-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HlArVZjDzlXEDjZzsF7wNOmH5CIFPetbsCwlfeqnHaBX2z83uK+GFj454To0H9Lr uvkzPWFoQ4ALk5/YWs56JA== /in/edgar/work/20000815/0000950136-00-001094/0000950136-00-001094.txt : 20000922 0000950136-00-001094.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950136-00-001094 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: L 3 COMMUNICATIONS HOLDINGS INC CENTRAL INDEX KEY: 0001056239 STANDARD INDUSTRIAL CLASSIFICATION: [3663 ] IRS NUMBER: 133937434 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14141 FILM NUMBER: 701351 BUSINESS ADDRESS: STREET 1: 600 THIRD AVENUE STREET 2: 34TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2126971111 MAIL ADDRESS: STREET 1: 600 THIRD AVENUE STREET 2: 34TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10016 FILER: COMPANY DATA: COMPANY CONFORMED NAME: L 3 COMMUNICATIONS CORP CENTRAL INDEX KEY: 0001039101 STANDARD INDUSTRIAL CLASSIFICATION: [3663 ] IRS NUMBER: 133937436 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-46983 FILM NUMBER: 701352 BUSINESS ADDRESS: STREET 1: 600 THIRD AVENUE STREET 2: 34TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 1216971111 MAIL ADDRESS: STREET 1: 600 THIRD AVENUE STREET 2: 34TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10016 10-Q 1 0001.txt QUARTERLY REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ---------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 Commission file numbers 001-14141 and 333-46983 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION 600 Third Avenue New York, NY 10016 Telephone: (212) 697-1111 State of incorporation: Delaware IRS identification numbers: 13-3937434 and 13-3937436 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X ] There were 33,330,481 shares of L-3 Communications Holdings, Inc. common stock with a par value of $0.01 outstanding as of the close of business on August 10, 2000. ================================================================================ L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION FORM 10-Q QUARTERLY REPORT FOR QUARTER ENDED JUNE 30, 2000 PART I -- FINANCIAL INFORMATION:
PAGE NO. -------- ITEM 1. Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 ................................................. 1 Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2000 and June 30, 1999 ............ 2 Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2000 and June 30, 1999 .......................... 4 Notes to Unaudited Condensed Consolidated Financial Statements .......... 5 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition ............................................... 14 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk .............. 22 PART II -- OTHER INFORMATION: ITEM 4. Submission of Matters to a Vote of Security Holders ..................... 23 ITEM 6. Exhibits and Reports on Form 8-K ........................................ 23
L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30, DECEMBER 31, 2000 1999 -------------- ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents ......................................... $ 45,247 $ 42,788 Contracts in process .............................................. 640,281 484,173 Deferred income taxes ............................................. 61,356 32,985 Other current assets .............................................. 7,736 7,761 ---------- ---------- Total current assets ............................................ 754,620 567,707 ---------- ---------- Property, plant and equipment, net ................................. 159,156 140,971 Intangibles, primarily cost in excess of net assets acquired, net of amortization ...................................................... 1,245,832 821,552 Deferred income taxes .............................................. 62,884 56,858 Other assets ....................................................... 38,620 46,683 ---------- ---------- Total assets .................................................... $2,261,112 $1,633,771 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Borrowings under Senior Credit Facilities ......................... $ 237,000 $ -- Accounts payable, trade ........................................... 123,519 98,693 Accrued employment costs .......................................... 89,225 70,618 Accrued expenses .................................................. 41,277 27,931 Customer advances ................................................. 54,982 56,738 Accrued interest .................................................. 14,710 12,683 Income taxes ...................................................... 1,114 2,715 Other current liabilities ......................................... 114,120 48,928 ---------- ---------- Total current liabilities ....................................... 675,947 318,306 ---------- ---------- Pension and postretirement benefits ................................ 104,576 110,262 Other liabilities .................................................. 17,727 17,028 Long-term debt ..................................................... 839,000 605,000 Commitments and contingencies Shareholders' equity: Common stock $.01 par value; authorized 100,000,000 shares, issued and outstanding 33,251,612 and 32,794,547 shares ................ 500,100 483,694 Retained earnings ................................................. 130,933 103,545 Unearned compensation ............................................. (2,995) (1,661) Accumulated other comprehensive loss .............................. (4,176) (2,403) ---------- ---------- Total shareholders' equity ......................................... 623,862 583,175 ---------- ---------- Total liabilities and shareholders' equity ...................... $2,261,112 $1,633,771 ========== ==========
See notes to unaudited 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 JUNE 30, ----------------------------- 2000 1999 ------------- ------------- Sales ..................................... $ 460,976 $ 314,432 Costs and expenses ........................ 411,323 283,283 --------- --------- Operating income .......................... 49,653 31,149 Interest and other income ................. 1,722 1,815 Interest expense .......................... 24,703 14,939 --------- --------- Income before income taxes ................ 26,672 18,025 Provision for income taxes ................ 10,213 6,939 --------- --------- Net income ................................ $ 16,459 $ 11,086 ========= ========= Earnings per common share: Basic .................................... $ 0.49 $ 0.34 ========= ========= Diluted .................................. $ 0.47 $ 0.33 ========= ========= Weighted average common shares outstanding: Basic .................................... 33,271 32,488 ========= ========= Diluted .................................. 34,855 33,948 ========= =========
See notes to unaudited condensed consolidated financial statements. 2 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ----------------------------- 2000 1999 ------------- ------------- Sales ..................................... $ 838,028 $ 589,994 Costs and expenses ........................ 753,706 532,678 --------- --------- Operating income .......................... 84,322 57,316 Interest and other income ................. 2,557 2,829 Interest expense .......................... 42,291 30,414 --------- --------- Income before income taxes ................ 44,588 29,731 Provision for income taxes ................ 17,200 11,446 --------- --------- Net income ................................ $ 27,388 $ 18,285 ========= ========= Earnings per common share: Basic .................................... $ 0.83 $ 0.58 ========= ========= Diluted .................................. $ 0.79 $ 0.56 ========= ========= Weighted average common shares outstanding: Basic .................................... 33,158 31,495 ========= ========= Diluted .................................. 34,681 32,925 ========= =========
See notes to unaudited condensed consolidated financial statements. 3 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, --------------------------- 2000 1999 ------------ ------------ OPERATING ACTIVITIES: Net income ......................................................... $ 27,388 $ 18,285 Depreciation and amortization ...................................... 34,177 26,390 Amortization of deferred debt issue costs .......................... 2,485 1,957 Deferred income taxes .............................................. 10,492 8,295 Other noncash items ................................................ 7,048 3,421 Changes in operating assets and liabilities, net of amounts acquired Contracts in process .............................................. (21,033) (30,093) Other current assets .............................................. (1,279) 2,896 Other assets ...................................................... 184 (183) Accounts payable and accrued expenses ............................. 9,908 (15,061) Customer advances ................................................. (12,977) 16,308 Other current liabilities ......................................... (10,700) (3,352) Pension and postretirement benefits ............................... (3,587) 229 Other liabilities ................................................. 334 (1,377) All other operating activities, net ................................ (714) (1,783) ---------- ---------- Net cash from operating activities ................................. 41,726 25,932 ---------- ---------- INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired .................... (515,461) (205,003) Capital expenditures ............................................... (13,397) (10,993) Disposition of property, plant and equipment ....................... 2,531 5,273 Other investing activities ......................................... 16,099 5,007 ---------- ---------- Net cash (used in) investing activities ............................ (510,228) (205,716) ---------- ---------- FINANCING ACTIVITIES: Borrowings under revolving credit facilities ....................... 627,000 74,700 Repayment of borrowings under revolving credit facilities .......... (156,000) (74,700) Proceeds from sale of common stock, net ............................ -- 201,582 Other financing activities, net .................................... (39) (1,171) ---------- ---------- Net cash from financing activities ................................. 470,961 200,411 ---------- ---------- Net increase in cash ............................................... 2,459 20,627 Cash and cash equivalents, beginning of the period ................. 42,788 26,130 ---------- ---------- Cash and cash equivalents, end of the period ....................... $ 45,247 $ 46,757 ========== ==========
See notes to unaudited condensed consolidated financial statements. 4 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION L-3 Communications Holdings, Inc. ("Holdings" and together with its subsidiaries "L-3" or the "Company") is a leading merchant supplier of sophisticated secure communication systems and specialized communication products. These systems and products are critical elements of virtually all major communication, command and control, intelligence gathering and space systems. The Company's customers include the U.S. department of defense (the "DoD"), certain U.S. government intelligence agencies, major aerospace and defense contractors, foreign governments and commercial customers. The Company has two reportable segments, Secure Communication Systems and Specialized Communication Products. Secure Communication Systems. This segment provides secure, high data rate communications systems for military and other U.S. government reconnaissance and surveillance applications. These operations are principally performed under cost plus, sole source contracts supporting long-term programs for the U.S. armed forces and classified customers. Major secure communications programs and systems include: secure data links for airborne, satellite, ground and seabased remote platforms for information collection, command and control and dissemination to users in real-time; strategic and tactical signal intelligence systems that detect, collect, identify, analyze and disseminate information and related support contracts for military and intelligence efforts; secure telephone, fax and network equipment and encryption management; communication software support services to military and related government intelligence markets; and communications systems for surface and undersea platforms and manned space flights. This segment also provides high fidelity, fully integrated simulator training products, including flight simulators, pilot training systems and training support services used by U.S. and foreign military agencies, which are principally performed under long-term fixed price contracts. Specialized Communication Products. This segment includes three product categories: microwave components, avionics and ocean products, and telemetry, instrumentation and space products. Microwave Components includes commercial off the shelf, high performance microwave components and frequency monitoring equipment. Avionics and Ocean Products include aviation recorders, traffic alert and collision avoidance systems, display products, antenna products, acoustic undersea warfare systems and naval power distribution, conditioning, switching and protection equipment for naval ships and submarines. Telemetry, Instrumentation and Space Products include commercial off the shelf real-time data collection and transmission products and components for missile, aircraft and space based electronic systems. The Specialized Communication Products segment provides products, systems and services used in the satellite transmission of voice, video and data through earth stations for uplink and downlink terminals. This segment also provides commercial off the shelf satellite control software, telemetry, tracking and control, mission processors, software engineering services, and Global Positioning Systems (GPS) receivers, navigation and positioning system products and subsystems to the worldwide military, civilian and commercial satellite markets. The accompanying unaudited condensed consolidated financial statements also include those of L-3 Communications Corporation ("L-3 Communications"), which is a wholly owned subsidiary of Holdings. Holdings owns all of the authorized, issued and outstanding common stock, par value $0.01 per share, of L-3 Communications. Holdings has no operations other than through its subsidiary, L-3 Communications. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission ("SEC"); accordingly, they do not include all of the information and notes required by generally accepted accounting principles for a complete set of financial statements. Certain reclassifications have been made to conform prior year financial statements amounts to the current year presentation. In the opinion of 5 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods presented have been included. The results of operations for the interim periods are not necessarily indicative of results for the full year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and costs and expenses during the reporting period. The most significant of these estimates and assumptions relate to contract estimates of sales and costs, estimates of pension and postretirement benefit obligations, recoverability of recorded amounts of fixed assets and cost in excess of net assets acquired, income taxes, litigation and environmental obligations. Actual results could differ from these estimates. For further information, these interim financial statements should be read in conjunction with the Consolidated Financial Statements of Holdings and L-3 Communications for the fiscal year ended December 31, 1999, included in their Annual Report on Form 10-K for fiscal year ended December 31, 1999. 2. ACQUISITIONS On January 8, 1999 the Company acquired all of the outstanding common stock of Microdyne Corporation ("Microdyne") for $94,228 in cash including expenses and the repayment of assumed debt, net of cash acquired. On April 16, 1999 the Company acquired all of the outstanding common stock of Aydin Corporation ("Aydin") for $60,034 in cash, including expenses net of cash acquired. On June 30, 1999 the Company acquired all the outstanding common stock of Interstate Electronics Corporation ("IEC") from Scott Technologies Inc. for $40,610 in cash including expenses. On December 31, 1999, the Company acquired the assets of the Space and Navigation Systems business ("Space & Nav") of Honeywell International Inc. ("Honeywell") for $55,000 in cash, plus expenses, subject to adjustment based on closing date net assets, as defined. On February 10, 2000, the Company acquired the assets of the Training Devices and Training Services ("TDTS") business of Raytheon Company for $160,000 in cash plus expenses, subject to adjustment based on closing date net working capital, as defined. Following the acquisition the Company changed the name of TDTS to L-3 Communications Link Simulation and Training ("Link Simulation and Training"). On February 14, 2000, the Company acquired the assets of Trex Communications Corporation, ("TrexCom"), for $50,210 in cash, plus expenses, subject to adjustment based on closing date net worth, as defined. The acquisitions were financed using borrowings under the Company's Senior Credit Facilities. On April 28, 2000, the Company acquired the Traffic Alert and Collision Avoidance System ("TCAS") product line from Honeywell for a purchase price of $237,000 in cash, reflecting a price reduction of $17,000 based on the preliminary closing date net assets, as defined, which is subject to a final adjustment. The TCAS acquisition was financed with borrowings under a new revolving 364 day senior credit facility. In addition, in February 2000, the Company entered into a Memorandum of Agreement ("MOA") with Thomson-CSF Sextant S.A. ("Sextant"), a subsidiary of Thomson-CSF, under which L-3 agreed to purchase the assets of TCAS from Honeywell, create a limited liability corporation for TCAS (the "TCAS LLC"), contribute 100% of the TCAS assets to TCAS LLC, and sell a 30% interest in the TCAS LLC to Sextant for a cash purchase price equal to 30% of the final purchase price paid by the Company for TCAS (which is expected to be approximately $71,100 based on the preliminary closing date net assets) (collectively, the "TCAS Minority Interest Transaction"). L-3 expects to maintain operating management of the TCAS LLC and to consolidate it. The MOA, as amended, will terminate if definitive agreements regarding the TCAS Minority Interest Transaction are not executed by August 31, 2000. The TCAS Minority Interest Transaction is subject to regulatory approval by United States agencies and the European Union Commission and the execution of definitive agreements. 6 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) On June 30, 2000, the Company acquired all the outstanding stock of MPRI for $34,500 in cash, subject to adjustment based on closing date net assets, as defined, and the financial performance of MPRI for the year ending June 30, 2001. The acquisition was financed using borrowings under the Company's Senior Credit Facilities. The historical interim financial statements of Space & Nav, TDTS and TCAS for the six months ended June 30, 1999 are not readily available (Audits of the financial statements of the Space & Nav, TDTS and TCAS businesses for their 1999 fiscal years are currently in process.) However, based on preliminary statement of operations data for Space & Nav, TDTS and TCAS, had the acquisitions of Aydin, IEC, Space & Nav, TrexCom, TDTS and TCAS occurred on January 1, 1999, the unaudited pro forma sales would have been $882,300 for the six months ended June 30, 2000 and $897,200 for the six months ended June 30, 1999. All of the Company's acquisitions have been accounted for as purchase business combinations and are included in the Company's results of operations from their respective effective dates. The assets and liabilities recorded in connection with the acquisitions of Space & Nav, TDTS, TrexCom and TCAS are based upon preliminary estimates of fair values for contracts in process, inventories, pension and postretirement benefit liabilities and deferred taxes. Actual adjustments will be based on the final purchase prices, audited acquired historical net assets, and the final appraisals and other analyses of fair values which are in process. Management does not expect that differences between the preliminary and final purchase price allocations will have a material impact on the Company's financial position or results of operations. In March, 2000 the Company completed the sale of its interest in the Network Security business which resulted in an after tax gain of $395, net of an after-tax loss on the write-down in the carrying value of certain other investments of $6,359. In May, 2000 the Company completed the sale of its interest in the Cardiovascular Computer Systems business which resulted in an after-tax gain of $785, net of an after-tax loss on the write-down in the carrying value of certain other investments of $1,215. The net proceeds from the sale of the Network Security business and Cardiovascular Computer Systems business were $13,443 and $5,594, respectively, and are included in other investing activities on the statement of cash flows. 3. CONTRACTS IN PROCESS Contracts in process consist of:
JUNE 30, 2000 DECEMBER 31, 1999 ------------- ----------------- Billed receivables ............................ $ 307,704 $ 258,054 Unbilled contract receivables, gross .......... 215,349 125,652 Less: unliquidated progress payments .......... (73,100) (10,351) --------- --------- Unbilled contract receivables, net ........... 142,249 115,301 --------- --------- Inventoried costs, gross ...................... 222,299 130,091 Less: unliquidated progress payments .......... (31,971) (19,273) --------- --------- Inventoried costs, net ....................... 190,328 110,818 --------- --------- Total contracts in process ................... $ 640,281 $ 484,173 ========= =========
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) 4. DEBT Debt consists of:
JUNE 30, 2000 DECEMBER 31, 1999 ------------- ----------------- Borrowings under Senior Credit Facilities ........... $ 471,000 $ -- 10 3/8% Senior Subordinated Notes due 2007 .......... 225,000 225,000 8 1/2% Senior Subordinated Notes due 2008 ........... 180,000 180,000 8% Senior Subordinated Notes due 2008 ............... 200,000 200,000 ---------- -------- Total debt ......................................... 1,076,000 605,000 Less current portion of borrowings under Senior Credit Facilities ................................ (237,000) -- ---------- -------- Long-term debt ..................................... $ 839,000 $605,000 ========== ========
On April 28, 2000, the Company entered into a new 364 day revolving credit facility for $300,000 (the "New 364 Day Revolving Credit Facility") that expires on April 27, 2001 and amended the Senior Credit Facilities to change the spreads on borrowings and commitment fees thereunder, as follows: on "base rate" borrowings, ranging from 0.375% to 1.75%; on "Eurodollar rate" borrowings ranging from 1.25% to 2.75%; and, on commitment fees, ranging from 0.20% to 0.50%; in each case, depending on L-3 Communications' Debt to EBITDA Ratio at the time of determination. Notwithstanding the new spreads, from April 28, 2000 until the adjustment date related to the quarter ending September 30, 2000, the spreads will be no lower than 0.75% and 1.75%, respectively, on "base rate" borrowings and "Eurodollar" borrowings. The spreads for the New 364 Day Revolving Credit Facility are the same as those under the Senior Credit Facilities. The lenders under the New 364 day Revolving Credit Facility rank pari passu with the lenders under the Senior Credit Facilities. The borrowings outstanding of $237,000 at June 30, 2000 under the New 364 Day Revolving Credit Facility are classified under current liabilities on the balance sheet because the facility expires in April 2001. The Company intends to either refinance the New 364 Day Revolving Credit Facility or to restructure it together with the Company's other existing revolving credit facilities by the end of the first quarter of 2001. In August 2000 the Revolving 364-Day Credit Facility was renewed for an additional 364 days and will expire on August 9, 2001, at which time the Company may exercise an option to convert a portion of the borrowings outstanding thereunder into term loans which fully amortize over an eighteen month period beginning September 30, 2001. Available borrowings under the Company's revolving credit facilities at June 30, 2000 were $120,528, after reductions for outstanding borrowings of $471,000 and letters of credit of $108,472. 5. COMPREHENSIVE INCOME Comprehensive income consists of:
SIX MONTHS ENDED JUNE 30, ----------------------- 2000 1999 ---------- ---------- Net income .................................................. $ 27,388 $ 18,285 Foreign currency translation losses ......................... (714) (1,783) Unrealized gain (loss) on investments, net of taxes ......... (1,059) (2,072) -------- -------- Comprehensive income ........................................ $ 25,615 $ 14,430 ======== ========
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) 6. EARNINGS PER SHARE Weighted-average shares used in the computation of earnings per share are presented in the table below.
SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Basic: Net income .......................................... $ 27,388 $ 18,285 $ 16,459 $ 11,086 Weighted average common shares outstanding .......... 33,158 31,495 33,271 32,488 --------- --------- --------- --------- Basic earnings per share ............................ $ 0.83 $ 0.58 $ 0.49 $ 0.34 ========= ========= ========= ========= Diluted: Net income .......................................... $ 27,388 $ 18,285 $ 16,459 $ 11,086 --------- --------- --------- --------- Common and potential common shares: Weighted average common shares outstanding ......... 33,158 31,495 33,271 32,488 Assumed exercise of stock options .................. 4,018 3,233 4,076 3,266 Assumed purchase of common shares for treasury ......................................... (2,495) (1,803) (2,492) (1,806) --------- --------- --------- --------- Common and potential common shares .................. 34,681 32,925 34,855 33,948 ========= ========= ========= ========= Diluted earnings per share .......................... $ 0.79 $ 0.56 $ 0.47 $ 0.33 ========= ========= ========= =========
7. CONTINGENCIES The Company is engaged in providing products and services under contracts with the U.S. government and to a lesser degree, under foreign government contracts, some of which are funded by the U.S. government. All such contracts are subject to extensive legal and regulatory requirements, and, from time to time, agencies of the U.S. government investigate whether such contracts were and are being conducted in accordance with these requirements. Under government procurement regulations, an indictment of the Company by a federal grand jury could result in the Company being suspended for a period of time from eligibility for awards of new government contracts. A conviction could result in debarment from contracting with the federal government for a specified term. Additionally, in the event that U.S. government expenditures for products and services of the type manufactured and provided by the Company are reduced, and not offset by greater commercial sales or other new programs or products, or acquisitions, there may be a reduction in the volume of contracts or subcontracts awarded to the Company. Management continually assesses the Company's obligations with respect to applicable environmental protection laws. While it is difficult to determine the timing and ultimate cost to be incurred by the Company in order to comply with these laws, based upon available internal and external assessments, with respect to those environmental loss contingencies of which management is aware, the Company believes that even without considering potential insurance recoveries, if any, there are no environmental loss contingencies that, individually or in the aggregate, would be material to the Company's financial position or results of operations. The Company accrues for these contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company has been periodically subject to litigation, claims or assessments and various contingent liabilities incidental to its business. With respect to those investigative actions, items of litigation, claims or assessments of which they are aware, management of the Company is of the opinion 9 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) that the probability is remote that, after taking into account certain provisions that have been made with respect to these matters, the ultimate resolution of any such investigative actions, items of litigation, claims or assessments will have a material adverse effect on the financial position or results of operations of the Company. 8. SEGMENT INFORMATION The Company has two reportable segments, Secure Communication Systems and Specialized Communication Products which are described in Note 1. The Company evaluates the performance of its operating divisions and reportable segments based on sales and operating income. The table below presents sales, operating income and assets by reportable segment.
SECURE SPECIALIZED ELIMINATION OF COMMUNICATION COMMUNICATION INTERSEGMENT CONSOLIDATED SYSTEMS PRODUCTS CORPORATE SALES TOTAL ------- -------- --------- ----- ----- Six Months Ended June 30, 2000: Sales ..................... $365,220 $ 476,633 $(3,825) $ 838,028 Operating income .......... 39,122 45,200 84,322 Six Months Ended June 30, 1999: Sales ..................... $243,447 $ 348,623 $(2,076) $ 589,994 Operating income .......... 21,828 35,488 57,316 Assets as of: June 30, 2000 ............. $701,685 $1,479,832 $79,595 $2,261,112 December 31, 1999 ......... 381,699 1,123,487 128,585 1,633,771
9. NEW ACCOUNTING PRONOUNCEMENTS In September 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value and is effective for all quarters of fiscal years beginning after September 15, 2000. The Company does not expect SFAS 133 to have a material impact on its results of operations or financial position. In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. The SEC delayed the effective date of this SAB in June 2000, so that the SAB must now be adopted by December 31, 2000. The Company does not expect SAB No. 101 to have a material impact on its results of operations or financial position. 10. UNAUDITED FINANCIAL INFORMATION OF L-3 COMMUNICATIONS SUBSIDIARY GUARANTORS L-3 Communications is a wholly owned subsidiary of Holdings. The debt of L-3 Communications, including the Senior Subordinated Notes and borrowings under and amounts drawn against the Company's credit facilities are guaranteed, on a joint and several, full and unconditional basis, by certain of its wholly owned domestic subsidiaries (the "Guarantor Subsidiaries"). The foreign subsidiaries and 10 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- CONTINUED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) certain domestic subsidiaries of L-3 Communications (the "Non-Guarantor Subsidiaries") do not guarantee the debt of L-3 Communications. None of the debt of L-3 Communications has been issued by its subsidiaries. There are no restrictions on the payment of dividends from the Guarantor Subsidiaries to L-3 Communications. In lieu of providing separate unaudited interim financial statements for the Guarantor Subsidiaries, the Company has included the accompanying condensed combining financial statement data based on the Company's understanding of the interpretation and application of Rule 3-10 of SEC Regulation S-X and Staff Accounting Bulletin No. 53. The following unaudited condensed combining financial information present the results of operations, financial position and cash flows of (i) L-3 Communications excluding its consolidated subsidiaries (the "Parent") (ii) the Guarantor Subsidiaries, (iii) the Non-Guarantor Subsidiaries and (iv) the eliminations to arrive at the information for L-3 Communications on a consolidated basis.
GUARANTOR NON-GUARANTOR CONSOLIDATED PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS L-3 COMMUNICATIONS ------ ------------ ------------ ------------ ------------------ CONDENSED COMBINING BALANCE SHEETS: - ----------------------------------- AS OF JUNE 30, 2000 - ------------------- Current assets: Cash and cash equivalents ................. $ 36,585 $ 6,471 $ 2,191 $ -- $ 45,247 Contracts in process ...................... 394,289 195,116 50,876 -- 640,281 Other current assets ...................... 56,519 7,853 4,720 -- 69,092 ---------- -------- --------- ---------- ---------- Total current assets .................... 487,393 209,440 57,787 -- 754,620 ---------- -------- --------- ---------- ---------- Property, plant and equipment, net ......... 122,555 25,232 11,369 -- 159,156 Intangibles, net ........................... 875,946 310,195 59,691 1,245,832 Other assets ............................... 67,961 14,057 19,486 101,504 Investment in and amounts due to and from consolidated subsidiaries ............ 551,900 86,248 (22,840) (615,308) -- ---------- -------- --------- ---------- ---------- Total assets ............................ $2,105,755 $645,172 $ 125,493 $ (615,308) $2,261,112 ========== ======== ========= ========== ========== Current liabilities: Borrowings under Senior Credit Facilities .............................. $ 237,000 $ -- $ -- $ -- $ 237,000 Accounts payable and accrued expenses ................................ 193,692 58,894 17,259 -- 269,845 Customer advances ......................... 50,787 1,506 2,689 -- 54,982 Other current liabilities ................. 88,672 15,931 9,517 -- 114,120 ---------- -------- --------- ---------- ---------- Total current liabilities ............... 570,151 76,331 29,465 675,947 ---------- -------- --------- ---------- ---------- Other liabilities .......................... 72,742 48,223 1,338 122,303 Long-term debt ............................. 839,000 -- -- 839,000 Shareholders' equity ....................... 623,862 520,618 94,690 (615,308) 623,862 ---------- -------- --------- ---------- ---------- Total liabilities and shareholders' equity ................................. $2,105,755 $645,172 $ 125,493 $ (615,308) $2,261,112 ========== ======== ========= ========== ==========
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)
GUARANTOR NON-GUARANTOR CONSOLIDATED PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS L-3 COMMUNICATIONS ------ ------------ ------------ ------------ ------------------ CONDENSED COMBINING BALANCE SHEETS: - ----------------------------------- AS OF DECEMBER 31, 1999 - ----------------------- Current assets: Cash and cash equivalents .................. $ 34,037 $ 5,164 $ 3,587 $ -- $ 42,788 Contracts in process ....................... 264,658 162,088 57,427 -- 484,173 Other current assets ....................... 24,616 10,455 5,675 -- 40,746 ---------- -------- --------- ---------- ---------- Total current assets ..................... 323,311 177,707 66,689 -- 567,707 ---------- -------- --------- ---------- ---------- Property, plant and equipment, net .......... 104,087 25,005 11,879 -- 140,971 Intangibles, net ............................ 399,746 377,177 44,629 -- 821,552 Other assets ................................ 67,820 10,337 25,384 -- 103,541 Investment in and amounts due to and from consolidated subsidiaries 644,560 23,591 (25,423) (642,728) -- ---------- -------- --------- ---------- ---------- Total assets ............................. $1,539,524 $613,817 $ 123,158 $ (642,728) $1,633,771 ========== ======== ========= ========== ========== Current liabilities: Accounts payable and accrued expenses ................................. $ 135,709 $ 57,924 $ 19,007 $ -- $ 212,640 Customer advances .......................... 53,345 543 2,850 -- 56,738 Other current liabilities .................. 24,798 17,230 6,900 -- 48,928 ---------- -------- --------- ---------- ---------- Total current liabilities ................ 213,852 75,697 28,757 -- 318,306 ---------- -------- --------- ---------- ---------- Other liabilities ........................... 79,234 47,961 95 -- 127,290 Long-term debt .............................. 605,000 -- -- -- 605,000 Shareholders' equity ........................ 641,438 490,159 94,306 (642,728) 583,175 ---------- -------- --------- ---------- ---------- Total liabilities and shareholders' equity .................................. $1,539,524 $613,817 $ 123,158 $ (642,728) $1,633,771 ========== ======== ========= ========== ========== CONDENSED COMBINING STATEMENTS OF - --------------------------------- OPERATIONS: - ----------- FOR THE SIX MONTHS ENDED JUNE 30, 2000 - -------------------------------------- Sales ....................................... $ 564,263 $197,368 $ 78,812 $ (2,415) $ 838,028 ---------- -------- --------- ---------- ---------- Operating income ............................ 74,307 7,043 2,972 -- 84,322 Interest and other income ................... 2,289 178 90 -- 2,557 Interest expense ............................ 42,158 126 7 -- 42,291 Provision for income taxes .................. 13,396 2,789 1,015 -- 17,200 Equity in net income (loss) of consolidated subsidiaries .................. 6,346 -- -- (6,346) -- ---------- -------- --------- ---------- ---------- Net income (loss) ........................... $ 27,388 $ 4,306 $ 2,040 $ (6,346) $ 27,388 ========== ======== ========= ========== ========== FOR THE SIX MONTHS ENDED JUNE 30, 1999 - -------------------------------------- Sales ....................................... $ 373,257 $174,729 $ 43,391 $ (1,383) $ 589,994 ---------- -------- --------- ---------- ---------- Operating income (loss) ..................... 45,342 16,159 (4,185) -- 57,316 Interest and other income ................... 2,509 176 144 -- 2,829 Interest expense ............................ 30,195 184 35 -- 30,414 Provision (benefit) for income taxes ........ 6,636 6,218 (1,408) -- 11,446 Equity in net income (loss) of consolidated subsidiaries .................. 7,265 -- -- (7,265) -- ---------- -------- --------- ---------- ---------- Net income (loss) ........................... $ 18,285 $ 9,933 $ (2,668) $ (7,265) $ 18,285 ========== ======== ========= ========== ==========
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)
GUARANTOR NON-GUARANTOR CONSOLIDATED PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS L-3 COMMUNICATIONS ------ ------------ ------------ ------------ ------------------ CONDENSED COMBINING STATEMENTS OF - --------------------------------- CASH FLOWS: - ----------- FOR THE SIX MONTHS ENDED JUNE 30, 2000: - --------------------------------------- OPERATING ACTIVITIES: Net income ........................................ $ 27,388 $ 4,306 $ 4,457 $ (6,346) $ 27,388 Depreciation, amortization, deferred taxes and noncash items .................................... 43,011 8,761 2,430 -- 54,202 Equity in net (income) loss of consolidated subsidiaries ..................................... (6,346) -- -- 6,346 -- Changes in operating assets and liabilities ....... (20,501) (18,261) (1,102) -- (39,864) ---------- ----------- --------- ----------- ----------- Net cash from (used in) operating activities ...... 43,552 (5,194) 3,368 -- 41,726 ---------- ----------- --------- ----------- ----------- INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired ... (513,732) (676) (1,053) -- (515,461) Investment in consolidated subsidiaries ........... 1,729 -- -- (1,729) -- Capital expenditures, net of dispositions ......... (9,335) (2,081) 550 -- (10,866) Other investing activities, net ................... 16,099 -- -- -- 16,099 ---------- ----------- --------- ----------- ----------- Net cash (used in) investing activities ........... (505,239) (2,757) (503) (1,729) (510,228) ---------- ----------- --------- ----------- ----------- FINANCING ACTIVITIES: Borrowings (repayments) under senior credit facilities, net .................................. 471,000 -- -- -- 471,000 Intercompany financing activities, net ............ (6,726) 9,258 (4,261) 1,729 -- Other financing activities, net ................... (39) -- -- -- (39) ---------- ----------- --------- ----------- ----------- Net cash from (used in) financing activities ...... 464,235 9,258 (4,261) 1,729 470,961 ---------- ----------- --------- ----------- ----------- Net (decrease) increase in cash ................... 2,548 1,307 (1,396) -- 2,459 Cash and cash equivalents, beginning of period .... 34,037 5,164 3,587 -- 42,788 ---------- ----------- --------- ----------- ----------- Cash and cash equivalents, end of period .......... $ 36,585 $ 6,471 $ 2,191 $ -- $ 45,247 ========== =========== ========= =========== =========== FOR THE SIX MONTHS ENDED JUNE 30, 1999: - --------------------------------------- OPERATING ACTIVITIES: Net income (loss) ................................. $ 18,285 $ 9,933 $ (2,668) $ (7,265) $ 18,285 Depreciation, amortization, deferred taxes and noncash items .................................... 24,666 14,454 943 -- 40,063 Equity in net (income) loss of consolidated subsidiaries ..................................... (7,265) -- -- 7,265 -- Changes in operating assets and liabilities ....... (25,504) 4,603 (11,515) -- (32,416) ---------- ----------- --------- ----------- ----------- Net cash from (used in) operating activities ...... 10,182 28,990 (13,240) -- 25,932 ---------- ----------- --------- ----------- ----------- INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired ... (9,109) (144,226) (51,668) -- (205,003) Investment in consolidated subsidiaries ........... (190,941) -- -- 190,941 -- Capital expenditures, net of dispositions ......... (6,524) 1,461 (657) -- (5,720) Other investing activities, net ................... 5,007 -- -- -- 5,007 ---------- ----------- --------- ----------- ----------- Net cash from (used in) investing activities ...... (201,567) (142,765) (52,325) 190,941 (205,716) ---------- ----------- --------- ----------- ----------- FINANCING ACTIVITIES: Borrowings (repayments) under senior credit facilities, net .................................. -- -- -- -- -- Contribution from Holdings ........................ 201,582 -- -- -- 201,582 Intercompany financing activities, net ............ -- 121,753 69,188 (190,941) -- Other financing activities, net ................... (1,171) -- -- -- (1,171) ---------- ----------- --------- ----------- ----------- Net cash from (used in) financing activities ...... 200,411 121,753 69,188 (190,941) 200,411 ---------- ----------- --------- ----------- ----------- Net increase in cash .............................. 9,026 7,978 3,623 -- 20,627 Cash and cash equivalents, beginning of period .... 23,737 459 1,934 -- 26,130 ---------- ----------- --------- ----------- ----------- Cash and cash equivalents, end of period .......... $ 32,763 $ 8,437 $ 5,557 $ -- $ 46,757 ========== =========== ========= =========== ===========
13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL L-3 Communications Holdings, Inc. and its subsidiaries ("Holdings, "L-3" or "the Company") is a leading merchant supplier of sophisticated secure communication systems and specialized communication products. These systems and products are critical elements of virtually all major communication, command and control, intelligence gathering and space systems. Holdings has no other assets or liabilities and conducts no other operations other than through its wholly owned subsidiary, L-3 Communications Corporation ("L-3 Communications"). The Company's customers include the DoD, certain U.S. government intelligence agencies, major aerospace and defense contractors, foreign governments and commercial customers. The Company has two reportable segments, Secure Communication Systems and Specialized Communication Products. The Secure Communication Systems segment provides secure, high data rate communications systems for military and other U.S. government reconnaissance and surveillance applications. The Secure Communication Systems segment also provides training systems, training support services and communication software support services. The Specialized Communication Products segment includes three product categories: microwave components, avionics and ocean products, and telemetry, instrumentation and space products. All domestic government contracts and subcontracts of the Company are subject to audit and various cost controls, and include standard provisions for termination for the convenience of the U.S. government. Multiyear U.S. government contracts and related orders are subject to cancellation if funds for contract performance for any subsequent year become unavailable. Foreign government contracts generally include comparable provisions relating to termination for the convenience of the relevant foreign government. The defense industry has undergone significant changes precipitated by ongoing U.S. federal budget pressures and new roles and missions to reflect changing strategic and tactical threats. Since the mid-1980's, the overall U.S. defense budget has declined in real dollars. In response, the DoD has focused its resources on enhancing its military readiness, joint operations and the value added capability of digital command and control communications by incorporating advanced electronics to improve the performance, reduce operating costs and extend the life expectancy of its existing and future platforms. The emphasis on system interoperability, force multipliers and providing battlefield commanders with real time data is increasing the electronics content of nearly all of the major military procurement and research programs. As a result, the DoD's budget for communications and defense electronics is expected to grow. ACQUISITIONS On January 8, 1999, the Company acquired all of the outstanding common stock of Microdyne Corporation ("Microdyne"). On April 16, 1999, the Company acquired all of the outstanding common stock of Aydin Corporation ("Aydin"). On June 30, 1999, the Company acquired all of the outstanding common stock of Interstate Electronics Corporation ("IEC") of Scott Technologies Inc. Collectively, the acquisitions of Microdyne, Aydin and IEC comprise the "1999 Acquisitions". On December 31, 1999, the Company completed its acquisition of the assets of the Space and Navigation business ("Space & Nav") from Honeywell, for $55.0 million in cash plus expenses, subject to adjustment based on closing date net assets, as defined. On February 10, 2000, the Company acquired the assets of the Training Devices and Training Services ("TDTS") business of the Raytheon Company for $160.0 million in cash plus expenses, subject to adjustment based on closing date net working capital, as defined. Following the acquisition the Company changed the name of TDTS to L-3 Communications Link Simulation and Training. On 14 February 14, 2000, the Company acquired the assets of Trex Communications Corporation ("TrexCom") for $50.2 million in cash, plus expenses, subject to adjustment based on closing date net worth, as defined. The acquisitions were financed using borrowings under the Company's Senior Credit Facilities. On April 28, 2000, the Company acquired the Traffic Alert and Collision Avoidance System ("TCAS") product line from Honeywell for a purchase price of $237.0 million in cash, reflecting a price reduction of $17.0 million based on the preliminary closing date net assets, as defined, which is subject to a final adjustment. The TCAS acquisition was financed with borrowings under a new revolving 364 day senior credit facility. In addition, in February 2000, the Company entered into a Memorandum of Agreement ("MOA") with Thomson-CSF Sextant S.A. ("Sextant"), a subsidiary of Thomson-CSF, under which L-3 agreed to purchase the assets of TCAS from Honeywell, create a limited liability corporation for TCAS (the "TCAS LLC"), contribute 100% of the TCAS assets to TCAS LLC, and sell a 30% interest in the TCAS LLC to Sextant for a cash purchase price equal to 30% of the final purchase price paid by the Company for TCAS (which is expected to be approximately $71.1 million based on the preliminary closing date net assets) (collectively, the "TCAS Minority Interest Transaction"). L-3 expects to maintain operating management of the TCAS LLC and to consolidate it. The MOA, as amended, will terminate if definitive agreements regarding the TCAS Minority Interest Transaction are not executed by August 31, 2000. The TCAS Minority Interest Transaction is subject to regulatory approval by United States agencies and the European Union Commission and the execution of definitive agreements. On June 30, 2000, the Company acquired all the outstanding stock of MPRI for $34.5 million in cash, subject to adjustment based on closing date net assets, as defined, and the financial performance of MPRI for the year ending June 30, 2001. The acquisition was financed using borrowings under the Company's Senior Credit Facilities. All of the acquisitions have been accounted for as purchase business combinations and are included in the Company's results of operations from their respective effective dates. RESULTS OF OPERATIONS The following information should be read in conjunction with the Condensed Consolidated Financial Statements as of June 30, 2000, which reflect the results of operations of the Company's acquisitions from their respective effective dates. The results of operations for all periods presented are significantly affected by the timing of the Company's acquisitions. The tables below provide selected statement of operations data for the Company for the three-month period ended June 30, 2000 (the "2000 Second Quarter") and the three-month period ended June 30, 1999 (the "1999 Second Quarter") and for the six-month period ended June 30, 2000 ("the 2000 First Half") and six-month period ended June 30, 1999 ("the 1999 First Half"). Prior year reported segment information has been restated to conform to the 2000 presentation of the Company's reportable segments. 15
THREE MONTHS ENDED JUNE 30, ------------------------- 2000 1999 ----------- ----------- (in millions) Sales(1): Secure Communication Systems ...................................... $ 200.4 $ 125.6 Specialized Communication Products ................................ 260.6 188.8 -------- -------- Total ........................................................... $ 461.0 $ 314.4 ======== ======== Operating income: Secure Communication Systems ...................................... $ 19.8 $ 11.0 Specialized Communication Products ................................ 29.9 20.1 -------- -------- Total ........................................................... $ 49.7 $ 31.1 ======== ======== Depreciation and amortization expenses included in operating income: Secure Communication Systems ...................................... $ 6.3 $ 4.6 Specialized Communication Products ................................ 12.1 9.1 -------- -------- Total ........................................................... $ 18.4 $ 13.7 ======== ======== EBITDA(2) Secure Communication Systems ...................................... $ 26.1 $ 15.6 Specialized Communication Products ................................ 42.0 29.2 -------- -------- Total ........................................................... $ 68.1 $ 44.8 ======== ========
- ---------- (1) Sales are after intersegment eliminations. See Note 8 to the Unaudited Condensed Consolidated Financial Statements. (2) EBITDA is defined as operating income plus depreciation expense and amortization expense (excluding the amortization of debt issuance costs). EBITDA is not a substitute for operating income, net income or cash flows from operating activities as determined in accordance with generally accepted accounting principles as a measure of profitability or liquidity. EBITDA is presented as additional information because the Company believes it to be a useful indicator of the Company's ability to meet debt service and capital expenditure requirements. EBITDA as defined by the Company may differ from similarly named measures used by other entities. THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1999 Sales increased $146.6 million to $461.0 million in 2000 Second Quarter compared with $314.4 million in the 1999 Second Quarter, and was comprised of sales growth of $74.8 million for the Secure Communication Systems segment and $71.8 million for the Specialized Communication Products segment. Operating income increased $18.6 million to $49.7 million, and operating income as a percentage of sales ("operating margin") increased to 10.8% from 9.9% for the reasons described below under the reportable segments discussion. Depreciation and amortization expenses in the 2000 Second Quarter increased $4.7 million to $18.4 million, reflecting increased goodwill amortization associated with acquisitions and additional depreciation related to acquisitions and capital expenditures. EBITDA increased $23.3 million to $68.1 million. EBITDA as a percentage of sales ("EBITDA margin") increased to 14.8% from 14.2%. Basic earnings per common share ("EPS") and diluted EPS grew 44.1% to $0.49 and 42.4% to $0.47, respectively. Basic weighted-average common shares outstanding and diluted weighted-average common shares outstanding increased 2.4% and 2.7%, respectively. Interest expense, net of interest income increased $10.6 million to $24.3 million in the 2000 Second Quarter because of the higher average outstanding debt, net of cash during the 2000 Second Quarter compared with the 1999 Second Quarter attributable to borrowings made under the Senior Credit Facilities to finance acquisitions completed during the 2000 First Half. The income tax provision for the 2000 Second Quarter reflects the Company's estimated effective income tax rate for the year ending December 31, 2000 of 38.5%, which is the same as the effective tax rate of 38.5% for the 1999 Second Quarter. Included in interest and other income for the 2000 Second Quarter is a net pre-tax gain of $1.3 million ($0.02 per diluted share), consisting of an after-tax gain of $2.0 million on the sale of the Company's 16 interest in the Cardiovascular Computer Systems business, which was largely offset by an after-tax loss of $1.2 million on the write-down in the carrying value of certain other investments. Excluding this net gain, diluted EPS was $0.45 per share, an increase of 36.4% over 1999 Second Quarter diluted EPS. The 1999 Second Quarter of the income included a $0.5 million pre-tax gain recognized on the sale of a business in June 1999. Sales of Secure Communication Systems segment increased $74.8 million or 59.6% to $200.4 million in 2000 Second Quarter compared with the 1999 Second Quarter. Operating income increased $8.8 million to $19.8 million. Operating margin increased to 9.9% from 8.8%. The increase in sales was primarily attributable to the Link Simulation and Training acquired business and increased volume on secure telephone equipment (STE), high data rate communications systems (data links), communication software support services and airport security equipment. The increase in operating margin was principally attributable to improved margins on military communication systems and high data rate communication systems arising from cost reductions and improved operating efficiencies, partially offset by the expected lower margins on the Link Training and Simulation acquired business. EBITDA increased $10.5 million to $26.1 million in 2000 Second Quarter and EBITDA margin improved to 13.0% from 12.4%. The increases in EBITDA and EBITDA margin were primarily attributable to the items affecting the trends in operating income. Sales of the Specialized Communication Products segment increased $71.8 million or 38.0% to $260.6 million in 2000 Second Quarter compared with the 1999 Second Quarter. Operating income increased $9.8 million to $29.9 million and operating margin increased to 11.5% from 10.6%. The increase in sales was principally attributable to the TCAS, IEC, Space & Nav and TrexCom acquisitions and volume increases on airborne dipping sonar systems, naval power control and conversion systems microwave products, antenna and display products, that were partially offset by decreased shipments of naval power delivery systems and space and satellite control components. The increase in operating margin was principally attributable to improved margins on ocean products and antenna and display products arising from sales volume increases and cost reductions and higher margins on the TCAS acquired business partially offset by the expected lower margins on the Space & Nav and TrexCom acquired businesses. EBITDA increased $12.8 million to $42.0 million and EBITDA margin increased to 16.1% from 15.5%. The changes in EBITDA and EBITDA margin were primarily attributable to the items affecting the trends in operating income. 17 SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
SIX MONTHS ENDED JUNE 30, ------------------------- 2000 1999 ----------- ----------- (in millions) Sales(1): Secure Communication Systems ...................................... $ 362.4 $ 243.0 Specialized Communication Products ................................ 475.6 347.0 -------- -------- Total ............................................................ $ 838.0 $ 590.0 ======== ======== Operating income: Secure Communication Systems ...................................... $ 39.1 $ 21.8 Specialized Communication Products ................................ 45.2 35.5 -------- -------- Total ............................................................ $ 84.3 $ 57.3 ======== ======== Depreciation and amortization expenses included in operating income: Secure Communication Systems ...................................... $ 11.8 $ 9.1 Specialized Communication Products ................................ 22.4 17.3 -------- -------- Total ............................................................ $ 34.2 $ 26.4 ======== ======== EBITDA Secure Communication Systems ...................................... $ 50.9 $ 30.9 Specialized Communications Products ............................... 67.6 52.8 -------- -------- Total ............................................................ $ 118.5 $ 83.7 ======== ========
- ---------- (1) Sales are after intersegment eliminations. See Note 8 to the Unaudited Condensed Consolidated Financial Statements. Sales increased $248.0 million or 42.0% to $838.0 million in 2000 First Half compared with $590.0 million in the 1999 First Half comprised of growth in sales of $119.4 million for the Secure Communication Systems segment and of $128.6 million for the Specialized Communication Products segment. Operating income increased $27.0 million to $84.3 million, and operating income as a percentage of sales ("operating margin") improved to 10.1% from 9.7% for the reasons described below under the reportable segments discussion. Depreciation and amortization expenses increased $7.8 million to $34.2 million, reflecting increased goodwill amortization associated with acquisitions and additional depreciation related to capital expenditures. EBITDA increased $34.8 million to $118.5 million. EBITDA as a percentage of sales ("EBITDA margin") was essentially flat at 14.1%. Basic earnings per common share ("EPS") and diluted EPS grew 43.1% to $0.83 and 41.1% to $0.79, respectively. Basic weighted-average common shares outstanding and diluted weighted-average common shares outstanding increased 5.3%. Interest expense, net of interest income, increased $13.6 million to $41.7 million in 2000 First Half principally because of higher average outstanding debt, net of cash during 2000 First Half compared with the 1999 First Half. The income tax provision for the 2000 First Half reflects the Company's estimated effective income tax rate for 2000 of 38.5%, which is the same as the effective tax rate of 38.5% for 1999 First Half. Included in interest and other income for the 2000 First Half are net pre-tax gains of $1.9 million ($0.03 per diluted share), consisting of gains on the sale of the Company's interests in the Network Security and Cardiovascular Computer Systems businesses, which were largely offset by an after-tax loss of $7.6 million on the write-down in the carrying value of certain other investments. Excluding this net gain, diluted EPS was $0.76 per share, an increase of 35.7% over 1999 First Half diluted EPS. The 1999 First Half other income included a $0.5 million pre-tax gain recognized on the sale of a business in June 1999. 18 Sales of Secure Communication Systems segment increased $119.4 million or 49.1% to $362.4 million in 2000 First Half compared with the 1999 First Half. Operating income increased $17.3 million to $39.1 million. Operating margin increased to 10.8% from 9.0%. The increase in sales was primarily attributable to the Link Training and Simulation acquired business and increased sales on STE, communication software support services and airport security equipment. The increase in operating margin was attributable to improved margins on military communication systems and high data rate communication systems, partially offset by the expected lower margins on the Link Training and Simulation acquired business. EBITDA increased $20.0 million to $50.9 million and EBITDA margin improved to 14.0% from 12.7%. The increases in EBITDA and EBITDA margin were primarily attributable to the items affecting the trends in operating income. Sales of the Specialized Communication Products segment increased $128.6 million or 37.1% to $475.6 million in 2000 First Half compared with the 1999 First Half. Operating income increased $9.7 million to $45.2 million and operating margin declined to 9.5% from 10.2%. The increase in sales is attributable to acquisitions and volume increases on airborne dipping sonar systems, naval power control and conversion systems and display products that were partially offset by decreased shipments of naval power delivery systems, space and satellite control components and airborne telemetry products. The decline in operating margin is attributable to lower margins on telemetry products and microwave components principally attributable to sales volumes and mix, and the expected lower margins on the Space & Nav and TrexCom acquired businesses, partially offset by higher margins on avionics and ocean products arising from sales volume increases and cost reductions and the TCAS acquired business. EBITDA increased $14.8 million to $67.6 million and EBITDA margin declined to 14.2% from 15.2%. The changes in EBITDA and EBITDA margin were primarily attributable to the items affecting the trends in operating income. LIQUIDITY AND CAPITAL RESOURCES BALANCE SHEET Contracts in process increased $156.1 million from December 31, 1999 to June 30, 2000, of which $119.1 million was related to businesses acquired during the 2000 First Half. The remaining increase in contracts in process was principally attributable to increases in inventory because of production on certain programs and products in advance of sales expected to occur later in 2000, partially offset by a reduction in billed contract receivables before acquired balances resulting from collections exceeding billings consistent with the record sales recorded during the quarter ended December 31, 1999. The increases from December 31, 1999 to June 30, 2000 in current deferred tax assets, property, plant and equipment, intangibles, accrued employment costs, accrued expenses and other current liabilities was related to acquired businesses net of amortization expense. The increase in accounts payable was principally related to balances of acquired businesses, partially offset by the timing of payments to vendors. STATEMENT OF CASH FLOWS The following table provides cash flow statement data for the Company.
SIX MONTHS ENDED JUNE 30, ----------------------- 2000 1999 ---------- ---------- (in millions) Net cash from operating activities .............. $ 41.7 $ 25.9 Net cash (used in) investing activities ......... (510.2) (205.7) Net cash from financing activities .............. 471.0 200.4
OPERATING ACTIVITIES During the 2000 First Half, L-3 generated $41.7 million of cash in its operating activities, a increase of $15.8 million over the $25.9 million generated in the 1999 First Half, principally as a result of improvements of $23.2 million in earnings adjusted for non-cash items and deferred taxes and a net 19 increase in working capital and other operating assets and liabilities excluding the effects of acquisitions of $39.9 million in the 2000 First Half compared with $32.4 million in the 1999 First Half. The Company expects its rate of increase in working capital to decline during the second half of 2000, and as a result cash flow is expected to improve. INVESTING ACTIVITIES The Company continued to pursue its acquisition strategy during the 2000 First Half and invested $515.5 million to acquire businesses, compared with $205.0 million in the 1999 First Half (See discussions under "Acquisitions" above). The Company makes capital expenditures for improvement of manufacturing facilities and equipment. The Company expects that its capital expenditures for the year ending December 31, 2000 will be between $35.0 and $40.0 million. In March 2000, the Company sold its interest in the Network Security business for net proceeds of $13.4 million. In May 2000, the Company sold its interest in the Cardiovascular Computer Systems business for net proceeds of $5.6 million. FINANCING ACTIVITIES On February 4, 1999, Holdings sold 5.0 million shares of common stock in a public offering for $42.00 per share (the "February 1999 Common Stock Offering"); the net proceeds of $201.5 million were contributed to the Company and partially used to repay borrowings made in January 1999 under the Senior Credit Facilities to finance the Microdyne acquisition. At June 30, 2000, available borrowings under the revolving credit facilities were $120.5 million after reductions for borrowings of $471.0 million outstanding thereunder used principally to finance acquisitions and outstanding letters of credit of $108.5 million. On April 28, 2000 the Company entered into a new 364 day revolving senior credit facility for $300.0 million (the "New 364 Day Revolving Credit Facility") that expires on April 27, 2001, and on April 28, 2000 borrowed $237.0 million thereunder to finance the TCAS acquisition. Additionally, on April 28, 2000 the Company amended the Senior Credit Facilities to change the spreads on borrowings and commitment fees thereunder. The spreads on the New 364 Day Revolving Credit Facility are the same as those under the Senior Credit Facilities, and the lenders under the New 364 Day Revolving Credit Facility rank pari passu with the lenders under the Senior Credit Facilities. See Note 4 to the Condensed Consolidated Financial Statements. The borrowings outstanding of $237.0 million at June 30, 2000 under the New 364 Day Revolving Credit Facility are classified under current liabilities on the balance sheet because the facility expires in April 2001. The Company intends to either refinance the New 364 Day Revolving Credit Facility or to restructure it together with the Company's other existing revolving credit facilities by the end of the first quarter of 2001. In August 2000, the Revolving 364 Day Credit Facility for $200.0 million which will expire on August 10, 2000 was renewed for an additional 364 days and will expire on August 9, 2001, at which time the Company may exercise an option to convert a portion of the borrowings outstanding thereunder into term loans which fully amortize over an eighteen month period beginning September 30, 2001. The Senior Credit Facilities and the Senior Subordinated Notes contain financial covenants which remain in effect so long as any amount is owed or any commitment to lend exists thereunder by L-3 Communications. As of June 30, 2000, L-3 Communications had been in compliance with these covenants at all times. The borrowings under the Senior Credit Facilities are guaranteed by Holdings and by substantially all of the Company's subsidiaries. The payments of principal and premium, if any, and interest on the Senior Subordinated Notes are unconditionally guaranteed, on an unsecured senior subordinated basis, jointly and severally, by substantially all of the subsidiaries of L-3 Communications, all of which guarantor subsidiaries are wholly owned. Based upon the current level of operations, management believes that the Company's cash from operating activities, together with available borrowings under the Senior Credit Facilities, will be 20 adequate to meet its anticipated requirements for working capital, capital expenditures, research and development expenditures, program and other discretionary investments, and interest payments for the foreseeable future including at least the next three years. There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels or that currently anticipated improvements will be achieved. If the Company is unable to generate sufficient cash flow from operations in the future to service its debt, it may be required to sell assets, reduce capital expenditures, refinance all or a portion of its existing debt or obtain additional financing. The Company's ability to make scheduled principal payments, to pay interest on or to refinance its indebtedness depends on its future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the defense industry and to general economic, political, financial, competitive, legislative and regulatory factors beyond its control. There can be no assurance that sufficient funds will be available to enable the Company to service its indebtedness, or make necessary capital expenditures and program and discretionary investments. CONTINGENCIES See Note 7 to the Condensed Consolidated Financial Statements. RECENTLY ISSUED ACCOUNTING STANDARDS In September 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value and is effective for all quarters of fiscal years beginning after September 15, 2000. The Company does not expect SFAS 133 to have a material impact on its results of operations or financial position. In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. The SEC delays the effective date of this SAB in June 2000, so that the SAB must now be adopted by December 31, 2000. The Company does not expect SAB No. 101 to have a material impact on its results of operations or financial position. YEAR 2000 The Company has not experienced any impact to its business since the Year 2000 roll-over either internally or from its customers and infrastructure suppliers. The planned phases of the Year 2000 efforts have been completed with total cost for all the efforts of $18.7 million which included $6.2 million of capitalized costs. Although the Company has experienced no failures in infrastructure systems and in the customer and supply chains since the Year 2000 roll-over, the likelihood and effect of such failure cannot be estimated, but such a failure could potentially result in a material adverse impact on results of operations, liquidity or financial position of the Company. The Year 2000 effort costs reflected above could change in the event of any unknown Year 2000 related occurrence during the remainder of the year ending December 31, 2000. FORWARD-LOOKING STATEMENTS Certain of the matters discussed concerning our operations, cash flows, financial position, economic performance, and financial condition, including in particular, the likelihood of our success in developing and expanding our business and the realization of sales from backlog, include forward-looking statements within the meaning of section 27A of the Securities Act and Section 21E of the Exchange Act. Statements that are predictive in nature, that depend upon or refer to events or conditions or that include words such as "expects", "anticipates", "intends", "plans", "believes", "estimates", and similar expressions are forward-looking statements. Although we believe that these statements are based upon reasonable assumptions, including projections of orders, sales, operating margins, earnings, cash flow, research and 21 development costs, working capital, capital expenditures and other projections, they are subject to several risks and uncertainties, and therefore, we can give no assurance that these statements will be achieved. Such statements will also be influenced by factors such as our dependence on the defense industry and the defense budget; our reliance on contracts with a limited number of agencies of, or contractors to, the U.S. government business risks peculiar to that industry including changing priorities or reductions in the U.S. government and the possibility of termination of government contracts by unilateral government action or for failure to perform; the ability to obtain or the timing of obtaining future government contracts; the availability of government funding and customer requirements; economic conditions, competitive environment, international business and political conditions, timing of international awards and contracts; our extensive use of fixed price contracts as compared to cost plus contracts; our ability to identify future acquisition candidates or to integrate acquired operations; the rapid change of technology in the communication equipment industry; the high level of competition in the communications equipment industry; our introduction of new products into commercial markets or our investments in commercial products or companies; the significant amount of out debt and the restrictions contained in our debt agreements; Year 2000 issues; collective bargaining labor disputes; pension, environmental or legal matters or proceedings and various other market, competition and industry factors, many of which are beyond our control. Investors are cautioned that any such statements are not guarantees of future performance and the actual results or developments may differ materially from the expectations expressed in the forward-looking statements. As for the forward-looking statements that relate to the future financial results and other projections, actual results will be different due to the inherent nature of projections and may be better or worse than projected. Given these uncertainties, you should not place any reliance on these forward-looking statements. These forward-looking statements also represent our estimates and assumptions only as of the date that they were made. We expressly disclaim a duty to provide updates to these forward-looking statements, and the estimates and assumptions associated with them, after the date of this filing to reflect events or changes or circumstances or changes in expectations or the occurrence of anticipated events. ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Part II, Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition--Liquidity and Capital Resources--Market Risks", of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 for a discussion of the Company's exposure to market risks. There was no significant change in those risks during the six months ended June 30, 2000. 22 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 25, 2000, at the Company's annual meeting of Stockholders, the following proposals were acted on: (1) Two nominees for the Board of Directors were elected to three year terms expiring in 2003. The votes were as follows:
FOR WITHHELD --- -------- Alberto M. Finali 25,341,651 112,987 Arthur L. Simon 25,336,688 117,950
(2) The selection of PricewaterhouseCoopers LLP to serve as independent auditors for 2000 was ratified. The votes were as follows: For 25,449,570 Against 4,034 Withheld 1,034
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits *11 L-3 Communications Holdings, Inc. Computation of Basic Earnings Per Share and Diluted Earnings Per Share 27 Financial Data Schedule * The information required on this exhibit is presented in Note 6 to the Condensed Consolidated Financial Statements as of June 30, 2000 in accordance with the provisions of FASB SFAS No. 128, Earnings Per Share. (b) Reports on Form 8-K Report filed on May 12, 2000 regarding the acquisition of the acquisition of the Traffic Alert and Collision Avoidance System (TCAS) product line of Honeywell Inc. The registrants have not filed the amendments to their Form 8-K, dated February 24, 2000 and their Form 8-K, dated May 12, 2000, concerning the acquisitions by L-3 of the TDTS and TCAS businesses, respectively, which were required to be filed by the Securities Exchange Act of 1934 during the preceding 3 months, because the audited financial statements of TDTS and TCAS businesses for the fiscal years preceding their acquisitions by L-3 are not yet available. Such audits for the TDTS and TCAS businesses are currently in process and the required amendments on Form 8-K will be filed upon the completion of the audits. 23 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. L-3 Communications Holdings, Inc. and L-3 Communications Corporation ---------------------------------------- Registrants Date: August 14, 2000 /s/ Robert V. LaPenta ---------------------------------------- Name: Robert V. LaPenta Title: President and Chief Financial Officer (Principal Financial Officer) 24 EX-27 2 0002.txt FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 6-MOS DEC-31-2000 JUN-30-2000 45,247 0 464,196 (14,243) 190,328 754,620 222,288 63,132 2,261,112 675,947 1,076,000 0 0 500,100 123,762 2,261,112 0 838,028 0 753,706 0 0 42,291 44,588 17,200 27,388 0 0 0 27,388 0.83 0.79
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