L-3 Communications Holdings Inc.
) announced that L-3 Communications Corporation, its wholly owned
subsidiary, has initiated redemption of its outstanding $250
million of 6???% Senior Subordinated Notes due in 2015. The
redemption of the notes will be effective on October 15, 2012.
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L-3 Communications decided to pay the holders a redemption price of
101.063% of the principal amount thereof, plus accrued and unpaid
interest. In connection with the redemption of the Notes, the
company will record a debt retirement charge of approximately $5
million ($3 million after income taxes, or $0.03 per diluted share)
in the fourth quarter of 2012.
The decision fits well with L-3 Communications' strategy, helping
it to improve earnings and generate cash flow thus assisting the
company in reducing its debt level. The company focuses on reducing
its interest expenses to improve its overall capital structure.
L-3 Communications' strong balance sheet provides financial
flexibility in matters of incremental dividend, ongoing share
repurchase and earnings accretive acquisitions. At the end of the
first half of 2012, the company had a low long-term,
debt-to-capitalization of 37.8% (Zacks industry average was 44.8%)
with a total long-term debt of $4.1 billion, along with cash
holdings of approximately $481 million and an unutilized credit
facility close to $996 million.
L-3 Communications Holdings operates through its wholly owned
subsidiary, L-3 Communications Corporation. L-3 Communications is a
leading supplier of a broad range of products and services used on
a number of aerospace and defense platforms. In addition, the
company is a prime system contractor for aircraft modernization and
maintenance; ISR collection platforms; simulation and training; and
government systems support services.
Recently, in July 2012, L-3 Communications completed the spin-off
of 100% of a new, independent, publicly traded government services
Engility Holdings Inc.
) - to L-3 shareholders. We believe that L-3 Communications has
ample opportunity for growth and profit expansion after the
favorable conclusion to the spin-off of its Government Services
businesses. The company has retained its profitable Cyber,
Intelligence, and Security Solutions business. The spin-off also
removes a lot of uncertainty with respect to revenue and takes away
some of the low margin businesses of the company. Over the longer
run, we view the company as one of the best-positioned pure defense
players based on its non-platform focus, broad diversification of
programs and its focus on shareholder value.
L-3 Communications remains a key player within the defense segment
and mainly competes with
FLIR Systems Inc.
). We believe it is one of the best-positioned pure defense plays
by virtue of its non-platform focus and a broad diversification of
L-3 Communications is strengthening itself by focusing on
improvement of operational efficiencies, investing in research and
development to provide affordable solutions, acquiring businesses
that will add new capabilities, and expanding product lines and
divesting businesses. Moreover, its broad diversification of
programs would provide growth momentum. Going forward, we expect
future growth to come from the company's strong presence in the
current focus areas of C3ISR equipment; precision-guided weapons;
unmanned aerial vehicles ("UAVs"); and other electro-mechanical
This was reflected in the company's recently reported second
quarter results with the top and bottom lines surpassing the
corresponding Zacks Consensus Estimates with ease. Going forward,
we expect the company to continue posting strong earnings based on
its opportunities in growth areas, including Intelligence,
Surveillance, and Reconnaissance, Electro-Optical/Infrared systems
and cyber security.
Moreover, the company's balanced business mix, improving
operational efficiencies and focus on research and development
allow it to pursue strategic opportunities in the commercial arena
and in overseas markets.
Also, with the completion of the spin-off, the company will be able
to focus more on core areas by providing market-leading,
value-added products and solutions to its customers. In the long
run, we expect the company to be one of the best-positioned pure
defense players based on its broad diversification of programs and
its focus on shareholder value. However, we remain concerned about
the loss of key contracts, defense spending cuts and the lack of
L-3 Communications currently retains a Zacks #4 Rank, which
translates into a short-term Strong Sell rating. Over the longer
run, we maintain our Neutral recommendation on the stock.