L-3 Releases Fourth Quarter 2015 Results

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Net (loss) income from continuing operations attributable to L-3 in the 2015 fourth quarter decreased by $261 million to a loss of$60 million, compared to income of $201 million in the 2014 fourth quarter. Diluted EPS from continuing operations decreased by $3.10 to a loss of $0.76 from $2.34 in the 2014 fourth quarter. Adjusted diluted EPS from continuing operations decreased 8% to $2.16. Diluted weighted average common shares outstanding for the 2015 fourth quarter declined by 9% compared to the 2014 fourth quarter due to share repurchases.

Full Year Results of Operations: For the year ended December 31, 2015, consolidated net sales of $10.5 billion decreased $520 million, or 5%, compared to the year ended December 31, 2014. Organic sales for the year ended December 31, 2015 declined$269 million, or 3%. Organic sales exclude $354 million related to business divestitures and $103 million from business acquisitions. Sales to the U.S. Government declined 2%, or $173 million, to $7,291 million in the year ended December 31, 2015compared to $7,464 million in the year ended December 31, 2014, driven primarily by U.S. defense budget constraints and reductions from sequestration, and by the U.S. military drawdown in Afghanistan. Sales to international and commercial customers declined 10%, or $347 million, to $3,175 million in the year ended December 31, 2015, compared to $3,522 million in the year ended December 31, 2014. Organic sales to international and commercial customers decreased $92 million, or 3%, driven by foreign currency exchange rate changes.

Segment operating income for the year ended December 31, 2015 decreased by $122 million, or 12%, compared to the year ended December 31, 2014. Segment operating margin decreased by 70 basis points to 8.5% for the year ended December 31, 2015 compared to 9.2% for the year ended December 31, 2014. This decrease was driven by higher pension expense of $61 million and unfavorable contract performance adjustments at the Aerospace Systems segment, partially offset by outside accounting and legal advisory expenses incurred in 2014 for the Internal Review completed in October 2014. See the reportable segment results below for additional discussion of sales and operating margin trends.

The effective income tax rate for the year ended December 31, 2015 is not meaningful due to the goodwill impairment charges. Excluding the goodwill impairment charges and related income tax benefit, the effective income tax rate for 2015 would have decreased to 20.5%. The decrease is primarily due to: (1) $17 million of foreign tax benefits related to a legal restructuring of our foreign entities and (2) an increased benefit from the Federal Research and Experimentation Tax Credit.

Net income from continuing operations attributable to L-3 in the year ended December 31, 2015 decreased to $282 million, compared to $632 million in the year ended December 31, 2014. Diluted EPS from continuing operations decreased 52% to$3.44 from $7.20 in the year ended December 31, 2014. Adjusted net income from continuing operations attributable to L-3 decreased 10% to $566 million compared to the year ended December 31, 2014, and adjusted diluted EPS from continuing operations decreased 4% to $6.91. Diluted weighted average common shares outstanding for the year ended December 31, 2015 declined by 7% compared to the year ended December 31, 2014 due to repurchases of L-3 common stock.

Orders: Funded orders for the 2015 fourth quarter were $2.6 billion, a decrease of 18.7% compared to the 2014 fourth quarter. Funded orders for the year ended December 31, 2015 were $9.9 billion, compared to $11.0 billion for the year ended December 31, 2014. The book-to-bill ratio was 0.89x for the 2015 fourth quarter and 0.94x for the year ended December 31, 2015. Funded backlog declined 13% to $8.4 billion at December 31, 2015, compared to $9.7 billion at December 31, 2014, due to the divestiture of MSI and a book-to-bill ratio of less than 1.

Cash flow and cash returned to shareholders: Net cash from operating activities from continuing operations decreased by $49 million, or 10%, to $465 million for the 2015 fourth quarter, compared to $514 million for the 2014 fourth quarter. Net cash from operating activities from continuing operations decreased by $71 million, or 7%, to $1,021 million for the year ended December 31, 2015, compared to $1,092 million for the year ended December 31, 2014. The decrease in net cash from operating activities in the year ended December 31, 2015 was due to lower net income partially offset by lower working capital requirements in the year ended December 31, 2015, compared to the year ended December 31, 2014.

Fourth Quarter: Electronic Systems net sales for the 2015 fourth quarter decreased by $118 million, or 9%, compared to the 2014 fourth quarter. Excluding $167 million related to the divestitures of MSI, BSI and the Tinsley Product Line and $24 million related to the CTC and ForceX acquisitions, organic sales increased by $25 million, or 2%. The increase is driven by: (1) $28 million for Aviation Products & Security Systems due to increased deliveries of airport and cargo security system products to international customers and cockpit avionics products to commercial and DoD customers, (2) $10 million primarily for Precision Engagement and Training due to increased deliveries of simulation devices to the DoD, partially offset by completed contracts for simulation devices to commercial customers and ordnance products to the U.S. military, and (3) $8 million for Sensor Systems, primarily due to deliveries of electronic warfare products to the United Kingdom Ministry of Defence and increased volume for photonics masts and surface ship stabilizing products to the U.S. Navy. These increases were partially offset by a reduction of $21 million at Warrior Systems related to a holographic weapons sight refund program at the EoTech business further discussed below.

Electronic Systems operating income for the 2015 fourth quarter decreased by $16 million, or 10%, compared to the 2014 fourth quarter. Operating margin decreased by 20 basis points to 11.3%. Operating margin decreased by: (1) 70 basis points due to sales mix changes primarily for Aviation Products & Security Systems, Sensor Systems, and Power & Propulsion Systems, (2) 20 basis points due to higher pension expense of $3 million and (3) 20 basis points due to higher severance costs of $2 million. These decreases were partially offset by increases of: (1) 40 basis points due to acquisitions and divestitures and (2) 50 basis points for favorable contract performance adjustments primarily for Sensor Systems.

In November 2015, the Company commenced a voluntary refund program and began accepting customer returns for various EoTech holographic weapons sight (HWS) products affected by certain performance issues. The refund program gives eligible owners of the affected HWS products the option to obtain a refund of the purchase price, including shipping costs. The estimated refund program liability of $20 million is based on several factors, including the number of HWS units that the Company anticipates purchasers will return for a refund. The refund program is in the early stages of implementation, and the Company will continue to evaluate the amount of the refund liability. This may cause a material adjustment to the liability.

Full Year: Electronic Systems net sales for the year ended December 31, 2015 decreased by $376 million, or 8%, compared to the year ended December 31, 2014. Excluding $354 million related to the divestitures of MSI, BSI, and the Tinsley Product Line, and $49 million for the CTC and ForceX acquisitions, organic sales declined $71 million, or 2%. The decrease was due to: (1)$85 million related to foreign currency exchange rate changes and (2) $44 million related to reduced sales at Warrior Systems driven by lower volume for night vision goggles and the holographic weapons sight refund program at EoTech discussed above. These decreases were partially offset by $58 million, primarily for Aviation Products & Security Systems, due to deliveries of airport security systems products to international customers and cockpit avionics products to commercial and DoD customers.

Electronic Systems operating income for the year ended December 31, 2015 decreased by $44 million, or 8%, compared to the year ended December 31, 2014. Operating margin remained at 11.5% compared to the year ended December 31, 2014. Operating margin increased by: (1) 50 basis points due to acquisitions and divestitures, (2) 40 basis points for favorable contract performance adjustments and (3) 20 basis points due to lower severance expense of $8 million. These increases were offset by decreases of: (1) 80 basis points primarily due to lower volume for Sensor Systems and sales mix changes for Aviation Products & Security and (2) 30 basis points due to higher pension expense of $13 million.

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