L-3 Communications Holdings, Inc.
) has received approval for the spin-off of Engility Holdings, Inc.
by its board of directors. The approval process includes
distribution of all the outstanding shares of its subsidiary,
Engility Holdings, Inc., to its shareholders. The distribution
ratio, record date and distribution date for the spin-off have been
set. The company also declared a dividend and revised its financial
The company had announced the spin-off in July 2011. It had
revealed plans to spin off 100% of a new, independent, publicly
traded government services company to L-3 shareholders. The new
public company, to be named Engility, will be a leader in Systems
Engineering and Technical Assistance, Training and Operational
Support services. It had however planned to retain Cyber,
Intelligence and Security Solutions businesses that are currently a
part of L-3's Government Services segment.
Under the spin-off process, on July 17, 2012, each L-3
shareholder of record as of July 16, 2012 is eligible to receive
one share of Engility for every six shares of L-3 common stock.
Currently, the company has approximately 97 million shares
outstanding. Therefore, the L-3 shareholders will receive
approximately 16 million shares. However, no fractional shares will
be distributed. They will be combined and sold on the open market
and the aggregate net proceeds will be distributed ratably in the
form of cash payments to L-3 shareholders that are entitled to
receive a fractional share of Engility common stock.
The company expects to receive net proceeds of approximately
$325 million from the spin-off and use it to redeem $250 million
aggregate principal amount of its 6.375% Senior Subordinated Notes
due in 2015. These notes will be redeemed on July 26, 2012 at a
redemption price of 102.125% of the principal amount thereof, plus
accrued and unpaid interest. The balance amount is expected to be
used to buy its outstanding shares worth $75 million.
Moreover, the company has updated its financial outlook for 2012
to incorporate the effects of the spin-off. The company expects
sales to be in the range of $12,950 million to $13,150 million,
down from the previous expectation of sales of $14,550 million to
$14,750 million. The prior forecast included sales from the
Engility business. Likewise, it now expects earnings per share in
the range of $7.70 to $7.85 versus the previous expectation of
$8.45 to $8.60 that included Engility. The company projects
operating margin of 10.3%, net cash from operating activities of
$1,240 million and capital expenditure of $195 million.
Engility plans to preserve approximately $10 million of cash on
its balance sheet and incur approximately $345 million of debt
financing. It plans to use the proceeds of the debt financing to
pay dividend to the company and to fund a portion of the
transaction expenses. Meanwhile, L-3 also declared a quarterly cash
dividend of 50 cents per share that will be paid on September 17,
2012 to shareholders of record at the close of business on August
L-3 Communications is one of the best-positioned pure defense
players based on its non-platform focus, broad diversification of
programs and its focus on shareholder value. Moreover, as a result
of the spin-off, the company will be able to track new business
opportunities and operate in a more cost-competitive manner.
However, negative offsets include the loss of key contracts,
defense spending cuts and a lack of near-term catalysts. Like its
Lockheed Martin Corporation
), L-3 also retains a short-term Zacks #3 Rank (Hold) that
corresponds with our long-term Neutral recommendation on the
L-3 COMM HLDGS (LLL): Free Stock Analysis
LOCKHEED MARTIN (LMT): Free Stock Analysis
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