Market Overview

L3 Announces Second Quarter 2018 Results

Share:
  • Funded orders increased 32% to $2.8 billion, with a book-to-bill
    ratio of 1.09x
  • Sales increased 8% to $2.6 billion
  • Diluted earnings per share (EPS) from continuing operations of $2.33
  • Diluted EPS from continuing operations excluding gain on sale of
    businesses and debt retirement charge of $2.47
  • Increased 2018 financial guidance

L3 Technologies, Inc. (NYSE:LLL) today reported diluted earnings per
share (EPS) from continuing operations of $2.33 and adjusted
diluted EPS(1) from continuing operations of $2.47 for the
quarter ended June 29, 2018 (2018 second quarter) compared to diluted
EPS from continuing operations for the quarter ended June 30, 2017 (2017
second quarter) of $2.39. Adjusted diluted EPS from continuing
operations is diluted EPS from continuing operations excluding: (1) a
gain on sale of the Crestview Aerospace and TCS businesses of $0.31 per
diluted share and (2) a debt retirement charge of $0.45 per diluted
share. The 2017 second quarter includes a pre-tax gain of $42 million
($26 million after-tax, or $0.33 per share) in connection with the sale
of the company's property in San Carlos, California. Net sales of $2,583
million for the 2018 second quarter increased by 8% compared to the 2017
second quarter.

"We had a strong second quarter, led by growth in orders, sales and
operating income. We are making steady progress optimizing our business
and delivering affordable solutions to our customers," said Christopher
E. Kubasik, L3's Chairman, Chief Executive Officer and President. "My
leadership team and employees have embraced our initiatives for
integration, collaboration and innovation, which are transforming L3 and
I'm grateful for their continued focus on our customers and world class
performance."

__________________________
(1) Adjusted
diluted EPS from continuing operations is not calculated in accordance
with accounting principles generally accepted in the United States of
America (U.S. GAAP). The company believes that the gain relating to the
Crestview Aerospace and TCS businesses divestiture and the debt
retirement charge affect the comparability of the results of operations
and that disclosing diluted EPS from continuing operations excluding
these items is useful to investors as it allows investors to more easily
compare 2018 results to 2017 results. However, these non-GAAP financial
measures may not be defined or calculated by other companies in the same
manner.

L3 Consolidated Results

The table below provides L3's selected financial data and presents the
adoption of Accounting Standards Update (ASU) 2014-09, Revenue from
Contracts with Customers
(commonly known as ASC 606), effective
January 1, 2018 using the modified retrospective transition method. In
accordance with the modified retrospective transition method, the 2018
second quarter and first half are presented under ASC 606, while the
2017 second quarter and first half are presented under ASC 605, Revenue
Recognition
, the accounting standard in effect for periods ending
prior to January 1, 2018. The cumulative effect of the change in
accounting for periods prior to January 1, 2018 was recognized through
retained earnings at the date of adoption.

                                 
      Second Quarter Ended

 

      First Half Ended    
(in millions, except per share data)

June 29,
2018(a)

   

June 30,
2017(b)

Increase/
(decrease)

June 29,
2018(a)

   

June 30,
2017(b)

Increase/
(decrease)

Net sales $2,583 $2,385 8 % $4,954 $4,706 5 %
Operating income $321 $294 9 % $572 $531 8 %
Gain on sale of the Crestview & TCS Businesses $(48) $— nm $(48) $— nm
Segment operating income $273 $294 (7 ) % $524 $531 (1 ) %
Operating margin 12.4% 12.3% 10 bpts 11.5% 11.3% 20 bpts
Segment operating margin 10.6% 12.3% (170 ) bpts 10.6% 11.3% (70 ) bpts
Interest expense and other $(36) $(40) (10 ) % $(71) $(78) (9 ) %
Debt retirement charge $(48) $— nm $(48) $— nm
Effective income tax rate 20.3% 23.2% (290 ) bpts 15.9% 22.3% (640 ) bpts
Net income from continuing operations attributable to L3 $185 $190 (3 ) % $372 $343 8 %
Diluted earnings per share from continuing operations $2.33 $2.39 (3 ) % $4.67 $4.32 8 %
Adjusted diluted earnings per share from continuing operations(c) $2.47 $2.39 3 % $4.81 $4.32 11 %
Diluted weighted average common shares outstanding 79.4 79.5 % 79.6 79.4 %
 
Net cash provided from operating activities from continuing
operations
$213 $229 (7 ) % $178 $315 (43 ) %
Less: Capital expenditures, net of dispositions (53) 9 nm (107) (31) nm
Plus: Income tax payments attributable to discontinued operations 5 6 (17 ) % 9 13 (31 ) %
Free cash flow(d)(e) $165 $244 (32 ) % $80 $297 (73 ) %

 

_________________

(a) The adoption of ASC 606 resulted in a net increase to
sales of approximately $45 million and no impact to operating
income for the 2018 second quarter

and resulted in
net increases to sales and operating income by approximately $121
million and $19 million, respectively, for the 2018 first half.
Under

ASC 606, sales from certain contracts
previously accounted for under the units-of-delivery method are
recognized earlier in the performance period as

costs
are incurred as opposed to when the units are delivered under ASC
605. Tables E and F quantify the impact by segment.

(b) Results for the 2017 second quarter and first half
include the sale of the company's property in San Carlos,
California, which resulted in a pre-tax gain of

$42
million ($26 million after-tax or $0.33 per diluted share) and $64
million of cash proceeds.

(c) Adjusted diluted EPS from continuing operations is
diluted EPS from continuing operations excluding: (1) the gain on
sale of the Crestview Aerospace

and TCS businesses
of $0.31 per diluted share and (2) the debt retirement charge of
$0.45 per diluted share. Adjusted diluted EPS from continuing

operations
is not calculated in accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP).
The company

believes that the gain relating to the
Crestview Aerospace and TCS businesses divestiture and the debt
retirement charge affect the comparability of the

results
of operations and that disclosing diluted EPS from continuing
operations excluding these items is useful to investors as it
allows investors to

more easily compare 2018
results to 2017 results. However, these non-GAAP financial
measures may not be defined or calculated by other companies in

the
same manner.

(d) Free cash flow is defined as net cash from operating
activities from continuing operations less net capital
expenditures (capital expenditures less cash

proceeds
from dispositions of property, plant and equipment), plus income
tax payments attributable to discontinued operations. The company
believes

free cash flow is a useful measure for
investors because it portrays the company's ability to generate
cash from operations for purposes such as repaying

debt,
returning cash to shareholders and funding acquisitions. The
company also uses free cash flow as a performance measure in
evaluating

management.

(e) Excludes free cash flow from discontinued operations.

nm = not meaningful

 

The 2018 second quarter results were impacted by a gain on the sale of
the Vertex Aerospace businesses and a debt retirement charge related to
the refinancing of $1.8 billion of senior notes further discussed below.

  • On June 29, 2018, the company successfully completed the sale of its
    Vertex Aerospace businesses for a sales price of $540 million subject
    to customary closing net working capital adjustments. In connection
    with the sale, the Company recognized: (1) a pre-tax gain from
    continuing operations of $48 million ($25 million after income taxes,
    or $0.31 per diluted share) related to the Crestview Aerospace and TCS
    businesses (the "Crestview & TCS Businesses") and (2) a pre-tax gain
    from discontinued operations of $237 million ($180 million after
    income taxes, or $2.27 per diluted share) related to the Vertex
    Aerospace business; and
  • On June 6, 2018, the company issued $1.8 billion of senior notes
    comprised of $800 million of 3.85% senior notes due 2023 and $1
    billion of 4.40% senior notes due 2028 (collectively, the "Senior
    Notes"). The net cash proceeds from the Senior Notes, along with cash
    on hand, were used to fund the concurrent tender offers for the
    company's outstanding $1 billion of 5.20% senior notes due October 15,
    2019 (2019 Senior Notes) and $800 million of 4.75% senior notes due
    July 15, 2020 (2020 Senior Notes). In connection with the tender
    offers, the company redeemed approximately $1.2 billion of Senior
    Notes in total and recorded a pre-tax debt retirement charge of $48
    million ($36 million after income taxes, or $0.45 per diluted share).
    On June 6, the company also initiated a redemption of its 2019 and
    2020 Senior Notes that remained outstanding after the expiration of
    the tender offers. The company completed the redemption of the 2019
    and 2020 Senior Notes on July 6, 2018. In connection with the
    redemption, the company will record a pre-tax debt retirement charge
    of $21 million ($16 million after income taxes, or $0.20 per diluted
    share) in the third quarter of 2018.

Second Quarter Results of Operations: For the 2018 second
quarter, consolidated net sales of $2,583 million increased $198
million, or 8%, compared to the 2017 second quarter. Organic sales(2)
increased by $178 million, or 7%, to $2,563 million for the 2018 second
quarter. Organic sales exclude $20 million of sales increases related to
business acquisitions. For the 2018 second quarter, organic sales to the
U.S. Government increased $158 million, or 10%, to $1,811 million and
organic sales to international and commercial customers increased $20
million, or 3%, to $752 million.

Segment operating income for the 2018 second quarter decreased by $21
million, or 7%, compared to the 2017 second quarter. Segment operating
income as a percentage of sales (segment operating margin) decreased by
170 basis points to 10.6% for the 2018 second quarter from 12.3% for the
2017 second quarter. The 2017 second quarter includes a pre-tax gain of
$42 million ($26 million after-tax, or $0.33 per share) on the sale of
the company's property in San Carlos, California in connection with the
consolidation of the EDD/ETI Traveling Wave Tube (TWT) businesses in the
Communication Systems segment. Excluding this gain, segment operating
margin would have been 10.6% for the 2017 second quarter. Lower
severance and restructuring costs, primarily at Communication Systems,
were largely offset by higher research and development costs, primarily
at Sensor Systems. See the reportable segment results below for
additional discussion of sales and operating margin trends.

The effective income tax rate for the 2018 second quarter was 20.3%.
Excluding the sale of the Crestview & TCS Businesses, the debt
retirement charge and the related income tax impacts of each, the
effective income tax rate would have decreased to 15.6% from 23.2% for
the 2017 second quarter. The decrease was primarily driven by an
increase in tax benefits from equity compensation and the reduction of
the U.S. corporate income tax rate enacted under the U.S. Tax Cuts and
Jobs Act.

__________________________
(2) Organic
sales represent net sales excluding the sales impact of acquisitions and
divestitures. Sales increases related to acquired businesses are sales
from acquisitions that are included in L3's actual results for less than
12 months. Sales declines related to business divestitures are sales
from divestitures that are included in L3's actual results for the 12
months prior to the divestitures. The company believes organic sales is
a useful measure for investors because it provides period-to-period
comparisons of the company's ongoing operational and financial
performance.

Diluted EPS from continuing operations was $2.33 for the 2018 second
quarter compared to $2.39 for the 2017 second quarter. The 2018 second
quarter includes: (1) a gain of $0.31 per diluted share related to the
sale of the Crestview & TCS Businesses and (2) a debt retirement charge
of $0.45 per diluted share. The 2017 second quarter includes a gain of
$0.33 per diluted share in connection with the sale of the company's
property in San Carlos, California. Diluted weighted average common
shares outstanding for the 2018 second quarter decreased slightly
compared to the 2017 second quarter due to changes in the dilutive
impact of common share equivalents.

First Half Results of Operations: For the first half ended
June 29, 2018 (2018 first half), consolidated net sales of $4,954
million increased $248 million, or 5%, compared to the first half ended
June 30, 2017 (2017 first half). Organic sales increased by $217
million, or 5%, to $4,913 million for the 2018 first half. Organic sales
exclude $41 million of sales increases related to business acquisitions
and $10 million of sales declines related to business divestitures. For
the 2018 first half, organic sales to the U.S. Government increased $177
million, or 5%, to $3,451 million, and organic sales to international
and commercial customers increased $40 million, or 3%, to $1,462 million.

Segment operating income for the 2018 first half decreased by $7
million, or 1%, compared to the 2017 first half. Segment operating
margin decreased by 70 basis points to 10.6% for the 2018 first half
from 11.3% for the 2017 first half. Excluding the gain on sale of the
company's property in San Carlos, California, segment operating margin
would have been 10.4% for the 2017 first half. Improved contract
performance primarily for the Electronic Systems and Aerospace Systems
segments, and lower severance and restructuring costs primarily at
Communication Systems, were partially offset by higher research and
development costs, primarily at Sensor Systems. See the reportable
segment results below for additional discussion of sales and operating
margin trends.

The effective income tax rate for the 2018 first half was 15.9%.
Excluding the sale of the Crestview & TCS Businesses, the debt
retirement charge and the related income tax impacts of each, the
effective income tax rate would have decreased to 13.5% from 22.3% for
the same period last year. The decrease was primarily driven by trends
similar to the 2018 second quarter.

Diluted EPS from continuing operations was $4.67 for the 2018 first half
compared to $4.32 for the 2017 first half. The 2018 first half includes:
(1) a gain of $0.31 per diluted share related to the sale of the
Crestview & TCS Businesses and (2) a debt retirement charge of $0.45 per
diluted share. The 2017 first half includes a gain of $0.33 per diluted
share in connection with the sale of the company's property in San
Carlos, California. Diluted weighted average common shares outstanding
for the 2018 first half increased slightly compared to the 2017 first
half due to changes in the dilutive impact of common share equivalents,
primarily caused by a higher L3 stock price.

Orders: Funded orders for the 2018 second quarter increased 32%
to $2,808 million compared to $2,129 million for

the 2017 second quarter. Funded orders for the 2018 first half increased
20% to $5,444 million compared to $4,518 million for the 2018 first
half. The book-to-bill ratio was 1.09x for the 2018 second quarter and
1.10x for the 2018 first half. Funded backlog increased 4% to $8,833
million at June 29, 2018, compared to $8,493 million at January 1, 2018.

Cash Flow: Net cash from operating activities from continuing
operations was $178 million for the 2018 first half, a decrease of $137
million compared to $315 million for the 2017 first half. The decrease
is primarily due to higher working capital requirements, primarily
contract assets and milestone payments for aircraft procurements related
to U.S. and foreign government contracts. Capital expenditures, net of
dispositions, increased by $76 million compared to the 2017 first half.
Excluding the proceeds of $64 million from the sale of the company's San
Carlos, California property, capital expenditures, net of dispositions,
increased by $11 million. In addition, during the 2018 second quarter,
the company received proceeds from: (1) the sale of the Vertex Aerospace
businesses of $535 million and (2) the issuance of the Senior Notes of
$1,798 million. The company paid $1,263 million to purchase a portion of
its outstanding senior notes. The company paid dividends of $128 million
during the 2018 first half compared to $119 million during the 2017
first half. Repurchases of the company's common stock were $287 million
during the 2018 first half compared to $26 million during the 2017 first
half.

Reportable Segment Results

The company has four reportable segments. The company evaluates the
performance of its segments based on their sales, operating income and
operating margin. Corporate expenses are allocated to the company's
operating segments using an allocation methodology prescribed by U.S.
Government regulations for government contractors. Accordingly, segment
results include all costs and expenses, except for goodwill impairment
charges, gains or losses on sale of businesses and certain other items
that are excluded by management for purposes of evaluating the
performance of the company's business segments.

Electronic Systems

               
      Second Quarter Ended     First Half Ended
($ in millions)

June 29,
2018

   

June 30,
2017

    Increase

June 29,
2018

   

June 30,
2017

    Increase
Net sales $ 812 $ 767 6   % $ 1,597 $ 1,505 6   %
Operating income $ 113 $ 103 10 % $ 221 $ 193 15 %
Operating margin       13.9 %     13.4 %     50   bpts     13.8 %     12.8 %     100   bpts
 

Second Quarter: Electronic Systems net sales for the 2018 second
quarter increased by $45 million, or 6%, compared to the 2017 second
quarter. Organic sales increased by $32 million, or 4%, compared to the
2017 second quarter. Organic sales exclude $13 million of sales
increases related to business acquisitions. Organic sales increased by:
(1) $20 million for Precision Engagement Systems primarily due to
increased deliveries and volume on fuzing and ordnance and guidance
systems products primarily to the U.S. Army and (2) $12 million for Link
Training & Simulation due to higher deliveries of training systems for
the U.S. Army's Flight School XXI program.

Electronic Systems operating income for the 2018 second quarter
increased by $10 million, or 10%, compared to the 2017 second quarter.
Operating margin increased by 50 basis points to 13.9% due to
acquisitions.

First Half: Electronic Systems net sales for the 2018 first half
increased by $92 million, or 6%, compared to the 2017 first half.
Organic sales increased by $78 million, or 5%, compared to the 2017
first half. Organic sales exclude $24 million of sales increases related
to business acquisitions and $10 million of sales declines related to
business divestitures. Organic sales increased by: (1) $49 million for
Precision Engagement Systems due to increased deliveries and volume on
fuzing and ordnance and guidance systems products primarily to the U.S.
Army, (2) $21 million for Security & Detection Systems due to increased
deliveries for airport screening devices primarily to the U.S.
Transportation Security Administration (TSA) and higher volume on an
industrial automation control contract for a commercial customer and (3)
$8 million primarily for Link Training & Simulation due to higher volume
for training systems to the U.S. Navy.

Electronic Systems operating income for the 2018 first half increased by
$28 million, or 15%, compared to the 2017 first half. Operating margin
increased by 100 basis points to 13.8%. Operating margin increased by
160 basis points primarily due to improved contract performance across
all business areas and 60 basis points due to higher margins related to
acquisitions. These increases were partially offset by 120 basis points
primarily due to sales mix changes at Power & Propulsion Systems,
Precision Engagement Systems and Security & Detection Systems.

Aerospace Systems

                               
      Second Quarter Ended           First Half Ended      
($ in millions)

June 29,
2018

   

June 30,
2017

Increase

June 29,
2018

   

June 30,
2017

Increase
Net sales $ 741 $ 679 9 % $ 1,427 $ 1,375 4 %
Operating income $ 61 $ 56 9 % $ 118 $ 112 5 %
Operating margin       8.2 %     8.2 %       bpts     8.3 %     8.1 %     20   bpts
 

Second Quarter: Aerospace Systems net sales for the 2018 second
quarter increased by $62 million, or 9%, compared to the 2017 second
quarter. Sales increased primarily due to the procurement of one U.S.
Air Force (USAF) Compass Call Recap aircraft to begin missionization.

Aerospace Systems operating income for the 2018 second quarter increased
by $5 million, or 9%, compared to the 2017 second quarter. Operating
margin was 8.2% for the 2018 and 2017 second quarters. Operating margin
increased by 30 basis points due to lower pension costs, which was
offset by sales mix changes primarily related to the Compass Call Recap
aircraft procurement at Mission Integration.

First Half: Aerospace Systems net sales for the 2018 first half
increased by $52 million, or 4%, compared to the 2017 first half. Sales
increased by: (1) $55 million related to the procurement of one USAF
Compass Call Recap aircraft to begin missionization, (2) $42 million due
to higher volume related to the Presidential Aircraft Recap Program and
(3) $30 million primarily due to higher volume on large Intelligence,
Surveillance and Reconnaissance (ISR) aircraft systems for the U.S.
Department of Defense (DoD). These increases were partially offset by
lower volume of: (1) $47 million related to international aircraft
modifications primarily the Australian Defence Force C-27J aircraft and
(2) $28 million primarily on ISR aircraft systems for foreign military
customers as contracts near completion.

Aerospace Systems operating income for the 2018 first half increased by
$6 million, or 5%, compared to the 2017 first half. Operating margin
increased by 20 basis points to 8.3%. Operating margin increased by 50
basis points due to favorable contract performance adjustments and 30
basis points due to lower pension costs. These increases were partially
offset by sales mix changes at Mission Integration.

Communication Systems

                               
      Second Quarter Ended         First Half Ended    
($ in millions)

June 29,
2018

   

June 30,
2017

Increase/
(decrease)

June 29,
2018

   

June 30,
2017

Decrease
Net sales $ 554 $ 550 1 % $ 1,047 $ 1,087 (4 ) %
Operating income $ 45 $ 84 (46 ) % $ 82 $ 126 (35 ) %
Operating margin       8.1 %     15.3 %     (720 ) bpts     7.8 %     11.6 %     (380 ) bpts
 

Second Quarter: Communication Systems net sales for the 2018
second quarter increased by $4 million, or 1%, compared to the 2017
second quarter. Sales increased by $33 million for Space & Power Systems
due to higher volume on power devices for commercial and military
satellites. The increase was partially offset by $29 million due to
lower production volume for Unmanned Aerial Vehicle (UAV) communication
systems for the DoD in Broadband Communication Systems.

Communication Systems operating income for the 2018 second quarter
decreased by $39 million, or 46%, compared to the 2017 second quarter.
Operating margin decreased by 720 basis points to 8.1%. Operating margin
decreased by: (1) 770 basis points due to a pre-tax gain of $42 million
related to the sale of the company's property in San Carlos, California
in connection with the consolidation of the EDD/ETI TWT businesses in
the 2017 second quarter that did not recur and (2) 170 basis points
primarily due to lower volume at Broadband Communication Systems. These
decreases were partially offset by 220 basis points due to lower
severance and restructuring costs of $6 million and lower operating
costs of $6 million for the 2018 second quarter compared to the 2017
second quarter, primarily at Space & Power Systems.

First Half: Communication Systems net sales for the 2018 first
half decreased by $40 million, or 4%, compared to the 2017 first half.
Sales decreased by $64 million primarily driven by lower production
volume for UAV communication systems for the DoD in Broadband
Communication Systems. The decrease was partially offset by $24 million
primarily for Space & Power Systems due to higher volume on power
devices for commercial and military satellites.

Communication Systems operating income for the 2018 first half decreased
by $44 million, or 35%, compared to the 2017 first half. Operating
margin decreased by 380 basis points to 7.8%. Operating margin decreased
by: (1) 390 basis points due to the gain on the sale of the company's
property in San Carlos, California, in the 2017 first half that did not
recur and (2) 160 basis points primarily due to lower volume at
Broadband Communication Systems and Space & Power Systems. These
decreases was partially offset by 170 basis points due to lower
severance and restructuring costs of $10 million and lower operating
costs of $9 million for the 2018 first half compared to the 2017 first
half, primarily at Space & Power Systems.

Sensor Systems

                               
      Second Quarter Ended         First Half Ended    
($ in millions)

June 29,
2018

   

June 30,
2017

Increase/
(decrease)

June 29,
2018

   

June 30,
2017

Increase/
(decrease)

Net sales $ 476 $ 389 22 % $ 883 $ 739 19 %
Operating income $ 54 $ 51 6 % $ 103 $ 100 3 %
Operating margin       11.3 %     13.1 %     (180 ) bpts     11.7 %     13.5 %     (180 ) bpts
 

Second Quarter: Sensor Systems net sales for the 2018 second
quarter increased by $87 million, or 22%, compared to the 2017 second
quarter. Organic sales increased by $80 million, or 21%, compared to the
2017 second quarter. Organic sales exclude $7 million of sales increases
related to business acquisitions. Organic sales increased by: (1) $34
million for Warrior Systems due to increased deliveries of night vision
products, primarily to foreign military customers, (2) $16 million due
to increased deliveries of airborne turret systems, primarily to foreign
militaries, (3) $14 million for Maritime Systems primarily due to
increased volume for new commercial contracts, (4) $11 million primarily
for Advanced Programs due to higher volume for mission management
systems and (5) $5 million for Space Systems due to higher volume for
optical systems, and space electronics and infrared detection products
to the U.S. military.

Sensor Systems operating income for the 2018 second quarter increased $3
million or 6%, compared to the 2017 second quarter. Operating margin
decreased by 180 basis points to 11.3%. Operating margin decreased by
330 basis points due to higher research and development costs related to
imaging, space and undersea growth investments and 50 basis points due
to lower margins related to acquisitions. These decreases were partially
offset primarily by higher volume, which increased operating margin by
200 basis points.

First Half: Sensor Systems net sales for the 2018 first half
increased by $144 million, or 19%, compared to the 2017 first half.
Organic sales increased by $127 million, or 17%, compared to the 2017
first half. Organic sales exclude $17 million of sales increases related
to business acquisitions. Organic sales increased by: (1) $34 million
for Warrior Systems due to increased deliveries of night vision products
primarily to foreign military customers, (2) $31 million due to
increased deliveries of airborne turret systems, primarily to foreign
militaries, (3) $23 million for Space Systems due to higher volume for
optical systems, and space electronics and infrared detection products
to the U.S. military, (4) $17 million for Intelligence & Mission Systems
due to increased deliveries of electronic warfare countermeasures
products primarily to foreign militaries, (5) $17 million for Maritime
Systems primarily due to higher volume for compact towed array products
to the U.S. Navy and (6) $5 million for Advanced Programs due to higher
volume for mission management systems.

Sensor Systems operating income for the 2018 first half increased by $3
million, or 3%, compared to the 2017 first half. Operating margin
decreased by 180 basis points to 11.7% due to trends similar to the 2018
second quarter.

Financial Guidance

Based on information known as of the date of this release, the company
has updated its consolidated and segment financial guidance for the year
ending December 31, 2018 that was previously provided on May 1, 2018, as
presented in the tables below. All financial guidance amounts are based
on results from continuing operations and are estimates subject to
change, including as a result of matters discussed under the
"Forward-Looking Statements" cautionary language beginning on page 9.
The company undertakes no duty to update its guidance.

 
Consolidated 2018 Financial Guidance
(in millions, except per share data)
      Current Guidance    

Prior Guidance
(May 1, 2018)

Net sales $10,000 to $10,200 $9,850 to $10,050
Operating margin 11.7% 11.2%
Segment operating margin(1) 11.2% 11.2%
Interest expense and other, net(2) $135 $141
Debt retirement charges $69
Effective tax rate 18.0% 19.0%
Minority interest expense(3) $20 $20
Diluted shares 80 80
Diluted EPS from continuing operations $9.46 to $9.66 $9.40 to $9.60
Adjusted diluted EPS from continuing operations(4) $9.80 to $10.00 $9.40 to $9.60
Net cash from operating activities from continuing operations $1,170 $1,155
Capital expenditures, net of dispositions of property, plant and
equipment

(255)

(255)
Free cash flow $915 $900

_________________

(1) Segment operating margin excludes the gain of $48 million
($25 million after income taxes, or $0.31 per diluted share)
related to the sale of the

company's Crestview &
TCS Businesses.

(2) Interest expense and other is comprised of: (i) interest
expense of $164 million and (ii) interest and other income, net,
of $29 million (including $9 million

of income
related to employee benefit plans).

(3) Minority interest expense represents net income from
continuing operations attributable to noncontrolling interests.

(4) Adjusted diluted EPS from continuing operations is
diluted EPS from continuing operations excluding: (i) the $0.31
gain related to the sale of the

company's
Crestview & TCS Businesses and (ii) $0.65 ($52 million after
income taxes) of debt retirement charges. Adjusted diluted EPS
from continuing

operations is not calculated in
accordance with U.S. GAAP. The company believes that the gain
relating to the Crestview & TCS Businesses divestiture

and
the debt retirement charge affect the comparability of the results
of operations and that disclosing diluted EPS from continuing
operations excluding

these items is useful to
investors as it allows investors to more easily compare the 2018
guidance to the 2017 results. However, these non-GAAP financial

measures
may not be defined or calculated by other companies in the same
manner.

 

 
Segment 2018 Financial Guidance
($ in millions)

 

      Current Guidance    

Prior Guidance
(May 1, 2018)

Net Sales:

Electronic Systems $3,200 to $3,300 $3,200 to $3,300

Aerospace Systems

$2,825 to $2,925 $2,625 to $2,725
Communication Systems $2,125 to $2,225 $2,225 to $2,325
Sensor Systems $1,750 to $1,850 $1,700 to $1,800
 

Operating Margin:

Electronic Systems 13.9% to 14.1% 13.6% to 13.8%
Aerospace Systems 7.9% to 8.1% 7.8% to 8.0%
Communication Systems 9.9% to 10.1% 10.9% to 11.1%
Sensor Systems       12.4% to 12.6%     11.7% to 11.9%
 

The revisions to our Current Guidance compared to our Prior Guidance
primarily includes:

  • an increase in estimated sales for Aerospace Systems due to higher
    expected sales to the DoD and Sensor Systems due to businesses
    acquisitions and higher expected sales of airborne turrets systems and
    night vision products to foreign military customers;
  • a decrease in estimated sales and operating margins for Communication
    Systems due to lower expected sales of UAV communication systems to
    the DoD and lower operating margins due to slower than planned
    productivity increases at the recently consolidated TWT business;
  • an increase in Electronic Systems and Sensor Systems operating margins
    primarily due to higher volume and improved contract performance; and
  • impacts from the recent debt refinancing and gain on the sale of the
    Crestview & TCS Businesses.

The current guidance for 2018 is subject to potential changes to
interpretations of U.S. Tax Reform and excludes: (i) any potential
goodwill impairment charges for which the information is presently
unknown, (ii) potential adverse results related to litigation
contingencies and (iii) other items related to potential business
divestitures and the impact of potential acquisitions.

Additional financial information regarding the 2018 second quarter
results and the 2018 financial guidance is available on the company's
website at www.L3T.com.

Conference Call

In conjunction with this release, L3 will host a conference call today,
Thursday, July 26, 2018, at 11:00 a.m. ET that will be simultaneously
broadcast over the Internet. Christopher E. Kubasik, Chairman, Chief
Executive Officer and President, and Ralph G. D'Ambrosio, Senior Vice
President and Chief Financial Officer, will host the call.

Listeners can access the conference call live at the following website
address:

http://www.L3T.com

Please allow 15 minutes prior to the call to visit this site to download
and install any necessary audio software. The archived version of the
call may be accessed at the site or by dialing 1-877-344-7529 (for
domestic callers) or 1-412-317-0088 (for international callers) and
using the Replay Access Code: 10122086 approximately one hour after the
call ends. The Conference Replay will be available through Thursday,
August 9, 2018.

Headquartered in New York City, L3 Technologies employs approximately
31,000 people worldwide and is a leading provider of a broad range of
communication, electronic and sensor systems used on military, homeland
security and commercial platforms. L3 is also a prime contractor in
aerospace systems, security and detection systems and pilot training.

To learn more about L3, please visit the company's website at www.L3T.com.
L3 uses its website as a channel of distribution of material company
information. Financial and other material information regarding L3 is
routinely posted on the company's website and is readily accessible.

Forward-Looking Statements

Certain of the matters discussed in this press release, including
information regarding the company's 2018 financial guidance, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. All statements other than historical
facts may be forward-looking statements, such as "may," "will,"
"should," "likely," "projects," "financial guidance," ‘‘expects,''
‘‘anticipates,'' ‘‘intends,'' ‘‘plans,'' ‘‘believes,'' ‘‘estimates,''
and similar expressions are used to identify forward-looking statements.
The company cautions investors that these statements are subject to
risks and uncertainties, many of which are difficult to predict and
generally beyond the company's control, that could cause actual results
to differ materially from those expressed in, or implied or projected
by, the forward-looking information and statements. Some of the factors
that could cause actual results to differ include, but are not limited
to, the following: our dependence on the defense industry; backlog
processing and program slips resulting from delayed awards and/or
funding from the Department of Defense (DoD) and other major customers;
the U.S. Government fiscal situation; changes in DoD budget levels and
spending priorities; our reliance on contracts with a limited number of
customers and the possibility of termination of government contracts by
unilateral government action or for failure to perform; the extensive
legal and regulatory requirements surrounding many of our contracts; our
ability to retain our existing business and related contracts; our
ability to successfully compete for and win new business, or, identify,
acquire and integrate additional businesses; our ability to maintain and
improve our operating margin; the availability of government funding and
changes in customer requirements for our products and services; the
outcome of litigation matters (see Notes to our annual report on Form
10-K and quarterly reports on Form 10-Q); results of audits by U.S.
Government agencies and of ongoing governmental investigations; our
significant amount of debt and the restrictions contained in our debt
agreements and actions taken by rating agencies that could result in a
downgrade of our debt; our ability to continue to recruit, retain and
train our employees; actual future interest rates, volatility and other
assumptions used in the determination of pension benefits and equity
based compensation, as well as the market performance of benefit plan
assets; our collective bargaining agreements; our ability to
successfully negotiate contracts with labor unions and our ability to
favorably resolve labor disputes should they arise; the business,
economic and political conditions in the markets in which we operate;
the risk that our commercial aviation products and services businesses
are affected by a downturn in global demand for air travel or a
reduction in commercial aircraft OEM (Original Equipment Manufacturer)
production rates; the DoD's Better Buying Power and other efficiency
initiatives; events beyond our control such as acts of terrorism; our
ability to perform contracts on schedule; our international operations
including currency risks and compliance with foreign laws; our extensive
use of fixed-price type revenue arrangements; the rapid change of
technology and high level of competition in which our businesses
participate; risks relating to technology and data security; our
introduction of new products into commercial markets or our investments
in civil and commercial products or companies; the impact on our
business of improper conduct by our employees, agents or business
partners; goodwill impairments and the fair values of our assets; and
the ultimate resolution of contingent matters, claims and investigations
relating to acquired businesses, and the impact on the final purchase
price allocations.

Our forward-looking statements speak only as of the date of this press
release or as of the date they were made, and we undertake no obligation
to update forward-looking statements. For a more detailed discussion of
these factors, also see the information under the captions "Risk
Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our most recent report on Form
10-K for the year ended December 31, 2017 and any material updates to
these factors contained in any of our future filings.

As for the forward-looking statements that relate to future financial
results and other projections, actual results will be different due to
the inherent uncertainties of estimates, forecasts and projections and
may be better or worse than projected and such differences could be
material. Given these uncertainties, you should not place any reliance
on these forward-looking statements.

- Financial Tables Follow -

Table A

L3 TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS

(in millions, expect per share data)

         
Second Quarter Ended(a) First Half Ended(a)

June 29,
2018(b)

   

June 30,
2017(b)

June 29,
2018(b)

   

June 30,
2017(b)

Net sales $ 2,583 $ 2,385 $ 4,954 $ 4,706
Cost of sales (1,927 ) (1,732 ) (3,650 ) (3,458 )
General and administrative expenses (383 ) (359 ) (780 ) (717 )
Total costs and operating expenses 2,310 2,091 4,430 4,175
Gain on sale of the Crestview & TCS Businesses 48     48    
Operating income 321 294 572 531
Interest expense (44 ) (42 ) (85 ) (84 )
Interest and other income, net 8 2 14 6
Debt retirement charge (48 )   (48 )  
Income from continuing operations before income taxes 237 254 453 453
Provision for income taxes (48 ) (59 ) (72 ) (101 )
Income from continuing operations 189 195 381 352
Income from discontinued operations, net of income tax 190   12   206   23  
Net income 379 207 587 375
Net income from continuing operations attributable to
noncontrolling interests
(4 ) (5 ) (9 ) (9 )
Net income attributable to L3 $ 375   $ 202   $ 578   $ 366  
 
Basic earnings per share attributable to L3's common shareholders:
Continuing operations $ 2.36 $ 2.44 $ 4.75 $ 4.40
Discontinued operations 2.42   0.15   2.63   0.30  
Basic earnings per share $ 4.78   $ 2.59   $ 7.38   $ 4.70  
 
Diluted earnings per share attributable to L3's common
shareholders:
Continuing operations $ 2.33 $ 2.39 $ 4.67 $ 4.32
Discontinued operations 2.39   0.15   2.59   0.29  
Diluted earnings per share $ 4.72   $ 2.54   $ 7.26   $ 4.61  
 
L3's weighted average common shares outstanding:
Basic 78.4   78.0   78.3   77.8  
Diluted 79.4   79.5   79.6   79.4  
 

_______________

(a)

It is the company's established practice to close its books
for the quarters ending March, June and September on the Friday
preceding the end of the

calendar quarter. The
interim financial statements and tables of financial information
included herein have been prepared and are labeled based on that

convention.
The company closes its annual books on December 31 regardless of
what day it falls on.

(b)

The company's statement of operations for the quarter and
first half ended June 29, 2018 is presented under ASC 606 while
the company's statement

of operations for the
quarter and first half ended June 30, 2017 is presented under ASC
605. Tables E and F quantify the impact of adopting ASC 606

on
the quarter and first half ended June 29, 2018.

Table B

L3 TECHNOLOGIES, INC.
UNAUDITED SELECT FINANCIAL DATA
(in
millions)

         
Second Quarter Ended First Half Ended

June 29,
2018(a)

   

June 30,
2017(a)

June 29,
2018(a)

   

June 30,
2017(a)

Segment operating data

Net sales:
Electronic Systems $ 812 $ 767 $ 1,597 $ 1,505
Aerospace Systems 741 679 1,427 1,375
Communication Systems 554 550 1,047 1,087
Sensor Systems 476   389   883   739  
Total $ 2,583   $ 2,385   $ 4,954   $ 4,706  
 
Operating income:
Electronic Systems $ 113 $ 103 $ 221 $ 193
Aerospace Systems 61 56 118 112
Communication Systems 45 84 82 126
Sensor Systems 54   51   103   100  
Segment operating income 273 294 524 531
Gain on sale of the Crestview & TCS Businesses 48     48    
Total $ 321   $ 294   $ 572   $ 531  
 
Operating margin:
Electronic Systems 13.9 % 13.4 % 13.8 % 12.8 %
Aerospace Systems 8.2 % 8.2 % 8.3 % 8.1 %
Communication Systems 8.1 % 15.3 % 7.8 % 11.6 %
Sensor Systems 11.3 % 13.1 % 11.7 % 13.5 %
Total 10.6 % 12.3 % 10.6 % 11.3 %
 
Depreciation and amortization:
Electronic Systems $ 24 $ 17 $ 43 $ 35
Aerospace Systems 12 13 24 24
Communication Systems 11 12 24 24
Sensor Systems 13   12   25   23  

Total

$ 60   $ 54   $ 116   $ 106  
 

Funded order data

Electronic Systems $ 860 $ 704 $ 1,800 $ 1,607
Aerospace Systems 915 411 1,625 1,059
Communication Systems 547 514 1,072 970
Sensor Systems 486   500   947   882  
Total $ 2,808   $ 2,129   $ 5,444   $ 4,518  
 

June 29,
2018

January 1,
2018(b)

Backlog

Funded $ 8,833 $ 8,493
 

_______________

(a)

The company's statement of operations for the quarter and
first half ended June 29, 2018 is presented under ASC 606 while
the company's statement

of operations for the
quarter and first half ended June 30, 2017 is presented under ASC
605. Tables E and F quantify the impact of adopting ASC 606

on
the quarter and first half ended June 29, 2018.

(b)

Funded backlog at January 1, 2018 is adjusted for the effects
on sales related to the adoption of ASC 606.

Table C

L3 TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED
BALANCE
SHEETS

(in millions)

         

June 29,
2018(a)

December 31,
2017(a)

ASSETS
 
Cash and cash equivalents $ 1,366 $ 662
Billed receivables, net 863 723
Contract assets 1,611
Contracts in process 1,933
Inventories 934 389
Prepaid expenses and other current assets 332 300
Assets held for sale 135
Assets of discontinued operations   306
Total current assets 5,106   4,448
Property, plant and equipment, net 1,137 1,110
Goodwill 6,651 6,615
Identifiable intangible assets 288 292
Other assets 348   264
Total assets $ 13,530   $ 12,729

 

LIABILITIES AND EQUITY
 
Current portion of long-term debt $ 581

$

Accounts payable, trade 588 531
Accrued employment costs 453 493
Accrued expenses 264 217
Contract liabilities 554
Advance payments and billings in excess of costs incurred 509
Income taxes payable 25 19
Other current liabilities 338 367
Liabilities held for sale 17
Liabilities of discontinued operations   226
Total current liabilities 2,803   2,379
Pension and postretirement benefits 1,290 1,313
Deferred income taxes 190 158
Other liabilities 416 398
Long-term debt 3,319   3,330
Total liabilities 8,018   7,578
Shareholders' equity 5,444 5,083
Noncontrolling interests 68   68
Total equity 5,512   5,151
Total liabilities and equity $ 13,530   $ 12,729
 

_______________

(a)

The company's balance sheet at June 29, 2018 is presented
under ASC 606 while the company's balance sheet at December 31,
2017 is presented

under ASC 605. Table G
quantifies the impact of adopting ASC 606 at June 29, 2018.

Table D

L3 TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS
OF CASH FLOWS

(in millions)

     
First Half Ended
June 29, 2018     June 30, 2017

Operating activities

Net income $ 587 $ 375
Less: income from discontinued operations, net of tax (206 ) (23 )
Income from continuing operations 381 352
Depreciation of property, plant and equipment 90 82
Amortization of intangibles and other assets 26 24
Deferred income tax provision 21 25
Stock-based compensation expense 34 28
Contributions to employee savings plans in common stock 68 56
Amortization of pension and postretirement benefit plans net loss
and prior service cost
35 30
Gain on sale of property, plant and equipment (42 )
Gain on sale of the Crestview & TCS Businesses (48 )
Debt retirement charge 48
Other non-cash items 1 6

Changes in operating assets and liabilities, excluding amounts
from acquisitions and divestitures and discontinued operations:

Billed receivables (137 ) (88 )
Contract assets (266 )
Contracts in process (123 )
Inventories (10 ) (12 )
Prepaid expenses and other current assets (82 ) (15 )
Accounts payable, trade 61 (99 )
Accrued employment costs (38 ) (28 )
Accrued expenses 63 158
Contract liabilities (2 )
Advance payments and billings in excess of costs incurred (10 )
Income taxes (22 ) (12 )
All other operating activities (45 ) (17 )
Net cash from operating activities from continuing operations 178   315  

Investing activities

Business acquisitions, net of cash acquired (69 ) (191 )
Proceeds from the sale of businesses, net of closing date cash
balances
535 16
Capital expenditures (108 ) (96 )
Dispositions of property, plant and equipment 1 65
Other investing activities (29 ) (1 )
Net cash from (used in) investing activities from continuing
operations
330   (207 )

Financing activities

Proceeds from senior debt 1,798
Repayment of senior debt (1,263 )
Borrowings under revolving credit facility 501 1,158
Repayments of borrowings under revolving credit facility (501 ) (1,158 )
Common stock repurchased (287 ) (26 )
Dividends paid (128 ) (119 )
Proceeds from exercise of stock options 103 25
Proceeds from employee stock purchase plan 17 16
Debt issue costs (13 )
Repurchases of common stock to satisfy tax withholding obligations (24 ) (18 )
Other financing activities (6 ) (8 )
Net cash from (used in) financing activities from continuing
operations
197   (130 )
Effect of foreign currency exchange rate changes on cash and cash
equivalents
(8 ) 10
Cash from (used in) discontinued operations:
Operating activities 9 36
Investing activities (2 ) (2 )
Cash from discontinued operations 7   34  
Net increase in cash and cash equivalents 704 22
Cash and cash equivalents, beginning of the period 662   363  
Cash and cash equivalents, end of the period $ 1,366   $ 385  
 

Table E

L3 TECHNOLOGIES, INC.
IMPACT OF NEW REVENUE RECOGNITION
STANDARD

ON THE UNAUDITED CONDENSED CONSOLIDATED STATEMENT
OF OPERATIONS

(in millions)

The table below presents the impact of adopting ASC 606 on the company's
statement of operations.

      Second Quarter Ended June 29, 2018
       
STATEMENT OF OPERATIONS

Under
ASC 605

Effect of
ASC 606

As Reported
Under ASC 606

     

(in millions)

     
Net sales $ 2,538 $ 45 $ 2,583
Cost of sales (1,877 ) (50 ) (1,927 )
General and administrative expenses (387 ) 4 (383 )
Gain on sale of the Crestview & TCS Businesses 47   1   48  
Operating income 321 321
Income from continuing operations before income taxes 237 237
Provision for income taxes (48 )   (48 )
Income from continuing operations 189 189
Income from discontinued operations, net of income taxes 191   (1 ) 190  
Net income 380 (1 ) 379
Net income attributable to L3 $ 376   $ (1 ) $ 375  
 
Basic earnings per share attributable to common shareholders:
Continuing operations $ 2.36 $ $ 2.36
Discontinued operations 2.44   (0.02 ) 2.42  
Basic earnings per share $ 4.80   $ (0.02 ) $ 4.78  
Diluted earnings per share attributable to common shareholders:
Continuing operations $ 2.33 $ $ 2.33
Discontinued operations 2.41   (0.02 ) 2.39  
Diluted earnings per share $ 4.74   $ (0.02 ) $ 4.72  
 

The following table quantifies the impact of adopting ASC 606 on segment
net sales and operating income.

     
Second Quarter Ended June 29, 2018
Effect of ASC 606
Sales    

Operating
Income

(in millions)
Electronic Systems $ 14 $ 4
Aerospace Systems (2 ) (7 )
Communication Systems 21 (1 )
Sensor Systems 12   3  
Segment totals $ 45   (1 )
 

Table F

L3 TECHNOLOGIES, INC.
IMPACT OF NEW REVENUE RECOGNITION
STANDARD

ON THE UNAUDITED CONDENSED CONSOLIDATED STATEMENT
OF OPERATIONS

(in millions)

The table below presents the impact of adopting ASC 606 on the company's
statement of operations.

     
First Half Ended June 29, 2018
STATEMENT OF OPERATIONS

Under
ASC 605

   

Effect of
ASC 606

   

As Reported
Under ASC 606

     

(in millions)

     
Net sales $ 4,833 $ 121 $ 4,954
Cost of sales (3,550 ) (100 ) (3,650 )
General and administrative expenses (777 ) (3 ) (780 )
Gain on sale of the Crestview & TCS Businesses 47   1   48  
Operating income 553 19 572
Income from continuing operations before income taxes 434 19 453
Provision for income taxes (67 ) (5 ) (72 )
Income from continuing operations 367 14 381
Income from discontinued operations, net of income taxes 206     206  
Net income 573 14 587
Net income attributable to L3 $ 564 $ 14 $ 578
 
Basic earnings per share attributable to common shareholders:
Continuing operations $ 4.57 $ 0.18 $ 4.75
Discontinued operations 2.63     2.63  
Basic earnings per share $ 7.20   $ 0.18   $ 7.38  
Diluted earnings per share attributable to common shareholders:
Continuing operations $ 4.50 $ 0.17 $ 4.67
Discontinued operations 2.59     2.59  
Diluted earnings per share $ 7.09   $ 0.17   $ 7.26  
 

The following table quantifies the impact of adopting ASC 606 on segment
net sales and operating income.

     
First Half Ended June 29, 2018
Effect of ASC 606
Sales    

Operating
Income

(in millions)
Electronic Systems $ 44 $ 7
Aerospace Systems 2 (6 )
Communication Systems 41 3
Sensor Systems 34   14  
Segment totals $ 121   18  
 

Table G

L3 TECHNOLOGIES, INC.
IMPACT OF NEW REVENUE RECOGNITION
STANDARD

ON THE UNAUDITED CONDENSED CONSOLIDATED BALANCE
SHEET

(in millions)

The table below presents the impact of adopting ASC 606 on the company's
balance sheet.

     
June 29, 2018
BALANCE SHEET Under
ASC 605
    Effect of
ASC 606
   

As Reported
Under ASC 606

(in millions)
Assets
Current assets:
Contract assets $ $ 1,611 $ 1,611
Contracts in process 2,185 (2,185 )
Inventories 405 529 934
Prepaid expenses and other current assets 316 16 332
Total current assets 5,135 (29 ) 5,106
Other assets 300 48 348
Total assets $ 13,511 $ 19 $ 13,530
 
Liabilities
Current liabilities:
Accrued expenses $ 279 $ (15 ) $ 264
Contract liabilities 554 554
Advance payments and billings in excess of costs incurred 522 (522 )
Other current liabilities 384 (46 ) 338
Total current liabilities 2,832 (29 ) 2,803
Deferred income taxes 181 9 190
Other liabilities 402 14 416
Total liabilities 8,024 (6 ) 8,018
Shareholders' Equity
Retained earnings 7,101 25 7,126
Total equity $ 5,487 $ 25 $ 5,512
 

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