10-Q 1 d414356d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

  þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 28, 2012

 

  ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file numbers 001-14141 and 333-46983

L-3 COMMUNICATIONS HOLDINGS, INC.

L-3 COMMUNICATIONS CORPORATION

(Exact names of registrants as specified in their charters)

 

Delaware   13-3937434 and 13-3937436

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Nos.)

600 Third Avenue, New York, NY   10016
(Address of principal executive offices)   (Zip Code)

(212) 697-1111

(Registrant’s telephone number, including area code)

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.    þ  Yes        ¨  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).    þ  Yes        ¨  No

Indicate by check mark whether the registrants are large accelerated filers, accelerated filers, non-accelerated filers, or smaller reporting companies. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  þ

  Accelerated filer  ¨   Non-accelerated filer  ¨   (Do not check if a smaller reporting company)   Smaller reporting company  ¨

Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Act).    ¨  Yes        þ  No

There were 94,058,714 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 26, 2012.

 

 

 


Table of Contents

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the quarterly period ended September 28, 2012

 

         Page
No.
 
  PART I — FINANCIAL INFORMATION   

ITEM 1.

  Financial Statements   
 

Condensed Consolidated Balance Sheets as of September 28, 2012 (Unaudited) and December 31, 2011

     1   
 

Unaudited Condensed Consolidated Statements of Operations for the Quarterly and
Year-to-Date periods ended September 28, 2012 and September 30, 2011

     2   
 

Unaudited Condensed Consolidated Statements of Comprehensive Income for the Quarterly and Year-to-Date periods ended September 28, 2012 and September 30, 2011

     4   
 

Unaudited Condensed Consolidated Statements of Equity for the Year-to-Date periods ended September 28, 2012 and September 30, 2011

     5   
 

Unaudited Condensed Consolidated Statements of Cash Flows for the Year-to-Date periods ended September 28, 2012 and September 30, 2011

     6   
 

Notes to Unaudited Condensed Consolidated Financial Statements

     7   

ITEM 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations   
 

Overview and Outlook

     35   
 

Business Acquisitions and Dispositions

     40   
 

Results of Operations, including business segments

     40   
 

Liquidity and Capital Resources

     46   
 

Legal Proceedings and Contingencies

     50   

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     53   

ITEM 4.

 

Controls and Procedures

     53   
  PART II — OTHER INFORMATION   

ITEM 1.

 

Legal Proceedings

     54   

ITEM 1A.

  Risk Factors      54   

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     55   

ITEM 6.

 

Exhibits

     55   

Signature

     56   


Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

 

     (Unaudited)
September 28,
2012
    December 31,
2011
 
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 514      $ 764   

Billed receivables, net of allowances of $27 in 2012 and $25 in 2011

     962        1,103   

Contracts in process

     2,839        2,351   

Inventories

     401        317   

Deferred income taxes

     131        132   

Other current assets

     139        191   

Assets of discontinued operations

            1,729   
  

 

 

   

 

 

 

Total current assets

     4,986        6,587   
  

 

 

   

 

 

 

Property, plant and equipment, net

     980        921   

Goodwill

     7,705        7,472   

Identifiable intangible assets

     327        308   

Deferred debt issue costs

     32        33   

Other assets

     170        176   
  

 

 

   

 

 

 

Total assets

   $     14,200      $     15,497   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

  

Current liabilities:

    

Accounts payable, trade

   $ 476      $ 395   

Accrued employment costs

     613        563   

Accrued expenses

     437        543   

Advance payments and billings in excess of costs incurred

     682        537   

Income taxes

     23        40   

Other current liabilities

     348        388   

Liabilities of discontinued operations

            351   
  

 

 

   

 

 

 

Total current liabilities

     2,579        2,817   
  

 

 

   

 

 

 

Pension and postretirement benefits

     1,090        1,137   

Deferred income taxes

     420        335   

Other liabilities

     391        359   

Long-term debt

     3,878        4,125   
  

 

 

   

 

 

 

Total liabilities

     8,358        8,773   
  

 

 

   

 

 

 

Commitments and contingencies (see Note 16)

    

Equity:

    

L-3 shareholders’ equity:

    

L-3 Communications Holdings, Inc.’s common stock: $.01 par value; 300,000,000 shares authorized, 94,802,315 shares outstanding at September 28, 2012 and 98,979,411 shares outstanding at December 31, 2011 (L-3 Communications Corporation’s common stock: $.01 par value, 100 shares authorized, issued and outstanding)

     5,244        5,064   

L-3 Communications Holdings, Inc.’s treasury stock (at cost), 52,532,762 shares at September 28, 2012 and 45,314,918 shares at December 31, 2011

     (4,120     (3,616

Retained earnings

     5,033        5,641   

Accumulated other comprehensive loss

     (391     (454
  

 

 

   

 

 

 

Total L-3 shareholders’ equity

     5,766        6,635   

Noncontrolling interests of continuing operations

     76        79   

Noncontrolling interests of discontinued operations

            10   
  

 

 

   

 

 

 

Total equity

     5,842        6,724   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 14,200      $ 15,497   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements

 

1


Table of Contents

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

 

     Third Quarter Ended  
     September 28,
2012
    September 30,
2011
 

Net sales:

    

Products

   $ 1,915      $ 1,854   

Services

     1,368        1,447   
  

 

 

   

 

 

 

Total net sales

     3,283        3,301   
  

 

 

   

 

 

 

Cost of sales:

    

Products

     1,717        1,645   

Services

     1,235        1,297   
  

 

 

   

 

 

 

Total cost of sales

     2,952        2,942   
  

 

 

   

 

 

 

Operating income

     331        359   

Interest and other income, net

            3   

Interest expense

     48        50   

Debt retirement charge

     8          
  

 

 

   

 

 

 

Income from continuing operations before income taxes

     275        312   

Provision for income taxes

     80        98   
  

 

 

   

 

 

 

Income from continuing operations

     195        214   

Income (loss) from discontinued operations, net of income tax

     (1     24   
  

 

 

   

 

 

 

Net income

   $ 194      $ 238   

Less: Net income attributable to noncontrolling interests

     2        3   
  

 

 

   

 

 

 

Net income attributable to L-3

   $ 192      $ 235   

Less: Net income allocable to participating securities

              
  

 

 

   

 

 

 

Net income allocable to L-3 Holdings’ common shareholders

   $ 192      $ 235   
  

 

 

   

 

 

 

Basic earnings (loss) per share allocable to L-3 Holdings’ common shareholders:

    

Continuing operations

   $ 2.01      $ 2.05   

Discontinued operations

     (0.01     0.22   
  

 

 

   

 

 

 

Basic earnings per share

   $ 2.00      $ 2.27   
  

 

 

   

 

 

 

Diluted earnings (loss) per share allocable to L-3 Holdings’ common shareholders:

    

Continuing operations

   $ 1.98      $ 2.02   

Discontinued operations

     (0.01     0.22   
  

 

 

   

 

 

 

Diluted earnings per share

   $ 1.97      $ 2.24   
  

 

 

   

 

 

 

Cash dividends paid per common share

   $ 0.50      $ 0.45   
  

 

 

   

 

 

 

L-3 Holdings’ weighted average common shares outstanding:

    

Basic

     96.1        103.5   
  

 

 

   

 

 

 

Diluted

     97.4        104.8   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements

 

2


Table of Contents

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 28,
2012
     September 30,
2011
 

Net sales:

     

Products

   $ 5,452       $ 5,464   

Services

     4,134         4,151   
  

 

 

    

 

 

 

Total net sales

     9,586         9,615   
  

 

 

    

 

 

 

Cost of sales:

     

Products

     4,837         4,829   

Services

     3,762         3,741   
  

 

 

    

 

 

 

Total cost of sales

     8,599         8,570   
  

 

 

    

 

 

 

Operating income

     987         1,045   

Interest and other income, net

     6         10   

Interest expense

     138         152   

Debt retirement charge

     8         18   
  

 

 

    

 

 

 

Income from continuing operations before income taxes

     847         885   

Provision for income taxes

     274         275   
  

 

 

    

 

 

 

Income from continuing operations

     573         610   

Income from discontinued operations, net of income tax

     32         81   
  

 

 

    

 

 

 

Net income

   $ 605       $ 691   

Less: Net income attributable to noncontrolling interests

     7         9   
  

 

 

    

 

 

 

Net income attributable to L-3

   $ 598       $ 682   

Less: Net income allocable to participating securities

             2   
  

 

 

    

 

 

 

Net income allocable to L-3 Holdings’ common shareholders

   $ 598       $ 680   
  

 

 

    

 

 

 

Basic earnings (loss) per share allocable to L-3 Holdings’ common shareholders:

     

Continuing operations

   $ 5.85       $ 5.68   

Discontinued operations

     0.29         0.74   
  

 

 

    

 

 

 

Basic earnings per share

   $ 6.14       $ 6.42   
  

 

 

    

 

 

 

Diluted earnings (loss) per share allocable to L-3 Holdings’ common shareholders:

     

Continuing operations

   $ 5.78       $ 5.62   

Discontinued operations

     0.28         0.72   
  

 

 

    

 

 

 

Diluted earnings per share

   $ 6.06       $ 6.34   
  

 

 

    

 

 

 

Cash dividends paid per common share

   $ 1.50       $ 1.35   
  

 

 

    

 

 

 

L-3 Holdings’ weighted average common shares outstanding:

     

Basic

     97.4         106.0   
  

 

 

    

 

 

 

Diluted

     98.7         107.2   
  

 

 

    

 

 

 

See notes to unaudited condensed consolidated financial statements

 

3


Table of Contents

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

 

     Third Quarter Ended     Year-to-Date Ended  
       September 28,
2012
     September 30,
2011
      September 28,
2012
     September 30,
2011
 

Net income

   $ 194       $ 238      $ 605       $ 691   

Other comprehensive income (loss):

          

Foreign currency translation adjustments

     46         (81     28         (14

Unrealized gains (losses) on hedging instruments(1)

     2         (9     4         (11

Pension and postretirement benefit plans:

          

Amortization of net loss and prior service cost previously recognized(2)

     9         6        31         22   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other comprehensive income (loss):

     57         (84     63         (3
  

 

 

    

 

 

   

 

 

    

 

 

 

Comprehensive income

     251         154        668         688   

Less: Comprehensive income attributable to noncontrolling interests

     2         3        7         9   
  

 

 

    

 

 

   

 

 

    

 

 

 

Comprehensive income attributable to L-3

   $     249       $     151      $     661       $     679   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

 

(1) 

Amounts are net of income tax benefits of $1 and $5 million for the quarterly periods ended September 28, 2012 and September 30, 2011, respectively, and income taxes of $2 million and an income tax benefit of $7 million for the year-to-date periods ended September 28, 2012 and September 30, 2011, respectively.

 

(2) 

Amounts are net of income taxes of $8 million and $4 million for the quarterly periods ended September 28, 2012 and September 30, 2011, respectively, and $20 million and $14 million for the year-to-date periods ended September 28, 2012 and September 30, 2011, respectively.

See notes to unaudited condensed consolidated financial statements

 

4


Table of Contents

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(in millions, except per share data)

 

    L-3 Holdings’
Common Stock
    Additional
Paid-in
Capital
                Accumulated
Other
Comprehensive
Income (Loss)
    Noncontrolling
Interests
    Total
Equity
 
    Shares
Outstanding
    Par
Value
      Treasury
Stock
    Retained
Earnings
       

For the Year-to-Date ended September 28, 2012:

               

Balance at December 31, 2011

    99.0      $ 1      $ 5,063      $ (3,616   $ 5,641      $   (454   $ 89      $ 6,724   

Net income

            598          7        605   

Other comprehensive income

              63          63   

Distributions to noncontrolling interests

                (7     (7

Cash dividends paid on common stock ($1.50 per share)

            (146         (146

Shares issued:

               

Employee savings plans

    1.7          111                111   

Exercise of stock options

    0.2          12                12   

Employee stock purchase plan

    0.7          21                21   

Stock-based compensation expense

        46                46   

Contribution received from the spin-off of Engility

            335            335   

Spin-off of Engility

            (1,393       (13     (1,406

Treasury stock purchased

    (7.2         (504           (504

Other

    0.4          (10       (2         (12
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 28, 2012

    94.8      $   1      $    5,243      $    (4,120   $    5,033      $ (391   $    76      $    5,842   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the Year-to-Date ended September 30, 2011:

               

Balance at December 31, 2010

    108.6      $ 1      $ 4,800      $ (2,658   $ 4,877      $ (256   $ 91      $ 6,855   

Net income

            682          9        691   

Other comprehensive income

              (3       (3

Distributions to noncontrolling interests

                (9     (9

Cash dividends paid on common stock ($1.35 per share)

            (143         (143

Shares issued:

               

Employee savings plans

    1.6          108                108   

Exercise of stock options

    0.4          18                18   

Employee stock purchase plan

    0.9          23                23   

Stock-based compensation expense

        51                51   

Treasury stock purchased

    (10.8         (800           (800

Other

    0.2          (1       (3         (4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

    100.9      $ 1      $ 4,999      $ (3,458   $ 5,413      $ (259   $ 91      $ 6,787   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements

 

5


Table of Contents

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

     Year-to-Date Ended  
     September 28,
2012
    September 30,
2011
 

Operating activities:

    

Net income

   $ 605      $ 691   

Less: Income from discontinued operations, net of tax

     32        81   
  

 

 

   

 

 

 

Income from continuing operations

     573        610   

Depreciation of property, plant and equipment

     124        125   

Amortization of intangibles and other assets

     41        44   

Deferred income tax provision

     50        80   

Stock-based employee compensation expense

     44        47   

Contributions to employee savings plans in L-3 Holdings’ common stock

     104        89   

Amortization of pension and postretirement benefit plans net loss and prior service cost

     51        36   

Amortization of bond discounts and deferred debt issue costs (included in interest expense)

     5        10   

Other non-cash items

     9        5   

Changes in operating assets and liabilities, excluding amounts from acquisitions, divestitures and discontinued operations:

    

Billed receivables

     161        18   

Contracts in process

     (385     (204

Inventories

     (83     (46

Accounts payable, trade

     47        41   

Accrued employment costs

     35        7   

Accrued expenses

     (120     16   

Advance payments and billings in excess of costs incurred

     94        (74

Income taxes

     (6     55   

Excess income tax benefits related to share-based payment arrangements

     (2     (2

Other current liabilities

     (54     (1

Pension and postretirement benefits

     (53     (74

All other operating activities

     57        (33
  

 

 

   

 

 

 

Net cash from operating activities from continuing operations

     692        749   
  

 

 

   

 

 

 

Investing activities:

    

Contribution received from the spin-off of Engility

     335          

Business acquisitions, net of cash acquired

     (349     (15

Capital expenditures

     (124     (124

Dispositions of property, plant and equipment

     6        5   

Other investing activities

     (5     1   
  

 

 

   

 

 

 

Net cash used in investing activities from continuing operations

     (137     (133
  

 

 

   

 

 

 

Financing activities:

    

Proceeds from sale of senior notes

            646   

Redemption of senior subordinated notes

     (250     (650

Redemption of CODES

            (11

Borrowings under revolving credit facility

     199        625   

Repayment of borrowings under revolving credit facility

     (199     (625

Common stock repurchased

     (504     (800

Dividends paid on L-3 Holdings’ common stock

     (149     (143

Proceeds from exercises of stock options

     12        21   

Proceeds from employee stock purchase plan

     30        34   

Debt issue costs

     (6     (7

Excess income tax benefits related to share-based payment arrangements

     2        2   

Other financing activities

     (18     (7
  

 

 

   

 

 

 

Net cash used in financing activities from continuing operations

     (883     (915
  

 

 

   

 

 

 

Effect of foreign currency exchange rate changes on cash and cash equivalents

     4          

Cash from (used in) discontinued opeations:

    

Operating activities

     75        235   

Investing activities

            (4

Financing activities

     (1     (1
  

 

 

   

 

 

 

Cash from discontinued operations

     74        230   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (250     (69

Cash and cash equivalents, beginning of the period

     764        607   
  

 

 

   

 

 

 

Cash and cash equivalents, end of the period

   $       514      $       538   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements

 

6


Table of Contents

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

1.  Description of Business

L-3 Communications Holdings, Inc. derives all of its operating income and cash flows from its wholly-owned subsidiary, L-3 Communications Corporation (L-3 Communications). L-3 Communications Holdings, Inc. (L-3 Holdings and, together with its subsidiaries, referred to herein as L-3 or the “Company”) is a prime contractor in Command, Control, Communications, Intelligence, Surveillance and Reconnaissance (C3ISR) systems, aircraft modernization and maintenance, and national security solutions. L-3 is also a leading provider of a broad range of electronic systems used on military and commercial platforms. The Company’s customers include the United States (U.S.) Department of Defense (DoD) and its prime contractors, U.S. Government intelligence agencies, the U.S. Department of Homeland Security (DHS), U.S. Department of State (DoS), allied foreign governments, and domestic and foreign commercial customers.

On July 17, 2012, L-3 completed the spin-off of its subsidiary, Engility Holdings, Inc. (Engility) to L-3’s shareholders. The spin-off was a tax-free distribution to L-3 shareholders for U.S. federal tax purposes, except for cash received in lieu of fractional shares. L-3 shareholders of record on July 16, 2012 (the record date) received one share of Engility common stock for every six shares of L-3 common stock held on the record date. Engility began trading as an independent publicly traded company on the New York Stock Exchange on July 18, 2012.

Engility included the systems engineering and technical assistance (SETA), training and operational support services businesses that were part of L-3’s Government Services segment. L-3 retained the cyber security, intelligence, enterprise information technology (IT) and security solutions businesses that were also part of L-3’s Government Services segment, which was renamed National Security Solutions (NSS). The NSS businesses develop unique solutions to address growing challenges for DoD, U.S. Government intelligence agencies, and global security customers. As a result of the spin-off, the assets, liabilities, noncontrolling interests, results of operations and cash flows of the Engility businesses have been reclassified as discontinued operations for all periods presented. See Note 4 for additional information.

The Company has the following four reportable segments: (1) Electronic Systems, (2) C3ISR, (3) Aircraft Modernization and Maintenance (AM&M), and (4) NSS. Financial information with respect to each of the Company’s segments is included in Note 20. Electronic Systems provides a broad range of products and services, including components, products, subsystems and systems and related services to military and commercial customers in several niche markets across several business areas, including microwave, power & control systems, integrated sensor systems, aviation products, simulation & training, warrior systems, precision engagement, security & detection, space & propulsion, undersea warfare and marine services. 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. 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 and other allied foreign governments. NSS provides a full range of cyber security, intelligence, enterprise information technology (IT) and security solutions services to the DoD, DoS, U.S. Government intelligence agencies and global security customers.

 

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L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

2.  Basis of Presentation

These unaudited condensed consolidated financial statements for the quarterly and year-to-date periods ended September 28, 2012 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, 2011.

Principles of Consolidation and Reporting

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 Amended and Restated Revolving Credit Facility of L-3 Communications and (3) its guarantee of other contractual obligations of L-3 Communications and its subsidiaries. L-3 Holdings’ obligations relating to the CODES have been jointly, severally, fully and unconditionally guaranteed by L-3 Communications and certain of its wholly-owned domestic subsidiaries. Accordingly, such debt has been reflected as debt of L-3 Communications in its consolidated financial statements in accordance with the accounting standards for pushdown accounting. All issuances of and conversions into L-3 Holdings’ equity securities, including grants of stock options, restricted stock, restricted stock units and performance units by L-3 Holdings to employees and directors of L-3 Communications and its subsidiaries, have been reflected in the consolidated financial statements of L-3 Communications. As a result, the consolidated financial positions, results of operations and cash flows of L-3 Holdings and L-3 Communications are substantially the same. See Note 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. The December 31, 2011 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. 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.

It is the Company’s established practice to close its books for the quarters ending March, June and September on the Friday nearest to the end of the calendar quarter. The interim unaudited condensed consolidated financial statements included herein have been prepared and are labeled based on that convention. The Company closes its books for annual periods on December 31 regardless of what day it falls on.

Accounting Estimates

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

 

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L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

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.

Sales and profits on contracts that are covered by accounting standards for construction-type and production-type contracts and federal government contractors are recognized using percentage-of-completion (POC) methods of accounting. For the year ended December 31, 2011, sales on such contracts represented approximately 45% of our consolidated net sales, including approximately 35% from fixed-price type contracts and 10% from cost-plus type contracts. For contracts accounted for under contract accounting standards, sales and profits are recognized based on: (1) a POC method of accounting (fixed-price contracts), (2) allowable costs incurred plus the estimated profit on those costs (cost-plus contracts), or (3) direct labor hours expended multiplied by the contractual fixed rate per hour plus incurred costs for material (time-and-material contracts). Sales and profits on fixed-price production contracts under which units are produced and delivered in a continuous or sequential process are recorded as units are delivered based on their contractual selling prices (the “units-of-delivery” method). Sales and profits on each fixed-price production contract under which units are not produced and delivered in a continuous or sequential process, or under which a relatively few number of units are produced, are recorded based on the ratio of actual cumulative costs incurred to total estimated costs at completion of the contract multiplied by the total estimated contract revenue, less cumulative sales recognized in prior periods (the “cost-to-cost” method). Under both POC methods of accounting, a single estimated total profit margin is used to recognize profit for each contract over its entire period of performance, which can exceed one year.

Accounting for the sales and profit on these fixed-price type contracts requires the preparation of estimates of (1) the total contract revenue, (2) the total costs at completion, which is equal to the sum of the actual incurred costs to date on the contract and the estimated costs to complete the contract’s statement of work, and (3) the measurement of progress towards completion. The estimated profit or loss at completion on a contract is equal to the difference between the total estimated contract revenue and the total estimated cost at completion. The profit recorded on a contract in any period using either the units-of-delivery method or cost-to-cost method is equal to the current estimated total profit margin multiplied by the cumulative sales recognized, less the amount of cumulative profit previously recorded for the contract.

Sales and profits on cost-plus type contracts that are covered by contract accounting standards are recognized as allowable costs are incurred on the contract, at an amount equal to the allowable costs plus the estimated profit on those costs. The estimated profit on a cost-plus type contract is fixed or variable based on the contractual fee arrangement. Incentive and award fees are the primary variable fee contractual arrangement types for the Company. Incentive and award fees on cost-plus type contracts are included as an element of total estimated contract revenues and are recorded to sales when a basis exists for the reasonable prediction of performance in relation to established contractual targets and the Company is able to make reasonably dependable estimates for them.

Sales and profits on time-and-material type contracts are recognized on the basis of direct labor hours expended multiplied by the contractual fixed rate per hour, plus the actual costs of materials and other direct non-labor costs.

Revisions or adjustments to estimates for a contract’s revenue, estimated costs at completion and estimated profit or loss are often required as work progresses under a contract, as experience is gained, as facts and circumstances change and as new information is obtained, even though the scope of work required under the contract may not change. Revisions or adjustments may also be required if contract modifications occur. The impact of revisions in profit (loss) estimates for all types of contracts subject to percentage-of-completion accounting are recognized on a cumulative catch-up basis in the period in which the revisions are made. The

 

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L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

revisions in contract estimates, if significant, can materially affect our results of operations and cash flows, as well as reduce the valuations of receivables and inventories, and in some cases result in liabilities to complete contracts in a loss position. Aggregate net changes in contract estimates increased consolidated operating income by $75 million, or 7.6%, for the year-to-date period ended September 28, 2012 and $65 million, or 4.7%, for the year-to-date period ended September 30, 2011.

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, 2011.

Reclassifications

Effective January 1, 2012, the Company re-aligned a business unit’s management and organizational structure, and made related reclassifications between its Electronic Systems and C3ISR segments. The segment results presented in this quarterly report reflect this reclassification. See Note 20 for the prior period sales, operating income, and assets reclassified between segments.

3.  New Accounting Standards

Effective January 1, 2012 the Company retrospectively adopted a new accounting standard issued by the Financial Accounting Standards Board (FASB) for the presentation of comprehensive income in financial statements. The adoption of this standard resulted in the presentation of a total for comprehensive income, and the components of net income and other comprehensive income in two separate, but consecutive statements. The adoption of this standard only changed how we present comprehensive income and did not impact the Company’s financial position, results of operations or cash flows.

Effective January 1, 2012, the Company adopted a revised accounting standard issued by the FASB allowing companies to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, as a result of the qualitative assessment, it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a more detailed two-step goodwill impairment test will be performed to identify potential goodwill impairment and measure the amount of loss to be recognized, if any. The standard is effective for goodwill impairment tests performed beginning in 2012, and did not have an impact on the Company’s financial position, results of operations or cash flows.

4.  Dispositions and Acquisitions

Spin-off of Engility

As discussed in Note 1, the Company completed the spin-off of its subsidiary, Engility, on July 17, 2012. In connection with the spin-off, Engility made a cash distribution of $335 million to L-3. L-3 used a portion of the proceeds to redeem $250 million of its 6 3/8% Senior Subordinated Notes due 2015 (2015 Notes) on July 26, 2012. See Note 9 for additional information on the redemption of the 2015 Notes. There was no gain or loss recognized by us as a result of the spin-off transaction.

Prior to the completion of the spin-off, L-3 and Engility entered into a Distribution Agreement dated July 16, 2012 and several other agreements that govern certain aspects of L-3’s current relationship with Engility. These agreements generally provide that each party is responsible for its respective assets, liabilities and obligations, including employee benefits, insurance and tax related assets and liabilities, whether accrued or contingent. The agreements also describe L-3’s commitments to provide Engility with certain services for a period of two to eighteen months in most circumstances.

L-3 incurred transaction expenses in connection with the spin-off of $19 million ($14 million after income taxes) for the year-to-date period ended September 28, 2012 and $4 million ($3 million after income taxes) for the year-to-date period ended September 30, 2011, respectively, which have been included in discontinued

 

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Table of Contents

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

operations. In addition, L-3 allocated interest expense for debt not directly attributable or related to L-3’s other operations of $14 million and $24 million for the year-to-date periods ended September 28, 2012 and September 30, 2011, respectively. Interest expense was allocated in accordance with the accounting standards for discontinued operations and was based on the ratio of Engility net assets to the sum of: (1) total L-3 consolidated net assets and (2) L-3 consolidated total debt.

Statement of operations data classified as discontinued operations related to Engility is provided in the table below:

 

    Third Quarter Ended     Year-to-Date Ended  
    September 28,
2012
    September 30,
2011
    September 28,
2012
    September 30,
2011
 
    (in millions)  

Product and service revenues

  $     68      $     486      $     911      $     1,539   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income from discontinued operations before income taxes

    2        47        68        155   

Interest expense allocated to discontinued operations

    1        7        14        24   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from discontinued operations before income taxes

  $ 1      $ 40      $ 54      $ 131   

Income tax expense

    2        16        22        50   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations, net of income tax

  $ (1   $ 24      $ 32      $ 81   

Net income from discontinued operations attributable to noncontrolling interests

           1        4        3   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from discontinued operations attributable to L-3

  $ (1   $ 23      $ 28      $ 78   
 

 

 

   

 

 

   

 

 

   

 

 

 

In connection with the spin-off of Engility, L-3 was required to allocate the goodwill of the former Government Services reporting unit between Engility and NSS based on the relative fair values of each business at the spin-off date in accordance with the accounting standards for goodwill. As a result, based on the relative fair value, L-3 allocated $1,225 million to Engility.

The major classes of assets and liabilities included in discontinued operations for Engility are presented in the table below:

 

     December 31,
2011
 
     (in millions)  

Assets

  

Current assets

   $         386   

Property, plant and equipment, net

     13   

Goodwill

     1,225   

Other assets

     105   
  

 

 

 

Total assets of discontinued operations

   $ 1,729   

Liabilities

  

Accounts payable, trade

   $ 37   

Other current liabilities

     187   
  

 

 

 

Current liabilities

     224   

Long-term liabilities

     127   
  

 

 

 

Total liabilities of discontinued operations

   $ 351   
  

 

 

 

 

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L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

All of the business acquisitions discussed below are included in the Company’s results of operations from their respective dates of acquisition.

2012 Business Acquisitions

On February 6, 2012, the Company acquired the Kollmorgen Electro-Optical (KEO) business for a purchase price of $205 million, which was financed with cash on hand. KEO develops and manufactures specialized equipment, including submarine photonics systems and periscopes, ship fire control systems, visual landing aids, ground electro-optical and sensor-cueing systems for the U.S. military and allied foreign governments. Based on preliminary purchase price allocations, goodwill of $137 million was recognized, of which $69 million is expected to be deductible for income tax purposes. The goodwill was assigned to the Electronic Systems segment. In addition, the Company recognized customer contractual relationships and technology intangibles of $32 million in the aggregate, with estimated weighted average useful lives of 10 years. The final purchase price, which is expected to be completed by the fourth quarter of 2012, is subject to adjustment based on the closing date net working capital. In addition, the final purchase price allocation is also expected to be completed in the fourth quarter of 2012 and will be based on the final purchase price, final appraisals and other analysis of fair values of acquired assets and liabilities. The Company does not expect differences between the preliminary and final purchase price allocation to have a material impact on its results of operations or financial position.

On April 13, 2012, the Company acquired the assets and liabilities of MAVCO, Inc. (MAVCO) for $10 million, with cash on hand. MAVCO is an audio, video, lighting and broadcast systems integration business primarily for cruise lines. Based on a preliminary purchase price allocation, goodwill of $8 million was recognized, all of which is expected to be deductible for income tax purposes. The goodwill was assigned to the Electronics Systems segment. In addition, the Company recognized customer relationships and technology intangibles of $1 million in the aggregate, with estimated weighted average useful lives of 7 years. The final purchase price allocation is expected to be completed in the fourth quarter of 2012 and will be based on the final purchase price, final appraisals and other analysis of fair values of acquired assets and liabilities. The Company does not expect that differences between the preliminary and final purchase price allocation to have a material impact on its results of operations or financial position.

Effective August 6, 2012, the Company acquired the commercial aircraft simulation business from Thales Group. L-3 renamed the business Link Simulation & Training U.K Limited (Link U.K.). The purchase price of $134 million was financed with cash on hand. Link U.K. is a leading manufacturer of flight simulation systems for the commercial aviation market. Based on preliminary purchase price allocations, goodwill of $65 million was recognized, of which $59 million is expected to be deductible for income tax purposes. The goodwill was assigned to the Electronic Systems segment. In addition, the Company recognized customer contractual relationships and technology intangibles of $20 million in the aggregate, with estimated weighted average useful lives of 10 years. The final purchase price, which is expected to be completed in the second quarter of 2013, is subject to adjustment based on the closing date net working capital. In addition, the final purchase price allocation is also expected to be completed in the second quarter of 2013 and will be based on the final purchase price, final appraisals and other analysis of fair values of acquired assets and liabilities. The Company does not expect that differences between the preliminary and final purchase price allocations for this acquisition will have a material impact on its results of operations or financial position.

2011 Business Acquisitions and Disposition

During the year ended December 31, 2011, in separate transactions, the Company acquired: (1) the communications and engineering business of ComHouse Wireless L.P. (ComHouse), which provides the Company with cellular wave form modulation technology, and (2) the cargo radiation screening business of Detector Networks International LLL (DNI) for an aggregate purchase price of $18 million. Both business

 

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L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

acquisitions were financed with cash on hand. Based on the purchase price allocations, which were finalized as of June 29, 2012, the aggregate goodwill recognized for the two acquired businesses was $19 million, of which $14 million is expected to be deductible for income tax purposes. The goodwill recognized for these businesses was assigned to the Electronic Systems segment.

In February 2011, the Company divested the Microdyne Corporation business, which was within the Electronic Systems segment. See Note 4 to the audited consolidated financial statements for the year ended December 31, 2011, included in the Company’s Annual Report on Form 10-K for additional information regarding these business acquisitions and the disposition.

Unaudited Pro Forma Statements of Operations Data

The following unaudited pro forma Statement of Operations data presents the combined results of the Company and its business acquisitions completed during the year-to-date period ended September 28, 2012 and the year ended December 31, 2011, in each case assuming that the business acquisitions completed during the year-to-date period ended September 28, 2012 and the year ended December 31, 2011 had occurred on January 1, 2011.

 

     Third Quarter Ended      Year-to-Date Ended  
     September 28,
2012
     September 30,
2011
     September 28,
2012
     September 30,
2011
 

Pro forma net sales

   $ 3,295       $ 3,377       $ 9,688       $ 9,824   

Pro forma income from continuing operations

     195         218         574         620   

Pro forma net income attributable to L-3

     192         239         599         692   

Pro forma diluted earnings per share from continuing operations

     1.98         2.06         5.79         5.71   

Pro forma diluted earnings per share

     1.97         2.28         6.07         6.44   

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, 2011.

5.  Contracts in Process

The components of contracts in process are presented in the table below.

 

     September 28,
2012
    December 31,
2011
 
     (in millions)  

Unbilled contract receivables, gross

   $   3,029      $   2,667   

Unliquidated progress payments

     (1,250     (1,146
  

 

 

   

 

 

 

Unbilled contract receivables, net

     1,779        1,521   
  

 

 

   

 

 

 

Inventoried contract costs, gross

     1,135        909   

Unliquidated progress payments

     (75     (79
  

 

 

   

 

 

 

Inventoried contract costs, net

     1,060        830   
  

 

 

   

 

 

 

Total contracts in process

   $ 2,839      $ 2,351   
  

 

 

   

 

 

 

Inventoried Contract Costs. In accordance with contract accounting standards, the Company’s U.S. Government contractor businesses account for the portion of their general and administrative (G&A), independent research and development (IRAD) and bids and proposal (B&P) costs that are allowable and

 

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L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

reimbursable indirect contract costs under U.S. Government procurement regulations on their U.S. Government contracts (revenue arrangements) as inventoried contract costs. G&A, IRAD and B&P costs are allocated to contracts for which the U.S. Government is the end customer and are charged to costs of sales when sales on the related contracts are recognized. The Company’s U.S. Government contractor businesses record the unallowable portion of their G&A, IRAD and B&P costs to expense as incurred, and do not include them 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 by the Company’s U.S. Government contractor businesses for the periods presented.

 

     Third Quarter Ended      Year-to-Date Ended  
     September 28,
2012
     September 30,
2011
     September 28,
2012
     September 30,
2011
 
     (in millions)  

Amounts included in inventoried contract costs at beginning of the period

   $ 105        $ 112       $ 91       $ 97    

Add: IRAD and B&P costs

     84         79         256         242   

Other G&A costs

     213         211         648         623   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total contract costs incurred

     297         290         904         865   
  

 

 

    

 

 

    

 

 

    

 

 

 

Less: Amounts charged to cost of sales

     (290)         (297)         (883)         (857)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Amounts included in inventoried contract costs at end of the period

   $ 112       $ 105       $ 112       $ 105   
  

 

 

    

 

 

    

 

 

    

 

 

 

The table below presents a summary of selling, general and administrative expenses and research and development expenses for the Company’s commercial businesses, which are expensed as incurred and not included in inventoried contract costs.

 

.    Third Quarter Ended      Year-to-Date Ended  
     September 28,
2012
     September 30,
2011
     September 28,
2012
     September 30,
2011
 
     (in millions)  

Selling, general and administrative expenses

   $ 68       $ 66       $ 220       $ 219   

Research and development expenses

     20         22         62         66   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 88       $ 88        $ 282       $ 285   
  

 

 

    

 

 

    

 

 

    

 

 

 

6.   Inventories

Inventories at Lower of Cost or Market. The table below presents the components of inventories at the lower of cost (first-in, first-out or average cost) or realizable value.

 

     September 28,
2012
     December 31,
2011
 
     (in millions)  

Raw materials, components and sub-assemblies

   $ 179       $ 121   

Work in process

     162         143   

Finished goods

     60         53   
  

 

 

    

 

 

 

Total

   $   401       $   317   
  

 

 

    

 

 

 

 

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L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

7.  Goodwill and Identifiable Intangible Assets

Goodwill. In accordance with the accounting standards for business combinations, the Company records the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition (commonly referred to as the purchase price allocation). The table below presents the changes in goodwill by segment.

 

     Electronic
Systems
     C3ISR     AM&M      NSS      Consolidated
Total
 
     (in millions)  

Balance at December 31, 2011

   $ 4,471       $ 866      $ 1,169       $ 966       $ 7,472   

Business acquisitions(1)

     210                                210   

Foreign currency translation adjustments(2)

     12                10         1        23   

Segment reclassification(3)

     69         (69                       
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Balance at September 28, 2012

   $   4,762       $   797      $   1,179       $   967       $   7,705   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

 

(1) 

The increase in goodwill for the Electronic Systems segment is due to the KEO, MAVCO and Link U.K. business acquisitions. See Note 4 for further discussion regarding these acquisitions.

 

(2) 

The increases in goodwill presented in the Electronic Systems, AM&M and NSS segments were primarily due to the weakening of the U.S. dollar against the Euro, Canadian dollar and British pound during the year-to-date period ended September 28, 2012.

 

(3) 

Effective January 1, 2012, the Company re-aligned a business unit’s management and organizational structure, as discussed in Note 2, and made a reclassification of goodwill between the Electronic Systems and C3ISR segments during the quarter ended March 30, 2012.

Identifiable Intangible Assets. Information on the Company’s identifiable intangible assets that are subject to amortization is presented in the table below.

 

     September 28, 2012      December 31, 2011  
     Weighted
Average
Amortization
Period
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
 
     (in years)                    (in millions)                

Customer contractual relationships

     18       $ 457       $ 216       $ 241       $ 422       $ 192       $ 230   

Technology

     10         167         95         72         149         87         62   

Other

     16         27         13         14         27         11         16   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     16       $   651       $   324       $   327       $   598       $   290       $   308   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 28,
2012
     September 30,
2011
     September 28,
2012
     September 30,
2011
 

Amortization Expense

   $   13       $   12       $   34       $   37   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

Based on gross carrying amounts at September 28, 2012, the Company’s estimate of amortization expense for identifiable intangible assets for the years ending December 31, 2012 through 2016 are presented in the table below.

 

     Year Ending December 31,  
     2012      2013      2014      2015      2016  
     (in millions)  

Estimated amortization expense

   $   45       $   40       $   42       $   37       $   31   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

8.  Other Current Liabilities and Other Liabilities

The table below presents the components of other current liabilities.

 

     September 28,
2012
     December 31,
2011
 
     (in millions)  

Other Current Liabilities:

     

Accruals for pending and threatened litigation (see Note 16)

   $ 10       $ 23   

Accrued product warranty costs

     76         90   

Estimated costs in excess of estimated contract value to complete contracts in process in a loss position

     63         76   

Accrued interest

     54         59   

Deferred revenues

     40         43   

Other

     105         97   
  

 

 

    

 

 

 

Total other current liabilities

   $   348       $   388   
  

 

 

    

 

 

 

The table below presents the components of other liabilities.

 

     September 28,
2012
     December 31,
2011
 
     (in millions)  

Other Liabilities:

     

Non-current income taxes payable (see Note 10)

   $ 136       $ 149   

Deferred compensation

     43         40   

Accrued workers’ compensation

     57         54   

Estimated contingent purchase price payable for acquired businesses

     12         16   

Notes payable and capital lease obligations

     27         10   

Accrued product warranty costs

     18         4   

Other

     98         86   
  

 

 

    

 

 

 

Total other liabilities

   $   391       $   359   
  

 

 

    

 

 

 

 

16


Table of Contents

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

The table below presents the changes in the Company’s accrued product warranty costs.

 

     Year-to-Date Ended  
     September 28,
2012
    September 30,
2011
 
     (in millions)  

Accrued product warranty costs:(1)

    

Balance at January 1

   $ 94      $ 92   

Acquisitions during the period

     2          

Accruals for product warranties issued during the period

     56        54   

Settlements made during the period

     (58     (54
  

 

 

   

 

 

 

Balance at end of period

   $   94      $   92   
  

 

 

   

 

 

 

 

 

(1) 

Warranty obligations incurred in connection with long-term production contracts that are accounted for under the percentage-of-completion cost-to-cost method are included within the contract estimates at completion and are excluded from the above amounts. The balances above include both the current and non-current amounts.

9.  Debt

The components of debt and a reconciliation to the carrying amount of long-term debt is presented in the table below.

 

     September 28,
2012
    December 31,
2011
 
     (in millions)  

L-3 Communications:

    

Borrowings under Amended and Restated Revolving Credit Facility(1)

   $      $   

3.95% Senior Notes due 2016

     500        500   

5.20% Senior Notes due 2019

     1,000        1,000   

4.75% Senior Notes due 2020

     800        800   

4.95% Senior Notes due 2021

     650        650   

6 3/8% Senior Subordinated Notes due 2015

     250        500   
  

 

 

   

 

 

 

Subtotal

     3,200        3,450   
  

 

 

   

 

 

 

L-3 Holdings:

    

3% Convertible Contingent Debt Securities due 2035(2)

     689        689   
  

 

 

   

 

 

 

Principal amount of long-term debt

     3,889        4,139   

Less: Unamortized discounts

     (11     (14
  

 

 

   

 

 

 

Carrying amount of long-term debt

   $   3,878      $   4,125   
  

 

 

   

 

 

 

 

 

(1) 

The Company’s three-year revolving credit facility, which was amended and restated on February 3, 2012 and matures on February 3, 2017, provides for total aggregate borrowings of up to $1 billion. At September 28, 2012, available borrowings under the Amended and Restated Revolving Credit Facility were $997 million after reductions for outstanding letters of credit of $3 million.

 

(2) 

Under select conditions, including if L-3 Holdings common stock price is more than 120% (currently $110.60) of the then current conversion price (currently $92.17) for a specified period, the conversion feature of the CODES will require L-3 Holdings, upon conversion, to pay the holders of the CODES the principal amount in cash, and if the settlement amount exceeds the principal amount, the

 

17


Table of Contents

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

  excess will be settled in cash or stock or a combination thereof, at the Company’s option. At the current conversion price of $92.17, the aggregate consideration to be delivered upon conversion would be determined based on 7.5 million shares of L-3 Holdings’ common stock. See Note 10 to the audited consolidated financial statements for the year ended December 31, 2011, included in the Company’s Annual Report on Form 10-K for additional information regarding the CODES, including conditions for conversion. L-3 Holdings’ closing stock price on November 2, 2012 was $75.85 per share. Through February 1, 2011, the effective interest rate on the CODES was 6.33%. Interest expense related to both the contractual coupon interest and amortization of the discount on the liability component. The Company amortized the discount on the liability component of the CODES through February 1, 2011 which was the first date that the holders of the CODES had a contractual right to require L-3 Holdings to repurchase the CODES. Interest expense for the CODES after February 1, 2011 relates only to the contractual coupon interest. Interest expense recognized was $5 million each for the third quarter ended September 28, 2012 and September 30, 2011, and $15 million and $17 million for the year-to-date periods ended September 28, 2012 and September 30, 2011, respectively, a portion of which was allocated to discontinued operations. The carrying amount of the equity component (conversion feature) of the CODES was $64 million at September 28, 2012 and December 31, 2011.

On February 3, 2012, L-3 Communications amended and restated its $1 billion Revolving Credit Facility, which extended the expiration date to February 3, 2017. See Note 10 to the audited consolidated financial statements for the year ended December 31, 2011, included in the Company’s Annual Report on Form 10-K for additional information regarding the Amended and Restated Revolving Credit Agreement.

On July 26, 2012 (the redemption date), L-3 Communications used a portion of the proceeds from the spin-off of Engility to redeem $250 million of its 2015 Notes at a redemption price of 102.125%, plus accrued and unpaid interest, up to but not including the redemption date. In connection with the redemption of the 2015 Notes, the Company recorded a debt retirement charge of $8 million ($5 million after income tax, or $0.05 per diluted share).

On October 15, 2012 (the redemption date), L-3 Communications redeemed the remaining outstanding $250 million of its 2015 Notes at a redemption price of 101.063%, plus accrued and unpaid interest, up to but not including the redemption date. In connection with the redemption, the Company will record a debt retirement charge of approximately $5 million ($3 million after income tax, or $0.03 per diluted share) in the quarter ending December 31, 2012.

10.  Income Taxes

The Company and its subsidiaries file income tax returns in the U.S. Federal jurisdiction and various state and foreign jurisdictions. As of September 28, 2012, the statutes of limitations for the Company’s U.S. Federal income tax returns for the years ended December 31, 2009 through 2011 were open. In the third quarter of 2012, the Company reversed previously accrued amounts relating to its provision for income taxes of $11 million due to the expiration of the statue of limitations for several tax returns, including the Company’s 2008 U.S. Federal income tax return as well as certain foreign tax returns. In the second quarter of 2011, the Company reached an agreement with the Internal Revenue Service in connection with the Company’s 2006 and 2007 U.S. Federal income tax returns. As a result of this agreement, the Company reversed previously accrued amounts relating to its provision for income taxes by $12 million. As of September 28, 2012, the Company anticipates that unrecognized tax benefits will decrease by approximately $21 million over the next 12 months due to the potential resolution of unrecognized tax benefits involving several jurisdictions and tax periods. The actual amount of the decrease over the next 12 months could vary significantly depending on the ultimate timing and nature of any settlement.

Non-current income taxes payable include accrued potential interest of $11 million ($7 million after income taxes) at September 28, 2012 and December 31, 2011, and potential penalties of $7 million at September 28, 2012 and $8 million at December 31, 2011.

 

18


Table of Contents

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

11.  L-3 Holdings’ Earnings Per Common Share

A reconciliation of basic and diluted earnings per share (EPS) is presented in the table below.

 

     Third Quarter Ended     Year-to-Date Ended  
     September 28,
2012
    September 30,
2011
    September 28,
2012
    September 30,
2011
 
     (in millions, except per share data)  

Reconciliation of net income:

        

Net income

   $ 194      $ 238      $ 605      $ 691   

Net income from continuing operations attributable to noncontrolling interests

     (2     (2     (3     (6

Net income (loss) from discontinued operations attributable to noncontrolling interests

            (1     (4     (3

Net income allocable to participating securities

                          (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income allocable to L-3 Holdings’ common shareholders

   $ 192      $ 235      $ 598      $ 680   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) allocable to L-3 Holdings’ common shareholders:

        

Continuing operations

   $ 193      $ 212      $ 570      $ 602   

Discontinued operations, net of income tax

     (1     23        28        78   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income allocable to L-3 Holdings’ common shareholders

   $ 192      $ 235      $ 598      $ 680   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share allocable to L-3 Holdings’ common shareholders:

        

Basic:

        

Weighted average common shares outstanding

     96.1        103.5        97.4        106.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings (loss) per share allocable to L-3 Holdings’ common shareholders:

        

Continuing operations

   $ 2.01      $ 2.05      $ 5.85      $ 5.68   

Discontinued operations, net of income tax

     (0.01     0.22        0.29        0.74   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 2.00      $ 2.27      $ 6.14      $ 6.42   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted:

        

Common and potential common shares:

        

Weighted average common shares outstanding

     96.1        103.5        97.4        106.0   

Assumed exercise of stock options

     2.1        1.5        1.7        2.3   

Unvested restricted stock awards

     2.0        2.1        2.1        1.8   

Employee stock purchase plan contributions

     0.3        0.4        0.3        0.1   

Performance unit awards

                          0.1   

Assumed purchase of common shares for treasury

     (3.1     (2.7     (2.8     (3.1

Assumed conversion of the CODES(1)

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Common and potential common shares

           97.4              104.8              98.7          107.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per share allocable to L-3 Holdings’ common shareholders:

        

Continuing operations

   $ 1.98      $ 2.02      $ 5.78      $ 5.62   

Discontinued operations, net of income tax

     (0.01     0.22        0.28        0.72   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 1.97      $ 2.24      $ 6.06      $ 6.34   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

 

 

(1) 

L-3 Holdings’ CODES had no impact on diluted EPS for the quarterly or year-to-date periods ended September 28, 2012 or September 30, 2011 as 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 28, 2012, the conversion price was $92.17.

The computation of diluted EPS excluded 3.2 million and 3.5 million of stock options for the quarterly and year-to-date periods ended September 28, 2012, respectively, and 3.3 million and 3.1 million of stock options and restricted stock units for the quarterly and year-to-date periods ended September 30, 2011, respectively, as they were anti-dilutive.

12.  Equity

On April 26, 2011, L-3 Holdings’ Board of Directors approved a new share repurchase program that authorizes L-3 Holdings to repurchase up to $1.5 billion of its outstanding shares of common stock through April 30, 2013. Repurchases of L-3 Holdings common stock under the share repurchase programs, approved by the Board of Directors, are made at management’s discretion in accordance with applicable U.S. federal securities laws in the open market or otherwise. The timing and actual number of shares to be repurchased in the future will depend on a variety of factors, including the Company’s financial position, earnings, legal requirements, other investment opportunities (including acquisitions), market conditions and other factors. All share repurchases of L-3 Holdings common stock have been recorded as treasury shares. L-3 Holdings repurchased 7.2 million shares of its common stock at an average price of $69.83 per share for an aggregate amount of approximately $504 million from January 1, 2012 through September 28, 2012. At September 28, 2012, the remaining dollar value under the $1.5 billion share repurchase program was approximately $630 million.

From September 29, 2012 through October 31, 2012, L-3 Holdings repurchased 1,019,790 shares of its common stock at an average price of $73.06 per share for an aggregate amount of $75 million.

On October 24, 2012, L-3 Holdings’ Board of Directors declared a quarterly cash dividend of $0.50 per share, payable on December 17, 2012, to shareholders of record at the close of business on November 19, 2012.

13.  Fair Value Measurements

The following table presents the fair value hierarchy level for each of the Company’s assets and liabilities that are measured and recorded at fair value on a recurring basis.

 

     September 28, 2012      December 31, 2011  

Description

   Level  1(1)      Level  2(2)      Level  3(3)      Level  1(1)      Level  2(2)      Level  3(3)  
     (in millions)  

Assets

                 

Cash equivalents

   $ 406       $       $       $ 725       $       $   

Derivatives (foreign currency forward contracts)

             10                         10           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 406       $ 10       $

  
   $ 725       $ 10       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

                 

Derivatives (foreign currency forward contracts)

   $       $ 3       $       $       $ 9       $   

 

 

(1) 

Level 1 is based on quoted market prices available in active markets for identical assets or liabilities as of the reporting date. Cash equivalents are primarily held in registered money market funds which are valued using quoted market prices.

 

(2) 

Level 2 is based on pricing inputs other than quoted prices in active markets, which are either directly or indirectly observable. The fair value is determined using a valuation model based on observable market inputs, including quoted foreign currency forward exchange rates and consideration of non-performance risk.

 

(3) 

Level 3 is based on pricing inputs that are not observable and not corroborated by market data. The Company has no Level 3 assets or liabilities.

 

20


Table of Contents

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

14. Financial Instruments

At September 28, 2012 and December 31, 2011, the Company’s financial instruments consisted primarily of cash and cash equivalents, billed receivables, trade accounts payable, long-term debt (i.e., Senior Notes, Senior Subordinated Notes and 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 carrying amounts and estimated fair values of the Company’s long-term debt and foreign currency forward contracts are presented in the table below.

 

     September 28, 2012      December 31, 2011  
     Carrying
  Amount  
     Estimated
  Fair Value  
     Carrying
  Amount  
     Estimated
  Fair Value  
 
     (in millions)  

Senior Notes(1)

   $   2,940       $   3,277       $   2,938       $   2,940   

Senior Subordinated Notes(1)

     249         253         498         513   

CODES(1)

     689         691         689         658   

Foreign currency forward contracts(2)

                           

 

 

(1) 

The Company measures the fair value of its long-term debt using Level 2 inputs based primarily on current market yields for its existing debt traded in the secondary market.

 

(2) 

See Note 15 for additional disclosures regarding the notional amounts and fair values of foreign currency forward contracts.

15.  Derivative Financial Instruments

The Company’s 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 Company’s U.S. and foreign businesses enter into contracts with customers, subcontractors or vendors that are denominated in currencies other than their functional currencies. To protect the functional currency equivalent cash flows associated with certain of these contracts, the Company enters into foreign currency forward contracts. The Company’s activities involving foreign currency forward contracts are designed to hedge the changes in the functional currency equivalent cash flows due to movements in foreign exchange rates compared to the functional currency. The foreign currencies hedged are primarily the Canadian dollar, the Euro, the British pound and the U.S. dollar. The Company manages exposure to counterparty non-performance credit risk by entering into foreign currency forward contracts only with major financial institutions that are expected to fully perform under the terms of such contracts. Foreign currency forward contracts are recorded in the Company’s condensed consolidated balance sheets at fair value and are generally designated and accounted for as cash flow hedges in accordance with the accounting standards for derivative instruments and hedging activities. Gains and losses on designated foreign currency forward contracts that are highly effective in offsetting the corresponding change in the cash flows of the hedged transactions are recorded net of income taxes in accumulated other comprehensive income (loss) (accumulated OCI) and then recognized in income when the underlying hedged transaction affects income. Gains and losses on foreign currency forward contracts that do not meet hedge accounting criteria are recognized in income immediately.

 

21


Table of Contents

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

Notional amounts are used to measure the volume of foreign currency forward contracts and do not represent exposure to foreign currency losses. The table below presents the notional amounts of the Company’s outstanding foreign currency forward contracts by currency at September 28, 2012:

 

Currency

   Notional Amount  
     (in millions)  

U.S. dollar

   $       118   

Canadian dollar

     63   

Euro

     61   

British pound

     24   
  

 

 

 

Total

   $ 266   
  

 

 

 

At September 28, 2012, the Company’s foreign currency forward contracts had maturities through 2017.

Embedded Derivative. The embedded derivative related to the issuance of the CODES is recorded at fair value, which was zero at September 28, 2012 and December 31, 2011.

The table below presents the fair values and the location of the Company’s derivative instruments in the condensed consolidated balance sheets.

 

    Fair Values of Derivative Instruments(1)  
    September 28, 2012     December 31, 2011  
    Other
Current
Assets
    Other
Assets
    Other
Current
Liabilities
    Other
Liabilities
    Other
Current
Assets
    Other
Assets
    Other
Current
Liabilities
    Other
Liabilities
 
    (in millions)  

Derivatives designated as hedging instruments:

               

Foreign currency forward contracts

  $     5      $     4      $     2      $     1      $     3      $     5      $     8      $     —   

Derivatives not designated as hedging instruments:

               

Foreign currency forward contracts

    1                             1        1        1          

Embedded derivative related to the CODES

                                                       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative instruments

  $     6      $     4      $     2      $     1      $     4      $     6      $     9      $     —   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1) 

See Note 13 for a description of the fair value hierarchy related to the Company’s foreign currency forward contracts.

The effect of gains or losses from foreign currency forward contracts was not material to the unaudited condensed consolidated statements of operations for the quarterly and year-to-date periods ended September 28, 2012 and September 30, 2011. At September 28, 2012, the estimated amount of existing gains that are expected to be reclassified into income within the next 12 months is $3 million.

16.  Commitments and Contingencies

Guarantees

As previously discussed in Note 4, L-3 entered into a Distribution Agreement and several other agreements that govern certain aspects of L-3’s relationship with Engility, including employee matters, tax matters, transition services, and the future supplier/customer relationship between L-3 and Engility. These agreements generally provide cross-indemnities that, except as otherwise provided, are principally designed to place the financial responsibility for the obligations and liabilities of each entity with that respective entity. Engility has joint and several liability with L-3 to the U.S. Internal Revenue Service (IRS) for the consolidated U.S. Federal income taxes of L-3’s consolidated group for taxable periods in which Engility was a part of that group. However, the

 

22


Table of Contents

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

Tax Matters Agreement specifies the portion of this tax liability for which L-3 and Engility will each bear responsibility, and L-3 and Engility have agreed to indemnify each other against any amounts for which the other is not responsible. The Tax Matters Agreement also allocates responsibility between L-3 and Engility for other taxes, including special rules for allocating tax liabilities in the event that the spin-off is determined not to be tax-free. Though valid as between the parties, the Tax Matters Agreement is not binding on the IRS.

Procurement Regulations

A substantial majority of the Company’s revenues are generated from providing products and services under legally binding agreements or contracts with U.S. Government and foreign government customers. U.S. Government contracts are subject to extensive legal and regulatory requirements, and from time to time, agencies of the U.S. Government investigate whether such contracts were and are being conducted in accordance with these requirements. The Company is currently cooperating with the U.S. Government on several investigations, including those specified below, from which civil, criminal or administrative proceedings have or could result and give rise to fines, penalties, compensatory and treble damages, restitution and/or forfeitures. The Company does not currently anticipate that any of these investigations will have a material adverse effect, individually or in the aggregate, on its consolidated financial position, results of operations or cash flows. However, under U.S. Government regulations, an indictment of the Company by a federal grand jury, or an administrative finding against the Company as to its present responsibility to be a U.S. Government contractor or subcontractor, could result in the Company being suspended for a period of time from eligibility for awards of new government contracts or task orders or in a loss of export privileges. A conviction, or an administrative finding against the Company that satisfies the requisite level of seriousness, could result in debarment from contracting with the federal government for a specified term. In addition, all of the Company’s U.S. Government contracts: (1) are subject to audit and various pricing and cost controls, (2) include standard provisions for termination for the convenience of the U.S. Government or for default, and (3) are subject to cancellation if funds for contracts become unavailable. Foreign government contracts generally include comparable provisions relating to terminations for convenience and default, as well as other procurement clauses relevant to the foreign government.

Litigation Matters

The Company is also subject to litigation, proceedings, claims or assessments and various contingent liabilities incidental to its businesses, including those specified below. Furthermore, in connection with certain business acquisitions, the Company has assumed some or all claims against, and liabilities of, such acquired businesses, including both asserted and unasserted claims and liabilities.

In accordance with the accounting standard for contingencies, the Company records a liability when management believes that it is both probable that a liability has been incurred and the Company can reasonably estimate the amount of the loss. Generally, the loss is recorded at the amount the Company expects to resolve the liability. The estimated amounts of liabilities recorded for pending and threatened litigation are disclosed in Note 8. Amounts recoverable from insurance contracts or third parties are recorded as assets when deemed probable. At September 28, 2012, 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. With respect to the litigation matters below for which it is reasonably possible that an unfavorable outcome may occur, an estimate of loss or range of loss is disclosed

 

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L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

when such amount or amounts can be reasonably estimated. Although the Company believes that it has valid defenses with respect to legal matters and investigations pending against it, the results of litigation can be difficult to predict, particularly those involving jury trials. Accordingly, our current judgment as to the likelihood of our loss (or our current estimate as to the potential range of loss, if applicable) with respect to any particular litigation matter may turn out to be wrong. Therefore, it is possible that the financial position, results of operations or cash flows of the Company could be materially adversely affected in any particular period by the unfavorable resolution of one or more of these or other contingencies.

Kalitta Air. On January 31, 1997, a predecessor of Kalitta Air filed a lawsuit in the U.S. District Court for the Northern District of California (the trial court) asserting, among other things, negligence and negligent misrepresentation against Central Texas Airborne Systems, Inc. (CTAS), a predecessor to L-3 Integrated Systems (L-3 IS), in connection with work performed by a predecessor to CTAS to convert two Boeing 747 aircraft from passenger configuration to cargo freighters. CTAS’ insurance carrier has accepted defense of this matter and has retained counsel, subject to a reservation of rights by the insurer to dispute its obligations under the applicable insurance policies in the event a judgment is ultimately rendered against CTAS. The work at issue in the lawsuit was performed using Supplemental Type Certificates (STCs) issued in 1988 by the Federal Aviation Administration (FAA). In 1996, following completion of the work, the FAA issued an airworthiness directive with respect to the STCs that effectively grounded the aircraft. On August 11, 2000, the trial court granted CTAS’ motion for summary judgment as to negligence, dismissing that claim. In January 2001, after a ruling by the trial court that excluded certain evidence from trial, a jury rendered a unanimous defense verdict in favor of CTAS on the negligent misrepresentation claim. On December 10, 2002, the U.S. Court of Appeals for the Ninth Circuit (the Court of Appeals) reversed the trial court’s decisions as to summary judgment and the exclusion of evidence, and remanded the case for a new trial on both the negligence and negligent misrepresentation claims. The retrial ended on March 2, 2005 with a deadlocked jury and mistrial. On July 22, 2005, the trial court granted CTAS’ motion for judgment as a matter of law as to negligence, dismissing that claim, and denied CTAS’ motion for judgment as a matter of law as to negligent misrepresentation. On October 8, 2008, the Court of Appeals reversed the trial court’s dismissal of the negligence claim and affirmed the trial court’s ruling as to the negligent misrepresentation claim. As a result, the case was remanded to the trial court to reconsider the negligence claim and for further proceedings on the negligent misrepresentation claim. The trial court held a new hearing on CTAS’ motion to dismiss the negligence claim on April 30, 2009, after which it determined to take the matter under advisement. A third jury trial for this matter began on October 31, 2011, during which Kalitta Air sought damages of approximately $235 million plus an unspecified amount of pre-judgment interest that, in other contexts, has been claimed by Kalitta Air to exceed $240 million. Following the completion of the third trial on November 30, 2011, the jury rendered a verdict in favor of CTAS, finding no negligence on the part of CTAS. The trial court entered a judgment upon the verdict on March 20, 2012. Kalitta Air has appealed the judgment to the Court of Appeals.

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

 

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L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

of both planes were lost. Investigations by the National Transportation Safety Board after the crash revealed that both TCAS units were performing as designed. The suits allege negligence and strict product liability based upon the design of the units and the training provided to resolve conflicting commands and seek approximately $315 million in damages, including $150 million in punitive damages. The Company’s insurers have accepted defense of this matter and have retained counsel. The matters were consolidated in the U.S. District Court for the District of New Jersey, which has dismissed the actions on the basis of forum non conveniens. The plaintiffs re-filed a complaint on April 23, 2007 with the Barcelona Court’s Registry in Spain. On March 9, 2010, the court ruled in favor of the plaintiffs and entered judgment against ACSS in the amount of approximately $6.7 million, all of which represented compensatory damages. Both ACSS and the plaintiffs appealed the judgment. In May 2012, the appellate court ruled in favor of the plaintiffs and entered judgment against ACSS in the amount of $48 million. The Company filed an appeal of the judgment with the Supreme Court of Spain on September 28, 2012 because it believes that the ruling and the damages awarded are inconsistent with the law and evidence presented. The Company continues to believe that it is not probable that a loss has been incurred with respect to this matter.

Gol Airlines. A complaint was filed on November 7, 2006 in the U.S. District Court for the Eastern District of New York against ExcelAire, Joseph Lepore, Jan Paul Paladino, and Honeywell. On October 23, 2007, an amended complaint was filed to include Lockheed, Raytheon, Amazon Technologies and ACSS. The complaints relate to the September 29, 2006 airplane crash over Brazil of a Boeing 737-800 operated by GOL Linhas Aereas Inteligentes, S.A. and an Embraer 600 business jet operated by ExcelAire. The complaints allege that ACSS designed the TCAS on the ExcelAire jet, and assert claims of negligence, strict products liability and breach of warranty against ACSS based on the design of the TCAS and the instructions provided for its use. The complaints seek unspecified monetary damages, including punitive damages. The Company’s insurers have accepted defense of this matter and have retained counsel. On July 2, 2008, the District Court dismissed the actions on the basis of forum non conveniens on the grounds that Brazil was the location of the accident and is more convenient for witnesses and document availability. On December 2, 2009, the U.S. Court of Appeals for the Second Circuit upheld this decision. Twelve 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, but withdrew their complaints in July 2010 without prejudice to their right to re-file them against ACSS. An additional four plaintiffs re-filed their complaints in the Lower Civil Court in Rio de Janeiro before the expiration of the statute of limitations. ACSS has not been served in any of these actions. While the statute of limitations has expired and would bar any additional plaintiffs (beyond the 16 noted above) from re-filing claims directly against ACSS, it would not bar GOL from filing a future suit against ACSS based on litigation claims being pursued by the original plaintiffs against GOL in connection with this matter. The Company is unable to estimate a range of loss that is reasonably possible for this matter because: (i) the proceedings are in early stages; (ii) there are significant factual issues to be resolved; (iii) there is uncertainty as to the outcome of the claims being pursued against GOL; and (iv) the Company’s knowledge of the proceedings relating to these claims is limited.

 

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L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

17.  Pension and Other Postretirement Benefits

The following table summarizes the components of net periodic benefit cost for the Company’s pension and postretirement benefit plans.

 

    Pension Plans     Postretirement Benefit Plans  
    Third Quarter Ended     Year-to-Date Ended     Third Quarter Ended     Year-to-Date Ended  
    September 28,
2012
    September 30,
2011
    September 28,
2012
    September 30,
2011
    September 28,
2012
    September 30,
2011
    September 28,
2012
    September 30,
2011
 
    (in millions)  

Components of net periodic benefit cost:

               

Service cost

  $     26      $     24      $     85      $     80      $     —      $     1      $     3      $     4   

Interest cost

    34        32        100        96        2        3        7        8   

Expected return on plan assets

    (37     (34     (108     (104            (1     (2     (2

Amortization of prior service credits

    1               1               (1            (2     (2

Amortization of net loss (gain)

    17        11        51        38               (1     1          

Curtailment loss (gain)

    4        (2     5                                      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

  $ 45      $ 31      $ 134      $ 110      $ 1      $ 2      $ 7      $ 8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Contributions. For the year ending December 31, 2012, the Company currently expects to contribute cash of approximately $174 million to its pension plans, and approximately $13 million to its postretirement benefit plans. The Company contributed cash of $138 million to its pension plans and $8 million to its postretirement benefit plans during the year-to-date period ended September 28, 2012.

18.    Employee Stock-Based Compensation

During the year-to-date period ended September 28, 2012, the Company granted stock-based compensation under the Amended and Restated 2008 Long Term Performance Plan (2008 LTPP) in the form of stock options, restricted stock units and performance units.

Engility Spin-off Adjustments. As a result of the spin-off of Engility, effective July 17, 2012, all outstanding stock-based compensation awards related to current and former Engility employees were assumed by and transferred to Engility. The share amounts for outstanding stock options, restricted stock units and performance units that remained with L-3, and the strike price for such stock options were adjusted to maintain their aggregate intrinsic value at the date of the spin-off pursuant to the terms of the Company’s 2008 LTPP and resulted in no charge to the statement of operations. The conversion ratio for stock options, restricted stock units and performance units that remained with L-3 was 1.04.

 

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L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

Stock Options. The Company granted 811,193 stock options with an exercise price equal to the closing price of L-3 Holdings common stock on the date of grant. The options expire after 10 years from the date of grant and vest ratably over a three-year period on the annual anniversary of the date of grant. The options granted to our Chairman, President and Chief Executive Officer are also subject to performance-based vesting conditions. The weighted average grant date fair value for the options awarded was $11.12 per option and was estimated using the Black-Scholes option-pricing model. The weighted average assumptions used in the valuation model for this grant are presented in the table below.

 

Expected holding period (in years)

     5.3   

Expected volatility

     26.5

Expected dividend yield

     3.5

Risk-free interest rate

     1.0

Restricted Stock Units. The Company granted 715,866 restricted stock units with a weighted average grant date fair value of $67.48 per share. Restricted stock units automatically convert into shares of L-3 Holdings common stock upon vesting, and are subject to forfeiture until certain restrictions have lapsed, including a three year cliff vesting period for employees and a one year cliff vesting period for non-employee directors, in each case starting on the date of grant.

Performance Units. The Company granted 66,756 performance units with a weighted average grant date fair value per unit of $67.49. The final payout for these units is based on the achievement of pre-determined EPS goals established by the compensation committee of the Company’s Board of Directors for the three-year period ending December 31, 2014. The payout can range from zero to 200% of the original number of units awarded, which are converted into shares of L-3 Holdings common stock based on the then existing closing price at the end of the performance period.

19.  Supplemental Cash Flow Information

 

     Year-to-Date Ended  
     September 28,
2012
     September 30,
2011
 
     (in millions)  

Interest paid on outstanding debt

   $ 152       $ 171   

Income tax payments, continuing operations

     224         158   

Income tax payments, discontinued operations

     24         46   

Income tax refunds

     18         14   

 

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L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

20.  Segment Information

The Company has four segments, which are described in Note 1. The tables below present net sales, operating income, depreciation and amortization and total assets by segment. Certain corporate expenses that had previously been allocated to the Engility businesses were retained by the Company and have been allocated to L-3’s four reportable segments. These corporate expenses were $7 million for the third quarter ended September 30, 2011, and $10 million and $20 million for the year-to-date periods ended September 28, 2012 and September 30, 2011 respectively.

 

     Third Quarter Ended     Year-to-Date Ended  
     September 28,
2012
    September  30,
2011(1)
    September 28,
2012
    September  30,
2011(1)
 
     (in millions)  

Net Sales:

        

Electronic Systems

   $ 1,432      $ 1,418      $ 4,191      $ 4,180   

C3ISR

     889        878        2,642        2,476   

AM&M

     715        671        2,033        1,975   

NSS

     353        421        1,042        1,257   

Elimination of intercompany sales

     (106     (87     (322     (273
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated total

   $   3,283      $   3,301      $   9,586      $   9,615   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income:

        

Electronic Systems

   $ 158      $ 166      $ 480      $ 504   

C3ISR

     93        100        272        285   

AM&M

     65        60        179        180   

NSS

     15        33        56        76   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated total

   $ 331      $ 359      $ 987      $ 1,045   
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization:

        

Electronic Systems

   $ 34      $ 35      $ 105      $ 110   

C3ISR

     11        11        34        33   

AM&M

     4        4        15        13   

NSS

     5        4        11        13   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated total

   $ 54      $ 54      $ 165      $ 169   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     September 28,
2012
     December  31,
2011(1)
 
     (in millions)  

Total Assets:

     

Electronic Systems

   $ 8,144       $ 7,555   

C3ISR

     2,086         2,022   

AM&M

     2,068         1,922   

NSS

     1,281         1,317   

Corporate

     621         952   

Assets of Discontinued Operations

             1,729   
  

 

 

    

 

 

 

Consolidated total

   $   14,200       $   15,497   
  

 

 

    

 

 

 

 

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L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

 

 

(1) 

Effective January 1, 2012, the company re-aligned a business unit’s management and organizational structure, as discussed in Note 2, and made a reclassification of sales of $17 million and $55 million from the C3ISR segment to the Electronic Systems segment for the third quarter and year-to-date periods ended September 30, 2011, respectively. Operating income of $2 million was reclassified from the C3ISR segment to the Electronic Systems segment for the third quarter period ended September 30, 2011. At December 31, 2011, $124 million of assets were reclassified from the C3ISR segment to the Electronic Systems segment.

21.  Employee Severance and Termination Costs

Consistent with the Company’s strategy to continuously improve its cost structure and right-size its businesses, the Company has completed employment reduction actions across several of its businesses to reduce both direct and indirect costs, including overhead and general and administrative costs. As a result of these initiatives, the Company recorded $19 million in employee severance and other related termination costs for approximately 1,200 employees during the year-to-date period ended September 28, 2012. During the year ended December 31, 2011, the Company recorded a total of $20 million in employee severance and other termination costs for approximately 1,200 employees. Employee severance and other termination costs are reported within cost of sales on the unaudited condensed consolidated statement of operations. The remaining balance to be paid for these initiatives was $10 million at September 28, 2012. Information on employee severance and other termination costs incurred by reportable segment for the year-to-date periods ended September 28, 2012 and September 30, 2011 is presented in the table below.

 

         Year-to-Date Ended      
     September 28,
2012
     September 30,
2011
 
     (in millions)  

Reportable Segment

     

Electronic Systems

   $ 14       $ 9   

C3ISR

     4         1   

AM&M

     1           
  

 

 

    

 

 

 

Consolidated

   $     19       $     10   
  

 

 

    

 

 

 

22.  Condensed Combining 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 Notes, Senior Subordinated Notes and borrowings under amounts drawn against the Amended and Restated Revolving Credit Facility are guaranteed, on a joint and several, full and unconditional basis, by certain of its domestic subsidiaries (the “Guarantor Subsidiaries”). The debt of L-3 Holdings, including the CODES, are guaranteed on a joint and several, full and unconditional basis, by L-3 Communications and certain of its domestic subsidiaries. See Note 10 to the audited consolidated financial statements for the year ended December 31, 2011, included in the Company’s Annual Report on Form 10-K. The foreign subsidiaries and certain domestic subsidiaries of L-3 Communications (the “Non-Guarantor Subsidiaries”) do not guarantee the debt of L-3 Communications or L-3 Holdings. 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.

Prior to the spin-off of Engility on July 17, 2012, Engility Holdings, Inc., Engility Corporation, International Resources Group Ltd. and LinCom Wireless, Inc. were guarantor subsidiaries of the Company. As a result of the spin-off, these entities no longer guarantee the debt of L-3 Communications or L-3 Holdings. As a result, the assets, liabilities, results of operations and cash flows of the Engility businesses have been reclassified from guarantor subsidiaries to L-3 Communications as discontinued operations in the following condensed combining financial information.

 

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L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

Under the terms of the indentures governing the Senior Notes and Senior Subordinated Notes, the guarantees of the Senior Notes and the Senior Subordinated Notes will automatically and unconditionally be released and discharged: (1) upon the release of all guarantees of all other outstanding indebtedness of L-3 Communications Corporation and, in the case of the Senior Subordinated Notes, its restricted subsidiaries, or (2) upon the determination that such guarantor is no longer a “domestic subsidiary,” in the case of the Senior Notes, or upon the designation of such guarantor as an “unrestricted subsidiary,” in the case of the Senior Subordinated Notes. In addition, the guarantees of the Senior Notes and the Senior Subordinated Notes will automatically and unconditionally be released and discharged in the event of a sale or other disposition of all of the assets of any guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the capital stock of such guarantor (provided that, in the case of the Senior Subordinated Notes, in the event of a sale or other disposition of all of the assets of any guarantor, the net proceeds of such sale or disposition are applied in accordance with any applicable provisions of the senior subordinated indenture). In addition, under the terms of the indenture governing the CODES, the guarantees of the CODES will automatically and unconditionally be released and discharged upon: (1) the release of all guarantees of all other outstanding indebtedness of L-3 Holdings or any of its subsidiaries (other than a foreign subsidiary), (2) the designation of such guarantor as an “excluded subsidiary”, or (3) the sale or other disposition of all of the assets of any guarantor, by way of merger or consolidation, or a sale or other disposition of all of the capital stock of such guarantor.

 

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L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

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
Holdings
(Parent)
    L-3
Communications
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated
L-3
 
    (in millions)  

Condensed Combining Balance Sheets:

           

At September 28, 2012:

           

Current assets:

           

Cash and cash equivalents

  $      $ 361      $ 1      $ 217      $ (65   $ 514   

Billed receivables, net

           318        434        210               962   

Contracts in process

           952        1,467        420               2,839   

Other current assets

           314        145        212               671   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

           1,945        2,047        1,059        (65     4,986   

Goodwill

           1,974        4,415        1,316               7,705   

Other assets

           716        565        228               1,509   

Investment in and amounts due from consolidated subsidiaries

    6,455        7,362        3,204               (17,021       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $   6,455      $   11,997      $   10,231      $   2,603      $   (17,086   $   14,200   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current liabilities

  $      $ 783      $ 1,207      $ 654      $ (65   $ 2,579   

Amounts due to consolidated subsidiaries

                         242        (242       

Other long-term liabilities

           1,570        223        108               1,901   

Long-term debt

    689        3,878                      (689     3,878   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    689        6,231        1,430        1,004        (996     8,358   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

L-3 shareholders’ equity

    5,766        5,766        8,801        1,599        (16,166     5,766   

Noncontrolling interests

                                76        76   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

    5,766        5,766        8,801        1,599        (16,090     5,842   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $   6,455      $   11,997      $   10,231      $   2,603      $   (17,086   $   14,200   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2011:

           

Current assets:

           

Cash and cash equivalents

  $      $ 644      $      $ 222      $ (102   $ 764   

Billed receivables, net

           367        532        204               1,103   

Contracts in process

           860        1,234        257               2,351   

Other current assets

           313        135        192               640   

Assets of discontinued operations

           1,729                             1,729   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

           3,913        1,901        875        (102     6,587   

Goodwill

           1,909        4,415        1,148               7,472   

Other assets

           731        522        185               1,438   

Investment in and amounts due from consolidated subsidiaries

    7,324        6,915        1,553               (15,792       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 7,324      $ 13,468      $ 8,391      $ 2,208      $ (15,894   $ 15,497   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current liabilities

  $      $ 848      $ 1,174      $ 546      $ (102   $ 2,466   

Liabilities of discontinued operations

           351                             351   

Amounts due to consolidated subsidiaries

                         238        (238       

Other long-term liabilities

           1,509        231        91               1,831   

Long-term debt

    689        4,125                      (689     4,125   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    689        6,833        1,405        875        (1,029     8,773   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

L-3 shareholders’ equity

    6,635        6,635        6,986        1,333        (14,954     6,635   

Noncontrolling interests

                                89        89   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

    6,635        6,635        6,986        1,333        (14,865     6,724   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 7,324      $ 13,468      $ 8,391      $ 2,208      $ (15,894   $ 15,497   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

31


Table of Contents

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

    L-3
Holdings
(Parent)
    L-3
Communications
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated
L-3
 
    (in millions)  

Condensed Combining Statements of Operations:

           

For the quarter ended September 28, 2012:

           

Total net sales

  $      $   868      $   1,929      $   574      $ (88   $   3,283   

Total cost of sales

    15        786        1,743        511        (103     2,952   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

    (15     82        186        63        15        331   

Interest and other income, net

           3        (4     1                 

Interest expense

    5        48                      (5     48   

Debt retirement charge

           8                             8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

    (20     29        182        64        20        275   

(Benefit) provision for income taxes

    (6     9        53        18        6        80   

Equity in net income of consolidated subsidiaries from continuing operations

    206        173                      (379       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    192        193        129        46        (365     195   

Loss from discontinued operations, net of income tax

           (1                          (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    192        192        129        46        (365     194   

Net income attributable to noncontrolling interests

                                2        2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to L-3

  $   192      $ 192      $ 129      $ 46      $   (367   $ 192   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to L-3

  $ 249      $ 249      $ 129      $ 94      $ (472   $ 249   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the quarter ended September 30, 2011:

           

Total net sales

  $      $ 905      $ 1,938      $ 541      $ (83   $ 3,301   

Total cost of sales

    15        831        1,737        457        (98     2,942   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

    (15     74        201        84        15        359   

Interest and other income, net

           4        (1     1        (1     3   

Interest expense

    5        50               1        (6     50   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

    (20     28        200        84        20        312   

(Benefit) provision for income taxes

    (7     8        63        27        7        98   

Equity in net income of consolidated subsidiaries from continuing operations

    248        191                      (439       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    235        211        137        57        (426     214   

Income from discontinued operations, net of income tax

           24                             24   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    235        235        137        57        (426     238   

Net income attributable to noncontrolling interests

                                3        3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to L-3

  $ 235      $ 235      $ 137      $ 57      $ (429   $ 235   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to L-3

  $ 151      $ 151      $ 128      $ (19   $ (260   $ 151   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

32


Table of Contents

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (Continued)

 

    L-3
Holdings
(Parent)
    L-3
Communications
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated
L-3
 
    (in millions)  

Condensed Combining Statements of Operations:

           

For the year-to-date ended September 28, 2012:

           

Total net sales

  $      $ 2,645      $ 5,476      $ 1,718      $ (253   $ 9,586   

Total cost of sales

    44        2,411        4,936        1,505        (297     8,599   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

    (44     234        540        213        44        987   

Interest and other income, net

           8        (4     2               6   

Interest expense

    15        138                      (15     138   

Debt retirement charge

           8                             8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

    (59     96        536        215        59        847   

(Benefit) provision for income taxes

    (19     32        173        69        19        274   

Equity in net income of consolidated subsidiaries from continuing operations

    638        502                      (1,140       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    598        566        363        146        (1,100     573   

Income from discontinued operations, net of tax

           32                             32   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    598        598        363        146        (1,100     605   

Net income attributable to noncontrolling interests

                                7        7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to L-3

  $ 598      $ 598      $ 363      $ 146      $   (1,107   $ 598   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to L-3

  $ 661      $ 661      $ 366      $ 174      $ (1,201   $ 661   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the year-to-date ended September 30, 2011:

           

Total net sales

  $      $   2,677      $   5,586      $   1,601      $ (249   $   9,615   

Total cost of sales

    47        2,408        5,044        1,367        (296     8,570   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

    (47     269        542        234        47        1,045   

Interest and other income (expense), net

           12        (2     3        (3     10   

Interest expense

    18        150        1        4        (21     152   

Debt retirement charge

           18