L-3 Cleaning Balance Sheet

L-3 Communications Holdings Inc. (LLL - Analyst Report) 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 - Snapshot Report), Herley Industries Inc. (HRLY - Snapshot Report), and Raytheon Company (RTN - Analyst Report). 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.