L-3 Announces First Quarter 2009 Results

L-3 Communications (NYSE: LLL) today reported diluted earnings per share (diluted EPS) of $1.66 for the quarter ended March 27, 2009 (2009 first quarter), up 10%, compared to $1.51⁽¹⁾ for the quarter ended March 28, 2008 (2008 first quarter). Net sales increased 4% to $3.6 billion compared to $3.5 billion for the 2008 first quarter. The 2009 first quarter net cash from operating activities was $152 million, compared to $93 million for the 2008 first quarter.

"L-3 had a good start to the year,” said Michael T. Strianese, chairman, president and chief executive officer. "We grew sales, operating income, diluted EPS and cash flow, and continued to deploy the company’s cash flow to increase shareholder value. During the quarter we acquired Chesapeake Sciences Corporation for $87 million, repurchased $232 million of our common stock, and paid cash dividends of $42 million. We also increased our quarterly cash dividend by 17% to $0.35 per share.”

Results of Operations: Consolidated net sales increased 4% compared to the 2008 first quarter driven primarily by growth in the Command, Control, Communication, Intelligence, Surveillance and Reconnaissance (C³ISR) segment, and in the Specialized Products segment. These increases were partially offset by a decrease in the Government Services and Aircraft Modernization and Maintenance (AM&M) segments driven primarily by lower linguist services and lower volume for the U.S. Air Force Contract Field Teams (CFT) contract. The increase in net sales from acquired businesses net of divestitures⁽²⁾ was $77 million, or 2%.

The 2009 first quarter operating income increased by 2% compared to the 2008 first quarter. Higher pension expense decreased operating income by $19 million ($12 million after income taxes, or $0.10 per diluted share). Operating income as a percentage of sales (operating margin) decreased by 20 basis points to 10.3% compared to 10.5% for the 2008 first quarter. Higher pension expense reduced operating margin by 60 basis points. See segment results below for additional discussion of segment operating income and margin results.

Interest expense, net decreased by $5 million compared to the same period last year primarily because of lower variable interest rates on our term loan.

The effective tax rate for the 2009 first quarter decreased by 20 basis points compared to the same quarter last year due to the U.S. Federal research and experimentation tax credit that was re-enacted during the quarter ended Dec. 31, 2008, partially offset by higher income taxes on foreign income.

In the 2009 first quarter as compared to the 2008 first quarter, net income attributable to L-3 Holdings increased by 5%, and diluted EPS increased by 10%. Diluted weighted average common shares outstanding declined by 4%.

Orders: Funded orders for the 2009 first quarter decreased 8% to $3.8 billion compared to $4.1 billion from the 2008 first quarter. Funded backlog increased slightly to $11.7 billion at March 27, 2009 from $11.6 billion at Dec. 31, 2008.

Cash flow: Free cash flow⁽³⁾ for the 2009 first quarter was $112 million compared with $55 million for the 2008 first quarter. The increase was primarily due to timing of collections of receivables during the 2009 first quarter compared to the 2008 first quarter.

Segment Results

During the quarter ended March 27, 2009, the company revised its segment presentations to conform to certain re-alignments in the company’s management and organization structure. Consequently, the company made certain reclassifications between its C³ISR, Government Services and AM&M segments. Tables H and I (Unaudited Supplemental Segment Data) attached to this earnings release present: (1) the previous segment data presentation for the year ended December 31, 2008, and the quarterly periods ended March 28, June 27, September 26 and December 31, 2008, (2) reclassifications for these periods to the respective segments, and (3) the revised segment data presentation for these periods.

C³ISR net sales for the 2009 first quarter increased by 28% compared to the 2008 first quarter primarily due to continued demand and new contracts from the U.S. Department of Defense (DoD) for airborne ISR and networked communication systems for manned and unmanned platforms.

C³ISR operating income for the 2009 first quarter increased by 26% compared to the 2008 first quarter. Operating margin decreased by 20 basis points. Higher pension expense reduced operating margin by 100 basis points and lower volume for Secure Terminal Equipment (STE) decreased operating margin by 70 basis points. These decreases were partially offset by cost improvements on an international airborne ISR system contract due to a restructuring of contract deliverables with a customer, which increased operating margin by 40 basis points, as well as higher sales volume, improved contract performance and a more favorable sales mix for airborne ISR and networked communication systems.

Government Services net sales for the 2009 first quarter decreased by 9% compared to the 2008 first quarter. Sales declines in linguist services of $130 million and intelligence solutions and support services were partially offset by increases for systems engineering, training and logistics support services to the DoD. The decline in linguist services was due to a decline in L-3’s work share in connection with the transition on June 9, 2008 from an L-3 prime contract to a sub contract. The increase in net sales from acquired businesses was $18 million, or 2%.

Government Services operating income for the 2009 first quarter decreased by 9% compared to the 2008 first quarter. Operating margin for the 2009 first quarter and the 2008 first quarter remained the same. An increase in operating margin due to a decline in lower margin linguist sales was offset by lower margins on an acquired business.

AM&M net sales for the 2009 first quarter decreased slightly compared to the 2008 first quarter. Sales volume declined for contract field services due to fewer task orders received because of more competitors on the follow-on CFT indefinite delivery/indefinite quantity contract that began on October 1, 2008, and lower international aircraft modernization sales due to contracts nearing completion. These decreases were largely offset by higher sales for system field support services for U.S. Army and U.S. Navy fixed and rotary wing training aircraft and U.S. Special Operations Forces logistics support due to new contracts and higher demand from existing contracts.

AM&M operating income for the 2009 first quarter decreased slightly compared to the 2008 first quarter. Operating margin for the 2009 first quarter compared to the 2008 first quarter remained the same. Higher pension expense reduced operating margin by 20 basis points and lower international aircraft modernization sales reduced operating margin by 70 basis points. These decreases were offset primarily by a favorable estimated cost adjustment on an international aircraft modernization contract.

Specialized Products net sales for the 2009 first quarter increased by 7% compared to the 2008 first quarter reflecting higher sales volume primarily for: (1) power & control systems due to new and follow-on contracts for shipboard electronics and power distribution, conditioning and conversion products primarily to the U.S. Navy and tactical remote sensor systems for the U.S. Marines, (2) microwave products primarily due to deliveries of mobile and ground mounted satellite communications systems, and tactical signal intelligence systems for the U.S. military, (3) Electro-Optic/Infrared (EO/IR) products primarily due to demand and deliveries on new and existing contracts, (4) combat propulsion systems due to new contracts and demand from existing contracts, and (5) security and detection systems primarily due to the timing of certain deliveries. These increases were partially offset by a decrease for commercial aviation products and commercial shipbuilding products as a result of reduced demand caused by the global economic recession. The increase in net sales from acquired businesses, net of divestitures, was $59 million, or 5%, and pertains mostly to the Electro-Optical Systems (EOS) business acquired on April 21, 2008 and to Chesapeake Sciences Corporation acquired on January 30, 2009.

Specialized Products operating income for the 2009 first quarter increased slightly compared to the 2008 first quarter. Operating margin for the 2009 first quarter compared to the 2008 first quarter decreased by 70 basis points. Higher pension expense reduced operating margin by 90 basis points and lower sales volume for commercial aviation products and commercial shipbuilding products reduced operating margin by 30 basis points. These decreases were partially offset by higher sales volume and favorable sales mix primarily for power & control systems and security and detection systems. Acquired businesses increased operating margin by 30 basis points.

Financial Outlook

Based on information known as of today, the company revised its consolidated and segment financial guidance for the year ending Dec. 31, 2009, as presented in the tables below.

All financial guidance amounts for the year ending Dec. 31, 2009 are estimates and are subject to the "Forward-Looking Statements” cautionary language on the following page, and the company undertakes no duty to update its guidance. The 2009 financial guidance includes approximately $160 million of sales growth from business acquisitions, net of divestitures. Additional financial information regarding the 2009 first quarter results is available on the company’s Web site at www.L-3com.com.

Conference Call

In conjunction with this release, L-3 will host a conference call today, Thursday, April 23, 2009 at 11:00 a.m. EDT that will be simultaneously broadcast over the Internet. Michael T. Strianese, chairman, president and chief executive officer, Ralph G. D’Ambrosio, vice president and chief financial officer, and Karen C. Tripp, vice president of corporate communications, will host the call.

11:00 a.m. EDT
10:00 a.m. CDT
9:00 a.m. MDT
8:00 a.m. PDT

Listeners may access the conference call live over the Internet at the company’s Web site at:

http://www.L-3com.com

Please allow fifteen minutes prior to the call to visit our Web site to download and install any necessary audio software. The archived version of the call may be accessed at our Web site or by dialing (888) 286-8010 (passcode: 55337281), beginning approximately two hours after the call ends, and will be available until the company’s next quarterly earnings release.

Headquartered in New York City, L-3 employs approximately 65,000 people worldwide and is a prime contractor in aircraft modernization and maintenance, C³ISR (Command, Control, Communications, Intelligence, Surveillance and Reconnaissance) systems and government services. L-3 is also a leading provider of high technology products, subsystems and systems. The company reported 2008 sales of $14.9 billion.

To learn more about L-3, please visit the company’s Web site at www.L-3com.com. L-3 uses its Web site as a channel of distribution of material company information. Financial and other material information regarding L-3 is routinely posted on the company’s Web site and is readily accessible.

Forward-Looking Statements

Certain of the matters discussed in this release 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 constitute forward-looking statements. Although we believe that these statements are based upon reasonable assumptions, including projections of total sales growth, sales growth from business acquisitions, organic sales growth, consolidated operating margins, total segment operating margins, interest expense, earnings, cash flow, research and development costs, working capital, capital expenditures and other projections, they are subject to several risks and uncertainties that are difficult to predict, and therefore, we can give no assurance that these statements will be achieved. Such statements will also be influenced by factors which include, among other things: our dependence on the defense industry and the business risks peculiar to that industry; 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; the extensive legal and regulatory requirements surrounding our contracts with the U.S. or foreign governments and the results of any investigation of our contracts undertaken by the U.S. or foreign governments; our ability to retain our existing business and related contracts (revenue arrangements); our ability to successfully compete for and win new business and related contracts (revenue arrangements) and to win re-competitions of our existing contracts; our ability to identify and acquire additional businesses in the future with terms that are attractive to L-3 and to integrate acquired business operations; our ability to maintain and improve our consolidated operating margin and total segment operating margin in future periods; our ability to obtain future government contracts (revenue arrangements) on a timely basis; the availability of government funding or cost-cutting initiatives and changes in customer requirements for our products and services; our significant amount of debt and the restrictions contained in our debt agreements; our ability to continue to retain and train our existing employees and to recruit and hire new qualified and skilled employees as well as our ability to retain and hire employees with U.S. Government Security clearances; actual future interest rates, volatility and other assumptions used in the determination of pension benefits and equity based compensation, as well as the market performance of benefit plan assets; our collective bargaining agreements, our ability to successfully negotiate contracts with labor unions and our ability to favorably resolve labor disputes should they arise; the business, economic and political conditions in the markets in which we operate, including those for the commercial aviation, shipbuilding and communications market; global economic uncertainty and continued tightening of the credit markets; our ability to perform contracts on schedule; events beyond our control such as acts of terrorism; our international operations; our extensive use of fixed-price type contracts as compared to cost-reimbursable type and time-and-material type contracts; the rapid change of technology and high level of competition in the defense industry and the commercial industries in which our businesses participate; our introduction of new products into commercial markets or our investments in civil and commercial products or companies; the outcome of litigation matters; results of audits by U.S. Government agencies; anticipated cost savings from business acquisitions not fully realized or realized within the expected time frame; Titan’s compliance with its plea agreement and consent to entry of judgment with the U.S. Government relating to the Foreign Corrupt Practices Act (FCPA), including Titan’s ability to maintain its export licenses as well as the outcome of other FCPA matters; ultimate resolution of contingent matters, claims and investigations relating to acquired businesses, and the impact on the final purchase price allocations; competitive pressure among companies in our industry; and the fair values of our assets, which can be impaired or reduced by other factors, some of which are discussed above.

For a discussion of other risks and uncertainties that could impair our results of operations or financial condition, see ‘‘Part I — Item 1A — Risk Factors’’ and Note 18 to our audited consolidated financial statements, included in our Annual Report on Form 10-K for the year ended Dec. 31, 2008.

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 and such differences could be material. 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 release to reflect events or changes in circumstances or changes in expectations or the occurrence of anticipated events.

⁽¹⁾ During the quarter ended March 27, 2009, the company adopted six new accounting standards, three of which required retrospective application of their provisions. These standards and their retrospective application are more fully described in Tables F and G (Unaudited Supplemental Financial Data) attached to this earnings release.

⁽²⁾ Sales from acquired businesses net of divestitures are comprised of (i) sales from business and product line acquisitions that are included in L-3’s actual results for less than 12 months, less (ii) sales from business and product line divestitures that are included in L-3’s actual results for the 12 months prior to the divestitures.

⁽³⁾ See discussion, definition and calculation of free cash flow in Table E attached to this earnings release.