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L-3 Acquires Simulation Business

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L-3 Communications Holdings Inc. (LLL - Free Report) has acquired Thales Training & Simulation Ltd’s civil aircraft simulation and training business, effective August 6, 2012. The company paid £83 million (approximately $130 million), funded with cash on hand.

Thales Training & Simulation is a leading manufacturer of commercial flight simulation equipment and had 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 business, which is now known as L-3 Link Simulation & Training U.K. Limited, will become a part of L-3’s existing Link Simulation & Training division, which is part of L-3’s Electronic Systems Group. The unit’s civil aircraft simulation solutions feature a suite of devices that meet every aspect of flight and maintenance crew training requirements.
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 - Free Report) – 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 spin-off removed a lot of uncertainty with respect to revenue and will also take away some of the lowest margins at the company.

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 to post 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.

The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

L-3 Communications Holdings operates through its wholly owned subsidiary, L-3 Communications Corporation. L-3 Communications is a leading supplier of a wide range of products and services used in a number of aerospace and defense platforms.

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