L 3 Communications : Q315 Earnings Release

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Contact: L-3 Communications Holdings, Inc.

Corporate Communications For Immediate Release 212-697-1111

L-3 Announces Third Quarter 2015 Results

• Net sales of $2.8 billion
• Adjusted diluted earnings per share(1) of $2.09; Diluted loss per share of $3.74
• Goodwill impairment charge of $5.79 per diluted share for National Security Solutions
• Net cash from operating activities of $317 million
• Funded orders of $2.4 billion, funded backlog of $9.4 billion
• Updated 2015 financial guidance
• Preliminary 2016 financial outlook

  
  

  NEW YORK, October 29, 2015 - L-3 Communications Holdings, Inc. (NYSE: LLL) today reported adjusted diluted earnings per share (EPS) of $2.09 and diluted loss per share of $3.74 for the quarter ended September 25, 2015 (2015 third quarter), compared to diluted EPS of $1.78 for the quarter ended September 26, 2014 (2014 third quarter). Adjusted diluted EPS excludes: (i) a non-cash goodwill impairment charge for the National Security Solutions (NSS) segment of $5.79 per diluted share and (ii) a loss related to a business divestiture of

  $0.08 per diluted share. Net sales of $2.8 billion for the 2015 third quarter decreased by 4% compared to the 2014 third quarter. Excluding sales from divestitures and acquisitions, net sales (organic sales) decreased 1%.

  
  

  'Our results for the third quarter reflect continued execution of our strategy, including the ongoing repositioning of our portfolio to focus on structurally stronger, higher-yielding businesses where we maintain leading positions,' said Michael T. Strianese, chairman and chief executive officer. 'While we had improved operating results, demonstrated by higher segment operating margins, we recorded a non-cash goodwill impairment charge for National Security Solutions. We continue to evaluate strategic alternatives for National Security Solutions and the process is proceeding as expected. We expect to undertake other significant portfolio actions in addition to National Security Solutions, and we have begun to evaluate strategic alternatives for our other service and hardware businesses with lower returns. By transforming our portfolio, we expect to enhance L-3's growth prospects, margin profile and overall competitive positioning.'

  
  

  Mr. Strianese added, 'We are confident that our strategy and healthy cash flow coupled with our disciplined capital allocation will enhance shareholder value.'

  
  

  Funded orders of $2.4 billion for the quarter included the following key wins:

  
  

  • a contract to missionize two C-130J aircraft with options to missionize ten additional C-130J aircraft and provide ground/flight test support to the U.S. Coast Guard,

    
    

  • a subcontract from Science and Engineering Services, LLC to provide broadband communication systems to the U.S. Army in support of the Apache helicopter program,

    
    

    (1) Adjusted diluted earnings per share is a non-GAAP financial measure. See Table E for a reconciliation and a discussion on why this information is presented.

  • a prime contractor position to compete on the U.S. Air Force's (USAF) Training Systems Acquisition III multi-award indefinite-delivery/indefinite-quantity (ID/IQ) contract to provide analysis, design, development, production, installation, test and sustainment for USAF training configurations encompassing complex aircrew, maintenance and system-specific training systems, and

    
    

  • a prime contractor position to compete on the USAF Agile Acquisition multi-award ID/IQ contract to provide pre-program activities, technology development activities, engineering and manufacturing activities, and production activities for the development of new systems or modification of existing systems for the USAF.

Adjusted diluted EPS for the 2015 third quarter excludes: (1) a goodwill impairment charge of $491 million ($463 million after income taxes), or $5.79 per diluted share, due to a decline in the estimated fair value of the NSS segment and (2) a pre-tax loss of $9 million ($6 million after income taxes), or $0.08 per diluted share, related to business divestitures, primarily the divestiture of the Tinsley Product Line, which was completed on July 27, 2015 for a sales price of $4 million. The goodwill impairment charge was a result of a decline in the projected future cash flows of NSS caused by NSS's inability to achieve its planned 2015 orders, sales and operating income, primarily due to lower than expected new commercial and international business awards, and a reduced outlook for operating margin and international sales.

Adjusted diluted EPS for the year-to-date period ended September 25, 2015 (2015 year-to-date period) excludes:

(1) a goodwill impairment charge of $491 million ($463 million after income taxes), or $5.68 per diluted share, related to the NSS segment and (2) a pre-tax loss of $29 million ($18 million after income taxes), or $0.22 per diluted share, related to business divestitures, of which $17 million relates to the divestiture of Marine Systems International (MSI), completed on May 29, 2015, $8 million relates to the Tinsley Product Line divestiture, and

$4 million relates to the Broadcast Sports, Inc. (BSI) divestiture, completed on April 24, 2015.

The goodwill impairment charge and pre-tax losses related to business divestitures are included in consolidated operating (loss) income, but excluded from segment operating income, because they are excluded by management for purposes of assessing segment operating performance.

L-3 Consolidated Results

Third Quarter Ended		Year-to-Date Ended
($ in millions, except per share data)	Sept. 25, 2015	Sept. 26, 2014	Increase/ (decrease)	Sept. 25, 2015	Sept. 26, 2014	Increase/ (decrease)
Net sales..............................................................	$ 2,817	$ 2,940	(4)%	$ 8,323	$ 8,916	(7)%
Operating (loss) income......................................	$ (214)	$ 257	nm	$ 152	$ 782	(81)%
Loss related to business divestitures ..............	9	―	nm	29	―	nm
Goodwill impairment charge .........................	491	―	nm	491	―	nm
Segment operating income..................................	$ 286	$ 257	11%	$ 672	$ 782	(14)%
Operating margin ................................................	nm	8.7%	nm	1.8%	8.8%	(700) bpts
Segment operating margin ..................................	10.2%	8.7%	150 bpts	8.1%	8.8%	(70) bpts
Interest expense...................................................	$ 47	$ 47	-	$ 139	$ 129	8%
Interest and other income, net .............................	$ 3	$ 5	(40)%	$ 11	$ 14	(21)%
Effective income tax rate ....................................	nm	27.0%	nm	nm	29.5%	nm
Net (loss) income attributable to L-3 ..................	$ (299)	$ 154	nm	$ (74)	$ 461	nm
Adjusted net income attributable to L-3(a) ...........	$ 170	$ 154	10%	$ 407	$ 461	(12)%
Diluted (loss) earnings per share.........................	$ (3.74)	$ 1.78	nm	$ (0.91)	$ 5.21	nm
Adjusted diluted EPS(a) .......................................	$ 2.09	$ 1.78	17%	$ 4.92	$ 5.21	(6)%
Diluted weighted average common shares outstanding..........................................................	80.0	86.6	(8)%	81.5	88.4	(8)%
(a) Non-GAAP metric that excludes the goodwill impairment charge and the aggregate loss related to business divestitures. See Table E for a reconciliation of this measure. nm - not meaningful

Third Quarter Results of Operations: For the 2015 third quarter, consolidated net sales of $2.8 billion decreased

$123 million, or 4%, compared to the 2014 third quarter. Sales to the U.S. Government declined 3%, or $58 million, to $2,040 million in the 2015 third quarter, compared to $2,098 million in the 2014 third quarter, driven primarily by U.S. defense budget constraints and reductions caused by sequestration, and by the U.S. military drawdown in Afghanistan. Sales to international and commercial customers declined 8%, or $65 million, to

$777 million in the 2015 third quarter, compared to $842 million in the 2014 third quarter driven by a $125 million decline related to business divestitures(2), primarily MSI, partially offset by $32 million of sales from the Miteq, Inc. and CTC business acquisitions(2). This decrease was partially offset by an increase of $28 million primarily due to a new contract for satellite communication systems to the Australian Defence Force (ADF).

Organic sales for the 2015 third quarter declined 1%. Organic sales to the U.S. Government declined 3%, while organic sales grew 3% for international and commercial customers.

Consolidated operating income for the 2015 third quarter decreased by $471 million, compared to the 2014 third quarter, to an operating loss of $214 million. Segment operating income for the 2015 third quarter increased $29 million, or 11%, compared to the 2014 third quarter. Segment operating income as a percentage of sales (segment operating margin) increased by 150 basis points to 10.2% for the 2015 third quarter compared to 8.7% for the 2014 third quarter. Segment operating margin increased by: (1) 90 basis points due to $24 million of outside accounting and legal advisory expenses incurred in the 2014 third quarter for the internal review of the Aerospace Systems segment (Internal Review) completed in October 2014, (2) 70 basis points due to favorable contract performance adjustments for the Intelligence, Surveillance and Reconnaissance (ISR) Systems sector in the Aerospace Systems segment, (3) 40 basis points due to the divestitures of MSI, BSI and the Tinsley Product Line and (4) 10 basis points due to sales mix changes. These increases were partially offset by a decrease of 60 basis points due to a higher pension expense of $18 million. See the reportable segment results below for additional discussion of sales and operating margin trends.

(2) Sales from acquired businesses are defined as sales from business acquisitions that are included in L-3's actual results for less than 12 months. Sales from business divestitures are defined as sales from business divestitures that are included in L-3's actual results for the 12 months prior to the divestitures.

The effective income tax rate for the 2015 third quarter is not meaningful because the company reported a pre- tax loss and income tax expense during the period due to the goodwill impairment charge. The marginal effective income tax rate on the goodwill impairment charge relating to the NSS segment was 6% because a significant portion of the NSS goodwill is not deductible for tax. Excluding the goodwill impairment charge and related income tax benefit, the effective income tax rate for the 2015 third quarter would have increased to 28.3% compared to 27.0%, primarily due to higher pre-tax income and state income tax expense.

Net (loss) income attributable to L-3 in the 2015 third quarter decreased by $453 million to a loss of $299 million, compared to income of $154 million in the 2014 third quarter. Diluted EPS decreased by $5.52 to a loss of $3.74 from $1.78 in the 2014 third quarter. Adjusted net income attributable to L-3 increased 10% to $170 million compared to the 2014 third quarter, and adjusted diluted EPS increased 17% to $2.09. Diluted weighted average common shares outstanding for the 2015 third quarter declined by 8% compared to the 2014 third quarter primarily due to repurchases of L-3 common stock.

Year-to-Date Results of Operations: For the 2015 year-to-date period, consolidated net sales of $8.3 billion decreased $593 million, or 7%, compared to the year-to-date period ended September 26, 2014 (2014 year-to- date period). Sales to the U.S. Government, including $5 million of sales from acquired businesses, declined 6%, or $395 million, to $5,981 million in the 2015 year-to-date period compared to $6,376 million in the 2014 year-to-date period, driven primarily by U.S. defense budget constraints and reductions caused by sequestration, and by the U.S. military drawdown in Afghanistan. Sales to international and commercial customers declined 8%, or $198 million, to $2,342 million in the 2015 year-to-date period, compared to $2,540 million in the 2014 year-to-date period driven by: (1) a $187 million decline relating to business divestitures, partially offset by $66 million of sales from the Miteq, Inc. and CTC business acquisitions, (2) a $82 million decline due to foreign currency exchange rate changes and (3) a $59 million decline on international head-of-state aircraft modification contracts primarily due to unfavorable contract performance adjustments. These decreases were partially offset by an increase of $64 million primarily due to higher volume for small ISR aircraft systems to a foreign government and a new contract for satellite communication systems to the ADF. Organic consolidated sales for the 2015 year-to-date period declined 5%. Organic sales to the U.S. Government declined 6% and organic sales to international and commercial customers declined 3%.

Consolidated operating income for the 2015 year-to-date period decreased $630 million, or 81%, compared to the 2014 year-to-date period. Segment operating income for the 2015 year-to-date period decreased by $110 million, or 14%, compared to the 2014 year-to-date period. Segment operating margin decreased by 70 basis points to 8.1% for the 2015 year-to-date period compared to 8.8% for the 2014 year-to-date period. Segment operating margin decreased by: (1) 60 basis points due to unfavorable contract performance adjustments at the Aerospace Systems segment, (2) 60 basis points due to higher pension expense of $46 million, (3) 10 basis points due to lower sales and mix changes and (4) 10 basis points related to a product specification matter in the Electronic Systems segment. Improved contract performance in Communication Systems and Electronic Systems increased segment operating margin by 40 basis points. Operating margin increased by 30 basis points due to $24 million of outside accounting and legal advisory expenses incurred in 2014 for the Internal Review completed in October 2014. See the reportable segment results below for additional discussion of sales and operating margin trends.

Interest expense in the 2015 year-to-date period increased by $10 million compared to the 2014 year-to-date period due to the issuance of $1 billion in new debt on May 28, 2014, partially offset by the redemption of our convertible contingent debt securities (CODES) in June 2014.

The effective income tax rate for the 2015 year-to-date period is not meaningful because the company reported income tax expense greater than pre-tax income during the period due to the goodwill impairment charge.

Excluding the goodwill impairment charge and related income tax benefit, the effective income tax rate for the 2015 year-to-date period would have decreased to 22.3%, compared to 29.5% for the same period last year primarily due to $36 million of tax benefits recorded in the second quarter of 2015, including: (1) $17 million of foreign tax benefits related to a legal restructuring of our foreign entities, (2) a $10 million benefit related to the resolution of various outstanding income tax matters with U.S. and foreign tax authorities and (3) $9 million related to deferred tax benefits.

Net (loss) income attributable to L-3 in the 2015 year-to-date period decreased by $535 million to a loss of $74 million, compared to income of $461 million in the 2014 year-to-date period. Diluted EPS decreased by $6.12 to a loss of $0.91 from $5.21 in the 2014 year-to-date period. Adjusted net income attributable to L-3 decreased 12% to $407 million compared to the 2014 year-to-date period, and adjusted diluted EPS decreased 6% to $4.92.