Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
     
x
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended March 27, 2009
     
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
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)
 
     
Delaware
  13-3937434 and 13-3937436
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Nos.)
     
600 Third Avenue, New York, NY
  10016
(Address of principal executive offices)
  (Zip Code)
 
(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):
 
             
Large accelerated filer  x
  Accelerated filer  o   Non-accelerated filer  o   Smaller reporting company  o
        (Do not check if a smaller
reporting company)
   
 
 
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
 
                 
        Page
        No.
 
             
             
            1  
             
            2  
             
            3  
             
            4  
             
            5  
             
          30  
             
          42  
             
          42  
 
             
          43  
             
          43  
             
          43  
             
          43  
       
    44  
  ex-10.1: AMENDED 1998 DIRECTORS STOCK OPTION PLAN
  EX-10.2: 2008 DIRECTORS STOCK INCENTIVE PLAN
  EX-12: RATIO OF EARNINGS TO FIXED CHARGES
  EX-31.1: CERTIFICATION
  EX-31.2: CERTIFICATION
  EX-32: CERTIFICATION


Table of Contents

 
PART I — FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
 
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
 
                 
    March 27,
    December 31,
 
    2009     2008  
 
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 638     $ 867  
Billed receivables, net of allowances of $26 in 2009 and 2008
    1,327       1,226  
Contracts in process
    2,424       2,267  
Inventories
    266       259  
Deferred income taxes
    210       211  
Other current assets
    138       131  
                 
Total current assets
    5,003       4,961  
                 
Property, plant and equipment, net
    825       821  
Goodwill
    8,076       8,029  
Identifiable intangible assets
    411       417  
Deferred debt issue costs
    41       44  
Other assets
    209       212  
                 
Total assets
  $ 14,565     $ 14,484  
                 
LIABILITIES AND EQUITY
               
Current liabilities:
               
Current portion of long-term debt
  $ 650     $  
Accounts payable, trade
    679       602  
Accrued employment costs
    608       700  
Accrued expenses
    541       479  
Advance payments and billings in excess of costs incurred
    503       530  
Income taxes
    96       45  
Other current liabilities
    341       351  
                 
Total current liabilities
    3,418       2,707  
                 
Pension and postretirement benefits
    826       802  
Deferred income taxes
    135       127  
Other liabilities
    424       414  
Long-term debt
    3,849       4,493  
                 
Total liabilities
    8,652       8,543  
                 
Commitments and contingencies (see Note 16) 
               
Equity:
               
L-3 Holdings’ shareholders’ equity:
               
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)
    4,187       4,136  
L-3 Holdings’ treasury stock at cost, 17,381,432 shares at March 27, 2009 and 13,995,450 shares at December 31, 2008
    (1,551 )     (1,319 )
Retained earnings
    3,530       3,373  
Accumulated other comprehensive loss
    (337 )     (332 )
                 
Total L-3 Holdings’ shareholders’ equity
    5,829       5,858  
Noncontrolling interests
    84       83  
                 
Total equity
    5,913       5,941  
                 
Total liabilities and equity
  $ 14,565     $ 14,484  
                 
 
See notes to unaudited condensed consolidated financial statements.
 
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L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
 
 
                 
    First Quarter Ended  
    March 27,
    March 28,
 
    2009     2008  
 
Net sales:
               
Products
  $ 1,762     $ 1,603  
Services
    1,874       1,903  
                 
Total net sales
    3,636       3,506  
                 
Cost of sales:
               
Products
    1,566       1,428  
Services
    1,694       1,710  
                 
Total cost of sales
    3,260       3,138  
                 
Operating income
    376       368  
Interest and other income, net
    3       8  
Interest expense
    66       76  
                 
Income before income taxes
    313       300  
Provision for income taxes
    112       108  
                 
Net income
  $ 201     $ 192  
Less: Net income attributable to noncontrolling interests
    2       3  
                 
Net income attributable to L-3 Holdings
  $ 199     $ 189  
Less: Net income allocable to participating securities
    2       1  
                 
Net income allocable to L-3 Holdings’ common shareholders
  $ 197     $ 188  
                 
L-3 Holdings’ earnings per common share:
               
Basic
  $ 1.66     $ 1.53  
                 
Diluted
  $ 1.66     $ 1.51  
                 
L-3 Holdings’ weighted average common shares outstanding:
               
Basic
    118.4       122.6  
                 
Diluted
    118.8       124.1  
                 
 
See notes to unaudited condensed consolidated financial statements.
 
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L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(in millions, except per share data)
 
 
                                                                 
    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:
                                                               
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.
 
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L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(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.
 
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L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
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 Company’s 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 Company’s 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.
 
2.  Basis of Presentation
 
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 Company’s 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 Commission’s (SEC) Staff Accounting Bulletin (SAB) No. 54.
 
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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 Company’s 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 Company’s 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);
 
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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 Company’s 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 Company’s 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 Company’s balance sheets, and (2) including net income attributable to noncontrolling interests in net income on the Company’s 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 Company’s 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 Company’s 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.
 
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L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
 
The tables below present the Company’s 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 Company’s 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  
                                 
 
 
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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  
                                         
 
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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 Company’s 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 GAI’s 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 Company’s 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  
 
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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.
 
5.  Contracts in Process
 
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 Company’s 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.
 
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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 Company’s 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  
                 
 
6.  Inventories
 
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  
                 
 
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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 Company’s 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 Company’s 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-3’s foreign subsidiaries, primarily in Canada, Germany and the United Kingdom.
 
Identifiable Intangible Assets.  Information on the Company’s 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 Company’s 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  
                                         
 
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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  
                 
 
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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 Company’s 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.
 
9.  Debt
 
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 Company’s 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 Company’s Annual Report on
 
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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 Company’s 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 Company’s 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.
 
10.  Comprehensive Income
 
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.
 
11.  Income Taxes
 
The U.S. Federal income tax jurisdiction is the Company’s major tax jurisdiction. The statute of limitations for the Company’s 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 Company’s 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.
 
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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.
 
13.  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 management’s 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.
 
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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 Company’s 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 Company’s 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 Company’s U.S. and foreign businesses enter into contracts with customers, subcontractors or vendors that are denominated in currencies other than their functional currencies. To protect the functional currency equivalent cash flows associated with these contracts, the Company enters into foreign currency forward contracts. The Company’s activities involving foreign currency forward contracts are designed to hedge the changes in the functional currency equivalent cash flows due to movements in foreign exchange rates compared to the functional currency. The foreign currencies hedged are primarily the Canadian 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 Company’s 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.
 
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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 Company’s 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 Company’s foreign currency forward contracts had maturities through 2015.
 
The table below presents the fair values and the location of the Company’s 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 Company’s foreign currency forward contracts.
 
The table below presents the effect of the Company’s 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.
 
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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 Company’s 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 Company’s U.S. Government contracts: (1) are subject to audit and various pricing and cost controls, (2) include standard provisions for termination for the convenience of the U.S. Government or for default, and (3) are subject to cancellation if funds for contracts become unavailable. Foreign government contracts generally include comparable provisions relating to terminations for convenience 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
 
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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 court’s 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 Company’s motion for judgment as a matter of law as to negligence dismissing that claim, denied the Company’s 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 court’s dismissal of the negligence claim and affirmed the trial court’s 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 Company’s motion to dismiss the negligence claim was held on April 30, 2009, and the parties are awaiting the trial court’s 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 Lockheed’s 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-3’s acquisition of SafeView, and in particular the earnout provisions of the acquisition agreement providing for certain payments contingent upon SafeView’s 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 Lockheed’s allegations or produced in the civil litigation settled in November 2007 as discussed above. The Company is cooperating fully with the U.S. Government.
 
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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 DoJ’s 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 Company’s 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 Court’s 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
 
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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 Company’s 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 Company’s 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 Company’s 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 Vertex’s negligence in connection with a phased maintenance inspection performed approximately one week before the crash, and seeks unspecified monetary damages, including punitive damages. The Company’s 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.
 
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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 Company’s 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  
 
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L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
 
19.  Segment Information
 
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 Company’s 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.
 
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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 employer’s 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 Company’s financial position, results of operations and cash flows, but will enhance the Company’s 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 entity’s 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 Company’s financial position, results of operations and cash flows, but will enhance the Company’s 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.
 
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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  
                                                 
 
 
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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  
                                                 
 
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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  
                                                 
 
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ITEM 2.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
Financial Section Roadmap
 
Management’s 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-3’s 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-3’s 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
 
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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-3’s earnings per common share and net cash from operating activities. L-3’s 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-3’s 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-3’s actual results of operations for less than twelve months, and (2) prior period from business and product line divestitures that are included in L-3’s 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 SOCOM’s 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-3’s 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
 
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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-3’s 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 )
 
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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.
 
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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.
 
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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-3’s 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,
 
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(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
 
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  •     Increases of $74 million in inventoried contract costs across several business areas to support customer demand.
 
L-3’s 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-3’s 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
 
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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 & Poor’s
    BBB-       BB+  
Fitch Ratings
    BBB-       BB+  
Moody’s 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 agency’s rating should be evaluated independently of any other agency’s 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 company’s 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,
 
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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 management’s 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,
 
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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;
 
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  •     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;
 
  •     Titan’s 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 Titan’s 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.
 
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ITEM 3.
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Derivative Financial Instruments,” 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 Commission’s (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.
 
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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 management’s 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.
 
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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. D’Ambrosio
  Title:  Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: May 5, 2009
 
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EXHIBIT INDEX
 
Exhibits identified in parentheses below are on file with the SEC and are incorporated herein by reference to such previous filings.
 
         
Exhibit
   
No.   Description of 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 Corporation’s 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 Corporation’s 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 Corporation’s 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).
 
4.10
    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 Corporation’s Registration Statement on Form S-4 (File No. 333-122499)).


Table of Contents

         
Exhibit
   
No.   Description of Exhibits
 
 
4.11
    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).
 
4.12
    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).
 
4.13
    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).
 
4.14
    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).
 
4.15
    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).
 
†*10.1
    Amendment to L-3 Communications Holdings, Inc. 1998 Directors Stock Option Plan Nonqualified Stock Option Agreements of Peter A. Cohen.
 
†*10.2
    Form of L-3 Communications Holdings, Inc. 2008 Directors Stock Incentive Plan Restricted Stock Unit Agreement.
 
**11
    L-3 Communications Holdings, Inc. Computation of Basic Earnings Per Share and Diluted Earnings Per Common Share.
 
*12
    Ratio of Earnings to Fixed Charges.
 
*31.1
    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.
 
*31.2
    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.
 
*32
    Section 1350 Certification.
 
 
* Filed herewith.
 
** 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 .
 
Represents management contract, compensatory plan or arrangement in which directors and/or executive officers are eligible to participate.

 
Exhibit 10.1
 
AMENDED AND RESTATED 1998 DIRECTORS STOCK OPTION PLAN FOR
NON-EMPLOYEE DIRECTORS OF L-3 COMMUNICATIONS HOLDINGS, INC.

AMENDMENT TO NONQUALIFIED STOCK OPTION AGREEMENTS
 
WHEREAS, L-3 Communications Holdings, Inc. (“L-3”) has previously maintained the Amended And Restated 1998 Directors Stock Option Plan for Non-Employee Directors of L-3 Communications Holdings, Inc. (the “Plan”);
 
WHEREAS, L-3 granted stock options under the Plan to Peter A. Cohen on April 25, 2006, April 2, 2007 and April 1, 2008, the terms of which were governed by individual Nonqualified Stock Option Agreements entered into on the applicable grant dates (collectively, the “Stock Option Agreements”); and
 
WHEREAS, on April 28, 2009, the Compensation Committee of the Board of Directors of L-3, acting pursuant to Section 10(a) of the Plan, approved the amendment of the Stock Option Agreements as contemplated hereunder.
 
NOW THEREFORE, effective as of April 28, 2009, each of the Stock Option Agreements is amended as follows:
 
1.  Section 6 is deleted in its entirety and replaced with the following:
 
6.  Effect of Certain Events on the Option .
 
In the event of the Optionee’s death, the Option shall become immediately fully exercisable as to 100% of the Shares subject to the Option, and the executor or administrator of the estate of the Optionee or the person or persons to whom the Option shall have been validly transferred by the executor or the administrator pursuant to will or the laws of descent or distribution shall have the right at any time during the Exercise Term to exercise the Option, subject to any other limitation contained herein on the exercise of the Option in effect at the date of exercise. If the Optionee is removed as a director of the Company for cause, the Option shall terminate as of the effective date of termination of the Optionee’s service as a director, whether or not exercisable. The Option shall not be affected by any other termination of the Optionee’s service as a director, whether as a result of a resignation, disability or otherwise.
 
2.  The last sentence of Section 7 is deleted and replaced with the following:
 
After the death of the Optionee, any exercisable portion of the Option may be exercised by the Optionee’s personal representative or by any person empowered to do so under the Optionee’s will or under the then applicable laws of descent and distribution.
 
[Signatures appear on next page]


 

By: L-3 COMMUNICATIONS HOLDINGS, INC.
 
-S- MICHAEL T. STRIANESE
Michael T. Strianese
President and Chief Executive Officer
 
 
-S- STEVEN M. POST
Steven M. Post
Senior Vice President, General Counsel and
Corporate Secretary

Exhibit 10.2
L-3 COMMUNICATIONS HOLDINGS, INC.
2008 DIRECTORS STOCK INCENTIVE PLAN
RESTRICTED STOCK UNIT AGREEMENT
(Version 0001)
     This Restricted Stock Unit Agreement (this “Agreement”), effective as of the Grant Date (as defined below), is between L-3 Communications Holdings, Inc., a Delaware corporation (the “Corporation”), and the Participant (as defined below).
     1.  Definitions . The following terms shall have the following meanings for purposes of this Agreement:
          (a) “Award Letter” shall mean the letter to the Participant attached hereto as Exhibit A.
          (b) “Change in Control” means:
          (1) The acquisition by any person or group (including a group within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than the Corporation or any of its subsidiaries, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a majority of the combined voting power of the Corporation’s then outstanding voting securities, other than by any employee benefit plan maintained by the Corporation;
          (2) The sale of all or substantially all the assets of the Corporation and its subsidiaries taken as a whole; or
          (3) The election, including the filling of vacancies, during any period of 24 months or less, of 50% or more of the members of the Board of Directors, without the approval of Continuing Directors, as constituted at the beginning of such period. “Continuing Directors” shall mean any director of the Corporation who either (i) is a member of the Board of Directors on the Grant Date, or (ii) is nominated for election to the Board of Directors by a majority of the Board which is comprised of directors who were, at the time of such nomination, Continuing Directors.
          (c) “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.
          (d) “Grant Date” shall mean the “Grant Date” listed in the Award Letter.
          (e) “Participant” shall mean the “Participant” listed in the Award Letter.
          (f) “Restricted Period” shall mean the period beginning on the Grant Date and expiring on the earlier of (i) the date on which the Participant ceases to be a director of the Corporation or (ii) the occurrence of a Change in Control that constitutes a Section 409A Change in Control Event.
          (g) “Restricted Units” shall mean that number of restricted units listed in the Award Letter as “Awards Granted,” as the same may be adjusted from time to time in accordance with the terms hereof.

 


 

          (h) “Section 409A Change in Control Event” shall mean a change in ownership or effective control of the Corporation, or in the ownership of a substantial portion of the assets of the Corporation, within the meaning of Section 409A(a)(2)(A)(v) of the Code.
          (i) “Shares” shall mean a number of shares of the Corporation’s Common Stock, par value $0.01 per share, equal to the number of Restricted Units.
          (j) “Specified Employee” shall mean a “specified employee” as defined in Treasury Regulation Section 1.490A-1(i).
          (k) “Vesting Date” shall mean the earliest of: (a) the first anniversary of the Grant Date (or if earlier, the date of the Corporation’s first regular annual meeting of stockholders held after the Grant Date), (b) the termination of the Participant’s service as a director of the Corporation by reason of death or permanent disability or (c) the occurrence of a Change in Control (without regard to whether such event constitutes a Section 409A Change in Control Event).
     2.  Grant of Units . The Corporation hereby grants the Restricted Units to the Participant, each of which represents the right to receive one Share upon the expiration of the Restricted Period, subject the terms, conditions and restrictions set forth in the L-3 Communications Holdings, Inc. 2008 Directors Stock Incentive Plan (the “Plan”) and this Agreement.
     3.  Restricted Unit Account . The Corporation shall cause an account (the “Unit Account”) to be established and maintained on the books of the Corporation to record the number of Restricted Units credited to the Participant under the terms of this Agreement. The Participant’s interest in the Unit Account shall be that of a general, unsecured creditor of the Corporation.
     4.  Restrictions on Transfer During Restricted Period . Until the Restricted Period has expired or terminated, the Restricted Units shall not be sold, assigned, transferred, pledged, hypothecated, loaned, or otherwise disposed of, and during the Participant’s lifetime the Participant’s rights with respect to the Restricted Units shall be exercised only by such Participant or by his or her guardian or legal representative, except that the Restricted Units may be transferred by will or by the laws of descent and distribution. Any sale, assignment, transfer, pledge, hypothecation, loan or other disposition other than in accordance with this Section 4 shall be null and void.
     5.  Vesting; Forfeiture . Notwithstanding anything in this agreement to the contrary, the Participant shall forfeit the Restricted Units and all of the Participants rights hereunder shall cease (unless otherwise provided for by the Committee in accordance with the Plan) in the event that either: (a) the Restricted Period expires prior to the Vesting Date or (b) the Participant is removed as director of the Corporation for cause.
     6.  Dividend Equivalents . If the Corporation pays a cash dividend or distribution on its Common Stock, the Participant’s Unit Account shall be credited as of the payment date with an additional number of Restricted Units equal to the following calculation (rounded up or down to the nearest whole number): (i) the amount payable per share of Common Stock outstanding as of record date of the dividend or distribution, multiplied by (ii) the number of Restricted Units credited to the Participant’s Unit Account as of the record date for the dividend or distribution, divided by (iii) the Fair Market Value (as defined in the Plan) of a share of Common Stock as of the payment date.
     7.  No Right to Continue as a Director . Nothing in this Agreement or the Plan shall be interpreted or construed to confer upon the Participant any right to continue as a director of the

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Corporation, nor shall this Agreement or the Plan interfere in any way with the right of the Corporation or its directors or stockholders to remove the Participant as a director in accordance with the by-laws of the Corporation.
     8.  No Rights as a Stockholder . The Participant’s interest in the Restricted Units shall not entitle the Participant to any rights as a stockholder of the Corporation. The Participant shall not be deemed to be the holder of, or have any of the rights and privileges of a stockholder of the Corporation in respect of, the Shares unless and until such Shares have been issued to the Participant in accordance Section 11.
     9.  Adjustments Upon Change in Capitalization . In the event of any reorganization, merger, consolidation, recapitalization, reclassification, stock split, stock dividend or similar capital adjustment, as a result of which shares of any class shall be issued in respect of outstanding shares of the Corporation’s Common Stock or shares of Corporation’s Common Stock shall be changed into a different number of shares or into another class or classes or into other property or cash, the Restricted Units, the Participant’s Unit Account and/or the Shares shall be adjusted to reflect such event so as to preserve (without enlarging) the value of the award hereunder, with the manner of such adjustment to be determined by the Committee in its sole discretion. This paragraph shall also apply with respect to any extraordinary dividend or other extraordinary distribution in respect of the Corporation’s Common Stock (whether in the form of cash or other property).
     10.  General Restrictions . Notwithstanding anything in this Agreement to the contrary, the Corporation shall have no obligation to issue or transfer the Shares as contemplated by this agreement unless and until such issuance or transfer shall comply with all relevant provisions of law and the requirements of any stock exchange on which the Corporation’s shares are listed for trading.
     11.  Issuance of Shares . Upon the expiration of the Restricted Period and subject to Sections 5 and 10 and payment by the Participant of any applicable withholding taxes, the Corporation shall, as soon as reasonably practicable (and in any event within 75 days of the expiration of the Restricted Period), issue the Shares to the Participant, free and clear of all restrictions; provided , that if the expiration of the Restricted Period results from a Section 409A Change in Control Event, then notwithstanding the foregoing, the Shares shall be issued within 30 days of the Section 409A Change in Control Event; provided further , that in the event the Participant is a Specified Employee and the expiration of the Restricted Period does not result from the death of the Participant or a Section 409A Change in Control Event, then notwithstanding the foregoing, the Shares shall be issued as soon as reasonably practicable following (and not prior to) the date that is six months after the expiration of the Restricted Period (and in any event within 75 days after such date). The Corporation shall not be required to deliver any fractional Shares, but shall pay, in lieu thereof, the Fair Market Value (as defined in the Plan) thereof as of the date on which the Shares first become issuable under this Section. The Corporation shall pay any costs incurred in connection with issuing the Shares. Upon the issuance of the Shares to the Participant, the Participant’s Unit Account shall be eliminated. Notwithstanding the provisions of this Section, if the Restricted Units have been transferred in accordance with the provisions of Section 4 prior to the issuance of the Shares to the Participant in accordance with this Section, then the issuance of the Shares and any payment in lieu of fractional Shares shall be made to the transferee(s).
     12.  Subsidiary . As used herein, the term “subsidiary” shall mean, as to any person, any corporation, association, partnership, joint venture or other business entity of which 50% or more of the voting stock or other equity interests (in the case of entities other than corporations), is owned or controlled (directly or indirectly) by that entity, or by one or more of the Subsidiaries of that entity, or by a combination thereof.

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     13.  Plan Governs . The Participant hereby acknowledges receipt of a copy of the Plan and agrees to be bound by its terms, all of which are incorporated herein by reference. The Plan shall govern in the event of any conflict between this Agreement and the Plan.
     14.  Modification of Agreement . This Agreement may be modified, amended, suspended or terminated, and any terms or conditions may be waived, but, subject to the terms and conditions of the Plan and this Agreement, only by a written instrument executed by the parties hereto.
     15.  Severability . Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms.
     16.  Governing Law . The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York without giving effect to the conflicts of laws principles thereof. If the Participant has received a copy of this Agreement (or the Plan or any other document related hereto or thereto) translated into a language other than English, such translated copy is qualified in its entirety by reference to the English version thereof, and in the event of any conflict the English version will govern.
     17.  Successors in Interest . This Agreement shall inure to the benefit of and be binding upon any successor to the Corporation. This Agreement shall inure to the benefit of the Participant or the Participant’s legal representatives. All obligations imposed upon the Participant and all rights granted to the Corporation under this Agreement shall be final, binding and conclusive upon the Participant’s heirs, executors, administrators and successors.
     18.  Administration . The Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Participant, the Corporation and all other interested persons. No member of the Committee shall be personally liable for any action determination or interpretation made in good faith with respect to the Plan or the Restricted Units. In its absolute discretion, the Board of Directors may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan and this Agreement.
     19.  Resolution of Disputes . Any dispute or disagreement which may arise under, or as a result of, or in any way related to, the interpretation, construction or application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding and conclusive on the Participant and Corporation for all purposes.
     20.  Data Privacy Consent . As a condition of the grant of the Restricted Units, the Participant hereby consents to the collection, use and transfer of personal data as described in this paragraph. The Participant understands that the Corporation and its subsidiaries hold certain personal information about the Participant, including name, home address and telephone number, date of birth, social security number, salary, nationality, job title, ownership interests or directorships held in the Corporation or its subsidiaries, and details of all restricted units or other equity awards or other entitlements to shares of common stock awarded, cancelled, exercised, vested or unvested (“Data”). The Participant further understands that the Corporation and its subsidiaries will transfer Data among themselves as necessary for the purposes of implementation, administration and management of the Participant’s participation in the Plan, and that the Corporation and any of its subsidiaries may each further transfer Data to any third

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parties assisting the Corporation in the implementation, administration and management of the Plan. The Participant understands that these recipients may be located in the European Economic Area or elsewhere, such as the United States. The Participant hereby authorizes them to receive, possess, use, retain and transfer such Data as may be required for the administration of the Plan or the subsequent holding of shares of common stock on the Participant’s behalf, in electronic or other form, for the purposes of implementing, administering and managing the Participant’s participation in the Plan, including any requisite transfer to a broker or other third party with whom the Participant may elect to deposit any shares of common stock acquired under the Plan. The Participant may, at any time, view such Data or require any necessary amendments to it.
     21.  Limitation on Rights; No Right to Future Grants . By accepting this Agreement and the grant of the Restricted Units contemplated hereunder, the Participant expressly acknowledges that (a) the Plan is discretionary in nature and may be suspended or terminated by the Corporation at any time; (b) the grant of Restricted Units is a one-time benefit that does not create any contractual or other right to receive future grants of restricted units, or benefits in lieu of restricted units; (c) all determinations with respect to future grants of restricted units, if any, including the grant date, the number of Shares granted and the restricted period, will be at the sole discretion of the Corporation; (d) the Participant’s participation in the Plan is voluntary; and (e) the future value of the underlying Shares is unknown and cannot be predicted with certainty.
     22.  Award Administrator . The Corporation may from time to time to designate a third party (an “Award Administrator”) to assist the Corporation in the implementation, administration and management of the Plan and any Restricted Units granted thereunder, including by sending Award Letters on behalf of the Corporation to Participants, and by facilitating through electronic means acceptance of Restricted Unit Agreements by Participants.
     23.  Section 409A . This Agreement is intended to comply with the provisions of Section 409A of the Code and the regulations promulgated thereunder. Without limiting the foregoing, the Committee shall have the right to amend the terms and conditions of this Agreement in any respect as may be necessary or appropriate to comply with Section 409A of the Code or any regulations promulgated thereunder, including without limitation by delaying the issuance of the Shares contemplated hereunder.
     24.  Book Entry Delivery of Shares . Whenever reference in this Agreement is made to the issuance or delivery of certificates representing one or more Shares, the Corporation may elect to issue or deliver such Shares in book entry form in lieu of certificates.

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     25.  Acceptance . This Agreement shall not be enforceable until it has been executed by the Participant. In the event the Corporation has designated an Award Administrator, the acceptance (including through electronic means) of the Restricted Unit award contemplated by this Agreement in accordance with the procedures established from time to time by the Award Administrator shall be deemed to constitute the Participant’s acknowledgment and agreement to the terms and conditions of this Agreement and shall have the same legal effect in all respects of the Participant having executed this Agreement by hand.
         
     
By:  L-3 COMMUNICATIONS HOLDINGS, INC.    
       
 
     
  -S- MICHAEL T. STRIANESE    
  Michael T. Strianese   
  President and Chief Executive Officer   
 
     
  -S- STEVEN M. POST    
  Steven M. Post   
  Senior Vice President, General Counsel and Corporate Secretary   
 
Acknowledged and Agreed
as of the date first written above:

                                                              
Participant Signature

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Exhibit 12
 
L-3 Communications Holdings, Inc.
and L-3 Communications Corporation
Ratio of Earnings to Fixed Charges
 
         
    First Quarter Ended
 
    March 27, 2009  
    ($ in millions)  
 
Earnings:
       
Income before income taxes
  $ 313  
Less: Net income attributable to noncontrolling interests
    (2 )
         
Income before income taxes after noncontrolling interests
  $ 311  
Add:
       
Interest expense
    63  
Amortization of debt expense
    3  
Interest component of rent expense
    15  
         
Earnings
  $ 392  
         
Fixed charges:
       
Interest expense
    63  
Amortization of debt expense
    3  
Interest component of rent expense
    15  
         
Fixed charges
  $ 81  
         
Ratio of earnings to fixed charges
    4.8x  
         

Exhibit 31.1
 
CERTIFICATION
 
I, Michael T. Strianese, Chairman, President and Chief Executive Officer, certify that:
 
1.   I have reviewed this report on Form 10-Q of L-3 Communications Holdings, Inc. and L-3 Communications Corporation;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrants as of, and for, the periods presented in this report;
 
4.   The registrants’ other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrants and have:
 
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrants, including their consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)   Evaluated the effectiveness of the registrants’ disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   Disclosed in this report any change in the registrants’ internal control over financial reporting that occurred during the registrants’ most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants’ internal control over financial reporting; and
 
5.   The registrants’ other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants’ auditors and the audit committee of the registrants’ board of directors (or persons performing the equivalent functions):
 
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants’ ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants’ internal control over financial reporting.
 
Date: May 5, 2009
 
/s/ Michael T. Strianese
Michael T. Strianese
Chairman, President and Chief Executive Officer

 
Exhibit 31.2
 
CERTIFICATION
 
I, Ralph G. D’Ambrosio, Vice President and Chief Financial Officer, certify that:
 
1.   I have reviewed this report on Form 10-Q of L-3 Communications Holdings, Inc. and L-3 Communications Corporation;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrants as of, and for, the periods presented in this report;
 
4.   The registrants’ other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrants and have:
 
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrants, including their consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)   Evaluated the effectiveness of the registrants’ disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   Disclosed in this report any change in the registrants’ internal control over financial reporting that occurred during the registrants’ most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants’ internal control over financial reporting; and
 
5.   The registrants’ other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants’ auditors and the audit committee of the registrants’ board of directors (or persons performing the equivalent functions):
 
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants’ ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants’ internal control over financial reporting.
 
Date: May 5, 2009
 
/s/ Ralph G. D’Ambrosio
Ralph G. D’Ambrosio
Vice President and Chief Financial Officer

 
Exhibit 32
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of L-3 Communications Holdings, Inc. (“L-3 Holdings”) and L-3 Communications Corporation (“L-3 Communications”; together with L-3 Holdings referred to as “L-3”) on Form 10-Q for the period ended March 27, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Michael T. Strianese, Chairman, President and Chief Executive Officer and Ralph G. D’Ambrosio, Vice President and Chief Financial Officer, in each case, of L-3 Holdings and L-3 Communications, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
  (1)  The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
  (2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of L-3.
 
Date: May 5, 2009
 
     
     
/s/ Michael T. Strianese
  /s/ Ralph G. D’Ambrosio
 
Michael T. Strianese
  Ralph G. D’Ambrosio
Chairman, President and Chief Executive Officer
  Vice President and Chief Financial Officer