<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 JUNE 30, 2000
Commission file numbers 001-14141 and 333-46983
L-3 COMMUNICATIONS HOLDINGS, INC.
AND
L-3 COMMUNICATIONS CORPORATION
600 Third Avenue
New York, NY 10016
Telephone: (212) 697-1111
State of incorporation: Delaware
IRS identification numbers: 13-3937434 and 13-3937436
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. Yes [ ] No [X ]
There were 33,330,481 shares of L-3 Communications Holdings, Inc. common
stock with a par value of $0.01 outstanding as of the close of business on
August 10, 2000.
================================================================================
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
FORM 10-Q QUARTERLY REPORT FOR
QUARTER ENDED JUNE 30, 2000
PART I -- FINANCIAL INFORMATION:
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999 ................................................. 1
Condensed Consolidated Statements of Operations for the
Three and Six Months ended June 30, 2000 and June 30, 1999 ............ 2
Condensed Consolidated Statements of Cash Flows for the Six
Months ended June 30, 2000 and June 30, 1999 .......................... 4
Notes to Unaudited Condensed Consolidated Financial Statements .......... 5
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition ............................................... 14
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk .............. 22
PART II -- OTHER INFORMATION:
ITEM 4. Submission of Matters to a Vote of Security Holders ..................... 23
ITEM 6. Exhibits and Reports on Form 8-K ........................................ 23
</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>
JUNE 30, DECEMBER 31,
2000 1999
-------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 45,247 $ 42,788
Contracts in process .............................................. 640,281 484,173
Deferred income taxes ............................................. 61,356 32,985
Other current assets .............................................. 7,736 7,761
---------- ----------
Total current assets ............................................ 754,620 567,707
---------- ----------
Property, plant and equipment, net ................................. 159,156 140,971
Intangibles, primarily cost in excess of net assets acquired, net of
amortization ...................................................... 1,245,832 821,552
Deferred income taxes .............................................. 62,884 56,858
Other assets ....................................................... 38,620 46,683
---------- ----------
Total assets .................................................... $2,261,112 $1,633,771
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under Senior Credit Facilities ......................... $ 237,000 $ --
Accounts payable, trade ........................................... 123,519 98,693
Accrued employment costs .......................................... 89,225 70,618
Accrued expenses .................................................. 41,277 27,931
Customer advances ................................................. 54,982 56,738
Accrued interest .................................................. 14,710 12,683
Income taxes ...................................................... 1,114 2,715
Other current liabilities ......................................... 114,120 48,928
---------- ----------
Total current liabilities ....................................... 675,947 318,306
---------- ----------
Pension and postretirement benefits ................................ 104,576 110,262
Other liabilities .................................................. 17,727 17,028
Long-term debt ..................................................... 839,000 605,000
Commitments and contingencies
Shareholders' equity:
Common stock $.01 par value; authorized 100,000,000 shares, issued
and outstanding 33,251,612 and 32,794,547 shares ................ 500,100 483,694
Retained earnings ................................................. 130,933 103,545
Unearned compensation ............................................. (2,995) (1,661)
Accumulated other comprehensive loss .............................. (4,176) (2,403)
---------- ----------
Total shareholders' equity ......................................... 623,862 583,175
---------- ----------
Total liabilities and shareholders' equity ...................... $2,261,112 $1,633,771
========== ==========
</TABLE>
See notes to unaudited 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 JUNE 30,
-----------------------------
2000 1999
------------- -------------
<S> <C> <C>
Sales ..................................... $ 460,976 $ 314,432
Costs and expenses ........................ 411,323 283,283
--------- ---------
Operating income .......................... 49,653 31,149
Interest and other income ................. 1,722 1,815
Interest expense .......................... 24,703 14,939
--------- ---------
Income before income taxes ................ 26,672 18,025
Provision for income taxes ................ 10,213 6,939
--------- ---------
Net income ................................ $ 16,459 $ 11,086
========= =========
Earnings per common share:
Basic .................................... $ 0.49 $ 0.34
========= =========
Diluted .................................. $ 0.47 $ 0.33
========= =========
Weighted average common shares outstanding:
Basic .................................... 33,271 32,488
========= =========
Diluted .................................. 34,855 33,948
========= =========
</TABLE>
See notes to unaudited 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>
SIX MONTHS ENDED JUNE 30,
-----------------------------
2000 1999
------------- -------------
<S> <C> <C>
Sales ..................................... $ 838,028 $ 589,994
Costs and expenses ........................ 753,706 532,678
--------- ---------
Operating income .......................... 84,322 57,316
Interest and other income ................. 2,557 2,829
Interest expense .......................... 42,291 30,414
--------- ---------
Income before income taxes ................ 44,588 29,731
Provision for income taxes ................ 17,200 11,446
--------- ---------
Net income ................................ $ 27,388 $ 18,285
========= =========
Earnings per common share:
Basic .................................... $ 0.83 $ 0.58
========= =========
Diluted .................................. $ 0.79 $ 0.56
========= =========
Weighted average common shares outstanding:
Basic .................................... 33,158 31,495
========= =========
Diluted .................................. 34,681 32,925
========= =========
</TABLE>
See notes to unaudited 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>
SIX MONTHS ENDED JUNE 30,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ......................................................... $ 27,388 $ 18,285
Depreciation and amortization ...................................... 34,177 26,390
Amortization of deferred debt issue costs .......................... 2,485 1,957
Deferred income taxes .............................................. 10,492 8,295
Other noncash items ................................................ 7,048 3,421
Changes in operating assets and liabilities, net of amounts acquired
Contracts in process .............................................. (21,033) (30,093)
Other current assets .............................................. (1,279) 2,896
Other assets ...................................................... 184 (183)
Accounts payable and accrued expenses ............................. 9,908 (15,061)
Customer advances ................................................. (12,977) 16,308
Other current liabilities ......................................... (10,700) (3,352)
Pension and postretirement benefits ............................... (3,587) 229
Other liabilities ................................................. 334 (1,377)
All other operating activities, net ................................ (714) (1,783)
---------- ----------
Net cash from operating activities ................................. 41,726 25,932
---------- ----------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired .................... (515,461) (205,003)
Capital expenditures ............................................... (13,397) (10,993)
Disposition of property, plant and equipment ....................... 2,531 5,273
Other investing activities ......................................... 16,099 5,007
---------- ----------
Net cash (used in) investing activities ............................ (510,228) (205,716)
---------- ----------
FINANCING ACTIVITIES:
Borrowings under revolving credit facilities ....................... 627,000 74,700
Repayment of borrowings under revolving credit facilities .......... (156,000) (74,700)
Proceeds from sale of common stock, net ............................ -- 201,582
Other financing activities, net .................................... (39) (1,171)
---------- ----------
Net cash from financing activities ................................. 470,961 200,411
---------- ----------
Net increase in cash ............................................... 2,459 20,627
Cash and cash equivalents, beginning of the period ................. 42,788 26,130
---------- ----------
Cash and cash equivalents, end of the period ....................... $ 45,247 $ 46,757
========== ==========
</TABLE>
See notes to unaudited 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" and together with its
subsidiaries "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. 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. This segment also provides high fidelity, fully integrated
simulator training products, including flight simulators, pilot training systems
and training support services used by U.S. and foreign military agencies, which
are principally performed under long-term fixed price contracts.
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, traffic alert
and collision avoidance systems, 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,
software engineering services, and Global Positioning Systems (GPS) receivers,
navigation and positioning system products and subsystems to the worldwide
military, civilian and commercial satellite markets.
The accompanying unaudited condensed consolidated financial statements also
include those 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 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. Certain reclassifications have been made to conform prior year
financial statements amounts to the current year presentation. In the opinion of
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)
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 the interim periods
are not necessarily indicative of results for the full year. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
sales and costs and expenses during the reporting period. The most significant
of these estimates and assumptions relate to contract estimates of sales and
costs, estimates of pension and postretirement benefit obligations,
recoverability of recorded amounts of fixed assets and cost in excess of net
assets acquired, income taxes, litigation and environmental obligations. Actual
results could differ from these estimates. For further information, these
interim 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, 1999, included in their Annual Report on Form 10-K for fiscal
year ended December 31, 1999.
2. ACQUISITIONS
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 $60,034 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") from Scott Technologies Inc. for $40,610 in cash
including expenses. On December 31, 1999, the Company acquired the assets of the
Space and Navigation Systems business ("Space & Nav") of Honeywell International
Inc. ("Honeywell") for $55,000 in cash, plus expenses, subject to adjustment
based on closing date net assets, as defined.
On February 10, 2000, the Company acquired the assets of the Training
Devices and Training Services ("TDTS") business of Raytheon Company for $160,000
in cash plus expenses, subject to adjustment based on closing date net working
capital, as defined. Following the acquisition the Company changed the name of
TDTS to L-3 Communications Link Simulation and Training ("Link Simulation and
Training"). On February 14, 2000, the Company acquired the assets of Trex
Communications Corporation, ("TrexCom"), for $50,210 in cash, plus expenses,
subject to adjustment based on closing date net worth, as defined. The
acquisitions were financed using borrowings under the Company's Senior Credit
Facilities.
On April 28, 2000, the Company acquired the Traffic Alert and Collision
Avoidance System ("TCAS") product line from Honeywell for a purchase price of
$237,000 in cash, reflecting a price reduction of $17,000 based on the
preliminary closing date net assets, as defined, which is subject to a final
adjustment. The TCAS acquisition was financed with borrowings under a new
revolving 364 day senior credit facility. In addition, in February 2000, the
Company entered into a Memorandum of Agreement ("MOA") with Thomson-CSF Sextant
S.A. ("Sextant"), a subsidiary of Thomson-CSF, under which L-3 agreed to
purchase the assets of TCAS from Honeywell, create a limited liability
corporation for TCAS (the "TCAS LLC"), contribute 100% of the TCAS assets to
TCAS LLC, and sell a 30% interest in the TCAS LLC to Sextant for a cash purchase
price equal to 30% of the final purchase price paid by the Company for TCAS
(which is expected to be approximately $71,100 based on the preliminary closing
date net assets) (collectively, the "TCAS Minority Interest Transaction"). L-3
expects to maintain operating management of the TCAS LLC and to consolidate it.
The MOA, as amended, will terminate if definitive agreements regarding the TCAS
Minority Interest Transaction are not executed by August 31, 2000. The TCAS
Minority Interest Transaction is subject to regulatory approval by United States
agencies and the European Union Commission and the execution of definitive
agreements.
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)
On June 30, 2000, the Company acquired all the outstanding stock of MPRI for
$34,500 in cash, subject to adjustment based on closing date net assets, as
defined, and the financial performance of MPRI for the year ending June 30,
2001. The acquisition was financed using borrowings under the Company's Senior
Credit Facilities.
The historical interim financial statements of Space & Nav, TDTS and TCAS
for the six months ended June 30, 1999 are not readily available (Audits of the
financial statements of the Space & Nav, TDTS and TCAS businesses for their 1999
fiscal years are currently in process.) However, based on preliminary statement
of operations data for Space & Nav, TDTS and TCAS, had the acquisitions of
Aydin, IEC, Space & Nav, TrexCom, TDTS and TCAS occurred on January 1, 1999, the
unaudited pro forma sales would have been $882,300 for the six months ended June
30, 2000 and $897,200 for the six months ended June 30, 1999.
All of the Company's acquisitions have been accounted for as purchase
business combinations and are included in the Company's results of operations
from their respective effective dates. The assets and liabilities recorded in
connection with the acquisitions of Space & Nav, TDTS, TrexCom and TCAS are
based upon preliminary estimates of fair values for contracts in process,
inventories, pension and postretirement benefit liabilities and deferred taxes.
Actual adjustments will be based on the final purchase prices, audited acquired
historical net assets, 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.
In March, 2000 the Company completed the sale of its interest in the Network
Security business which resulted in an after tax gain of $395, net of an
after-tax loss on the write-down in the carrying value of certain other
investments of $6,359. In May, 2000 the Company completed the sale of its
interest in the Cardiovascular Computer Systems business which resulted in an
after-tax gain of $785, net of an after-tax loss on the write-down in the
carrying value of certain other investments of $1,215. The net proceeds from the
sale of the Network Security business and Cardiovascular Computer Systems
business were $13,443 and $5,594, respectively, and are included in other
investing activities on the statement of cash flows.
3. CONTRACTS IN PROCESS
Contracts in process consist of:
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
Billed receivables ............................ $ 307,704 $ 258,054
Unbilled contract receivables, gross .......... 215,349 125,652
Less: unliquidated progress payments .......... (73,100) (10,351)
--------- ---------
Unbilled contract receivables, net ........... 142,249 115,301
--------- ---------
Inventoried costs, gross ...................... 222,299 130,091
Less: unliquidated progress payments .......... (31,971) (19,273)
--------- ---------
Inventoried costs, net ....................... 190,328 110,818
--------- ---------
Total contracts in process ................... $ 640,281 $ 484,173
========= =========
</TABLE>
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)
4. DEBT
Debt consists of:
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
Borrowings under Senior Credit Facilities ........... $ 471,000 $ --
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 ......................................... 1,076,000 605,000
Less current portion of borrowings under Senior
Credit Facilities ................................ (237,000) --
---------- --------
Long-term debt ..................................... $ 839,000 $605,000
========== ========
</TABLE>
On April 28, 2000, the Company entered into a new 364 day revolving credit
facility for $300,000 (the "New 364 Day Revolving Credit Facility") that expires
on April 27, 2001 and amended the Senior Credit Facilities to change the spreads
on borrowings and commitment fees thereunder, as follows: on "base rate"
borrowings, ranging from 0.375% to 1.75%; on "Eurodollar rate" borrowings
ranging from 1.25% to 2.75%; and, on commitment fees, ranging from 0.20% to
0.50%; in each case, depending on L-3 Communications' Debt to EBITDA Ratio at
the time of determination. Notwithstanding the new spreads, from April 28, 2000
until the adjustment date related to the quarter ending September 30, 2000, the
spreads will be no lower than 0.75% and 1.75%, respectively, on "base rate"
borrowings and "Eurodollar" borrowings. The spreads for the New 364 Day
Revolving Credit Facility are the same as those under the Senior Credit
Facilities. The lenders under the New 364 day Revolving Credit Facility rank
pari passu with the lenders under the Senior Credit Facilities. The borrowings
outstanding of $237,000 at June 30, 2000 under the New 364 Day Revolving Credit
Facility are classified under current liabilities on the balance sheet because
the facility expires in April 2001. The Company intends to either refinance the
New 364 Day Revolving Credit Facility or to restructure it together with the
Company's other existing revolving credit facilities by the end of the first
quarter of 2001.
In August 2000 the Revolving 364-Day Credit Facility was renewed for an
additional 364 days and will expire on August 9, 2001, at which time the Company
may exercise an option to convert a portion of the borrowings outstanding
thereunder into term loans which fully amortize over an eighteen month period
beginning September 30, 2001.
Available borrowings under the Company's revolving credit facilities at June
30, 2000 were $120,528, after reductions for outstanding borrowings of $471,000
and letters of credit of $108,472.
5. COMPREHENSIVE INCOME
Comprehensive income consists of:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Net income .................................................. $ 27,388 $ 18,285
Foreign currency translation losses ......................... (714) (1,783)
Unrealized gain (loss) on investments, net of taxes ......... (1,059) (2,072)
-------- --------
Comprehensive income ........................................ $ 25,615 $ 14,430
======== ========
</TABLE>
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)
6. EARNINGS PER SHARE
Weighted-average shares used in the computation of earnings per share are
presented in the table below.
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic:
Net income .......................................... $ 27,388 $ 18,285 $ 16,459 $ 11,086
Weighted average common shares outstanding .......... 33,158 31,495 33,271 32,488
--------- --------- --------- ---------
Basic earnings per share ............................ $ 0.83 $ 0.58 $ 0.49 $ 0.34
========= ========= ========= =========
Diluted:
Net income .......................................... $ 27,388 $ 18,285 $ 16,459 $ 11,086
--------- --------- --------- ---------
Common and potential common shares:
Weighted average common shares outstanding ......... 33,158 31,495 33,271 32,488
Assumed exercise of stock options .................. 4,018 3,233 4,076 3,266
Assumed purchase of common shares for
treasury ......................................... (2,495) (1,803) (2,492) (1,806)
--------- --------- --------- ---------
Common and potential common shares .................. 34,681 32,925 34,855 33,948
========= ========= ========= =========
Diluted earnings per share .......................... $ 0.79 $ 0.56 $ 0.47 $ 0.33
========= ========= ========= =========
</TABLE>
7. 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.
Additionally, in the event that U.S. government expenditures for products and
services of the type manufactured and provided by the Company are reduced, and
not offset by greater commercial sales or other new programs or products, or
acquisitions, there may be a reduction in the volume of contracts or
subcontracts awarded to the Company.
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 financial position or 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
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)
that the probability is remote that, after taking into account certain
provisions that have been made with 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.
8. SEGMENT INFORMATION
The Company has two reportable segments, Secure Communication Systems and
Specialized Communication Products which are described in 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, operating
income and assets by reportable segment.
<TABLE>
<CAPTION>
SECURE SPECIALIZED ELIMINATION OF
COMMUNICATION COMMUNICATION INTERSEGMENT CONSOLIDATED
SYSTEMS PRODUCTS CORPORATE SALES TOTAL
------- -------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
Six Months Ended
June 30, 2000:
Sales ..................... $365,220 $ 476,633 $(3,825) $ 838,028
Operating income .......... 39,122 45,200 84,322
Six Months Ended
June 30, 1999:
Sales ..................... $243,447 $ 348,623 $(2,076) $ 589,994
Operating income .......... 21,828 35,488 57,316
Assets as of:
June 30, 2000 ............. $701,685 $1,479,832 $79,595 $2,261,112
December 31, 1999 ......... 381,699 1,123,487 128,585 1,633,771
</TABLE>
9. NEW ACCOUNTING PRONOUNCEMENTS
In September 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards 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
results of operations or financial position.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements. The SEC delayed the effective date
of this SAB in June 2000, so that the SAB must now be adopted by December 31,
2000. The Company does not expect SAB No. 101 to have a material impact on its
results of operations or financial position.
10. UNAUDITED FINANCIAL INFORMATION OF L-3 COMMUNICATIONS SUBSIDIARY GUARANTORS
L-3 Communications is a wholly owned subsidiary of Holdings. The debt of L-3
Communications, including the Senior Subordinated Notes and borrowings under and
amounts drawn against the Company's credit facilities are guaranteed, on a joint
and several, full and unconditional basis, by certain of its wholly owned
domestic subsidiaries (the "Guarantor Subsidiaries"). The foreign subsidiaries
and
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)
certain domestic subsidiaries of L-3 Communications (the "Non-Guarantor
Subsidiaries") do not guarantee the debt of L-3 Communications. None of the debt
of L-3 Communications has been issued by its subsidiaries. There are no
restrictions on the payment of dividends from the Guarantor Subsidiaries to L-3
Communications.
In lieu of providing separate unaudited interim financial statements for the
Guarantor Subsidiaries, the Company has included the accompanying condensed
combining financial statement data based on the Company's understanding of the
interpretation and application of Rule 3-10 of SEC Regulation S-X and Staff
Accounting Bulletin No. 53.
The following unaudited condensed combining financial information present
the results of operations, financial position and cash flows of (i) L-3
Communications excluding its consolidated subsidiaries (the "Parent") (ii) the
Guarantor Subsidiaries, (iii) the Non-Guarantor Subsidiaries and (iv) the
eliminations to arrive at the information for L-3 Communications on a
consolidated basis.
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS L-3 COMMUNICATIONS
------ ------------ ------------ ------------ ------------------
<S> <C> <C> <C> <C> <C>
CONDENSED COMBINING BALANCE SHEETS:
-----------------------------------
AS OF JUNE 30, 2000
-------------------
Current assets:
Cash and cash equivalents ................. $ 36,585 $ 6,471 $ 2,191 $ -- $ 45,247
Contracts in process ...................... 394,289 195,116 50,876 -- 640,281
Other current assets ...................... 56,519 7,853 4,720 -- 69,092
---------- -------- --------- ---------- ----------
Total current assets .................... 487,393 209,440 57,787 -- 754,620
---------- -------- --------- ---------- ----------
Property, plant and equipment, net ......... 122,555 25,232 11,369 -- 159,156
Intangibles, net ........................... 875,946 310,195 59,691 1,245,832
Other assets ............................... 67,961 14,057 19,486 101,504
Investment in and amounts due to and
from consolidated subsidiaries ............ 551,900 86,248 (22,840) (615,308) --
---------- -------- --------- ---------- ----------
Total assets ............................ $2,105,755 $645,172 $ 125,493 $ (615,308) $2,261,112
========== ======== ========= ========== ==========
Current liabilities:
Borrowings under Senior Credit
Facilities .............................. $ 237,000 $ -- $ -- $ -- $ 237,000
Accounts payable and accrued
expenses ................................ 193,692 58,894 17,259 -- 269,845
Customer advances ......................... 50,787 1,506 2,689 -- 54,982
Other current liabilities ................. 88,672 15,931 9,517 -- 114,120
---------- -------- --------- ---------- ----------
Total current liabilities ............... 570,151 76,331 29,465 675,947
---------- -------- --------- ---------- ----------
Other liabilities .......................... 72,742 48,223 1,338 122,303
Long-term debt ............................. 839,000 -- -- 839,000
Shareholders' equity ....................... 623,862 520,618 94,690 (615,308) 623,862
---------- -------- --------- ---------- ----------
Total liabilities and shareholders'
equity ................................. $2,105,755 $645,172 $ 125,493 $ (615,308) $2,261,112
========== ======== ========= ========== ==========
</TABLE>
11
<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)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS L-3 COMMUNICATIONS
------ ------------ ------------ ------------ ------------------
<S> <C> <C> <C> <C> <C>
CONDENSED COMBINING BALANCE SHEETS:
-----------------------------------
AS OF DECEMBER 31, 1999
-----------------------
Current assets:
Cash and cash equivalents .................. $ 34,037 $ 5,164 $ 3,587 $ -- $ 42,788
Contracts in process ....................... 264,658 162,088 57,427 -- 484,173
Other current assets ....................... 24,616 10,455 5,675 -- 40,746
---------- -------- --------- ---------- ----------
Total current assets ..................... 323,311 177,707 66,689 -- 567,707
---------- -------- --------- ---------- ----------
Property, plant and equipment, net .......... 104,087 25,005 11,879 -- 140,971
Intangibles, net ............................ 399,746 377,177 44,629 -- 821,552
Other assets ................................ 67,820 10,337 25,384 -- 103,541
Investment in and amounts due
to and from consolidated subsidiaries 644,560 23,591 (25,423) (642,728) --
---------- -------- --------- ---------- ----------
Total assets ............................. $1,539,524 $613,817 $ 123,158 $ (642,728) $1,633,771
========== ======== ========= ========== ==========
Current liabilities:
Accounts payable and accrued
expenses ................................. $ 135,709 $ 57,924 $ 19,007 $ -- $ 212,640
Customer advances .......................... 53,345 543 2,850 -- 56,738
Other current liabilities .................. 24,798 17,230 6,900 -- 48,928
---------- -------- --------- ---------- ----------
Total current liabilities ................ 213,852 75,697 28,757 -- 318,306
---------- -------- --------- ---------- ----------
Other liabilities ........................... 79,234 47,961 95 -- 127,290
Long-term debt .............................. 605,000 -- -- -- 605,000
Shareholders' equity ........................ 641,438 490,159 94,306 (642,728) 583,175
---------- -------- --------- ---------- ----------
Total liabilities and shareholders'
equity .................................. $1,539,524 $613,817 $ 123,158 $ (642,728) $1,633,771
========== ======== ========= ========== ==========
CONDENSED COMBINING STATEMENTS OF
---------------------------------
OPERATIONS:
-----------
FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------
Sales ....................................... $ 564,263 $197,368 $ 78,812 $ (2,415) $ 838,028
---------- -------- --------- ---------- ----------
Operating income ............................ 74,307 7,043 2,972 -- 84,322
Interest and other income ................... 2,289 178 90 -- 2,557
Interest expense ............................ 42,158 126 7 -- 42,291
Provision for income taxes .................. 13,396 2,789 1,015 -- 17,200
Equity in net income (loss) of
consolidated subsidiaries .................. 6,346 -- -- (6,346) --
---------- -------- --------- ---------- ----------
Net income (loss) ........................... $ 27,388 $ 4,306 $ 2,040 $ (6,346) $ 27,388
========== ======== ========= ========== ==========
FOR THE SIX MONTHS ENDED JUNE 30, 1999
--------------------------------------
Sales ....................................... $ 373,257 $174,729 $ 43,391 $ (1,383) $ 589,994
---------- -------- --------- ---------- ----------
Operating income (loss) ..................... 45,342 16,159 (4,185) -- 57,316
Interest and other income ................... 2,509 176 144 -- 2,829
Interest expense ............................ 30,195 184 35 -- 30,414
Provision (benefit) for income taxes ........ 6,636 6,218 (1,408) -- 11,446
Equity in net income (loss) of
consolidated subsidiaries .................. 7,265 -- -- (7,265) --
---------- -------- --------- ---------- ----------
Net income (loss) ........................... $ 18,285 $ 9,933 $ (2,668) $ (7,265) $ 18,285
========== ======== ========= ========== ==========
</TABLE>
12
<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)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS L-3 COMMUNICATIONS
------ ------------ ------------ ------------ ------------------
<S> <C> <C> <C> <C> <C>
CONDENSED COMBINING STATEMENTS OF
---------------------------------
CASH FLOWS:
-----------
FOR THE SIX MONTHS ENDED JUNE 30, 2000:
---------------------------------------
OPERATING ACTIVITIES:
Net income ........................................ $ 27,388 $ 4,306 $ 4,457 $ (6,346) $ 27,388
Depreciation, amortization, deferred taxes and
noncash items .................................... 43,011 8,761 2,430 -- 54,202
Equity in net (income) loss of consolidated
subsidiaries ..................................... (6,346) -- -- 6,346 --
Changes in operating assets and liabilities ....... (20,501) (18,261) (1,102) -- (39,864)
---------- ----------- --------- ----------- -----------
Net cash from (used in) operating activities ...... 43,552 (5,194) 3,368 -- 41,726
---------- ----------- --------- ----------- -----------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ... (513,732) (676) (1,053) -- (515,461)
Investment in consolidated subsidiaries ........... 1,729 -- -- (1,729) --
Capital expenditures, net of dispositions ......... (9,335) (2,081) 550 -- (10,866)
Other investing activities, net ................... 16,099 -- -- -- 16,099
---------- ----------- --------- ----------- -----------
Net cash (used in) investing activities ........... (505,239) (2,757) (503) (1,729) (510,228)
---------- ----------- --------- ----------- -----------
FINANCING ACTIVITIES:
Borrowings (repayments) under senior credit
facilities, net .................................. 471,000 -- -- -- 471,000
Intercompany financing activities, net ............ (6,726) 9,258 (4,261) 1,729 --
Other financing activities, net ................... (39) -- -- -- (39)
---------- ----------- --------- ----------- -----------
Net cash from (used in) financing activities ...... 464,235 9,258 (4,261) 1,729 470,961
---------- ----------- --------- ----------- -----------
Net (decrease) increase in cash ................... 2,548 1,307 (1,396) -- 2,459
Cash and cash equivalents, beginning of period .... 34,037 5,164 3,587 -- 42,788
---------- ----------- --------- ----------- -----------
Cash and cash equivalents, end of period .......... $ 36,585 $ 6,471 $ 2,191 $ -- $ 45,247
========== =========== ========= =========== ===========
FOR THE SIX MONTHS ENDED JUNE 30, 1999:
---------------------------------------
OPERATING ACTIVITIES:
Net income (loss) ................................. $ 18,285 $ 9,933 $ (2,668) $ (7,265) $ 18,285
Depreciation, amortization, deferred taxes and
noncash items .................................... 24,666 14,454 943 -- 40,063
Equity in net (income) loss of consolidated
subsidiaries ..................................... (7,265) -- -- 7,265 --
Changes in operating assets and liabilities ....... (25,504) 4,603 (11,515) -- (32,416)
---------- ----------- --------- ----------- -----------
Net cash from (used in) operating activities ...... 10,182 28,990 (13,240) -- 25,932
---------- ----------- --------- ----------- -----------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ... (9,109) (144,226) (51,668) -- (205,003)
Investment in consolidated subsidiaries ........... (190,941) -- -- 190,941 --
Capital expenditures, net of dispositions ......... (6,524) 1,461 (657) -- (5,720)
Other investing activities, net ................... 5,007 -- -- -- 5,007
---------- ----------- --------- ----------- -----------
Net cash from (used in) investing activities ...... (201,567) (142,765) (52,325) 190,941 (205,716)
---------- ----------- --------- ----------- -----------
FINANCING ACTIVITIES:
Borrowings (repayments) under senior credit
facilities, net .................................. -- -- -- -- --
Contribution from Holdings ........................ 201,582 -- -- -- 201,582
Intercompany financing activities, net ............ -- 121,753 69,188 (190,941) --
Other financing activities, net ................... (1,171) -- -- -- (1,171)
---------- ----------- --------- ----------- -----------
Net cash from (used in) financing activities ...... 200,411 121,753 69,188 (190,941) 200,411
---------- ----------- --------- ----------- -----------
Net increase in cash .............................. 9,026 7,978 3,623 -- 20,627
Cash and cash equivalents, beginning of period .... 23,737 459 1,934 -- 26,130
---------- ----------- --------- ----------- -----------
Cash and cash equivalents, end of period .......... $ 32,763 $ 8,437 $ 5,557 $ -- $ 46,757
========== =========== ========= =========== ===========
</TABLE>
13
<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. The Secure Communication Systems segment also
provides training systems, training support services and communication software
support services. 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.
ACQUISITIONS
On January 8, 1999, the Company acquired all of the outstanding common
stock of Microdyne Corporation ("Microdyne"). On April 16, 1999, the Company
acquired all of the outstanding common stock of Aydin Corporation ("Aydin"). On
June 30, 1999, the Company acquired all of the outstanding common stock of
Interstate Electronics Corporation ("IEC") of Scott Technologies Inc.
Collectively, the acquisitions of Microdyne, Aydin and IEC comprise the "1999
Acquisitions". On December 31, 1999, the Company completed its acquisition of
the assets of the Space and Navigation business ("Space & Nav") from Honeywell,
for $55.0 million in cash plus expenses, subject to adjustment based on closing
date net assets, as defined.
On February 10, 2000, the Company acquired the assets of the Training
Devices and Training Services ("TDTS") business of the Raytheon Company for
$160.0 million in cash plus expenses, subject to adjustment based on closing
date net working capital, as defined. Following the acquisition the Company
changed the name of TDTS to L-3 Communications Link Simulation and Training. On
14
<PAGE>
February 14, 2000, the Company acquired the assets of Trex Communications
Corporation ("TrexCom") for $50.2 million in cash, plus expenses, subject to
adjustment based on closing date net worth, as defined. The acquisitions were
financed using borrowings under the Company's Senior Credit Facilities.
On April 28, 2000, the Company acquired the Traffic Alert and Collision
Avoidance System ("TCAS") product line from Honeywell for a purchase price of
$237.0 million in cash, reflecting a price reduction of $17.0 million based on
the preliminary closing date net assets, as defined, which is subject to a
final adjustment. The TCAS acquisition was financed with borrowings under a new
revolving 364 day senior credit facility. In addition, in February 2000, the
Company entered into a Memorandum of Agreement ("MOA") with Thomson-CSF Sextant
S.A. ("Sextant"), a subsidiary of Thomson-CSF, under which L-3 agreed to
purchase the assets of TCAS from Honeywell, create a limited liability
corporation for TCAS (the "TCAS LLC"), contribute 100% of the TCAS assets to
TCAS LLC, and sell a 30% interest in the TCAS LLC to Sextant for a cash
purchase price equal to 30% of the final purchase price paid by the Company for
TCAS (which is expected to be approximately $71.1 million based on the
preliminary closing date net assets) (collectively, the "TCAS Minority Interest
Transaction"). L-3 expects to maintain operating management of the TCAS LLC and
to consolidate it. The MOA, as amended, will terminate if definitive agreements
regarding the TCAS Minority Interest Transaction are not executed by August 31,
2000. The TCAS Minority Interest Transaction is subject to regulatory approval
by United States agencies and the European Union Commission and the execution
of definitive agreements.
On June 30, 2000, the Company acquired all the outstanding stock of MPRI
for $34.5 million in cash, subject to adjustment based on closing date net
assets, as defined, and the financial performance of MPRI for the year ending
June 30, 2001. The acquisition was financed using borrowings under the
Company's Senior Credit Facilities.
All of the acquisitions have been accounted for as purchase business
combinations and are included in the Company's results of operations from their
respective effective dates.
RESULTS OF OPERATIONS
The following information should be read in conjunction with the Condensed
Consolidated Financial Statements as of June 30, 2000, which reflect the
results of operations of the Company's acquisitions from their respective
effective dates. The results of operations for all periods presented are
significantly affected by the timing of the Company's acquisitions. The tables
below provide selected statement of operations data for the Company for the
three-month period ended June 30, 2000 (the "2000 Second Quarter") and the
three-month period ended June 30, 1999 (the "1999 Second Quarter") and for the
six-month period ended June 30, 2000 ("the 2000 First Half") and six-month
period ended June 30, 1999 ("the 1999 First Half"). Prior year reported segment
information has been restated to conform to the 2000 presentation of the
Company's reportable segments.
15
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------------
2000 1999
----------- -----------
(in millions)
<S> <C> <C>
Sales(1):
Secure Communication Systems ...................................... $ 200.4 $ 125.6
Specialized Communication Products ................................ 260.6 188.8
-------- --------
Total ........................................................... $ 461.0 $ 314.4
======== ========
Operating income:
Secure Communication Systems ...................................... $ 19.8 $ 11.0
Specialized Communication Products ................................ 29.9 20.1
-------- --------
Total ........................................................... $ 49.7 $ 31.1
======== ========
Depreciation and amortization expenses included in operating income:
Secure Communication Systems ...................................... $ 6.3 $ 4.6
Specialized Communication Products ................................ 12.1 9.1
-------- --------
Total ........................................................... $ 18.4 $ 13.7
======== ========
EBITDA(2)
Secure Communication Systems ...................................... $ 26.1 $ 15.6
Specialized Communication Products ................................ 42.0 29.2
-------- --------
Total ........................................................... $ 68.1 $ 44.8
======== ========
</TABLE>
----------
(1) Sales are after intersegment eliminations. See Note 8 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. 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. EBITDA as defined
by the Company may differ from similarly named measures used by other
entities.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1999
Sales increased $146.6 million to $461.0 million in 2000 Second Quarter
compared with $314.4 million in the 1999 Second Quarter, and was comprised of
sales growth of $74.8 million for the Secure Communication Systems segment and
$71.8 million for the Specialized Communication Products segment. Operating
income increased $18.6 million to $49.7 million, and operating income as a
percentage of sales ("operating margin") increased to 10.8% from 9.9% for the
reasons described below under the reportable segments discussion. Depreciation
and amortization expenses in the 2000 Second Quarter increased $4.7 million to
$18.4 million, reflecting increased goodwill amortization associated with
acquisitions and additional depreciation related to acquisitions and capital
expenditures. EBITDA increased $23.3 million to $68.1 million. EBITDA as a
percentage of sales ("EBITDA margin") increased to 14.8% from 14.2%. Basic
earnings per common share ("EPS") and diluted EPS grew 44.1% to $0.49 and 42.4%
to $0.47, respectively. Basic weighted-average common shares outstanding and
diluted weighted-average common shares outstanding increased 2.4% and 2.7%,
respectively.
Interest expense, net of interest income increased $10.6 million to $24.3
million in the 2000 Second Quarter because of the higher average outstanding
debt, net of cash during the 2000 Second Quarter compared with the 1999 Second
Quarter attributable to borrowings made under the Senior Credit Facilities to
finance acquisitions completed during the 2000 First Half. The income tax
provision for the 2000 Second Quarter reflects the Company's estimated
effective income tax rate for the year ending December 31, 2000 of 38.5%, which
is the same as the effective tax rate of 38.5% for the 1999 Second Quarter.
Included in interest and other income for the 2000 Second Quarter is a net
pre-tax gain of $1.3 million ($0.02 per diluted share), consisting of an
after-tax gain of $2.0 million on the sale of the Company's
16
<PAGE>
interest in the Cardiovascular Computer Systems business, which was largely
offset by an after-tax loss of $1.2 million on the write-down in the carrying
value of certain other investments. Excluding this net gain, diluted EPS was
$0.45 per share, an increase of 36.4% over 1999 Second Quarter diluted EPS. The
1999 Second Quarter of the income included a $0.5 million pre-tax gain
recognized on the sale of a business in June 1999.
Sales of Secure Communication Systems segment increased $74.8 million or
59.6% to $200.4 million in 2000 Second Quarter compared with the 1999 Second
Quarter. Operating income increased $8.8 million to $19.8 million. Operating
margin increased to 9.9% from 8.8%. The increase in sales was primarily
attributable to the Link Simulation and Training acquired business and
increased volume on secure telephone equipment (STE), high data rate
communications systems (data links), communication software support services
and airport security equipment. The increase in operating margin was
principally attributable to improved margins on military communication systems
and high data rate communication systems arising from cost reductions and
improved operating efficiencies, partially offset by the expected lower margins
on the Link Training and Simulation acquired business. EBITDA increased $10.5
million to $26.1 million in 2000 Second Quarter and EBITDA margin improved to
13.0% from 12.4%. 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 $71.8
million or 38.0% to $260.6 million in 2000 Second Quarter compared with the
1999 Second Quarter. Operating income increased $9.8 million to $29.9 million
and operating margin increased to 11.5% from 10.6%. The increase in sales was
principally attributable to the TCAS, IEC, Space & Nav and TrexCom acquisitions
and volume increases on airborne dipping sonar systems, naval power control and
conversion systems microwave products, antenna and display products, that were
partially offset by decreased shipments of naval power delivery systems and
space and satellite control components. The increase in operating margin was
principally attributable to improved margins on ocean products and antenna and
display products arising from sales volume increases and cost reductions and
higher margins on the TCAS acquired business partially offset by the expected
lower margins on the Space & Nav and TrexCom acquired businesses. EBITDA
increased $12.8 million to $42.0 million and EBITDA margin increased to 16.1%
from 15.5%. The changes in EBITDA and EBITDA margin were primarily attributable
to the items affecting the trends in operating income.
17
<PAGE>
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
----------- -----------
(in millions)
<S> <C> <C>
Sales(1):
Secure Communication Systems ...................................... $ 362.4 $ 243.0
Specialized Communication Products ................................ 475.6 347.0
-------- --------
Total ............................................................ $ 838.0 $ 590.0
======== ========
Operating income:
Secure Communication Systems ...................................... $ 39.1 $ 21.8
Specialized Communication Products ................................ 45.2 35.5
-------- --------
Total ............................................................ $ 84.3 $ 57.3
======== ========
Depreciation and amortization expenses included in operating income:
Secure Communication Systems ...................................... $ 11.8 $ 9.1
Specialized Communication Products ................................ 22.4 17.3
-------- --------
Total ............................................................ $ 34.2 $ 26.4
======== ========
EBITDA
Secure Communication Systems ...................................... $ 50.9 $ 30.9
Specialized Communications Products ............................... 67.6 52.8
-------- --------
Total ............................................................ $ 118.5 $ 83.7
======== ========
</TABLE>
----------
(1) Sales are after intersegment eliminations. See Note 8 to the Unaudited
Condensed Consolidated Financial Statements.
Sales increased $248.0 million or 42.0% to $838.0 million in 2000 First
Half compared with $590.0 million in the 1999 First Half comprised of growth in
sales of $119.4 million for the Secure Communication Systems segment and of
$128.6 million for the Specialized Communication Products segment. Operating
income increased $27.0 million to $84.3 million, and operating income as a
percentage of sales ("operating margin") improved to 10.1% from 9.7% for the
reasons described below under the reportable segments discussion. Depreciation
and amortization expenses increased $7.8 million to $34.2 million, reflecting
increased goodwill amortization associated with acquisitions and additional
depreciation related to capital expenditures. EBITDA increased $34.8 million to
$118.5 million. EBITDA as a percentage of sales ("EBITDA margin") was
essentially flat at 14.1%. Basic earnings per common share ("EPS") and diluted
EPS grew 43.1% to $0.83 and 41.1% to $0.79, respectively. Basic
weighted-average common shares outstanding and diluted weighted-average common
shares outstanding increased 5.3%.
Interest expense, net of interest income, increased $13.6 million to $41.7
million in 2000 First Half principally because of higher average outstanding
debt, net of cash during 2000 First Half compared with the 1999 First Half. The
income tax provision for the 2000 First Half reflects the Company's estimated
effective income tax rate for 2000 of 38.5%, which is the same as the effective
tax rate of 38.5% for 1999 First Half.
Included in interest and other income for the 2000 First Half are net
pre-tax gains of $1.9 million ($0.03 per diluted share), consisting of gains
on the sale of the Company's interests in the Network Security and
Cardiovascular Computer Systems businesses, which were largely offset by an
after-tax loss of $7.6 million on the write-down in the carrying value of
certain other investments. Excluding this net gain, diluted EPS was $0.76 per
share, an increase of 35.7% over 1999 First Half diluted EPS. The 1999 First
Half other income included a $0.5 million pre-tax gain recognized on the sale
of a business in June 1999.
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<PAGE>
Sales of Secure Communication Systems segment increased $119.4 million or
49.1% to $362.4 million in 2000 First Half compared with the 1999 First Half.
Operating income increased $17.3 million to $39.1 million. Operating margin
increased to 10.8% from 9.0%. The increase in sales was primarily attributable
to the Link Training and Simulation acquired business and increased sales on
STE, communication software support services and airport security equipment. The
increase in operating margin was attributable to improved margins on military
communication systems and high data rate communication systems, partially offset
by the expected lower margins on the Link Training and Simulation acquired
business. EBITDA increased $20.0 million to $50.9 million and EBITDA margin
improved to 14.0% from 12.7%. 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 $128.6
million or 37.1% to $475.6 million in 2000 First Half compared with the 1999
First Half. Operating income increased $9.7 million to $45.2 million and
operating margin declined to 9.5% from 10.2%. The increase in sales is
attributable to acquisitions and volume increases on airborne dipping sonar
systems, naval power control and conversion systems and display products that
were partially offset by decreased shipments of naval power delivery systems,
space and satellite control components and airborne telemetry products. The
decline in operating margin is attributable to lower margins on telemetry
products and microwave components principally attributable to sales volumes and
mix, and the expected lower margins on the Space & Nav and TrexCom acquired
businesses, partially offset by higher margins on avionics and ocean products
arising from sales volume increases and cost reductions and the TCAS acquired
business. EBITDA increased $14.8 million to $67.6 million and EBITDA margin
declined to 14.2% from 15.2%. The changes in EBITDA and EBITDA margin were
primarily attributable to the items affecting the trends in operating income.
LIQUIDITY AND CAPITAL RESOURCES
BALANCE SHEET
Contracts in process increased $156.1 million from December 31, 1999 to
June 30, 2000, of which $119.1 million was related to businesses acquired
during the 2000 First Half. The remaining increase in contracts in process was
principally attributable to increases in inventory because of production on
certain programs and products in advance of sales expected to occur later in
2000, partially offset by a reduction in billed contract receivables before
acquired balances resulting from collections exceeding billings consistent with
the record sales recorded during the quarter ended December 31, 1999. The
increases from December 31, 1999 to June 30, 2000 in current deferred tax
assets, property, plant and equipment, intangibles, accrued employment costs,
accrued expenses and other current liabilities was related to acquired
businesses net of amortization expense. The increase in accounts payable was
principally related to balances of acquired businesses, partially offset by the
timing of payments to vendors.
STATEMENT OF CASH FLOWS
The following table provides cash flow statement data for the Company.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
2000 1999
---------- ----------
(in millions)
<S> <C> <C>
Net cash from operating activities .............. $ 41.7 $ 25.9
Net cash (used in) investing activities ......... (510.2) (205.7)
Net cash from financing activities .............. 471.0 200.4
</TABLE>
OPERATING ACTIVITIES
During the 2000 First Half, L-3 generated $41.7 million of cash in its
operating activities, a increase of $15.8 million over the $25.9 million
generated in the 1999 First Half, principally as a result of improvements of
$23.2 million in earnings adjusted for non-cash items and deferred taxes and a
net
19
<PAGE>
increase in working capital and other operating assets and liabilities excluding
the effects of acquisitions of $39.9 million in the 2000 First Half compared
with $32.4 million in the 1999 First Half. The Company expects its rate of
increase in working capital to decline during the second half of 2000, and as a
result cash flow is expected to improve.
INVESTING ACTIVITIES
The Company continued to pursue its acquisition strategy during the 2000
First Half and invested $515.5 million to acquire businesses, compared with
$205.0 million in the 1999 First Half (See discussions under "Acquisitions"
above).
The Company makes capital expenditures for improvement of manufacturing
facilities and equipment. The Company expects that its capital expenditures for
the year ending December 31, 2000 will be between $35.0 and $40.0 million.
In March 2000, the Company sold its interest in the Network Security
business for net proceeds of $13.4 million. In May 2000, the Company sold its
interest in the Cardiovascular Computer Systems business for net proceeds of
$5.6 million.
FINANCING ACTIVITIES
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"); the net proceeds of $201.5 million were contributed to the Company
and partially used to repay borrowings made in January 1999 under the Senior
Credit Facilities to finance the Microdyne acquisition.
At June 30, 2000, available borrowings under the revolving credit
facilities were $120.5 million after reductions for borrowings of $471.0
million outstanding thereunder used principally to finance acquisitions and
outstanding letters of credit of $108.5 million.
On April 28, 2000 the Company entered into a new 364 day revolving senior
credit facility for $300.0 million (the "New 364 Day Revolving Credit
Facility") that expires on April 27, 2001, and on April 28, 2000 borrowed
$237.0 million thereunder to finance the TCAS acquisition. Additionally, on
April 28, 2000 the Company amended the Senior Credit Facilities to change the
spreads on borrowings and commitment fees thereunder. The spreads on the New
364 Day Revolving Credit Facility are the same as those under the Senior Credit
Facilities, and the lenders under the New 364 Day Revolving Credit Facility
rank pari passu with the lenders under the Senior Credit Facilities. See Note 4
to the Condensed Consolidated Financial Statements. The borrowings outstanding
of $237.0 million at June 30, 2000 under the New 364 Day Revolving Credit
Facility are classified under current liabilities on the balance sheet because
the facility expires in April 2001. The Company intends to either refinance the
New 364 Day Revolving Credit Facility or to restructure it together with the
Company's other existing revolving credit facilities by the end of the first
quarter of 2001.
In August 2000, the Revolving 364 Day Credit Facility for $200.0 million
which will expire on August 10, 2000 was renewed for an additional 364 days and
will expire on August 9, 2001, at which time the Company may exercise an option
to convert a portion of the borrowings outstanding thereunder into term loans
which fully amortize over an eighteen month period beginning September 30,
2001.
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 by L-3 Communications. As of June 30,
2000, 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 subsidiaries of L-3
Communications, all of which guarantor subsidiaries 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
20
<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 7 to the Condensed Consolidated Financial Statements.
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards 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
results of operations or financial position.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements. The SEC delays the effective date
of this SAB in June 2000, so that the SAB must now be adopted by December 31,
2000. The Company does not expect SAB No. 101 to have a material impact on its
results of operations or financial position.
YEAR 2000
The Company has not experienced any impact to its business since the Year
2000 roll-over either internally or from its customers and infrastructure
suppliers. The planned phases of the Year 2000 efforts have been completed with
total cost for all the efforts of $18.7 million which included $6.2 million of
capitalized costs. Although the Company has experienced no failures in
infrastructure systems and in the customer and supply chains since the Year
2000 roll-over, the likelihood and effect of such failure 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 Year
2000 effort costs reflected above could change in the event of any unknown Year
2000 related occurrence during the remainder of the year ending December 31,
2000.
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 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
21
<PAGE>
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
defense budget; our reliance on contracts with a limited number of agencies of,
or contractors to, the U.S. government business risks peculiar to that industry
including changing priorities or reductions in 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 out debt and the restrictions contained in our debt
agreements; Year 2000 issues; collective bargaining labor disputes; pension,
environmental or legal 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 the 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 changes or circumstances or changes in expectations or the occurrence
of anticipated events.
ITEM 3. QUANTITIVE 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, 1999 for a discussion of the Company's exposure to market risks.
There was no significant change in those risks during the six months ended June
30, 2000.
22
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 25, 2000, at the Company's annual meeting of Stockholders, the
following proposals were acted on:
(1) Two nominees for the Board of Directors were elected to three year
terms expiring in 2003. The votes were as follows:
<TABLE>
<CAPTION>
FOR WITHHELD
--- --------
<S> <C> <C>
Alberto M. Finali 25,341,651 112,987
Arthur L. Simon 25,336,688 117,950
</TABLE>
(2) The selection of PricewaterhouseCoopers LLP to serve as independent
auditors for 2000 was ratified. The votes were as follows:
<TABLE>
<S> <C>
For 25,449,570
Against 4,034
Withheld 1,034
</TABLE>
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
* The information required on this exhibit is presented in Note 6 to the
Condensed Consolidated Financial Statements as of June 30, 2000 in
accordance with the provisions of FASB SFAS No. 128, Earnings Per
Share.
(b) Reports on Form 8-K
Report filed on May 12, 2000 regarding the acquisition of the acquisition
of the Traffic Alert and Collision Avoidance System (TCAS) product line of
Honeywell Inc.
The registrants have not filed the amendments to their Form 8-K, dated
February 24, 2000 and their Form 8-K, dated May 12, 2000, concerning the
acquisitions by L-3 of the TDTS and TCAS businesses, respectively, which
were required to be filed by the Securities Exchange Act of 1934 during the
preceding 3 months, because the audited financial statements of TDTS and
TCAS businesses for the fiscal years preceding their acquisitions by L-3
are not yet available. Such audits for the TDTS and TCAS businesses are
currently in process and the required amendments on Form 8-K will be filed
upon the completion of the audits.
23
<PAGE>
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: August 14, 2000
/s/ Robert V. LaPenta
----------------------------------------
Name: Robert V. LaPenta
Title: President and Chief Financial
Officer (Principal Financial
Officer)
24
