e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-Q
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 25,
2009
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission
file numbers 001-14141 and 333-46983
L-3 COMMUNICATIONS HOLDINGS,
INC.
L-3 COMMUNICATIONS
CORPORATION
(Exact names of registrants as
specified in their charters)
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Delaware
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13-3937434 and 13-3937436
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(State or other jurisdiction of incorporation or organization)
600 Third Avenue, New York, NY (Address of principal executive offices)
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(I.R.S. Employer Identification Nos.)
10016 (Zip Code)
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(212) 697-1111
(Telephone
number)
Indicate by check mark whether the registrants (1) have
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and
(2) have been subject to such filing requirements for the
past
90 days. x
Yes o No
Indicate by check mark whether the registrants have submitted
electronically and posted on their corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrants
were required to submit and post such
files). x Yes o No
Indicate by check mark whether the registrants are large
accelerated filers, accelerated filers, non-accelerated filers,
or smaller reporting companies. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act.
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Large
accelerated
filer x
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrants are shell
companies (as defined in
Rule 12b-2
of the
Act). o Yes x No
There were 116,225,477 shares of L-3 Communications
Holdings, Inc. common stock with a par value of $0.01
outstanding as of the close of business on October 30, 2009.
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
INDEX TO QUARTERLY REPORT ON
FORM 10-Q
For the quarterly period ended September 25, 2009
PART I
FINANCIAL INFORMATION
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ITEM 1.
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FINANCIAL
STATEMENTS
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L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
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September 25,
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December 31,
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2009
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2008
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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1,191
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$
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867
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Billed receivables, net of allowances, of $33 in 2009 and $26 in
2008
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1,270
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1,226
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Contracts in process
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2,398
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2,267
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Inventories
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258
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259
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Deferred income taxes
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169
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211
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Other current assets
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127
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131
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Total current assets
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5,413
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4,961
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Property, plant and equipment, net
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838
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821
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Goodwill
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8,188
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8,029
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Identifiable intangible assets
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390
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417
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Deferred debt issue costs
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35
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44
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Other assets
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204
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212
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Total assets
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$
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15,068
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$
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14,484
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LIABILITIES AND EQUITY
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Current liabilities:
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Current portion of long-term debt
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$
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650
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$
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Accounts payable, trade
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593
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602
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Accrued employment costs
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674
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700
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Accrued expenses
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525
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479
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Advance payments and billings in excess of costs incurred
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499
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530
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Income taxes
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30
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45
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Other current liabilities
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336
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351
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Total current liabilities
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3,307
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2,707
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Pension and postretirement benefits
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844
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802
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Deferred income taxes
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179
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127
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Other liabilities
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424
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414
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Long-term debt
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3,860
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4,493
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Total liabilities
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8,614
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8,543
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Commitments and contingencies (see Note 16)
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Equity:
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L-3 shareholders equity:
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L-3 Communications Holdings, Inc.s common stock:
$.01 par value; 300,000,000 shares authorized,
116,136,178 shares outstanding at September 25, 2009
and 118,633,746 shares outstanding at December 31,
2008 (L-3 Communications Corporations common stock:
$.01 par value, 100 shares authorized, issued and
outstanding)
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4,345
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4,136
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L-3 Communications Holdings, Inc.s treasury stock at cost,
19,633,649 shares at September 25, 2009 and
13,995,450 shares at December 31, 2008
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(1,715
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)
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(1,319
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)
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Retained earnings
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3,922
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3,373
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Accumulated other comprehensive loss
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(190
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)
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(332
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)
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Total L-3 shareholders equity
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6,362
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5,858
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Noncontrolling interests
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92
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83
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Total equity
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6,454
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5,941
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Total liabilities and equity
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$
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15,068
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$
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14,484
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See notes to unaudited condensed consolidated financial
statements.
1
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
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Third Quarter Ended
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September 25,
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September 26,
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2009
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2008
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Net sales:
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Products
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$
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1,810
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$
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1,752
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Services
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2,032
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1,910
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Total net sales
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3,842
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3,662
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Cost of sales:
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Products
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1,586
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1,561
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Services
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1,838
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1,701
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Total cost of sales
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3,424
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3,262
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Operating income
|
|
|
418
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|
400
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Interest and other income, net
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|
3
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|
|
|
7
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Interest expense
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68
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72
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|
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Income before income taxes
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353
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|
335
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Provision for income taxes
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|
100
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|
|
123
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|
|
|
|
|
|
|
|
|
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Net income
|
|
$
|
253
|
|
|
$
|
212
|
|
Less: Net income attributable to noncontrolling interests
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|
3
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|
|
2
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|
|
|
|
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|
|
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Net income attributable to L-3
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$
|
250
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$
|
210
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Less: Net income allocable to participating securities
|
|
|
2
|
|
|
|
3
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|
|
|
|
|
|
|
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Net income allocable to L-3 Communications Holdings, Inc.s
common shareholders
|
|
$
|
248
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|
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$
|
207
|
|
|
|
|
|
|
|
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|
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L-3 Communications Holdings, Inc.s earnings per common
share:
|
|
|
|
|
|
|
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Basic
|
|
$
|
2.13
|
|
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$
|
1.71
|
|
|
|
|
|
|
|
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Diluted
|
|
$
|
2.12
|
|
|
$
|
1.70
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|
|
|
|
|
|
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|
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L-3 Communications Holdings, Inc.s weighted average common
shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
116.4
|
|
|
|
121.0
|
|
|
|
|
|
|
|
|
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Diluted
|
|
|
117.0
|
|
|
|
122.0
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial
statements.
2
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
Year-to-Date Ended
|
|
|
|
September 25,
|
|
|
September 26,
|
|
|
|
2009
|
|
|
2008
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
5,456
|
|
|
$
|
5,120
|
|
Services
|
|
|
5,951
|
|
|
|
5,770
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
11,407
|
|
|
|
10,890
|
|
|
|
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
Products
|
|
|
4,842
|
|
|
|
4,588
|
|
Services
|
|
|
5,354
|
|
|
|
5,159
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
10,196
|
|
|
|
9,747
|
|
|
|
|
|
|
|
|
|
|
Litigation Gain
|
|
|
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,211
|
|
|
|
1,269
|
|
Interest and other income, net
|
|
|
12
|
|
|
|
22
|
|
Interest expense
|
|
|
203
|
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,020
|
|
|
|
1,077
|
|
Provision for income taxes
|
|
|
339
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
681
|
|
|
$
|
682
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
7
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to L-3
|
|
$
|
674
|
|
|
$
|
674
|
|
Less: Net income allocable to participating securities
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Net income allocable to L-3 Communications Holdings, Inc.s
common shareholders
|
|
$
|
668
|
|
|
$
|
668
|
|
|
|
|
|
|
|
|
|
|
L-3 Communications Holdings, Inc.s earnings per common
share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
5.70
|
|
|
$
|
5.48
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
5.68
|
|
|
$
|
5.42
|
|
|
|
|
|
|
|
|
|
|
L-3 Communications Holdings, Inc.s weighted average common
shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
117.1
|
|
|
|
121.8
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
117.6
|
|
|
|
123.2
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial
statements.
3
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communications
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holdings, Inc.s
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Par
|
|
|
Paid-in
|
|
|
Treasury
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Issued
|
|
|
Value
|
|
|
Capital
|
|
|
Stock
|
|
|
Earnings
|
|
|
(Loss) Income
|
|
|
Interests
|
|
|
Equity
|
|
|
For the
Year-to-Date
ended September 25, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
118.6
|
|
|
$
|
1
|
|
|
$
|
4,135
|
|
|
$
|
(1,319
|
)
|
|
$
|
3,373
|
|
|
$
|
(332
|
)
|
|
$
|
83
|
|
|
$
|
5,941
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
674
|
|
|
|
|
|
|
|
7
|
|
|
|
681
|
|
Pension and postretirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net loss and prior service cost previously
recognized, net of income taxes of $16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
23
|
|
Unrealized gain on hedging instruments, net of income taxes of $1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116
|
|
|
|
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
823
|
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
(6
|
)
|
Cash dividends paid on common stock ($1.05 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(124
|
)
|
|
|
|
|
|
|
|
|
|
|
(124
|
)
|
Recognition of non-controlling interest in consolidated
subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
8
|
|
Shares issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee savings plans
|
|
|
1.6
|
|
|
|
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110
|
|
Exercise of stock options
|
|
|
0.3
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
Employee stock purchase plan
|
|
|
1.1
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
Treasury stock purchased
|
|
|
(5.6
|
)
|
|
|
|
|
|
|
|
|
|
|
(396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(396
|
)
|
Other
|
|
|
0.1
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 25, 2009
|
|
|
116.1
|
|
|
$
|
1
|
|
|
$
|
4,344
|
|
|
$
|
(1,715
|
)
|
|
$
|
3,922
|
|
|
$
|
(190
|
)
|
|
$
|
92
|
|
|
$
|
6,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Year-to-Date
ended
September 26, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
124.2
|
|
|
$
|
1
|
|
|
$
|
3,816
|
|
|
$
|
(525
|
)
|
|
$
|
2,582
|
|
|
$
|
153
|
|
|
$
|
87
|
|
|
$
|
6,114
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
674
|
|
|
|
|
|
|
|
8
|
|
|
|
682
|
|
Pension and postretirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net loss and prior service cost previously
recognized, net of income taxes of $1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Unrealized gain on hedging instruments, net of income taxes of $2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
634
|
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Cash dividends paid on common stock
($0.90 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(111
|
)
|
|
|
|
|
|
|
|
|
|
|
(111
|
)
|
Shares issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee savings plans
|
|
|
1.0
|
|
|
|
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108
|
|
Exercise of stock options
|
|
|
0.7
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
Employee stock purchase plan
|
|
|
0.8
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
Treasury stock purchased
|
|
|
(5.6
|
)
|
|
|
|
|
|
|
|
|
|
|
(573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(573
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 26, 2008
|
|
|
121.1
|
|
|
$
|
1
|
|
|
$
|
4,052
|
|
|
$
|
(1,098
|
)
|
|
$
|
3,145
|
|
|
$
|
105
|
|
|
$
|
87
|
|
|
$
|
6,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial
statements.
4
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
Year-to-Date Ended
|
|
|
|
September 25,
|
|
|
September 26,
|
|
|
|
2009
|
|
|
2008
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
681
|
|
|
$
|
682
|
|
Depreciation of property, plant and equipment
|
|
|
117
|
|
|
|
114
|
|
Amortization of intangibles and other assets
|
|
|
45
|
|
|
|
41
|
|
Deferred income tax provision
|
|
|
36
|
|
|
|
143
|
|
Stock-based employee compensation expense
|
|
|
53
|
|
|
|
48
|
|
Contributions to employee savings plans in L-3 Communications
Holdings, Inc.s common stock
|
|
|
110
|
|
|
|
108
|
|
Amortization of pension and postretirement benefit plans net
loss and prior service cost
|
|
|
39
|
|
|
|
3
|
|
Amortization of bond discounts (included in interest expense)
|
|
|
17
|
|
|
|
15
|
|
Amortization of deferred debt issue costs (included in interest
expense)
|
|
|
8
|
|
|
|
8
|
|
Impairment charge
|
|
|
|
|
|
|
28
|
|
Gain on sale of a product line
|
|
|
|
|
|
|
(12
|
)
|
Other non-cash items
|
|
|
(2
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,104
|
|
|
|
1,172
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities, excluding acquired
amounts:
|
|
|
|
|
|
|
|
|
Billed receivables
|
|
|
(18
|
)
|
|
|
(2
|
)
|
Contracts in process
|
|
|
(98
|
)
|
|
|
(161
|
)
|
Inventories
|
|
|
(3
|
)
|
|
|
(32
|
)
|
Other assets
|
|
|
|
|
|
|
(31
|
)
|
Accounts payable, trade
|
|
|
10
|
|
|
|
171
|
|
Accrued employment costs
|
|
|
(44
|
)
|
|
|
(23
|
)
|
Accrued expenses
|
|
|
1
|
|
|
|
30
|
|
Advance payments and billings in excess of costs incurred
|
|
|
(35
|
)
|
|
|
71
|
|
Income taxes
|
|
|
32
|
|
|
|
(10
|
)
|
Excess income tax benefits related to share-based payment
arrangements
|
|
|
(3
|
)
|
|
|
(10
|
)
|
Other current liabilities
|
|
|
(20
|
)
|
|
|
(143
|
)
|
Pension and postretirement benefits
|
|
|
40
|
|
|
|
17
|
|
All other operating activities
|
|
|
12
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
(126
|
)
|
|
|
(141
|
)
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
978
|
|
|
|
1,031
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Business acquisitions, net of cash acquired
|
|
|
(86
|
)
|
|
|
(224
|
)
|
Proceeds from sale of product lines
|
|
|
|
|
|
|
12
|
|
Capital expenditures
|
|
|
(128
|
)
|
|
|
(139
|
)
|
Dispositions of property, plant and equipment
|
|
|
3
|
|
|
|
5
|
|
Other investing activities
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(211
|
)
|
|
|
(352
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Common stock repurchased
|
|
|
(396
|
)
|
|
|
(573
|
)
|
Dividends paid on L-3 Communications Holdings, Inc.s
common stock
|
|
|
(124
|
)
|
|
|
(111
|
)
|
Proceeds from exercise of stock options
|
|
|
11
|
|
|
|
38
|
|
Proceeds from employee stock purchase plan
|
|
|
51
|
|
|
|
52
|
|
Excess income tax benefits related to share-based payment
arrangements
|
|
|
3
|
|
|
|
10
|
|
Other financing activities
|
|
|
(9
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(464
|
)
|
|
|
(595
|
)
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes on cash and
cash equivalents
|
|
|
21
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
324
|
|
|
|
77
|
|
Cash and cash equivalents, beginning of the period
|
|
|
867
|
|
|
|
780
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the period
|
|
$
|
1,191
|
|
|
$
|
857
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial
statements.
5
|
|
1.
|
Description
of Business
|
L-3 Communications Holdings, Inc. derives all of its operating
income and cash flows from its wholly-owned subsidiary, L-3
Communications Corporation (L-3 Communications). L-3
Communications Holdings, Inc. (L-3 Holdings and, together with
its subsidiaries, referred to herein as L-3 or the Company) is a
prime system contractor in aircraft modernization and
maintenance, Command, Control, Communications, Intelligence,
Surveillance and Reconnaissance
(C3ISR)
systems, and government services. L-3 is also a leading provider
of high technology products, subsystems and systems. The
Companys customers include the U.S. Department of
Defense (DoD) and its prime contractors, U.S. Government
intelligence agencies, the U.S. Department of Homeland
Security (DHS), U.S. Department of State (DoS),
U.S. Department of Justice (DoJ), allied foreign
governments, domestic and foreign commercial customers and
select other U.S. federal, state and local government
agencies.
The Company has the following four reportable segments:
(1) C3ISR,
(2) Government Services, (3) Aircraft Modernization
and Maintenance (AM&M), and (4) Specialized Products.
Financial information with respect to each of the Companys
reportable segments is included in Note 20.
C3ISR
provides products and services for the global ISR market,
C3
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, information technology (IT), advisory, training 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
Defense (DND) and other allied foreign governments. Specialized
Products provides a broad range of products, including
components, products, subsystems, systems, and related services
to military and commercial customers in several niche markets
across several business areas, including power &
control systems, electro-optic/infrared (EO/IR), microwave,
simulation & training, precision engagement, aviation
products, security & detection, propulsion systems,
displays, telemetry & advanced technology, undersea
warfare, and marine services.
These unaudited condensed consolidated financial statements for
the quarterly period and
year-to-date
period ended September 25, 2009 should be read in
conjunction with the audited consolidated financial statements
of L-3 Holdings and L-3 Communications included in their Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2008.
The Company adopted eight new accounting standards during the
year-to-date
period ended September 25, 2009, six of which were
effective January 1, 2009. In accordance with the
transition and disclosure provisions of three of these
standards, the Company retrospectively applied those provisions
and adjusted the prior period financial statements accordingly.
See Note 3 for the standards adopted and their impact to
the Companys financial position and results of operations.
The accompanying financial statements comprise the consolidated
financial statements of L-3 Holdings and L-3 Communications. L-3
Holdings only asset is its investment in the common stock
of L-3 Communications, its wholly-owned subsidiary, and its only
obligations are: (1) the 3% Convertible Contingent
Debt Securities (CODES) due 2035, which were issued by L-3
Holdings on July 29, 2005, (2) its guarantee of
borrowings under the senior credit facility of L-3
Communications and (3) its guarantee of other contractual
obligations of L-3 Communications and its subsidiaries. L-3
Holdings obligations relating to the CODES have been
jointly, severally, fully and
6
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
unconditionally guaranteed by L-3 Communications and certain of
its wholly-owned domestic subsidiaries. Accordingly, such debt
has been reflected as debt of L-3 Communications in its
consolidated financial statements in accordance with the
U.S. Securities and Exchange Commissions (SEC) Staff
Accounting Bulletin (SAB) No. 54. All issuances of and
conversions into L-3 Holdings equity securities, including
grants of stock options, restricted stock, restricted stock
units and performance units by L-3 Holdings to employees and
directors of L-3 Communications and its subsidiaries, have been
reflected in the consolidated financial statements of L-3
Communications. As a result, the consolidated financial
positions, results of operations and cash flows of L-3 Holdings
and L-3 Communications are substantially the same. See
Note 22 for additional information regarding the unaudited
financial information of L-3 Communications and its subsidiaries.
The unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally
accepted in the United States of America (U.S. GAAP) for
interim financial information and in accordance with the
instructions to
Form 10-Q
and Article 10 of
Regulation S-X
of the SEC. Accordingly, they do not include all of the
disclosures required by U.S. GAAP for a complete set of
annual audited financial statements. In the opinion of
management, all adjustments (consisting of normal and recurring
adjustments) considered necessary for a fair presentation of the
results for the interim periods presented have been included.
The results of operations for the interim periods are not
necessarily indicative of results for the full year.
Certain reclassifications have been made to conform prior year
amounts to the current year presentation.
It is the Companys established practice to close its books
for the quarters ending March, June and September on the Friday
nearest to the end of the calendar quarter. The interim
unaudited condensed consolidated financial statements included
herein have been prepared and are labeled based on that
convention. The Company closes its annual books on December 31
regardless of what day it falls on.
The preparation of financial statements in conformity with
U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of sales and costs of sales during the reporting period. The
most significant of these estimates and assumptions relate to
contract revenue, profit and loss recognition, fair values of
assets acquired and liabilities assumed in business
combinations, market values for inventories reported at lower of
cost or market, pension and post-retirement benefit obligations,
stock-based employee compensation expense, income taxes,
including the valuations of deferred tax assets, litigation
reserves and environmental obligations, accrued product warranty
costs, and the recoverability, useful lives and valuation of
recorded amounts of long-lived assets, identifiable intangible
assets and goodwill. Changes in estimates are reflected in the
periods during which they become known. Actual amounts will
differ from these estimates and could differ materially. For a
more complete discussion of these estimates and assumptions, see
the Annual Report of L-3 Holdings and L-3 Communications on
Form 10-K
for the fiscal year ended December 31, 2008.
During the quarter ended March 27, 2009, the Company
revised its reportable segment presentations to conform to
certain re-alignments in the Companys management and
organization structure. Consequently, the Company made certain
reclassifications between its
C3ISR,
Government Services, and AM&M reportable segments. See
Note 20 for the prior period amounts reclassified between
reportable segments.
7
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
3.
|
New
Accounting Standards Implemented
|
In June 2009, the Financial Accounting Standards Board (FASB)
issued the FASB Accounting Standards Codifications
(Codification). The Codification has become the single source
for all authoritative U.S. GAAP recognized by the FASB,
does not change U.S. GAAP and did not impact the
Companys financial position, results of operations and
cash flows. All references to U.S. GAAP in this report are
in accordance with the Codification.
The Company adopted eight newly issued accounting standards
during the
year-to-date
period ended September 25, 2009. The following six
standards were effective January 1, 2009:
|
|
|
|
|
Accounting for convertible debt instruments that may be settled
in cash upon conversion (Convertible Debt). The new standard is
contained in FASB Accounting Standards Codification (ASC) Topic
470, Debt;
|
|
|
|
Determining whether instruments granted in share-based payment
transactions are participating securities (Participating
Securities). The new standard is contained in FASB ASC Topic
260, Earnings Per Share;
|
|
|
|
Noncontrolling interests in consolidated financial statements
(Noncontrolling Interests). The new standard is contained in
FASB ASC Topic 810, Consolidation;
|
|
|
|
Disclosures about derivative instruments and hedging activities
(Derivative Disclosures). The new standard is contained in FASB
ASC Topic 815, Derivatives and Hedging;
|
|
|
|
Business combinations (Business Combinations). The new standard
is contained in FASB ASC Topic 805, Business Combinations;
and
|
|
|
|
Fair value measurements and disclosures (Fair Value
Measurements). The new standard is contained in FASB ASC Topic
820, Fair Value Measurements and Disclosures.
|
For the impact of the adoption of the newly issued standards for
Convertible Debt, Participating Securities and Noncontrolling
Interests on the Companys: (1) Condensed Consolidated
Balance Sheet, at December 31, 2008, (2) Consolidated
Equity Account Balances, at December 31, 2007, and
(3) Condensed Consolidated Statements of Operations for the
quarter and
year-to-date
periods ended September 26, 2008, see
pages 11-13.
The adoption of the new accounting standards for Derivative
Disclosures, Business Combinations and Fair Value Measurements
did not have a material impact on the Companys prior
period financial statements.
Convertible Debt: In accordance with the provisions
of the newly issued standard for convertible debt, the Company
is separately accounting for the liability and equity
(conversion option) components of the CODES in a manner that
reflects the Companys non-convertible debt borrowing rate
when interest expense is recognized. Previously, the CODES were
recorded at maturity value. The Convertible Debt standard does
not apply to the Companys other outstanding debt
instruments because they are not convertible debt instruments
within its scope. The Company has retrospectively applied the
provisions of this standard and adjusted the prior period
financial statements accordingly.
8
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The following table presents the impact of the provisions of the
Convertible Debt standard on the Statements of Operations for
the quarter and
year-to-date
period ended September 25, 2009.
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended
|
|
|
Year-to-Date Ended
|
|
|
|
September 25, 2009
|
|
|
September 25, 2009
|
|
|
|
(in millions, except per share data)
|
|
|
Interest expense
|
|
$
|
5
|
|
|
$
|
15
|
|
Provision for income taxes
|
|
|
(2
|
)
|
|
|
(6
|
)
|
Net income attributable to L-3
|
|
|
(3
|
)
|
|
|
(9
|
)
|
L-3 Holdings earnings per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.03
|
)
|
|
$
|
(0.08
|
)
|
Diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.08
|
)
|
Participating Securities: In accordance with the
provisions of the newly issued standard for participating
securities, the Company is including the impact of restricted
stock and restricted stock units that are entitled to receive
non-forfeitable dividends when calculating both basic EPS and
diluted EPS. The Company has retrospectively applied the
provisions of this standard and adjusted the prior period
financial statements accordingly. The adoption of the provisions
of this standard decreased basic EPS by $0.02 and diluted EPS by
$0.01 for the quarter ended September 25, 2009 and
decreased basic EPS by $0.05 and diluted EPS by $0.02 for the
year-to-date
period ended September 25, 2009.
Noncontrolling Interests: The Company
retrospectively applied the presentation requirements of the
newly issued standard for noncontrolling interest by:
(1) reclassifying noncontrolling interests (minority
interests) to equity on the Companys balance sheets, and
(2) including net income attributable to noncontrolling
interests in net income on the Companys statements of
operations.
Derivative Disclosures: The enhanced disclosures for
derivative instruments and related hedging activities required
in accordance with the provisions of this standard can be found
in Note 15.
Business Combinations: The Company adopted the
provisions of the newly issued standard for business
combinations to its acquisition of Chesapeake Sciences
Corporation (CSC), which was completed on January 30, 2009.
See Note 4 for additional information regarding the CSC
acquisition. There were no other material business acquisitions
completed during the
year-to-date
period ended September 25, 2009. In accordance with the
provisions of this standard, the Company is: (1) expensing
transaction and restructuring costs, (2) recognizing and
measuring contingent consideration at fair value,
(3) measuring contingent assets and liabilities at fair
value, or in accordance with FASB ASC Topic 450,
Contingencies, as appropriate, and (4) capitalizing
in-process research and development. In addition, the difference
between the ultimate resolution and the amount recorded on the
balance sheet for acquired uncertain tax positions is recorded
through earnings. Previously, the difference would have been
recorded through goodwill. Other than the net reversal of
amounts previously accrued of $26 million disclosed in
Note 11, the adoption of this standard did not have a
material impact on the Companys financial position,
results of operations and cash flows for the quarter and
year-to-date
period ended September 25, 2009.
9
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Fair Value Measurements: The Company applied the
provisions of the standard for fair value measurements to
non-financial assets and non-financial liabilities not
recognized or disclosed at fair value in the financial
statements on a recurring basis. The effective date for
application of the provisions of this standard to all
non-financial assets and non-financial liabilities not
recognized or disclosed at fair value on a recurring basis was
previously delayed until January 1, 2009. The application
of the provisions of the fair value measurement standard had no
impact on the Companys financial position, results of
operations and cash flows as the Company did not have any
non-financial assets and non-financial liabilities that were
recognized or disclosed at fair value on a non-recurring basis
at September 25, 2009.
Effective June 26, 2009, the Company adopted the following
two new accounting standards:
|
|
|
|
|
Subsequent Events (Subsequent Events). The new standard is
contained in FASB ASC Topic 855, Subsequent
Events; and
|
|
|
|
Interim Disclosures about Fair Value of Financial Instruments
(Financial Instruments). The new standard is contained in FASB
ASC Topic 825, Financial Instruments.
|
Subsequent Events: The adoption of the provisions of
the newly issued standard for subsequent events requires the
Company to evaluate events after the balance sheet date and
disclose the date through which the evaluation is performed. The
Company has evaluated subsequent events through the time of
filing this
Form 10-Q
with the SEC on November 4, 2009.
Financial Instruments: The adoption of the
provisions of the newly issued standard for financial
instruments requires: (1) the fair value disclosures of an
entitys financial instruments for interim financial
statements, and (2) disclosures about the methods and
significant assumptions used to estimate the fair value of
financial instruments. See Note 15 for the disclosures
required by the provisions of the Financial Instruments standard.
10
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The tables below present the Companys As Previously
Reported and As Currently Reported: (1) Condensed
Consolidated Balance Sheet, at December 31, 2008,
(2) Consolidated Equity Account Balances, at
December 31, 2007, and (3) Condensed Consolidated
Statement of Operations, for the quarter and
year-to-date
period ended September 26, 2008, in each case to reflect
the adjustments made to adopt the provisions of the newly issued
standards for Noncontrolling Interests, Convertible Debt and
Participating Securities, as applicable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments for:
|
|
|
|
|
|
|
As Previously
|
|
|
Noncontrolling
|
|
|
Convertible
|
|
|
As Currently
|
|
|
|
Reported
|
|
|
Interests
|
|
|
Debt
|
|
|
Reported
|
|
|
|
(in millions)
|
|
|
Condensed Consolidated Balance Sheet, at December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
4,961
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,961
|
|
Property, plant and equipment, net
|
|
|
821
|
|
|
|
|
|
|
|
|
|
|
|
821
|
|
Goodwill
|
|
|
8,029
|
|
|
|
|
|
|
|
|
|
|
|
8,029
|
|
Identifiable intangible assets
|
|
|
417
|
|
|
|
|
|
|
|
|
|
|
|
417
|
|
Deferred debt issue costs
|
|
|
45
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
44
|
|
Other assets
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
14,485
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
14,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
$
|
2,707
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,707
|
|
Pension and postretirement benefits
|
|
|
802
|
|
|
|
|
|
|
|
|
|
|
|
802
|
|
Deferred income taxes
|
|
|
110
|
|
|
|
|
|
|
|
17
|
|
|
|
127
|
|
Other liabilities
|
|
|
414
|
|
|
|
|
|
|
|
|
|
|
|
414
|
|
Long-term debt
|
|
|
4,538
|
|
|
|
|
|
|
|
(45
|
)
|
|
|
4,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,571
|
|
|
|
|
|
|
|
(28
|
)
|
|
|
8,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests
|
|
|
83
|
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 Communications Holdings Inc.s common stock
|
|
|
4,072
|
|
|
|
|
|
|
|
64
|
|
|
|
4,136
|
|
L-3 Communications Holdings Inc.s treasury stock at cost
|
|
|
(1,319
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,319
|
)
|
Retained earnings
|
|
|
3,410
|
|
|
|
|
|
|
|
(37
|
)
|
|
|
3,373
|
|
Accumulated other comprehensive loss
|
|
|
(332
|
)
|
|
|
|
|
|
|
|
|
|
|
(332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total L-3 shareholders equity
|
|
|
5,831
|
|
|
|
|
|
|
|
27
|
|
|
|
5,858
|
|
Noncontrolling interests
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
5,831
|
|
|
|
83
|
|
|
|
27
|
|
|
|
5,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
14,485
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
14,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Equity Account Balances, at December 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 Communications Holdings Inc.s common stock, net of
treasury stock
|
|
$
|
3,228
|
|
|
$
|
|
|
|
$
|
64
|
|
|
$
|
3,292
|
|
Retained earnings
|
|
|
2,608
|
|
|
|
|
|
|
|
(26
|
)
|
|
|
2,582
|
|
Accumulated other comprehensive income
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
153
|
|
Noncontrolling interests
|
|
|
|
|
|
|
87
|
|
|
|
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
$
|
5,989
|
|
|
$
|
87
|
|
|
$
|
38
|
|
|
$
|
6,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments for:
|
|
|
|
|
|
|
As Previously
|
|
|
Noncontrolling
|
|
|
Participating
|
|
|
Convertible
|
|
|
As Currently
|
|
|
|
Reported
|
|
|
Interests
|
|
|
Securities
|
|
|
Debt
|
|
|
Reported
|
|
|
|
(in millions, except per share data)
|
|
|
Condensed Consolidated Statement of Operations, for the
quarter ended September 26, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,662
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,662
|
|
Cost of sales
|
|
|
3,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400
|
|
Interest and other income, net
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Interest expense
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
72
|
|
Minority interests in net income of consolidated subsidiaries
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
337
|
|
|
|
2
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
335
|
|
Provision for income taxes
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
212
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
(2
|
)
|
|
$
|
212
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to L-3
|
|
$
|
212
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(2
|
)
|
|
$
|
210
|
|
Less: Net income allocable to participating securities
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocable to L-3 Communications Holdings, Inc.s
common shareholders
|
|
$
|
212
|
|
|
$
|
|
|
|
$
|
(3
|
)
|
|
$
|
(2
|
)
|
|
$
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 Communications Holdings, Inc.s earnings per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.75
|
|
|
$
|
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
1.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.73
|
|
|
$
|
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
1.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 Communications Holdings, Inc.s weighted average common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
121.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
122.6
|
|
|
|
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
122.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments for:
|
|
|
|
|
|
|
As Previously
|
|
|
Noncontrolling
|
|
|
Participating
|
|
|
Convertible
|
|
|
As Currently
|
|
|
|
Reported
|
|
|
Interests
|
|
|
Securities
|
|
|
Debt
|
|
|
Reported
|
|
|
|
(in millions, except per share data)
|
|
|
Condensed Consolidated Statement of Operations, for the
year-to-date
period ended September 26, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
10,890
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,890
|
|
Cost of sales
|
|
|
9,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,747
|
|
Litigation Gain
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,269
|
|
Interest and other income, net
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
Interest expense
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
214
|
|
Minority interests in net income of consolidated subsidiaries
|
|
|
8
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,083
|
|
|
|
8
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
1,077
|
|
Provision for income taxes
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
682
|
|
|
$
|
8
|
|
|
$
|
|
|
|
$
|
(8
|
)
|
|
$
|
682
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to L-3
|
|
$
|
682
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(8
|
)
|
|
$
|
674
|
|
Less: Net income allocable to participating securities
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocable to L-3 Communications Holdings, Inc.s
common shareholders
|
|
$
|
682
|
|
|
$
|
|
|
|
$
|
(6
|
)
|
|
$
|
(8
|
)
|
|
$
|
668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 Communications Holdings, Inc.s earnings per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
5.60
|
|
|
$
|
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
5.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
5.51
|
|
|
$
|
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
5.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 Communications Holdings, Inc.s weighted average common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
121.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
123.7
|
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
123.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Acquisitions
and Dispositions
|
All of the business acquisitions are included in the
Companys results of operations from their respective dates
of acquisition.
2009
Business Acquisitions
On January 30, 2009, the Company acquired all of the
outstanding stock of CSC for a preliminary purchase price of
$92 million, consisting of: (1) $87 million in
cash, including a $7 million net working capital
adjustment, of which $6 million was for cash acquired, and
(2) a purchase price payable of $5 million related to
certain tax benefits acquired. CSC is a developer and
manufacturer of anti-submarine warfare systems for use onboard
submarines and surface ship combatants. Based on the preliminary
purchase price allocation, the amount of goodwill recognized was
$57 million, which was assigned to the Specialized Products
reportable segment, and is not expected to be deductible for
income tax purposes. The final purchase price allocation is
expected to be completed during the
13
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
fourth quarter of 2009, and will be based on final appraisals
and other analyses of fair values for acquired assets and
assumed liabilities. The Company does not expect any of the
differences between the preliminary and final purchase price
allocations to have a material impact on its results of
operations and financial position. The acquisition was financed
with cash on hand.
2008
Business Acquisitions
During the
year-to-date
period ended September 25, 2009, the Company completed the
purchase price allocations for G.A. International (GAI) and
International Resources Group, Ltd. (IRG), subject to the
finalization of the purchase price for GAI. The purchase price
for GAI is subject to additional consideration not to exceed
$1 million that is contingent upon GAIs
post-acquisition financial performance through July 25,
2011. Any additional consideration paid that is contingent upon
post-acquisition performance will be accounted for as goodwill.
The final purchase price allocations for these business
acquisitions compared to the 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
year-to-date
period ended September 25, 2009 and the year ended
December 31, 2008, in each case assuming that the business
acquisitions that were completed during these periods had
occurred on January 1, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended
|
|
Year-to-Date Ended
|
|
|
September 25,
|
|
September 26,
|
|
September 25,
|
|
September 26,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
(in millions, except per share data)
|
|
Pro forma net sales
|
|
$
|
3,842
|
|
|
$
|
3,694
|
|
|
$
|
11,413
|
|
|
$
|
11,034
|
|
Pro forma net income attributable to L-3
|
|
$
|
250
|
|
|
$
|
212
|
|
|
$
|
674
|
|
|
$
|
676
|
|
Pro forma diluted EPS
|
|
$
|
2.12
|
|
|
$
|
1.71
|
|
|
$
|
5.68
|
|
|
$
|
5.43
|
|
The unaudited pro forma results disclosed in the table above are
based on various assumptions and are not necessarily indicative
of the results of operations that would have occurred had the
Company completed these acquisitions on January 1, 2008.
2008
Business and Product Line Dispositions
On October 8, 2008, the Company divested its 85% ownership
interest in Medical Education Technologies, Inc. (METI), which
was within the Specialized Products reportable segment. The sale
resulted in a fourth quarter 2008 after-tax gain of
$20 million (pre-tax gain of $33 million). The gain
was excluded from income from continuing operations for the 2008
fourth quarter in accordance with U.S. GAAP for impairment
or disposal of long-lived assets (contained in FASB ASC Topic
360, Property, Plant, and Equipment and FASB ASC Topic
205, Presentation of Financial Statements).The
revenues, operating results and net assets of METI for all
periods presented were not material and, therefore, are not
presented as discontinued operations. METI generated
$17 million of sales and $2 million of operating
income for the quarter ended September 26, 2008,
$47 million of sales and $4 million of operating
income for the
year-to-date
period ended September 26, 2008, and $48 million of
sales and $4 million of operating income for the year ended
December 31, 2008.
On May 9, 2008, the Company sold the Electron Technologies
Passive Microwave Devices (PMD) product line, which was within
the Specialized Products reportable segment. The sale resulted
in a second quarter 2008 after-tax gain of approximately
$7 million (pre-tax gain of $12 million), which was
recorded as a reduction of cost
14
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
of sales for products in the Unaudited Condensed Consolidated
Statement of Operations. The net proceeds from the sale are
included in investing activities on the Unaudited Condensed
Consolidated Statement of Cash Flows. The PMD product line
generated $8 million of sales for both the
year-to-date
period ended September 26, 2008 and the year ended
December 31, 2008.
The components of contracts in process are presented in the
table below.
|
|
|
|
|
|
|
|
|
|
|
September 25,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Unbilled contract receivables, gross
|
|
$
|
2,318
|
|
|
$
|
2,079
|
|
Less: unliquidated progress payments
|
|
|
(629
|
)
|
|
|
(462
|
)
|
|
|
|
|
|
|
|
|
|
Unbilled contract receivables, net
|
|
|
1,689
|
|
|
|
1,617
|
|
|
|
|
|
|
|
|
|
|
Inventoried contract costs, gross
|
|
|
846
|
|
|
|
754
|
|
Less: unliquidated progress payments
|
|
|
(137
|
)
|
|
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
Inventoried contract costs, net
|
|
|
709
|
|
|
|
650
|
|
|
|
|
|
|
|
|
|
|
Total contracts in process
|
|
$
|
2,398
|
|
|
$
|
2,267
|
|
|
|
|
|
|
|
|
|
|
Inventoried Contract Costs. In accordance
with FASB ASC Topic
605-35-25,
Revenue Recognition Construction-Type and
Production-Type Contracts General, the Company
accounts for the portion of its general and administrative
(G&A) costs, independent research and development (IRAD)
costs and bid and proposal (B&P) costs that are allowable
and reimbursable indirect contract costs under
U.S. Government procurement regulations on its
U.S. Government contracts (revenue arrangements) as
inventoried contract costs. G&A, IRAD and B&P costs
are allocated to contracts for which the U.S. Government is
the end customer and are charged to costs of sales when sales on
the related contracts are recognized. The Companys
unallowable portion of its G&A, IRAD and B&P costs for
its U.S. Government contractor businesses are expensed as
incurred and are not included in inventoried contract costs.
The table below presents a summary of G&A, IRAD and
B&P costs included in inventoried contract costs and the
changes to them, including amounts charged to cost of sales for
U.S. Government contracts for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended
|
|
|
Year-to-Date Ended
|
|
|
|
September 25,
|
|
|
September 26,
|
|
|
September 25,
|
|
|
September 26,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Amounts included in inventoried contract costs at beginning of
the period
|
|
$
|
79
|
|
|
$
|
79
|
|
|
$
|
74
|
|
|
$
|
68
|
|
Add: Contract costs
incurred(1)
|
|
|
305
|
|
|
|
335
|
|
|
|
951
|
|
|
|
935
|
|
Amounts included in acquired inventoried contract costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Less: Amounts charged to cost of sales
|
|
|
(294
|
)
|
|
|
(339
|
)
|
|
|
(935
|
)
|
|
|
(935
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in inventoried contract costs at end of the
period
|
|
$
|
90
|
|
|
$
|
75
|
|
|
$
|
90
|
|
|
$
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
(1) |
|
Incurred costs include IRAD and
B&P costs of $76 million for the quarter ended
September 25, 2009, $74 million for the quarter ended
September 26, 2008, $232 million for the
year-to-date
period ended September 25, 2009 and $211 million for
the
year-to-date
period ended September 26, 2008.
|
The table below presents a summary of selling, general and
administrative expenses and research and development expenses
for the Companys commercial businesses, which are expensed
as incurred and not included in inventoried contract costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended
|
|
|
Year-to-Date Ended
|
|
|
|
September 25,
|
|
|
September 26,
|
|
|
September 25,
|
|
|
September 26,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Selling, general and administrative expenses
|
|
$
|
57
|
|
|
$
|
70
|
|
|
$
|
175
|
|
|
$
|
209
|
|
Research and development expenses
|
|
|
17
|
|
|
|
19
|
|
|
|
54
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
74
|
|
|
$
|
89
|
|
|
$
|
229
|
|
|
$
|
276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
September 25,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Raw materials, components and
sub-assemblies
|
|
$
|
99
|
|
|
$
|
95
|
|
Work in process
|
|
|
127
|
|
|
|
121
|
|
Finished goods
|
|
|
32
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
258
|
|
|
$
|
259
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Goodwill
and Identifiable Intangible Assets
|
Goodwill. In accordance with U.S. GAAP
for business combinations (contained in FASB ASC Topic 805,
Business Combinations), the Company allocates the cost of
business acquisitions to the assets acquired and liabilities
assumed based on their fair values at the date of acquisition
(commonly referred to as the purchase price allocation). The
table below presents the changes in goodwill allocated to the
Companys reportable segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
|
|
|
|
|
|
Specialized
|
|
|
Consolidated
|
|
|
|
C3ISR
|
|
|
Services
|
|
|
AM&M
|
|
|
Products
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Balance at December 31,
2008(1)
|
|
$
|
862
|
|
|
$
|
2,313
|
|
|
$
|
1,121
|
|
|
$
|
3,733
|
|
|
$
|
8,029
|
|
Business acquisition
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
57
|
|
|
|
62
|
|
Foreign currency translation
adjustments(2)
|
|
|
14
|
|
|
|
2
|
|
|
|
30
|
|
|
|
51
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 25, 2009
|
|
$
|
876
|
|
|
$
|
2,320
|
|
|
$
|
1,151
|
|
|
$
|
3,841
|
|
|
$
|
8,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a result of certain
re-alignments in the Companys management and organization
structure as discussed in Note 2, $17 million of
goodwill was reclassified from the
C3ISR
reportable segment to the Government Services reportable
segment, and $17 million of goodwill was reclassified from
the C3ISR
reportable segment to the AM&M reportable segment.
|
16
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
(2) |
|
The increase in goodwill from
foreign currency translation adjustments is due to the weakening
of the U.S. dollar during the
year-to-date
period ended September 25, 2009 against the functional
currencies of L-3s foreign subsidiaries, primarily in
Canada, Germany and the United Kingdom.
|
Identifiable Intangible Assets. Information
on the Companys identifiable intangible assets that are
subject to amortization is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Average
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Amortization
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Period
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(in years)
|
|
|
(in millions)
|
|
|
Customer contractual relationships
|
|
|
23
|
|
|
$
|
515
|
|
|
$
|
154
|
|
|
$
|
361
|
|
|
$
|
505
|
|
|
$
|
124
|
|
|
$
|
381
|
|
Technology
|
|
|
8
|
|
|
|
78
|
|
|
|
55
|
|
|
|
23
|
|
|
|
76
|
|
|
|
47
|
|
|
|
29
|
|
Other, primarily favorable leasehold interests
|
|
|
7
|
|
|
|
14
|
|
|
|
8
|
|
|
|
6
|
|
|
|
14
|
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
22
|
|
|
$
|
607
|
|
|
$
|
217
|
|
|
$
|
390
|
|
|
$
|
595
|
|
|
$
|
178
|
|
|
$
|
417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense recorded by the Company for its
identifiable intangible assets is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended
|
|
|
Year-to-Date Ended
|
|
|
|
September 25,
|
|
|
September 26,
|
|
|
September 25,
|
|
|
September 26,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Amortization expense
|
|
$
|
13
|
|
|
$
|
12
|
|
|
$
|
39
|
|
|
$
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on gross carrying amounts at September 25, 2009, the
Companys estimate of amortization expense for identifiable
intangible assets for the years ending December 31, 2009
through 2013 are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ending December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
(in millions)
|
|
|
Estimated amortization expense
|
|
$
|
52
|
|
|
$
|
52
|
|
|
$
|
47
|
|
|
$
|
39
|
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 25, 2009 and December 31, 2008, the
Company had $1 million of indefinite-lived identifiable
intangible assets.
17
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
8.
|
Other
Current Liabilities and Other Liabilities
|
The table below presents the components of other current
liabilities.
|
|
|
|
|
|
|
|
|
|
|
September 25,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Other Current Liabilities:
|
|
|
|
|
|
|
|
|
Accruals for pending and threatened litigation (see Note 16)
|
|
$
|
3
|
|
|
$
|
5
|
|
Accrued product warranty costs
|
|
|
91
|
|
|
|
97
|
|
Accrued interest
|
|
|
65
|
|
|
|
66
|
|
Estimated costs in excess of estimated contract value to
complete contracts in process in a loss position
|
|
|
58
|
|
|
|
58
|
|
Deferred revenues
|
|
|
27
|
|
|
|
25
|
|
Aggregate purchase price payable for acquired businesses
|
|
|
5
|
|
|
|
|
|
Other
|
|
|
87
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
Total other current liabilities
|
|
$
|
336
|
|
|
$
|
351
|
|
|
|
|
|
|
|
|
|
|
The table below presents the components of other liabilities.
|
|
|
|
|
|
|
|
|
|
|
September 25,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Other Liabilities:
|
|
|
|
|
|
|
|
|
Non-current income taxes payable (see Note 11)
|
|
$
|
176
|
|
|
$
|
177
|
|
Deferred compensation
|
|
|
87
|
|
|
|
79
|
|
Accrued workers compensation
|
|
|
51
|
|
|
|
45
|
|
Unfavorable lease obligations
|
|
|
6
|
|
|
|
8
|
|
Non-current portion of net deferred gains from terminated
interest rate swap agreements
|
|
|
6
|
|
|
|
9
|
|
Notes payable and capital lease obligations
|
|
|
10
|
|
|
|
10
|
|
Accrued product warranty costs
|
|
|
7
|
|
|
|
5
|
|
Other non-current liabilities
|
|
|
81
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
$
|
424
|
|
|
$
|
414
|
|
|
|
|
|
|
|
|
|
|
The table below presents the changes in the Companys
accrued product warranty costs.
|
|
|
|
|
|
|
|
|
|
|
Year-to-Date Ended
|
|
|
|
September 25,
|
|
|
September 26,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Accrued product warranty
costs(1):
|
|
|
|
|
|
|
|
|
Balance at January 1
|
|
$
|
102
|
|
|
$
|
98
|
|
Acquisitions during the period
|
|
|
|
|
|
|
5
|
|
Accruals for product warranties issued during the period
|
|
|
36
|
|
|
|
27
|
|
Foreign currency translation adjustments
|
|
|
2
|
|
|
|
(1
|
)
|
Settlements made during the period
|
|
|
(42
|
)
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
98
|
|
|
$
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Warranty obligations incurred in
connection with long-term production contracts are accounted for
within the contract estimates at completion (EACs) and are
excluded from the above amounts. Balances include both long-term
and short-term amounts.
|
18
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED 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.
|
|
|
|
|
|
|
|
|
|
|
September 25,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
L-3 Communications:
|
|
|
|
|
|
|
|
|
Borrowings under Revolving Credit
Facility(1)
|
|
$
|
|
|
|
$
|
|
|
Borrowings under Term Loan
Facility(2)
|
|
|
650
|
|
|
|
650
|
|
7
5/8% Senior
Subordinated Notes due 2012
|
|
|
750
|
|
|
|
750
|
|
6
1/8% Senior
Subordinated Notes due 2013
|
|
|
400
|
|
|
|
400
|
|
6
1/8% Senior
Subordinated Notes due 2014
|
|
|
400
|
|
|
|
400
|
|
5
7/8% Senior
Subordinated Notes due 2015
|
|
|
650
|
|
|
|
650
|
|
6
3/8% Senior
Subordinated Notes due 2015
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
3,850
|
|
|
|
3,850
|
|
|
|
|
|
|
|
|
|
|
L-3 Holdings:
|
|
|
|
|
|
|
|
|
3% Convertible Contingent Debt Securities due
2035(3)
|
|
|
700
|
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
Principal amount of long-term debt
|
|
|
4,550
|
|
|
|
4,550
|
|
Less: Unamortized discounts
|
|
|
(40
|
)
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
Carrying amount of long-term debt
|
|
|
4,510
|
|
|
|
4,493
|
|
Less: Current portion of long-term debt
|
|
|
(650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount of long-term debt, excluding current portion
|
|
$
|
3,860
|
|
|
$
|
4,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Companys five-year
revolving credit facility, which was replaced on
October 23, 2009 by a new $1 billion three-year
revolving credit facility maturing on October 23, 2012,
allowed for total aggregate borrowings of up to $1 billion.
At September 25, 2009, available borrowings under the
revolving credit facility were $965 million after
reductions for outstanding letters of credit of $35 million.
|
|
(2) |
|
The interest rate at
September 25, 2009 and December 31, 2008 was 1.12% and
2.70%, respectively, and was based on the LIBOR rate (as defined
in the credit agreement) plus a spread. See Note 10 to the
audited consolidated financial statements included in the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2008 for additional
information regarding the interest on borrowings under the term
loan facility. Borrowings under the term loan facility were
repaid on October 7, 2009 and are classified as a current
liability as of September 25, 2009.
|
|
(3) |
|
Under select conditions, including
if L-3 Holdings common stock price is more than 120% (currently
$120.17) of the then current conversion price (currently
$100.14) for a specified period, the conversion feature of the
CODES will require L-3 Holdings, upon conversion, to pay the
$700 million principal amount in cash, and if the
settlement amount exceeds the principal amount, the excess will
be settled in cash or stock or a combination thereof, at the
Companys option. At the current conversion price of
$100.14, the aggregate consideration to be delivered upon
conversion would be determined based on 7.0 million shares
of L-3
Holdings common stock. See Note 10 to the audited
consolidated financial statements for the year ended
December 31, 2008, included in the Companys Annual
Report on
Form 10-K
for additional information regarding the CODES, including
conditions for conversion. L-3s stock price on
October 30, 2009 was $72.29 per share. The effective
interest rate on 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 $11 million and $10 million for the
third quarter periods ended September 25, 2009 and
September 26, 2008, respectively, and $31 million and
$30 million for the
year-to-date
periods ended September 25, 2009 and September 26,
2008, respectively. The following table provides additional
information about the Companys CODES:
|
|
|
|
|
|
|
|
|
|
|
|
September 25,
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
|
(in millions)
|
|
Carrying amount of the equity component (conversion feature)
|
|
$
|
64
|
|
|
$
|
64
|
|
Unamortized discount of liability component being amortized
through February 1, 2011
|
|
$
|
29
|
|
|
$
|
45
|
|
Net carrying amount of liability component
|
|
$
|
671
|
|
|
$
|
655
|
|
19
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
On October 2, 2009, L-3 Communications issued
$1 billion in aggregate principal amount of
5.20% Senior Notes due October 15, 2019 (2009 Notes).
The 2009 Notes have an effective interest rate of 5.25% and were
issued 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. Interest on the 2009 Notes is payable semi-annually on
April 15 and October 15 of each year, commencing on
April 15, 2010. The net cash proceeds from this offering
amounted to approximately $988 million after deducting the
discounts, commissions and estimated expenses, and were used,
together with cash on hand, to redeem L-3 Communications
$750 million
75/8% 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
will record a debt retirement charge in the fourth quarter of
2009 of approximately $9 million ($6 million after
income tax, or $0.05 per diluted share). The 2009 Notes are
unsecured senior obligations of L-3 Communications, rank equal
in right of payment with all of L-3 Communications
existing and future senior indebtedness and rank senior in right
of payment to all of L-3 Communications existing and
future senior subordinated indebtedness. The 2009 Notes are also
guaranteed on a senior, unsecured basis by each of L-3
Communications material domestic subsidiaries that
guarantee any of L-3 Communications other indebtedness.
The 2009 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 credit agreement) plus
0.30%. For additional information on the terms of L-3
Communications 2009 Notes, including restrictive
covenants, see the Companys Current Report on
Form 8-K
dated October 2, 2009 and the indenture governing the terms
of the 2009 Notes, which is filed as an exhibit to this report.
On October 23, 2009, L-3 Communications replaced its
$1 billion revolving credit facility with a new
$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 credit agreement), and (c) 1.00% per annum above a
LIBOR rate (as defined in the credit agreement),
plus a spread ranging from 1.25% to 3.00% per annum, or
(ii) a LIBOR rate (as defined in the credit
agreement) 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 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. For additional information on the
terms of L-3 Communications new $1 billion three-year
revolving credit facility, including the financial and other
restrictive covenants, see the Companys Current Report on
Form 8-K
dated October 23, 2009, and the credit agreement governing
the terms of the new $1 billion three-year revolving credit
facility, which is incorporated by reference as an exhibit to
this report.
20
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
A reconciliation of net income to comprehensive income
attributable to L-3 is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended
|
|
|
Year-to-Date Ended
|
|
|
|
September 25,
|
|
|
September 26,
|
|
|
September 25,
|
|
|
September 26,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Net income
|
|
$
|
253
|
|
|
$
|
212
|
|
|
$
|
681
|
|
|
$
|
682
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
66
|
|
|
|
(57
|
)
|
|
|
116
|
|
|
|
(54
|
)
|
Unrealized gains on hedging
instruments(1)
|
|
|
4
|
|
|
|
3
|
|
|
|
3
|
|
|
|
4
|
|
Amortization of pension and postretirement benefit plans net
loss (gain) and prior service
cost(2)
|
|
|
8
|
|
|
|
(1
|
)
|
|
|
23
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
331
|
|
|
|
157
|
|
|
|
823
|
|
|
|
634
|
|
Less: Comprehensive income attributable to noncontrolling
interests
|
|
|
3
|
|
|
|
2
|
|
|
|
7
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to L-3
|
|
$
|
328
|
|
|
$
|
155
|
|
|
$
|
816
|
|
|
$
|
626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts are net of income taxes of
$2 million and $1 million for the quarterly periods
ended September 25, 2009 and September 26, 2008,
respectively, and $1 million and $2 million for the
year-to-date
periods ended September 25, 2009 and September 26,
2008, respectively.
|
(2) |
|
Amounts are net of income taxes of
$5 million for the quarterly period ended
September 25, 2009, and $16 million and
$1 million for the
year-to-date
periods ended September 25, 2009 and September 26,
2008, respectively. See Note 17.
|
The U.S. Federal income tax jurisdiction is the
Companys major tax jurisdiction. The statute of
limitations for the 2004 and 2005 tax years of the Company and
certain of its acquired subsidiaries expired during the third
quarter of 2009. The statute of limitations for the
Companys U.S. Federal income tax returns for the
years ended December 31, 2006 through 2008 remain open. 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
September 25, 2009, the Company anticipates that
unrecognized tax benefits will decrease by approximately
$15 million over the next 12 months.
Current and non-current income taxes payable include potential
interest of $18 million ($11 million after income
taxes) at September 25, 2009 and December 31, 2008,
and potential penalties of $8 million at September 25,
2009 and $7 million at December 31, 2008.
During the third quarter of 2009, the Company recorded a tax
benefit of $26 million for a net reversal of amounts previously
accrued, related to the 2004 and 2005 tax years, for which the
statute of limitations has expired.
21
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
12.
|
L-3
Holdings Earnings Per Common Share
|
A reconciliation of basic EPS and diluted EPS is presented in
the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended
|
|
|
Year-to-Date Ended
|
|
|
|
September 25,
|
|
|
September 26,
|
|
|
September 25,
|
|
|
September 26,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions, except per share data)
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocable to L-3 Holdings common shareholders
|
|
$
|
248
|
|
|
$
|
207
|
|
|
$
|
668
|
|
|
$
|
668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
116.4
|
|
|
|
121.0
|
|
|
|
117.1
|
|
|
|
121.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
2.13
|
|
|
$
|
1.71
|
|
|
$
|
5.70
|
|
|
$
|
5.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocable to L-3 Holdings common shareholders
|
|
$
|
248
|
|
|
$
|
207
|
|
|
$
|
668
|
|
|
$
|
668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common and potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
116.4
|
|
|
|
121.0
|
|
|
|
117.1
|
|
|
|
121.8
|
|
Assumed exercise of stock options
|
|
|
3.5
|
|
|
|
4.0
|
|
|
|
3.5
|
|
|
|
4.3
|
|
Unvested restricted stock awards
|
|
|
0.6
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
Employee stock purchase plan contributions
|
|
|
|
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
0.4
|
|
Performance unit awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed purchase of common shares for treasury
|
|
|
(3.5
|
)
|
|
|
(3.4
|
)
|
|
|
(3.6
|
)
|
|
|
(3.5
|
)
|
Assumed conversion of the CODES
|
|
|
|
(1)
|
|
|
|
(1)
|
|
|
|
(1)
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common and potential common shares
|
|
|
117.0
|
|
|
|
122.0
|
|
|
|
117.6
|
|
|
|
123.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
2.12
|
|
|
$
|
1.70
|
|
|
$
|
5.68
|
|
|
$
|
5.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
L-3 Holdings CODES had no
impact on diluted EPS for the quarter and
year-to-date
period ended September 25, 2009 and the quarter ended
September 26, 2008, 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 September 25, 2009,
the conversion price was $100.14.
|
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 3.5 million
and 3.0 million for the quarter and
year-to-date
period ended September 25, 2009, respectively, and
2.4 million and 1.9 million for the quarter and
year-to-date
period ended September 26, 2008, respectively, because they
were anti-dilutive.
EPS for the
year-to-date
period ended September 26, 2008 includes: (1) a gain
of $0.65 per diluted share for the reversal of a current
liability for pending and threatened litigation as a result of a
June 27, 2008 decision by the U.S. Court of Appeals
vacating an adverse 2006 jury verdict, (2) a gain of $0.06
per diluted share for the sale of the PMD product line (see
Note 4), and (3) a non-cash charge of $0.14 per
diluted share related to a write-down of capitalized software
development costs.
22
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Repurchases of L-3 Holdings common stock under the
$1 billion share repurchase program, approved by the Board
of Directors in November 2008, are made from time to time at
managements discretion in accordance with applicable
U.S. federal securities laws in the open market or
otherwise. All share repurchases of L-3 Holdings common stock
have been recorded as treasury shares. At September 25,
2009, the remaining dollar value under the share repurchase
program was $535 million.
From September 26, 2009 through November 4, 2009, L-3
repurchased 324,207 shares of L-3 Holdings common
stock at an average price of $74.10 per share for an aggregate
amount of $24 million.
On October 6, 2009, L-3 Holdings Board of Directors
declared a quarterly cash dividend of $0.35 per share, payable
on December 15, 2009 to shareholders of record at the close
of business on November 17, 2009.
|
|
14.
|
Fair
Value Measurements
|
The following table presents the fair value hierarchy level for
each of the Companys assets and liabilities that are
measured and recorded at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2009
|
|
|
December 31, 2008
|
|
Description
|
|
Level
1(a)
|
|
|
Level
2(b)
|
|
|
Level
3(c)
|
|
|
Level
1(a)
|
|
|
Level
2(b)
|
|
|
Level
3(c)
|
|
|
|
(in millions)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
958
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
794
|
|
|
$
|
|
|
|
$
|
|
|
Derivative instruments
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
958
|
|
|
$
|
18
|
|
|
$
|
|
|
|
$
|
794
|
|
|
$
|
22
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
$
|
|
|
|
$
|
9
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
21
|
|
|
$
|
|
|
|
|
|
(a) |
|
Level 1 is based on quoted
market prices available in active markets for identical assets
or liabilities as of the reporting date.
|
|
(b) |
|
Level 2 is based on pricing
inputs other than quoted prices in active markets, which are
either directly or indirectly observable. The fair value is
determined using a valuation model based on observable market
inputs, including quoted foreign currency forward exchange rates
and consideration of non-performance risk.
|
|
(c) |
|
Level 3 is based on pricing
inputs that are not observable and not corroborated by market
data. The Company has no Level 3 assets or liabilities.
|
|
|
15.
|
Financial
Instruments
|
Fair Value of Financial Instruments. At
September 25, 2009 and December 31, 2008, the
Companys financial instruments consisted primarily of cash
and cash equivalents, billed receivables, trade accounts
payable, borrowings under the term loan facility, senior
subordinated notes, CODES and foreign currency forward
contracts. The carrying amounts of cash and cash equivalents,
billed receivables and trade accounts payable are representative
of their respective fair values because of the short-term
maturities or expected settlement dates of these instruments.
The fair value of borrowings under the term loan facility are
based on similar debt issued. The senior subordinated notes are
registered, unlisted public debt traded in the
over-the-counter
market and their fair values are based on quoted trading
activity. The fair values of the CODES are based on quoted
prices for the same or similar issues. The fair values of
foreign currency
23
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
forward contracts were estimated based on forward exchange rates
at September 25, 2009 and December 31, 2008. The
carrying amounts and estimated fair values of the Companys
financial instruments are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2009
|
|
|
December 31, 2008
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
(in millions)
|
|
|
Borrowings under the Term Loan Facility
|
|
$
|
650
|
|
|
$
|
643
|
|
|
$
|
650
|
|
|
$
|
608
|
|
Senior Subordinated Notes
|
|
|
3,189
|
|
|
|
3,172
|
|
|
|
3,188
|
|
|
|
2,916
|
|
CODES
|
|
|
671
|
|
|
|
717
|
|
|
|
655
|
|
|
|
697
|
|
Foreign currency forward
contracts(1)
|
|
|
9
|
|
|
|
9
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
(1) |
|
Notional amounts of foreign
currency forward contracts were $359 million at
September 25, 2009 and $414 million at
December 31, 2008.
|
Derivative Financial Instruments. The Companys
derivative financial instruments include foreign currency
forward contracts, which are entered into for risk management
purposes, and an embedded derivative representing the contingent
interest payment provision related to the CODES.
Foreign Currency Forward Contracts. The
Companys U.S. and foreign businesses enter into
contracts with customers, subcontractors or vendors that are
denominated in currencies other than their functional
currencies. To protect the functional currency equivalent cash
flows associated with certain of these contracts, the Company
enters into foreign currency forward contracts. The
Companys activities involving foreign currency forward
contracts are designed to hedge the changes in the functional
currency equivalent cash flows due to movements in foreign
exchange rates compared to the functional currency. The foreign
currencies hedged are primarily the Canadian dollar, Euro,
British pound and U.S. dollar. The Company manages exposure
to counterparty credit risk by entering into foreign currency
forward contracts only with major financial institutions that
are expected to fully perform under the terms of such contracts.
Foreign currency forward contracts are recorded in the
Companys Consolidated Balance Sheets at fair value and are
generally designated and accounted for as cash flow hedges in
accordance with U.S. GAAP for derivative instruments and
hedging activities (contained in FASB ASC Topic 815,
Derivatives and Hedging). Gains and losses on designated
foreign currency forward contracts that are considered highly
effective in offsetting the corresponding change in the cash
flows of the hedged transaction are recorded net of income taxes
in accumulated other comprehensive income (loss) (accumulated
OCI) and then recognized in income when the underlying hedged
transaction affects income. The estimated net amount of existing
gains at September 25, 2009 that are expected to be
reclassified into income within the next 12 months is
$5 million. Gains and losses on foreign currency forward
contracts that do not meet hedge accounting criteria are
recognized in income immediately.
The table below presents the notional amounts of the
Companys outstanding foreign currency forward contracts by
currency as of September 25, 2009:
|
|
|
|
|
Currency
|
|
Notional Amount
|
|
|
|
(in millions)
|
|
|
U.S. dollar
|
|
$
|
130
|
|
Canadian dollar
|
|
|
105
|
|
British pound
|
|
|
99
|
|
Euro
|
|
|
14
|
|
Other
|
|
|
11
|
|
|
|
|
|
|
Total
|
|
$
|
359
|
|
|
|
|
|
|
24
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The notional amounts are used to measure the volume of these
contracts and do not represent exposure to foreign currency
losses. At September 25, 2009, the Companys foreign
currency forward contracts had maturities through 2016.
The table below presents the fair values and the location of the
Companys derivative instruments in the Unaudited Condensed
Consolidated Balance Sheet as of September 25, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Derivative
Instruments(1)
|
|
|
|
Other
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Current
|
|
|
Other
|
|
|
Current
|
|
|
Other
|
|
|
|
Assets
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Liabilities
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
6
|
|
|
$
|
9
|
|
|
$
|
3
|
|
|
$
|
2
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
|
2
|
|
|
|
1
|
|
|
|
3
|
|
|
|
1
|
|
Embedded derivative related to the CODES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative instruments
|
|
$
|
8
|
|
|
$
|
10
|
|
|
$
|
6
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 14 for a description
of the fair value hierarchy related to the Companys
foreign currency forward contracts.
|
The tables below present the effects of the Companys
derivative instruments on the Unaudited Condensed Consolidated
Statement of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain or (Loss) Recognized
|
|
|
|
Amount of
|
|
|
|
|
|
|
|
in Income on Derivative
|
|
|
|
Gain or (Loss)
|
|
|
Gain or (Loss) Reclassified from Accumulated
|
|
|
(Ineffective Portion and
|
|
|
|
Recognized in
|
|
|
OCI into Income
|
|
|
Amount Excluded from
|
|
|
|
OCI on Derivative
|
|
|
(Effective Portion)
|
|
|
Effectiveness Testing)
|
|
Derivatives Designated as Hedging Instruments
|
|
(Effective Portion)
|
|
|
Location
|
|
Amount
|
|
|
Location
|
|
Amount
|
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
|
|
|
For the quarter ended September 25, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
5
|
|
|
Cost of Sales
|
|
$
|
|
|
|
Cost of Sales
|
|
$
|
|
|
For the
year-to-date
ended September 25, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
|
|
|
Cost of Sales
|
|
$
|
(3
|
)
|
|
Cost of Sales
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Gain or (Loss) Recognized in Income on Derivative
|
|
Derivatives not Designated as Hedging Instruments
|
|
Location
|
|
Amount
|
|
|
|
|
|
(in millions)
|
|
|
For the quarter ended September 25, 2009:
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Cost of Sales
|
|
$
|
2
|
|
For the
year-to-date
ended September 25, 2009:
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Cost of Sales
|
|
$
|
2
|
|
|
|
16.
|
Commitments
and Contingencies
|
U.S.
and Foreign Government Procurement Regulations
A substantial majority of the Companys revenues are
generated from providing products and services under legally
binding agreements, or contracts, with U.S. Government and
foreign government customers. U.S. Government contracts are
subject to extensive legal and regulatory requirements, and,
from time to time, agencies of the U.S. Government
investigate whether such contracts were and are being conducted
in accordance with these
25
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
requirements. The Company is currently cooperating with the
U.S. Government on several investigations from which civil,
criminal or administrative proceedings could result and give
rise to fines, penalties, compensatory and treble damages,
restitution
and/or
forfeitures. The Company does not currently anticipate that any
of these investigations will have a material adverse effect,
individually or in the aggregate, on its consolidated financial
position, results of operations or cash flows. However, under
U.S. Government regulations, an indictment of the Company
by a federal grand jury could result in the Company being
suspended for a period of time from eligibility for awards of
new government contracts or in a loss of export privileges. A
conviction could result in debarment from contracting with the
federal government for a specified term. In addition, all of the
Companys U.S. Government contracts: (1) are
subject to audit and various pricing and cost controls,
(2) include standard provisions for termination for the
convenience of the U.S. Government or for default, and
(3) are subject to cancellation if funds for contracts
become unavailable. Foreign government contracts generally
include comparable provisions relating to terminations for
convenience and default, as well as other procurement clauses
relevant to the foreign government.
Litigation
Matters
The Company has been subject to and is involved in litigation,
government investigations, proceedings, claims or assessments
and various contingent liabilities incidental to its businesses,
including those specified below. Furthermore, in connection with
certain business acquisitions, the Company has assumed some or
all claims against, and liabilities of, the acquired business,
including both asserted and unasserted claims and liabilities.
In accordance with U.S. GAAP for contingencies (contained
in FASB ASC Topic 450, Contingencies), the Company
records a liability when management believes that it is both
probable that a liability has been incurred and the Company can
reasonably estimate the amount of the loss. Generally, the loss
is recorded at the amount the Company expects to resolve the
liability. The estimated amounts of liabilities recorded for
pending and threatened litigation is disclosed in Note 8.
Amounts recoverable from insurance contracts or third parties
are recorded as assets when deemed probable. At
September 25, 2009, the Company did not record any amounts
for recoveries from insurance contracts or third parties in
connection with the amount of liabilities recorded for pending
and threatened litigation. Legal defense costs are expensed as
incurred. The Company believes it has recorded adequate
provisions for its litigation matters. The Company reviews these
provisions quarterly and adjusts these provisions to reflect the
impact of negotiations, settlements, rulings, advice of legal
counsel and other information and events pertaining to a
particular matter. While it is reasonably possible that an
unfavorable outcome may occur in one or more of the following
matters, unless otherwise stated below, the Company believes
that it is not probable that a loss has been incurred in any of
these matters. An estimate of loss or range of loss is disclosed
for a particular litigation matter when such amount or amounts
can be reasonably estimated and no loss has been accrued. The
Company believes that any damage amounts claimed in the specific
matters discussed below are not meaningful indicators of
potential liability. Although the Company believes that it has
valid defenses with respect to legal matters and investigations
pending against it, litigation is inherently unpredictable.
Therefore, it is possible that the financial position, results
of operations or cash flows of the Company could be materially
adversely affected in any particular period by the unfavorable
resolution of one or more of these contingencies.
Kalitta Air. L-3 Integrated Systems and its
predecessors have been involved in litigation with Kalitta Air
arising from a contract to convert Boeing 747 aircraft from
passenger configuration to cargo freighters. The lawsuit was
brought in the United States District Court for the Northern
District of California (the trial court) on January 31,
1997. The aircraft were modified using Supplemental Type
Certificates (STCs) issued in 1988 by the Federal Aviation
Administration (FAA) to Hayes International, Inc. (Hayes/Pemco)
as a subcontractor to GATX/Airlog Company (GATX). Between 1988
and 1990, Hayes/Pemco modified five aircraft as a subcontractor
to GATX using the STCs. Between 1990 and 1994, Chrysler
Technologies Airborne Systems, Inc. (CTAS), a predecessor to L-3
Integrated Systems, performed as a subcontractor to GATX and
modified an additional five aircraft using the STCs. Two of the
aircraft modified by CTAS were owned by American International
Airways, the predecessor to Kalitta
26
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Air. In 1996, the FAA determined that the engineering data
provided by Hayes/Pemco supporting the STCs was inadequate and
issued an Airworthiness Directive that effectively grounded the
ten modified aircraft. The Kalitta Air aircraft have not been in
revenue service since that date. The matter was tried in January
2001 against GATX and CTAS with the jury finding fault on the
part of GATX, but rendering a unanimous defense verdict in favor
of CTAS. Certain co-defendants had settled prior to trial. The
U.S. Court of Appeals for the Ninth Circuit subsequently
reversed and remanded the trial courts summary judgment
rulings in favor of CTAS regarding a negligence claim by Kalitta
Air, which asserts that CTAS as an expert in aircraft
modification should have known that the STCs were deficient. The
retrial began on January 18, 2005, and ended on
March 2, 2005 with a deadlocked jury and mistrial. At the
retrial, Kalitta Air claimed damages of $235 million plus
interest. By order dated July 22, 2005, the trial court
granted the Companys motion for judgment as a matter of
law as to negligence dismissing that claim, denied the
Companys motion for judgment as a matter of law as to
negligent misrepresentation, and certified the decision for
interlocutory appeal to the U.S. Court of Appeals for the
Ninth Circuit. On October 8, 2008, the Ninth Circuit
reversed the trial courts dismissal of the negligence
claim and affirmed the trial courts ruling as to the
negligent misrepresentation claim. The case has been remanded to
the trial court to reconsider the negligence claim and for
further proceedings on the negligent misrepresentation claim. A
court-ordered mediation held on March 18, 2009 was
unsuccessful. A hearing on the Companys motion to dismiss
the negligence claim was held on April 30, 2009, after
which the trial court determined to take the matter under
advisement and ordered the parties to attend another mediation,
which has yet to be scheduled. The case is currently scheduled
to go to a third trial on November 1, 2010. CTAS
insurance carrier has accepted defense of the matter and has
retained counsel, subject to a reservation of rights by the
insurer to dispute its obligations under the applicable
insurance policies in the event of an adverse finding.
Korean Lot II Program. On April 4, 2005,
Lockheed Martin Corporation (Lockheed) filed a lawsuit in the
Federal District Court for the Northern District of Georgia
alleging misappropriation of proprietary information and breach
of a license agreement. The complaint alleges that L-3
Integrated Systems (L-3 IS) is in breach of its license
agreement with Lockheed and is infringing on Lockheeds
intellectual property rights as a result of its performance of a
subcontract awarded to L-3 IS for the Korean Lot II
program. On May 21, 2009, a jury found in favor of Lockheed
and awarded $30 million on the misappropriation claim,
$7.28 million on the breach of license agreement claim,
plus legal fees and expenses. On July 3, 2009, Lockheed
filed a motion with the court seeking a final judgment,
approximately $17 million in legal fees and expenses and an
injunction prohibiting L-3s further use of the
intellectual property that was the basis of the jurys
award. On August 7, 2009, L-3 IS filed a motion for
judgment in its favor notwithstanding the verdict and opposing
the relief sought by Lockheed in its July
3rd
motion. The court held a hearing on the motions on
September 2, 2009, and the parties are awaiting the
courts decision. L-3 IS has also filed a motion seeking
dismissal or a retrial of the case on various grounds. The
motion is subject to further briefing by the parties and has not
yet been considered by the court. The Company believes that the
verdict and the damages awarded are inconsistent with the law
and evidence presented, and intends to appeal in the event of an
adverse decision on the motions.
Aircrew Training and Rehearsal Support (ATARS)
Investigation. Following a lawsuit filed by Lockheed on
April 6, 2006 in the U.S. District Court for the
Middle District of Florida against the Company and certain
individuals related to the ATARS II Program (which was settled
in November 2007), the Company received Grand Jury subpoenas in
connection with an investigation being conducted by the United
States Attorney for the Middle District of Florida, Orlando
Division. The subpoenas request the production of documents
related to Lockheeds allegations or produced in the civil
litigation settled in November 2007. The Company is cooperating
fully with the U.S. Government.
Titan Government Investigation. In October 2002, 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-
27
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Patterson Air Force Base in Ohio. Titan was informed that other
companies who have performed similar services had received
subpoenas as well. The Company acquired Titan in July 2005. On
September 20, 2006, counsel for the Company was informed by
the New York Field Office of the DoJs Criminal
Antitrust Division that it was considering indictment.
Additionally, a former Titan employee received a letter from the
DoJ indicating that he was a target of the investigation. If the
Field Office recommends indictment then, under normal DoJ
procedures, Titan (now known as L-3 Services) will be afforded
an opportunity to make a presentation to the Criminal Antitrust
Division in Washington, D.C. before the DoJ acts on the
recommendation. It is not known whether an indictment of L-3
Services or any of its employees will occur. If it does occur,
it is possible that L-3 Services could be suspended or debarred
from conducting business with the U.S. Government. In
December 2008, the DoJ indicated its interest in conducting
additional employee interviews concerning a teaming agreement
relating to the Wright Patterson Air Force Base procurement. The
Company is cooperating fully with the DoJ.
SEC Inquiry. In March 2007, the Company was
contacted by the U.S. Securities and Exchange Commission
(SEC), Enforcement Division, requesting that the Company provide
certain information relating to its previously disclosed review
of its historical stock option granting practices. On
September 3, 2009, the Company was notified by the SEC
staff that it had completed its inquiry and did not intend to
recommend that any enforcement action be taken 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. The Company is cooperating fully with the Government. The
Company believes that it is entitled to indemnification for any
course of defense related to this matter and has made a claim
against the escrow under the purchase agreement by which the
Company acquired CyTerra in March 2006.
Bashkirian Airways. On July 1, 2004, lawsuits
were filed on behalf of the estates of 31 Russian children in
the state courts of Washington, Arizona, California, Florida,
New York and New Jersey against Honeywell, Honeywell TCAS,
Thales USA, Thales France, the Company and Aviation
Communications & Surveillance Systems (ACSS), which is
a joint venture of L-3 and Thales. The suits relate to the crash
over southern Germany of Bashkirian Airways Tupelov TU 154M
aircraft and a DHL Boeing 757 cargo aircraft. On-board the
Tupelov aircraft were 9 crew members and 60 passengers,
including 45 children. The Boeing aircraft carried a crew of
two. Both aircraft were equipped with Honeywell/ACSS Model 2000,
Change 7 Traffic Collision and Avoidance Systems (TCAS). Sensing
the other aircraft, the on-board DHL TCAS instructed the DHL
pilot to descend, and the Tupelov on-board TCAS instructed the
Tupelov pilot to climb. However, the Swiss air traffic
controller ordered the Tupelov pilot to descend. The Tupelov
pilot disregarded the on-board TCAS and put the Tupelov aircraft
into a descent striking the DHL aircraft in midair at
approximately 35,000 feet. All crew and passengers of both
planes were lost. Investigations by the National Transportation
Safety Board after the crash revealed that both TCAS units were
performing as designed. The suits allege negligence and strict
product liability based upon the design of the units and the
training provided to resolve conflicting commands and seek
approximately $315 million in damages, including
$150 million in punitive damages. The Companys
insurers have accepted defense of the matter and retained
counsel, subject to a reservation of rights by the insurers to
dispute their obligations under the applicable insurance
policies in the event of an adverse finding. The matters were
consolidated in the Federal Court in New Jersey, which has
dismissed the actions on the basis of forum non conveniens. The
plaintiffs re-filed a complaint on April 23, 2007 with the
Barcelona Courts Registry in Spain. The trial for this
matter was completed on April 22, 2009, and the parties are
awaiting the Courts decision.
Gol Airlines. The Company was served with complaints
filed in the U.S. District Court for the Eastern District
of New York against ExcelAire, Joseph Lepore, Jan Paul Paladino,
Honeywell, Lockheed, Raytheon, and Amazon Technologies and ACSS.
The complaints relate to the September 29, 2006 airplane
crash over Brazil of a Boeing
737-800
operated by GOL Linhas Aereas Inteligentes, S.A. and an Embraer
600 business jet operated by ExcelAire.
28
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The complaints allege that ACSS designed the Traffic Collision
and Avoidance System (TCAS) on the ExcelAire jet, and assert
claims of negligence, strict products liability and breach of
warranty against ACSS based on the design of the TCAS and the
instructions provided for its use. The complaints seek
unspecified monetary damages, including punitive damages. The
Companys insurers have accepted defense of this matter and
have retained counsel, subject to a reservation of rights by the
insurers to dispute their obligations under the applicable
insurance policies in the event of an adverse finding. On
July 3, 2008, the District Court dismissed the actions on
the basis of forum non conveniens on the grounds that Brazil was
the location of the accident and is more convenient for
witnesses and document availability. On August 1, 2008, the
plaintiffs filed an appeal of this ruling with the
U.S. Court of Appeals for the Second Circuit. Oral argument
on the appeal has been scheduled for November 12, 2009.
Although the appeal is still pending, some of the plaintiffs
re-filed their complaints in the Lower Civil Court in the
Judicial District of Peixoto de Azevedo in Brazil on
July 3, 2009.
Pilatus PC-12 Aircraft. On July 6, 2007, the
Company was served with an amended complaint filed in the
U.S. District Court for the Eastern District of
Pennsylvania against Pilatus Aircraft, Ltd., Pilatus Flugzeuweke
Aktiengellschaft, Rosemont Aerospace, Inc., Revue Thommen AC,
EMCA, Goodrich Corp., Goodrich Avionics Systems, Inc. (the
predecessor to L-3 Avionics) and the Company. The amended
complaint relates to the March 26, 2005 crash of a Pilatus
PC-12 aircraft near Belafonte, Pennsylvania in which all six on
board were lost. The amended complaint alleges that L-3 Avionics
(and/or its predecessor company, Goodrich Avionics) designed,
manufactured, tested, marketed, and sold the stick shaker/pusher
servo actuator on the Pilatus PC-12, and asserts claims against
L-3 Avionics and the Company based on negligence, breach of
warranty, and strict liability. The amended complaint seeks
unspecified monetary damages, including punitive damages. On
October 1, 2009, the court issued an order severing the
claims against Pilatus Aircraft, Ltd. and transferring those
claims to the U.S. District Court for the District of
Colorado. The Companys insurers have accepted defense of
the matter and have retained counsel, subject to a reservation
of rights by the insurers to dispute their obligations under the
applicable insurance policies in the event of an adverse finding.
T-39 Sabreliner Aircraft. On January 16, 2008,
the Company was served with three wrongful death lawsuits filed
in the U.S. District Court for the Southern District of New
York arising from the crash of a T-39 Sabreliner Aircraft near
Rome, GA on January 10, 2006. The Plaintiffs allege that
L-3 Vertex employed the pilot in command, David Roark, and
maintained the aircraft, and are seeking unspecified monetary
damages. The cases have been consolidated and transferred to the
U.S. District Court for the Northern District of Florida.
The Companys insurers have accepted defense of the matter
and have retained counsel, subject to a reservation of rights by
the insurers to dispute their obligations under the applicable
insurance policies in the event of an adverse finding. Two out
of the three lawsuits have been settled. The remaining lawsuit
is currently scheduled to go to trial in July of 2010.
Blackhawk Helicopter. On August 7, 2008, a
lawsuit was filed in the U.S. District Court for the
Southern District of Texas relating to the August 22, 2007
crash of a U.S. Army Blackhawk helicopter near Kirkuk,
Iraq. The complaint, which was brought on behalf of 14
passengers who were killed in the crash, alleges that the crash
was the result of L-3 Vertexs negligence in connection
with a phased maintenance inspection performed approximately one
week before the crash, and seeks unspecified monetary damages,
including punitive damages. Discovery is expected to be finished
by the end of February 2010, and the case is currently scheduled
to go to trial in May 2010. The Companys insurers have
accepted defense of this matter and have retained counsel,
subject to a reservation of rights by the insurers to dispute
their obligations under the applicable insurance policies in the
event of an adverse finding.
29
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
17.
|
Pension
and Other Postretirement Benefits
|
The following table summarizes the components of net periodic
benefit cost for the Companys pension and postretirement
benefit plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Postretirement Benefit Plans
|
|
|
|
Third Quarter Ended
|
|
|
Year-to-Date Ended
|
|
|
Third Quarter Ended
|
|
|
Year-to-Date Ended
|
|
|
|
September 25,
|
|
|
September 26,
|
|
|
September 25,
|
|
|
September 26,
|
|
|
September 25,
|
|
|
September 26,
|
|
|
September 25,
|
|
|
September 26,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
22
|
|
|
$
|
21
|
|
|
$
|
67
|
|
|
$
|
67
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
4
|
|
Interest cost
|
|
|
29
|
|
|
|
26
|
|
|
|
84
|
|
|
|
79
|
|
|
|
2
|
|
|
|
3
|
|
|
|
8
|
|
|
|
8
|
|
Expected return on plan assets
|
|
|
(22
|
)
|
|
|
(29
|
)
|
|
|
(67
|
)
|
|
|
(89
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
(1
|
)
|
Amortization of prior service costs (credits)
|
|
|
1
|
|
|
|
|
|
|
|
3
|
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Amortization of net losses (gains)
|
|
|
13
|
|
|
|
1
|
|
|
|
39
|
|
|
|
5
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
Curtailment loss
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
43
|
|
|
$
|
20
|
|
|
$
|
127
|
|
|
$
|
65
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
6
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions. For the year ending December 31,
2009, the Company currently expects to contribute cash of
approximately $65 million to its pension plans, and
approximately $13 million to its postretirement benefit
plans. The Company contributed cash of $46 million to its
pension plans and $8 million to its postretirement benefit
plans during the
year-to-date
period ended September 25, 2009.
|
|
18.
|
Employee
Stock-Based Compensation
|
At its Annual Meeting of Stockholders held on April 28,
2009, the stockholders of L-3 Holdings approved the L-3
Communications Corporation 2009 Employee Stock Purchase Plan
(2009 ESPP), which became effective on July 1, 2009. As a
result, no new options to purchase shares of L-3 Holdings
common stock will be granted under the Companys prior
employee stock purchase plan (2001 ESPP).
Under the 2009 ESPP, eligible employees are offered options to
purchase shares of L-3 Holdings common stock at 85% of the
fair market value of L-3 Holdings common stock on the last
day of each six-month offering period. Eligible employees
include all employees of the Company, or of a subsidiary or
affiliate of the Company that has been designated to participate
in the 2009 ESPP. Offering periods begin on the first trading
day in January and July of each calendar year and end on the
last trading day in June and December of each calendar year.
Fair market value is defined as the average of the highest and
lowest sales price of a share of L-3 Holdings common stock
on the last trading day of the trading period. Share purchases
are funded through payroll deductions of up to 10% of a
participating employees compensation for each payroll
period, or $21,250 each calendar year. Employees may not
purchase more than $25,000 worth of L-3 Holdings common
stock for each year based on the value of the common stock at
the beginning of each offering period during the year. After
adjustment for the shares issued under the 2001 ESPP, the 2009
ESPP authorizes L-3 Holdings to issue up to 7.4 million
shares. No shares will be issued under the 2009 ESPP until the
conclusion of the first six-month offering period, which began
on July 1, 2009 and ends on December 31, 2009.
30
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
19.
|
Supplemental
Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-Date Ended
|
|
|
|
September 25,
|
|
|
September 26,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Interest paid on outstanding debt
|
|
$
|
181
|
|
|
$
|
198
|
|
Income tax payments
|
|
|
271
|
|
|
|
265
|
|
Income tax refunds
|
|
|
3
|
|
|
|
6
|
|
The Company has four reportable segments, which are described in
Note 1. The tables below present net sales, operating
income, depreciation and amortization and total assets by
reportable segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended
|
|
|
Year-to-Date Ended
|
|
|
|
September 25,
|
|
|
September 26,
|
|
|
September 25,
|
|
|
September 26,
|
|
|
|
2009
|
|
|
2008(1)
|
|
|
2009
|
|
|
2008(1)
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C3ISR
|
|
$
|
772
|
|
|
$
|
622
|
|
|
$
|
2,258
|
|
|
$
|
1,794
|
|
Government Services
|
|
|
1,012
|
|
|
|
1,045
|
|
|
|
3,089
|
|
|
|
3,259
|
|
AM&M
|
|
|
775
|
|
|
|
636
|
|
|
|
2,176
|
|
|
|
1,956
|
|
Specialized Products
|
|
|
1,369
|
|
|
|
1,401
|
|
|
|
4,090
|
|
|
|
3,987
|
|
Elimination of intercompany sales
|
|
|
(86
|
)
|
|
|
(42
|
)
|
|
|
(206
|
)
|
|
|
(106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
3,842
|
|
|
$
|
3,662
|
|
|
$
|
11,407
|
|
|
$
|
10,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C3ISR
|
|
$
|
78
|
|
|
$
|
56
|
|
|
$
|
251
|
|
|
$
|
185
|
|
Government Services
|
|
|
103
|
|
|
|
100
|
|
|
|
295
|
|
|
|
322
|
|
AM&M
|
|
|
67
|
|
|
|
70
|
|
|
|
184
|
|
|
|
178
|
|
Specialized Products
|
|
|
170
|
|
|
|
174
|
|
|
|
481
|
|
|
|
458
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total
|
|
$
|
418
|
|
|
$
|
400
|
|
|
$
|
1,211
|
|
|
$
|
1,143
|
|
Litigation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
418
|
|
|
$
|
400
|
|
|
$
|
1,211
|
|
|
$
|
1,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C3ISR
|
|
$
|
11
|
|
|
$
|
10
|
|
|
$
|
32
|
|
|
$
|
30
|
|
Government Services
|
|
|
10
|
|
|
|
8
|
|
|
|
29
|
|
|
|
26
|
|
AM&M
|
|
|
5
|
|
|
|
7
|
|
|
|
15
|
|
|
|
19
|
|
Specialized Products
|
|
|
29
|
|
|
|
27
|
|
|
|
86
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
55
|
|
|
$
|
52
|
|
|
$
|
162
|
|
|
$
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
September 25,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008(1)
|
|
|
|
(in millions)
|
|
|
Total Assets:
|
|
|
|
|
|
|
|
|
C3ISR
|
|
$
|
1,877
|
|
|
$
|
1,755
|
|
Government Services
|
|
|
3,458
|
|
|
|
3,494
|
|
AM&M
|
|
|
1,968
|
|
|
|
1,836
|
|
Specialized Products
|
|
|
6,590
|
|
|
|
6,319
|
|
Corporate
|
|
|
1,175
|
|
|
|
1,080
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
15,068
|
|
|
$
|
14,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As a result of certain
re-alignments in the Companys management and organization
structure as discussed in Note 2, sales of $4 million and
$11 million and operating income of $1 million and
$2 million were reclassified from the
C3ISR
reportable segment to the Government Services reportable segment
for the quarter and
year-to-date
period ended September 26, 2008, and sales of
$4 million and $16 million and operating income of
less than $1 million and $2 million were reclassified
from the
C3ISR
reportable segment to the AM&M reportable segment for the
quarter and
year-to-date
period ended September 26, 2008. At December 31, 2008,
$30 million of total assets was reclassified from the
C3ISR
reportable segment to the Government Services reportable segment
and $29 million of total assets was reclassified from the
C3ISR
reportable segment to the AM&M reportable segment.
|
(2) |
|
Operating income for the
Specialized Products reportable segment includes: (i) a
gain of $12 million from the sale of the PMD product line
(see Note 4) and (ii) a non-cash impairment
charge of $28 million related to a write-down of
capitalized software development costs, which were both recorded
in the second quarter of 2008.
|
(3) |
|
Represents a gain recorded in the
second quarter of 2008 for the reversal of a current liability
for pending and threatened litigation as a result of a
June 27, 2008 decision by the U.S. Court of Appeals
vacating an adverse 2006 jury verdict.
|
|
|
21.
|
Accounting
Standards Issued and Not Yet Implemented
|
In October 2009, the FASB revised the accounting guidance 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. This update is effective for the Company beginning
January 1, 2011 and can be applied prospectively or
retrospectively. The Company is currently assessing the impact
of the revised accounting guidance.
In June 2009, the FASB issued an accounting standard for
variable interest entities which changes the approach to
determining the primary beneficiary of a variable interest
entity (VIE) and requires companies to assess more frequently
whether they must consolidate VIEs. The new accounting standard
is effective for the Company beginning on January 1, 2010.
The Company is currently assessing the impact of the new
accounting standard.
In December 2008, the FASB issued an accounting standard that
expands the disclosure requirements for pension and other
postretirement plan assets and is effective for the Company
beginning December 31, 2009. The adoption of this standard
will not have a material effect on the Companys financial
position, results of operations and cash flows, but will enhance
the Companys pension and other postretirement benefit plan
assets disclosures.
32
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
22.
|
Unaudited
Financial Information of L-3 Communications and Its
Subsidiaries
|
L-3 Communications is a wholly-owned subsidiary of L-3 Holdings.
The debt of L-3 Communications, including the Senior
Subordinated Notes and borrowings under amounts drawn against
the Senior Credit Facility, are guaranteed, on a joint and
several, full and unconditional basis, by certain of its
domestic subsidiaries (the Guarantor Subsidiaries).
The foreign subsidiaries and certain domestic subsidiaries of
L-3 Communications (the Non-Guarantor Subsidiaries)
do not guarantee the debt of L-3 Communications. None of the
debt of L-3 Communications has been issued by its subsidiaries.
There are no restrictions on the payment of dividends from the
Guarantor Subsidiaries to L-3 Communications.
The following unaudited condensed combining financial
information presents the results of operations, financial
position and cash flows of: (1) L-3 Holdings, excluding L-3
Communications and its consolidated subsidiaries (the
Parent), (2) L-3 Communications, excluding its
consolidated subsidiaries, (3) the Guarantor Subsidiaries,
(4) the Non-Guarantor Subsidiaries, and (5) the
eliminations to arrive at the information for L-3 on a
consolidated basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
|
L-3
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
(Parent)
|
|
|
Communications
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
L-3
|
|
|
|
(in millions)
|
|
|
Condensed Combining Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 25, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
887
|
|
|
$
|
12
|
|
|
$
|
337
|
|
|
$
|
(45
|
)
|
|
$
|
1,191
|
|
Billed receivables, net
|
|
|
|
|
|
|
303
|
|
|
|
765
|
|
|
|
202
|
|
|
|
|
|
|
|
1,270
|
|
Contracts in process
|
|
|
|
|
|
|
641
|
|
|
|
1,494
|
|
|
|
263
|
|
|
|
|
|
|
|
2,398
|
|
Other current assets
|
|
|
|
|
|
|
250
|
|
|
|
176
|
|
|
|
128
|
|
|
|
|
|
|
|
554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
2,081
|
|
|
|
2,447
|
|
|
|
930
|
|
|
|
(45
|
)
|
|
|
5,413
|
|
Goodwill
|
|
|
|
|
|
|
1,144
|
|
|
|
5,876
|
|
|
|
1,168
|
|
|
|
|
|
|
|
8,188
|
|
Other assets
|
|
|
5
|
|
|
|
461
|
|
|
|
823
|
|
|
|
183
|
|
|
|
(5
|
)
|
|
|
1,467
|
|
Investment in and amounts due from consolidated subsidiaries
|
|
|
7,057
|
|
|
|
8,869
|
|
|
|
1,721
|
|
|
|
|
|
|
|
(17,647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,062
|
|
|
$
|
12,555
|
|
|
$
|
10,867
|
|
|
$
|
2,281
|
|
|
$
|
(17,697
|
)
|
|
$
|
15,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
|
|
|
$
|
650
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
650
|
|
Other current liabilities
|
|
|
|
|
|
|
732
|
|
|
|
1,362
|
|
|
|
608
|
|
|
|
(45
|
)
|
|
|
2,657
|
|
Amounts due to consolidated subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
|
|
Other long-term liabilities
|
|
|
|
|
|
|
951
|
|
|
|
230
|
|
|
|
266
|
|
|
|
|
|
|
|
1,447
|
|
Long-term debt
|
|
|
700
|
|
|
|
3,860
|
|
|
|
|
|
|
|
|
|
|
|
(700
|
)
|
|
|
3,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
700
|
|
|
|
6,193
|
|
|
|
1,592
|
|
|
|
877
|
|
|
|
(748
|
)
|
|
|
8,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 shareholders equity
|
|
|
6,362
|
|
|
|
6,362
|
|
|
|
9,275
|
|
|
|
1,404
|
|
|
|
(17,041
|
)
|
|
|
6,362
|
|
Noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
6,362
|
|
|
|
6,362
|
|
|
|
9,275
|
|
|
|
1,404
|
|
|
|
(16,949
|
)
|
|
|
6,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
7,062
|
|
|
$
|
12,555
|
|
|
$
|
10,867
|
|
|
$
|
2,281
|
|
|
$
|
(17,697
|
)
|
|
$
|
15,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
720
|
|
|
$
|
2
|
|
|
$
|
228
|
|
|
$
|
(83
|
)
|
|
$
|
867
|
|
Billed receivables, net
|
|
|
|
|
|
|
324
|
|
|
|
701
|
|
|
|
201
|
|
|
|
|
|
|
|
1,226
|
|
Contracts in process
|
|
|
|
|
|
|
587
|
|
|
|
1,461
|
|
|
|
219
|
|
|
|
|
|
|
|
2,267
|
|
Other current assets
|
|
|
|
|
|
|
291
|
|
|
|
170
|
|
|
|
140
|
|
|
|
|
|
|
|
601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
1,922
|
|
|
|
2,334
|
|
|
|
788
|
|
|
|
(83
|
)
|
|
|
4,961
|
|
Goodwill
|
|
|
|
|
|
|
1,171
|
|
|
|
5,746
|
|
|
|
1,112
|
|
|
|
|
|
|
|
8,029
|
|
Other assets
|
|
|
8
|
|
|
|
475
|
|
|
|
837
|
|
|
|
182
|
|
|
|
(8
|
)
|
|
|
1,494
|
|
Investment in and amounts due from consolidated subsidiaries
|
|
|
6,550
|
|
|
|
8,489
|
|
|
|
1,283
|
|
|
|
80
|
|
|
|
(16,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,558
|
|
|
$
|
12,057
|
|
|
$
|
10,200
|
|
|
$
|
2,162
|
|
|
$
|
(16,493
|
)
|
|
$
|
14,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
|
|
|
$
|
824
|
|
|
$
|
1,395
|
|
|
$
|
571
|
|
|
$
|
(83
|
)
|
|
$
|
2,707
|
|
Other long-term liabilities
|
|
|
|
|
|
|
882
|
|
|
|
219
|
|
|
|
242
|
|
|
|
|
|
|
|
1,343
|
|
Long-term debt
|
|
|
700
|
|
|
|
4,493
|
|
|
|
|
|
|
|
|
|
|
|
(700
|
)
|
|
|
4,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
700
|
|
|
|
6,199
|
|
|
|
1,614
|
|
|
|
813
|
|
|
|
(783
|
)
|
|
|
8,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3 shareholders equity
|
|
|
5,858
|
|
|
|
5,858
|
|
|
|
8,586
|
|
|
|
1,349
|
|
|
|
(15,793
|
)
|
|
|
5,858
|
|
Noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
5,858
|
|
|
|
5,858
|
|
|
|
8,586
|
|
|
|
1,349
|
|
|
|
(15,710
|
)
|
|
|
5,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
6,558
|
|
|
$
|
12,057
|
|
|
$
|
10,200
|
|
|
$
|
2,162
|
|
|
$
|
(16,493
|
)
|
|
$
|
14,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
|
L-3
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
(Parent)
|
|
|
Communications
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
L-3
|
|
|
|
(in millions)
|
|
|
Condensed Combining Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended September 25, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
789
|
|
|
$
|
2,627
|
|
|
$
|
459
|
|
|
$
|
(33
|
)
|
|
$
|
3,842
|
|
Cost of sales
|
|
|
18
|
|
|
|
678
|
|
|
|
2,377
|
|
|
|
402
|
|
|
|
(51
|
)
|
|
|
3,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(18
|
)
|
|
|
111
|
|
|
|
250
|
|
|
|
57
|
|
|
|
18
|
|
|
|
418
|
|
Interest and other income, net
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
(28
|
)
|
|
|
3
|
|
Interest expense
|
|
|
11
|
|
|
|
68
|
|
|
|
27
|
|
|
|
1
|
|
|
|
(39
|
)
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(29
|
)
|
|
|
74
|
|
|
|
223
|
|
|
|
56
|
|
|
|
29
|
|
|
|
353
|
|
(Benefit) provision for income taxes
|
|
|
(9
|
)
|
|
|
27
|
|
|
|
53
|
|
|
|
20
|
|
|
|
9
|
|
|
|
100
|
|
Equity in net income of consolidated subsidiaries
|
|
|
270
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
(473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
250
|
|
|
|
250
|
|
|
|
170
|
|
|
|
36
|
|
|
|
(453
|
)
|
|
|
253
|
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to L-3
|
|
$
|
250
|
|
|
$
|
250
|
|
|
$
|
170
|
|
|
$
|
36
|
|
|
$
|
(456
|
)
|
|
$
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended September 26, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
803
|
|
|
$
|
2,408
|
|
|
$
|
489
|
|
|
$
|
(38
|
)
|
|
$
|
3,662
|
|
Cost of sales
|
|
|
18
|
|
|
|
689
|
|
|
|
2,161
|
|
|
|
450
|
|
|
|
(56
|
)
|
|
|
3,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(18
|
)
|
|
|
114
|
|
|
|
247
|
|
|
|
39
|
|
|
|
18
|
|
|
|
400
|
|
Interest and other income, net
|
|
|
|
|
|
|
32
|
|
|
|
2
|
|
|
|
2
|
|
|
|
(29
|
)
|
|
|
7
|
|
Interest expense
|
|
|
11
|
|
|
|
71
|
|
|
|
28
|
|
|
|
2
|
|
|
|
(40
|
)
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(29
|
)
|
|
|
75
|
|
|
|
221
|
|
|
|
39
|
|
|
|
29
|
|
|
|
335
|
|
(Benefit) provision for income taxes
|
|
|
(10
|
)
|
|
|
25
|
|
|
|
83
|
|
|
|
15
|
|
|
|
10
|
|
|
|
123
|
|
Equity in net income of consolidated subsidiaries
|
|
|
229
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
(389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
210
|
|
|
|
210
|
|
|
|
138
|
|
|
|
24
|
|
|
|
(370
|
)
|
|
|
212
|
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to L-3
|
|
$
|
210
|
|
|
$
|
210
|
|
|
$
|
138
|
|
|
$
|
24
|
|
|
$
|
(372
|
)
|
|
$
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
|
L-3
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
(Parent)
|
|
|
Communications
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
L-3
|
|
|
|
(in millions)
|
|
|
Condensed Combining Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
year-to-date
period ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
2,476
|
|
|
$
|
7,659
|
|
|
$
|
1,369
|
|
|
$
|
(97
|
)
|
|
$
|
11,407
|
|
Cost of sales
|
|
|
53
|
|
|
|
2,163
|
|
|
|
6,913
|
|
|
|
1,217
|
|
|
|
(150
|
)
|
|
|
10,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(53
|
)
|
|
|
313
|
|
|
|
746
|
|
|
|
152
|
|
|
|
53
|
|
|
|
1,211
|
|
Interest and other income, net
|
|
|
|
|
|
|
94
|
|
|
|
1
|
|
|
|
2
|
|
|
|
(85
|
)
|
|
|
12
|
|
Interest expense
|
|
|
33
|
|
|
|
202
|
|
|
|
82
|
|
|
|
4
|
|
|
|
(118
|
)
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(86
|
)
|
|
|
205
|
|
|
|
665
|
|
|
|
150
|
|
|
|
86
|
|
|
|
1,020
|
|
(Benefit) provision for income taxes
|
|
|
(29
|
)
|
|
|
71
|
|
|
|
214
|
|
|
|
54
|
|
|
|
29
|
|
|
|
339
|
|
Equity in net income of consolidated subsidiaries
|
|
|
731
|
|
|
|
540
|
|
|
|
|
|
|
|
|
|
|
|
(1,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
674
|
|
|
|
674
|
|
|
|
451
|
|
|
|
96
|
|
|
|
(1,214
|
)
|
|
|
681
|
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to L-3
|
|
$
|
674
|
|
|
$
|
674
|
|
|
$
|
451
|
|
|
$
|
96
|
|
|
$
|
(1,221
|
)
|
|
$
|
674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
year-to-date
period ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
2,204
|
|
|
$
|
7,277
|
|
|
$
|
1,494
|
|
|
$
|
(85
|
)
|
|
$
|
10,890
|
|
Cost of sales
|
|
|
48
|
|
|
|
1,894
|
|
|
|
6,588
|
|
|
|
1,350
|
|
|
|
(133
|
)
|
|
|
9,747
|
|
Litigation gain
|
|
|
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(48
|
)
|
|
|
436
|
|
|
|
689
|
|
|
|
144
|
|
|
|
48
|
|
|
|
1,269
|
|
Interest and other income, net
|
|
|
|
|
|
|
99
|
|
|
|
4
|
|
|
|
5
|
|
|
|
(86
|
)
|
|
|
22
|
|
Interest expense
|
|
|
32
|
|
|
|
213
|
|
|
|
82
|
|
|
|
5
|
|
|
|
(118
|
)
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(80
|
)
|
|
|
322
|
|
|
|
611
|
|
|
|
144
|
|
|
|
80
|
|
|
|
1,077
|
|
(Benefit) provision for income taxes
|
|
|
(29
|
)
|
|
|
112
|
|
|
|
229
|
|
|
|
54
|
|
|
|
29
|
|
|
|
395
|
|
Equity in net income of consolidated subsidiaries
|
|
|
725
|
|
|
|
464
|
|
|
|
|
|
|
|
|
|
|
|
(1,189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
674
|
|
|
|
674
|
|
|
|
382
|
|
|
|
90
|
|
|
|
(1,138
|
)
|
|
|
682
|
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to L-3
|
|
$
|
674
|
|
|
$
|
674
|
|
|
$
|
382
|
|
|
$
|
90
|
|
|
$
|
(1,146
|
)
|
|
$
|
674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
L-3
COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L-3
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
|
L-3
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
(Parent)
|
|
|
Communications
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
L-3
|
|
|
|
(in millions)
|
|
|
Condensed Combining Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
year-to-date
period ended
September 25, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
$
|
520
|
|
|
$
|
30
|
|
|
$
|
753
|
|
|
$
|
157
|
|
|
$
|
(482
|
)
|
|
$
|
978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business acquisitions, net of cash acquired
|
|
|
|
|
|
|
(86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(86
|
)
|
Other investing activities
|
|
|
(55
|
)
|
|
|
(31
|
)
|
|
|
(85
|
)
|
|
|
(9
|
)
|
|
|
55
|
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(55
|
)
|
|
|
(117
|
)
|
|
|
(85
|
)
|
|
|
(9
|
)
|
|
|
55
|
|
|
|
(211
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock repurchased
|
|
|
(396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(396
|
)
|
Other financing activities
|
|
|
(69
|
)
|
|
|
254
|
|
|
|
(658
|
)
|
|
|
(60
|
)
|
|
|
465
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) from financing activities
|
|
|
(465
|
)
|
|
|
254
|
|
|
|
(658
|
)
|
|
|
(60
|
)
|
|
|
465
|
|
|
|
(464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
|
|
|
|
167
|
|
|
|
10
|
|
|
|
109
|
|
|
|
38
|
|
|
|
324
|
|
Cash and cash equivalents, beginning of the period
|
|
|
|
|
|
|
720
|
|
|
|
2
|
|
|
|
228
|
|
|
|
(83
|
)
|
|
|
867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the period
|
|
$
|
|
|
|
$
|
887
|
|
|
$
|
12
|
|
|
$
|
337
|
|
|
$
|
(45
|
)
|
|
$
|
1,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
year-to-date
period ended
September 26, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
$
|
684
|
|
|
$
|
13
|
|
|
$
|
848
|
|
|
$
|
140
|
|
|
$
|
(654
|
)
|
|
$
|
1,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business acquisitions, net of cash acquired
|
|
|
|
|
|
|
(224
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(224
|
)
|
Other investing activities
|
|
|
(87
|
)
|
|
|
(38
|
)
|
|
|
(76
|
)
|
|
|
(14
|
)
|
|
|
87
|
|
|
|
(128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(87
|
)
|
|
|
(262
|
)
|
|
|
(76
|
)
|
|
|
(14
|
)
|
|
|
87
|
|
|
|
(352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock repurchased
|
|
|
(573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(573
|
)
|
Other financing activities
|
|
|
(24
|
)
|
|
|
256
|
|
|
|
(770
|
)
|
|
|
(121
|
)
|
|
|
637
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) from financing activities
|
|
|
(597
|
)
|
|
|
256
|
|
|
|
(770
|
)
|
|
|
(121
|
)
|
|
|
637
|
|
|
|
(595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
|
|
|
|
7
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
70
|
|
|
|
77
|
|
Cash and cash equivalents, beginning of the period
|
|
|
|
|
|
|
632
|
|
|
|
7
|
|
|
|
237
|
|
|
|
(96
|
)
|
|
|
780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the period
|
|
$
|
|
|
|
$
|
639
|
|
|
$
|
9
|
|
|
$
|
235
|
|
|
$
|
(26
|
)
|
|
$
|
857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
ITEM 2.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial
Section Roadmap
Managements discussion and analysis (MD&A) can be
found on pages 37 to 54, and our unaudited condensed
consolidated financial statements and related notes contained in
this quarterly report can be found on pages 1 to 36. The
following table is designed to assist in your review of
MD&A.
|
|
|
Topic
|
|
Location
|
|
Overview and Outlook:
|
|
|
L-3s Business
|
|
Pages 37 38
|
Key Performance Measures
|
|
Pages 38 39
|
Other Events
|
|
Pages 39 40
|
Business Acquisitions and Business and Product Line Dispositions
|
|
Page 40
|
Critical Accounting Policies
|
|
Pages 40 43
|
Results of Operations (includes business segments)
|
|
Pages 43 49
|
Liquidity and Capital Resources:
|
|
|
Anticipated Sources of Cash Flow
|
|
Page 50
|
Balance Sheet
|
|
Pages 50 51
|
Statement of Cash Flows
|
|
Pages 51 54
|
Legal Proceedings and Contingencies
|
|
Page 54
|
Overview
and Outlook
L-3s
Business
L-3 is a prime system contractor in aircraft modernization and
maintenance, Command, Control, Communications, Intelligence,
Surveillance and Reconnaissance
(C3ISR)
systems, and government services.
L-3 is also
a leading provider of high technology products, subsystems and
systems. Our customers include the U.S. Department of
Defense (DoD) and its prime contractors, U.S. Government
intelligence agencies, the U.S. Department of Homeland
Security (DHS), U.S. Department of State (DoS),
U.S. Department of Justice (DoJ), allied foreign
governments, domestic and foreign commercial customers, and
select other U.S. federal, state and local government
agencies.
For the year ended December 31, 2008, we generated sales of
$14.9 billion. The table below presents a summary of our
2008 sales by major category of end customer and the percent
contributed by each end customer to our total 2008 sales. We
currently do not anticipate significant changes to our end
customer sales mix for the year ending December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
2008 Sales
|
|
|
2008 Sales
|
|
|
|
(in millions)
|
|
|
|
|
|
DoD
|
|
$
|
11,059
|
|
|
|
74
|
%
|
Other U.S. Government
|
|
|
1,067
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Total U.S. Government
|
|
|
12,126
|
|
|
|
81
|
%
|
Foreign governments
|
|
|
1,099
|
|
|
|
7
|
|
Commercial foreign
|
|
|
987
|
|
|
|
7
|
|
Commercial domestic
|
|
|
689
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
14,901
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
37
We have the following four reportable segments:
(1) C3ISR,
(2) Government Services, (3) Aircraft Modernization
and Maintenance (AM&M), and (4) Specialized Products.
Financial information with respect to each of our reportable
segments is included in Note 20 to our unaudited condensed
consolidated financial statements contained in this quarterly
report.
C3ISR
provides products and services for the global ISR market,
C3
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, information technology (IT), advisory,
training 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 (DND) and other allied foreign
governments. Specialized Products provides a broad range of
products, including components, products, subsystems, systems,
and related services to military and commercial customers in
several niche markets across several business areas, including
power & control systems, electro-optic/infrared
(EO/IR), microwave, simulation & training, precision
engagement, aviation products, security & detection,
propulsion systems, displays, telemetry & advanced
technology, undersea warfare, and marine services. During the
quarter ended March 27, 2009, we revised our reportable
segment presentations to conform to certain re-alignments in our
management and organization structure. Consequently, we made
certain reclassifications between our
C3ISR,
Government Services and AM&M reportable segments. See
Note 20 to our unaudited condensed consolidated financial
statements contained in this quarterly report for the prior
period amounts reclassified between reportable segments.
Key
Performance Measures
The primary financial performance measures that L-3 uses to
manage its businesses and monitor results of operations are
sales growth and operating income growth. Management believes
that these financial performance measures are the primary growth
drivers for L-3s earnings per common share and net cash
from operating activities. L-3s business strategy is
focused on increasing sales from organic growth and select
business acquisitions that add important new products, services,
technologies, programs, contract vehicles or customers in areas
that complement L-3s existing businesses. We define
organic sales growth as the increase or decrease in sales for
the current period compared to the prior period, excluding sales
in the: (1) current period from business and product line
acquisitions that are included in L-3s actual results of
operations for less than twelve months, and (2) prior
period from business and product line divestitures that are
included in L-3s actual results of operations for the
twelve-month period prior to the divestiture date. The two main
determinants of our operating income growth are sales growth and
improvements in operating margin. We define operating margin as
operating income as a percentage of sales.
Sales Growth. Sales growth for the year ended
December 31, 2008 was 7%, comprised of organic sales growth
of 5%, and sales growth from business acquisitions, net of
divestitures, of 2%. Sales growth for the quarter ended
September 25, 2009 (2009 Third Quarter) was 4.9%, comprised
of organic sales growth of 4.1%, and sales growth from business
acquisitions, net of divestitures, of 0.8%. Sales growth for the
year-to-date
period ended September 25, 2009
(2009 Year-to-Date
Period) was 4.7%, comprised of organic sales growth of 3.4%, and
sales growth from business acquisitions, net of divestitures, of
1.3%.
For the year ended December 31, 2008, our Special
Operations Forces Support Activity (SOFSA) contract generated
approximately $400 million, or 2.7% of our sales. On
March 3, 2009, SOFSA announced that L-3 was not selected to
perform on the follow-on contract. L-3 subsequently protested
and, as a consequence, SOFSA has taken corrective action, which
will include the issuance of a revised solicitation. Once a new
solicitation is issued, proposals will be requested from all
bidders. In the interim, L-3s incumbent contract has been
extended until February 2010. We can provide no assurance as to
the outcome of the competition for the next SOFSA contact.
As is the case with most other U.S. defense contractors, we
have benefited from the upward trend in DoD budget authorization
and spending outlays over recent years, including supplemental
appropriations for military
38
operations in Iraq and Afghanistan. We expect future DoD
budgets, including supplemental appropriations, to grow at a
significantly slower pace than the past several years, and to
possibly flatten or decline. However, we believe that our
businesses should be able to continue to generate modest organic
sales growth because we anticipate the defense budget and
spending priorities will continue to focus on several areas that
match L-3s core competencies, such as communications and
ISR, sensors, special operations support, helicopter crew
training and maintenance and simulation & training.
The
2008 Year-to-Date
Period results were impacted by three items that, in the
aggregate, increased operating income for that period by
$110 million. These three items are collectively referred
to as the Q2 2008 Items and are further discussed below under
the caption Other Events. In addition, higher
pension expense for the 2009 Third Quarter compared to the 2008
Third Quarter reduced operating income by $21 million
($13 million after income taxes, or $0.11 per diluted
share) and $56 million ($34 million after income
taxes, or $0.29 per diluted share) for the
2009 Year-to-Date
Period compared to the
2008 Year-to-Date
Period. The Q2 2008 items increased the
2008 Year-to-Date
Period operating margin by 110 basis points. The increase
in pension expense reduced operating margin by 50 basis
points for both the 2009 Third Quarter and
2009 Year-to-Date
Period. The pension expense increase is primarily due to the
actuarial loss that we experienced in 2008 as a result of the
decline in the fair value of our pension plan assets, which is
being amortized as a component of pension expense. See segment
results below for additional discussion of segment operating
margin results.
Excluding the Q2 2008 Items and the increase in our 2009 pension
expense, we expect to continue to generate modest annual
increases in operating margin. We expect to increase sales, grow
sales at a rate faster than the increase in our indirect costs,
and improve our overall contract performance. However, we may
not be able to continue to expand our operating margin at the
rates we expect and our operating margin could also decrease.
Additionally, in the future, select business acquisitions and
select new business, including contract renewals and new
contracts, while increasing or maintaining our operating income
could also reduce our operating margin if their margins are
lower than L-3s existing operating margin. Our business
objectives include growing earnings per common share and net
cash from operating activities.
Other
Events
Accounting Standards Implemented. We adopted eight
newly issued accounting standards during the
2009 Year-to-Date
Period, six of which were effective January 1, 2009. In
accordance with the transition and disclosure provisions of
three of these standards, we retrospectively applied those
provisions and adjusted the prior period financial statements
accordingly. The adoption of these standards reduced net income
attributable to L-3 by $3 million ($0.03 per diluted share)
for the 2009 Third Quarter and $9 million ($0.10 per
diluted share) for the
2009 Year-to-Date
Period. See Note 3 to our unaudited condensed consolidated
financial statements contained in this quarterly report for the
standards adopted and their impact to our financial position and
results of operations.
Debt Refinancing. On October 2, 2009, L-3
Communications successfully completed a $1 billion offering
of 5.20% senior notes. The net cash proceeds from the
offering, together with cash on hand, were used by
L-3 Communications
to repay its outstanding $650 million term loan on
October 7, 2009 and to redeem its outstanding
$750 million
75/8% senior
subordinated notes on November 2, 2009. On October 23,
2009,
L-3 Communications
also replaced its $1 billion senior revolving credit
facility, which was due to expire on March 9, 2010, with a
new $1 billion three-year senior revolving credit facility
that expires on October 23, 2012. See Liquidity and
Capital Resources Debt on page 52 for a
further discussion.
2008 Year-to-Date
Events. As discussed above, our
2008 Year-to-Date
period results were affected by three matters, which increased
consolidated operating income by $110 million, income
before taxes by $117 million, net income by
$71 million and diluted earnings per share (EPS) by $0.57,
which are collectively referred to as the Q2 2008 Items:
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A gain of $133 million ($81 million after income
taxes, or $0.65 per diluted share) relating to the reversal of a
$126 million liability as a result of a June 27, 2008
decision by the U.S. Court of Appeals vacating an adverse
2006 jury verdict and the reversal of $7 million of related
accrued interest (the Litigation Gain),
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A gain of $12 million ($7 million after income taxes,
or $0.06 per diluted share) relating to the sale of a product
line (the Product Line Divestiture Gain), and
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39
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A non-cash impairment charge of $28 million
($17 million after income taxes, or $0.14 per diluted
share) relating to a write-down of capitalized software
development costs associated with a general aviation product
(the Impairment Charge).
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Business
Acquisitions and Business and Product Line
Dispositions
Our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2008 summarizes the
business acquisitions and business and product line dispositions
that we completed during the three years ended December 31,
2008. Also, see Note 4 to our unaudited condensed
consolidated financial statements contained in this quarterly
report for a discussion of the acquisition of Chesapeake
Sciences Corporation (CSC) acquired on January 30, 2009.
During the
2009 Year-to-Date
Period, we used $86 million of cash (net of cash received)
primarily to acquire CSC.
All of our business acquisitions are included in our
consolidated results of operations from their dates of
acquisition. We regularly evaluate potential business
acquisitions.
Critical
Accounting Policies Goodwill and Identifiable
Intangible Assets
The following paragraphs are an update to the discussion of our
critical accounting policies included in
Part II Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations of our Annual Report on
Form 10-K
for the year ended December 31, 2008. The update provides
additional information about the assumptions and estimates used
in connection with the 2008 annual goodwill impairment test.
There were no changes to our critical accounting policies since
December 31, 2008.
Goodwill and Identifiable Intangible Assets. 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 as of November 30 in accordance with
U.S. Generally Accepted Accounting Principles
(U.S. GAAP) for goodwill and other intangible assets
(contained in Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) Topic 350,
Intangibles-Goodwill and Other).
U.S. GAAP for goodwill and other intangible assets require
that goodwill be tested, at a minimum, annually for each
reporting unit using a two-step process. A reporting unit is an
operating segment, as defined in U.S. GAAP for segment
reporting (contained in FASB ASC Topic 280, Segment
Reporting), 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 18 reporting units at December 31, 2008 and 2007.
The composition of our reporting units and associated goodwill
were substantially the same in 2008 as compared to 2007 except
for changes in goodwill caused primarily by business
acquisitions, a divestiture, the completion of Internal Revenue
Service audits related to previously acquired businesses and
foreign currency translation adjustments, in each case, as
disclosed in Note 7 to our audited consolidated financial
statements, included in our Annual Report on
Form 10-K
for the year ended December 31, 2008.
The table below presents the number of reporting units in each
of our reportable segments and the associated goodwill, at
December 31, 2008.
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Number of
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Aggregate
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Reportable Segment
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Reporting Units
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Goodwill
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(in millions)
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C3ISR
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3
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$
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896
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Government Services
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1
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2,296
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AM&M
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1
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1,104
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Specialized Products
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13
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3,733
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Total
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18
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$
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8,029
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40
The first step to identify any potential impairment in goodwill
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 uses 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 and
interest rates. All of these factors are affected by economic
conditions related to the industries in which we operate
(predominantly the U.S. defense industry), and prevailing
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 goodwill impairment assessments at November 30, 2008,
were: (1) detailed five-year cash flow projections for each
of our reporting units, which are based primarily on our
estimates of future sales and operating income, (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. There were no changes to the underlying methods used in
2008 as compared to the prior year DCF valuations of our
reporting units.
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 3.5% on the 30 year
U.S. Treasury Bond as of November 30, 2008) and
an equity risk premium of 5%, and (2) the current after-tax
market rate of return on L-3s debt (which was 4.3% as of
November 30, 2008), 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 2008 equity risk
premium of 5% used to determine our WACC was unchanged from the
prior year.
The table below presents the weighted average risk adjusted
discount rate assumptions used in our DCF valuation for each of
our reportable segments in connection with the goodwill
impairment assessments at November 30, 2008.
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Reportable Segment
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2009 2018
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After 2018
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C3ISR(1)
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7.9
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%
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8.6
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%
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Government
Services(2)
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8.3
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%
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9.2
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%
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AM&M(2)
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7.9
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%
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8.6
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%
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Specialized
Products(3)
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8.2
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%
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9.0
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%
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(1)
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All reporting units within the
C3ISR
reportable segment used the same risk adjusted discount rate for
both periods.
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(2)
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The Government Services and
AM&M reportable segments are each comprised of one
reporting unit.
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(3)
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The risk adjusted discount rates
used for reporting units within the Specialized Products
reportable segment range from 7.9% to 9.3% for 2009 to 2018, and
8.6% to 10.3% for the years after 2018.
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