the weekend defense giants L3 Technologies (LLL
213.42, +17.64) and Harris (HRS 167.09, +12.22) announced an
all stock merger of equals to create a global defense technology leader with
combined net revenue of approximately $16 bln, EBIT of $2.4 bln and free cash
flow of $1.9 bln. They also both reported quarterly results over the weekend.
The combined company, L3 Harris Technologies, Inc., will be the 6th largest defense company in the U.S., behind LockheedMartin (LMT 332.08, +4.46, +1.4%), Boeing (BA 359.68, -0.43, -0.1%), Raytheon (RTN 192.51, +0.82, +0.4%), Northrop Grumman (NOC 306/42, +4.05, +1.3%), and General Dynamics (GD 193.57, +1.72, +0.9%). It will also be a top 10 defense company globally, with approximately 48,000 employees and customers in over 100 countries. The merger is expected to close in mid-calendar year 2019.
The parties see the deal being accretive in terms of cash earnings per share (EPS) in the first full year post close and currently are targeting $3 bln in free cash flow by year 3. The companies expect that the combination will generate approximately $500 mln of annual gross pre-tax cost synergies, or $300 mln net of savings returned to customers, in year 3. The savings will come from reducing direct and indirect spend, rationalizing footprint, consolidating corporate and segment headquarters, establishing a common shared services platform for IT and finance and reducing other overhead costs. The company is expected to invest approximately $450 mln cash to achieve the synergies over the next 3 years.
Also, the combined company will remain committed to maintaining an investment grade credit rating and a dividend payout consistent with each company’s current practice and deploying excess cash toward share repurchases, including up to $2 bln in share repurchases in the 12 months post-closing.
The combined company will be headquartered in Melbourne, Florida and have a 12 member Board of Directors, consisting of six directors from each company. William Brown will serve as chairman and chief executive officer, and Christopher Kubasik will serve as vice chairman, president and chief operating officer for the first two years following the closing of the transaction. For the third year, Mr. Brown will transition to executive chairman and Mr. Kubasik to chief executive officer, after which Mr. Kubasik will become chairman and chief executive officer. Additional senior leadership positions for L3 Harris Technologies will be determined at a later date.
Turning to the earnings results then L3 announced preliminary Q3 EPS which beat market expectations at $2.85 on revenues which grew 9.9% to $2.52 bln. The company also raised its FY18 EPS outlook and reaffirmed revenues for the year at $10.20-10.30 (from $9.80-10.00) and $10.0-10.2 bln, respectively.
Harris similarly announced better than expected results, reporting Q1 EPS of $1.78 and net sales of $1.54 bln. The company guided FY19 EPS in-line at reaffirmed FY19 revenues of $7.80-7.90 (up from previous $7.65-7.85) and $6.53-6.65 bln.
Shares of both HRS and LLL recouped the majority of the broader market-driven losses from the past few sessions. Today's gains help prop up the S&P 500 industrials (+0.5%) group, which trades about middle of the pack in today's sector standings.
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