L-3 Communications Holdings, Inc. has reported preliminary unaudited financial results for the second quarter of 2014. The results are preliminary because the company is currently conducting an internal review that could result in increases to the preliminary adjustments included in this release. The company is working expeditiously to complete the review in order to file its Quarterly Report on Form 10-Q for the three months ended June 27, 2014, as soon as possible.
The review relates to accounting matters at the company’s Aerospace Systems segment, and is being conducted with the assistance of outside accounting and legal advisors. The company currently expects to incur an aggregate pre-tax charge of $84 million against operating income and a related reduction in net sales of approximately $43 million. Of these charges, approximately $50 million relates to periods prior to 2014, and approximately $34 million relates to the first half of 2014, of which $30 million relates to the second quarter of 2014. Additionally, as a result of the review, the company has lowered its estimated operating income for the Aerospace Systems segment by approximately $35 million for the second half of 2014.
The adjustments primarily relate to contract cost overruns that were inappropriately deferred and overstatements of net sales, in each case with respect to a fixed-price maintenance and logistics support contract. The period of performance on this contract began December 1, 2010, and is scheduled to end on January 31, 2015. The company believes that the amounts associated with these adjustments are the result of misconduct and accounting errors at the Aerospace Systems segment. The misconduct included concealment from L-3’s Corporate staff and external auditors.
The company is committed to the integrity of its financial statements, and maintaining effective internal controls and ethical conduct. Accordingly, management has taken and expects to continue taking remedial actions, including the termination of certain employees in the Aerospace Systems segment.
"We are extremely disappointed that our established policies, code of ethical conduct and controls were violated in this instance. This does not represent the way we do business, and we are thoroughly addressing it,” said Michael T. Strianese, chairman, president and chief executive officer.
“Notwithstanding the above, strong program execution, a book-to-bill ratio of 1.08 and higher international and commercial sales drove our second quarter performance. We continued to successfully integrate our businesses to reflect customer priorities in a persistently challenging environment, and we remain focused on disciplined growth and delivering shareholder value,” said Michael T. Strianese. “Our customers have very well-defined needs, and the synergies we have built into our operations are meeting those needs efficiently and affordably.”
“As part of our ongoing commitment to delivering value for our shareholders, we returned $252 million during the quarter in repurchases of common stock and dividends. We continue to focus on expanding our commercial and international business, and are well-positioned to compete, gain market share and win new opportunities in any environment.”