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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, 2002
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 preceding 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 39,709,284 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
13, 2002.
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L-3 COMMUNICATIONS HOLDINGS, INC. AND
L-3 COMMUNICATIONS CORPORATION
FORM 10-Q QUARTERLY REPORT FOR
QUARTER ENDED MARCH 31, 2002
PART I -- FINANCIAL INFORMATION:
PAGE NO.
---------
ITEM 1. Unaudited Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2002 and
December 31, 2001 ................................................. 1
Condensed Consolidated Statements of Operations for the Three Months
ended March 31, 2002 and March 31, 2001 ........................... 2
Condensed Consolidated Statements of Cash Flows for the Three Months
ended March 31, 2002 and March 31, 2001 ........................... 3
Notes to Unaudited Condensed Consolidated Financial Statements ..... 4
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition ............................................... 17
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ......... 28
PART II -- OTHER INFORMATION:
ITEM 6. Exhibits and Reports on Form 8-K ................................... 28
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2002 2001
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 46,005 $ 361,022
Contracts in process ............................................ 1,226,811 801,824
Deferred income taxes ........................................... 58,047 62,965
Other current assets ............................................ 20,414 16,590
---------- ----------
Total current assets .......................................... 1,351,277 1,242,401
---------- ----------
Property, plant and equipment, net ............................... 382,743 203,374
Goodwill ......................................................... 2,388,303 1,707,718
Deferred income taxes ............................................ 130,710 97,883
Deferred debt issue costs ........................................ 39,724 40,190
Other assets ..................................................... 65,063 47,683
---------- ----------
Total assets .................................................. $4,357,820 $3,339,249
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade ......................................... $ 167,224 $ 129,538
Accrued employment costs ........................................ 160,841 126,981
Accrued expenses ................................................ 36,625 38,823
Customer advances ............................................... 65,945 74,060
Accrued interest ................................................ 24,394 13,288
Income taxes .................................................... 12,650 16,768
Other current liabilities ....................................... 76,252 125,113
---------- ----------
Total current liabilities ..................................... 543,931 524,571
---------- ----------
Pension and postretirement benefits .............................. 252,326 155,052
Other liabilities ................................................ 63,245 60,585
Long-term debt ................................................... 2,161,259 1,315,252
---------- ----------
Total liabilities ............................................. 3,020,761 2,055,460
Minority interest ................................................ 70,598 69,897
Commitments and contingencies
Shareholders' equity:
L-3 Holdings' common stock $.01 par value; authorized 100,000,000
shares, issued and outstanding 39,650,774 and 39,248,313 shares
(L-3 Communications common stock: $.01 par value, 100 shares
authorized, issued and outstanding) ........................... 964,416 939,037
Retained earnings ............................................... 331,009 301,730
Unearned compensation ........................................... (5,110) (3,205)
Accumulated other comprehensive loss ............................ (23,854) (23,670)
---------- ----------
Total shareholders' equity ....................................... 1,266,461 1,213,892
---------- ----------
Total liabilities and shareholders' equity .................... $4,357,820 $3,339,249
========== ==========
See notes to condensed consolidated financial statements.
1
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,
-----------------------------
2002 2001
------------- -------------
Sales ................................................... $ 696,840 $ 461,901
Costs and expenses ...................................... 625,533 415,032
--------- ---------
Operating income ........................................ 71,307 46,869
Interest and other income ............................... 1,027 482
Interest expense ........................................ 26,093 24,405
Minority interest ....................................... 988 --
--------- ---------
Income before income taxes .............................. 45,253 22,946
Provision for income taxes .............................. 15,974 8,788
--------- ---------
Net income .............................................. $ 29,279 $ 14,158
========= =========
L-3 Holdings' earnings per common share:
Basic .................................................. $ 0.74 $ 0.42
========= =========
Diluted ................................................ $ 0.71 $ 0.40
========= =========
L-3 Holdings' weighted average common shares outstanding:
Basic .................................................. 39,450 34,082
========= =========
Diluted ................................................ 41,177 35,753
========= =========
See notes to condensed consolidated financial statements.
2
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------
2002 2001
--------------- ------------
OPERATING ACTIVITIES:
Net income ......................................................... $ 29,279 $ 14,158
Depreciation and amortization ...................................... 15,207 10,383
Goodwill amortization .............................................. -- 9,936
Amortization of deferred debt issuance costs ....................... 1,747 1,884
Deferred income taxes .............................................. 12,447 5,389
Minority interest .................................................. 988 --
Other noncash items ................................................ 6,644 4,445
Changes in operating assets and liabilities, net of amounts
acquired:
Contracts in process .............................................. (65,378) (11,610)
Other current assets .............................................. (1,778) (1,526)
Other assets ...................................................... (3,651) (1,124)
Accounts payable .................................................. 28,503 (15,455)
Customer advances ................................................. (8,115) 7,961
Accrued expenses and other current liabilities .................... 20,924 (8,709)
Pension and postretirement benefits and other liabilities ......... 5,238 1,916
All other operating activities, net ................................ (663) (522)
------------ ----------
Net cash from operating activities ................................. 41,392 17,126
------------ ----------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired .................... (1,201,547) (13,022)
Capital expenditures ............................................... (10,358) (9,257)
Disposition of property, plant and equipment ....................... 85 100
Other investing activities, net .................................... (387) (5,001)
------------ ----------
Net cash (used in) investing activities ............................ (1,212,207) (27,180)
------------ ----------
FINANCING ACTIVITIES:
Borrowings under revolving credit facilities ....................... 441,000 117,700
Repayment of borrowings under revolving credit facilities .......... (91,000) (107,700)
Borrowings under bridge loan facility .............................. 500,000 --
Debt issuance costs ................................................ (1,281) --
Proceeds from exercise of stock options ............................ 10,103 8,417
Distributions paid to minority interest ............................ (287) --
Other financing activities, net .................................... (2,737) (2,026)
------------ ----------
Net cash from financing activities ................................. 855,798 16,391
------------ ----------
Net increase (decrease) in cash .................................... (315,017) 6,337
Cash and cash equivalents, beginning of the period ................. 361,022 32,680
------------ ----------
Cash and cash equivalents, end of the period ....................... $ 46,005 $ 39,017
============ ==========
See notes to condensed consolidated financial statements.
3
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
L-3 Communications Holdings, Inc. derives all its operating income and cash
flow from its wholly owned subsidiary L-3 Communications Corporation ("L-3
Communications"). L-3 Communications Holdings, Inc. ("L-3 Holdings" and together
with its subsidiaries, "L-3" or "the Company") is a merchant supplier of
sophisticated ISR (Information, Surveillance and Reconnaissance) products,
secure communications systems and products, aviation and ocean products,
telemetry, instrumentation, space and guidance products and microwave
components. These systems and products are critical elements of virtually all
major communication, command and control, intelligence gathering and space
systems. The Company's systems and products are used to connect a variety of
airborne, space, ground and sea-based communication systems and are used in
transmission, processing, recording, monitoring and dissemination functions of
these communication systems. The Company also provides training devices and
motion simulators, a wide range of engineering development and integration
support, communication support services, a full range of teaching, training,
logistics and training, simulation and support services, aircraft modernization
services, fuzing products, and custom ballistic targets. The Company's customers
include the U.S. Department of Defense ("DoD"), certain U.S. Government
intelligence agencies, major aerospace and defense contractors, foreign
governments, commercial customers and certain other U.S. federal, state and
local government agencies.
As a result of recently completed acquisitions, including Aircraft
Integration Systems, a division of Raytheon Company, on March 8, 2002, and
Spar, Analytics, BT Fuze and SY Technologies in November and December of 2001
and their effect on the Company's management and operations, effective January
1, 2002, the Company will present its businesses in the following four
reportable segments: (1) Secure Communications & ISR, (2) Training, Simulation
& Support Services; (3) Aviation Products & Aircraft Modernization; and (4)
Specialized Products. Prior to December 31, 2001, the Company had two
reportable segments: Secure Communications Systems and Specialized Products.
Prior year segment data have been reclassified to conform to the current year
presentation of segments.
Secure Communications & ISR. This segment provides products and services
for the global ISR market, specializing in signals intelligence (SIGINT) and
communications intelligence (COMINT) systems, which provide the unique ability
to collect and analyze unknown electronic signals from command centers,
communication nodes and air defense systems for real-time situation awareness
and response in real-time to the warfighter. This segment also provides secure,
high data rate communications systems for military and other U.S. Government and
foreign government reconnaissance and surveillance applications. The major
secure communication programs and systems include:
o secure data links for airborne, satellite, ground and sea-based remote
platforms for real time information collection and dissemination to
users;
o highly specialized fleet management and support including procurement,
systems integration, sensor development, modifications and maintenance
for SIGINT and ISR special mission aircraft, and airborne surveillance
systems;
o strategic and tactical signal intelligence systems that detect, collect,
identify, analyze and disseminate information;
o secure telephone and network equipment and encryption management; and
o communication systems for surface and undersea vessels and manned space
flights.
Training, Simulation & Support Services. This segment provides training,
simulation and support services, including a wide range of engineering
development and integration support, a full range of teaching, training,
logistic services and communication software support and information services.
These services include:
4
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)
o services designed to meet customer training requirements for aircrews,
navigators, mission operators, gunners and maintenance technicians for
virtually any platform, including military fixed and rotary wing
aircraft, air vehicles and various ground vehicles;
o high-end engineering and information support services used for Command,
Control, Communications, Computers, Intelligence, Surveillance and
Reconnaissance (C4ISR) architectures, as well as for air warfare modeling
and simulation tools for applications used by the DoD and U.S. Government
intelligence agencies, including missile and space systems, Unmanned
Aerial Vehicles (UAVs), and military aircraft;
o developing and managing extensive programs in the United States and
internationally, focusing on training and education, strategic planning,
organizational design, democracy transition and leadership development;
and
o design, prototype development and production of ballistic missile targets
for present and future threat scenarios.
Aviation Products & Aircraft Modernization. This segment provides aviation
products and aircraft modernization services including:
o airborne traffic and collision avoidance systems (TCAS);
o commercial, solid-state, crash-protected cockpit voice recorders, flight
data recorders and cruise ship hardened voyage recorders;
o ruggedized displays for military and high-end commercial applications;
o turnkey aviation life cycle management services that integrate custom
developed and commercial off-the-shelf products for various military and
commercial wide-body and rotary wing aircraft, including heavy
maintenance and structural modifications and Head-of-State and commercial
interior completions; and
o engineering, modification maintenance, logistics and upgrade for U.S.
Special Operations Command aircraft, vehicles and personal equipment.
Specialized Products. This segment supplies products to military and
commercial customers, in several niche markets. The products include:
o ocean products, including acoustic undersea warfare products for mine
hunting, dipping sonars and anti-submarine, and naval power distribution,
conditioning, switching and protection equipment for surface and undersea
platforms;
o telemetry, instrumentation, space and guidance products including
tracking and flight termination;
o premium fuzing products;
o microwave components;
o explosive detection systems for checked baggage at airports;
o high performance antennas and ground based radomes; and
o training devices and motion simulators which produce advanced virtual
reality simulation and high-fidelity representations of cockpits and
mission stations for aircraft and land vehicles.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
comprise the unaudited condensed consolidated financial statements of L-3
Holdings and L-3 Communications. L-3 Holdings'
5
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)
only asset is its investment in L-3 Communications. The only obligations of L-3
Holdings are the 5 1/4% Convertible Senior Subordinated Notes due 2009 (the
"Convertible Notes") and the 4% Senior Subordinated Convertible Contingent Debt
Securities due 2011 ("CODES"). L-3 Holdings has also guaranteed the borrowings
under the senior credit facilities of L-3 Communications. Because the debt
obligations of L-3 Holdings have been jointly, severally, fully and
unconditionally guaranteed by L-3 Communications and certain of its domestic
subsidiaries, such debt obligations have been reported as debt of L-3
Communications in its unaudited condensed consolidated financial statements in
accordance with the Securities and Exchange Commission's Staff Accounting
Bulletin No. 54. In addition, all issuances of equity securities including
grants of stock options and restricted stock by L-3 Holdings to employees of
L-3 Communications have also been reported in the unaudited condensed
consolidated financial statements of L-3 Communications. As a result, the
unaudited condensed consolidated financial positions, results of operations and
cash flows of L-3 Holdings and L-3 Communications are substantially the same.
L-3 Holdings has no independent assets or operations other than through
its wholly owned subsidiary L-3 Communications. L-3 Communications and all of
the guarantor subsidiaries of L-3 Communications are guarantor subsidiaries of
L-3 Holdings. All of the non-guarantor subsidiaries of L-3 Communications are
indirect non-guarantor subsidiaries of L-3 Holdings. Financial information of
the subsidiaries of L-3 Communications is presented in Note 12.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America 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; accordingly, they do not include all of the
information and notes required by accounting principles generally accepted in
the United States of America 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 periods are not necessarily indicative of results for the full year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 estimated
costs to complete contracts in process, estimates of market values for
inventories reported at lower of cost or market, estimates of pension and
postretirement benefit obligations, recoverability of recorded amounts of fixed
assets and goodwill, income taxes, litigation and environmental obligations.
Changes in estimates are reflected in the periods during which they become
known. Actual results could differ from these estimates.
Certain reclassifications have been made to conform prior period amounts
to the current period presentation.
These interim financial statements should be read in conjunction with the
Consolidated Financial Statements of L-3 Holdings and L-3 Communications for
the fiscal year ended December 31, 2001, included in their Annual Report on
Form 10-K for fiscal year ended December 31, 2001.
3. ACQUISITIONS AND DIVESTITURES
Aircraft Integration Systems. On March 8, 2002, the Company acquired the
assets of Aircraft Integration Systems ("AIS"), a division of Raytheon Company,
for $1,149,320 in cash which includes
6
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)
$1,130,000 for the original contract purchase price, an increase to the
contract purchase price of $18,700 related to additional assets contributed by
Raytheon to AIS and other acquisition costs. The purchase price is subject to
adjustment based on the AIS closing date net tangible book value, as defined.
The acquisition was financed using approximately $229,000 of cash on hand,
borrowings under the Company's senior credit facilities of $420,000 and a
$500,000 senior subordinated bridge loan. (See Note 5.) The Company acquired
AIS because it is a long-standing, sole-source business provider of critical
COMINT, SIGINT and unique sensor systems for special customers within the U.S.
Government. The Company believes that AIS has excellent operating prospects as
its major customers increasingly focus on intelligence gathering and information
distribution to the battlefield. The Company also believes there are significant
opportunities to apply its proven business integration and cost control skills
to further enhance AIS's operating and financial performance. The Company also
believes that AIS also creates significant pull-through opportunities for the
sale of the Company's secure communications and aviation products, including
communication links, signal processing, antennas, data recorders, displays and
traffic control and collision avoidance systems. The table below presents a
summary of the preliminary estimates of fair values of the assets acquired and
liabilities assumed on the acquisition date.
Contracts in process .................. $ 360,567
Other current assets .................. 1,678
Property, plant and equipment ......... 182,307
Goodwill .............................. 663,215
Other non-current assets .............. 54,852
----------
Total assets acquired .............. 1,262,619
----------
Current liabilities ................... 17,020
Long-term liabilities ................. 96,279
----------
Total liabilities assumed .......... 113,299
----------
Net assets acquired ................ $1,149,320
==========
Based on the preliminary purchase price allocation for AIS, goodwill, of which
approximately $611,000 is expected to be deductible for income tax purposes, in
the amount of $464,250 was assigned to the Secure Communications & ISR segment
and $198,965 was assigned to the Aviation Products & Aircraft Modernization
segment.
Detection Systems. On January 2, 2002, the Company agreed to acquire the
detection systems business of PerkinElmer for $100,000 in cash plus acquisition
costs. The acquisition is subject to customary closing conditions, including
clearance under the Hart-Scott-Rodino Antitrust Improvements Act and is
expected to close by the end of the second quarter of 2002.
Spar Aerospace. At December 31, 2001, the Company had acquired 70.3% of
the outstanding common stock of Spar Aerospace Limited ("Spar"), a leading
provider of high-end aviation product modernization, for $105,078 in cash and
acquired control of Spar and the ability to require the remaining stockholders
to tender their shares. During January 2002, the Company completed the
acquisition and paid $43,641 for the remaining outstanding common stock of
Spar.
SY Tech, BT Fuze and Emergent. During the fourth quarter of 2001, the
Company acquired three other businesses for an aggregate purchase price of
$139,090 in cash plus acquisition costs, subject to adjustment based on the
closing date net assets or net working capital of the acquired business and, in
one case, additional purchase price contingent upon the post-acquisition
performance of the acquired company. The Company acquired:
7
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)
(1) the net assets of SY Technology, Inc. ("SY"), a provider of air
warfare simulation services, on December 31, 2001. This acquisition is
subject to additional purchase price not to exceed $3,000 which is
contingent upon the financial performance of SY for the years ending
December 31, 2002 and 2003;
(2) the net assets of Bulova Technologies, a producer of military fuzes
that prevent the inadvertent firing and detonation of weapons during
handling, on December 19, 2001. Bulova Technology was later renamed BT
Fuze Products ("BT Fuze"); and
(3) the common stock of Emergent Government Services Group ("Emergent"),
a provider of engineering and information services to the U.S. Air
Force, Army, Navy and intelligence agencies, on November 30, 2001.
Following the acquisition, the Company changed Emergent's name to L-3
Communications Analytics.
KDI and EER. On May 4, 2001, the Company acquired all of the outstanding
common stock of KDI Precision Products ("KDI") for $79,432 in cash including
acquisition costs. On May 31, 2001, the Company acquired all of the outstanding
common stock of EER Systems ("EER") for $119,533 in cash including acquisition
costs, and additional purchase price not to exceed $5,000 which is contingent
upon the financial performance of EER for the year ending December 31, 2002.
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 purchase price allocations for the acquisitions of KDI, EER,
Spar, Emergent, BT Fuze, SY and AIS are based upon preliminary estimates of fair
values for contracts in process, estimated costs in excess of billings to
complete contracts in process, inventories, identifiable intangibles and
deferred taxes. Actual adjustments will be based on the final purchase prices
and final appraisals and other analyses of fair values which are in process. The
Company has valued acquired contracts in process at their estimated contract
selling prices less the estimated costs to complete and the Company's normal
profit allowance for the Company's effort to complete such contracts. With the
exception of the AIS acquisition, the Company does not expect the differences
between the preliminary and final purchase price allocations for the
acquisitions to be material. Material differences between the preliminary and
final purchase price allocations for the AIS acquisition could result from the
valuation of contracts in process, estimated costs in excess of billings to
complete contracts in process, identifiable intangibles, deferred income taxes
and pension and postretirement benefits and other items.
Had the acquisition of AIS and the related financing transactions occurred
on January 1, 2002, the unaudited pro forma sales, net income and diluted
earnings per share for the three months ended March 31, 2002, would have been
approximately $910,200, $26,000 and $0.63. Had the acquisitions of KDI, EER,
SY, BT Fuze, Emergent, Spar and AIS and the related financing transactions
occurred on January 1, 2001, the unaudited pro forma sales, net income and
diluted earnings per share for the three months ended March 31, 2001, would
have been approximately $789,800, $16,700 and $0.41. The pro forma results are
based on various assumptions and are not necessarily indicative of the result
of operations that would have occurred had the acquisitions and the related
financing transactions occurred on January 1, 2001 and 2002.
In March 2001, the Company settled certain items with a third party
provider related to a services agreement. In connection with the settlement,
L-3 received a net cash payment of $14,200. The payment represents a credit for
fees paid over the term of the services agreement and incremental costs
incurred by the Company over the same period arising from performance
deficiencies under the services
8
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)
agreement. These incremental costs included additional operating costs for
material management, vendor replacement, rework, warranty, manufacturing and
engineering support, and administrative activities. The credit was amortized in
2001 as a reduction to costs and expenses over the period in which the services
were provided.
4. CONTRACTS IN PROCESS
The components of contracts in process are presented in the table below.
MARCH 31, 2002 DECEMBER 31, 2001
---------------- ------------------
Billed receivables, less allowances of $11,099 and
$11,649......................................... $ 419,379 $ 330,795
---------- ----------
Unbilled contract receivables .................... 730,388 353,262
Less: unliquidated progress payments ............. (215,392) (102,739)
---------- ----------
Unbilled contract receivables, net .............. 514,996 250,523
---------- ----------
Inventoried contract costs, gross ................ 168,683 110,244
Less: unliquidated progress payments ............. (3,759) (6,575)
---------- ----------
Inventoried contract costs, net ................. 164,924 103,669
Inventories at lower of cost or market ........... 127,512 116,837
---------- ----------
Total contracts in process ...................... $1,226,811 $ 801,824
========== ==========
5. DEBT
The components of long-term debt and a reconciliation of the principal
amounts to the carrying amount of long-term debt are presented in the table
below.
MARCH 31, 2002 DECEMBER 31, 2001
---------------- ------------------
Borrowings under Bridge Loan Facility .................... $ 500,000 $ --
Borrowings under Senior Credit Facilities ................ 350,000 --
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
5 1/4% Convertible Senior Subordinated Notes due
2009 ................................................... 300,000 300,000
4% Senior Subordinated Convertible Contingent Debt
Securities due 2011 (CODES) ............................ 420,000 420,000
---------- ----------
Principal amount of long-term debt ....................... 2,175,000 1,325,000
Less: Unamortized discount on CODES ...................... 2,438 2,502
Fair value of interest rate swap agreements .......... 11,303 7,246
---------- ----------
Carrying amount of long-term debt ........................ $2,161,259 $1,315,252
========== ==========
Available borrowings under the Company's senior credit facilities at March
31, 2002 were $233,436, after reductions for outstanding borrowings of $350,000
and letters of credit of $166,564.
On February 26, 2002, the Company's lenders approved a $150,000 increase
in the amount of the senior credit facilities. The five-year revolving credit
facility, maturing on May 15, 2006, was increased by
9
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)
$100,000 to $500,000 and the 364-day revolving credit facility increased by
$50,000 to $250,000. Additionally, the maturity date of the $200,000 364-day
revolving credit facility was extended to February 26, 2003.
On March 8, 2002, L-3 Communications borrowed $500,000 under a senior
subordinated Bridge Loan Facility to finance a portion of the purchase price of
AIS and related expenses. The Bridge Loan Facility is subordinated in right of
payment to all of L-3 Communications' existing and future senior debt.
Borrowings under the Bridge Loan Facility bear interest through March 8, 2003,
at L-3 Communications' option, at either the one-month or three month LIBOR
rate plus a spread equal to 350 basis points. The Bridge Loan Facility matures
on May 15, 2009, but if the loans under the facility are not repaid by March 8,
2003, each lender's loan will be automatically converted into an exchange note
with terms substantially similar to those of the Company's other senior
subordinated indebtedness, and will bear interest at a fixed rate equal to the
yield to maturity on the Company's highest yielding existing subordinated
indebtedness at the time of exchange plus 100 basis points. Subject to the
exceptions set forth in the Bridge Loan Facility, L-3 Communications is
required to prepay the Bridge Loan Facility with the net cash proceeds from:
o any debt offerings by L-3 Holdings or its subsidiaries, including L-3
Communications;
o issuances of any equity interests in L-3 Holdings or L-3 Communications;
o incurrences of any other indebtedness of L-3 Holdings or any of its
subsidiaries, including L-3 Communications (other than under the senior
credit facilities and certain permitted indebtedness); and
o any sale of assets or stock of any subsidiaries of L-3 Communications.
6. COMPREHENSIVE INCOME
Comprehensive income for the three months ended March 31, 2002 and 2001 is
presented in the table below.
THREE MONTHS ENDED
MARCH 31,
-----------------------
2002 2001
---------- ----------
Net income ........................................... $29,279 $14,158
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax
benefits of $236 and $185........................... (433) (298)
Unrealized losses on securities:
Unrealized losses arising during the period, net
of tax benefit of $115 ............................. -- (225)
Unrealized gains (losses) on hedging instruments:
Cumulative adjustment at January 1, 2001, net of
tax benefit of $25 ................................. -- (41)
Unrealized losses arising during the period, net
of tax benefits of $40 and $15 ..................... (74) (24)
Reclassification adjustment for losses included in
net income, net of tax expense of $198 .......... 323 --
------- -------
Comprehensive income ................................. $29,095 $13,570
======= =======
10
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)
Accumulated other comprehensive balances as of March 31, 2002 and December
31, 2001 are presented in the table below.
FOREIGN UNREALIZED MINIMUM ACCUMULATED
CURRENCY UNREALIZED GAINS (LOSSES) PENSION OTHER
TRANSLATION GAINS (LOSSES) ON HEDGING LIABILITY COMPREHENSIVE
ADJUSTMENTS ON SECURITIES INSTRUMENTS ADJUSTMENTS INCOME (LOSS)
------------- ---------------- ---------------- ------------- --------------
MARCH 31, 2002
Balance January 1, 2002 ...... $ (2,852) $ (246) $ (163) $ (20,409) $ (23,670)
Period change ................ (433) -- 249 -- (184)
-------- -------- ------ --------- ---------
Balance March 31, 2002 ....... $ (3,285) $ (246) $ 86 $ (20,409) $ (23,854)
======== ======== ====== ========= =========
DECEMBER 31, 2001
Balance January 1, 2001 ...... $ (2,584) $ (3,698) $ -- $ (890) $ (7,172)
Period change ................ (268) 3,452 (163) (19,519) (16,498)
-------- -------- ------ --------- ---------
Balance December 31, 2001..... $ (2,852) $ (246) (163) $ (20,409) $ (23,670)
======== ======== ====== ========= =========
7. L-3 HOLDINGS EARNINGS PER SHARE
A reconciliation of basic and diluted earnings per share ("EPS") is
presented in the table below.
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
------------ ------------
Basic:
Net income ......................................... $ 29,279 $ 14,158
Weighted average common shares outstanding ......... 39,450 34,082
--------- ---------
Basic earnings per share ........................... $ 0.74 $ 0.42
========= =========
Diluted:
Net income ......................................... $ 29,279 $ 14,158
--------- ---------
Common and potential common shares:
Weighted average common shares outstanding ......... 39,450 34,082
Assumed exercise of stock options .................. 3,972 3,887
Assumed purchase of common shares for
treasury .......................................... (2,245) (2,216)
--------- ---------
Common and potential common shares ................... 41,177 35,753
========= =========
Diluted earnings per share ........................... $ 0.71 $ 0.40
========= =========
The 3,680,982 shares of L-3 Holdings' common stock that are issuable upon
conversion of the Convertible Notes were not included in the computation of
diluted EPS for the three month periods ended March 31, 2002 and 2001 because,
the effect of the assumed conversion would have been anti-dilutive.
The 3,902,439 shares of L-3 Holdings' common stock that are issuable upon
conversion of the CODES were not included in the computation of diluted EPS for
the three months ended March 31, 2002 because the conditions required for the
CODES to become convertible were not satisfied.
On April 23, 2002, the Company announced that its Board of Directors has
authorized a two-for-one- stock split on all shares of L-3 Holdings common
stock. The stock split will entitle all shareholders of record at the close of
business on May 6, 2002 to receive one additional share of L-3 Holdings common
stock for every share held on that date. The additional shares will be
distributed to shareholders in the form of a stock dividend on May 20, 2002.
Upon completion of the stock split, L-3 Holdings will have approximately 80
million shares of common stock outstanding. Additionally, all of L-3 Holdings'
historical as reported EPS data will be restated to give effect to the stock
split.
11
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. TRANSITIONAL DISCLOSURES REQUIRED BY SFAS NO. 142
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and
Other Intangible Assets, which supersedes Accounting Principles Board ("APB")
Opinion No. 17, Intangible Assets. SFAS No. 142 revised the standards for
accounting for goodwill and other intangible assets. SFAS No. 142 requires that
goodwill and indefinite lived identifiable intangible assets shall no longer be
amortized, but be tested for impairment at least annually. The provisions of
SFAS No. 142 became effective on January 1, 2002, with full implementation of
the impairment measurement provisions required to be completed by December 31,
2002. Effective January 1, 2002, the Company is not recording goodwill
amortization expense. Based on a preliminary internal assessment and analysis of
the estimated fair values of the Company's reporting units based on discounted
cash flows, the Company does not believe that the cumulative effect of the
accounting change resulting from the adoption of the transitional impairment
measurement provisions of SFAS No. 142 will be material. The Company expects to
complete its impairment assessment by the end of the second quarter of 2002.
The following table presents net income for the three month periods ended
March 31, 2002 and 2001, adjusted to exclude goodwill amortization expense, net
of any related tax effects, recognized in 2001 related to goodwill that is no
longer being amortized.
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------
2002 2001
------------ ------------
Reported net income .................................... $ 29,279 $ 14,158
Add: Goodwill amortization expense, net of tax ......... -- 7,373
-------- --------
Adjusted net income .................................... $ 29,279 $ 21,531
======== ========
BASIC EPS:
Reported net income .................................... $ 0.74 $ 0.42
Goodwill amortization expense, net of tax .............. -- 0.21
-------- --------
Adjusted basic EPS ..................................... $ 0.74 $ 0.63
======== ========
DILUTED EPS:
Reported net income .................................... $ 0.71 $ 0.40
Goodwill amortization expense, net of tax .............. -- 0.20
-------- --------
Adjusted diluted EPS ................................... $ 0.71 $ 0.60
======== ========
9. 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 U.S.
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
12
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 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 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 items of
litigation, claims or assessments will have a material adverse effect on the
financial position or results of operations of the Company.
10. SEGMENT INFORMATION
The Company has four reportable segments: (1) Secure Communications & ISR,
(2) Training, Simulation & Support Services, (3) Aviation Products & Aircraft
Modernization and (4) Specialized Products, which are described in Note 1. The
Company evaluates the performance of its operating segments and reportable
segments based on their sales and operating income.
The table below presents sales, operating income and assets by reportable
segment.
TRAINING, AVIATION
SECURE SIMULATION PRODUCTS & ELIMINATION OF
COMMUNICATIONS & SUPPORT AIRCRAFT SPECIALIZED INTERSEGMENT CONSOLIDATED
& ISR SERVICES MODERNIZATION PRODUCTS CORPORATE SALES TOTAL
---------------- ------------ --------------- ------------- ----------- --------------- -------------
THREE MONTHS ENDED
MARCH 31, 2002:
Sales ................ $ 157,736 $197,302 $ 107,309 $ 237,713 $(3,220) $ 696,840
Operating income...... 16,409 21,470 17,470 15,958 71,307
THREE MONTHS ENDED
MARCH 31, 2001:
Sales ................ $ 83,285 $116,986 $ 60,581 $ 202,631 $(1,582) $ 461,901
Operating income...... 6,320 9,166 22,679 8,704 46,869
TOTAL ASSETS:
March 31, 2002 ....... $1,129,739 $515,216 $1,018,668 $1,413,549 $280,648 $4,357,820
December 31, 2001..... 366,482 497,368 545,517 1,382,010 547,872 3,339,249
The following table presents the changes in goodwill allocated to the
reportable segments during the three months ended March 31, 2002.
SECURE TRAINING AVIATION PRODUCTS
COMMUNICATIONS & SIMULATION & & AIRCRAFT SPECIALIZED CONSOLIDATED
ISR SUPPORT SERVICES MODERNIZATION PRODUCTS TOTAL
---------------- ---------------- ----------------- ----------- ------------
Balance January 1,
2002 $181,215 $371,653 $371,222 $783,628 $1,707,718
Acquired 464,250 5,065 210,362 908 680,585
---------------- ---------------- ----------------- ----------- ------------
Balance March 31,
2002 $645,465 $376,718 $581,584 $784,536 $2,388,303
---------------- ---------------- ----------------- ----------- ------------
The Company's sales by product and services are summarized in the table
below.
THREE MONTHS ENDED
MARCH 31,
-------------------------
2002 2001
----------- -----------
(DOLLARS IN MILLIONS)
Avionics, ocean systems and premium fuzing products ........... $ 213.8 $ 131.8
Training, simulation and support services ..................... 196.5 119.0
Military and high data rate communications .................... 92.5 79.0
Telemetry and instrumentation ................................. 80.8 70.7
Information, surveillance and reconnaissance products ......... 38.4 --
Information security systems .................................. 43.7 21.2
Microwave components .......................................... 22.1 24.8
Space and commercial communications, satellite control and
tactical sensor systems ...................................... 17.0 20.2
Intercompany eliminations ..................................... (8.0) (4.8)
-------- --------
Total ...................................................... 696.8 461.9
======== ========
13
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)
11. NEW ACCOUNTING PRONOUNCEMENTS
In August of 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 applies to legal obligations associated
with the retirement of tangible long-lived assets that result from the
acquisition, construction, development or normal operation of a long-lived
asset, except for certain obligations of lessees. This statement does not apply
to obligations that arise solely from a plan to dispose of a long-lived asset.
SFAS No. 143 requires that estimated asset retirement costs be measured at
their fair values and recognized as assets and depreciated over the useful life
of the related asset. Similarly, liabilities for the present value of asset
retirement obligations are to be recognized and accreted as interest expense
each year to their estimated future value until the asset is retired. These
provisions will be applied to existing asset retirement obligations as of the
adoption date as a cumulative-effect of a change in accounting policy. SFAS No.
143 is effective for the Company's fiscal years beginning January 1, 2003. SFAS
No. 143 will not have a material effect on the Company's consolidated results
of operations and financial position.
In October of 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to Be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions (APB No. 30), for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS No. 144 expands the scope of
accounting for disposals to include all components of an entity, including
reportable segments and operating segments, reporting units, subsidiaries and
certain asset groups. It requires the gain or loss on disposal to be measured
as the difference between (1) the fair value less the costs to sell and (2) the
carrying value of the component, and such gain or loss cannot include the
estimated future operating losses of the component, which were included in the
gain or loss determination under APB No. 30. SFAS No. 144 also amends
Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
eliminate the exception to consolidation for a subsidiary for which control is
likely to be temporary. The provisions of SFAS No. 144 became effective on
January 1, 2002. SFAS No. 144 did not have a material effect on the Company's
consolidated results of operations and financial position.
In May 2002, the FASB issued SFAS No. 145, Rescission of SFAS Nos. 4, 44
and 64, Amendment of SFAS No. 13, and Technical Corrections as of April 2002.
SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and SFAS No. 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements. Under the provisions of SFAS No. 145, gains
and losses from extinguishment of debt can only be classified as extraordinary
items if they meet the criteria in APB Opinion No. 30. The provisions of this
Statement related to the rescission of SFAS No. 4 shall be applied in fiscal
years beginning after May 15, 2002. Earlier application is permitted. This
statement also amends SFAS No. 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar and is effective for transactions occurring after May
15, 2002. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions and are effective for
financial statements issued on or after May 15, 2002. SFAS No. 145 will not
have a material effect on the Company's consolidated results of operations,
financial position or cash flows.
14
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)
12. UNAUDITED FINANCIAL INFORMATION OF L-3 COMMUNICATIONS AND ITS SUBSIDIARIES
L-3 Communications is a wholly owned subsidiary of L-3 Holdings. The debt
of L-3 Communications, including the Senior Subordinated Notes, the Bridge Loan
Facility and borrowings under amounts drawn against the senior 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 Rule 3-10 of SEC Regulation S-X.
The Company does not believe that separate financial statements of the
Guarantor Subsidiaries are material to users of the financial statements.
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.
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS L-3 COMMUNICATIONS
------------- -------------- --------------- ---------------- -------------------
CONDENSED COMBINING BALANCE SHEETS:
-----------------------------------------
AS OF MARCH 31, 2002
-----------------------------------------
Total current assets .................... $ 569,375 $ 668,246 $113,656 $ -- $1,351,277
Other long-term assets .................. 1,003,772 1,596,455 406,316 -- 3,006,543
Investment in and amounts due from
consolidated subsidiaries .............. 2,323,789 241,078 66,135 (2,631,002) --
---------- ---------- -------- ------------ ----------
Total assets ......................... $3,896,936 $2,505,779 $586,107 $ (2,631,002) $4,357,820
========== ========== ======== ============ ==========
Total current liabilities ............... $ 292,132 $ 191,459 $ 60,340 $ -- $ 543,931
Other long-term liabilities ............. 177,084 130,034 8,453 -- 315,571
Long-term debt .......................... 2,161,259 -- -- -- 2,161,259
Minority interest ....................... -- -- 70,598 -- 70,598
Shareholders' equity .................... 1,266,461 2,184,286 446,716 (2,631,002) 1,266,461
---------- ---------- -------- ------------ ----------
Total liabilities and shareholders'
equity .............................. $3,896,936 $2,505,779 $586,107 $ (2,631,002) $4,357,820
========== ========== ======== ============ ==========
CONDENSED COMBINING BALANCE SHEETS:
------------------------------------------
AS OF DECEMBER 31, 2001
------------------------------------------
Total current assets .................... $ 786,498 $ 300,585 $155,318 $ -- $1,242,401
Other long-term assets .................. 965,566 701,887 429,395 -- 2,096,848
Investment in and amounts due
from consolidated subsidiaries ......... 1,229,572 150,580 43,236 (1,423,388) --
---------- ---------- -------- ------------ ----------
Total assets ......................... $2,981,636 $1,153,052 $627,949 $ (1,423,388) $3,339,249
========== ========== ======== ============ ==========
Total current liabilities ............... $ 278,598 $ 136,579 $109,394 $ -- $ 524,571
Other long-term liabilities ............. 173,894 31,080 10,663 -- 215,637
Long-term debt .......................... 1,315,252 -- -- -- 1,315,252
Minority interest ....................... -- -- 69,897 -- 69,897
Shareholders' equity .................... 1,213,892 985,393 437,995 (1,423,388) 1,213,892
---------- ---------- -------- ------------ ----------
Total liabilities and shareholders'
equity .............................. $2,981,636 $1,153,052 $627,949 $ (1,423,388) $3,339,249
========== ========== ======== ============ ==========
15
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)
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS L-3 COMMUNICATIONS
--------------- -------------- --------------- -------------- -------------------
CONDENSED COMBINING STATEMENTS OF
---------------------------------
OPERATIONS:
-----------
FOR THE THREE MONTHS ENDED
MARCH 31, 2002
---------------
Sales ....................................... $ 340,703 $ 302,700 $ 56,634 $ (3,197) $ 696,840
------------ ------------ --------- ------------ ------------
Operating income ............................ 41,004 21,657 8,646 -- 71,307
Interest and other income ................... 822 75 130 -- 1,027
Interest expense ............................ 24,760 1,261 72 -- 26,093
Minority interest ........................... -- -- 988 -- 988
Provision for income taxes .................. 6,024 7,226 2,724 -- 15,974
Equity in net income of consolidated
subsidiaries .............................. 18,237 -- -- (18,237) --
------------ ------------ --------- ------------ ------------
Net income .................................. $ 29,279 $ 13,245 $ 4,992 $ (18,237) $ 29,279
============ ============ ========= ============ ============
FOR THE THREE MONTHS ENDED
MARCH 31, 2001
----------------
Sales ....................................... $ 280,885 $ 79,879 $ 102,244 $ (1,107) $ 461,901
------------ ------------ --------- ------------ ------------
Operating income (loss) ..................... 44,595 (3,675) 5,949 -- 46,869
Interest and other income ................... 383 -- 99 -- 482
Interest expense ............................ 24,132 273 -- -- 24,405
Provision (benefit) for income taxes ........ 7,984 (1,512) 2,316 -- 8,788
Equity in net income (loss) of
consolidated subsidiaries ................. 1,296 -- -- (1,296) --
------------ ------------ --------- ------------ ------------
Net income (loss) ........................... $ 14,158 $ (2,436) $ 3,732 $ (1,296) $ 14,158
============ ============ ========= ============ ============
CONDENSED COMBINING STATEMENTS OF
---------------------------------
CASH FLOWS:
-----------
FOR THE THREE MONTHS ENDED
MARCH 31, 2002:
-----------------
Net cash from (used in) operating
activities ................................ $ (11,782) $ 57,015 $ (3,841) $ -- $ 41,392
------------ ------------ --------- ------------ ------------
Net cash (used in) investing
activities ................................ (1,207,573) (1,157,712) (48,125) 1,201,203 (1,212,207)
------------ ------------ --------- ------------ ------------
Net cash from financing activities .......... 936,675 1,098,842 21,484 (1,201,203) 855,798
------------ ------------ --------- ------------ ------------
Net (decrease) in cash ...................... (282,680) (1,855) (30,482) -- (315,017)
Cash and cash equivalents, beginning
of period ................................. 320,210 (4,412) 45,224 -- 361,022
------------ ------------ --------- ------------ ------------
Cash and cash equivalents, end of
period .................................... $ 37,530 $ (6,267) $ 14,742 $ -- $ 46,005
============ ============ ========= ============ ============
FOR THE THREE MONTHS ENDED
MARCH 31, 2001:
-----------------
Net cash from (used in) operating
activities ................................ $ 22,587 $ (12,642) $ 7,181 $ -- $ 17,126
------------ ------------ --------- ------------ ------------
Net cash (used in) investing activities ..... (18,669) (3,308) (13,902) 8,699 (27,180)
------------ ------------ --------- ------------ ------------
Net cash from financing activities .......... 6,931 12,214 5,945 (8,699) 16,391
------------ ------------ --------- ------------ ------------
Net (decrease) increase in cash ............. 10,849 (3,736) (776) -- 6,337
Cash and cash equivalents, beginning
of period ................................. 18,708 4,911 9,061 -- 32,680
------------ ------------ --------- ------------ ------------
Cash and cash equivalents, end of
period .................................... $ 29,557 $ 1,175 $ 8,285 $ -- $ 39,017
============ ============ ========= ============ ============
16
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
We are a leading merchant supplier of sophisticated ISR (Information,
Surveillance and Reconnaissance) products, secure communications systems and
products, aviation products and aircraft modernization, ocean products,
telemetry, instrumentation, space and guidance products and microwave
components. We believe our systems and products are critical elements of
virtually all major communication, command and control, intelligence gathering
and space systems. Our systems and products are used to connect a variety of
airborne, space, ground and sea-based communication systems and are used in
transmission, processing, recording, monitoring and dissemination functions of
these communication systems. We also provide training, simulation and support
services. Our customers include the DoD, certain U.S. Government intelligence
agencies, major aerospace and defense contractors, foreign governments,
commercial customers and certain other U.S. federal, state and local government
agencies. As a result of our recently completed acquisitions, including
Aircraft Integration Systems, a division of Raytheon Company, on March 8, 2002,
and Spar, Analytics, BT Fuze and SY Technologies in November and December of
2001 and their effect on our management and operations, effective January 1,
2002, we will present our businesses in the following four reportable segments:
(1) Secure Communications & ISR; (2) Training, Simulation & Support Services;
(3) Aviation Products & Aircraft Modernization; and (4) Specialized Products.
Prior to December 31, 2001, we had two reportable segments: Secure
Communications Systems and Specialized Products.
Our Secure Communications & ISR segment provides products and services for
the global ISR market as well as secure, high data rate communications systems
for military and other U.S. Government reconnaissance and surveillance
applications. Our Training, Simulation & Support Services segment produces
training systems and related support services, and provides a wide range of
engineering development and integration support, a full range of teaching,
training, logistic and communication software support services and custom
ballistic targets. Our Aviation Products & Aircraft Modernization segment
provides our TCAS products, cockpit voice, flight data and cruise ship hardened
voyage recorders, displays and specialized aircraft modernization services. Our
Specialized Products segment provides ocean products, telemetry,
instrumentation, space and guidance products, premium fuzing products,
explosive detection systems, training devices and microwave components.
In recent years, domestic and worldwide political and economic
developments have significantly affected the markets for defense systems,
products and services. Two events in 2001 had a dramatic impact on the domestic
and international political and economic landscape. They impacted L-3 and the
defense industry generally. First, the events of September 11 created
uncertainty and exposed vulnerabilities in security and the overall defense of
our homeland. Second, in the conclusions of the U.S. Quadrennial Defense Review
(QDR) there was a fundamental and philosophical shift in focus from a
"threat-based" model to one that emphasizes the capabilities needed to defeat a
full spectrum of adversaries. Transforming the nation's defense posture to a
capabilities-based approach involves creating the ability for a more flexible
response, with greater force mobility, stronger space capabilities, missile
defense, improved communications, intelligence and information systems security
and an increased emphasis on homeland defense.
The current U.S. defense budget and the proposed U.S. defense budgets for
fiscal years 2003 through 2006 have each been increased by approximately 20%
over their previous budgets. These increases in U.S. defense budgets were
preceded by a period of declining defense budgets from the mid-1980s to the
late 1990s precipitated by ongoing U.S. federal budget pressures and
adjustments in political roles and missions to reflect changing strategic and
tactical threats wherein the U.S. defense budget experienced a decline in real
dollars. This declining trend was reversed by an increase in defense spending
in 1999, followed by current dollar increases in fiscal 2000, 2001 and 2002
with an anticipated increase in fiscal 2003 to $379.0 billion. The proposed
U.S. defense budget increases include larger allocations to command,
17
control, communications, intelligence, surveillance and reconnaissance (C3ISR),
precision-guided weapons, unmanned aerial vehicles (UAVs), communications
networks and missile defense. We believe we are well positioned to benefit from
increased spending in those areas. In addition, increased emphasis on homeland
defense may increase demand for our capabilities in areas such as airport
security systems, information security, crisis management, preparedness and
prevention services, and civilian security operations. While there is no
assurance that the proposed increased DoD budget levels will be approved by
Congress, after over a decade of downward trends, the current outlook is one of
increased spending, which we believe should positively affect our future sales
and could potentially favorably affect our future operating profits because of
increased sale volumes.
All of our domestic government contracts and subcontracts 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.
We believe that the U.S. defense industry structure contains three tiers
of defense contractors. The first tier is dominated by five prime system
contractors: The Boeing Company, Lockheed Martin Corporation, Northrop Grumman
Corporation, Raytheon Company and General Dynamics Corporation, all of whom
compete for major platform programs. The second tier defense contractors are
smaller products and niche subsystems contractors and are comprised of
traditional aerospace and defense companies, as well as, the non-core aerospace
and defense sectors of certain industrial conglomerates and include L-3,
Honeywell Inc., Rockwell Collins Inc., Harris Corporation, TRW Inc., ITT
Industries, Inc., Alliant Techsystems Inc., United Technologies Corporation, and
United Defense Industries Inc. The third tier, which represents the vendor base
and supply chain for niche products, is comprised of numerous smaller publicly
and privately owned contractors.
We believe we are the aerospace and defense "merchant supplier" with the
broadest and most diverse product portfolio. We supply our products to all of
the five prime system contractors and in some cases directly to the end
customer. We primarily compete with third tier contractors and certain of the
second tier contractors and to a lesser extent with the prime system
contractors in certain niche areas. Some of the second tier contractors are
larger than we are and have greater resources than we have available to us. We
are larger than all of the third tier contractors and believe we have greater
resources than all of them. We believe that most of our businesses enjoy the
number one or number two competitive position in their respective market
niches. We believe that the primary competitive factors for our businesses are:
technology, quality, cost, market position and past performance. In addition,
our ability to compete for non "sole source" contracts often requires us to
"team" with one or more of the prime system contractors that bids and competes
for major platform programs. Futhermore, our ability to "team" with a prime
system contractor is often dependent upon the outcome of a competitive process.
ACQUISITIONS
The table below summarizes the material acquisitions that we have
completed during the year ended December 31, 2001 and the three month period
ended March 31, 2002.
PURCHASE
ACQUIRED COMPANY DATE ACQUIRED PRICE(1)
------------------------------------ ------------------- -----------------------
KDI Precision Products May 4, 2001 $ 78.9
EER Systems May 31, 2001 $ 119.4(2)
Spar Aerospace Limited November 23, 2001 $ 146.8(3)
Emergent Government Services Group November 30, 2001 $ 39.8(4)(5)
BT Fuze Products December 19, 2001 $ 49.5(4)
SY Technology December 31, 2001 $ 49.8(4)(6)
Aircraft Integration Systems March 8, 2002 $ 1,148.7(4)(7)
18
----------
(1) Purchase price represents the contractual consideration for the acquired
business excluding adjustments for net cash acquired and acquisition
costs.
(2) Excludes additional purchase price, not to exceed $5.0 million, which is
contingent upon the financial performance of EER for the year ending
December 31, 2002.
(3) Includes $43.6 million for the remaining 29.7% of the outstanding common
stock of Spar that we acquired and paid for in January 2002.
(4) Purchase price is subject to adjustment based on actual closing date net
assets or net working capital of the acquired business.
(5) Following the acquisition we changed Emergent Government Services Group's
name to L-3 Communications Analytics.
(6) Excludes additional purchase price, not to exceed $3.0 million, which is
contingent upon the financial performance of SY for the years ending
December 31, 2002 and 2003.
(7) Includes $18.7 million related to additional assets contributed by
Raytheon Company to AIS. Following the acquisition, we changed AIS's name
to L-3 Integrated Systems.
----------
On January 2, 2002, we agreed to acquire the detection systems business of
PerkinElmer for $100.0 million in cash plus acquisition costs. The acquisition
is subject to customary closing conditions, including clearance under the
Hart-Scott-Rodino Antitrust Improvements Act and is expected to close by the
end of the second quarter of 2002.
Additionally, we purchased other businesses during 2001 and 2002, which
individually and in the aggregate were not material to our consolidated results
of operations, financial position or cash flows in the year acquired.
All of our acquisitions have been accounted for as purchase business
combinations and are included in our consolidated results of operations from
their respective effective dates.
We regularly evaluate potential acquisitions and joint venture
transactions, but we have not entered into any agreements with respect to any
material transactions at this time other than our acquisition of PerkinElmer.
RESULTS OF OPERATIONS
The following information should be read in conjunction with our unaudited
condensed consolidated financial statements as of March 31, 2002. Our results
of operations for the periods presented are impacted significantly by our
acquisitions. See Note 3 to the unaudited condensed consolidated financial
statements for a discussion of our acquisitions, including pro forma sales, net
income and diluted earnings per share data. The tables below provide our
selected statement of operations data for the three-month period ended March
31, 2002, which we refer to as the 2002 First Quarter and the three-month
period ended March 31, 2001, which we refer to as the 2001 First Quarter. Prior
year reportable segment information has been restated to conform to the 2002
presentation of reportable segments.
19
THREE MONTHS ENDED MARCH 31,
------------------------------
2002 2001
------------- ---------------
(in millions)
Sales(1):
Secure Communications & ISR ....................................... $ 157.4 $ 82.7
Training, Simulation & Support Services ........................... 194.8 117.0
Aviation Products & Aircraft Modernization ........................ 107.3 60.6
Specialized Products .............................................. 237.3 201.6
---------- --------
Total ........................................................... $ 696.8 $ 461.9
========== ========
Operating income:
Secure Communications & ISR ....................................... $ 16.4 $ 6.3(2)
Training, Simulation & Support Services ........................... 21.5 9.2(2)
Aviation Products & Aircraft Modernization ........................ 17.5 22.7(2)
Specialized Products .............................................. 15.9 8.7(2)
---------- -----------
Total ........................................................... $ 71.3 $ 46.9
========== ===========
Depreciation and amortization expenses included in operating income:
Secure Communications & ISR ....................................... $ 4.2 $ 2.9
Training, Simulation & Support Services ........................... 1.9 2.7
Aviation Products & Aircraft Modernization ........................ 2.5 3.0
Specialized Products .............................................. 6.6 11.7
---------- -----------
Total ........................................................... $ 15.2 $ 20.3
========== ===========
EBITDA(3)
Secure Communications & ISR ....................................... $ 20.6 $ 9.2
Training, Simulation & Support Services ........................... 23.4 11.9
Aviation Products & Aircraft Modernization ........................ 20.0 25.7
Specialized Products .............................................. 22.5 20.4
---------- -----------
Total ........................................................... $ 86.5 $ 67.2
========== ===========
Consolidated cash flows:
Net cash from operating activities ................................ $ 41.4 $ 17.1
Net cash (used in) investing activities ........................... (1,212.2) (27.2)
Net cash from financing activities ................................ 855.8 16.4
---------- -----------
Net increase (decrease) in cash ................................. $ (315.0) $ 6.3
========== ===========
----------
(1) Sales are after intersegment eliminations. See Note 10 to the Unaudited
Condensed Consolidated Financial Statements.
(2) Adjusting 2001 First Quarter results on a pro forma basis to exclude
goodwill amortization expense, 2001 First Quarter operating income would
have been $7.3 million for the Secure Communications & ISR segment, $10.5
million for the Training, Simulation & Support Services segment, $24.6
million for the Aviation Products & Aircraft Modernization segment and
$14.4 million for the Specialized Products segment.
(3) EBITDA is defined as operating income plus depreciation expense and
amortization expense. 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 in the United
States or a measure of profitability or liquidity. EBITDA is presented as
additional information because we believe it to be a useful indicator of
an entity's debt capacity and an entity's ability to service its debt.
EBITDA is not a cash flow measure and is not available for an entity's
discretionary use because EBITDA does not take into account an entity's
obligation to service its debt, fund its working capital and capital
expenditures and pay income taxes. EBITDA as we defined it may differ
from similarly named measures used by other entities and, consequently
EBITDA comparisons between other entities and us could be misleading
unless all entities calculate and define EBITDA in the same manner as we
do. EBITDA is not an indicator of an entity's profitability or cash
flows.
------------
THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2001
Sales increased $234.9 million to $696.8 million in the 2002 First Quarter
compared with the 2001 First Quarter. The AIS, Analytics, SY, Spar, BT Fuze,
KDI and EER acquisitions contributed
20
$203.2 million of the sales increase in the 2002 First Quarter. The remaining
sales increase in the 2002 First Quarter was primarily attributable to volume
increases of (1) $36.3 million on secure telephone equipment and secure data
links, (2) $12.6 million on training devices and services and (3) $9.3 million
on guidance systems. These sales increases were partially offset by declines of
$13.6 million on naval power equipment arising from lower shipments caused by
production capacity diverted to fixing quality control problems and volume
declines of $12.9 million on aviation products due to reduced demand and
customer-deferred delivery schedules stemming from the downturn in the
commercial aircraft industry that began in 2001. Costs and expenses increased
$210.5 million to $625.5 million in 2002 from $415.0 million in 2001 consistent
with the increase in sales. Operating income increased by 24.4 million to $71.3
million in the 2002 First Quarter compared with the 2001 First Quarter
primarily because of higher sales. Operating income as a percentage of sales
("operating margin") improved slightly to 10.2% compared to 10.1% in the 2001
First Quarter. Adjusting 2001 First Quarter results on a pro forma basis to
exclude goodwill amortization expense for SFAS No. 142, 2001 First Quarter
costs and expenses would have been $405.1 million, operating income would have
been $56.8 million and operating margin would have been 12.3%. The decline in
operating margin on a pro forma basis was due to declines in our Aviation
Products & Aircraft Modernization segment and our Specialized Products segment,
which were partially offset by increases in our Secure Communications & ISR
segment and our Training, Simulation & Support Services segment, the details of
which are discussed below.
Depreciation and amortization expenses decreased $5.1 million to $15.2
million in the 2002 First Quarter primarily due to a $9.9 million decrease in
goodwill amortization, due to the implementation of SFAS No. 142 effective
January 1, 2002. The decrease was partially offset by a $3.2 million increase
in depreciation expense related to our capital expenditures and acquired
businesses. Our EBITDA for the 2002 First Quarter increased $19.3 million to
$86.5 million, which indicates that our borrowing capacity increased.
Interest expense increased $1.7 million to $26.1 million in the 2002 First
Quarter. The increase is because of the higher average outstanding debt during
the 2002 First Quarter, partially offset by savings of $2.9 million from the
interest rate swap agreements we entered into in July 2001 and November 2001
and lower interest rates on our variable rate debt. Interest and other income
increased $0.5 million to $1.0 million because of higher average cash and cash
equivalents balances during the 2002 First Quarter compared to the 2001 First
Quarter.
The income tax provision for the 2002 First Quarter is based on our
estimated effective income tax rate for 2002 of 35.3%, compared with the
effective tax rate of 38.3% for the 2001 First Quarter. The decrease in the 2002
First Quarter effective income tax rate is primarily due to the exclusion of
goodwill amortization expense, that is deductible for income tax purposes,
from our results of operations.
Basic earnings per share ("EPS") grew 76.2% to $0.74 in the 2002 First
Quarter and diluted EPS grew 77.5% to $0.71 in the 2002 First Quarter.
Adjusting 2001 First Quarter results on pro forma basis to exclude goodwill
amortization expense, 2001 First Quarter diluted earnings per share would have
been $0.60 per share, resulting in a 18.3% increase in the 2002 First Quarter
when compared to the 2001 First Quarter. Diluted weighted-average common shares
outstanding increased 15.2% in the 2002 First Quarter, primarily because of the
sale of our common stock in May 2001.
The 2002 First Quarter diluted EPS computation did not include the effect
of the 3.9 million shares of L-3 Holdings common stock that are issuable upon
conversion of the CODES (See Notes 5 and 7 to the condensed consolidated
financial statements) because the conditions for their conversion were not
satisfied, but, if the CODES had been convertible, they would have been
anti-dilutive for the 2002 First Quarter. However, the effect of the inclusion
of the shares convertible from the CODES would be dilutive if our levels of net
income increase.
SECURE COMMUNICATIONS & ISR
Sales within our Secure Communications & ISR segment increased $74.7
million or 90.3% to $157.4 million in the 2002 First Quarter compared with the
2001 First Quarter. The increase in sales was
21
principally attributed to $38.4 million from the AIS acquisition and $36.3
million of increased volume primarily on secure telephone equipment and secure
data links which was attributable to greater demand for secure communications
from the DoD and U.S. Government intelligence agencies.
Operating income increased by $10.1 million to $16.4 million in the 2002
First Quarter because of higher sales and operating margin. Operating margin
improved to 10.4% in the 2002 First Quarter compared to 7.6% in the 2001 First
Quarter. Adjusting 2001 First Quarter results on a pro forma basis to exclude
goodwill amortization expense for SFAS No. 142, 2001 First Quarter operating
income would have been $7.3 million, operating margin would have been 8.8% and
2002 First Quarter operating margin would have improved by 1.6 percentage
points compared to the 2001 First Quarter. Increased volume and improvements on
secure telephone equipment accounted for 3.9 percentage points of the increase.
Higher operating margins from the AIS acquisition accounted for 0.8 percentage
points of the increase. These increases to operating margin were partially
offset by a decrease of 3.1 percentage points due to negative contract margins
and increased expenditures associated with our Prime Wave business.
TRAINING, SIMULATION & SUPPORT SERVICES
Sales within our Training, Simulation & Support Services segment increased
$77.8 million or 66.5% to $194.8 million in the 2002 First Quarter compared
with the 2001 First Quarter. The EER, SY and Analytics acquisitions contributed
$67.3 million of the increase in sales. The remaining net increase of $10.5
million in sales during the 2002 First Quarter was principally attributable to
volume increases at our training and simulation business attributable to new
contracts competitively awarded during 2001.
Operating income increased by $12.3 million to $21.5 million in the 2002
First Quarter because of higher sales and operating margin. Operating margin
improved to 11.0% in the 2002 First Quarter compared to 7.8% in the 2001 First
Quarter. Adjusting 2001 First Quarter results on a pro forma basis to exclude
goodwill amortization expense for SFAS No. 142, 2001 First Quarter operating
income would have been $10.5 million, operating margin would have been 9.0% and
2002 First Quarter operating margin would have improved by 2.0 percentage
points compared to the 2001 First Quarter. Higher operating margins from the
acquired businesses accounted for 0.9 percentage points of the increase and
higher volumes and cost reductions at our training and simulation business
accounted for 1.4 percentage points of the increase. The remaining 0.3
percentage points decline was attributable to our other businesses.
AVIATION PRODUCTS & AIRCRAFT MODERNIZATION
Sales within our Aviation Products & Aircraft Modernization segment
increased $46.7 million or 77.1% to $107.3 million in the 2002 First Quarter
compared with the 2001 First Quarter. The AIS and Spar acquisitions contributed
$58.4 million of the increase in sales offset by decreases in sales of $11.7
million primarily attributable to volume decreases of TCAS products and
aviation recorders due to the downturn in the commercial aircraft industry. We
expect the sales volume for all of 2002 on our aviation products to be lower
than 2001 volumes; however, the amount of the declines are expected to be
smaller during the remainder of 2002.
Operating income decreased by $5.2 million to $17.5 million in the 2002
First Quarter. Operating margin declined to 16.3% in the 2002 First Quarter
compared to 37.4% in the 2001 First Quarter. Adjusting 2001 First Quarter
results on a pro forma basis to exclude goodwill amortization expense for SFAS
No. 142, 2001 First Quarter operating income would have been $24.6 million,
operating margin would have been 40.7% and 2002 First Quarter operating margin
would have declined by 24.4 percentage points compared to the 2001 First
Quarter. Lower volumes on TCAS products and aviation recorders, which generated
lower gross margin contributions, as well as increased development expenses for
a terrain awareness warning system and a commercial displays product-line which
we plan to introduce later this year, accounted for 19.3 percentage points of
the decrease and lower margins which we expected from the AIS and Spar acquired
businesses accounted for 5.1 percentage points of the decrease. We expect the
operating margins on aviation products to increase during the remainder of 2002
as volumes increase.
22
SPECIALIZED PRODUCTS
Sales within our Specialized Products segment increased $35.7 million or
17.7% to $237.3 million in the 2002 First Quarter compared to the 2001 First
Quarter. The KDI and BT Fuze acquisitions contributed $39.1 million of the
increase in sales and $10.2 million of the increase was primarily due to
guidance products and acoustic undersea warfare products arising from various
new contracts. These increases were partially offset by decreases in sales
primarily attributable to a decrease of $13.6 million on naval power equipment
arising from lower shipments caused by production capacity diverted to fixing
quality control problems. We expect to return to normal production levels on
our naval power equipment in the second half of 2002.
Operating income increased by $7.2 million to $15.9 million in the 2002
First Quarter because of higher sales and operating margin. Operating margin
improved to 6.7% in the 2002 First Quarter compared to 4.3% in the 2001 First
Quarter. Adjusting 2001 First Quarter results on a pro forma basis to exclude
goodwill amortization expense for SFAS No. 142, 2001 First Quarter operating
income would have been $14.4 million, operating margin would have been 7.1% and
2002 First Quarter operating margin would have declined by 0.4 percentage
points compared to the 2001 First Quarter. The lower margin was primarily due
to lower sales volume for naval power equipment. This decline which reduced
operating margin by 1.1 percentage points, was partially offset by higher
margins from the KDI and BT Fuze acquired businesses arising from volume
increases related to new contracts entering production.
LIQUIDITY AND CAPITAL RESOURCES
BALANCE SHEET
Contracts in process increased $425.0 million from December 31, 2001 to
March 31, 2002. The increase included $359.6 million related to acquired
businesses and $65.4 million principally from:
o increases of $37.9 million in billed receivables due to higher sales of
ISR products, data links and ocean products;
o increases of $33.1 million in inventories, including inventories of data
links, ocean products, secure telephone equipment and certain commercial
products; and
o decreases of $5.6 million in unbilled contract receivables due to higher
billings for ISR products, partially offset by increases on secure
communications products, including secure telephone equipment.
Included in contracts in process at March 31, 2002, are billed receivables of
$15.8 million and inventories of $30.0 million related to our Prime Wave
business. At December 31, 2001, we had $15.8 million of billed receivables and
$30.2 million of inventories related to our Prime Wave business.
The increase in property, plant and equipment, goodwill and pension and
postretirement benefits during the 2002 First Quarter was principally related
to the acquisition of AIS. The increases in accounts payable and accrued
employment costs were primarily due to the timing of payments as well as the
acquisition of AIS. The increase in accrued interest is due to the timing of
the interest coupon payments on our debt as well as additional borrowings under
our bridge loan and senior credit facilities. The decrease in other current
liabilities is primarily attributable to the payment of $43.6 million related
to the remaining outstanding common stock of Spar during January 2002.
STATEMENT OF CASH FLOWS
OPERATING ACTIVITIES
During the 2002 First Quarter, we generated $41.4 million of cash from our
operating activities, an increase of $24.3 million over the $17.1 million
generated during the 2001 First Quarter. Earnings adjusted for non-cash items
and deferred taxes increased $20.1 million to $66.3 million in the 2002 First
Quarter from $46.2 million in the 2001 First Quarter. During the 2002 First
Quarter, our working capital and operating assets and liabilities increased
$24.9 million compared with an increase of $29.1 million in the
23
2001 First Quarter. Our cash flows from operating activities during the 2002
First Quarter include increases in inventories and billed receivables as
described above, as well as declines in customer advances related to
liquidations on a contract for acoustic undersea warfare products. These uses
were partially offset by lower payments to vendors and an increase in accrued
employment costs due to the timing of payments for salaries and wages. Uses of
cash relating to performance on certain contracts in process, for which
estimated costs exceed the estimated billings, declined in the 2002 First
Quarter compared to the 2001 First Quarter. Deferred income taxes for the 2002
First Quarter compared with the 2001 First Quarter increased primarily because
of larger estimated tax deductions arising from the Company's recently completed
acquisitions, including AIS. We expect our deferred income taxes to be higher in
2002 than they were in 2001.
INVESTING ACTIVITIES
During the 2002 First Quarter, we invested $1,201.5 million to acquire
businesses, compared with $13.0 million during the 2001 First Quarter. This
increase in acquisition spending during the 2002 First Quarter was primarily
attributable to the acquisition of AIS. The acquisition was financed using
approximately $229.0 million of cash on hand, borrowings under our senior
credit facilities of $420.0 million and a $500.0 million senior subordinated
bridge loan. We expect to offer and sell $1,000.0 million to $1,500.0 million
of debt and equity securities during the second quarter of 2002, depending on
capital market conditions, and use a portion of the proceeds from those
offerings to repay the $500.0 million senior subordinated bridge loan and other
outstanding borrowings.
We make capital expenditures for the improvement of manufacturing
facilities and equipment. We expect that capital expenditures for the remainder
of 2002 will be between $75.0 million and $80.0 million, including Aircraft
Integration Systems.
FINANCING ACTIVITIES
On April 23, 2002, we announced that our Board of Directors has authorized
a two-for-one stock split on all shares of our common stock. The stock split
will entitle all shareholders of record at the close of business on May 6, 2002
to receive one additional share of our common stock for every share held on
that date. The additional shares will be distributed to shareholders in the
form of a stock dividend on May 20, 2002. Upon completion of the stock spilt,
we will have approximately 80 million shares of common stock outstanding.
Additionally, all of our historical as reported EPS data will be restated
prospectively to give effect to the stock split.
At March 31, 2002, available borrowings under our senior credit facilities
were $233.4 million after reductions for outstanding borrowings of $350.0
million and outstanding letters of credit of $166.6 million.
On February 26, 2002, our lenders approved a $150.0 million increase in
the amount of our senior credit facilities. The five-year revolving credit
facility increased by $100.0 million to $500.0 million and the 364-day
revolving credit facility increased by $50.0 million to $250.0 million.
Additionally, the maturity date of the $200.0 million 364-day revolving credit
facility was extended to February 26, 2003.
On March 8, 2002, we borrowed $500.0 million under a senior subordinated
bridge loan facility ("Bridge Loan Facility") to finance a portion of the
purchase price of AIS and related expenses. The Bridge Loan Facility is
subordinated in right of payment to all of L-3 Communications' existing and
future senior debt. Borrowings under the Bridge Loan Facility bear interest
through March 8, 2003, at our option, at either the one-month or three-month
LIBOR rate plus a spread equal to 350 basis points. The Bridge Loan Facility
matures on May 15, 2009, but if the loans under the facility are not repaid by
March 8, 2003, each lender's loan will be automatically converted into an
exchange note with terms substantially similar to those of our other senior
subordinated indebtedness, and will bear interest at a fixed rate equal to the
yield to maturity on our highest yielding existing subordinated indebtedness at
the time of exchange plus 100 basis points. Subject to the exceptions set forth
in the Bridge Loan Facility, we are required to prepay the Bridge Loan Facility
with the net cash proceeds from:
o any debt offerings by L-3 Holdings or its subsidiaries, including L-3
Communications;
o issuances of any equity interests in L-3 Holdings or L-3 Communications;
o incurrences of any other indebtedness of L-3 Holdings or any of its
subsidiaries, including L-3 Communications (other than under the senior
credit facilities and certain permitted indebtedness); and
24
o any sale of assets or stock of any subsidiaries of L-3 Communications.
The senior credit facilities, Bridge Loan Facility, Senior Subordinated
Notes, Convertible Notes and CODES agreements contain financial covenants and
other restrictive covenants which remain in effect so long as we owe any amount
or any commitment to lend exists thereunder. As of March 31, 2002, we were in
compliance with those covenants at all times. The borrowings under the senior
credit facilities are guaranteed by L-3 Holdings and by substantially all of
the domestic subsidiaries of L-3 Communications on a senior basis. The payments
of principal and premium, if any, and interest on the Senior Subordinated Notes
and Bridge Loan Facility are unconditionally guaranteed, on an unsecured senior
subordinated basis, jointly and severally, by all of L-3 Communications'
restricted subsidiaries other than its foreign subsidiaries. The guarantees of
the Senior Subordinated Notes and Bridge Loan Facility are junior to the
guarantees of the senior credit facilities and rank pari passu with each other
and the guarantees of the Convertible Notes and the CODES. The Convertible
Notes and CODES are unconditionally guaranteed, on an unsecured senior
subordinated basis, jointly and severally, by L-3 Communications and
substantially all of its direct and indirect domestic subsidiaries. These
guarantees rank junior to the guarantees of the senior credit facilities and
rank pari passu with each other and the guarantees of the Senior Subordinated
Notes and Bridge Loan Facility. See Note 7 to our consolidated financial
statements for fiscal year ended December 31, 2001, included in our Annual
Report on Form 10K for fiscal year ended December 31, 2001, for a description
of our debt and related financial covenants at December 31, 2001.
Based upon our current level of operations, we believe that our cash from
operating activities, together with available borrowings under the senior
credit facilities, will be adequate to meet our anticipated requirements for
working capital, capital expenditures, commitments, research and development
expenditures, contingent purchase prices, program and other discretionary
investments, and interest payments for the foreseeable future. There can be no
assurance, however, that our business will continue to generate cash flow at
current levels, or that currently anticipated improvements will be achieved. If
we are unable to generate sufficient cash flow from operations to service our
debt, we may be required to sell assets, reduce capital expenditures, refinance
all or a portion of our existing debt or obtain additional financing. Our
ability to make scheduled principal payments or to pay interest on or to
refinance our indebtedness depends on our 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 our control. There can
be no assurance that sufficient funds will be available to enable us to service
our indebtedness, or make necessary capital expenditures and to make
discretionary investments.
CONTINGENCIES
See Note 9 to the Condensed Consolidated Financial Statements.
RECENTLY ISSUED AND PROPOSED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and
Other Intangible Assets, which supersedes Accounting Principles Board ("APB")
Opinion No. 17, Intangible Assets. SFAS No. 142 revised the standards for
accounting for goodwill and other intangible assets. SFAS No. 142 requires that
goodwill and indefinite lived identifiable intangible assets shall no longer be
amortized, but be tested for impairment at least annually. The provisions of
SFAS No. 142 were effective beginning January 1, 2002, will full implementation
of the impairment measurement provisions completed by December 31, 2002.
Effective January 1, 2002, we are not recording goodwill amortization expense.
Based on our preliminary internal assessment, we do not believe that the
cumulative effect of the accounting change resulting from the adoption of the
transitional impairment measurement provisions of SFAS No. 142 will be
material. We expect to complete our impairment assessment by the end of the
second quarter of 2002.
In August of 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 applies to legal obligations associated
with the retirement of tangible long-lived assets that result from the
acquisition, construction, development or normal operation of a long-lived
asset, except
25
for certain obligations of lessees. This statement does not apply to
obligations that arise solely from a plan to dispose of a long-lived asset.
SFAS No. 143 requires that estimated asset retirement costs be measured at
their fair values and recognized as assets and depreciated over the useful life
of the related asset. Similarly, liabilities for the present value of asset
retirement obligations are to be recognized and accreted as interest expense
each year to their estimated future value until the asset is retired. These
provisions will be applied to existing asset retirement obligations as of the
adoption date as a cumulative-effect of a change in accounting policy. SFAS No.
143 is effective for our fiscal years beginning January 1, 2003. SFAS No. 143
will not have a material effect on our consolidated results of operations and
financial position.
In October of 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to Be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions (APB No. 30), for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS No. 144 expands the scope of
accounting for disposals to include all components of an entity, including
reportable segments and operating segments, reporting units, subsidiaries and
certain asset groups. It requires the gain or loss on disposal to be measured
as the difference between (1) the fair value less the costs to sell and (2) the
carrying value of the component, and such gain or loss cannot include the
estimated future operating losses of the component, which were included in the
gain or loss determination under APB No. 30. SFAS No. 144 also amends
Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
eliminate the exception to consolidation for a subsidiary for which control is
likely to be temporary. The provisions of SFAS No. 144 became effective on
January 1, 2002, SFAS No. 144 did not have a material effect on our
consolidated results of operations and financial position.
In May 2002, the FASB issued SFAS No. 145, Rescission of SFAS Nos. 4, 44
and 64, Amendment of SFAS No. 13, and Technical Corrections as of April
2002. SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and SFAS No. 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements. Under the provisions of SFAS No. 145, gains
and losses from extinguishment of debt can only be classified as extraordinary
items if they meet the criteria in APB Opinion No. 30. The provisions of this
Statement related to the rescission of SFAS No. 4 shall be applied in fiscal
years beginning after May 15, 2002. Earlier application is permitted. This
statement also amends SFAS No. 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar and is effective for transactions occurring after May
15, 2002. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions and are effective for
financial statements issued on or after May 15, 2002. SFAS No. 145 will not
have a material effect on our consolidated results of operations, financial
position or cash flows.
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 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.
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Our forward-looking statements will also be influenced by factors such as:
o our dependence on the defense industry and the business risks peculiar to
that industry including changing priorities or reductions in the U.S.
Government defense budget;
o our reliance on contracts with a limited number of agencies of, or
contractors to, the U.S. Government and the possibility of termination of
government contracts by unilateral government action or for failure to
perform;
o our ability to obtain future government contracts on a timely basis;
o the availability of government funding and changes in customer
requirements for our products and services;
o our significant amount of debt and the restrictions contained in our debt
agreements;
o collective bargaining agreements and labor disputes;
o economic conditions, competitive environment, international business and
political conditions, timing of international awards and contracts;
o our extensive use of fixed-price contracts as compared to
cost-reimbursable contracts;
o our ability to identify future acquisition candidates or to integrate
acquired operations;
o the rapid change of technology and high level of competition in the
communication equipment industry;
o our introduction of new products into commercial markets or our
investments in commercial products or companies;
o pension, environmental or legal matters or proceedings and various other
market, competition and industry factors, many of which are beyond our
control; and
o the fair values of the assets, including goodwill and other intangibles,
of our business which can be impaired or reduced by the other factors
discussed above.
Readers of this document are cautioned that our forward-looking statements
are not guarantees of future performance and the actual results or developments
may differ materially from the expectations expressed in the forward-looking
statements.
As for the forward-looking statements that relate to future financial
results and other projections, actual results will be different due to the
inherent uncertainties of estimates, forecasts and 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.
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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, 2001 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, 2002.
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
*The information required on this exhibit is presented in Note 7 to the
Condensed Consolidated Financial Statements as of March 31, 2002 in
accordance with the provisions of FASB SFAS No. 128, Earnings Per Share.
(b) Reports on Form 8-K
Report filed on March 22, 2002 regarding the Financial Statements for the
years ended December 31, 2001, 2000 and 1999 of Raytheon's Aircraft Integration
Systems Business and unaudited pro forma financial information of L-3
Communications Holdings, Inc. and L-3 Communications Corporation for the year
ended December 31, 2001.
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, 2002
/s/ Robert V. LaPenta
--------------------------------------
Name: Robert V. LaPenta
Title: President and Chief
Financial Officer
(Principal Financial Officer)
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