- Diluted earnings per share (EPS)
from continuing operations increased 35% to $1.88
- Net sales increased 5%
- Net cash from operating activities
from continuing operations increased 30%
- Updated 2016 financial
guidance
L-3 Communications Holdings, Inc. (NYSE:LLL) today reported
diluted EPS from continuing operations of $1.88 for the quarter
ended June 24, 2016 (2016 second quarter) compared to diluted EPS
from continuing operations for the quarter ended June 26, 2015
(2015 second quarter) of $1.39. Net sales of $2,664 million for the
2016 second quarter increased by 5% compared to the 2015 second
quarter. Excluding sales from divestitures and acquisitions(1), net
sales (organic sales) increased 7%.
“We are pleased to report another quarter of progress on L-3’s
strategy to drive growth through organic sales and
higher operating income,” said Michael T. Strianese, chairman and
chief executive officer. “Our initiatives to strengthen our
core businesses and market-leading positions have led
to solid results and higher operating margin across
all segments. By focusing on performance and organic
growth, we will continue to generate value to all of our
stakeholders."
(1)
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.
L-3 Consolidated Results
The table below provides L-3’s selected financial data from
continuing operations, which excludes the results of operations of
the National Security Solutions (NSS) business. NSS was divested on
February 1, 2016, and is reported as discontinued operations for
all periods presented.
Second Quarter Ended First Half Ended (in
millions, except per share data) June 24, June 26,
Increase/
June 24, June 26, Increase/
2016 2015
(decrease)
2016 2015 (decrease) Net sales
$
2,664 $ 2,543 5 %
$ 5,017 $ 5,031 - %
Operating income
$ 247 $ 153 61 %
$ 499
$ 340 47 % (Gain) loss related to business divestitures
- (2) nm
- 20 nm Segment
operating income
$ 247 $ 151 64 %
$ 499
$ 360 39 % Operating margin
9.3 % 6.0 % 330 bpts
9.9 % 6.8 % 310 bpts Segment operating margin
9.3 % 5.9 % 340 bpts
9.9 % 7.2 % 270
bpts Interest expense and other
$ (43) $ (37) 16 %
$ (80) $ (73) 10 % Effective income tax rate
provision (benefit)
26.0 % (3.4) % nm
24.1
% 15.7 % nm Net income from continuing operations
attributable to L-3
$ 147 $ 116 27 %
$
311 $ 217 43 % Adjusted net income from continuing
operations attributable to L-3 (a)
$ 147 $ 113 30 %
$ 311 $ 229 36 % Diluted earnings per share from
continuing operations
$ 1.88 $ 1.39 35 %
$
3.95 $ 2.60 52 % Adjusted diluted earnings per share from
continuing operations(a)
$ 1.88 $ 1.36 38 %
$
3.95 $ 2.74 44 % Diluted weighted average common shares
outstanding
78.4 83.2 (6) %
78.7 83.5 (6) %
(a) Non-GAAP metric that excludes the aggregate gain or loss
related to business divestitures. See Table E for a reconciliation
and a discussion of why this information is presented. nm –
not meaningful
Second Quarter Results of Operations: For the 2016 second
quarter, consolidated net sales of $2,664 million increased $121
million, or 5%, compared to the 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 2016 second quarter, organic sales
to the U.S. Government increased $104 million, or 6%, and organic
sales to international and commercial customers increased $83
million, or 11%.
Segment operating income for the 2016 second quarter increased
by $96 million, or 64%, compared to the 2015 second quarter.
Segment operating income as a percentage of sales (segment
operating margin) increased by 340 basis points to 9.3% for the
2016 second quarter, compared to 5.9% for the 2015 second quarter.
Segment operating margin increased by: (1) 250 basis points
primarily due to unfavorable contract performance adjustments
related to cost growth in the 2015 second quarter that did not
recur in the 2016 second quarter on international head-of-state
aircraft modification contracts in the Aerospace Systems segment,
(2) 50 basis points due to $14 million of charges in the Electronic
Systems segment recorded in the 2015 second quarter in connection
with a settlement with the U.S. Government related to the EoTech
holographic weapons sight (HWS) product and an adverse arbitration
ruling and (3) 40 basis points due to lower pension expense of $10
million. See the reportable segment results below for additional
discussion of sales and operating margin trends.
Interest expense and other for the 2016 second quarter includes
a $5 million debt retirement charge related to the redemption of
$300 million aggregate principal amount of 3.95% Senior Notes due
November 15, 2016.
The effective tax rate for the 2016 second quarter increased to
26.0% compared to a benefit of 3.4% for the same period last year.
The 2016 second quarter includes a benefit from the reinstatement
of the Federal Research and Experimentation (R&E) tax credit.
The 2015 second quarter included tax benefits of: (1) $17 million
related to a legal restructuring of foreign entities, (2) $10
million related to the resolution of various outstanding income tax
matters with U.S. and foreign tax authorities and (3) $9 million
primarily associated with the release of the valuation allowance
for certain deferred tax assets.
Net income from continuing operations attributable to L-3 in the
2016 second quarter increased 27% compared to the 2015 second
quarter and diluted EPS from continuing operations increased 35% to
$1.88 from $1.39. Diluted weighted average common shares
outstanding for the 2016 second quarter declined by 6% compared to
the 2015 second quarter due to repurchases of L-3 common stock.
First Half Results of Operations: For the 2016 first half,
consolidated net sales of $5,017 million decreased $14 million
compared to the 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. For
the 2016 first half, organic sales to the U.S. Government increased
$166 million, or 5%, and organic sales to international and
commercial customers decreased $31 million, or 2%.
Segment operating income for the 2016 first half increased by
$139 million, or 39%, compared to the 2015 first half. Segment
operating margin increased by 270 basis points to 9.9% for the 2016
first half, compared to 7.2% for the 2015 first half. Segment
operating margin increased by: (1) 190 basis points primarily due
to unfavorable contract performance adjustments related to cost
growth in the 2015 first half that did not recur in the 2016 first
half at Aerospace Systems on international head-of-state aircraft
modification contracts, (2) 40 basis points due to higher margins
resulting from acquisitions and divestitures and (3) 40 basis
points due to lower pension expense of $21 million. See the
reportable segment results below for additional discussion of sales
and operating margin trends.
Interest expense and other for the 2016 first half includes a $5
million debt retirement charge related to the redemption of $300
million aggregate principal amount of 3.95% Senior Notes due
November 15, 2016.
The effective tax rate for the 2016 first half increased to
24.1% from 15.7% for the same period last year. The 2016 first half
included a $12 million reduction to income tax expense due to the
early adoption of a new accounting standard related to income tax
benefits from employee stock-based compensation awards, which
increased diluted EPS by $0.15, and a benefit from the
reinstatement of the Federal R&E tax credit. The 2015 first
half included $36 million of tax benefits, discussed above.
Net income from continuing operations attributable to L-3 in the
2016 first half increased 43% to $311 million compared to the 2015
first half, and diluted EPS from continuing operations increased
52% to $3.95 from $2.60. Diluted EPS from continuing operations
increased 44% compared to adjusted diluted EPS of $2.74 for the
2015 first half. The 2015 first half adjusted diluted EPS from
continuing operations excludes a pre-tax loss of $20 million ($12
million after income taxes), or $0.14 per diluted share, related to
the divestitures of Marine Systems International and Broadcast
Sports, Inc. Diluted weighted average common shares outstanding for
the 2016 first half declined by 6% compared to the 2015 first half
due to repurchases of L-3 common stock.
Orders: Funded orders for the 2016 second quarter were $2,136
million compared to $2,512 million for the 2015 second quarter.
Funded orders for the 2016 first half were $4,727 million compared
to $5,101 million for the 2015 first half. The book-to-bill ratio
was 0.80x for the 2016 second quarter and 0.94x for the 2016 first
half. Excluding the impacts of business divestitures and
acquisitions, orders decreased by $338 million, or 14% for the 2016
second quarter and $265 million, or 5% for the 2016 first half. The
decrease is primarily due to award delays and timing. Funded
backlog declined 4% to $8,125 million at June 24, 2016, compared to
$8,423 million at December 31, 2015.
The table below summarizes the cash returned to shareholders
during the 2016 and 2015 second quarter and first half periods.
Second Quarter
Ended First Half Ended June 24,
June 26,
June 24, June 26,
($ in millions)
2016 2015
2016 2015 Net cash from operating
activities from continuing operations
$ 257 $ 197
$ 369 $ 309 Less: Capital expenditures, net of
dispositions
(36 ) (43 )
(64 ) (82 )
Plus: Income tax payments attributable to discontinued operations
- 1
- 1 Free cash flow(1)
$ 221 $ 155
$ 305
$ 228 Dividends paid ($1.40 per share in 2016; $1.30 per
share in 2015)
$ 54 $ 53
$ 112 $ 111
Common stock repurchases
78 246
276
346
Cash returned to shareholders
$ 132 $ 299
$ 388
$ 457
(1)
Free cash flow is defined as net cash from
operating activities from continuing operations 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 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 the company 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.
Reportable Segment Results
The company has three reportable segments. The company evaluates
the performance of its segments based on their sales, operating
income and operating margin. Corporate expenses are allocated to
the company’s operating segments using an allocation methodology
prescribed by U.S. Government regulations for government
contractors. Accordingly, segment results include all costs and
expenses, except for goodwill impairment charges, gains or losses
related to business divestitures and certain other items that are
excluded by management for purposes of evaluating the operating
performance of the company’s business segments.
Electronic Systems
Second Quarter Ended First Half
Ended June 24, June 26, Increase/
June 24, June
26, Increase/
($ in millions) 2016 2015 (decrease)
2016 2015 (decrease) Net sales $
1,021 $ 1,044 (2.2)
% $
1,898 $ 2,061 (7.9) % Operating income $
125 $
118 5.9 % $
220 $ 231 (4.8) % Operating margin
12.2 % 11.3 % 90 bpts
11.6 % 11.2 % 40 bpts
Second Quarter: Electronic Systems net sales for the 2016 second
quarter decreased by $23 million, or 2%, compared to the 2015
second quarter. Excluding $90 million of sales declines related to
business divestitures (primarily MSI divestiture in May 2015) and
$20 million of sales increases related to business acquisitions,
organic sales increased by $47 million, or 5%. The increase was
driven by: (1) $35 million for Aviation Products & Security
primarily due to increased deliveries of cargo and airport security
screening systems to international customers and timing of
deliveries of cockpit displays for the CH-47 aircraft, (2) $18
million for Warrior Systems primarily due to increased deliveries
of night vision products to the U.S. Army and foreign militaries
and (3) $8 million for Sensor Systems due to deliveries of
electronic warfare products to foreign militaries. These increases
were partially offset by a decrease of $14 million for Precision
Engagement & Training due to lower volume for civil aviation
simulation and training devices for commercial customers as
contracts near completion.
Electronic Systems operating income for the 2016 second quarter
increased by $7 million, or 6%, compared to the 2015 second
quarter. Operating margin increased by 90 basis points to 12.2%.
Operating margin increased by: (1) 140 basis points due to $14
million of charges recorded during the 2015 second quarter that did
not recur in 2016 in connection with (i) a settlement with the U.S.
Government relating to the EoTech HWS product in Warrior Systems
and (ii) an adverse arbitration ruling to resolve a dispute for the
termination of a supply arrangement in Aviation Products &
Security, (2) 60 basis points due to higher margins resulting from
acquisitions and divestitures, all of which were completed in 2015,
and (3) 30 basis points due to lower pension expense of $3 million.
These increases were partially offset by 140 basis points primarily
due to higher net aggregate favorable contract performance
adjustments in the 2015 second quarter compared to the 2016 second
quarter.
First Half: Electronic Systems net sales for the 2016 first half
decreased by $163 million, or 8%, compared to the 2015 first half.
Excluding $204 million of sales declines related to business
divestitures (primarily MSI divestiture in May 2015) and $46
million of sales increases related to business acquisitions,
organic sales decreased by $5 million. The decrease was driven by:
(1) $20 million for Power & Propulsion Systems due to decreased
volume on contracts nearing completion for U.S. government and
foreign government customers and (2) $16 million primarily for
Precision Engagement & Training due to lower volume of ordnance
products for the U.S. military, and civil aviation simulation and
training devices for commercial customers as contracts near
completion. These decreases were partially offset by an increase of
$31 million primarily for Aviation Products & Security due to
increased deliveries of cargo and airport security screening
systems to international customers, and commercial and military
cockpit display products and repair services.
Electronic Systems operating income for the 2016 first half
decreased by $11 million, or 5%, compared to the 2015 first half.
Operating margin increased by 40 basis points to 11.6%. Operating
margin increased by 110 basis points due to higher margins
resulting from acquisitions and divestitures and 30 basis points
due to lower pension expense of $6 million. These increases were
partially offset by a decrease of 60 basis points due to sales mix
changes, primarily for Aviation Products & Security Systems,
and 40 basis points due to higher net aggregate favorable contract
performance adjustments in the 2015 first half compared to the 2016
first half.
Aerospace Systems
Second Quarter Ended First Half
Ended June 24, June 26,
June 24, June 26,
($
in millions) 2016 2015 Increase
2016 2015
Increase Net sales $
1,148 $ 995 15.4 % $
2,153 $
2,021 6.5 % Operating income (loss) $
70 $ (18) nm $
176 $ 42 319.0 % Operating margin
6.1 % (1.8) % 790 bpts
8.2 % 2.1 % 610 bpts
Second Quarter: Aerospace Systems net sales for the 2016 second
quarter increased by $153 million, or 15%, compared to the 2015
second quarter. Sales increased $64 million for Aircraft Systems,
$63 million for ISR Systems and $26 million for Vertex Aerospace.
Sales increased for Aircraft Systems primarily due to unfavorable
contract performance adjustments in the 2015 second quarter that
did not recur in the 2016 second quarter on international
head-of-state aircraft modification contracts. Sales increased by
$78 million for ISR Systems primarily due to the procurement and
delivery of two business jets to a foreign military customer, which
was partially offset by a decrease of $15 million primarily for
small ISR aircraft fleet management services to the U.S. Air Force
due to reduced demand resulting from the U.S. military drawdown in
Afghanistan. The increase in sales for Vertex Aerospace was due to
a $12 million contract price adjustment for a recovery of cost
overruns on the previous U.S. Army C-12 contract, which ended on
July 31, 2015, and pre-production activities related to U.S. Navy
training aircraft.
Aerospace Systems operating income for the 2016 second quarter
increased by $88 million, compared to the 2015 second quarter.
Operating margin increased by 790 basis points to 6.1%. Operating
margin increased by: (1) 730 basis points primarily due to $84
million of unfavorable contract performance adjustments related to
cost growth in the 2015 second quarter that did not recur in the
2016 second quarter on international head-of-state aircraft
modification contracts at Aircraft Systems, (2) 130 basis points
primarily due to a $12 million contract price adjustment received
in the 2016 second quarter for a recovery of cost overruns
recognized in prior periods on the previous U.S. Army C-12
contract, and better terms on the new U.S. Army C-12 contract,
which began in August 2015, and (3) 40 basis points due to lower
pension expense of $4 million. These increases were partially
offset by a $13 million charge at Aircraft Systems to reduce
internal-use simulator training assets to net realizable value,
decreasing operating margin by 110 basis points.
First Half: Aerospace Systems net sales for the 2016 first half
increased by $132 million, or 7%, compared to the 2015 first half.
Sales increased $64 million for Aircraft Systems, $45 million for
ISR Systems and $23 million for Vertex Aerospace due to trends
similar to the 2016 second quarter.
Aerospace Systems operating income for the 2016 first half
increased by $134 million, or 319%, compared to the 2015 first
half. Operating margin increased by 610 basis points to 8.2% due to
trends similar to the 2016 second quarter, as well as lower pension
expense of $9 million.
Communication Systems
Second Quarter Ended First
Half Ended June 24, June 26, Increase/
June 24,
June 26,
($ in millions) 2016 2015 (decrease)
2016 2015 Increase Net sales $
495 $ 504 (1.8) % $
966 $ 949 1.8 % Operating income $
52 $ 51 2.0 % $
103 $ 87 18.4 % Operating margin
10.5 % 10.1 % 40 bpts
10.7 % 9.2 % 150 bpts
Second Quarter: Communication Systems net sales for the 2016
second quarter decreased by $9 million, or 2%, compared to the 2015
second quarter. Sales for Space & Power Systems decreased by
$30 million primarily due to reduced demand for power devices for
commercial satellites. This decrease was partially offset by $17
million primarily for Broadband Communication Systems due to
increased volume and deliveries of secure networked communication
systems for the U.S. Department of Defense (DoD) and $4 million
related to business acquisitions.
Communication Systems operating income for the 2016 second
quarter increased by $1 million, or 2%, compared to the 2015 second
quarter. Operating margin increased by 40 basis points to 10.5%
primarily due to lower pension expense of $3 million.
First Half: Communication Systems net sales for the 2016 first
half increased by $17 million, or 2%, compared to the 2015 first
half. The increase was due to: (1) $34 million for Broadband
Communication Systems, primarily due to increased volume and
deliveries of secure networked communication systems for the DoD,
(2) $9 million related to business acquisitions, (3) $8 million for
Tactical Satellite Communications products primarily due to
increased deliveries on a satellite communication land terminals
contract for the Australian Defence Force and (4) $6 million for
Advanced Communications products primarily due to increased
deliveries of secure mission data storage systems for the Joint
Strike Fighter program. These increases were partially offset by a
decrease of $40 million for Space & Power Systems, primarily
due to reduced demand for power devices for commercial
satellites.
Communication Systems operating income for the 2016 first half
increased by $16 million, or 18%, compared to the 2015 first half.
Operating margin increased by 150 basis points to 10.7%. Operating
margin increased by: (1) 90 basis points primarily due to increased
manufacturing productivity, overhead cost reductions and favorable
contract performance adjustments for Broadband Communication
Systems and (2) 60 basis points due to lower pension expense of $6
million.
Financial Guidance
Based on information known as of today, the company has updated
its consolidated and segment financial guidance for the year ending
December 31, 2016, previously provided on April 27, 2016 as
presented in the tables below. All financial guidance amounts are
estimates subject to change in the future, including as a result of
matters discussed under the “Forward-Looking Statements” cautionary
language beginning on page 8. The company undertakes no duty to
update its guidance.
Consolidated 2016 Financial Guidance ($ in
millions, except per share data)
Prior Guidance
Current Guidance (April
27, 2016) Net sales
$10,150 to $10,250 $9,950 to $10,150
Segment operating margin
9.8% 9.8% Interest expense and
other(1)
$157 $162 Effective tax rate
26.4% 26.7%
Minority interest expense(2)
$13 $11 Diluted shares
78.2 77.5 Diluted EPS
$7.65 to $7.85 $7.55 to $7.75
Net cash from operating activities
$1,030 $1,030
Capital expenditures, net of dispositions of property, plant and
equipment
(205)
(205)
Free cash flow
$825
$825
(1) Interest expense and other is comprised of: (i) interest
expense of $168 million, (ii) interest and other income, net, and
(iii) a debt retirement charge of $5 million. (2) Minority
interest expense represents net income from continuing operations
attributable to non-controlling interests.
Segment 2016 Financial
Guidance ($ in millions)
Prior Guidance
Current Guidance
(April 27, 2016)
Net
Sales:
Electronic Systems
$4,100 to $4,200 $4,150 to $4,250
Aerospace Systems
$4,050 to $4,150 $3,900 to $4,000
Communication Systems
$1,900 to $2,000 $1,850 to $1,950
Operating
Margins:
Electronic Systems
12.0% to 12.2 % 12.0% to 12.2 %
Aerospace Systems
7.0% to 7.2 % 7.0% to 7.2 %
Communication Systems
10.3%
to 10.5 % 10.3% to 10.5 %
The revisions to our Current Guidance compared to our Prior
Guidance primarily include:
- An increase in estimated sales for
Aerospace Systems and Communication Systems primarily related to
higher sales volume on various DoD contracts, and
- A decrease in estimated sales for
Electronic Systems due to lower unit sales of EoTech HWS products
and lower than expected demand for a recently introduced general
aviation product.
The current guidance for 2016 excludes: (i) any potential
non-cash goodwill impairment charges for which the information is
presently unknown, (ii) potential adverse results related to
litigation contingencies and (iii) other items such as gains or
losses related to potential business divestitures and the impact of
potential acquisitions.
Additional financial information regarding the 2016 second
quarter results and the 2016 financial guidance is available on the
company’s website at www.L-3com.com.
Conference Call
In conjunction with this release, L-3 will host a conference
call today, Thursday, July 28, 2016 at 11:00 a.m. ET that will be
simultaneously broadcast over the Internet. Michael T. Strianese,
chairman and chief executive officer, Christopher E. Kubasik,
president and chief operating officer, and Ralph G. D’Ambrosio,
senior vice president and chief financial officer, will host the
call.
Listeners may access the conference call live over the Internet
at the company’s website at:
http://www.L-3com.com
Please allow fifteen minutes prior to the call to visit our
website to download and install any necessary audio software. The
archived version of the call may be accessed at our website or by
dialing (800) 585-8367/ passcode: 42125719 (for domestic callers)
or (404) 537-3406/passcode: 42125719 (for international callers)
beginning approximately two hours after the call ends and will be
available until the company’s next quarterly earnings release.
Headquartered in New York City, L-3 employs approximately 38,000
people worldwide and is a leading provider of a broad range of
communication and electronic systems and products used on military
and commercial platforms. L-3 is also a prime contractor in
aerospace systems.
To learn more about L-3, please visit the company’s website at
www.L-3com.com. L-3 uses its website as a channel of distribution
of material company information. Financial and other material
information regarding L-3 is routinely posted on the company’s
website and is readily accessible.
Forward-Looking Statements
Certain of the matters discussed in this press release,
including information regarding the company’s 2016 financial
guidance are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. All statements
other than historical facts, may be forward-looking statements,
such as “may,” “will,” “should,” “likely,” “projects,” “financial
guidance,” ‘‘expects,’’ ‘‘anticipates,’’ ‘‘intends,’’ ‘‘plans,’’
‘‘believes,’’ ‘‘estimates,’’ and similar expressions are used to
identify forward-looking statements. The company cautions investors
that these statements are subject to risks and uncertainties many
of which are difficult to predict and generally beyond the
company’s control that could cause actual results to differ
materially from those expressed in, or implied or projected by, the
forward-looking information and statements. Some of the factors
that could cause actual results to differ include, but are not
limited to, the following: our dependence on the defense industry;
backlog processing and program slips resulting from delayed awards
and/or funding from the Department of Defense (DoD) and other major
customers; the U.S. Government fiscal situation; changes in DoD
budget levels and spending priorities; U.S. Government failure to
raise the debt ceiling; our reliance on contracts with a limited
number of customers and the possibility of termination of
government contracts by unilateral government action or for failure
to perform; the extensive legal and regulatory requirements
surrounding many of our contracts; our ability to retain our
existing business and related contracts; our ability to
successfully compete for and win new business, or, identify,
acquire and integrate additional businesses; our ability to
maintain and improve our operating margin; the availability of
government funding and changes in customer requirements for our
products and services; our significant amount of debt and the
restrictions contained in our debt agreements and actions taken by
rating agencies that could result in a downgrade of our debt; our
ability to continue to recruit, retain and train our employees;
actual future interest rates, volatility and other assumptions used
in the determination of pension benefits and equity based
compensation, as well as the market performance of benefit plan
assets; our collective bargaining agreements; our ability to
successfully negotiate contracts with labor unions and our ability
to favorably resolve labor disputes should they arise; the
business, economic and political conditions in the markets in which
we operate; global economic uncertainty; the DoD’s Better Buying
Power and other efficiency initiatives; events beyond our control
such as acts of terrorism; our ability to perform contracts on
schedule; our international operations including currency risks and
compliance with foreign laws; our extensive use of fixed-price type
revenue arrangements; the rapid change of technology and high level
of competition in which our businesses participate; risks relating
to technology and data security; our introduction of new products
into commercial markets or our investments in civil and commercial
products or companies; the outcome of litigation matters (see Notes
to our annual report on Form 10-K and quarterly reports on Form
10-Q); results of audits by U.S. Government agencies and of ongoing
governmental investigations, including the Aerospace Systems
segment; our ability to predict the level of participation in and
the related costs of our voluntary return program for certain
EoTech holographic weapons sight products, and our ability to
change and terminate the voluntary return program at our
discretion; the impact on our business of improper conduct by our
employees, agents or business partners; goodwill impairments and
the fair values of our assets; and ultimate resolution of
contingent matters, claims and investigations relating to acquired
businesses, and the impact on the final purchase price
allocations.
Our forward-looking statements speak only as of the date of this
press release or as of the date they were made, and we undertake no
obligation to update forward-looking statements. For a more
detailed discussion of these factors, also see the information
under the captions “Risk Factors” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in our
most recent report on Form 10-K for the year ended December 31,
2015 and any material updates to these factors contained in any of
our future filings.
As for the forward-looking statements that relate to future
financial results and other projections, actual results will be
different due to the inherent uncertainties of estimates, forecasts
and projections and may be better or worse than projected and such
differences could be material. Given these uncertainties, you
should not place any reliance on these forward-looking
statements.
Table A L-3 COMMUNICATIONS HOLDINGS,
INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS (in millions, except per share data)
Second Quarter Ended (a)
First Half Ended
June 24, June 26,
June 24,
June 26,
2016
2015
2016
2015
Net sales $ 2,664 $ 2,543
$
5,017 $ 5,031
Cost of sales (2,417 )
(2,392 )
(4,518 ) (4,671 )
Gain (loss) related to
business divestitures(b) - 2
- (20 )
Operating income
247 153
499 340
Interest expense (43
) (42 )
(84 ) (81 )
Interest and other
income, net 5 5
9 8
Debt retirement charge
(5 ) -
(5 )
-
Income from continuing operations before income
taxes 204 116
419 267
(Provision) benefit for
income taxes (53 ) 4
(101 ) (42 )
Income from continuing
operation 151 120
318 225
Income from
discontinued operations, net of income tax (c)
- 4
63 8
Net income 151 124
381 233
Net
income attributable to noncontrolling interests
(4 ) (4 )
(7 ) (8
)
Net income attributable to L-3 $ 147
$ 120
$ 374 $ 225
Basic earnings per share attributable to L-3 Holdings’ common
shareholders: Continuing operations $ 1.90
$
1.41
$
4.02
$
2.64
Discontinued operations - 0.05
0.81 0.10
Basic
earnings per share $ 1.90 $
1.46
$
4.83
$
2.74
Diluted earnings per share attributable to L-3
Holdings’ common shareholders: Continuing operations
$ 1.88 $
1.39
$
3.95
$
2.60
Discontinued operations - 0.05
0.80
0.09
Diluted earnings per share $ 1.88
$
1.44
$
4.75
$
2.69
L-3 Holdings’ weighted average common shares
outstanding: Basic 77.2 82.1
77.5 82.2
Diluted
78.4 83.2
78.7
83.5
(a) It is the company's established practice to close its
books for the quarters ending March, June and September on the
Friday preceding the end of the calendar quarter. The interim
financial statements and tables of financial information included
herein have been prepared and are labeled based on that convention.
The company closes its annual books on December 31 regardless of
what day it falls on. (b) The company completed the sale of
Marine Systems International and Broadcast Sports Inc. and recorded
a net pre-tax gain of $2 million during the 2015 second quarter and
a pre-tax loss of $20 million during the 2015 first half.
(c) Income from discontinued operations, net of income taxes for
the 2016 first half includes an after-tax gain of $64 million on
the sale of the National Security Solutions business.
Table B
L-3 COMMUNICATIONS HOLDINGS, INC. UNAUDITED SELECT
FINANCIAL DATA (in millions) Second Quarter
Ended First Half Ended June 24, June 26,
June
24, June 26,
2016 2015
2016 2015
Segment operating
data
Net sales: Electronic Systems $ 1,021 $
1,044
$ 1,898 $ 2,061
Aerospace Systems
1,148 995
2,153 2,021
Communication Systems
495 504
966 949
Total $ 2,664 $ 2,543
$
5,017 $ 5,031
Operating income (loss): Electronic
Systems $ 125 $ 118
$ 220 $ 231
Aerospace Systems 70 (18 )
176 42
Communication Systems 52 51
103 87
Total $ 247 $ 151
$ 499 $ 360
Operating margin:
Electronic Systems 12.2 % 11.3
%
11.6 % 11.2
%
Aerospace Systems 6.1 % (1.8 )
%
8.2 % 2.1
%
Communication Systems 10.5 % 10.1
%
10.7 % 9.2
%
Total 9.3 % 5.9
% 9.9 %
7.2
%
Depreciation and amortization: Electronic Systems
$ 27 $ 27
$ 52 $ 55
Aerospace
Systems 14 12
27 24
Communication Systems
11 13
23 25
Total $ 52 $ 52
$ 102 $
104
Funded order
data
Electronic Systems $ 929 $ 1,085
$
1,886 $ 2,138
Aerospace Systems 734 844
1,917 1,922
Communication Systems 473
583
924 1,041
Total
$ 2,136 $ 2,512
$ 4,727 $ 5,101
June 24, Dec. 31,
2016 2015
Period end
data
Funded backlog $ 8,125 $ 8,423
Table
C
L-3 COMMUNICATIONS HOLDINGS, INC. UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS (in
millions) June 24, December 31,
2016 2015
ASSETS Cash and cash equivalents $
352 $ 207
Billed receivables, net 808
746
Contracts in process 2,162 2,081
Inventories 356 333
Other current assets
182 201
Assets of discontinued operations —
664
Total current assets 3,860
4,232
Property, plant and equipment, net 1,075 1,097
Goodwill 6,306 6,281
Identifiable intangible
assets 190 199
Deferred income taxes 4 3
Other assets 265 255
Total
assets $ 11,700 $ 12,067
LIABILITIES
AND EQUITY Current portion of long-term debt
$ 549 $ 499
Accounts payable, trade 415
297
Accrued employment costs 481 504
Accrued
expenses 387 390
Advance payments and billings in
excess of costs incurred 448 562
Income taxes
- 13
Other current liabilities 399 394
Liabilities of discontinued operations — 220
Total current liabilities 2,679 2,879
Pension and postretirement benefits 1,046 1,047
Deferred income taxes 262 219
Other
liabilities 374 368
Long-term debt
2,780 3,125
Total liabilities
7,141 7,638
Shareholders’ equity 4,486
4,355
Noncontrolling interests 73 74
Total equity 4,559 4,429
Total
liabilities and equity $ 11,700 $ 12,067
Table
D
L-3 COMMUNICATIONS HOLDINGS, INC. UNAUDITED CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (in
millions) First Half Ended June 24, June 26,
2016 2015
Operating
activities
Net income $ 381 $ 233
Less: Income
from discontinued operations, net of tax (63
) (8 )
Income from continuing operations
318 225
Depreciation of property, plant and equipment
81 83
Amortization of intangibles and other assets
21 21
Deferred income tax provision (benefit)
29 (14 )
Stock-based employee compensation expense
19 23
Contributions to employee savings plans in L-3
Holdings’ common stock 58 57
Amortization of pension
and postretirement benefit plans net loss and prior service
cost 25 33
Amortization of bond discounts and
deferred debt issue costs (included in interest expense)
4 4
Loss related to business divestitures - 20
Other non-cash items 9 (6 )
Changes in operating
assets and liabilities, excluding amounts from acquisitions and
divestitures and discontinued operations: Billed
receivables (62 ) 21
Contracts in process
(84 ) (144 )
Inventories (24 )
(70 )
Other assets (5 ) 7
Accounts payable,
trade 118 77
Accrued employment costs (23
) 8
Accrued expenses (2 ) (43 )
Advance payments and billings in excess of costs incurred
(111 ) 40
Income taxes 25 (6 )
Other
current liabilities (10 ) 7
Pension and
postretirement benefits - 13
All other operating
activities (17 ) (47 )
Net cash
from operating activities from continuing operations
369 309
Investing
activities
Business acquisitions, net of cash acquired (27
) (260 )
Proceeds from the sale of businesses, net of
closing date cash balances 575 304
Capital
expenditures (75 ) (83 )
Dispositions of
property, plant and equipment 11 1
Other investing
activities 6 5
Net cash
from (used in) investing activities from continuing operations
490 (33 )
Financing
activities
Borrowings under revolving credit facility 320 600
Repayment of borrowings under revolving credit facility
(320 ) (600 )
Redemption of senior notes
(298 ) -
Common stock repurchased (276
) (346 )
Dividends paid on L-3 Holdings’ common stock
(112 ) (111 )
Proceeds from exercises of stock
options 38 39
Proceeds from employee stock purchase
plan 16 17
Repurchases of common stock to satisfy tax
withholding obligations (20 ) (33 )
Other
financing activities (6 ) (11 )
Net cash used in financing activities from continuing
operations (658 ) (445 )
Effect
of foreign currency exchange rate changes on cash and cash
equivalents - (8 )
Cash (used in) from discontinued
operations: Operating activities (56 ) 29
Investing activities - (2 )
Cash (used in) from discontinued operations
(56 ) 27
Change in cash balance in
assets held for sale - 61
Net increase (decrease) in
cash and cash equivalents 145 (89 )
Cash and cash
equivalents, beginning of the period 207
442
Cash and cash equivalents, end of the
period $ 352 $ 353
Table
E
L-3 COMMUNICATIONS HOLDINGS, INC. NON-GAAP
FINANCIAL MEASURES SECOND QUARTER AND FIRST HALF 2016
(in millions, except per share amounts)
Second Quarter Ended First Half Ended June 24,
June 26,
June 24,
June 26, 2016 2015
2016
2015 Diluted EPS from continuing operations
attributable to L-3 Holdings' $ 1.88 $ 1.39
$ 3.95 $ 2.60
common stockholders EPS
impact of (gain) loss on business divestitures (1)
― (0.03 ) ― 0.14
Adjusted
diluted EPS from continuing operations(2) $
1.88 $ 1.36
$ 3.95 $ 2.74
Net income from continuing operations attributable to L-3
$ 147 $ 116
$ 311 $ 217
(Gain) loss
on business divestitures(1) ― (3 )
― 12
Adjusted net income from
continuing operations attributable to L-3(2) $
147 $ 113
$ 311 $ 229
______________________ (1 ) Gain (loss) on business divestitures $
2 $ (20 ) Tax benefit 1 8 After-tax
impact 3 (12 ) Diluted weighted average common shares outstanding
83.2 83.5 Per share impact(3) $ 0.03
$ (0.14 ) (2)
Adjusted diluted EPS is diluted EPS
attributable to L-3 Holdings’ common stockholders, excluding the
charges or credits relating to business divestitures. Adjusted net
income attributable to L-3 is net income attributable to L-3,
excluding the charges or credits relating to business divestitures.
These amounts are not calculated in accordance with accounting
principles generally accepted in the United States of America (U.S.
GAAP). The company believes that the charges or credits relating to
business divestitures affect the comparability of the results of
operations for 2015 to the results of operations and financial
guidance for 2016. The company also believes that disclosing net
income and diluted EPS excluding the charges or credits relating to
business divestitures will allow investors to more easily compare
the 2016 results and financial guidance to the 2015 results.
However, these measures may not be defined or calculated by other
companies in the same manner.
(3)
Amounts may not calculate directly due to
rounding.
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