Press Release

• Diluted earnings per share of $2.12
• Net sales increased 5% to $3.8 billion
• Net cash from operating activities of $450 million
• Updates financial guidance for 2009
• Provides initial financial guidance for 2010

NEW YORK--(BUSINESS WIRE)--Oct. 27, 2009-- L-3 Communications Holdings, Inc. (NYSE: LLL) today reported diluted earnings per share (diluted EPS) of $2.12 for the quarter ended Sept. 25, 2009 (2009 third quarter), compared to $1.70⁽¹⁾ for the quarter ended Sept. 26, 2008 (2008 third quarter). The 2009 third quarter included a tax benefit of $0.22 for a net reversal of amounts previously accrued related to tax years for which the statute of limitations has expired. Net sales increased 5% to $3.8 billion compared to $3.7 billion for the 2008 third quarter.

On October 2, 2009, the company successfully completed a $1 billion offering of 5.20% senior notes, its first investment grade rated bond issue. A portion of the net proceeds from the offering were used to repay the company’s outstanding $650 million term loan and the remaining net proceeds, together with cash on hand, will be used to redeem the company’s outstanding $750 million 7 ⅝% senior subordinated notes on November 2, 2009. On October 23, 2009, the company also replaced its $1 billion senior revolving credit facility, which was due to expire on March 9, 2010, with a new $1 billion three-year senior revolving credit facility that expires on October 23, 2012.

“L-3 had a good third quarter, led by our C³ISR businesses,” said Michael T. Strianese, chairman, president and chief executive officer. “We delivered solid operating results, earnings per share and cash flow and continued to deploy the company’s cash flow to increase shareholder value by repurchasing $95 million of our common stock during the quarter and $396 million since the beginning of the year. In addition, our successful debt refinancings improve L-3’s debt maturity profile and leverage metrics and also reduce L-3’s cost of capital.”

Mr. Strianese continued, “Looking ahead, we are well positioned for shifting customer priorities and slowing U.S. Department of Defense budgets. Our focus will continue to be strong program performance, rapidly delivering innovation and value to our customers, and disciplined capital allocation.”

Consolidated Results

Third Quarter Results of Operations: For the 2009 third quarter, consolidated net sales increased 5% compared to the 2008 third quarter driven primarily by growth in the Command, Control, Communications, Intelligence, Surveillance and Reconnaissance (C³ISR) and Aircraft Modernization and Maintenance (AM&M) reportable segments. These sales increases were partially offset by a decrease in the Government Services reportable segment. The increase in consolidated net sales from acquired businesses net of divestitures⁽²⁾ was $28 million, or 0.8%.

The 2009 third quarter operating income increased by 5% compared to the 2008 third quarter. Operating income as a percentage of sales (operating margin) remained the same at 10.9% compared to the 2008 third quarter. Higher margins primarily for C³ISR and certain Specialized Products businesses were offset by higher pension expense in the 2009 third quarter compared to the 2008 third quarter. The increase in pension expense reduced operating income by $21 million ($13 million after income taxes, or $0.11 per diluted share) and reduced operating margin by 50 basis points. The pension expense increase is primarily due to the actuarial loss that we experienced in 2008 as a result of the decline in the fair value of our pension plan assets, which is amortized as a component of pension expense. See segment results below for additional discussion of segment operating margin results.

Net interest expense and other income remained the same compared to the same period last year primarily due to lower interest expense on our term loans, which are based on variable interest rates, offset by lower interest income on cash investments.

The effective tax rate for the 2009 third quarter decreased by 840 basis points compared to the same quarter last year. The decrease is primarily due to a tax benefit of $26 million, or $0.22 per diluted share, for a net reversal during the 2009 third quarter of amounts previously accrued related to tax years for which the statute of limitations has expired.

In the 2009 third quarter as compared to the 2008 third quarter, net income attributable to L-3 increased by $40 million, or 19% and diluted EPS increased by $0.42, or 25%. Diluted weighted average common shares outstanding for the 2009 third quarter compared to the 2008 third quarter declined by 4% due primarily to share repurchases of L-3 common stock made during the past year.

Year-to-Date Results of Operations: For the year-to-date period ended Sept. 25, 2009 (2009 year-to-date period), consolidated net sales increased 5% compared to the year-to-date period ended Sept. 26, 2008 (2008 year-to-date period) driven primarily by growth in the C³ISR, AM&M and Specialized Products reportable segments. These sales increases were partially offset by a decrease in the Government Services reportable segment driven primarily by lower linguist services (discussed below under the Government Services reportable segment). The increase in consolidated net sales from acquired businesses net of divestitures was $145 million, or 1%.

The 2008 year-to-date period results were impacted by three items that, in the aggregate, increased operating income for that period by $110 million and reduced interest expense by $7 million (net $71 million after income taxes, or $0.57 per diluted share). These three items are collectively referred to as the Q2 2008 Items and are comprised of:

• A gain of $133 million ($81 million after income taxes, or $0.65 per diluted share) for the reversal of a $126 million liability as a result of a June 27, 2008 decision by the U.S. Court of Appeals which vacated an adverse 2006 jury verdict and $7 million of related accrued interest (the “Litigation Gain”),
• A gain of $12 million ($7 million after income taxes, or $0.06 per diluted share) from the sale of a product line (the “Product Line Divestiture Gain”), and
• A non-cash impairment charge of $28 million ($17 million after income taxes, or $0.14 per diluted share) relating to a write-down of capitalized software development costs for a general aviation product (the “Impairment Charge”).

The 2009 year-to-date period operating income decreased by 5% compared to the 2008 year-to-date period. Operating income for the 2009 year-to-date period as compared to the 2008 year-to-date period decreased by $110 million as a result of the Q2 2008 Items and by $56 million ($34 million after income taxes, or $0.29 per diluted share) because of higher pension expense.

The 2009 year-to-date period operating margin decreased by 110 basis points to 10.6% compared to 11.7% for the 2008 year-to-date period. Excluding the Q2 2008 Items, the 2008 year-to-date period operating margin was 10.6%. Higher margins primarily for C³ISR and certain Specialized Products businesses were offset by an increase in pension expense, which reduced operating margin by 50 basis points during the 2009 year-to-date period compared to the 2008 year-to-date period. See segment results below for additional discussion of segment operating margin results.

Net interest expense and other income decreased compared to the same period last year driven by lower interest expense on our term loans partially offset by $7 million of accrued interest reversed during the 2008 year-to-date period in connection with the Litigation Gain and lower interest income on cash investments.

The effective tax rate for the 2009 year-to-date period decreased by 350 basis points compared to the same period last year. Excluding the Q2 2008 Items, the effective tax rate for the 2009 year-to-date period would have decreased by 320 basis points. The decrease is primarily due to a tax benefit of $26 million, or $0.22 per diluted share, for a net reversal during the 2009 third quarter of amounts previously accrued related to tax years for which the statue of limitations has expired.

Net income attributable to L-3 was $674 million for the 2009 year-to-date period and the 2008 year-to-date period. Diluted EPS increased by $0.26, or 5% . Diluted weighted average common shares outstanding for the 2009 year-to-date period compared to the 2008 year-to-date period declined by 5% primarily due to share repurchases of L-3 common stock made during the past year.

Orders: Funded orders for the 2009 third quarter decreased 15% to $3.4 billion compared to $4.0 billion from the 2008 third quarter and decreased 14% to $10.5 billion for the 2009 year-to-date period from $12.2 billion for the 2008 year-to-date period. Funded backlog decreased 6% to $10.8 billion compared to $11.6 billion at Dec. 31, 2008.

Cash flow: Net cash from operating activities was $978 million for the 2009 year-to-date period, compared to $1,031 million for the 2008 year-to-date period. Capital expenditures, net of dispositions of property, plant and equipment, was $125 million for the 2009 year-to-date period, compared to $134 million for the 2008 year-to-date period.

Segment Results
C³ISR

Third Quarter: C³ISR net sales for the 2009 third quarter increased by 21% compared to the 2008 third quarter primarily due to increased demand and new business 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 third quarter increased by 40% compared to the 2008 third quarter. Operating margin increased by 140 basis points. Higher sales volume, improved contract performance and a more favorable sales mix for airborne ISR and networked communication systems increased operating margin by 260 basis points. These increases were partially offset by an increase in pension expense of $9 million, which reduced operating margin by 120 basis points.

Year-to-Date: C³ISR net sales for the 2009 year-to-date period increased by 24% compared to the 2008 year-to-date period due to increased demand and new business from the DoD for airborne ISR and networked communication systems for manned and unmanned platforms.

C³ISR operating income for the 2009 year-to-date period increased 36% compared to the 2008 year-to-date period. Operating margin increased by 100 basis points. Higher sales volume, improved contract performance and a more favorable sales mix for airborne ISR and networked communication systems increased operating margin by 210 basis points. These increases were partially offset by an increase in pension expense of $24 million, which reduced operating margin by 110 basis points.

Government Services

Third Quarter: Government Services net sales for the 2009 third quarter decreased by 3% compared to the 2008 third quarter. Sales declined due to: (1) reduced subcontractor pass-through sales volume of $35 million related to task orders for U.S. Army systems and software engineering and sustainment (SSES) services stemming from task order renewals migrating to a different contract vehicle where L-3 is not a prime contractor, (2) lower Iraq-related linguist services of $19 million, and (3) lower volume for intelligence support for the U.S. Army and U.S. Government agencies. These decreases were partially offset by increases in information technology (IT) support services primarily for the U.S. Special Operations Command (USSOCOM) and the executive branch of the U.S. Government due to higher volume on new and existing contracts. Additionally, net sales from acquired businesses were $32 million, or 3%.

Government Services operating income for the 2009 third quarter increased by 3% compared to the 2008 third quarter. Operating margin for the 2009 third quarter increased by 60 basis points. Operating margins increased by 130 basis points primarily due to an award fee for linguist services and favorable close-outs on completed contracts, and a decline in sales of lower margin linguist and SSES services. These increases were partially offset by lower volume for intelligence support services, which decreased operating margin by 50 basis points. Acquired businesses reduced operating margin by 20 basis points.

Year-to-Date: Government Services net sales for the 2009 year-to-date period decreased by 5% compared to the 2008 year-to-date period. Sales declined due to: (1) lower Iraq-related linguist services of $222 million, (2) timing of deliveries for engineering support services, and (3) lower volume for intelligence support services for the U.S. Army and U.S. Government agencies. These decreases were partially offset by increases for IT support services for USSOCOM and the executive branch of the U.S. Government due to higher volume on new and existing contracts and net sales from acquired businesses of $82 million, or 3%.

Government Services operating income for the 2009 year-to-date period decreased by 9% compared to the 2008 year-to-date period. Operating margin for the 2009 year-to-date period decreased by 30 basis points. Lower margins on select contract renewals during the 2009 year-to-date period and higher profit margins on certain fixed price contracts in the 2008 year-to-date period reduced operating margin by 60 basis points. Acquired businesses also reduced operating margin by 10 basis points. These decreases were partially offset by a decline in sales of lower margin linguist services, which increased operating margin by 40 basis points.

AM&M

Third Quarter: AM&M net sales for the 2009 third quarter increased by 17% compared to the 2008 third quarter. The increase in sales is due to: (1) new contracts and higher demand from existing contracts for systems field support services for U.S. Army and U.S. Air Force rotary and fixed wing training aircraft and U.S. Special Operations Forces logistics support, and (2) higher sales for Joint Cargo Aircraft (JCA). These increases were partially offset by sales volume declines for contract field services (CFS) as fewer task orders were received because of more competitors on the current contract that began on October 1, 2008.

AM&M operating income for the 2009 third quarter decreased by 5% compared to the 2008 third quarter. Operating margin decreased by 210 basis points. The decrease is due to: (1) a change in sales mix, primarily higher sales volume for lower margin JCA and system field support services, which reduced operating margin by 130 basis points, and (2) lower sales volume and sales prices for CFS, which reduced operating margin by 30 basis points. In addition, the 2008 third quarter included approximately $3 million of income to adjust litigation accruals, which reduced operating margin by 50 basis points.

Year-to-Date: AM&M net sales for the 2009 year-to-date period increased by 8% compared to the 2008 year-to-date period. Higher sales for systems field support services and JCA were partially offset by sales declines for CFS.

AM&M operating income for the 2009 year-to-date period increased 3% compared to the 2008 year-to-date period. Operating margin decreased by 30 basis points. Sales volume declines for CFS reduced operating margin by 30 basis points and margins declined by 50 basis points primarily due to cost increases on international aircraft modernization contracts. In addition, the 2008 year-to-date period included $10 million of charges to adjust litigation accruals, which increased operating margin by 50 basis points.

Specialized Products

Third Quarter: Specialized Products net sales for the 2009 third quarter decreased by 2% compared to the 2008 third quarter reflecting lower sales volume primarily for: (1) naval power & control systems and aviation products as a result of reduced demand from commercial customers caused by the global economic recession, (2) training & simulation, precision engagement and displays due to the timing of certain deliveries and delays in receipt of expected orders, and (3) combat propulsion systems due to a reduction in DoD funding for the Bradley fighting vehicle. These decreases were partially offset by increases for: (1) microwave products primarily due to deliveries of mobile and ground based satellite communications systems and spare parts for the U.S. military and higher sales volume for tactical signal intelligence systems, and (2) Electro-Optic/Infrared (EO/IR) products primarily due to demand and deliveries on new and existing contracts.

Specialized Products operating income for the 2009 third quarter decreased by 2% as compared to the 2008 third quarter. Operating margin remained the same as compared to the 2008 third quarter. Operating margin increased by 110 basis points primarily due to higher sales volume, favorable sales mix and improved contract performance for EO/IR products and improved contract performance for precision engagement. The 2008 third quarter also included a charge of $4 million to adjust certain litigation accruals, which increased operating margin by 30 basis points. These increases were offset by: (1) an increase in pension expense of $11 million, which reduced operating margin by 80 basis points, (2) lower sales volume for training and simulation due to timing of deliveries, which reduced operating margin by 50 basis points, and (3) acquired businesses, which decreased operating margin by 10 basis points.

Year-to-Date: Specialized Products net sales for the 2009 year-to-date period increased by 3% compared to the 2008 year-to-date period reflecting higher sales volume primarily for: (1) EO/IR products and microwave products driven by trends similar to the 2009 third quarter, (2) training & simulation primarily related to new and existing contracts, and (3) combat propulsion systems mostly from continued performance on existing contracts. The increase in net sales from acquired businesses, net of divestitures, was $64 million, or 2%, 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. These increases were partially offset by a decrease primarily for naval power & control systems and aviation products, displays and precision engagement products driven by trends similar to the 2009 third quarter.

Specialized Products operating income for the 2009 year-to-date period increased by 5% as compared to the 2008 year-to-date period. Operating margin of 12.0% for the 2009 year-to-date period increased by 30 basis points. Excluding the Product Line Divestiture Gain and non-cash Impairment Charge, operating margin for the 2009 year-to-date period of 12.0% decreased by 10 basis points compared to the 2008 year-to-date period. An increase in pension expense of $31 million reduced operating margin by 80 basis points and lower sales volume for aviation products reduced operating margin by 30 basis points. These decreases were partially offset by higher sales volume and favorable sales mix primarily for EO/IR products and improved contract performance for precision engagement, which increased operating margin by 80 basis points, and acquired businesses, which increased operating margin by 10 basis points. In addition, the 2008 year-to-date period included $6 million of charges to adjust litigation accruals, which increased operating margin by 10 basis points.

Financial Guidance

Based on information known as of today, the company revised its consolidated and segment financial guidance for the year ending Dec. 31, 2009, and has provided its initial financial guidance for the year ending Dec. 31, 2010, as presented in the tables below. All financial guidance amounts are estimates subject to revisions in the future for matters discussed under the “Forward-Looking Statements” cautionary language on the next page, and the company undertakes no duty to update its guidance.

The 2009 financial guidance includes approximately $170 million of estimated sales growth for the full year from business acquisitions, net of divestitures.

The company’s 2010 financial guidance assumes the following:

• Sales for the Special Operations Forces Support Activity (SOFSA) contract through Feb. 28, 2010, the end of the current contract’s performance period. If the SOFSA contract were retained for all of 2010, the additional 10 months could add approximately $400 million of sales to our 2010 sales guidance,
• Pension expense essentially the same as 2009, which is expected to be approximately $169 million. The 2010 pension expense assumes a lower discount rate compared to 2009, offset by better than expected asset returns for 2009. The company will finalize these pension plan assumptions as of Dec. 31, 2009, and
• An expectation that the U.S. Federal research and experimental (R&E) tax credit that expires on Dec. 31, 2009, will be extended for the year ended Dec. 31, 2010. The benefit of the R&E credit on the 2010 tax rate is approximately $0.14 per diluted share.

Additional financial information regarding the 2009 third quarter results and the updated 2009 financial guidance and 2010 initial financial guidance 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, Tuesday, October 27, 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: 25485585), 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 over 66,000 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, including information regarding the Company’s 2009 and 2010 financial outlook 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; the DoD’s contractor support services in-sourcing initiative; 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 as well as any material updates to these factors in our future filings.

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 E and F (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.

Source: L-3 Communications Holdings, Inc.

L-3 Communications Holdings, Inc.
Corporate Communications
212-697-1111