L-3 Communications Hldgs (LLL)

Headquartered in New York City, L-3 Communications is a leading supplier of a broad range of products and services used in a number of aerospace and defense platforms. The company supplies subsystems on many platforms that are used for secure communication networks mobile satellite communications information security systems shipboard communications naval power systems fuses and safety & arming devices for missiles and munitions microwave assemblies for radars and missiles telemetry and instrumentation and airport security systems. In addition, the company is a prime system contractor for aircraft modernization and maintenance Intelligence, Surveillance & Reconnaissance (ISR) collection platforms simulation and training and government systems support services.

L-3 functions through four primary business segments. Specialized Products (34% of Q1'08 revenue) segment caters to military and commercial customers in several niche markets. Products include security and surveillance systems for aviation, port and border applications, including those for detection of explosives, concealed weapons, contraband and illegal narcotics. The Government Services (GS) segment (31%) offers a wide range of services. These include training modules for aircrew and navigator, communication software support, and crisis management software. The Aircraft Modernization and Maintenance (AM&M) segment (19%) provides products and services such as airborne traffic and collision avoidance systems (TCAS), cockpit voice and flight data recorders, and rugged displays for military and commercial applications. The Command, Control, Communications and Intelligence, Surveillance, and Reconnaissance (C3ISR) segment (16%) specializes in signals intelligence and communications intelligence systems. The company operates in the U.S., Canada, and Germany. The U.S. Department of Defense (DoD) is LLL s largest customer, accounting for 74% of revenues in 2007. On July 29, 2005, the company acquired all of the outstanding stock of the Titan Corporation. In April of 2007, L-3 Communications acquired Geneva Aerospace, Inc. and in May 2007, it acquired Global Communications Solutions, Inc which has been renamed L-3 GCS. Both the acquired companies will be included in L-3's Specialized Products segment. In August 2007, the company also acquired APSS S.r.l. which provides mechanical, electric and automation systems for ships and in December 2007, a logistics company named MKI Systems, Inc. The string of inorganic growth continued in 2008 with the acquisition of HSA Systems Pty Limited (HSA), an Australian provider of geospatial, marine and electronic systems for maritime and defense customers in March 2008. This was followed by the acquisition of the Electro-Optical Systems (EOS) business of Northrop Grumman Corporation (NYSE: NOC) in April 2008. The EOS business is a provider of night vision technology and electro-optical products for military, commercial and public safety customers.

Over the past few years, the government's increased focus on command, control, communications, intelligence, surveillance and reconnaissance (C3ISR) equipment precision-guided weapons unmanned aerial vehicles (UAVs) communication networks and missile defense have collectively benefited the company. Post-9/11, the threat of terrorist attacks has led to significantly greater government spending on homeland security. L-3's products are essential for the improvement and upgrade of existing and new military platforms and systems. Accordingly, we believe these offerings will be in demand even if there is a reduction in defense spending, thus ensuring strong organic growth for the company. With respect to the hostility in Iraq, L-3 is clearly benefiting from both support in the country and CONUS-based activities that directly support the combat activities of U.S. forces. Other Iraq-related growth is taking place in the Army's Reset program, which re-organizes and outfits the active Army into brigade-sized combat units instead of large divisional units, and this growth is likely to continue well beyond the end of the current hostilities.

L-3 Communications has also been experiencing strong demand from the Department of Homeland Security, primarily for airport security systems. The DoD's greater focus on maintenance and upgrading of existing aircraft for current operations and force readiness (instead of purchasing new platforms) is positive for L-3 Holdings Aviation Products and Aircraft Modernization segment. The company, in our view, has a superior strategy, products and services that can support sales growth faster than the DoD budget, a Homeland Security Agency business that is growing faster than the company as a whole, and aeronautical and commercial aviation products that are growing with a recovering commercial aerospace business fueled by regulations, which mandate upgrades. The company expects to continue to benefit from the outsourcing of subsystems, components and products by prime contractors. Management plans to continue to align its research and development, manufacturing and new business efforts to complement its customers' requirements with state-of-the-art products. Furthermore, management seeks to maintain a diversified and broad business mix with limited reliance on any single program, a favorable balance of cost-reimbursable and fixed-price type contracts, a significant follow-on business, and an attractive customer profile. L-3 is also expected to benefit from some of the Bradley recap work under the supplemental, through the recent purchase of General Dynamics' (NYSE: GD) transmission division, which builds transmissions for the Bradley Fighting Vehicle. In addition to airport security, L-3 is also a leading developer of products for rail security. Going forward, if the U.S. Navy exercises four additional annual contract options, with a potential contract value of the C-9 CLS program, now worth $43.7 million, could grow to approximately $230 million. In April of 2007, L-3 Communications announced that its Government Services, Inc. (L-3 GSI) subsidiary was awarded a five-year contract valued at $93 million by the Joint Warfare Support Division (JWSD), Space and Naval Warfare (SPAWAR) Systems Center.

L-3's acquisition of Mobile-Vision, Inc. is likely to prove accretive to earnings. With its excellent market position, solid customer relationship and large installed base, Mobile-Vision is an excellent fit with L-3 s growing public safety and homeland security segments. Moreover, as management carries out its strategy to develop total solutions for communications and information fuzing and recording for the first responder organizations of local municipalities and federal, state, county, and civic agencies, Mobile-Vision, with its broad user base, is expected to create new opportunities for expansion in these areas. Additionally, the Titan-acquisition is the largest yet by L-3. Titan has meaningful synergies with L-3 s existing businesses, which should lead to growth opportunities in major areas. Those areas include C3ISR, naval warfare in both air and surface, technical services and network communications. Titan s capabilities are also expected to broaden and enhance L-3 s DHS participation in infrastructure protection and analysis of weapons of mass destruction and expand L-3 s operational analysis and simulation offerings. Titan is also likely to enable L-3 to penetrate new customer areas including the National Reconnaissance Office, National Security Agency, U.S. Marine Corps, FBI, and DoD Intelligence, as well as expand into existing markets. The company financed the Titan transaction by issuing debt rather than equity shares, which should avoid dilution to existing shareholders. L-3 completed the acquisition on July 29, renaming the company L-3 Communications Titan Corporation. The Titan acquisition added about $1.5 billion to sales for 2006. L-3 s acquisition program hit a roadblock when OSI filed a lawsuit in 2002 related to L-3's sale of a business to OSI and subsequently L-3 planned to appeal a decision by a trial court upholding a $125.6 million jury verdict in favor of OSI. The U.S. Army also amended L-3 s Linguist contract, extending it until June 9, 2008. In addition, during March 2008, Global Linguist Solutions (GLS) selected L-3 as a subcontractor in Iraq under the U.S. Army's Translation and Interpretation Management Services (TIMS) contract. The company subsequently withdrew its previously filed protest with the U.S. Government Accountability Office (GAO) regarding the Translation and Interpretation Management Services (TIMS) contract.

Previously, during the 1st quarter of 2007, L-3 Communications acquired Geneva Aerospace, Inc., a leading provider of unmanned aerial vehicle (UAV) technology, and later in May 2007 acquired Global Communications Solutions, Inc. (GCS), a leading provider of portable satellite communications equipment and products. The string of inorganic growth continued in 2008 with the acquisition of HSA Systems Pty Limited, an Australian provider of geospatial, marine and electronic systems for maritime and defense customers in March 2008. This was followed by the acquisition of the Electro-Optical Systems (EOS) business of Northrop Grumman Corporation (NYSE: NOC) in April 2008. The EOS business is a provider of night vision technology and electro-optical products for military, commercial and public safety customers. In June 2007, L-3s Integrated Systems Group was awarded a $600 million increase to the ceiling of its previously awarded indefinite delivery/indefinite quantity (ID/IQ) contract. The amended contract is now valued at $2.1 billion. The company received an award of a baseline contract estimated at $2.04 billion over the life of the program to supply a minimum of 78 C-27J Joint Cargo Aircraft (JCA) to the U.S. Army and U.S. Air Force. The winning C-27J team is led by L-3's Integrated Systems (L-3 IS) Group and includes Alenia North America, Boeing Integrated Defense Systems and Global Military Aircraft Systems (GMAS). L-3 Communications commenced work on a $6 billion contract for providing Joint Cargo Aircrafts to the US government in September 2007, after the Government Accountability Office denied Raytheon's (NYSE: RTN) protest. Raytheon had filed the protest in June 2007 with the U.S. government, challenging the Department of Army's award of the contract to L-3 Communications.

L-3 Communications has also been selected by the U.S. General Services Administration as a supplier to compete for projects under the $50 billion Alliant government-wide acquisition contract. Alliant will be providing all federal agencies with IT services over the next ten years. Meanwhile, the opening of the London headquarters represents a significant step in expanding its international defense business.

Financially, L-3 Communications generates strong operating cash flow, which is expected to be at least $1.2 billion for the full-year 2008. The company is poised for substantial growth, in our opinion, both through internal operations, as well as through acquisitions. Numerous acquisitions over the past three years continue to add to top-line growth. The company was also able to complete within a year its $500 million share repurchase program started in December 14, 2006. Subsequently, on December 11, 2007, management announced a new $750 million share repurchase program to be completed within the next two years. In the recently reported 1st quarter of 2008, the company had repurchased 283 million of stock and hopes to repurchase 400 million of stock during the full fiscal 2008. In addition, the company increased its quarterly cash dividend by 20% to $0.30 per share in the 1st quarter of 2008, following a 33% increase in the 1st quarter of 2007. As of this report, LLL common stock currently yields 1.2%.

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