- Net sales increased 6% to $2,646
million
- Diluted earnings per share (EPS)
from continuing operations of $0.29, including a goodwill
impairment charge for Vertex Aerospace of $187 million, or $1.67
per diluted share
- Adjusted diluted EPS from continuing
operations(1) of $1.96
- Net cash from operating activities
from continuing operations of $316 million
- Book-to-bill ratio of 1.18x on
funded orders of $3.1 billion
- Updated 2017 financial
guidance
L3 Technologies, Inc. (NYSE: LLL) today reported diluted EPS
from continuing operations of $0.29 and adjusted diluted EPS from
continuing operations of $1.96 for the quarter ended September 29,
2017 (2017 third quarter). Adjusted diluted EPS excludes a
previously disclosed goodwill impairment charge of $1.67 per
diluted share for Vertex Aerospace. Diluted EPS from continuing
operations for the quarter ended September 23, 2016 (2016
third quarter) was $1.88. Net sales of $2,646 million for the
2017 third quarter increased by 6% compared to the 2016
third quarter.
“Our third quarter results demonstrated that we are on a
disciplined growth trajectory, with increased orders, sales,
book-to-bill ratio and segment operating margins,” said Michael T.
Strianese, L3’s Chairman and Chief Executive Officer. “We also
achieved organic sales growth, primarily through strong performance
in our Electronic and Communication Systems segments. During the
quarter, we restructured our businesses in the Aerospace Systems
segment, and as a result of the Fort Rucker recompetition loss, we
recorded an impairment charge related to the Vertex Aerospace
goodwill. We also began to evaluate strategic alternatives for
Vertex Aerospace. Looking ahead, we are making good progress on our
strategic priorities: improving operating efficiencies, making
beneficial acquisitions, and driving topline growth.”
___________________
(1) Adjusted diluted earnings per share from
continuing operations is a non-GAAP financial measure. See Table E
for a reconciliation and a discussion of the reasons why the
company believes that such presentation provides useful information
to investors.
During the 2017 third quarter the company recorded a
goodwill impairment charge of $187 million ($133 million after
income taxes), or $1.67 per diluted share related to the decline in
the estimated fair value of the Vertex Aerospace reporting unit due
to the Fort Rucker Aviation Maintenance and Support contract
recompetition loss. The goodwill impairment charge is included in
consolidated operating income. Segment operating income represents
earnings from the company’s business segments before the goodwill
impairment charge. Segment operating income is used by management
for purposes of evaluating the operating performance of the
company’s business segments.
L3 Consolidated Results
The table below provides L3’s selected financial data.
Third Quarter Ended
Year-to-Date Ended
(in millions, except per share data) Sept. 29,
Sept. 23, Increase/
Sept. 29, Sept. 23,
Increase/
2017 2016 (decrease)
2017 2016 (decrease)
Net sales
$ 2,646 $ 2,505 6 %
$ 8,047 $
7,522 7 % Operating income
$ 63 $ 215 (71) %
$
628 $ 714 (12) % Goodwill impairment charge
187 - nm
187 - nm Segment operating income
$ 250 $ 215
16 %
$ 815 714 14 % Operating margin
2.4
% 8.6 % (620) bpts
7.8 % 9.5 % (170) bpts
Segment operating margin
9.4 % 8.6 % 80 bpts
10.1 % 9.5 % 60 bpts Interest expense and other
$ (37) $ (35) 6 %
$ (113) $ (115) (2) %
Effective income tax rate
- % 16.1 % nm
22.1
% 21.7 % 40 bpts Net income from continuing operations
attributable to L3
$ 23 $ 148 (84) %
$
389 $ 459 (15) % Adjusted net income from continuing
operations attributable to L3(a)
$ 156 $ 148 5 %
$ 522 $ 459 14 % Diluted earnings per share from
continuing operations
$ 0.29 $ 1.88 (85) %
$
4.88 $ 5.83 (16) % Adjusted diluted earnings per share from
continuing operations(a)
$ 1.96 $ 1.88 4 %
$
6.55 $ 5.83 12 % Diluted weighted average common shares
outstanding
79.8 78.8 1 %
79.6 78.7 1 % Net
cash from operating activities from continuing operations
$
316 $ 210 50 %
$ 667 $ 586 14 % Less: Capital
expenditures, net of dispositions(b)
(54) (47) 15 %
(87) (111) (22) % Free cash flow(c)
$ 262 $
163 61 %
$ 580 $ 475 22 %
___________________
(a) Non-GAAP metric that excludes the
goodwill impairment charge for Vertex Aerospace. See Table E for a
reconciliation and a discussion of the reasons why the company
believes that such information provides useful information to
investors.
(b) Results for the 2017 year-to-date
period include $64 million of cash proceeds related to the sale of
the company's property in San Carlos, California.
(c) Free cash flow is defined as net cash
from operating activities from continuing operations less net
capital expenditures (capital expenditures less cash proceeds from
dispositions of property, plant and equipment). The company
believes free cash flow is a useful measure for investors because
it portrays the company's ability to generate cash from operations
for purposes such as repaying debt, returning cash to shareholders
and funding acquisitions. The company also uses free cash flow as a
performance measure in evaluating management.
nm = not meaningful
Third Quarter Results of Operations: For the 2017
third quarter, consolidated net sales of $2,646 million
increased $141 million, or 6%, compared to the 2016
third quarter, including organic sales(2) growth of 4%.
Organic sales exclude $56 million of sales increases related to
business acquisitions and $17 million of sales declines related to
business divestitures. For the 2017 third quarter, organic
sales to the U.S. Government increased $82 million, or 4%, to
$1,945 million, and organic sales to international and commercial
customers increased $20 million, or 3%, to $645 million.
Operating income for the 2017 third quarter decreased by
$152 million, or 71%, compared to the 2016 third quarter.
Segment operating income for the 2017 third quarter increased
by $35 million, or 16%, compared to the 2016 third quarter.
Segment operating income as a percentage of sales (segment
operating margin) increased by 80 basis points to 9.4% for the 2017
third quarter, compared to 8.6% for the 2016
third quarter. The increase in segment operating margin was
driven primarily by improved contract performance, primarily at
Communication Systems and a pre-tax charge in Sensor Systems for a
settlement of the class action litigation related to EoTech
recorded in the 2016 third quarter that did not recur. These
increases were partially offset by severance and restructuring
costs of $34 million, primarily at Communication Systems and
Aerospace Systems. See the reportable segment results for
additional discussion of sales and operating margin trends.
The effective tax rate for the 2017 third quarter was
approximately 0%, and therefore not meaningful because the company
recorded an income tax benefit related to the goodwill impairment
charge at Vertex Aerospace. Excluding the goodwill impairment
charge and related income tax benefits, the effective tax rate
would have increased to 24.9% compared to 16.1% for the 2016
third quarter due to $17 million of tax benefits for the
reversal of previously accrued amounts in the 2016
third quarter related to various U.S. Federal, foreign and
state tax matters that did not recur.
Diluted EPS from continuing operations was $0.29 for the 2017
third quarter, compared to $1.88 for the 2016
third quarter. Adjusted diluted EPS from continuing operations
increased 4% to $1.96. Diluted weighted average common shares
outstanding for the 2017 third quarter increased 1% compared
to the 2016 third quarter due to changes in the dilutive
impact of common share equivalents, primarily caused by a higher L3
stock price.
Year-to-Date Results of Operations: For the year-to-date period
ended September 29, 2017 (2017 year-to-date period), consolidated
net sales of $8,047 million increased $525 million, or 7%, compared
to the year-to-date period ended September 23, 2016 (2016
year-to-date period). Organic sales increased by $401 million, or
5%, to $7,886 million for the 2017 year-to-date period. Organic
sales exclude $162 million of sales increases related to business
acquisitions and $38 million of sales declines related to business
divestitures. For the 2017 year-to-date period, organic sales to
the U.S. Government increased $390 million, or 7%, to $5,877
million, and organic sales to international and commercial
customers increased $11 million, or 1%, to $2,009 million.
Due to the calendarization of the company’s fiscal quarter end
dates, the 2017 year-to-date period had 2% more business days
compared to the 2016 year-to-date period. The extra days for the
2017 year-to-date period will reverse in the 2017 fourth
quarter.
Operating income for the 2017 year-to-date period decreased by
$86 million, or 12%, compared to the 2016 year-to-date period.
Segment operating income for the 2017 year-to-date period increased
by $101 million, or 14%, compared to the 2016 year-to-date period.
Segment operating margin increased by 60 basis points to 10.1% for
the 2017 year-to-date period, compared to 9.5% for the 2016
year-to-date period. The increase in segment operating margin was
primarily driven by a pre-tax charge for a settlement of the class
action litigation related to EoTech in the 2016 third quarter
that did not recur and lower return allowances related to a
voluntary returns program, which ended in the first quarter of
2017, and improved contract performance, primarily for
Communication Systems and Sensor Systems. See the reportable
segment results for additional discussion of sales and operating
margin trends.
___________________
(2) Organic sales represent net sales excluding the
sales impact of acquisitions and divestitures. Sales declines
related to business divestitures are sales from divestitures that
are included in L3’s actual results for the 12 months prior to the
divestitures. Sales increases related to acquired businesses are
sales from acquisitions that are included in L3’s actual results
for less than 12 months. The company believes organic sales is a
useful measure for investors because it provides period-to-period
comparisons of the company’s ongoing operational and financial
performance.
The effective tax rate for the 2017 year-to-date period
increased to 22.1% from 21.7% for the same period last year.
Excluding the goodwill impairment charge and related income tax
benefits, the effective tax rate would have increased to 23.8% due
to prior year tax benefits of $21 million for the reversal of
certain previously accrued amounts related to various U.S. Federal,
foreign and state tax matters that did not recur, which were
partially offset by a lower effective tax rate on foreign
earnings.
Diluted EPS from continuing operations was $4.88 for the 2017
year-to-date period, compared to $5.83 for the 2016 year-to-date
period. Adjusted diluted EPS from continuing operations increased
12% to $6.55. Diluted weighted average common shares outstanding
for the 2017 year-to-date period increased 1% compared to the 2016
year-to-date period due to changes in the dilutive impact of common
share equivalents, primarily caused by a higher L3 stock price.
Orders: Funded orders for the 2017 third quarter increased
16% to $3,126 million compared to $2,688 million for the 2016
third quarter. Funded orders for the 2017 year-to-date period
increased 9% to $8,107 million compared to $7,415 million for the
2016 year-to-date period. The book-to-bill ratio was 1.18x for the
2017 third quarter and 1.01x for the 2017 year-to-date period.
Funded backlog increased 1% to $9,021 million at September 29, 2017
compared to $8,896 million at December 31, 2016.
Cash Flow: Net cash from operating activities from continuing
operations was $667 million for the 2017 year-to-date period, an
increase of $81 million, compared to $586 million for the 2016
year-to-date period. The increase in net cash from operating
activities from continuing operations was driven by higher segment
operating income and by less cash used for working capital
partially offset by higher income tax payments compared to the 2016
year-to-date period. Capital expenditures, net of dispositions,
were $87 million for the 2017 year-to-date period and included
proceeds of $64 million from the sale of the company’s property in
San Carlos, California. The company paid dividends of $178 million
during the 2017 year-to-date period compared to $166 million during
the 2016 year-to-date period. Repurchases of the company’s common
stock were $91 million during the 2017 year-to-date period,
compared to $326 million during the 2016 year-to-date period.
Reportable Segment Results
The company has four reportable segments. The company evaluates
the performance of its segments based on their sales, operating
income and operating margin. Corporate expenses are allocated to
the company’s operating segments using an allocation methodology
prescribed by U.S. Government regulations for government
contractors. Accordingly, segment results include all costs and
expenses, except for goodwill impairment charges and certain other
items that are excluded by management for purposes of evaluating
the performance of the company’s business segments.
Electronic Systems
Third
Quarter Ended Year-to-Date
Ended Sept. 29, Sept. 23,
Sept. 29, Sept. 23,
($ in millions)
2017 2016 Increase
2017 2016 Increase Net sales $
715 $ 635 13 % $
2,220 $ 1,890 17 % Operating income
$
103 $ 88 17 % $
299 $ 256 17 % Operating margin
14.4 % 13.9 % 50 bpts
13.5 % 13.5 % - bpts
Third Quarter: Electronic Systems net sales for the 2017
third quarter increased by $80 million, or 13%, compared to
the 2016 third quarter. Organic sales increased by $51
million, or 8%, compared to the 2016 third quarter. Organic
sales exclude $47 million of sales increases related to business
acquisitions and $18 million of sales declines related to business
divestitures. Organic sales increased by: (1) $38 million for Total
Training Solutions primarily due to higher volume on commercial
flight simulators, (2) $19 million for Precision Engagement Systems
primarily due to increased deliveries of fuzing and ordnance
products for the U.S. Army and (3) $13 million for Power &
Propulsion primarily due to higher volume for U.S. Navy (USN) power
conversion and distribution systems. These increases were partially
offset primarily by a $19 million decrease at Security &
Detection due to lower deliveries of airport screening devices to
the U.S. Transportation Security Administration and international
customers.
Electronic Systems operating income for the 2017
third quarter increased by $15 million, or 17%, compared to
the 2016 third quarter. Operating margin increased by 50 basis
points to 14.4%. Operating margin increased by 110 basis points
primarily due to higher sales volume and mix changes at Power &
Propulsion Systems and Aviation Products partially offset by 60
basis points primarily due to severance costs of $4 million.
Year-to-Date: Electronic Systems net sales for the 2017
year-to-date period increased by $330 million, or 17%, compared to
the 2016 year-to-date period. Organic sales increased by $225
million, or 12%, compared to the 2016 year-to-date period. Organic
sales exclude $143 million of sales increases related to business
acquisitions and $38 million of sales declines related to business
divestitures. Organic sales increased by: (1) $136 million for
Total Training Solutions due to higher volume on commercial flight
simulators and training systems for the U.S. Air Force (USAF) and
deliveries of training systems for the U.S. Army’s Flight School
XXI program, (2) $77 million for Precision Engagement Systems
primarily due to trends similar to the 2017 third quarter and
guidance and control products primarily for the USAF and foreign
militaries, (3) $39 million for Power & Propulsion primarily
due to trends similar to the 2017 third quarter and higher
volume for surface ship bridge system upgrades and guided destroyer
modernization program, and (4) $22 million for Aviation Products
primarily due to deliveries of aviation recorders and traffic and
collision avoidance systems for commercial airline customers. These
increases were partially offset by a $49 million decrease at
Security & Detection due to trends similar to the 2017
third quarter and timing of deliveries of cargo screening
devices to international customers.
Electronic Systems operating income for the 2017 year-to-date
period increased by $43 million, or 17%, compared to the 2016
year-to-date period. Operating margin for the 2017 year-to-date
period and 2016 year-to-date period was 13.5%. Higher sales volume
and mix changes, primarily for Power & Propulsion Systems and
Aviation Products increased operating margin by 140 basis points
and were offset by lower margins related to acquisitions, higher
severance costs of $5 million and lower favorable contract
performance adjustments across several business areas.
Aerospace Systems
Third
Quarter Ended Year-to-Date
Ended Sept. 29, Sept. 23,
Sept. 29, Sept. 23,
($ in millions)
2017 2016 Increase
2017 2016 Decrease Net sales $
1,025 $ 1,012 1 % $
3,096 $ 3,165 (2) % Operating
income $
57 $ 56 2 % $
196 $ 232 (16) % Operating
margin
5.6 % 5.5 % 10 bpts
6.3 % 7.3 % (100) bpts
Third Quarter: During the 2017 third quarter, the
company restructured Aerospace Systems to streamline operations by
consolidating most of the Aircraft Systems sector into the ISR
Systems sector, which has been renamed Mission Integration. The
company incurred employee severance costs of $15 million in
connection with the restructuring.
Aerospace Systems net sales for the 2017 third quarter
increased by $13 million, or 1%, compared to the 2016
third quarter. Sales increased $28 million for Vertex
Aerospace partially offset by lower sales of $15 million for
Mission Integration. Sales increased for Vertex Aerospace primarily
due to higher volume on the USAF KC-10 contractor logistics support
contract, partially offset by reduced deliveries for UH-1Y aircraft
cabin assemblies. Sales decreased for Mission Integration due to
lower volume, primarily for the USAF Compass Call aircraft,
Australian Defence Force (ADF) C-27J aircraft and small ISR
aircraft systems for the U.S. Army. These decreases were partially
offset by higher volume for large ISR aircraft systems and small
ISR aircraft fleet management services for the DoD.
Aerospace Systems operating income for the 2017
third quarter remained substantially the same as the 2016
third quarter. Operating margin increased by 10 basis points
to 5.6%. Operating margin increased 140 basis points due to
improved contract performance primarily at Mission Integration and
increased sales volume and mix changes for Vertex Aerospace. These
increases were partially offset by 130 basis points primarily due
to severance costs of $15 million.
Year-to-Date: Aerospace Systems net sales for the 2017
year-to-date period decreased by $69 million, or 2%, compared to
the 2016 year-to-date period. Sales decreased $128 million for
Mission Integration partially offset by higher sales of $59 million
for Vertex Aerospace. Sales decreased for Mission Integration due
to trends similar to the 2017 third quarter and due to the
procurement and delivery of two business jets to a foreign military
customer in the 2016 second quarter that did not recur. Sales
increased for Vertex Aerospace due to trends similar to the 2017
third quarter.
Aerospace Systems operating income for the 2017 year-to-date
period decreased by $36 million, or 16%, compared to the 2016
year-to-date period. Operating margin decreased by 100 basis points
to 6.3%. Operating margin decreased by: (1) 60 basis points due to
severance costs of $15 million and (2) 40 basis points primarily
due to lower favorable contract performance adjustments during the
2017 year-to-date period compared to 2016 year-to-date period.
Communication Systems
Third
Quarter Ended Year-to-Date
Ended Sept. 29, Sept. 23,
Increase/
Sept. 29, Sept. 23,
($ in
millions) 2017 2016 (decrease)
2017 2016 Increase
Net sales $
540 $ 504 7 % $
1,626 $ 1,470 11 %
Operating income $
42 $ 40 5 % $
170 $ 143 19 %
Operating margin
7.8 % 7.9 % (10) bpts
10.5 % 9.7 %
80 bpts
Third Quarter: Communication Systems net sales for the 2017
third quarter increased by $36 million, or 7%, compared to the
2016 third quarter. The increase was primarily driven by
Broadband Communication Systems due to increased deliveries of
secure networked communication systems primarily for the U.S.
Department of Defense (DoD).
Communication Systems operating income for the 2017
third quarter increased by $2 million, or 5%, compared to the
2016 third quarter. Operating margin decreased by 10 basis
points to 7.8%. Severance and restructuring costs of $15 million
primarily related to the EDD/ETI Traveling Wave Tube (TWT)
businesses consolidation decreased operating margin by 280 basis
points. Sales mix changes partially offset by improved contract
performance, primarily in Space & Power Systems and Broadband
Communication Systems increased operating margin by 270 basis
points.
Year-to-Date: Communication Systems net sales for the 2017
year-to-date period increased by $156 million, or 11%, compared to
the 2016 year-to-date period due to trends similar to the 2017
third quarter.
Communication Systems operating income for the 2017 year-to-date
period increased by $27 million, or 19%, compared to the 2016
year-to-date period. Operating margin increased by 80 basis points
to 10.5%. Consolidation activities related to the EDD/ETI TWT
businesses increased operating margin by 80 basis points consisting
of: (1) an increase in operating margin of 260 basis points related
to a pre-tax gain of $42 million on the sale of the company’s
property in San Carlos, California, in the second quarter of 2017
and (2) a decrease in operating margin of 180 basis points related
to severance and restructuring costs of $30 million.
Sensor Systems
Third
Quarter Ended Year-to-Date
Ended Sept. 29, Sept. 23,
Sept. 29, Sept. 23,
($ in millions)
2017 2016 Increase
2017 2016 Increase Net sales $
366 $ 354 3 % $
1,105 $ 997 11 % Operating income $
48 $ 31 55 % $
150 $ 83 81 % Operating margin
13.1 % 8.8 % 430 bpts
13.6 % 8.3 % 530 bpts
Third Quarter: Sensor Systems net sales for the 2017
third quarter increased by $12 million, or 3%, compared to the
2016 third quarter. Organic sales increased by $3 million, or
1%, compared to the 2016 third quarter. Organic sales exclude
$9 million of sales increases related to business acquisitions.
Organic sales increased by $15 million due to higher volume for
space electronics products and $7 million due to higher deliveries
of night vision equipment primarily to the ADF. These increases
were offset by $19 million of lower deliveries of airborne turret
systems primarily to foreign militaries.
Sensor Systems operating income for the 2017 third quarter
increased by $17 million, or 55%, compared to the 2016
third quarter. Operating margin increased by 430 basis points
to 13.1% primarily due to a $14 million pre-tax charge for a
settlement of the class action litigation related to EoTech
recorded in the 2016 third quarter that did not recur.
Year-to-Date: Sensor Systems net sales for the 2017 year-to-date
period increased by $108 million, or 11%, compared to the 2016
year-to-date period. Organic sales increased by $91 million, or 9%,
compared to the 2016 year-to-date period. Organic sales exclude $17
million of sales increases related to business acquisitions.
Organic sales increased primarily due to increased task order
volume on U.S. Government contracts, higher volume for space
electronics products and increased deliveries of airborne turret
systems to the USAF and foreign militaries.
Sensor Systems operating income for the 2017 year-to-date period
increased by $67 million, or 81%, compared to the 2016 year-to-date
period. Operating margin increased by 530 basis points to 13.6%.
Operating margin increased by: (1) 230 basis points due to a
pre-tax charge for a settlement of the class action litigation
related to EoTech in the 2016 third quarter that did not recur
and lower return allowances related to a voluntary returns program,
which ended in the first quarter of 2017, (2) 170 basis points
primarily for improved contract performance at Maritime Sensor
Systems and (3) 130 basis points primarily due to higher sales
volume and mix changes primarily airborne turret systems.
Financial Guidance
Based on information known as of today, the company has updated
its consolidated and segment financial guidance for the year ending
December 31, 2017, that was previously provided on July 27, 2017,
as presented in the tables below. All financial guidance amounts
are estimates subject to change in the future, including as a
result of matters discussed under the “Forward-Looking Statements”
cautionary language beginning on page 9. The company undertakes no
duty to update its guidance.
Consolidated 2017 Financial Guidance ($ in
millions, except per share data) Prior Guidance
Current Guidance (July 27, 2017) Net sales $10,800 to
$11,000 $10,800 to $11,000 Segment operating margin(1) 10.3% 10.3%
Interest expense and other(2) $154 $158 Effective tax rate(1) 24.9%
25.8% Minority interest expense(3) $17 $17 Diluted shares 80 80
Diluted EPS $7.13 to $7.23 $8.65 to $8.85 Adjusted diluted EPS(1)
$8.80 to $8.90 NA Net cash from operating activities $1,030 $1,030
Capital expenditures, net of dispositions of property, plant and
equipment
(155) (155) Free cash flow
$875 $875
___________________
(1) Excludes the goodwill impairment
charge of $187 million ($133 million after income taxes), or $1.67
per diluted share, for Vertex Aerospace.
(2) Interest expense and other is
comprised of: (i) interest expense of $172 million and (ii)
interest and other income, net, of $18 million.
(3) Minority interest expense represents
net income from continuing operations attributable to
non-controlling interests.
NA = Not Applicable
Segment 2017 Financial Guidance ($ in
millions) Current Guidance
Prior Guidance
(July 27, 2017)
Net
Sales:
Electronic Systems $3,000 to $3,100 $3,000 to $3,100 Aerospace
Systems $4,050 to $4,150 $4,050 to $4,150 Communication Systems
$2,125 to $2,225 $2,125 to $2,225 Sensor Systems $1,525 to $1,625
$1,525 to $1,625
Operating
Margin:
Electronic Systems 13.3% to 13.5% 13.2% to 13.4% Aerospace Systems
6.4% to 6.6% 6.9% to 7.1% Communication Systems 10.6% to 10.8%
10.6% to 10.8% Sensor Systems 13.3% to 13.5% 12.7% to 12.9%
The revisions to our Current Guidance compared to our Prior
Guidance primarily include:
- An increase in Electronic Systems and
Sensor Systems operating margins primarily due to improved contract
performance;
- A decrease in Aerospace Systems
operating margin primarily due to severance costs incurred in the
2017 third quarter; and
- A decrease in the effective tax rate
primarily due to an increase in tax benefits related to share-based
compensation awards.
The current guidance for 2017 excludes: (i) the Vertex Aerospace
and any potential 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.
Additional financial information regarding the 2017
third quarter results and the 2017 financial guidance is
available on the company’s website at www.L3T.com.
Conference Call
In conjunction with this release, L3 will host a conference call
today, Thursday, October 26, 2017, at 11:00 a.m. ET that will be
simultaneously broadcast over the Internet. Michael T. Strianese,
Chairman and Chief Executive Officer, Christopher E. Kubasik,
President and Chief Operating Officer, and Ralph G. D’Ambrosio,
Senior Vice President and Chief Financial Officer, will host the
call.
Listeners can access the conference call live at the following
website address:
http://www.L3T.com
Please allow 15 minutes prior to the call to visit this site to
download and install any necessary audio software. The archived
version of the call may be accessed at the site or by dialing (800)
585-8367/passcode: 96590595 (for domestic callers) or (404)
537-3406/passcode: 96590595 (for international callers) 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, L3 Technologies employs
approximately 38,000 people worldwide and is a leading provider of
a broad range of communication, electronic and sensor systems used
on military, homeland security and commercial platforms. L3 is also
a prime contractor in aerospace systems, security and detection
systems and pilot training.
To learn more about L3, please visit the company’s website at
www.L3T.com. L3 uses its website as a channel of distribution of
material company information. Financial and other material
information regarding L3 is routinely posted on the company’s
website and is readily accessible.
Forward-Looking Statements
Certain of the matters discussed in this press release,
including information regarding the company’s 2017 financial
guidance are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. All statements
other than historical facts, may be forward-looking statements,
such as “may,” “will,” “should,” “likely,” “projects,” “financial
guidance,” ‘‘expects,’’ ‘‘anticipates,’’ ‘‘intends,’’ ‘‘plans,’’
‘‘believes,’’ ‘‘estimates,’’ and similar expressions are used to
identify forward-looking statements. The company cautions investors
that these statements are subject to risks and uncertainties many
of which are difficult to predict and generally beyond the
company’s control that could cause actual results to differ
materially from those expressed in, or implied or projected by, the
forward-looking information and statements. Some of the factors
that could cause actual results to differ include, but are not
limited to, the following: our dependence on the defense industry;
backlog processing and program slips resulting from delayed awards
and/or funding from the Department of Defense (DoD) and other major
customers; the U.S. Government fiscal situation; changes in DoD
budget levels and spending priorities; U.S. Government failure to
raise the debt ceiling; our reliance on contracts with a limited
number of customers and the possibility of termination of
government contracts by unilateral government action or for failure
to perform; the extensive legal and regulatory requirements
surrounding many of our contracts; our ability to retain our
existing business and related contracts; our ability to
successfully compete for and win new business, or, identify,
acquire and integrate additional businesses; our ability to
maintain and improve our operating margin; the availability of
government funding and changes in customer requirements for our
products and services; the outcome of litigation matters (see Notes
to our annual report on Form 10-K and quarterly reports on Form
10-Q); results of audits by U.S. Government agencies and of ongoing
governmental investigations; our significant amount of debt and the
restrictions contained in our debt agreements and actions taken by
rating agencies that could result in a downgrade of our debt; our
ability to continue to recruit, retain and train our employees;
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; the risk that our commercial aviation products and
services businesses are affected by a downturn in global demand for
air travel or a reduction in commercial aircraft OEM (Original
Equipment Manufacturer) production rates; the DoD’s Better Buying
Power and other efficiency initiatives; events beyond our control
such as acts of terrorism; our ability to perform contracts on
schedule; our international operations including currency risks and
compliance with foreign laws; our extensive use of fixed-price type
revenue arrangements; the rapid change of technology and high level
of competition in which our businesses participate; risks relating
to technology and data security; our introduction of new products
into commercial markets or our investments in civil and commercial
products or companies; the impact on our business of improper
conduct by our employees, agents or business partners; goodwill
impairments and the fair values of our assets; and ultimate
resolution of contingent matters, claims and investigations
relating to acquired businesses, and the impact on the final
purchase price allocations.
Our forward-looking statements speak only as of the date of this
press release or as of the date they were made, and we undertake no
obligation to update forward-looking statements. For a more
detailed discussion of these factors, also see the information
under the captions “Risk Factors” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in our
most recent report on Form 10-K for the year ended December 31,
2016 and any material updates to these factors contained in any of
our future filings.
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.
– Financial Tables Follow –
Table A
L3 TECHNOLOGIES, INC. UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (in millions, except per share
data) Third Quarter Ended(a)
Year-to-Date Ended(a) Sept. 29, Sept. 23,
Sept. 29, Sept. 23,
2017 2016
2017 2016
Net
sales $ 2,646 $ 2,505
$ 8,047 $
7,522
Cost of sales (2,396 ) (2,290 )
(7,232 ) (6,808 )
Goodwill impairment
charge(b) (187 ) -
(187 ) -
Operating income
63 215
628 714
Interest expense (43
) (41 )
(128 ) (125 )
Interest and other
income, net 6 6
15 15
Debt retirement
charge - -
-
(5 )
Income from continuing operations before
income taxes 26 180
515 599
Provision for
income taxes - (29 )
(114 ) (130 )
Income from continuing
operations 26 151
401 469
(Loss) income from
discontinued operations, net of income tax(c)
(1 ) -
(1 )
63
Net income 25 151
400 532
Net
income from continuing operations attributable to noncontrolling
interests (3 ) (3 )
(12 ) (10 )
Net income attributable to
L3 $ 22 $ 148
$ 388
$ 522
Basic earnings (loss) per share
attributable to L3’s common shareholders: Continuing
operations $ 0.29 $ 1.91
$ 4.98 $
5.93
Discontinued operations (0.01 )
-
(0.01 ) 0.81
Basic earnings per share $ 0.28 $ 1.91
$ 4.97 $ 6.74
Diluted
earnings (loss) per share attributable to L3's common
shareholders: Continuing operations $ 0.29
$ 1.88
$ 4.88 $ 5.83
Discontinued operations
(0.01 ) -
(0.01
) 0.80
Diluted earnings per share
$ 0.28 $ 1.88
$ 4.87
$ 6.63
L3’s weighted average common shares
outstanding: Basic 78.2 77.3
78.0 77.4
Diluted
79.8 78.8
79.6
78.7 ______________________ (a) It is the
company's established practice to close its books for the quarters
ending March, June and September on the Friday preceding the end of
the calendar quarter. The interim financial statements and tables
of financial information included herein have been prepared and are
labeled based on that convention. The company closes its annual
books on December 31 regardless of what day it falls on. (b) The
goodwill impairment charge for the 2017 third quarter and 2017
year-to-date period represents a goodwill impairment charge related
to the Vertex Aerospace reporting unit. (c) (Loss) income from
discontinued operations, net of income taxes includes an after-tax
gain of $64 million on the sale of the National Security Solutions
(NSS) business recognized during the 2016 year-to-date period and
$1 million of trailing expenses related to the sale of NSS incurred
during the 2017 third quarter.
Table B
L3 TECHNOLOGIES, INC. UNAUDITED SELECT FINANCIAL
DATA (in millions) Third Quarter Ended
Year-to-Date Ended Sept. 29, Sept. 23,
Sept.
29, Sept. 23,
2017 2016
2017 2016
Segment operating
data
Net sales: Electronic Systems $
715 $ 635
$ 2,220 $ 1,890
Aerospace
Systems 1,025 1,012
3,096 3,165
Communication
Systems 540 504
1,626 1,470
Sensor Systems
366 354
1,105 997
Total $ 2,646 $ 2,505
$ 8,047 $
7,522
Operating income: Electronic Systems
$ 103 $ 88
$ 299 $ 256
Aerospace
Systems 57 56
196 232
Communication
Systems 42 40
170 143
Sensor Systems
48 31
150 83
Total
$ 250 $ 215
$ 815 $ 714
Operating margin: Electronic Systems 14.4
% 13.9 %
13.5 % 13.5
Aerospace Systems
5.6 % 5.5 %
6.3 % 7.3
Communication
Systems 7.8 % 7.9 %
10.5 % 9.7
Sensor Systems 13.1 % 8.8 %
13.6
% 8.3
Total 9.4 % 8.6 %
10.1
% 9.5
Depreciation and amortization:
Electronic Systems $ 19 $ 15
$
54 $ 45
Aerospace Systems 15 13
42 40
Communication Systems 12 12
36 35
Sensor
Systems 10 11
33 33
Total $ 56 $ 51
$ 165 $ 153
Funded order
data
Electronic Systems $ 802 $ 910
$
2,409 $ 2,134
Aerospace Systems 1,009 821
2,531 2,738
Communication Systems 685 490
1,655 1,414
Sensor Systems 630
467
1,512 1,129
Total $
3,126 $ 2,688
$ 8,107 $ 7,415
Sept.
29, Dec. 31,
2017 2016
Period end
data
Funded backlog $ 9,021 $ 8,896
Table C L3 TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions) Sept. 29, December 31,
2017 2016
ASSETS Cash and cash
equivalents $ 439 $ 363
Billed receivables,
net 776 731
Contracts in process 2,273
2,055
Inventories 392 330
Other current assets
219 218
Total current assets
4,099 3,697
Property, plant and equipment, net
1,145 1,121
Goodwill 6,652 6,560
Identifiable intangible assets 299 238
Other
assets 273 249
Total assets
$ 12,468 $ 11,865
LIABILITIES AND
EQUITY Accounts payable, trade $
425 $ 299
Accrued employment costs 535 516
Accrued expenses 438 375
Advance payments and
billings in excess of costs incurred 493 492
Income
taxes payable 26 22
Other current liabilities
366 431
Total current liabilities
2,283 2,135
Pension and postretirement
benefits 1,143 1,177
Deferred income taxes
259 236
Other liabilities 385 368
Long-term
debt 3,329 3,325
Total liabilities
7,399 7,241
Shareholders’ equity
4,999 4,553
Noncontrolling interests 70
71
Total equity 5,069 4,624
Total liabilities and equity $ 12,468 $ 11,865
Table D L3
TECHNOLOGIES, INC. UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS (in millions)
Year-to-Date Ended Sept. 29, Sept. 23,
2017
2016
Operating
activities
Net income $ 400 $ 532
Less: (Loss) income
from discontinued operations, net of tax 1
(63)
Income from continuing operations 401 469
Depreciation of property, plant and equipment 128 121
Amortization of intangibles and other assets 37 32
Deferred income tax (benefit) provision (15) 48
Stock-based employee compensation expense 43 34
Contributions to employee savings plans in common stock
96 92
Goodwill impairment charge 187 -
Amortization of pension and postretirement benefit plans net
loss and prior service cost 43 37
Amortization of
bond discounts and deferred debt issue costs (included in interest
expense) 4 6
Gain on sale of property, plant and
equipment (42) (6)
Other non-cash items 3
21
Changes in operating assets and liabilities, excluding
amounts from acquisitions and divestitures and discontinued
operations: Billed receivables (29) (69)
Contracts in process (183) (193)
Inventories
(72) (31)
Other assets (6) 21
Accounts
payable, trade 112 130
Accrued employment costs
4 8
Accrued expenses 64 3
Advance payments
and billings in excess of costs incurred (11) (102)
Income taxes 13 -
Other current liabilities
(80) (3)
Pension and postretirement benefits
(32) (19)
All other operating activities
2 (13)
Net cash from operating activities from
continuing operations 667 586
Investing
activities
Business acquisitions, net of cash acquired (291)
(27)
Proceeds from the sale of businesses, net of closing date
cash balances 18 561
Capital expenditures
(154) (126)
Dispositions of property, plant and
equipment 67 15
Other investing activities
(6) 7
Net cash (used in) from investing activities
from continuing operations (366) 430
Financing
activities
Borrowings under revolving credit facility 1,265 335
Repayments of borrowings under revolving credit facility
(1,265) (335)
Redemption of senior notes -
(305)
Common stock repurchased (91) (326)
Dividends paid (178) (166)
Proceeds from exercise
of stock options 36 49
Proceeds from employee stock
purchase plan 24 23
Repurchases of common stock to
satisfy tax withholding obligations (18) (20)
Other
financing activities (12) (8)
Net cash
used in financing activities from continuing operations
(239) (753)
Effect of foreign currency exchange
rate changes on cash and cash equivalents 16 (3)
Net
cash used in operating activities from discontinued operations:
(2) (56)
Net increase in cash and cash equivalents
76 204
Cash and cash equivalents, beginning of the
period 363 207
Cash and cash
equivalents, end of the period $ 439 $ 411
Table
E L3 TECHNOLOGIES, INC. NON-GAAP
FINANCIAL MEASURES (in millions, except per share
amounts) Third Quarter Ended Year-to-Date
Ended Sept. 29, Sept. 23, Sept. 29,
Sept. 23, 2017 2016 2017 2016
Diluted EPS from continuing operations attributable to L3's
$ 0.29 $ 1.88
$ 4.88 $ 5.83
common
stockholders EPS impact of goodwill impairment
charge(1) 1.67 - 1.67
-
Adjusted diluted EPS from continuing
operations(2) $ 1.96 $ 1.88
$ 6.55 $ 5.83
Net income from
continuing operations attributable to L3 $ 23 $
148
$ 389 $ 459
Goodwill impairment
charge(1) 133 - 133
-
Adjusted net income from continuing operations
attributable to L3(2) $ 156 $ 148
$ 522 $ 459 ______________________
(1)
Goodwill impairment charge $ (187 ) $ (187 )
Tax benefit
54 54 After-tax impact (133 ) (133 )
Diluted weighted average common shares outstanding 79.8
79.6 Per share impact(3) $ (1.67 ) $ (1.67 )
(2) Adjusted diluted EPS is diluted EPS attributable to L3's
common stockholders, excluding the goodwill impairment charge
related to Vertex Aerospace. Adjusted net income attributable to L3
is net income attributable to L3, excluding the goodwill impairment
charge related to Vertex Aerospace. These amounts are not
calculated in accordance with accounting principles generally
accepted in the United States of America (U.S. GAAP). The company
believes that the goodwill impairment charge affects the
comparability of the results of operations for 2017 to the results
of operations for 2016. The company also believes that disclosing
net income and diluted EPS excluding the goodwill impairment charge
will allow investors to more easily compare the 2017 results to the
2016 results. However, these measures may not be defined or
calculated by other companies in the same manner. (3)
Amounts may not calculate directly due to rounding.
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