Company did not record any change to the Preliminary Net Tax Benefit on the unaudited condensed consolidated financial statements for the quarterly period ended March 30, 2018 . The Preliminary Net Tax Benefit ultimately recorded may differ in the future due principally to changes to the interpretations of U.S. Tax Reform, legislative action to clarify the interpretation of U.S. Tax Reform and changes to estimates the Company has utilized to calculate the tax benefit. The Company expects to finalize the tax benefit from U.S. Tax Reform with the filing of its tax return and at that time will record the difference between the final benefit and the Preliminary Net Tax Benefit previously recorded, if any, in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act . Additionally, the Company is still evaluating the Global Intangible Low-Taxed Income (GILTI) provisions enacted under U.S. Tax Reform, and the associated election to record its effects as a period cost or as a component of deferred taxes.
The effective income tax rate for the quarterly period ended March 30, 2018 decreased to 11.1% from 21.1% for the quarterly period ended March 31, 2017 . The decrease was primarily driven by an increase in tax benefits from equity compensation and the reduction of the U.S. corporate income tax rate enacted under U.S. Tax Reform.
At March 30, 2018 , the Company anticipates that unrecognized tax benefits will decrease by approximately $6 million over the next 12 months due to the potential resolution of unrecognized tax benefits involving several jurisdictions and tax periods. The actual amount of the decrease over the next 12 months could vary significantly depending on the ultimate timing and nature of any settlements.
Current and non-current income taxes payable include accrued potential interest of $15 million ( $12 million after income taxes) at March 30, 2018 and $15 million ( $11 million after income taxes) at December 31, 2017 , and potential penalties of $8 million at March 30, 2018 and December 31, 2017 .


24
Table of Contents
L3 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — CONTINUED


13 . Accumulated Other Comprehensive (Loss) Income (AOCI)
The changes in the AOCI balances, including amounts reclassified from AOCI into net income, are presented in the table below.
 
Foreign currency translation
 
Unrealized gains (losses) on hedging instruments
 
Unrecognized (losses) gains
and prior service cost, net
 
Total accumulated other comprehensive loss
 
(in millions)
Balance at December 31, 2017
$
(54
)
 
$
9

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

 
—

 
—

 
33

Amounts reclassified from AOCI, net of tax
—

 
(1
)
 
14

 
13

Net current period other comprehensive income (loss)
33


(1
)

14


46

Balance at March 30, 2018
$
(21
)
 
$
8

 
$
(632
)
 
$
(645
)
 
 
 
 
 
 
 
 
Balance at December 31, 2016
$
(178
)
 
$
6

 
$
(554
)
 
$
(726
)
Other comprehensive income before reclassifications, net of tax
19

 
—

 
—

 
19

Amounts reclassified from AOCI, net of tax
—

 
—

 
9

 
9

Net current period other comprehensive income
19


—


9


28

Balance at March 31, 2017
$
(159
)

$
6


$
(545
)

$
(698
)
Further 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
  Unaudited Condensed Consolidated
  Statements of Operations
 
 
First Quarter Ended
 
Details About AOCI Components
 
March 30,
2018
 
March 31,
2017
 
 
 
(in millions)
 
 
Gain on hedging instruments
 
$
1

 
$
—

 
Income from continuing operations before income taxes
 
 
$
1


$
—

 
Income from continuing operations
 
 
 
 
 
 
 
Amortization of defined benefit   pension and postretirement items:
 
 
 
 
 
 
Net loss (b)
 
$
(18
)
 
$
(15
)
 
Income from continuing operations before income taxes
 
 
4

 
6

 
Provision for income taxes
 
 
$
(14
)

$
(9
)
 
Income from continuing operations
Total reclassification for the period
 
$
(13
)
 
$
(9
)
 
Income from continuing operations
__________________
(a)  
Amounts in parenthesis indicate charges to the unaudited condensed consolidated statements of operations.
(b)  
Amounts related to pension and postretirement benefit plans were reclassified from AOCI and recorded as a component of net periodic benefit cost (see Note 20 for additional information).
14 . Equity
On May 8, 2017, L3’s Board of Directors approved a share repurchase program that authorizes L3 to repurchase up to an additional $1.5 billion of its common stock. The program became effective on July 1, 2017 and has no set expiration date. Repurchases of L3’s common stock are made from time to time at management’s discretion in accordance with applicable U.S. Federal securities laws. The timing and actual number of shares to be repurchased in the future will depend on a variety of factors, including, but not limited to, the Company’s financial position, earnings, legal requirements, other investment opportunities (including acquisitions) and market conditions. L3 repurchased 581,229 shares of its common stock at an average price of $203.93 per share for an aggregate amount of $119 million from January 1, 2018 through March 30, 2018 . All share repurchases of L3’s common stock have been recorded as treasury shares.


25
Table of Contents
L3 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — CONTINUED


From March 31, 2018 through April 27, 2018 , L3 repurchased 116,581 shares of its common stock at an average price of $208.71 per share for an aggregate amount of approximately $24 million .
On February 12, 2018 , L3’s Board of Directors declared a quarterly cash dividend of $0.80 per share, paid on March 15, 2018 to shareholders of record at the close of business on March 1, 2018 . During the quarterly period ended March 30, 2018 , the Company paid $65 million of cash dividends, including a $2 million net reduction of previously accrued dividends for employee-held stock awards.
15 . L3’s Earnings Per Share
A reconciliation of basic and diluted Earnings Per Share (EPS) is presented in the table below.
 
First Quarter Ended
 
March 30,
2018
 
March 31,
2017
 
(in millions, except per share data)
Reconciliation of net income:
 
 
 
Net income
$
208

 
$
168

Net income from continuing operations attributable to noncontrolling interests
(5
)
 
(4
)
Net income attributable to L3’s common shareholders
$
203


$
164

Earnings attributable to L3’s common shareholders:
 
 
 
Continuing operations
$
187

 
$
153

Discontinued operations, net of income tax
16

 
11

Net income attributable to L3’s common shareholders
$
203


$
164

Earnings per share attributable to L3’s common   shareholders:
 
 
 
Basic:
 
 
 
Weighted average common shares outstanding
78.2

 
77.7

Basic earnings per share:
 
 
 
Continuing operations
$
2.40

 
$
1.97

Discontinued operations, net of income tax
0.20

 
0.14

Net income
$
2.60


$
2.11

Diluted:
 
 
 
Common and potential common shares:
 
 
 
Weighted average common shares outstanding
78.2

 
77.7

Effect of dilutive securities
1.7

 
1.6

Common and potential common shares
79.9


79.3

Diluted earnings per share:
 
 
 
Continuing operations
$
2.34

 
$
1.93

Discontinued operations, net of income tax
0.20

 
0.14

Net income
$
2.54


$
2.07

The computation of diluted EPS excludes 0.3 million shares for each of the quarterly periods ended March 30, 2018 and March 31, 2017 , for share-based payment awards as they were anti-dilutive.


26
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L3 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — CONTINUED


16 . Fair Value Measurements
Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants. The standards establish a fair value hierarchy that gives the highest priority to observable inputs and the lowest priority to unobservable inputs.
The following table presents the fair value hierarchy level for each of the Company’s assets and liabilities that are measured and recorded at fair value on a recurring basis.
 
 
March 30, 2018
 
December 31, 2017
Description
 
Level 1   (1)
 
Level 2   (2)
 
Level 3   (3)
 
Level 1   (1)
 
Level 2   (2)
 
Level 3   (3)  
 
 
(in millions)
Assets
 
 

 
 

 
 

 
 

 
 

 
 

Cash equivalents
 
$
12

 
$
—

 
$
—

 
$
310

 
$
—

 
$
—

Derivatives (foreign currency forward contracts)
 
—

 
11

 
—

 
—

 
11

 
—

Total assets
 
$
12


$
11


$
—


$
310


$
11


$
—

Liabilities
 
 

 
 

 
 

 
 

 
 

 
 

Derivatives (foreign currency forward contracts)
 
$
—

 
$
4

 
$
—

 
$
—

 
$
1

 
$
—

Contingent consideration
 
—

 
—

 
34

 
—

 
—

 
31

Total liabilities
 
$
—


$
4


$
34


$
—


$
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 registered money market funds, which are valued using quoted market prices.
(2)  
Level 2 is based on pricing inputs other than quoted prices in active markets, which are either directly or indirectly observable. The fair value is determined using a valuation model based on observable market inputs, including quoted foreign currency forward exchange rates 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 MacH and Open Water Power acquisitions and achieving certain milestones related to the Peak Nano investment. The fair value of the MacH 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. The significant unobservable inputs used in calculating the fair value of the MacH contingent consideration include: (i) projected revenues of the MacH acquired business, (ii) company specific risk premium, which is a component of the discount rate applied to the revenue projections and (iii) volatility. The fair value of the Open Water Power contingent consideration liability is based on the Scenario-Based Method of the income approach using post-acquisition milestone achievements of Open Water Power through December 31, 2020. The significant unobservable inputs used in calculating the fair value of the Open Water Power contingent consideration include: (i) timing of achieving the milestones associated with the contingent consideration arrangement, (ii) probabilities of achieving each milestone and (iii) discount rate. The fair value of the contingent consideration for potential earn-out payments is reassessed quarterly, including an analysis of the significant inputs used in the evaluation, as well as the accretion of the present value discount. Changes are reflected within operating costs and expenses in the unaudited condensed consolidated statements of operations.
The Peak Nano contingent consideration liability was recorded at fair value on the acquisition date based on a probability assessment of the likelihood of achieving certain development milestones on or before August 5, 2018. The fair value of the contingent consideration liability is reassessed quarterly and changes are reflected within interest and other income, net, in the unaudited condensed consolidated statements of operations.


27
Table of Contents
L3 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — CONTINUED


The table below presents the changes to contingent consideration obligations during the quarterly period ended March 30, 2018 .
 
March 30, 2018
 
(in millions)
Balance at beginning of period
$
31

Acquisitions and investments
6

Changes in fair value of contingent consideration, net
(3
)
Balance at end of period
$
34

17 . Financial Instruments
At March 30, 2018 and December 31, 2017 , the Company’s financial instruments consisted primarily of cash and cash equivalents, billed receivables, trade accounts payable, Senior Notes and foreign currency forward contracts. The carrying amounts of cash and cash equivalents, billed receivables and trade accounts payable are representative of their respective fair values because of the short-term maturities or the expected settlement dates of these instruments. The carrying amounts and estimated fair values of the Company’s other financial instruments are presented in the table below.
 
March 30, 2018
 
December 31, 2017
 
Carrying
  Amount
 
Estimated
  Fair Value
 
Carrying
  Amount
 
Estimated
  Fair Value
 
(in millions)
Senior Notes (1)
$
3,331

 
$
3,429

 
$
3,330

 
$
3,502

Foreign currency forward contracts (2)
$
7

 
$
7

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


28
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L3 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — CONTINUED


18 . Derivative Financial Instruments
The Company’s derivative financial instruments include foreign currency forward contracts, which are entered into for risk management purposes, as well as the Peak Nano contingent consideration liability. See Note 16 for further information on the contingent consideration liability.
Foreign Currency Forward Contracts.  The Company’s U.S. and foreign businesses enter into contracts with customers, subcontractors or vendors that are denominated in currencies other than their functional currencies. To protect the functional currency equivalent cash flows associated with certain of these contracts, the Company enters into foreign currency forward contracts. The Company’s activities involving foreign currency forward contracts are designed to hedge the changes in the functional currency equivalent cash flows due to movements in foreign exchange rates compared to the functional currency. The foreign currencies hedged are primarily the U.S. dollar, the Canadian dollar, the Euro, the British pound, the United Arab Emirates dirham and the New Zealand dollar. The Company manages exposure to counterparty non-performance credit risk by entering into foreign currency forward contracts only with major financial institutions that are expected to fully perform under the terms of such contracts. Foreign currency forward contracts are recorded in the Company’s condensed consolidated balance sheets at fair value and are generally designated and accounted for as cash flow hedges in accordance with the accounting standards for derivative instruments and hedging activities. Gains and losses on designated foreign currency forward contracts that are highly effective in offsetting the corresponding change in the cash flows of the hedged transactions are recorded net of income taxes in AOCI and then recognized in income when the underlying hedged transaction affects income. Gains and losses on foreign currency forward contracts that do not meet hedge accounting criteria are recognized in income immediately. Notional amounts are used to measure the volume of foreign currency forward contracts and do not represent exposure to foreign currency losses. The table below presents the notional amounts of the Company’s outstanding foreign currency forward contracts by currency at March 30, 2018 .
Currency
 
Notional Amounts
 
 
(in millions)
U.S. dollar
 
$
188

Canadian dollar
 
166

Euro
 
94

British pound
 
13

United Arab Emirates dirham
 
13

New Zealand dollar
 
12

Total
 
$
486

At March 30, 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 condensed consolidated balance sheets.
 
March 30, 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   hedging instruments:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency forward contracts (1)
$
10

 
$
1

 
$
3

 
$
1

 
$
11

 
$
—

 
$
1

 
$
—

Derivatives not designated as   hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration (2)
—

 
—

 
6

 
—

 
—

 
—

 
—

 
—

Total derivative instruments
$
10


$
1


$
9


$
1

 
$
11

 
$
—


$
1


$
—

__________________
(1)  
See Note 16 for a description of the fair value hierarchy related to the Company’s foreign currency forward contracts.
(2)  
See Note 16 for additional information on Peak Nano contingent consideration liability.


29
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L3 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — CONTINUED


The effects from foreign currency forward contracts on the unaudited condensed consolidated statements of operations was a pre-tax gain of $1 million for the quarterly period ended March 30, 2018 . At March 30, 2018 , the estimated net amount of existing gains that are expected to be reclassified into income within the next 12 months was $3 million .
19 . Commitments and Contingencies
Procurement Regulations
A substantial majority of the Company’s revenues are generated from providing products and services under legally binding agreements or contracts with the U.S. Government, foreign government customers and state and local governments. U.S. Government contracts are subject to extensive legal and regulatory requirements, and, from time to time, agencies of the U.S. Government investigate whether such contracts were and are being conducted in accordance with these requirements. The Company is currently cooperating with the U.S. Government on several investigations from which civil, criminal or administrative proceedings have or could result and give rise to fines, penalties, compensatory and treble damages, restitution and/or forfeitures, including investigations into the pricing of certain contracts entered into by the Communication Systems segment. The Company does not currently anticipate that any of these investigations will have a material adverse effect, individually or in the aggregate, on its consolidated financial position, results of operations or cash flows. However, under U.S. Government regulations, an indictment of the Company by a federal grand jury, or an administrative finding against the Company as to its present responsibility to be a U.S. Government contractor or subcontractor, could result in the Company being suspended for a period of time from eligibility for awards of new government contracts or task orders or in a loss of export privileges. A conviction, or an administrative finding against the Company that satisfies the requisite level of seriousness, could result in debarment from contracting with the federal government for a specified term. In addition, all of the Company’s U.S. Government contracts: (1) are subject to audit and various pricing and cost controls, (2) include standard provisions for termination for the convenience of the U.S. Government or for default and (3) are subject to cancellation if funds for contracts become unavailable. Foreign government contracts generally include comparable provisions relating to terminations for convenience or default, as well as other procurement clauses relevant to the foreign government.
Litigation Matters
The Company is also subject to litigation, proceedings, claims or assessments and various contingent liabilities incidental to its businesses, including the matter specified below. Furthermore, in connection with certain business acquisitions, the Company has assumed some or all claims against, and liabilities of, such acquired businesses, including both asserted and unasserted claims and liabilities.
In accordance with the accounting standard for contingencies, the Company records a liability when management believes that it is both probable that a liability has been incurred and the Company can reasonably estimate the amount of the loss. Generally, the loss is recorded at the amount the Company expects to resolve the liability. The estimated amounts of liabilities recorded for pending and threatened litigation are disclosed in Note 10 . Amounts recoverable from insurance contracts or third parties are recorded as assets when deemed probable. At March 30, 2018 , the Company recorded approximately $2 million of receivables for recoveries from insurance contracts or third parties in connection with the amount of liabilities recorded for pending and threatened litigation. Legal defense costs are expensed as incurred. The Company believes it has recorded adequate provisions for its litigation matters. The Company reviews these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. While it is reasonably possible that an unfavorable outcome may occur in the matter set forth below, unless otherwise stated, the Company believes that it is not probable that a loss has been incurred in such matter. With respect to any litigation matter below for which it is reasonably possible that an unfavorable outcome may occur, an estimate of loss or range of loss is disclosed when such amount or amounts can be reasonably estimated. Although the Company believes that it has valid defenses with respect to legal matters and investigations pending against it, the results of litigation can be difficult to predict, particularly those involving jury trials. Therefore, it is possible that any of the following or other contingencies could have a material impact on the financial position, results of operations or cash flows of the Company in future periods.
HVC Alkmaar . On July 23, 2014, a notice of claim was received by the Company’s former JovyAtlas business unit. The notice relates to losses resulting from a fire that occurred at an HVC Alkmaar bio-energy plant on July 21, 2013. The notice states that the fire resulted from the failure of an uninterruptible power supply (UPS) to provide sufficient power to act as a back-up energy supply, alleges that JovyAtlas was the manufacturer and service provider for the UPS and claims €11 million in estimated property damages and €35 million in estimated business interruption damages. The Company has tendered the notice of claim to its insurance carriers.


30
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L3 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — CONTINUED


20 . Pension and Other Postretirement Benefits
The following table summarizes the components of net periodic benefit cost for the Company’s pension and other postretirement benefit plans.
 
Pension Plans
 
Postretirement Benefit Plans
 
First Quarter Ended
 
First Quarter Ended
 
March 30,
2018
 
March 31,
2017
 
March 30,
2018
 
March 31,
2017
 
(in millions)
Components of net   periodic benefit cost:
 

 
 

 
 

 
 

Service cost
$
26

 
$
25

 
$
—

 
$
1

Interest cost
36

 
35

 
1

 
1

Expected return on plan assets
(56
)
 
(49
)
 
(1
)
 
(1
)
Amortization of net loss (gains)
19

 
16

 
(1
)
 
(1
)
Net periodic benefit cost
$
25


$
27


$
(1
)

$
—

The components of net periodic benefit cost other than the service cost component are included in interest and other income, net, in the unaudited condensed consolidated statements of operations. Service cost is included in operating costs and expenses in the unaudited condensed consolidated statements of operations.
Contributions.  The Company contributed cash of $3 million to its pension plans and $1 million to its other postretirement benefit plans during the quarterly period ended March 30, 2018 . The Company expects to contribute an additional $97 million to its pension plans and $9 million to its other postretirement benefit plans during the remainder of 2018 .
21 . Stock-Based Compensation
During the quarterly period ended March 30, 2018 , the Company granted stock-based awards under the Amended and Restated 2008 Long Term Performance Plan in the form of stock options, restricted stock units and performance units. The stock-based compensation awards granted during the quarterly period ended March 30, 2018 are further discussed below.
Stock Options.  The Company granted 195,769 stock options with a weighted average exercise price of $210.98 per option, which was equal to the closing price of L3’s common stock on the 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. The options granted to the Company’s Chairman are also subject to performance-based vesting conditions. The weighted average grant date fair value for the options of $38.05 per option was estimated using the Black-Scholes option-pricing model. The weighted average assumptions used in the valuation model for this grant are presented below.
Expected holding period (in years)
5.2

Expected volatility
19.8
%
Expected dividend yield
1.8
%
Risk-free interest rate
2.7
%
Restricted Stock Units.  The Company granted 238,298 restricted stock units with a weighted average grant date fair value of $210.98 per share. Restricted stock units typically vest three years after the grant date for employees and one year after the grant date for non-employee directors, or if earlier, on the date of the first annual stockholders meeting held after the grant date. The restricted stock units automatically convert into shares of L3’s common stock upon vesting. The grant date fair value of the restricted stock unit awards is based on L3’s closing stock price at the date of grant and is generally recognized as compensation expense on a straight-line basis over the vesting period. However, for employees who attain retirement eligibility status prior to the end of the three -year cliff vesting period and who have provided at least one year of service after the date of grant, compensation expense is recognized over the shorter period from the date of grant to the retirement eligibility date. For grants of restricted stock units made during the quarterly period ended March 30, 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 must be 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).


31
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L3 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — CONTINUED


Performance Units.  The Company granted 20,885 performance units with a weighted average grant date fair value per unit of $210.98 . The final payout for these units is based on the achievement of pre-determined EPS goals established by the Compensation Committee of the Company’s Board of Directors for the three -year period ending December 31, 2020 . Units earned can range from zero to 200% of the original number of units awarded, which are converted into shares of L3’s common stock.
22 . Supplemental Cash Flow Information
 
First Quarter Ended
 
March 30,
2018
 
March 31,
2017
 
(in millions)
Interest paid
$
37

 
$
37

Income tax payments
$
21

 
$
20

Income tax refunds
$
2

 
$
5

23 . Segment Information
The Company has four reportable segments, which are described in Note 1 . The Company evaluates the performance of its operating segments and reportable segments based on their sales, operating income and operating margin. Corporate expenses are allocated to the Company’s operating segments using an allocation methodology prescribed by U.S. Government regulations for government contractors. Accordingly, segment results include all costs and expenses, except for goodwill impairment charges and certain other items that are excluded by management for purposes of evaluating the operating performance of the Company’s business segments.
The tables below present net sales, operating income, depreciation and amortization and total assets by reportable segment.
 
First Quarter Ended
 
March 30,
2018
 
March 31,
2017
 
(in millions)
Net Sales:
 

 
 

Electronic Systems
$
802

 
$
760

Aerospace Systems
699

 
701

Communication Systems
499

 
543

Sensor Systems
412

 
354

Elimination of intercompany sales
(41
)
 
(37
)
Consolidated total
$
2,371


$
2,321

Operating Income:
 
 
 
Electronic Systems
$
108

 
$
90

Aerospace Systems
57

 
56

Communication Systems
37

 
42

Sensor Systems
49

 
49

Consolidated total
$
251


$
237

Depreciation and amortization:
 
 
 
Electronic Systems
$
19

 
$
18

Aerospace Systems
12

 
11

Communication Systems
13

 
12

Sensor Systems
12

 
11

Consolidated total
$
56


$
52



32
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L3 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — CONTINUED


 
March 30,
2018
 
December 31,
2017
 
(in millions)
Total Assets:
 

 
 

Electronic Systems
$
4,966

 
$
4,796

Aerospace Systems
2,163

 
2,014

Communication Systems
2,128

 
2,063

Sensor Systems
2,814

 
2,706

Corporate
379

 
709

Assets held for sale
136

 
135

Assets of discontinued operations
287

 
306

Consolidated total
$
12,873


$
12,729

Disaggregation of Total Net Sales . The Company disaggregates its sales from contracts with customers by end customer, contract type, deliverable type and revenue recognition method for each of its segments, as the Company believes these factors affect the nature, amount, timing, and uncertainty of the Company’s revenue and cash flows.
Sales by End Customer. Direct sales to the end customer represented approximately 65% of the Company’s consolidated sales for the quarterly period ended March 30, 2018 and indirect sales as a subcontractor or supplier represented the remaining 35% . The table below presents total net sales disaggregated by end customer.
 
 
 
First Quarter Ended March 30, 2018
End Customer
 
Electronic Systems
 
Aerospace Systems
 
Communication Systems
 
Sensor Systems
 
Consolidated L3
 
 
 
 
 
 
 
(in millions)
 
 
 
 
Total DoD
 
 
$
417

 
$
568

 
$
371

 
$
206

 
$
1,562

Other U.S. Government
 
 
39

 
5

 
24

 
25

 
93

Total U.S. Government
 
 
456

 
573

 
395

 
231

 
1,655

Foreign governments (1)
 
 
68

 
103

 
34

 
126

 
331

Commercial — foreign
 
 
167

 
8

 
21

 
21

 
217

Commercial — domestic
 
 
94

 
2

 
43

 
29

 
168

Total
 
 
$
785

 
$
686

 
$
493

 
$
407

 
$
2,371

__________________
(1)  
Includes sales under foreign military sales agreements, which are made directly between the U.S. Government and foreign governments.
Sales by Contract Type. Generally, the sales price arrangements for the Company’s contracts are either fixed-price, cost-plus or time-and-material type. Fixed-price type contracts generally offer higher profit margin potential than cost-plus type or time-and-material type contracts due to the greater levels of risk assumed on a fixed-price type contract.
On a fixed-price type contract, the Company agrees to perform the contractual statement of work for a predetermined sales price. On a cost-plus type contract, the Company is paid its allowable incurred costs plus a profit which can be fixed or variable depending on the contract’s fee arrangement up to predetermined funding levels determined by the customer. Cost-plus type contracts with award and incentive fee provisions are the Company’s primary variable contract fee arrangement. On a time-and-material type contract, the Company is paid on the basis of direct labor hours expended at specified fixed-price hourly rates (that include wages, overhead, allowable general and administrative expenses and profit) and materials at cost.


33
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L3 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — CONTINUED


Substantially all of the Company’s cost-plus type contracts and time-and-material type contracts are with U.S. Government customers, while sales to foreign government and commercial customers are generally transacted under fixed-price sales arrangements and are included in the Company’s fixed-price contract type sales. The table below presents total net sales disaggregated by contract type.
 
 
First Quarter Ended March 30, 2018
Contract Type
 
Electronic Systems
 
Aerospace Systems
 
Communication Systems
 
Sensor Systems
 
Consolidated L3
 
 
 
 
 
 
(in millions)
 
 
 
 
Fixed-price (1)
 
$
664

 
$
366

 
$
329

 
$
333

 
$
1,692

Cost-plus (2)
 
108

 
269

 
148

 
71

 
596

Time-and-material
 
13

 
51

 
16

 
3

 
83

Total sales
 
$
785

 
$
686

 
$
493

 
$
407

 
$
2,371

__________________
(1)  
Includes fixed-price incentive fee type contracts, which contributed approximately 2% to the Company's total net sales.
(2)  
Includes cost-plus award and incentive fee type contracts, which contributed approximately 4% to the Company's total net sales.
Sales by Deliverable Type: The table below presents total net sales disaggregated by the type of deliverable, which is determined by the Company at the performance obligation level.
 
 
First Quarter Ended March 30, 2018
Sales by Deliverable Type
 
Electronic Systems
 
Aerospace Systems
 
Communication Systems
 
Sensor Systems
 
Consolidated L3
 
 
 
 
 
 
(in millions)
 
 
 
 
Products
 
$
560

 
$
372

 
$
364

 
$
350

 
$
1,646

Services
 
225

 
314

 
129

 
57

 
725

Total sales
 
$
785

 
$
686

 
$
493

 
$
407

 
$
2,371

Revenue Recognition Method: The table below presents total net sales disaggregated based on the revenue recognition method applied.
 
 
First Quarter Ended March 30, 2018
Revenue Recognition Method
 
Electronic Systems
 
Aerospace Systems
 
Communication Systems
 
Sensor Systems
 
Consolidated L3
 
 
 
 
 
 
(in millions)
 
 
 
 
Cost to cost method
 
$
533

 
$
666

 
$
390

 
$
213

 
$
1,802

Point in time
 
194

 
2

 
77

 
159

 
432

Output method
 
51

 
—

 
7

 
16

 
74

Billing method
 
7

 
18

 
19

 
19

 
63

Total sales
 
$
785

 
$
686

 
$
493

 
$
407

 
$
2,371



34
Table of Contents
L3 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — CONTINUED


24 . Severance and Restructuring Related Costs
Consistent with the Company’s strategy to continuously improve its cost structure and right-size its businesses, L3 is completing employment reduction actions across several of its businesses to reduce both direct and indirect costs, including overhead and general and administrative costs. As a result of these initiatives, the Company recorded a total of $8 million of severance and restructuring related costs, with respect to approximately 200 employees during the quarterly period ended March 30, 2018 . During the year ended December 31, 2017 , the Company recorded a total of $101 million of severance and restructuring related costs with respect to approximately 1,500 employees. Severance and restructuring related costs are reported within operating costs and expenses on the unaudited condensed consolidated statements of operations. Severance and restructuring related costs incurred by reportable segment are presented in the table below.
 
First Quarter Ended
 
March 30,
2018
 
March 31,
2017
 
(in millions)
Reportable Segment
 
 
 
Electronic Systems
$
2

 
$
3

Aerospace Systems
1

 
—

Communication Systems
5

 
9

Sensor Systems
—

 
2

Consolidated
$
8


$
14

The Company had severance and restructuring related liabilities of $14 million and $23 million included in other current liabilities on the Company’s balance sheets at March 30, 2018 and December 31, 2017 , respectively. The remaining liability balance at March 30, 2018 is expected to be paid primarily by the end of 2018. The table below presents the change to the Company’s severance and restructuring related liability during the quarterly period ended March 30, 2018 .
 
March 30, 2018
 
(in millions)
Balance at beginning of period
$
23

Additional provisions
8

Cash payments
(17
)
Balance at end of period
$
14

25 . Condensed Combining Financial Information of L3 and Its Subsidiaries
The debt of L3, including the Senior Notes and borrowings under amounts drawn against the Credit Facility, are guaranteed, on a joint and several, full and unconditional basis, by certain of its domestic subsidiaries (the Guarantor Subsidiaries). See Note 9 to the audited consolidated financial statements for the year ended December 31, 2017 , included in the Company’s Annual Report on Form 10-K for additional information. The foreign subsidiaries and certain domestic subsidiaries of L3 (the Non-Guarantor Subsidiaries) do not guarantee the debt of L3. None of the debt of L3 has been issued by its subsidiaries.
Under the terms of the indentures governing the Senior Notes, the guarantees of the Senior Notes will automatically and unconditionally be released and discharged: (1) upon the release of all guarantees of all other outstanding indebtedness of L3 or (2) upon the determination that such guarantor is no longer a “domestic subsidiary.” In addition, the guarantees of the Senior Notes will be automatically and unconditionally released and discharged in the event of a sale or other disposition of all of the assets of any guarantor, by way of merger, consolidation or otherwise, or a sale of all of the capital stock of such guarantor. There are no restrictions on the payment of dividends from the Guarantor Subsidiaries to L3.


35
Table of Contents
L3 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — CONTINUED


The following unaudited condensed combining financial information presents the results of operations, financial position and cash flows of: (1) L3 excluding its consolidated subsidiaries (the Parent), (2) the Guarantor Subsidiaries, (3) the Non-Guarantor Subsidiaries and (4) the eliminations to arrive at the information for L3 on a consolidated basis.
 
L3
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated L3
 
(in millions)
Condensed Combining Balance Sheets:
 
 
 
 
 
 
 
 
 
At March 30, 2018
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
158

 
$
19

 
$
215

 
$
(18
)
 
$
374

Billed receivables, net
230

 
301

 
267

 
—

 
798

Contract assets
574

 
740

 
185

 
—

 
1,499

Inventories
428

 
348

 
218

 
—

 
994

Prepaid expenses and other current assets
160

 
160

 
72

 
—

 
392

Assets held for sale
—

 
136

 
—

 
—

 
136

Assets of discontinued operations
—

 
287

 
—

 
—

 
287

Total current assets
1,550


1,991


957


(18
)

4,480

Goodwill
2,269

 
2,827

 
1,536

 
—

 
6,632

Other assets
699

 
713

 
349

 
—

 
1,761

Investment in and amounts due from consolidated subsidiaries
5,844

 
4,425

 
—

 
(10,269
)
 
—

Total assets
$
10,362


$
9,956


$
2,842


$
(10,287
)

$
12,873

Current liabilities
$
796

 
$
817

 
$
567

 
$
(18
)
 
$
2,162

Liabilities held for sale
—

 
19

 
—

 
—

 
19

Liabilities of discontinued operations
—

 
154

 
—

 
—

 
154

Amounts due to consolidated subsidiaries
—

 
—

 
395

 
(395
)
 
—

Other long-term liabilities
982

 
759

 
146

 
—

 
1,887

Long-term debt
3,331

 
—

 
—

 
—

 
3,331

Total liabilities
5,109


1,749


1,108


(413
)

7,553

L3 shareholders’ equity
5,253

 
8,207

 
1,734

 
(9,941
)
 
5,253

Noncontrolling interests
—

 
—

 
—

 
67

 
67

Total equity
5,253


8,207


1,734


(9,874
)

5,320

Total liabilities and equity
$
10,362


$
9,956


$
2,842


$
(10,287
)

$
12,873




36
Table of Contents
L3 TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS — CONTINUED


 
L3
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated L3
 
(in millions)
At December 31, 2017
 

 
 

 
 

 
 

 
 

Current assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
432

 
$
14

 
$
287

 
$
(71
)
 
$
662

Billed receivables, net
266

 
232

 
225

 
—

 
723

Contracts in process
706

 
891

 
336

 
—

 
1,933

Prepaid expenses and other current assets
330

 
231

 
128

 
—

 
689

Assets held for sale
—

 
118

 
17

 
—

 
135

Assets of discontinued operations
—

 
306

 
—

 
—

 
306

Total current assets
1,734


1,792


993


(71
)

4,448

Goodwill
2,269

 
2,635

 
1,711

 
—

 
6,615

Other assets
658

 
556

 
452

 
—

 
1,666

Investment in and amounts due from consolidated subsidiaries
5,572

 
5,287

 
—

 
(10,859
)
 
—

Total assets
$
10,233


$
10,270


$
3,156


$
(10,930
)

$
12,729

Current liabilities
$
811

 
$
800

 
$
596

 
$
(71
)
 
$
2,136

Liabilities held for sale
—

 
16

 
1

 
—

 
17

Liabilities of discontinued operations
—

 
226

 
—

 
—

 
226

Amounts due to consolidated subsidiaries
—

 
—

 
348

 
(348
)
 
—

Other long-term liabilities
1,009

 
714

 
146

 
—

 
1,869

Long-term debt
3,330

 
—

 
—

 
—

 
3,330

Total liabilities
5,150


1,756


1,091


(419
)

7,578

L3 shareholders’ equity
5,083

 
8,514

 
2,065

 
(10,579
)
 
5,083

Noncontrolling interests
—

 
—

 
—

 
68

 
68

Total equity
5,083


8,514


2,065


(10,511
)

5,151

Total liabilities and equity
$
10,233


$
10,270


$
3,156


$
(10,930
)

$
12,729




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


 
L3
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated L3
 
(in millions)
Condensed Combining Statements of Operations:
 

 
 

 
 

 
 

 
 

For the quarter ended March 30, 2018:
 

 
 

 
 

 
 

 
 

Total net sales
$
807

 
$
1,239

 
$
422

 
$
(97
)
 
$
2,371

Total operating costs and expenses
(722
)
 
(1,155
)
 
(340
)
 
97

 
(2,120
)
Operating income
85


84


82


—


251

Interest expense
(41
)
 
—

 
—

 
—

 
(41
)
Interest and other income, net
5

 
—

 
1

 
—

 
6

Income from continuing operations before income taxes
49


84


83


—


216

Provision for income taxes
(6
)
 
(9
)
 
(9
)
 
—

 
(24
)
Equity in net income of consolidated subsidiaries
160

 
—

 
—

 
(160
)
 
—

Income from continuing operations
203


75


74


(160
)

192

Income from discontinued operations, net of income taxes
—

 
16

 
—

 
—

 
16

Net income
203


91


74


(160
)

208

Net income attributable to noncontrolling interests
—

 
—

 
—

 
(5
)
 
(5
)
Net income attributable to L3
$
203


$
91


$
74


$
(165
)

$
203

Comprehensive income attributable to L3
$
249

 
$
92

 
$
107

 
$
(199
)
 
$
249

 
 
 
 
 
 
 
 
 
 
For the quarter ended March 31, 2017:
 
 
 
 
 
 
 
 
 
Total net sales
$
850

 
$
1,176

 
$
373

 
$
(78
)
 
$
2,321

Total operating costs and expenses
(772
)
 
(1,077
)
 
(313
)
 
78

 
(2,084
)
Operating income
78


99


60


—


237

Interest expense
(42
)
 
—

 
—

 
—

 
(42
)
Interest and other income, net
3

 
—

 
1

 
—

 
4

Income from continuing operations before income taxes
39


99


61


—


199

Provision for income taxes
(8
)
 
(21
)
 
(13
)
 
—

 
(42
)
Equity in net income of consolidated subsidiaries
133

 
—

 
—

 
(133
)
 
—

Income from continuing operations
164

 
78

 
48

 
(133
)
 
157

Income from discontinued operations, net of income taxes
—

 
11

 
—

 
—

 
11

Net income
164


89


48


(133
)

168

Net income attributable to noncontrolling interests
—

 
—

 
—

 
(4
)
 
(4
)
Net income attributable to L3
$
164


$
89


$
48


$
(137
)

$
164

Comprehensive income attributable to L3
$
192

 
$
89

 
$
68

 
$
(157
)
 
$
192



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


 
L3
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated L3
 
(in millions)
Condensed Combining Statements of Cash Flows
 

 
 

 
 

 
 

 
 

For the quarterly period ended March 30, 2018:
 

 
 

 
 

 
 

 
 

Operating activities:
 

 
 

 
 

 
 

 
 

Net cash from (used in) operating activities from continuing operations
$
198

 
$
(204
)
 
$
(24
)
 
$
(5
)
 
$
(35
)
Investing activities:
 
 
 
 
 
 
 
 
 
Other investing activities
(62
)
 
(17
)
 
(4
)
 
—

 
(83
)
Net cash used in investing activities from continuing operations
(62
)
 
(17
)
 
(4
)
 
—

 
(83
)
Financing activities:
 
 
 
 
 
 
 
 
 
Common stock repurchased
(119
)
 
—

 
—

 
—

 
(119
)
Dividends paid
(65
)
 
—

 
—

 
—

 
(65
)
Other financing activities
(226
)
 
256

 
(50
)
 
58

 
38

Net cash (used in) from financing activities from continuing operations
(410
)
 
256

 
(50
)
 
58

 
(146
)
Effect of foreign currency exchange rate changes on cash
—

 
—

 
6

 
—

 
6

Net decrease in cash and cash equivalents of discontinued operations
—

 
(30
)
 
—

 
—

 
(30
)
Net (decrease) increase in cash
(274
)
 
5

 
(72
)
 
53

 
(288
)
Cash and cash equivalents, beginning of the period
432

 
14

 
287

 
(71
)
 
662

Cash and cash equivalents, end of the period
$
158

 
$
19

 
$
215

 
$
(18
)
 
$
374

For the quarterly period ended March 31, 2017:
 

 
 

 
 

 
 

 
 

Operating activities:
 

 
 

 
 

 
 

 
 

Net cash from (used in) operating activities from continuing operations
$
131

 
$
(71
)
 
$
67

 
$
(41
)
 
$
86

Investing activities:
 
 
 
 
 
 
 
 
 
Business acquisitions, net of cash acquired
(139
)
 
—

 
—

 
—

 
(139
)
Proceeds from sale of businesses, net of closing date cash balances
15

 
—

 
1

 
—

 
16

Other investing activities
(16
)
 
(16
)
 
(3
)
 
—

 
(35
)
Net cash used in investing activities from continuing operations
(140
)
 
(16
)
 
(2
)
 
—

 
(158
)
Financing activities:
 
 
 
 
 
 
 
 
 
Dividends paid
(61
)
 
—

 
—

 
—

 
(61
)
Other financing activities
(164
)
 
89

 
(80
)
 
153

 
(2
)
Net cash (used in) from financing activities from continuing operations
(225
)
 
89

 
(80
)
 
153

 
(63
)
Effect of foreign currency exchange rate changes on cash
—

 
—

 
4

 
—

 
4

Net decrease in cash and cash equivalents of discontinued operations
—

 
(2
)
 
—

 
—

 
(2
)
Net decrease in cash
(234
)
 
—

 
(11
)
 
112

 
(133
)
Cash and cash equivalents, beginning of the period
291

 
1

 
207

 
(136
)
 
363

Cash and cash equivalents, end of the period
$
57

 
$
1

 
$
196

 
$
(24
)
 
$
230



39
Table of Contents


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview and Outlook
L3’s Business
L3 is a prime contractor in Intelligence, Surveillance and Reconnaissance (ISR) systems, aircraft sustainment (including modifications and fleet management of special mission aircraft), simulation and training, night vision and image intensification equipment and security and detection systems. L3 is also a leading provider of a broad range of communication, electronic and sensor systems used on military, homeland security and commercial platforms. Our customers include the United States (U.S.) Department of Defense (DoD) and its prime contractors, U.S. Government intelligence agencies, the U.S. Department of Homeland Security (DHS), foreign governments, and domestic and foreign commercial customers.
We have the following four reportable segments: (1) Electronic Systems, (2) Aerospace Systems, (3) Communication Systems and (4) Sensor Systems.
Electronic Systems provides a broad range of products and services, including components, products, subsystems, systems and related services to military and commercial customers. These products and services serve niche markets, such as, aircraft simulation and training, power and distribution, cockpit avionics, airport security and precision weapons. Electronic Systems sells these products and services primarily to the DoD and select foreign governments. The Electronic Systems business areas are Link Training & Simulation, Power & Propulsion Systems, Commercial Aviation Solutions, Precision Engagement Systems and Security & Detection Systems.
Aerospace Systems provides products and services for the global ISR and Command, Control and Communications (C 3 ) markets, specializing in signals intelligence (SIGINT) and multi-intelligence platforms, including engineering, modernization and sustainment solutions for military and various government aircraft, ground support equipment and other platforms. These strategic and tactical products and services provide warfighters with the ability to detect, collect, identify, analyze and disseminate information from command centers, communication nodes and air defense systems for real-time situational awareness and response. Aerospace Systems sells these products and services primarily to the DoD and select foreign governments. The Aerospace Systems business areas are Mission Integration, MAS, Aerostructures and Advanced Systems.
Communication Systems provides network and communication systems, secure communications products, radio frequency (RF) components, satellite communication terminals and space, microwave and telemetry products. These products include secure data links that are used to connect a variety of space, airborne, ground and sea-based communication systems and are used in transmission, processing, recording, monitoring and dissemination functions of these communication systems. Communication Systems sells these products and services primarily to the DoD and select foreign governments. The Communications Systems business areas are Broadband Communication Systems, Space & Power Systems and Advanced Communications.
Sensor Systems provides a broad range of multi-domain ISR mission solutions from seabed to space for DoD, intelligence community, international, federal, civil and commercial customers. Major capabilities and mission solutions include networked warfighter systems, integrated ISR and targeting systems, space avionics and imaging payloads, Counter Unmanned Aircraft Systems mission solutions, integrated maritime mission solutions, directed energy, cyber and electronic warfare, special mission command & control, lightweight unmanned undersea vehicles, modeling & simulation and life cycle support. Sensor Systems sells these products and services primarily to the DoD and select foreign governments. The Sensor Systems business areas are Space & Sensor Systems, Airborne Sensor Systems, Warrior Sensor Systems, Maritime Sensor Systems, Intelligence & Mission Systems and Advanced Programs.
Financial information with respect to our segments is included in Results of Operations within this section, Note 23 to our unaudited condensed consolidated financial statements and Note 21 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 .
We adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (commonly known as ASC 606), effective January 1, 2018 using the modified retrospective transition method. In accordance with the modified retrospective transition method, the quarter ended March 30, 2018 ( 2018 First Quarter ) is presented under ASC 606, while the quarter ended March 31, 2017 ( 2017 First Quarter ) is presented under ASC 605, Revenue Recognition , the accounting standard in


40
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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.
On October 16, 2017, our Board of Directors approved a plan to explore strategic alternatives to sell or otherwise divest the Vertex Aerospace business. On May 1, 2018, we announced that we entered into a definitive agreement to sell the Vertex Aerospace, Crestview Aerospace and TCS businesses. We expect to complete the transaction in the summer of 2018, subject to customary closing conditions and regulatory approvals and record a gain on the sale of these businesses upon closing. The divestiture of the Vertex Aerospace business represents a strategic shift by us to exit the logistics solution and maintenance services business for military aircraft where we do not provide complex ISR systems integration and modification. The Vertex Aerospace business generated sales of $1.4 billion for the year ended December 31, 2017. The assets and liabilities and results of operations of the Vertex Aerospace business are reported as discontinued operations for all periods presented.
All references made to financial data in this Quarterly Report on Form 10-Q are to L3’s continuing operations, unless specifically noted.
For the year ended December 31, 2017 , we generated sales of $9,573 million and our primary end customer was the DoD. The table below presents a summary of our consolidated 2017 sales by major category of end customer and the percent contributed by each to our consolidated 2017 sales.
 
2017 Sales
 
% of
2017 Sales
 
(in millions)
 
 
DoD
$
6,329

 
66
%
Other U.S. Government
368

 
4

Total U.S. Government
6,697

 
70

Foreign governments
1,420

 
15

Commercial — foreign
809

 
8

Commercial — domestic
647

 
7

Total sales
$
9,573

 
100
%
We currently expect the composition of our 2018 consolidated sales to the U.S. Government and to international and commercial customers to remain approximately the same as compared to 2017 .
Business Environment
U.S. Government Markets.  Sales to U.S. Government customers represented 70% of our 2017 sales and were primarily to DoD customers, which comprised 66% of our sales. Therefore, our annual sales are generally highly correlated to changes in U.S. Government spending levels, especially DoD budget levels.
The total DoD budget for FY 2016 was $581 billion, an increase of 4% compared to FY 2015. The increase was due to a higher base budget of $522 billion, representing an increase of $25 billion compared to FY 2015. The FY 2016 Overseas Contingency Operations (OCO) budget declined slightly to $59 billion compared to $63 billion for FY 2015. The total DoD budget for FY 2017 was $606 billion ($523 billion base budget, $83 billion OCO), an increase of 4% compared to the appropriated FY 2016 DoD budget.
Because the FY 2018 DoD Appropriations bill was not enacted into law prior to start of fiscal year 2018 (October 1, 2017), the DoD’s FY 2018 funding was addressed through a series of Continuing Resolutions (CR). However, on February 9, 2018, President Trump signed into law the Bipartisan Budget Act of 2018 (BBA), a bipartisan two-year budget and debt ceiling agreement that provides a level of stability in the U.S. Government budget process over the next two fiscal years (FYs 2018 and 2019). The BBA included a short-term CR extension to March 23, 2018, to allow for completion of the FY 2018 appropriations process (including enactment of the FY 2018 DoD Appropriations bill). On March 23, 2018, Congress passed and President Trump signed into law the Consolidated Appropriations Act, 2018 (2018 Appropriations Act), a $1.3 trillion spending package that funds the government through September 30, 2018. The 2018 Appropriations Act includes $665 billion for the DoD ($599 billion base budget, $66 billion OCO). While 2018 BBA does raise the spending caps for FY 2018 and FY 2019 previously constrained by the Budget Control Act of 2011 (BCA) and temporarily suspends the statutory debt ceiling through March 1, 2019, it does not modify the BCA’s spending caps or sequestration mechanism beyond FY 2019.


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On February 12, 2018, the Trump Administration submitted its FY 2019 DoD budget request to Congress. The total FY 2019 DoD budget request is $686 billion ($617 billion base budget, $69 billion OCO), a requested increase of 3% compared to the appropriated FY 2018 DoD budget. Congress is currently in the process of reviewing the President’s budget request for FY 2019 with a target for enactment by the end of the government’s current fiscal year (September 30, 2018).
While the BBA and 2018 Appropriations Act provide a level of stability, future DoD budgets and spending levels are determined by a number of factors beyond our control, including changes to U.S. procurement policies, current and future domestic and international budget conditions, presidential administration priorities and changing national security and defense requirements. Furthermore, the U.S. Government’s overall fiscal challenges remain, including uncertainties regarding BCA sequestration cuts after FY 2019 and, therefore, future DoD budgets and spending levels are difficult 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 project power in denied environments. For more information on the risks and uncertainties related to our U.S. Government contracts, see “Part I - Item 1A - Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 .
International and Commercial Markets. Sales to end customers other than the U.S. Government represented 30% of our 2017 sales. These sales are generally affected by global economic conditions, geopolitical and security conditions and commodity prices, as well as our competitive success in winning new business and increasing our market share. We believe that L3 will benefit from a large addressable international market with sales directly to foreign allied governments and under foreign military sales agreements between the U.S. Government and foreign governments. Although our international sales are experiencing near-term softness, we believe the focus of our international markets in areas such as ISR, simulators, communication systems, night vision products and sensors systems will benefit L3 in the long term. We also believe that the commercial markets in which we participate, such as aviation products, security and screening, simulation and training, and RF microwave and power, have long term favorable fundamentals.
Key Performance Measures
The primary financial performance measures that we use to manage our businesses and monitor results of operations are (i) sales, (ii) operating income and (iii) net cash from operating activities (Operating Cash Flow). Management believes that these financial performance measures are the primary growth drivers for our earnings per share and cash flow per common share. Generally, in evaluating our businesses and contract performance, we focus on net sales, operating income, operating margin, which we define as operating income as a percentage of sales, and the financial performance measure of Operating Cash Flow, and not the type or amount of operating costs.
One of our primary business objectives is to increase sales organically and through select business acquisitions. We define organic sales as net sales excluding the sales impact of acquisitions and divestitures. Sales declines related to business divestitures are sales from divestitures that are included in our actual results for the twelve-month period prior to the divestitures. Sales increases related to acquired businesses are sales from acquisitions that are included in our actual results for less than a twelve-month period. We expect to supplement, strengthen and enhance our existing businesses by selectively acquiring businesses that: (1) add important new technologies and products, (2) provide access to select customers, programs and contracts and (3) provide attractive returns on investment. Another important financial performance measure that we use is operating margin, because sales growth combined with operating margin levels determine our operating income levels. Operating Cash Flow is also an important financial performance measure because Operating Cash Flow measures our ability to convert operating income into cash after paying income taxes and interest expenses and investing in working capital.

Sales Trends.  For the 2018 First Quarter , consolidated net sales of $2,371 million increased by $50 million , or 2% , compared to the 2017 First Quarter . Organic sales increased by $39 million, or 2%, to $2,350 million for the 2018 First Quarter . Organic sales exclude $21 million of sales increases related to business acquisitions and $10 million of sales declines related to business divestitures. See “Results of Operations,” including segment results below for a further discussion of sales.
We derived approximately 66% of our 2017 sales from DoD customers; as a result, our sales are highly correlated to DoD budget levels. DoD budgets are a function of several factors and uncertainties beyond our control, including, but not limited to, changes in U.S. procurement policies, budget considerations, current and future economic conditions, presidential administration priorities, U.S. military engagements, changing national security and defense requirements, geo-political developments, actual fiscal year congressional appropriations for defense budgets, and sequestration and other DoD budget reductions. Any of these factors could result in a significant increase, decrease or redirection of DoD budgets and impact L3’s future results of operations, including our sales and operating income growth rates. Additionally, L3’s future results of operations will be affected by our ability to retain our existing business, including our revenue arrangements with DoD customers, and to successfully re-compete for


42
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existing business and compete for new business, which largely depends on: (1) our successful performance on existing contracts, (2) the effectiveness and innovation of our technologies and research and development activities, (3) our ability to offer better program performance than our competitors at an affordable cost and (4) our ability to retain our employees and hire new ones, particularly those employees who have U.S. Government security clearances and those with clearances of top-secret and above. We expect our 2018 consolidated and organic sales to increase by approximately 4% compared to 2017 . We expect organic sales to the DoD and U.S. Government to increase by approximately 4% and organic international sales to decline by approximately 4% due to the completion of certain contracts with foreign governments. We expect organic commercial sales to increase by approximately 9% primarily for commercial aviation products.
Operating Income and Margin Trends.  For the 2018 First Quarter , our operating income was $251 million , an increase of 6% from $237 million for the 2017 First Quarter . Our operating margin was 10.6% for the 2018 First Quarter , an increase of 40 basis points from 10.2% for the 2017 First Quarter . See “Results of Operations”, including segment results below, for a further discussion of operating margin. In addition, general and administrative expenses as a percentage of sales was 16.7% for the 2018 First Quarter , compared to 15.4% for the 2017 First Quarter . The increase is primarily due to $15 million of higher research and development cost primarily at Sensor Systems segment, $9 million for new product introduction expenses in newly acquired business and $5 million related to information technology investments, including Enterprise Resource Planning implementation costs.
Our effective management of labor, material, subcontractor and other direct costs is an important element of cost control and favorable contract performance. We believe that proactively re-sizing our businesses to their anticipated sales, combined with continuous cost improvement, will enable us to increase our cost competitiveness. While we continue to undertake cost management actions, such as reducing our indirect costs, curtailing pension benefits for salaried employees, resizing select business units and improving our productivity and contract performance in an effort to maintain or even increase operating margin, these efforts may not be successful and may be partially or fully offset by other cost increases. Furthermore, as a U.S. Government contractor, we do not retain the benefit of all cost management actions, particularly on cost-plus type contracts or on contracts where we are the sole-source provider. Although we expect our 2018 annual operating margin to increase as compared to 2017 , changes in the competitive environment and DoD procurement practices and changes in annual pension expense, including related assumptions such as the benefit obligation discount rates, among other factors, 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.  For the 2018 First Quarter , Operating Cash Flow used was $35 million compared to $86 million generated for the 2017 First Quarter . The decrease in Operating Cash Flow was primarily due to higher working capital requirements, primarily contract assets and milestone payments for aircraft procurements related to U.S. and foreign government contracts.
U.S. Tax Reform
The U.S. Government enacted the U.S. Tax Cuts and Jobs Act (U.S. Tax Reform) on December 22, 2017, which made significant changes to the U.S. tax system. Significant changes under U.S. Tax Reform included, among other things, the reduction of the U.S. corporate income tax rate from 35% to 21%, the implementation of a modified territorial tax system, and the imposition of a one-time repatriation tax on deemed repatriated earnings and profits of U.S. owned foreign subsidiaries (Toll Charge). As a result, we recorded an estimated tax benefit (Preliminary Net Tax Benefit) from U.S. Tax Reform in our consolidated financial statements for the year ended December 31, 2017. We did not record any change to the Preliminary Net Tax Benefit on the unaudited condensed consolidated financial statements for the 2018 First Quarter . The Preliminary Net Tax Benefit ultimately recorded may differ in the future due principally to changes to the interpretations of U.S. Tax Reform, legislative action to clarify the interpretation of U.S. Tax Reform and changes to estimates we have utilized to calculate the tax benefit. We expect to finalize the tax benefit from U.S. Tax Reform with the filing of our tax return and at that time will record the difference between the final benefit and the Preliminary Net Tax Benefit previously recorded, if any, in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act . Additionally, we are still evaluating the Global Intangible Low-Taxed Income (GILTI) provisions enacted under U.S. Tax Reform, and the associated election to record its effects as a period cost or as a component of deferred taxes.
Discontinued Operations
Vertex Aerospace. On October 16, 2017, our Board of Directors approved a plan to explore strategic alternatives to sell or otherwise divest the Vertex Aerospace business. The assets and liabilities and results of operations of the Vertex Aerospace business are reported as discontinued operations for all periods presented. See Note 5 to the unaudited condensed consolidated financial statements for additional information.


43
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The table below presents the statement of operations data for Vertex Aerospace. The amounts presented in discontinued operations include allocated interest expenses for debt not directly attributable or related to L3’s other operations. Interest expense was allocated in accordance with the accounting standards for discontinued operations and were based on the ratio of Vertex Aerospace’s net assets to the sum of: (1) total L3 consolidated net assets and (2) L3 consolidated total debt.
 
First Quarter Ended
 
March 30,
2018
 
March 31,
2017
 
(in millions)
Net sales
$
371

 
$
352

Operating costs and expenses
(349
)
 
(335
)
Operating income from discontinued operations
22

 
17

Interest expense allocated to discontinued operations
(1
)
 
—

Income from discontinued operations before income taxes
21

 
17

Income tax expense
(5
)
 
(6
)
Income from discontinued operations, net of income taxes
$
16

 
$
11

Business Acquisitions and Divestitures
Our Annual Report on Form 10-K summarizes the business acquisitions and divestitures that we completed during the three years ended December 31, 2017 . See Note 5 to our unaudited condensed consolidated financial statements for additional information regarding our acquisitions and divestitures.
Results of Operations
The following information should be read in conjunction with our unaudited condensed consolidated financial statements contained in this quarterly report. Our results of operations for the periods presented are affected by our business acquisitions and divestitures.
Consolidated Results of Operations
The table below provides L3’s selected financial data, excluding discontinued operations, for the 2018 First Quarter compared with the 2017 First Quarter .
 
 
First Quarter Ended
 
 
 
 
 
(in millions, except per share data)
March 30,
2018
 
March 31,
2017
 
Increase/
  (decrease)
 
 
Net sales (1)
$
2,371

 
$
2,321

 
2
%
 
 
Operating income (1)
$
251

 
$
237

 
6
%
 
 
Operating margin
10.6
%
 
10.2
%
 
40
bpts
 
 
Interest expense and other
$
(35
)
 
$
(38
)
 
(8)
%
 
 
Effective income tax rate
11.1
%
 
21.1
%
 
  nm
 
 
 
Net income from continuing operations attributable to L3
$
187

 
$
153

 
22
%
 
 
Diluted earnings per share from continuing operations
$
2.34

 
$
1.93

 
21
%
 
 
Diluted weighted average common shares outstanding
79.9

 
79.3

 
1
%
 
 
__________________
 
 
 
 
 
 
 
 
(1)       The adoption of ASC 606 accelerated sales by approximately $76 million and operating income by approximately $19 million primarily related to contracts previously accounted for under the units-of-delivery method, which are recognized earlier in the performance period as costs are incurred under ASC 606, as opposed to when the units are delivered under ASC 605. See Note 3 for additional information on the impact by segment.
nm - not meaningful
 
Net Sales: For the 2018 First Quarter , consolidated net sales of $2,371 million increased $50 million , or 2% , compared to the 2017 First Quarter . Organic sales increased by $39 million, or 2%, to $2,350 million for the 2018 First Quarter . Organic sales exclude $21 million of sales increases related to business acquisitions and $10 million of sales declines related to business divestitures. For the 2018 First Quarter , organic sales to the U.S. Government increased $18 million, or 1%, to $1,638 million and organic sales to international and commercial customers increased $21 million, or 3%, to $712 million.
Sales from products increased by $42 million to $1,646 million for the 2018 First Quarter , compared to $1,604 million for the 2017 First Quarter . Sales from products represented approximately 69% of consolidated net sales for the 2018 First Quarter


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and the 2017 First Quarter . Sales from products increased by: (1) $28 million for Precision Engagement Systems due to higher deliveries and volume on fuzing and ordnance and guidance systems products primarily to the U.S. Army, (2) $23 million for Space & Sensor Systems due to higher volume for space electronics and infrared detection products, (3) $21 million due to higher deliveries of airborne turret systems primarily to foreign militaries, (4) $12 million primarily for Intelligence & Mission Systems primarily due to higher deliveries of electronic warfare countermeasures products primarily to foreign militaries and (5) $9 million for Security & Detection Systems due to higher deliveries for airport screening devices to the U.S. Transportation Security Administration (TSA). These increases were offset by $51 million, primarily driven by lower production volume for Unmanned Aerial Vehicle (UAV) communication systems for the DoD.
    Sales from services increased by $8 million to $725 million for the 2018 First Quarter , compared to $717 million for the 2017 First Quarter . Sales from services represented approximately 31% of consolidated net sales for the 2018 First Quarter and the 2017 First Quarter . Sales from services increased primarily by: (1) $10 million due to business acquisitions, net of divestitures and (2) $6 million due to higher volume on new awards for simulation and training devices at Commercial Aviation Solutions. These increases were partially offset by $8 million primarily at Mission Integration driven by lower volume for training and delivery services to the Australian Defence Force for the C-27J aircrafts.
Operating income and operating margin: Operating income for the 2018 First Quarter increased by $14 million , or 6% , compared to the 2017 First Quarter . Operating margin increased by 40 basis points to 10.6% for the 2018 First Quarter , compared to 10.2% for the 2017 First Quarter . Operating margin increased 90 basis points due to improved contract performance primarily for the Electronic Systems and Aerospace Systems segments and 30 basis points due to lower severance and restructuring costs, primarily at Communication Systems. These increases were partially offset by 60 basis points primarily due to higher research and development costs and 20 basis points due to lower margins related to acquisitions primarily for the Sensor Systems segment. See the reportable segment results below for additional discussion of sales and operating margin trends.
Effective income tax rate: The effective tax rate for the 2018 First Quarter decreased to 11.1% from 21.1% for the 2017 First Quarter . The decrease was primarily driven by an increase in tax benefits from equity compensation and the reduction of the U.S. corporate income tax rate enacted under U.S. Tax Reform.
Net income from continuing operations attributable to L3 and diluted earnings per share (EPS) from continuing operations: Net income from continuing operations attributable to L3 for the 2018 First Quarter increased 22% to $187 million , compared to $153 million for the 2017 First Quarter . Diluted EPS from continuing operations increased 21% to $2.34 for the 2018 First Quarter , compared to $1.93 for the 2017 First Quarter .
Diluted weighted average common shares outstanding: Diluted weighted average common shares outstanding for the 2018 First Quarter increased 1% compared to the 2017 First Quarter , due to changes in the dilutive impact of common share equivalents, primarily caused by a higher L3 stock price.


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Reportable Segment Results of Operations
The table below presents selected data by reportable segment reconciled to consolidated totals.
 
First Quarter Ended
 
March 30, 2018
 
March 31, 2017
 
(dollars in millions)
Net sales:   (1)
 
 
 
Electronic Systems
$
785

 
$
738

Aerospace Systems
686

 
696

Communication Systems
493

 
537

Sensor Systems
407

 
350

Consolidated net sales
$
2,371


$
2,321

Operating income:
 
 
 
Electronic Systems
$
108

 
$
90

Aerospace Systems
57

 
56

Communication Systems
37

 
42

Sensor Systems
49

 
49

Consolidated operating income
$
251


$
237

Operating margin:
 
 
 
Electronic Systems
13.8
%
 
12.2
%
Aerospace Systems
8.3
%
 
8.0
%
Communication Systems
7.5
%
 
7.8
%
Sensor Systems
12.0
%
 
14.0
%
Consolidated operating margin
10.6
%

10.2
%
__________________
(1)  
Net sales after intercompany eliminations.
Electronic Systems
 
 
First Quarter Ended
 
 
 
 
 
 
March 30,
2018
 
March 31,
2017
 
Increase
 
 
 
(dollars in millions)
 
 
Net sales
$
785

 
$
738

 
6
%
 
 
Operating income
$
108

 
$
90

 
20
%
 
 
Operating margin
13.8
%
 
12.2
%
 
160
bpts
 
Electronic Systems net sales for the 2018 First Quarter increased by $47 million , or 6% , compared to the 2017 First Quarter . Organic sales increased by $46 million, or 6% , compared to the 2017 First Quarter . Organic sales exclude $11 million of sales increases related to business acquisitions and $10 million of sales declines related to business divestitures. Organic sales increased by: (1) $29 million for Precision Engagement Systems due to increased deliveries and volume on fuzing and ordnance and guidance systems products primarily to the U.S. Army, (2) $12 million for Security & Detection Systems due to increased deliveries for airport screening devices to the U.S. Transportation Security Administration (TSA) and (3) $5 million primarily for Power & Propulsion due to higher volume for U.S. Navy power conversion and distribution systems.

Electronic Systems operating income for the 2018 First Quarter increased by $18 million , or 20% , compared to the 2017 First Quarter . Operating margin increased by 160 basis points to 13.8% . primarily due to improved contract performance across all business areas.


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Aerospace Systems
 
 
First Quarter Ended
 
 
 
 
 
 
March 30,
2018
 
March 31,
2017
 
Increase/ (decrease)
 
 
 
(dollars in millions)
 
 
Net sales
$
686

 
$
696

 
(1)
%
 
 
Operating income
$
57

 
$
56

 
2
%
 
 
Operating margin
8.3
%
 
8.0
%
 
30
bpts
 
Aerospace Systems net sales for the 2018 First Quarter decreased by $10 million , or 1% , compared to the 2017 First Quarter . Sales decreased by: (1) $21 million due to lower volume for international aircraft modifications, primarily Australian Defence Force C-27J aircraft, and (2) $6 million due to lower volume on Intelligence, Surveillance and Reconnaissance (ISR) aircraft systems for foreign military customers as contracts near completion. These decreases were partially offset by higher volume primarily on large ISR aircraft systems for the U.S. Department of Defense (DoD).
Aerospace Systems operating income for the 2018 First Quarter increased by $1 million , or 2% , compared to the 2017 First Quarter . Operating margin increased by 30 basis points to 8.3% . Operating margin increased by 150 basis points primarily due to improved contract performance. This increase was partially offset by lower volume.
Communication Systems
 
 
First Quarter Ended
 
 
 
 
 
 
March 30,
2018
 
March 31,
2017
 
Decrease
 
 
 
(dollars in millions)
 
 
Net sales
$
493

 
$
537

 
(8)
%
 
 
Operating income
$
37

 
$
42

 
(12)
%
 
 
Operating margin
7.5
%
 
7.8
%
 
(30)
bpts
 
Communication Systems net sales for the 2018 First Quarter decreased by $44 million , or 8% , compared to the 2017 First Quarter , primarily driven by lower production volume for Unmanned Aerial Vehicle (UAV) communication systems for the DoD.
Communication Systems operating income for the 2018 First Quarter decreased by $5 million , or 12% , compared to the 2017 First Quarter . Operating margin decreased by 30 basis points to 7.5% . Operating margin decreased by 170 basis points primarily due to lower volume. This decrease was partially offset by: (1) 80 basis points for lower severance and restructuring costs of $4 million to $5 million for the 2018 first quarter, from $9 million for the 2017 first quarter and (2) 60 basis points for lower operating costs of $3 million, primarily at Space & Power Systems.
Sensor Systems
 
 
First Quarter Ended
 
 
 
 
 
 
March 30,
2018
 
March 31,
2017
 
Increase/ (decrease)
 
 
 
(dollars in millions)
 
 
Net sales
$
407

 
$
350

 
16
%
 
 
Operating income
$
49

 
$
49

 
—
%
 
 
Operating margin
12.0
%
 
14.0
%
 
(200)
bpts
 
Sensor Systems net sales for the 2018 First Quarter increased by $57 million , or 16% , compared to the 2017 First Quarter . Organic sales increased by $47 million, or 13% , compared to the 2017 First Quarter . Organic sales exclude $10 million of sales increases related to business acquisitions. Organic sales increased by: (1) $17 million for Space & Sensor Systems due to higher volume for space electronics and infrared detection products, (2) $16 million due to increased deliveries of airborne turret systems primarily to foreign militaries and (3) $14 million primarily for Intelligence & Mission Systems due to increased deliveries of electronic warfare countermeasures products primarily to foreign militaries.


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Sensor Systems operating income was $49 million for the 2018 and 2017 First Quarter s. Operating margin decreased by 200 basis points to 12.0% . Operating margin decreased by: (1) 300 basis points due to higher research and development costs related to imaging, space and undersea growth investments and (2) 100 basis points due to lower margins related to acquisitions. These decreases were partially offset by higher volume, which increased operating margin by 200 basis points.
Liquidity and Capital Resources
Anticipated Sources and Uses of Cash Flow
At March 30, 2018 , we had total cash and cash equivalents of $374 million as compared to $662 million at December 31, 2017 . While no amounts of the cash and cash equivalents are considered restricted, $219 million of cash was held by our foreign subsidiaries at March 30, 2018 . The repatriation of cash held in non-U.S. jurisdictions is subject to local capital requirements. Our primary sources of liquidity are cash flow generated from operations, cash on hand and our five-year unsecured $1 billion revolving credit facility (Credit Facility), which we entered into on October 31, 2016. At March 30, 2018 , we had the full availability of our Credit Facility. We used $35 million of net cash from operating activities from continuing operations and $30 million for investments in nonconsolidated affiliates, primarily Peak Nano Optics, LLC (Peak Nano) during the 2018 First Quarter . Significant cash uses during the 2018 First Quarter further included $119 million related to repurchasing shares of our common stock, $65 million related to the payment of dividends and $56 million related to capital expenditures.
We currently believe that our cash from operating activities generated during the year, together with our cash on hand and available borrowings under our Credit Facility, will be adequate for the foreseeable future to meet our anticipated requirements for working capital, capital expenditures, defined benefit plan contributions, commitments, contingencies, research and development expenditures, select business acquisitions (depending on the size), program and other discretionary investments, interest payments, income tax payments, L3 dividends and share repurchases.
Balance Sheet
We made certain presentation changes to our consolidated balance sheet on January 1, 2018 to comply with ASC 606. The components of contracts in process as reported under ASC 605, which included unbilled contract receivables and inventoried contract costs, have been reclassified to contract assets and inventories, respectively, after certain adjustments described below under ASC 606. The adoption of ASC 606 resulted in an increase in unbilled contract receivables (referred to as contract assets under ASC 606) primarily from 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 inventories not controlled by our customers, were reclassified to inventories. Additionally, under ASC 606, we capitalize 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). We previously accounted for costs to fulfill a contract either as inventoried contract costs or expensed them as incurred. Costs to obtain a contract were generally expensed as incurred. Advance payments and billings in excess of costs and deferred revenue, previously classified in other current liabilities, have been combined and are presented as contract liabilities.
Billed receivables increased by $75 million to $798 million at March 30, 2018 , from $723 million at December 31, 2017 , primarily due to the timing of billings and collections for Intelligence & Mission Systems, Mission Integration, and Commercial Aviation Solutions. These increases were partially offset by decreases for Advanced Communications and Broadband Communication Systems, and $4 million for foreign currency translation adjustments.
Contract assets increased by $150 million to $1,499 million at March 30, 2018 , from $1,349 million at January 1, 2018 , primarily due to sales exceeding billings for Advanced Communications, Mission Integration, Link Training & Simulation and Space & Power Systems, partially offset by a decrease for Security & Detection Systems primarily due to higher billings relating to product shipments.
Inventories increased by $605 million to $994 million at March 30, 2018 from $389 million at December 31, 2017 . The increase consisted of: (1) $537 million due to reclassifications related to the adoption of ASC 606, and (2) $68 million primarily for Broadband Communication Systems and Warrior Sensor Systems to support customer demand.
The increase in prepaid expenses and other current assets was primarily due to milestone payments for aircraft procurements related to U.S. and foreign government contracts at Mission Integration and annual prepaid insurance payments.


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Goodwill increased by $17 million to $6,632 million at March 30, 2018 from $6,615 million at December 31, 2017 . The table below presents the changes in goodwill by segment.
 
Electronic Systems
 
Aerospace Systems
 
Communication Systems
 
Sensor Systems
 
Consolidated Total
 
(in millions)
December 31, 2017
$
2,813

 
$
1,146

 
$
1,023

 
$
1,633

 
$
6,615

Foreign currency translation adjustments
14

 
(2
)
 
—

 
5

 
17

March 30, 2018
$
2,827

 
$
1,144

 
$
1,023

 
$
1,638

 
$
6,632

The decrease in identifiable intangible assets was primarily was primarily due to amortization expense, partially offset by $3 million for foreign currency translation adjustments.
The increase in other assets was primarily due to the capitalization of costs to fulfill a contract and costs to obtain a contract in connection with the adoption of ASC 606 and investments in nonconsolidated affiliates made during the 2018 First Quarter.
The fluctuations in accounts payable and accrued expenses were primarily due to the timing of when invoices for purchases from third party vendors and subcontractors were received and payments were made.
Accrued employment costs decreased primarily due to the payment of annual management incentive bonuses during the 2018 First Quarter and lower accrued salaries and wages due to the timing of payroll dates at the end of the 2018 First Quarter, partially offset by higher accrued payroll taxes due to the timing of remittances.
Contracts liabilities increased by $42 million to $607 million at March 30, 2018 , from $565 million at January 1, 2018 , primarily due to advances received by Mission Integration for aircraft procurements related to U.S. and foreign government contracts.
Statement of Cash Flows
2018 First Quarter Compared with the 2017 First Quarter
The table below provides a summary of our cash flows (used in) from operating, investing and financing activities for the periods indicated.
 
First Quarter Ended
 
March 30,
2018
 
March 31,
2017
 
Cash Flow
  Increase/
  (decrease)
 
(in millions)
Net cash (used in) provided from operating activities from continuing operations
$
(35
)
 
$
86

 
$
(121
)
Net cash used in investing activities from continuing operations
(83
)
 
(158
)
 
75

Net cash used in financing activities from continuing operations
(146
)
 
(63
)
 
(83
)
Operating Activities
We used $35 million of cash from operating activities during the 2018 First Quarter , a decrease of $121 million compared with $86 million generated during the 2017 First Quarter . The decrease in the 2018 First Quarter was primarily due to higher working capital requirements, primarily contract assets and milestone payments for aircraft procurements related to U.S. and foreign government contracts. The net cash from changes in operating assets and liabilities is further discussed above under “Liquidity and Capital Resources - Balance Sheet”.
Investing Activities
During the 2018 First Quarter , we used $83 million of cash from investing activities, which included $56 million for capital expenditures and $30 million for investments in nonconsolidated affiliates, primarily Peak Nano. During the 2017 First Quarter , we used $158 million of cash from investing activities, which included $139 million used from business acquisitions and $41 million for capital expenditures, partially offset by cash generated of $16 million for business divestitures.


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Financing Activities
Debt
At March 30, 2018 , total outstanding debt was $3,331 million , compared to $3,330 million at December 31, 2017 , all of which was senior debt. At March 30, 2018 , there were no borrowings or letters of credit outstanding under our Credit Facility. Accordingly, we had the full availability of our $1 billion facility for future borrowings. We also had $429 million of outstanding standby letters of credit with financial institutions covering performance and financial guarantees per contractual requirements with certain customers at March 30, 2018 . These standby letters of credit may be drawn upon in the event that we do not perform on certain of our contractual requirements. At March 30, 2018 , our outstanding debt matures between October 15, 2019 and December 15, 2026. See Note 11 to our unaudited condensed consolidated financial statements contained in this quarterly report for the components of our debt at March 30, 2018 .
We consider our credit rating as an important element of our capital allocation strategy and, while no assurances can be given, we intend to maintain our investment grade credit rating. Our senior unsecured credit rating from both Standard and Poor’s and Fitch Ratings is BBB- with a stable outlook, and our senior unsecured credit rating from Moody’s Investors Service is Baa3 with a stable outlook.
Debt Covenants and Other Provisions.  The Credit Facility and Senior Notes contain financial and/or other restrictive covenants. See Note 9 to our audited consolidated financial statements for the year ended December 31, 2017 , included in our Annual Report on Form 10-K, for a description of our debt, related financial covenants and cross default provisions. We were in compliance with our financial and other restrictive covenants at March 30, 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, if any, and interest on the Senior Notes is fully and unconditionally guaranteed, on an unsecured senior basis, jointly and severally, by L3’s material 100% owned domestic subsidiaries that guarantee any of its other indebtedness. The guarantees of the Credit Facility and the Senior Notes rank pari passu with each other.
Equity
Repurchases of L3’s common stock under the current share repurchase program are made from time to time at management’s discretion, in accordance with applicable U.S. Federal securities laws. The timing and actual number of shares to be repurchased in the future will depend on a variety of factors, including, but not limited to, our financial position, earnings, legal requirements, other investment opportunities (including acquisitions) and market conditions. All share repurchases of L3’s common stock have been recorded as treasury shares.
The table below presents our repurchases of L3’s common stock during the 2018 First Quarter .
 
Total Number of
  Shares Purchased
 
Average Price Paid
  Per Share
 
Treasury Stock
 
 
 
 
 
(at cost in millions)
January 1 — March 30, 2018
581,229

 
$
203.93

 
$
119

On May 8, 2017, L3’s Board of Directors approved a share repurchase program that authorizes L3 to repurchase up to an additional $1.5 billion of its common stock. The program became effective on July 1, 2017 and has no set expiration date. From March 31, 2018 through April 27, 2018 , we repurchased 116,581 shares of our common stock at an average price of $208.71 per share for an aggregate amount of $24 million .
During the 2018 First Quarter , our Board of Directors authorized the quarterly cash dividends in the table below.
Date Declared
 
Record Date
 
Cash Dividend Per Share
 
Total Cash Dividends Declared
 
Date Paid
 
 
 
 
 
 
(in millions)
 
 
February 12, 2018
 
March 1, 2018
 
$
0.80

 
$
63

(1)  
 
March 15, 2018
__________________
(1)  
During the 2018 First Quarter , we paid $65 million of cash dividends, including a $2 million net reduction of previously accrued dividends for employee-held stock awards.


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Legal Proceedings and Contingencies
For a discussion of legal proceedings and contingencies that could impact our results of operations, financial condition or cash flows, see Note 19 to our unaudited condensed consolidated financial statements contained in this quarterly report.
Forward-Looking Statements
Certain of the matters discussed in this report, including information regarding the Company’s 2018 financial outlook, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 that these statements are subject to risks and uncertainties many of which are difficult to predict and generally beyond our control that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements. Some of the factors that could cause actual results to differ include, but are not limited to, the following: our dependence on the defense industry; backlog processing and program slips resulting from delayed awards and/or funding from the DoD and other major customers; the U.S. Government fiscal situation; changes in DoD budget levels and spending priorities; our reliance on contracts with a limited number of customers and the possibility of termination of government contracts by unilateral government action or for failure to perform; the extensive legal and regulatory requirements surrounding many of our contracts; our ability to retain our existing business and related contracts; our ability to successfully compete for and win new business, or, identify, acquire and integrate additional businesses; our ability to maintain and improve our operating margin; the availability of government funding and changes in customer requirements for our products and services; the outcome of litigation matters ; results of audits by U.S. Government agencies and of ongoing governmental investigations; our significant amount of debt and the restrictions contained in our debt agreements and actions taken by 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 benefit plan assets; our collective bargaining agreements; our ability to successfully negotiate contracts with labor unions and our ability to favorably resolve labor disputes should they arise; the business, economic and political conditions in the markets in which we operate; the risk that our commercial aviation products and services businesses are affected by a downturn in global demand for air travel or a reduction in commercial aircraft OEM (Original Equipment Manufacturer) 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 use of fixed-price type revenue arrangements; the rapid change of technology and high level of competition in which our businesses participate; risks relating to technology 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 the ultimate 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 “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2017 and in this quarterly report on Form 10-Q, 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 or developments 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 inherent uncertainties of estimates, forecasts and projections and may be better or worse than projected and such differences could be material. Given these uncertainties, you should not place any reliance on these forward-looking statements. These forward-looking statements also represent our estimates and assumptions only as of the date that they were made. We expressly disclaim a duty to provide updates to these forward-looking statements, and the estimates and assumptions associated with them, after the date of this filing, to reflect events or changes in circumstances or changes in expectations or the occurrence of anticipated events.


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Table of Contents


ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Derivative Financial Instruments and Other Market Risk,” of our Annual Report on Form 10-K for the year ended December 31, 2017 for a discussion of our exposure to market risks. There were no material changes to our disclosure about market risks during the 2018 First Quarter . See Notes 16 and 18 to our unaudited condensed consolidated financial statements contained in this quarterly report for the aggregate fair values and notional amounts of our foreign currency forward contracts at March 30, 2018 .
ITEM 4.

CONTROLS AND PROCEDURES
Conclusions Regarding Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports that we file or submit under the Securities Exchange Act of 1934 related to L3 Technologies, Inc. is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and President and our Senior Vice President and Chief Financial Officer to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our Chief Executive Officer and President and our Senior Vice President and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 30, 2018 . Based upon that evaluation, our Chief Executive Officer and President and our Senior Vice President and Chief Financial Officer concluded that, as of March 30, 2018 , the design and operation of our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
Effective January 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers . While the new revenue standard is expected to have an immaterial impact on our ongoing net income, it will require management to make significant judgments and estimates.  As a result, we implemented changes to our internal controls related to revenue recognition for the quarter ended March 30, 2018 . These changes include updated accounting policies affected by ASC 606, redesigned internal controls over financial reporting related to ASC 606, expanded data gathering to comply with the additional disclosure requirements, training of individuals responsible for implementation/continuing compliance of ASC 606 and ongoing contract review requirements.


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Table of Contents


PART II — OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS
The information required with respect to this item can be found in Note 19 to our unaudited condensed consolidated financial statements contained in this quarterly report and is incorporated by reference into this Item 1.
ITEM 1A.

RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Part I — Item 1A — Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 , and “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview and Outlook — Business Environment” in our Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. There have been no material changes to the risk factors disclosed in “Part I — Item 1A — Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 . The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.



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Table of Contents


ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information about repurchases of L3’s common stock made during the 2018 First Quarter . Repurchases are made from time to time at management’s discretion in accordance with applicable U.S. Federal securities laws. All share repurchases of L3’s common stock have been recorded as treasury shares.
Period
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans
or Programs
 
Maximum Number (or Approximate Dollar Value) of Shares That May Yet be Purchased Under the Plans
   or Programs   (1)
 
 
 
 
 
 
 
 
(in millions)
January 1 — January 31, 2018
 
79,311

 
$
199.04

 
79,311

 
$
1,331

February 1 — February 28, 2018
 
377,311

 
204.77

 
377,311

 
1,254

March 1 — March 30, 2018
 
124,607

 
204.51

 
124,607

 
1,228

Total
 
581,229

 
203.93

 
581,229

 
 
__________________
(1)  
The share repurchases described in the table above were made pursuant to the $1.5 billion share repurchase program auhorized by L3’s Board of Directors on May 8, 2017. The program became effective on July 1, 2017 and has no set expiration date.
ITEM 6.
EXHIBITS
For a list of exhibits, see the Exhibit Index in this Form 10-Q.


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EXHIBIT INDEX
Exhibits identified in parentheses below are on file with the SEC and are incorporated herein by reference to such previous filings.
Exhibit
  No.
 
Description of Exhibit
 
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)).
 
Stock Purchase Agreement, dated as of December 7, 2015, by and among L-3 Communications Corporation, CACI International Inc and 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)).
 
Restated Certificate of Incorporation of L3 Technologies, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on January 3, 2017 (File No. 001-37975)).
 
Amended and Restated Bylaws of L3 Technologies, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on February 13, 2018 (File No. 333-46983)).
 
Form of Common Stock Certificate of L3 Technologies, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (File No. 001-37975)).
 
Indenture dated as of October 2, 2009 among L-3 Communications Corporation, the guarantors named therein and The Bank of New York Mellon, as Trustee (incorporated by reference to Exhibit 4.15 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 25, 2009 (File No. 333-46983)).
 
Supplemental Indenture dated as of February 3, 2012 among L-3 Communications Corporation, The Bank of New York Mellon, as Trustee, and the guarantors named therein (incorporated by reference to Exhibit 4.7 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 333-46983)).
 
Second Supplemental Indenture, dated as of October 31, 2016 among L-3 Communications Corporation, The Bank of New York Mellon, as Trustee, and the guarantors named therein (incorporated by reference to Exhibit 4.4 of the Registrant’s Annual Report on Form 10-K for the period ended December 31, 2016 (File No. 001-37975)).
 
Third Supplemental Indenture, dated as of March 30, 2018 among L3 Technologies, Inc., The Bank of New York Mellon, as Trustee, and the guarantors named therein.
 
Indenture, dated as of May 21, 2010, among L-3 Communications Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated May 24, 2010 (File No. 333-46983)).
 
First Supplemental Indenture, dated as of May 21, 2010, among L-3 Communications Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated May 24, 2010 (File No. 333-46983)).
 
Second Supplemental Indenture, dated as of February 7, 2011, among L-3 Communications Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated February 8, 2011 (File No. 333-46983)).
 
Third Supplemental Indenture, dated as of November 22, 2011, among L-3 Communications Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A, as Trustee (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated November 22, 2011 (File No. 333-46983)).
 
Fourth Supplemental Indenture, dated as of February 3, 2012, among L-3 Communications Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A, as Trustee (incorporated by reference to Exhibit 4.12 to the Registrant’s Annual Report on Form 10‑K for the fiscal year ended December 31, 2011 (File No. 333-46983)).
 
Fifth Supplemental Indenture, dated as of May 28, 2014, among L-3 Communications Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A, as Trustee (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated May 28, 2014 (File No. 333-46983)).
 
Sixth Supplemental Indenture, dated as of June 21, 2016, among L-3 Communications Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A, as Trustee (incorporated by reference to Exhibit 4.2 to L-3 Communications Corporation’s Registration Statement on Form S-3ASR filed on June 21, 2016 (File No. 333-212152)).


55
Table of Contents

 
Seventh Supplemental Indenture, dated as of October 31, 2016, among L-3 Communications Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A, as Trustee (incorporated by reference to Exhibit 4.12 of the Registrant’s Annual Report on Form 10‑K for the period ended December 31, 2016 (File No. 001-37975)).
 
Eighth Supplemental Indenture, dated as of December 5, 2016, among L-3 Communications Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A, as Trustee (incorporated by reference to Exhibit 4.6 to the Registrant’s Current Report on Form 8-K dated December 5, 2016 (File No. 333-46983)).
 
Ninth Supplemental Indenture, dated as of March 30, 2018 among L3 Technologies, Inc., The Bank of New York Mellon Trust Company, N.A., as Trustee, and the guarantors named therein.
 
Form of L3 Technologies, Inc. 2008 Long Term Performance Plan Nonqualified Stock Option Agreement (2018 Version).
 
Form of L3 Technologies, Inc. 2008 Long Term Performance Plan Nonqualified Stock Option Agreement (2018 CEO Version).
 
Form of L3 Technologies, Inc. 2008 Long Term Performance Plan Restricted Stock Unit Agreement (2018 Version).
 
Form of L3 Technologies, Inc. 2008 Long Term Performance Plan Restricted Stock Unit Agreement (2018 Non-Employee Directors Deferred Compensation Version).
 
Form of L3 Technologies, Inc. 2008 Long Term Performance Plan Performance Unit Agreement (2018 Version).
 
Form of L3 Technologies, Inc. 2012 Cash Incentive Plan Performance Cash Award Agreement (2018 Version).
 
L3 Technologies, Inc. Computation of Basic Earnings Per Share and Diluted Earnings Per Common Share.
 
Certification of Chief Executive Officer and President pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
 
Certification of Senior Vice President and Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
 
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.
**
The information required in this exhibit is presented in Note 15 to the unaudited condensed consolidated financial statements as of March 30, 2018 contained in this quarterly report in accordance with the provisions of ASC 260, Earnings Per Share .
***
Filed electronically with this report.
†
Represents management contract or compensatory plan, contract or arrangement in which directors and/or executive officers are entitled to participate.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by the Company in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.



56
Table of Contents


SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
L3 TECHNOLOGIES, INC.
 
 
 
 
By:
/s/ Ralph G. D’Ambrosio
 
Title:
Senior Vice President and Chief Financial Officer
 
 
(Principal Financial Officer and Authorized Signatory)
 
 
 
Date: May 1, 2018
 
 



57
Execution Version

THIRD SUPPLEMENTAL INDENTURE
THIRD SUPPLEMENTAL INDENTURE (this “Third Supplemental Indenture”), dated as of March 30, 2018, among L3 Technologies, Inc., (formerly known as L-3 Communications Corporation) (or its permitted successor), a Delaware corporation (the “Company”), each direct or indirect subsidiary of the Company signatory hereto (each, a “Guaranteeing Subsidiary”, and collectively, the “Guaranteeing Subsidiaries”), and The Bank of New York Mellon, as trustee under the indenture referred to below (the “Trustee”).
W I T N E S S E T H:
WHEREAS, the Company and the Guaranteeing Subsidiaries party thereto have heretofore executed and delivered to the Trustee (1) an indenture (as amended and supplemented to the date hereof, the “Base Indenture”) , dated as of October 2, 2009, providing for the issuance of an unlimited amount of 5  1 / 5 % Senior Notes due 2019 (the “Notes”), (2) a first supplemental indenture, dated as of February 3, 2012 (the “First Supplemental Indenture”), and (3) a second supplemental indenture, dated as of October 31, 2016 (the “Second Supplemental Indenture” together with the Base Indenture and the First Supplemental Indenture, collectively, the “Indenture”), providing for the accession of certain Guaranteeing Subsidiaries.
WHEREAS, the Indenture provides that under certain circumstances the Guaranteeing Subsidiaries shall execute and deliver to the Trustee a supplemental indenture pursuant to which the Guaranteeing Subsidiaries shall unconditionally guarantee all of the Company’s Obligations (as defined in the Indenture) under the Notes and the Indenture on the terms and conditions set forth herein (the “Subsidiary Guarantee”); and
WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is authorized to execute and deliver this Third Supplemental Indenture.
NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties mutually covenant and agree for the equal and ratable benefit of the Holders of the Notes as follows:

1

1.
CAPITALIZED TERMS . Capitalized terms used herein without definition shall have the meanings assigned to them in the Indenture.
2.
AGREEMENT TO GUARANTEE . Each Guaranteeing Subsidiary hereby agrees as follows:
(a)
Such Guaranteeing Subsidiary, jointly and severally with all other current and future guarantors of the Notes (collectively, the “Guarantors” and each, a “Guarantor”), unconditionally guarantees to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, regardless of the validity and enforceability of the Indenture, the Notes or the Obligations of the Company under the Indenture or the Notes, that:
(i)
the principal of, premium, interest and Special Interest, if any, on the Notes will be promptly paid in full when due, whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal of, premium, interest and Special Interest, if any, on the Notes, to the extent lawful, and all other Obligations of the Company to the Holders or the Trustee thereunder or under the Indenture will be promptly paid in full, all in accordance with the terms thereof; and
(ii)
in case of any extension of time for payment or renewal of any Notes or any of such other Obligations, that the same will be promptly paid in full when due in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise.
(b)
Notwithstanding the foregoing, in the event that this Subsidiary Guarantee would constitute or result in a violation of any applicable fraudulent conveyance or similar law of any relevant jurisdiction, the liability of such Guaranteeing Subsidiary under this Third Supplemental Indenture and its Subsidiary Guarantee shall be reduced to the maximum amount permissible under such fraudulent conveyance or similar law.
3.
EXECUTION AND DELIVERY OF SUBSIDIARY GUARANTEES .
(a)
The Subsidiary Guarantee set forth in this Third Supplemental Indenture of a Guaranteeing Subsidiary shall be evidenced by the execution and delivery of this Third Supplemental Indenture by an Officer of such Guaranteeing Subsidiary.
(b)
If the Officer whose signature is on this Third Supplemental Indenture no longer holds that office at the time the Trustee authenticates any Note under the Indenture, the Subsidiary Guarantee shall be valid nevertheless.

2

(c)
The delivery of any Note by the Trustee, after the authentication thereof under the Indenture, shall constitute due delivery of the Subsidiary Guarantee set forth in this Third Supplemental Indenture on behalf of each Guaranteeing Subsidiary.
(d)
Each Guaranteeing Subsidiary hereby agrees that its Obligations hereunder shall be unconditional, regardless of the validity, regularity or enforceability of the Notes or the Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Notes with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor.
(e)
Each Guaranteeing Subsidiary hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever and covenants that its Subsidiary Guarantee made pursuant to this Third Supplemental Indenture will not be discharged except by complete performance of the Obligations contained in the Notes and the Indenture.
(f)
If any Holder or the Trustee is required by any court or otherwise to return to the Company or any Guaranteeing Subsidiary, or any custodian, Trustee, liquidator or other similar official acting in relation to either the Company or such Guaranteeing Subsidiary, any amount paid by either to the Trustee or such Holder, the Subsidiary Guarantee made pursuant to this Third Supplemental Indenture, to the extent theretofore discharged, shall be reinstated in full force and effect.
(g)
Each Guaranteeing Subsidiary agrees that it shall not be entitled to any right of subrogation in relation to the Holders in respect of any Obligations guaranteed hereby until payment in full of all Obligations guaranteed hereby. Each Guaranteeing Subsidiary further agrees that, as between such Guaranteeing Subsidiary, on the one hand, and the Holders and the Trustee, on the other hand:
(i)
the maturity of the Obligations guaranteed hereby may be accelerated as provided in Article 6 of the Indenture for the purposes of the Subsidiary Guarantee made pursuant to this Third Supplemental Indenture, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Obligations guaranteed hereby; and

3

(ii)
in the event of any declaration of acceleration of such Obligations as provided in Article 6 of the Indenture, such Obligations (whether or not due and payable) shall forthwith become due and payable by such Guaranteeing Subsidiary for the purpose of the Subsidiary Guarantee made pursuant to this Third Supplemental Indenture.
(h)
Each Guaranteeing Subsidiary shall have the right to seek contribution from any other non-paying Guaranteeing Subsidiary so long as the exercise of such right does not impair the rights of the Holders or the Trustee under the Subsidiary Guarantee made pursuant to this Third Supplemental Indenture.
4.
GUARANTEEING SUBSIDIARY MAY CONSOLIDATE, ETC. ON CERTAIN TERMS .
(a)
Except as set forth in Article 5 of the Indenture, nothing contained in the Indenture, this Third Supplemental Indenture or in the Notes shall prevent any consolidation or merger of any Guaranteeing Subsidiary with or into the Company or any other Guarantor or shall prevent any transfer, sale or conveyance of the property of any Guaranteeing Subsidiary as an entirety or substantially as an entirety, to the Company or any other Guarantor.
(b)
Except as set forth in Article 5 of the Indenture, nothing contained in the Indenture, this Third Supplemental Indenture or in the Notes shall prevent any consolidation or merger of any Guaranteeing Subsidiary with or into an entity other than the Company or any other Guarantor (in each case, whether or not affiliated with the Guaranteeing Subsidiary), or successive consolidations or mergers in which a Guaranteeing Subsidiary or its successor or successors shall be a party or parties, or shall prevent any sale or conveyance of the property of any Guaranteeing Subsidiary as an entirety or substantially as an entirety, to an entity other than the Company or any other Guarantor (in each case, whether or not affiliated with the Guaranteeing Subsidiary) authorized to acquire and operate the same; provided, however, that each Guaranteeing Subsidiary hereby covenants and agrees that (i) subject to the Indenture, upon any such consolidation, merger, sale or conveyance, the due and punctual performance and observance of all of the covenants and conditions of the Indenture and this Third Supplemental Indenture to be performed by such Guaranteeing Subsidiaries, shall be expressly assumed (in the event that such Guaranteeing Subsidiary is not the surviving entity in the merger), by supplemental indenture satisfactory in form to the Trustee, executed and delivered to the Trustee, by the entity formed by such consolidation, or into which such Guaranteeing Subsidiary shall have been merged, or by the entity which shall have acquired such property and (ii) immediately

4

after giving effect to such consolidation, merger, sale or conveyance no Default or Event of Default exists.
(c)
In case of any such consolidation, merger, sale or conveyance and upon the assumption by the successor entity, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the Subsidiary Guarantee made pursuant to this Third Supplemental Indenture and the due and punctual performance of all of the covenants and conditions of the Indenture and this Third Supplemental Indenture to be performed by such Guaranteeing Subsidiary, such successor entity shall succeed to and be substituted for such Guaranteeing Subsidiary with the same effect as if it had been named herein as the Guaranteeing Subsidiary. Such successor entity thereupon may cause to be signed any or all of the Subsidiary Guarantees to be endorsed upon the Notes issuable under the Indenture which theretofore shall not have been signed by the Company and delivered to the Trustee. All the Subsidiary Guarantees so issued shall in all respects have the same legal rank and benefit under the Indenture and this Third Supplemental Indenture as the Subsidiary Guarantees theretofore and thereafter issued in accordance with the terms of the Indenture and this Third Supplemental Indenture as though all of such Subsidiary Guarantees had been issued at the date of the execution hereof.
5.
RELEASES .
(a)
Upon the release of a Guarantor from its Guarantees of, and all pledges and security interests granted in connection with, all other Indebtedness of the Company, such Guaranteeing Subsidiary shall be released and relieved of its Obligations under its Subsidiary Guarantee and this Third Supplemental Indenture. Any Guaranteeing Subsidiary not released from its Obligations under its Subsidiary Guarantee shall remain liable for the full amount of principal of and interest on the Notes and for the other Obligations of any Guaranteeing Subsidiary under the Indenture as provided herein.
(b)
Each Guaranteeing Subsidiary shall be released and relieved of its obligations under this Third Supplemental Indenture in accordance with, and subject to, Sections 4.09 and 10.04 of the Indenture.
6.
NO RECOURSE AGAINST OTHERS . No past, present or future director, officer, employee, incorporator, stockholder or agent of any Subsidiary of the Company, as such, shall have any liability for any Obligations of the Company or any Subsidiary of the Company under the Notes, any Subsidiary Guarantees, the Indenture or this Third Supplemental Indenture or for any claim based on, in respect of, or by reason of, such Obligations or their creation. Each Holder of the Notes by accepting a Note waives and releases all such liability. The waiver and

5

release are part of the consideration for issuance of the Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the SEC that such a waiver is against public policy.
7.
NEW YORK LAW TO GOVERN . THIS THIRD SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
8.
COUNTERPARTS . The parties may sign any number of copies of this Third Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement.
9.
EFFECT OF HEADINGS . The Section headings herein are for convenience only and shall not affect the construction hereof.
10.
THE TRUSTEE . The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Third Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made solely by the Guaranteeing Subsidiaries and the Company.
11.
BENEFITS ACKNOWLEDGED . Each Guaranteeing Subsidiary’s Guarantee is subject to the terms and conditions set forth in the Indenture. Each Guaranteeing Subsidiary acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by the Indenture and this Third Supplemental Indenture and that the guarantee and waivers made by it pursuant to this Guarantee are knowingly made in contemplation of such benefits.
12.
SUCCESSORS . All agreements of the Guaranteeing Subsidiaries in this Third Supplemental Indenture shall bind its successors, except as otherwise provided in Section 10.04 of the Indenture. All agreements of the Trustee in this Third Supplemental Indenture shall bind its successors.



6


IN WITNESS WHEREOF, the parties hereto have caused this Third Supplemental Indenture to be duly executed, all as of the date first above written.
Dated: March 30, 2018
L3 TECHNOLOGIES, INC. _________________
 
SOUZA-IMAGE.JPG



[Signature Page to Third Supplemental Indenture]     



Electrodynamics, Inc.
Interstate Electronics Corporation
L3 Advanced Programs, Inc. (f/k/a L-3 Advanced Programs, Inc.)
L3 Applied Technologies, Inc. (f/k/a L-3 Applied Technologies, Inc.)
L3 Chesapeake Sciences Corporation (f/k/a L-3 Chesapeake Sciences Corporation)
L-3 Communications AIS GP Corporation
L-3 Communications Avionics Systems, Inc.
L3 Cincinnati Electronics Corporation (f/k/a L-3 Communications Cincinnati Electronics Corporation)
L-3 Communications Electron Technologies, Inc.
Wescam USA, Inc. (f/k/a L-3 Communications EO/IR, Inc.)
L3 ESSCO, Inc. (f/k/a L-3 Communications ESSCO, Inc.)
L-3 Communications Flight Capital LLC
L-3 Communications Flight International Aviation LLC
L-3 Communications Foreign Holdings, Inc.
L-3 Communications Investments Inc.
L3 MariPro, Inc. (f/k/a L-3 Communications MariPro, Inc.)
L3 Mobile-Vision, Inc. (f/k/a L-3 Communications Mobile-Vision, Inc.)
L3 Security & Detection Systems, Inc. (f/k/a L-3 Communications Security And Detection Systems, Inc.)
L-3 Communications Vector International Aviation LLC
L-3 Communications Vertex Aerospace LLC
L3 Westwood Corporation (f/k/a L-3 Communications Westwood Corporation)
L-3 Domestic Holdings, Inc.
L3 Fuzing and Ordnance Systems, Inc. (f/k/a L-3 Fuzing And Ordnance Systems, Inc.)
L3 Unidyne, Inc. (f/k/a L-3 Unidyne, Inc.)
L3 Unmanned Systems, Inc. (f/k/a L-3 Unmanned Systems, Inc.)
Power Paragon, Inc.
SPD Electrical Systems, Inc.
SPD Switchgear Inc.
L-3 Afghanistan, LLC
L-3 Army Sustainment LLC
L-3 Centaur, LLC
L-3 CTC Aviation Holdings Inc.
L-3 CTC Aviation Leasing (US) Inc.
L-3 CTC Aviation Training (US) Inc.
L-3 Investments, LLC
Aerosim Academy, Inc.
Aerosim Technologies, Inc.
Flight Training Acquisitions LLC
ForceX, Inc.
L3 Kigre, Inc.
L3 Adaptive Methods, Inc.
L3 Doss Aviation, Inc.
L3 OceanServer, Inc.
L3 Open Water Power, Inc.
 
As Guaranteeing Subsidiaries ________________
 
SOUZA-IMAGE.JPG

[Signature Page to Third Supplemental Indenture]     



 
L-3 Communications Integrated Systems L.P., a _
Delaware limited partnership ________________
 
 
 
By: L-3 COMMUNICATIONS AIS GP _____ _  
   CORPORATION, ____________ ___________  

   as General Partner _______________________  
 
SOUZA-IMAGE.JPG
 
 
 
Mustang Technology Group, L.P., a Texas limited
partnership __________ ____________________
 
 
 
By: L-3 TECHNOLOGIES, INC., ___________  

   as General Partner ___ ____________________  
 
SOUZA-IMAGE.JPG










[Signature Page to Third Supplemental Indenture]     



Dated: March 30, 2018
THE BANK OF NEW YORK MELLON, ______  
as Trustee _______________________________
 
LATOYA-IMAGE.JPG


[Signature Page to Third Supplemental Indenture]     
Execution Version

NINTH SUPPLEMENTAL INDENTURE
NINTH SUPPLEMENTAL INDENTURE (this “Ninth Supplemental Indenture”) , dated as of March 30, 2018, among L3 Technologies, Inc., (formerly known as L-3 Communications Corporation) (or its permitted successor), a Delaware corporation (the “Company”) , each direct or indirect subsidiary of the Company signatory hereto (each, a “Guaranteeing Subsidiary”, and collectively, the “Guaranteeing Subsidiaries”) , and The Bank of New York Mellon Trust Company, N.A., as trustee under the indenture referred to below (the “Trustee”) .
W I T N E S S E T H :
WHEREAS, the Company and the Guaranteeing Subsidiaries party thereto have heretofore executed and delivered to the Trustee (1) an indenture dated May 21, 2010 (the “Base Indenture”), (2) a first supplemental indenture dated as of May 21, 2010 (the “First Supplemental Indenture”), providing for the issuance of $800,000,000 4.750% Senior Notes due 2020 (the “2020 Notes”) , (3) a second supplemental indenture dated as of February 7, 2011 (the “Second Supplemental Indenture”), providing for the issuance of $650,000,000 4.95% Senior Notes due 2021 (the “2021 Notes”), (4) a third supplemental indenture dated as of November 22, 2011 (the “Third Supplemental Indenture”), providing for the issuance of $500,000,000 3.95% Senior Notes due 2016 (the “2016 Notes”), (5) a fourth supplemental indenture dated as of February 3, 2012 (the “Fourth Supplemental Indenture”), providing for the accession of certain Guaranteeing Subsidiaries, (6) a fifth supplemental indenture dated as of May 28, 2014 (the “Fifth Supplemental Indenture”), providing for the issuance of $350,000,000 1.50% Senior Notes due 2017 (the “2017 Notes”) and the issuance of $650,000,000 3.95% Senior Notes due 2024 (the “2024 Notes”, together with the 2020 Notes, the 2021 Notes, the 2016 Notes, the 2017 Notes and the 2024 Notes, collectively, the “Notes”) (7) a sixth supplemental indenture dated as of June 21, 2016 (the “Sixth Supplemental Indenture”), (8) a seventh supplemental indenture dated as of October 31, 2016 (the “Seventh Supplemental Indenture”), and (9) an eighth supplemental indenture dated as of December 5, 2016 (the “Eighth Supplemental Indenture” together with the First Supplemental Indenture, the Second Supplemental Indenture, the Third Supplemental Indenture, the Fourth Supplemental Indenture, the Fifth Supplemental Indenture, the Sixth Supplemental Indenture, the Seventh Supplemental Indenture and the Base Indenture, collectively, the “Indenture”), effecting certain amendments to the Indenture;
WHEREAS, the Indenture provides that under certain circumstances the Guaranteeing Subsidiaries shall execute and deliver to the Trustee a supplemental indenture pursuant to which the Guaranteeing Subsidiaries shall unconditionally guarantee all of the Company’s Obligations (as defined in the Indenture) under the Notes and the Indenture on the terms and conditions set forth herein (the “Subsidiary Guarantee”); and
WHEREAS, pursuant to Section 9.1 of the Indenture, the Trustee is authorized to execute and deliver this Ninth Supplemental Indenture.
NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties mutually covenant and agree for the equal and ratable benefit of the Holders of the Notes as follows:

1

1.
CAPITALIZED TERMS . Capitalized terms used herein without definition shall have the meanings assigned to them in the Indenture.
2.
SUBSIDIARY GUARANTOR . The Guaranteeing Subsidiaries hereby agree to each be Guarantors under the Indenture and to be bound by, and in accordance with, the terms of the Indenture applicable to Guarantors, including Article 10 thereof.
3.
RELEASES . The Guarantees of the Guaranteeing Subsidiaries shall be unconditionally released and discharged as provided in Section 10.4 of the Indenture.
4.
NO RECOURSE AGAINST OTHERS . No past, present or future director, officer, employee, incorporator, stockholder or agent of any Guarantor, as such, shall have any liability for any Obligations of the Company or any Guarantor under the Notes, any Guarantee, the Indenture or this Ninth Supplemental Indenture or for any claim based on, in respect of, or by reason of, such Obligations or their creation. Each Holder of the Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the SEC that such a waiver is against public policy.
5.
NEW YORK LAW TO GOVERN . THIS NINTH SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
6.
COUNTERPARTS . The parties may sign any number of copies of this Ninth Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement.
7.
EFFECT OF HEADINGS . The Section headings herein are for convenience only and shall not affect the construction hereof.
8.
THE TRUSTEE . The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Ninth Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made solely by the Guaranteeing Subsidiaries and the Company.
9.
BENEFITS ACKNOWLEDGED . Each Guaranteeing Subsidiary’s Guarantee is subject to the terms and conditions set forth in the Indenture. Each Guaranteeing Subsidiary acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by the Indenture and this Ninth Supplemental Indenture and that the guarantee and waivers made by it pursuant to this Guarantee are knowingly made in contemplation of such benefits.

2

10.
SUCCESSORS . All agreements of the Guaranteeing Subsidiaries in this Ninth Supplemental Indenture shall bind its successors, except as otherwise provided in Section 10.4 of the Indenture. All agreements of the Trustee in this Ninth Supplemental Indenture shall bind its successors.

3



IN WITNESS WHEREOF, the parties hereto have caused this Ninth Supplemental Indenture to be duly executed, all as of the date first above written.
Dated: March 30, 2018
L3 TECHNOLOGIES, INC. _________________
 
SOUZA-IMAGE.JPG


[Signature Page to Ninth Supplemental Indenture]     









Electrodynamics, Inc.
Interstate Electronics Corporation
L3 Advanced Programs, Inc. (f/k/a L-3 Advanced Programs, Inc.)
L3 Applied Technologies, Inc. (f/k/a L-3 Applied Technologies, Inc.)
L3 Chesapeake Sciences Corporation (f/k/a L-3 Chesapeake Sciences Corporation)
L-3 Communications AIS GP Corporation
L-3 Communications Avionics Systems, Inc.
L3 Cincinnati Electronics Corporation (f/k/a L-3 Communications Cincinnati Electronics Corporation)
L-3 Communications Electron Technologies, Inc.
Wescam USA, Inc. (f/k/a L-3 Communications EO/IR, Inc.)
L3 ESSCO, Inc. (f/k/a L-3 Communications ESSCO, Inc.)
L-3 Communications Flight Capital LLC
L-3 Communications Flight International Aviation LLC
L-3 Communications Foreign Holdings, Inc.
L-3 Communications Investments Inc.
L3 MariPro, Inc. (f/k/a L-3 Communications MariPro, Inc.)
L3 Mobile-Vision, Inc. (f/k/a L-3 Communications Mobile-Vision, Inc.)
L3 Security & Detection Systems, Inc. (f/k/a L-3 Communications Security And Detection Systems, Inc.)
L-3 Communications Vector International Aviation LLC
L-3 Communications Vertex Aerospace LLC
L3 Westwood Corporation (f/k/a L-3 Communications Westwood Corporation)
L-3 Domestic Holdings, Inc.
L3 Fuzing and Ordnance Systems, Inc. (f/k/a L-3 Fuzing And Ordnance Systems, Inc.)
L3 Unidyne, Inc. (f/k/a L-3 Unidyne, Inc.)
L3 Unmanned Systems, Inc. (f/k/a L-3 Unmanned Systems, Inc.)
Power Paragon, Inc.
SPD Electrical Systems, Inc.
SPD Switchgear Inc.
L-3 Afghanistan, LLC
L-3 Army Sustainment LLC
L-3 Centaur, LLC
L-3 CTC Aviation Holdings Inc.
L-3 CTC Aviation Leasing (US) Inc.
L-3 CTC Aviation Training (US) Inc.
L-3 Investments, LLC
Aerosim Academy, Inc.
Aerosim Technologies, Inc.
Flight Training Acquisitions LLC
ForceX, Inc.
L3 Kigre, Inc.
L3 Adaptive Methods, Inc.
L3 Doss Aviation, Inc.
L3 OceanServer, Inc.
L3 Open Water Power, Inc.
 
As Guaranteeing Subsidiaries ________________
 
SOUZA-IMAGE.JPG

[Signature Page to Ninth Supplemental Indenture]     



 
L-3 Communications Integrated Systems L.P., a _
Delaware limited partnership ________________
 
 
 
By: L-3 COMMUNICATIONS AIS GP _____ _
   CORPORATION, ____________ ___________

   as General Partner _______________________
 
SOUZA-IMAGE.JPG
 
 
 
Mustang Technology Group, L.P., a Texas limited
partnership __________ ____________________
 
 
 
By: L-3 TECHNOLOGIES, INC., ___________  

   as General Partner ___ ____________________  
 
SOUZA-IMAGE.JPG










[Signature Page to Ninth Supplemental Indenture]     



Dated: March 30, 2018
THE BANK OF NEW YORK MELLON TRUST
COMPANY, N.A., ________________________
as Trustee _______________________________
 
VALERE-IMAGE.JPG



[Signature Page to Ninth Supplemental Indenture]     


L3 TECHNOLOGIES, INC.
AMENDED AND RESTATED
2008 LONG TERM PERFORMANCE PLAN
NONQUALIFIED STOCK OPTION AGREEMENT
(Version 0011)


THIS AGREEMENT , effective as of the Grant Date (as defined below), is between L3 Technologies, Inc., a Delaware corporation (the “Company”), and the Optionee (as defined below).

WHEREAS , the Company has adopted the L3 Technologies, Inc. Amended and Restated 2008 Long Term Performance Plan (the “Plan”) in order to provide additional incentives to selected officers and employees of the Company and its subsidiaries; and

WHEREAS , the following terms shall have the following meanings for purposes of this Option Agreement:

“Award Letter” shall mean the letter to the Optionee attached hereto as Exhibit A;

“Common Stock” means the Company’s Common Stock, par value $0.01 per share;

“Exercise Price” shall mean the “Grant Price” listed in the Award Letter;

“Grant Date” shall mean the “Grant Date” listed in the Award Letter;

“Option Agreement” or this “Agreement” shall mean this agreement including (unless the context otherwise requires) the Award Letter.

“Optionee” shall mean the “Participant” listed in the Award Letter; and

“Shares” shall mean that number of shares of Common Stock listed in the Award Letter as “Awards Granted.”

NOW, THEREFORE , the parties hereto agree as follows:

1.     Grant of Option.

1.1    Effective as of the Grant Date, for good and valuable consideration, the Company hereby irrevocably grants to the Optionee the right and option (the “Option”) to purchase all or any part of the Shares, subject to, and in accordance with, the terms and conditions set forth in this Option Agreement.

1.2    The Option is not intended to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code.

1.3    This Option Agreement shall be construed in accordance and consistent with, and subject to, the terms of the Plan (the provisions of which are incorporated hereby by reference); and, except as otherwise expressly set forth herein, the capitalized terms used in this Option Agreement shall have the same definitions as set forth in the Plan. In the event of any conflict between one or more of this Option Agreement, the Award Letter and the Plan, the Plan shall govern this Option Agreement and the Award Letter, and the Option Agreement (to the extent not in conflict with the Plan) shall govern the Award Letter.



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2.     Exercise Price.

The price at which the Optionee shall be entitled to purchase the Shares upon the exercise of the Option shall be the Exercise Price per share, subject to adjustment as provided in Section 9.

3.     Duration of Option.

The Option shall be exercisable to the extent and in the manner provided herein for a period of ten (10) years from the Grant Date (the “Exercise Term”); provided , however , that the Option may be earlier terminated as provided in Section 6 hereof.

4.     Exercisability of Option.

Unless otherwise provided in this Option Agreement or the Plan, the Option shall entitle the Optionee to purchase, in whole at any time or in part from time to time, one-third (1/3 rd ) of the total number of shares covered by the Option on the first anniversary of the Grant Date, an additional one-third (1/3 rd ) of the total number of Shares covered by the Option on the second anniversary of the Grant Date and the final one-third (1/3 rd ) of the total number of Shares covered by the Option on the expiration of the third anniversary of the Grant Date. Each such right of purchase shall be cumulative and shall continue, unless sooner exercised or terminated as herein provided, during the remaining period of the Exercise Term.

5.     Manner of Exercise and Payment.

5.1    Subject to the terms and conditions of this Option Agreement and the Plan, the Option may be exercised by delivery of written notice to the Secretary of the Company (or his or her designee), at its principal executive office. Such notice shall state that the Optionee or other authorized person is electing to exercise the Option and the number of Shares in respect of which the Option is being exercised and shall be signed by the person or persons exercising the Option. In the event the Company has designated an Award Administrator (as defined below), the Option may also be exercised by giving notice (including through electronic means) in accordance with the procedures established from time to time by the Award Administrator. Any exercisable portion of the Option or the entire Option, if then wholly exercisable, may be exercised in whole or in part, provided that partial exercise shall be for whole shares of Common Stock only. If requested by the Committee, such person or persons shall (i) deliver this Agreement (including the Award Letter) to the Secretary of the Company who shall endorse thereon a notation of such exercise and (ii) provide satisfactory proof as to the right of such person or persons to exercise the Option.

5.2    The notice of exercise described in Section 5.1 shall be accompanied by either (i) payment of the full purchase price for the Shares in respect of which the Option is being exercised and of all applicable Withholding Taxes (as defined in Section 11) pursuant to Section 11 hereof (such payment to be made in cash, by delivering Shares, by withholding a portion of the Shares otherwise issuable or by any combination thereof) or (ii) instructions from the Optionee to the Company directing the Company to deliver a specified number of Shares directly to a designated broker or dealer pursuant to a cashless exercise election, in which case the Company must receive, prior to the issuance of the Shares in respect of which the Option is being exercised, payment of the full purchase price for the Shares in respect of which the Option is being exercised and all applicable Withholding Taxes pursuant to Section 11 hereof (such payment to be made in cash, by delivering Shares, by withholding a portion of the Shares otherwise issuable or by any combination thereof). The value of any Shares withheld or delivered in satisfaction of the purchase price for the Shares in respect of which the Option is being exercised and/or Withholding Taxes shall be determined by reference to the Fair Market Value of such Shares as of the date of such withholding or delivery. In the event that Withholding Taxes are satisfied by withholding a portion of the Shares otherwise issuable in connection with an exercise of the Option, the Company shall not withhold


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any Shares in excess of the minimum number of Shares necessary to satisfy the applicable Withholding Taxes.

5.3    Upon receipt of the notice of exercise and any payment or other documentation as may be necessary pursuant to Sections 5.1 and 5.2 relating to the Shares in respect of which the Option is being exercised, the Company shall, subject to the Plan and this Option Agreement, take such action as may be necessary to effect the transfer to the Optionee of the number of Shares as to which such exercise was effective.

5.4    The Optionee shall not be deemed to be the holder of, or to have any of the rights and privileges of a stockholder of the Company in respect of, Shares purchased upon exercise of the Option until (i) the Option shall have been exercised pursuant to the terms of this Option Agreement and the Optionee shall have paid the full purchase price for the number of Shares in respect of which the Option was exercised and any applicable Withholding Taxes and (ii) the Company shall have issued the Shares in connection with such exercise.

6.     Termination of Employment; Permanent Disability.

6.1    If, prior to the date of the initial vesting of the Option pursuant to Section 4 hereof (the “Initial Vesting Date”), the Optionee’s employment with the Company and its subsidiaries shall be terminated for any reason, other than death or permanent disability (as herein defined), the Optionee’s right to exercise the Option shall terminate as of the effective date of termination (the “Termination Date”) and all rights hereunder shall cease (unless otherwise provided for by the Committee in accordance with the Plan).

6.2    Upon the Optionee’s death or permanent disability, the Option shall become immediately fully exercisable as to 100% of the Shares subject to the Option, and the Optionee or the executor or administrator of the estate of the Optionee or the person or persons to whom the Option shall have been validly transferred by the executor or the administrator pursuant to will or the laws of descent or distribution shall have the right, within one year from the date of the Optionee’s death or permanent disability, to exercise the Option, subject to any other limitation contained herein on the exercise of the Option in effect at the date of exercise. For purposes hereof, “permanent disability” means the Optionee (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment 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 be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Optionee’s employer.

6.3    If, on or after the Initial Vesting Date, the Optionee’s employment with the Company and its subsidiaries shall be terminated for any reason other than for Cause or death or permanent disability, the Optionee shall have the right within three months after the Termination Date (or, if the Optionee’s employment with the Company and its subsidiaries is terminated by reason of a qualified retirement as herein defined, within three years after the Termination Date) to exercise the Option to the extent that installments thereof shall have been or become exercisable at the Termination Date and shall not have been exercised, subject to any other limitation contained herein on the exercise of the Option in effect at the date of exercise, and (unless otherwise provided for by the Committee in accordance with the Plan) the Optionee’s right to exercise any installments of the Option that were not exercisable at the Termination Date (if any) shall terminate as of the Termination Date. If the Optionee’s employment is terminated for Cause, the Option shall terminate as of the Termination Date, whether or not exercisable. For purposes hereof, “Cause” means the Optionee’s (i) intentional failure to perform reasonably assigned duties, (ii) dishonesty or willful misconduct in the performance of duties, (iii) engaging in a transaction in connection with the performance of duties to the Company or its subsidiaries which transaction is adverse to the interests of the Company or its subsidiaries and is engaged in for


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personal profit or (iv) willful violation of any law, rule or regulation in connection with the performance of duties (other than traffic violations or similar offenses). In addition, “qualified retirement” means the Optionee (a) terminates employment with the Company and its subsidiaries other than for Cause (and is not subject to termination for Cause at the time of such termination) more than one year after the Grant Date, (b) is available for consultation with the Company or its subsidiaries at the reasonable request of the Company or its subsidiaries and (c) terminates employment either (1) on or after attaining age 60 and completing at least five years of service in the aggregate with the Corporation and its subsidiaries (which service must be continuous through the date of termination except for a single break in service that does not exceed one year in length), or (2) on or after attaining age 65.

6.4    If the Optionee shall die within the three-month period (or the three-year period, if applicable) referred to in Section 6.3 above, the Optionee or the executor or administrator of the estate of the Optionee or the person or persons to whom the Option shall have been validly transferred by the executor or administrator pursuant to will or the laws of descent and distribution shall have the right, within one year from the date of the Optionee’s death (or, if longer and applicable under Section 6.3 above, within the original three-year period referred to therein), to exercise the Option to the extent that the Option was exercisable at the date of death, subject to any other limitation contained herein on the exercise of the Option in effect at the date of exercise.

6.5    The Optionee’s rights with respect to the Option shall not be affected by any change in the nature of the Optionee’s employment so long as the Optionee continues to be an employee of the Company or any of its subsidiaries. Whether (and the circumstances under which) employment has been terminated and the determination of the Termination Date for the purposes of this Agreement (or whether, and the date upon which, the Optionee as suffered a permanent disability) shall be determined by the Committee or (with respect to any employee other than an “Executive Officer” as defined under the Plan) its designee (who, at the date of this Agreement, shall be the Company’s Vice President of Human Resources), whose good faith determination shall be final, binding and conclusive; provided , that such designee may not make any such determination with respect to his or her own employment.

7.     Nontransferability.

The Option shall not be transferable other than by will or by the laws of descent and distribution, and during the lifetime of the Optionee, the Option shall be exercisable only by the Optionee. After the death of the Optionee, any exercisable portion of the Option may, prior to the time when the Option becomes unexercisable under Section 6.2 or 6.4, be exercised by the Optionee’s personal representative or by any person empowered to do so under the Optionee’s will or under the then applicable laws of descent and distribution.

8.     No Right to Continued Employment.

Nothing in this Option Agreement or the Plan shall be interpreted or construed to confer upon the Optionee any right to continue employment by the Company or any of its subsidiaries, nor shall this Agreement or the Plan interfere in any way with the right of the Company or any of its subsidiaries to terminate the Optionee’s employment at any time for any reason whatsoever, whether or not with Cause.

9.     Adjustments.

In the event that the outstanding shares of the Common Stock are, from time to time, changed into or exchanged for a different number or kind of shares of the capital stock of the Company or other securities of the Company by reason of a merger, consolidation, recapitalization, reclassification, stock split, stock dividend, combination of capital stock, or other similar increase or decrease in the number of shares outstanding without receiving compensation therefor, the Committee shall, in accordance with the terms of the Plan, make an appropriate and equitable adjustment in the number and kind of Shares or other consideration as to which such Option, or portions thereof then unexercised, shall


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be exercisable and the exercise price therefor. Any such adjustment made by the Committee shall be final, binding and conclusive upon the Optionee, the Company and all other interested persons. Any such adjustment may provide for the elimination of any fractional share which might otherwise become subject to the Option. This paragraph shall also apply with respect to any extraordinary dividend or other extraordinary distribution in respect of the Common Stock (whether in the form of cash or other property).

10.     Effect of a Change in Control.

10.1    Notwithstanding anything contained in the Plan or this Agreement to the contrary, in the event of a Change in Control, (a) the Option becomes immediately and fully exercisable as to 100% of the Shares subject to the Option, and (b) upon termination of an Optionee’s employment with the Company, following a Change in Control, the Option shall remain exercisable until one year after termination, but in no event beyond the Exercise Term. The Company reserves the right to change or modify in any way the definition of Change in Control set forth in this Option Agreement and any such change or modification shall be binding on the Optionee.

10.2    For the purposes of this Option Agreement, “Change in Control” shall mean the first to occur of the following:

a.
The acquisition by any person or group (including a group within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than the Company or any of its subsidiaries, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a majority of the combined voting power of the Company’s then outstanding voting securities, other than by any employee benefit plan maintained by the Company;

a.
The sale of all or substantially all the assets of the Company and its subsidiaries taken as a whole;

b.
The consummation of a merger, combination, consolidation, recapitalization or other reorganization of the Company 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 or resulting corporation shall immediately after the event be beneficially owned in the aggregate by the stockholders of the Company immediately prior to the event; or

a.
The election, including the filling of vacancies, during any period of 24 months or less, of 50% or more, of the members 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 Company who either (i) is a member of the Board of Directors on the Grant Date, or (ii) is nominated for election to the Board of Directors by a majority of the Board which is comprised of directors who were, at the time of such nomination, Continuing Directors.

11.     Withholding of Taxes.

As a condition to the issuance of Shares in respect of any exercise of the Option or any other issuance or payment to the Optionee hereunder, the Optionee shall pay to the Company (and the Company shall have the right to deduct from any distribution of cash to the Optionee) the minimum amount necessary to satisfy Federal, state, local and foreign withholding tax requirements, if any (“Withholding Taxes”) with respect to such exercise, issuance or payment.



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12.     Optionee bound by the Plan.

The Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof.

13.     Modification of Agreement.

This Agreement may not be modified, amended, suspended or terminated, and any terms or conditions may not be waived, without the approval of the Committee. The Committee reserves the right to amend or modify this Agreement at any time without prior notice to the Optionee or any other interested party; provided , that except as expressly provided hereunder, any such amendment or modification may not adversely affect in any material respect the Optionee’s rights or benefits hereunder except for such amendments or modifications as are required by law.
 
14.     Severability.

Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms.

15.     Governing Law.

The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York without giving effect to the conflicts of laws principles thereof. If the Optionee has received a copy of this Agreement (or the Plan or any other document related hereto or thereto) translated into a language other than English, such translated copy is qualified in its entirety by reference to the English version thereof, and in the event of any conflict the English version will govern.

16.     Successors in Interest.

This Agreement shall inure to the benefit of and be binding upon any successor to the Company. This Agreement shall inure to the benefit of the Optionee or the Optionee’s legal representatives. All obligations imposed upon the Optionee and all rights granted to the Company under this Agreement shall be final, binding and conclusive upon the Optionee’s heirs, executors, administrators and successors.

17.     Administration.

The Committee shall have the power to interpret the Plan and this Option Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Optionee, the Company and all other interested persons. No member of the Committee shall be personally liable for any action determination or interpretation made in good faith with respect to the Plan or the Options. In its absolute discretion, the Board of Directors may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan and this Option Agreement.

18.     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 made hereunder shall be final, binding and conclusive on the Optionee and Company for all purposes.


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19.     Data Privacy Consent.

As a condition of the grant of the Option, the Optionee hereby consents to the collection, use and transfer of personal data as described in this paragraph. The Optionee understands that the Company and its subsidiaries hold certain personal information about the Optionee, including name, home address and telephone number, date of birth, social security number, salary, nationality, job title, ownership interests or directorships held in the Company or its subsidiaries, and details of all stock options or other equity awards or other entitlements to shares of common stock awarded, cancelled, exercised, vested or unvested (“Data”). The Optionee further understands that the Company and its subsidiaries will transfer Data among themselves as necessary for the purposes of implementation, administration and management of the Optionee’s participation in the Plan, and that the Company and any of its subsidiaries may each further transfer Data to any third parties assisting the Company in the implementation, administration and management of the Plan. The Optionee understands that these recipients may be located in the European Economic Area or elsewhere, such as the United States. The Optionee 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 stock on the Optionee’s behalf, in electronic or other form, for the purposes of implementing, administering and managing the Optionee’s participation in the Plan, including any requisite transfer to a broker or other third party with whom the Optionee may elect to deposit any shares of common stock acquired under the Plan. The Optionee may, at any time, view such Data or require any necessary amendments to it.

20.     Limitation on Rights; No Right to Future Grants; Extraordinary Item of Compensation.

By accepting this Agreement and the grant of the Option evidenced hereby, the Optionee expressly acknowledges that (a) the Plan is discretionary in nature and may be suspended or terminated by the Company at any time; (b) the grant of the Option is a one-time benefit that does not create any contractual or other right to receive future grants of options, or benefits in lieu of options; (c) all determinations with respect to future option grants, if any, including the grant date, the number of Shares granted, the exercise price and the exercise date or dates, will be at the sole discretion of the Company; (d) the Optionee’s participation in the Plan is voluntary; (e) the value of the Option is an extraordinary item of compensation that is outside the scope of the Optionee’s employment contract, if any, and nothing can or must automatically be inferred from such employment contract or its consequences; (f) Options 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 Optionee waives any claim on such basis; and (g) the future value of the underlying Shares is unknown and cannot be predicted with certainty. In addition, the Optionee understands, acknowledges and agrees that the Optionee will have no rights to compensation or damages related to option proceeds in consequence of the termination of the Optionee’s employment for any reason whatsoever and whether or not in breach of contract.

21.     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 other than corporations), is owned or controlled (directly or indirectly) by that entity, or by one or more of the Subsidiaries of that entity, or by a combination thereof.

22.     Award Administrator.

The Company may from time to time to designate a third party (an “Award Administrator”) to assist the Company in the implementation, administration and management of the Plan and any Options granted thereunder, including by sending Award Letters on behalf of the Company to


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Optionees, and by facilitating through electronic means acceptance of Option Agreements by Optionees and Option exercises by Optionees.

23.     Book Entry Delivery of Shares.

Whenever reference in this Agreement is made to the issuance or delivery of certificates representing one or more Shares, the Company may elect to issue or deliver such Shares in book entry form in lieu of certificates.

24.     Acceptance.

This Agreement shall not be enforceable until it has been executed by the Optionee. In the event the Company has designated an Award Administrator, the acceptance (including through electronic means) of the Option contemplated by this Option Agreement in accordance with the procedures established from time to time by the Award Administrator shall be deemed to constitute the Optionee’s acknowledgment and agreement to the terms and conditions of this Option Agreement and shall have the same legal effect in all respects of the Optionee having executed this Option Agreement by hand.
 

 
By: L3 TECHNOLOGIES, INC. _______
 
KUBASIK-IMAGE.JPG
————————————————————
Christopher E. Kubasik _________________
Chief Executive Officer and President __ ___
 
 
 
DAVIDSON-IMAGE.JPG
————————————————————
Ann D. Davidson ______________________
Senior Vice President, General Counsel and _
Corporate Secretary __________________
                


Acknowledged and Agreed
as of the date first written above:


Participant ES
______________________________
Optionee Signature


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Exhibit A


L3 Technologies, Inc.
Nonqualified Stock Option Award Notification Letter



Participant: Participant Name

Grant Date: Grant Date

Grant Price: Grant Price

Awards Granted: # Shares shares





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L3 TECHNOLOGIES, INC.
AMENDED AND RESTATED
2008 LONG TERM PERFORMANCE PLAN
NONQUALIFIED STOCK OPTION AGREEMENT
(Version CEO 2018)


THIS AGREEMENT , effective as of the Grant Date (as defined below), is between L3 Technologies, Inc., a Delaware corporation (the “Company”), and the Optionee (as defined below).

WHEREAS , the Company has adopted the L3 Technologies, Inc. Amended and Restated 2008 Long Term Performance Plan (the “Plan”) in order to provide additional incentives to selected officers and employees of the Company and its subsidiaries; and

WHEREAS , the following terms shall have the following meanings for purposes of this Option Agreement:

“Award Letter” shall mean the letter to the Optionee attached hereto as Exhibit A;

“Common Stock” means the Company’s Common Stock, par value $0.01 per share;

“Continuing Operations” means continuing operations as presented at the beginning of 2018 (i.e., excluding the Vertex operations).

“Diluted EPS” means diluted earnings per common share from Continuing Operations of the Company, determined in accordance with GAAP and as derived from the Company’s audited consolidated financial statements prepared in the ordinary course of business; provided , that Diluted EPS shall be calculated so as to eliminate the effect of any: (a) impairment losses incurred on goodwill and other intangible assets or on debt or equity investments computed in accordance with Financial Accounting Standard No. 142 or other GAAP; (b) gains or losses incurred on the retirement of debt computed in accordance with Financial Accounting Standard No. 145; (c) extraordinary gains and losses in accordance with GAAP; (d) gains and losses related to changes in U.S. Federal statutory tax rates; (e) gains and losses in connection with asset dispositions that are not contemplated under the Corporation’s most recent internal plan for the year as presented to the Board of Directors prior to the Grant Date; (f) non-cash gains or losses on discontinued operations; (g) adoption by the Company of any new accounting standards required by GAAP or the Securities and Exchange Commission following the Grant Date; (h) gains or losses of $5 million or more individually, or $25 million or more in the aggregate, in respect of litigation matters; and (i) gains or losses (other than accrued interest) related to the resolution of income tax contingencies for business acquisitions, to the extent that such contingencies were established as of the dates of such acquisitions in the GAAP purchase price allocations in respect thereof;

“Exercise Price” shall mean the “Grant Price” listed in the Award Letter;

“Free Cash Flow” means (a) the Company’s net cash from operating activities, minus (b) capital expenditures, plus (c) dispositions of property, plant and equipment, in each case from Continuing Operations, determined in accordance with GAAP and as derived from the Company’s audited consolidated financial statements prepared in the ordinary course of business; provided , that Free Cash Flow shall be calculated so as to eliminate the effect of: (i) discretionary contributions to pension plans that exceed the contributions forecasted in the Company’s most recent internal plan for the year as presented to the Board of Directors prior to the Grant Date; (ii) premiums and other payments in excess of principal and accrued interest associated with the retirement of debt , including without limitation payments of income taxes incurred in connection therewith; and (iii) tax payments or benefits associated with gains or losses on business divestitures in calculating net cash from operating activities;



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“GAAP” shall mean generally accepted accounting principles in the United States.

“Grant Date” shall mean the “Grant Date” listed in the Award Letter;

“Option Agreement” or this “Agreement” shall mean this agreement including (unless the context otherwise requires) the Award Letter.

“Optionee” shall mean the “Participant” listed in the Award Letter; and

“Shares” shall mean that number of shares of Common Stock listed in the Award Letter as “Awards Granted,” subject to Section 4.2.

NOW, THEREFORE , the parties hereto agree as follows:

1.     Grant of Option.

1.1    Effective as of the Grant Date, for good and valuable consideration, the Company hereby irrevocably grants to the Optionee the right and option (the “Option”) to purchase all or any part of the Shares, subject to, and in accordance with, the terms and conditions set forth in this Option Agreement.

1.2    The Option is not intended to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code.

1.3    This Option Agreement shall be construed in accordance and consistent with, and subject to, the terms of the Plan (the provisions of which are incorporated hereby by reference); and, except as otherwise expressly set forth herein, the capitalized terms used in this Option Agreement shall have the same definitions as set forth in the Plan. In the event of any conflict between one or more of this Option Agreement, the Award Letter and the Plan, the Plan shall govern this Option Agreement and the Award Letter, and the Option Agreement (to the extent not in conflict with the Plan) shall govern the Award Letter.

2.     Exercise Price.

The price at which the Optionee shall be entitled to purchase the Shares upon the exercise of the Option shall be the Exercise Price per share, subject to adjustment as provided in Section 9.

3.     Duration of Option.

The Option shall be exercisable to the extent and in the manner provided herein for a period of ten (10) years from the Grant Date (the “Exercise Term”); provided , however , that the Option may be earlier terminated as provided in Section 6 hereof.

4.     Exercisability of Option.

4.1    Subject to Section 4.2, and unless otherwise provided in this Option Agreement or the Plan, the Option shall entitle the Optionee to purchase, in whole at any time or in part from time to time, one-third (1/3 rd ) of the total number of Shares covered by the Option on the first anniversary of the Grant Date, an additional one-third (1/3 rd ) of the total number of Shares covered by the Option on the second anniversary of the Grant Date and the final one-third (1/3 rd ) of the total number of Shares covered by the Option on the expiration of the third anniversary of the Grant Date. Each such right of purchase shall be cumulative and shall continue, unless sooner exercised or terminated as herein provided, during the remaining period of the Exercise Term.



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4.2    No right of purchase in respect of the Option shall become exercisable by virtue of Section 4.1 prior to the Determination Date. As promptly as practicable following December 31, 2018, the Committee shall determine, subject to Section 4.3, whether the following conditions have been satisfied (the “Performance Conditions”): (a) the Company’s Diluted EPS for the year ended December 31, 2018 is at least $7.99; and (b) the Company’s Free Cash Flow for the year ended December 31, 2018 is at least $765 million (the date of such determinations being referred to herein as the “Determination Date”). In the event that (i) the Committee determines that only one of the two Performance Conditions shall have been satisfied as of the Determination Date and (ii) the Option shall not have become fully exercisable prior to the Determination Date under Section 6 or 10, then the number of Shares subject to the Option shall be automatically reduced by 50% (rounded to the nearest whole Share). In the event that (1) the Committee determines that none of the Performance Conditions shall have been satisfied as of the Determination Date and (2) the Option shall not have become fully exercisable prior to the Determination Date under Section 6 or 10, then Optionee’s right to exercise all or any portion of the Option shall automatically be terminated, and all of Optionee’s rights hereunder shall cease.

4.3    In the event of an equity restructuring, as defined in Financial Accounting Standards Board Accounting Standards Codification 718-10 (formerly Statement of Financial Accounting Standards 123R ), the Committee shall adjust any Performance Conditions affected by such restructuring so as to preserve (without enlarging) the likelihood that such Performance Conditions shall be satisfied, with the manner of such adjustment to be determined by the Committee in its sole discretion.

5.     Manner of Exercise and Payment.

5.1    Subject to the terms and conditions of this Option Agreement and the Plan, the Option may be exercised by delivery of written notice to the Secretary of the Company (or his or her designee), at its principal executive office. Such notice shall state that the Optionee or other authorized person is electing to exercise the Option and the number of Shares in respect of which the Option is being exercised and shall be signed by the person or persons exercising the Option. In the event the Company has designated an Award Administrator (as defined below), the Option may also be exercised by giving notice (including through electronic means) in accordance with the procedures established from time to time by the Award Administrator. Any exercisable portion of the Option or the entire Option, if then wholly exercisable, may be exercised in whole or in part, provided that partial exercise shall be for whole shares of Common Stock only. If requested by the Committee, such person or persons shall (i) deliver this Agreement (including the Award Letter) to the Secretary of the Company who shall endorse thereon a notation of such exercise and (ii) provide satisfactory proof as to the right of such person or persons to exercise the Option.

5.2    The notice of exercise described in Section 5.1 shall be accompanied by either (i) payment of the full purchase price for the Shares in respect of which the Option is being exercised and of all applicable Withholding Taxes (as defined in Section 11) pursuant to Section 11 hereof (such payment to be made in cash, by delivering Shares, by withholding a portion of the Shares otherwise issuable or by any combination thereof) or (ii) instructions from the Optionee to the Company directing the Company to deliver a specified number of Shares directly to a designated broker or dealer pursuant to a cashless exercise election, in which case the Company must receive, prior to the issuance of the Shares in respect of which the Option is being exercised, payment of the full purchase price for the Shares in respect of which the Option is being exercised and all applicable Withholding Taxes pursuant to Section 11 hereof (such payment to be made in cash, by delivering Shares, by withholding a portion of the Shares otherwise issuable or by any combination thereof). The value of any Shares withheld or delivered in satisfaction of the purchase price for the Shares in respect of which the Option is being exercised and/or Withholding Taxes shall be determined by reference to the Fair Market Value of such Shares as of the date of such withholding or delivery. In the event that Withholding Taxes are satisfied by withholding a portion of the Shares otherwise issuable in connection with an exercise of the Option, the Company shall not withhold


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any Shares in excess of the minimum number of Shares necessary to satisfy the applicable Withholding Taxes.

5.3    Upon receipt of the notice of exercise and any payment or other documentation as may be necessary pursuant to Sections 5.1 and 5.2 relating to the Shares in respect of which the Option is being exercised, the Company shall, subject to the Plan and this Option Agreement, take such action as may be necessary to effect the transfer to the Optionee of the number of Shares as to which such exercise was effective.

5.4    The Optionee shall not be deemed to be the holder of, or to have any of the rights and privileges of a stockholder of the Company in respect of, Shares purchased upon exercise of the Option until (i) the Option shall have been exercised pursuant to the terms of this Option Agreement and the Optionee shall have paid the full purchase price for the number of Shares in respect of which the Option was exercised and any applicable Withholding Taxes and (ii) the Company shall have issued the Shares in connection with such exercise.

6.     Termination of Employment; Permanent Disability.

6.1    If, prior to the date of the initial vesting of the Option pursuant to Section 4 hereof (the “Initial Vesting Date”), the Optionee’s employment with the Company and its subsidiaries shall be terminated for any reason, other than death or permanent disability (as herein defined), the Optionee’s right to exercise the Option shall terminate as of the effective date of termination (the “Termination Date”) and all rights hereunder shall cease (unless otherwise provided for by the Committee in accordance with the Plan).

6.2    Upon the Optionee’s death or permanent disability, the Option shall become immediately fully exercisable as to 100% of the Shares subject to the Option, and the Optionee or the executor or administrator of the estate of the Optionee or the person or persons to whom the Option shall have been validly transferred by the executor or the administrator pursuant to will or the laws of descent or distribution shall have the right, within one year from the date of the Optionee’s death or permanent disability, to exercise the Option, subject to any other limitation contained herein on the exercise of the Option in effect at the date of exercise. For purposes hereof, “permanent disability” means the Optionee (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment 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 be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Optionee’s employer.

6.3    If, on or after the Initial Vesting Date, the Optionee’s employment with the Company and its subsidiaries shall be terminated for any reason other than for Cause or death or permanent disability, the Optionee shall have the right within three months after the Termination Date (or, if the Optionee’s employment with the Company and its subsidiaries is terminated by reason of a qualified retirement as herein defined, within three years after the Termination Date) to exercise the Option to the extent that installments thereof shall have been or become exercisable at the Termination Date and shall not have been exercised, subject to any other limitation contained herein on the exercise of the Option in effect at the date of exercise, and (unless otherwise provided for by the Committee in accordance with the Plan) the Optionee’s right to exercise any installments of the Option that were not exercisable at the Termination Date (if any) shall terminate as of the Termination Date. If the Optionee’s employment is terminated for Cause, the Option shall terminate as of the Termination Date, whether or not exercisable. For purposes hereof, “Cause” means the Optionee’s (i) intentional failure to perform reasonably assigned duties, (ii) dishonesty or willful misconduct in the performance of duties, (iii) engaging in a transaction in connection with the performance of duties to the Company or its subsidiaries which transaction is adverse to the interests of the Company or its subsidiaries and is engaged in for


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personal profit or (iv) willful violation of any law, rule or regulation in connection with the performance of duties (other than traffic violations or similar offenses). In addition, “qualified retirement” means the Optionee (a) terminates employment with the Company and its subsidiaries other than for Cause (and is not subject to termination for Cause at the time of such termination) more than one year after the Grant Date, (b) is available for consultation with the Company or its subsidiaries at the reasonable request of the Company or its subsidiaries and (c) terminates employment either (1) on or after attaining age 60 and completing at least five years of service in the aggregate with the Corporation and its subsidiaries (which service must be continuous through the date of termination except for a single break in service that does not exceed one year in length), or (2) on or after attaining age 65.

6.4    If the Optionee shall die within the three-month period (or the three-year period, if applicable) referred to in Section 6.3 above, the Optionee or the executor or administrator of the estate of the Optionee or the person or persons to whom the Option shall have been validly transferred by the executor or administrator pursuant to will or the laws of descent and distribution shall have the right, within one year from the date of the Optionee’s death (or, if longer and applicable under Section 6.3 above, within the original three-year period referred to therein), to exercise the Option to the extent that the Option was exercisable at the date of death, subject to any other limitation contained herein on the exercise of the Option in effect at the date of exercise.

6.5    The Optionee’s rights with respect to the Option shall not be affected by any change in the nature of the Optionee’s employment so long as the Optionee continues to be an employee of the Company or any of its subsidiaries. Whether (and the circumstances under which) employment has been terminated and the determination of the Termination Date for the purposes of this Agreement (or whether, and the date upon which, the Optionee as suffered a permanent disability) shall be determined by the Committee or (with respect to any employee other than an “Executive Officer” as defined under the Plan) its designee (who, at the date of this Agreement, shall be the Company’s Vice President of Human Resources), whose good faith determination shall be final, binding and conclusive; provided , that such designee may not make any such determination with respect to his or her own employment.

7.     Nontransferability.

The Option shall not be transferable other than by will or by the laws of descent and distribution, and during the lifetime of the Optionee, the Option shall be exercisable only by the Optionee. After the death of the Optionee, any exercisable portion of the Option may, prior to the time when the Option becomes unexercisable under Section 6.2 or 6.4, be exercised by the Optionee’s personal representative or by any person empowered to do so under the Optionee’s will or under the then applicable laws of descent and distribution.

8.     No Right to Continued Employment.

Nothing in this Option Agreement or the Plan shall be interpreted or construed to confer upon the Optionee any right to continue employment by the Company or any of its subsidiaries, nor shall this Agreement or the Plan interfere in any way with the right of the Company or any of its subsidiaries to terminate the Optionee’s employment at any time for any reason whatsoever, whether or not with Cause.

9.     Adjustments.

In the event that the outstanding shares of the Common Stock are, from time to time, changed into or exchanged for a different number or kind of shares of the capital stock of the Company or other securities of the Company by reason of a merger, consolidation, recapitalization, reclassification, stock split, stock dividend, combination of capital stock, or other similar increase or decrease in the number of shares outstanding without receiving compensation therefor, the Committee shall, in accordance with the terms of the Plan, make an appropriate and equitable adjustment in the number and kind of Shares or other consideration as to which such Option, or portions thereof then unexercised, shall


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be exercisable and the exercise price therefor. Any such adjustment made by the Committee shall be final, binding and conclusive upon the Optionee, the Company and all other interested persons. Any such adjustment may provide for the elimination of any fractional share which might otherwise become subject to the Option. This paragraph shall also apply with respect to any extraordinary dividend or other extraordinary distribution in respect of the Common Stock (whether in the form of cash or other property).

10.     Effect of a Change in Control.

10.1    Notwithstanding anything contained in the Plan or this Agreement to the contrary, in the event of a Change in Control, (a) the Option becomes immediately and fully exercisable as to 100% of the Shares subject to the Option, and (b) upon termination of an Optionee’s employment with the Company, following a Change in Control, the Option shall remain exercisable until one year after termination, but in no event beyond the Exercise Term. The Company reserves the right to change or modify in any way the definition of Change in Control set forth in this Option Agreement and any such change or modification shall be binding on the Optionee.

10.2    For the purposes of this Option Agreement, “Change in Control” shall mean the first to occur of the following:

a.
The acquisition by any person or group (including a group within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than the Company or any of its subsidiaries, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a majority of the combined voting power of the Company’s then outstanding voting securities, other than by any employee benefit plan maintained by the Company;

a.
The sale of all or substantially all the assets of the Company and its subsidiaries taken as a whole;

b.
The consummation of a merger, combination, consolidation, recapitalization or other reorganization of the Company 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 or resulting corporation shall immediately after the event be beneficially owned in the aggregate by the stockholders of the Company immediately prior to the event; or

a.
The election, including the filling of vacancies, during any period of 24 months or less, of 50% or more, of the members 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 Company who either (i) is a member of the Board of Directors on the Grant Date, or (ii) is nominated for election to the Board of Directors by a majority of the Board which is comprised of directors who were, at the time of such nomination, Continuing Directors.

11.     Withholding of Taxes.

As a condition to the issuance of Shares in respect of any exercise of the Option or any other issuance or payment to the Optionee hereunder, the Optionee shall pay to the Company (and the Company shall have the right to deduct from any distribution of cash to the Optionee) the minimum amount necessary to satisfy Federal, state, local and foreign withholding tax requirements, if any (“Withholding Taxes”) with respect to such exercise, issuance or payment.



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12.     Optionee bound by the Plan.

The Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof.

13.     Modification of Agreement.

This Agreement may not be modified, amended, suspended or terminated, and any terms or conditions may not be waived, without the approval of the Committee. The Committee reserves the right to amend or modify this Agreement at any time without prior notice to the Optionee or any other interested party; provided , that except as expressly provided hereunder, any such amendment or modification may not adversely affect in any material respect the Optionee’s rights or benefits hereunder except for such amendments or modifications as are required by law.
 
14.     Severability.

Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms.

15.     Governing Law.

The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York without giving effect to the conflicts of laws principles thereof. If the Optionee has received a copy of this Agreement (or the Plan or any other document related hereto or thereto) translated into a language other than English, such translated copy is qualified in its entirety by reference to the English version thereof, and in the event of any conflict the English version will govern.

16.     Successors in Interest.

This Agreement shall inure to the benefit of and be binding upon any successor to the Company. This Agreement shall inure to the benefit of the Optionee or the Optionee’s legal representatives. All obligations imposed upon the Optionee and all rights granted to the Company under this Agreement shall be final, binding and conclusive upon the Optionee’s heirs, executors, administrators and successors.

17.     Administration.

The Committee shall have the power to interpret the Plan and this Option Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Optionee, the Company and all other interested persons. No member of the Committee shall be personally liable for any action determination or interpretation made in good faith with respect to the Plan or the Options. In its absolute discretion, the Board of Directors may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan and this Option Agreement.

18.     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 made hereunder shall be final, binding and conclusive on the Optionee and Company for all purposes.


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19.     Data Privacy Consent.

As a condition of the grant of the Option, the Optionee hereby consents to the collection, use and transfer of personal data as described in this paragraph. The Optionee understands that the Company and its subsidiaries hold certain personal information about the Optionee, including name, home address and telephone number, date of birth, social security number, salary, nationality, job title, ownership interests or directorships held in the Company or its subsidiaries, and details of all stock options or other equity awards or other entitlements to shares of common stock awarded, cancelled, exercised, vested or unvested (“Data”). The Optionee further understands that the Company and its subsidiaries will transfer Data among themselves as necessary for the purposes of implementation, administration and management of the Optionee’s participation in the Plan, and that the Company and any of its subsidiaries may each further transfer Data to any third parties assisting the Company in the implementation, administration and management of the Plan. The Optionee understands that these recipients may be located in the European Economic Area or elsewhere, such as the United States. The Optionee 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 stock on the Optionee’s behalf, in electronic or other form, for the purposes of implementing, administering and managing the Optionee’s participation in the Plan, including any requisite transfer to a broker or other third party with whom the Optionee may elect to deposit any shares of common stock acquired under the Plan. The Optionee may, at any time, view such Data or require any necessary amendments to it.

20.     Limitation on Rights; No Right to Future Grants; Extraordinary Item of Compensation.

By accepting this Agreement and the grant of the Option evidenced hereby, the Optionee expressly acknowledges that (a) the Plan is discretionary in nature and may be suspended or terminated by the Company at any time; (b) the grant of the Option is a one-time benefit that does not create any contractual or other right to receive future grants of options, or benefits in lieu of options; (c) all determinations with respect to future option grants, if any, including the grant date, the number of Shares granted, the exercise price and the exercise date or dates, will be at the sole discretion of the Company; (d) the Optionee’s participation in the Plan is voluntary; (e) the value of the Option is an extraordinary item of compensation that is outside the scope of the Optionee’s employment contract, if any, and nothing can or must automatically be inferred from such employment contract or its consequences; (f) Options 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 Optionee waives any claim on such basis; and (g) the future value of the underlying Shares is unknown and cannot be predicted with certainty. In addition, the Optionee understands, acknowledges and agrees that the Optionee will have no rights to compensation or damages related to option proceeds in consequence of the termination of the Optionee’s employment for any reason whatsoever and whether or not in breach of contract.

21.     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 other than corporations), is owned or controlled (directly or indirectly) by that entity, or by one or more of the Subsidiaries of that entity, or by a combination thereof.

22.     Award Administrator.

The Company may from time to time to designate a third party (an “Award Administrator”) to assist the Company in the implementation, administration and management of the Plan and any Options granted thereunder, including by sending Award Letters on behalf of the Company to


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Optionees, and by facilitating through electronic means acceptance of Option Agreements by Optionees and Option exercises by Optionees.

23.     Book Entry Delivery of Shares.

Whenever reference in this Agreement is made to the issuance or delivery of certificates representing one or more Shares, the Company may elect to issue or deliver such Shares in book entry form in lieu of certificates.

24.     Acceptance.

This Agreement shall not be enforceable until it has been executed by the Optionee. In the event the Company has designated an Award Administrator, the acceptance (including through electronic means) of the Option contemplated by this Option Agreement in accordance with the procedures established from time to time by the Award Administrator shall be deemed to constitute the Optionee’s acknowledgment and agreement to the terms and conditions of this Option Agreement and shall have the same legal effect in all respects of the Optionee having executed this Option Agreement by hand.
 

 
By: L3 TECHNOLOGIES, INC. _______
 
KUBASIK-IMAGE.JPG
————————————————————
Christopher E. Kubasik _________________
Chief Executive Officer and President __ ___
 
 
 
DAVIDSON-IMAGE.JPG
————————————————————
Ann D. Davidson ______________________
Senior Vice President, General Counsel and _
Corporate Secretary __________________




Acknowledged and Agreed
as of the date first written above:


Participant ES
______________________________
Optionee Signature


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Exhibit A


L3 Technologies, Inc.
Nonqualified Stock Option Award Notification Letter



Participant: Participant Name

Grant Date: Grant Date

Grant Price: Grant Price

Awards Granted: # Shares shares








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L3 TECHNOLOGIES, INC.
AMENDED AND RESTATED
2008 LONG TERM PERFORMANCE PLAN
RESTRICTED STOCK UNIT AGREEMENT
(Version 0008)


This Restricted Stock Unit Agreement (this “Agreement”), effective as of the Grant Date (as defined below), is between L3 Technologies, 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)    “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.

(c)    “Fair Market Value” shall have the meaning assigned to such term under the Plan.

(d)    “Grant Date” shall mean the “Grant Date” listed in the Award Letter.

(e)    “Participant” shall mean the “Participant” listed in the Award Letter.

(f)    “Restricted Units” shall mean that number of restricted units listed in the Award Letter as “Awards Granted.”

(g)    “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 the Code.

(h)    “Shares” shall mean a number of shares of the Corporation’s Common Stock, par value $0.01 per share, equal to the number of Restricted Units.

2.     Grant of Units . The Corporation hereby grants the Restricted Units to the Participant, each of which represents the right to receive one Share upon the expiration or termination of the Restricted Period (as defined below), subject to the terms, conditions and restrictions set forth in the L3 Technologies, Inc. Amended and Restated 2008 Long Term Performance Plan (the “Plan”) and this Agreement.

3.     Restricted Unit Account . The Corporation shall cause an account (the “Unit Account”) to be established and maintained on the books of the Corporation to record the number of Restricted Units credited to the Participant under the terms of this Agreement. The Participant’s interest in the Unit Account shall be that of a general, unsecured creditor of the Corporation.


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4.     Restricted Period . Except as otherwise provided in paragraphs 6 and 7 hereof, the “Restricted Period” shall mean the period beginning on the Grant Date and expiring on the third anniversary of the Grant Date. Upon the expiration or termination of the Restricted Period, the Shares shall be issued to the Participant in accordance with Section 13.

5.     Nonalienation of Benefits . No Participant or beneficiary shall have the power or right to transfer, anticipate, or otherwise encumber the Participant’s interest under this Agreement. The provisions of this Agreement shall inure to the benefit of the Participant and the Participant’s beneficiaries, heirs, executors, administrators or successors in interest.

6.     Change in Control During Restricted Period . Upon the occurrence of a “change in control” that constitutes a Section 409A Change in Control Event, the Restricted Period shall automatically terminate and the Shares shall thereafter be issued to the Participant in accordance with Section 13. In the event of any other “change in control,” the Restricted Period shall not be immediately affected, but shall subsequently terminate (and the Shares shall thereafter be issued to the Participant in accordance with Section 13) upon the earliest to occur of: (a) a Section 409A Change in Control Event, (b) the Participant’s death, (c) the Participant’s “disability” (as defined in Section 7(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) of the Exchange Act), other than the Corporation or any of its subsidiaries, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a majority of the combined voting power of the Corporation’s then outstanding voting securities, 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 the Corporation 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 or resulting corporation shall immediately after the event be beneficially owned in the aggregate by the stockholders of the Corporation immediately prior to the event; or

(d)    The election, including the filling of vacancies, during any period of 24 months or less, of 50% or more of the members 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 Grant Date, or (ii) is nominated for election to the Board of Directors by a majority of the Board which is comprised of directors who were, at the 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 by reason of death, “retirement” or “disability,” as defined below) prior to the expiration or termination of the Restricted Period and prior to the occurrence of a “change in control” (as defined in Section 6), the Participant shall forfeit the Restricted Units and all of the Participant’s rights hereunder shall cease (unless otherwise provided for by the Committee in accordance

2


with the Plan). The Participant’s rights to the Restricted Units shall not be affected by any change in the nature of the Participant’s employment so long as the Participant continues to be an employee of the Corporation 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 and prior to the occurrence of a “change in control” (as defined in Section 6), the Restricted Period shall not be affected and shall expire with the passage of time in accordance with paragraph 4, except that (i) in the event that the Participant dies following retirement but prior to the expiration of the Restricted Period, the Restricted Period shall automatically terminate and the Shares shall thereafter be delivered in accordance with Section 13 and (ii) the Restricted Period may earlier terminate in accordance with Section 6. 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 the time of such termination) more than one year after the Grant Date, (B) is available for consultation with the Corporation or its subsidiaries at the reasonable request of the Corporation or its subsidiaries and (C) terminates employment either (i) on or after attaining age 60 and completing at least five years of service in the aggregate with the Corporation and its subsidiaries (which service must be continuous through the date of termination except for a single break in service that does not exceed one year in length), or (ii) on or after attaining age 65. For purposes of this Agreement, “Cause” means the Participant’s (1) intentional failure to perform reasonably assigned duties, (2) dishonesty or willful misconduct in the performance of duties, (3) engaging in a transaction in connection with the performance of duties to the Corporation or its subsidiaries which transaction is adverse to the interests of the Corporation and is engaged in for personal profit or (4) willful violation of any law, rule or regulation in connection with the performance of duties (other than traffic violations or similar offenses).

(c)    Upon Participant’s death or “disability” (as defined below), the Restricted Period shall automatically terminate and the Shares shall thereafter be issued in accordance with Section 13. For purposes of this Agreement, disability means the Participant, (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment 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 be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Participant's employer.

(d)    Whether (and the circumstances under which) employment has been terminated and the determination of the termination date for the purposes of this Agreement (or whether, and the date upon which, the Participant has suffered a disability under Section 7(c)) shall be determined by the Committee or (with respect to any employee other than an “Executive Officer” as defined under the Plan) its designee (who, at the date of this Agreement, shall be the Corporation’s Vice President of Human Resources), whose good faith determination shall be final, binding and conclusive; provided , that such designee may not make any such determination with respect to his or her own employment.

8.     Dividends . If the Corporation pays a cash dividend on its common stock, the Participant shall accrue in his or her Dividend Account (as defined below) a cash dividend equivalent with respect to the Restricted Units credited to the Participant’s Unit Account as of the record date for the dividend, with each Restricted Unit being equivalent to one share of common stock. The Corporation shall cause an account (the “Dividend Account”) to be established and maintained as part of the records of the Corporation to evidence the aggregate cash dividend equivalents accrued by the Participant from time to

3


time under this Section. No interest shall accrue on any amounts reflected in the Dividend Account. The Participant’s interest in the amounts reflected in the Dividend Account shall be that of a general, unsecured creditor of the Corporation. Subject to, and as promptly as practicable following, the issuance of the Shares pursuant to Section 13 hereunder, the Corporation shall pay an amount in cash (without interest and subject to applicable withholding taxes) to the Participant (or his or her beneficiaries, heirs, executors, administrators or successors in interest who are issued the Shares pursuant to Section 13 hereunder) equal to the aggregate cash dividend equivalents accrued in the Participant’s Dividend Account and the Participant’s Dividend Account shall be eliminated at that time. In the event that the Participant forfeits his or her rights to the Restricted Units, the Participant also shall be deemed to have forfeited his or her rights to any cash dividend equivalents accrued in the Participant’s Dividend Account and 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 upon the Participant any right to continue employment by the Corporation or any of its subsidiaries, nor shall this Agreement or the Plan interfere in any way with the right of the Corporation or any of its subsidiaries to terminate the Participant’s employment at any time for any reason whatsoever, whether or not with cause.

10.     No Rights as a Stockholder . The Participant’s interest in the Restricted Units shall not entitle the Participant to any rights as a stockholder of the Corporation. The Participant shall not be deemed to be the holder of, or have any of the rights and privileges of a stockholder of the Corporation in respect of, the Shares unless and until such Shares have been issued to the Participant in accordance Section 13.

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 in respect of outstanding shares of the Corporation’s Common Stock or shares of Corporation’s Common Stock shall be changed into a different number of shares or into another class or classes or into other property or cash, the Restricted Units, the Participant’s Unit Account and/or the Shares shall be adjusted to reflect such event so as to preserve (without enlarging) the value of the award hereunder, with the manner of such adjustment to be determined by the Committee in its sole discretion. This paragraph shall also apply with respect to any extraordinary dividend or other extraordinary distribution in respect of the Corporation’s Common Stock (whether in the form of cash or other property).

12.     General Restrictions . Notwithstanding anything in this Agreement to the contrary, the Corporation shall have no obligation to issue or transfer the Shares as contemplated by this agreement unless and until such issuance or transfer shall comply with all relevant provisions of law and the requirements of any stock exchange on which the Corporation's shares are listed for trading.

13.     Issuance of Shares . Upon the expiration or termination of the Restricted Period and payment by the Participant of any applicable taxes pursuant to Section 14 of this Agreement, the Corporation shall, as soon as reasonably practicable (and in any event within 75 days of the termination or expiration of the Restricted Period), but subject to any delay necessary to comply with Section 12 hereof, issue the Shares to the Participant, free and clear of all restrictions; provided , that if the termination of the Restricted Period results from a Section 409A Change in Control Event, then notwithstanding the foregoing, the Shares shall be issued within 30 days of the Section 409A Change in Control Event. The Corporation shall not be required to deliver any fractional Shares, but shall pay, in lieu thereof, the Fair Market Value of such fractional Shares as of the date the remaining Shares are deemed delivered to the

4


Participant. The Corporation shall pay any costs incurred in connection with issuing the Shares. Upon the issuance of the Shares to the Participant, the Participant’s Unit Account shall be eliminated. Notwithstanding the provisions of this Section, in the event of the death of the Participant prior to the issuance of the Shares under this Section 13, the issuance of the Shares and any payment in lieu of fractional Shares shall be made to the Participant’s beneficiaries, heirs, executors, administrators or successors in interest as the case may be. Notwithstanding the foregoing, the Corporation may, in its sole discretion, elect to pay cash in lieu of any portion or all of the Shares otherwise deliverable to the Participant hereunder, with such cash amount equal to the Fair Market Value of the corresponding Shares on the relevant deemed payment date.

14.     Tax Withholding . Upon the expiration or termination of the Restricted Period, the Participant shall remit to the Corporation the minimum amount necessary to satisfy Federal, state, local or foreign withholding tax requirements, if any (“Withholding Taxes”) as a condition to the Corporation’s issuance of any Shares as provided in Section 13. The payment shall be in (i) cash, (ii) the delivery of Shares, (iii) a reduction in the number of Shares otherwise issuable or deliverable or other amounts otherwise payable to the Participant pursuant to this Agreement, or (iv) a combination of (i), (ii) and/or (iii). The value of any Shares delivered or withheld as payment in respect of withholding tax requirements shall be determined by reference to the Fair Market Value of such Shares as of the date of such deemed withholding or delivery. In the event that Withholding Taxes are satisfied by withholding a portion of the Shares otherwise issuable or deliverable to the Participant pursuant to this Agreement, the Corporation shall not withhold any Shares in excess of the minimum number of Shares necessary to satisfy the applicable Withholding Taxes.

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 other than corporations), is owned or controlled (directly or indirectly) by that entity, or by one or more of the Subsidiaries of that entity, or by 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, all of 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 terms or conditions may not be waived, without the approval of the Committee. The Committee reserves the right to amend or modify this Agreement at any time without prior notice to any Participant or other interested party; provided , that except as expressly provided hereunder, any such amendment or modification may not adversely affect in any material respect the Participant’s rights or benefits hereunder except for such amendments or modifications as are required by law.

18.     Severability . Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms.

19.     Governing Law . The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York without giving effect to the conflicts of laws principles thereof. If the Participant has received a copy of this Agreement (or the Plan or any other document related hereto or thereto) translated into a language other than English, such translated

5


copy is qualified in its entirety by reference to the English version thereof, and in the event of any conflict the English version will govern.

20.     Successors in Interest .     This Agreement shall inure to the benefit of and be binding upon any successor to the Corporation. This Agreement shall inure to the benefit of the Participant or the Participant’s legal representatives. All obligations imposed upon the Participant and all rights granted to the Corporation under this Agreement shall be final, binding and conclusive upon the 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 for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Participant, the Corporation and all other interested persons. No member of the Committee shall be personally liable for any action determination or interpretation made in good faith with respect to the Plan or the Restricted Units. In its absolute discretion, the Board of Directors may at 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 made hereunder 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 Units, the Participant hereby consents to the collection, use and transfer of personal data as described in this paragraph. The Participant understands that the Corporation and its subsidiaries 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, and details of all restricted units 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 among themselves as necessary for the purposes of implementation, administration and management of the Participant’s participation in the Plan, and that the Corporation and any of its subsidiaries may each further transfer Data to any third parties assisting the Corporation in the implementation, administration and management of the Plan. The Participant understands that these recipients may be located in the European 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 stock on the Participant’s behalf, in electronic or other form, for the purposes of implementing, administering and managing the Participant’s participation in the Plan, including any requisite transfer to a broker or other third party with whom the Participant may elect to deposit any shares of common stock acquired under the Plan. The Participant may, at any time, view such Data or require any necessary amendments to it.

24.     Limitation on Rights; No Right to Future Grants; Extraordinary Item of Compensation . By accepting this Agreement and the grant of the Restricted Units contemplated hereunder, the Participant expressly acknowledges that (a) the Plan is discretionary in nature and may be suspended or terminated by the Corporation at any time; (b) the grant of Restricted Units is a one-time benefit that does not create any contractual or other right to receive future grants of restricted units, or benefits in lieu of restricted units; (c) all determinations with respect to future grants of restricted units, if any, including the grant

6


date, the number of Shares granted and the restricted period, will be at the sole discretion of the Corporation; (d) the Participant’s participation in the Plan is voluntary; (e) the value of the Restricted Units is an extraordinary item of compensation that is outside the scope of the Participant’s employment contract, if any, and nothing can or must automatically be inferred from such employment contract or its consequences; (f) grants of restricted units 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 be predicted with certainty. In addition, the Participant understands, acknowledges and agrees that the Participant will have no rights to compensation or damages related to restricted unit proceeds in consequence of the termination of the Participant’s employment for any 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”) to assist the Corporation in the implementation, administration and management of the Plan and any Restricted Units granted thereunder, including by sending Award Letters on behalf of the Corporation to Participants, and by facilitating through electronic means acceptance of Restricted Unit Agreements by Participants.

26.     Section 409A . This Agreement is intended to comply with the provisions of Section 409A of the Code and the regulations promulgated thereunder. Without limiting the foregoing, the Committee shall have the right to amend the terms and conditions of this Agreement in any respect as may be necessary or appropriate to comply with Section 409A of the Code or any regulations promulgated thereunder, 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 certificates representing one or more Shares, the Corporation may elect to issue or deliver such Shares in book entry form in lieu of certificates.


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28.     Acceptance . This Agreement shall not be enforceable until it has been executed by the Participant. In the event the Corporation has designated an Award Administrator, the acceptance (including through electronic means) of the Restricted Unit award contemplated by this Agreement in accordance with the procedures established from time to time by the Award Administrator shall be deemed to constitute the Participant’s acknowledgment and agreement to the terms and conditions of this Agreement and shall have the same legal effect in all respects of the Participant having executed this Agreement by hand.
 

 
By: L3 TECHNOLOGIES, INC. _______
 
KUBASIK-IMAGE.JPG
————————————————————
Christopher E. Kubasik _________________
Chief Executive Officer and President __ ___
 
 
 
DAVIDSON-IMAGE.JPG
————————————————————
Ann D. Davidson ______________________
Senior Vice President, General Counsel and _
Corporate Secretary __________________


Acknowledged and Agreed
as of the date first written above:


Participant ES
______________________________
Participant Signature

8


Exhibit A


L3 Technologies, Inc.
Restricted Stock Unit Award Notification Letter



Participant: Participant Name

Grant Date: Grant Date

Awards Granted: # Shares Restricted Units    



9


L3 TECHNOLOGIES, INC.
AMENDED AND RESTATED
2008 LONG TERM PERFORMANCE PLAN
RESTRICTED STOCK UNIT AGREEMENT
(Director Deferral Version 0002)


This Restricted Stock Unit Agreement (this “Agreement”), effective as of the Grant Date (as defined below), is between L3 Technologies, 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)    “Change in Control” means:

(1)    The acquisition by any person or group (including a group within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than the Corporation or any of its subsidiaries, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a majority of the combined voting power of the Corporation’s then outstanding voting securities, other than by any employee benefit plan maintained by the Corporation;

(2)    The sale of all or substantially all the assets of the Corporation and its subsidiaries taken as a whole;

(3)    The consummation of a merger, combination, consolidation, recapitalization, or other reorganization of the Corporation 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 or resulting corporation shall immediately after the event be beneficially owned in the aggregate by the stockholders of the Corporation immediately prior to the event; or

(4)    The election, including the filling of vacancies, during any period of 24 months or less, of 50% or more of the members 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 Grant Date, or (ii) is nominated for election to the Board of Directors by a majority of the Board which is comprised of directors who were, at the time of such nomination, Continuing Directors.

(c)    “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.

(d)    “Grant Date” shall mean the “Grant Date” listed in the Award Letter.


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(e)    “Participant” shall mean the “Participant” listed in the Award Letter.

(f)    “Restricted Period” shall mean the period beginning on the Grant Date and expiring on the earlier of (i) the date on which the Participant ceases to be a director of the Corporation or (ii) the occurrence of a Change in Control that constitutes a Section 409A Change in Control Event.

(g)    “Restricted Units” shall mean that number of restricted units listed in the Award Letter as “Awards Granted,” as the same may be adjusted from time to time in accordance with the terms hereof.

(h)    “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 the Code.

(i)    “Shares” shall mean a number of shares of the Corporation’s Common Stock, par value $0.01 per share, equal to the number of Restricted Units.

(j)    “Specified Employee” shall mean a “specified employee” as defined in Treasury Regulation Section 1.490A-1(i).

(k)    “Vesting Date” shall mean the Grant Date.

2.     Grant of Units . The Corporation hereby grants the Restricted Units to the Participant, each of which represents the right to receive one Share upon the expiration of the Restricted Period, subject the terms, conditions and restrictions set forth in the L3 Technologies, Inc. Amended and Restated 2008 Directors Stock Incentive Plan (as amended from time to time, the “Plan”) and this Agreement.

3.     Restricted Unit Account . The Corporation shall cause an account (the “Unit Account”) to be established and maintained on the books of the Corporation to record the number of Restricted Units credited to the Participant under the terms of this Agreement. The Participant’s interest in the Unit Account shall be that of a general, unsecured creditor of the Corporation.

4.     Nonalienation of Benefits . No Participant or beneficiary shall have the power or right to transfer, anticipate, or otherwise encumber the Participant’s interest under this Agreement. The provisions of this Agreement shall inure to the benefit of the Participant and the Participant’s beneficiaries, heirs, executors, administrators or successors in interest.

5.     Vesting; Forfeiture . Notwithstanding anything in this agreement to the contrary, the Participant shall forfeit the Restricted Units and all of the Participants rights hereunder shall cease (unless otherwise provided for by the Committee in accordance with the Plan) in the event that either: (a) the Restricted Period expires prior to the Vesting Date or (b) the Participant is removed as director of the Corporation for cause.
 
6.     Dividend Equivalents . If the Corporation pays a cash dividend or distribution on its Common Stock, the Participant’s Unit Account shall be credited as of the payment date with an additional number of Restricted Units equal to the following calculation: (i) the amount payable per share of Common Stock outstanding as of record date of the dividend or distribution, multiplied by (ii) the number of Restricted Units credited to the Participant’s Unit Account as of the record date for the dividend or

2


distribution, divided by (iii) the Fair Market Value (as defined in the Plan) of a share of Common Stock as of the payment date.

7.     No Right to Continue as a Director . Nothing in this Agreement or the Plan shall be interpreted or construed to confer upon the Participant any right to continue as a director of the Corporation, nor shall this Agreement or the Plan interfere in any way with the right of the Corporation or its directors or stockholders to remove the Participant as a director in accordance with the by-laws of the Corporation.

8.     No Rights as a Stockholder . The Participant’s interest in the Restricted Units shall not entitle the Participant to any rights as a stockholder of the Corporation. The Participant shall not be deemed to be the holder of, or have any of the rights and privileges of a stockholder of the Corporation in respect of, the Shares unless and until such Shares have been issued to the Participant in accordance Section 11.

9.     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 in respect of outstanding shares of the Corporation’s Common Stock or shares of Corporation’s Common Stock shall be changed into a different number of shares or into another class or classes or into other property or cash, the Restricted Units, the Participant’s Unit Account and/or the Shares shall be adjusted to reflect such event so as to preserve (without enlarging) the value of the award hereunder, with the manner of such adjustment to be determined by the Committee in its sole discretion. This paragraph shall also apply with respect to any extraordinary dividend or other extraordinary distribution in respect of the Corporation’s Common Stock (whether in the form of cash or other property).

10.     General Restrictions . Notwithstanding anything in this Agreement to the contrary, the Corporation shall have no obligation to issue or transfer the Shares as contemplated by this agreement unless and until such issuance or transfer shall comply with all relevant provisions of law and the requirements of any stock exchange on which the Corporation's shares are listed for trading.

11.     Issuance of Shares . Upon the expiration of the Restricted Period and subject to Sections 5 and 10 and payment by the Participant of any applicable withholding taxes, the Corporation shall, as soon as reasonably practicable (and in any event within 75 days of the expiration of the Restricted Period), issue the Shares to the Participant, free and clear of all restrictions; provided , that if the expiration of the Restricted Period results from a Section 409A Change in Control Event, then notwithstanding the foregoing, the Shares shall be issued within 30 days of the Section 409A Change in Control Event; provided further , that in the event the Participant is a Specified Employee and the expiration of the Restricted Period does not result from the death of the Participant or a Section 409A Change in Control Event, then notwithstanding the foregoing, the Shares shall be issued as soon as reasonably practicable following (and not prior to) the date that is six months after the expiration of the Restricted Period (and in any event within 75 days after such date). The Corporation shall not be required to deliver any fractional Shares, and may pay, in lieu thereof, the Fair Market Value (as defined in the Plan) thereof as of the date on which the Shares first become issuable under this Section. The Corporation shall pay any costs incurred in connection with issuing the Shares. Upon the issuance of the Shares to the Participant, the Participant’s Unit Account shall be eliminated.

12.     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

3


voting stock or other equity interests (in the case of entities other than corporations), is owned or controlled (directly or indirectly) by that entity, or by one or more of the Subsidiaries of that entity, or by a combination thereof.

13.     Plan Governs . The Participant hereby acknowledges receipt of a copy of the Plan and agrees to be bound by its terms, all of which are incorporated herein by reference. The Plan shall govern in the event of any conflict between this Agreement and the Plan.

14.     Modification of Agreement . This Agreement may be not be modified, amended, suspended or terminated, and any terms or conditions may not be waived, without the approval of the Committee. The Committee reserves the right to amend or modify this Agreement at any time without prior notice to any Participant or other interested party; provided , that except as expressly provided hereunder, any such amendment or modification may not adversely affect in any material respect the Participant’s rights or benefits hereunder except for such amendments or modifications as are required by law.
 
15.     Severability . Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms.

16.     Governing Law . The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York without giving effect to the conflicts of laws principles thereof. If the Participant has received a copy of this Agreement (or the Plan or any other document related hereto or thereto) translated into a language other than English, such translated copy is qualified in its entirety by reference to the English version thereof, and in the event of any conflict the English version will govern.

17.     Successors in Interest .     This Agreement shall inure to the benefit of and be binding upon any successor to the Corporation. This Agreement shall inure to the benefit of the Participant or the Participant’s legal representatives. All obligations imposed upon the Participant and all rights granted to the Corporation under this Agreement shall be final, binding and conclusive upon the Participant’s heirs, executors, administrators and successors.

18.     Administration . The Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Participant, the Corporation and all other interested persons. No member of the Committee shall be personally liable for any action determination or interpretation made in good faith with respect to the Plan or the Restricted Units. In its absolute discretion, the Board of Directors may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan and this Agreement.

19.     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 made hereunder shall be final, binding and conclusive on the Participant and Corporation for all purposes.

20.     Data Privacy Consent . As a condition of the grant of the Restricted Units, the Participant hereby consents to the collection, use and transfer of personal data as described in this paragraph. The

4


Participant understands that the Corporation and its subsidiaries 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, and details of all restricted units 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 among themselves as necessary for the purposes of implementation, administration and management of the Participant’s participation in the Plan, and that the Corporation and any of its subsidiaries may each further transfer Data to any third parties assisting the Corporation in the implementation, administration and management of the Plan. The Participant understands that these recipients may be located in the European 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 stock on the Participant’s behalf, in electronic or other form, for the purposes of implementing, administering and managing the Participant’s participation in the Plan, including any requisite transfer to a broker or other third party with whom the Participant may elect to deposit any shares of common stock acquired under the Plan. The Participant may, at any time, view such Data or require any necessary amendments to it.

21.     Limitation on Rights; No Right to Future Grants . By accepting this Agreement and the grant of the Restricted Units contemplated hereunder, the Participant expressly acknowledges that (a) the Plan is discretionary in nature and may be suspended or terminated by the Corporation at any time; (b) the grant of Restricted Units is a one-time benefit that does not create any contractual or other right to receive future grants of restricted units, or benefits in lieu of restricted units; (c) all determinations with respect to future grants of restricted units, if any, including the grant date, the number of Shares granted and the restricted period, will be at the sole discretion of the Corporation; (d) the Participant’s participation in the Plan is voluntary; and (e) the future value of the underlying Shares is unknown and cannot be predicted with certainty.

22.     Award Administrator . The Corporation may from time to time to designate a third party (an “Award Administrator”) to assist the Corporation in the implementation, administration and management of the Plan and any Restricted Units granted thereunder, including by sending Award Letters on behalf of the Corporation to Participants, and by facilitating through electronic means acceptance of Restricted Unit Agreements by Participants.

23.     Section 409A . This Agreement is intended to comply with the provisions of Section 409A of the Code and the regulations promulgated thereunder. Without limiting the foregoing, the Committee shall have the right to amend the terms and conditions of this Agreement in any respect as may be necessary or appropriate to comply with Section 409A of the Code or any regulations promulgated thereunder, including without limitation by delaying the issuance of the Shares contemplated hereunder.

24.     Book Entry Delivery of Shares . Whenever reference in this Agreement is made to the issuance or delivery of certificates representing one or more Shares, the Corporation may elect to issue or deliver such Shares in book entry form in lieu of certificates.

25.     Acceptance . This Agreement shall not be enforceable until it has been executed by the Participant. In the event the Corporation has designated an Award Administrator, the acceptance (including through electronic means) of the Restricted Unit award contemplated by this Agreement in accordance with the procedures established from time to time by the Award Administrator shall be

5


deemed to constitute the Participant’s acknowledgment and agreement to the terms and conditions of this Agreement and shall have the same legal effect in all respects of the Participant having executed this Agreement by hand.
 

 
By: L3 TECHNOLOGIES, INC. _______
 
KUBASIK-IMAGE.JPG
————————————————————
Christopher E. Kubasik _________________
Chief Executive Officer and President __ ___
 
 
 
DAVIDSON-IMAGE.JPG
————————————————————
Ann D. Davidson ______________________
Senior Vice President, General Counsel and _
Corporate Secretary __________________




Acknowledged and Agreed
as of the date first written above:



______________________________
Participant Signature
Name:


6



L3 TECHNOLOGIES, INC.
AMENDED AND RESTATED
2008 LONG TERM PERFORMANCE PLAN
PERFORMANCE UNIT AGREEMENT
(Version 2018)


This Performance Unit Agreement (this “Agreement”), effective as of the Grant Date (as defined below), is between L3 Technologies, Inc., a Delaware corporation (the “Corporation” or “L3”), and the Participant (as defined below).

1.     Definitions . Capitalized terms not otherwise defined herein shall have the respective meanings ascribed to them in the L3 Technologies, Inc. Amended and Restated 2008 Long Term Performance Plan (the “Plan”). The following terms shall have the following meanings for purposes of this Agreement:

(a)    “Applicable Unit Multiplier” shall mean, with respect to each Performance Measure, the “Unit Multiplier” calculated pursuant to the Award Letter based on the actual level of achievement for the Performance Period; provided , that in the event of a Change in Control, the “Applicable Unit Multiplier” shall mean 100%, subject to upward adjustment (but not above 200%) to the extent (if any) that the Committee is able, in its sole discretion, to assess that the Corporation’s progress, at or prior to the Change in Control, towards the achievement levels set forth in the Award Letter for such Performance Measure exceeds the “Target” performance level as adjusted to account for the reduced period of actual performance.

(b)    “Award Letter” shall mean the award notice to the Participant attached hereto as Exhibit A.    

(c)     “Cause” shall mean the Participant’s (1) intentional failure to perform reasonably assigned duties, (2) dishonesty or willful misconduct in the performance of duties, (3) engaging in a transaction in connection with the performance of duties to the Corporation or its subsidiaries which transaction is adverse to the interests of the Corporation and is engaged in for personal profit or (4) willful violation of any law, rule or regulation in connection with the performance of duties (other than traffic violations or similar offenses).

(d)    “Change in Control” shall mean:

(1)    the acquisition by any person or group (including a group within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than the Corporation or any of its subsidiaries, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a majority more of the combined voting power of the Corporation’s then outstanding voting securities, other than by any employee benefit plan maintained by the Corporation;

(2)    the sale of all or substantially all the assets of the Corporation and its subsidiaries taken as a whole;

(3)    the consummation of a merger, combination, consolidation, recapitalization or other reorganization of the Corporation with one or more other entities that are not subsidiaries if, as a result of the consummation of the merger,

1

combination, consolidation, recapitalization or other reorganization, less than 50 percent of the outstanding voting securities of the surviving or resulting corporation shall immediately after the event be beneficially owned in the aggregate by the stockholders of the Corporation immediately prior to the event; or

(4)    the election, including the filling of vacancies, during any period of 24 months or less, of 50% or more of the members 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 Grant Date, or (ii) is nominated for election to the Board of Directors by a majority of the Board which is comprised of directors who were, at the time of such nomination, Continuing Directors.

(e)    “Committee” or “Compensation Committee” shall mean the Compensation Committee of the Board of Directors of the Corporation.

(f)     “Disability” shall mean that the Participant, (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment 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 be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Participant's employer.

(g)    “Fair Market Value” shall mean, with respect to any security, the closing price of the security as reported on the composite tape of New York Stock Exchange issues (or if, at the date of determination, the security is not so listed or if the principal market on which it is traded is not the New York Stock Exchange, such other reporting system as shall be selected by the Committee) on the relevant date, or, if no sale of the security is reported for that date, the next preceding day for which there is a reported sale. The Committee shall determine the Fair Market Value of any security that is not publicly traded, using criteria as it shall determine, in its sole direction, to be appropriate for the valuation.

(h)    “Final Cash Performance Unit Dividends” shall mean an amount equal to the aggregate cash dividends that would have been payable on the Final Cash Performance Units if they represented shares of L3 common stock held on all record dates between the Grant Date and the date on which the payment contemplated under Section 10(b) is made; provided , that in the event of an equity restructuring that triggers an adjustment to Performance Measures and/or the number of Performance Units as contemplated by Section 9, the amount of the Final Cash Performance Unit Dividends attributable to record dates that are prior to the date of such equity restructuring shall be calculated based on a number of Final Cash Performance Units that includes the effect of the adjustment to the Performance Measures but excludes the effect of the adjustment to the number of Performance Units.

(i)    “Final Cash Performance Units” shall mean the number of Total Earned
Performance Units attributable to Performance Measures the payment of which are to be made in cash as specified in the Award Letter.

(j)    “Final Stock Performance Unit Dividends” shall mean an amount equal to the aggregate cash dividends that would have been payable on the Final Stock Performance Units if they represented shares of L3 common stock held on all record dates between the Grant Date and the date on

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which the issuance of Award Shares and the payment of the amounts contemplated under Section 10(c) is made; provided , that in the event of an equity restructuring that triggers an adjustment to Performance Measures and/or the number of Performance Units as contemplated by Section 9, the amount of the Final Cash Performance Unit Dividends attributable to record dates that are prior to the date of such equity restructuring shall be calculated based on a number of Final Cash Performance Units that includes the effect of the adjustment to the Performance Measures but excludes the effect of the adjustment to the number of Performance Units.
 
(k)    “Final Stock Performance Units” shall mean the number of Total Earned
Performance Units attributable to Performance Measures the payment of which are to be made in shares of L3 stock as specified in the Award Letter.

(l)    “Grant Date” shall mean the “Grant Date” listed in the Award Letter.

(m)    “Participant” shall mean the “Participant” listed in the Award Letter.

(n)    “Performance Measures” shall mean the performance measures set forth in the Award Letter.

(o)    “Performance Period” shall mean the “Performance Period” set forth in the Award Letter, subject to adjustment in accordance with Section 5 hereof.

(p)     “Performance Units” shall mean the number of performance units equal to the Total Target Performance Units or, when finally determined in accordance with this Agreement, the Total Earned Performance Units.

(q)     “Retirement” shall mean that the Participant (A) terminates employment with the Corporation and its subsidiaries other than for Cause (and is not subject to termination for Cause at the time of such termination), (B) is available for consultation with the Corporation or its subsidiaries at the reasonable request of the Corporation or its subsidiaries and (C) terminates employment either (1) on or after attaining age 60 and completing at least five years of service in the aggregate with the Corporation and its subsidiaries (which service must be continuous through the date of termination except for a single break in service that does not exceed one year in length), or (2) on or after attaining age 65.

(r)     “Segmented Target Performance Units” shall mean, with respect to each Performance Measure, the number of “Target Units” set forth in the Award Letter for the Performance Measure, subject to adjustment pursuant to the terms hereof.

(s)     “Segmented Earned Performance Units” shall mean, with respect to each Performance Measure, the number of Segmented Target Performance Units multiplied by the Applicable Unit Multiplier.

(t)    “Subsidiary” or “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 other than corporations), is owned or controlled (directly or indirectly) by that entity, or by one or more of the Subsidiaries of that entity, or by a combination thereof.

(u)     “Total Earned Performance Units” shall mean the sum the Segmented Earned Performance Units for all Performance Measures.

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(v)     “Total Target Performance Units” shall mean the sum of the Segmented Target Performance Units for all Performance Measures.
    
2.     Target and Final Awards . Subject to the terms, conditions and restrictions set forth in the Plan and this Agreement, the Corporation hereby grants the Performance Units to the Participant. The initial amount of Performance Units granted hereunder represent a target award to the Participant in respect of the Performance Measures for the Performance Period. The final award to the Participant, and the amount of any payments to the Participant hereunder, shall be based on the actual level of achievement of the Performance Measures for the Performance Period subject to the terms of this Agreement.

3.     Performance Unit Account . The Corporation shall cause an account (the “Account”) to be established and maintained on the books of the Corporation to record the number of Performance Units credited to the Participant under the terms of this Agreement. The Participant’s interest in the Account shall be that of a general, unsecured creditor of the Corporation. For the avoidance of doubt, neither this Agreement nor the grant of Performance Units hereunder shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Corporation and a Participant or any other person.

4.     Nonalienation of Benefits . No Participant or beneficiary shall have the power or right to transfer, anticipate, or otherwise encumber the Participant’s interest under this Agreement. The provisions of this Agreement shall inure to the benefit of the Participant and the Participant’s beneficiaries, heirs, executors, administrators or successors in interest.

5.     Change in Control During Performance Period . In the event of a Change in Control, (a) the Segmented Target Performance Units for each Performance Measure shall automatically be adjusted on a pro-rata basis to reflect the number of completed months out of the entire Performance Period as of the date of the Change in Control and (b) the Performance Period shall automatically be deemed to have terminated and the provisions of Section 10 hereof shall become applicable.

6.     Termination of Employment or Disability During Performance Period .

(a)    If the Participant suffers a Disability, or the Participant’s employment with the Corporation and its subsidiaries is terminated during the Performance Period: (1) by reason of death or Disability, (2) by Retirement at least one year after the first day of the Performance Period, or (3) by the Company without Cause (each, a “Qualified Separation”), the Segmented Target Performance Units for each Performance Measure shall automatically be adjusted on a pro-rata basis to reflect the number of completed months out of the entire Performance Period as of the date the Participant suffered a Disability or the date of the termination of employment, as applicable. Thereafter, the Participant (or his/her beneficiaries, heirs, executors, administrators or successors in interest) shall be entitled to any amounts payable under Section 10 following the termination of the Performance Period in accordance with the terms hereof.

(b)    In the event that the Participant’s employment with the Corporation and its subsidiaries is terminated during the Performance Period and is not a Qualified Separation, then the Participant shall forfeit the Performance Units and all of the Participant’s rights hereunder shall cease.


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(c)    The Participant’s rights to the Performance Units shall not be affected by any change in the nature of the Participant’s employment so long as the Participant continues to be an employee of the Corporation or any of its subsidiaries. Whether (and the circumstances under which) employment has been terminated and the determination of the termination date for the purposes of this Agreement (or whether, and the date upon which, the Participant has suffered a Disability) shall be determined by the Committee or (with respect to any employee other than an “Executive Officer” as defined under the Plan) its designee (who, at the date of this Agreement, shall be the Corporation’s Vice President of Human Resources), whose good faith determination shall be final, binding and conclusive; provided , that such designee may not make any such determination with respect to his or her own employment.

7.     No Right to Continued Employment . Nothing in this Agreement shall be interpreted or construed to confer upon the Participant any right to continue employment by the Corporation or any of its subsidiaries, nor shall this Agreement interfere in any way with the right of the Corporation or any of its subsidiaries to terminate the Participant’s employment at any time for any reason whatsoever, whether or not with cause.

8.     No Rights as a Stockholder . The Participant’s interest in the Performance Units shall not entitle the Participant to any rights as a stockholder of the Corporation. The Participant shall not be deemed to be the holder of, or have any of the rights and privileges of a stockholder of the Corporation in respect of, the Award Shares (as defined below) unless and until such shares have been issued to the Participant in accordance with Section 10.

9.     Adjustments for Certain Changes . The Committee shall make adjustments in the calculation of any earnings-based Performance Measure to eliminate the effect of any: (a) impairment losses incurred on goodwill and other intangible assets or on debt or equity investments computed in accordance with Financial Accounting Standard No. 142 or other GAAP; (b) gains or losses incurred on the retirement of debt computed in accordance with Financial Accounting Standard No. 145; (c) extraordinary gains and losses in accordance with GAAP; (d) gains and losses related to changes in U.S. Federal statutory tax rates; (e) gains and losses in connection with asset dispositions that are not contemplated under the Corporation’s most recent internal plan for the year as presented to the Board of Directors prior to the Grant Date; (f) non-cash gains or losses on discontinued operations; (g) adoption by the Company of any new accounting standards required by GAAP or the Securities and Exchange Commission following the Grant Date; (h) gains or losses of $5 million or more individually, or $25 million or more in the aggregate, in respect of litigation matters; and (i) gains or losses (other than accrued interest) related to the resolution of income tax contingencies for business acquisitions, to the extent that such contingencies were established as of the dates of such acquisitions in the GAAP purchase price allocations in respect thereof. In the event of an equity restructuring, as defined in Financial Accounting Standards Board Accounting Standards Codification 718-10 (formerly Statement of Financial Accounting Standards 123R ), which affects the Corporation’s common stock, a Participant shall have a legal right to an adjustment to the Performance Measures (including any performance goal in respect of the Performance Measures based on market price per share) and/or the number of Performance Units which shall preserve (without enlarging) the value of the award hereunder, with the manner of such adjustment to be determined by the Committee in its sole discretion.


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10.
Determination and Payment of Final Awards; Negative Discretion .

(a)    As promptly as practicable following the termination of the Performance Period, the Committee shall determine the Applicable Unit Multiplier for each of the Performance Measures (the date of such determination being referred to herein as the “Determination Date”).

(b)    Subject to clause (f) below, promptly following the Determination Date, the Corporation shall pay the Participant an amount in cash (if any), without interest thereon and subject to applicable withholding taxes, equal to the sum of (1) number of Final Cash Performance Units multiplied by the Fair Market Value per share of L3 common stock as of the last day of the Performance Period, and (2) the Final Cash Performance Unit Dividends. Upon the payment of the cash amount contemplated under this clause (b), the Participant’s Account in respect of the Final Cash Performance Units shall be eliminated.

(c)    Subject to clause (f) below, promptly following the Determination Date and the payment by the Participant of any applicable taxes pursuant to Section 11 of this Agreement, but subject to any delay necessary to comply with Section 12 hereof, the Corporation shall (1) issue to the Participant, free and clear of all restrictions, a number of shares of L3 common stock (if any) equal to the number of Final Stock Performance Units (the “Award Shares”) , and (2) pay the Participant an amount in cash (if any), without interest thereon and subject to applicable withholding taxes, equal to the Final Stock Performance Unit Dividends. The Corporation shall not be required to deliver any fractional shares, but shall pay to the Participant, in lieu thereof, an amount in cash, without interest thereon and subject to applicable withholding taxes, equal to the Fair Market Value as of the last day of the Performance Period of such fractional share. The Corporation shall pay any costs incurred in connection with issuing the Award Shares. Upon the issuance of the Award Shares (and payment of any cash amounts contemplated under this clause (c)) to the Participant, the Participant’s Account in respect of the Final Stock Performance Units shall be eliminated.

(d)    Subject to the provisions of Sections 11 and 12 with respect to the issuance of Award Shares, all payments of cash or issuances of Award Shares under this Section 10 shall be made no earlier than January 1, and no later than March 15, of the year after the year in which the Performance Period terminates; provided , that notwithstanding the foregoing, in the event the Performance Period terminates as a result of a Change in Control, such payments of cash and issuances of Award Shares shall be made no later than the 30 th calendar day following such Change in Control.

(e)    Notwithstanding the provisions of this Section, in the event of the death of the Participant prior to the making of any payment or the issuance of the Award Shares under this Section 10, such payment or issuance shall be made to the Participant’s beneficiaries, heirs, executors, administrators or successors in interest as the case may be.

(f)    Notwithstanding the provisions of this Agreement, the Committee shall have the right to reduce (or eliminate) any amount of cash payable hereunder and/or any amount of shares issuable hereunder to the extent attributable to one or more of the adjustments in the calculation of earnings-based Performance Measures provided for under Section 9, in accordance with any standards or on any other basis (including the Committee’s sole discretion) as the Committee may impose.

11.     Tax Withholding . As a condition to the Corporation’s issuance of the Award Shares (if any), the Participant shall remit to the Corporation the minimum amount necessary to satisfy Federal, state, local and foreign withholding tax requirements, if any (“Withholding Taxes”). The payment shall

6

be in the form of: (i) cash, (ii) the delivery of Shares, (iii) a reduction in the number of Shares otherwise issuable or deliverable or other amounts otherwise payable to the Participant pursuant to this Agreement, or (iv) a combination of (i), (ii) and/or (iii). The value of any Shares delivered or withheld as payment in respect of Withholding Taxes shall be determined by reference to the Fair Market Value of such Shares as of the date of such withholding or delivery. In the event that Withholding Taxes are satisfied by withholding a portion of the Shares otherwise issuable or deliverable to the Participant pursuant to this Agreement, the Corporation shall not withhold any Shares in excess of the minimum number of Shares necessary to satisfy the applicable Withholding Taxes.

12.     General Restrictions . Notwithstanding anything in this Agreement to the contrary, the Corporation shall have no obligation to issue or transfer any Award Shares as contemplated by this Agreement unless and until such issuance or transfer shall comply with all relevant provisions of law and the requirements of any stock exchange on which the Corporation's shares are listed for trading.

13.     Plan Governs. The Participant hereby acknowledges receipt of a copy of the Plan and agrees to be bound by its terms, all of which are incorporated herein by reference. The Plan shall govern in the event of any conflict between this Agreement and the Plan.

14.     Modification of Agreement . This Agreement may be not be modified, amended, suspended or terminated, and any terms or conditions may not be waived, without the approval of the Committee. The Committee reserves the right to amend or modify this Agreement at any time without prior notice to any Participant or other interested party; provided , that except as expressly provided hereunder, any such amendment or modification may not adversely affect in any material respect the Participant’s rights or benefits hereunder except for such amendments or modifications as are required by law.
 
15.     Severability . Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms.

16.     Governing Law . The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York without giving effect to the conflicts of laws principles thereof.

17.     Successors in Interest; No Third Party Beneficiaries . This Agreement shall inure to the benefit of and be binding upon any successor to the Corporation. This Agreement shall inure to the benefit of the Participant or the Participant’s legal representatives. All obligations imposed upon the Participant and all rights granted to the Corporation under this Agreement shall be final, binding and conclusive upon the Participant’s heirs, executors, administrators and successors. Except as expressly provided herein, nothing in this Agreement shall confer any rights upon any person other than the parties hereto and their respective heirs, legal representatives, successors and permitted assigns.

18.     Administration . The Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Participant, the Corporation and all other interested persons. No member of the Committee shall be personally liable for any action determination or interpretation made in good faith with respect to the Plan or the Performance Units. In its absolute discretion, the Board of Directors may at any time and from time to time exercise any and all

7

rights and duties of the Committee under the Plan and this Agreement. The Committee shall have the power to delegate any and all of its rights and duties hereunder to any officer of the Corporation to the extent permitted under applicable law.

19.     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 made hereunder shall be final, binding and conclusive on the Participant and Corporation for all purposes.

20.     Data Privacy Consent . As a condition of the grant of the Performance Units, the Participant hereby consents to the collection, use and transfer of personal data as described in this paragraph. The Participant understands that the Corporation and its subsidiaries 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, and details of all performance units or other equity-based 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 among themselves as necessary for the purposes of implementation, administration and management of the Participant’s participation in the Plan, and that the Corporation and any of its subsidiaries may each further transfer Data to any third parties assisting the Corporation in the implementation, administration and management of the Plan. The Participant understands that these recipients may be located in the European 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 stock on the Participant’s behalf, in electronic or other form, for the purposes of implementing, administering and managing the Participant’s participation in the Plan, including any requisite transfer to a broker or other third party with whom the Participant may elect to deposit any shares of common stock acquired under the Plan. The Participant may, at any time, view such Data or require any necessary amendments to it.

21.     Limitation on Rights; No Right to Future Grants; Extraordinary Item of Compensation . By accepting this Agreement and the grant of the Performance Units contemplated hereunder, the Participant expressly acknowledges that (a) the grant of Performance Units is a one-time benefit that does not create any contractual or other right to receive future grants of performance units, or benefits in lieu of performance units; (b) all determinations with respect to future grants of Performance Units, if any, including the grant date, the number of Performance Units granted and the performance period, will be at the sole discretion of the Corporation; (c) the Participant’s acknowledgment and acceptance of this Agreement is voluntary; (d) the value of the Performance Units is an extraordinary item of compensation that is outside the scope of the Participant’s employment contract, if any, and nothing can or must automatically be inferred from such employment contract or its consequences; (e) grants of performance units 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; (f) the future value of the Performance Units is unknown, cannot be predicted with certainty and may be zero; and (g) the Plan is discretionary in nature and may be suspended or terminated by the Corporation at any time. In addition, the Participant understands, acknowledges and agrees that except as expressly provided hereunder, the Participant will have no rights to compensation or damages related to Performance Unit proceeds in consequence of the termination of the Participant’s employment for any reason whatsoever and whether or not in breach of contract.


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22.     Book Entry Delivery of Award Shares . Whenever reference in this Agreement is made to the issuance or delivery of Award Shares, the Corporation may elect to issue or deliver such shares in book entry form in lieu of certificates.

23.     Acceptance . This Agreement shall not be enforceable until it has been executed by the Participant.
 

 
By: L3 TECHNOLOGIES, INC. _______
 
KUBASIK-IMAGE.JPG
————————————————————
Christopher E. Kubasik _________________
Chief Executive Officer and President __ ___
 
 
 
DAVIDSON-IMAGE.JPG
————————————————————
Ann D. Davidson ______________________
Senior Vice President, General Counsel and _
Corporate Secretary __________________




Acknowledged and Agreed
as of the date first written above:


Participant ES
______________________________
Participant Signature



9


Exhibit A

Performance Unit Award Notice


A. Participant :                 Participant Name

B. Grant Date:                 Grant Date

C. Performance Period:             1/1/2018 through 12/31/2020

D. Aggregate Target Performance Units:      # Shares

E. Performance Measure(s):

1.
Diluted Earnings per Share : “Diluted EPS” means earnings per common share on a fully diluted basis, determined in accordance with generally accepted accounting principles and as derived from L3’s audited consolidated financial statements prepared in the ordinary course of business. Diluted EPS shall be adjusted as contemplated by the terms of the Performance Unit Agreement to exclude certain items specified therein, and for 2018, shall be calculated based on continuing operations as presented at the beginning of 2018 (i.e., excluding the Vertex operations).


Portion of Aggregate Award for this Performance Measure: 100%
Target Units for this Performance Measure: # Shares

Performance Scale:

 
 
Cumulative
 
 
Performance
 
Diluted
 
Unit
Levels
 
EPS Required
 
Multiplier
 
 
 
 
 
Maximum
 
≥ $33.28
 
200
%
 
 
$31.76
 
150
%
Target
 
$30.25
 
100
%
 
 
$28.74
 
75
%
Threshold
 
$27.23
 
50
%
Below Threshold
 
< $27.23
 
0
%

In the event that the level of actual performance exceeds the Threshold and falls between two of the stated performance levels listed above, the Unit Multiplier will be calculated on a straight-line basis between the two stated Unit Multipliers for those performance levels.

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Payment Method: Shares of L3 stock. Subject to the terms of the Performance Unit Agreement, the number of shares will be determined by multiplying (1) the Target Units for this Performance Measure, by (2) the applicable Unit Multiplier.


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L3 TECHNOLOGIES, INC.
AMENDED AND RESTATED 2012 CASH INCENTIVE PLAN
PERFORMANCE CASH AWARD AGREEMENT
(Version 2018)


This Performance Cash Award Agreement (this “Agreement”), effective as of the Grant Date (as defined below), is between L3 Technologies, Inc., a Delaware corporation (the “Corporation” or “L3”), and the Participant (as defined below).

1.     Definitions . Capitalized terms not otherwise defined herein shall have the respective meanings ascribed to them in the L3 Technologies, Inc. Amended and Restated 2012 Cash Incentive Plan (the “Plan”). The following terms shall have the following meanings for purposes of this Agreement:

(a)    “Applicable Award Multiplier” shall mean, with respect to each Performance Measure, the “Award Multiplier” calculated pursuant to the Award Letter based on the actual level of achievement for the Performance Period; provided , that in the event of a Change in Control, the “Applicable Award Multiplier” shall mean 100%, subject to upward adjustment (but not above 200%) to the extent (if any) that the Committee is able, in its sole discretion, to assess that the Corporation’s progress, at or prior to the Change in Control, towards the achievement levels set forth in the Award Letter for such Performance Measure exceeds the “Target” performance level as adjusted to account for the reduced period of actual performance.

(b)    “Award Letter” shall mean the award notice to the Participant attached hereto as Exhibit A.    

(c)     “Cause” shall mean the Participant’s (1) intentional failure to perform reasonably assigned duties, (2) dishonesty or willful misconduct in the performance of duties, (3) engaging in a transaction in connection with the performance of duties to the Corporation or its subsidiaries which transaction is adverse to the interests of the Corporation and is engaged in for personal profit or (4) willful violation of any law, rule or regulation in connection with the performance of duties (other than traffic violations or similar offenses).

(d)    “Change in Control” shall mean:

(1)    the acquisition by any person or group (including a group within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than the Corporation or any of its subsidiaries, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a majority more of the combined voting power of the Corporation’s then outstanding voting securities, other than by any employee benefit plan maintained by the Corporation;

(2)    the sale of all or substantially all the assets of the Corporation and its subsidiaries taken as a whole;

(3)    the consummation of a merger, combination, consolidation, recapitalization or other reorganization of the Corporation 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

1


outstanding voting securities of the surviving or resulting corporation shall immediately after the event be beneficially owned in the aggregate by the stockholders of the Corporation immediately prior to the event; or

(4)    the election, including the filling of vacancies, during any period of 24 months or less, of 50% or more of the members 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 Grant Date, or (ii) is nominated for election to the Board of Directors by a majority of the Board which is comprised of directors who were, at the time of such nomination, Continuing Directors.

(e)    “Committee” or “Compensation Committee” shall mean the Compensation Committee of the Board of Directors of the Corporation.

(f)     “Disability” shall mean that the Participant, (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment 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 be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Participant's employer.

(g)    “Grant Date” shall mean the “Grant Date” listed in the Award Letter.

(h)    “Participant” shall mean the “Participant” listed in the Award Letter.

(i)    “Performance Measures” shall mean the performance measures set forth in the Award Letter.

(j)    “Performance Period” shall mean the “Performance Period” set forth in the Award Letter, subject to adjustment in accordance with Section 4 hereof.

(k)     “Retirement” shall mean that the Participant (A) terminates employment with the Corporation and its subsidiaries other than for Cause (and is not subject to termination for Cause at the time of such termination), (B) is available for consultation with the Corporation or its subsidiaries at the reasonable request of the Corporation or its subsidiaries and (C) terminates employment either (1) on or after attaining age 60 and completing at least five years of service in the aggregate with the Corporation and its subsidiaries (which service must be continuous through the date of termination except for a single break in service that does not exceed one year in length), or (2) on or after attaining age 65.

(l)     “Segmented Target Award Value” shall mean, with respect to each Performance Measure, the “Target Award Value” set forth in the Award Letter for the Performance Measure, subject to adjustment pursuant to the terms hereof.

(m)     “Segmented Earned Award Value” shall mean, with respect to each Performance Measure, the Segmented Target Award Value multiplied by the Applicable Award Multiplier.


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(n)    “Subsidiary” or “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 other than corporations), is owned or controlled (directly or indirectly) by that entity, or by one or more of the Subsidiaries of that entity, or by a combination thereof.

(o)     “Total Earned Award Value” shall mean the sum of the Segmented Earned Award Values for all Performance Measures.

(p)     “Total Target Award Value” shall mean the sum of the Segmented Target Award Values for all Performance Measures.
    
2.     Target and Final Awards . Subject to the terms, conditions and restrictions set forth in the Plan and this Agreement, a target incentive compensation opportunity is hereby established for the Participant with respect to each Performance Measure in an amount equal to the Segmented Target Award Value in respect thereof. The final amount that shall be earned (if at all) by the Participant under the Plan and this Agreement with respect to each Performance Measure shall be based on the Segmented Target Award Value and the Applicable Award Multiplier, which shall reflect the actual level of performance achieved by the Corporation with respect to the Performance Measure over the Performance Period.

3.     Nonalienation of Benefits . No Participant or beneficiary shall have the power or right to transfer, anticipate, or otherwise encumber the Participant’s interest under this Agreement. The provisions of this Agreement shall inure to the benefit of the Participant and the Participant’s beneficiaries, heirs, executors, administrators or successors in interest.

4.     Change in Control During Performance Period . In the event of a Change in Control, (a) the Segmented Target Award Value for each Performance Measure shall automatically be adjusted on a pro-rata basis to reflect the number of completed months out of the entire Performance Period as of the date of the Change in Control and (b) the Performance Period shall automatically be deemed to have terminated and the provisions of Section 8 hereof shall become applicable.

5.     Termination of Employment or Disability During Performance Period .

(a)    If the Participant suffers a Disability or the Participant’s employment with the Corporation and its subsidiaries is terminated during the Performance Period: (1) by reason of death or Disability, (2) by Retirement at least one year after the first day of the Performance Period, or (3) by the Corporation without Cause (each, a “Qualified Separation”), the Segmented Target Award Value for each Performance Measure shall automatically be adjusted on a pro-rata basis to reflect the number of completed months out of the entire Performance Period as of the date the Participant suffered a Disability or the date of the termination of employment, as applicable. Thereafter, the Participant (or his/her beneficiaries, heirs, executors, administrators or successors in interest as the case may be) shall be entitled to any amounts payable under Section 8 following the termination of the Performance Period in accordance with the terms hereof.

(b)    In the event that the Participant’s employment with the Corporation and its subsidiaries is terminated during the Performance Period by reason other than Qualified Separation, then the Participant shall forfeit all of his or her rights hereunder.

(c)    The Participant’s rights to the Performance Units shall not be affected by any change in the nature of the Participant’s employment so long as the Participant continues to be an

3


employee of the Corporation or any of its subsidiaries. Whether (and the circumstances under which) employment has been terminated and the determination of the termination date for the purposes of this Agreement (or whether, and the date upon which, the Participant has suffered a Disability) shall be determined by the Committee or (with respect to any employee other than a person who is an “executive officer” of the Corporation as defined in Rule 3b-7 under the Securities Exchange Act of 1934, as amended) its designee (who, at the date of this Agreement, shall be the Corporation’s Vice President of Human Resources), whose good faith determination shall be final, binding and conclusive; provided , that such designee may not make any such determination with respect to his or her own employment

6.     No Right to Continued Employment . Nothing in this Agreement shall be interpreted or construed to confer upon the Participant any right to continue employment by the Corporation or any of its subsidiaries, nor shall this Agreement interfere in any way with the right of the Corporation or any of its subsidiaries to terminate the Participant’s employment at any time for any reason whatsoever, whether or not with cause.

7.     Adjustments for Certain Changes . In the event of an equity restructuring, as defined in Financial Accounting Standards Board Accounting Standards Codification 718-10 (formerly Statement of Financial Accounting Standards 123R ), that affects the Shares, the Committee shall adjust any Share-based Performance Measures affected by such restructuring so as to preserve (without enlarging) such Participant’s incentive compensation opportunity in respect thereof, with the manner of such adjustment to be determined by the Committee in its sole discretion and in a manner consistent with Section 162(m) of the Code, to the extent applicable.

8.
Determination and Payment of Final Awards .

(a)    As promptly as practicable following the termination of the Performance Period, the Committee shall determine the Applicable Award Multiplier for each of the Performance Measures (the date of such determination being referred to herein as the “Determination Date”).

(b)    Promptly following the Determination Date, the Corporation shall pay the Participant an amount in cash (if any), without interest thereon and subject to applicable withholding taxes, equal to the Total Earned Award Value.

(c)    All payments of cash under this Section 8 shall be made no earlier than January 1, and no later than March 15, of the year after the year in which the Performance Period terminates; provided , that notwithstanding the foregoing, in the event the Performance Period terminates as a result of a Change in Control, such payments of cash shall be made no later than the 30 th calendar day following such Change in Control.

(d)    Notwithstanding the provisions of this Section, in the event of the death of the Participant prior to the making of any payment under this Section 8, such payment or issuance shall be made to the Participant’s beneficiaries, heirs, executors, administrators or successors in interest as the case may be.

9.     Plan Governs. The Participant hereby acknowledges receipt of a copy of the Plan and agrees to be bound by its terms, all of which are incorporated herein by reference. The Plan shall govern in the event of any conflict between this Agreement and the Plan.


4


10.     Modification of Agreement . This Agreement may be not be modified, amended, suspended or terminated, and any terms or conditions may not be waived, without the approval of the Committee. The Committee reserves the right to amend or modify this Agreement at any time without prior notice to any Participant or other interested party; provided , that except as expressly provided hereunder, any such amendment or modification may not adversely affect in any material respect the Participant’s rights or benefits hereunder except for such amendments or modifications as are required by law.
 
11.     Severability . Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms.

12.     Governing Law . The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York without giving effect to the conflicts of laws principles thereof.

13.     Successors in Interest; No Third Party Beneficiaries . This Agreement shall inure to the benefit of and be binding upon any successor to the Corporation. This Agreement shall inure to the benefit of the Participant or the Participant’s legal representatives. All obligations imposed upon the Participant and all rights granted to the Corporation under this Agreement shall be final, binding and conclusive upon the Participant’s heirs, executors, administrators and successors. Except as expressly provided herein, nothing in this Agreement shall confer any rights upon any person other than the parties hereto and their respective heirs, legal representatives, successors and permitted assigns.

14.     Administration . The Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Participant, the Corporation and all other interested persons. No member of the Committee shall be personally liable for any action determination or interpretation made in good faith with respect to the Plan or the awards or award opportunities contemplated hereunder. In its absolute discretion, the Board of Directors may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan and this Agreement. The Committee shall have the power to delegate any and all of its rights and duties hereunder to any officer of the Corporation to the extent permitted under applicable law.

15.     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 made hereunder shall be final, binding and conclusive on the Participant and Corporation for all purposes.

16.     Data Privacy Consent . As a condition to the awards and award opportunities contemplated hereunder, the Participant hereby consents to the collection, use and transfer of personal data as described in this paragraph. The Participant understands that the Corporation and its subsidiaries 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, and details of all performance awards and 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 among themselves as necessary for the purposes of implementation, administration and management of the

5


Participant’s participation in the Plan, and that the Corporation and any of its subsidiaries may each further transfer Data to any third parties assisting the Corporation in the implementation, administration and management of the Plan. The Participant understands that these recipients may be located in the European 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, in electronic or other form, for the purposes of implementing, administering and managing the Participant’s participation in the Plan. The Participant may, at any time, view such Data or require any necessary amendments to it.

17.     Limitation on Rights; No Right to Future Awards; Extraordinary Item of Compensation . By accepting this Agreement and the awards or award contemplated hereunder, the Participant expressly acknowledges that (a) the awards and award opportunities contemplated hereunder are one-time benefits that do not create any contractual or other right to receive future awards or award opportunities under the Plan, or any benefits in lieu of thereof; (b) all determinations with respect to future awards and award opportunities under the Plan, if any, will be at the sole discretion of the Committee and/or the Corporation; (c) the Participant’s acknowledgment and acceptance of this Agreement is voluntary; (d) the awards and award opportunities contemplated hereunder are extraordinary items of compensation that are outside the scope of the Participant’s employment contract, if any, and nothing can or must automatically be inferred from such employment contract or its consequences; (e) the awards and award opportunities contemplated hereunder 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; (f) the future value of the award opportunities hereunder are unknown, cannot be predicted with certainty and may be zero; and (g) the Plan is discretionary in nature and may be suspended or terminated by the Corporation at any time. In addition, the Participant understands, acknowledges and agrees that except as expressly provided hereunder, the Participant will have no rights to compensation or damages related to the awards and award opportunities contemplated hereunder in consequence of the termination of the Participant’s employment for any reason whatsoever and whether or not in breach of contract.


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18.     Acceptance . This Agreement shall not be enforceable until it has been executed by the Participant.
 

 
By: L3 TECHNOLOGIES, INC. _______
 
KUBASIK-IMAGE.JPG
————————————————————
Christopher E. Kubasik _________________
Chief Executive Officer and President __ ___
 
 
 
DAVIDSON-IMAGE.JPG
————————————————————
Ann D. Davidson ______________________
Senior Vice President, General Counsel and _
Corporate Secretary __________________




Acknowledged and Agreed
as of the date first written above:


Participant ES
______________________________
Participant Signature
Name: Participant Name






    

7


Exhibit A

Performance Cash Award Notice


A. Participant :                 Participant Name

B. Grant Date:                 Grant Date

C. Performance Period:             1/1/2018 through 12/31/2020

D. Aggregate Target Award Value:     $ # Shares

E. Performance Measure(s):

1.
Relative Total Stockholder Return : This measure will be assessed based on the percentile positioning of L3’s TSR as compared to the TSRs of the Peer Companies, calculated using the formula:

Relative TSR Percentile = 1 - ( Rank - 1 ) / ( Total - 1 )

where “Rank” is the relative ranking of L3’s TSR among the TSRs of the Peer Companies (with a Rank of one being the highest ranked TSR), and “Total” is the sum of (a) one and (b) the total number of Peer Companies on the last day of the Performance Period.

“TSR” means, with respect to any company, the value calculated by dividing (i) the average of L3’s per share closing prices during the one-month period ending on the last day of the Performance Period, by (ii) the average of L3’s per share closing prices during the one-month period ending on the date immediately prior to the first day of the Performance Period, and then subtracting one (1); provided , that all closing prices shall be adjusted to reflect (a) the cumulative effect of the reinvestment of dividends as of their respective ex-dividend dates, beginning with the first ex-dividend date that is on or after the first day of the one-month period referred to in clause (ii) above; and (b) any equity restructuring, as defined in Statement of Financial Accounting Standards 123R, which affects the company’s shares and which is not otherwise accounted for under clause (a) above; provided , further , that TSR shall mean negative 100% with respect to any company that, during the Performance Period, (w) files for bankruptcy, reorganization, or liquidation under any chapter of the U.S. Bankruptcy Code (or under any similar non-U.S. law, as applicable); (x) is the subject of an involuntary bankruptcy proceeding that is not dismissed within 30 days; (y) is the subject of a stockholder approved plan of liquidation or dissolution; or (z) ceases to conduct substantial business operations.


8


“Peer Companies” means the companies listed on Appendix 1 hereto; provided , that in the event of a merger, acquisition or business combination transaction to which a Peer Company is a party, if the stockholders of the Peer Company immediately prior to the event shall, collectively as a group, have beneficial ownership of less than 50 percent of the outstanding voting securities of the surviving or resulting entity immediately after the event, then such Peer Company shall not be considered a Peer Company for any purpose (including during any time period prior to such transaction).


Portion of Aggregate Target Award Value for this Performance Measure: 100%

Performance Scale:

Performance
 
Relative
 
Award
Levels
 
TSR
 
Multiplier
 
 
 
 
 
Maximum
 
≥ 75th percentile
 
200
%
Target
 
50th percentile
 
100
%
Threshold
 
25th percentile
 
25
%
Below Threshold
 
< 25th percentile
 
0
%

In the event that the level of actual performance exceeds the Threshold and falls between two of the stated performance levels listed above, the Award Multiplier will be calculated on a straight-line basis between the two stated Award Multipliers for those performance levels.

9


Appendix 1

The companies included for the Relative Total Stockholder Return assessment are those listed below.


 
Company
 
Ticker
 
 
 
 
1.
AEROJET ROCKETDYNE HOLDINGS INC
 
AJRD
2.
BAE SYSTEMS PLC (ADR)
 
BAESY
3.
BWX TECHNOLOGIES INC
 
BWXT
4.
CAE INC
 
CAE
5.
CUBIC CORP
 
CUB
6.
CURTISS-WRIGHT CORP
 
CW
7.
ESTERLINE TECHNOLOGIES CORP
 
ESL
8.
FLIR SYSTEMS INC
 
FLIR
9.
GENERAL DYNAMICS CORP
 
GD
10.
HARRIS CORP
 
HRS
11.
HUNTINGTON INGALLS INDUSTRIES INC
 
HII
12.
LEIDOS HOLDINGS INC
 
LDOS
13.
LOCKHEED MARTIN CORP
 
LMT
14.
MOOG INC
 
MOG.B
15.
NORTHROP GRUMMAN CORP
 
NOC
16.
ORBITAL ATK
 
OA
17.
RAYTHEON CO
 
RTN
18.
ROCKWELL COLLINS INC
 
COL
19.
TELEDYNE TECHNOLOGIES INC
 
TDY
20.
TEXTRON INC
 
TXT
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





10

Exhibit 31.1


CERTIFICATION
I, Christopher E. Kubasik, certify that:
1.
I have reviewed this report on Form 10-Q for the quarter ended March 30, 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 the statements 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 the financial 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 Exchange Act 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 the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that 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 our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes 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 effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (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; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’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 reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.    
Date: May 1, 2018
/s/ Christopher E. Kubasik
 
Christopher E. Kubasik
 
Chief Executive Officer and President
 



Exhibit 31.2


CERTIFICATION
I, Ralph G. D’Ambrosio, certify that:
1.
I have reviewed this report on Form 10-Q for the quarter ended March 30, 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 the statements 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 the financial 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 Exchange Act 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 the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that 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 our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes 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 effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (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; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’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 reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 1, 2018
/s/ Ralph G. D’Ambrosio
 
Ralph G. D’Ambrosio
 
Senior Vice President and Chief Financial Officer
 







Exhibit 32


CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of L3 Technologies, Inc. (“L3”) on Form 10-Q for the quarter ended March 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Christopher E. Kubasik, 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 of the 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: May 1, 2018
/s/ Christopher E. Kubasik 
 
/s/ Ralph G. D’Ambrosio
Christopher E. Kubasik
 
Ralph G. D’Ambrosio
Chief Executive Officer and President
 
Senior Vice President and Chief Financial Officer