Harris Q2 Results Beat View; To Buy Exelis For $4.75 Bln Enterprise Value

(RTTNews) - Communications equipment maker Harris Corp. (HRS) on Friday reported a 2 percent increase in profit for the second quarter from last year, reflecting higher revenues at its government communications systems segment. Both earnings per share from continuing operations and quarterly revenues topped analysts' expectations. The company also raised its earnings outlook for fiscal 2015.

Harris said in a separate statement that it will acquire McLean, Virginia-based defense contractor Exelis Inc. (XLS) for $23.75 per share in cash and stock, or an enterprise value of about $4.75 billion.

The Melbourne, Florida-based company's net income for the second quarter was $139.5 million or $1.32 per share, up from $136.2 million or $1.26 per share in the prior-year quarter.

Income from continuing operations increased to $139.5 million or $1.32 per share from $137.1 million or $1.27 per share in the year-ago quarter.

On average, eight analysts polled by Thomson Reuters expected the company to report earnings of $1.18 per share for the quarter. Analysts' estimates typically exclude one-time items.

Revenues from product sales and services for the quarter edged down to $1.21 billion from $1.22 billion in the same quarter last year. Analysts expected revenue of $1.18 billion.

The company's total orders in the quarter totaled $1.11 billion.

RF communications segment revenue for the quarter decreased 5 percent to $432.2 million, reflecting a 1 percent decline in tactical communications revenue and 14 percent decrease in public safety revenue.

Meanwhile, government communications systems revenue increased 5 percent to $454.3 million. Major drivers included higher revenue from the F-35 program, classified programs and wireless products, partially offset by lower revenue from NASA's Space Network Ground Segment Sustainment program.

Integrated network solutions revenue decreased 7 percent from the year-ago quarter to $339.6 million primarily due to the wind-down of two IT Services programs.

For fiscal 2015, Harris increased its outlook for income from continuing operations to a range of $4.95 to $5.05 per share from the prior range of $4.75 to $5.00 per share. However, the company affirmed its outlook for revenue to decline 1 to 3 percent compared with last year.

The company noted that its fiscal 2015 guidance does not include the impact of its pending acquisition of Exelis announced today.

Street is currently looking for full-year earnings of $4.91 per share on a revenue decline of 3 percent to $4.86 billion.

Harris noted that the acquisition of Exelis will add scale and strengthen its core franchises. Exelis provides command, control, communications, computers, intelligence, and surveillance and reconnaissance or C4ISR related products and systems in the U.S. and internationally.

Under the terms of the deal, Exelis shareholders will receive $16.625 in cash and 0.1025 of a share of Harris common stock, based on Harris' closing price as of February 5, 2015, for each share of Exelis common stock.

The per share acquisition price represents a 34 percent premium to Exelis' closing stock price of $17.71 on Thursday. The deal has been unanimously approved by the boards of directors of both companies.

Upon closing, Harris shareholders will own about 85 percent of the combined company, while Exelis shareholders will own the remaining 15 percent stake.

On a pro forma basis for the latest twelve months ended December 31, 2014, the combined company would have had more than $8 billion in revenue and about 23,000 employees globally, including 9,000 engineers and scientists.

The transaction, expected to close in June 2015, is subject to approval by Exelis shareholders.

Harris said that based on an expected June 2015 closing, it expects the transaction to be slightly accretive in the first full year and a significant contributor thereafter.

Harris has identified estimated net pre-tax cost synergies from the combination in a range of $100 million to $120 million, with savings expected to achieve annual run-rate in the third year.

Harris has secured $3.4 billion of fully committed bridge financing from Morgan Stanley Senior Funding, Inc. and expects to put in place permanent financing in the form of term loans and unsecured bonds prior to closing.

In late September 2014, Exelis completed the spin off of its former Mission Systems government services business into a new independent, publicly traded company, Vectrus, Inc. (VEC).

HRS closed Thursday's trading at $69.49, up $0.81 or 1.18 percent on a volume of 632,741 shares. XLS closed Thursday's trading at $17.71, up $0.33 or 1.9 percent on a volume of 441,147 shares.