Form 10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 25, 2016

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file numbers 001-14141 and 333-46983

L-3 COMMUNICATIONS HOLDINGS, INC.

L-3 COMMUNICATIONS CORPORATION

(Exact names of registrants as specified in their charters)


Delaware		13-3937434 and 13-3937436
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Nos.)

600 Third Avenue, New York, NY		10016
(Address of principal executive offices)		(Zip Code)

(212) 697-1111

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files). x Yes ¨ No

Indicate by check mark whether the registrant, L-3 Communications Holdings, Inc., is a large accelerated filer, accelerated filer, non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant, L-3 Communications Corporation, Inc., is a large accelerated filer, accelerated filer, non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

There were 76,952,735 shares of L-3 Communications Holdings, Inc. common stock with a par value of $0.01 outstanding as of the close of business on April 22, 2016.

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the quarterly period ended March 25, 2016


		Page No.
	PART I — FINANCIAL INFORMATION

ITEM 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of March 25, 2016 (Unaudited) and December 31, 2015		1
	Unaudited Condensed Consolidated Statements of Operations for the Quarterly periods ended March 25, 2016 and March 27, 2015		2
	Unaudited Condensed Consolidated Statements of Comprehensive Income for the Quarterly periods ended March 25, 2016 and March 27, 2015		3
	Unaudited Condensed Consolidated Statements of Equity for the Quarterly periods ended March 25, 2016 and March 27, 2015		4
	Unaudited Condensed Consolidated Statements of Cash Flows for the Quarterly periods ended March 25, 2016 and March 27, 2015		5
	Notes to Unaudited Condensed Consolidated Financial Statements		6
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		35
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		51
ITEM 4.	Controls and Procedures		51

	PART II — OTHER INFORMATION
ITEM 1.	Legal Proceedings		52
ITEM 1A.	Risk Factors		52
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		53
ITEM 6.	Exhibits		53
Signature			54

PART I — FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share data)


	(Unaudited) March 25, 2016			December 31, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	534		$	207
Billed receivables, net of allowances of $13 in 2016 and $15 in 2015		779			746
Contracts in process		2,226			2,081
Inventories		351			333
Other current assets		173			201
Assets of discontinued operations		—			664

Total current assets		4,063			4,232

Property, plant and equipment, net		1,085			1,097
Goodwill		6,306			6,281
Identifiable intangible assets		195			199
Deferred income taxes		4			3
Other assets		258			255

Total assets	$	11,911		$	12,067

LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt	$	499		$	499
Accounts payable, trade		407			297
Accrued employment costs		466			504
Accrued expenses		406			390
Advance payments and billings in excess of costs incurred		495			562
Income taxes		3			13
Other current liabilities		403			394
Liabilities of discontinued operations		—			220

Total current liabilities		2,679			2,879

Pension and postretirement benefits		1,045			1,047
Deferred income taxes		238			219
Other liabilities		371			368
Long-term debt		3,127			3,125

Total liabilities		7,460			7,638

Commitments and contingencies (see Note 18)
Equity:
L-3 shareholders’ equity:
L-3 Communications Holdings, Inc.’s common stock: $.01 par value; 300,000,000 shares authorized, 77,340,520 shares outstanding at March 25, 2016 and 78,133,763 shares outstanding at December 31, 2015 (L-3 Communications Corporation’s common stock: $.01 par value, 100 shares authorized, issued and outstanding)		6,084			6,052
L-3 Communications Holdings, Inc.’s treasury stock (at cost), 81,083,248 shares at March 25, 2016 and 79,375,063 shares at December 31, 2015		(7,049	)		(6,851	)
Retained earnings		5,901			5,728
Accumulated other comprehensive loss		(558	)		(574	)

Total L-3 shareholders’ equity		4,378			4,355
Noncontrolling interests		73			74

Total equity		4,451			4,429

Total liabilities and equity	$	11,911		$	12,067

See notes to unaudited condensed consolidated financial statements.

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)


	First Quarter Ended
	March 25, 2016			March 27, 2015
Net sales:
Products	$	1,423		$	1,538
Services		930			950

Total net sales		2,353			2,488

Cost of sales:
Products		(1,266	)		(1,382	)
Services		(835	)		(897	)

Total cost of sales		(2,101	)		(2,279	)

Loss related to business divestiture		—			(22	)

Operating income		252			187
Interest expense		(41	)		(39	)
Interest and other income, net		4			3

Income from continuing operations before income taxes		215			151
Provision for income taxes		(48	)		(46	)

Income from continuing operations		167			105
Income from discontinued operations, net of income taxes		63			4

Net income		230			109
Net income from continuing operations attributable to noncontrolling interests		(3	)		(4	)

Net income attributable to L-3	$	227		$	105

Basic earnings per share attributable to L-3 Holdings’ common shareholders:
Continuing operations	$	2.11		$	1.23
Discontinued operations		0.81			0.05

Basic earnings per share	$	2.92		$	1.28

Diluted earnings per share attributable to L-3 Holdings’ common shareholders:
Continuing operations	$	2.08		$	1.20
Discontinued operations		0.79			0.05

Diluted earnings per share	$	2.87		$	1.25

Cash dividends declared per common share	$	0.70		$	0.65

L-3 Holdings’ weighted average common shares outstanding:
Basic		77.8			82.3

Diluted		79.0			83.8

See notes to unaudited condensed consolidated financial statements.

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)


	First Quarter Ended
	March 25, 2016			March 27, 2015
Net income	$	230		$	109
Other comprehensive income (loss):
Foreign currency translation adjustments		1			(87	)
Unrealized gains (losses) on hedging instruments⁽¹⁾		7			(3	)
Pension and postretirement benefit plans:
Amortization of net loss and prior service cost previously recognized⁽²⁾		8			11

Total other comprehensive income (loss)		16			(79	)

Comprehensive income		246			30
Comprehensive income attributable to noncontrolling interests		(3	)		(4	)

Comprehensive income attributable to L-3	$	243		$	26

⁽¹⁾	Net of income taxes of $3 million for the quarterly period ended March 25, 2016.

⁽²⁾	Net of income taxes of $4 million and $6 million for the quarterly periods ended March 25, 2016 and March 27, 2015, respectively.

See notes to unaudited condensed consolidated financial statements.

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(in millions, except per share data)


	L-3 Holdings’ Common Stock					Additional Paid-in Capital									Accumulated Other Comprehensive Loss
	Shares Outstanding			Par Value		Additional Paid-in Capital			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Loss			Noncontrolling Interests			Total Equity
For the Quarter Ended March 25, 2016:
Balance at December 31, 2015		78.1		$	1	$	6,051		$	(6,851	)	$	5,728		$	(574	)	$	74		$	4,429
Net income													227						3			230
Other comprehensive income																16						16
Distributions to noncontrolling interests																			(4	)		(4	)
Cash dividends declared on common stock ($0.70 per share)													(54	)								(54	)
Shares issued:
Employee savings plans		0.3					32															32
Exercise of stock options		0.2					14															14
Employee stock purchase plan		0.1					—															—
Vesting of restricted stock and performance units		0.5																				—
Employee restricted stock units surrendered in lieu of income tax withholding		(0.2	)				(20	)														(20	)
Stock-based compensation expense							6															6
Treasury stock purchased		(1.7	)							(198	)											(198	)

Balance at March 25, 2016		77.3		$	1	$	6,083		$	(7,049	)	$	5,901		$	(558	)	$	73		$	4,451

For the Quarter Ended March 27, 2015:
Balance at December 31, 2014		82.0		$	1	$	5,798		$	(6,111	)	$	6,181		$	(584	)	$	75		$	5,360
Net income													105						4			109
Other comprehensive loss																(79	)					(79	)
Distributions to noncontrolling interests																			(5	)		(5	)
Cash dividends declared on common stock ($0.65 per share)													(55	)								(55	)
Shares issued:
Employee savings plans		0.3					29															29
Exercise of stock options		0.5					60															60
Employee stock purchase plan		0.1																				—
Vesting of restricted stock and performance units		0.7																				—
Employee restricted stock units surrendered in lieu of income tax withholding		(0.2	)				(33	)														(33	)
Stock-based compensation expense							13															13
Treasury stock purchased		(0.8	)							(100	)											(100	)
Other		—					3															3

Balance at March 27, 2015		82.6		$	1	$	5,870		$	(6,211	)	$	6,231		$	(663	)	$	74		$	5,302

See notes to unaudited condensed consolidated financial statements.

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)


	First Quarter Ended
	March 25, 2016			March 27, 2015
Operating activities:
Net income	$	230		$	109
Less: Income from discontinued operations, net of tax		(63	)		(4	)

Income from continuing operations		167			105
Depreciation of property, plant and equipment		40			42
Amortization of intangibles and other assets		10			10
Deferred income tax provision		12			10
Stock-based employee compensation expense		6			13
Contributions to employee savings plans in L-3 Holdings’ common stock		30			26
Amortization of pension and postretirement benefit plans net loss and prior service cost		12			17
Amortization of bond discounts and deferred debt issue costs (included in interest expense)		2			2
Loss related to business divestiture		—			22
Other non-cash items		1			(6	)
Changes in operating assets and liabilities, excluding amounts from acquisitions and divestitures, and discontinued operations:
Billed receivables		(32	)		23
Contracts in process		(148	)		(147	)
Inventories		(19	)		(31	)
Other assets		4			—
Accounts payable, trade		115			98
Accrued employment costs		(46	)		(8	)
Accrued expenses		16			(56	)
Advance payments and billings in excess of costs incurred		(64	)		(19	)
Income taxes		20			27
Other current liabilities		(6	)		4
Pension and postretirement benefits		(1	)		4
All other operating activities		(7	)		(24	)

Net cash from operating activities from continuing operations		112			112

Investing activities:
Business acquisitions, net of cash acquired		(27	)		(41	)
Proceeds from the sale of businesses, net of closing date cash balances		576			—
Capital expenditures		(35	)		(40	)
Dispositions of property, plant and equipment		7			1
Other investing activities		9			6

Net cash from (used in) investing activities from continuing operations		530			(74	)

Financing activities:
Borrowings under revolving credit facility		217			108
Repayment of borrowings under revolving credit facility		(217	)		(108	)
Common stock repurchased		(198	)		(100	)
Dividends paid on L-3 Holdings’ common stock		(58	)		(58	)
Proceeds from exercises of stock options		14			37
Proceeds from employee stock purchase plan		8			9
Employee restricted stock units surrendered in lieu of income tax withholding		(20	)		(33	)
Other financing activities		(5	)		(5	)

Net cash used in financing activities from continuing operations		(259	)		(150	)

Effect of foreign currency exchange rate changes on cash and cash equivalents		—			(11	)
Cash used in discontinued operations:
Operating activities		(56	)		(2	)
Investing activities		—			(1	)

Cash used in discontinued operations		(56	)		(3	)

Change in cash balance in assets held for sale		—			1
Net increase (decrease) in cash and cash equivalents		327			(125	)
Cash and cash equivalents, beginning of the period		207			442

Cash and cash equivalents, end of the period	$	534		$	317

See notes to unaudited condensed consolidated financial statements.

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

1. Description of Business

L-3 Communications Holdings, Inc. derives all of its operating income and cash flows from its wholly-owned subsidiary, L-3 Communications Corporation (L-3 Communications). L-3 Communications Holdings, Inc. (L-3 Holdings and, together with its subsidiaries, referred to herein as L-3 or the Company) is a prime contractor in Intelligence, Surveillance and Reconnaissance (ISR) systems, aircraft sustainment (including modifications, logistics and maintenance), simulation and training, night vision and image intensification equipment, and security and detection systems. L-3 is also a leading provider of a broad range of communication and electronic systems and products used on military and commercial platforms. The Company’s customers include the United States (U.S.) Department of Defense (DoD) and its prime contractors, U.S. Government intelligence agencies, the U.S. Department of Homeland Security (DHS), foreign governments, and domestic and international commercial customers.

On December 7, 2015, the Company entered into a definitive agreement to sell its National Security Solutions (NSS) business to CACI International Inc. The transaction was completed on February 1, 2016. NSS provides cybersecurity solutions, high-performance computing, enterprise IT services, analytics and intelligence analysis to the DoD, U.S. Government intelligence agencies, federal civilian agencies and foreign governments. In accordance with Accounting Standards Update (ASU) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, the assets and liabilities and results of operations of NSS are reported as discontinued operations for all periods presented. Accordingly, all references made to financial data in this Quarterly Report on Form 10-Q are to the Company’s continuing operations, unless specifically noted. See Note 5 for additional information.

The Company has the following three reportable segments: (1) Electronic Systems, (2) Aerospace Systems and (3) Communication Systems. Electronic Systems provides a broad range of components, products, subsystems, systems, and related services for military and commercial customers in several niche markets across several business areas. These business areas include precision engagement & training, sensor systems, power & propulsion systems, aviation products & security systems, warrior systems and advanced programs. Aerospace Systems delivers integrated solutions for the global ISR market and provides modernization, upgrade, sustainment, and maintenance and logistics support for a wide variety of aircraft and ground systems. Communication Systems delivers products and services for the global communications market, specializing in strategic and tactical airborne, space, ground and sea-based communication systems.

Financial information with respect to the Company’s segments is included in Note 22 to the unaudited condensed consolidated financial statements and in Note 21 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

2. Basis of Presentation

These unaudited condensed consolidated financial statements for the quarterly period ended March 25, 2016 should be read in conjunction with the audited consolidated financial statements of L-3 Holdings and L-3 Communications included in their Annual Report on Form 10-K for the year ended December 31, 2015.

Principles of Consolidation and Reporting

The accompanying financial statements comprise the consolidated financial statements of L-3 Holdings and L-3 Communications. L-3 Holdings’ only asset is its investment in the common stock of L-3 Communications, its wholly-owned subsidiary, and its only obligations are: (1) its guarantee of borrowings under the Amended and

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)

Restated Revolving Credit Facility (Credit Facility) of L-3 Communications and (2) its guarantee of other contractual obligations of L-3 Communications and its subsidiaries. All issuances of and conversions into L-3 Holdings’ equity securities, including grants of stock options, restricted stock units and performance units by L-3 Holdings to employees and directors of L-3 Communications and its subsidiaries, have been reflected in the consolidated financial statements of L-3 Communications. As a result, the consolidated financial positions, results of operations and cash flows of L-3 Holdings and L-3 Communications are substantially the same. See Note 23 for additional information regarding the unaudited financial information of L-3 Communications and its subsidiaries.

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the disclosures required by U.S. GAAP for a complete set of annual audited financial statements. The December 31, 2015 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair statement of the results for the interim periods presented have been included. The results of operations for the interim periods are not necessarily indicative of results for the full year.

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 unaudited condensed consolidated financial statements included herein have been prepared and are labeled based on that convention. The Company closes its books for annual periods on December 31 regardless of what day it falls on.

Certain reclassifications have been made to conform prior-year amounts to the current-year presentation.

Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and costs of sales during the reporting period. The most significant of these estimates and assumptions for L-3 relate to contract revenue, profit and loss recognition, fair values of assets acquired and liabilities assumed in business combinations, market values for inventories reported at lower of cost or market, pension and post-retirement benefit obligations, stock-based employee compensation expense, income taxes, including the valuation of deferred tax assets, litigation reserves and environmental obligations, accrued product warranty costs, liabilities for the voluntary return program of various EoTech holographic weapon sight products, and the recoverability, useful lives and valuation of recorded amounts of long-lived assets, identifiable intangible assets and goodwill. Changes in estimates are reflected in the periods during which they become known. Actual amounts will differ from these estimates and could differ materially.

Sales and profits on contracts that are covered by accounting standards for construction-type and production-type contracts and federal government contractors are substantially recognized using percentage-of-completion (POC) methods of accounting. Approximately 49% of the Company’s net sales in 2015 were accounted for under contract accounting standards, of which approximately 41% were fixed-price type contracts and approximately 8% were cost-plus type contracts. For contracts that are accounted for under contract

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)

accounting standards, sales and profits are recognized based on: (1) a POC method of accounting (fixed-price contracts), (2) allowable costs incurred plus the estimated profit on those costs (cost-plus contracts), or (3) direct labor hours expended multiplied by the contractual fixed rate per hour plus incurred costs for material (time-and-material contracts). Sales and profits on fixed-price production contracts under which units are produced and delivered in a continuous or sequential process are recorded as units are delivered based on their contractual selling prices (the “units-of-delivery” method). Sales and profits on each fixed-price production contract under which units are not produced and delivered in a continuous or sequential process, or under which a relatively few number of units are produced, are recorded based on the ratio of actual cumulative costs incurred to total estimated costs at completion of the contract, multiplied by the total estimated contract revenue, less cumulative sales recognized in prior periods (the “cost-to-cost” method). Under both POC methods of accounting, a single estimated total profit margin is used to recognize profit for each contract over its entire period of performance, which can exceed one year.

Accounting for the sales and profit on these fixed-price type contracts requires the preparation of estimates of: (1) the total contract revenue, (2) the total costs at completion, which is equal to the sum of the actual incurred costs to date on the contract and the estimated costs to complete the contract’s statement of work, and (3) the measurement of progress towards completion. The estimated profit or loss at completion on a contract is equal to the difference between the total estimated contract revenue and the total estimated cost at completion. The profit recorded on a contract in any period using either the units-of-delivery method or cost-to-cost method is equal to the current estimated total profit margin multiplied by the cumulative sales recognized, less the amount of cumulative profit previously recorded for the contract.

Sales and profits on cost-plus type contracts that are covered by contract accounting standards are recognized as allowable costs are incurred on the contract, at an amount equal to the allowable costs plus the estimated profit on those costs. The estimated profit on a cost-plus type contract is fixed or variable based on the contractual fee arrangement. Incentive and award fees are the primary variable fee contractual arrangement types for the Company. Incentive and award fees on cost-plus type contracts are included as an element of total estimated contract revenues and are recorded as sales when a basis exists for the reasonable prediction of performance in relation to established contractual targets and the Company is able to make reasonably dependable estimates for them.

Sales and profits on time-and-material type contracts are recognized on the basis of direct labor hours expended multiplied by the contractual fixed rate per hour, plus the actual costs of materials and other direct non-labor costs.

Revisions or adjustments to estimates for a contract’s revenue, estimated costs at completion and estimated profit or loss are often required as work progresses under a contract, as experience is gained, as facts and circumstances change and as new information is obtained, even though the scope of work required under the contract may not change. Revisions or adjustments may also be required if contract modifications occur. The impact of revisions in profit (loss) estimates for all types of contracts subject to POC accounting are recognized on a cumulative catch-up basis in the period in which the revisions are made. The revisions in contract estimates, if significant, can materially affect the Company’s results of operations and cash flows, as well as reduce the valuations of receivables and inventories, and in some cases result in liabilities to complete contracts in a loss position. Aggregate net changes in contract estimates amounted to increases of $60 million, or 24% of consolidated operating income for the quarterly period ended March 25, 2016, and increases of $32 million, or 17% of consolidated operating income for the quarterly period ended March 27, 2015.

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)

As previously disclosed, during the fourth quarter of 2015, the Company commenced a voluntary return program and began accepting customer returns for various EoTech holographic weapons sight (HWS) products that may have been affected by certain performance issues. The return program gives eligible owners of such HWS products the option to return their products in exchange for a refund of the purchase price, including shipping costs. The Company initially recorded a reduction to net sales of $20 million in the Warrior Systems sector of the Electronic Systems segment in the fourth quarter of 2015, associated with establishing a product returns allowance to reflect the estimated cost of the return program. The program has now been in operation for more than four months, and as of April 22, 2016, the Company had approved refunds at a cost of approximately $21 million, with an average refund cost per unit of $507. Accordingly, with the benefit of a larger volume of actual refund transactions, the Company used a statistical analysis of the voluntary return program to estimate the number and cost of future refunds. In its statistical analysis, the Company utilized empirical models to forecast the expected emergence pattern of new refunds over time to produce a probabilistic distribution of new refund costs that reflects the existing level of estimation uncertainty. Based on this analysis, the Company expects the total cost of the voluntary return program to be approximately $35 million, and has therefore increased the product returns allowance by recording a reduction to net sales of $15 million during the first quarter of 2016. The product returns allowance was $25 million at March 25, 2016, reflects refund payments made to eligible owners during the quarter and is included in other current liabilities on the unaudited condensed consolidated balance sheets. See Note 9. The Company will continue to review the product returns allowance as the program matures and new information becomes available. The Company’s ongoing evaluation may cause it to record further adjustments to the allowance in future periods. These adjustments could be material.

For a more complete discussion of these estimates and assumptions, see the Annual Report on Form 10-K for the year ended December 31, 2015.

3. New Accounting Standards Implemented

In March 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payments, including the income tax consequences and classification on the statement of cash flows. Under the new standard, all excess tax benefits and tax deficiencies will be recognized as income tax expense or benefit in the income statement as discrete items in the reporting period in which they occur. Additionally, excess tax benefits will be classified as an operating activity on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods, and early adoption is permitted. The amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement must be applied prospectively, and entities are allowed to elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective or retrospective transition method. The Company has elected to early adopt ASU 2016-09 for the quarterly period ending March 25, 2016, and apply the amendments relating to the presentation of excess tax benefits on the statement of cash flows using a retrospective transition method. See Note 11 for additional information.

4. Accounting Standards Issued and Not Yet Implemented

In February 2016, the FASB issued ASU 2016-02, Leases, which updates the existing guidance on accounting for leases and requires new qualitative and quantitative disclosures about the Company’s leasing activities. The new standard requires the Company to recognize lease assets and lease liabilities on the balance sheet for all leases under which the Company is the lessee, including those classified as operating leases under previous accounting guidance. The new standard allows the Company to make an accounting policy election not to recognize on the balance sheet lease assets and liabilities for leases with a term of 12 months or less. The

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)

accounting applied by a lessor is largely unchanged from previous guidance. The new standard, as amended, will be effective for the Company for interim and annual reporting periods beginning on January 1, 2019, with early adoption permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that the Company may elect to apply. The Company is currently evaluating the expected impact of the adoption of this standard on its consolidated financial statements and related disclosures.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which will replace numerous requirements in U.S. GAAP, including industry-specific requirements, provide companies with a single revenue recognition model for recognizing revenue from contracts with customers and significantly expand the disclosure requirements for revenue arrangements. The new standard, as amended, will be effective for the Company for interim and annual reporting periods beginning on January 1, 2018, with early application permitted beginning on January 1, 2017. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application with disclosure of results under the new and old standards for the first year of adoption. Under the new standard, an entity recognizes revenue when or as it satisfies a performance obligation by transferring a good or service to the customer, either at a point in time or over time. The Company expects to recognize revenue over time on most of its contracts that are covered by contract accounting standards and on its contracts to perform services for the U.S. Government that are not covered by contract accounting standards, which is similar to the POC cost-to-cost method currently used on certain of these contracts. The Company is currently evaluating the expected impact of the adoption of this standard on its consolidated financial statements and related disclosures and the transition alternatives available.

Other accounting standard updates effective for interim and annual periods beginning after December 15, 2016 are not expected to have an impact on the Company’s financial position, results of operations or cash flows.

5. Divestitures and Acquisitions

Discontinued Operations

As discussed in Note 1, the Company entered into a definitive agreement to sell its NSS business to CACI International Inc. on December 7, 2015. The transaction was completed on February 1, 2016 for a sale price of $561 million, subject to finalization based on customary adjustments for closing date net working capital.

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)

The table below presents statement of operations data for NSS, which was previously a reportable segment and has been classified as discontinued operations and includes allocated interest expense for debt not directly attributable or related to L-3’s other operations. Interest expense was allocated in accordance with the accounting standards for discontinued operations and was based on the ratio of NSS’s net assets to the sum of: (1) total L-3 consolidated net assets and (2) L-3 consolidated total debt.


	First Quarter Ended
	March 25, 2016			March 27, 2015
	(in millions)
Net sales	$	86		$	238
Cost of sales		(92	)		(225	)
Gain related to business divestiture⁽¹⁾		64			—

Operating income from discontinued operations		58			13
Interest expense allocated to discontinued operations		—			(5	)

Income from discontinued operations before income taxes		58			8
Income tax benefit (expense)		5			(4	)

Income from discontinued operations, net of income taxes	$	63		$	4

⁽¹⁾	The first quarter ended March 25, 2016 includes a gain of $64 million (before and after income taxes) on the sale of the NSS business.

The major classes of assets and liabilities included in discontinued operations related to NSS are presented in the table below.


	December 31, 2015
	(in millions)
Assets
Current assets	$	201
Property, plant and equipment, net		25
Goodwill⁽¹⁾		390
Other assets		48

Total assets of discontinued operations	$	664

Liabilities
Accounts payable, trade	$	48
Other current liabilities		78

Current liabilities		126
Long-term liabilities		94

Total liabilities of discontinued operations	$	220

⁽¹⁾	The goodwill balance at December 31, 2015 is based on an allocation of the goodwill attributable to the NSS reporting unit to discontinued operations based on the relative fair value of the NSS business retained by L-3 and NSS business sold.

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)

Business Divestitures

2015 Business Divestiture

Marine Systems International (MSI) Divestiture. On May 29, 2015, the Company completed the sale of its MSI business to Wärtsilä Corporation for a sale price of €295 million (approximately $318 million), in addition to the assumption by Wärtsilä Corporation of approximately €60 million of MSI employee pension-related liabilities. The sale price is subject to finalization based on customary adjustments for closing date net working capital. MSI was a sector within the Company’s Electronic Systems segment, primarily selling to the commercial shipbuilding industry. During the quarterly period ended March 27, 2015, the Company recorded a pre-tax loss of $22 million related to the divestiture of MSI.

Business Acquisitions

The business acquisitions discussed below are included in the Company’s results of operations from their respective dates of acquisition.

2016 Business Acquisition

On January 22, 2016, the Company acquired the assets of Advanced Technical Materials, Inc. (ATM) for a purchase price of $27 million (subject to customary adjustments), which was financed with cash on hand. ATM develops and manufactures a broad product line of passive microwave waveguides and specialized coaxial components. The aggregate goodwill recognized for this business was $22 million, which was assigned to the Communication Systems reportable segment, all of which is expected to be deductible for income tax purposes. The final purchase price allocation, which is expected to be completed in the third quarter of 2016, will be based on final appraisals and other analysis of fair values of acquired assets and liabilities. The Company does not expect that differences between the preliminary and final purchase price allocations will have a material impact on its results of operations or financial position.

2015 Business Acquisitions

ForceX, Inc. Acquisition. On October 13, 2015, the Company acquired ForceX, Inc., renamed L-3 ForceX, for a purchase price of $61 million, which was financed with cash on hand. L-3 ForceX specializes in ISR mission management software and geospatial application technology programs, offering an array of advanced products, including cueing system software, hardware and video algorithms, and wide-area sensor integration solutions and software. L-3 ForceX’s proprietary processing, exploitation and dissemination capability provides an integrated tactical operational picture, allowing users to make critical decisions in real time. L-3 ForceX also supports several key DoD ISR initiatives and classified programs. L-3 ForceX’s customer base includes the U.S. Air Force, U.S. Special Operations Command, the Naval Surface Warfare Center and a variety of DoD agencies. The aggregate goodwill recognized for this business was $48 million, which was assigned to the Electronic Systems reportable segment, of which $47 million is expected to be deductible for income tax purposes. The final purchase price allocation, which is expected to be completed in the second quarter of 2016, will be based on final appraisals and other analysis of fair values of acquired assets and liabilities. The Company does not expect that differences between the preliminary and final purchase price allocations will have a material impact on its results of operations or financial position.

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)

with cash on hand. L-3 CTC is a global airline pilot training and crew resourcing specialist, based in the United Kingdom, which offers customized and innovative solutions to major airlines and flight training customers globally. L-3 CTC expands L-3’s commercial aviation training business to encompass a growing portfolio of airline and third-party training company customers. The aggregate goodwill recognized for this business was $185 million, which was assigned to the Electronic Systems reportable segment, and is not expected to be deductible for income tax purposes. The final purchase price allocation, which is expected to be completed in the second quarter of 2016, will be based on final appraisals and other analysis of fair values of acquired assets and liabilities. The Company does not expect that differences between the preliminary and final purchase price allocations will have a material impact on its results of operations or financial position.

MITEQ, Inc. Acquisition. On January 21, 2015, the Company acquired the assets of MITEQ, Inc. (Miteq) for a purchase price of $41 million, which was financed with cash on hand. The purchase price and purchase price allocation of Miteq was finalized as of September 25, 2015, with no significant changes to preliminary amounts. Miteq was combined with the Company’s Narda Microwave-East business, and the new organization was re-named L-3 Narda-Miteq. Miteq offers a broad product line of active and passive radio frequency (RF) microwave components and low-power satellite communications (SATCOM) products for space and military applications that complement the existing Narda Microwave East product line. The combined L-3 Narda-Miteq business will provide products for the DoD, other U.S. Government agencies, prime contractors and commercial customers. The aggregate goodwill recognized for this business was $11 million, of which $4 million is expected to be deductible for income tax purposes. The goodwill was assigned to the Communication Systems reportable segment.

Unaudited Pro Forma Statements of Operations Data

The following unaudited pro forma Statements of Operations data present the combined results of the Company and its business acquisitions completed during the quarterly period ended March 25, 2016 and the year ended December 31, 2015, assuming that the business acquisitions completed during these periods had occurred on January 1, 2015.


	First Quarter Ended
	March 25, 2016		March 27, 2015
	(in millions, except per share data)
Pro forma net sales	$	2,353	$	2,518
Pro forma income from continuing operations		167		108
Pro forma net income attributable to L-3		227		108
Pro forma diluted earnings per share from continuing operations		2.08		1.24
Pro forma diluted earnings per share		2.87		1.29

The unaudited pro forma results disclosed in the table above are based on various assumptions and are not necessarily indicative of the results of operations that would have occurred had the Company completed these acquisitions on January 1, 2015.

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)

6. Contracts in Process

The components of contracts in process are presented in the table below.


	March 25, 2016			December 31, 2015
	(in millions)
Unbilled contract receivables, gross	$	2,243		$	2,097
Unliquidated progress payments		(977	)		(869	)

Unbilled contract receivables, net		1,266			1,228

Inventoried contract costs, gross		1,097			975
Unliquidated progress payments		(137	)		(122	)

Inventoried contract costs, net		960			853

Total contracts in process	$	2,226		$	2,081

Inventoried Contract Costs. In accordance with contract accounting standards, the Company’s U.S. Government contractor businesses account for the portion of their general and administrative (G&A), independent research and development (IRAD) and bids and proposal (B&P) costs that are allowable and reimbursable indirect contract costs under U.S. Government procurement regulations on their U.S. Government contracts (revenue arrangements) as inventoried contract costs. G&A, IRAD and B&P costs are allocated to contracts for which the U.S. Government is the end customer and are charged to costs of sales when sales on the related contracts are recognized. The Company’s U.S. Government contractor businesses record the unallowable portion of their G&A, IRAD and B&P costs to expense as incurred, and do not include them in inventoried contract costs.

The table below presents a summary of G&A, IRAD and B&P costs included in inventoried contract costs and the changes to them, including amounts charged to cost of sales by the Company’s U.S. Government contractor businesses for the periods presented.


	First Quarter Ended
	March 25, 2016			March 27, 2015
	(in millions)
Amounts included in inventoried contract costs at beginning of the period	$	137		$	117
Contract costs incurred:
IRAD and B&P		65			63
Other G&A		194			195

Total		259			258

Amounts charged to cost of sales		(239	)		(247	)

Amounts included in inventoried contract costs at end of the period	$	157		$	128

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)

The table below presents a summary of selling, general and administrative expenses and research and development expenses for the Company’s commercial businesses, which are expensed as incurred and included in cost of sales on the unaudited condensed consolidated statements of operations.


	First Quarter Ended
	March 25, 2016		March 27, 2015
	(in millions)
Selling, general and administrative expenses	$	52	$	70
Research and development expenses		11		12

Total	$	63	$	82

7. Inventories

Inventories at Lower of Cost or Market. The table below presents the components of inventories at the lower of cost (first-in, first-out or average cost) or realizable value.


	March 25, 2016		December 31, 2015
	(in millions)
Raw materials, components and sub-assemblies	$	174	$	164
Work in process		101		103
Finished goods		76		66

Total	$	351	$	333

8. Goodwill and Identifiable Intangible Assets

Goodwill. In accordance with the accounting standards for business combinations, the Company records the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition (commonly referred to as the purchase price allocation). The table below presents the changes in goodwill allocated to the Company’s reporting units in each reportable segment.


	Electronic Systems			Aerospace Systems			Communication Systems			Consolidated Total
	(in millions)
Goodwill	$	3,994		$	1,691		$	1,038		$	6,723
Accumulated impairment losses		(69	)		(338	)		(35	)		(442	)

Balance at December 31, 2015		3,925			1,353			1,003			6,281

Business acquisitions⁽¹⁾		—			—			22			22
Foreign currency translation adjustments⁽²⁾		(7	)		10			—			3

Balance at March 25, 2016	$	3,918		$	1,363		$	1,025		$	6,306

Goodwill	$	3,987		$	1,701		$	1,060		$	6,748
Accumulated impairment losses		(69	)		(338	)		(35	)		(442	)

	$	3,918		$	1,363		$	1,025		$	6,306

⁽¹⁾	The increase in goodwill for the Communication Systems segment was due to the ATM business acquisition.

⁽²⁾

The decrease in goodwill presented in the Electronic Systems segment was due to the strengthening of the U.S. dollar against the British pound, primarily offset by the weakening of the U.S. dollar against the Canadian dollar and the Euro. The increase in goodwill presented in the Aerospace Systems segment was due to the weakening of the U.S. dollar against the Canadian dollar.

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)

Identifiable Intangible Assets. The most significant identifiable intangible asset that is separately recognized for the Company’s business acquisitions is customer contractual relationships. All of the Company’s customer relationships are established through written customer contracts (revenue arrangements). The fair value for customer contractual relationships is determined, as of the date of acquisition, based on estimates and judgments regarding expectations for the estimated future after-tax earnings and cash flows (including cash flows for working capital) arising from the follow-on sales on contract (revenue arrangement) renewals expected from the customer contractual relationships over their estimated lives, including the probability of expected future contract renewals and sales, less a contributory assets charge, all of which is discounted to present value.

Identifiable Intangible Assets. The table below presents information for the Company’s identifiable intangible assets that are subject to amortization.


			March 25, 2016						December 31, 2015
	Weighted Average Amortization Period		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
	(in years)		(in millions)
Customer contractual relationships		16	$	372	$	251	$	121	$	370	$	246	$	124
Technology		11		158		94		64		156		91		65
Other		18		21		11		10		21		11		10

Total		15	$	551	$	356	$	195	$	547	$	348	$	199

The table below presents amortization expense recorded by the Company for its identifiable intangible assets.


	First Quarter Ended
	March 25, 2016		March 27, 2015
	(in millions)
Amortization Expense	$	8	$	9

Based on gross carrying amounts at March 25, 2016, the Company’s estimate of amortization expense for identifiable intangible assets for the years ending December 31, 2016 through 2020 is presented in the table below.


	Year Ending December 31,
	2016		2017		2018		2019		2020
	(in millions)
Estimated amortization expense	$	33	$	31	$	27	$	24	$	21

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)

9. Other Current Liabilities and Other Liabilities

The table below presents the components of other current liabilities.


	March 25, 2016		December 31, 2015
	(in millions)
Other Current Liabilities:
Estimated costs in excess of estimated contract value to complete contracts in process in a loss position	$	76	$	82
Accrued product warranty costs		66		70
Accrued interest		48		45
Deferred revenues		33		32
Product returns allowance (see Note 2)		25		20
Accruals for pending and threatened litigation (see Note 18)		1		6
Other		154		139

Total other current liabilities	$	403	$	394

The table below presents the components of other liabilities.


	March 25, 2016		December 31, 2015
	(in millions)
Other Liabilities:
Non-current income taxes payable (see Note 11)	$	161	$	161
Deferred compensation		49		45
Accrued workers’ compensation		37		38
Accrued product warranty costs		37		35
Notes payable and capital lease obligations		10		10
Other		77		79

Total other liabilities	$	371	$	368

The table below presents the changes in the Company’s accrued product warranty costs.


	First Quarter Ended
	March 25, 2016			March 27, 2015
	(in millions)
Accrued product warranty costs:⁽¹⁾
Balance at January 1	$	105		$	93
Acquisitions during the period		—			1
Accruals for product warranties issued during the period		9			17
Settlements made during the period		(11	)		(17	)

Balance at end of period	$	103		$	94

⁽¹⁾

Warranty obligations incurred in connection with long-term production contracts that are accounted for under the POC cost-to-cost method are included within the contract estimates at completion and are excluded from the above amounts. The balances above include both the current and non-current amounts.

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)

10. Debt

The components of debt and a reconciliation to the carrying amount of current and long-term debt are presented in the table below.


	March 25, 2016			December 31, 2015
	(in millions)
L-3 Communications:
Borrowings under Amended and Restated Revolving Credit Facility⁽¹⁾	$	—		$	—
3.95% Senior Notes due 2016		500			500
1.50% Senior Notes due 2017		350			350
5.20% Senior Notes due 2019		1,000			1,000
4.75% Senior Notes due 2020		800			800
4.95% Senior Notes due 2021		650			650
3.95% Senior Notes due 2024		350			350

Principal amount of long-term debt		3,650			3,650
Unamortized discounts		(7	)		(8	)
Deferred debt issue costs		(17	)		(18	)

Carrying amount of long-term debt		3,626			3,624
Current portion of long-term debt		(499	)		(499	)

Carrying amount of long-term debt, excluding current portion	$	3,127		$	3,125

⁽¹⁾	During the quarterly period ended March 25, 2016, L-3 Communications’ aggregate borrowings and repayments under the Credit Facility were each $217 million. At March 25, 2016, L-3 Communications had the full availability of its $1 billion Credit Facility, which expires on February 3, 2017.

On March 24, 2016, the Company initiated a redemption of $300 million aggregate principal amount of its 3.95% Senior Notes due in 2016 (the 2016 Notes). The 2016 Notes will be redeemed on May 20, 2016 (the Redemption Date), at a redemption price equal to the greater of: (1) 100% of the aggregate principal amount, or (2) the present value of the remaining principal and interest payments discounted to the date of redemption, on a semi-annual basis, at the treasury rate (as defined in the indenture governing the 2016 Notes), plus a spread of 50 basis points.

In April 2015, the FASB issued ASU 2015-03 which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the associated debt liability. The Company has adopted this standard during the quarterly period ended March 25, 2016.

11. Income Taxes

The Company and its subsidiaries file income tax returns in the U.S. Federal jurisdiction, which is the Company’s primary tax jurisdiction, and various state and foreign jurisdictions. As of March 25, 2016, the statutes of limitations for the Company’s U.S. Federal income tax returns for the years ended December 31, 2010 through 2014 were open. The U.S. Internal Revenue Service (IRS) commenced an audit of the Company’s U.S. Federal income tax return for 2012. The Company cannot predict the outcome of the audit at this time.

The effective income tax rate for the quarterly period ended March 25, 2016 decreased to 22.3% from 30.5% for the quarterly period ended March 27, 2015. The decrease was primarily due to: (1) the early adoption of a new accounting standard related to tax benefits from employee stock based compensation awards, which resulted in a

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)

$10 million reduction to income tax expense (see Note 3) and (2) a benefit from the reinstatement of the Federal Research and Experimentation (R&E) tax credit. As of March 25, 2016, the Company anticipates that unrecognized tax benefits will decrease by approximately $6 million over the next 12 months due to the potential resolution of unrecognized tax benefits involving several jurisdictions and tax periods. The actual amount of the decrease over the next 12 months could vary significantly depending on the ultimate timing and nature of any settlements.

Current and non-current income taxes payable include accrued potential interest of $19 million ($11 million after income taxes) at March 25, 2016 and $18 million ($11 million after income taxes) at December 31, 2015, and potential penalties of $8 million at March 25, 2016 and $9 million at December 31, 2015.

12. Accumulated Other Comprehensive (Loss) Income (AOCI)

The changes in the AOCI balances, including amounts reclassified from AOCI into net income, are presented in the table below.


	Foreign currency translation			Unrealized losses on hedging instruments			Unrecognized losses and prior service cost, net			Total accumulated other comprehensive (loss) income
	(in millions)
Balance at December 31, 2015	$	(101	)	$	(8	)	$	(465	)	$	(574	)
Other comprehensive income before reclassifications, net of tax		1			6			—			7
Amounts reclassified from AOCI, net of tax		—			1			8			9

Net current period other comprehensive income		1			7			8			16

Balance at March 25, 2016	$	(100	)	$	(1	)	$	(457	)	$	(558	)

Balance at December 31, 2014	$	19		$	(5	)	$	(598	)	$	(584	)
Other comprehensive loss before reclassifications, net of tax		(87	)		(5	)		—			(92	)
Amounts reclassified from AOCI, net of tax		—			2			11			13

Net current period other comprehensive (loss) income		(87	)		(3	)		11			(79	)

Balance at March 27, 2015	$	(68	)	$	(8	)	$	(587	)	$	(663	)

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)

Further details regarding the amounts reclassified from AOCI into net income are presented in the table below.


	Amount Reclassified from AOCI^(a)
	First Quarter Ended
Details About AOCI Components	March 25, 2016			March 27, 2015
	(in millions)
Loss on hedging instruments	$	(3	)	$	(2	)	Cost of sales-products

		(3	)		(2	)	Income from continuing operations before income taxes
		2			—		Provision for income taxes

	$	(1	)	$	(2	)	Income from continuing operations

Amortization of defined benefit pension items:
Net loss	$	(12	)	$	(17	)	(b)

		(12	)		(17	)	Income from continuing operations before income taxes
		4			6		Provision for income taxes

	$	(8	)	$	(11	)	Income from continuing operations

Total reclassification for the period	$	(9	)	$	(13	)	Income from continuing operations

^(a)	Amounts in parenthesis indicate charges to the unaudited condensed consolidated statements of operations.

^(b)	Amounts related to pension and postretirement benefit plans were reclassified from AOCI and recorded as a component of net periodic benefit cost (see Note 19 for additional information).

13. Equity

On December 4, 2014, L-3 Holdings’ Board of Directors approved a share repurchase program that authorizes L-3 Holdings to repurchase up to $1.5 billion of its common stock through June 30, 2017. Repurchases of L-3 Holdings’ common stock are made from time to time at management’s discretion in accordance with applicable U.S. Federal securities laws. The timing and actual number of shares to be repurchased in the future will depend on a variety of factors, including, but not limited to, the Company’s financial position, earnings, legal requirements, other investment opportunities (including acquisitions) and market conditions. L-3 Holdings repurchased 1,708,185 shares of its common stock at an average price of $115.80 per share for an aggregate amount of $198 million from January 1, 2016 through March 25, 2016. All share repurchases of L-3 Holdings’ common stock have been recorded as treasury shares.

At March 25, 2016, the remaining dollar value of authorization under the December 4, 2014 share repurchase program was $608 million.

From March 26, 2016 through April 22, 2016, L-3 Holdings repurchased 467,854 shares of its common stock at an average price of $119.36 per share for an aggregate amount of $56 million.

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)

On February 9, 2016, L-3 Holdings’ Board of Directors declared a cash dividend of $0.70 per share, paid on March 15, 2016 to shareholders of record at the close of business on March 1, 2016. During the quarterly period ended March 25, 2016, the Company paid $58 million of cash dividends, including $4 million of previously accrued dividends for employee held stock awards.

14. L-3 Holdings’ Earnings Per Common Share

A reconciliation of basic and diluted earnings per share (EPS) is presented in the table below.


	First Quarter Ended
	March 25, 2016			March 27, 2015
	(in millions, except per share data)
Reconciliation of net income:
Net income	$	230		$	109
Net income from continuing operations attributable to noncontrolling interests		(3	)		(4	)

Net income attributable to L-3 Holdings’ common shareholders	$	227		$	105

Earnings attributable to L-3 Holdings’ common shareholders:
Continuing operations	$	164		$	101
Discontinued operations, net of income tax		63			4

Net income attributable to L-3 Holdings’ common shareholders	$	227		$	105

Earnings per share attributable to L-3 Holdings’ common shareholders:
Basic:
Weighted average common shares outstanding		77.8			82.3

Basic earnings per share:
Continuing operations	$	2.11		$	1.23
Discontinued operations, net of income tax		0.81			0.05

Net income	$	2.92		$	1.28

Diluted:
Common and potential common shares:
Weighted average common shares outstanding		77.8			82.3
Assumed exercise of stock options		2.0			2.9
Unvested restricted stock awards		1.1			1.4
Employee stock purchase plan contributions		0.1			0.1
Performance unit awards		0.1			0.2
Assumed purchase of common shares for treasury		(2.1	)		(3.1	)

Common and potential common shares		79.0			83.8

Diluted earnings per share:
Continuing operations	$	2.08		$	1.20
Discontinued operations, net of income tax		0.79			0.05

Net income	$	2.87		$	1.25

The computation of diluted EPS excludes shares for stock options, restricted stock awards and performance unit awards of 1.2 million for the quarterly period ended March 25, 2016 and shares for stock options of 0.2 million for the quarterly period ended March 27, 2015, as they were anti-dilutive.

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)

15. Fair Value Measurements

L-3 applies the accounting standards for fair value measurements to all of the Company’s assets and liabilities that are measured and recorded at fair value. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants. The standards establish a fair value hierarchy that gives the highest priority to observable inputs and the lowest priority to unobservable inputs.

The following table presents the fair value hierarchy level for each of the Company’s assets and liabilities that are measured and recorded at fair value on a recurring basis.


	March 25, 2016						December 31, 2015
Description	Level 1⁽¹⁾		Level 2⁽²⁾		Level 3⁽³⁾		Level 1⁽¹⁾		Level 2⁽²⁾		Level 3⁽³⁾
	(in millions)
Assets
Cash equivalents	$	329	$	—	$	—	$	187	$	—	$	—
Derivatives (foreign currency forward contracts)		—		7		—		—		2		—

Total assets	$	329	$	7	$	—	$	187	$	2	$	—

Liabilities
Derivatives (foreign currency forward contracts)	$	—	$	11	$	—	$	—	$	16	$	—

⁽¹⁾	Level 1 is based on quoted market prices available in active markets for identical assets or liabilities as of the reporting date. Cash equivalents are primarily held in registered money market funds, which are valued using quoted market prices.

⁽²⁾

Level 2 is based on pricing inputs other than quoted prices in active markets, which are either directly or indirectly observable. The fair value is determined using a valuation model based on observable market inputs, including quoted foreign currency forward exchange rates and consideration of non-performance risk.

⁽³⁾	Level 3 is based on pricing inputs that are not observable and not corroborated by market data. The Company has no Level 3 assets or liabilities.

16. Financial Instruments

At March 25, 2016 and December 31, 2015, the Company’s financial instruments consisted primarily of cash and cash equivalents, billed receivables, trade accounts payable, Senior Notes and foreign currency forward contracts. The carrying amounts of cash and cash equivalents, billed receivables and trade accounts payable are representative of their respective fair values because of the short-term maturities or the expected settlement dates of these instruments. The carrying amounts and estimated fair values of the Company’s other financial instruments are presented in the table below.


	March 25, 2016						December 31, 2015
	Carrying Amount			Estimated Fair Value			Carrying Amount			Estimated Fair Value
	(in millions)
Senior Notes⁽¹⁾	$	3,626		$	3,745		$	3,624		$	3,754
Foreign currency forward contracts⁽²⁾		(4	)		(4	)		(14	)		(14	)

⁽¹⁾	The Company measures the fair value of its Senior Notes using Level 2 inputs based primarily on current market yields for its existing debt traded in the secondary market.

⁽²⁾	The Company measures the fair values of foreign currency forward contracts based on forward exchange rates. See Note 17 for additional disclosures regarding the notional amounts and fair values of foreign currency forward contracts.

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)

17. Derivative Financial Instruments

The Company’s derivative financial instruments include foreign currency forward contracts, which are entered into for risk management purposes.

Foreign Currency Forward Contracts. The Company’s U.S. and foreign businesses enter into contracts with customers, subcontractors or vendors that are denominated in currencies other than their functional currencies. To protect the functional currency equivalent cash flows associated with certain of these contracts, the Company enters into foreign currency forward contracts. The Company’s activities involving foreign currency forward contracts are designed to hedge the changes in the functional currency equivalent cash flows due to movements in foreign exchange rates compared to the functional currency. The foreign currencies hedged are primarily the Canadian dollar, the U.S. dollar, the Euro and the British pound. The Company manages exposure to counterparty non-performance credit risk by entering into foreign currency forward contracts only with major financial institutions that are expected to fully perform under the terms of such contracts. Foreign currency forward contracts are recorded in the Company’s condensed consolidated balance sheets at fair value and are generally designated and accounted for as cash flow hedges in accordance with the accounting standards for derivative instruments and hedging activities. Gains and losses on designated foreign currency forward contracts that are highly effective in offsetting the corresponding change in the cash flows of the hedged transactions are recorded net of income taxes in AOCI and then recognized in income when the underlying hedged transaction affects income. Gains and losses on foreign currency forward contracts that do not meet hedge accounting criteria are recognized in income immediately. Notional amounts are used to measure the volume of foreign currency forward contracts and do not represent exposure to foreign currency losses. The table below presents the notional amounts of the Company’s outstanding foreign currency forward contracts by currency at March 25, 2016.


Currency	Notional Amounts
	(in millions)
Canadian dollar	$	183
U.S. dollar		90
Euro		36
British pound		7

Total	$	316

At March 25, 2016, the Company’s foreign currency forward contracts had maturities through 2020.

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)

The table below presents the location of the Company’s derivative instruments recorded at fair value on the condensed consolidated balance sheets.


	March 25, 2016								December 31, 2015
	Other Current Assets		Other Assets		Other Current Liabilities		Other Liabilities		Other Current Assets		Other Assets		Other Current Liabilities		Other Liabilities
	(in millions)
Derivatives designated as hedging instruments:
Foreign currency forward contracts⁽¹⁾	$	3	$	4	$	10	$	1	$	1	$	1	$	15	$	1

Total derivative instruments	$	3	$	4	$	10	$	1	$	1	$	1	$	15	$	1

⁽¹⁾	See Note 15 for a description of the fair value hierarchy related to the Company’s foreign currency forward contracts.

The effects from foreign currency forward contracts on the unaudited condensed consolidated statements of operations were pre-tax losses of $3 million and $2 million for the quarterly periods ended March 25, 2016 and March 27, 2015, respectively. At March 25, 2016, the estimated net amount of existing losses that are expected to be reclassified into income within the next 12 months is $7 million.

18. Commitments and Contingencies

Procurement Regulations

A substantial majority of the Company’s revenues are generated from providing products and services under legally binding agreements or contracts with the U.S. Government, foreign government customers and state and local governments. U.S. Government contracts are subject to extensive legal and regulatory requirements, and, from time to time, agencies of the U.S. Government investigate whether such contracts were and are being conducted in accordance with these requirements. The Company is currently cooperating with the U.S. Government on several investigations from which civil, criminal or administrative proceedings have or could result and give rise to fines, penalties, compensatory and treble damages, restitution and/or forfeitures, including investigations into the pricing of certain contracts entered into by the Communication Systems segment. The Company does not currently anticipate that any of these investigations will have a material adverse effect, individually or in the aggregate, on its consolidated financial position, results of operations or cash flows. However, under U.S. Government regulations, an indictment of the Company by a federal grand jury, or an administrative finding against the Company as to its present responsibility to be a U.S. Government contractor or subcontractor, could result in the Company being suspended for a period of time from eligibility for awards of new government contracts or task orders or in a loss of export privileges. A conviction, or an administrative finding against the Company that satisfies the requisite level of seriousness, could result in debarment from contracting with the federal government for a specified term. In addition, all of the Company’s U.S. Government contracts: (1) are subject to audit and various pricing and cost controls, (2) include standard provisions for termination for the convenience of the U.S. Government or for default, and (3) are subject to cancellation if funds for contracts become unavailable. Foreign government contracts generally include comparable provisions relating to terminations for convenience or default, as well as other procurement clauses relevant to the foreign government.

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)

Litigation Matters

The Company is also subject to litigation, proceedings, claims or assessments and various contingent liabilities incidental to its businesses, including those specified below. Furthermore, in connection with certain business acquisitions, the Company has assumed some or all claims against, and liabilities of, such acquired businesses, including both asserted and unasserted claims and liabilities.

In accordance with the accounting standard for contingencies, the Company records a liability when management believes that it is both probable that a liability has been incurred and the Company can reasonably estimate the amount of the loss. Generally, the loss is recorded at the amount the Company expects to resolve the liability. The estimated amounts of liabilities recorded for pending and threatened litigation are disclosed in Note 9. Amounts recoverable from insurance contracts or third parties are recorded as assets when deemed probable. At March 25, 2016, the Company did not record any amounts for recoveries from insurance contracts or third parties in connection with the amount of liabilities recorded for pending and threatened litigation. Legal defense costs are expensed as incurred. The Company believes it has recorded adequate provisions for its litigation matters. The Company reviews these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. While it is reasonably possible that an unfavorable outcome may occur in one or more of the following matters, unless otherwise stated below, the Company believes that it is not probable that a loss has been incurred in any of these matters. With respect to the litigation matters below for which it is reasonably possible that an unfavorable outcome may occur, an estimate of loss or range of loss is disclosed when such amount or amounts can be reasonably estimated. Although the Company believes that it has valid defenses with respect to legal matters and investigations pending against it, the results of litigation can be difficult to predict, particularly those involving jury trials. Accordingly, the Company’s current judgment as to the likelihood of loss (or our current estimate as to the potential range of loss, if any) with respect to any particular litigation matter may turn out to be wrong. Therefore, it is possible that one or more of the following or other contingencies could have a material impact on the financial position, results of operations or cash flows of the Company in future periods.

EoTech Class Actions. In December 2015 and February 2016, three putative class action complaints against the Company were filed in the United States District Court for the Western District of Missouri and the United States District Court of the District of Oregon. The complaints allege that the Company’s EoTech business unit knowingly sold defective holographic weapons sights, and seek monetary damages, pre- and post-judgment interest, and fees and expenses based on claims including breach of warranty, fraud, violation of state consumer protection statutes and unjust enrichment. These cases have been consolidated into a single, putative class action in the United States District Court for the Western District of Missouri. In March 2016, two additional putative class action complaints were filed in the United States District Court for the Eastern District of Michigan, which assert similar claims against the Company. The Company believes it has valid defenses with respect to these actions and intends to defend against them vigorously. The Company is unable to reasonably estimate any amount or range of loss that may be incurred in connection with these matters because the proceedings are in their early stages.

Securities Class Action. In August 2014, three separate, putative class actions were filed in the United States District Court for the Southern District of New York (the District Court) against the Company and certain of its officers. These cases were consolidated into a single action on October 24, 2014. A consolidated amended complaint was filed in the District Court on December 22, 2014, which was further amended and restated on March 13, 2015. The complaint alleges violations of federal securities laws related to misconduct and accounting errors identified by the Company at its Aerospace Systems segment, and seeks monetary damages, pre- and post-judgment interest, and fees and expenses. On March 30, 2016, the District Court dismissed with prejudice all

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)

claims against the Company’s officers and allowed the claim against the Company to proceed to discovery. Discovery has commenced. The Company believes the claim lacks merit and intends to defend itself vigorously. The Company is unable to reasonably estimate any amount or range of loss, if any, that may be incurred in connection with this matter because the proceedings are in their early stages.

Government Inquiries. On July 30, 2014, the Company voluntarily contacted the Securities and Exchange Commission (SEC) to report information concerning its internal review related to misconduct and accounting errors identified by the Company at its Aerospace Systems segment. The Company has received requests for interviews of current and former employees, and subpoenas for documents and other materials from the SEC and the Department of Justice concerning these self-reported matters. The Company is fully cooperating with both agencies. The Company is unable to reasonably estimate any amount or range of loss, if any, that may be incurred in connection with these inquiries based on the nature of the inquiries to date.

Bashkirian Airways. In March 2016, approximately $3.7 million was paid from the escrow account on behalf of the remaining four plaintiffs in full satisfaction of the amounts awarded to them. The remaining escrow balance was returned to the Company’s insurers.

HVC Alkmaar. On July 23, 2014, a notice of claim was received by our former JovyAtlas business unit. The notice relates to losses resulting from a fire that occurred at an HVC Alkmaar bio-energy plant on July 21, 2013. The notice states that the fire resulted from the failure of an uninterruptible power supply (UPS) to provide sufficient power to act as a back-up energy supply, alleges that JovyAtlas was the manufacturer and service provider for the UPS and claims €11 million in estimated property damages and €35 million in estimated business interruption damages. The Company has tendered the notice of claim to its insurance carriers.

19. Pension and Other Postretirement Benefits

The following table summarizes the components of net periodic benefit cost for the Company’s pension and other postretirement benefit plans.


	Pension Plans						Postretirement Benefit Plans
	First Quarter Ended						First Quarter Ended
	March 25, 2016			March 27, 2015			March 25, 2016			March 27, 2015
	(in millions)
Components of net periodic benefit cost:
Service cost	$	27		$	32		$	1		$	1
Interest cost		35			37			1			2
Expected return on plan assets		(51	)		(52	)		(1	)		(1	)
Amortization of prior service costs (credits)		—			1			(1	)		(1	)
Amortization of net loss		13			17			—			—

Net periodic benefit cost	$	24		$	35		$	—		$	1

Contributions. The Company contributed cash of $12 million to its pension plans and $2 million to its other postretirement benefit plans during the quarterly period ended March 25, 2016. The Company expects to contribute an additional $88 million to its pension plans and $8 million to its other postretirement benefit plans during the remainder of 2016.

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)

20. Stock-Based Compensation

During the quarterly period ended March 25, 2016, the Company granted stock-based compensation under its Amended and Restated 2008 Long Term Performance Plan (2008 LTPP) in the form of stock options, restricted stock units and performance units. The stock-based compensation awards granted during the quarterly period ended March 25, 2016 are further discussed below.

Stock Options. The Company granted 608,860 stock options with a weighted average exercise price of $116.20 per option, which was equal to the closing price of L-3 Holdings’ common stock on the date of grant. The options expire after 10 years from the date of grant and vest ratably over a three-year period on the annual anniversary of the date of grant. The options granted to our Chairman and Chief Executive Officer are also subject to performance-based vesting conditions. The weighted average grant date fair value for the options of $15.80 per option was estimated using the Black-Scholes option-pricing model. The weighted average assumptions used in the valuation model for this grant are presented in the table below.


Expected holding period (in years)	5.0
Expected volatility	21.3	%
Expected dividend yield	2.8	%
Risk-free interest rate	1.1	%

Restricted Stock Units. The Company granted 383,693 restricted stock units with a weighted average grant date fair value of $116.20 per share. Restricted stock units automatically convert into shares of L-3 Holdings’ common stock upon vesting, and are subject to forfeiture until certain restrictions have lapsed, including a three year cliff vesting period for employees and a one year cliff vesting period for non-employee directors, in each case starting on the date of grant.

Performance Units. The Company granted 51,892 performance units with a weighted average grant date fair value per unit of $116.20. The final payout for these units is based on the achievement of pre-determined EPS goals established by the compensation committee of the Company’s Board of Directors for the three-year period ending December 31, 2018. Units earned under the award can range from zero to 200% of the original number of units awarded, which are converted into shares of L-3 Holdings’ common stock.

Award Modifications. As disclosed in Note 5, the Company completed the sale of NSS on February 1, 2016. In connection with the divestiture of NSS, the Company modified unvested restricted stock unit and stock option awards held by approximately 300 NSS employees by converting each award into a right to receive a cash payment. The cash payment was based on the original number of units awarded, the closing price of L-3’s common stock on the closing date of the sale, and the portion of the three-year vesting period for the award that had been satisfied through the closing date, and additionally in the case of stock options, the exercise price of the options. As a result of the award modification, the Company reversed $4 million of previously recorded stock compensation expense relating to the original awards as a reduction to shareholders equity and recorded $5 million of expense based on the cash payments made to NSS employees in connection with the modified awards, each of which is included in the Company’s results from discontinued operations.

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)

21. Supplemental Cash Flow Information


	First Quarter Ended
	March 25, 2016		March 27, 2015
	(in millions)
Interest paid on outstanding debt	$	36	$	37
Income tax payments		12		10
Income tax refunds		1		1

22. Segment Information

The Company has three reportable segments, which are described in Note 1. The Company evaluates the performance of its operating segments and reportable 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 related to business divestitures, and certain other items that are excluded by management for purposes of evaluating the operating performance of the Company’s business segments. Certain Corporate expenses of $4 million for the quarterly period ended March 27, 2015, that had previously been allocated to the NSS business were retained by the Company and were allocated to L-3’s three reportable segments.

The tables below present net sales, operating income, depreciation and amortization and total assets by reportable segment.


	First Quarter Ended
	March 25, 2016			March 27, 2015
	(in millions)
Net Sales:
Electronic Systems	$	903		$	1,046
Aerospace Systems		1,007			1,027
Communication Systems		477			455
Elimination of intercompany sales		(34	)		(40	)

Consolidated total	$	2,353		$	2,488

Operating Income:
Electronic Systems	$	95		$	113
Aerospace Systems		106			60
Communication Systems		51			36

Segment total		252			209
Loss related to business divestiture⁽¹⁾		—			(22	)

Consolidated total	$	252		$	187

Depreciation and amortization:
Electronic Systems	$	25		$	28
Aerospace Systems		13			12
Communication Systems		12			12

Consolidated total	$	50		$	52

⁽¹⁾	See Note 5 for information regarding the Company’s business divestiture.

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)


	March 25, 2016		December 31, 2015
	(in millions)
Total Assets:
Electronic Systems	$	6,533	$	6,426
Aerospace Systems		2,769		2,630
Communication Systems		2,064		1,984
Corporate		545		363
Assets of discontinued operations		—		664

Consolidated total	$	11,911	$	12,067

23. Condensed Combining Financial Information of L-3 Communications and Its Subsidiaries

L-3 Communications is a 100% owned subsidiary of L-3 Holdings. The debt of L-3 Communications, including the Senior Notes and borrowings under amounts drawn against the Credit Facility are guaranteed, on a joint and several, full and unconditional basis, by certain of its domestic subsidiaries (the “Guarantor Subsidiaries”) and, in the case of the Credit Facility, by L-3 Holdings. See Note 9 to the audited consolidated financial statements for the year ended December 31, 2015, included in the Company’s Annual Report on Form 10-K for additional information. The foreign subsidiaries and certain domestic subsidiaries of L-3 Communications (the “Non-Guarantor Subsidiaries”) do not guarantee the debt of L-3 Communications or L-3 Holdings. None of the debt of L-3 Communications has been issued by its subsidiaries. There are no restrictions on the payment of dividends from the Guarantor Subsidiaries to L-3 Communications or from L-3 Communications to L-3 Holdings.

Under the terms of the indentures governing the Senior Notes, the guarantees of the Senior Notes will automatically and unconditionally be released and discharged: (1) upon the release of all guarantees of all other outstanding indebtedness of L-3 Communications Corporation, or (2) upon the determination that such guarantor is no longer a “domestic subsidiary.” In addition, the guarantees of the Senior Notes will be automatically and unconditionally released and discharged in the event of a sale or other disposition of all of the assets of any guarantor, by way of merger, consolidation or otherwise, or a sale of all of the capital stock of such guarantor.

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)

The following unaudited condensed combining financial information presents the results of operations, financial position and cash flows of: (1) L-3 Holdings, excluding L-3 Communications and its consolidated subsidiaries (the Parent), (2) L-3 Communications, excluding its consolidated subsidiaries, (3) the Guarantor Subsidiaries, (4) the Non-Guarantor Subsidiaries, and (5) the eliminations to arrive at the information for L-3 on a consolidated basis.


	L-3 Holdings (Parent)		L-3 Communications		Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Consolidated L-3
	(in millions)
Condensed Combining Balance Sheets:
At March 25, 2016:
Current assets:
Cash and cash equivalents	$	—	$	349	$	3	$	189	$	(7	)	$	534
Billed receivables, net		—		276		256		247		—			779
Contracts in process		—		925		1,030		271		—			2,226
Other current assets		—		279		134		111		—			524

Total current assets		—		1,829		1,423		818		(7	)		4,063
Goodwill		—		2,339		2,974		993		—			6,306
Other assets		—		784		500		258		—			1,542
Investment in and amounts due from consolidated subsidiaries		4,378		5,393		4,312		—		(14,083	)		—

Total assets	$	4,378	$	10,345	$	9,209	$	2,069	$	(14,090	)	$	11,911

Current portion of long-term debt	$	—	$	499	$	—	$	—	$	—		$	499
Current liabilities		—		913		818		456		(7	)		2,180
Amounts due to consolidated subsidiaries		—		—		—		247		(247	)		—
Other long-term liabilities		—		1,428		195		31		—			1,654
Long-term debt		—		3,127		—		—		—			3,127

Total liabilities		—		5,967		1,013		734		(254	)		7,460

L-3 shareholders’ equity		4,378		4,378		8,196		1,335		(13,909	)		4,378
Noncontrolling interests		—		—		—		—		73			73

Total equity		4,378		4,378		8,196		1,335		(13,836	)		4,451

Total liabilities and equity	$	4,378	$	10,345	$	9,209	$	2,069	$	(14,090	)	$	11,911

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)


	L-3 Holdings (Parent)		L-3 Communications		Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Consolidated L-3
	(in millions)
At December 31, 2015:
Current assets:
Cash and cash equivalents	$	—	$	137	$	—	$	165	$	(95	)	$	207
Billed receivables, net		—		278		297		171		—			746
Contracts in process		—		872		958		251		—			2,081
Other current assets		—		288		137		109		—			534
Assets of discontinued operations		—		—		664		—		—			664

Total current assets		—		1,575		2,056		696		(95	)		4,232
Goodwill		—		2,318		2,973		990		—			6,281
Other assets		—		798		496		260		—			1,554
Investment in and amounts due from consolidated subsidiaries		4,355		5,609		3,739		111		(13,814	)		—

Total assets	$	4,355	$	10,300	$	9,264	$	2,057	$	(13,909	)	$	12,067

Current portion of long-term debt	$	—	$	499	$	—	$	—	$	—		$	499
Current liabilities		—		911		899		445		(95	)		2,160
Liabilities of discontinued operations		—		—		220		—		—			220
Other long-term liabilities		—		1,410		195		29		—			1,634
Long-term debt		—		3,125		—		—		—			3,125

Total liabilities		—		5,945		1,314		474		(95	)		7,638

L-3 shareholders’ equity		4,355		4,355		7,950		1,583		(13,888	)		4,355
Noncontrolling interests		—		—		—		—		74			74

Total equity		4,355		4,355		7,950		1,583		(13,814	)		4,429

Total liabilities and equity	$	4,355	$	10,300	$	9,264	$	2,057	$	(13,909	)	$	12,067

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)


	L-3 Holdings (Parent)			L-3 Communications			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated L-3
	(in millions)
Condensed Combining Statements of Operations:
For the quarter ended March 25, 2016:
Total net sales	$	—		$	822		$	1,185		$	409		$	(63	)	$	2,353
Total cost of sales		(6	)		(739	)		(1,068	)		(357	)		69			(2,101	)

Operating (loss) income		(6	)		83			117			52			6			252
Interest expense		—			(41	)		—			—			—			(41	)
Interest and other income, net		—			3			—			1			—			4

(Loss) income from continuing operations before income taxes		(6	)		45			117			53			6			215
Benefit (provision) for income taxes		1			(10	)		(26	)		(12	)		(1	)		(48	)
Equity in net income of consolidated subsidiaries		232			192			—			—			(424	)		—

Income from continuing operations		227			227			91			41			(419	)		167
Income from discontinued operations, net of income tax		—			—			63			—			—			63

Net income		227			227			154			41			(419	)		230
Net income attributable to noncontrolling interests		—			—			—			—			(3	)		(3	)

Net income attributable to L-3	$	227		$	227		$	154		$	41		$	(422	)	$	227

Comprehensive income attributable to L-3	$	243		$	243		$	162		$	41		$	(446	)	$	243

Condensed Combining Statements of Operations:
For the quarter ended March 27, 2015:
Total net sales	$	—		$	796		$	1,272		$	486		$	(66	)	$	2,488
Total cost of sales		(13	)		(729	)		(1,172	)		(444	)		79			(2,279	)
Loss related to business divestitures		—			—			(3	)		(19	)		—			(22	)

Operating (loss) income		(13	)		67			97			23			13			187
Interest expense		—			(39	)		—			—			—			(39	)
Interest and other income, net		—			3			—			—			—			3

(Loss) income from continuing operations before income taxes		(13	)		31			97			23			13			151
Benefit (provision) for income taxes		4			(10	)		(29	)		(7	)		(4	)		(46	)
Equity in net income of consolidated subsidiaries		114			84			—			—			(198	)		—

Income from continuing operations		105			105			68			16			(189	)		105
Income from discontinued operations, net of income tax		—			—			4			—			—			4

Net income		105			105			72			16			(189	)		109
Net income attributable to noncontrolling interests		—			—			—			—			(4	)		(4	)

Net income attributable to L-3	$	105		$	105		$	72		$	16			(193	)	$	105

Comprehensive income (loss) attributable to L-3	$	26		$	26		$	69		$	(73	)	$	(22	)	$	26

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)


	L-3 Holdings (Parent)			L-3 Communications			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated L-3
	(in millions)
Condensed Combining Statements of Cash Flows
For the quarter ended March 25, 2016:
Operating activities:
Net cash from (used in) operating activities	$	256		$	46		$	117		$	(32	)	$	(275	)	$	112

Investing activities:
Business acquisitions, net of cash acquired		—			(27	)		—			—			—			(27	)
Proceeds from sale of businesses, net of closing date cash balances		—			576			—			—			—			576
Investments in L-3 Communications		(1	)		—			—			—			1			—
Other investing activities		—			3			(12	)		(10	)		—			(19	)

Net cash (used in) from investing activities from continuing operations		(1	)		552			(12	)		(10	)		1			530

Financing activities:
Common stock repurchased		(198	)		—			—			—			—			(198	)
Dividends paid on L-3 Holdings common stock		(58	)		—			—			—			—			(58	)
Dividends paid to L-3 Holdings		—			(256	)		—			—			256			—
Investments from L-3 Holdings		—			1			—			—			(1	)		—
Other financing activities		1			(131	)		(46	)		66			107			(3	)

Net cash (used in) from financing activities from continuing operations		(255	)		(386	)		(46	)		66			362			(259	)

Net decrease in cash and cash equivalents of discontinued operations		—			—			(56	)		—			—			(56	)

Net increase in cash		—			212			3			24			88			327
Cash and cash equivalents, beginning of the period		—			137			—			165			(95	)		207

Cash and cash equivalents, end of the period	$	—		$	349		$	3		$	189		$	(7	)	$	534

L-3 COMMUNICATIONS HOLDINGS, INC.

AND L-3 COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (continued)


	L-3 Holdings (Parent)			L-3 Communications			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated L-3
	(in millions)
For the quarter ended March 27, 2015:
Operating activities:
Net cash from operating activities	$	158		$	107		$	4		$	1		$	(158	)	$	112

Investing activities:
Business acquisitions, net of cash acquired		—			(41	)		—			—			—			(41	)
Investments in L-3 Communications		(13	)		—			—			—			13			—
Other investing activities		—			(19	)		(5	)		(9	)		—			(33	)

Net cash used in investing activities from continuing operations		(13	)		(60	)		(5	)		(9	)		13			(74	)

Financing activities:
Common stock repurchased		(100	)		—			—			—			—			(100	)
Dividends paid on L-3 Holdings common stock		(58	)		—			—			—			—			(58	)
Dividends paid to L-3 Holdings		—			(158	)		—			—			158			—
Investments from L-3 Holdings		—			13			—			—			(13	)		—
Other financing activities		13			(53	)		4			(7	)		51			8

Net cash (used in) from financing activities from continuing operations		(145	)		(198	)		4			(7	)		196			(150	)

Effect of foreign currency exchange rate changes on cash		—			—			—			(11	)		—			(11	)
Net decrease in cash and cash equivalents of discontinued operations		—			—			(3	)		—			—			(3	)
Change in cash balance in assets held for sale		—			—			1			—			—			1

Net (decrease) increase in cash		—			(151	)		1			(26	)		51			(125	)
Cash and cash equivalents, beginning of the period		—			361			1			142			(62	)		442

Cash and cash equivalents, end of the period	$	—		$	210		$	2		$	116		$	(11	)	$	317

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Overview and Outlook

L-3’s Business

L-3 Holdings derives all of its operating income and cash flows from its wholly-owned subsidiary, L-3 Communications. L-3 Communications is a prime contractor in Intelligence, Surveillance and Reconnaissance (ISR) systems, aircraft sustainment (including modifications, logistics and maintenance), simulation and training, night vision and image intensification equipment and security and detection systems. L-3 is also a leading provider of a broad range of communication and electronic systems and products used on military and commercial platforms. Our customers include the United States (U.S.) Department of Defense (DoD) and its prime contractors, U.S. Government intelligence agencies, the U.S. Department of Homeland Security (DHS), foreign governments, and domestic and international commercial customers.

On December 7, 2015, we entered into a definitive agreement to sell our National Security Solutions (NSS) business to CACI International Inc. The transaction was completed on February 1, 2016. NSS provides cybersecurity solutions, high-performance computing, enterprise IT services, analytics and intelligence analysis to the DoD, U.S. Government intelligence agencies, federal civilian agencies and foreign governments. In accordance with Accounting Standards Update (ASU) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, the assets and liabilities and results of operations of NSS are reported as discontinued operations for all periods presented. Accordingly, all references made to financial data in this Quarterly Report on Form 10-Q are to L-3’s continuing operations, unless specifically noted.

We have the following three reportable segments: (1) Electronic Systems, (2) Aerospace Systems and (3) Communication Systems. Electronic Systems provides a broad range of components, products, subsystems, systems, and related services for military and commercial customers in several niche markets across several business areas. These business areas include precision engagement & training, sensor systems, power & propulsion systems, aviation products & security systems, warrior systems and advanced programs. Aerospace Systems delivers integrated solutions for the global ISR market and provides modernization, upgrade, sustainment, and maintenance and logistics support for a wide variety of aircraft and ground systems. Communication Systems delivers products and services for the global communications market, specializing in strategic and tactical airborne, space, ground and sea-based communication systems.

Financial information with respect to our segments is included in Results of Operations within this section, Note 22 to our unaudited condensed consolidated financial statements and Note 21 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015.

For the year ended December 31, 2015, we generated sales of $10,466 million and our primary end customer was the DoD. The table below presents a summary of our consolidated 2015 sales by major category of end customer and the percent contributed by each to our consolidated 2015 sales.


	2015 Sales		% of 2015 Sales
	(in millions)
DoD	$	6,973		67	%
Other U.S. Government		318		3

Total U.S. Government		7,291		70	%
International (foreign governments)		1,799		17
Commercial — international		759		7
Commercial — domestic		617		6

Total sales	$	10,466		100	%

We currently expect the percentages of our 2016 consolidated sales to the U.S. Government and to international and commercial customers to remain approximately the same compared to 2015.

Business Environment

U.S. Government Markets. Sales to U.S. Government customers represented 70% of our 2015 sales, and were primarily to DoD customers, which comprised 67% of our consolidated sales. Therefore, our annual sales are generally highly correlated to changes in U.S. Government spending levels, especially DoD budget levels.

The total DoD budget for FY 2015 was $560 billion, a decline of 4% as compared to the FY 2014 budget due to a decrease in the Overseas Contingency Operations (OCO) budget. The FY 2015 base budget remained substantially unchanged from FY 2014 at $497 billion, while the OCO budget decreased by $22 billion. The total DoD budget for FY 2016 is $581 billion, an increase of 4% compared to FY 2015. The increase is due to a base budget of $522 billion, higher by $25 billion compared to FY 2015. The FY 2016 OCO budget declined slightly to $59 billion compared to $63 billion for FY 2015.

On November 2, 2015, the President signed the Bipartisan Budget Act of 2015 (BBA), which suspended the debt ceiling through March 15, 2017 and raised spending caps previously enacted by Congress under the Budget Control Act of 2011 (BCA). The spending caps on defense programs were raised by $25 billion to $548 billion for FY 2016 and by $15 billion to $551 billion for FY 2017. The BBA also sets a target for OCO funding for the DoD at $59 billion for each of FY 2016 and FY 2017, subject to the Congressional appropriation process. The BBA, however, does not change the BCA budget sequestration cuts after FY 2017.

On December 18, 2015, the President signed the Consolidated Appropriations Act of 2016, which funded the U.S. Government through September 30, 2016. On February 9, 2016, the Administration submitted its FY 2017 DoD Proposed Budget Request (PBR). The total FY 2017 DoD budget request is $583 billion ($524 billion base budget, $59 billion OCO), which is substantially unchanged compared to the appropriated FY 2016 DoD budget. The FY 2017 PBR complies with the BBA.

While the BBA provides a level of stability, future DoD budgets and spending levels are determined by a number of factors beyond our control, including changes to U.S. procurement policies, current and future domestic and international budget conditions, presidential administration priorities and changing national security and defense requirements. Furthermore, the U.S. Government’s overall fiscal challenges remain, and if an annual appropriations bill is not enacted for FY 2017 or beyond, the U.S. Government may operate under a continuing resolution. We expect members of Congress and the Administration to continue to discuss various options throughout the budget appropriations process for FY 2017, and we cannot predict the outcome of these efforts. We believe that L-3 will benefit from several of the DoD’s focus areas such as ISR, unmanned systems, undersea warfare, precision strike, secure communications, missile defense and space programs, electronic warfare, aircraft readiness and the ability to project power in denied environments. Uncertainties continue to exist regarding how sequestration cuts, which are scheduled to resume in FY 2018, will be implemented in DoD budgets and how they will affect L-3’s DoD business. (For more information on the risks and uncertainties related to our U.S. Government contracts, see “Part I — Item 1A — Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015).

International and Commercial Markets

Sales to end customers other than the U.S. Government represented 30% of our 2015 sales, including 2% of our consolidated sales related to Marine Systems International (MSI), which we divested on May 29, 2015. These sales are generally affected by international government security and military priorities, as well as the fiscal situations of our international government end customers, global economic conditions for our commercial end markets and our competitive success in winning new business and increasing market share.

Key Performance Measures

The primary financial performance measures that we use to manage our businesses and monitor results of operations are (i) sales, (ii) operating income, and (iii) net cash from operating activities (Operating Cash Flow). Management believes that these financial performance measures are the primary growth drivers for our earnings per share and cash flow generation. Generally, in evaluating our businesses and contract performance, we focus on net sales, operating income, operating margin, which we define as operating income as a percentage of sales, and Operating Cash Flow, and not the type or amount of operating costs.

One of our primary business objectives is to increase sales organically and through select business acquisitions. 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: (1) current period from business acquisitions that are included in our actual results of operations for less than twelve months, and (2) prior period from business divestitures that are included in our actual results of operations for the twelve-month period prior to the divestiture date. We expect to supplement, strengthen and enhance our existing businesses by selectively acquiring businesses that: (1) add important new technologies and products, (2) provide access to select customers, programs and contracts and (3) provide attractive returns on investment. Another important financial performance measure that we use is operating margin, because sales growth combined with operating margin levels determine our operating income levels. Operating Cash Flow is also an important financial performance measure because Operating Cash Flow measures our ability to convert operating income into cash after paying income taxes and interest expenses and investing in working capital.

Sales Trend. For the quarter ended March 25, 2016 (2016 First Quarter), consolidated net sales of $2,353 million decreased by $135 million, or 5%, compared to the quarter ended March 27, 2015 (2015 First Quarter). Organic sales declined by $52 million, or 2.1%, for the 2016 First Quarter. Organic sales exclude $114 million of sales declines related to business divestitures and $31 million of sales increases related to business acquisitions. See “Results of Operations,” including segment results below for a further discussion of sales.

For the year ended December 31, 2015, our largest contract (revenue arrangement) in terms of annual sales was the Fort Rucker Maintenance Support contract with the U.S. Army Aviation and Missile Life Cycle Management Command (AMCOM), which is included in our Aerospace Systems segment. Under this contract, which generated approximately 4% of our 2015 sales, we provide maintenance, logistics and other related sustainment support services for rotary wing aircraft assigned to Fort Rucker and satellite units in Alabama. Our period of performance, including unexercised annual options, continues through September 30, 2017.

We derived approximately 67% of our 2015 sales from DoD customers and, as a result, our sales are highly correlated to DoD budget levels. DoD budgets are a function of several factors and uncertainties beyond our control, including, but not limited to, changes in U.S. procurement policies, budget considerations, current and future economic conditions, presidential administration priorities, U.S. military engagements, changing national security and defense requirements, geo-political developments, actual fiscal year congressional appropriations for defense budgets, and sequestration and other DoD budget reductions. Any of these factors could result in a significant increase, decrease or redirection of DoD budgets and impact L-3’s future results of operations, including our sales and operating income growth rates. Additionally, L-3’s future results of operations will be affected by our ability to retain our existing business, including our revenue arrangements with DoD customers, and to successfully re-compete for existing business and compete for new business, which largely depends on: (1) our successful performance on existing contracts, (2) the effectiveness and innovation of our technologies and research and development activities, (3) our ability to offer better program performance than our competitors at an affordable cost, and (4) our ability to retain our employees and hire new ones, particularly those employees who have U.S. Government security clearances. We expect our 2016 consolidated sales to decline by approximately 4% compared to 2015, including an organic sales decline of 2.5%. We expect organic international sales to decline by approximately 14% due to the completion of certain contracts with foreign governments, and organic sales to the DoD and U.S. Government to decline by approximately 2% due to the final

phase of the U.S. military drawdown from Afghanistan. We expect organic commercial sales to increase by approximately 8% primarily for commercial aviation products. See “Other Events” for information related to the MSI divestiture, which contributed approximately 2% of our consolidated sales in 2015.

Operating Income Trend. For the 2016 First Quarter, our consolidated and segment operating income was $252 million and our consolidated operating margin was 10.7%. Our segment operating income increased 21% compared to $209 million for the 2015 First Quarter, and our segment operating income as a percentage of sales (segment operating margin) was 10.7% for the 2016 First Quarter, an increase of 230 basis points from 8.4% for the 2015 First Quarter. Our consolidated operating income and consolidated operating margin for the 2015 First Quarter were reduced by charges related to the divestiture of MSI, which is further discussed below. The charges related to the divestiture of MSI are excluded from segment operating income because they are excluded by management for purposes of evaluating the operating performance of our business segments. See “Results of Operations,” including segment results below for a further discussion of operating margin.

Our effective management of labor, material, subcontractor and other direct costs is an important element of cost control and favorable contract performance. We believe that proactively re-sizing our businesses to their anticipated sales, combined with continuous cost improvement will enable us to increase our cost competitiveness. While we continue to undertake cost management actions, such as reducing our indirect costs, resizing select business units, and improving our productivity and contract performance in an effort to maintain or even increase operating margin, these efforts may not be successful and may be partially or fully offset by other cost increases. Although we expect our 2016 annual consolidated and segment operating margin to increase as compared to 2015, changes in the competitive environment and DoD procurement practices, lower consolidated sales and changes in annual pension expense, including related assumptions such as the benefit obligation discount rates, among other factors, could result in lower operating margin. Furthermore, select business acquisitions and new business, including contract renewals and new contracts, could have lower future operating margins compared to L-3’s operating margins on existing contracts, and could reduce future consolidated and segment operating margins.

Operating Cash Flow Trend. Operating Cash Flow of $112 million for the 2016 First Quarter was unchanged from the 2015 First Quarter. The decrease of Operating Cash Flow due to higher uses of cash for working capital in the 2016 First Quarter compared to the 2015 First Quarter primarily related to billed accounts receivables and advanced payments and billings in excess of costs incurred, was offset by higher net income.

Other Events

Discontinued Operations. On December 7, 2015, we entered into a definitive agreement to sell our NSS business to CACI International Inc. The transaction was completed on February 1, 2016 for a sale price of $561 million, subject to finalization based on customary adjustments for closing date net working capital.

The table below presents statement of operations data for NSS, which was previously a reportable segment, and has been classified as discontinued operations and includes allocated interest expense for debt not directly attributable or related to L-3’s other operations. Interest expense was allocated in accordance with the accounting standards for discontinued operations and was based on the ratio of NSS’s net assets to the sum of: (1) total L-3 consolidated net assets and (2) L-3 consolidated total debt. See Note 5 to the unaudited condensed consolidated financial statements for additional information.


	First Quarter Ended
	March 25, 2016			March 27, 2015
	(in millions)
Net sales		$	86		$	238
Cost of sales			(92)			(225)
Gain related to business divestiture⁽¹⁾			64			—

Operating income from discontinued operations			58			13
Interest expense allocated to discontinued operations			—			(5)

Income from discontinued operations before income taxes			58			8
Income tax benefit (expense)			5			(4)

Income from discontinued operations, net of income taxes		$	63		$	4

⁽¹⁾	The 2016 First Quarter includes a gain of $64 million (before and after income taxes) on the sale of the NSS business.

MSI Divestiture. On May 29, 2015, we completed the sale of our MSI business to Wärtsilä Corporation for a sale price of €295 million (approximately $318 million), in addition to the assumption by Wärtsilä Corporation of approximately €60 million of MSI employee pension-related liabilities. The sale price is subject to finalization based on customary adjustments for closing date net working capital. MSI was a sector within our Electronic Systems segment, primarily selling to the commercial shipbuilding industry. During the 2015 First Quarter, we recorded a pre-tax loss of $22 million related to the divestiture of MSI.

Business Acquisitions and Dispositions

Our Annual Report on Form 10-K summarizes the business acquisitions and dispositions that we completed during the three years ended December 31, 2015. During the 2016 First Quarter, we acquired the assets of Advanced Technical Materials, Inc. (ATM), with $27 million of cash on hand. Business acquisitions are included in our consolidated results of operations from their dates of acquisition. See Note 5 to our unaudited condensed consolidated financial statements contained in this quarterly report for a further discussion of our business acquisitions and dispositions during the 2016 First Quarter.

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 are affected by our business acquisitions and divestitures.

Consolidated Results of Operations

The table below provides L-3’s selected financial data, excluding discontinued operations, for the 2016 First Quarter compared with the 2015 First Quarter.


	First Quarter Ended
	March 25, 2016			March 27, 2015			Increase/ (decrease)
	(in millions, except per share data)
Net sales	$	2,353		$	2,488			(5	)%
Operating income	$	252		$	187			35	%
Loss related to business divestiture		—			22			nm

Segment operating income	$	252		$	209			21	%

Operating margin		10.7	%		7.5	%		320	bpts
Segment operating margin		10.7	%		8.4	%		230	bpts
Interest expense	$	(41	)	$	(39	)		5	%
Effective income tax rate		22.3	%		30.5	%		(820	) bpts
Net income from continuing operations attributable to L-3	$	164		$	101			62	%
Adjusted net income from continuing operations attributable to L-3⁽¹⁾	$	164		$	116			41	%
Diluted earnings per share from continuing operations	$	2.08		$	1.20			73	%
Adjusted diluted earnings per share from continuing operations⁽¹⁾	$	2.08		$	1.38			51	%
Diluted weighted average common shares outstanding		79.0			83.8			(6	)%
⁽¹⁾ Non-GAAP metric that excludes the loss related to business divestitures. See the table on page 42 for a reconciliation of this measure. nm – not meaningful

Net Sales: For the 2016 First Quarter, consolidated net sales of $2.4 billion decreased $135 million, or 5%, compared to the 2015 First Quarter. Organic sales declined by $52 million, or 2.1%, for the 2016 First Quarter. Organic sales exclude $114 million of sales declines related to business divestitures and $31 million of sales increases related to business acquisitions. For the 2016 First Quarter, organic sales to the U.S. Government increased $62 million, or 4%, and organic sales to international and commercial customers decreased $114 million, or 14%.

Sales from products decreased by $115 million to $1,423 million for the 2016 First Quarter, compared to $1,538 million for the 2015 First Quarter. Sales from products represented approximately 60% of consolidated net sales for the 2016 First Quarter, compared to 62% for the 2015 First Quarter. Sales from products declined by: (1) $87 million related to the divestiture of MSI on May 29, 2015 and (2) $28 million primarily for Power & Propulsion Systems due to decreased volume on contracts nearing completion primarily for foreign government customers.

Sales from services decreased by $20 million to $930 million for the 2016 First Quarter, compared to $950 million for the 2015 First Quarter. Sales from services represented approximately 40% of consolidated net sales for the 2016 First Quarter, compared to 38% for the 2015 First Quarter. Sales from services declined primarily due to lower volume for small ISR aircraft fleet management services for the U.S. Air Force due to reduced demand resulting from the U.S. military drawdown in Afghanistan.

Operating income and operating margin: Consolidated operating income for the 2016 First Quarter increased by $65 million to $252 million, compared to the 2015 First Quarter. Segment operating income for the 2016 First Quarter increased by $43 million, or 21%, compared to the 2015 First Quarter. Segment operating margin increased by 230 basis points to 10.7% for the 2016 First Quarter, compared to 8.4% for the 2015 First Quarter. Segment operating margin increased by: (1) 170 basis points due to improved contract performance, (2) 70 basis points due to higher margins resulting from acquisitions and divestitures and (3) 50 basis points due

to lower pension expense of $11 million. These increases were partially offset by a decrease of 60 basis points due to a $15 million increase in the product returns allowance for EoTech holographic weapons sight (HWS) products. See the reportable segment results below for additional information of sales and operating margin trends.

Interest Expense: Interest expense in the 2016 First Quarter increased by $2 million compared to the 2015 First Quarter, primarily due to $5 million of interest expense that was allocated to discontinued operations during the 2015 First Quarter, partially offset by a decrease of $3 million due to the repurchase of $300 million of our 3.95% Senior Notes due 2024 on December 22, 2015.

Effective income tax rate: The effective income tax rate for the 2016 First Quarter decreased to 22.3% from 30.5% primarily due to: (1) the early adoption of a new accounting standard related to income tax benefits from employee stock based compensation awards, which resulted in a $10 million reduction to income tax expense and increased diluted earnings per share (EPS) by $0.13 and (2) a benefit from the reinstatement of the Federal Research and Experimentation (R&E) tax credit. For information on this new accounting standard, see Note 3 to the unaudited condensed consolidated financial statements.

Net income from continuing operations attributable to L-3 and diluted EPS from continuing operations: Net income from continuing operations attributable to L-3 in the 2016 First Quarter increased 62% to $164 million, compared to the 2015 First Quarter. Diluted EPS from continuing operations increased 73% to $2.08 from $1.20.

Adjusted net income from continuing operations attributable to L-3 and adjusted diluted EPS from continuing operations: Adjusted net income from continuing operations attributable to L-3 increased 41% compared to $116 million for the 2015 First Quarter and adjusted diluted EPS from continuing operations increased 51% compared to $1.38 for the 2015 First Quarter.

The table below presents a reconciliation of net income from continuing operations attributable to L-3 to adjusted net income from continuing operations attributable to L-3 and diluted EPS from continuing operations to adjusted diluted EPS from continuing operations.


	First Quarter Ended
	March 25, 2016			March 27, 2015
	(in millions)
Net income from continuing operations attributable to L-3	$	164		$	101
Loss on MSI business divestiture⁽¹⁾		—			15

Adjusted net income from continuing operations attributable to L-3⁽²⁾	$	164		$	116

Diluted EPS from continuing operations attributable to L-3 Holdings’ common stockholders	$	2.08		$	1.20
EPS impact of loss on MSI business divestiture⁽¹⁾		—			0.18

Adjusted diluted EPS from continuing operations⁽²⁾	$	2.08		$	1.38

⁽¹⁾ Loss on MSI business divestiture	$	(22	)
Tax benefit		7

After-tax impact		(15	)
Diluted weighted average common shares outstanding		83.8
Per share impact	$	0.18

⁽²⁾ Adjusted diluted EPS is diluted EPS attributable to L-3 Holdings’ common stockholders, excluding the charges relating to business divestitures. Adjusted net income attributable to L-3 is net income attributable to L-3, excluding the charges relating to business divestitures. These amounts are not calculated in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The company believes that the charges relating to business divestitures affect the comparability of the results of operations of 2015 to the results of operations for 2016. The company also believes that disclosing net income and diluted EPS excluding the charges relating to business divestitures will allow investors to more easily compare the 2016 results to the 2015 results. However, these measures may not be defined or calculated by other companies in the same manner.

Diluted weighted average common shares outstanding: Diluted weighted average common shares outstanding for the 2016 First Quarter declined by 6% compared to the 2015 First Quarter, due to repurchases of L-3 common stock in connection with our share repurchase programs authorized by our Board of Directors.

Reportable Segment Results of Operations

The table below presents selected data by reportable segment reconciled to consolidated totals. The results of operations of the NSS business sold to CACI International Inc. are classified as discontinued operations for all periods presented. Accordingly, the NSS business is no longer a reportable segment. See Note 22 to our unaudited condensed consolidated financial statements contained in this quarterly report for additional reportable segment data.


	First Quarter Ended
	March 25, 2016			March 27, 2015
	(dollars in millions)
Net sales:⁽¹⁾
Electronic Systems	$	877		$	1,017
Aerospace Systems		1,005			1,026
Communication Systems		471			445

Consolidated net sales	$	2,353		$	2,488

Operating income:
Electronic Systems	$	95		$	113
Aerospace Systems		106			60
Communication Systems		51			36

Total segment operating income	$	252		$	209
Loss related to business divestiture		—			(22	)

Consolidated operating income	$	252		$	187

Operating margin:
Electronic Systems		10.8	%		11.1	%
Aerospace Systems		10.5	%		5.8	%
Communication Systems		10.8	%		8.1	%

Total segment operating margin		10.7	%		8.4	%
Loss related to business divestiture		—			(0.9	)%

Consolidated operating margin		10.7	%		7.5	%

⁽¹⁾	Net sales after intercompany eliminations.

Electronic Systems


	First Quarter Ended
	March 25, 2016			March 27, 2015			Decrease
	(dollars in millions)
Net sales	$	877		$	1,017			(13.8	)%
Operating income	$	95		$	113			(15.9	)%
Operating margin		10.8	%		11.1	%		(30	) bpts

Electronic Systems net sales for the 2016 First Quarter decreased by $140 million, or 14%, compared to the 2015 First Quarter. Excluding $114 million of sales declines related to business divestitures (primarily MSI divested on May 29, 2015) and $26 million of sales increases related to business acquisitions, organic sales decreased by $52 million, or 5%. The decrease was driven by: (1) $24 million for Power & Propulsion Systems due to decreased volume on contracts nearing completion primarily for foreign government customers, (2) $15 million for Warrior Systems related to an increase in the product returns allowance for EoTech HWS products and (3) $13 million for Sensor Systems, due to the completion of contracts for infrared detection and space electronics products primarily for the U.S. Air Force.

Electronic Systems operating income for the 2016 First Quarter decreased by $18 million, or 16%, compared to the 2015 First Quarter. Operating margin decreased by 30 basis points to 10.8%. Operating margin decreased by: (1) 160 basis points due to sales mix changes, primarily for Aviation Products & Security Systems and (2) 150 basis points for Warrior Systems due to an increase of $15 million in the product returns allowance for EoTech HWS products. These decreases were partially offset by: (1) 160 basis points due to higher margins resulting from acquisitions and divestitures, (2) 90 basis points due to improved contract performance primarily for Power & Propulsion Systems and (3) 30 basis points due to lower pension expense of $3 million.

As previously disclosed, in November 2015, we commenced a voluntary return program and began accepting customer returns for various EoTech HWS products that may have been affected by certain performance issues. The refund program gives eligible owners of such HWS products the option to return their products in exchange for a refund of the purchase price, including shipping costs. During the 2016 First Quarter, we increased our product returns allowance by recording a reduction to net sales of $15 million. We continue to review the product returns allowance as the program matures and new information becomes available. Our ongoing evaluation may cause us to record further adjustments to the allowance in future periods. These adjustments could be material. See Note 2 to the unaudited condensed consolidated financial statements for additional information.

Aerospace Systems


	First Quarter Ended
	March 25, 2016			March 27, 2015			Increase/ (decrease)
	(dollars in millions)
Net sales	$	1,005		$	1,026			(2.0	)%
Operating income	$	106		$	60			76.7	%
Operating margin		10.5	%		5.8	%		470	bpts

Aerospace Systems net sales for the 2016 First Quarter decreased by $21 million, or 2%, compared to the 2015 First Quarter primarily related to ISR Systems. Sales decreased for ISR Systems by $37 million for ISR aircraft systems for foreign military customers as contracts near completion and $18 million for small ISR aircraft fleet management services for the U.S. Air Force due to reduced demand resulting from the U.S. military drawdown in Afghanistan. The decreases were partially offset by higher volume of $26 million for large ISR aircraft systems and $11 million for small ISR aircraft systems for the U.S. Government. Sales decreased by $3 million for Logistics Solutions due to the completion of contracts for field maintenance and sustainment services, primarily for the U.S. Army.

Aerospace Systems operating income for the 2016 First Quarter increased by $46 million, or 77%, compared to the 2015 First Quarter. Operating margin increased by 470 basis points to 10.5%. Operating margin increased by: (1) 170 basis points due to improved contract performance at Aircraft Systems, primarily international head-of-state aircraft modification contracts, for which a $17 million cost growth charge was recorded during the 2015 First Quarter, (2) 140 basis points due to improved performance at Logistics Solutions primarily related to the Army C-12 contract due to improved pricing terms on the new contract which began on August 1, 2015, (3) 110 basis points primarily due to a higher than planned price adjustment for a contract in ISR Systems and (4) 50 basis points due to lower pension expense of $5 million.

Communication Systems


	First Quarter Ended
	March 25, 2016			March 27, 2015			Increase
	(dollars in millions)
Net sales	$	471		$	445			5.8	%
Operating income	$	51		$	36			41.7	%
Operating margin		10.8	%		8.1	%		270	bpts

Communication Systems net sales for the 2016 First Quarter increased by $26 million, or 6%, compared to the 2015 First Quarter. The increase was due to: (1) $19 million for Broadband Communication Systems, primarily due to increased volume and deliveries of secure networked communication systems for the DoD, (2) $8 million for Tactical Satellite Communications products primarily due to increased deliveries on a satellite communication land terminals contract for the Australian Defence Force (ADF), (3) $5 million related to business acquisitions and (4) $4 million for Advanced Communications products primarily due to increased deliveries of secure mission data storage systems for the Joint Strike Fighter program. These increases were partially offset by a decrease of $10 million for Space & Power Systems, primarily due to reduced demand for power devices for commercial satellites.

Communication Systems operating income for the 2016 First Quarter increased by $15 million, or 42%, compared to the 2015 First Quarter. Operating margin increased by 270 basis points to 10.8%. Operating margin increased by: (1) 150 basis points due to increased manufacturing productivity and favorable contract performance adjustments, primarily for secure networked communications and secure communications systems, (2) 60 basis points due to lower pension expense of $3 million and (3) 60 basis points due to a $3 million gain on the sale of land in the Space & Power Systems Sector.

Liquidity and Capital Resources

Anticipated Sources and Uses of Cash Flow

At March 25, 2016, we had total cash and cash equivalents of $534 million as compared to $207 million at December 31, 2015. While no amounts of the cash and cash equivalents are considered restricted, $177 million of cash was held by the Company’s foreign subsidiaries at March 25, 2016. The repatriation of cash held in non-U.S. jurisdictions is subject to local capital requirements, as well as income tax considerations. Our primary source of liquidity is cash flow generated from operations and our cash on hand. We generated $112 million of net cash from operating activities from continuing operations during the 2016 First Quarter. Significant cash uses during the 2016 First Quarter included $198 million to repurchase shares of our common stock, $58 million related to dividends, $35 million related to capital expenditures and $27 million related to the ATM business acquisition. Additionally, L-3 received net cash proceeds of $576 million for the NSS divestiture.

As of March 25, 2016, we had the full availability of our $1 billion Amended and Restated Revolving Credit Facility (Credit Facility), which expires on February 3, 2017. We currently believe that our cash from operating activities generated during the year, together with our cash on hand, and available borrowings under our Credit Facility, will be adequate for the foreseeable future to meet our anticipated requirements for working capital, capital expenditures, defined benefit plan contributions, commitments, contingencies, research and development expenditures, select business acquisitions (depending on the size), program and other discretionary investments, interest payments, income tax payments, L-3 Holdings’ dividends and share repurchases and the redemption of $300 million aggregate principal amount of our 3.95% Senior Notes due in November 2016 (the 2016 Notes), on May 20, 2016.

Balance Sheet

Billed receivables increased by $33 million to $779 million at March 25, 2016, from $746 million at December 31, 2015 primarily due to the timing of billings and collections for Logistics Solutions.

Contracts in process increased by $145 million to $2,226 million at March 25, 2016, from $2,081 million at December 31, 2015. During the 2016 First Quarter, contracts in process increased by $148 million comprised of:

•

increases of $41 million in unbilled contract receivables primarily due to sales exceeding billings for Logistic Solutions, and

•

increases of $107 million in inventoried contract costs primarily due to the timing of deliveries for ISR Systems, Precision Engagement, Sensor Systems and secure networked communications.

These increases were partially offset by a decrease of $3 million for foreign currency translation adjustments.

L-3’s receivables days sales outstanding (DSO) was 72 at March 25, 2016, compared with 70 at December 31, 2015 and 75 at March 27, 2015. 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 and exclude sales from business divestitures that we completed as of the end of the period and discontinued operations, multiplied by the number of calendar days in the trailing 12 month period (364 days at March 25, 2016, 365 days at December 31, 2015 and 364 days at March 27, 2015). Our trailing 12 month pro forma sales were $10,273 million at March 25, 2016, $10,314 million at December 31, 2015 and $10,346 million at March 27, 2015. The increase in DSO during the 2016 First Quarter was primarily due to an increase in net billed and unbilled contract receivables, which is discussed above.

Inventories increased by $18 million to $351 million at March 25, 2016, from $333 million at December 31, 2015, primarily for Warrior Systems and security systems to support customer demand.

The decrease in other current assets was primarily due to lower prepaid taxes caused by the timing of income tax payments.

The decrease in assets and liabilities of discontinued operations is due to the completion of the NSS divestiture during the 2016 First Quarter.

Goodwill increased by $25 million to $6,306 million at March 25, 2016 from $6,281 million at December 31, 2015. The table below presents the changes in goodwill by segment.


	Electronic Systems			Aerospace Systems		Communication Systems		Consolidated Total
	(in millions)
Balance at December 31, 2015	$	3,925		$	1,353	$	1,003	$	6,281
Business acquisitions⁽¹⁾		—			—		22		22
Foreign currency translation adjustments⁽²⁾		(7	)		10		—		3

Balance at March 25, 2016	$	3,918		$	1,363	$	1,025	$	6,306

⁽¹⁾	The increase in goodwill for the Communication Systems segment was due to the ATM business acquisition.

⁽²⁾

The fluctuations in accounts payable and accrued expenses were primarily due to the timing of when invoices for purchases from third party vendors and subcontractors were received and payments were made.

Accrued employment costs decreased primarily due to the payment of annual management incentive bonuses during the 2016 First Quarter.

The decrease in advance payments and billings in excess of costs incurred was primarily due to the liquidation of balances on contracts for Aircraft Systems and ISR Systems.

The decrease in pension and postretirement benefit plan liabilities was due to cash contributions exceeding pension and postretirement benefit expense (excluding amortization of net losses) during the 2016 First Quarter. We expect to contribute approximately $100 million to our pension plans in 2016, of which $12 million was contributed during the 2016 First Quarter.

The increase in deferred tax liabilities was primarily due to the tax amortization of certain goodwill and other identifiable intangible assets during the 2016 First Quarter.

Statement of Cash Flows

2016 First Quarter Compared with 2015 First Quarter

The table below provides a summary of our cash flows from (used in) operating, investing, and financing activities for the periods indicated.


	First Quarter Ended
	March 25, 2016			March 27, 2015			Cash Flow Increase/ (Decrease)
	(in millions)
Net cash from operating activities from continuing operations	$	112		$	112		$	—
Net cash from (used in) investing activities from continuing operations		530			(74	)		604
Net cash used in financing activities from continuing operations		(259	)		(150	)		(109	)

Operating Activities

We generated $112 million of cash from operating activities during the 2016 First Quarter, which was unchanged compared to the 2015 First Quarter. The decrease of cash from operating activities due to more cash used for changes in operating assets and liabilities primarily related to billed accounts receivables and advanced payments and billing in excess of costs incurred, was offset by higher net income. The net cash from changes in operating assets and liabilities is further discussed above under “Liquidity and Capital Resources — Balance Sheet”.

Investing Activities

During the 2016 First Quarter, we generated $530 million of cash from investing activities, which included $576 million of cash received from the sale of NSS, partially offset by cash used of $27 million for the acquisition of ATM and $35 million for capital expenditures. During the 2015 First Quarter, we used $74 million of cash, which included $41 million for the acquisition of L-3 Miteq and $40 million for capital expenditures.

Financing Activities

Debt

At March 25, 2016, total outstanding debt was $3,626 million, compared to $3,624 million at December 31, 2015, all of which was senior debt. On March 24, 2016, we initiated a redemption of $300 million aggregate principal amount of the 2016 Notes. The 2016 Notes will be redeemed on May 20, 2016, at a redemption price equal to the greater of: (1) 100% of the aggregate principal amount, or (2) the present value of the remaining principal and interest payments discounted to the date of redemption, on a semi-annual basis, at the treasury rate

(as defined in the indenture governing the 2016 Notes), plus a spread of 50 basis points. At March 25, 2016, there were no borrowings or letters of credit outstanding under our $1 billion Credit Facility. Accordingly, we had the full availability of our $1 billion facility for future borrowings. We also had $428 million of outstanding standby letters of credit with financial institutions covering performance and financial guarantees per contractual requirements with certain customers at March 25, 2016. These standby letters of credit may be drawn upon in the event that we do not perform on certain of our contractual requirements. At March 25, 2016, our outstanding debt matures between November 15, 2016 and May 28, 2024. See Note 10 to our unaudited condensed consolidated financial statements contained in this quarterly report for the components of our debt at March 25, 2016.

We consider our credit rating as an important element of our capital allocation strategy and, while no assurances can be given, we intend to maintain our investment grade credit rating. On April 8, 2016, Standard and Poor’s changed our rating outlook to stable from negative and affirmed our BBB- senior unsecured rating.

Debt Covenants and Other Provisions. The Credit Facility and Senior Notes contain financial and/or other restrictive covenants. See Note 9 to our audited consolidated financial statements for the year ended December 31, 2015, included in our Annual Report on Form 10-K, for a description of our debt, related financial covenants and cross default provisions. As of March 25, 2016, we were in compliance with our financial and other restrictive covenants.

Guarantees. The borrowings under the Credit Facility are fully and unconditionally guaranteed by L-3 Holdings and by substantially all of the material 100% owned domestic subsidiaries of L-3 Communications on an unsecured senior basis. The payment of principal and premium, if any, and interest on the Senior Notes is fully and unconditionally guaranteed, on an unsecured senior basis, jointly and severally, by L-3 Communications’ material 100% owned domestic subsidiaries that guarantee any of its other indebtedness. The guarantees of the Credit Facility and the Senior Notes rank pari passu with each other.

Equity

Repurchases of L-3 Holdings’ common stock, under the share repurchase program approved by the Board of Directors, are made from time to time at management’s discretion, in accordance with applicable U.S. Federal securities laws. The timing and actual number of shares to be repurchased in the future will depend on a variety of factors, including our financial position, earnings, legal requirements, other investment opportunities (including acquisitions), market conditions and other factors. All share repurchases of L-3 Holdings’ common stock have been recorded as treasury shares.

The table below presents our repurchases of L-3 Holdings’ common stock during the 2016 First Quarter.


	Total Number of Shares Purchased		Average Price Paid Per Share		Treasury Stock
					(at cost in millions)
January 1 — March 25, 2016		1,708,185	$	115.80	$	198

At March 25, 2016, the remaining dollar value under share repurchase programs authorized by L-3 Holdings’ Board of Directors was $608 million. From March 26, 2016 through April 22, 2016, L-3 Holdings repurchased 467,854 shares of its common stock at an average price of $119.36 per share for an aggregate amount of $56 million.

During the 2016 First Quarter, L-3 Holdings’ Board of Directors authorized the quarterly cash dividends in the table below.

Date Declared

Record Date

Cash Dividend
Per Share

Total Cash
Dividends
Declared

Date Paid

(in millions)

February 9, 2016

March 1, 2016

0.70

⁽¹⁾

March 15, 2016

⁽¹⁾	During the 2016 First Quarter, we paid $58 million of cash dividends, including $4 million of previously accrued dividends for employee held stock awards.

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 18 to our unaudited condensed consolidated financial statements contained in this quarterly report.

Forward-Looking Statements

Certain of the matters discussed in this report, including information regarding the Company’s 2016 financial outlook, 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,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” and similar expressions are used to identify forward-looking statements. We caution investors that these statements are subject to risks and uncertainties many of which are difficult to predict and generally beyond our 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 DoD and other major customers; the U.S. Government fiscal situation; changes in DoD budget levels and spending priorities; U.S. Government failure to raise the debt ceiling; 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; 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; global economic uncertainty; 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 outcome of litigation matters; results of audits by U.S. Government agencies and of ongoing governmental investigations, including the Aerospace Systems segment; our ability to predict the level of participation in, and the related costs of, our voluntary return program for certain EoTech holographic weapons sight products, and our ability to change and terminate the voluntary return program at our discretion; 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.

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 “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2015 and in this quarterly report on Form 10-Q, and any material updates to these factors contained in any of our future filings.

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 in circumstances or changes in expectations or the occurrence of anticipated events.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Derivative Financial Instruments and Other Market Risk,” of our Annual Report on Form 10-K for the year ended December 31, 2015 for a discussion of our exposure to market risks. There were no material changes to our disclosure about market risks during the 2016 First Quarter. See Notes 15 and 17 to our unaudited condensed consolidated financial statements contained in this quarterly report for the aggregate fair values and notional amounts of our foreign currency forward contracts at March 25, 2016.

ITEM 4.

CONTROLS AND PROCEDURES

Conclusions Regarding Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934 related to L-3 Holdings and L-3 Communications is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chairman and Chief Executive Officer, and our Senior Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our Chairman and Chief Executive Officer, and our Senior Vice President and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 25, 2016. Based upon that evaluation, our Chairman and Chief Executive Officer, and our Senior Vice President and Chief Financial Officer concluded that, as of March 25, 2016, the design and operation of our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 25, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

The information required with respect to this item can be found in Note 18 to our unaudited condensed consolidated financial statements contained in this quarterly report and is incorporated by reference into this Item 1.

ITEM 1A.

RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Part I — Item 1A — Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, and “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview and Outlook — Business Environment”, in our Annual Report on Form 10-K which could materially affect our business, financial condition or future results. There have been no material changes to the risk factors disclosed in “Part I — Item 1A — Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

The following table provides information about share repurchases made by L-3 Holdings of its common stock during the 2016 First Quarter. Repurchases are made from time to time at management’s discretion in accordance with applicable U.S. Federal securities laws. All share repurchases of L-3 Holdings’ common stock have been recorded as treasury shares.


Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares That May Yet be Purchased Under the Plans or Programs⁽¹⁾
							(in millions)
January 1 — January 31, 2016		664,386	$	113.59		664,386	$	730
February 1 — February 29, 2016		655,899		116.54		655,899		654
March 1 — March 25, 2016		387,900		118.36		387,900		608

Total		1,708,185		115.80		1,708,185

⁽¹⁾	The share repurchases described in the table above were made pursuant to the $1.5 billion share repurchase program authorized by L-3 Holdings’ Board of Directors on December 4, 2014, which expires on June 30, 2017.

ITEM 6.

EXHIBITS

For a list of exhibits, see the Exhibit Index in this Form 10-Q.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.


L-3 COMMUNICATIONS HOLDINGS, INC.

L-3 COMMUNICATIONS CORPORATION

By:		/s/ Ralph G. D’Ambrosio
Title:		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer and Authorized Signatory)

Date: April 27, 2016

EXHIBIT INDEX

Exhibits identified in parentheses below are on file with the SEC and are incorporated herein by reference to such previous filings.


Exhibit No.		Description of Exhibits
	2.1	Distribution Agreement between L-3 Communications Holdings, Inc. and Engility Holdings, Inc. dated as of July 16, 2012 (incorporated by reference to Exhibit 2.1 to the Registrants’ Quarterly Report on Form 10-Q for the period ended September 28, 2012 (File Nos. 001-14141 and 333-46983)).
	2.2	Stock Purchase Agreement, dated as of December 7, 2015, by and among L-3 Communications Corporation, CACI International Inc and CACI, Inc.-Federal (incorporated by reference to Exhibit 2.1 to the Registrants’ Current Report on Form 8-K filed on December 11, 2015 (File Nos. 001-14141 and 333-46983)).
	3.1	Amended and Restated Certificate of Incorporation of L-3 Communications Holdings, Inc. (incorporated by reference to Exhibit 3.1 to the Registrants’ Current Report on Form 8-K filed on May 2, 2013 (File Nos. 001-14141 and 333-46983)).
	3.2	Amended and Restated By-Laws of L-3 Communications Holdings, Inc. (incorporated by reference to Exhibit 3.2 to the Registrants’ Annual Report on Form 10-K for the year ended December 31, 2015 (File Nos. 001-14141 and 333-46983)).
	3.3	Certificate of Incorporation of L-3 Communications Corporation (incorporated by reference to Exhibit 3.1 to L-3 Communications Corporation’s Registration Statement on Form S-4/A filed on September 12, 1997 (File No. 333-31649)).
	3.4	Amended and Restated By-Laws of L-3 Communications Corporation (incorporated by reference to Exhibit 3.2 to the Registrants’ Current Report on Form 8-K filed on December 17, 2007 (File Nos. 001-14141 and 333-46983)).
	4.1	Form of Common Stock Certificate of L-3 Communications Holdings, Inc. (incorporated by reference to Exhibit 4.1 to the Registrants’ Quarterly Report on Form 10-Q for the quarter ended June 25, 2010 (File Nos. 001-14141 and 333-46983)).
	4.2	Indenture dated as of October 2, 2009 among L-3 Communications Corporation, the guarantors named therein and The Bank of New York Mellon, as Trustee (incorporated by reference to Exhibit 4.15 to the Registrants’ Quarterly Report on Form 10-Q for the quarter ended September 25, 2009 (File Nos. 001-14141 and 333-46983)).
	4.3	Supplemental Indenture dated as of February 3, 2012 among L-3 Communications Corporation, The Bank of New York Mellon, as Trustee, and the guarantors named therein to the Indenture dated as of October 2, 2009 among L-3 Communications Corporation, the guarantors named therein and The Bank of New York Mellon, as Trustee (incorporated by reference to Exhibit 4.7 to the Registrants’ Annual Report on Form 10-K for the year ended December 31, 2011 (File Nos. 001-14141 and 333-46983)).
	4.4	Indenture, dated as of May 21, 2010, among L-3 Communications Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to the Registrants’ Current Report on Form 8-K dated May 24, 2010 (File Nos. 001-14141 and 333-46983)).
	4.5	First Supplemental Indenture, dated as of May 21, 2010, among L-3 Communications Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.2 to the Registrants’ Current Report on Form 8-K dated May 24, 2010 (File Nos. 001-14141 and 333-46983)).


Exhibit No.		Description of Exhibits
	4.6	Second Supplemental Indenture, dated as of February 7, 2011, among L-3 Communications Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.2 to the Registrants’ Current Report on Form 8-K dated February 8, 2011 (File Nos. 001-14141 and 333-46983)).
	4.7	Third Supplemental Indenture, dated as of November 22, 2011, among L-3 Communications Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A, as Trustee (incorporated by reference to Exhibit 4.2 to the Registrants’ Current Report on Form 8-K dated November 22, 2011 (File Nos. 001-14141 and 333-46983)).
	4.8	Fourth Supplemental Indenture, dated as of February 3, 2012, among L-3 Communications Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A, as Trustee (incorporated by reference to Exhibit 4.12 to the Registrants’ Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (File Nos. 001-14141 and 333-46983)).
	4.9	Fifth Supplemental Indenture, dated as of May 28, 2014, among L-3 Communications Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A, as Trustee (incorporated by reference to Exhibit 4.2 to the Registrants’ Current Report on Form 8-K dated May 28, 2014 (File Nos. 001-14141 and 333-46983)).
	†*10.1	Form of L-3 Communications Holdings, Inc. 2008 Long Term Performance Plan Nonqualified Stock Option Agreement (2016 CEO Version).
	†*10.2	Form of L-3 Communications Holdings, Inc. 2008 Long Term Performance Plan Restricted Stock Unit Agreement (2016 CEO Version).
	†*10.3	Form of L-3 Communications Holdings, Inc. 2008 Long Term Performance Plan Restricted Stock Unit Agreement (2016 Senior Executive Version).
	†*10.4	Form of L-3 Communications Holdings, Inc. 2008 Long Term Performance Plan Performance Unit Award Notice (2016 Version).
	†*10.5	Form of L-3 Communications Holdings, Inc. 2012 Cash Incentive Plan Performance Cash Award Notice (2016 Version).
	**11	L-3 Communications Holdings, Inc. Computation of Basic Earnings Per Share and Diluted Earnings Per Common Share.
	*31.1	Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
	*31.2	Certification of Senior Vice President and Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
	*32	Section 1350 Certification.
	***101.INS	XBRL Instance Document.
	***101.SCH	XBRL Taxonomy Extension Schema Document.
	***101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
	***101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
	***101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
	***101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

Filed herewith.

The information required in this exhibit is presented in Note 14 to the unaudited condensed consolidated financial statements as of March 25, 2016 contained in this quarterly report in accordance with the provisions of ASC 260, Earnings Per Share.

***

Filed electronically with this report.

†

Represents management contract or compensatory plan, contract or arrangement in which directors and/or executive officers are entitled to participate.

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by the Company in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.

EX-10.1

Exhibit 10.1

L-3 COMMUNICATIONS HOLDINGS, INC.

2008 LONG TERM PERFORMANCE PLAN

NONQUALIFIED STOCK OPTION AGREEMENT

(Version CEO 2016)

THIS AGREEMENT, effective as of the Grant Date (as defined below), is between L-3 Communications Holdings, Inc., a Delaware corporation (the “Company”), and the Optionee (as defined below).

WHEREAS, the Company has adopted the L-3 Communications Holdings, Inc. 2008 Long Term Performance Plan (the “Plan”) in order to provide additional incentives to selected officers and employees of the Company and its subsidiaries; and

WHEREAS, the Committee responsible for administration of the Plan has determined to grant an option to the Optionee as provided herein and the Company and the Optionee hereby wish to memorialize the terms and conditions applicable to the Option (as defined below);

WHEREAS, the following terms shall have the following meanings for purposes of this Option Agreement:

“Award Letter” shall mean the letter to the Optionee attached hereto as Exhibit A;

“Common Stock” means the Company’s Common Stock, par value $0.01 per share;

“Diluted EPS” means diluted earnings per common share from continuing operations of the Company, determined in accordance with GAAP and as derived from the Company’s audited consolidated financial statements prepared in the ordinary course of business; provided, that Diluted EPS shall be calculated so as to eliminate the effect of any: (a) impairment losses incurred on goodwill and other intangible assets or on debt or equity investments computed in accordance with Financial Accounting Standard No. 142 or other GAAP; (b) gains or losses incurred on the retirement of debt computed in accordance with Financial Accounting Standard No. 145; (c) extraordinary gains and losses in accordance with GAAP; (d) gains and losses in connection with asset dispositions whether or not constituting extraordinary gains and losses; (e) non-cash gains or losses on discontinued operations; (f) adoption by the Company of any new accounting standards required by GAAP or the Securities and Exchange Commission following the Grant Date; (g) gains or losses of $5 million or more individually, or $25 million or more in the aggregate, in respect of litigation matters; and (h) gains or losses (other than accrued interest) related to the resolution of income tax contingencies for business acquisitions, to the extent that such contingencies were established as of the dates of such acquisitions in the GAAP purchase price allocations in respect thereof;

“Exercise Price” shall mean the “Grant Price” listed in the Award Letter;

“Free Cash Flow” means (a) the Company’s net cash from operating activities, minus (b) capital expenditures, plus (c) dispositions of property, plant and equipment, in each case from continuing operations, determined in accordance with GAAP and as derived from the Company’s audited consolidated financial statements prepared in the ordinary course of business; provided, that Free Cash Flow shall be calculated so as to eliminate the effect of: (i) discretionary contributions to pension plans that exceed the contributions forecasted in the Company’s most recent internal plan for the year as presented to the Board of Directors prior to the Grant Date; (ii) premiums and other payments in excess of principal and accrued interest associated with the retirement of debt, including without limitation payments of income taxes incurred in connection therewith; and (iii) tax payments or benefits associated with gains or losses on business divestitures in calculating net cash from operating activities;

“GAAP” shall mean generally accepted accounting principles in the United States.

“Grant Date” shall mean the “Grant Date” listed in the Award Letter;

“Option Agreement” or this “Agreement” shall mean this agreement including (unless the context otherwise requires) the Award Letter.

“Optionee” shall mean the “Participant” listed in the Award Letter; and

“Shares” shall mean that number of shares of Common Stock listed in the Award Letter as “Awards Granted,” subject to Section 4.2.

NOW, THEREFORE, the parties hereto agree as follows:

1.	Grant of Option.

1.1 Effective as of the Grant Date, for good and valuable consideration, the Company hereby irrevocably grants to the Optionee the right and option (the “Option”) to purchase all or any part of the Shares, subject to, and in accordance with, the terms and conditions set forth in this Option Agreement.

1.2 The Option is not intended to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code.

1.3 This Option Agreement shall be construed in accordance and consistent with, and subject to, the terms of the Plan (the provisions of which are incorporated hereby by reference); and, except as otherwise expressly set forth herein, the capitalized terms used in this Option Agreement shall have the same definitions as set forth in the Plan. In the event of any conflict between one or more of this Option Agreement, the Award Letter and the Plan, the Plan shall govern this Option Agreement and the Award Letter, and the Option Agreement (to the extent not in conflict with the Plan) shall govern the Award Letter.

2.	Exercise Price.

The price at which the Optionee shall be entitled to purchase the Shares upon the exercise of the Option shall be the Exercise Price per share, subject to adjustment as provided in Section 9.

3.	Duration of Option.

The Option shall be exercisable to the extent and in the manner provided herein for a period of ten (10) years from the Grant Date (the “Exercise Term”); provided, however, that the Option may be earlier terminated as provided in Section 6 hereof.

4.	Exercisability of Option.

4.1 Subject to Section 4.2, and unless otherwise provided in this Option Agreement or the Plan, the Option shall entitle the Optionee to purchase, in whole at any time or in part from time to time, one-third (1/3^rd) of the total number of Shares covered by the Option on the first anniversary of the Grant Date, an additional one-third (1/3^rd) of the total number of Shares covered by the Option on the second anniversary of the Grant Date and the final one-third (1/3^rd) of the total number of Shares covered by the Option on the expiration of the third anniversary of the Grant Date. Each such right of purchase shall be cumulative and shall continue, unless sooner exercised or terminated as herein provided, during the remaining period of the Exercise Term.

4.2 No right of purchase in respect of the Option shall become exercisable by virtue of Section 4.1 prior to the Determination Date. As promptly as practicable following December 31, 2016,

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the Committee shall determine, subject to Section 4.3, whether the following conditions have been satisfied (the “Performance Conditions”): (a) the Company’s Diluted EPS for the year ended December 31, 2016 is at least $6.38; and (b) the Company’s Free Cash Flow for the year ended December 31, 2016 is at least $701 million (the date of such determinations being referred to herein as the “Determination Date”). In the event that (i) the Committee determines that only one of the two Performance Conditions shall have been satisfied as of the Determination Date and (ii) the Option shall not have become fully exercisable prior to the Determination Date under Section 6 or 10, then the number of Shares subject to the Option shall be automatically reduced by 50% (rounded to the nearest whole Share). In the event that (1) the Committee determines that none of the Performance Conditions shall have been satisfied as of the Determination Date and (2) the Option shall not have become fully exercisable prior to the Determination Date under Section 6 or 10, then Optionee’s right to exercise all or any portion of the Option shall automatically be terminated, and all of Optionee’s rights hereunder shall cease.

4.3 In the event of an equity restructuring, as defined in Financial Accounting Standards Board Accounting Standards Codification 718-10 (formerly Statement of Financial Accounting Standards 123R), the Committee shall adjust any Performance Conditions affected by such restructuring so as to preserve (without enlarging) the likelihood that such Performance Conditions shall be satisfied, with the manner of such adjustment to be determined by the Committee in its sole discretion.

5.	Manner of Exercise and Payment.

5.1 Subject to the terms and conditions of this Option Agreement and the Plan, the Option may be exercised by delivery of written notice to the Secretary of the Company (or his or her designee), at its principal executive office. Such notice shall state that the Optionee or other authorized person is electing to exercise the Option and the number of Shares in respect of which the Option is being exercised and shall be signed by the person or persons exercising the Option. In the event the Company has designated an Award Administrator (as defined below), the Option may also be exercised by giving notice (including through electronic means) in accordance with the procedures established from time to time by the Award Administrator. Any exercisable portion of the Option or the entire Option, if then wholly exercisable, may be exercised in whole or in part, provided that partial exercise shall be for whole shares of Common Stock only. If requested by the Committee, such person or persons shall (i) deliver this Agreement (including the Award Letter) to the Secretary of the Company who shall endorse thereon a notation of such exercise and (ii) provide satisfactory proof as to the right of such person or persons to exercise the Option.

5.2 The notice of exercise described in Section 5.1 shall be accompanied by either (i) payment of the full purchase price for the Shares in respect of which the Option is being exercised and of all applicable Withholding Taxes (as defined in Section 11) pursuant to Section 11 hereof (such payment to be made in cash, by delivering Shares, by withholding a portion of the Shares otherwise issuable or by any combination thereof) or (ii) instructions from the Optionee to the Company directing the Company to deliver a specified number of Shares directly to a designated broker or dealer pursuant to a cashless exercise election, in which case the Company must receive, prior to the issuance of the Shares in respect of which the Option is being exercised, payment of the full purchase price for the Shares in respect of which the Option is being exercised and all applicable Withholding Taxes pursuant to Section 11 hereof (such payment to be made in cash, by delivering Shares, by withholding a portion of the Shares otherwise issuable or by any combination thereof). The value of any Shares withheld or delivered in satisfaction of the purchase price for the Shares in respect of which the Option is being exercised and/or Withholding Taxes shall be determined by reference to the Fair Market Value of such Shares as of the date of such withholding or delivery. In the event that Withholding Taxes are satisfied by withholding a portion of the Shares otherwise issuable in connection with an exercise of the Option, the Company shall not withhold any Shares in excess of the minimum number of Shares necessary to satisfy the applicable Withholding Taxes.

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5.3 Upon receipt of the notice of exercise and any payment or other documentation as may be necessary pursuant to Sections 5.1 and 5.2 relating to the Shares in respect of which the Option is being exercised, the Company shall, subject to the Plan and this Option Agreement, take such action as may be necessary to effect the transfer to the Optionee of the number of Shares as to which such exercise was effective.

5.4 The Optionee shall not be deemed to be the holder of, or to have any of the rights and privileges of a stockholder of the Company in respect of, Shares purchased upon exercise of the Option until (i) the Option shall have been exercised pursuant to the terms of this Option Agreement and the Optionee shall have paid the full purchase price for the number of Shares in respect of which the Option was exercised and any applicable Withholding Taxes and (ii) the Company shall have issued the Shares in connection with such exercise.

6.	Termination of Employment; Permanent Disability.

6.1 If, prior to the date of the initial vesting of the Option pursuant to Section 4 hereof (the “Initial Vesting Date”), the Optionee’s employment with the Company and its subsidiaries shall be terminated for any reason, other than death or permanent disability (as herein defined), the Optionee’s right to exercise the Option shall terminate as of the effective date of termination (the “Termination Date”) and all rights hereunder shall cease (unless otherwise provided for by the Committee in accordance with the Plan).

6.2 Upon the Optionee’s death or permanent disability, the Option shall become immediately fully exercisable as to 100% of the Shares subject to the Option, and the Optionee or the executor or administrator of the estate of the Optionee or the person or persons to whom the Option shall have been validly transferred by the executor or the administrator pursuant to will or the laws of descent or distribution shall have the right, within one year from the date of the Optionee’s death or permanent disability, to exercise the Option, subject to any other limitation contained herein on the exercise of the Option in effect at the date of exercise. For purposes hereof, “permanent disability” means the Optionee (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months; or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Optionee’s employer.

6.3 If, on or after the Initial Vesting Date, the Optionee’s employment with the Company and its subsidiaries shall be terminated for any reason other than for Cause or death or permanent disability, the Optionee shall have the right within three months after the Termination Date (or, if the Optionee’s employment with the Company and its subsidiaries is terminated by reason of a qualified retirement as herein defined, within three years after the Termination Date) to exercise the Option to the extent that installments thereof shall have been or become exercisable at the Termination Date and shall not have been exercised, subject to any other limitation contained herein on the exercise of the Option in effect at the date of exercise, and (unless otherwise provided for by the Committee in accordance with the Plan) the Optionee’s right to exercise any installments of the Option that were not exercisable at the Termination Date (if any) shall terminate as of the Termination Date. If the Optionee’s employment is terminated for Cause, the Option shall terminate as of the Termination Date, whether or not exercisable. For purposes hereof, “Cause” means the Optionee’s (i) intentional failure to perform reasonably assigned duties, (ii) dishonesty or willful misconduct in the performance of duties, (iii) engaging in a transaction in connection with the performance of duties to the Company or its subsidiaries which transaction is adverse to the interests of the Company or its subsidiaries and is engaged in for personal profit or (iv) willful violation of any law, rule or regulation in connection with the performance of duties (other than traffic violations or similar offenses). In addition, “qualified retirement” means the Optionee (a) terminates employment with the Company and its subsidiaries other than for Cause (and is

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not subject to termination for Cause at the time of such termination) more than one year after the Grant Date, (b) is available for consultation with the Company or its subsidiaries at the reasonable request of the Company or its subsidiaries and (c) terminates employment on or after attaining age 65 and completing at least five years of service in the aggregate with the Company and its subsidiaries (which service must be continuous through the date of termination except for a single break in service that does not exceed one year in length).

6.4 If the Optionee shall die within the three-month period (or the three-year period, if applicable) referred to in Section 6.3 above, the Optionee or the executor or administrator of the estate of the Optionee or the person or persons to whom the Option shall have been validly transferred by the executor or administrator pursuant to will or the laws of descent and distribution shall have the right, within one year from the date of the Optionee’s death (or, if longer and applicable under Section 6.3 above, within the original three-year period referred to therein), to exercise the Option to the extent that the Option was exercisable at the date of death, subject to any other limitation contained herein on the exercise of the Option in effect at the date of exercise.

6.5 The Optionee’s rights with respect to the Option shall not be affected by any change in the nature of the Optionee’s employment so long as the Optionee continues to be an employee of the Company or any of its subsidiaries. Whether (and the circumstances under which) employment has been terminated and the determination of the Termination Date for the purposes of this Agreement (or whether, and the date upon which, the Optionee as suffered a permanent disability) shall be determined by the Committee or (with respect to any employee other than an “Executive Officer” as defined under the Plan) its designee (who, at the date of this Agreement, shall be the Company’s Vice President of Human Resources), whose good faith determination shall be final, binding and conclusive; provided, that such designee may not make any such determination with respect to his or her own employment.

7.	Nontransferability.

The Option shall not be transferable other than by will or by the laws of descent and distribution, and during the lifetime of the Optionee, the Option shall be exercisable only by the Optionee. After the death of the Optionee, any exercisable portion of the Option may, prior to the time when the Option becomes unexercisable under Section 6.2 or 6.4, be exercised by the Optionee’s personal representative or by any person empowered to do so under the Optionee’s will or under the then applicable laws of descent and distribution.

8.	No Right to Continued Employment.

Nothing in this Option Agreement or the Plan shall be interpreted or construed to confer upon the Optionee any right to continue employment by the Company or any of its subsidiaries, nor shall this Agreement or the Plan interfere in any way with the right of the Company or any of its subsidiaries to terminate the Optionee’s employment at any time for any reason whatsoever, whether or not with Cause.

9.	Adjustments.

In the event that the outstanding shares of the Common Stock are, from time to time, changed into or exchanged for a different number or kind of shares of the capital stock of the Company or other securities of the Company by reason of a merger, consolidation, recapitalization, reclassification, stock split, stock dividend, combination of capital stock, or other similar increase or decrease in the number of shares outstanding without receiving compensation therefor, the Committee shall, in accordance with the terms of the Plan, make an appropriate and equitable adjustment in the number and kind of Shares or other consideration as to which such Option, or portions thereof then unexercised, shall be exercisable and the exercise price therefor. Any such adjustment made by the Committee shall be final, binding and conclusive upon the Optionee, the Company and all other interested persons. Any such adjustment may provide for the elimination of any fractional share which might otherwise become subject to the Option. This paragraph shall also apply with respect to any extraordinary dividend or other extraordinary distribution in respect of the Common Stock (whether in the form of cash or other property).

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10.	Effect of a Change in Control.

10.1 Notwithstanding anything contained in the Plan or this Agreement to the contrary, in the event of a Change in Control, (a) the Option becomes immediately and fully exercisable as to 100% of the Shares subject to the Option, and (b) upon termination of an Optionee’s employment with the Company, following a Change in Control, the Option shall remain exercisable until one year after termination, but in no event beyond the Exercise Term. The Company reserves the right to change or modify in any way the definition of Change in Control set forth in this Option Agreement and any such change or modification shall be binding on the Optionee.

10.2 For the purposes of this Option Agreement, “Change in Control” shall mean the first to occur of the following:

The acquisition by any person or group (including a group within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than the Company or any of its subsidiaries, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a majority of the combined voting power of the Company’s then outstanding voting securities, other than by any employee benefit plan maintained by the Company;

The sale of all or substantially all the assets of the Company and its subsidiaries taken as a whole;

The consummation of a merger, combination, consolidation, recapitalization or other reorganization of the Corporation with one or more other entities that are not subsidiaries if, as a result of the consummation of the merger, combination, consolidation, recapitalization or other reorganization, less than 50 percent of the outstanding voting securities of the surviving or resulting corporation shall immediately after the event be beneficially owned in the aggregate by the stockholders of the Corporation immediately prior to the event; or

The election, including the filling of vacancies, during any period of 24 months or less, of 50% or more, of the members of the Board of Directors, without the approval of Continuing Directors, as constituted at the beginning of such period. “Continuing Directors” shall mean any director of the Company who either (i) is a member of the Board of Directors on the Grant Date, or (ii) is nominated for election to the Board of Directors by a majority of the Board which is comprised of directors who were, at the time of such nomination, Continuing Directors.

11.	Withholding of Taxes.

As a condition to the issuance of Shares in respect of any exercise of the Option or any other issuance or payment to the Optionee hereunder, the Optionee shall pay to the Company (and the Company shall have the right to deduct from any distribution of cash to the Optionee) the minimum amount necessary to satisfy Federal, state, local and foreign withholding tax requirements, if any (“Withholding Taxes”) with respect to such exercise, issuance or payment.

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12.	Optionee bound by the Plan.

The Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof.

13.	Modification of Agreement.

This Agreement may not be modified, amended, suspended or terminated, and any terms or conditions may not be waived, without the approval of the Committee. The Committee reserves the right to amend or modify this Agreement at any time without prior notice to the Optionee or any other interested party; provided, that except as expressly provided hereunder, any such amendment or modification may not adversely affect in any material respect the Optionee’s rights or benefits hereunder except for such amendments or modifications as are required by law.

14.	Severability.

Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms.

15.	Governing Law.

The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York without giving effect to the conflicts of laws principles thereof. If the Optionee has received a copy of this Agreement (or the Plan or any other document related hereto or thereto) translated into a language other than English, such translated copy is qualified in its entirety by reference to the English version thereof, and in the event of any conflict the English version will govern.

16.	Successors in Interest.

This Agreement shall inure to the benefit of and be binding upon any successor to the Company. This Agreement shall inure to the benefit of the Optionee or the Optionee’s legal representatives. All obligations imposed upon the Optionee and all rights granted to the Company under this Agreement shall be final, binding and conclusive upon the Optionee’s heirs, executors, administrators and successors.

17.	Administration.

The Committee shall have the power to interpret the Plan and this Option Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Optionee, the Company and all other interested persons. No member of the Committee shall be personally liable for any action determination or interpretation made in good faith with respect to the Plan or the Options. In its absolute discretion, the Board of Directors may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan and this Option Agreement.

18.	Resolution of Disputes.

Any dispute or disagreement which may arise under, or as a result of, or in any way related to, the interpretation, construction or application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding and conclusive on the Optionee and Company for all purposes.

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19.	Data Privacy Consent.

As a condition of the grant of the Option, the Optionee hereby consents to the collection, use and transfer of personal data as described in this paragraph. The Optionee understands that the Company and its subsidiaries hold certain personal information about the Optionee, including name, home address and telephone number, date of birth, social security number, salary, nationality, job title, ownership interests or directorships held in the Company or its subsidiaries, and details of all stock options or other equity awards or other entitlements to shares of common stock awarded, cancelled, exercised, vested or unvested (“Data”). The Optionee further understands that the Company and its subsidiaries will transfer Data among themselves as necessary for the purposes of implementation, administration and management of the Optionee’s participation in the Plan, and that the Company and any of its subsidiaries may each further transfer Data to any third parties assisting the Company in the implementation, administration and management of the Plan. The Optionee understands that these recipients may be located in the European Economic Area or elsewhere, such as the United States. The Optionee hereby authorizes them to receive, possess, use, retain and transfer such Data as may be required for the administration of the Plan or the subsequent holding of shares of common stock on the Optionee’s behalf, in electronic or other form, for the purposes of implementing, administering and managing the Optionee’s participation in the Plan, including any requisite transfer to a broker or other third party with whom the Optionee may elect to deposit any shares of common stock acquired under the Plan. The Optionee may, at any time, view such Data or require any necessary amendments to it.

20.	Limitation on Rights; No Right to Future Grants; Extraordinary Item of Compensation.

By accepting this Agreement and the grant of the Option evidenced hereby, the Optionee expressly acknowledges that (a) the Plan is discretionary in nature and may be suspended or terminated by the Company at any time; (b) the grant of the Option is a one-time benefit that does not create any contractual or other right to receive future grants of options, or benefits in lieu of options; (c) all determinations with respect to future option grants, if any, including the grant date, the number of Shares granted, the exercise price and the exercise date or dates, will be at the sole discretion of the Company; (d) the Optionee’s participation in the Plan is voluntary; (e) the value of the Option is an extraordinary item of compensation that is outside the scope of the Optionee’s employment contract, if any, and nothing can or must automatically be inferred from such employment contract or its consequences; (f) Options are not part of normal or expected compensation for any purpose and are not to be used for calculating any severance, resignation, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments, and the Optionee waives any claim on such basis; and (g) the future value of the underlying Shares is unknown and cannot be predicted with certainty. In addition, the Optionee understands, acknowledges and agrees that the Optionee will have no rights to compensation or damages related to option proceeds in consequence of the termination of the Optionee’s employment for any reason whatsoever and whether or not in breach of contract.

21.	Subsidiary.

As used herein, the term “subsidiary” shall mean, as to any person, any corporation, association, partnership, joint venture or other business entity of which 50% or more of the voting stock or other equity interests (in the case of entities other than corporations), is owned or controlled (directly or indirectly) by that entity, or by one or more of the Subsidiaries of that entity, or by a combination thereof.

22.	Award Administrator.

The Company may from time to time to designate a third party (an “Award Administrator”) to assist the Company in the implementation, administration and management of the Plan and any Options granted thereunder, including by sending Award Letters on behalf of the Company to Optionees, and by facilitating through electronic means acceptance of Option Agreements by Optionees and Option exercises by Optionees.

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23.	Book Entry Delivery of Shares.

Whenever reference in this Agreement is made to the issuance or delivery of certificates representing one or more Shares, the Company may elect to issue or deliver such Shares in book entry form in lieu of certificates.

24.	Acceptance.

This Agreement shall not be enforceable until it has been executed by the Optionee. In the event the Company has designated an Award Administrator, the acceptance (including through electronic means) of the Option contemplated by this Option Agreement in accordance with the procedures established from time to time by the Award Administrator shall be deemed to constitute the Optionee’s acknowledgment and agreement to the terms and conditions of this Option Agreement and shall have the same legal effect in all respects of the Optionee having executed this Option Agreement by hand.



By:		L-3 COMMUNICATIONS HOLDINGS, INC.


		Michael T. Strianese
		President and Chief Executive Officer Chief Financial Officer


		Steven M. Post
		Senior Vice President, General Counsel and Corporate Secretary

Acknowledged and Agreed

as of the date first written above:

Optionee Signature

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EX-10.2

Exhibit 10.2

L-3 COMMUNICATIONS HOLDINGS, INC.

2008 LONG TERM PERFORMANCE PLAN

RESTRICTED STOCK UNIT AGREEMENT

(CEO Version 2016)

This Restricted Stock Unit Agreement (this “Agreement”), effective as of the Grant Date (as defined below), is between L-3 Communications Holdings, Inc., a Delaware corporation (the “Corporation”), and the Participant (as defined below).

1. Definitions. The following terms shall have the following meanings for purposes of this Agreement:

(a) “Award Letter” shall mean the letter to the Participant attached hereto as Exhibit A.

(b) “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.

(c) “Determination Date” shall mean the date on which the Committee determines whether the Performance Condition (as defined below) has been satisfied.

(d) “Free Cash Flow” shall mean (1) the Corporation’s net cash from operating activities, minus (2) capital expenditures, plus (3) dispositions of property, plant and equipment, in each case from continuing operations, determined in accordance with GAAP and as derived from the Corporation’s audited consolidated financial statements prepared in the ordinary course of business; provided, that Free Cash Flow shall be calculated so as to eliminate the effect of: (i) discretionary contributions to pension plans that exceed the contributions forecasted in the Corporation’s most recent internal plan for the year as presented to the Board of Directors prior to the Grant Date; (ii) premiums and other payments in excess of principal and accrued interest associated with the retirement of debt; and (iii) tax payments or benefits associated with gains or losses on business divestitures in calculating net cash from operating activities;

(e) “GAAP” shall mean generally accepted accounting principles in the United States.

(f) “Grant Date” shall mean the “Grant Date” listed in the Award Letter.

(g) “Participant” shall mean the “Participant” listed in the Award Letter.

(h) “Restricted Units” shall mean that number of restricted units listed in the Award Letter as “Awards Granted,” subjection to Section 4(b).

(i) “Section 409A Change in Control Event” shall mean a change in ownership or effective control of the Corporation, or in the ownership of a substantial portion of the assets of the Corporation, within the meaning of Section 409A(a)(2)(A)(v) of the Code.

(j) “Shares” shall mean a number of shares of the Corporation’s Common Stock, par value $0.01 per share, equal to the number of Restricted Units outstanding under this Agreement.

2. Grant of Units. The Corporation hereby grants the Restricted Units to the Participant, each of which represents the right to receive one Share upon the expiration or termination of the Restricted Period (as defined below), subject to the terms, conditions and restrictions set forth in the L-3 Communications Holdings, Inc. 2008 Long Term Performance Plan (the “Plan”) and this Agreement.

3. Restricted Unit Account. The Corporation shall cause an account (the “Unit Account”) to be established and maintained on the books of the Corporation to record the number of Restricted Units credited to the Participant under the terms of this Agreement, which Unit Account shall be subject to adjustment in accordance with the terms of the Plan and this Agreement, including without limitation Section 4(b). The Participant’s interest in the Unit Account shall be that of a general, unsecured creditor of the Corporation.

4. Restricted Period; Performance Condition.

(a) Except as otherwise provided in paragraphs 6 and 7 hereof, the “Restricted Period” shall mean the period beginning on the Grant Date and expiring on the third anniversary of the Grant Date. Subject to Section 4(b) below, upon the expiration or termination of the Restricted Period, the Shares shall be issued to the Participant in accordance with Section 13.

(b) As promptly as practicable following the last day of the fiscal year which includes the Grant Date, the Committee shall determine, subject to Section 4(c), whether: (x) the amount of 1.0% of the Company’s Free Cash Flow for such fiscal year, exceeds (y) the grant date fair value of the Shares underlying the Restricted Units, determined in accordance with GAAP (such condition, the “Performance Condition”). If the Performance Condition is not satisfied, then:

(1) the number of Restricted Units shall automatically be reduced to the highest whole number that would have resulted in the Performance Condition being satisfied; and

(2) any Restricted Units previously awarded in excess of the number calculated in accordance with clause (1) above (and any cash dividends accrued thereon in accordance with Section 8 hereof) shall be forfeited without any further action on behalf of the Corporation, the Committee or the Participant.

(c) In the event of an equity restructuring, as defined in Financial Accounting Standards Board Accounting Standards Codification 718-10 (formerly Statement of Financial Accounting Standards 123R), the Committee shall modify the Performance Condition to the extent it is affected by such restructuring so as to preserve (without enlarging) the likelihood that such Performance Condition shall be satisfied, with the manner of such adjustment to be determined by the Committee in its sole discretion.

5. Nonalienation of Benefits. No Participant or beneficiary shall have the power or right to transfer, anticipate, or otherwise encumber the Participant’s interest under this Agreement. The provisions of this Agreement shall inure to the benefit of the Participant and the Participant’s beneficiaries, heirs, executors, administrators or successors in interest.

6. Change in Control During Restricted Period. Upon the occurrence of a “change in control” that constitutes a Section 409A Change in Control Event, the Restricted Period shall automatically terminate and, if the Determination Date has not occurred, the Performance Condition shall automatically be waived, and the Shares shall thereafter be issued to the Participant in accordance with Section 13. In the event of any other “change in control” prior to the Determination Date the Performance Condition shall automatically be waived, but the Restricted Period shall not be immediately affected, and shall subsequently terminate (and the Shares shall thereafter be issued to the Participant in

accordance with Section 13) upon the earliest to occur of: (a) a Section 409A Change in Control Event, (b) the Participant’s death, (c) the Participant’s “disability” (as defined in Section 7(c) hereof) or (d) the third anniversary of the Grant Date. For purposes of this Agreement, a “change in control” means:

(a) The acquisition by any person or group (including a group within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than the Corporation or any of its subsidiaries, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a majority of the combined voting power of the Corporation’s then outstanding voting securities, other than by any employee benefit plan maintained by the Corporation;

(b) The sale of all or substantially all the assets of the Corporation and its subsidiaries taken as a whole;

(c) The consummation of a merger, combination, consolidation, recapitalization or other reorganization of the Corporation with one or more other entities that are not subsidiaries if, as a result of the consummation of the merger, combination, consolidation, recapitalization or other reorganization, less than 50 percent of the outstanding voting securities of the surviving or resulting corporation shall immediately after the event be beneficially owned in the aggregate by the stockholders of the Corporation immediately prior to the event; or

(d) The election, including the filling of vacancies, during any period of 24 months or less, of 50% or more of the members of the Board of Directors, without the approval of Continuing Directors, as constituted at the beginning of such period. “Continuing Directors” shall mean any director of the Corporation who either (i) is a member of the Board of Directors on the Grant Date, or (ii) is nominated for election to the Board of Directors by a majority of the Board which is comprised of directors who were, at the time of such nomination, Continuing Directors.

7. Termination of Employment or Disability During Restricted Period.

(a) In the event that the Participant’s employment with the Corporation and its subsidiaries is terminated (other than by reason of death, “retirement” or “disability,” as defined below) prior to the expiration or termination of the Restricted Period and prior to the occurrence of a “change in control” (as defined in Section 6), the Participant shall forfeit the Restricted Units and all of the Participant’s rights hereunder shall cease (unless otherwise provided for by the Committee in accordance with the Plan). The Participant’s rights to the Restricted Units shall not be affected by any change in the nature of the Participant’s employment so long as the Participant continues to be an employee of the Corporation or any of its subsidiaries.

(b) In the event the Participant terminates employment with the Corporation and its subsidiaries because of “retirement” prior to the expiration or termination of the Restricted Period and prior to the occurrence of a “change in control” (as defined in Section 6), the Restricted Period and the Performance Condition shall not be affected and shall expire with the passage of time or be satisfied or not satisfied, as applicable, in each case in accordance with paragraph 4, except that (i) in the event that the Participant dies following retirement but prior to the expiration of the Restricted Period, the Restricted Period shall automatically terminate and in the event the Determination Date has not occurred, the Performance Condition shall be waived, and the Shares shall thereafter be delivered in accordance with Section 13 and (ii) the Restricted Period may earlier terminate and the Performance Condition may be waived in accordance with Section 6. For purposes of this Agreement, retirement means the Participant (A) terminates employment with the Corporation and its subsidiaries other than for Cause (and is not subject to termination for Cause at the time of such termination) more than one year after the Grant Date,

(B) is available for consultation with the Corporation or any of its subsidiaries at the reasonable request of the Corporation or one of its subsidiaries and (C) terminates employment on or after attaining age 65 and completing at least five years of service in the aggregate with the Corporation and its subsidiaries (which service must be continuous through the date of termination except for a single break in service that does not exceed one year in length). For purposes of this Agreement, “Cause” means the Participant’s (1) intentional failure to perform reasonably assigned duties, (2) dishonesty or willful misconduct in the performance of duties, (3) engaging in a transaction in connection with the performance of duties to the Corporation or its subsidiaries which transaction is adverse to the interests of the Corporation and is engaged in for personal profit or (4) willful violation of any law, rule or regulation in connection with the performance of duties (other than traffic violations or similar offenses).

(c) Upon Participant’s death or “disability” (as defined below), the Restricted Period shall automatically terminate and in the event the Determination Date has not occurred, the Performance Condition shall be waived, and the Shares shall thereafter be issued in accordance with Section 13. For purposes of this Agreement, disability means the Participant, (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months; or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Participant’s employer.

(d) Whether (and the circumstances under which) employment has been terminated and the determination of the termination date for the purposes of this Agreement (or whether, and the date upon which, the Participant has suffered a disability under Section 7(c)) shall be determined by the Committee or (with respect to any employee other than an “Executive Officer” as defined under the Plan) its designee (who, at the date of this Agreement, shall be the Corporation’s Vice President of Human Resources), whose good faith determination shall be final, binding and conclusive; provided, that such designee may not make any such determination with respect to his or her own employment.

8. Dividends. If the Corporation pays a cash dividend on its common stock, the Participant shall accrue in his or her Dividend Account (as defined below) a cash dividend equivalent with respect to the Restricted Units credited to the Participant’s Unit Account as of the record date for the dividend, with each Restricted Unit being equivalent to one share of common stock. The Corporation shall cause an account (the “Dividend Account”) to be established and maintained as part of the records of the Corporation to evidence the aggregate cash dividend equivalents accrued by the Participant from time to time under this Section. No interest shall accrue on any amounts reflected in the Dividend Account. The Participant’s interest in the amounts reflected in the Dividend Account shall be that of a general, unsecured creditor of the Corporation. Subject to, and as promptly as practicable following, the issuance of the Shares pursuant to Section 13 hereunder, the Corporation shall pay an amount in cash (without interest and subject to applicable withholding taxes) to the Participant (or his or her beneficiaries, heirs, executors, administrators or successors in interest who are issued the Shares pursuant to Section 13 hereunder) equal to the aggregate cash dividend equivalents accrued in the Participant’s Dividend Account and the Participant’s Dividend Account shall be eliminated at that time. In the event that the Participant forfeits his or her rights to any or all of the Restricted Units, including pursuant to Section 4(b) hereof, the Participant also shall be deemed to have forfeited his or her rights to any cash dividend equivalents accrued in the Participant’s Dividend Account in respect of such forfeited Restricted Units and, if no Restricted Units remain outstanding under this Agreement the Participant’s Dividend Account shall be eliminated at that time.

9. No Right to Continued Employment. Nothing in this Agreement or the Plan shall be interpreted or construed to confer upon the Participant any right to continue employment by the Corporation or any of its subsidiaries, nor shall this Agreement or the Plan interfere in any way with the right of the Corporation or any of its subsidiaries to terminate the Participant’s employment at any time for any reason whatsoever, whether or not with cause.

10. No Rights as a Stockholder. The Participant’s interest in the Restricted Units shall not entitle the Participant to any rights as a stockholder of the Corporation. The Participant shall not be deemed to be the holder of, or have any of the rights and privileges of a stockholder of the Corporation in respect of, the Shares unless and until such Shares have been issued to the Participant in accordance Section 13.

11. Adjustments Upon Change in Capitalization. In the event of any reorganization, merger, consolidation, recapitalization, reclassification, stock split, stock dividend or similar capital adjustment, as a result of which shares of any class shall be issued in respect of outstanding shares of the Corporation’s Common Stock or shares of Corporation’s Common Stock shall be changed into a different number of shares or into another class or classes or into other property or cash, the Restricted Units, the Participant’s Unit Account and/or the Shares shall be adjusted to reflect such event so as to preserve (without enlarging) the value of the award hereunder, with the manner of such adjustment to be determined by the Committee in its sole discretion. This paragraph shall also apply with respect to any extraordinary dividend or other extraordinary distribution in respect of the Corporation’s Common Stock (whether in the form of cash or other property).

12. General Restrictions. Notwithstanding anything in this Agreement to the contrary, the Corporation shall have no obligation to issue or transfer the Shares as contemplated by this agreement unless and until such issuance or transfer shall comply with all relevant provisions of law and the requirements of any stock exchange on which the Corporation’s shares are listed for trading.

13. Issuance of Shares. Upon the expiration or termination of the Restricted Period and payment by the Participant of any applicable taxes pursuant to Section 14 of this Agreement, the Corporation shall, as soon as reasonably practicable (and in any event within 75 days of the termination or expiration of the Restricted Period), but subject to any delay necessary to comply with Section 12 hereof, issue the Shares to the Participant, free and clear of all restrictions; provided, that if the termination of the Restricted Period results from a Section 409A Change in Control Event, then notwithstanding the foregoing, the Shares shall be issued within 30 days of the Section 409A Change in Control Event. The Corporation shall not be required to deliver any fractional Shares, but shall pay, in lieu thereof, the fair market value (as defined in the Plan) as of the date the restrictions lapse of such fractional share to the Participant. The Corporation shall pay any costs incurred in connection with issuing the Shares. Upon the issuance of the Shares to the Participant, the Participant’s Unit Account shall be eliminated. Notwithstanding the provisions of this Section, in the event of the death of the Participant prior to the issuance of the Shares under this Section 13, the issuance of the Shares and any payment in lieu of fractional Shares shall be made to the Participant’s beneficiaries, heirs, executors, administrators or successors in interest as the case may be.

14. Tax Withholding. Upon the expiration or termination of the Restricted Period, the Participant shall remit to the Corporation the minimum amount necessary to satisfy Federal, state, local or foreign withholding tax requirements, if any (“Withholding Taxes”) as a condition to the Corporation’s issuance of any Shares as provided in Section 13. The payment shall be in (i) cash, (ii) the delivery of Shares, (iii) a reduction in the number of Shares otherwise issuable or deliverable or other amounts otherwise payable to the Participant pursuant to this Agreement, or (iv) a combination of (i), (ii) and/or

(iii). The value of any Shares delivered or withheld as payment in respect of withholding tax requirements shall be determined by reference to the Fair Market Value of such Shares as of the date of such withholding or delivery. In the event that Withholding Taxes are satisfied by withholding a portion of the Shares otherwise issuable or deliverable to the Participant pursuant to this Agreement, the Corporation shall not withhold any Shares in excess of the minimum number of Shares necessary to satisfy the applicable Withholding Taxes.

15. Subsidiary. As used herein, the term “subsidiary” shall mean, as to any person, any corporation, association, partnership, joint venture or other business entity of which 50% or more of the voting stock or other equity interests (in the case of entities other than corporations), is owned or controlled (directly or indirectly) by that entity, or by one or more of the Subsidiaries of that entity, or by a combination thereof.

16. Plan Governs. The Participant hereby acknowledges receipt of a copy of the Plan and agrees to be bound by its terms, all of which are incorporated herein by reference. The Plan shall govern in the event of any conflict between this Agreement and the Plan.

17. Modification of Agreement. This Agreement may be not be modified, amended, suspended or terminated, and any terms or conditions may not be waived, without the approval of the Committee. The Committee reserves the right to amend or modify this Agreement at any time without prior notice to any Participant or other interested party; provided, that except as expressly provided hereunder, any such amendment or modification may not adversely affect in any material respect the Participant’s rights or benefits hereunder except for such amendments or modifications as are required by law.

18. Severability. Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms.

19. Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York without giving effect to the conflicts of laws principles thereof. If the Participant has received a copy of this Agreement (or the Plan or any other document related hereto or thereto) translated into a language other than English, such translated copy is qualified in its entirety by reference to the English version thereof, and in the event of any conflict the English version will govern.

20. Successors in Interest. This Agreement shall inure to the benefit of and be binding upon any successor to the Corporation. This Agreement shall inure to the benefit of the Participant or the Participant’s legal representatives. All obligations imposed upon the Participant and all rights granted to the Corporation under this Agreement shall be final, binding and conclusive upon the Participant’s heirs, executors, administrators and successors.

21. Administration. The Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Participant, the Corporation and all other interested persons. No member of the Committee shall be personally liable for any action determination or interpretation made in good faith with respect to the Plan or the Restricted Units. In its absolute discretion, the Board of Directors may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan and this Agreement.

22. Resolution of Disputes. Any dispute or disagreement which may arise under, or as a result of, or in any way related to, the interpretation, construction or application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding and conclusive on the Participant and Corporation for all purposes.

23. Data Privacy Consent. As a condition of the grant of the Restricted Units, the Participant hereby consents to the collection, use and transfer of personal data as described in this paragraph. The Participant understands that the Corporation and its subsidiaries hold certain personal information about the Participant, including name, home address and telephone number, date of birth, social security number, salary, nationality, job title, ownership interests or directorships held in the Corporation or its subsidiaries, and details of all restricted units or other equity awards or other entitlements to shares of common stock awarded, cancelled, exercised, vested or unvested (“Data”). The Participant further understands that the Corporation and its subsidiaries will transfer Data among themselves as necessary for the purposes of implementation, administration and management of the Participant’s participation in the Plan, and that the Corporation and any of its subsidiaries may each further transfer Data to any third parties assisting the Corporation in the implementation, administration and management of the Plan. The Participant understands that these recipients may be located in the European Economic Area or elsewhere, such as the United States. The Participant hereby authorizes them to receive, possess, use, retain and transfer such Data as may be required for the administration of the Plan or the subsequent holding of shares of common stock on the Participant’s behalf, in electronic or other form, for the purposes of implementing, administering and managing the Participant’s participation in the Plan, including any requisite transfer to a broker or other third party with whom the Participant may elect to deposit any shares of common stock acquired under the Plan. The Participant may, at any time, view such Data or require any necessary amendments to it.

24. Limitation on Rights; No Right to Future Grants; Extraordinary Item of Compensation. By accepting this Agreement and the grant of the Restricted Units contemplated hereunder, the Participant expressly acknowledges that (a) the Plan is discretionary in nature and may be suspended or terminated by the Corporation at any time; (b) the grant of Restricted Units is a one-time benefit that does not create any contractual or other right to receive future grants of restricted units, or benefits in lieu of restricted units; (c) all determinations with respect to future grants of restricted units, if any, including the grant date, the number of Shares granted and the restricted period, will be at the sole discretion of the Corporation; (d) the Participant’s participation in the Plan is voluntary; (e) the value of the Restricted Units is an extraordinary item of compensation that is outside the scope of the Participant’s employment contract, if any, and nothing can or must automatically be inferred from such employment contract or its consequences; (f) grants of restricted units are not part of normal or expected compensation for any purpose and are not to be used for calculating any severance, resignation, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments, and the Participant waives any claim on such basis; and (g) the future value of the underlying Shares is unknown and cannot be predicted with certainty. In addition, the Participant understands, acknowledges and agrees that the Participant will have no rights to compensation or damages related to restricted unit proceeds in consequence of the termination of the Participant’s employment for any reason whatsoever and whether or not in breach of contract.

25. Award Administrator. The Corporation may from time to time to designate a third party (an “Award Administrator”) to assist the Corporation in the implementation, administration and management of the Plan and any Restricted Units granted thereunder, including by sending Award Letters on behalf of the Corporation to Participants, and by facilitating through electronic means acceptance of Restricted Unit Agreements by Participants.

26. Section 409A. This Agreement is intended to comply with the provisions of Section 409A of the Code and the regulations promulgated thereunder. Without limiting the foregoing, the Committee shall have the right to amend the terms and conditions of this Agreement in any respect as may be necessary or appropriate to comply with Section 409A of the Code or any regulations promulgated thereunder, including without limitation by delaying the issuance of the Shares contemplated hereunder.

27. Book Entry Delivery of Shares. Whenever reference in this Agreement is made to the issuance or delivery of certificates representing one or more Shares, the Corporation may elect to issue or deliver such Shares in book entry form in lieu of certificates.

28. Acceptance. This Agreement shall not be enforceable until it has been executed by the Participant. In the event the Corporation has designated an Award Administrator, the acceptance (including through electronic means) of the Restricted Unit award contemplated by this Agreement in accordance with the procedures established from time to time by the Award Administrator shall be deemed to constitute the Participant’s acknowledgment and agreement to the terms and conditions of this Agreement and shall have the same legal effect in all respects of the Participant having executed this Agreement by hand.


By:		L-3 COMMUNICATIONS HOLDINGS, INC.


		Michael T. Strianese
		President and Chief Executive Officer
		Chief Financial Officer


		Steven M. Post
		Senior Vice President, General Counsel and Corporate Secretary

Acknowledged and Agreed

as of the date first written above:

Participant Signature

EX-10.3

Exhibit 10.3

L-3 COMMUNICATIONS HOLDINGS, INC.

2008 LONG TERM PERFORMANCE PLAN

RESTRICTED STOCK UNIT AGREEMENT

(Senior Executive Version 2016)