L-3 to Buy Simulation Business

L-3 Communications Holdings Inc. ( LLL - Analyst Report ) has entered into an agreement with Thales Training & Simulation Ltd’s civil aircraft simulation and training business under which it will acquire its assets for approximately $132 million. L-3 plans to make the payment with cash already in hand.

Subject to customary closing conditions and regulatory approvals, the company expects the transaction to be completed by mid-2012. With respect to income tax purposes, the transaction will be treated as an asset purchase.

Thales Training & Simulation is a leading manufacturer of commercial flight simulation equipment and has an installed base of more than 540 simulators and a significant global customer roster. Its advanced civil aircraft simulators conform to U.S. Federal Aviation Administration, European Aviation Safety Agency and International Civil Aviation Organization regulations.

Post-acquisition, the business will strengthen L-3’s Electronic Systems Group with its full flight simulator capability and help expand into the civil simulation market. The company will thus be able to offer a full range of total training system solutions to its military as well as commercial customers. This would not only expand the company’s global presence, but will diversify its product offering.

The company ended 2011 with cash and cash equivalents of $764 million, a sharp spike from $607 million at the end of December 31, 2010. During fiscal 2011, L-3 Communications generated net cash of $1.5 billion from operating activities, up $23 million from cash generated in the year-ago period.

The company seems to be utilizing its cash at its best. In fourth-quarter 2011, the company repurchased $158 million of common stock, consistent with its shareholder-friendly moves. In February, 2012, the company increased its regular quarterly cash dividend by 11% from 45 cents to 50 cents per share. In the same month, the company completed the acquisition of the Kollmorgen Electro-Optical unit of Danaher Corporation for $210 million. This acquisition will expand the company’s existing product portfolio and create a variety of technical synergies.

With these fundamentals, we believe that L-3 Communications is one of the best-positioned pure defense players. Its strengths include a broad diversification of programs and an unfailing focus on shareholder value. Going forward, the company has opportunities for growth and profit expansion from the impending spin-off of the Government Services businesses and from the retaining of the Cyber, Intelligence and Security Solutions businesses.

However, negative offsets include the loss of key contracts, defense spending cuts and lack of near-term catalysts. The company presently retains a short-term Zacks #2 Rank (Buy). We have a long-term Neutral recommendation on the stock.

Based in New York City, L-3 is a prime contractor in C³ISR systems, aircraft modernization and maintenance, and government services. L-3 is also a leading provider of a broad range of electronic systems used on military and commercial platforms. The company mainly competes with Lockheed Martin Corporation ( LMT - Analyst Report ) and Raytheon Company ( RTN - Analyst Report ) .