<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 MARCH 31, 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. X Yes No
--- ---
There were 33,051,850 shares of L-3 Communications Holdings, Inc. common
stock with a par value of $0.01 outstanding as of the close of business on May
12, 2000.
================================================================================
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
FORM 10-Q QUARTERLY REPORT FOR
QUARTER ENDED MARCH 31, 2000
PART I -- FINANCIAL INFORMATION:
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999 .................................................... 1
Condensed Consolidated Statements of Operations for the Three Months
ended March 31, 2000 and March 31, 1999 .............................. 2
Condensed Consolidated Statements of Cash Flows for the Three Months
ended March 31, 2000 and March 31, 1999 .............................. 3
Notes to Condensed Consolidated Financial Statements ................... 4
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition .................................................. 14
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>
MARCH 31, DECEMBER 31,
2000 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 27,381 $ 42,788
Contracts in process .............................................. 577,451 484,173
Deferred income taxes ............................................. 62,648 32,985
Other current assets .............................................. 7,658 7,761
---------- ----------
Total current assets ............................................ 675,138 567,707
---------- ----------
Property, plant and equipment, net ................................. 159,130 140,971
Intangibles, primarily cost in excess of net assets acquired, net of
amortization ...................................................... 972,665 821,552
Deferred income taxes .............................................. 64,095 56,858
Other assets ....................................................... 40,992 46,683
---------- ----------
Total assets .................................................... $1,912,020 $1,633,771
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade ........................................... $ 112,024 $ 98,693
Accrued employment costs .......................................... 82,616 70,618
Accrued expenses .................................................. 50,022 27,931
Customer advances ................................................. 48,831 56,738
Accrued interest .................................................. 18,858 12,683
Income taxes ...................................................... 2,435 2,715
Other current liabilities ......................................... 88,897 48,928
---------- ----------
Total current liabilities ....................................... 403,683 318,306
---------- ----------
Pension and postretirement benefits ................................ 107,200 110,262
Other liabilities .................................................. 17,663 17,028
Long-term debt ..................................................... 785,000 605,000
Commitments and contingencies
Shareholders' equity:
Common stock $.01 par value; authorized 100,000,000 shares, issued
and outstanding 32,910,000 and 32,794,547 shares ................ 489,161 483,694
Retained earnings ................................................. 114,474 103,545
Unearned compensation ............................................. (3,185) (1,661)
Accumulated other comprehensive loss .............................. (1,976) (2,403)
---------- ----------
Total shareholders' equity ......................................... 598,474 583,175
---------- ----------
Total liabilities and shareholders' equity ...................... $1,912,020 $1,633,771
========== ==========
</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)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2000 1999
------------- -------------
Sales ..................................... $ 377,052 $ 275,562
Costs and expenses ........................ 342,383 249,395
--------- ---------
Operating income .......................... 34,669 26,167
Interest and other income ................. 835 1,014
Interest expense .......................... 17,588 15,475
--------- ---------
Income before income taxes ................ 17,916 11,706
Provision for income taxes ................ 6,987 4,507
--------- ---------
Net income ................................ $ 10,929 $ 7,199
========= =========
Earnings per common share:
Basic .................................... $ 0.33 $ 0.24
========= =========
Diluted .................................. $ 0.32 $ 0.23
========= =========
Weighted average common shares outstanding:
Basic .................................... 33,042 30,491
========= =========
Diluted .................................. 34,478 31,884
========= =========
See notes to condensed consolidated financial statements.
2
<PAGE>
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ........................................................ $ 10,929 $ 7,199
Depreciation and amortization ..................................... 15,701 12,774
Amortization of deferred debt issuance costs ...................... 1,006 978
Deferred income taxes ............................................. 4,700 3,155
Other noncash items ............................................... 2,295 1,973
Changes in operating assets and liabilities, net of amounts
acquired:
Contracts in process ............................................. (25,942) (23,677)
Other current assets ............................................. 395 2,081
Other assets ..................................................... (1,200) (1,417)
Accounts payable and accrued expenses ............................ 16,145 (9,499)
Customer advances ................................................ (8,199) 8,112
Other current liabilities ........................................ 336 (822)
Pension and postretirement benefits .............................. 4,838 (546)
Other liabilities ................................................ (5,247) (742)
All other operating activities, net ............................... (598) (1,086)
---------- ---------
Net cash from (used in) operating activities ...................... 15,159 (1,517)
---------- ---------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ................... (217,670) (96,312)
Capital expenditures .............................................. (5,393) (4,545)
Disposition of property, plant and equipment ...................... 952 269
Other investing activities, net ................................... 11,506 1,189
---------- ---------
Net cash (used in) investing activities ........................... (210,605) (99,399)
---------- ---------
FINANCING ACTIVITIES:
Borrowings under revolving credit facilities ...................... 244,000 74,700
Repayment of borrowings under revolving credit facilities ......... (64,000) (74,700)
Proceeds from sale of common stock, net ........................... -- 201,582
Other financing activities, net ................................... 39 (1,265)
---------- ---------
Net cash from financing activities ................................ 180,039 200,317
---------- ---------
Net (decrease) increase in cash ................................... (15,407) 99,401
Cash and cash equivalents, beginning of the period ................ 42,788 26,130
---------- ---------
Cash and cash equivalents, end of the period ...................... $ 27,381 $ 125,531
========== =========
</TABLE>
See notes to condensed consolidated financial statements.
3
<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, 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. 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 the interim
4
<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)
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 (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
will terminate if the TCAS Minority Interest Transaction is not consummated by
May 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.
Space and Nav and TDTS historical interim financial statements for the
three months ended March 31, 1999 are not readily available. However, based
on preliminary statement of operations data, had the acquisitions of Aydin, IEC,
Space & Nav, TrexCom and TDTS occurred on January 1, 1999, the unaudited pro
forma sales would have been $399,700 for the three months ended March 31, 2000
and $406,100 for the three months ended March 31, 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
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)
liabilities recorded in connection with the acquisitions of Space & Nav, Link
Training and Simulation and TrexCom 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.
3. CONTRACTS IN PROCESS
Contracts in process consist of:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
---------------- ------------------
<S> <C> <C>
Billed receivables ............................ $ 263,238 $ 258,054
Unbilled contract receivables, gross .......... 214,061 125,652
Less: unliquidated progress payments .......... (74,022) (10,351)
--------- ---------
Unbilled contract receivables, net ........... 140,039 115,301
--------- ---------
Inventoried costs, gross ...................... 199,138 130,091
Less: unliquidated progress payments .......... (24,964) (19,273)
--------- ---------
Inventoried costs, net ....................... 174,174 110,818
--------- ---------
Total contracts in process ................... $ 577,451 $ 484,173
========= =========
</TABLE>
4. DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
---------------- ------------------
<S> <C> <C>
Borrowings under Senior Credit Facilities ........... $180,000 --
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 ......................................... 785,000 605,000
Less current portion ................................ -- --
-------- --------
Long-term debt ..................................... $785,000 $605,000
======== ========
</TABLE>
Available borrowings under the Company's revolving credit facilities at
March 31, 2000 were $122,559, after reductions for outstanding borrowings of
$180,000 and letters of credit of $97,441.
In January 2000, the Senior Credit Facilities were amended to change the
spreads on borrowings, commitment fees and letter of credit fees thereunder, as
follows: on "base rate" borrowings, ranging from 0.375% to 1.25%; on "LIBOR
rate" borrowings and financial letters of credit, ranging from 1.00% to
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)
2.25%; on commitment fees, ranging from 0.20% to 0.50%; and, on performance
letters of credit, ranging from 0.50% to 1.125%, in each case, depending on L-3
Communications' Debt to EBITDA Ratio at the time of determination.
On April 24, 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 23, 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 24, 2000
until the adjustment date related to the quarter ending September 30, 2000, the
spreads will be no lower than 0.75%, 1.75% and 0.25%, respectively, on "base
rate" borrowings, "Eurodollar" borrowings and commitment fees. 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.
5. COMPREHENSIVE INCOME
Comprehensive income consists of:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
---------- -----------
<S> <C> <C>
Net income .................................................. $10,929 $ 7,199
Foreign currency translation losses ......................... (598) (1,086)
Unrealized gain (loss) on investments, net of taxes ......... 1,025 (2,072)
------- --------
Comprehensive income ........................................ $11,356 $ 4,041
======= ========
</TABLE>
6. EARNINGS PER SHARE
Weighted-average shares used in the computation of earnings per share are
presented in the table below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
--------------------------
2000 1999
------------ -----------
<S> <C> <C>
Basic:
Net income .......................................... $ 10,929 $ 7,199
Weighted average common shares outstanding .......... 33,042 30,491
--------- --------
Basic earnings per share ............................ $ 0.33 $ 0.24
========= ========
Diluted:
Net income .......................................... $ 10,929 $ 7,199
--------- --------
Common and potential common shares:
Weighted average common shares outstanding ......... 33,042 30,491
Assumed exercise of stock options .................. 3,815 3,197
Assumed purchase of common shares for treasury ..... (2,379) (1,804)
--------- --------
Common and potential common shares ................ 34,478 31,884
========= ========
Diluted earnings per share .......................... $ 0.32 $ 0.23
========= ========
</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
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)
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 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 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
<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)
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>
Three Months Ended
March 31, 2000:
Sales ..................... $162,176 $ 215,684 $(808) $ 377,052
Operating income .......... 19,360 15,309 34,669
Three Months Ended
March 31, 1999:
Sales ..................... $117,514 $ 158,607 $(559) $ 275,562
Operating income .......... 10,794 15,373 26,167
Assets as of:
March 31, 2000 ............ $634,700 $1,200,996 $ 76,324 $1,912,020
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.
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)
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 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.
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)
<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 MARCH 31, 2000
- --------------------
Current assets:
Cash and cash equivalents .................... $ 20,723 $ 4,414 $ 2,244 $ -- $ 27,381
Contracts in process ......................... 352,697 171,234 53,520 -- 577,451
Other current assets ......................... 56,489 8,327 5,490 -- 70,306
---------- -------- --------- ---------- ----------
Total current assets ....................... 429,909 183,975 61,254 -- 675,138
---------- -------- --------- ---------- ----------
Property, plant and equipment, net ............ 121,366 26,921 10,843 -- 159,130
Intangibles, net .............................. 567,766 362,574 42,325 -- 972,665
Other assets .................................. 66,873 12,148 26,066 -- 105,087
Investment in and amounts due to and
from consolidated subsidiaries ............... 629,118 29,981 (24,356) (634,743) --
---------- -------- --------- ---------- ----------
Total assets ............................... $1,815,032 $615,599 $ 116,132 $ (634,743) $1,912,020
========== ======== ========= ========== ==========
Current liabilities:
Accounts payable and accrued
expenses ................................... $ 190,812 $ 55,281 $ 17,427 $ -- $ 263,520
Customer advances ............................ 44,494 746 3,591 -- 48,831
Other current liabilities .................... 64,277 16,780 10,275 -- 91,332
---------- -------- --------- ---------- ----------
Total current liabilities .................. 299,583 72,807 31,293 -- 403,683
---------- -------- --------- ---------- ----------
Other liabilities ............................. 73,712 49,932 1,219 -- 124,863
Long-term debt ................................ 785,000 -- -- -- 785,000
Shareholders' equity .......................... 656,737 492,860 83,620 (634,743) 598,474
---------- -------- --------- ---------- ----------
Total liabilities and shareholders'
equity .................................... $1,815,032 $615,599 $ 116,132 $ (634,743) $1,912,020
========== ======== ========= ========== ==========
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
========== ======== ========= ========== ==========
</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 STATEMENTS OF OPERATIONS:
- ---------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2000
- -----------------------------------------
Sales ........................................ $244,547 $94,108 $39,409 $ (1,012) $377,052
-------- ------- ------- -------- --------
Operating income ............................. 29,631 4,499 539 -- 34,669
Interest and other income .................... 136 25 674 -- 835
Interest expense ............................. 17,463 63 62 -- 17,588
Provision for income taxes ................... 4,896 1,760 331 -- 6,987
Equity in net income of
consolidated subsidiaries ................... 3,521 -- -- (3,521) --
-------- ------- ------- -------- --------
Net income ................................... $ 10,929 $ 2,701 $ 820 $ (3,521) $ 10,929
======== ======= ======= ======== ========
FOR THE THREE MONTHS ENDED MARCH 31, 1999
- -----------------------------------------
Sales ........................................ $178,999 $78,717 $18,350 $ (504) $275,562
-------- ------- ------- -------- --------
Operating income (loss) ...................... 21,671 5,442 (946) -- 26,167
Interest and other income .................... 1,004 10 -- -- 1,014
Interest expense ............................. 15,391 53 31 -- 15,475
Provision (benefit) for income taxes ......... 2,734 2,079 (306) -- 4,507
Equity in net income (loss) of consolidated
subsidiaries ................................ 2,649 (2,649) --
-------- ------- ------- -------- --------
Net income (loss) ............................ $ 7,199 $ 3,320 $ (671) $ (2,649) $ 7,199
======== ======= ======= ======== ========
</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
PARENT SUBSIDIARIES
------------- --------------
<S> <C> <C>
CONDENSED COMBINING STATEMENTS OF CASH FLOWS:
- ---------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2000:
- ------------------------------------------
OPERATING ACTIVITIES:
Net income .............................................. $ 10,929 $ 2,701
Depreciation, amortization, deferred taxes and
noncash items .......................................... 16,620 5,640
Equity in net (income) loss of consolidated
subsidiaries ........................................... (3,521) --
Changes in operating assets and liabilities ............. (8,216) (7,335)
----------- ----------
Net cash from (used in) operating activities ............ 15,812 1,006
----------- ----------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ......... (217,670) --
Capital expenditures, net of dispositions ............... (3,186) (1,571)
Other investing activities, net ......................... -- --
----------- ----------
Net cash (used in) investing activities ................. (220,856) (1,571)
----------- ----------
FINANCING ACTIVITIES:
Borrowings (repayments) under senior credit
facilities, net ........................................ 180,000 --
Intercompany financing activities, net .................. 11,506
Other financing activities, net ......................... 224 (185)
----------- ----------
Net cash from (used in) financing activities ............ 191,730 (185)
----------- ----------
Net (decrease) increase in cash ......................... (13,314) (750)
Cash and cash equivalents, beginning of period .......... 34,037 5,164
----------- ----------
Cash and cash equivalents, end of period ................ $ 20,723 $ 4,414
=========== ==========
FOR THE THREE MONTHS ENDED MARCH 31, 1999:
- ------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) ....................................... $ 7,199 $ 3,320
Depreciation, amortization, deferred taxes and
noncash items .......................................... 13,173 5,308
Equity in net (income) loss of consolidated
subsidiaries ........................................... (2,649) --
Changes in operating assets and liabilities ............. (18,841) (7,021)
----------- ----------
Net cash from (used in) operating activities ............ (1,118) 1,607
----------- ----------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ......... (2,871) (93,441)
Investment in consolidated subsidiaries ................. (92,252) --
Capital expenditures, net of dispositions ............... (2,971) (1,068)
Other investing activities, net ......................... -- 2,275
----------- ----------
Net cash (used in) investing activities ................. (98,094) (92,234)
----------- ----------
FINANCING ACTIVITIES:
Borrowings (repayments) under senior credit
facilities, net ........................................ -- --
Contribution from Holdings .............................. 201,582 --
Intercompany financing activities, net .................. (5,105) 91,166
Other financing activities, net ......................... (1,265) --
----------- ----------
Net cash from (used in) financing activities ............ 195,212 91,166
----------- ----------
Net increase (decrease) in cash ......................... 96,000 539
Cash and cash equivalents, beginning of period .......... 23,737 459
----------- ----------
Cash and cash equivalents, end of period ................ $ 119,737 $ 998
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
NON-GUARANTOR CONSOLIDATED
SUBSIDIARIES ELIMINATIONS L-3 COMMUNICATIONS
--------------- -------------- -------------------
<S> <C> <C> <C>
CONDENSED COMBINING STATEMENTS OF CASH FLOWS:
- ---------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2000:
- ------------------------------------------
OPERATING ACTIVITIES:
Net income ....................................... $ 820 $ (3,521) $ 10,929
Depreciation, amortization, deferred taxes and
noncash items .......................................... 1,442 -- 23,702
Equity in net (income) loss of consolidated
subsidiaries ........................................... -- 3,521 --
Changes in operating assets and liabilities ............. (3,921) -- (19,472)
---------- --------- -----------
Net cash from (used in) operating activities ............ (1,659) -- 15,159
---------- --------- -----------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ......... -- -- (217,670)
Capital expenditures, net of dispositions ............... 316 -- (4,441)
Other investing activities, net ......................... 11,506 -- 11,506
---------- --------- -----------
Net cash (used in) investing activities ................. 11,822 -- (210,605)
---------- --------- -----------
FINANCING ACTIVITIES:
Borrowings (repayments) under senior credit
facilities, net ........................................ -- -- 180,000
Intercompany financing activities, net .................. (11,506) -- --
Other financing activities, net ......................... -- -- 39
---------- --------- -----------
Net cash from (used in) financing activities ............ (11,506) -- 180,039
---------- --------- -----------
Net (decrease) increase in cash ......................... (1,343) -- (15,407)
Cash and cash equivalents, beginning of period .......... 3,587 -- 42,788
---------- --------- -----------
Cash and cash equivalents, end of period ................ $ 2,244 $ -- $ 27,381
========== ========= ===========
FOR THE THREE MONTHS ENDED MARCH 31, 1999:
- ------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) ....................................... $ (671) $ (2,649) $ 7,199
Depreciation, amortization, deferred taxes and
noncash items .......................................... 399 -- 18,880
Equity in net (income) loss of consolidated
subsidiaries ........................................... -- 2,649 --
Changes in operating assets and liabilities ............. (1,734) -- (27,596)
---------- --------- -----------
Net cash from (used in) operating activities ............ (2,006) -- (1,517)
---------- --------- -----------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ......... -- -- (96,312)
Investment in consolidated subsidiaries ................. -- 92,252 --
Capital expenditures, net of dispositions ............... (237) -- (4,276)
Other investing activities, net ......................... (1,086) -- 1,189
---------- --------- -----------
Net cash (used in) investing activities ................. (1,323) 92,252 (99,399)
---------- --------- -----------
FINANCING ACTIVITIES:
Borrowings (repayments) under senior credit
facilities, net ........................................ -- -- --
Contribution from Holdings .............................. -- -- 201,582
Intercompany financing activities, net .................. 6,191 (92,252) --
Other financing activities, net ......................... -- -- (1,265)
---------- --------- -----------
Net cash from (used in) financing activities ............ 1,086 (92,252) 200,317
---------- --------- -----------
Net increase (decrease) in cash ......................... 2,862 -- 99,401
Cash and cash equivalents, beginning of period .......... 1,934 -- 26,130
---------- --------- -----------
Cash and cash equivalents, end of period ................ $ 4,796 $ -- $ 125,531
========== ========= ===========
</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. 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 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. 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.
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
14
<PAGE>
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 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 (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
will terminate if the TCAS Minority Interest Transaction is not consummated by
May 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.
RESULTS OF OPERATIONS
The following information should be read in conjunction with the Condensed
Consolidated Financial Statements as of March 31, 2000, which reflect the
results of operations of the Company's acquisitions from their respective
effective dates. Accordingly, the results of operations for the three months
ended March 31, 2000 and 1999 are significantly affected by the timing of those
acquisitions. The table below provides selected statement of operations data
for the Company for the three-month period ended March 31, 2000 (the "2000
First Quarter") and the three-month period ended March 31, 1999 (the "1999
First Quarter"). Prior year reported segment information has been restated to
conform to the 2000 presentation of the Company's reportable segments.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
-------------------------
2000 1999
----------- -----------
(in millions)
<S> <C> <C>
Sales(1):
Secure Communication Systems ...................................... $ 162.1 $ 117.4
Specialized Communication Products ................................ 215.0 158.2
-------- --------
Total ........................................................... $ 377.1 $ 275.6
======== ========
Operating income:
Secure Communication Systems ...................................... $ 19.4 $ 10.8
Specialized Communication Products ................................ 15.3 15.4
-------- --------
Total ........................................................... $ 34.7 $ 26.2
======== ========
Depreciation and amortization expenses included in operating income:
Secure Communication Systems ...................................... $ 5.4 $ 4.5
Specialized Communication Products ................................ 10.3 8.2
-------- --------
Total ........................................................... $ 15.7 $ 12.7
======== ========
EBITDA(2)
Secure Communication Systems ...................................... $ 24.8 $ 15.3
Specialized Communication Products ................................ 25.6 23.6
-------- --------
Total ........................................................... $ 50.4 $ 38.9
======== ========
</TABLE>
15
<PAGE>
- ----------
(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 MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1999
Sales increased $101.5 million to $377.1 million in 2000 First Quarter
compared with $275.6 million in the 1999 First Quarter, and was comprised of
sales growth of $44.7 million for the Secure Communications Systems segment and
$56.8 million for the Specialized Communications Products segment. Operating
income increased $8.5 million to $34.7 million, and operating income as a
percentage of sales ("operating margin") declined to 9.2% from 9.5% for the
reasons described below under the reportable segments discussion. 2000 First
Quarter depreciation and amortization expenses increased $3.0 million to $15.7
million, reflecting increased goodwill amortization associated with
acquisitions and additional depreciation related to acquisition and capital
expenditures. EBITDA increased $11.5 million to $50.4 million. EBITDA as a
percentage of sales ("EBITDA margin") declined to 13.4% from 14.1%. Basic
earnings per common share ("EPS") and diluted EPS grew 37.5% to $0.33 and 39.1%
to $0.32, respectively. Basic weighted-average common shares outstanding and
diluted weighted-average common shares outstanding increased 8.4% and 8.1%,
respectively, because of the shares of common stock issued in connection with
the February 1999 Common Stock Offering.
Interest expense increased $2.1 million to $17.6 million in the 2000 First
Quarter because of the borrowings made under the Senior Credit Facilities to
finance acquisitions during the 2000 First Quarter. The income tax provision
for the 2000 First Quarter reflects the Company's estimated effective income
tax rate for the year ending December 31, 2000 of 39.0%, compared with the
effective tax rate of 38.5% for the 1999 First Quarter.
Included in interest and other income for the 2000 First Quarter is a net
gain of $0.6 million ($0.4 million after taxes) or $0.01 per diluted share,
consisting of an after-tax gain of $6.8 million on the sale of the Company's
interest in the Network Security business, which was largely offset by an
after-tax loss of $6.4 million on the write-down in the carrying value of
certain other investments. Excluding this net gain, diluted EPS would have been
$0.31 per share, an increase of 43.5% over 1999 First Quarter diluted EPS.
Sales of Secure Communication Systems segment increased $44.7 million or
38.1% to $162.1 million in 2000 First Quarter compared with the 1999 First
Quarter. Operating income increased $8.6 million to $19.4 million. Operating
margin increased to 11.9% from 9.2%. The increase in sales was primarily
attributable to the Link Simulation and Training acquisition and increased
volume on secure telephone equipment (STE) and high data rate communications
systems, partially offset by lower sales on the U-2 Support Program and
communication subsystems for the International Space Station (ISS). 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 lower margins on the Link Training and Simulation business acquired
during February 2000. EBITDA increased $9.5 million to $24.8 million in 2000
First Quarter and EBITDA margin improved to 15.3% from 13.0%. 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 $56.8
million or 35.9% to $215.0 million in 2000 First Quarter compared with the 1999
First Quarter. Operating income was essentially flat at $15.3 million and
operating margin declined to 7.1% from 9.7%. The increase in sales was
principally attributable to the Aydin, IEC, Space & Nav and TrexCom
acquisitions and volume increases on ocean products, naval power control and
conversion systems, and display products, that were partially offset by
decreased shipments on microwave components and space and satellite control
components. The
16
<PAGE>
decrease in operating margin was principally attributable to lower margins on
the recently acquired Space & Nav and TrexCom businesses which were not included
in the 1999 First Quarter due to timing of those acquisitions and on telemetry
products, partially offset by improved margins on ocean products and aviation
recorders arising from sales volume increases. EBITDA increased $2.0 million to
$25.6 million and EBITDA margin declined to 11.9% from 14.9%. 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 $93.3 million from December 31, 1999 to
March 31, 2000, of which $75.2 million was related to businesses acquired
during the 2000 First Quarter. 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 March 31, 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.
THREE MONTHS ENDED MARCH
31,
-----------------------
2000 1999
---------- ----------
(in millions)
Net cash (used in) from operating activities ....... $ 15.2 $ (1.5)
Net cash (used in) investing activities ............ (210.6) (99.4)
Net cash from financing activities ................. 180.0 200.3
OPERATING ACTIVITIES
During the 2000 First Quarter, L-3 generated $15.2 million of cash in its
operating activities, a increase of $16.7 million compared with the 1999 First
Quarter, principally as a result of improvements of $8.5 million in earnings
adjusted for non-cash items and a net change in working capital excluding the
effects of acquisitions of $19.4 million in the 2000 First Quarter compared with
$27.6 million in the 1999 First Quarter. The Company expects its rate of
increase in working capital to decline during the remainder 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 Quarter and acquired several businesses for an aggregate cash purchase
prices of $217.7 million, as compared to $96.3 million in the 1999 First
Quarter.
The Company makes capital expenditures for improvement of manufacturing
facilities and equipment. The Company expects that its capital expenditures for
2000 will be approximately $40.0 million.
In March 2000, the Company sold its interest in the Network Security
business for net proceeds of $13.4 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.
17
<PAGE>
At March 31, 2000, available borrowings under the revolving credit
facilities were $122.6 million after reductions for borrowings of $180,000
thereunder and outstanding letters of credit of $97.4 million.
On April 24, 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 23, 2001, and on April 28, 2000 borrowed
$237.0 million thereunder to finance the TCAS acquisition. Additionally, on
April 24, 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 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 March 31,
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 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 AND PROPOSED 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.
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
18
<PAGE>
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 or
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
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.
19
<PAGE>
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 three months ended
March 31, 2000.
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
* The information required on this exhibit is presented in Note 6 to the
Condensed Consolidated Financial Statements as of March 31, 2000 in
accordance with the provisions of FASB SFAS No. 128, Earnings Per Share.
(b) Reports on Form 8-K
Report filed on February 25, 2000 regarding the acquisition of Training
Devices and Training Services business of Raytheon Company.
21
<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: May 15, 2000
/s/ Robert V. LaPenta
---------------------------------------
Name: Robert V. LaPenta
Title: President and Chief Financial Officer
(Principal Financial Officer)
22
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