- Diluted earnings per share (EPS)
from continuing operations of $1.88
- Net sales of $2.5 billion
- Net cash from operating activities
from continuing operations of $210 million
- Book-to-bill ratio of 1.07x on
funded orders of $2.7 billion
- Updated 2016 financial
guidance
- Preliminary 2017 financial
outlook
L-3 Communications Holdings, Inc. (NYSE:LLL) today reported
diluted EPS from continuing operations of $1.88 for the quarter
ended September 23, 2016 (2016 third quarter) compared to diluted
EPS from continuing operations for the quarter ended September 25,
2015 (2015 third quarter) of $1.54 and adjusted diluted EPS(1) from
continuing operations for the 2015 third quarter of $2.03. Net
sales of $2,505 million for the 2016 third quarter decreased by 2%
compared to the 2015 third quarter.
The 2016 third quarter results were impacted by: (1) tax
benefits of $17 million, or $0.22 per diluted share, for the
reversal of previously accrued amounts related to various tax
matters, and (2) a $14 million pre-tax charge, or $0.11 per diluted
share, in the Electronic Systems segment for a settlement in
principle of the class action litigation, which is subject to court
approval, in connection with the EoTech holographic weapons sights
(HWS).
“Third quarter results were in line with our expectations,” said
Michael T. Strianese, L-3’s Chairman and Chief Executive Officer.
“We continue to make progress on our strategy to grow and improve
our operational and financial performance. Our book-to-bill ratio
was 1.07x for the quarter. Looking ahead, we will continue to
strengthen our product and service offerings in higher margin areas
while enhancing productivity and efficiency across our businesses.
Further, we recently announced three modest acquisitions that
complement our core strengths and extend our leadership in key
markets, positioning us to deliver shareholder value for the
balance of 2016 and beyond.”
(1) Adjusted diluted earnings per share from continuing
operations is a non-GAAP financial measure. See Table E for a
reconciliation and a discussion of why this information is
presented.
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.
Third Quarter Ended
Year-to-Date Ended Sept. 23, Sept. 25,
Increase/
Sept. 23, Sept. 25, Increase/
(in
millions, except per share data) 2016 2015 (decrease)
2016 2015 (decrease) Net sales
$ 2,505 $ 2,564
(2) %
$ 7,522 $ 7,595 (1) % Operating income
$
215 $ 231 (7) %
$ 714 $ 571 25 % Loss related
to business divestitures
- 9 nm
- 29 nm Goodwill
impairment charges
- 35 nm
-
35 nm Segment operating income
$ 215 $ 275
(22) %
$ 714 $ 635 12 % Operating margin
8.6
% 9.0 % (40) bpts
9.5 % 7.5 % 200 bpts Segment
operating margin
8.6 % 10.7 % (210) bpts
9.5
% 8.4 % 110 bpts Interest expense and other
$
(35) $ (40) (13) %
$ (115) $ (113) 2 %
Effective income tax rate
16.1 % 33.0 % nm
21.7 % 22.9 % (120) bpts Net income from continuing
operations attributable to L-3
$ 148 $ 125 18 %
$ 459 $ 342 34 % Adjusted net income from continuing
operations attributable to L-3 (a)
$ 148 $ 165 (10) %
$ 459 $ 394 16 % Diluted earnings per share from
continuing operations
$ 1.88 $ 1.54 22 %
$
5.83 $ 4.14 41 % Adjusted diluted earnings per share from
continuing operations(a)
$ 1.88 $ 2.03 (7) %
$
5.83 $ 4.76 22 % Diluted weighted average common shares
outstanding
78.8 81.2 (3) %
78.7 82.7 (5) %
(a) Non-GAAP metric that excludes goodwill
impairment charges and the aggregate loss related to business
divestitures. See Table E for a reconciliation and a
discussion of why this information is presented.
nm – not meaningful
Third Quarter Results of Operations: For the 2016 third
quarter, consolidated net sales of $2,505 million decreased $59
million, or 2%, compared to the 2015 third quarter. Organic
sales(2) decreased by 2.5%, or $65 million, for the 2016 third
quarter. Organic sales exclude $2 million of sales declines related
to business divestitures and $8 million of sales increases related
to business acquisitions. For the 2016 third quarter, organic sales
to the U.S. Government increased $84 million, or 5%, and organic
sales to international and commercial customers decreased $149
million, or 19%.
Segment operating income for the 2016 third quarter decreased by
$60 million, or 22%, compared to the 2015 third quarter. Segment
operating income as a percentage of sales (segment operating
margin) decreased by 210 basis points to 8.6% for the 2016 third
quarter, compared to 10.7% for the 2015 third quarter. Segment
operating margins were lower in all three segments. The 2016 third
quarter included a $14 million pre-tax charge in the Electronic
Systems segment for a settlement in principle of the class action
litigation, which is subject to court approval, in connection with
the EoTech HWS. Pension expense declined by $15 million compared to
the 2015 third quarter. See the reportable segment results below
for additional discussion of sales and operating margin trends.
(2) Organic sales represents net sales excluding the sales
impact of acquisitions and divestitures. Sales declines related to
business divestitures are sales from divestitures that are included
in L-3’s actual results for the 12 months prior to the
divestitures. Sales increases related to acquired businesses are
sales from acquisitions that are included in L-3’s actual results
for less than 12 months. The company believes organic sales is a
useful measure for investors because it provides period-to-period
comparisons of the company’s ongoing operational and financial
performance.
Interest expense and other declined by $5 million, primarily due
to lower outstanding debt as a result of the redemption of: (1)
$300 million aggregate principal amount of 3.95% Senior Notes due
November 15, 2016 in the second quarter of 2016 and (2) $300
million aggregate principal amount of 3.95% Senior Notes due May
28, 2024 in the fourth quarter of 2015.
The effective tax rate for the 2016 third quarter decreased to
16.1% from 33.0% for the same period last year. The 2016 third
quarter includes: (1) tax benefits of $17 million for the reversal
of previously accrued amounts related to various U.S. Federal,
foreign and state tax matters, (2) a benefit from the reinstatement
of the Federal Research and Experimentation (R&E) tax credit
and (3) $4 million due to the early adoption of a new accounting
standard related to income tax benefits from employee stock-based
compensation awards.
Diluted EPS from continuing operations decreased 7% to $1.88
compared to adjusted diluted EPS of $2.03 for the 2015 third
quarter. The 2015 third quarter adjusted diluted EPS from
continuing operations excludes after tax losses of: (1) $34
million, or $0.42 per share, related to goodwill impairment charges
and (2) $6 million, or $0.07 per share, related to business
divestitures. Diluted weighted average common shares outstanding
for the 2016 third quarter declined by 3% compared to the 2015
third quarter primarily due to repurchases of L-3 common stock.
Year-to-Date Results of Operations: For the year-to-date period
ended September 23, 2016 (2016 year-to-date period), consolidated
net sales of $7,522 million decreased $73 million, or 1%, compared
to the year-to-date period ended September 25, 2015 (2015
year-to-date period). Organic sales increased by $70 million, or
1%, for the 2016 year-to-date period. Organic sales exclude $206
million of sales declines related to business divestitures and $63
million of sales increases related to business acquisitions. For
the 2016 year-to-date period, organic sales to the U.S. Government
increased $250 million, or 5%, and organic sales to international
and commercial customers decreased $180 million, or 8%.
Segment operating income for the 2016 year-to-date period
increased by $79 million, or 12%, compared to the 2015 year-to-date
period. Segment operating margin increased by 110 basis points to
9.5% for the 2016 year-to-date period, compared to 8.4% for the
2015 year-to-date period. Segment operating margin increased by:
(1) 100 basis points primarily due to unfavorable contract
performance adjustments related to cost growth in 2015 that did not
recur in 2016 at Aerospace Systems on international head-of-state
aircraft modification contracts and (2) 50 basis points due to
lower pension expense of $36 million. These increases were
partially offset by charges in the Electronic Systems segment for a
settlement in principle of the class action litigation, which is
subject to court approval, in connection with the EoTech HWS and
increases to the HWS product returns allowance, which, together,
decreased operating margin by 40 basis points. See the reportable
segment results below for additional discussion of sales and
operating margin trends.
Interest expense and other for the 2016 year-to-date period
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 year-to-date period
decreased to 21.7% from 22.9% for the same period last year. The
2016 year-to-date period includes: (1) a benefit from the
reinstatement of the Federal R&E tax credit, (2) tax benefits
of $21 million for the reversal of previously accrued amounts
related to various U.S. Federal, foreign and state tax matters and
(3) $16 million due to the early adoption of a new accounting
standard related to income tax benefits from employee stock-based
compensation awards.
Diluted EPS from continuing operations increased 22% to $5.83
compared to adjusted diluted EPS of $4.76 for the 2015 year-to-date
period. The 2015 year-to-date period adjusted diluted EPS from
continuing operations excludes after tax losses of: (1) $34
million, or $0.40 per share, related to goodwill impairment charges
and (2) $18 million, or $0.22 per share, related to business
divestitures. Diluted weighted average common shares outstanding
for the 2016 year-to-date period declined by 5% compared to the
2015 year-to-date period primarily due to repurchases of L-3 common
stock.
Orders: Funded orders for the 2016 third quarter increased 22%
to $2,688 million compared to $2,200 million for the 2015 third
quarter. Funded orders for the 2016 year-to-date period increased
2% to $7,415 million compared to $7,301 million for the 2015
year-to-date period. The book-to-bill ratio was 1.07x for the 2016
third quarter and 0.99x for the 2016 year-to-date period. Excluding
the impacts of business divestitures and acquisitions, orders
increased by $216 million, or 3%, for the 2016 year-to-date period.
Funded backlog declined 2% to $8,294 million at September 23, 2016,
compared to $8,423 million at December 31, 2015.
The table below summarizes the cash returned to shareholders
during the 2016 and 2015 third quarter and year-to-date
periods.
Third Quarter Ended Year-to-Date
Ended Sept. 23, Sept. 25,
Sept. 23,
Sept. 25,
($ in millions, except per share
data) 2016 2015
2016 2015 Net cash from
operating activities from continuing operations
$ 210
$ 288
$ 579 $ 597 Less: Capital expenditures, net of
dispositions
(47) (53)
(111) (135) Plus: Income tax
payments attributable to discontinued operations
- 1
- 2 Free cash flow(1)
$ 163 $ 236
$
468 $ 464 Dividends paid ($2.10 per share in 2016; $1.95 per
share in 2015)
$ 54 $ 52
$ 166 $ 163
Common stock repurchases
50 259
326 605 Cash returned
to shareholders
$ 104 $ 311
$ 492 $ 768
(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. The company believes free cash flow is a useful
measure for investors because it portrays the company’s ability to
generate cash from operations for purposes such as repaying debt,
returning cash to shareholders and funding acquisitions. The
company uses free cash flow as a performance measure in evaluating
management.
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
Third Quarter Ended Year-to-Date Ended Sept.
23, Sept. 25,
Sept. 23, Sept. 25, Increase/
($ in
millions) 2016 2015 Decrease
2016 2015 (decrease)
Net sales $
989 $ 991 (0.2) % $
2,887 $ 3,052 (5.4) %
Operating income $
119 $ 121 (1.7) % $
339 $ 352
(3.7) % Operating margin
12.0 %
12.2 % (20) bpts
11.7 %
11.5 % 20 bpts
Third Quarter: Electronic Systems net sales for the 2016
third quarter decreased by $2 million compared to the 2015 third
quarter. Organic sales decreased by $5 million, or 0.5%, compared
to the 2015 third quarter. Organic sales exclude $2 million of
sales declines related to business divestitures and $5 million of
sales increases related to business acquisitions. Sales decreased
by $28 million for Aviation Products and Security due to lower
cargo sales and the timing of deliveries on airport security
screening systems for international customers, partially offset by
$23 million primarily for Sensor Systems due to increased
deliveries of airborne EO/IR turrets to foreign militaries.
Electronic Systems operating income for the 2016 third quarter
decreased by $2 million, or 2%, compared to the 2015 third quarter.
Operating margin decreased by 20 basis points to 12.0%. A $14
million pre-tax charge for a settlement in principle of the class
action litigation, which is subject to court approval, in
connection with the EoTech HWS, lowered operating margin by 140
basis points. Sales mix changes, primarily for Warrior Systems,
lowered operating margin 80 basis points. These decreases were
partially offset by 150 basis points for improved contract
performance and 50 basis points due to lower pension expense of $5
million.
Year-to-Date: Electronic Systems net sales for the 2016
year-to-date period decreased by $165 million, or 5%, compared to
the 2015 year-to-date period. Organic sales decreased by $10
million, or 0.3%, compared to the 2015 year-to-date period. Organic
sales exclude $206 million of sales declines related to business
divestitures (primarily MSI in May 2015) and $51 million of sales
increases related to business acquisitions. The decrease was driven
by $16 million for Warrior Systems related to an increase in the
products returns allowance for EoTech HWS products and $13 million
for Precision Engagement & Training due to lower volume of: (i)
ordnance products for the U.S. military and (ii) civil aviation
simulation and training devices for commercial customers as
contracts near completion. These decreases were partially offset by
an increase of $19 million primarily for Sensor Systems due to
increased deliveries of airborne EO/IR turrets and electronic
warfare products to foreign militaries.
Electronic Systems operating income for the 2016 year-to-date
period decreased by $13 million, or 4%, compared to the 2015
year-to-date period. Operating margin increased by 20 basis points
to 11.7%. Operating margin increased by: (1) 70 basis points due to
higher margins related to acquisitions and divestitures, (2) 40
basis points due to lower pension expense of $11 million, and (3)
10 basis points primarily due to higher net aggregate favorable
contract performance adjustments in the 2016 year-to-date period
compared to the 2015 year-to-date period. These increases were
offset by a decrease of 100 basis points due to $30 million of
pre-tax charges for a settlement in principle, of the class action
litigation, which is subject to court approval, in connection with
the EoTech HWS and increases to the HWS product returns
allowance.
Aerospace Systems
Third Quarter
Ended Year-to-Date Ended Sept. 23, Sept. 25,
Sept. 23, Sept. 25,
($ in millions) 2016 2015
Decrease
2016 2015 Increase Net sales $
1,012 $ 1,066
(5.1) % $
3,165 $ 3,087 2.5 % Operating income $
56 $
102 (45.1) % $
232 $ 144 61.1 % Operating margin
5.5 % 9.6 % (410) bpts
7.3 % 4.7 % 260 bpts
Third Quarter: Aerospace Systems net sales for the 2016
third quarter decreased by $54 million, or 5%, compared to the 2015
third quarter. Sales decreased $64 million for ISR Systems and $2
million for Aircraft Systems, partially offset by a $12 million
increase for Vertex Aerospace. Sales decreased for ISR Systems by:
(1) $46 million 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 and (2) $42 million for ISR
aircraft systems for foreign military customers as contracts near
completion. These decreases were partially offset by higher volume
of $12 million for large ISR aircraft systems for the U.S.
Government and $12 million for small ISR aircraft systems for the
U.S. Army. Sales increased for Vertex Aerospace due to higher
volume for U.S. Navy training aircraft and the U.S. Army C-12
contract.
Aerospace Systems operating income for the 2016 third quarter
decreased by $46 million, compared to the 2015 third quarter.
Operating margin decreased by 410 basis points to 5.5%. Operating
margin decreased by: (1) 200 basis points primarily due to lower
favorable contract performance adjustments in the 2016 third
quarter compared to the 2015 third quarter for ISR Systems
primarily on contracts that are nearing completion, (2) 100 basis
points due to lower sales and changes in sales mix for ISR Systems,
(3) 90 basis points due to lower incentive fees and increases in
lower margin task orders on the Fort Rucker Maintenance Support
contract and (4) 80 basis points due to an $8 million contract
price adjustment in the 2015 third quarter for a recovery of cost
overruns on the previous U.S. Army C-12 contract that did not recur
in the 2016 third quarter. These decreases were partially offset by
60 basis points due to lower pension expense of $6 million.
Year-to-Date: Aerospace Systems net sales for the 2016
year-to-date period increased by $78 million, or 3%, compared to
the 2015 year-to-date period. Sales increased $62 million for
Aircraft Systems and $35 million for Vertex Aerospace, partially
offset by a $19 million decrease for ISR Systems. Sales increased
for Aircraft Systems primarily due to unfavorable contract
performance adjustments in the 2015 year-to-date period that did
not recur in the 2016 year-to-date period on international
head-of-state aircraft modification contracts. Sales increased for
Vertex Aerospace due to higher volume and pre-production activities
for U.S. Navy training aircraft and the U.S. Army C-12 contract.
Sales decreases for ISR Systems were due to trends similar to the
2016 third quarter, partially offset by an increase in sales due to
the procurement and delivery of two business jets to a foreign
military customer in the 2016 second quarter.
Aerospace Systems operating income for the 2016 year-to-date
period increased by $88 million, or 61%, compared to the 2015
year-to-date period. Operating margin increased by 260 basis points
to 7.3%. Operating margin increased by: (1) 210 basis points
primarily due to net aggregate unfavorable contract performance
adjustments in the 2015 year-to-date period, which included $101
million of cost growth on international head-of-state aircraft
modification contracts, that did not recur in the 2016 year-to-date
period, and (2) 50 basis points due to lower pension expense of $15
million.
Communication Systems
Third Quarter Ended Year-to-Date Ended
Sept. 23, Sept. 25,
Sept. 23, Sept. 25,
($ in
millions) 2016 2015 Decrease
2016 2015 Increase
Net sales $
504 $ 507 (0.6) % $
1,470 $ 1,456 1.0 %
Operating income $
40 $ 52 (23.1) % $
143 $ 139 2.9 %
Operating margin
7.9 %
10.3 % (240) bpts
9.7 %
9.5 % 20 bpts
Third Quarter: Communication Systems net sales for the 2016
third quarter decreased by $3 million compared to the 2015 third
quarter. Organic sales decreased by $6 million, or 1%, compared to
the 2015 third quarter. Organic sales exclude $3 million of sales
increases related to business acquisitions. Sales decreased by $30
million in the Tactical Satcom sector due to fewer deliveries on a
satellite communications (Satcom) land terminals contract for the
Australian Defence Force (ADF), which was completed in the second
quarter of 2016. In the Space & Power Systems sector, sales
declined by $22 million due to reduced demand for power devices for
commercial satellites. These decreases were largely offset by
increased volume and deliveries to the U.S. Department of Defense
(DoD) of secure networked communication systems in the Broadband
Communication Systems sector and mobile and ground-based Satcom
systems in the Tactical Satcom sector.
Communication Systems operating income for the 2016 third
quarter decreased by $12 million, or 23%, compared to the 2015
third quarter. Operating margin decreased by 240 basis points to
7.9%. The lower sales on the ADF Satcom land terminals contract and
power devices for commercial satellites reduced operating margin by
220 basis points. Increased design and production costs on new
commercial ground-based power amplifier products partially offset
by sales growth and favorable contract performance, primarily in
Broadband Communication Systems sector, reduced operating margin by
100 basis points. Lower pension expense of $4 million increased
operating margin by 80 basis points.
Year-to-Date: Communication Systems net sales for the 2016
year-to-date period increased by $14 million, or 1%, compared to
the 2015 year-to-date period. Organic sales increased by $2
million, or 0.1%, compared to the 2015 year-to-date period. Organic
sales exclude $12 million of sales increases related to business
acquisitions. The increase was due to: (1) $62 million for
Broadband Communication Systems, primarily due to increased volume
and deliveries of secure networked communication systems for the
DoD and (2) $7 million primarily for Advanced Communications
products due to increased deliveries of secure mission data storage
systems for the Joint Strike Fighter program. These increases were
largely offset by a decrease of $67 million for Space & Power
Systems, primarily due to reduced demand for power devices for
commercial satellites.
Communication Systems operating income for the 2016 year-to-date
period increased by $4 million, or 3%, compared to the 2015
year-to-date period. Operating margin increased by 20 basis points
to 9.7%. Operating margin increased by 70 basis points due to lower
pension expense of $10 million, partially offset by a decrease of
50 basis points primarily due to sales mix changes.
Financial Guidance
Based on information known as of today, the company has updated
its consolidated and segment financial guidance for the year ending
December 31, 2016, previously provided on July 28, 2016, and has
provided a preliminary financial outlook for 2017, as presented in
the tables below. All financial guidance amounts are estimates
subject to change in the future, including as a result of matters
discussed under the “Forward-Looking Statements” cautionary
language beginning on page 10. The company undertakes no duty to
update its guidance.
Consolidated 2016 Financial Guidance ($ in
millions, except per share data)
Prior Guidance
Current Guidance
(July 28, 2016) Net sales
$10,250 to $10,350 $10,150 to
$10,250 Segment operating margin
9.6% 9.8% Interest expense
and other(1)
$157 $157 Effective tax rate
23.5% 26.4%
Minority interest expense(2)
$14 $13 Diluted shares
78.8 78.2 Diluted EPS
$7.85 to $7.95 $7.65 to $7.85
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) Current Guidance
Prior Guidance
(July 28, 2016)
Net
Sales:
Electronic Systems
$4,125 to $4,175 $4,100 to $4,200
Aerospace Systems
$4,150 to $4,200 $4,050 to $4,150
Communication Systems
$1,950 to $2,000 $1,900 to $2,000
Operating
Margins:
Electronic Systems
12.0% to 12.1% 12.0% to 12.2% Aerospace
Systems
7.0% to 7.1% 7.0% to 7.2% Communication
Systems
10.0% to 10.1% 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 primarily related to higher pass-through volume
in the Vertex Aerospace sector;
- A decrease in Electronic Systems
operating margin primarily due to a charge in Warrior Systems for a
settlement in principle of the class action litigation, which is
subject to court approval, in connection with the EoTech HWS,
partially offset by an improvement in contract performance across
several business areas;
- A reduction in the effective tax rate
from 26.4% to 23.5%, primarily due to the tax benefits recorded in
the 2016 third quarter; and
- An increase in diluted share count from
78.2 to 78.8 million shares primarily as a result of an $85 million
reduction in our share repurchases estimate from $750 million to
$665 million.
The following tables present our preliminary consolidated and
segment financial outlook for 2017.
2017 Consolidated Preliminary
Outlook
($ in millions, except per share
data)
Net sales growth 1% to 2 %* Operating margin 10.0%
(10.3 %**) Interest expense and other $154 Effective tax rate 27.5
% Minority interest expense $14 Diluted shares 76.5 Diluted EPS
$8.25 Net cash from operating activities $1,060 Capital
expenditures, net of dispositions of property, plant and equipment
(210 ) Free cash flow $850
* Also represents the estimated organic
sales growth rate for 2017.
** Represents operating margin before an
expected increase in pension expense.
2017 Segment Preliminary Outlook
($ in millions)
Net Sales
Growth:
Electronic Systems 3% to 4% Aerospace Systems -1% to -2%
Communication Systems 4% to 5%
Operating
Margin:
Electronic Systems ~12.8% (13.0 %**) Aerospace Systems ~6.8% (7.1
%**) Communication Systems ~10.3% (10.7 %**)
** Represents operating margin before an
expected increase in pension expense.
The 2017 consolidated preliminary outlook for operating income
includes an increase in estimated pension expense (net Financial
Accounting Standards/Cost Accounting Standards, or FAS/CAS) of
approximately $29 million for 2017 compared to 2016. The 2017
preliminary pension expense estimate assumes a weighted average
discount rate of 3.91%, compared to 4.66% for 2016 and a weighted
average asset return of approximately 8% in 2016, consistent with
our planned weighted average asset return. The preliminary outlook
also assumes share repurchases for 2017 of $600 million. However,
the amount of 2017 share repurchases could be reduced to pay for
potential future business acquisitions, which would cause an
increase in the estimated diluted shares outstanding for 2017.
The current guidance for 2016 and the preliminary outlook for
2017 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 third
quarter results, the 2016 financial guidance and the preliminary
2017 outlook 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, October 27, 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: 95332526 (for domestic callers)
or (404) 537-3406/passcode: 95332526 (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 and 2017 preliminary outlook 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; 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 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; 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.
– Financial Tables Follow –
Table
A
L-3 COMMUNICATIONS HOLDINGS, INC. UNAUDITED CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (in millions, except
per share data) Third
Quarter Ended (a) Year-to-Date Ended Sept.
23, Sept. 25,
Sept. 23,
Sept. 25,
2016 2015
2016 2015
Net sales
$ 2,505 $ 2,564
$ 7,522 $ 7,595
Cost
of sales (2,290) (2,289)
(6,808) (6,960)
Loss
related to business divestitures(b) - (9)
- (29)
Goodwill impairment charges (c)
- (35)
- (35)
Operating
income 215 231
714 571
Interest expense
(41) (43)
(125) (124)
Interest and other income,
net 6 3
15 11
Debt retirement charge
- -
(5) -
Income from
continuing operations before income taxes 180 191
599 458
Provision for income taxes (29)
(63)
(130) (105)
Income from
continuing operations 151 128
469 353
(Loss)
income from discontinued operations, net of income
tax(d) - (424)
63
(416)
Net income (loss) 151 (296)
532
(63)
Net income attributable to noncontrolling interests
(3) (3)
(10) (11)
Net
income (loss) attributable to L-3 $ 148 $ (299)
$ 522 $ (74)
Basic earnings (loss) per
share attributable to L-3 Holdings’ common shareholders:
Continuing operations $ 1.91 $ 1.56
$
5.93 $ 4.19
Discontinued operations -
(5.30)
0.81 (5.10)
Basic earnings
(loss) per share $ 1.91 $
(3.74) $
6.74 $
(0.91) Diluted earnings (loss) per
share attributable to L-3 Holdings’ common shareholders:
Continuing operations $ 1.88 $ 1.54
$
5.83 $ 4.14
Discontinued operations -
(5.22)
0.80 (5.03)
Diluted earnings
(loss) per share $ 1.88 $
(3.68) $
6.63 $
(0.89) L-3 Holdings’ weighted
average common shares outstanding: Basic
77.3 80.0
77.4 81.5
Diluted 78.8 81.2
78.7
82.7
(a) It is generally 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 loss related to
business divestitures for the 2015 third quarter included an $8
million loss on the divestiture of the Tinsley Product Line and a
$1 million loss on the divestiture of Broadcast Sports, Inc. (BSI).
The loss related to business divestitures for the 2015 year-to-date
period included a $17 million loss related to the divestiture of
Marine Systems International (MSI), an $8 million loss on the
divestiture of the Tinsley Product Line and a $4 million loss on
the divestiture of BSI. (c) The goodwill impairment charges for the
2015 third quarter and 2015 year-to-date period represents non-cash
goodwill impairment charges due to the re-allocation of goodwill of
the business retained by L-3 in connection with the sale of the
National Security Solutions business. (d) Income from discontinued
operations, net of income taxes for the 2016 year-to-date period
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)
Third Quarter Ended Year-to-Date Ended
Sept. 23, Sept. 25,
Sept. 23, Sept. 25,
2016
2015
2016 2015
Segment operating
data
Net sales: Electronic Systems $ 989 $
991
$ 2,887 $ 3,052
Aerospace Systems
1,012 1,066
3,165 3,087
Communication Systems
504 507
1,470 1,456
Total $ 2,505 $ 2,564
$ 7,522 $
7,595
Operating income: Electronic Systems $
119 $ 121
$ 339 $ 352
Aerospace Systems
56 102
232 144
Communication Systems
40 52
143 139
Total
$ 215 $ 275
$ 714 $ 635
Operating
margin: Electronic Systems 12.0 % 12.2
% 11.7 % 11.5
% Aerospace
Systems 5.5 % 9.6
% 7.3 %
4.7
% Communication Systems 7.9 % 10.3
% 9.7 % 9.5
% Total 8.6
% 10.7
% 9.5 % 8.4
%
Depreciation and amortization: Electronic Systems
$ 26 $ 26
$ 78 $ 81
Aerospace
Systems 13 13
40 37
Communication Systems
12 12
35 37
Total
$ 51 $ 51
$ 153 $ 155
Funded order
data
Electronic Systems $ 1,377 $ 961
$
3,263 $ 3,099
Aerospace Systems 821 692
2,738 2,614
Communication Systems 490
547
1,414 1,588
Total $
2,688 $ 2,200
$ 7,415 $ 7,301
Sept.
23, Dec. 31,
2016 2015
Period end
data
Funded backlog $ 8,294 $ 8,423
Table
C
L-3 COMMUNICATIONS HOLDINGS, INC. UNAUDITED CONDENSED
CONSOLIDATED BALANCE SHEETS (in millions)
Sept.
23,
December 31,
2016 2015
ASSETS Cash and cash
equivalents $ 411 $ 207
Billed
receivables, net 812 746
Contracts in process
2,265 2,081
Inventories 361 333
Other
current assets 160 201
Assets of discontinued
operations — 664
Total current assets
4,009 4,232
Property, plant and equipment,
net 1,083 1,097
Goodwill 6,284 6,281
Identifiable intangible assets 181 199
Deferred
income taxes 4 3
Other assets 250
255
Total assets $ 11,811 $ 12,067
LIABILITIES AND EQUITY Current portion of
long-term debt $ 549 $ 499
Accounts payable,
trade 426 297
Accrued employment costs 519
504
Accrued expenses 391 390
Advance payments and
billings in excess of costs incurred 453 562
Income
taxes 8 13
Other current liabilities 404
394
Liabilities of discontinued operations —
220
Total current liabilities 2,750
2,879
Pension and postretirement benefits 1,027 1,047
Deferred income taxes 286 219
Other
liabilities 326 368
Long-term debt
2,782 3,125
Total liabilities
7,171 7,638
Shareholders’ equity 4,568
4,355
Noncontrolling interests 72 74
Total equity 4,640 4,429
Total
liabilities and equity $ 11,811 $ 12,067
Table
D
L-3 COMMUNICATIONS HOLDINGS, INC. UNAUDITED CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (in
millions)
Year-to-Date Ended
Sept. 23,
Sept. 25,
2016
2015
Operating
activities
Net income (loss) $ 532 $ (63)
Less: (Income) loss from discontinued
operations, net of tax
(63)
416
Income from continuing operations 469 353
Depreciation of property, plant and equipment 121 123
Amortization of intangibles and other assets 32 32
Deferred income tax provision 48 5
Stock-based
employee compensation expense 34 35
Contributions to
employee savings plans in L-3 Holdings’ common stock 92
87
Goodwill impairment charges - 35
Amortization
of pension and postretirement benefit plans net loss and prior
service cost 37 50
Amortization of bond discounts and
deferred debt issue costs (included in interest expense)
6 6
Loss related to business divestitures - 29
Other non-cash items 8 (5)
Changes in operating assets and
liabilities, excluding amounts from acquisitions and divestitures
anddiscontinued operations:
Billed receivables
(69)
36
Contracts in process
(193)
(181)
Inventories
(31)
(77)
Other assets
21
(11)
Accounts payable, trade
130
117
Accrued employment costs
8
41
Accrued expenses
3
(34)
Advance payments and billings in excess
of costs incurred
(102)
6
Income taxes
-
(8)
Other current liabilities
(3)
(6)
Pension and postretirement
benefits
(19)
(18)
All other operating activities
(13)
(18)
Net cash from operating activities from continuing
operations 579 597
Investing
activities
Business acquisitions, net of cash acquired (27)
(260)
Proceeds from the sale of businesses, net of closing date
cash balances 561 308
Capital expenditures
(126) (137)
Dispositions of property, plant and
equipment 15 2
Other investing activities
7 5
Net cash from (used in) investing activities
from continuing operations 430 (82)
Financing
activities
Borrowings under revolving credit facility 335 861
Repayment of borrowings under revolving credit facility
(335) (861)
Redemption of senior notes (298) -
Common stock repurchased (326) (605)
Dividends
paid on L-3 Holdings’ common stock (166) (163)
Proceeds from exercise of stock options 49 41
Proceeds from employee stock purchase plan 23 26
Repurchases of common stock to satisfy tax withholding
obligations (20) (33)
Other financing activities
(8) (1)
Net cash used in financing
activities from continuing operations (746)
(735)
Effect of foreign currency exchange rate changes on
cash and cash equivalents (3) (14)
Net cash (used in)
from discontinued operations:
Operating activities
(56)
58
Investing activities
-
(4)
Net cash (used in) from discontinued
operations
(56)
54
Change in cash balance in assets held for sale - 61
Net increase (decrease) in cash and cash equivalents
204 (119)
Cash and cash equivalents, beginning of the
period 207 442
Cash and cash
equivalents, end of the period $ 411 $ 323
Table
E
L-3 COMMUNICATIONS HOLDINGS, INC. NON-GAAP FINANCIAL
MEASURES (in millions, except per share amounts)
Third Quarter Ended
Year-to-Date Ended
Sept. 23,
Sept. 25,
Sept. 23,
Sept. 25,
2016
2015
2016
2015
Diluted EPS from continuing operations
attributable to L-3 Holdings' common
stockholders
$ 1.88 $ 1.54
$ 5.83 $ 4.14
EPS
impact of loss on business divestitures(1) ― 0.07 ― 0.22
EPS impact of goodwill impairment charges(2) ―
0.42 ― 0.40
Adjusted diluted EPS from
continuing operations(3) $
1.88
$ 2.03
$ 5.83 $ 4.76
Net income from continuing operations
attributable to L-3 $ 148 $ 125
$
459 $ 342
Loss on business divestitures(1) ―
6
― 18
Goodwill impairment charges(2) ―
34 ― 34
Adjusted net income from continuing
operations attributable to L-3(3) $ 148 $
165
$ 459 $ 394
(1)
Loss on business divestitures $
(9)
$ (29) Tax benefit 3 11 After-tax impact (6)
(18) Diluted weighted average common shares outstanding 81.2
82.7 Per share impact $ (0.07) $ (0.22)
(2)
Goodwill impairment charges $ (35) $ (35) Tax benefit 1
1 After-tax impact (34) (34) Diluted weighted average common
shares outstanding 81.2
82.7 Per share impact (4) $ (0.42) $ (0.40)
(3) Adjusted diluted EPS is diluted EPS attributable to L-3
Holdings’ common stockholders, excluding the charges or credits
relating to business divestitures and non-cash goodwill impairment
charges. Adjusted net income attributable to L-3 is net income
attributable to L-3, excluding the charges or credits relating to
business divestitures and non-cash goodwill impairment charges.
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 and non-cash goodwill impairment charges
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
and non-cash goodwill impairment charges 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. (4)
Amounts may not calculate directly due to rounding.
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L-3 Communications Holdings, Inc.Corporate Communications,
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