3. Revisions to Previously Issued Financial Statements

As disclosed on October 10, 2014, the Company is revising its previously issued financial statements for the quarterly and year-to-date periods ended September 27, 2013 to update for: (1) accounting adjustments due to the internal review at its Aerospace Systems segment, (2) accounting related to a sales-type lease transaction for flight simulator systems within its Electronic Systems segment, and (3) previously identified immaterial errors already recognized in its financial statements but not recorded in the appropriate periods. The accounting errors related to the sales-type lease transaction and immaterial out of period amounts are not related to the internal review at its Aerospace Systems segment.

Internal Review of Aerospace Systems Segment: The Company conducted an internal review related to instances of misconduct and accounting errors at its Aerospace Systems segment. This review was conducted with the assistance of outside legal and accounting advisors, and has been completed. As a result of the internal review, the Company identified and recorded aggregate pre-tax charges as follows: (1) $75 million for the six months ended June 27, 2014, (2) $60 million for 2013, (3) $25 million for 2012, (4) $5 million for 2011, and (5) $4 million for periods prior to 2011. The pre-tax charges related to the quarterly and year-to-date periods ended September 27, 2013 were approximately $7 million and $36 million, respectively.

The adjustments related to the internal review only affected the Logistics Solutions and Platform Systems sectors of the Aerospace Systems segment. The cumulative aggregate adjustments attributable to the Logistics Solutions sector are approximately $117 million, and at the Platform Systems sector are approximately $52 million through June 27, 2014. The Logistics Solutions sector adjustments relate to: (1) losses of $69 million with respect to the U.S. Army C-12 fixed-price maintenance and logistics support contract due to cost overruns inappropriately deferred, sales invoices inappropriately prepared, and the failure to timely and accurately perform contract estimates at completion and valuation assessments of inventories and receivables, at the Army Sustainment Division, and (2) accounting errors of $48 million in connection with the valuation of inventories and receivables as well as the correction for certain accruals on other logistics support contracts. The Platform Systems sector adjustments are primarily due to: (1) losses of $37 million on two aircraft modification contracts and two contracts for rotary wing sub-assemblies and parts, and (2) write-offs of deferred costs of $15 million to design and test aerostructures for a new commercial aircraft.

Sales-Type Lease Transaction: The Company routinely performs on-site accounting and internal control review procedures on a rotational basis. As part of a previously planned review of the Simulation & Training business in its Electronic Systems segment and unrelated to the internal review at its Aerospace Systems segment, the Company evaluated the accounting treatment related to a sales-type lease transaction with the U.S. Army for rotary wing flight simulator systems. The period of performance under this contract began in 2004 and ends in 2023. Based on the results of this evaluation, the Company has adjusted its previously issued financial statements to: (1) increase interest income accretion on the net investment related to this sales-type lease transaction by an estimated aggregate amount of approximately $5 million for 2013, $3 million for each of 2012 and 2011, and $12 million for periods prior to 2011 and (2) decrease sales by approximately $8 million for 2014 and $7 million for 2013 and a related decrease in cost of sales by approximately $7 million for each of 2014 and 2013 and $5 million for periods prior to 2011.

Out of Period Amounts: The Company identified various out of period amounts included in its previously issued financial statements that were deemed to be immaterial individually and in the aggregate. In prior periods, in accordance with Accounting Standards Codification (“ASC”) 250-10-S99 and S55 (formerly Staff Accounting Bulletins (“SAB”) No. 99 and No. 108), Accounting Changes and Error Corrections, the Company concluded that these errors were, individually, and in the aggregate, not material, quantitatively or qualitatively, to the financial statements in the period recorded or to the relevant prior periods. Accordingly, the Company recorded these errors in the financial statements in the period that the error was identified. The Company, on a voluntary basis, is revising its previously issued financial statements to correct for these errors already recognized in its financial statements but not recorded in the appropriate periods to reflect them in the appropriate period. These out of period amounts were not discovered as part of the internal review of the Aerospace Systems segment discussed above, but rather represent previously identified errors “resulting from mathematical mistakes, mistakes in application of generally accepted accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared,” as defined in ASC 250-10-20 Accounting Changes and Error Corrections. The Company, therefore, is not treating these amounts as changes in estimates. These errors consist of: (1) increases in development and material costs related to Broadband Communication Systems that were recorded in the first quarter of 2013 but should have been recorded in the fourth quarter of 2012, (2) a sub-contractor subscription deposit that was recorded as sales and income in the fourth quarter of 2012 but should have been amortized to sales and income during 2013, (3) costs accrued in the fourth quarter of 2012 for goods or services received in the first quarter of 2013, (4) several unrecorded liabilities that were recorded in the first quarter of 2013 but should have been recorded in the fourth quarter of 2012, (5) a correction of accrued vacation that was recorded in the fourth quarter of 2013 but should have been recorded in the fourth quarter of 2012 and the first, second and third quarters of 2013, and (6) a warranty reserve reduction recorded in the third quarter of 2012 that should have been recorded in the fourth quarter of 2011.

With respect to each of these immaterial out of period amounts included in the Company’s previously issued financial statements, the table below presents the: (1) nature of the adjustments, (2) applicable segment and (3) amount of increase (or decrease) to sales and operating income for the quarters ended December 31, September 27, June 28, and March 29, 2013.


		December 31, 2013				September 27, 2013						June 28, 2013					March 29, 2013
Nature of Adjustment	Applicable Segment	Sales		Operating Income		Sales			Operating Income			Sales		Operating Income			Sales			Operating Income
		($ in millions)
Higher development and material costs for networked communications systems	Communication Systems	$	—	$	—	$	—		$	—		$	—	$	—		$	10		$	10

Sub-contractor subscription deposit	Aerospace Systems		5		—		7			1			7		1			7			1

Costs accruals for goods/services received	Aerospace Systems		—		—		—			—			—		—			5			1

Unrecorded liabilities	Aerospace Systems		—		—		—			—			—		—			(2	)		—

Accrued vacation	Aerospace Systems		—		6		—			(2	)		—		(2	)		—			(2	)

Overstated revenue	Aerospace Systems		4		—		(4	)		—			—		—			—			—

Total		$	9	$	6	$	3		$	(1	)	$	7	$	(1	)	$	20		$	10

The table below presents the impact of the matters discussed above on sales and pre-tax income in total, for the six month period ended June 27, 2014, years ended December 31, 2013, 2012, and 2011, and for the years ended prior to December 31, 2011.


	Total						Six Months 2014						2013						2012						2011						Prior to 2011
	Sales			Pre-tax Income			Sales			Pre-tax Income			Sales			Pre-tax Income			Sales			Pre-tax Income			Sales			Pre-tax Income			Sales			Pre-tax Income
	(in millions)
Army C-12 Contract	$	(32	)	$	(69	)	$	(3	)	$	(15	)	$	(25	)	$	(35	)	$	(3	)	$	(16	)	$	(1	)	$	(3	)	$	—		$	—
Other Logistics Support Contracts		(5	)		(48	)		—			(20	)		(2	)		(11	)		(2	)		(11	)		—			(2	)		(1	)		(4	)

Logistics Solutions		(37	)		(117	)		(3	)		(35	)		(27	)		(46	)		(5	)		(27	)		(1	)		(5	)		(1	)		(4	)
Platform Systems		(21	)		(52	)		(12	)		(40	)		(12	)		(14	)		3			2			—			—			—			—

Total Internal Review of Aerospace Systems Segment		(58	)		(169	)		(15	)		(75	)		(39	)		(60	)		(2	)		(25	)		(1	)		(5	)		(1	)		(4	)
Sales-Type Lease Transaction		(15	)		29			(8	)		1			(7	)		5			—			3			—			3			—			17
Out of Period Amounts		—			—			—			—			39			14			(36	)		(18	)		(3	)		4			—			—

Total Revisions	$	(73	)	$	(140	)	$	(23	)	$	(74	)	$	(7	)	$	(41	)	$	(38	)	$	(40	)	$	(4	)	$	2		$	(1	)	$	13

The table below presents the impact of the matters discussed above on sales and pre-tax income for the quarters ended June 27 and March 28, 2014, December 31, September 27, June 28, 2013 and March 29, 2013.


	June 27, 2014						March 28, 2014						December 31, 2013						September 27, 2013						June 28, 2013						March 29, 2013
	Sales			Pre-tax Income			Sales			Pre-tax Income			Sales			Pre-tax Income			Sales			Pre-tax Income			Sales			Pre-tax Income			Sales			Pre-tax Income
	(in millions)
Army C-12 Contract	$	(1	)	$	(11	)	$	(2	)	$	(4	)	$	(24	)	$	(20	)	$	3		$	(2	)	$	(3	)	$	(7	)	$	(1	)	$	(6	)
Other Logistics Support Contracts		—			(15	)		—			(5	)		(1	)		(2	)		(1	)		(5	)		—			(2	)		—			(2	)

Logistics Solutions		(1	)		(26	)		(2	)		(9	)		(25	)		(22	)		2			(7	)		(3	)		(9	)		(1	)		(8	)
Platform Systems		(6	)		(29	)		(6	)		(11	)		(2	)		(2	)		1			—			(6	)		(6	)		(5	)		(6	)

Total Internal Review of Aerospace Systems Segment		(7	)		(55	)		(8	)		(20	)		(27	)		(24	)		3			(7	)		(9	)		(15	)		(6	)		(14	)
Sales-Type Lease Transaction		(3	)		1			(5	)		—			(3	)		1			(1	)		2			(1	)		1			(2	)		1
Out of Period Amounts		—			—			—			—			9			6			3			(1	)		7			(1	)		20			10

Total Revisions	$	(10	)	$	(54	)	$	(13	)	$	(20	)	$	(21	)	$	(17	)	$	5		$	(6	)	$	(3	)	$	(15	)	$	12		$	(3	)

In accordance with ASC 250-10-S99 and S55, the Company performed an analysis to determine if the impact of the amounts disclosed above were material to its previously issued financial statements. Based on that analysis, the Company believes that its previously issued financial statements are not materially misstated on either a quantitative or qualitative basis. However, as a result of completing the review, the Company believed that correcting these errors in the quarterly report on Form 10-Q for the quarter ended June 27, 2014 would, in the aggregate, have caused a material misstatement to forecasted pre-tax income and net income for the fiscal year ending December 31, 2014. Accordingly, the Company is correcting these errors by revising its previously issued financial statements for the quarterly and year-to-date periods ended September 27, 2013 on this Form 10-Q to record all the adjustments in the tables above in the appropriate period. In addition, the Company revised its previously issued financial statements for the quarterly and first half periods ended June 28, 2013 on its Quarterly Report on Form 10-Q filed on October 10, 2014 for the quarterly and first half periods ended June 27, 2014, for the quarterly periods ended March 28, 2014 and March 29, 2013 on its Quarterly Report on Form 10-Q/A filed on October 10, 2014 for the quarterly period ended March 28, 2014, and its Annual Report on Form 10-K/A filed on October 10, 2014 for the years ended December 31, 2013, 2012 and 2011 to record all the adjustments in the tables above in the appropriate period.

The tables below present the Company’s: (1) As Previously Reported, (2) Adjustments, and (3) As Revised Condensed Consolidated Statements of Operations for the quarterly and year-to-date periods ended September 27, 2013 and the Operating Activities for the Statement of Cash Flows for the year-to-date period ended September 27, 2013. The Adjustments correct for: (1) the results of the Aerospace Systems internal review, (2) the accounting related to a sales-type lease transaction within the Company’s Electronic Systems segment and (3) immaterial out of period amounts previously recorded in the Company’s financial statements but not recorded in the appropriate period to reflect them in the appropriate period.


				Adjustments for:
	As Previously Reported			Aerospace Systems Segment Internal Review			Sales-Type Lease Transaction			Out of Period Amounts			As Revised
	(in millions, except per share data)
Unaudited Condensed Consolidated Statement of Operations, for the third quarter ended September 27, 2013:
Net sales:
Products	$	1,696		$	2		$	(1	)	$	—		$	1,697
Services		1,300			2			—			3			1,305

Total net sales		2,996			4	⁽¹⁾		(1	)		3			3,002

Cost of sales:
Products		(1,486	)		(2	)		1			—			(1,487	)
Services		(1,196	)		(9	)		—			(4	)		(1,209	)

Total cost of sales		(2,682	)		(11	)		1			(4	)		(2,696	)

Operating income		314			(7	)		—			(1	)		306
Interest expense		(44	)		—			—			—			(44	)
Interest and other income, net		3			—			1			—			4

Income before income taxes		273			(7	)		1	⁽¹⁾		(1	)		266
Provision for income taxes		(65	)		3			—			—			(62	)

Net income	$	208		$	(4	)	$	1		$	(1	)	$	204
Net income attributable to noncontrolling interests		(4	)		—			—			—			(4	)

Net income attributable to L-3	$	204		$	(4	)	$	1		$	(1	)	$	200

Earnings per share attributable to L-3 Holdings’ common shareholders:
Basic	$	2.28		$	(0.05	)	$	0.01		$	(0.01	)	$	2.23

Diluted	$	2.23		$	(0.04	)	$	0.01		$	(0.01	)	$	2.19

Cash dividends paid per common share	$	0.55		$	—		$	—		$	—		$	0.55

L-3 Holdings’ weighted average common shares outstanding:
Basic		89.6			—			—			—			89.6

Diluted		91.3			—			—			—			91.3

⁽¹⁾	Includes rounding of $1 million.


				Adjustments for:
	As Previously Reported			Aerospace Systems Segment Internal Review			Sales-Type Lease Transaction			Out of Period Amounts			As Revised
	(in millions, except per share data)
Unaudited Condensed Consolidated Statement of Operations, for the Year-to-Date Period Ended September 27, 2013:
Net sales:
Products	$	5,319		$	(9	)	$	(4	)	$	15		$	5,321
Services		4,054			(2	)		—			15			4,067

Total net sales		9,373			(11	)⁽¹⁾		(4	)		30			9,388

Cost of sales:
Products		(4,729	)		(3	)		5			(5	)		(4,732	)
Services		(3,710	)		(22	)		—			(18	)		(3,750	)

Total cost of sales		(8,439	)		(25	)		5			(23	)		(8,482	)

Operating income		934			(36	)		1			7	⁽¹⁾		906
Interest expense		(131	)		—			—			—			(131	)
Interest and other income, net		11			—			3			—			14

Income before income taxes		814			(36	)		4			7			789
Provision for income taxes		(226	)		13			(1	)		(3	)		(217	)

Net income	$	588		$	(23	)	$	3		$	4		$	572
Net income attributable to noncontrolling interests		(6	)		—			—			—			(6	)

Net income attributable to L-3	$	582		$	(23	)	$	3		$	4		$	566

Earnings per share attributable to L-3 Holdings’ common shareholders:
Basic	$	6.47		$	(0.25	)	$	0.04		$	0.04		$	6.30

Diluted	$	6.37		$	(0.25	)	$	0.04		$	0.04		$	6.20

Cash dividends paid per common share	$	1.65		$	—		$	—		$	—		$	1.65

L-3 Holdings’ weighted average common shares outstanding:
Basic		89.9			—			—			—			89.9

Diluted		91.3			—			—			—			91.3

⁽¹⁾	Includes rounding of $1 million.


	As Previously Reported			Net Adjustments			As Revised
	(in millions)
Unaudited Consolidated Statement of Cash Flows for the Year-to-Date Period Ended September 27, 2013:

Operating activities:
Net income	$	588		$	(16	)	$	572
Depreciation of property, plant and equipment		122			—			122
Amortization of intangibles and other assets		36			—			36
Deferred income tax provision		45			(7	)		38
Stock-based employee compensation expense		42			—			42
Contributions to employee savings plans in L-3 Holdings’ common stock		90			—			90
Amortization of pension and postretirement benefit plans net loss and prior service cost		63			—			63
Amortization of bond discounts and deferred debt issue costs (included in interest expense)		5			—			5
Other non-cash items		1			—			1
Changes in operating assets and liabilities, excluding amounts from acquisitions and divestitures:
Billed receivables		(117	)		—			(117	)
Contracts in process		(36	)		(34	)		(70	)
Inventories		(55	)		(5	)		(60	)
Other assets		(45	)		(3	)		(48	)
Accounts payable, trade		65			(11	)		54
Accrued employment costs		27			10			37
Accrued expenses		(41	)		(4	)		(45	)
Advance payments and billings in excess of costs incurred		(109	)		48			(61	)
Income taxes		32			(1	)		31
Excess income tax benefits related to share-based payment arrangements		(3	)		—			(3	)
Other current liabilities		(8	)		3			(5	)
Pension and postretirement benefits		(23	)		—			(23	)
All other operating activities		(62	)		20			(42	)

Net cash from operating activities	$	617		$	—		$	617