L-3 Releases Third Quarter 2016 Results

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Third Quarter: Electronic Systems net sales for the 2016 third quarter decreased by $2 million compared to the 2015 third quarter. Organic sales decreased by $5 million, or 0.5%, compared to the 2015 third quarter. Organic sales exclude $2 million of sales declines related to business divestitures and $5 million of sales increases related to business acquisitions. Sales decreased by $28 million for Aviation Products and Security due to lower cargo sales and the timing of deliveries on airport security screening systems for international customers, partially offset by $23 million primarily for Sensor Systems due to increased deliveries of airborne EO/IR turrets to foreign militaries.

Electronic Systems operating income for the 2016 third quarter decreased by $2 million, or 2%, compared to the 2015 third quarter. Operating margin decreased by 20 basis points to 12.0%. A $14 million pre-tax charge for a settlement in principle of the class action litigation, which is subject to court approval, in connection with the EoTech HWS, lowered operating margin by 140 basis points. Sales mix changes, primarily for Warrior Systems, lowered operating margin 80 basis points. These decreases were partially offset by 150 basis points for improved contract performance and 50 basis points due to lower pension expense of $5 million.

Year-to-Date: Electronic Systems net sales for the 2016 year-to-date period decreased by $165 million, or 5%, compared to the 2015 year-to-date period. Organic sales decreased by $10 million, or 0.3%, compared to the 2015 year-to-date period. Organic sales exclude $206 million of sales declines related to business divestitures (primarily MSI in May 2015) and $51 million of sales increases related to business acquisitions. The decrease was driven by $16 million for Warrior Systems related to an increase in the products returns allowance for EoTech HWS products and $13 million for Precision Engagement & Training due to lower volume of: (i) ordnance products for the U.S. military and (ii) civil aviation simulation and training devices for commercial customers as contracts near completion. These decreases were partially offset by an increase of $19 million primarily for Sensor Systems due to increased deliveries of airborne EO/IR turrets and electronic warfare products to foreign militaries.

Electronic Systems operating income for the 2016 year-to-date period decreased by $13 million, or 4%, compared to the 2015 year-to-date period. Operating margin increased by 20 basis points to 11.7%. Operating margin increased by: (1) 70 basis points due to higher margins related to acquisitions and divestitures, (2) 40 basis points due to lower pension expense of $11 million, and (3) 10 basis points primarily due to higher net aggregate favorable contract performance adjustments in the 2016 year-to-date period compared to the 2015 year-to-date period. These increases were offset by a decrease of 100 basis points due to $30 million of pre-tax charges for a settlement in principle, of the class action litigation, which is subject to court approval, in connection with the EoTech HWS and increases to the HWS product returns allowance.

Aerospace Systems                       

Third Quarter: Aerospace Systems net sales for the 2016 third quarter decreased by $54 million, or 5%, compared to the 2015 third quarter. Sales decreased $64 million for ISR Systems and $2 million for Aircraft Systems, partially offset by a $12 million increase for Vertex Aerospace. Sales decreased for ISR Systems by: (1) $46 million for small ISR aircraft fleet management services to the U.S. Air Force due to reduced demand resulting from the U.S. military drawdown in Afghanistan and (2) $42 million for ISR aircraft systems for foreign military customers as contracts near completion. These decreases were partially offset by higher volume of $12 million for large ISR aircraft systems for the U.S. Government and $12 million for small ISR aircraft systems for the U.S. Army. Sales increased for Vertex Aerospace due to higher volume for U.S. Navy training aircraft and the U.S. Army C-12 contract.

Aerospace Systems operating income for the 2016 third quarter decreased by $46 million, compared to the 2015 third quarter. Operating margin decreased by 410 basis points to 5.5%. Operating margin decreased by: (1) 200 basis points primarily due to lower favorable contract performance adjustments in the 2016 third quarter compared to the 2015 third quarter for ISR Systems primarily on contracts that are nearing completion, (2) 100 basis points due to lower sales and changes in sales mix for ISR Systems, (3) 90 basis points due to lower incentive fees and increases in lower margin task orders on the Fort Rucker Maintenance Support contract and (4) 80 basis points due to an $8 million contract price adjustment in the 2015 third quarter for a recovery of cost overruns on the previous U.S. Army C-12 contract that did not recur in the 2016 third quarter. These decreases were partially offset by 60 basis points due to lower pension expense of $6 million.

Year-to-Date: Aerospace Systems net sales for the 2016 year-to-date period increased by $78 million, or 3%, compared to the 2015 year-to-date period. Sales increased $62 million for Aircraft Systems and $35 million for Vertex Aerospace, partially offset by a $19 million decrease for ISR Systems. Sales increased for Aircraft Systems primarily due to unfavorable contract performance adjustments in the 2015 year-to-date period that did not recur in the 2016 year-to-date period on international head-of-state aircraft modification contracts. Sales increased for Vertex Aerospace due to higher volume and pre-production activities for U.S. Navy training aircraft and the U.S. Army C-12 contract. Sales decreases for ISR Systems were due to trends similar to the 2016 third quarter, partially offset by an increase in sales due to the procurement and delivery of two business jets to a foreign military customer in the 2016 second quarter.

Aerospace Systems operating income for the 2016 year-to-date period increased by $88 million, or 61%, compared to the 2015 year-to-date period. Operating margin increased by 260 basis points to 7.3%. Operating margin increased by: (1) 210 basis points primarily due to net aggregate unfavorable contract performance adjustments in the 2015 year-to-date period, which included $101 million of cost growth on international head-of-state aircraft modification contracts, that did not recur in the 2016 year-to-date period, and (2) 50 basis points due to lower pension expense of $15 million.

Communication Systems

Third Quarter: Communication Systems net sales for the 2016 third quarter decreased by $3 million compared to the 2015 third quarter. Organic sales decreased by $6 million, or 1%, compared to the 2015 third quarter. Organic sales exclude $3 million of sales increases related to business acquisitions. Sales decreased by $30 million in the Tactical Satcom sector due to fewer deliveries on a satellite communications (Satcom) land terminals contract for the Australian Defence Force (ADF), which was completed in the second quarter of 2016. In the Space & Power Systems sector, sales declined by $22 million due to reduced demand for power devices for commercial satellites. These decreases were largely offset by increased volume and deliveries to the U.S. Department of Defense (DoD) of secure networked communication systems in the Broadband Communication Systems sector and mobile and ground-based Satcom systems in the Tactical Satcom sector.

Communication Systems operating income for the 2016 third quarter decreased by $12 million, or 23%, compared to the 2015 third quarter. Operating margin decreased by 240 basis points to 7.9%. The lower sales on the ADF Satcom land terminals contract and power devices for commercial satellites reduced operating margin by 220 basis points. Increased design and production costs on new commercial ground-based power amplifier products partially offset by sales growth and favorable contract performance, primarily in Broadband Communication Systems sector, reduced operating margin by 100 basis points. Lower pension expense of $4 million increased operating margin by 80 basis points.

Year-to-Date: Communication Systems net sales for the 2016 year-to-date period increased by $14 million, or 1%, compared to the 2015 year-to-date period. Organic sales increased by $2 million, or 0.1%, compared to the 2015 year-to-date period. Organic sales exclude $12 million of sales increases related to business acquisitions. The increase was due to: (1) $62 million for Broadband Communication Systems, primarily due to increased volume and deliveries of secure networked communication systems for the DoD and (2) $7 million primarily for Advanced Communications products due to increased deliveries of secure mission data storage systems for the Joint Strike Fighter program. These increases were largely offset by a decrease of $67 million for Space & Power Systems, primarily due to reduced demand for power devices for commercial satellites.

Communication Systems operating income for the 2016 year-to-date period increased by $4 million, or 3%, compared to the 2015 year-to-date period. Operating margin increased by 20 basis points to 9.7%. Operating margin increased by 70 basis points due to lower pension expense of $10 million, partially offset by a decrease of 50 basis points primarily due to sales mix changes.

The 2017 consolidated preliminary outlook for operating income includes an increase in estimated pension expense (net Financial Accounting Standards/Cost Accounting Standards, or FAS/CAS) of approximately $29 million for 2017 compared to 2016. The 2017 preliminary pension expense estimate assumes a weighted average discount rate of 3.91%, compared to 4.66% for 2016 and a weighted average asset return of approximately 8% in 2016, consistent with our planned weighted average asset return. The preliminary outlook also assumes share repurchases for 2017 of $600 million. However, the amount of 2017 share repurchases could be reduced to pay for potential future business acquisitions, which would cause an increase in the estimated diluted shares outstanding for 2017.

The current guidance for 2016 and the preliminary outlook for 2017 excludes: (i) any potential non-cash goodwill impairment charges for which the information is presently unknown, (ii) potential adverse results related to litigation contingencies and (iii) other items such as gains or losses related to potential business divestitures and the impact of potential acquisitions.

About L-3

Headquartered in New York City, L-3 employs approximately 38,000 people worldwide and is a leading provider of a broad range of communication and electronic systems and products used on military and commercial platforms. L-3 is also a prime contractor in aerospace systems.

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