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4-Traders Homepage  >  Equities  >  Nyse  >  L-3 Communications Holdings, Inc.    LLL

Delayed Quote. Delayed  - 07/28 10:01:28 pm
149.84 USD   +1.63%
07/28DJAerospace Results Boost L-3 to Higher Profit, Guidance
07/28 L 3 COMMUNICATI : -3 beats Street 2Q forecasts
07/28 L 3 COMMUNICATI : -3 Announces Second Quarter 2016 Resuts
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L 3 Communications : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

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07/28/2016 | 07:01pm CEST

CONDITION AND RESULTS OF OPERATIONS

Overview and Outlook

L-3's Business


L-3 Holdings derives all of its operating income and cash flows from its
wholly-owned subsidiary, L-3 Communications. L-3 Communications is a prime
contractor in Intelligence, Surveillance and Reconnaissance (ISR) systems,
aircraft sustainment (including modifications, logistics and maintenance),
simulation and training, night vision and image intensification equipment and
security and detection systems. L-3 is also a leading provider of a broad range
of communication and electronic systems and products used on military and
commercial platforms. Our customers include the United States (U.S.) Department
of Defense (DoD) and its prime contractors, U.S. Government intelligence
agencies, the U.S. Department of Homeland Security (DHS), foreign governments,
and domestic and international commercial customers.

On December 7, 2015, we entered into a definitive agreement to sell our National
Security Solutions (NSS) business to CACI International Inc. The transaction was
completed on February 1, 2016. NSS provides cybersecurity solutions,
high-performance computing, enterprise IT services, analytics and intelligence
analysis to the DoD, U.S. Government intelligence agencies, federal civilian
agencies and foreign governments. In accordance with Accounting Standards Update
(ASU) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of
Components of an Entity, the assets and liabilities and results of operations of
NSS are reported as discontinued operations for all periods presented.
Accordingly, all references made to financial data in this Quarterly Report on
Form 10-Q are to L-3's continuing operations, unless specifically noted.

We have the following three reportable segments: (1) Electronic Systems,
(2) Aerospace Systems and (3) Communication Systems. Electronic Systems provides
a broad range of components, products, subsystems, systems, and related services
for military and commercial customers in several niche markets across several
business areas. These business areas include precision engagement & training,
sensor systems, power & propulsion systems, aviation products & security
systems, warrior systems and advanced programs. Aerospace Systems delivers
integrated solutions for the global ISR market and provides modernization,
upgrade, sustainment, and maintenance and logistics support for a wide variety
of aircraft and ground systems. Communication Systems delivers products and
services for the global communications market, specializing in strategic and
tactical airborne, space, ground and sea-based communication systems.

Financial information with respect to our segments is included in Results of
Operations within this section, Note 22 to our unaudited condensed consolidated
financial statements and Note 21 to our audited consolidated financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2015.

For the year ended December 31, 2015, we generated sales of $10,466 million and
our primary end customer was the DoD. The table below presents a summary of our
consolidated 2015 sales by major category of end customer and the percent
contributed by each to our consolidated 2015 sales.



                                                                     % of
                                               2015 Sales         2015 Sales
                                              (in millions)
       DoD                                   $         6,973               67 %
       Other U.S. Government                             318                3

       Total U.S. Government                           7,291               70 %
       International (foreign governments)             1,799               17
       Commercial - international                        759                7
       Commercial - domestic                             617                6

       Total sales                           $        10,466              100 %





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We currently expect the composition of our 2016 consolidated sales to the U.S.
Government and to international and commercial customers to remain approximately
the same as compared to 2015.

Business Environment


U.S. Government Markets. Sales to U.S. Government customers represented 70% of
our 2015 sales, and were primarily to DoD customers, which comprised 67% of our
consolidated sales. Therefore, our annual sales are generally highly correlated
to changes in U.S. Government spending levels, especially DoD budget levels.

The total DoD budget for FY 2015 was $560 billion, a decline of 4% as compared
to the FY 2014 budget due to a decrease in the Overseas Contingency Operations
(OCO) budget. The FY 2015 base budget remained substantially unchanged from FY
2014 at $497 billion, while the OCO budget decreased by $22 billion. The total
DoD budget for FY 2016 is $581 billion, an increase of 4% compared to FY 2015.
The increase is due to a base budget of $522 billion, higher by $25 billion
compared to FY 2015. The FY 2016 OCO budget declined slightly to $59 billion
compared to $63 billion for FY 2015.

On November 2, 2015, the President signed the Bipartisan Budget Act of 2015
(BBA), which suspended the debt ceiling through March 15, 2017 and raised
spending caps previously enacted by Congress under the Budget Control Act of
2011 (BCA). The spending caps on defense programs were raised by $25 billion to
$548 billion for FY 2016 and by $15 billion to $551 billion for FY 2017. The BBA
also sets a target for OCO funding for the DoD at $59 billion for each of FY
2016 and FY 2017, subject to the Congressional appropriation process. The BBA,
however, does not change the BCA budget sequestration cuts after FY 2017.

On December 18, 2015, the President signed the Consolidated Appropriations Act
of 2016, which funded the U.S. Government through September 30, 2016. On
February 9, 2016, the Obama Administration submitted its FY 2017 DoD Proposed
Budget Request (PBR). The total FY 2017 DoD budget request is $583 billion
($524 billion base budget, $59 billion OCO), which is substantially unchanged
compared to the appropriated FY 2016 DoD budget. The FY 2017 PBR complies with
the BBA. However, Congress has not approved the FY 2017 DoD budget.

While the BBA provides a level of stability, future DoD budgets and spending
levels are determined by a number of factors beyond our control, including
changes to U.S. procurement policies, current and future domestic and
international budget conditions, presidential administration priorities and
changing national security and defense requirements. Furthermore, the U.S.
Government's overall fiscal challenges remain, and if an annual appropriations
bill is not enacted for FY 2017 or beyond, the U.S. Government may operate under
a continuing resolution. We expect members of Congress and the Obama
Administration to continue to discuss various options throughout the budget
appropriations process for FY 2017, and we cannot predict the outcome of these
efforts. We believe that L-3 will benefit from several of the DoD's focus areas
such as ISR, unmanned systems, undersea warfare, precision strike, secure
communications, missile defense and space programs, electronic warfare, aircraft
readiness and the ability to project power in denied environments. Uncertainties
continue to exist regarding how sequestration cuts, which are scheduled to
resume in FY 2018, will be implemented in DoD budgets and how they will affect
L-3's DoD business. (For more information on the risks and uncertainties related
to our U.S. Government contracts, see "Part I - Item 1A - Risk Factors" in our
Annual Report on Form 10-K for the year ended December 31, 2015).

International and Commercial Markets


Sales to end customers other than the U.S. Government represented 30% of our
2015 sales, including 2% of our consolidated sales related to Marine Systems
International (MSI), which we divested on May 29, 2015. These sales are
generally affected by international government security and military priorities,
as well as the fiscal situations of our international government end customers,
global economic conditions for our commercial end markets and our competitive
success in winning new business and increasing market share.



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Key Performance Measures


The primary financial performance measures that we use to manage our businesses
and monitor results of operations are (i) sales, (ii) operating income, and
(iii) net cash from operating activities (Operating Cash Flow). Management
believes that these financial performance measures are the primary growth
drivers for our earnings per share and cash flow generation. Generally, in
evaluating our businesses and contract performance, we focus on net sales,
operating income, operating margin, which we define as operating income as a
percentage of sales, and Operating Cash Flow, and not the type or amount of
operating costs.

One of our primary business objectives is to increase sales organically and
through select business acquisitions. We define organic sales growth as the
increase or decrease in sales for the current period compared to the prior
period, excluding sales in the: (1) current period from business acquisitions
that are included in our actual results of operations for less than twelve
months, and (2) prior period from business divestitures that are included in our
actual results of operations for the twelve-month period prior to the
divestiture date. We expect to supplement, strengthen and enhance our existing
businesses by selectively acquiring businesses that: (1) add important new
technologies and products, (2) provide access to select customers, programs and
contracts and (3) provide attractive returns on investment. Another important
financial performance measure that we use is operating margin, because sales
growth combined with operating margin levels determine our operating income
levels. Operating Cash Flow is also an important financial performance measure
because Operating Cash Flow measures our ability to convert operating income
into cash after paying income taxes and interest expenses and investing in
working capital.

Sales Trend. For the quarter ended June 24, 2016 (2016 Second Quarter),
consolidated net sales of $2,664 million increased by $121 million, or 5%,
compared to the quarter ended June 26, 2015 (2015 Second Quarter). Organic sales
increased by $187 million, or 7%, for the 2016 Second Quarter. Organic sales
exclude $90 million of sales declines related to business divestitures and $24
million of sales increases related to business acquisitions.

For the first half period ended June 24, 2016 (2016 First Half), consolidated
net sales of $5,017 million decreased by $14 million, compared to the first half
period ended June 26, 2015 (2015 First Half). Organic sales increased by $135
million, or 3%, for the 2016 First Half. Organic sales exclude $204 million of
sales declines related to business divestitures and $55 million of sales
increases related to business acquisitions. See "Results of Operations,"
including segment results below for a further discussion of sales.

For the year ended December 31, 2015, our largest contract (revenue arrangement)
in terms of annual sales was the Fort Rucker Maintenance Support contract with
the U.S. Army Aviation and Missile Life Cycle Management Command (AMCOM), which
is included in our Aerospace Systems segment. Under this contract, which
generated approximately 4% of our 2015 sales, we provide maintenance, logistics
and other related sustainment support services for rotary wing aircraft assigned
to Fort Rucker and satellite units in Alabama. Our period of performance,
including unexercised annual options, continues through September 30, 2017.

We derived approximately 67% of our 2015 sales from DoD customers and, as a
result, our sales are highly correlated to DoD budget levels. DoD budgets are a
function of several factors and uncertainties beyond our control, including, but
not limited to, changes in U.S. procurement policies, budget considerations,
current and future economic conditions, presidential administration priorities,
U.S. military engagements, changing national security and defense requirements,
geo-political developments, actual fiscal year congressional appropriations for
defense budgets, and sequestration and other DoD budget reductions. Any of these
factors could result in a significant increase, decrease or redirection of DoD
budgets and impact L-3's future results of operations, including our sales and
operating income growth rates. Additionally, L-3's future results of operations
will be affected by our ability to retain our existing business, including our
revenue arrangements with DoD customers, and to successfully re-compete for
existing business and compete for new business, which largely depends on:
(1) our successful performance on existing contracts, (2) the effectiveness and
innovation of our technologies and



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research and development activities, (3) our ability to offer better program
performance than our competitors at an affordable cost, and (4) our ability to
retain our employees and hire new ones, particularly those employees who have
U.S. Government security clearances. We expect our 2016 consolidated sales to
decline by approximately 3% compared to 2015, including an organic sales decline
of 1.2%. We expect organic international sales to decline by approximately 13%
due to the completion of certain contracts with foreign governments, and organic
sales to the DoD and U.S. Government to increase by approximately 1%. We expect
organic commercial sales to increase by approximately 3% primarily for
commercial aviation products. See "Other Events" for information related to the
MSI divestiture, which contributed approximately 2% of our consolidated sales in
2015.

Operating Income Trend. For the 2016 Second Quarter, our consolidated and
segment operating income was $247 million and our consolidated operating margin
was 9.3%. Our consolidated operating income and consolidated operating margin
for the 2015 Second Quarter were impacted by a net pre-tax gain of $2 million
related to the business divestitures, which are further discussed below. The net
gain related to business divestitures is excluded from segment operating income
because it is excluded by management for purposes of evaluating the operating
performance of our business segments. Our segment operating income increased 64%
compared to $151 million for the 2015 Second Quarter, and our segment operating
income as a percentage of sales (segment operating margin) was 9.3% for the 2016
Second Quarter, an increase of 340 basis points from 5.9% for the 2015 Second
Quarter.

For the 2016 First Half, our consolidated and segment operating income was $499
million and our consolidated operating margin was 9.9%. Our consolidated
operating income and consolidated operating margin for the 2015 First Half were
reduced by a pre-tax loss of $20 million related to business divestitures. Our
segment operating income increased 39% compared to $360 million for the 2015
First Half, and our segment operating margin was 9.9% for the 2016 First Half,
an increase of 270 basis points from 7.2% for the 2015 First Half. See "Results
of Operations", including segment results below for a further discussion of
operating margin.

Our effective management of labor, material, subcontractor and other direct
costs is an important element of cost control and favorable contract
performance. We believe that proactively re-sizing our businesses to their
anticipated sales, combined with continuous cost improvement will enable us to
increase our cost competitiveness. While we continue to undertake cost
management actions, such as reducing our indirect costs, resizing select
business units, and improving our productivity and contract performance in an
effort to maintain or even increase operating margin, these efforts may not be
successful and may be partially or fully offset by other cost increases.
Although we expect our 2016 annual consolidated and segment operating margin to
increase as compared to 2015, changes in the competitive environment and DoD
procurement practices, lower consolidated sales and changes in annual pension
expense, including related assumptions such as the benefit obligation discount
rates, among other factors, could result in lower operating margin. Furthermore,
select business acquisitions and new business, including contract renewals and
new contracts, could have lower future operating margins compared to L-3's
operating margins on existing contracts, and could reduce future consolidated
and segment operating margins.

Operating Cash Flow Trend. Operating Cash Flow of $369 million for the 2016
First Half increased by $60 million compared to $309 million for the 2015 First
Half. The increase of Operating Cash Flow was due to higher net income adjusted
for non-cash expenses, partially offset by higher uses of cash for working
capital in the 2016 First Half compared to the 2015 First Half, primarily
related to liquidations of advanced payments and billings in excess of costs
incurred.

Business Divestitures

Discontinued Operations. On February 1, 2016, we completed the sale of our NSS
business to CACI International Inc. for a sale price of $561 million, subject to
finalization based on customary adjustments for closing date net working
capital.



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The table below presents statement of operations data for NSS, which was previously a reportable segment, and has been classified as discontinued operations and includes allocated interest expense for debt not directly attributable or related to L-3's other operations. Interest expense was allocated in accordance with the accounting standards for discontinued operations and was based on the ratio of NSS's net assets to the sum of: (1) total L-3 consolidated net assets and (2) L-3 consolidated total debt. See Note 5 to the unaudited condensed consolidated financial statements for additional information.




                                                Second Quarter Ended                   First Half Ended
                                            June 24,            June 26,           June 24,         June 26,
                                              2016                2015               2016             2015
                                                                     (in millions)
Net sales                                 $        -          $       264         $      86         $   502
Cost of sales                                      -                 (251)              (92)           (476)
Gain related to business
divestiture(1)                                     -                    -                64               -

Operating income from discontinued
operations                                         -                   13                58              26
Interest expense allocated to
discontinued operations                            -                   (6)                -             (11)

Income from discontinued operations
before income taxes                                -                    7                58              15
Income tax (expense) benefit                       -                   (3)                5              (7)

Income from discontinued operations,
net of income taxes                       $        -          $         4         $      63         $     8




(1) The 2016 First Half includes a gain of $64 million (before and after income

taxes) on the sale of the NSS business.



MSI Divestiture. On May 29, 2015, we completed the sale of our MSI business to
Wärtsilä Corporation for a sale price of €295 million (approximately $318
million), in addition to the assumption by Wärtsilä Corporation of approximately
€60 million of MSI employee pension-related liabilities. The sale price was
finalized as of June 24, 2016, with no significant changes to preliminary
amounts. MSI was a sector within our Electronic Systems segment, primarily
selling to the commercial shipbuilding industry. We recorded a pre-tax gain of
$5 million ($9 million after income taxes) for the 2015 Second Quarter and a
pre-tax loss of $17 million ($6 million after income taxes) for the 2015 First
Half, related to the divestiture of MSI.

Broadcast Sports Inc. (BSI) Divestiture. On April 24, 2015, we divested our BSI
business for a sales price of $26 million. BSI is a provider of wireless
technology and communications systems services for use in the field of sports
television broadcasting, and was included in the Sensor Systems sector of the
Electronic Systems segment. During the 2015 Second Quarter and 2015 First Half,
we recorded a pre-tax loss of $3 million ($6 million after income taxes) related
to the divestiture of BSI.

Business Acquisitions

Our Annual Report on Form 10-K summarizes the business acquisitions that we
completed during the three years ended December 31, 2015. During the 2016 First
Half, we acquired the assets of Advanced Technical Materials, Inc. (ATM), with
$27 million of cash on hand. Business acquisitions are included in our
consolidated results of operations from their dates of acquisition. See Note 5
to our unaudited condensed consolidated financial statements contained in this
quarterly report for a further discussion of our business acquisitions during
the 2016 First Half.

Results of Operations

The following information should be read in conjunction with our unaudited
condensed consolidated financial statements contained in this quarterly report.
Our results of operations for the periods presented are affected by our business
acquisitions and divestitures.



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© Edgar Online, source Glimpses

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Sales 2016 10 158 M
EBIT 2016 1 003 M
Net income 2016 637 M
Debt 2016 3 026 M
Yield 2016 2,03%
P/E ratio 2016 18,19
P/E ratio 2017 17,43
EV / Sales 2016 1,43x
EV / Sales 2017 1,39x
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Average target price 152 $
Spread / Average Target 1,4%
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NameTitle
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Christopher Eugene Kubasik President & Chief Operating Officer
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