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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) January 1, 2002
L-3 COMMUNICATIONS HOLDINGS, INC.
AND
L-3 COMMUNICATIONS CORPORATION
(Exact name of registrants as specified in their charters)
DELAWARE
(State or other jurisdiction of incorporation)
001-14141 13-3937434
333-46983 13-3937436
(Commission file numbers) (IRS Employer Identification No.)
600 THIRD AVE
NEW YORK, NY 10016
(212) 697-1111
(Address of principal executive office)
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ITEM 5. OTHER EVENTS
As a result of the Company's recently completed acquisitions, including
the Company's acquisitions of Aircraft Integration Systems, a division of
Raytheon Company, on March 8, 2002, and Spar Aerospace Limited, L-3 Analytics,
BT Fuze Products and SY Technology, Inc. in November and December of 2001 and
their effect on the Company's operations, effective January 1, 2002, the
Company began to present its businesses with the following four reportable
segments: (1) Secure Communications & ISR, (2) Training, Simulation & Support
Services; (3) Aviation Products & Aircraft Modernization; and (4) Specialized
Products. Prior to December 31, 2001, the Company had two reportable segments:
Secure Communications Systems and Specialized Products. The Company's
reportable segment financial data for the years ended December 31, 2001, 2000
and 1999 and as of December 31, 2001 and 2000, along with the Company's
"Business" section and "Management's Discussion and Analysis of Results of
Operations" included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001, have been restated in this filing to conform to the
current presentation of reportable segments.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and
Other Intangible Assets, which supersedes Accounting Principles Board ("APB")
Opinion No. 17, Intangible Assets. SFAS No. 142 revised the standards for
accounting for goodwill and other intangible assets. SFAS No. 142 requires that
goodwill and indefinite lived identifiable intangible assets shall no longer be
amortized, but be tested for impairment at least annually. The provisions of
SFAS No. 142 became effective on January 1, 2002, with full implementation of
the impairment measurement provisions required to be completed by December 31,
2002. Effective January 1, 2002, the Company is not recording goodwill
amortization expense. Reported net income, basic earning per share ("EPS") and
diluted EPS for the years ended December 31, 2001, 2000 and 1999 have been
restated in this filing in Note 2 to the consolidated financial statements to
exclude goodwill amortization expense, net of related income tax effects, in
accordance with SFAS No. 142.
On April 23, 2002, the Company announced that its Board of Directors had
authorized a two-for-one stock split on all shares of L-3 Holdings' common
stock. The stock split entitled all shareholders of record at the close of
business on May 6, 2002 to receive one additional share of L-3 Holdings common
stock for every share held on that date. The additional shares were distributed
to shareholders in the form of a stock dividend on May 20, 2002. The reported
number of shares of L-3 Holdings' common stock issued and outstanding, as well
as the historical EPS, outstanding stock options, and the number of common
shares issuable upon conversion of the Company's convertible securities data,
have been restated in this filing to give effect to the stock split.
On April 23, 2002, the Company's shareholders approved an increase in the
number of authorized shares of L-3 Holdings' common stock from 100,000,000 to
300,000,000 and an increase in the number of authorized shares of L-3 Holdings'
preferred stock from 25,000,000 to 50,000,000. The reported number of
authorized shares have been restated in this filing to give effect to the
increased number of authorized shares.
o Business .......................................................... 1
o Market for Registrant's Common Equity and Related
Stockholder Matters ............................................... 23
o Selected Financial Data ........................................... 24
o Management's Discussion and Analysis of Results of Operations and
Financial Condition ............................................... 25
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
A. FINANCIAL STATEMENTS
L-3 COMMUNICATIONS HOLDINGS, INC. AND L-3 COMMUNICATIONS CORPORATION
o Report of Independent Auditors .................................... 44
o Financial Statements
-- Consolidated Balance Sheets at December 31, 2001 and
December 31, 2000 ............................................... 45
-- Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999 ................................ 46
-- Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2001,
2000, and 1999 .................................................. 47
-- Consolidated Statements of Cash Flows for the years ended December
31, 2001, 2000 and 1999 ......................................... 48
-- Notes to Consolidated Financial Statements ...................... 49
C. EXHIBITS
23. Consent of PricewaterhouseCoopers LLP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
L-3 COMMUNICATIONS HOLDINGS, INC.
By: /s/ Robert V. LaPenta
-------------------------------------
President and Chief Financial Officer
L-3 COMMUNICATIONS CORPORATION
Date June 19, 2002 By: /s/ Robert V. LaPenta
-------------------------------------
President and Chief Financial Officer
For convenience purposes in this filing on Form 8-K, "L-3 Holdings" refers
to L-3 Communications Holdings, Inc., and "L-3 Communications" refers to L-3
Communications Corporation, a wholly-owned operating subsidiary of L-3
Holdings. "L-3", "we", "us" and "our" refer to L-3 Holdings and its
subsidiaries, including L-3 Communications. The predecessor company refers to
the ten initial business units we purchased from Lockheed Martin Corporation in
April 1997.
BUSINESS
L-3 Holdings, a Delaware corporation organized in 1997, derives all of its
operating income and cash flow from its wholly-owned subsidiary L-3
Communications. L-3 Communications, a Delaware corporation, was organized in
1997 to acquire the predecessor company. The only obligations of L-3 Holdings
are its 5 1/4% Convertible Senior Subordinated Notes due 2009 and its 4% Senior
Subordinated Convertible Contingent Debt Securities due 2011, each of which are
jointly and severally guaranteed by substantially all of its direct and
indirect domestic subsidiaries, including L-3 Communications. L-3 Holdings also
has guaranteed the indebtedness under the bank credit facilities of L-3
Communications. L-3 Holdings relies on dividends and other payments from its
subsidiaries or must raise funds in public or private equity or debt offerings
to generate the funds necessary to pay principal and interest on its
indebtedness.
OVERVIEW
We are a leading merchant supplier of secure communications and
intelligence, surveillance and reconnaissance (ISR) systems, training,
simulation and support services, aviation products and aircraft modernization,
as well as specialized products. Our businesses employ proprietary technologies
and capabilities, and we believe our businesses have leading positions in their
respective primary markets. Our customers include the U.S. Department of
Defense ("DoD") and prime contractors thereof, certain U.S. Government
intelligence agencies, major aerospace and defense contractors, foreign
governments, commercial customers and certain other U.S. federal, state and
local government agencies. For the year ended December 31, 2001, direct and
indirect sales to the DoD provided 64.7% of our sales, and sales to commercial
customers, foreign governments and U.S. federal, state and local government
agencies other than the DoD provided 35.3% of our sales. For the year ended
December 31, 2001, we had sales of $2,347.4 million, of which U.S. customers
accounted for 82.1% and foreign customers accounted for 17.9%, and operating
income of $275.3 million. At December 31, 2001, we had two reportable segments:
Secure Communication Systems and Specialized Products. Effective as of January
1, 2002, primarily as a result of our recent acquisitions, including our
acquisition of Aircraft Integration Systems business from Raytheon Company on
March 8, 2002, we began to present our businesses with the following four
reportable segments: (1) Secure Communications & ISR; (2) Training, Simulation
& Support Services; (3) Aviation Products & Aircraft Modernization; and (4)
Specialized Products. The descriptions of our reportable segments below include
the products and services provided by our Aircraft Integration Systems
business. Financial information on our reportable segments is included in
Management's Discussion and Analysis of Result of Operations and Financial
Condition and in Note 16 of our consolidated financial statements, each
included elsewhere herein.
Secure Communications & ISR
This segment provides products and services for the global ISR market,
specializing in signals intelligence and communications intelligence systems,
which provide the unique ability to collect and analyze unknown electronic
signals from command centers, communication nodes and air defense systems for
real-time situation awareness and response in real-time to the warfighter. This
segment also provides secure, high data rate communications systems for
military and other U.S. Government and foreign government reconnaissance and
surveillance applications. We believe our systems and products are critical
elements of virtually all major communication, command and control,
intelligence gathering and space systems. Our systems and products are used to
connect a variety of airborne, space, ground and sea-based communication
systems and are used in the transmission, processing, recording, monitoring and
dissemination functions of these communication systems. The major secure
communication programs and systems include:
1
o secure data links for airborne, satellite, ground and sea-based remote
platforms for real time information collection and dissemination to
users;
o highly specialized fleet management and support including procurement,
systems integration, sensor development, modifications and maintenance
for signals intelligence and ISR special mission aircraft and airborne
surveillance systems;
o strategic and tactical signal intelligence systems that detect, collect,
identify, analyze and disseminate information;
o secure telephone and network equipment and encryption management; and
o communication systems for surface and undersea vessels and manned space
flights.
Training, Simulation & Support Services. This segment provides a full range
of services, including:
o services designed to meet customer training requirements for aircrews,
navigators, mission operators, gunners and maintenance technicians for
virtually any platform, including military fixed and rotary wing
aircraft, air vehicles and various ground vehicles;
o communication software support, information services and a wide range of
engineering development services and integration support;
o high-end engineering and information support services used for command,
control, communications and ISR architectures, as well as for air
warfare modeling and simulation tools for applications used by the DoD
and U.S. Government intelligence agencies, including missile and space
systems, Unmanned Aerial Vehicles (UAVs) and military aircraft;
o developing and managing extensive programs in the United States and
internationally, focusing on teaching, training and education,
logistics, strategic planning, organizational design, democracy
transition and leadership development; and
o design, prototype development and production of ballistic missile
targets for present and future threat scenarios.
Aviation Products & Aircraft Modernization. This segment provides aviation
products and aircraft modernization services including:
o airborne traffic and collision avoidance systems (TCAS);
o commercial, solid-state, crash-protected cockpit voice recorders and
flight data recorders (known as "black boxes") and cruise ship hardened
voyage recorders;
o ruggedized displays for military and high-end commercial applications;
o turnkey aviation life cycle management services that integrate custom
developed and commercial off-the-shelf products for various military and
commercial wide-body and rotary wing aircraft, including heavy
maintenance and structural modifications and Head-of-State and
commercial interior completions; and
o engineering, modification, maintenance, logistics and upgrade for U.S.
Special Operations Command aircraft, vehicles and personal equipment.
Specialized Products. This segment supplies products to military and
commercial customers in several niche markets. The products include:
o ocean products, including acoustic undersea warfare products for mine
hunting, dipping sonars and anti-submarine and naval power distribution,
conditioning, switching and protection equipment for surface and
undersea platforms;
o telemetry, instrumentation, space and guidance products including
tracking and flight termination;
o premium fuzing products;
2
o microwave components;
o explosives detection systems for checked baggage at airports;
o high performance antennas and ground based radomes; and
o training devices and motion simulators which produce advanced virtual
reality simulation and high-fidelity representations of cockpits and
mission stations for aircraft and land vehicles.
DEVELOPING COMMERCIAL OPPORTUNITIES
Our growth strategy includes identifying and exploiting commercial
applications from select products and technologies currently sold to defense
customers. We have currently identified two vertical markets where we believe
there are significant opportunities to expand our existing commercial sales:
Transportation Products and Broadband Wireless Communications Products. We
believe that these vertical markets, together with our existing commercial
products, provide us with the opportunity for substantial commercial growth in
future years.
Within the transportation market, we are offering (1) an explosives
detection system for checked baggage at airports, display and power propulsion
systems for rail transportation and power switches for internet service
providers, all of which are part of our Specialized Products segment, and (2)
cruise ship voyage recorders and an enhanced aviation collision avoidance
product that incorporates ground proximity warning, which are part of our
Aviation Products & Aircraft Modernization segment.
Within the communications product market, we are offering local fixed
wireless access equipment for voice, DSL and internet access, transceivers for
LMDS (Local Multipoint Distribution Service) and a broad range of commercial
components and digital test equipment for broadband communications providers,
which are part of our Secure Communications & ISR and Specialized Products
segments.
We have developed the majority of our commercial products employing
technology used in our defense businesses. Sales generated from our developing
commercial opportunities have not yet been material to us.
INDUSTRY OVERVIEW
The U.S. defense industry has undergone significant changes precipitated
by ongoing U.S. federal budget pressures and adjustments in political roles and
missions to reflect changing strategic and tactical threats. From the mid-1980s
to the late 1990s, the U.S. defense budget experienced a decline in real
dollars. This trend was reversed by an increase in defense spending in 1999,
followed by current dollar increases in fiscal 2000, 2001 and 2002 with an
anticipated increase in fiscal 2003 to $379.0 billion. In addition, the DoD
philosophy has focused on its transformation strategy that balances
modernization and recapitalization (or upgrading existing platforms) while
enhancing readiness and joint operations which include digital command and
control communications capabilities by incorporating advanced electronics to
improve performance, reduce operating costs, and extend the life expectancy of
its existing and future platforms. As a result, defense budget program
allocations continue to favor advanced information technologies related to
command, control and communications, (C3), intelligence, surveillance and
reconnaissance (ISR). In addition, the DoD's emphasis on system
interoperability, force multipliers and providing battlefield commanders with
real-time data is increasing the electronic content of nearly all major
military procurement and research programs. As a result, it is expected that
the DoD's budget for communications and defense electronics will continue to
grow.
The U.S. defense industry has also undergone dramatic consolidation
resulting in the emergence of five dominant prime system contractors: The
Boeing Company, Lockheed Martin Corporation, Northrop Grumman Corporation,
Raytheon Company and General Dynamics Corporation. We believe that one outcome
of this consolidation is that the DoD wants to ensure that continued vertical
integration does not further diminish the fragmented, yet critical DoD vendor
base. Additionally, we believe it has become uneconomical for the prime
contractors to design, develop and manufacture numerous essential products,
components and subsystems for their own use. We believe this situation has and
will continue to create opportunities for merchant suppliers such as L-3. As
the prime contractors continue to evaluate their core
3
competencies and competitive positions, 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.
Examples of this trend include recent divestitures of certain non-core
defense-related businesses by several of the prime contractors.
The focus on cost reduction by the prime contractors and DoD is also
driving increased use of commercial off-the-shelf products for upgrades of
existing systems and in new systems. We believe the prime contractors will
continue to be under pressure to reduce their costs and will increasingly seek
to focus their resources and capabilities on major platforms and systems,
turning to commercially oriented "best of breed" merchant suppliers to produce
subsystems, components and products. We believe successful merchant suppliers
will continue to use their resources to complement and support, rather than
compete with, the prime contractors. We anticipate that the relationships
between the major prime contractors and their primary suppliers will continue
to evolve in a fashion similar to those employed in the automotive and
commercial aircraft industries. We expect that these relationships will be
defined by critical partnerships encompassing increasingly greater outsourcing
of non-core products and systems by the prime contractors to their key merchant
suppliers and increasing supplier participation in the development of future
programs. We believe early involvement in the upgrading of existing systems and
the design and engineering of new systems incorporating these outsourced
products will provide merchant suppliers, including us, with a competitive
advantage in securing new business and provide the prime contractors with
significant cost reduction opportunities through coordination of the design,
development and manufacturing processes.
BUSINESS STRATEGY
We intend to grow our sales, enhance our profitability and build on our
position as a leading merchant supplier of communication systems and products
to the major contractors in the aerospace and defense industry as well as the
U.S. Government. We also intend to leverage our expertise and products into
selected new commercial business areas where we can adapt our existing products
and technologies. Our strategy to achieve our objectives includes:
EXPAND MERCHANT SUPPLIER RELATIONSHIPS. We have developed strong
relationships with the DoD, several other U.S. Government agencies and all of
the major U.S. defense prime contractors, enabling us to identify new business
opportunities and anticipate customer needs. As an independent merchant
supplier, we anticipate that our growth will be driven by expanding our share
of existing programs and by participating in new programs. We identify
opportunities where we are able to use our strong relationships to increase our
business presence and allow customers to reduce their costs. We also expect to
benefit from increased outsourcing by prime contractors who in the past may
have limited their purchases to captive suppliers and who are now expected to
view our capabilities on a more favorable basis due to our status as an
independent company, which positions us to be a merchant supplier to multiple
bidders on prime contract bids.
SUPPORT CUSTOMER REQUIREMENTS. A significant portion of our sales is
derived from strategic, long-term programs and from programs for which we have
been the incumbent supplier, and in many cases acted as the sole provider over
many years. Our customer satisfaction and excellent performance record are
evidenced by our performance-based award fees exceeding an average of 90% of
the available award fees since our inception in April 1997. We believe that
prime contractors will increasingly award long-term, outsourcing contracts to
the best-of-breed merchant suppliers they believe to be most capable on the
basis of quality, responsiveness, design, engineering and program management
support as well as cost. We intend to continue to align our research and
development, manufacturing and new business efforts to complement our
customers' requirements and provide state-of-the-art products.
ENHANCE OPERATING MARGINS. We have a history of improving the operating
performance of the businesses we acquire through the reduction of corporate
administrative expenses and facilities costs, increasing sales, improving
contract bidding and proposals controls and practices and increasing
4
competitive contract award win rates. We have a tradition of enhancing
operating margins, primarily due to efficient management and elimination of
significant corporate expense allocations. We intend to continue to enhance our
operating performance by reducing overhead expenses, continuing consolidation
and increasing productivity.
LEVERAGE TECHNICAL AND MARKET LEADERSHIP POSITIONS. We have developed
strong, proprietary technical capabilities that have enabled us to capture the
number one or number two market position in most of our key business areas,
including secure, high data rate communications systems, solid state aviation
recorders, telemetry, instrumentation and space products, advanced antenna
products and high performance microwave components. We continue to invest in
company-sponsored independent research and development, including bid and
proposal costs, in addition to making substantial investments in our technical
and manufacturing resources. Further, we have a highly skilled workforce,
including approximately 7,600 engineers. We are applying our technical
expertise and capabilities to several closely aligned commercial business
markets and applications such as transportation and broadband wireless
communications and we expect to continue to explore other similar commercial
opportunities.
MAINTAIN DIVERSIFIED BUSINESS MIX. We have a diverse and broad business
mix with limited reliance on any particular program, a balance of
cost-reimbursable and fixed-price contracts, a significant follow-on business
and an attractive customer profile. Our largest program represented 3.9% of our
sales for the year ended December 31, 2001 and is a long term, firm-fixed price
contract for intelligence agencies and the DoD. No other program represented
more than 3.2% of sales for the year ended December 31, 2001. Furthermore,
31.7% of our sales for the same period were from cost-reimbursable contracts,
and 68.3% were from fixed-price contracts, providing us with a mix of
predictable profitability (cost-reimbursable) and higher margin (fixed-price)
business. We also enjoy a mix of defense and non-defense business, with direct
and indirect sales to the DoD accounting for 64.7%, and sales to commercial
customers, foreign governments and U.S. federal, state and local government
agencies other than the DoD accounting for 35.3% of our sales for the year
ended December 31, 2001. We intend to leverage this business profile to expand
our merchant supplier business base.
CAPITALIZE ON STRATEGIC ACQUISITION OPPORTUNITIES. Recent U.S. defense
industry consolidation has dramatically reduced the number of traditional
middle-tier aerospace and defense companies, which are smaller than the five
dominant prime system contractors and larger than the many smaller publicly and
privately owned companies, as well as non-core aerospace and defense businesses
of the prime contractors. We intend to enhance our existing product base
through internal research and development efforts and selective acquisitions
that will add new products in areas that complement our present technologies.
We intend to continue acquiring potential targets with the following criteria:
o significant market position(s) in their business area(s);
o product offerings which complement and/or extend our product offerings;
and
o positive future growth and earnings prospects.
5
Since January 1, 2001, we acquired thirteen businesses for an aggregate
adjusted purchase price of $1,636.0 million, twelve of which were acquired for
an aggregate adjusted purchase price of $506.0 million during 2001. For certain
of these acquisitions, the purchase price may be subject to further adjustment
based on actual closing date net assets or net working capital of the acquired
business and the post-acquisition financial performance of the acquired
business. The table below summarizes our primary acquisitions completed since
January 1, 2001.
SELECTED RECENT ACQUISITIONS
PRICE
BUSINESS NAME DATE ACQUIRED ACQUIRED FROM ($ MN) BUSINESS DESCRIPTION
----------------------- ------------------- --------------------- ------------- ---------------------------------
Aircraft Integration March 8, 2002 Raytheon Company $ 1,130.0 Provides products and services
Systems for the global Intelligence,
Surveillance and Reconnaissance
(ISR) market, specializing in
signals intelligence (SIGINT)
and communications intelligence
(COMINT) systems, which
provide the unique ability to
collect, decode and analyze
electronic signals from command
centers, communication nodes
and air defense for real-time
communication and response to
the warfighter. Also provides
complete aircraft and mission
system engineering integration,
test and support capability.
SY Technology December 31, 2001 SY Technology, Inc. 48.0 Specializes in air warfare
simulation; command, control,
communications, computers and
intelligence architectures; and
missile defense and space
systems technologies.
BT Fuze Products December 19, 2001 Bulova Technologies 49.5 Produces military fuzes that
prevent the inadvertent firing
and detonation of weapons
during handling.
Government Services November 30, 2001 Emergent 39.8 Provides high-end engineering
Group (renamed L-3 Technologies and information services to the
Communications U.S. Air Force, Army, Navy and
Analytics) intelligence agencies.
Spar Aerospace November 23, 2001 Spar Stockholders 146.8 Provides turnkey aviation life
Limited cycle management services for
wide body and rotary wing
aircraft. Also providing
value-added engineering and
modernization for selected
military and commercial aviation
programs.
EER Systems May 31, 2001 EER Systems 119.4 Provides a wide range of
Stockholders engineering development and
integration support to the DoD,
Federal civilian agencies, state
and local governments and
commercial customers.
KDI Precision May 4, 2001 KDI Precision 78.9 Produces military fuzes that
Products Stockholders prevent the inadvertent firing
and detonation of weapons
during handling.
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PRODUCTS AND SERVICES
SECURE COMMUNICATIONS & ISR
The systems and products, selected applications and selected platforms or
end users of our Secure Communications & ISR segment at December 31, 2001 are
summarized in the table below.
SYSTEMS/PRODUCTS SELECTED APPLICATIONS SELECTED PLATFORMS/END USERS
---------------------------------------- ------------------------------------- --------------------------------------
High Data Rate Communications
o Wideband data links and ground o High performance, wideband o Manned and unmanned aircraft,
terminals secure communication links for naval ships, terminals and
relaying of intelligence and satellites
reconnaissance information
Satellite Communication Terminals
o Ground-based satellite o Interoperable, transportable o Remote personnel provided with
communication terminals and ground terminals communication links to distant
payloads forces
Space Communication and Satellite Control
o Satellite communication and o On-board satellite external o International Space Station,
tracking system communications, video systems, Space Shuttle and various
solid state recorders and ground satellites
support equipment
o Satellite command and control o Software integration, test and o U.S. Air Force Satellite Control
sustainment and support maintenance support satellite Network and rocket launch
control network and engineering system
support for satellite launch
system
Military Communications
o Shipboard communications o Internal and external o Naval vessels
systems communications (radio room)
Information Security Systems
o STE (Secure Terminal o Secure and non-secure voice, o U.S. Armed services, intelligence
Equipment) data and video communication and security agencies
for office and battlefield utilizing
ISDN and ATM commercial
network technologies
We are an established leader in the development, construction and
installation of communication systems for high performance intelligence
collection, imagery processing and ground, air, sea and satellite
communications for the DoD and other U.S. Government agencies. We provide
secure, high data rate, real-time communication systems for surveillance,
reconnaissance and other intelligence collection systems. We also design,
develop, produce and integrate communication systems and support equipment for
space, ground and naval applications, as well as provide communication software
support services to military and related government intelligence markets.
Product lines of the Secure Communications & ISR business include high data
rate communications links, satellite communications terminals, naval vessel
communication systems, space communications and satellite control systems,
signal intelligence information processing systems, information security
systems, tactical battlefield sensor systems and commercial communication
systems.
High Data Rate Communications
We are a technology leader in high data rate, covert, jam-resistant
microwave communications used in military and other national agency
reconnaissance and surveillance applications. Our product line covers a full
range of tactical and strategic secure point-to-point and relay data
transmission systems, products and support services that conform to military
and intelligence specifications. Our systems and products are capable of
providing battlefield commanders with real-time, secure surveillance and
targeting information and were used extensively by U.S. armed forces in the
Persian Gulf War and during operations in Bosnia, Kosovo and Afghanistan.
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Our current family of strategic and tactical data links or CDL (Common
Data Link) systems are considered DoD standards for data link hardware. Our
primary focus is spread spectrum secure communication links technology, which
involves transmitting a data signal with a high-rate noise signal making it
difficult to detect by others, and then re-capturing the signal and removing
the noise. Our data links are capable of providing information at over 300
megabytes per second and use point-to-point and point-to-multipoint
architectures.
We provide these secure high bandwidth products to the U.S. Air Force, the
U.S. Navy, the U.S. Army and various U.S. Government agencies, many through
long-term programs. The scope of these programs include air-to-ground,
air-to-air, ground-to-air and satellite communications such as the U-2 Support
Program, GUARDRAIL, ASTOR and major UAV (unmanned aerial vehicle) programs,
such as Predator, Global Hawk and Fire Scout.
We remain the industry leader in the mobile airborne satellite terminal
product market, delivering mobile satellite communication services to many
airborne platforms. These services provide real time connectivity between the
battlefield and non-local exploiters of ISR data.
Satellite Communication Terminals
We provide ground-to-satellite, high availability, real-time global
communications capability through a family of transportable field terminals
used to communicate with commercial, military and international satellites.
These terminals provide remote personnel with constant and effective
communication capability and provide communications links to distant forces.
Our TSS (TriBand SATCOM Subsystem) employs a 6.25 meter tactical dish with a
single point feed that provides C, Ku and X band communication to support the
U.S. Army. We also offer an 11.3 meter antenna satellite terminal which is
transportable on two C-130 aircraft. The SHF PTS (Portable Terminal System) is
a lightweight (28 pounds), portable terminal, which communicates through DSCS,
NATO or SKYNET satellites and brings connectivity to small military tactical
units and mobile command posts.
We provide System Engineering and Software/Life-cycle support to the Air
Force Satellite control network as well as the Eastern and Western Test
Rangers. These contracts were recently won and last well beyond 2010.
Space Communications and Satellite Control
We produced and are delivering three communication subsystems for the ISS
(International Space Station). These systems will control all ISS radio
frequency communications and external video activities. We also provide
solid-state recorders and memory units for data capture, storage, transfer and
retrieval for space applications. Our standard NASA tape recorder has completed
over five million hours of service without a mission failure. Our recorders are
on National Oceanic & Atmospheric Administration weather satellites, the Earth
Observing Satellite, AM spacecraft and Landsat-7 Earth-monitoring spacecraft.
We have extended this technology to our Strategic Tactical Airborne Recorder
(S/TAR (Trade Mark) ) which was selected for the New Shared Reconnaissance Port
(SHARD) Program. We also provide space and satellite system simulation,
satellite operations and computer system training, depot support, network
engineering, resource scheduling, launch system engineering, support, software
integration and test through cost-plus contracts with the U.S. Air Force.
Military Communications
We provide integrated, computer controlled switching systems for the
interior and exterior voice and data needs of naval vessels. Our products
include the MarCom Integrated Voice Communication Systems for Aegis class
destroyers and for the LPD amphibious ship class. We produced the MarCom
Baseband Switch for Los Angeles class submarines. Our MarCom secure digital
switching system provides an integrated approach to the specialized voice and
data communications needs of shipboard environment for internal and external
communications, command and control and air traffic control. Along with the
Keyswitch Integrated Terminals, MarCom provides automated switching of
radio/cryptocircuits, which results in significant timesavings. We also offer
on-board, high data rate communications systems, which
8
provide a data link for carrier battle groups, which are interoperable with the
U.S. Air Force's Surveillance/reconnaissance terminals. We supply the
"communications on the move" capability needed for the digital battlefield by
packaging advanced communications into the U.S. Army's Interim Brigade Combat
Team Commander's Vehicle.
Information Security Systems
We believe we are a leader in the development of secure communications
equipment for both military and commercial applications. We are producing the
next generation digital, ISDN-compatible STE (secure telephone equipment). STE
provides clearer voice and thirteen-times faster data/fax transmission
capabilities than the previous generation secure telecommunications equipment.
STE also supports secure conference calls and secure video teleconferencing.
STE uses a CryptoCard security system which consists of a small, portable,
cryptographic module holding the algorithms, keys and personalized credentials
to identify its user for secure communications access. We also provide the
workstation component of the U.S. Government's EKMS (Electronic Key Management
System), the next generation of information security systems. EKMS is the
government's system to replace current "paper" encryption keys used to secure
government communications with "electronic" encryption keys. The component we
provide produces and distributes the electronic keys. We also develop
specialized strategic and tactical signal intelligence systems to detect,
acquire, collect, and process information derived from electronic sources.
These systems are used by classified customers for intelligence gathering and
require high-speed digital signal processing and high-density custom hardware
designs.
TRAINING, SIMULATION & SUPPORT SERVICES
The products and services, selected applications and selected platforms or
end users of our Training, Simulation & Support Services segment at December
31, 2001 are summarized in the table below.
PRODUCTS/SERVICES SELECTED APPLICATIONS SELECTED PLATFORMS/END USERS
---------------------------------- -------------------------------------- --------------------------------------
Training and Simulation
o Battlefield and Weapon o Missile system modeling and o U.S. Army Missile Command
Simulation simulation
o Design and manufacture custom o U.S. Army Missile Command
ballistic missile targets that are
ground launched and air
launched for threat replication
targets
o Training o Training for soldiers on complex o DoD
command and control systems
o Training and logistics services o DoD and foreign governments
and training device support
o Human Patient Simulators o Medical training o Medical schools, nursing schools,
and DoD
Engineering Development and
Integration Support
o System Support o C3ISR (Command, Control, o U.S. Armed services, intelligence
Communications, Intelligence, and security agencies, Ballistic
Surveillance and Missile Defense Organization,
Reconnaissance), modeling and NASA and other U.S.
simulation Government agencies
o Communication software o Value-added, critical software o DoD, FAA and NASA
support services support for C3I (Command,
Control, Communication and
Intelligence) systems and other
engineering and technical
services
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Training and Simulation
We believe we are a leading provider of training, simulation and support
services to the U.S. and foreign military agencies.
Our products and services are designed to meet customer training
requirements for aircrews, navigators, mission operators, gunners and
maintenance technicians for virtually any platform, including military fixed
and rotary wing aircraft, air vehicles and various ground vehicles. As one of
the leading suppliers of training services, we believe we are able to leverage
our unique full-service capabilities to develop fully-integrated, innovative
solutions for training systems, propose and provide program upgrades and
modifications, as well as provide hands-on, best-in-class training operations
in accordance with virtually any customer requirement in a timely manner. In
addition, we are developing, demonstrating, evaluating and transitioning
training technologies and methods for use by warfighters at the US Air Force's
Fighter Training Research Division.
We also design and develop prototypes of ballistic missile targets for
present and future threat scenarios. We provide high-fidelity custom targets to
the DoD that are complementary to the U.S. Government's growing focus and
priority on national missile defense and space programs. We are the only
provider of Ballistic Missile targets that have successfully launched a
Ballistic Missile Target from an Air Force Cargo Aircraft.
We also develop and manage extensive programs in the United States and
internationally, focusing on training and education, strategic planning,
organizational design, democracy transition and leadership development. To
provide these services, we utilize a pool of experienced former armed service,
law enforcement and other national security professionals. In the United
States, our personnel are instructors in the U.S. Army's Force Management
School and other schools and courses and are also involved in recruiting for
the U.S. Army. In addition, we own a one-third interest in Medical Education
Technologies, Inc., which has developed and is producing human patient
simulators for sale to medical teaching and training institutions and the DoD.
Engineering Development and Integration Support
We are a premier provider of numerous air campaign modeling and simulation
tools for applications, such as Thunder, Storm and Brawler, for the U.S. Air
Force Studies and Analysis Agency and of space science research for NASA. We
also provide high-end systems support for the HAWK and PATRIOT missile systems,
Unmanned Aerial Vehicles (UAVs), the Cooperative Engagement Capacity (CEC)
Program, and the F/A-18.
Our products and services specialize in communication systems, training
and simulation equipment and a broad range of hardware and software for the
U.S. Army, Air Force and Navy, the Federal Aviation Administration and the
Ballistic Missile Defense Organization (BMDO). As one of the leading suppliers
of high-end engineering and information support, we believe we are able to
provide value-added C3ISR engineering support, wargames simulation and modeling
of battlefield communications.
Our Ilex Systems business provides systems and software engineering
products and services for military applications. We specialize in the
innovative application of state-of-the-art software technology and software
development methodologies to produce comprehensive real-time solutions
satisfying our customers' systems and software needs. We specialize in
providing engineering services to the U.S. Army military intelligence community
including the Communications-Electronics Command (CECOM) Software Engineering
Center, for the development and maintenance of Intelligence, Electronic
Warfare, Fusion and Sensor systems and software.
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AVIATION PRODUCTS & AIRCRAFT MODERNIZATION
The systems and products, selected applications and selected platforms or
end users of our Aviation Products & Aircraft Modernization segment at December
31, 2001, are summarized in the table below.
SYSTEM/PRODUCTS SELECTED APPLICATIONS SELECTED PLATFORMS/END USERS
-------------------------------------- ------------------------------------- -------------------------------------
Aviation Products
o Solid state crash protected o Voice recorders continuously o Business and commercial aircraft
cockpit voice and flight data record most recent 30-120 and certain military transport
recorders minutes of voice and sounds aircraft; sold to both aircraft
from cockpit and aircraft manufacturers and airlines under
intercommunications. Flight data the Fairchild brand name
recorders record the last 25
hours of flight parameters
o TCAS (Traffic Alert and o Reduce the potential for midair o Commercial, business, regional
Collision Avoidance System) aircraft collisions by providing and military transport aircraft
visual and audible warnings and
maneuvering instructions to
pilots
Display Products
o Cockpit and mission displays o High performance, ruggedized o Military aircraft including
and controls flat panel and cathode ray tube surveillance, fighters and
displays and processors bombers, attack helicopters,
transport aircraft and land
vehicles
Aircraft Modernization
o High end aviation product o Turnkey aviation life cycle o Various military and commercial
modernization services management services wide body and rotary wing
aircraft
Aviation and Maritime Recorders
We manufacture commercial, solid-state, crash-protected recorders,
commonly known as black boxes, under the Fairchild brand name for the aviation
and maritime industries, and have delivered nearly 55,000 flight recorders to
aircraft manufacturers and airlines around the world. We believe we are the
leading manufacturer of commercial cockpit voice recorders and flight data
recorders. The hardened voyage recorder, launched from our state-of-the-art
aviation technology, and expanded to include cutting edge internet
communication protocols, has taken an early leadership position within the
maritime industry. We offer three types of recorders:
o the cockpit voice recorder, which records the last 30 to 120 minutes of
crew conversation and ambient sounds from the cockpit;
o the flight data recorder, which records the last 25 hours of aircraft
flight parameters such as speed, altitude, acceleration and thrust from
each engine and direction of the flight in its final moments; and
o the hardened voyage recorder, which stores and protects 12 hours of
voice, radar, radio and shipboard performance data on solid state memory.
Recorders are highly ruggedized instruments, designed to absorb the shock
equivalent to that of an object traveling at 268 knots stopping in 18 inches,
fire resistant to 1,100 degrees centigrade and pressure resistant to 20,000
feet undersea for 30 days. Our recorders are mandated and regulated by various
worldwide agencies for use in commercial airlines and a large portion of
business aviation aircraft. In addition, our aviation recorders are certified
and approved for installation at the world's leading aircraft original
equipment manufacturers ("OEM's"), while our maritime recorders are an integral
component to
11
a mandated recording system for numerous vessels that travel on international
waters. The U.S. military has recently required the installation of black boxes
in military transport aircraft. We believe this development will provide us
with new opportunities for expansion into the military market.
We have completed development of a combined voice and data recorder and
are developing an enhanced recorder that monitors engine and other aircraft
parameters for use in maintenance and safety applications.
Traffic Alert and Collision Avoidance Systems (TCAS)
TCAS is an avionics safety system that was developed to reduce the
potential for mid-air collisions. The system is designed to operate
independently from the air traffic control ("ATC") system to provide a
complementary supplement to the existing ATC system. TCAS operates by
transmitting interrogations that elicit replies from transponders in nearby
aircraft. The system tracks aircraft within certain range and altitude bands to
determine whether they have the potential to become a collision threat.
There are two levels of TCAS protection currently in operation: TCAS I and
TCAS II. In the United States, passenger aircraft with 10 to 30 seats must be
equipped with a TCAS I system. The TCAS II system is required for passenger
aircraft with more than 30 seats. These aircraft, as well as aircraft used in
all-cargo operations, must also be equipped with transponders, either Mode S or
Mode C. The transponder provides altitude and airplane identification to
TCAS-equipped aircraft as well as to the ATC system.
If the TCAS I system calculates that an aircraft may be a threat, it
provides the pilot with a visual and audible traffic advisory. The advisory
information provides the intruder aircraft's range and relative
altitude/bearing. In addition to traffic advisories, a TCAS II system will
provide the pilot a resolution advisory ("RA"). This resolution advisory
recommends a vertical maneuver to provide separation from the intruder
aircraft.
TCAS systems have proven to be very effective, with many documented
successful RA's. TCAS II has been in worldwide operation in many aircraft types
since 1990. Today, over 16,000 airline, corporate and military aircraft are
equipped with TCAS II-type systems, logging over 100 million hours of
operation. The number of reported near mid-air collisions in the U.S. has
decreased significantly since 1989, a period during which both passenger and
cargo air traffic has increased substantially.
Display Products
We design, develop and manufacture ruggedized displays for military and
high-end commercial applications. Our current product line includes a family of
high performance display processing systems, which use either a cathode ray
tube or active matrix liquid crystal display. Our displays are used in numerous
airborne, ship-board and ground based platforms and are designed to survive in
military and harsh environments.
Aircraft Modernization
We are a leading global provider of turnkey aviation life cycle management
services, providing value-added engineering and upgrades for selected military
and commercial aviation programs, component repair and overhaul and support
services. Our major programs include high-end aviation product modernization
and services on the C-130 for a number of military organizations around the
world, including the Canadian Department of National Defense, U.S. Coast Guard,
Mexican Air Force, Royal Malaysian Air Force and Royal Australian Air Force. We
also provide avionics maintenance, repair and overhaul for the Sikorsky
S-61/H-3 Sea King helicopter for a number of military organizations including
the Canadian military, the U.S. Navy and the Brazilian Air Force. We are also a
full service provider for the Boeing 727 and 737 to a number of airlines,
including Canada's WestJet.
12
SPECIALIZED PRODUCTS
The products, selected applications and selected platforms or end users of
our Specialized Products segment at December 31, 2001 are summarized in the
table below.
PRODUCTS SELECTED APPLICATIONS SELECTED PLATFORMS/END USERS
----------------------------------------- -------------------------------------- --------------------------------------
Ocean Products
o Airborne dipping sonars o Submarine detection and o Various military helicopters
localization
o Submarine and surface ship o Submarine and surface ship o U.S. Navy and foreign navies
towed arrays detection and localization
o Naval and commercial power o Switching, distribution and o All naval combatants:
delivery and switching products protection, as well as frequency submarines, surface ships and
and voltage conversion aircraft carriers
o Commercial transfer switches, o Production and maintenance of o Federal Aviation
uninterruptible power supplies systems and high-speed switches Administration, internet service
and power products for power interruption providers, financial institutions
prevention and rail transportation
Telemetry, Instrumentation and Space Products
o Aircraft, missile and satellite o Real-time data acquisition, o Aircraft, missiles and satellites
telemetry and instrumentation measurement, processing,
systems simulation, distribution, display
and storage for flight testing
o Global satellite communications o Satellite transmission of voice, o Rural telephony or private
systems video and data networks, direct to home
uplinks, satellite news gathering
and wideband applications
Guidance Products
o GPS (Global Positioning o Location tracking o Guided projectiles and precision
Systems) receivers munitions
o Navigation systems and o Space navigation o Hubble Space Telescope,
subsystems, gyroscopes, reaction Delta IV launch vehicle and
wheels, star sensor satellites
Premium Fuzing Products
o Fuzing products o Munitions and electronic and o Various DoD and foreign
electro-mechanical safety and military customers
arming devices (ESADs)
Microwave Components
o Passive components, switches o Radio transmission, switching o DoD, telephony service
and wireless assemblies and conditioning, antenna and providers and original
base station testing and equipment manufacturers
monitoring, broad-band and
narrow-band applications (PCS,
cellular, SMR and paging
infrastructure)
o Safety products o Radio frequency monitoring and o Monitor cellular base station and
measurement for safety industrial radio frequency
emissions
o Satellite and wireless o Satellite transponder control, o Communications satellites and
components (channel amplifiers, channel and frequency wireless communications
transceivers, converters, filters separation equipment
and multiplexers)
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PRODUCTS SELECTED APPLICATIONS SELECTED PLATFORMS/END USERS
------------------------------------------ -------------------------------------- -------------------------------------
o Amplifiers and amplifier based o Automated test equipment, o DoD and commercial satellite
components (amplifiers, up/down military electronic warfare, operators
converters and Ka assemblies) ground and space
communications
Antenna Products
o Ultra-wide frequency and o Surveillance and radar detection o Military aircraft including
advanced radar antennas and surveillance, fighters and
rotary joints bombers, attack helicopters and
transport
o Precision antennas serving major o Antennas for high frequency, o Various military and commercial
military and commercial millimeter satellite customers including scientific
frequencies, including Ka band communications astronomers
Training Devices and Motion
Simulators
o Military Aircraft Flight o Training for pilots, navigators, o Military fixed and rotary winged
Simulators flight engineers, gunners and aircraft and ground vehicles
operators
Security Systems
o Explosives detection systems o Rapid scanning of passenger o Airports
checked baggage
Ocean Products
We are one of the world's leading suppliers of acoustic undersea warfare
systems. Our experience spans a wide range of platforms, including helicopters,
submarines and surface ships. Our products include towed array sonar, hull
mounted sonar, airborne dipping sonar and ocean mapping sonar for navies around
the world.
We are also a leading provider of state-of-the-art power electronics
systems and electrical power delivery systems and subsystems. We provide
communications and control systems for the military and commercial customers.
We offer the following:
o military power propulsion, distribution and conversion equipment and
components which focus on motor drives switching, distribution and
protection, providing engineering design and development, manufacturing
and overhaul and repair services; and
o ship control and interior communications equipment.
We have been able to apply our static transfer switch technology, which we
developed for the U.S. military, to commercial applications. Our commercial
customers for static transfer switches are primarily financial institutions and
internet service providers, including American Express, AOL-Time Warner, AT&T,
Charles Schwab and the Federal Aviation Administration. In addition, we provide
electrical products for rail transportation and utilities businesses.
Telemetry, Instrumentation and Space Products
We are a leader in the development and marketing of component products and
systems used in telemetry and instrumentation for airborne applications such as
satellites, aircraft, UAVs, launch vehicles, guided missiles, projectiles and
targets. Telemetry involves the collection of data for various equipment
performance parameters and is required when the object under test is moving too
quickly or is of too great a distance to use a direct connection. Telemetry
products measure, process, receive and collect thousands of parameters of a
platform's operation including heat, vibration, stress and operational
performance and transmits this data to the ground.
Additionally, our satellite telemetry equipment transmits data necessary
for ground processing. These applications demand high reliability of components
because of the high cost of satellite repair and
14
the need for uninterrupted service. Telemetry products also provide the data
used to terminate the flight of missiles and rockets under errant conditions
and/or at the end of a mission. These telemetry and command/control products
are currently used for a variety of missile and satellite programs.
We offer value-added solutions that provide our customers with complex
product integration and comprehensive support. We focus on the following niches
within the satellite ground segment equipment market: telephony, video
broadcasting and multimedia. Our customers include foreign communications
companies, domestic and international prime communications infrastructure
contractors, telecommunications or satellite service providers, broadcasters
and media-related companies. We also provide space products for advanced
guidance and control systems including gyroscopes, controlled momentum devices
and star sensors. These products are used on satellites, launch vehicles, the
Hubble Telescope, the Space Shuttle and the International Space Station.
Guidance Products
We provide airborne equipment and data link systems that gather critical
information and then process, format and transmit the data to the ground from
communications satellites, spacecraft, aircraft and missiles. These products
are available in both commercial off-the-shelf and custom configurations and
include software and software engineering services. Primary customers include
many of the major defense contractors who manufacture aircraft, missiles,
warheads, launch vehicles and munitions. Our ground station instrumentation
receives, encrypts and/or decrypts the serial stream of combined data in
real-time as it is received from the airborne platform. We are a leader in
digital GPS (Global Positioning System) receiver technology for high
performance military applications. These GPS receivers are currently in use on
aircraft, cruise missiles and precision guided bombs and provide highly
accurate positioning and navigational information. Additionally, we provide
navigation systems for high performance weapon pointing and positioning systems
for programs such as MLRS (Multiple Launch Rocket System) and MFCS (Mortar Fire
Control System).
Premium Fuzing Products
We are a leading provider of premium fuzing products, including proximity
fuzes, electronic and electro-mechanical safety and arming devices (ESADs) and
self-destruct/sub-munition grenade fuzes. ESADs prevent the inadvertent firing
and detonation of guided missiles during handling, flight operations and the
initial phases of launch. Our proximity fuzes are used in smart munitions. All
are considered to be critical safety and arming products. Additionally, during
missile flight the ESAD independently analyzes flight conditions and determines
safe separation distance after a missile launch.
Microwave Components
We are a premier worldwide supplier of commercial off-the-shelf and
custom, high performance RF (radio frequency) microwave components, assemblies
and instruments supplying the wireless communications, industrial and military
markets. We are also a leading provider of state-of-the-art space-qualified
commercial satellite and strategic military RF products and millimeter
amplifier based products. We sell many of these components under the
well-recognized Narda brand name through a comprehensive catalog of standard,
stocked hardware. We also sell our products through a direct sales force and an
extensive network of market representatives. Specific catalog offerings include
wireless products, Electro-mechanical switches, power dividers and hybrids,
couplers/detectors, attenuators, terminations and phase shifters, isolators and
circulators, adapters, control products, sources, mixers, waveguide components,
RF safety products, power meters/monitors and custom passive products. Passive
components are generally purchased in both narrow and broadband frequency
configurations by wireless equipment manufacturers, wireless service providers
and military equipment suppliers. Commercial applications include cellular and
PCS base station automated test equipment, and equipment for the paging
industry. Military applications include electronic surveillance and
countermeasure systems.
Our space-qualified and wireless components separate various signals and
direct them to sections of the satellites' payload. Our main satellite products
are channel amplifiers and linearizers, payload
15
products, transponders and antennas. Channel amplifiers amplify the weak
signals received from earth stations, and then drive the power amplifier tubes
that broadcast the signal back to earth. Linearizers, used either in
conjunction with a channel amplifier or by themselves, pre-distort a signal to
be transmitted back to earth before it enters a traveling wave tube for
amplification. This pre-distortion is exactly the opposite of the distortion
created at peak power by the traveling wave tube and, consequently, has a
cancellation effect that keeps the signal linear over a much larger power band
of the tube. The traveling wave tube and area covered by the satellite is
significantly increased.
Narda is the world's largest supplier of non-ionizing radiation safety
detection equipment. These devices are used to quantify and alarm of exposure
to excessive RF radiation. This equipment is used by wireless tower operators
and the military to protect personnel, and insure compliance to various
published standards. We design and manufacture both broad and narrow band
amplifiers and amplifier-based products in the microwave and millimeter wave
frequencies. We use these amplifiers in defense and communications
applications. These devices can be narrow band for communication needs or
broadband for electronic warfare.
We offer standard packaged amplifiers for use in various test equipment
and system applications. We design and manufacture millimeter range (at least
20 to 38GHz) amplifier products for use in emerging communication applications
such as back haul radios, LMDS (Local Multipoint Distribution Service) and
ground terminals for LEO satellites. Narda filters are sold to some of the
world's leading service providers and base station OEM's. Robust demand
continues for Narda filters due to ongoing system upgrades by service providers
for 2.5G and 3.0G applications geared toward providing higher data rate
capabilities for the commercial cellular and PCS marketplace.
We also design, manufacture and market solid state, broadband wireless
communications infrastructure equipment, subsystems and modules used to provide
point-to-Multipoint ("PMP") and point-to-point ("PTP") terrestrial and
satellite-based distribution services in frequency bands from 24 to 38
Gigahertz. Our products include solid-state power amplifiers, hub transmitters,
active repeaters, cell-to-cell relays, Internet access systems and other
millimeter wave-based modules and subsystems. These products are used in
various applications, such as broadband communications, local loop services and
Ka-band satellite communications.
Antenna Products
We produce high performance antennas under the Randtron brand name which
are designed for:
o surveillance of high-resolution, ultra-wide frequency bands;
o detection of low radar cross-section targets and low radar cross-section
installations;
o severe environmental applications; and
o polarization diversity.
Our primary product is a sophisticated 24-foot diameter antenna used on
all E-2C surveillance aircraft. This airborne antenna is a rotating aerodynamic
radome containing a UHF surveillance radar antenna, an IFF antenna, and forward
and aft auxiliary antennas. Production is planned beyond 2001 for the E-2C, P-3
and C-130 AEW aircraft. We have been funded to begin the development of the
next generation for this antenna. We also produce broadband antennas for a
variety of tactical aircraft, as well as rotary joints for the AWAC antenna. We
have delivered over 2,000 sets of antennas for aircraft and have a backlog of
orders through 2004.
We are a leading supplier of ground based radomes used for air traffic
control, weather radar, defense and scientific purposes. These radomes enclose
an antenna system as a protective shield against the environment and are
intended to enhance the performance of an antenna system.
Training Devices and Motion Simulators
Our training devices and motion simulators business designs, develops and
manufacturers advanced virtual reality simulation and high-fidelity
representations of cockpits and mission stations for aircraft and
16
land vehicles. We have developed flight simulators for most of the U.S.
military aircraft in active operation. We have numerous proprietary
technologies and fully-developed systems integration capabilities that provide
competitive advantages. Our proprietary software is used for visual display
systems, high-fidelity system models, database production, digital radar land
mass image simulation and creation of synthetic environments. We are also a
leader in developing training systems which allow multiple trainees at multiple
sites to engage in networked group, unit and task force training and combat
simulations.
DEVELOPING COMMERCIAL OPPORTUNITIES
Part of our growth strategy is to identify commercial applications from
select products and technologies currently sold to defense customers. We have
initially identified two vertical markets where we believe there are
significant opportunities to expand our products: transportation and broadband
wireless communications.
Transportation. Our products, designed to meet strict government quality
and reliability standards, are easily adapted to the commercial transportation
marketplace. Our aircraft voice recorders, designed to meet FAA requirements,
have been successfully marketed to the cruise ship, marine shipping and
railroad industries. Similarly, our state-of-the-art power propulsion products,
originally designed for the U.S. Navy, meet the needs of commuter railroads,
including Philadelphia's regional rail system and New York City's Metropolitan
Transportation Authority. Our explosives detection system, the eXaminer 3DXTM
6000, enables the rapid scanning of passenger checked baggage at airports using
state-of-the-art technology. The new Transportation Security Administration
(TSA), of the Department of Transportation, created as a result of the Aviation
and Transportation Security Act enacted by Congress on January 3, 2002, has
expressed requirements for as many as 500 examiner units. In April, 2002, we
received an order from the TSA that included funding for 100 examiner units and
long-lead material funding for an additional 200 examiner units.
Communications. The wireless communications technology we developed for
our military customers also meets the needs of a growing commercial marketplace
for technologically advanced communications products. Some of the products we
have developed or are developing to exploit this market include wireless loop
products, transceivers, LMDS, compression products, remote sensing internet
networks, microwave links and products for microwave base stations. Our Prime
Wave fixed wireless loop products are an example of our expanding involvement
in the commercial communications industry. Using synchronous CDMA technology
that supports terrestrial, space, fixed and mobile communications, we produce
wireless loop equipment for use in areas that do not have an adequate
telecommunications infrastructure, including emerging market countries and
customers in rural areas.
In the expanding broadband wireless commercial communications market, we
also have developed a broad assortment of other products including
transponders, payloads, uplinks- downlinks, fly-away SATCOM terminals,
telemetry tracking and control and test equipment and waveform generators.
These new commercial products are subject to certain risks and may require
us to:
o develop and maintain marketing, sales and customer support capabilities;
o secure sales and customer support capabilities;
o obtain customer and/or regulatory certification;
o respond to rapidly changing technologies including those developed by
others that may render our products and systems obsolete or
non-competitive; and
o obtain customer acceptance of these products and product performance.
Our efforts to expand our presence in commercial markets require
significant resources, including additional working capital and capital
expenditures, as well as the use of our management's time. Our ability to sell
certain commercial products, particularly our broadband wireless communications
products, depends to a significant degree on the efforts of independent
distributors or communications service providers and on the financial viability
of our existing and target customers for the commercial products.
17
Certain of our existing and target customers are agencies or affiliates of
governments of emerging and under-developed countries or private business
enterprises operating in those countries. In addition, we have made equity
investments in entities that plan to commence operations as communications
service providers using some of our commercial products. We can give no
assurance that these distributors or service providers will be able to market
our products or their services successfully or that we will be able to realize
a return of investment in them. We also cannot assure you that we will be
successful in addressing these risks or in developing these commercial business
opportunities.
BACKLOG AND ORDERS
We define funded backlog as the value of contract awards received from the
U.S. Government, which the U.S. Government has appropriated funds, plus the
value of contract awards and orders received from customers other than the U.S.
Government, which have yet to be recognized as sales. Our funded backlog as of
December 31, 2001 was $1,719.3 million and as of December 31, 2000 was $1,354.0
million. We expect to record as sales approximately 69.7% of our funded backlog
as of December 31, 2001 during 2002. However, there can be no assurance that
our funded backlog will become sales in any particular period, if at all. Our
funded orders for the year ended December 31, 2001 were $2,456.1 million, for
the year ended December 31, 2000 were $2,013.7 million and for the year ended
December 31, 1999 were $1,423.1 million.
Our funded backlog does not include the full value of our contract awards
including those pertaining to multi-year, cost-reimbursable contracts, which
are generally funded on an annual basis. Funded backlog also excludes the sales
value of unexercised contract options that may be exercised by customers under
existing contracts and the sales value of purchase orders that may be issued
under indefinite quantity contracts or basic ordering agreements.
MAJOR CUSTOMERS
For the year ended December 31, 2001, direct and indirect sales to the DoD
provided 64.7% of our sales, and sales to commercial, foreign governments and
U.S. federal, state and local government agencies other than the DoD provided
35.3% of our sales.
Our U.S. Government sales are predominantly derived from contracts with
agencies of, and prime contractors to, the U.S. Government. Various U.S.
Government agencies and contracting entities exercise independent and
individual purchasing decisions, subject to annual appropriations by the U.S.
Congress. As of December 31, 2001, we had approximately 575 contracts each with
a value exceeding $1.0 million. For the year ended December 31, 2001, sales of
our five largest programs amounted to $249.7 million or 10.6% of our sales.
RESEARCH AND DEVELOPMENT
We conduct research and development activities that consist of projects
involving basic research, applied research, development, and systems and other
concept studies. We employ scientific, engineering and other personnel to
improve our existing product lines and develop new products and technologies.
As of December 31, 2001, we employed approximately 7,600 engineers, a
substantial portion of whom hold advanced degrees. For the year ended December
31, 2001, we incurred $319.4 million on research and development costs for
customer-funded contracts and spent $107.5 million on company-sponsored
research and development projects, including bid and proposal costs.
COMPETITION
We encounter intense competition in all of our businesses. We believe that
we are a significant supplier of many of the products that we manufacture and
services we provide in our defense and government businesses, as well as in our
commercial businesses.
Defense and Government Business
Our ability to compete for defense contracts depends on a variety of
factors, including:
18
o the effectiveness and innovation of our research and development
programs;
o our ability to offer better program performance than our competitors at
a lower cost; and
o the availability of our facilities, equipment and personnel to undertake
the programs for which we compete.
In some instances, we are the incumbent supplier or have been the sole
provider for many years for certain programs. We refer to such contracts as
"sole-source" contracts. In such cases, there may be other suppliers who have
the capability to compete for the programs involved, but they can only enter or
reenter the market if the customer chooses to reopen the particular program to
competition. Sole-source contracts accounted for approximately 62.4% and
competitive contracts accounted for approximately 37.6% of our total sales for
the year ended December 31, 2001. The majority of our sales are derived from
contracts with the U.S. Government and its prime contractors, which are
principally awarded on the basis of negotiations or competitive bids.
We believe that the U.S. defense industry structure contains three tiers
of defense contractors. The first tier is dominated by five prime system
contractors: The Boeing Company, Lockheed Martin Corporation, Northrop Grumman
Corporation, Raytheon Company and General Dynamics Corporation, all of whom
compete for major platform programs. The second tier defense contractors are
smaller products and niche subsystems contractors and are comprised of
traditional aerospace and defense companies, as well as, the non-core aerospace
and defense sectors of certain industrial conglomerates and include L-3,
Honeywell Inc., Rockwell Collins Inc., Harris Corporation, TRW Inc., ITT
Industries, Inc., Alliant Techsystems Inc., United Technologies Corporation,
and United Defense Industries Inc. The third tier, which represents the vendor
base and supply chain for niche products, is comprised of numerous smaller
publicly and privately owned aerospace and defense contractors.
We believe we are the aerospace and defense "merchant supplier" with the
broadest and most diverse product portfolio. We supply our products to all of
the five prime system contractors and in some cases directly to the end
customer. We primarily compete with third tier contractors and certain of the
second tier contractors and to a lesser extent with the prime system
contractors in certain niche areas. Some of the second tier contractors are
larger than we are and have greater resources than we have available to us. We
are larger than all of the third tier contractors and believe we have greater
resources than all of them. We believe that most of our businesses enjoy the
number one or number two competitive position in their respective market
niches. We believe that the primary competitive factors for our businesses are:
technology, quality, cost, market position and past performance. In addition,
our ability to compete for non "sole source" contracts often requires us to
"team" with one or more of the prime system contractors that bids and competes
for major platform programs. Furthermore, our ability to "team" with a prime
system contractor is often dependent upon the outcome of a competitive process.
We believe that we will continue to be a successful participant in the
business areas in which we compete, based upon the quality and cost
competitiveness of our products and services.
Commercial Activities
Our commercial activities have become an increasingly significant portion
of our business mix, and comprised 22.6% of our total sales for the year ended
December 31, 2001. Our ability to compete for commercial business depends on a
variety of factors, including:
o Pricing;
o Product features and performance;
o Reliability, scalability and compatibility;
o Customer relationships, service and support; and
o Brand recognition.
In these markets, we compete with various companies, several of which are
listed below.
19
o Agilent Technologies, Inc.;
o Globecomm Systems, Inc.;
o ViaSat, Inc.;
o Honeywell Inc.;
o Smiths Industries; and
o Airspan Networks, Inc.
We believe that our sales in these business areas will continue to grow as
a percentage of our total sales, even though several of our competitors may
have greater resources and technologies than we have available to us.
PATENTS AND LICENSES
We do not believe that our patents, trademarks and licenses are material
to our operations. Furthermore, our U.S. Government contracts generally permit
us to use patents owned by others. Similar provisions in U.S. Government
contracts awarded to other companies make it impossible for us to prevent the
use of our patents in most domestic work performed by other companies for the
U.S. Government.
RAW MATERIALS
In manufacturing our products, we use our own production capabilities as
well as a diverse base of third party suppliers and sub-contractors. Although
aspects of certain of our businesses require relatively scarce raw materials,
we have not experienced difficulty in our ability to procure raw materials,
components, sub-assemblies and other supplies required in our manufacturing
processes.
CONTRACTS
A significant portion of our sales are derived from strategic, long-term
programs and from sole-source contracts. Approximately 62.4% of our sales for
the year ended December 31, 2001 were generated from sole-source contracts. Our
customer satisfaction and performance record are evidenced by our receipt of
performance-based award fees exceeding 91% of the available award fees on
average during the year ended December 31, 2001. We believe that our customers
will award long-term, sole-source, outsourcing contracts to the most capable
merchant supplier in terms of quality, responsiveness, design, engineering and
program management support as well as cost. As a consequence of our strong
competitive position, for the year ended December 31, 2001, we won contract
awards in excess of 50% on new competitive contracts that we bid on, and in
excess of 90% on the contracts we rebid for which we were the incumbent
supplier.
We have a diverse business mix with limited reliance on any single
program, a balance of cost-plus and fixed price contracts, a significant
sole-source follow-on business and an attractive customer profile. For the year
ended December 31, 2001, 31.7% of our sales were generated from
cost-reimbursable contracts and 68.3% from fixed-price contracts, providing us
with a sales mix of predictable profitability (cost-reimbursable) and higher
profit margin (fixed-price) business.
Generally, contracts are either fixed-price or cost-reimbursable. Under a
fixed-price contract we agree to perform the scope of work required by the
contract for a predetermined contract price. Although a fixed-price contract
generally permits us to retain profits if the total actual contract costs are
less than the estimated contract costs, we bear the risk that increased or
unexpected costs may reduce our profit or cause us to sustain losses on the
contract. Conversely, on a cost-reimbursable contract we are paid up to
predetermined funding levels determined by our customers, our allowable
incurred costs and generally a fee representing a profit on those costs, which
can be fixed or variable depending on the contract's pricing arrangement.
Therefore, on a cost-reimbursable contract we do not bear the risks of
unexpected cost overruns. Generally, a fixed-price contract offers higher
profit margins than a cost-reimbursable contract which is commensurate with the
greater levels of risk assumed on a fixed-price contract.
Most of our U.S. Government business is subject to unique procurement and
administrative rules based on both laws and regulations, including various
profit and cost controls, allocations of costs to contracts and
non-reimbursement of unallowable costs such as lobbying expenses and interest
expenses. Our contract administration and cost accounting policies and
practices are subject to oversight by government inspectors, technical
specialists and auditors.
20
Certain of our sales are under foreign military sales agreements directly
between the U.S. Government and foreign governments. In such cases, because we
serve only as the supplier, we do not have unilateral control over the terms of
the agreements. These contracts are subject to extensive legal and regulatory
requirements and, from time to time, agencies of the U.S. Government
investigate whether our operations are being conducted in accordance with these
laws and regulations. Investigations could result in administrative, civil, or
criminal liabilities, including repayments, disallowance of certain costs, or
fines and penalties.
Certain of our sales are direct commercial sales to foreign governments.
These sales are subject to U.S. Government approval and licensing under the
Arms Export Control Act. Legal restrictions on sales of sensitive U.S.
technology also limit the extent to which we can sell our products to foreign
governments or private parties.
U.S. Government contracts are, by their terms, subject to termination by
the U.S. Government either for its convenience or default by the contractor if
the contractor fails to perform the contracts' scope of work. Upon termination
other than for a contractor's default, the contractor will normally be entitled
to reimbursement for allowable costs and an allowance for profit. Foreign
defense contracts generally contain comparable provisions permitting
termination at the convenience of the government. To date, none of our
significant fixed price contracts have been terminated.
Companies supplying defense-related equipment to the U.S Government are
subject to certain additional business risks peculiar to the U.S. defense
industry. Among these risks are the ability of the U.S. Government to
unilaterally suspend a company from new contracts pending resolution of alleged
violations of procurement laws or regulations. In addition, U.S. Government
contracts are conditioned upon the continuing availability of Congressional
appropriations. Congress usually appropriates funds for a given program on a
September 30 fiscal year basis, even though contract performance may take
years. Consequently, at the outset of a major program, the contract is usually
partially funded, and additional monies are normally committed to the contract
by the procuring agency only as appropriations are made by Congress for future
fiscal years.
As is common in the U.S. defense industry, we are subject to business
risks, including changes in the U.S. Government's procurement policies (such as
greater emphasis on competitive procurement), governmental appropriations,
national defense policies or regulations, service modernization plans, and
availability of funds. A reduction in expenditures by the U.S. Government for
products and services of the type we manufacture and provide, lower margins
resulting from increasingly competitive procurement policies, a reduction in
the volume of contracts or subcontracts awarded to us or if we incur
substantial contract cost overruns could materially adversely affect our
business.
ENVIRONMENTAL MATTERS
Our operations are subject to various federal, state and local
environmental laws and regulations relating to the discharge, storage,
treatment, handling, disposal and remediation of certain materials, substances
and wastes used in our operations. We continually assess our obligations and
compliance with respect to these requirements. We have also assessed the risk
of environmental contamination on various manufacturing facilities of our
acquired businesses and, where appropriate, have obtained indemnification,
either from the sellers of those acquired businesses or through pollution
liability insurance. We believe that our current operations are in substantial
compliance with all existing applicable environmental laws and permits. We
believe our current expenditures will allow us to continue to be in compliance
with applicable environmental laws and regulations. While it is difficult to
determine the timing and ultimate cost to be incurred in order to comply with
these laws, based upon available internal and external assessments, with
respect to those environmental loss contingencies of which we are aware, we
believe 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 our consolidated results of operations.
Despite our current level of compliance, new laws and regulations,
stricter enforcement of existing laws and regulations, the discovery of
previously unknown contamination or the imposition of new clean-up requirements
may require us to incur costs in the future that could have a negative effect
on our financial condition or results of operations.
21
PENSION PLANS
In connection with our acquisition of the predecessor company, we assumed
certain liabilities relating to defined benefit pension plans for present and
former employees and retirees of certain businesses which were transferred from
Lockheed Martin to us. Prior to the consummation of our acquisition of the
predecessor company, Lockheed Martin received a letter from the Pension Benefit
Guaranty Corporation (the "PBGC") which requested information regarding the
transfer of such pension plans and indicated that the PBGC believed certain of
such pension plans were underfunded using the PBGC's actuarial assumptions. The
PBGC assumptions result in a larger liability for accrued benefits than the
assumptions used for financial reporting under Statement of Financial
Accounting Standards No. 87. The PBGC underfunding is related to the
Communication Systems -- West and Aviation Recorders pension plans (the
"Subject Plans").
With respect to the Subject Plans, Lockheed Martin entered into an
agreement (the "Lockheed Martin Commitment") among Lockheed Martin, L-3
Communications and the PBGC dated as of April 30, 1997. The material terms and
conditions of the Lockheed Martin Commitment include a commitment by Lockheed
Martin to the PBGC to, under certain circumstances, assume sponsorship of the
Subject Plans or provide another form of financial support for the Subject
Plans. The Lockheed Martin Commitment will continue with respect to any Subject
Plan until such time as such Subject Plan is no longer underfunded on a PBGC
basis for two consecutive years or, at any time after May 31, 2002, if we
achieve investment grade credit ratings. Pursuant to the Lockheed Martin
Commitment, the PBGC agreed that it would take no further action in connection
with our acquisition of the predecessor company.
Upon the occurrence of certain events, Lockheed Martin, at its option, has
the right to decide whether to cause us to transfer sponsorship of any or all
of the Subject Plans to Lockheed Martin, even if the PBGC has not sought to
terminate the Subject Plans. Such a triggering event occurred in 1998, but
reversed in 1999, relating to a decrease in the PBGC-mandated discount rate in
1998 that had resulted in an increase in the underlying liability. We notified
Lockheed Martin of the 1998 triggering event, and in February 1999, Lockheed
Martin informed us that it had no present intention to exercise its right to
cause us to transfer sponsorship of the Subject Plans. If Lockheed Martin did
assume sponsorship of these plans, it would be primarily liable for the costs
associated with funding the Subject Plans or any costs associated with the
termination of the Subject Plans, but we would be required to reimburse
Lockheed Martin for these costs. To date, there has been no impact on pension
expense and funding requirements resulting from this arrangement. In the event
Lockheed Martin assumes sponsorship of the Subject Plans we would be required
to reimburse Lockheed Martin for all amounts that it contributes to, or costs
it incurs with respect to, the Subject Plans. For the year ended December 31,
2001, no pension contributions were required to be made by us to the Subject
Plans. For subsequent years, our funding requirements will depend upon
prevailing interest rates, return on plan assets and underlying actuarial
assumptions.
We have performed our obligations under the letter agreement with Lockheed
Martin and the Lockheed Martin Commitment and have not received any
communications from the PBGC concerning actions which the PBGC contemplates
taking in respect of the Subject Plans.
EMPLOYEES
As of December 31, 2001, we employed approximately 18,000 full-time and
part-time employees, the majority of whom are located in the United States. Of
these employees, approximately 11.1% are covered by 35 separate collective
bargaining agreements with various labor unions. We have a continuing need for
skilled and professional personnel to meet contract schedules and obtain new
and ongoing orders for our products. We believe that relations with our
employees are good.
22
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The common stock of L-3 Holdings is traded on the New York Stock Exchange
(the "NYSE") under the symbol "LLL". The following table sets forth, for each
of the quarterly periods indicated, the high and low closing price of the
common stock as reported on the NYSE.
PRICE RANGE
OF COMMON STOCK
-------------------------
HIGH LOW
----------- -----------
FISCAL YEAR ENDED DECEMBER 31, 2000:
Quarter Ended:
March 31, 2000 .................. $ 25.97 $ 17.85
June 30, 2000 ................... 29.32 22.63
September 30, 2000 .............. 31.88 26.28
December 31, 2000 ............... 38.78 28.60
FISCAL YEAR ENDED DECEMBER 31, 2001:
Quarter Ended:
March 31, 2001 .................. $ 45.00 $ 32.50
June 30, 2001 ................... 44.45 38.04
September 30, 2001 .............. 43.73 31.24
December 31, 2001 ............... 48.24 39.70
On March 12, 2002, the closing price of L-3 Holdings common stock, as
reported by the NYSE, was $55.49 per share. As of March 12, 2002, there were
144 stockholders of record of L-3 Holdings' common stock, not including the
stockholders for whom shares are held in a "nominee" or "street" name.
L-3 Communications is a wholly owned subsidiary of L-3 Holdings.
DIVIDEND POLICY
L-3 Holdings currently intends to retain its earnings to finance future
growth and, therefore, does not anticipate paying any cash dividends on its
common stock in the foreseeable future. Since its formation, L-3 Holdings has
not paid any cash dividends to its stockholders. Any determination as to the
payment of dividends will depend upon the future results of operations, capital
requirements and financial condition of L-3 Holdings and its subsidiaries and
such other facts as the Board of Directors of L-3 Holdings may consider,
including any contractual or statutory restrictions on L-3 Holdings' ability to
pay dividends. Moreover, L-3 Holdings is a holding company and its ability to
pay dividends is dependent upon receipt of dividends, distributions, advances,
loans or other cash transfers from L-3 Communications. Certain outstanding debt
instruments of L-3 Communications limit its ability to pay dividends or other
distributions on its common stock or to make advances, loans or other cash
transfers to L-3 Holdings.
23
SELECTED FINANCIAL DATA
We derived the selected financial data presented below as of December 31,
2001 and 2000 and for each of the three years in the period ended December 31,
2001 from our audited consolidated financial statements included elsewhere
herein. We derived the selected financial data presented below as of December
31, 1999, 1998 and 1997 and for the nine months ended December 31, 1997 from
our audited consolidated financial statements not included herein. We derived
the selected financial data presented below for the three months ended March
31, 1997 from the audited combined financial statements of our predecessor
company not included herein. You should read the selected financial data
together with our "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and our audited consolidated financial
statements.
PREDECESSOR
L-3 COMPANY
------------------------------------------------------------------------ ------------
THREE
YEAR ENDED NINE MONTHS MONTHS
DECEMBER 31, ENDED ENDED
------------------------------------------------------- DECEMBER 31, MARCH 31,
2001(1) 2000(1) 1999(1) 1998(1) 1997(2) 1997
------------- ------------- ------------- ------------- ---------------- ------------
(in millions, except per share data)
STATEMENT OF OPERATIONS DATA:
Sales ...................................... $ 2,347.4 $ 1,910.1 $ 1,405.5 $ 1,037.0 $ 546.5 $ 158.9
Operating income ........................... 275.3 222.7 150.5 100.3 51.5(3) 7.9
Interest expense, net of interest and
other income .............................. 84.5 88.6 55.1 46.8 28.5 8.4
Minority interest .......................... 4.5 -- -- -- -- --
Provision (benefit) for income taxes ....... 70.8 51.4 36.7 20.9 10.7 (0.2)
Net income (loss) .......................... 115.5 82.7 58.7 32.6 12.3(3) (0.3)
Earnings per common share: --
Basic ..................................... $ 1.54 $ 1.24 $ 0.91 $ 0.66 $ 0.31(3) --
Diluted ................................... $ 1.47 $ 1.18 $ 0.88 $ 0.63 $ 0.31(3) --
Weighted average common shares
outstanding:
Basic ..................................... 74.9 66.7 64.2 49.4 40.0 --
Diluted ................................... 85.4 69.9 67.0 51.8 40.0 --
BALANCE SHEET DATA
(AT PERIOD END):
Working capital ............................ $ 717.8 $ 360.9 $ 255.5 $ 157.8 $ 143.2 --
Total assets ............................... 3,339.2 2,463.5 1,628.7 1,285.4 697.0 --
Long-term debt ............................. 1,315.3 1,095.0 605.0 605.0 392.0 --
Shareholders' equity ....................... 1,213.9 692.6 583.2 300.0 113.7 --
----------
(1) The results of operations are impacted significantly by our acquisitions
described elsewhere herein.
(2) Reflects the acquisition of our predecessor company and the commencement
of our operations effective April 1, 1997.
(3) Includes a nonrecurring, noncash compensation charge of $4.4 million
($0.11 per share) related to our initial capitalization, which we
recorded effective April 1, 1997.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
OVERVIEW
We are a leading merchant supplier of secure communications and
intelligence, surveillance and reconnaissance (ISR) systems, training,
simulation and support services, aviation products and aircraft modernization,
as well as specialized products. Our customers include the DoD and prime
contractors thereof, certain U.S. Government intelligence agencies, major
aerospace and defense contractors, foreign governments, commercial customers
and certain other U.S. federal, state and local government agencies. As a
result of our recently completed acquisitions, including our acquisitions of
Aircraft Integration Systems, a division of Raytheon Company, on March 8, 2002,
and Spar Aerospace Limited, L-3 Analytics, BT Fuze Products and SY
Technologies, Inc. in November and December of 2001 and their effect on our
operations, effective January 1, 2002, we began to present our businesses with
the following four reportable segments: (1) Secure Communications & ISR; (2)
Training, Simulation & Support Services; (3) Aviation Products & Aircraft
Modernization; and (4) Specialized Products. The descriptions of our reportable
segments below include the products and services provided by our Aircraft
Integration Systems business. Prior to December 31, 2001, we had two reportable
segments: Secure Communications Systems and Specialized Products.
Our Secure Communications & ISR segment provides products and services for
the global ISR market as well as secure, high data rate communications systems
and equipment for military and other U.S. Government reconnaissance and
surveillance applications. We believe our systems and products are critical
elements of virtually all major communication, command and control,
intelligence gathering and space systems. Our systems and products are used to
connect a variety of airborne, space, ground and sea-based communication
systems and are used in the transmission, processing, recording, monitoring and
dissemination functions of these communication systems. Our Training,
Simulation & Support Services segment produces training systems and related
support services, and provides a wide range of engineering development and
integration support, a full range of teaching, training, logistics and
communication software support services and custom ballistic targets. Our
Aviation Products & Aircraft Modernization segment provides our TCAS products,
cockpit voice, flight data and cruise ship hardened voyage recorders, displays
and specialized aircraft modernization, upgrade and maintenance services. Our
Specialized Products segment provides ocean products, telemetry,
instrumentation, space and guidance products, premium fuzing products,
explosives detection systems, training devices and motion simulators and
microwave components.
In recent years, domestic and worldwide political and economic
developments have significantly affected the markets for defense systems,
products and services. Two events in 2001 had a dramatic impact on the domestic
and international political and economic landscape. They impacted L-3 and the
defense industry generally. First, the events of September 11 created
uncertainty and exposed vulnerabilities in security and the overall defense of
the U.S. homeland. Second, in the conclusions of the U.S. Quadrennial Defense
Review (QDR) there was a fundamental and philosophical shift in focus from a
"threat-based" model to one that emphasizes the capabilities needed to defeat a
full spectrum of adversaries. Transforming the nation's defense posture to a
capabilities-based approach involves creating the ability for a more flexible
response, with greater force mobility, stronger space capabilities, missile
defense, improved and network-centric communications and information systems
security and an increased emphasis on homeland defense.
The current defense budget and proposed budgets for 2003 through 2006 have
been increased by approximately 20% over previous budgets for those same years
with increased focus on command, control, communications, intelligence,
surveillance and reconnaissance (C3ISR), precision-guided weapons, unmanned
aerial vehicles (UAVs), communications networks and missile defense. We believe
we are well positioned to benefit from increased spending in those areas. In
addition, increased emphasis on homeland defense may increase demand for our
capabilities in areas such as airport security systems, information security,
crisis management, preparedness and prevention services, and civilian security
operations. While there is no assurance that the proposed increased DoD budget
levels will be approved by Congress, after over a decade of downward trends,
the current outlook is one of increased spending,
25
which we believe should positively affect our future sales and could
potentially favorably affect our future operating profits because of increased
sale volumes.
All of our domestic government contracts and subcontracts are subject to
audit and various cost controls, and include standard provisions for
termination for the convenience of the U.S. Government. Multiyear U.S.
Government contracts and related orders are subject to cancellation if funds
for contract performance for any subsequent year become unavailable. Foreign
government contracts generally include comparable provisions relating to
termination for the convenience of the relevant foreign government.
ACQUISITIONS AND DIVESTITURES
The table below summarizes the material acquisitions that we have
completed during the three years ended December 31, 2001.
PURCHASE
ACQUIRED COMPANY DATE ACQUIRED PRICE (1)
-------------------------------------------------------- ------------------- ----------------------
(in millions)
Microdyne Corporation January 8, 1999 $ 91.1
Aydin Corporation April 16, 1999 $ 70.5
Interstate Electronics Corporation June 30, 1999 $ 40.0
Space and Navigation Systems December 31, 1999 $ 55.2
Training Devices and Training Services (TDTS) business
of Raytheon Company February 10, 2000 $ 158.1 (2)
Trex Communications Corporation February 14, 2000 $ 49.3
Traffic Alert and Collision Avoidance Systems April 28, 2000 $ 239.2
MPRI, Inc. June 30, 2000 $ 39.6 (3)
Coleman Research Corporation December 29, 2000 $ 60.0 (4)
KDI Precision Products May 4, 2001 $ 78.9
EER Systems May 31, 2001 $ 119.4 (5)
Spar Aerospace Limited November 23, 2001 $ 146.8 (6)
Emergent Government Services Group November 30, 2001 $ 39.8 (7)(8)
BT Fuze Products December 19, 2001 $ 49.5 (7)
SY Technology December 31, 2001 $ 48.0 (7)(9)
----------
(1) Purchase price represents the contractual consideration for the acquired
business excluding adjustments for net cash acquired and acquisition
costs.
(2) Following the acquisition we changed TDTS's name to L-3 Communications
Link Simulation and Training.
(3) Includes $4.0 million of additional purchase price that was based on the
financial performance of MPRI for the year ended June 30, 2001.
(4) Excludes additional purchase price, not to exceed $5.0 million, which is
contingent upon the financial performance of Coleman for the year ended
December 31, 2001.
(5) Excludes additional purchase price, not to exceed $10.0 million, which
is contingent upon the financial performance of EER for the year ended
December 31, 2001 and the year ending December 31, 2002.
(6) Includes $43.6 million for the remaining 29.7% of the outstanding common
stock of Spar at December 31, 2001 that we acquired and paid for in
January 2002.
(7) Purchase price is subject to adjustment based on actual closing date net
assets or net working capital of the acquired business.
(8) Following the acquisition we changed Emergent Government Services
Group's name to L-3 Communications Analytics.
(9) Excludes additional purchase price, not to exceed $4.8 million, which is
contingent upon the financial performance of SY for the year ended
December 31, 2001 and the years ending December 31, 2002 and 2003.
26
On January 14, 2002, we agreed to acquire Aircraft Integration Systems
("AIS"), a division of Raytheon Company, for $1.13 billion in cash. The
acquisition was completed on March 8, 2002, and was financed using cash on
hand, borrowings under our senior credit facilities and a $500.0 million senior
subordinated bridge loan. We expect to offer and sell approximately $1.0
billion of debt and equity securities during the first half of 2002, depending
on capital market conditions, and use the proceeds from those offerings to
repay the $500.0 million senior subordinated bridge loan and the borrowings
made under the senior credit facilities.
On January 2, 2002, we agreed to acquire the detection systems business of
PerkinElmer for $100.0 million in cash. The acquisition is subject to customary
closing conditions, including clearance under the Hart-Scott-Rodino Antitrust
Improvements Act. We expect to complete this acquisition during the second
quarter of 2002.
Additionally, we purchased other businesses during 1999, 2000 and 2001,
which individually and in the aggregate were not material to our consolidated
results of operations, financial position or cash flows in the year acquired.
All of our acquisitions have been accounted for as purchase business
combinations and are included in our consolidated results of operations from
their respective effective dates.
On May 31, 2001, we sold a 30% interest in Aviation Communications and
Surveillance Systems LLC ("ACSS") which comprises our TCAS business to Thales
Avionics, a wholly owned subsidiary of Thales (formerly Thomson-CSF), for $75.2
million of cash. We continue to consolidate the financial statements of ACSS.
We regularly evaluate potential acquisitions and joint venture
transactions, but we have not entered into any other agreements with respect to
any material transactions at this time.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note 2 to the
consolidated financial statements. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
of America requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of sales and costs and expenses during the reporting period. The most
significant of these estimates and assumptions relate to contract estimates of
sales and estimated costs to complete contracts in process, estimates of market
values for inventories reported at lower of cost or market, estimates of
pension and postretirement benefit obligations, recoverability of recorded
amounts of fixed assets and goodwill, income taxes, including the valuations of
deferred tax assets, litigation and environmental obligations. Actual results
could differ from these estimates. We believe the following critical accounting
policies contain the more significant judgements and estimates used in the
preparation of our financial statements.
Revenue Recognition on Contracts and Contract Estimates. The substantial
majority of our direct and indirect sales to the U.S. Government and certain of
our sales to foreign governments and commercial customers are made pursuant to
written contractual arrangements or "contracts" to design, develop, manufacture
and or modify complex products, and to the specifications of the buyers
(customers) or to provide services related to the performance of such
contracts. These contracts are within the scope of the American Institute of
Certified Public Accountants Statement of Position 81-1 Accounting for
Performance of Construction-Type and Certain Production-Type Contracts ("SOP
81-1"), and sales and profits on them are recognized using
percentage-of-completion methods of accounting. Sales and profits on
fixed-price production contracts whose units are produced and delivered in a
continuous or sequential process are recorded as units are delivered based on
their selling prices (the "units-of-delivery" method). Sales and profits on
other fixed-price contracts are recorded based on the ratio of total actual
incurred costs to date to the total estimated costs for each contract (the
"cost-to-cost method"). Sales and fees on cost-reimbursable contracts are
recognized as costs are incurred. Amounts representing contract change orders
or claims are included in sales only when they can be reliably estimated and
their realization is reasonably assured. Under the percentage-of-completion
methods of accounting, a single estimated total
27
profit margin is used to recognize profit for each contract over its entire
period of performance which can exceed one year. The impact of revisions in
profit estimates are recognized on a cumulative catch-up basis in the period in
which the revisions are made. Provisions for anticipated losses on contracts
are recorded in the period in which they become evident. The revisions in
contract estimates, if significant, can materially affect our results of
operations and cash flows, as well as our valuations of Contracts in Process.
Accounting for the sales and profit on a contract requires estimates of
(1) the contract value or total contract revenue, (2) the total costs at
completion, which is equal to the sum of the actual incurred costs to date on
the contract and the estimated costs to complete the contract's scope of work
and (3) the measurement of progress towards completion. The estimated profit or
loss on a contract is equal to the difference between the total contract value
and the estimated total cost at completion. Under the units-of-delivery
percentage of completion method, sales on a contract are recorded as the units
are delivered during the period at an amount equal to the contractual selling
price of those units. Under the cost-to-cost percentage of completion method,
sales on a contract are recorded at amounts equal to the ratio of cumulative
costs incurred to date to total estimated costs at completion multiplied by the
contract value, less the cumulative sales recognized in prior periods. The
profit recorded on a contract under both the units-of-delivery method and
cost-to-cost method is equal to the estimated total profit margin for the
contract stated as a percentage of contract revenue multiplied by the sales
recorded on the contract during the period. Adjustments to original estimates
for a contract's revenues, estimated costs at completion and estimated total
profit are often required as work progresses under a contract, as experience is
gained and as more information is obtained, even though the scope of work
required under the contract may not change, or if contract modifications occur.
Sales on a cost-reimbursable contract are recorded as costs are incurred at an
amount equal to the costs incurred plus the fee (profit) on the contract which
is determined according to the contract's fee arrangement.
For the year ended December 31, 2001: (1) sales recognized using the
units-of-delivery percentage of completion method accounted for 17.9% of total
sales, (2) sales recognized using the cost-to-cost percentage of completion
method accounted for 36.8% of total sales, and (3) sales on cost-reimbursable
contracts, which are recognized as costs are incurred, accounted for 26.4% of
total sales. The remaining 18.9% of sales for the year ended December 31, 2001
pertain to sales on arrangements that are not within the scope of SOP 81-1,
which are recorded when products are delivered and services are performed.
Valuation of Deferred Tax Assets and Liabilities. At December 31, 2001, we
had net deferred tax assets of $160.8 million, including $32.5 million for net
operating loss carryforwards and $31.9 million for tax credit carryforwards
which are subject to various limitations and will expire if unused within their
respective carryforward periods. Deferred taxes are determined separately for
each of our tax-paying entities in each tax jurisdiction. Future realization of
deferred tax assets ultimately depends on the existence of sufficient taxable
income of the appropriate character (for example, ordinary income or capital
gain) within the carryback and carryforward periods available under the tax
law. Based on our estimates of the amounts and timing of future taxable income,
we believe that we will realize our recorded deferred tax assets. A change in
the ability of our operations to continue to generate future taxable income
could affect our ability to realize the future tax deductions underlying our
net deferred tax assets, and require us to provide a valuation allowance
against our net deferred tax assets. Such changes, if significant, could have a
material impact in our effective tax rate, results of operations and financial
position in any given period.
28
RESULTS OF OPERATIONS
The following information should be read in conjunction with our
consolidated financial statements. Our results of operations for the periods
presented are impacted significantly by our acquisitions. (See Note 3 to the
consolidated financial statements for a discussion of our acquisitions,
including pro forma sales, net income and diluted earnings per share data for
the years ended December 31, 2001 and 2000). The tables below provide our
selected income statement data for the years ended December 31, 2001, 2000 and
1999.
SEGMENT OPERATING DATA
YEAR ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
------------ ------------ -----------
(in millions)
Sales(1):
Secure Communications & ISR ........................ $ 450.5 $ 393.0 $ 435.3
Training, Simulation & Support Services ............ 596.8 283.4 91.7
Aviation Products & Aircraft Modernization ......... 263.3 209.1 119.4
Specialized Products ............................... 1,036.8 1,024.6 759.1
--------- --------- ---------
Total ........................................... $ 2,347.4 $ 1,910.1 $ 1,405.5
========= ========= =========
Operating income:
Secure Communications & ISR ........................ $ 32.0 $ 54.1 $ 37.7
Training, Simulation & Support Services ............ 65.7 23.5 6.8
Aviation Products & Aircraft Modernization ......... 85.6 66.9 27.8
Specialized Products ............................... 92.0 78.2 78.2
--------- --------- ---------
Total ........................................... $ 275.3 $ 222.7 $ 150.5
========= ========= =========
----------
(1) Sales are after intersegment eliminations. See Note 16 to the
consolidated financial statements.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Sales increased $437.3 million to $2,347.4 million in 2001 compared with
2000. Sales to the U.S. Government, foreign governments and other customers
that are made pursuant to written contractual arrangements or "contracts" for
products and or services according to the specifications of the customer are
within the scope of SOP 81-1 and are presented on the statement of operations
under the caption "Contracts, primarily long-term U.S. Government." Sales from
"Contracts, primarily long-term U.S. Government", increased $367.2 million to
$1,903.7 million in 2001 from $1,536.5 million in 2000. The MPRI, Coleman, KDI
and EER acquisitions contributed $335.6 million of the sales increase in 2001.
The remaining sales increase in 2001 was primarily attributable to volume
increases of (1) $66.0 million on secure telephone equipment and secure data
links, (2) $21.2 million on training devices and services, (3) $16.2 million on
acoustic undersea warfare products and (4) $4.4 million on airport security
systems. These sales increases were partially offset by declines of $56.7
million on naval power equipment arising from lower shipments caused by
production quality control problems and customer-directed reductions in
delivery requirements, and volume declines of $19.5 million primarily on
telemetry and space products related to the continued decline in the telemetry,
space and broadband markets. Sales arrangements that are not within the scope
of SOP 81-1 are recognized in accordance with the SEC's SAB No. 101 and are
presented on the statement of operations under the caption "Commercial,
primarily products." Sales from "Commercial, primarily products", increased
$70.1 million to $443.7 million in 2001 from $373.6 million in 2000. The
increase in 2001 was primarily attributable to volume increases of (1) $53.1
million on aviation products, (2) $20.8 million in microwave components and (3)
$13.5 million from fixed wireless access products. These sales increases were
partially offset by declines of $17.3 million primarily on telemetry and space
products related to the continued decline in the commercial telemetry, space
and broadband communications markets. "
The total increase in costs and expenses of $384.7 million to $2,072.1
million in 2001 from $1,687.4 million in 2000 is consistent with the increases
in sales. In 2001, costs and expenses were $1,674.4 million for "Contracts,
primarily long-term U.S. Government" and $397.7 million for "Commerical,
primarily products.
29
The liabilities and expenses for our pension plans are based on several
actuarial assumptions including discount rates and expected returns on plan
assets. Current market conditions including changes in interest rates and actual
returns on plan assets are considered when selecting these assumptions. During
2001, these assumptions were not realized, which when combined with previous
experience resulted in an aggregate unrecognized actuarial loss of $69.7 million
at December 31, 2001. This actuarial loss combined with the reduction in the
discount rate and the decline in the pension assets (before transfers of assets
from acquisitions) is expected to increase our pension expense, which is
included in our cost and expenses, by about $14.0 million for 2002 before the
impact from the acquisition of AIS. Future actuarial gains would reduce or
eliminate this unrecognized actuarial loss and future actuarial losses would
increase it.
Operating income increased because of higher sales by $52.6 million to
$275.3 million in 2001 compared with 2000. Operating income as a percentage of
sales ("operating margin") remained unchanged at 11.7%. Operating margins
improved at our Training, Simulation & Support Services segment, our Aviation
Products & Aircraft Modernization segment and our Specialized Products segment.
These margin improvements were offset by a margin decline at our Secure
Communications & ISR segment. The change in operating margin for each of our
segments is discussed below.
Interest expense decreased $6.6 million to $86.4 million in 2001 because
of lower interest rates, changes in the components and levels of our debt, and
savings of $4.1 million from the interest rate swap agreements we entered into
in July 2001 and November 2001. The interest rate swap agreements exchange the
fixed interest rate of 8% on our $200.0 million Senior Subordinated Notes due
2008 and the fixed interest rate of 8 1/2% on our $180.0 million Senior
Subordinated Notes due 2008 to variable interest rates determined using the six
month LIBOR rate. See "-- Liquidity and Capital Resources".
Interest and other income decreased $2.6 million to $1.8 million. Interest
and other income for 2001 includes 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 to write-down the carrying amount of an investment in common stock
of a telecommunications company because the decline of its value was determined
to be other than temporary. Also included in interest and other income for 2001
is a pre-tax charge of $0.5 million to account for the increase, in accordance
with the Financial Accounting Standards Board's ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments
and Hedging Activities, in the fair value assigned to the embedded derivatives
in our $420.0 million 4% Senior Subordinated Convertible Contingent Debt
Securities due 2011 ("CODES"), we sold in the fourth quarter of 2001 (See "--
Liquidity and Capital Resources"), and a pre-tax loss of $0.8 million from an
equity method investment. Interest and other income for 2000 includes a net
pre-tax gain of $2.5 million ($0.02 per diluted share), consisting of an
after-tax gain of $9.2 million from the sale of our interests in certain
businesses and an after-tax charge of $7.6 million on the write-down in the
carrying amount of an investment in a telecommunications venture that is no
longer a going concern, the carrying amount of an investment in a
telecommunications equipment provider that was determined to be permanently
impaired and a related intangible asset. Excluding these net gains from both
2001 and 2000, diluted EPS increased 25.9% to $1.46 in 2001 from $1.16 in 2000.
The income tax provision for 2001 is based on an effective income tax rate
for 2001 of 38.0% which declined slightly from the effective tax rate of 38.3%
for 2000.
Basic earnings per share ("EPS") grew 24.2% to $1.54 in 2001 and diluted
EPS grew 24.6% to $1.47 in 2001. Diluted weighted-average common shares
outstanding increased 22.2% in 2001, primarily because of the sale of our
common stock in May 2001, and the dilutive effect of our Convertible Notes we
sold in the fourth quarter of 2000. See "-- Liquidity and Capital Resources".
SECURE COMMUNICATIONS & ISR
Sales within our Secure Communications & ISR segment increased $57.5
million or 14.6% to $450.5 million in 2001 compared with 2000. The increase in
sales was attributed to increased sales of $46.4 million from secure telephone
equipment arising from an increase in demand for secure communications, and
30
$13.6 million from Prime Wave fixed wireless access products related to a
contract for a customer in Argentina. The remaining net decrease in sales was
principally attributable to a decline in communication subsystems for the
International Space Station partially offset by higher volume for secure data
links.
Operating income decreased by $22.1 million to $32.0 million in 2001 from
$54.1 million in 2000 because of lower operating margins that were partially
offset by higher operating income from higher sales. Operating margin declined
6.7 percentage points from 13.8% in 2000 to 7.1% in 2001. Negative contract
margins and increased SG&A and development expenditures and bad debt provisions
associated with our Prime Wave business reduced operating margin by 3.7
percentage points. Volume declines and cost overruns related to design and
manufacturing problems on certain signal collection and processing equipment
reduced operating margin by 1.7 percentage points. The remaining decline in
operating margin was principally attributable to lower volumes on certain
military communication systems programs caused by contract deliveries that were
completed or approaching completion in 2001. The declines were partially offset
by higher operating margins on secure telephone equipment attributable to
increased volumes and cost improvements.
TRAINING, SIMULATION & SUPPORT SERVICES
Sales within our Training, Simulation & Support Services segment increased
$313.4 million or 110.6% to $596.8 million in 2001 compared with 2000. The
Coleman, MPRI, and EER acquisitions contributed $277.0 million of the increase
in sales. The remaining increase in sales was attributable to various training,
simulation and communications software support services.
Operating income increased by $42.2 million to $65.7 million in 2001
because of higher sales and operating margins. Operating margin increased 2.7
percentage points from 8.3% in 2000 to 11.0% in 2001. Volume increases and cost
improvements from the Link Training Services business increased operating
margin by 1.6 percentage points. The remaining increase was principally
attributable to higher margins from acquired businesses.
AVIATION PRODUCTS & AIRCRAFT MODERNIZATION
Sales within our Aviation Products & Aircraft Modernization segment
increased $54.2 million or 25.9% to $263.3 million in 2001 compared with 2000.
Volume increased $44.9 million on TCAS products and was attributable to
increased customer demand and the timing of the TCAS acquisition completed in
April 2000. Volume also increased by $8.2 million for aviation recorders
because of commercial customer retrofit deliveries. The remaining increase was
primarily attributable to the Spar Aerospace business acquired in November 2001
offset by volume declines of $8.7 million for displays sold to military
customers related to the timing of contractual shipments. We expect sales of
aviation products to decline by approximately 20% in 2002 from 2001 because of
the downturn in the commercial aircraft industry that began this year.
Operating income increased by $18.7 million to $85.6 million in 2001 from
$66.9 million in 2000 primarily because of higher sales. Operating margin
increased 0.5 percentage points from 32.0% in 2000 to 32.5% in 2001. Operating
margin increased by 5.2 percentage points because of higher volume of TCAS
products with higher gross margin contributions. Lower margins on display
products related to volume declines reduced operating margin by 3.3 percentage
points. Lower margins from the Spar Aerospace acquired business, which we
expected, caused the remaining change in the operating margin.
SPECIALIZED PRODUCTS
Sales within our Specialized Products segment increased $12.2 million or
1.2% to $1,036.8 million in 2001 compared with 2000. The increase in sales was
principally attributable to the KDI acquired business and increases in volume
for microwave components and acoustic undersea warfare products, partially
offset by decreases in sales of telemetry and space products and naval power
equipment. We expect sales of our telemetry and space products for 2002 to
remain essentially unchanged as compared to 2001, due to continued softness in
the space and broadband commercial communications markets.
31
Operating income increased by $13.8 million in 2001 to $92.0 million
because of higher operating margin. Operating margin increased 1.3 percentage
points to 8.9% in 2001 from 7.6% in 2000. Reductions in contract costs related
to favorable performance on the AVCATT contract, arising from engineering
design changes, material sourcing changes and unit price reductions on several
parts in the contract bill of materials that occurred during 2001 increased
operating margin by 1.3 percentage points. Cost improvements from increased
volume and product sales mix on microwave components resulted in an increase of
1.0 percentage points. Higher margins from fuzing products resulted in an
increase of 0.7 percentage points. The remaining increase in operating margin
was primarily attributable to overhead cost reductions and other cost
improvements for training devices, volume increases for explosives detection
systems and reduced losses on voice and data communication products. These
improvements in operating margin were partially offset by continued unfavorable
performance on certain contracts and lower production levels for naval power
equipment which caused a decrease of 3.2 percentage points in operating margin.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
Sales increased $504.6 million to $1,910.1 million in 2000 compared with
1999. Our sales from "Contracts, primarily long-term U.S. Government",
increased $403.8 million to $1,536.5 million in 2000 from $1,132.7 million in
1999. The TDTS, MPRI and Space and Navigation Systems acquisitions contributed
$367.8 million of the increase in sales. The remaining increase in sales during
2000 was principally attributable to volume increases of (1) $25.1 million on
display products, (2) $17.7 million on communications software support
services, (3) $15.2 million on acoustic undersea warfare products, (4) $6.6
million on airport security systems, and (5) $9.4 million on secure telephone
equipment. These sales increases were partially offset by declines on certain
secure data links programs and $17.1 million in sales on naval power equipment.
Sales from "Commercial, primarily products", increased $100.8 million to $373.6
million in 2000 from $272.8 million in 1999. The TCAS acquired business
contributed $61.3 million of the increase in sales. The remaining increase in
sales during 2000 was principally attributable to volume increases on microwave
components, aviation recorders and fixed wireless access products.
The total increase in costs and expenses of $432.4 million to $1,687.4
million in 2000 from $1,255.0 million in 1999 is consistent with the increases
in sales. In 2000, costs and expenses were $1,343.4 million for "Contracts,
primarily long-term U.S. Government" and $344.0 million for "Commerical,
primarily products."
Operating income increased $72.2 million to $222.7 million in 2000.
Operating margin improved to 11.7% from 10.7%, which was attributable to
improvements in our Secure Communications & ISR segment, our Training,
Simulation & Support Services segment and our Aviation Products & Aircraft
Modernization segment, which was partially offset by a decline in our
Specialized Products segment, the details of which are described below.
Interest expense increased $32.4 million to $93.0 million in 2000
principally because of the higher average outstanding debt during 2000.
Interest and other income decreased $1.1 million to $4.4 million. Interest and
other income for 2000 includes a net pre-tax gain of $2.5 million ($0.02 per
diluted share), consisting of an after-tax gain of $9.2 million from the sale
of our interests in certain businesses and an after-tax charge of $7.6 million
on the write-down in the carrying amount of an investment in a
telecommunications venture that is no longer a going concern, the carrying
amount of an investment in a telecommunications equipment provider that was
determined to be permanently impaired and a related intangible asset. Excluding
the net gain, diluted EPS was $1.16, an increase of 31.8% in 2000 compared with
1999.
The income tax provision for 2000 is based on an effective income tax rate
for 2000 of 38.3% which declined slightly from the effective tax rate of 38.5%
for 1999.
Basic EPS grew 36.3% to $1.24 in 2000 and diluted EPS grew 34.1% to $1.18
in 2000. Basic weighted-average common shares outstanding increased 3.9% in
2000, and diluted weighted-average common shares outstanding increased 4.3% in
2000, primarily because of common stock issued for exercises of employee stock
options.
32
SECURE COMMUNICATIONS & ISR
Sales within our Secure Communications & ISR segment decreased $42.3
million to $393.0 million in 2000 compared with 1999. We attribute the decrease
in sales principally to less support required on the U-2 and Guardrail
programs, as well as completion of the primary development contract on the
communications subsystems for the International Space Station. These declines
in sales were partially offset by increased sales of secure telephone
equipment, secure data links and Prime Wave fixed access wireless products.
Operating income increased by $16.4 million to $54.1 million because of
higher operating margin. Operating margin improved 5.1 percentage points from
8.7% in 1999 to 13.8% in 2000. Cost improvements on secure data links and
military communication systems accounted for 4.3 percentage points of the
increase. Our divestiture in March 2000 of the Network Security Systems
business accounted for another 1.9 percentage points of the increase in
operating margin. Operating margin decreased by 1.5 percentage points because
of higher marketing and development costs for our Prime Wave business. The
remaining net operating margin increase was attributable to our other products.
TRAINING, SIMULATION & SUPPORT SERVICES
Sales within our Training, Simulation & Support Services segment increased
$191.7 million or 209.1% to $283.4 million in 2000 compared with 1999. The
Training Services and MPRI acquisitions contributed $159.6 million of the
increase in sales. The remaining increase of $32.1 million in sales during 2000
was principally attributable to increased sales of communication software
support services.
Operating income increased by $16.7 million to $23.5 million in 2000
because of higher sales and operating margin. Operating margin increased 0.9
percentage points from 7.4% in 1999 to 8.3% in 2000. The increase in operating
margin was principally attributable to higher margins from the acquired
businesses.
AVIATION PRODUCTS & AIRCRAFT MODERNIZATION
Sales within our Aviation Products & Aircraft Modernization segment
increased $89.7 million or 75.1% to $209.1 million in 2000 compared with 1999.
The TCAS acquisition contributed $61.3 million of the increase in sales. The
remaining net increase of $28.4 million in sales during 2000 was principally
attributable to increased sales of aviation recorders and display products.
Operating income increased by $39.1 million to $66.9 million in 2001
because of higher sales and operating margin. Operating margin increased 8.7
percentage points from 23.3% in 1999 to 32.0% in 2000. Higher operating margin
from the TCAS acquired business accounted for 3.7 percentage points of the
increase and the remaining increase of 5.0 percentage points was principally
attributable to increased volume and cost improvements in aviation recorders
and display products.
SPECIALIZED PRODUCTS
Sales within our Specialized Products segment increased $265.5 million or
35.0% to $1,024.6 million in 2000 compared with 1999. The Training Devices and
Space & Navigation Systems acquisitions contributed $208.2 million of the
increase in sales. The remaining net increase of $57.3 million in sales during
2000 was principally attributable to volume increases on acoustic undersea
warfare products and microwave components. These increases in sales were
partially offset by decreased shipments of naval power equipment in 2000
compared with 1999 principally due to the slippage of certain sales into 2001
which were previously anticipated to occur in 2000. Sales of our telemetry
products were essentially unchanged in 2000 compared with 1999 due to continued
softness in the space and broadband commercial communications markets.
Operating income remained unchanged at $78.2 million, despite higher sales
due to lower operating margin. Operating margin declined 2.7 percentage points
to 7.6% in 2000 from 10.3% in 1999. Lower shipments on our naval power
equipment resulted in a 2.7 percentage point decrease in operating margin.
Reduced volumes and a change in the sales mix to lower margin products in
telemetry and space products
33
and microwave components resulted in a 2.2 percentage point decrease. These
decreases were partially offset by higher margins at our acquired businesses,
which resulted in a 2.0 percentage point increase, and by increased volume and
cost improvements in acoustic undersea warfare products, which resulted in a
1.1 percentage point increase. The remaining net operating margin decrease was
attributable to our other businesses.
LIQUIDITY AND CAPITAL RESOURCES
BALANCE SHEET
Contracts in process increased $101.7 million from December 31, 2000 to
$801.8 million at December 31, 2001. The increase included $61.0 million
related to acquired businesses and $40.7 million principally from:
o increases of $56.2 million in unbilled contract receivables principally
arising from an increase in programs in production phases, during which
unbilled costs and profits generally exceed progress payments and
advances received from the customers until contract shipments are
completed;
o increases of $31.9 million in inventories, including inventories of our
Prime Wave business, naval power equipment products and on certain other
programs and products; and
o decreases of $47.4 million in billed receivables due to improved
collections on certain programs, partially offset by increases at our
Prime Wave business.
Included in contracts in process at December 31, 2001, are billed
receivables of $15.8 million and inventories of $30.2 million related to our
Prime Wave business. At December 31, 2000, we had $6.4 million of billed
receivables and $17.4 million of inventories related to our Prime Wave
business.
The increases in property, plant and equipment, intangibles, and accrued
employment costs during 2001 were principally related to acquired businesses.
The decreases in accounts payable and accrued expenses were principally related
to the timing of payments to vendors partially offset by balances of acquired
businesses. The increase in other current liabilities is primarily attributable
to balances of acquired businesses and an accrual of $43.6 million related to
the remaining outstanding common stock of Spar at December 31, 2001, that we
acquired and paid for in January 2002, and was partially offset by a decline in
estimated contract costs in excess of billings to complete contracts in
process. The decrease in other liabilities is in part related to the issuance
of common stock in April 2001 to satisfy our $17.7 million obligation for the
additional purchase price for the ILEX acquisition completed in 1998. The
decrease is also related to a reclassification of the current portion of
estimated costs in excess of billings to complete contracts in process to other
current liabilities.
The decrease in accrued interest was due to the effect of lower interest
rates, as well as interest savings of $4.1 million from the interest rate swap
agreements we entered into in July 2001 and November 2001, partially offset by
an increase in accrued interest due to higher outstanding debt balances at
December 31, 2001, attributable to our sale of the CODES in the fourth quarter
of 2001. The quarterly cash interest payments on our Senior Subordinated Notes
and Convertible Notes in 2001 were $8.0 million in the first quarter and third
quarter, $27.6 million in the second quarter and $27.2 million in the fourth
quarter. Our cash interest payments may be adjusted in future years due to the
interest rate swap agreements we entered into on our $200.0 million 8% Senior
Subordinated Notes due 2008 and our $180.0 million 8 1/2% Senior Subordinated
Notes due 2008 and changes in the amount of our outstanding debt.
34
STATEMENT OF CASH FLOWS
The following table provides cash flow statement data:
YEARS ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
----------- ----------- ----------
(IN MILLIONS)
Net cash from operating activities ............ $ 173.0 $ 113.8 $ 99.0
Net cash used in investing activities ......... (424.9) (608.2) (284.8)
Net cash from financing activities ............ 580.3 484.3 202.4
OPERATING ACTIVITIES
During 2001, we generated $173.0 million of cash from our operating
activities, an increase of $59.2 million from the $113.8 million generated
during 2000. Earnings adjusted for non-cash items and deferred income taxes
increased $83.2 million to $283.5 million in 2001 from $200.3 million in 2000.
During 2001, our working capital and operating assets and liabilities increased
$110.5 million compared with an increase of $86.5 million in 2000.
In 2001, we used cash for increases in inventories, receivables and
negative operating margins related to our Prime Wave business and naval power
equipment products, as well as for incurred contract costs in excess of
billings for the continued effort on the AVCATT contract. These uses of cash
were partially offset by a settlement of certain items related to a services
agreement and lower income tax payments related to an increase in tax
deductions for temporary differences between the tax basis and financial
reporting amounts for inventoried costs, income recognition on contracts in
process, and long-lived assets including goodwill and other intangibles. We
expect the amount of our deferred income tax provision for 2002, excluding any
additional income tax benefits arising from the acquisition of AIS, to be
consistent with that for 2001.
During 2000, we generated $113.8 million of cash from our operating
activities, an increase of $14.8 million from the $99.0 million generated
during 1999. Earnings adjusted for non-cash items and deferred taxes increased
$48.5 million to $200.3 million in 2000 from $151.8 million in 1999. During
2000, our working capital and operating assets and liabilities increased $86.5
million compared with an increase of $52.8 million in 1999. Our cash flows from
operating activities during 2000 include uses of cash relating to performance
on certain contracts in process including the AVCATT contract that were assumed
in the TDTS acquisition for which the estimated costs exceed the estimated
billings to complete these contracts.
INVESTING ACTIVITIES
In 2001, we invested $446.9 million to acquire businesses, compared with
$599.6 million in 2000 and $272.2 million in 1999.
We make capital expenditures for the improvement of manufacturing
facilities and equipment. We expect that our capital expenditures for the year
ending December 31, 2002 will be between $75 million and $80 million, including
Aircraft Integration Systems, compared with $48.1 million for the year ended
December 31, 2001. The anticipated increase is principally due to capital
expenditures for our acquired businesses. Dispositions of property, plant and
equipment for 2000 includes net proceeds of $13.3 million related to a facility
located in Hauppauge, NY which we sold and leased back in December 2000.
On May 31, 2001, we sold a 30% interest in ACSS to Thales Avionics for
$75.2 million in cash. In 2000, we sold our interests in two businesses for net
cash proceeds of $19.6 million, which are included in other investing
activities.
On January 14, 2002, we agreed to acquire AIS for $1.13 billion in cash
plus acquisition costs. The acquisition was completed on March 8, 2002. The
acquisition was financed using cash on hand, borrowings under our senior credit
facilities and a $500.0 million senior subordinated bridge loan. We expect to
offer and sell approximately $1.0 billion of debt and equity securities during
the first half of 2002, depending on capital market conditions, and use the
proceeds from those offerings to repay the $500.0 million senior subordinated
bridge loan and the borrowings made under the senior credit facilities.
35
FINANCING ACTIVITIES
DEBT. In May 2001, we restructured our senior credit facilities. At
December 31, 2001, the senior credit facilities were 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, (1) at our request and subject to approval of the
lenders, extend the maturity date, in whole or in part, for an additional
364-day period, or (2) 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 conversion date. Additionally, the senior credit facilities
provided us the ability to increase, on an uncommitted basis, the amount 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.
At December 31, 2001, available borrowings under our senior credit
facilities were $497.6 million, after reductions for outstanding letters of
credit of $102.4 million. There were no outstanding borrowings under our senior
credit facilities at December 31, 2001.
On February 26, 2002, the lenders approved a $150.0 million increase in
the amount of our senior credit facilities. The five year revolving credit
facility increased by $100.0 million to $500.0 million. The 364-day revolving
credit facility increased by $50.0 million to $250.0 million. Additionally, the
maturity date of the $200.0 million 364-day revolving credit facility was
extended to February 26, 2003.
On March 8, 2002, we borrowed $500.0 million under a senior subordinated
bridge loan facility ("Bridge Loan Facility") to finance a portion of the
purchase price of AIS and related expenses as discussed above. The Bridge Loan
Facility is subordinated in right of payment to all of L-3 Communications'
existing and future senior debt and ranks pari passu with our other senior
subordinated indebtedness and related guarantees discussed below. Borrowings
under the Bridge Loan Facility bear interest through March 8, 2003, at our
option, at either the one-month or three-month LIBOR rate plus a spread equal
to 350 basis points. The Bridge Loan Facility matures on May 15, 2009, but if
the loans under the facility are not repaid by March 8, 2003, each lender's
loan will be automatically converted into an exchange note with terms
substantially similar to those of our other senior subordinated indebtedness
discussed below, and will bear interest at a fixed rate equal to the yield to
maturity on our highest yielding existing subordinated indebtedness at the time
of exchange plus 100 basis points. Subject to the exceptions set forth in the
Bridge Loan Facility, we are required to prepay the Bridge Loan Facility with
the net cash proceeds from:
o any debt offerings by L-3 Holdings or its subsidiaries, including L-3
Communications;
o issuance of any equity interests in L-3 Holdings or L-3 Communications;
o incurrence of any other indebtedness of L-3 Holdings or any of its
subsidiaries, including L-3 Communications (other than under the senior
credit facilities and certain permitted indebtedness); and
o any sale of assets or stock of any subsidiaries of L-3 Communications.
In the fourth quarter of 2001, L-3 Holdings sold $420.0 million of 4%
Senior Subordinated Convertible Contingent Debt Securities due 2011 ("CODES").
The net proceeds from this offering amounted to approximately $407.5 million
after underwriting discounts and commissions and other offering expenses.
Interest is payable semi-annually on March 15 and September 15 of each year
commencing March 15, 2002. The CODES are convertible into L-3 Holdings' common
stock at a conversion price of $53.81 per share (7,804,878 shares) under any of
the following circumstances: (1) during any Conversion Period (defined below)
if the closing sales price of the common stock of L-3 Holdings is more than
120% of the conversion price ($64.58) for at least 20 trading days in the 30
consecutive trading-day period ending on the first day of the respective
Conversion Period, (2) during the five business day period following any 10
consecutive trading-day period in which the average of the trading prices for
the CODES was less than 105% of the conversion value, (3) if the credit ratings
assigned to the CODES by either Moody's or Standard & Poor's are below certain
specified ratings, (4) if they have been called for redemption by us, or (5)
upon the occurrence of certain specified corporate transactions.
36
A Conversion Period is the period from and including the thirtieth trading day
in a fiscal quarter to, but not including, the thirtieth trading day of the
immediately following fiscal quarter. There are four Conversion Periods in each
fiscal year. Additionally, holders of the CODES have a right to receive
contingent interest payments, not to exceed a per annum rate of 0.5% of the
outstanding principal amount of the CODES, which will be paid on the CODES
during any six-month period following a six-month period in which the average
trading price of the CODES is above 120% of the principal amount of the CODES.
The contingent interest payment provision as well as the ability of the holders
of the CODES to exercise the conversion features as a result of changes in the
credit ratings assigned to the CODES have been accounted for as embedded
derivatives.
In the fourth quarter of 2000, L-3 Holdings sold $300.0 million of 5 1/4%
Convertible Senior Subordinated Notes due 2009 (the "Convertible Notes"). The
net proceeds from this offering amounted to $290.5 million after underwriting
discounts and commissions and other offering expenses, and were used to repay
revolver borrowings outstanding under our senior credit facilities. The
Convertible Notes may be converted at any time into L-3 Holdings common stock
at a conversion price of $40.75 per share (7,361,964 shares).
In April 1997, May 1998 and December 1998, L-3 Communications sold $225.0
million of 10 3/8% Senior Subordinated Notes due 2007, $180.0 million of 8 1/2%
Senior Subordinated Notes due 2008, and $200.0 million of 8% Senior
Subordinated Notes due 2008 (collectively, the "Senior Subordinated Notes"),
whose aggregate net proceeds amounted to $576.0 million after underwriting
discounts and commissions and other offering expenses.
In November 2001, we entered into interest rate swap agreements on our
$180.0 million of 8 1/2% Senior Subordinated Notes due 2008. These swap
agreements exchange our fixed interest rate for a variable interest rate on the
entire principal amount. Under these swap agreements, we will pay or receive
the difference between the fixed interest rate of 8 1/2% on the senior
subordinated notes and a variable interest rate, set in arrears, determined two
business days prior to the interest payment date of the related senior
subordinated notes equal to (1) the six month LIBOR rate plus (2) an average of
350.8 basis points. In July 2001, we entered into interest rate swap agreements
on our $200.0 million of 8% Senior Subordinated Notes due 2008. These swap
agreements exchange our fixed interest rate for a variable interest rate on the
entire principal amount. Under these swap agreements, we will pay or receive
the difference between the fixed interest rate of 8% on the senior subordinated
notes and a variable interest rate, set in arrears, determined two business
days prior to the interest payment date of the related senior subordinated
notes equal to (1) the six month LIBOR rate plus (2) an average of 192 basis
points. The difference to be paid or received on these swap agreements is
recorded as an adjustment to interest expense. The swap agreements are
accounted for as fair value hedges.
The senior credit facilities, Bridge Loan Facility, Senior Subordinated
Notes, Convertible Notes and CODES agreements contain financial covenants and
other restrictive covenants which remain in effect so long as we owe any amount
or any commitment to lend exists thereunder. As of December 31, 2001, we were
in compliance with those covenants at all times. The borrowings under the
senior credit facilities are guaranteed by L-3 Holdings and by substantially
all of the domestic subsidiaries of L-3 Communications on a senior basis. The
payments of principal and premium, if any, and interest on the Senior
Subordinated Notes and Bridge Loan Facility are unconditionally guaranteed, on
an unsecured senior subordinated basis, jointly and severally, by all of L-3
Communications' restricted subsidiaries other than its foreign subsidiaries.
The guarantees of the Senior Subordinated Notes and Bridge Loan Facility are
junior to the guarantees of the senior credit facilities and rank pari passu
with each other and the guarantees of the Convertible Notes and the CODES. The
Convertible Notes and CODES are unconditionally guaranteed, on an unsecured
senior subordinated basis, jointly and severally, by L-3 Communications and
substantially all of its direct and indirect domestic subsidiaries. These
guarantees rank junior to the guarantees of the senior credit facilities and
rank pari passu with each other and the guarantees of the Senior Subordinated
Notes and Bridge Loan Facility. See Note 7 to our consolidated financial
statements for a description of our debt and related financial covenants at
December 31, 2001.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA)
Our EBITDA was $362.3 million for 2001, $297.0 million for 2000 and $204.2
million for 1999. We define EBITDA as operating income plus depreciation
expense and amortization expense. Other than
37
our amount of debt and interest expense, EBITDA is the major component in the
calculation of the debt ratio and interest coverage ratio which are part of the
financial covenants for our debt. The debt ratio is defined as the ratio of
consolidated total debt to consolidated EBITDA. The interest coverage ratio is
equal to the ratio of consolidated EBITDA to consolidated cash interest
expense. The higher our EBITDA is on a relative basis to our outstanding debt,
the lower our debt ratio will be. A lower debt ratio indicates a higher
borrowing capacity. Similarly, an increase in our EBITDA on a relative basis to
consolidated cash interest expense, results in a higher interest coverage
ratio, which indicates a greater capacity to service debt.
EBITDA is presented as additional information because we believe it to be
a useful indicator of an entity's debt capacity and its ability to service its
debt. EBITDA is not a substitute for operating income, net income or cash flows
from operating activities as determined in accordance with generally accepted
accounting principles in the United States of America. EBITDA is not a complete
net cash flow measure because EBITDA is a financial performance measurement
that does not include reductions for cash payments for an entity's obligation
to service its debt, fund its working capital and capital expenditures and pay
its income taxes. Rather, EBITDA is one potential indicator of an entity's
ability to fund these cash requirements. EBITDA as we defined it may differ
from similarly named measures used by other entities and, consequently could be
misleading unless all entities calculate and define EBITDA in the same manner.
EBITDA is also not a complete measure of an entity's profitability because it
does not include costs and expenses for depreciation and amortization, interest
and income taxes.
CONTRACTUAL OBLIGATIONS AND CONTINGENT COMMITMENTS
The tables below present our contractual obligations and contingent
commitments as of December 31, 2001.
YEARS ENDING DECEMBER 31,
-------------------------------------------------
2005 AND
CONTRACTUAL OBLIGATIONS: TOTAL 2002 2003 2004 THEREAFTER
-------------------------------------------- ------------- --------- --------- --------- -------------
(IN MILLIONS)
Principal amount of long-term debt ......... $ 1,325.0 $ -- $ -- $ -- $ 1,325.0
Non-cancelable operating leases ............ 350.5 61.9 49.3 33.1 206.2
Capital leases ............................. 4.7 1.7 1.4 0.9 0.7
---------- ----- ----- ----- ----------
Total ..................................... $ 1,680.2 $ 63.6 $ 50.7 $ 34.0 $ 1,531.9
========== ====== ====== ====== ==========
YEARS ENDING DECEMBER 31,
-------------------------------------------------
2005 AND
CONTINGENT COMMITMENTS: TOTAL 2002 2003 2004 THEREAFTER
----------------------------------------------------- ----------- ---------- ---------- --------- -----------
(IN MILLIONS)
Outstanding letters of credit under our senior credit
facilities ......................................... $ 102.4 $ 86.5 $ 10.6 $ 3.6 $ 1.7
Other outstanding letters of credit ................. 20.0 12.5 7.3 -- 0.2
Construction agency agreement ....................... 43.5 43.5 -- -- --
Simulator systems operating leases .................. 89.2 -- 4.2 5.2 79.8
Guarantees of affiliate debt ........................ 1.0 1.0 -- -- --
Capital contributions for limited partnership
investments ........................................ 5.0 5.0 -- -- --
-------- ------- ------- ------ ------
Total .............................................. $ 261.1 $ 148.5 $ 22.1 $ 8.8 $ 81.7
======== ======= ======= ====== ======
EQUITY. On May 2, 2001, we sold 9.2 million shares of L-3 Holdings common
stock in a public offering for $40.00 per share. In addition, as part of the
transaction, other selling stockholders including affiliates of Lehman Brothers
Inc. sold 4.7 million secondary shares. Upon closing, we received net proceeds
of $353.6 million, which we used to repay borrowings outstanding under our
senior credit facilities, pay for the KDI and EER acquisitions and to increase
cash and cash equivalents.
38
On February 4, 1999, we sold 10.0 million shares of L-3 Holdings common
stock in a public offering for $21.00 per share which generated net proceeds of
$201.6 million. In addition, as part of the same transaction, 13.0 million
shares of L-3 Holdings common stock were sold by Lehman Brothers Capital
Partners III, L.P. and its affiliates ("the Lehman Partnership") and Lockheed
Martin in a secondary public offering. In October 1999, Lockheed Martin sold
its remaining L-3 Holdings common stock. In December 1999, the Lehman
Partnership distributed approximately 7.6 million shares of its shares of
common stock of L-3 Holdings to its partners. On December 31, 2001, the Lehman
Partnership owned approximately 4.4% of the outstanding common stock of L-3
Holdings.
Based upon our current level of operations, we believe that our cash from
operating activities, together with available borrowings under the senior
credit facilities, will be adequate to meet our anticipated requirements for
working capital, capital expenditures, commitments, research and development
expenditures, contingent purchase prices, program and other discretionary
investments, and interest payments for the foreseeable future. There can be no
assurance, however, that our business will continue to generate cash flow at
current levels, or that currently anticipated improvements will be achieved. If
we are unable to generate sufficient cash flow from operations to service our
debt, we may be required to sell assets, reduce capital expenditures, refinance
all or a portion of our existing debt or obtain additional financing. Our
ability to make scheduled principal payments or to pay interest on or to
refinance our indebtedness depends on our future performance and financial
results, which, to a certain extent, are subject to general conditions in or
affecting the defense industry and to general economic, political, financial,
competitive, legislative and regulatory factors beyond our control. There can
be no assurance that sufficient funds will be available to enable us to service
our indebtedness, to make necessary capital expenditures and to make
discretionary investments.
DERIVATIVE FINANCIAL INSTRUMENTS
Included in our derivative financial instruments are interest rate swap
agreements, caps, floors, foreign currency forward contracts and the embedded
derivatives related to the issuance of our CODES. All of our derivative
financial instruments that are sensitive to market risk are entered into for
purposes other than trading.
EMBEDDED DERIVATIVES. The contingent interest payment and contingent
conversion features of the CODES are embedded derivatives which were bifurcated
from the CODES, and a portion of the net proceeds received from the CODES equal
to their aggregate fair value of $2.5 million was ascribed to the embedded
derivatives as required by SFAS No. 133. The subsequent changes in the fair
values of the embedded derivatives are recorded in the statement of operations.
Their fair values at December 31, 2001 were $3.1 million.
INTEREST RATE RISK. Our financial instruments that are sensitive to
changes in interest rates include borrowings under the senior credit facilities
and our purchased interest rate cap contracts, written interest rate floor
contracts and interest rate swap agreements, all of which are denominated in
U.S. dollars. The interest rates on the Senior Subordinated Notes, Convertible
Notes and CODES are fixed-rate and are not affected by changes in interest
rates.
To mitigate risks associated with changing interest rates on borrowings
under the senior credit facilities that bear interest at variable rates we
entered into interest rate cap and floor contracts. The interest rate cap
contract provides protection against increases in interest rates on borrowings
to the extent:
o those borrowings are less than or equal to the notional amount of the
cap contract; and
o the interest rate paid on the borrowings rises above the sum of the cap
reference rate plus our applicable borrowing spread.
However, the written interest rate floor limits our ability to enjoy
decreases in interest rates on our borrowings to the extent:
o those borrowings are less than or equal to the notional amount of the
floor contract; and
o the interest rate paid on those borrowings falls below the sum of the
floor reference rate plus our applicable borrowing spread.
39
In 2001, we entered into interest rate swap agreements on $380.0 million
of our senior subordinated notes to convert their fixed interest rates to
variable rates and to take advantage of the current low interest rate
environment. These swap agreements are described above. For every basis point
(0.01%) that the six month LIBOR interest rate is greater than 4.99%, we will
incur an additional $18,000 of interest expense above the fixed interest rate
on $180.0 million of senior subordinated notes calculated on a per annum basis
until maturity. For every basis point that the six month LIBOR interest rate is
greater than 6.08%, we will incur an additional $20,000 of interest expense
above the fixed interest rate on $200.0 million of senior subordinated notes
calculated on a per annum basis until maturity. Conversely, for every basis
point that the six month LIBOR interest rate is less than 4.99%, we will
recognize $18,000 of interest income on $180.0 million of senior subordinated
notes calculated on a per annum basis until maturity. For every basis point
that the six month LIBOR interest rate is less than 6.08%, we will recognize
$20,000 of interest income on $200.0 million of senior subordinated notes
calculated on a per annum basis until maturity. The six month LIBOR rate at
December 31, 2001 was 1.96%.
We attempt to manage exposure to counterparty credit risk by entering into
interest rate agreements only with major financial institutions that are
expected to perform fully under the terms of such agreements. Cash payments
between us and the counterparties are made at the end of each quarter on the
caps and floors and on the interest payment dates of the senior subordinated
notes on the interest rate swap agreements. Such payments are recorded as
adjustments to interest expense. Additional data on our debt obligations, our
applicable borrowing spreads included in the interest rates we pay on
borrowings under the senior credit facilities and interest rate agreements are
provided in Notes 7 and 8 to our consolidated financial statements.
The table below presents significant contract terms and fair values as of
December 31, 2001 for our interest rate agreements.
CAPS FLOORS INTEREST RATE SWAP AGREEMENTS
------------------ ------------------ --------------------------------------
(in millions)
Notional amount ............. $ 100.0 $ 50.0 $ 200.0 $ 180.0
Interest rate ............... 7.5% 5.5% 8.0% 8.5%
Reference rate .............. 3 month LIBOR 3 month LIBOR 6 month LIBOR 6 month LIBOR
Designated maturity ......... Quarterly Quarterly Semi-Annual Semi-Annual
Expiration date ............. March 28, 2002 March 28, 2002 August 1, 2008 May 15, 2008
Fair value .................. $ -- $ (0.4) $ 2.4 $ (9.6)
FOREIGN CURRENCY EXCHANGE RISK. We conduct some of our operations outside
the U.S. in functional currencies other than the U.S. dollar. Additionally,
some of our U.S. operations have contracts with foreign customers denominated
in foreign currencies. To mitigate the risk associated with certain of these
contracts denominated in foreign currency we have entered into foreign currency
forward contracts. At December 31, 2001, the notional value of foreign currency
forward contracts was $7.1 million and the fair value of these contracts was
$0.3 million. We account for these contracts as cash flow hedges.
EQUITY PRICE RISK. Our investments in common equities are subject to
equity price risk. The fair values of the Company's investments are based on
quoted market prices, as available, and on historical cost for investments
which it is not practicable to estimate fair value. Both the carrying values
and estimated fair values of such instruments amounted to $16.5 million at the
end of 2001.
BACKLOG AND ORDERS
We define funded backlog as the value of contract awards received from the
U.S. Government, which the U.S. Government has appropriated funds, plus the
value of contract awards and orders received from customers other than the U.S.
Government which have yet to be recognized as sales. Our funded backlog as of
December 31, 2001 was $1,719.3 million and as of December 31, 2000 was $1,354.0
million. We expect to record as sales approximately 69.7% of our December 31,
2001 funded backlog during 2002. However, there can be no assurance that our
funded backlog will become sales in any particular period, if at all. Our
funded orders were $2,456.1 million for 2001, $2,013.7 million for 2000 and
$1,423.1 million for 1999.
40
Our funded backlog does not include the full value of our contract awards
including those pertaining to multi-year, cost-plus reimbursable contracts,
which are generally funded on an annual basis. Funded backlog also excludes the
sales value of unexercised contract options that may be exercised by customers
under existing contracts and the sales value of purchase orders that may be
issued under indefinite quantity contracts or basic ordering agreements.
RESEARCH AND DEVELOPMENT
Company-sponsored research and development costs including bid and
proposal costs were $107.5 million for 2001, $101.9 million for 2000 and $76.1
million for 1999. Customer-funded research and development costs were $319.4
million for 2001, $299.3 million for 2000 and $226.3 million for 1999.
CONTINGENCIES
We are engaged in providing products and services under contracts with the
U.S. Government and to a lesser degree, under foreign government contracts,
some of which are funded by the U.S. Government. All such contracts are subject
to extensive legal and regulatory requirements, and, periodically, agencies of
the U.S. Government investigate whether such contracts were and are being
conducted in accordance with these requirements. Under government procurement
regulations, an indictment by a federal grand jury could result in the
suspension 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 we manufacture
and provide 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 us.
We continually assess our obligations with respect to applicable
environmental protection laws. While it is difficult to determine the timing
and ultimate cost to be incurred in order to comply with these laws, based upon
available internal and external assessments, with respect to those
environmental loss contingencies of which we are aware, we believe 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 our consolidated financial position, results of operations or
cash flows. Also, we have been periodically subject to litigation, claims or
assessments and various contingent liabilities incidental to our business. We
accrue for these contingencies when it is probable that a liability has been
incurred and the amount of the loss can be reasonably estimated.
With respect to those investigative actions, items of litigation, claims
or assessments of which we are aware, we are 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 our consolidated financial position, results
of operations or cash flows.
RECENTLY ISSUED AND PROPOSED ACCOUNTING STANDARDS
In July 2001, the FASB issued SFAS No. 141, Business Combinations, which
supersedes 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
identifiable 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 identifiable intangible assets with finite lives be no longer limited
to forty years. The provisions of SFAS No. 142 are effective beginning January
1, 2002, with full implementation of the impairment measurement provisions
completed by December 31, 2002. Under SFAS No. 142, we will not amortize
goodwill, but will be required to amortize identifiable intangibles with finite
lives. Our goodwill amortization expense for the year ended December 31, 2001
was $42.6 million. Based on a preliminary internal assessment, we do not
believe that the cumulative effect of the accounting change resulting from the
adoption of the transitional impairment provisions of SFAS No. 142 will be
material.
41
In August of 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 applies to legal obligations associated
with the retirement of tangible long-lived assets that result from the
acquisition, construction, development or normal operation of a long-lived
asset, except for certain obligations of lessees. This statement does not apply
to obligations that arise solely from a plan to dispose of a long-lived asset.
SFAS No. 143 requires that estimated asset retirement costs be measured at
their fair values and recognized as assets and depreciated over the useful life
of the related asset. Similarly, liabilities for the present value of asset
retirement obligations are to be recognized and accreted as interest expense
each year to their estimated future value until the asset is retired. These
provisions will be applied to existing asset retirement obligations as of the
adoption date as a cumulative-effect of a change in accounting policy. SFAS No.
143 is effective for our fiscal years beginning January 1, 2003. SFAS No. 143
will not have a material effect on our consolidated results of operations and
financial position.
In October of 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, Reporting the Results of Operations -- Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions (APB No. 30), for the disposal of a segment of a
business (as previously defined in that Opinion). SFAS No. 144 expands the
scope of accounting for disposals to include all components of an entity,
including reportable segments and operating segments, reporting units,
subsidiaries and certain asset groups. It requires the gain or loss on disposal
to be measured as the difference between (1) the fair value less the costs to
sell and (2) the carrying value of the component, and such gain or loss cannot
include the estimated future operating losses of the component, which were
included in the gain or loss determination under APB No. 30. SFAS No. 144 also
amends Accounting Research Bulletin No. 51, Consolidated Financial Statements,
to eliminate the exception to consolidation for a subsidiary for which control
is likely to be temporary. The provisions of SFAS No. 144 are effective for our
fiscal years beginning January 1, 2002, and interim periods within those fiscal
years. SFAS No. 144 will not have a material effect on our consolidated results
of operations and financial position.
INFLATION
The effect of inflation on our sales and earnings has not been
significant. Although a majority of our sales are made under long-term
contracts, the selling prices of such contracts, established for deliveries in
the future, generally reflect estimated costs to be incurred in these future
periods. In addition, some contracts provide for price adjustments through
escalation clauses.
FORWARD-LOOKING STATEMENTS
Certain of the matters discussed concerning our operations, cash flows,
financial position, economic performance, and financial condition, including in
particular, the likelihood of our success in developing and expanding our
business and the realization of sales from backlog, include forward- looking
statements within the meaning of section 27A of the Securities Act and Section
21E of the Exchange Act.
Statements that are predictive in nature, that depend upon or refer to
events or conditions or that include words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates" and similar expressions are
forward-looking statements. Although we believe that these statements are based
upon reasonable assumptions, including projections of orders, sales, operating
margins, earnings, cash flow, research and development costs, working capital,
capital expenditures and other projections, they are subject to several risks
and uncertainties, and therefore, we can give no assurance that these
statements will be achieved.
Such 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;
42
o our reliance on contracts with a limited number of agencies of, or
contractors to, the U.S. Government and the possibility of termination
of government contracts by unilateral government action or for failure
to perform;
o our ability to obtain future government contracts on a timely basis;
o the availability of government funding and changes in customer
requirements for our products and services;
o our significant amount of debt and the restrictions contained in our
debt agreements;
o collective bargaining agreements and labor disputes;
o economic conditions, competitive environment, international business and
political conditions, timing of international awards and contracts;
o our extensive use of fixed-price contracts as compared to
cost-reimbursable contracts;
o our ability to identify future acquisition candidates or to integrate
acquired operations;
o the rapid change of technology and high level of competition in the
communication equipment industry;
o our introduction of new products into commercial markets or our
investments in commercial products or companies;
o pension, environmental or legal matters or proceedings and various other
market, competition and industry factors, many of which are beyond our
control; and
o the fair values of the assets including goodwill and other intangibles
of our businesses which can be impaired or reduced by the other factors
discussed above.
Readers of this document are cautioned that our forward-looking statements
are not guarantees of future performance and the actual results or developments
may differ materially from the expectations expressed in the forward-looking
statements.
As for the forward-looking statements that relate to future financial
results and other projections, actual results will be different due to the
inherent uncertainties of estimates, forecasts and projections and may be
better or worse than projected. Given these uncertainties, you should not place
any reliance on these forward-looking statements. These forward-looking
statements also represent our estimates and assumptions only as of the date
that they were made. We expressly disclaim a duty to provide updates to these
forward-looking statements, and the estimates and assumptions associated with
them, after the date of this filing to reflect events or changes or
circumstances or changes in expectations or the occurrence of anticipated
events.
43
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
L-3 Communications Holdings, Inc.
We have audited the accompanying consolidated balance sheets of L-3
Communications Holdings, Inc. ("L-3 Holdings") and L-3 Communications
Corporation ("L-3 Communications") and subsidiaries (collectively, the
"Company") as of December 31, 2001 and 2000, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the three years ended December 31, 2001. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of L-3
Holdings and L-3 Communications and subsidiaries as of December 31, 2001 and
2000 and their respective consolidated results of operations and cash flows for
each of the three years ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
/s/ PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 4, 2002, except as to Note 1, Note 2 (Basis of
Presentation and Recently Issued Accounting
Standards) and Note 16 to the consolidated financial
statements, for which the date is May 20, 2002
44
L-3 COMMUNICATIONS HOLDINGS , INC.
AND L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
------------------------------
2001 2000
------------- --------------
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 361,022 $ 32,680
Contracts in process ...................................... 801,824 700,133
Deferred income taxes ..................................... 62,965 89,732
Other current assets ...................................... 16,590 7,025
---------- ----------
Total current assets .................................... 1,242,401 829,570
---------- ----------
Property, plant and equipment, net ......................... 203,374 156,128
Intangibles, primarily goodwill ............................ 1,707,718 1,371,368
Deferred income taxes ...................................... 97,883 57,111
Deferred debt issue costs .................................. 40,190 29,907
Other assets ............................................... 47,683 19,460
---------- ----------
Total assets ............................................ $3,339,249 $2,463,544
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade ................................... $ 129,538 $ 159,901
Accrued employment costs .................................. 126,981 102,606
Accrued expenses .......................................... 38,823 55,576
Customer advances ......................................... 74,060 55,203
Accrued interest .......................................... 13,288 16,335
Income taxes .............................................. 16,768 7,251
Other current liabilities ................................. 125,113 71,797
---------- ----------
Total current liabilities ............................... 524,571 468,669
---------- ----------
Pension and postretirement benefits ........................ 155,052 105,523
Other liabilities .......................................... 60,585 101,783
Long-term debt ............................................. 1,315,252 1,095,000
---------- ----------
Total liabilities ....................................... 2,055,460 1,770,975
Minority interest .......................................... 69,897 --
Commitments and contingencies
Shareholders' equity:
L-3 Holdings' common stock; $.01 par value; authorized
300,000,000 shares, issued and outstanding 78,496,626 and
67,213,290 shares (L-3 Communications' common stock;
$.01 par value, 100 shares authorized, issued and
outstanding) ............................................ 939,037 515,926
Retained earnings ......................................... 301,730 186,272
Unearned compensation ..................................... (3,205) (2,457)
Accumulated other comprehensive loss ...................... (23,670) (7,172)
---------- ----------
Total shareholders' equity ................................. 1,213,892 692,569
---------- ----------
Total liabilities and shareholders' equity .............. $3,339,249 $2,463,544
========== ==========
See notes to consolidated financial statements.
45
L-3 COMMUNICATIONS HOLDINGS , INC.
AND L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Sales:
Contracts, primarily long-term U.S. Government..... $ 1,903,728 $ 1,536,486 $ 1,132,699
Commercial, primarily products .................... 443,694 373,575 272,763
----------- ----------- -----------
Total sales .................................... 2,347,422 1,910,061 1,405,462
----------- ----------- -----------
Costs and expenses:
Contracts, primarily long-term U.S. Government..... 1,674,438 1,343,376 994,262
Commercial, primarily products:
Cost of sales ................................... 271,250 238,034 175,278
Selling, general and administrative ............. 126,404 105,933 85,436
----------- ----------- -----------
Total costs and expenses ....................... 2,072,092 1,687,343 1,254,976
----------- ----------- -----------
Operating income ................................... 275,330 222,718 150,486
Interest and other income .......................... 1,739 4,393 5,534
Interest expense ................................... 86,390 93,032 60,590
Minority interest .................................. 4,457 -- --
----------- ----------- -----------
Income before income taxes ......................... 186,222 134,079 95,430
Provision for income taxes ......................... 70,764 51,352 36,741
----------- ----------- -----------
Net income ......................................... $ 115,458 $ 82,727 $ 58,689
=========== =========== ===========
L-3 Holdings' earnings per common share:
Basic ............................................. $ 1.54 $ 1.24 $ 0.91
=========== =========== ===========
Diluted ........................................... $ 1.47 $ 1.18 $ 0.88
=========== =========== ===========
L-3 Holdings' weighted average common shares
outstanding:
Basic ............................................. 74,880 66,710 64,214
=========== =========== ===========
Diluted ........................................... 85,438 69,906 67,032
=========== =========== ===========
See notes to consolidated financial statements.
46
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS)
L-3 HOLDINGS'
COMMON STOCK ADDITIONAL
SHARES PAR PAID-IN RETAINED
ISSUED VALUE CAPITAL EARNINGS
-------- ------- ----------- ----------
Balance December 31, 1998 .................... 54,804 $548 $264,221 $ 44,856
Comprehensive income:
Net income .................................. 58,689
Minimum pension liability adjustment ........
Unrealized loss on securities ...............
Foreign currency translation adjustment
Shares issued:
Sale of common stock ........................ 10,000 100 201,713
Employee benefit plans ...................... 326 3 6,990
Acquisition consideration ................... 302 3 6,431
Exercise of stock options ................... 158 1 1,763
------ ---- -------- --------
Grant of restricted stock .................... 1,921
Amortization of unearned compensation ........
Balance December 31, 1999 .................... 65,590 655 483,039 103,545
Comprehensive income:
Net income .................................. 82,727
Minimum pension liability adjustment,
net of ($553) tax benefit...................
Foreign currency translation adjustment
Unrealized loss on securities, net of
($2,316) tax benefit........................
Shares issued:
Employee benefit plans ...................... 469 5 12,637
Exercise of stock options ................... 1,154 12 18,050
Grant of restricted stock .................... 1,512
Amortization of unearned compensation ........
Other ........................................ 16
------ ---- -------- --------
Balance December 31, 2000 .................... 67,213 672 515,254 186,272
Comprehensive income:
Net income .................................. 115,458
Minimum pension liability adjustment,
net of ($11,955) tax benefit................
Foreign currency translation
adjustment, net of ($164) tax benefit ......
Unrealized loss on securities, net of
($111) tax benefit .........................
Unrealized loss on securities reclassified
into net income, net of $2,274 tax
expense ....................................
Unrealized losses on hedging
instruments, net of ($100) tax benefit......
Shares issued:
Sale of common stock ........................ 9,150 92 353,530
Employee benefit plans ...................... 418 4 16,864
Acquisition consideration ................... 588 6 17,351
Exercise of stock options ................... 1,128 11 28,253
Employee stock purchase plan
contributions ............................... 4,861
Grant of restricted stock .................... 2,118
Amortization of unearned compensation.........
Other ........................................ 21
------ ---- -------- --------
Balance December 31, 2001 .................... 78,497 $785 $938,252 $301,730
====== ==== ======== ========
ACCUMULATED
OTHER
UNEARNED COMPREHENSIVE
COMPENSATION INCOME (LOSS) TOTAL
-------------- -------------- --------------
Balance December 31, 1998 .................... $ -- $ (9,651) $ 299,974
Comprehensive income:
Net income .................................. 58,689
Minimum pension liability adjustment ........ 9,443 9,443
Unrealized loss on securities ............... (970) (970)
Foreign currency translation adjustment (1,225) (1,225)
----------
65,937
Shares issued:
Sale of common stock ........................ 201,813
Employee benefit plans ...................... 6,993
Acquisition consideration ................... 6,434
Exercise of stock options ................... 1,764
Grant of restricted stock .................... (1,921) --
Amortization of unearned compensation ........ 260 260
-------- --------- ----------
Balance December 31, 1999 .................... (1,661) (2,403) 583,175
Comprehensive income:
Net income .................................. 82,727
Minimum pension liability adjustment,
net of ($553) tax benefit................... (819) (819)
Foreign currency translation adjustment (1,222) (1,222)
Unrealized loss on securities, net of
($2,316) tax benefit........................ (2,728) (2,728)
-------- --------- ----------
77,958
Shares issued:
Employee benefit plans ...................... 12,642
Exercise of stock options ................... 18,062
Grant of restricted stock .................... (1,512) --
Amortization of unearned compensation ........ 716 716
Other ........................................ 16
-------- --------- ----------
Balance December 31, 2000 .................... (2,457) (7,172) 692,569
Comprehensive income:
Net income .................................. 115,458
Minimum pension liability adjustment,
net of ($11,955) tax benefit................ (19,519) (19,519)
Foreign currency translation
adjustment, net of ($164) tax benefit ...... (268) (268)
Unrealized loss on securities, net of
($111) tax benefit ......................... (180) (180)
Unrealized loss on securities reclassified
into net income, net of $2,274 tax
expense .................................... 3,632 3,632
Unrealized losses on hedging
instruments, net of ($100) tax benefit...... (163) (163)
----------
98,960
Shares issued:
Sale of common stock ........................ 353,622
Employee benefit plans ...................... 16,868
Acquisition consideration ................... 17,357
Exercise of stock options ................... 28,264
Employee stock purchase plan
contributions ............................... 4,861
Grant of restricted stock .................... (2,118) --
Amortization of unearned compensation......... 1,370 1,370
Other ........................................ 21
-------- --------- ----------
Balance December 31, 2001 .................... $ (3,205) $ (23,670) $1,213,892
======== ========= ==========
See notes to consolidated financial statements.
47
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
------------- ------------ -------------
OPERATING ACTIVITIES:
Net income ...................................................... $ 115,458 $ 82,727 $ 58,689
Goodwill amortization ........................................... 42,606 35,327 20,970
Depreciation and other amortization ............................. 44,345 38,927 32,748
Amortization of deferred debt issue costs ....................... 6,388 5,724 3,904
Minority interest ............................................... 4,457 -- --
Deferred income tax provision ................................... 52,638 25,103 28,831
Other noncash items ............................................. 17,576 12,517 6,617
Changes in operating assets and liabilities, net of amounts
acquired:
Contracts in process ........................................... (40,652) (66,402) (61,670)
Other current assets ........................................... 1,643 (2,599) (70)
Other assets ................................................... (12,033) (416) 552
Accounts payable ............................................... (43,165) 38,065 2,896
Accrued employment costs ....................................... 11,931 6,239 2,052
Accrued expenses ............................................... (20,300) 2,274 (6,280)
Customer advances .............................................. 12,627 (17,087) 5,766
Accrued interest ............................................... (3,047) 3,637 5,985
Income taxes ................................................... 14,431 13,161 3,917
Other current liabilities ...................................... (37,555) (59,286) (13,554)
Pension and postretirement benefits ............................ 4,550 (7,214) 1,788
Other liabilities .............................................. 1,423 1,959 7,102
All other operating activities ................................. (353) 1,149 (1,225)
---------- ---------- ----------
Net cash from operating activities .............................. 172,968 113,805 99,018
---------- ---------- ----------
INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ................. (446,911) (599,608) (272,195)
Proceeds from sale of interest in subsidiary .................... 75,206 -- --
Capital expenditures ............................................ (48,121) (33,580) (23,456)
Disposition of property, plant and equipment .................... 1,237 18,060 6,713
Other investing activities ...................................... (6,301) 6,905 4,136
---------- ---------- ----------
Net cash (used in) investing activities ......................... (424,890) (608,223) (284,802)
---------- ---------- ----------
FINANCING ACTIVITIES:
Borrowings under revolving credit facility ...................... 316,400 858,500 74,700
Repayment of borrowings under revolving credit facility ......... (506,400) (668,500) (74,700)
Proceeds from sale of convertible senior subordinated notes 420,000 300,000 --
Proceeds from sale of L-3 Holdings' common stock, net ........... 353,622 -- 201,582
Debt issuance costs ............................................. (16,671) (12,916) (323)
Proceeds from exercise of stock options ......................... 16,325 8,954 658
Employee stock purchase plan contributions ...................... 4,861 -- --
Distributions to minority interest .............................. (2,530) -- --
Other financing activities ...................................... (5,343) (1,728) 525
---------- ---------- ----------
Net cash from financing activities .............................. 580,264 484,310 202,442
---------- ---------- ----------
Net increase (decrease) in cash ................................. 328,342 (10,108) 16,658
Cash and cash equivalents, beginning of period .................. 32,680 42,788 26,130
---------- ---------- ----------
Cash and cash equivalents, end of period ........................ $ 361,022 $ 32,680 $ 42,788
========== ========== ==========
See notes to consolidated financial statements.
48
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO 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 secure communications and intelligence, surveillance and reconnaissance
("ISR") systems, training, simulation and support services, aviation products
and aircraft modernization, as well as specialized products. The Company's
customers include the U.S. Department of Defense ("DoD") and prime contractors
thereof, certain U.S. Government intelligence agencies, major aerospace and
defense contractors, foreign governments, commercial customers and certain
other U.S. federal, state and local government agencies.
As a result of recently completed acquisitions, including Aircraft
Integration Systems, a division of Raytheon Company, on March 8, 2002, and
Spar, Analytics, BT Fuze and SY Technologies in November and December of 2001
and their effect on the Company's operations, effective January 1, 2002, the
Company began to present its businesses with the following four reportable
segments: (1) Secure Communications & ISR, (2) Training, Simulation & Support
Services; (3) Aviation Products & Aircraft Modernization; and (4) Specialized
Products. The descriptions of the Company's reportable segments below include
the products and services provided by our Aircraft Integration Systems
business. Prior to December 31, 2001, the Company had two reportable segments:
Secure Communications Systems and Specialized Products. Prior year segment data
have been reclassified to conform to the current year presentation of segments.
Secure Communications & ISR. This segment provides products and services
for the global ISR market, specializing in signals intelligence (SIGINT) and
communications intelligence (COMINT) systems, which provide the unique ability
to collect and analyze unknown electronic signals from command centers,
communication nodes and air defense systems for real-time situation awareness
and response in real-time to the warfighter. This segment also provides secure,
high data rate communications systems for military and other U.S. Government
and foreign government reconnaissance and surveillance applications. These
systems and products are critical elements of virtually all major
communication, command and control, intelligence gathering and space systems.
The Company's systems and products are used to connect a variety of airborne,
space, ground and sea-based communication systems and are used in the
transmission, processing, recording, monitoring and dissemination functions of
these communication systems. The major secure communication programs and
systems include:
o secure data links for airborne, satellite, ground and sea-based remote
platforms for real time information collection and dissemination to
users;
o highly specialized fleet management and support including procurement,
systems integration, sensor development, modifications and maintenance
for signals intelligence and ISR special mission aircraft and airborne
surveillance systems;
o strategic and tactical signal intelligence systems that detect, collect,
identify, analyze and disseminate information;
o secure telephone and network equipment and encryption management; and
o communication systems for surface and undersea vessels and manned space
flights.
Training, Simulation & Support Services. This segment provides a full range
of services, including:
o services designed to meet customer training requirements for aircrews,
navigators, mission operators, gunners and maintenance technicians for
virtually any platform, including military fixed and rotary wing
aircraft, air vehicles and various ground vehicles;
49
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
o communication software support, information services and a wide range of
engineering development services and integration support;
o high-end engineering and information support services used for command,
control, communications and ISR architectures, as well as for air
warfare modeling and simulation tools for applications used by the DoD
and U.S. Government intelligence agencies, including missile and space
systems, Unmanned Aerial Vehicles (UAVs) and military aircraft;
o developing and managing extensive programs in the United States and
internationally, focusing on teaching, training and education,
logistics, strategic planning, organizational design, democracy
transition and leadership development; and
o design, prototype development and production of ballistic missile
targets for present and future threat scenarios.
Aviation Products & Aircraft Modernization. This segment provides aviation
products and aircraft modernization services including:
o airborne traffic and collision avoidance systems (TCAS);
o commercial, solid-state, crash-protected cockpit voice recorders and
flight data recorders (known as "black boxes") and cruise ship hardened
voyage recorders;
o ruggedized displays for military and high-end commercial applications;
o turnkey aviation life cycle management services that integrate custom
developed and commercial off-the-shelf products for various military and
commercial wide-body and rotary wing aircraft, including heavy
maintenance and structural modifications and Head-of-State and
commercial interior completions; and
o engineering, modification, maintenance, logistics and upgrades for U.S.
Special Operations Command aircraft, vehicles and personal equipment.
Specialized Products. This segment supplies products to military and
commercial customers in several niche markets. The products include:
o ocean products, including acoustic undersea warfare products for mine
hunting, dipping sonars and anti-submarine and naval power distribution,
conditioning, switching and protection equipment for surface and
undersea platforms;
o telemetry, instrumentation, space and guidance products including
tracking and flight termination;
o premium fuzing products;
o microwave components;
o explosives detection systems for checked baggage at airports;
o high performance antennas and ground based radomes; and
o training devices and motion simulators which produce advanced virtual
reality simulation and high-fidelity representations of cockpits and
mission stations for aircraft and land vehicles.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying financial statements comprise the
consolidated financial statements of L-3 Holdings and L-3 Communications. L-3
Holdings' only asset is its investment in L-3
50
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Communications. The only obligations of L-3 Holdings are the 5 1/4% Convertible
Senior Subordinated Notes and the 4% Senior Subordinated Convertible Contingent
Debt Securities. L-3 Holdings has also guaranteed the borrowings under the
senior credit facilities of L-3 Communications. Because obligations of L-3
Holdings have been jointly, severally, fully and unconditionally guaranteed by
L-3 Communications and certain of its domestic subsidiaries, such debt has been
reflected as debt of L-3 Communications in its consolidated financial
statements in accordance with the Securities and Exchange Commission's ("SEC")
Staff Accounting Bulletin ("SAB") 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 been reflected in the
consolidated financial statements of L-3 Communications. As a result, the
consolidated financial positions, results of operations and cash flows of L-3
Holdings and L-3 Communications are substantially the same.
On April 23, 2002, the Company announced that its Board of Directors
authorized a two-for-one stock split on all shares of L-3 Holdings' common
stock. The stock split entitled all shareholders of record at the close of
business on May 6, 2002 to receive one additional share of L-3 Holdings common
stock for every share held on that date. The additional shares were distributed
to shareholders in the form of a stock dividend on May 20, 2002. The reported
number of shares of L-3 Holdings' common stock issued and outstanding, as well
as the historical EPS, outstanding stock options, and the number of common
shares issuable upon conversion of the Company's convertible securities data,
have been restated in this filing to give effect to the stock split.
On April 23, 2002, the Company's shareholders approved an increase in the
number of authorized shares of L-3 Holdings common stock from 100,000,000 to
300,000,000 and an increase in the number of authorized shares of L-3 Holdings
preferred stock from 25,000,000 to 50,000,000.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements of the
Company include all wholly-owned and significant majority-owned subsidiaries.
All significant intercompany transactions are eliminated in consolidation.
Investments over which the Company has significant influence but does not have
voting control are accounted for by the equity method.
CASH AND CASH EQUIVALENTS: Cash equivalents consist of highly liquid
investments with a maturity of three months or less at time of purchase.
REVENUE RECOGNITION: The substantial majority of the Company's direct and
indirect sales to the U.S. Government and certain of the Company's sales to
foreign governments and commercial customers are made pursuant to written
contractual arrangements or "contracts" to design, develop, manufacture and or
modify complex products, and to the specifications of the buyers (customers) or
to provide services related to the performance of such contracts. These
contracts are within the scope of the American Institute of Certified Public
Accountants Statement of Position 81-1 Accounting for Performance of
Construction -- Type and Certain Production-Type Contracts ("SOP 81-1"), and
sales and profits on them are recognized using percentage-of-completion methods
of accounting. Sales and profits on fixed-price production contracts whose
units are produced and delivered in a continuous or sequential process are
recorded as units are delivered based on their selling prices (the
"units-of-delivery" method). Sales and profits on other fixed-price contracts
are recorded based on the ratio of total actual incurred costs to date to the
total estimated costs for each contract (the "cost-to-cost method.") Sales and
fees on cost-reimbursable contracts are recognized as costs are incurred.
Amounts representing contract change orders or claims are included in sales
only when they can be reliably estimated and their realization is reasonably
assured. Losses on contracts are recognized in the period in which they are
determined. The impact of revisions of contract estimates, which may result
from contract modifications, performance or other reasons, are recognized on a
cumulative catch-up basis in the period in which the revisions are made.
51
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales on arrangements that are not within the scope of SOP 81-1 are
recognized in accordance with the SEC's SAB No. 101. Sales are recognized when
there is persuasive evidence of an arrangement, delivery has occurred or
services have been performed, the selling price to the buyer is fixed or
determinable and collectibility is reasonably assured.
CONTRACTS IN PROCESS: For the Company's contracts that are within the
scope of SOP 81-1, accumulated costs incurred that are allowable under the
terms of the contract and profits earned on contract sales are reported in
Contracts in Process. Billed Receivables represent the uncollected portion of
amounts recorded as sales and billed to customers, including those amounts for
sales arrangements that are not within the scope of SOP 81-1. Unbilled Contract
Receivables represent accumulated recoverable costs and earned profits or
losses on contracts in process that have been recorded as sales, but have not
yet been billed to customers. Inventoried Contract Costs represent recoverable
incurred costs on contracts in process. Incurred contract costs include direct
costs and overhead costs, and for U.S. Government contracts and contracts with
prime contractors or subcontractors of the U.S. Government, general and
administrative costs, independent research and development costs and bid and
proposal costs. Contracts in Process also contain amounts relating to contracts
and programs with long performance cycles, a portion of which may not be
realized within one year. Provisions for contracts in a loss position in excess
of the amounts included in Contracts in Process represent the unrecoverable
costs on the loss contracts that will be incurred in future periods and are
reported in Estimated Costs in Excess of Billings to Complete Contracts in
Process, which is a component of Other Current Liabilities and Other
Liabilities. Under the contractual arrangements on certain contracts with the
U.S. Government, the Company receives progress payments as it incurs costs. The
U.S. Government has a security interest in the Unbilled Contract Receivables
and Inventoried Contract Costs to which progress payments have been applied,
and such progress payments are reflected as a reduction of the related Unbilled
Contract Receivables and Inventoried Contract Costs. Customer Advances are
classified as current liabilities.
Inventories other than Inventoried Contract Costs are stated at the lower
of cost or market primarily using the average cost method.
DERIVATIVE FINANCIAL INSTRUMENTS: In connection with its risk management
and financial derivatives, the Company has entered into interest rate swap
agreements, interest rate cap and floor contracts and foreign currency forward
contracts. The interest rate swap agreements are accounted for as fair value
hedges. The foreign currency forward contracts are accounted for as cash flow
hedges. The embedded derivatives related to the issuance of the Company's debt
is recorded at fair value with changes reflected in the statement of
operations. The differential to be paid or received as interest rates change on
the interest rate swap agreements is recorded as an adjustment to interest
expense.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at
cost. Depreciation is computed by applying principally the straight-line method
to the estimated useful lives of the related assets. Useful lives range
substantially from 10 to 40 years for buildings and improvements and 3 to 10
years for machinery, equipment, furniture and fixtures. Leasehold improvements
are amortized over the shorter of the lease term or the estimated useful life
of the improvements.
DEBT ISSUANCE COSTS: Costs incurred to issue debt are deferred and
amortized as interest expense over the term of the related debt using a method
that approximates the effective interest method.
INTANGIBLES: Intangibles consist primarily of the excess of the purchase
cost of acquired businesses over the fair value of identifiable net assets
acquired ("goodwill"). Goodwill related to acquisitions consummated after June
30, 2001 is not amortized. Other intangibles are amortized on a straight-line
basis over periods ranging from 5 to 15 years. Accumulated goodwill
amortization was $117,975 at December 31, 2001 and $76,001 at December 31,
2000. The carrying amount of goodwill is evaluated on a recurring
52
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
basis. Current and estimated future profitability and undiscounted cash flows
excluding financing costs of the acquired businesses are the primary indicators
used to assess the recoverability of goodwill. For the years ended December 31,
2001 and 2000, there were no material adjustments to the carrying amounts of
goodwill resulting from these evaluations (see Recently Issued Accounting
Standards below for a description of changes in accounting for goodwill).
INCOME TAXES: The Company provides for income taxes using the liability
method. Deferred income tax assets and liabilities reflect tax carryforwards
and the net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting and income tax purposes, as
determined under enacted tax laws and rates. The effect of changes in tax laws
or rates is accounted for in the period of enactment.
RESEARCH AND DEVELOPMENT: Research and development costs sponsored by the
Company include bid and proposal costs related to government products and
services. These costs generally are allocated among all contracts in progress
under U.S. Government contractual arrangements. Customer-funded research and
development costs, including software development costs, incurred pursuant to
contracts are accounted for as direct contract costs. Other software
development costs incurred after establishing technological feasibility are
capitalized and are amortized on a product by product basis using the amount
that is the greater of the straight line method over the useful life or the
ratio of current revenues to total estimated revenues.
STOCK OPTIONS: Compensation expense for stock options is recognized in
income based on the excess, if any, of L-3 Holdings' fair value of the stock at
the grant date of the award or other measurement date over the amount an
employee must pay to acquire the stock. When the exercise price for stock
options granted to employees equals or exceeds the fair value of the L-3
Holdings common stock at the date of grant, the Company does not recognize
compensation expense. See Note 12 for the fair value pro forma disclosure of
stock-based compensation.
USE OF ESTIMATES: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
sales and costs and expenses during the reporting period. The most significant
of these estimates and assumptions relate to contract estimates of sales and
estimated costs to complete contracts in process, estimates of market values
for inventories reported at lower of cost or market, estimates of pension and
postretirement benefit obligations, recoverability of recorded amounts of fixed
assets and goodwill, income taxes, litigation and environmental obligations.
Actual results could differ from these estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS: In July 2001, the FASB issued SFAS
No. 141, Business Combinations, which supersedes 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 identifiable 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 identifiable intangible assets with finite lives be
no longer limited to forty years. The provisions of SFAS No. 142 are effective
beginning January 1, 2002, with full implementation of the impairment
measurement provisions completed by December 31, 2002. Effective January 1,
2002, the Company will not record goodwill amortization expense, but will be
required to amortize identifiable intangibles with finite lives. Goodwill
amortization expense for the year ended December 31, 2001 was $42,606.
53
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table presents net income for the years ended December 31,
2001, 2000, and 1999 adjusted to exclude goodwill amortization expense, net of
the related income tax effects, related to goodwill that is no longer being
amortized.
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
------------- ------------- ------------
Reported net income ............................................... $ 115,458 $ 82,727 $ 58,689
Add: Goodwill amortization expense, net of tax .................... 33,899 29,617 17,532
--------- --------- --------
Adjusted net income before assumed conversion of notes ............ 149,357 112,344 76,221
After-tax interest expense on assumed conversion of notes ......... 10,502 -- --
--------- --------- --------
Adjusted net income including assumed conversion of notes ......... $ 159,859 $ 112,344 $ 76,221
========= ========= ========
BASIC EPS:
Reported .......................................................... $ 1.54 $ 1.24 $ 0.91
Goodwill amortization expense, net of tax ......................... 0.45 0.44 0.28
--------- --------- --------
Adjusted .......................................................... $ 1.99 $ 1.68 $ 1.19
========= ========= ========
DILUTED EPS:
Reported .......................................................... $ 1.47 $ 1.18 $ 0.88
Goodwill amortization expense, net of tax ......................... 0.40 0.43 0.26
--------- --------- --------
Adjusted .......................................................... $ 1.87 $ 1.61 $ 1.14
========= ========= ========
In August of 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 applies to legal obligations associated
with the retirement of tangible long-lived assets that result from the
acquisition, construction, development or normal operation of a long-lived
asset, except for certain obligations of lessees. This statement does not apply
to obligations that arise solely from a plan to dispose of a long-lived asset.
SFAS No. 143 requires that estimated asset retirement costs be measured at
their fair values and recognized as assets and depreciated over the useful life
of the related asset. Similarly, liabilities for the present value of asset
retirement obligations are to be recognized and accreted as interest expense
each year to their estimated future value until the asset is retired. These
provisions will be applied to existing asset retirement obligations as of the
adoption date as a cumulative-effect of a change in accounting policy. SFAS No.
143 is effective for the Company's fiscal years beginning January 1, 2003. SFAS
No. 143 will not have a material effect on the Company's consolidated results
of operations and financial position.
In October of 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to Be Disposed Of, and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, Reporting the Results of Operations -- Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions (APB No. 30), for the disposal of a segment of a
business (as previously defined in that Opinion). SFAS No. 144 expands the
scope of accounting for disposals to include all components of an entity,
including reportable segments and operating segments, reporting units,
subsidiaries and certain asset groups. It requires the gain or loss on disposal
to be measured as the difference between (1) the fair value less the costs to
sell and (2) the carrying value of the component, and such gain or loss cannot
include the estimated future operating losses of the component, which were
included in the gain or loss determination under APB No. 30. SFAS No. 144 also
amends Accounting
54
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Research Bulletin No. 51, Consolidated Financial Statements, to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary. The provisions of SFAS No. 144 are effective for the Company's
fiscal years beginning January 1, 2002, and interim periods within those fiscal
years. SFAS No. 144 will not have a material effect on the Company's
consolidated results of operations and financial position.
RECLASSIFICATIONS: Certain reclassifications have been made to conform
prior-year amounts to the current-year presentation.
3. ACQUISITIONS, DIVESTITURES AND OTHER TRANSACTIONS
On October 3, 2001, the Company announced that it had signed a definitive
agreement with Spar Aerospace Limited ("Spar"), a leading provider of high-end
aviation product modernization, pursuant to which L-3 offered to acquire all of
the outstanding common stock of Spar for Cdn$15.50 per share or approximately
Cdn$182,000, net of cash to be acquired of approximately Cdn$47,500. The
acquisition of Spar provides the Company significant opportunity for
pull-through sales of its avionics products. The acquisition also opens up the
Canadian and worldwide high-end aviation product modernization marketplace to
the Company.
On November 23, 2001, the Company acquired 65.8% of the outstanding common
stock of Spar for $97,223 in cash and acquired control of Spar and the ability
to require the remaining stockholders to tender their shares. The Company
acquired an additional 4.5% of the outstanding common stock of Spar for $7,855
in cash, during the remainder of 2001. Additional consideration of $43,641 for
the remaining outstanding common stock of Spar at December 31, 2001, that the
Company acquired and paid for in January 2002, has been recorded in other
current liabilities in the consolidated balance sheet at December 31, 2001.
During January 2002, the Company completed the acquisition and paid for the
remaining outstanding common stock of Spar.
The table below presents a summary of the preliminary estimates of fair
values of the assets acquired and liabilities assumed on the date the Company
obtained a majority ownership interest in Spar.
Cash .................................. $ 29,460
Other current assets .................. 33,108
Property, plant and equipment ......... 12,565
Goodwill .............................. 104,289
Other non-current assets .............. 229
--------
Total assets acquired ................ 179,651
--------
Current liabilities ................... 23,816
Long-term liabilities ................. 7,116
--------
Total liabilities assumed ............ 30,932
--------
Net assets acquired .................. $148,719
========
The goodwill was assigned to the Aviation Products & Aircraft
Modernization segment and is not deductible for tax purposes.
During the fourth quarter of 2001, the Company acquired three other
businesses for an aggregate purchase price of $137,290 in cash plus acquisition
costs, subject to adjustment based on the closing date net assets or net
working capital of the acquired business and, in one case, additional purchase
price contingent upon the post-acquisition performance of the acquired company.
The Company acquired:
55
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) the net assets of SY Technology, Inc. ("SY"), a provider of air
warfare simulation services, on December 31, 2001. This acquisition is
subject to additional purchase price not to exceed $4,800 which is
contingent upon the financial performance of SY for the year ended
December 31, 2001, and the years ending December 31, 2002 and 2003;
(2) the net assets of Bulova Technologies, a producer of military fuzes
that prevent the inadvertent firing and detonation of weapons during
handling, on December 19, 2001. Bulova Technology was later renamed BT
Fuze Products ("BT Fuze"); and,
(3) the common stock of Emergent Government Services Group ("Emergent"),
a provider of engineering and information services to the U.S. Air
Force, Army, Navy and intelligence agencies, on November 30, 2001.
Following the acquisition, the Company changed Emergent Government
Services Group's name to L-3 Communications Analytics.
Based on the preliminary purchase price allocations, the goodwill recognized in
the acquisitions of SY, BT Fuze and Emergent was $102,145, of which
approximately $74,000 is expected to be fully deductible for tax purposes.
Goodwill of $60,525 was assigned to the Training, Simulation & Support Services
segment and $41,620 was assigned to the Specialized Products segment.
On May 4, 2001, the Company acquired all of the outstanding common stock
of KDI Precision Products ("KDI") for $79,432 in cash including acquisition
costs. On May 31, 2001, the Company acquired all of the outstanding common
stock of EER Systems ("EER") for $119,533 in cash including acquisition costs,
and additional purchase price not to exceed $10,000 which is contingent upon
the financial performance of EER for the year ended December 31, 2001 and the
year ending December 31, 2002.
On February 10, 2000, the Company acquired the assets of the Training
Devices and Training Services ("TDTS") business of Raytheon Company for
$159,203 in cash including acquisition costs. Following the acquisition, the
Company changed TDTS's name to L-3 Communications Link Simulation and Training
("Link Simulation and Training"). On February 14, 2000, the Company acquired
the assets of Trex Communications Corporation ("TrexCom") for $50,069 in cash
including acquisition costs. On April 28, 2000, the Company acquired the
Traffic Alert and Collision Avoidance System ("TCAS") product line from
Honeywell Inc. for a purchase price of $239,988 in cash including acquisition
costs. On June 30, 2000, the Company acquired all the outstanding common stock
of MPRI Inc. ("MPRI") for $39,725 in cash including acquisition costs and
$4,000 of additional purchase price that was based on the financial performance
of MPRI for the year ended June 30, 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 $60,565 in cash
including acquisition costs, and additional purchase price not to exceed $5,000
which is contingent upon the financial performance of Coleman for the year
ended December 31, 2001.
Additionally, during the years ended December 31, 2001, 2000 and 1999, the
Company purchased other businesses, which individually and in the aggregate
were not material to its consolidated results of operations, financial position
or cash flows in the year acquired.
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 recorded in
connection with the purchase price allocations for the acquisitions of KDI,
EER, Spar, Emergent, BT Fuze and SY are based upon preliminary estimates of
fair values for contracts in process, estimated costs in excess of billings to
complete contracts in process, inventories, identifiable intangibles and
deferred taxes. Actual adjustments will be based on the final purchase prices
and final
56
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 the Company's normal profit on its
effort to complete such contracts. The preliminary assets and liabilities
recorded in connection with the acquisitions of KDI, EER, Emergent, BT Fuze and
SY were $367,570 and $31,214. The Company does not expect the differences
between the preliminary and final purchase price allocations for the
acquisitions to be material. Goodwill is amortized on a straight-line basis
over periods of 40 years for KDI and EER. In accordance with SFAS No. 142,
goodwill is not amortized for Spar, Emergent, BT Fuze and SY.
Had the acquisitions of KDI, EER, SY, BT Fuze, Emergent and Spar and the
related financing transactions occurred on January 1, 2001, the unaudited pro
forma sales, net income and diluted earnings per share for the year ended
December 31, 2001 would have been $2,638,700, $121,300 and $1.49. Had the
acquisitions of TDTS, TrexCom, TCAS, MPRI, Coleman, KDI, EER, SY, BT Fuze,
Emergent and Spar and the related financing transactions occurred on January 1,
2000 the unaudited pro forma sales, net income and diluted earnings per share
for the year ended December 31, 2000 would have been $2,554,600, $103,700 and
$1.31. 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, 2000 and 2001.
On January 14, 2002, the Company agreed to acquire Aircraft Integration
Systems ("AIS"), a division of Raytheon Company, for $1,130,000 in cash plus
acquisition costs. The acquisition is expected to close in March 2002. The
acquisition is expected to be financed using cash on hand, borrowings under the
Company's senior credit facilities and a $500,000 senior subordinated bridge
loan. The Company expects to offer and sell approximately $1,000,000 of debt
and equity securities during the first half of 2002, depending on capital
market conditions, and use the proceeds from those offerings to repay the
$500,000 senior subordinated bridge loan and the borrowings made under the
senior credit facilities.
On January 2, 2002, the Company agreed to acquire the detection system
business of PerkinElmer for $100,000 in cash plus acquisition costs. The
acquisition is subject to customary closing conditions, including clearance
under the Hart-Scott-Rodino Antitrust Improvements Act and is expected to close
by the end of the second quarter of 2002.
On May 31, 2001, the Company sold a 30% interest in Aviation
Communications and Surveillance Systems LLC ("ACSS") which comprised the
Company's TCAS business to Thales Avionics, a wholly owned subsidiary of Thales
(formerly Thomson-CSF), for $75,206 of cash. L-3 continues to consolidate the
financial statements of ACSS.
Interest and other income for the year ended December 31, 2001 includes a
gain of $6,966 from the sale of a 30% interest in ACSS which was largely offset
by a $6,341 write-down in the carrying amount of an investment in common stock.
Also included in interest and other income for 2001 is a charge of $515 to
account for the increase, in accordance with SFAS No. 133, in the fair value
assigned to the embedded derivatives in L-3 Holdings' $420,000 4% Senior
Subordinated Contingent Debt Securities due 2011 sold in the fourth quarter of
2001, and a loss of $751 from an equity method investment. Interest and other
income for the year ended December 31, 2000 includes gains of $14,940 from the
sales of the Company's interests in certain businesses. These gains were
largely offset by losses of $12,456 on the write-down in the carrying value of
certain investments and intangible assets. The net proceeds from the sales were
$19,638, and are included in Other Investing Activities on the Statement of
Cash Flows.
In March 2001, the Company settled certain items with a third party
provider related to an existing services agreement. 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
57
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
costs 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 $14,200 cash receipt was recorded as a reduction of costs and expenses in
2001.
4. CONTRACTS IN PROCESS
The components of contracts in process are presented in the table below.
The unbilled contract receivables, inventoried contract costs and unliquidated
progress payments are principally related to contracts with the U.S. Government
and prime contractors or subcontractors of the U.S. Government.
DECEMBER 31,
---------------------------
2001 2000
------------- -----------
Billed receivables, less allowances of $11,649 and $6,430 ......... $ 330,795 $ 310,185
---------- ---------
Unbilled contract receivables ..................................... 353,262 277,026
Less: unliquidated progress payments .............................. (102,739) (69,529)
---------- ---------
Unbilled contract receivables, net ............................... 250,523 207,497
---------- ---------
Inventoried contract costs, gross ................................. 110,244 83,808
Less: unliquidated progress payments .............................. (6,575) (5,685)
---------- ---------
Inventoried contract costs, net .................................. 103,669 78,123
Inventories at lower of cost or market ............................ 116,837 104,328
---------- ---------
Total contracts in process ....................................... $ 801,824 $ 700,133
========== =========
The Company believes that approximately $289,396 of the unbilled contract
receivables at December 31, 2001 will be billed and collected within one year.
The selling, general and administrative ("SG&A") cost data presented in
the table below have been used in the determination of the costs and expenses
presented on the statements of operations.
YEAR ENDED DECEMBER 31
------------------------------------
2001 2000 1999
---------- ---------- ----------
SG&A costs included in inventoried contract
costs ...................................... $ 19,970 $ 24,396 $ 23,637
SG&A incurred costs ......................... 418,002 350,561 265,136
Independent research and development,
including bid and proposal costs included in
SG&A incurred costs ........................ 107,466 101,883 76,134
5. OTHER CURRENT LIABILITIES AND OTHER LIABILITIES
At December 31, 2001, other current liabilities include an accrual of
$43,641 for the remaining Spar common shares outstanding at December 31, 2001
which the Company acquired in January 2002, and $19,236 of estimated costs in
excess of billings to complete contracts in process. At December 31, 2001,
other liabilities include $18,814 for the non-current portion of estimated
costs in excess of billings to complete contracts in process.
At December 31, 2000, other current liabilities include $31,737 of
estimated costs in excess of billings to complete contracts in process
principally related to contracts assumed as part of the TDTS business
58
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
that was acquired from Raytheon in February 2000, including the U.S. Army
Aviation Combined Arms Tactical Trainer ("AVCATT") contract. At December 31,
2000, other liabilities include $59,641 for the non-current portion of
estimated costs in excess of billings to complete contracts in process,
principally for the AVCATT contract.
At December 31, 2001, current and non-current estimated costs in excess of
billings to complete contracts in process reflect contract costs incurred
during 2001 that were charged against the estimated costs in excess of billings
and favorable performance on the AVCATT contract related to cost reductions
arising from engineering design changes, material sourcing changes, unit price
reductions on several parts in the contract bill of materials and lower
overhead costs that occurred during 2001.
6. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
Land .................................................... $ 12,947 $ 11,242
Buildings and improvements .............................. 38,544 25,942
Machinery, equipment, furniture and fixtures ............ 260,338 192,679
Leasehold improvements .................................. 29,232 24,514
-------- --------
Gross property, plant and equipment .................... 341,061 254,377
Less: accumulated depreciation and amortization ......... 137,687 98,249
-------- --------
Property, plant and equipment, net ..................... $203,374 $156,128
======== ========
Depreciation and amortization expense for property, plant and equipment
was $40,362 for 2001, $36,158 for 2000, and $29,554 for 1999.
7. DEBT
The components of long-term debt and a reconciliation to the carrying
amount of long-term debt are presented in the table below.
DECEMBER 31,
----------------------------
2001 2000
------------ -------------
Borrowings under Senior Credit Facilities .................... $ -- $ 190,000
10 3/8% Senior Subordinated Notes due 2007 ................... 225,000 225,000
8 1/2% Senior Subordinated Notes due 2008 .................... 180,000 180,000
8% Senior Subordinated Notes due 2008 ........................ 200,000 200,000
5 1/4% Convertible Senior Subordinated Notes due 2009 ........ 300,000 300,000
4% Senior Subordinated Convertible Contingent
Debt Securities due 2011 .................................... 420,000 --
---------- ----------
Principal amount of long-term debt ........................... 1,325,000 1,095,000
Less: Unamortized discount ................................... 2,502 --
Fair value of interest rate swap agreements ............... 7,246 --
---------- ----------
Carrying amount of long-term debt ............................ $1,315,252 $1,095,000
========== ==========
The borrowings under the Senior Credit Facilities, 10 3/8% Senior
Subordinated Notes due 2007, 8 1/2% Senior Subordinated Notes due 2008 and 8%
Senior Subordinated Notes due 2008 are the indebtedness of L-3 Communications.
The 5 1/4% Convertible Senior Subordinated Notes due 2009 and the 4% Senior
Subordinated Convertible Contingent Debt Securities due 2011 are the
indebtedness of L-3 Holdings. Details on all of the outstanding debt of both
L-3 Communications and L-3 Holdings are discussed below.
59
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
In May 2001, L-3 Communications restructured its Senior Credit Facilities.
At December 31, 2001, the Senior Credit Facilities were comprised of a $400,000
five year revolving credit facility maturing 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, (1) at its request and subject to approval of the
lenders, extend the maturity date, in whole or in part, for an additional
364-day period, or (2) 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 conversion date. Additionally, the Senior Credit Facilities
provided L-3 Communications the ability to increase, on an uncommitted basis,
the amount of either the five year revolving credit facility or the 364-day
revolving credit facility up to an additional $150,000 in the aggregate.
At December 31, 2001, available borrowings under the Company's Senior
Credit Facilities were $497,594, after reductions for outstanding letters of
credit of $102,406. There were no outstanding borrowings under the Senior
Credit Facilities at December 31, 2001.
Borrowings under the Senior Credit Facilities bear interest, at L-3
Communications' option, at either: (i) a "base rate" equal to the higher of
0.50% per annum above the latest federal funds rate and the Bank of America
"reference rate" (as defined) plus a spread ranging from 2.00% to 0.50% per
annum depending on L-3 Communications' Debt Ratio at the time of determination
or (ii) a "LIBOR rate" (as defined) plus a spread ranging from 3.00% to 1.50%
per annum depending on L-3 Communications' Debt Ratio at the time of
determination. The Debt Ratio is defined as the ratio of Consolidated Total
Debt to Consolidated EBITDA. Consolidated Total Debt is equal to outstanding
debt plus capitalized lease obligations minus the lesser of actual unrestricted
cash or $50,000. Consolidated EBITDA is equal to consolidated net income
(excluding extraordinary gains and losses, and gains and losses in connection
with asset dispositions and discontinued operations) for the most recent four
quarters, plus consolidated interest expense, income taxes, depreciation and
amortization minus depreciation and amortization related to minority interest.
At December 31, 2001, there were no borrowings outstanding under the Senior
Credit Facilities. L-3 Communications pays commitment fees calculated on the
daily amounts of the available unused commitments under the Senior Credit
Facilities at a rate ranging from 0.50% to 0.35% per annum, depending on L-3
Communications' Debt Ratio in effect at the time of determination. L-3
Communications pays letter of credit fees calculated at a rate ranging from
1.50% to 0.75% per annum for performance letters of credit and 3.00% to 1.50%
for all other letters of credit, in each case depending on L-3 Communications'
Debt Ratio at the time of determination.
Additionally, in February 2002, the Company expects the lenders to approve
a $150,000 increase in the amount of the Senior Credit Facilities. The five
year revolving credit facility will increase by $100,000 to $500,000 and the
364-day revolving credit facility will increase by $50,000 to $250,000.
Additionally, the maturity date of the $200,000 364-day revolving credit
facility is expected to be extended to February 2003.
In March 2002, L-3 Communications expects to borrow $500,000 under a
senior subordinated Bridge Loan Facility to finance a portion of the purchase
price of AIS and related expenses. The Bridge Loan Facility will be
subordinated in right of payment to all of L-3 Communications' existing and
future senior debt. Borrowings under the Bridge Loan Facility will bear
interest through March 2003, at L-3 Communications' option, at either the
one-month or three-month LIBOR rate plus a spread equal to 350 basis points.
The Bridge Loan Facility will mature in May 2009, but if the loans under the
facility are not repaid by March 2003, each lender's loan will be automatically
converted into an exchange note with terms substantially similar to those of
the senior subordinated notes discussed below, and will bear interest at a
fixed rate equal to the yield to maturity on the Company's highest yielding
existing subordinated indebtedness at the time of exchange plus 100 basis
points. Subject to the exceptions that will be set forth in the Bridge Loan
Facility, L-3 Communications will be required to prepay the Bridge Loan
Facility with the net cash proceeds from:
60
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
o any debt offerings by L-3 Holdings or its subsidiaries, including L-3
Communications;
o issuance of any equity interests in L-3 Holdings or L-3 Communications;
o incurrence of any other indebtedness of L-3 Holdings or any of its
subsidiaries, including L-3 Communications (other than under the Senior
Credit Facilities and certain permitted indebtedness); and
o any sale of assets or stock of any subsidiaries of L-3 Communications.
In the fourth quarter of 2001, L-3 Holdings sold $420,000 of 4% Senior
Subordinated Convertible Contingent Debt Securities ("CODES") due September 15,
2011. The net proceeds from this offering amounted to approximately $407,450
after underwriting discounts and commissions and other offering expenses.
Interest is payable semi-annually on March 15 and September 15 of each year
commencing March 15, 2002. The CODES are convertible into L-3 Holdings' common
stock at a conversion price of $53.81 per share (7,804,878 shares) under any of
the following circumstances: (1) during any Conversion Period (defined below)
if the closing sales price of the common stock of L-3 Holdings is more than
120% of the conversion price ($64.58) for at least 20 trading days in the 30
consecutive trading-day period ending on the first day of the respective
Conversion Period; (2) during the five business day period following any 10
consecutive trading-day period in which the average of the trading prices for
the CODES was less than 105% of the conversion value; (3) if the credit ratings
assigned to the CODES by either Moody's or Standard & Poor's are below certain
specified ratings, (4) if they have been called for redemption by the Company,
or (5) upon the occurrence of certain specified corporate transactions. A
Conversion Period is the period from and including the thirtieth trading day in
a fiscal quarter to, but not including, the thirtieth trading day of the
immediately following fiscal quarter. There are four Conversion Periods in each
fiscal year. Additionally, holders of the CODES have a right to receive
contingent interest payments, not to exceed a per annum rate of 0.5% of the
outstanding principal amount of the CODES, which will be paid on the CODES
during any six-month period following a six-month period in which the average
trading price of the CODES is above 120% of the principal amount of the CODES.
The contingent interest payment provision as well as the ability of the holders
of the CODES to exercise the conversion features as a result of changes in the
credit ratings assigned to the CODES have been accounted for as embedded
derivatives. The initial aggregate fair values assigned to the embedded
derivatives was $2,502, which was also recorded as a discount to the CODES. The
carrying values assigned to the embedded derivatives were recorded in other
liabilities and will be adjusted periodically through other income (expense)
for changes in their fair values. The CODES are subject to redemption at any
time at the option of L-3 Holdings, in whole or in part, on or after October
24, 2004 at redemption prices (plus accrued and unpaid interest -- including
contingent interest) starting at 102% of principal (plus accrued and unpaid
interest -- including contingent interest) during the 12 month period beginning
October 24, 2004 and declining annually to 100% of principal (plus accrued and
unpaid interest -- including contingent interest) on September 15, 2006. The
CODES are general unsecured obligations of L-3 Holdings and are subordinated in
right of payment to all existing and future senior debt of L-3.
In the fourth quarter of 2000, L-3 Holdings sold $300,000 of 5 1/4%
Convertible Senior Subordinated Notes (the "Convertible Notes") due June 1,
2009. The net proceeds from this offering amounted to approximately $290,500
after underwriting discounts and other offering expenses, and were used to
repay revolver borrowings outstanding under the Company's Senior Credit
Facilities. Interest is payable semi-annually on June 1 and December 1 of each
year commencing June 1, 2001. The Convertible Notes may be converted at any
time into L-3 Holdings common stock at a conversion price of $40.75 per share.
If all the Convertible Notes were converted, an additional 7,361,964 shares of
L-3 Holdings common stock would have been outstanding at December 31, 2001. The
Convertible Notes are general unsecured obligations of L-3 Holdings and are
subordinated in right of payment to all existing and future senior debt
61
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
of L-3 Holdings and L-3 Communications. The Convertible Notes are subject to
redemption at any time, at the option of L-3 Holdings, in whole or in part, on
or after December 1, 2003 at redemption prices (plus accrued and unpaid
interest) starting at 102.625% of principal (plus accrued and unpaid interest)
during the 12-month period beginning December 1, 2003 and declining annually to
100% of principal (plus accrued and unpaid interest) on December 1, 2005 and
thereafter.
In December 1998, L-3 Communications sold $200,000 of 8% Senior
Subordinated Notes due August 1, 2008 (the "December 1998 Notes") with interest
payable semi-annually on February 1 and August 1 of each year commencing
February 1, 1999. The December 1998 Notes are general unsecured obligations of
L-3 Communications and are subordinated in right of payment to all existing and
future senior debt of L-3 Communications. The December 1998 Notes are subject
to redemption at any time, at the option of L-3 Communications, in whole or in
part, on or after August 1, 2003 at redemption prices (plus accrued and unpaid
interest) starting at 104% of principal (plus accrued and unpaid interest)
during the 12-month period beginning August 1, 2003 and declining annually to
100% of principal (plus accrued and unpaid interest) on August 1, 2006 and
thereafter.
In May 1998, L-3 Communications sold $180,000 of 8 1/2% Senior Subordinated
Notes due May 15, 2008 (the "May 1998 Notes") with interest payable
semi-annually on May 15 and November 15 of each year commencing November 15,
1998. The May 1998 Notes are general unsecured obligations of L-3
Communications and are subordinated in right of payment to all existing and
future senior debt of L-3 Communications. The May 1998 Notes are subject to
redemption at any time, at the option of L-3 Communications, in whole or in
part, on or after May 15, 2003 at redemption prices (plus accrued and unpaid
interest) starting at 104.250% of principal (plus accrued and unpaid interest)
during the 12-month period beginning May 15, 2003 and declining annually to
100% of principal (plus accrued and unpaid interest) on May 15, 2006 and
thereafter.
In April 1997, L-3 Communications sold $225,000 of 10 3/8% Senior
Subordinated Notes due May 1, 2007 (the "1997 Notes") with interest payable
semi-annually on May 1 and November 1 of each year commencing November 1, 1997.
The 1997 Notes are general unsecured obligations of L-3 Communications and are
subordinated in right of payment to all existing and future senior debt of L-3
Communications. The 1997 Notes are subject to redemption at any time, at the
option of L-3 Communications, in whole or in part, on or after May 1, 2002 at
redemption prices (plus accrued and unpaid interest) starting at 105.188% of
principal (plus accrued and unpaid interest) during the 12-month period
beginning May 1, 2002 and declining annually to 100% of principal (plus accrued
and unpaid interest) on May 1, 2005 and thereafter.
Collectively the 1997 Notes, May 1998 Notes and December 1998 Notes
comprise the "Senior Subordinated Notes". The maturities on the Senior
Subordinated Notes, Convertible Notes and CODES are $225,000 in 2007, $380,000
in 2008, $300,000 in 2009 and $420,000 in 2011.
In November 2001, L-3 Communications entered into interest rate swap
agreements on its $180,000 of 8 1/2% Senior Subordinated Notes due 2008. These
swap agreements exchange the fixed interest rate for a variable interest rate
on the entire principal amount. Under these swap agreements, L-3 Communications
will pay or receive the difference between the fixed interest rate of 8 1/2% on
the senior subordinated notes and a variable interest rate determined two
business days prior to the interest payment date of the senior subordinated
notes equal to (1) the six month LIBOR rate, set in arrears, plus (2) an
average of 350.8 basis points. In July 2001, L-3 Communications entered into
interest rate swap agreements on its $200,000 of 8% Senior Subordinated Notes
due 2008. These swap agreements exchange the fixed interest rate for a variable
interest rate on the entire principal amount. Under these swap agreements, L-3
Communications will pay or receive the difference between the fixed interest
rate of 8% on the senior subordinated notes and a variable interest rate
determined two business days prior to the interest
62
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
payment date of the senior subordinated notes equal to (1) the six month LIBOR
rate, set in arrears, plus (2) an average of 192 basis points. The difference
to be paid or received on these swap agreements as interest rates change is
recorded as an adjustment to interest expense. The swap agreements are
accounted for as fair value hedges.
The Senior Credit Facilities, Senior Subordinated Notes, Convertible Notes
and CODES agreements contain (and the Bridge Loan Facility will contain)
financial and other restrictive covenants that limit, among other things, the
ability of the Company to borrow additional funds, dispose of assets, or pay
cash dividends. The Company's most restrictive covenants are contained in the
Senior Credit Facilities, as amended. The covenants require that (1) the
Company's Debt Ratio be less than or equal to 4.50 for the quarter ended
December 31, 2001, and that the maximum allowable Debt Ratio be 4.85 for the
quarters ending March 31, 2002 and June 30, 2002, thereafter declining over
time to less than or equal to 3.50 for the quarters ending December 31, 2004
and thereafter, and (2) the Company's Interest Coverage Ratio be greater than
or equal to 2.50 for the quarter ended December 31, 2001, and that the minimum
allowable Interest Coverage Ratio, thereafter increase over time to greater
than or equal to at least 3.00 for the quarters ending December 31, 2003 and
thereafter. The Interest Coverage Ratio is equal to the ratio of Consolidated
EBITDA to Consolidated Cash Interest Expense. Consolidated Cash Interest
Expense is equal to interest expense less the amortization of deferred debt
issue costs included in interest expense. For purposes of calculating the
financial covenants under the Senior Credit Facilities, the Convertible Notes
and CODES are considered debt of L-3 Communications. The Senior Credit
Facilities also limit the payment of dividends by L-3 Communications to L-3
Holdings except for payment of franchise taxes, fees to maintain L-3 Holdings'
legal existence, income taxes up to certain amounts, interest accrued on the
Convertible Notes and CODES or to provide for operating costs of up to $1,000
annually. Under the covenant, L-3 Communications may also pay permitted
dividends to L-3 Holdings from its excess cash flow, as defined, a cumulative
amount of $5,000, provided that the Debt Ratio is no greater than 3.5 to 1 as
of the most recent fiscal quarter. As a result, at December 31, 2001, $5,000 of
L-3 Communications net assets were available for payment of dividends to L-3
Holdings. Through December 31, 2001, the Company was in compliance with these
covenants at all times.
In connection with the Senior Credit Facilities, the Company has granted
the lenders a first priority lien on the stock of L-3 Communications and
substantially all of its domestic subsidiaries. The borrowings under the Senior
Credit Facilities are guaranteed by L-3 Holdings and by substantially all of
the domestic subsidiaries of L-3 Communications on a senior basis. The payment
of principal and premium, if any, and interest on the Senior Subordinated Notes
are (and the Bridge Loan Facility will be) unconditionally guaranteed, on an
unsecured senior subordinated basis, jointly and severally, by all of L-3
Communications' restricted subsidiaries other than its foreign subsidiaries.
The guarantees of the Senior Subordinated Notes are (and the Bridge Loan
Facility will be) junior to the guarantees of the Senior Credit Facilities and
rank pari passu with each other and the guarantees of the Convertible Notes and
the CODES. Additionally, the Convertible Notes and CODES are unconditionally
guaranteed, on an unsecured senior subordinated basis, jointly and severally,
by L-3 Communications and substantially all of its direct and indirect domestic
subsidiaries. These guarantees rank junior to the guarantees of the Senior
Credit Facilities and rank pari passu with each other and the guarantees of the
Senior Subordinated Notes and will rank pari passu with the guarantees of the
Bridge Loan Facility.
8. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments. The Company's financial instruments
consist primarily of cash and cash equivalents, billed receivables,
investments, trade accounts payable, customer advances, Senior Credit
Facilities, Senior Subordinated Notes, Convertible Notes, CODES, foreign
currency forward contracts, interest rate cap and floor contracts, interest
rate swap agreements and embedded derivatives
63
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
related to the issuance of the CODES. The carrying amounts of cash and cash
equivalents, billed receivables, trade accounts payable, Senior Credit
Facilities, and customer advances are representative of their respective fair
values because of the short-term maturities or expected settlement dates of
these instruments. The fair values of the Company's investments are based on
quoted market prices, as available, and on historical cost for investments
which it is not practicable to estimate fair value. The Senior Subordinated
Notes are registered, unlisted public debt which are traded in the
over-the-counter market and their fair values are based on quoted trading
activity. The fair values of the Convertible Notes and CODES are based on
quoted prices for the same or similar issues. The fair value of foreign
currency forward contracts were estimated based on exchange rates at December
31, 2001 and 2000. The fair values of the interest rate cap and floor
contracts, interest rate swap agreements and the embedded derivatives were
estimated by discounting expected cash flows using quoted market interest
rates. The carrying amounts and estimated fair values of the Company's
financial instruments are presented in the table below.
DECEMBER 31,
----------------------------------------------
2001 2000
----------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ------------ ---------- -----------
Investments ................................. $ 16,532 $ 16,532 $ 8,985 $ 8,985
Senior Subordinated Notes ................... 597,754 630,925 605,000 586,300
Convertible Notes ........................... 300,000 387,000 300,000 331,350
CODES ....................................... 417,498 432,600 -- --
Borrowings under Senior Credit Facilities ... -- -- 190,000 190,000
Interest rate caps .......................... -- -- 431 2
Interest rate floor ......................... (432) (432) (74) (104)
Foreign currency forward contracts .......... 258 258 -- 392
Interest rate swaps ......................... (7,246) (7,246) -- --
Embedded derivatives ........................ (3,060) (3,060) -- --
Interest Rate Risk Management. To mitigate risks associated with changing
interest rates on borrowings under the Senior Credit Facilities, the Company
entered into interest rate cap and interest rate floor contracts. The interest
rate caps and floors are denominated in U.S. dollars and have designated
maturities which occur every three months until the interest rate cap and floor
contracts expire in March 2002. In 2001, the Company entered into interest rate
swap agreements on $380,000 of its Senior Subordinated Notes to take advantage
of the current low interest rate environment. These swap agreements exchanged
the fixed interest rate for a variable interest rate on the entire notional
amount, are denominated in U.S. dollars and have designated maturities which
occur on the interest payment dates of the related Senior Subordinated Notes.
Collectively the interest rate cap and floor contracts and interest rate swap
agreements are herein referred to as the ("interest rate agreements"). Cash
payments received from or paid to the counterparties on the interest rate
agreements are the difference between the amount that the reference interest
rates are greater than or less than the contract rates on the designated
maturity dates, multiplied by the notional amounts underlying the respective
interest rate agreements. Cash payments or receipts between the Company and
counterparties are recorded as a component of interest expense. The initial
cost or receipt of these arrangements, if any, are deferred and amortized as a
component of interest expense over the term of the interest rate agreement. The
Company manages exposure to counterparty credit risk by entering into the
interest rate agreements only with major financial institutions that are
expected to fully perform under the terms of such agreements. The notional
amounts are used to measure the volume of these agreements and do not represent
exposure to credit loss.
Foreign Currency Exchange Risk Management. Some of the Company's U.S.
operations have contracts with foreign customers which are denominated in
foreign currencies. To mitigate the risk
64
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
associated with certain of these contracts denominated in foreign currency, the
Company has entered into foreign currency forward contracts. The Company's
activities involving foreign currency forward contracts are designed to hedge
the foreign denominated cash paid or received, primarily Euro, British Pound
and Italian Lira. The Company manages exposure to counterparty credit risk by
entering into foreign currency forward contracts only with major financial
institutions that are expected to fully perform under the terms of such
contracts. The notional amounts are used to measure the volume of these
contracts and do not represent exposure to foreign currency losses.
Information with respect to the interest rate agreements and foreign
currency forward contracts is presented in the table below.
DECEMBER 31,
------------------------------------------------------------
2001 2000
----------------------------- ----------------------------
NOTIONAL UNREALIZED NOTIONAL UNREALIZED
AMOUNT GAINS (LOSSES) AMOUNT GAINS (LOSSES)
---------- ---------------- ---------- ---------------
Interest rate swaps ........................ $380,000 -- -- --
Interest rate caps ......................... 100,000 $ (107) $100,000 $ (429)
Interest rate floor ........................ 50,000 (414) 50,000 (30)
Foreign currency forward contracts ......... 7,138 258 6,863 392
9. L-3 HOLDINGS COMMON STOCK
On June 29, 2001, the Company established the L-3 Communications
Corporation Employee Stock Purchase Plan ("ESPP") and registered 3,000,000
shares of L-3 Holdings common stock, which may be purchased by employees of L-3
Communications Corporation and its U.S. subsidiaries through payroll
deductions. In general, an eligible employee who participates in the ESPP may
purchase L-3 Holdings' common stock at a fifteen percent discount. The ESPP is
not subject to the Employment Retirement Income Security Act of 1974, as
amended. As of December 31, 2001, $4,861 of employee contributions to the
employee stock purchase plan were received by the Company and recorded as a
component of shareholders' equity in the consolidated balance sheet. On January
7, 2002, the Company transferred 148,570 shares of L-3 Holdings' common stock
to the trustee of the ESPP on behalf of those employees who made contributions
to the ESPP in 2001.
On May 2, 2001, L-3 Holdings sold 13,800,000 shares of common stock in a
public offering for $40.00 per share. L-3 Holdings sold 9,150,000 shares and
other selling stockholders, including affiliates of Lehman Brothers Inc., sold
4,650,000 secondary shares. Upon closing, L-3 Holdings received net proceeds
after underwriting discounts and commissions and other offering expenses of
$353,622. The net proceeds were contributed to L-3 Communications and were used
to repay borrowings under the Senior Credit Facilities, pay for the KDI and EER
acquisitions and to increase cash and cash equivalents.
As additional consideration for the ILEX acquisition, L-3 Holdings issued
588,248 shares of its common stock valued at $17,357 in April 2001 based on the
financial performance of ILEX in 1999 and 2000, and in August 1999, L-3
Holdings issued 301,910 shares of its common stock valued at $6,434 based on
the financial performance of ILEX in 1998. There is no remaining contingent
consideration for the ILEX acquisition.
On February 4, 1999, L-3 Holdings sold 10,000,000 shares of common stock
in a public offering for $21.00 per share (the "February 1999 Common Stock
Offering"); the net proceeds amounted to $201,582 and were contributed by L-3
Holdings to L-3 Communications. In addition, 13,000,000 shares were also sold
in the February 1999 Common Stock Offering by the Lehman Partnership and
Lockheed Martin. In October 1999, Lockheed Martin sold its remaining interest
in L-3 Holdings' common stock. In December 1999, the Lehman Partnership
distributed to its partners approximately 7,600,000 shares of L-3 Holdings'
common stock. As of December 31, 2001, the Lehman Partnership owned
approximately 4.4% of the outstanding common stock of L-3 Holdings.
65
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
On May 19, 1998, L-3 Holdings sold 13,800,000 shares of its common stock
in an initial public offering ("IPO"). The net proceeds of the IPO amounted to
$139,500 and were contributed by L-3 Holdings to L-3 Communications. Prior to
the IPO, the common stock of L-3 Holdings consisted of three classes Class A,
Class B, and Class C common stock. Immediately prior to the IPO, each
authorized share of L-3 Holdings Class A common stock, Class B common stock and
Class C common stock was converted into one class of common stock and the
authorized L-3 Holdings common stock was increased to 100,000,000 shares.
10. L-3 HOLDINGS EARNINGS PER SHARE
A reconciliation of basic and diluted earnings per share ("EPS") is
presented in the table below.
YEAR ENDED DECEMBER 31,
-------------------------------------------
2001 2000 1999
------------- ------------ ------------
Basic:
Net income ......................................... $ 115,458 $ 82,727 $ 58,689
--------- --------- ---------
Weighted average common shares outstanding ......... 74,880 66,710 64,214
--------- --------- ---------
Basic earnings per share ........................... $ 1.54 $ 1.24 $ 0.91
========= ========= =========
Diluted:
Net income ......................................... $ 115,458 $ 82,727 $ 58,689
After-tax interest expense savings on the assumed
conversion of Convertible Notes .................. 10,502 -- --
--------- --------- ---------
Net income including assumed conversion ............ $ 125,960 $ 82,727 $ 58,689
========= ========= =========
Common and potential common shares:
Weighted average common shares outstanding ......... 74,880 66,710 64,214
Assumed exercise of stock options .................. 7,692 7,880 6,752
Assumed purchase of common shares for treasury ..... (4,496) (4,684) (3,934)
Assumed conversion of Convertible Notes ............ 7,362 -- --
--------- --------- ---------
Common and potential common shares .................. 85,438 69,906 67,032
========= ========= =========
Diluted earnings per share .......................... $ 1.47 $ 1.18 $ 0.88
========= ========= =========
The 7,804,878 shares of L-3 Holdings' common stock that are issuable upon
conversion of the CODES were not included in the computation of diluted EPS for
the year ended December 31, 2001 because the conditions required for the CODES
to become convertible have not been met.
66
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
11. INCOME TAXES
Pretax income of the Company was $186,222 for 2001, $134,079 for 2000, and
$95,430 for 1999 substantially all of which was derived from domestic
operations. The components of the Company's provision for income taxes are
presented in the table below.
YEAR ENDED DECEMBER 31,
-----------------------------------
2001 2000 1999
---------- ---------- ---------
Current income tax provision, primarily federal . ......... $18,126 $26,249 $ 7,910
Deferred income tax provision:
Federal .................................................. 43,965 23,130 27,881
State and local .......................................... 8,673 1,973 950
------- ------- -------
Subtotal ............................................... 52,638 25,103 28,831
------- ------- -------
Total provision for income taxes .......................... $70,764 $51,352 $36,741
======= ======= =======
A reconciliation of the statutory federal income tax rate to the effective
income tax rate of the Company is presented in the table below.
YEAR ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
Statutory federal income tax rate . ..................... 35.0% 35.0% 35.0%
State and local income taxes, net of federal income
tax benefit ............................................ 5.3 4.4 4.6
Foreign sales corporation and extra territorial income
benefits ............................................... (3.6) (2.6) --
Nondeductible goodwill amortization and other
expenses ............................................... 4.8 6.8 5.2
Research and experimentation and other tax credits ...... (5.0) (6.1) (7.1)
Other, net .............................................. 1.5 0.8 0.8
---- ---- ----
Effective income tax rate ............................... 38.0% 38.3% 38.5%
==== ==== ====
The provision for income taxes excludes current tax benefits related to
compensation expense deductions for the exercise of stock options that were
credited directly to shareholders' equity of $11,939 for 2001, $9,108 for 2000
and $1,011 for 1999.
The significant components of the Company's net deferred tax assets and
liabilities are presented in the table below.
DECEMBER 31,
----------------------
2001 2000
--------- ----------
Deferred tax assets:
Inventoried costs .................................. $ 8,520 $14,868
Compensation and benefits .......................... 11,460 10,461
Pension and postretirement benefits ................ 59,397 39,486
Property, plant and equipment ...................... 16,579 9,081
Income recognition on contracts in process ......... 16,670 55,942
67
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
---------------------------
2001 2000
------------ ------------
Net operating loss carryforwards ......... 32,480 9,660
Tax credit carryforwards ................. 31,943 18,444
Other, net ............................... 21,555 14,430
------ ------
Total deferred tax assets .............. 198,604 172,372
------- -------
Deferred tax liabilities:
Goodwill ................................. (26,493) (18,903)
Other, net ............................... (11,263) (6,626)
------- -------
Total deferred tax liabilities ......... (37,756) (25,529)
------- -------
Net deferred tax assets ............... $ 160,848 $ 146,843
========= =========
The following table presents the classification of the Company's net
deferred tax assets.
Current deferred tax assets . ............. $ 62,965 $ 89,732
Long-term deferred tax assets ............. 97,883 57,111
--------- ---------
Total net deferred tax assets .......... $ 160,848 $ 146,843
========= =========
At December 31, 2001, the Company had $82,340 of U.S. net operating losses
and $31,943 of tax credit carryforwards primarily related to U.S. and state
research and experimentation credits and state investment tax credits. The net
operating losses, some of which are subject to limitation, expire, if unused,
between 2011 and 2021. The tax credits primarily expire, if unused, beginning
in 2012. The Company believes that it will generate sufficient taxable income
to utilize these net operating losses and tax credit carryforwards before they
expire.
12. STOCK OPTIONS
The Company adopted the 1999 Long Term Performance Plan in April 1999, and
adopted the 1997 Option Plan in April 1997. As of December 31, 2001, the number
of shares of L-3 Holdings' common stock authorized for grant of options or
awards under these plans was 16,611,630. On April 26, 2001, an additional
6,000,000 shares of L-3 Holdings' common stock were authorized for grant of
options or awards under the 1999 Long Term Performance Plan. The grants may be
awarded to employees of the Company in the form of non-qualified stock options,
incentive stock options, stock appreciation rights, restricted stock or other
incentive awards. The price at which options may be granted shall not be less
than 100% of the fair market value of L-3 Holdings' common stock on the date of
grant. In general, options expire after 10 years and are exercisable ratably
over a 3 year period. As of December 31, 2001, the Company had 5,005,838 shares
of L-3 Holdings' common stock available for awards under these plans.
On January 1, 2001, January 1, 2000 and May 19, 1999, the Company awarded
60,928, 85,792 and 80,678 shares of restricted stock of L-3 Holdings to
employees. The 2001 and 1999 awards vest January 1, 2004 and the 2000 award
vests January 1, 2005.
On April 5, 1999, the Company amended the terms of the stock options
granted to Frank C. Lanza, Chairman and Chief Executive Officer and Robert V.
LaPenta, President and Chief Financial Officer on April 30, 1997 for the
purchase of 2,285,714 shares each of L-3 Holdings' common stock at an option
price of $3.24. Such amendment eliminated the performance target acceleration
provisions on the unvested performance options, so that 914,286 options for
each of Mr. Lanza and Mr. LaPenta, vested on April 5, 1999. These performance
options would have originally vested nine years after the grant date, but would
have become exercisable with respect to 25% of the shares subject to such
performance options on each of April 30, 1999, 2000, 2001 and 2002, to the
extent certain targets for the Company's EBITDA were achieved.
68
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The table below presents the Company's stock option activity.
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------------- ---------
(IN THOUSANDS)
Balance at December 31, 1998 ......... 5,756 $ 4.64
Options granted ...................... 2,018 19.55
Options exercised .................... (158) 4.19
Options cancelled .................... (86) 15.00
-----
Balance at December 31, 1999 ......... 7,530 8.51
Options granted ...................... 1,322 23.87
Options exercised .................... (1,154) 7.76
Options cancelled .................... (442) 19.91
------
Balance at December 31, 2000 ......... 7,256 10.71
Options granted ...................... 2,214 35.81
Options exercised .................... (1,128) 14.57
Options cancelled .................... (362) 21.23
------
Balance at December 31, 2001 ......... 7,980 $ 16.68
======
The following table summarizes information about stock options outstanding
at December 31, 2001.
OUTSTANDING EXERCISABLE
------------------------------------------ -----------------------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE WEIGHTED
RANGE OF REMAINING AVERAGE REMAINING AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER CONTRACTUAL EXERCISE
PRICES OF OPTIONS LIFE (YEARS) PRICE OF OPTIONS LIFE (YEARS) PRICE
-------------------------- ------------ -------------- ---------- ------------ -------------- ---------
$3.24 .................... 3,718 5.5 $ 3.24 3,260 5.5 $ 3.24
$11.00 ................... 170 6.3 $ 11.00 170 6.3 $ 11.00
$16.38 -- $19.99 ......... 740 7.7 $ 18.77 430 7.7 $ 18.62
$20.00 - $23.50 .......... 820 7.6 $ 20.80 256 7.3 $ 20.55
$29.00 ................... 368 8.6 $ 29.00 100 8.6 $ 29.00
$32.50 - $35.00........... 1,284 9.3 $ 33.25 -- -- --
$39.70.................... 880 9.9 $ 39.70 -- -- --
----- -----
Total ................... 7,980 7.2 $ 16.68 4,216 5.9 $ 6.78
===== =====
69
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The weighted average fair values of stock options at their grant date
during 2001, 2000 and 1999, where the exercise price equaled the market price
(estimated fair value) on the grant date were $14.87, $10.10 and $7.30,
respectively. In accordance with APB 25, no compensation expense was
recognized. The following table reflects pro forma net income and L-3 Holdings
EPS had the Company elected to adopt the fair value approach of SFAS 123.
YEAR ENDED DECEMBER 31,
-------------------------------------------
2001 2000 1999
------------- ------------ ------------
Net income:
As reported ............ $ 115,458 $ 82,727 $ 58,689
Pro forma .............. 107,573 75,064 54,625
L-3 Holdings Basic EPS:
As reported ............ $ 1.54 $ 1.24 $ 0.91
Pro forma .............. 1.44 1.13 0.85
L-3 Holdings Diluted EPS:
As reported ............ $ 1.47 $ 1.18 $ 0.88
Pro forma .............. 1.38 1.07 0.81
The estimated fair value of options granted was calculated using the
Black-Scholes option-pricing valuation model. The weighted average assumptions
used in the valuation models are presented in the table below.
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
Expected option term ............ 5.0 5.0 4.8
Expected volatility ............. 39.5% 35.8% 31.0%
Expected dividend yield ......... -- -- --
Risk-free interest rate ......... 4.5% 6.4% 4.7%
13. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under agreements
expiring at various dates through 2028. The following table presents future
minimum payments under noncancellable operating leases with initial or
remaining terms in excess of one year as of December 31, 2001.
OPERATING LEASES
----------------------------------------
REAL ESTATE EQUIPMENT TOTAL
------------- ----------- ----------
2002 ............... $ 60,163 $1,735 $ 61,898
2003 ............... 48,302 996 49,298
2004 ............... 32,693 379 33,072
2005 ............... 28,788 104 28,892
2006 ............... 25,722 12 25,734
Thereafter ......... 151,561 -- 151,561
-------- ------ --------
Total ............. $347,229 $3,226 $350,455
======== ====== ========
70
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Real estate lease commitments have been reduced by minimum sublease rental
income of $5,127 due in the future under noncancellable subleases. Leases
covering major items of real estate and equipment contain renewal and or
purchase options. Rent expense, net of sublease income was $41,370 for 2001,
$34,123 for 2000 and $22,452 for 1999.
On March 30, 1998, the Company entered into a real estate lease agreement,
as lessee, with an unrelated lessor which expired on March 30, 2001, which is
accounted for as an operating lease. On March 29, 2001, the Company exercised
its option to renew the lease through March 30, 2003. On or before the lease
expiration date, the Company can exercise options under the lease agreement to
either renew the lease, purchase the property for $12,500, or sell the property
on behalf of the lessor (the "Sale Option"). If the Company elects the Sale
Option, the Company must pay the lessor a residual guarantee amount of $10,894,
on or before the lease expiration date, and at the time the property is sold,
the Company must pay the lessor a supplemental rent equal to the gross sales
proceeds in excess of the residual guarantee amount not to exceed $1,606.
On June 30, 1999, the Company entered into a real estate lease agreement,
as lessee, with an unrelated lessor which expires on June 30, 2002, which is
accounted for as an operating lease. On or before the lease expiration date,
the Company can exercise options under the lease agreement to either renew the
lease, purchase the property for $15,500, or sell the property on behalf of the
lessor. If the Company elects the Sale Option, the Company must pay the lessor
a residual guarantee amount of $13,524, on or before the lease expiration date,
and at the time the property is sold, the Company must pay the lessor a
supplemental rent equal to the gross sales proceeds in excess of the residual
guarantee amount not to exceed $1,976.
For both real estate lease agreements discussed above, if the gross sales
proceeds are less than the sum of the residual guarantee amount and the
supplemental rent, the Company is required to pay a supplemental rent to the
extent the reduction in the fair value of the property is demonstrated by an
independent appraisal to have been caused by the Company's failure to properly
maintain the property. Accordingly, the aggregate residual guarantee amounts of
$24,418 have been included in the noncancellable real estate operating lease
payments relating to the expiration of such leases.
On December 28, 2000, the Company entered into a sale-leaseback
transaction on its facility located in Hauppauge, NY. The facility was sold for
$13,650. The lease agreement which is accounted for as an operating lease, has
an initial term of 14 years with a fixed annual rent that increases 2.5%
annually. The Company has the option to extend the lease term for an additional
3 terms of 5 years each. The gain of $4,110 on the sale of the facility has
been deferred and will be recognized ratably over the term of the lease.
The Company has a contract to provide and operate for the U.S. Air Force
("USAF") a full-service training facility including simulator systems near a
USAF base. The Company expects to lease the simulator systems from unrelated
third parties, and has entered into agreements with the owner-lessors of the
simulator systems, under which the Company is acting as the construction agent
on behalf of the owner-lessors for procurement and construction for the
simulator systems. The estimated project costs to construct the simulator
systems is approximately $48,360. During the construction period, if certain
events occur that are caused by the Company's actions or failures to act, these
agreements may obligate the Company to make payments to the owner-lessors which
may be equal to 89.9% of the incurred project costs for the simulator systems
at the time of such defaults. At December 30, 2002, the estimated completion
date of the construction, pursuant to these agreements, the Company, as lessee,
will enter into leases each with a term of 15 years with the owner-lessors for
the use of the simulator systems. These leases are expected to be accounted for
as operating leases and the aggregate noncancellable rental payments under such
leases are estimated to be $89,241.
71
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company is engaged in providing products and services under contracts
with the U.S. Government and to a lesser degree, under foreign government
contracts, some of which are funded by the U.S. Government. All such contracts
are subject to extensive legal and regulatory requirements, and, from time to
time, agencies of the U.S. Government investigate whether such contracts were
and are being conducted in accordance with these requirements. Under U.S.
Government procurement regulations, an indictment of the Company by a federal
grand jury could result in the Company being suspended for a period of time
from eligibility for awards of new government contracts. A conviction could
result in debarment from contracting with the federal government for a
specified term. Additionally, in the event that U.S. Government expenditures
for products and services of the type manufactured and provided by the Company
are reduced, and not offset by greater commercial sales or other new programs
or products, or acquisitions, there may be a reduction in the volume of
contracts or subcontracts awarded to the Company.
The Company has been periodically subject to litigation, claims or
assessments and various contingent liabilities incidental to its business.
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
consolidated 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.
With respect to those investigative actions, items of litigation, claims
or assessments of which it is 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 consolidated financial
position, results of operations or cash flows of the Company.
14. PENSIONS AND OTHER EMPLOYEE BENEFITS
The Company maintains a number of pension plans, both contributory and
noncontributory, covering employees at certain locations. Eligibility for
participation in these plans varies and benefits are generally based on the
participant's compensation and/or years of service. The Company's funding
policy is generally to contribute in accordance with cost accounting standards
that affect government contractors, subject to the Internal Revenue Code and
regulations thereon. Plan assets are invested primarily in U.S. government and
agency obligations and listed stocks and bonds.
The Company also provides postretirement medical and life insurance
benefits for retired employees and dependents at certain locations.
Participants are eligible for these benefits when they retire from active
service and meet the eligibility requirements for the Company's pension plans.
These benefits are funded primarily on a pay-as-you-go basis with the retiree
generally paying a portion of the cost through contributions, deductibles and
coinsurance provisions.
72
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes the balance sheet impact, as well as the
benefit obligations, assets, funded status and rate assumptions associated with
the pension and postretirement benefit plans.
POSTRETIREMENT
PENSION PLANS BENEFIT PLANS
----------------------------- -----------------------------
2001 2000 2001 2000
-------------- ------------ ------------- -------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year ...... $ 415,483 $ 328,541 $ 68,538 $ 65,554
Service cost ................................. 18,516 16,343 1,709 1,670
Interest cost ................................ 31,428 28,029 4,746 4,754
Participants' contributions .................. 62 36 607 --
Amendments ................................... -- 853 -- --
Actuarial loss (gain) ........................ 22,277 8,867 4,043 (1,271)
Acquisitions ................................. 63,793 48,187 12,369 1,879
Benefits paid ................................ (18,108) (15,373) (4,869) (4,048)
---------- --------- --------- ---------
Benefit obligation at end of year ............ $ 533,451 $ 415,483 $ 87,143 $ 68,538
---------- --------- --------- ---------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of
year ........................................ $ 391,263 $ 367,451 $ -- $ --
Actual return on plan assets ................. (13,754) (21,905) -- --
Acquisitions ................................. 63,344 49,709 -- --
Employer contributions ....................... 8,108 11,345 4,262 4,048
Participants' contributions .................. 62 36 607 --
Benefits paid ................................ (18,108) (15,373) (4,869) (4,048)
---------- --------- --------- ---------
Fair value of plan assets at end of year ..... $ 430,915 $ 391,263 $ -- $ --
---------- --------- --------- ---------
FUNDED STATUS OF THE PLANS ................... $ (102,536) $ (24,220) $ (87,143) $ (68,538)
Unrecognized actuarial loss (gain) ........... 69,697 (5,044) (5,032) (9,401)
Unrecognized prior service cost .............. 3,426 3,777 (547) (1,207)
---------- --------- --------- ---------
Net amount recognized ........................ $ (29,413) $ (25,487) $ (92,722) $ (79,146)
========== ========= ========= =========
AMOUNTS RECOGNIZED IN THE BALANCE SHEETS
CONSIST OF:
Accrued benefit liability .................... $ (62,330) $ (26,377) $ (92,722) $ (79,146)
Accumulated other comprehensive income........ 32,917 890 -- --
---------- --------- --------- ---------
Net amount recognized ........................ $ (29,413) $ (25,487) $ (92,722) $ (79,146)
========== ========= ========= =========
RATE ASSUMPTIONS:
Discount rate ................................ 7.25% 7.50% 7.25% 7.50%
Rate of return on plan assets ................ 9.50% 9.50% n.a. n.a.
Salary increases ............................. 4.50% 4.50% 4.50% 4.50%
The annual increase in cost of benefits ("health care cost trend rate") is
assumed to be an average of 10.00% in 2001 and is assumed to gradually decrease
to a rate of 4.5% thereafter. Assumed health care cost trend rates have a
significant effect on amounts reported for postretirement medical benefit
plans. A one percentage point decrease in the assumed health care cost trend
rates would have the effect of decreasing the aggregate service and interest
cost by $540 and the postretirement medical obligations by $6,139. A one
percentage point increase in the assumed health care cost trend rate would have
the effect of increasing the aggregate service and interest cost by $658 and
the postretirement medical obligations by $6,651.
73
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes the components of net periodic pension and
postretirement medical costs.
POSTRETIREMENT
PENSION PLANS PENSION PLANS
--------------------------- ---------------------
2001 2000 2001 2000
------------ ------------ --------- ---------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost ............................... $ 18,516 $ 16,343 $1,709 $1,670
Interest cost .............................. 31,428 28,029 4,746 4,754
Amortization of prior service cost ......... 351 351 (99) (99)
Expected return on plan assets ............. (37,716) (39,109) -- --
Recognized actuarial (gain) loss ........... (424) (3,981) (887) (865)
Recognition due to settlement .............. -- 307 -- --
--------- --------- ------ ------
Net periodic benefit cost ................. $ 12,155 $ 1,940 $5,469 $5,460
========= ========= ====== ======
The accumulated benefit obligation, projected benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $300,072, $324,840, and $247,383, respectively, as
of December 31, 2001 and $86,426, $92,180 and $78,773, respectively, as of
December 31, 2000.
In connection with the Company's assumption of certain plan obligations
pursuant to the Company's acquisition of the predecessor company, Lockheed
Martin has provided the Pension Benefit Guaranty Corporation ("PBGC") with
commitments to assume sponsorship or other forms of financial support under
certain circumstances with respect to the Company's pension plans for
Communication Systems -- West and Aviation Recorders (the "Subject Plans").
Upon the occurrence of certain events, Lockheed Martin, at its option, has the
right to decide whether to cause the Company to transfer sponsorship of any or
all of the Subject Plans to Lockheed Martin, even if the PBGC has not sought to
terminate the Subject Plans. Such a triggering event occurred in 1998, but
reversed in 1999, relating to a decrease in the PBGC-mandated discount rate in
1998 that had resulted in an increase in the underlying liability. The Company
notified Lockheed Martin of the 1998 triggering event, and in February 1999,
Lockheed Martin informed the Company that it had no present intention to
exercise its right to cause the Company to transfer sponsorship of the Subject
Plans. If Lockheed Martin did assume sponsorship of these plans, it would be
primarily liable for the costs associated with funding the Subject Plans or any
costs associated with the termination of the Subject Plans but L-3
Communications would be required to reimburse Lockheed Martin for these costs.
To date, the impact on pension expense and funding requirements resulting from
this arrangement has not been significant. However, should Lockheed Martin
assume sponsorship of the Subject Plans or if these plans were terminated, the
impact of any increased pension expenses or funding requirements could be
material to the Company. The Company has performed its obligations under the
letter agreement with Lockheed Martin and the Lockheed Martin Commitment and
has not received any communications from the PBGC concerning actions which the
PBGC contemplates taking in respect of the Subject Plans.
Employee Savings Plans. Under its various employee savings plans, the
Company matches the contributions of participating employees up to a designated
level. The extent of the match, vesting terms and the form of the matching
contributions vary among the plans. Under these plans, the Company's matching
contributions in L-3 Holdings common stock and cash were $21,462 for 2001,
$15,201 for 2000 and $8,798 for 1999.
74
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
15. SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
Interest paid .......................................... $81,552 $81,390 $50,532
Income taxes paid ...................................... 4,904 10,052 6,317
Noncash transactions:
Common stock issued related to acquisition ............ 17,357 -- 6,432
Contribution in common stock to savings plans ......... 16,868 12,642 6,993
16. SEGMENT INFORMATION
The Company has four reportable segments: (1) Secure Communications & ISR,
(2) Training, Simulation & Support Services, (3) Aviation Products & Aircraft
Modernization and (4) Specialized Products, which are described in Note 1. The
Company evaluates the performance of its operating segments and reportable
segments based on their sales and operating income. All corporate expenses are
allocated to the Company's divisions using an allocation methodology prescribed
by U.S. Government regulations for government contractors. Accordingly, all
costs and expenses are included in the Company's measure of segment
profitability.
TRAINING AVIATION
SECURE SIMULATION & PRODUCTS &
COMMUNICATIONS SUPPORT AIRCRAFT
& ISR SERVICES MORDERNIZATION
---------------- -------------- ----------------
2001
----
Sales ..................... $452,152 $597,029 $263,450
Operating income .......... 31,975 65,715 85,602
Total assets .............. 366,482 497,368 545,517
Capital expenditures . .... 11,561 2,999 9,625
Depreciation and
amortization ............. 13,839 13,207 12,064
2000
----
Sales ..................... $405,379 $283,407 $209,207
Operating income .......... 54,174 23,491 66,854
Total assets .............. 293,023 295,139 360,469
Capital expenditures ...... 6,405 2,762 2,145
Depreciation and
amortization ............. 13,093 9,340 10,085
1999
----
Sales ..................... $437,050 $ 91,857 $119,369
Operating income .......... 37,759 6,745 27,826
Total assets .............. 265,380 74,187 96,734
Capital expenditures . .... 5,864 644 1,330
Depreciation and
amortization ............. 14,672 2,527 3,815
ELIMINATION OF
SPECIALIZED INTERSEGMENT CONSOLIDATED
PRODUCTS CORPORATE SALES TOTAL
------------- ----------- --------------- -------------
2001
----
Sales ..................... $1,040,753 $ (5,962) $2,347,422
Operating income .......... 92,038 275,330
Total assets .............. 1,382,010 $547,872 3,339,249
Capital expenditures . .... 23,657 279 48,121
Depreciation and
amortization ............. 47,481 86,951
2000
----
Sales ..................... $1,028,802 $ (16,734) $1,910,061
Operating income .......... 78,199 222,718
Total assets .............. 1,325,108 $189,805 2,463,544
Capital expenditures ...... 21,667 601 33,580
Depreciation and
amortization ............. 41,736 74,254
1999
----
Sales ..................... $ 765,706 $ (8,520) $1,405,462
Operating income .......... 78,156 150,486
Total assets .............. 1,017,152 $175,288 1,628,741
Capital expenditures . .... 15,385 233 23,456
Depreciation and
amortization ............. 32,704 53,718
Corporate assets not allocated to the reportable segments primarily
include cash and cash equivalents, corporate office fixed assets, deferred
income tax assets and deferred debt issuance costs.
75
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Substantially all of the Company's operations are domestic. The Company's
foreign operations are not material to the Company's results of operations,
cash flows or financial position. Sales to principal customers are summarized
in the table below.
YEAR ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
------------- ------------- -------------
U.S. Government agencies . .................. $1,614,858 $1,284,379 $ 924,006
Foreign governments ......................... 200,913 144,274 127,637
Commercial export . ......................... 218,971 172,101 144,274
Other (principally U.S. commercial) ......... 312,680 309,307 209,545
---------- ---------- ----------
Consolidated sales ......................... $2,347,422 $1,910,061 $1,405,462
========== ========== ==========
The Company's sales by product and services are summarized in the table
below:
YEARS ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
(DOLLARS IN MILLIONS)
Avionics, ocean systems and premium
fuzing products .................................. $ 672.3 $ 595.6 $ 492.7
Telemetry and instrumentation ..................... 327.8 385.6 301.4
Military communications and high data
rate communications .............................. 234.2 234.5 249.3
Training devices and motion simulators ............ 160.7 148.5 --
Information security systems ...................... 151.2 105.4 102.9
Microwave components .............................. 112.9 92.8 78.7
Space and commercial communications,
satellite control and tactical sensor
systems .......................................... 109.0 95.0 106.6
--------- --------- ---------
Sub-total products ............................... 1,768.1 1,657.4 1,331.6
Training, simulation and support services ......... 597.0 283.4 91.8
--------- --------- ---------
Subtotal ......................................... 2,365.1 1,940.8 1,423.4
Intercompany eliminations ......................... ( 17.7) ( 30.7) ( 17.9)
--------- --------- ---------
Total .......................................... $ 2,347.4 $ 1,910.1 $ 1,405.5
========= ========= =========
17. UNAUDITED QUARTERLY FINANCIAL DATA
Unaudited summarized financial data by quarter for the years ended
December 31, 2001 and 2000 is presented in the table below.
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- ------------- -------------- ------------
2001
Sales .................... $ 461,901 $ 561,560 $ 618,164 $ 705,797
Operating income ......... 46,869 60,467 75,208 92,786
Net income ............... 14,158 23,336 33,435 44,529
Basic EPS . .............. $ 0.21 $ 0.31 $ 0.43 $ 0.57
Diluted EPS .............. $ 0.20 $ 0.30 $ 0.41 $ 0.53
2000
Sales .................... $ 377,052 $ 460,976 $ 514,415 $ 557,618
Operating income ......... 34,669 49,653 62,815 75,581
Net income ............... 10,929 16,459 24,116 31,223
Basic EPS ................ $ 0.17 $ 0.25 $ 0.36 $ 0.46
Diluted EPS .............. $ 0.16 $ 0.24 $ 0.34 $ 0.44
76
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
18. FINANCIAL INFORMATION OF L-3 COMMUNICATIONS AND ITS SUBSIDIARIES
The shareholders' equity of L-3 Communications equals that of L-3 Holdings
but its components of the common stock and additional paid-in capital accounts
are different. The table below presents information regarding changes in common
stock and additional paid-in capital of L-3 Communications for each of the
three years ended December 31, 2001.
L-3 COMMUNICATIONS
COMMON STOCK
------------------
ADDITIONAL
SHARES PAR PAID-IN
ISSUED VALUE CAPITAL TOTAL
-------- ------- ------------- -------------
Balance at December 31, 1998 ............. 100 $-- $ 264,769 $ 264,769
Contributions from L-3 Holdings ......... 218,925 218,925
--- --- ---------- ----------
Balance at December 31, 1999 ............. 100 -- 483,694 483,694
Contributions from L-3 Holdings ......... 322,732 322,732
Push down of Convertible Notes .......... (290,500) (290,500)
--- --- ---------- ----------
Balance at December 31, 2000 ............. 100 -- 515,926 515,926
Contributions from L-3 Holdings ......... 830,561 830,561
Push down of CODES ...................... (407,450) (407,450)
--- --- ---------- ----------
Balance at December 31, 2001 ............. 100 $-- $ 939,037 $ 939,037
=== === ========== ==========
The net proceeds received by L-3 Holdings from the sale of its common
stock, exercise of L-3 Holdings employee stock options and L-3 Holdings common
stock contributed to the Company's savings plans are contributed to L-3
Communications. The net proceeds from the sale of the Convertible Notes and
CODES by L-3 Holdings were also contributed to L-3 Communications and are
reflected as indebtedness of L-3 Communications. See Notes 2 and 7.
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"). See Note
7. The foreign subsidiaries and certain domestic subsidiaries of L-3
Communications (the "Non-Guarantor Subsidiaries") do not guarantee the debt of
L-3 Communications. None of the debt of L-3 Communications has been issued by
its subsidiaries. There are no restrictions on the payment of dividends from
the Guarantor Subsidiaries to L-3 Communications.
In lieu of providing separate audited financial statements for the
Guarantor Subsidiaries, the Company has included the accompanying condensed
combining financial statement based on Rule 3-10 of SEC Regulation S-X . The
Company does not believe that separate financial statements of the Guarantor
Subsidiaries are material to users of the financial statements.
The following 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.
77
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS L-3 COMMUNICATIONS
------------- -------------- --------------- ---------------- -------------------
CONDENSED COMBINING BALANCE
SHEETS:
-----------------------------------------
AS OF DECEMBER 31, 2001:
-----------------------------------------
Total current assets .................... $ 786,498 $ 300,585 $ 155,318 $ -- $1,242,401
Other long-term assets .................. 965,566 701,887 429,395 -- 2,096,848
Investment in and amounts due
from consolidated subsidiaries ......... 1,229,572 150,580 43,236 (1,423,388) --
---------- ---------- --------- ------------ ----------
Total assets ........................... $2,981,636 $1,153,052 $ 627,949 $ (1,423,388) $3,339,249
========== ========== ========= ============ ==========
Total current liabilities ............... $ 278,598 $ 136,579 $ 109,394 $ -- $ 524,571
Other long-term liabilities ............. 173,894 31,080 10,663 -- 215,637
Long-term debt .......................... 1,315,252 -- -- -- 1,315,252
Minority interest ....................... -- -- 69,897 -- 69,897
Shareholders' equity .................... 1,213,892 985,393 437,995 (1,423,388) 1,213,892
---------- ---------- --------- ------------ ----------
Total liabilities and
shareholders' equity ................. $2,981,636 $1,153,052 $ 627,949 $ (1,423,388) $3,339,249
========== ========== ========= ============ ==========
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
========== ========== ========= ============ ==========
78
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS L-3 COMMUNICATIONS
------------- -------------- --------------- -------------- -------------------
CONDENSED COMBINING STATEMENTS OF
----------------------------------------------
OPERATIONS:
----------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2001:
----------------------------------------------
Sales ........................................ $1,328,702 $854,094 $168,558 $ (3,932) $2,347,422
---------- -------- -------- --------- ----------
Operating income ............................. 219,373 30,237 25,720 -- 275,330
Interest and other income (expense) .......... 8,335 (515) (6,081) -- 1,739
Interest expense ............................. 86,024 51 315 -- 86,390
Minority interest ............................ -- -- 4,457 -- 4,457
Provision for income taxes ................... 53,840 11,275 5,649 -- 70,764
Equity in net income of consolidated
subsidiaries ................................ 27,614 -- -- (27,614) --
---------- -------- -------- --------- ----------
Net income ................................... $ 115,458 $ 18,396 $ 9,218 $ (27,614) $ 115,458
========== ======== ======== ========= ==========
FOR THE YEAR ENDED DECEMBER 31, 2000:
-----------------------------------------------
Sales ........................................ $1,313,998 $441,677 $159,735 $ (5,349) $1,910,061
---------- -------- -------- --------- ----------
Operating income ............................. 206,680 5,755 10,283 -- 222,718
Interest and other income .................... 3,061 264 1,068 -- 4,393
Interest expense ............................. 92,633 149 250 -- 93,032
Provision for income taxes ................... 44,852 2,248 4,252 -- 51,352
Equity in net income of consolidated
subsidiaries ................................ 10,471 -- -- (10,471) --
---------- -------- -------- --------- ----------
Net income ................................... $ 82,727 $ 3,622 $ 6,849 $ (10,471) $ 82,727
========== ======== ======== ========= ==========
FOR THE YEAR ENDED DECEMBER 31, 1999:
-----------------------------------------------
Sales ........................................ $ 837,924 $440,160 $130,122 $ (2,744) $1,405,462
---------- -------- -------- --------- ----------
Operating income (loss) ...................... 103,753 52,016 (5,283) -- 150,486
Interest and other income .................... 4,738 469 327 -- 5,534
Interest expense ............................. 60,307 -- 283 -- 60,590
Provision (benefit) for income taxes ......... 18,238 20,091 (1,588) -- 36,741
Equity in net income of consolidated
subsidiaries ................................ 28,743 -- -- (28,743) --
---------- -------- -------- --------- ----------
Net income (loss) ............................ $ 58,689 $ 32,394 $ (3,651) $ (28,743) $ 58,689
========== ======== ======== ========= ==========
79
L-3 COMMUNICATIONS HOLDINGS, INC.
AND L-3 COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS L-3 COMMUNICATIONS
------------- -------------- --------------- -------------- -------------------
CONDENSED COMBINING STATEMENTS OF
-------------------------------------------------
CASH FLOWS:
-------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2001:
-------------------------------------------------
Net cash from operating activities .............. $ 104,169 $ 30,014 $ 38,785 $ -- $ 172,968
---------- ---------- --------- ---------- ----------
Net cash (used in) investing activities ......... (470,091) (227,199) (61,820) 334,220 (424,890)
---------- ---------- --------- ---------- ----------
Net cash from financing activities .............. 667,424 187,862 59,198 (334,220) 580,264
---------- ---------- --------- ---------- ----------
Net increase (decrease) in cash ................. 301,502 (9,323) 36,163 -- 328,342
Cash and cash equivalents, beginning of
period ......................................... 18,708 4,911 9,061 -- 32,680
---------- ---------- --------- ---------- ----------
Cash and cash equivalents, end of
period ......................................... $ 320,210 $ (4,412) $ 45,224 $ -- $ 361,022
========== ========== ========= ========== ==========
FOR THE YEAR ENDED DECEMBER 31, 2000:
--------------------------------------------------
Net cash from (used in) operating
activities ..................................... $ 108,726 $ (10,504) $ 15,583 $ -- $ 113,805
---------- ---------- --------- ---------- ----------
Net cash (used in) investing activities ......... (607,579) (21,819) (8,163) 29,338 (608,223)
---------- ---------- --------- ---------- ----------
Net cash from (used in) financing
activities ..................................... 483,524 32,070 (1,946) (29,338) 484,310
---------- ---------- --------- ---------- ----------
Net increase (decrease) in cash ................. (15,329) (253) 5,474 -- (10,108)
Cash and cash equivalents, beginning of
period ......................................... 34,037 5,164 3,587 -- 42,788
---------- ---------- --------- ---------- ----------
Cash and cash equivalents, end of
period ......................................... $ 18,708 $ 4,911 $ 9,061 $ -- $ 32,680
========== ========== ========= ========== ==========
FOR THE YEAR ENDED DECEMBER 31, 1999:
--------------------------------------------------
Net cash from (used in) operating
activities ..................................... $ 75,737 $ 31,315 $ (8,034) $ -- $ 99,018
---------- ---------- --------- ---------- ----------
Net cash (used in) investing activities ......... (280,118) (155,607) (62,408) 213,331 (284,802)
---------- ---------- --------- ---------- ----------
Net cash from financing activities .............. 214,681 128,997 72,095 (213,331) 202,442
---------- ---------- --------- ---------- ----------
Net increase in cash ............................ 10,300 4,705 1,653 -- 16,658
Cash and cash equivalents, beginning of
period ......................................... 23,737 459 1,934 -- 26,130
---------- ---------- --------- ---------- ----------
Cash and cash equivalents, end of
period ......................................... $ 34,037 $ 5,164 $ 3,587 $ -- $ 42,788
========== ========== ========= ========== ==========
80