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Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
FORM 10-Q
(Mark One) | ||
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended September 30, 2011 | ||
or | ||
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission File Number:
001-35228
EXELIS INC.
(Exact name of registrant as
specified in its charter)
State of Indiana (State or Other Jurisdiction of Incorporation or Organization) |
45-2083813 (I.R.S. Employer Identification Number) |
1650 Tysons Boulevard,
Suite 1700, McLean, Virginia 22102
(Address of principal executive offices)
(Address of principal executive offices)
(703) 790-6300
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months and (2) has been subject to such filing
requirements for the past
90 days. Yes o No x
Indicate by check mark whether the registrant has submitted
electronically and posted on its web site, if any, every
Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes x No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer x | Smaller reporting company o |
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No x
As of November 15, 2011, there were 184,578,157 shares
of common stock ($0.01 par value per share) issued and
outstanding.
Table of Contents
TABLE OF
CONTENTS
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 22 | |||
22 | ||||
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29 | ||||
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32 | ||||
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 34 | |||
ITEM 4. CONTROLS AND PROCEDURES | 34 |
Table of Contents
Table of Contents
PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
THE DEFENSE AND
INFORMATION SOLUTIONS SEGMENT OF ITT CORPORATION
CONDENSED
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN MILLIONS)
(IN MILLIONS)
Three Months | Nine Months | |||||||||||||||||||
FOR THE PERIODS ENDED SEPTEMBER 30, | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||
Product revenue
|
$ | 744 | $ | 812 | $ | 2,111 | $ | 2,541 | ||||||||||||
Service revenue
|
785 | 550 | 2,248 | 1,715 | ||||||||||||||||
Total revenue
|
1,529 | 1,362 | 4,359 | 4,256 | ||||||||||||||||
Cost of product and service revenue
|
||||||||||||||||||||
Cost of product revenue
|
510 | 565 | 1,465 | 1,782 | ||||||||||||||||
Cost of service revenue
|
688 | 483 | 1,996 | 1,510 | ||||||||||||||||
Selling, general and administrative expenses
|
150 | 125 | 429 | 389 | ||||||||||||||||
Research and development expenses
|
24 | 27 | 72 | 85 | ||||||||||||||||
Restructuring charges, net
|
1 | 1 | 5 | 20 | ||||||||||||||||
Operating income
|
156 | 161 | 392 | 470 | ||||||||||||||||
Interest expense, net
|
1 | | 1 | | ||||||||||||||||
Other expense (income), net
|
1 | (8 | ) | (13 | ) | (7 | ) | |||||||||||||
Income from continuing operations before income tax expense
|
154 | 169 | 404 | 477 | ||||||||||||||||
Income tax expense
|
53 | 61 | 142 | 169 | ||||||||||||||||
Income from continuing operations
|
101 | 108 | 262 | 308 | ||||||||||||||||
Income from discontinued operations, net of tax
|
| 144 | | 150 | ||||||||||||||||
Net income
|
$ | 101 | $ | 252 | $ | 262 | $ | 458 | ||||||||||||
The accompanying notes are an
integral part of the Condensed Combined Financial Statements.
Page ï 1
Table of Contents
THE DEFENSE AND
INFORMATION SOLUTIONS SEGMENT OF ITT CORPORATION
CONDENSED
COMBINED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN MILLIONS)
(IN MILLIONS)
Three Months | Nine Months | |||||||||||||||
FOR THE PERIODS ENDED SEPTEMBER 30, | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Net income
|
$ | 101 | $ | 252 | $ | 262 | $ | 458 | ||||||||
Other comprehensive income (loss), net of tax
|
||||||||||||||||
Net foreign currency translation adjustment
|
10 | 4 | 12 | (1 | ) | |||||||||||
Defined benefit plans
|
||||||||||||||||
Amortization of net actuarial loss included in net periodic
pension cost
|
1 | 1 | 3 | 2 | ||||||||||||
Amortization of prior service cost included in net periodic
pension cost
|
| | 1 | 1 | ||||||||||||
Unrealized loss on securities
|
||||||||||||||||
Unrealized loss arising during the period
|
| (3 | ) | (1 | ) | (2 | ) | |||||||||
Less: reclassification adjustment for gains included in net
income
|
| | (9 | ) | | |||||||||||
Other comprehensive income, net of tax
|
$ | 11 | $ | 2 | $ | 6 | $ | | ||||||||
Total comprehensive income
|
$ | 112 | $ | 254 | $ | 268 | $ | 458 | ||||||||
The accompanying notes are an
integral part of the Condensed Combined Financial Statements.
Page ï 2
Table of Contents
THE DEFENSE AND
INFORMATION SOLUTIONS SEGMENT OF ITT CORPORATION
CONDENSED
COMBINED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS)
(IN MILLIONS)
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
Assets
|
||||||||
Current assets
|
||||||||
Cash and cash equivalents
|
$ | 64 | $ | 18 | ||||
Receivables, net
|
1,057 | 954 | ||||||
Inventories, net
|
330 | 238 | ||||||
Deferred tax asset
|
121 | 121 | ||||||
Other current assets
|
36 | 52 | ||||||
Total current assets
|
1,608 | 1,383 | ||||||
Plant, property and equipment, net
|
459 | 458 | ||||||
Goodwill
|
2,154 | 2,156 | ||||||
Other intangible assets, net
|
224 | 258 | ||||||
Other non-current assets
|
80 | 40 | ||||||
Total non-current assets
|
2,917 | 2,912 | ||||||
Total assets
|
$ | 4,525 | $ | 4,295 | ||||
Liabilities and Parent Company Equity
|
||||||||
Current liabilities
|
||||||||
Accounts payable
|
$ | 430 | $ | 326 | ||||
Advance payments and billings in excess of costs
|
444 | 427 | ||||||
Compensation and other employee benefits
|
193 | 215 | ||||||
Other accrued liabilities
|
285 | 200 | ||||||
Total current liabilities
|
1,352 | 1,168 | ||||||
Postretirement benefits
|
188 | 184 | ||||||
Long-term debt
|
649 | | ||||||
Deferred tax liability
|
222 | 204 | ||||||
Other non-current liabilities
|
135 | 129 | ||||||
Total non-current liabilities
|
1,194 | 517 | ||||||
Total liabilities
|
2,546 | 1,685 | ||||||
Commitments and contingencies (Note 13)
|
||||||||
Parent Company Equity
|
||||||||
Parent company investment
|
2,041 | 2,678 | ||||||
Accumulated other comprehensive loss, net of tax
|
(62 | ) | (68 | ) | ||||
Total parent company equity
|
1,979 | 2,610 | ||||||
Total liabilities and parent company equity
|
$ | 4,525 | $ | 4,295 | ||||
The accompanying notes are an
integral part of the Condensed Combined Financial Statements.
Page ï 3
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THE DEFENSE AND
INFORMATION SOLUTIONS SEGMENT OF ITT CORPORATION
CONDENSED
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
(IN MILLIONS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, | 2011 | 2010 | ||||||
Operating Activities
|
||||||||
Net income
|
$ | 262 | $ | 458 | ||||
Less: Income from discontinued operations
|
| (150 | ) | |||||
Income from continuing operations
|
262 | 308 | ||||||
Adjustments to reconcile income from continuing operations to
net cash provided by operating activities:
|
||||||||
Depreciation and amortization
|
100 | 102 | ||||||
Stock-based compensation
|
12 | 11 | ||||||
Restructuring charges, net
|
5 | 20 | ||||||
Payments for restructuring
|
(17 | ) | (12 | ) | ||||
Changes in assets and liabilities
|
||||||||
Change in receivables
|
(103 | ) | (27 | ) | ||||
Change in inventories
|
(91 | ) | 9 | |||||
Change in other assets
|
(43 | ) | (2 | ) | ||||
Change in accounts payable
|
104 | (32 | ) | |||||
Changes in advance payments and billings in excess of costs
|
17 | (22 | ) | |||||
Changes in Other Liabilities
|
96 | 134 | ||||||
Other, net
|
1 | 2 | ||||||
Net cash provided by operating activities
|
343 | 491 | ||||||
Investing Activities
|
||||||||
Capital expenditures
|
(55 | ) | (72 | ) | ||||
Proceeds from the sale of assets
|
14 | 251 | ||||||
Acquisition, net of cash acquired
|
| (5 | ) | |||||
Other, net
|
(4 | ) | 1 | |||||
Net Cash (used in) provided by investing activities
|
(45 | ) | 175 | |||||
Financing Activities
|
||||||||
Proceeds from the issuance of long-term debt, net
|
649 | | ||||||
Debt issuance costs
|
(6 | ) | | |||||
Transfer to parent, net
|
(899 | ) | (662 | ) | ||||
Other, net
|
6 | (12 | ) | |||||
Net Cash used in financing activities
|
(250 | ) | (674 | ) | ||||
Exchange rate effects on cash and cash equivalents
|
(2 | ) | | |||||
Net cash from discontinued operations
|
| 4 | ||||||
Net change in cash and cash equivalents
|
46 | (4 | ) | |||||
Cash and cash equivalents, beginning of the year
|
18 | 34 | ||||||
Cash and Cash Equivalents, End of Period
|
$ | 64 | $ | 30 | ||||
The accompanying notes are an
integral part of the Condensed Combined Financial Statements.
Page ï 4
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THE DEFENSE AND
INFORMATION SOLUTIONS SEGMENT OF ITT CORPORATION
(DOLLARS IN
MILLIONS, UNLESS OTHERWISE STATED)
NOTE 1
BACKGROUND AND
BASIS OF PRESENTATION
Background
Exelis Inc. (Exelis or the Company) is a
leader in Command, Control, Communications, Computers,
Intelligence, Surveillance and Reconnaissance (C4ISR) related
products and systems and information and technical services,
which it supplies to military, government and commercial
customers in the United States and globally. Exelis provides
mission-critical systems in the areas of integrated electronic
warfare, sensing and surveillance, air traffic management,
information and cyber-security, and networked communications.
Exelis also has growing positions in composite aerostructures,
logistics and technical services. The Companys customers
include the U.S. Army, Navy, Marines and Air Force, NASA,
various U.S. civil, intelligence and security agencies, the
Federal Aviation Administration, allied militaries and
governments, and various commercial customers. Exelis Inc.
(f/k/a ITT DCO, Inc.) was incorporated in Indiana on May 4,
2011. The name of the Company was changed from ITT DCO, Inc. to
Exelis Inc. on July 14, 2011.
On October 31, 2011, ITT Corporation (ITT)
completed the previously announced spin-off (the
Spin-off)
of Exelis, formerly ITTs Defense & Information
Solutions segment. Effective as of 12:01 a.m., Eastern time
on October 31, 2011 (the Distribution Date),
the common stock of Exelis was distributed, on a pro rata basis,
to ITTs shareholders of record as of the close of business
on October 17, 2011 (the Record Date). On the
Distribution Date, each of the shareholders of ITT received one
share of Exelis common stock for every one share of common stock
of ITT held on the Record Date. The Spin-off was completed
pursuant to the Distribution Agreement, dated as of
October 25, 2011, among ITT, Exelis and Xylem Inc. After
the Distribution Date, ITT does not beneficially own any shares
of Exelis common stock.
Our Registration Statement on Form 10 was declared
effective by the U.S. Securities and Exchange Commission
(SEC) on October 6, 2011. Our common stock began trading
regular-way under the symbol XLS on the
New York Stock Exchange on November 1, 2011.
In connection with the Spin-off, the Company issued senior notes
and borrowed under a credit facility to fund an $884 dividend to
ITT (ITT Dividend). Specifically, on
September 20, 2011, we issued an aggregate principal amount
of $650 senior notes (See Note 9, Debt) and on
October 28, 2011 we borrowed $240 under a revolving credit
facility (See Note 15, Subsequent Events). The net proceeds
from the issuance of the senior notes and borrowings under the
credit facility were paid to ITT to fund the ITT Dividend.
Following the Spin-off on October 31, 2011, we will have
cash and cash equivalents balance of at least $200.
Unless the context otherwise requires, references in these notes
to Exelis, we, us,
our, the Company and our
company refer to Exelis Inc. References in these notes to
ITT or parent refers to ITT Corporation,
an Indiana corporation, and its consolidated subsidiaries (other
than Exelis), unless the context otherwise requires.
Page ï 5
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Basis of
Presentation
The unaudited Condensed Combined Financial Statements have been
prepared pursuant to the rules and regulations of the SEC and,
in the opinion of management, reflect all adjustments (which
include normal recurring adjustments) necessary for a fair
presentation of the financial position, results of operations,
and cash flows for the periods presented. Certain information
and note disclosures normally included in financial statements
prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP) have been
condensed or omitted pursuant to such SEC rules. We believe that
the disclosures made are adequate to make the information
presented not misleading. We consistently applied the accounting
policies described in the information statement filed as an
exhibit to our Registration Statement on Form 10 as amended
and filed with the SEC on October 5, 2011
(Information Statement), in preparing these
financial statements. These financial statements should be read
in conjunction with the financial statements and notes thereto
included in our Information Statement.
All significant intra-company transactions between our
businesses have been eliminated. All significant intercompany
transactions between us and ITT have been included in these
financial statements and are considered to be effectively
settled for cash in these financial statements at the time the
transaction is recorded. The total net effect of the settlement
of these transactions is reflected in the Condensed Combined
Statements of Cash Flows as a financing activity and in the
Condensed Combined Balance Sheets as parent company
investment.
The unaudited Condensed Combined Financial Statements have been
prepared on a stand-alone basis and are derived from the
consolidated financial statements and accounting records of ITT
and may not be indicative of Exeliss future performance
and periods prior to the Spin-off do not necessarily reflect
what the results of operations, financial position, and cash
flows would have been had Exelis operated as a stand-alone
company.
Our unaudited Condensed Combined Financial Statements include
expenses of ITT allocated to us for certain functions provided
by ITT, including, but not limited to, general corporate
expenses related to finance, legal, information technology,
human resources, communications, ethics and compliance, shared
services, employee benefits and incentives, insurance and
stock-based compensation. These expenses have been allocated to
us on the basis of direct usage when identifiable, with the
remainder allocated on the basis of revenue, headcount or other
measures. Both we and ITT consider the basis on which the
expenses have been allocated to be a reasonable reflection of
the utilization of services provided to, or the benefit received
by, us during the periods presented. The allocations may not,
however, reflect the expense we would have incurred as an
independent, publicly-traded company for the periods presented.
Actual costs that may have been incurred if we had been a
stand-alone company would depend on a number of factors,
including the chosen organizational structure, what functions
were outsourced or performed by employees and strategic
decisions made in areas such as information technology and
infrastructure. Following our separation from ITT, we will
perform these functions using our own resources or purchased
services. For an interim period, however, some of these
functions will continue to be provided by ITT under transition
services agreements, which are planned to extend for a period of
3 to 24 months in most circumstances. In addition to the
transition services agreements, we will enter into a number of
commercial agreements with ITT in connection with the
separation, many of which are expected to have terms longer than
one year.
ITT uses a centralized approach to cash management and financing
of its operations, excluding debt where we are the legal
obligor. Prior to the Spin-off, the majority of our cash was
transferred to ITT daily and ITT funded our operating and
investing activities as needed. Cash transfers to and from
ITTs cash management accounts are reflected in the
Condensed Combined Balance Sheets as Parent company
investment.
Page ï 6
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The unaudited Condensed Combined Financial Statements include
certain assets and liabilities that have historically been held
at the ITT corporate level but are specifically identifiable or
otherwise allocable to us. The cash and cash equivalents held by
ITT at the corporate level are not specifically identifiable to
Exelis and therefore were not allocated to us for any of the
periods presented. Cash and cash equivalents in our balance
sheets primarily represent cash held locally by entities
included in these financial statements. ITT third-party debt,
and the related interest expense has not been allocated to us
for any of the periods presented as we were not the legal
obligor of the debt and the ITT borrowings were not directly
attributable to our business.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue
and expenses during the reporting periods. Estimates are revised
as additional information becomes available. Estimates and
assumptions are used for, but not limited to, revenue
recognition, income tax contingency accruals and valuation
allowances, fair value measurements, impairment of goodwill and
other intangibles, postretirement obligations and certain
contingent liabilities. Actual results could differ from these
estimates.
Exelis combines companies in which it has a controlling
financial interest or when Exelis is considered the primary
beneficiary of a variable interest entity. We account for
investments in companies over which we have the ability to
exercise significant influence, but do not hold a controlling
interest under the equity method, and we record our
proportionate share of income or losses in the Condensed
Combined Statements of Operations. The results of companies
acquired or disposed of during the fiscal year are included in
the Condensed Combined Statements of Operations from the
effective date of acquisition or up to the date of disposal.
Our quarterly financial periods end on the Saturday closest to
the last day of the calendar quarter, except for the last
quarterly period of the fiscal year, which ends on
December 31st.
For ease of presentation, the quarterly unaudited Condensed
Combined Financial Statements are described as ending on the
last day of the calendar quarter.
NOTE 2
RECENT ACCOUNTING
PRONOUNCEMENTS
Recently
Adopted Pronouncements
In December 2010, the Financial Accounting Standards Board
(FASB) issued additional guidance applicable to the testing of
goodwill for potential impairment. Specifically, for reporting
units with zero or negative carrying amounts, an entity is
required to perform the second step of the goodwill impairment
test (a comparison between the carrying amount of a reporting
units goodwill to its implied fair value) if it is more
likely than not that a goodwill impairment exists, considering
any adverse qualitative factors. This guidance is effective for
fiscal years, and interim periods within those years, beginning
after December 15, 2010. As of the date of our most recent
goodwill impairment test, none of our reporting units would have
been affected by the application of this guidance as each
reporting unit had a carrying amount that exceeded zero.
In April 2010, the FASB issued authoritative guidance permitting
use of the milestone method of revenue recognition for research
or development arrangements that contain payment provisions or
consideration contingent on the achievement of specified events.
On January 1, 2011, we adopted the new guidance on a
prospective basis. The adoption of this guidance did not have a
material impact on our financial condition, results of
operations or cash flows.
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In October 2009, the FASB issued amended guidance on the
accounting for revenue arrangements that contain multiple
elements by eliminating the criteria that objective and reliable
evidence of fair value for undelivered products or services
needs to exist in order to be able to account separately for
deliverables and eliminating the use of the residual method of
allocating arrangement consideration. The amendments establish a
hierarchy for determining the selling price of a deliverable and
will allow for the separation of products and services in more
instances than previously permitted. On January 1, 2011, we
adopted the new guidance on a prospective basis. The adoption of
this guidance did not have a material impact on our financial
condition, results of operations or cash flows.
Pronouncements
Not Yet Adopted
In September 2011, the FASB provided companies with the option
to make an initial qualitative evaluation, based on the
entitys events and circumstances, to determine the
likelihood of goodwill impairment. The results of this
qualitative assessment determine whether it is necessary to
perform the currently required two-step impairment test. If it
is more likely than not that the fair value of a reporting unit
is less than its carrying amount, a company would be required to
perform the two-step impairment test. This guidance is effective
for annual and interim goodwill impairment tests performed for
fiscal years beginning after December 15, 2011, with early
adoption permitted. We will adopt this guidance on
January 1, 2012; however, the requirements are not expected
to have a material effect on the Companys Unaudited
Condensed Combined Financial Statements.
In May 2011, the FASB issued guidance intended to achieve common
fair value measurements and related disclosures between
U.S. GAAP and international accounting standards. The
amendments primarily clarify existing fair value guidance and
are not intended to change the application of existing fair
value measurement guidance. However, the amendments include
certain instances where a particular principle or requirement
for measuring fair value or disclosing information about fair
value measurements has changed. This guidance is effective for
the periods beginning after December 15, 2011, and early
application is prohibited. We will adopt these amendments on
January 1, 2012; however, the requirements are not expected
to have a material effect on the Companys Unaudited
Condensed Combined Financial Statements.
NOTE 3
Acquisitions
We did not engage in any significant acquisitions during the
first nine months of 2011 and 2010.
Divestitures
We did not engage in any divestitures during the first nine
months of 2011. On September 8, 2010, we completed the sale
of CAS, Inc. (CAS), a component of our Information and Technical
Services segment engaged in systems engineering and technical
assistance (SETA) for the U.S. Government. Proceeds from
the sale were $237, net of applicable direct transaction costs.
The sale resulted in a $130 after tax gain reported as a
component of income from discontinued operations. The
transaction resulted in a tax benefit of $4 primarily due to the
difference in book and tax bases of CAS. Subsequent to this
divestiture, we do not have any significant continuing
involvement in the operations of CAS, nor do we expect
significant continuing cash flows from CAS. Accordingly, the
financial position, results of operations and cash flows from
CAS are reported as a discontinued operation for the periods
presented. During the three and nine months ended
September 30, 2010, CAS provided third-party revenue of $46
and $160, respectively, and operating income of $4 and $13,
respectively, included within discontinued operations.
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NOTE 4
During the three and nine months ended September 30, 2011,
we recognized restructuring charges of $1 and $11, respectively,
representing additional employee severance costs associated with
restructuring actions initiated primarily by our C4ISR
Electronics and Systems segment. We do not expect to incur
significant future charges related to these actions.
During the three and nine months ended September 30, 2010,
we recognized restructuring charges of $5 and $32, respectively,
primarily related to an action to realign our company to enable
better product portfolio integration, encouraging a more
coordinated market approach and reduced operational
redundancies. The initiative was substantially completed during
2010 and resulted in a total charge of $26 primarily related to
employee severance, and to a lesser extent, lease cancellation
and other costs associated with three facilities that were
substantially closed during 2010. There was no remaining
liability related to the realignment activities as of
September 30, 2011. The realignment resulted in headcount
reductions of 642, which included 162 factory workers, 457
office workers and 23 management employees.
The table provided below summarizes the presentation of
restructuring charges, net, within our Condensed Combined
Statements of Operations for the three and nine month periods
ended September 30, 2011 and 2010.
Three Months | Nine Months | ||||||||||||||||||
For the Periods Ended September 30, | 2011 | 2010 | 2011 | 2010 | |||||||||||||||
Net restructuring cost presented in cost of product revenue
|
$ | | $ | 4 | $ | 6 | $ | 12 | |||||||||||
Net restructuring cost presented in restructuring charges, net
|
1 | 1 | 5 | 20 | |||||||||||||||
Total restructuring charges, net
|
$ | 1 | $ | 5 | $ | 11 | $ | 32 | |||||||||||
NOTE 5
INCOME
TAXES
Effective Tax
Rate
Our income taxes as presented are calculated on a separate tax
return basis, and may not be reflective of the results that
would have occurred on a stand-alone basis. Our operations have
historically been included in ITTs U.S. federal and
state tax returns or
non-U.S. jurisdictions
tax returns.
With the exception of certain dedicated foreign entities, we are
deemed to settle the current tax balances annually at year-end
or at spin-off with the legal tax-paying entities in the
respective jurisdictions. The annual year-end settlements are
reflected as changes in parent company investment in the
Condensed Combined Balance Sheets. The quarterly taxes payable
balance is recorded in other accrued liabilities in our
Condensed Combined Balance Sheet.
Our quarterly income tax expense is measured using an estimated
annual effective tax rate, adjusted for discrete items within
the period. The comparison of effective tax rates between
periods is significantly affected by discrete items recognized
during the periods, the level and mix of earnings by tax
jurisdiction and permanent differences. The estimated annual
effective tax rate for 2011 and 2010 was comparable before the
impact of discrete items.
For the three months ended September 30, 2011, the Company
recorded an income tax provision of $53 or 34.4% of income from
continuing operations before income tax expense compared to $61
or 36.1% during the same prior year period. For 2011 and 2010,
the effective tax rate varies from the
Page ï 9
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federal statutory rate of 35% due to favorable impacts from the
U.S. manufacturing deduction and research and development
credits substantially offset by the unfavorable impact of state
taxes.
For the nine months ended September 30, 2011, the Company
recorded an income tax provision of $142 or 35.1% of income from
continuing operations before income tax expense compared to $169
or 35.4% during the same prior year period. For 2011 and 2010,
the effective tax rate was slightly higher than the federal
statutory rate of 35% due to favorable impacts from the
U.S. manufacturing deduction and research and development
credits substantially offset by the unfavorable impact of state
taxes.
Uncertain Tax
Positions
We recognize a tax benefit from an uncertain tax position only
if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the
technical merits of the position. As of September 30, 2011
and December 31, 2010, we had $34 and $38, respectively, of
total unrecognized tax benefits. The amount of unrecognized tax
benefits that would affect the effective tax rate was $21 and
$18, as of September 30, 2011 and December 31, 2010,
respectively. Uncertain tax positions are related to tax years
that remain subject to examination by the relevant taxing
authorities. We believe it is reasonably possible that the total
amount of unrecognized tax benefits at September 30, 2011
could decrease by $8 within the next 12 months.
We classify interest relating to tax matters as a component of
interest expense and tax penalties as a component of income tax
expense in our Condensed Combined Statement of Operations. We
had $4 and $3 of interest accrued as of September 30, 2011
and December 31, 2010, respectively.
NOTE 6
RECEIVABLES,
NET
September 30, 2011 | December 31, 2010 | ||||||||||||||
Billed receivables
|
$ | 555 | $ | 598 | |||||||||||
Unbilled contract receivables
|
505 | 357 | |||||||||||||
Other
|
1 | 3 | |||||||||||||
Receivables, gross
|
1,061 | 958 | |||||||||||||
Allowance for doubtful accounts
|
(4 | ) | (4 | ) | |||||||||||
Receivables, net
|
$ | 1,057 | $ | 954 | |||||||||||
Unbilled contract receivables represent revenue recognized on
long-term contracts in excess of amounts billed as of the
balance sheet date. We expect to bill and collect substantially
all of the September 30, 2011 unbilled contract receivables
during the next twelve months as scheduled performance
milestones are completed or units are delivered.
Total billed receivables due from the U.S. Government,
either directly or as subcontractor with the Government were
$455 and $489 at September 30, 2011 and December 31,
2010, respectively.
NOTE 7
INVENTORIES,
NET
September 30, 2011 | December 31, 2010 | ||||||||||||||
Production costs of contracts in process
|
$ | 299 | $ | 216 | |||||||||||
Less progress payments
|
(11 | ) | (25 | ) | |||||||||||
Production costs of contracts in process, net
|
288 | 191 | |||||||||||||
Product inventory
|
42 | 47 | |||||||||||||
Inventories, net
|
$ | 330 | $ | 238 | |||||||||||
Page ï 10
Table of Contents
Deferred production costs incurred on in-process and delivered
units in excess of the aggregate estimated average cost of those
units were $39 and $29 as of September 30, 2011 and
December 31, 2010, respectively.
NOTE 8
GOODWILL AND
OTHER INTANGIBLE ASSETS, NET
Goodwill
During the second quarter of 2011, the Company finalized its
valuation of the purchase price and acquired intangible assets
for SRA AOS which was acquired during the fourth quarter of
2010, resulting in a $2 increase in other intangible assets and
a corresponding decrease in goodwill. The following table
provides a roll-forward of the carrying amount of goodwill by
segment during the nine months ended September 30, 2011:
C4ISR Electronics and |
Information and |
|||||||||||||||||||
Systems | Technical Services | TOTAL | ||||||||||||||||||
Balance as of January 1, 2011
|
$ | 1,776 | $ | 380 | $ | 2,156 | ||||||||||||||
Increase in Other Intangible Assets
|
| (2 | ) | (2 | ) | |||||||||||||||
Balance as of September 30, 2011
|
$ | 1,776 | $ | 378 | $ | 2,154 | ||||||||||||||
Other
Intangible Assets, Net
September 30, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||
Gross |
Gross |
|||||||||||||||||||||||||||||
Carrying |
Accumulated |
Net |
Carrying |
Accumulated |
Net |
|||||||||||||||||||||||||
Amount | Amortization | Intangibles | Amount | Amortization | Intangibles | |||||||||||||||||||||||||
Customer and distributor relationships
|
$ | 515 | $ | (300 | ) | $ | 215 | $ | 513 | $ | (265 | ) | $ | 248 | ||||||||||||||||
Proprietary technology
|
22 | (14 | ) | 8 | 22 | (13 | ) | 9 | ||||||||||||||||||||||
Patents and other
|
4 | (3 | ) | 1 | 4 | (3 | ) | 1 | ||||||||||||||||||||||
Other Intangible Assets, net
|
$ | 541 | $ | (317 | ) | $ | 224 | $ | 539 | $ | (281 | ) | $ | 258 | ||||||||||||||||
We amortize other intangible assets on a straight-line basis
unless the pattern of usage of the benefits indicates an
alternate method is more representative of the usage of the
asset. Amortization expense related to other intangible assets
for the three and nine month periods ended September 30,
2011 were $12 and $36, respectively, and $15 and $46 for the
three and nine month periods ended September 30, 2010,
respectively. Estimated amortization expense for the remaining
three months of 2011 and each of the five succeeding years is as
follows:
Remaining 2011
|
$ | 13 | ||||||||
2012
|
38 | |||||||||
2013
|
24 | |||||||||
2014
|
21 | |||||||||
2015
|
18 | |||||||||
2016 and thereafter
|
110 | |||||||||
Total
|
$ | 224 | ||||||||
Page ï 11
Table of Contents
NOTE 9
DEBT
The following table provides the components of long-term debt at
September 30, 2011 and December 31, 2010:
September 30, 2011 | December 30, 2010 | ||||||||||||||
Long-term debt
|
$ | 650 | $ | - | |||||||||||
Unamortized debt discounts
|
(1 | ) | - | ||||||||||||
Total Long-Term debt
|
$ | 649 | $ | - | |||||||||||
The following table provides a summary of outstanding Notes with
associated maturity dates and interest rates at
September 30, 2011 and December 31, 2010. The
estimated fair value was determined using quoted prices in
active markets (Level 1 inputs) for identical securities
obtained from an external pricing service.
September 30, 2011 | December 31, 2010 | |||||||||||||||||||||||||||
Carrying |
Carrying |
|||||||||||||||||||||||||||
Interest rate | Value | Fair Value | Value | Fair Value | ||||||||||||||||||||||||
Maturity Date:
|
||||||||||||||||||||||||||||
October 2016
|
4.25 | $ | 250 | $ | 254 | $ | | $ | | |||||||||||||||||||
October 2021
|
5.55 | 400 | 406 | | | |||||||||||||||||||||||
$ | 650 | $ | 660 | $ | | $ | | |||||||||||||||||||||
Senior
Notes
In connection with the Spin-off, on September 20, 2011, the
Company and ITT entered into an indenture with Union Bank, N.A.,
as trustee (the Indenture), related to the issuance
by the Company of $250 aggregate principal amount of
4.25% senior notes due October 1, 2016 (the 2016
Notes) and $400 aggregate principal amount of
5.55% senior notes due October 1, 2021 (the 2021
Notes and together with the 2016 Notes, the
Notes) in a private placement arrangement to
qualified institutional buyers pursuant to Rule 144A under
the U.S. Securities Act of 1933, as amended (the
Securities Act). The public offering prices of the
2016 Notes and the 2021 Notes were 99.824% and 99.762%,
respectively, of their principal amounts. Interest on the 2016
Notes and the 2021 Notes accrue from September 20, 2011 and
is payable on April 1 and October 1 of each year, commencing on
April 1, 2012. The Notes were initially guaranteed on a
senior unsecured basis by ITT, which guarantee was automatically
and unconditionally terminated on October 31, 2011, in
connection with the Spin-off. The Company paid the net proceeds
from the issuance of the Notes to ITT as part of the ITT
Dividend, which is included in transfer to parent, net, in our
Condensed Combined Statements of Cash Flows.
In connection with the issuance of the Notes, we capitalized
debt issuance costs of approximately $2 and $4 for the 2016
Notes and 2021 Notes, respectively, which are included in other
non-current assets. The original debt discount of $0.4 and $1
for the 2016 and 2021 Notes, respectively, are included as a
reduction to long-term debt. Both the debt issuance costs and
the debt discount will be amortized over the life of the Notes.
Accrued interest payable, included in other accrued liabilities
was $1 at September 30, 2011.
The Indenture includes covenants that restrict our ability to,
subject to exceptions, incur indebtedness secured by liens or
engage in sale and leaseback transactions. The Indenture also
provides for customary events of default (subject, in certain
cases, to receipt of notice of default
and/or
customary grace and cure periods), including but not limited to,
(i) failure to pay interest for 30 days,
(ii) failure to pay principal when due, (iii) failure
to perform any other covenant in the
Page ï 12
Table of Contents
Indenture for 90 days after receipt of notice from the
trustee or from holders of 25% of the outstanding principal
amount and (iv) certain events of bankruptcy, insolvency or
reorganization of the Company.
We may redeem each series of the Notes, in whole or in part, at
any time at a redemption price equal to the principal amount of
the Notes to be redeemed. The Notes shall be redeemable as a
whole or in part, at the Companys option at any time and
from time to time, at a redemption price equal to the greater of
(i) 100% of the principal amount of such Notes and
(ii) the sum of the present values of the remaining
scheduled payments of principal and interest thereon (exclusive
of interest accrued to the date of redemption) discounted to the
redemption date on a semiannual basis at the Treasury Rate plus
50 basis points, plus in each case accrued and unpaid
interest to the date of redemption. If a change of control
triggering event occurs, as defined in the Indenture, we will be
required to make an offer to purchase the Notes at a price equal
to 101% of their principal amount plus accrued and unpaid
interest to the date of repurchase.
On September 20, 2011, the Company entered into a
registration rights agreement with the initial purchasers of the
Notes (the Exelis Registration Rights Agreement).
The Company agreed under the Exelis Registration Rights
Agreement, to (i) file a registration statement on an
appropriate registration form with respect to a registered offer
to exchange the Notes, as applicable, for new notes, with terms
substantially identical in all material respects to the Notes,
as applicable, and (ii) cause the registration statement to
be declared effective under the Securities Act. If the exchange
offer is not completed within 365 days after the issue date
of the Notes or, if required, the Company will use its
reasonable best efforts to file and to have declared effective a
shelf registration statement relating to the resale of the
Notes. If the Company fails to satisfy this obligation (a
registration default) under the Exelis Registration
Rights Agreement, the annual interest rate on the Notes will
increase by 0.25%. The annual interest rate on the Notes will
increase by an additional 0.25% for each subsequent
90-day
period during which the registration default continues, up to a
maximum additional interest rate of 1.00% per year. If the
registration default is corrected, the applicable interest rate
on such Notes will revert to the original level. If the Company
must pay additional interest, the Company will pay it to the
holders of the Notes in cash on the same dates that it makes
other interest payments until the registration default is
corrected.
NOTE 10
POSTRETIREMENT
BENEFIT PLANS
The following tables provide the components of net periodic
benefit costs for pension plans, and other employee-related
benefit plans for the three and nine months ended
September 30, 2011 and 2010:
Three Months Ended September 30, | |||||||||||||||||||||||||||||
2011 | 2010 | ||||||||||||||||||||||||||||
Other |
Other |
||||||||||||||||||||||||||||
Pension | Benefits | Total | Pension | Benefits | Total | ||||||||||||||||||||||||
Net periodic benefit costs:
|
|||||||||||||||||||||||||||||
Service cost
|
$ | 2 | $ | | $ | 2 | $ | 2 | $ | | $ | 2 | |||||||||||||||||
Interest cost
|
5 | 1 | 6 | 6 | 1 | 7 | |||||||||||||||||||||||
Expected return on plan assets
|
(7 | ) | | (7 | ) | (7 | ) | | (7 | ) | |||||||||||||||||||
Amortization of net actuarial loss
|
1 | | 1 | | | | |||||||||||||||||||||||
Amortization of prior service cost
|
| | | | | | |||||||||||||||||||||||
Net periodic benefit costs
|
$ | 1 | $ | 1 | $ | 2 | $ | 1 | $ | 1 | $ | 2 | |||||||||||||||||
Page ï 13
Table of Contents
Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2011 | 2010 | ||||||||||||||||||||||||||||
Other |
Other |
||||||||||||||||||||||||||||
Pension | Benefits | Total | Pension | Benefits | Total | ||||||||||||||||||||||||
Net periodic benefit costs:
|
|||||||||||||||||||||||||||||
Service cost
|
$ | 5 | $ | | $ | 5 | $ | 5 | $ | 1 | $ | 6 | |||||||||||||||||
Interest cost
|
16 | 4 | 20 | 16 | 4 | 20 | |||||||||||||||||||||||
Expected return on plan assets
|
(22 | ) | | (22 | ) | (21 | ) | | (21 | ) | |||||||||||||||||||
Amortization of net actuarial loss
|
4 | | 4 | 2 | (1 | ) | 1 | ||||||||||||||||||||||
Amortization of prior service cost
|
1 | (1 | ) | | 1 | (1 | ) | | |||||||||||||||||||||
Net periodic benefit costs
|
$ | 4 | $ | 3 | $ | 7 | $ | 3 | $ | 3 | $ | 6 | |||||||||||||||||
We contributed approximately $33 and $4 to our various plans
during the nine months ended September 30, 2011 and 2010,
respectively. We expect to make additional contributions of $8
during the remainder of 2011. Certain Company employees
participate in defined benefit pension and other postretirement
benefit plans sponsored by ITT, which include participants of
other ITT subsidiaries. We recorded approximately $27 and $67 of
expense related to such multiemployer plans during the three and
nine months ended September 30, 2011, respectively, and $16
and $48 for the three and nine months ended September 30,
2010, respectively.
Accumulated
Other Comprehensive Loss
The following table provides the components of accumulated other
comprehensive loss:
September 30, |
December 31, |
|||||||||
2011 | 2010 | |||||||||
Foreign currency translation adjustment
|
$ | 2 | $ | (9 | ) | |||||
Net unrealized gain on securities, net of tax of $0 and $5,
respectively
|
| 9 | ||||||||
Unamortized defined benefit plan costs, net of tax of $34 and
$37, respectively
|
(64 | ) | (68 | ) | ||||||
Total accumulated other comprehensive loss
|
$ | (62 | ) | $ | (68 | ) | ||||
The changes in the unamortized defined benefit plan costs, net
of tax, were $4 and $3 for the nine months ended
September 30, 2011 and 2010, respectively, and are included
in other comprehensive income in the Condensed Combined
Statements of Comprehensive Income.
Unamortized defined benefit plan costs consist primarily of net
after-tax actuarial loss amounts totaling $60 and $62 as of
September 30, 2011, and December 31, 2010,
respectively. Net actuarial gains or losses principally arise
from gains or losses on plan assets due to variations in the
fair market value of the underlying assets and changes in the
benefit obligation due to changes in actuarial assumptions.
NOTE 11
LONG-TERM
INCENTIVE EMPLOYEE COMPENSATION
ITT maintains several plans for the benefit of certain of its
officers, directors and employees. The following disclosures
represent our portion of the plans maintained by ITT in which
our employees participated. All awards granted under the plans
consist of ITT common shares. Accordingly, the amounts presented
are not necessarily indicative of future performance and do not
necessarily reflect the results that we would have experienced
as an independent, publicly-traded company for the periods
presented. ITTs long-term incentive awards program
comprises three components:
non-qualified
stock options (NQOs), restricted stock or restricted stock units
(RS) and a target cash award (TSR). We account for NQOs and RS
as equity-based compensation awards. TSR awards are cash settled
and accounted for as liability-based compensation.
Page ï 14
Table of Contents
Long-term incentive employee compensation costs for grants to
Exelis employees are primarily recorded within selling, general
and administrative (SG&A) expenses, and are reduced by an
estimated forfeiture rate. The following table provides the
impact of these costs in our Condensed Combined Statements of
Operations for the three and nine months ended
September 30, 2011 and 2010:
Three Months | Nine Months | ||||||||||||||||||
For the periods ended September 30, | 2011 | 2010 | 2011 | 2010 | |||||||||||||||
Compensation costs on equity-based awards
|
$ | 4 | $ | 5 | $ | 12 | $ | 11 | |||||||||||
Compensation costs on liability-based awards
|
(1 | ) | (1 | ) | | (2 | ) | ||||||||||||
Total compensation costs, pre-tax
|
$ | 3 | $ | 4 | $ | 12 | $ | 9 | |||||||||||
Future tax benefit
|
$ | 1 | $ | 1 | $ | 4 | $ | 3 |
At September 30, 2011, there was $17 of total unrecognized
compensation cost related to non-vested NQOs and RS held by
Exelis employees. This cost is expected to be recognized ratably
over a
weighted-average
period of 1.9 years.
On March 3, 2011, ITT granted long-term incentive awards to
Exelis employees consisting of 0.2 NQOs, 0.2 RS and 2.8
TSRs with respective grant date fair values (in whole
dollars) of $14.31, $57.68 and $1.00. The NQOs vest either on
the completion of a three-year service period or annually in
three equal installments, as determined by employee level, and
have a ten-year expiration period. RS and TSR units vest on the
completion of a three-year service period.
ITT did not grant any awards to Exelis employees during the
second or third quarter of 2011.
The fair value of RS is determined based on the closing price of
ITT common stock on the date of grant. The fair value of each
NQO grant was estimated on the date of grant using the binomial
lattice pricing model incorporating multiple and variable
assumptions over time, including assumptions such as employee
exercise patterns, stock price volatility and changes in
dividends. The following table details the assumptions utilized.
Dividend yield
|
1.73% | |||||||||
Expected volatility
|
24.75% | |||||||||
Expected life (in years)
|
6.5 | |||||||||
Risk-free rates
|
2.93% | |||||||||
Grant date fair value (in whole dollars)
|
$ | 14.31 | ||||||||
Expected volatilities are based on ITTs historical stock
price volatility, and implied volatility derived from traded
options on ITTs stock. ITT uses historical data to
estimate employee option exercise and employee termination
behavior within the valuation model. Employee groups and option
characteristics are considered separately for valuation
purposes. The expected life represents an estimate of the period
of time options are expected to remain outstanding. The expected
life provided above represents the weighted average of expected
behavior for certain groups of employees who have historically
exhibited different behavior. The risk-free rate is based on the
U.S. Treasury yield curve in effect at the time of option
grant.
NOTE 12
RELATED PARTY
TRANSACTIONS AND PARENT COMPANY INVESTMENT
Related Party
Sales and Cost of Revenue
Our unaudited Condensed Combined Financial Statements have been
prepared on a stand-alone basis and are derived from the
consolidated financial statements and accounting records of ITT.
Page ï 15
Table of Contents
During the three and nine months ended September 30, 2011
and 2010, we sold inventory to other ITT businesses, which were
included in total revenue and cost of product and service
revenue, respectively, in our Condensed Combined Statements of
Operations. These amounts were not significant. The aggregate
inventory on hand from other ITT businesses as of
September 30, 2011 and December 30, 2010 was not
significant.
Allocation of
General Corporate Expenses
The unaudited Condensed Combined Financial Statements include
expense allocations for certain functions provided by ITT as
well as other ITT employees not solely dedicated to Exelis,
including, but not limited to, general corporate expenses
related to finance, legal, information technology, human
resources, communications, ethics and compliance, shared
services, employee benefits and incentives, and stock-based
compensation. These expenses have been allocated to us on the
basis of direct usage when identifiable, with the remainder
allocated on the basis of revenue, headcount or other measure.
During the three and nine month periods ended September 30,
2011, we were allocated $31 and $90, respectively, and $33 and
$82 for the three and nine month periods ended
September 30, 2010, respectively, of general corporate
expenses incurred by ITT which is included within SG&A
expenses in our Condensed Combined Statements of Operations.
The expense allocations have been determined on a basis that we
consider to be a reasonable reflection of the utilization of
services provided or the benefit received by us during the
periods presented. The allocations may not, however, reflect the
expense we would have incurred as an independent,
publicly-traded company for the periods presented. Actual costs
that may have been incurred if we had been a stand-alone company
would depend on a number of factors, including the chosen
organizational structure, functions outsourced or performed by
employees and strategic decisions made in areas such as
information technology and infrastructure.
Parent Company
Equity
Parent company investment in the Condensed Combined Balance
Sheets represents ITTs historical investment in our
accumulated net earnings after taxes and the net effect of the
transactions with and allocations from ITT described above.
NOTE 13
General
From time to time, we are involved in legal proceedings that are
incidental to the operation of our businesses. Some of these
proceedings seek remedies relating to environmental matters,
product liability, personal injury claims, employment and
pension matters, and commercial or contractual disputes,
sometimes related to acquisitions or divestitures. We will
continue to defend vigorously against all claims.
Although the ultimate outcome of any legal matter cannot be
predicted with certainty, based on present information,
including our assessment of the merits of the particular claim,
we do not expect that any asserted or unasserted legal claims or
proceedings, individually or in the aggregate, will have a
material adverse effect on our cash flow, results of operations,
or financial condition.
Environmental
In the ordinary course of business, we are subject to federal,
state, local, and foreign environmental laws and regulations. We
are responsible, or are alleged to be responsible, for ongoing
environmental
Page ï 16
Table of Contents
investigation and remediation of multiple sites. These sites are
in various stages of investigation
and/or
remediation and in many of these proceedings our liability is
considered de minimis. We have received notification from the
U.S. Environmental Protection Agency, and from similar
other environmental agencies, that a number of sites formerly or
currently owned
and/or
operated by Exelis, and other properties or water supplies that
may be or have been impacted from those operations, contain
disposed or recycled materials or wastes and require
environmental investigation
and/or
remediation. These sites include instances where we have been
identified as a potentially responsible party under federal and
state environmental laws and regulations.
Accruals for environmental matters are recorded on a site by
site basis when it is probable that a liability has been
incurred and the amount of the liability can be reasonably
estimated, based on current law and existing technologies. Our
accrued liabilities for these environmental matters represent
the best estimates related to the investigation and remediation
of environmental media such as water, soil, soil vapor, air and
structures, as well as related legal fees. These estimates, and
related accruals, are reviewed quarterly and updated for
progress of investigation and remediation efforts and changes in
facts and legal circumstances. Liabilities for these
environmental expenditures are recorded on an undiscounted basis.
It is difficult to estimate the final costs of investigation and
remediation due to various factors, including incomplete
information regarding particular sites and other potentially
responsible parties, uncertainty regarding the extent of
investigation or remediation and our share, if any, of liability
for such conditions, the selection of alternative remedial
approaches, and changes in environmental standards and
regulatory requirements. We have estimated and accrued $27 and
$22 as of September 30, 2011 and December 31, 2010,
respectively, for environmental matters. In our opinion, the
total amount accrued is appropriate based on existing facts and
circumstances.
The following table illustrates the range of estimated loss and
number of active sites for these environmental matters:
September 30, 2011 | ||||||||||
Low-end range
|
$ | 20 | ||||||||
High-end range
|
$ | 50 | ||||||||
Number of active environmental investigations and remediation
sites
|
22 | |||||||||
U.S.
Government Contracts, Investigations and Claims
The company has U.S. Government contracts that are funded
incrementally on a
year-to-year
basis. Changes in government policies, priorities or funding
levels through agency or program budget reductions by the
U.S. Congress or executive agencies could materially
adversely affect the companys financial condition or
results of operations. Furthermore, contracts with the
U.S. Government may be terminated or suspended by the
U.S. Government at any time, with or without cause. Such
contract suspensions or terminations could result in
unreimbursable expenses or charges or otherwise adversely affect
the companys financial condition
and/or
results of operations.
Departments and agencies of the U.S. Government have the
authority to investigate various transactions and operations of
the company, and the results of such investigations may lead to
administrative, civil or criminal proceedings, the ultimate
outcome of which could be fines, penalties, repayments or
compensatory or treble damages. U.S. Government regulations
provide that certain findings against a contractor may lead to
suspension or debarment from future U.S. Government
contracts or the loss of export privileges for a company or an
operating division or subdivision. Suspension or debarment could
have a material adverse effect on the company because of its
reliance on government contracts.
Page ï 17
Table of Contents
U.S. Government agencies, including the Defense Contract
Audit Agency (DCAA) and others, routinely audit and review a
contractors performance on government contracts, indirect
rates and pricing practices, and compliance with applicable
contracting and procurement laws, regulations and standards.
Accordingly, costs billed or billable to the
U.S. Government customers are subject to potential
adjustment upon audit by such agencies. They also review the
adequacy of the contractors compliance with government
standards for its accounting and management internal control
systems, including: control environment and overall accounting
system, general information technology system, budget and
planning system, purchasing system, material management and
accounting system, compensation system, labor system, indirect
and other direct costs system, billing system and estimating
system. Audits currently underway include the Companys
control environment and overall accounting, billing, and
indirect and other direct cost systems, as well as reviews of
the Companys compliance with certain U.S. Government
Cost Accounting Standards.
From time to time, customers advise the company of claims and
penalties concerning certain potential disallowed costs. When
such findings are presented, Exelis and the U.S. Government
representatives engage in discussions to enable Exelis Inc. to
evaluate the merits of these claims as well as to assess the
amounts being claimed. Where appropriate, provisions are made to
reflect the expected exposure to the matters raised by the
U.S. Government representatives and such provisions are
reviewed on a quarterly basis for sufficiency based on the most
recent information available.
On March 27, 2007, ITT Corporation reached a settlement
relating to an investigation of our Night Vision Divisions
compliance with the International Traffic in Arms Regulations
(ITAR) pursuant to which ITT pled guilty to two violations,
based on the export of defense articles without a license and
the omission of material facts in required export reports. ITT
was assessed a total of $50 in fines, forfeitures and penalties.
ITT also entered into a Deferred Prosecution Agreement with the
U.S. Government which deferred action regarding a third
count of violations related to ITAR pending implementation of a
remedial action plan, including the appointment of an
independent monitor. ITT was also assessed a deferred
prosecution monetary penalty of $50 which is being reduced for
monies spent, during the
five-year
period following the date of the Plea Agreement, to accelerate
and further the development and fielding of advanced night
vision technology. On April 12, 2011, the Department of
Justice dismissed the deferred third count of the Deferred
Prosecution Agreement. This dismissal terminates any further
obligation of ITT and the Company under the Deferred Prosecution
Agreement with the exception of the obligation to fulfill the
$50 deferred prosecution monetary penalty as identified above.
Management believes that this matter will not have a material
adverse effect on our combined financial position, results of
operations or cash flows.
Indemnifications
As part of the Spin-off, Exelis, ITT and Xylem Inc. will
indemnify one another with respect to such parties assumed
or retained liabilities under the Distribution Agreement and
breaches of the Distribution Agreement or related Spin-off
agreements. ITTs indemnification obligations include
asserted and unasserted asbestos and silica liability claims
that relate to the presence or alleged presence of asbestos or
silica in products manufactured, repaired or sold prior to the
Distribution Date, subject to limited exceptions with respect to
certain employee claims, or in the structure or material of any
building or facility, subject to exceptions with respect to
employee claims relating to Exelis or Xylem Inc. buildings or
facilities. The indemnifications are absolute and indefinite.
The indemnification associated with pending and future asbestos
claims does not expire. Exelis expects ITT and Xylem Inc. to
fully perform under the terms of the Distribution Agreement and
therefore we have not recorded a liability for matters for which
we will be indemnified. In addition, we are not aware of any
claims or other circumstances that would give rise to material
payments to ITT or Xylem Inc. under the indemnity that we will
provide.
Page ï 18
Table of Contents
NOTE 14
SEGMENT
INFORMATION
The Companys segments are reported on the same basis used
internally for evaluating performance and for allocating
resources. We operate in two segments: C4ISR Electronics and
Systems, and Information and Technical Services. Assets of the
business segments exclude general corporate assets, which
principally consist of cash, deferred tax assets, certain plant,
property, and equipment, and certain other assets.
C4ISR
Electronics and Systems
This segment provides communications, sensing and surveillance,
space and advanced engineering solutions for government and
commercial customers around the world.
Information
and Technical Services
This segment provides a broad range of systems integration,
operations, sustainment, advanced engineering, logistics, space
launch and range-support solutions for a wide variety of
U.S. military and government agency customers.
Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
2011 | 2010 | ||||||||||||||||||||||||||||||||||
Product |
Service |
Total |
Product |
Service |
Total |
||||||||||||||||||||||||||||||
Revenue | Revenue | Revenue | Revenue | Revenue | Revenue | ||||||||||||||||||||||||||||||
C4ISR Electronics and Systems
|
$ | 746 | $ | | $ | 746 | $ | 815 | $ | | $ | 815 | |||||||||||||||||||||||
Information and Technical Services
|
| 786 | 786 | | 552 | 552 | |||||||||||||||||||||||||||||
Eliminations
|
(2 | ) | (1 | ) | (3 | ) | (3 | ) | (2 | ) | (5 | ) | |||||||||||||||||||||||
Total
|
$ | 744 | $ | 785 | $ | 1,529 | $ | 812 | $ | 550 | $ | 1,362 | |||||||||||||||||||||||
Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
2011 | 2010 | ||||||||||||||||||||||||||||||||||
Product |
Service |
Total |
Product |
Service |
Total |
||||||||||||||||||||||||||||||
Revenue | Revenue | Revenue | Revenue | Revenue | Revenue | ||||||||||||||||||||||||||||||
C4ISR Electronics and Systems
|
$ | 2,114 | $ | | $ | 2,114 | $ | 2,547 | $ | | $ | 2,547 | |||||||||||||||||||||||
Information and Technical Services
|
| 2,250 | 2,250 | | 1,718 | 1,718 | |||||||||||||||||||||||||||||
Eliminations
|
(3 | ) | (2 | ) | (5 | ) | (6 | ) | (3 | ) | (9 | ) | |||||||||||||||||||||||
Total
|
$ | 2,111 | $ | 2,248 | $ | 4,359 | $ | 2,541 | $ | 1,715 | $ | 4,256 | |||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||||||||
Operating Income
|
|||||||||||||||||||
C4ISR Electronics and Systems
|
$ | 107 | $ | 125 | $ | 278 | $ | 364 | |||||||||||
Information and Technical Services
|
49 | 36 | 114 | 106 | |||||||||||||||
Total Operating Income
|
$ | 156 | $ | 161 | $ | 392 | $ | 470 | |||||||||||
Operating Margin
|
|||||||||||||||||||
C4ISR Electronics and Systems
|
14.3% | 15.3% | 13.2% | 14.3% | |||||||||||||||
Information and Technical Services
|
6.2% | 6.5% | 5.1% | 6.2% | |||||||||||||||
Total Operating Margin
|
10.2% | 11.8% | 9.0% | 11.0% | |||||||||||||||
Page ï 19
Table of Contents
September 30, | December 31, | |||||||||
Assets | 2011 | 2010 | ||||||||
C4ISR Electronics and Systems
|
$ | 3,202 | $ | 3,187 | ||||||
Information and Technical Services
|
1,178 | 983 | ||||||||
Corporate and Other
|
145 | 125 | ||||||||
Total Assets
|
$ | 4,525 | $ | 4,295 | ||||||
NOTE 15
SUBSEQUENT
EVENTS
Separation
from ITT Corporation
On October 31, 2011, Exelis completed its Spin-off from ITT
Corporation and became an independent publicly owned company. On
October 31, 2011, each ITT stockholder received a dividend
of one share of Exelis common stock and one share of Xylem Inc.
common stock for every one share of ITT common stock held on the
Record Date. The shares of common stock of Exelis began
regular-way trading on the New York Stock Exchange
on November 1, 2011, under the ticker symbol
XLS.
Pursuant to the terms of the Distribution Agreement,
(i) Exelis and ITT effected certain transfers of assets and
assumed certain liabilities so that Exelis and ITT retained both
the assets of and liabilities associated with their respective
businesses, (ii) subject to certain exceptions, all
agreements, arrangements, commitments and undertakings,
including all intercompany accounts payable or accounts
receivable, including intercompany indebtedness were terminated,
novated or otherwise satisfied, effective no later than the
Distribution Date, and (iii) Exelis and ITT effected a pro
rata distribution of our common stock to ITT shareholders.
Following the Spin-off, Exelis and ITT began operating
independently of each other, and neither has any ownership
interest in the other. In order to govern certain ongoing
relationships between Exelis and ITT following the Spin-off and
to provide mechanisms for an orderly transition, on
October 25, 2011, Exelis, ITT, and Xylem Inc. executed
various agreements that will govern the ongoing relationships
between and among the three companies after the Spin-off and
provide for the allocation of employee benefits, income taxes,
and certain other liabilities and obligations attributable to
periods prior to the Spin-off. The executed agreements include
the Distribution Agreement, Benefits and Compensation Matters
Agreement, Tax Matters Agreement, Master Transition Services
Agreement and a number of on-going commercial relationships. The
Distribution Agreement also provides for certain
indemnifications and cross-indemnifications among Exelis, ITT
and Xylem Inc. The indemnifications address a variety of
subjects, including indemnification by ITT of Exelis in respect
of certain asserted and unasserted asbestos or silica liability
claims relating to the presence or alleged presence of asbestos
or silica in products sold prior to the Distribution Date or in
the structure or material of any building or facility, subject
to limited exceptions. The indemnifications are absolute and
indefinite. The indemnification associated with pending and
future asbestos and silica claims does not expire. Effective
upon the Distribution, we intend for certain intercompany work
orders
and/or
informal intercompany commercial arrangements to be converted
into third-party contracts based on ITTs standard terms
and conditions.
New Credit
Facility
On October 25, 2011, we entered into a competitive advance
and revolving credit facility agreement (Credit Facility) with a
consortium of lenders including JP Morgan Chase Bank, N.A., as
administrative agent, and Citibank, N.A. as syndication agent.
The Credit Facility will be used for working capital, capital
Page ï 20
Table of Contents
expenditures and other general corporate purposes. The Credit
Facility provides for a four year maturity with a one year
extension option upon satisfaction of certain conditions, and
comprises an aggregate principal amount of up to
$600 million of (i) revolving extensions of credit
(the revolving loans) outstanding at any time,
(ii) competitive advance borrowing option which will be
provided on an uncommitted competitive advance basis through an
auction mechanism (the competitive advances), and
(iii) letters of credit in a face amount up to
$100 million at any time outstanding. Subject to certain
conditions, we will be permitted to terminate permanently the
total commitments and reduce commitments in minimum amounts of
$10 million. We will also be permitted, subject to certain
conditions, to request that lenders increase the commitments
under the facility by up to $200 million for a maximum
aggregate principal amount of $800 million. Voluntary
prepayments will be permitted in minimum amounts of
$50 million.
At our election, the interest rate per annum applicable to the
competitive advances will be based on either (i) a
Eurodollar rate determined by reference to LIBOR, plus an
applicable margin offered by the lender making such loans and
accepted by us or (ii) a fixed percentage rate per annum
specified by the lender making such loans. At our election,
interest rate per annum applicable to the revolving loans will
be based on either (i) a Eurodollar rate determined by
reference to LIBOR, adjusted for statutory reserve requirements,
plus an applicable margin or (ii) a fluctuating rate of
interest determined by reference to the greatest of (a) the
prime rate of JPMorgan Chase Bank, N.A., (b) the federal
funds effective rate plus one-half of 1% or (c) the
Eurodollar rate determined by reference to LIBOR, adjusted for
statutory reserve requirements, in each case, plus an applicable
margin.
We will pay certain customary and recurring fees with respect to
the Credit Facility, including (i) fees on the commitments
of the lenders under the revolving facility,
(ii) administration fees and (iii) letter of credit
participation fees on the aggregate face amounts of outstanding
letters of credit, plus a customary fronting fee to the issuing
bank.
The credit facility contains customary affirmative and negative
covenants that, among other things, limits or restricts our
ability to: incur additional debt or issue guarantees; create
liens; enter into certain sale and lease-back transactions;
merge or consolidate with another person; sell, transfer, lease
or otherwise dispose of assets; liquidate or dissolve; and enter
into restrictive covenants. Additionally, the credit facility
agreement requires us not to permit the ratio of combined total
indebtedness to combined EBITDA (leverage ratio) to exceed 3.50
to 1.00 at any time.
On October 28, 2011, we borrowed $240 under the Credit
Facility to fund the remaining balance of the ITT Dividend.
ITT Transfer
of Pension Liability to Exelis
In connection with the Spin-off, on October 31, 2011, ITT
transferred to the Company certain defined benefit pension and
other postretirement benefit plans (Transferred Plans), most
significantly the ITT Salaried Retirement Plan (U.S. SRP).
As a result of this action, we assumed all liabilities and
assets associated with the Transferred Plans and became the
plans sponsor. The net liabilities associated with the
Transferred Plans were approximately $2,150, excluding net
deferred tax assets of $800.
The funded status of the plans and future required contributions
will depend primarily on the return on assets and the discount
rate used to measure the benefit obligation at the end of the
year. Depending on these factors, and the resulting funded
status of our pension plans, the level of future statutory
minimum contributions could be material.
Page ï 21
Table of Contents
Rabbi
Trust
On November 2, 2011, the Company established a grantor
trust (Rabbi Trust) for the purpose of assisting the
Company with the payment of certain nonqualified deferred
compensation obligations in the event of a change in control of
the Company. The Company will make a nominal contribution to
establish the Rabbi Trust and, under the terms of the trust
agreement, the Company is obligated to contribute an amount
equal to 110 percent of the Companys obligations
under eight nonqualified deferred compensation plans at the time
of an Acceleration Event, as defined in such plans
and the Rabbi Trust.
Dividends
On November 2, 2011, the Board of Directors declared a cash
dividend of $0.1033 per share, payable on January 1, 2012
to shareholders of record on November 16, 2011.
ITEM 2. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(In millions, unless otherwise stated)
You should read the following discussion of our results of
operations and financial condition together with the unaudited
Condensed Combined Financial Statements included in this
Form 10-Q,
as well as the audited historical Combined financial statements
and the notes thereto included in the information statement
filed as an exhibit to our Registration Statement on
Form 10 as amended and filed with the SEC on
October 5, 2011 (Information Statement), which provides
additional information regarding our products and services,
industry outlook and forward-looking statements that involve
risks and uncertainties. The forward-looking statements are not
historical facts, but rather are based on current expectations,
estimates, assumptions and projections about our industry,
business and future financial results. Our actual results could
differ materially from the results contemplated by these forward
looking statements.
OVERVIEW
Exelis Inc. (Exelis or the Company) is a
leader in Command, Control, Communications, Computers,
Intelligence, Surveillance and Reconnaissance (C4ISR) related
products and systems and information and technical services,
which it supplies to military, government and commercial
customers in the United States and globally. Exelis provides
mission-critical systems in the areas of integrated electronic
warfare, sensing and surveillance, air traffic management,
information and cyber-security, and networked communications.
Exelis also has growing positions in composite aerostructures,
logistics and technical services. The Companys customers
include the U.S. Army, Navy, Marines and Air Force, NASA,
various U.S. civil, intelligence and security agencies, the
Federal Aviation Administration, allied militaries and
governments, and various commercial customers.
Our business is reported in two segments: C4ISR Electronics and
Systems and Information and Technical Services. Our C4ISR
Electronics and Systems segment provides engineered electronic
systems and equipment, including force protection, electronic
warfare systems, reconnaissance and surveillance systems, and
integrated structures. Our Information and Technical Services
segment is a provider of logistics, infrastructure, and
sustainment support, while also providing a diverse set of
technical services.
Page ï 22
Table of Contents
On October 31, 2011, ITT Corporation (ITT)
completed the previously announced spin-off (the
Spin-off)
of Exelis, formerly ITTs Defense & Information
Solutions segment. Effective as of 12:01 a.m., Eastern time
on October 31, 2011 (the Distribution Date),
the common stock of Exelis was distributed, on a pro rata basis,
to ITTs shareholders of record as of the close of business
on October 17, 2011 (the Record Date). On the
Distribution Date, each of the shareholders of ITT received one
share of Exelis common stock for every one share of common stock
of ITT held on the Record Date. The Spin-off was completed
pursuant to the Distribution Agreement, dated as of
October 25, 2011, among ITT, Exelis and Xylem Inc. After
the Distribution Date, ITT does not beneficially own any shares
of Exelis common stock.
Prior to the Spin-off, we were a subsidiary of ITT Corporation.
The financial information included herein may not necessarily
reflect our financial position, results of operations and cash
flows in the future or what our financial position, result of
operations and cash flows would have been had we been an
independent, publicly traded company during the periods
presented. We are incurring additional costs to be able to
function as an independent, publicly traded company, including
additional costs related to corporate finance, governance and
public reporting.
Except as otherwise indicated or unless the context otherwise
requires, the information included in this discussion and
analysis assumes the completion of all the transactions referred
to in this
Form 10-Q
in connection with the Spin-off and Distribution. Unless the
context otherwise requires, references in this
Form 10-Q
to Exelis, we, us,
our and our company refer to Exelis Inc.
and its combined subsidiaries. References in this
Form 10-Q
to ITT or parent refers to ITT
Corporation, an Indiana corporation, and its combined
subsidiaries, unless the context otherwise requires. Amounts are
in millions, unless stated otherwise.
Executive
Summary
Exelis reported revenue of $1.5 billion for the quarter
ended September 30, 2011, an increase of approximately 12%
compared to the corresponding period in 2010. The increase in
revenue was primarily driven by approximately 42% growth within
our Information and Technical Services segment due primarily to
new contract wins on our Middle Eastern Programs. The increase
in revenue in our Information and Technical Services Segment was
partially offset by lower demand for surge- related products in
our C4ISR Electronics and Systems segment, including our Single
Channel Ground and Airborne Radio Systems (SINCGARS). Operating
income for the third quarter ended September 30, 2011, was
$156, reflecting a decline of $5 or 3% compared to the
corresponding prior period. Overall, operating margin declined
year-over-year
due to a shift in sales from higher margin products to lower
margin services.
Additional Company highlights for the third quarter of 2011
included the following:
§ | Funded orders of approximately $1.7 billion were received during the quarter, representing 12% total growth compared to the corresponding prior year period. | |
§ | Total backlog (funded and unfunded) expanded to $12.3 billion at September 30, 2011 as backlog benefited from strong demand in our Information and Technical Services segment, including backlog increases on our Kuwait Base Operations and Security Support Services (K-BOSSS) and Afghan National Security Forces (ANSF) service contracts. | |
§ | In connection with the Spin-off, we issued senior notes in an aggregate principal amount of $650 from which net proceeds were paid to ITT as part of the ITT Dividend. |
Page ï 23
Table of Contents
Further details related to the quarter and
year-to-date
results are contained in the Discussion of Financial Results
section.
Economic
Opportunities, Challenges, and Risks
The following represents an update of trends and uncertainties
from those included in our Information Statement, which could
have a significant impact on our results of operations,
financial position
and/or cash
flows:
The U.S. continues to face a complex and changing national
security environment, and domestic economic challenges, such as
unemployment, federal budget deficits and the growing national
debt. Significant uncertainties exist due to the competing
priorities to modernize and expand U.S. security
capabilities and the efforts to reduce overall government
spending. Although reductions to certain programs in which we
participate or for which we expect to compete are always
possible, we believe that spending on recapitalization,
modernization and maintenance of defense and homeland security
assets will continue to be a national priority. Based on the FY
2012 DoD budget, we believe that the U.S. Government will
continue to place a high priority on the future challenges of
modernization and transformation of forces and capabilities.
Examples include intelligence, surveillance and reconnaissance,
network communications, cyber warfare and security, unmanned
aircraft and integrated logistics support. Our portfolio of
defense solutions, which covers a broad range of air, sea and
ground platforms and applications, aligns with the priorities
outlined by the DoD. However, uncertainty related to potential
changes in appropriations and priorities could materially impact
our business.
The information provided above does not represent a complete
list of known trends and uncertainties that could impact our
business in either the near or long-term. It should, however, be
considered along with the risk factors identified under the
caption Risk Factors in our Information Statement
and our disclosure under the caption Forward-Looking
Statements and Cautionary Statements at the end of this
section.
Key
Performance Indicators and Non-GAAP Measures
Management reviews key performance indicators including revenue,
segment operating income and margins, orders growth, and
backlog, among others metrics on a regular basis. In addition,
we consider certain additional measures to be useful to
management and investors evaluating our operating performance
for the periods presented, and provide a tool for evaluating our
ongoing operations, liquidity and management of assets. This
information can assist investors in assessing our financial
performance and measures our ability to generate capital for
deployment among competing strategic alternatives and
initiatives, including, but not limited to, dividends,
acquisitions, and debt repayment. These metrics, however, are
not measures of financial performance under accounting
principles generally accepted in the United States of America
(GAAP) and should not be considered a substitute for revenue,
operating income, income from continuing operations, or net cash
from continuing operations as determined in accordance with
GAAP. We consider the following non-GAAP measures, which may not
be comparable to similarly titled measures reported by other
companies, to be key performance indicators:
§ | Adjusted income from continuing operations defined as income from continuing operations, adjusted to exclude items that include, but are not limited to significant charges or credits that impact current results, but not related to our ongoing operations, unusual and infrequent non-operating items and non-operating tax settlements or adjustments. |
Page ï 24
Table of Contents
The following table provides a reconciliation of adjusted income
from continuing operations for the three and nine months ended
September 30, 2011 and 2010:
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Income from continuing operations
|
$ | 101 | $ | 108 | $ | 262 | $ | 308 | ||||||||
Separation costs, net of tax
|
6 | | 15 | | ||||||||||||
Adjusted income from continuing operations
|
$ | 107 | $ | 108 | $ | 277 | $ | 308 | ||||||||
DISCUSSION OF
FINANCIAL RESULTS
COMBINED
OPERATING RESULTS
Selected financial highlights are presented in the table below:
Nine Months Ended |
||||||||||||||||||||||||
Three Months Ended September 30, | September 30, | |||||||||||||||||||||||
2011 | 2010 | Change | 2011 | 2010 | Change | |||||||||||||||||||
Product and service revenue
|
$ | 1,529 | $ | 1,362 | 12.3 | % | $ | 4,359 | $ | 4,256 | 2.4% | |||||||||||||
Cost of product and service revenue
|
1,198 | 1,048 | 14.3 | % | 3,461 | 3,292 | 5.1% | |||||||||||||||||
Operating expense
|
175 | 153 | 14.4 | % | 506 | 494 | 2.4% | |||||||||||||||||
Operating income
|
156 | 161 | (3.1 | )% | 392 | 470 | (16.6)% | |||||||||||||||||
Operating margin
|
10.2 | 11.8% | 9.0% | 11.0% | ||||||||||||||||||||
Interest expense
|
1 | | 1 | | ||||||||||||||||||||
Other expense (income), net
|
1 | (8) | (13) | (7) | ||||||||||||||||||||
Income tax expense
|
53 | 61 | (13.1 | )% | 142 | 169 | (16.0)% | |||||||||||||||||
Effective tax rate
|
34.5% | 36.1% | 35.1% | 35.4 | % | |||||||||||||||||||
Income from continuing operations
|
101 | 108 | (6.5 | )% | 262 | 308 | (14.9)% | |||||||||||||||||
Income from discontinued operations, net of tax
|
| 144 | | 150 | ||||||||||||||||||||
Net income
|
$ | 101 | $ | 252 | (59.9 | )% | $ | 262 | $ | 458 | (42.8)% | |||||||||||||
Revenue
Revenue for the three and nine months ended September 30,
2011, increased $167 or 12.3% and $103 or 2.4%, respectively, as
compared to same prior year periods. For the three and nine
months ended September 30, 2011, revenue growth in our
Information and Technical services segment more than offset
declines in our C4ISR Electronics and Systems segment. The
following table illustrates revenue for our segments for the
three and nine months ended September 30, 2011 and 2010:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2011 | 2010 | Change | 2011 | 2010 | Change | |||||||||||||||||||
C4ISR Electronics & Systems
|
$ | 746 | $ | 815 | (8.5 | )% | $ | 2,114 | $ | 2,547 | (17.0)% | |||||||||||||
Information & Technical Services
|
786 | 552 | 42.4 | % | 2,250 | 1,718 | 31.0% | |||||||||||||||||
Eliminations
|
(3) | (5) | (5) | (9) | ||||||||||||||||||||
Total Revenue
|
$ | 1,529 | $ | 1,362 | 12.3 | % | $ | 4,359 | $ | 4,256 | 2.4% | |||||||||||||
Revenue from our C4ISR Electronics and Systems segment decreased
$69 and $433 for the three and nine months ended
September 30, 2011, respectively, as compared with the same
prior periods in 2010. The decrease in revenue for the three and
nine months ended September 30, 2011 is primarily due to
revenue declines in CREW 2.1 (Counter RCIED Electronic Warfare)
and special purpose jammers products of approximately $60 and
$240, respectively, domestic SINCGARS (Single Channel Ground and
Page ï 25
Table of Contents
Airborne Radio Systems) platforms of approximately $27 and $115,
respectively, and electronic warfare systems on the Special
Operations Aircraft contract of approximate $34 and $44,
respectively. The CREW 2.1 program has reached maturity and we
do not expect significant sales to occur under this program
going forward. However, during the first quarter of 2011, we
received a significant award for CREW 3.3, the next generation
of CREW technology. The extent for which revenue from the CREW
3.3 program will replace revenue from the CREW 2.1 program is
uncertain. The decline in revenue for the three months ended
September 30, 2011 as compared to the same period in the
prior period was partially offset by higher revenue of $36 for
Night Vision goggles under the Omni-7 contract.
Revenue from our Information and Technical Services segment
increased $234 and $532 for the three and nine months ended
September 30, 2011, respectively, compared with the
corresponding prior periods in 2010. The increase in revenue is
primarily due to contract wins on our Middle Eastern Programs,
namely K-BOSSS (Kuwait Base Operations and Security Support
Services) and surge-related efforts for support of the
U.S. Armed Services in Kuwait and Afghanistan, SCNS (Space
Communication and Networks Services) and other classified
programs. During the three and nine months ended
September 30, 2011, revenue increased on K-BOSSS by
approximately $130 and $328, respectively, the APS-5 (Army
Prepositioned Stock 5) Kuwait and Afghanistan
efforts by $51 and $296, respectively, and SCNS by $28 and $47,
respectively, while other classified programs increased by $41
and $80, respectively. The increase in revenue during the three
and nine months ended September 30, 2011 was partially
offset by lower revenue on our GMASS (Global Maintenance and
Supply Services) contract of approximately $5 and $126,
respectively, as well as lower sales on our DACS (Data and
Analysis Center for Software) contract of approximately $13 and
$84, respectively. The APS-5 contract replaced the services
provided under GMASS contract, which was substantially completed
by the end of fiscal year 2010.
Cost of Product
and Service Revenue
Cost of product and service revenue, selling, general and
administrative and internal research and development expenses
are comprised of the following:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2011 | 2010 | Change | 2011 | 2010 | Change | |||||||||||||||||||
Cost of product revenue
|
$ | 510 | $ | 565 | (9.7 | )% | $ | 1,465 | $ | 1,782 | (17.8)% | |||||||||||||
% of product revenue
|
68.5 | % | 69.6 | % | 69.4 | % | 70.1 | % | ||||||||||||||||
Cost of service revenue
|
688 | 483 | 42.4 | % | 1,996 | 1,510 | 32.2% | |||||||||||||||||
% of service revenue
|
87.6 | % | 87.8 | % | 88.8 | % | 88.0 | % | ||||||||||||||||
Selling, general and administrative expenses
|
150 | 125 | 20.0 | % | 429 | 389 | 10.3% | |||||||||||||||||
% of total revenue
|
9.8 | % | 9.2 | % | 9.8 | % | 9.1 | % | ||||||||||||||||
Research and development expenses
|
24 | 27 | (11.1 | )% | 72 | 85 | (15.3)% | |||||||||||||||||
% of total revenue
|
1.6 | % | 2.0 | % | 1.7 | % | 2.0 | % | ||||||||||||||||
Restructuring charges, net
|
1 | 1 | 5 | 20 | ||||||||||||||||||||
Cost of product and service revenue and other operating expenses
|
$ | 1,373 | $ | 1,201 | 14.3 | % | $ | 3,967 | $ | 3,786 | 4.8% | |||||||||||||
The decrease in cost of product revenue of $55 and $317 for the
three and nine months ended September 30, 2011,
respectively, as compared to the same prior year periods was
primarily due to the lower sales noted above and productivity
improvements in our C4ISR Electronics and Systems segment.
The increase in cost of service revenue of $205 and $486 for the
three and nine months ended September 30, 2011,
respectively, compared to the same periods in 2010 is primarily
due to higher revenue. There was no significant change to cost
of service revenue as a percentage of service revenue
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for the three and nine months ended September 30, 2011,
compared to the corresponding periods in 2010.
Selling,
General & Administrative Expenses
(SG&A)
SG&A expenses as a percent of total revenue was 9.8% for
the three and nine months ended September 30, 2011,
compared to 9.2% and 9.1% for the same periods in 2010. For the
three months ended September 30, 2011, SG&A increased
primarily due to increases in Spin-off related expenses of
approximately $9 and bid and proposal and marketing efforts of
approximately $7. This increase was partially offset by lower
other intangible amortization expense of approximately $3.
SG&A expenses for the nine months ended September 30,
2011, increased primarily due to Spin-off related costs of
approximately $23, additional spending to support significant
program growth in our Information and Technical Services
segment, as well as increases in bid and proposal and marketing
efforts of $10. This increase was partially offset by lower
other intangible amortization expense of $9. Other intangible
amortization expense is decreasing as certain other intangible
assets from prior acquisitions are becoming fully amortized.
Research and
Development Expenses (R&D)
The decrease in R&D spending for both the quarter and
year-to-date
periods as compared to the same periods in the prior year
primarily reflects the completion of certain R&D projects
for integrated electronic warfare systems and other
communication technologies within our C4ISR Electronics and
Systems segment.
Restructuring
Charges, Net
During the three and nine months ended September 30, 2011,
we recognized net restructuring charges of $1 and $11,
respectively, of which $6 is reflected in cost of product
revenue for the nine month period. During the three and nine
months ended September 30, 2010, we recognized
restructuring costs of $5 and $32, respectively, of which $4 and
$12 were reflected in cost of product revenue for the three and
nine months, respectively. Restructuring charges for the three
and nine months in 2010 primarily related to an initiative to
realign our organizational structure. This action was
substantially complete as of December 31, 2010. See
Note 4, Restructuring Charges, Net, in the
Notes to the Condensed Combined Financial Statements for
additional information.
Operating
Income
The following table illustrates the operating income results of
our business segments, including operating margin results for
the three and nine months ended September 30, 2011 and 2010.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2011 | 2010 | Change | 2011 | 2010 | Change | |||||||||||||||||||
C4ISR Electronics & Systems
|
$ | 107 | $ | 125 | (14.4 | )% | $ | 278 | $ | 364 | (23.6)% | |||||||||||||
Operating margin
|
14.3% | 15.3% | 13.2% | 14.3 | % | |||||||||||||||||||
Information and Technical Services
|
49 | 36 | 36.1 | % | 114 | 106 | 7.5% | |||||||||||||||||
Operating margin
|
6.2% | 6.5% | 5.1% | 6.2 | % | |||||||||||||||||||
Total operating income
|
$ | 156 | $ | 161 | (3.1 | )% | $ | 392 | $ | 470 | (16.6)% | |||||||||||||
Combined operating margin
|
10.2% | 11.8% | 9.0% | 11.0 | % | |||||||||||||||||||
Operating income at our C4ISR Electronics and Systems segment
for the three and nine months ended September 30, 2011,
decreased $18 and $86, or 14.4% and 23.6%, respectively,
compared with the same periods in 2010. Operating income for the
three and nine months ended September 30, 2011 as a
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percentage of revenue was 14.3% and 13.2%, respectively,
compared to 15.3% and 14.3%, respectively, for the same periods
in 2010. The decrease in operating margin was primarily driven
by lower sales on higher margin surge-related products partially
offset by lower R&D of $11 for the nine months period, and
lower other intangible amortization expense of $3 and $9, for
the three and nine month periods, respectively, compared to the
corresponding periods in the prior year.
Operating income at our Information and Technical Services
segment for the three and nine months ended September 30,
2011, increased $13 and $8 or 36.1% and 7.5%, respectively,
compared with the same periods in 2010. Operating income as a
percentage of revenue for the three and nine months ended
September 30, 2011 was 6.2% and 5.1%, respectively,
compared to 6.5% and 6.2%, respectively, for the corresponding
periods in 2010. The lower operating margin was primarily due to
change in sales mix.
As demand has changed from surge-related equipment such as CREW
2.1 and SINCGARS in our C4ISR Electronics and Systems segment to
increased volume in our operational services business on
contracts such as K-BOSSS and the APS-5 contracts in Kuwait and
Afghanistan related to our Information and Technical Services
segment, we expect the current margins to be more in line with
longer term operating margin expectations.
Impact to
Operating Income from Postretirement Expense
We recorded net periodic benefit costs (pension and other
employee-related defined benefit plan expense, excluding any
expense from the Transferred Plans or intercompany expense
allocations for the Transferred Plans through September 30,
2011) of $2 and $7 for the three and nine months ended
September 30, 2011, respectively. Net periodic benefit
costs were $2 and $6 for the three and nine months ended
September 30, 2010.
In 2011, we expect to incur approximately $10 of net periodic
benefit costs, representing an increase of $3, or 43% as
compared to 2010. This increase is primarily attributable to
additional amortization of net actuarial losses.
Income Tax
Expense
Effective Tax
Rate
For the three months ended September 30, 2011, the Company
recorded an income tax provision of $53 or 34.4% of income from
continuing operations before income tax expense compared to $61
or 36.1% during the same prior year period. For 2011 and 2010,
the effective tax rate varies from the federal statutory rate of
35% due to the U.S. manufacturing deduction and research
and development credits substantially offset by the impact of
state taxes.
For the nine months ended September 30, 2011, the Company
recorded an income tax provision of $142 or 35.1% of income from
continuing operations before income tax expense compared to $169
or 35.4% during the same prior year period. For 2011 and 2010,
the effective tax rate was slightly higher than the federal
statutory rate of 35% due to favorable impacts from the
U.S. manufacturing deduction and research and developmental
credits substantially offset by the unfavorable impact of state
taxes.
Income from
Discontinued Operations, Net of Tax
Income from discontinued operations of $144 and $150, net of tax
benefits, of $14 and $11, respectively, during the three and
nine months ended September 30, 2010, respectively,
reflected our divesture of CAS, Inc., which was sold on
September 8, 2010.
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Backlog
Total backlog includes both funded backlog (firm orders for
which funding is contractually obligated by the customer) and
unfunded backlog (firm orders for which funding is not currently
contractually obligated by the customer) and represents firm
orders and potential options on multi-year contracts, excluding
potential orders under indefinite
delivery / indefinite quantity (IDIQ) contracts.
Backlog is converted into sales as work is performed or
deliveries are made. The level of order activity related to
Defense programs can be affected by the timing of government
funding authorizations and project evaluation cycles.
Year-over-year
comparisons could, at times, be impacted by these factors, among
others.
Funded orders received during the third quarter of 2011
increased 12% or $183 to $1,719 and 25% or $858 to $4,328 during
the nine months ended September 30, 2011, as compared with
the same periods in 2010. The increase in funded awards was
primarily driven by the K-BOSSS and SCNS service contracts and
additional work orders under the Logistics Civilian Augmentation
Program (LOGCAP) contract within our Information and Technical
Services segment, as well as a combination of international and
domestic awards. The increase in these service related contract
orders was partially offset by declines in orders within our
counter RCIED and SINCGARS product lines.
Backlog consisted of the following at September 30, 2011
and December 31, 2010:
September 30, | December 30, | |||||||
2011 | 2010 | |||||||
Funded Backlog
|
$ | 4.0 | $ | 4.1 | ||||
Unfunded backlog
|
8.3 | 7.4 | ||||||
Total backlog
|
$ | 12.3 | $ | 11.5 | ||||
On September 30, 2011, total backlog was $12.3 billion
compared to $11.5 billion at December 31, 2010. The
increase relates to key contract awards for TAC-SWACAA (Total
Army Communications Southwest Asia, Central Asia and Africa),
APS-5, K-BOSSS, GPS III EMD (Engineering, Manufacturing and
Design), and electronic warfare systems on the Special
Operations Aircraft contract, partially offset by lower order
volume for Night Vision goggles under Omni-7 contract and
SINCGARS.
LIQUIDITY AND
CAPITAL RESOURCES
Current
Liquidity
Historically, we have generated operating cash flow sufficient
to fund our working capital, capital expenditure and financing
requirements. Subsequent to the Spin-off, we expect to fund our
ongoing working capital, capital expenditure and financing
requirements through cash flows from operations, cash on hand
and access to capital markets.
If our cash flows from operations are less than we expect, we
may need to access the short or long-term capital markets.
Although we believe that the arrangements in place at the time
of the Spin-off will permit us to finance our operations on
acceptable terms and conditions, our access to, and the
availability of, financing on acceptable terms and conditions in
the future will be impacted by many factors, including:
(i) our credit ratings or absence of a credit rating,
(ii) the liquidity of the overall capital markets, and
(iii) the current state of the economy. We cannot assure
that such financing will be available to us on acceptable terms
or that such financing will be available at all.
Prior to the Spin-off, the majority of our operations
participated in U.S. and international cash management and
funding arrangements managed by ITT where cash was swept from
our balance sheet daily and cash to meet our operating and
investing needs was provided as needed from ITT.
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Table of Contents
Transfers of cash both to and from these arrangements are
reflected as a component of Parent company
investment within Parent company equity in the
Condensed Combined Balance Sheets. The cash presented on our
balance sheet consists primarily of U.S. and international
cash from subsidiaries who do not participate in these
arrangements. The Company does not currently expect that it will
be required to repatriate undistributed earnings of foreign
subsidiaries.
In connection with the Spin-off, we issued debt and borrowed
under a credit facility to fund the $884 ITT Dividend.
Specifically, on September 20, 2011 we issued an aggregate
principal amount of $650 senior notes (See Note 9, Debt)
and on October 28, 2011 we borrowed $240 under a revolving
credit facility (See Note 15, Subsequent Events). The net
proceeds from the issuance of the senior notes and borrowings
under the credit facility were paid to ITT to fund the ITT
Dividend. Following the Spin-off on October 31, 2011, we
will have cash and cash equivalents balance of at least $200.
Funding of
Pension Plans
In connection with the Spin-off, on October 31, 2011, ITT
transferred to the Company certain defined benefit pension and
other postretirement benefit plans (Transferred Plans), most
significantly the ITT Salaried Retirement Plan (U.S. SRP).
As a result of this action, we assumed all liabilities and
assets associated with the Transferred Plans and became the
plans sponsor. The net liabilities associated with the
Transferred Plans were approximately $2,150, excluding net
deferred tax assets of $800.
While the Company has significant discretion in making voluntary
contributions, the Employee Retirement Income Security Act of
1974, as amended by the Pension Protection Act of 2006 and
further amended by the Worker, Retiree, and Employer Recovery
Act of 2008 and applicable Internal Revenue Code regulations
mandate minimum funding thresholds. Failure to satisfy the
minimum funding thresholds could result in restrictions on our
ability to amend the plan or make benefit payments. In general,
certain benefit restrictions apply when the Adjusted Funding
Target Attainment Percentage (AFTAP) of a plan is less than 80%.
When the AFTAP is between 80% and 60%, there is a restriction on
plan amendments and a partial restriction on accelerated benefit
payments (i.e., lump sums cannot exceed 50% of the value of the
participants total benefit). Full benefit restrictions apply if
the plans AFTAP falls below 60%. Although mandatory
contributions to the Transferred Plans were not required during
2011, we will continue to monitor the funded status and minimum
funding requirements.
As a result of the changes to ITTs postretirement plans,
certain plans were remeasured as of September 30, 2011. Due
to these remeasurements, the net liabilities of the Transferred
Plans reflect an increase in the net pension liability during
the third quarter of 2011 of $933. ITTs most significant
plan, the U.S. SRP, was 66% funded. For purposes of
determining minimum funding thresholds pursuant to the Pension
Protection Act of 2006, as amended, the funded status will be
determined using a January 1, 2012 measurement. The 2011
AFTAP for the U.S. SRP was 80%. If the funded status on
January 1, 2012 is less than 80%, the Company could make
additional contributions during 2012 to the U.S. SRP to
maintain a funded status of at least 80% based on the
January 1, 2012 AFTAP measurement in order to avoid benefit
restrictions.
The funded status at January 1, 2012 and future required
contributions will depend primarily on the return on assets and
the discount rate, both determined using AFTAP guidelines.
Depending on these factors, and the resulting funded status of
our pension plans, the level of future statutory minimum
contributions could be material.
Page ï 30
Table of Contents
Future
Liquidity
Our primary future cash needs will be centered on operating
activities, working capital, capital expenditures, and strategic
investments. Our ability to fund these needs will depend, in
part, on our ability to generate or raise cash in the future,
which is subject to general economic, financial, competitive,
regulatory and other factors that are beyond our control. For at
least the next 12 months, we expect to generate sufficient
cash from operations to meet our liquidity and capital needs.
Thereafter, while cash generated from operations is expected to
be sufficient to service our liquidity and capital needs,
including existing and known or reasonably likely short and
long-term cash requirements, we also have access to our
revolving line of credit and capital markets to accommodate
timing differences in cash flows.
Sources and
Uses of Liquidity
Our principal source of liquidity is our cash flow generated
from operating activities, which provides us with the ability to
meet the majority of our short-term funding requirements. The
following table summarizes net cash provided by or used in
operating, investing and financing activities for the nine
months ended September 30, 2011 and 2010:
Nine Months Ended September 30, | |||||||||
2011 | 2010 | ||||||||
Operating Activities
|
$ | 343 | $ | 491 | |||||
Investing Activities
|
(45 | ) | 175 | ||||||
Financing Activities
|
(250 | ) | (674 | ) | |||||
Foreign Exchange
|
(2 | ) | | ||||||
Net cash flows from continuing operations
|
$ | 46 | $ | (8 | ) | ||||
Net cash provided by operating activities decreased $148 for the
nine months ended September 30, 2011 compared to the same
period in 2010, primarily due to a $46 decrease in net income
from continuing operations, changes related to other assets of
$41, inventory of $100 and other liabilities of $38.
Net cash used in investing activities for the nine months ended
September 30, 2011 increased $220, as compared to the
corresponding period in 2010, due primarily to aggregate
proceeds of $251 from the sale of assets in 2010, including net
proceeds of $237 from the divestiture of CAS which was sold on
September 8, 2010, which was partially offset by lower
capital expenditures of $16 due primarily to higher capital
outlays in 2010 on phase 1 of our ADS-B program in our
Information and Technical Services segment, and proceeds of $14
from the sale of a marketable security.
Net cash used in financing activities for the nine months ended
September 30, 2011, decreased $424 compared to 2010, due
primarily to lower net cash generated from operating and
investing activities compared to the prior period. Net cash
generated from net operating and investing activities is swept
to our parent. Proceeds from the issuance of our notes were
transferred to our parent, resulting in no net impact on
financing activities.
Page ï 31
Table of Contents
Contractual
Obligations
The table provided below has been included as an update to the
contractual obligations table included in our Information
Statement. The amounts provided in the following tables are
presented as of September 30, 2011.
PAYMENTS DUE BY PERIOD | |||||||||||||||||||||||||
LESS THAN |
|||||||||||||||||||||||||
TOTAL | 1 YEAR | 1-3 YEARS | 3-5 YEARS | THEREAFTER | |||||||||||||||||||||
September 30, 2011:
|
|||||||||||||||||||||||||
Debt Notes (1)
|
$ | 650 | $ | | $ | | $ | 250 | $ | 400 | |||||||||||||||
Interest payments(2)
|
$ | 276 | $ | 17 | $ | 66 | $ | 66 | $ | 127 | |||||||||||||||
(1) | In connection with the Spin-off, we issued senior notes in an aggregate principal amount of $650. | |
(2) | Amounts represent estimate of future interest payments on long-term debt outstanding as of the period end date. |
Dividends
Our Board of Directors will review and approve the declaration
and distribution of any future dividends based on an analysis of
many factors, including our operating performance and outlook,
financial condition, available liquidity and expected future
requirements for cash and capital resources. Moreover, if we
determine to pay any dividend in the future, there can be no
assurance that we will continue to pay such dividends.
On November 2, 2011, the Board of Directors declared a cash
dividend of $0.1033 per share, payable on January 1, 2012
to shareholders of record on November 16, 2011.
CRITICAL
ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue
and expenses during the reporting periods. Estimates are revised
as additional information becomes available. Estimates and
assumptions are used for, but not limited to, revenue
recognition, income tax contingency accruals and valuation
allowances, fair value measurements, impairment of goodwill and
other intangibles, postretirement obligations and certain
contingent liabilities. Actual results could differ from these
estimates.
There have been no significant changes in the information
concerning Exeliss critical accounting policies, estimates
and judgments as stated in our Information Statement.
RECENT ACCOUNTING
PRONOUNCEMENTS
See Note 2 to the unaudited Condensed Combined Financial
Statements for information related to recent accounting
pronouncements.
FORWARD-LOOKING
AND CAUTIONARY STATEMENTS
Some of the information included herein includes forward-looking
statements intended to qualify for the safe harbor from
liability established by the Private Securities Litigation
Reform Act of 1995 (the
Page ï 32
Table of Contents
Act). These forward-looking statements include, but
are not limited to, statements about the separation of Exelis
from ITT, the terms and the effect of the Spin-off, the nature
and impact of such a separation, capitalization of the Company,
future strategic plans and other statements that describe our
business strategy, outlook, objectives, plans, intentions or
goals, and any discussion of future operating or financial
performance. Whenever used, words such as
anticipate, estimate,
expect, project, intend,
plan, believe, target and
other terms of similar meaning are intended to identify such
forward-looking statements. Forward-looking statements are
uncertain and to some extent unpredictable, and involve known
and unknown risks, uncertainties and other important factors
that could cause actual results to differ materially from those
expressed in, or implied from, such forward-looking statements.
Factors that could cause results to differ materially from those
anticipated include, but are not limited to:
§ | Economic, political and social conditions in the countries in which we conduct our businesses; | |
§ | Changes in U.S. or International government defense budgets; | |
§ | Decline in consumer spending; | |
§ | Sales and revenue mix and pricing levels; | |
§ | Availability of adequate labor, commodities, supplies and raw materials; | |
§ | Interest and foreign currency exchange rate fluctuations and changes in local government regulations; | |
§ | Competition, industry capacity and production rates; | |
§ | Ability of third parties, including our commercial partners, counterparties, financial institutions and insurers, to comply with their commitments to us; | |
§ | Our ability to borrow or refinance our existing indebtedness and availability of liquidity sufficient to meet our needs; | |
§ | Changes in the value of goodwill or intangible assets; | |
§ | Our ability to achieve stated synergies or cost savings from acquisitions or divestitures; | |
§ | The number of personal injury claims filed against the company or the degree of liability; | |
§ | Our ability to affect restructuring and cost reduction programs and realize savings from such actions; | |
§ | Government regulations and compliance therewith, including compliance with and costs associated with new Dodd-Frank legislation; | |
§ | Changes in technology; | |
§ | Intellectual property matters; | |
§ | Governmental investigations; | |
§ | Potential future postretirement benefit plan contributions and other employment and pension matters; | |
§ | Contingencies related to actual or alleged environmental contamination, claims and concerns; | |
§ | Changes in generally accepted accounting principles; | |
§ | Other factors set forth in this Form 10-Q and any other filings with the Securities and exchange commissions. |
In addition, there are risks and uncertainties relating to the
Spin-off from ITT including whether those transactions will
result in any tax liability, the operational and financial
profile of the Company or any of its businesses after giving
effect to the separation, and the ability of the Company to
operate as an independent entity.
There may be other risks and uncertainties that we are unable to
predict at this time or that we currently do not expect to have
a material adverse effect on our business. The Company
undertakes no
Page ï 33
Table of Contents
obligation to update any forward-looking statements, whether as
a result of new information, future events or otherwise.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Exelis has limited exposure to foreign currency exchange risk as
the substantial majority of the business is done in
U.S. dollars. As an operating segment within ITT, Exelis
has not directly experienced exposure to the impacts of certain
market risks, including those related to equity price risk and
interest rate risk. In the future, we expect impacts from any
changes in market conditions to be minimized through our normal
operating and financing activities. We estimate that a
hypothetical 10% adverse movement in the underlying market risks
would not be material to Exeliss financial position,
results of operations or cash flows.
There has been no material change in the information concerning
market risk as stated in our Information Statement.
ITEM 4.
CONTROLS AND PROCEDURES
The companys management, with the participation of the
companys Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the companys
disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of September 30, 2011. Based on that
evaluation, the companys Chief Executive Officer and Chief
Financial Officer concluded that, as of September 30, 2011,
the Companys disclosure controls and procedures were
effective to ensure that information required to be disclosed in
reports the Company files or submit under the Exchange Act is
(i) recorded, processed, summarized and reported within the
time periods specified in SEC rules and forms, and
(ii) accumulated and communicated to management to allow
their timely decisions regarding required disclosure.
We have evaluated the changes in our internal control over
financial reporting that occurred during the three months ended
September 30, 2011 and concluded that no change occurred in
our internal control over financial reporting that materially
affected, or is likely to materially affect, our internal
control over financial reporting.
PART II.
OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
From time to time, we are involved in legal proceedings that are
incidental to the operation of our businesses. Some of these
proceedings allege damages relating to environmental exposures,
intellectual property matters, copyright infringement, personal
injury claims, employment and pension matters, government
contract issues and commercial or contractual disputes,
sometimes related to acquisitions or divestitures. We will
continue to defend vigorously against all claims.
On March 27, 2007, ITT Corporation reached a settlement
relating to an investigation of our Night Vision Divisions
compliance with the International Traffic in Arms Regulations
(ITAR) pursuant to which ITT pled guilty to two violations,
based on the export of defense articles without a license and
the omission of material facts in required export reports. ITT
was assessed a total of $50 in fines, forfeitures and penalties.
ITT also entered into a Deferred Prosecution Agreement with the
U.S. Government which deferred action regarding a third
count of violations related to ITAR pending implementation of a
remedial action plan, including the appointment of an
independent monitor. ITT was also assessed a deferred
prosecution monetary penalty of $50 which is being reduced for
monies spent, during the
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Table of Contents
five-year
period following the date of the Plea Agreement, to accelerate
and further the development and fielding of advanced night
vision technology. On April 12, 2011, the Department of
Justice dismissed the deferred third count of the Deferred
Prosecution Agreement. This dismissal terminates any further
obligation of ITT and the Company under the Deferred Prosecution
Agreement with the exception of the obligation to fulfill the
$50 deferred prosecution monetary penalty as identified above.
Management believes that this matter will not have a material
adverse effect on our combined financial position, results of
operations or cash flows.
ITEM 1A. | RISK FACTORS |
While we attempt to identify, manage, and mitigate risks and
uncertainties associated with our business to the extent
practical under the circumstances, some level of risk and
uncertainty will always be present. The Risk Factors
section of our Information Statement on Form 10 as amended
and filed with the SEC on October 5, 2011, describes risks
and uncertainties associated with our business. These risks and
uncertainties have the potential to materially affect our
business, financial condition, results of operations, cash
flows, projected results, and future prospects. We do not
believe that there have been any material changes to the risk
factors previously disclosed in our Information Statement.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4. | (REMOVED AND RESERVED) |
ITEM 5. | OTHER INFORMATION |
None
ITEM 6. | EXHIBITS |
See the Exhibit Index below for a list of exhibits filed
herewith.
Page ï 35
Table of Contents
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
EXELIS INC. |
||
November 17, 2011 |
/s/ GREG P. KUDLA Chief Accounting Officer (Principal Accounting Officer) |
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Table of Contents
EXHIBIT INDEX
EXHIBIT |
||||
NUMBER | DESCRIPTION | LOCATION | ||
(3.1)
|
Amended and Restated Articles of Incorporation of Exelis Inc. | Incorporated by reference to Exhibit 3.1 of Exelis Inc.s Form 8-K Current Report filed on October 14, 2011 (CIK No. 1524471, File No. 1-35228). | ||
(3.2)
|
By-laws of Exelis Inc. | Incorporated by reference to Exhibit 3.2 of Exelis Inc.s Form 8-K Current Report filed on October 14, 2011 (CIK No. 1524471, File No. 1-35228). | ||
(4.1)
|
Indenture, dated as of September 20, 2011, between Exelis Inc., ITT Corporation, as initial guarantor, and Union Bank, N.A., as trustee | Incorporated by reference to Exhibit 4.1 of ITT Corporations Form 8-K Current Report filed on September 21, 2011 (CIK No. 216228, File No. 1-5672). | ||
(4.2 )
|
Form of Exelis Inc. 4.250% Senior Notes due 2016 | Incorporated by reference to Exhibit 4.3 of ITT Corporations Form 8-K Current Report filed on September 21, 2011 (CIK No. 216228, File No. 1-5672). | ||
(4.3 )
|
Form of Exelis Inc. 5.550% Senior Notes due 2021 | Incorporated by reference to Exhibit 4.4 of ITT Corporations Form 8-K Current Report filed on September 21, 2011 (CIK No. 216228, File No. 1-5672). | ||
(4.4 )
|
Registration Rights Agreement, dated as of September 20, 2011, between Exelis Inc., ITT Corporation and Barclays Capital Inc., Citigroup Global Markets Inc. and J.P. Morgan Securities LLC, as representatives of the Initial Purchasers | Incorporated by reference to Exhibit 4.7 of ITT Corporations Form 8-K Current Report filed on September 21, 2011 (CIK No. 216228, File No. 1-5672). | ||
(10.1)
|
Distribution Agreement, dated as of October 25, 2011, among ITT Corporation, Exelis Inc. and Xylem Inc. | Incorporated by reference to Exhibit 10.1 of ITT Corporations Form 10-Q Quarterly Report filed on October 28, 2011 (CIK No. 216228, File No. 1-5672). | ||
(10.2)
|
Benefits and Compensation Matters Agreement, dated as of October 25, 2011, among ITT Corporation, Exelis Inc. and Xylem Inc. | Incorporated by reference to Exhibit 10.2 of ITT Corporations Form 10-Q Quarterly Report filed on October 28, 2011 (CIK No. 216228, File No. 1-5672). | ||
(10.3)
|
Tax Matters Agreement, dated as of October 25, 2011, among ITT Corporation, Exelis Inc. and Xylem Inc. | Incorporated by reference to Exhibit 10.3 of ITT Corporations Form 10-Q Quarterly Report filed on October 28, 2011 (CIK No. 216228, File No. 1-5672). | ||
(10.4)
|
Master Transition Services Agreement, dated as of October 25, 2011, among ITT Corporation, Exelis Inc. and Xylem Inc. | Incorporated by reference to Exhibit 10.4 of ITT Corporations Form 10-Q Quarterly Report filed on October 28, 2011 (CIK No. 216228, File No. 1-5672). | ||
(10.5)
|
ITT Transitional Trademark License Agreement Exelis, dated as of October 25, 2011, between ITT Manufacturing Enterprises LLC and Exelis Inc. | Incorporated by reference to Exhibit 10.5 of ITT Corporations Form 10-Q Quarterly Report filed on October 28, 2011 (CIK No. 216228, File No. 1-5672). |
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(10.6)
|
Four-Year Competitive Advance and Revolving Credit Facility Agreement, dated as of October 25, 2011, among Exelis Inc., the Lenders Named Therein, J.P. Morgan Chase Bank, N.A., as Administrative Agent and Citibank, N.A., as Syndication Agent. | Filed herewith. | ||
(10.7)
|
Exelis Inc. 2011 Omnibus Incentive Plan | Incorporated by reference to Exhibit 4.3 of Exelis Inc.s Registration Statement on Form S-8 filed on October 28, 2011 (CIK No. 1524471, File No. 333-177605). | ||
(10.8)
|
Exelis Inc. 1997 Long-Term Incentive Plan | Filed herewith. | ||
(10.9)
|
Exelis Inc. 1997 Annual Incentive Plan | Filed herewith. | ||
(10.10)
|
Exelis Inc. Annual Incentive Plan for Executive Officers | Filed herewith. | ||
(10.11)
|
Exelis Salaried Investment and Savings Plan | Incorporated by reference to Exhibit 4.4 of Exelis Inc.s Registration Statement on Form S-8 filed on October 28, 2011 (CIK No. 1524471, File No. 333-177605). | ||
(10.12)
|
Exelis Inc. Excess Savings Plan | Filed herewith. | ||
(10.13)
|
Exelis Inc. Deferred Compensation Plan | Incorporated by reference to Exhibit 4.5 of Exelis Inc.s Registration Statement on Form S-8 filed on October 28, 2011 (CIK No. 1524471, File No. 333-177605). | ||
(10.14)
|
Exelis Inc. Deferred Compensation Plan for Non-Employee Directors | Filed herewith. | ||
(10.15)
|
Exelis Inc. Enhanced Severance Pay Plan | Filed herewith. | ||
(10.16)
|
Exelis Inc. Special Senior Executive Severance Pay Plan | Filed herewith. | ||
(10.17)
|
Exelis Inc. Senior Executive Severance Pay Plan | Filed herewith. | ||
(10.18)
|
ITT Excess Pension Plan IA (formerly known as ITT Industries Excess Pension Plan IA.). Originally effective as of July 1, 1975. Amended and restated as of December 31, 2008. | Incorporated by reference to Exhibit 10.14 of ITT Corporations Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | ||
(10.19)
|
ITT Excess Pension Plan IB (formerly known as ITT Industries Excess Pension Plan IB). Originally effective as of January 1, 1996. Amended and restated as of December 31, 2008. | Incorporated by reference to Exhibit 10.15 of ITT Corporations Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | ||
(10.20)
|
ITT Excess Pension Plan IIA (formerly known as ITT Excess Pension Plan II, and ITT Industries Excess Pension Plan II, as amended and restated as of July 13, 2004). Originally effective as of January 1, 1988. Amended and restated as of December 31, 2008. | Incorporated by reference to Exhibit 10.16 of ITT Corporations Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). |
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(10.21)
|
ITT Excess Pension Plan IIB. Effective as of January 1, 1988. Amended and restated as of December 31, 2008. | Incorporated by reference to Exhibit 10.55 of ITT Corporations Form 10-K for the year ended December 31, 2008 (CIK No. 216228, File No. 1-5672). | ||
(10.22)
|
Special Retention and Employment Compensation Memorandum between Christopher C. Bernhardt and ITT Corporation, dated February 13, 2009 | Incorporated by reference to Exhibit 10.7 of Exelis Inc.s Registration Statement on Form 10 filed on September 26, 2011 (CIK No. 1524471, File No. 1-35228). | ||
(10.23)
|
Special Retention and Employment Compensation Memorandum between Christopher C. Bernhardt and ITT Corporation, dated August 11, 2010 | Incorporated by reference to Exhibit 10.8 of Exelis Inc.s Registration Statement on Form 10 filed on September 26, 2011 (CIK No. 1524471, File No. 1-35228). | ||
(10.24)
|
Form of Exelis Inc. 2011 Omnibus Incentive Plan 2011 Non-Qualified Stock Option Award Agreement Founders Grant | Filed herewith. | ||
(10.25)
|
Form of Exelis Inc. 2011 Omnibus Incentive Plan Non-Qualified Stock Option Award Agreement General Grant | Filed herewith. | ||
(10.26)
|
Form of Exelis Inc. 2011 Omnibus Incentive Plan Restricted Stock Unit Agreement 2010 TSR Replacement (Stock Settled) | Filed herewith. | ||
(10.27)
|
Form of Exelis Inc. 2011 Omnibus Incentive Plan Restricted Stock Unit Agreement 2011 TSR Replacement (Stock Settled) | Filed herewith. | ||
(10.28)
|
Form of Exelis Inc. 2011 Omnibus Incentive Plan Restricted Stock Unit Agreement Founders Grant (Stock Settled) | Filed herewith. | ||
(10.29)
|
Form of Exelis Inc. 2011 Omnibus Incentive Plan Restricted Stock Unit Agreement General Grant (Stock Settled) | Filed herewith. | ||
(10.30)
|
Form of Exelis Inc. 2011 Omnibus Incentive Plan Restricted Stock Unit Agreement General Grant (Cash Settled) | Filed herewith. | ||
(10.31)
|
Form of Exelis Inc. 2011 Omnibus Incentive Plan 2011 Restricted Stock Unit Award Agreement Non-Employee Director (Stock Settled) | Filed herewith. | ||
(10.32)
|
Form of Exelis Inc. 2011 Omnibus Incentive Plan General Restricted Stock Unit Award Agreement Non Employee Director (Stock Settled) | Filed herewith. | ||
(10.33)
|
Form of Indemnification Agreement | Filed herewith. | ||
(31.1)
|
Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith. |
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(31.2)
|
Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith. | ||
(32.1)
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | This Exhibit is intended to be furnished in accordance with Regulation S-K Item 601(b) (32) (ii) and shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference. | ||
(32.2)
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | This Exhibit is intended to be furnished in accordance with Regulation S-K Item 601(b) (32) (ii) and shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference. | ||
(101)
|
The following materials from Exelis Inc.s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Combined Income Statements, (ii) Condensed Combined Statements of Comprehensive Income, (iii) Condensed Combined Balance Sheets, (iv) Condensed Combined Statements of Cash Flows and (v) Notes to Condensed Combined Financial Statements | Submitted electronically with this report. | ||
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