SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
Commission File Number
L-3 Communications Corporation
600 Third Avenue
New York, NY 10016
Telephone: (212) 697-1111
State of incorporation: Delaware
IRS identification number: 13-3937436
L-3 Communications Corporation
Form 10-Q Quarterly Report for
Fiscal Quarter Ended September 30, 1997
PART I -FINANCIAL INFORMATION:
PAGE NO.
ITEM 1. Financial Statements:
Condensed Consolidated (Combined) Balance
Sheets as of September 30, 1997 and
December 31, 1996. 1
Condensed Consolidated (Combined) Statements
of Operations for the Three and Nine Months
ended September 30, 1997 and September 30,
1996. 2-3
Condensed Consolidated (Combined) Statements
of Cash Flows for the Nine Months ended
September 30, 1997 and September 30, 1996.
4
Notes to Condensed Consolidated (Combined)
Financial Statements. 5-11
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
12-20
PART II -OTHER INFORMATION:
Not Applicable. 21
L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED (COMBINED) BALANCE SHEETS
(in thousands)
(Unaudited)
The Company Predecessor Company
------------------------- -------------------------
September 30, 1997 December 31, 1996
------------------------- -------------------------
ASSETS |
Current assets: |
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 39,767 | --
Contracts in process . . . . . . . . . . . . . . . . . . . . . . . . . 204,870 | $198,073
Net assets held for sale . . . . . . . . . . . . . . . . . . . . . . . 16,671 | --
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 3,708 | 3,661
-------- | --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 265,016 | 201,734
-------- | --------
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . 91,849 | 116,566
Less, accumulated depreciation and amortization . . . . . . . . . . . 7,740 | 24,983
-------- | --------
84,109 | 91,583
-------- | --------
Intangibles, primarily cost in excess of net assets acquired, net of |
amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299,341 | 282,674
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,362 | 17,307
-------- | --------
$684,828 | $593,298
======== | ========
LIABILITIES AND SHAREHOLDERS' (INVESTED) EQUITY |
Current liabilities: |
Current portion of long-term debt . . . . . . . . . . . . . . . . . . $ 4,500 | --
Accounts payable, trade . . . . . . . . . . . . . . . . . . . . . . . 34,819 | $ 34,163
Accrued employment costs . . . . . . . . . . . . . . . . . . . . . . . 37,450 | 27,313
Customer advances and amounts in excess of costs incurred . . . . . . 16,180 | 14,299
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,752 | --
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . 18,267 | 27,113
-------- | --------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 122,968 | 102,888
-------- | --------
Pension and postretirement benefits . . . . . . . . . . . . . . . . . . . . 27,933 | --
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,560 | 16,801
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393,500 | --
Commitments and contingencies . . . . . . . . . . . . . . . . . . . . . . . |
Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . |
Common Stock, $.01 par value; authorized 100 shares, issued 100 |
shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- | --
Capital Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,000 | --
Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 8,367 | --
Deemed Distribution . . . . . . . . . . . . . . . . . . . . . . . . . (7,500) | --
-------- | --------
Total Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . 125,867 | --
Invested equity at December 31, 1996 . . . . . . . . . . . . . . . . . . . -- | 473,609
-------- | --------
$684,828 | $593,298
======== | ========
See notes to condensed consolidated (combined) financial statements.
L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED (COMBINED) STATEMENTS OF OPERATIONS
(in thousands)
(Unaudited)
The Company Predecessor Company
------------------------ ------------------------
Three Months Three Months
Ended Ended
September 30, 1997 September 30, 1996
------------------------ ------------------------
Sales . . . . . . . . . . . . . . . . . $174,822 | $158,594
Cost and expenses . . . . . . . . . . . 156,968 | 146,397
-------- | --------
Operating income . . . . . . . . . . . 17,854 | 12,197
|
Net interest expense . . . . . . . . . 9,289 | 7,366
-------- | --------
Income before income taxes . . . . . . 8,565 | 4,831
|
Income taxes . . . . . . . . . . . . . $ 3,289 | $ 1,776
-------- | --------
Net income . . . . . . . . . . . . . . $ 5,276 | $ 3,055
======== | ========
See notes to condensed consolidated (combined) financial statements.
L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED (COMBINED) STATEMENTS OF OPERATIONS
(in thousands)
(Unaudited)
The Company Predecessor Company
------------------ --------------------------------------
Six Months Three Months Nine Months
Ended Ended Ended
September 30, 1997 March 31, 1997 September 30, 1996
------------------ ----------------- ------------------
(Unaudited) (Unaudited)
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . $342,852 | $ 158,873 $365,041
Cost and expenses . . . . . . . . . . . . . . . . . . . . 309,877 | 150,937 341,914
-------- | -------- --------
Operating income . . . . . . . . . . . . . . . . . . . . 32,975 | 7,936 23,127
|
Net interest expense . . . . . . . . . . . . . . . . . . 19,259 | 8,441 16,780
-------- | -------- --------
Income (loss) before income taxes . . . . . . . . . . . . 13,716 | (505) 6,347
Income taxes . . . . . . . . . . . . . . . . . . . . . . 5,349 | (247) 3,052
-------- | -------- --------
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ 8,367 | $ (258) $ 3,295
======== | ======== ========
See notes to condensed consolidated (combined) financial statements.
L-3 COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED (COMBINED) STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
The Company Predecessor Company
-------------------- ------------------------------------------
Six Months Three Months Nine Months
Ended Ended Ended
September 30, 1997 March 31, 1997 September 30, 1996
-------------------- -------------------- --------------------
Operating activities: |
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . $ 8,367 | $ (258) $ 3,295
Depreciation and amortization . . . . . . . . . . . . . . . . . 14,075 | 7,184 17,962
Changes in operating assets and liabilities |
Contracts in process . . . . . . . . . . . . . . . . . . . 11,658 | (17,475) 27,555
Other current assets . . . . . . . . . . . . . . . . . . . (1,113) | (481) 2,144
Other assets . . . . . . . . . . . . . . . . . . . . . . . 3,912 | (159) (8,431)
Accounts payable . . . . . . . . . . . . . . . . . . . . . (4,879) | (207) (5,881)
Accrued employment costs . . . . . . . . . . . . . . . . . 12,651 | (625) 4,150
Customer advances and amounts in excess of costs incurred 875 | (1,891) (11,902)
Accrued interest . . . . . . . . . . . . . . . . . . . . . 11,752 | -- --
Other current liabilities . . . . . . . . . . . . . . . . (6,741) | (1,867) (53)
Pension and postretirement benefits . . . . . . . . . . . (567) | -- --
Other liabilities . . . . . . . . . . . . . . . . . . . . 6,388 | (500) (22,835)
-------- | ------- --------
Net cash from (used in) operating activities . . . . . . . . . 56,378 | (16,279) 6,004
-------- | ------- --------
Investing activities: |
Acquisition of business . . . . . . . . . . . . . . . . . . . . (470,700) | -- (287,803)
Net change in assets held for sale . . . . . . . . . . . . . . 1,503 |
Purchases of investments . . . . . . . . . . . . . . . . . . . (4,020) |
Capital expenditures . . . . . . . . . . . . . . . . . . . . . (6,436) | (4,300) (7,995)
Disposition of property, plant and equipment . . . . . . . . . 649 | -- 2,931
-------- | ------- --------
Net cash used in investing activities . . . . . . . . . . . . . (479,004) | (4,300) (292,867)
-------- | ------- --------
Financing activities: |
Advances from Lockheed Martin . . . . . . . . . . . . . . . . . -- | 20,579 286,863
Borrowings under senior credit facility . . . . . . . . . . . . 175,000 | -- --
Proceeds from sale of 10 3/8% subordinated notes . . . . . . . 225,000 | -- --
Proceeds from issuance of common stock . . . . . . . . . . . . 80,000 | -- --
Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . (15,607) | -- --
Payment of debt . . . . . . . . . . . . . . . . . . . . . . . . (2,000) | -- --
-------- | ------- --------
Net cash from financing activities . . . . . . . . . . . . . . 462,393 | 20,579 286,863
-------- | ------- --------
Net change in cash . . . . . . . . . . . . . . . . . . . . . . 39,767 | -- --
Cash and cash equivalents, beginning of the period -- | -- --
-------- | ------- --------
Cash and cash equivalents, end of the period . . . . . . . . . $ 39,767 | -- --
======== | ======= ========
Supplemental information: |
Cash paid for interest . . . . . . . . . . . . . . . . . . . . $ 4,332 | -- --
Cash paid for income taxes . . . . . . . . . . . . . . . . . . -- | -- --
Issuance of common stock to Lockheed Martin in connection |
with the acquisition of business . . . . . . . . . . . . . . $ 45,000 | -- --
See notes to condensed consolidated (combined) financial statements.
L-3 Communications Corporation
Notes to Condensed Consolidated (Combined) Financial Statements
1. Basis of Presentation
The accompanying condensed consolidated (combined) financial statements
include the assets, liabilities and results of operations of L-3
Communications Corporation, the successor company, ("L-3" or the "Company")
following the change in ownership (see Note 2) effective as of April 1, 1997
and for the period from April 1, 1997 to September 30, 1997. The statements
also include on a combined basis, substantially all of the assets and certain
liabilities of (i) nine business units previously purchased by Lockheed
Martin Corporation ("Lockheed Martin") as part of its acquisition of Loral
Corporation ("Loral") in April 1996, and (ii) one business unit,
Communications Systems--Camden purchased by Lockheed Martin as part of its
acquisition of the aerospace business of GE in April 1993, (collectively, the
"Businesses" or the "Predecessor Company"), prior to the change in ownership
and for the periods of January 1, 1996 to September 30, 1996 and January 1,
1997 to March 31, 1997, and as of December 31, 1996.
The accompanying unaudited condensed consolidated (combined) financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulations S-X of the Securities
and Exchange Commission ("SEC"); accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. All significant intercompany
balances and transactions have been eliminated. The balance sheet data as of
December 31, 1996 and the financial statement data as of March 31, 1997 and
for the three months ended March 31, 1997 have been derived from the audited
financial statements of the Predecessor Company for such periods. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Results of operations for interim periods are not necessarily indicative of
results for the entire year.
2. Change in Ownership Transaction
L-3 was formed on April 8, 1997, and is a wholly-owned subsidiary of L-3
Communications Holdings, Inc. ("Holdings"). Holdings and L-3 were formed by
Mr. Frank C. Lanza, the former President and Chief Operating Officer of
Loral, Mr. Robert V. LaPenta, the former Senior Vice President and Controller
of Loral, Lehman Brothers Capital Partners III, L.P. and its affiliates (the
"Lehman Partnership") and Lockheed Martin to acquire the Businesses.
On March 28, 1997, Lanza, LaPenta, the Lehman Partnership, Holdings, and
Lockheed Martin entered into a Transaction Agreement whereby Holdings would
acquire the Businesses from Lockheed Martin. Also included in the
acquisition is a semiconductor product line of another business and certain
leasehold improvements in New York City which were not material. Pursuant to
the Transaction Agreement on April 30, 1997 (closing date), Holdings
acquired the Businesses from Lockheed Martin for $525 million, comprised of
$480 million of cash before an estimated $20 million reduction related to a
purchase price adjustment, and $45 million of common equity, representing a
34.9% interest in Holdings retained by Lockheed Martin, plus estimated
acquisition costs of $6.6 million. Also pursuant to the Transaction
Agreement, Lockheed Martin, on behalf and at the direction of Holdings,
transferred the Businesses to the Company. The acquisition was financed with
the debt proceeds of $400 million (see Note 5) and capital contributions of
$125 million from Holdings, including the $45 million retained by Lockheed
Martin.
On November 5, 1997, the Company and Lockheed Martin amended the
Transaction Agreement to finalize the purchase price adjustment which
amounted to $21.2 million of which $15.9 million was received on the closing
date and $5.3 million was received on November 7, 1997, plus interest
thereon. The amendment to the Transaction Agreement also included the
assignment to the Company from Lockheed Martin of a contract for the
production of mission communication systems for track vehicles.
In connection with the Transaction Agreement, Holdings and the Company
anticipate entering into a transition services agreement with Lockheed Martin
pursuant to which Lockheed Martin will provide to L-3 and its subsidiaries
(and L-3 will provide to Lockheed Martin) certain corporate services of a
type previously provided at costs consistent with past practices until
December 31, 1997 (or, in the case of Communications Systems--Camden, for a
period of up to 18 months after the Closing). Lockheed Martin is currently
providing L-3 the services contemplated by the proposed transaction services
agreement in the absence of any executed agreement. The parties also entered
into supply agreements which reflect existing intercompany work transfer
agreements or similar support arrangements upon prices and other terms
consistent with previously existing arrangements. Holdings, the Company and
Lockheed Martin have entered into certain subleases of real property and
cross-licenses of intellectual property.
Pursuant to the Transaction Agreement the Company also assumed certain
obligations relating to environmental liabilities and benefit plans.
In accordance with Accounting Principles Board Opinion No. 16, the
acquisition of the Businesses by Holdings and L-3 has been accounted for as a
purchase business combination effective as of April 1, 1997. The purchase
cost (including the fees and expenses related thereto) was allocated to the
tangible and intangible assets and liabilities of the Company based upon
their respective fair values. The assets and liabilities recorded in
connection with the preliminary purchase price allocation were $660.3 million
and $152.1 million, respectively. The excess of the purchase price over the
fair value of net assets acquired of $306.2 million was recorded as goodwill,
and is being amortized on a straight-line basis over a period of 40 years.
Also in connection with the purchase price allocation estimated deferred tax
assets of $35.0 million, fully offset by a valuation allowance, that related
principally to differences between book and tax bases of assumed liabilities
were recorded. The assets and liabilities recorded in connection with the
purchase price allocation are based on preliminary estimates of fair values;
actual adjustments will be based on final appraisals and other analyses of
fair values which are currently in progress. Changes between preliminary and
final purchase price allocations for the valuation of contracts in process,
inventories, pension liabilities, fixed assets and deferred taxes could be
material. As a result of the 34.9% ownership interest retained by Lockheed
Martin, the provisions of EITF 88-16 were applied in connection with the
purchase price allocation, which resulted in recording net assets at
approximately 34.9% of Lockheed Martin's carrying values in the Businesses
plus 65.1% at fair value, and the recognition of a deemed distribution of
$7.5 million.
Had the acquisition of the Businesses occurred on January 1, 1996, the
unaudited pro forma sales and net income for the nine months ended
September 30, 1997 and 1996 would have been $499.9 million and $487.1 million
and $7.9 million and $2.5 million, respectively. The pro forma results, which
are based on various assumptions, are not necessarily indicative of what
would have occurred had the acquisition been consummated on January 1, 1996.
The 1996 pro forma sales and net income have been adjusted to include the
operations of the Loral Acquired Businesses from January 1, 1996 (See
Note 3).
3. Predecessor Company Acquisitions
Effective April 1, 1996, Lockheed Martin acquired substantially all the
assets and liabilities of the defense businesses of Loral, including the
Wideband Systems Division and the Products Group which are included in the
Businesses. The acquisition of the Wideband Systems Division and Products
Group businesses (the "Loral Acquired Businesses") has been accounted for as
a purchase by Lockheed Martin Communications Systems--Camden Division
("Division"). The acquisition has been reflected in the financial
statements based on the purchase price allocated to those acquired businesses
by Lockheed Martin. The assets and liabilities recorded in connection with
the purchase price allocation were $401.0 million and $113.2 million,
respectively. As such, the accompanying condensed combined financial
statements for periods prior to April 1, 1997 reflect the results of
operations of the Division and the Loral Acquired Businesses from the
effective date of acquisition including the effects of an allocated portion
of cost in excess of net assets acquired resulting from the acquisition.
4. Contracts in Progress
Billings and accumulated costs and profits on long-term contracts,
principally with the U.S. Government, comprise the following:
The Company Predecessor Company
September 30, 1997 December 31, 1996
-------------------------- --------------------------
(Dollars in thousands)
Billed contract receivables . . . . . . . . . . . . . . . . . . . . . . . $ 44,815 $ 45,212
Unbilled contract receivables . . . . . . . . . . . . . . . . . . . . . . 56,626 84,814
Other billed receivables, principally commercial and affiliates . . . . . 30,390 41,154
Inventoried costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,511 72,880
-------- --------
222,342 244,060
Less, unliquidated progress payments . . . . . . . . . . . . . . . . . . (17,472) (45,987)
-------- --------
Net contracts in process . . . . . . . . . . . . . . . . . . . . . . . . $204,870 $198,073
======== ========
5. Net assets held for sale
The Company has accounted for the allocation of purchase price and the
net assets of its Hycor business, which it intends to sell, in accordance
with the FASB's Emerging Issues Task Force Issue 87-11 "Allocation of
Purchase Price to Assets to be Sold" ("EITF 87-11"). Accordingly, the net
assets related to the Hycor business as of April 1, 1997 are included in the
accompanying condensed consolidated balance sheet as "Net assets held for
sale". The fair value assigned to such net assets is based upon management's
estimate of the proceeds from the sale of the Hycor business less the
estimated income from operations for such business during the holding period
of April 1997 through December 1997 (the "holding period"), plus interest
expense on debt allocated to such net assets during the holding period. In
accordance with EITF 87-11, income from the operations of the Hycor business
of $112,000 and interest expense of $436,000 on the debt allocated to the
Hycor net assets have been excluded from the Company's consolidated
statements of operations for the six months ended September 30, 1997.
Also included in net assets held for sale is the Company's Sarasota,
Florida facility which was sold effective October 24, 1997.
6. Debt
In connection with the acquisition of the Businesses, the Company
entered into a $275.0 million senior secured Credit Agreement consisting of
$175.0 million of term loan facilities and a $100.0 million revolving credit
facility (collectively the "senior secured credit facility"). The senior
secured credit facility has been provided by a syndicate of banks and
financial institutions and bear interest at the option of the Company at a
rate related to (i) the higher of federal funds rate plus 0.50% per annum or
the reference rate published by Bank of America NT&SA or (ii) LIBOR.
Interest payments vary in accordance with the type of borrowing and are made
at a minimum every three months. The revolving credit facility expires in
2003 and is available for ongoing working capital and letter of credit needs.
Substantially all of the revolving credit facility is available at
September 30, 1997. The Company pays a commitment fee on the unused portion.
In April 1997, the Company also issued $225.0 million of 10 3/8% senior
subordinated notes (the "Old Notes") due May 1, 2007 with interest payable
semi-annually on May 1 and November 1 of each year, commencing November 1,
1997. The Old Notes are redeemable under certain circumstances.
In September 1997, the Company filed a registration statement to
initiate an offer to exchange an aggregate of up to $225.0 million principal
amount of 10 3/8% series B Senior Subordinated Notes due 2007 (the "Exchange
Notes") for the outstanding Old Notes. The terms of the Exchange Notes are
identical in all material respects to the Old Notes, except that the Exchange
Notes have been registered under the Securities Act of 1933. On November 5,
1997, the exchange offer was concluded; all of the $225.0 million of Old
Notes were exchanged. The Exchange Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after May 1, 2002, at various
redemption prices plus accrued and unpaid interest to the applicable
redemption date. In addition, prior to May 1, 2000, the Company may redeem
up to 35% of the aggregate principal amount of Exchange Notes at a redemption
price of 109.375% of the principal amount thereof, plus accrued and unpaid
interest to the redemption date with the net cash proceeds of one or more
equity offerings by Holdings that are contributed to the Company as common
equity capital.
The costs related to the issuance of debt have been capitalized and are
being amortized as interest expense using a method that approximates the
effective interest method over the term of the related debt.
The aggregate principal payments for debt, excluding the revolving
credit borrowings, for the five years ending December 31, 1998 through 2002
are: $5.0 million, $11.0 million, $19.0 million, $25.0 million and $33.2
million, respectively.
7. Stock Option Plan
Holdings sponsors an option plan for key employees of Holdings and L-3,
pursuant to which options to purchase an aggregate of 14.0% of Holdings'
fully-diluted common stock outstanding at the closing date have been
authorized for grant.
On April 30, 1997, Holdings granted the Chairman and the President
(collectively, the "Equity Executives") nonqualified options, to purchase, at
$6.47 per share 2,285,714 shares of Class A common stock of Holdings. In
each case, half of the options are "Time Options" and half are "Performance
Options" (collectively, the "Options"). The Time Options become exercisable
with respect to 20% of the shares subject to the Time Options on each of the
first five anniversaries if employment continues through and including such
date. The Performance Options become exercisable nine years after the
closing date, but may become exercisable earlier with respect to up to 20% of
the shares subject to the Performance Options on each of the first five
anniversaries, to the extent certain defined targets are achieved. The
Options, which have a ten year term, become fully exercisable under certain
circumstances, including a change in control.
On July 1, 1997, Holdings adopted the 1997 Option Plan for key employees
of Holdings and L-3 and granted nonqualified options to certain officers and
other employees of L-3 to purchase at $6.47 per share 675,500 shares of Class
A common stock of Holdings (collectively, the "1997 Options"). Generally,
the 1997 Options are exercisable over a three-year vesting period and expire
ten years from the date of grant.
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees",
which provides that compensation cost for stock options is recognized based
on the excess, if any, of the fair value of the stock at the grant date of
the award or other measurement date over the stock option exercise price.
The exercise price for Holdings' stock options granted to employees equaled
the fair value of Holdings' common stock at the date of grant. Accordingly,
no compensation expense was recognized by the Company. The Company has
adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation".
8. Contingencies
Management is continually assessing 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 of the Company is aware, the Company believes that even without
considering potential insurance recoveries, if any, there are no
environmental loss contingencies that, individually or in the aggregate,
would be material to the Company's results of operations. The Company
accrues for these contingencies when it is probable that a liability has been
incurred and the amount of the loss can be reasonably estimated.
The Company 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, 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 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.
The Company is periodically subject to litigation, claims or assessments
and various contingent liabilities (including environmental matters)
incidental to its business. With respect to those investigative actions,
items of litigation, claims or assessments of which they are aware,
management of the Company believes 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 would not have a material adverse effect on the financial position
or results of operations of the Company.
9. Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share". SFAS No. 128 establishes accounting standards for
computing and presenting earnings per share and applies to entities with
publicly held common stock or potential common stock. In February 1997, the
FASB issued SFAS No. 129, "Disclosures of Information about Capital
Structure". SFAS No. 129 requires disclosure of for all type of securities
issued and applies to all entities that have issued securities. In June
1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related
Information". SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set general-purpose financial statements. SFAS No. 131
establishes accounting standards for the way that public business enterprises
report information about operating segments and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. SFAS No. 128 and SFAS No. 129 are
required to be adopted for periods ending after December 15, 1997, and SFAS
No. 130 and SFAS No. 131 are required to be adopted by 1998. The Company is
currently evaluating the impact, if any, of these new FASB statements.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company is a supplier of sophisticated secure communication systems
and specialized communication products including secure, high data rate
communication systems, commercial fixed wireless communication products,
microwave components, avionic displays and recorders and instrument products.
The Company's customers include the Department of Defense (the "DoD"),
selected U.S. government intelligence agencies, major aerospace/defense prime
contractors and commercial customers. The Company operates primarily in one
industry segment, electronic components and systems.
Substantially all the Company's products are sold to agencies of the
U.S. Government, primarily the Department of Defense, to foreign government
agencies or to prime contractors or subcontractors thereof. All domestic
government contracts and subcontracts of the Businesses are subject to audit
and various cost controls, and include standard provisions for termination
for the convenience of the U.S. Government. Multi-year 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 government.
The decline in the U.S. defense budget since the mid-1980s has resulted
in program delays, cancellations and scope reduction for defense contracts in
general. These events may or may not have an effect on the Company's
programs; however, in the event that U.S. Government expenditures for
products of the type manufactured 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.
In response to the decline in the defense budget, the DoD has focused
its resources on enhancing its military readiness, joint operations and
multiple mission capabilities and on incorporating advanced electronics to
improve performance, reduce operating costs and extend life expectancy of its
existing and future platforms. The emphasis on system interoperability,
force multipliers and providing battlefield commanders with real-time data is
increasing the electronics content of nearly all of the major military
procurement and research programs. As a result, the DoD's budget for
communications and defense electronics is expected to grow. According to
Federal Sources, an independent private consulting group, the U.S. defense
budget for command, control, communications and intelligence ("C3I") is
projected to increase at a compound annual growth rate of 5.8% through 2002.
Management believes that L-3 will benefit from this growth due to its
substantial position in the markets for secure communication systems, antenna
systems, display systems, microwave components and other related areas.
Results of Operations
The following information should be read in conjunction with condensed
consolidated (combined) financial statements and the notes thereto.
The Company's financial statements reflect operations since the
effective date of the acquisition (April 1, 1997); accordingly comparisons
for the nine months ended September 30, 1997 to the prior period of the
Predecessor Company are not meaningful. To facilitate meaningful comparisons
of the operating results of the periods set forth below, the results of
operations for the nine months September 30, 1997 were obtained by combining,
without adjustment, the results of operations of the Predecessor Company for
the period January 1, 1997 through March 31, 1997 and the Company for the
period April 1, 1997 through September 30, 1997. The results of operations
for the nine months ended September 30, 1996 represent the results of
operations of the Predecessor Company, and include the results of operations
of the Loral Acquired Businesses beginning on April 1, 1996, the effective
date of that acquisition. See Note 3 to the condensed consolidated
(combined) financial statements. Interest expense and income taxes expense
for the periods are not comparable and the impact of interest expense and
income taxes expense on the Company is discussed below. See the columns
denoted "Predecessor Company" and "The Company" representing the predecessor
periods and successor periods, respectively, in the statements of operations
and cash flows for the nine and three month periods ended September 30, 1997
and 1996 included in this report.
The results of operations of the Predecessor Company for the three
months ended March 31, 1997 and the nine months ended September 30, 1996,
include certain costs and expenses allocated by Lockheed Martin for corporate
office expenses based primarily on the allocation methodology prescribed by
government regulations pertaining to government contractors. Interest
expense was allocated based on Lockheed Martin's actual weighted average
consolidated interest rate applied to the portion of the beginning of the
year invested equity deemed to be financed by consolidated debt based on
Lockheed Martin's debt to equity ratio on such date. The provision (benefit)
for income taxes was allocated to the Predecessor Company as if it were a
separate taxpayer, calculated by applying statutory rates to reported pre-tax
income after considering items that do not enter into the determination of
taxable income and tax credits related to the Predecessor Company. Also,
pension and postemployment benefit costs were allocated based on employee
headcount. Accordingly, the results of operations and financial position
hereinafter of the Predecessor Company may not be the same as would have
occurred had the Predecessor Company been an independent entity.
Three Months Ended September 30, 1997 Compared with Three Months Ended
September 30, 1996
The following table sets forth selected statement of operations data for
the Company and the Predecessor Company for the periods indicated:
The Company Predecessor Company
------------------------ -----------------------
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
------------------------ -----------------------
(Dollars in millions)
Sales . . . . . . . . . . . . . . . . . . . . . . . . $174.8 $158.6
Cost and expenses . . . . . . . . . . . . . . . . . . 156.9 146.4
------ ------
Operating income . . . . . . . . . . . . . . . . . . 17.9 12.2
Net interest expense . . . . . . . . . . . . . . . . 9.3 7.4
------ ------
Income before income taxes . . . . . . . . . . . . . 8.6 4.8
Income taxes . . . . . . . . . . . . . . . . . . . . 3.3 1.7
------ ------
Net income . . . . . . . . . . . . . . . . . . . . . $ 5.3 $ 3.1
====== ======
Sales for the quarter ended September 30, 1997 increased to $174.8
million from $158.6 million for the quarter ended September 30, 1996 (the
"prior period"). Operating income increased to $17.9 million compared with
$12.2 million in the prior period. Net income increased to $5.3 million
compared to $3.1 million in the prior period.
The sales increase was attributable to increased volume on sales of
Common High-bandwidth Data Link (CHBDL) systems, Predator unmanned aerial
vehicle systems, microwave components, power supplies, and E-2C display
systems, which were partially offset by lower volume on E-2C Trac-A antenna
and U-2 Support programs.
Operating income as a percentage of sales increased to 10.2% in the
quarter ended September 30, 1997 compared to 7.7% in the prior period. The
increase in operating income was attributable to the increased sales volume
on higher margin sales noted above and improved margins on microwave
components.
Net interest expense for the quarter ended September 30, 1997 was $9.3
million representing interest expense on the Company's senior secured credit
facility, the 10 3/8% Senior Subordinated Notes, and amortization of debt
issuance costs, less interest income of $0.4 million. See Note 6 to the
condensed (combined) consolidated financial statements. Interest expense for
the prior period was $7.4 million and was allocated to the Predecessor
Company by applying Lockheed Martin's weighted average consolidated interest
rate to the portion of the Predecessor Company's invested equity account
deemed to be financed by Lockheed Martin's consolidated debt.
The income tax provision for the quarter ended September 30, 1997,
reflects the expected estimated effective income tax rate of 39% for the
nine months ending December 31, 1997. In the prior period, income taxes were
allocated to the Predecessor Company by Lockheed Martin and the effective
income tax rate was significantly impacted by amortization of costs in excess
of net assets acquired, which were not deductible for income tax purposes.
Nine Months Ended September 30, 1997 Compared with Nine Months Ended
September 30, 1996
The following table sets forth selected statement data of operations for
the Company and the Predecessor Company for the periods indicated.
Predecessor Predecessor
The Company Company Combined Company
----------------- ----------------- ----------------- -----------------
Six Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, March 31, September 30, September 30,
1997 1997 1997 1996
----------------- ----------------- ----------------- -----------------
(Dollars in millions)
Sales . . . . . . . . . . . . . . . . . . . . . . . $342.9 $158.8 $501.7 $365.0
Cost and expenses . . . . . . . . . . . . . . . . . 309.9 150.9 460.8 341.9
------ ------ ------ ------
Operating income . . . . . . . . . . . . . . . . . 33.0 7.9 40.9 23.1
Net interest expense . . . . . . . . . . . . . . . 19.3 8.4 27.7 16.8
------ ------ ------ ------
Income (loss) before income taxes . . . . . . . . . 13.7 (0.5) 13.2 6.3
Income taxes . . . . . . . . . . . . . . . . . . . 5.3 (0.2) 5.1 3.0
------ ------ ------ ------
Net income (loss) . . . . . . . . . . . . . . . . . $ 8.4 $ (0.3) $ 8.1 $ 3.3
====== ====== ====== ======
Sales for the nine months ended September 30, 1997 (the "current
period") increased to $501.7 million from $365.0 million for the nine months
ended September 30, 1996 (the "prior period"). Operating income increased to
$40.9 million from $23.1 million in the prior period. Net income increased
to $8.1 million from $3.3 million in the prior period.
The sales increase in the current period was attributable primarily to
the sales of the Loral Acquired Businesses which contributed $378.4 million
for the nine months ended September 30, 1997 compared to $243.0 in the prior
year period. Sales of Communication Systems--Camden increased by $1.2 million
to $123.3 million in the current period compared to prior period. The
acquisition of the Loral Acquired Businesses was effective April 1, 1996, and
accordingly, the prior period only includes the results of operations of the
Loral Acquired Businesses for the six months from April 1, 1996 to
September 30, 1996. See Note 3 to the condensed (combined) consolidated
financial statements. Sales of the Loral Acquired Businesses (excluding the
Hycor business) for the six month period ended September 30, 1997 increased
$21.1 million to $258.6 million from $237.5 million for the six month period
ended September 30, 1996.
Operating income as a percentage of sales increased to 8.2% in the nine
months ended September 30, 1997 compared to 6.3% in the prior period reflecting
higher margins on the sales of the Loral Acquired Businesses and operating
improvements at Communications Systems -- Camden. The increase in operating
income also was largely attributable to the Loral Acquired Businesses, which
contributed operating income of $34.6 million for the nine months ended
September 30, 1997 compared to $18.1 million in the prior period which only
reflected six months of operations of the Loral Acquired Businesses.
Operating income for the Loral Acquired Businesses (excluding the Hycor
business) in the six month period ended September 30, 1997 increased 36%
to $24.6 million from $18.1 million in the comparable period in 1996. This
increase is due to the higher sales volume discussed above and improved
margins on avionic and microwave product sales and increased sales on the
CHBDL program.
Net interest expense for the six months ended September 30, 1997 was
$19.3 million representing interest expense on the Company's senior secured
credit facility, the 10 3/8% Senior Subordinated Notes, and amortization of
debt issuance costs, less interest income of $0.5 million. See Note 6 to the
condensed (combined) consolidated financial statements. Interest expense for
the three months ended March 31, 1997 and the prior period was $8.4 million
and $16.8 million, respectively, and was allocated to the Predecessor
Company by applying Lockheed Martin's weighted average consolidated interest
rate to the portion of the Predecessor Company's invested equity account
deemed to be financed by Lockheed Martin's consolidated debt.
The income tax provision for the quarter ended September 30, 1997,
reflects the expected estimated effective income tax rate of 39% for the nine
months ending December 31, 1997. In the prior period, income taxes were
allocated to the Predecessor Company by Lockheed Martin and the effective
income tax rate was significantly impacted by amortization of costs in excess
of net assets acquired, which were not deductible for income tax purposes.
Liquidity and Capital Resources
Effective April 1, 1997, the Company was purchased from Lockheed Martin
Corporation for approximately $525 million, before an estimated purchase
price adjustment of $20 million, plus estimated acquisition costs of $6.6
million.
The acquisition was funded by a combination of debt and equity. The
equity was provided by Holdings who contributed $125 million, including $45
million retained by Lockheed Martin, in exchange for all of the capital stock
of the Company. The funded debt consisted of $175 million of Term Loans
under the Credit Agreement and $225 million of 10 3/8% Senior Subordinated
Notes. The required principal payments under the Term Loans are: $1.0
million in the remainder of 1997, $5.0 million in 1998, $11.0 million in
1999, $19.0 million in 2000, $25.0 million in 2001, $33.2 million in 2002,
$20.0 million in 2003, and $25.2 million in 2004, $24.9 million 2005, and
$8.7 million in 2006. With respect to the Term Loans, interest payments vary
in accordance with the type of borrowings and are made at a minimum every
three months. Other than upon a change in control, the Company will not be
required to make principal payments in respect of the 10 3/8% Senior
Subordinated Notes until maturity on May 1, 2007. The Company is required to
make semi-annual interest payments with respect to the 10 3/8% Senior
Subordinated Notes. The Company typically makes capital expenditures
related primarily to improvement of manufacturing facilities and equipment.
On November 5, 1997, the Company and Lockheed Martin amended the
Transaction Agreement to finalize the purchase price adjustment which
amounted to $21.2 million of which $15.9 million was received on the closing
date and $5.3 million was received on November 7, 1997, plus interest
thereon. The amendment also included the assignment to the Company from
Lockheed Martin of a contract for the production of mission communication
systems for track vehicles.
The Credit Agreement contains financial covenants, which remain in
effect so long as any amount is owed by the Company under the senior secured
credit facility. These financial covenants require that (i) the Company's
debt ratio be less than or equal to 5.75 for the quarter ending
September 30, 1997, and that the maximum allowable debt ratio thereafter be
further reduced to less than or equal to 3.1 for the quarters ending after
June 30, 2002, and (ii) the Company's interest coverage ratio be at least 1.5
for the quarter ending September 30, 1997, thereafter increase the interest
coverage ratio to at least 3.10 for any fiscal quarters ending after June 30,
2002. At September 30, 1997, the Company was in compliance with these
covenants.
The Company has a substantial amount of indebtedness. Based upon the
current level of operation and anticipated improvements, management believes
that the Company's cash flow from operations, together with available
borrowings under the Revolving Credit Facility, will be adequate to meet its
anticipated requirements for working capital, expenditures, research and
development expenditures, program and other discretionary investments,
interest payments and scheduled principal payments for the foreseeable future
including at least the next three years. There can be no assurance, however,
that the Company's business will continue to generate cash flow at or above
current levels or that currently anticipated improvements will be achieved.
If the Company is unable to generate sufficient cash flow from operations in
the future to service its debt, it may be required to sell assets, reduce
capital expenditures, refinance all or a portion of its existing debt or
obtain additional financing. The Company's ability to make scheduled
principal payments, to pay interest on or to refinance its indebtedness
depends on its future performance and financial results, which, to a certain
extent, are subject to general economic financial, competitive, legislative,
regulatory and other factors beyond its control. There can be no assurance
that sufficient funds will be available to enable the Company to service its
indebtedness, including the Notes, or make necessary capital expenditures and
program and other disciplinary investments. The Senior Credit Facilities and
the 10 3/8% Senior Subordinated Notes credit agreements contain financial and
restrictive covenants that limit, among other things, the ability of the
Company to borrow additional funds, dispose of assets, or pay cash dividends.
In September 1997, the Company filed a registration statement to
initiate an offer to exchange an aggregate of up to $225.0 million principal
amount of 10 3/8% Series B Senior Subordinated Notes due 2007 (the "Exchange
Notes") for the outstanding Old Notes. The terms of the Exchange Notes are
identical in all material respects to the Old Notes, except that the Exchange
Notes have been registered under the Securities Act of 1933. On November 5,
1997, the exchange offer was concluded; all of the $225.0 million Old Notes
were exchanged. The Exchange Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after May 1, 2002, at various
redemption prices plus accrued and unpaid interest to the applicable
redemption date. In addition, prior to May 1, 2000, the Company may redeem
up to 35% of the aggregate principal amount of Exchange Notes at a
redemption price of 109.375% of the principal amount thereof, plus accrued
and unpaid interest to the redemption date with the net cash proceeds of one
or more equity offerings by Holdings that are contributed to the Company as
common equity capital.
The following table sets forth selected cash flow statement data for the
Company and the Predecessor Company the periods indicated:
Predecessor Predecessor
The Company Company Combined Company
----------------- ----------------- ----------------- -----------------
Six Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, March 31, September 30, September 30,
1997 1997 1997 1996
----------------- ----------------- ----------------- -----------------
(Dollars in millions)
Net cash from (used in) operating activities . . . $ 56.4 $(16.3) $ 40.1 $ 6.0
Net cash used in investing activities . . . . . . . (479.0) (4.3) (483.3) (292.9)
Net cash from financing activities . . . . . . . . 462.4 20.6 483.0 286.9
------- ------ ------- -------
Net change in cash . . . . . . . . . . . . . . . . $ 39.8 -- $ 39.8 --
======= ====== ======= =======
Net cash provided by operating activities of the Company for the six
months ended September 30, 1997 was $56.4 million. Cash provided by
operations benefited from improved operating results, effective management of
contracts in process resulting in reduced levels of receivables and increases
in accrued interest and accrued employment costs.
Net cash used for operating activities of the Predecessor Company was
$16.3 million for the quarter ended March 31, 1997, resulting primarily from
the increase in contracts in process and decrease in current liabilities,
offset by cash flows provided by the Loral Acquired Businesses. Without the
Loral Acquired Businesses, cash used for operating activities for
Communication Systems - Camden amounted to $6.1 million.
Net cash from operating activities of the Predecessor Company was $6.0
million for the nine months ended September 30, 1996. The acquisition of the
Loral Acquired Businesses was effective April 1, 1996, and accordingly, net
cash from operating activities for the nine months ended September 30, 1996,
include the cash flows of the Loral Acquired Businesses for the six month
period from April 1, 1996 to September 30, 1996.
The Company's current ratio at September 30, 1997 increased slightly to
2.2:1 from the Predecessor Company's current ratio of 2.0:1 at December 31,
1996. The Predecessor Company's current ratio at March 31, 1997 was 2.2:1.
Net cash used in investing activities for the six months ended
September 30, 1997 consisted primarily of $470.7 million paid by the Company
for the acquisition of Businesses from Lockheed Martin Corporation. See Note
1 to condensed consolidated (combined) financial statements. During the nine
months ended September 30, 1996, $287.8 million was paid by the Predecessor
Company for the acquisition of the Loral Acquired Businesses. See Note 3 to
the condensed consolidated (combined) financial statements. In addition, for
the six months ended September 30, 1997, $6.4 million was used for capital
expenditures.
Net Assets of Acquired Business Held for Sale
The Company has accounted for the allocation of purchase price and the
net assets to its Hycor business which it acquired as part of the Businesses
and intends to sell in accordance with the FASB's Emerging Issues Task Force
Issue 87-11 "Allocation of Purchase Price to Assets to be Sold" ("EITF 87-
11"). Accordingly, the net assets related to the Hycor business as of
April 1, 1997 have been reflected on a single line item in the accompanying
condensed consolidated balance sheet as "Net assets held for sale". The fair
value assigned to such net assets is based upon management's estimate of the
proceeds from the sale of the Hycor business less the estimated income from
operations for such business during the holding period of April 1997 through
December 1997 (the "holding period"), plus interest expense on debt allocated
to such net assets during the holding period. The purchase price allocated
to the Businesses by Holdings and L-3 discussed in Note 2 reflects these
allocations of purchase price. In accordance with EITF 87-11, income from
the operations of the Hycor business of $112,000 and interest expense of
$436,000 on the debt allocated to the Hycor net assets have been excluded
from the Company's consolidated statements of operations for the period
April 1, 1997 to September 30, 1997.
Also, included in net assets held for sale at September 30, 1997 is the
Company's Sarasota, Florida facility which was sold effective October 24,
1997.
Contingencies
See Note 8 to the condensed consolidated (combined) financial
statements.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share". SFAS No. 128 establishes accounting standards for
computing and presenting earnings per share and applies to entities with
publicly held common stock or potential common stock. In February 1997, the
FASB issued SFAS No. 129, "Disclosures of Information about Capital
Structure". SFAS No. 129 requires disclosure of for all type of securities
issued and applies to all entities that have issued securities. In June
1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related
Information." SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set general-purpose financial statements. SFAS No. 131
establishes accounting standards for the way that public business enterprises
report information about operating segments and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. SFAS No. 128 and SFAS No. 129 are
required to be adjusted for periods ending after December 15, 1997, and SFAS
No. 130 and SFAS No. 131 are required to be adopted by 1998. The Company is
currently evaluating the impact, if any of these new FASB statements.
Effective January 1, 1996, the Businesses adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121
establishes the accounting standards for the impairment of long-lived assets,
certain intangible assets and cost in excess of net assets acquired to be
held and used for long-lived assets and certain intangible assets to be
disposed of. The impact of adopting SFAS 121 was not material.
PART II -OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
No exhibits are required for this filing.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1997.
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 thereunto duly authorized.
L-3 Communications Corporation
Registrant
Date: November 14, 1997 /s/ Michael T. Strianese
-------------------------------------
Michael T. Strianese
Vice President-Finance and Controller
(Principal Accounting Officer)
