L-3 Communications Holdings Inc.
Annual Report 2011

Plain-text annual report

Bowne Communications bow121289a_Cov_p1 Proof 2 L - 3 2 0 1 1 A N N U A L R E P O R T sItuatIonalaWareness L - 3 C O M M U N I C A T I O N S 6 0 0 T H I R D A V E N U E N E W Y O R K , N Y 1 0 0 1 6 L-3 2011 ANNUAL REPORT Black Cyan Magenta Yellow PMS 295 PMS 643 Bowne Communications bow121289a_Cov_p1 Proof 2 L - 3 2 0 1 1 A N N U A L R E P O R T sItuatIonalaWareness L - 3 C O M M U N I C A T I O N S 6 0 0 T H I R D A V E N U E N E W Y O R K , N Y 1 0 0 1 6 L-3 2011 ANNUAL REPORT Black Cyan Magenta Yellow PMS 295 PMS 643 Bowne Communications bow121289a_Cov_p2 Proof 3 seleCt fInanCIal HIgHlIgHts C o rp o r at e In f o rm at Io n SUCCESS IN THIS ENVIRONMENT DEPENDS ON ADAPTABILITY AND KEEN SITUATIONAL AWARENESS. Situational awareness has always been critical to our customers, and L-3’s ability to adapt is integral to everything we do. Our strategy is defined by our focus on the evolving geopolitical, economic and market forces that create the landscape in which we operate. This is L-3’s strength — the ability to deliver in every environment. Cover: L-3 is the prime contractor on the C-17 Training System program, overseeing program management, training device modification, courseware development and instruction. In millions, except per share amounts For the year ended December 31, Net sales Operating income Q4 2011 and Q2 2008 Items Operating income before Items Income from continuing operations attributable to L-3 Q4 2011 and Q2 2008 Items Income from continuing operations attributable to L-3 before Items Net income attributable to L-3 (c) Diluted earnings per share from continuing operations Q4 2011 and Q2 2008 Items Diluted earnings per share from continuing operations before Items Diluted earnings per share (c) Net cash from operating activities Capital expenditures, net of dispositions Free cash flow(d) Equity 2011(a) 2010 2009 2008 (b) 2007 $15,169 $15,680 $15,615 $ 14,901 $ 13,961 1,598 1,750 1,656 43 — — 1,641 1,750 1,656 956 (28) 928 956 9.03 (0.26) 8.77 9.03 955 — 955 955 8.25 — 8.25 8.25 901 — 901 901 7.61 — 7.61 7.61 1,685 (110) 1,575 918 (71) 847 938 7.43 (0.58) 6.85 7.59 1,448 — 1,448 745 — 745 745 5.86 — 5.86 5.86 1,484 1,461 1,407 1,387 1,270 186 1,298 6,724 171 1,290 6,855 182 1,225 6,660 203 1,184 5,941 149 1,121 6,114 (a) The year ended December 31, 2011, includes: (1) a tax benefit of $78 million, or $0.74 per diluted share, for a net reversal of amounts previously accrued related to tax years for which the statutes of limitations expired, (2) a non-cash goodwill impairment charge of $43 million ($42 million after income taxes, or $0.40 per diluted share) due to a decline in the estimated fair value of the Marine Services business, and (3) $14 million ($8 million after income taxes, or $0.08 per diluted share) for L-3’s portion of an impairment charge for long-lived assets at an equity method investment (collectively the “Q4 2011 Items”). (b) The year ended December 31, 2008, includes: (1) a pre-tax gain of $133 million ($81 million after income taxes, or $0.66 per diluted share) related to 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, (2) a gain of $12 million ($7 million after income taxes, or $0.06 per diluted share) related to the sale of a product line, and (3) a non-cash impairment charge of $28 million ($17 million after income taxes, or $0.14 per diluted share) related to a write-down of capitalized software development costs for a general aviation product (collectively the “Q2 2008 Items”). (c) Net income attributable to L-3 and diluted earnings per share for the year ended December 31, 2008 includes an after-tax gain of $20 million, or $0.16 per diluted share, related to the divestiture of our 85% ownership interest in Medical Education Technologies, Inc. (d) We define “free cash flow” as net cash from operating activities, less capital expenditures, net of dispositions. Sales (In millions) $ 1 4 , 9 0 1 $ 1 3 , 9 6 1 $ 1 5 , 6 1 5 $ 1 5 , 6 8 0 $ 1 5 , 1 6 9 Operating Income Excluding items* (In millions) $ 1 , 6 5 6 $ 1 , 5 7 5 $ 1 , 4 4 8 $ 1 , 7 5 0 $ 1 , 6 4 1 Diluted EPS from continuing operations Excluding items* Free Cash Flow (In millions) $ 8 . 7 7 $ 8 . 2 5 $ 7 . 6 1 $ 1 , 1 8 4 $ 1 , 2 2 5 $ 1 , 1 2 1 $ 1 , 2 9 0 $ 1 , 2 9 8 $ 6 . 8 5 $ 5 . 8 6 07 08 09 10 11 07 08 09 10 11 07 08 09 10 11 07 08 09 10 11 CAGR 2% CAGR 3% CAGR 11% CAGR 4% *Operating income and diluted EPS for 2011 and 2008 exclude the Q4 2011 and Q2 2008 items, respectively, described above. This Summary Annual Report should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011, included in this book. Corporate Headquarters equal opportunIty employer You can contact the corporate headquarters by writing to: L-3 Communications is an equal opportunity employer and does not discriminate L-3 Communications 600 Third Avenue New York, NY 10016 on the basis of age, race, sex, sexual orientation, creed, color, national origin, ancestry, marital status, disability or any other characteristic protected by law. All employment-related decisions are based solely on business needs and relevant or by calling 212-697-1111. To send a fax, dial 212-867-5249. requisite skills related to the position. Corporate InformatIon safe Harbor statement under tHe prIvate News media, analysts, shareholders and others seeking corporate seCurItIes lItIgatIon reform aCt of 1995 information about L-3 Communications should contact corporate Except for historical information contained herein, the matters set forth in this communications at 212-697-1111. prInted materIals Annual Report are forward-looking statements. Statements 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 Printed financial and governance materials may be obtained without expressions are forward-looking statements. The forward-looking statements set charge by calling (866) INFO-LLL (866-463-6555). forth herein involve a number of risks and uncertainties that could cause actual Internet results to differ materially from any such statement, including the risks and uncertainties discussed in the Company’s “Forward-looking Statements” included You can access quarterly and annual financial information, news in the Company’s recent filings, including Forms 10-K and 10-Q, with the Securities releases and an overview of the company’s products and services and Exchange Commission. The forward-looking statements speak only as of the through the L-3 Communications website at www.L-3com.com date made, and the Company undertakes no obligation to update these forward- looking statements. For a discussion of other risks and uncertainties that could stoCk exCHange lIstIng impair our results of operations or financial condition, see Part I - Item 1A -“Risk The common stock of L-3 Communications Holdings, Inc. is traded on the Factors” and Note 19 to our audited consolidated financial statements, included in New York Stock Exchange (NYSE) under the symbol LLL. our Annual Report on Form 10-K for the year ended December 31, 2011. annual meetIng CredIts The annual meeting of shareholders will be held at 2:30 p.m. on Tuesday, Design: Froeter Design Company, Chicago. Use of DoD images featured throughout this report does not imply or constitute DoD endorsement of this organization, its products or services. © 2012 L-3 Communications Holdings, Inc. Printed in the U.S.A. April 24, 2012, at The Ritz-Carlton New York, Battery Park, Two West Street, New York, NY. sHareHolder assIstanCe If you have questions concerning your shareholder account, please contact the stock transfer agent: regular maIl Computershare Trust Company, N.A. P.O. Box 43078 Providence, RI 02940-3078 overnIgHt delIverIes 250 Royall Street Canton, MA 02021 or call 877-282-1168 (781-575-2879 from outside the United States). For the hearing impaired, the phone number is TDD: 800-952-9245. You can also contact the stock transfer agent at its website at: www.computershare.com Black Cyan Magenta Yellow PMS 295 PMS 643 Bowne Communications bow121289a_Cov_p2 Proof 3 seleCt fInanCIal HIgHlIgHts C o rp o r at e In f o rm at Io n SUCCESS IN THIS ENVIRONMENT DEPENDS ON ADAPTABILITY AND KEEN SITUATIONAL AWARENESS. Situational awareness has always been critical to our customers, and L-3’s ability to adapt is integral to everything we do. Our strategy is defined by our focus on the evolving geopolitical, economic and market forces that create the landscape in which we operate. This is L-3’s strength — the ability to deliver in every environment. Cover: L-3 is the prime contractor on the C-17 Training System program, overseeing program management, training device modification, courseware development and instruction. In millions, except per share amounts For the year ended December 31, Net sales Operating income Q4 2011 and Q2 2008 Items Operating income before Items Income from continuing operations attributable to L-3 Q4 2011 and Q2 2008 Items Income from continuing operations attributable to L-3 before Items Net income attributable to L-3 (c) Diluted earnings per share from continuing operations Q4 2011 and Q2 2008 Items Diluted earnings per share from continuing operations before Items Diluted earnings per share (c) Net cash from operating activities Capital expenditures, net of dispositions Free cash flow(d) Equity 2011(a) 2010 2009 2008 (b) 2007 $15,169 $15,680 $15,615 $ 14,901 $ 13,961 1,598 1,750 1,656 43 — — 1,641 1,750 1,656 956 (28) 928 956 9.03 (0.26) 8.77 9.03 955 — 955 955 8.25 — 8.25 8.25 901 — 901 901 7.61 — 7.61 7.61 1,685 (110) 1,575 918 (71) 847 938 7.43 (0.58) 6.85 7.59 1,448 — 1,448 745 — 745 745 5.86 — 5.86 5.86 1,484 1,461 1,407 1,387 1,270 186 1,298 6,724 171 1,290 6,855 182 1,225 6,660 203 1,184 5,941 149 1,121 6,114 (a) The year ended December 31, 2011, includes: (1) a tax benefit of $78 million, or $0.74 per diluted share, for a net reversal of amounts previously accrued related to tax years for which the statutes of limitations expired, (2) a non-cash goodwill impairment charge of $43 million ($42 million after income taxes, or $0.40 per diluted share) due to a decline in the estimated fair value of the Marine Services business, and (3) $14 million ($8 million after income taxes, or $0.08 per diluted share) for L-3’s portion of an impairment charge for long-lived assets at an equity method investment (collectively the “Q4 2011 Items”). (b) The year ended December 31, 2008, includes: (1) a pre-tax gain of $133 million ($81 million after income taxes, or $0.66 per diluted share) related to 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, (2) a gain of $12 million ($7 million after income taxes, or $0.06 per diluted share) related to the sale of a product line, and (3) a non-cash impairment charge of $28 million ($17 million after income taxes, or $0.14 per diluted share) related to a write-down of capitalized software development costs for a general aviation product (collectively the “Q2 2008 Items”). (c) Net income attributable to L-3 and diluted earnings per share for the year ended December 31, 2008 includes an after-tax gain of $20 million, or $0.16 per diluted share, related to the divestiture of our 85% ownership interest in Medical Education Technologies, Inc. (d) We define “free cash flow” as net cash from operating activities, less capital expenditures, net of dispositions. Sales (In millions) $ 1 4 , 9 0 1 $ 1 3 , 9 6 1 $ 1 5 , 6 1 5 $ 1 5 , 6 8 0 $ 1 5 , 1 6 9 Operating Income Excluding items* (In millions) $ 1 , 6 5 6 $ 1 , 5 7 5 $ 1 , 4 4 8 $ 1 , 7 5 0 $ 1 , 6 4 1 Diluted EPS from continuing operations Excluding items* Free Cash Flow (In millions) $ 8 . 7 7 $ 8 . 2 5 $ 7 . 6 1 $ 1 , 1 8 4 $ 1 , 2 2 5 $ 1 , 1 2 1 $ 1 , 2 9 0 $ 1 , 2 9 8 $ 6 . 8 5 $ 5 . 8 6 07 08 09 10 11 07 08 09 10 11 07 08 09 10 11 07 08 09 10 11 CAGR 2% CAGR 3% CAGR 11% CAGR 4% *Operating income and diluted EPS for 2011 and 2008 exclude the Q4 2011 and Q2 2008 items, respectively, described above. This Summary Annual Report should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011, included in this book. Corporate Headquarters equal opportunIty employer You can contact the corporate headquarters by writing to: L-3 Communications is an equal opportunity employer and does not discriminate L-3 Communications 600 Third Avenue New York, NY 10016 on the basis of age, race, sex, sexual orientation, creed, color, national origin, ancestry, marital status, disability or any other characteristic protected by law. All employment-related decisions are based solely on business needs and relevant or by calling 212-697-1111. To send a fax, dial 212-867-5249. requisite skills related to the position. Corporate InformatIon safe Harbor statement under tHe prIvate News media, analysts, shareholders and others seeking corporate seCurItIes lItIgatIon reform aCt of 1995 information about L-3 Communications should contact corporate Except for historical information contained herein, the matters set forth in this communications at 212-697-1111. prInted materIals Annual Report are forward-looking statements. Statements 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 Printed financial and governance materials may be obtained without expressions are forward-looking statements. The forward-looking statements set charge by calling (866) INFO-LLL (866-463-6555). forth herein involve a number of risks and uncertainties that could cause actual Internet results to differ materially from any such statement, including the risks and uncertainties discussed in the Company’s “Forward-looking Statements” included You can access quarterly and annual financial information, news in the Company’s recent filings, including Forms 10-K and 10-Q, with the Securities releases and an overview of the company’s products and services and Exchange Commission. The forward-looking statements speak only as of the through the L-3 Communications website at www.L-3com.com date made, and the Company undertakes no obligation to update these forward- looking statements. For a discussion of other risks and uncertainties that could stoCk exCHange lIstIng impair our results of operations or financial condition, see Part I - Item 1A -“Risk The common stock of L-3 Communications Holdings, Inc. is traded on the Factors” and Note 19 to our audited consolidated financial statements, included in New York Stock Exchange (NYSE) under the symbol LLL. our Annual Report on Form 10-K for the year ended December 31, 2011. annual meetIng CredIts The annual meeting of shareholders will be held at 2:30 p.m. on Tuesday, Design: Froeter Design Company, Chicago. Use of DoD images featured throughout this report does not imply or constitute DoD endorsement of this organization, its products or services. © 2012 L-3 Communications Holdings, Inc. Printed in the U.S.A. April 24, 2012, at The Ritz-Carlton New York, Battery Park, Two West Street, New York, NY. sHareHolder assIstanCe If you have questions concerning your shareholder account, please contact the stock transfer agent: regular maIl Computershare Trust Company, N.A. P.O. Box 43078 Providence, RI 02940-3078 overnIgHt delIverIes 250 Royall Street Canton, MA 02021 or call 877-282-1168 (781-575-2879 from outside the United States). For the hearing impaired, the phone number is TDD: 800-952-9245. You can also contact the stock transfer agent at its website at: www.computershare.com Black Cyan Magenta Yellow PMS 295 PMS 643 Bowne Communications bow121289b_Text_p1 Proof 2 dear fellow shareholders: L-3 delivered solid performance, innovation and program execution in 2011. We also strengthened the company’s competitiveness and enhanced shareholder value. delivering value In the midst of the challenging Department of Defense (DoD) environment, L-3 delivered record diluted earnings per share and strong free cash flow in 2011. Diluted EPS (before Q4 2011 Items of $0.26) was $8.77, up from 2010’s $8.25. The company also generated free cash flow of $1.298 billion in 2011. Other elements of our 2011 financial performance showed modest declines, as company-wide net sales in 2011 were $15.2 billion, a 3 percent decline from 2010, with growth in our Command, Control, Communications, Intelligence, Surveillance and Reconnaissance (C3ISR) business offset by declines in other L-3 segments. Operating income (before Q4 2011 Items of $43 million) was down 6 percent for the year at $1,641 million, and our book-to-bill ratio was 0.97 at year-end. We returned the majority of our free cash flow to L-3 shareholders in the form of dividends and share buybacks, increasing our dividend for the seventh consecutive year and repurchasing 13 million shares of L-3 stock. We have reduced our outstanding weighted average diluted shares by 16% over the last five years—a testament to our commit- ment to deploy cash in a disciplined manner to generate shareholder value. Reflecting confidence in L-3’s future, our board of directors authorized the repurchase of up to an additional $1.5 billion of L-3 common stock through April 30, 2013, and increased our dividend rate for 2012. We also continued to strengthen our balance sheet in 2011, improving our maturity profile and reducing interest costs on our outstanding debt. reshaping to strengthen our business Throughout 2011, we continued to review and reshape our business operations, sharpening our focus and bolstering our capabilities to maintain a competitive advantage in a constantly evolving marketplace. After completing a comprehensive assessment of our business units, on July 28, 2011, we announced our plan to spin off certain businesses from our Government Services segment to create an independent company that will be publicly traded. Under this plan, the new company will be a leader in acquisition and engineering services, training programs, and sustainment support for U.S. government operations worldwide. The new company will be named Engility, combining the words “engineering” with “agility” to express the unique combination of strengths it will bring to the marketplace. L-3 will retain the cybersecurity, enterprise information technology and intelligence solutions businesses that are also part of the Government Services segment. The Government Services segment will be renamed National Security Solutions (NSS) to better reflect its mission going forward. L-3 2011 AnnuAL RepoRt 1 Black Cyan Magenta Yellow PMS 295 PMS 574 PMS 315 PMS Cool Gray 11 Bowne Communications bow121289b_Text_p2 Proof 2 throughout our company, cross- segment collaboration is an integral part of our culture, making us more versatile and agile. This transaction will be beneficial to both L-3 and Engility, enabling the two businesses to more closely align with customer challenges and priorities in their respective markets. The separation will free Engility from organizational conflicts of interest (OCI) that constrained it within L-3. We also believe that it will enable Engility to streamline its cost structure to more effectively pursue new and existing opportunities and capture share in its addressable markets. For L-3, the spin-off will enable us to focus on technology- based solutions in areas of increasing customer need. As NSS, we will be able to better apply our resources to develop next- generation offerings and leverage complementary capabilities through cross-segment collaboration. In late 2011, we announced an agreement to acquire the Kollmorgen Electro-Optical (KEO) unit of Danaher Corporation. This acquisition will bring new customers and proprietary systems to L-3 that will broaden our capabilities, including submarine photonics systems and periscopes, ship fire control systems, and visual landing aids. KEO extends our base in the electro-optical/infrared (EO/IR) market with products that enhance L-3 content in high-priority areas such as Virginia-class submarines. This transaction exemplifies our disciplined, highly selective approach to acquisitions that enhance our core business mix at attractive prices. We also added to the strength of our board with the election of General (R) H. Hugh Shelton. As the 14th Chairman of the Joint Chiefs of Staff and former commander of the U.S. Special Operations Command, General Shelton’s broad strategic perspective on military and global affairs and wealth of leadership and experience in technology and national security make him an asset to our organization. aligned with customer priorities With the increased budget pressure on the DoD, its “force for the future” will be smaller, leaner, quick to deploy and techno- logically advanced. To that end, the DoD is terminating some programs and implementing efficiency initiatives to reduce costs. We believe that the savings will be invested in key L-3 strengths, such as C3ISR, EO/IR sensors, special operations, intelligence support and counter-terrorism. Throughout our company, cross-segment collaboration is an integral part of our culture, making us more versatile and agile. Communication and teamwork among L-3’s different businesses enhance the speed with which we apply our expertise and allocate resources to develop innovative, cost-effective solutions. In our C3ISR business, an excellent example of this is SPYDR, which leverages the integrated capabilities we showcased in the highly successful Project Liberty program. SPYDR is a platform-agnostic airborne intelligence data collection, processing, exploitation and dissemination system designed specifically for military and civilian customers who want a versatile intelligence solution at a disruptive price. While we are marketing the system to international customers as a turnkey solution, it is also generating domestic interest. C3ISR was a major driver of our 2011 results. Our best- in-class systems enabled us to hold significant market share in key areas where technical innovation and customer service are essential. We were awarded a contract to assist the U.S. Air Force (USAF) with development of next-generation data link communications. The contract includes multi-spectral RF equipment, communications waveform development and security studies for future communications systems. We also received follow-on work in networked communications systems for manned and unmanned platforms, airborne ISR logistics support and fleet management services for the DoD. As NSS, we will place greater emphasis on high-perfor- mance computing and cybersecurity, analytics, information technology and intelligence services and solutions. In October, we announced that L-3 had joined Virginia Tech as an industry partner in the Security and Software Engineering Research Center (S2ERC), established with a grant from the National Science Foundation. Our participation in the S2ERC is part of our strategy to facilitate the development of next-generation cybersecurity solutions. New business wins during 2011 included a contract to provide distributed computing management services to the U.S. Special Operations Command and a key recompetition to establish and maintain the DoD-wide intelligence infrastructure under the Joint Deployable Intelligence Support System program. We also surpassed a performance milestone as a prime contractor in support of the U.K.’s high- priority Integrated Broadcast Service program, achieving the project’s in-service date within budget and ahead of schedule. 2 L-3 2011 AnnuAL RepoRt Black Cyan Magenta Yellow PMS 295 PMS 574 PMS 315 PMS Cool Gray 11 Bowne Communications bow121289b_Text_p3 Proof 2 L-3’s AM&M business segment gained market share in 2011 by offering cost-effective solutions for customers looking to maintain their fleets in a budget-constrained environment. Competitive wins from 2011 included a follow-on program to provide aircraft sustainment services for the U.S. Navy’s fleet of P-3, EP-3 and NP-3 aircraft, and a contract for modification, operation and maintenance of special-purpose aircraft that utilize complex EO/IR sensors under the U.S. Missile Defense Agency’s Airborne Sensor program. We were also recognized with the 2011 Materiel Readiness Award from the Army Avia- tion Association of America. This prestigious honor is awarded to defense contractors making outstanding contributions to the warfighter. We are honored to have received this recognition. Our Electronic Systems segment continued to build upon L-3’s technology leadership with a contract for 3.9-meter Quad Band Large Aperture Antennas for the USAF. These antennas will be deployed with Ground Multi-band Terminals to provide worldwide tactical SATCOM capability for our warfighters. L-3 is the prime contractor for the USAF C-17 Training System, its largest airlift transport training program. We also won a recompetition for the F-16 Training System to provide pilot and maintenance training device support for the USAF. L-3 is now providing all F-16 pilot and maintenance training support for USAF locations around the world, in addition to Foreign Mili- tary Sales (FMS) customers Bahrain, Greece and Jordan. L-3 also received an order from the U.S. Transportation Security Administration for 300 additional millimeter wave ProVision® systems featuring our Automatic Target Detection software that eliminates privacy concerns for travelers. Deployments are under way, with over 900 systems in use or on order worldwide. L-3 sells a wide range of solutions to international customers. In addition to aviation and cargo security, we see opportunities in commercial shipbuilding, aviation products and VIP aircraft modification. In FMS, the demand for manned and unmanned airborne ISR is particularly strong. Our wins in 2011 demonstrate L-3’s continued focus on quality of service and speed of response to customer needs. A POSITIVE FORCE IN OUR COMMUNITIES L-3 is committed to being a responsible and ethical corporate citizen. As an aerospace and defense contractor, we are part of an industry that contributes more than a million highly skilled jobs to local economies. We are a major employer of former military personnel and are committed to veterans’ issues as a member of the Employer Partnership of the Armed Forces and a proud supporter of the Fisher House Foundation, Homes for Our Troops and the Wounded Warrior Project. From board membership in key organizations to strategic partnerships with leading research universities, we are supporting education and diversity in science, technology, engineering and math—critical needs in our nation and industry today. Across the organiza- tion, L-3 divisions make significant contributions to their local communities every day. A HEALTHY, DIVERSE COMPANY THAT IS POSITIONED FOR THE FUTURE L-3 remains well-positioned to successfully compete, build our business and deliver shareholder value. We are focused on customer priorities, growing market share through disruptive, cost-effective solutions, demonstrated program performance and collaboration across L-3. We will continue to aggressively manage our costs and streamline our infrastructure, while maintaining our disciplined, balanced approach to capital allocation and value creation. Although the uncertainty surrounding future DoD budgets is yet to be resolved, one thing remains clear: the threats to national and global security are not decreasing. The U.S. defense industry has provided the products and expertise to make our military the strongest and most technologically advanced in the world—an advantage our nation cannot afford to compromise. Budget pressures on the DoD notwithstanding, we are confident that several of the key areas of investment in the defense budget are where L-3 is strongest. The foresight and strategic vision—the situational awareness—of our management team and solid execution by our employees across the globe put us where we are today and will drive our success going forward. Sincerely, Michael T. Strianese Chairman, President and Chief Executive Officer L-3 2011 ANNUAL REPORT 3 bow121289b_Text.indd 3 3/9/12 2:56 PM Black Cyan Magenta Yellow PMS 295 PMS 574 PMS 315 PMS Cool Gray 11 Bowne Communications bow121289b_Text_p4 Proof 2 Continuously evolving threats worldwide are driving demand for ISR enhancements that play directly to our strengths. L-3 is a clear leader in C3ISR—from integrated platforms and secure ground communications products to large, highly complex systems. L-3’s solutions combine encryption capabilities and network infrastructure expertise to provide the highest levels of security and interopera- bility for legacy and next-generation systems. LeveRAging C3ISR Command, ContRol, CommunICatIonS, IntellIgenCe, SuRveIllanCe and ReConnaISSanCe L-3’s SPYDR is a small manned airborne ISR platform that delivers mission-critical intelligence in real time. Its modular, reconfigurable design can be tailored to rapidly adapt to dynamic global requirements. 4 L-3 2011 AnnuAL RepoRt Black Cyan Magenta Yellow PMS 295 PMS 574 PMS 315 PMS Cool Gray 11 Bowne Communications bow121289b_Text_p5 Proof 3 Market-leading products and outstanding program performance are why our communications systems are on virtually every airborne ISR platform in theater today. By advancing our networking tech- nologies to fuse data from multiple sources, we are satisfying the demand for higher data rates in surveillance missions. Our systems also provide forensic capabilities that allow users to reconstruct an event after the fact. L-3 has earned a strong reputation for meeting the most demanding customer schedules with products that perform from day one. We have hundreds of forward-deployed employees in the field, giving us the ability to enhance and refine our technologies based on combat- condition experience. As industry competition increases in this space, L-3’s speed to market, combined with our proven performance on key aircraft ISR programs like Project Liberty, position the company for continued success. L-3’s secure communications are on virtually every ISR aircraft, from the pioneering U-2 and P-3 to the unmanned Predator and Global Hawk. L-3 continues aircraft modification and crew training as part of the U.K.’s AIRSEEKER signals intelligence aircraft program. L-3 is providing its Hawklink common data link terminals for the U.S. Navy’s MH-60R helicopter. This system provides secure real-time, high-speed air-to-surface digital transmission of imagery, sensor data, communications and radar information. L-3 2011 AnnuAL RepoRt 5 Black Cyan Magenta Yellow PMS 295 PMS 574 PMS 315 PMS Cool Gray 11 Bowne Communications bow121289b_Text_p6 Proof 2 Challenging times call for new strategies for success. With the Engility spin-off, L-3’s Government Services business segment will be renamed National Security Solutions, focused on solving our customers’ toughest security challenges with high-performance computing, cybersecurity, analytics, intel- ligence, and IT services and solutions. Today’s defense, government and civil agen- cies responsible for protecting our national interests are faced with unprecedented challenges in effectively accumulating, securing, processing, analyzing and acting Refocusing goveRnment seRvices to natIonal SeCuRItY SolutIonS Lorem ipsum sic fugias in auditum atque ipsum sic fugias in auditum atque. Apsum sic fugias in auditum atque ipsum sic fugias in auditum atque. 6 L-3 2011 AnnuAL RepoRt With the world’s growing dependence on instantly accessible, relevant and accurate information, we offer customers a solutions-based approach to communications intelligence. Black Cyan Magenta Yellow PMS 295 PMS 574 PMS 315 PMS Cool Gray 11 Bowne Communications bow121289b_Text_p7 Proof 1 upon the enormous and growing amount of data from multiple sources, including sensors, UAS and satellites. This environ- ment represents an opportunity for L-3 to offer discriminating solutions that ensure end-to-end mission success for customers. From systems architecture and engineering to application development and cyber solu- tions, we have the experience and cleared personnel to help sort, protect and analyze vast, disparate databases, along with products and technologies from other L-3 segments to enable the secure transmission of actionable information to users. Data and network security represent a critical, growing need for all organizations today, whether military, government or commercial. As customers make increasing use of mobile computing, secure access to information will be critical and will present significant opportunities. L-3’s unique cloud computing, encryption and cybersecurity solutions will enable us to address these opportunities. Our know-how spans from protection to prevention. Both in classified and non-classified environments, L-3’s extensive experience with securing networks and communica- tions creates an in-depth understanding of the immediate and long-term challenges of our customers. We are forming strategic partnerships that leverage commercial technologies to speed the development of next-generation solutions. L-3’s technologies support a variety of critical intelligence needs, including enterprise IT, identity management and data protection. Lorem ipsum sic fugias in auditum atque. L-3 2011 AnnuAL RepoRt 7 Black Cyan Magenta Yellow PMS 295 PMS 574 PMS 315 PMS Cool Gray 11 Bowne Communications bow121289b_Text_p8 Proof 1 L-3’s Aircraft Modernization and Maintenance (AM&M) business operates in a market that has been shaped by a high operational tempo environment for more than a decade. In the current budget environment, relatively few new platforms are expected to be developed, which will drive continued demand for modification and sustainment services to optimize the government’s existing fleets. positioning am&m aIRCRaft modeRnIzatIon and maIntenanCe Targeted investment in AM&M to improve productivity over the past few years has increased L-3’s ability to maintain or modify aircraft faster and more cost-effectively than our competition. We also provide Contractor Logistics Support (CLS) services, supporting comprehensive sustainment of a wide range of rotary- and fixed-wing aircraft. L-3 has built a solid reputation in the field by performing in-theater CLS in some of the world’s most demanding environments and terrains. 8 L-3 2011 AnnuAL RepoRt Black Cyan Magenta Yellow PMS 295 PMS 574 PMS 315 PMS Cool Gray 11 Bowne Communications bow121289b_Text_p9 Proof 2 L-3’s AM&M operations are essential to our performance as a systems integrator. Our diverse product portfolio and expertise in other segments give us significant competitive advantages. We continue to leverage opportunities for pull-through of L-3 products from our C3ISR and Electronic Systems segments to improve aircraft performance. With an organization structured to enable rapid configuration of multiple services, we create tailored solutions for our customers. L-3’s track record of success in mission- driven aircraft modification has solidified our reputation for delivering integrated solutions, including logistics, on budget and within accelerated time frames. Outside of the defense marketplace, L-3 remains a leader in VIP/Head-of-State aircraft with considerable experience on numerous platforms. L-3 was awarded one of the first contracts to modify the new 747-8 and will be the first to deliver a completed VIP interior on this platform for a prestigious Head of State. Cross-segment collaboration across L-3 supported the U.S. Special Operations Command’s MC-130W Dragon Spear program that won the 2011 William J. Perry Award for the nation’s best precision- strike program. L-3 provided quick-reaction engineering and integration for a system that incorporated our battle-proven sensors. L-3 provides a broad array of rotary-wing aircraft services—from maintenance and logistics support for the U.S. Army, Air Force, Navy and Marines, to fabrication and assembly of parts and aerostructures for manufacturers of new helicopters. L-3 2011 AnnuAL RepoRt 9 Black Cyan Magenta Yellow PMS 295 PMS 574 PMS 315 PMS Cool Gray 11 Bowne Communications bow121289b_Text_p10 Proof 2 For Electronic Systems, L-3’s broad portfolio of solutions and technology leadership are key discriminators. We stay ahead of our competition by quickly translating that leader- ship into innovative solutions that anticipate the evolving needs of our customers. deLiveRing eleCtRonIC SYStemS Demand for effective intelligence-gathering capabilities continues to grow among military and non-military customers. L-3’s electro- optical/infrared (EO/IR) products, integrated sensor systems and other advanced technologies deliver industry-best reliability and performance in this essential area. As equipment becomes smaller, lighter and faster, our expertise is also valuable in areas such as small VSAT systems, where our solutions include flyaway and manpackable communi- cation products. L-3’s broad range of aviation products can be found on tens of thousands of military and commercial aircraft worldwide. L-3’s VideoScout® App delivers full-motion video and data to Android™ devices utilizing local area network connections. L-3 provides satellite communications technology solutions for military and commercial use, from mobile VSAT terminals to very large SATCOM devices. L-3 is a world leader in the development and production of advanced night vision and electro-optical systems and components. L-3 is supplying essential products and systems for enhanced performance and cost reduction on the U.S. Navy’s Virginia-class submarine program. 10 L-3 2011 AnnuAL RepoRt Black Cyan Magenta Yellow PMS 295 PMS 574 PMS 315 PMS Cool Gray 11 Bowne Communications bow121289b_Text_p11 Proof 2 Security is another vital need. L-3’s safe, innovative millimeter wave airport detection technology holds potential in comprehensive checkpoint systems that include baggage and cargo. Force protection and anti-IED jamming technolo- gies from our precision engagement business, our work in vehicle up-armoring, and L-3’s night vision leadership all support the security and mission performance of U.S. and allied ground forces. Our leading technologies deliver solutions that help our customers operate more efficiently. Highly sophisticated L-3 training and simulation systems span from jet fighters to transport aircraft, optimizing the productivity of our armed forces’ training programs, a key benefit in today’s budget- constrained environment. Meanwhile, the recovering commercial aviation and maritime markets expand opportunities for L-3’s products and systems. Our aviation offerings help airlines reduce fuel emissions and operating costs—from our GreenTaxi™ electric drive technology, which eliminates the use of aircraft engines on taxi, to products that support the FAA’s NextGen air traffic control initiative. Our marine and power technologies also provide turnkey solutions with full integration and interoperability for a wide range of platforms for the U.S. Navy and U.S. Coast Guard, as well as commercial and international navy customers. L-3’s MX™-Series of imaging turrets provides Lorem ipsum sic situational awareness by capturing highly detailed fugias in auditum intelligence from fixed-wing, rotary-wing, aerostat atque. and ground-based platforms. L-3 2011 ANNUAL REPORT 11 bow121289b_Text.indd 11 3/9/12 2:56 PM Black Cyan Magenta Yellow PMS 295 PMS 574 PMS 315 PMS Cool Gray 11 Bowne Communications bow121289b_Text_p12 Proof 1 m a n ag em e n t b oa r d o f d i r e c t o r s Michael T. Strianese Chairman, President and Chief Executive Officer Claude R. Canizares General (R) H. Hugh Shelton Alan H. Washkowitz Member of the Audit Committee Member of the Nominating/Corporate Chairman of the Nominating/Corporate Governance Committee Governance Committee Member of the Executive Committee Thomas A. Corcoran Member of the Compensation Committee Robert B. Millard Lead Independent Director Chairman of the Audit Committee Arthur L. Simon Member of the Executive Committee Member of the Audit Committee John P. White Member of the Nominating/Corporate Member of the Compensation Committee Chairman of the Executive Committee Lewis Kramer Governance Committee Member of the Nominating/Corporate Chairman of the Compensation Committee Member of the Audit Committee Governance Committee Member of the Compensation Committee e x e c u t i v e m a n ag em e n t Curtis Brunson Ralph G. D’Ambrosio Executive Vice President of Corporate Senior Vice President and Strategy and Development Chief Financial Officer Steven M. Post Senior Vice President, General Counsel and Corporate Secretary Richard A. Cody Senior Vice President of Washington Operations g r o u p p r e s i d e n t s James W. Dunn Steve Kantor John C. McNellis Senior Vice President and President Senior Vice President and Senior Vice President and of Electronic Systems Group President of L-3 Services Group President of Integrated Systems Group Robert E. Leskow John S. Mega Susan D. Opp Vice President and President Vice President and President Vice President and President of Marine & Power Systems Group of Microwave Group of Communication Systems Group 12 L-3 2011 AnnuAL RepoRt Black Cyan Magenta Yellow PMS 295 PMS 574 PMS 315 PMS Cool Gray 11 Bowne Communications bow121289a_Cov_p2 Proof 3 seleCt fInanCIal HIgHlIgHts C o rp o r at e In f o rm at Io n SUCCESS IN THIS ENVIRONMENT DEPENDS ON ADAPTABILITY AND KEEN SITUATIONAL AWARENESS. Situational awareness has always been critical to our customers, and L-3’s ability to adapt is integral to everything we do. Our strategy is defined by our focus on the evolving geopolitical, economic and market forces that create the landscape in which we operate. This is L-3’s strength — the ability to deliver in every environment. Cover: L-3 is the prime contractor on the C-17 Training System program, overseeing program management, training device modification, courseware development and instruction. In millions, except per share amounts For the year ended December 31, Net sales Operating income Q4 2011 and Q2 2008 Items Operating income before Items Income from continuing operations attributable to L-3 Q4 2011 and Q2 2008 Items Income from continuing operations attributable to L-3 before Items Net income attributable to L-3 (c) Diluted earnings per share from continuing operations Q4 2011 and Q2 2008 Items Diluted earnings per share from continuing operations before Items Diluted earnings per share (c) Net cash from operating activities Capital expenditures, net of dispositions Free cash flow(d) Equity 2011(a) 2010 2009 2008 (b) 2007 $15,169 $15,680 $15,615 $ 14,901 $ 13,961 1,598 1,750 1,656 43 — — 1,641 1,750 1,656 956 (28) 928 956 9.03 (0.26) 8.77 9.03 955 — 955 955 8.25 — 8.25 8.25 901 — 901 901 7.61 — 7.61 7.61 1,685 (110) 1,575 918 (71) 847 938 7.43 (0.58) 6.85 7.59 1,448 — 1,448 745 — 745 745 5.86 — 5.86 5.86 1,484 1,461 1,407 1,387 1,270 186 1,298 6,724 171 1,290 6,855 182 1,225 6,660 203 1,184 5,941 149 1,121 6,114 (a) The year ended December 31, 2011, includes: (1) a tax benefit of $78 million, or $0.74 per diluted share, for a net reversal of amounts previously accrued related to tax years for which the statutes of limitations expired, (2) a non-cash goodwill impairment charge of $43 million ($42 million after income taxes, or $0.40 per diluted share) due to a decline in the estimated fair value of the Marine Services business, and (3) $14 million ($8 million after income taxes, or $0.08 per diluted share) for L-3’s portion of an impairment charge for long-lived assets at an equity method investment (collectively the “Q4 2011 Items”). (b) The year ended December 31, 2008, includes: (1) a pre-tax gain of $133 million ($81 million after income taxes, or $0.66 per diluted share) related to 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, (2) a gain of $12 million ($7 million after income taxes, or $0.06 per diluted share) related to the sale of a product line, and (3) a non-cash impairment charge of $28 million ($17 million after income taxes, or $0.14 per diluted share) related to a write-down of capitalized software development costs for a general aviation product (collectively the “Q2 2008 Items”). (c) Net income attributable to L-3 and diluted earnings per share for the year ended December 31, 2008 includes an after-tax gain of $20 million, or $0.16 per diluted share, related to the divestiture of our 85% ownership interest in Medical Education Technologies, Inc. (d) We define “free cash flow” as net cash from operating activities, less capital expenditures, net of dispositions. Sales (In millions) $ 1 4 , 9 0 1 $ 1 3 , 9 6 1 $ 1 5 , 6 1 5 $ 1 5 , 6 8 0 $ 1 5 , 1 6 9 Operating Income Excluding items* (In millions) $ 1 , 6 5 6 $ 1 , 5 7 5 $ 1 , 4 4 8 $ 1 , 7 5 0 $ 1 , 6 4 1 Diluted EPS from continuing operations Excluding items* Free Cash Flow (In millions) $ 8 . 7 7 $ 8 . 2 5 $ 7 . 6 1 $ 1 , 1 8 4 $ 1 , 2 2 5 $ 1 , 1 2 1 $ 1 , 2 9 0 $ 1 , 2 9 8 $ 6 . 8 5 $ 5 . 8 6 07 08 09 10 11 07 08 09 10 11 07 08 09 10 11 07 08 09 10 11 CAGR 2% CAGR 3% CAGR 11% CAGR 4% *Operating income and diluted EPS for 2011 and 2008 exclude the Q4 2011 and Q2 2008 items, respectively, described above. This Summary Annual Report should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011, included in this book. Corporate Headquarters equal opportunIty employer You can contact the corporate headquarters by writing to: L-3 Communications is an equal opportunity employer and does not discriminate L-3 Communications 600 Third Avenue New York, NY 10016 on the basis of age, race, sex, sexual orientation, creed, color, national origin, ancestry, marital status, disability or any other characteristic protected by law. All employment-related decisions are based solely on business needs and relevant or by calling 212-697-1111. To send a fax, dial 212-867-5249. requisite skills related to the position. Corporate InformatIon safe Harbor statement under tHe prIvate News media, analysts, shareholders and others seeking corporate seCurItIes lItIgatIon reform aCt of 1995 information about L-3 Communications should contact corporate Except for historical information contained herein, the matters set forth in this communications at 212-697-1111. prInted materIals Annual Report are forward-looking statements. Statements 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 Printed financial and governance materials may be obtained without expressions are forward-looking statements. The forward-looking statements set charge by calling (866) INFO-LLL (866-463-6555). forth herein involve a number of risks and uncertainties that could cause actual Internet results to differ materially from any such statement, including the risks and uncertainties discussed in the Company’s “Forward-looking Statements” included You can access quarterly and annual financial information, news in the Company’s recent filings, including Forms 10-K and 10-Q, with the Securities releases and an overview of the company’s products and services and Exchange Commission. The forward-looking statements speak only as of the through the L-3 Communications website at www.L-3com.com date made, and the Company undertakes no obligation to update these forward- looking statements. For a discussion of other risks and uncertainties that could stoCk exCHange lIstIng impair our results of operations or financial condition, see Part I - Item 1A -“Risk The common stock of L-3 Communications Holdings, Inc. is traded on the Factors” and Note 19 to our audited consolidated financial statements, included in New York Stock Exchange (NYSE) under the symbol LLL. our Annual Report on Form 10-K for the year ended December 31, 2011. annual meetIng CredIts The annual meeting of shareholders will be held at 2:30 p.m. on Tuesday, Design: Froeter Design Company, Chicago. Use of DoD images featured throughout this report does not imply or constitute DoD endorsement of this organization, its products or services. © 2012 L-3 Communications Holdings, Inc. Printed in the U.S.A. April 24, 2012, at The Ritz-Carlton New York, Battery Park, Two West Street, New York, NY. sHareHolder assIstanCe If you have questions concerning your shareholder account, please contact the stock transfer agent: regular maIl Computershare Trust Company, N.A. P.O. Box 43078 Providence, RI 02940-3078 overnIgHt delIverIes 250 Royall Street Canton, MA 02021 or call 877-282-1168 (781-575-2879 from outside the United States). For the hearing impaired, the phone number is TDD: 800-952-9245. You can also contact the stock transfer agent at its website at: www.computershare.com Black Cyan Magenta Yellow PMS 295 PMS 643 Bowne Communications bow121289a_Cov_p1 Proof 2 L - 3 2 0 1 1 A N N U A L R E P O R T sItuatIonalaWareness L - 3 C O M M U N I C A T I O N S 6 0 0 T H I R D A V E N U E N E W Y O R K , N Y 1 0 0 1 6 L-3 2011 ANNUAL REPORT Black Cyan Magenta Yellow PMS 295 PMS 643 

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