- Diluted earnings per share (EPS)
from continuing operations of $2.38
- Net sales increased 4% to $3.0
billion
- Net cash from operating activities
from continuing operations increased 8% to $511 million
- Book-to-bill ratio of 1.20x on
funded orders of $3.6 billion, increasing funded backlog 6% to $8.9
billion
- Increased 2017 financial
guidance
L3 Technologies, Inc. (NYSE:LLL) today reported diluted EPS from
continuing operations of $2.38 for the quarter ended December 31,
2016 (2016 fourth quarter) compared to diluted loss per share from
continuing operations for the quarter ended December 31, 2015 (2015
fourth quarter) of $0.76 and adjusted diluted EPS(1) from
continuing operations for the 2015 fourth quarter of $2.16. Net
sales of $2,989 million for the 2016 fourth quarter increased by 4%
compared to the 2015 fourth quarter.
“We are very pleased with our strong fourth quarter results.”
said Michael T. Strianese, L3’s Chairman and Chief Executive
Officer. "Our solid program execution contributed to increases in
orders, sales, operating income and diluted EPS, and a book-to-bill
ratio of 1.20x. Throughout the quarter, we won key contracts, and
increased organic growth and margins across our businesses. We have
positive momentum moving into 2017, as we remain focused on
disciplined growth, contract performance and operational
efficiencies to deliver value for our customers and our
shareholders.”
As previously announced on January 25, 2017, the company will
realign its Electronic Systems segment effective March 1, in
connection with the retirement of Steve Kantor, Senior Vice
President and President of Electronic Systems, in the second
quarter of 2017. The current Electronic Systems segment will be
split into two separate segments named (1) Electronic Systems and
(2) Sensor Systems. Accordingly, the company’s structure will
consist of the following four segments: Aerospace Systems,
Communication Systems, Electronic Systems and Sensor Systems. The
company will report its results under the realigned business
segments commencing in the first quarter of 2017.
__________
(1) Adjusted diluted EPS from continuing operations is a
non-GAAP financial measure. See Table F for a reconciliation and a
discussion of why this information is presented.
L3 Consolidated Results
The table below provides L3’s selected financial data from
continuing operations, which excludes the results of operations of
the National Security Solutions (NSS) business. NSS was divested on
February 1, 2016, and is reported as discontinued operations for
all periods presented.
Fourth Quarter Ended
Year Ended Dec. 31, Increase/
(in millions, except per
share data) 2016 2015 Increase
2016
2015 (decrease) Net sales
$ 2,989 $ 2,871 4%
$ 10,511 $ 10,466 0.4% Operating income (loss)
$ 294 $ (96) nm
$ 1,008 $ 475 nm Loss
related to business divestitures
- 2 nm
- 31 nm
Goodwill impairment charges
- 349 nm
- 384 nm Segment operating income
$ 294
$ 255 15%
$ 1,008 $ 890 13% Operating margin
9.8 % nm nm
9.6 % 4.5 % nm Segment
operating margin
9.8 % 8.9 %
90 bpts
9.6 % 8.5 %
110 bpts
Interest expense and other
$ (43) $ (40) 8%
$
(158) $ (153) 3% Effective income tax rate
23.5
% nm nm
22.2 % nm nm Net income (loss) from
continuing operations attributable to L3
$ 188 $ (60)
nm
$ 647 $ 282 nm Adjusted net income from continuing
operations attributable to L3(a)
$ 188 $ 172 9%
$ 647 $ 566 14% Diluted earnings (loss) per share
from continuing operations
$ 2.38 $ (0.76) nm
$ 8.21 $ 3.44 nm Adjusted diluted earnings per share
from continuing operations(a)
$ 2.38 $ 2.16 (b) 10%
$ 8.21 $ 6.91 19% Diluted weighted average common
shares outstanding
78.9 78.5 1%
78.8 81.9 (4)%
__________
(a) Non-GAAP metric that excludes goodwill
impairment charges and the aggregate loss related to business
divestitures. See Table Ffor a reconciliation and a discussion of
why this information is presented.
(b) 2015 adjusted diluted earnings per
share from continuing operations reflects the dilutive impact of
common share equivalents of1.2 million shares.
nm – not meaningful
Fourth Quarter Results of Operations: For the 2016 fourth
quarter, consolidated net sales of $2,989 million increased $118
million, or 4%, compared to the 2015 fourth quarter. Organic
sales(2) increased by 3%, or $91 million, for the 2016 fourth
quarter. Organic sales exclude $30 million of sales increases
related to business acquisitions and $3 million of sales declines
related to business divestitures. For the 2016 fourth quarter,
organic sales to the U.S. Government increased $98 million, or 5%,
to $2,126 million and organic sales to international and commercial
customers decreased $7 million, or 0.8%, to $833 million.
Segment operating income for the 2016 fourth quarter increased
by $39 million, or 15%, compared to the 2015 fourth quarter.
Segment operating income as a percentage of sales (segment
operating margin) increased by 90 basis points to 9.8% for the 2016
fourth quarter compared to 8.9% for the 2015 fourth quarter. The
increase in segment operating margin was driven primarily by a
lower EoTech return allowance recorded in the 2016 fourth quarter
compared to the 2015 fourth quarter of $18 million and 30 basis
points due to lower pension expense of $9 million. See the
reportable segment results below 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. fourth
quarter of $18 million and 30 basis points due to lower pension
expense of $9 million. See the reportable segment results below for
additional discussion of sales and operating margin trends.
Interest expense and other for the 2016 fourth quarter includes
a $2 million debt retirement charge related to the redemption on
December 30, 2016 of $350 million aggregate principal amount of
1.50% Senior Notes due May 28, 2017.
The effective tax rate for the 2016 fourth quarter was 23.5%.
The effective income tax rate for the 2015 fourth quarter was not
meaningful due to the goodwill impairment charges. Excluding the
2015 fourth quarter goodwill impairment charges and related income
tax benefits, the effective income tax rate would have been 18.3%.
The increase in the effective income tax rate during the 2016
fourth quarter was primarily driven by lower Federal Research and
Experimentation (R&E) tax credits as compared to the 2015
fourth quarter.
Diluted EPS from continuing operations increased 10% to $2.38
compared to adjusted diluted EPS of $2.16 for the 2015 fourth
quarter. The 2015 fourth quarter adjusted diluted EPS from
continuing operations excludes after-tax losses of: (1) $230
million, or $2.93 per share, related to goodwill impairment charges
and (2) $2 million, or $0.02 per share, related to business
divestitures. Diluted weighted average common shares outstanding
for the 2016 fourth quarter increased by 1% compared to the 2015
fourth quarter.
Full Year Results of Operations: For the year ended December 31,
2016, consolidated net sales of $10,511 million increased $45
million, or 0.4%, compared to the year ended December 31, 2015.
Organic sales increased by $161 million, or 2%, for the year ended
December 31, 2016. Organic sales exclude $209 million of sales
declines related to business divestitures and $93 million of sales
increases related to business acquisitions. For the year ended
December 31, 2016, organic sales to the U.S. Government increased
$348 million, or 5%, to $7,631 million and organic sales to
international and commercial customers decreased $187 million, or
6%, to $2,787 million.
Segment operating income for the year ended December 31, 2016
increased by $118 million, or 13%, compared to the year ended
December 31, 2015. Segment operating margin increased by 110 basis
points to 9.6% for the year ended December 31, 2016, compared to
8.5% for the year ended December 31, 2015. Segment operating margin
increased by: (1) 100 basis points due to losses in 2015 at
Aerospace Systems on international head-of-state aircraft
modification contracts which did not recur and (2) 40 basis points
due to lower pension expense of $45 million. These increases were
partially offset by sales mix changes. See the reportable segment
results below for additional discussion of sales and operating
margin trends.
Interest expense and other for the year ended December 31, 2016
includes $7 million of debt retirement charges related to the
redemption of: (1) $300 million aggregate principal amount of 3.95%
Senior Notes due November 15, 2016 in the second quarter of 2016
and (2) $350 million aggregate principal amount of 1.50% Senior
Notes due May 28, 2017 in the fourth quarter of 2016.
The effective tax rate for the year ended December 31, 2016 was
22.2%. The effective income tax rate for the year ended December
31, 2015 was not meaningful due to the goodwill impairment charges.
Excluding the goodwill impairment charges and related income tax
benefits, the effective income tax rate for 2015 would have been
20.5%. The increase in the effective income tax rate was driven by
lower foreign tax benefits and lower Federal R&E tax credits in
2016 compared to 2015, partially offset by a benefit of $17 million
due to the early adoption of a new accounting standard related to
income tax benefits from employee stock-based compensation
awards.
Diluted EPS from continuing operations increased 19% to $8.21
compared to adjusted diluted EPS of $6.91 for the year ended
December 31, 2015. Adjusted diluted EPS from continuing operations
for the year ended December 31, 2015 excludes after tax losses of:
(1) $264 million, or $3.22 per share, related to goodwill
impairment charges and (2) $20 million, or $0.25 per share, related
to business divestitures. Diluted weighted average common shares
outstanding for the year ended December 31, 2016 declined by 4%
compared to the year ended December 31, 2015 primarily due to
repurchases of L3 common stock.
Orders: Funded orders for the 2016 fourth quarter increased 40%
to $3,577 million compared to $2,561 million for the 2015 fourth
quarter. Funded orders for the year ended December 31, 2016
increased 11% to $10,992 million compared to $9,862 million for the
year ended December 31, 2015. The book-to-bill ratio was 1.20x for
the 2016 fourth quarter and 1.05x for the year ended December 31,
2016. The increase in funded orders was driven primarily by new
business contract awards at Electronic Systems and earlier than
expected funding on existing contracts with the U.S. Department of
Defense (DoD) at Aerospace Systems. Funded backlog increased 6% to
$8,896 million at December 31, 2016, compared to $8,423 million at
December 31, 2015.
The table below summarizes the cash returned to shareholders
during the 2016 and 2015 fourth quarter and years ended December
31, 2016 and 2015.
Fourth Quarter Ended Year
Ended Dec. 31, ($ in millions, except per share data)
2016 2015
2016 2015
Net cash from operating activities from continuing
operations
$ 511 $ 472
$ 1,097 $ 1,069
Less: Capital expenditures, net of dispositions
(84) (59)
(195) (194) Plus: Income tax payments attributable to
discontinued operations
- -
- 2 Free cash flow(1)
$ 427 $ 413
$ 902 $ 877 Dividends paid
($2.80 per share in 2016; $2.60 per share in 2015)
$
54 $ 51
$ 220 $ 214 Common stock repurchases
47 135
373 740 Cash returned to shareholders
$
101 $ 186
$ 593 $ 954
(1) 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),
plus income tax payments attributable to discontinued operations.
Free cash flow represents cash generated after paying for interest
on borrowings, income taxes, pension benefit contributions, capital
expenditures and changes in working capital, but before repaying
principal amount of outstanding debt, paying cash dividends on
common stock, repurchasing shares of our common stock, investing
cash to acquire businesses, and making other strategic investments.
Thus, a key assumption underlying free cash flow is that the
company will be able to refinance its existing debt. Because of
this assumption, free cash flow is not a measure that should be
relied upon to represent the residual cash flow available for
discretionary expenditures. 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 uses free cash flow as a performance
measure in evaluating management.
Reportable Segment Results
The company has three reportable segments. The company evaluates
the performance of its segments based on their sales, segment
operating income and segment 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,
gains or losses related to business divestitures and certain other
items that are excluded by management for purposes of evaluating
the operating performance of the company’s business segments.
Electronic
Systems
Fourth
Quarter Ended Year Ended Dec. 31, Increase/
($ in
millions) 2016 2015 Increase
2016 2015 (decrease)
Net sales $
1,332 $ 1,217 9.4 % $
4,219 $ 4,269 (1.2)
% Operating income $
179 $ 137 30.7 % $
518 $ 489 5.9
% Operating margin
13.4 % 11.3 %
210 bpts
12.3 % 11.5 %
80 bpts
Fourth Quarter: Electronic Systems net sales for the 2016 fourth
quarter increased by $115 million, or 9%, compared to the 2015
fourth quarter. Organic sales increased by $91 million, or 7%,
compared to the 2015 fourth quarter. Organic sales exclude $27
million of sales increases related to business acquisitions and $3
million of sales declines related to business divestitures. Sales
increased by: (1) $39 million for Aviation Products & Security
due to deliveries of airport security screening systems to the U.S.
Transportation Security Administration (TSA) and foreign customers,
and commercial aviation recorders products, (2) $27 million for
Power & Propulsion Systems primarily due to higher volume for
the Ship-to-Shore Connector and Hybrid Electric Drive contracts and
the timing of deliveries for power conversion and distribution
systems to the U.S. Navy, (3) $14 million for Precision Engagement
& Training due to delivery of civil aviation simulation and
training devices to international airline customers partially
offset by lower simulation and training services to the U.S. Air
Force as contracts near completion and (4) $11 million for Warrior
Systems primarily driven by a lower EoTech return allowance
recorded in the 2016 fourth quarter compared to the 2015 fourth
quarter.
Electronic Systems operating income for the 2016 fourth quarter
increased by $42 million, or 31%, compared to the 2015 fourth
quarter. Operating margin increased by 210 basis points to 13.4%.
Operating margin increased by: (1) 130 basis points due to a lower
EoTech return allowance recorded in the 2016 fourth quarter
compared to the 2015 fourth quarter of $18 million, (2) 50 basis
points primarily for improved contract performance and (3) 30 basis
points due to lower pension expense of $4 million.
Full Year: Electronic Systems net sales for the year ended
December 31, 2016 decreased by $50 million, or 1%, compared to the
year ended December 31, 2015. Organic sales increased by $81
million, or 2%, compared to the year ended December 31, 2015.
Organic sales exclude $209 million of sales declines related to
business divestitures and $78 million of sales increases related to
business acquisitions. Sales increased by: (1) $42 million for
Aviation Products & Security due to: (i) deliveries of airport
security screening systems to international customers and
commercial aviation recorders products and (ii) higher volume for
overhaul and repair services for cockpit display products to the
U.S. Air Force and a new commercial cockpit control/display unit
product, (2) $21 million for Power & Propulsion Systems
primarily due to higher volume for Hybrid Electric Drive contracts,
and power conversion and distribution systems to the U.S. Navy and
an allied foreign naval customer and (3) $18 million primarily for
Sensor Systems due to increased deliveries of infrared detection
and space electronics products to the U.S. Air Force and higher
volume for photonics masts products to the U.S. Navy.
Electronic Systems operating income for the year ended December
31, 2016 increased by $29 million, or 6%, compared to the year
ended December 31, 2015. Operating margin increased by 80 basis
points to 12.3%. Operating margin increased by 40 basis points
primarily due to higher margins related to acquisitions and
divestitures and 40 basis points due to lower pension expense of
$15 million.
Aerospace Systems
Fourth Quarter Ended Increase/
Year Ended Dec.
31, ($ in millions) 2016 2015 (decrease)
2016 2015 Increase Net sales $
1,075 $ 1,069 0.6 % $
4,240 $ 4,156 2.0 % Operating income $
57 $ 61 (6.6)
% $
289 $ 205 41.0 % Operating margin
5.3 % 5.7 % (40) bpts
6.8 % 4.9 % 190 bpts
Fourth Quarter: Aerospace Systems net sales for the 2016 fourth
quarter increased by $6 million, or 1%, compared to the 2015 fourth
quarter. Sales increased $31 million for Vertex Aerospace and $1
million for ISR Systems, partially offset by a sales decrease of
$26 million for Aircraft Systems. Sales increased for Vertex
Aerospace primarily due to higher volume for U.S. Navy training
aircraft and the U.S. Army C-12 contract. At ISR Systems, higher
volume for special mission aircraft for the U.S. Government was
substantially offset by lower volume 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. Sales
decreased for Aircraft Systems primarily due to lower volume for
international aircraft modifications as contracts near
completion.
Aerospace Systems operating income for the 2016 fourth quarter
decreased by $4 million, or 7%, compared to the 2015 fourth
quarter. Operating margin decreased by 40 basis points to 5.3%.
Operating margin decreased 60 basis points primarily due to sales
mix changes at ISR Systems partially offset by lower pension
expense of $2 million, which increased operating margin by 20 basis
points.
Full Year: Aerospace Systems net sales for the year ended
December 31, 2016 increased by $84 million, or 2%, compared to the
year ended December 31, 2015. Sales increased $66 million for
Vertex Aerospace and $36 million for Aircraft Systems, partially
offset by an $18 million decrease for ISR Systems. Sales increased
for Vertex Aerospace primarily due to higher volume and
pre-production activities for U.S. Navy training aircraft and the
U.S. Army C-12 contract. Sales increased for Aircraft Systems
primarily due to unfavorable contract performance adjustments in
the year ended December 31, 2015 that did not recur in the year
ended December 31, 2016 on international head-of-state aircraft
modification contracts. Sales decreased for ISR Systems by: (1)
$148 million for large ISR aircraft systems for foreign military
customers as contracts near completion and (2) $91 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
from Afghanistan. These decreases for ISR Systems were partially
offset by increases of: (1) $107 million primarily due to the
procurement and delivery of two business jets to foreign military
customers in the 2016 second quarter, (2) $74 million due to higher
volume for special mission aircraft and large ISR aircraft systems
primarily for the U.S. Government and (3) $40 million due to higher
volume for small ISR aircraft systems primarily for the U.S.
Army.
Aerospace Systems operating income for the year ended December
31, 2016 increased by $84 million, or 41%, compared to the year
ended December 31, 2015. Operating margin increased by 190 basis
points to 6.8%. Operating margin increased by: (1) 170 basis points
primarily due to net aggregate unfavorable contract performance
adjustments in the year ended December 31, 2015, which included
$101 million of cost growth on international head-of-state aircraft
modification contracts that did not recur in the year ended
December 31, 2016, (2) 40 basis points due to improved performance
on the Army C-12 contract due to better terms on the new contract
which began August 1, 2015 and (3) 40 basis points due to lower
pension expense of $17 million. These increases were partially
offset by a decrease of 60 basis points primarily due to sales mix
changes at ISR Systems.
Communication Systems
Fourth Quarter Ended Increase/
Year Ended
Dec. 31, ($ in millions) 2016 2015 (decrease)
2016 2015 Increase Net sales $
582 $ 585 (0.5) % $
2,052 $ 2,041 0.5 % Operating income $
58 $ 57 1.8 %
$
201 $ 196 2.6 % Operating margin
10.0 % 9.7 % 30 bpts
9.8 % 9.6 % 20 bpts
Fourth Quarter: Communication Systems net sales for the 2016
fourth quarter decreased by $3 million, or 1%, compared to the 2015
fourth quarter. Organic sales decreased by $6 million, or 1%,
compared to the 2015 fourth quarter. Organic sales exclude $3
million of sales increases related to business acquisitions. The
decrease was due to: (1) $43 million in the Tactical Satcom sector
related to the completion of a satellite communications (Satcom)
land terminals contract for the Australian Defence Force (ADF) in
the second quarter of 2016 and (2) $22 million in the Space &
Power Systems sector due to reduced demand for power devices for
commercial satellites. These decreases were largely offset by
increases of $44 million in the Broadband Communications Systems
sector due to increased volume and deliveries to the U.S.
Department of Defense (DoD) of secure networked communication
systems and $15 million due to increased volume and deliveries of
mobile and ground-based Satcom systems for the U.S. military in the
Tactical Satcom sector.
Communication Systems operating income for the 2016 fourth
quarter increased by $1 million, or 2%, compared to the 2015 fourth
quarter. Operating margin for the 2016 fourth quarter increased by
30 basis points to 10.0% as compared to the 2015 fourth quarter.
Operating margin increased by 170 basis points due to improved
contract performance, primarily in the Broadband Communication
Systems sector and 50 basis points due to lower pension expense of
$3 million. These increases were partially offset by 190 basis
points primarily due to lower volume and sales mix changes.
Full Year: Communication Systems net sales for the year ended
December 31, 2016 increased by $11 million, or 1%, compared to the
year ended December 31, 2015. Organic sales decreased by $4
million, or 0.2%, compared to the year ended December 31, 2015.
Organic sales exclude $15 million of sales increases related to
business acquisitions. The decrease was due to: (1) $88 million in
the Space & Power Systems sector, primarily due to reduced
demand for power devices for commercial satellites and (2) $64
million in the Tactical Satcom sector due to fewer deliveries on a
Satcom land terminals contract for the ADF, which was completed in
the second quarter of 2016. These decreases were largely offset by
increases of $109 million in the Broadband Communication Systems
sector primarily due to increased volume and deliveries of secure
networked communication systems for the DoD and $39 million
primarily for increased volume and deliveries to the DoD of mobile
and ground-based Satcom systems for the U.S. military in the
Tactical Satcom sector.
Communication Systems operating income for the year ended
December 31, 2016 increased by $5 million, or 3%, compared to the
year ended December 31, 2015. Operating margin increased by 20
basis points to 9.8%. Operating margin increased by 60 basis points
due to lower pension expense of $13 million, partially offset
primarily due to sales mix changes.
Financial Guidance
Based on information known as of today, the company has updated
its consolidated and segment financial guidance for the year ending
December 31, 2017, previously provided on December 6, 2016. All
financial guidance amounts are estimates subject to change in the
future, including as a result of matters discussed under the
“Forward-Looking Statements” cautionary language beginning on page
9. The company undertakes no duty to update its guidance.
Consolidated 2017 Financial Guidance ($ in
millions, except per share data)
Prior Guidance
Current Guidance
(December 6, 2016) Net sales
$10,625 to $10,825 $10,475 to
$10,675 Segment operating margin
10.3% 10.0% Interest
expense and other(1)
$158 $157 Effective tax rate
27.2% 27.2% Minority interest expense(2)
$15 $15
Diluted shares
79.3 78.3 Diluted EPS
$8.40 to $8.60
$8.15 to $8.35 Net cash from operating activities
$1,085 $1,075 Capital expenditures, net of dispositions of
property, plant and equipment
(220)
(210) Free cash flow
$865
$865 ___________________ (1) Interest
expense and other is comprised of: (i) interest expense of $172
million and (ii) interest and other income, net, of $14 million.
(2) Minority interest expense represents net income from continuing
operations attributable to non-controlling interests.
Segment 2017 Financial Guidance
($ in millions)
Current Guidance Prior Guidance
(December 6, 2016)
Net
Sales:
Electronic Systems
$4,475 to $4,575 $4,375 to $4,475
Aerospace Systems
$4,025 to $4,125 $4,025 to $4,125
Communication Systems
$2,075 to $2,175 $2,025 to $2,125
Operating
Margins:
Electronic Systems(3)
13.0% to 13.2% 12.8% to 13.0%
Aerospace Systems
6.9% to 7.1% 6.7% to 6.9% Communication
Systems
10.5% to 10.7% 10.2% to 10.4%
___________________
(3) As previously disclosed, effective
March 1, 2017, the Electronic Systems segment will be realigned
into two separate segments named (1) ElectronicSystems and (2)
Sensor Systems. The net sales and operating margin 2017 guidance
for each of the new Electronic Systems and Sensor Systemssegments
are presented below.
Net Sales Operating Margin Electronic Systems
$2,950 to
$3,050 13.2% to 13.4% Sensor Systems
$1,475 to $1,575
12.6% to 12.8% The recasted historical 2015 and 2016
financial data for the new Electronic Systems and Sensor Systems
segments is presented on Table E.
The revisions to our Current Guidance compared to our Prior
Guidance primarily include:
- An increase in estimated sales for
Electronic Systems primarily related to the Implant Sciences
business acquisition completed on January 5, 2017;
- An increase in estimated sales for
Communication Systems primarily for broadband communication systems
due to higher expected DoD sales;
- An increase in consolidated and segment
operating margin due to lower expected pension expense of $29
million ($9 million for Electronic Systems, $10 million for
Aerospace Systems and $10 million for Communication Systems);
and
- An increase in diluted shares
outstanding due to a shift of cash deployment from share
repurchases to pay for the acquisition of Implant Sciences.
The current guidance 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.
Additional financial information regarding the 2016 fourth
quarter results and full year 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, January 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 may access the conference call live over the Internet
at the company’s website at:
http://www.L3T.com
Please allow 15 minutes prior to the call to visit our website
to download and install any necessary audio software. The archived
version of the call may be accessed at our website or by dialing
(800) 585-8367/ passcode: 51741658 (for domestic callers) or (404)
537-3406/passcode: 51741658 (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 and electronic systems and products
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; global economic uncertainty; 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; our ability to predict the level of
participation in and the related costs of our voluntary return
program for certain EoTech holographic weapons sight products, and
our ability to change and terminate the voluntary return program at
our discretion; 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,
2015 and in the quarterly report on Form 10-Q for the quarterly
period ended September 23, 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) Fourth Quarter Ended Year
Ended Dec. 31, 2016 2015
2016 2015
Net
sales $ 2,989 $ 2,871
$ 10,511 $
10,466
Cost of sales (2,695) (2,616)
(9,503)
(9,576)
Loss related to business divestitures(a)
- (2)
- (31)
Goodwill impairment charges
(b) - (349)
-
(384)
Operating income (loss) 294 (96)
1,008
475
Interest expense (44) (45)
(169) (169)
Interest and other income, net 3 6
18 17
Debt retirement charge (2) (1)
(7) (1)
Income (loss) from continuing operations
before income taxes 251 (136)
850 322
(Provision) benefit for income taxes (59)
80
(189) (25)
Income (loss) from
continuing operations 192 (56)
661 297
(Loss)
income from discontinued operations, net of income
tax(c) - (106)
63
(522)
Net income (loss) 192 (162)
724
(225)
Net income attributable to noncontrolling interests
(4) (4)
(14) (15)
Net
income (loss) attributable to L3 $ 188 $ (166)
$ 710 $ (240)
Basic earnings (loss) per
share attributable to L3’s common shareholders: Continuing
operations $ 2.43 $ (0.76)
$ 8.36 $
3.49
Discontinued operations - (1.35)
0.81 (6.46)
Basic earnings (loss) per
share $ 2.43 $ (2.11)
$ 9.17 $
(2.97)
Diluted earnings (loss) per share attributable to
L3's common shareholders: Continuing operations $
2.38 $ (0.76)
$ 8.21 $ 3.44
Discontinued
operations - (1.35)
0.80
(6.37)
Diluted earnings (loss) per share $
2.38 $ (2.11)
$ 9.01 $ (2.93)
L3’s
weighted average common shares outstanding: Basic
77.3 78.5
77.4 80.7
Diluted 78.9 78.5 (d)
78.8 81.9 ______________________ (a) The loss
related to business divestitures for the 2015 fourth quarter
includes a $2 million loss on the divestiture of Klein Associates,
Inc. The loss related to the business divestitures for the year
ended December 31, 2015 includes a $17 million loss related to the
divestiture of Marine Systems International, an $8 million loss on
the divestiture of the Tinsley Product Line, a $4 million loss on
the divestiture of Broadcast Sports, Inc. and a $2 million loss on
the divestiture of Klein Associates, Inc. (b) The impairment charge
for the 2015 fourth quarter represents non-cash goodwill impairment
charges due to a decline in the estimated fair value of the Vertex
Aerospace reporting unit of $338 million and $11 million due to the
re-allocation of goodwill of the business retained by L3 in
connection with the sale of the National Security Solutions
business. The impairment charge for the year ended December 31,
2015 represents non-cash goodwill impairment charges due to a
decline in the estimated fair value of the Vertex Aerospace
reporting unit of $338 million and $46 million due to the
re-allocation of goodwill of the business retained by L3 in
connection with the sale of the National Security Solutions
business. (c) Income from discontinued operations, net of income
taxes for the year ended December 31, 2016 includes an after-tax
gain of $64 million on the sale of the National Security Solutions
business. (d) Due to a loss for the 2015 fourth quarter, zero
incremental weighted average common shares are included because the
effect would be antidilutive.
Table
B
L3 TECHNOLOGIES, INC. UNAUDITED SELECT FINANCIAL
DATA (in millions) Fourth Quarter Ended
Year Ended Dec. 31, 2016 2015
2016 2015
Segment operating
data
Net sales: Electronic Systems $ 1,332 $
1,217
$ 4,219 $ 4,269
Aerospace Systems
1,075 1,069
4,240 4,156
Communication Systems
582 585
2,052 2,041
Total $ 2,989 $ 2,871
$ 10,511 $
10,466
Operating income: Electronic Systems $
179 $ 137
$ 518 $ 489
Aerospace Systems
57 61
289 205
Communication Systems
58 57
201 196
Total
$ 294 $ 255
$ 1,008 $ 890
Operating
margin: Electronic Systems 13.4 % 11.3 %
12.3 % 11.5
Aerospace Systems 5.3
% 5.7 %
6.8 % 4.9
Communication Systems
10.0 % 9.7 %
9.8 % 9.6
Total
9.8 % 8.9 %
9.6 % 8.5
Depreciation
and amortization: Electronic Systems $ 27
$ 29
$ 105 $ 110
Aerospace Systems 14
13
54 50
Communication Systems 12
13
47 50
Total $
53 $ 55
$ 206 $ 210
Funded order
data
Electronic Systems $ 1,521 $ 1,038
$
4,784 $ 4,137
Aerospace Systems 1,505 955
4,243 3,569
Communication Systems 551
568
1,965 2,156
Total $
3,577 $ 2,561
$ 10,992 $ 9,862
Dec.
31, Dec. 31,
2016 2015
Period end
data
Funded backlog
$ 8,896 $ 8,423
Table
C
L3 TECHNOLOGIES, INC. UNAUDITED PRELIMINARY
CONDENSED CONSOLIDATED BALANCE SHEETS (in
millions) December 31, December 31,
2016
2015
ASSETS Cash and cash equivalents $
363 $ 207
Billed receivables, net 731 746
Contracts in process 2,057 2,081
Inventories
330 333
Other current assets 218 201
Assets
of discontinued operations — 664
Total current
assets 3,699 4,232
Property, plant and
equipment, net 1,121 1,097
Goodwill 6,572
6,281
Identifiable intangible assets 238 199
Deferred income taxes 5 3
Other assets
242 255
Total assets $ 11,877 $
12,067
LIABILITIES AND EQUITY Current
portion of long-term debt $ — $ 499
Accounts payable,
trade 299 297
Accrued employment costs 516
504
Accrued expenses 380 390
Advance payments and
billings in excess of costs incurred 492 562
Income
taxes 11 13
Other current liabilities 432
394
Liabilities of discontinued operations —
220
Total current liabilities 2,130
2,879
Pension and postretirement benefits 1,177 1,047
Deferred income taxes 263 219
Other
liabilities 366 368
Long-term debt
3,320 3,125
Total liabilities
7,256 7,638
Shareholders’ equity 4,550
4,355
Noncontrolling interests 71 74
Total equity 4,621 4,429
Total
liabilities and equity $ 11,877 $ 12,067
Table
D
L3 TECHNOLOGIES, INC. UNAUDITED PRELIMINARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in
millions) Year Ended Dec. 31, 2016 2015
Operating
activities
Net income (loss) $ 724 $ (225)
Less:
(Income) loss from discontinued operations, net of tax
(63) 522
Income from continuing operations
661 297
Depreciation of property, plant and equipment
162 166
Amortization of intangibles and other assets
44 44
Deferred income tax provision (benefit)
56 (66)
Stock-based employee compensation expense
49 46
Contributions to employee savings plans in L3’s
common stock 113 110
Goodwill impairment charges
- 384
Amortization of pension and postretirement benefit
plans net loss and prior service cost 48 67
Amortization of bond discounts and deferred debt issue costs
(included in interest expense) 8 8
Loss related to
business divestitures - 31
Other non-cash items
12 (3)
Changes in operating assets and liabilities,
excluding amounts from acquisitions and divestitures and
discontinued operations: Billed receivables 30
50
Contracts in process 12 32
Inventories
22 (38)
Other assets 29 (27)
Accounts
payable, trade 4 (32)
Accrued employment costs
9 34
Accrued expenses (11) 14
Advance
payments and billings in excess of costs incurred (69)
(6)
Income taxes 21 (33)
Other current
liabilities 18 (2)
Pension and postretirement
benefits (57) (8)
All other operating activities
(64) 1
Net cash from operating activities
from continuing operations 1,097 1,069
Investing
activities
Business acquisitions, net of cash acquired (388)
(320)
Proceeds from the sale of businesses, net of closing date
cash balances 561 318
Capital expenditures
(216) (197)
Dispositions of property, plant and
equipment 21 3
Other investing activities
6 4
Net cash used in investing activities from
continuing operations (16) (192)
Financing
activities
Proceeds from sale of senior notes 547 -
Repurchase of senior notes (856) (297)
Borrowings
under revolving credit facility 819 1,194
Repayments
of borrowings under revolving credit facility (819)
(1,194)
Common stock repurchased (373) (740)
Dividends paid on L3’s common stock (220) (214)
Proceeds from exercise of stock options 53 48
Proceeds from employee stock purchase plan 31 34
Debt issue costs (10) -
Repurchases of common
stock to satisfy tax withholding obligations (21) (33)
Other financing activities (7) (3)
Net cash used in financing activities from continuing
operations (856) (1,205)
Effect of
foreign currency exchange rate changes on cash and cash
equivalents (13) (19)
Net cash (used in) from
discontinued operations: Operating activities
(56) 56
Investing activities -
(5)
Net cash (used in) from discontinued operations
(56) 51
Change in cash balance in assets held for
sale - 61
Net increase (decrease) in cash and cash
equivalents 156 (235)
Cash and cash equivalents,
beginning of the period 207 442
Cash
and cash equivalents, end of the period $ 363 $
207
Table
E
L3 TECHNOLOGIES, INC. UNAUDITED HISTORICAL RECAST
SEGMENT DATA
(in millions)
Year EndedDec. 31, 2015
Q1 2016 Q2 2016 Q3 2016 Q4 2016
Year Ended Dec. 31, 2016
Segment operating
data
Net sales: Electronic Systems $ 2,823 $ 593 $ 662 $
635 $ 861 $ 2,751
Sensor Systems 1,446 284
359 354 471 1,468
Total $ 4,269
$ 877 $ 1,021 $ 989 $ 1,332 $ 4,219
Operating income:
Electronic Systems $ 345 $ 85 $ 83 $ 88 $ 111 $ 367
Sensor Systems 144 10 42 31
68 151
Total $ 489 $ 95 $ 125 $ 119 $ 179 $
518
Operating margin: Electronic Systems 12.2% 14.3%
12.5% 13.9% 12.9% 13.3%
Sensor Systems 10.0%
3.5% 11.7% 8.8% 14.4% 10.3%
Total 11.5% 10.8% 12.2% 12.0%
13.4% 12.3%
Depreciation and amortization:
Electronic Systems $ 59 $ 14 $ 16 $ 15 $ 15 $ 60
Sensor
Systems 51 11 11 11 12
45
Total $ 110 $ 25 $ 27 $ 26 $ 27 $ 105
Funded order
data
Electronic Systems $ 2,720 $ 668 $ 556 $ 910 $ 821 $ 2,955
Sensor Systems 1,417 289 373 467
700 1,829
Total $ 4,137 $ 957 $ 929 $ 1,377 $
1,521 $ 4,784
Table
F
L3 TECHNOLOGIES, INC. NON-GAAP FINANCIAL
MEASURES (in millions, except per share amounts)
Fourth Quarter Ended Year Ended Dec. 31,
2016 2015 2016 2015 Diluted earnings
(loss) per share from continuing operations attributable to
L3's $ 2.38 $ (0.76)
$ 8.21 $ 3.44
common stockholders EPS impact of loss on business
divestitures(1) ― 0.02 ― 0.25
EPS impact of goodwill
impairment charges(2) ― 2.93 ― 3.22
Dilutive impact
of common share equivalents(3) ― (0.03)
― ―
Adjusted diluted EPS from continuing
operations(4) $ 2.38 $ 2.16
$
8.21 $ 6.91
Net income (loss) from continuing
operations attributable to L3 $ 188 $ (60)
$ 647 $ 282
Loss on business
divestitures(1) ― 2 ― 20
Goodwill impairment
charges(2) ― 230 ― 264
Adjusted net income from continuing operations attributable to
L3(4) $ 188 $ 172
$ 647 $
566 ______________________ (1) Loss on business divestitures
$ (2) $ (31) Tax benefit ― 11 After-tax impact (2)
(20) Diluted weighted average common shares outstanding 78.5
81.9 Per share impact(5) $ (0.02) $ (0.25) (2)
Goodwill impairment charges $ (349) $ (384) Tax benefit 119
120 After-tax impact (230) (264) Diluted weighted average
common shares outstanding 78.5 81.9 Per share impact
$ (2.93) $ (3.22) (3) The dilutive impact of common
share equivalents represents an increase in the diluted weighted
average common shares outstanding of 1.2 million shares from 78.5
million to 79.7 million. (4) Adjusted diluted EPS is diluted
EPS attributable to L3's common stockholders, excluding the charges
or credits relating to business divestitures and non-cash goodwill
impairment charges. Adjusted net income attributable to L3 is net
income attributable to L3, excluding the charges or credits
relating to business divestitures and non-cash goodwill impairment
charges. 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 charges or
credits relating to business divestitures and non-cash goodwill
impairment charges affect the comparability of the results of
operations for 2015 to the results of operations for 2016. The
company also believes that disclosing net income and diluted EPS
excluding the charges or credits relating to business divestitures
and non-cash goodwill impairment charges will allow investors to
more easily compare the 2016 results to the 2015 results. However,
these measures may not be defined or calculated by other companies
in the same manner. (5) Amounts may not calculate directly
due to rounding.
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