L-3 Communications Holdings, management discussion

From the 10-Q, dated May 7th:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Financial Section Roadmap

The financial section includes management’s discussion and analysis (MD&A), our unaudited condensed consolidated financial statements and notes to those financial statements. The MD&A can be found on pages 25 to 34, the unaudited condensed financial statements and related notes can be found on pages 1 to 24. The following table is designed to assist in your review of MD&A.


Topic Location
Overview and Outlook
L-3’s Business Page 25
Key Performance Measures Page 26
Business Acquisitions Page 27
Results of Operations, including business segments Page 27 - 31
Liquidity and Capital Resources:
Anticipated Sources of Cash Flow Page 31
Balance Sheet Page 31 - 32
Statement of Cash Flows Page 33 - 34
Legal Proceedings and Contingencies Page 34

Overview and Outlook

L-3’s Business

L-3 is a prime system contractor in aircraft modernization and maintenance, Command, Control, Communications, Intelligence, Surveillance and Reconnaissance (C3ISR) systems and government services. L-3 is also a leading provider of high technology products, subsystems and systems. Our customers include the U.S. Department of Defense (DoD) and its prime contractors, the U.S. Department of Homeland Security (DHS), U.S. Government intelligence agencies, major aerospace and defense contractors, allied foreign government ministries of defense, commercial customers and certain other U.S. federal, state and local government agencies. Our sales to the DoD represented approximately 73% of our total sales in 2006. Our remaining sales in 2006 were composed of approximately 7% to non-DoD U.S. Government customers, including federal, state and local agencies, approximately 7% to allied foreign governments, and approximately 13% to commercial customers, both domestic and foreign.

We have the following four reportable segments: (1) C3ISR, (2) Government Services, (3) Aircraft Modernization and Maintenance (AM&M), and (4) Specialized Products. Financial information for our reportable segments is included in Note 15 to our unaudited condensed consolidated financial statements.

The C3ISR reportable segment provides products and services for the global ISR market and secure networked communication systems and equipment. We believe that these products and services are critical elements for a substantial number of major command, control, communication, intelligence gathering and space systems. These products and services are used to connect a variety of airborne, space, ground and sea-based communication systems and are used in the transmission, processing, recording, monitoring and dissemination functions of these communication systems. The Government Services reportable segment provides communications systems support and engineering services, information technology services, teaching and training services, leadership development, logistics support, intelligence support and analysis and other technical services. The AM&M reportable segment provides specialized aircraft modernization, upgrades and sustainment, maintenance and logistics support services. The Specialized Products reportable segment provides a broad range of products, including power and control systems, microwave components, simulation and training, electro-optic/infrared (EO/IR) products, precision engagement, aviation and display products, telemetry products, security and detection systems, combat propulsion systems and undersea warfare products.

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Key Performance Measures

The key financial performance measures that L-3 uses to manage its businesses and monitor results of operations are sales growth and operating margin. We define organic sales growth as the increase or decrease in sales for the current period compared to the prior period, excluding sales in the current period from business acquisitions that have been included in L-3’s actual results of operations for less than twelve months. Combined, these financial performance measures are the primary drivers of L-3’s operating income, earnings and net cash from operating activities. We define operating margin as operating income as a percentage of sales. L-3’s business strategy continues to be focused on increasing sales from organic growth and select business acquisitions that add new products, technologies, programs or customers in areas that complement L-3’s existing businesses. The larger portion of our historical sales growth has been from business acquisitions. We made our largest acquisition on July 29, 2005, when we acquired The Titan Corporation (Titan) for a purchase price of approximately $2.8 billion. We expect that our sales growth from business acquisitions will decline from our historical levels for the foreseeable future. The aggregate size of our most recent business acquisitions are not as large as Titan, and we do not expect to acquire businesses as large as Titan in the foreseeable future.

Sales Growth. For the five years ended December 31, 2006, our compounded annual growth rate for our consolidated sales was 32.8% and our average annual organic sales growth was approximately 11%. Sales growth for the three months ended March 31, 2007 (2007 First Quarter) was 13.6%, including organic sales growth of 9.1%, and sales growth from business acquisitions of 4.5%.

Our World Wide Linguist Support Services contract (Linguist Contract) with the U.S. Army generated sales of $174 million for the 2007 First Quarter. In March 2007, the U.S. Army amended the Linguist Contract. The amendment provides for three contract options, each with a three-month period of performance. The first option was exercised extending the contract to June 9, 2007. As previously disclosed, the U.S. Army did not select our proposal for the Translation and Interpretation Management Services (TIMS) contract, and, on December 22, 2006, we filed a protest with the U.S. Government Accountability Office (GAO). On March 29, 2007, our protest challenging the evaluation and selection decision for the TIMS contract was sustained by the GAO. The U.S. Army has 60 days to respond to the GAO’s recommendation. The U.S. Army has asked the GAO to reconsider its decision. The TIMS contract is the successor contract to the Linguist Contract to provide translators and linguists in support of the U.S. military operations in Iraq. We can provide no assurances about the outcome of our protest of the TIMS contract and whether the Linguist Contract will be extended beyond June 9, 2007.

We, as most U.S. defense contractors, have benefited from the upward trend in overall DoD spending over recent years. The Bush Administration’s fiscal year 2008 DoD budget request, including a fiscal year 2008 Global War on Terror (GWOT) supplemental request and the President’s five-year Defense Plan, indicates a slower rate of growth is unlikely until after 2008. We believe that our businesses should be able to continue to generate organic sales growth after 2008 as we anticipate the defense budget will continue its focus on areas that match certain of the core competencies of L-3: C3ISR, precision-guided weapons, network-centric communications, special operations forces (SOF), government services and training and simulation. Additionally, the increased DoD spending during recent years has included supplemental appropriations for military operations in Iraq, Afghanistan and the GWOT.

Operating Margin. Our operating margin was 9.9% for the 2007 First Quarter and the three months ended March 31, 2006 (2006 First Quarter). As described more fully in Reportable Segment Results of Operations, operating margins improved in three of the company’s business segments resulting from improved contract performance, higher sales volume and lower indirect costs. The improvements were primarily offset by lower margins in the C3ISR segment primarily due to lower secure terminal equipment (STE) sales and higher development costs for new products. Over the next year, we expect to generate modest improvements in operating margin as we expect to continue to increase sales volume, reduce indirect costs and improve our overall contract performance. However, future business acquisitions and future new business, including the Linguist Contract if extended, could reduce our future operating margins, if they have margins lower than L-3’s existing operating margin. One of our business objectives is to sustainably grow operating income, earnings and cash flow, and improving operating margins is a primary consideration for achieving this growth, but it is not the only consideration.

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Business Acquisitions

Our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 summarizes the business acquisitions that we completed through the end of last year. Also see Note 3 to our unaudited condensed consolidated financial statements contained in this quarterly report. During the 2007 First Quarter, we used $22.0 million of cash in the aggregate to acquire a business and pay the remaining contractual purchase price for our TRL Electronics plc (TRL) acquisition.

All of our business acquisitions are included in our consolidated results of operations from their dates of acquisition. We regularly evaluate potential business acquisitions. On May 4, 2007, we acquired Global Communication Solutions, Inc. (GCS) with cash on hand. GCS has annual sales of approximately $90 million.

Results of Operations

The following information should be read in conjunction with our unaudited condensed consolidated financial statements contained in this quarterly report. Our results of operations for the periods presented can be affected significantly by our business acquisitions. See Note 4 to our audited consolidated financial statements for the year ended December 31, 2006, included in our Annual Report on Form 10-K, for a discussion of our 2006 business acquisitions and Note 3 to our unaudited condensed consolidated financial statements for the 2007 First Quarter, included in this report for a discussion of our business acquisitions during the 2007 First Quarter.

Three Months Ended March 31, 2007 Compared with Three Months Ended March 31, 2006

Consolidated Results of Operations

The table below provides selected financial data for L-3 for the 2007 First Quarter and 2006 First Quarter.


Three Months Ended
March 31,
2007 2006
($ in millions, except per
share data)
Net sales $ 3,299.7 $ 2,903.8
Operating income $ 326.1 $ 288.4
Operating margin 9.9 % 9.9 %
Interest and other income, net $ 5.1 $ 5.9
Interest expense $ 73.0 $ 71.9
Effective income tax rate 36.6 % 36.9 %
Net income $ 162.1 $ 138.9
Diluted shares 126.0 123.3
Diluted earnings per share $ 1.29 $ 1.13

Net sales: For the 2007 First Quarter, consolidated net sales increased by $395.9 million, or 13.6%, to $3,299.7 million, compared to consolidated net sales of $2,903.8 million for the 2006 First Quarter. Consolidated organic sales growth of 9.1%, or $265.4 million, was driven primarily by strong demand for government services, aircraft modernization, base support operations, intelligence, surveillance and reconnaissance (ISR) systems, secure networked communications products and several specialized products, including power and control systems, propulsion systems, EO/IR and precision engagement products. The increase in consolidated net sales from acquired businesses was $130.5 million, or 4.5%. Sales from services increased by $137.2 million to $1,704.8 million for the 2007 First Quarter, compared to $1,567.6 million. The increase in service sales was primarily due to organic sales growth in the Government Services reportable segment. Sales from products increased by $258.7 million to $1,594.9 million for the 2007 First Quarter, compared to $1,336.2 million. The increase in product sales was primarily due to organic sales growth in several product areas in the Specialized Products and C3ISR reportable segments. See the reportable segment discussions below for a quantitative analysis of our organic sales growth.

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Operating income and operating margin: Consolidated operating income increased by $37.7 million, or 13.1%, to $326.1 million for the 2007 First Quarter, compared to $288.4 million for the 2006 First Quarter. Operating margin remained at 9.9%. Operating margins improved in three of our business segments resulting from improved contract performance, higher sales volume and lower indirect costs. The improvements were primarily offset by lower margins in the C3ISR segment primarily due to lower secure terminal equipment (STE) sales and higher development costs for new products. The changes in operating margin are further explained in our reportable segment results discussed below.

Interest and other income, net: Interest and other income was $5.1 million for the 2007 First Quarter, compared to $5.9 million for the 2006 First Quarter. The 2006 First Quarter included $4 million of interest income on the settlement of a claim.

Interest expense: Interest expense for the 2007 First Quarter increased by $1.1 million, or 1.5%, to $73.0 million, compared to $71.9 million for the 2006 First Quarter.

Effective income tax rate: The effective income tax rate for the 2007 First Quarter decreased to 36.6% from 36.9% for the 2006 First Quarter primarily due to the retroactive enactment of the U.S. Federal income tax credits for research and experimentation activities in the fourth quarter of 2006.

Diluted Shares Outstanding: Diluted shares outstanding for the 2007 First Quarter increased by 2.7 million shares to 126.0 million shares from 123.3 million shares for the 2006 First Quarter. The increase was primarily due to more shares of common stock outstanding because of shares issued in connection with our various employee stock based compensation programs and contributions to employee savings plans made in common stock. These increases were partially offset by purchases of common stock in connection with our share repurchase program that was authorized by L-3’s Board of Directors in December 2006.

Diluted earnings per share and net income: Diluted EPS increased by $0.16, or 14.2%, to $1.29 per share for the 2007 First Quarter, compared to $1.13 per share for the 2006 First Quarter. Net income for the 2007 First Quarter increased by $23.2 million, or 16.7%, to $162.1 million, compared to $138.9 million for the 2006 First Quarter.

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Reportable Segment Results of Operations

The table below presents selected data by reportable segment reconciled to consolidated totals. See Note 15 to our unaudited condensed consolidated financial statements contained in this quarterly report for our reportable segment data.


Three Months Ended
March 31,
2007 2006
(dollars in millions)
Net sales:(1)
C3ISR $ 553.8 $ 466.7
Government Services 1,028.0 898.8
AM&M 636.9 561.8
Specialized Products 1,081.0 976.5
Consolidated net sales $ 3,299.7 $ 2,903.8
Operating income:
C3ISR $ 49.7 $ 53.5
Government Services 92.1 76.8
AM&M 62.2 51.4
Specialized Products 122.1 106.7
Consolidated operating income $ 326.1 $ 288.4
Operating margin:
C3ISR 9.0 % 11.5 %
Government Services 9.0 % 8.5 %
AM&M 9.8 % 9.1 %
Specialized Products 11.3 % 10.9 %
Consolidated operating margin 9.9 % 9.9 %

(1) Net sales are after intersegment eliminations.

C3ISR


Three Months Ended
March 31, Increase /
(decrease)
2007 2006
Net sales $ 553.8 $ 466.7 $ 87.1
Operating income 49.7 53.5 (3.8 )
Operating margin 9.0 % 11.5 % (2.5 )ppts

C3ISR net sales for the 2007 First Quarter increased by 18.7% compared to the 2006 First Quarter. Organic sales growth was $58.8 million, or 12.6%, reflecting an increase in sales of $64.7 million, primarily related to strong demand from the DoD for secure networked communications products and ISR systems. This increase was partially offset by lower sales volume of $5.9 million for STE, a product with declining demand as it continues to approach full deployment in the marketplace. The increase in net sales from acquired businesses was 6.1%, primarily due to the acquisition of TRL on July 12, 2006.

C3ISR operating income for the 2007 First Quarter decreased by 7.1% compared to the 2006 First Quarter, primarily due to lower operating margin, which was partially offset by higher sales volume. Operating margin for the 2007 First Quarter decreased by 2.8 percentage points, primarily due to a decrease in higher margin STE sales, increased sales volume on contracts with greater material content and complex work scope which generated lower margin, and higher development costs for new secure communications products. These decreases were partially offset by the TRL acquired business, which increased operating margin by 0.3 percentage points.

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Government Services


Three Months Ended
March 31, Increase /
(decrease)
2007 2006
Net Sales $ 1,028.0 $ 898.8 $ 129.2
Operating income 92.1 76.8 15.3
Operating margin 9.0 % 8.5 % 0.5 ppts

Government Services net sales for the 2007 First Quarter increased by 14.4% compared to the 2006 First Quarter. Organic sales growth was $129.0 million, or 14.4%, primarily due to (1) increased sales volume of $82.1 million on existing contracts and recent new business awards for linguist, intelligence, training, and law enforcement services to support the U.S. military operations in Iraq and Afghanistan as well as the broader global war on terrorism and (2) $46.9 million of higher sales for communication software support, systems engineering, and other technical services to support U.S. Army communications and surveillance activities, and enterprise information technology support services for the U.S. Special Operation Forces Command because of growth on existing contracts and a recent new contract award.

Government Services operating income for the 2007 First Quarter increased by 19.9% compared to the 2006 First Quarter. The increase in operating income was primarily due to higher sales volume and higher operating margin. Operating margin increased by 0.5 percentage points due to improved contract performance and lower indirect costs.

Aircraft, Modernization and Maintenance (AM&M)


Three Months Ended
March 31, Increase /
(decrease)
2007 2006
Net sales $ 636.9 $ 561.8 $ 75.1
Operating income 62.2 51.4 10.8
Operating margin 9.8 % 9.1 % 0.7 ppts

AM&M net sales for the 2007 First Quarter increased by 13.4% compared to the 2006 First Quarter. Organic sales growth was $42.8 million, or 7.6%, driven primarily by increased volume of $61.3 million for base support operations related to continued support of U.S. military operations in Iraq and Afghanistan, growth in the Canadian Maritime Helicopter Program, and recent new business awards to maintain U.S. Navy E-6B aircraft and to modify C-130 aircraft for certain foreign government customers. These increases were partially offset by a decline of $18.5 million in aircraft support services sales, primarily due to a competitive loss of a contract in June 2006 to provide maintenance and support services for U.S. Navy fixed-wing training aircraft. The increase in net sales from acquired businesses was 5.8%, primarily due to the acquisition of Crestview Aerospace Corporation on June 29, 2006.

AM&M operating income for the 2007 First Quarter increased by 21.0% compared to the 2006 First Quarter. The increase in operating income was due to higher sales and higher operating margin. Operating margin increased by 0.9 percentage points, primarily due to improved performance on certain aircraft modernization contracts, partially offset by severance costs of $2 million related to certain administrative consolidation activities that began in the fourth quarter of 2006. The increase in margin was partially offset by acquired businesses, which reduced operating margin by 0.2 percentage points.

Specialized Products


Three Months Ended
March 31, Increase /
(decrease)
2007 2006
Net sales $ 1,081.0 $ 976.5 $ 104.5
Operating income 122.1 106.7 15.4
Operating margin 11.3 % 10.9 % 0.4 ppts

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Specialized Products net sales for the 2007 First Quarter increased by 10.7% compared to the 2006 First Quarter. The increase in net sales from acquired businesses was 7.1%, mainly due to the acquisitions of SAM Electronics GmbH (SAM) on January 31, 2006, and SSG Precision Optronics, Inc. and Nautronix Defence Group on June 1, 2006. Organic sales growth was $34.8 million, or 3.6%, primarily due to higher sales volume of (1) $31.3 million for power and control systems products due to recent new business awards from the U.S. Navy for power conversion and switching products and higher volume from commercial ship builders, (2) $22.1 million for combat vehicle propulsion systems for U.S. military reset and replacement of equipment consumed in the U.S. military operations in Iraq, (3) $12.7 million for airport security products due to procurement of explosive detection systems by the U.S. Transportation Security Administration, (4) $16.6 million for EO/IR and precision engagement products primarily related to new business wins in 2006 and (5) $5.1 million primarily for undersea warfare products. These increases were partially offset by a decline in sales volume of $53.0 million primarily for simulation devices and microwave products due to timing of certain deliveries, which are expected to occur after March 31, 2007.

Specialized Products operating income for the 2007 First Quarter increased by 14.4% compared to the 2006 First Quarter. The increase in operating income was due to higher sales volume and higher operating margin. Operating margin for the 2007 First Quarter increased by 1.2 percentage points, primarily because of improved contract performance and lower indirect costs for several business areas, including Displays, EO/IR and aviation products. These increases were partially offset by acquired businesses, which reduced operating margin by 0.8 percentage points.

Liquidity and Capital Resources

Anticipated Sources of Cash Flow

Our primary source of liquidity is cash flow generated from operations. We also have funds available to use under our revolving credit facility, subject to certain conditions. We believe that our cash from operating activities, together with available borrowings under the revolving credit facility, will be adequate to meet our anticipated requirements for working capital, capital expenditures, defined benefit plan contributions, commitments, contingencies, research and development expenditures, contingent purchase price payments on previous business acquisitions, program and other discretionary investments, interest payments, L-3 Holdings’ dividends and share repurchase plan for the foreseeable future. There can be no assurance, however, that our business will continue to generate cash flow at current levels, or that currently anticipated improvements will be achieved. If we are unable to generate sufficient cash flow from operations to service our debt, we may be required to sell assets, reduce capital expenditures, refinance all or a portion of our existing debt or obtain additional financing. Our ability to make scheduled principal payments or to pay interest on or to refinance our indebtedness depends on our future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the defense industry and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control. There can be no assurance that sufficient funds will be available to enable us to service our indebtedness, to pay dividends, to repurchase shares of L-3 Holdings common stock, to make necessary capital expenditures and to make discretionary investments.

Balance Sheet

Contracts in process increased by $104.0 million to $3,374.1 million at March 31, 2007 from $3,270.1 million at December 31, 2006. The increase included (1) $73.5 million to support the Company’s recent and near-term anticipated organic sales growth as discussed below, including organic sales growth of $265.4 million for the 2007 First Quarter, (2) $24.7 million primarily to reclassify certain non-current assets to receivables on a contract based on the anticipated invoicing dates at March 31, 2007 and (3) $5.8 million of acquired receivables and inventory balances from business acquisitions.

Unbilled contract receivables increased by $62.6 million due to sales exceeding billings for combat vehicle propulsion systems, the Linguist Contract, aircraft modernization and power and control systems sold to commercial shipbuilders, partially offset by collections of progress payments on microwave

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products for contract performance milestones that have not been delivered. Billed receivables decreased by $20.9 million primarily due to collections for combat vehicle propulsion systems, aircraft support services and secure communications products. These decreases were partially offset by billings for government services. Inventoried contract costs increased by $15.0 million, primarily for aircraft support services and secure networked communications. These increases were partially offset by deliveries of ISR systems and combat vehicle propulsion systems. Inventories at lower of cost or market increased by $16.8 million primarily due to timing of deliveries for microwave products expected to occur during the year.

L-3’s receivables days sales outstanding (DSO) was 72 at March 31, 2007, compared with 72 at December 31, 2006 and 77 at March 31, 2006. We calculate our DSO by dividing (1) our aggregate end of period billed receivables and net unbilled contract receivables, by (2) our trailing 12 month sales adjusted, on a pro forma basis, to include sales from business acquisitions that we completed as of the end of the period multiplied by 365. Our trailing 12 month pro forma sales were $12,945 million at March 31, 2007, $12,657 million at December 31, 2006 and $11,568 million at March 31, 2006.

The increase in other current assets was primarily due to annual insurance premiums paid during the 2007 First Quarter. The decrease in property, plant and equipment (PP&E) during the 2007 First Quarter was principally due to depreciation expense in excess of capital expenditures during the 2007 First Quarter. The percentage of depreciation expense to average gross PP&E remained at 2.8% for the 2007 First Quarter compared to the 2006 First Quarter. We did not change any of the depreciation methods or assets estimated useful lives that L-3 uses to calculate its depreciation expense.

Goodwill increased by $27.6 million to $7,897.9 million at March 31, 2007 from $7,870.3 million at December 31, 2006. The increase related to business acquisitions is comprised of an increase of $14.6 million for a business acquisition completed during the 2007 First Quarter, partially offset by a decrease of $10.8 million relating to completion of final estimates of the fair value for assets acquired, and liabilities assumed, in connection with certain businesses acquired prior to January 1, 2007 and for final purchase price determinations. Additionally, goodwill increased by $7.0 million due to foreign currency translation and by $16.8 million due to the adoption of FASB Interpretation No. 48 ‘‘Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109’’ during the 2007 First Quarter. See Note 10 to our unaudited condensed consolidated financial statements for the 2007 First Quarter.

The decrease in other assets was primarily due to balance sheet classification adjustments to contracts in process as discussed above.

The increase in accounts payable was primarily due to the timing of payments for purchases from third-party vendors and subcontractors. The decrease in accrued employment costs was due to the timing of payroll dates for salaries and wages, and the payment to employees of 2006 management incentive bonuses. The increase in accrued expenses was primarily due to the timing of invoices received for subcontractor services. The decrease in advance payments and billings in excess of costs was primarily due to revenue recognized on contracts with foreign customers for aircraft modernization and the U.S. Transportation Security Agency (TSA) for airport security products.

The decrease in pension and postretirement benefit plan liabilities was primarily due to a $57.2 million reduction of liabilities in connection with the adoption of the measurement date provisions of SFAS 158, which requires us to use December 31 as the measurement date for all of our benefit plans. We previously used November 30 as the measurement date. The decrease was partially offset by pension expenses in excess of cash contributions during the 2007 First Quarter. See Note 13 to our unaudited condensed consolidated financial statements for the three months ended March 31, 2007, included in this report for a discussion of the impact of SFAS 158 on retained earnings.

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Statement of Cash Flows

Three Months Ended March 31, 2007 Compared with Three Months Ended March 31, 2006

We had cash and cash equivalents of $387.1 at March 31, 2007 and $348.2 million at December 31, 2006. The table below provides a summary of our cash flows for the periods indicated.


Three Months Ended
March 31,
2007 2006
(dollars in million)
Net cash from operating activities $ 223.9 $ 187.5
Net cash used in investing activities (49.2 ) (437.2 )
Net cash (used in) from financing activities (135.8 ) 28.4
Net increase (decrease) in cash $ 38.9 $ (221.3 )

Operating Activities

We generated $223.9 million of cash from operating activities during the 2007 First Quarter, an increase of $36.4 million compared with $187.5 million generated during the 2006 First Quarter due to (1) an increase in net income of $23.2 million and (2) an increase of $24.4 million because of less cash used for changes in operating assets and liabilities. These increases were partially offset by lower non-cash expenses of $11.2 million comprised of lower deferred income tax expense of $19.3 million, partially offset by $8.1 million primarily for higher depreciation expense. The cash generated from changes in operating assets and liabilities is discussed above under ‘‘Liquidity and Capital Resources — Balance Sheet.’’

Investing Activities

During the 2007 First Quarter, we used $22.0 million of cash in the aggregate to acquire a business and pay the remaining contractual price for the TRL acquisition.

Financing Activities

Debt

Senior Credit Facility. Our senior credit facility provides for a term loan facility and a $1.0 billion revolving credit facility.

At March 31, 2007, borrowings under the term loan facility were $650.0 million, and available borrowings under our revolving credit facility were $923.3 million, after reduction for outstanding letters of credit of $76.7 million. There were no outstanding revolving credit borrowings under our senior credit facility at March 31, 2007. Total debt outstanding was $4,535.3 at March 31, 2007, compared to $4,535.0 million at December 31, 2006. On April 3, 2007, we issued a standby letter of credit in the amount of $138.8 million, which reduced the available borrowings under our revolving credit facility by the same amount, as security in connection with a filing of a Notice of Appeal related to an adverse jury verdict previously rendered against the Company. See Note 12 to our unaudited condensed consolidated financial statements contained in this quarterly report.

Debt Covenants and Other Provisions. The senior credit facility and senior subordinated notes agreements contain financial covenants and other restrictive covenants. See Note 9 to our audited consolidated financial statements for the year ended December 31, 2006, included in our Annual Report on Form 10-K for a description of our debt and related financial covenants, including dividend payment restrictions and cross default provisions, under our senior credit facility. As of March 31, 2007, we were in compliance with our financial and other restrictive covenants.

The borrowings under the senior credit facility are guaranteed by L-3 Holdings and by substantially all of the material wholly-owned domestic subsidiaries of L-3 Communications on a senior basis. The

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payment of principal and premium, if any, and interest on the senior subordinated notes are unconditionally guaranteed, on an unsecured senior subordinated basis, jointly and severally, by substantially all of L-3 Communications’ wholly-owned domestic subsidiaries. The guarantees of the senior subordinated notes rank pari passu with one another and are junior to the guarantees of the senior credit facility. The payment of principal and premium, if any, and interest on the CODES are fully and unconditionally guaranteed, on an unsecured senior subordinated basis, jointly and severally by certain of L-3 Holdings’ wholly-owned domestic subsidiaries. The guarantees of the CODES rank pari passu with all of the guarantees of the senior subordinated notes and are junior to the guarantees of the senior credit facility.

Equity

During December 2006, the Company’s Board of Directors authorized a program to repurchase up to $500 million of its outstanding shares of common stock through December 31, 2008. Under this program, repurchases may be made from time to time in the open market, pursuant to pre-set trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, in private transactions or otherwise. The timing and actual number of shares to be repurchased in the future will depend on a variety of factors, including corporate and contractual requirements, price and other market conditions. During the 2007 First Quarter, we repurchased 1,840,523 shares of L-3 Holdings common stock for an aggregate amount of $150.8 million. At March 31, 2007, the dollar value of the remaining authorized L-3 share repurchase program was $323.6 million. Since April 1, 2007 through May 7, 2007, we repurchased an additional 366,900 shares of L-3 Holdings common stock for an aggregate amount of $32.7 million.

On February 6, 2007, L-3 Holdings announced that its Board of Directors had increased L-3 Holdings’ regular quarterly cash dividend by 33% to $0.25 per share. On March 15, 2007, we paid cash dividends of $31.3 million to shareholders of record at the close of business on February 21, 2007.

On April 24, 2007, our Board of Directors declared a regular quarterly cash dividend of $0.25 per share, payable June 15, 2007 to shareholders of record at the close of business on May 16, 2007.

Legal Proceedings and Contingencies

For a discussion of legal proceedings and contingencies that could impact our results of operations, financial condition, or cash flows, see Note 12 to our unaudited condensed consolidated financial statements.

Recently Issued Accounting Standards

For a discussion of recently issued accounting standards, see Note 16 to our unaudited condensed consolidated financial statements.

Forward-Looking Statements

Certain of the matters discussed concerning our operations, cash flows, financial position, economic performance and financial condition, including in particular, the likelihood of our success in developing and expanding our business and the realization of sales from backlog, include forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act.

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 expressions are forward-looking statements. Although we believe that these statements are based upon reasonable assumptions, including projections of total sales growth, sales growth from business acquisitions, organic sales growth, consolidated operating margin, total segment operating margin, interest expense, earnings, cash flow, research and development costs, working capital, capital expenditures and other projections, they are subject to several risks and uncertainties, and therefore, we can give no assurance that these statements will be achieved. Such statements will also be influenced by factors which include, among other things:

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• our dependence on the defense industry and the business risks peculiar to that industry, including changing priorities or reductions in the U.S. Government defense budget;

• our reliance on contracts with a limited number of agencies of, or contractors to, the U.S. Government and the possibility of termination of government contracts by unilateral government action or for failure to perform;

• the extensive legal and regulatory requirements surrounding our contracts with the U.S. or foreign governments and the results of any investigation of our contracts undertaken by the U.S. or foreign governments;

• our ability to retain our existing business and related contracts (revenue arrangements);

• our ability to successfully compete for and win new business and related contracts (revenue arrangements) and to win re-competitions of our existing contracts;

• our ability to identify and acquire additional businesses in the future with terms, including the purchase price, that are attractive to L-3 and to integrate acquired business operations;

• our ability to maintain and improve our consolidated operating margin and total segment operating margin in future periods;

• our ability to obtain future government contracts (revenue arrangements) on a timely basis;

• the availability of government funding or cost-cutting initiatives and changes in customer requirements for our products and services;

• our significant amount of debt and the restrictions contained in our debt agreements;

• our ability to continue to retain and train our existing employees and to recruit and hire new qualified and skilled employees, as well as our ability to retain and hire employees with U.S. Government security clearances that are a prerequisite to compete for and to perform work on classified contracts for the U.S. Government;

• actual future interest rates, volatility and other assumptions used in the determination of pension, benefits and stock options amounts;

• 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 and economic conditions in the markets in which we operate, including those for the commercial aviation and communications markets;

• our ability to perform contracts on schedule;

• economic conditions, competitive environment and political conditions (including acts of terrorism) and timing of international awards and contracts;

• our international operations, including sales to foreign customers;

• our extensive use of fixed-price type contracts as compared to cost-reimbursable type and time-and-material type contracts;

• the rapid change of technology and high level of competition in the defense industry and the commercial industries in which our businesses participate;

• our introduction of new products into commercial markets or our investments in civil and commercial products or companies;

• the outcome of litigation matters or government investigations material to us to which we currently are, or to which we may become in the future, a party;

• the outcome of current or future litigation matters and governmental investigation(s) of our businesses, including acquired businesses;

• costs or difficulties related to the integration of our acquired businesses, including Titan, may be greater than expected;

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• anticipated cost savings from business acquisitions may not be fully realized or realized within the expected time frame;

• Titan’s compliance with its plea agreement and consent to entry of judgment with the U.S. Government relating to the Foreign Corrupt Practices Act, including Titan’s ability to maintain its export licenses;

• ultimate resolution of contingent matters, claims and investigations relating to acquired businesses, including Titan, and the impact on the final purchase price allocations;

• competitive pressure among companies in our industry may increase significantly;

• pension, environmental or legal matters or proceedings and various other market, competition and industry factors, many of which are beyond our control; and

• the fair values of our assets, including identifiable intangible assets and the estimated fair value of the goodwill balances for our reporting units, which can be impaired or reduced by other factors, some of which are discussed above.

In addition, 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 16 to our audited consolidated financial statements, in each case included in our Annual Report on Form 10-K for the year ended December 31, 2006.

Readers of this document are cautioned that our forward-looking statements are not guarantees of future performance and the actual results or developments may differ materially from the expectations expressed in the forward-looking statements.

As for the forward-looking statements that relate to future financial results and other projections, actual results will be different due to the inherent uncertainties of estimates, forecasts and projections and may be better or worse than projected and such differences could be material. Given these uncertainties, you should not place any reliance on these forward-looking statements. These forward-looking statements also represent our estimates and assumptions only as of the date that they were made. We expressly disclaim a duty to provide updates to these forward-looking statements, and the estimates and assumptions associated with them, after the date of this filing to reflect events or changes or circumstances or changes in expectations or the occurrence of anticipated events.

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