UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-Q
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly
period ended June 26, 2009
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file numbers
001-14141
and
333-46983
L-3 COMMUNICATIONS HOLDINGS,
INC.
L-3 COMMUNICATIONS
CORPORATION
(Exact names of registrants as specified in their charters)
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Delaware
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13-3937434 and 13-3937436
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification Nos.)
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600 Third Avenue, New York, NY
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10016
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(Address of principal executive
offices)
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(Zip Code)
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(212) 697-1111
(Telephone
number)
Indicate by check mark whether the registrants (1) have
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and
(2) have been subject to such filing requirements for the
past
90 days.
x
Yes
o
No
Indicate by check mark whether the registrants have submitted
electronically and posted on their corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrants
were required to submit and post such files).
x
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.
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Large
accelerated
filer
x
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Accelerated
filer
o
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Non-accelerated
filer
o
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Smaller
reporting
company
o
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(Do not check if a smaller
reporting company)
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 116,576,254 shares of L-3 Communications
Holdings, Inc. common stock with a par value of $0.01
outstanding as of the close of business on July 31, 2009.
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
INDEX TO QUARTERLY REPORT ON
FORM 10-Q
For the quarterly period ended June 26, 2009
PART I
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
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June 26,
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December 31,
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2009
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2008
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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897
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$
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867
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Billed receivables, net of allowances, of $35 in 2009 and $26 in
2008
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1,332
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1,226
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Contracts in process
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2,402
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2,267
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Inventories
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267
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259
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Deferred income taxes
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211
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211
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Other current assets
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124
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131
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Total current assets
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5,233
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4,961
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Property, plant and equipment, net
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830
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821
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Goodwill
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8,127
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8,029
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Identifiable intangible assets
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399
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417
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Deferred debt issue costs
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38
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44
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Other assets
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209
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212
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Total assets
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$
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14,836
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$
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14,484
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LIABILITIES AND EQUITY
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Current liabilities:
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Current portion of long-term debt
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$
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650
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$
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Accounts payable, trade
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652
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602
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Accrued employment costs
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654
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700
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Accrued expenses
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518
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479
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Advance payments and billings in excess of costs incurred
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482
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530
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Income taxes
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56
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45
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Other current liabilities
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347
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351
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Total current liabilities
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3,359
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2,707
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Pension and postretirement benefits
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833
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802
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Deferred income taxes
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155
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127
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Other liabilities
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432
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414
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Long-term debt
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3,854
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4,493
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Total liabilities
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8,633
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8,543
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Commitments and contingencies (see Note 16)
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Equity:
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L-3 shareholders equity:
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L-3 Communications Holdings, Inc.s common stock:
$.01 par value; 300,000,000 shares authorized,
116,031,097 shares outstanding at June 26, 2009 and
118,633,746 shares outstanding at December 31, 2008
(L-3 Communications Corporations common stock:
$.01 par value, 100 shares authorized, issued and
outstanding)
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4,286
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4,136
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L-3 Communications Holdings, Inc.s treasury stock at cost,
18,352,663 shares at June 26, 2009 and
13,995,450 shares at December 31, 2008
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(1,620
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(1,319
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Retained earnings
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3,713
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3,373
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Accumulated other comprehensive loss
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(268
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(332
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)
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Total L-3 shareholders equity
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6,111
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5,858
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Noncontrolling interests
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92
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83
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Total equity
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6,203
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5,941
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Total liabilities and equity
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$
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14,836
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$
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14,484
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See notes to unaudited condensed consolidated financial
statements.
1
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Second Quarter Ended
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June 26,
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June 27,
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2009
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2008
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Net sales:
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Products
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$
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1,884
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$
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1,765
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Services
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2,045
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1,957
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Total net sales
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3,929
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3,722
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Cost of sales:
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Products
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1,690
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1,598
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Services
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1,822
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1,749
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Total cost of sales
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3,512
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3,347
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Litigation Gain
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126
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Operating income
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417
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501
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Interest and other income, net
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6
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7
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Interest expense
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69
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66
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Income before income taxes
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354
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442
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Provision for income taxes
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127
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164
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Net income
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$
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227
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$
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278
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Less: Net income attributable to noncontrolling interests
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2
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3
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Net income attributable to L-3
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$
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225
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$
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275
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Less: Net income allocable to participating securities
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2
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2
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Net income allocable to L-3 Communications Holdings, Inc.s
common shareholders
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$
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223
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$
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273
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L-3 Communications Holdings, Inc.s earnings per common
share:
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Basic
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$
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1.91
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$
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2.24
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Diluted
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$
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1.90
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$
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2.21
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L-3 Communications Holdings, Inc.s weighted average common
shares outstanding:
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Basic
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116.5
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122.0
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Diluted
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117.2
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123.5
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See notes to unaudited condensed consolidated financial
statements.
2
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
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First Half Ended
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June 26,
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June 27,
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2009
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2008
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Net sales:
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Products
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$
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3,646
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$
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3,368
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Services
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3,919
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3,860
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Total net sales
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7,565
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7,228
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Cost of sales:
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Products
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3,256
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3,027
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Services
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3,516
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3,458
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Total cost of sales
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6,772
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6,485
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Litigation Gain
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126
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Operating income
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793
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869
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Interest and other income, net
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9
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15
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Interest expense
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135
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|
142
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Income before income taxes
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667
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742
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Provision for income taxes
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239
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|
|
|
272
|
|
|
|
|
|
|
|
|
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Net income
|
|
$
|
428
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|
$
|
470
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Less: Net income attributable to noncontrolling interests
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4
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6
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Net income attributable to L-3
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$
|
424
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$
|
464
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Less: Net income allocable to participating securities
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4
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3
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Net income allocable to L-3 Communications Holdings, Inc.s
common shareholders
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$
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420
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$
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461
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L-3 Communications Holdings, Inc.s earnings per common
share:
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Basic
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$
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3.58
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$
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3.77
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Diluted
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$
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3.56
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$
|
3.72
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L-3 Communications Holdings, Inc.s weighted average common
shares outstanding:
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Basic
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117.4
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122.3
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|
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Diluted
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118.0
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123.8
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See notes to unaudited condensed consolidated financial
statements.
3
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(in millions, except per share data)
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L-3 Communications
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|
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|
|
|
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Holdings, Inc.s
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Accumulated
|
|
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|
|
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|
|
Common Stock
|
|
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Additional
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|
|
|
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Other
|
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Shares
|
|
|
Par
|
|
|
Paid-in
|
|
|
Treasury
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Issued
|
|
|
Value
|
|
|
Capital
|
|
|
Stock
|
|
|
Earnings
|
|
|
(Loss) Income
|
|
|
Interests
|
|
|
Equity
|
|
|
For the first half ended June 26, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
118.6
|
|
|
$
|
1
|
|
|
$
|
4,135
|
|
|
$
|
(1,319
|
)
|
|
$
|
3,373
|
|
|
$
|
(332
|
)
|
|
$
|
83
|
|
|
$
|
5,941
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
424
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|
|
|
|
|
|
|
4
|
|
|
|
428
|
|
Pension and postretirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Amortization of net loss and prior service cost, net of income
taxes of $10
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
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|
|
|
|
|
|
|
15
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|
Unrealized loss on hedging instruments, net of income taxes of $1
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(1
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)
|
|
|
|
|
|
|
(1
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
492
|
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Cash dividends paid on common stock ($0.35 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
(84
|
)
|
Recognition of non-controlling interest in consolidated
subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
8
|
|
Shares issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee savings plans
|
|
|
1.1
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
Exercise of stock options
|
|
|
0.1
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Employee stock purchase plan
|
|
|
0.6
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
Treasury stock purchased
|
|
|
(4.4
|
)
|
|
|
|
|
|
|
|
|
|
|
(301
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(301
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 26, 2009
|
|
|
116.0
|
|
|
$
|
1
|
|
|
$
|
4,285
|
|
|
$
|
(1,620
|
)
|
|
$
|
3,713
|
|
|
$
|
(268
|
)
|
|
$
|
92
|
|
|
$
|
6,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the first half ended June 27, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
124.2
|
|
|
$
|
1
|
|
|
$
|
3,816
|
|
|
$
|
(525
|
)
|
|
$
|
2,582
|
|
|
$
|
153
|
|
|
$
|
87
|
|
|
$
|
6,114
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
464
|
|
|
|
|
|
|
|
6
|
|
|
|
470
|
|
Pension and postretirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net loss and prior service cost, net of income
taxes of $2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Unrealized gain on hedging instruments, net of income taxes of $1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
477
|
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
(5
|
)
|
Cash dividends paid on common stock ($0.30 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
(74
|
)
|
Shares issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee savings plans
|
|
|
0.7
|
|
|
|
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
|
|
Exercise of stock options
|
|
|
0.4
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
Employee stock purchase plan
|
|
|
0.4
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
Treasury stock purchased
|
|
|
(4.8
|
)
|
|
|
|
|
|
|
|
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(500
|
)
|
Other
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 27, 2008
|
|
|
120.8
|
|
|
$
|
1
|
|
|
$
|
3,983
|
|
|
$
|
(1,025
|
)
|
|
$
|
2,972
|
|
|
$
|
160
|
|
|
$
|
88
|
|
|
$
|
6,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial
statements.
4
|
|
|
|
|
|
|
|
|
|
|
First Half Ended
|
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
428
|
|
|
$
|
470
|
|
Depreciation of property, plant and equipment
|
|
|
77
|
|
|
|
76
|
|
Amortization of intangibles and other assets
|
|
|
30
|
|
|
|
27
|
|
Deferred income tax provision
|
|
|
29
|
|
|
|
107
|
|
Stock-based employee compensation expense
|
|
|
35
|
|
|
|
30
|
|
Contributions to employee savings plans in L-3 Communications
Holdings, Inc.s common stock
|
|
|
74
|
|
|
|
72
|
|
Amortization of pension and postretirement benefit plans net
loss and prior service cost
|
|
|
26
|
|
|
|
4
|
|
Amortization of bond discounts (included in interest expense)
|
|
|
11
|
|
|
|
10
|
|
Amortization of deferred debt issue costs (included in interest
expense)
|
|
|
6
|
|
|
|
5
|
|
Impairment charge
|
|
|
|
|
|
|
28
|
|
Gain on sale of a product line
|
|
|
|
|
|
|
(12
|
)
|
Other non-cash items
|
|
|
(3
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
713
|
|
|
|
812
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities, excluding acquired
amounts:
|
|
|
|
|
|
|
|
|
Billed receivables
|
|
|
(83
|
)
|
|
|
(29
|
)
|
Contracts in process
|
|
|
(116
|
)
|
|
|
(72
|
)
|
Inventories
|
|
|
(9
|
)
|
|
|
(27
|
)
|
Other current assets
|
|
|
11
|
|
|
|
(33
|
)
|
Accounts payable, trade
|
|
|
70
|
|
|
|
81
|
|
Accrued employment costs
|
|
|
(46
|
)
|
|
|
(5
|
)
|
Accrued expenses
|
|
|
(1
|
)
|
|
|
51
|
|
Advance payments and billings in excess of costs incurred
|
|
|
(43
|
)
|
|
|
10
|
|
Income taxes
|
|
|
21
|
|
|
|
(24
|
)
|
Excess income tax benefits related to share-based payment
arrangements
|
|
|
(1
|
)
|
|
|
(7
|
)
|
Other current liabilities
|
|
|
(8
|
)
|
|
|
(137
|
)
|
Pension and postretirement benefits
|
|
|
31
|
|
|
|
21
|
|
All other operating activities
|
|
|
(11
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
(185
|
)
|
|
|
(184
|
)
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
528
|
|
|
|
628
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Business acquisitions, net of cash acquired
|
|
|
(82
|
)
|
|
|
(218
|
)
|
Proceeds from sale of product lines
|
|
|
|
|
|
|
12
|
|
Capital expenditures
|
|
|
(86
|
)
|
|
|
(76
|
)
|
Dispositions of property, plant and equipment
|
|
|
6
|
|
|
|
5
|
|
Other investing activities
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(162
|
)
|
|
|
(275
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Common stock repurchased
|
|
|
(301
|
)
|
|
|
(500
|
)
|
Dividends paid on L-3 Communications Holdings, Inc.s
common stock
|
|
|
(84
|
)
|
|
|
(74
|
)
|
Proceeds from exercise of stock options
|
|
|
3
|
|
|
|
24
|
|
Proceeds from employee stock purchase plan
|
|
|
34
|
|
|
|
35
|
|
Excess income tax benefits related to share-based payment
arrangements
|
|
|
1
|
|
|
|
7
|
|
Other financing activities
|
|
|
1
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(346
|
)
|
|
|
(516
|
)
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes on cash and
cash equivalents
|
|
|
10
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
30
|
|
|
|
(158
|
)
|
Cash and cash equivalents, beginning of the period
|
|
|
867
|
|
|
|
780
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the period
|
|
$
|
897
|
|
|
$
|
622
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial
statements.
5
|
|
1.
|
Description
of Business
|
L-3 Communications Holdings, Inc. derives all of its operating
income and cash flows from its wholly-owned subsidiary, L-3
Communications Corporation (L-3 Communications). L-3
Communications Holdings, Inc. (L-3 Holdings and, together with
its subsidiaries, referred to herein as L-3 or the Company) is a
prime system contractor in aircraft modernization and
maintenance, Command, Control, Communications, Intelligence,
Surveillance and Reconnaissance
(C
3
ISR)
systems, and government services. L-3 is also a leading provider
of high technology products, subsystems and systems. The
Companys customers include the U.S. Department of
Defense (DoD) and its prime contractors, U.S. Government
intelligence agencies, the U.S. Department of Homeland
Security (DHS), U.S. Department of State (DoS),
U.S. Department of Justice (DoJ), allied foreign
governments, domestic and international commercial customers and
select other U.S. federal, state and local government
agencies.
The Company has the following four reportable segments,
comprised of:
(1) C
3
ISR,
(2) Government Services, (3) Aircraft Modernization
and Maintenance (AM&M), and (4) Specialized Products.
Financial information relating to the Companys reportable
segments is included in Note 20.
C
3
ISR
provides products and services for the global ISR market,
networked communications systems and secure communications
products. The Company believes that these products and services
are critical elements for a substantial number of major command,
control, communication, intelligence gathering and space
systems. These products and services are used to connect a
variety of airborne, space, ground and sea-based communication
systems and are used in the transmission, processing, recording,
monitoring, and dissemination functions of these communication
systems. Government Services provides training and operational
support services, enterprise information technology solutions,
intelligence solutions and support, command & control
systems and software services and global security &
engineering solutions services. AM&M provides
modernization, upgrades and sustainment, maintenance and
logistics support services for military and various government
aircraft and other platforms. Specialized Products provides a
broad range of products, including components, products,
subsystems, systems, and related services to military and
commercial customers in several niche markets across several
business areas, including power & control systems,
electro-optic/infrared (EO/IR), microwave, avionics &
displays, simulation & training, precision engagement,
security & detection, propulsion systems,
telemetry & advanced technology, undersea warfare and
marine services.
These unaudited condensed consolidated financial statements for
the quarterly period and first half period ended June 26,
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 eight new accounting standards during the
first half ended June 26, 2009, six of which were effective
January 1, 2009. In accordance with the transition and
disclosure provisions of three of these standards, the Company
retrospectively applied those provisions and adjusted the prior
period financial statements accordingly. See Note 3 for the
standards adopted and their impact to the Companys
financial position and results of operations.
The accompanying financial statements comprise the consolidated
financial statements of L-3 Holdings and L-3
Communications. L-3 Holdings only asset is its investment
in the common stock of L-3 Communications, its wholly-owned
subsidiary, and its only obligations are: (1) the
3% Convertible Contingent Debt Securities (CODES) due 2035,
which were issued by L-3 Holdings on July 29, 2005,
(2) its guarantee of borrowings under the senior credit
facility of L-3 Communications and (3) its guarantee of
other contractual obligations of L-3 Communications and its
subsidiaries. L-3 Holdings obligations relating to the
CODES have been jointly, severally, fully and unconditionally
guaranteed by L-3 Communications and certain of its wholly-owned
domestic subsidiaries.
6
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Accordingly, such debt has been reflected as debt of L-3
Communications in its consolidated financial statements in
accordance with the U.S. Securities and Exchange
Commissions (SEC) Staff Accounting Bulletin (SAB)
No. 54. 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 22 for additional
information regarding the unaudited financial information of L-3
Communications and its subsidiaries.
The unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally
accepted in the United States of America (U.S. GAAP) for
interim financial information and in accordance with the
instructions to
Form 10-Q
and Article 10 of
Regulation S-X
of the SEC. Accordingly, they do not include all of the
disclosures required by U.S. GAAP for a complete set of
annual audited financial statements. In the opinion of
management, all adjustments (consisting of normal and recurring
adjustments) considered necessary for a fair presentation of the
results for the interim periods presented have been included.
The results of operations for the interim periods are not
necessarily indicative of results for the full year. Certain
reclassifications have been made to conform prior year amounts
to the current year presentation. It is the Companys
established practice to close its books for the quarters ending
March, June and September on the Friday nearest to the end of
the calendar quarter. The interim unaudited condensed
consolidated financial statements included herein have been
prepared and are labeled based on that convention. The Company
closes its annual books on December 31 regardless of what day it
falls on.
The preparation of financial statements in conformity with
U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of sales and costs of sales during the reporting period. The
most significant of these estimates and assumptions relate to
contract revenue, profit and loss recognition, fair values of
assets acquired and liabilities assumed in business
combinations, market values for inventories reported at lower of
cost or market, pension and post-retirement benefit obligations,
stock-based employee compensation expense, income taxes,
including the valuations of deferred tax assets, litigation
reserves and environmental obligations, accrued product warranty
costs, and the recoverability, useful lives and valuation of
recorded amounts of long-lived assets, identifiable intangible
assets and goodwill. Changes in estimates are reflected in the
periods during which they become known. Actual amounts will
differ from these estimates and could differ materially. For a
more complete discussion of these estimates and assumptions, see
the Annual Report of L-3 Holdings and L-3 Communications on
Form 10-K
for the fiscal year ended December 31, 2008.
During the quarter ended March 27, 2009, the Company
revised its reportable segment presentations to conform to
certain re-alignments in the Companys management and
organization structure. Consequently, the Company made certain
reclassifications between its
C
3
ISR,
Government Services, and AM&M reportable segments. See
Note 20 for the prior period amounts reclassified between
reportable segments.
|
|
3.
|
New
Accounting Standards Implemented
|
The Company adopted eight new accounting standards during the
first half ended June 26, 2009. The following six standards
were effective January 1, 2009:
|
|
|
|
|
Financial Accounting Standards Board (FASB) Staff Position (FSP)
Accounting Pronouncement Bulletin (APB)
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement)
(FSP APB
14-1);
|
7
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
FSP Emerging Issues Task Force (EITF)
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);
|
|
|
|
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).
|
For the impact of the adoption of FSP APB
14-1,
FSP
EITF 03-6-1
and SFAS 160 on the Companys: (1) the Condensed
Consolidated Balance Sheet, at December 31, 2008,
(2) the Consolidated Equity Account Balances, at
December 31, 2007, and (3) the Condensed Consolidated
Statements of Operations for the quarter and first half ended
June 27, 2008, see pages 10-12. The adoption of
SFAS 161, SFAS 141(R) and FSP
FAS 157-2
did not have a material impact on the Companys prior
period financial statements.
FSP APB
14-1:
In
accordance with FSP APB
14-1,
the
Company is separately accounting for the liability and equity
(conversion option) components of the CODES in a manner that
reflects the Companys non-convertible debt borrowing rate
when interest expense is recognized. Previously, the CODES were
recorded at maturity value. FSP APB
14-1
does
not apply to the Companys other outstanding debt
instruments because they are not convertible debt instruments
within the scope of FSP APB
14-1.
The
Company has retrospectively applied the provisions of this
standard and adjusted the prior period financial statements
accordingly.
The following table presents the impact of FSP APB
14-1
on the
Statements of Operations for the quarter and first half ended
June 26, 2009.
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
First Half Ended
|
|
|
|
June 26, 2009
|
|
|
June 26, 2009
|
|
|
|
(in millions, except per share data)
|
|
|
Interest expense
|
|
$
|
5
|
|
|
$
|
10
|
|
Provision for income taxes
|
|
|
(2
|
)
|
|
|
(4
|
)
|
Net income attributable to L-3
|
|
|
(3
|
)
|
|
|
(6
|
)
|
L-3 Holdings earnings per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.03
|
)
|
|
$
|
(0.05
|
)
|
Diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.05
|
)
|
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. The
adoption of FSP
EITF 03-6-1
decreased basic EPS by $0.02 and diluted EPS by $0.01 for the
quarter ended June 26, 2009 and decreased basic EPS by
$0.03 and diluted EPS by $0.02 for the first half ended
June 26, 2009.
SFAS 160:
The Company retrospectively applied the
presentation requirements of SFAS 160 by:
(1) reclassifying noncontrolling interests (minority
interests) to equity on the Companys balance sheets, and
(2) including net income attributable to noncontrolling
interests in net income on the Companys statements of
operations.
SFAS 161:
The enhanced disclosures for derivative
instruments and related hedging activities required in
accordance with SFAS 161 can be found in Note 15.
8
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
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 material business acquisitions
completed during the first half ended June 26, 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, pursuant to
SFAS 141(R), the difference between the ultimate resolution and
the amount recorded on the balance sheet for acquired uncertain
tax positions is recorded through earnings. Previously, the
difference would have been recorded through goodwill. The
Company has not resolved any uncertain tax positions related to
acquisitions completed prior to January 1, 2009. The
adoption of SFAS 141(R) did not have a material impact on
the Companys financial position, results of operations and
cash flows for the quarter and first half ended June 26,
2009.
FSP
FAS 157-2:
The Company adopted the provisions of SFAS No. 157,
Fair Value Measurements,
for non-financial assets and
non-financial liabilities not recognized or disclosed at fair
value in the financial statements on a recurring basis. FSP
FAS 157-2
previously delayed the effective date of applying the provisions
of SFAS 157 to all non-financial assets and non-financial
liabilities not recognized or disclosed at fair value on a
recurring basis until January 1, 2009. The adoption had no
impact on the Companys financial position, results of
operations and cash flows as the Company did not have any
non-financial assets and non-financial liabilities that were
recognized or disclosed at fair value on a non-recurring basis
at June 26, 2009.
Effective June 26, 2009, the Company adopted the following
two new accounting standards:
|
|
|
|
|
SFAS 165,
Subsequent Events
(SFAS 165); and
|
|
|
|
FSP
FAS 107-1
and APB
28-1,
Interim Disclosures about Fair Value of Financial Instruments
(FSP
FAS 107-1).
|
SFAS 165:
The adoption of SFAS 165
requires the Company to evaluate events after the balance sheet
date and disclose the date through which the evaluation is
performed. The Company evaluated subsequent events through
August 4, 2009, the date the Company filed this quarterly
report on
Form 10-Q,
and did not identify any subsequent events that should be
disclosed pursuant to SFAS 165.
FSP
FAS 107-1:
The
adoption of FSP
FAS 107-1
requires: (1) the fair value disclosures of an
entitys financial instruments for interim financial
statements, and (2) disclosures about the methods and
significant assumptions used to estimate the fair value of
financial instruments. See Note 15 for the disclosures required
by FSP
FAS 107-1.
9
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The tables below present the Companys As Previously
Reported and As Currently Reported: (1) Condensed
Consolidated Balance Sheet, at December 31, 2008,
(2) Consolidated Equity Account Balances, at
December 31, 2007, and (3) Condensed Consolidated
Statement of Operations, for the quarter and first half ended
June 27, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 Communications Holdings Inc.s common stock
|
|
|
4,072
|
|
|
|
|
|
|
|
64
|
|
|
|
4,136
|
|
L-3 Communications Holdings Inc.s treasury stock at cost
|
|
|
(1,319
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,319
|
)
|
Retained earnings
|
|
|
3,410
|
|
|
|
|
|
|
|
(37
|
)
|
|
|
3,373
|
|
Accumulated other comprehensive loss
|
|
|
(332
|
)
|
|
|
|
|
|
|
|
|
|
|
(332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total L-3 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Communications Holdings Inc.s 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
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 EITF 03-6-1
|
|
|
FSP APB 14-1
|
|
|
Reported
|
|
|
|
(in millions, except per share data)
|
|
|
Condensed Consolidated Statement of Operations, for the
quarter ended June 27, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,722
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,722
|
|
Cost of sales
|
|
|
3,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,347
|
|
Litigation Gain
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
501
|
|
Interest and other income, net
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Interest expense
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
66
|
|
Minority interests in net income of consolidated subsidiaries
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
444
|
|
|
|
3
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
442
|
|
Provision for income taxes
|
|
|
166
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
278
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
(3
|
)
|
|
$
|
278
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to L-3
|
|
$
|
278
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(3
|
)
|
|
$
|
275
|
|
Less: Net income allocable to participating securities
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocable to L-3 Communications Holdings, Inc.s
common shareholders
|
|
$
|
278
|
|
|
$
|
|
|
|
$
|
(2
|
)
|
|
$
|
(3
|
)
|
|
$
|
273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 Communications Holdings, Inc.s earnings per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.28
|
|
|
$
|
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
2.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
2.24
|
|
|
$
|
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
2.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 Communications Holdings, Inc.s weighted average common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
122.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
124.0
|
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
123.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
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 EITF 03-6-1
|
|
|
FSP APB 14-1
|
|
|
Reported
|
|
|
|
|
|
|
(in millions, except per share data)
|
|
|
|
|
|
Condensed Consolidated Statement of Operations, for the first
half ended June 27, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
7,228
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,228
|
|
Cost of sales
|
|
|
6,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,485
|
|
Litigation Gain
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
869
|
|
Interest and other income, net
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Interest expense
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
142
|
|
Minority interests in net income of consolidated subsidiaries
|
|
|
6
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
746
|
|
|
|
6
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
742
|
|
Provision for income taxes
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
470
|
|
|
$
|
6
|
|
|
$
|
|
|
|
$
|
(6
|
)
|
|
$
|
470
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to L-3
|
|
$
|
470
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(6
|
)
|
|
$
|
464
|
|
Less: Net income allocable to participating securities
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocable to L-3 Communications Holdings, Inc.s
common shareholders
|
|
$
|
470
|
|
|
$
|
|
|
|
$
|
(3
|
)
|
|
$
|
(6
|
)
|
|
$
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 Communications Holdings, Inc.s earnings per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.84
|
|
|
$
|
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
3.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
3.78
|
|
|
$
|
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
3.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 Communications Holdings, Inc.s weighted average common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
122.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
124.3
|
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
123.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Acquisitions
and Dispositions
|
All of the business acquisitions are included in the
Companys results of operations from their respective dates
of acquisition.
2009
Business Acquisitions
On January 30, 2009, the Company acquired all of the
outstanding stock of CSC for a preliminary purchase price of
$92 million, consisting of: (1) $87 million in
cash, including a $7 million 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. Based on the preliminary
purchase price allocation, the amount of goodwill recognized
12
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
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 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 first half ended June 26, 2009, the Company
completed the final purchase price allocation for G.A.
International (GAI), except for the finalization of the
contractual purchase price, which is subject to additional
consideration not to exceed $1 million that is contingent
upon GAIs post-acquisition financial performance through
July 25, 2011. Additional consideration, if any, will be
accounted for as goodwill. The final purchase price allocation
for GAI compared to the preliminary purchase price allocation
did not have a material impact on the Companys results of
operations or financial position. The purchase price allocation
for International Resources Group Ltd. (IRG) is expected to be
completed during the third 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 first half ended June 26,
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
First Half Ended
|
|
|
|
June 26,
|
|
|
June 27,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions, except per share data)
|
|
|
Pro forma net sales
|
|
$
|
3,929
|
|
|
$
|
3,762
|
|
|
$
|
7,571
|
|
|
$
|
7,341
|
|
Pro forma net income attributable to L-3
|
|
$
|
225
|
|
|
$
|
275
|
|
|
$
|
424
|
|
|
$
|
464
|
|
Pro forma diluted EPS
|
|
$
|
1.90
|
|
|
$
|
2.21
|
|
|
$
|
3.56
|
|
|
$
|
3.72
|
|
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. METI generated
$17 million of sales and $1 million of operating
income for the quarter ended June 27, 2008,
$30 million of sales and $2 million of
13
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
operating income for the first half ended June 27, 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), which was
recorded as a reduction of cost of sales for products in the
Unaudited Condensed Consolidated Statement of Operations. The
net proceeds from the sale are included in investing activities
on the Unaudited Condensed Consolidated Statement of Cash Flows.
The PMD product line generated $4 million of sales for the
quarter ended June 27, 2008, and $8 million of sales
for both the first half ended June 27, 2008, and the year
ended December 31, 2008.
The components of contracts in process are presented in the
table below.
|
|
|
|
|
|
|
|
|
|
|
June 26,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Unbilled contract receivables, gross
|
|
$
|
2,250
|
|
|
$
|
2,079
|
|
Less: unliquidated progress payments
|
|
|
(557
|
)
|
|
|
(462
|
)
|
|
|
|
|
|
|
|
|
|
Unbilled contract receivables, net
|
|
|
1,693
|
|
|
|
1,617
|
|
|
|
|
|
|
|
|
|
|
Inventoried contract costs, gross
|
|
|
855
|
|
|
|
754
|
|
Less: unliquidated progress payments
|
|
|
(146
|
)
|
|
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
Inventoried contract costs, net
|
|
|
709
|
|
|
|
650
|
|
|
|
|
|
|
|
|
|
|
Total contracts in process
|
|
$
|
2,402
|
|
|
$
|
2,267
|
|
|
|
|
|
|
|
|
|
|
Inventoried Contract Costs.
In accordance
with the American Institute of Certified Public Accountants
Statement of Position
81-1,
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts
(SOP 81-1)
and the AICPA Audit and Accounting Guide,
Audits of Federal
Government Contractors,
the Company accounts for the portion
of its general and administrative (G&A) costs, independent
research and development (IRAD) costs and bid and proposal
(B&P) costs that are allowable and reimbursable indirect
contract costs under U.S. Government procurement
regulations on its U.S. Government contracts (revenue
arrangements) as inventoried contract costs. G&A, IRAD and
B&P costs are allocated to contracts for which the
U.S. Government is the end customer and are charged to
costs of sales when sales on the related contracts are
recognized. The Companys unallowable portion of its
G&A, IRAD and B&P costs for its U.S. Government
contractor businesses are expensed as incurred and are not
included in inventoried contract costs.
14
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
First Half Ended
|
|
|
|
June 26,
|
|
|
June 27,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Amounts included in inventoried contract costs at beginning of
the period
|
|
$
|
79
|
|
|
$
|
69
|
|
|
$
|
74
|
|
|
$
|
68
|
|
Add: Contract costs
incurred
(1)
|
|
|
334
|
|
|
|
318
|
|
|
|
646
|
|
|
|
600
|
|
Amounts included in acquired inventoried contract costs
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
7
|
|
Less: Amounts charged to cost of sales
|
|
|
(334
|
)
|
|
|
(315
|
)
|
|
|
(641
|
)
|
|
|
(596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in inventoried contract costs at end of the
period
|
|
$
|
79
|
|
|
$
|
79
|
|
|
$
|
79
|
|
|
$
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Incurred costs include IRAD and
B&P costs of $79 million for the quarter ended
June 26, 2009, $78 million for the quarter ended
June 27, 2008, $156 million for the first half ended
June 26, 2009 and $137 million for the first half
ended June 27, 2008.
|
The table below presents a summary of selling, general and
administrative expenses and research and development expenses
for the Companys commercial businesses, which are expensed
as incurred and not included in inventoried contract costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
First Half Ended
|
|
|
|
June 26,
|
|
|
June 27,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Selling, general and administrative expenses
|
|
$
|
57
|
|
|
$
|
73
|
|
|
$
|
118
|
|
|
$
|
139
|
|
Research and development expenses
|
|
|
20
|
|
|
|
24
|
|
|
|
37
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
77
|
|
|
$
|
97
|
|
|
$
|
155
|
|
|
$
|
187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
June 26,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Raw materials, components and
sub-assemblies
|
|
$
|
104
|
|
|
$
|
95
|
|
Work in process
|
|
|
126
|
|
|
|
121
|
|
Finished goods
|
|
|
37
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
267
|
|
|
$
|
259
|
|
|
|
|
|
|
|
|
|
|
15
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
7.
|
Goodwill
and Identifiable Intangible Assets
|
Goodwill.
In accordance with
SFAS No. 141(R), adopted on January 1, 2009, the
Company allocates the cost of business acquisitions to the
assets acquired and liabilities assumed based on their fair
values at the date of acquisition (commonly referred to as the
purchase price allocation). The table below presents the changes
in goodwill allocated to the Companys reportable segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
|
|
|
|
|
|
Specialized
|
|
|
Consolidated
|
|
|
|
C
3
ISR
|
|
|
Services
|
|
|
AM&M
|
|
|
Products
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Balance at December 31,
2008
(1)
|
|
$
|
862
|
|
|
$
|
2,313
|
|
|
$
|
1,121
|
|
|
$
|
3,733
|
|
|
$
|
8,029
|
|
Business acquisition
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
58
|
|
|
|
59
|
|
Foreign currency translation
adjustments
(2)
|
|
|
9
|
|
|
|
2
|
|
|
|
13
|
|
|
|
15
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 26, 2009
|
|
$
|
871
|
|
|
$
|
2,316
|
|
|
$
|
1,134
|
|
|
$
|
3,806
|
|
|
$
|
8,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As a result of certain
re-alignments in the Companys management and organization
structure as discussed in Note 2, $17 million of
goodwill was reclassified from the
C
3
ISR
reportable segment to the Government Services reportable
segment, and $17 million of goodwill was reclassified from
the C
3
ISR
reportable segment to the AM&M reportable segment.
|
|
(2)
|
|
The increase in goodwill from
foreign currency translation adjustments is due to the weakening
of the U.S. dollar during the first half of 2009 against the
functional currencies of L-3s foreign subsidiaries,
primarily in Canada, Germany and the United Kingdom.
|
Identifiable Intangible Assets.
Information on the
Companys identifiable intangible assets that are subject
to amortization is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
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
|
|
|
$
|
511
|
|
|
$
|
144
|
|
|
$
|
367
|
|
|
$
|
505
|
|
|
$
|
124
|
|
|
$
|
381
|
|
Technology
|
|
|
8
|
|
|
|
78
|
|
|
|
52
|
|
|
|
26
|
|
|
|
76
|
|
|
|
47
|
|
|
|
29
|
|
Other, primarily favorable leasehold interests
|
|
|
7
|
|
|
|
14
|
|
|
|
8
|
|
|
|
6
|
|
|
|
14
|
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
22
|
|
|
$
|
603
|
|
|
$
|
204
|
|
|
$
|
399
|
|
|
$
|
595
|
|
|
$
|
178
|
|
|
$
|
417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense recorded by the Company for its
identifiable intangible assets is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
First Half Ended
|
|
|
|
June 26,
|
|
|
June 27,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Amortization expense
|
|
$
|
13
|
|
|
$
|
11
|
|
|
$
|
26
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Based on gross carrying amounts at June 26, 2009, the
Companys estimate of amortization expense for identifiable
intangible assets for the years ending December 31, 2009
through 2013 are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ending December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
(in millions)
|
|
|
Estimated amortization expense
|
|
$
|
52
|
|
|
$
|
52
|
|
|
$
|
47
|
|
|
$
|
38
|
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 26, 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.
|
|
|
|
|
|
|
|
|
|
|
June 26,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Other Current Liabilities:
|
|
|
|
|
|
|
|
|
Accruals for pending and threatened litigation (see Note 16)
|
|
$
|
2
|
|
|
$
|
4
|
|
Accrued product warranty costs
|
|
|
92
|
|
|
|
97
|
|
Accrued interest
|
|
|
62
|
|
|
|
66
|
|
Estimated costs in excess of estimated contract value to
complete contracts in process in a loss position
|
|
|
68
|
|
|
|
58
|
|
Deferred revenues
|
|
|
28
|
|
|
|
25
|
|
Aggregate purchase price payable for acquired businesses
|
|
|
5
|
|
|
|
|
|
Other
|
|
|
90
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
Total other current liabilities
|
|
$
|
347
|
|
|
$
|
351
|
|
|
|
|
|
|
|
|
|
|
The table below presents the components of other liabilities.
|
|
|
|
|
|
|
|
|
|
|
June 26,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Other Liabilities:
|
|
|
|
|
|
|
|
|
Non-current income taxes payable (see Note 11)
|
|
$
|
189
|
|
|
$
|
177
|
|
Deferred compensation
|
|
|
87
|
|
|
|
79
|
|
Accrued workers compensation
|
|
|
49
|
|
|
|
45
|
|
Unfavorable lease obligations
|
|
|
7
|
|
|
|
8
|
|
Non-current portion of net deferred gains from terminated
interest rate swap agreements
|
|
|
7
|
|
|
|
9
|
|
Notes payable and capital lease obligations
|
|
|
10
|
|
|
|
10
|
|
Accrued product warranty costs
|
|
|
6
|
|
|
|
5
|
|
Other non-current liabilities
|
|
|
77
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
$
|
432
|
|
|
$
|
414
|
|
|
|
|
|
|
|
|
|
|
17
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The table below presents the changes in the Companys
accrued product warranty costs.
|
|
|
|
|
|
|
|
|
|
|
First Half Ended
|
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Accrued product warranty
costs
(1)
:
|
|
|
|
|
|
|
|
|
Balance at January 1
|
|
$
|
102
|
|
|
$
|
98
|
|
Acquisitions during the period
|
|
|
|
|
|
|
2
|
|
Accruals for product warranties issued during the period
|
|
|
22
|
|
|
|
18
|
|
Foreign currency translation adjustments
|
|
|
1
|
|
|
|
1
|
|
Changes to accruals for product warranties existing before
January 1
|
|
|
|
|
|
|
1
|
|
Settlements made during the period
|
|
|
(27
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
98
|
|
|
$
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. Balances include both long-term
and short-term amounts.
|
The components of debt and a reconciliation to the carrying
amount of current and long-term debt are presented in the table
below.
|
|
|
|
|
|
|
|
|
|
|
June 26,
|
|
|
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
|
|
|
(46
|
)
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
Carrying amount of long-term debt
|
|
|
4,504
|
|
|
|
4,493
|
|
Less: Current portion of long-term debt
|
|
|
(650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount of long-term debt, excluding current portion
|
|
$
|
3,854
|
|
|
$
|
4,493
|
|
|
|
|
|
|
|
|
|
|
18
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
(1)
|
|
The Companys five-year
revolving credit facility, which matures on March 9, 2010,
allows for total aggregate borrowings of up to $1 billion.
At June 26, 2009, available borrowings under the revolving
credit facility were $964 million after reductions for
outstanding letters of credit of $36 million.
|
(2)
|
|
The interest rate at June 26,
2009 and December 31, 2008 was 1.19% and 2.70%,
respectively, and is based on the LIBOR rate (as defined) plus a
spread. See Note 10 to the audited consolidated financial
statements included in the Companys Annual Report on
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 and is classified as a current liability.
|
(3)
|
|
Under select conditions, including
if L-3 Holdings common stock price is more than 120% (currently
$120.17) of the then current conversion price ($100.14 as of
July 29, 2009) for a specified period, the conversion
feature of the CODES will require L-3 Holdings, upon conversion,
to pay the $700 million principal amount in cash, and if
the settlement amount exceeds the principal amount, the excess
will be settled in cash or stock or a combination thereof, at
the Companys option. At the June 26, 2009 conversion
price of $101.13, the aggregate consideration to be delivered
upon conversion would be determined based on 6.9 million
shares of L-3 Holdings common stock. See Note 10 to
the audited consolidated financial statements for the year ended
December 31, 2008, included in the Companys Annual
Report on
Form 10-K
for additional information regarding the CODES, including
conditions for conversion. L-3s stock price on
July 31, 2009 was $75.50 per share. The effective interest
rate on the CODES is 6.33%. Interest expense relates to both the
contractual interest coupon and amortization of the discount on
the liability component. Interest expense recognized was
$10 million for the second quarter periods ended
June 26, 2009 and June 27, 2008 and $20 million
for the first half periods ended June 26, 2009 and
June 27, 2008. The following table provides additional
information about the Companys CODES:
|
|
|
|
|
|
|
|
|
|
|
|
June 26,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Carrying amount of the equity component (conversion feature)
|
|
$
|
64
|
|
|
$
|
64
|
|
Unamortized discount of liability component being amortized
through February 1, 2011
|
|
$
|
35
|
|
|
$
|
45
|
|
Net carrying amount of liability component
|
|
$
|
665
|
|
|
$
|
655
|
|
A reconciliation of net income to comprehensive income
attributable to L-3 is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
First Half Ended
|
|
|
|
June 26,
|
|
|
June 27,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Net income
|
|
$
|
227
|
|
|
$
|
278
|
|
|
$
|
428
|
|
|
$
|
470
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
62
|
|
|
|
4
|
|
|
|
50
|
|
|
|
4
|
|
Unrealized (losses) gains on hedging
instruments
(1)
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
1
|
|
Amortization of pension and postretirement benefit plans net
loss and prior service
cost
(2)
|
|
|
8
|
|
|
|
1
|
|
|
|
15
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
296
|
|
|
|
283
|
|
|
|
492
|
|
|
|
477
|
|
Less: Comprehensive income attributable to noncontrolling
interests
|
|
|
2
|
|
|
|
3
|
|
|
|
4
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to L-3
|
|
$
|
294
|
|
|
$
|
280
|
|
|
$
|
488
|
|
|
$
|
471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amounts are net of income taxes of
$1 million for the quarterly period ended June 26,
2009 and $1 million for the first half periods ended
June 26, 2009 and June 27, 2008.
|
|
(2)
|
|
Amounts are net of income taxes of
$5 million and $1 million for the quarterly periods
ended June 26, 2009 and June 27, 2008, respectively,
and $10 million and $2 million for the first half
periods ended June 26, 2009 and June 27, 2008,
respectively. See Note 17.
|
19
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The U.S. Federal income tax jurisdiction is the
Companys major tax jurisdiction. The statute of
limitations for the Companys U.S. Federal income tax
returns for the years ended December 31, 2004 through 2007
is open as of June 26, 2009. The Company expects the
statute of limitations on the 2004 and 2005 years to close
in the third quarter of 2009. The Internal Revenue Service (IRS)
began its audit of the Companys 2006 and 2007
U.S. Federal income tax returns in April 2009. In addition,
the Company has numerous state and foreign income tax audits
currently in process. As of June 26, 2009, the Company
anticipates that unrecognized tax benefits will decrease by
approximately $39 million over the next 12 months.
Current and non-current income taxes payable include potential
interest of $21 million ($13 million after income
taxes) at June 26, 2009 and $18 million
($11 million after income taxes) at December 31, 2008,
and potential penalties of $8 million at June 26, 2009
and $7 million at December 31, 2008.
|
|
12.
|
L-3
Holdings Earnings Per Common Share
|
A reconciliation of basic EPS and diluted EPS is presented in
the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
First Half Ended
|
|
|
|
June 26,
|
|
|
June 27,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions, except per share data)
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocable to L-3 Holdings common shareholders
|
|
$
|
223
|
|
|
$
|
273
|
|
|
$
|
420
|
|
|
$
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
116.5
|
|
|
|
122.0
|
|
|
|
117.4
|
|
|
|
122.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
1.91
|
|
|
$
|
2.24
|
|
|
$
|
3.58
|
|
|
$
|
3.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocable to L-3 Holdings common shareholders
|
|
$
|
223
|
|
|
$
|
273
|
|
|
$
|
420
|
|
|
$
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common and potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
116.5
|
|
|
|
122.0
|
|
|
|
117.4
|
|
|
|
122.3
|
|
Assumed exercise of stock options
|
|
|
3.5
|
|
|
|
4.3
|
|
|
|
3.5
|
|
|
|
4.4
|
|
Unvested restricted stock awards
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
Employee stock purchase plan contributions
|
|
|
0.6
|
|
|
|
0.4
|
|
|
|
0.6
|
|
|
|
0.4
|
|
Performance unit awards
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed purchase of common shares for treasury
|
|
|
(3.6
|
)
|
|
|
(3.5
|
)
|
|
|
(3.6
|
)
|
|
|
(3.6
|
)
|
Assumed conversion of the CODES
|
|
|
|
(1)
|
|
|
0.3
|
|
|
|
|
(1)
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common and potential common shares
|
|
|
117.2
|
|
|
|
123.5
|
|
|
|
118.0
|
|
|
|
123.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
1.90
|
|
|
$
|
2.21
|
|
|
$
|
3.56
|
|
|
$
|
3.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
L-3 Holdings CODES had no
impact on diluted EPS for the quarter and first half ended
June 26, 2009, because the average market price of L-3
Holdings common stock during these periods was less than
the price at which the CODES would have been convertible into
L-3 Holdings common stock. As of July 29, 2009, the
current conversion price was $100.14.
|
20
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Excluded from the computations of diluted EPS are shares related
to stock options, restricted stock, and restricted stock units
underlying employee stock-based compensation of 2.8 million
for the quarter and first half ended June 26, 2009, and
1.6 million for the quarter and first half ended
June 27, 2008, because they were anti-dilutive.
EPS for the quarter and first half ended June 27, 2008
includes: (1) a gain of $0.65 per diluted share for the
reversal of a current liability for pending and threatened
litigation as a result of a June 27, 2008 decision by the
U.S. Court of Appeals vacating an adverse 2006 jury
verdict, (2) a gain of $0.06 per diluted share for the sale
of the PMD product line (see Note 4), and (3) a
non-cash charge of $0.14 per diluted share related to a
write-down of capitalized software development costs.
Repurchases of L-3 Holdings common stock under the
$1 billion share repurchase program, approved by the Board
of Directors in November 2008, are made from time to time at
managements discretion in accordance with applicable
U.S. federal securities laws. All share repurchases of L-3
Holdings common stock have been recorded as treasury shares. At
June 26, 2009, the remaining dollar value of the authorized
share repurchase program was $630 million.
From June 27, 2009 through August 4, 2009, L-3
repurchased 246,755 shares of L-3 Holdings common stock at
an average price of $70.84 per share for an aggregate amount of
$17 million.
On July 14, 2009, L-3 Holdings Board of Directors
declared a quarterly cash dividend of $0.35 per share, payable
on September 15, 2009 to shareholders of record at the
close of business on August 17, 2009.
|
|
14.
|
Fair
Value Measurements
|
The following table presents the fair value hierarchy level for
each of the Companys assets and liabilities that are
measured and recorded at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26, 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
|
|
$
|
676
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
794
|
|
|
$
|
|
|
|
$
|
|
|
Derivative instruments
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
676
|
|
|
$
|
12
|
|
|
$
|
|
|
|
$
|
794
|
|
|
$
|
22
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
$
|
|
|
|
$
|
13
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
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.
|
Financial
Instruments
|
Fair Value of Financial Instruments.
At
June 26, 2009 and December 31, 2008, the
Companys financial instruments consisted primarily of cash
and cash equivalents, billed receivables, trade accounts
payable, borrowings under the term loan facility, Senior
Subordinated Notes, CODES and foreign currency forward
contracts. The
21
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
carrying amounts of cash and cash equivalents, billed
receivables and trade accounts payable are representative of
their respective fair values because of the short-term
maturities or expected settlement dates of these instruments.
The fair value of borrowings under the term loan facility are
based on similar debt issued. The Senior Subordinated Notes are
registered, unlisted public debt traded in the
over-the-counter
market and their fair values are based on quoted trading
activity. The fair values of the CODES are based on quoted
prices for the same or similar issues. The fair values of
foreign currency forward contracts were estimated based on
forward exchange rates at June 26, 2009 and
December 31, 2008. The carrying amounts and estimated fair
values of the Companys financial instruments are presented
in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26, 2009
|
|
|
December 31, 2008
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
(in millions)
|
|
|
Borrowings under the Term Loan Facility
|
|
$
|
650
|
|
|
$
|
639
|
|
|
$
|
650
|
|
|
$
|
608
|
|
Senior Subordinated Notes
|
|
|
3,189
|
|
|
|
2,956
|
|
|
|
3,188
|
|
|
|
2,916
|
|
CODES
|
|
|
665
|
|
|
|
669
|
|
|
|
655
|
|
|
|
697
|
|
Foreign currency forward
contracts
(1)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
1
|
|
|
|
|
(1)
|
|
Notional amounts of foreign
currency forward contracts were $343 million at
June 26, 2009 and $414 million at December 31,
2008.
|
Derivative Financial Instruments.
The Companys
derivative financial instruments include foreign currency
forward contracts, which are entered into for risk management
purposes, and an embedded derivative representing the contingent
interest payment provision related to the CODES.
Foreign Currency Forward Contracts.
The
Companys U.S. and foreign businesses enter into
contracts with customers, subcontractors or vendors that are
denominated in currencies other than their functional
currencies. To protect the functional currency equivalent cash
flows associated with certain of these contracts, the Company
enters into foreign currency forward contracts. The
Companys activities involving foreign currency forward
contracts are designed to hedge the changes in the functional
currency equivalent cash flows due to movements in foreign
exchange rates compared to the functional currency. The foreign
currencies hedged are primarily the Canadian dollar, Euro,
British pound and U.S. dollar. The Company manages exposure
to counterparty credit risk by entering into foreign currency
forward contracts only with major financial institutions that
are expected to fully perform under the terms of such contracts.
Foreign currency forward contracts are recorded in the
Companys Consolidated Balance Sheets at fair value and are
generally designated and accounted for as cash flow hedges in
accordance with Statement of Financial Accounting Standards
No. 133,
Accounting for Derivative Instruments and
Hedging Activities
(SFAS 133). Gains and losses
on designated foreign currency forward contracts that are
considered highly effective in offsetting the corresponding
change in the cash flows of the hedged transaction are recorded
net of income taxes in accumulated other comprehensive loss
(accumulated OCI) and then recognized in earnings when the
underlying hedged transaction affects earnings. The estimated
net amount of existing losses at June 26, 2009 that are
expected to be reclassified into earnings within the next
12 months is $1 million. Gains and losses on foreign
currency forward contracts that do not meet the SFAS 133
hedge accounting criteria are recognized in earnings immediately.
22
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The table below presents the notional amounts of the
Companys outstanding foreign currency forward contracts by
currency as of June 26, 2009:
|
|
|
|
|
Currency
|
|
Notional Amount
|
|
|
|
(in millions)
|
|
|
U.S. dollar
|
|
$
|
127
|
|
British pound
|
|
|
103
|
|
Euro
|
|
|
19
|
|
Canadian dollar
|
|
|
85
|
|
Other
|
|
|
9
|
|
|
|
|
|
|
Total
|
|
$
|
343
|
|
|
|
|
|
|
The notional amounts are used to measure the volume of these
contracts and do not represent exposure to foreign currency
losses. At June 26, 2009, the Companys foreign
currency forward contracts had maturities through 2016.
The table below presents the fair values and the location of the
Companys derivative instruments in the Unaudited Condensed
Consolidated Balance Sheet as of June 26, 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
|
|
|
$
|
8
|
|
|
$
|
6
|
|
|
$
|
2
|
|
Derivatives not designated as hedging instruments under
SFAS 133:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
|
1
|
|
|
|
|
|
|
|
4
|
|
|
|
1
|
|
Embedded derivative related to the CODES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative instruments
|
|
$
|
4
|
|
|
$
|
8
|
|
|
$
|
10
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
See Note 14 for a description
of the fair value hierarchy related to the Companys
foreign currency forward contracts.
|
The tables below present the effects of the Companys
derivative instruments on the Unaudited Condensed Consolidated
Statement of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of
|
|
|
|
|
|
Gain or (Loss) Recognized in
|
|
|
|
Gain or (Loss)
|
|
|
|
|
|
Income on Derivative
|
|
|
|
Recognized in
|
|
|
|
|
|
(Ineffective Portion and
|
|
Derivatives in SFAS 133
|
|
OCI on Derivative
|
|
|
Gain or (Loss) Reclassified from Accumulated
|
|
|
Amount Excluded from
|
|
Cash Flow Hedging Relationships
|
|
(Effective Portion)
|
|
|
OCI into Income (Effective Portion)
|
|
|
Effectiveness Testing)
|
|
|
|
|
|
|
Location
|
|
|
Amount
|
|
|
Location
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
For the quarter ended June 26, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
(5
|
)
|
|
|
Cost of Sales
|
|
|
$
|
(2
|
)
|
|
|
Cost of Sales
|
|
|
$
|
|
|
For the first half ended June 26, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
(6
|
)
|
|
|
Cost of Sales
|
|
|
$
|
(3
|
)
|
|
|
Cost of Sales
|
|
|
$
|
|
|
23
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
Gain or (Loss) Recognized in Income on Derivative
|
|
Derivatives not Designated as Hedging Instruments
|
|
Location
|
|
|
Amount
|
|
|
|
|
|
|
(in millions)
|
|
|
For the quarter ended June 26, 2009:
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
|
Cost of Sales
|
|
|
$
|
|
|
For the first half ended June 26, 2009:
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
|
Cost of Sales
|
|
|
$
|
|
|
|
|
16.
|
Commitments
and Contingencies
|
U.S.
and Foreign Government Procurement Regulations
A substantial majority of the Companys revenues are
generated from providing products and services under legally
binding agreements, or contracts, with U.S. Government and
foreign government customers. U.S. Government contracts are
subject to extensive legal and regulatory requirements, and,
from time to time, agencies of the U.S. Government
investigate whether such contracts were and are being conducted
in accordance with these requirements. The Company is currently
cooperating with the U.S. Government on several
investigations from which civil, criminal or administrative
proceedings could result and give rise to fines, penalties,
compensatory and treble damages, restitution
and/or
forfeitures. The Company does not currently anticipate that any
of these investigations will have a material adverse effect,
individually or in the aggregate, on its consolidated financial
position, results of operations or cash flows. However, under
U.S. Government regulations, an indictment of the Company
by a federal grand jury could result in the Company being
suspended for a period of time from eligibility for awards of
new government contracts or in a loss of export privileges. A
conviction could result in debarment from contracting with the
federal government for a specified term. In addition, all of the
Companys U.S. Government contracts: (1) are
subject to audit and various pricing and cost controls,
(2) include standard provisions for termination for the
convenience of the U.S. Government or for default, and
(3) are subject to cancellation if funds for contracts
become unavailable. Foreign government contracts generally
include comparable provisions relating to terminations for
convenience and default, as well as other procurement clauses
relevant to the foreign government.
Litigation
Matters
The Company has been subject to and is involved in litigation,
government investigations, proceedings, claims or assessments
and various contingent liabilities incidental to its businesses,
including those specified below. Furthermore, in connection with
certain business acquisitions, the Company has assumed some or
all claims against, and liabilities of, the acquired business,
including both asserted and unasserted claims and liabilities.
In accordance with SFAS No. 5,
Accounting for
Contingencies,
the Company records a liability when
management believes that it is both probable that a liability
has been incurred and the Company can reasonably estimate the
amount of the loss. Generally, the loss is recorded at the
amount the Company expects to resolve the liability. The
estimated amounts of liabilities recorded for pending and
threatened litigation is disclosed in Note 8. Amounts
recoverable from insurance contracts or third parties are
recorded as assets when deemed probable. At June 26, 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. Legal defense costs are expensed as incurred. 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.
While it is reasonably possible that an unfavorable outcome may
occur in one or more of the following matters, unless otherwise
stated below, the Company believes that it is not probable that
a loss has been incurred in any of
24
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
these matters. 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 (the trial court) 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 1994, Chrysler
Technologies Airborne Systems, Inc. (CTAS), a predecessor to L-3
Integrated Systems, performed as a subcontractor to GATX and
modified an additional five aircraft using the STCs. Two of the
aircraft modified by CTAS were owned by American International
Airways, the predecessor to Kalitta Air. In 1996, the FAA
determined that the engineering data provided by Hayes/Pemco
supporting the STCs was inadequate and issued an Airworthiness
Directive that effectively grounded the ten modified aircraft.
The Kalitta Air aircraft have not been in revenue service since
that date. The matter was tried in January 2001 against GATX and
CTAS with the jury finding fault on the part of GATX, but
rendering a unanimous defense verdict in favor of CTAS. Certain
co-defendants had settled prior to trial. The U.S. Court of
Appeals for the Ninth Circuit subsequently reversed and remanded
the trial courts summary judgment rulings in favor of CTAS
regarding a negligence claim by Kalitta Air, which asserts that
CTAS as an expert in aircraft modification should have known
that the STCs were deficient. The retrial began on
January 18, 2005, and ended on March 2, 2005 with a
deadlocked jury and mistrial. At the retrial, Kalitta Air
claimed damages of $235 million plus interest. By order
dated July 22, 2005, the trial court granted the
Companys motion for judgment as a matter of law as to
negligence dismissing that claim, denied the Companys
motion for judgment as a matter of law as to negligent
misrepresentation, and certified the decision for interlocutory
appeal to the U.S. Court of Appeals for the Ninth Circuit.
On October 8, 2008, the Ninth Circuit reversed the trial
courts dismissal of the negligence claim and affirmed the
trial courts ruling as to the negligent misrepresentation
claim. The case has been remanded to the trial court to
reconsider the negligence claim and for further proceedings on
the negligent misrepresentation claim. A court-ordered mediation
held on March 18, 2009 was unsuccessful. A hearing on the
Companys motion to dismiss the negligence claim was held
on April 30, 2009, after which the trial court determined
to take the matter under advisement and ordered the parties to
attend another mediation not later than September 4, 2009.
The case is currently scheduled to go to a third trial on
November 1, 2010. CTAS insurance carrier has accepted
defense of the matter and has retained counsel, subject to a
reservation of rights by the insurer to dispute its obligations
under the applicable insurance policies in the event of an
adverse finding.
Korean Lot II Program.
On April 4, 2005,
Lockheed Martin Corporation (Lockheed) filed a lawsuit in the
Federal District Court for the Northern District of Georgia
alleging misappropriation of proprietary information and breach
of a license agreement. The complaint alleges that L-3
Integrated Systems (L-3 IS) is in breach of its license
agreement with Lockheed and is infringing on Lockheeds
intellectual property rights as a result of its performance of a
subcontract awarded to L-3 IS for the Korean Lot II
program. On May 21, 2009, a jury found in favor of Lockheed
and awarded $30 million on the misappropriation claim,
$7.28 million on the breach of license agreement claim,
plus legal fees and expenses. On July 3, 2009, Lockheed
filed a motion with the court seeking approximately
$17 million in legal fees and expenses, and an injunction
prohibiting L-3s further use of the intellectual property
that was the basis of the jurys award. The Company
believes that the verdict and the damages awarded are
inconsistent with the law and evidence presented, and intends to
appeal following entry of the judgment by the trial court.
25
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
SafeView Arbitration.
The Company was previously subject
to an American Arbitration Association proceeding initiated by
Paladin Homeland Security Fund on behalf of all former
stockholders of SafeView, Inc. alleging violations of federal
securities laws, fraud, negligent misrepresentation, breach of
contract and unjust enrichment in connection with L-3s
acquisition of SafeView. On May 28, 2009, the arbitration
panel ruled in favor of L-3 and denied any award to the
claimants. Under the terms of the agreement governing the
acquisition, the decision is final, conclusive and binding on
the parties.
Aircrew Training and Rehearsal Support (ATARS)
Investigation.
Following a lawsuit filed by Lockheed on
April 6, 2006 in the U.S. District Court for the
Middle District of Florida against the Company and certain
individuals related to the ATARS II Program (which was settled
in November 2007), the Company received Grand Jury subpoenas in
connection with an investigation being conducted by the United
States Attorney for the Middle District of Florida, Orlando
Division. The subpoenas request the production of documents
related to Lockheeds allegations or produced in the civil
litigation settled in November 2007. The Company is cooperating
fully with the U.S. Government.
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 had received
subpoenas as well. The Company acquired Titan in July 2005. On
September 20, 2006, counsel for the Company was informed by
the New York Field Office of the DoJs Criminal Antitrust
Division that it was considering indictment. Additionally, a
former Titan employee received a letter from the DoJ indicating
that he was 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
26
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
DHL aircraft in midair at approximately 35,000 feet. All
crew and passengers of both planes were lost. Investigations by
the National Transportation Safety Board after the crash
revealed that both TCAS units were performing as designed. The
suits allege negligence and strict product liability based upon
the design of the units and the training provided to resolve
conflicting commands and seek approximately $315 million in
damages, including $150 million in punitive damages. The
Companys insurers have accepted defense of the matter and
retained counsel, subject to a reservation of rights by the
insurers to dispute their obligations under the applicable
insurance policies in the event of an adverse finding. The
matters were consolidated in the Federal Court in New Jersey,
which has dismissed the actions on the basis of forum non
conveniens. The plaintiffs re-filed a complaint on
April 23, 2007 with the Barcelona Courts Registry in
Spain. The trial for this matter was completed on April 22,
2009, and the parties are awaiting the Courts decision.
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 jet, and assert claims of negligence,
strict products liability and breach of warranty against ACSS
based on the design of the TCAS and the instructions provided
for its use. The complaints seek unspecified monetary damages,
including punitive damages. The Companys insurers have
accepted defense of this matter and have retained counsel,
subject to a reservation of rights by the insurers to dispute
their obligations under the applicable insurance policies in the
event of an adverse finding. On July 3, 2008, the District
Court dismissed the actions on the basis of forum non conveniens
on the grounds that Brazil was the location of the accident and
is more convenient for witnesses and document availability. On
August 1, 2008, the plaintiffs filed an appeal of this
ruling with the U.S. Court of Appeals for the Second
Circuit. Although the appeal is still pending, some of the
plaintiffs re-filed their complaints in the Lower Civil Court in
the Judicial District of Peixoto de Azevedo in Brazil on
July 3, 2009.
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. On
May 14, 2009, the Third Circuit Court of Appeals affirmed
the trial courts dismissal of the case against Pilatus for
lack of personal jurisdiction, vacated the trial courts
decision denying a motion to transfer the action to Colorado,
and remanded the case back to the trial court for further
proceedings. Discovery was stayed during the pendency of the
appeal, and the Company expects that additional discovery will
be conducted in this matter involving the potential transfer to
Colorado. The Companys insurers have accepted defense of
the matter and have retained counsel, subject to a reservation
of rights by the insurers to dispute their obligations under the
applicable insurance policies in the event of an adverse finding.
T-39 Sabreliner Aircraft.
On January 16, 2008, the
Company was served with three wrongful death lawsuits filed in
the U.S. District Court for the Southern District of New
York arising from the crash of a T-39 Sabreliner Aircraft near
Rome, GA on January 10, 2006. The Plaintiffs allege that
L-3 Vertex employed the pilot in command, David Roark, and
maintained the aircraft, and are seeking unspecified monetary
damages. The cases have been consolidated and transferred to the
U.S. District Court for the Northern District of Florida. A
mediation held in August 2008 was unsuccessful, and a settlement
conference is scheduled for August 2009. The Companys
insurers
27
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
have accepted defense of the matter and have retained counsel,
subject to a reservation of rights by the insurers to dispute
their obligations under the applicable insurance policies in the
event of an adverse finding.
Blackhawk Helicopter.
On August 7, 2008, a lawsuit
was filed in the U.S. District Court for the Southern
District of Texas relating to the August 22, 2007 crash of
a U.S. Army Blackhawk helicopter near Kirkuk, Iraq. The
complaint, which was brought on behalf of 14 passengers who were
killed in the crash, alleges that the crash was the result of
L-3 Vertexs negligence in connection with a phased
maintenance inspection performed approximately one week before
the crash, and seeks unspecified monetary damages, including
punitive damages. The parties are currently conducting discovery
in this matter. The Companys insurers have accepted
defense of this matter and have retained counsel, subject to a
reservation of rights by the insurers to dispute their
obligations under the applicable insurance policies in the event
of an adverse finding.
|
|
17.
|
Pension
and Other Postretirement Benefits
|
The following table summarizes the components of net periodic
benefit cost for the Companys pension and postretirement
benefit plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Postretirement Benefit Plans
|
|
|
|
Second Quarter Ended
|
|
|
First Half Ended
|
|
|
Second Quarter Ended
|
|
|
First Half Ended
|
|
|
|
June 26,
|
|
|
June 27,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
23
|
|
|
$
|
23
|
|
|
$
|
45
|
|
|
$
|
46
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
3
|
|
Interest cost
|
|
|
28
|
|
|
|
27
|
|
|
|
55
|
|
|
|
53
|
|
|
|
3
|
|
|
|
2
|
|
|
|
6
|
|
|
|
5
|
|
Expected return on plan assets
|
|
|
(23
|
)
|
|
|
(30
|
)
|
|
|
(45
|
)
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Amortization of prior service costs (credits)
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
Amortization of net losses (gains)
|
|
|
13
|
|
|
|
2
|
|
|
|
26
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
Curtailment loss
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
42
|
|
|
$
|
23
|
|
|
$
|
84
|
|
|
$
|
45
|
|
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $25 million to its
pension plans and $5 million to its postretirement benefit
plans during the first half ended June 26, 2009.
|
|
18.
|
Employee
Stock-Based Compensation
|
At its Annual Meeting of Stockholders held on April 28,
2009, the stockholders of L-3 Holdings approved the L-3
Communications Corporation 2009 Employee Stock Purchase Plan
(2009 ESPP), which became effective on July 1, 2009. As a
result, no new options to purchase shares of L-3 Holdings
common stock will be granted under the Companys prior
employee stock purchase plan (2001 ESPP).
Under the 2009 ESPP, eligible employees are offered options to
purchase shares of L-3 Holdings common stock at 85% of the
fair market value of L-3 Holdings common stock on the last
day of each
six-month
offering period. Eligible employees include all employees of the
Company, or of a subsidiary or affiliate of the Company that has
been designated to participate in the 2009 ESPP. Offering
periods begin on the first trading day in January and July of
each calendar year and end on the last trading day in June and
December of each calendar year. Fair market value is defined as
the average of
28
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
the highest and lowest sales price of a share of L-3
Holdings common stock on the last trading day of the
trading period. Share purchases are funded through payroll
deductions of up to 10% of a participating employees
compensation for each payroll period, or $21,250 each calendar
year. Employees may not purchase more than $25,000 worth of L-3
Holdings common stock for each year based on the value of
the common stock at the beginning of each offering period during
the year. After adjustment for the shares issued under the 2001
ESPP, the 2009 ESPP authorizes L-3 Holdings to issue up to
7.4 million shares. No shares will be issued under the 2009
ESPP until the conclusion of the first six-month offering
period, which began on July 1, 2009 and ends on
December 31, 2009.
|
|
19.
|
Supplemental
Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
First Half Ended
|
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Interest paid on outstanding debt
|
|
$
|
123
|
|
|
$
|
136
|
|
Income tax payments
|
|
|
191
|
|
|
|
195
|
|
Income tax refunds
|
|
|
2
|
|
|
|
3
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
First Half Ended
|
|
|
|
June 26,
|
|
|
June 27,
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2009
|
|
|
2008
(1)
|
|
|
2009
|
|
|
2008
(1)
|
|
|
|
(In millions)
|
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C
3
ISR
|
|
$
|
771
|
|
|
$
|
618
|
|
|
$
|
1,486
|
|
|
$
|
1,172
|
|
Government Services
|
|
|
1,070
|
|
|
|
1,102
|
|
|
|
2,077
|
|
|
|
2,214
|
|
AM&M
|
|
|
729
|
|
|
|
654
|
|
|
|
1,401
|
|
|
|
1,320
|
|
Specialized Products
|
|
|
1,435
|
|
|
|
1,377
|
|
|
|
2,721
|
|
|
|
2,586
|
|
Elimination of intercompany sales
|
|
|
(76
|
)
|
|
|
(29
|
)
|
|
|
(120
|
)
|
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
3,929
|
|
|
$
|
3,722
|
|
|
$
|
7,565
|
|
|
$
|
7,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C
3
ISR
|
|
$
|
95
|
|
|
$
|
67
|
|
|
$
|
173
|
|
|
$
|
129
|
|
Government Services
|
|
|
101
|
|
|
|
123
|
|
|
|
192
|
|
|
|
222
|
|
AM&M
|
|
|
51
|
|
|
|
42
|
|
|
|
117
|
|
|
|
108
|
|
Specialized
Products
(2)
|
|
|
170
|
|
|
|
143
|
|
|
|
311
|
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total
|
|
$
|
417
|
|
|
$
|
375
|
|
|
$
|
793
|
|
|
$
|
743
|
|
Litigation
gain
(3)
|
|
|
|
|
|
|
126
|
|
|
|
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
417
|
|
|
$
|
501
|
|
|
$
|
793
|
|
|
$
|
869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C
3
ISR
|
|
$
|
11
|
|
|
$
|
10
|
|
|
$
|
21
|
|
|
$
|
20
|
|
Government Services
|
|
|
9
|
|
|
|
9
|
|
|
|
19
|
|
|
|
18
|
|
AM&M
|
|
|
5
|
|
|
|
6
|
|
|
|
10
|
|
|
|
12
|
|
Specialized Products
|
|
|
29
|
|
|
|
27
|
|
|
|
57
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
54
|
|
|
$
|
52
|
|
|
$
|
107
|
|
|
$
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
June 26,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
(1)
|
|
|
|
(in millions)
|
|
|
Total Assets:
|
|
|
|
|
|
|
|
|
C
3
ISR
|
|
$
|
1,887
|
|
|
$
|
1,755
|
|
Government Services
|
|
|
3,523
|
|
|
|
3,494
|
|
AM&M
|
|
|
1,973
|
|
|
|
1,836
|
|
Specialized Products
|
|
|
6,529
|
|
|
|
6,319
|
|
Corporate
|
|
|
924
|
|
|
|
1,080
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
14,836
|
|
|
$
|
14,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As a result of certain
re-alignments in the Companys management and organization
structure as discussed in Note 2, sales of $4 million
and $7 million and operating income of $1 million were
reclassified from the
C
3
ISR
reportable segment to the Government Services reportable segment
for the quarter and first half ended June 27, 2008, and
sales of $1 million and $13 million and operating
income of less than $1 million and $2 million were
reclassified from the
C
3
ISR
reportable segment to the AM&M reportable segment for the
quarter and first half ended June 27, 2008. 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 $29 million of total assets was reclassified from the
C
3
ISR
reportable segment to the AM&M reportable segment.
|
|
(2)
|
|
Operating income for the
Specialized Products reportable segment includes: (i) a
gain of $12 million from the sale of the PMD product line
(see Note 4) and (ii) a non-cash impairment
charge of $28 million related to a write-down of
capitalized software development costs, which were both recorded
in the second quarter of 2008.
|
|
(3)
|
|
Represents a gain recorded in the
second quarter of 2008 for the reversal of a current liability
for pending and threatened litigation as a result of a
June 27, 2008 decision by the U.S. Court of Appeals
vacating an adverse 2006 jury verdict.
|
|
|
21.
|
Accounting
Standards Issued and Not Yet Implemented
|
In June 2009, the FASB issued SFAS 167,
Amendments to
FASB Interpretation No. 46(R)
, which changes the
approach to determining the primary beneficiary of a variable
interest entity (VIE) and requires companies to assess more
frequently whether they must consolidate VIEs. SFAS 167 is
effective for the Company beginning on January 1, 2010. The
Company is currently assessing the impact of SFAS 167.
In June 2009, the FASB issued the FASB Accounting Standards
Codification (Codification). The Codification will become the
single source for all authoritative GAAP recognized by the FASB
to be applied for financial statements issued for periods ended
after September 15, 2009. The Codification does not change
GAAP and will not have an effect on our financial position,
results of operations and cash flows.
In December 2008, the FASB issued FSP FAS 132(R)-1,
Employers Disclosures about Pensions and Other
Postretirement Benefit
(FSP FAS 132(R)-1). FSP
FAS 132(R)-1 expands the disclosures of an employers
defined benefit pension or other postretirement plan assets,
amending SFAS No. 132(R),
Employers
Disclosures about Pensions and Other Postretirement
Benefits
. FSP FAS 132(R)-1 is effective for the Company
beginning December 31, 2009. The adoption of FSP
FAS 132(R)-1 will not have a material effect on the
Companys financial position, results of operations and
cash flows, but will enhance the Companys pension and
other postretirement benefit plan assets disclosures.
30
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
22.
|
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.
31
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 June 26, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
603
|
|
|
$
|
(8
|
)
|
|
$
|
302
|
|
|
$
|
|
|
|
$
|
897
|
|
Billed receivables, net
|
|
|
|
|
|
|
324
|
|
|
|
812
|
|
|
|
196
|
|
|
|
|
|
|
|
1,332
|
|
Contracts in process
|
|
|
|
|
|
|
657
|
|
|
|
1,515
|
|
|
|
230
|
|
|
|
|
|
|
|
2,402
|
|
Other current assets
|
|
|
|
|
|
|
296
|
|
|
|
169
|
|
|
|
137
|
|
|
|
|
|
|
|
602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
1,880
|
|
|
|
2,488
|
|
|
|
865
|
|
|
|
|
|
|
|
5,233
|
|
Goodwill
|
|
|
|
|
|
|
1,202
|
|
|
|
5,807
|
|
|
|
1,118
|
|
|
|
|
|
|
|
8,127
|
|
Other assets
|
|
|
6
|
|
|
|
466
|
|
|
|
828
|
|
|
|
182
|
|
|
|
(6
|
)
|
|
|
1,476
|
|
Investment in and amounts due from consolidated subsidiaries
|
|
|
6,805
|
|
|
|
8,812
|
|
|
|
1,436
|
|
|
|
1
|
|
|
|
(17,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,811
|
|
|
$
|
12,360
|
|
|
$
|
10,559
|
|
|
$
|
2,166
|
|
|
$
|
(17,060
|
)
|
|
$
|
14,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
|
|
|
$
|
650
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
650
|
|
Other current liabilities
|
|
|
|
|
|
|
810
|
|
|
|
1,309
|
|
|
|
590
|
|
|
|
|
|
|
|
2,709
|
|
Other long-term liabilities
|
|
|
|
|
|
|
935
|
|
|
|
229
|
|
|
|
256
|
|
|
|
|
|
|
|
1,420
|
|
Long-term debt
|
|
|
700
|
|
|
|
3,854
|
|
|
|
|
|
|
|
|
|
|
|
(700
|
)
|
|
|
3,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
700
|
|
|
|
6,249
|
|
|
|
1,538
|
|
|
|
846
|
|
|
|
(700
|
)
|
|
|
8,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 shareholders equity
|
|
|
6,111
|
|
|
|
6,111
|
|
|
|
9,021
|
|
|
|
1,320
|
|
|
|
(16,452
|
)
|
|
|
6,111
|
|
Noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
6,111
|
|
|
|
6,111
|
|
|
|
9,021
|
|
|
|
1,320
|
|
|
|
(16,360
|
)
|
|
|
6,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
6,811
|
|
|
$
|
12,360
|
|
|
$
|
10,559
|
|
|
$
|
2,166
|
|
|
$
|
(17,060
|
)
|
|
$
|
14,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
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 June 26, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
893
|
|
|
$
|
2,588
|
|
|
$
|
485
|
|
|
$
|
(37
|
)
|
|
$
|
3,929
|
|
Cost of sales
|
|
|
18
|
|
|
|
788
|
|
|
|
2,325
|
|
|
|
436
|
|
|
|
(55
|
)
|
|
|
3,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(18
|
)
|
|
|
105
|
|
|
|
263
|
|
|
|
49
|
|
|
|
18
|
|
|
|
417
|
|
Interest and other income, net
|
|
|
|
|
|
|
33
|
|
|
|
1
|
|
|
|
1
|
|
|
|
(29
|
)
|
|
|
6
|
|
Interest expense
|
|
|
11
|
|
|
|
68
|
|
|
|
28
|
|
|
|
2
|
|
|
|
(40
|
)
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(29
|
)
|
|
|
70
|
|
|
|
236
|
|
|
|
48
|
|
|
|
29
|
|
|
|
354
|
|
(Benefit) provision for income taxes
|
|
|
(10
|
)
|
|
|
24
|
|
|
|
86
|
|
|
|
17
|
|
|
|
10
|
|
|
|
127
|
|
Equity in net income of consolidated subsidiaries
|
|
|
244
|
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
|
(423
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
225
|
|
|
|
225
|
|
|
|
150
|
|
|
|
31
|
|
|
|
(404
|
)
|
|
|
227
|
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to L-3
|
|
$
|
225
|
|
|
$
|
225
|
|
|
$
|
150
|
|
|
$
|
31
|
|
|
$
|
(406
|
)
|
|
$
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended June 27, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
745
|
|
|
$
|
2,466
|
|
|
$
|
532
|
|
|
$
|
(21
|
)
|
|
$
|
3,722
|
|
Cost of sales
|
|
|
15
|
|
|
|
650
|
|
|
|
2,241
|
|
|
|
477
|
|
|
|
(36
|
)
|
|
|
3,347
|
|
Litigation gain
|
|
|
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(15
|
)
|
|
|
221
|
|
|
|
225
|
|
|
|
55
|
|
|
|
15
|
|
|
|
501
|
|
Interest and other income, net
|
|
|
|
|
|
|
33
|
|
|
|
1
|
|
|
|
1
|
|
|
|
(28
|
)
|
|
|
7
|
|
Interest expense
|
|
|
10
|
|
|
|
66
|
|
|
|
27
|
|
|
|
1
|
|
|
|
(38
|
)
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(25
|
)
|
|
|
188
|
|
|
|
199
|
|
|
|
55
|
|
|
|
25
|
|
|
|
442
|
|
(Benefit) provision for income taxes
|
|
|
(10
|
)
|
|
|
67
|
|
|
|
76
|
|
|
|
21
|
|
|
|
10
|
|
|
|
164
|
|
Equity in net income of consolidated subsidiaries
|
|
|
290
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
(444
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
275
|
|
|
|
275
|
|
|
|
123
|
|
|
|
34
|
|
|
|
(429
|
)
|
|
|
278
|
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to L-3
|
|
$
|
275
|
|
|
$
|
275
|
|
|
$
|
123
|
|
|
$
|
34
|
|
|
$
|
(432
|
)
|
|
$
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
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 first half ended June 26, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
1,687
|
|
|
$
|
5,032
|
|
|
$
|
910
|
|
|
$
|
(64
|
)
|
|
$
|
7,565
|
|
Cost of sales
|
|
|
35
|
|
|
|
1,485
|
|
|
|
4,536
|
|
|
|
815
|
|
|
|
(99
|
)
|
|
|
6,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(35
|
)
|
|
|
202
|
|
|
|
496
|
|
|
|
95
|
|
|
|
35
|
|
|
|
793
|
|
Interest and other income, net
|
|
|
|
|
|
|
63
|
|
|
|
1
|
|
|
|
2
|
|
|
|
(57
|
)
|
|
|
9
|
|
Interest expense
|
|
|
22
|
|
|
|
134
|
|
|
|
55
|
|
|
|
3
|
|
|
|
(79
|
)
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(57
|
)
|
|
|
131
|
|
|
|
442
|
|
|
|
94
|
|
|
|
57
|
|
|
|
667
|
|
(Benefit) provision for income taxes
|
|
|
(20
|
)
|
|
|
44
|
|
|
|
161
|
|
|
|
34
|
|
|
|
20
|
|
|
|
239
|
|
Equity in net income of consolidated subsidiaries
|
|
|
461
|
|
|
|
337
|
|
|
|
|
|
|
|
|
|
|
|
(798
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
424
|
|
|
|
424
|
|
|
|
281
|
|
|
|
60
|
|
|
|
(761
|
)
|
|
|
428
|
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to L-3
|
|
$
|
424
|
|
|
$
|
424
|
|
|
$
|
281
|
|
|
$
|
60
|
|
|
$
|
(765
|
)
|
|
$
|
424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the first half ended June 27, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
1,401
|
|
|
$
|
4,869
|
|
|
$
|
1,005
|
|
|
$
|
(47
|
)
|
|
$
|
7,228
|
|
Cost of sales
|
|
|
30
|
|
|
|
1,205
|
|
|
|
4,427
|
|
|
|
900
|
|
|
|
(77
|
)
|
|
|
6,485
|
|
Litigation gain
|
|
|
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(30
|
)
|
|
|
322
|
|
|
|
442
|
|
|
|
105
|
|
|
|
30
|
|
|
|
869
|
|
Interest and other income, net
|
|
|
|
|
|
|
67
|
|
|
|
2
|
|
|
|
3
|
|
|
|
(57
|
)
|
|
|
15
|
|
Interest expense
|
|
|
21
|
|
|
|
142
|
|
|
|
54
|
|
|
|
3
|
|
|
|
(78
|
)
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(51
|
)
|
|
|
247
|
|
|
|
390
|
|
|
|
105
|
|
|
|
51
|
|
|
|
742
|
|
(Benefit) provision for income taxes
|
|
|
(19
|
)
|
|
|
87
|
|
|
|
146
|
|
|
|
39
|
|
|
|
19
|
|
|
|
272
|
|
Equity in net income of consolidated subsidiaries
|
|
|
496
|
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
464
|
|
|
|
464
|
|
|
|
244
|
|
|
|
66
|
|
|
|
(768
|
)
|
|
|
470
|
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to L-3
|
|
$
|
464
|
|
|
$
|
464
|
|
|
$
|
244
|
|
|
$
|
66
|
|
|
$
|
(774
|
)
|
|
$
|
464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
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 first half ended June 26, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
$
|
384
|
|
|
$
|
|
|
|
$
|
423
|
|
|
$
|
105
|
|
|
$
|
(384
|
)
|
|
$
|
528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business acquisitions, net of cash acquired
|
|
|
|
|
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(82
|
)
|
Other investing activities
|
|
|
(35
|
)
|
|
|
(22
|
)
|
|
|
(55
|
)
|
|
|
(3
|
)
|
|
|
35
|
|
|
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(35
|
)
|
|
|
(104
|
)
|
|
|
(55
|
)
|
|
|
(3
|
)
|
|
|
35
|
|
|
|
(162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock repurchased
|
|
|
(301
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(301
|
)
|
Other financing activities
|
|
|
(48
|
)
|
|
|
(13
|
)
|
|
|
(295
|
)
|
|
|
(38
|
)
|
|
|
349
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(349
|
)
|
|
|
(13
|
)
|
|
|
(295
|
)
|
|
|
(38
|
)
|
|
|
349
|
|
|
|
(346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
|
|
|
|
(117
|
)
|
|
|
73
|
|
|
|
74
|
|
|
|
|
|
|
|
30
|
|
Cash and cash equivalents, beginning of the period
|
|
|
|
|
|
|
720
|
|
|
|
(81
|
)
|
|
|
228
|
|
|
|
|
|
|
|
867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the period
|
|
$
|
|
|
|
$
|
603
|
|
|
$
|
(8
|
)
|
|
$
|
302
|
|
|
$
|
|
|
|
$
|
897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the first half ended June 27, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
$
|
574
|
|
|
$
|
2
|
|
|
$
|
538
|
|
|
$
|
113
|
|
|
$
|
(599
|
)
|
|
$
|
628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business acquisitions, net of cash acquired
|
|
|
|
|
|
|
(218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(218
|
)
|
Other investing activities
|
|
|
(56
|
)
|
|
|
(20
|
)
|
|
|
(28
|
)
|
|
|
(9
|
)
|
|
|
56
|
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(56
|
)
|
|
|
(238
|
)
|
|
|
(28
|
)
|
|
|
(9
|
)
|
|
|
56
|
|
|
|
(275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock repurchased
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(500
|
)
|
Other financing activities
|
|
|
(18
|
)
|
|
|
7
|
|
|
|
(451
|
)
|
|
|
(97
|
)
|
|
|
543
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) from financing activities
|
|
|
(518
|
)
|
|
|
7
|
|
|
|
(451
|
)
|
|
|
(97
|
)
|
|
|
543
|
|
|
|
(516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
|
|
|
|
(229
|
)
|
|
|
59
|
|
|
|
12
|
|
|
|
|
|
|
|
(158
|
)
|
Cash and cash equivalents, beginning of the period
|
|
|
|
|
|
|
632
|
|
|
|
(89
|
)
|
|
|
237
|
|
|
|
|
|
|
|
780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the period
|
|
$
|
|
|
|
$
|
403
|
|
|
$
|
(30
|
)
|
|
$
|
249
|
|
|
$
|
|
|
|
$
|
622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
ITEM 2.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial
Section Roadmap
Managements discussion and analysis (MD&A) can be
found on pages 36 to 49, and our unaudited condensed
consolidated financial statements and related notes contained in
this quarterly report can be found on pages 1 to 35. The
following table is designed to assist in your review of
MD&A.
|
|
|
Topic
|
|
Location
|
|
Overview and Outlook:
|
|
|
L-3s Business
|
|
Pages 36 37
|
Key Performance Measures
|
|
Pages 37 38
|
Other Events
|
|
Pages 38 39
|
Business Acquisitions and Business and Product Line Dispositions
|
|
Page 39
|
Results of Operations (includes business segments)
|
|
Pages 39 45
|
Liquidity and Capital Resources:
|
|
|
Anticipated Sources of Cash Flow
|
|
Pages 45 46
|
Balance Sheet
|
|
Pages 46 47
|
Statement of Cash Flows
|
|
Pages 47 49
|
Legal Proceedings and Contingencies
|
|
Page 49
|
Overview
and Outlook
L-3s
Business
L-3 is a prime system contractor in aircraft modernization and
maintenance, Command, Control, Communications, Intelligence,
Surveillance and Reconnaissance
(C
3
ISR)
systems, and government services. L-3 is also a leading provider
of high technology products, subsystems and systems. Our
customers include the U.S. Department of Defense (DoD) and
its prime contractors, U.S. Government intelligence
agencies, the U.S. Department of Homeland Security (DHS),
U.S. Department of State (DoS), U.S. Department of
Justice (DoJ), allied foreign governments, domestic and
international commercial customers, and select other
U.S. federal, state and local government agencies.
For the year ended December 31, 2008, we generated sales of
$14.9 billion. The table below presents a summary of our
2008 sales by major category of end customer. We currently do
not anticipate significant changes to our end customer sales mix
for the year ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
2008 Sales
|
|
|
Total Sales
|
|
|
|
(in millions)
|
|
|
|
|
|
DoD
|
|
$
|
11,059
|
|
|
|
74
|
%
|
Other U.S. Government
|
|
|
1,067
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Total U.S. Government
|
|
|
12,126
|
|
|
|
81
|
%
|
Foreign Government
|
|
|
1,099
|
|
|
|
7
|
|
Commercial foreign
|
|
|
987
|
|
|
|
7
|
|
Commercial domestic
|
|
|
689
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
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 20 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
36
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 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 20 to our unaudited condensed consolidated financial
statements contained in this quarterly report for the prior
period amounts reclassified between reportable segments.
Key
Performance Measures
The primary financial performance measures that L-3 uses to
manage its businesses and monitor results of operations are
sales growth and operating income growth. Management believes
that these financial performance measures are the primary growth
drivers for L-3s earnings per common share and net cash
from operating activities. L-3s business strategy is
focused on increasing sales from organic growth and select
business acquisitions that add important new products, services,
technologies, programs or customers in areas that complement
L-3s existing businesses. We define organic sales growth
as the increase or decrease in sales for the current period
compared to the prior period, excluding sales in the:
(1) current period from business and product line
acquisitions that are included in L-3s actual results of
operations for less than twelve months, and (2) prior
period from business and product line divestitures that are
included in L-3s actual results of operations for the
twelve-month period prior to the divestiture date. The two main
determinants of our operating income growth are sales growth and
improvements in operating margin. We define operating margin as
operating income as a percentage of sales.
Sales Growth.
Our average annual sales growth for
the five years ended December 31, 2008 was 25%, with
average annual organic sales growth of approximately 10% and
average annual sales growth from business acquisitions of
approximately 15%. Sales growth for the year ended
December 31, 2008 was 7%, comprised of organic sales growth
of 5%, and sales growth from business acquisitions, net of
divestitures, of 2%. Sales growth for the quarter ended
June 26, 2009 (2009 Second Quarter) was 6%, comprised of
organic sales growth of 5%, and sales growth from business
acquisitions, net of divestitures, of 1%. Sales growth for the
first half ended June 26, 2009 (2009 First Half) was 5%,
comprised of organic sales growth of 3%, and sales growth from
business acquisitions, net of divestitures, of 2%. We expect our
sales growth rate going forward to be significantly less than
our 25% average annual sales growth we experienced for the five
years ended December 31, 2008.
For the year ended December 31, 2008, our Special
Operations Forces Support Activity (SOFSA) contract with the
U.S. Special Operations Command (SOCOM) generated
approximately $400 million, or 2.7% of our sales. On
March 3, 2009, SOCOM announced that it did not select our
proposal for the next SOFSA contract. We protested SOCOMs
selection with the U.S. Government Accountability Office
(GAO). In response to our protest, SOCOM has taken corrective
action and amended the solicitation. Revised proposals from
bidders are required to be submitted on August 6, 2009. We
continue to perform on the current SOFSA contract pending the
outcome of the competition. The period of performance for our
current SOFSA contract ends on October 24, 2009. We can
provide no assurance as to the outcome of the competition for
the next SOFSA contract.
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. We expect
future DoD budgets, including supplemental appropriations, to
grow at a significantly slower pace than the past several years,
and to also possibly flatten. However, we believe that our
businesses should
37
be able to continue to generate modest organic sales growth
because we anticipate the defense budget and spending priorities
will continue to focus on areas that match several of L-3s
core competencies, such as communications and ISR, sensors,
special operations support, helicopter crew training and
maintenance and simulation & training.
Operating Income Growth.
Our consolidated operating
income was $417 million for the 2009 Second Quarter, a
decrease of 17% from $501 million for the quarter ended
June 27, 2008 (2008 Second Quarter). For the 2009 First
Half operating income was $793 million, a decrease of 9%
from $869 million for the first half ended June 27,
2008 (2008 First Half). Our consolidated operating margin was
10.6% for the 2009 Second Quarter, a decrease of 290 basis
points from 13.5% for the 2008 Second Quarter. Our consolidated
operating margin was 10.5% for the 2009 First Half, a decrease
of 150 basis points from 12.0% for the 2008 First Half. As
discussed in the next paragraph, operating income and operating
margin for 2008 included a net gain of $110 million from
certain items and 2009 was impacted by higher pension expense.
The 2008 Second Quarter and 2008 First Half results were
impacted by three items that, in the aggregate, increased
operating income by $110 million during these periods.
These three items are collectively referred to as the Q2 2008
Items and are further discussed below under the caption
Other Events. In addition, higher pension expense
for the 2009 Second Quarter compared to the 2008 Second Quarter
reduced operating income by $16 million ($10 million
after income taxes, or $0.09 per diluted share) and
$35 million ($22 million after income taxes, or $0.18
per diluted share) for the 2009 First Half compared to the 2008
First Half. The Q2 2008 items increased the 2008 Second Quarter
operating margin by 300 basis points and the 2008 First
Half by 150 basis points. The increase in pension expense
reduced operating margin by 40 basis points for the 2009
Second Quarter and 50 basis points for the 2009 First Half.
The pension expense increase is primarily due to the actuarial
loss that we experienced in 2008 as a result of the decline in
the fair value of our pension plan assets which is being
amortized as a component of pension expense beginning in 2009.
See segment results below for additional discussion of segment
operating income and margin results.
Excluding the Q2 2008 Items and the increase in our 2009 pension
expense, 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 continue to expand our operating margin at the
rates we expect and our operating margin could also decrease.
Additionally, in the future, select business acquisitions and
select new business, including contract renewals and new
contracts, could reduce our operating margin if their margins
are lower than L-3s existing operating margin. Our
business objectives include growing earnings per common share
and net cash from operating activities.
Other
Events
Accounting Standards Implemented.
We adopted eight
new accounting standards during the 2009 First Half, six of
which were effective January 1, 2009. 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. The
adoption of these standards reduced net income attributable to
L-3 by $3 million ($0.04 per diluted share) for the
2009 Second Quarter and $6 million ($0.07 per diluted
share) for the 2009 First Half. 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.
Q2 2008 Items.
The Q2 2008 Items increased
consolidated operating income by $110 million, income
before taxes by $117 million, net income by
$71 million and diluted earnings per share (EPS) by $0.57.
The Q2 2008 Items were:
|
|
|
|
|
A gain of $133 million ($81 million after income
taxes, or $0.65 per diluted share) relating to the reversal of a
$126 million liability as a result of a June 27, 2008
decision by the U.S. Court of Appeals vacating an adverse
2006 jury verdict and the reversal of $7 million of accrued
interest (the Litigation Gain),
|
|
|
|
A gain of $12 million ($7 million after income taxes,
or $0.06 per diluted share) relating to the sale of a product
line (the Product Line Divestiture Gain), and
|
38
|
|
|
|
|
A non-cash impairment charge of $28 million
($17 million after income taxes, or $0.14 per diluted
share) relating to a write-down of capitalized software
development costs associated with a general aviation product
(the Impairment Charge).
|
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 Half, we used $82 million of cash
(net of cash received) primarily 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 Second Quarter compared with the 2008 Second Quarter and
the 2009 First Half compared with the 2008 First Half.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
|
|
|
First Half Ended
|
|
|
|
|
|
|
June 26,
|
|
|
June 27,
|
|
|
Increase/
|
|
|
June 26,
|
|
|
June 27,
|
|
|
Increase/
|
|
(in millions, except per share data)
|
|
2009
|
|
|
2008
(1)
|
|
|
(decrease)
|
|
|
2009
|
|
|
2008
(1)
|
|
|
(decrease)
|
|
|
Net sales
|
|
$
|
3,929
|
|
|
$
|
3,722
|
|
|
$
|
207
|
|
|
$
|
7,565
|
|
|
$
|
7,228
|
|
|
$
|
337
|
|
Operating income
|
|
$
|
417
|
|
|
$
|
501
|
|
|
$
|
(84
|
)
|
|
$
|
793
|
|
|
$
|
869
|
|
|
$
|
(76
|
)
|
Litigation
Gain
(2)
|
|
|
|
|
|
|
(126
|
)
|
|
|
126
|
|
|
|
|
|
|
|
(126
|
)
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
417
|
|
|
$
|
375
|
|
|
$
|
42
|
|
|
$
|
793
|
|
|
$
|
743
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
10.6
|
%
|
|
|
13.5
|
%
|
|
|
(290
|
) bpts
|
|
|
10.5
|
%
|
|
|
12.0
|
%
|
|
|
(150
|
) bpts
|
Litigation Gain
|
|
|
|
%
|
|
|
(3.4
|
)%
|
|
|
340
|
bpts
|
|
|
|
%
|
|
|
(1.7
|
)%
|
|
|
170
|
bpts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating margin
|
|
|
10.6
|
%
|
|
|
10.1
|
%
|
|
|
50
|
bpts
|
|
|
10.5
|
%
|
|
|
10.3
|
%
|
|
|
20
|
bpts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense and other income
|
|
$
|
63
|
|
|
$
|
59
|
|
|
$
|
4
|
|
|
$
|
126
|
|
|
$
|
127
|
|
|
$
|
(1
|
)
|
Effective income tax rate
|
|
|
35.9
|
%
|
|
|
37.1
|
%
|
|
|
(120
|
)bpts
|
|
|
35.8
|
%
|
|
|
36.7
|
%
|
|
|
(90
|
)bpts
|
Net income attributable to L-3
|
|
$
|
225
|
|
|
$
|
275
|
|
|
$
|
(50
|
)
|
|
$
|
424
|
|
|
$
|
464
|
|
|
$
|
(40
|
)
|
Diluted earnings per share
|
|
$
|
1.90
|
|
|
$
|
2.21
|
|
|
$
|
(0.31
|
)
|
|
$
|
3.56
|
|
|
$
|
3.72
|
|
|
$
|
(0.16
|
)
|
Diluted weighted average common shares outstanding
|
|
|
117.2
|
|
|
|
123.5
|
|
|
|
(6.3
|
)
|
|
|
118.0
|
|
|
|
123.8
|
|
|
|
(5.8
|
)
|
|
|
|
(1)
|
|
The 2008 Second Quarter and First
Half include: (1) a gain of $12 million
($7 million after income taxes, or $0.06 per share)
relating to the sale of a product line and (2) a non-cash
impairment charge of $28 million ($17 million after
income taxes, or $0.14 per share) related to a write-down of
capitalized software development costs associated with a general
aviation product.
|
|
(2)
|
|
The Litigation Gain
represents a June 27, 2008 decision by the U.S. Court of
Appeals vacating an adverse 2006 jury verdict. In the second
quarter of 2008, we recorded a gain of $133 million
($81 million after income taxes, or $0.65 per diluted
share), comprised of a $126 million reversal of a current
liability for pending and threatened litigation and the reversal
of $7 million of accrued interest.
|
39
Net sales:
For the 2009 Second Quarter, consolidated
net sales increased 6% compared to the 2008 Second Quarter
driven primarily by growth in the
C
3
ISR,
AM&M and Specialized Products reportable segments. These
increases were partially offset by a decrease in the Government
Services reportable segment driven primarily by lower linguist
services (discussed below under the Government Services
reportable segment). The increase in consolidated net sales from
acquired businesses net of divestitures was $41 million, or
1%. Sales from services increased by $88 million to
$2,045 million, representing approximately 52% of
consolidated net sales for the 2009 Second Quarter, compared to
$1,957 million, or 53% of consolidated net sales for the
2008 Second Quarter. The increase in service sales was primarily
due to an increase in organic sales growth in ISR systems,
system field support services, information technology (IT)
support services, and intelligence support and training
services. These increases were partially offset by a decrease
for linguist services and lower volume for Contract Field
Services (CFS). Sales from products increased by
$119 million to $1,884 million, representing
approximately 48% of consolidated net sales for the 2009 Second
Quarter, compared to $1,765 million, or 47% of consolidated
net sales for the 2008 Second 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, training &
simulation, naval power & control systems, and
microwave products. These increases were partially offset by a
decrease in commercial aviation products and commercial
shipbuilding products. See the reportable segment results below
for additional discussions of our sales growth.
For the 2009 First Half, consolidated net sales increased 5%
compared to the 2008 First Half driven primarily by growth in
the
C
3
ISR,
AM&M and Specialized Products reportable segments. These
increases were partially offset by a decrease in the Government
Services reportable segment driven primarily by lower linguist
services (discussed below under the Government Services
reportable segment). The increase in net sales from acquired
businesses net of divestitures was $117 million, or 2%.
Sales from services increased by $59 million to
$3,919 million, representing approximately 52% of
consolidated net sales for the 2009 First Half, compared to
$3,860 million, or 53% of consolidated net sales for the
2008 First Half. The increase in service sales was primarily due
to organic sales growth in ISR systems, system field support
services, systems and software engineering and sustainment
services, and logistics support services. These increases were
partially offset by a decrease for linguist services and lower
volume for CFS. Sales from products increased by
$278 million to $3,646 million, representing
approximately 48% of consolidated net sales for the 2009 First
Half, compared to $3,368 million, or 47% of consolidated
net sales for the 2008 First Half. 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, training &
simulation, microwave products, combat propulsion systems, and
naval power & control systems. These increases were
partially offset by a decrease in aircraft modernization for
international customers, commercial aviation products and
commercial shipbuilding products. See the reportable segment
results below for additional discussions of our sales growth.
Operating income and operating margin:
The 2009
Second Quarter operating income decreased by $84 million,
or 17%, to $417 million from $501 million for the 2008
Second Quarter. The 2009 First Half operating income decreased
by $76 million, or 9%, to $793 million from
$869 million for the 2008 First Half. The Q2 2008 Items
increased consolidated operating income in the 2008 Second
Quarter and 2008 First Half by an aggregate $110 million.
Higher pension expense in the 2009 Second Quarter decreased
operating income by $16 million ($10 million after
income taxes, or $0.09 per diluted share) and $35 million
($22 million after income taxes, or $0.18 per diluted
share) for the 2009 First Half.
Operating margin for the 2009 Second Quarter decreased by
290 basis points to 10.6% compared to 13.5% for the 2008
Second Quarter and decreased by 150 basis points to 10.5%
compared to 12.0% for the 2008 First Half. The Q2 2008 Items
increased the 2008 Second Quarter operating margin by
300 basis points and the 2008 First Half operating margin
by 150 basis points. The increase in pension expense
reduced the 2009 Second Quarter operating margin by
40 basis points, and the 2009 First Half by 50 basis
points. See segment results below for additional discussion of
segment operating income and margin results.
Net interest expense and other income:
Net interest
expense and other income for the 2009 Second Quarter increased
compared to the same period last year primarily because of the
reversal of $7 million of accrued interest during the 2008
Second Quarter in connection with the Litigation Gain. This
increase was partially offset by lower interest expense on our
term loans, which are based on variable interest rates.
40
Net interest expense and other income for the 2009 First Half
decreased compared to the same period last year driven by lower
interest expense on our term loans substantially offset by
$7 million of accrued interest reversed during the 2008
Second Quarter in connection with the Litigation Gain and lower
interest income on cash investments.
Effective income tax rate:
The effective tax rate
for the 2009 Second Quarter decreased by 120 basis points
compared to the 2008 Second Quarter. Excluding the Q2 2008
Items, the effective income tax rate for the 2009 Second Quarter
decreased by 40 basis points. The effective tax rate for
the 2009 First Half decreased by 90 basis points compared
to the same period last year. Excluding the Q2 2008 Items, the
effective income tax rate for the 2009 First Half decreased by
40 basis points. The decrease for both 2009 Second Quarter
and 2009 First Half is primarily due to the U.S. Federal
research and experimentation tax credit that was re-enacted
during the quarter ended December 31, 2008, and for the
2009 First Half, is partially offset by higher income taxes on
foreign income.
Diluted earnings per share and net
income:
L-3s diluted earnings per share (diluted
EPS) decreased by $0.31 to $1.90 for the 2009 Second Quarter
from $2.21 for the 2008 Second Quarter, and net income
attributable to L-3 decreased by $50 million, or 18%, to
$225 million from $275 million for the same periods.
Excluding the Q2 2008 Items, diluted EPS increased $0.26 to
$1.90 compared to $1.64 and net income attributable to L-3
increased $21 million to $225 million compared to
$204 million.
In the 2009 First Half as compared to the 2008 First Half,
diluted EPS decreased by $0.16 to $3.56 from $3.72, and net
income attributable to L-3 decreased by $40 million, or 9%,
to $424 million from $464 million. Excluding the Q2
2008 Items, diluted EPS increased $0.41 to $3.56 compared to
$3.15 and net income attributable to L-3 increased
$31 million to $424 million compared to
$393 million.
Diluted weighted average shares outstanding:
Diluted
weighted average shares outstanding for the 2009 Second Quarter
decreased by 6.3 million shares or 5%, compared to the 2008
Second Quarter and for the 2009 First Half decreased by
5.8 million shares or 5%, compared to the 2008 First Half.
The decrease in both periods 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.
41
Reportable
Segment Results of Operations
The table below presents selected data by reportable segment
reconciled to consolidated totals. See Note 20 to our
unaudited condensed consolidated financial statements contained
in this quarterly report for our reportable segment data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
First Half Ended
|
|
|
|
June 26,
|
|
|
June 27,
|
|
|
June 26,
|
|
|
June 27,
|
|
(dollars in millions)
|
|
2009
|
|
|
2008
(1)
|
|
|
2009
|
|
|
2008
(1)
|
|
|
Net
Sales:
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C
3
ISR
|
|
$
|
761.4
|
|
|
$
|
616.2
|
|
|
$
|
1,471.5
|
|
|
$
|
1,169.0
|
|
Government Services
|
|
|
1,069.0
|
|
|
|
1,098.7
|
|
|
|
2,073.9
|
|
|
|
2,207.0
|
|
AM&M
|
|
|
695.3
|
|
|
|
653.8
|
|
|
|
1,358.8
|
|
|
|
1,319.3
|
|
Specialized Products
|
|
|
1,403.7
|
|
|
|
1,353.2
|
|
|
|
2,660.9
|
|
|
|
2,532.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,929.4
|
|
|
$
|
3,721.9
|
|
|
$
|
7,565.1
|
|
|
$
|
7,228.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C
3
ISR
|
|
$
|
95.1
|
|
|
$
|
66.9
|
|
|
$
|
173.3
|
|
|
$
|
128.9
|
|
Government Services
|
|
|
101.2
|
|
|
|
122.6
|
|
|
|
191.8
|
|
|
|
222.1
|
|
AM&M
|
|
|
51.0
|
|
|
|
42.2
|
|
|
|
116.8
|
|
|
|
108.2
|
|
Specialized Products
|
|
|
169.6
|
|
|
|
143.3
|
(3)
|
|
|
310.9
|
|
|
|
283.8
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
|
416.9
|
|
|
|
375.0
|
(3)
|
|
|
792.8
|
|
|
|
743.0
|
(3)
|
Litigation gain
|
|
|
|
|
|
|
126.0
|
|
|
|
|
|
|
|
126.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income
|
|
$
|
416.9
|
|
|
$
|
501.0
|
|
|
$
|
792.8
|
|
|
$
|
869.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C
3
ISR
|
|
|
12.5
|
%
|
|
|
10.9
|
%
|
|
|
11.8
|
%
|
|
|
11.0
|
%
|
Government Services
|
|
|
9.5
|
%
|
|
|
11.2
|
%
|
|
|
9.2
|
%
|
|
|
10.1
|
%
|
AM&M
|
|
|
7.3
|
%
|
|
|
6.5
|
%
|
|
|
8.6
|
%
|
|
|
8.2
|
%
|
Specialized Products
|
|
|
12.1
|
%
|
|
|
10.6
|
%
(3)
|
|
|
11.7
|
%
|
|
|
11.2
|
%
(3)
|
Total segment operating income
|
|
|
10.6
|
%
|
|
|
10.1
|
%
(3)
|
|
|
10.5
|
%
|
|
|
10.3
|
%
(3)
|
Litigation gain
|
|
|
|
|
|
|
3.4
|
%
|
|
|
|
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating margin
|
|
|
10.6
|
%
|
|
|
13.5
|
%
|
|
|
10.5
|
%
|
|
|
12.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $3.4 million and $6.6 million and operating income
of $0.8 million and $1.1 million were reclassified
from the
C
3
ISR
reportable segment to the Government Services reportable segment
for the quarter and first half ended June 27, 2008, and
sales of $1.5 million and $11.7 million and operating
income of less than $1 million and $1.5 million and
were reclassified from the
C
3
ISR
reportable segment to the AM&M reportable segment for the
quarter and first half ended June 27, 2008.
|
|
(2)
|
|
Net sales are after intercompany
eliminations.
|
|
(3)
|
|
Total segment operating income
includes the $12 million Product Line Divestiture gain and
the $28 million Impairment Charge, which were recorded in
the Specialized Products reportable segment. The Product Line
Divestiture gain and Impairment Charge, in the aggregate,
reduced total segment operating margin by 40 basis points
and operating margin for the Specialized Products reportable
segment by 110 basis points for the 2008 Second Quarter.
For the 2008 First Half, these items reduced total segment
operating margin by 20 basis points and operating margin
for the Specialized Products reportable segment by 60 basis
points.
|
42
C
3
ISR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
|
|
|
First Half Ended
|
|
|
|
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
|
($ in millions)
|
|
2009
|
|
|
2008
|
|
|
Increase
|
|
|
2009
|
|
|
2008
|
|
|
Increase
|
|
|
Net sales
|
|
$
|
761.4
|
|
|
$
|
616.2
|
|
|
$
|
145.2
|
|
|
$
|
1,471.5
|
|
|
$
|
1,169.0
|
|
|
$
|
302.5
|
|
Operating income
|
|
|
95.1
|
|
|
|
66.9
|
|
|
|
28.2
|
|
|
|
173.3
|
|
|
|
128.9
|
|
|
|
44.4
|
|
Operating margin
|
|
|
12.5
|
%
|
|
|
10.9
|
%
|
|
|
160
|
bpts
|
|
|
11.8
|
%
|
|
|
11.0
|
%
|
|
|
80
|
bpts
|
C
3
ISR net
sales for the 2009 Second Quarter increased by 24% compared to
the 2008 Second Quarter primarily due to increased demand and
new business from the U.S. Department of Defense (DoD) for
airborne ISR and networked communication systems for manned and
unmanned platforms.
C
3
ISR
operating income for the 2009 Second Quarter increased by 42%
compared to the 2008 Second Quarter. Operating margin increased
by 160 basis points. Higher sales volume, improved contract
performance and a more favorable sales mix for airborne ISR and
networked communication systems increased operating margin by
250 basis points. These increases were partially offset by
higher pension expense of $7 million, which reduced
operating margin by 90 basis points.
C
3
ISR net
sales for the 2009 First Half increased by 26% compared to the
2008 First Half primarily due to increased demand and new
business from the DoD for airborne ISR and networked
communication systems for manned and unmanned platforms.
C
3
ISR
operating income for the 2009 First Half increased 34% compared
to the 2008 First Half. Operating margin increased by
80 basis points. Higher sales volume, improved contract
performance and a more favorable sales mix for airborne ISR and
networked communication systems increased operating margin by
160 basis points. Cost improvements on an international
airborne ISR system contract due to a restructuring of contract
deliverables with a customer increased operating margin by
20 basis points. These increases were partially offset by
higher pension expense of $15 million, which reduced
operating margin by 100 basis points.
Government
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
|
|
|
First Half Ended
|
|
|
|
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
|
($ in millions)
|
|
2009
|
|
|
2008
|
|
|
Decrease
|
|
|
2009
|
|
|
2008
|
|
|
Decrease
|
|
|
Net sales
|
|
$
|
1,069.0
|
|
|
$
|
1,098.7
|
|
|
$
|
(29.7
|
)
|
|
$
|
2,073.9
|
|
|
$
|
2,207.0
|
|
|
$
|
(133.1
|
)
|
Operating income
|
|
|
101.2
|
|
|
|
122.6
|
|
|
|
(21.4
|
)
|
|
|
191.8
|
|
|
|
222.1
|
|
|
|
(30.3
|
)
|
Operating margin
|
|
|
9.5
|
%
|
|
|
11.2
|
%
|
|
|
(170
|
) bpts
|
|
|
9.2
|
%
|
|
|
10.1
|
%
|
|
|
(90
|
)bpts
|
Government Services net sales for the 2009 Second Quarter
decreased by 3% compared to the 2008 Second Quarter. Sales
declines in linguist services of $72 million were partially
offset by $10 million of sales increases primarily for
information technology (IT) support services for the
U.S. Special Operations Command (USSOCOM) and intelligence
support and training services for the U.S. Army and
U.S. Government agencies. Linguist services declined due to
L-3s transition from a prime contractor to a subcontractor
on the current U.S. Army linguist contract on June 9,
2008. The increase in net sales from acquired businesses was
$32 million, or 3%.
Government Services operating income for the 2009 Second Quarter
decreased by 17% compared to the 2008 Second Quarter. Operating
margin for the 2008 Second Quarter decreased by 170 basis
points. Lower margins on select contract renewals and higher
profit margins on certain fixed-price contracts in the 2008
Second Quarter reduced operating margin by 160 basis
points. Acquired businesses also reduced operating margin by
10 basis points.
Government Services net sales for the 2009 First Half decreased
by 6% compared to the 2008 First Half. Sales declines in
linguist services of $203 million were partially offset by
$21 million of sales increases for IT support services for
USSOCOM, systems and software engineering and sustainment
services to the U.S. Army and logistics support services to
the U.S. Marine Corps driven by new and existing contracts.
The increase in net sales from acquired businesses was
$49 million, or 2%.
43
Government Services operating income for the 2009 First Half
decreased by 14% compared to the 2008 First Half. Operating
margin for the 2009 First Half decreased by 90 basis points
compared to the 2008 First Half. Lower margins on select
contract renewals and higher profit margins on certain fixed
price contracts in the 2008 First Half reduced operating margin
by 80 basis points. Acquired businesses also reduced
operating margin by 10 basis points.
Aircraft
Modernization and Maintenance (AM&M)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
|
|
|
First Half Ended
|
|
|
|
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
|
($ in millions)
|
|
2009
|
|
|
2008
|
|
|
Increase
|
|
|
2009
|
|
|
2008
|
|
|
Increase
|
|
|
Net sales
|
|
$
|
695.3
|
|
|
$
|
653.8
|
|
|
$
|
41.5
|
|
|
$
|
1,358.8
|
|
|
$
|
1,319.3
|
|
|
$
|
39.5
|
|
Operating income
|
|
|
51.0
|
|
|
|
42.2
|
|
|
|
8.8
|
|
|
|
116.8
|
|
|
|
108.2
|
|
|
|
8.6
|
|
Operating margin
|
|
|
7.3
|
%
|
|
|
6.5
|
%
|
|
|
80
|
bpts
|
|
|
8.6
|
%
|
|
|
8.2
|
%
|
|
|
40
|
bpts
|
AM&M net sales for the 2009 Second Quarter increased by 6%
compared to the 2008 Second Quarter. Sales increased by
$72 million primarily for systems 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. These increases were partially offset by
$30 million of sales volume declines for CFS as fewer task
orders were received because of more competitors on the current
indefinite delivery/indefinite quantity contract that began on
October 1, 2008.
AM&M operating income for the 2009 Second Quarter increased
by 21% compared to the 2008 Second Quarter. Operating margin
increased by 80 basis points. The 2008 Second Quarter
included $13 million of litigation charges for estimated
costs to settle certain claims, which increased operating margin
for the 2009 Second Quarter as compared to the 2008 Second
Quarter by 180 basis points. This increase was partially
offset by 50 basis points due to lower CFS volume and
50 basis points primarily for cost increases on an
international aircraft modernization contract.
AM&M net sales for the 2009 First Half increased by 3%
compared to the 2008 First Half. Sales increased by
$98 million primarily for systems field support services
for U.S. Army and U.S. Navy training aircraft and
U.S. Special Forces logistics support. These increases were
partially offset by $58 million of sales declines for CFS
and lower international aircraft modernization sales due to
contracts nearing completion.
AM&M operating income for the 2009 First Half increased 8%
compared to the 2008 First Half. Operating margin increased by
40 basis points. The 2008 First Half included
$13 million of litigation charges, which increased
operating margin for the 2009 First Half as compared to the 2008
First Half by 100 basis points. This increase was partially
offset by 40 basis points for lower CFS volume and
20 basis points primarily for cost increases on
international aircraft modernization sales.
Specialized
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
|
|
|
First Half Ended
|
|
|
|
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
|
($ in millions)
|
|
2009
|
|
|
2008
|
|
|
Increase
|
|
|
2009
|
|
|
2008
|
|
|
Increase
|
|
|
Net sales
|
|
$
|
1,403.7
|
|
|
$
|
1,353.2
|
|
|
$
|
50.5
|
|
|
$
|
2,660.9
|
|
|
$
|
2,532.8
|
|
|
$
|
128.1
|
|
Operating income
|
|
|
169.6
|
|
|
|
143.3
|
|
|
|
26.3
|
|
|
|
310.9
|
|
|
|
283.8
|
|
|
|
27.1
|
|
Operating margin
|
|
|
12.1
|
%
|
|
|
10.6
|
%
|
|
|
150
|
bpts
|
|
|
11.7
|
%
|
|
|
11.2
|
%
|
|
|
50
|
bpts
|
Specialized Products net sales for the 2009 Second Quarter
increased by 4% compared to the 2008 Second Quarter reflecting
higher sales volume primarily: (1) $34 million for
EO/IR products primarily due to demand and deliveries on new and
existing contracts, (2) $27 million for
training & simulation primarily related to new and
existing contracts, (3) $12 million for combat
propulsion systems mostly from continued performance on existing
contracts, (4) $11 million for naval power &
control systems due to follow-on contracts for tactical quiet
generators for mobile electric power for the U.S. Armed
Services, and (5) $11 million for microwave products
primarily due to deliveries of mobile and ground based satellite
communications systems, tactical signal intelligence systems,
and spare parts for the U.S. military. These increases were
partially offset by a decrease primarily for commercial aviation
products and commercial shipbuilding products as a result of
reduced demand caused by the global economic recession, and
security and detection systems primarily due to the timing of
certain deliveries. The
44
increase in net sales from acquired businesses, net of
divestitures, was $9 million, or 1%, and pertains mostly to
the Electro-Optical Systems (EOS) business acquired on
April 21, 2008 and Chesapeake Sciences Corporation acquired
on January 30, 2009.
Specialized Products operating income for the 2009 Second
Quarter as compared to the 2008 Second Quarter increased by 18%
to $170 million from $143 million and operating margin
of 12.1% for the 2009 Second Quarter increased by 150 basis
points. The 2008 Second Quarter included a gain of
$12 million for the Product Line Divestiture Gain and a
$28 million non-cash Impairment Charge, and excluding these
two items, operating margin for the 2009 Second Quarter of 12.1%
increased by 40 basis points compared to the 2008 Second
Quarter. Higher sales volume and favorable sales mix primarily
for naval power & control systems, EO/IR products and
training & simulation increased operating margin by
120 basis points. Acquired businesses increased operating
margin by 20 basis points. These margin increases were
partially offset by higher pension expense of $9 million,
which reduced operating margin by 70 basis points and lower
sales volume for commercial aviation and commercial ship
building products, which reduced operating margin by
30 basis points.
Specialized Products net sales for the 2009 First Half increased
by 5% compared to the 2008 First Half reflecting higher sales
volume primarily: (1) $48 million for EO/IR products
primarily due to demand and deliveries on new and existing
contracts, (2) $31 million for training &
simulation primarily related to new and existing contracts,
(3) $29 million for microwave products primarily due
to deliveries of mobile and ground based satellite
communications systems, tactical signal intelligence systems,
communication services and spare parts for the
U.S. military, (4) $24 million for combat
propulsion systems mostly from continued performance on existing
contracts, and (5) $13 million for naval
power & control systems 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. These increases were partially offset by a
decrease primarily 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
$68 million, or 3%, and pertains mostly to the EOS business
and to Chesapeake Sciences Corporation.
Specialized Products operating income for the 2009 First Half as
compared to the 2008 First Half increased by 10% to
$311 million from $284 million and operating margin of
11.7% for the 2009 First Half increased by 50 basis points.
Excluding the Product Line Divestiture Gain and non-cash
Impairment Charge, operating margin for the 2009 First Half of
11.7% decreased 10 basis points compared to the 2008 First
Half. Higher pension expense of $20 million reduced
operating margin by 70 basis points and lower sales volume
for commercial aviation products and commercial shipbuilding
products reduced operating margin by 30 basis points. These
operating margin decreases were partially offset by
70 basis points primarily for higher sales volume and
favorable sales mix for naval power & control systems,
EO/IR products and microwave products. Acquired businesses
increased operating margin by 20 basis points.
Liquidity
and Capital Resources
Anticipated
Sources of Cash Flow
Our primary source of liquidity is cash flow generated from
operations. As of June 26, 2009, we also had
$964 million of borrowings available under our revolving
credit facility, after reductions of $36 million for
outstanding letters of credit, subject to certain conditions.
Our revolving credit facility, under 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 June 26, 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, business acquisitions (depending on
the size), 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.
45
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 $106 million to
$1,332 million at June 26, 2009 from
$1,226 million at December 31, 2008 primarily due to:
(1) higher sales primarily for networked communications and
IT support services, (2) the timing of billings and
collections primarily for ISR systems and aircraft modernization
and maintenance, and (3) $18 million of acquired
billed receivables. These increases were partially offset by
collections for propulsion systems and linguist services.
Contracts in process increased $135 million to
$2,402 million at June 26, 2009, from
$2,267 million at December 31, 2008. The increase
included $19 million primarily for acquired
contracts-in-process
and $116 million from:
|
|
|
|
|
Increases of $65 million in unbilled contract receivables
primarily due to sales exceeding billings for aircraft
modernization and maintenance, and networked communications,
partially offset by a decrease for billings for ISR
systems; and
|
|
|
|
Increases of $51 million in inventoried contract costs
across several business areas, primarily aircraft modernization
and maintenance, networked communications and propulsion systems
to support customer demand.
|
L-3s receivables days sales outstanding (DSO) was 72 at
June 26, 2009, compared with 69 at December 31, 2008
and 71 at June 27, 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 June 26, 2009,
366 days at December 31, 2008 and 364 days at
June 27, 2008). Our trailing 12 month pro forma sales
were $15,284 million at June 26, 2009,
$14,976 million at December 31, 2008 and
$14,678 million at June 27, 2008.
The increase in inventories was primarily for
security & detection systems and microwave products
due to timing of deliveries.
Goodwill increased by $98 million to $8,127 million at
June 26, 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
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
58
|
|
|
|
59
|
|
Foreign currency translation
adjustments
(2)
|
|
|
9
|
|
|
|
2
|
|
|
|
13
|
|
|
|
15
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 26, 2009
|
|
$
|
871
|
|
|
$
|
2,316
|
|
|
$
|
1,134
|
|
|
$
|
3,806
|
|
|
$
|
8,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 increase in goodwill from
foreign currency translation adjustments is due to the weakening
of the U.S. dollar during the 2009 First Half against the
functional currencies of L-3s foreign subsidiaries,
primarily in Canada, Germany and the United Kingdom.
|
46
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 and payments for salaries and wages. 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, security & detection systems and
government services.
The increase in pension and postretirement benefit plan
liabilities was primarily due to pension plan expenses exceeding
cash contributions to pension plans during the 2009 First Half.
We expect to contribute cash of approximately $65 million
to our pension plans for all of 2009, of which $25 million
was contributed during the 2009 First Half.
Statement
of Cash Flows
First
Half Ended June 26, 2009 Compared with First Half Ended
June 27, 2008
The table below provides a summary of our cash flows from
operating, investing, and financing activities for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
First Half Ended
|
|
|
|
June 26,
|
|
|
June 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Net cash from operating activities
|
|
$
|
528
|
|
|
$
|
628
|
|
Net cash used in investing activities
|
|
|
(162
|
)
|
|
|
(275
|
)
|
Net cash used in financing activities
|
|
|
(346
|
)
|
|
|
(516
|
)
|
Operating
Activities
We generated $528 million of cash from operating activities
during the 2009 First Half, a decrease of $100 million
compared with $628 million generated during the 2008 First
Half. The decrease was due to: (1) a decrease in net income
of $42 million, (2) lower non-cash expenses of
$57 million, primarily due to lower deferred income taxes,
and (3) $1 million of more cash used for changes in
operating assets and liabilities primarily for billed
receivables, contracts in process and advance payments and
billings in excess of costs incurred, substantially offset by
less cash used for changes in other current liabilities (mainly
the Litigation Gain). 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 46.
Investing
Activities
During the 2009 First Half, we used $162 million of cash in
the aggregate primarily to: (1) acquire CSC, and
(2) pay $86 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 of our long-term debt. Our senior credit agreement
provides for a term loan and a $1 billion revolving credit
facility. The senior credit agreement expires on March 9,
2010. Our remaining outstanding debt matures between
June 15, 2012 and August 1, 2035. At June 26,
2009, borrowings under the term loan were $650 million
(classified as a current liability), and available borrowings
under our revolving credit facility were $964 million,
after reduction for outstanding letters of credit of
$36 million. There were no outstanding revolving credit
borrowings under our senior credit facility at June 26,
2009. Total debt outstanding was $4,504 million at
June 26, 2009, compared to $4,493 million at
December 31, 2008.
47
Credit Ratings.
Our credit ratings as of July 2009
are as follows:
|
|
|
|
|
Rating Agency
|
|
Senior Debt
|
|
Subordinated Debt
|
|
Standard & Poors
|
|
BBB-
|
|
BB+
|
Fitch Ratings
|
|
BBB-
|
|
BB+
|
Moodys Investors Service
|
|
Ba2
|
|
Ba3
|
Agency ratings are not a recommendation to buy, sell or hold any
security, and they may be revised or withdrawn at any time by
the rating agency. Each agencys rating should be evaluated
independently of any other agencys rating. The system and
the number of rating categories can vary widely from rating
agency to rating agency. Customers usually focus on
claims-paying ratings, while creditors focus on debt ratings.
Investors use both to evaluate a companys overall
financial strength. The ratings issued on L-3 or its
subsidiaries by any of these agencies are announced publicly and
are available from the agencies. Our ability to access the
capital markets could be impacted by a downgrade in one or more
of our debt ratings. If this were to occur, we could incur
higher borrowing costs.
Debt Covenants and Other Provisions.
The senior
credit facility and senior subordinated notes agreements contain
financial covenants and other restrictive covenants. See
Note 10 to our audited consolidated financial statements
for the year ended December 31, 2008, included in our
Annual Report on
Form 10-K,
for a description of our debt and related financial covenants,
including dividend payment and share repurchase restrictions and
cross default provisions, under our senior credit facility. As
of June 26, 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.
Effective July 29, 2009, under select conditions, including
if L-3 Holdings common stock price is more than 120% (currently
$120.17) of the then current conversion price (currently
$100.14) 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, 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
July 31, 2009 was $75.50 per share.
Equity
Repurchases of L-3 Holdings common stock under the
$1 billion share repurchase program, approved by the Board
of Directors in November 2008, are made from time to time at
managements discretion in accordance with applicable
federal securities laws. All share repurchases of L-3
Holdings common stock have been recorded as treasury
shares.
48
The table below presents our repurchases of L-3 Holdings common
stock during the 2009 First Half.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
March 28 June 26, 2009
|
|
|
971,231
|
|
|
$
|
71.84
|
|
|
$
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,357,213
|
|
|
$
|
69.16
|
|
|
$
|
301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 26, 2009, the remaining dollar value of the
authorized share repurchase program was $630 million.
From June 27, 2009 through August 4, 2009, L-3
repurchased 246,755 shares of L-3 Holdings common stock at
an average price of $70.84 per share for an aggregate amount of
$17 million.
During the 2009 First Half, 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
|
|
April 28, 2009
|
|
May 18, 2009
|
|
$
|
0.35
|
|
|
June 15, 2009
|
|
$
|
42
|
|
On July 14, 2009, L-3 Holdings Board of Directors
declared a quarterly cash dividend of $0.35 per share, payable
on September 15, 2009 to shareholders of record at the
close of business on August 17, 2009.
Legal
Proceedings and Contingencies
For a discussion of legal proceedings and contingencies that
could impact our results of operations, financial condition or
cash flows, see Note 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 21 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, 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;
|
49
|
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
results of audits by U.S. Government agencies, including
the Defense Contract Audit Agency, of our sell prices, costs and
performance on contracts (revenue arrangements), and our
accounting and general business practices;
|
|
|
|
anticipated cost savings from business acquisitions not fully
realized or realized within the expected time frame;
|
|
|
|
Titans compliance with its plea agreement and consent to
entry of judgment with the U.S. Government relating to the
Foreign Corrupt Practices Act (FCPA), including Titans
ability to maintain its export licenses as well as the outcome
of other FCPA matters;
|
|
|
|
ultimate resolution of contingent matters, claims and
investigations relating to acquired businesses, and the impact
on the final purchase price allocations;
|
|
|
|
significant increase in competitive pressure among companies in
our industry; and
|
50
|
|
|
|
|
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.
ITEM 3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Part II, Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital
Resources Derivative Financial Instruments, of
our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2008 for a
discussion of our exposure to market risks. There were no
material changes in those risks during the 2009 First Half. 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 June 26, 2009.
ITEM 4.
CONTROLS
AND PROCEDURES
Conclusions
Regarding Effectiveness of Disclosure Controls and
Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
reports under the Securities Exchange Act of 1934 related to L-3
Holdings and L-3 Communications is recorded, processed,
summarized and reported within the time periods specified in the
U.S. Securities and Exchange Commissions (SEC) rules
and forms, and that such information is accumulated and
communicated to our management, including our Chairman,
President and Chief Executive Officer, and our Vice President
and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosures. Any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives. Our management, with the participation of
our Chairman, President and Chief Executive Officer, and our
Vice President and Chief Financial Officer, has evaluated the
effectiveness of the design and operation of our disclosure
controls and procedures as of June 26, 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 June 26,
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 June 26,
2009 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
51
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
Second Quarter. Repurchases are made from time to time at
managements discretion in accordance with applicable
federal securities law. All share repurchases of L-3
Holdings common stock have been recorded as treasury
shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum number
|
|
|
|
|
|
|
|
|
|
Total number
|
|
|
(or approximate
|
|
|
|
|
|
|
|
|
|
of shares
|
|
|
dollar value)
|
|
|
|
|
|
|
|
|
|
purchased
|
|
|
of shares that
|
|
|
|
Total number
|
|
|
Average
|
|
|
as part of
|
|
|
may yet be
|
|
|
|
of shares
|
|
|
price paid
|
|
|
publicly announced
|
|
|
purchased under
|
|
|
|
purchased
|
|
|
per share
|
|
|
plans or programs
|
|
|
the plans or
programs
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
March 28 April 30, 2009
|
|
|
27,700
|
|
|
$
|
72.07
|
|
|
|
27,700
|
|
|
$
|
698
|
|
May 1 May 31, 2009
|
|
|
157,973
|
|
|
$
|
72.80
|
|
|
|
157,973
|
|
|
$
|
686
|
|
June 1 June 26, 2009
|
|
|
785,558
|
|
|
$
|
71.64
|
|
|
|
785,558
|
|
|
$
|
630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
971,231
|
|
|
$
|
71.84
|
|
|
|
971,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
ITEM 3.
DEFAULTS
UPON SENIOR SECURITIES
Not applicable
52
ITEM 4.
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 28, 2009, at the Companys Annual Meeting of
Stockholders, the following proposals were acted upon:
|
|
|
|
(1)
|
Two nominees for the Board of Directors were elected to
three-year terms expiring in 2012. The votes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Term
|
|
|
For
|
|
Withheld
|
|
Expires
|
|
Robert B. Millard
|
|
|
94,547,568
|
|
|
|
3,170,785
|
|
|
|
2012
|
|
Arthur L. Simon
|
|
|
94,971,368
|
|
|
|
2,746,985
|
|
|
|
2012
|
|
Directors whose term of office continued after the
Companys 2009 Annual Meeting of Shareholders and who were
not subject to election at the 2009 Annual Meeting of
Shareholders are Claude R. Canizares, Thomas A. Corcoran and
Alan H. Washkowitz, whose terms expire in 2010; and John M.
Shalikashvili, Michael T. Strianese, and John P. White, whose
terms expire in 2011. Lewis Kramer was elected to the Board of
Directors on July 14, 2009 as a Class III director.
Mr. Kramer is expected to stand for re-election at the
Annual Meeting of Stockholders in April 2010.
|
|
|
|
(2)
|
The approval of the L-3 Communications Corporation 2009 Employee
Stock Purchase Plan. The votes were as follows:
|
|
|
|
|
|
For
|
|
|
73,869,610
|
|
Against
|
|
|
11,913,752
|
|
Abstain
|
|
|
106,921
|
|
Broker non-votes
|
|
|
11,828,070
|
|
|
|
|
|
(3)
|
The selection of PricewaterhouseCoopers LLP to serve as the
independent registered public accounting firm for 2009 was
ratified. The votes were as follows:
|
|
|
|
|
|
For
|
|
|
95,350,126
|
|
Against
|
|
|
2,130,503
|
|
Abstain
|
|
|
237,724
|
|
ITEM 5.
OTHER
INFORMATION
Not
applicable
ITEM 6.
EXHIBITS
For a list of exhibits, see the Exhibit Index in this
Form 10-Q.
53
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrants have duly caused this report to be signed
on their behalf by the undersigned, thereunto duly authorized.
L-3 COMMUNICATIONS HOLDINGS, INC.
L-3 COMMUNICATIONS CORPORATION
|
|
|
|
By:
|
/s/ Ralph
G. DAmbrosio
|
|
|
|
|
Title:
|
Vice President and Chief Financial Officer
|
(Principal Financial Officer)
Date: August 4, 2009
54
EXHIBIT INDEX
Exhibits identified in parentheses below are on file with the
SEC and are incorporated herein by reference to such previous
filings.
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Exhibits
|
|
|
3
|
.1
|
|
Certificate of Incorporation of L-3 Communications Holdings,
Inc. (incorporated by reference to Exhibit 3.1 to the
Registrants Quarterly Report on
Form 10-Q
for the period ended June 30, 2002).
|
|
3
|
.2
|
|
Amended and Restated By-Laws of L-3 Communications Holdings,
Inc. (incorporated by reference to Exhibit 3(ii) to the
Registrants Current Report on
Form 8-K
filed on April 29, 2009).
|
|
3
|
.3
|
|
Certificate of Incorporation of L-3 Communications Corporation
(incorporated by reference to Exhibit 3.1 to L-3
Communications Corporations Registration Statement on
Form S-4
(File
No. 333-31649)).
|
|
3
|
.4
|
|
Amended and Restated Bylaws of L-3 Communications Corporation
(incorporated by reference to Exhibit 3.2 to the
Registrants Current Report on
Form 8-K
filed on December 17, 2007).
|
|
4
|
.1
|
|
Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to L-3 Communications Holdings
Registration Statement on
Form S-1
(File
No. 333-46975)).
|
|
4
|
.2
|
|
Amended and Restated Credit Agreement, dated as of July 29,
2005, among L-3 Communications Corporation, L-3 Communications
Holdings, Inc. and certain subsidiaries of the Registrants from
time to time party thereto as guarantors, the lenders from time
to time party thereto, and Bank of America, N.A., as
administrative agent (incorporated by reference to
Exhibit 10.40 to the Registrants Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2005).
|
|
4
|
.3
|
|
Form of L-3 Communications Corporation First Amendment to
Amended and Restated Credit Agreement, dated as of
October 25, 2006, among L-3 Communications Corporation, L-3
Communications Holdings, Inc. and certain subsidiaries of the
Registrants from time to time party thereto as guarantors, the
lenders from time to time party thereto, and Bank of America,
N.A., as administrative agent (incorporated by reference to
Exhibit 10.41 to the Registrants Current Report on
Form 8-K
dated October 25, 2006).
|
|
4
|
.4
|
|
Indenture dated as of June 28, 2002, among L-3
Communications Corporation, the guarantors named therein and The
Bank of New York, as Trustee (incorporated by reference to
Exhibit 4.1 of
L-3
Communications Corporations Registration Statement on
Form S-4
(File
No. 333-99757)).
|
|
4
|
.5
|
|
Supplemental Indenture dated as of February 20, 2009 among
L-3 Communications Corporation, The Bank of New York, as
trustee, and the guarantors named therein to the Indenture dated
as of June 28, 2002 among L-3 Communications Corporation,
the guarantors named therein and The Bank of New York, as
trustee (incorporated by reference to Exhibit 4.5 to the
Registrants Annual Report on
Form 10-K
for the year ended December 31, 2008).
|
|
4
|
.6
|
|
Indenture dated as of May 21, 2003 among L-3 Communications
Corporation, the Guarantors named therein and The Bank of New
York, as Trustee (incorporated by reference to Exhibit 4.1
to
L-3
Communications Corporations Registration Statement on
Form S-4
(File
No. 333-106106)).
|
|
4
|
.7
|
|
Supplemental Indenture dated as of February 20, 2009 among
L-3 Communications Corporation, The Bank of New York, as
trustee, and the guarantors named therein to the Indenture dated
as of May 21, 2003 among L-3 Communications Corporation,
the guarantors named therein and The Bank of New York, as
trustee (incorporated by reference to Exhibit 4.7 to the
Registrants Annual Report on
Form 10-K
for the year ended December 31, 2008).
|
|
4
|
.8
|
|
Indenture dated as of December 22, 2003 among L-3
Communications Corporation, the Guarantors named therein and The
Bank of New York, as Trustee (incorporated by reference to
Exhibit 10.33 to the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2003).
|
|
4
|
.9
|
|
Supplemental Indenture dated as of February 20, 2009 among
L-3 Communications Corporation, The Bank of New York, as
trustee, and the guarantors named therein to the Indenture dated
as of December 22, 2003 among L-3 Communications
Corporation, the guarantors named therein and The Bank of New
York, as trustee (incorporated by reference to Exhibit 4.9
to the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2008).
|
|
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 Corporations Registration Statement
on
Form S-4
(File
No. 333-122499)).
|
|
|
|
|
|
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
|
|
Form of L-3 Communications Holdings, Inc. 2008 Long Term
Performance Plan Nonqualified Stock Option Agreement (2009
Version).
|
|
*10
|
.2
|
|
Form of L-3 Communications Holdings, Inc. 2008 Long Term
Performance Plan Performance Unit Award Notice (2009 Version).
|
|
**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 Chairman, 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.
|
|
***101
|
.INS
|
|
XBRL Instance Document
|
|
***101
|
.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
|
***101
|
.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
***101
|
.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
***101
|
.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
|
|
*
|
|
Filed herewith.
|
|
**
|
|
The information required in this exhibit is presented in
Note 12 to the unaudited condensed consolidated financial
statements as of June 26, 2009 in accordance with the
provisions of SFAS No. 128,
Earnings Per Share
.
|
|
***
|
|
Furnished electronically with this report. Users of this data
are advised that pursuant to Rule 406T of Regulation S-T these
interactive data files are deemed not filed or part of a
registration statement or prospectus for purposes of Sections 11
or 12 of the Securities Act of 1933, are deemed not filed for
purposes of Section 18 of the Securities and Exchange Act of
1934, and otherwise are not subject to liability under those
sections.
|
|
|
|
Represents management contract, compensatory plan or arrangement
in which directors and/or executive officers are eligible to
participate.
|