L-3 Communications Holdings Inc. (LLL) announced that it would acquire the Kollmorgen Electro-Optical unit of Danaher Corporation (DHR) for $210 million. Kollmorgen Electro-Optical, or KEO, develops and manufactures specialized equipment, including submarine photonics systems and periscopes, ship fire control systems, visual landing aids, ground electro-optical and sensor-cueing systems. L-3 Communications would fund the acquisition with the cash on hand.
L-3 Communications’ strong balance sheet provides financial flexibility in matters of incremental dividend, ongoing share repurchase and earnings accretive acquisitions. As of third quarter-end of 2011, the company had a low long-term debt-to-capitalization of 37.4% (Zacks industry average was 42.4%) with a total long-term debt of $4.1 billion, along with cash holdings of $538 million and an unutilized credit facility close to $990 million.
Headquartered in New York City, L-3 Communications is a prime contractor in C3ISR (Command, Control, Communications, Intelligence, Surveillance and Reconnaissance) 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 reported fiscal 2010 sales of $15.7 billion.
L-3 Communications stands out among pure defense players by virtue of its non-platform focus, broad diversification of programs, strong order bookings and funded order backlog of $11.5 billion versus $11.1 billion at fiscal end-2010.
Revenue and earnings growth continues to be driven by its strong presence in the current focus areas of C3ISR equipment, precision-guided weapons, unmanned aerial vehicles (UAVs), and other electro-mechanical robotic capabilities, networked information technologies, special operations forces and missile defense.
L-3 Communications’ topline is spread over a large number of contracts, which are in process. In fiscal 2010, its largest contract in terms of annual sales was the Army Fleet Support contract with the U.S. Army Aviation and Missile Command, which accounted for only 3% of its sales. A diversified revenue base insulates the financial performance of the company from any contract-specific risk.
L-3 Communications’ presently retains a short-term Zacks #3 Rank, which translates into a short-term Hold rating. We have a long-term Neutral recommendation on the stock. In-lieu of the uncertainty in the movement of the defense budget the sideways stance is consistent with its peers like Raytheon Company (RTN) and FLIR Systems Inc. (FLIR).
