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L-3 Communications Holdings, Inc. (LLL - Analyst Report) 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 outlook.
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 17, 2012.
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 peer, Lockheed Martin Corporation (LMT - Analyst Report), L-3 also retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.