L-3 Communications Holdings Inc. (LLL) yesterday announced that its subsidiary L-3 Communications Corporation will issue $1 billion in senior notes with coupon rate of 5.2%. The notes are due in October 2019.

L-3 Communications will use the proceeds from the note issue along with available cash to reduce its debt burden. The company plans to redeem $750 million in senior subordinated notes due in 2012 and repay a $650 million term loan. Apart from that the company will also replace its existing $1 billion revolving credit facility with a 3-year facility of at least $750 million.

L-3 Communications has one of the strongest balance sheets among its peers with a low debt-to-capitalization of 38.3% after the first half of fiscal 2009. The company continues to be a strong cash generator and closed the first half of fiscal 2009 with cash and cash equivalents of $897 million. Debt burden also steadily improved from $4.5 billion at year-end 2008 to $3.9 billion after the first half of the fiscal 2009. This provides ample opportunity for appreciation of the company’s earnings per share through share repurchase.

Headquartered in New York, L-3 Communications is a leading provider of Intelligence, Surveillance and Reconnaissance (ISR) systems and products; secure communications systems; aircraft modernization, training and government services; and is a merchant supplier of a broad array of high technology products. L-3’s functions through four primary business segments: Specialized Products; Government Services; Aircraft Modernization and Maintenance (AM&M); and Command, Control, Communications and Intelligence, Surveillance, and Reconnaissance (C3ISR).

L-3 Communications remains a key player within the defense segment and mainly competes with FLIR Systems Inc. (FLIR), Herley Industries Inc. (HRLY), and Raytheon Company (RTN). The company we believe is one of the best positioned pure defense plays by virtue of its non-platform focus, and broad diversification of programs.

Our bullish outlook for L-3 Communications is supported by strong performance mainly in the C3ISR and Specialized Products segments, the GLS subcontract, and strong operating results and robust cash flow; partially offset by divestitures, higher pension funding, and declining Linguist and CFT revenues. We also expect that L-3’s ongoing share repurchase program will be accretive to earnings over the near-term.

We maintain our market Outperform recommendation on the shares.

Zacks Investment Research
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