(LLL) L-3 Communications Holdings to Redeem $250 Million in Notes

L-3 Communications Holdings Inc. (LLL) 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.

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 company – Engility Holdings Inc. (EGL) – 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. (FLIR) and Raytheon Company (RTN). We believe it is one of the best-positioned pure defense plays by virtue of its non-platform focus and a broad diversification of programs.

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 robotic capabilities.

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 near-term catalysts.

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.
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