DEF 14A 1 d488508ddef14a.htm DEF 14A DEF 14A
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SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934

Filed by the Registrant  x

Filed by a Party other than the Registrant  ¨

Check the appropriate box:

 

¨ Preliminary Proxy Statement

 

¨ Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

x Definitive Proxy Statement

 

¨ Definitive Additional Materials

 

¨ Soliciting Material Pursuant to Rule 14a-12

L-3 COMMUNICATIONS HOLDINGS, INC.

(Name of Registrant as Specified in Its Charter)

Payment of Filing Fee (Check the appropriate box):

 

x No fee required.

 

¨ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
  1. Title of each class of securities to which transaction applies:
  2. Aggregate number of securities to which transaction applies:
  3. Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
  4. Proposed maximum aggregate value of transaction:
  5. Total fee paid:

 

  ¨ Fee paid previously with preliminary materials:
  ¨ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
  1. Amount previously paid:
  2. Form, Schedule or Registration Statement No.:
  3. Filing Party:
  4. Date Filed:


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L-3 COMMUNICATIONS HOLDINGS, INC.

 

LOGO

To Our Shareholders:

On behalf of the Board of Directors, I cordially invite you to attend the Annual Meeting of Shareholders of L-3 Communications Holdings, Inc., to be held at 2:30 p.m., Eastern Daylight Time, on Tuesday, April 30, 2013, at the Ritz-Carlton New York, Battery Park, located at Two West Street, New York, New York. The notice and proxy statement for the Annual Meeting are attached to this letter and describe the business to be conducted at the Annual Meeting.

In accordance with the rules of the Securities and Exchange Commission, we sent a Notice of Internet Availability of Proxy Materials on or about March 18, 2013 to our shareholders of record as of the close of business on March 1, 2013. We also provided access to our proxy materials over the Internet beginning on that date. If you received a Notice of Internet Availability of Proxy Materials by mail and did not receive, but would like to receive, a printed copy of our proxy materials, you should follow the instructions for requesting such materials included on page 5 of this proxy statement or in the Notice of Internet Availability of Proxy Materials.

To have your vote recorded, you should vote over the Internet or by telephone. In addition, if you have requested or received a paper copy of the proxy materials, you can vote by signing, dating and returning the proxy card sent to you in the envelope accompanying the proxy materials sent to you. We encourage you to vote by any of these methods even if you currently plan to attend the Annual Meeting. By doing so, you will ensure that your shares are represented and voted at the Annual Meeting. If you decide to attend, you can still vote your shares in person if you wish. Please let us know whether you plan to attend the Annual Meeting by indicating your plans when prompted over the Internet voting system or the telephone or (if you have received a paper copy of the proxy materials) by marking the appropriate box on the proxy card sent to you.

On behalf of the Board of Directors, I thank you for your cooperation and look forward to seeing you on April 30, 2013.

Very truly yours,

 

LOGO

Michael T. Strianese

Chairman, President and

    Chief Executive Officer


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TABLE OF CONTENTS

 

Notice of 2013 Annual Meeting of Shareholders And Proxy Statement

     1   

Proxy Statement

     2   

Proposal 1.    Election of Directors

     6   

Continuing Members of the Board of Directors

     8   

Proposal 2.     Approval of the Amendment to the L-3 Communications Holdings, Inc. Amended and Restated 2008 Long Term Performance Plan

     10   

Equity Compensation Plan Information

     21   

Proposal 3.     Proposal to Amend L-3’s Amended and Restated Certificate of Incorporation to Provide for the Phased-in Declassification of the Board of Directors, Beginning in 2014

     22   

Proposal 4.     Proposal to Amend L-3’s Amended and Restated Certificate of Incorporation to Reduce the Vote Required to Alter, Amend or Repeal Certain Provisions in L-3’s Bylaws

     24   

Proposal 5.     Proposal to Amend L-3’s Amended and Restated Certificate of Incorporation to Permit Shareholders to Take Action by Written Consent

     26   

Proposal 6.    Selection of Independent Registered Public Accounting Firm

     27   

Proposal 7.    Advisory (Non-Binding) Vote on Executive Compensation

     28   

The Board of Directors and Certain Governance Matters

     30   

Shareholder Proposals and Nominations

     39   

Executives and Certain Other Officers of the Company

     40   

Security Ownership of Certain Beneficial Owners

     43   

Security Ownership of Management

     44   

Compensation Discussion and Analysis

     45   

Compensation Committee Report

     70   

Tabular Executive Compensation Disclosure

     71   

Summary Compensation Table

     71   

2012 Grants of Plan-Based Awards

     75   

Outstanding Equity Awards at Fiscal Year End 2012

     77   

2012 Option Exercises and Stock Vested

     80   

2012 Pension Benefits

     81   

2012 Nonqualified Deferred Compensation

     86   

Potential Payments Upon Change in Control or Termination of Employment

     87   

Compensation of Directors

     92   

2012 Director Compensation

     93   

Report of The Audit Committee

     94   

Independent Registered Public Accounting Firm Fees

     95   

Compensation Committee Interlocks and Insider Participation

     95   

Certain Relationships and Related Transactions

     96   

Section 16(A) Beneficial Ownership Reporting Compliance

     98   

Householding of Proxy Materials

     98   

General and Other Matters

     99   

Exhibit A Amendment to the L-3 Communications Holdings, Inc. Amended and Restated 2008 Long Term Performance Plan

     A-1   

Exhibit B Amendment to Article Sixth of L-3 Communications Holdings, Inc.’s Amended and Restated Certificate of Incorporation

     B-1   

Exhibit C Amendment to Article Fifth of L-3 Communications Holdings, Inc.’s Amended and Restated Certificate of Incorporation

     C-1   

Exhibit D Amendment to Article Tenth of L-3 Communications Holdings, Inc.’s Amended and Restated Certificate of Incorporation

     D-1   


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L-3 COMMUNICATIONS HOLDINGS, INC.

 

LOGO

NOTICE OF 2013 ANNUAL MEETING OF

SHAREHOLDERS AND PROXY STATEMENT

Notice is hereby given that the 2013 Annual Meeting of Shareholders (the “Annual Meeting”) of L-3 Communications Holdings, Inc. (“L-3” or the “Company”) will be held at the Ritz-Carlton New York, Battery Park, located at Two West Street, New York, New York on Tuesday, April 30, 2013, at 2:30 p.m., Eastern Daylight Time, for the following purposes:

 

  1. Election of the four Class II Directors listed herein whose terms expire in 2016 and the one Class I Director Nominee listed herein whose term expires in 2014;

 

  2. To approve the amendment to the L-3 Communications Holdings, Inc. Amended and Restated 2008 Long Term Performance Plan (the “Amended and Restated Plan”);

 

  3. To approve the amendment and restatement of the Company’s Amended and Restated Certificate of Incorporation to provide for the phased-in declassification of the Board of Directors, beginning in 2014 (the “Declassification Proposal”);

 

  4. To approve the amendment and restatement of the Company’s Amended and Restated Certificate of Incorporation to reduce the vote required to alter, amend or repeal certain provisions in L-3’s Amended and Restated Bylaws (the “Supermajority Proposal”);

 

  5. To approve the amendment and restatement of the Company’s Amended and Restated Certificate of Incorporation to permit shareholders to take action by written consent (the “Written Consent Proposal”);

 

  6. Ratification of the appointment of our independent registered public accounting firm for 2013 (the “Auditor Ratification Proposal”);

 

  7. To approve, in a non-binding, advisory vote, the compensation paid to our named executive officers as described herein (the “Say-on-Pay Proposal”); and

 

  8. Transaction of such other business as may properly come before the Annual Meeting and any adjournments or postponements thereof.

By Order of the Board of Directors

 

LOGO

Steven M. Post

Senior Vice President, General Counsel and

    Corporate Secretary

March 18, 2013

 

IMPORTANT

Whether or not you currently plan to attend the Annual Meeting in person, please vote over the Internet or by telephone, or (if you received a paper copy of the proxy materials) complete, date, sign and promptly mail the paper proxy card sent to you. You may revoke your proxy if you attend the Annual Meeting and wish to vote your shares in person.


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L-3 Communications Holdings, Inc.

600 Third Avenue

New York, New York 10016

PROXY STATEMENT

This proxy statement is being made available to the holders of the common stock, par value $0.01 per share, of L-3 Communications Holdings, Inc. (the “Common Stock”) in connection with the solicitation of proxies for use at the Annual Meeting to be held at the Ritz-Carlton New York, Battery Park, located at Two West Street, New York, New York at 2:30 p.m., Eastern Daylight Time, on Tuesday, April 30, 2013.

RECORD DATE

Our Board of Directors has fixed the close of business on March 1, 2013 as the Record Date (the “Record Date”) for the Annual Meeting. Only shareholders of record at the Record Date are entitled to notice of, and to vote at, the Annual Meeting or at any adjournments or postponements thereof, in person or by proxy. At the Record Date, there were 90,204,497 shares of our Common Stock outstanding and entitled to vote at the Annual Meeting. Each holder of Common Stock is entitled to one vote for each share of our Common Stock held by such holder. The holders of a majority of the outstanding shares of our Common Stock entitled to vote generally in the election of directors, represented in person or by proxy, shall constitute a quorum at the Annual Meeting.

On or about March 18, 2013, we either mailed you a notice (the “Notice”) notifying you how to vote online and how to electronically access a copy of this proxy statement, our Summary Annual Report and our Annual Report on Form 10-K for the year ended December 31, 2012 (together referred to as the “Proxy Materials”) or mailed you a complete set of the Proxy Materials. If you have not received but would like to receive printed copies of these documents, including a proxy card in paper format, you should follow the instructions for requesting such materials contained in the Notice.

PROXIES

The proxies are solicited by our Board of Directors on our behalf for use at the Annual Meeting and any adjournments or postponements of the Annual Meeting, and the expenses of solicitation of proxies will be borne by us. The solicitation will be made primarily via the Internet and by mail, but our officers and regular employees may also solicit proxies by telephone, telegraph, facsimile, or in person. We also have retained Georgeson Inc. to assist in soliciting proxies. We expect to pay Georgeson Inc. approximately $10,000 plus expenses in connection with its solicitation of proxies.

Each shareholder may appoint a person (who need not be a shareholder), other than the persons named in the proxy, to represent him or her at the Annual Meeting by completing another proper proxy. In either case, such completed proxy should be returned in the envelope provided to you for that purpose (if you have requested or received a paper copy of the Proxy Materials). If you own your shares of our Common Stock directly in your name in our stock records maintained by our transfer agent, Computershare Trust Company, N.A. (“Computershare”), your proxy card should be delivered to L-3 Communications Holdings, Inc. c/o Computershare Investor Services, P.O. Box 43102, Providence, Rhode Island 02940-5068, not later than 1:00 a.m., Eastern Daylight Time, on April 30, 2013. If you own shares through L-3’s 401(k) plan, return completed proxy cards in the envelope provided to Broadridge Financial Solutions c/o Vote Processing, 51 Mercedes Way, Edgewood, NY 11717 by 8:00 a.m., Eastern Daylight Time on April 29, 2013.

Any proxy delivered pursuant to this solicitation is revocable at the option of the person(s) executing the proxy upon our receipt, prior to the time the proxy is voted, of a duly executed instrument revoking it, or of a duly executed proxy bearing a later date, or by such person(s) voting in person at the Annual Meeting. Unless revoked, all proxies representing shares entitled to vote that are delivered pursuant to this solicitation will be voted at the Annual Meeting and, where a choice has been specified on the proxy card, will be voted in accordance with such specification. Where a choice has not been specified on the proxy card, the proxy will be voted in accordance with the recommendations of our Board of Directors.

 

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VOTING IN PERSON

If you are a shareholder of record and prefer to vote your shares at the Annual Meeting, you must bring proof of identification along with your Notice or the admission ticket attached to your proxy card if you received a paper copy. You may vote shares held in street name at the Annual Meeting only if you obtain a signed proxy from the record holder (broker or other nominee) giving you the right to vote the shares.

Even if you plan to attend the Annual Meeting, we encourage you to vote in advance by Internet, telephone or (if you received a paper copy of the Proxy Materials) by mail so that your vote will be counted even if you later decide not to attend the Annual Meeting. Voting your proxy by the Internet, telephone or mail will not limit your right to vote at the Annual Meeting if you later decide to attend in person. If you own your shares of our Common Stock through a bank, brokerage firm or other record holder and wish to vote in person at the Annual Meeting, you must request a “legal proxy” from your bank or broker or obtain a proxy from the record holder.

Please note that you may receive multiple copies of the Notice or Proxy Materials (electronically and/or by mail). These materials may not be duplicates as you may receive separate copies of the Notice or Proxy Materials for each type of account in which you hold shares of our Common Stock. Please be sure to vote all of your shares in each of your accounts in accordance with the directions on the proxy card(s) and/or voting instruction form(s) that you receive. In the case of duplicate votes for shares in a particular account, your last vote is the one that counts.

VOTING BY INTERNET, TELEPHONE OR MAIL

The following sets forth how a shareholder can vote over the Internet, by telephone or by mail:

Voting By Internet

If you hold your shares of our Common Stock through a bank or brokerage firm (i.e., you are not a registered holder), or if you own shares through L-3’s 401(k) plan, you can vote at www.proxyvote.com, 24 hours a day, seven days a week. You will need the 12-digit Control Number included on your Notice or your paper voting instruction form (if you received a paper copy of the Proxy Materials).

If you own your shares of our Common Stock directly in your name in our stock records maintained by Computershare, you can vote at www.investorvote.com/LLL, 24 hours a day, seven days a week. You will need the 15-digit Control Number included on your paper proxy card.

Voting By Telephone

If you hold your shares of our Common Stock through a bank or brokerage firm, you can vote using a touch-tone telephone by calling the toll-free number included on your paper voting instruction form (if you received a paper copy of the Proxy Materials), 24 hours a day, seven days a week. You will need the 12-digit Control Number included on your paper voting instruction form.

If you own your shares of our Common Stock directly in your name in our stock records maintained by Computershare, you can vote using a touch-tone telephone by calling 1-800-652-VOTE (8683), 24 hours a day, seven days a week. You will need the 15-digit Control Number included on your paper proxy card.

If you hold your shares through L-3’s 401(k) plan, you can vote using a touch-tone telephone by calling 1-800-690-6903, 24 hours a day, seven days a week. You will need the 12-digit Control Number included on your paper proxy card.

If you hold your shares in street name, you may also submit voting instructions to your bank, broker or other nominee. In most instances, you will be able to do this over the Internet, by telephone, or by mail. Please refer to the information from your bank, broker or other nominee on how to submit voting instructions.

 

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The Internet and telephone voting procedures, which comply with Delaware law and the Securities and Exchange Commission (the “SEC”) rules, are designed to authenticate shareholders’ identities, to allow shareholders to vote their shares and to confirm that their instructions have been properly recorded.

Voting By Mail

If you have received a paper copy of the Proxy Materials by mail, you may complete, sign, date and return by mail the paper proxy card or voting instruction form sent to you in the envelope provided to you with your Proxy Materials or voting instruction form.

Deadline for Submitting Votes By Internet, Telephone or Mail

If you hold your shares of our Common Stock through a bank or brokerage account, proxies submitted over the Internet or by telephone as described above must be received by 11:59 p.m., Eastern Daylight Time, on April 29, 2013.

If you own your shares of our Common Stock directly in your name in our stock records maintained by Computershare, proxies submitted over the Internet or by telephone as described above must be received by 1:00 a.m., Eastern Daylight Time, on April 30, 2013.

If you own your shares of our Common Stock through L-3’s 401(k) plan, proxies submitted over the Internet or by telephone as described above must be received by 11:59 p.m., Eastern Daylight Time, on April 28, 2013.

Proxies submitted by mail should be returned in the envelope provided to you with your paper proxy card or voting instruction form, and must be received no later than 1:00 a.m., Eastern Daylight Time, on April 30, 2013, if you own your shares of our Common Stock directly in your name in our stock records maintained by Computershare, or by 8:00 a.m., Eastern Daylight Time, on April 29, 2013, if you own your shares through L-3’s 401(k) plan.

REQUIRED VOTE

The vote required to approve all of the proposals listed herein assumes the presence of a quorum. For each proposal, abstentions and instances where brokers are prohibited from exercising discretionary authority for beneficial owners who have not returned a proxy (so-called “broker non-votes”) will be counted for purposes of determining a quorum.

 

   

Proposal 1: Election of the four Class II Directors listed herein whose terms expire in 2016 and the one Class I Director Nominee listed herein whose term expires in 2014: A majority of the votes cast at the Annual Meeting is required for the election of each nominee for director. Abstentions and “broker non-votes” will have no effect on the outcome of this proposal.

 

   

Proposal 2: Amended and Restated Plan: A majority of the votes cast at the Annual Meeting is required to approve the Amended and Restated Plan, provided that the total number of votes cast on the proposal must also represent a majority of all shares of Common Stock entitled to vote on the proposal. Abstentions and “broker non-votes” will have no effect on the outcome of this proposal, provided that the total number of votes cast on the proposal must also represent a majority of all shares of Common Stock entitled to vote on the proposal.

 

   

Proposal 3: Declassification Proposal: The two-thirds approval of all shareholders entitled to vote on the proposal is required to approve the Declassification Proposal. Abstentions and “broker non-votes” will have the same effect as votes against this proposal.

 

   

Proposal 4: Supermajority Proposal: The affirmative vote of a majority of the outstanding common stock of the Company is required to approve the Supermajority Proposal. Abstentions and “broker non-votes” will have the same effect as votes against this proposal.

 

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Proposal 5: Written Consent Proposal: The affirmative vote of all of the outstanding common stock of the Company is required to approve the Written Consent Proposal. Abstentions and “broker non-votes” will have the same effect as votes against this proposal.

 

   

Proposal 6: Auditor Ratification Proposal: A majority of the votes cast at the Annual Meeting is required for the Auditor Ratification Proposal. Abstentions will have no effect on the outcome of this proposal.

 

   

Proposal 7: Say-on-Pay Proposal: A majority of the votes cast at the Annual Meeting is required to approve the Say-on-Pay Proposal. Abstentions and “broker non-votes” will have no effect on the outcome of this proposal.

Revocation of Proxies Submitted by Internet, Telephone or Mail

To revoke a proxy previously submitted over the Internet, by telephone or by mail, you may simply vote again at a later date, using the same procedures, in which case your later submitted vote will be recorded and your earlier vote revoked. You may also attend the Annual Meeting and vote in person.

 

Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to be held on April 30, 2013.

The following Proxy Materials are available for you to view online at http://www.L-3com.com: (i) this proxy statement (including all attachments); (ii) our Summary Annual Report and Annual Report on Form 10-K, in each case for the year ended December 31, 2012 (which is not deemed to be part of the official proxy soliciting materials); and (iii) any amendments to the foregoing materials that are required to be furnished to shareholders. In addition, if you have not received a copy of our Proxy Materials and would like one, you may download an electronic copy of our Proxy Materials or request a paper copy at http://www.L-3com.com. You will also have the opportunity to request paper or email copies of our Proxy Materials for all future Annual Meetings.

 

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PROPOSAL 1. ELECTION OF DIRECTORS

Our existing Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) provides for a classified Board of Directors divided into three classes: Claude R. Canizares, Thomas A. Corcoran, Lloyd W. Newton and Alan H. Washkowitz constitute a class with a term that expires at the Annual Meeting in 2013 (the “Class II Directors”); H. Hugh Shelton, Michael T. Strianese and John P. White constitute a class with a term that expires at the Annual Meeting in 2014 (the “Class I Directors”); and Lewis Kramer, Robert B. Millard and Arthur L. Simon constitute a class with a term that expires at the Annual Meeting in 2015 (the “Class III Directors”).

As discussed in greater detail in Proposal 3, the Board has approved an amendment to our Certificate of Incorporation to provide for the phased-in declassification of the Board, beginning in 2014, subject to the approval of the shareholders at the Annual Meeting. If Proposal 3 is approved by the requisite vote of the shareholders, the directors elected at the 2014 Annual Meeting of Shareholders (and each Annual Meeting of Shareholders held thereafter) will be elected for one-year terms, and beginning with the 2016 Annual Meeting of Shareholders, the entire Board will be elected on an annual basis.

The full Board of Directors has considered and nominated the following slate of Class II nominees for a three-year term expiring in 2016: Claude R. Canizares, Thomas A. Corcoran, Lloyd W. Newton and Alan H. Washkowitz as well as the following Class I nominee for a one-year term expiring in 2014: Vincent Pagano, Jr. Action will be taken at the Annual Meeting for the election of these five nominees.

It is intended that the proxies delivered pursuant to this solicitation will be voted in favor of the election of Claude R. Canizares, Thomas A. Corcoran, Lloyd W. Newton, Alan H. Washkowitz and Vincent Pagano, Jr. except in cases of proxies bearing contrary instructions. In the event that these nominees should become unavailable for election due to any presently unforeseen reason, the persons named in the proxy will have the right to use their discretion to vote for a substitute.

NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS IN 2013

The following information describes the offices held, other business directorships and the class and term of each nominee. Beneficial ownership of equity securities of the nominees is described in “Security Ownership of Management” on page 44.

Class II — Directors Whose Terms Expire in 2016

 

Name

   Age     

Principal Occupation And Other Information

Claude R. Canizares

     67       Director since May 2003. Member of the Audit Committee. Since 1971, Professor Canizares has been at MIT. He currently serves as the Vice President, and is the Bruno Rossi Professor of Physics. In addition, he is a principal investigator on NASA’s Chandra X-ray observatory and Associate Director of its science center. Professor Canizares is a member of the National Academy of Sciences, the International Academy of Astronautics, and a fellow of the American Academy of Arts and Sciences, the American Physical Society and the American Association for the Advancement of Science. He serves on the Department of Commerce’s National Advisory Council on Innovation and Entrepreneurship and the Emerging Technology and Research Advisory Committee and the National Research Council’s (NRC) Committee on Science, Technology and the Law. He has served on the Air Force Scientific Advisory Board, the NASA Advisory Council and the Council of the National Academy of Sciences.

 

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Name

   Age     

Principal Occupation And Other Information

Thomas A. Corcoran

     68       Director since July 1997. Chair of the Audit Committee and member of the Executive Committee. Mr. Corcoran is President of Corcoran Enterprises, LLC, a private management consulting firm, since 2001. From March 2001 to April 2004, Mr. Corcoran was the President and Chief Executive Officer of Gemini Air Cargo. Mr. Corcoran was the President and Chief Executive Officer of Allegheny Teledyne Incorporated from October 1999 to December 2000. From April 1993 to September 1999, he was the President and Chief Operating Officer of the Electronic Systems Sector and Space & Strategic Missiles Sector of Lockheed Martin Corporation. Prior to that he worked for General Electric for 26 years and held various management positions with GE Aerospace. Mr. Corcoran is also a director of GenCorp Inc. and ARINC. He formerly served as a director of La Barge, Inc., REMEC, Inc., Serco Ltd, United Industrial Corporation and Force Protection, Inc.

Lloyd W. Newton

     70       Director since September 2012. General Newton (U.S. Air Force – Ret.) was a four-star General and Commander of the Air Force, Air Education and Training Command, where he was responsible for the recruiting, training and education of Air Force personnel from 1997 until his retirement in 2000. Following his retirement from the Air Force, General (Ret.) Newton was executive vice president of Pratt & Whitney Military Engines until 2006. During his 34 year military career, General (Ret.) Newton also served as an Air Force congressional liaison officer with the U.S. House of Representatives and was a member of the Air Force’s Air Demonstration Squadron, the Thunderbirds. General (Ret.) Newton is a current director of Sonoco Products Co. and Torchmark Corporation. He formerly served as a director of Goodrich Corporation.

Alan H. Washkowitz

     72       Director since April 1997. Chair of the Nominating/Corporate Governance Committee and member of the Compensation Committee. Mr. Washkowitz is a private investor. Before his retirement in July 2005, Mr. Washkowitz was a Managing Director of Lehman Brothers, and was responsible for the oversight of Lehman Brothers Inc. Merchant Banking Portfolio Partnership L.P. Mr. Washkowitz joined Lehman Brothers Inc. in 1978 when Kuhn Loeb & Co. was acquired by Lehman Brothers. Mr. Washkowitz is also a director of Peabody Energy Corporation.

Class I — Director Nominee Whose Term Expires in 2014

 

Name

   Age     

Principal Occupation And Other Information

Vincent Pagano, Jr.

     62       Mr. Pagano was a partner at Simpson Thacher & Bartlett LLP until his retirement at the end of 2012. He was the head of the firm’s capital markets practice from 1999 to 2012, and, before that, administrative partner of the firm from 1996 to 1999. He was a member of the firm’s executive committee during nearly all of that period. He also serves on the Board of Directors of Cheniere Energy Partners GP, LLC, the general partner of Cheniere Energy Partners and Hovnanian Enterprises, Inc. Mr. Pagano serves on the Engineering Advisory Council of Lehigh University.

 

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The nominees for election to the Board of Directors are hereby proposed for approval by the shareholders. Assuming a quorum is present, a majority of the votes cast at the Annual Meeting is required for the election of each nominee.

The Board of Directors Recommends a Vote FOR Each of the Proposed Nominees Listed Above for Election to the Board of Directors.

CONTINUING MEMBERS OF THE BOARD OF DIRECTORS

The following information describes the offices held, other business directorships and the class and term of each director whose term continues beyond the 2013 Annual Meeting and who is not subject to election this year.

Beneficial ownership of equity securities for these directors is described in “Security Ownership of Management” on page 44.

Class I — Directors Whose Terms Expire in 2014

 

Name

   Age     

Principal Occupation And Other Information

H. Hugh Shelton

     71       Director since April 2011. Member of the Nominating/Corporate Governance Committee. General (Ret.) Shelton, U.S. Army was the senior officer of the United States military and principal military advisor to the President of the United States, the Secretary of Defense and the National Security Council when he served as the fourteenth Chairman of the Joint Chiefs of Staff from 1997 until his retirement in 2001. He had previously served as Commander-in-Chief of U.S. Special Operations Command (SOCOM). He has served as the Executive Director of the General H. Hugh Shelton Leadership Center at North Carolina State University since January 2002. From January 2002 until April 2006, General (Ret.) Shelton served as the President, International Sales of M.I.C. Industries, an international manufacturing company. Knighted by Queen Elizabeth II in 2001 and awarded the Congressional Gold Medal in 2002, General (Ret.) Shelton is Chairman of the Board of Directors of Red Hat, Inc. He has also served as a director of Anheuser-Busch Companies, Inc., CACI International Inc., Protective Products of America, Inc. and Anteon International.

Michael T. Strianese

     57       Director since October 2006. Member of the Executive Committee. Chairman, President and Chief Executive Officer. Mr. Strianese became Chairman on October 7, 2008 and has served as President and Chief Executive Officer since October 2006. Until February 2007, Mr. Strianese was also our Corporate Ethics Officer. He was our interim Chief Executive Officer and Chief Financial Officer from June 2006. Mr. Strianese became Chief Financial Officer in March 2005. From March 2001 to March 2005 he was our Senior Vice President—Finance. He joined us in April 1997 as Vice President—Finance and Controller and was our Controller until July 2000.

 

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Name

   Age     

Principal Occupation And Other Information

John P. White

     76       Director since October 2004. Member of the Nominating/Corporate Governance and Compensation Committees. Dr. White retired in September 2011, after having served for fifteen years in various capacities at Harvard University, including, most recently, as the Robert and Renée Belfer Lecturer at the John F. Kennedy School of Government. Dr. White was also the leader of then President-elect Obama’s transition team for the Department of Defense. Dr. White has had a long history of government service, including serving as U.S. Deputy Secretary of Defense; Deputy Director of the Office of Management and Budget; Assistant Secretary of Defense, Manpower, Reserve Affairs and Logistics; Chairman of the Commission on Roles and Missions of the Armed Forces; and a member of the Missile Defense Advisory Committee of the U.S. Department of Defense.

Class III — Directors Whose Terms Expire in 2015

 

Name

   Age     

Principal Occupation And Other Information

Lewis Kramer

     65       Director since July 2009. Member of the Audit and Compensation Committees. Mr. Kramer was a partner at Ernst & Young from 1981 until he retired in June 2009 after a nearly 40-year career at Ernst & Young. At the time of his retirement, Mr. Kramer served as the Global Client Service Partner for worldwide external audit and all other services for major clients, and served on the firm’s United States Executive Board. He previously served as Ernst & Young’s National Director of Audit Services.

Robert B. Millard

     62       Director since April 1997. Lead Independent Director of the Board of Directors and Chair of the Compensation and Executive Committees. Mr. Millard is currently the Managing Partner of Realm Partners LLC. He held various positions, including Managing Director, at Lehman Brothers and its predecessors from 1976 to 2008. Mr. Millard is also a director of GulfMark Offshore, Inc. and Evercore Partners Inc. He is also a current member of the Council on Foreign Relations.

Arthur L. Simon

     81       Director since April 2001. Member of the Audit and Nominating/Corporate Governance Committees. Mr. Simon is an independent consultant. Before his retirement, Mr. Simon was a partner at Coopers & Lybrand LLP, Certified Public Accountants, from 1968 to 1994. He is also a director of Loral Space & Communications Inc.

For a discussion of the specific experience, qualifications, attributes and skills that led the Board of Directors to conclude that each of the Company’s continuing directors and its nominees for director, Claude R. Canizares, Thomas A. Corcoran, Lloyd W. Newton, Alan H. Washkowitz and Vincent Pagano, Jr., should serve on the Board of Directors, see “The Board of Directors and Certain Governance Matters — Board of Directors Composition” beginning on page 32.

 

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PROPOSAL 2. APPROVAL OF THE AMENDMENT TO THE L-3 COMMUNICATIONS
HOLDINGS, INC. AMENDED AND RESTATED 2008 LONG TERM PERFORMANCE PLAN

The L-3 Communications Holdings, Inc. 2008 Long Term Performance Plan was originally adopted effective April 29, 2008 and an amendment was subsequently approved by shareholders on April 27, 2010 (as amended, the “2008 Plan”). On March 5, 2013, the Board of Directors authorized and approved an additional amendment to the 2008 Plan (as amended, the “Amended and Restated Plan”), which approval is subject to shareholders approving this Proposal 2. The principal purpose of the amendment is to (i) amend the plan to include all future equity issuances to non-employee directors under the 2008 Plan instead of through the L-3 Communications Holdings, Inc. 2008 Directors Stock Incentive Plan (the “2008 DSIP”), a separate equity plan currently used solely for non-employee directors, (ii) increase the number of shares authorized for issuance under the 2008 Plan by 6,500,000 shares, (iii) include revised limits on the amount of annual equity grants to employees and include new limits on the amount of annual equity grants to non-employee directors and (iv) modify the way that shares issued under “full value” awards granted under the 2008 Plan are counted for purposes of calculating the number of authorized shares that have been issued, as further described below. In addition, the amendment to the 2008 Plan is intended to allow the Compensation Committee of the Company’s Board of Directors (the “Committee”) to make awards that may satisfy the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended from time to time (the “Internal Revenue Code”) with respect to certain performance-based awards that may be granted under the 2008 Plan, and to expand the scope of the performance measures that may be utilized for these awards. The Company is not seeking to make any other material changes to the terms of the 2008 Plan at this time. If the Amended and Restated Plan is approved by shareholders at the 2013 Annual Meeting, it will become immediately effective as of the date of the 2013 Annual Meeting and the Company will cease issuing new awards under the 2008 DSIP. If shareholders do not approve the Amended and Restated Plan, the 2008 Plan and 2008 DSIP will each continue in effect until 2018.

Besides the 2008 Plan and the 2008 DSIP, the only equity compensation plan maintained by the Company under which future awards are authorized for issuance is the L-3 Communications Corporation 2009 Employee Stock Purchase Plan (the “2009 ESPP”). For additional information concerning the terms under which shares can be purchased under the 2009 ESPP and the number of shares available for future issuance under the 2009 ESPP, see Note 18 to the audited consolidated financial statements included in L-3’s 2012 Annual Report on Form 10-K.

The purpose of the Amended and Restated Plan is to benefit the Company’s shareholders by encouraging high levels of performance by individuals who contribute to the success of the Company and its subsidiaries and to enable the Company and its subsidiaries to attract, motivate, retain and reward talented and experienced individuals. This purpose is to be accomplished by providing eligible individuals with an opportunity to obtain or increase a proprietary interest in the Company and/or by providing eligible individuals with additional incentives to join or remain with the Company and its subsidiaries. A copy of the Amended and Restated Plan, which is marked to show the changes made to the 2008 Plan, is attached hereto as Exhibit A.

As of February 25, 2013, a total of 12,713,817 and 312,995 shares were authorized for issuance under the 2008 Plan and the 2008 DSIP, respectively, of which 1,211,511 and 265,552 shares remained available for issuance under future awards. If shareholders approve the Amended and Restated Plan, no new awards would be issuable under the 2008 DSIP, and the total number of shares authorized for issuance under the 2008 Plan would be increased by 6,500,000 shares. As a result, 19,213,817 shares would be authorized for issuance under the Amended and Restated Plan, of which 7,711,511 shares would be available for issuance under future awards. This amount excludes any shares that would become available again under the Amended and Restated Plan in connection with expired, cancelled, terminated or forfeited awards on or after February 26, 2013. We expect that if the Amended and Restated Plan is approved by our shareholders, the additional shares would be sufficient to allow us to make equity awards in the amounts we believe are necessary to attract, motivate, retain and reward talented and experienced individuals for the next two to three years. Unless terminated earlier by the Company’s Board of Directors, the Amended and Restated Plan will terminate on April 29, 2023.

 

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Under the 2008 Plan, shares issued under “full value” awards (i.e., all awards other than stock options or stock appreciation rights (“SARs”)) granted on or after March 1, 2010 count as 2.60 shares for purposes of calculating the number of shares that remain available for future awards under the plan. As of February 25, 2013, a maximum of 465,965 shares were available for issuance under full value awards to be granted in the future. If shareholders approve the Amended and Restated Plan, shares issued under full value awards granted on or after February 26, 2013 would count as 3.69 shares against the remaining share reserve. Accordingly, if shareholders approve the Amended and Restated Plan, of the 7,711,511 shares that would be available for issuance under future awards, a maximum of 2,089,840 shares would be available for issuance under full value awards. This amount excludes the effect of any shares that would become available again under the Amended and Restated Plan in connection with expired, cancelled, terminated or forfeited awards on or after February 26, 2013.

On February 20, 2013, we granted equity awards under which a total of 1,454,040 shares may be issued under the 2008 Plan to employees, including 712,348 shares that may be issued under full value awards. We have not granted, nor do we currently expect to grant, any other equity awards to employees in 2013. Based on our current projections, without shareholder approval of the Amended and Restated Plan, we will likely not be able to grant the full number of equity awards in 2014 that we believe is necessary to continue to attract, motivate, retain and reward talented and experienced employees.

As of February 25, 2013, our non-employee directors hold an aggregate of 44,983 restricted stock units. On March 15, 2013, we expect to grant dividend equivalents to our non-employee directors on their outstanding restricted stock units in the form of additional restricted stock units under the 2008 DSIP that have an aggregate grant date fair value of $24,741. Assuming the per share closing price of L-3’s Common Stock on March 15, 2013 is $75.00, the Company would grant a total of approximately 330 restricted stock units under the 2008 DSIP on that date. The Company will not grant any other equity awards under the 2008 DSIP prior to the 2013 Annual Meeting, and, as stated above, will cease issuing new awards under the 2008 DSIP in the event the Amended and Restated Plan is approved by shareholders at the 2013 Annual Meeting.

Whether or not shareholders approve the Amended and Restated Plan, from and after the date of the annual meeting, we expect to grant the following additional equity awards to our non-employee directors for the remainder of 2013: (1) restricted stock units to each of our non-employee directors on the date of the 2013 Annual Meeting having a grant date fair value of $120,000 per director, and (2) additional restricted stock units, as quarterly dividend equivalents, to the non-employee directors on their restricted stock units then outstanding on June 15, September 15 and December 15 of 2013. Assuming the per share closing price of L-3’s Common Stock is $75.00 per share for the remainder of the year, we would grant approximately 17,500 restricted stock units in 2013 from and after the date of the 2013 Annual Meeting.

As of February 25, 2013, a total of 7,758,630 shares were issuable in respect of outstanding awards under all equity compensation plans maintained by the Company, including the 2008 LTPP, the 2008 DSIP and other equity compensation plans under which no new awards are authorized for issuance (the “Prior Plans”). Of these shares, a total of 5,546,636 shares were issuable in respect of stock options with a weighted average exercise price of $77.06 and a weighted average remaining contractual term of 6.4 years. The remaining 2,211,994 shares were issuable in respect of restricted stock units and performance units based on the assumption that the maximum levels of performance applicable to the performance units will be achieved.

The total number of shares issuable under awards we have granted under the 2008 Plan, the 2008 DSIP and the Prior Plans as a percentage of our annual weighted average common shares outstanding (commonly referred to as the “burn rate”) has been on average 1.39% over the last three completed fiscal years and 1.35% over the last five completed fiscal years. This calculation is based on the amounts of shares issuable under awards as of the dates they were granted, and not as adjusted, in the case of awards outstanding as of July 17, 2012, to reflect the effect of the Company’s spin-off of Engility Holdings, Inc. (“Engility”) as described in “Outstanding Equity Awards at Fiscal Year End 2012” beginning on page 77.

 

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Over the last five completed fiscal years, we have repurchased substantially more shares than we have issued, with the net impact being an average annual reduction of 6.19% and 5.03% in our weighted average common shares outstanding over the last three and five completed fiscal years, respectively.

The Amended and Restated Plan is hereby proposed for approval by the shareholders. The affirmative vote of a majority of the votes cast at the Annual Meeting is required to approve the Amended and Restated Plan, provided that the total number of votes cast on the proposal must also represent a majority of all shares of Common Stock entitled to vote on the proposal. Abstentions and “broker non-votes” will have no effect on the outcome of this proposal, provided that the total number of votes cast on the proposal must also represent a majority of all shares of Common Stock entitled to vote on the proposal.

Description of the Amended and Restated Plan

Eligibility

Awards under the Amended and Restated Plan may be granted to any employee, including any officer, of the Company or any of its subsidiaries, or to any non-employee director or other individual who provides services to or on behalf of the Company or any of its subsidiaries, subject to the discretion of the Committee to determine the particular employees, non-employee directors and other individuals who, from time to time, will be selected to receive awards. As of December 31, 2012, we employed approximately 51,000 full-time and part-time employees, and nine non-employee directors served on our Board of Directors.

Types of Awards

Awards under the Amended and Restated Plan may be in the form of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock and other share-based awards, such as performance-based awards. Awards may be granted singly or in combination with other awards, consistent with the terms of the Amended and Restated Plan. Each award will be evidenced by an award agreement entered into between the Company and the recipient setting forth the specific terms and conditions applicable to that award. Awards under the Amended and Restated Plan generally will be nontransferable by a holder (other than by will or the laws of descent and distribution) and rights thereunder generally will be exercisable during the holder’s lifetime only by the holder. The maximum term of any unvested or unexercised non-qualified stock options, incentive stock options or SARs under the Amended and Restated Plan is ten years from the initial grant date.

Stock options authorized under the Amended and Restated Plan are rights to purchase a specified number of shares of the Common Stock at an exercise price of not less than the fair market value of the Common Stock on the grant date during the period set forth in the individual participant’s award agreement. The fair market value of the underlying shares of Common Stock as of March 1, 2013 was $76.40 per share. Dividends and dividend equivalents may not be paid on unissued shares underlying option awards. Stock options that are granted as incentive stock options will be granted with such additional terms as are necessary to satisfy the applicable requirements of Section 422 of the Internal Revenue Code. The fair market value of the Common Stock for which incentive stock options are exercisable for the first time by an optionee during any calendar year cannot exceed $100,000 (measured as of the grant date) under current tax laws. Other awards are not limited in this manner.

SARs may be granted on a freestanding basis, in relation to a stock option or in “tandem” with a stock option, such that the exercise of either the option or the SAR cancels the recipient’s rights under the tandem award with respect to the number of shares so exercised. SARs entitle the recipient to receive, upon exercise of the SAR, an amount (payable in cash and/or Common Stock or other property) equal to the amount of the excess, if any, of the fair market value of a share of the Common Stock on the date the SAR is exercised (or some lesser ceiling amount) over the base price of the SAR (or the exercise price of an option, if the SAR is granted in tandem with an option), which cannot be less than the fair market value of a share of the Common Stock on the date the SAR was awarded (or the exercise price of a related stock option). Dividends and dividend equivalents may not be paid on unissued shares underlying SARs.

 

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Restricted stock is Common Stock issued to the recipient, typically for minimal lawful consideration and subject to certain risks of forfeiture and restrictions and limitations on transfer, the vesting of which may depend on individual or corporate performance, continued service or other criteria.

Other incentive awards might include minimum ownership stock, phantom stock or units, performance stock or units, bonus stock or units, dividend equivalent units, similar securities or rights and other awards payable in or with a value derived from or a price related to the fair market value of the Common Stock, payable in Common Stock and/or cash, all on such terms as the Committee may approve. Such awards may be granted, become vested or be payable based upon the continued employment of a participant, or upon the attainment of specified corporate or individual performance goals (as in the case of performance stock or units).

Under Section 162(m) of the Internal Revenue Code (“Section 162(m)”), the Company may not deduct certain compensation over $1,000,000 in any year to the Chief Executive Officer or any of the three other most highly compensated executive officers of the Company, other than the Chief Financial Officer, unless, among other things, this compensation qualifies as “performance-based compensation” under Section 162(m), and the material terms of the plan for such compensation are approved by shareholders. With reference to awards intended to qualify as performance-based compensation under Section 162(m), the material terms of the Amended and Restated Plan include the eligible class of participants, the performance goal or goals and the maximum annual amount payable thereunder to any individual participant. The Committee may also approve compensation that does not qualify for a deduction under Section 162(m) if it determines that it is appropriate to do so in light of other competing interests and goals, such as the attraction and retention of key executives.

The eligible class of persons for performance-based awards under the Amended and Restated Plan is all employees of the Company and its subsidiaries. Awards that are intended to qualify as performance-based awards under the Amended and Restated Plan (other than stock options and SARs) may be granted only in accordance with the performance-based requirements of Section 162(m), as set forth below.

The performance goals for performance-based awards under the Amended and Restated Plan are any one or a combination of the following: (i) consolidated income before or after taxes (including income before interest, taxes, depreciation and amortization); (ii) EBIT or EBITDA; (iii) operating income or operating margin; (iv) book value per share of Common Stock; (v) expense management (including without limitation, total general and administrative expense percentages); (vi) improvements in capital structure; (vii) profitability of an identifiable business unit or product; (viii) maintenance or improvement of profit margins; (ix) stock price; (x) market share; (xi) revenue or sales (including, without limitation, net loans charged off and average finance receivables); (xi) costs (including, without limitation, total general and administrative expense percentage); (xiii) orders; (xiv) working capital; (xv) total debt (including, without limitation, total debt as a multiple of EBIT or EBITDA); (xvi) cash flow or net funds provided; (xvii) net income or earnings per share; (xviii) return on equity; (xix) return on investment or invested capital; and (xx) total shareholder return or any other performance goal that the Committee in its sole discretion establishes in accordance with the requirements of Section 162(m). Specific performance periods (which may overlap with performance periods under outstanding performance-based awards), weightings of more than one performance goal and target levels of performance upon which actual payments will be based, as well as the award levels payable upon achievement of specified levels of performance, will be determined by the Committee not later than the applicable deadline under Section 162(m) and in any event at a time when achievement of such targets is substantially uncertain. These variables may change from award to award. To the extent set forth in an individual participant’s award agreement, appropriate adjustments to the performance goals and targets in respect of performance-based awards may be made by the Committee based upon objective criteria in the case of (i) a change in corporate capitalization, a corporate transaction or a complete or partial corporate liquidation, (ii) any extraordinary gain or loss under generally accepted accounting principles or (iii) any material change in accounting policies or practices affecting the Company and/or the performance goals or targets.

 

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The Committee must certify the achievement of the applicable performance goals and the actual amount payable to each participant under the performance-based awards prior to payment. The Committee may retain discretion to reduce, but not increase, the amount payable under a performance-based award to any participant, notwithstanding the achievement of targeted performance goals. Awards may be accelerated in the event of the employee’s death or permanent disability, or in the event of a Change in Control of the Company as described below.

The Committee also has the authority to grant awards under the Amended and Restated Plan in substitution for or as the result of the assumption of stock incentive awards held by employees of other entities who become employees of the Company or a subsidiary as a result of a merger or acquisition of the entity.

Awards may be granted in connection with the surrender or cancellation of previously granted awards, or may be amended, under such terms and conditions, including numbers of shares and exercise price, exercisability or termination, that are the same as or different from the existing awards, all as the Committee may approve, except that no such grant or amendment may effect a repricing of the original award.

Administration; Change in Control

The Amended and Restated Plan provides that it shall be administered by the Committee (or subcommittee thereof) or another committee of the Board of Directors, constituted so as to permit awards under the Amended and Restated Plan to comply with the “non-employee director” provisions of Rule 16b-3 under the Exchange Act and the “outside director” requirements of Section 162(m). The Committee has the authority within the terms and limitations of the Amended and Restated Plan to designate recipients of awards, determine or modify (so long as it does not effect a repricing of the original award) the form, amount, terms, conditions, restrictions, and limitations of awards, including vesting provisions (subject to applicable limitations described below with respect to restricted stock), terms of exercise of an award, expiration dates and the treatment of an award in the event of the retirement, disability, death or other termination of a participant’s employment with the Company, and to construe and interpret the Amended and Restated Plan. Such authority includes (subject to the limitations of the Amended and Restated Plan) the discretion to accelerate vesting, extend the term or waive termination provisions or other restrictive conditions of outstanding awards.

The Committee is authorized to include specific provisions in award agreements relating to the treatment of awards in the event of a “Change in Control” of the Company and is authorized to take certain other actions in such an event. Change in Control under the Amended and Restated Plan is defined generally to include: (i) a change in ownership involving a majority of the outstanding voting securities of the Company, (ii) a sale of all or substantially all of the assets of the Company or L-3 Communications Corporation or any successor thereto, (iii) the consummation of a merger, combination, consolidation, recapitalization, or other reorganization of the Company with one or more other entities that are not subsidiaries, if as a result of such reorganization, less than 50 percent of the outstanding voting securities of the surviving or resulting corporation are beneficially owned by the shareholders of the Company immediately prior to such event; (iv) certain changes, during any period of 24 months or less, of 50 percent or more of the members of its Board of Directors, or (v) in the Committee’s sole discretion on a case-by-case basis with respect to outstanding awards to affected employees, the sale of a subsidiary, division or business unit.

The Committee may delegate to the officers or employees of the Company the authority to execute and deliver such instruments and documents and to take actions necessary, advisable or convenient for the effective administration of the Amended and Restated Plan. It is intended generally that the awards under the Amended and Restated Plan and the Amended and Restated Plan itself comply with and be interpreted in a manner that, in the case of participants who are subject to Section 16 of the Exchange Act and for whom (or whose awards) the benefits of Rule 16b-3 are intended, satisfies the applicable requirements of Rule 16b-3 so that such persons will be entitled to the benefits of Rule 16b-3 or other

 

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exemptive rules under that Section. Similarly and as described further below, it is intended generally that the awards under the Amended and Restated Plan will not be granted, deferred, accelerated, extended, modified or paid in a manner that would result in the participant incurring any tax liability under Section 409A of the Code. The Amended and Restated Plan provides that neither the Company nor any member of the Board of Directors or of the Committee shall have any liability to any person for any action taken or not taken in good faith under the Amended and Restated Plan.

Amendment and Termination

The Board of Directors has the authority to amend, suspend or discontinue the Amended and Restated Plan at any time, subject to any shareholder approval that may be required under applicable law and provided that no such action will affect any outstanding award in any manner adverse to the participant without the consent of the participant. Notwithstanding the foregoing, any amendment to the Amended and Restated Plan that would (i) materially increase the benefits accruing to any participant, (ii) materially increase the aggregate number of shares of Common Stock or other equity interests that may be issued under the Amended and Restated Plan, or (iii) materially modify the requirements as to eligibility for participation in this Amended and Restated Plan, shall be subject to shareholder approval. In addition, shareholder approval may be required to satisfy tax rules applicable to performance-based compensation under Section 162(m) or to subsequent grants of incentive stock options, or to satisfy other applicable legal requirements. Because the Committee retains the discretion to set and change the specific targets for each performance period under a performance-based award intended to be exempt from Section 162(m), shareholder ratification of the performance goals will be required, in any event, at five-year intervals in the future to exempt awards granted under the Amended and Restated Plan from the limitations on deductibility thereunder.

Authorized Shares; Other Provisions; Non-Exclusivity

If the Amended and Restated Plan is approved by shareholders, the maximum number of shares of Common Stock that may be issued in respect of awards under the Amended and Restated Plan may not exceed 19,213,817 shares. For purposes of this share limit, each share of Common Stock issued pursuant to “full value” awards (i.e., all awards other than stock options or SARs) granted from March 1, 2010 through February 25, 2013 will be counted as 2.6 shares; and each share of Common Stock that may be issued pursuant to full value awards granted on or after February 26, 2013 will be counted as 3.69 shares. In addition, (i) the maximum number of shares of Common Stock that may be issued pursuant to all awards of incentive stock options (i.e., stock options granted in accordance with Section 422 of the Internal Revenue Code) is 3,000,000, (ii) the maximum number of shares of Common Stock that may be issuable (or payable in cash by reference to such shares) under stock options or SARs granted during a calendar year to any employee shall be 750,000 and (iii) the maximum number of shares of Common Stock that may be issuable (or payable in cash by reference to such shares) under other performance based-awards during a calendar year to any employee shall be 300,000. For non-employee directors, the maximum number of shares of Common Stock that may be issuable (or payable in cash by reference to such shares) subject to awards granted during a calendar year, together with any cash fees paid to such non-employee director, shall not exceed $525,000 in total value (which shall be calculated for awards granted under the Amended and Restated Plan based on the grant date fair value of such awards for financial reporting purposes and excluding the value of any dividends or dividend equivalents on unissued shares of Common Stock (or on unpaid amounts payable in cash by reference to such shares) underlying any such awards).

The number and kind of shares available for grant and the shares subject to outstanding awards (as well as individual share limits on awards and exercise prices of awards) shall be adjusted to reflect the effect of a stock dividend, stock split, recapitalization, merger, consolidation, reorganization, combination or exchange of shares, extraordinary dividend or other distribution or other similar transaction. Any unexercised or undistributed portion of any expired, cancelled, terminated or forfeited award, or any alternative form of consideration under an award that is not paid in connection with the

 

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settlement of any portion of an award, will again be available for award under the Amended and Restated Plan, whether or not the participant has received benefits of ownership (such as dividends or dividend equivalents or voting rights) during the period in which the participant’s ownership was restricted or otherwise not vested. However, the following shares of Common Stock shall not become available for reissuance under the Amended and Restated Plan: (i) shares tendered by participants as full or partial payment to the Company upon exercise of stock options or other awards granted under the Amended and Restated Plan; (ii) shares of Common Stock reserved for issuance upon the grant of SARs, to the extent the number of reserved shares exceeds the number of shares actually issued upon exercise of the SARs; (iii) shares withheld by, or otherwise remitted to, the Company to satisfy a participant’s tax withholding obligations upon the lapse of restrictions on restricted stock or the exercise of stock options or SARs or upon any other payment or issuance of shares under any other award granted under the Amended and Restated Plan; and (iv) shares of Common Stock acquired by the Company in connection with the Amended and Restated Plan or the satisfaction of an award granted under the Amended and Restated Plan. With respect to the individual share limits on performance-based awards, awards that are cancelled will be counted against the applicable limits to the extent required by Section 162(m).

UPON APPROVAL OF THE AMENDED AND RESTATED PLAN BY THE SHAREHOLDERS, THE COMPANY INTENDS TO REGISTER UNDER THE SECURITIES ACT OF 1933 THE ADDITIONAL 6,500,000 SHARES OF COMMON STOCK AUTHORIZED FOR ISSUANCE UNDER THE AMENDED AND RESTATED PLAN.

Full payment for shares purchased on exercise of any option or received under any other award, along with payment of any required tax withholding, must be made in cash prior to the delivery of the underlying shares or, if permitted by the Committee, in shares of Common Stock delivered by the participant or withheld from an award, or any combination thereof, or pursuant to such “cashless exercise” procedures as may be permitted by the Committee.

Except as specifically provided under an individual participant’s award agreement approved by the Committee, the minimum vesting period for awards of restricted stock is three years from the grant date (or one year in the case of restricted stock awards that are performance-based awards) and may not be accelerated to an earlier date except in the event of the participant’s death, permanent disability or in the event of a Change in Control. The Amended and Restated Plan does not impose any minimum vesting periods on other types of awards, and the Committee may establish the vesting requirements (if any) for such awards in its sole discretion.

The Amended and Restated Plan is not exclusive and does not limit the authority of the Company, the Board of Directors or the Committee to grant awards or authorize any other compensation, with or without reference to the Common Stock, under any other plan or authority.

Federal Income Tax Consequences

The following is a general description of federal income tax consequences to participants and the Company relating to nonqualified and incentive stock options and certain other awards that may be granted under the Amended and Restated Plan. This discussion does not purport to cover all tax consequences relating to stock options and other awards.

An optionee will not recognize income upon the grant of a nonqualified stock option to purchase shares of Common Stock. Upon exercise of the option, the optionee will recognize ordinary compensation income equal to the excess of the fair market value of the Common Stock on the date the option is exercised over the option price for such Common Stock. The tax basis of the Common Stock acquired by exercising an option in the hands of the optionee will equal the option price for the Common Stock plus the amount of ordinary compensation income the optionee recognizes upon exercise of the option, and the holding period for the Common Stock will commence on the day the option is exercised. An optionee who sells Common Stock acquired by exercising an option will recognize capital gain or loss measured by the difference between the tax basis of the Common Stock and the amount realized on the sale. Such gain or loss will be long-term if the Common Stock is held for more than 12 months after exercise, and short-term if held for 12 months or less after exercise. The Company or a subsidiary will be

 

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entitled to a deduction equal to the amount of ordinary compensation income recognized by the optionee. The deduction will be allowed at the same time the optionee recognizes the income.

An optionee will not recognize income upon the grant of an incentive stock option to purchase shares of Common Stock, and will not recognize income upon exercise of the option, provided such optionee was an employee of the Company or a subsidiary at all times from the grant date until three months prior to exercise (or one year prior to exercise in the event of disability). Generally, the amount by which the fair market value of the Common Stock on the date of exercise exceeds the option price will be includable in alternative minimum taxable income for purposes of determining alternative minimum tax and such amount will be added to the tax basis of such Common Stock for purposes of determining alternative minimum taxable income in the year the Common Stock is sold. Where an optionee who has exercised an incentive stock option sells the shares acquired upon exercise more than two years after the grant date and more than one year after exercise, long-term capital gain or loss will be recognized equal to the difference between the sales price and the option price. An optionee who sells such shares within two years after the grant date or within one year after exercise will recognize ordinary compensation income in an amount equal to the lesser of (i) the difference between the fair market value of the shares on the date of exercise and the amount paid for the shares, or (ii) the excess of the amount realized on the sale over the adjusted basis in the shares. Any remaining gain or loss will be treated as a capital gain or loss. The Company or a subsidiary will be entitled to a deduction equal to the amount of ordinary compensation income recognized by the optionee in this case. The deduction will be allowable at the same time the optionee recognizes the income.

The current federal income tax consequences of other awards authorized under the Amended and Restated Plan generally follow certain basic patterns: SARs are taxed to the individuals and deductible by the Company in substantially the same manner as nonqualified stock options; and nontransferable restricted stock subject to a substantial risk of forfeiture results in income recognition equal to the excess of the fair market value of the Common Stock over the purchase price (if any) at the time the restrictions lapse (unless the recipient elects to accelerate recognition as of the grant date); in each of the foregoing cases, the Company will generally have (at the time the participant recognizes income) a corresponding deduction.

If, as a result of a Change in Control event, a participant’s stock options or SARs or other rights become immediately exercisable, or restrictions immediately lapse on an award, or cash, shares or other benefits covered by another type of award are immediately vested or issued, the additional economic value, if any, attributable to the acceleration or issuance may be deemed a “parachute payment” under Section 280G of the Internal Revenue Code. In such case, the participant may be subject to a 20% non-deductible excise tax as to all or a portion of such economic value, in addition to any income tax payable. The Company will not be entitled to a deduction for that portion of any parachute payment that is subject to the excise tax.

Notwithstanding any of the foregoing discussions with respect to the deductibility of compensation under the Amended and Restated Plan, Section 162(m) would render non-deductible to the Company certain compensation in excess of $1,000,000 in any year to the Named Executive Officers (other than the Chief Financial Officer), unless such excess compensation is “performance-based” (as defined in Section 162(m)) or is otherwise exempt from Section 162(m). The applicable conditions of an exemption for a performance-based compensation plan include, among others, a requirement that the shareholders approve the material terms of the plan. Stock options, SARs and certain (but not all) other types of awards may be granted to qualify for the exemption for performance-based compensation under Section 162(m).

Section 409A of the Internal Revenue Code generally establishes rules that must be followed with respect to covered deferred compensation arrangements in order to avoid the imposition of an additional 20% tax (plus interest) on the service provider who is entitled to receive the deferred compensation. Certain awards that may be granted under the Amended and Restated Plan may constitute “deferred compensation” within the meaning of and subject to Section 409A. The Amended and Restated Plan and

 

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award agreements entered into under the Amended and Restated Plan are intended to be interpreted and operated in accordance with Section 409A, including any regulations or guidance issued by the Treasury Department, and contains a number of provisions intended to avoid the imposition of additional tax on the Amended and Restated Plan participants under Section 409A (though each participant is solely responsible and liable for the satisfaction of all taxes and penalties in respect of any payments or benefits delivered in connection with the Amended and Restated Plan, including taxes and penalties under Section 409A). The Board of Directors may amend the Amended and Restated Plan, and the Committee may amend outstanding awards thereunder, while preserving the intended benefits of awards granted under the Amended and Restated Plan to avoid the imposition of an additional tax under Section 409A. In addition, it is intended under the Amended and Restated Plan that no award be granted, deferred, accelerated, extended, paid out or modified under the Amended and Restated Plan, and no award agreement be interpreted, in a manner that would result in the imposition of an additional tax under Section 409A on a participant. If it is reasonably determined that a payment with respect to an award would result in tax liability to a participant under 409A, the Company will not make the payment when otherwise required and instead will make the payment on the first day that payment would not result in the tax liability.

 

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STOCK-BASED AWARDS PREVIOUSLY GRANTED
UNDER THE 2008 LONG TERM PERFORMANCE PLAN

AS OF FEBRUARY 25, 2013

The number of shares or units reported in the following table reflects the terms of the awards on the date they were granted and, in the case of awards that were outstanding on July 17, 2012, does not reflect subsequent adjustments that were made to reflect the effect of the Company’s spin-off of Engility. For a discussion of these adjustments, see “Outstanding Equity Awards at Fiscal Year End 2012” beginning on page 77.

 

     Totals  

Name and Position

   Stock Option
Grants
# of Shares
Covered
     Restricted
Stock Unit
Grants
# of Shares
Covered
     EPS
Performance
Unit Grants
# of Shares
Covered (1)
     TSR
Performance
Unit Grants
# of Shares
Covered(2)
     Total of All
Columns in
Table
# of Shares
Covered
 

Michael T. Strianese
(Chairman, President and Chief Executive Officer and Director)

     1,345,398         205,099         115,610         63,369         1,729,476   

Ralph G. D’Ambrosio
(Senior Vice President and Chief Financial Officer)

     256,976         39,353         22,720         10,547         329,596   

Curtis Brunson
(Executive Vice President of Corporate Strategy and Development)

     260,091         39,802         22,945         10,772         333,610   

Steve Kantor
(Senior Vice President and President of Electronic Systems Group)

     163,588         25,041         14,353         7,025         210,007   

John McNellis
(Senior Vice President and President of Integrated Systems Group)

     171,835         25,565         16,289         8,417         222,106   

James W. Dunn
(Former Senior Vice President and President of Electronic Systems Group)
(3)

     156,336         23,728         12,930         8,670         201,664   

All Current Executive
Officers as a Group

     2,808,970         459,880         242,032         126,287         3,637,169   

Each Associate of any of such Directors, Executive Officers or Nominees

     0         1,936         0         0         1,936   

All Employees, including all Current Officers who are not Executive Officers as a Group

     4,271,430         3,838,926         270,603         144,947         8,525,906   

 

 

(1) Reflects the number of shares of our Common Stock issuable assuming achievement of the maximum level of performance in respect of performance units whose performance targets are based on earnings per share.

 

(2) Reflects the number of shares of our Common Stock payable in cash (based on the closing price of our Common Stock at the end of the applicable performance periods) assuming achievement of the maximum level of performance in respect of performance units whose performance targets are based on total shareholder return.

 

(3) Mr. Dunn retired from the Company effective December 31, 2012.

 

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The Amendment to the 2008 Plan is hereby proposed for approval by the shareholders. The affirmative vote of a majority of the votes cast at the Annual Meeting is required for approval of the Amendment to the 2008 Plan, provided that the total number of votes cast on the proposal must also represent a majority of all shares of Common Stock entitled to vote on the proposal. Abstentions and “broker non-votes” will have no effect on the outcome of this proposal, provided that the total number of votes cast on the proposal must also represent a majority of all shares of Common Stock entitled to vote on the proposal.

The Board of Directors Recommends a Vote FOR the Amendment to the L-3 Communications Holdings, Inc. Amended and Restated 2008 Long Term Performance Plan.

 

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EQUITY COMPENSATION PLAN INFORMATION

The table below sets forth information about shares of our Common Stock that may be issued under our equity compensation plans as of December 31, 2012. For a description of our equity compensation plans, see Note 18 to the audited consolidated financial statements included in L-3’s 2012 Annual Report on Form 10-K.

 

     Equity Compensation Plan Information

Plan category

   Number of
securities to be
issued upon exercise
of outstanding
options, warrants
and rights
  Weighted average
exercise of
outstanding
options, warrants
and rights
  Number of
securities remaining
available for future
issuance under
equity compensation
plans
     (In millions)       (In millions)

Equity compensation plans approved by security holders

       7.0 (1)     $ 76.48 (2)       9.0 (3)

Equity compensation plans not approved by security holders(4)

       0.1       $ 80.20          

Total

       7.1       $ 76.57         9.0  

 

 

(1) Represents awards, including stock options, RSUs and performance units, issuable under the 1999 Long Term Performance Plan (the “1999 Plan”), the L-3 Communications Holdings, Inc. Amended and Restated 2008 Long Term Performance Plan (the “2008 LTPP”) and the L-3 Communications Holdings, Inc. Amended and Restated 2008 Directors Stock Incentive Plan (the “2008 DSIP”). The number of shares of Common Stock to be issued in respect of performance units has been calculated based on the assumption that the maximum levels of performance applicable to the performance units will be achieved.

 

(2) The calculation of the weighted average exercise price excludes the effect of the RSU awards and performance unit awards, which have been granted to employees at no cost.

 

(3) Includes 5.1 million, 3.7 million and 0.2 million shares available for future issuance under the L-3 Communications Corporation 2009 Employee Stock Purchase Plan (the “2009 ESPP”), the 2008 LTPP and the 2008 DSIP, respectively. Each share of our Common Stock issued under a “full value” award (i.e., awards other than stock options or stock appreciation rights) granted on or after March 1, 2010 under the 2008 LTPP is counted as 2.6 shares for purposes of calculating the number of shares available for future issuance under the 2008 LTPP.

 

(4) Represents awards under the 1997 Option Plan for Key Employees of L-3 Communications Holdings, Inc. and Subsidiaries and the Amended and Restated 1998 Directors Stock Option Plan for Non-Employee Directors of L-3 Communications Holdings, Inc.

 

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PROPOSAL 3. PROPOSAL TO AMEND L-3’s AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION TO PROVIDE FOR THE PHASED-IN DECLASSIFICATION OF THE
BOARD OF DIRECTORS, BEGINNING IN 2014

The Board of Directors has unanimously approved and declared advisable, and recommends that the Company’s shareholders adopt, an amendment to our Certificate of Incorporation that would phase-in the declassification of the Board of Directors and provide for the annual election of all directors (the “Declassification Proposal”) as described below and set forth on Exhibit B. The Board of Directors has adopted corresponding amendments to Section 3.2 of our Amended and Restated Bylaws (the “Bylaws”), which will become effective if the Declassification Proposal receives the requisite approval by shareholders.

Background of the Proposal

Our current classified board structure has been in place since our initial public offering in 1997. The Board of Directors believes that its classified structure has helped assure continuity of the Company’s business strategies and has reinforced a commitment to long-term shareholder value. Although these are important benefits, the Board of Directors recognizes the growing sentiment among shareholders and the investment community in favor of annual elections for all directors. After careful consideration, the Board of Directors determined that it is appropriate to propose declassifying the Board on a phased-in basis, commencing with the Company’s 2014 Annual Meeting of Shareholders, subject to the requisite approval by shareholders of this Proposal 3.

Proposed Amendment to Certificate of Incorporation

Currently, members of our Board of Directors are elected for staggered terms of three years. If the Declassification Proposal is approved, commencing with the class of directors standing for election at our 2014 Annual Meeting of Shareholders, directors whose terms expire at each meeting will stand for election for one-year terms, expiring at the next succeeding annual meeting of shareholders. The directors who are elected at our Annual Meeting under Proposal 1, whose terms will expire in 2016, and the directors who were elected at our 2012 Annual Meeting of Shareholders, whose terms will expire in 2015, will continue to hold office until the end of the terms for which they were elected. All directors will be elected on an annual basis beginning with the Company’s 2016 Annual Meeting of Shareholders, subject to the requisite approval by shareholders of this Proposal 3 and the effectiveness of the amendment effectuating the Declassification Proposal. In all cases, each director will hold office until his or her successor has been duly elected and qualified or until such director’s earlier death, resignation, retirement, disqualification or removal.

Presently, because the terms of the directors are staggered, our directors are removable only for cause. Upon adoption of the Declassification Proposal, any director serving the term to which he or she was elected prior to our 2014 Annual Meeting of Shareholders (as well as any director appointed to fill a vacancy in respect of any such directorship) would continue to be removable only for cause until the completion of his or her current term. Consistent with Delaware law for corporations without classified boards, directors elected at our 2014 Annual Meeting of Shareholders and thereafter will be removable “with or without cause” by the holders of a majority in voting power of the outstanding shares of capital stock of the Company entitled to vote thereon.

Exhibit B shows the proposed changes to Article Sixth of L-3’s Certificate of Incorporation, with deletions indicated by strikeouts and additions indicated by underlining.

Effective Date

If this proposal is approved by the shareholders at the Annual Meeting, the proposed amendment to Article Sixth of the Certificate of Incorporation described above will become effective upon the filing of appropriate amendment documentation with the Delaware Secretary of State, which filing is expected to take place shortly after shareholder approval. As required by Delaware law, if this proposal does not

 

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receive the requisite approval by the shareholders at the Annual Meeting, the proposed amendment to Article Sixth of the Certificate of Incorporation described in this proposal and the corresponding amendment to Section 3.2 of the Bylaws will not be implemented and the Company’s Board will remain classified. While Proposals 4 and 5 also concern amendments to the Company’s governing documents, the approval of this Proposal 3 is not conditioned on the approval of either Proposal 4 or Proposal 5.

The two-thirds approval of all shareholders entitled to vote on the proposal is required to approve the Declassification Proposal. Abstentions and “broker non-votes” will have the same effect as votes against the proposal.

The Board of Directors unanimously recommends that you vote FOR the proposal to approve the amendment to the Company’s Certificate of Incorporation to phase-in the declassification of the Board of Directors, beginning in 2014.

 

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PROPOSAL 4. PROPOSAL TO AMEND L-3’s AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION TO REDUCE THE VOTE REQUIRED TO ALTER, AMEND OR REPEAL

CERTAIN PROVISIONS IN L-3’s BYLAWS

The Board of Directors has unanimously approved and declared advisable, and recommends that the Company’s shareholders adopt, an amendment to the Certificate of Incorporation that would reduce the vote required by the Certificate of Incorporation to alter, amend or repeal certain provisions in L-3’s Bylaws from a required vote of two-thirds of the directors then in office to the affirmative vote of a majority of the Board of Directors (the “Supermajority Proposal”) as described below and set forth on Exhibit C. Our Board of Directors has adopted a corresponding amendment to Section 7.1 of the Bylaws that reduces the vote required to amend the Supermajority Provisions (as defined below) in the Company’s Bylaws from the affirmative vote of two-thirds of the Board of Directors or two-thirds of the votes entitled to be cast by the shareholders on the matter to the affirmative vote of a majority of the Board of Directors or the affirmative vote of the holders of a majority of voting power of the outstanding capital stock of the Company. The amendment to Section 7.1 of the Company’s Bylaws that reduces the vote that is required for shareholders to alter, amend or repeal the Company’s Bylaws became effective in January of 2013. As required by Delaware law, the amendment to the Company’s Certificate of Incorporation that reduces the vote that is required for directors to alter, amend or repeal the Company’s Bylaws will only become effective if the Supermajority Proposal to the Company’s Certificate of Incorporation contained in this Proposal 4 receives the requisite approval by shareholders at our Annual Meeting.

Background of the Proposal

The Board is committed to ensuring effective corporate governance. As part of this effort, the Nominating/Corporate Governance Committee and the Board periodically evaluate the Certificate of Incorporation, Bylaws and other corporate governance documents to determine if any changes are advisable. Considering the views of some investors who believe that supermajority voting provisions are inconsistent with principles of good corporate governance, the Nominating/Corporate Governance Committee and the Board reviewed those provisions of our Certificate of Incorporation and Bylaws that specify a supermajority voting standard and considered the arguments for and against the presence of supermajority vote requirements in our governing documents. The Nominating/Corporate Governance Committee and the Board also considered the potential effect of changing the voting standard required to amend certain provisions in the Company’s Bylaws from that of the affirmative vote of two-thirds of the directors then in office in the case of the Company’s Certificate of Incorporation and the affirmative vote of two-thirds of the Board of Directors or of two-thirds of the votes entitled to be cast by the shareholders on the matter in the case of certain provisions in our Bylaws, to a majority standard.

The Nominating/Corporate Governance Committee and the Board determined that it is advisable and in the best interests of the Company and its shareholders to reduce the vote required by the Certificate of Incorporation for the Board to alter, amend or repeal certain provisions in the Company’s Bylaws as discussed in the prior paragraph.

Proposed Amendment to Certificate of Incorporation

Currently, under the Company’s existing Certificate of Incorporation and Bylaws, a simple majority vote requirement already applies to most matters submitted for shareholder approval. Article Fifth of the Certificate of Incorporation requires the affirmative vote of two-thirds of the directors then in office to amend provisions in our Bylaws related to a small number of fundamental matters of corporate structure and governance including: (i) the quorum and adjournment provisions for board and shareholder meetings; (ii) the voting standard for shareholder meetings; (iii) board vacancies; (iv) the payment of dividends; (v) indemnification and insurance provisions for L-3’s directors and officers; (vi) amendments to the Company’s Bylaws; and (vii) the number and tenure of directors which, if the Declassification Proposal is approved, will be modified from that of a staggered board where each director serves a three-year term to a declassified board where the entire board will be up for election annually beginning in 2016 (collectively, the “Supermajority Provisions”).

 

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The Supermajority Proposal amends Article Fifth of the Certificate of Incorporation to remove the higher vote standard required to amend the Supermajority Provisions which reduces the vote required to amend such provisions from the affirmative vote of two-thirds of the directors then in office to the affirmative vote of a majority of the Board of Directors.

Exhibit C shows the proposed changes to Article Fifth of L-3’s Certificate of Incorporation, with deletions indicated by strikeouts and additions indicated by underlining.

Effective Date

If Proposal 4 is approved by the shareholders, the proposed amendment to Article Fifth of the Certificate of Incorporation described above will become effective upon the filing of appropriate amendment documentation with the Delaware Secretary of State, which filing is expected to take place shortly after shareholder approval. Under Delaware law, if this proposal does not receive the requisite approval by the shareholders at the Annual Meeting, the proposed amendment to Article Fifth of the Certificate of Incorporation described in this proposal will not be implemented. While Proposals 3 and 5 also concern amendments to the Company’s governing documents, the approval of this Proposal 4 is not conditioned on the approval of either Proposal 3 or Proposal 5.

The affirmative vote of a majority of the outstanding common stock of the Company is required to approve the Supermajority Proposal. Abstentions and “broker non-votes” will have the same effect as votes against the proposal.

The Board of Directors unanimously recommends that you vote FOR the proposal to reduce the vote required by the Certificate of Incorporation to alter, amend or repeal certain provisions in L-3’s Bylaws and provide that the Bylaws may be altered, amended or repealed by the affirmative vote of a majority of the Board of Directors.

 

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PROPOSAL 5. PROPOSAL TO AMEND L-3’s AMENDED AND RESTATED CERTIFICATE OF

INCORPORATION TO PERMIT SHAREHOLDERS TO TAKE ACTION BY WRITTEN
CONSENT

The Board of Directors has unanimously approved and declared advisable, and recommends that the Company’s shareholders adopt, an amendment to the Certificate of Incorporation that would expand shareholders’ ability to take action by written consent by reducing shareholders’ requirement to act by written consent from the unanimous consent of all shareholders to consent of a majority of the outstanding shares of capital stock of the Company entitled to vote on the matter (the “Written Consent Proposal”) as described below and set forth on Exhibit D.

Background of the Proposal

As discussed above, the Nominating/Corporate Governance Committee and the Board are committed to ensuring effective corporate governance and periodically evaluate the Certificate of Incorporation, Bylaws and other corporate governance documents to determine if any changes are advisable. As part of such review, the Board considered whether to expand shareholders’ ability to take action by written consent. In determining whether to enhance the ability of shareholders to influence the direction of the Company, the Board considered the factors in favor of authorizing stockholder action by written consent and those opposed to it. After discussion and consideration, the Board determined that it is advisable and in the best interests of the Company and its shareholders to provide shareholders with broader rights to act by written consent if approved by shareholders.

Proposed Amendment to Certificate of Incorporation

Currently, under the Company’s existing Certificate of Incorporation, a simple majority vote requirement already applies to most matters submitted for shareholder approval. However, pursuant to Article Tenth of the Certificate of Incorporation, in order for shareholders to act by written consent, all of the shareholders entitled to vote on such a matter must sign such consent. In addition, Article Tenth currently also requires the unanimous consent of all shareholders entitled to vote on the matter to amend Article Tenth.

The Written Consent Proposal amends Article Tenth of the Certificate of Incorporation by: (1) permitting shareholders to act by written consent if a majority of the outstanding shares of capital stock of the Company entitled to vote on the matter sign such consent, and (2) reducing the required vote to amend Article Tenth from the unanimous consent of all shareholders to a majority of the outstanding shares of capital stock of the Company entitled to vote on the matter.

Exhibit D shows the proposed changes to Article Tenth of the Certificate of Incorporation, with deletions indicated by strikeouts and additions indicated by underlining.

Effective Date

If Proposal 5 is approved by the shareholders, the proposed amendment to Article Tenth of the Certificate of Incorporation described above will become effective upon the filing of appropriate amendment documentation with the Delaware Secretary of State, which filing is expected to take place shortly after shareholder approval. As required by Delaware law, if this proposal is not approved by the shareholders at the Annual Meeting, the proposed amendment to Article Tenth of the Certificate of Incorporation described in this proposal will not be implemented and the existing vote required to act by written consent and amend Article Tenth will remain the unanimous consent of all shareholders. While Proposals 3 and 4 also concern amendments to the Company’s governing documents, the approval of this Proposal 5 is not conditioned on the approval of either Proposal 3 or Proposal 4.

The affirmative vote of all of the outstanding common stock of the Company is required to approve the Written Consent Proposal. Abstentions and “broker non-votes” will have the same effect as votes against the proposal.

The Board of Directors unanimously recommends that you vote FOR the proposal to expand shareholders’ ability to act by written consent and reduce the vote required to amend such provision.

 

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PROPOSAL 6. SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of the independent registered public accounting firm retained to audit the Company’s financial statements. Following its annual evaluation of its independent registered public accounting firm, the Audit Committee considered whether there should be a rotation of such a firm and decided to select PricewaterhouseCoopers LLP (“PwC”) to serve as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2013. PwC has continuously been retained as our independent registered public accounting firm since our formation in 1997, and the Audit Committee and the Board of Directors believe that the continued retention of PwC to serve as the Company’s independent registered public accounting firm is in the best interests of the Company and its shareholders. In conjunction with the mandated rotation of the independent registered public accounting firm’s lead engagement partner, the Audit Committee and its chairperson have been directly involved in the selection of PwC’s new lead engagement partner. Representatives of PwC will be present at the Annual Meeting. Such representatives will have the opportunity to make a statement if they desire to do so and are expected to be available to respond to appropriate questions.

Although ratification is not required by our Bylaws or otherwise, the Board of Directors is submitting the selection of PwC to our shareholders for ratification because the Audit Committee and the Board value our shareholders’ views on the Company’s independent registered public accounting firm. If the foregoing proposal is not approved by the holders of a majority of the votes cast, it will be considered as notice to the Board of Directors and the Audit Committee to consider the selection of a different firm. Even if the selection is ratified, the Audit Committee in its discretion may select a different independent registered public accounting firm at any time during the year if it determines that such a change would be in the best interests of the Company and our shareholders.

The Board of Directors Recommends a Vote FOR Ratification of the Appointment of PricewaterhouseCoopers LLP as our Independent Registered Public Accounting Firm.

 

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PROPOSAL 7. ADVISORY (NON-BINDING) VOTE ON EXECUTIVE COMPENSATION

We are asking our shareholders to approve, in a non-binding, advisory vote, the compensation paid to our named executive officers as disclosed beginning on page 71 of this proxy statement. In connection with this vote, shareholders may also wish to consider the discussion appearing under “The Board of Directors and Certain Governance Matters—Compensation Committee” beginning on page 35. While the results of this vote are advisory, our Compensation Committee intends to consider the results of this vote when making future compensation decisions. The following is a summary of key points that shareholders may wish to consider in connection with their voting decision.

We made substantial changes to our compensation programs that emphasize our pay-for-performance philosophy and reflect our commitment to compensation best practices. Our compensation program highlights include:

 

   

Formula-Based Bonus Plan. Adopted a transparent, formula-based approach for determining annual incentive awards that uses pre-established goals to assess financial and individual performance achievements. Annual incentives earned under the program are intended to qualify as tax-deductible compensation under Section 162(m) of the Internal Revenue Code.

 

   

Increased Performance-Based Equity Awards. Changed the mix of our long-term incentive awards to increase the use of performance awards and decrease time-vested stock options.

 

   

Applied Performance Criteria to CEO Stock Options. Modified the stock options previously granted to our Chief Executive Officer in February 2011 to add performance vesting conditions, and included performance vesting conditions in the stock options awarded to our Chief Executive Officer in February 2012.

 

   

Increased Stock Ownership Guidelines. Strengthened stock ownership requirements by:

 

   

Increasing the Chief Executive Officer’s guideline from five to six times base salary;

 

   

Increasing the number of shares that must be held until satisfaction of the minimum ownership guidelines from 50% to 75% of the shares acquired from equity awards.

 

   

Eliminating the value of unexercised stock options in calculating the value of shares owned.

 

   

Clawback, Anti-Hedging and Anti-Pledging Policies. Adopted new clawback and anti-hedging policies in 2012, and an anti-pledging policy in 2013.

Our compensation program places a strong emphasis on performance-based variable pay that aligns our executives’ interests with those of shareholders. In 2012, 68% of our Chief Executive Officer’s target pay was in the form of performance-based annual and long-term incentives, including:

 

   

22% of target pay in the form of stock options that have value only based on future increases in our stock price, and that will be forfeited if vesting conditions based on 2012 financial performance are not satisfied.

 

   

30% of target pay in the form of performance awards that will be forfeited unless our company’s performance during fiscal 2012-2014 meets pre-established goals for cumulative earnings per share and for achieving favorable total shareholder returns when compared to a custom peer group of companies with a defense-based sales mix that is similar to L-3, and includes the primary U.S. public company competitors for each of L-3’s four reporting segments.

Our compensation program reflects sound pay practices. In addition to the practices described above, our compensation program reflects the following:

 

   

Our perquisites are modest and do not include any tax reimbursements or “gross-ups.”

 

   

Our equity plans prohibit repricings of stock options or other equity-based awards without shareholder approval.

 

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We do not pay dividends on stock options or unvested performance awards.

 

   

Our retirement plans only provide age or service credit for years worked with L-3 and its predecessor companies.

We believe that the information disclosed in this proxy statement demonstrates that our executive compensation program is well-designed and is working as intended. In accordance with the requirements of Section 14A of the Securities Exchange Act of 1934 (which was added by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)) and the related rules of the SEC, we are submitting for shareholder consideration the following resolution to approve, in a non-binding, advisory vote, the compensation paid to our named executive officers as disclosed beginning on page 71 of this proxy statement:

“RESOLVED, that the compensation paid to the company’s named executive officers, as disclosed in this proxy statement pursuant to the rules of the SEC, including the Compensation Discussion and Analysis, compensation tables and any related narrative discussion is hereby APPROVED.”

The Board of Directors Recommends a Vote FOR Approval of the Compensation Paid to Our Named Executive Officers.

 

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THE BOARD OF DIRECTORS AND CERTAIN GOVERNANCE MATTERS

Our Board of Directors directs the management of our business and affairs, as provided by Delaware law, and conducts its business through meetings of the Board of Directors and four standing committees: the Executive, Audit, Nominating/Corporate Governance and Compensation Committees. In addition, from time to time, special committees may be established under the direction of the Board of Directors when necessary to address specific issues.

Leadership Structure

The Board of Directors determined that combining the Chief Executive Officer and Chairman positions is the appropriate leadership structure for L-3 at this time. The Board of Directors believes that “one-size” does not fit all, and the decision of whether to combine or separate the positions of Chief Executive Officer and Chairman will vary company to company and depend upon a company’s particular circumstances at a given point in time. Accordingly, the Board of Directors carefully considers from time to time whether the Chief Executive Officer and Chairman positions should be combined based on what the Board of Directors believes is best for the Company and its shareholders.

Board structures vary greatly among U.S. public corporations, with 57% of S&P 500 companies combining the positions of Chief Executive Officer and Chairman and only 23% of the S&P 500 having an independent chairman, according to a recent survey. The Board of Directors does not believe that the evidence demonstrates that any one leadership structure is more effective at creating long-term shareholder value. The Board of Directors believes that an effective leadership structure could be achieved either by combining or separating the Chief Executive Officer and Chairman positions, if the structure encourages the free and open dialogue of competing views and provides for strong checks and balances. Specifically, an effective governance structure must balance the powers of the Chief Executive Officer and the independent directors and ensure that the independent directors are fully informed, able to discuss and debate the issues that they deem important, and able to provide effective oversight of management.

The Board of Directors believes that if the positions of Chief Executive Officer and Chairman are combined, then appointing a lead independent director is necessary for effective governance. Accordingly, the Company’s Corporate Governance Guidelines provide that, in the event the Chief Executive Officer and Chairman positions are combined, the independent members of the Board of Directors will elect a “Lead Independent Director.” In addition to presiding at executive sessions of the independent directors, the responsibilities of the Lead Independent Director, which are clearly set forth in the Company’s Corporate Governance Guidelines, also include:

 

   

approving schedules for Board of Directors meetings;

 

   

approving the agendas for meetings of the Board of Directors;

 

   

specifically requesting the inclusion of certain materials for Board of Directors meetings, when appropriate;

 

   

recommending, as appropriate, that the Board of Directors retain consultants who will report directly to the Board of Directors; and

 

   

acting as a liaison between the independent directors and the Chairman.

The Board of Directors believes that the responsibilities delegated to the Lead Independent Director are substantially similar to many of the functions typically fulfilled by a board chairman. The Board of Directors believes that its Lead Independent Director position balances the need for effective and independent oversight of management with the need for strong, unified leadership. The Board of Directors believes that one of the key elements of effective, independent oversight is that the independent directors meet in executive session on a regular basis without the presence of management. Accordingly, in 2012, the independent directors met in executive session four times with the Lead Independent Director presiding at such meetings.

 

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L-3’s approach regarding its leadership structure has varied depending on what was best for L-3 at a particular point in time. Frank C. Lanza, one of L-3’s founders, served as Chairman and CEO from the time of L-3’s formation in 1997 until his death in 2006. Following his death, the Board of Directors promoted Michael T. Strianese, then L-3’s Chief Financial Officer, to the CEO position but also chose to appoint Robert B. Millard, one of its independent directors, as Chairman. In 2008, the Board of Directors decided to again combine the Chairman and CEO positions, and the independent directors appointed Mr. Millard as the Lead Independent Director. The Board of Directors believes that its current structure is in the best interest of L-3 at this time as it allows for a balance of power between the CEO and the independent directors and provides an environment in which its independent directors are fully informed, have significant input into the content of Board meeting agendas and are able to provide objective and thoughtful oversight of management. The Board also believes that L-3’s current leadership structure does not affect the Board’s role in risk oversight of the Company. In addition, The Board of Directors also believes that combining the roles of Chairman and CEO gives L-3 the best chance to continue its strong performance over the long term. With the expected declines in the U.S. Department of Defense budget, it has become more important than ever for L-3 to seek out business opportunities in the international community. In L-3’s industry, the Board of Directors believes that access to decision-makers in foreign countries is made easier when the roles of Chairman and CEO are combined as their customs often dictate having comparable titles when conducting negotiations. Moreover, since most of L-3’s industry peers have combined the roles of chairman and CEO, L-3 believes that separating such roles would put us at a significant competitive disadvantage.

Independence

The Board of Directors has affirmatively determined that all of the directors, other than Mr. Strianese, including those who serve on the Audit, Nominating/Corporate Governance and Compensation Committees of the Board of Directors, have no material relationship with us, either directly or as a partner, shareholder or officer of an organization that has a relationship with us. Therefore, all of our directors, other than Mr. Strianese, are “independent” under all applicable standards. In connection with its determination that Mr. Millard and Professor Canizares are independent directors, the Board of Directors considered the fact that we conducted business with MIT where Mr. Millard is a trustee and Professor Canizares is employed as a full time professor. In addition, the Board of Directors considered the fact that we conducted business with NASA where Professor Canizares is a principal investigator of NASA’s Chandra X-ray observatory and is Associate Director of its science center. During 2012, we retained MIT to provide research and development on our behalf, and MIT and NASA purchased equipment and services from us. Payments made to, or received from, MIT or NASA were less than 1% of MIT’s, NASA’s or L-3’s annual consolidated gross revenues during each of their last completed fiscal years. Mr. Millard and Professor Canizares did not have any interest in these transactions and Professor Canizares recused himself from all decisions regarding L-3 with respect to these transactions. In connection with its determination that Mr. Pagano is an independent director nominee, the Board of Directors considered that he retired as a partner with Simpson Thacher & Bartlett LLP on December 31, 2012. Simpson Thacher & Bartlett LLP has provided, and continues to provide, legal services to the Company.

Messrs. Corcoran, Kramer and Shelton and Dr. White serve as directors, trustees or in similar capacities (but not as executive officers or employees) for one or more non-profit organizations to which we have made charitable contributions. Contributions to these organizations did not exceed either $120,000 or 1% of each of those organizations’ annual consolidated gross revenues during their last completed fiscal years and were below the thresholds set forth under our categorical standards of director independence.

In addition, the Board of Directors has determined that Professor Canizares and Messrs. Corcoran, Kramer and Simon, members of the Audit Committee, are “independent” for purposes of Rule 10A-3 under the Securities Exchange Act of 1934, as amended (“the Exchange Act”).

The Board of Directors has adopted Corporate Governance Guidelines that meet the independence standards of the NYSE. Also, as part of our Corporate Governance Guidelines, the Board of Directors

 

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has adopted categorical standards to assist it in evaluating the independence of each of its directors. The categorical standards are intended to assist the Board of Directors in determining whether or not certain relationships between our directors and us, either directly or as a partner, shareholder or officer of an organization that has a relationship with us, are “material relationships” for purposes of the NYSE independence standards. The categorical standards establish thresholds at which such relationships are deemed not to be material. Our Corporate Governance Guidelines, which include our categorical standards of independence, can be obtained through our website at http://www.L-3com.com.

Directors are expected to attend board meetings and meetings of the committees on which they serve, to spend the time needed, and to meet as frequently as necessary, in order to properly discharge their responsibilities. In addition, to the extent reasonably practicable, directors are expected to attend shareholder meetings. During the fiscal year ended December 31, 2012, the Board of Directors held nine meetings. Each director attended at least 75% of the combined number of meetings of the Board of Directors and meetings of committees on which he served during the period in 2012 in which he served as a director or member of such committee, as applicable. All of our current directors who were serving on the Board at the time of the annual shareholders meeting in April 2012 attended the meeting in person. In accordance with applicable NYSE listing requirements, our independent directors hold regular executive sessions at which management, including the Chairman, President and Chief Executive Officer, is not present. Mr. Millard, our Lead Independent Director of the Board of Directors, presides at the regularly held executive sessions of the independent directors.

Board of Directors Composition

The Board of Directors seeks to ensure that the Board is composed of members whose particular experience, qualifications, attributes and skills, when taken together, will allow the Board of Directors to satisfy its oversight responsibilities effectively. In that regard, the Nominating/Corporate Governance Committee is responsible for recommending candidates for all directorships to be filled by the Board of Directors or by the shareholders at an annual or special meeting. In identifying candidates for membership on the Board of Directors, the Nominating/Corporate Governance Committee takes into account (1) minimum individual qualifications, such as strength of character, mature judgment, industry knowledge or experience and an ability to work collegially with the other members of the Board of Directors and (2) all other factors it considers appropriate. In addition, although the Board of Directors does not have a policy with regard to the consideration of diversity in identifying director nominees, among the many factors that the Nominating/Corporate Governance Committee carefully considers, are the benefits to the Company of diversity, including gender and racial diversity, in board composition.

As part of its recurring activities, the Nominating/Corporate Governance Committee seeks to identify qualified candidates to sit on the Board of Directors. To identify and recruit qualified candidates for the Board, the Nominating/Corporate Governance Committee has previously utilized the services of professional search firms and has also sought referrals from other members of the Board, management, shareholders and other sources. After conducting an initial evaluation of a candidate, one or more members of the Nominating/Corporate Governance Committee will interview that candidate if the Nominating/Corporate Governance Committee believes the candidate might be suitable to be a director and may also ask the candidate to meet with other directors and management. If the Nominating/Corporate Governance Committee believes a candidate would be a valuable addition to the Board of Directors, it will recommend to the full Board of Directors that candidate’s election.

In the case of Lloyd W. Newton, a professional search firm identified him as a potential director nominee. Prior to his nomination, the Nominating/Corporate Governance Committee Chairman, as well as a number of other members of the Board of Directors, met with General (Ret.) Newton to consider whether he would be an appropriate candidate for L-3’s Board of Directors. On September 6, 2012, the Nominating/Corporate Governance Committee met to review General (Ret.) Newton’s qualifications and consider General (Ret.) Newton’s candidacy. At that meeting, they voted unanimously to recommend General (Ret.) Newton’s appointment as a director to the full Board for final consideration and approval. Also on September 6, 2012, the full Board of Directors appointed General (Ret.) Newton as a director effective immediately.

 

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In the case of Vincent Pagano, Jr., the Chief Executive Officer initially identified him as a potential director nominee. Prior to his nomination, the Nominating/Corporate Governance Committee Chairman, as well as a number of other members of the Board of Directors, met with Mr. Pagano to consider whether he would be an appropriate candidate for L-3’s Board of Directors. On February 5, 2013, the Nominating/Corporate Governance Committee met to review Mr. Pagano’s qualifications and consider his candidacy. At that meeting, they voted unanimously to recommend Mr. Pagano to the Board as a nominee for election by the shareholders at the 2013 Annual Meeting. Following such recommendation, the Board voted unanimously to nominate Mr. Pagano for election by shareholders as a Class I Director at the 2013 Annual Meeting.

When considering whether the Board’s directors and nominees have the experience, qualifications, attributes and skills, taken as a whole, to enable the Board of Directors to satisfy its oversight responsibilities effectively in light of L-3’s business and structure, the Board of Directors focused primarily on the information discussed in each of the Board members’ or nominees’ biographical information set forth on pages 6-9. In particular,

 

   

with regards to Professor Canizares, the Board of Directors considered his distinguished career as a tenured professor at MIT including his current responsibility for over 20 research laboratories with an aggregate annual research budget of $1.5 billion, as well as his extensive knowledge of the aerospace industry;

 

   

with regards to Mr. Corcoran, the Board of Directors considered his business operations background, including his service as the chief executive officer of a number of businesses, and his expertise in the aerospace and defense industries;

 

   

with regards to Mr. Kramer, the Board of Directors considered his significant experience, expertise and background with regard to accounting and internal control matters as well as the breadth of his business knowledge gained while serving as an independent auditor for numerous organizations across many industries;

 

   

with respect to Mr. Millard, the Board of Directors considered his extensive financial background;

 

   

with regards to General (Ret.) Newton, the Board of Directors considered his distinguished career in the Air Force, his experience as an Executive Vice President of Pratt & Whitney Military Engines and his knowledge as a director of public companies;

 

   

with regards to Mr. Pagano, the Board of Directors considered his significant experience, expertise and background with regard to legal, capital markets and corporate governance matters, including his broad perspective brought by his experience advising clients in many diverse industries;

 

   

with regards to General (Ret.) Shelton, the Board of Directors considered his distinguished career as the Chairman of the Joint Chiefs of Staff, Department of Defense and as the Commander in Chief of U.S. Special Operations Command (SOCOM) and his extensive knowledge of the defense industry;

 

   

with regards to Mr. Simon, the Board of Directors considered his significant experience, expertise and background with regard to accounting and internal control matters and the breadth of his business knowledge gained while serving as an independent auditor for numerous organizations across many industries and as the Chair of the Audit Committee of Loral Space & Communications Inc.;

 

   

with regards to Mr. Strianese, the Board of Directors considered his position as Chief Executive Officer and his expertise and experience in the aerospace and defense industries;

 

   

with regards to Mr. Washkowitz, the Board of Directors considered his extensive financial background; and

 

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with regards to Dr. White, the Board of Directors considered his distinguished career of government service, his distinguished career as a lecturer of government at Harvard and his extensive knowledge of the defense industry.

In addition, in connection with the nominations of Messrs. Canizares, Corcoran and Washkowitz for election as directors at the 2013 Annual Meeting, the Board of Directors considered their valuable contributions to L-3’s success during their years of Board service.

Audit Committee

The current members of the Audit Committee are: Claude R. Canizares, Thomas A. Corcoran (Chair), Lewis Kramer and Arthur L. Simon. The Audit Committee met 12 times in 2012. The Audit Committee is generally responsible for, among other things:

 

   

selecting, appointing, compensating, retaining and terminating our independent registered public accounting firm;

 

   

overseeing the auditing work of any independent registered public accounting firm employed by us, including the resolution of any disagreements, if any, between management and the independent registered public accounting firm regarding financial reporting, for the purpose of preparing or issuing an audit report or performing other audit, review or attest services;

 

   

pre-approving audit, other audit, audit-related and permitted non-audit services to be performed by the independent registered public accounting firm and related fees;

 

   

meeting with our independent registered public accounting firm to review the proposed scope of the annual audit of our financial statements and to discuss such other matters that it deems appropriate;

 

   

reviewing the findings of the independent registered public accounting firm with respect to the annual audit;

 

   

meeting to review and discuss with management and the independent registered public accounting firm our periodic financial reports prior to our filing them with the SEC and reporting annually to the Board of Directors with respect to such matters;

 

   

reviewing with our financial and accounting management, the independent registered public accounting firm and internal auditor the adequacy and effectiveness of our internal control over financial reporting, financial reporting procedures and disclosure controls and procedures; and

 

   

reviewing the internal audit function.

L-3’s Audit Committee Charter states that the Audit Committee shall consist of at least three members, all of whom are determined by the Board of Directors to meet the independence, financial literacy and expertise requirements of the SEC and NYSE. These requirements dictate that all Audit Committee members must be financially literate and at least one member of the Audit Committee shall be an “audit committee financial expert” in compliance with the criteria established by the SEC and NYSE. The Board of Directors has determined that all of the members of the Audit Committee are financially literate and meet the independence requirements mandated by the NYSE listing standards, Rule 10A-3 under the Exchange Act and our independence standards. In addition, the Board of Directors has determined that Mr. Simon and Mr. Kramer are both “audit committee financial experts,” as defined by Item 407(d)(5) of Regulation S-K.

 

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Compensation Committee

The current members of the Compensation Committee are: Robert B. Millard (Chair), Lewis Kramer, Alan H. Washkowitz and John P. White. The Compensation Committee, which had seven meetings in 2012, is responsible for, among other functions:

 

   

reviewing and approving corporate goals and objectives relevant to the Chief Executive Officer’s compensation;

 

   

evaluating the performance of the Chief Executive Officer in light of these corporate goals and objectives and, either as a committee or together with other independent directors (as directed by the Board of Directors), determining and approving the annual salary, bonus, equity and equity-based incentives and other benefits, direct and indirect, of the Chief Executive Officer based on such evaluation;

 

   

reviewing and approving the annual salary, bonus, equity and equity-based incentives and other benefits, direct and indirect, of the other executive officers;

 

   

discussing the results of the shareholder advisory vote on the compensation paid to our named executive officers;

 

   

reviewing and making recommendations to the Board of Directors with respect to director compensation;

 

   

reviewing and recommending to the Board of Directors, or approving, all equity-based awards, including pursuant to the Company’s equity-based plans;

 

   

reviewing and approving, or making recommendations to the Board of Directors with respect to, the Company’s equity-based plans and executive officer incentive-compensation plans, and overseeing the activities of the individuals responsible for administering those plans;

 

   

reviewing and discussing with management, on at least an annual basis, management’s assessment of whether risks arising from the Company’s compensation policies and practices for all employees, including non-executive officers, are reasonably likely to have a material adverse effect on the Company;

 

   

reviewing and discussing the “Compensation Discussion and Analysis” section contained in this proxy statement;

 

   

retaining or terminating, as needed, and approving the fees and any other retention terms for, compensation and benefits consultants and other outside consultants or advisors to provide independent advice to the Committee; and

 

   

evaluating on at least an annual basis whether any work provided by a consultant retained by the Committee raised any conflict of interest.

In fulfilling its responsibilities, the Compensation Committee can delegate any or all of its responsibilities to a subcommittee of the committee consisting of two or more members. For a discussion concerning the processes and procedures for considering and determining executive and director compensation and the role of executive officers and compensation consultants in determining or recommending the amount or form of executive and director compensation, see “Compensation Discussion and Analysis” beginning on page 45 and “2012 Director Compensation” beginning on page 93.

The Board of Directors has determined that all of the members of the Compensation Committee meet our standards for independence and the independence requirements mandated by the NYSE listing standards. In addition, all members of the Compensation Committee qualify as “non-employee directors” for purposes of Rule 16b-3 under the Exchange Act and “outside directors” for purposes of Section 162(m) of the Internal Revenue Code.

 

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Use of Consultants

As set forth in its charter, the Compensation Committee has the sole authority to retain or terminate, as needed, outside consultants to provide advice to the Compensation Committee in connection with its fulfillment of its responsibilities. The Compensation Committee engages Frederic W. Cook (“Cook & Co.”) to serve as the Compensation Committee’s independent consultant. Cook & Co. and its affiliates do not provide any services to the Company or any of the Company’s affiliates other than advising the Compensation Committee on director and executive officer compensation. In 2012, the Compensation Committee requested that Cook & Co. advise it directly on a variety of compensation-related matters, including:

 

   

validating the compensation peer group to be used for competitive benchmarking;

 

   

preparing analyses and recommendations of senior executive compensation levels as compared to the compensation peer group and published compensation surveys;

 

   

assessing the pay recommendations that the Chief Executive Officer developed for senior executives, including the named executive officers;

 

   

developing pay recommendations for the Chief Executive Officer;

 

   

assessing the alignment of senior executive pay and company performance;

 

   

preparing analyses and recommendations of non-employee director pay levels as compared to the peer group;

 

   

preparing annual analyses of annual equity plan share usage and share dilution as compared to the peer group;

 

   

assessing performance measures and targets for annual and long-term incentive awards;

 

   

updating the Compensation Committee on executive compensation trends; and

 

   

recommending executive compensation program changes in response to executive compensation trends and shareholder concerns identified through investor engagement efforts.

In the course of conducting its activities, Cook & Co. attended meetings of the Compensation Committee and presented its findings and recommendations to the Compensation Committee for discussion. During 2012, Cook & Co. also met with management to obtain and validate data, and review materials. Cook & Co. also attended one meeting of the Board of Directors in February of 2013 in connection with the assessment of the Chief Executive Officer’s 2012 performance under the Company’s annual incentive plan. In March of 2013, the Compensation Committee evaluated whether any work performed by Cook &Co. raised any conflict of interest and determined that it did not.

Nominating/Corporate Governance Committee

The Nominating/Corporate Governance Committee currently consists of Messrs. Alan H. Washkowitz (Chair), Arthur L. Simon, John P. White and General (Ret.) H. Hugh Shelton. This committee, which met five times during 2012, monitors corporate governance policies and procedures and serves as the nominating committee for the Board of Directors.

The primary functions performed by this committee include, among other responsibilities:

 

   

developing, recommending and monitoring corporate governance policies and procedures for L-3 and the Board of Directors;

 

   

recommending to the Board of Directors criteria for the selection of new directors;

 

   

identifying and recommending to the Board of Directors individuals to be nominated as directors;

 

   

evaluating candidates recommended by shareholders in a timely manner;

 

   

conducting all necessary and appropriate inquiries into the backgrounds and qualifications of possible candidates;

 

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overseeing the evaluation of the Board of Directors and management; and

 

   

overseeing and approving the management continuity planning process.

The Nominating/Corporate Governance Committee will consider candidates for nomination as a director recommended by shareholders, directors, officers, third party search firms and other sources. The Nominating/Corporate Governance Committee will review all candidates for director in the same manner, regardless of the source of the recommendation. Individuals recommended by shareholders for nomination as a director will be considered in accordance with the procedures described under “Shareholder Proposals and Nominations” on page 39 of this proxy statement.

The Board of Directors has determined that all of the members of the Nominating/Corporate Governance Committee meet the independence requirements mandated by the applicable NYSE listing standards applicable to serving on the Nominating/Corporate Governance Committee and our standards of independence.

Executive Committee

The Executive Committee currently consists of Messrs. Millard (Chair), Corcoran, and Strianese. The Executive Committee did not meet during 2012. The Executive Committee may exercise most board powers during periods between board meetings.

Oversight of Risk Management

L-3 is exposed to various risks including, but not limited to, strategic, operational, financial, liquidity, reputational, and also risks relating to reporting, pending and threatened litigation, regulatory and legal compliance. L-3’s enterprise risk profile is also affected by changes in the yearly budget and spending levels, priorities, procurement practices, and also the fiscal situations and general economic conditions affecting our major customers, especially the U.S. Department of Defense. L-3’s management designed the Company’s enterprise risk management process to identify, monitor and evaluate these risks, and develop an approach to address each identified risk. L-3’s enterprise risk management process is a company-wide initiative and involves each of our operating segments and business units. The Company takes a multi-disciplinary approach to risk.

L-3’s Chief Financial Officer, at the direction of the Chief Executive Officer, is responsible for overseeing the Company’s enterprise risk management process and periodically reports enterprise risk information to each of the Chief Executive Officer, the Audit Committee and the Board of Directors. In fulfilling his risk management responsibilities, the Chief Financial Officer works closely with members of the senior management team, including the Company’s General Counsel, the Executive Vice President of Corporate Strategy and Development, the Controller and Principal Accounting Officer, the Vice President — Planning, the Vice President of Internal Audit and Corporate Ethics Officer, and each of the business unit group presidents and group chief financial officers.

On behalf of the Board of Directors, the Audit Committee plays a key role in the oversight of the Company’s enterprise risk management function. In this regard, the Audit Committee discusses policies with respect to risk assessment and risk management, and the Company’s Chief Financial Officer meets with the Audit Committee at least five times per year to specifically discuss the enterprise risks facing the Company, highlighting any new risks that may have arisen since they last met. Additionally, at each Board of Directors meeting, the Chief Executive Officer and Chief Financial Officer report information about major risks facing the company. Finally, the Chief Financial Officer reports directly to the Board of Directors at least once per year to apprise it directly of the Company’s enterprise risk management process.

Committee Charters and Corporate Governance Guidelines

The Board of Directors has adopted a charter for each of the Audit, Nominating/Corporate Governance and Compensation Committees and corporate governance guidelines that address the make-up and functioning of the Board of Directors. You can find links to these materials on our website at http://www.L-3com.com under the “Investor Relations” tab by selecting “Corporate Governance.”

 

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Code of Ethics and Business Conduct

The Board of Directors has adopted a code of ethics and business conduct that applies to all of our directors, officers and employees. You can find a link to such code on our website at http://www.L-3com.com. In accordance with, and to the extent required by, the rules and regulations of the SEC, we intend to post on our Web site waivers or implicit waivers (as such terms are defined in Item 5.05 of Form 8-K of the Exchange Act) and amendments of the code of ethics and business conduct that apply to any of our directors and executive officers, including our Chairman, President and Chief Executive Officer, Senior Vice President and Chief Financial Officer, and Vice President, Controller and Principal Accounting Officer or other persons performing similar functions.

Communications with Directors

Anyone who would like to communicate with, or otherwise make his or her concerns known directly to, the full Board of Directors, the Chair of any of the Executive, Audit, Nominating/Corporate Governance and Compensation Committees, to the non-management directors as a group or to the Lead Independent Director of the Board of Directors, may do so either by email that can be accessed through our website at http://www.L-3com.com or by addressing such communications or concerns to the Corporate Secretary of L-3 Communications Holdings, Inc., 600 Third Avenue, New York, New York 10016, who will forward such communications to the appropriate party. The addressed communications may be done confidentially or anonymously. The Corporate Secretary or Assistant Secretary will forward all correspondence to the Board of Directors or the specifically designated party, except for spam, junk mail, mass mailings, product complaints or inquiries, job inquiries, surveys, business solicitations or advertisements or patently offensive or otherwise inappropriate material.

 

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SHAREHOLDER PROPOSALS AND NOMINATIONS

Under the SEC’s rules and regulations, any shareholder desiring to submit a proposal to be included in our 2014 proxy statement must submit such proposal to us at our principal executive offices located at 600 Third Avenue, New York, New York 10016, to the attention of the Corporate Secretary, no later than the close of business on November 18, 2013. Under Rule 14a-8 under the Exchange Act, a shareholder submitting a proposal to be included in the Company’s proxy statement is required to be a record or beneficial owner of at least 1% or $2,000 in market value of the Common Stock and to have held such Common Stock continuously for at least one year prior to the date of submission of the proposal, and he or she must continue to own such securities through the date on which the meeting is held.

The Bylaws provide for advance notice provisions. The Bylaws require the timely notice of certain information to be provided by any shareholder who proposes director nominations or any other business for consideration at a shareholders’ meeting. Failure to deliver a proposal in accordance with the procedures discussed below and in the Bylaws may result in the proposal not being deemed timely received. To be timely, notice of a director nomination or any other business for consideration at a shareholders’ meeting must be received by our Corporate Secretary at our principal executive offices no less than 90 days nor more than 120 days prior to the first anniversary of the preceding year’s annual meeting. Therefore, to be presented at the Company’s 2014 Annual Meeting, such a proposal must be received by the Corporate Secretary on or after December 31, 2013 but no later than January 30, 2014. In the event that the date of the 2014 Annual Meeting is advanced by more than 20 days, or delayed by more than 70 days, from the anniversary date of the 2013 Annual Meeting, notice must be received not earlier than 120 days prior to such Annual Meeting and not later than the close of business on the later of the 90th day prior to such Annual Meeting or the 10th day following the day on which public announcement of the date of the 2014 Annual Meeting is first made. All proposals must be sent to our principal executive offices by certified mail, return receipt requested, to the attention of the Corporate Secretary, L-3 Communications Holdings, Inc., 600 Third Avenue, New York, New York 10016.

Shareholders may, subject to and in accordance with the Bylaws, recommend director candidates for consideration by the Nominating/Corporate Governance Committee. The recommendation must be delivered to the Corporate Secretary, who will forward the recommendation to the Nominating/Corporate Governance Committee for consideration. The Bylaws contain certain informational and other requirements that must be followed in connection with submitting director nominations and any other business for consideration at a shareholders’ meeting. The Bylaws are posted on our website at http://www.L-3com.com.

 

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EXECUTIVES AND CERTAIN OTHER OFFICERS OF THE COMPANY

Set forth below is certain information regarding each of our current executives, other than Mr. Strianese who is presented under “Class I — Directors Whose Terms Expire in 2014”, and certain of our other officers.

 

Name

   Age     

Principal Occupation and Other Information

Curtis Brunson

     65       Executive Vice President of Corporate Strategy and Development. Mr. Brunson became an Executive Vice President in February 2009 and is responsible for leading the execution of L-3’s business strategy, including customer relationships, technical development and business development. Prior to that, he was a Senior Vice President. Mr. Brunson began his career in 1972 with Sperry Systems Management Division, prior to its merger into Unisys Government Services. At Unisys for over 20 years, he held several management positions of increasing responsibility. When Loral acquired Unisys Communication Systems in Salt Lake City, he was General Manager. That division became part of L-3 during L-3’s formation in 1997, with Mr. Brunson becoming President at that time. Mr. Brunson holds a Bachelor of Science degree in Computer Science from the New York Institute of Technology and a Master’s of Science degree in Computer Science from Polytechnic Institute of New York University.

Ralph G. D’Ambrosio

     45       Senior Vice President and Chief Financial Officer. Mr. D’Ambrosio became Chief Financial Officer in January 2007 and a Senior Vice President in April 2010. From March 2005 to January 2007, he was our Vice President — Finance and Principal Accounting Officer and he continued to be our Principal Accounting Officer until April 2008. He became our Controller in August 2000 and a Vice President in July 2001 and was our Vice President and Controller until March 2005. He joined us in August 1997 and was our Assistant Controller until July 2000. Prior to joining us, he was a senior manager at Coopers & Lybrand LLP, where he held a number of positions since 1989. Mr. D’Ambrosio holds a Bachelor’s degree, summa cum laude, in Business Administration from Iona College and a Master’s degree, with honors, in Business Administration from the Stern School of Business at New York University.

Steven M. Post

     60       Senior Vice President, General Counsel and Corporate Secretary. Mr. Post became Senior Vice President, General Counsel and Corporate Secretary on May 27, 2008. Prior to that, Mr. Post held several positions at L-3 and its predecessor companies, including, most recently, Senior Vice President and General Counsel of the Integrated Systems’ group and prior to that, group counsel and associate counsel positions. Prior to joining L-3, Mr. Post was an instructor in the Contract Law department at the Judge Advocate General’s School in Charlottesville, Va. He began his legal and military career at the Office of the Staff Judge Advocate in Ft. Dix, N.J., as the contract and fiscal law advisor and as senior trial counsel. Following that assignment, Mr. Post served as a trial attorney in the litigation division for the Judge Advocate General at the Pentagon. Mr. Post earned his law degree with honors from Indiana University, and his undergraduate degree from the University of Dayton.

 

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Name

   Age     

Principal Occupation and Other Information

Richard A. Cody

     62       Senior Vice President of Washington Operations. General Cody (U.S. Army — Ret.) joined L-3 in October 2008 and serves as a corporate Senior Vice President. Prior to joining L-3, General Cody served as the 31st Vice Chief of Staff, U.S. Army, a position he held from 2004 until his retirement from the U.S. Army in August 2008. With more than 36 years of service, General Cody has served in command and staff positions throughout the Army in the U.S. and overseas. He has also received major military awards and decorations, including the Defense Distinguished Service Medal. A graduate of the U.S. Military Academy, General Cody is also a Master Aviator with more than 5,000 hours of flight time and was inducted into the Army Aviation Hall of Fame in 2009.

Dan Azmon

     49       Vice President, Controller and Principal Accounting Officer. Mr. Azmon was elected as a Vice President in April 2010. He has been our Principal Accounting Officer since April 2008 and our Controller since January 2005. Mr. Azmon joined L-3 in October 2000 and was our Assistant Controller until December 2004. Prior to joining L-3, Mr. Azmon held a number of financial management and financial reporting positions at ASARCO Incorporated and Salomon Brothers, Inc., and was a manager in the audit practice at Coopers & Lybrand LLP. He holds a Master of Business Administration degree from St. John’s University in accounting and a Bachelor of Business Administration degree in finance from Hofstra University. Mr. Azmon is also a certified public accountant.

Steve Kantor

     68       Senior Vice President and President of L-3 Electronic Systems Group. Mr. Kantor was appointed to this position in August 2012. Prior to that, he was Senior Vice President and President of L-3 Services Group from June 2010 to August 2012 and, prior to that, Mr. Kantor was President of L-3’s Power & Controls Systems Group which was later renamed Marine & Power Systems Group from 2005 until 2010. Mr. Kantor joined L-3 in 2003 and has over 35 years of experience in the defense electronics industry, serving the U.S. Department of Defense, prime contractors and original equipment manufacturers, and foreign allies. Previously, Mr. Kantor served as president of BAE Systems’ Reconnaissance and Surveillance Systems, a position he held since 1998. Prior to that, Mr. Kantor held various executive positions at Lockheed Martin, Loral and United Technologies. Mr. Kantor holds a Bachelor of Science degree in electrical engineering from the New York Institute of Technology.

 

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Name

   Age     

Principal Occupation and Other Information

John C. McNellis

     60       Senior Vice President and President of Integrated Systems Group since November 2008. Prior to that he was President of our Link Simulation and Training Division since September 2003. He possesses over 30 years of executive and project management experience in a broad spectrum of domestic and international defense programs. Prior to
L-3, he served as President of Lockheed Martin’s Tactical Systems unit and held executive positions at Loral and IBM. Mr. McNellis has an extensive background in aircraft special mission systems, modification and maintenance; command, control, communications, intelligence, surveillance and reconnaissance systems; training systems; and satellite command and control. Mr. McNellis holds a Master of Science degree in physics from the University of California, Los Angeles as well as a Master of Business Administration degree from the University of Santa Clara.

Robert E. Leskow

     54       Vice President and President of Marine & Power Systems Group (“M&PS”) since June 2010. Mr. Leskow has extensive operational and financial management experience in the defense and commercial marine electronics industries. From 2002 to 2010, Mr. Leskow served as executive vice president and chief financial officer of M&PS. Prior to joining L-3, Mr. Leskow was the corporate controller for Signal Technology Corporation from 1999-2002 and held various management and financial leadership positions with Lockheed Martin and Loral. He holds a Bachelor of Science degree in Accounting from the University of Bridgeport, and a Master’s of Business Administration from Pace University.

John S. Mega

     60       Vice President and President of Microwave Group since August 1997. Mr. Mega has worked his entire career in the defense electronics industry, having started his career at Raytheon and held executive positions at Loral, Lockheed Martin and, since its inception, L-3 Communications. He received his Bachelor of Science degree, magna cum laude, from Boston College and is a member of American Mensa.

Susan D. Opp

     49       Senior Vice President and President of Communication Systems Group since February 2007. Ms. Opp formerly served as Vice President of Strategic Development and has extensive experience in engineering, product and business development and program management. She holds a Bachelor of Science degree in Electrical Engineering from South Dakota School of Mines & Technology, and a Master’s Degree in Business Administration from the University of Utah.

Les Rose

     65       Vice President and President of National Security Solutions Group since July 2012. Mr. Rose joined L-3 in 2005 as president of Enterprise IT Solutions and became president of
L-3 STRATIS in 2010. He has also held a variety of executive management positions for 20 years with other defense contractors in IT services. Mr. Rose holds a Bachelor of Science degree in mechanical engineering from the South Dakota School of Mines and Technology, and a Master’s of Science in civil engineering from the University of Michigan.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

Based on information available to us as of March 1, 2013, the Record Date, we know of no person who beneficially owned more than five percent of the Common Stock, except as set forth below.

 

Name and Address of Beneficial Owner

  

Amount and Nature of
Beneficial Ownership

 

Percent of Class

The Vanguard Group, Inc.
100 Vanguard Blvd.
Malvern, PA 19355
(1)

       5,829,829 (1)       6.19 %(1)

ClearBridge Investments, LLC
620 8th Avenue
New York, NY 10018
(2)

       5,150,437 (2)       5.48 %(2)

 

(1) Information shown is based on information reported by the filer on a Schedule 13G filed with the SEC on February 11, 2013, in which The Vanguard Group, Inc. reported that it has sole dispositive power over 5,672,032 shares of Common Stock, shared dispositive power over 157,797 shares of Common Stock and sole voting power over 167,336 shares of Common Stock. The Vanguard Group, Inc. reported that Vanguard Fiduciary Trust Company and Vanguard Investments Australia, Ltd., wholly-owned subsidiaries of The Vanguard Group, Inc., are the beneficial owners of 131,697 shares or 0.14% and 61,739 shares or 0.07%, respectively, of the Common Stock outstanding as a result of its serving as investment manager of collective trust accounts.

 

(2) Information shown is based on information reported by the filer on a Schedule 13G filed with the SEC on February 14, 2013 in which ClearBridge Advisors, LLC reported that it has sole dispositive power over 5,150,437 shares of Common Stock and sole voting power over 5,114,827 shares of Common Stock.

 

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SECURITY OWNERSHIP OF MANAGEMENT

As of March 1, 2013, the Record Date, there were 90,204,497 shares of our Common Stock outstanding. The following table shows the amount of Common Stock beneficially owned (unless otherwise indicated) by our named executive officers, our directors and our director nominee, and by all of our current executive officers and directors as a group.

Except as otherwise indicated, all information listed below is as of March 1, 2013.

 

Name of Beneficial Owner

   Common
Stock
Beneficially
Owned
Directly or
Indirectly(1)
   Common
Stock
Acquirable
Within
60 Days(2)
   Total
Common
Stock
Beneficially
Owned
   Percentage of
Shares of
Common Stock
Outstanding(3)

Directors, Director Nominee and Named Executive Officers:

                   

Michael T. Strianese

       83,590          1,216,396          1,299,986          1.4 %

Ralph G. D’Ambrosio

       9,425          178,837          188,262          *  

Curtis Brunson

       43,415          201,374          244,789          *  

Steve Kantor

       12,057          139,079          151,136          *  

John C. McNellis

       16,481          122,279          138,760          *  

Claude R. Canizares

       1,228          20,009          21,237          *  

Thomas A. Corcoran

       1,558          20,118          21,676          *  

Lewis Kramer

       1,300          5,523          6,823          *  

Robert B. Millard(4)

       329,978          22,618          352,596          *  

Lloyd W. Newton

                                  *  

Vincent Pagano, Jr.(5)

                                  *  

H. Hugh Shelton

                3,180          3,180          *  

Arthur L. Simon

       4,000          20,009          24,009          *  

Alan H. Washkowitz

       33,898          22,618          56,516          *  

John P. White

       1,356          17,400          18,756          *  

Directors and Executive Officers as a Group (21 persons)

       594,278          2,349,925          2,944,203          3.3 %

 

 

(1) The number of shares shown includes shares that are individually or jointly owned and over which the individual has either sole or shared investment or voting authority. The shares of our Common Stock directly owned include the number of shares allocated to the accounts of executive officers under our savings plan as follows: Mr. Strianese, 2,861 shares; Mr. D’Ambrosio, 2,127 shares; Mr. Brunson, 3,952 shares; Mr. Kantor, 701 shares; Mr. McNellis, 1,836 shares; and 20,317 shares held by the executive officers as a group.

 

(2) Shares that are deemed to be beneficially owned by the individual by virtue of the individual’s right to acquire the shares upon the exercise of outstanding stock options within 60 days from March 1, 2013.

 

(3) In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of the acquisition rights described above. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of shares of Common Stock actually outstanding at March 1, 2013.

 

(4) Includes 96,770 shares owned by a charitable foundation of which Mr. Millard and his wife are the sole trustees, and as to which Mr. Millard disclaims beneficial ownership.

 

(5) As of March 1, 2013, Vincent Pagano, Jr., a nominee for director, did not own any shares of our Common Stock.

 

 * Share ownership does not exceed one percent, including stock options exercisable within 60 days of March 1, 2013.

 

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COMPENSATION DISCUSSION AND ANALYSIS

The Compensation Discussion and Analysis describes L-3’s executive compensation program for the year ended December 31, 2012. This section details the compensation framework applied by the Compensation Committee of our Board of Directors (the “Committee”) in determining the pay levels and programs available to our named executive officers for whom compensation is disclosed in the compensation tables included in the Tabular Executive Compensation Disclosure section of this proxy statement beginning on page 71. In particular, this section reviews our compensation philosophy, elements of executive pay, compensation decisions, and the link between executive pay and performance. The named executive officers for the 2012 fiscal year are:

 

   

Michael T. Strianese, Chairman, President and Chief Executive Officer

 

   

Ralph G. D’Ambrosio, Senior Vice President and Chief Financial Officer

 

   

Curtis Brunson, Executive Vice President of Corporate Strategy and Development

 

   

Steve Kantor, Senior Vice President and President of Electronic Systems Group

 

   

John C. McNellis, Senior Vice President and President of Integrated Systems Group

 

   

James W. Dunn, Former Senior Vice President and President of Electronic Systems Group

At the beginning of 2012, Mr. Kantor served as Senior Vice President and President of L-3 Services Group. Mr. Kantor succeeded Mr. Dunn as Senior Vice President and President of Electronic Systems Group effective July 31, 2012. Mr. Dunn remained employed by the Company for a transition period until his retirement on December 31, 2012. Details of Mr. Dunn’s retirement agreement can be found in “James Dunn Retirement Agreement” beginning on page 65.

Company Background, 2012 Operating Environment and 2012 Performance Achievements

Company Background. L-3 is a prime contractor in Intelligence, Surveillance and Reconnaissance (ISR) systems, Command, Control, Communications (C3) systems, aircraft modernization and sustainment of aircraft, maritime vessels and ground vehicles, and national security solutions. L-3 is also a leading provider of a broad range of electronic systems used on military and commercial platforms. Approximately 71% of our consolidated net sales for 2012 were made to the U.S. Department of Defense (“DoD”). Accordingly, changes in DoD budget trends generally result in similar changes in our results of operations and cash flows. Additionally, most of our businesses are short-cycle in nature, and, as a result, changes in business trends immediately affect our sales volume.

2012 Operating Environment. The year ended December 31, 2012 was a challenging year characterized by the continuation of a cyclical downturn for DoD budgets. The Budget Control Act of 2011 imposed cuts of approximately $487 billion to DoD budgets over a 10-year period as compared to previously proposed budgets, beginning with the U.S. Government fiscal year ended September 30, 2012. The Act also triggered an automatic sequestration process that became effective on March 1, 2013, which imposes additional cuts to DoD budgets of approximately $490 billion over a nine-year period, beginning with the U.S. Government fiscal year ended September 30, 2013. Our business also continued to be affected by DoD efficiency and better buying power initiatives implemented to generate savings by reducing overhead, improving business practices and culling excess or troubled military programs, with the aim of preserving funding for the U.S. military force structure and equipment modernization, despite tightening DoD budgets. These DoD initiatives have generally resulted in more competition, lower profit margins and increased contract turnover, especially in our national security solutions businesses.

 

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2012 Performance Achievements. Despite the challenging U.S. defense sector environment, L-3 had a solid year underscored by diluted earnings per share (“EPS”) and free cash flow (“FCF”) achievements that exceeded corporate goals under our annual incentive plan. EPS from continuing operations was $8.01 for 2012 as compared to $8.08 for 2011. Excluding the Q4 2011 Items, which are defined in “Reconciliation of Non-GAAP Measures to GAAP Measures” on page 68, our EPS from continuing operations grew 2% for 2012 as compared to 2011. We also generated net cash from operating activities (from continuing operations) of $1,231 million and FCF of $1,050 million for 2012. In addition, we took significant actions to strengthen our business portfolio in 2012, led by our successful completion of the spin-off of Engility Holdings, Inc. (“Engility”). The Engility spin-off, completed in July 2012, enabled L-3 to strengthen its competitive positions and improve its financial performance, reduced L-3’s exposure to the U.S. military troop drawdowns in Iraq and Afghanistan, and eliminated significant organizational conflicts of interest issues under DoD procurement regulations. We also completed two acquisitions that increased our international and commercial businesses and mitigated our exposure to decreases in the DoD budget. Accordingly, while the DoD budget for the U.S. Government fiscal year ended September 30, 2012 fell by 6% from the prior year, our DoD sales only declined 3% for 2012 as compared to 2011, and our commercial and international sales increased 15% for 2012, which allowed us to maintain our 2012 net sales at prior year levels. We also remained focused on delivering shareholder value and deploying our capital using a disciplined and balanced approach that includes cash dividends, share repurchases, debt reduction, investment in research and development and acquisitions. For 2012, we repurchased a total of $872 million of our common stock and paid dividends of $195 million following our eighth consecutive annual dividend increase, resulting in approximately $1.1 billion in cash returned to our shareholders. We also repaid $500 million of our outstanding debt. Our 2012 total shareholder return (“TSR”) was approximately 23%, which approximated the 65th percentile of the peer group used to measure our TSR performance under the long-term incentives awarded to our named executive officers in 2012. Our results for EPS and FCF discussed in this paragraph are subject to the adjustments set forth in “Reconciliation of Non-GAAP Measures to GAAP Measures” beginning on page 68.

Compensation Philosophy, 2012 Target Pay and 2012 Incentive Plan Payouts

Compensation Philosophy. Our compensation philosophy supports a pay for performance culture. We target base salaries and annual and long-term incentive opportunities to approximate market median compensation levels, subject to adjustments based on experience, performance, and other individual factors as described in “Use of Market Data and Competitive Compensation Positioning” beginning on page 51. The majority of each executive’s target pay opportunity is in the form of incentive compensation, which is subject to future performance to have any realizable value. See the information in “Mix of Pay” on page 50.

2012 Target Pay. For 2012, our Chief Executive Officer’s base salary, target annual incentive opportunity (“target bonus”) and grant date target value of long-term incentive awards were held constant at 2011 levels, resulting in a total target pay opportunity aligned with market median compensation levels, consistent with our compensation philosophy. Total target pay opportunities for our other named executive officers (other than Mr. Dunn) were at or below median, and within a range of 85% to 100% of median on average. Mr. Dunn’s total target pay opportunity was above median, but within a range of 100% to 115% of median, reflecting adjustments made in 2012 based on his long-term performance achievements and experience.

 

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The table below illustrates each named executive officer’s 2012 total target pay and change in pay opportunity relative to 2011 levels.

 

     Salary   Target Bonus   Target Value of
Long-Term Incentives
  Total Target  Pay
Named Executive Officer   ($)   (% Change)   (% of Salary)   (Change)   ($)   (% Change)   ($)   (% Change)
                                   

Michael T. Strianese

      1,300,000         0.0 %       154 %       -         9,250,000         0 %   12,550,000   0%

Ralph G. D’Ambrosio

      607,000         2.5 %       90 %       +5 %       2,000,000         11 %   3,153,300   9%

Curtis Brunson

      607,000         2.5 %       90 %       +5 %       2,000,000         5 %   3,153,300   5%

Steve Kantor

      633,000         2.4 %       100 %       -         1,300,000         0 %   2,566,000   1%

John C. McNellis

      575,000         9.5 %       100 %       -         1,400,000         8 %   2,550,000   9%

James W. Dunn

      675,000         12.5 %       110 %       -         1,500,000         15 %   2,917,500   14%
                                                                         

2012 Incentive Plan Payouts. Our annual incentive plan and the performance units under our long-term incentive plan are subject to the achievement of pre-established targets.

We exceeded our 2012 annual plan targets for EPS and FCF, which resulted in annual incentive plan payouts above target. While our annual incentive payouts for 2012 generally exceeded those for 2011, the Committee, acting at the prior request of our Chief Executive Officer made in light of the continuing economic challenges facing L-3 and the U.S. defense industry generally, agreed to limit Mr. Strianese’s 2012 payout to his 2011 level. In addition to the payouts under our annual incentive plan, the Committee approved special one-time bonus awards for Messrs. D’Ambrosio and Kantor based on their outstanding performance in connection with the Engility spin-off, one of the most complex business restructuring transactions undertaken by L-3 since its formation. Mr. Dunn’s 2012 bonus was governed by the terms of his retirement agreement discussed on page 65.

Incentive payouts under our long-term performance units that vested on December 31, 2012 were based on our EPS performance and our relative TSR performance over the three-year period ending on the vesting date. We performed above target on EPS, resulting in a 147.92% payout for this measure, but below the minimum requirement for a payout based on TSR. As a result, our named executive officers received performance unit payouts that were 26% below their target number of shares.

2012 Shareholder Advisory Vote on Executive Compensation (“Say on Pay”)

At our 2012 annual shareholders meeting, shareholders exhibited strong support for our Say on Pay proposal, which sought advisory approval of the compensation paid to our named executive officers. Over 90% of the votes cast on the proposal were in favor, which demonstrates the effectiveness of the Company’s response to shareholder feedback that began in connection with our first Say on Pay vote in 2011. The Committee has adopted a broad range of program changes over the past two years, resulting in an executive pay program that strongly supports our pay for performance culture and features corporate governance measures considered by investors to reflect market “best practices.” Pay program highlights include:

 

   

Formulaic Annual Incentive Plan. L-3 adopted a transparent, formula-based approach for determining annual incentive awards that uses pre-established goals to assess the financial and individual performance achievements of our executives.

 

   

Performance Conditions on the Chief Executive Officer’s Stock Options. L-3 applied performance-based vesting conditions to the stock options granted to Mr. Strianese in 2011 (retroactively) and 2012, which are based on the achievement of 2012 financial goals.

 

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Emphasis on Performance Awards. Beginning with the long-term incentive awards granted in 2012, L-3 increased the percentage of long-term incentive grants made in the form of performance awards from 30% to 40%, and decreased the percentage of stock options from 40% to 30%.

 

   

Higher Stock Ownership Guidelines. L-3 increased the Chief Executive Officer’s stock ownership guideline from five to six times base salary. In addition, L-3 revised all executive guidelines to no longer provide credit for the value of unexercised stock options.

 

   

Enhanced Stock Retention Guidelines. All executives subject to stock ownership guidelines are also now required to retain 75% of net shares acquired upon the vesting of long-term equity incentives (increased from 50% of net shares under the previous guidelines) until their minimum stock ownership requirements are met.

 

   

Adoption of clawback, anti-hedging and anti-pledging policies. L-3 adopted clawback and anti-hedging policies in 2012, and an anti-pledging policy in 2013.

 

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Program Overview

The table below outlines the principal elements of our executive compensation and benefits program.

 

Element   Purpose/Objectives    Program Changes
              

Base Salary

 

•    

•    

•    

•    

  

Foundation of the compensation program

Attract and retain top executives

Steady income stream

Reflects each executive’s individual role and responsibilities

  

•    

   No changes in 2012

Annual Incentives

 

•    

•    

  

Link pay and short-term performance

Align with individual, group and company performance

  

•    

   Fully implemented the formulaic and transparent annual incentive plan originally adopted for fiscal 2011

Long-Term Incentives

 

•    

   Link pay and long-term performance   

•    

   Increased weighting for performance
   

•    

   Promote stock price appreciation       awards granted in 2012
   

•    

   Align executives with shareholder   

•    

   Performance vesting conditions
       interests       imposed on CEO stock options
   

•    

   Motivate achievement of long-term   

•    

   Changed TSR-based incentives from
       business objectives       equity-based to cash-based awards
   

•    

   Retention of key employees   

•    

   Updated comparator group that
   

•    

   Wealth creation vehicle         serves as the relative benchmark for measuring TSR performance

Health & Welfare and

Retirement Benefit Plans

 

•    

   Tax qualified retirement, vacation, medical, dental, and other insurance options provide a competitive level of benefits   

•    

   No changes in 2012
   

•    

   Nonqualified retirement plan (restoration SERP) provides a competitive level of replacement income upon retirement for executives who are subject to Internal Revenue Code limits under the tax qualified retirement plan        
   

•    

   Nonqualified deferred compensation plan serves as a voluntary tax deferred savings vehicle, with no employer contributions and no above-market interest        
   

•    

   Retention of key employees        

Perquisites

 

•    

   Personal benefits in limited circumstances consistent with competitive practices   

•    

   No changes in 2012

Change in Control Severance

Plan

 

•    

   Temporary income following involuntary termination   

•    

   No changes in 2012
 

•    

   Promotes management continuity in the event of change in control        

Sound Pay Practices

 

•    

   No additional age/service credits for years not worked with L-3 or its predecessor companies under pension plan/SERP   

•    

   Adopted stronger stock ownership guidelines, clawback and anti-hedging policies in 2012, and anti-pledging policy in 2013
   

•    

   No personal use of corporate aircraft at L-3’s expense      
   

•    

   No excessive severance or change in control provisions        
   

•    

   No payment of dividends on stock options or unvested performance awards        
   

•    

   No stock option repricing without shareholder approval        
   

•    

   No tax gross-ups on perquisites or severance/ change in control payments          
                    

 

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Determining Executive Compensation

Role of the Compensation Committee. L-3’s executive compensation program is administered by the Committee. The Committee is ultimately responsible for the review and approval of compensation for L-3’s Chief Executive Officer and all executives that directly report to him, including the other named executive officers. Key areas of responsibility for the Committee are described in “The Board of Directors and Certain Governance Matters — Compensation Committee” beginning on page 35.

Role of Management and the Chief Executive Officer. The Company’s human resources, finance and legal departments assist the Committee in the design and development of competitive compensation programs by providing data and analyses to the Committee and Cook & Co., the Committee’s independent compensation consultant, in order to ensure that L-3’s programs and incentives align with and support the Company’s business strategy. Management also recommends incentive plan metrics, performance targets and other plan objectives to be achieved, based on expected Company performance and subject to Committee approval.

On an annual basis, the Chief Executive Officer reviews the performance of those executives who report directly to him, including the other named executive officers, relative to their individual goals and Company performance and submits recommendations to the Committee for proposed base salary adjustments, target bonuses and personal ratings, and grant date target values for long-term incentive awards. The Chief Executive Officer also provides the Committee with an annual assessment of his own performance, but has no role in determining his own compensation other than his request in 2012 to limit his maximum payout under the annual incentive plan to the amount of his 2011 payout. See “Annual Incentives” beginning on page 53 for details. No other named executive officer participates in the setting of compensation for himself or any other named executive officer.

Role of the Compensation Consultant. The Committee has the sole authority to select, retain, terminate and approve the fees payable to outside consultants to provide it with advice on various aspects of executive compensation design and delivery. The Committee retains Cook & Co. to advise the Committee on executive and non-employee director compensation. For a description of Cook & Co.’s activities for the Committee, see “The Board of Directors and Certain Governance Matters — Compensation Committee — Use of Consultants” on page 36 for additional details.

Mix of Pay

The Committee believes that L-3’s 2012 pay mix strongly supports the Company’s pay for performance culture, as 68% of the Chief Executive Officer’s 2012 target total direct compensation (“TDC”) is contingent upon future performance to have any realizable value (“at risk” pay). Target TDC for 2012 is defined as the sum of (1) annualized base salary as of the end of fiscal year 2012, (2) the target bonus for fiscal year 2012 performance and (3) the grant date target value of long-term incentives awarded in 2012.

Base salary and restricted stock units (“RSUs”) are the only elements of 2012 target TDC that are not contingent on future performance to have value (“fixed” pay). However, they both serve to attract and retain top executive talent, and the use of these pay elements is consistent with competitive market practices. As illustrated below, the mix of incentive compensation for our named executive officers is balanced to avoid the risk of emphasizing short-term gains at the expense of long-term

 

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performance. The emphasis on long-term incentives demonstrates our strong commitment to the alignment of management and shareholder interests over time.

 

LOGO

Use of Market Data and Competitive Compensation Positioning

Use of Market Data. The Committee believes that the success of our Company is dependent upon its ability to continue to attract and retain high-performing executives. To ensure the comparability of our executive compensation practices and pay levels, the Committee has historically monitored executive pay at 14 leading defense, aerospace and other industrial companies (the “compensation peer group”) with whom L-3 competes for business, executive talent or investor capital. The table below shows the composition of our peer group used to benchmark target pay in 2012.

 

2012 Compensation Peer Group
       

Danaher Corporation

  ITT Corporation   Rockwell Collins, Inc.

Eaton Corporation

  Lockheed Martin Corporation   SAIC, Inc.

General Dynamics Corporation

  Northrop Grumman Corporation   Textron, Inc.

Goodrich Corporation

  Parker Hannifin Corporation   United Technologies Corporation

Honeywell International, Inc.

  Raytheon Company    
         

The Committee evaluates each peer company on an annual basis to determine its continued suitability from a pay benchmarking perspective. The selection criteria examined include:

 

   

Operational Fit: companies in the same or similar industries with a comparable business mix and client base, and diversified global operations. Due to the limited number of “pure defense” companies of comparable size, the Committee believes that it is appropriate to include other companies in L-3’s compensation peer group that are similar in size and compete with L-3 for executive talent or investor capital.

 

   

Financial Scope: companies of similar size as measured by annual corporate revenues. Most of the peers fall within a range of one-third to three times the size of L-3, and L-3’s revenues are at or near the median of the compensation peer group. In limited circumstances, we have found it appropriate to include companies with revenues that fall both above and below this range if they are proven competitors for business, executive talent or investor capital.

In June of 2012, the Committee conducted its annual review of the suitability of the peer group companies, taking into account L-3’s projected revenues from continuing operations following the Engility spin-off. As part of its annual review, the Committee also considered a number of business transactions that occurred during the past year with respect to the peer group companies. Among other

 

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things, ITT separated into three new companies by completing two spin-offs in 2012, which reduced ITT’s revenue size by more than 50%. In addition, two peer companies, Goodrich and United Technologies, merged with one another, materially increasing the size of the resulting entity. In consideration of these changes, the Committee determined to remove ITT, Goodrich and United Technologies from the peer group, and to add Harris Corporation to the peer group. Harris is a communications and information technology company with business operations that are similar in nature to those of L-3, and with revenues that are smaller than L-3, but within the range of at least one-third of L-3’s projected revenues from continuing operations. The table below shows the revised peer group that the Committee has determined to use to benchmark named executive officer target pay levels for fiscal 2013.

 

2013 Compensation Peer Group
 

Danaher Corporation

 

Honeywell International, Inc.

  Raytheon Company

Eaton Corporation

 

Lockheed Martin Corporation

 

Rockwell Collins, Inc.

General Dynamics Corporation

 

Northrop Grumman Corporation

 

SAIC, Inc.

Harris Corporation (added)

 

Parker Hannifin Corporation

 

Textron, Inc.

         

In reviewing competitive compensation levels, the Committee considers compensation peer group data for all named executive officers and, for those named executive officers who are group presidents (Messrs. Kantor and McNellis, and prior to his retirement, Mr. Dunn), also considers general industry compensation data included in third-party surveys because it believes that including a broader industry group more accurately reflects the labor market for these positions and ensures a meaningful sample size given the revenues of the groups they lead. With respect to compensation decisions made by the Committee for group presidents in 2012, the Committee considered compensation survey data from the Towers Watson Executive Compensation Database General Industry survey. The survey data is size-adjusted by Cook & Co. to reflect each group’s annual revenues, and is used to provide a supplemental market reference.

Competitive Market Positioning. The Committee’s practice is to make pay decisions regarding the elements of compensation that compose each named executive officer’s target TDC (base salary, target bonus and grant date target value of long-term incentives) in February of each fiscal year. As part of its decision-making process, the Committee compares each named executive officer’s target TDC for the fiscal year against the market median; however, the Committee does not use market data in isolation in determining pay. Instead, competitive market data serves as one of many considerations used by the Committee in determining base salary adjustments and target pay opportunities for both annual and long-term incentives. The complete list of factors considered by the Committee in making pay determinations is shown below.

 

Target Pay Determinants
 

•   Positioning to competitive market median

  

•   Long-term financial and individual performance

  

•   Role and responsibilities relative to benchmark

•   Competitive mix of fixed and at-risk pay

  

•   Tenure and experience in role

  

•   Internal pay equity

•   Competitive mix of cash and equity

  

•   Expected future contributions and market conditions

    
           

For 2012, our Chief Executive Officer’s target TDC was aligned with market median compensation levels. Total target pay opportunities for our other named executive officers (other than Mr. Dunn) were at or below median, but within a range of 85% to 100% of median on average. Mr. Dunn’s total target pay opportunity was above median, but within a range of 100% to 115% of median, reflecting adjustments made in 2012 based on his long-term performance achievements and experience.

 

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Elements of 2012 Total Direct Compensation

Base Salary

Base salary serves as the foundation of an executive’s compensation and is an important component in L-3’s ability to attract and retain executive talent. On an individual basis, the Committee considers each executive’s role and responsibilities, experience, tenure, business results and individual performance, competitive market pay levels, and internal pay equity considerations in making base salary adjustments. In 2012, the Committee did not increase the Chief Executive Officer’s base salary. The Committee approved base salary adjustments of 2.5% on average for Messrs. D’Ambrosio, Brunson and Kantor to maintain competitive positioning as compared to market levels. Mr. McNellis received an adjustment intended to increase his base salary to approach market median levels. Mr. Dunn’s base salary increase reflected a one-time adjustment made to his target TDC as an overall package, which was intended to recognize his long-term performance achievements and experience, which resulted in his base salary being above market median. All base salary increases for 2012 were made effective on April 1.

 

Named Executive Officer   

2011 Salary

(in $000)

    

2012 Salary

(in $000)

     Percent  Change
 

Michael T. Strianese

     $1,300         $1,300       0.0%

Ralph G. D’Ambrosio

     $   592         $   607       2.5%

Curtis Brunson

     $   592         $   607       2.5%

Steve Kantor

     $   618         $   633       2.4%

John C. McNellis

     $   525         $   575       9.5%

James W. Dunn

     $   600         $   675       12.5%
                        

Note: Amounts reflect annualized base salary rates in effect at the end of the fiscal years indicated.

Annual Incentives

The annual incentive plan provides senior executives with the opportunity to earn annual cash incentive awards based on corporate, group and individual performance relative to pre-established internal targets. The Committee adopted a formulaic plan design following extensive and ongoing engagement efforts with investors to enhance the transparency of the relationship between short-term performance achievements and incentive awards earned. The plan design, originally adopted for fiscal 2011, was fully implemented for fiscal 2012.

 

Award Determination under Annual Incentive Plan

     

•   

  Performance criteria defined at the beginning of the performance period

•   

  Performance compared to pre-established goals

•   

 

•   

 

For corporate named executive officers, financial performance is based on EPS and FCF results

 

For group presidents, financial performance is primarily based on the operating income (“OI”) and FCF results for their respective groups, with additional consideration given to Company-wide EPS and FCF

•   

  Individual performance measured based on pre-established goals and assigned specific weighting

•   

 

Payouts can range from 0% to 225% of target bonus based on performance

¡     0% to 200% of target bonus can be earned by the CEO, and the other named executive officers who are not group presidents

 

¡     For group presidents, up to an additional 25% of the target bonus can be earned based on achievement of organic OI growth

     

The Committee established the 2012 corporate and group financial targets under the annual incentive plan, as well as individual performance goals and weightings, in February 2012. The corporate

 

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financial targets were based on management’s most recent consolidated internal financial plan presented to L-3’s Board of Directors (the “Original 2012 Plan”), which formed the basis for L-3’s financial guidance for 2012 EPS and FCF disclosed to investors in January 2012. The individual group financial targets were based on internal group financial plans that were consistent with the Original 2012 Plan. Following the completion of the Engility spin-off in July 2012, the Committee revised the corporate financial targets for 2012 EPS and FCF based on management’s restatement of the Original 2012 Plan that excluded the expected performance contained within the original plan for the Engility business units (the “Spin-off Adjusted Plan”), and determined to measure actual 2012 performance achievements based on continuing operations (that is, on a basis that excludes the actual 2012 performance of the Engility business units). At the same time, the Committee also established 2012 financial targets for National Security Solutions group (composed of business units that, prior to the spin-off, were managed together with the Engility business units as the L-3 Services Group).

Based on L-3’s actual 2012 financial performance relative to plan, and on the Committee’s assessment of the named executive officers’ individual performance for 2012, the Committee approved 2012 annual incentive payouts for the named executive officers (other than Mr. Dunn) that were above target based on performance as detailed in the steps below. Mr. Dunn entered into a retirement agreement with the Company in June 2012 that separately provided for a bonus in lieu of his participation in the annual incentive plan for 2012. See “James Dunn Retirement Agreement” beginning on page 65 for further information.

STEP 1. Determine target bonus at beginning of fiscal year

Annual incentive plan (“AIP”) target bonuses are set as a percent of base salary in connection with the determination of target TDC for each named executive officer. The 2012 target bonus of $2 million for the Chief Executive Officer has been unchanged since 2007, his first full year in this role. The 2012 target bonus for Messrs. D’Ambrosio and Brunson was adjusted from 85% to 90% of base salary, which was intended to increase their target TDC toward market median levels, while the target bonus for Messrs. Kantor and McNellis was held constant at 100% of base salary.

 

Named Executive Officer   

2012 Salary

(in $000)

  

2012 AIP

Target Bonus (%)

 

2012 AIP

Target Bonus (in $000)

   

Michael T. Strianese

     $ 1,300          154 %     $ 2,000  

Ralph G. D’Ambrosio

     $ 607          90 %     $ 546  

Curtis Brunson

     $ 607          90 %     $ 546  

Steve Kantor

     $ 633          100 %     $ 633  

John C. McNellis

     $ 575          100 %     $ 575  

STEP 2. Determine the financial rating based on performance for the fiscal year

Financial ratings are based on a weighted-average assessment of L-3’s consolidated performance (or for group presidents, both L-3’s and their respective group’s performance) relative to pre-established targets for key financial measures. For corporate named executive officers, our annual incentive plan is focused on L-3’s consolidated EPS and FCF performance because we believe that they constitute two of the most important financial measures that create shareholder value. For group presidents, our plan emphasizes the respective group’s OI and FCF performance because we consider them to be important measures that group presidents can directly influence in order to increase L-3’s consolidated EPS and FCF. Our plan also takes into account L-3’s consolidated EPS and FCF results in evaluating group presidents’ financial ratings in order to provide a degree of alignment for group presidents with L-3’s

 

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overall performance. The table below provides the relative weightings of these performance measures that are utilized in evaluating each named executive officer’s financial rating. We believe that these weightings appropriately reflect the importance of these measures to our overall financial success.

 

Corporate Executives

        

Group Presidents

    Financial
Measure    

   Weight        

Financial Measure

   Weight
(by measure)
   Weight
(corporate/group)
   Final Effective
Weighting
                        

Consolidated EPS

   80%         Consolidated EPS    80%   

 

}

 

 

 

  

   25%    20%

Consolidated FCF

   20%         Consolidated FCF    20%          5%
           Group OI    80%   

 

}

 

 

 

  

   75%    60%
           Group FCF    20%          15%

Total

   100%         Total                       100%
                                        

Pay for Performance: A financial rating of 100% indicates weighted-average performance at target levels (that is, at plan). Performance that exceeds plan by 15% (or by 25% for group presidents) results in a maximum financial rating of 200%. If performance is below plan by 15% (or by 25% for group presidents), this results in a threshold financial rating of 50%. If performance is below threshold, this results in a zero financial rating. Performance is interpolated between these points. We believe it is appropriate to consider a wider range of performance at the group level, consistent with the increased range of volatility for group-level financial results as compared to L-3’s consolidated financial results.

 

Performance Level    Corporate
(% of Plan Performance)
  

Group

(% of Plan Performance)

   Financial
Rating
            

Maximum

   ³115%    ³125%    200%

Target

     100%      100%    100%

Threshold

       85%        75%         50%

Below Threshold

     <85%      <75%        0%
                

FCF under the annual incentive plan is calculated as net cash from operating activities, less capital expenditures, net of dispositions. As described above, FCF for 2012 was calculated based on continuing operations (that is, on a basis that excludes the actual 2012 performance of the Engility business units), and excludes tax payments attributable to discontinued operations.

For purposes of calculating actual financial results under the annual financial plan, the Committee has determined to exclude the effects of pre-established categories of items that it believes

 

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are not reflective of operating performance. In February 2012, the Committee determined to exclude the following categories of adjustments in calculating L-3’s consolidated EPS and FCF for 2012:

 

L-3 Consolidated EPS Adjustments   L-3 Consolidated FCF Adjustments
         

•   

 

Impairment losses on goodwill and other intangible assets, or on debt or equity investments

 

•   

 

Discretionary contributions to pension plans that exceed the amount forecasted in L-3’s consolidated internal financial plan established at the beginning of the fiscal year

       

•   

  Gains or losses on retirement of debt, or on asset dispositions    
     

•   

  Premiums and other payments in excess of principal and interest associated with the retirement of debt, including income taxes incurred in connection with the debt retirement

•   

  Extraordinary gains and losses under U.S. generally accepted accounting principles (“GAAP”)    
       

•   

  Non-cash gains or losses on discontinued operations    

•   

  New accounting standards required to be adopted under GAAP or SEC rules  

•   

 

Tax payments or benefits associated with gains or losses on business divestitures in determining net cash from operating

activities

     

•   

  Gains or losses on litigation matters at or exceeding $5 million individually or $25 million in the aggregate    
       

•   

  Gains or losses related to the resolution of income tax contingencies for business acquisitions which existed at the date of acquisition        
             

The group OI and FCF performance targets are subject to adjustment based on acquisitions or dispositions that occur during the fiscal year, or to account for internal realignments that result in business units being transferred from one group to another group during the fiscal year. In 2012, these targets were also adjusted to reflect changes in corporate allocations resulting from the Engility spin-off. In addition, the group OI and FCF results reflect adjustments to account for the impact of non-operational items that were not anticipated at the time the group performance targets were established.

Mr. Kantor’s financial rating for 2012 reflects the changes in his group responsibilities that occurred during the fiscal year. At the beginning of 2012, Mr. Kantor served as President of L-3 Services Group, the continuing operations of which were renamed as the National Security Solutions group following the Engility spin-off. Effective July 31, 2012, Mr. Kantor succeeded Mr. Dunn as President of Electronic Systems Group. Accordingly, in assessing Mr. Kantor’s group financial performance, the Committee considered the full-year performance of the two groups (excluding the results of the Engility business units), and weighted the performance of each group in proportion to the number of months out of the year for which Mr. Kantor served as its president.

Each named executive officer’s 2012 financial rating, based on actual performance relative to their performance targets (as revised to reflect to the Spin-off Adjusted Plan), is set forth in the following table.

 

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2012 Financial Performance Achieved Relative to Plan

 

Named

Executive

Officer

               Corporate Level Financial Performance                            Group Level Financial Performance              

Financial

Rating

  Earnings Per Share  

Free Cash Flow

(in millions)

 

Operating Income

(in millions)

 

Free Cash Flow

(in millions)

 
         Plan       Actual   Weight     Plan     Actual   Weight     Plan     Actual   Weight     Plan     Actual   Weight     
                                                     

Strianese

  $7.73   $8.11   80%   $1,031   $1,055   20%               129%

D’Ambrosio

  $7.73   $8.11   80%   $1,031   $1,055   20%               129%

Brunson

  $7.73   $8.11   80%   $1,031   $1,055   20%               129%

Kantor

                                                   

ES*

  $7.73   $8.11   20%   $1,031
  $1,055   5%   $534   $508   25%   $523   $510   6%   108%

NSS**

              $94   $87   35%   $110   $163   9%  

McNellis

  $7.73   $8.11   20%   $1,031   $1,055   5%   $441   $491   60%   $368   $461   15%   149%
* 

Electronic Systems Group

** 

National Security Solutions Group

STEP 3. Determine personal rating based on individual performance

Personal ratings are based on the assessment of an executive’s performance relative to pre-determined individual goals. The personal rating can range from 0% to 200% of target. The Chief Executive Officer provides individual performance assessments and recommends personal ratings for the Committee’s consideration for all executives who report directly to him, including the other named executive officers, based on the factors in the table below. The Chief Executive Officer also submits a self-assessment addressing factors listed for him, but makes no recommendation as to his own personal rating. The Committee determines the Chief Executive Officer’s performance rating based on the factors indicated below and following input from the other independent members of the Board of Directors.

 

                                 

Michael T. Strianese

 

Ralph G. D’Ambrosio

  Curtis Brunson   Steve Kantor  

John C. McNellis

  Market positioning    

Timely and

accurate financial

forecasting

    Business
development
   

Group financial

performance

   

Group financial

performance



 


 

Optimizing

operations

 


Internal

collaboration

   

Management of

capital structure,

liquidity and

capital allocation

    Strategic customer

relationships

   

Winning

important re-

competitions and

new business

contracts

   

Winning

important re-

competitions and

new business

contracts

 

 

Leadership

 

Enterprise risk

management

   

Internal

management

reporting and

external financial

reporting

    Guidance of
strategic growth
pursuits
 

 


 

Market share

gains

 

Program

performance

 

 


 

Market share

gains

 

Program

performance



 

 

Corporate

governance

 

Strategic planning

 


  
  

 

 

Internal controls

over financial

reporting

 

Investor relations

    Development of

products and

services in

international

markets

 

 


 

Cost savings

initiatives

 

International

expansion

 

 


 

Cost savings

initiatives

 

International

expansion

  Succession planning    

Enterprise risk

management

    Research and
development
    Internal collaboration    

Internal

collaboration

 

Internal/external

communications

   

Mergers, acquisitions

and divestitures

    Customer service    

Developing

adjacent markets

   

Developing

adjacent markets

  Board relations    

Tax planning and

strategies

    Leadership in
engineering and
technology initiatives
   

Research and

development

   

Research and

development

 

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STEP 4. Determine total rating

Each executive’s total rating determines the potential payout under the annual incentive plan and is equal to the weight-adjusted sum of the financial and individual ratings.

 

   
      Corporate Executives
(weight)
 

Group Presidents

(weight)

  Financial Rating

       80 %       67 %

  Personal Rating

         20 %         33 %

Total Rating

       100 %       100 %

 

        
   

Annual Incentive Plan

Payout Formula

    

Total Rating = [Financial Rating x Weight] + [Personal Rating x Weight]

Potential Annual Incentive Plan Payout ($) = Target Bonus ($) x Total Rating

        

STEP 5. For Group Presidents, determine organic growth adjustment

 

For Group Presidents, the final annual incentive payout may be adjusted upwards by up to an additional 25% of their target bonus under the formulaic plan design. This performance modifier is intended to incentivize Group Presidents to drive organic growth in their respective groups as measured by OI. For 2012, organic OI growth of 5.0% or above triggers the maximum adjustment of 25% of target bonus. Payouts for organic growth between zero and the maximum level are adjusted based on the graduated scale in the table to the right, with performance interpolated between these points.

 

Organic Operating  Income
Growth
 

Growth Adjustment

(% of Target Bonus)

0.0%   0.0%
0.6%   1.5%
1.3%   3.0%
1.9%   6.0%
2.5%   9.0%
3.1%   13.0%
3.8%   17.0%
4.4%   21.0%
5.0%   25.0%
     

 

 

 

For 2012, Mr. McNellis’ group, Integrated Systems Group, achieved organic OI growth that exceeded the maximum growth target of 5.0%. Accordingly, Mr. McNellis’ was awarded an additional 25% of his 2012 target bonus as part of his annual incentive award payout. Mr. Kantor’s groups did not achieve organic OI growth for 2012, and, accordingly, he did not receive an OI growth-based adjustment to his annual incentive award payout.

STEP 6. Negative Discretion

Notwithstanding the achievement of any of the aforementioned performance criteria, the Committee retains the ability to apply negative discretion to reduce awards that would otherwise be considered “earned” based on the formulaic plan design. For 2012, prior to the Committee’s review of the Chief Executive Officer’s performance under the annual incentive plan, Mr. Strianese requested that the Committee use its negative discretion to limit his maximum 2012 payout to the amount of his 2011 payout, or $2.5 million, in light of the continuing economic challenges facing L-3 and the U.S. defense industry generally. As detailed below, the Committee ultimately determined that Mr. Strianese would have earned a 2012 payout under the annual incentive plan of $2.7 million, but exercised its negative discretion to limit his actual payout to $2.5 million as requested.

CEO ANNUAL INCENTIVE AWARD CALCULATION: Detailed below are the calculation steps used to determine the Chief Executive Officer’s 2012 AIP payout.

 

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LOGO

2012 Annual Incentive Plan Payouts. The table below lists the final 2012 annual incentive payments to the named executive officers that were approved by the Committee.

 

2012 Formulaic Annual Incentive Plan Payout  

Named Executive Officer

   2012 Target
AIP
[Step 1]
     Total
Rating

[Steps 2-4]
     Organic Growth
Adjustment
[Step 5]
   Negative
Discretion
[Step 6]*
     2012 AIP
Payout

[Final]
 
                  

Michael T. Strianese

   $       2,000,000         135    N/A    $       (200,000)       $       2,500,000   

Ralph G. D’Ambrosio

   $ 546,300         138    N/A    $ -         $ 750,000   

Curtis Brunson

   $ 546,300         133    N/A    $ -         $ 725,000   

Steve Kantor

   $ 633,000         110    0%    $ -         $ 700,000   

John C. McNellis

   $ 575,000         144    25%    $ -         $ 975,000   
                                          
* Reflects the Committee’s exercise of its negative discretion in accord with Mr. Strianese’s prior request as described above.

 

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Special Discretionary Cash Awards. The Committee retains the authority to make special cash bonus awards outside of the annual incentive plan in the event of exceptional achievements. The Committee exercised that authority in recognition of Messrs. D’Ambrosio and Kantor’s superior performance in 2012 for successfully executing the spin-off of the Engility business, which was one of the most complex business restructuring transactions undertaken since the formation of L-3. The Committee elected to pay Messrs. D’Ambrosio and Kantor a discretionary cash bonus in the amount of $250,000 each to recognize their outstanding performance in connection with the spin-off, which is expected to improve the Company’s competitive position and financial performance by refocusing L-3 on structurally stronger areas of the DoD market, with more sustainable competitive advantages and discriminators that enhance the durability of L-3’s sales, operating income and cash flow.

Long-Term Incentives

Long-term incentives are intended to align the interests of the named executive officers and shareholders by linking a meaningful portion of executive pay to long-term shareholder value creation over a multi-year period. Long-term incentives are also provided to drive the performance of our long-term business strategy, engage and retain our key executives, and facilitate ownership of our Common Stock. The table below details the long-term incentive vehicles granted in 2012, and their respective weights as a percentage of the total grant date target value of the long-term incentives awarded. Beginning with the long-term incentive awards granted in 2012, L-3 increased the weight of awards granted in the form of performance units and performance cash, collectively referred to as “performance awards,” from 30% to 40%, and decreased the weight of stock options from 40% to 30%.

 

Long-term Incentive    Weight    Rationale    Performance Criteria & Other Features
                  

Stock Options

   30%   

  

Stock price appreciation

Stock ownership and capital accumulation

  


 

  

Ultimate value dependent on stock price appreciation

Vests ratably over three years and has a 10-year term

                 Exercise price equal to the closing price of our Common Stock on the date of grant
                       Grants to the Chief Executive Officer include additional performance vesting conditions as described below under “Stock Options”

RSUs

   30%   

  

Retention

Stock ownership and capital accumulation

  


  

Ultimate value dependent upon stock price

Vest at the end of three years

Performance Awards

   40%   

 

  

Stock price appreciation

Stock ownership and capital accumulation for performance units

Motivates achievement of long-term business strategy

  

 

 


 

 

  

50% Performance Cash: vests at the end of a three-year period based on TSR relative to performance peer group and is paid in cash

50% Performance Units: vest at the end of a three-year period based on EPS performance and are paid in shares of stock

The actual percentage of the awards that vest ranges from 0 to 200% of target, based on performance

                          

For purposes of allocating the total grant date target value of long-term incentives approved by the Committee in accordance with the weightings listed above, stock options are valued based on their grant date fair value for financial reporting purposes, RSUs are valued based on the total number of units awarded multiplied by the closing price of our Common Stock on the grant date, performance cash is valued based on the target dollar value at the time the award is made, and performance units are valued based on the target number of units awarded multiplied by the closing price of our Common Stock on the grant date.

 

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2012 Grant Date Target Values for Long-Term Incentive Awards. In connection with determining the total grant date target value of the long-term incentives awarded to each named executive officer, the Committee considered the following factors:

 

   

Competitive market median pay levels in the context of target TDC as described in the section “Use of Market Data and Competitive Compensation Positioning” beginning on page 51;

 

   

The grant date target value of the prior year’s long-term incentive awards;

 

   

The long-term performance of the named executive officer;

 

   

The scope of responsibility of the executive relative to the other participants in the long-term incentive program; and

 

   

In the case of the named executive officers other than Mr. Strianese, the long-term incentive award recommendation of Mr. Strianese.

As set forth in the table below, the Committee made no change to the target value of Mr. Strianese’s long-term incentive awards from that in fiscal 2011. Messrs. D’Ambrosio, Brunson, Kantor and McNellis received adjustments intended to increase their target TDC toward market median levels. Mr. Dunn received a one-time adjustment to his target award value as part of the change to his overall compensation package intended to recognize his long-term performance achievements and experience.

 

Named Executive Officer    2011 Grant Date Target Value 
(in $000)
   2012 Grant Date Target Value 
(in $000)
  

    Percent        

    Change        

            

Michael T. Strianese

   $    9,250    $    9,250      0%        

Ralph G. D’Ambrosio

   $    1,800    $    2,000    11%        

Curtis Brunson

   $    1,900    $    2,000      5%        

Steve Kantor

   $    1,300    $    1,300      0%        

John C. McNellis

   $    1,300    $    1,400      8%        

James W. Dunn

   $    1,300    $    1,500    15%        
                

Stock Options. Stock options are a regular component of our long-term incentive program. Stock options directly align the long-term interests of L-3’s executives with those of L-3’s shareholders because they provide value to executives only if the price of our Common Stock increases after the options are granted. Stock options are granted with an exercise price equal to the closing price of our Common Stock on the date of grant, vest in equal annual increments over a three-year period and expire ten years from the grant date.

As part of the efforts undertaken by the Committee to strengthen the performance-based orientation of our executive compensation programs, the Committee determined to add performance-based vesting conditions to stock options that are granted to our Chief Executive Officer, beginning with his 2012 stock option grants. In addition, in February 2012, the Committee and Mr. Strianese also mutually agreed to retroactively amend the stock options granted to him in 2011 to make them subject to the same performance conditions. As a result,

 

   

50% of these stock options would vest only if L-3’s consolidated EPS for the fiscal year ended December 31, 2012 is at least $7.64; and

 

   

50% of these stock options would vest only if L-3’s consolidated FCF for the fiscal year ended December 31, 2012 is at least $969 million.

 

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In the event that one or both of the performance conditions were not satisfied, the stock options that fail to vest as a result would be forfeited.

The EPS and FCF requirements disclosed above reflect the performance conditions as adjusted by the Committee following the Engility spin-off. The original EPS requirement established by the Committee represented the low-end of L-3’s 2012 financial guidance published in January 2012, and the original FCF requirement was intended to be generally consistent with the low end of our EPS guidance. Following the completion of the Engility spin-off, the Committee adjusted the EPS and FCF requirements to the amounts set forth above by considering the original requirements as a percentage of their corresponding targets under L-3’s Original 2012 Plan, and recalculated the revised requirements by applying the same percentages to the EPS and FCF targets under the Spin-off Adjusted Plan.

For purposes of evaluating whether the performance conditions have been satisfied, L-3’s consolidated EPS and FCF results for 2012 are required to be calculated on the same basis as the methodology used to determine performance for these measures under L-3’s annual incentive plan. In February 2013, the Committee determined that both the EPS and FCF performance conditions of Mr. Strianese’s options were satisfied with respect to the 2011 and 2012 option awards.

Performance Awards. The performance awards granted by the Committee in 2012 were equally weighted between performance cash earned on the basis of relative TSR and performance units earned based on cumulative EPS results for the three-year period ending December 31, 2014. The payout ultimately earned can range from zero to 200% of the target amount of cash or stock, in each case based on actual performance relative to the pre-determined goals. The Committee chose relative TSR and cumulative EPS because it believes that they are aligned with shareholder value creation both directly (relative TSR) and indirectly (EPS).

 

Performance Cash: Relative TSR

(50% weighting; denominated and paid in cash)

       

Performance Units: Diluted EPS

(50% weighting; denominated and paid in stock)

                          
                          

  

      Level   Relative TSR    Payout*                 Level    Diluted EPS    Payout*    

  

     Maximum   >74th Percentile      200%        Maximum    >$24.81      200    
       63rd Percentile      150%             $24.00      150    
     Target   50th Percentile      100%        Target      $23.19      100    
     Threshold   40th Percentile        50%        Threshold      $21.57      50    
     Below Threshold   <40th Percentile          0%        Below Threshold    <$21.57      0    
     *Interim points are interpolated.        *Interim points are interpolated.       

 

                        

 

                                            

While the Committee has elected to use EPS as a performance measure for both the annual incentive plan and the long-term performance awards, the performance requirements under these plans are designed so that the resulting payouts under the plans reflect different and important aspects of Company performance that are not duplicative. Payouts under the annual incentive plan take into account EPS performance for a single fiscal year, while payouts under the long-term performance awards require EPS performance to be sustained and measured over a three-year period. For example, EPS performance in a single fiscal year that leads to an above-target payout under the annual incentive plan can be offset by lower EPS performance in subsequent years under the long-term performance plan, resulting in no long-term incentive payout for the three-year period. The Committee believes it is appropriate to separately reward annual and long-term EPS performance achievements because of the importance of EPS in creating shareholder value.

 

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2012 Program Changes to TSR-Based Performance Awards. In prior years, the relative TSR goal measured L-3’s percentile ranking in TSR against other companies in the S&P 1500 Aerospace and Defense Index. Beginning in 2012, the Committee elected to change the benchmark used for assessing relative TSR performance to a custom peer group (the “performance peer group”) of 15 companies with a sales mix that is more heavily weighted towards sales to the DoD and the defense industry, and which include the primary U.S. public company competitors for each of L-3’s four reporting segments. The Committee believes that a custom peer group is a more appropriate benchmark for evaluating our performance. The companies in the performance peer group are listed below.

 

Performance Peer Group
       

Alliant Techsystems Inc

  Harris Corporation   Raytheon Company

BAE Systems Plc

  Huntington Ingalls Industries Inc   Rockwell Collins Inc

CACI International Inc

  Lockheed Martin Corporation   SAIC Inc

Exelis Inc

  ManTech International Corporation   Textron Inc

General Dynamics Corporation

  Northrop Grumman Corporation   URS Corporation
         

In prior years, performance awards contingent upon TSR achievements were granted as a target number of units, and were payable in cash based on the final number of units earned for the period (which could range from zero to 200% of the target number of units), multiplied by the per share closing price of L-3 common stock on the last trading day of the performance period. Beginning in 2012, these awards are granted as a target amount of cash, and are payable in cash based on the payout multiple earned for the period (which could range from zero to 200%), multiplied by the target amount of cash. The Committee elected to make this change because under the prior methodology, the Company was required to record compensation expense at the time of grant that exceeded the target value of the awards.

Targets for 2012 EPS-Based Performance Awards. Prior to 2012, the cumulative EPS performance targets for performance unit grants were determined based on compound annual growth rate goals for the performance period. For 2012, the Committee considered whether this methodology remained appropriate in light of the challenging economic environment for the defense industry that was expected to continue for the foreseeable future.

In February 2012, the time at which the Committee was considering the three-year EPS performance targets to be established for the performance units to be granted in 2012, the total DoD budget that had been enacted for the U.S. Government’s fiscal year ending September 30, 2012 reflected a decline of 6% from the prior year. The DoD budget proposed by the Obama Administration on February 13, 2012, which complied with the initial phase of spending cuts imposed by the Budget Control Act of 2011, but did not address the sequestration cuts imposed by the Act, contemplated additional year-over-year reductions in the DoD budget of 5% and 6% for the U.S. Government’s fiscal years ending September 30, 2013 and 2014, respectively. The sequestration provisions were projected to incrementally reduce the DoD’s budgets by approximately 8% per year beyond the cuts contemplated by the Obama Administration proposal.

Given this outlook, the Committee determined that instead of using compound annual growth, EPS preservation over a three-year period would be a more appropriate basis on which to set the “target” EPS goal for the performance unit awards to be granted in 2012. Accordingly, the Committee set the three-year cumulative EPS target by tripling the projected EPS for 2012 under
L-3’s Original 2012 Plan, which formed the basis for L-3’s 2012 EPS financial guidance disclosed to investors in January 2012. The Committee believes that the “target” three-year EPS requirement for the 2012 performance units is meaningful and rigorous because the 2012 EPS projection upon which it is based does not reflect the DoD budget reductions required by law to be implemented under the Budget Control Act of 2011 with respect to the U.S. Government’s fiscal years ending September 30, 2013, 2014 and 2015.

 

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The Committee set the threshold and maximum EPS performance goals under the performance unit awards based on a range of ±7% of the target three-year goal. The Committee determined to use this range based on three-year projection scenarios developed by management that address the projected financial impact to L-3 of the mandated DoD spending cuts.

Following the completion of the Engility spin-off in July 2012, the Committee revised the EPS goals based on the Spin-off Adjusted Plan. The revised three-year cumulative EPS target was set by tripling the projected EPS for 2012 under the Spin-off Adjusted Plan, and the threshold and minimum cumulative EPS performance goals were set at ±7% of the revised target. The EPS goals disclosed in the table above reflect the revised targets that were established by the Committee.

For purposes of calculating actual financial results under the performance units, EPS is required to be calculated on the same basis as the methodology used to determine EPS performance under L-3’s annual incentive plan. EPS results for 2012 will be calculated based on continuing operations (that is, on a basis that excludes the performance of the Engility business units), while EPS results for 2013 and 2014 will be calculated based on all operations.

RSUs. RSUs are a regular component of our long-term incentive program. The Committee believes that RSUs enhance retention of L-3’s senior executives. The Committee may also make these awards to recognize increased responsibilities or special contributions, to attract new executives, to retain executives or to recognize certain other special circumstances. RSU grants generally have the following characteristics:

 

   

automatically convert into shares of our Common Stock on the vesting date;

 

   

vest three years from the grant date; and

 

   

accumulate cash dividend equivalents payable in a lump sum contingent upon vesting.

Payment of Performance Unit Awards for the 2010-2012 Award Cycle

At its February 20, 2013 meeting, the Committee reviewed and certified the performance for the performance units granted to named executive officers in 2010. Payouts under the 2010 performance units were contingent upon L-3’s EPS growth and relative TSR achievements over the three-year performance period ending December 31, 2012. The Company achieved cumulative EPS of $26.15, resulting in the vesting of 147.92% of the target number of EPS-based performance units originally awarded in 2010. With respect to the performance units based on relative TSR performance, L-3’s relative TSR was below the 40th percentile of the S&P 1500 Aerospace and Defense Index and, as a result, no payments were made with respect to these units.

The payout under the 2010 performance units was calculated based on adjusted EPS targets that were established by the Committee following the Engility spin-off. The original cumulative EPS targets were based on compound annual growth rate goals for the three year performance period ended December 31, 2012. To determine the revised targets, the committee recalculated the cumulative EPS targets based on the same compound annual growth rate goals, as adjusted to reflect that EPS results for the third year of the award would be based on continuing operations (that is, on a basis that excludes the performance of the Engility business units).

Actual EPS results for the 2010 performance units were calculated based on L-3’s consolidated EPS from all operations for 2010 and 2011, and based on continuing operations for 2012. The EPS calculations were subject to the same pre-established categories of adjustments that apply to the calculation of EPS under the annual incentive plan, except that the terms of the 2010 performance units do not provide for any adjustment based on gains or losses related to the resolutions of income tax contingencies for business acquisitions which existed at the date of acquisition.

 

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Executive Benefits and Perquisites

Retirement Plans. L-3 provides retirement benefits as part of a competitive compensation package to retain our key employees. Plan design and benefit levels of these plans are closely monitored by the Committee and are periodically reviewed to ensure that they are consistent with the pay practices of our compensation peer group. All of L-3’s named executive officers participate in the L-3 Communications Corporation Pension Plan (the “Corporate Plan”), which is a tax qualified defined benefit plan, and in a nonqualified supplemental executive retirement plan (the “Restoration Plan”). The Restoration Plan fills the gap in benefits that are not accrued under the Corporate Plan due to limits imposed by the Internal Revenue Code. The Corporate Pension Plan and Restoration Plan are designed such that the combined annual amount a named executive officer would receive with 30 years of employment by L-3 equals approximately 45% to 55% of their final average cash compensation (base salary and annual incentive). See “2012 Pension Benefits” beginning on page 81 for additional details.

A significant portion of the 2012 and 2011 amounts reported in the Summary Compensation Table on page 71 under the heading “Change in Pension Value and Nonqualified Deferred Compensation Earnings” reflect changes in actuarial assumptions made since 2010 that are required under GAAP, and are not the result of any arrangements entered into between the Company and any named executive officer that modify any of our pension plans or enhance any benefits accrued or to be accrued thereunder. For a further discussion, see Note 4 to the Summary Compensation Table on page 72.

Deferred Compensation Plans. L-3 sponsors two nonqualified deferred compensation plans, the L-3 Communications Corporation Deferred Compensation Plan I and the L-3 Communications Corporation Deferred Compensation Plan II, to a select group of highly compensated executives, including our named executive officers, as a competitive practice. These plans allow for voluntary deferrals by executives, including the named executive officers, of up to 50% of base salary and 100% of annual cash incentive awards into an unfunded, nonqualified account. There are no company contributions under these plans, and deferred amounts earn interest at the prime rate.

Employment, Severance and Change in Control Arrangements. Except as described under “James Dunn Retirement Agreement,” L-3 does not have any employment agreements with its named executive officers nor do we have any severance arrangements other than in connection with a change in control. L-3’s named executive officers are offered protection under the L-3 Change in Control Severance Plan (the “Change in Control Severance Plan”), which provides for specified severance benefits in the event of termination by the Company without cause or by the employee for good reason following a change of control. The purpose of these arrangements is to preserve morale and productivity, and encourage retention, in the face of the disruptive impact of a change in control. Severance benefits under the Change in Control Severance Plan are market competitive and do not provide tax gross-ups. See “Potential Payments Upon Change in Control or Termination of Employment” beginning on page 87 for additional details.

Perquisites. L-3 provides the named executive officers with limited perquisites. In 2012, the named executive officers were eligible for an annual executive physical, supplemental life insurance and participation in an executive medical plan. We provide our Chief Executive Officer with a car and security driver, and access to L-3’s fractionally-owned aircraft for occasional personal use. Our corporate aircraft policy however requires that our Chief Executive Officer reimburse the Company for the incremental costs incurred in connection with his personal use of the aircraft.

James Dunn Retirement Agreement

On June 13, 2012, L-3 announced that Mr. Kantor would succeed Mr. Dunn as President of Electronic Systems Group effective July 31, 2012, and that Mr. Dunn would be retiring from the Company effective December 31, 2012. In light of Mr. Dunn’s significant knowledge of the Company’s

 

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business and customer base gained over his 12 years of service, the Company entered into a retirement agreement that provided for the employment of Mr. Dunn through the end of the year to assist in the transition, and also provided for: (1) an annual cash bonus for 2012 of $925,000 (which is equal to the amount of his annual bonus for 2011) in lieu of his continued participation in L-3’s formula-based annual incentive plan, (2) cash severance in the amount of $975,000, payable over the one-year period following his retirement, (3) an amendment to his RSUs and performance awards granted in February 2012 that would allow his retirement on December 31, 2012 to meet the “retirement” definition under the terms of the awards (notwithstanding the fact that his retirement would be effective prior to February 22, 2013, the one-year anniversary of the RSU grant date, and prior to January 1, 2013, the one-year anniversary of the start of the performance period for the performance awards) and (4) a one-year consulting agreement ending on December 31, 2013 under which Mr. Dunn would be engaged to provide business strategy and operations advice and other consulting services as may be requested by Mr. Strianese for a monthly fee of $25,000. All unvested stock options outstanding at the time of his retirement were forfeited. The agreement also provides for a general release of claims by Mr. Dunn in favor of the Company, and a prohibition on Mr. Dunn soliciting the Company’s employees or competing with the Company during the one-year period following his retirement.

Stock Ownership Guidelines and Retention Requirements

L-3’s stock ownership guidelines reflect the Committee’s belief that executives should accumulate a meaningful level of ownership in Company stock to align their interests with shareholders. In 2012, the Committee increased the Chief Executive Officer’s stock ownership guidelines from five times to six times base salary. Minimum ownership requirements for officers, other than the Chief Executive Officer, range from one and a half to three times base salary depending on roles and organizational levels. The Committee reviews progress towards guideline achievement annually. In prior years, each executive had five years from the date they became subject to the guidelines to achieve the minimum level of ownership. In 2012, the Committee replaced the five-year compliance period with retention requirements that are effective immediately. Each executive subject to stock ownership guidelines is required to retain 75% of net shares (after payment of fees, taxes and exercise prices, if applicable) acquired upon the vesting of stock awards or the exercise of stock options granted on or after August 1, 2007 until the required multiple of base salary is met.

The current stock ownership guidelines for the named executive officers (except for Mr. Dunn, who retired as of December 31, 2012) are as follows:

 

Named Executive Officer   

Ownership Guideline

(multiple of salary)

  

Stock Ownership

(as of 12/31/2012)

   Actual Ownership
(multiple of salary)
  

Subject to

Retention Ratio

                       

Michael T. Strianese

       6.0        $ 14,050,874          10.8          No  

Ralph G. D’Ambrosio

       3.0        $ 2,812,399          4.6          No  

Curtis Brunson

       3.0        $ 4,599,370          7.6          No  

Steve Kantor

       3.0        $ 1,818,746          2.9          Yes  

John C. McNellis

       3.0        $ 2,092,088          3.6          No  
                                             

“Stock ownership” is defined to include shares of common stock held outright, shares and share equivalents held in benefit plans, and unvested RSUs. Unvested performance units are not included in this calculation. In prior years, the Company included up to 50% of the value of vested “in the money” stock options towards stock ownership guideline compliance. Starting in 2012, L-3 no longer includes unexercised stock options in the definition of stock ownership. The stock ownership in the table above excludes unexercised stock options.

 

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Compensation Clawback Policy

The Committee adopted a clawback policy in 2012 that allows the Company to recoup and/or cancel any incentive compensation, including equity-based compensation, awarded to executives on or after January 1, 2012 under the following circumstances:

 

   

The award was predicated upon the achievement of financial results that were subsequently the subject of a material restatement of L-3’s financial statements,

 

   

The executive’s fraud or willful misconduct was a significant contributing cause to the need for the restatement, and

 

   

A smaller award would have been earned under the restated financial results.

Subject to the discretion and approval of the Board of Directors, the Company will, to the extent permitted by law, seek to recover the amount of incentive compensation paid or payable to the executive in excess of the amount that would have been paid based on the financial restatement.

Anti-Hedging and Anti-Pledging Policies

In 2012, we adopted a policy that prohibits the hedging of L-3 stock by all executives, employees and non-employee directors. In 2013, we expanded our policy to prohibit pledging of L-3 stock by all such persons.

Compensation Risk Assessment

L-3’s Compensation Committee reviews and discusses with management, on at least an annual basis, management’s assessment of whether risks arising from the Company’s compensation policies and practices for all employees, including executive officers, are reasonably likely to have a material adverse effect on the Company. As part of the 2012 assessment performed by L-3, the following were determined on a collective basis for L-3 and its subsidiaries:

 

   

no business unit carries a significant portion of the Company’s risk profile;

 

   

the Company’s compensation policies and practices are not structured differently from one business unit to another in any material respect;

 

   

incentive compensation expense is not a significant percentage of the Company’s sales;

 

   

the Company’s compensation programs do not vary significantly from the overall risk and reward structure of the Company;

 

   

the Company’s long-term incentive awards are intended to align the interests of the Company’s executives and key employees with those of shareholders by linking a meaningful portion of their compensation to value creation over a multi-year period (and, with respect to senior executives, by utilizing overlapping performance periods and multiple performance measures such as relative TSR and cumulative EPS) to promote sustainable, long-term performance;

 

   

the Company’s short-term incentive awards are based upon a variety of financial and non-financial performance measures, which, in the Company’s view, reward performance without incentivizing inappropriate risk-taking; and

 

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the Company has policies and procedures that require compensation programs adopted at the subsidiary and business unit level to be reviewed and approved by senior corporate management to, among other things, ensure that none of the Company’s or its subsidiaries’ compensation programs encourage inappropriate risk-taking.

The Committee has also adopted stock ownership guidelines for our senior executives, including our named executive officers, which are intended to align their long-term interests with those of our shareholders and to encourage a long-term focus in managing the Company. See “—Stock Ownership Guidelines and Retention Requirements” on page 66 for additional details.

Tax Considerations

Section 162(m) of the Internal Revenue Code generally limits tax deductibility of compensation paid by a public company to its chief executive officer and certain other highly compensated executive officers to $1 million in the year compensation becomes taxable to the executive, subject to an exception for performance-based compensation that meets specific requirements. The Committee considers the impact of this rule when developing and implementing its executive compensation programs; however, the Committee reserves the right to provide compensation that is not tax deductible if it believes the value in doing so outweighs the value of the lost tax deduction.

In 2012, base salaries paid to Chief Executive Officer in excess of $1 million, and RSUs granted in 2012 to named executive officers do not qualify as tax deductible compensation under Section 162(m). In the case of the Chief Executive Officer’s base salary and the RSUs, the Committee believes that these awards are necessary to remain market competitive.

Equity Grant Timing

The Committee approves all long-term incentive awards to the named executive officers at in-person or telephonic meetings on an annual basis. We do not time the grant of equity awards, including stock options, to precede the release of non-public information. The Committee makes grants on an annual basis in February. It is the Committee’s general policy to grant long-term incentive awards to the named executive officers either (1) during window periods we establish following quarterly or annual announcements of historical earnings results or (2) at Committee meetings held in connection with or following new hires or promotions. Under the terms of the Amended and Restated 2008 Long-Term Performance Plan, the exercise price of each stock option granted is equal to fair market value of the underlying Common Stock on the date of grant. The Committee does not grant discounted stock options and does not permit stock option repricing without shareholder approval.

Reconciliation of Non-GAAP Measures to GAAP Measures

Diluted earnings per share (Diluted EPS) from continuing operations for the year ended December 31, 2011 includes the following items: (1) a tax benefit of $78 million ($0.74 per diluted share) for a net reversal of amounts previously accrued related to tax years for which the statutes of limitations had expired, (2) a non-cash goodwill impairment charge of $43 million ($42 million after income taxes, or $0.40 per diluted share) due to a decline in the estimated fair value of the Marine Services business, and (3) $14 million ($8 million after income taxes, or $0.08 per diluted share) for L-3’s portion of an impairment charge for long-lived assets at an equity method investment (collectively, the “Q4 2011 Items”).

 

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The following table provides a reconciliation of Diluted EPS from continuing operations to Diluted EPS from continuing operations, excluding the Q4 2011 Items, for the year ended December 31, 2011:

 

For the year ended December 31,
  (per share amounts)

       2012            2011    

Diluted earnings per share

   $8.01    $8.08

Q4 2011

   —      ($0.26)
  

 

  

 

Diluted earnings per share before Q4 2011 Items

       $8.01            $7.82    
  

 

  

 

Management believes that excluding the Q4 2011 Items from Diluted EPS from continuing operations is meaningful to investors in assessing the Company’s financial performance for the relevant period and will allow investors to more easily compare the Company’s results from period to period. Diluted EPS from continuing operations, excluding the Q4 2011 Items, is not intended to replace the most directly comparable GAAP measure.

Free cash flow is defined as net cash from operating activities less net capital expenditures (capital expenditures less cash proceeds from dispositions of property, plant and equipment), plus income tax payments attributable to discontinued operations. Free cash flow represents cash generated after paying for interest on borrowings, income taxes, pension benefit contributions, capital expenditures and changes in working capital, but before repaying the principal amount of outstanding debt, paying cash dividends on common stock, repurchasing shares of our common stock, investing cash to acquire businesses, and making other strategic investments. Thus, a key assumption underlying free cash flow is that L-3 will be able to refinance its existing debt. Because of this assumption, free cash flow is not a measure that should be relied upon to represent the residual cash flow available for discretionary expenditures. Management believes that free cash flow is a useful measure of cash flow that may be available for discretionary use by L-3 and is an important measure that drives long-term shareholder value creation.

The following table provides a reconciliation of net cash from operating activities to free cash flow for the year ended December 31, 2012:

 

For the year ended December 31,
  ($ in millions)

       2012      

Net cash from operating activities

       $1,231   

Less: Capital expenditures, net of dispositions

     ($205

Plus: Income tax payments attributable to discontinued operations

     $24   
  

 

 

 

Free cash flow

     $1,050   
  

 

 

 

 

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COMPENSATION COMMITTEE REPORT

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on its review and discussion with management, the Compensation Committee recommended to L-3’s Board of Directors that the Compensation Discussion and Analysis be included in L-3’s proxy statement and Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

During 2012, Robert B. Millard, Lewis Kramer, Alan H. Washkowitz and John P. White served as members of the Compensation Committee.

Robert B. Millard (Chairman)

Lewis Kramer

Alan H. Washkowitz

John P. White

 

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TABULAR EXECUTIVE COMPENSATION DISCLOSURE

SUMMARY COMPENSATION TABLE

The following table provides summary information concerning compensation paid or accrued by us to or on behalf of our Chairman, President and Chief Executive Officer, our Senior Vice President and Chief Financial Officer, each of our three other most highly compensated executive officers serving at fiscal year end and one other person who would have been among those three except for the fact that he was no longer serving as an executive officer at fiscal year end. These officers are collectively referred to as the named executive officers.

 

Name and Principal Position

  Year   Salary
($)
  Bonus(1)
($)
  Stock
Awards(2)

($)
  Option
Awards(3)

($)
  Non-Equity
Incentive Plan
Compensation(1)

($)
  Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings(4)

($)
  All Other
Compensation(5)

($)
  Total(6)
($)

Michael T. Strianese

      2012         1,300,000                 4,624,997         2,775,003         2,500,000         3,603,420         99,632         14,903,052  

(Chairman, President and Chief

Executive Officer and Director)

      2011         1,300,000         2,500,000         6,080,468         3,699,993                 2,975,928         106,238         16,662,627  
      2010         1,287,885         2,600,000         6,011,771         3,699,992                 2,772,295         144,417         16,516,360  

Ralph G. D’Ambrosio

      2012         603,250         250,000 (7)       999,965         599,996         750,000         640,350         34,610         3,878,171  

(Senior Vice President and Chief Financial Officer)

      2011         587,815         630,000         1,183,280         720,004                 388,722         35,386         3,545,207  
      2010         567,731         650,000         1,039,928         639,999                 324,563         36,333         3,258,554  

Curtis Brunson

      2012         603,250                 999,965         599,996         725,000         500,836         87,177         3,516,224  

(Executive Vice President of

Corporate Strategy and

Development)

      2011         586,092         630,000         1,248,978         760,003                 442,159         91,714         3,758,946  
      2010         563,639         650,000         974,871         600,009                 424,944         79,954         3,293,417  
                                   

Steve Kantor

(Senior Vice President and

President of Electronic Systems Group) (8)

      2012         629,250         250,000 (7)       649,999         390,002         700,000         488,608         77,692         3,185,551  
      2011         613,569         650,000         854,611         520,007                 453,351         71,702         3,163,240  
      2010         548,666         700,000         777,110         479,996                 402,712         58,626         2,967,110  

John C. McNellis

      2012         562,500                 700,004         419,999         975,000         373,502         56,296         3,087,301  

(Senior Vice President and
President of Integrated Systems
Group)(9)

                                   

James W. Dunn

      2012         656,250         925,000 (10)       1,293,281 (11)       449,997 (12)               547,822         86,471         3,958,821  

(Former Senior Vice President
and President of Electronic
Systems Group) (8)

      2011         584,246         925,000         854,611         520,007                 486,334         82,549         3,452,747  
      2010         532,122         975,000         812,327         499,995                 643,013         72,380         3,534,837  
                                   

 

 

(1) The 2012 annual incentive awards were calculated under a formula-based approach that was established at the beginning of the year and, accordingly, are reported in the Non-Equity Incentive Plan Compensation column. Amounts reported as Bonus in 2012 represent additional discretionary bonuses paid for 2012 performance, as discussed in Notes 7 and 10 below. The 2011 annual incentive awards are reported in the Bonus column, even though they were determined by reference to a formula-based approach, because this approach was not in place at the beginning of 2011. The 2010 annual incentive awards are reported in the Bonus column because they were not determined using a formulaic approach. All amounts are reported for the fiscal year in which the related services are rendered, although the actual payments are made in the following year. For a further discussion, see “Compensation Discussion and Analysis — Annual Incentives” beginning on page 53.

 

(2) Represents the grant date fair value of RSUs and performance units granted in 2012, 2011 and 2010, which is calculated in accordance with the accounting standards for share-based compensation (excluding the effect of estimated forfeitures). The grant date fair value of RSUs and performance units whose performance targets are based on EPS is calculated using L-3’s stock price on the date of grant. See Note 18 to the audited consolidated financial statements included in L-3’s 2012 Annual Report on Form 10-K for a discussion of the assumptions used in calculating the grant date fair value of performance units whose performance targets are based on TSR. The Company did not award any performance units based on TSR in 2012. Instead, in 2012 the Company granted three-year performance awards based on TSR that are denominated and payable in cash and, accordingly, are not considered Stock Awards for purposes of the Summary Compensation Table. These awards will be reported, to the extent any amounts are earned under the awards, in the Non-Equity Incentive Plan column for the fiscal year in which the performance period ends. For a discussion of the general terms of RSUs and performance awards, see “Compensation Discussion and Analysis — Long-Term Incentives” beginning on page 60 and “— Potential Payments Upon Change in Control or Termination of Employment — Effect of Change in Control or Termination of Employment Upon Long-Term Incentive Awards” beginning on page 88.

 

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     With respect to the performance units, the grant date fair value included in the Summary Compensation Table above is based upon the expected performance and vesting conditions on the date of grant. The grant date fair value of performance units based on EPS in 2012, 2011 and 2010 assumes that target performance will be achieved. The grant date fair value of the performance units based on TSR in 2011 and 2010 represents an expected outcome of performance based on a binomial valuation technique. Other than with respect to Mr. Dunn’s performance units whose value is discussed in Note 11 below, the following table provides the target value of performance units granted in 2012 under GAAP (which is their grant date fair value included in the Summary Compensation Table above) and their maximum value as of the grant date assuming the highest level of performance will be achieved:

 

Name

   2012
Target(a)
($)
   2012
Maximum
($)

Michael T. Strianese

       1,849,985          3,699,970  

Ralph G. D’Ambrosio

       399,972          799,944  

Curtis Brunson

       399,972          799,944  

Steve Kantor

       260,028          520,056  

John C. McNellis

       280,030          560,060  

 

 

  (a) Amounts are included in the Stock Awards column of the Summary Compensation Table above.

 

(3) Represents the grant date fair value calculated in accordance with the accounting standards for share-based compensation (excluding the effect of estimated forfeitures) for stock options granted in 2012, 2011 and 2010. See Note 18 to the audited consolidated financial statements included in L-3’s 2012 Annual Report on Form 10-K for a discussion of the assumptions used in calculating equity compensation expense in connection with these stock options. For a discussion of the general terms of our stock options, see “Compensation Discussion and Analysis — Long-Term Incentives — Stock Options” beginning on page 61 and “— Potential Payments Upon Change in Control or Termination of Employment — Effect of Change in Control or Termination of Employment Upon Long-Term Incentive Awards” beginning on page 88.

 

(4) Amounts in this column reflect the increase in the actuarial value of defined benefit plans during 2012, 2011 and 2010, as applicable, including $488,901, $486,218 and $363,841 during 2012 for Messrs. Brunson, Kantor and McNellis, respectively, and also include above market interest in the amounts of $11,935, $2,390 and $9,661 earned on deferred compensation balances during 2012 for Messrs. Brunson, Kantor and McNellis, respectively. Actuarial value computations are based on assumptions discussed in Note 20 to the audited consolidated financial statements included in L-3’s 2012 Annual Report filed on Form 10-K.

 

     A significant portion of the change in pension value reported in this column for 2012 and 2011 reflects changes in actuarial assumptions made since 2010 as required under GAAP, and are not the result of any arrangements entered into between the Company and any named executive officer that modify any of our pension plans or enhance any benefits accrued or to be accrued thereunder. The table below sets forth the different actuarial assumptions used to calculate the change in pension value for the years indicated:

 

     Actuarial Assumptions

Year

   Discount Rate  

Post-Retirement Mortality

2012

   4.20%   RP-2000 Annuitant Mortality table, projected 7 years from valuation date

2011

   5.10%   RP-2000 Annuitant Mortality table, projected 7 years from valuation date

2010

   5.60%   RP-2000 Combined Mortality table, projected to the valuation date

If no change had been made to the discount rate and mortality assumptions used in connection with calculating the 2010 amounts, the amounts that would have been reported in this column for the named executive officers for 2012 and 2011 would have been as follows:

 

Name

   Change in Pension Value and
Nonqualified Deferred  Compensation
Earnings
   2012
($)
   2011
($)

Michael T. Strianese

       1,592,361          2,002,367  

Ralph G. D’Ambrosio

       211,939          218,915  

Curtis Brunson

       296,793          321,646  

Steve Kantor

       311,626          351,804  

John C. McNellis(9)

       227,623       

James W. Dunn

       323,607          347,213  

 

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(5) The following table describes each component of the All Other Compensation column in the Summary Compensation Table above for 2012.

 

Name                             

   Employer
Contribution
to Employee
Savings Plan
($)
   Life
Insurance(a)
($)
   Medical
Insurance
Benefits(b)
($)
   Other
($)
  Total
($)

Michael T. Strianese(c)

       15,500          23,780          7,858          52,494 (d)       99,632  

Ralph G. D’Ambrosio

       10,000          12,144          12,466                  34,610  

Curtis Brunson

       15,500          27,135          10,388          34,154 (e)       87,177  

Steve Kantor

       15,500          16,150          10,388          35,654 (e)       77,692  

John C. McNellis

       15,500          28,330          12,466                  56,296  

James W. Dunn

       15,500          26,420          10,388          34,163 (f)       86,471  

 

 

  (a) Represents payments of premiums for executive and group term life insurance.

 

  (b) Represents payments of premiums for a company-provided executive medical reimbursement plan.

 

  (c) Mr. Strianese has access to L-3’s fractionally-owned aircraft for occasional personal use. Mr. Strianese is required to and has reimbursed L-3 for all incremental costs incurred by L-3 in connection with his personal use of the aircraft.

 

  (d) Represents incremental costs associated with the use of a company car, which include the monthly lease payments, maintenance, gas, tolls, parking and all other costs associated with the car.

 

  (e) Represents payment for accumulated vacation time.

 

  (f) Represents a payment of $30,000 for accumulated vacation time, $1,639 reimbursement for parking and $2,524 for spousal travel to a Company-sponsored event.

 

(6) The amounts in this column include the change in pension value reported for each year, a significant portion of which for 2012 and 2011 resulted from changes in actuarial assumptions described in Note 4 above. If no changes had been made to these actuarial assumptions, the amounts that would have been reported in this column for the named executive officers for 2012 and 2011 would have been as follows:

 

Name                             

   Total  
   2012
($)
     2011
($)
 

Michael T. Strianese

     12,891,993         15,689,066   

Ralph G. D’Ambrosio

     3,449,760         3,375,400   

Curtis Brunson

     3,312,181         3,638,433   

Steve Kantor

     3,008,569         3,061,693   

John C. McNellis(9)

     2,941,422      

James W. Dunn

     3,734,606         3,313,626   

 

(7) As discussed under “Compensation Discussion and Analysis—Annual Incentives—Special Discretionary Cash Awards” on page 60, in recognition of Messrs. D’Ambrosio’s and Kantor’s superior performance in 2012 in connection with the Engility spin-off, the Compensation Committee awarded each of them an additional discretionary bonus of $250,000.

 

(8) At the beginning of 2012, Mr. Kantor served as President of L-3 Services Group. Mr. Kantor succeeded Mr. Dunn as Senior Vice President and President of Electronic Systems Group effective July 31, 2012. Mr. Dunn retired from the Company effective December 31, 2012.

 

(9) Mr. McNellis was not considered a named executive officer prior to the 2012 fiscal year.

 

(10) As discussed under “Compensation Discussion and Analysis—James Dunn Retirement Agreement” beginning on page 65, Mr. Dunn’s received a 2012 cash bonus of $925,000 under his retirement agreement in lieu of his participation in L-3’s annual incentive plan for 2012.

 

(11)

As described in “Compensation Discussion and Analysis—James Dunn Retirement Agreement,” the Company and Mr. Dunn entered into an agreement on June 13, 2012 pursuant to which Mr. Dunn retired from the Company on December 31, 2012, and the Company modified the terms of the RSUs and performance units that were previously granted to Mr. Dunn on February 22, 2012 so as to allow Mr. Dunn to meet the “retirement” definition under the terms of the awards in lieu of forfeiture of the awards upon retirement. In accordance with SEC requirements, the amount disclosed in the table above represents the sum of (a) the grant date fair values of the RSUs and performance units granted to Mr. Dunn on February 22, 2012 (which are calculated as described in Note 2 above) and (b) the grant date fair values of the awards as modified on June 13, 2012 (which are calculated in accordance with the accounting standards for share-based compensation), in order to reflect the two compensation decisions made by the Company on February 22, 2012 and June 13, 2012 with respect to these

 

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  awards. With respect to Mr. Dunn’s performance units granted in February and modified in June of 2012, the target value of the performance units as of the grant and modification dates (which is the grant date fair value included in the Summary Compensation Table above) is $300,032 and $98,789, respectively, and the maximum value of the performance units as of the grant and modification dates, assuming the highest level of performance, is $600,064 and $197,578, respectively.

 

(12) Represents stock options granted on February 22, 2012 that were forfeited by Mr. Dunn effective December 31, 2012 in connection with his retirement as of that date.

 

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2012 GRANTS OF PLAN-BASED AWARDS

The following table provides information regarding: (1) annual incentive awards and three-year performance cash awards based on TSR granted in 2012 under the L-3 Communications Holdings, Inc. 2012 Cash Incentive Plan, and (2) stock options, RSUs and three-year performance units based on EPS granted in 2012 under the L-3 Communications Holdings, Inc. Amended and Restated 2008 Long Term Performance Plan. Plan-based awards are generally granted to the named executive officers on an annual basis in February.

The number of shares or units, exercise prices and/or grant date fair values reported in the following table reflects the terms of the awards and their respective valuations on the date they were granted, and does not reflect subsequent adjustments that were made to reflect the effect of the Engility spin-off as required under the terms of the stock-based compensation plans under which they were issued. For a discussion of these adjustments, see “Outstanding Equity Awards at Fiscal Year End 2012” beginning on page 77, as well as the discussions regarding adjustments to the performance terms of these awards in the Compensation Discussion and Analysis sections referenced for each type of award in the notes below.

 

          Estimated Future Payouts
Under Non-Equity Incentive Plan
Awards
    Estimated Future Payouts
Under Equity Incentive Plan
Awards
    All Other
Stock
Awards:
Number
of
Shares
of Stock
or

Units(1)
(#)
    All Other
Option
Awards:
Number of

Securities
Underlying

Options(2)
(#)
    Exercise
or Base
Price of
Option

Awards
($/Sh)
    Grant Date
Fair
Value of
Stock and
Option

Awards(3)
($)
 
  Grant
Date
    Threshold
($)
    Target
($)
    Maximum
($)
    Threshold
(#)
    Target
(#)
    Maximum
(#)
         

Michael T. Strianese

    2/22/12 (4)            122,897        245,793        245,793            70.43        2,775,003   
    2/22/12                    39,401            2,775,012   
    2/22/12 (5)            13,134        26,267        52,534              1,849,985   
    2/22/12 (6)      925,000        1,850,000        3,700,000                 
    2/22/12 (7)      0        2,000,000        4,000,000                 

Ralph G. D’Ambrosio

    2/22/12                      53,144        70.43        599,996   
    2/22/12                    8,519            599,993   
    2/22/12 (5)            2,840        5,679        11,358              399,972   
    2/22/12 (6)      200,000        400,000        800,000                 
    2.22/12 (7)      0        546,300        1,092,600                 

Curtis Brunson

    2/22/12                      53,144        70.43        599,996   
    2/22/12                    8,519            599,993   
    2/22/12 (5)            2,840        5,679        11,358              399,972   
    2/22/12 (6)      200,000        400,000        800,000                 
    2/22/12 (7)      0        546,300        1,092,600                 

Steve Kantor

    2/22/12                      34,544        70.43        390,002   
    2/22/12                    5,537            389,971   
    2/22/12 (5)            1,846        3,692        7,384              260,028   
    2/22/12 (6)      130,000        260,000        520,000                 
    2/22/12 (7)      0        633,000        1,424,250                 

John C. McNellis

    2/22/12                      37,201        70.43        419,999   
    2/22/12                    5,963            419,974   
    2/22/12 (5)            1,988        3,976        7,952              280,030   
    2/22/12 (6)      140,000        280,000        560,000                 
    2/22/12 (7)      0        575,000        1,293,750                 

James W. Dunn(8)

    2/22/12                      39,858        70.43        449,997   
    2/22/12                    6,389            449,977   
    2/22/12 (5)            2,130        4,260        8,520              300,032   
    2/22/12 (6)      150,000        300,000        600,000                 
    2/22/12 (7)      0        742,500        1,670,625                 
    6/13/12                    6,389            444,483   
    6/13/12              710        1,420        2,840              98,789   

 

 

(1)

Represents RSUs granted to the named executive officers. There were no performance or other market condition requirements included in the terms of the RSU awards granted to the named executive officers. For a discussion of our RSUs, see “Compensation Discussion and Analysis — Long-Term Incentives — RSUs” on page 64. For a discussion concerning the effect

 

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  of a change in control or termination of employment on outstanding RSUs, see “— Potential Payments Upon Change in Control or Termination of Employment — Effect of Change in Control or Termination of Employment Upon Long-Term Incentive Awards” beginning on page 88.

 

(2) Represents stock options granted to the named executive officers (other than Mr. Strianese). These awards had an exercise price equal to the closing price of our Common Stock on the grant date, and provide value to the recipient only if the price of our Common Stock increases after the grant date. There were no other performance or other market condition requirements included in the terms of the option awards to the named executive officers (other than Mr. Strianese). For a discussion of our stock option awards, see “Compensation Discussion and Analysis — Long-Term Incentives — Stock Options” beginning on page 61. For a discussion concerning the effect of a change in control or termination of employment on outstanding stock option awards, see “— Potential Payments Upon Change in Control or Termination of Employment — Effect of Change in Control or Termination of Employment Upon Long-Term Incentive Awards” beginning on page 88.

 

(3) Represents, in the case of performance units based on EPS, the grant date fair value of each performance unit awarded, as calculated in accordance with the accounting standards for share-based compensation, multiplied by the Target number of shares of our Common Stock issuable (as discussed in Note 5 below), which represented the expected outcome of such units as of their grant date pursuant to the award. Represents, in the case of stock options granted to Mr. Strianese, the grant date fair value of such awards assuming satisfaction of the performance conditions included in their terms, as calculated in accordance with the accounting standards for stock-based compensation. Represents, in the case of a stock option (other than those granted to Mr. Strianese) or RSU award, the grant date fair value of the option or RSU award, as calculated in accordance with the accounting standards for stock-based compensation.

 

(4) Represents stock option awards granted to Mr. Strianese, which have two separate vesting conditions based on L-3’s 2012 financial performance that are in addition to the time-based vesting terms of the awards as described in Note 2 to the “Outstanding Equity Awards at Fiscal Year End 2012” table beginning on page 77. The Threshold level of performance assumes the satisfaction of only one of the financial performance conditions. The Target and Maximum levels of performance assume the satisfaction of both financial performance conditions. For a discussion of Mr. Strianese’s stock option awards, see “Compensation Discussion and Analysis — Long-Term Incentives — Stock Options” beginning on page 61. For a discussion concerning the effect of a change in control or termination of employment on outstanding stock option awards, see “— Potential Payments Upon Change in Control or Termination of Employment — Effect of Change in Control or Termination of Employment Upon Long-Term Incentive Awards” beginning on page 88.

 

(5) Represents performance units based on EPS granted to the named executive officers, which are payable in shares of our Common Stock at the end of the performance period. The final value of each unit will vary based upon (a) the level of performance achieved over the associated performance period in relation to pre-determined performance goals established by the Compensation Committee and (b) the price of our Common Stock at the end of the three-year performance period beginning January 1, 2012 and ending December 31, 2014. The amounts disclosed represent the number of shares of our Common Stock issuable assuming achievement of the specific Threshold, Target or Maximum levels of performance established by the Compensation Committee for these measures over the performance period. See “Compensation Discussion and Analysis — Long-Term Incentives — Performance Awards” beginning on page 62 for a further discussion of the performance units. See “— Potential Payments Upon Change in Control or Termination of Employment — Effect of Change in Control or Termination of Employment Upon Long-Term Incentive Awards” beginning on page 88 for a discussion concerning the effect of a change in control or termination of employment on outstanding performance units.

 

(6) Represents performance cash awards based on TSR granted to the named executive officers, which are payable in cash at the end of the performance period. The final value of each award will vary based upon the relative TSR achieved over the three-year performance period beginning January 1, 2012 and ending December 31, 2014 in relation to pre-determined performance goals established by the Compensation Committee. The amounts disclosed represent the amount of cash to be paid assuming achievement of the specific Threshold, Target or Maximum levels of performance established by the Compensation Committee for these measures over the performance period. See “Compensation Discussion and Analysis — Long-Term Incentives — Performance Awards” beginning on page 62 for a further discussion of the performance cash awards. See “— Potential Payments Upon Change in Control or Termination of Employment — Effect of Change in Control or Termination of Employment Upon Long-Term Incentive Awards” beginning on page 88 for a discussion concerning the effect of a change in control or termination of employment on outstanding performance cash awards.

 

(7) Represents the Threshold, Target and Maximum payout opportunities for fiscal 2012 under the L-3 Annual Incentive Plan, which were established by the Compensation Committee in February of 2012. For a further discussion of the payout opportunities, see “Compensation Discussion and Analysis — Annual Incentives” beginning on page 53.

 

(8) As described in “Compensation Discussion and Analysis—James Dunn Retirement Agreement,” the Company and Mr. Dunn entered into an agreement on June 13, 2012 pursuant to which Mr. Dunn retired from the Company on December 31, 2012, and the Company modified the terms of the RSUs and performance awards that were previously granted to Mr. Dunn on February 22, 2012 so as to allow Mr. Dunn to meet the “retirement” definition under the terms of these awards in lieu of forfeiture of the awards upon retirement. In addition, in connection with his retirement, Mr. Dunn forfeited his unvested stock options and received a $925,000 cash bonus in lieu of his participation in the annual incentive plan. In accordance with SEC requirements, the amounts disclosed in the table above include the stock options awarded to him on February 22, 2012 (which were forfeited upon his retirement effective December 31, 2012) and his Threshold, Target and Maximum payout opportunities under the L-3 Annual Incentive Plan for fiscal 2012 (in which he ceased to participate by virtue of his retirement agreement). In addition, the table contains separate line items that disclose the grant date fair values of the RSUs and performance units awarded to him as of February 22, 2012 (their grant date), and also as modified on June 13, 2012, in order to reflect the two compensation decisions made by the Company on February 22, 2012 and June 13, 2012 with respect to these awards.

 

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END 2012

The following table provides information with respect to holdings of exercisable and unexercisable stock options and unvested and (as applicable) unearned RSUs and performance units held by the Company’s named executive officers at December 31, 2012.

In connection with the Engility spin-off, the number of shares subject to options and stock awards, and the exercise price for stock options, were adjusted to maintain the intrinsic value of each award outstanding at the Engility spin-off date of July 17, 2012, as required pursuant to the terms of the stock-based compensation plans under which they were issued. Equity awards outstanding, whether vested or unvested at the time of spin-off, were converted using a factor of 1.043678 times the quantity granted. Option exercise prices were converted using the inverse of the factor. The awards otherwise retained the original terms and conditions after conversion, except in the case of financial performance conditions, which were adjusted to reflect the spin-off. See “Compensation Discussion and Analysis — Long-Term Incentives — Stock Options” and “— Targets for 2012 EPS-Based Performance Awards” beginning on pages 61 and 63, respectively.

 

    Option Awards     Stock Awards  

Name

  Grant
Date
    Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisa-
ble(1)
    Number of
Securities
Underlying
Unexercised
Options
(#)
Unexerc-
isable(1)
    Option
Exercise
Price
($)
    Option
Expiration
Date
    Number of
Shares or
Units of
Stock
That Have
Not
Vested(2)
(#)
    Market
Value of
Shares or
Units of
Stock That
Have Not
Vested(3)
($)
    Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested
(#)
    Equity
Incentive
Plan Awards:
Market or
Payout Value
Of Unearned
Shares,
Units or
Other Rights
That Have
Not Vested(3)
($)
 

Michael T. Strianese

    11/10/04        41,747               65.31        11/10/14           
    7/12/05        20,873               71.81        7/12/15           
    8/2/06        104,367               69.18