Melbourne, Florida’s Harris Corp. (NYSE: HRS – $154.87) reported fiscal 2019 first quarter revenue of $1.5 billion, up 9% compared with the prior year with accelerated revenue growth across all business segments: Communications (revenue up 16%), Electronic Systems (up 9%) and Space & Intelligence Systems (up 5%). Net income increased 34% to $213 million and earnings per share rose 31% to $1.78 from $1.38 a year ago and six cents above consensus. As a result of the strong first fiscal quarter performance, Harris updated its guidance for 2019 to the following not taking into account the pending merger with L3:
- Revenue in a range of $6.53 – 6.65 billion, up 6 – 8% from fiscal 2018
- Earnings per share in a range of $7.80 – $7.90 (increased from previous guidance of $7.65 – $7.85)
- Free cash flow ≥ $1 billion
Harris Corp. and New York-based L3 Technologies, Inc. plan to combine in one of the country’s largest defense mergers. The enlarged company – to be named L3 Harris Technologies – would have annual sales of around $16 billion this year and a staff of 48,000, ranking sixth among U.S. defense contractors by revenue as the industry enjoys a bump in Pentagon spending after five years of budget cuts. The deal would unite two companies with a combined market value of about $33.5 billion. The merged company would have a product range stretching from military radios, top-secret space hardware, homeland security systems and civil aviation to air-traffic control technologies. The terms of the merger call for L3 shareholders to receive 1.3 Harris shares for each share they own. That would give Harris shareholders 54% of a company. The companies said the enlarged entity would generate $3 billion in free cash flow within three years and $500 million in cost savings, of which $200 million would be returned to customers. They also earmarked $2 billion for stock buybacks in the year after closing.
The merger is expected to close in mid-calendar year 2019, subject to customary closing conditions, including regulatory approvals and approval by the shareholders of each company. For now, I am going to continue to hold my position in Harris, which has provided a 35% annual return to investors including dividends since entering the aggressive list eight years ago.
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