UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-Q
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 27, 2009
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file numbers
001-14141
and
333-46983
L-3 COMMUNICATIONS HOLDINGS,
INC.
L-3 COMMUNICATIONS
CORPORATION
(Exact names of registrants as specified in their charters)
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Delaware
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13-3937434 and 13-3937436
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification Nos.)
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600 Third Avenue, New York, NY
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10016
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(Address of principal executive offices)
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(Zip Code)
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(212) 697-1111
(Telephone number)
Indicate by check mark whether the registrants (1) have
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
registrants were required to file such reports), and
(2) have been subject to such filing requirements for the
past
90 days.
x
Yes
o
No
Indicate by check mark whether the registrants have submitted
electronically and posted on their corporate Web site, 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 registrants
were required to submit and post such files).
o
Yes
o
No
Indicate by check mark whether the registrants are large
accelerated filers, accelerated filers, non-accelerated filers,
or smaller reporting companies. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2
of the
Exchange Act. (Check one):
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Large accelerated
filer
x
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Accelerated
filer
o
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Non-accelerated
filer
o
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Smaller reporting
company
o
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(Do not check if a smaller
reporting company)
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Indicate by check mark whether the registrants are shell
companies (as defined in
Rule 12b-2
of the
Act).
o
Yes
x
No
There were 116,553,106 shares of L-3 Communications Holdings,
Inc. common stock with a par value of $0.01 outstanding as of
the close of business on April 30, 2009.
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
INDEX TO QUARTERLY REPORT ON
FORM 10-Q
For the quarterly period ended March 27, 2009
PART I
FINANCIAL INFORMATION
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ITEM 1.
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FINANCIAL
STATEMENTS
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(in millions, except share data)
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March 27,
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December 31,
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2009
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2008
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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638
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$
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867
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Billed receivables, net of allowances of $26 in 2009 and 2008
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1,327
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1,226
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Contracts in process
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2,424
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2,267
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Inventories
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266
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259
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Deferred income taxes
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210
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211
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Other current assets
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138
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131
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Total current assets
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5,003
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4,961
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Property, plant and equipment, net
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825
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821
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Goodwill
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8,076
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8,029
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Identifiable intangible assets
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411
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417
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Deferred debt issue costs
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41
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44
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Other assets
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209
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|
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212
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|
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Total assets
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$
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14,565
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$
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14,484
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LIABILITIES AND EQUITY
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Current liabilities:
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Current portion of long-term debt
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$
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650
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$
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Accounts payable, trade
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|
679
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602
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Accrued employment costs
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608
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700
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Accrued expenses
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541
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479
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Advance payments and billings in excess of costs incurred
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503
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530
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Income taxes
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|
96
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|
45
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Other current liabilities
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|
341
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|
351
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|
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|
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Total current liabilities
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3,418
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2,707
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Pension and postretirement benefits
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826
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|
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|
802
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Deferred income taxes
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135
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127
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Other liabilities
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424
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414
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Long-term debt
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3,849
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4,493
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Total liabilities
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8,652
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8,543
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Commitments and contingencies (see Note 16)
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Equity:
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L-3 Holdings shareholders equity:
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L-3 Holdings common stock: $.01 par value;
300,000,000 shares authorized, 116,343,766 shares
outstanding at March 27, 2009 and 118,633,746 shares
outstanding at December 31, 2008 (L-3 Communications
common stock: $.01 par value, 100 shares authorized,
issued and outstanding)
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4,187
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4,136
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L-3 Holdings treasury stock at cost,
17,381,432 shares at March 27, 2009 and
13,995,450 shares at December 31, 2008
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(1,551
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)
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(1,319
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)
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Retained earnings
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|
3,530
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3,373
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Accumulated other comprehensive loss
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(337
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)
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(332
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)
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Total L-3 Holdings shareholders equity
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5,829
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5,858
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Noncontrolling interests
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84
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|
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83
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Total equity
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5,913
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5,941
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Total liabilities and equity
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$
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14,565
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$
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14,484
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See notes to unaudited condensed consolidated financial
statements.
1
(in millions, except per share data)
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First Quarter Ended
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March 27,
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March 28,
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2009
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2008
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Net sales:
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Products
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$
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1,762
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$
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1,603
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Services
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1,874
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1,903
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Total net sales
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3,636
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3,506
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Cost of sales:
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Products
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1,566
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1,428
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Services
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1,694
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1,710
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|
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|
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Total cost of sales
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|
3,260
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3,138
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|
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Operating income
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|
|
376
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|
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|
368
|
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Interest and other income, net
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|
|
3
|
|
|
|
8
|
|
Interest expense
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|
|
66
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|
|
|
76
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|
|
|
|
|
|
|
|
|
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Income before income taxes
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|
313
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|
|
|
300
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|
Provision for income taxes
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|
112
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|
|
108
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|
|
|
|
|
|
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Net income
|
|
$
|
201
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|
$
|
192
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|
Less: Net income attributable to noncontrolling interests
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|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
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Net income attributable to L-3 Holdings
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|
$
|
199
|
|
|
$
|
189
|
|
Less: Net income allocable to participating securities
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
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|
Net income allocable to L-3 Holdings common shareholders
|
|
$
|
197
|
|
|
$
|
188
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|
|
|
|
|
|
|
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|
L-3 Holdings earnings per common share:
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|
|
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Basic
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|
$
|
1.66
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|
$
|
1.53
|
|
|
|
|
|
|
|
|
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|
Diluted
|
|
$
|
1.66
|
|
|
$
|
1.51
|
|
|
|
|
|
|
|
|
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|
L-3 Holdings weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
118.4
|
|
|
|
122.6
|
|
|
|
|
|
|
|
|
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|
Diluted
|
|
|
118.8
|
|
|
|
124.1
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial
statements.
2
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
L-3 Holdings
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Par
|
|
|
Paid-in
|
|
|
Treasury
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Issued
|
|
|
Value
|
|
|
Capital
|
|
|
Stock
|
|
|
Earnings
|
|
|
(Loss) Income
|
|
|
Interests
|
|
|
Equity
|
|
|
For the quarter ended March 27, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Balance at December 31, 2008
|
|
|
118.6
|
|
|
$
|
1
|
|
|
$
|
4,135
|
|
|
$
|
(1,319
|
)
|
|
$
|
3,373
|
|
|
$
|
(332
|
)
|
|
$
|
83
|
|
|
$
|
5,941
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
199
|
|
|
|
|
|
|
|
2
|
|
|
|
201
|
|
Pension and postretirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net loss, net of income taxes of $5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
8
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
196
|
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Cash dividends paid on common stock ($0.35 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
(42
|
)
|
Shares issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee savings plans
|
|
|
0.5
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Employee stock purchase plan
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
Treasury stock purchased
|
|
|
(3.4
|
)
|
|
|
|
|
|
|
|
|
|
|
(232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 27, 2009
|
|
|
116.3
|
|
|
$
|
1
|
|
|
$
|
4,186
|
|
|
$
|
(1,551
|
)
|
|
$
|
3,530
|
|
|
$
|
(337
|
)
|
|
$
|
84
|
|
|
$
|
5,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended March 28, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
124.2
|
|
|
$
|
1
|
|
|
$
|
3,816
|
|
|
$
|
(525
|
)
|
|
$
|
2,582
|
|
|
$
|
153
|
|
|
$
|
87
|
|
|
$
|
6,114
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189
|
|
|
|
|
|
|
|
3
|
|
|
|
192
|
|
Pension and postretirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net loss, net of income taxes of $1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Unrealized gain on hedging instruments, net of income taxes of $1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194
|
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Cash dividends paid on common stock ($0.30 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
(37
|
)
|
Shares issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee savings plans
|
|
|
0.3
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
Exercise of stock options
|
|
|
0.3
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
Employee stock purchase plan
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Treasury stock purchased
|
|
|
(2.7
|
)
|
|
|
|
|
|
|
|
|
|
|
(283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(283
|
)
|
Other
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 28, 2008
|
|
|
122.4
|
|
|
$
|
1
|
|
|
$
|
3,877
|
|
|
$
|
(808
|
)
|
|
$
|
2,734
|
|
|
$
|
155
|
|
|
$
|
89
|
|
|
$
|
6,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial
statements.
3
(in millions)
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
|
|
March 27,
|
|
|
March 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
201
|
|
|
$
|
192
|
|
Depreciation of property, plant and equipment
|
|
|
38
|
|
|
|
37
|
|
Amortization of intangibles and other assets
|
|
|
15
|
|
|
|
14
|
|
Deferred income tax provision
|
|
|
14
|
|
|
|
26
|
|
Stock-based employee compensation expense
|
|
|
17
|
|
|
|
15
|
|
Contributions to employee savings plans in L-3 Holdings
common stock
|
|
|
32
|
|
|
|
29
|
|
Amortization of pension and postretirement benefit plans net loss
|
|
|
13
|
|
|
|
2
|
|
Amortization of bond discounts (included in interest expense)
|
|
|
6
|
|
|
|
5
|
|
Amortization of deferred debt issue costs (included in interest
expense)
|
|
|
3
|
|
|
|
3
|
|
Other non-cash items
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
339
|
|
|
|
322
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities, excluding acquired
amounts:
|
|
|
|
|
|
|
|
|
Billed receivables
|
|
|
(101
|
)
|
|
|
(149
|
)
|
Contracts in process
|
|
|
(144
|
)
|
|
|
(140
|
)
|
Inventories
|
|
|
(10
|
)
|
|
|
(14
|
)
|
Accounts payable, trade
|
|
|
99
|
|
|
|
94
|
|
Accrued employment costs
|
|
|
(102
|
)
|
|
|
(96
|
)
|
Accrued expenses
|
|
|
25
|
|
|
|
58
|
|
Advance payments and billings in excess of costs incurred
|
|
|
(15
|
)
|
|
|
18
|
|
Income taxes
|
|
|
56
|
|
|
|
21
|
|
Excess income tax benefits related to share-based payment
arrangements
|
|
|
(1
|
)
|
|
|
(4
|
)
|
Other current liabilities
|
|
|
(13
|
)
|
|
|
(17
|
)
|
Pension and postretirement benefits
|
|
|
26
|
|
|
|
20
|
|
All other operating activities
|
|
|
(7
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
(187
|
)
|
|
|
(229
|
)
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
152
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Business acquisitions, net of cash acquired
|
|
|
(82
|
)
|
|
|
(17
|
)
|
Capital expenditures
|
|
|
(41
|
)
|
|
|
(38
|
)
|
Dispositions of property, plant and equipment
|
|
|
1
|
|
|
|
|
|
Other investing activities
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(122
|
)
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Common stock repurchased
|
|
|
(232
|
)
|
|
|
(283
|
)
|
Cash dividends paid on L-3 Holdings common stock
|
|
|
(42
|
)
|
|
|
(37
|
)
|
Proceeds from exercise of stock options
|
|
|
1
|
|
|
|
14
|
|
Proceeds from employee stock purchase plan
|
|
|
17
|
|
|
|
17
|
|
Excess income tax benefits related to share-based payment
arrangements
|
|
|
1
|
|
|
|
4
|
|
Other financing activities
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(256
|
)
|
|
|
(289
|
)
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes on cash and
cash equivalents
|
|
|
(3
|
)
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(229
|
)
|
|
|
(244
|
)
|
Cash and cash equivalents, beginning of the period
|
|
|
867
|
|
|
|
780
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the period
|
|
$
|
638
|
|
|
$
|
536
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial
statements.
4
FINANCIAL STATEMENTS
|
|
1.
|
Description
of Business
|
L-3 Communications Holdings, Inc. derives all of its operating
income and cash flows from its wholly-owned subsidiary, L-3
Communications Corporation (L-3 Communications). L-3
Communications Holdings, Inc.
(L-3 Holdings
and, together with its subsidiaries, referred to herein as L-3
or the Company) is a prime system contractor in aircraft
modernization and maintenance, Command, Control, Communications,
Intelligence, Surveillance and Reconnaissance
(C
3
ISR)
systems, and government services. L-3 is also a leading provider
of high technology products, subsystems and systems. The
Companys customers include the U.S. Department of
Defense (DoD) and its prime contractors, U.S. Government
intelligence agencies, the U.S. Department of Homeland
Security (DHS), U.S. Department of State (DoS),
U.S. Department of Justice (DoJ), allied foreign
governments, domestic and international commercial customers and
select other U.S. federal, state and local government
agencies.
The Company has the following four reportable segments,
comprised of:
(1) C
3
ISR,
(2) Government Services, (3) Aircraft Modernization
and Maintenance (AM&M), and (4) Specialized Products.
Financial information relating to the Companys reportable
segments is included in Note 19.
C
3
ISR
provides products and services for the global ISR market,
networked communications systems and secure communications
products. The Company believes that these products and services
are critical elements for a substantial number of major command,
control, communication, intelligence gathering and space
systems. These products and services are used to connect a
variety of airborne, space, ground and sea-based communication
systems and are used in the transmission, processing, recording,
monitoring, and dissemination functions of these communication
systems. Government Services provides training and operational
support services, enterprise information technology solutions,
intelligence solutions and support, command & control
systems and software services and global security &
engineering solutions services. AM&M provides
modernization, upgrades and sustainment, maintenance and
logistics support services for military and various government
aircraft and other platforms. Specialized Products provides a
broad range of products, including components, products,
subsystems, systems, and related services to military and
commercial customers in several niche markets across several
business areas, including power & control systems,
electro-optic/infrared (EO/IR), microwave, avionics &
displays, simulation & training, precision engagement,
security & detection, propulsion systems,
telemetry & advanced technology, undersea warfare and
marine services.
These unaudited condensed consolidated financial statements for
the quarterly period ended March 27, 2009 should be read in
conjunction with the audited consolidated financial statements
of L-3 Holdings and
L-3 Communications
included in their Annual Report on
Form 10-K
for the fiscal year ended December 31, 2008.
The Company adopted six new accounting standards during the
quarter ended March 27, 2009. In accordance with the
transition and disclosure provisions of three of these
standards, the Company retrospectively applied those provisions
and adjusted the prior period financial statements accordingly.
See Note 3 for the standards adopted and their impact to
the Companys financial position and results of operations.
The accompanying financial statements comprise the consolidated
financial statements of L-3 Holdings and
L-3 Communications.
L-3 Holdings only asset is its investment in the common
stock of L-3 Communications, its wholly-owned subsidiary, and
its only obligations are: (1) the 3% Convertible
Contingent Debt Securities (CODES) due 2035, which were issued
by L-3 Holdings on July 29, 2005, (2) its guarantee of
borrowings under the senior credit facility of L-3
Communications and (3) its guarantee of other contractual
obligations of L-3 Communications and its subsidiaries. L-3
Holdings obligations relating to the CODES have been
jointly, severally, fully and unconditionally guaranteed by L-3
Communications and certain of its wholly-owned domestic
subsidiaries. Accordingly, such debt has been reflected as debt
of L-3 Communications in its consolidated financial statements
in accordance with the U.S. Securities and Exchange
Commissions (SEC) Staff Accounting Bulletin (SAB)
No. 54.
5
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
All issuances of and conversions into L-3 Holdings equity
securities, including grants of stock options, restricted stock,
restricted stock units and performance units by L-3 Holdings to
employees and directors of L-3 Communications and its
subsidiaries, have been reflected in the consolidated financial
statements of L-3 Communications. As a result, the consolidated
financial positions, results of operations and cash flows of L-3
Holdings and L-3 Communications are substantially the same. See
Note 21 for additional information regarding the unaudited
financial information of L-3 Communications and its subsidiaries.
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 SEC. Accordingly, they do not include all of the
disclosures required by U.S. GAAP for a complete set of
annual audited financial statements. In the opinion of
management, all adjustments (consisting of normal and recurring
adjustments) considered necessary for a fair presentation 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. Certain
reclassifications have been made to conform prior year amounts
to the current year presentation. It is the Companys
established practice to close its books for the quarters ending
March, June and September on the Friday nearest to 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 annual books on December 31 regardless of what day it
falls on.
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 relate to
contract revenue, profit and loss recognition, fair values of
assets acquired and liabilities assumed in business
combinations, market values for inventories reported at lower of
cost or market, pension and post-retirement benefit obligations,
stock-based employee compensation expense, income taxes,
including the valuations of deferred tax assets, litigation
reserves and environmental obligations, accrued product warranty
costs, and the recoverability, 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 will
differ from these estimates and could differ materially. For a
more complete discussion of these estimates and assumptions, see
the Annual Report of L-3 Holdings and L-3 Communications on
Form 10-K
for the fiscal year ended December 31, 2008.
During the quarter ended March 27, 2009, the Company
revised its reportable segment presentations to conform to
certain re-alignments in the Companys management and
organization structure. Consequently, the Company made certain
reclassifications between its
C
3
ISR,
Government Services, and AM&M reportable segments. See
Note 19 for the prior period amounts reclassified between
reportable segments.
|
|
3.
|
New
Accounting Standards Implemented
|
Effective January 1, 2009, the Company adopted the
following six new accounting standards:
|
|
|
|
|
Financial Accounting Standards Board (FASB) Staff Position (FSP)
Accounting Pronouncement
Bulletin 14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement)
(FSP APB
14-1);
|
|
|
|
FSP Emerging Issues Task Force
03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities
(FSP
EITF 03-6-1);
|
|
|
|
FASB Statement No. 160,
Noncontrolling Interests in
Consolidated Financial Statements
(SFAS 160);
|
6
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
FASB Statement No. 161,
Disclosures about Derivative
Instruments and Hedging Activities
(SFAS 161);
|
|
|
|
FASB Statement No. 141(R),
Business Combinations
, as
amended by FSP Financial Accounting Standard (FAS) 141(R)-1,
Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies
(SFAS 141(R)); and
|
|
|
|
FSP
FAS 157-2,
Effective Date of FASB Statement No. 157
(FSP FAS
157-2).
|
FSP APB
14-1:
In
accordance with FSP APB
14-1,
the
Company is separately accounting for the liability and equity
(conversion option) components of the CODES in a manner that
reflects the Companys non-convertible debt borrowing rate
when interest expense is recognized. Previously, the CODES were
recorded at maturity value. FSP APB
14-1
does
not apply to the Companys other outstanding debt
instruments because they are not convertible debt instruments
within the scope of FSP APB
14-1.
The
Company has retrospectively applied the provisions of this
standard and adjusted the prior period financial statements
accordingly. For the quarter ended March 27, 2009, the
adoption of FSP APB
14-1
increased interest expense by $5 million, decreased the
provision for income taxes by $2 million, decreased net
income attributable to L-3 Holdings by $3 million, and
decreased L-3 Holdings basic earnings per common share
(basic EPS) by $0.03 and L-3 Holdings diluted earnings per
common share (diluted EPS) by $0.02.
FSP
EITF 03-6-1:
In
accordance with FSP
EITF 03-6-1,
the Company is including the impact of restricted stock and
restricted stock units that are entitled to receive
non-forfeitable dividends (Participating Securities) when
calculating both basic EPS and diluted EPS. The Company has
retrospectively applied the provisions of this standard and
adjusted the prior period financial statements accordingly. For
the quarter ended March 27, 2009, the adoption of FSP
EITF 03-6-1
decreased basic EPS by $0.02 and diluted EPS by $0.01.
SFAS 160:
The Company retrospectively applied
the presentation requirements of SFAS 160 by:
(1) reclassifying noncontrolling interests (minority
interests) to equity on the Companys balance sheets, and
(2) including net income attributable to noncontrolling
interests in net income on the Companys statements of
operations.
SFAS 161:
The enhanced disclosures for
derivative instruments and related hedging activities required
in accordance with SFAS 161 can be found in Note 15.
SFAS 141(R):
The Company adopted the provisions
of SFAS 141(R) to its acquisition of Chesapeake Sciences
Corporation (CSC), which was completed on January 30, 2009.
See Note 4 for additional information regarding the CSC
acquisition. There were no other business acquisitions completed
during the quarter ended March 27, 2009. In accordance with
SFAS 141(R) the Company is: (1) expensing transaction
and restructuring costs, (2) recognizing and measuring
contingent consideration at fair value, (3) measuring
contingent assets and liabilities at fair value, or in
accordance with FAS 5
Accounting for Contingencies,
as appropriate, and (4) capitalizing in-process research
and development. In addition, the Company did not resolve any
uncertain tax positions related to acquisitions completed prior
to January 1, 2009, which would have been recorded through
earnings if the amount of the resolution were different than
recorded amounts. Previously, the difference between the
resolution and recorded amounts related to uncertain tax
positions would have been recorded through goodwill. The
adoption of SFAS 141(R) did not have a material impact on
the Companys financial position, results of operations and
cash flows for the quarter ended March 27, 2009.
FSP
FAS 157-2:
The
Company adopted the provisions of SFAS No. 157,
Fair Value Measurements,
for non-financial assets and
non-financial liabilities not recognized or disclosed at fair
value in the financial statements on a recurring basis. FSP
FAS 157-2
previously delayed the effective date of applying the provisions
of SFAS 157 to all non-financial assets and non-financial
liabilities not recognized or disclosed at fair value on a
recurring basis until January 1, 2009. The adoption had no
impact on the Companys financial position, results of
operations and cash flows as the Company did not have any
non-financial assets and non-financial liabilities that were
recognized or disclosed at fair value on a non-recurring basis
at March 27, 2009.
7
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The tables below present the Companys As Previously
Reported and As Currently Reported: (1) Condensed
Consolidated Balance Sheet, at December 31, 2008, (2)
Consolidated Equity Account Balances, at December 31, 2007,
and (3) Condensed Consolidated Statement of Operations, for
the quarter ended March 28, 2008, in each case to reflect
the adjustments made to adopt SFAS 160, FSP APB
14-1,
and
FSP
EITF 03-6-1,
as applicable. The adoption of SFAS 161, SFAS 141(R)
and FSP
FAS 157-2
did not have a material impact on the Companys results of
operations for the quarter ended March 28, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
Adjustments for:
|
|
|
As Currently
|
|
|
|
Reported
|
|
|
SFAS 160
|
|
|
FSP APB 14-1
|
|
|
Reported
|
|
|
|
(in millions)
|
|
|
Condensed Consolidated Balance Sheet, at December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
4,961
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,961
|
|
Property, plant and equipment, net
|
|
|
821
|
|
|
|
|
|
|
|
|
|
|
|
821
|
|
Goodwill
|
|
|
8,029
|
|
|
|
|
|
|
|
|
|
|
|
8,029
|
|
Identifiable intangible assets
|
|
|
417
|
|
|
|
|
|
|
|
|
|
|
|
417
|
|
Deferred debt issue costs
|
|
|
45
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
44
|
|
Other assets
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
14,485
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
14,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
$
|
2,707
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,707
|
|
Pension and postretirement benefits
|
|
|
802
|
|
|
|
|
|
|
|
|
|
|
|
802
|
|
Deferred income taxes
|
|
|
110
|
|
|
|
|
|
|
|
17
|
|
|
|
127
|
|
Other liabilities
|
|
|
414
|
|
|
|
|
|
|
|
|
|
|
|
414
|
|
Long-term debt
|
|
|
4,538
|
|
|
|
|
|
|
|
(45
|
)
|
|
|
4,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,571
|
|
|
|
|
|
|
|
(28
|
)
|
|
|
8,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests
|
|
|
83
|
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 Holdings shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 Holdings common stock
|
|
|
4,072
|
|
|
|
|
|
|
|
64
|
|
|
|
4,136
|
|
L-3 Holdings treasury stock at cost
|
|
|
(1,319
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,319
|
)
|
Retained earnings
|
|
|
3,410
|
|
|
|
|
|
|
|
(37
|
)
|
|
|
3,373
|
|
Accumulated other comprehensive loss
|
|
|
(332
|
)
|
|
|
|
|
|
|
|
|
|
|
(332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total L-3 Holdings shareholders equity
|
|
|
5,831
|
|
|
|
|
|
|
|
27
|
|
|
|
5,858
|
|
Noncontrolling interests
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
5,831
|
|
|
|
83
|
|
|
|
27
|
|
|
|
5,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
14,485
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
14,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
Adjustments for:
|
|
|
As Currently
|
|
|
|
Reported
|
|
|
SFAS 160
|
|
|
FSP APB 14-1
|
|
|
Reported
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Consolidated Equity Account Balances, at December 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 Holdings common stock, net of treasury stock
|
|
$
|
3,228
|
|
|
$
|
|
|
|
$
|
64
|
|
|
$
|
3,292
|
|
Retained earnings
|
|
|
2,608
|
|
|
|
|
|
|
|
(26
|
)
|
|
|
2,582
|
|
Accumulated other comprehensive income
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
153
|
|
Noncontrolling interests
|
|
|
|
|
|
|
87
|
|
|
|
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
$
|
5,989
|
|
|
$
|
87
|
|
|
$
|
38
|
|
|
$
|
6,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
Adjustments for:
|
|
|
As Currently
|
|
|
|
Reported
|
|
|
SFAS 160
|
|
|
FSP EITF 03-6-1
|
|
|
FSP APB 14-1
|
|
|
Reported
|
|
|
|
|
|
|
(in millions, except per share data)
|
|
|
|
|
|
Condensed Consolidated Statement of Operations, for the
quarter ended March 28, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,506
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,506
|
|
Cost of sales
|
|
|
3,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
368
|
|
Interest and other income, net
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
Interest expense
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
76
|
|
Minority interests in net income of consolidated subsidiaries
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
302
|
|
|
|
3
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
300
|
|
Provision for income taxes
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
192
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
(3
|
)
|
|
$
|
192
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to L-3 Holdings
|
|
$
|
192
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(3
|
)
|
|
$
|
189
|
|
Less: Net income allocable to participating securities
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocable to L-3 Holdings common shareholders
|
|
$
|
192
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
(3
|
)
|
|
$
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 Holdings earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.57
|
|
|
$
|
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
1.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.54
|
|
|
$
|
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
1.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 Holdings weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
122.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
124.5
|
|
|
|
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
124.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
4.
|
Acquisitions
and Dispositions
|
All of the business acquisitions are included in the
Companys results of operations from their respective dates
of acquisition.
2009
Business Acquisitions
On January 30, 2009, the Company acquired all of the
outstanding stock of Chesapeake Sciences Corporation for a
preliminary purchase price of $92 million, consisting of:
(1) $87 million in cash, including a $7 million
estimated net working capital adjustment, of which
$6 million was for cash acquired, and (2) a purchase price
payable of $5 million related to certain tax benefits
acquired. CSC is a developer and manufacturer of anti-submarine
warfare systems for use onboard submarines and surface ship
combatants. The purchase price is subject to adjustment based on
actual closing date net working capital, which has not been
finalized. Additional consideration, if any, will be accounted
for as goodwill. Based on the preliminary purchase price
allocation, the amount of goodwill recognized was
$58 million, which was assigned to the Specialized Products
reportable segment, and is not expected to be deductible for
income tax purposes. The final purchase price allocation is
expected to be completed by the fourth quarter of 2009, and will
be based on the final purchase price and final appraisals and
other analyses of fair values for acquired assets and assumed
liabilities. The Company does not expect any of the differences
between the preliminary and final purchase price allocations to
have a material impact on its results of operations and
financial position. The acquisition was financed with cash on
hand.
2008
Business Acquisitions
During the quarter ended March 27, 2009, the Company
completed the final purchase price allocation for G.A.
International Electronics and subsidiaries (GAI), except for the
finalization of the contractual purchase price, which is subject
to additional consideration not to exceed $1 million that
is contingent upon GAIs post-acquisition financial
performance through July 25, 2011. The final purchase price
allocation for GAI compared to the preliminary purchase price
allocation did not have a material impact on the Companys
results of operation or financial position. Additional
consideration, if any, will be accounted for as goodwill. The
purchase price allocation for International Resources Group Ltd.
(IRG) is expected to be completed during the second quarter of
2009, and will be based on the final purchase price, final
appraisals and other analyses of fair values for acquired assets
and assumed liabilities. The purchase price for IRG is subject
to adjustment based on actual closing date net assets, which has
not yet been finalized. Additional consideration, if any, will
be accounted for as goodwill. The Company does not expect the
difference, if any, between the preliminary and final purchase
price allocation for IRG to have a material impact on its
results of operations or financial position.
Unaudited
Pro Forma Statements of Operations Data
The following unaudited pro forma Statements of Operations data
presents the combined results of the Company and its business
acquisitions completed during the quarter ended March 27,
2009 and the year ended December 31, 2008, in each case
assuming that the business acquisitions completed during these
periods had occurred on January 1, 2008.
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
|
|
March 27,
|
|
|
March 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions, except per share data)
|
|
|
Pro forma net sales
|
|
$
|
3,642
|
|
|
$
|
3,579
|
|
Pro forma net income attributable to L-3 Holdings
|
|
$
|
199
|
|
|
$
|
189
|
|
Pro forma diluted EPS
|
|
$
|
1.66
|
|
|
$
|
1.51
|
|
10
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The unaudited pro forma results disclosed in the table above are
based on various assumptions and are not necessarily indicative
of the results of operations that would have occurred had the
Company completed these acquisitions on January 1, 2008.
2008
Business and Product Line Dispositions
On October 8, 2008, the Company divested its 85% ownership
interest in Medical Education Technologies, Inc. (METI), which
was within the Specialized Products reportable segment. The sale
resulted in a fourth quarter 2008 after-tax gain of
$20 million (pre-tax gain of $33 million). The gain
was excluded from income from continuing operations for the 2008
fourth quarter in accordance with SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets.
The revenues, operating results and net assets of METI for
all periods presented were not material and, therefore, are not
presented as discontinued operations. The sales price and
related gain are subject to adjustment based on closing date net
working capital. METI generated $13 million of sales and
$1 million of operating income for the quarter ended
March 28, 2008, and $48 million of sales and
$4 million of operating income for the year ended
December 31, 2008.
On May 9, 2008, the Company sold the Electron Technologies
Passive Microwave Devices (PMD) product line, which was within
the Specialized Products reportable segment. The sale resulted
in a second quarter 2008 after-tax gain of approximately
$7 million (pre-tax gain of $12 million). The PMD
product line generated $4 million of sales for the quarter
ended March 28, 2008, and $8 million of sales for the
year ended December 31, 2008.
The components of contracts in process are presented in the
table below.
|
|
|
|
|
|
|
|
|
|
|
March 27,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Unbilled contract receivables, gross
|
|
$
|
2,208
|
|
|
$
|
2,079
|
|
Less: unliquidated progress payments
|
|
|
(515
|
)
|
|
|
(462
|
)
|
|
|
|
|
|
|
|
|
|
Unbilled contract receivables, net
|
|
|
1,693
|
|
|
|
1,617
|
|
|
|
|
|
|
|
|
|
|
Inventoried contract costs, gross
|
|
|
847
|
|
|
|
754
|
|
Less: unliquidated progress payments
|
|
|
(116
|
)
|
|
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
Inventoried contract costs, net
|
|
|
731
|
|
|
|
650
|
|
|
|
|
|
|
|
|
|
|
Total contracts in process
|
|
$
|
2,424
|
|
|
$
|
2,267
|
|
|
|
|
|
|
|
|
|
|
Inventoried Contract Costs.
In accordance
with the American Institute of Certified Public Accountants
Statement of Position
81-1,
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts
(SOP 81-1)
and the AICPA Audit and Accounting Guide,
Audits of Federal
Government Contractors,
the Company accounts for the portion
of its general and administrative (G&A) costs, independent
research and development (IRAD) costs and bid and proposal
(B&P) costs that are allowable and reimbursable indirect
contract costs under U.S. Government procurement
regulations on its U.S. Government contracts (revenue
arrangements) as inventoried contract costs. G&A, IRAD and
B&P costs are allocated to contracts for which the
U.S. Government is the end customer and are charged to
costs of sales when sales on the related contracts are
recognized. The Companys unallowable portion of its
G&A, IRAD and B&P costs for its U.S. Government
contractor businesses are expensed as incurred and are not
included in inventoried contract costs.
11
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The table below presents a summary of G&A, IRAD and
B&P costs included in inventoried contract costs and the
changes to them, including amounts charged to cost of sales for
U.S. Government contracts for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
|
|
March 27,
|
|
|
March 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Amounts included in inventoried contract costs at beginning of
the period
|
|
$
|
74
|
|
|
$
|
68
|
|
Add: Contract costs
incurred
(1)
|
|
|
312
|
|
|
|
282
|
|
Less: Amounts charged to cost of sales
|
|
|
(307
|
)
|
|
|
(281
|
)
|
|
|
|
|
|
|
|
|
|
Amounts included in inventoried contract costs at end of the
period
|
|
$
|
79
|
|
|
$
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Incurred costs include IRAD and
B&P costs of $76 million for the quarter ended
March 27, 2009 and $59 million for the quarter ended
March 28, 2008.
|
The table below presents a summary of selling, general and
administrative expenses and research and development expenses
for the Companys commercial businesses, which are expensed
as incurred and not included in inventoried contract costs.
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
|
|
March 27,
|
|
|
March 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Selling, general and administrative expenses
|
|
$
|
61
|
|
|
$
|
66
|
|
Research and development expenses
|
|
|
17
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
78
|
|
|
$
|
90
|
|
|
|
|
|
|
|
|
|
|
Inventories at Lower of Cost or Market.
The
table below presents the components of inventories at cost
(first-in,
first-out or average cost), but not in excess of realized value.
|
|
|
|
|
|
|
|
|
|
|
March 27,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Raw materials, components and sub-assemblies
|
|
$
|
101
|
|
|
$
|
95
|
|
Work in process
|
|
|
126
|
|
|
|
121
|
|
Finished goods
|
|
|
39
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
266
|
|
|
$
|
259
|
|
|
|
|
|
|
|
|
|
|
12
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
7.
|
Goodwill
and Identifiable Intangible Assets
|
Goodwill.
In accordance with
SFAS No. 141(R), adopted on January 1, 2009, the
Company allocates the cost of business acquisitions to the
assets acquired and liabilities assumed based on their 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 Companys reportable segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
|
|
|
|
|
|
Specialized
|
|
|
Consolidated
|
|
|
|
C
3
ISR
|
|
|
Services
|
|
|
AM&M
|
|
|
Products
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Balance at December 31,
2008
(1)
|
|
$
|
862
|
|
|
$
|
2,313
|
|
|
$
|
1,121
|
|
|
$
|
3,733
|
|
|
$
|
8,029
|
|
Business acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
58
|
|
Foreign currency translation
adjustments
(2)
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(10
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 27, 2009
|
|
$
|
862
|
|
|
$
|
2,313
|
|
|
$
|
1,120
|
|
|
$
|
3,781
|
|
|
$
|
8,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As a result of certain
re-alignments in the Companys management and organization
structure as discussed in Note 2, $17 million of
goodwill was reclassified from the
C
3
ISR
reportable segment to the Government Services reportable
segment, and $17 million of goodwill was reclassified from
the C
3
ISR
reportable segment to the AM&M reportable segment.
|
|
(2)
|
|
The decrease in goodwill from
foreign currency translation adjustments is due to the continued
strengthening of the U.S. dollar during the first quarter of
2009 against the functional currencies of L-3s foreign
subsidiaries, primarily in Canada, Germany and the United
Kingdom.
|
Identifiable Intangible Assets.
Information on the
Companys identifiable intangible assets that are subject
to amortization is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 27, 2009
|
|
|
December 31, 2008
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Amortization
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Period
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(in years)
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Customer contractual relationships
|
|
|
23
|
|
|
$
|
510
|
|
|
$
|
134
|
|
|
$
|
376
|
|
|
$
|
505
|
|
|
$
|
124
|
|
|
$
|
381
|
|
Technology
|
|
|
8
|
|
|
|
78
|
|
|
|
50
|
|
|
|
28
|
|
|
|
76
|
|
|
|
47
|
|
|
|
29
|
|
Other, primarily favorable leasehold interests
|
|
|
7
|
|
|
|
14
|
|
|
|
7
|
|
|
|
7
|
|
|
|
14
|
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
22
|
|
|
$
|
602
|
|
|
$
|
191
|
|
|
$
|
411
|
|
|
$
|
595
|
|
|
$
|
178
|
|
|
$
|
417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense recorded by the Company for its
identifiable intangible assets is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
|
|
March 27,
|
|
|
March 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Amortization expense
|
|
$
|
13
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
Based on gross carrying amounts at March 27, 2009, the
Companys estimate of amortization expense for identifiable
intangible assets for the years ending December 31, 2009
through 2013 are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ending December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
(in millions)
|
|
|
Estimated amortization expense
|
|
$
|
52
|
|
|
$
|
52
|
|
|
$
|
47
|
|
|
$
|
38
|
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
At March 27, 2009 and December 31, 2008, the Company
had $1 million of indefinite-lived identifiable intangible
assets.
|
|
8.
|
Other
Current Liabilities and Other Liabilities
|
The table below presents the components of other current
liabilities.
|
|
|
|
|
|
|
|
|
|
|
March 27,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Other Current Liabilities:
|
|
|
|
|
|
|
|
|
Accruals for pending and threatened litigation (see Note 16)
|
|
$
|
3
|
|
|
$
|
4
|
|
Accrued product warranty costs
|
|
|
93
|
|
|
|
97
|
|
Accrued interest
|
|
|
65
|
|
|
|
66
|
|
Estimated costs in excess of estimated contract value to
complete contracts in process in a loss position
|
|
|
54
|
|
|
|
58
|
|
Deferred revenues
|
|
|
30
|
|
|
|
25
|
|
Aggregate purchase price payable for acquired businesses
|
|
|
5
|
|
|
|
|
|
Other
|
|
|
91
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
Total other current liabilities
|
|
$
|
341
|
|
|
$
|
351
|
|
|
|
|
|
|
|
|
|
|
The table below presents the components of other liabilities.
|
|
|
|
|
|
|
|
|
|
|
March 27,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Other Liabilities:
|
|
|
|
|
|
|
|
|
Non-current income taxes payable (see Note 11)
|
|
$
|
182
|
|
|
$
|
177
|
|
Deferred compensation
|
|
|
85
|
|
|
|
79
|
|
Accrued workers compensation
|
|
|
48
|
|
|
|
45
|
|
Unfavorable lease obligations
|
|
|
7
|
|
|
|
8
|
|
Non-current portion of net deferred gains from terminated
interest rate swap agreements
|
|
|
8
|
|
|
|
9
|
|
Notes payable and capital lease obligations
|
|
|
10
|
|
|
|
10
|
|
Accrued product warranty costs
|
|
|
5
|
|
|
|
5
|
|
Other non-current liabilities
|
|
|
79
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
$
|
424
|
|
|
$
|
414
|
|
|
|
|
|
|
|
|
|
|
14
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The table below presents the changes in the Companys
accrued product warranty costs.
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
|
|
March 27,
|
|
|
March 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Accrued product warranty
costs
(1)
:
|
|
|
|
|
|
|
|
|
Balance at January 1
|
|
$
|
102
|
|
|
$
|
98
|
|
Accruals for product warranties issued during the period
|
|
|
10
|
|
|
|
8
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
1
|
|
Settlements made during the period
|
|
|
(14
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
98
|
|
|
$
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Warranty obligations incurred in
connection with long-term production contracts are accounted for
within the contract estimates at completion (EACs) and are
excluded from the above amounts. The balances above include both
long-term and short-term amounts.
|
The components of debt and a reconciliation to the carrying
amount of current and long-term debt are presented in the table
below.
|
|
|
|
|
|
|
|
|
|
|
March 27,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
L-3 Communications:
|
|
|
|
|
|
|
|
|
Borrowings under Revolving Credit
Facility
(1)
|
|
$
|
|
|
|
$
|
|
|
Borrowings under Term Loan Facility maturing
2010
(2)
|
|
|
650
|
|
|
|
650
|
|
7
5
/
8
% Senior
Subordinated Notes due 2012
|
|
|
750
|
|
|
|
750
|
|
6
1
/
8
% Senior
Subordinated Notes due 2013
|
|
|
400
|
|
|
|
400
|
|
6
1
/
8
% Senior
Subordinated Notes due 2014
|
|
|
400
|
|
|
|
400
|
|
5
7
/
8
% Senior
Subordinated Notes due 2015
|
|
|
650
|
|
|
|
650
|
|
6
3
/
8
% Senior
Subordinated Notes due 2015
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
3,850
|
|
|
|
3,850
|
|
|
|
|
|
|
|
|
|
|
L-3 Holdings:
|
|
|
|
|
|
|
|
|
3% Convertible Contingent Debt Securities due
2035
(3)
|
|
|
700
|
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
Principal amount of long-term debt
|
|
|
4,550
|
|
|
|
4,550
|
|
Less: Unamortized
discounts
(4)
|
|
|
(51
|
)
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
Carrying amount of long-term debt
|
|
|
4,499
|
|
|
|
4,493
|
|
Less: Current portion of long-term debt
|
|
|
(650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount of long-term debt, excluding current portion
|
|
$
|
3,849
|
|
|
$
|
4,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The Companys five-year
revolving credit facility, which matures on March 9, 2010,
allows for total aggregate borrowings of up to $1 billion.
At March 27, 2009, available borrowings under the revolving
credit facility were $938 million after reductions for
outstanding letters of credit of $62 million.
|
|
(2)
|
|
The interest rate at March 27,
2009 and December 31, 2008 was 1.44% and 2.70%,
respectively, and is based on the LIBOR rate (as defined) plus a
spread. See Note 10 to the audited consolidated financial
statements included in the Companys Annual Report on
|
15
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
Form 10-K
for the year ended December 31, 2008 for additional
information regarding the interest on borrowings under the term
loan facility. The term loan facility matures on March 9,
2010.
|
|
(3)
|
|
Under select conditions, including
if L-3 Holdings common stock price is more than 120%
(currently $121.36) of the then current conversion price
(currently $101.13) for a specified period, the conversion
feature of the CODES will require L-3 Holdings, upon conversion,
to pay the $700 million principal amount in cash, and if
the settlement amount exceeds the principal amount, the excess
will be settled in cash or stock or a combination thereof, at
the Companys option. At the current conversion price, the
aggregate consideration to be delivered upon conversion would be
determined based on 6.9 million shares of L-3
Holdings common stock. See Note 10 to the audited
consolidated financial statements for the year ended
December 31, 2008, included in the Companys Annual
Report on Form
10-K
for
additional information regarding the CODES, including conditions
for conversion. The carrying amount of the conversion option of
the CODES is $64 million and is recorded as a component of
equity for all periods presented. The net carrying amount of the
CODES after its unamortized discount was $660 million at
March 27, 2009 and $655 million at December 31, 2008.
The effective interest rate on the CODES is 6.33%. Interest
expense recognized for each of the quarters ended March 27,
2009 and March 28, 2008 was $10 million. L-3
Holdings stock price on April 30, 2009 was $76.15 per
share.
|
|
(4)
|
|
The unamortized discount for the
CODES was $40 million at March 27, 2009 and
$45 million at December 31, 2008, which is being
amortized through February 1, 2011.
|
A reconciliation of net income to comprehensive income
attributable to L-3 Holdings is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
|
|
March 27,
|
|
|
March 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Net income
|
|
$
|
201
|
|
|
$
|
192
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(13
|
)
|
|
|
|
|
Unrealized gains on hedging
instruments
(1)
|
|
|
|
|
|
|
1
|
|
Amortization of pension and postretirement benefit plans net
loss
(2)
|
|
|
8
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
196
|
|
|
|
194
|
|
Less: Comprehensive income attributable to noncontrolling
interests
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to L-3 Holdings
|
|
$
|
194
|
|
|
$
|
191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amount is net of income tax expense
of $1 million for the quarterly period ended March 28,
2008.
|
|
(2)
|
|
Amounts are net of income tax
expense of $5 million and $1 million for the quarterly
periods ended March 27, 2009 and March 28, 2008,
respectively. See Note 17.
|
The U.S. Federal income tax jurisdiction is the
Companys major tax jurisdiction. The statute of
limitations for the Companys U.S. Federal income tax
returns for the years ended December 31, 2004 through 2007
is open as of March 27, 2009. The Company expects the
statute of limitations on the 2004 and 2005 years to close
in the third quarter of 2009. The Internal Revenue Service (IRS)
began its audit of the Companys 2006 and 2007 U.S. Federal
income tax returns in April 2009. In addition, the Company has
numerous state and foreign income tax audits currently in
process. As of March 27, 2009, the Company anticipates that
unrecognized tax benefits will decrease by approximately
$31 million over the next 12 months.
Current and non-current income taxes payable include potential
interest of $19 million ($12 million after income
taxes) at March 27, 2009 and $18 million
($11 million after income taxes) at December 31, 2008,
and potential penalties of $7 million at March 27,
2009 and December 31, 2008.
16
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
12.
|
L-3
Holdings Earnings Per Common Share
|
A reconciliation of basic EPS and diluted EPS is presented in
the table below.
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
|
|
March 27,
|
|
|
March 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions, except per share data)
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
Net income allocable to L-3 Holdings common shareholders
|
|
$
|
197
|
|
|
$
|
188
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
118.4
|
|
|
|
122.6
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
1.66
|
|
|
$
|
1.53
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Net income allocable to L-3 Holdings common shareholders
|
|
$
|
197
|
|
|
$
|
188
|
|
|
|
|
|
|
|
|
|
|
Common and potential common shares:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
118.4
|
|
|
|
122.6
|
|
Assumed exercise of stock options
|
|
|
3.5
|
|
|
|
4.5
|
|
Employee stock purchase plan contributions
|
|
|
0.6
|
|
|
|
0.4
|
|
Unvested restricted stock awards
|
|
|
0.1
|
|
|
|
|
|
Assumed purchase of common shares for treasury
|
|
|
(3.8
|
)
|
|
|
(3.7
|
)
|
Assumed conversion of the CODES
|
|
|
|
(1)
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
Common and potential common shares
|
|
|
118.8
|
|
|
|
124.1
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
1.66
|
|
|
$
|
1.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
L-3 Holdings CODES had no
impact on diluted EPS for the quarter ended March 27, 2009,
because the average market price of L-3 Holdings common
stock during this period was less than the price at which the
CODES would have been convertible into L-3 Holdings common
stock. As of March 27, 2009, the current conversion price
was $101.13.
|
Excluded from the computations of diluted EPS are stock options,
restricted stock, and restricted stock units underlying employee
stock-based compensation of 2.8 million for the quarter
ended March 27, 2009, and 1.6 million for the quarter
ended March 28, 2008, because they were anti-dilutive.
Repurchases of L-3 Holdings common stock under the
$1 billion share repurchase program, approved by the Board
of Directors in November 2008, are made from time to time at
managements discretion in accordance with applicable U.S.
federal securities laws. All share repurchases of L-3
Holdings common stock have been recorded as treasury
shares. At March 27, 2009, the remaining dollar value of
the authorized share repurchase program was $700 million.
From March 28, 2009 through May 4, 2009, L-3
repurchased 40,800 shares of L-3 Holdings common
stock at an average price of $73.33 per share for an aggregate
amount of $3 million.
On April 28, 2009, L-3 Holdings Board of Directors
declared a quarterly cash dividend of $0.35 per share, payable
on June 15, 2009 to shareholders of record at the close of
business on May 18, 2009.
17
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
14.
|
Fair
Value Measurements
|
The following table presents the fair value hierarchy level for
each of the Companys assets and liabilities that are
measured and recorded at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 27, 2009
|
|
|
December 31, 2008
|
|
Description
|
|
Level
1
(a)
|
|
|
Level
2
(b)
|
|
|
Level
3
(c)
|
|
|
Level
1
(a)
|
|
|
Level
2
(b)
|
|
|
Level
3
(c)
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
493
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
794
|
|
|
$
|
|
|
|
$
|
|
|
Derivative instruments
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
493
|
|
|
$
|
19
|
|
|
$
|
|
|
|
$
|
794
|
|
|
$
|
22
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
$
|
|
|
|
$
|
17
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
21
|
|
|
$
|
|
|
|
|
|
(a)
|
|
Level 1 is based on quoted
market prices available in active markets for identical assets
or liabilities as of the reporting date.
|
|
(b)
|
|
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.
|
|
(c)
|
|
Level 3 is based on pricing
inputs that are not observable and not corroborated by market
data. The Company has no Level 3 assets or liabilities.
|
|
|
15.
|
Derivative
Financial Instruments
|
The Companys derivative instruments include foreign
currency forward contracts, which are entered into for risk
management purposes, and an embedded derivative representing the
contingent interest payment provision related to the CODES.
Foreign Currency Forward Contracts.
The
Companys 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 these contracts, the Company enters into
foreign currency forward contracts. The Companys
activities involving foreign currency forward contracts are
designed to hedge the changes in the functional currency
equivalent cash flows due to movements in foreign exchange rates
compared to the functional currency. The foreign currencies
hedged are primarily the Canadian dollar, Euro, British Pound
and U.S. dollar. The Company manages exposure to
counterparty 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
Companys Consolidated Balance Sheets at fair value and are
generally designated and accounted for as cash flow hedges in
accordance with Statement of Financial Accounting Standards
No. 133,
Accounting for Derivative Instruments and
Hedging Activities
(SFAS 133). Gains and losses
on designated foreign currency forward contracts that are
considered highly effective in offsetting the corresponding
change in the cash flows of the hedged transaction are recorded
net of income taxes in accumulated other comprehensive loss
(accumulated OCI) and then recognized in earnings when the
underlying hedged transaction affects earnings. The estimated
net amount of existing losses at March 27, 2009 that are
expected to be reclassified into earnings within the next
12 months is $4 million. Gains and losses on foreign
currency forward contracts that do not meet the SFAS 133
hedge accounting criteria are recognized in earnings immediately.
18
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The table below presents the notional amounts of the
Companys outstanding foreign currency forward contracts by
currency as of March 27, 2009:
|
|
|
|
|
Currency
|
|
Notional Amount
|
|
|
|
(in millions)
|
|
|
U.S. Dollar
|
|
|
$140
|
|
British Pound
|
|
|
71
|
|
Euro
|
|
|
24
|
|
Canadian Dollar
|
|
|
85
|
|
Other
|
|
|
10
|
|
|
|
|
|
|
Total
|
|
|
$330
|
|
|
|
|
|
|
The notional amounts are used to measure the volume of these
contracts and do not represent exposure to foreign currency
losses. At March 27, 2009, the Companys foreign
currency forward contracts had maturities through 2015.
The table below presents the fair values and the location of the
Companys derivative instruments in the Unaudited Condensed
Consolidated Balance Sheet as of March 27, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Derivative
Instruments
(1)
|
|
|
|
Other
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Other
|
|
|
Current
|
|
|
Other
|
|
|
|
|
|
|
Assets
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments under
SFAS 133:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
3
|
|
|
$
|
14
|
|
|
$
|
10
|
|
|
$
|
3
|
|
|
|
|
|
Derivatives not designated as hedging instruments under
SFAS 133:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
|
|
1
|
|
|
|
|
|
Embedded derivative related to the CODES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative instruments
|
|
$
|
4
|
|
|
$
|
15
|
|
|
$
|
13
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
See Note 14 for a description
of the fair value hierarchy related to the Companys
foreign currency forward contracts.
|
The table below presents the effect of the Companys
derivative instruments on the Unaudited Condensed Consolidated
Statement of Operations for the quarter ended March 27,
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
|
|
|
|
|
|
Location of Gain or (Loss)
|
|
|
Amount of Gain or (Loss)
|
|
|
|
Amount of
|
|
|
Gain or (Loss)
|
|
|
Amount of Gain or
|
|
|
Recognized in Income on
|
|
|
Recognized in Income on
|
|
|
|
Gain or (Loss)
|
|
|
Reclassified from
|
|
|
(Loss) Reclassified
|
|
|
Derivative (Ineffective
|
|
|
Derivative (Ineffective
|
|
Derivatives in SFAS 133
|
|
Recognized in
|
|
|
Accumulated
|
|
|
from Accumulated
|
|
|
Portion and Amount
|
|
|
Portion and Amount
|
|
Cash Flow Hedging
|
|
OCI on Derivative
|
|
|
OCI into Income
|
|
|
OCI into Income
|
|
|
Excluded from
|
|
|
Excluded from
|
|
Relationships
|
|
(Effective Portion)
|
|
|
(Effective Portion)
|
|
|
(Effective Portion)
|
|
|
Effectiveness Testing)
|
|
|
Effectiveness Testing)
|
|
|
Foreign currency forward contracts
|
|
$
|
(1
|
)
|
|
|
Cost of Sales
|
|
|
$
|
(1
|
)
|
|
|
Cost of Sales
|
|
|
$
|
|
|
The amount of gain or loss recognized in income for derivatives
not designated as hedging instruments under SFAS 133 for the
quarter ended March 27, 2009 was less than $1 million.
19
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
16.
|
Commitments
and Contingencies
|
U.S.
and Foreign Government Procurement Regulations
A substantial majority of the Companys revenues are
generated from providing products and services under legally
binding agreements, or contracts, with U.S. Government and
foreign government customers. 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 could result and give rise to fines, penalties,
compensatory and treble damages, restitution
and/or
forfeitures. The Company does not currently anticipate that any
of these investigations will have a material adverse effect 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 could result
in the Company being suspended for a period of time from
eligibility for awards of new government contracts or in a loss
of export privileges. A conviction could result in debarment
from contracting with the federal government for a specified
term. In addition, all of the Companys
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 and default, as well as
other procurement clauses relevant to the foreign government.
Litigation
Matters
The Company has been subject to and is involved in litigation,
government investigations, proceedings, claims or assessments
and various contingent liabilities incidental to its businesses,
including those specified below. Furthermore, in connection with
certain business acquisitions, the Company has assumed some or
all claims against, and liabilities of, the acquired business,
including both asserted and unasserted claims and liabilities.
In accordance with SFAS No. 5,
Accounting 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 is disclosed in Note 8. Amounts
recoverable from insurance contracts or third parties are
recorded as assets when deemed probable. At March 27, 2009,
the Company did not record any amounts for recoveries from
insurance contracts or third parties in connection with the
amount of liabilities recorded for pending and threatened
litigation. The Company believes it has recorded adequate
provisions for its litigation matters. The Company reviews these
provisions quarterly and adjusts these provisions to reflect the
impact of negotiations, settlements, rulings, advice of legal
counsel and other information and events pertaining to a
particular matter. An estimate of loss or range of loss is
disclosed for a particular litigation matter when such amount or
amounts can be reasonably estimated and no loss has been
accrued. The Company believes that any damage amounts claimed in
the specific matters discussed below are not meaningful
indicators of potential liability. Although the Company believes
that it has valid defenses with respect to legal matters and
investigations pending against it, litigation is inherently
unpredictable. Therefore, it is possible that the financial
position, results of operations or cash flows of the Company
could be materially adversely affected in any particular period
by the unfavorable resolution of one or more of these
contingencies.
Kalitta Air.
L-3 Integrated Systems and its
predecessors have been involved in litigation with Kalitta Air
arising from a contract to convert Boeing 747 aircraft from
passenger configuration to cargo freighters. The lawsuit was
brought in the United States District Court for the Northern
District of California on January 31, 1997. The aircraft
were modified using Supplemental Type Certificates (STCs) issued
in 1988 by the Federal Aviation Administration (FAA) to Hayes
International, Inc. (Hayes/Pemco) as a subcontractor to
GATX/Airlog Company (GATX). Between 1988 and 1990, Hayes/Pemco
modified five aircraft as a subcontractor to GATX using the
STCs. Between 1990 and
20
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
1994, Chrysler Technologies Airborne Systems, Inc. (CTAS), a
predecessor to L-3 Integrated Systems, performed as a
subcontractor to GATX and modified an additional five aircraft
using the STCs. Two of the aircraft modified by CTAS were owned
by American International Airways, the predecessor to Kalitta
Air. In 1996, the FAA determined that the engineering data
provided by Hayes/Pemco supporting the STCs was inadequate and
issued an Airworthiness Directive that effectively grounded the
ten modified aircraft. The Kalitta Air aircraft have not been in
revenue service since that date. The matter was tried in January
2001 against GATX and CTAS with the jury finding fault on the
part of GATX, but rendering a unanimous defense verdict in favor
of CTAS. Certain co-defendants had settled prior to trial. The
U.S. Court of Appeals for the Ninth Circuit subsequently
reversed and remanded the trial courts summary judgment
rulings in favor of CTAS regarding a negligence claim by Kalitta
Air, which asserts that CTAS as an expert in aircraft
modification should have known that the STCs were deficient. The
retrial began on January 18, 2005, and ended on
March 2, 2005 with a deadlocked jury and mistrial. At the
retrial, Kalitta Air claimed damages of $235 million plus
interest. By order dated July 22, 2005, the trial court
granted the Companys motion for judgment as a matter of
law as to negligence dismissing that claim, denied the
Companys motion for judgment as a matter of law as to
negligent misrepresentation, and certified the decision for
interlocutory appeal to the U.S. Court of Appeals for the
Ninth Circuit. On October 8, 2008, the Ninth Circuit
reversed the trial courts dismissal of the negligence
claim and affirmed the trial courts ruling as to the
negligent misrepresentation claim. The case has been remanded to
the trial court to reconsider the negligence claim and for
further proceedings on the negligent misrepresentation claim. A
court-ordered mediation held on March 18, 2009 was
unsuccessful. A hearing on the Companys motion to dismiss
the negligence claim was held on April 30, 2009, and the parties
are awaiting the trial courts decision. CTAS
insurance carrier has accepted defense of the matter and has
retained counsel, subject to a reservation of rights by the
insurer to dispute its obligations under the applicable
insurance policies in the event of an adverse finding.
Korean Lot II Program.
On April 4, 2005,
Lockheed Martin Corporation (Lockheed) filed a lawsuit in the
Federal District Court for the Northern District of Georgia
alleging misappropriation of proprietary information and breach
of a license agreement. The complaint alleges that L-3
Integrated Systems (L-3 IS) is in breach of its license
agreement with Lockheed and is infringing on Lockheeds
intellectual property rights as a result of its performance of a
subcontract awarded to L-3 IS for the Korean Lot II
program. The complaint seeks unspecified monetary damages,
including punitive damages and attorneys fees, and an
injunction enjoining L-3 from use or disclosure of the
intellectual property at issue in the lawsuit. At a court
hearing held in March of 2009, Lockheed claimed that at trial it
will seek disgorgement of the monies paid or payable to L-3 IS
under its subcontract for the Korean Lot II program (which
Lockheed claims to be approximately $315 million) or, under
an alternative theory of damages, royalties of approximately
$20 million. The case is scheduled to go to trial in May
2009.
SafeView Arbitration.
The Company is currently
subject to an American Arbitration Association proceeding
initiated by Paladin Homeland Security Fund on behalf of all
former stockholders of SafeView, Inc. The claimants are alleging
violations of federal securities laws, fraud, negligent
misrepresentation, breach of contract and unjust enrichment in
connection with L-3s acquisition of SafeView, and in
particular the earnout provisions of the acquisition agreement
providing for certain payments contingent upon SafeViews
financial performance during the three year period ended
December 31, 2008. The claimants are seeking damages of
approximately $35 million (the maximum amount payable under
the earnout provisions), unspecified punitive damages and
attorneys and arbitration fees. A decision is expected to
be rendered in the second quarter of 2009.
Aircrew Training and Rehearsal Support (ATARS)
Investigation.
Following a lawsuit filed by Lockheed on
April 6, 2006 in the U.S. District Court for the
Middle District of Florida against the Company and certain
individuals related to the ATARS II Program (which was settled
in November 2007), the Company received Grand Jury subpoenas in
connection with an investigation being conducted by the United
States Attorney for the Middle District of Florida, Orlando
Division. The subpoenas request the production of documents
related to Lockheeds allegations or produced in the civil
litigation settled in November 2007 as discussed above. The
Company is cooperating fully with the U.S. Government.
21
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Titan Government Investigation.
In October 2002,
Titan received a grand jury subpoena from the Antitrust Division
of the DoJ requesting the production of documents relating to
information technology services performed for the U.S. Air
Force at Hanscom Air Force Base in Massachusetts and
Wright-Patterson Air Force Base in Ohio. Titan was informed that
other companies who have performed similar services have
received subpoenas as well. The Company acquired Titan in July
2005. On September 20, 2006, counsel for the Company was
informed by the New York Field Office of the DoJs Criminal
Antitrust Division that it is considering indictment.
Additionally, a former Titan employee received a letter from the
DoJ indicating that he is a target of the investigation. If the
Field Office recommends indictment then, under normal DoJ
procedures, Titan (now known as L-3 Services) will be afforded
an opportunity to make a presentation to the Criminal Antitrust
Division in Washington, D.C. before the DoJ acts on the
recommendation. It is not known whether an indictment of L-3
Services or any of its employees will occur. If it does occur,
it is possible that L-3 Services could be suspended or debarred
from conducting business with the U.S. Government. In
December 2008, the DoJ indicated its interest in conducting
additional employee interviews concerning a teaming agreement
relating to the Wright Patterson Air Force Base procurement. The
Company is cooperating fully with the DoJ.
SEC Inquiry.
In March 2007, the Company was
contacted by the U.S. Securities and Exchange Commission,
Enforcement Division, requesting that the Company provide
certain information relating to its previously disclosed review
of its historical stock option granting practices. The Company
voluntarily provided the requested information and has
cooperated fully with the SEC.
CyTerra Government Investigation.
Since November
2006, CyTerra has been served with civil and Grand Jury
subpoenas by the DoD Office of the Inspector General and the
DoJ. The Company is cooperating fully with the Government. The
Company believes that it is entitled to indemnification for any
course of defense related to this matter and has made a claim
against the escrow under the purchase agreement by which the
Company acquired CyTerra in March 2006.
Bashkirian Airways.
On July 1, 2004, lawsuits
were filed on behalf of the estates of 31 Russian children in
the state courts of Washington, Arizona, California, Florida,
New York and New Jersey against Honeywell, Honeywell TCAS,
Thales USA, Thales France, the Company and Aviation
Communications & Surveillance Systems (ACSS), which is
a joint venture of L-3 and Thales. The suits relate to the crash
over southern Germany of Bashkirian Airways Tupelov TU 154M
aircraft and a DHL Boeing 757 cargo aircraft. On-board the
Tupelov aircraft were 9 crew members and 60 passengers,
including 45 children. The Boeing aircraft carried a crew of
two. Both aircraft were equipped with Honeywell/ACSS Model 2000,
Change 7 Traffic Collision and Avoidance Systems (TCAS). Sensing
the other aircraft, the on-board DHL TCAS instructed the DHL
pilot to descend, and the Tupelov on-board TCAS instructed the
Tupelov pilot to climb. However, the Swiss air traffic
controller ordered the Tupelov pilot to descend. The Tupelov
pilot disregarded the on-board TCAS and put the Tupelov aircraft
into a descent striking the DHL aircraft in midair at
approximately 35,000 feet. All crew and passengers of both
planes were lost. Investigations by the National Transportation
Safety Board after the crash revealed that both TCAS units were
performing as designed. The suits allege negligence and strict
product liability based upon the design of the units and the
training provided to resolve conflicting commands and seek
approximately $315 million in damages, including
$150 million in punitive damages. The Companys
insurers have accepted defense of the matter and retained
counsel, subject to a reservation of rights by the insurers to
dispute their obligations under the applicable insurance
policies in the event of an adverse finding. The matters were
consolidated in the Federal Court in New Jersey, which has
dismissed the actions on the basis of forum non conveniens. The
plaintiffs re-filed a complaint on April 23, 2007 with the
Barcelona Courts Registry in Spain. The trial for this
matter began in January 2009 and is ongoing.
Gol Airlines.
The Company was served with complaints
filed in the U.S. District Court for the Eastern District
of New York against ExcelAire, Joseph Lepore, Jan Paul Paladino,
Honeywell, Lockheed, Raytheon, and Amazon Technologies and ACSS.
The complaints relate to the September 29, 2006 airplane
crash over Brazil of a Boeing
737-800
operated by GOL Linhas Aereas Inteligentes, S.A. and an Embraer
600 business jet operated by ExcelAire. The complaints allege
that ACSS designed the Traffic Collision and Avoidance System
(TCAS) on the ExcelAire
22
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
jet, and assert claims of negligence, strict products liability
and breach of warranty against ACSS based on the design of the
TCAS and the instructions provided for its use. The complaints
seek unspecified monetary damages, including punitive damages.
The Companys insurers have accepted defense of this matter
and have retained counsel, subject to a reservation of rights by
the insurers to dispute their obligations under the applicable
insurance policies in the event of an adverse finding. On
July 3, 2008, the District Court dismissed the actions on
the basis of forum non conveniens on the grounds that Brazil was
the location of the accident and is more convenient for
witnesses and document availability. On August 1, 2008, the
plaintiffs filed an appeal of this ruling with the
U.S. Court of Appeals for the Second Circuit.
Pilatus PC-12 Aircraft.
On July 6, 2007, the
Company was served with an amended complaint filed in the
U.S. District Court for the Eastern District of
Pennsylvania against Pilatus Aircraft, Ltd., Pilatus Flugzeuweke
Aktiengellschaft, Rosemont Aerospace, Inc., Revue Thommen AC,
EMCA, Goodrich Corp., Goodrich Avionics Systems, Inc. (the
predecessor to L-3 Avionics) and the Company. The amended
complaint relates to the March 26, 2005 crash of a Pilatus
PC-12 aircraft near Belafonte, Pennsylvania in which all six on
board were lost. The amended complaint alleges that L-3 Avionics
(and/or its predecessor company, Goodrich Avionics) designed,
manufactured, tested, marketed, and sold the stick shaker/pusher
servo actuator on the Pilatus PC-12, and asserts claims against
L-3 Avionics and the Company based on negligence, breach of
warranty, and strict liability. The amended complaint seeks
unspecified monetary damages, including punitive damages. The
Companys insurers have accepted defense of the matter and
have retained counsel, subject to a reservation of rights by the
insurers to dispute their obligations under the applicable
insurance policies in the event of an adverse finding.
T-39 Sabreliner Aircraft.
On January 16, 2008,
the Company was served with three wrongful death lawsuits filed
in the U.S. District Court for the Southern District of New
York arising from the crash of a T-39 Sabreliner Aircraft near
Rome, GA on January 10, 2006. The Plaintiffs allege that
L-3 Vertex employed the pilot in command, David Roark, and
maintained the aircraft, and are seeking unspecified monetary
damages. The cases have been consolidated and transferred to the
U.S. District Court for the Northern District of Florida.
The Companys insurers have accepted defense of the matter
and have retained counsel, subject to a reservation of rights by
the insurers to dispute their obligations under the applicable
insurance policies in the event of an adverse finding.
Blackhawk Helicopter.
On August 7, 2008, a
lawsuit was filed in the U.S. District Court for the
Southern District of Texas relating to the August 22, 2007
crash of a U.S. Army Blackhawk helicopter near Kirkuk,
Iraq. The complaint, which was brought on behalf of 14
passengers who were killed in the crash, alleges that the crash
was the result of L-3 Vertexs negligence in connection
with a phased maintenance inspection performed approximately one
week before the crash, and seeks unspecified monetary damages,
including punitive damages. The Companys insurers have
accepted defense of this matter and have retained counsel,
subject to a reservation of rights by the insurers to dispute
their obligations under the applicable insurance policies in the
event of an adverse finding.
23
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
17.
|
Pension
and Other Postretirement Benefits
|
The following table summarizes the components of net periodic
benefit cost for the Companys pension and postretirement
benefit plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Postretirement Benefit Plans
|
|
|
|
First Quarter Ended
|
|
|
|
March 27,
|
|
|
March 28,
|
|
|
March 27,
|
|
|
March 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
22
|
|
|
$
|
23
|
|
|
$
|
1
|
|
|
$
|
2
|
|
Interest cost
|
|
|
27
|
|
|
|
26
|
|
|
|
3
|
|
|
|
3
|
|
Expected return on plan assets
|
|
|
(22
|
)
|
|
|
(30
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Amortization of prior service costs (credits)
|
|
|
1
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Amortization of net losses
|
|
|
13
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Curtailment loss
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
42
|
|
|
$
|
22
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions.
For the year ending December 31,
2009, the Company currently expects to contribute cash of
approximately $65 million to its pension plans, and
approximately $13 million to its postretirement benefit
plans. The Company contributed cash of $3 million to its
pension plans and $3 million to its postretirement benefit
plans during the quarter ended March 27, 2009.
|
|
18.
|
Supplemental
Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
|
|
March 27,
|
|
|
March 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Interest paid
|
|
$
|
59
|
|
|
$
|
67
|
|
Income tax payments
|
|
|
45
|
|
|
|
65
|
|
Income tax refunds
|
|
|
2
|
|
|
|
2
|
|
24
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The Company has four reportable segments, which are described in
Note 1. The tables below present net sales, operating
income, depreciation and amortization and total assets by
reportable segment.
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
|
|
March 27,
|
|
|
March 28,
|
|
|
|
2009
|
|
|
2008
(1)
|
|
|
|
(In millions)
|
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
C
3
ISR
|
|
$
|
715
|
|
|
$
|
554
|
|
Government Services
|
|
|
1,007
|
|
|
|
1,112
|
|
AM&M
|
|
|
672
|
|
|
|
666
|
|
Specialized Products
|
|
|
1,286
|
|
|
|
1,209
|
|
Elimination of intercompany sales
|
|
|
(44
|
)
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
3,636
|
|
|
$
|
3,506
|
|
|
|
|
|
|
|
|
|
|
Operating Income:
|
|
|
|
|
|
|
|
|
C
3
ISR
|
|
$
|
78
|
|
|
$
|
62
|
|
Government Services
|
|
|
91
|
|
|
|
100
|
|
AM&M
|
|
|
66
|
|
|
|
66
|
|
Specialized Products
|
|
|
141
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
376
|
|
|
$
|
368
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
C
3
ISR
|
|
$
|
10
|
|
|
$
|
9
|
|
Government Services
|
|
|
10
|
|
|
|
9
|
|
AM&M
|
|
|
5
|
|
|
|
7
|
|
Specialized Products
|
|
|
28
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
53
|
|
|
$
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 27,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
(1)
|
|
|
|
(in millions)
|
|
|
Total Assets:
|
|
|
|
|
|
|
|
|
C
3
ISR
|
|
$
|
1,787
|
|
|
$
|
1,767
|
|
Government Services
|
|
|
3,550
|
|
|
|
3,494
|
|
AM&M
|
|
|
1,923
|
|
|
|
1,824
|
|
Specialized Products
|
|
|
6,519
|
|
|
|
6,319
|
|
Corporate
|
|
|
786
|
|
|
|
1,080
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
14,565
|
|
|
$
|
14,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As a result of certain
re-alignments in the Companys management and organization
structure as discussed in Note 2, sales of $4 million
and operating income of less than $1 million were
reclassified from the
C
3
ISR
reportable segment to the Government Services reportable segment
and sales of $11 million and operating income of
$1 million were reclassified from the
C
3
ISR
reportable segment to the AM&M reportable segment. At
December 31, 2008, $30 million of total assets was
reclassified from the
C
3
ISR
reportable segment to the Government Services reportable segment
and $17 million of total assets was reclassified from the
C
3
ISR
reportable segment to the AM&M reportable segment.
|
25
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
20.
|
Accounting
Standards Issued and Not Yet Implemented
|
In December 2008, the FASB issued FSP FAS 132(R)-1,
Employers Disclosures about Pensions and Other
Postretirement Benefit
(FSP FAS 132(R)-1). FSP
FAS 132(R)-1 expands the disclosures of an employers
defined benefit pension or other postretirement plan assets,
amending SFAS No. 132(R),
Employers
Disclosures about Pensions and Other Postretirement
Benefits
. FSP FAS 132(R)-1 is effective for the Company
beginning December 31, 2009. The adoption of FSP
FAS 132(R)-1 will not have a material effect on the
Companys financial position, results of operations and
cash flows, but will enhance the Companys pension and
other postretirement benefit plan assets disclosures.
In April 2009, the FASB issued FSP
FAS 107-1
and APB
28-1,
Interim Disclosures about Fair Value of Financial Instruments
(FSP
FAS 107-1).
FSP
FAS 107-1
requires: (1) the current annual disclosures about fair
value of an entitys financial instruments for interim
financial statements, and (2) new disclosures about the
methods and significant assumptions used to estimate the fair
value of financial instruments. FSP
FAS 107-1
is effective for the Company beginning June 26, 2009. The
adoption of FSP
FAS 107-1
will not have a material effect on the Companys financial
position, results of operations and cash flows, but will enhance
the Companys disclosures related to financial instruments.
|
|
21.
|
Unaudited
Financial Information of L-3 Communications and Its
Subsidiaries
|
L-3 Communications is a wholly-owned subsidiary of L-3 Holdings.
The debt of L-3 Communications, including the Senior
Subordinated Notes and borrowings under amounts drawn against
the Senior Credit Facility are guaranteed, on a joint and
several, full and unconditional basis, by certain of its
domestic subsidiaries (the Guarantor Subsidiaries).
The foreign subsidiaries and certain domestic subsidiaries of
L-3 Communications (the Non-Guarantor Subsidiaries)
do not guarantee the debt of L-3 Communications. None of the
debt of L-3 Communications has been issued by its subsidiaries.
There are no restrictions on the payment of dividends from the
Guarantor Subsidiaries to L-3 Communications.
The following unaudited condensed combining financial
information presents the results of operations, financial
position and cash flows of: (1) L-3 Holdings, excluding L-3
Communications and its consolidated subsidiaries (the
Parent), (2) L-3 Communications, excluding its
consolidated subsidiaries, (3) the Guarantor Subsidiaries,
(4) the Non-Guarantor Subsidiaries, and (5) the
eliminations to arrive at the information for L-3 on a
consolidated basis.
26
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
|
L-3
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
(Parent)
|
|
|
Communications
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
L-3
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Condensed Combining Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 27, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
449
|
|
|
$
|
(42
|
)
|
|
$
|
231
|
|
|
$
|
|
|
|
$
|
638
|
|
Billed receivables, net
|
|
|
|
|
|
|
321
|
|
|
|
792
|
|
|
|
214
|
|
|
|
|
|
|
|
1,327
|
|
Contracts in process
|
|
|
|
|
|
|
649
|
|
|
|
1,539
|
|
|
|
236
|
|
|
|
|
|
|
|
2,424
|
|
Other current assets
|
|
|
|
|
|
|
311
|
|
|
|
164
|
|
|
|
139
|
|
|
|
|
|
|
|
614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
1,730
|
|
|
|
2,453
|
|
|
|
820
|
|
|
|
|
|
|
|
5,003
|
|
Goodwill
|
|
|
|
|
|
|
1,168
|
|
|
|
5,849
|
|
|
|
1,059
|
|
|
|
|
|
|
|
8,076
|
|
Other assets
|
|
|
7
|
|
|
|
467
|
|
|
|
839
|
|
|
|
180
|
|
|
|
(7
|
)
|
|
|
1,486
|
|
Investment in and amounts due from consolidated subsidiaries
|
|
|
6,522
|
|
|
|
8,807
|
|
|
|
1,245
|
|
|
|
12
|
|
|
|
(16,586
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,529
|
|
|
$
|
12,172
|
|
|
$
|
10,386
|
|
|
$
|
2,071
|
|
|
$
|
(16,593
|
)
|
|
$
|
14,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
|
|
|
$
|
650
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
650
|
|
Other current liabilities
|
|
|
|
|
|
|
938
|
|
|
|
1,261
|
|
|
|
569
|
|
|
|
|
|
|
|
2,768
|
|
Other long-term liabilities
|
|
|
|
|
|
|
906
|
|
|
|
229
|
|
|
|
250
|
|
|
|
|
|
|
|
1,385
|
|
Long-term debt
|
|
|
700
|
|
|
|
3,849
|
|
|
|
|
|
|
|
|
|
|
|
(700
|
)
|
|
|
3,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
700
|
|
|
|
6,343
|
|
|
|
1,490
|
|
|
|
819
|
|
|
|
(700
|
)
|
|
|
8,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 Holdings shareholders equity
|
|
|
5,829
|
|
|
|
5,829
|
|
|
|
8,896
|
|
|
|
1,252
|
|
|
|
(15,977
|
)
|
|
|
5,829
|
|
Noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
5,829
|
|
|
|
5,829
|
|
|
|
8,896
|
|
|
|
1,252
|
|
|
|
(15,893
|
)
|
|
|
5,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
6,529
|
|
|
$
|
12,172
|
|
|
$
|
10,386
|
|
|
$
|
2,071
|
|
|
$
|
(16,593
|
)
|
|
$
|
14,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
720
|
|
|
$
|
(81
|
)
|
|
$
|
228
|
|
|
$
|
|
|
|
$
|
867
|
|
Billed receivables, net
|
|
|
|
|
|
|
324
|
|
|
|
701
|
|
|
|
201
|
|
|
|
|
|
|
|
1,226
|
|
Contracts in process
|
|
|
|
|
|
|
587
|
|
|
|
1,461
|
|
|
|
219
|
|
|
|
|
|
|
|
2,267
|
|
Other current assets
|
|
|
|
|
|
|
291
|
|
|
|
170
|
|
|
|
140
|
|
|
|
|
|
|
|
601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
1,922
|
|
|
|
2,251
|
|
|
|
788
|
|
|
|
|
|
|
|
4,961
|
|
Goodwill
|
|
|
|
|
|
|
1,171
|
|
|
|
5,746
|
|
|
|
1,112
|
|
|
|
|
|
|
|
8,029
|
|
Other assets
|
|
|
8
|
|
|
|
475
|
|
|
|
837
|
|
|
|
182
|
|
|
|
(8
|
)
|
|
|
1,494
|
|
Investment in and amounts due from consolidated subsidiaries
|
|
|
6,550
|
|
|
|
8,489
|
|
|
|
1,283
|
|
|
|
80
|
|
|
|
(16,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,558
|
|
|
$
|
12,057
|
|
|
$
|
10,117
|
|
|
$
|
2,162
|
|
|
$
|
(16,410
|
)
|
|
$
|
14,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
|
|
|
$
|
824
|
|
|
$
|
1,312
|
|
|
$
|
571
|
|
|
$
|
|
|
|
$
|
2,707
|
|
Other long-term liabilities
|
|
|
|
|
|
|
882
|
|
|
|
219
|
|
|
|
242
|
|
|
|
|
|
|
|
1,343
|
|
Long-term debt
|
|
|
700
|
|
|
|
4,493
|
|
|
|
|
|
|
|
|
|
|
|
(700
|
)
|
|
|
4,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
700
|
|
|
|
6,199
|
|
|
|
1,531
|
|
|
|
813
|
|
|
|
(700
|
)
|
|
|
8,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 Holdings shareholders equity
|
|
|
5,858
|
|
|
|
5,858
|
|
|
|
8,586
|
|
|
|
1,349
|
|
|
|
(15,793
|
)
|
|
|
5,858
|
|
Noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
5,858
|
|
|
|
5,858
|
|
|
|
8,586
|
|
|
|
1,349
|
|
|
|
(15,710
|
)
|
|
|
5,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
6,558
|
|
|
$
|
12,057
|
|
|
$
|
10,117
|
|
|
$
|
2,162
|
|
|
$
|
(16,410
|
)
|
|
$
|
14,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
|
L-3
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
(Parent)
|
|
|
Communications
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
L-3
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Condensed Combining Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended March 27, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
794
|
|
|
$
|
2,444
|
|
|
$
|
425
|
|
|
$
|
(27
|
)
|
|
$
|
3,636
|
|
Cost of sales
|
|
|
17
|
|
|
|
697
|
|
|
|
2,211
|
|
|
|
379
|
|
|
|
(44
|
)
|
|
|
3,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(17
|
)
|
|
|
97
|
|
|
|
233
|
|
|
|
46
|
|
|
|
17
|
|
|
|
376
|
|
Interest and other income, net
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
1
|
|
|
|
(28
|
)
|
|
|
3
|
|
Interest expense
|
|
|
11
|
|
|
|
66
|
|
|
|
27
|
|
|
|
1
|
|
|
|
(39
|
)
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(28
|
)
|
|
|
61
|
|
|
|
206
|
|
|
|
46
|
|
|
|
28
|
|
|
|
313
|
|
(Benefit) provision for income taxes
|
|
|
(10
|
)
|
|
|
20
|
|
|
|
75
|
|
|
|
17
|
|
|
|
10
|
|
|
|
112
|
|
Equity in net income of consolidated subsidiaries
|
|
|
217
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
(375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
199
|
|
|
|
199
|
|
|
|
131
|
|
|
|
29
|
|
|
|
(357
|
)
|
|
|
201
|
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to L-3 Holdings
|
|
$
|
199
|
|
|
$
|
199
|
|
|
$
|
131
|
|
|
$
|
29
|
|
|
$
|
(359
|
)
|
|
$
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended March 28, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
656
|
|
|
$
|
2,403
|
|
|
$
|
473
|
|
|
$
|
(26
|
)
|
|
$
|
3,506
|
|
Cost of sales
|
|
|
15
|
|
|
|
555
|
|
|
|
2,186
|
|
|
|
423
|
|
|
|
(41
|
)
|
|
|
3,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(15
|
)
|
|
|
101
|
|
|
|
217
|
|
|
|
50
|
|
|
|
15
|
|
|
|
368
|
|
Interest and other income, net
|
|
|
|
|
|
|
34
|
|
|
|
1
|
|
|
|
2
|
|
|
|
(29
|
)
|
|
|
8
|
|
Interest expense
|
|
|
6
|
|
|
|
76
|
|
|
|
27
|
|
|
|
2
|
|
|
|
(35
|
)
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(21
|
)
|
|
|
59
|
|
|
|
191
|
|
|
|
50
|
|
|
|
21
|
|
|
|
300
|
|
(Benefit) provision for income taxes
|
|
|
(8
|
)
|
|
|
20
|
|
|
|
70
|
|
|
|
18
|
|
|
|
8
|
|
|
|
108
|
|
Equity in net income of consolidated subsidiaries
|
|
|
202
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
(352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
189
|
|
|
|
189
|
|
|
|
121
|
|
|
|
32
|
|
|
|
(339
|
)
|
|
|
192
|
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to L-3 Holdings
|
|
$
|
189
|
|
|
$
|
189
|
|
|
$
|
121
|
|
|
$
|
32
|
|
|
$
|
(342
|
)
|
|
$
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
|
L-3
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
(Parent)
|
|
|
Communications
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
L-3
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Condensed Combining Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended March 27, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
$
|
274
|
|
|
$
|
83
|
|
|
$
|
61
|
|
|
$
|
8
|
|
|
$
|
(274
|
)
|
|
$
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business acquisitions, net of cash acquired
|
|
|
|
|
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(82
|
)
|
Other investing activities
|
|
|
(16
|
)
|
|
|
(10
|
)
|
|
|
(27
|
)
|
|
|
(3
|
)
|
|
|
16
|
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(16
|
)
|
|
|
(92
|
)
|
|
|
(27
|
)
|
|
|
(3
|
)
|
|
|
16
|
|
|
|
(122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock repurchased
|
|
|
(232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(232
|
)
|
Other financing activities
|
|
|
(26
|
)
|
|
|
(262
|
)
|
|
|
5
|
|
|
|
1
|
|
|
|
258
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) from financing activities
|
|
|
(258
|
)
|
|
|
(262
|
)
|
|
|
5
|
|
|
|
1
|
|
|
|
258
|
|
|
|
(256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
|
|
|
|
(271
|
)
|
|
|
39
|
|
|
|
3
|
|
|
|
|
|
|
|
(229
|
)
|
Cash and cash equivalents, beginning of the period
|
|
|
|
|
|
|
720
|
|
|
|
(81
|
)
|
|
|
228
|
|
|
|
|
|
|
|
867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the period
|
|
$
|
|
|
|
$
|
449
|
|
|
$
|
(42
|
)
|
|
$
|
231
|
|
|
$
|
|
|
|
$
|
638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended March 28, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) operating activities
|
|
$
|
320
|
|
|
$
|
(20
|
)
|
|
$
|
116
|
|
|
$
|
(3
|
)
|
|
$
|
(320
|
)
|
|
$
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business acquisitions, net of cash acquired
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
Other investing activities
|
|
|
(29
|
)
|
|
|
(7
|
)
|
|
|
(24
|
)
|
|
|
(4
|
)
|
|
|
29
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(29
|
)
|
|
|
(24
|
)
|
|
|
(24
|
)
|
|
|
(4
|
)
|
|
|
29
|
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock repurchased
|
|
|
(283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(283
|
)
|
Other financing activities
|
|
|
(8
|
)
|
|
|
(251
|
)
|
|
|
(12
|
)
|
|
|
(26
|
)
|
|
|
291
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(291
|
)
|
|
|
(251
|
)
|
|
|
(12
|
)
|
|
|
(26
|
)
|
|
|
291
|
|
|
|
(289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
|
|
|
|
(295
|
)
|
|
|
80
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
(244
|
)
|
Cash and cash equivalents, beginning of the period
|
|
|
|
|
|
|
632
|
|
|
|
(89
|
)
|
|
|
237
|
|
|
|
|
|
|
|
780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the period
|
|
$
|
|
|
|
$
|
337
|
|
|
$
|
(9
|
)
|
|
$
|
208
|
|
|
$
|
|
|
|
$
|
536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial
Section Roadmap
Managements discussion and analysis (MD&A) can be
found on pages 30 to 39, and our unaudited condensed
consolidated financial statements and related notes contained in
this quarterly report can be found on pages 1 to 29. The
following table is designed to assist in your review of
MD&A.
|
|
|
|
|
Topic
|
|
Location
|
|
Overview and Outlook:
|
|
|
|
|
L-3s Business
|
|
|
Pages 30 31
|
|
Key Performance Measures
|
|
|
Pages 31 32
|
|
Other 2009 Events
|
|
|
Page 32
|
|
Business Acquisitions and Business and Product Line Dispositions
|
|
|
Page 32
|
|
Results of Operations (includes business segments)
|
|
|
Pages 32 36
|
|
Liquidity and Capital Resources:
|
|
|
|
|
Anticipated Sources of Cash Flow
|
|
|
Page 36
|
|
Balance Sheet
|
|
|
Pages 36 37
|
|
Statement of Cash Flows
|
|
|
Pages 37 39
|
|
Legal Proceedings and Contingencies
|
|
|
Page 39
|
|
Overview
and Outlook
L-3s
Business
L-3 is a prime system contractor in aircraft modernization and
maintenance, Command, Control, Communications, Intelligence,
Surveillance and Reconnaissance
(C
3
ISR)
systems, and government services. L-3 is also a leading provider
of high technology products, subsystems and systems. Our
customers include the U.S. Department of Defense (DoD) and
its prime contractors, U.S. Government intelligence
agencies, the U.S. Department of Homeland Security (DHS),
U.S. Department of State (DoS), U.S. Department of
Justice (DoJ), allied foreign governments, domestic and
international commercial customers, and select other
U.S. federal, state and local government agencies.
For the year ended December 31, 2008, we generated sales of
$14.9 billion. The table below presents a summary of our
2008 sales by major category of end customer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
2008 Sales
|
|
|
Total Sales
|
|
|
|
(in millions)
|
|
|
|
|
|
DoD
|
|
$
|
11,059
|
|
|
|
74.2
|
%
|
Other U.S. Government
|
|
|
1,067
|
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
Total U.S. Government
|
|
|
12,126
|
|
|
|
81.4
|
%
|
Foreign Government
|
|
|
1,099
|
|
|
|
7.4
|
|
Commercial foreign
|
|
|
987
|
|
|
|
6.6
|
|
Commercial domestic
|
|
|
689
|
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
14,901
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
We have the following four reportable segments:
(1) C
3
ISR,
(2) Government Services, (3) Aircraft Modernization
and Maintenance (AM&M), and (4) Specialized Products.
Financial information relating to our reportable segments is
included in Note 19 to our unaudited condensed consolidated
financial statements contained in this quarterly report.
C
3
ISR
provides products and services for the global ISR market,
networked communications systems and secure communications
products. We believe that these products and services are
critical elements for a substantial number of major command,
control, communication, intelligence gathering and space
systems. These products and services are used to connect a
variety of airborne, space, ground and sea-based communication
systems and are used in the transmission, processing, recording,
monitoring, and dissemination functions of these
30
communication systems. Government Services provides training and
operational support services, enterprise information technology
solutions, intelligence solutions and support,
command & control systems and software services and
global security & engineering solutions services.
AM&M provides modernization, upgrades and sustainment,
maintenance and logistics support services for military and
various government aircraft and other platforms. Specialized
Products provides a broad range of products, including
components, products, subsystems, systems, and related services
to military and commercial customers in several niche markets
across several business areas, including power &
control systems, electro-optic/infrared (EO/IR), microwave,
avionics & displays, simulation & training,
precision engagement, security & detection, propulsion
systems, telemetry & advanced technology, undersea
warfare, and marine services. During the quarter ended
March 27, 2009, we revised our reportable segment
presentations to conform to certain re-alignments in our
management and organization structure. Consequently, we made
certain reclassifications between our
C
3
ISR,
Government Services and AM&M reportable segments. See
Note 19 to our unaudited condensed consolidated financial
statements contained in this quarterly report for the prior
period amounts reclassified between reportable segments.
Key
Performance Measures
The primary financial performance measures that L-3 uses to
manage its businesses and monitor results of operations are
sales growth and operating income growth. Management believes
that these financial performance measures are the primary growth
drivers for L-3s earnings per common share and net cash
from operating activities. L-3s business strategy is
focused on increasing sales from organic growth and select
business acquisitions that add new products, services,
technologies, programs or customers in areas that complement
L-3s existing businesses. We define organic sales growth
as the increase or decrease in sales for the current period
compared to the prior period, excluding sales in the
(1) current period from business and product line
acquisitions that are included in L-3s actual results of
operations for less than twelve months, and (2) prior
period from business and product line divestitures that are
included in L-3s actual results of operations for the
twelve-month period prior to the divestiture date. The two main
determinants of our operating income growth are sales growth and
improvements in operating margin. We define operating margin as
operating income as a percentage of sales.
Sales Growth.
Our average annual sales growth for
the five years ended December 31, 2008 was 25%, with
average annual organic sales growth of approximately 10% and
average annual sales growth from business acquisitions of
approximately 15%. Sales growth for the year ended
December 31, 2008 was 7%, comprised of organic sales growth
of 5%, and sales growth from business acquisitions, net of
divestitures, of 2%. Sales growth for the quarter ended
March 27, 2009 (2009 First Quarter) was 3.7%, comprised of
organic sales growth of 1.5%, and sales growth from business
acquisitions, net of divestitures, of 2.2%.
For the year ended December 31, 2008, our Special
Operations Forces Support Activity (SOFSA) contract with the
U.S. Special Operations Command (SOCOM) generated
approximately $400 million, or 2.7% of our sales. On
March 3, 2009, SOCOM announced that it did not select our
proposal for the next SOFSA contract. We protested SOCOMs
selection with the U.S. Government Accountability Office (GAO).
In response to our protest, SOCOM has agreed to take corrective
action. We continue to perform on the current SOFSA contract
pending the outcome of the protest.
We, as most U.S. defense contractors, have benefited from
the upward trend in DoD budget authorization and spending
outlays over recent years, including supplemental appropriations
for military operations in Iraq and Afghanistan. Even though we
expect future DoD budgets, including supplemental
appropriations, to grow at a slower pace than the past several
years, we believe that our businesses should be able to continue
to generate organic sales growth because we anticipate the
defense budget will continue its focus on areas that match
several of L-3s core competencies, such as: communications
and ISR, sensors, precision engagement, Special Operations
Forces, wartime support services and simulation &
training. The increased DoD spending during recent years has
included supplemental appropriations for military operations in
Iraq and Afghanistan.
Operating Income Growth.
Our consolidated operating
income was $376 million for the 2009 First Quarter, an
increase of 2% from $368 million for the 2008 First
Quarter. Our consolidated operating margin was 10.3% for the
2009 First Quarter, a decrease of 20 basis points from
10.5% for the 2008 First Quarter. Our operating income and
operating margins were impacted by higher pension expense
because of declines in domestic and foreign equity and fixed
income financial markets that negatively affected the 2008
actual return on our pension assets. Higher pension expense
decreased operating income by $19 million ($12 million
after income taxes, or $0.10 per diluted
31
share) and reduced operating margin by 60 basis points for
the 2009 First Quarter. See segment results below for additional
discussion of segment operating income and margin results.
Excluding an increase in our 2009 pension expense, due to a
decline in pension plan asset returns as discussed above, we
expect to continue to generate modest annual increases in
operating margin. We expect to increase sales, grow sales at a
rate faster than the increase in our indirect costs, and improve
our overall contract performance. However, we may not be able to
expand our operating margin annually. Additionally, in the
future, select business acquisitions and select new business
could reduce our operating margin if their margins are lower
than L-3s existing operating margin. Our business
objectives include growing earnings per common share and cash
flow. Improving operating margin is one method for achieving
this growth, but it is not the only one.
Other
2009 Events
We adopted six new accounting standards during the 2009 First
Quarter. In accordance with the transition and disclosure
provisions of three of these standards, we retrospectively
applied those provisions and adjusted the prior period financial
statements accordingly. See Note 3 to our unaudited
condensed consolidated financial statements contained in this
quarterly report for the standards adopted and their impact to
our financial position and results of operations.
Business
Acquisitions and Business and Product Line
Dispositions
Our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2008 summarizes the
business acquisitions and business and product line dispositions
that we completed during the three years ended December 31,
2008. Also, see Note 4 to our unaudited condensed
consolidated financial statements contained in this quarterly
report for a discussion of the acquisition of Chesapeake
Sciences Corporation (CSC) acquired on January 30, 2009.
During the 2009 First Quarter, we used $82 million of cash
(net of cash received) to acquire CSC.
All of our business acquisitions are included in our
consolidated results of operations from their dates of
acquisition. We regularly evaluate potential business
acquisitions.
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. See
Note 4 to our audited consolidated financial statements for
the year ended December 31, 2008, included in our Annual
Report on
Form 10-K,
for a discussion of our 2008 business acquisitions, and
Note 4 to our unaudited condensed consolidated financial
statements, included in this report, for a discussion of the CSC
acquisition on January 30, 2009.
Consolidated
Results of Operations
The table below provides selected financial data for L-3 for the
2009 First Quarter compared with the 2008 First Quarter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
|
|
|
|
|
March 27,
|
|
|
March 28,
|
|
|
Increase/
|
|
(dollars in millions, except per share data)
|
|
2009
|
|
|
2008
|
|
|
(decrease)
|
|
|
Net sales
|
|
$
|
3,636
|
|
|
$
|
3,506
|
|
|
$
|
130
|
|
Operating income
|
|
$
|
376
|
|
|
$
|
368
|
|
|
$
|
8
|
|
Operating margin
|
|
|
10.3
|
%
|
|
|
10.5
|
%
|
|
|
(20
|
) bpts
|
Interest expense, net
|
|
$
|
63
|
|
|
$
|
68
|
|
|
$
|
(5
|
)
|
Effective income tax rate
|
|
|
35.8
|
%
|
|
|
36.0
|
%
|
|
|
(20
|
) bpts
|
Net income attributable to L-3 Holdings
|
|
$
|
199
|
|
|
$
|
189
|
|
|
$
|
10
|
|
Diluted earnings per share
|
|
$
|
1.66
|
|
|
$
|
1.51
|
|
|
$
|
0.15
|
|
Diluted weighted average common shares outstanding
|
|
|
118.8
|
|
|
|
124.1
|
|
|
|
(5.3
|
)
|
32
Net sales:
For the 2009 First Quarter, consolidated
net sales increased 4% compared to the 2008 First Quarter driven
primarily by growth in the
C
3
ISR
segment, and in the Specialized Products segment. These
increases were partially offset by a decrease in the Government
Services and AM&M segments driven primarily by lower
linguist services and lower volume for the U.S. Air Force
Contract Field Teams (CFT) contract, which is further discussed
in the segments below. The increase in net sales from acquired
businesses, net of divestitures, was $77 million or 2%.
Sales from services decreased by $29 million to
$1,874 million, representing approximately 52% of
consolidated net sales for the 2009 First Quarter, compared to
$1,903 million, or 54% of consolidated net sales for the
2008 First Quarter. The decrease in service sales was primarily
due to a decrease for linguist services partially offset by
organic sales growth in ISR systems, system field support
services and systems engineering, training and logistics support
services. Sales from products increased by $159 million to
$1,762 million, representing approximately 48% of
consolidated net sales for the 2009 First Quarter, compared to
$1,603 million, or 46% of consolidated net sales for the
2008 First Quarter. The increase in product sales was primarily
due to growth in
C
3
ISR
products and several areas in the Specialized Products
reportable segment primarily for EO/IR, microwave products,
combat propulsion systems and security and detection systems,
partially offset by a decrease in aircraft modernization for
international customers, commercial aviation products and
shipbuilding products. See the reportable segment results below
for additional discussions of our sales growth.
Operating income and operating margin:
The 2009
First Quarter operating income increased by $8 million to
$376 million from $368 million for the 2008 First
Quarter. Higher pension expense decreased operating income by
$19 million ($12 million after income taxes, or $0.10
per diluted share). Operating margin decreased by 20 basis
points to 10.3% compared to the 2008 First Quarter. Higher
pension expense reduced operating margin by 60 basis
points. See segment results below for additional discussion of
segment operating income and margin results.
Interest expense, net:
Interest expense, net for the
2009 First Quarter decreased compared to the same period last
year, primarily due to lower variable interest rates on our term
loan.
Effective income tax rate:
The effective tax rate
for the 2009 First Quarter decreased by 20 basis points
compared to the same quarter last year due to the
U.S. Federal research and experimentation tax credit that
was re-enacted during the quarter ended December 31, 2008,
partially offset by higher income taxes on foreign income.
Diluted earnings per share and net income:
L-3
Holdings diluted earnings per share (diluted EPS)
increased by $0.15 to $1.66 for the 2009 First Quarter from
$1.51 for the 2008 First Quarter, and net income attributable to
L-3 Holdings increased by $10 million to $199 million
from $189 million for the same periods.
Diluted weighted average shares outstanding:
Diluted
weighted average shares outstanding for the 2009 First Quarter
decreased by 5.3 million shares or 4%, compared to the 2008
First Quarter. The decrease was primarily due to repurchases of
our common stock in connection with our share repurchase program
authorized by our Board of Directors, partially offset by
additional shares issued in connection with various employee
stock-based compensation programs and contributions to employee
savings plans made in common stock.
33
Reportable
Segment Results of Operations
The table below presents selected data by reportable segment
reconciled to consolidated totals. See Note 19 to our
unaudited condensed consolidated financial statements contained
in this quarterly report for our reportable segment data.
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
|
|
March 27,
|
|
|
March 28,
|
|
(dollars in millions)
|
|
2009
|
|
|
2008
(1)
|
|
|
Net
Sales:
(2)
|
|
|
|
|
|
|
|
|
C
3
ISR
|
|
$
|
710.1
|
|
|
$
|
552.8
|
|
Government Services
|
|
|
1,004.9
|
|
|
|
1,108.3
|
|
AM&M
|
|
|
663.5
|
|
|
|
665.5
|
|
Specialized Products
|
|
|
1,257.2
|
|
|
|
1,179.6
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,635.7
|
|
|
$
|
3,506.2
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
C
3
ISR
|
|
$
|
78.2
|
|
|
$
|
62.0
|
|
Government Services
|
|
|
90.6
|
|
|
|
99.5
|
|
AM&M
|
|
|
65.8
|
|
|
|
66.0
|
|
Specialized Products
|
|
|
141.3
|
|
|
|
140.5
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income
|
|
$
|
375.9
|
|
|
$
|
368.0
|
|
|
|
|
|
|
|
|
|
|
Operating margin:
|
|
|
|
|
|
|
|
|
C
3
ISR
|
|
|
11.0
|
%
|
|
|
11.2
|
%
|
Government Services
|
|
|
9.0
|
%
|
|
|
9.0
|
%
|
AM&M
|
|
|
9.9
|
%
|
|
|
9.9
|
%
|
Specialized Products
|
|
|
11.2
|
%
|
|
|
11.9
|
%
|
Consolidated operating margin
|
|
|
10.3
|
%
|
|
|
10.5
|
%
|
|
|
|
(1)
|
|
As a result of certain
re-alignments in our management and organization structure as
discussed in Note 2 to our unaudited condensed consolidated
financial statements contained in this quarterly report, sales
of $3.2 million and operating income of less than
$1 million were reclassified from the
C
3
ISR
reportable segment to the Government Services reportable segment
and sales of $10.2 million and operating income of
$1 million were reclassified from the
C
3
ISR
reportable segment to the AM&M reportable segment.
|
|
(2)
|
|
Net sales are after intercompany
eliminations.
|
C
3
ISR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
|
|
|
|
|
March 27,
|
|
|
March 28,
|
|
|
Increase/
|
|
(dollars in millions)
|
|
2009
|
|
|
2008
|
|
|
(decrease)
|
|
|
Net sales
|
|
$
|
710.1
|
|
|
$
|
552.8
|
|
|
$
|
157.3
|
|
Operating income
|
|
|
78.2
|
|
|
|
62.0
|
|
|
|
16.2
|
|
Operating margin
|
|
|
11.0
|
%
|
|
|
11.2
|
%
|
|
|
(20
|
) bpts
|
C
3
ISR net
sales for the 2009 First Quarter increased by 28% compared to
the 2008 First Quarter primarily due to continued demand and new
contracts from the DoD for airborne ISR and networked
communication systems for manned and unmanned platforms.
C
3
ISR
operating income for the 2009 First Quarter increased by 26%
compared to the 2008 First Quarter. Operating margin decreased
by 20 basis points. Higher pension expense reduced
operating margin by 100 basis points and lower volume for
Secure Terminal Equipment (STE) decreased operating margin by
70 basis points. These decreases were partially offset by
cost improvements on an international airborne ISR system
contract due to a restructuring of contract deliverables with a
customer, which increased operating margin by 40 basis
points, as well as higher sales volume, improved contract
performance and a more favorable sales mix for airborne ISR and
networked communication systems.
34
Government
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
|
|
|
|
|
March 27,
|
|
|
March 28,
|
|
|
|
|
(dollars in millions)
|
|
2009
|
|
|
2008
|
|
|
Decrease
|
|
|
Net sales
|
|
$
|
1,004.9
|
|
|
$
|
1,108.3
|
|
|
$
|
(103.4
|
)
|
Operating income
|
|
|
90.6
|
|
|
|
99.5
|
|
|
|
(8.9
|
)
|
Operating margin
|
|
|
9.0
|
%
|
|
|
9.0
|
%
|
|
|
|
bpts
|
Government Services net sales for the 2009 First Quarter
decreased by 9% compared to the 2008 First Quarter. Sales
declines in linguist services of $130 million and
intelligence solutions and support services of $13 million
were partially offset by $22 million of sales primarily
related to increases for systems engineering, training and
logistics support services to the DoD. The decline in linguist
services was due to a decline in L-3s work share in
connection with the transition on June 9, 2008 from an L-3
prime contract to a sub contract. The increase in net sales from
acquired businesses was $18 million, or 2%.
Government Services operating income for the 2009 First Quarter
decreased by 9% compared to the 2008 First Quarter. Operating
margin for the 2009 First Quarter and the 2008 First Quarter
remained the same. An increase in operating margin due to a
decline in lower margin linguist sales was offset by lower
margins on an acquired business.
Aircraft
Modernization and Maintenance (AM&M)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
|
|
|
|
|
March 27,
|
|
|
March 28,
|
|
|
|
|
(dollars in millions)
|
|
2009
|
|
|
2008
|
|
|
Decrease
|
|
|
Net sales
|
|
$
|
663.5
|
|
|
$
|
665.5
|
|
|
$
|
(2.0
|
)
|
Operating income
|
|
|
65.8
|
|
|
|
66.0
|
|
|
|
(0.2
|
)
|
Operating margin
|
|
|
9.9
|
%
|
|
|
9.9
|
%
|
|
|
|
bpts
|
AM&M net sales for the 2009 First Quarter decreased
slightly compared to the 2008 First Quarter. Sales volume
declined for contract field services by $34 million due to
fewer task orders received because of more competitors on the
follow-on CFT indefinite delivery/indefinite quantity contract
that began on October 1, 2008, and $16 million due to
lower international aircraft modernization sales due to
contracts nearing completion. These decreases were largely
offset by $48 million in higher sales primarily for system
field support services for U.S. Army and U.S. Navy
fixed and rotary wing training aircraft and U.S. Special
Operations Forces logistics support due to new contracts and
higher demand from existing contracts.
AM&M operating income for the 2009 First Quarter decreased
slightly compared to the 2008 First Quarter. Operating margin
for the 2009 First Quarter compared to the 2008 First Quarter
remained the same. Higher pension expense reduced operating
margin by 20 basis points and lower international aircraft
modernization sales reduced operating margin by 70 basis
points. These decreases were offset by a $6 million
favorable estimated cost adjustment on an international aircraft
modernization contract.
Specialized
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
|
|
|
|
|
March 27,
|
|
|
March 28,
|
|
|
Increase/
|
|
(dollars in millions)
|
|
2009
|
|
|
2008
|
|
|
(decrease)
|
|
|
Net sales
|
|
$
|
1,257.2
|
|
|
$
|
1,179.6
|
|
|
$
|
77.6
|
|
Operating income
|
|
|
141.3
|
|
|
|
140.5
|
|
|
|
0.8
|
|
Operating margin
|
|
|
11.2
|
%
|
|
|
11.9
|
%
|
|
|
(70
|
) bpts
|
Specialized Products net sales for the 2009 First Quarter
increased by 7% compared to the 2008 First Quarter reflecting
higher sales volume primarily for: (1) $18 million for
microwave products primarily due to deliveries of mobile and
ground mounted satellite communications systems, and tactical
signal intelligence systems for the U.S. military,
(2) $14 million for EO/IR products primarily due to
demand and deliveries on new and existing contracts,
(3) $12 million for combat propulsion systems due to
new contracts and demand from existing contracts,
35
(4) $10 million primarily due to new and follow-on
contracts for shipboard electronics and power distribution,
conditioning and conversion products primarily to the
U.S. Navy and tactical remote sensor systems for the
U.S. Marines, and (5) $9 million for security and
detection systems primarily due to the timing of certain
deliveries. These increases were partially offset primarily by a
decrease for commercial aviation products and commercial
shipbuilding products as a result of reduced demand caused by
the global economic recession. The increase in net sales from
acquired businesses, net of divestitures, was $59 million,
or 5%, and pertains mostly to the Electro-Optical Systems (EOS)
business acquired on April 21, 2008 and to Chesapeake
Sciences Corporation acquired on January 30, 2009.
Specialized Products operating income for the 2009 First Quarter
increased slightly compared to the 2008 First Quarter. Operating
margin for the 2009 First Quarter compared to the 2008 First
Quarter decreased by 70 basis points. Higher pension
expense reduced operating margin by 90 basis points and
lower sales volume for commercial aviation products and
commercial shipbuilding products reduced operating margin by
30 basis points. These decreases were partially offset by
higher sales volume and favorable sales mix primarily for
power & control systems and security and detection
systems. Acquired businesses increased operating margin by
30 basis points.
Liquidity
and Capital Resources
Anticipated
Sources of Cash Flow
Our primary source of liquidity is cash flow generated from
operations. As of March 27, 2009, we also have
$938 million of borrowings available under our revolving
credit facility, after reductions of $62 million for
outstanding letters of credit, subject to certain conditions.
Our revolving credit facility, for which there are no borrowings
outstanding, and our $650 million term loan mature on
March 9, 2010. The term loan is classified as a current
liability at March 27, 2009. We intend to enter into a new
revolving credit facility on or before March 9, 2010. We
currently believe that our cash from operating activities
together with our cash on hand 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, contingent purchase price payments on
previous business acquisitions, program and other discretionary
investments, interest payments, income tax payments, L-3
Holdings dividends and share repurchases and to repay the
term loan when it matures. However, we may decide to refinance
all or a portion of the term loan on or prior to its maturity if
we have the ability to do so on terms and conditions that are
acceptable to us.
Our business may not continue to generate cash flow at current
levels, and it is possible that currently anticipated
improvements may not be achieved. If we are unable to generate
sufficient cash flow from operations to service our debt, we may
be required to reduce costs and expenses, sell assets, reduce
capital expenditures, refinance all or a portion of our existing
debt or obtain additional financing and we may not be able to do
so on a timely basis, on satisfactory terms, or at all. Our
ability to make scheduled principal payments or to pay interest
on or to refinance our indebtedness depends on our future
performance and financial results, which, to a certain extent,
are subject to general conditions in or affecting the defense
industry and to general economic, political, financial,
competitive, legislative and regulatory factors beyond our
control.
Balance
Sheet
Billed receivables increased by $101 million to
$1,327 million at March 27, 2009 from
$1,226 million at December 31, 2008 primarily due to:
(1) the timing of billings and collections primarily for
aircraft modernization and maintenance, networked
communications, system field support services, training services
and ISR systems, and (2) $3 million of acquired billed
receivables. These increases were partially offset by foreign
currency translation adjustments.
Contracts in process increased $157 million to
$2,424 million at March 27, 2009, from
$2,267 million at December 31, 2008. The increase
included $13 million primarily for acquired
contracts-in-process
and $144 million from:
|
|
|
|
|
Increases of $70 million in unbilled contract receivables
primarily due to sales exceeding billings for system field
support services, propulsion systems, and networked
communications; and
|
36
|
|
|
|
|
Increases of $74 million in inventoried contract costs
across several business areas to support customer demand.
|
L-3s receivables days sales outstanding (DSO) was 73 at
March 27, 2009, compared with 69 at December 31, 2008
and 77 at March 28, 2008. We calculate our DSO by dividing
(1) our aggregate end of period billed receivables and net
unbilled contract receivables, by (2) our trailing
12 month sales adjusted, on a pro forma basis, to include
sales from business acquisitions and exclude sales from business
divestitures that we completed as of the end of the period,
multiplied by the number of calendar days in the trailing
12 month period (364 days at March 27, 2009,
366 days at December 31, 2008 and 364 days at
March 28, 2008). Our trailing 12 month pro forma sales
were $15,099 at March 27, 2009, $14,976 million at
December 31, 2008 and $14,219 million at
March 28, 2008.
The increase in inventories was primarily for commercial
shipbuilding customers due to timing of deliveries.
Goodwill increased by $47 million to $8,076 million at
March 27, 2009 from $8,029 million at
December 31, 2008. The table below presents the changes in
goodwill allocated to our reportable segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
|
|
|
|
|
|
Specialized
|
|
|
Consolidated
|
|
|
|
C
3
ISR
|
|
|
Services
|
|
|
AM&M
|
|
|
Products
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Balance at December 31,
2008
(1)
|
|
$
|
862
|
|
|
$
|
2,313
|
|
|
$
|
1,121
|
|
|
$
|
3,733
|
|
|
$
|
8,029
|
|
Business acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
58
|
|
Foreign currency translation
adjustments
(2)
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(10
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 27, 2009
|
|
$
|
862
|
|
|
$
|
2,313
|
|
|
$
|
1,120
|
|
|
$
|
3,781
|
|
|
$
|
8,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As a result of certain
re-alignments in our management and organization structure as
discussed in Note 2 to our unaudited condensed consolidated
financial statements contained in this quarterly report,
$17 million of goodwill was reclassified from the
C
3
ISR
reportable segment to the Government Services reportable
segment, and $17 million of goodwill was reclassified from
the C
3
ISR
reportable segment to the AM&M reportable segment.
|
|
(2)
|
|
The decrease in goodwill from
foreign currency translation adjustments is due to the continued
strengthening of the U.S. dollar during the 2009 First Quarter
against the functional currencies of L-3s foreign
subsidiaries, primarily in Canada, Germany and the United
Kingdom.
|
The increases in accounts payable and accrued expenses were
primarily due to the timing of payments and invoices received
for purchases from third-party vendors and subcontractors. The
decrease in accrued employment costs was due to the timing of
payroll dates for salaries and wages and the payment to
employees of 2008 management incentive bonuses. The decrease in
advance payments and billings in excess of costs incurred was
primarily due to the liquidation of balances on contracts for
ISR systems and government services. The increase in income
taxes payable is due primarily to the timing of
U.S. federal income tax payments, which are made beginning
in the second quarter of each calendar year.
The increase in pension and postretirement benefit plan
liabilities was primarily due to pension expenses exceeding
pension cash contributions during the 2009 First Quarter. We
expect to contribute cash of approximately $65 million to
our pension plans for all of 2009, of which $3 million was
contributed during the 2009 First Quarter.
Statement
of Cash Flows
Quarter
Ended March 27, 2009 Compared with Quarter Ended
March 28, 2008
The table below provides a summary of our cash flows from
operating, investing, and financing activities for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
|
|
March 27,
|
|
|
March 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Net cash from operating activities
|
|
$
|
152
|
|
|
$
|
93
|
|
Net cash used in investing activities
|
|
|
(122
|
)
|
|
|
(52
|
)
|
Net cash used in financing activities
|
|
|
(256
|
)
|
|
|
(289
|
)
|
Operating
Activities
We generated $152 million of cash from operating activities
during the 2009 First Quarter, an increase of $59 million
compared with $93 million generated during the 2008 First
Quarter. The increase was due to: (1) an increase in net
income of $9 million, (2) higher non-cash expenses of
$8 million, primarily due to higher
37
amortization of pension and postretirement plans net loss, and
(3) $42 million of less cash used for changes in
operating assets and liabilities, primarily due to timing of
collections of receivables during the 2009 First Quarter
compared to the 2008 First Quarter. The net cash used for
changes in operating assets and liabilities is further discussed
above under Liquidity and Capital Resources
Balance Sheet beginning on page 36.
Investing
Activities
During the 2009 First Quarter, we used $122 million of cash
in the aggregate to: (1) acquire Chesapeake Sciences
Corporation, and (2) pay $41 million for capital
expenditures.
Financing
Activities
Debt
See Note 9 to our unaudited condensed consolidated
financial statements contained in this quarterly report for the
components and maturity dates of our long-term debt. Our senior
credit facility provides for a term loan and a $1 billion
revolving credit facility. The senior credit facility matures on
March 9, 2010. Our remaining outstanding debt matures
between June 15, 2012 and August 1, 2035. At
March 27, 2009, borrowings under the term loan were
$650 million (classified as a current liability), and
available borrowings under our revolving credit facility were
$938 million, after reduction for outstanding letters of
credit of $62 million. There were no outstanding revolving
credit borrowings under our senior credit facility at
March 27, 2009. Total debt outstanding was
$4,499 million at March 27, 2009, compared to
$4,493 million at December 31, 2008.
Credit Ratings.
Our credit ratings as of April 2009
are as follows:
|
|
|
|
|
|
|
|
|
Rating Agency
|
|
Senior Debt
|
|
Subordinated Debt
|
|
Standard & Poors
|
|
|
BBB-
|
|
|
|
BB+
|
|
Fitch Ratings
|
|
|
BBB-
|
|
|
|
BB+
|
|
Moodys Investors Service
|
|
|
Ba2
|
|
|
|
Ba3
|
|
Agency ratings are not a recommendation to buy, sell or hold any
security, and they may be revised or withdrawn at any time by
the rating agency. Each agencys rating should be evaluated
independently of any other agencys rating. The system and
the number of rating categories can vary widely from rating
agency to rating agency. Customers usually focus on
claims-paying ratings, while creditors focus on debt ratings.
Investors use both to evaluate a companys overall
financial strength. The ratings issued on L-3 or its
subsidiaries by any of these agencies are announced publicly and
are available from the agencies. Our ability to access the
capital markets could be impacted by a downgrade in one or more
of our debt ratings. If this were to occur, we could incur
higher borrowing costs.
Debt Covenants and Other Provisions.
The senior
credit facility and senior subordinated notes agreements contain
financial covenants and other restrictive covenants. See
Note 10 to our audited consolidated financial statements
for the year ended December 31, 2008, included in our
Annual Report on
Form 10-K,
for a description of our debt and related financial covenants,
including dividend payment and share repurchase restrictions and
cross default provisions, under our senior credit facility. As
of March 27, 2009, we were in compliance with our financial
and other restrictive covenants.
The borrowings under the senior credit facility are guaranteed
by L-3 Holdings and by substantially all of the material
wholly-owned domestic subsidiaries of L-3 Communications on a
senior basis. The payment of principal and premium, if any, and
interest on the senior subordinated notes are unconditionally
guaranteed, on an unsecured senior subordinated basis, jointly
and severally, by substantially all of L-3 Communications
wholly-owned domestic subsidiaries. The guarantees of the senior
subordinated notes rank pari passu with one another and are
junior to the guarantees of the senior credit facility. The
payment of principal and premium, if any, and interest on the
3% Convertible Contingent Debt Securities (CODES) due 2035
are fully and unconditionally guaranteed, on an unsecured senior
subordinated basis, jointly and severally, by certain of L-3
Holdings wholly-owned domestic subsidiaries. The
guarantees of the CODES rank pari passu with all of the
guarantees of the senior subordinated notes and are junior to
the guarantees of the senior credit facility.
Under select conditions, including if L-3 Holdings common
stock price is more than 120% (currently $121.36) of the then
current conversion price (currently $101.13) for a specified
period, the conversion feature of the CODES will require L-3
Holdings, upon conversion, to pay the $700 million
principal amount in cash, and if the settlement amount exceeds
the principal amount, the excess will be settled in cash or
stock or a combination thereof, at our option. See Note 10
to our audited consolidated financial statements for the year
ended December 31, 2008,
38
included in our Annual Report on
Form 10-K,
for additional information regarding the CODES, including
conditions for conversion. L-3 Holdings common stock price
on April 30, 2009 was $76.15 per share.
Equity
Repurchases of L-3 Holdings common stock under the
$1 billion share repurchase program, approved by the Board
of Directors in November 2008, are made from time to time at
managements discretion in accordance with applicable
federal securities laws. All share repurchases of L-3
Holdings common stock have been recorded as treasury
shares.
The table below presents repurchases of L-3 Holdings
common stock by L-3 during the 2009 First Quarter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Average Price Paid
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Per Share
|
|
|
Treasury Stock
|
|
|
|
|
|
|
|
|
|
(at cost in millions)
|
|
|
January 1 March 27, 2009
|
|
|
3,385,982
|
|
|
$
|
68.39
|
|
|
$
|
232
|
|
At March 27, 2009, the remaining dollar value of the
authorized share repurchase program was $700 million.
From March 28, 2009 through May 4, 2009, L-3
repurchased 40,800 shares of L-3 Holdings common
stock at an average price of $73.33 per share for an aggregate
amount of $3 million.
During the 2009 First Quarter, L-3 Holdings Board of
Directors authorized the following quarterly cash dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividends
|
|
|
|
Total Dividend
|
Date Declared
|
|
Record Date
|
|
Per Share
|
|
Date Paid
|
|
Paid
|
|
|
|
|
|
|
|
|
(in millions)
|
|
February 5, 2009
|
|
February 19, 2009
|
|
|
$ 0.35
|
|
|
March 16, 2009
|
|
|
$ 42
|
|
On April 28, 2009, L-3 Holdings Board of Directors
declared a quarterly cash dividend of $0.35 per share, payable
on June 15, 2009 to shareholders of record at the close of
business on May 18, 2009.
Legal
Proceedings and Contingencies
For a discussion of legal proceedings and contingencies that
could impact our results of operations, financial conditions, or
cash flows, see Note 16 to our unaudited condensed
consolidated financial statements contained in this quarterly
report.
Accounting
Standards Issued and Not Yet Implemented
For a discussion of accounting standards issued and not yet
implemented, see Note 20 to our unaudited condensed
consolidated financial statements contained in this quarterly
report.
Forward-Looking
Statements
Certain of the matters discussed concerning our operations, cash
flows, financial position, economic performance and financial
condition, including in particular, the likelihood of our
success in developing and expanding our business and the
realization of sales from backlog, include forward-looking
statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act.
Statements that are predictive in nature, that depend upon or
refer to events or conditions or that include words such as
expects, anticipates,
intends, plans, believes,
estimates and similar expressions are
forward-looking statements. Although we believe that these
statements are based upon reasonable assumptions, including
projections of total sales growth, sales growth from business
acquisitions, organic sales growth, consolidated operating
margins, total segment operating margins, interest expense
earnings, cash flow, research and development costs, working
capital, capital expenditures and other projections, they are
subject to several risks and uncertainties,
39
and therefore, it is possible that these statements may not be
achieved. Such statements will also be influenced by factors
which include, among other things:
|
|
|
|
|
our dependence on the defense industry and the business risks
peculiar to that industry, including changing priorities or
reductions in the U.S. Government defense budget;
|
|
|
|
our reliance on contracts with a limited number of agencies of,
or contractors to, the U.S. Government and the possibility
of termination of government contracts by unilateral government
action or for failure to perform;
|
|
|
|
the extensive legal and regulatory requirements surrounding our
contracts with the U.S. or foreign governments and the
results of any investigation of our contracts undertaken by the
U.S. or foreign governments;
|
|
|
|
our ability to retain our existing business and related
contracts (revenue arrangements);
|
|
|
|
our ability to successfully compete for and win new business and
related contracts (revenue arrangements) and to win
re-competitions of our existing contracts;
|
|
|
|
our ability to identify and acquire additional businesses in the
future with terms, including the purchase price, that are
attractive to L-3 and to integrate acquired business operations;
|
|
|
|
our ability to maintain and improve our consolidated operating
margin and total segment operating margin in future periods;
|
|
|
|
our ability to obtain future government contracts (revenue
arrangements) on a timely basis;
|
|
|
|
the availability of government funding or cost-cutting
initiatives and changes in customer requirements for our
products and services;
|
|
|
|
our significant amount of debt and the restrictions contained in
our debt agreements;
|
|
|
|
our ability to continue to retain and train our existing
employees and to recruit and hire new qualified and skilled
employees, as well as our ability to retain and hire employees
with U.S. Government security clearances that are a
prerequisite to compete for and to perform work on classified
contracts for the U.S. Government;
|
|
|
|
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, including those for the commercial
aviation, shipbuilding and communications markets;
|
|
|
|
global economic uncertainty and continued tightening of the
credit markets;
|
|
|
|
events beyond our control such as acts of terrorism;
|
|
|
|
our ability to perform contracts (revenue arrangements) on
schedule;
|
|
|
|
our international operations, including sales to foreign
customers;
|
|
|
|
our extensive use of fixed-price type contracts as compared to
cost-reimbursable type and
time-and-material
type contracts;
|
|
|
|
the rapid change of technology and high level of competition in
the defense industry and the commercial industries in which our
businesses participate;
|
|
|
|
our introduction of new products into commercial markets or our
investments in civil and commercial products or companies;
|
|
|
|
the outcome of current or future litigation matters;
|
40
|
|
|
|
|
results of audits by U.S. Government agencies, including
the Defense Contract Audit Agency, of our sell prices, costs and
performance on contracts (revenue arrangements), and our
accounting and general business practices;
|
|
|
|
anticipated cost savings from business acquisitions not fully
realized or realized within the expected time frame;
|
|
|
|
Titans compliance with its plea agreement and consent to
entry of judgment with the U.S. Government relating to the
Foreign Corrupt Practices Act (FCPA), including Titans
ability to maintain its export licenses as well as the outcome
of other FCPA matters;
|
|
|
|
ultimate resolution of contingent matters, claims and
investigations relating to acquired businesses, and the impact
on the final purchase price allocations;
|
|
|
|
significant increase in competitive pressure among companies in
our industry; and
|
|
|
|
the fair values of our assets, including identifiable intangible
assets and the estimated fair value of the goodwill balances for
our reporting units, which can be impaired or reduced by other
factors, some of which are discussed above.
|
In addition, for a discussion of other risks and uncertainties
that could impair our results of operations or financial
condition, see Part I Item 1A
Risk Factors and Note 18 to our audited
consolidated financial statements, in each case included in our
Annual Report on
Form 10-K
for the year ended December 31, 2008.
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.
41
ITEM 3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Part II, Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital
Resources Derivative Financial Instruments, of
our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2008 for a
discussion of our exposure to market risks. There were no
material changes in those risks during the 2009 First Quarter.
See Notes 14 and 15 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 27, 2009.
ITEM 4.
CONTROLS
AND PROCEDURES
Conclusions
Regarding Effectiveness of Disclosure Controls and
Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
reports under the Securities Exchange Act of 1934 related to L-3
Holdings and L-3 Communications is recorded, processed,
summarized and reported within the time periods specified in the
U.S. Securities and Exchange Commissions (SEC) rules
and forms, and that such information is accumulated and
communicated to our management, including our Chairman,
President and Chief Executive Officer, and our Vice President
and Chief Financial Officer, as appropriate, 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 Chairman, President and Chief Executive Officer, and our
Vice President and Chief Financial Officer, has evaluated the
effectiveness of the design and operation of our disclosure
controls and procedures as of March 27, 2009. Based upon
that evaluation and subject to the foregoing, our Chairman,
President and Chief Executive Officer, and our Vice President
and Chief Financial Officer concluded that, as of March 27,
2009, the design and operation of our disclosure controls and
procedures were effective to accomplish their objectives at the
reasonable assurance level.
There were no changes in our internal control over financial
reporting that occurred during the quarter ended March 27,
2009 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
42
PART II
OTHER INFORMATION
ITEM 1.
LEGAL
PROCEEDINGS
The information required with respect to this item can be found
in Note 16 to our unaudited condensed consolidated
financial statements and is incorporated by reference herein.
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, 2008, which could
materially affect our business, financial condition or future
results. The risks described in our Annual Report on
Form 10-K
are not the only risks facing our Company. 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.
ITEM 2.
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer
Purchases of Equity Securities
The following table provides information about share repurchases
made by L-3 Holdings of its common stock that is registered
pursuant to Section 12 of the Exchange Act during the 2009
First Quarter. Repurchases are made from time to time at
managements discretion in accordance with applicable
federal securities law. All share repurchases of L-3
Holdings common stock have been recorded as treasury
shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum number
|
|
|
|
|
|
|
|
|
|
Total number
|
|
|
(or approximate
|
|
|
|
|
|
|
|
|
|
of shares
|
|
|
dollar value)
|
|
|
|
|
|
|
|
|
|
purchased
|
|
|
of shares that
|
|
|
|
Total number
|
|
|
Average
|
|
|
as part of
|
|
|
may yet be
|
|
|
|
of shares
|
|
|
price paid
|
|
|
publicly announced
|
|
|
purchased under
|
|
|
|
purchased
|
|
|
per share
|
|
|
plans or programs
|
|
|
the plans or
programs
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
January 1-January 31, 2009
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
931
|
|
February 1-February 28, 2009
|
|
|
1,343,382
|
|
|
$
|
75.73
|
|
|
|
1,343,382
|
|
|
$
|
829
|
|
March 1-March 27, 2009
|
|
|
2,042,600
|
|
|
$
|
63.56
|
|
|
|
2,042,600
|
|
|
$
|
700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,385,982
|
|
|
$
|
68.39
|
|
|
|
3,385,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
On November 24, 2008, L-3
Holdings Board of Directors approved a new share
repurchase program that authorizes L-3 Holdings to repurchase up
to an additional $1 billion of its outstanding shares of
common stock through December 31, 2010. All purchases of
shares described in the table above were made pursuant to the
new share repurchase program.
|
ITEMS 3,
4, and 5.
Not
applicable and have been omitted
ITEM 6.
EXHIBITS
For a list of exhibits, see the Exhibit Index in this
Form 10-Q.
43
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrants have duly caused this report to be signed
on their behalf by the undersigned, thereunto duly authorized.
L-3 COMMUNICATIONS HOLDINGS, INC.
L-3 COMMUNICATIONS CORPORATION
|
|
|
|
By:
|
/s/ Ralph
G. DAmbrosio
|
|
|
|
|
Title:
|
Vice President and Chief Financial Officer
|
(Principal Financial Officer)
Date: May 5, 2009
44
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 Exhibits
|
|
|
3.1
|
|
|
Certificate of Incorporation of L-3 Communications Holdings,
Inc. (incorporated by reference to Exhibit 3.1 to the
Registrants Quarterly Report on
Form 10-Q
for the period ended June 30, 2002).
|
|
3.2
|
|
|
Amended and Restated By-Laws of L-3 Communications Holdings,
Inc. (incorporated by reference to Exhibit 3(ii) to the
Registrants Current Report on
Form 8-K
filed on April 29, 2009).
|
|
3.3
|
|
|
Certificate of Incorporation of L-3 Communications Corporation
(incorporated by reference to Exhibit 3.1 to L-3
Communications Corporations Registration Statement on
Form S-4
(File No. 333-31649)).
|
|
3.4
|
|
|
Amended and Restated Bylaws of L-3 Communications Corporation
(incorporated by reference to Exhibit 3.2 to the
Registrants Current Report on
Form 8-K
filed on December 17, 2007).
|
|
4.1
|
|
|
Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to L-3 Communications Holdings
Registration Statement on
Form S-1
(File
No. 333-46975)).
|
|
4.2
|
|
|
Amended and Restated Credit Agreement, dated as of July 29,
2005, among L-3 Communications Corporation, L-3 Communications
Holdings, Inc. and certain subsidiaries of the Registrants from
time to time party thereto as guarantors, the lenders from time
to time party thereto, and Bank of America, N.A., as
administrative agent (incorporated by reference to
Exhibit 10.40 to the Registrants Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2005).
|
|
4.3
|
|
|
Form of L-3 Communications Corporation First Amendment to
Amended and Restated Credit Agreement, dated as of
October 25, 2006, among L-3 Communications Corporation, L-3
Communications Holdings, Inc. and certain subsidiaries of the
Registrants from time to time party thereto as guarantors, the
lenders from time to time party thereto, and Bank of America,
N.A., as administrative agent (incorporated by reference to
Exhibit 10.41 to the Registrants Current Report on
Form 8-K
dated October 25, 2006).
|
|
4.4
|
|
|
Indenture dated as of June 28, 2002, among L-3
Communications Corporation, the guarantors named therein and The
Bank of New York, as Trustee (incorporated by reference to
Exhibit 4.1 of L-3 Communications Corporations
Registration Statement on
Form S-4
(File
No. 333-99757)).
|
|
4.5
|
|
|
Supplemental Indenture dated as of February 20, 2009 among
L-3 Communications Corporation, The Bank of New York, as
trustee, and the guarantors named therein to the Indenture dated
as of June 28, 2002 among L-3 Communications Corporation,
the guarantors named therein and The Bank of New York, as
trustee (incorporated by reference to Exhibit 4.5 to the
Registrants Annual Report on
Form 10-K
for the year ended December 31, 2008).
|
|
4.6
|
|
|
Indenture dated as of May 21, 2003 among L-3 Communications
Corporation, the Guarantors named therein and The Bank of New
York, as Trustee (incorporated by reference to Exhibit 4.1
to L-3 Communications Corporations Registration Statement
on
Form S-4
(File
No. 333-106106)).
|
|
4.7
|
|
|
Supplemental Indenture dated as of February 20, 2009 among
L-3 Communications Corporation, The Bank of New York, as
trustee, and the guarantors named therein to the Indenture dated
as of May 21, 2003 among L-3 Communications Corporation,
the guarantors named therein and The Bank of New York, as
trustee (incorporated by reference to Exhibit 4.7 to the
Registrants Annual Report on
Form 10-K
for the year ended December 31, 2008).
|
|
4.8
|
|
|
Indenture dated as of December 22, 2003 among L-3
Communications Corporation, the Guarantors named therein and The
Bank of New York, as Trustee (incorporated by reference to
Exhibit 10.33 to the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2003).
|
|
4.9
|
|
|
Supplemental Indenture dated as of February 20, 2009 among
L-3 Communications Corporation, The Bank of New York, as
trustee, and the guarantors named therein to the Indenture dated
as of December 22, 2003 among L-3 Communications
Corporation, the guarantors named therein and The Bank of New
York, as trustee (incorporated by reference to Exhibit 4.9
to the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2008).
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4.10
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Indenture dated as of November 12, 2004 among L-3
Communications Corporation, the Guarantors and The Bank of New
York, as Trustee (incorporated by reference to Exhibit 4.1
to L-3 Communications Corporations Registration Statement
on
Form S-4
(File
No. 333-122499)).
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Exhibit
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No.
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Description of Exhibits
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4.11
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Supplemental Indenture dated as of February 20, 2009 among
L-3 Communications Corporation, The Bank of New York, as
trustee, and the guarantors named therein to the Indenture dated
as of November 12, 2004 among L-3 Communications
Corporation, the guarantors named therein and The Bank of New
York, as trustee (incorporated by reference to Exhibit 4.11
to the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2008).
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4.12
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Indenture dated as of July 29, 2005 (Notes Indenture) among
L-3 Communications Corporation, the guarantors named therein and
The Bank of New York, as Trustee (incorporated by reference to
Exhibit 10.69 to the Registrants Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2005).
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4.13
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Supplemental Indenture dated as of February 20, 2009 among
L-3 Communications Corporation, The Bank of New York, as
trustee, and the guarantors named therein to the Notes Indenture
dated as of July 29, 2005 among L-3 Communications
Corporation, the guarantors named therein and The Bank of New
York, as trustee (incorporated by reference to Exhibit 4.13
to the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2008).
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4.14
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Indenture dated as of July 29, 2005 (CODES Indenture) among
L-3 Communications Holdings, Inc., the guarantors named therein
and The Bank of New York, as Trustee (incorporated by reference
to Exhibit 10.70 to the Registrants Quarterly Report
on
Form 10-Q
for the quarter ended June 30, 2005).
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4.15
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|
Supplemental Indenture dated as of February 20, 2009 among
L-3 Communications Holdings, Inc., The Bank of New York, as
trustee, and the guarantors named therein to the CODES Indenture
dated as of July 29, 2005 among L-3 Communications
Holdings, Inc., the guarantors named therein and The Bank of New
York, as trustee (incorporated by reference to Exhibit 4.15
to the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2008).
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*10.1
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Amendment to L-3 Communications Holdings, Inc.
1998 Directors Stock Option Plan Nonqualified Stock Option
Agreements of Peter A. Cohen.
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*10.2
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Form of L-3 Communications Holdings, Inc. 2008 Directors
Stock Incentive Plan Restricted Stock Unit Agreement.
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**11
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L-3 Communications Holdings, Inc. Computation of Basic Earnings
Per Share and Diluted Earnings Per Common Share.
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*12
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Ratio of Earnings to Fixed Charges.
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*31.1
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Certification of President and Chief Executive Officer pursuant
to
Rule 13a-14(a)
and
Rule 15d-14(a)
of the Securities Exchange Act, as amended.
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*31.2
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Certification of Vice President and Chief Financial Officer
pursuant to
Rule 13a-14(a)
and
Rule 15d-14(a)
of the Securities and Exchange Act, as amended.
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*32
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Section 1350 Certification.
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*
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Filed herewith.
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**
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The information required in this exhibit is presented in
Note 12 to the unaudited condensed consolidated financial
statements as of March 27, 2009 in accordance with the
provisions of SFAS No. 128,
Earnings Per Share
.
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Represents management contract, compensatory plan or arrangement
in which directors and/or executive officers are eligible to
participate.
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