<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
Commission file numbers 001-14141 and 333-46983
L-3 COMMUNICATIONS HOLDINGS, INC.
AND
L-3 COMMUNICATIONS CORPORATION
State of incorporation: Delaware
IRS identification numbers: 13-3937434 and 13-3937436
600 Third Avenue
New York, NY 10016
Telephone: (212) 697-1111
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the proceeding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
----- -----
There were 32,768,992 shares of L-3 Communications Holdings, Inc. common
stock with a par value of $0.01 outstanding as of the close of business on
November 11, 1999.
================================================================================
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
FORM 10-Q QUARTERLY REPORT FOR
QUARTER ENDED SEPTEMBER 30, 1999
PART I -- FINANCIAL INFORMATION:
<TABLE>
<CAPTION>
PAGE NO.
---------
<S> <C> <C>
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 ........................................................ 1
Condensed Consolidated Statements of Operations for the Three Months and
Nine Months ended September 30, 1999 and September 30, 1998 .............. 2-3
Condensed Consolidated Statements of Cash Flows for the Nine Months ended
September 30, 1999 and September 30, 1998 ................................ 4
Notes to Unaudited Condensed Consolidated Financial Statements ............ 5-11
ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial
Condition ................................................................ 12-19
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ................ 20
PART II -- OTHER INFORMATION:
ITEM 6. Exhibits and Reports on Form 8-K .......................................... 21
</TABLE>
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
-------------------- ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 70,793 $ 26,130
Contracts in process .............................................. 481,204 351,049
Deferred income taxes ............................................. 23,163 16,591
Other current assets .............................................. 6,895 11,597
---------- ----------
Total current assets ............................................ 582,055 405,367
---------- ----------
Property, plant and equipment ...................................... 182,688 155,712
Less, accumulated depreciation and amortization ................... 51,249 32,557
---------- ----------
131,439 123,155
---------- ----------
Intangibles, primarily cost in excess of net assets acquired, net of
amortization ...................................................... 786,823 669,362
Deferred income taxes .............................................. 54,047 39,139
Other assets ....................................................... 45,029 48,373
---------- ----------
Total assets .................................................... $1,599,393 $1,285,396
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade ........................................... $ 85,748 $ 81,826
Accrued employment costs .......................................... 66,277 58,380
Accrued expenses .................................................. 33,590 18,241
Customer advances ................................................. 54,977 45,874
Accrued interest .................................................. 18,345 6,698
Other current liabilities ......................................... 51,665 36,515
---------- ----------
Total current liabilities ....................................... 310,602 247,534
---------- ----------
Pension and postretirement benefits ................................ 116,617 114,293
Other liabilities .................................................. 20,263 18,595
Long-term debt ..................................................... 605,000 605,000
Commitments and contingencies
Shareholders' equity:
Common stock $.01 par value; authorized 100,000,000 shares,
issued and outstanding 32,742,431 and 27,402,429 shares ......... 479,956 264,769
Retained earnings ................................................. 80,490 44,856
Equity adjustments ................................................ (13,535) (9,651)
---------- ----------
Total shareholders' equity ......................................... 546,911 299,974
---------- ----------
Total liabilities and shareholders' equity ...................... $1,599,393 $1,285,396
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Sales ..................................... $ 382,356 $ 291,312
Costs and expenses ........................ 339,516 261,244
--------- ---------
Operating income .......................... 42,840 30,068
Interest and other income ................. 636 711
Interest expense .......................... 15,266 13,584
--------- ---------
Income before income taxes ................ 28,210 17,195
Provision for income taxes ................ 10,861 6,728
--------- ---------
Net income ................................ $ 17,349 $ 10,467
========= =========
Earnings per common share:
Basic .................................... $ 0.53 $ 0.38
========= =========
Diluted .................................. $ 0.51 $ 0.37
========= =========
Weighted average common shares outstanding:
Basic .................................... 32,650 27,364
========= =========
Diluted .................................. 34,222 28,663
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Sales ..................................... $ 972,350 $ 708,300
Costs and expenses ........................ 872,194 644,681
--------- ---------
Operating income .......................... 100,156 63,619
Interest and other income ................. 3,465 2,287
Interest expense .......................... 45,680 35,230
--------- ---------
Income before income taxes ................ 57,941 30,676
Provision for income taxes ................ 22,307 11,986
--------- ---------
Net income ................................ $ 35,634 $ 18,690
========= =========
Earnings per common share:
Basic .................................... $ 1.12 $ 0.78
========= =========
Diluted .................................. $ 1.06 $ 0.75
========= =========
Weighted average common shares outstanding:
Basic .................................... 31,885 23,870
========= =========
Diluted .................................. 33,465 25,044
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ...................................................... $ 35,634 $ 18,690
Depreciation and amortization ................................... 40,380 26,651
Amortization of deferred debt issue costs ....................... 2,918 1,805
Deferred income tax provision ................................... 18,011 11,611
Other noncash items ............................................. 5,395 --
Changes in operating assets and liabilities, net of amounts
acquired:
Contracts in process ........................................... (54,910) (12,723)
Accounts payable and accrued expenses .......................... 1,181 22,373
Customer advances .............................................. 7,412 (18,376)
Pension and postretirement benefits ............................ 1,884 135
All other operating activities ................................. 2,287 (1,973)
---------- ----------
Net cash from operating activities .............................. 60,192 48,193
---------- ----------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ................. (211,393) (412,526)
Proceeds from net assets held for sale .......................... -- 6,653
Capital expenditures ............................................ (15,758) (12,691)
Disposition of property, plant and equipment .................... 6,138 1,029
Other investing activities ...................................... 4,777 (300)
---------- ----------
Net cash (used in) investing activities ......................... (216,236) (417,835)
---------- ----------
FINANCING ACTIVITIES:
Repayment of borrowings under term loan facilities .............. -- (172,000)
Borrowings under revolving credit facility ...................... 74,700 271,800
Repayment of borrowings under revolving credit facility ......... (74,700) (116,800)
Proceeds from sale of 8 1/2% senior subordinated notes .......... -- 180,000
Proceeds from sale of common stock, net ......................... 201,582 139,500
Other financing activities ...................................... (875) (4,645)
---------- ----------
Net cash from financing activities .............................. 200,707 297,855
---------- ----------
Net increase (decrease) in cash ................................. 44,663 (71,787)
Cash and cash equivalents, beginning of the period .............. 26,130 77,474
---------- ----------
Cash and cash equivalents, end of the period .................... $ 70,793 $ 5,687
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
L-3 Communications Holdings, Inc. ("Holdings" or the "Company") is a
leading merchant supplier of sophisticated secure communication systems and
specialized communication products, which are critical elements of virtually
all major communication, command and control, intelligence gathering and space
systems. The Company's customers include the U.S. department of defense (the
"DoD"), certain U.S. government intelligence agencies, major aerospace and
defense contractors, foreign governments and commercial customers. The Company
has two reportable segments, Secure Communication Systems and Specialized
Communication Products.
Secure Communication Systems. This segment provides secure, high data rate
communications systems for military and other U.S. government reconnaissance
and surveillance applications. These operations are principally performed under
cost plus, sole source contracts supporting long-term programs for the U.S.
armed forces and classified customers. Major secure communications programs and
systems include: secure data links for airborne, satellite, ground and seabased
remote platforms for information collection, command and control and
dissemination to users in real-time; strategic and tactical signal intelligence
systems that detect, collect, identify, analyze and disseminate information and
related support contracts for military and intelligence efforts; secure
telephone, fax and network equipment and encryption management; communication
software support services to military and related government intelligence
markets; and communications systems for surface and undersea platforms and
manned space flights.
Specialized Communication Products. This segment includes three product
categories: microwave components, avionics and ocean products, and telemetry,
instrumentation and space products. Microwave Components includes commercial
off the shelf, high performance microwave components and frequency monitoring
equipment. Avionics and Ocean Products include aviation recorders, display
products, antenna products, acoustic undersea warfare systems and naval power
distribution, conditioning, switching and protection equipment for naval ships
and submarines. Telemetry, Instrumentation and Space Products include
commercial off the shelf real-time data collection and transmission products
and components for missile, aircraft and space based electronic systems. The
Specialized Communication Products segment provides products, systems and
services used in the satellite transmission of voice, video and data through
earth stations for uplink and downlink terminals. This segment also provides
commercial off the shelf satellite control software, telemetry, tracking and
control, mission processors, global positioning systems (GPS) and software
engineering services to the worldwide military, civilian and commercial
satellite markets.
The accompanying unaudited condensed consolidated financial statements
also include the financial statements of L-3 Communications Corporation ("L-3
Communications"), which is a wholly owned subsidiary of Holdings. Holdings owns
all of the authorized, issued and outstanding common stock, par value $0.01 per
share, of L-3 Communications. Holdings has no other assets or liabilities and
conducts no operations other than through its subsidiary, L-3 Communications.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X of the Securities and Exchange Commission ("SEC");
accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for a complete set of financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the results
for the interim periods presented have been included. The results of operations
for these interim periods are not necessarily indicative of results for the
full year. For further information, these interim
5
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
financial statements should be read in conjunction with the Consolidated
Financial Statements of Holdings and L-3 Communications for the fiscal year
ended December 31, 1998, included in the Annual Report on Form 10-K for fiscal
year ended December 31, 1998 of Holdings and L-3 Communications.
2. COMMON STOCK OFFERING
On February 4, 1999, Holdings sold 5.0 million shares of common stock in a
public offering for $42.00 per share (the "February 1999 Common Stock
Offering") representing 15.4% of Holdings outstanding common stock immediately
after the February 1999 Common Stock Offering. The net proceeds to Holdings
from the February 1999 Common Stock Offering amounted to $201.5 million and
were contributed to L-3 Communications. In addition, 6.5 million shares were
sold in the February 1999 Common Stock Offering by the Lehman Brothers Capital
Partners III, LLP and its affiliates ("the Lehman Partnership") and Lockheed
Martin Corporation ("Lockheed Martin"), after which the Lehman Partnership
owned 24.7% and Lockheed Martin owned 7.1% of the outstanding shares of
Holdings' common stock. In October 1999, Lockheed Martin sold its remaining
interest in Holdings' common stock.
3. ACQUISITIONS
On August 13, 1998, the Company purchased all of the outstanding stock of
SPD Technologies, Inc. ("SPD") for $238,325 of cash including expenses, net of
cash acquired. On February 5, 1998, March 4, 1998 and March 30, 1998 the
Company purchased the assets of the Satellite Transmission Systems division
("STS") of California Microwave, Inc., ILEX Systems ("ILEX") and Ocean Systems
business ("Ocean Systems") of AlliedSignal, Inc. for cash of $26,572, $51,930
and $68,845, respectively. SPD, STS, ILEX and Ocean Systems, collectively
comprise the "1998 Acquisitions". All of the acquisitions have been accounted
for as purchase business combinations and are included in the Company's results
of operations from their effective dates. In August 1999, the Company issued
150,955 shares of common stock as additional consideration for the ILEX
acquisition that was based on the post-acquisition performance of ILEX for 1998
and was recorded as a $6,434 credit to additional paid-in-capital.
On January 8, 1999 the Company acquired all of the outstanding common
stock of Microdyne Corporation ("Microdyne") for $94,228 in cash, including
expenses and the repayment of assumed debt, net of cash acquired. On April 16,
1999, the Company acquired all of the outstanding common stock of Aydin
Corporation ("Aydin") for $59,864 in cash, including expenses, net of cash
acquired. On June 30, 1999, the Company acquired all the outstanding common
stock of Interstate Electronics Corporation ("IEC") of Scott Technologies Inc.
for $44,804 in cash including expenses, subject to adjustment based on closing
date net worth, as defined. Collectively, the acquisitions of Microdyne, Aydin
and IEC comprise the "1999 Acquisitions".
Had the 1999 Acquisitions and the related financing transactions, occurred
on January 1, 1999, the unaudited pro forma sales, operating income, net income
and diluted earnings per common share for the nine months ended September 30,
1999 would have been $1,024,300, $103,600, $38,600 and $1.13, respectively. Had
the 1998 Acquisitions and the 1999 Acquisitions and the related financing
transactions occurred on January 1, 1998, the unaudited pro forma sales,
operating income, net income (loss) and diluted earnings (loss) per share for
the nine months ended September 30, 1998 would have been $993,700, $37,600,
($12,500) and ($0.39), respectively. The pro forma results are based on various
assumptions and are not necessarily indicative of the result of operations that
would have occurred had the 1998 Acquisitions and the 1999 Acquisitions, and
the related financing transactions occurred on January 1, 1998.
The assets and liabilities recorded in connection with the acquisitions of
Microdyne, Aydin and IEC were $113,383 and $95,268, $99,039 and $74,395, and
$52,875 and $43,998, respectively. The assets and
6
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
liabilities recorded in connection with the acquisitions of Microdyne, Aydin,
and IEC are based upon preliminary estimates of fair values for the valuation
of contracts in process, inventories and deferred taxes. Actual adjustments
will be based on the final purchase prices and the final appraisals and other
analyses of fair values which are in process. Management does not expect that
differences between the preliminary and final purchase price allocations will
have a material impact on the Company's financial position or results of
operations.
4. CONTRACTS IN PROCESS
The components of contracts in process are presented below.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
-------------------- ------------------
<S> <C> <C>
Billed contract receivables ........................ $ 116,328 $ 100,234
Unbilled contract receivables ...................... 138,262 69,361
Other billed receivables, principally commercial and
affiliates ........................................ 101,269 81,372
Inventoried costs .................................. 168,198 130,350
--------- ---------
524,057 381,317
Less unliquidated progress payments ................ (42,853) (30,268)
--------- ---------
Contracts in process .............................. $ 481,204 $ 351,049
========= =========
</TABLE>
5. DEBT
Long term debts consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
-------------------- ------------------
<S> <C> <C>
10 3/8% Senior Subordinated Notes due 2007 ......... $225,000 $225,000
8 1/2% Senior Subordinated Notes due 2008 .......... 180,000 180,000
8% Senior Subordinated Notes due 2008 .............. 200,000 200,000
-------- --------
Total debt ........................................ 605,000 605,000
Less current portion ............................... -- --
-------- --------
Long-term debt .................................... $605,000 $605,000
======== ========
</TABLE>
Available borrowings under the Revolving Credit Facility and the Revolving
364 Day Credit Facility at September 30, 1999 were $125,584 and $200,000,
respectively, after reductions for outstanding letters of credit of $74,416,
and $0, respectively. In July 1999, the Revolving 364-Day Credit Facility was
renewed for an additional 364 days and will expire on August 10, 2000, at which
time the Company may exercise an option to convert any or all of the borrowings
outstanding thereunder into term loans which fully amortize over a two year
period beginning March 31, 2001.
7
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
6. L-3 COMMUNICATIONS SHAREHOLDERS' EQUITY
Holdings has no other assets or liabilities and conducts all of its
operations through its wholly owned subsidiary, L-3 Communications. The table
below presents the components of the shareholders' equity of L-3
Communications.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
-------------------- ------------------
<S> <C> <C>
Common stock, $0.1 par value; 100 shares authorized
and outstanding .................................. $ -- $ --
Additional paid in capital ........................ 479,956 264,769
Retained earnings ................................. 80,490 44,856
Accumulated other comprehensive loss .............. (13,535) (9,651)
--------- --------
Total shareholders' equity ........................ $ 546,911 $299,974
========= ========
</TABLE>
The increase in additional paid-in capital at September 30, 1999 reflects
the contribution to L-3 Communications from Holdings of the $201,500 of net
proceeds from the February 1999 Common Stock Offering.
7. STOCK OPTIONS
On September 1, 1999 and January 19, 1999, Holdings granted to certain of
its employees options to purchase 152,500 and 414,150 shares of its common
stock at exercise prices of $39.69 and $40.50, respectively.
8. COMPREHENSIVE INCOME
For the nine months ended September 30, 1999, comprehensive income was
$31,750 and was comprised of net income of $35,634 and other comprehensive
losses of $1,740 and $2,144, respectively, relating to foreign currency
translations and unrealized losses on investments. For the nine months ended
September 30, 1998, net comprehensive income was $19,038 and was comprised of
net income of $18,690 and other comprehensive income of $348 relating to
foreign currency translations.
8
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
9. EARNINGS PER SHARE
Details of the computation of earnings per share are presented in the
table below.
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic:
Net income .................................. $ 35,634 $ 18,690 $ 17,349 $ 10,467
Weighted average common
shares outstanding ........................ 31,885 23,870 32,650 27,364
--------- --------- --------- ---------
Basic earnings per share .................... $ 1.12 $ 0.78 $ 0.53 $ 0.38
========= ========= ========= =========
Diluted:
Net income .................................. $ 35,634 $ 18,690 $ 17,349 $ 10,467
--------- --------- --------- ---------
Common and potential common shares:
Weighted average common
share outstanding ........................ 31,885 23,870 32,650 27,364
Assumed exercise of stock options ......... 3,249 2,802 3,281 2,883
Assumed purchase of common shares
for treasury ............................. (1,669) (1,628) (1,709) (1,584)
--------- --------- --------- ---------
Common and potential common shares .......... 33,465 25,044 34,222 28,663
========= ========= ========= =========
Diluted earnings per share .................. $ 1.06 $ 0.75 $ 0.51 $ 0.37
========= ========= ========= =========
</TABLE>
10. CONTINGENCIES
The Company is engaged in providing products and services under contracts
with the U.S. government and to a lesser degree, under foreign government
contracts, some of which are funded by the U.S. government. All such contracts
are subject to extensive legal and regulatory requirements, and, from time to
time, agencies of the U.S. government investigate whether such contracts were
and are being conducted in accordance with these requirements. Under government
procurement regulations, an indictment of the Company by a federal grand jury
could result in the Company being suspended for a period of time from
eligibility for awards of new government contracts. A conviction could result
in debarment from contracting with the federal government for a specified term.
Management continually assesses the Company's obligations with respect to
applicable environmental protection laws. While it is difficult to determine
the timing and ultimate cost to be incurred by the Company in order to comply
with these laws, based upon available internal and external assessments, with
respect to those environmental loss contingencies of which management is aware,
the Company believes that even without considering potential insurance
recoveries, if any, there are no environmental loss contingencies that,
individually or in the aggregate, would be material to the Company's results of
operations. The Company accrues for these contingencies when it is probable
that a liability has been incurred and the amount of the loss can be reasonably
estimated.
The Company has been periodically subject to litigation, claims or
assessments and various contingent liabilities incidental to its business. With
respect to those investigative actions, items of litigation, claims or
assessments of which they are aware, management of the Company is of the
opinion that the probability is remote that, after taking into account certain
provisions that have been made with
9
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
respect to these matters, the ultimate resolution of any such investigative
actions, items of litigation, claims or assessments will have a material
adverse effect on the financial position or results of operations of the
Company.
11. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
----------- ----------
<S> <C> <C>
Interest paid ........................................... $ 30,611 $19,828
Income taxes paid ....................................... 4,385 203
Noncash transactions:
Contribution in common stock to savings plan .......... 5,395 --
Common stock issued related to an acquisition ......... 6,434 --
</TABLE>
12. SEGMENT INFORMATION
The Company has two reportable segments, Secure Communication Systems and
Specialized Communication Products. Secure Communication Systems consists of
secure, high data rate communications in support of military and other U.S.
government reconnaissance and surveillance applications. Specialized
Communication Products consists of the microwave components, avionics and ocean
products, and telemetry, instrumentation and space products operations of the
Company. See Note 1.
The Company evaluates the performance of its operating divisions and
reportable segments based on sales and operating income. The table below
presents sales and operating income by reportable segment for the nine-month
periods ended September 30, 1999 and 1998 and assets by reportable segment as
of September 30, 1999 and December 31, 1998. Previously reported segment
information has been restated to conform to the current period presentation of
the Company's reportable segments.
<TABLE>
<CAPTION>
SECURE SPECIALIZED ELIMINATION OF
COMMUNICATION COMMUNICATION INTERSEGMENT CONSOLIDATED
SYSTEMS PRODUCTS CORPORATE SALES TOTAL
--------------- --------------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Nine Months Ended September 30, 1999:
Sales .............................. $385,387 $ 591,248 $ (4,285) $ 972,350
Operating income ................... 33,788 66,368 -- 100,156
Nine Months Ended September 30, 1998:
Sales .............................. 344,758 368,199 (4,657) 708,300
Operating income ................... 30,301 33,318 63,619
Assets as of:
September 30, 1999 ................. 426,672 1,055,740 $116,981 1,599,393
December 31, 1998 .................. 368,891 797,469 119,036 1,285,396
</TABLE>
10
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1999, the Company adopted Statement of Position 98-5,
Reporting on the Costs of Startup Activities ("SOP 98-5"), which provides
guidance on the financial reporting of startup and organization costs,
including precontract costs. It requires costs of startup activities and
organization costs to be expensed as incurred. The impact of adopting SOP 98-5
was not material to the Company's results of operations or financial position.
In September 1998, the Financial Accounting Standards Board issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
133"), which establishes accounting and reporting standards for derivative
instruments including certain derivative instruments embedded in other
contracts and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value and is effective for all
quarters of fiscal years beginning after September 15, 2000. The Company does
not expect SFAS 133 to have a material impact on its financial position.
11
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
L-3 Communications Holdings, Inc. and its subsidiaries ("Holdings", "L-3"
or "the Company") is a leading merchant supplier of sophisticated secure
communication systems and specialized communication products. These systems and
products are critical elements of virtually all major communication, command
and control, intelligence gathering and space systems. Holdings has no other
assets or liabilities and conducts no other operations other than through its
wholly owned subsidiary, L-3 Communications Corporation ("L-3 Communications").
The Company's customers include the DoD, certain U.S. government intelligence
agencies, major aerospace and defense contractors, foreign governments and
commercial customers. The Company has two reportable segments, Secure
Communication Systems and Specialized Communication Products.
The Secure Communication Systems segment provides secure, high data rate
communications systems for military and other U.S. government reconnaissance
and surveillance applications. These operations are principally performed under
cost plus, sole source contracts supporting long term programs for the U.S.
armed forces and classified customers. The Secure Communication Systems segment
also supplies communication software support services to military and related
government intelligence markets. The Specialized Communication Products segment
includes three product categories: microwave components, avionics and ocean
products, and telemetry, instrumentation and space products.
All domestic government contracts and subcontracts of the Company are
subject to audit and various cost controls, and include standard provisions for
termination for the convenience of the U.S. government. Multiyear U.S.
government contracts and related orders are subject to cancellation if funds
for contract performance for any subsequent year become unavailable. Foreign
government contracts generally include comparable provisions relating to
termination for the convenience of the relevant foreign government.
The defense industry has undergone significant changes precipitated by
ongoing U.S. federal budget pressures and new roles and missions to reflect
changing strategic and tactical threats. Since the mid-1980's, the overall U.S.
defense budget has declined in real dollars. In response, the DoD has focused
its resources on enhancing its military readiness, joint operations and the
value added capability of digital command and control communications by
incorporating advanced electronics to improve the performance, reduce operating
costs and extend the life expectancy of its existing and future platforms. The
emphasis on system interoperability, force multipliers and providing
battlefield commanders with real time data is increasing the electronics
content of nearly all of the major military procurement and research programs.
As a result, the DoD's budget for communications and defense electronics is
expected to grow.
ACQUISITION HISTORY
1998 Acquisitions. On August 13, 1998, the Company purchased all of the
outstanding stock of SPD Technologies, Inc. ("SPD"). On March 30, 1998, March
4, 1998 and February 5, 1998, respectively, the Company acquired the assets of
the Ocean Systems business ("Ocean Systems") of AlliedSignal, Inc., ILEX
Systems ("ILEX") and Satellite Transmission Systems ("STS") of California
Microwave, Inc. Collectively, the acquisitions of SPD, Ocean Systems, ILEX and
STS comprise the "1998 Acquisitions". Additionally, during 1998, the Company
purchased several other operations and product lines, which individually and in
the aggregate were not material to the results of operations or financial
position of the Company.
1999 Acquisitions. On January 8, 1999 the Company acquired all of the
outstanding common stock of Microdyne Corporation ("Microdyne") for $94.2
million in cash, including expenses and the repayment of assumed debt, net of
cash acquired. The Company financed the Microdyne acquisition using cash on
hand and borrowings under the Company's Senior Credit Facilities, which were
subsequently repaid
12
<PAGE>
during the first quarter of 1999. On April 16, 1999, the Company acquired all
of the outstanding common stock of Aydin Corporation ("Aydin") for $59.9
million, in cash, including expenses, net of cash acquired. On June 30, 1999,
the Company acquired all of the outstanding common stock of Interstate
Electronics Corporation ("IEC") of Scott Technologies Inc. for $44.8 million in
cash, including expenses, and is subject to adjustment based on closing date
net worth, as defined. The Aydin and IEC acquisitions were financed using cash
on hand. Collectively, the acquisitions of Microdyne, Aydin and IEC comprise
the "1999 Acquisitions." See proforma disclosures in Note 3 to the financial
statements.
RESULTS OF OPERATIONS
The following information should be read in conjunction with the Condensed
Consolidated Financial Statements as of September 30, 1999, which reflect the
results of operations of the Company's acquisitions from their respective
effective dates. Accordingly, the results of operations for the nine months
ended September 30, 1999 and 1998 are significantly affected by the timing of
those acquisitions. The tables below provide selected statement of operations
data for the Company for the three-month period ended September 30, 1999 ("the
1999 Third Quarter") and the three-month period ended September 30, 1998 ("the
1998 Third Quarter") and for the nine-month period ended September 30, 1999
("the 1999 Nine Month Period") and nine-month period ended September 30, 1998
("the 1998 Nine Month Period").
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
------------ -----------
(in millions)
<S> <C> <C>
Sales(1):
Secure Communication Systems ...................................... $ 141.4 $ 121.3
Specialized Communication Products ................................ 241.0 170.0
--------- --------
Total ........................................................... $ 382.4 $ 291.3
========= ========
Operating income:
Secure Communication Systems ...................................... $ 11.7 $ 11.6
Specialized Communication Products ................................ 31.1 18.5
--------- --------
Total ........................................................... $ 42.8 $ 30.1
========= ========
Depreciation and amortization expenses included in operating income:
Secure Communication Systems ...................................... $ 4.5 $ 3.4
Specialized Communication Products ................................ 9.5 7.1
--------- --------
Total ........................................................... $ 14.0 $ 10.5
========= ========
EBITDA(2):
Secure Communication Systems ...................................... $ 16.2 $ 15.0
Specialized Communication Products ................................ 40.6 25.6
--------- --------
Total ........................................................... $ 56.8 $ 40.6
========= ========
</TABLE>
- ----------
(1) Sales are after intersegment eliminations. See Note 12 to the Unaudited
Condensed Consolidated Financial Statements.
(2) EBITDA is defined as operating income plus depreciation expense and
amortization expense (excluding the amortization of debt issuance costs).
EBITDA is not a substitute for operating income, net income or cash flows
from operating activities as determined in accordance with generally
accepted accounting principles as a measure of profitability or liquidity
and may not be comparable to similar measures presented by other
entities. EBITDA is presented as additional information because the
Company believes it to be a useful indicator of the Company's ability to
meet debt service and capital expenditure requirements.
Sales increased $91.1 million to $382.4 million in the 1999 Third Quarter
compared with $291.3 million in the 1998 Third Quarter, and was comprised of
growth in sales of $20.1 million for the Secure
13
<PAGE>
Communication systems segment and of $71.0 million for the Specialized
Communication Products segment. Operating income increased $12.7 million to
$42.8 million, and operating income as a percentage of sales ("operating
margin") improved to 11.2% from 10.3% for the reasons described below under the
reportable segments discussion. Depreciation and amortization expenses
increased $3.5 million to $14.0 million, reflecting increased goodwill
amortization associated with acquisitions and additional depreciation related
to capital expenditures. EBITDA increased $16.2 million to $56.8 million.
EBITDA as a percentage of sales ("EBITDA margin") improved to 14.9% from 13.9%.
Basic earnings per common share ("EPS") and diluted EPS grew 39.5% to $0.53 and
37.8% to $0.51, respectively. Basic weighted-average common shares outstanding
and diluted weighted-average common shares outstanding increased 19.3% and
19.4%, respectively, principally because of the 5.0 million shares of common
stock issued during the Company's public offering in February 1999 (the
"February 1999 Common Stock Offering").
Sales of Secure Communication Systems segment increased $20.1 million or
16.6% to $141.4 million in the 1999 Third Quarter compared with the 1998 Third
Quarter. Operating income increased $0.1 million to $11.7 million. Operating
margin declined to 8.3% from 9.6%. The increase in sales was primarily
attributable to the Microdyne acquisition and increased sales on the U-2
Support Program and secure telephone equipment (STE), partially offset by lower
sales of communication subsystems for the International Space Station (ISS)
consistent with the scheduled phasedown of this program. The decline in
operating margin were principally attributable to lower operating margins for
the Microdyne acquired businesses and costs incurred for network security
systems, which were partially offset by improved margins on (i) high data rate
communication systems arising from cost reductions and operating efficiencies
and (ii) STE arising primarily from volume increases. EBITDA increased $1.2
million to $16.2 million and EBITDA margin declined to 11.5% from 12.4%. The
changes in EBITDA and EBITDA margin were attributable to the items affecting
operating income and operating margin.
Sales of the Specialized Communication Products segment increased $71.0
million or 41.8% to $241.0 million in the 1999 Third Quarter compared with the
1998 Third Quarter. Operating income increased $12.6 million to $31.1 million
and operating margin improved to 12.9% from 10.9%. The increase in sales was
principally attributable to the IEC and Aydin acquisitions and volume increases
on ocean products, primarily for power distribution, control and conversion
systems for both military and commercial applications, and space and satellite
control products. These sales gains were partially offset by lower sales volume
on microwave components and decreased shipments of displays and antenna
products. The increase in operating margin was principally attributable to
improved margins on ocean products attributable to volume increases and cost
reductions, partially offset by lower margins from the IEC and Aydin acquired
businesses and on microwave components, displays and antenna products
attributable to declines in sales. EBITDA increased $15.0 million to $40.6
million and EBITDA margin improved to 16.8% from 15.1%. The increases in EBITDA
and EBITDA margin were primarily attributable to the items affecting the trends
in operating income.
Interest expense, net of interest and other income, increased $1.8 million
to $14.6 million in 1999 Third Quarter and was attributable to higher average
outstanding debt during the 1999 Third Quarter compared with the 1998 Third
Quarter principally because of the $200.0 million of senior subordinated notes
sold by the Company in December 1998. The income tax provision for the 1999
Third Quarter reflects the Company's estimated effective income tax rate for
1999 of 38.5%, compared with the effective tax rate of 39.0% for the 1998 Third
Quarter. The decrease in the effective tax rate was principally attributable to
additional research and experimentation credits partially offset by an increase
in non-deductible amortization expense for costs in excess of net assets
acquired for certain acquisitions.
14
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
------------ -----------
(in millions)
<S> <C> <C>
Sales(1):
Secure Communication Systems ...................................... $ 384.4 $ 344.5
Specialized Communication Products ................................ 588.0 363.8
--------- --------
Total ........................................................... $ 972.4 $ 708.3
========= ========
Operating income:
Secure Communication Systems ...................................... $ 33.5 $ 30.3
Specialized Communication Products ................................ 66.6 33.3
--------- --------
Total ........................................................... $ 100.1 $ 63.6
========= ========
Depreciation and amortization expenses included in operating income:
Secure Communication Systems ...................................... $ 13.7 $ 11.1
Specialized Communication Products ................................ 26.7 15.6
--------- --------
Total ........................................................... $ 40.4 $ 26.7
========= ========
EBITDA:
Secure Communication Systems ...................................... $ 47.2 $ 41.4
Specialized Communication Products ................................ 93.3 48.9
--------- --------
Total ........................................................... $ 140.5 $ 90.3
========= ========
</TABLE>
- ----------
(1) Sales are after intersegment eliminations. See Note 12 to the Unaudited
Condensed Consolidated Financial Statements.
Sales increased $264.1 million to $972.4 million in the 1999 Nine Month
Period compared with $708.3 million in the 1998 Nine Month Period and was
comprised of growth in sales of $39.9 million for the Secure Communication
Systems segment and of $224.2 million for the Specialized Communication
Products segment. Operating income increased $36.5 million to $100.1 million,
and operating income as a percentage of sales ("operating margin") improved to
10.3% from 9.0% for the reasons described below under the reportable segments
discussion. Depreciation and amortization expenses increased $13.7 million to
$40.4 million, reflecting increased goodwill amortization associated with
acquisitions and additional depreciation related to capital expenditures.
EBITDA increased $50.2 million to $140.5 million. EBITDA as a percentage of
sales ("EBITDA margin") improved to 14.4% from 12.7%. Basic earnings per common
share ("EPS") and diluted EPS grew 43.6% to $1.12 and 41.3% to $1.06,
respectively. Both basic weighted-average common shares outstanding and diluted
weighted-average common shares outstanding increased 33.6% principally because
of the timing of the shares of common stock issued in connection with the
Company's Initial Public Offering (IPO) in May 1998 and the February 1999
Common Stock Offering.
Sales of Secure Communication Systems segment increased $39.9 million or
11.6% to $384.4 million in the 1999 Nine Month Period compared with the 1998
Nine Month Period. Operating income increased $3.2 million to $33.5 million.
Operating margin decreased to 8.7% from 8.8%. The increase in sales was
primarily attributable to the Microdyne acquisition and increased sales on the
U-2 Support Program and STE, partially offset by lower sales of certain high
data rate communication systems and the communication subsystems for ISS
consistent with the scheduled phasedown of these programs. The decline in
operating margin was principally attributable to lower margins from the
Microdyne acquired businesses and costs incurred for network security systems,
that were partially offset by improved margins on (i) military communication
systems and high data rate communication systems arising from cost reductions
and operating efficiencies and (ii) STE arising primarily from volume
increases. EBITDA increased
15
<PAGE>
$5.8 million to $47.2 million and EBITDA margin improved to 12.3% from 12.0%.
The increases in EBITDA and EBITDA margin were primarily attributable to the
items affecting the trends in operating income.
Sales of the Specialized Communication Products segment increased $224.2
million or 61.6% to $588.0 million in the 1999 Nine Month Period compared with
the 1998 Nine Month Period. Operating income increased $33.3 million to $66.6
million and operating margin improved to 11.3% from 9.2%. The increase in sales
was principally attributable to the timing of the SPD, Aydin, IEC and Ocean
Systems acquisitions and volume increases on commercial aviation recorders and
ocean products, primarily for power distribution, control and conversion
systems for both military and commercial applications, and space and satellite
control products. These sales gains were partially offset by lower sales volume
on microwave components and decreased shipments of displays and antenna
products. The increase in operating margin was principally attributable to
improved margins on ocean products and aviation recorders attributable to
volume increases and cost reductions and higher margins from the SPD acquired
business which was included in the results of operations in the 1998 Nine Month
Period for three months. These operating margin improvements were partially
offset by lower operating margins for the Aydin and IEC acquired businesses,
and lower margins on microwave components and antenna products principally
attributable to declines in sales. EBITDA increased $44.4 million to $93.3
million and EBITDA margin improved to 15.9% from 13.4%. The increases in EBITDA
and EBITDA margin were primarily attributable to the items affecting the trends
in operating income and operating margin.
Interest expense, net of interest and other income, increased $9.3 million
to $42.2 million in the 1999 Nine Month Period principally because of higher
average outstanding debt during the 1999 Nine Month Period compared with the
1998 Nine Month Period. Interest and other income for the 1999 Nine Month
Period includes $0.4 million for a gain recognized on the sale of a business.
The income tax provision for the 1999 Nine Month Period reflects the Company's
estimated effective income tax rate for 1999 of 38.5%, compared with the
effective tax rate of 39.0% for the 1998 Nine Month Period. Also see discussion
under "Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998" above.
LIQUIDITY AND CAPITAL RESOURCES
BALANCE SHEET
Contracts in process increased $130.2 million in the 1999 Nine Month
Period, of which $94.8 million of the balance at September 30, 1999 was related
to businesses acquired during the 1999 Nine Month Period. The remaining increase
was principally from (i) increases in unbilled receivables arising from an
increase in programs entering the production phase wherein unbilled costs and
profits generally exceed progress payments received from the customers until
contract shipments are completed and (ii) investments in inventory for
production on certain programs and products in advance of sales expected to
occur in the fourth quarter of 1999 and the first half of 2000. The increases in
property, plant and equipment, intangibles, accounts payable, accrued expenses
and other current liabilities were principally related to the 1999 Acquisitions.
During the 1999 Third Quarter the Company issued 150,955 shares of common stock,
recorded as a credit to additional paid-in-capital for $6.4 million, as
additional consideration for the ILEX acquisition that was based on
post-acquisition performance of ILEX for 1998.
STATEMENT OF CASH FLOWS
The following table provides cash flow statement data for the 1999 and
1998 Nine Month Periods:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
----------- ----------
(in millions)
<S> <C> <C>
Net cash from operating activities .............. $ 60.2 $ 48.2
Net cash (used in) investing activities ......... (216.2) (417.8)
Net cash from financing activities .............. 200.7 297.9
</TABLE>
16
<PAGE>
OPERATING ACTIVITIES
During the 1999 Nine Month Period, L-3 generated $60.2 million of cash
from its operating activities, an increase of $12.0 million compared with the
1998 Nine Month Period. Earnings plus noncash costs and expenses and the
deferred portion of the income tax provision increased $43.5 million to $102.3
million from $58.8 million for the 1998 Nine Month Period because of growth in
the Company's level of operations. Cash from operating activities for the 1999
Nine Month Period includes a net increase in operating assets and liabilities
of $42.1 million compared with $10.6 million for the 1998 Nine Month Period.
The increase was principally related to the greater working capital
requirements primarily in contracts in process arising from the Company's sales
growth. Also, see discussions under "Results of Operations" and "--Balance
Sheet" above.
INVESTING ACTIVITIES
Since L-3's formation in April 1997, the Company has actively pursued its
acquisition strategy. In the 1999 Nine Month Period, the Company invested
$211.4 million in acquisitions primarily for the purchases of the Microdyne,
Aydin and IEC businesses. The Company also received net proceeds of $4.8
million for the sale of a business in June 1999.
The Company makes capital expenditures for improvement of manufacturing
facilities and equipment. The increase in capital expenditures for the 1999
Nine Month Period compared with the 1998 Nine Month Period was principally
attributable to capital expenditures for the acquired businesses. The Company
expects that its capital expenditures for 1999 will be approximately $30.0
million.
FINANCING ACTIVITIES
On February 4, 1999, Holdings sold 5.0 million shares of common stock in
an offering for $42.00 per share representing 15.4% of Holdings' common stock
immediately after the offering. In addition, 6.5 million shares were sold by
Lehman Brothers Capital Partners III, LLP and its affiliates ("the Lehman
Partnership") and Lockheed Martin Corporation ("Lockheed Martin"), immediately
after which the Lehman Partnership owned 24.7% and Lockheed Martin owned 7.1%
of the outstanding shares of Holdings' common stock. In October 1999, Lockheed
Martin sold its remaining ownership interest in Holdings' common stock through
a private transaction. The net proceeds to Holdings from the February 1999
Common Stock Offering amounted to $201.5 million and were contributed to the
Company. The net proceeds were principally used to finance the acquisitions of
Microdyne, Aydin and IEC.
On March 3, 1999, the Senior Credit Facilities were amended to increase
the Company's revolving credit facilities thereunder by $15.0 million to $400.0
million. The $200.0 million 364 Day Revolving Credit Facility, which is
included in the revolving credit facilities, was renewed for one additional
364-day period in July 1999 and will expire on August 10, 2000 at which time
the Company may exercise an option to convert any or all of the borrowings
outstanding thereunder into term loans which fully amortize over a two year
period beginning March 31, 2001.
At September 30, 1999, the Company's cash balance was $70.8 million and
there were no borrowings outstanding under the revolving credit facilities. The
available borrowings under the revolving credit facilities were $325.6 million
after reductions for outstanding letters of credit of $74.4 million.
The Senior Credit Facilities and the Senior Subordinated Notes contain
financial covenants which remain in effect so long as any amount is owed or any
commitment to lend exists thereunder. As of September 30, 1999, L-3
Communications had been in compliance with these covenants at all times. The
borrowings under the Senior Credit Facilities are guaranteed by Holdings and by
substantially all of the Company's subsidiaries. The payments of principal and
premium, if any, and interest on the Senior Subordinated Notes are
unconditionally guaranteed, on an unsecured senior subordinated basis, jointly
and severally, by substantially all of the Company's subsidiaries, all of which
are wholly owned.
Based upon the current level of operations, management believes that the
Company's cash from operating activities, together with available borrowings
under the Senior Credit Facilities, will be
17
<PAGE>
adequate to meet its anticipated requirements for working capital, capital
expenditures, research and development expenditures, program and other
discretionary investments, and interest payments for the foreseeable future
including at least the next three years. There can be no assurance, however,
that the Company's business will continue to generate cash flow at or above
current levels or that currently anticipated improvements will be achieved. If
the Company is unable to generate sufficient cash flow from operations in the
future to service its debt, it may be required to sell assets, reduce capital
expenditures, refinance all or a portion of its existing debt or obtain
additional financing. The Company's ability to make scheduled principal
payments, to pay interest on or to refinance its indebtedness depends on its
future performance and financial results, which, to a certain extent, are
subject to general conditions in or affecting the defense industry and to
general economic, political, financial, competitive, legislative and regulatory
factors beyond its control. There can be no assurance that sufficient funds will
be available to enable the Company to service its indebtedness, or make
necessary capital expenditures and program and discretionary investments.
CONTINGENCIES
See Note 10 to the Unaudited Condensed Consolidated Financial Statements.
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 1999, the Company adopted Statement of Position 98-5,
Reporting on the Costs of Start Up Activities ("SOP 98-5"), which provides
guidance on the financial reporting of startup and organization costs,
including precontract costs. It requires costs of startup activities and
organization costs to be expensed as incurred. The impact of adopting SOP 98-5
was not material to the Company's results of operations or financial position.
In September 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company does not expect that the impact of
SFAS 133, which is effective for all quarters of fiscal years beginning after
September 15, 2000, will be material to the Company's financial position.
YEAR 2000
The inability of business processes to continue to function correctly
after the beginning of the Year 2000 could have serious adverse effects on
companies and entities throughout the world. Because the Company's business
units operate autonomously, each business unit has undertaken an effort to
identify and mitigate Year 2000 issues related to their information systems,
products, facilities, suppliers and customers. Therefore, the Company's Year
2000 effort is a composite of its business units' Year 2000 efforts,
coordinated through a Company wide program instituted to oversee, guide and
track each business unit's Year 2000 efforts and to facilitate Company-wide
communications regarding Year 2000 methods.
Each business unit has appointed a Year 2000 project manager who oversees
a team responsible for performing its Year 2000 efforts in four phases: (i)
define, identify and inventory possible sources of Year 2000 issues, including
internal systems and products and services sold to customers; (ii) analyze and
determine the nature and extent of Year 2000 issues and develop project plans
to address those issues; (iii) implement and execute project plans to remediate
or replace non-compliant items, as appropriate, based upon assessed risk and
priority; and (iv) commence and complete testing, continue monitoring readiness
and prepare necessary contingency plans. The progress of this program is
monitored at each business unit with oversight by management. This oversight
includes periodic reviews as well as visits to each business unit to monitor
progress with the plans.
The substantial majority of the business units of the Company have
completed the four phases of the program with limited follow-on activity
remaining. The remaining business units of the Company which
18
<PAGE>
include the recently completed acquisitions of Microdyne, Aydin and IEC have
been integrated into the Company's Year 2000 efforts. With the exception of the
Aydin Yasilim business unit located in Turkey, all of these acquired business
units are in the final phase of the program. The Company plans to have
substantially all significant information systems, products and facilities for
the acquired businesses completed during the fourth quarter of 1999. Although
Aydin Yasilim is behind schedule, it is working on completing the program for
substantially all of its significant information systems, products and
facilities by the end of the fourth quarter of 1999.
The total estimated costs associated with the Company's Year 2000 efforts
have been updated to reflect recently acquired business units and estimated
costs for calendar year 2000. The revised estimated cost are $20.3 million and
include $6.6 million of capitalizable costs, with the remaining costs to be
expensed as incurred. The Company has incurred approximately $17.1 million of
such costs to date. Substantially all of the remaining estimated costs are
expected to be incurred during the remainder of 1999.
The Company believes that there is low risk with respect to its operations
that any internal critical system will not be Year 2000 compliant by the end of
1999. The Company's business operations are also dependent on the Year 2000
readiness of its customers and infrastructure suppliers in areas such as
utilities, communications, transportation and other services. In a "reasonably
likely worst case" scenario, there could be instances of failure that could
cause disruptions in business transaction processes of the Company. The
likelihood and effects of failures in infrastructure systems and in the
customer and supply chains cannot be estimated, but such a failure could
potentially result in a material adverse impact on results of operations,
liquidity or financial position of the Company. The Company continues to
attempt to assess the Year 2000 compliance and readiness of its material
third-party suppliers and customers. Such attempts include written inquiries as
to their Year 2000 certification of compliance. As indicated above, contingency
plans for suppliers, customers, critical systems and utilities impacted by Year
2000 issues have been developed except for those pertaining to recently
acquired businesses for which the anticipated completion is the fourth quarter
of 1999. It is anticipated that the contingency plans will be tested or
rehearsed throughout the remainder of 1999. These estimates and projections
could change as the year 2000 efforts progress.
FORWARD LOOKING STATEMENTS
Certain of the matters discussed concerning our operations, cash flows,
financial position, economic performance, and financial condition, including in
particular, the likelihood of our success in developing and expanding our
business and the realization of sales from backlog, include forward looking
statements within the meaning of section 27A of the Securities Act and Section
21E of the Exchange Act. Statements that are predictive in nature, that depend
upon or refer to future events or conditions or that include words such as
"expects", "anticipates", "intends", "plans", "believes", "estimates" and
similar expressions are forward looking statements. Although we believe that
these statements are based upon reasonable assumptions, including projections
of orders, sales, operating margins, earnings, cash flow, research and
development costs, working capital, capital expenditures and other projections,
they are subject to several risks and uncertainties, and therefore, we can give
no assurance that these statements will be achieved. Such statements will also
be influenced by factors such as our dependence on the defense industry and the
business risks peculiar to that industry including changing priorities or
reductions in the U.S. government defense budget; our reliance on contracts
with a limited number of agencies of, or contractors to, the U.S. government
and the possibility of termination of government contracts by unilateral
government action or for failure to perform; the ability to obtain or the
timing of obtaining future government contracts; the availability of government
funding and customer requirements; economic conditions, competitive
environment, international business and political conditions, timing of
international awards and contracts; our extensive use of fixed price contracts
as compared to cost plus contracts; our ability to identify future acquisition
candidates or to integrate acquired operations; the rapid change of technology
in the communication equipment industry; the high level of competition in the
communications equipment industry; our introduction of new products into
commercial markets or our investments in commercial products or companies; the
significant amount of our debt and the restrictions contained in our debt
agreements; Year 2000 issues; collective bargaining labor disputes; pension,
environmental or legal
19
<PAGE>
matters or proceedings and various other market, competition and industry
factors, many of which are beyond our control. Investors are cautioned that any
such statements are not guarantees of future performance and the actual results
or developments may differ materially from the expectations expressed in the
forward looking statements.
As for the forward-looking statements that relate to future financial
results and other projections, actual results will be different due to the
inherent nature of projections and may be better or worse than projected. Given
these uncertainties, you should not place any reliance on these forward-looking
statements. These forward-looking statements also represent our estimates and
assumptions only as of the date that they were made. We expressly disclaim a
duty to provide updates to these forward-looking statements, and the estimates
and assumptions associated with them, after the date of this filing to reflect
events or circumstances or changes in expectations or the occurrence of
anticipated events.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Part II, Item 7, "Management's Discussion and Analysis of Results of
Operations and Financial Condition--Liquidity and Capital Resources--Market
Risks", of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 for a discussion of its exposure to market risks. There was
no significant change in the Company's market risks during the nine months
ended September 30, 1999.
20
<PAGE>
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*11 L-3 Communications Holdings, Inc. Computation of Basic
Earnings Per Share and Diluted Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
----------
* The information required on this exhibit is presented on Note 9 to
the Unaudited Condensed Consolidated Financial Statements as of
September 30, 1999 in accordance with the provisions of SFAS No. 128,
Earnings Per Share.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
L-3 Communications Holdings, Inc. and
L-3 Communications Corporation
Registrants
Date: November 12, 1999
/s/ Robert V. LaPenta
- ------------------------------------------------
Name: Robert V. LaPenta
Title: President and Chief Financial Officer
(Principal Financial Officer)
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001056239
<NAME> L-3 COMMUNICATIONS HOLDINGS, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 70,793
<SECURITIES> 0
<RECEIVABLES> 341,905
<ALLOWANCES> (12,726)
<INVENTORY> 152,025
<CURRENT-ASSETS> 582,055
<PP&E> 182,688
<DEPRECIATION> 51,249
<TOTAL-ASSETS> 1,599,393
<CURRENT-LIABILITIES> 310,602
<BONDS> 605,000
0
0
<COMMON> 479,956
<OTHER-SE> 66,955
<TOTAL-LIABILITY-AND-EQUITY> 1,599,393
<SALES> 0
<TOTAL-REVENUES> 972,350
<CGS> 0
<TOTAL-COSTS> 872,194
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45,680
<INCOME-PRETAX> 57,941
<INCOME-TAX> 22,307
<INCOME-CONTINUING> 35,634
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,634
<EPS-BASIC> 1.12
<EPS-DILUTED> 1.06
</TABLE>
