CORE STRENGTH 2014 L-3 ANNUAL REPORT L-3 2014 ANNUAL REPORT 1 SELECT FINANCIAL HIGHLIGHTS In millions, except per share amounts For the year ended December 31, Net sales Operating income Operating margin Income from continuing operations attributable to L-3 Net income attributable to L-3 Diluted earnings per share from continuing operations Diluted earnings per share Diluted shares outstanding 2014 2013 (a) 2012 (a) (b) $12,124 $12,622 $13,107 1,085 8.9% 664 664 7.56 7.56 87.8 1,212 9.6% 751 751 8.24 8.24 91.1 1,263 197 — 1,066 6,056 1,308 10.0% 756 784 7.74 8.03 97.6 1,231 205 24 1,050 5,527 Net cash provided by operating activities from continuing operations 1,125 Less: Capital expenditures, net of dispositions Plus: Income tax payments attributable to discontinued operations Free cash flow (c) Equity 179 — 946 5,360 (a) The years ended December 31, 2013 and 2012 have been revised following the completion, in October 2014, of the internal review at our Aerospace Systems segment. (b) The year ended December 31, 2012 gives effect to the spin-off of Engility Holdings, Inc., which was completed on July 17, 2012, and is reported as discontinued operations. (c) We define “free cash flow” as net cash from operating activities, less capital expenditures, net of dispositions, plus income tax payments attributable to discontinued operations. SALES (In millions) 7 0 1 , 3 1 $ 2 2 6 , 2 1 $ 4 2 1 , 2 1 $ OPERATING INCOME (In millions) DILUTED EPS from continuing operations FREE CASH FLOW (In millions) 8 0 3 , 1 $ 2 1 2 , 1 $ 5 8 0 , 1 $ 4 2 . 8 $ 4 7 . 7 $ 6 5 . 7 $ 0 5 0 , 1 $ 6 6 0 , 1 $ 6 4 9 $ 12 13 14 12 13 14 12 13 14 12 13 14 This Summary Annual Report should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014, included in this book. L-3 demonstrated its resilience and core strength with solid strategic execution and operational performance in 2014. We capitalized on opportunities and overcame challenges, finishing the year well-positioned to create long-term value for our customers and shareholders. On The Cover: L-3’s SATCOM solutions meet our customers’ increased demand for mobile communications and intelligence gathering in any environment. From man-portable systems to fly-away VSAT terminals, L-3 enables secure, multi-band communications worldwide. L-3 2014 ANNUAL REPORT 1 CORE CAPABILITIES L-3’s industry-leading capabilities combine critical expertise and state-of-the-art technologies with responsiveness, reliability and affordability. We work continuously to strengthen and expand our core solutions to drive performance. CORE VALUES L-3’s core values – agility, performance, customer focus, integrity, collaboration and innovation – guide us in all our efforts, from addressing challenges to pursuing goals. We strive to maintain high ethical standards in everything we do. 2 L-3 2014 ANNUAL REPORT CORE COMMITMENT L-3 maintains our steadfast commitment to creating maximum value for all of our stakeholders. We do this through our consistent performance, technology investments, efficient cost management, strong cash flow and a focused approach to capital allocation. This enables us to deliver value to our customers through market-leading solutions, while delivering value to our shareholders through the right mix of share repurchases, dividends and strategic acquisitions. CORE TALENT L-3’s people are among the most knowledgeable and experienced in the industry. The depth of our talent enables us to understand, anticipate and meet our customers’ changing needs. Our employees have the expertise to align us with evolving market forces, allowing us to innovate, compete and succeed. L-3 2014 ANNUAL REPORT 3 DEAR FELLOW SHAREHOLDERS: 2014: A YEAR OF PROGRESS, PERFORMANCE, CHALLENGE AND OPPORTUNITY L-3 performed well amidst continuing challenges. We executed our strategy and managed our business effectively, exceeding our financial plan for orders and continuing to generate robust free cash flow. In 2014, we delivered strong program and operational performance, winning new contracts and gaining market share in all four of our segments. We also won our major contract recompetitions. We reshaped our portfolio of businesses and invested in L-3’s future, while delivering value to shareholders through a disciplined capital $7.56 and our operating margin was 8.9 percent. Free cash allocation and dividend strategy. flow for the full year 2014 was a robust $946 million. I appreciate the efforts of our 45,000 employees around the world. Through out the year, they maintained a consistent focus on performance and dedication to our customers. Thanks to them, L-3 continues to be an industry Maximizing value through a disciplined strategy During 2014, we adhered to our long-standing capital leader and well-posi tioned to achieve long-term success. allocation strategy by increasing shareholder value through Continued financial performance and strength Our consolidated net sales were $12.1 billion in 2014, dividends and share repurchases, while investing in selective acquisitions and internal research and development (R&D) initiatives. For the year ended December 31, we converted 142 percent of our earnings to cash and returned more than with growth in our international and commercial businesses $1 billion to L-3 shareholders. In the aggregate, we returned partially offsetting U.S. government sales declines. Net 109 percent of our 2014 free cash flow to our investors. international and commercial sales increased by 2 percent We raised our dividend for the 10th consecutive year to year-over-year, reaching 29 percent of our total net $2.40 per share, paying total cash dividends of $208 million, consolidated sales, compared with 27 percent in 2013. and repurchased a total of $823 million in common stock We recorded orders of $12.1 billion for 2014, yielding a for the year ended December 31, up from $800 million in book-to-bill ratio of 1.0, exceeding expectations and under- the prior year. scoring the continued strength of our market positions across Delivering value is also about investing in the growth the business. Our diluted earnings per share for 2014 was of our products and capabilities. R&D initiatives drive the 4 L-3 2014 ANNUAL REPORT innovation that makes L-3 an industry leader and differen- improve our margins. We expect to close this transaction in tiates us in the marketplace. We continued to develop new the second quarter of 2015. technologies that support our customers’ critical require- ments and priorities, allocating $413 million in R&D and capital expenditures in 2014. We plan to increase this invest- ment in 2015. The coming year’s focus will be on electronic Driving growth in international and commercial businesses Our strategy of expanding our international and commercial warfare, sensor development, ISR systems, space work businesses in an increasingly volatile world continues to be and cyber, as well as niche areas in the classified arena — a successful. This area has grown from 21 percent to 29 percent growing DoD budget priority. Across the company, we are of net sales in just three years. increasing efforts to leverage our expertise and technologies These gains were achieved through a disciplined focus to generate new opportunities and capitalize on the growing on major markets around the world. To bolster customer number of U.S. government mandates for cybersecurity relations and increase our local presence, we have established mea sures at commercial entities, many of which align well corporate footprints in the U.K., Australia, Canada, Saudi with L-3’s existing capabilities. Arabia and South Korea. These offices are led by L-3 managers Strategic acquisitions continue to be important with a deep under standing of conducting business in their components of our growth strategy. We seek out companies respective regions. that complement L-3’s core businesses, enhance our We had a number of strategic international wins in the number-one or number-two market positions, create new, Middle East during the year, highlighted by our first interna- adjacent product opportunities, and deliver attractive returns tional sale of L-3’s SPYDR ISR aircraft to the Royal Saudi Air on investment. Our Data Tactics acquisition, which we Force. This sale validates the strong ongoing interest we have completed in March 2014, broadened and strengthened our seen in this platform and provides a success story to leverage National Security Solutions (NSS) segment. in our pursuit of additional orders in the Middle East and In January 2015, we acquired MITEQ, Inc. and combined other key international markets. it with our Narda Microwave-East business to form L-3 We also won a contract to build three UH-60L Opera- Narda-MITEQ. This addition expands our existing tactical tional Flight Trainers and associated training systems for SATCOM capabilities and adds RF microwave and low-power the Royal Saudi Land Forces Aviation Command. Delivery of SATCOM products that create new cross-selling opportunities these high-fidelity trainers marks the first time L-3’s Reality- and expand our customer base. Seven™ full flight simulator technology solution will be used At the same time, we continually evaluate our existing in support of a military training program. Other wins in the operations to better align us with our customers’ priorities region include Hawkeye™ VSAT terminals for a Middle and bring additional efficiencies to our business. In December, Eastern customer and WESCAM electro-optical/infrared we entered into an agreement to sell our Marine Systems (EO/IR) sensors for the Royal Saudi Air Force, the UAE and International (MSI) business. The disposition of MSI will Egypt. L-3 was also selected to provide cargo screening L-3 2014 ANNUAL REPORT 5 With more than 50 years of experience in C-130 modifications, L-3 continues to capitalize on the robust market for technology, mainte- nance and upgrades on this widely used plat- form. In 2014, L-3 won a contract to upgrade C-130 avionics for the Argentine Air Force. L-3 will deliver two SPYDR manned aircraft to Saudi Arabia, with the potential for additional sales over the next three years. The international sale of L-3’s SPYDR platform serves as a solid foundation for the continued growth of our tactical ISR business. L-3’s Lynx® MultiLink Surveillance System is a new line of single-box ADS-B solutions, offering groundbreaking technology to the NextGen flight environment for General Aviation (GA). The Lynx systems integrate into any existing GA cockpit, providing pilots with ADS-B, as well as traffic, weather and situational awareness, at an attractive price point. 6 L-3 2014 ANNUAL REPORT TO OUR SHAREHOLDERS systems for customs agencies in Saudi Arabia and other In addition, we signed a contract with Virgin Atlantic for customers in the Middle East. training services and expanded our Asian Aviation Training We received a five-year indefinite-delivery/indefinite- Centre in Bangkok, Thailand. quantity (ID/IQ) contract for advanced target pointers and weapon-mounted thermal imagers for the Italian Army’s Future Soldier System program. In 2014, we made our first delivery of Hawklink radio terminal sets for use aboard Royal Australian Navy MH-60R SEAHAWK® helicopters. Supporting the DoD with excellent program performance across L-3 operations Overall, the company’s businesses continued to deliver solu- L-3 also won a C-130 aircraft avionics upgrade contract for tions on time and on budget to our DoD customers in 2014. the Argentine Air Force. This win sets the stage for future L-3’s Electronic Systems segment is known for business in South America and positions L-3 for additional innovation, with state-of-the-art products and solutions international C-130 contracts with customers throughout that span a diverse range of applications. L-3 won a support the world. contract for the Battle Force Tactical Training System from The growth in our commercial business in 2014 was led the Naval Surface Warfare Center. The contract includes by international wins for ProVision® passenger screening engineering services and support, training systems support, systems for customers in Europe and baggage screening operation and maintenance training, and fleet synthetic systems for South Korea’s Incheon International Airport. exercise support. Domestically, orders from the TSA continue to be strong. Our Warrior Systems business, which is a leader in L-3 recently introduced our Lynx® MultiLink Surveillance advanced optical and night vision systems, expanded our System line of Automatic Dependent Surveillance-Broadcast business base with a large order from the U.S. Air Force for (ADS-B) products for General Aviation. This introduction, our Enhanced Night Vision Goggles. L-3’s state-of-the-art which is well in advance of ADS-B compliance deadlines, night vision solutions combine the benefits of image intensifi- bolsters L-3’s position as a leading ADS-B innovator — with cation and heat signature technology to create a greater level products for all aviation markets. It also adds to the already of situational awareness for the warfighter. strong demand for our aviation products, including our Other wins in the segment included a classified space- Traffic Alert and Collision Avoidance Systems (TCAS) and based sensor program for the U.S. government and a advanced display systems. nine-shipset order for switchgear and circuit breakers on We also received multiple orders for our training and Virginia-class submarines. simulation systems from commercial customers in 2014, Our Aerospace Systems segment’s solutions remain including Boeing 787 full flight simulators for All Nippon in demand across the DoD, as well as international and Airways, an Airbus A320 simulator for Sichuan Airlines and commercial marketplaces, where the need for ISR continues a Sukhoi Superjet 100 full flight simulator for Interjet. due to geopolitical volatility. L-3 2014 ANNUAL REPORT 7 L-3’s competitively won contract to provide 1.2-meter and 1.6-meter Hawkeye™ VSAT terminals to a Middle Eastern customer will optimize communications services in areas where commercial satellite resources are limited. These small, transportable terminals feature multiple modem waveforms that enable proven, reliable communications in the harshest desert environments. L-3’s CX-Mobile™ G3 high-energy mobile cargo scanner was selected by several Middle Eastern countries for use at their ports and borders. It utilizes industry-leading technology to scan large freight loads safely and efficiently via a fully automated drive-through, allowing drivers to safely remain in their cabs during scans. L-3 is the leading supplier of Boeing 787 full flight simulators to commercial airlines worldwide. In 2014, we expanded our leadership position by winning a contract to supply All Nippon Airways (ANA) with its third B787 full flight simulator and second associated flight training device. The devices will expand ANA’s training capacity at its Tokyo facility, enabling the airline to keep pace with the acceptance of several new 787 aircraft. 8 L-3 2014 ANNUAL REPORT TO OUR SHAREHOLDERS Our largest win of the year was the recompetition of our safeguarding critical, sensitive and classified data. In 2014, contract to provide logistics services in support of the U.S. we continued to improve the competitive position of NSS, Navy’s T-45A and T-45C aircraft. L-3 was also selected for penetrating new markets and gaining share in the U.S. the Vance Air Force Base Training Aircraft Flight Operations government intelligence community. Support contract. On this program, L-3 will provide aircraft L-3 won a major competitive contract for the National maintenance and logistical support to T-1, T-6 and T-38 Geospatial-Intelligence Agency’s (NGA) Information Tech- training aircraft. These strategic wins complement existing nology Enterprise Managed Services (ITEMS) Transport L-3 contracts of similar scope at various bases around the Services program. L-3 will provide engineering, operations country. We will also perform work on the U.S. Air Force’s and sustainment services to the NGA’s global communica- communications systems replacement program for the tions infrastructure to enable the secure, reliable and timely C-32/40, a fleet of VIP transport aircraft. L-3 was awarded a transmission of data. Another important competitive award similar communications system upgrade for the C-37 aircraft was a contract to support the Pentagon Information Technol- in this same fleet. We also completed the early delivery of a ogy Agency, Enterprise Information and Mission Assurance baseline Rivet Joint aircraft to the U.S. Air Force. This aircraft Directorate, which is responsible for cyber-related network is the first to use our new conformal antenna design, which defense, intrusion detection, incident handling and other provides increased ISR capabilities and performance. cyber support activities. Additional NSS contract wins include Communication Systems is proud to be a trusted provider a National Reconnaissance Office contract, CASCADE, to and go-to source for advanced products and solutions that provide the mechanism for quick-reaction capability deliver seamless, secure broadband data to the warfighter. initiatives and studies. L-3 equipment can be found on virtually every military Underscoring L-3’s strengths in the classified arena, platform, supplying mission-critical infrastructure to meet the company won two prestigious James S. Cogswell Out- the secure communications needs of troops worldwide. standing Industrial Security Achievement Awards from the In 2014, L-3 continued to support network operations DoD Defense Security Service (DSS) in 2014. The Cogswell is for U.S. Combatant Commands by providing wideband the highest award a company can receive for the handling of communications to senior leaders and warfighters. L-3 will classified information. This was the 10th consecutive year that also supply ground terminals to interface with the network, L-3 has received at least one Cogswell Award. Also, for the providing the data needed for current and future operations. second time in three years, L-3 was recognized by the DSS Also during the year, we began deliveries of airborne commu- with the Excellence in Counterintelligence Award for excep- nications equipment for use aboard NATO Alliance Ground tional actions to prevent foreign attempts to illegally obtain Surveillance Global Hawk unmanned vehicles, supporting U.S. defense technology. secure real-time data transfer for the Joint Intelligence, Surveillance and Reconnaissance system. National Security Solutions (NSS) is a capabilities-based Integrity, first and foremost Everyone at L-3 must operate with honesty, transparency business that addresses today’s cyber threat environment by and integrity. Our progress in 2014 was adversely affected by L-3 2014 ANNUAL REPORT 9 TO OUR SHAREHOLDERS problems in our Aerospace Systems segment. We immedi- partnerships with major research colleges and universities ately undertook an extensive internal review of the segment. near L-3 operations. We are also active in a variety of As a result, we revised the company’s previously issued education programs and institutions, including the Texas financial statements and took appropriate remedial actions A&M University-Commerce robotics summer camp, the to strengthen the control environment. Throughout this University of North Texas engineering department and process, our management team and employees remained many more. In 2014, L-3 was the first corporate tenant of the focused on performance and delivering for our customers — Baylor Research and Innovation Collaborative, the flagship demonstrating the strength and resilience of our company development of a planned 21-acre research park near and our commitment to the highest level of ethical conduct. Baylor University. Working with our local communities L-3 businesses and employees participate in a wide range of activities that give back to our communities and make a L-3: well-positioned and focused on the future The defense industry works in close partnership with difference in important areas through both corporate support government agencies and is a valuable contributor to and contributions at the business unit level. national security and global stability. Together, we share a For example, as part of our ongoing dedication to the deep commitment to ensuring that our military personnel men and women in the armed forces, L-3 supports a variety have the very best technology to help them safely and of efforts to help our veterans and their families. In 2014, effectively fulfill their duties. our employees volunteered at and donated to Homes for Our Events unfolding around the world continue to under- Troops, which builds adaptive homes for wounded warriors. score the reality that a strong national defense is vital to the We also provide a supportive work environment for service interests of the United States and its allies. We expect to see personnel as part of the Employer Partnership of the Armed continuing demand for L-3’s leading-edge capabilities and Forces and contribute to the Coast Guard Foundation, the products, particularly in ISR, communications, electronics Special Operations Warrior Foundation, the Tragedy Assis- and security. While the challenging environment has tance Program for Survivors (TAPS), the Wounded Warrior persisted due to sequestration, the DoD budget downturn is Project and the Marine Corps Scholarship Foundation. nearing its end. Consequently, we are focused on growth. L-3 supports science, technology, engineering and To pursue that growth, L-3 is moving ahead in implement- mathematics (STEM) initiatives through our involvement ing our core strategy. We will continue to build and maintain in education at all levels, from elementary to university and close relationships with our customers, increasing market postgraduate school. Our efforts range from co-op programs share by understanding, anticipating and meeting their needs. that provide technical work experience for students to We will also expand our international business through a 10 L-3 2014 ANNUAL REPORT L-3 was awarded a contract to provide flight operations support services at Vance Air Force Base in Oklahoma. The win expands L-3’s role in maintaining safe and effective operations for several different training aircraft platforms at U.S. military bases around the world. L-3 continues to grow our enhanced night vision capability, giving warriors greater day- and nighttime visibility in the most challenging environments. We have won contracts with the U.S. Army and Air Force for our innovative Enhanced Night Vision Goggles, which deliver superior situational awareness. L-3 2014 ANNUAL REPORT 11 TO OUR SHAREHOLDERS strong local presence in key markets and work with the right As we look ahead, we will remain focused on our core partners to extend our leading defense technologies into new strengths to create shareholder value through financial and commercial areas. operational performance and by exceeding our customers’ L-3 will continue to shape our portfolio for success, expectations. Once again, my thanks to our shareholders, acquiring businesses that align with our strategy and add customers and employees for their support. value for our customers and shareholders. And we will build our capabilities in high-priority classified businesses, Sincerely, collaborating across the company to leverage our products, technologies and experience to create new opportunities. Michael T. Strianese Chairman, President and Chief Executive Officer L-3 won two National Security Agency (NSA) Enterprise Program Management contracts to provide systems engineering, acquisition planning, program management and financial management for two of NSA’s major mission areas. 12 L-3 2014 ANNUAL REPORT MANAGEMENT BOARD OF DIRECTORS Michael T. Strianese Claude R. Canizares Thomas A. Corcoran General (Ret.) Ann E. Dunwoody Lewis Kramer Robert B. Millard General (Ret.) Lloyd W. Newton Vincent Pagano, Jr. General (Ret.) H. Hugh Shelton Arthur L. Simon Alan H. Washkowitz EXECUTIVE MANAGEMENT Curtis Brunson Executive Vice President, Corporate Strategy and Development Richard A. Cody Senior Vice President, Washington Operations Ron Cook Senior Vice President, London Operations Ralph G. D’Ambrosio Senior Vice President and Chief Financial Officer Steve Kantor Senior Vice President and President of Electronic Systems Kathleen E. Karelis Senior Vice President and Senior Counsel John C. McNellis Senior Vice President and President of Aerospace Systems John S. Mega Senior Vice President and President of Communication Systems Steven M. Post Senior Vice President, General Counsel and Corporate Secretary Les A. Rose Vice President and President of National Security Solutions David M. Van Buren Senior Vice President, Business Strategy Juliet N. Bouyea Vice President, Corporate Communications Sheila M. Sheridan Vice President, Administration Kevin Weiss Vice President, Human Resources CORPORATE INFORMATION CORPOR ATE HEADQUARTERS You can contact the corporate headquarters by writing to: L-3 600 Third Avenue New York, NY 10016 or by calling 212-697-1111. To send a fax, dial 212-867-5249. CORPOR ATE INFOR MATION News media, analysts, shareholders and others seeking corporate information about L-3 should contact corporate communications at 212-697-1111. PRINTED MATERIALS Printed financial and governance materials can be obtained without charge by written request to the corporate headquarters addressed to the Corporate Secretary or by calling (866) INFO-LLL (866-463-6555). INTER NET You can access quarterly and annual financial information, news releases, and an overview of the company’s products and services through the L-3 website at www.L-3com.com. STOCK EXCHA NGE LISTING L-3’s common stock is listed on the New York Stock Exchange (NYSE) under the symbol LLL. A NNUAL MEETING The annual meeting of shareholders will be held at 2:30 p.m. on Tuesday, May 5, 2015, at The Ritz-Carlton New York, Battery Park, Two West Street, New York, NY. EQUAL OPPORTUNIT Y EMPLOYER L-3 is an equal opportunity employer and does not discriminate on the basis of age, race, gender, sexual orientation, religion, color, national origin, marital status, disability and protected veterans status or any other characteristic protected by law. All employment-related decisions are based solely on business needs and relevant requisite skills related to the position. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFOR M ACT OF 1995 Except for historical information contained herein, the matters set forth in this Annual Report are forward-looking statements. State- ments 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 are forward-looking statements. The forward-looking statements set forth herein involve a number of risks and uncertainties that could cause actual results to differ materially from any such statement, including the risks and uncertainties discussed in the Company’s “Forward-look- ing Statements” included in the Company’s recent filings, including Forms 10-K and 10-Q, with the Securities and Exchange Commission. The forward-looking statements speak only as of the date made, and the Company undertakes no obligation to update these forward-looking statements. 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 19 to our audited consolidated financial statements, included in our Annual Report on Form 10-K for the year ended December 31, 2014. CREDITS Design: Conjure, Chicago SHAREHOLDER ASSISTA NCE If you have questions concerning your shareholder account, please contact the stock transfer agent: Use of U.S. DoD visual information does not imply or constitute DoD endorsement. © 2015 L-3 Communications Holdings, Inc. Printed in the U.S.A. REGUL AR MAIL Computershare P.O. Box 30170 College Station, TX 77842-3170 OVER NIGHT DELIVERIES Computershare 211 Quality Circle, Suite 210 College Station, TX 77845 or call 877-282-1168 (781-575-2879 from outside the United States). For the hearing impaired, the phone number is TDD: 800-490-1493. You can also contact the stock transfer agent at its website at www.computershare.com. 600 THIRD AVENUE NEW YORK, NY 10016