UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal
year ended December 31, 2010
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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
(State or other jurisdiction of incorporation or
organization)
600 Third Avenue, New York, NY
(Address of principal executive offices)
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13-3937434 and 13-3937436
(I.R.S. Employer Identification Nos.)
10016
(Zip Code)
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(212) 697-1111
(Telephone number)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered:
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L-3 Communications Holdings, Inc.
common stock, par value $0.01 per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None.
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Indicate
by check mark if the registrants are well-known seasoned
issuers, as defined in Rule 405 of the Securities Act.
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Yes
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No
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Indicate
by check mark if the registrants are not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
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Yes
x
No
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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
registrant was required to file such reports), and (2) have
been subject to such filing requirements for the past
90 days.
x
Yes
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No
Indicate by check mark whether the registrants have submitted
electronically and posted on their corporate Website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrants
were required to submit and post such
files).
x
Yes
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No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer
x
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Accelerated
filer
o
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Non-accelerated
filer
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Smaller reporting
company
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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
The aggregate market value of the L-3 Communications Holdings,
Inc. voting stock held by non-affiliates of the Registrants as
of June 25, 2010 was approximately $8.6 billion. For
purposes of this calculation, the Registrants have assumed that
their directors and executive officers are affiliates.
There were 108,404,230 shares of L-3 Communications
Holdings, Inc. common stock with a par value of $0.01
outstanding as of the close of business on February 21,
2011.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be filed with the
Securities Exchange Commission (SEC) pursuant to
Regulation 14A relating to the Registrants Annual
Meeting of Shareholders, to be held on April 26, 2011, will
be incorporated by reference in this
Form 10-K
in response to Items 10,11,12,13 and 14 of Part III.
The definitive Proxy Statement will be filed with the SEC no
later than 120 days after the registrants fiscal year
ended December 31, 2010.
L-3
COMMUNICATIONS HOLDINGS, INC.
L-3 COMMUNICATIONS CORPORATION
INDEX TO ANNUAL REPORT ON
FORM 10-K
For the Year Ended December 31, 2010
PART I
For convenience purposes in this filing on
Form 10-K,
L-3 Holdings refers to L-3 Communications Holdings,
Inc., and L-3 Communications refers to L-3
Communications Corporation, a wholly-owned operating subsidiary
of
L-3 Holdings.
L-3, we, us and
our refer to L-3 Holdings and its subsidiaries,
including L-3 Communications.
Overview
L-3 Holdings, a Delaware corporation organized in April 1997,
derives all of its operating income and cash flows from its
wholly-owned subsidiary, L-3 Communications. L-3 Communications,
a Delaware corporation, was organized in April 1997. L-3 is a
prime contractor in Command, Control, Communications,
Intelligence, Surveillance and Reconnaissance
(C
3
ISR)
systems, aircraft modernization and maintenance, and government
services. L-3 is also a leading provider of a broad range of
electronic systems used on military and commercial platforms.
Our customers include the United States (U.S.) Department of
Defense (DoD) and its prime contractors, U.S. Government
intelligence agencies, the U.S. Department of Homeland
Security (DHS), U.S. Department of State (DoS),
U.S. Department of Justice (DoJ), allied foreign
governments, domestic and foreign commercial customers and
select other U.S. federal, state and local government
agencies.
For the year ended December 31, 2010, we generated sales of
$15.7 billion, operating income of $1,750 million and
net cash from operating activities of $1,461 million. The
table below presents a summary of our 2010 sales by major
category of end customer. For a more detailed presentation of
our sales by end customer, see Major Customers on
page 12.
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% of
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2010 Sales
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Total Sales
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(in millions)
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DoD
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$
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11,932
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76
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%
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Other U.S. Government
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1,145
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7
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Total U.S. Government
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$
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13,077
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83
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%
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Foreign governments
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1,142
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8
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Commercial foreign
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791
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5
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Commercial domestic
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670
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4
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Total sales
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$
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15,680
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100
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%
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We have the following four reportable segments:
(1) C
3
ISR,
(2) Government Services, (3) Aircraft Modernization
and Maintenance (AM&M), and (4) Electronic Systems.
Financial information for our reportable segments, including
financial information about geographic areas, is included in
Part II Item 7
Managements Discussion and Analysis of Financial Condition
and Results of Operations and in Note 22 to our
audited consolidated financial statements.
Business
Strategy
Our business strategy is customer-focused and aims to increase
shareholder value by providing products and services to our
customers that create value for them with responsive,
high-quality, innovative and affordable solutions. Financially,
our emphasis is on growing earnings per share and cash flow over
time. Our strategy involves a flexible and balanced combination
of organic growth, cost reductions, and select business
acquisitions and divestitures, enabling us to grow the Company
and also return cash to our shareholders in a balanced and
disciplined manner. We intend to maintain and expand our
position as a leading prime system contractor and supplier of
products, subsystems, systems and services to the DoD, other
U.S. Government agencies, allied foreign governments and
commercial customers, both domestic and international. Our
strategy includes the elements discussed below.
Entrepreneurial, Accountable and Results-Driven
Culture.
A key part of L-3s strategy is to create
an entrepreneurial, accountable, and results-driven culture that
is focused on meeting our customers needs and on achieving
L-3s strategic goals and growth objectives. L-3s
culture is made up of diverse people providing creative
solutions and ideas in an
1
environment that fosters teamwork and collaboration across our
business units. Operating with integrity and with a commitment
to the highest standards of ethical conduct is an important part
of our strategy to build and maintain the trust of our
customers, shareholders, employees, suppliers and communities
where we live and work.
Grow Sales Organically and Selectively Acquire
Businesses.
We intend to use our existing prime
contractor and supplier positions and internal investments to
grow our sales organically. We expect to continue to benefit
from our position as a supplier to multiple bidders on select
prime contract bids. We plan to maintain our diversified and
broad business mix with our limited reliance on any single
contract, follow-on or new business opportunities. We also
expect to continue to supplement our organic sales growth by
acquiring, on a select basis, businesses that add new products,
services, technologies, programs and contracts, or provide
access to select DoD and non-DoD customers and provide
attractive returns on investment.
Collaborate to Increase Growth Opportunities.
We
intend to deepen the collaboration among our diversified
businesses to develop new business opportunities. The
combination of our leading technologies and our ability to
deliver the right solutions to our customers quickly and
re-shape our portfolio underscores our reputation for
performance and customer focus. We expect that our core
strengths of agility, responsiveness and cost-effectiveness will
allow us to continue to provide exceptional performance to our
customers. We intend to continue our internal initiatives to
consolidate and drive efficiency in our operations and develop
our collaborative culture to continue our shift from a
black box provider to a full-service solutions
provider.
Continuously Improve our Cost Structure and Business
Processes.
We intend to continue to aggressively improve
and reduce our direct contract costs and overhead costs,
including general and administrative costs. Effective management
of labor, material, subcontractor and other direct costs is an
important element of favorable contract performance. We also
intend to grow sales at a faster rate than overhead costs. We
believe continuous cost improvement will enable us to increase
our cost competitiveness, expand our operating margin and
selectively invest in new product development, bids and
proposals and other business development activities to
organically grow our sales.
Align Research & Development with Customer
Priorities.
We intend to continue to align our products,
services, internal investments in research and development and
business development activities to proactively address customer
priorities and requirements and invest in growth areas such as
C
3
ISR,
Electro-Optic/Infrared (EO/IR) and intelligence support. We also
intend to grow our sales and gain market share through the
introduction of innovative and disruptive solutions, new
products and services and continued increased collaboration
among our businesses to offer high quality and competitive
solutions and services to our customers.
Expand our Prime Contractor and Supplier
Positions.
We intend to expand our prime system
contractor roles in select business areas where we have domain
expertise, including
C
3
ISR,
aircraft modernization and maintenance and government technical
services. We also intend to enter into teaming arrangements with
other prime system contractors and platform original equipment
manufacturers to compete for select new business opportunities.
As an independent supplier of a broad range of products,
subsystems and systems in several key business areas, our growth
will partially be driven by expanding our share of existing
programs and participating in new programs. We also expect to
identify opportunities to use our customer relationships and
leverage the capabilities of our various businesses, including
proprietary technologies, to expand the scope of our products
and services to existing and new customers.
Focus On Outstanding Program Performance.
We
believe that outstanding performance on our existing programs
and contracts in terms of staying on-budget, on-schedule and in
accordance with our contractual obligations is the foundation
for successfully meeting our objectives of expanding L-3s
prime contractor and supplier positions and growing sales
organically. We believe that a prerequisite for growing and
winning new business is to retain our existing business by
successfully meeting the performance criteria included in our
existing contracts. We will continue to focus on delivering
superior contract performance to our customers in order to
maintain our reputation as an agile and responsive contractor
and to differentiate ourselves from our competitors.
Attract and Retain Skilled Personnel.
The success
of our businesses is, to a large extent, dependent upon the
knowledge and skills of our employees. We intend to continue to
attract and retain employees who have management,
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contracting, engineering and technical skills and who have
U.S. Government security clearances, particularly those
with clearances of top-secret and above.
Selected
Recent Business Acquisitions and Business and Product Line
Dispositions
During the year ended December 31, 2010, we used cash of
$756 million for business acquisitions. See
Part II Item 7
Managements Discussion and Analysis of Financial Condition
and Results of Operations Business Acquisitions and
Business and Product Line Dispositions on page 34 for
additional details about our 2010 business acquisitions,
including their aggregate purchase prices, and a 2010
divestiture.
Products and Services
Our four reportable segments provide a wide range of products
and services to various customers and are described below.
C
3
ISR
Reportable Segment
In 2010,
C
3
ISR net
sales of $3,399 million represented 22% of our total net
sales. The businesses in this segment provide products and
services for the global ISR market, specializing in signals
intelligence (SIGINT) and communications intelligence (COMINT)
systems. These products and services provide the warfighter the
unique ability to collect and analyze data from command centers,
communication nodes and air defense systems for real-time
situational awareness and response. The businesses in this
reportable segment also provide
C
3
systems, networked communications systems and secure
communications products for military and other
U.S. Government and allied foreign government intelligence,
reconnaissance and surveillance applications. We believe that
these products and services are critical elements for a
substantial number of major command, control and 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. Major
products and services for this reportable segment include:
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highly specialized fleet management sustainment and support
services, including procurement, systems integration, sensor
development, modifications and periodic depot maintenance for
ISR and special mission aircraft and airborne systems;
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strategic and tactical SIGINT systems that detect, collect,
identify, analyze and disseminate information;
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secure data links that enable real-time information collection
and dissemination to users of networked communications for
airborne, satellite, ground and sea-based remote platforms, both
manned and unmanned;
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secure terminal and communication network equipment and
encryption management; and
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communication systems for surface and undersea vessels and
manned space flights.
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3
The table below provides additional information for the systems,
products and services, selected applications and selected
platforms or end users of our
C
3
ISR
reportable segment.
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Systems/Products/Services
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Selected Applications
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Selected Platforms/End
Users
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ISR Systems
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Prime mission systems integration,
sensor development and operations and support
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Signal processing, airborne SIGINT
applications, antenna technology, real-time process control and
software development
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U.S. Air Force (USAF),
United Kingdom (U.K.) Ministry of Defence (MoD), and other
allied foreign military ISR aircraft platforms and ground systems
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Fleet management of special mission
aircraft, including avionics and mission system upgrades and
logistics support
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Measurement collection and signal
intelligence, special missions
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DoD and classified customers within the
U.S. Government
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ISR operations and support
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Data link support and services, special
applications, classified projects, spares and repairs
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USAF and U.S. Army ISR aircraft
platforms and ground systems
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Networked Communications
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Airborne, space and surface data link
terminals, ground stations, and transportable tactical SATCOM
(satellite communications) systems
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High performance, wideband secure
communication links for relaying of intelligence and
reconnaissance information
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Manned aircraft, unmanned aerial
vehicles (UAVs), naval ships, ground vehicles and satellites for
the DoD
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Multi-band Manpack Receivers
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Portable, ruggedized terminals used for
receiving reconnaissance video and sensor data from multiple
airborne platforms
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U.S. Special Operations Command
(USSOCOM), USAF and other DoD customers
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Satellite command and control
sustainment and support
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Software integration, test and
maintenance support, satellite control network and engineering
support for satellite launch systems
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USAF Space Command (AFSC), USAF
Satellite Control Network and launch ranges
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Secure Communications Products
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Secure communication terminals and
equipment, and secure network encryption products
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Secure and non-secure voice, data and
video communication for office, battlefield and secure internet
protocol (IP) network applications
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DoD and U.S. Government intelligence
agencies
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Ground-based satellite communication
terminals and payloads
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Interoperable, transportable ground
terminals
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DoD and U.S. Government intelligence
agencies
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Shipboard communications systems
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Internal and external communications
(radio rooms)
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U.S. Navy (USN), U.S. Coast Guard (USCG)
and allied foreign navies
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4
Government
Services Reportable Segment
In 2010, Government Services net sales of $3,963 million
represented 25% of our total net sales. The businesses in this
segment provide a full range of engineering, technical,
analytical, information technology (IT), advisory, training,
logistics and support services to the DoD, DoS, DoJ and
U.S. Government intelligence agencies and allied foreign
governments. Major services for this reportable segment include:
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communication software support, information technology services
and a wide range of engineering development services and
integration support;
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high-end engineering and information systems support services
used for command, control, communications and ISR architectures
for applications used by the DoD, DHS and U.S. Government
intelligence agencies, including missile and space systems, UAVs
and manned military aircraft;
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developing and managing extensive programs in the United States
and internationally that focus on teaching, training and
education, logistics, strategic planning, organizational design,
democracy transition and leadership development;
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human intelligence support and other services, including
linguist and translation services and related management to
support contingency operations and current
intelligence-gathering requirements;
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Command & Control Systems and Software services in
support of maritime and expeditionary warfare;
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intelligence, analysis and solutions support to the DoD,
including the U.S. Armed Services combatant commands and
the U.S. Government intelligence agencies, including those
within the U.S. Armed Services;
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technical and management services, which provide support of
intelligence, logistics,
C
3
and
combatant commands; and
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conventional high-end enterprise IT support, systems and other
services to the DoD and other U.S. federal agencies.
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5
The table below provides additional information for the systems,
products and services, selected applications and selected
platforms or end users of our Government Services reportable
segment.
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Systems/Products/Services
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Selected Applications
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Selected Platforms/End
Users
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Training and Operational Support
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Training systems, courseware and
doctrine development
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Training, leadership development and
education services for U.S. and allied foreign armed forces,
counterintelligence and law enforcement personnel
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U.S. Army, U.S. Marine Corps (USMC),
DoS, DoJ and allied foreign governments
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Acquisition management and staff
augmentation
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Rapid fielding support for combatants
and physical location management
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U.S. Army
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Weapons Training Systems
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Laser marksmanship training systems and
advanced integrated technologies for security products and
services
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DoD and law enforcement agencies
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Specialized management, policy and
training in energy, environmental and natural resource management
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Water and Coastal resource management,
sustainable agriculture and food security, climate change
mitigation strategies, emergency preparedness, response and
reconstruction, power sector restructuring and energy economics
and finance
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U.S. Agency for International
Development, foreign governments, World Bank and
Non-Governmental Organizations
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Enterprise IT Solutions
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Network and enterprise administration
and management
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Systems engineering, assurance and risk
management, network and systems administration, management,
software development and life cycle support and systems
integration
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U.S. Army, U.S. Joint Chiefs of Staff,
USAF, USSOCOM, Federal Aviation Administration (FAA) and NASA
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Systems acquisition and advisory support
and comprehensive operational support services
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Requirements definition, program
management, planning and analysis, systems engineering,
integration and development, intelligence analysis and managing
and network engineering
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U.S. Army, USAF, USN and DHS
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Intelligence Solutions and Support
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System support and concept operations
(CONOPS)
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C
3
ISR,
modeling and simulation
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DoD, U.S. Missile Defense Agency (MDA),
U.S. Government intelligence agencies, and NASA
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IT services
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IT infrastructure modernization and
operations
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U.S. Government intelligence agencies
and U.K. MoD
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Information management and IT systems
support and software design, development and systems integration
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Intelligence and operations support,
C
3
systems, network centric operations and information operations
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DoD and U.S. Government intelligence
agencies
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Linguistic, interpretation, translation
and analyst services
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Counterintelligence, threat protection
and counter terrorism
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U.S. Army
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6
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Systems/Products/Services
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Selected Applications
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Selected Platforms/End
Users
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Command & Control Systems and Software
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Software engineering/software
sustainment, operations analysis, research, technical analysis,
training and test and evaluation
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Software, systems and field services
support for
C
4
ISR
Systems, fixed and rotary wing aircraft, naval vessels and
ground vehicles
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U.S. Army, USN and USMC
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Communication systems and software
engineering services
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Value-added, critical software support
for C
3
ISR systems, electronic warfare and fire support systems
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U.S. Army Communications
Electronics Command (CECOM)
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Acquisition and Procurement Support
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Support defense acquisition programs,
develop acquisition roadmaps, capability assessments and develop
requirements
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U.S. Army, USN and USMC
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Systems Engineering and Integration
Support
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System design and development, platform
simulations, systems testing, prototype development and
deployment and hardware and software integration
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USMC, U.S. Army and USSOCOM
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Global Security & Engineering Solutions
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Surveillance systems and products,
including installation and logistics support
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Remote surveillance for U.S. borders
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DHS
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Security Solutions
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Border security systems, area
surveillance and access control, critical infrastructure
protection, continuity planning and emergency management
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DHS, USMC and Customs and Border Patrol
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Engineering and technical solutions
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Systems engineering and design, analysis
and integration, technical support and test & evaluation,
Weapons of Mass Destruction (WMD) effects analysis and
Improvised Explosive Device (IED) counter measures
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DoD and U.S. Government agencies
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Program management and operational
support
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Command center operations, systems
acquisitions, emergency management training, continuity of
operations and government planning
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Federal Emergency Management Agency,
FAA, Joint Task Force Civil Support
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Aircraft
Modernization and Maintenance (AM&M) Reportable
Segment
In 2010, AM&M net sales of $2,781 million represented
18% of our total net sales. The businesses in this segment
provide logistics services for aircraft, including modernization
and refurbishments, upgrades and sustainment, maintenance and
logistics support services for military, and various government
and commercial customers. We sell these services primarily to
the DoD, the Canadian Department of National Defense (DND) and
other allied foreign governments. Major products and services
for this reportable segment include:
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engineering, modification, maintenance, logistics and upgrades
for aircraft, vehicles and personnel equipment;
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turnkey aviation life cycle management services that integrate
custom developed and commercial
off-the-shelf
products for various military fixed and rotary wing aircraft,
including heavy maintenance and structural modifications and
interior modifications and construction; and
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aerospace and other technical services related to large fleet
support, such as aircraft and vehicle modernization,
maintenance, repair and overhaul, logistics, support and supply
chain management, primarily for military training, tactical,
cargo and utility aircraft.
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7
The table below provides additional information for the systems,
products and services, selected applications and selected
platforms or end users of our AM&M reportable segment.
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Systems/Products/Services
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Selected Applications
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Selected Platforms/End
Users
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Aircraft and Base Support Services
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Logistics support, maintenance and
refurbishment
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Aircraft maintenance repair and
overhaul, flight operations support for training, cargo and
special mission aircraft
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U.S. Army, USAF, USN, Canadian DND and
other allied foreign militaries
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Contract Field Teams (CFT)
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Deployment of highly mobile, quick
response field teams to customer locations to supplement the
customers resources for various ground vehicles and
aircraft
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U.S. Army, USAF, USN and USMC
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Contractor operated and managed base
supply (COMBS)
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Inventory management activities relating
to flight support and maintenance, including procurement and
field distribution
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Military training and cargo aircraft
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Aircraft Modernization
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Modernization and life extension
maintenance upgrades and support
|
|
Aircraft structural modifications and
inspections, installation of mission equipment, navigation and
avionics products, interior modifications
|
|
USN, USAF, Canadian DND, Royal
Australian Air Force, other allied foreign governments, various
military, fixed and rotary wing aircraft, original equipment
manufacturers (OEM), very important person and head of state
aircraft
|
Fabrication and assembly of fixed and
rotary wing aeronautical structures
|
|
Rotary wing cabin assemblies, new and
modified wings and subassemblies, and parts fabrication for
original equipment manufacturers
|
|
U.S. Army, USN, USMC, Canadian DND and
OEMs
|
Electronic
Systems Reportable Segment
In 2010, Electronic Systems net sales of $5,537 million
represented 35% of our total net sales. The businesses in this
reportable segment provide a broad range of products, including
components, products, systems and subsystems, and related
services to military and commercial customers in several niche
markets. The table below provides a summary of the
segments business areas and the percentage that each
contributed to Electronic Systems net sales in 2010.
|
|
|
|
|
|
|
% of 2010
|
|
Business Area
|
|
Segment Sales
|
|
|
Microwave
|
|
|
16
|
%
|
Power & Control Systems
|
|
|
16
|
|
Electro-Optic/Infrared (EO/IR)
|
|
|
11
|
|
Avionics & Displays
|
|
|
10
|
|
Precision Engagement
|
|
|
9
|
|
Simulation & Training
|
|
|
9
|
|
Warrior Systems
|
|
|
9
|
|
Security & Detection
|
|
|
6
|
|
Telemetry & Advanced Technology
|
|
|
5
|
|
Undersea Warfare
|
|
|
4
|
|
Propulsion Systems
|
|
|
3
|
|
Marine Services
|
|
|
2
|
|
|
|
|
|
|
Total Electronic Systems
|
|
|
100
|
%
|
|
|
|
|
|
8
The table below provides additional information for the systems,
products, and services selected applications and selected
platforms or end users of our Electronic Systems reportable
segment.
|
|
|
|
|
Systems/Products/Services
|
|
Selected Applications
|
|
Selected Platforms/End
Users
|
|
|
|
|
|
|
Microwave
|
|
|
|
|
Passive and active microwave components
and subsystems and non-ionizing radiation monitoring equipment
|
|
Radio transmission, switching and
conditioning, transponder control, channel and frequency
separation, ground vehicles, aircraft and satellites
|
|
DoD and original equipment
manufacturers, SATCOM for DoD and various government agencies
|
Traveling wave tubes, power modules,
klystrons and digital broadcast
|
|
Microwave vacuum electron devices and
power modules
|
|
DoD and allied foreign military
manned/unmanned platforms, various missile programs and
commercial broadcast
|
Quick-deploy flyaway very small aperture
terminals (VSAT) and vehicular satellite systems
|
|
Satellite communication systems
|
|
U.S. Army, USAF and various DoD agencies
|
High dynamic small aperture
Ku/Ka-band
receive/transmit systems
|
|
Off road use on military vehicles,
watercraft, and airborne platforms to provide two-way broadband
connectivity while on the move
|
|
U.S. Army and various DoD agencies
|
Tactical ground based signal intercept
and direction finding systems
|
|
Man portable and military vehicle
mounted tactical signal intercept/exploitation and direction
finding systems
|
|
U.S. Army and other DoD/U.S.
intelligence agencies
|
Managed satellite networks and
integrated remote VSAT satellite systems
|
|
Deployment and support of global
communication networks for tactical and enterprise applications
|
|
U.S. Army, DoD/U.S. intelligence
agencies, allied forces and commercial contractors
|
Spread spectrum & time
division multiple access modems that support ultra high
frequency (UHF) using Ka band operation
|
|
On the move SATCOM and other tactical
communications systems utilizing small aperture terminals
|
|
U.S. military and various international
allied military and special forces customers
|
Ultra-wide frequency and advanced radar
antennas and radomes
|
|
Surveillance and radar detection
|
|
Military fixed and rotary winged
aircraft, SATCOM
|
|
|
|
|
|
Power & Control Systems
|
|
|
|
|
Shipboard electrical power packages,
electric drives and propulsion, automation, navigation and
communication systems
|
|
Surface ships ranging from shipping
vessels, container carriers, environmental and research ships,
ferries and cruise liners
|
|
Commercial shipbuilders and allied
foreign navies
|
Naval power delivery, conversion and
switching products
|
|
Switching, distribution and protection,
as well as frequency and voltage conversion
|
|
Naval submarines, surface ships and
aircraft carriers
|
EO/IR
|
|
|
|
|
Targeted stabilized camera systems with
integrated sensors and wireless communication systems
|
|
Intelligence Data Collection,
Surveillance and Reconnaissance
|
|
DoD, intelligence and security agencies,
law enforcement, manned/unmanned platforms
|
Airborne and ground based high energy
laser beam directors, laser designators and high tracking rate
telescopes
|
|
Directed energy systems, space
surveillance, satellite laser ranging and laser communications,
airborne and ground target designation/illumination
|
|
USAF and NASA
|
Avionics & Displays
|
|
|
|
|
Solid state crash protected cockpit
voice and flight data recorders
|
|
Aircraft voice and flight data recorders
that continuously record voice and sounds from cockpit and
aircraft intercommunications
|
|
Commercial transport, business, regional
and military aircraft
|
9
|
|
|
|
|
Systems/Products/Services
|
|
Selected Applications
|
|
Selected Platforms/End
Users
|
|
Airborne traffic and collision avoidance
systems, terrain awareness warning systems
|
|
Reduce the potential for midair aircraft
collisions and crashes into terrain by providing visual and
audible warnings and maneuvering instructions to pilots
|
|
Commercial transport, business, regional
and military aircraft
|
Advanced cockpit avionics
|
|
Pilot safety, navigation and situation
awareness products
|
|
Commercial transport, business, regional
and military aircraft
|
Cockpit and mission displays
|
|
High performance, ruggedized flat panel
and cathode ray tube displays and processors
|
|
Various military aircraft
|
Lightweight man portable
computer/displays for dismounted soldiers
|
|
Situational awareness and connectivity
for dismounted soldiers
|
|
U.K. MoD and U.K. Royal Army
|
Precision Engagement
|
|
|
|
|
Unmanned systems and components
|
|
Tactical unmanned air systems (UAS),
medium altitude long endurance (MALE) UAS, small expendable UAS,
flight controls, sensors and remote viewing systems
|
|
U.S. DoD and allied foreign ministries
of defense
|
Global Positioning System (GPS) receivers
|
|
Location tracking
|
|
Guided projectiles and precision
munitions
|
Navigation systems and positioning
navigation units
|
|
Satellite launch and orbiting navigation
and navigation for ground vehicles and fire control systems
|
|
USAF, U.S. Army, USMC and NASA
|
Ballistic missile targets
|
|
Targets for ground based ballistic
missile intercept systems
|
|
Missile Defense Agency
|
Fuzing and ordnance systems
|
|
Precision munitions, fuzes, and
electronic and electro safety arming devices (ESADs)
|
|
Various DoD and allied foreign military
customers
|
Simulation & Training
|
|
|
|
|
Military aircraft flight simulators,
reconfigurable training devices, distributed mission training
(DMT) suites
|
|
Advanced simulation technologies and
training for pilots, navigators, flight engineers, gunners and
operators
|
|
Fixed and rotary winged aircraft and
ground vehicles for USAF, USN, U.S. Army, Canadian DND and
allied foreign militaries
|
|
|
|
|
|
|
|
|
|
|
Training services, integrated logistics
support and maintenance
|
|
Systems management, operations, and
maintenance
|
|
Various DoD and allied foreign military
customers
|
Warrior Systems
|
|
|
|
|
Enhanced vision and weapon sights
products
|
|
Image intensified night vision
goggles/sights, holographic weapon sights, thermal sights and
images, and driver viewers for special forces, pilots and
aircrews, soldiers, marines, sailors and law enforcement
personnel
|
|
U.S. Army, USN, USMC, DHS, allied
foreign militaries and law enforcement agencies
|
Security & Detection
|
|
|
|
|
Airport security systems, explosives
detection systems and whole body imaging systems
|
|
Rapid scanning of passenger checked
baggage and carry-on luggage, scanning of large cargo containers
|
|
DHS, including the U.S. Transportation
and Security Administration (TSA), domestic and international
airports and state and local governments
|
Non-invasive security systems and
portals, and sophisticated sensors with threat detection
capabilities
|
|
Aviation, rail and border crossing
security
|
|
TSA, U.S. Customs agency, various
regulatory authorities and private security companies
|
10
|
|
|
|
|
Systems/Products/Services
|
|
Selected Applications
|
|
Selected Platforms/End
Users
|
|
Force protection, electronic warfare and
satellite monitoring
|
|
Counter IED systems, jamming and
satellite monitoring
|
|
U.K. MoD and other international
security agencies and ministries of defense
|
Telemetry & Advanced Technology
|
|
|
|
|
Telemetry and instrumentation systems
|
|
Real-time data acquisition, measurement,
processing, simulation, distribution, display and storage for
flight tracking, testing and termination
|
|
Aircraft, missiles and satellites
|
High power microwave sources,
systems & effects, pulse power systems and
electromagnetics hardened construction
|
|
Forensic analysis of weapons of mass
destruction, active detection of special nuclear material and
irradiation systems for decontamination and industrial
applications
|
|
U.K. MoD, U.S. Defense Threat Reduction
Agency, U.S. Army and USAF
|
Undersea Warfare
|
|
|
|
|
Airborne dipping sonars, submarine and
surface ship towed arrays
|
|
Submarine and surface ship detection and
localization
|
|
USN and allied foreign navies
|
Propulsion Systems
|
|
|
|
|
Heavy fuel engines, cross drive variable
transmissions, turret drive systems, vehicle suspension,
advanced drive systems and auxiliary power generators
|
|
Power trains and suspension systems for
military vehicles, power and energy management for military
hybrid electric vehicles, non portable and under armor auxiliary
power units, and heavy fueled engines for unmanned systems
|
|
U.S. Army, USMC and allied foreign
ministries of defense, manned/unmanned military platforms
|
Marine Services
|
|
|
|
|
Shipboard electronics racks, rugged
computers, rugged displays and communication terminals
|
|
Ruggedized displays, computers and
electronic systems
|
|
Naval vessels and other DoD applications
|
Service life extensions
|
|
Landing craft air cushion amphibious
vehicle
|
|
USN
|
Ship repair, overhaul and maintenance,
ship instructions, and battle force tactical training
|
|
Embedded shipboard training systems
|
|
USN, USCG and commercial shipowners
|
|
|
|
|
|
11
Backlog
and Orders
We define funded backlog as the value of funded orders received
from customers, less the cumulative amount of sales recognized
on such orders. We define funded orders as the value of contract
awards received from the U.S. Government, for which the
U.S. Government has appropriated funds, plus the value of
contract awards and orders received from customers other than
the U.S. Government. The table below presents our funded
backlog, percent of funded backlog at December 31, 2010
expected to be recorded as sales in 2011 and funded orders for
each of our reportable segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded Backlog at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
Funded Backlog
|
|
|
Expected to be
|
|
|
|
|
|
|
|
|
|
at December 31,
|
|
|
Recorded as
|
|
|
Funded Orders
|
|
|
|
2010
|
|
|
2009
|
|
|
Sales in 2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
|
|
|
(in millions)
|
|
|
Reportable Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C
3
ISR
|
|
$
|
2,635
|
|
|
$
|
2,313
|
|
|
|
71
|
%
|
|
$
|
3,723
|
|
|
$
|
3,156
|
|
Government Services
|
|
|
1,744
|
|
|
|
1,815
|
|
|
|
85
|
%
|
|
|
3,892
|
|
|
|
3,659
|
|
AM&M
|
|
|
1,872
|
|
|
|
1,655
|
|
|
|
51
|
|
|
|
2,996
|
|
|
|
2,594
|
|
Electronic Systems
|
|
|
4,840
|
|
|
|
5,079
|
|
|
|
67
|
|
|
|
5,041
|
|
|
|
5,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
11,091
|
|
|
$
|
10,862
|
|
|
|
68
|
%
|
|
$
|
15,652
|
|
|
$
|
14,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our funded backlog does not include the full potential value of
our contract awards, including those pertaining to multi-year,
cost-plus type contracts, which are generally funded on an
annual basis. Funded backlog also excludes the potential future
orders and related sales from unexercised priced contract
options that may be exercised by customers under existing
contracts and the potential future orders and related sales of
purchase orders that we may receive in the future under
indefinite quantity contracts or basic ordering agreements
during the term of such agreements.
Major
Customers
The table below presents a summary of our 2010 sales by end
customer and the percent contributed by each to our total 2010
sales. For additional information regarding domestic and foreign
sales, see Note 22 to our audited consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
2010 Sales
|
|
|
Total Sales
|
|
|
|
(in millions)
|
|
|
|
|
|
Air Force
|
|
$
|
3,981
|
|
|
|
25
|
%
|
Army
|
|
|
3,843
|
|
|
|
25
|
|
Navy/Marines
|
|
|
2,538
|
|
|
|
16
|
|
Other Defense
|
|
|
1,570
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Total DoD
|
|
$
|
11,932
|
|
|
|
76
|
%
|
Other U.S. Government
|
|
|
1,145
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Total U.S. Government
|
|
$
|
13,077
|
|
|
|
83
|
%
|
Foreign governments
|
|
|
1,142
|
|
|
|
8
|
|
Commercial foreign
|
|
|
791
|
|
|
|
5
|
|
Commercial domestic
|
|
|
670
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
15,680
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Direct sales to the end customer represent approximately 70% of
our consolidated sales, and we are a subcontractor or supplier
for the remaining 30%. Additionally, approximately 70% of our
DoD sales for 2010 were direct to the customer, and
approximately 30% were indirect through other prime system
contractors and subcontractors of the DoD.
Our sales are predominantly derived from contracts with agencies
of, and prime system contractors to, the U.S. Government.
Various U.S. Government agencies and contracting entities
exercise independent and individual purchasing decisions,
subject to annual appropriations by the U.S. Congress. For
the year ended December 31, 2010, our five largest
contracts generated 12% of our consolidated sales. For the year
ended December 31, 2010, our largest contract
12
(revenue arrangement) in terms of annual sales was the Army
Fleet Support contract with the U.S. Army Aviation and
Missile Command. Under this contract, which generated
approximately 3% of our sales, we provide maintenance and
logistical support services for rotary aircraft assigned to
Fort Rucker and satellite units in Alabama. The current
contract, assuming the exercise of two one-year options, expires
on September 30, 2013 and we anticipate that the customer
will announce an acquisition timeline during the third quarter
of 2011 for the contract re-competition.
Research
and Development
We conduct research and development activities that consist of
projects involving applied research, new product and systems
development and select concept studies. We employ scientific,
engineering and other personnel to improve our existing
product-lines and systems and develop new products,
technologies, and systems. As of December 31, 2010, we
employed approximately 13,500 engineers, a substantial portion
of whom hold advanced degrees, and who work on company sponsored
research and development efforts and customer funded research
and development contracts.
Company-sponsored (Independent) research and development costs
for our businesses that are U.S. Government contractors are
allocated to U.S. Government contracts and are charged to
cost of sales when the related sales are recognized as revenue.
Research and development costs for our commercial businesses are
expensed as incurred and are also charged to cost of sales. The
table below presents company-sponsored (Independent) research
and development expenses incurred for the years ended
December 31, 2010, 2009 and 2008 for our
U.S. Government businesses and our commercial businesses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Company-Sponsored Research and Development Costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Contractor Businesses
|
|
$
|
202
|
|
|
$
|
198
|
|
|
$
|
182
|
|
Commercial Businesses
|
|
|
68
|
|
|
|
59
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
270
|
|
|
$
|
257
|
|
|
$
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-funded research and development costs pursuant to
contracts (revenue arrangements) are not included in the table
above because they are direct contract costs and are charged to
cost of sales when the corresponding revenue is recognized. See
Note 2 to our audited consolidated financial statements for
additional information regarding research and development.
Competition
Our businesses generally encounter significant competition. We
believe that we are a major provider for many of the products
and services we offer to our DoD, government and commercial
customers.
Our ability to compete for existing and new business depends on
a variety of factors, including,
|
|
|
|
|
the effectiveness and innovation of our technologies, systems
and research and development programs;
|
|
|
|
our ability to offer better program performance at a competitive
cost;
|
|
|
|
historical technical and schedule performance;
|
|
|
|
our ability to attain supplier positions on contracts;
|
|
|
|
our ability to maintain an effective supplier and vendor base;
|
|
|
|
our ability to retain our employees and hire new ones,
particularly those who have U.S. Government security
clearances;
|
|
|
|
the capabilities of our facilities, equipment and personnel to
undertake the business for which we compete; and
|
|
|
|
our ability to quickly and flexibly meet customer requirements
and priorities.
|
In some instances, we are the incumbent supplier or have been
the sole provider on a contract for many years, and we refer to
these positions as sole-source. On our sole-source
contracts, there may be other suppliers who have the
13
capability to compete for the contracts involved, but they can
only enter the market if the customer chooses to reopen the
particular contract to competition. Sole-source contracts are
generally re-competed every three to five years and at times
more frequently. For the year ended December 31, 2010,
contracts where we held sole-source positions accounted for 53%
of our total sales and contracts which we had competitively won
accounted for 47% of our total sales.
L-3 is a defense supplier with a broad and diverse portfolio of
products and services. We are primarily a non-platform prime
system contractor and have diverse subcontractor positions. We
supply our products and services to other prime system
contractors. However, we also compete directly with other large
prime system contractors for (i) certain products,
subsystems and systems, where they have vertically integrated
businesses and (ii) niche areas where we are a prime system
contractor. We also compete with numerous other aerospace,
defense and government technical services contractors, which
generally provide similar products, subsystems, systems or
services.
In addition, our ability to compete for select contracts may
require us to team with one or more of the other
prime system contractors that bid and compete for major platform
programs, and our ability to team with them is often
dependent upon the outcome of a competition for subcontracts
they award.
Patents
and Licenses
Generally, we do not believe that our patents, trademarks and
licenses are material to our operations. Furthermore, most of
our U.S. Government contracts generally permit us to use
patents owned by other U.S. Government contractors. Similar
provisions in U.S. Government contracts awarded to other
companies make it impossible for us to prevent the use of our
patents in most DoD work performed by other companies for the
U.S. Government.
Raw
Materials
Generally, our businesses engage in limited manufacturing
activities and have minimal exposure to fluctuations in the
supply of raw materials. L-3s business mix is
approximately 50% services work, and for those businesses that
sell hardware and product, most of the value that we provide is
labor oriented, such as design, engineering, assembly and test
activities. In manufacturing our products, we use our own
production capabilities as well as a diverse base of third party
suppliers and subcontractors. Although certain aspects of our
manufacturing activities require relatively scarce raw
materials, we have not experienced difficulty in our ability to
procure raw materials, components,
sub-assemblies
and other supplies required in our manufacturing processes.
Contracts
A significant portion of our sales are derived from sole-source
contracts as discussed above. We believe that our customers
award sole-source contracts to the most capable supplier in
terms of quality, responsiveness, design, engineering and
program management competency and cost. However, as discussed
above, we are increasingly competing against other prime system
contractors for major subsystems and systems business.
Generally, the sales price arrangements for our contracts are
either fixed-price, cost-plus or
time-and-material
type. Generally, a fixed-price type contract offers higher
profit margin potential than a cost-plus type or
time-and-material
type contract, which is commensurate with the greater levels of
risk we assume on a fixed-price type contract.
On a fixed-price type contract (revenue arrangement), we agree
to perform the contractual statement of work for a predetermined
sales price. Although a fixed-price type contract generally
permits us to retain profits if the total actual contract costs
are less than the estimated contract costs, we bear the risk
that increased or unexpected costs may reduce our profit or
cause us to sustain losses on the contract. Accounting for the
sales on a fixed-price type contract that is covered by contract
accounting standards requires the preparation of estimates of
(1) the total contract revenue, (2) the total costs at
completion, which is equal to the sum of the actual incurred
costs to date on the contract and the estimated costs to
complete the contracts statement of work, and (3) the
measurement of progress towards completion. Adjustments to
original estimates for a contracts revenue, estimated
costs at completion and estimated total profit or loss are often
required as work progresses under a contract, as experience is
gained and as more information is obtained, even though the
scope of work required under the contract may not change.
14
On a cost-plus type contract (revenue arrangement), we are paid
our allowable incurred costs plus a profit which can be fixed or
variable depending on the contracts fee arrangement up to
predetermined funding levels determined by our customers.
Cost-plus type contracts with award and incentive fee provisions
are our primary variable contract fee arrangement. Award fees
provide for a fee based on actual performance relative to
contractually specified performance criteria. Incentive fees
provide for a fee based on the relationship which total
allowable costs bear to target cost. Sales from cost-plus type
contracts with award fees were approximately $907 million
for the year ended December 31, 2010. Sales from cost-plus
type contracts with incentive fees were approximately
$944 million for the year ended December 31, 2010. Our
customer satisfaction and performance record is evidenced by our
receipt of performance-based award fees achieving approximately
90% of the available award fees on average during the year ended
December 31, 2010.
On a
time-and-material
type contract (revenue arrangement), we are paid on the basis of
direct labor hours expended at specified fixed-price hourly
rates (that include wages, overhead, allowable general and
administrative expenses and profit) and materials at cost.
Therefore, on cost-plus type and
time-and-material
type contracts we do not bear the risks of unexpected cost
overruns, provided that we do not incur costs that exceed the
predetermined funded amounts.
We believe we have a balanced mix of fixed-price, cost-plus and
time-and-material
type contracts, a diversified business base and an attractive
customer profile with limited reliance on any single contract.
The table below presents the percentage of our total sales
generated from each contract-type for the years ended
December 31, 2010, 2009, and 2008.
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Year Ended December 31,
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Contract-Type
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2010
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2009
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2008
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Fixed-price
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58
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%
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57
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%
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54
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%
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Cost-plus
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28
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%
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28
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%
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27
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%
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Time-and-material
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14
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%
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15
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%
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19
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%
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Total sales
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100
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%
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100
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%
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100
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%
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Substantially all of our cost-plus type contracts and
time-and-material
type contracts are with U.S. Government customers.
Substantially all of our sales to commercial customers are
transacted under fixed-price sales arrangements and are included
in our fixed-price type contract sales.
Regulatory
Environment
Most of our revenue arrangements with agencies of the
U.S. Government, including the DoD, are subject to unique
procurement and administrative rules. These rules are based on
both laws and regulations, including the U.S. Federal
Acquisition Regulation (FAR), that: (1) impose various
profit and cost controls, (2) regulate the allocations of
costs, both direct and indirect, to contracts and
(3) provide for the non-reimbursement of unallowable costs.
Unallowable costs include, but are not limited to, lobbying
expenses, interest expenses and certain costs related to
business acquisitions, including, for example, the incremental
depreciation and amortization expenses arising from fair value
increases to the historical carrying values of acquired assets.
Our contract administration and cost accounting policies and
practices are also subject to oversight by government
inspectors, technical specialists and auditors. See
Part I Item 1A Risk
Factors beginning on page 17 for a discussion of
certain additional business risks specific to our government
contracts.
As is common in the U.S. defense industry, we are subject
to business risks, including changes in the
U.S. Governments procurement policies (such as
greater emphasis on competitive procurement), governmental
appropriations, national defense policies or regulations,
service modernization plans, and availability of funds. A
reduction in expenditures by the U.S. Government for
products and services of the type we manufacture and provide,
lower margins resulting from increasingly competitive
procurement policies, a reduction in the volume of contracts or
subcontracts awarded to us or the incurrence of substantial
contract cost overruns could materially adversely affect our
business.
Certain of our sales are under foreign military sales (FMS)
agreements directly between the U.S. Government and allied
foreign governments. In such cases, because we serve only as the
supplier, we do not have unilateral control over the terms of
the agreements. These contracts are subject to extensive legal
and regulatory requirements and, from time to time, agencies of
the U.S. Government investigate whether our operations are
being conducted in accordance with these laws
15
and regulations. Investigations could result in administrative,
civil, or criminal liabilities, including repayments,
disallowance of certain costs, or fines and penalties. Certain
of our sales are direct commercial sales to allied foreign
governments. These sales are subject to U.S. Government
approval and licensing under the Arms Export Control Act. Legal
restrictions on sales of sensitive U.S. technology also
limit the extent to which we can sell our products to allied
foreign governments or private parties.
All of our U.S. Government contracts can be terminated by
the U.S. Government either for its convenience or if we
default by failing to perform under the contract. Termination
for convenience provisions provide only for our recovery of
costs incurred or committed settlement expenses and profit on
the work completed prior to termination. Termination for default
provisions provide for the contractor to be liable for excess
costs incurred by the U.S. Government in procuring
undelivered items from another source. Our contracts with
foreign governments generally contain similar provisions
relating to termination at the convenience of the customer.
Environmental
Matters
Our operations are subject to various environmental laws and
regulations relating to the discharge, storage, treatment,
handling, disposal and remediation of certain materials,
substances and wastes used in our operations. We continually
assess our obligations and compliance with respect to these
requirements.
We have also assessed the risk of environmental contamination
for our various manufacturing facilities, including our acquired
businesses and, where appropriate, have obtained
indemnification, either from the sellers of those acquired
businesses or through pollution liability insurance. We believe
that our current operations are in substantial compliance with
all existing applicable environmental laws and permits. We
believe our current expenditures will allow us to continue to be
in compliance with applicable environmental laws and
regulations. While it is difficult to determine the timing and
ultimate cost to be incurred in order to comply with these laws,
based upon available internal and external assessments, with
respect to those environmental loss contingencies of which we
are aware, we believe that after considering recorded
liabilities, there are no environmental loss contingencies that,
individually or in the aggregate, would be material to our
consolidated results of operations, financial position or cash
flows.
Employees
As of December 31, 2010, we employed approximately
63,000 full-time and part-time employees, 83% of whom were
located in the United States. Of these employees, approximately
16% are covered by 111 separate collective bargaining agreements
with various labor unions. The success of our business is, to a
large extent, dependent upon the knowledge of our employees and
on the management, contracting, engineering and technical skills
of our employees. In addition, our ability to grow our
businesses, obtain additional orders for our products and
services and to satisfy contractual obligations under certain of
our existing revenue arrangements is largely dependent upon our
ability to attract and retain employees who have
U.S. Government security clearances, particularly those
with clearances of top-secret and above. We believe that
relations with our employees are positive.
L-3
Holdings Obligations
The only obligations of L-3 Holdings at December 31, 2010
were: (1) its 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 Revolving 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. In order to
generate the funds necessary to repurchase its common stock and
pay dividends declared and principal and interest on its
outstanding indebtedness, if any, L-3 Holdings relies on
dividends and other payments from its subsidiaries.
Available
Information
We are subject to the informational requirements of the
Securities Exchange Act of 1934 and, in accordance therewith,
16
file reports, including annual, quarterly and current reports,
proxy statements and other information with the SEC. Such
reports and other information can be inspected and copied at the
Public Reference Room of the SEC located at
100 F Street, N.E., Washington, D.C. 20549.
Copies of such material can be obtained from the Public
Reference Room of the SEC at prescribed rates. You may obtain
information on the operation of the Public Reference Room by
calling the SEC at
1-800-SEC-0330.
Such material may also be accessed electronically by means of
the SECs home page on the Internet at
http://www.sec.gov
.
You may also obtain a free copy of our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and proxy statement for the annual shareholders meeting,
as well as any amendments to those reports as soon as reasonably
practicable after electronic filing with the SEC through our
website on the Internet at
http://www.L-3com.com
.
The Company also has a Corporate Governance webpage. You can
access the Companys Corporate Governance Guidelines and
charters for the audit, compensation and nominating/corporate
governance committees of our Board of Directors through our Web
site,
http://www.L-3com.com
,
by clicking on the Corporate Governance link under
the heading Investor Relations. The Company posts
its Code of Ethics and Business Conduct on its Corporate
Governance webpage under the link Code of Ethics and
Business Conduct. The Companys Code of Ethics and
Business Conduct applies to all directors, officers and
employees, including our chairman, president and chief executive
officer, our senior vice president and chief financial officer,
and our vice president, controller, and principal accounting
officer. We will post any amendments to the Code of Ethics and
Business Conduct, and any waivers that are required to be
disclosed by the rules of either the SEC or the New York Stock
Exchange, Inc. (NYSE), on our Web site within the
required periods. The information on the Companys Web site
is not incorporated by reference into this report.
To learn more about L-3, please visit the Companys Web
site at
http://www.L-3com.com
.
From time to time, L-3 uses its Web site as a channel of
distribution of material Company information. Financial and
other material information regarding L-3 is routinely posted on
the Companys Web site and is readily accessible.
You should carefully consider the following risk factors and
other information contained or incorporated by reference in this
Form 10-K,
including Part II Item 7
Managements Discussion and Analysis of Financial Condition
and Results of Operations. Any of these risks could
materially affect our business and our financial condition,
results of operations and cash flows, which could in turn
materially affect the price of our common stock.
Our
contracts (revenue arrangements) with U.S. Government customers
entail certain risks.
A
decline in or a redirection of the U.S. defense budget could
result in a material decrease in our sales, results of
operations and cash flows.
Our government contracts are primarily dependent upon the
U.S. defense budget which is subject to the congressional
budget authorization and appropriations process. Congress
usually appropriates funds for a given program on a September 30
fiscal year basis, even though contract periods of performance
may extend over many years. Consequently, at the beginning of a
major program, the contract is usually partially funded, and
additional monies are normally committed to the contract by the
procuring agency only as appropriations are made by Congress in
future fiscal years. The entire federal government is currently
operating under a continuing resolution authority for fiscal
year ending September 30, 2011. The continuing resolution
funds programs and services, including DoD budgets, at
approximately the same levels as fiscal year 2010. The
continuing resolution expires on March 4, 2011, after
which, Congress will either pass a new appropriations bill,
extend the continuing resolution, or shut down the government
for all nonessential federal government services. An extension
of the continuing resolution or a shut down of the government
for all nonessential federal government services may adversely
affect our sales and operating results and possibly delay new
awards. We are unable to predict the total funding that congress
will approve for the U.S. defense budget and the funding of
individual programs for fiscal year 2011 and subsequent fiscal
years, including supplemental appropriations for military
operations in Iraq and Afghanistan.
17
In addition, DoD budgets could be negatively affected by several
factors, including events we cannot foresee,
U.S. Government budget deficits and national debt, current
or future economic conditions, presidential administration
priorities, U.S. national security strategies, a change in
spending priorities, the cost of sustaining U.S. military
and related security operations in Iraq and Afghanistan and
other locales around the world where U.S. military support
may be pivotal, and other related exigencies and contingencies.
While we are unable to predict the impact or outcome of these
uncertainties, the effect of changes in these DoD imperatives
could cause the DoD budget to remain unchanged or to decline (or
even to increase). A significant decline in or redirection of
U.S. military expenditures in the future could result in a
decrease to our sales, earnings and cash flows. The loss or
significant reduction in U.S. government funding of a large
program in which we participate could also result in a decrease
in our future sales, earnings and cash flows.
We
rely predominantly on sales to U.S. Government entities, and the
loss or delay of a significant number of our contracts would
have a material adverse effect on our results of operations and
cash flows.
Our sales are predominantly derived from contracts (revenue
arrangements) with agencies of, and prime system contractors to,
the U.S. Government. The loss or delay of all or a
substantial portion of our sales to the U.S. Government
would have a material adverse effect on our results of
operations and cash flows. Approximately 83%, or
$13.1 billion, of our sales for the year ended
December 31, 2010 were made directly or indirectly to
U.S. Government agencies, including the DoD. Aggregate
sales from our five largest contracts (revenue arrangements)
amounted to approximately $1.9 billion, or 12% of our sales
for the year ended December 31, 2010. For the year ended
December 31, 2010, our largest contract (revenue
arrangement) in terms of annual sales was the Army Fleet Support
contract with the U.S. Army Aviation and Missile Command.
Under this contract, which generated approximately 3% of our
sales, we provide maintenance and logistical support services
for rotary wing aircraft assigned to Fort Rucker and
satellite units in Alabama. The current contract, assuming the
exercise of two one-year options, expires on September 30,
2013 and we anticipate that the customer will announce an
acquisition timeline during the third quarter of 2011 for the
contract re-competition.
A substantial majority of our total sales are for products and
services under contracts with various agencies and procurement
offices of the DoD or with prime contractors to the DoD.
Although these various agencies, procurement offices and prime
contractors are subject to common budgetary pressures and other
factors, our customers exercise independent purchasing
decisions. Because of this concentration of contracts, if a
significant number of our DoD contracts and subcontracts are
simultaneously delayed or cancelled for budgetary, performance
or other reasons, it would have a material adverse effect on our
results of operations and cash flows.
In addition to contract cancellations and declines in agency
budgets, our backlog and future financial results may be
adversely affected by:
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curtailment of the U.S. Governments use of technology
or other services and product providers, including curtailment
due to government budget reductions and related fiscal matters;
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developments in Iraq or Afghanistan, or other geopolitical
developments that affect demand for our products and services;
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our ability to hire and retain personnel to meet increasing
demand for our services; and
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technological developments that impact purchasing decisions or
our competitive position.
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The
DoDs wide-ranging efficiencies initiative, which targets
affordability and cost growth, could have a material effect on
the procurement process and may adversely affect our existing
contracts and the awards of new contracts.
The U.S. Government has issued guidance regarding changes
to the procurement process that is intended to control cost
growth throughout the acquisition cycle by developing a
competitive strategy for each program. As a result, the Company
expects to engage in more frequent negotiations and
re-competitions on a cost or price analysis basis with every
competitive bid in which it participates. This initiative is
organized into five major areas: affordability and cost growth;
productivity and innovation; competition; services acquisition;
and processes and bureaucracy. Because this initiative
18
significantly changes the way the U.S. Government solicits,
negotiates and manages its contracts, this initiative could
result in a reduction in expenditures for the type of products
we manufacture for, and services we provide to, the
U.S. Government and could have a material negative impact
on our future sales, earnings and cash flows.
In addition, on January 6, 2011, U.S. Secretary
Gates announcement on future DoD spending plans included
an outline to reduce contractor staff support jobs by 10% per
year for three years in order to save approximately
$6 billion. This initiative will primarily affect the
businesses within our Government Services reportable segment and
could result in the Company losing certain of its existing
contracts (revenue arrangements) depending on how the DoD
implements this initiative.
Our
government contracts contain unfavorable termination provisions
and are subject to audit and modification. If a termination
right is exercised by the government, it could have a material
adverse effect on our business, financial condition, results of
operations and cash flows.
Companies engaged primarily in supplying defense-related
equipment and services to U.S. Government agencies are
subject to certain business risks peculiar to the defense
industry. These risks include the ability of the
U.S. Government to unilaterally:
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suspend us from receiving new contracts pending resolution of
alleged violations of procurement laws or regulations;
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terminate existing contracts;
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reduce the value of existing contracts;
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audit our contract-related costs and fees, including allocated
indirect costs; and
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control and potentially prohibit the export of our products and
systems.
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All of our U.S. Government contracts can be terminated by
the U.S. Government either for its convenience or if we
default by failing to perform under the contract. Termination
for convenience provisions provide only for our recovery of
costs incurred or committed settlement expenses and profit on
the work completed prior to termination. Termination for default
provisions provide for the contractor to be liable for excess
costs incurred by the U.S. Government in procuring
undelivered items from another source. Our contracts with
foreign governments generally contain similar provisions
relating to termination at the convenience of the customer.
U.S. Government agencies, including the Defense Contract
Audit Agency and various agency Inspectors General, routinely
audit and investigate our costs and performance on contracts, as
well as our accounting and general business practices. Based on
the results of such audits, the U.S. Government may adjust
our contract related costs and fees, including allocated
indirect costs. In addition, under U.S. Government
purchasing regulations, some of our costs, including certain
business acquisition costs, most financing costs, portions of
research and development costs, and certain marketing expenses
may not be reimbursable under U.S. Government contracts.
We currently have a backlog of funded orders, primarily under
contracts with the U.S. Government. Our total funded
backlog was $11,091 million at December 31, 2010. As
described above, the U.S. Government may unilaterally
modify or terminate its contracts with us. Accordingly, most of
our backlog could be modified or terminated by the
U.S. Government, which would negatively impact our future
sales, results of operations and cash flows.
We may
not be able to win competitively awarded contracts or receive
required licenses to export our products, which could have a
material adverse effect on our business, financial condition,
results of operations and future prospects.
Our government contracts are subject to competitive bidding. We
obtain many of our U.S. Government contracts through a
competitive bidding process. We may not be able to continue to
win competitively awarded contracts. In
19
addition, awarded contracts may not generate sales sufficient to
result in our profitability. We are also subject to risks
associated with the following:
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the frequent need to bid on programs in advance of the
completion of their design, which may result in unforeseen
technological difficulties
and/or
cost
overruns;
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the substantial time, effort and experience required to prepare
bids and proposals for competitively awarded contracts that may
not be awarded to us;
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design complexity and rapid technological obsolescence; and
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the constant need for design improvement.
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In addition to these U.S. Government contract risks, we are
not permitted to export some of our products and are also
required to obtain licenses from U.S. Government agencies
to export many of our products and systems. Failure to receive
required licenses would eliminate our ability to sell our
products and systems outside the United States.
Intense
competition and bid protests may adversely effect our sales,
results of operations and cash flows.
The defense and commercial industries in which our businesses
operate are highly competitive. We expect that the DoDs
increased use of commercial
off-the-shelf
products and components in military equipment will continue to
encourage new competitors to enter the market. We also expect
increased competition for our products and services due to the
uncertainty of future U.S. defense budgets. Furthermore,
the current competitive environment has resulted in an increase
of bid protests from unsuccessful bidders, which typically
extends the time until work on a contract can begin.
Additionally, some of our competitors are larger than we are and
have more financial and other resources than we have. For more
information concerning the factors that affect our ability to
compete, see Part I
Item 1 Business Competition
beginning on page 13.
We are
subject to government investigations, which could have a
material adverse effect on our business, financial condition,
results of operations, cash flows and future
prospects.
U.S. Government contracts are subject to extensive legal
and regulatory requirements, and from time to time agencies of
the U.S. Government investigate whether such contracts were
and are being conducted in accordance with these requirements.
We are currently cooperating with the U.S. Government on
several investigations, including those discussed in
Note 19 to our audited consolidated financial statements
beginning on
page F-38.
Under U.S. Government regulations, an indictment of the
Company by a federal grand jury, or an administrative finding
against us as to our present responsibility to be a
U.S. Government contractor or subcontractor, could result
in us being suspended for a period of time from eligibility for
awards of new government contracts or task orders or in a loss
of export privileges, as was the case in June 2010 when we
received notice that our Integrated Systems Special
Support Programs Division had been temporarily suspended from
receiving new contracts or orders in connection with a
governmental investigation (the temporary suspension was lifted
a month later). A conviction, or an administrative finding
against us that satisfies the requisite level of seriousness,
could result in debarment from contracting with the federal
government for a specific term.
We are
subject to the risks of current and future legal proceedings,
which could have a material adverse effect on our business,
financial condition, results of operations, cash flows and
future prospects.
At any given time, we are a defendant in various material legal
proceedings and litigation matters arising in the ordinary
course of business, including litigation, claims and assessments
that have been asserted against acquired businesses, which we
have assumed. Although we maintain insurance policies, these
policies may not be adequate to protect us from all material
judgments and expenses related to current or future claims and
may not cover the conduct that is the subject of the litigation.
Desired levels of insurance may not be available in the future
at economical prices or at all. In addition, we believe that
while we have valid defenses with respect to legal matters
pending against us, the results of litigation can be difficult
to predict, including those involving jury trials. Accordingly,
our current judgment as to the likelihood of our loss (or our
current estimate as to the potential range of loss, if
applicable) with respect to any particular litigation matter may
20
turn out to be wrong. A significant judgment against us, arising
out of any of our current or future legal proceedings and
litigation, could have a material adverse effect on our
business, financial condition, results of operations, cash flows
and future prospects. For a discussion of material litigation to
which we are currently a party, including the Kalitta Air
matter, which is expected to go to a jury trial during 2011 and
as to which the amount of damages likely to be claimed is
significant, see Note 19 to our audited consolidated
financial statements on
page F-38.
If we are
unable to keep pace with rapidly evolving products and service
offerings and technological change, there could be a material
adverse effect on our business, financial condition, results of
operations, cash flows and future prospects.
The rapid change of technology is a key feature of most of the
markets in which our products, services and systems oriented
businesses operate. To succeed in the future, we will need to
continue to design, develop, manufacture, assemble, test, market
and support new products and enhancements on a timely and
cost-effective basis. Historically, our technology has been
developed through customer-funded and internally funded research
and development and through certain business acquisitions. We
may not be able to continue to maintain comparable levels of
research and development or successfully complete such
acquisitions. In the past, we have allocated substantial funds
to capital expenditures, programs and other investments. This
practice will continue to be required in the future. Even so, we
may not be able to successfully identify new opportunities and
may not have the necessary financial resources to develop new
products and systems in a timely or cost-effective manner. At
the same time, products and technologies developed by others may
render our products, services and systems obsolete or
non-competitive.
Our
business acquisition strategy involves risks, and we may not
successfully implement our strategy.
We opportunistically seek to acquire businesses that enhance our
capabilities and add new technologies, products, services,
programs, contracts, and customers to our existing businesses.
We may not be able to continue to identify acquisition
candidates on commercially reasonable terms or at all. If we
make additional business acquisitions, we may not realize the
benefits anticipated from these acquisitions, including sales
growth, cost synergies and improving margins. Furthermore, we
may not be able to obtain additional financing for business
acquisitions, since such additional financing could be
restricted or limited by the terms of our debt agreements or due
to unfavorable credit market conditions.
The process of integrating the operations of acquired businesses
into our existing operations may result in unforeseen
difficulties and may require significant financial and
managerial resources that would otherwise be available for the
ongoing development or expansion of our existing operations.
Possible future business acquisitions could result in the
incurrence of additional debt and related interest expense and
contingent liabilities, each of which could result in an
increase to our already significant level of outstanding debt,
as well as more restrictive covenants.
We consider and may enter into strategic business acquisitions
on an ongoing basis and may be evaluating acquisitions or
engaging in acquisition negotiations at any given time. We
regularly evaluate potential acquisitions and joint venture
transactions and have not entered into any agreements with
respect to any material transactions at this time. Furthermore,
in certain of our business acquisitions we have assumed all
claims against and liabilities of the acquired business,
including both asserted and unasserted claims and liabilities.
Goodwill
represents a significant asset on our balance sheet and may
become impaired.
Goodwill represents a significant asset on our balance sheet. We
review goodwill and intangible assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of these assets may not be recoverable, and also review
goodwill annually in accordance with the accounting standards
for goodwill and intangible assets. The annual impairment test
requires us to determine the fair value of our reporting units
in comparison to their carrying values. A decline in the
estimated fair value of a reporting unit could result in a
goodwill impairment, and a related non-cash impairment charge
against earnings, if estimated fair value for the reporting unit
is less than the carrying value of the net assets of the
reporting unit, including its goodwill. The fair value of
several of our reporting units has declined in 2010 compared to
2009 due to continued global economic weakness and uncertainty
of future U.S. and foreign defense budgets. A further
decline in the estimated fair value of several of our reporting
units could result in an adverse effect on our
21
financial condition and results of operations. See
Part II Item 7
Managements Discussion and Analysis of Financial Condition
and Results of Operations Critical Accounting
Policies beginning on page 35.
Our
results of operations and cash flows are substantially affected
by our mix of fixed-price, cost-plus and
time-and-material
type contracts.
Our sales are transacted using written revenue arrangements, or
contracts, which are generally either fixed-price, cost-plus or
time-and-material.
For a description of our revenue recognition policies, see
Part II Item 7
Managements Discussion and Analysis of Financial Condition
and Results of Operations Critical Accounting
Policies beginning on page 35.
The table below presents the percentage of our total sales
generated from each contract-type.
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|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Contract-Type
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-price
|
|
|
58
|
%
|
|
|
57
|
%
|
|
|
54
|
%
|
Cost-plus
|
|
|
28
|
%
|
|
|
28
|
%
|
|
|
27
|
%
|
Time-and-material
|
|
|
14
|
%
|
|
|
15
|
%
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substantially all of our cost-plus and
time-and-material
type contracts are with the U.S. Government, primarily the
DoD. Substantially all of our sales to commercial customers are
transacted under fixed-price sales arrangements, and are
included in our fixed-price type contract sales.
On a fixed-price type contract (revenue arrangement), we agree
to perform the contractual statement of work for a predetermined
sales price. Although a fixed-price type contract generally
permits us to retain profits if the total actual contract costs
are less than the estimated contract costs, we bear the risk
that increased or unexpected costs may reduce our profit or
cause us to sustain losses on the contract.
On a cost-plus type contract (revenue arrangement), we are paid
our allowable incurred costs plus a profit which can be fixed or
variable depending on the contracts fee arrangement up to
predetermined funding levels determined by our customers. On a
time-and-material
type contract (revenue arrangement), we are paid on the basis of
direct labor hours expended at specified fixed-price hourly
rates (that include wages, overhead, allowable general and
administrative expenses and profit) and materials at cost.
Therefore, on cost-plus type and
time-and-material
type contracts, we do not bear the risks of unexpected cost
overruns, provided that we do not incur costs that exceed the
predetermined funded amounts.
Additionally, the impact of revisions in profit or loss
estimates for all types of contracts subject to percentage of
completion accounting are recognized on a cumulative
catch-up
basis in the period in which the revisions are made. Provisions
for anticipated losses on contracts are recorded in the period
in which they become evident. Amounts representing contract
change orders or claims are included in sales only when they can
be reliably estimated and their realization is reasonably
assured. The revisions in contract estimates, if significant,
can materially affect our results of operations and cash flows,
as well as reduce the valuations of receivables and inventories;
and in some cases, result in liabilities to complete contracts
in a loss position.
Our
significant level of debt and our ability to make payments on or
service our indebtedness may adversely affect our financial and
operating activities or ability to incur additional
debt.
At December 31, 2010, we had approximately
$4,150 million in aggregate principal amount of outstanding
debt. In addition, at December 31, 2010, we had borrowing
capacity of $983 million available to us under our
three-year $1 billion revolving credit facility that
expires on October 23, 2012 (Revolving Credit Facility),
after reductions of $17 million for outstanding letters of
credit. In the future, we may increase our borrowings, subject
to limitations imposed on us by our debt agreements. On
February 7, 2011, we issued $650 million in principal
amount of 4.95% Senior Notes maturing
22
February 15, 2021. We will use the net proceeds, together
with cash on hand, to redeem our $650 million
5
7
/
8
% Senior
Subordinated Notes maturing January 15, 2015 (2015 Notes).
The redemption price is 101.958% of the principal amount, plus
accrued and unpaid interest up to, but not including,
March 9, 2011, the redemption date. Subsequent to the
redemption of the 2015 Notes, the first scheduled maturity of
our existing debt will be our $1 billion
6
3
/
8
% Senior
Subordinated Notes maturing October 15, 2015. See
Part II Item 7
Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital
Resources Debt beginning on page 55.
Our ability to make scheduled payments of principal and interest
on our indebtedness and to refinance our existing debt depends
on our future financial performance as well as our ability to
access the capital markets, and the relative attractiveness of
available financing terms. We do not have complete control over
our future financial performance because it is subject to
economic, political, financial (including credit market
conditions), competitive, regulatory and other factors affecting
the aerospace and defense industry, as well as commercial
industries in which we operate. It is possible that in the
future our businesses may not generate sufficient cash flow from
operations to allow us to service our debt and make necessary
capital expenditures. If this situation occurs, we may have to
reduce costs and expenses, sell assets, restructure debt or
obtain additional equity capital. We may not be able to do so in
a timely manner or upon acceptable terms in accordance with the
restrictions contained in our debt agreements. Our level of
indebtedness has important consequences to us. These
consequences may include:
|
|
|
|
|
requiring a substantial portion of our net cash flow from
operations to be used to pay interest and principal on our debt
and therefore be unavailable for other purposes, including
acquisitions, capital expenditures, paying dividends to our
shareholders, repurchasing shares of our common stock, research
and development and other investments;
|
|
|
|
limiting our ability to obtain additional financing for
acquisitions, working capital, investments or other
expenditures, which, in each case, may limit our ability to
carry out our acquisition strategy;
|
|
|
|
increasing interest expenses due to higher interest rates on our
Revolving Credit Facility as it has a variable interest rate;
|
|
|
|
heightening our vulnerability to downturns in our business or in
the general economy and restricting us from making acquisitions,
introducing new technologies and products or exploiting business
opportunities; and
|
|
|
|
impacting debt covenants that limit our ability to borrow
additional funds, dispose of assets, pay cash dividends to our
shareholders or repurchase shares of our common stock. Failure
to comply with such covenants could result in an event of
default which, if not cured or waived, could result in the
acceleration of our outstanding indebtedness.
|
Additionally, on December 31, 2010, we had
$9,578 million of contractual obligations (including
outstanding indebtedness). For a detailed listing of the
components of our contractual obligations, see
Part II Item 7
Managements Discussion and Analysis of Financial Condition
and Results of Operations Contractual
Obligations on page 57.
Our debt
agreements restrict our ability to finance our future operations
and, if we are unable to meet our financial ratios, could cause
our existing debt to be accelerated.
Our debt agreements contain a number of significant covenants
that, among other things, restrict our ability to:
|
|
|
|
|
sell assets;
|
|
|
|
incur more indebtedness;
|
|
|
|
repay certain indebtedness;
|
|
|
|
make certain investments or business acquisitions;
|
|
|
|
make certain capital expenditures;
|
23
|
|
|
|
|
engage in business mergers or consolidations; and
|
|
|
|
engage in certain transactions with subsidiaries and affiliates.
|
These restrictions could impair our ability to finance our
future operations or capital needs or engage in other business
activities that may be in our interest. In addition, some of our
debt agreements also require us to maintain compliance with
certain financial ratios, including (1) total consolidated
earnings before interest, taxes, depreciation and amortization
to total consolidated cash interest expense, (2) total
consolidated funded indebtedness less designated cash balances
to total consolidated earnings before interest, taxes,
depreciation and amortization, and (3) consolidated senior
indebtedness less designated cash balances to consolidated
earnings before interest, taxes, depreciation and amortization.
Our ability to comply with these ratios and covenants may be
affected by events beyond our control. A breach of any of these
agreements or our inability to comply with the required
financial ratios or covenants could result in a default under
those debt agreements. In the event of any such default, the
lenders under those debt agreements could elect to:
|
|
|
|
|
declare all outstanding debt, accrued interest and fees to be
due and immediately payable;
|
|
|
|
require us to apply all of our available cash to repay our
outstanding senior debt; and
|
|
|
|
prevent us from making debt service payments on our other debt.
|
For further discussion of our financial ratios, debt agreements
and other payment restrictions, see Note 10 to our audited
consolidated financial statements on
page F-21.
If we are
unable to attract and retain key management and personnel, we
may become unable to operate our business effectively.
Our future success depends to a significant degree upon the
continued contributions of our management, and our ability to
attract and retain highly qualified management and technical
personnel, including employees who have U.S. Government
security clearances, particularly clearances of top-secret and
above. We do not maintain any key person life insurance policies
for members of our management. We face competition for
management and technical personnel from other companies and
organizations. Failure to attract and retain such personnel
would damage our future prospects.
Environmental
laws and regulations may subject us to significant
liability.
Our operations are subject to various U.S. federal, state
and local as well as certain foreign environmental laws and
regulations within the countries in which we operate relating to
the discharge, storage, treatment, handling, disposal and
remediation of certain materials, substances and wastes used in
our operations.
New laws and regulations, stricter enforcement of existing laws
and regulations, the discovery of previously unknown
contamination or the imposition of new
clean-up
requirements may require us to incur a significant amount of
additional costs in the future and could decrease the amount of
cash flow available to us for other purposes, including capital
expenditures, research and development and other investments and
could have a material adverse effect on our business, financial
condition, results of operations, cash flows and future
prospects.
Our sales
to certain foreign customers expose us to risks associated with
operating internationally.
For the year ended December 31, 2010, sales to foreign
customers, excluding our foreign sales made under foreign
military sales (FMS) agreements directly between the
U.S. Government and allied foreign governments, represented
approximately 11% of our consolidated sales. Consequently, our
businesses are subject to a variety of risks that are specific
to international operations, including the following:
|
|
|
|
|
export regulations that could erode profit margins or restrict
exports;
|
|
|
|
compliance with the U.S. Foreign Corrupt Practices Act
(FCPA) and similar
non-U.S. regulations;
|
24
|
|
|
|
|
the burden and cost of compliance with foreign laws, treaties
and technical standards and changes in those regulations;
|
|
|
|
contract award and funding delays;
|
|
|
|
potential restrictions on transfers of funds;
|
|
|
|
currency fluctuations;
|
|
|
|
import and export duties and value added taxes;
|
|
|
|
transportation delays and interruptions;
|
|
|
|
uncertainties arising from foreign local business practices and
cultural considerations; and
|
|
|
|
potential military conflicts and political risks.
|
While we have and will continue to adopt measures to reduce the
potential impact of losses resulting from the risks of our
foreign business, we cannot ensure that such measures will be
adequate.
Continued
global economic weakness and U.S. Government budget deficits may
materially and adversely affect our results.
Domestic and foreign economies have continued to show weakness,
which has negatively impacted, and may continue to negatively
impact, our sales to the commercial markets in which we operate,
including our commercial aviation products and commercial
shipbuilding products businesses. Sales to commercial customers
were approximately $1.5 billion in 2010 and 2009, or 9% of
our total sales in 2010 compared to 10% of our total sales in
2009.
Additionally, while we are unable to predict the impact and
outcome of current or longer term economic conditions and the
U.S. Governments budget deficits and national debt
and actions taken to address them, these conditions could also
negatively affect future U.S. defense budgets and spending,
and consequently, our financial condition, results of
operations, cash flows and future prospects. Sales to the DoD
represented 76% of our total sales in 2010 and 2009,
respectively.
These economic conditions could also adversely affect our
pension plan funded status and annual pension expense. See
Part II Item 7
Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital
Resources Pension Plans on page 53 and
Note 20 to our audited consolidated financial statements.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Item 2. Properties
At December 31, 2010, we operated in 537 locations
consisting of manufacturing facilities, administration, research
and development and other properties throughout the United
States and internationally. Of these, we owned 39 locations
consisting of approximately 5.9 million square feet and
leased space at 498 locations consisting of approximately
16.5 million square feet.
Our reportable segments have major operations at the following
locations:
|
|
|
|
|
C
3
ISR
Camden, New Jersey; Deerfield, Ohio; Greenville and Rockwall,
Texas; and Salt Lake City, Utah.
|
|
|
|
Government Services Washington, DC; Annapolis,
Maryland; and Alexandria, Chantilly and Reston, Virginia.
|
|
|
|
AM&M Crestview, Florida; Madison, Mississippi;
Waco, Texas; and Edmonton and Quebec, Canada.
|
25
|
|
|
|
|
Electronic Systems Phoenix and Tempe, Arizona;
Anaheim, Menlo Park, San Carlos, San Diego,
San Leandro, Santa Barbara, Simi Valley, Sylmar and
Torrance, California; Orlando, Sarasota and St. Petersburg,
Florida; Ayer, Massachusetts; Grand Rapids and Muskegon,
Michigan; Londonderry, New Hampshire; Budd Lake, New Jersey;
Albuquerque, New Mexico; Binghamton and Hauppauge, New York;
Cincinnati and Mason, Ohio; Tulsa, Oklahoma; Philadelphia,
Pittsburgh and Williamsport, Pennsylvania; Arlington, Dallas and
Garland, Texas; Burlington, Ontario and Toronto, Canada; and
Elmenhorst, Jemgum, Leer and Hamburg, Germany.
|
|
|
|
Corporate and other locations New York, New York and
Arlington, Virginia
|
A summary of square footage by reportable segment as of
December 31, 2010 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased
|
|
|
Owned
|
|
|
Total
|
|
|
|
(Square feet in millions)
|
|
|
C
3
ISR
|
|
|
5.0
|
|
|
|
0.2
|
|
|
|
5.2
|
|
Government Services
|
|
|
2.5
|
|
|
|
|
|
|
|
2.5
|
|
AM&M
|
|
|
1.0
|
|
|
|
2.0
|
|
|
|
3.0
|
|
Electronic Systems
|
|
|
7.9
|
|
|
|
3.7
|
|
|
|
11.6
|
|
Corporate
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
16.5
|
|
|
|
5.9
|
|
|
|
22.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management believes all of our properties have been well
maintained, are in good condition, and are adequate to meet our
current contractual requirements.
|
|
Item 3.
|
Legal
Proceedings
|
The information required with respect to this item can be found
in Note 19 to our audited consolidated financial statements
and is incorporated by reference into this Item 3.
|
|
Item 4.
|
(Removed
and Reserved)
|
PART II
Item 5. Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
The common stock of L-3 Holdings is traded on the New York Stock
Exchange (NYSE) under the symbol LLL. On
February 16, 2011, the number of holders of L-3
Holdings common stock was approximately 58,000. On
February 23, 2011, the closing price of L-3 Holdings
common stock, as reported by the NYSE, was $79.45 per share.
The table below sets forth the high and low closing price of L-3
Holdings common stock as reported on the NYSE composite
transaction tape and the amount of dividends paid per share
during the past two calendar years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing Price
|
|
|
Dividends Paid
|
|
|
(High-Low)
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
2009
|
|
Common Stock Dividends Paid and Market Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
0.40
|
|
|
$
|
0.35
|
|
|
$94.62 $83.34
|
|
$79.83 $57.63
|
Second Quarter
|
|
|
0.40
|
|
|
|
0.35
|
|
|
97.54 74.85
|
|
79.71 67.52
|
Third Quarter
|
|
|
0.40
|
|
|
|
0.35
|
|
|
76.65 66.60
|
|
82.19 63.97
|
Fourth Quarter
|
|
|
0.40
|
|
|
|
0.35
|
|
|
73.90 68.87
|
|
88.50 72.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
$
|
1.60
|
|
|
$
|
1.40
|
|
|
97.54 66.60
|
|
88.50 57.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 8, 2011, L-3 Holdings announced that its Board
of Directors had increased L-3 Holdings regular quarterly
26
cash dividend by 12.5% to $0.45 per share, payable on
March 15, 2011, to shareholders of record at the close of
business on March 1, 2011.
L-3 Holdings relies on dividends received from L-3
Communications to generate the funds necessary to pay dividends
on L-3 Holdings common stock. See Note 10 to our
audited consolidated financial statements for the financial and
other restrictive covenants that limit the payment of dividends
by L-3 Communications to L-3 Holdings.
Issuer
Purchases of Equity Securities
The following table provides information about share repurchases
made by L-3 Holdings of its common stock that are registered
pursuant to Section 12 of the Exchange Act during the 2010
fourth quarter. Repurchases 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum number
|
|
|
|
|
|
|
|
|
|
|
|
|
(or approximate
|
|
|
|
|
|
|
|
|
|
Total number of
|
|
|
dollar value) of
|
|
|
|
|
|
|
|
|
|
shares purchased as
|
|
|
shares that may
|
|
|
|
Total number
|
|
|
Average
|
|
|
part of publicly
|
|
|
yet be purchased
|
|
|
|
of shares
|
|
|
price paid
|
|
|
announced plans
|
|
|
under the plans
|
|
|
|
purchased
|
|
|
per share
|
|
|
or programs
|
|
|
or
programs
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
September 25 October 31, 2010
|
|
|
70,100
|
|
|
$
|
71.17
|
|
|
|
70,100
|
|
|
$
|
952
|
|
November 1 30, 2010
|
|
|
1,989,685
|
|
|
|
72.05
|
|
|
|
1,989,685
|
|
|
$
|
809
|
|
December 1 31, 2010
|
|
|
3,040,933
|
|
|
|
71.22
|
|
|
|
3,040,933
|
|
|
$
|
592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,100,718
|
|
|
$
|
71.54
|
|
|
|
5,100,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
On July 14, 2010, L-3
Holdings Board of Directors approved a share repurchase
program that authorizes L-3 Holdings to repurchase up to
$1 billion of its outstanding common stock through
December 31, 2012.
|
From January 1, 2011 through February 24, 2011, L-3
Holdings has repurchased 1,367,992 shares of its common stock at
an average price of $77.70 per share for an aggregate amount of
approximately $106 million.
27
The graph below compares the cumulative total returns of our
common stock with the cumulative total return of the
Standard & Poors 500 Composite Stock Index and
the Standard & Poors 1500 Aerospace &
Defense Index, for the period from December 31, 2005 to
December 31, 2010. These figures assume that all dividends
paid over the performance period were reinvested, and that the
starting value of each index and the investment in our common
stock was $100 on December 31, 2005.
We are one of the companies included in the Standard &
Poors 1500 Aerospace & Defense Index and the
Standard & Poors 500 Composite Stock Index. The
starting point for the measurement of our common stock
cumulative total return was our stock price of $74.35 per share
on December 30, 2005. The graph is not, and is not intended
to be, indicative of future performance of our common stock.
28
|
|
Item 6.
|
Selected
Financial Data
|
We derived the selected financial data presented below at
December 31, 2010 and 2009 and for each of the three years
in the period ended December 31, 2010 from our audited
consolidated financial statements included elsewhere in this
Form 10-K.
We derived the selected financial data presented below at
December 31, 2008, 2007 and 2006 and for the years ended
December 31, 2007 and 2006 from our audited consolidated
financial statements not included in this
Form 10-K.
The selected financial data should be read in conjunction with
our Managements Discussion and Analysis of Financial
Condition and Results of Operations and our audited
consolidated financial statements. Our results of operations,
cash flows and financial position are affected significantly, in
some periods, by our business acquisitions, the more significant
of which are described elsewhere herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
(1)
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(in millions, except per share data)
|
|
|
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
15,680
|
|
|
$
|
15,615
|
|
|
$
|
14,901
|
|
|
$
|
13,961
|
|
|
$
|
12,477
|
|
Cost of sales
|
|
|
13,930
|
|
|
|
13,959
|
|
|
|
13,342
|
|
|
|
12,513
|
|
|
|
11,198
|
|
Litigation gain
(charge)
(2)
|
|
|
|
|
|
|
|
|
|
|
126
|
|
|
|
|
|
|
|
(129
|
)
|
Stock-based
charge
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,750
|
|
|
|
1,656
|
|
|
|
1,685
|
|
|
|
1,448
|
|
|
|
1,111
|
|
Interest and other income, net
|
|
|
21
|
|
|
|
19
|
|
|
|
28
|
|
|
|
31
|
|
|
|
20
|
|
Interest
expense
(2)
|
|
|
269
|
|
|
|
279
|
|
|
|
290
|
|
|
|
314
|
|
|
|
313
|
|
Debt retirement charge
|
|
|
18
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
1,484
|
|
|
|
1,386
|
|
|
|
1,423
|
|
|
|
1,165
|
|
|
|
818
|
|
Provision for income taxes
|
|
|
518
|
|
|
|
475
|
|
|
|
494
|
|
|
|
411
|
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
966
|
|
|
|
911
|
|
|
|
929
|
|
|
|
754
|
|
|
|
526
|
|
Less: Noncontrolling interests
|
|
|
11
|
|
|
|
10
|
|
|
|
11
|
|
|
|
9
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to L-3
|
|
$
|
955
|
|
|
$
|
901
|
|
|
$
|
918
|
|
|
$
|
745
|
|
|
$
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to L-3
|
|
$
|
955
|
|
|
$
|
901
|
|
|
$
|
938
|
|
|
$
|
745
|
|
|
$
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share allocable to L-3 Holdings common
shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
8.31
|
|
|
$
|
7.65
|
|
|
$
|
7.50
|
|
|
$
|
5.92
|
|
|
$
|
4.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8.31
|
|
|
$
|
7.65
|
|
|
$
|
7.67
|
|
|
$
|
5.92
|
|
|
$
|
4.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
8.25
|
|
|
$
|
7.61
|
|
|
$
|
7.43
|
|
|
$
|
5.86
|
|
|
$
|
4.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8.25
|
|
|
$
|
7.61
|
|
|
$
|
7.59
|
|
|
$
|
5.86
|
|
|
$
|
4.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 Holdings weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
114.3
|
|
|
|
116.8
|
|
|
|
121.2
|
|
|
|
124.9
|
|
|
|
123.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
115.1
|
|
|
|
117.4
|
|
|
|
122.4
|
|
|
|
126.2
|
|
|
|
124.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share on L-3 Holdings common
stock
|
|
$
|
1.60
|
|
|
$
|
1.40
|
|
|
$
|
1.20
|
|
|
$
|
1.00
|
|
|
$
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The year ended December 31,
2008 includes: (1) a gain of $12 million
($7 million after income taxes, or $0.06 per diluted share)
related to the sale of a product line, (2) a non-cash
impairment charge of $28 million ($17 million after
income taxes, or $0.14 per diluted share) related to a
write-down of capitalized software development costs associated
with a general aviation product, and (3) an after-tax gain
of $20 million, or $0.16 per diluted share, related to the
sale of our 85% ownership interest in Medical Education
Technologies, Inc. on October 8, 2008. (The gain is
excluded from income from continuing operations for the year
ended December 31, 2008.)
|
(2)
|
|
The year ended December 31,
2008 includes a gain of $133 million ($81 million
after income taxes, or $0.66 per diluted share) related to the
reversal of a $126 million current liability for pending
and threatened litigation and $7 million of related accrued
interest as a result of a June 27, 2008 decision by the
U.S. Court of Appeals which vacated an adverse 2006 jury
verdict. The year ended December 31, 2006 includes the
charge of $129 million ($78 million after income
taxes, or $0.63 per diluted share) related to this adverse jury
verdict, which was rendered on May 24, 2006.
|
29
|
|
|
(3)
|
|
The stock-based charge of
$39 million ($25 million after income taxes, or $0.20
per diluted share) was recorded in the second quarter of 2006 in
connection with L-3s voluntary review of its past stock
option granting practices and the related accounting.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Balance Sheet Data (at year end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
2,345
|
|
|
$
|
2,669
|
|
|
$
|
2,254
|
|
|
$
|
2,181
|
|
|
$
|
1,553
|
|
Total assets
|
|
|
15,451
|
|
|
|
14,875
|
|
|
|
14,484
|
|
|
|
14,389
|
|
|
|
13,285
|
|
Long-term debt
|
|
|
4,126
|
|
|
|
4,112
|
|
|
|
4,493
|
|
|
|
4,472
|
|
|
|
4,452
|
|
Equity
|
|
|
6,855
|
|
|
|
6,660
|
|
|
|
5,941
|
|
|
|
6,114
|
|
|
|
5,439
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
$
|
1,461
|
|
|
$
|
1,407
|
|
|
$
|
1,387
|
|
|
$
|
1,270
|
|
|
$
|
1,074
|
|
Net cash used in investing activities
|
|
|
(945
|
)
|
|
|
(272
|
)
|
|
|
(432
|
)
|
|
|
(388
|
)
|
|
|
(1,091
|
)
|
Net cash used in financing activities
|
|
|
(918
|
)
|
|
|
(1,005
|
)
|
|
|
(840
|
)
|
|
|
(464
|
)
|
|
|
(29
|
)
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Financial
Section Roadmap
Managements discussion and analysis (MD&A) can be
found on pages 30 to 58, the report related to the financial
statements and internal control over financial reporting can be
found on page 62 and the financial statements and related
notes can be found on pages F-1 to F-57. The following table is
designed to assist in your review of MD&A.
|
|
|
|
|
|
|
Topic
|
|
Location
|
|
Overview and Outlook:
|
|
|
|
|
|
|
L-3s Business
|
|
Pages
|
|
30-31
|
|
|
Industry Considerations
|
|
Page
|
|
32
|
|
|
Key Performance Measures
|
|
Pages
|
|
32-34
|
|
|
Business Acquisitions and Business and Product Line Dispositions
|
|
Pages
|
|
34-35
|
|
|
Critical Accounting Policies:
|
|
|
|
|
|
|
Contract Revenue Recognition and Contract Estimates
|
|
Pages
|
|
35-37
|
|
|
Goodwill and Identifiable Intangible Assets
|
|
Pages
|
|
37-42
|
|
|
Pension Plan and Postretirement Benefit Plan Obligations
|
|
Page
|
|
42
|
|
|
Valuation of Deferred Income Tax Assets and Liabilities
|
|
Pages
|
|
42-43
|
|
|
Liabilities for Pending and Threatened Litigation
|
|
Page
|
|
43
|
|
|
Valuation of Long-Lived Assets
|
|
Page
|
|
43
|
|
|
Results of Operations, including business segments
|
|
Pages
|
|
44-51
|
|
|
Liquidity and Capital Resources:
|
|
|
|
|
|
|
Anticipated Sources of Cash Flow
|
|
Page
|
|
51
|
|
|
Balance Sheet
|
|
Pages
|
|
51-53
|
|
|
Pension Plans
|
|
Page
|
|
53
|
|
|
Statement of Cash Flows
|
|
Pages
|
|
54-56
|
|
|
Contractual Obligations
|
|
Page
|
|
57
|
|
|
Off Balance Sheet Arrangements
|
|
Page
|
|
58
|
|
|
Legal Proceedings and Contingencies
|
|
Page
|
|
58
|
|
|
Overview
and Outlook
L-3s
Business
L-3 is a prime contractor in Command, Control, Communications,
Intelligence, Surveillance and Reconnaissance
(C
3
ISR)
systems, aircraft modernization and maintenance, and government
services. L-3 is also a leading provider of a broad range of
electronic systems used on military and commercial platforms.
Our customers include the United States
30
(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 foreign
commercial customers, and select other U.S. federal, state
and local government agencies.
We have the following four reportable segments:
(1) C
3
ISR,
(2) Government Services, (3) Aircraft Modernization
and Maintenance (AM&M), and (4) Electronic Systems.
Financial information with respect to each of our reportable
segments is included in Note 22 to our audited consolidated
financial statements.
C
3
ISR
provides products and services for the global ISR market,
C
3
systems, networked communications systems and secure
communications products. We believe that these products and
services are critical elements for a substantial number of major
command, control and 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 a full range of
engineering, technical, analytical, information technology (IT),
advisory, training, logistics and support services to the DoD,
DoS, DoJ, and U.S. Government intelligence agencies and
allied foreign governments. AM&M provides modernization,
upgrades and sustainment, maintenance and logistics support
services for military and various government aircraft and other
platforms. We sell these services primarily to the DoD, the
Canadian Department of Defense and other allied foreign
governments. Electronic Systems provides a broad range of
products and services, 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,
simulation & training, precision engagement, warrior
systems, security & detection, propulsion systems,
avionics and displays, telemetry & advanced
technology, undersea warfare, and marine services.
During the quarter ended June 25, 2010, we made certain
reclassifications between our Government Services and Electronic
Systems reportable segments due to a re-alignment of a business
within our management and organizational structure. See
Note 22 to our audited consolidated financial statements
for the prior period amounts reclassified between reportable
segments.
For the year ended December 31, 2010, we generated sales of
$15,680 million. Our primary customer was the DoD. The
table below presents a summary of our 2010 sales by end customer
and the percent contributed by each to our total 2010 sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
2010 Sales
|
|
|
Total Sales
|
|
|
|
(in millions)
|
|
|
|
|
|
Air Force
|
|
$
|
3,981
|
|
|
|
25
|
%
|
Army
|
|
|
3,843
|
|
|
|
25
|
|
Navy/Marines
|
|
|
2,538
|
|
|
|
16
|
|
Other Defense
|
|
|
1,570
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Total DoD
|
|
$
|
11,932
|
|
|
|
76
|
%
|
Other U.S. Government
|
|
|
1,145
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Total U.S. Government
|
|
$
|
13,077
|
|
|
|
83
|
%
|
Foreign governments
|
|
|
1,142
|
|
|
|
8
|
|
Commercial foreign
|
|
|
791
|
|
|
|
5
|
|
Commercial domestic
|
|
|
670
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
15,680
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Most of our contracts (revenue arrangements) with the
U.S. Government are subject to U.S. Defense Contract
Audit Agency audits and various cost and pricing regulations,
and include standard provisions for termination for the
convenience of the U.S. Government. Multiyear
U.S. Government contracts and related orders are subject to
cancellation if funds for contract performance for any
subsequent year become unavailable. Foreign government contracts
generally include comparable provisions relating to termination
for the convenience of the relevant foreign government.
31
Industry
Considerations
In recent years, a variety of changing conditions have
significantly affected the markets for defense systems, products
and services. There has been a fundamental shift in focus from a
traditional threat-based model to one that
emphasizes a broad range of capabilities needed to respond to
all contingencies and to defeat all adversaries (all hazards,
all threats). This expanded scope has transformed the
U.S. defense posture to a capabilities-based
orientation that can be tailored and structured to meet the
demands of contemporary and future national and homeland
security requirements. This approach involves creating a more
flexible response with appropriate capability, agility and force
while highlighting changing technologies and operational
approaches applied to the challenges we face at every level of
warfare and in conditions short of war. The entire set of
capabilities resident in the DoD inventory are being examined
for change, with special attention given to improved strategic
defense systems, interoperable and brilliant networked
information and communications systems, precise weapons and
survivable delivery platforms, improved and enhanced
intelligence, reconnaissance, surveillance and target
acquisition systems, and security systems in general. This
transformation also includes the application of military
capabilities for homeland defense and selected emergency
response efforts.
Furthermore, the latest DoD budgets have reflected increased
focus on
C
5
ISR
(command, control, communications, computers, collaboration and
intelligence, surveillance and reconnaissance), precision-guided
weapons, UAVs and other electro-mechanical robotic capabilities,
networked information technologies, special operations forces,
and missile defense. In addition, the DoD has focused on a
transformation strategy that seeks to balance modernization and
recapitalization (or upgrading existing platforms and
capabilities) while enhancing readiness and joint
operations all while engaging in demanding on-going
military operations. As a result, defense budget program
allocations continue to favor immediate war-fighting
improvements and concurrent measured investment in new
platforms. DoDs emphasis on systems interoperability,
force multipliers, advances in intelligence gathering, and the
provision of real-time relevant data to battle
commanders often referred to as the common operating
picture (COP), have increased the electronic content of nearly
all major military procurement and research programs. Therefore,
it is expected that the DoD budget for information technologies
and defense electronics will grow. We believe L-3 is well
positioned to benefit from the expected focus in those areas.
While the DoD budget could be affected by several factors,
including current and future economic conditions and
presidential administration priorities, we are unable to predict
the impact and outcome of these uncertainties. However, the
current outlook is one of a more focused application of DoD
spending, based on emerging priorities, which we believe
benefits L-3s future orders and sales, operating results
and cash flows. Conversely, a decline in the DoD budget would
generally have a negative effect on future orders, sales,
operating profits, and cash flows of defense contractors,
including L-3, depending on the platforms and programs affected
by such budget reductions.
With regard to U.S. homeland defense and security,
increased emphasis in these important endeavors may increase the
demand for our capabilities in areas such as security systems,
information assurance and cyber security, crisis management,
preparedness and prevention services, and non-DoD security
operations.
As of today, the entire federal government is operating under a
continuing resolution authority for the fiscal year ending
September 30, 2011. The continuing resolution funds
programs and services, including DoD budgets, at approximately
the same levels as fiscal year 2010. The continuing resolution
expires on March 4, 2011, after which, Congress will either
pass a new appropriations bill, extend the continuing resolution
or shut down the government for all nonessential federal
government services. An extension of the continuing resolution
or a shut down of the government for all nonessential federal
government services may adversely affect our sales and operating
income and possibly delay new awards.
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. One of L-3s primary business
objectives is to increase sales from organic growth and select
business acquisitions. 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
32
results of operations for the twelve-month period prior to the
divestiture date. We expect to supplement our organic sales
growth by selectively acquiring businesses that: (1) add
important new technologies, services, and products,
(2) provide access to select customers, programs and
contracts, and (3) provide attractive returns on
investments. The two main determinants of our operating income
growth are sales growth and improvements in direct and indirect
contract costs. We define operating margin as operating income
as a percentage of sales. Improving operating margins is one
method for growing earnings per common share and net cash from
operating activities, but it is not the only one.
Sales Growth.
Our average annual sales growth for the
five years ended December 31, 2010, was 11%, with average
annual organic sales growth of approximately 5% and average
annual sales growth from business acquisitions, net of
divestitures, of approximately 6%. Sales growth for the year
ended December 31, 2010 was 0.4%, comprised of sales growth
from business acquisitions, net of divestitures, of 1.3%,
partially offset by an organic sales decline of 0.9%.
For the year ended December 31, 2010, our largest contract
(revenue arrangement) in terms of annual sales was the Army
Fleet Support contract with the U.S. Army Aviation and
Missile Command. Under this contract, which generated
approximately 3% of our sales, we provide maintenance and
logistical support services for rotary aircraft assigned to
Fort Rucker and satellite units in Alabama. The current
contract, assuming the exercise of two
one-year
options, expires on September 30, 2013 and we anticipate
that the customer will announce an acquisition timeline during
the third quarter of 2011 for the contract re-competition.
For the year ended December 31, 2009, our largest contract
(revenue arrangement) in terms of annual sales was the Special
Operations Forces Support Activity (SOFSA) contract, which
generated approximately 3% of our sales. On June 21, 2010,
SOFSA announced that the follow-on contract was awarded to
another contractor. The transition to the successor contractor
began immediately and ended in October 2010.
Like most of the U.S. defense industry, we have benefited
from the upward trend in DoD budget authorization and spending
outlays since 2001, including wartime supplemental funding for
U.S. Overseas Contingency Operations (OCO) in Iraq and
Afghanistan. While we believe the U.S. Government will
continue to place a high priority on national security, we
anticipate that future DoD base budgets will grow at a slower
rate compared to the recent past and flatten or modestly decline
in select areas, and that future OCO supplemental appropriations
are declining. Mounting pressure for deficit reduction and
reduced national spending has created an environment where
national security spending will also be closely examined and
possibly reduced. The fiscal year ending September 30, 2012
DoD base budget request of $553 billion was submitted by
the Obama Administration to Congress on February 14, 2011,
and is higher than the fiscal year 2011 base budget request of
$549 billion by $4 billion or 1%. As noted in Industry
Considerations on page 32, the entire federal government is
currently operating under a continuing resolution authority for
fiscal year 2011, including the DoD. Accordingly, the fiscal
year 2011 DoD budget is currently $526 billion, which is
the same as the actual DoD budget for fiscal year 2010. The
fiscal year 2012 Budget Request includes Secretary Gates
January 6, 2011 future budget outlook in which he
identified $78 billion in DoD reductions for the five year
fiscal period 2012 to 2016 compared to the same period in the
fiscal year 2011 budget request. The fiscal year 2012 budget
request shows average nominal growth in the base budget for
fiscal years 2012 to 2016 of 2.2% compared to the fiscal year
2011 request. The base budget request reflects sustained funding
for many areas, including communications, ISR, special
operations support, modernization and upgrades to existing
platforms, such as the Bradley Fighting Vehicles, helicopter
crew training and maintenance and simulation and training
systems, that are important to L-3. The fiscal year 2012 budget
request also includes $118 billion of supplemental
appropriations for OCO, which is $41 billion lower from the
OCO request for fiscal year 2011 of $159 billion, due
primarily to the planned draw down of U.S. military forces
from Iraq by December 31, 2011. The actual OCO budget for
fiscal year 2010 was $162 billion. The Presidents
budget request uses an annual OCO placeholder of
$50 billion for fiscal year 2013 to fiscal year 2016.
The current and future DoD base budgets and OCO supplemental
appropriations are a function of several factors beyond our
control, including, but not limited to, changes in
U.S. procurement policies, budget considerations, current
and future economic conditions, presidential administration
priorities, changing national security and defense requirements,
the level of U.S. military forces committed to OCO and
geo-political developments. Any of these factors could result in
a significant decline in or redirection of current and future
DoD budgets and impact L-3s future results of operations,
including our sales and operating income growth rates.
Additionally, L-3s future results of operations will be
affected by our ability to retain our existing business and to
successfully compete for new business, which largely depend on:
(1) our successful performance on existing contracts,
(2) the effectiveness and innovation of our technologies
and
33
research and development activities, (3) our ability to
offer better program performance than our competitors at a lower
cost, and (4) our ability to retain our employees and hire
new ones, particularly those employees who have
U.S. Government security clearances.
Operating Income Growth.
For the year ended
December 31, 2010, our consolidated operating income was
$1,750 million, an increase of 6% from $1,656 million
for the year ended December 31, 2009. Our consolidated
operating margin was 11.2% for the year ended December 31,
2010, an increase of 60 basis points from 10.6% for the
year ended December 31, 2009.
We are focused on modestly increasing operating margin, to the
extent possible, by reducing our indirect costs and improving
our overall contract performance. However, we may not be able to
continue to expand our operating margin on an annual basis and
our operating margin could decline. Additionally, in the future,
select business acquisitions and select new business, including
contract renewals and new contracts, could also reduce our
operating margin if their margins are lower than L-3s
operating margin on existing business and contracts. In
addition, changes in the competitive environment and our
consolidated sales levels could also result in lower operating
margin.
Business
Acquisitions and Business and Product Line
Dispositions
As discussed above, one aspect of our strategy is to selectively
acquire businesses that add new products, services and
technologies, or provide access to select customers, programs
and contracts. We intend to continue acquiring select businesses
for reasonable valuations that will provide attractive returns
to L-3. Our business acquisitions, depending on their
contract-type, sales mix or other factors, could reduce
L-3s consolidated operating margin while still increasing
L-3s
operating income, earnings per share, and net cash from
operating activities. In addition, we may also dispose of
certain businesses or product lines if we determine that they no
longer fit into L-3s overall business strategy and we are
able to receive an attractive sales price.
Business
Acquisitions and Divestitures
Acquisitions.
The table below summarizes the
acquisitions that we have completed during the years ended
December 31, 2008, 2009 and 2010, referred to herein as
business acquisitions. See Note 4 to our audited
consolidated financial statements for further information
regarding our business acquisitions. During the year ended
December 31, 2010, we used $756 million of cash for
business acquisitions, including earnout payments and remaining
contractual purchase prices for acquisitions completed prior to
January 1, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
Business Acquisitions
|
|
Date Acquired
|
|
Price
(1)
|
|
|
|
|
|
(in millions)
|
|
|
2008
|
|
|
|
|
|
|
|
|
HSA Systems Pty. Ltd.
|
|
|
March 14, 2008
|
|
|
$
|
16
|
|
METI
|
|
|
April 4, 2008
|
|
|
|
3
|
(2)
|
Electro-Optical Systems
|
|
|
April 21, 2008
|
|
|
|
178
|
|
G.A. International Electronics and subsidiaries (GAI)
|
|
|
July 25, 2008
|
|
|
|
4
|
(3)
|
International Resources Group Ltd.
|
|
|
December 3, 2008
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
Total 2008
|
|
|
|
|
|
$
|
264
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
Chesapeake Sciences Corporation
|
|
|
January 30, 2009
|
|
|
$
|
91
|
(4)
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
Insight Technology Incorporated
|
|
|
April 14, 2010
|
|
|
$
|
611
|
|
Airborne Technologies, Inc.
|
|
|
August 4, 2010
|
|
|
|
34
|
|
3Di Technologies (3Di)
|
|
|
September 17, 2010
|
|
|
|
60
|
(5)(6)
|
FUNA International, GmbH
|
|
|
December 22, 2010
|
|
|
|
50
|
(6)
|
|
|
|
|
|
|
|
|
|
Total 2010
|
|
|
|
|
|
$
|
755
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
(1)
|
|
The purchase price represents the
contractual consideration for the acquired business, excluding
adjustments for net cash acquired and acquisition transaction
costs.
|
|
(2)
|
|
We increased our ownership interest
in METI from approximately 80% to 85% in 2008. METI was sold on
October 8, 2008, as described below.
|
|
(3)
|
|
Excludes additional purchase price,
not to exceed $1 million, which is contingent upon the
financial performance of GAI through July 2011.
|
|
(4)
|
|
Includes additional purchase price
of approximately $4 million for certain acquired tax
benefits.
|
|
(5)
|
|
Excludes additional purchase price,
not to exceed $11 million, which is contingent upon the
post acquisition financial performance of 3Di through
December 31, 2012.
|
|
(6)
|
|
The final purchase price is subject
to adjustment based on the closing date actual net assets.
|
All of our business acquisitions are included in our
consolidated results of operations from their dates of
acquisition. We regularly evaluate potential business
acquisitions but, at this time, have not entered into any other
agreements for transactions that would be considered significant
business acquisitions.
Divestitures.
On December 17, 2010, we divested
InfraredVision Technology Corporation (ITC), which was within
the Electronic Systems reportable segment. The divestiture
resulted in an after-tax loss of less than $1 million. The
annual revenues of approximately $4 million, operating
results and net assets of ITC were not material for any period
presented and, therefore, the ITC divestiture is not reported as
a discontinued operation.
On October 8, 2008, we divested our 85% ownership interest
in METI, which was within the Electronic Systems reportable
segment. The sale resulted in an after-tax gain of
$20 million (pre-tax gain of $33 million), which was
excluded from income from continuing operations. The revenues,
operating results and net assets of METI for all periods
presented were not material and, therefore, are not presented as
discontinued operations. On May 9, 2008, we sold the
Electron Technologies Passive Microwave Devices (PMD) product
line within the Electronic Systems reportable segment and
recognized an after-tax gain of approximately $7 million
(pre-tax gain of $12 million).
Critical
Accounting Policies
Our significant accounting policies are described in Note 2
to our audited consolidated financial statements. The
preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (U.S. GAAP) requires us 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 net sales and cost 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, valuation of deferred
taxes, 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. Actual amounts will
differ from these estimates and could differ materially. We
believe that our critical accounting estimates have the
following attributes: (1) we are required to make
assumptions about matters that are uncertain and inherently
judgmental at the time of the estimate; (2) use of
reasonably different assumptions could have changed our
estimates, particularly with respect to estimates of contract
revenues and costs, and recoverability of assets, and
(3) changes in the estimate could have a material effect on
our financial condition or results of operations. We believe the
following critical accounting policies contain the more
significant judgments and estimates used in the preparation of
our financial statements.
Contract Revenue Recognition and Contract
Estimates.
A large portion of our revenue is generated
using written contracts (revenue arrangements) that require us
to design, develop, manufacture, modify, upgrade, test and
integrate complex aerospace and electronic equipment, and to
provide related engineering and technical services according to
the buyers specifications. These revenue arrangements or
contracts are generally fixed price, cost-plus, or
time-and-material
and are covered by accounting standards for construction-type
and production-type contracts and federal government
contractors. Substantially all of our cost-plus type and
time-and-material
type contracts are with the U.S. Government, primarily the
DoD. Certain of our contracts with the U.S. Government are
multi-year contracts that are funded annually by
35
the customer, and sales on these multi-year contracts are based
on amounts appropriated (funded) by the U.S. Government.
Sales and profits on fixed-price type contracts that are covered
by accounting standards for construction-type and
production-type contracts and federal government contractors are
substantially recognized using
percentage-of-completion
(POC) methods of accounting. Sales and profits on fixed-price
production contracts under which units are produced and
delivered in a continuous or sequential process are recorded as
units are delivered based on their contractual selling prices
(the
units-of-delivery
method). Sales and profits on each fixed-price production
contract under which units are not produced and delivered in a
continuous or sequential process, or under which a relatively
few number of units are produced, are recorded based on the
ratio of actual cumulative costs incurred to total estimated
costs at completion of the contract multiplied by the total
estimated contract revenue, less cumulative sales recognized in
prior periods (the
cost-to-cost
method). Under both POC methods of accounting, a single
estimated total profit margin is used to recognize profit for
each contract over its entire period of performance, which can
exceed one year.
Accounting for the sales on these fixed-price contracts requires
the preparation of estimates of (1) the total contract
revenue, (2) the total costs at completion, which is equal
to the sum of the actual incurred costs to date on the contract
and the estimated costs to complete the contracts
statement of work, and (3) the measurement of progress
towards completion. The estimated profit or loss at completion
on a contract is equal to the difference between the total
estimated contract revenue and the total estimated cost at
completion. Under the
units-of-delivery
method, sales on a fixed-price type contract are recorded as the
units are delivered during the period based on their contractual
selling prices. Under the
cost-to-cost
method, sales on a fixed-price type contract are recorded at
amounts equal to the ratio of actual cumulative costs incurred
divided by total estimated costs at completion, multiplied by
(i) the total estimated contract revenue, less
(ii) the cumulative sales recognized in prior periods. The
profit recorded on a contract in any period using either the
units-of-delivery
method or
cost-to-cost
method is equal to (i) the current estimated total profit
margin multiplied by the cumulative sales recognized, less
(ii) the amount of cumulative profit previously recorded
for the contract. In the case of a contract for which the total
estimated costs exceed the total estimated revenues, a loss
arises, and a provision for the entire loss is recorded in the
period that the loss becomes evident. The unrecoverable costs on
a loss contract that are expected to be incurred in future
periods are recorded as a component of other current liabilities
entitled Estimated cost in excess of estimated contract
value to complete contracts in process in a loss position.
Adjustments to estimates for a contracts revenue,
estimated costs at completion and estimated profit or loss are
often required as work progresses under a contract, as
experience is gained and as more information is obtained, even
though the scope of work required under the contract may not
change, or if contract modifications occur. The impact of
revisions in profit (loss) estimates for all types of contracts
subject to
percentage-of-completion
accounting are recognized on a cumulative
catch-up
basis in the period in which the revisions are made. Amounts
representing contract change orders or claims are included in
sales only when they can be reliably estimated and their
realization is reasonably assured. The revisions in contract
estimates, if significant, can materially affect our results of
operations and cash flows, as well as reduce the valuations of
receivables and inventories, and in some cases result in
liabilities to complete contracts in a loss position.
Sales and profits on cost-plus type contracts that are covered
by accounting standards for government contractors are
recognized as allowable costs are incurred on the contract, at
an amount equal to the allowable costs plus the estimated profit
on those costs. The estimated profit on a cost-plus contract is
fixed or variable based on the contractual fee arrangement.
Incentive and award fees are our primary variable fee
contractual arrangement. Incentive and award fees on cost-plus
type contracts are included as an element of total estimated
contract revenues and recorded to sales when a basis exists for
the reasonable prediction of performance in relation to
established contractual targets and we are able to make
reasonably dependable estimates for them. Sales and profits on
time-and-material
type contracts are recognized on the basis of direct labor hours
expended multiplied by the contractual fixed rate per hour, plus
the actual costs of material and other direct non-labor costs.
On a
time-and-material
type contract, the fixed hourly rates include amounts for the
cost of direct labor, indirect contract costs and profit.
Cost-plus type or
time-and-material
type contracts generally contain less estimation risks than
fixed-price type contracts.
Sales on arrangements for (1) fixed-price type contracts
that require us to perform services that are not related to
production of tangible assets (Fixed-Price Service Contracts),
and (2) certain commercial customers are recognized in
36
accordance with revenue recognition accounting standards for
revenue arrangements with commercial customers. Sales for our
businesses whose customers are primarily commercial business
enterprises are substantially generated from single element
revenue arrangements. Sales are recognized when there is
persuasive evidence of an arrangement, delivery has occurred or
services have been performed, the selling price to the buyer is
fixed or determinable and collectability is reasonably assured.
Sales for Fixed-Price Service Contracts that do not contain
measurable units of work performed are generally recognized on a
straight-line basis over the contractual service period, unless
evidence suggests that the revenue is earned, or obligations
fulfilled, in a different manner. Sales for Fixed-Price Service
Contracts that contain measurable units of work performed are
generally recognized when the units of work are completed. Sales
and profit on cost-plus and
time-and-material
type contracts within the scope of revenue recognition
accounting standards for revenue arrangements with commercial
customers are recognized in the same manner as those within the
scope of contract accounting standards, except for incentive and
award fees. Cost-based incentive fees are recognized when they
are realizable in the amount that would be due under the
contractual termination provisions as if the contract was
terminated. Performance based incentive fees and award fees are
recorded as sales when awarded by the customer.
For contracts with multiple deliverables, we apply the
separation and allocation guidance under the accounting standard
for revenue arrangements with multiple deliverables, unless all
the deliverables are covered by contract accounting standards,
in which case we apply the separation and allocation guidance
under contract accounting standards. Revenue arrangements with
multiple deliverables are evaluated to determine if the
deliverables should be separated into more than one unit of
accounting. We recognize revenue for each unit of accounting
based on the revenue recognition policies discussed above.
Sales and profit in connection with contracts to provide
services to the U.S. Government that contain collection
risk because the contracts are incrementally funded and subject
to the availability of funds appropriated, are deferred until
the contract modification is obtained, indicating that adequate
funds are available to the contract or task order.
Goodwill and Identifiable Intangible Assets.
In
accordance with the accounting standards for business
combinations, we record the assets acquired and liabilities
assumed based on their estimated fair values at the date of
acquisition (commonly referred to as the purchase price
allocation). As part of the purchase price allocations for our
business acquisitions, identifiable intangible assets are
recognized as assets apart from goodwill if they arise from
contractual or other legal rights, or if they are capable of
being separated or divided from the acquired business and sold,
transferred, licensed, rented or exchanged. However, we do not
recognize any intangible assets apart from goodwill for the
assembled workforces of our business acquisitions.
Generally, the largest separately identifiable intangible asset
from the businesses that we acquire is the value of their
assembled workforces, which includes the human capital of the
management, administrative, marketing and business development,
scientific, engineering and technical employees of the acquired
businesses. The success of our businesses, including their
ability to retain existing business (revenue arrangements) and
to successfully compete for and win new business (revenue
arrangements), is primarily dependent on the management,
marketing and business development, contracting, engineering and
technical skills and knowledge of our employees, rather than on
productive capital (plant and equipment, and technology and
intellectual property). Additionally, for a significant portion
of our businesses, our ability to attract and retain employees
who have U.S. Government security clearances, particularly
those with top-secret and above clearances, is critical to our
success, and is often a prerequisite for retaining existing
revenue arrangements and pursuing new ones. Generally, patents,
trademarks and licenses are not material for our acquired
businesses. Furthermore, our U.S. Government contracts
(revenue arrangements) generally permit other companies to use
our patents in most domestic work performed by such other
companies for the U.S. Government. Therefore, because
intangible assets for assembled workforces are part of goodwill,
the substantial majority of the intangible assets for our
acquired business acquisitions are recognized as goodwill.
Additionally, the value assigned to goodwill for our business
acquisitions also includes the value that we expect to realize
from cost reduction measures that we implement for our acquired
businesses. Goodwill equals the amount of the purchase price of
the business acquired in excess of the sum of the fair value of
identifiable acquired assets, both tangible and intangible, less
the fair value of liabilities assumed. At December 31,
2010, we had goodwill of $8,730 million and identifiable
intangible assets of $470 million.
The most significant identifiable intangible asset that is
separately recognized in accordance with U.S. GAAP for our
business acquisitions is customer contractual relationships. All
of our customer relationships are established through
37
written customer contracts (revenue arrangements). The fair
value for customer contractual relationships is determined, as
of the date of acquisition, based on estimates and judgments
regarding expectations for the estimated future after-tax
earnings and cash flows (including cash flows from working
capital) arising from the follow-on sales on contract (revenue
arrangement) renewals expected from customer contractual
relationships over their estimated lives, including the
probability of expected future contract renewals and sales, less
a contributory asset charge, all of which is discounted to
present value. If actual future after-tax cash flows are
significantly lower than our estimates, we may be required to
record an impairment charge to write down the identifiable
intangible assets to their realizable values. All identifiable
intangible assets are amortized over their estimated useful
lives as the economic benefits are consumed, ranging from four
to 30 years.
We review goodwill for impairment at least annually as of
November 30, as well as whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable in accordance with the accounting standards for
goodwill. The goodwill for each reporting unit is tested using a
two-step process. A reporting unit is an operating segment, as
defined by the segment reporting accounting standards, or a
component of an operating segment. A component of an operating
segment is a reporting unit if the component constitutes a
business for which discrete financial information is available
and is reviewed by operating segment management. Two or more
components of an operating segment may be aggregated and deemed
a single reporting unit for goodwill impairment testing purposes
if the components have similar economic characteristics.
L-3 had 19 reporting units at December 31, 2010 and 18
reporting units at December 31, 2009. The composition of our
reporting units and associated goodwill were substantially the
same in 2010 as compared to 2009 except for changes in goodwill
caused primarily by business acquisitions and foreign currency
translation adjustments, as disclosed in Note 7 to our
audited consolidated financial statements, included elsewhere
herein.
The table below presents the number of reporting units in each
of our reportable segments and the associated goodwill, at
December 31, 2010 for each of our reportable segments.
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Aggregate
|
|
Reportable Segment
|
|
Reporting Units
|
|
|
Goodwill
|
|
|
|
|
|
|
(in millions)
|
|
|
C
3
ISR
|
|
|
3
|
|
|
$
|
868
|
|
Government Services
|
|
|
1
|
|
|
|
2,285
|
|
AM&M
|
|
|
1
|
|
|
|
1,172
|
|
Electronic Systems
|
|
|
14
|
|
|
|
4,405
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
19
|
|
|
$
|
8,730
|
|
|
|
|
|
|
|
|
|
|
The first step in the process of testing goodwill for potential
impairment is to compare the carrying value of the reporting
unit to its fair value. If a potential impairment is identified,
the second step is to measure the impairment loss by comparing
the implied fair value of goodwill with the carrying value of
goodwill of the reporting unit. Our methodology for determining
the fair value of a reporting unit is estimated using a
discounted cash flow (DCF) valuation approach, and is dependent
on estimates for future sales, operating income, depreciation
and amortization, income tax payments, working capital changes,
and capital expenditures, as well as, expected long-term growth
rates for cash flows. All of these factors are affected by
economic conditions related to the industries in which we
operate (predominantly the U.S. defense industry), as well
as, conditions in the U.S. capital markets.
The more significant assumptions used in our DCF valuations to
determine the fair values of our reporting units in connection
with the goodwill valuation assessment at November 30,
2010, were: (1) detailed three-year cash flow projections
for each of our reporting units, which are based primarily on
our estimates of future sales, operating income, and cash flows,
(2) the expected long-term growth rates for each of our
reporting units, which approximate the expected long-term growth
rate for the U.S. economy and the respective industries in
which the reporting units operate, and (3) risk adjusted
discount rates, including the estimated risk-free rate of
return, that are used to discount future cash flow projections
to their present values. Although certain refinements to the
process used to forecast cash flows were implemented, there were
no significant changes to the underlying methods used in 2010 as
compared to the prior year DCF valuations of our reporting units.
38
The risk adjusted discount rate represents the estimated
weighted-average cost of capital (WACC) for each reporting unit
at the date of the annual impairment test. Each reporting unit
WACC was comprised of (1) an estimated required rate of
return on equity, based on publicly traded companies with
business characteristics comparable to each of L-3s
reporting units, including a risk free rate of return (i.e.
prevailing market yield of 4.1% on the 30 year
U.S. Treasury Bond as of November 30, 2010) and
an equity risk premium of 5%, and (2) the current after-tax
market rate of return on L-3s debt (which was 3.1% as of
November 30, 2010), each weighted by the relative market
value percentages of L-3s equity and debt. The WACC
assumptions for each reporting unit are based on a number of
market inputs that are outside of our control and are updated
annually to reflect changes to such market inputs as of the date
of our annual goodwill impairment assessments, including:
(1) changes to the estimated required rate of return on
equity based on historical returns on common stock securities of
publicly traded companies with business characteristics
comparable to each of L-3s reporting units and the
Standard & Poors 500 Index over a two-year
period, (2) changes to the risk free rate of return based
on the prevailing market yield on the 30 year
U.S. Treasury Bond on the date of our annual goodwill
impairment assessments, and (3) changes to the market rate
of return on L-3s debt based on the prevailing yields on
L-3s publicly traded debt securities on the date of our
annual goodwill impairment assessments. The 2010 equity risk
premium of 5% used to determine our WACC was unchanged from the
prior year. The WACC for 2011 to 2015 remained the same as last
year except for Government Services, which increased by
40 basis points. The WACC after 2015 increased
80 basis points for the Government Services reportable
segment, 40 basis points for the Electronic Systems
reportable segment, and 30 basis points the
C
3
ISR and
AM&M reportable segments. These increases were primarily
due to higher estimated required rates of return on equity for
the comparable companies that we utilize to develop our cost of
equity.
The table below presents the weighted average risk adjusted
discount rate assumptions used in our DCF valuation for each of
our reportable segments for our goodwill impairment assessments
at November 30, 2010.
|
|
|
|
|
|
|
|
|
Reportable Segment
|
|
2011 2015
|
|
After 2015
|
|
C
3
ISR
(1)
|
|
|
7.0
|
%
|
|
|
8.2
|
%
|
Government
Services
(2)
|
|
|
7.0
|
%
|
|
|
8.2
|
%
|
AM&M
(2)
|
|
|
7.0
|
%
|
|
|
8.2
|
%
|
Electronic
Systems
(3)
|
|
|
7.3
|
%
|
|
|
8.6
|
%
|
|
|
|
(1)
|
|
All reporting units within the
C
3
ISR
reportable segment used the risk adjusted discount rates as
presented in the table above.
|
|
(2)
|
|
The Government Services and
AM&M reportable segments are each comprised of one
reporting unit.
|
|
(3)
|
|
The weighted average risk adjusted
discount rate for the Electronic Systems reportable segment is
comprised of separate assumptions for each reporting unit that
range that from 7.0% to 8.6% for 2011 to 2015, and 8.2% to 10.3%
for the years after 2015.
|
As presented in the table below, L-3s historical
three-year average annual cash flow growth rates for 2010, 2009
and 2008 for our reportable segments ranged from a negative 3%
to a positive 8%. The annual cash flows generated by each of our
reporting units varies from year to year, and, therefore, the
annual cash flow growth rates do not result in linear trends,
due to a number of factors. The factors that affect the level of
annual cash flows in each of our reporting units include, but
are not limited to: (1) variability of annual sales volume
and sales growth rates, (2) increases and decreases in
working capital, including customer advance payments and
billings on multi-year contracts (revenue arrangements) with
long-term performance periods (exceeding one year), (3) the
timing of invoicing and cash collections between fiscal years
from receivables due from customers on multi-year contracts
(revenue arrangements) that are affected by the financing terms
of individual contracts, (4) the timing of increases and
decreases of select inventories procured and produced in
anticipation of future product sales, which frequently overlap
the ending and beginning of fiscal years, (5) the timing of
the receipt of award fee and incentive fee payments from
customers on contracts (revenue arrangements),
(6) variability in annual cash outlays for research and
development costs, (7) changes in cash outlays for capital
expenditures for property, plant and equipment, and
(8) increases in annual sales and costs and expense volumes
of a reporting unit resulting from business acquisitions. As a
result of the factors discussed above and the varying sizes of
our reporting units, the annual cash flow levels and growth
rates at the reporting unit level tend to fluctuate
significantly from year to year. The 2010 cash flow
39
amount and the cash flow growth rate for each of the last three
years for each of our reportable segments are presented in the
following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
Reportable Segment
|
|
Cash
Flow
(1)
|
|
|
Growth Rate
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
3 Yr. Average
|
|
|
C
3
ISR
(2)
|
|
$
|
120
|
|
|
|
(44
|
)%
|
|
|
32
|
%
|
|
|
17
|
%
|
|
|
2
|
%
|
Government
Services
(3)
|
|
$
|
285
|
|
|
|
8
|
%
|
|
|
(40
|
)%
|
|
|
23
|
%
|
|
|
(3
|
)%
|
AM&M
(4)
|
|
$
|
228
|
|
|
|
46
|
%
|
|
|
(30
|
)%
|
|
|
9
|
%
|
|
|
8
|
%
|
Electronic
Systems
(5)
|
|
$
|
568
|
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
(9
|
)%
|
|
|
1
|
%
|
|
|
|
(1)
|
|
Reportable segment estimated cash
flow excludes interest payments on debt and other corporate cash
flows.
|
|
(2)
|
|
The decrease in cash flow in 2010
for C
3
ISR
was due to the timing of billings and cash receipts on certain
fixed price contracts for networked communications and higher
working capital requirements, partially offset by growth in
sales and operating income. The increase in cash flow in 2009
for C
3
ISR
was primarily due to growth in sales and operating income. In
2008, the cash flow growth was primarily due to growth in sales
and operating income, in addition to a smaller increase in
working capital for ISR Systems as compared to 2007.
|
|
(3)
|
|
The increase in cash flows in 2010
for Government Services was primarily due to working capital
improvements and the timing of advanced payments for certain
contracts for foreign customers. The decrease in cash flows in
2009 was primarily due to lower sales and operating income in
comparison to the prior year, driven primarily by lower
Iraq-related linguist services. The increase in cash flows in
2008 was primarily due to higher sales and operating income for
business areas other than linguist services and collection of
receivables on the Iraq-related linguist services contract that
L-3 was the prime contractor for which the period of performance
ended June 9, 2008.
|
|
(4)
|
|
The increase in cash flows in 2010
for AM&M was primarily due to lower working capital,
primarily for billed receivables on contracts nearing completion
and the loss of the SOFSA contract, and lower capital
expenditures. In 2009, lower cash flow was primarily due to cash
used for working capital attributable to increased billed
receivables associated with 2009 sales growth, primarily system
field services. The increase in cash flows in 2008 for AM&M
was primarily due to increases in accounts payable balances and
receivable collections for aircraft and base support services
due to the timing of payments and collections.
|
|
(5)
|
|
The increase in cash flows in 2010
for Electronic Systems was primarily due to higher operating
income compared to 2009 for EO/IR, microwave, aviation products
and undersea warfare. The increase in cash flows in 2009 was
primarily due to higher operating income compared to 2008 for
several business areas, primarily EO/IR and power and control
systems. The decrease in cash flows in 2008 for Electronic
Systems was primarily due to more cash used for working capital
across several business areas, partially offset by higher 2008
operating income.
|
We consistently consider several factors to determine expected
future annual cash flows for our reporting units, including, but
not limited to historical multi-year average cash flow trends by
reporting unit, as well as: (1) the DoD budget and spending
priorities, (2) expansion into new markets,
(3) changing conditions in existing markets for our
products, systems, and services, (4) possible termination
of certain government contracts, (5) expected success in
new business competitions and re-competitions on existing
business, and (6) anticipated operating margins and working
capital requirements, which vary significantly depending on the
stage of completion (early, mature, ending) of contracts
(revenue arrangements). We closely monitor changes in these
factors and their impact on the expected cash flow growth rates
of our reporting units. For our goodwill impairment assessments
as of November 30, 2010, we assumed that the economic and
competitive environments continue to be challenging in
Government Services and our commercial businesses and slower
growth in DoD budgets compared to prior year. We also made
additional assumptions that consider the factors noted above
that were relevant and specific to each of our reporting units.
The table below presents the estimated (1) 2011 cash flow
amount, (2) average cash flow growth rates for
2011 2013, and (3) weighted average cash flow
growth rates for 2014 and 2015 and after 2015 for each of our
reportable segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
Reportable Segment
|
|
Cash Flow
|
|
|
Estimated Average Growth Rates
|
|
|
|
(in millions)
|
|
|
2011 2013
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
3 Yr. Average
|
|
|
2014 2015
|
|
|
After 2015
|
|
|
C
3
ISR
|
|
$
|
284
(1
|
)
|
|
|
47
|
%
|
|
|
2
|
%
|
|
|
1
|
%
|
Government Services
|
|
$
|
278
(2
|
)
|
|
|
(1
|
)%
|
|
|
0
|
%
|
|
|
0
|
%
|
AM&M
|
|
$
|
147
(3
|
)
|
|
|
(11
|
)%
|
|
|
0
|
%
|
|
|
0
|
%
|
Electronic Systems
|
|
$
|
410
(4
|
)
|
|
|
7
|
%
|
|
|
0
|
%
|
|
|
1
|
%
|
40
|
|
|
(1)
|
|
C
3
ISR
projected cash flows are expected to increase by
$164 million from $120 million in 2010 to
$284 million in 2011. The increase is due primarily to
higher expected sales and working capital improvements for
networked communications.
|
|
(2)
|
|
Government Services projected cash
flows are expected to decrease by $7 million from
$285 million in 2010 to $278 million in 2011. The
decrease is due primarily to lower expected sales volume,
partially offset by the timing of the collection of billed and
unbilled receivables.
|
|
(3)
|
|
AM&M projected cash flows are
expected to decrease by $81 million from $228 million
in 2010 to $147 million in 2011. The decrease is primarily
due lower expected sales volume and the timing of cash receipts
and disbursements used for working capital.
|
|
(4)
|
|
Electronic Systems projected cash
flows are expected to decrease by $158 million from
$568 million in 2010 to $410 million in 2011. The
decrease is primarily due to the timing of cash receipts for
advance payments and billed receivables.
|
A decline in the estimated fair value of a reporting unit could
result in a goodwill impairment, and a related non-cash
impairment charge against earnings, if the estimated fair value
for the reporting unit is less than the carrying value of the
net assets of the reporting unit, including its goodwill. A
large decline in estimated fair value of a reporting unit could
result in an adverse effect on our financial condition and
results of operations.
In order to evaluate the sensitivity of the fair value
calculations relating to our goodwill impairment assessment, we
applied hypothetical decreases to the estimated fair values of
each of our reporting units. We determined that a decrease in
fair value of at least 20% would be required before any
reporting unit, with the exception of six, would have a carrying
value in excess of its fair value. The table below presents the:
(1) risk adjusted discount rates, (2) annual cash flow
and three-year average growth rate, (3) 2010 cash flow,
(4) goodwill balance, and (5) excess fair value
percentage and dollar amount, for each of these six reporting
units. These reporting units are all included in our Electronic
Systems reportable segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rates
|
|
|
Estimated Annual Cash Flow Growth Rate
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Year
|
|
|
2010
|
|
|
Goodwill
|
|
|
Excess
|
|
Reporting Unit
|
|
2011-2015
|
|
|
After 2015
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Average
|
|
|
Cash Flows
|
|
|
Balance
(1)
|
|
|
Fair
Value
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
%
|
|
|
$
|
|
|
Undersea
Warfare
(3)
|
|
|
7.0
|
%
|
|
|
8.2
|
%
|
|
|
27
|
%
|
|
|
1,460
|
%
|
|
|
(72
|
)%
|
|
|
472
|
%
|
|
$
|
50
|
|
|
$
|
238
|
|
|
|
15
|
%
|
|
$
|
36
|
|
Warrior
Systems
(4)
|
|
|
7.0
|
%
|
|
|
8.2
|
%
|
|
|
(24
|
)%
|
|
|
22
|
%
|
|
|
316
|
%
|
|
|
105
|
%
|
|
$
|
29
|
|
|
$
|
567
|
|
|
|
13
|
%
|
|
$
|
138
|
|
Marine
Services
(5)
|
|
|
7.0
|
%
|
|
|
8.2
|
%
|
|
|
(67
|
)%
|
|
|
592
|
%
|
|
|
23
|
%
|
|
|
183
|
%
|
|
$
|
9
|
|
|
$
|
105
|
|
|
|
10
|
%
|
|
$
|
11
|
|
Advanced Technology &
Telemetry
(6)
|
|
|
7.7
|
%
|
|
|
9.1
|
%
|
|
|
(30
|
)%
|
|
|
83
|
%
|
|
|
0
|
%
|
|
|
18
|
%
|
|
$
|
28
|
|
|
$
|
193
|
|
|
|
8
|
%
|
|
$
|
21
|
|
Propulsion
Systems
(7)
|
|
|
7.0
|
%
|
|
|
8.2
|
%
|
|
|
83
|
%
|
|
|
(68
|
)%
|
|
|
0
|
%
|
|
|
5
|
%
|
|
$
|
22
|
|
|
$
|
138
|
|
|
|
6
|
%
|
|
$
|
14
|
|
Power & Control
Systems
(8)
|
|
|
7.0
|
%
|
|
|
8.2
|
%
|
|
|
(35
|
)%
|
|
|
41
|
%
|
|
|
(29
|
)%
|
|
|
(8
|
)%
|
|
$
|
67
|
|
|
$
|
686
|
|
|
|
3
|
%
|
|
$
|
21
|
|
|
|
|
(1)
|
|
The goodwill balance is as of
November 30, 2010, our goodwill impairment testing date.
|
|
(2)
|
|
The excess fair value represents
the percentage and dollar amount by which the fair value of a
reporting unit must decline before a potential impairment is
identified and would require the second step of the goodwill
impairment assessment to be performed.
|
|
(3)
|
|
Our DCF valuation for this
reporting unit assumed lower projected cash flow of
approximately 90% in 2011 compared to 2010 levels due to
liquidations of advance payments on contracts with non-DoD
customers and contracts nearing completion. In addition, our DCF
valuation for this reporting unit assumed that projected cash
flow will remain approximately 70% below 2010 levels in 2012 and
2013 reflecting continued liquidations of advance payments and
working capital requirements, primarily inventory for airborne
dipping sonar contracts for allied foreign navies. Projected
cash flows are expected to grow annually at 2% after 2013.
|
|
(4)
|
|
The Warrior Systems reporting unit
was created in the third quarter of 2010 as a result of our
acquisition of Insight on April 14, 2010, and its
combination with two existing EO/IR businesses. Cash flow data
for 2008 and 2009 include the cash flows from the two former
EO/IR businesses and the 2010 cash flow includes these two
businesses and Insight from the acquisition date. The DCF
valuation for this reporting unit assumed an average annual cash
flow growth rate of 39% during 2011 through 2013, reflecting
full year operations for Insight compared to partial year of
operations in 2010, timing of cash receipts and disbursements
used for working capital and expected reductions in
administrative and overhead costs resulting from the formation
of this reporting unit and consolidation of select business
processes within the reporting unit. Projected cash flows are
expected to grow 1% after 2013.
|
|
(5)
|
|
Our DCF valuation for this
reporting unit assumed lower projected cash flow of
approximately 40% in 2011 compared to 2010 due to contracts
nearing completion and expected delay of repairs and service
life extensions of U.S. Navy surface vessels because of current
military and humanitarian deployments. In addition, our DCF
valuation for this reporting unit assumed that the projected
cash flow will remain substantially the same through 2013
reflecting an expected 3% three-year average growth in sales for
service life extension on landing craft air cushion amphibious
vehicles, and of U.S. Navy surface vessels as deployments are
completed, and higher operating income due to improved contract
performance. Projected cash flows are expected to grow annually
at 4% for 2014 and 1% thereafter.
|
|
(6)
|
|
Our DCF valuation for this
reporting unit assumed lower projected cash flow of
approximately 50% in 2011 compared to 2010 due to expected
liquidations of advance payments on contracts with non-DoD
customers. In addition, our DCF valuation for this reporting
unit assumed that the projected cash flow level will remain
approximately 20% below 2010 levels through 2013 reflecting
continued liquidations of advanced payments partially offset by
slightly higher operating margin due to an expected 4% three
year average growth in sales primarily for space-based and
high-altitude electromagnetic pulse products. Projected cash
flows are expected to grow annually at 1% after 2013.
|
41
|
|
|
(7)
|
|
Our DCF valuation for this
reporting unit assumed lower projected cash flow of
approximately 60% in 2011 compared to 2010 levels due to lower
sales and operating income because of expected reductions in DoD
funding for Bradley Fighting Vehicles and delays in foreign
military procurement of engines for combat vehicles. In
addition, our DCF valuation for this reporting unit assumed that
the DoD will continue to fund the Bradley Fighting Vehicle at
2010 levels thereby keeping sales, operating income and cash
flow substantially the same through 2013. Projected cash flows
are expected to grow annually at 2% after 2013.
|
|
(8)
|
|
Our DCF valuation for this
reporting unit assumed lower projected cash flow of
approximately 50% in 2011 compared to 2010 due to expected
liquidations of advance payments on an electric drive contract
for a Korean shipyard and lower sales and operating income due
to continued reduced demand for commercial shipbuilding
products. In addition, our DCF valuation for this reporting unit
assumed that projected cash flow will be approximately 15% below
2010 in 2012 and 2013 reflecting an expected three year average
sales growth of 2% in sales for commercial shipbuilding from the
2010 depressed levels. Projected cash flows are expected to grow
annually at 3% for 2014 and 2015 and 1% thereafter.
|
As noted above, the expected future cash flow growth rates for
each of our reporting units are primarily based on our estimates
of future sales, operating income, and working capital changes.
The substantial majority of our reporting units are primarily
dependent upon the DoD budget and spending. Historically,
approximately 75% of L-3s annual sales have been generated
from DoD customers. Although the DoD budget could be negatively
affected by several factors, including but not limited to
U.S. Government budget deficits and the national debt, as
of today, the DoD budget has not been meaningfully impacted by
the current economic and political environment. Moreover,
consistent with our discussion of industry considerations under
Key Performance Measures beginning on page 32,
we anticipate defense budget and spending priorities will
continue to focus on many areas that match several of L-3s
core competencies. However, our current estimates and
assumptions may not result in the projected cash flow outcomes
due to a number of factors, including an economic environment
that is more challenging than we anticipate, U.S. Government
efforts to reduce budget deficits and the national debt, and DoD
priority shifts that do not match L-3s core competencies.
Conversely, our actual cash flows may be higher than our
projections and the DCF valuation does not reflect actions that
we may take to increase the profitability and cash flows of our
reporting units, including the six in the table above, such as
reducing administrative and other overhead costs, creating
future synergies with other L-3 businesses, or pursuing
incremental targeted growth opportunities. Additionally, the DCF
valuations do not assume future business acquisitions or
divestitures.
Pension Plan and Postretirement Benefit Plan
Obligations.
The obligations for our pension plans and
postretirement benefit plans and the related annual costs of
employee benefits are calculated based on several long-term
assumptions, including discount rates and expected mortality for
employee benefit liabilities, and rates of return on plan
assets, and expected annual rates for salary increases for
employee participants in the case of pension plans, and expected
annual increases in the costs of medical and other health care
benefits in the case of postretirement benefit obligations.
These long-term assumptions are subject to revision based on
changes in interest rates, financial market conditions, expected
versus actual returns on plan assets, expected participant
mortality and other actuarial assumptions, including future
rates of salary increases, benefit formulas and levels, and
rates of increase in the costs of benefits. Changes in the
assumptions, if significant, could materially affect the amount
of annual net periodic benefit costs recognized in our results
of operations from one year to the next, the liabilities for the
pension plans and postretirement benefit plans, and our annual
cash requirements to fund these plans. Our pension expense for
2011 is expected to increase by $3 million to
$157 million from $154 million in 2010. Our discount
rate assumption decreased from a weighted average rate of 6.26%
in 2009 to 5.57% in 2010. The increase in our 2011 pension
expense resulting from the decrease in discount rate and change
in mortality assumptions is mostly offset by higher expected
asset returns in 2011 due to higher pension plan asset balances
as of the beginning of 2011 compared to 2010. See
Part II Item 7
Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital
Resources Pension Plans on page 53 for a
further discussion of our estimated 2011 pension expense.
Discount rates are used to determine the present value of our
pension obligations and also affect the amount of pension
expense in any given period. The discount rate assumptions used
to determine our pension and postretirement benefit obligations
at December 31, 2010 and 2009 were based on a hypothetical
AA yield curve represented by a series of annualized individual
discount rates. Each bond issue underlying the yield curve is
required to have a rating of AA or better by Moodys
Investors Service, Inc.
and/or
Standard & Poors. The resulting discount rate
reflects the matching of plan liability cash flows to the yield
curve. For a sensitivity analysis projecting the impact of a
change in the discount rate on our projected benefit obligation
and pension expense, see Part II
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of
Operations Liquidity and Capital
Resources Pension Plans on page 53.
Valuation of Deferred Income Tax Assets and
Liabilities.
At December 31, 2010, we had net
deferred tax liabilities of $194 million, net of deferred
tax assets of $14 million for loss carryforwards and
$8 million for tax credit carryforwards
42
which are subject to various limitations and will expire if
unused within their respective carryforward periods. Deferred
income taxes are determined separately for each of our
tax-paying entities in each tax jurisdiction. The future
realization of our deferred income tax assets ultimately depends
on our ability to generate sufficient taxable income of the
appropriate character (for example, ordinary income or capital
gains) within the carryback and carryforward periods available
under the tax law and, to a lesser extent, our ability to
execute successful tax planning strategies. Based on our
estimates of the amounts and timing of future taxable income and
tax planning strategies, we believe that L-3 will be able to
realize its deferred tax assets, except for certain foreign and
state net operating losses. A change in the ability of our
operations to continue to generate future taxable income, or our
ability to implement desired tax planning strategies, could
affect our ability to realize the future tax deductions
underlying our deferred tax assets, and require us to provide a
valuation allowance against our deferred tax assets. The
recognition of a valuation allowance would result in a reduction
to net income and, if significant, could have a material impact
on our effective tax rate, results of operations and financial
position in any given period.
Liabilities for Pending and Threatened
Litigation.
We are subject to litigation, government
investigations, proceedings, claims or assessments and various
contingent liabilities incidental to our business or assumed in
connection with certain business acquisitions. In accordance
with the accounting standards for contingencies, we accrue a
charge for a loss contingency when we believe it is both
probable that a liability has been incurred, and the amount of
the loss can be reasonably estimated. If the loss is within a
range of specified amounts, the most likely amount is accrued,
and if no amount within the range represents a better estimate
we accrue the minimum amount in the range. Generally, we record
the loss contingency at the amount we expect to pay to resolve
the contingency and the amount is generally not discounted to
the present value. Amounts recoverable under insurance contracts
are recorded as assets when recovery is deemed probable.
Contingencies that might result in a gain are not recognized
until realizable. Changes to the amount of the estimated loss,
or resolution of one or more contingencies could have a material
impact on our results of operations, financial position and cash
flows. See Note 19 to our audited consolidated financial
statements for further discussion of our litigation matters.
Valuation of Long-Lived Assets.
In addition to
goodwill and identifiable intangible assets recognized in
connection with our business acquisitions, our long-lived assets
also include property, plant and equipment, capitalized software
development costs for software to be sold, leased or otherwise
marketed, and certain long-term investments. As of
December 31, 2010, the consolidated carrying values of our
property, plant and equipment were $923 million, certain
long-term investments were $55 million, and capitalized
software development costs were $43 million. As of
December 31, 2010, the carrying value of our property,
plant and equipment represented 6% of total assets and the
carrying value of our capitalized software development costs and
certain long-term investments each represented less than 1% of
total assets. We review the valuation of our long-lived assets
whenever events or changes in circumstances indicate that the
carrying amount of these assets may not be recoverable. An
impairment loss is recognized when the carrying amount of a
long-lived asset exceeds its fair value or net realizable value
expected to result from the assets use and eventual
disposition. We use a variety of factors to assess valuation,
depending upon the asset. Long-lived assets are evaluated based
upon the expected period the asset will be utilized, and other
factors depending on the asset, including estimated future
sales, profits and related cash flows, estimated product
acceptance and product life cycles, changes in technology and
customer demand, and the performance of invested companies and
joint ventures, as well as volatility in external markets for
investments. Changes in estimates and judgments on any of these
factors could have a material impact on our results of
operations and financial position.
43
Results
of Operations
The following information should be read in conjunction with our
audited consolidated financial statements. Our results of
operations for the periods presented are affected, significantly
in some periods, by our business acquisitions. See Note 4
to our audited consolidated financial statements for a
discussion of our business acquisitions.
Consolidated
Results of Operations
The table below provides selected financial data for L-3 for the
years ended December 31, 2010 compared with 2009 and 2009
compared with 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase/
|
|
|
Year Ended December 31,
|
|
|
Increase/
|
|
(in millions, except per share data)
|
|
2010
|
|
|
2009
|
|
|
(decrease)
|
|
|
2009
|
|
|
2008
(1)
|
|
|
(decrease)
|
|
|
Net sales
|
|
$
|
15,680
|
|
|
$
|
15,615
|
|
|
$
|
65
|
|
|
$
|
15,615
|
|
|
$
|
14,901
|
|
|
$
|
714
|
|
Operating income
|
|
$
|
1,750
|
|
|
$
|
1,656
|
|
|
$
|
94
|
|
|
$
|
1,656
|
|
|
$
|
1,685
|
|
|
$
|
(29
|
)
|
Litigation
Gain
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(126
|
)
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
1,750
|
|
|
$
|
1,656
|
|
|
$
|
94
|
|
|
$
|
1,656
|
|
|
$
|
1,559
|
|
|
$
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
11.2
|
%
|
|
|
10.6
|
%
|
|
|
60
|
bpts
|
|
|
10.6
|
%
|
|
|
11.3
|
%
|
|
|
(70
|
)bpts
|
Litigation
Gain
(2)
|
|
|
|
%
|
|
|
|
%
|
|
|
|
bpts
|
|
|
|
%
|
|
|
(0.8
|
)%
|
|
|
80
|
bpts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating margin
|
|
|
11.2
|
%
|
|
|
10.6
|
%
|
|
|
60
|
bpts
|
|
|
10.6
|
%
|
|
|
10.5
|
%
|
|
|
10
|
bpts
|
Net interest expense and other income
|
|
$
|
266
|
|
|
$
|
270
|
|
|
$
|
(4
|
)
|
|
$
|
270
|
|
|
$
|
262
|
(2)
|
|
$
|
8
|
|
Effective income tax rate
|
|
|
34.9
|
%
|
|
|
34.3
|
%
|
|
|
60
|
bpts
|
|
|
34.3
|
%
|
|
|
34.7
|
%
|
|
|
(40
|
) bpts
|
Income from continuing operations attributable to L-3
|
|
$
|
955
|
|
|
$
|
901
|
|
|
$
|
54
|
|
|
$
|
901
|
|
|
$
|
918
|
|
|
$
|
(17
|
)
|
Net income attributable to L-3
|
|
$
|
955
|
|
|
$
|
901
|
|
|
$
|
54
|
|
|
$
|
901
|
|
|
$
|
938
|
|
|
$
|
(37
|
)
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
8.25
|
|
|
$
|
7.61
|
|
|
$
|
0.64
|
|
|
$
|
7.61
|
|
|
$
|
7.43
|
|
|
$
|
0.18
|
|
Net income
|
|
$
|
8.25
|
|
|
$
|
7.61
|
|
|
$
|
0.64
|
|
|
$
|
7.61
|
|
|
$
|
7.59
|
|
|
$
|
0.02
|
|
Diluted weighted average common shares outstanding
|
|
|
115.1
|
|
|
|
117.4
|
|
|
|
(2.3
|
)
|
|
|
117.4
|
|
|
|
122.4
|
|
|
|
(5.0
|
)
|
|
|
|
(1)
|
|
The year ended December 31,
2008 includes: (1) a gain of $12 million
($7 million after income taxes, or $0.06 per diluted share)
related to the sale of a product line (the Product Line
Divestiture Gain), and (2) a non-cash impairment
charge of $28 million ($17 million after income taxes,
or $0.14 per diluted share) related to a write down of
capitalized software development costs for a general aviation
product (the Impairment Charge), both recorded in
the second quarter of 2008. Together with the Litigation Gain
described in Note (2) below, these items are referred to as
the Q2 2008 Items.
|
|
(2)
|
|
On June 27, 2008, a decision
by the U.S. Court of Appeals vacated an adverse 2006 jury
verdict. In the second quarter of 2008, we recorded a gain of
$133 million ($81 million after income taxes, or $0.66
per diluted share), comprised of the reversal of a
$126 million current liability for pending and threatened
litigation and the reversal of $7 million of related
accrued interest (the Litigation Gain).
|
2010
Compared with 2009
Net Sales:
For the year ended December 31,
2010, consolidated net sales of approximately $15.7 billion
increased slightly compared to the year ended December 31,
2009. Sales growth from the
C
3
ISR
segment was offset by lower sales from the Government Services
and Electronic Systems reportable segments and the AM&M
reportable segment, primarily due to the loss of the SOFSA
contract. Acquired businesses, primarily Insight Technology
(Insight) and 3Di Technologies (3Di), contributed
$207 million to net sales for the year ended
December 31, 2010.
Sales from services, which include services performed by
businesses primarily in our Government Services, AM&M and
C
3
ISR
reportable segments, as well as marine services,
simulation & training and maintenance for security and
detection systems within our Electronic Systems reportable
segment, decreased by $15 million to $8,084 million,
compared to $8,099 million for the year ended
December 31, 2009. Sales from services represented
approximately 52% of consolidated net sales for each of the
years. The decrease was due primarily to reduced subcontractor
pass-through sales for U.S. Army systems and software
engineering and sustainment (SSES) services, the loss of the
SOFSA contract and the loss of an aircraft
44
maintenance contract with the U.S. Customs and Border
Patrol, and lower sales volume for marine services and
simulation & training due to contracts nearing
completion. These decreases were partially offset by organic
sales growth in airborne ISR logistics support and fleet
management services for the U.S. Air Force and information
technology (IT) support services for the U.S. Special
Operations Command (SOCOM) and other U.S. Government
agencies.
Sales from products, primarily from our
C
3
ISR and
Electronic Systems reportable segments increased by
$80 million to $7,596 million for the year ended
December 31, 2010, compared to $7,516 million for the
year ended December 31, 2009. Sales from products
represented approximately 48% of consolidated net sales for each
of the years. The increase was primarily due to organic growth
from networked communications, aircraft modernization, EO/IR,
microwave, and security & detection systems and sales
from the Insight acquired business. These increases were
partially offset by sales declines for combat propulsion
systems, commercial shipbuilding products, precision engagement,
displays, and marine services. See the reportable segment
results below for additional discussion of our segment sales.
Operating income and operating margin:
Consolidated
operating income for the year ended December 31, 2010
increased by $94 million, or 6%, to $1,750 million
from $1,656 million from the year ended December 31,
2009. Operating margin increased to 11.2% for the year ended
December 31, 2010 from 10.6% for the year ended
December 31, 2009. Higher sales and improved contract
performance for the
C
3
ISR
segment and favorable sales mix across several businesses,
improved contract performance, and $9 million from the sale
of a technology license in the Electronic Systems segment
increased operating margin by 80 basis points. Lower
pension expense of $16 million ($10 million after
income taxes, or $0.09 per diluted share) increased operating
margin by 10 basis points. These increases were partially
offset by lower operating margins in the Government Services
segment, which reduced operating margin by 20 basis points.
Severance charges, primarily in the Electronic Systems segment,
of $17 million reduced operating margin by 10 basis
points. See the reportable segment results below for additional
discussion of segment operating margin.
Net interest expense and other income:
Net interest
expense and other income decreased by $4 million for the
year ended December 31, 2010 compared to last year. Lower
interest expense primarily as a result of lower outstanding debt
and higher income from investments accounted for using the
equity method were partially offset by higher debt retirement
charges. During 2010, we redeemed our
6
1
/
8
% Senior
Subordinated Notes due 2013 and 2014 and recorded related debt
retirement charges of $18 million. During 2009, we redeemed
our
7
5
/
8
% Senior
Subordinated Notes due 2012 and recorded a related
$10 million debt retirement charge.
Effective income tax rate:
The effective tax rate
for the year ended December 31, 2010 increased by
60 basis points to 34.9% compared to last year. The
increase was primarily due to higher tax benefits for the
resolution of tax contingencies in 2009. In addition, the year
ended December 31, 2010 included a tax provision of
$5 million, or $0.04 per diluted share, related to the
U.S. Federal Patient Protection and Affordable Care Act,
which changed the tax treatment for certain retiree prescription
drug benefits and increased the tax rate by 30 basis points.
Diluted earnings per share and net income attributable to
L-3:
Diluted earnings per share (EPS) increased by $0.64, or
8%, to $8.25 for the year ended December 31, 2010 from
$7.61 for the year ended December 31, 2009. Net income
attributable to L-3 increased by $54 million, or 6%, to
$955 million for the year ended December 31, 2010 from
$901 million for the year ended December 31, 2009.
Diluted weighted average shares outstanding:
Diluted
weighted average shares outstanding for the year ended
December 31, 2010 decreased by 2.3 million shares, or
2%, compared to the year ended December 31, 2009. The
decrease was due to repurchases of our common stock in
connection with our share repurchase programs 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.
2009
Compared with 2008
Net sales:
For the year ended December 31,
2009, consolidated net sales increased by 5% compared to the
year ended December 31, 2008, driven primarily by strong
growth in the
C
3
ISR
reportable segment and modest growth in the AM&M and
Electronic Systems reportable segments. These sales increases
were partially offset by a decrease in the Government
45
Services reportable segment caused primarily by lower linguist
sales. The increase in consolidated net sales from acquired
businesses, net of divestitures, was $187 million, or 1%.
Sales from services increased by $328 million to
$8,099 million, representing approximately 52% of
consolidated net sales for the year ended December 31,
2009, compared to $7,771 million, or 52% of consolidated
net sales for the year ended December 31, 2008. The
increase in service sales was primarily due to organic sales
growth in ISR systems, systems field support services,
information technology (IT) support services and marine systems.
These increases were partially offset by a decrease in
Iraq-related linguist services, lower volume for contract field
services (CFS) and reduced subcontractor pass-through sales for
SSES services.
Sales from products, primarily for our Electronic Systems and
C
3
ISR
reportable segments, increased by $386 million to
$7,516 million, representing approximately 48% of
consolidated net sales for the year ended December 31,
2009, compared to $7,130 million, or approximately 48% of
consolidated net sales, for the year ended December 31,
2008. The increase in product sales was primarily due to growth
in C
3
ISR
products and several areas in the Electronic Systems reportable
segment primarily for EO/IR and microwave products. See the
reportable segment results below for additional discussion of
our segment sales.
Operating income and operating margin:
Consolidated
operating income for the year ended December 31, 2009,
decreased by $29 million, or 2%, to $1,656 million
from $1,685 million for the year ended December 31,
2008. Consolidated operating income for the year ended
December 31, 2009 compared to the year ended
December 31, 2008 decreased by $79 million
($48 million after income taxes, or $0.41 per diluted
share) because of higher pension expense. In addition, the year
ended December 31, 2008 included a net gain of
$110 million as a result of the Q2 2008 Items.
For the year ended December 31, 2009, operating margin
decreased by 70 basis points to 10.6% compared to 11.3% for
the year ended December 31, 2008. The Q2 2008 Items
increased consolidated operating margin for the year ended
December 31, 2008 by 70 basis points. Excluding the Q2
2008 Items, consolidated operating margin would have been 10.6%
for the year ended December 31, 2008. Operating margin for
the year ended December 31, 2009 increased by 50 basis
points due to higher margins, primarily for the
C
3
ISR
reportable segment and certain businesses within the Electronic
Systems reportable segment. This increase was offset by higher
pension expense for the year ended December 31, 2009
compared to the year ended December 31, 2008, which reduced
operating margin by 50 basis points. See the reportable
segment results below for additional discussion of segment
operating margin.
Net interest expense and other income:
Net interest
expense and other income for the year ended December 31,
2009 compared to the year ended December 31, 2008 increased
by $8 million, or 3%, primarily due to a $10 million
debt retirement charge related to the redemption of our
$750 million
7
5
/
8
% Senior
Subordinated Notes due 2012 on November 2, 2009, and the
$7 million of accrued interest that was reversed during
2008 in connection with the Litigation Gain. These increases
were partially offset by lower interest expense and income from
equity method investments.
Effective income tax rate:
The effective tax rate
for the year ended December 31, 2009 decreased by
40 basis points to 34.3% compared to last year. Excluding
the Q2 2008 Items, the effective tax rate for the year ended
December 31, 2008 was 34.3%.
Diluted earnings per share from continuing operations and
income from continuing operations:
For the year ended
December 31, 2009 as compared to the year ended
December 31, 2008, diluted EPS from continuing operations
increased by $0.18, or 2%, to $7.61 from $7.43 and income from
continuing operations attributable to L-3 decreased by
$17 million to $901 million from $918 million.
The Q2 2008 Items increased diluted EPS from continuing
operations by $0.58 for the year ended December 31, 2008.
Excluding the Q2 2008 Items, diluted EPS from continuing
operations for the year ended December 31, 2009 would have
increased by $0.76, or 11%, to $7.61 from $6.85 and income from
continuing operations attributable to L-3 would have increased
by $54 million, or 6%, to $901 million from
$847 million.
Diluted earnings per share and net income attributable to
L-3:
For the year ended December 31, 2009 as compared
to the year ended December 31, 2008, diluted EPS increased
by $0.02 to $7.61 from $7.59 and net income attributable to L-3
decreased by $37 million to $901 million from
$938 million. The year ended December 31, 2008
included a gain on the sale of METI of $33 million
($20 million after income taxes, or $0.16 per diluted
share).
46
Diluted weighted average shares outstanding:
Diluted
weighted average shares outstanding for the year ended
December 31, 2009 decreased by 5.0 million shares, or
4%, compared to the year ended December 31, 2008. The
decrease was due to repurchases of our common stock in
connection with our share repurchase programs 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.
Reportable
Segment Results of Operations
The table below presents selected data by reportable segment
reconciled to consolidated totals. See Note 22 to our
audited consolidated financial statements for additional
reportable segment data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
(1)
|
|
|
2008
(1)
|
|
|
|
(dollars in millions)
|
|
|
Net
sales:
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
C
3
ISR
|
|
$
|
3,399.1
|
|
|
$
|
3,095.0
|
|
|
$
|
2,537.2
|
|
Government Services
|
|
|
3,963.0
|
|
|
|
4,094.2
|
|
|
|
4,269.8
|
|
AM&M
|
|
|
2,780.9
|
|
|
|
2,826.4
|
|
|
|
2,672.6
|
|
Electronic Systems
|
|
|
5,536.6
|
|
|
|
5,599.1
|
|
|
|
5,421.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales
|
|
$
|
15,679.6
|
|
|
$
|
15,614.7
|
|
|
$
|
14,901.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
C
3
ISR
|
|
$
|
395.2
|
|
|
$
|
343.9
|
|
|
$
|
244.4
|
|
Government Services
|
|
|
344.3
|
|
|
|
394.1
|
|
|
|
422.8
|
|
AM&M
|
|
|
229.1
|
|
|
|
243.0
|
|
|
|
243.1
|
|
Electronic Systems
|
|
|
781.5
|
|
|
|
675.2
|
|
|
|
648.7
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$
|
1,750.1
|
|
|
$
|
1,656.2
|
|
|
$
|
1,559.0
|
(3)
|
Litigation Gain
|
|
|
|
|
|
|
|
|
|
|
125.6
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income
|
|
$
|
1,750.1
|
|
|
$
|
1,656.2
|
|
|
$
|
1,684.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
C
3
ISR
|
|
|
11.6
|
%
|
|
|
11.1
|
%
|
|
|
9.6%
|
|
Government Services
|
|
|
8.7
|
%
|
|
|
9.6
|
%
|
|
|
9.9%
|
|
AM&M
|
|
|
8.2
|
%
|
|
|
8.6
|
%
|
|
|
9.1%
|
|
Electronic Systems
|
|
|
14.1
|
%
|
|
|
12.1
|
%
|
|
|
12.0%
|
(3)
|
Total segment operating margin
|
|
|
11.2
|
%
|
|
|
10.6
|
%
|
|
|
10.5%
|
(3)
|
Litigation Gain
|
|
|
|
%
|
|
|
|
%
|
|
|
0.8%
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating margin
|
|
|
11.2
|
%
|
|
|
10.6
|
%
|
|
|
11.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As a result of a re-alignment of a
business unit in our management and organizational structure as
discussed in Note 2 to our audited consolidated financial
statements, sales of $60.9 million and $47.7 million
and operating income of $2.6 million and $2.9 million
were reclassified from the Government Services reportable
segment to the Electronic Systems reportable segment for the
years ended December 31, 2009 and December 31, 2008,
respectively.
|
|
(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 Electronic Systems reportable segment. The Product Line
Divestiture gain and Impairment Charge, on a net basis, reduced
total segment operating margin by 10 basis points and
operating margin for the Electronic Systems reportable segment
by 30 basis points for the year ended December 31,
2008.
|
|
(4)
|
|
Represents the $126 million
Litigation Gain recorded in the second quarter of 2008.
|
47
C
3
ISR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Increase
|
|
|
2009
|
|
|
2008
|
|
|
Increase
|
|
|
|
(dollars in millions)
|
|
|
Net sales
|
|
$
|
3,399.1
|
|
|
$
|
3,095.0
|
|
|
$
|
304.1
|
|
|
$
|
3,095.0
|
|
|
$
|
2,537.2
|
|
|
$
|
557.8
|
|
Operating income
|
|
|
395.2
|
|
|
|
343.9
|
|
|
|
51.3
|
|
|
|
343.9
|
|
|
|
244.4
|
|
|
|
99.5
|
|
Operating margin
|
|
|
11.6
|
%
|
|
|
11.1
|
%
|
|
|
50
|
bpts
|
|
|
11.1
|
%
|
|
|
9.6
|
%
|
|
|
150
|
bpts
|
2010
Compared with 2009
C
3
ISR net
sales for the year ended December 31, 2010 increased by 10%
compared to the year ended December 31, 2009 primarily due
to demand for airborne ISR logistics support and fleet
management services and networked communications systems for
manned and unmanned platforms.
C
3
ISR
operating income for the year ended December 31, 2010
increased by 15% compared to the year ended December 31,
2009. Operating margin increased by 50 basis points. Higher
sales volume and improved contract performance increased
operating margin by 50 basis points and lower pension
expense of $6 million increased operating margin by
20 basis points. These increases were partially offset by
higher lower margin services sales, which reduced operating
margin by 20 basis points.
2009
Compared with 2008
C
3
ISR net
sales for the year ended December 31, 2009 increased by 22%
compared to the year ended December 31, 2008 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 year ended December 31, 2009
increased 41% compared to the year ended December 31, 2008.
Operating margin increased by 150 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 an increase in pension
expense of $32 million, which reduced operating margin by
100 basis points.
Government
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Decrease
|
|
|
2009
|
|
|
2008
|
|
|
Decrease
|
|
|
|
(dollars in millions)
|
|
|
Net sales
|
|
$
|
3,963.0
|
|
|
$
|
4,094.2
|
|
|
$
|
(131.2
|
)
|
|
$
|
4,094.2
|
|
|
$
|
4,269.8
|
|
|
$
|
(175.6
|
)
|
Operating income
|
|
|
344.3
|
|
|
|
394.1
|
|
|
|
(49.8
|
)
|
|
|
394.1
|
|
|
|
422.8
|
|
|
|
(28.7
|
)
|
Operating margin
|
|
|
8.7
|
%
|
|
|
9.6
|
%
|
|
|
(90
|
) bpts
|
|
|
9.6
|
%
|
|
|
9.9
|
%
|
|
|
(30
|
) bpts
|
2010
Compared with 2009
Government Services net sales for the year ended
December 31, 2010 decreased by 3% compared to the year
ended December 31, 2009. The decrease was primarily due to:
(1) reduced subcontractor pass-through sales volume of
$154 million related to SSES services that migrated to a
contract where L-3 is not a prime contractor,
(2) $46 million of lower sales volume from the loss of
an Afghanistan Ministry of Defense support contract, and
(3) $27 million of lower sales volume from reduced
tasking for Iraq training work. These decreases were partially
offset by increases of $83 million primarily for increased
logistics and law enforcement support services for the
U.S. Army due to higher volume for Afghanistan, and
information technology support services for SOCOM and other
U.S. Government agencies. The increase in net sales from
acquired businesses was $13 million.
Government Services operating income for the year ended
December 31, 2010 decreased by 13% compared to the year
ended December 31, 2009. Operating margin decreased by
90 basis points. Operating margin was reduced by 120 basis
points primarily due to lower sales volume and lower margins on
select contract renewals and new contracts. These
48
decreases were partially offset by a decline in lower margin
subcontractor pass-through sales, which increased operating
margin by 30 basis points.
2009
Compared with 2008
Government Services net sales for the year ended
December 31, 2009 decreased by 4% compared to the year
ended December 31, 2008. Sales declined due to:
(1) lower sales of Iraq-related linguist services of
$226 million, (2) reduced subcontractor pass-through
sales volume of $56 million related to task order renewals
for U.S. Army systems and software engineering and
sustainment (SSES) services which migrated to a contract where
L-3 is not a prime contractor, (3) $37 million of
lower sales volume due to the timing of deliveries for
engineering support services to the DoD, and
(4) $15 million of lower volume for intelligence
support services for the U.S. Army and U.S. Government
agencies. These decreases were partially offset by increases of
$48 million primarily for IT support services for USSOCOM
and the executive branch of the U.S. Government due to
higher volume on new and existing contracts. Additionally, the
increase in net sales from acquired businesses was
$110 million, or 3%.
Government Services operating income for the year ended
December 31, 2009 decreased by 7% compared to the year
ended December 31, 2008. Operating margin decreased by
30 basis points. Lower margins on select contract renewals
during 2009 and higher profit margins on certain fixed price
contracts during 2008 reduced operating margin by 40 basis
points for the year ended December 31, 2009 compared to the
year ended December 31, 2008. Acquired businesses also
reduced operating margin by 10 basis points. These
decreases were partially offset by a decline in sales of lower
margin linguist services, which increased operating margin by
20 basis points.
Aircraft
Modernization and Maintenance (AM&M)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase/
|
|
|
|
2010
|
|
|
2009
|
|
|
Decrease
|
|
|
2009
|
|
|
2008
|
|
|
(decrease)
|
|
|
|
(dollars in millions)
|
|
|
Net sales
|
|
$
|
2,780.9
|
|
|
$
|
2,826.4
|
|
|
$
|
(45.5
|
)
|
|
$
|
2,826.4
|
|
|
$
|
2,672.6
|
|
|
$
|
153.8
|
|
Operating income
|
|
|
229.1
|
|
|
|
243.0
|
|
|
|
(13.9
|
)
|
|
|
243.0
|
|
|
|
243.1
|
|
|
|
(0.1
|
)
|
Operating margin
|
|
|
8.2
|
%
|
|
|
8.6
|
%
|
|
|
(40
|
) bpts
|
|
|
8.6
|
%
|
|
|
9.1
|
%
|
|
|
(50
|
) bpts
|
2010
Compared with 2009
AM&M net sales for the year ended December 31, 2010
decreased by 2% compared to the year ended December 31,
2009. The decrease was primarily due to sales volume declines of
$123 million from SOFSA and $45 million from the loss
of an aircraft maintenance contract with the U.S. Customs
and Border Patrol in 2009. These decreases were partially offset
by $122 million in sales increases primarily for higher
volume for Joint Cargo Aircraft (JCA), rotary wing cabin
assemblies, and the Canadian Maritime Helicopter Program.
AM&M operating income for the year ended December 31,
2010 decreased by 6% compared to the year ended
December 31, 2009. Operating margin decreased by
40 basis points. The decrease in operating margin was
primarily due to lower volume and prices for systems field
support services and lower margin sales mix, primarily related
to higher JCA volume, which has lower margins than the overall
AM&M segment.
2009
Compared with 2008
AM&M net sales for the year ended December 31, 2009
increased by 6% compared to the year ended December 31,
2008. The increase in sales was due to:
(1) $217 million of higher sales volume primarily due
to higher demand from existing contracts for systems field
support services for U.S. Army and U.S. Air Force
rotary and fixed wing training aircraft and U.S. Special
Operations Forces logistics support and higher sales for new
contracts, and (2) $61 million of higher sales for
JCA. These increases were partially offset by sales volume
declines of $124 million for contract field services (CFS)
as fewer task orders were received because of more competitors
on the current contract that began on October 1, 2008.
AM&M operating income for the year ended December 31,
2009 remained substantially the same compared to the year
49
ended December 31, 2008. Operating margin decreased by
50 basis points. Sales volume declines for CFS reduced
operating margin by 40 basis points. Operating margins
decreased by 30 basis points primarily due to cost
increases on international aircraft modernization contracts.
Higher pension expense reduced operating margin by 10 basis
points. These decreases were partially offset by
$10 million of charges to adjust litigation accruals during
2008 that did not recur in 2009, which increased operating
margin by 30 basis points.
Electronic
Systems
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
(Decrease)/
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Increase
|
|
|
2009
|
|
|
2008
|
|
|
Increase
|
|
|
|
(dollars in millions)
|
|
|
Net sales
|
|
$
|
5,536.6
|
|
|
$
|
5,599.1
|
|
|
$
|
(62.5
|
)
|
|
$
|
5,599.1
|
|
|
$
|
5,421.5
|
|
|
$
|
177.6
|
|
Operating income
|
|
|
781.5
|
|
|
|
675.2
|
|
|
|
106.3
|
|
|
|
675.2
|
|
|
|
648.7
|
|
|
|
26.5
|
|
Operating margin
|
|
|
14.1
|
%
|
|
|
12.1
|
%
|
|
|
200
|
bpts
|
|
|
12.1
|
%
|
|
|
12.0
|
%
|
|
|
10
|
bpts
|
2010
Compared with 2009
Electronic Systems net sales for the year ended
December 31, 2010 decreased by 1% compared to the year
ended December 31, 2009, reflecting lower sales volume of:
(1) $113 million for combat propulsion systems due to
a reduction in DoD funding for Bradley Fighting Vehicles,
(2) $107 million due to reduced demand for commercial
ship building products, and (3) $168 million from
precision engagement, marine services, training &
simulation, and displays due to contracts nearing completion.
These decreases were partially offset by $122 million of
sales volume increases due to higher demand primarily for EO/IR
products to the U.S. Army, microwave products and
security & detection systems, and $9 million from
the sale of a technology license. Acquired businesses, primarily
Insight and 3Di, contributed $194 million to net sales.
Electronic Systems operating income for the year ended
December 31, 2010 increased by 16% compared to the year
ended December 31, 2009. Operating margin increased by
200 basis points. Favorable sales mix across several
businesses, primarily EO/IR products, increased operating margin
by 160 basis points. Additionally, three items comprised
of: (1) the sale of a technology license for
$9 million, (2) a volume price adjustment on a supply
contract of $6 million, and (3) a favorable contract
modification for precision engagement of $5 million,
collectively increased operating income by $20 million and
operating margin by 40 basis points compared to the year
ended December 31, 2009. Lower pension expense of
$10 million increased operating margin by 20 basis
points. These increases were partially offset by severance
charges of $11 million, which reduced operating margin by
20 basis points.
2009
Compared with 2008
Electronic Systems net sales for the year ended
December 31, 2009 increased by 3% compared to the year
ended December 31, 2008, reflecting higher sales volume of:
(1) $91 million for EO/IR products, primarily due to
demand and deliveries on new and existing contracts,
(2) $57 million for microwave products primarily due
to deliveries of mobile and ground-based satellite
communications systems and spare parts for the
U.S. military, communication services primarily to the DoD,
and higher sales volume for tactical signal intelligence
systems, and (3) $47 million primarily for deliveries
of tactical quiet generators for mobile electric power for the
U.S. Armed Services, and new and follow-on contracts for
shipboard electronics and power distribution, conditioning and
conversion products primarily to the U.S. Navy. The
increase in net sales from acquired businesses, net of
divestitures, was $78 million, or 1%, and pertains mostly
to the Electro-Optical Systems (EOS) business acquired on
April 21, 2008, and to Chesapeake Sciences Corporation
acquired on January 30, 2009. These sales increases were
partially offset by decreases of: (1) $59 million for
aviation products as a result of reduced demand from commercial
customers caused by the global economic recession, and
(2) $36 million for security & detection and
undersea warfare due to delays in receipt of expected orders and
timing of deliveries.
Electronic Systems operating income for the year ended
December 31, 2009 increased by 4% compared to the year
ended December 31, 2008. Operating margin of 12.1% for the
year ended December 31, 2009 increased by 10 basis
points compared to the year ended December 31, 2008.
Excluding the Product Line Divestiture Gain ($12 million)
and Impairment Charge ($28 million), operating margin for
the year ended December 31, 2009 decreased by 20 basis
points compared to operating margin of 12.3% for the year ended
December 31, 2008. An increase in pension expense of
50
$42 million reduced operating margin by 80 basis
points. Operating margin increased by 40 basis points
primarily due to higher sales volume and favorable sales mix for
EO/IR products and power & control systems. Operating
margin increased by 10 basis points due to $6 million
of charges to adjust litigation accruals in 2008 that did not
recur in 2009 and acquired businesses increased operating margin
by 10 basis points.
Liquidity
and Capital Resources
Anticipated
Sources and Uses of Cash Flow
At December 31, 2010, we had total cash and cash
equivalents of $607 million. While no amounts of the cash
and cash equivalents are considered restricted,
$425 million are held by the Companys foreign
subsidiaries. The repatriation of cash held in non-U.S.
jurisdictions is subject to local capital requirements, as well
as income tax considerations. Our primary source of liquidity is
cash flow generated from operations. We generated
$1,461 million of cash from operating activities during the
year ended December 31, 2010. Significant cash uses during
the year ended December 31, 2010, included
$834 million to repurchase shares of our common stock,
$756 million paid for business acquisitions, and
$184 million for dividends.
As of December 31, 2010, we also had $983 million of
borrowings available under our Revolving Credit Facility, after
reductions of $17 million for outstanding letters of
credit, subject to certain conditions. Our Revolving Credit
Facility expires on October 23, 2012. We currently believe
that our cash from operating activities together with our cash
on hand and available borrowings under our Revolving Credit
Facility will be adequate for the foreseeable future to meet our
anticipated requirements for working capital, capital
expenditures, defined benefit plan contributions, commitments,
contingencies, research and development expenditures, 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.
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, reduce dividend payments, refinance all or
a portion of our existing debt or obtain additional financing,
which we may not be able to do 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 U.S. defense industry and to
general economic, political, financial, competitive, legislative
and regulatory factors beyond our control.
On February 2, 2011, we repurchased approximately
$11 million of our CODES as a result of the exercise by the
holders of their contractual right to require us to repurchase
their CODES. On February 7, 2011, we issued
$650 million in principal amount of 4.95% Senior Notes
maturing February 15, 2021. We will use the net proceeds,
together with cash on hand, to redeem our $650 million
5
7
/
8
% Senior
Subordinated Notes maturing January 15, 2015 (2015 Notes).
The redemption price is 101.958% of the principal amount, plus
accrued and unpaid interest up to, but not including,
March 9, 2011, the redemption date. Subsequent to the
redemption of our 2015 Notes, the first scheduled maturity of
our existing debt will be our $1 billion
6
3
/
8
% Senior
Subordinated Notes maturing on October 15, 2015.
For a discussion of our debt refinancing activities during 2010,
which improved our debt maturity profile and reduced ongoing
interest expense, see Financing Activities-Debt on
page 55.
Balance
Sheet
Billed receivables increased by $150 million to
$1,299 million at December 31, 2010 from
$1,149 million at December 31, 2009 due to:
(1) higher sales for networked communications, (2) the
timing of billings and collections primarily for government
services and undersea warfare, and (3) $47 million of
acquired billed receivables from business acquisitions. These
increases were partially offset by decreases for AM&M,
displays, simulation & training, and combat propulsion
systems due to lower sales and $3 million for foreign
currency translation adjustments.
Contracts in process increased by $153 million to
$2,548 million at December 31, 2010, from
$2,395 million at
51
December 31, 2009. The increase included $13 million
for acquired
contracts-in-process,
$4 million primarily for balance sheet reclassifications,
and $136 million from:
|
|
|
|
|
Increases of $76 million in unbilled contract receivables
primarily due to sales exceeding billings for networked
communications, aircraft modernization, secure communications,
and ISR services, partially offset by decreases due to lower
sales and billings for government services, SOFSA, precision
engagement, and commercial shipbuilding; and
|
|
|
|
Increases of $60 million in inventoried contract costs
across several business areas, primarily precision engagement,
networked communications and EO/IR products to support current
and anticipated customer demand.
|
L-3s receivables days sales outstanding (DSO) was 70 at
December 31, 2010, compared with 66 at December 31,
2009. The increase in DSO was primarily due to the growth in
billed receivables for government services and unbilled
receivables for networked communications. 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 (365 days at both
December 31, 2010 and December 31, 2009). Our trailing
12 month pro forma sales were $15,850 million at
December 31, 2010 and $15,621 million at
December 31, 2009.
The increase in inventories was primarily due to
$50 million of acquired inventories from business
acquisitions and higher inventory for security and detection
systems to support demand. These increases were partially offset
by lower commercial shipbuilding inventory.
The decrease in current deferred income tax assets was due to
Internal Revenue Service tax accounting method changes we
elected regarding compensation expense and income recognition of
service contracts during 2010.
The increase in other current assets is primarily due to higher
expected tax refunds, primarily for U.S. federal and state
income taxes.
The increase in net property, plant and equipment (PP&E)
was principally due to capital expenditures and $66 million
of acquired PP&E from completed business acquisitions,
partially offset by depreciation expense.
Goodwill increased by $540 million to $8,730 million
at December 31, 2010 from $8,190 million at
December 31, 2009.
The table below presents the changes in goodwill applicable to
our reporting units in each reportable segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
|
|
|
|
|
|
Electronic
|
|
|
Consolidated
|
|
|
|
C
3
ISR
|
|
|
Services
|
|
|
AM&M
|
|
|
Systems
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Balance at December 31, 2009
|
|
$
|
870
|
|
|
$
|
2,320
|
|
|
$
|
1,158
|
|
|
$
|
3,842
|
|
|
$
|
8,190
|
|
Business acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
530
|
|
|
|
530
|
|
Sale of a business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Foreign currency translation
adjustments
(1)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
14
|
|
|
|
1
|
|
|
|
12
|
|
Segment
reclassification
(2)
|
|
|
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
868
|
|
|
$
|
2,285
|
|
|
$
|
1,172
|
|
|
$
|
4,405
|
|
|
$
|
8,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The changes in goodwill from
foreign currency translation adjustments are due to fluctuations
in the U.S. dollar and foreign currency exchange rates during
the year ended December 31, 2010. The decreases in goodwill
presented in the
C
3
ISR and
Government Services reportable segments were due to the
strengthening of the U.S. dollar against the British pound. The
increases in goodwill presented in the AM&M and Electronic
Systems reportable segments were primarily due to the weakening
of the U.S. dollar against the Canadian dollar.
|
|
(2)
|
|
As a result of a re-alignment of a
business unit in our management and organizational structure as
discussed in Note 2 of our audited consolidated financial
statements, goodwill was reclassified on a relative fair value
basis from the Government Services reportable segment to the
Electronic Systems reportable segment.
|
52
The increase in identifiable intangible assets was primarily due
to the recognition of $153 million of intangible assets for
the business acquisitions during 2010, partially offset by
amortization expense.
For the year ended December 31, 2010, the increase in
accrued expenses was primarily due to the timing of invoices
received for purchases from third party vendors and
subcontractors. The increase in accrued employment costs was due
to accrued severance payments, higher benefit costs, and the
timing of payments for payroll taxes and salaries and wages. The
increase in advance payments and billings in excess of costs
incurred was primarily due to performance based billings for
certain undersea warfare, training & simulation,
security & detection systems, and microwave contracts.
Non-current deferred income tax liabilities increased primarily
due to amortization of certain goodwill and other identifiable
intangible assets and income recognition of service contracts
during 2010 for tax purposes.
Pension
Plans
L-3 maintains defined benefit pension plans covering employees
at certain of its businesses and approximately 23% of its
employees. At December 31, 2010, L-3s projected
benefit obligation, which includes accumulated benefits plus the
incremental benefits attributable to projected future salary
increases for covered employees, was $2,365 million and
exceeded the fair value of L-3s pension plan assets of
$1,585 million by $780 million. At December 31,
2009, L-3s projected benefit obligation was
$1,964 million and exceeded the fair value of L-3s
pension plan assets of $1,304 million by $660 million.
The $120 million increase in our unfunded status was due to
pension expense of $154 million for 2010, and an increase
of $158 million in accumulated other comprehensive loss
comprised of $201 million primarily for net actuarial
losses experienced in 2010 and $43 million of amortization
of net actuarial losses and prior service costs as a component
of pension expense in 2010, partially offset by employer pension
contributions of $186 million and a decrease of
$6 million for foreign currency translation adjustments.
The 2010 increase of $201 million in accumulated other
comprehensive loss as noted above was primarily due to the
reduction in our weighted average discount rate from 6.26% at
December 31, 2009 to 5.57% at December 31, 2010 and
change in expected mortality assumptions. The actuarial gains
and losses that our pension plans experience are not recognized
in pension expense in the year incurred, but rather are recorded
as a component of accumulated other comprehensive income (loss)
and amortized to pension expense in future periods over the
estimated average remaining service periods of the covered
employees. See Note 20 to our audited consolidated
financial statements.
Our pension expense for 2010 was $154 million. We currently
expect pension expense for 2011 to increase $3 million to
approximately $157 million primarily due to the reduction
in our weighted average discount rate and the change in expected
mortality assumptions as noted above, partially offset by higher
expected asset returns in 2011.
Our pension expense for 2011 may be different from our
current expectations when finalized due to a number of factors,
including the effect of any future business acquisitions for
which we assume liabilities for pension benefits, changes in
headcount at our businesses that sponsor pension plans, actual
pension plan contributions and changes (if any) to our pension
assumptions for 2011, including the discount rate, expected
long-term return on plan assets and salary increases.
Our contributions for 2010 were $186 million and we
currently expect to contribute approximately $185 million
to our pension plans in 2011. Actual 2011 pension contributions
could be affected by changes in the funded status of our pension
plans during 2011. A substantial portion of our pension plan
contributions for L-3s businesses that are
U.S. Government contractors are recoverable as allowable
indirect contract costs at amounts generally equal to the annual
pension contributions.
Our projected benefit obligation and annual pension expense are
significantly affected by our discount rate assumption. For
example, a reduction to the discount rate of 25 basis
points would increase our projected benefit obligation at
December 31, 2010 by approximately $79 million and our
estimated pension expense for 2011 by approximately
$11 million. Conversely, an increase to the discount rate
of 25 basis points would have decreased our projected
benefit obligation at December 31, 2010 by approximately
$75 million, and our estimated pension expense for 2011 by
approximately $10 million.
53
Statement
of Cash Flows
The table below provides a summary of our cash flows from
operating, investing, and financing activities for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Net cash from operating activities
|
|
$
|
1,461
|
|
|
$
|
1,407
|
|
|
$
|
1,387
|
|
Net cash used in investing activities
|
|
|
(945
|
)
|
|
|
(272
|
)
|
|
|
(432
|
)
|
Net cash used in financing activities
|
|
|
(918
|
)
|
|
|
(1,005
|
)
|
|
|
(840
|
)
|
Operating
Activities
2010 Compared with 2009.
We generated
$1,461 million of cash from operating activities during the
year ended December 31, 2010, an increase of
$54 million compared with $1,407 million generated
during the year ended December 31, 2009. The increase was
due to $55 million of higher net income and
$51 million of higher non-cash expenses primarily for
higher deferred income taxes and stock-based employee
compensation. These increases were partially offset by
$52 million of more net cash used for changes in operating
assets and liabilities primarily for billed receivables and
pension and postretirement benefits. The net cash from changes
in operating assets and liabilities is further discussed above
under Liquidity and Capital Resources Balance
Sheet beginning on page 51.
2009 Compared with 2008.
We generated
$1,407 million of cash from operating activities during the
year ended December 31, 2009, an increase of
$20 million compared with $1,387 million generated
during the year ended December 31, 2008. The increase was
due to less net cash used of $61 million for changes in
operating assets and liabilities primarily for billed
receivables, contracts in process, other current liabilities
(mainly the Litigation Gain) and pension and postretirement
benefits, partially offset by more cash used for changes in
accounts payable, accrued employment costs, accrued expenses,
and advance payments and billings in excess of costs incurred.
This increase was partially offset by: (1) a decrease in
net income of $38 million, and (2) lower non-cash
expenses of $3 million, primarily due to lower deferred
income taxes.
Interest Payments.
Our cash from operating
activities included interest payments on debt of
$233 million for the year ended December 31, 2010,
$237 million for the year ended December 31, 2009, and
$267 million for the year ended December 31, 2008. Our
interest expense also included amortization of deferred debt
issue costs and bond discounts, which are non-cash items.
Investing
Activities
During 2010, we used $945 million of cash primarily to:
(1) acquire four businesses discussed under Business
Acquisitions on page 34, (2) pay
$181 million for capital expenditures, and (3) invest
$23 million in an unconsolidated subsidiary accounted for
using the equity method.
During 2009, we used $272 million of cash primarily to:
(1) acquire a business and pay the remaining contractual
purchase price for a business acquisition completed prior to
January 1, 2009 for a total of $90 million, and
(2) pay $186 million for capital expenditures.
During 2008, we used $283 million of cash primarily to:
(1) acquire four businesses discussed under Business
Acquisitions, (2) pay earnouts and the remaining
contractual purchase price for certain business acquisitions
completed prior to January 1, 2008, and (3) increase
our ownership interest in METI by 5% from 80% to 85%. We also
used $218 million of cash for capital expenditures.
Investing activities for the year ended December 31, 2008
included a $63 million source of cash in the aggregate from
the sale of METI on October 8, 2008 and the sale of the PMD
product line during the second quarter.
54
Financing
Activities
Debt
At December 31, 2010, total outstanding debt was
$4,137 million, of which $1,794 million was senior
debt and $2,343 million was subordinated debt and CODES,
compared to $4,112 million at December 31, 2009, of
which $996 million was senior debt and $3,116 million
was subordinated debt and CODES. At December 31, 2010,
borrowings available under our Revolving Credit Facility were
$983 million, after reduction for outstanding letters of
credit of $17 million. We also have $377 million of
other standby letters of credit at December 31, 2010, that
may be drawn upon in the event we do not perform on certain of
our contractual requirements. There were no borrowings
outstanding under our Revolving Credit Facility at
December 31, 2010. At December 31, 2010, our
outstanding debt matures between January 15, 2015 and
August 1, 2035. See Note 10 to our audited
consolidated financial statements for the components of our debt
at December 31, 2010.
Debt Issuances and Repayments.
On May 21, 2010,
L-3 Communications issued $800 million in principal amount
of 4.75% Senior Notes maturing July 15, 2020 (2020
Senior Notes) at a discount of $3 million. The effective
interest rate of the 2020 Senior Notes is 4.79%. Interest on the
2020 Senior Notes is payable semi-annually on January 15 and
July 15 of each year. The net cash proceeds from this offering
amounted to approximately $790 million after deducting the
discounts, commissions and estimated expenses, and were used,
together with cash on hand, to redeem L-3 Communications
6
1
/
8
% Senior
Subordinated Notes due 2013 and 2014. In connection with the
redemption of the
6
1
/
8
% Senior
Subordinated Notes due 2013 and 2014, we recorded debt
retirement charges of approximately $18 million
($11 million after income tax, or $0.10 per diluted share)
during year ended December 31, 2010.
On October 2, 2009, L-3 Communications issued
$1 billion in aggregate principal amount of
5.20% Senior Notes maturing October 15, 2019 (2019
Senior Notes) at a discount of $4 million. The 2019 Senior
Notes have an effective interest rate of 5.25%. Interest on the
2019 Senior Notes is payable semi-annually on April 15 and
October 15 of each year. The net cash proceeds from this
offering amounted to approximately $987 million after
deducting the discounts, commissions and estimated expenses, and
were used, together with cash on hand, to redeem L-3
Communications outstanding $750 million
7
5
/
8
% Senior
Subordinated Notes due in 2012 (2012 Notes) on November 2,
2009 and to repay L-3 Communications outstanding
$650 million term loan on October 7, 2009. In
connection with the redemption of the 2012 Notes, we recorded a
debt retirement charge in the fourth quarter of 2009 of
approximately $10 million ($6 million after income
tax, or $0.05 per diluted share).
On October 23, 2009, L-3 Communications replaced its
$1 billion revolving credit facility that was scheduled to
expire on March 9, 2010, with a $1 billion three-year
Revolving Credit Facility maturing on October 23, 2012.
2011 Debt Issuance and Repayment.
On
February 2, 2011, we repurchased approximately
$11 million of our CODES as a result of the exercise by the
holders of their contractual right to require us to repurchase
their CODES.
On February 7, 2011, L-3 Communications issued
$650 million in principal amount of 4.95% Senior Notes
maturing February 15, 2021 (2021 Senior Notes) at a
discount of $4 million. The effective interest rate of the
2021 Senior Notes is 5.02%. Interest on the 2021 Senior Notes is
payable semi-annually on February 15 and August 15 of each year.
The net cash proceeds from this offering amounted to
approximately $640 million after deducting the discounts,
commissions and estimated expenses. We will use the net
proceeds, together with cash on hand, to redeem L-3
Communications $650 million
5
7
/
8
% Senior
Subordinated Notes maturing 2015 (2015 Notes). The redemption
price is 101.958% of the principal amount, plus accrued and
unpaid interest up to, but not including, March 9, 2011,
the redemption date. In connection with the redemption of the
2015 Notes, we will record a debt retirement charge in the 2011
first quarter of $18 million ($11 million after income
tax, or $0.10 per diluted share).
Debt Covenants and Other Provisions.
The Revolving
Credit Facility, senior notes and senior subordinated notes
contain financial
and/or
other
restrictive covenants. See Note 10 to our audited
consolidated financial statements for a description of our debt
and related financial covenants, including dividend payment and
share repurchase restrictions and cross default provisions. As
of December 31, 2010, we were in compliance with our
financial and other restrictive covenants.
55
Under select conditions, including if L-3 Holdings common
stock price is more than 120% (currently $118.73) of the then
current conversion price ($98.94 as of May 14,
2010) for a specified period, the conversion feature of the
CODES will require L-3 Holdings, upon conversion, to pay the
holders of the CODES the 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 additional information regarding the CODES,
including conditions for conversion. L-3 Holdings closing
stock price of February 23, 2010 was $79.45 per share.
Guarantees.
The borrowings under the Revolving
Credit Facility are fully and unconditionally guaranteed by L-3
Holdings and by substantially all of the material wholly-owned
domestic subsidiaries of L-3 Communications on an unsecured
senior basis. The payment of principal and premium, if any, and
interest on the senior notes are fully and unconditionally
guaranteed, on an unsecured senior basis, jointly and severally,
by L-3 Communications material wholly-owned domestic
subsidiaries that guarantee any of its other indebtedness. The
payment of principal and premium, if any, and interest on the
senior subordinated notes are fully and unconditionally
guaranteed, on an unsecured senior subordinated basis, jointly
and severally, by L-3 Communications wholly-owned domestic
subsidiaries that guarantee any of its other indebtedness. The
payment of principal and premium, if any, and interest on the
CODES are fully and unconditionally guaranteed, on an unsecured
senior subordinated basis, jointly and severally, by L-3
Communications and its wholly-owned domestic subsidiaries that
guarantee any of its other liabilities.
Subordination.
The guarantees of the Revolving
Credit Facility and the senior notes rank senior to the
guarantees of the senior subordinated notes and the CODES and
rank pari passu with each other. The guarantees of the senior
subordinated notes and CODES rank pari passu with each other and
are junior to the guarantees of the Revolving Credit Facility
and senior notes.
Equity
During 2010 and 2009, L-3 Holdings Board of Directors
authorized the following quarterly cash dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividends
|
|
|
|
|
Total Dividends
|
|
Date Declared
|
|
Record Date
|
|
Per Share
|
|
|
Date Paid
|
|
Paid
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2
|
|
March 1
|
|
$
|
0.40
|
|
|
March 15
|
|
$
|
47
|
|
April 27
|
|
May 17
|
|
$
|
0.40
|
|
|
June 15
|
|
$
|
46
|
|
July 13
|
|
August 17
|
|
$
|
0.40
|
|
|
September 15
|
|
$
|
46
|
|
October 26
|
|
November 17
|
|
$
|
0.40
|
|
|
December 15
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
February 5
|
|
February 19
|
|
$
|
0.35
|
|
|
March 16
|
|
$
|
42
|
|
April 28
|
|
May 18
|
|
$
|
0.35
|
|
|
June 15
|
|
$
|
41
|
|
July 14
|
|
August 17
|
|
$
|
0.35
|
|
|
September 15
|
|
$
|
41
|
|
October 6
|
|
November 17
|
|
$
|
0.35
|
|
|
December 15
|
|
$
|
41
|
|
On February 8, 2011, L-3 Holdings announced that its Board
of Directors had increased L-3 Holdings regular quarterly
cash dividend by 12.5% to $0.45 per share, payable on
March 15, 2011, to shareholders of record at the close of
business on March 1, 2011.
On February 16, 2011, the number of holders of L-3
Holdings common stock was approximately 58,000. On
February 23, 2011, the closing price of L-3 Holdings common
stock, as reported by the NYSE, was $79.45 per share.
For the year ended December 31, 2010, L-3 Holdings
repurchased $834 million, or 11.0 million shares, of
its common stock compared to $505 million, or
7.0 million shares, of its common stock for the year ended
December 31, 2009.
56
Contractual
Obligations
The table below presents our estimated total contractual
obligations at December 31, 2010, including the amounts
expected to be paid or settled for each of the periods indicated
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 year
|
|
|
1 3 Years
|
|
|
3 5 years
|
|
|
5 years
|
|
|
|
(in millions)
|
|
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 Communications long-term
debt
(1)
|
|
$
|
3,450
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,650
|
|
|
$
|
1,800
|
|
L-3 Holdings long-term
debt
(1)(2)
|
|
|
700
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
689
|
|
Interest
payments
(3)
|
|
|
1,864
|
|
|
|
213
|
|
|
|
426
|
|
|
|
407
|
|
|
|
818
|
|
Non-cancelable operating
leases
(4)
|
|
|
714
|
|
|
|
183
|
|
|
|
235
|
|
|
|
152
|
|
|
|
144
|
|
Notes payable and capital lease obligations
|
|
|
10
|
|
|
|
1
|
|
|
|
|
|
|
|
8
|
|
|
|
1
|
|
Purchase
obligations
(5)
|
|
|
2,514
|
|
|
|
2,034
|
|
|
|
460
|
|
|
|
19
|
|
|
|
1
|
|
Other long-term
liabilities
(6)
|
|
|
326
|
|
|
|
198
|
(7)
|
|
|
62
|
|
|
|
8
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(8)
|
|
$
|
9,578
|
|
|
$
|
2,640
|
|
|
$
|
1,183
|
|
|
$
|
2,244
|
|
|
$
|
3,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents principal amount of
long-term debt and only includes scheduled principal payments.
|
(2)
|
|
As of May 14, 2010, the CODES
are convertible into cash and shares of L-3 Holdings
common stock based on a conversion rate of 10.1074 shares
of L-3 Holdings common stock per one thousand dollars in
principal amount of the CODES (equivalent to a conversion price
of $98.94 per share). The conversion feature of the CODES may
require L-3 Holdings to settle the principal amount with the
holders of the CODES if L-3 Holdings common stock price is more
than 120% of the then current conversion price (currently
$118.73) for a specified period, 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 additional information regarding the CODES, including
conditions for conversion and contingent interest features. L-3
Holdings stock price on February 23, 2011 was $79.45.
|
(3)
|
|
Represents expected interest
payments on L-3s long-term debt balance as of
December 31, 2010 using the stated interest rate on our
fixed rate debt, assuming that current borrowings remain
outstanding to the contractual maturity date. The interest
payments do not reflect the impact of the 2011 debt issuance and
repayment. For additional information regarding the 2011 debt
issuance and repayment, see Note 10 to our audited
consolidated financial statements.
|
(4)
|
|
Non-cancelable operating leases are
presented net of estimated sublease rental income.
|
(5)
|
|
Represents open purchase orders at
December 31, 2010 for amounts expected to be paid for goods
or services that are legally binding.
|
(6)
|
|
Other long-term liabilities
primarily consist of workers compensation and deferred
compensation for the years ending December 31, 2012 and
thereafter and also include pension and postretirement benefit
plan contributions that we expect to pay in 2011.
|
(7)
|
|
Our pension and postretirement
benefit plan funding policy is generally to contribute in
accordance with cost accounting standards that affect government
contractors, subject to the Internal Revenue Code and
regulations thereon. For 2011, we expect to contribute
approximately $185 million to our pension plans and
approximately $13 million to our postretirement benefit
plans. Due to the current uncertainty of the amounts used to
compute our expected pension and postretirement benefit plan
funding, we believe it is not practicable to reasonably estimate
such future funding for periods in excess of one year and we may
decide or be required to contribute more than we expect to our
pension and postretirement plans.
|
(8)
|
|
Excludes all income tax
obligations, a portion of which represents unrecognized tax
benefits in connection with uncertain tax positions taken, or
expected to be taken on our income tax returns as of
December 31, 2010 since we cannot determine the time period
of future tax consequences. For additional information regarding
income taxes, see Note 17 to our audited consolidated
financial statements.
|
57
Off
Balance Sheet Arrangements
The table below presents our estimated total contingent
commitments and other guarantees at December 31, 2010,
including the amounts expected to be paid or settled for each of
the periods indicated below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 and
|
|
|
|
Total
|
|
|
2011
|
|
|
2012-2013
|
|
|
2014-2015
|
|
|
thereafter
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Contingent Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit under our Revolving Credit
Facility
(1)
|
|
$
|
17
|
|
|
$
|
14
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
|
|
Other standby letters of
credit
(1)
|
|
|
377
|
|
|
|
313
|
|
|
|
50
|
|
|
|
7
|
|
|
|
7
|
|
Other
guarantees
(2)
|
|
|
47
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Contingent commitments for earnout payments on business
acquisitions
(3)
|
|
|
13
|
|
|
|
4
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(4)
|
|
$
|
454
|
|
|
$
|
375
|
|
|
$
|
62
|
|
|
$
|
7
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents outstanding letters of
credit with financial institutions covering performance and
financial guarantees per contractual requirements with certain
customers. These letters of credit may be drawn upon in the
event of L-3s nonperformance.
|
|
(2)
|
|
Represents the minimum guarantees
made by L-3 or lessee (i) under the purchase option for
certain operating leases in which the lease renewal is not
exercised and (ii) for 50% of certain bank debt related to
a joint venture arrangement (see Note 19 to our audited
consolidated financial statements for a description of these
guarantees).
|
|
(3)
|
|
Represents potential additional
contingent purchase payments for business acquisitions that are
contingent upon the post-acquisition financial performance or
certain other performance conditions of the acquired businesses
in accordance with the contractual purchase agreement.
|
|
(4)
|
|
The total amount does not include
residual value guarantees for two real estate lease agreements
that are accounted for as operating leases. We have the right to
exercise options under the lease agreements to purchase both
properties for $28 million on or before August 31,
2011. See Note 19 to our audited consolidated financial
statements for further description of these leases.
|
Legal
Proceedings and Contingencies
We are engaged in providing products and services under
contracts with the U.S. Government and, to a lesser degree,
under foreign government contracts, some of which are funded by
the U.S. Government. All such contracts are subject to
extensive legal and regulatory requirements, and, periodically,
agencies of the U.S. Government investigate whether such
contracts were and are being conducted in accordance with these
requirements. Under U.S. Government procurement
regulations, an indictment by a federal grand jury, or an
administrative finding against us as to our present
responsibility to be a U.S. Government contractor or
subcontractor, could result in the suspension for a period of
time from eligibility for awards of new government contracts or
task orders or in a loss of export privileges. A conviction, or
an administrative finding that satisfies the requisite level of
seriousness, could result in debarment from contracting with the
federal government for a specified term. We are currently
cooperating with the U.S. Government on several
investigations, none of which we anticipate will have a material
adverse effect on our consolidated financial position, results
of operations or cash flows.
We continually assess our obligations with respect to applicable
environmental protection laws. While it is difficult to
determine the timing and ultimate cost that we will incur to
comply with these laws, based upon available internal and
external assessments, with respect to those environmental loss
contingencies of which we are aware, we believe that even
without considering potential insurance recoveries, if any,
there are no environmental loss contingencies that, in the
aggregate, would be material to our consolidated financial
position, results of operations or cash flows. Also, we have
been periodically subject to litigation, government
investigations, proceedings, claims or assessments and various
contingent liabilities incidental to our business. We accrue for
these contingencies when it is probable that a liability has
been incurred and the amount of the loss can be reasonably
estimated. For a description of our legal proceedings and
contingencies, see Note 19 to our audited consolidated
financial statements.
58
Derivative
Financial Instruments and Other Market Risk
Included in our derivative financial instruments are foreign
currency forward contracts. All of our derivative financial
instruments that are sensitive to market risk are entered into
for purposes other than trading.
Interest Rate Risk.
Our Revolving Credit Facility is
subject to variable interest and is therefore sensitive to
changes in interest rates. The interest rates on the Senior
Notes, senior subordinated notes, and CODES are fixed-rate and
are not affected by changes in interest rates. Additional data
on our debt obligations and our applicable borrowing spreads
included in the interest rates we would pay on borrowings under
the Revolving Credit Facility, if any, are provided in
Note 10 to our audited consolidated financial statements.
Foreign Currency Exchange Risk.
Our 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, we enter into foreign currency
forward contracts, which are generally designated and accounted
for as cash flow hedges. At December 31, 2010, the notional
value of foreign currency forward contracts was
$337 million and the net fair value of these contracts was
an asset of $17 million. The notional values of our foreign
currency forward contracts with maturities ranging through 2015
and thereafter are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year of Maturity
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015 and thereafter
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Notional value
|
|
$
|
272
|
|
|
$
|
33
|
|
|
$
|
14
|
|
|
$
|
13
|
|
|
$
|
5
|
|
Accounting
Standards Issued and Not Yet Implemented
For a discussion of accounting standards issued and not yet
implemented, see Note 2 to our audited consolidated
financial statements.
Inflation
The effect of inflation on our sales and earnings has not been
significant. Although a majority of our sales are made under
long-term contracts (revenue arrangements), the selling prices
of such contracts, established for deliveries in the future,
generally reflect estimated costs to be incurred in these future
periods. In addition, some of our contracts provide for price
adjustments through cost escalation clauses.
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;
|
59
|
|
|
|
|
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, including potential
suspensions or debarments;
|
|
|
|
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;
|
|
|
|
the DoDs contractor support services in-sourcing and
efficiency initiatives;
|
|
|
|
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-plus 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 litigation matters, including in connection with
jury trials;
|
60
|
|
|
|
|
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;
|
|
|
|
results of on-going governmental investigations, including
potential suspensions or debarments;
|
|
|
|
the impact on our business of improper conduct by our employees,
agents, or business partners;
|
|
|
|
anticipated cost savings from business acquisitions not fully
realized or realized within the expected time frame;
|
|
|
|
the outcome of matters relating to the Foreign Corrupt Practices
Act (FCPA) and similar
non-U.S. regulations;
|
|
|
|
ultimate resolution of contingent matters, claims and
investigations relating to acquired businesses, and the impact
on the final purchase price allocations;
|
|
|
|
significant increase in competitive pressure among companies in
our industry; and
|
|
|
|
the fair values of our assets, including identifiable intangible
assets and the estimated fair value of the goodwill balances for
our reporting units, which can be impaired or reduced by other
factors, some of which are discussed above.
|
In addition, for a discussion of other risks and uncertainties
that could impair our results of operations or financial
condition, see Part I
Item 1A Risk Factors and Note 19 to
our audited consolidated financial statements, in each case
included in this Annual Report on
Form 10-K
for the year ended December 31, 2010.
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 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
For data regarding quantitative and qualitative disclosures
related to our market risk sensitive financial instruments, see
Part II Item 7
Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital
Resources Derivative Financial Instruments and Other
Market Risk on page 59 and Note 13 to our
audited consolidated financial statements. See Notes 12 and
14 to our audited consolidated financial statements for the
aggregate fair values and notional amounts of our foreign
currency forward contracts at December 31, 2010.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
See our audited consolidated financial statements beginning on
page F-1.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
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
61
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 Senior 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
Senior Vice President and Chief Financial Officer, has evaluated
the effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2010. Based upon
that evaluation and subject to the foregoing, our Chairman,
President and Chief Executive Officer, and our Senior Vice
President and Chief Financial Officer concluded that, as of
December 31, 2010, 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
December 31, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
Managements
Report on Internal Control Over Financial
Reporting
As required by the SECs rules and regulations for the
implementation of Section 404 of the Sarbanes-Oxley Act,
our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Our internal
control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of our consolidated financial
statements for external reporting purposes in accordance with
accounting principles generally accepted in the United States of
America. Our internal control over financial reporting includes
those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the
assets of L-3, (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America,
and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors,
and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on
the consolidated financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements in
our consolidated financial statements. Also, projections of any
evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
Management assessed the effectiveness of L-3 Holdings and
L-3 Communications internal control over financial
reporting as of December 31, 2010. In making these
assessments, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in
Internal Control Integrated
Framework
. Based on our assessments and those criteria,
management determined that L-3 Holdings and L-3 Communications
maintained effective internal control over financial reporting
as of December 31, 2010.
Our independent registered public accounting firm has audited
and issued their attestation report on the Companys
internal control over financial reporting as of
December 31, 2010. See
page F-2
to our audited consolidated financial statements for their
report.
|
|
Item 9B:
|
Other
Information
|
None.
62
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The Company posts its Code of Ethics and Business Conduct on the
Corporate Governance webpage at its website at
http://www.L-3com.com
under the link Code of Ethics and Business Conduct.
The Companys Code of Ethics and Business Conduct applies
to all directors, officers and employees, including our
chairman, president and chief executive officer, our vice
president and chief financial officer, and our corporate
controller and principal accounting officer. We will post any
amendments to the Code of Ethics and Business Conduct, and any
waivers that are required to be disclosed by the rules of either
the SEC or the NYSE, on our Web site within the required periods.
The remaining information called for by Item 10 is included
in the sections captioned Proposal 1. Election of
Directors, Continuing Members of the Board of
Directors, Executives and Certain Other Officers of
the Company and Section 16(A) Beneficial
Ownership Reporting Compliance in the definitive proxy
statement (the Companys Proxy Statement)
relating to the Companys 2011 Annual Meeting of
Shareholders, to be held on April 26, 2011, and is
incorporated herein by reference. L-3 Holdings will file its
proxy statement with the SEC pursuant to Regulation 14A
within 120 days after the end of the Companys 2010
fiscal year covered by this
Form 10-K.
|
|
Item 11.
|
Executive
Compensation
|
The following sections of the Companys Proxy Statement are
incorporated herein by reference: Compensation Discussion
and Analysis, Tabular Executive Compensation
Disclosure, Compensation of Directors and
Compensation Committee Interlocks and Insider
Participation.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The Security Ownership of Certain Beneficial Owners,
Security Ownership of Management, and Equity
Compensation Plan Information sections of the
Companys Proxy Statement are incorporated herein by
reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The Certain Relationships and Related Transactions
and The Board of Directors and Certain Governance
Matters, sections of the Companys Proxy Statement
are incorporated herein by reference.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The Independent Registered Public Accounting Firm
Fees section of the Companys Proxy Statement is
incorporated herein by reference.
63
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
The agreements and other documents filed as exhibits to this
report are not intended to provide factual information or other
disclosure other than with respect to the terms of the
agreements or other documents themselves, and you should not
rely on them for that purpose. In particular, any
representations and warranties made by us in these agreements or
other documents were made solely within the specific context of
the relevant agreement or document and may not describe the
actual state of affairs as of the date they were made or at any
other time.
(a)(1)
Financial statements filed as part of this report:
|
|
|
|
|
|
|
Page
|
|
|
Number
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
(a)(2)
Financial Statement Schedules
Financial statement schedules are omitted since the required
information is either not applicable or is included in our
audited consolidated financial statements.
64
Exhibits
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 (File Nos.
001-14141
and
333-46983)).
|
|
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 October 27, 2010 (File Nos.
001-14141
and
333-46983)).
|
|
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 (File Nos.
001-14141
and
333-46983)).
|
|
4
|
.1
|
|
Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Registrants Quarterly Report on
Form 10-Q
for the quarter ended June 25, 2010 (File Nos.
001-14141
and
333-46983)).
|
|
4
|
.2
|
|
Credit Agreement, dated as of October 23, 2009, 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 10.1 to the
Registrants Current Report on
Form 8-K
dated October 26, 2009 (File Nos.
001-14141
and
333-46983)).
|
|
4
|
.3
|
|
Indenture dated as of November 12, 2004 among L-3
Communications Corporation, the Guarantors and The Bank of New
York Mellon (formerly known as 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)).
|
|
4
|
.4
|
|
Supplemental Indenture dated as of October 1, 2009 among
L-3 Communications Corporation, The Bank of New York Mellon
(formerly known as 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 Mellon, as
trustee (incorporated by reference to Exhibit 4.10 to the
Registrants Quarterly Report on
Form 10-Q
for the quarter ended September 25, 2009 (File Nos.
001-14141
and
333-46983)).
|
|
4
|
.5
|
|
Indenture dated as of July 29, 2005 (Notes Indenture) among
L-3 Communications Corporation, the guarantors named therein and
The Bank of New York Mellon (formerly known as 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 (File Nos.
001-14141
and
333-46983)).
|
|
4
|
.6
|
|
Supplemental Indenture dated as of October 1, 2009 among
L-3 Communications Corporation, The Bank of New York Mellon
(formerly known as 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 Mellon, as
trustee (incorporated by reference to Exhibit 4.12 to the
Registrants Quarterly Report on
Form 10-Q
for the quarter ended September 25, 2009 (File Nos.
001-14141
and
333-46983)).
|
|
4
|
.7
|
|
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 Mellon (formerly known as 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 (File Nos.
001-14141
and
333-46983)).
|
|
4
|
.8
|
|
Supplemental Indenture dated as of October 1, 2009 among
L-3 Communications Holdings, Inc., The Bank of New York Mellon
(formerly known as 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 Mellon, as
trustee (incorporated by reference to Exhibit 4.14 to the
Registrants Quarterly Report on
Form 10-Q
for the quarter ended September 25, 2009 (File Nos.
001-14141
and
333-46983)).
|
|
4
|
.9
|
|
Indenture dated as of October 2, 2009 among L-3
Communications Corporation, the guarantors named therein and The
Bank of New York Mellon, as Trustee (incorporated by reference
to Exhibit 4.15 to the Registrants Quarterly Report
on
Form 10-Q
for the quarter ended September 25, 2009 (File Nos.
001-14141
and
333-46983)).
|
65
|
|
|
|
|
|
4
|
.10
|
|
Indenture, dated as of May 21, 2010, among L-3
Communications Corporation, the guarantors named therein and The
Bank of New York Mellon Trust Company, N.A., as Trustee
(incorporated by reference to Exhibit 4.1 to the
Registrants Current Report on
Form 8-K
dated May 24, 2010 (File Nos.
001-14141
and
333-46983)).
|
|
4
|
.11
|
|
First Supplemental Indenture, dated as of May 21, 2010,
among L-3 Communications Corporation, the guarantors named
therein and The Bank of New York Mellon Trust Company,
N.A., as Trustee (incorporated by reference to Exhibit 4.2
to the Registrants Current Report on
Form 8-K
dated May 24, 2010 (File Nos.
001-14141
and
333-46983)).
|
|
4
|
.12
|
|
Second Supplemental Indenture, dated as of February 7,
2011, among L-3 Communications Corporation, the guarantors named
therein and The Bank of New York Mellon Trust Company,
N.A., as Trustee (incorporated by reference to Exhibit 4.2
to the Registrants Current Report on
Form 8-K
dated February 8, 2011 (File Nos.
001-14141
and
333-46983)).
|
|
10
|
.1
|
|
L-3 Communications Holdings, Inc. 1997 Option Plan for Key
Employees (incorporated by reference to Exhibit 10.91 to
L-3 Communications Holdings, Inc.s Registration Statement
on
Form S-1
(File
No. 333-46975)).
|
|
10
|
.2
|
|
Form of L-3 Communications Holdings, Inc. 1997 Option Plan for
Key Employees Nonqualified Stock Option Agreement (incorporated
by reference to Exhibit 10.9 to L-3 Communications
Holdings, Inc.s Registration Statement on
Form S-1
(File
No. 333-46975)).
|
|
10
|
.3
|
|
L-3 Communications Holdings, Inc. Amended and Restated
1998 Directors Stock Option Plan for Non-Employee Directors
(incorporated by reference to Exhibit 10.16 to the
Registrants Annual Report on
Form 10-K
for the year ended December 31, 2006 (File Nos.
001-14141
and
333-46983)).
|
|
10
|
.4
|
|
Form of L-3 Communications Holdings, Inc. 1998 Directors
Stock Option Plan Nonqualified Stock Option Agreement
(incorporated by reference to Exhibit 10.96 of the
Registrants Annual Report on
Form 10-K
for the year ended December 31, 2004 (File Nos.
001-14141
and
333-46983)).
|
|
10
|
.5
|
|
Form of L-3 Communications Holdings, Inc. 1998 Directors
Stock Option Plan Nonqualified Stock Option Agreement (2007
Version) (incorporated by reference to Exhibit 10.3 of the
Registrants Annual Report on
Form 10-K
for the year ended December 31, 2008 (File Nos.
001-14141
and
333-46983)).
|
|
10
|
.6
|
|
L-3 Communications Holdings, Inc. Amended and Restated 1999 Long
Term Performance Plan (Conformed copy reflecting all amendments
through February 11, 2008) (incorporated by reference to
Exhibit 10.4 of the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2008 (File Nos.
001-14141
and
333-46983)).
|
|
10
|
.7
|
|
Form of L-3 Communications Holdings, Inc. 1999 Long Term
Performance Plan Nonqualified Stock Option Agreement
(incorporated by reference to Exhibit 10.97 of the
Registrants Quarterly Report on
Form 10-Q
for the period ended September 30, 2004 (File Nos.
001-14141
and
333-46983)).
|
|
10
|
.8
|
|
Form of L-3 Communications Holdings, Inc. 1999 Long Term
Performance Plan Nonqualified Stock Option Agreement (2006
Version) (incorporated by reference to Exhibit 10.64 to the
Registrants Annual Report on
Form 10-K
for the year ended December 31, 2006 (File Nos.
001-14141
and
333-46983)).
|
|
10
|
.9
|
|
L-3 Communications Holdings, Inc. 2008 Amended and Restated Long
Term Performance Plan (incorporated by reference to
Exhibit 10.1 of the Registrants Quarterly Report on
Form 10-Q
for the period ended March 26, 2010 (File Nos.
001-14141
and
333-46983)).
|
|
10
|
.10
|
|
Form of L-3 Communications Holdings, Inc. 2008 Long Term
Performance Plan Nonqualified Stock Option Agreement (2008
Version) (incorporated by reference to Exhibit 10.2 of the
Registrants Quarterly Report on
Form 10-Q
for the period ended June 27, 2008 (File Nos.
001-14141
and
333-46983)).
|
|
10
|
.11
|
|
Form of L-3 Communications Holdings, Inc. 2008 Long Term
Performance Plan Nonqualified Stock Option Agreement (2009
Version) (incorporated by reference to Exhibit 10.1 of the
Registrants Quarterly Report on
Form 10-Q
for the period ended June 26, 2009 (File Nos.
001-14141
and
333-46983)).
|
|
*10
|
.12
|
|
Form of L-3 Communications Holdings, Inc. 2008 Long Term
Performance Plan Nonqualified Stock Option Agreement (2011
Version).
|
|
10
|
.13
|
|
Form of L-3 Communications Holdings, Inc. 2008 Long Term
Performance Plan Restricted Stock Unit Agreement (2008 Version)
(incorporated by reference to Exhibit 10.3 of the
Registrants Quarterly Report on
Form 10-Q
for the period ended June 27, 2008 (File Nos.
001-14141
and
333-46983)).
|
|
10
|
.14
|
|
Form of L-3 Communications Holdings, Inc. 2008 Long Term
Performance Plan Restricted Stock Unit Agreement (2009 Version)
(incorporated by reference to Exhibit 10.17 of the
Registrants Annual Report on
Form 10-K
for the year ended December 31, 2008 (File Nos.
001-14141
and
333-46983)).
|
|
10
|
.15
|
|
Form of L-3 Communications Holdings, Inc. 2008 Long Term
Performance Plan Performance Unit Agreement (2008 Version)
(incorporated by reference to Exhibit 10.4 of the
Registrants Quarterly Report on
Form 10-Q
for the period ended June 27, 2008 (File Nos.
001-14141
and
333-46983)).
|
|
10
|
.16
|
|
Form of L-3 Communications Holdings, Inc. 2008 Long Term
Performance Plan Performance Unit Agreement (2010 Version)
(incorporated by reference to Exhibit 10.17 of the
Registrants Annual Report on
Form 10-K
for the year ended December 31, 2009 (File Nos.
001-14141
and
333-46983)).
|
66
|
|
|
|
|
|
10
|
.17
|
|
Form of L-3 Communications Holdings, Inc. 2008 Long Term
Performance Plan Performance Unit Award Notice (2009 Version)
(incorporated by reference to Exhibit 10.2 of the
Registrants Quarterly Report on
Form 10-Q
for the period ended June 26, 2009 (File Nos.
001-14141
and
333-46983)).
|
|
10
|
.18
|
|
Form of L-3 Communications Holdings, Inc. 2008 Long Term
Performance Plan Performance Unit Award Notice (2010 Version)
(incorporated by reference to Exhibit 10.20 of the
Registrants Annual Report on
Form 10-K
for the year ended December 31, 2010 (File Nos.
001-14141
and
333-46983)).
|
|
*10
|
.19
|
|
Form of L-3 Communications Holdings, Inc. 2008 Long Term
Performance Plan Performance Unit Award Notice (2011 Version).
|
|
10
|
.20
|
|
L-3 Communications Holdings, Inc. Amended and Restated
2008 Directors Stock Incentive Plan (incorporated by
reference to Exhibit 10.21 of the Registrants Annual
Report on
Form 10-K
for the year ended December 31, 2009 (File Nos.
001-14141
and
333-46983)).
|
|
10
|
.21
|
|
Form of L-3 Communications Holdings, Inc. 2008 Directors
Stock Incentive Plan Restricted Stock Unit Agreement
(incorporated by reference to Exhibit 10.2 of the
Registrants Quarterly Report on
Form 10-Q
for the period ended March 27, 2009 (File Nos.
001-14141
and
333-46983)).
|
|
10
|
.22
|
|
L-3 Communications Holdings, Inc. Amended and Restated Change in
Control Severance Plan (incorporated by reference to
Exhibit 10.21 of the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2008 (File Nos.
001-14141
and
333-46983)).
|
|
10
|
.23
|
|
L-3 Communications Corporation Amended and Restated Supplemental
Executive Retirement Plan (incorporated by reference to
Exhibit 10.22 of the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2008 (File Nos.
001-14141
and
333-46983)).
|
|
10
|
.24
|
|
L-3 Communications Corporation Deferred Compensation Plan I
(incorporated by reference to Exhibit 10.15 of the
Registrants Annual Report on
Form 10-K
for the year ended December 31, 2007 (File Nos.
001-14141
and
333-46983)).
|
|
10
|
.25
|
|
Amendment No. 1 to the L-3 Communications Corporation
Deferred Compensation Plan I (incorporated by reference to
Exhibit 10.16 of the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2007 (File Nos.
001-14141
and
333-46983)).
|
|
10
|
.26
|
|
L-3 Communications Corporation Deferred Compensation
Plan II (incorporated by reference to Exhibit 10.25 of
the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2008 (File Nos.
001-14141
and
333-46983)).
|
|
10
|
.27
|
|
Administrative Agreement dated July 27, 2010 between L-3
Communications Holdings, Inc. and the United States
Department of the Air Force (incorporated by reference to
Exhibit 4.1 to the Registrants Quarterly Report on
Form 10-Q
for the quarter ended June 25, 2010 (File Nos.
001-14141
and
333-46983)).
|
|
**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.
|
|
*21
|
|
|
Subsidiaries of the Registrant.
|
|
*23
|
|
|
Consent of PricewaterhouseCoopers LLP.
|
|
*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 of 1934, as amended.
|
|
*31
|
.2
|
|
Certification of Senior Vice President and Chief Financial
Officer pursuant to
Rule 13a-14(a)
and
Rule 15d-14(a)
of the Securities Exchange Act of 1934, as amended.
|
|
*32
|
|
|
Section 1350 Certification
|
|
***101
|
.INS
|
|
XBRL Instance Document
|
|
***101
|
.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
|
***101
|
.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
***101
|
.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 16 to the consolidated
financial statements as of December 31, 2010 in accordance
with the provisions of ASC 260,
Earnings Per Share
.
|
|
***
|
|
Furnished electronically with this
report.
|
|
|
|
Represents management contract,
compensatory plan or arrangement in which directors and/or
executive officers are entitled to participate.
|
67
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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:
|
Senior Vice President and Chief Financial Officer
|
Date: February 24, 2011
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrants in the capacities indicated
on February 24, 2011.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/
Michael
T. Strianese
Michael
T. Strianese
|
|
Chairman, President and Chief Executive Officer
(Principal Executive Officer) and Director
|
|
|
|
/s/
Ralph
G. DAmbrosio
Ralph
G. DAmbrosio
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
|
|
|
|
/s/
Dan
Azmon
Dan
Azmon
|
|
Vice President, Controller and Principal Accounting Officer
|
|
|
|
/s/
Robert
B. Millard
Robert
B. Millard
|
|
Director
|
|
|
|
/s/
Claude
R. Canizares
Claude
R. Canizares
|
|
Director
|
|
|
|
/s/
Thomas
A. Corcoran
Thomas
A. Corcoran
|
|
Director
|
|
|
|
/s/
Lewis
Kramer
Lewis
Kramer
|
|
Director
|
|
|
|
/s/
John
M. Shalikashvili
John
M. Shalikashvili
|
|
Director
|
|
|
|
/s/
Arthur
L. Simon
Arthur
L. Simon
|
|
Director
|
|
|
|
/s/
Alan
H. Washkowitz
Alan
H. Washkowitz
|
|
Director
|
|
|
|
/s/
John
P. White
John
P. White
|
|
Director
|
68
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements as of December 31, 2010
and 2009 and for the years ended December 31, 2010, 2009
and 2008.
|
|
|
|
|
|
|
Page
|
|
|
No.
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
F-1
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of L-3 Communications
Holdings, Inc. and L-3 Communications Corporation:
In our opinion, the consolidated financial statements listed in
the accompanying index appearing on
page F-1
present fairly, in all material respects, the financial position
of L-3 Communications Holdings, Inc. and L-3 Communications
Corporation and its subsidiaries (collectively, the
Company) at December 31, 2010 and 2009, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2010 in
conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the Company
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2010, based on
criteria established in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial
statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in
Managements Report on Internal Control Over Financial
Reporting appearing under Item 9A. Our responsibility is to
express opinions on these financial statements and on the
Companys internal control over financial reporting based
on our integrated audits. We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. Our audits of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
PricewaterhouseCoopers LLP
New York, New York
February 24, 2011
F-2
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
607
|
|
|
$
|
1,016
|
|
Billed receivables, net of allowances of $34 in 2010 and $32 in
2009
|
|
|
1,299
|
|
|
|
1,149
|
|
Contracts in process
|
|
|
2,548
|
|
|
|
2,395
|
|
Inventories
|
|
|
303
|
|
|
|
258
|
|
Deferred income taxes
|
|
|
114
|
|
|
|
247
|
|
Other current assets
|
|
|
207
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
5,078
|
|
|
|
5,213
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
923
|
|
|
|
854
|
|
Goodwill
|
|
|
8,730
|
|
|
|
8,190
|
|
Identifiable intangible assets
|
|
|
470
|
|
|
|
377
|
|
Deferred debt issue costs
|
|
|
39
|
|
|
|
47
|
|
Other assets
|
|
|
211
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
15,451
|
|
|
$
|
14,875
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
11
|
|
|
$
|
|
|
Accounts payable, trade
|
|
|
463
|
|
|
|
447
|
|
Accrued employment costs
|
|
|
672
|
|
|
|
642
|
|
Accrued expenses
|
|
|
569
|
|
|
|
537
|
|
Advance payments and billings in excess of costs incurred
|
|
|
580
|
|
|
|
512
|
|
Income taxes
|
|
|
49
|
|
|
|
35
|
|
Other current liabilities
|
|
|
389
|
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,733
|
|
|
|
2,544
|
|
|
|
|
|
|
|
|
|
|
Pension and postretirement benefits
|
|
|
943
|
|
|
|
817
|
|
Deferred income taxes
|
|
|
308
|
|
|
|
272
|
|
Other liabilities
|
|
|
486
|
|
|
|
470
|
|
Long-term debt
|
|
|
4,126
|
|
|
|
4,112
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,596
|
|
|
|
8,215
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (see Note 19)
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
L-3 shareholders equity:
|
|
|
|
|
|
|
|
|
L-3 Communications Holdings, Incs common stock:
$.01 par value; 300,000,000 shares authorized,
108,623,509 shares outstanding at December 31, 2010
and 115,353,546 shares outstanding at December 31,
2009 (L-3 Communications Corporations common stock:
$.01 par value, 100 shares authorized, issued and
outstanding)
|
|
|
4,801
|
|
|
|
4,449
|
|
L-3 Communications Holdings, Incs treasury stock (at
cost), 32,037,454 shares at December 31, 2010 and
21,040,541 shares at December 31, 2009
|
|
|
(2,658
|
)
|
|
|
(1,824
|
)
|
Retained earnings
|
|
|
4,877
|
|
|
|
4,108
|
|
Accumulated other comprehensive loss
|
|
|
(256
|
)
|
|
|
(166
|
)
|
|
|
|
|
|
|
|
|
|
Total L-3 shareholders equity
|
|
|
6,764
|
|
|
|
6,567
|
|
Noncontrolling interests
|
|
|
91
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
6,855
|
|
|
|
6,660
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
15,451
|
|
|
$
|
14,875
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
7,596
|
|
|
$
|
7,516
|
|
|
$
|
7,130
|
|
Services
|
|
|
8,084
|
|
|
|
8,099
|
|
|
|
7,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
15,680
|
|
|
|
15,615
|
|
|
|
14,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
6,664
|
|
|
|
6,671
|
|
|
|
6,380
|
|
Services
|
|
|
7,266
|
|
|
|
7,288
|
|
|
|
6,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
13,930
|
|
|
|
13,959
|
|
|
|
13,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litigation gain
|
|
|
|
|
|
|
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,750
|
|
|
|
1,656
|
|
|
|
1,685
|
|
Interest and other income, net
|
|
|
21
|
|
|
|
19
|
|
|
|
28
|
|
Interest expense
|
|
|
269
|
|
|
|
279
|
|
|
|
290
|
|
Debt retirement charge
|
|
|
18
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
1,484
|
|
|
|
1,386
|
|
|
|
1,423
|
|
Provision for income taxes
|
|
|
518
|
|
|
|
475
|
|
|
|
494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
966
|
|
|
|
911
|
|
|
|
929
|
|
Gain on sale of a business, net of income taxes of
$13 million
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
966
|
|
|
$
|
911
|
|
|
$
|
949
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
11
|
|
|
|
10
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to L-3
|
|
$
|
955
|
|
|
$
|
901
|
|
|
$
|
938
|
|
Less: Net income allocable to participating securities
|
|
|
5
|
|
|
|
8
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocable to L-3 Holdings common shareholders
|
|
$
|
950
|
|
|
$
|
893
|
|
|
$
|
929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share allocable to L-3 Holdings common
shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
8.31
|
|
|
$
|
7.65
|
|
|
$
|
7.50
|
|
Gain on sale of a business, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8.31
|
|
|
$
|
7.65
|
|
|
$
|
7.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
8.25
|
|
|
$
|
7.61
|
|
|
$
|
7.43
|
|
Gain on sale of a business, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8.25
|
|
|
$
|
7.61
|
|
|
$
|
7.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid per common share
|
|
$
|
1.60
|
|
|
$
|
1.40
|
|
|
$
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 Holdings weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
114.3
|
|
|
|
116.8
|
|
|
|
121.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
115.1
|
|
|
|
117.4
|
|
|
|
122.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-4
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
For the Years Ended December 31, 2010,
2009 and 2008
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 Holdings
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Par
|
|
|
Paid-in
|
|
|
Treasury
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Issued
|
|
|
Value
|
|
|
Capital
|
|
|
Stock
|
|
|
Earnings
|
|
|
(Loss) Income
|
|
|
Interests
|
|
|
Equity
|
|
|
Balance at December 31, 2007
|
|
|
124.2
|
|
|
$
|
1
|
|
|
$
|
3,816
|
|
|
$
|
(525
|
)
|
|
$
|
2,582
|
|
|
$
|
153
|
|
|
$
|
87
|
|
|
$
|
6,114
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
938
|
|
|
|
|
|
|
|
11
|
|
|
|
949
|
|
Pension and postretirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss arising during the period, net of income taxes of $174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(271
|
)
|
|
|
|
|
|
|
(271
|
)
|
Net prior service cost arising during the period, net of income
taxes of $1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
Amortization of net loss previously recognized, net of income
taxes of $2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(222
|
)
|
|
|
|
|
|
|
(222
|
)
|
Unrealized gains on hedging instruments, net of income taxes of
$4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
464
|
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
(12
|
)
|
Derecognition of noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Cash dividends paid on common stock ($1.20 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(147
|
)
|
|
|
|
|
|
|
|
|
|
|
(147
|
)
|
Shares issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee savings plans
|
|
|
1.5
|
|
|
|
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141
|
|
Exercise of stock options
|
|
|
0.7
|
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
Employee stock purchase plan
|
|
|
0.8
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
|
|
Treasury stock purchased
|
|
|
(8.5
|
)
|
|
|
|
|
|
|
|
|
|
|
(794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(794
|
)
|
Other
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
118.6
|
|
|
|
1
|
|
|
|
4,135
|
|
|
|
(1,319
|
)
|
|
|
3,373
|
|
|
|
(332
|
)
|
|
|
83
|
|
|
|
5,941
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
901
|
|
|
|
|
|
|
|
10
|
|
|
|
911
|
|
Pension and postretirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain arising during the period, net of income taxes of $13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
19
|
|
Net prior service cost arising during the period, net of income
taxes of $1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
Amortization of net loss and prior service cost previously
recognized, net of income taxes of $21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
31
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117
|
|
|
|
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,077
|
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Recognition of noncontrolling interest in a consolidated
subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
8
|
|
Cash dividends paid on common stock ($1.40 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(165
|
)
|
|
|
|
|
|
|
|
|
|
|
(165
|
)
|
Shares issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee savings plans
|
|
|
2.0
|
|
|
|
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139
|
|
Exercise of stock options
|
|
|
0.5
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
Employee stock purchase plan
|
|
|
1.1
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
|
|
Treasury stock purchased
|
|
|
(7.0
|
)
|
|
|
|
|
|
|
|
|
|
|
(505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(505
|
)
|
Other
|
|
|
0.2
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
115.4
|
|
|
|
1
|
|
|
|
4,448
|
|
|
|
(1,824
|
)
|
|
|
4,108
|
|
|
|
(166
|
)
|
|
|
93
|
|
|
|
6,660
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
955
|
|
|
|
|
|
|
|
11
|
|
|
|
966
|
|
Pension and postretirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss arising during the period, net of income taxes of $97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(145
|
)
|
|
|
|
|
|
|
(145
|
)
|
Net prior service cost arising during the period, net of income
taxes of $12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
19
|
|
Amortization of net loss and prior service cost previously
recognized, net of income taxes of $16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
25
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
Unrealized gains on hedging instruments, net of income taxes of
$4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
876
|
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
(13
|
)
|
Cash dividends paid on common stock ($1.60 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(184
|
)
|
|
|
|
|
|
|
|
|
|
|
(184
|
)
|
Shares issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee savings plans
|
|
|
1.8
|
|
|
|
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143
|
|
Exercise of stock options
|
|
|
1.0
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
Employee stock purchase plan
|
|
|
1.0
|
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
|
|
Treasury stock purchased
|
|
|
(11.0
|
)
|
|
|
|
|
|
|
|
|
|
|
(834
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(834
|
)
|
Other
|
|
|
0.4
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
108.6
|
|
|
$
|
1
|
|
|
$
|
4,800
|
|
|
$
|
(2,658
|
)
|
|
$
|
4,877
|
|
|
$
|
(256
|
)
|
|
$
|
91
|
|
|
$
|
6,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
966
|
|
|
$
|
911
|
|
|
$
|
949
|
|
Depreciation of property, plant and equipment
|
|
|
164
|
|
|
|
158
|
|
|
|
152
|
|
Amortization of intangibles and other assets
|
|
|
67
|
|
|
|
60
|
|
|
|
54
|
|
Deferred income tax provision
|
|
|
111
|
|
|
|
74
|
|
|
|
153
|
|
Stock-based employee compensation expense
|
|
|
82
|
|
|
|
74
|
|
|
|
64
|
|
Contributions to employee savings plans in L-3 Holdings
common stock
|
|
|
143
|
|
|
|
139
|
|
|
|
141
|
|
Amortization of pension and postretirement benefit plans net
loss and prior service cost
|
|
|
41
|
|
|
|
52
|
|
|
|
5
|
|
Amortization of bond discounts (included in interest expense)
|
|
|
24
|
|
|
|
23
|
|
|
|
21
|
|
Amortization of deferred debt issue costs (included in interest
expense)
|
|
|
12
|
|
|
|
11
|
|
|
|
11
|
|
Gain on sale of a business
|
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
Impairment charge
|
|
|
|
|
|
|
|
|
|
|
28
|
|
Gain on sale of a product line
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
Other non-cash items
|
|
|
(5
|
)
|
|
|
(3
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,605
|
|
|
|
1,499
|
|
|
|
1,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities, excluding acquired
and divested amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Billed receivables
|
|
|
(109
|
)
|
|
|
107
|
|
|
|
49
|
|
Contracts in process
|
|
|
(136
|
)
|
|
|
(79
|
)
|
|
|
(162
|
)
|
Inventories
|
|
|
2
|
|
|
|
14
|
|
|
|
(25
|
)
|
Accounts payable, trade
|
|
|
(2
|
)
|
|
|
(118
|
)
|
|
|
31
|
|
Accrued employment costs
|
|
|
22
|
|
|
|
(59
|
)
|
|
|
66
|
|
Accrued expenses
|
|
|
47
|
|
|
|
(39
|
)
|
|
|
81
|
|
Advance payments and billings in excess of costs incurred
|
|
|
63
|
|
|
|
(15
|
)
|
|
|
101
|
|
Income taxes
|
|
|
78
|
|
|
|
27
|
|
|
|
(2
|
)
|
Excess income tax benefits related to share-based payment
arrangements
|
|
|
(7
|
)
|
|
|
(4
|
)
|
|
|
(10
|
)
|
Other current liabilities
|
|
|
23
|
|
|
|
9
|
|
|
|
(128
|
)
|
Pension and postretirement benefits
|
|
|
(78
|
)
|
|
|
43
|
|
|
|
(81
|
)
|
All other operating activities
|
|
|
(47
|
)
|
|
|
22
|
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
(144
|
)
|
|
|
(92
|
)
|
|
|
(153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
1,461
|
|
|
|
1,407
|
|
|
|
1,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Business acquisitions, net of cash acquired
|
|
|
(756
|
)
|
|
|
(90
|
)
|
|
|
(283
|
)
|
Proceeds from sale of a business and product line
|
|
|
2
|
|
|
|
|
|
|
|
63
|
|
Capital expenditures
|
|
|
(181
|
)
|
|
|
(186
|
)
|
|
|
(218
|
)
|
Dispositions of property, plant and equipment
|
|
|
10
|
|
|
|
4
|
|
|
|
15
|
|
Investments in equity investees
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
Other investing activities
|
|
|
3
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(945
|
)
|
|
|
(272
|
)
|
|
|
(432
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of senior notes
|
|
|
797
|
|
|
|
996
|
|
|
|
|
|
Repayment of borrowings under term loan facility
|
|
|
|
|
|
|
(650
|
)
|
|
|
|
|
Redemption of senior subordinated notes
|
|
|
(800
|
)
|
|
|
(750
|
)
|
|
|
|
|
Borrowings under revolving credit facility
|
|
|
13
|
|
|
|
|
|
|
|
|
|
Repayment of borrowings under revolving credit facility
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
Common stock repurchased
|
|
|
(834
|
)
|
|
|
(505
|
)
|
|
|
(794
|
)
|
Dividends paid on L-3 Holdings common stock
|
|
|
(184
|
)
|
|
|
(165
|
)
|
|
|
(147
|
)
|
Proceeds from exercise of stock options
|
|
|
60
|
|
|
|
24
|
|
|
|
40
|
|
Proceeds from employee stock purchase plan
|
|
|
68
|
|
|
|
70
|
|
|
|
69
|
|
Debt issue costs
|
|
|
(7
|
)
|
|
|
(22
|
)
|
|
|
|
|
Excess income tax benefits related to share-based payment
arrangements
|
|
|
7
|
|
|
|
4
|
|
|
|
10
|
|
Other financing activities
|
|
|
(25
|
)
|
|
|
(7
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(918
|
)
|
|
|
(1,005
|
)
|
|
|
(840
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes on cash and
cash equivalents
|
|
|
(7
|
)
|
|
|
19
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(409
|
)
|
|
|
149
|
|
|
|
87
|
|
Cash and cash equivalents, beginning of the year
|
|
|
1,016
|
|
|
|
867
|
|
|
|
780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the year
|
|
$
|
607
|
|
|
$
|
1,016
|
|
|
$
|
867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-6
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Description
of Business
|
L-3 Communications Holdings, Inc. derives all of its operating
income and cash flows from its wholly-owned subsidiary, L-3
Communications Corporation (L-3 Communications). L-3
Communications Holdings, Inc. (L-3 Holdings and, together with
its subsidiaries, referred to herein as L-3 or the Company) is a
prime contractor in Command, Control, Communications,
Intelligence, Surveillance and Reconnaissance
(C
3
ISR)
systems, aircraft modernization and maintenance, and government
services. L-3 is also a leading provider of a broad range of
electronic systems used on military and commercial platforms.
The Companys customers include the United States (U.S.)
Department of Defense (DoD) and its prime contractors,
U.S. Government intelligence agencies, the
U.S. Department of Homeland Security (DHS),
U.S. Department of State (DoS), U.S. Department of
Justice (DoJ), allied foreign governments, domestic and foreign
commercial customers and select other U.S. federal, state
and local government agencies.
The Company has the following four reportable segments:
(1) C
3
ISR,
(2) Government Services, (3) Aircraft Modernization
and Maintenance (AM&M), and (4) Electronic Systems.
Financial information with respect to each of the Companys
reportable segments is included in Note 22.
C
3
ISR
provides products and services for the global ISR market,
C
3
systems, 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 and 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 a full range of engineering,
technical, analytical, information technology (IT), advisory,
training, logistics and support services to the DoD, DoS, DoJ,
and U.S. Government intelligence agencies and allied
foreign governments. AM&M provides modernization, upgrades
and sustainment, maintenance and logistics support services for
military and various government aircraft and other platforms.
The Company sells these services primarily to the DoD, the
Canadian Department of National Defense and other allied foreign
governments. Electronic Systems provides a broad range of
products and services, 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,
simulation & training, precision engagement, warrior
systems, security & detection, propulsion systems,
avionics and displays, telemetry & advanced
technology, undersea warfare, and marine services.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis of Presentation:
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 Revolving Credit Facility of L-3 Communications and
(3) its guarantee of other contractual obligations of L-3
Communications and its subsidiaries. L-3 Holdings
obligations relating to the CODES have been jointly, severally,
fully and unconditionally guaranteed by L-3 Communications and
certain of its wholly-owned domestic subsidiaries. Accordingly,
such debt has been reflected as debt of L-3 Communications in
its consolidated financial statements in accordance with the
accounting standards for pushdown accounting. 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 25 for additional information regarding the audited
financial information of L-3 Communications and its subsidiaries.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (U.S. GAAP) requires management to make estimates
and assumptions that affect the reported amounts
F-7
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
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.
During the quarter ended June 25, 2010, the Company made
certain reclassifications between its Government Services and
Electronic Systems reportable segments due to a re-alignment of
a business unit in the Companys management and
organizational structure. See Note 22 for the prior period
amounts reclassified between reportable segments.
Certain other reclassifications have been made to conform
prior-year amounts to the current-year presentation.
Principles of Consolidation:
The consolidated
financial statements of the Company include all wholly-owned and
majority-owned subsidiaries. All significant intercompany
transactions are eliminated in consolidation. Investments in
equity securities, joint ventures and limited liability
corporations over which the Company has significant influence
but does not have voting control are accounted for using the
equity method. Investments over which the Company does not have
significant influence are accounted for using the cost method.
Revenue Recognition:
The majority of the
Companys contracts are generally fixed price, cost-plus or
time-and-material
type contracts. Depending on the type of contract, sales and
profits are recognized based on: (1) a
Percentage-of-Completion
(POC) method of accounting, (2) allowable costs incurred
plus the estimated profit on those costs (cost-plus), or
(3) direct labor hours expended multiplied by the
contractual fixed rate per hour plus incurred costs for material
(time-and-material).
Sales and profits on fixed-price type contracts that are covered
by contract accounting standards are substantially recognized
using POC methods of accounting. Sales and profits on
fixed-price production contracts under which units are produced
and delivered in a continuous or sequential process are recorded
as units are delivered based on their contractual selling prices
(the
units-of-delivery
method). Sales and profits on each fixed-price production
contract under which units are not produced and delivered in a
continuous or sequential process, or under which a relatively
few number of units are produced, are recorded based on the
ratio of actual cumulative costs incurred to the total estimated
costs at completion of the contract, multiplied by the total
estimated contract revenue, less cumulative sales recognized in
prior periods (the
cost-to-cost
method). Under both POC methods of accounting, a single
estimated total profit margin is used to recognize profit for
each contract over its entire period of performance, which can
exceed one year. Losses on contracts are recognized in the
period in which they become evident. The impact of revisions of
contract estimates, which may result from contract
modifications, performance or other reasons, are recognized on a
cumulative
catch-up
basis in the period in which the revisions are made.
Sales and profits on cost-plus type contracts that are covered
by contract accounting standards are recognized as allowable
costs are incurred on the contract, at an amount equal to the
allowable costs plus the estimated profit on those costs. The
estimated profit on a cost-plus type contract is fixed or
variable based on the contractual fee arrangement. Incentive and
award fees are the primary variable fee contractual
arrangements. Incentive and award fees on cost-plus type
contracts are included as an element of total estimated contract
revenues and are recorded to sales when a basis exists for the
reasonable prediction of performance in relation to established
contractual targets and the Company is able to make reasonably
dependable estimates for them.
F-8
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
Sales and profits on
time-and-material
type contracts are recognized on the basis of direct labor hours
expended multiplied by the contractual fixed rate per hour, plus
the actual costs of materials and other direct non-labor costs.
Sales on arrangements for (1) fixed-price type contracts
that require us to perform services that are not related to the
production of tangible assets (Fixed-Price Service Contracts)
and (2) certain commercial customers are recognized in
accordance with revenue recognition accounting standards for
revenue arrangements with commercial customers. Sales for the
Companys businesses whose customers are primarily
commercial business enterprises are substantially all generated
from single element revenue arrangements. Sales are recognized
when there is persuasive evidence of an arrangement, delivery
has occurred or services have been performed, the selling price
to the buyer is fixed or determinable and collectability is
reasonably assured. Sales for Fixed-Price Service Contracts that
do not contain measurable units of work performed are generally
recognized on a straight-line basis over the contractual service
period, unless evidence suggests that the revenue is earned, or
obligations fulfilled, in a different manner. Sales for
Fixed-Price Service Contracts that contain measurable units of
work performed are generally recognized when the units of work
are completed. Sales and profit on cost-plus and
time-and-material
type contracts to perform services are recognized in the same
manner as those within the scope of contract accounting
standards, except for incentive and award fees. Cost-based
incentive fees are recognized when they are realizable in the
amount that would be due under the contractual termination
provisions as if the contract was terminated. Performance based
incentive fees and award fees are recorded as sales when awarded
by the customer.
For contracts with multiple deliverables, the Company applies
the separation and allocation guidance under the accounting
standard for revenue arrangements with multiple deliverables,
unless all the deliverables are covered by contract accounting
standards, in which case the Company applies the separation and
allocation guidance under contract accounting standards. Revenue
arrangements with multiple deliverables are evaluated to
determine if the deliverables should be separated into more than
one unit of accounting. The Company recognizes revenue for each
unit of accounting based on the revenue recognition policies
discussed above.
Sales and profit in connection with contracts to provide
services to the U.S. Government that contain collection
risk because the contracts are incrementally funded and subject
to the availability of funds appropriated, are deferred until a
contract modification is obtained, indicating that adequate
funds are available to the contract or task order.
Research and Development:
Independent research and
development (IRAD) costs sponsored by the Company and bid and
proposal (B&P) costs relate to both U.S. Government
products and services and those for commercial and international
customers. The IRAD and B&P costs for the Companys
businesses that are U.S. Government contractors are
recoverable indirect contract costs that are allocated to our
U.S. Government contracts in accordance with
U.S. Government procurement regulations, and are
specifically excluded from research and development accounting
standards. The Company includes IRAD and B&P costs
allocated to U.S. Government contracts in inventoried
contract costs, and charges them to costs of sales when the
related contract sales are recognized as revenue. Research and
development costs for the Companys businesses that are not
U.S. Government contractors are accounted for in accordance
with research and development accounting standards and are
expensed as incurred to cost of sales.
Customer-funded research and development costs are incurred
pursuant to contracts (revenue arrangements) to perform research
and development activities according to customer specifications.
These costs are not accounted for as research and development
expenses, and are also not indirect contract costs. Instead,
these costs are direct contract costs and are expensed to cost
of sales when the corresponding revenue is recognized, which is
generally as the research and development services are
performed. Customer-funded research and development costs are
substantially all incurred under cost-plus type contracts with
the U.S. Government.
Product Warranties:
Product warranty costs are
accrued when revenue is recognized for the covered products.
Product warranty expense is recognized based on the terms of the
product warranty and the related estimated costs. Accrued
warranty costs are reduced as product warranty costs are
incurred.
F-9
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
The table below presents the changes in the Companys
accrued product warranty costs.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Accrued product warranty
costs
(1)
:
|
|
|
|
|
|
|
|
|
Balance at January 1
|
|
$
|
99
|
|
|
$
|
102
|
|
Acquisitions during this period
|
|
|
1
|
|
|
|
|
|
Accruals for product warranties issued during the period
|
|
|
62
|
|
|
|
55
|
|
Changes to accruals for product warranties existing before
January 1
|
|
|
4
|
|
|
|
2
|
|
Foreign currency translation adjustments
|
|
|
(1
|
)
|
|
|
2
|
|
Settlements made during the period
|
|
|
(73
|
)
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
92
|
|
|
$
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Warranty obligations incurred in
connection with long-term production contracts that are
accounted for under the POC
cost-to-cost
method are included within the contract estimates at completion
and are excluded from the above amounts. The balances above
include both the current and non-current amounts.
|
Deferred Debt Issue Costs:
Costs to issue
debt are capitalized and deferred when incurred, and
subsequently amortized to interest expense over the term of the
related debt using the effective interest rate method.
Stock-Based Compensation:
The Company follows
the fair value based method of accounting for stock-based
employee compensation, which requires the Company to expense all
stock-based employee compensation. Stock-based employee
compensation is primarily a non-cash expense because the Company
settles these obligations by issuing shares of L-3 Holdings
common stock instead of settling such obligations with cash
payments, except for certain performance unit awards that are
payable in cash.
Compensation expense for all restricted stock, restricted stock
unit and stock option awards is recognized on a straight-line
basis over the requisite service period for the entire award
based on the grant date fair value. All of the stock options
granted to employees by the Company are non-qualified stock
options under U.S. income tax regulations. Compensation
expense for performance units payable in L-3 Holdings common
stock are based on the fair value of the units at the grant date
(measurement date), adjusted each reporting period for progress
towards the target award, and recognized on a straight line
basis over the requisite service period. Compensation expense
for performance units that are payable in cash is based on a
binomial valuation technique (the Monte Carlo valuation model)
adjusted for historical performance each reporting period and
recognized on a straight-line basis over the requisite service
period.
Income Taxes:
The Company provides for income
taxes using the liability method. Deferred income tax assets and
liabilities reflect tax carryforwards and the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting and income tax purposes, as
determined under enacted tax laws and rates. The effect of
changes in tax laws or rates is accounted for in the period of
enactment. Valuation allowances for deferred tax assets are
provided when it is more likely than not that the assets will
not be realized, considering, when appropriate, tax planning
strategies.
Income tax accounting standards prescribe (1) a minimum
recognition threshold that an income tax benefit arising from an
uncertain income tax position taken, or expected to be taken, on
an income tax return is required to meet before being recognized
in the financial statements and (2) the measurement of the
income tax benefits recognized from such positions. The
Companys accounting policy is to classify uncertain income
tax positions that are not expected to be resolved in one year
as non-current income tax liabilities and to classify potential
interest and penalties on uncertain income tax positions as
elements of the provision for income taxes on its financial
statements.
Cash and Cash Equivalents:
Cash equivalents
consist of highly liquid investments with an original maturity
of three months or less at the time of purchase.
F-10
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
Contracts in Process:
Contracts in process
include unbilled contract receivables and inventoried contract
costs for which sales and profits are recognized using a POC
method of accounting. Unbilled Contract Receivables represent
accumulated incurred costs and earned profits or losses on
contracts in process that have been recorded as sales, primarily
using the
cost-to-cost
method, which have not yet been billed to customers. Inventoried
Contract Costs represent incurred costs on contracts in process
that have not yet been recognized as costs and expenses because
the related sales, which are primarily recorded using the
units-of-delivery
method, have not been recognized. Contract costs include direct
costs and indirect costs, including overhead costs. As discussed
in Note 5, the Companys inventoried contract costs
for U.S. Government contracts, and contracts with prime
contractors or subcontractors of the U.S. Government
include allocated general and administrative costs (G&A),
IRAD costs and B&P costs. Contracts in Process contain
amounts relating to contracts and programs with long performance
cycles, a portion of which may not be realized within one year.
For contracts in a loss position, the unrecoverable costs
expected to be incurred in future periods are recorded in
Estimated Costs in Excess of Estimated Contract Value to
Complete Contracts in Process in a Loss Position, which is a
component of Other Current Liabilities. Under the terms of
certain revenue arrangements (contracts) with the
U.S. Government, the Company may receive progress payments
as costs are incurred or milestone payments as work is
performed. The U.S. Government has a security interest in
the Unbilled Contract Receivables and Inventoried Contract Costs
to which progress payments have been applied, and such progress
payments are reflected as a reduction of the related amounts.
Milestone payments that have been received in excess of contract
costs incurred and related estimated profits are reported on the
Companys balance sheet as Advance Payments and Billings in
Excess of Costs Incurred.
The Company values its acquired contracts in process in
connection with business acquisitions on the date of acquisition
at contract value less the Companys estimated costs to
complete the contract and a reasonable profit allowance on the
Companys completion effort commensurate with the profit
margin that the Company earns on similar contracts.
Inventories:
Inventories, other than
Inventoried Contract Costs, are stated at cost
(first-in,
first-out or average cost), but not in excess of realizable
value. A provision for excess or inactive inventory is recorded
based upon an analysis that considers current inventory levels,
historical usage patterns and future sales expectations.
Property, Plant and Equipment:
Property,
plant and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed by applying principally
the straight-line method to the estimated useful lives of the
related assets. Useful lives range substantially from 10 to
40 years for buildings and improvements and 3 to
10 years for machinery, equipment, furniture and fixtures.
Leasehold improvements are amortized over the shorter of the
lease term or the estimated useful life of the improvements.
When property or equipment is retired or otherwise disposed of,
the net book value of the asset is removed from the
Companys balance sheet and the net gain or loss is
included in the determination of operating income. Property,
plant and equipment acquired as part of a business acquisition
is valued at fair value.
Goodwill:
The carrying value of goodwill and
indefinite lived identifiable intangible assets are not
amortized, but are tested for impairment annually as of November
30 as well as whenever events or changes in circumstances
indicate that the carrying amount of these assets may not be
recoverable using a two-step process for each reporting unit.
The first step in the process is to identify any potential
impairment by comparing the carrying value of a reporting unit
and its fair value. The Company determines the fair value of its
reporting units using a discounted cash flows valuation
approach. If a potential impairment is identified, the second
step is to measure the impairment loss by comparing the implied
fair value of goodwill with the carrying value of goodwill of
the reporting unit. There were no impairment charges that
resulted from the annual impairment assessment or change in
circumstances during 2010, 2009, or 2008.
Identifiable Intangible Assets:
Identifiable
intangible assets represent assets acquired as part of the
Companys business acquisitions and include customer
contractual relationships, technology, favorable leasehold
interests and trade names. The initial measurement of these
intangible assets is based on their fair values. Identifiable
intangible assets are amortized over their estimated useful
lives as the economic benefits are consumed, ranging from 4 to
30 years.
F-11
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
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.
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, the Euro,
the British pound and the U.S. dollar. The Company manages
exposure to counterparty non-performance credit risk by entering
into foreign currency forward contracts only with major
financial institutions that are expected to fully perform under
the terms of such contracts. Foreign currency forward contracts
are recorded in the Companys Consolidated Balance Sheets
at fair value and are generally designated and accounted for as
cash flow hedges in accordance with the accounting standards for
derivative instruments and hedging activities. Gains and losses
on designated foreign currency forward contracts that are highly
effective in offsetting the corresponding change in the cash
flows of the hedged transactions are recorded net of income
taxes in accumulated other comprehensive income (loss)
(accumulated OCI) and then recognized in income when the
underlying hedged transaction affects income. Gains and losses
on foreign currency forward contracts that do not meet hedge
accounting criteria are recognized in income immediately.
The embedded derivative related to the issuance of the CODES is
recorded at fair value with changes reflected in the
Consolidated Statements of Operations.
Translation of Foreign Currency and Foreign Currency
Transactions:
Transactions in foreign currencies are
translated into the local (functional) currency of the
respective business at the approximate prevailing rate at the
time of the transaction. Foreign exchange transaction gains and
losses in the years ended December 31, 2010, 2009 and 2008
are not material to the Companys results of operations.
The operations of the Companys foreign subsidiaries are
translated from the local (functional) currencies into
U.S. dollars using weighted average rates of exchange
during each reporting period. The rates of exchange at each
balance sheet date are used for translating the assets and
liabilities of the Companys foreign subsidiaries. Gains or
losses resulting from these translation adjustments are included
in the accompanying Consolidated Balance Sheets as a component
of accumulated other comprehensive income (loss).
Accounting Standards Issued and Not Yet Implemented:
In October 2009, the Financial Accounting Standards
Board (FASB) issued a revised accounting standard for revenue
arrangements with multiple deliverables. The revision:
(1) removes the
objective-and-reliable-evidence-of-fair-value
criterion from the separation criteria used to determine whether
an arrangement involving multiple deliverables contains more
than one unit of accounting, (2) provides a hierarchy that
entities must use to estimate the selling price,
(3) eliminates the use of the residual method for
allocation, and (4) expands the ongoing disclosure
requirements. The revised accounting standard is effective for
the Company beginning on January 1, 2011, and is not
expected to have a material impact on the Companys
financial position, results of operations or cash flows.
In October 2009, the FASB issued a revised accounting standard
for certain revenue arrangements that include software elements.
Under the revised standard, tangible products that contain both
software and non-software components that work together to
deliver a products essential functionality are excluded
from the scope of pre-existing software revenue recognition
standards. In addition, hardware components of a tangible
product containing software components are excluded from the
scope of software revenue recognition standards. The revised
accounting standard is effective for the Company beginning on
January 1, 2011, and is not expected to have a material
impact on the Companys financial position, results of
operations or cash flows.
F-12
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
|
|
3.
|
New
Accounting Standards Implemented
|
In June 2009, the FASB issued a revised standard for the
accounting for variable interest entities (VIE), which replaces
the quantitative-based risks and rewards approach with a
qualitative approach and requires certain additional
disclosures. The new qualitative approach focuses on determining
which entity has the power and control to direct the activities
of a VIE and requires an ongoing assessment of that conclusion.
The revised accounting standard was effective for the Company
beginning on January 1, 2010 and did not have a material
impact on the Companys financial position, results of
operations or cash flows.
|
|
4.
|
Acquisitions
and Dispositions
|
All of the business acquisitions are included in the
Companys results of operations from their respective dates
of acquisition.
2010
Business Acquisitions
During the year ended December 31, 2010, in separate
transactions, the Company acquired four businesses for an
aggregate purchase price of $755 million, which were
financed with cash on hand. Based on preliminary and final
purchase price allocations, the aggregate goodwill recognized
for these businesses was $530 million, of which
$472 million is expected to be deductible for income tax
purposes. The goodwill was assigned to the Electronic Systems
reportable segment. The Company also recognized identifiable
intangible assets of $153 million in the aggregate, which
consisted of $71 million for customer relationships,
$67 million for technology, and $15 million for other
identifiable intangible assets, primarily trade names. The
identifiable intangible assets will be amortized over a weighted
average useful life of 15 years. Customer relationships,
technology and the other identifiable intangible assets will be
amortized over their weighted average useful lives of
18 years, 12 years, and 16 years, respectively. A
description of each business acquisition made by the Company
during the year ended December 31, 2010 is listed below:
|
|
|
|
|
On December 22, 2010, the Company acquired all of the
outstanding stock of FUNA International GmbH (FUNA), a leading
supplier of control and safety systems, communication systems
and entertainment solutions for cruise ships, ferries, and mega
yachts;
|
|
|
|
On September 17, 2010, the Company acquired 3Di
Technologies (3Di), a provider of highly specialized
end-to-end
secure communications utilized by forward-deployed
U.S. special operations and in-theater personnel. The
purchase price for 3Di is subject to additional, contingent
consideration not to exceed $11 million and is based upon
3Dis post-acquisition financial performance through
December 31, 2012. The Company recorded a $9 million
liability on the acquisition date for the fair value of the
contingent consideration, which was unchanged at
December 31, 2010;
|
|
|
|
On August 4, 2010, the Company acquired all of the
outstanding stock of Airborne Technologies, Inc. (ATI), a
provider of highly specialized aeronautical engineering
expertise, manufacturing and operations support for unmanned
aircraft systems; and
|
|
|
|
On April 14, 2010, the Company acquired all of the
outstanding stock of Insight Technology Incorporated (Insight),
a manufacturer of mission critical night vision and
electro-optical equipment.
|
At December 31, 2010, the purchase prices for Insight and
ATI have been finalized and the Insight purchase price
allocation has been completed. The final purchase price for 3Di
and FUNA is subject to adjustment based on the closing date
actual net assets. The final purchase price allocations for the
ATI, 3Di, and FUNA business acquisitions are expected to be
completed by the second quarter of 2011 and will be based on the
final purchase prices and final appraisals and other analyses of
fair values for acquired assets and assumed liabilities. The
Company does not expect any of the differences
F-13
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
between the preliminary and final purchase price allocations to
have a material impact on its results of operations or final
position.
2009
Business Acquisition
On January 30, 2009, the Company acquired all of the
outstanding stock of Chesapeake Sciences Corporation (CSC) for a
purchase price of $91 million in cash, which includes a
$7 million net working capital adjustment, of which
$6 million was for cash acquired, and a $4 million
adjustment related to certain tax benefits acquired. The
acquisition was financed using cash on hand. CSC is a developer
and manufacturer of anti-submarine warfare systems for use
onboard submarines and surface ship combatants. Based on the
final purchase price allocation, the amount of goodwill
recognized was $56 million, which was assigned to the
Electronic Systems reportable segment, and is not expected to be
deductible for income tax purposes.
2008
Business Acquisitions
During the year ended December 31, 2008, in separate
transactions, the Company acquired four businesses and increased
its ownership interest in a subsidiary for an aggregate purchase
price of $264 million in cash, plus acquisition costs.
These acquisitions were all financed with cash on hand. Based on
preliminary and final purchase price allocations, the aggregate
goodwill recognized for these businesses and increase in
ownership interest was $191 million, of which
$86 million is expected to be deductible for income tax
purposes. The goodwill was assigned to the reportable segments
listed below:
|
|
|
|
|
Segment
|
|
December 31, 2010
|
|
|
|
(in millions)
|
|
|
Electronic Systems
|
|
$
|
150
|
|
Government Services
|
|
|
41
|
|
|
|
|
|
|
Total
|
|
$
|
191
|
|
|
|
|
|
|
In certain instances, the purchase price is subject to
adjustment based on post-acquisition financial performance not
to exceed an aggregate amount of $1 million, as discussed
below. Any such additional consideration will be accounted for
as goodwill. A description of each business acquisition made by
the Company during 2008 is listed below:
|
|
|
|
|
All of the outstanding stock of International Resources Group
Ltd. (IRG) on December 3, 2008. IRG is an international
professional services firm that provides specialized management,
policy and training support in the areas of energy, environment
and natural resource management, relief and reconstruction, and
economic development to U.S. Government agencies and
international development organizations;
|
|
|
|
All of the outstanding stock of G.A. International Electronics
and subsidiaries (GAI) on July 25, 2008. Headquartered in
Florida, GAI provides repair services and retrofit installation
of navigation and communication systems for cruise vessels and
cargo ships. The purchase price for GAI is subject to additional
consideration not to exceed $1 million that is contingent
upon its post-acquisition financial performance through
July 25, 2011;
|
|
|
|
All of the assets and liabilities of the Northrop Grumman
Electro-Optical Systems (EOS) business on April 21, 2008.
The EOS business is a provider of night vision technology and
electro-optical products for military, commercial and public
safety customers;
|
|
|
|
On April 4, 2008, the Company increased its ownership
interest in its Medical Education Technologies, Inc. (METI)
business from 80% to 85% for a purchase price of
$3 million. This business supplied human patient and
surgical simulators, as well as related educational products. On
October 8, 2008, the Company sold its 85% ownership
interest in METI, as described below under 2008 Business and
Product Line Dispositions; and
|
F-14
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
|
|
|
|
|
All of the outstanding stock of HSA Systems Pty Ltd. (HSA) on
March 14, 2008. HSA is a provider of geospatial, marine and
electronic systems for maritime and defense customers.
|
The Company has completed the purchase price allocations for all
acquisitions made during 2008, except for those business
acquisitions in which the purchase price is subject to
adjustment, as described above. The final purchase price
allocations were based on the final purchase prices, including
the payment of contingent consideration, if any, and final
appraisals and other analyses of fair values. The final purchase
price allocations for these business acquisitions, compared to
their preliminary purchase price allocations, did not have a
material impact on the Companys 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 years ended December 31,
2010, 2009 and 2008, assuming that the business acquisitions
completed during 2010 and 2009 had occurred on January 1,
2009, and that the business acquisitions completed during 2009
and 2008 had occurred on January 1, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions, except per share data)
|
|
|
Pro forma net sales
|
|
$
|
15,854
|
|
|
$
|
16,047
|
|
|
$
|
15,071
|
|
Pro forma net income attributable to L-3
|
|
$
|
967
|
|
|
$
|
931
|
|
|
$
|
939
|
|
Pro forma diluted earnings per share
|
|
$
|
8.36
|
|
|
$
|
7.87
|
|
|
$
|
7.60
|
|
The unaudited pro forma results disclosed in the table above are
based on various assumptions and are not necessarily indicative
of the results of operations that would have occurred had the
Company completed these acquisitions on the dates indicated
above.
2010
Business Disposition
On December 17, 2010, the Company divested the
InfraredVision Technology Corporation (ITC) business, which was
within the Electronic Systems reportable segment. The
divestiture resulted in an after-tax loss of less than
$1 million. The annual revenues of approximately
$4 million, operating results and net assets of ITC were
not material for any period presented and, therefore, the ITC
divestiture is not reported as a discontinued operation. The net
proceeds from the sale are included in investing activities on
the Consolidated Statement of Cash Flows.
2008
Business and Product Line Dispositions
On October 8, 2008, the Company divested its 85% ownership
interest in METI, which was within the Electronic Systems
reportable segment. The sale resulted in an after-tax gain of
$20 million (pre-tax gain of $33 million), which was
excluded from income from continuing operations. The revenues,
operating results and net assets of METI were not material for
any period presented and, therefore, were not reported as a
discontinued operation.
On May 9, 2008, the Company sold the Electron Technologies
Passive Microwave Devices (PMD) product line, which was within
the Electronic Systems reportable segment, and recognized an
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 Consolidated Statement of Operations.
The net proceeds from the sale are included in investing
activities on the Consolidated Statement of Cash Flows.
F-15
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
The components of contracts in process are presented in the
table below. The unbilled contract receivables, inventoried
contract costs and unliquidated progress payments are
principally related to contracts with the U.S. Government
and prime contractors or subcontractors of the
U.S. Government. Identifiable intangible assets related to
contracts in process assumed by the Company in its business
acquisitions and the underlying contractual customer
relationships are separately recognized at the date of
acquisition, and are discussed and presented in Note 7.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Unbilled contract receivables, gross
|
|
$
|
2,769
|
|
|
$
|
2,373
|
|
Less: unliquidated progress payments
|
|
|
(1,007
|
)
|
|
|
(700
|
)
|
|
|
|
|
|
|
|
|
|
Unbilled contract receivables, net
|
|
|
1,762
|
|
|
|
1,673
|
|
|
|
|
|
|
|
|
|
|
Inventoried contract costs, gross
|
|
|
882
|
|
|
|
837
|
|
Less: unliquidated progress payments
|
|
|
(96
|
)
|
|
|
(115
|
)
|
|
|
|
|
|
|
|
|
|
Inventoried contract costs, net
|
|
|
786
|
|
|
|
722
|
|
|
|
|
|
|
|
|
|
|
Total contracts in process
|
|
$
|
2,548
|
|
|
$
|
2,395
|
|
|
|
|
|
|
|
|
|
|
Unbilled Contract Receivables.
Unbilled
contract receivables represent accumulated incurred costs and
earned profits on contracts (revenue arrangements), which have
been recorded as sales, but have not yet been billed to
customers. Unbilled contract receivables arise from the
cost-to-cost
method of revenue recognition that is used to record sales on
certain fixed-price contracts. Unbilled contract receivables
from fixed-price type contracts are converted to billed
receivables when amounts are invoiced to customers according to
contractual billing terms, which generally occur when deliveries
or other performance milestones are completed. Unbilled contract
receivables also arise from cost-plus type contracts and
time-and-material
type contracts, for revenue amounts that have not been billed by
the end of the accounting period due to the timing of
preparation of invoices to customers. The Company believes that
approximately 95% of the unbilled contract receivables at
December 31, 2010 will be billed and collected within one
year.
Unliquidated Progress Payments.
Unliquidated
progress payments arise from fixed-price type contracts with the
U.S. Government that contain progress payment clauses, and
represent progress payments on invoices that have been collected
in cash, but have not yet been liquidated. Progress payment
invoices are billed to the customer as contract costs are
incurred at an amount generally equal to 75% to 80% of incurred
costs. Unliquidated progress payments are liquidated as
deliveries or other contract performance milestones are
completed, at an amount equal to a percentage of the contract
sales price for the items delivered or work performed, based on
a contractual liquidation rate. Therefore, unliquidated progress
payments are a contra asset account, and are classified against
unbilled contract receivables if revenue for the underlying
contract is recorded using the
cost-to-cost
method, and against inventoried contract costs if revenue is
recorded using the
units-of-delivery
method.
Inventoried Contract Costs.
In accordance
with contract accounting standards, the Company accounts for the
portion of its G&A, IRAD and 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.
F-16
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO 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 by
the Companys U.S. Government contractor businesses for the
periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Amounts included in inventoried contract costs at beginning of
the year
|
|
$
|
77
|
|
|
$
|
74
|
|
|
$
|
68
|
|
Add: Contract costs
incurred
(1)
|
|
|
1,331
|
|
|
|
1,314
|
|
|
|
1,288
|
|
Amounts included in acquired inventoried contract costs
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Less: Amounts charged to cost of sales
|
|
|
(1,311
|
)
|
|
|
(1,311
|
)
|
|
|
(1,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in inventoried contract costs at end of the year
|
|
$
|
97
|
|
|
$
|
77
|
|
|
$
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Incurred costs include IRAD and
B&P costs of $344 million for 2010, $324 million
for 2009, and $293 million for 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 contracts costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Selling, general and administrative expenses
|
|
$
|
279
|
|
|
$
|
250
|
|
|
$
|
288
|
|
Research and development expenses
|
|
|
68
|
|
|
|
59
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
347
|
|
|
$
|
309
|
|
|
$
|
360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 realizable
value.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Raw materials, components and
sub-assemblies
|
|
$
|
114
|
|
|
$
|
92
|
|
Work in process
|
|
|
130
|
|
|
|
129
|
|
Finished goods
|
|
|
59
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
303
|
|
|
$
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Goodwill
and Identifiable Intangible Assets
|
Goodwill.
In accordance with the accounting
standards for business combinations, the Company records the
assets acquired and liabilities assumed based on their estimated
fair values at the date of acquisition (commonly referred to as
the purchase price allocation). As part of the purchase price
allocations for the Companys business acquisitions,
identifiable intangible assets are recognized as assets apart
from goodwill if they arise from contractual or other legal
rights, or if they are capable of being separated or divided
from the acquired business and sold, transferred, licensed,
rented or exchanged. However, the Company does not recognize any
intangible assets apart from goodwill for the assembled
workforces of its business acquisitions. At December 31,
2010, the Company had approximately 63,000 employees, and
the substantial majority of the sales generated by the
Companys businesses are from the productive labor efforts
of its employees, as compared to selling manufactured products
or
right-to-use
technology.
Generally, the largest intangible assets from the businesses
that the Company acquires are the assembled workforces,
F-17
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
which includes the human capital of the management,
administrative, marketing and business development, scientific,
engineering and technical employees of the acquired businesses.
The success of the Companys businesses, including their
ability to retain existing business (revenue arrangements) and
to successfully compete for and win new business (revenue
arrangements), is primarily dependent on the management,
marketing and business development, contracting, engineering and
technical skills and knowledge of its employees, rather than on
productive capital (plant and equipment, and technology and
intellectual property). Additionally, for a significant portion
of its businesses, the Companys ability to attract and
retain employees who have U.S. Government security
clearances, particularly those of top-secret and above, is
critical to its success, and is often a prerequisite for
retaining existing revenue arrangements and pursuing new ones.
Generally, patents, trademarks and licenses are not material for
the Companys acquired businesses. Furthermore, the
Companys U.S. Government contracts (revenue
arrangements) generally permit other companies to use the
Companys patents in most domestic work performed by such
other companies for the U.S. Government. Therefore, because
intangible assets for assembled workforces are part of goodwill
in accordance with the accounting standards for business
combinations, the substantial majority of the intangible assets
for the Companys business acquisitions is recognized as
goodwill. Additionally, the value assigned to goodwill for the
Companys business acquisitions also includes the value
that the Company expects to realize from cost reduction measures
that it implements for its acquired businesses.
The table below presents the changes in goodwill allocated to
the Companys reporting units in each reportable segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
|
|
|
|
|
|
Electronic
|
|
|
Consolidated
|
|
|
|
C
3
ISR
|
|
|
Services
|
|
|
AM&M
|
|
|
Systems
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Balance at December 31, 2008
|
|
$
|
862
|
|
|
$
|
2,313
|
|
|
$
|
1,121
|
|
|
$
|
3,733
|
|
|
$
|
8,029
|
|
Business acquisitions
|
|
|
2
|
|
|
|
5
|
|
|
|
|
|
|
|
57
|
|
|
|
64
|
|
Foreign currency translation
adjustments
(1)
|
|
|
6
|
|
|
|
2
|
|
|
|
37
|
|
|
|
52
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
870
|
|
|
$
|
2,320
|
|
|
$
|
1,158
|
|
|
$
|
3,842
|
|
|
$
|
8,190
|
|
Business acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
530
|
|
|
|
530
|
|
Sale of a business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Foreign currency translation
adjustments
(1)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
14
|
|
|
|
1
|
|
|
|
12
|
|
Segment
reclassification
(2)
|
|
|
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
868
|
|
|
$
|
2,285
|
|
|
$
|
1,172
|
|
|
$
|
4,405
|
|
|
$
|
8,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The changes in goodwill from
foreign currency translation adjustments are due to fluctuations
in the U.S. dollar and foreign currency exchange rates. The
decreases in goodwill presented in the
C
3
ISR and
Government Services reportable segments during 2010 were due to
the strengthening of the U.S. dollar against the British pound.
The increases in goodwill presented in the AM&M and
Electronic Systems reportable segments during 2010 were
primarily due to the weakening of the U.S. dollar against the
Canadian dollar. The increases in goodwill during 2009 were
primarily due to the weakening of the U.S. dollar against the
Canadian dollar.
|
|
(2)
|
|
As a result of a re-alignment of a
business unit in the Companys management and
organizational structure as discussed in Note 2, goodwill
was reclassified on a relative fair value basis from the
Government Services reportable segment to the Electronic Systems
reportable segment during the quarter ended June 25, 2010.
|
For the year ended December 31, 2010, the increase of
$530 million related to business acquisitions completed
during the year ended December 31, 2010. The decrease of
$2 million related to the sale of InfraredVision Technology
Corporation completed on December 17, 2010.
For the year ended December 31, 2009, the increase of
$64 million related to business acquisitions was comprised
of (1) an increase of $56 million for a business
acquisition completed during the year ended December 31,
2009, (2) an increase of $4 million primarily for
earnouts related to certain business acquisitions completed
prior to January 1, 2009, and (3) an increase of
$4 million related to final purchase price determinations
for certain business acquisitions completed prior to
January 1, 2009.
Identifiable Intangible Assets.
The most significant
identifiable intangible asset that is separately recognized for
the Companys business acquisitions is customer contractual
relationships. All of the Companys customer relationships
are
F-18
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
established through written customer contracts (revenue
arrangements). The fair value for customer contractual
relationships is determined, as of the date of acquisition,
based on estimates and judgments regarding expectations for the
estimated future after-tax earnings and cash flows (including
cash flows for working capital) arising from the follow-on sales
on contract (revenue arrangement) renewals expected from the
customer contractual relationships over their estimated lives,
including the probability of expected future contract renewals
and sales, less a contributory assets charge, all of which is
discounted to present value.
Information on the Companys identifiable intangible assets
that are subject to amortization is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Amortization
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Period
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(in years)
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Customer contractual relationships
|
|
|
22
|
|
|
$
|
584
|
|
|
$
|
205
|
|
|
$
|
379
|
|
|
$
|
515
|
|
|
$
|
163
|
|
|
$
|
352
|
|
Technology
|
|
|
11
|
|
|
|
145
|
|
|
|
72
|
|
|
|
73
|
|
|
|
78
|
|
|
|
58
|
|
|
|
20
|
|
Other
|
|
|
14
|
|
|
|
28
|
|
|
|
10
|
|
|
|
18
|
|
|
|
14
|
|
|
|
9
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
20
|
|
|
$
|
757
|
|
|
$
|
287
|
|
|
$
|
470
|
|
|
$
|
607
|
|
|
$
|
230
|
|
|
$
|
377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense recorded by the Company for its
identifiable intangible assets is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Amortization expense
|
|
$
|
59
|
|
|
$
|
52
|
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on gross carrying amounts at December 31, 2010, the
Companys estimate of amortization expense for identifiable
intangible assets for the years ending December 31, 2011
through 2015 are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
(in millions)
|
|
|
Estimated amortization expense
|
|
$
|
61
|
|
|
$
|
53
|
|
|
$
|
43
|
|
|
$
|
43
|
|
|
$
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Other
Current Liabilities and Other Liabilities
|
The table below presents the components of other current
liabilities.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Other Current Liabilities:
|
|
|
|
|
|
|
|
|
Accruals for pending and threatened litigation (see Note 19)
|
|
$
|
19
|
|
|
$
|
2
|
|
Accrued product warranty costs
|
|
|
86
|
|
|
|
90
|
|
Estimated costs in excess of estimated contract value to
complete contracts in process in a loss position
|
|
|
93
|
|
|
|
81
|
|
Accrued interest
|
|
|
75
|
|
|
|
76
|
|
Deferred revenues
|
|
|
34
|
|
|
|
28
|
|
Aggregate purchase price payable for acquired businesses
|
|
|
|
|
|
|
4
|
|
Other
|
|
|
82
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
Total other current liabilities
|
|
$
|
389
|
|
|
$
|
371
|
|
|
|
|
|
|
|
|
|
|
F-19
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
The table below presents the components of other liabilities.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Other Liabilities:
|
|
|
|
|
|
|
|
|
Non-current income taxes payable (see Note 17)
|
|
$
|
248
|
|
|
$
|
232
|
|
Deferred compensation
|
|
|
53
|
|
|
|
83
|
|
Accrued workers compensation
|
|
|
57
|
|
|
|
46
|
|
Estimated contingent purchase price payable for acquired
businesses
|
|
|
9
|
|
|
|
|
|
Notes payable and capital lease obligations
|
|
|
10
|
|
|
|
10
|
|
Accrued product warranty costs
|
|
|
6
|
|
|
|
9
|
|
Other
|
|
|
103
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
$
|
486
|
|
|
$
|
470
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
Property,
Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Land
|
|
$
|
64
|
|
|
$
|
57
|
|
Buildings and improvements
|
|
|
366
|
|
|
|
321
|
|
Machinery, equipment, furniture and fixtures
|
|
|
1,280
|
|
|
|
1,167
|
|
Leasehold improvements
|
|
|
276
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
Gross property, plant and equipment
|
|
|
1,986
|
|
|
|
1,798
|
|
Accumulated depreciation and amortization
|
|
|
(1,063
|
)
|
|
|
(944
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
923
|
|
|
$
|
854
|
|
|
|
|
|
|
|
|
|
|
F-20
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
The components of debt and a reconciliation to the carrying
amount of current and long-term debt are presented in the table
below.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
L-3 Communications:
|
|
|
|
|
|
|
|
|
Borrowings under Revolving Credit
Facility
(1)
|
|
$
|
|
|
|
$
|
|
|
5.20% Senior Notes due 2019
|
|
|
1,000
|
|
|
|
1,000
|
|
4.75% Senior Notes due 2020
|
|
|
800
|
|
|
|
|
|
6
1
/
8
% Senior
Subordinated Notes due 2013
|
|
|
|
|
|
|
400
|
|
6
1
/
8
% Senior
Subordinated Notes due 2014
|
|
|
|
|
|
|
400
|
|
5
7
/
8
% Senior
Subordinated Notes due 2015
|
|
|
650
|
|
|
|
650
|
|
6
3
/
8
% Senior
Subordinated Notes due 2015
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
3,450
|
|
|
|
3,450
|
|
|
|
|
|
|
|
|
|
|
L-3 Holdings:
|
|
|
|
|
|
|
|
|
3% Convertible Contingent Debt Securities due 2035
|
|
|
700
|
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
Principal amount of long-term debt
|
|
|
4,150
|
|
|
|
4,150
|
|
Less: Unamortized discounts
|
|
|
(13
|
)
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
Carrying amount of long-term debt
|
|
|
4,137
|
|
|
|
4,112
|
|
Less: Current portion of long-term debt
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount of long-term debt, excluding current portion
|
|
$
|
4,126
|
|
|
$
|
4,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Available borrowings under the
Revolving Credit Facility were $983 million after
reductions for outstanding letters of credit of $17 million
at December 31, 2010 and $968 million after reductions
for outstanding letters of credit of $32 million at
December 31, 2009.
|
L-3
Communications Revolving Credit Facility
On October 23, 2009, L-3 Communications replaced its
$1 billion Senior Credit Facility with a $1 billion
three-year Revolving Credit Facility maturing on
October 23, 2012. Borrowings under the new Revolving Credit
Facility bear interest, at L-3 Communications option, at
either (i) a base rate equal to the higher of
(a) 0.50% per annum above the latest federal funds rate,
(b) the Bank of America prime rate (as defined
in the Revolving Credit Facility), and (c) 1.00% per annum
above a LIBOR rate (as defined in the Revolving
Credit Facility), plus a spread ranging from 1.25% to 3.00% per
annum, or (ii) a LIBOR rate (as defined in the
Revolving Credit Facility) plus a spread ranging from 2.25% to
4.00% per annum. The spread, in both cases, depends on L-3
Communications debt rating at the time of determination.
L-3 Communications pays: (1) commitment fees calculated on
the daily amounts of the available unused commitments at a rate
ranging from 0.375% to 0.75% per annum, (2) letter of
credit fees ranging from 1.50% to 2.67% per annum for
performance and commercial letters of credit and (3) letter
of credit fees ranging from 2.25% to 4.00% for financial letters
of credit. The fee rate, in all cases, depends on L-3
Communications debt rating at the time of determination.
The debt rating is based on the credit ratings as determined by
Standard & Poors Rating Services, Moodys
Investors Service, Inc. and Fitch Ratings of L-3
Communications non-credit enhanced senior, unsecured
long-term debt.
L-3
Communications Senior Notes
2010 Debt
Issuances and Redemptions
On May 21, 2010, L-3 Communications issued
$800 million in principal amount of 4.75% Senior Notes
that mature on July 15, 2020 (2020 Senior Notes) at a
discount of $3 million. The discount was recorded as a
reduction to the principal
F-21
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
amount of the notes and will be amortized as interest expense
over the term of the notes. The effective interest rate of the
2020 Senior Notes is 4.79%. Interest on the 2020 Senior Notes is
payable semi-annually on January 15 and July 15 of each year.
The net cash proceeds from this offering amounted to
approximately $790 million after deducting the discounts,
commissions and estimated expenses, and were used, together with
cash on hand, to redeem L-3 Communications
$800 million in aggregate
6
1
/
8
% Senior
Subordinated Notes due 2014 and 2013 on June 21 and
July 15, 2010, respectively. In connection with the
redemption of the
6
1
/
8
% Senior
Subordinated Notes due 2014 and 2013, the Company recorded debt
retirement charges of approximately $18 million
($11 million after income tax, or $0.10 per diluted share)
during the year ended December 31, 2010.
2009 Debt
Issuances and Redemptions
On October 2, 2009, L-3 Communications issued
$1 billion in aggregate principal amount of
5.20% Senior Notes due October 15, 2019 (2019 Senior
Notes) at a discount of $4 million. The discount was
recorded as a reduction to the principal amount of the notes and
will be amortized as an interest expense over the term of the
notes. The effective interest rate of the 2019 Senior Notes is
5.25%. Interest on the 2019 Senior Notes is payable
semi-annually on April 15 and October 15 of each year. The net
cash proceeds from this offering amounted to approximately
$987 million after deducting the discounts, commissions and
estimated expenses, and were used, together with cash on hand,
to redeem L-3 Communications $750 million
7
5
/
8
% Senior
Subordinated Notes due in 2012 (2002 Notes) on November 2,
2009 and to repay L-3 Communications outstanding
$650 million Term Loan on October 7, 2009. In
connection with the redemption of the 2002 Notes, the Company
recorded a debt retirement charge of approximately
$10 million ($6 million after income tax).
2011 Debt
Issuances and Redemptions
On February 7, 2011, L-3 Communications issued
$650 million in principal amount of 4.95% Senior Notes
that mature on February 15, 2021 (2021 Senior Notes) at a
discount of $4 million. The discount was recorded as a
reduction to the principal amount of the notes and will be
amortized as interest expense over the term of the notes. The
effective interest rate of the 2021 Senior Notes is 5.02%.
Interest on the 2021 Senior Notes is payable semi-annually on
February 15 and August 15 of each year. The net cash proceeds
from this offering amounted to approximately $640 million
after deducting the discounts, commissions and estimated
expenses. We will use the net proceeds, together with cash on
hand, to redeem L-3 Communications $650 million
5
7
/
8
% Senior
Subordinated Notes due 2015 (2015 Notes). The redemption price
is 101.958% of the principal amount, plus accrued and unpaid
interest up to, but not including, March 9, 2011, the
redemption date. In connection with the redemption of the 2015
Notes, the Company will record a debt retirement charge in the
2011 first quarter of $18 million ($11 million after
income tax, or $0.10 per diluted share).
The 2019, 2020, and 2021 Senior Notes (collectively the Senior
Notes) are unsecured senior obligations of L-3 Communications.
The Senior Notes may be redeemed at any time prior to their
maturity at the option of L-3 Communications, in whole or in
part, at a redemption price equal to the greater of:
(1) 100% of the principal amount, or (2) the present
value of the remaining principal and interest payments
discounted to the date of redemption, on a semi-annual basis, at
the Treasury Rate (as defined in the Indenture dated as of
October 2, 2009 (the Senior Indenture)), plus 0.25% for the
2020 and 2021 Senior Notes and 0.30% for the 2019 Senior Notes.
Upon the occurrence of a change in control (as defined in the
Senior Indenture), each holder of the notes will have the right
to require L-3 Communications to repurchase all or any part of
such holders notes at an offer price in cash equal to 101%
of the aggregate principle amount plus accrued and unpaid
interest and special interest (as defined in the Senior
Indenture), if any, to the date of the purchase.
F-22
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
L-3
Communications Senior Subordinated Notes
The Senior Subordinated Notes, which are included as components
of long-term debt in the table above, are general unsecured
obligations of L-3 Communications and are subordinated in right
of payment to all existing and future senior debt of L-3
Communications. The terms of each outstanding Senior
Subordinated Note are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Effective
|
|
|
|
|
|
Redemption
|
|
|
|
|
|
|
Amount
|
|
|
|
|
|
Cash
|
|
|
Interest
|
|
|
|
|
|
Price % of
|
|
Note
|
|
Date of Issuance
|
|
|
Issued
|
|
|
Discount
(1)
|
|
|
Proceeds
|
|
|
Rate
|
|
|
Current Call
Date
(2)
|
|
|
Principal
(3)
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
5
7
/
8
% Senior
Subordinated Notes due January 15,
2015
(4)
|
|
|
November 12, 2004
|
|
|
$
|
650
|
|
|
$
|
|
|
|
$
|
639
|
|
|
|
5.875
|
%
|
|
|
January 15, 2011
|
|
|
|
101.958
|
%
|
6
3
/
8
% Senior
Subordinated Notes due October 15, 2015
|
|
|
July 29, 2005
|
|
|
$
|
1,000
|
|
|
$
|
9
|
|
|
$
|
972
|
|
|
|
6.470
|
%
|
|
|
October 15, 2010
|
|
|
|
103.188
|
%
|
|
|
|
(1)
|
|
Discounts are recorded as a
reduction to the principal amount of the notes and are amortized
as interest expense over the term of the notes.
|
|
(2)
|
|
Notes are subject to redemption at
any time, at the option of L-3 Communications, in whole or in
part, on or after the call date.
|
|
(3)
|
|
Redemption prices (plus accrued and
unpaid interest) include a premium on the principal amount (plus
accrued and unpaid interest). The prices above represent the
current redemption prices, which decline annually to 100% of
principal (plus accrued and unpaid interest) starting three
years from the first allowable date of redemption, and
thereafter.
|
|
(4)
|
|
The 2015 Notes will be redeemed at
a redemption price of 101.958% of the principal amount, plus
accrued and unpaid interest up to, but not including,
March 9, 2011, the redemption date.
|
L-3
Holdings
On July 29, 2005, L-3 Holdings sold $600 million of
3% Convertible Contingent Debt Securities (CODES) due
August 1, 2035. Interest is payable semi-annually on
February 1 and August 1 of each year. On August 4, 2005,
L-3 Holdings sold an additional $100 million of CODES,
pursuant to an over-allotment option exercised by the initial
purchasers of the CODES. Effective January 1, 2009, 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 realized in accordance with the
provisions of the accounting standard for convertible debt. The
effective interest rate of the CODES is 6.33%. Interest expense
relates to both the contractual coupon interest and amortization
of the discount on the liability components. Interest expense
recognized was $43 million and $42 million for the
years ended December 31, 2010 and December 31, 2009,
respectively. The following table provides additional
information about the Companys CODES:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Carrying amount of the equity component (conversion feature)
|
|
$
|
64
|
|
|
$
|
64
|
|
Unamortized discount of liability component being amortized
through February 1, 2011
|
|
$
|
2
|
|
|
$
|
24
|
|
Net carrying amount of liability component
|
|
$
|
698
|
|
|
$
|
676
|
|
The CODES are convertible into cash and shares of L-3
Holdings common stock based on a conversion rate of
10.1074 shares of L-3 Holdings common stock per one
thousand dollars in principal amount of the CODES (equivalent to
a conversion price of $98.94 per share) only under the following
circumstances: (1) prior to August 1, 2033, on any
date during any fiscal quarter (and only during such fiscal
quarter) beginning after September 30, 2005, if the closing
sales price of the common stock of L-3 Holdings is more than
120% of the then current conversion price (currently $118.73)
for at least 20 trading days in the 30 consecutive
trading-day
period ending on the last trading day of the previous fiscal
quarter; (2) on or after August, 1, 2033, at all times on
or after any date on which the closing sale price of the common
stock of L-3 Holdings is more than 120% of the then current
conversion price (currently $118.73); (3) if we distribute
to all holders of our common stock, rights or warrants (other
than pursuant to a rights plan) entitling them to purchase, for
a period of 45 calendar days or less, shares of L-3
Holdings common stock at a price less than the average
closing sales
F-23
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
price for the ten trading days preceding the declaration date
for such distribution; (4) if we distribute to all holders
of our common stock, cash and other assets, debt securities or
rights to purchase L-3 Holdings securities (other than
pursuant to a rights plan), which distribution has a per share
value exceeding 10% of the closing sale price of L-3 Holdings
common stock on the trading day preceding the declaration date
for such distribution; (5) during the five consecutive
business-day
period following any five consecutive
trading-day
period in which the average trading price of the CODES was less
than 98% of the average of the closing sale price of L-3
Holdings common stock during such five trading day period
multiplied by the then current conversion rate; (6) during
a specified period if the CODES have been called for redemption;
or (7) during a specified period if a fundamental
change (as such term is defined in the indenture governing
the CODES) occurs. The conversion rate is subject to adjustments
in certain circumstances set forth in the indenture governing
the CODES. For the year ended December 31, 2010, the
conversion feature of the CODES had no impact on diluted
earnings per share (EPS) (see Note 16).
Upon conversion of the CODES, the settlement amount will be
computed as follows: (1) if L-3 Holdings elects to satisfy
the entire conversion obligation in cash, L-3 Holdings will
deliver to the holder for each one thousand dollars in principal
amount of the CODES converted cash in an amount equal to the
conversion value; or (2) if L-3 Holdings elects to satisfy
the conversion obligation in a combination of cash and common
stock, L-3 Holdings will deliver to the holder for each one
thousand dollars in principal amount of the CODES converted
(x) cash in an amount equal to (i) the fixed dollar
amount per one thousand dollars in principal amount of the CODES
of the conversion obligation to be satisfied in cash specified
in the notice regarding L-3 Holdings chosen method of
settlement or, if lower, the conversion value, or (ii) the
percentage of the conversion obligation to be satisfied in cash
specified in the notice regarding L-3 Holdings chosen method of
settlement multiplied by the conversion value, as the case may
be (the cash amount); provided that in either case
the cash amount shall in no event be less than the lesser of
(a) the principal amount of the CODES converted and
(b) the conversion value; and (y) a number of shares
of common stock of L-3 Holdings for each of the 20 trading days
in the conversion period equal to 1/20th of (i) the
conversion rate then in effect minus (ii) the quotient of
the cash amount divided by the closing price of common stock of
L-3 Holdings for that day (plus cash in lieu of fractional
shares, if applicable).
The CODES are senior unsecured obligations of L-3 Holdings and
rank equal in right of payment with all existing and future
senior indebtedness and senior to all future senior subordinated
indebtedness of L-3 Holdings. The CODES are jointly and
severally guaranteed on a senior subordinated basis by the
existing and future domestic subsidiaries of L-3 Holdings that
guarantee any other indebtedness of L-3 Holdings or any of its
domestic subsidiaries.
At any time on or after February 1, 2011, the CODES are
subject to redemption at the option of L-3 Holdings, in whole or
in part, at a cash redemption price (plus accrued and unpaid
interest, including contingent interest and additional interest,
if any) equal to 100% of the principal amount of the CODES.
On February 2, 2011,
L-3
Holdings
repurchased approximately $11 million of the CODES as a
result of the exercise by the holders of their contractual right
to require L-3 Holdings to repurchase their CODES. Holders of
the remaining CODES may require L-3 Holdings to repurchase the
CODES, in whole or in part, on February 1, 2016,
February 1, 2021, February 1, 2026 and
February 1, 2031 at a cash repurchase price equal to 100%
of the principal amount of the CODES (plus accrued and unpaid
interest, including contingent interest and additional interest,
if any). In addition, holders of the CODES may require L-3
Holdings to repurchase the CODES at a repurchase price equal to
100% of the principal amount of the CODES (plus accrued and
unpaid interest, including contingent interest and additional
interest, if any) if a fundamental change occurs
prior to maturity of the CODES. At December 31, 2010, the
$11 million of repurchased CODES are classified as a current
liability and the remaining $689 million principal amount
of CODES are classified as long-term debt.
Holders of the CODES have a right to receive contingent interest
payments, which will be paid on the CODES during any six-month
period commencing February 1, 2011 in which the trading
price of the CODES for each of the five trading
F-24
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
days ending on the second trading day preceding the first day of
the applicable six-month interest period equals or exceeds 120%
of the principal amount of the CODES. The contingent interest
payable per one thousand dollars in principal amount of CODES
will equal 0.25% of the average trading price of one thousand
dollars in principal amount of CODES during the five trading
days ending on the second trading day preceding the first day of
the applicable six-month interest period. The contingent
interest payment provision has been accounted for as an embedded
derivative. The amount assigned to the embedded derivative is
adjusted periodically through other income (expense) for changes
in its fair value, if any.
Guarantees
L-3
Communications
The borrowings under the Revolving Credit Facility are fully and
unconditionally guaranteed by L-3 Holdings and by substantially
all of the material wholly-owned domestic subsidiaries of L-3
Communications on an unsecured senior basis. The payment of
principal and premium, if any, and interest on the Senior Notes
are fully and unconditionally guaranteed, on an unsecured senior
basis, jointly and severally, by
L-3 Communications
material wholly-owned domestic subsidiaries that guarantee any
of its other indebtedness. The payment of principal and premium,
if any, and interest on the
5
7
/
8
% Senior
Subordinated Notes due 2015 and
6
3
/
8
% Senior
Subordinated Notes due 2015 (collectively the Senior
Subordinated Notes) are fully and unconditionally guaranteed, on
an unsecured senior subordinated basis, jointly and severally,
by L-3 Communications wholly-owned domestic subsidiaries
that guarantee any of its other liabilities.
L-3
Holdings
The payment of principal and premium, if any, and interest on
the CODES are fully and unconditionally guaranteed, on an
unsecured senior subordinated basis, jointly and severally, by
L-3 Communications and its wholly-owned domestic subsidiaries
that guarantee any of its other liabilities.
Subordination
The guarantees of the Revolving Credit Facility and the Senior
Notes rank senior to the guarantees of the Senior Subordinated
Notes and the CODES and rank pari passu with each other. The
guarantees of the Senior Subordinated Notes and CODES rank pari
passu with each other and are junior to the guarantees of the
Revolving Credit Facility and Senior Notes.
Covenants
Financial and other restrictive covenants.
The
Revolving Credit Facility and Senior Subordinated Notes
indentures contain financial and other restrictive covenants
that limit, among other things, the ability of the subsidiaries
of L-3 Communications to borrow additional funds, and the
ability of L-3 Communications and its subsidiaries to incur
liens, make investments, merge or consolidate, dispose of
assets, pay dividends or repurchase its common stock. The
Companys Revolving Credit Facility contains covenants that
require that (1) the Companys consolidated leverage
ratio be less than or equal to 4.0 to 1.0; (2) the
Companys consolidated interest coverage ratio be greater
than or equal to 3.0 to 1.0; and (3) the Companys
consolidated senior leverage ratio be less than or equal to 3.5
to 1.0, in each case, as of the end of any fiscal quarter.
Calculations of the financial covenants are to exclude, among
other things, certain items such as impairment losses on
goodwill or other intangible assets, non-cash gains or losses
from discontinued operations, gains or losses in connection with
asset dispositions, and gains or losses with respect to
judgments or settlements in connection with litigation matters.
As of December 31, 2010, the Company was in compliance with
its financial and other restrictive covenants.
F-25
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
The Senior Indenture contains covenants customary for investment
grade notes, including covenants that restrict the ability of
L-3 Communications and its wholly-owned domestic subsidiaries to
create, incur, assume or permit to exist any lien, except
permitted liens (as defined in the Senior Indenture) and
restrict the ability of L-3 Communications and its subsidiaries
to enter into certain sale and leaseback transactions (as
defined in the Senior Indenture).
The Senior Subordinated Notes indentures contain covenants that
restrict the ability of L-3 Communications to incur indebtedness
and issue capital stock that matures or is redeemable
91 days or less after the maturity date of such series of
notes, and the ability of its restricted subsidiaries to incur
indebtedness or issue preferred stock, unless the Companys
fixed charge coverage ratio would have been at least 2.0 to 1.0
on a pro forma basis. The covenants are subject to several
material exceptions, including an exception for indebtedness
under the Companys credit facilities up to a specified
amount.
Restricted Payments.
L-3 Holdings relies on
dividends paid by L-3 Communications to generate the funds
necessary to pay dividends on and repurchase its common stock.
The Revolving Credit Facility contains provisions that limit the
ability of L-3 Communications to pay dividends, repurchase L-3
Holdings common stock or other distributions with respect
to any capital stock and make investments in L-3 Holdings.
However, the Revolving Credit Facility permits L-3
Communications to:
|
|
|
|
|
fund payments of interest on indebtedness of L-3 Holdings and to
fund payments of dividends on disqualified preferred stock
issued by L-3 Holdings, so long as (1) any such
indebtedness or disqualified preferred stock is guaranteed by
L-3 Communications and (2) the proceeds received by L-3
Holdings from the issuance of such indebtedness or disqualified
preferred stock have been invested by L-3 Holdings in L-3
Communications;
|
|
|
|
fund payments and prepayments of principal of indebtedness of
L-3 Holdings and to fund optional and mandatory redemptions of
disqualified preferred stock issued by L-3 Holdings, so long as
(1) any such indebtedness or disqualified preferred stock
is guaranteed by L-3 Communications and (2) the amount of
such fundings does not exceed the sum of (a) the aggregate
amount of investments made by L-3 Holdings in L-3 Communications
with the proceeds from any issuance of indebtedness or
disqualified preferred stock by L-3 Holdings that is guaranteed
by
L-3 Communications
and (b) the amount of any premium, penalty, or accreted
value payable in connection with such payment, prepayment or
redemption;
|
|
|
|
pay other dividends on and make other redemptions of its equity
interests (including for the benefit of L-3 Holdings) and make
other investments in L-3 Holdings, so long as no default or
event of default has occurred and is continuing, up to an
aggregate amount of $2.0 billion, increased (or decreased)
on a cumulative basis at the end of each quarter, commencing
with the quarter ended December 31, 2009 by an amount equal
to 50% of the consolidated net income (or deficit) of L-3
Communications for the quarter, plus (1) 100% of the
proceeds from any issuance of capital stock (other than
disqualified preferred stock) by L-3 Holdings after
October 23, 2009, provided those proceeds were invested in
L-3 Communications, plus (2) 100% of the proceeds from any
issuance of indebtedness or disqualified preferred stock by L-3
Holdings after October 23, 2009 provided those proceeds
were invested in L-3 Communications and the indebtedness or
disqualified preferred stock is not guaranteed by L-3
Communications, plus (3) 100% of the proceeds from any
issuance of capital stock (other than disqualified preferred
stock) by
L-3 Communications
after October 23, 2009.
|
Disqualified preferred stock discussed above is stock, other
than common stock, that is not classified as a component of
shareholders equity on the balance sheet. At
December 31, 2010, L-3 Holdings and L-3 Communications did
not have any disqualified preferred stock.
The Senior Subordinated Notes indentures contain provisions that
limit the ability of L-3 Communications to pay dividends to L-3
Holdings and make investments in L-3 Holdings, subject to
exceptions. Subject to certain limitations, the
F-26
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
indentures permit L-3 Communications to make such restricted
payments so long as it would be able to incur at least one
dollar of additional indebtedness under the fixed charge
coverage ratio test described above and meet other conditions.
Cross default provisions.
The Revolving Credit
Facility contains cross default provisions that are triggered
when a payment default occurs or certain other defaults occur
that would allow the acceleration of indebtedness, swap
contracts or guarantees of L-3 Holdings, L-3 Communications or
its subsidiaries, so long as the aggregate amount of such
indebtedness, swap contracts or guarantees is at least
$50 million and such defaults (other than payment defaults
and defaults that have resulted in acceleration) have not been
cured within 10 days. The Senior Subordinated Notes
indentures contain cross acceleration provisions that are
triggered when holders of the indebtedness of L-3 Holdings,
L-3 Communications
or their restricted subsidiaries (or the payment of which is
guaranteed by such entities) accelerate at least
$10 million in aggregate principal amount of those
obligations. The Senior Notes indenture contains a cross
acceleration provision that is triggered when a default or
acceleration occurs under any indenture or instrument of L-3
Communications or its subsidiaries or the payment of which is
guaranteed by L-3 Communications or its subsidiaries in an
aggregate amount of at least $100 million.
In August 2010, L-3 Holdings completed its previously announced
$1 billion share repurchase program, which was approved by
its Board of Directors on November 24, 2008. On
July 14, 2010, 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,
2012. Repurchases 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. L-3 Holdings
repurchased 11.0 million shares of its common stock at an
average price of $75.86 per share for an aggregate amount of
approximately $834 million from January 1, 2010
through December 31, 2010. At December 31, 2010, the
remaining dollar value under the share repurchase program was
$592 million.
From January 1, 2011 through February 24, 2011, L-3
Holdings repurchased 1,367,992 shares of its common stock at an
average price of $77.70 per share for an aggregate amount of
approximately $106 million.
|
|
12.
|
Fair
Value Measurements
|
The Company applies the accounting standards for fair value
measurements to all of the Companys assets and liabilities
that are measured and recorded at fair value. Fair value is
defined as the price that would be received for an asset or the
exit price that would be paid to transfer a liability in the
principal or most advantageous market in an orderly transaction
between market participants. The standards establish a fair
value hierarchy that gives the highest priority to observable
inputs and the lowest priority to unobservable inputs.
The following table presents the fair value hierarchy level for
each of the Companys assets and liabilities that are
measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Description
|
|
Level
1
(1)
|
|
|
Level
2
(2)
|
|
|
Level
3
(3)
|
|
|
Level
1
(1)
|
|
|
Level
2
(2)
|
|
|
Level
3
(3)
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
347
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
891
|
|
|
$
|
|
|
|
$
|
|
|
Derivatives (foreign currency forward contracts)
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
347
|
|
|
$
|
22
|
|
|
$
|
|
|
|
$
|
891
|
|
|
$
|
16
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives (foreign currency forward contracts)
|
|
$
|
|
|
|
$
|
5
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10
|
|
|
$
|
|
|
F-27
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
|
|
|
(1)
|
|
Level 1 is based on quoted
market prices available in active markets for identical assets
or liabilities as of the reporting date. Cash equivalents are
primarily held in registered money market funds that are valued
using quoted market prices.
|
|
(2)
|
|
Level 2 is based on pricing
inputs other than quoted prices in active markets, which are
either directly or indirectly observable. The fair value is
determined using a valuation model based on observable market
inputs, including quoted foreign currency forward exchange rates
and consideration of non-performance risk.
|
|
(3)
|
|
Level 3 is based on pricing
inputs that are not observable and not corroborated by market
data. The Company has no Level 3 assets or liabilities.
|
|
|
13.
|
Financial
Instruments
|
At December 31, 2010 and 2009, the Companys financial
instruments consisted primarily of cash and cash equivalents,
billed receivables, trade accounts payable, Senior Notes, Senior
Subordinated Notes, CODES and foreign currency forward
contracts. The carrying amounts of cash and cash equivalents,
billed receivables and trade accounts payable are representative
of their respective fair values because of the short-term
maturities or expected settlement dates of these instruments.
The fair value of the Senior Notes, Senior Subordinated Notes,
and CODES are based on quoted prices for these securities. The
fair values of foreign currency forward contracts are based on
forward exchange rates. The carrying amounts and estimated fair
values of the Companys financial instruments are presented
in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Senior Notes
|
|
|
1,794
|
|
|
|
1,810
|
|
|
|
996
|
|
|
|
995
|
|
Senior Subordinated Notes
|
|
|
1,645
|
|
|
|
1,691
|
|
|
|
2,440
|
|
|
|
2,461
|
|
CODES
|
|
|
698
|
|
|
|
701
|
|
|
|
676
|
|
|
|
736
|
|
Foreign currency forward
contracts
(1)
|
|
|
17
|
|
|
|
17
|
|
|
|
6
|
|
|
|
6
|
|
|
|
|
(1)
|
|
See Note 14 for additional
disclosures regarding the notional amounts and fair values of
foreign currency forward contracts.
|
|
|
14.
|
Derivative
Financial Instruments
|
Notional amounts are used to measure the volume of foreign
currency forward contracts and do not represent exposure to
foreign currency losses. The table below presents the notional
amounts of the Companys outstanding foreign currency
forward contracts by currency as of December 31, 2010:
|
|
|
|
|
Currency
|
|
Notional Amount
|
|
|
|
(in millions)
|
|
|
Canadian dollar
|
|
$
|
166
|
|
U.S. dollar
|
|
|
75
|
|
British pound
|
|
|
61
|
|
Euro
|
|
|
32
|
|
Other
|
|
|
3
|
|
|
|
|
|
|
Total
|
|
$
|
337
|
|
|
|
|
|
|
At December 31, 2010, 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 Consolidated Balance Sheets.
F-28
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Derivative
Instruments
(1)
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Other
|
|
|
|
|
|
Other
|
|
|
|
|
|
Other
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Current
|
|
|
Other
|
|
|
Current
|
|
|
Other
|
|
|
Current
|
|
|
Other
|
|
|
Current
|
|
|
Other
|
|
|
|
Assets
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Liabilities
|
|
|
|
(in millions)
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
11
|
|
|
$
|
8
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
6
|
|
|
$
|
7
|
|
|
$
|
4
|
|
|
$
|
2
|
|
Derivatives not designated as hedging instruments
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
|
2
|
|
|
|
1
|
|
|
|
3
|
|
|
|
|
|
|
|
2
|
|
|
|
1
|
|
|
|
3
|
|
|
|
1
|
|
Embedded derivative related to the CODES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative instruments
|
|
$
|
13
|
|
|
$
|
9
|
|
|
$
|
5
|
|
|
$
|
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
7
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
See Note 12 for a description
of the fair value hierarchy related to the Companys
foreign currency forward contracts.
|
The effect of gains or losses from foreign currency forward
contracts was not material to the Consolidated Statements of
Operations for the years ended December 31, 2010 and 2009.
The estimated net amount of existing gains at December 31,
2010 that is expected to be reclassified into income within the
next 12 months is $9 million.
|
|
15.
|
Accumulated
Other Comprehensive (Loss) Income
|
The changes in the accumulated other comprehensive (loss) income
balances, net of related tax effects are presented in the table
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized
|
|
|
Total
|
|
|
|
|
|
|
Unrealized
|
|
|
gains
|
|
|
accumulated
|
|
|
|
Foreign
|
|
|
gains (losses)
|
|
|
(losses) and
|
|
|
other
|
|
|
|
currency
|
|
|
on hedging
|
|
|
prior service
|
|
|
comprehensive
|
|
|
|
translation
|
|
|
instruments
|
|
|
cost, net
|
|
|
(loss) income
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
260
|
|
|
$
|
(1
|
)
|
|
$
|
(106
|
)
|
|
$
|
153
|
|
Period change
|
|
|
(222
|
)
|
|
|
6
|
|
|
|
(269
|
)
|
|
|
(485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
38
|
|
|
|
5
|
|
|
|
(375
|
)
|
|
|
(332
|
)
|
Period change
|
|
|
117
|
|
|
|
|
|
|
|
49
|
|
|
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
155
|
|
|
|
5
|
|
|
|
(326
|
)
|
|
|
(166
|
)
|
Period change
|
|
|
6
|
|
|
|
5
|
|
|
|
(101
|
)
|
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
161
|
|
|
$
|
10
|
|
|
$
|
(427
|
)
|
|
$
|
(256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-29
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
|
|
16.
|
L-3
Holdings Earnings Per Share
|
A reconciliation of basic and diluted EPS is presented in the
table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions, except per share data)
|
|
|
Reconciliation of net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
966
|
|
|
$
|
911
|
|
|
$
|
929
|
|
Net income attributable to noncontrolling interests
|
|
|
(11
|
)
|
|
|
(10
|
)
|
|
|
(11
|
)
|
Net income allocable to participating securities
|
|
|
(5
|
)
|
|
|
(8
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations allocable to L-3 Holdings
|
|
|
950
|
|
|
|
893
|
|
|
|
909
|
|
Gain on sale of a business, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocable to L-3 Holdings
|
|
$
|
950
|
|
|
$
|
893
|
|
|
$
|
929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share allocable to L-3 Holdings common
shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
114.3
|
|
|
|
116.8
|
|
|
|
121.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
8.31
|
|
|
$
|
7.65
|
|
|
$
|
7.50
|
|
Gain on sale of a business, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8.31
|
|
|
$
|
7.65
|
|
|
$
|
7.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common and potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
114.3
|
|
|
|
116.8
|
|
|
|
121.2
|
|
Assumed exercise of stock options
|
|
|
2.7
|
|
|
|
3.5
|
|
|
|
4.1
|
|
Unvested restricted stock awards
|
|
|
1.3
|
|
|
|
0.4
|
|
|
|
|
|
Employee stock purchase plan contributions
|
|
|
0.5
|
|
|
|
0.4
|
|
|
|
0.4
|
|
Performance unit awards
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
Assumed purchase of common shares for treasury
|
|
|
(3.8
|
)
|
|
|
(3.7
|
)
|
|
|
(3.5
|
)
|
Assumed conversion of the CODES
|
|
|
|
(1)
|
|
|
|
(1)
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common and potential common shares
|
|
|
115.1
|
|
|
|
117.4
|
|
|
|
122.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
8.25
|
|
|
$
|
7.61
|
|
|
$
|
7.43
|
|
Gain on sale of a business, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8.25
|
|
|
$
|
7.61
|
|
|
$
|
7.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
L-3 Holdings CODES had no
impact on diluted EPS for the years ended December 31, 2010
and 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 December 31, 2010 and 2009, the conversion
prices were $98.94 and $100.14, respectively.
|
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 year ended December 31, 2010, 3.0 million for
the year ended December 31, 2009 and 2.3 million for
the year ended December 31, 2008, because they were
anti-dilutive.
Diluted EPS for the year ended December 31, 2008 included
(1) a gain of $0.66 per share for the reversal of a current
liability as a result of a June 27, 2008 decision by the
U.S. Court of Appeals which vacated an adverse 2006 jury
verdict and related accrued interest, (2) a gain of $0.06
per share for the sale of a product line (see Note 4), and
(3) a non-cash impairment charge of $0.14 per share related
to a write-down of capitalized software development costs
associated with a general aviation product.
F-30
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
Income before income taxes is summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Domestic
|
|
$
|
1,258
|
|
|
$
|
1,210
|
|
|
$
|
1,272
|
|
Foreign
|
|
|
226
|
|
|
|
176
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
$
|
1,484
|
|
|
$
|
1,386
|
|
|
$
|
1,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the Companys current and deferred
portions of the provision for income taxes are presented in the
table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Current income tax provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
302
|
|
|
$
|
304
|
|
|
$
|
244
|
|
State and local
|
|
|
53
|
|
|
|
58
|
|
|
|
47
|
|
Foreign
|
|
|
52
|
|
|
|
39
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
407
|
|
|
|
401
|
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
84
|
|
|
|
60
|
|
|
|
137
|
|
State and local
|
|
|
16
|
|
|
|
5
|
|
|
|
23
|
|
Foreign
|
|
|
11
|
|
|
|
9
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
111
|
|
|
|
74
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
518
|
|
|
$
|
475
|
|
|
$
|
494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory federal income tax rate to the
effective income tax rate of the Company is presented in the
table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local income taxes, net of federal income tax benefit
|
|
|
3.0
|
|
|
|
3.1
|
|
|
|
3.1
|
|
Foreign income taxes
|
|
|
(1.0
|
)
|
|
|
(0.5
|
)
|
|
|
(1.1
|
)
|
Manufacturing benefits
|
|
|
(1.4
|
)
|
|
|
(0.8
|
)
|
|
|
(0.9
|
)
|
Research and experimentation and other tax credits
|
|
|
(1.0
|
)
|
|
|
(1.3
|
)
|
|
|
(1.0
|
)
|
Resolution of tax contingencies
|
|
|
(0.6
|
)
|
|
|
(1.9
|
)
|
|
|
(1.2
|
)
|
Other, net
|
|
|
0.9
|
|
|
|
0.7
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
34.9
|
%
|
|
|
34.3
|
%
|
|
|
34.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
The significant components of the Companys net deferred
tax assets and liabilities are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Inventoried costs
|
|
$
|
24
|
|
|
$
|
12
|
|
Compensation and benefits
|
|
|
104
|
|
|
|
137
|
|
Pension and postretirement benefits
|
|
|
337
|
|
|
|
290
|
|
Loss carryforwards
|
|
|
14
|
|
|
|
21
|
|
Tax credit carryforwards
|
|
|
8
|
|
|
|
14
|
|
Other
|
|
|
113
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
600
|
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
597
|
|
|
|
603
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Goodwill and other intangible assets
|
|
$
|
606
|
|
|
$
|
538
|
|
Income recognition on contracts in process
|
|
|
97
|
|
|
|
17
|
|
Property, plant and equipment
|
|
|
66
|
|
|
|
58
|
|
Other
|
|
|
22
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
791
|
|
|
|
628
|
|
|
|
|
|
|
|
|
|
|
Total net deferred tax liabilities
|
|
$
|
(194
|
)
|
|
$
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
The following table presents the classification of the
Companys deferred tax assets and liabilities.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Current deferred tax assets
|
|
$
|
114
|
|
|
$
|
247
|
|
Non-current deferred tax liabilities
|
|
|
(308
|
)
|
|
|
(272
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax liabilities
|
|
$
|
(194
|
)
|
|
$
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, the Company had approximately
$105 million of state net operating losses that will
expire, if unused, between 2011 and 2030 and $29 million of
foreign net operating losses that will expire beginning in 2025.
The Company also has $8 million of tax credit carryforwards
related to state and foreign research and experimentation
credits and investment tax credits that will expire, if unused,
beginning in 2012. The Company believes that it will generate
sufficient taxable income, of the appropriate character, to
utilize $99 million of the state net operating losses,
$21 million of the foreign net operating losses and all the
state and foreign credit carryforwards before they expire.
As of December 31, 2010, the total amount of unrecognized
tax benefits was $237 million, $148 million of which
would reduce the effective income tax rate, if recognized. A
reconciliation of the change in unrecognized income tax
benefits, excluding potential interest and penalties, is
presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Balance at January 1
|
|
$
|
219
|
|
|
$
|
171
|
|
|
$
|
253
|
|
Additions for tax positions related to the current year
|
|
|
8
|
|
|
|
17
|
|
|
|
10
|
|
Additions for tax positions related to prior years
|
|
|
73
|
|
|
|
64
|
|
|
|
14
|
|
Reductions for tax positions related to prior years
|
|
|
(63
|
)
|
|
|
|
|
|
|
(87
|
)
|
Reductions for tax positions related to settlements with taxing
authorities
|
|
|
|
|
|
|
(2
|
)
|
|
|
(19
|
)
|
Reduction for tax positions related to prior years as a result
of a lapse of statute of limitations
|
|
|
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
237
|
|
|
$
|
219
|
|
|
$
|
171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO 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, 2006 through 2009
is open as of December 31, 2010. 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 December 31, 2010, the
Company anticipates that unrecognized tax benefits will decrease
by approximately $21 million over the next 12 months.
In 2009, the statute of limitations for the 2004 and 2005
U.S. Federal income tax returns of the Company, certain
foreign income tax returns and certain returns of its acquired
subsidiaries expired. As a result, the Company reduced its
income tax provision by $31 million for the reversal of
previously accrued amounts.
In December 2008, the Company reached an agreement with the IRS
relating to the audit of its 2004 and 2005 U.S. Federal
income tax returns. The Company also settled numerous state and
local income tax audits during 2008. As a result of these
settlements, the Company reduced its provision for income tax by
approximately $27 million in 2008 for the reversal of
previously accrued amounts, including interest.
As of December 31, 2010 and 2009, current and non-current
income taxes payable include accrued potential interest of
$22 million ($13 million after income taxes) and
$23 million ($14 million after income taxes),
respectively, and potential penalties of $13 million and
$9 million, respectively. With respect to the interest
related items, the Companys income tax expense included a
benefit of $1 million and $2 million for the years
ended December 31, 2010 and 2008, respectively, and an
expense of $3 million for the year ended December 31,
2009.
At December 31, 2010, the Company has not provided deferred
U.S. income taxes and foreign withholding taxes for
$132 million of undistributed earnings by our
non-U.S. subsidiaries as such earnings are intended to be
reinvested indefinitely. Quantification of additional taxes that
may be payable on distribution is not practicable.
|
|
18.
|
Stock-Based
Compensation
|
Stock-based Compensation Plans.
Effective
April 29, 2008, the Company adopted the 2008 Long Term
Performance Plan (2008 LTPP) and the 2008 Directors Stock
Incentive Plan (2008 DSIP). As a result, no subsequent awards in
respect of shares of L-3 Holdings common stock have been or will
be issued under the Companys 1997 Stock Option Plan, the
1998 Directors Stock Option Plan and the 1999 Long Term
Performance Plan (Prior Plans).
Awards under the 2008 LTPP may be granted to any officer or
employee of the Company or any of its subsidiaries, or to any
other individual who provides services to or on behalf of the
Company or any of its subsidiaries. Awards under the 2008 LTPP
may be in the form of stock options, stock appreciation rights,
restricted stock and other stock-based awards (including
restricted stock units and performance units).
Under the terms of the 2008 LTPP, (i) the maximum number of
shares of L-3 Holdings common stock that may be issued
pursuant to incentive stock option awards (i.e.,
stock options granted in accordance with Section 422 of the
U.S. Internal Revenue Code of 1986, as amended) is 3,000,000,
(ii) the maximum number of shares of L-3 Holdings
common stock that may be issued (or paid in cash by reference to
such shares) pursuant to all awards granted during a calendar
year to any individual participant is 500,000 and (iv) the
maximum number of shares of L-3 Holdings common stock that
may be issued (or paid in cash by reference to such shares) to
any participant over the life of the 2008 LTPP with respect to
performance-based awards may not exceed 5% of L-3 Holdings
total outstanding shares of common stock.
On April 27, 2010, the stockholders of L-3 Holdings
approved an amendment to the 2008 LTPP that increased the number
of shares authorized for issuance under the 2008 LTPP to
approximately 12.2 million shares, except that each
F-33
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
share of L-3 Holdings common stock issued under a full
value award (i.e., awards other than stock options or
stock appreciation rights) granted on or after March 1,
2010 will be counted as 2.6 shares for purposes of this
share limit. At December 31, 2010, 8.4 million shares
of L-3 Holdings common stock remained available for future
awards under the 2008 LTPP.
Awards under the 2008 DSIP may be granted only to non-employee
directors of the Company. Awards under the 2008 DSIP may be in
the form of stock options, restricted stock, restricted stock
units and minimum ownership stock. At December 31, 2010,
the number of shares of L-3 Holdings common stock
authorized for grant under the 2008 DSIP was 300,000, of which,
272,218 shares were still available for awards. The 2008 LTPP
and the 2008 DSIP are collectively referred to as the 2008 Plans.
To date, awards under the 2008 Plans and Prior Plans
(collectively, the Plans) have been in the form of L-3
Holdings restricted stock, restricted stock units,
performance units and options to purchase L-3 Holdings
common stock. The Company adopted the Plans in order to provide
incentives to directors, officers, employees and other
individuals providing services to or on behalf of the Company
and its subsidiaries. The Company believes that its stock-based
compensation awards encourage high levels of performance by
individuals who contribute to the success of the Company and
enable the Company to attract, retain and reward talented and
experienced individuals. This is accomplished by providing
eligible individuals with an opportunity to obtain or increase a
proprietary interest in the Company
and/or
by
providing eligible individuals with additional incentives to
join or remain with the Company. The Plans serve to better align
the interests of management and its employees with those of the
Companys shareholders.
Stock Options.
The exercise price of stock options
that may be granted under the 2008 Plans may not be less than
the fair market value of L-3 Holdings common stock on the
date of grant. Options expire after 10 years from the date
of grant and vest ratably over a three year period on the annual
anniversary of the date of grant. All unvested options are
subject to forfeiture upon termination of employment (subject to
customary exceptions for death or disability). Compensation
expense for stock option awards was $12 million
($8 million after income taxes) for the year ended
December 31, 2010, $16 million ($10 million after
income taxes) for the year ended December 31, 2009, and
$17 million ($10 million after income taxes) for the
year ended December 31, 2008. All of the stock option
awards issued under the Plans are non-qualified stock options
for U.S. income tax regulations. The table below presents a
summary of the Companys stock option activity as of
December 31, 2010 and changes during the year then ended.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
|
(in thousands)
|
|
|
|
|
|
(in Years)
|
|
|
(in millions)
|
|
|
Number of shares under option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2010
|
|
|
5,233.9
|
|
|
$
|
73.68
|
|
|
|
6.3
|
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
555.4
|
|
|
|
90.23
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(1,010.2
|
)
|
|
|
59.03
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(217.0
|
)
|
|
|
87.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
4,562.1
|
|
|
$
|
78.27
|
|
|
|
6.2
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31,
2010
(1)
|
|
|
4,517.0
|
|
|
$
|
78.20
|
|
|
|
6.2
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
|
3,369.1
|
|
|
$
|
75.64
|
|
|
|
5.2
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents outstanding options
reduced by expected forfeitures for options not fully vested.
|
The weighted average grant date fair value of each stock option
awarded was $18.41, $14.67, and $18.65 for the years ended
December 31, 2010, 2009 and 2008, respectively. The
aggregate intrinsic value, disclosed in the table above,
F-34
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
represents the difference between L-3 Holdings closing
stock price on the last trading day for the period, and the
exercise price, multiplied by the number of
in-the-money
stock options.
The total intrinsic value of stock options exercised, based on
the difference between the L-3 Holdings stock price at the time
of exercise and the related exercise price, was
$30 million, $12 million, and $35 million for the
years ended December 31, 2010, 2009 and 2008, respectively.
At December 31, 2010, unrecognized compensation costs
related to stock options was $15 million ($9 million
after income taxes), which is expected to be recognized over a
weighted average remaining period of 1.7 years.
The actual income tax benefit realized related to compensation
deductions arising from the exercise of stock options by the
Companys employees totaled $10 million,
$5 million and $13 million for the years ended
December 31, 2010, 2009 and 2008, respectively.
Stock Option Fair Value Estimation Assumptions.
The
Company estimates the fair value of its stock options at the
date of grant using the Black-Scholes option-pricing valuation
model. The Companys valuation model is affected by L-3
Holdings stock price as well as weighted average
assumptions for a number of subjective variables described below.
|
|
|
|
|
Expected Holding Period.
The expected holding period
of stock options granted represents the period of time that
stock options granted are expected to be outstanding until they
are exercised. The Company uses historical stock option exercise
data to estimate the expected holding period.
|
|
|
|
Expected Volatility.
Expected volatility is based on
L-3 Holdings historical share price volatility matching
the expected holding period.
|
|
|
|
Expected Dividend Yield.
Expected dividend yield is
based on L-3 Holdings anticipated dividend payments and
historical pattern of dividend increases over the expected
holding period.
|
|
|
|
Risk-Free Interest Rate.
The risk-free interest
rates for stock options are based on U.S. Treasuries for a
maturity matching the expected holding period.
|
Changes in assumptions can materially impact the estimated fair
value of stock options. The weighted average assumptions used in
the valuation model are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Grants
|
|
|
Grants
|
|
|
Grants
|
|
|
Expected holding period (in years)
|
|
|
4.7
|
|
|
|
4.6
|
|
|
|
4.7
|
|
Expected volatility
|
|
|
26.2
|
%
|
|
|
26.2
|
%
|
|
|
20.2
|
%
|
Expected dividend yield
|
|
|
2.2
|
%
|
|
|
2.4
|
%
|
|
|
1.6
|
%
|
Risk-free interest rate
|
|
|
2.3
|
%
|
|
|
2.5
|
%
|
|
|
3.2
|
%
|
Restricted Stock Units.
The Company awards
restricted stock units that automatically convert into shares of
L-3 Holdings common stock upon vesting (in the case of
awards granted to employees) or upon the date on which the
recipient ceases to be a director (in the case of awards granted
to directors). These awards are subject to forfeiture until
certain restrictions have lapsed, including a three year cliff
vesting period for employees and a one year cliff vesting period
for directors, in each case starting on the date of grant. The
weighted average grant date fair value of each restricted stock
units awarded was $90.23, $74.02 and $98.18 for the years ended
December 31, 2010, 2009 and 2008, respectively. The grant
date fair value of the restricted stock unit awards is based on
L-3 Holdings closing stock price at the date of grant, and
will generally be recognized as compensation expense on a
straight-line basis over the vesting period. However, for
employees who attain retirement eligibility status prior to the
end of the three year cliff vesting period, and who have
provided at least one year of service after the date of grant,
compensation expense is recognized over the shorter period from
the date of grant to the retirement eligibility date. Retirement
eligible employees are those employees that have
F-35
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
attained the age of 65 and have completed at least five years of
service (which service must be continuous through the date of
termination except for a single break in service that does not
exceed one year in length).
Compensation expense for all restricted stock unit awards was
$52 million ($32 million after income taxes) for the
year ended December 31, 2010, $42 million
($25 million after income taxes) for the year ended
December 31, 2009, and $32 million ($19 million
after income taxes) for the year ended December 31, 2008.
The table below presents a summary of the Companys
nonvested restricted stock unit awards as of December 31,
2010 and changes during the year then ended.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
|
|
|
|
Nonvested balance at January 1, 2010
|
|
|
1,707.2
|
|
|
$
|
86.30
|
|
Granted
|
|
|
603.4
|
|
|
|
90.23
|
|
Vested
|
|
|
(418.5
|
)
|
|
|
95.33
|
|
Forfeited
|
|
|
(158.4
|
)
|
|
|
87.17
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance at December 31, 2010
|
|
|
1,733.7
|
|
|
$
|
85.41
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, total unrecognized compensation
costs related to nonvested restricted stock unit awards were
$62 million ($38 million after income taxes) and are
expected to be recognized over a weighted average remaining
period of 1.8 years. The total fair value of restricted
stock unit awards vested during the years ended
December 31, 2010, 2009 and 2008 as of their vesting dates
was $31 million, $23 million, and $20 million,
respectively.
Performance Units.
The Companys Long-Term
Incentive Program (LTIP) is a multi-year performance program
under which each participant receives a target award of
performance units, with each unit having a value at the time of
grant equal to a share of L-3 Holdings common stock. The
number of units ultimately earned can range from zero to 200% of
the target award. The final value of each award will vary based
upon (1) the level of performance achieved by the Company
over the associated performance period in relation to
pre-determined performance goals established by the Compensation
Committee of the Board of Directors of L-3 Holdings and
(2) the closing price of L-3 Holdings common stock at
the end of the performance period. Units issued under the
program are payable in either cash or shares of
L-3 Holdings
common stock as determined at the time of grant by the
Compensation Committee.
In 2010, 2009, and 2008, the Company awarded performance units
with a weighted average grant date fair value per unit of
$105.14, $87.18, and $103.10, respectively. Of these units,
(1) the final value of half of the units is contingent upon
the compound annual growth rate in L-3s diluted earnings
per share (the EPS Element) and (2) the final value of half
of the units is contingent upon L-3s total stockholder
return relative to a peer group of companies (the TSR Element).
The performance period for units awarded during 2010 is for the
three-year period ending December 31, 2012. The performance
period for units awarded during 2009 and 2008 begins on the
first day of the Companys fiscal third quarter of the
applicable grant year and ends on the December 31 that is two
and a half years later. Units related to the EPS Element are
payable in shares of L-3 Holdings common stock, while
units related to the TSR Element are payable in cash based on
the closing price of L-3 Holdings common stock at the end
of the performance period. The total compensation expense
recognized for all LTIP awards for the years ended
December 31, 2010, 2009, and 2008 was $3 million
($2 million after income taxes), $9 million
($5 million after income taxes), and $4 million
($2 million after income taxes), respectively. As of
December 31, 2010, total unrecognized compensation costs
related to the performance units were $4 million
($3 million after income taxes) and are expected to be
recognized over a weighted average remaining period of
1.6 years.
F-36
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
The table below presents a summary of the Companys
performance unit awards based on expected performance as of
December 31, 2010 and changes during the year then ended.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable in Cash (TSR)
|
|
|
Payable in Shares (EPS)
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Units
|
|
|
Fair Value
|
|
|
Units
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Outstanding at January 1, 2010
|
|
|
91.0
|
|
|
$
|
104.44
|
|
|
|
82.9
|
|
|
$
|
85.51
|
|
Granted
|
|
|
35.0
|
|
|
|
119.96
|
|
|
|
35.0
|
|
|
|
90.32
|
|
Increase (decrease) due to expected performance
|
|
|
(115.7
|
)
|
|
|
108.24
|
|
|
|
24.0
|
|
|
|
82.23
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
(51.7
|
)
|
|
|
94.02
|
|
Forfeited
|
|
|
(2.5
|
)
|
|
|
103.29
|
|
|
|
(2.1
|
)
|
|
|
82.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
7.8
|
|
|
$
|
117.13
|
|
|
|
88.1
|
|
|
$
|
80.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The performance period for the units awarded in 2008 ended on
December 31, 2010. Based on the EPS element and TSR element
achieved during the performance period, total performance units
of 51,692 having a fair market value of $4 million as of
their vesting date were earned by the LTIP participants on
December 31, 2010.
Performance Units Fair Value Assumptions.
The TSR
element is initially measured at fair value and subsequently
remeasured each reporting period using a Monte Carlo valuation
model that incorporates current assumptions, including L-3
Holdings stock price and the variables described below.
|
|
|
|
|
Expected Volatility.
Expected volatility is based on
L-3 Holdings historical share price volatility matching
the remaining measurement period.
|
|
|
|
Expected Dividend Yield.
Expected dividend yield is
based on L-3 Holdings anticipated dividend payments and
historical pattern of dividend increases over the remaining
measurement period.
|
|
|
|
Risk-Free Interest Rate.
Risk-free interest rates
for the performance units are based on U.S. Treasuries for
a maturity matching the remaining measurement period.
|
Changes in assumptions can materially impact the estimated fair
value of the TSR element from period to period. The weighted
average assumptions used in the valuation model as of
December 31, 2010 are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Grants
|
|
|
Grants
|
|
|
Expected volatility
|
|
|
24.2
|
%
|
|
|
31.6
|
%
|
Expected dividend yield
|
|
|
2.3
|
%
|
|
|
1.6
|
%
|
Risk-free interest rate
|
|
|
0.6
|
%
|
|
|
1.1
|
%
|
Employee Stock Purchase Plan.
Effective July 1,
2009, the Company adopted the 2009 Employee Stock Purchase Plan
(2009 ESPP). As a result, no subsequent options to purchase
shares of L-3 Holdings common stock have been or will be
granted under the Companys prior employee stock purchase
plan (2001 ESPP).
The general terms of the 2009 ESPP are substantially identical
to those of the 2001 ESPP. Under the 2009 ESPP, eligible
employees are offered options to purchase shares of L-3
Holdings common stock at the end of each six-month
offering period at 85% of fair market value (or 95% of fair
market value for offering periods beginning on or after
January 1, 2011) based on the average of the highest
and lowest sales prices for the stock on the purchase date.
Eligible employees generally include all employees of the
Company and each 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. Share purchases are funded
through payroll deductions of up to 10% of an employees
eligible compensation for each payroll period, or $21,250 each
calendar year.
F-37
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
As of December 31, 2010, 6.4 million shares were
available for future issuance under the 2009 ESPP (i.e.,
excluding the effect of shares issued in January 2011 as
described below). In July 2010, the Company issued
0.5 million shares under the 2009 ESPP at an average price
of $60.90 per share, which covered employee contributions for
the six months ended June 30, 2010. In January 2011, the
Company issued 0.6 million shares under the 2009 ESPP at an
average price of $60.01 per share, which covered employee
contributions for the six months ended December 31, 2010.
For both years ended December 31, 2010 and 2009, the
Company recognized $12 million ($10 million after
income taxes) in compensation expense related to the discount
for L-3 Holdings common stock purchases under the 2001
ESPP and 2009 ESPP.
|
|
19.
|
Commitments
and Contingencies
|
Non-Cancelable
Operating Leases
The Company leases certain facilities and equipment under
agreements expiring at various dates through 2028. Certain
leases contain renewal options or escalation clauses providing
for increased rental payments based upon maintenance, utility
and tax increases. No lease agreement imposes a restriction on
the Companys ability to pay dividends, engage in debt or
equity financing transactions, or enter into further lease
agreements.
The following table presents future minimum payments under
non-cancelable operating leases with initial or remaining terms
in excess of one year at December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
Equipment
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
2011
|
|
$
|
169
|
|
|
$
|
20
|
|
|
$
|
189
|
|
2012
|
|
|
119
|
|
|
|
17
|
|
|
|
136
|
|
2013
|
|
|
98
|
|
|
|
10
|
|
|
|
108
|
|
2014
|
|
|
83
|
|
|
|
7
|
|
|
|
90
|
|
2015
|
|
|
57
|
|
|
|
6
|
|
|
|
63
|
|
Thereafter
|
|
|
128
|
|
|
|
16
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum payments required
|
|
|
654
|
|
|
|
76
|
|
|
|
730
|
|
Less: Sublease rentals under non-cancelable leases
|
|
|
16
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net minimum payments required
|
|
$
|
638
|
|
|
$
|
76
|
|
|
$
|
714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense, net of sublease income, was $176 million for
2010, $170 million for 2009, and $166 million for 2008.
Letters
of Credit
The Company enters into standby letters of credit with financial
institutions covering performance and financial guarantees
pursuant to contractual arrangements with certain customers. The
Company had total outstanding letters of credit aggregating to
$394 million, of which $17 million reduces the amount
of available borrowings to the Company under the Revolving
Credit Facility at December 31, 2010, and
$360 million, of which, $32 million reduced the amount
of available borrowings under the Revolving Credit Facility at
December 31, 2009. These letters of credit may be drawn
upon in the event of the Companys nonperformance.
Guarantees
The Company, from time to time, enters into contractual
guarantees that arise in connection with its business
acquisitions, dispositions, and other contractual arrangements
in the normal course of business.
In connection with the Companys acquisition of L-3
Communications MAPPS Inc. in 2005, the Company acquired a 47.5%
interest in FAST Holdings Limited (FAST), a joint venture
corporation. FAST has been contracted to provide and operate
training facilities and equipment for the United Kingdoms
Astute Class Submarine Training Service program.
F-38
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
The Company has guaranteed 50% of certain bank debt borrowed by
FAST to finance its activities on this program. At
December 31, 2010, the Companys guarantee
amounted to $44 million. The Company expects to be released
from the guarantee upon customer acceptance of all contract
deliverables, which is expected to occur no later than the
second quarter of 2011.
The Company has two existing real estate lease agreements, which
include residual guarantee amounts, expiring on August 31,
2011 and are accounted for as operating leases. On or before the
lease expiration date, the Company can exercise options under
the lease agreements to either renew the leases, purchase both
properties for $28 million, or sell both properties on
behalf of the lessor (the Sale Option). If the
Company elects the Sale Option, the Company must pay the lessor
a residual guarantee amount of $23 million for both
properties, on or before the lease expiration date. In addition,
at the time both properties are sold, the Company must pay the
lessor a supplemental rent payment equal to the gross sales
proceeds in excess of the residual guarantee, provided that such
amount shall not exceed $5 million. For these real estate
lease agreements, if the gross sales proceeds are less than the
sum of the residual guarantee amount and the supplemental rent
payment, the Company is required to pay a supplemental rent
payment to the extent the reduction in the fair value of the
properties is demonstrated by an independent appraisal to have
been caused by the Companys failure to properly maintain
the properties. The aggregate residual guarantee amounts equal
$23 million and are included in the future minimum payments
under non-cancelable real estate operating lease payments
relating to the expiration dates of such leases.
The Company has a contract to provide and operate for the
U.S. Air Force (USAF) a full-service training facility,
including simulator systems adjacent to a USAF base in Oklahoma.
The Company acted as the construction agent on behalf of the
third-party owner-lessors for procurement and construction for
the simulator systems, which were completed and delivered in
August 2002. The Company, as lessee, entered into operating
lease agreements for a term of 15 years for the simulator
systems with the owner-lessors. At the end of the lease term,
the Company may elect to purchase the simulator systems at fair
market value, which can be no less than $7 million and no
greater than $21 million. If the Company does not elect to
purchase the simulator systems on the date of expiration
(July 15, 2017), the Company shall pay to the lessor, as
additional rent, $3 million and return the simulator
systems to the lessors.
Environmental
Matters
Management continually assesses the Companys obligations
with respect to applicable environmental protection laws,
including those obligations assumed in connection with certain
business acquisitions. While it is difficult to determine the
timing and ultimate cost to be incurred by the Company in order
to comply with these laws, based upon available internal and
external assessments, with respect to those environmental loss
contingencies of which management is aware, the Company believes
that, after considering amounts accrued, there are no
environmental loss contingencies that, individually or in the
aggregate, would be material to the Companys consolidated
results of operations. The Company accrues for these
contingencies when it is probable that a liability has been
incurred and the amount of the liability can be reasonably
estimated.
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, including those specified below, from which
civil, criminal or administrative proceedings have or could
result and give rise to fines, penalties, compensatory and
treble damages, restitution
and/or
forfeitures. The Company does not currently anticipate that any
of these investigations will have a material adverse effect,
individually or in the aggregate, on its consolidated financial
position, results of operations or cash flows. However, under
U.S. Government regulations, an indictment of the Company
by a federal grand jury, or an
F-39
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
administrative finding against the Company as to its present
responsibility to be a U.S. Government contractor or
subcontractor, could result in the Company being suspended for a
period of time from eligibility for awards of new government
contracts or task orders or in a loss of export privileges. A
conviction, or an administrative finding against the Company
that satisfies the requisite level of seriousness, could result
in debarment from contracting with the federal government for a
specified term. In addition, all of the 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 is also subject to litigation, 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 the accounting standard for contingencies,
the Company records a liability when management believes that it
is both probable that a liability has been incurred and the
Company can reasonably estimate the amount of the loss.
Generally, the loss is recorded at the amount the Company
expects to resolve the liability. The estimated amounts of
liabilities recorded for pending and threatened litigation are
disclosed in Note 8. Amounts recoverable from insurance
contracts or third parties are recorded as assets when deemed
probable. At December 31, 2010, 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 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 do not
constitute reasonable estimates of loss. Although the Company
believes that it has valid defenses with respect to legal
matters and investigations pending against it, the results of
litigation can be difficult to predict, including those
involving jury trials. Accordingly, our current judgment as to
the likelihood of our loss (or our current estimate as to the
potential range of loss, if applicable) with respect to any
particular litigation matter may turn out to be wrong.
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 or other contingencies.
Kalitta Air.
On January 31, 1997, a predecessor
of Kalitta Air filed a lawsuit in the U.S. District Court
for the Northern District of California (the trial court)
asserting, among other things, negligence and negligent
misrepresentation against Central Texas Airborne Systems, Inc.
(CTAS), a predecessor to L-3 Integrated Systems (L-3 IS), in
connection with work performed by a predecessor to CTAS to
convert two Boeing 747 aircraft from passenger configuration to
cargo freighters. The work was performed using Supplemental Type
Certificates (STCs) issued in 1988 by the Federal Aviation
Administration (FAA). In 1996, following completion of the work,
the FAA issued an airworthiness directive with respect to the
STCs that effectively grounded the aircraft. On August 11,
2000, the trial court granted CTAS motion for summary
judgment as to negligence, dismissing that claim. In January
2001, after a ruling by the trial court that excluded certain
evidence from trial, a jury rendered a unanimous defense verdict
in favor of CTAS on the negligent misrepresentation claim. On
December 10, 2002, the U.S. Court of Appeals for the
Ninth Circuit (the Court of Appeals) reversed the trial
courts decisions as to summary judgment and the exclusion
of evidence, and remanded
F-40
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
the case for a new trial on both the negligence and negligent
misrepresentation claims. The retrial ended on March 2,
2005 with a deadlocked jury and mistrial. On July 22, 2005,
the trial court granted CTAS motion for judgment as a
matter of law as to negligence, dismissing that claim, and
denied CTAS motion for judgment as a matter of law as to
negligent misrepresentation. On October 8, 2008, the Court
of Appeals reversed the trial courts dismissal of the
negligence claim and affirmed the trial courts ruling as
to the negligent misrepresentation claim. As a result, the case
was remanded to the trial court to reconsider the negligence
claim and for further proceedings on the negligent
misrepresentation claim. The trial court held a new hearing on
CTAS motion to dismiss the negligence claim on
April 30, 2009, after which it determined to take the
matter under advisement. The case is currently scheduled to go
to a third jury trial on October 31, 2011. The parties have
participated in court-ordered mediations from time to time, and
are expected to participate in future court-ordered mediations
prior to trial, but to date such mediations have not resulted in
a mutually acceptable resolution of this matter. In connection
with these mediations, Kalitta Air has claimed it may seek
damages at the third trial of between $430 million and
$900 million, including between $200 million and
$240 million of pre-judgment interest. CTAS insurance
carrier has accepted defense of this 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 a finding against L-3. The Company believes that
it has meritorious defenses to the claims asserted and the
damages sought and intends to defend itself vigorously.
Titan Government Investigation.
In October 2002, The
Titan Corporation (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. The
Company acquired Titan in July 2005. The Company was recently
advised by the DoJ that it has closed this matter without taking
action against the Company.
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
and has been asked to facilitate employee interviews. The
Company is cooperating fully with the U.S. Government. The
Company believes that it is entitled to indemnification for any
course of defense related to this matter out of, and has made a
claim against, a $15 million escrow fund established in
connection with the Companys acquisition of CyTerra in
March 2006.
Bashkirian Airways.
On July 1, 2004, lawsuits
were filed on behalf of the estates of 31 Russian children in
the state courts of Washington, Arizona, California, Florida,
New York and New Jersey against Honeywell, Honeywell TCAS,
Thales USA, Thales France, the Company and Aviation
Communications & Surveillance Systems (ACSS), which is
a joint venture of L-3 and Thales. The suits relate to the crash
over southern Germany of Bashkirian Airways Tupelov TU 154M
aircraft and a DHL Boeing 757 cargo aircraft. On-board the
Tupelov aircraft were 9 crew members and 60 passengers,
including 45 children. The Boeing aircraft carried a crew of
two. Both aircraft were equipped with Honeywell/ACSS Model 2000,
Change 7 Traffic Collision and Avoidance Systems (TCAS). Sensing
the other aircraft, the on-board DHL TCAS instructed the DHL
pilot to descend, and the Tupelov on-board TCAS instructed the
Tupelov pilot to climb. However, the Swiss air traffic
controller ordered the Tupelov pilot to descend. The Tupelov
pilot disregarded the on-board TCAS and put the Tupelov aircraft
into a descent striking the DHL aircraft in midair at
approximately 35,000 feet. All crew and passengers of both
planes were lost. Investigations by the National Transportation
Safety Board after the crash revealed that both TCAS units were
performing as designed. The suits allege negligence and strict
product liability based upon the design of the units and the
training provided to resolve conflicting commands and seek
approximately $315 million in damages, including
$150 million in punitive damages. The Companys
insurers have accepted defense of this matter and have retained
counsel. The matters were consolidated in the U.S. District
Court for the District of 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. On March 9, 2010, the court
ruled in favor of the plaintiffs and entered judgment against
ACSS in the amount of approximately $6.7 million, all of
which represented compensatory damages. The Company believes
that the verdict and the damages awarded are inconsistent with
the law and evidence
F-41
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
presented. Accordingly, ACSS filed an appeal of this ruling on
April 27, 2010. The plaintiffs also filed an appeal of this
ruling on the same date.
Gol Airlines.
A complaint was filed on
November 7, 2006 in the U.S. District Court for the
Eastern District of New York against ExcelAire, Joseph
Lepore, Jan Paul Paladino, and Honeywell. On October 23,
2007, an amended complaint was filed to include Lockheed,
Raytheon, 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 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. On July 2, 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
December 2, 2009, the U.S. Court of Appeals for the
Second Circuit upheld this decision. 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.
|
|
20.
|
Pensions
and Other Employee Benefits
|
The Company maintains multiple pension plans, both contributory
and non-contributory, covering employees at certain locations.
Eligibility for participation in these plans varies and benefits
are generally based on the participants compensation
and/or
years
of service. The Companys funding policy is generally to
contribute in accordance with cost accounting standards that
affect government contractors, subject to the Internal Revenue
Code and regulations thereon. Plan assets are invested primarily
in listed stocks, mutual funds, corporate bonds,
U.S. Government obligations and U.S. Government agency
obligations.
The Company also provides postretirement medical and life
insurance benefits for retired employees and dependents at
certain locations. Participants are eligible for these benefits
when they retire from active service and meet the eligibility
requirements for the Companys pension plans. These
benefits are funded primarily on a pay-as-you-go basis with the
retiree generally paying a portion of the cost through
contributions, deductibles and coinsurance provisions.
In accordance with accounting standards for employee pension and
postretirement benefits, the Company recognizes the unfunded
status of its pension and postretirement benefit plans in the
consolidated financial statements and measures its pension and
postretirement benefit plan assets and benefit obligations as of
December 31.
F-42
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
The following table summarizes changes in the benefit
obligations, the plan assets and funded status for all of the
Companys pension and postretirement benefit plans, as well
as the aggregate balance sheet impact.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
Pension Plans
|
|
|
Benefit Plans
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at the beginning of the year
|
|
$
|
1,964
|
|
|
$
|
1,722
|
|
|
$
|
188
|
|
|
$
|
162
|
|
Service cost
|
|
|
99
|
|
|
|
93
|
|
|
|
4
|
|
|
|
4
|
|
Interest cost
|
|
|
122
|
|
|
|
112
|
|
|
|
11
|
|
|
|
11
|
|
Plan participants contributions
|
|
|
3
|
|
|
|
3
|
|
|
|
4
|
|
|
|
4
|
|
Amendments
|
|
|
(33
|
)
|
|
|
7
|
|
|
|
|
|
|
|
(4
|
)
|
Actuarial loss
|
|
|
284
|
|
|
|
68
|
|
|
|
9
|
|
|
|
21
|
|
Foreign currency exchange rate changes
|
|
|
9
|
|
|
|
31
|
|
|
|
2
|
|
|
|
5
|
|
Curtailments, settlements and special termination benefits
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
Benefits paid
|
|
|
(83
|
)
|
|
|
(72
|
)
|
|
|
(14
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at the end of the year
|
|
$
|
2,365
|
|
|
$
|
1,964
|
|
|
$
|
203
|
|
|
$
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at the beginning of the year
|
|
$
|
1,304
|
|
|
$
|
1,064
|
|
|
$
|
33
|
|
|
$
|
27
|
|
Actual return on plan assets
|
|
|
163
|
|
|
|
212
|
|
|
|
3
|
|
|
|
5
|
|
Employer contributions
|
|
|
186
|
|
|
|
67
|
|
|
|
13
|
|
|
|
12
|
|
Plan participants contributions
|
|
|
3
|
|
|
|
3
|
|
|
|
4
|
|
|
|
4
|
|
Foreign currency exchange rate changes
|
|
|
12
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(83
|
)
|
|
|
(72
|
)
|
|
|
(14
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at the end of the year
|
|
$
|
1,585
|
|
|
$
|
1,304
|
|
|
$
|
39
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at the end of the year
|
|
$
|
(780
|
)
|
|
$
|
(660
|
)
|
|
$
|
(164
|
)
|
|
$
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheets consist
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
$
|
9
|
|
|
$
|
11
|
|
|
$
|
|
|
|
$
|
|
|
Current liabilities
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Non-current liabilities
|
|
|
(787
|
)
|
|
|
(670
|
)
|
|
|
(156
|
)
|
|
|
(147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(780
|
)
|
|
$
|
(660
|
)
|
|
$
|
(164
|
)
|
|
$
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below summarizes the net loss and prior service cost
balances at December 31, in the accumulated other
comprehensive loss account, before related tax effects, for all
of the Companys pension and postretirement benefit plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
Pension Plans
|
|
|
Benefit Plans
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Net loss
|
|
$
|
712
|
|
|
$
|
518
|
|
|
$
|
16
|
|
|
$
|
9
|
|
Prior service (credit) cost
|
|
|
(12
|
)
|
|
|
24
|
|
|
|
(11
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount recognized
|
|
$
|
700
|
|
|
$
|
542
|
|
|
$
|
5
|
|
|
$
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate accumulated benefit obligation (ABO) for all of
the Companys pension plans was $2,004 million at
December 31, 2010 and $1,659 million at
December 31, 2009. The table below presents information for
the pension plans with an ABO in excess of the fair value of
plan assets at December 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
Projected benefit obligation
|
|
$
|
2,216
|
|
|
$
|
1,863
|
|
Accumulated benefit obligation
|
|
|
1,875
|
|
|
|
1,566
|
|
Fair value of plan assets
|
|
|
1,441
|
|
|
|
1,196
|
|
F-43
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
The table below summarizes the weighted average assumptions used
to determine the benefit obligations for the Companys
pension and postretirement plans disclosed at December 31,
2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
Pension Plans
|
|
|
Benefit Plans
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.57
|
%
(1)
|
|
|
6.26
|
%
(1)
|
|
|
5.40
|
%
(2)
|
|
|
5.94
|
%
(2)
|
Rate of compensation increase
|
|
|
4.50
|
%
|
|
|
4.50
|
%
|
|
|
4.50
|
%
|
|
|
4.50
|
%
|
|
|
|
(1)
|
|
The weighted average discount rate
assumptions used at December 31, 2010 and 2009 were
comprised of separate assumptions determined by country of 5.6%
and 6.3% for the U.S. based plans, 5.4% and 6.1% for the
Canadian based plans and 5.4% and 5.8% for the German based
plans.
|
|
(2)
|
|
The weighted average discount rate
assumptions used at December 31, 2010 and 2009 were
comprised of separate assumptions determined by country of 5.4%
and 5.9% for the U.S. based plans and 5.4% and 6.1% for the
Canadian based plans.
|
The following table summarizes the components of net periodic
benefit cost for the Companys pension and postretirement
benefit plans for the years ended December 31, 2010, 2009
and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
Pension Plans
|
|
|
Benefit Plans
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
99
|
|
|
$
|
93
|
|
|
$
|
89
|
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
6
|
|
Interest cost
|
|
|
122
|
|
|
|
112
|
|
|
|
104
|
|
|
|
11
|
|
|
|
11
|
|
|
|
10
|
|
Expected return on plan assets
|
|
|
(112
|
)
|
|
|
(91
|
)
|
|
|
(117
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Amortization of prior service costs (credits)
|
|
|
3
|
|
|
|
4
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Amortization of net loss (gain)
|
|
|
40
|
|
|
|
53
|
|
|
|
7
|
|
|
|
1
|
|
|
|
(3
|
)
|
|
|
(2
|
)
|
Curtailment or settlement loss (gain)
|
|
|
2
|
|
|
|
2
|
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
154
|
|
|
$
|
173
|
|
|
$
|
87
|
|
|
$
|
9
|
|
|
$
|
8
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the other changes in plan assets
and benefit obligations recognized in other comprehensive income
for the Companys pension and postretirement benefit plans
for the year ended December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Postretirement
|
|
|
|
Plans
|
|
|
Benefit Plans
|
|
|
|
(in millions)
|
|
|
Other changes in plan assets and benefit obligations
recognized in other comprehensive income:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
234
|
|
|
$
|
8
|
|
Prior service (credit) cost
|
|
|
(33
|
)
|
|
|
2
|
|
Amortization of net loss
|
|
|
(40
|
)
|
|
|
(1
|
)
|
Amortization of prior service (cost) credit
|
|
|
(3
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income
|
|
|
158
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and other
comprehensive income
|
|
$
|
312
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
F-44
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
The following table summarizes the amounts expected to be
amortized from accumulated other comprehensive (loss) income and
recognized as components of net periodic benefit costs during
2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Postretirement
|
|
|
|
|
|
|
Plans
|
|
|
Benefit Plans
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Net loss
|
|
$
|
54
|
|
|
$
|
1
|
|
|
$
|
55
|
|
Prior service cost (credit)
|
|
|
1
|
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55
|
|
|
$
|
(2
|
)
|
|
$
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below summarizes the weighted average assumptions used
to determine the net periodic benefit cost for the years ended
December 31, 2010, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
Pension Plans
|
|
Benefit Plans
|
|
|
2010
|
|
2009
|
|
2008
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.26
|
%
(1)
|
|
|
6.49
|
%
(1)
|
|
|
6.36
|
%
(1)
|
|
|
5.94
|
%
(3)
|
|
|
6.74
|
%
(3)
|
|
|
6.07
|
%
(3)
|
Expected long-term return on plan assets
|
|
|
8.55
|
%
(2)
|
|
|
8.54
|
%
(2)
|
|
|
8.55
|
%
(2)
|
|
|
6.20
|
%
|
|
|
6.18
|
%
|
|
|
6.36
|
%
|
Rate of compensation increase
|
|
|
4.50
|
%
|
|
|
4.50
|
%
|
|
|
4.50
|
%
|
|
|
4.50
|
%
|
|
|
4.50
|
%
|
|
|
4.50
|
%
|
|
|
|
(1)
|
|
The weighted average discount rate
assumptions used for the years ended December 31, 2010,
2009 and 2008 were comprised of separate assumptions determined
by country of 6.3%, 6.4% and 6.5% for the U.S. based plans,
6.1%, 7.4% and 5.75% for the Canadian based plans and 5.8%,
6.2%, and 5.4% for the German based plans, respectively.
|
|
(2)
|
|
The weighted average expected
long-term return on plan assets assumptions used for the years
ended December 31, 2010, 2009 and 2008 were comprised of
separate assumptions determined by country of 8.75% for the U.S.
based plans and 7.5% for the Canadian based plans.
|
|
(3)
|
|
The weighted average discount rate
assumptions used for the years ended December 31, 2010,
2009 and 2008 were comprised of separate assumptions determined
by country of 5.9%, 6.6% and 6.25% for the U.S. based plans and
6.1%, 7.4% and 5.5% for the Canadian based plans, respectively.
|
The expected long-term return on plan assets assumption
represents the average rate that the Company expects to earn
over the long-term on the assets of the Companys benefit
plans, including those from dividends, interest income and
capital appreciation. The assumption has been determined based
on expectations regarding future long-term rates of return for
the plans investment portfolio, with consideration given
to the allocation of investments by asset class and historical
rates of return for each individual asset class.
The annual increase in cost of benefits (health care cost trend
rate) is assumed to be an average of 9.5% in 2011 and is assumed
to gradually decrease to a rate of 5.0% in 2020 and thereafter.
Assumed health care cost trend rates have a significant effect
on amounts reported for postretirement medical benefit plans. A
one percentage point change in the assumed health care cost
trend rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
1 percentage point
|
|
|
|
Increase
|
|
|
Decrease
|
|
|
|
(in millions)
|
|
|
Effect on total service and interest cost
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
Effect on postretirement benefit obligations
|
|
|
10
|
|
|
|
(9
|
)
|
Plan Assets.
The Companys Benefit Plan
Committee (Committee) has the responsibility to formulate the
investment policies and strategies for the plans assets.
The Committee structures the investment of plan assets to
achieve the following goals: (1) maximize the plans
long-term rate of return on assets for an acceptable level of
risk; and (2) limit the volatility of investment returns
and consequent impact on the plans assets. In the pursuit
of these goals, the Committee has formulated the following
investment policies and objectives: (1) invest assets of
the plans in a manner consistent with
F-45
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
the fiduciary standards of ERISA; (2) preserve the
plans assets; (3) maintain sufficient liquidity to
fund benefit payments and pay plan expenses; (4) evaluate
the performance of investment managers; and (5) achieve, on
average, a minimum total rate of return equal to the established
benchmarks for each asset category.
The Committee retains a professional investment consultant to
advise the Committee and help ensure that the above policies and
strategies are met. The Committee does not actively manage the
day to day operations and selection process of individual
securities and investments, as it retains the professional
services of qualified investment management organizations to
fulfill those tasks. Qualified investment management
organizations are evaluated on several criteria for selection,
with a focus on the investment management organizations
demonstrated capability to achieve results that will meet or
exceed the investment objectives they have been assigned and
conform to the policies established by the Committee. While the
investment management organizations have investment discretion
over the assets placed under their management, the Committee
provides each investment manager with specific investment
guidelines relevant to its asset class.
The Committee has established the allowable range that the
plans assets may be invested in for each major asset
category. In addition, the Committee has established guidelines
regarding diversification within asset categories to limit risk
and exposure to a single or limited number of securities. The
investments of the plans include a diversified portfolio
of both equity and fixed income investments. Equity investments
are further diversified across U.S. and
non-U.S. stocks,
small to large capitalization stocks, and growth and value
stocks. Fixed income assets are diversified across U.S. and
non-U.S. issuers,
corporate and governmental issuers, and credit quality. The plan
also invests in real estate through publicly traded real estate
securities. Derivatives may be used only for hedging purposes or
to create synthetic long positions. The plans are prohibited
from directly owning commodities, unregistered securities,
restricted stock, private placements, or interest in oil, gas,
mineral exploration, or other development programs. Further,
short selling or utilizing margin buying for investment purposes
is prohibited.
The table below presents the allowable range for each major
category of the plans assets at December 31, 2010, as
well as the Companys pension plan and postretirement
benefit plan weighted-average asset allocations at
December 31, 2010 and 2009, by asset category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
Canada
|
|
Asset Category
|
|
Range
|
|
2010
|
|
|
2009
|
|
|
Range
|
|
2010
|
|
|
2009
|
|
|
Domestic
equity
(1)
|
|
30%-60%
|
|
|
46
|
%
|
|
|
44
|
%
|
|
15%-30%
|
|
|
21
|
%
|
|
|
20
|
%
|
International
equity
(2)
|
|
10%-20%
|
|
|
16
|
|
|
|
17
|
|
|
20%-50%
|
|
|
38
|
|
|
|
25
|
|
Fixed income securities
|
|
20%-40%
|
|
|
29
|
|
|
|
28
|
|
|
30%-55%
|
|
|
36
|
|
|
|
49
|
|
Real estate securities
|
|
0%-15%
|
|
|
5
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
Other, primarily cash and cash equivalents
|
|
0%-15%
|
|
|
4
|
|
|
|
6
|
|
|
0%-15%
|
|
|
5
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Domestic equities for Canadian
plans refers to equities of Canadian companies.
|
|
(2)
|
|
International equities for Canadian
plans includes equities of U.S. companies.
|
The Committee regularly monitors the investment of the
plans assets to ensure that the actual investment
allocation remains within the established range. The Committee
also regularly measures and monitors investment risk through
ongoing performance reporting and investment manager reviews.
Investment manager reviews include assessing the managers
performance versus the appropriate benchmark index both in the
short and long-term period, performance versus peers, and an
examination of risk the managers assumed in order to achieve
rates of return.
F-46
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
The table below presents the fair value of the Companys
pension plans assets at December 31, 2010 and 2009,
by asset category segregated by level within the fair value
hierarchy, as described in Note 12:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans Assets
|
|
|
Canadian Plans Assets
|
|
|
|
Fair Value Measured at
|
|
|
Fair Value Measured at
|
|
|
|
December 31, 2010
|
|
|
December 31, 2010
|
|
Asset Category
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Equity
securities
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Equity
|
|
|
609
|
|
|
|
|
|
|
|
|
|
|
|
609
|
|
|
|
32
|
|
|
|
11
|
|
|
|
|
|
|
|
43
|
|
International Equity
|
|
|
100
|
|
|
|
113
|
|
|
|
|
|
|
|
213
|
|
|
|
35
|
|
|
|
71
|
|
|
|
|
|
|
|
106
|
|
Fixed Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Grade
|
|
|
155
|
(2)
|
|
|
153
|
(3)
|
|
|
|
|
|
|
308
|
|
|
|
|
|
|
|
92
|
(3)
|
|
|
|
|
|
|
92
|
|
Fixed Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
Yield
(4)
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trusts
(5)
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(6)
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
50
|
|
|
|
4
|
|
|
|
7
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
934
|
|
|
$
|
399
|
|
|
$
|
|
|
|
$
|
1,333
|
|
|
$
|
71
|
|
|
$
|
181
|
|
|
$
|
|
|
|
$
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans Assets
|
|
|
Canadian Plans Assets
|
|
|
|
Fair Value Measured at
|
|
|
Fair Value Measured at
|
|
|
|
December 31, 2009
|
|
|
December 31, 2009
|
|
Asset Category
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Equity
|
|
|
470
|
|
|
|
|
|
|
|
|
|
|
|
470
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
19
|
|
International Equity
|
|
|
85
|
|
|
|
103
|
|
|
|
|
|
|
|
188
|
|
|
|
41
|
|
|
|
38
|
|
|
|
|
|
|
|
79
|
|
Fixed Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Grade
|
|
|
125
|
(2)
|
|
|
109
|
(3)
|
|
|
|
|
|
|
234
|
|
|
|
|
|
|
|
109
|
(3)
|
|
|
|
|
|
|
109
|
|
Fixed Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
Yield
(4)
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trusts
(5)
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(6)
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
65
|
|
|
|
2
|
|
|
|
13
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
735
|
|
|
$
|
347
|
|
|
$
|
|
|
|
$
|
1,082
|
|
|
$
|
43
|
|
|
$
|
179
|
|
|
$
|
|
|
|
$
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Equity securities consist of
investments in common stock of U.S. and foreign companies. The
fair value of equity securities is based on quoted market prices
available in active markets at the close of a trading day,
primarily the New York Stock Exchange (NYSE), National
Association of Securities Dealers Automated Quotations (NASDAQ),
and various foreign exchanges. The Level 2 investment
balance is derived from pooled equity funds offered by
registered investment companies.
|
|
(2)
|
|
Approximately 50% in 2010 and 53%
in 2009 of U.S. plan assets invested in fixed income
investment grade securities consist of a mutual fund offered by
a registered investment company. The mutual fund invests in
investment grade fixed income securities, mortgaged-backed
securities, U.S. treasury and agency bonds and corporate bonds.
This fund is classified by the Company as a Level 1
measurement within the fair value hierarchy as the mutual fund
trades on an active market and daily, quoted prices are
available.
|
|
(3)
|
|
The remaining 50% in 2010 and 47%
in 2009 of U.S. plan assets invested in fixed income
investment grade securities as well as the Canadian plan assets
invested in fixed income investment grade securities
is derived from pooled bond funds offered by registered
investment companies. As these funds do not trade in an active
market, the fair value is based on net asset values (NAVs)
calculated by fund managers based on yields currently available
on comparable bonds of issuers with similar credit ratings,
quoted prices of similar bonds in an active market, or cash
flows based on observable inputs.
|
|
(4)
|
|
Fixed income high yield
consists of investments in corporate high-yield bonds from
various industries. The fair values of these investments are
based on yields currently available on comparable bonds of
issuers with similar credit ratings, quoted prices of similar
bonds in an active market, or cash flows based on observable
inputs.
|
|
(5)
|
|
Real Estate Investment Trusts
(REITs) consist of securities that trade on the major exchanges
and invest in real estate directly, either through properties or
mortgages.
|
F-47
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
|
|
|
(6)
|
|
Other consists primarily of (i)
short term investments maintained in a commingled trust or
pooled fund, which primarily invests in short term, high quality
money market securities such as government obligations,
commercial paper, time deposits and certificates of deposit,
which are classified as Level 2, and (ii) cash, which is
classified as Level 1.
|
The table below presents the fair value of the Companys
postretirement benefit plans assets at December 31,
2010 and 2009, by asset category segregated by level within the
fair value hierarchy, as described in Note 12.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefit Plans Assets
|
|
|
|
Fair Value Measured at
|
|
|
Fair Value Measured at
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
Asset Category
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Equity
securities
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Equity
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
International Equity
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
2
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
2
|
|
Fixed Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Grade
|
|
|
10
|
(2)
|
|
|
2
|
(3)
|
|
|
|
|
|
|
12
|
|
|
|
14
|
(2)
|
|
|
1
|
(3)
|
|
|
|
|
|
|
15
|
|
Fixed Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
Yield
(4)
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Real Estate Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trusts
(5)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Other
(6)
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34
|
|
|
$
|
5
|
|
|
$
|
|
|
|
$
|
39
|
|
|
$
|
29
|
|
|
$
|
4
|
|
|
$
|
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Equity securities consist of
investments in common stock of U.S. and foreign companies. The
fair value of equity securities is based on quoted market prices
available in active markets at the close of a trading day,
primarily the NYSE, NASDAQ, and various foreign exchanges. The
Level 2 investment balance is derived from a pooled equity
fund offered by a registered investment company.
|
|
(2)
|
|
Approximately 83% in 2010 and 93%
in 2009 of the postretirement benefit plan assets invested in
fixed income investment grade securities consist of
a mutual fund offered by a registered investment company. The
mutual fund invests in investment grade fixed income securities,
mortgaged-backed securities, U.S. treasury and agency bonds and
corporate bonds. This fund is classified by the Company as a
Level 1 measurement within the fair value hierarchy as the
mutual fund trades on an active market and daily, quoted prices
are available.
|
|
(3)
|
|
The remaining 17% in 2010 and 7% in
2009 of the postretirement benefit plan assets invested in fixed
income investment grade securities is derived from a
pooled bond fund offered by a registered investment company,
which does not trade in an active market. The fair value is
based on NAVs calculated by the fund manager based on
yields currently available on comparable bonds of issuers with
similar credit ratings, quoted prices of similar bonds in an
active market, or cash flows based on observable inputs.
|
|
(4)
|
|
Fixed income high yield
consists of investments in corporate high-yield bonds from
various industries. The fair values of these investments are
based on yields currently available on comparable bonds of
issuers with similar credit ratings, quoted prices of similar
bonds in an active market, or cash flows based on observable
inputs.
|
|
(5)
|
|
Real Estate Investment Trusts
(REITs) consist of securities that trade on the major exchanges
and invest in real estate directly, either through properties or
mortgages.
|
|
(6)
|
|
Other consists primarily of short
term investments maintained in a commingled trust or pooled
fund, which primarily invests in short term, high quality money
market securities such as government obligations, commercial
paper, time deposits and certificates of deposit.
|
Contributions.
For the year ending December 31,
2011, the Company currently expects to contribute approximately
$185 million to its pension plans and approximately
$13 million to its postretirement benefit plans.
Multi-employer Benefit Plans.
Certain of the
Companys businesses participate in multi-employer defined
benefit pension plans. The Company makes cash contributions to
these plans based on a fixed rate per hour of service worked by
the covered employees. Under these plans, the Company
contributed cash and recorded expenses of $17 million for
2010, $15 million for 2009 and $13 million for 2008.
Estimated Future Benefit Payments.
The following table
presents expected pension and postretirement benefit
F-48
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
payments and expected postretirement subsidies due to the
Medicare Prescription Drug Improvement and Modernization Act of
2003, which reflect expected future service, as appropriate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
|
Benefits
|
|
|
Pension
|
|
Benefit
|
|
Subsidy
|
|
|
Benefits
|
|
Payments
|
|
Receipts
|
|
|
(in millions)
|
|
2011
|
|
$
|
91
|
|
|
|
13
|
|
|
|
1
|
|
2012
|
|
|
95
|
|
|
|
14
|
|
|
|
1
|
|
2013
|
|
|
105
|
|
|
|
14
|
|
|
|
1
|
|
2014
|
|
|
113
|
|
|
|
15
|
|
|
|
1
|
|
2015
|
|
|
122
|
|
|
|
16
|
|
|
|
1
|
|
Years
2016-2020
|
|
|
776
|
|
|
|
90
|
|
|
|
6
|
|
Employee Savings Plans.
Under its various employee
savings plans, the Company matches the contributions of
participating employees up to a designated level. The extent of
the match, vesting terms and the form of the matching
contributions vary among the plans. Under these plans, the
Companys matching contributions in L-3 Holdings
common stock and cash were $147 million for 2010,
$143 million for 2009 and $144 million for 2008.
|
|
21.
|
Supplemental
Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Interest paid on outstanding debt
|
|
$
|
233
|
|
|
$
|
237
|
|
|
$
|
267
|
|
Income tax payments
|
|
|
341
|
|
|
|
387
|
|
|
|
343
|
|
Income tax refunds
|
|
|
12
|
|
|
|
13
|
|
|
|
8
|
|
F-49
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
The Company has four reportable segments, which are described in
Note 1. The Company evaluates the performance of its
operating segments and reportable segments based on their sales
and operating income. All corporate expenses are allocated to
the Companys operating segments using an allocation
methodology prescribed by U.S. Government regulations for
government contractors. Accordingly, all costs and expenses,
except for the litigation gain in 2008 (which was not included
in the Companys segment performance measures), are
included in the Companys measure of segment profitability.
The tables below present net sales, operating income,
depreciation and amortization, capital expenditures and total
assets by reportable segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
(1)
|
|
|
2008
(1)
|
|
|
|
(in millions)
|
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
C
3
ISR
|
|
$
|
1,978
|
|
|
$
|
2,082
|
|
|
$
|
1,794
|
|
Government Services
|
|
|
253
|
|
|
|
245
|
|
|
|
237
|
|
AM&M
|
|
|
811
|
|
|
|
688
|
|
|
|
647
|
|
Electronic Systems
|
|
|
4,711
|
|
|
|
4,796
|
|
|
|
4,652
|
|
Elimination of intercompany sales
|
|
|
(157
|
)
|
|
|
(295
|
)
|
|
|
(200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total products sales
|
|
|
7,596
|
|
|
|
7,516
|
|
|
|
7,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
C
3
ISR
|
|
|
1,469
|
|
|
|
1,090
|
|
|
|
778
|
|
Government Services
|
|
|
3,717
|
|
|
|
3,938
|
|
|
|
4,118
|
|
AM&M
|
|
|
2,215
|
|
|
|
2,255
|
|
|
|
2,031
|
|
Electronic Systems
|
|
|
956
|
|
|
|
1,039
|
|
|
|
976
|
|
Elimination of intercompany sales
|
|
|
(273
|
)
|
|
|
(223
|
)
|
|
|
(132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total services sales
|
|
|
8,084
|
|
|
|
8,099
|
|
|
|
7,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
15,680
|
|
|
$
|
15,615
|
|
|
$
|
14,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
C
3
ISR
|
|
$
|
395
|
|
|
$
|
344
|
|
|
$
|
244
|
|
Government Services
|
|
|
344
|
|
|
|
394
|
|
|
|
423
|
|
AM&M
|
|
|
229
|
|
|
|
243
|
|
|
|
243
|
|
Electronic Systems
|
|
|
782
|
|
|
|
675
|
|
|
|
649
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Total
|
|
$
|
1,750
|
|
|
$
|
1,656
|
|
|
$
|
1,559
|
|
Litigation gain
|
|
|
|
|
|
|
|
|
|
|
126
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
1,750
|
|
|
$
|
1,656
|
|
|
$
|
1,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-50
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
(1)
|
|
|
2008
(1)
|
|
|
|
(in millions)
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
C
3
ISR
|
|
$
|
45
|
|
|
$
|
43
|
|
|
$
|
40
|
|
Government Services
|
|
|
37
|
|
|
|
39
|
|
|
|
35
|
|
AM&M
|
|
|
20
|
|
|
|
19
|
|
|
|
24
|
|
Electronic Systems
|
|
|
129
|
|
|
|
117
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
231
|
|
|
$
|
218
|
|
|
$
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
C
3
ISR
|
|
$
|
64
|
|
|
$
|
60
|
|
|
$
|
86
|
|
Government Services
|
|
|
7
|
|
|
|
12
|
|
|
|
14
|
|
AM&M
|
|
|
6
|
|
|
|
15
|
|
|
|
12
|
|
Electronic Systems
|
|
|
104
|
|
|
|
95
|
|
|
|
100
|
|
Corporate
|
|
|
|
|
|
|
4
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
181
|
|
|
$
|
186
|
|
|
$
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
C
3
ISR
|
|
$
|
2,068
|
|
|
$
|
1,875
|
|
|
$
|
1,755
|
|
Government Services
|
|
|
3,323
|
|
|
|
3,293
|
|
|
|
3,454
|
|
AM&M
|
|
|
1,961
|
|
|
|
1,914
|
|
|
|
1,836
|
|
Electronic Systems
|
|
|
7,548
|
|
|
|
6,591
|
|
|
|
6,359
|
|
Corporate
|
|
|
551
|
|
|
|
1,202
|
|
|
|
1,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
15,451
|
|
|
$
|
14,875
|
|
|
$
|
14,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As a result of a re-alignment of a
business unit in the Companys management and
organizational structure as discussed in Note 2, sales of
$61 million and $48 million, and operating income of
$3 million were reclassified from the Government Services
reportable segment to the Electronic Systems reportable segment
for the years ended December 31, 2009 and 2008,
respectively. At December 31, 2009 and 2008,
$39 million and $40 million of total assets were
reclassified from the Government Services reportable segment to
the Electronic Systems reportable segment.
|
|
(2)
|
|
Operating income for the Electronic
Systems 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 threatening litigation as a result of a
June 27, 2008 decision by the U.S. Court of Appeals which
vacated an adverse 2006 jury verdict.
|
Corporate assets not allocated to the reportable segments
primarily include cash and cash equivalents, corporate office
fixed assets, deferred income tax assets and deferred debt issue
costs. In addition, substantially all of the Companys
assets are located in North America.
F-51
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
The Companys sales attributable to U.S. customers and
foreign customers, based on location of the customer, are
summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
U.S.
|
|
$
|
13,747
|
|
|
$
|
13,666
|
|
|
$
|
12,815
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
305
|
|
|
|
283
|
|
|
|
308
|
|
United Kingdom
|
|
|
231
|
|
|
|
173
|
|
|
|
212
|
|
Germany
|
|
|
215
|
|
|
|
276
|
|
|
|
324
|
|
Australia
|
|
|
164
|
|
|
|
176
|
|
|
|
147
|
|
South Korea
|
|
|
100
|
|
|
|
132
|
|
|
|
140
|
|
Italy
|
|
|
68
|
|
|
|
76
|
|
|
|
93
|
|
China
|
|
|
65
|
|
|
|
63
|
|
|
|
59
|
|
Other
|
|
|
785
|
|
|
|
770
|
|
|
|
803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total foreign
|
|
|
1,933
|
|
|
|
1,949
|
|
|
|
2,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
15,680
|
|
|
$
|
15,615
|
|
|
$
|
14,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to principal customers are summarized in the table
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
U.S. Government
agencies
(1)
|
|
$
|
13,077
|
|
|
$
|
13,059
|
|
|
$
|
12,126
|
|
Commercial
|
|
|
1,461
|
|
|
|
1,474
|
|
|
|
1,676
|
|
Allied foreign
governments
(1)
|
|
|
1,142
|
|
|
|
1,082
|
|
|
|
1,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
15,680
|
|
|
$
|
15,615
|
|
|
$
|
14,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes sales for which the
Company is the prime contractor as well as sales based on the
ultimate end customer for which the Company is a subcontractor.
|
|
|
23.
|
Employee
Severance and Termination Costs
|
During the year-ended December 31, 2010, the Company
commenced headcount reductions across several businesses to
reduce both direct and indirect costs, including overhead and
general and administrative costs. As a result of this
initiative, the Company recorded a total of $17 million in
employee severance and other related termination costs for
approximately 700 employees, primarily in the Electronic
Systems reportable segment. At December 31, 2010, the
remaining balance to be paid was $12 million.
F-52
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
24. Unaudited Quarterly Financial Data
|
|
24.
|
Unaudited
Quarterly Financial Data
|
Unaudited summarized financial data by quarter for the years
ended December 31, 2010 and 2009 is presented in the table
below. The Companys unaudited quarterly results of
operations are affected, significantly in some periods, by our
business acquisitions. See Note 4.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
(in millions, except per share data)
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
3,624
|
|
|
$
|
3,966
|
|
|
$
|
3,835
|
|
|
$
|
4,255
|
|
Operating income
|
|
|
410
|
|
|
|
442
|
|
|
|
437
|
|
|
|
461
|
|
Net income attributable to L-3
|
|
|
221
|
|
|
|
228
|
|
|
|
238
|
|
|
|
268
|
|
Basic
EPS
(1)
|
|
|
1.89
|
|
|
|
1.97
|
|
|
|
2.08
|
|
|
|
2.38
|
|
Diluted
EPS
(1)
|
|
|
1.87
|
|
|
|
1.95
|
|
|
|
2.07
|
|
|
|
2.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
3,636
|
|
|
$
|
3,929
|
|
|
$
|
3,842
|
|
|
$
|
4,208
|
|
Operating income
|
|
|
376
|
|
|
|
417
|
|
|
|
418
|
|
|
|
446
|
|
Net income attributable to L-3
|
|
|
199
|
|
|
|
225
|
|
|
|
250
|
|
|
|
227
|
|
Basic
EPS
(1)
|
|
|
1.66
|
|
|
|
1.91
|
|
|
|
2.13
|
|
|
|
1.94
|
|
Diluted
EPS
(1)
|
|
|
1.66
|
|
|
|
1.90
|
|
|
|
2.12
|
|
|
|
1.93
|
|
|
|
|
(1)
|
|
Basic and diluted EPS amounts in
each quarter are computed using the weighted-average number of
shares outstanding during that quarter, while basic and diluted
EPS for the full year is computed using the weighted-average
number of shares outstanding during the year. Therefore, the sum
of the four quarters basic or diluted EPS may not equal
the full year basic or diluted EPS.
|
|
|
25.
|
Financial
Information of L-3 Communications and Its Subsidiaries
|
Total shareholders equity for L-3 Communications equals
that of L-3 Holdings, but the components (common stock,
additional paid-in capital, treasury stock and retained
earnings) are different. The table below presents information
regarding the balances and changes in common stock, additional
paid-in capital, treasury stock and retained earnings of
L-3
Communications for each of the three years ended
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 Communications
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Par
|
|
|
Paid-in
|
|
|
Treasury
|
|
|
Retained
|
|
|
|
|
|
|
Issued
|
|
|
Value
|
|
|
Capital
|
|
|
Stock
|
|
|
Earnings
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Balance at December 31, 2007
|
|
|
100
|
|
|
|
|
|
|
$
|
3,817
|
|
|
$
|
|
|
|
$
|
2,057
|
|
|
$
|
5,874
|
|
Net income attributable to L-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
938
|
|
|
|
938
|
|
Contributions from L-3 Holdings
|
|
|
|
|
|
|
|
|
|
|
319
|
|
|
|
|
|
|
|
|
|
|
|
319
|
|
Dividends to L-3 Holdings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(941
|
)
|
|
|
(941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
100
|
|
|
|
|
|
|
|
4,136
|
|
|
|
|
|
|
|
2,054
|
|
|
|
6,190
|
|
Net income attributable to L-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
901
|
|
|
|
901
|
|
Contributions from L-3 Holdings
|
|
|
|
|
|
|
|
|
|
|
313
|
|
|
|
|
|
|
|
|
|
|
|
313
|
|
Dividends to L-3 Holdings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(670
|
)
|
|
|
(670
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
100
|
|
|
|
|
|
|
|
4,449
|
|
|
|
|
|
|
|
2,284
|
|
|
|
6,733
|
|
Net income attributable to L-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
955
|
|
|
|
955
|
|
Contributions from L-3 Holdings
|
|
|
|
|
|
|
|
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
|
352
|
|
Dividends to L-3 Holdings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,018
|
)
|
|
|
(1,018
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
100
|
|
|
|
|
|
|
$
|
4,801
|
|
|
$
|
|
|
|
$
|
2,219
|
|
|
$
|
7,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net proceeds received by L-3 Holdings from (i) the sale
of its common stock, (ii) exercise of L-3 Holdings
F-53
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
employee and director stock options, and related tax benefits,
and (iii) L-3 Holdings common stock contributed to
the Companys savings plans are contributed to L-3
Communications. The amounts paid by L-3 Holdings for dividends
and share repurchases are generated from dividends received from
L-3 Communications.
L-3 Communications is a wholly-owned subsidiary of L-3 Holdings.
The debt of L-3 Communications, including the Senior Notes,
Senior Subordinated Notes and borrowings under amounts drawn
against the Revolving Credit Facility are guaranteed, on a joint
and several, full and unconditional basis, by certain of its
domestic subsidiaries (the Guarantor Subsidiaries).
See Note 10. 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.
In lieu of providing separate audited financial statements for
the Guarantor Subsidiaries, the Company has included the
accompanying condensed combining financial statements based on
Rule 3-10
of SEC
Regulation S-X.
The Company does not believe that separate financial statements
of the Guarantor Subsidiaries are material to users of the
financial statements.
F-54
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
The following 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
|
L-3
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
(Parent)
|
|
|
Communications
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
L-3
|
|
|
|
(in millions)
|
|
|
Condensed Combining Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
257
|
|
|
$
|
3
|
|
|
$
|
482
|
|
|
$
|
(135
|
)
|
|
$
|
607
|
|
Billed receivables, net
|
|
|
|
|
|
|
387
|
|
|
|
680
|
|
|
|
232
|
|
|
|
|
|
|
|
1,299
|
|
Contracts in process
|
|
|
|
|
|
|
801
|
|
|
|
1,525
|
|
|
|
222
|
|
|
|
|
|
|
|
2,548
|
|
Other current assets
|
|
|
|
|
|
|
295
|
|
|
|
161
|
|
|
|
168
|
|
|
|
|
|
|
|
624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
1,740
|
|
|
|
2,369
|
|
|
|
1,104
|
|
|
|
(135
|
)
|
|
|
5,078
|
|
Goodwill
|
|
|
|
|
|
|
1,857
|
|
|
|
5,592
|
|
|
|
1,281
|
|
|
|
|
|
|
|
8,730
|
|
Other assets
|
|
|
|
|
|
|
693
|
|
|
|
763
|
|
|
|
187
|
|
|
|
|
|
|
|
1,643
|
|
Investment in and amounts due from consolidated subsidiaries
|
|
|
7,462
|
|
|
|
8,912
|
|
|
|
2,417
|
|
|
|
|
|
|
|
(18,791
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,462
|
|
|
$
|
13,202
|
|
|
$
|
11,141
|
|
|
$
|
2,572
|
|
|
$
|
(18,926
|
)
|
|
$
|
15,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
11
|
|
|
$
|
11
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(11
|
)
|
|
$
|
11
|
|
Other current liabilities
|
|
|
|
|
|
|
898
|
|
|
|
1,388
|
|
|
|
571
|
|
|
|
(135
|
)
|
|
|
2,722
|
|
Amounts due to consolidated subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
439
|
|
|
|
(439
|
)
|
|
|
|
|
Other long-term liabilities
|
|
|
|
|
|
|
1,403
|
|
|
|
235
|
|
|
|
99
|
|
|
|
|
|
|
|
1,737
|
|
Long-term debt
|
|
|
687
|
|
|
|
4,126
|
|
|
|
|
|
|
|
|
|
|
|
(687
|
)
|
|
|
4,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
698
|
|
|
|
6,438
|
|
|
|
1,623
|
|
|
|
1,109
|
|
|
|
(1,272
|
)
|
|
|
8,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 shareholders equity
|
|
|
6,764
|
|
|
|
6,764
|
|
|
|
9,518
|
|
|
|
1,463
|
|
|
|
(17,745
|
)
|
|
|
6,764
|
|
Noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
6,764
|
|
|
|
6,764
|
|
|
|
9,518
|
|
|
|
1,463
|
|
|
|
(17,654
|
)
|
|
|
6,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
7,462
|
|
|
$
|
13,202
|
|
|
$
|
11,141
|
|
|
$
|
2,572
|
|
|
$
|
(18,926
|
)
|
|
$
|
15,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
797
|
|
|
$
|
4
|
|
|
$
|
364
|
|
|
$
|
(149
|
)
|
|
$
|
1,016
|
|
Billed receivables, net
|
|
|
|
|
|
|
321
|
|
|
|
629
|
|
|
|
199
|
|
|
|
|
|
|
|
1,149
|
|
Contracts in process
|
|
|
|
|
|
|
616
|
|
|
|
1,538
|
|
|
|
241
|
|
|
|
|
|
|
|
2,395
|
|
Other current assets
|
|
|
|
|
|
|
359
|
|
|
|
164
|
|
|
|
130
|
|
|
|
|
|
|
|
653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
2,093
|
|
|
|
2,335
|
|
|
|
934
|
|
|
|
(149
|
)
|
|
|
5,213
|
|
Goodwill
|
|
|
|
|
|
|
1,190
|
|
|
|
5,828
|
|
|
|
1,172
|
|
|
|
|
|
|
|
8,190
|
|
Other assets
|
|
|
3
|
|
|
|
485
|
|
|
|
810
|
|
|
|
177
|
|
|
|
(3
|
)
|
|
|
1,472
|
|
Investment in and amounts due from consolidated subsidiaries
|
|
|
7,240
|
|
|
|
8,916
|
|
|
|
1,949
|
|
|
|
|
|
|
|
(18,105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,243
|
|
|
$
|
12,684
|
|
|
$
|
10,922
|
|
|
$
|
2,283
|
|
|
$
|
(18,257
|
)
|
|
$
|
14,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
|
|
|
$
|
762
|
|
|
$
|
1,343
|
|
|
$
|
588
|
|
|
$
|
(149
|
)
|
|
$
|
2,544
|
|
Amounts due to consolidated subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
260
|
|
|
|
(260
|
)
|
|
|
|
|
Other long-term liabilities
|
|
|
|
|
|
|
1,243
|
|
|
|
226
|
|
|
|
90
|
|
|
|
|
|
|
|
1,559
|
|
Long-term debt
|
|
|
676
|
|
|
|
4,112
|
|
|
|
|
|
|
|
|
|
|
|
(676
|
)
|
|
|
4,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
676
|
|
|
|
6,117
|
|
|
|
1,569
|
|
|
|
938
|
|
|
|
(1,085
|
)
|
|
|
8,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 shareholders equity
|
|
|
6,567
|
|
|
|
6,567
|
|
|
|
9,353
|
|
|
|
1,345
|
|
|
|
(17,265
|
)
|
|
|
6,567
|
|
Noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
6,567
|
|
|
|
6,567
|
|
|
|
9,353
|
|
|
|
1,345
|
|
|
|
(17,172
|
)
|
|
|
6,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
7,243
|
|
|
$
|
12,684
|
|
|
$
|
10,922
|
|
|
$
|
2,283
|
|
|
$
|
(18,257
|
)
|
|
$
|
14,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-55
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO 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 year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
3,831
|
|
|
$
|
10,013
|
|
|
$
|
2,130
|
|
|
$
|
(294
|
)
|
|
$
|
15,680
|
|
Cost of sales
|
|
|
82
|
|
|
|
3,309
|
|
|
|
9,077
|
|
|
|
1,837
|
|
|
|
(375
|
)
|
|
|
13,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(82
|
)
|
|
|
522
|
|
|
|
936
|
|
|
|
293
|
|
|
|
81
|
|
|
|
1,750
|
|
Interest and other income, net
|
|
|
|
|
|
|
132
|
|
|
|
|
|
|
|
3
|
|
|
|
(114
|
)
|
|
|
21
|
|
Interest expense
|
|
|
46
|
|
|
|
268
|
|
|
|
110
|
|
|
|
6
|
|
|
|
(161
|
)
|
|
|
269
|
|
Debt retirement charge
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(128
|
)
|
|
|
368
|
|
|
|
826
|
|
|
|
290
|
|
|
|
128
|
|
|
|
1,484
|
|
(Benefit) provision for income taxes
|
|
|
(45
|
)
|
|
|
129
|
|
|
|
288
|
|
|
|
101
|
|
|
|
45
|
|
|
|
518
|
|
Equity in net income of consolidated subsidiaries
|
|
|
1,038
|
|
|
|
716
|
|
|
|
|
|
|
|
|
|
|
|
(1,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
955
|
|
|
|
955
|
|
|
|
538
|
|
|
|
189
|
|
|
|
(1,671
|
)
|
|
|
966
|
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to L-3
|
|
$
|
955
|
|
|
$
|
955
|
|
|
$
|
538
|
|
|
$
|
189
|
|
|
$
|
(1,682
|
)
|
|
$
|
955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
3,419
|
|
|
$
|
10,397
|
|
|
$
|
1,929
|
|
|
$
|
(130
|
)
|
|
$
|
15,615
|
|
Cost of sales
|
|
|
74
|
|
|
|
2,987
|
|
|
|
9,413
|
|
|
|
1,689
|
|
|
|
(204
|
)
|
|
|
13,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(74
|
)
|
|
|
432
|
|
|
|
984
|
|
|
|
240
|
|
|
|
74
|
|
|
|
1,656
|
|
Interest and other income, net
|
|
|
|
|
|
|
128
|
|
|
|
3
|
|
|
|
2
|
|
|
|
(114
|
)
|
|
|
19
|
|
Interest expense
|
|
|
45
|
|
|
|
277
|
|
|
|
110
|
|
|
|
6
|
|
|
|
(159
|
)
|
|
|
279
|
|
Debt retirement charge
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(119
|
)
|
|
|
273
|
|
|
|
877
|
|
|
|
236
|
|
|
|
119
|
|
|
|
1,386
|
|
(Benefit) provision for income taxes
|
|
|
(37
|
)
|
|
|
119
|
|
|
|
275
|
|
|
|
81
|
|
|
|
37
|
|
|
|
475
|
|
Equity in net income of consolidated subsidiaries
|
|
|
983
|
|
|
|
747
|
|
|
|
|
|
|
|
|
|
|
|
(1,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
901
|
|
|
|
901
|
|
|
|
602
|
|
|
|
155
|
|
|
|
(1,648
|
)
|
|
|
911
|
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to L-3
|
|
$
|
901
|
|
|
$
|
901
|
|
|
$
|
602
|
|
|
$
|
155
|
|
|
$
|
(1,658
|
)
|
|
$
|
901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
3,192
|
|
|
$
|
9,826
|
|
|
$
|
2,000
|
|
|
$
|
(117
|
)
|
|
$
|
14,901
|
|
Cost of sales
|
|
|
64
|
|
|
|
2,768
|
|
|
|
8,893
|
|
|
|
1,798
|
|
|
|
(181
|
)
|
|
|
13,342
|
|
Litigation gain
|
|
|
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(64
|
)
|
|
|
550
|
|
|
|
933
|
|
|
|
202
|
|
|
|
64
|
|
|
|
1,685
|
|
Interest and other income, net
|
|
|
|
|
|
|
130
|
|
|
|
5
|
|
|
|
7
|
|
|
|
(114
|
)
|
|
|
28
|
|
Interest expense
|
|
|
43
|
|
|
|
287
|
|
|
|
110
|
|
|
|
7
|
|
|
|
(157
|
)
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes
|
|
|
(107
|
)
|
|
|
393
|
|
|
|
828
|
|
|
|
202
|
|
|
|
107
|
|
|
|
1,423
|
|
(Benefit) provision for income taxes
|
|
|
(39
|
)
|
|
|
116
|
|
|
|
304
|
|
|
|
74
|
|
|
|
39
|
|
|
|
494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(68
|
)
|
|
|
277
|
|
|
|
524
|
|
|
|
128
|
|
|
|
68
|
|
|
|
929
|
|
Gain on sale of a business, net of income taxes
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
Equity in net income of consolidated subsidiaries
|
|
|
1,006
|
|
|
|
641
|
|
|
|
|
|
|
|
|
|
|
|
(1,647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
938
|
|
|
|
938
|
|
|
|
524
|
|
|
|
128
|
|
|
|
(1,579
|
)
|
|
|
949
|
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to L-3
|
|
$
|
938
|
|
|
$
|
938
|
|
|
$
|
524
|
|
|
$
|
128
|
|
|
$
|
(1,590
|
)
|
|
$
|
938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-56
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO 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 year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
$
|
1,018
|
|
|
$
|
288
|
|
|
$
|
953
|
|
|
$
|
243
|
|
|
$
|
(1,041
|
)
|
|
$
|
1,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business acquisitions, net of cash acquired
|
|
|
|
|
|
|
(756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(756
|
)
|
Investments in L-3 Communications
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116
|
|
|
|
|
|
Other investing activities
|
|
|
|
|
|
|
(79
|
)
|
|
|
(102
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
(189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(116
|
)
|
|
|
(835
|
)
|
|
|
(102
|
)
|
|
|
(8
|
)
|
|
|
116
|
|
|
|
(945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of senior notes
|
|
|
|
|
|
|
797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
797
|
|
Redemption of senior subordinated notes
|
|
|
|
|
|
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(800
|
)
|
Common stock repurchased
|
|
|
(834
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(834
|
)
|
Dividends paid on L-3 Holdings common stock
|
|
|
(184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(184
|
)
|
Dividends paid to L-3 Holdings
|
|
|
|
|
|
|
(1,018
|
)
|
|
|
|
|
|
|
|
|
|
|
1,018
|
|
|
|
|
|
Investments from L-3 Holdings
|
|
|
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
(116
|
)
|
|
|
|
|
Other financing activities
|
|
|
116
|
|
|
|
912
|
|
|
|
(852
|
)
|
|
|
(110
|
)
|
|
|
37
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) from financing activities
|
|
|
(902
|
)
|
|
|
7
|
|
|
|
(852
|
)
|
|
|
(110
|
)
|
|
|
939
|
|
|
|
(918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
|
|
|
|
(540
|
)
|
|
|
(1
|
)
|
|
|
118
|
|
|
|
14
|
|
|
|
(409
|
)
|
Cash and cash equivalents, beginning of the year
|
|
|
|
|
|
|
797
|
|
|
|
4
|
|
|
|
364
|
|
|
|
(149
|
)
|
|
|
1,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the year
|
|
$
|
|
|
|
$
|
257
|
|
|
$
|
3
|
|
|
$
|
482
|
|
|
$
|
(135
|
)
|
|
$
|
607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
$
|
670
|
|
|
$
|
132
|
|
|
$
|
1,093
|
|
|
$
|
248
|
|
|
$
|
(736
|
)
|
|
$
|
1,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business acquisitions, net of cash acquired
|
|
|
|
|
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(90
|
)
|
Investments in L-3 Communications
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
|
|
|
|
|
|
Other investing activities
|
|
|
|
|
|
|
(64
|
)
|
|
|
(103
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
(182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(87
|
)
|
|
|
(154
|
)
|
|
|
(103
|
)
|
|
|
(15
|
)
|
|
|
87
|
|
|
|
(272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of senior notes
|
|
|
|
|
|
|
996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
996
|
|
Repayment of borrowings under term loan facility
|
|
|
|
|
|
|
(650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(650
|
)
|
Redemption of senior subordinated notes
|
|
|
|
|
|
|
(750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(750
|
)
|
Common stock repurchased
|
|
|
(505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(505
|
)
|
Dividends paid on L-3 Holdings common stock
|
|
|
(165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(165
|
)
|
Dividends paid to L-3 Holdings
|
|
|
|
|
|
|
(670
|
)
|
|
|
|
|
|
|
|
|
|
|
670
|
|
|
|
|
|
Investments from L-3 Holdings
|
|
|
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
(87
|
)
|
|
|
|
|
Other financing activities
|
|
|
87
|
|
|
|
1,086
|
|
|
|
(988
|
)
|
|
|
(116
|
)
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) from financing activities
|
|
|
(583
|
)
|
|
|
99
|
|
|
|
(988
|
)
|
|
|
(116
|
)
|
|
|
583
|
|
|
|
(1,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
|
|
|
|
77
|
|
|
|
2
|
|
|
|
136
|
|
|
|
(66
|
)
|
|
|
149
|
|
Cash and cash equivalents, beginning of the year
|
|
|
|
|
|
|
720
|
|
|
|
2
|
|
|
|
228
|
|
|
|
(83
|
)
|
|
|
867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the year
|
|
$
|
|
|
|
$
|
797
|
|
|
$
|
4
|
|
|
$
|
364
|
|
|
$
|
(149
|
)
|
|
$
|
1,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
$
|
941
|
|
|
$
|
38
|
|
|
$
|
1,215
|
|
|
$
|
204
|
|
|
$
|
(1,011
|
)
|
|
$
|
1,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business acquisitions, net of cash acquired
|
|
|
|
|
|
|
(283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(283
|
)
|
Investments in L-3 Communications
|
|
|
(103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
|
|
|
|
|
|
Other investing activities
|
|
|
|
|
|
|
(15
|
)
|
|
|
(111
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
(149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(103
|
)
|
|
|
(298
|
)
|
|
|
(111
|
)
|
|
|
(23
|
)
|
|
|
103
|
|
|
|
(432
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock repurchased
|
|
|
(794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(794
|
)
|
Dividends paid on L-3 Holdings common stock
|
|
|
(147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(147
|
)
|
Dividends paid to L-3 Holdings
|
|
|
|
|
|
|
(941
|
)
|
|
|
|
|
|
|
|
|
|
|
941
|
|
|
|
|
|
Investments from L-3 Holdings
|
|
|
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
(103
|
)
|
|
|
|
|
Other financing activities
|
|
|
103
|
|
|
|
1,186
|
|
|
|
(1,109
|
)
|
|
|
(162
|
)
|
|
|
83
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) from financing activities
|
|
|
(838
|
)
|
|
|
348
|
|
|
|
(1,109
|
)
|
|
|
(162
|
)
|
|
|
921
|
|
|
|
(840
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
|
|
|
|
88
|
|
|
|
(5
|
)
|
|
|
(9
|
)
|
|
|
13
|
|
|
|
87
|
|
Cash and cash equivalents, beginning of the year
|
|
|
|
|
|
|
632
|
|
|
|
7
|
|
|
|
237
|
|
|
|
(96
|
)
|
|
|
780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the year
|
|
$
|
|
|
|
$
|
720
|
|
|
$
|
2
|
|
|
$
|
228
|
|
|
$
|
(83
|
)
|
|
$
|
867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-57