10-Q 1 file001.txt FORM 10-Q -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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, 2001 Commission file numbers 001-14141 and 333-46983 L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION 600 Third Avenue New York, NY 10016 Telephone: (212) 697-1111 State of incorporation: Delaware IRS identification numbers: 13-3937434 and 13-3937436 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No --- --- There were 38,966,724 shares of L-3 Communications Holdings, Inc. common stock with a par value of $0.01 outstanding as of the close of business on July 31, 2001. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION FORM 10-Q QUARTERLY REPORT FOR QUARTER ENDED JUNE 30, 2001 PART I -- FINANCIAL INFORMATION:
PAGE NO. --------- ITEM 1. Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000 .................................................. 1 Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2001 and June 30, 2000 ....................... 2 Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2001 and June 30, 2000 .............................. 4 Notes to Unaudited Condensed Consolidated Financial Statements ...... 5 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition ................................................ 15 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk .......... 23 PART II -- OTHER INFORMATION: 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) (UNAUDITED)
JUNE 30, DECEMBER 31, 2001 2000 -------------- ------------- ASSETS Current assets: Cash and cash equivalents ....................................... $ 68,333 $ 32,680 Contracts in process ............................................ 749,805 700,133 Deferred income taxes ........................................... 80,296 89,732 Other current assets ............................................ 11,679 7,025 ---------- ---------- Total current assets .......................................... 910,113 829,570 ---------- ---------- Property, plant and equipment, net ............................... 171,765 156,128 Intangibles, primarily goodwill .................................. 1,525,002 1,371,368 Deferred income taxes ............................................ 61,448 57,111 Other assets ..................................................... 59,758 49,367 ---------- ---------- Total assets .................................................. $2,728,086 $2,463,544 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable, trade ......................................... $ 147,970 $ 159,901 Accrued employment costs ........................................ 115,479 102,606 Accrued expenses ................................................ 41,484 55,576 Customer advances ............................................... 62,226 55,203 Accrued interest ................................................ 14,706 16,335 Income taxes .................................................... 5,299 7,251 Other current liabilities ....................................... 66,768 71,797 ---------- ---------- Total current liabilities ..................................... 453,932 468,669 ---------- ---------- Pension and postretirement benefits .............................. 110,085 105,523 Other liabilities ................................................ 58,096 101,783 Long-term debt ................................................... 905,000 1,095,000 Minority interest ................................................ 69,555 -- Commitments and contingencies Shareholders' equity: L-3 Holdings' common stock $.01 par value; authorized 100,000,000 shares, issued and outstanding 38,944,962 and 33,606,645 shares (L-3 Communications common stock: $.01 par value, 100 shares authorized, issued and outstanding) ........................... 915,818 515,926 Retained earnings ............................................... 223,766 186,272 Unearned compensation ........................................... (4,054) (2,457) Accumulated other comprehensive loss ............................ (4,112) (7,172) ---------- ---------- Total shareholders' equity ....................................... 1,131,418 692,569 ---------- ---------- Total liabilities and shareholders' equity .................... $2,728,086 $2,463,544 ========== ==========
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 JUNE 30, ----------------------------- 2001 2000 ------------- ------------- Sales ................................................... $ 561,560 $ 460,976 Costs and expenses ...................................... 501,093 411,323 --------- --------- Operating income ........................................ 60,467 49,653 Interest and other income ............................... 972 1,722 Interest expense ........................................ 22,031 24,703 Minority interest ....................................... 1,585 -- --------- --------- Income before income taxes .............................. 37,823 26,672 Provision for income taxes .............................. 14,487 10,213 --------- --------- Net income .............................................. $ 23,336 $ 16,459 ========= ========= L-3 Holdings' earnings per common share: Basic .................................................. $ 0.62 $ 0.49 ========= ========= Diluted ................................................ $ 0.60 $ 0.47 ========= ========= L-3 Holdings' weighted average common shares outstanding: Basic .................................................. 37,385 33,271 ========= ========= Diluted ................................................ 39,013 34,855 ========= =========
See notes to 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, ------------------------------- 2001 2000 --------------- ------------- Sales ................................................... $ 1,023,461 $ 838,028 Costs and expenses ...................................... 916,125 753,706 ----------- --------- Operating income ........................................ 107,336 84,322 Interest and other income ............................... 1,454 2,557 Interest expense ........................................ 46,436 42,291 Minority interest ....................................... 1,585 -- ----------- --------- Income before income taxes .............................. 60,769 44,588 Provision for income taxes .............................. 23,275 17,200 ----------- --------- Net income .............................................. $ 37,494 $ 27,388 =========== ========= L-3 Holdings' earnings per common share: Basic .................................................. $ 1.05 $ 0.83 =========== ========= Diluted ................................................ $ 1.00 $ 0.79 =========== ========= L-3 Holdings' weighted average common shares outstanding: Basic .................................................. 35,743 33,158 =========== ========= Diluted ................................................ 37,395 34,681 =========== =========
See notes to 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, ---------------------------- 2001 2000 ------------- ------------ OPERATING ACTIVITIES: Net income .......................................................... $ 37,494 $ 27,388 Depreciation and amortization ....................................... 21,959 19,025 Goodwill amortization ............................................... 20,677 15,152 Amortization of deferred debt issue costs ........................... 3,642 2,485 Deferred income taxes ............................................... 16,467 10,492 Minority interest ................................................... 1,585 -- Other noncash items ................................................. 8,306 7,048 Changes in operating assets and liabilities, net of amounts acquired: Contracts in process ............................................... (36,848) (21,033) Other current assets ............................................... (2,584) (1,279) Other assets ....................................................... (5,293) 184 Accounts payable and accrued expenses .............................. (18,661) 9,908 Customer advances .................................................. 5,982 (12,977) Other current liabilities .......................................... (25,899) (10,700) Pension and postretirement benefits ................................ 3,864 (3,587) Other liabilities .................................................. 2,534 334 All other operating activities, net ................................ (547) (714) ---------- ---------- Net cash from operating activities .................................. 32,678 41,726 ---------- ---------- INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired ..................... (211,019) (515,461) Proceeds from sale of interest in subsidiary ........................ 72,060 -- Capital expenditures ................................................ (20,517) (13,397) Disposition of property, plant and equipment ........................ 247 2,531 Other investing activities .......................................... (5,001) 16,099 ---------- ---------- Net cash used in investing activities ............................... (164,230) (510,228) ---------- ---------- FINANCING ACTIVITIES: Borrowings under revolving credit facilities ........................ 235,200 627,000 Repayment of borrowings under revolving credit facilities ........... (425,200) (156,000) Proceeds from sale of common stock, net ............................. 353,783 -- Proceeds from exercise of stock options ............................. 10,044 3,581 Debt issuance costs ................................................. (3,813) (3,250) Other financing activities, net ..................................... (2,809) (370) ---------- ---------- Net cash from financing activities .................................. 167,205 470,961 ---------- ---------- Net increase in cash ................................................ 35,653 2,459 Cash and cash equivalents, beginning of the period .................. 32,680 42,788 ---------- ---------- Cash and cash equivalents, end of the period ........................ $ 68,333 $ 45,247 ========== ==========
See notes to 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 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 secure communication systems and specialized communication products. The Company produces secure, high data rate communication systems, training and simulation systems, avionics and ocean products, telemetry, instrumentation and space 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 specialized 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'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. Government agencies. 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. 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 strategic and tactical signal intelligence systems that detect, collect, identify, analyze and disseminate information; o secure telephone and network equipment and encryption management; o communication software support services; and o communication systems for surface and undersea vessels and manned space flights. The Secure Communication Systems segment includes the training and simulation business, which produces advanced simulation and training products, with high-fidelity representations of cockpits and operator stations for aircraft and vehicle system simulation. This segment also provides a full range of teaching, training, logistic and training device support services to domestic and international military customers, and custom ballistic targets for the DoD. Specialized Communication Products. This segment supplies products to military and commercial customers, and focuses on niche markets in which the Company believes it can achieve a market leadership position. This reportable segment includes three product categories: o avionics and ocean products including aviation recorders, airborne collision avoidance products, displays, antennas, acoustic undersea warfare products and naval power distribution, conditioning, switching and protection equipment; o telemetry, instrumentation and space products including commercial off-the-shelf, real-time data collection and transmission products and components for missile, aircraft and space-based electronic systems; and o microwave components including commercial off-the-shelf, high-performance microwave components and frequency monitoring equipment. 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) 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' only asset is its investment in L-3 Communications. The only debt obligation of L-3 Holdings is the 5.25% Convertible Senior Subordinated Notes due 2009 (the "Convertible Notes"). L-3 Holdings has also guaranteed the borrowings under the senior credit facilities of L-3 Communications. Because the Convertible Notes of L-3 Holdings have been jointly, severally, fully and unconditionally guaranteed by L-3 Communications and certain of its domestic subsidiaries, the Convertible Notes 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 11. 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 require 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, estimated costs in excess of billings to complete contracts in process, estimates of pension and postretirement benefit obligations, recoverability of recorded amounts of fixed assets and goodwill, income taxes, litigation and environmental obligations. Actual results could differ from these estimates. Certain reclassifications have been made to conform prior period amounts to the current period presentation. For further information, 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, 2000, included in their Annual Reports on Form 10-K for the fiscal year ended December 31, 2000. 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) 3. ACQUISITIONS AND DIVESTITURES On February 10, 2000, the Company acquired the assets of the Training Devices and Training Services ("TDTS") business of the Raytheon Company for $160,000 in cash plus expenses, subject to adjustment based on closing date net working capital, as defined. On April 28, 2000, the Company acquired the Traffic Alert and Collision Avoidance System ("TCAS") product line from Honeywell for a purchase price of $239,594 in cash, including expenses. On June 30, 2000, the Company acquired all the outstanding stock of MPRI Inc. ("MPRI") for $35,686 in cash including expenses, plus additional consideration of $4,000 in cash based on the financial performance of MPRI for the year ended June 30, 2001 to be paid in the second half of 2001. On December 29, 2000, the Company acquired all of the outstanding common stock of Coleman Research Corporation ("Coleman"), a subsidiary of Thermo Electron Corporation for $60,911 in cash including expenses, and additional consideration not to exceed $5,000 based on the financial performance of Coleman for the year ending December 31, 2001. On May 4, 2001, the Company acquired all of the outstanding common stock of KDI Precision Products ("KDI") for $79,512 in cash plus expenses, reflecting a purchase price increase of $12,000 based on preliminary closing date net assets, as defined, of KDI which is subject to final adjustment. On May 16, 2001, the Company acquired all of the outstanding common stock of EER Systems ("EER") for $118,728 in cash plus expenses, reflecting a purchase price increase of $13,728 based on preliminary closing date net assets, as defined, of EER which is subject to final adjustment, and additional consideration up to $10,000 based on the financial performance of EER for the years ending December 31, 2001 and 2002. All of the acquisitions were financed with cash on hand or borrowings on bank credit facilities. 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 of $292,286 and $33,135 recorded in connection with the purchase price allocations for the acquisitions of Coleman, KDI and EER are based upon preliminary estimates of fair values for contracts in process, estimated costs in excess of billings to complete contracts in process, inventories, 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 contract price, less the estimated costs to complete and an allowance for normal profit on the Company's effort to complete such contracts. The Company does not expect the differences between the preliminary and final purchase price allocations for the acquisitions to be material. Had the acquisition of EER and the related financing transaction occurred on January 1, 2001, the unaudited pro forma sales, net income and diluted earnings per share for the six months ended June 30, 2001 would have been $1,072,800, $33,700 and $0.90. Had the acquisitions of TDTS, TCAS, Coleman, MPRI and EER and the related financing transactions occurred on January 1, 2000, the unaudited pro forma sales, net income and diluted earnings per share for the six months ended June 30, 2000 would have been $1,053,300, $30,200, and $0.87. The pro forma results are based on various assumptions and are not necessarily indicative of the results of operations that would have occurred had the acquisitions and the related financing transactions occurred on January 1, 2001 and January 1, 2000. On May 31, 2001, the Company sold a 30% interest in Aviation Communications and Surveillance Systems LLC ("ACSS") which comprises the Company's TCAS business to Thales Avionics, a wholly owned subsidiary of Thales (formerly Thomson-CSF), for $72,060 of cash. L-3 will continue to consolidate the financial statements of ACSS. Interest and other income for the six months ended June 30, 2001 includes an after-tax gain of $4,298 from the sale of a 30% interest in ACSS which was largely offset by a $3,912 after-tax write-down in the 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) carrying amount of an investment in common stock. Interest and other income for the six months ended June 30, 2000 includes an after-tax gain of $8,754 from the sale of the Company's interests in two businesses. These gains were largely offset by after-tax losses of $7,574 on the write-down in the carrying value of certain investments and intangible assets. The net proceeds from the sales are reported in "Other investing activities" on the Condensed Consolidated Statements of Cash Flows. In March 2001, the Company settled certain items with a third party provider related to an existing services agreement which expires in April 2002. In connection with the settlement, L-3 received a net cash payment of $14,200. The payment represents a credit for fees being paid over the term of the services agreement and incremental costs incurred and to be incurred by the Company over the same period arising from performance deficiencies under the services agreement. These incremental costs include additional operating costs for material management, vendor replacement, rework, warranty, manufacturing and engineering support, and administrative activities. The credit is being amortized as a reduction to costs and expenses over the period in which the services are provided. 4. CONTRACTS IN PROCESS The components of contracts in process are presented in the table below.
JUNE 30, 2001 DECEMBER 31, 2000 --------------- ------------------ Billed receivables .............................. $ 275,406 $ 310,185 --------- --------- Unbilled contract receivables, gross ............ 312,467 277,026 Less: unliquidated progress payments ............ (97,873) (69,529) --------- --------- Unbilled contract receivables, net ............. 214,594 207,497 --------- --------- Inventoried contract costs, gross ............... 128,604 83,808 Less: unliquidated progress payments ............ (18,953) (5,685) --------- --------- Inventoried contract costs, net ................ 109,651 78,123 Inventories at lower of cost or market .......... 150,154 104,328 --------- --------- Total contracts in process ..................... $ 749,805 $ 700,133 ========= =========
5. DEBT The components of long-term debt are presented in the table below.
JUNE 30, 2001 DECEMBER 31, 2000 --------------- ------------------ Borrowings under Senior Credit Facilities .......... $ -- $ 190,000 103/8% Senior Subordinated Notes due 2007 .......... 225,000 225,000 81/2% Senior Subordinated Notes due 2008 ........... 180,000 180,000 8% Senior Subordinated Notes due 2008 .............. 200,000 200,000 51/4% Convertible Senior Subordinated Notes due 2009 ............................................. 300,000 300,000 -------- ---------- Total long-term debt .............................. $905,000 $1,095,000 ======== ==========
Available borrowings under the Company's senior credit facilities at June 30, 2001 were $503,664, after reductions for outstanding letters of credit of $96,336. There were no outstanding borrowings under the Senior Credit Facilities at June 30, 2001. During the second quarter of 2001, L-3 Communications restructured its senior credit facilities. The restructured senior credit facilities are comprised of a $400,000 five year revolving credit facility maturing 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) on May 15, 2006 and a $200,000 364-day revolving facility maturing on May 15, 2002 under which at the maturity date L-3 Communications may, (i) at its request and subject to approval of the lenders, be extended, in whole or in part, for an additional 364 day period, or (ii) at its election, convert the outstanding principal amount thereunder into a term loan which would be repayable in a single payment two years from the maturity date. Additionally, the senior credit facilities provides L-3 Communications the ability to increase, on an uncommitted basis, the size of either the five year revolving credit facility or the 364-day revolving credit facility up to an additional $150,000 in the aggregate. On April 5, 2001, pursuant to a registration rights agreement that L-3 Holdings entered into with the initial purchaser of the Convertible Notes, L-3 Holdings filed a registration statement with the SEC to cover resales by holders of the Convertible Notes and the Guarantees and the 3,680,982 shares of L-3 Holdings common stock issuable upon conversion of the Convertible Notes. This registration statement became effective on April 12, 2001. 6. COMPREHENSIVE INCOME Comprehensive income for the six and three months ended June 30, 2001 and 2000 is presented in the tables below.
SIX MONTHS ENDED JUNE 30, ----------------------- 2001 2000 ---------- ---------- Net income ............................................ $37,494 $27,388 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments ............ (540) (714) Unrealized gains (losses) on securities: Unrealized losses arising during the period ......... (180) (1,059) Reclassification adjustment for losses included in net income ........................................ 3,632 -- Unrealized gains (losses) on hedging instruments: Cumulative adjustment at January 1, 2001 .......... (41) -- Unrealized gains arising during the period ........ 189 -- ------- ------- Comprehensive income .................................. $40,554 $25,615 ======= =======
THREE MONTHS ENDED JUNE 30, ----------------------- 2001 2000 ---------- ---------- Net income ............................................ $23,336 $16,459 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments ............ (242) (116) Unrealized gains (losses) on securities: Unrealized losses arising during the period ......... (66) (2,084) Reclasssification adjustment for losses included in net income ..................................... 3,743 -- Unrealized gains on hedging instruments: Unrealized gains arising during the period ........ 213 -- ------- ------- Comprehensive income .................................. $26,984 $14,259 ======= =======
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) Accumulated other comprehensive balances as of June 30, 2001 and December 31, 2000 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) ------------- ---------------- ---------------- ------------- -------------- JUNE 30, 2001 Balance January 1, 2001 ...... $(2,584) $(3,698) $ -- $(890) $(7,172) Period change ................ (540) 3,452 148 -- 3,060 ------- ------- ---- ----- ------- Balance June 30, 2001 ........ $(3,124) $ (246) $148 $(890) $(4,112) ======= ======= ==== ===== ======= DECEMBER 31, 2000 Balance January 1, 2000 ...... $(1,362) $ (970) $ -- $ (71) $(2,403) Period change ................ (1,222) (2,728) -- (819) (4,769) ------- ------- ---- ----- ------- Balance December 31, 2000..... $(2,584) $(3,698) $ -- $(890) $(7,172) ======= ======= ==== ===== =======
7. L-3 HOLDINGS EARNINGS PER SHARE A reconciliation of basic and diluted earnings per share ("EPS") is presented in the table below.
SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Basic: Net income .......................................... $37,494 $27,388 $23,336 $16,459 Weighted average common shares outstanding .......... 35,743 33,158 37,385 33,271 ------- ------- ------- ------- Basic earnings per share ............................ $ 1.05 $ 0.83 $ 0.62 $ 0.49 ======= ======= ======= ======= Diluted: Net income .......................................... $37,494 $27,388 $23,336 $16,459 ------- ------- ------- ------- Common and potential common shares: Weighted average common shares outstanding ......... 35,743 33,158 37,385 33,271 Assumed exercise of stock options .................. 3,817 4,018 3,735 4,076 Assumed purchase of common shares for treasury ......................................... (2,165) (2,495) (2,107) (2,492) ------- ------- ------- ------- Common and potential common shares .................. 37,395 34,681 39,013 34,855 ======= ======= ======= ======= Diluted earnings per share .......................... $ 1.00 $ 0.79 $ 0.60 $ 0.47 ======= ======= ======= =======
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 six and three month periods ended June 30, 2001 because the effect of the assumed conversion would have been anti-dilutive. On May 2, 2001, L-3 Holdings sold 6,900,000 shares of its common stock in a public offering for $80.00 per share, including shares related to an over-allotment option that was granted to the underwriters. Of this amount, L-3 Holdings sold 4,575,000 shares and other selling stockholders including affiliates of Lehman Brothers Inc. sold 2,325,000 secondary shares. Upon closing, L-3 Holdings received net proceeds after expenses of $353,783. The net proceeds were used to repay borrowings outstanding under the Company's senior credit facilities, pay for the KDI and EER acquisitions and to increase cash and cash equivalents. Following the offering, affiliates of Lehman Brothers Inc. owned approximately 8.3% of L-3 Holdings common stock. 8. 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 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) 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 that even without considering potential insurance recoveries, if any, there are no environmental loss contingencies that, individually or in the aggregate, would be material to the Company's results of operations. The Company accrues for these contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company has been periodically subject to litigation, claims or assessments and various contingent liabilities incidental to its business. With respect to those investigative actions, items of litigation, claims or assessments of which they are aware, management of the Company is of the opinion that the probability is remote that, after taking into account certain provisions that have been made with respect to these matters, the ultimate resolution of any such investigative actions, items of litigation, claims or assessments will have a material adverse effect on the financial position or results of operations of the Company. 9. 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.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- -------------------------- 2001 2000 2001 2000 ----------- ----------- -------------- ----------- SALES: Secure Communication Systems ............... $284,256 $203,044 $ 521,121 $365,220 Specialized Communication Products ......... 278,972 260,949 505,051 476,633 Elimination of intersegment sales .......... (1,668) (3,017) (2,711) (3,825) -------- -------- ---------- -------- Consolidated total ....................... $561,560 $460,976 $1,023,461 $838,028 ======== ======== ========== ======== OPERATING INCOME: Secure Communication Systems ............... $ 30,163 $ 19,569 $ 51,258 $ 38,695 Specialized Communication Products ......... 30,304 30,084 56,078 45,627 -------- -------- ---------- -------- Consolidated total ....................... $ 60,467 $ 49,653 $ 107,336 $ 84,322 ======== ======== ========== ========
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)
JUNE 30, 2001 DECEMBER 31, 2000 --------------- ------------------ ASSETS: Secure Communication Systems ............... $ 911,389 $ 792,949 Specialized Communication Products ......... 1,564,649 1,480,790 Corporate .................................. 252,048 189,805 ---------- ---------- Consolidated total ....................... $2,728,086 $2,463,544 ========== ==========
10. NEW ACCOUNTING PRONOUNCEMENTS In September 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which replaces SFAS No. 125 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The adoption of SFAS No. 140 is not expected to have a material impact on the Company's consolidated results of operations or financial position. In July 2001, the FASB issued SFAS No. 141, Business Combinations, which supercedes Accounting Principles Board Opinion ("APB") No. 16, Business Combinations. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and establishes specific criteria for the recognition of intangible assets separately from goodwill. In July 2001, the FASB also issued SFAS No. 142, Goodwill and Other Intangible Assets, which supercedes APB No. 17, Intangible Assets. SFAS No. 142 revises the standards for accounting for goodwill and intangible assets. SFAS No. 142 requires that goodwill and indefinite lived intangible assets no longer be amortized, but be tested for impairment at least annually. SFAS No. 142 also requires that the amortization period of intangible assets with finite lives be no longer limited to forty years. The provisions of SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001. The Company has not yet determined the impact of SFAS No. 141 and SFAS No. 142 on its consolidated results of operations or financial position. 11. 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 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. 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. 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 BALANCE SHEETS: ---------------------------------- AS OF JUNE 30, 2001 ------------------- Total current assets ..................... $ 528,362 $ 208,890 $ 172,861 $ -- $ 910,113 Other long-term assets ................... 804,458 427,276 586,239 -- 1,817,973 Investment in and amounts due from (to) consolidated subsidiaries ......... 1,168,487 (261,770) (46,794) (859,923) -- ---------- ---------- --------- --------- ---------- Total assets .......................... $2,501,307 $ 374,396 $ 712,306 $(859,923) $2,728,086 ========== ========== ========= ========= ========== Total current liabilities ................ $ 300,647 $ 55,491 $ 97,794 $ -- $ 453,932 Other long-term liabilities .............. 94,687 69,978 3,516 -- 168,181 Long-term debt ........................... 905,000 -- -- -- 905,000 Minority interest ........................ 69,555 -- -- -- 69,555 Shareholders' equity ..................... 1,131,418 248,927 610,996 (859,923) 1,131,418 ---------- ---------- --------- --------- ---------- Total liabilities and shareholders' equity ............................... $2,501,307 $ 374,396 $ 712,306 $(859,923) $2,728,086 ========== ========== ========= ========= ========== AS OF DECEMBER 31, 2000 ----------------------- Total current assets ..................... $ 530,672 $ 229,531 $ 69,367 $ -- $ 829,570 Other long-term assets ................... 1,110,082 433,763 90,129 -- 1,633,974 Investment in and amounts due from (to) consolidated subsidiaries ...... 613,153 55,805 (27,022) (641,936) -- ---------- ---------- --------- --------- ---------- Total assets .......................... $2,253,907 $ 719,099 $ 132,474 $(641,936) $2,463,544 ========== ========== ========= ========= ========== Total current liabilities ................ $ 365,123 $ 71,948 $ 31,598 $ -- $ 468,669 Other long-term liabilities .............. 101,215 103,173 2,918 -- 207,306 Long-term debt ........................... 1,095,000 -- -- -- 1,095,000 Shareholders' equity ..................... 692,569 543,978 97,958 (641,936) 692,569 ---------- ---------- --------- --------- ---------- Total liabilities and shareholders' equity ............................... $2,253,907 $ 719,099 $ 132,474 $(641,936) $2,463,544 ========== ========== ========= ========= ========== CONDENSED COMBINING STATEMENTS OF --------------------------------- OPERATIONS: ---------- FOR THE SIX MONTHS ENDED JUNE 30, 2001 -------------------------------------- Sales .................................... $ 597,558 $ 165,947 $ 262,195 $ (2,239) $1,023,461 ---------- ---------- --------- --------- ---------- Operating income (loss) .................. 88,913 (7,729) 26,152 -- 107,336 Interest and other income (expense) ...... 7,997 (306) (6,237) -- 1,454 Interest expense ......................... 46,415 17 4 -- 46,436 Minority interest ........................ 1,585 -- -- -- 1,585 Provision for income taxes ............... 18,733 (3,084) 7,626 -- 23,275 Equity in net income of consolidated subsidiaries ............... 7,317 -- -- (7,317) -- ---------- ---------- --------- --------- ---------- Net income (loss) ........................ $ 37,494 $ (4,968) $ 12,285 $ (7,317) $ 37,494 ========== ========== ========= ========= ==========
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)
GUARANTOR NON-GUARANTOR CONSOLIDATED PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS L-3 COMMUNICATIONS ------------- -------------- --------------- -------------- ------------------- 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 of consolidated subsidiaries ................ 6,346 -- -- (6,346) -- ---------- --------- ---------- --------- --------- Net income ................................ $ 27,388 $ 4,306 $ 2,040 $ (6,346) $ 27,388 ========== ========= ========== ========= ========= CONDENSED COMBINING STATEMENTS OF --------------------------------- CASH FLOWS: ---------- FOR THE SIX MONTHS ENDED JUNE 30, 2001 -------------------------------------- Net cash from (used in) operating activities ............................... $ 20,806 $ (23,583) $ 35,455 $ -- $ 32,678 ---------- --------- ---------- --------- --------- Net cash used in investing activities ..... (151,123) (5,232) (216,621) 208,746 (164,230) ---------- --------- ---------- --------- --------- Net cash from financing activities ........ 160,929 26,974 188,048 (208,746) 167,205 ---------- --------- ---------- --------- --------- Net increase (decrease) in cash ........... 30,612 (1,841) 6,882 -- 35,653 Cash and cash equivalents, beginning of period ................................ 18,708 4,911 9,061 -- 32,680 ---------- --------- ---------- --------- --------- Cash and cash equivalents, end of period ................................... $ 49,320 $ 3,070 $ 15,943 $ -- $ 68,333 ========== ========= ========== ========= ========= FOR THE SIX MONTHS ENDED JUNE 30, 2000 -------------------------------------- Net cash from (used in) operating activities ............................... $ 43,552 $ (5,194) $ 3,368 $ -- $ 41,726 ---------- --------- ---------- --------- --------- Net cash used in investing activities ..... (505,239) (2,757) (503) (1,729) (510,228) ---------- --------- ---------- --------- --------- Net cash from (used in) financing activities ............................... 464,235 9,258 (4,261) 1,729 470,961 ---------- --------- ---------- --------- --------- Net increase (decrease) 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 ========== ========= ========== ========= =========
14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL We are 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. Our customers include the U.S. Department of Defense ("DoD"), certain U.S. Government agencies, major aerospace and defense contractors, foreign governments and commercial customers. We have two reportable segments: Secure Communication Systems and Specialized Communication Products. Our 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 produces advanced simulation and training products, and provides communication software support services and a full range of teaching, training, logistic and training device support services to domestic and international military customers and custom ballistic targets for the DoD. Our Specialized Communication Products segment includes three product categories: avionics and ocean products, telemetry, instrumentation and space products and microwave components. 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. The U.S. defense industry has also undergone dramatic consolidation resulting in the emergence of four dominant prime system contractors: The Boeing Company, Lockheed Martin Corporation, Northrop Grumman Corporation and Raytheon Company. We believe that one outcome of this consolidation is that the DoD wants to ensure that vertical integration does not further diminish the fragmented, yet critical DoD vendor base. Additionally, it has become economically unfeasible for the prime contractors to design, develop or manufacture numerous essential products, components and systems for their own use. This situation creates opportunities for merchant suppliers such as L-3. As the prime contractors continue to evaluate their core competencies and competitive position, focusing their resources on larger programs and platforms, we expect the prime contractors to continue to exit non-strategic business areas and procure these needed elements on more favorable terms from independent, commercially-oriented merchant suppliers. Recent examples of this trend include divestitures of certain non-core defense-related businesses by Lockheed Martin and Raytheon. RESULTS OF OPERATIONS The following information should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements as of June 30, 2001. Our results of operations for the periods presented are impacted significantly by our acquisitions (see Note 3 to the Condensed Consolidated Financial Statements). The tables below provide our selected statement of operations data for the three-month period ended June 30, 2001 (which we refer to as the 2001 Second Quarter) and the three-month period ended June 30, 2000 (which we refer to as the 2000 Second Quarter) and for the six-month period ended June 30, 2001 (which we refer to as the 2001 First Half) and the six-month period ended June 30, 2000 (which we refer to as the 2000 First Half). Prior period reported segment information has been reclassified to conform with the 2001 presentation. 15 THREE MONTHS ENDED JUNE 30, 2001 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2000
THREE MONTHS ENDED JUNE 30, ------------------------- 2001 2000 ----------- ----------- (in millions) Sales(1): Secure Communication Systems ...................................... $284.1 $200.4 Specialized Communication Products ................................ 277.5 260.6 ------ ------ Total ........................................................... $561.6 $461.0 ====== ====== Operating income: Secure Communication Systems ...................................... $ 30.2 $ 19.6 Specialized Communication Products ................................ 30.3 30.1 ------ ------ Total ........................................................... $ 60.5 $ 49.7 ====== ====== Depreciation and amortization expenses included in operating income: Secure Communication Systems ...................................... $ 8.7 $ 6.2 Specialized Communication Products ................................ 13.6 12.2 ------ ------ Total ........................................................... $ 22.3 $ 18.4 ====== ====== EBITDA(2) Secure Communication Systems ...................................... $ 38.9 $ 25.8 Specialized Communication Products ................................ 43.9 42.3 ------ ------ Total ........................................................... $ 82.8 $ 68.1 ====== ======
---------- (1) Sales are after intersegment eliminations. See Note 9 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 accounting principles generally accepted in the United States of America 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. Sales increased $100.6 million to $561.6 million in the 2001 Second Quarter from $461.0 million in the 2000 Second Quarter. Sales grew $83.7 million in our Secure Communication Systems segment and $16.9 million in our Specialized Communication Products segment. Operating income increased $10.8 million to $60.5 million in the 2001 Second Quarter. Operating income as a percentage of sales ("operating margin") remained unchanged at 10.8%. Depreciation and amortization expenses increased $3.9 million to $22.3 million in the 2001 Second Quarter, due to increased goodwill amortization associated with our acquisitions and additional depreciation related to our capital expenditures and acquired businesses. EBITDA for the 2001 Second Quarter increased $14.7 million to $82.8 million. EBITDA as a percentage of sales ("EBITDA margin") also remained relatively unchanged at 14.7% in the 2001 Second Quarter. Basic earnings per common share ("EPS") grew 26.5% to $0.62 and diluted EPS grew 27.7% to $0.60 in the 2001 Second Quarter. The increases in basic and diluted weighted-average common shares outstanding were principally related to our sale of 4.6 million shares of our common stock, which was completed on May 2, 2001. Interest expense decreased $2.7 million to $22.0 million in the 2001 Second Quarter because of the lower average outstanding debt during the 2001 Second Quarter. Included in interest and other income for the 2001 Second Quarter is a net pre-tax gain of $0.6 million ($0.01 per diluted share), consisting of an after-tax gain of $4.3 million from the sale of a 30% interest in ACSS to Thales Avionics and an after-tax charge of $3.9 million on the write-down in the carrying amount of an investment in common stock. Interest and other income for the 2000 Second Quarter includes a net pre-tax gain of $1.3 million ($0.02 per diluted share), consisting of an after-tax gain of $2.0 million from the sale of our interest in a business and an after-tax charge of $1.2 million on the write-down in the carrying value of certain investments and intangible assets. Excluding these net gains from both the 2001 Second Quarter and 2000 Second Quarter, diluted EPS increased 31.1% to $0.59 in the 2001 Second Quarter from $0.45 in the 2000 Second Quarter. 16 The income tax provision for the 2001 Second Quarter is based on our estimated effective income tax rate for 2001 of 38.3%, which is the same as the effective tax rate of 38.3% for the 2000 Second Quarter. Sales within our Secure Communication Systems segment increased $83.7 million or 41.8% to $284.1 million in the 2001 Second Quarter compared with the 2000 Second Quarter. Operating income increased $10.6 million to $30.2 million. Operating margin increased to 10.6% from 9.8%. We attribute the increase in sales principally to the Coleman Research, MPRI and EER acquired businesses and growth in sales in our training and simulation businesses, secure data links and wireless products. These increases in sales were partially offset by an expected decline in shipments of secure telephone equipment ("STE"). We plan to release our next STE product incorporating certain software enhancements in the second half of 2001, after which shipments of STE are expected to increase as compared with the prior year period. The increase in operating margin was principally attributable to improving margins from the training and simulation businesses and the Coleman Research acquired business, partially offset by increased expenditures associated with our Prime Wave business. EBITDA increased $13.1 million to $38.9 million in the 2001 Second Quarter and EBITDA margin increased to 13.7% from 12.9%. Sales within our Specialized Communication Products segment increased $16.9 million or 6.5% to $277.5 million in the 2001 Second Quarter compared with the 2000 Second Quarter. Operating income increased $0.2 million and operating margin declined to 10.9% from 11.6%. The increase in sales was principally attributable to volume increases on aviation products and microwave components and to the KDI acquired business. These increases in sales were partially offset by decreases in sales of telemetry and space products and lower shipments of naval power systems. Sales of our telemetry and space products declined due to continued softness in the space and broadband commercial communications market. We expect sales of our telemetry and space products for 2001 to remain essentially unchanged as compared to 2000. The decline in operating margin was principally attributable to lower sales volume on telemetry and space products and ocean products partially offset by higher margins for aviation products and microwave components attributable to increased sales volume. EBITDA increased $1.6 million to $43.9 million and EBITDA margin declined to 15.8% from 16.2%. In March 2001, we settled certain items with a third party provider related to an existing services agreement which expires in April 2002. In connection with the settlement, we received a net cash payment of $14.2 million. The payment represents a credit for fees being paid over the term of the services agreement and incremental costs incurred and to be incurred by us over the same period arising from performance deficiencies under the services agreement. These incremental costs include additional operating costs for material management, vendor replacement, rework, warranty, manufacturing and engineering support, and administrative activities. The credit is being amortized as a reduction to costs and expenses over the period in which services are being provided. 17 SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2000
SIX MONTHS ENDED JUNE 30, -------------------------- 2001 2000 ------------ ----------- (in millions) Sales(1): Secure Communication Systems ...................................... $ 520.9 $362.4 Specialized Communication Products ................................ 502.6 475.6 -------- ------ Total ............................................................ $1,023.5 $838.0 ======== ====== Operating income: Secure Communication Systems ...................................... $ 51.2 $ 38.7 Specialized Communication Products ................................ 56.1 45.6 -------- ------ Total ............................................................ $ 107.3 $ 84.3 ======== ====== Depreciation and amortization expenses included in operating income: Secure Communication Systems ...................................... $ 16.4 $ 11.8 Specialized Communication Products ................................ 26.2 22.4 -------- ------ Total ............................................................ $ 42.6 $ 34.2 ======== ====== EBITDA(2) Secure Communication Systems ...................................... $ 67.6 $ 50.5 Specialized Communications Products ............................... 82.3 68.0 -------- ------ Total ............................................................ $ 149.9 $118.5 ======== ======
---------- (1) Sales are after intersegment eliminations. See Note 9 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 accounting principles generally accepted in the United States of America 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. Sales increased $185.5 million to $1,023.5 million in the 2001 First Half from $838.0 million in the 2000 First Half. Sales grew $158.5 million in our Secure Communication Systems segment and $27.0 million in our Specialized Communication Products segment. Operating income increased $23.0 million to $107.3 million in the 2001 First Half. Operating income as a percentage of sales ("operating margin") improved to 10.5% from 10.1%. Depreciation and amortization expenses increased $8.4 million to $42.6 million in the 2001 First Half, due to increased goodwill amortization associated with our acquisitions and additional depreciation related to our capital expenditures and acquired businesses. EBITDA for the 2001 First Half increased $31.4 million to $149.9 million. EBITDA as a percentage of sales ("EBITDA margin") improved to 14.6% in the 2001 First Half from 14.1% in the 2000 First Half. Basic earnings per common share ("EPS") grew 26.5% to $1.05 and diluted EPS grew 26.6% to $1.00 in the 2001 First Half. The increases in basic and diluted weighted-average common shares outstanding were principally related to our sale of 4.6 million shares of our common stock, which was completed on May 2, 2001. Interest expense increased $4.1 million to $46.4 million in the 2001 First Half because of the higher average outstanding debt during the 2001 First Quarter. Included in interest and other income for the 2001 First Half is a net pre-tax gain of $0.6 million ($0.01 per diluted share), consisting of an after-tax gain of $4.3 million from the sale of a 30% interest in 18 ACSS to Thales Avionics and an after-tax charge of $3.9 million on the write-down in the carrying amount of an investment in common stock. Interest and other income for the 2000 First Half includes a net pre-tax gain of $1.9 million ($0.03 per diluted share), consisting of an after-tax gain of $8.8 million from the sale of our interests in two businesses and an after-tax charge of $7.6 million on the write-down in the carrying value of certain investments and intangible assets. Excluding these net gains from both the 2001 First Half and 2000 First Half, diluted EPS increased 30.3% to $0.99 in the 2001 First Half from $0.76 in the 2000 First Half. The income tax provision for the 2001 First Half is based on our estimated effective income tax rate for 2001 of 38.3%, compared with the effective tax rate of 38.6% for the 2000 First Half. Sales within our Secure Communication Systems segment increased $158.5 million or 43.7% to $520.9 million in the 2001 First Half compared with the 2000 First Half. Operating income increased $12.5 million to $51.2 million. Operating margin declined to 9.8% from 10.7%. We attribute the increase in sales principally to the Coleman Research, MPRI and EER acquired businesses and growth in sales in our training and simulation businesses and secure data links. These increases in sales were partially offset by an expected decline in shipments of STE compared with the 2000 First Half. The decline in operating margin was principally attributable to increased expenditures associated with our Prime Wave business, which we expected, and was partially offset by improved margins from our training and simulation businesses. EBITDA increased $17.1 million to $67.6 million in the 2001 First Half and EBITDA margin declined to 13.0% from 13.9%. Sales within our Specialized Communication Products segment increased $27.0 million or 5.7% to $502.6 million in the 2001 First Half compared with the 2000 First Half. Operating income increased $10.5 million and operating margin improved to 11.2% from 9.6%. The increase in sales was principally attributable to volume increases on aviation products and microwave components and to the KDI acquired business. These increases in sales were partially offset by decreases in sales of telemetry and space products and lower shipments of naval power systems. The increase in operating margin was principally attributable to increased sales volumes for aviation products and microwave components. EBITDA increased $14.3 million to $82.3 million and EBITDA margin increased to 16.4% from 14.3%. LIQUIDITY AND CAPITAL RESOURCES BALANCE SHEET Contracts in process increased $49.7 million from December 31, 2000 to June 30, 2001 of which $12.9 million was related to businesses acquired during the 2001 First Half. The remaining increase of $36.8 million was principally attributable to planned increases of inventories for the Prime Wave business related to a new contract and on certain other programs and products including STE in advance of shipments expected to occur in the second half of 2001. During the 2001 First Half receivables declined, as we expected, because collections exceeded billings. The increase in intangibles was primarily related to goodwill for the KDI and EER acquistions. The decrease in other liabilities was related to common stock which we issued in April 2001 to satisfy our $17.7 million obligation for the additional consideration for the ILEX acquisitions. The decrease was also related to a reclassification of the current portion of estimated costs in excess of billings to other current liabilities. OPERATING ACTIVITIES During the 2001 First Half, we generated $32.7 million of cash from our operating activities, a decrease of 21.6% compared to the $41.7 million generated during the 2000 First Half. Earnings adjusted for non-cash items and deferred taxes increased $28.5 million to $110.1 million in the 2001 First Half from $81.6 million in the 2000 First Half. During the 2001 First Half, our working capital and operating assets and liabilities increased $77.4 million compared with an increase of $39.9 million in the 2000 First Half. Our cash flows from operating activities during the 2001 First Half include uses of cash for a planned increase in inventory related to the Prime Wave business and STE program reported in the change in 19 contracts in process and the continued effort on the AVCATT contract for costs in excess of billings reported in the change in other current liabilities. These uses of cash were partially offset by an adjustment on a services agreement related to a business acquired in 2000. Overall, we expect the rate of increase in working capital to decline during the second half of 2001, and as a result cash flow is expected to improve. We also expect to continue increasing inventories for the Prime Wave business and the STE product until the fourth quarter of 2001 when we expect shipments to begin to exceed production. We also expect to continue to incur costs in excess of billings on the AVCATT contract during the remainder of 2001, but at a declining rate. The quarterly cash interest payments on our Senior Subordinated Notes and Convertible Notes, based on their terms, are $8.0 million in the first quarter and third quarter and $27.6 million in the second quarter and fourth quarter. INVESTING ACTIVITIES The Company continued to pursue its acquisition strategy during the 2001 First Half and invested $211.0 million to acquire businesses and product lines, as compared with the $515.5 million invested in the 2000 First Half. On May 31, 2001, we sold a 30% interest in ACSS to Thales Avionics for $72.1 million in cash. We make capital expenditures for improvement of manufacturing facilities and equipment. We expect that capital expenditures for 2001 will be between $40.0 million and $45.0 million. In March 2000, we sold our interest in the Network Security business for net proceeds of $13.4 million. In May 2000, we sold our interest in the Cardio Vascular Computer Systems business for net proceeds of $5.6 million. The proceeds from these sales are included in other investing activities. FINANCING ACTIVITIES On May 2, 2001, we sold 6.9 million shares of our common stock in a public offering for $80.00 per share, including shares related to an over-allotment option that was granted to the underwriters. Of this amount, we sold 4.6 million shares and other selling stockholders including affiliates of Lehman Brothers Inc. sold 2.3 million secondary shares. Upon closing, we received net proceeds of $353.8 million. The net proceeds of this offering were used to repay existing indebtedness under our senior credit facilities, pay for the KDI and EER acquisitions and to increase cash and cash equivalents. Following the offering, affiliates of Lehman Brothers Inc. owned approximately 8.3% of L-3 Holdings common stock. At June 30, 2001, available borrowings under our senior credit facilities were $503.7 million after reductions for outstanding letters of credit of $96.3 million. There were no outstanding borrowings under our Senior Credit Facilities at June 30, 2001. In May 2001, we restructured our senior credit facilities. The restructured senior credit facilities are comprised of a $400.0 million five year revolving credit facility maturing on May 15, 2006 and a $200.0 million 364-day revolving facility maturing on May 15, 2002 under which at the maturity date we may, (i) at our request and subject to approval of the lenders, be extended, in whole or in part, for an additional 364 day period, or (ii) at our election, convert the outstanding principal amount thereunder into a term loan which would be repayable in a single payment two years from the maturity date. Additionally, the senior credit facilities provide us the ability to increase, on an uncommitted basis, the size of either the five year revolving credit facility or the 364-day revolving credit facility up to an additional $150.0 million in the aggregate. The senior credit facilities, Senior Subordinated Notes and Convertible Notes contain financial covenants which remain in effect so long as we owe any amount or any commitment to lend exists thereunder. As of June 30, 2001, L-3 Communications had been in compliance with the covenants of the agreements governing those loans 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. The payments of principal and premium, if any, and interest on the Senior Subordinated Notes are 20 unconditionally guaranteed, on an unsecured senior subordinated basis, jointly and severally, by L-3 Holdings and substantially all of its direct and indirect wholly owned subsidiaries, including L-3 Communications. The Convertible Notes are jointly and severally guaranteed on a full and unconditional basis, by certain existing direct and indirect domestic subsidiaries of L-3 Holdings, including L-3 Communications and are subordinated in right of payment to all existing and future senior debt of the guarantors and rank pari passu with the other senior subordinated indebtedness of the guarantors. See Note 7 to our consolidated financial statements for fiscal year ended December 31, 2000, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2000 for a description of our debt and related financial covenants at December 31, 2000. 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, 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 our business will continue to generate cash flow at or above 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, 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 8 to the Condensed Consolidated Financial Statements. RECENTLY ISSUED AND PROPOSED ACCOUNTING STANDARDS In September 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which replaces SFAS No. 125 Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The adoption of SFAS No. 140 is not expected to have a material impact on our consolidated results of operations or financial position. In July 2001, the FASB issued SFAS No.141, Business Combinations, which supercedes Accounting Principles Board Opinion ("APB") No. 16, Business Combinations, SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and establishes specific criteria for the recognition of intangible assets separately from goodwill. In July 2001, the FASB also issued SFAS No. 142, Goodwill and Other Intangible Assets, which supersedes APB No. 17, Intangible Assets. SFAS No. 142 revises the standards for accounting for goodwill and intangible assets. SFAS No. 142 requires that goodwill and indefinite lived intangible assets shall no longer be amortized, but be tested for impairment at least annually. SFAS No. 142 also requires that the amortization period of intangible assets with finite lives be no longer limited to forty years. The provisions of SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001. We have not yet determined the impact of SFAS No. 141 and SFAS No. 142 on our consolidated results of operations or financial position. 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 21 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. 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 our 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 plus 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; and o pension, environmental or legal matters or proceedings and various other market, competitive and industry factors, many of which are beyond our control. 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 22 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Part II, Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition--Liquidity and Capital Resources--Market Risks", of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 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, 2001. 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 12.1 Ratio of Earnings to Fixed Charges *The information required on this exhibit is presented in Note 7 to the Condensed Consolidated Financial Statements as of June 30, 2001 in accordance with the provisions of FASB SFAS No. 128, Earnings Per Share. (b) Reports on Form 8-K None 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 9, 2001 /s/ Robert V. LaPenta -------------------------------------------- Name: Robert V. LaPenta Title: President and Chief Financial Officer (Principal Financial Officer) 23 EXHIBIT 12.1 L-3 COMMUNICATIONS HOLDINGS, INC. L-3 COMMUNICATIONS CORPORATION RATIO OF EARNINGS TO FIXED CHARGES ($ IN THOUSANDS) SIX MONTHS ENDED JUNE 30, 2001 ----------------- Earnings: Income before income taxes ................... $ 60,769 Add: Interest expense ........................... 46,436 Amortization of debt expense ............... 3,642 Interest component of rent expense ......... 6,227 -------- Earnings ..................................... $117,074 -------- Fixed Charges: Interest expense ........................... 46,436 Amortization of debt expense ............... 3,642 Interest component of rent expense ......... 6,227 -------- Fixed Charges ................................ 56,305 -------- Ratio of earnings to fixed charges ............ 2.1x ========