L 3 Communications : Q415 Earnings Release

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Contact: L-3 Communications Holdings, Inc.

Corporate Communications For Immediate Release 212-697-1111

L-3 Announces Fourth Quarter 2015 Results

• Agreement to sell National Security Solutions (presented as discontinued operations)
• Net sales of $2.9 billion
• Adjusted diluted earnings per share (EPS) from continuing operations(1) of $2.16; Diluted loss per share from continuing operations of $0.76
• Goodwill impairment charges of $2.93 per diluted share, primarily for Logistics Solutions
• Net cash from operating activities from continuing operations of $465 million
• Funded orders of $2.6 billion, funded backlog of $8.4 billion
• Updated 2016 financial guidance

  
  

  NEW YORK, January 28, 2016 - L-3 Communications Holdings, Inc. (NYSE: LLL) today reported adjusted diluted EPS from continuing operations of $2.16 and diluted loss per share from continuing operations of $0.76 for the quarter ended December 31, 2015 (2015 fourth quarter). Diluted EPS from continuing operations for the quarter ended December 31, 2014 (2014 fourth quarter) was $2.34. Net sales of $2.9 billion for the 2015 fourth quarter decreased by 3% compared to the 2014 fourth quarter. Excluding sales from divestitures(2) and acquisitions(2), net sales (organic sales) increased 1%. The prior period results have been adjusted to present the National Security Solutions business as discontinued operations.

  
  

  "In the fourth quarter, we continued the progress we made on our transformation throughout 2015, highlighted by our announcement of the sale of our National Security Solutions (NSS) business." said Michael T. Strianese, chairman and chief executive officer. "Our strategic portfolio shaping efforts and solid program execution allowed us to focus on higher returning, higher margin businesses where we have market leading positions, supporting organic growth and increased segment operating margins. While there is still work to do, we are seeing benefits of our refined strategy. Our organic sales growth for the quarter was 1% and we strengthened our offerings in key markets through our ForceX acquisition, which will expand our brand and market share in 2016 and beyond."

  
  

  "While we are disappointed in our 2015 book-to-bill ratio, which was impacted by lower than anticipated international awards at Aerospace Systems, our other two segments generated healthy orders from the DoD and other U.S. Government customers. Looking ahead to 2016, we are a leaner, more focused company with robust cash flows operating in what we believe will be a more stable budgetary environment. We are confident that our ongoing efforts will drive additional organic growth in 2016 and enable us to continue returning capital to shareholders."

  
  

  
  

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

  
  

  (2) 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. 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.

  Funded orders of $2.6 billion for the quarter included the following key wins:

  
  

  • a contract to design, manufacture, qualify, test and deliver Integrated Power Node Center/Power Node Control Center (IPNC/PNCC) units to General Dynamics Bath Iron Works,

  • a contract to deliver two night vision product variants, monocular and binocular, to the Saudi Ministry of Defense, Land Forces,

  • a contract to provide immersion fidelity updates on the F/A-18 C/D/E/F and EA-18G Tactical Operational Flight Trainers (TOFT's) at multiple Air Stations for the Naval Air Warfare Center Training Systems Division,

  • a contract to provide three Full Flight Simulators for an Airbus A320, an Airbus A330 and a Boeing B737 to Turkish Airlines, and

  • a contract to provide an Airbus A320 Full Flight Simulator to Spring Airlines.

Adjusted diluted EPS from continuing operations for the 2015 fourth quarter excludes: (1) goodwill impairment charges of $349 million ($230 million after income taxes), or $2.93 per diluted share, including $338 million related to a decline in the estimated fair value of the Logistics Solutions reporting unit and $11 million related to the re-allocation of goodwill to a business unit retained by L-3 in connection with the expected sale of the National Security Solutions business and (2) a pre-tax loss of $2 million ($2 million after income taxes), or

$0.02 per diluted share, related to the divestiture of Klein Associates, Inc., which was completed on December 31, 2015 for a sales price of $10 million.

Adjusted diluted EPS from continuing operations for the year ended December 31, 2015 excludes: (1) goodwill impairment charges of $384 million ($264 million after income taxes), or $3.22 per diluted share, including

$338 million related to a decline in the estimated fair value of the Logistics Solutions reporting unit, and $46 million related to the re-allocation of goodwill and an impairment charge recorded during the third quarter of 2015 to a business retained by L-3 in connection with the expected sale of the National Security Solutions business and (2) a pre-tax loss of $31 million ($20 million after income taxes), or $0.25 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 completed on July 27, 2015, $4 million relates to the Broadcast Sports, Inc. (BSI) divestiture, completed on April 24, 2015, and $2 million relates to the Klein Associates, Inc. divestiture, completed on December 31, 2015.

The goodwill impairment charges and pre-tax losses related to business divestitures are included in consolidated operating (loss) income. Segment operating income represents earnings from the Company's business segments before the goodwill impairment charges and pre-tax losses related to business divestitures. Segment operating income is used by management for purposes of evaluating the operating performance of the Company's business segments.

L-3 Consolidated Results

Fourth Quarter Ended		Year Ended Dec. 31,
($ in millions, except per share data)	2015	2014	Increase/ (decrease)	2015	2014	Increase/ (decrease)
Net sales..............................................................	$ 2,871	$ 2,961	(3)%	$ 10,466	$10,986	(5)%
Operating (loss) income......................................	$ (96)	$ 294	nm	$ 475	$ 1,012	(53)%
Loss related to business divestitures ..............	2	―	nm	31	―	nm
Goodwill impairment charges........................	349	―	nm	384	―	nm
Segment operating income..................................	$ 255	$ 294	(13)%	$ 890	$ 1,012	(12)%
Operating margin ................................................	nm	9.9%	nm	4.5%	9.2%	(470) bpts
Segment operating margin ..................................	8.9%	9.9%	(100) bpts	8.5%	9.2%	(70) bpts
Interest expense...................................................	$ 45	$ 43	5%	$ 169	$ 158	7%
Interest and other income, net .............................	$ 6	$ 4	50%	$ 17	$ 18	(6)%
Debt retirement charge........................................	$ 1	$ ―	nm	$ 1	$ ―	nm
Effective income tax rate ....................................	nm	19.6%	nm	nm	26.0%	nm
Net (loss) income from continuing operations attributable to L-3 ............................................	$ (60)	$ 201	nm	$ 282	$ 632	(55)%
Adjusted net income from continuing operations attributable to L-3(a)........................	$ 172	$ 201	(14)%	$ 566	$ 632	(10)%
Diluted (loss) earnings per share from continuing operations ......................................	$ (0.76)	$ 2.34	nm	$ 3.44	$ 7.20	(52)%
Adjusted diluted earnings per share from continuing operations(a)....................................	$ 2.16	$ 2.34	(8)%	$ 6.91	$ 7.20	(4)%
Diluted weighted average common shares outstanding ......................................................	78.5	86.0	(9)%	81.9	87.8	(7)%
(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

Fourth Quarter Results of Operations: For the 2015 fourth quarter, consolidated net sales of $2.9 billion decreased $90 million, or 3%, compared to the 2014 fourth quarter. Organic sales growth for the 2015 fourth quarter was $40 million, or 1%. Organic sales growth excludes $167 million of sales declines related to business divestitures and $37 million of sales increases from business acquisitions. Sales to the U.S. Government increased 3%, or $66 million, to $2,029 million in the 2015 fourth quarter, compared to $1,963 million in the 2014 fourth quarter. Sales to international and commercial customers declined 19%, or $156 million, to $842 million in the 2015 fourth quarter, compared to $998 million in the 2014 fourth quarter. Organic sales to international and commercial customers decreased $22 million, or 3%.

Segment operating income for the 2015 fourth quarter decreased $39 million, or 13%, compared to the 2014 fourth quarter. Segment operating income as a percentage of sales (segment operating margin) decreased by 100 basis points to 8.9% for the 2015 fourth quarter compared to 9.9% for the 2014 fourth quarter. This decrease was driven by higher pension expense of $14 million and unfavorable contract performance adjustments primarily in the Aerospace Systems segment. See the reportable segment results below for additional discussion of sales and operating margin trends.

The effective income tax rate for the 2015 fourth quarter is not meaningful due to the goodwill impairment charges. Excluding the goodwill impairment charges and related income tax benefit, the effective income tax rate for the 2015 fourth quarter would have decreased to 17.4% compared to 19.6% primarily due to an increased benefit from the Federal Research and Experimentation (R&E) Tax Credit, which was permanently reenacted on December 18, 2015.

Net (loss) income from continuing operations attributable to L-3 in the 2015 fourth quarter decreased by

$261 million to a loss of $60 million, compared to income of $201 million in the 2014 fourth quarter. Diluted EPS from continuing operations decreased by $3.10 to a loss of $0.76 from $2.34 in the 2014 fourth quarter. Adjusted diluted EPS from continuing operations decreased 8% to $2.16. Diluted weighted average common

shares outstanding for the 2015 fourth quarter declined by 9% compared to the 2014 fourth quarter due to share repurchases.

Full Year Results of Operations: For the year ended December 31, 2015, consolidated net sales of $10.5 billion decreased $520 million, or 5%, compared to the year ended December 31, 2014. Organic sales for the year ended December 31, 2015 declined $269 million, or 3%. Organic sales exclude $354 million related to business divestitures and $103 million from business acquisitions. Sales to the U.S. Government declined 2%, or $173 million, to $7,291 million in the year ended December 31, 2015 compared to $7,464 million in the year ended December 31, 2014, driven primarily by U.S. defense budget constraints and reductions from sequestration, and by the U.S. military drawdown in Afghanistan. Sales to international and commercial customers declined 10%, or $347 million, to $3,175 million in the year ended December 31, 2015, compared to $3,522 million in the year ended December 31, 2014. Organic sales to international and commercial customers decreased $92 million, or 3%, driven by foreign currency exchange rate changes.

Segment operating income for the year ended December 31, 2015 decreased by $122 million, or 12%, compared to the year ended December 31, 2014. Segment operating margin decreased by 70 basis points to 8.5% for the year ended December 31, 2015 compared to 9.2% for the year ended December 31, 2014. This decrease was driven by higher pension expense of $61 million and unfavorable contract performance adjustments at the Aerospace Systems segment, partially offset by 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.

The effective income tax rate for the year ended December 31, 2015 is not meaningful due to the goodwill impairment charges. Excluding the goodwill impairment charges and related income tax benefit, the effective income tax rate for 2015 would have decreased to 20.5%. The decrease is primarily due to: (1) $17 million of foreign tax benefits related to a legal restructuring of our foreign entities and (2) an increased benefit from the Federal Research and Experimentation Tax Credit.

Net income from continuing operations attributable to L-3 in the year ended December 31, 2015 decreased to

$282 million, compared to $632 million in the year ended December 31, 2014. Diluted EPS from continuing operations decreased 52% to $3.44 from $7.20 in the year ended December 31, 2014. Adjusted net income from continuing operations attributable to L-3 decreased 10% to $566 million compared to the year ended December 31, 2014, and adjusted diluted EPS from continuing operations decreased 4% to $6.91. Diluted weighted average common shares outstanding for the year ended December 31, 2015 declined by 7% compared to the year ended December 31, 2014 due to repurchases of L-3 common stock.

Orders: Funded orders for the 2015 fourth quarter were $2.6 billion, a decrease of 18.7% compared to the 2014 fourth quarter. Funded orders for the year ended December 31, 2015 were $9.9 billion, compared to $11.0 billion for the year ended December 31, 2014. The book-to-bill ratio was 0.89x for the 2015 fourth quarter and 0.94x for the year ended December 31, 2015. Funded backlog declined 13% to $8.4 billion at December 31, 2015, compared to $9.7 billion at December 31, 2014, due to the divestiture of MSI and a book-to-bill ratio of less than 1.

Cash flow and cash returned to shareholders: Net cash from operating activities from continuing operations decreased by $49 million, or 10%, to $465 million for the 2015 fourth quarter, compared to $514 million for the 2014 fourth quarter. Net cash from operating activities from continuing operations decreased by $71 million, or 7%, to $1,021 million for the year ended December 31, 2015, compared to $1,092 million for the year ended December 31, 2014. The decrease in net cash from operating activities in the year ended December 31, 2015 was due to lower net income partially offset by lower working capital requirements in the year ended

December 31, 2015, compared to the year ended December 31, 2014.