UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
or
¨ 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.
State of Indiana | 45-2083813 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification Number) |
1650 Tysons Boulevard, Suite 1700, McLean, Virginia 22102
(Address of Principal Executive Offices)
(703) 790-6300
(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 þ No ¨
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 þ No ¨
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 ¨ | Accelerated filer ¨ | Non-accelerated filer þ | Smaller reporting company ¨ | |||
(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 ¨ No þ
As of October 30, 2012 there were 187,593,063 shares of common stock ($0.01 par value per share) issued and outstanding.
Page | 2
EXELIS INC.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Product revenue |
$ | 611 | $ | 744 | $ | 1,884 | $ | 2,111 | ||||||||
Service revenue |
750 | 785 | 2,277 | 2,248 | ||||||||||||
Total revenue |
1,361 | 1,529 | 4,161 | 4,359 | ||||||||||||
Cost of product and service revenue |
||||||||||||||||
Cost of product revenue |
434 | 510 | 1,328 | 1,465 | ||||||||||||
Cost of service revenue |
649 | 688 | 1,977 | 1,996 | ||||||||||||
Selling, general and administrative expenses |
114 | 150 | 377 | 429 | ||||||||||||
Research and development expenses |
18 | 24 | 48 | 72 | ||||||||||||
Restructuring and asset impairment charges, net |
3 | 1 | 5 | 5 | ||||||||||||
Operating income |
143 | 156 | 426 | 392 | ||||||||||||
Interest expense, net |
9 | 1 | 29 | 1 | ||||||||||||
Other expense (income), net |
(4 | ) | 1 | 3 | (13 | ) | ||||||||||
Income from continuing operations before income tax expense |
138 | 154 | 394 | 404 | ||||||||||||
Income tax expense |
50 | 53 | 150 | 142 | ||||||||||||
Net income |
$ | 88 | $ | 101 | $ | 244 | $ | 262 | ||||||||
Earnings Per Share |
||||||||||||||||
Basic |
||||||||||||||||
Net income |
$ | 0.47 | $ | 0.54 | $ | 1.30 | $ | 1.41 | ||||||||
Diluted |
||||||||||||||||
Net income |
$ | 0.47 | $ | 0.54 | $ | 1.30 | $ | 1.40 | ||||||||
Weighted average common shares basic |
187.6 | 186.2 | 187.3 | 186.2 | ||||||||||||
Weighted average common shares diluted |
188.7 | 187.1 | 188.3 | 187.1 | ||||||||||||
Cash dividends declared per common share |
$ | 0.10 | $ | | $ | 0.31 | $ | |
The accompanying notes are an integral part of the condensed consolidated and combined financial statements.
Page | 3
EXELIS INC.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(IN MILLIONS)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Net income |
$ | 88 | $ | 101 | $ | 244 | $ | 262 | ||||||||
Other comprehensive income (loss), net of tax |
||||||||||||||||
Net foreign currency translation adjustments |
5 | 10 | 4 | 12 | ||||||||||||
Defined benefit plans |
||||||||||||||||
Amortization of actuarial loss included in net periodic benefit cost |
13 | 1 | 39 | 3 | ||||||||||||
Amortization of prior service cost included in net periodic benefit cost |
| | | 1 | ||||||||||||
Investment securities |
||||||||||||||||
Unrealized loss arising during the period |
| | | (1 | ) | |||||||||||
Reclassification adjustments for gain realized in net income |
| | | (9 | ) | |||||||||||
Other comprehensive income (loss), net of tax |
18 | 11 | 43 | 6 | ||||||||||||
Total comprehensive income |
$ | 106 | $ | 112 | $ | 287 | $ | 268 |
The accompanying notes are an integral part of the condensed consolidated and combined financial statements.
Page | 4
EXELIS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS)
|
September 30, 2012 |
December 31, 2011 |
||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 194 | $ | 116 | ||||
Receivables, net |
1,080 | 1,061 | ||||||
Inventories, net |
310 | 337 | ||||||
Deferred tax asset |
80 | 106 | ||||||
Other current assets |
47 | 49 | ||||||
Total current assets |
1,711 | 1,669 | ||||||
Plant, property and equipment, net |
511 | 494 | ||||||
Goodwill |
2,178 | 2,154 | ||||||
Other intangible assets, net |
194 | 211 | ||||||
Deferred tax asset |
420 | 507 | ||||||
Other non-current assets |
68 | 64 | ||||||
Total non-current assets |
3,371 | 3,430 | ||||||
Total assets |
$ | 5,082 | $ | 5,099 | ||||
Liabilities and Shareholders Equity |
||||||||
Current liabilities |
||||||||
Short-term debt |
$ | 134 | $ | | ||||
Accounts payable |
416 | 447 | ||||||
Advance payments and billings in excess of costs |
366 | 378 | ||||||
Compensation and other employee benefits |
217 | 250 | ||||||
Other accrued liabilities |
184 | 199 | ||||||
Total current liabilities |
1,317 | 1,274 | ||||||
Postretirement benefit plans |
1,828 | 2,149 | ||||||
Long-term debt |
649 | 649 | ||||||
Deferred tax liability |
1 | 1 | ||||||
Other non-current liabilities |
132 | 133 | ||||||
Total non-current liabilities |
2,610 | 2,932 | ||||||
Total liabilities |
3,927 | 4,206 | ||||||
Commitments and contingencies (Note 13) |
||||||||
Shareholders equity |
||||||||
Common stock |
2 | 2 | ||||||
Additional paid-in capital |
2,568 | 2,523 | ||||||
Retained earnings |
208 | 23 | ||||||
Accumulated other comprehensive loss |
(1,623 | ) | (1,655 | ) | ||||
Total shareholders equity |
1,155 | 893 | ||||||
Total liabilities and shareholders equity |
$ | 5,082 | $ | 5,099 |
The accompanying notes are an integral part of the condensed consolidated and combined financial statements.
Page | 5
EXELIS INC.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
Nine Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
Operating activities |
||||||||
Net income |
$ | 244 | $ | 262 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
97 | 100 | ||||||
Stock-based compensation |
18 | 12 | ||||||
Restructuring and asset impairment charges, net |
5 | 5 | ||||||
Payments for restructuring |
(14 | ) | (17 | ) | ||||
Postretirement benefit plans expense |
36 | 7 | ||||||
Postretirement benefit plans payments |
(293 | ) | (33 | ) | ||||
Change in assets and liabilities |
||||||||
Change in receivables |
(40 | ) | (103 | ) | ||||
Change in inventories |
29 | (91 | ) | |||||
Change in other assets |
1 | (43 | ) | |||||
Change in accounts payable |
(53 | ) | 104 | |||||
Change in advance payments and billings in excess of costs |
(14 | ) | 17 | |||||
Change in deferred taxes |
147 | 19 | ||||||
Change in other liabilities |
(66 | ) | 103 | |||||
Other, net |
| 1 | ||||||
Net cash provided by operating activities |
97 | 343 | ||||||
Investing activities |
||||||||
Capital expenditures |
(86 | ) | (55 | ) | ||||
Proceeds from the sale of assets |
2 | 14 | ||||||
Acquisitions, net of cash acquired |
(42 | ) | | |||||
Other, net |
(1 | ) | (4 | ) | ||||
Net cash used in investing activities |
(127 | ) | (45 | ) | ||||
Financing activities |
||||||||
Proceeds from commercial paper, net |
134 | | ||||||
Proceeds from the issuance of debt, net |
| 649 | ||||||
Payment of debt Issuance costs |
| (6 | ) | |||||
Dividends paid |
(39 | ) | | |||||
Proceeds from the exercise of stock options |
14 | | ||||||
Transfers to parent, net |
| (899 | ) | |||||
Other, net |
(7 | ) | 6 | |||||
Net cash provided by (used in) financing activities |
102 | (250 | ) | |||||
Exchange rate effects on cash and cash equivalents |
6 | (2 | ) | |||||
Net change in cash and cash equivalents |
78 | 46 | ||||||
Cash and cash equivalents beginning of year |
116 | 18 | ||||||
Cash and cash equivalents end of period |
$ | 194 | $ | 64 |
The accompanying notes are an integral part of the condensed consolidated and combined financial statements.
Page | 6
EXELIS INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN MILLIONS, UNLESS OTHERWISE STATED)
BACKGROUND, BASIS OF PRESENTATION AND USE OF ESTIMATES
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 United States (U.S.) Department of Defense (DoD), including the U.S. Army, Navy, Marines and Air Force, and its prime contractors, U.S. Government intelligence agencies, National Aeronautics and Space Administration (NASA), Federal Aviation Administration (FAA), allied foreign governments and domestic and foreign commercial customers. As a prime contractor, subcontractor, or preferred supplier, Exelis participates in many high priority defense and non-defense programs in the United States. Exelis conducts most of its business with the U.S. Government, principally the DoD.
On October 31, 2011, ITT Corporation (ITT) completed the spin-off (the Spin-off) of Exelis and Exelis began operating as a stand-alone publicly traded corporation. Prior to the Spin-off, Exelis operated as the Defense and Information Solutions Segment of ITT.
Unless the context otherwise requires, references in these notes to Exelis, we, us, our, the Company and our Company refer to Exelis Inc. and its subsidiaries. References in these notes to ITT or parent refer to ITT Corporation, an Indiana corporation, and its subsidiaries (other than Exelis), unless the context otherwise requires.
Basis of Presentation
The unaudited Condensed Consolidated and Combined Financial Statements included in this Form 10-Q have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (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 annually in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such SEC rules. These financial statements should be read in conjunction with the audited Consolidated and Combined Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2011. We believe that the disclosures included in this Form 10-Q are adequate to make the information presented not misleading.
All significant intercompany transactions between our businesses have been eliminated. Prior to October 31, 2011, all significant intercompany transactions between us and ITT have been included in
Page | 7
these financial statements and are considered to be effectively settled for cash in these financial statements at the time the transaction was recorded. The total net effect of the settlement of these intercompany transactions is reflected in the unaudited Condensed Consolidated and Combined Statements of Cash Flows as Transfers to parent, net.
These financial statements reflect the consolidated operations of Exelis as a separate stand-alone entity beginning on October 31, 2011. Periods presented prior to the Spin-off 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 the future performance of Exelis and 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.
ITT used a centralized approach to cash management and financing of its operations, excluding debt where we were the legal obligor. Prior to October 31, 2011, 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 unaudited Condensed Consolidated and Combined Statements of Cash Flows as Transfers to parent, net.
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 financial statements included herein are described as ending on the last day of the calendar quarter.
Certain amounts in the prior period financial statements have been reclassified to conform to the current year presentation.
Use of Estimates
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.
During the performance of long-term sale contracts, estimated final contract prices and costs are reviewed periodically and revisions are made as required and recorded in income in the period in which they are determined. Changes in estimated revenues, cost of revenue and the related effect to operating income are recognized using a cumulative catch-up adjustment which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a contracts percent complete. For the three and nine months ended September 30, 2012, net favorable cumulative catch-up adjustments related to prior periods increased operating income by approximately $26 and $79, respectively, and diluted earnings per share by approximately $0.09 and $0.26, respectively. For the three and nine months ended September 30, 2011, net favorable cumulative catch-up adjustments related to prior periods increased operating income by approximately $52 and $127, respectively, and diluted earnings per share by approximately $0.18 and $0.44, respectively.
Page | 8
RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Pronouncements
In September 2011, the Financial Accounting Standards Board (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. The adoption of this guidance did not have a material impact on our financial condition, results of operations or cash flows.
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. We adopted the new guidance on January 1, 2012. The adoption of this guidance did not have a material impact on our financial condition, results of operations or cash flows.
EARNINGS PER SHARE
The following table sets forth the reconciliation of basic and diluted weighted average shares outstanding for our earnings per share calculations:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Weighted average common shares outstanding |
186.8 | 184.6 | 186.3 | 184.6 | ||||||||||||
Add: Weighted average restricted stock awards outstanding(a) |
0.8 | 1.6 | 1.0 | 1.6 | ||||||||||||
Basic weighted average common shares outstanding |
187.6 | 186.2 | 187.3 | 186.2 | ||||||||||||
Add: Dilutive impact of stock options |
0.4 | 0.8 | 0.5 | 0.8 | ||||||||||||
Add: Dilutive impact of restricted stock units |
0.7 | 0.1 | 0.5 | 0.1 | ||||||||||||
Diluted weighted average common shares outstanding |
188.7 | 187.1 | 188.3 | 187.1 |
(a) | Restricted stock awards containing rights to non-forfeitable dividends which participate in undistributed earnings with common shareholders are considered participating securities for purposes of computing earnings per share. |
For the three and nine months ended September 30, 2011, basic and diluted earnings per common share were computed using the number of shares of our common stock outstanding on October 31, 2011, the date on which Exelis common stock was distributed to shareholders of ITT. In addition, for our dilutive weighted average share calculation, we have assumed the dilutive securities outstanding at October 31, 2011 were also outstanding for the three and nine months ended September 30, 2011.
Page | 9
We excluded from our diluted share calculation for the three and nine months ended September 30, 2012 10.0 and 9.3 shares, respectively, related to stock options and less than 0.1 shares for both periods related to restricted stock units, as their effect would have been antidilutive.
SHAREHOLDERS EQUITY
Capital Stock
As of September 30, 2012 and December 31, 2011, our authorized capital was comprised of 750 shares of common stock and 50 shares of preferred stock. As of September 30, 2012 and December 31, 2011, there were 187.6 and 186.2 shares of common stock ($0.01 par value in whole dollars), respectively, issued and outstanding. No preferred stock was issued and outstanding at September 30, 2012 and December 31, 2011.
Accumulated Other Comprehensive Loss
The following table provides the components of accumulated other comprehensive loss:
September 30, 2012 |
December 31, 2011 |
|||||||
Net foreign currency translation adjustments |
$ | 10 | $ | 7 | ||||
Unamortized defined benefit plan costs, net of tax of $1,080 and $1,116, respectively |
(1,633 | ) | (1,662 | ) | ||||
Total accumulated other comprehensive loss |
$ | (1,623 | ) | $ | (1,655 | ) |
Unamortized defined benefit plan costs consist primarily of actuarial loss, net of tax, totaling $1,605 and $1,656 as of September 30, 2012 and December 31, 2011, 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.
The changes in unamortized defined benefit plan cost included in other comprehensive income in the unaudited Condensed Consolidated and Combined Statements of Comprehensive Income were reduced by tax of $9 and $26 for the three and nine month ended September 30, 2012, respectively, and less than $1 for both the three and nine months ended September 30, 2011.
Dividends
On August 14, 2012, the Board of Directors declared a cash dividend of $0.1033 per share, payable on October 1, 2012 to shareholders of record on August 31, 2012. During the nine months ended September 30, 2012, we declared three quarterly dividends totaling $59 or $0.3099 per share.
INCOME TAXES
Effective Tax Rate
Prior to October 31, 2011, amounts presented in these financial statements related to income taxes have been determined on a separate return basis; however, our operating results have been included
Page | 10
in ITTs consolidated U.S. federal and state income tax returns. With the exception of certain dedicated foreign entities, we were deemed to settle the current tax balances at Spin-off and prior to the Spin-off annually at year-end with the legal tax-paying entities in the respective jurisdictions.
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.
For the three months ended September 30, 2012, the Company recorded an income tax provision of $50 or 36.2% of income from continuing operations before income tax expense compared to $53 or 34.4% during the same prior year period. For the nine months ended September 30, 2012, the Company recorded an income tax provision of $150 or 38.1% of income from continuing operations before income tax expense compared to $142 or 35.1% during the same prior year period. The effective tax rate varies from the federal statutory rate of 35% due to the unfavorable impact of state taxes offset by favorable impacts from the U.S. manufacturing deduction. The effective tax rate for the three months ended September 30, 2012 also included the favorable impact of discrete items related to the Spin-off. The 2011 effective tax rate benefited from the federal research and development tax credit, which expired at the end of 2011.
Uncertain Tax Positions
Under the Tax Matters Agreement entered into between Exelis and ITT in connection with the Spin-off, ITT agreed to assume liability up to a certain amount for U.S. federal, state or local income taxes that are determined on a consolidated, combined, unitary or similar basis for each taxable period in which Exelis was included in such group with ITT. We remain responsible for certain foreign income taxes and any income taxes (primarily state taxes) that are not determined on a consolidated, combined, unitary or similar basis for each taxable period in which Exelis was included in such group with ITT. With respect to future federal, state, and foreign income tax audits of pre Spin-off tax returns (other than separate returns of Exelis or Xylem Inc.), Exelis, ITT, and Xylem Inc. have generally agreed to share in any unfavorable tax audit liabilities over a specified threshold. ITT is responsible for liabilities below the threshold.
As of September 30, 2012 and December 31, 2011, we had no unrecognized tax benefits. We do not believe that unrecognized tax benefits will significantly increase within the next twelve 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 unaudited Condensed Consolidated and Combined Statements of Operations. We did not have any interest accrued for tax matters as of September 30, 2012 and December 31, 2011.
Page | 11
RECEIVABLES, NET
Receivables, net were comprised of the following:
September 30, 2012 | December 31, 2011 | |||||||
Billed receivables |
$ | 435 | $ | 463 | ||||
Unbilled contract receivables |
639 | 559 | ||||||
Other |
10 | 42 | ||||||
Receivables, gross |
1,084 | 1,064 | ||||||
Allowance for doubtful accounts |
(4 | ) | (3 | ) | ||||
Receivables, net |
$ | 1,080 | $ | 1,061 |
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, 2012 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 a subcontractor with the U.S. Government, were $391 and $368 at September 30, 2012 and December 31, 2011, respectively. Because the Companys receivables are primarily with the U.S. Government, the Company does not have a material credit risk exposure.
Other primarily includes amounts receivable from ITT and Xylem Inc. under various separation agreements related to the Spin-off.
INVENTORIES, NET
Inventories, net were comprised of the following:
September 30, 2012 | December 31, 2011 | |||||||
Production costs of contracts in process |
$ | 274 | $ | 303 | ||||
Less progress payments |
(21 | ) | (19 | ) | ||||
Production costs of contracts in process, net |
253 | 284 | ||||||
Product inventory |
57 | 53 | ||||||
Inventories, net |
$ | 310 | $ | 337 |
Deferred production costs incurred on in-process and delivered units in excess of the aggregate estimated average cost of those units were $2 and $29 as of September 30, 2012 and December 31, 2011, respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
As of September 30, 2012 and December 31, 2011, goodwill was $2,178 and $2,154, respectively. As of September 30, 2012 and December 31, 2011, goodwill for our C4ISR Electronics and Systems segment was $1,800 and $1,776, respectively, and goodwill for our Information and Technical Services segment was $378 on both dates.
Page | 12
During the nine months ended September 30, 2012, the Company acquired Applied Kilovolts Group Holdings, Limited and Space Computer Corporation for an aggregate purchase price of $44 in cash, resulting in an increase to goodwill of $24 and other intangible assets of $13. The operating results of these businesses are included in the C4ISR Electronics and Systems segment from the date of acquisition. The assets, liabilities and results of operations for the acquired businesses were not material to the Company.
Other Intangible Assets, Net
Information regarding our other intangible assets was as follows:
September 30, 2012 | December 31, 2011 | |||||||||||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net Intangibles |
Gross Carrying |
Accumulated Amortization |
Net Intangibles |
|||||||||||||||||||||
Customer and distributor relationships |
$ | 524 | $ | (339) | $ | 185 | $ | 515 | $ | (311) | $ | 204 | ||||||||||||||
Proprietary technology |
25 | (17) | 8 | 22 | (15) | 7 | ||||||||||||||||||||
Patents and other |
5 | (4) | 1 | 4 | (4) | | ||||||||||||||||||||
Other intangible assets, net |
$ | 554 | $ | (360) | $ | 194 | $ | 541 | $ | (330) | $ | 211 |
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 months ended September 30, 2012 was $10 and $29, respectively, and $12 and $36 for the three and nine months ended September 30, 2011, respectively.
Estimated amortization expense for the remaining three months of 2012 and each of the five succeeding years and thereafter is as follows:
Remaining 2012 |
$ | 10 | ||||
2013 |
27 | |||||
2014 |
23 | |||||
2015 |
20 | |||||
2016 |
18 | |||||
2017 and thereafter |
96 | |||||
Total Other intangible assets, net |
$ | 194 |
DEBT
Debt consisted of the following:
September 30, 2012 | December 31, 2011 | |||||||
Commercial paper |
$ | 134 | $ | | ||||
Total short-term debt |
134 | | ||||||
Long-term debt |
650 | 650 | ||||||
Unamortized debt discount |
(1 | ) | (1 | ) | ||||
Total long-term debt |
649 | 649 | ||||||
Total debt |
$ | 783 | $ | 649 |
Page | 13
The following table provides a summary of interest rates, carrying amounts and estimated fair values of outstanding long-term debt:
September 30, 2012 | December 31, 2011 | |||||||||||||||||||||
Interest rate | Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
||||||||||||||||||
Long-term debt |
||||||||||||||||||||||
Senior notes (due 2016) |
4.25 | % | $ | 250 | $ | 264 | $ | 250 | $ | 252 | ||||||||||||
Senior notes (due 2021) |
5.55 | % | 400 | 438 | 400 | 405 | ||||||||||||||||
Total long-term debt |
$ | 650 | $ | 702 | $ | 650 | $ | 657 |
The fair value of our notes was determined using prices in secondary markets for identical and similar securities (Level 2 inputs) obtained from external pricing sources. The carrying value of our commercial paper approximates fair value because of the short-term duration of the borrowings.
Commercial Paper
The Companys commercial paper program generally enables the Company to borrow short-term funds at competitive rates. The commercial paper program is fully supported by available borrowing capacity under our Credit Facility. As of September 30, 2012, the Companys outstanding commercial paper had a weighted average interest rate of 0.98% with a weighted average term of 35 days.
Credit Facility
The Company has a competitive advance and revolving credit facility agreement (Credit Facility) with a consortium of lenders, which is available for working capital, capital expenditures and other general corporate purposes. The Credit Facility provides for a four year maturity, expiring October 25, 2015, with a one year extension option upon satisfaction of certain conditions, and comprises an aggregate principal amount of up to $600 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 at any time outstanding. Subject to certain conditions, we are permitted to terminate permanently the total commitments and reduce commitments in minimum amounts of $10. We are also permitted, subject to certain conditions, to request that lenders increase the commitments under the facility by up to $200 for a maximum aggregate principal amount of $800. Voluntary prepayments are permitted in minimum amounts of $50. As of September 30, 2012 and December 31, 2011, there were no borrowings or letters of credit outstanding under the Credit Facility.
At our election, the interest rate per annum applicable to the competitive advances is 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 is 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 (the alternative base rate) 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.
Page | 14
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 of indebtedness; 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. The ratio of combined total indebtedness to combined EBITDA (leverage ratio) cannot exceed 3.50 to 1.00 at any time.
The Credit Facility agreement contains customary events of default, including nonpayment of principal, interest, fees or other amounts; material inaccuracy of a representation or warranty when made; violation of a covenant; cross-default to material indebtedness; bankruptcy events; material judgments; certain ERISA events and change in control.
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 Notes accrues from September 20, 2011 and is payable on April 1 and October 1 of each year, commencing on April 1, 2012. As of September 30, 2012 and December 31, 2011, accrued interest payable on the Notes, included in other accrued liabilities, was $16 and $9, respectively.
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 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.
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 Registration Rights Agreement). The Company agreed under the 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
Page | 15
registration statement to be declared effective under the Securities Act. During the second quarter of 2012, the Company filed the required registration statement, which was declared effective by the SEC under the Securities Act on June 11, 2012. The offer to exchange the Notes for the new registered senior notes began on June 14, 2012 and the exchange was settled on July 25, 2012. All Notes were exchanged for new registered senior notes.
POSTRETIREMENT BENEFIT PLANS
The following table provides the components of net periodic benefit cost for our defined benefit plans, including pension plans and other employee-related benefit plans:
Three Months Ended September 30, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Pension | Other Benefits |
Total | Pension | Other Benefits |
Total | |||||||||||||||||||
Net periodic benefit cost |
||||||||||||||||||||||||
Service cost |
$ | 19 | $ | | $ | 19 | $ | 2 | $ | | $ | 2 | ||||||||||||
Interest cost |
65 | 6 | 71 | 5 | 1 | 6 | ||||||||||||||||||
Expected return on plan assets |
(96 | ) | (5 | ) | (101 | ) | (7 | ) | | (7 | ) | |||||||||||||
Amortization of net actuarial loss |
19 | 3 | 22 | 1 | | 1 | ||||||||||||||||||
Amortization of prior service cost (credit) |
1 | | 1 | | | | ||||||||||||||||||
Net periodic benefit cost |
$ | 8 | $ | 4 | $ | 12 | $ | 1 | $ | 1 | $ | 2 |
Nine Months Ended September 30, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Pension | Other Benefits |
Total | Pension | Other Benefits |
Total | |||||||||||||||||||
Net periodic benefit cost |
||||||||||||||||||||||||
Service cost |
$ | 57 | $ | 2 | $ | 59 | $ | 5 | $ | | $ | 5 | ||||||||||||
Interest cost |
197 | 17 | 214 | 16 | 4 | 20 | ||||||||||||||||||
Expected return on plan assets |
(287 | ) | (16 | ) | (303 | ) | (22 | ) | | (22 | ) | |||||||||||||
Amortization of net actuarial loss |
55 | 10 | 65 | 4 | | 4 | ||||||||||||||||||
Amortization of prior service cost (credit) |
2 | (1 | ) | 1 | 1 | (1 | ) | | ||||||||||||||||
Net periodic benefit cost |
$ | 24 | $ | 12 | $ | 36 | $ | 4 | $ | 3 | $ | 7 |
We contributed $265 and $33 to our qualified defined benefit pension plans during the nine months ended September 30, 2012 and 2011, respectively. We estimate that our minimum funding requirements for the remainder of 2012 will not exceed $2.
LONG-TERM INCENTIVE COMPENSATION
The Company maintains an equity incentive plan to govern awards granted to Exelis employees and directors under the prior ITT plans and to provide for awards, including non-qualified stock options (NQOs), restricted stock units (RSUs), total shareholder return (TSR) awards, and other awards that are granted to certain of our employees and directors.
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During the second quarter of 2012, our shareholders approved an increase in shares reserved and authorized for issuance under our equity incentive plan from 28.0 shares to 40.0 shares.
Long-term incentive compensation costs 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 unaudited Condensed Consolidated and Combined Statements of Operations:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Compensation cost on equity-based awards |
$ | 4 | $ | 4 | $ | 16 | $ | 12 | ||||||||
Compensation cost on liability-based awards |
1 | (1 | ) | 2 | | |||||||||||
Total compensation costs, pre-tax |
$ | 5 | $ | 3 | $ | 18 | $ | 12 | ||||||||
Future tax benefit |
$ | 2 | $ | 1 | $ | 7 | $ | 4 |
At September 30, 2012, total unrecognized compensation costs related to equity-based awards and liability-based awards were $34 and $4, respectively, which are both expected to be recognized ratably over a weighted-average period of 2.3 years.
The following table provides a summary of the activities for NQOs and restricted stock, including RSUs and restricted stock awards, for the nine months ended September 30, 2012:
Stock Options | Restricted Stock | |||||||||||||||
Shares | Weighted Average Exercise Price(a) |
Shares | Weighted Average Grant Date Fair value(a) |
|||||||||||||
Outstanding at January 1, 2012 |
10.59 | $ | 10.65 | 3.51 | $ | 10.93 | ||||||||||
Granted |
3.02 | 11.20 | 1.25 | 11.16 | ||||||||||||
Exercised |
(1.46 | ) | 9.60 | | | |||||||||||
Vested |
| | (0.88 | ) | 8.08 | |||||||||||
Canceled or expired |
(0.15 | ) | 11.44 | (0.13 | ) | 12.00 | ||||||||||
Outstanding at September 30, 2012 |
12.00 | $ | 10.91 | 3.75 | $ | 11.64 |
(a) | In whole dollars. |
During the nine months ended September 30, 2012, we granted long-term incentive awards to employees consisting of 3.0 NQOs and 1.3 RSUs with respective weighted average grant date fair values (in whole dollars) of $1.96 and $11.16. The NQOs vest annually in three equal installments and have a ten-year expiration period. RSUs vest on the completion of a three-year service period. We also granted TSR awards with an aggregate target value of $4 that are cash settled at the end of a three-year performance period.
The fair values of NQOs are estimated on the date of grant using the Black-Scholes model. The fair values of RSUs are determined based on the closing price of Exelis common stock on the date of grant. The fair values of TSR awards are measured quarterly based on the Companys performance relative to the performance of a concentrated group of our peer companies and the S&P 1500 Aerospace and Defense index. Depending on the Companys performance during the three-year performance period, payment can range from 0% to 200% of the target value.
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The following table details the weighted average assumptions utilized in determining the fair value of the NQOs granted during the first nine months of 2012.
Dividend yield |
3.69% | |||
Expected volatility |
27.1% | |||
Expected life (in years) |
7.0 | |||
Risk-free rates |
1.41% | |||
Grant date fair value (in whole dollars) |
$ | 1.96 |
RELATED PARTY TRANSACTIONS
The unaudited Condensed Consolidated and Combined Financial Statements have been prepared on a stand-alone basis. However, prior to October 31, 2011, they were derived from the consolidated financial statements and accounting records of ITT.
Related Party Sales and Cost of Revenue
Historically, we sold certain inventory to other ITT businesses, which were included in total revenue and cost of product and service revenue in our unaudited Condensed Consolidated and Combined Statements of Operations. For the three and nine months ended September 30, 2011, these amounts were not significant. The aggregate inventory on hand from other ITT businesses as of December 31, 2011 was not significant.
Allocation of General Corporate Expenses
Prior to October 31, 2011, these unaudited Condensed Consolidated and Combined Financial Statements included 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 share-based compensation. During the three and nine months ended September 30, 2011, we were allocated $31 and $90, respectively, of general corporate expenses incurred by ITT, which is included within SG&A expenses in our unaudited Condensed Consolidated and Combined Statements of Operations.
Separation Agreements
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 the various agreements that 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, several real estate matters agreements, and Master Transition Services Agreement. The Distribution Agreement 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
Page | 18
certain asserted and unasserted asbestos or silica liability claims. Certain intercompany work orders and/or informal intercompany commercial arrangements have been converted into third-party contracts based on ITTs standard terms and conditions.
For the three and nine months ended September 30, 2012, charges incurred for services provided to Exelis by ITT and Xylem Inc. under the transaction service agreements, net of costs passed through to third parties, were $1 and $2, respectively, and charges related to the these agreements for services provided by Exelis to ITT and Xylem Inc., net of costs passed through to third parties, were $1 and $2, respectively. At September 30, 2012 and December 31, 2011, total payables due from Exelis to ITT and Xylem Inc. were $10 on both dates and total receivables due to Exelis from ITT and Xylem Inc. were $8 and $42, respectively.
COMMITMENTS AND CONTINGENCIES
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, personal injury claims, employment and pension matters, and commercial or contractual disputes, sometimes related to acquisitions or divestitures.
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 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 available to us. Our accrued liabilities for these environmental matters represent our 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,
Page | 19
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 $29 as of September 30, 2012 and December 31, 2011, 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, 2012 | December 31, 2011 | |||||||
Low-end range |
$ | 19 | $ | 20 | ||||
High-end range |
$ | 46 | $ | 53 | ||||
Number of active environmental investigations and remediation sites |
22 | 23 |
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.
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 to evaluate the merits of these claims as well
Page | 20
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.
Indemnifications
As part of the Spin-off, Exelis, ITT and Xylem Inc. 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. 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 are 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 provide to them.
Letters of Credit
In the ordinary course of business, we use standby letters of credit and guarantees issued by commercial banks and surety bonds issued by insurance companies, as well as self-guarantees, principally to guarantee our performance on certain contracts and to support our self-insured workers compensation plans. At September 30, 2012, there was an aggregate of approximately $105 in surety bonds, guarantees and stand-by letters of credit outstanding.
Rabbi Trust
The Company maintains 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 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.
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 equipment and systems for government and commercial customers around the world.
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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, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Product Revenue |
Service Revenue |
Total Revenue |
Product Revenue |
Service Revenue |
Total Revenue |
|||||||||||||||||||
C4ISR Electronics and Systems |
$ | 611 | $ | | $ | 611 | $ | 746 | $ | | $ | 746 | ||||||||||||
Information and Technical Services |
| 750 | 750 | | 786 | 786 | ||||||||||||||||||
Eliminations |
| | | (2 | ) | (1 | ) | (3 | ) | |||||||||||||||
Total |
$ | 611 | $ | 750 | $ | 1,361 | $ | 744 | $ | 785 | $ | 1,529 | ||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Product Revenue |
Service Revenue |
Total Revenue |
Product Revenue |
Service Revenue |
Total Revenue |
|||||||||||||||||||
C4ISR Electronics and Systems |
$ | 1,884 | $ | | $ | 1,884 | $ | 2,114 | $ | | $ | 2,114 | ||||||||||||
Information and Technical Services |
| 2,277 | 2,277 | | 2,250 | 2,250 | ||||||||||||||||||
Eliminations |
| | | (3 | ) | (2 | ) | (5 | ) | |||||||||||||||
Total |
$ | 1,884 | $ | 2,277 | $ | 4,161 | $ | 2,111 | $ | 2,248 | $ | 4,359 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Operating Income |
||||||||||||||||
C4ISR Electronics and Systems |
$ | 84 | $ | 107 | $ | 261 | $ | 278 | ||||||||
Information and Technical Services |
59 | 49 | 165 | 114 | ||||||||||||
Total Operating Income |
$ | 143 | $ | 156 | $ | 426 | $ | 392 | ||||||||
Operating Margin |
||||||||||||||||
C4ISR Electronics and Systems |
13.7 | % | 14.3 | % | 13.9 | % | 13.2 | % | ||||||||
Information and Technical Services |
7.9 | % | 6.2 | % | 7.2 | % | 5.1 | % | ||||||||
Total Operating Margin |
10.5 | % | 10.2 | % | 10.2 | % | 9.0 | % |
September 30, | December 31, | |||||||
2012 | 2011 | |||||||
Assets |
||||||||
C4ISR Electronics and Systems |
$ | 3,150 | $ | 3,168 | ||||
Information and Technical Services |
1,253 | 1,186 | ||||||
Corporate and Other |
679 | 745 | ||||||
Total Assets |
$ | 5,082 | $ | 5,099 |
SUBSEQUENT EVENT
Dividends
On October 11, 2012, the Board of Directors declared a cash dividend of $0.1033 per share, payable on January 1, 2013, to shareholders of record on November 16, 2012.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In millions, except per share amounts, unless otherwise stated)
You should read the following discussion of our results of operations and financial condition together with the unaudited Condensed Consolidated and Combined Financial Statements and notes thereto included in this quarterly report on Form 10-Q, as well as the audited Consolidated and Combined Financial Statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011, which provides additional information regarding the Company, 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.
Exelis 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 United States (U.S.) Department of Defense (DoD), including the U.S. Army, Navy, Marines and Air Force, and its prime contractors, U.S. Government intelligence agencies, National Aeronautics and Space Administration (NASA), Federal Aviation Administration (FAA), allied foreign governments and domestic and foreign commercial customers. As a prime contractor, subcontractor, or preferred supplier, Exelis participates in many high priority defense and non-defense programs in the United States. Exelis conducts most of its business with the U.S. Government, principally the DoD.
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.
On October 31, 2011, ITT Corporation (ITT) completed the spin-off (the Spin-off) of Exelis and Exelis began operating as a stand-alone publicly traded corporation. Prior to the Spin-off, Exelis operated as the Defense and Information Solutions Segment of ITT.
Prior to the Spin-off, 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 prior to October 31, 2011. We are incurring additional costs as an independent, publicly traded company, including additional costs related to corporate finance, governance and public reporting. We believe cash flows from operations will be sufficient to fund these additional costs going forward.
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Unless the context otherwise requires, references in these notes to Exelis, we, us, our, the Company and our Company refer to Exelis Inc. and its subsidiaries. References in these notes to ITT or parent refer to ITT Corporation, an Indiana corporation, and its subsidiaries (other than Exelis), unless the context otherwise requires.
Economic Opportunities, Challenges, and Risks
The United States continues to face significant economic and fiscal challenges, including slow GDP growth, high unemployment, and persistent U.S. federal government budget deficits. Concerns over fiscal deficits and the national debt continue to drive the political debate and no national consensus exists on the appropriate level of defense and other federal spending, making long-term funding targets and priorities unclear.
This uncertainty is not likely to abate prior to the U.S. presidential election in November 2012, and we expect that fiscal uncertainty is likely to prevail through mid-December 2012. We believe the prospects for finalizing fiscal year 2013 spending levels remain low because Congress has failed to pass either a fiscal year 2013 budget resolution or the individual appropriations bills that serve to allocate discretionary spending among the federal governments cabinet agencies, commissions, boards and independent agencies. For the near term, Congress has enacted a six month continuing resolution (CR), which will keep the government operating through March 27, 2013.
The CR assumes a top line discretionary spending amount of $1.05 trillion for fiscal year 2013, consistent with the Comprehensive Budget Agreement (CBA) of August 2011, which translates into an expected spending level of $608 billion for the DoD, down from $634 billion in fiscal year 2012, driven in large part by declining Overseas Contingency Operation (OCO) funding of $89 billion, down from about $115 billion in fiscal year 2012. The CBA also includes a provision known as Sequestration, scheduled to be implemented in January 2013, which would impose significantly greater cuts to DoD budgets over the next ten years, unless a compromise solution to reduce budget deficits is reached by Congress and the President. If Sequestration were implemented it would significantly reduce most defense and domestic discretionary spending by fixed percentages of approximately 9% and 8%, respectively.
We believe potential solutions to this budgetary uncertainty include the following: a yearlong CR with no enacted fiscal year 2013 appropriations bills or budget resolutions; a short term one year spending reduction bill which temporarily delays the first year of Sequestration; or a comprehensive multi-year budget agreement which combines spending cuts, tax reform, and entitlement or mandatory spending formula changes. Companies which derive substantial revenues from federal contracting will benefit the most from a comprehensive agreement which implements fundamental multi-year changes that would prevent Sequestration from actually occurring. The debate over how and when a solution may be reached over the as-yet unresolved Sequestration issue remains a significant issue for the defense industry.
We believe that spending on recapitalization, modernization and maintenance of defense and security assets will continue despite possible reductions to some defense programs in which we participate or for which we expect to compete. We expect ongoing DoD emphasis to be placed on our areas of strength, such as electronic warfare, intelligence, surveillance and reconnaissance (ISR), precision navigation instruments, cyber, and information processing, exploitation and dissemination. However, uncertainty related to potential changes in appropriations and priorities could materially impact our business.
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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 in Part 1, Item 1A under the caption Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2011 and our disclosure under the caption Forward-Looking and Cautionary Statements at the end of this section.
Executive Summary
Exelis reported revenue of $1.4 billion for the quarter ended September 30, 2012, a decrease of 11% compared to the corresponding period in 2011. The decrease in revenue was driven by revenue declines of 18% in our C4ISR Electronics and Systems segment primarily due to lower demand for surge-related products, including our Night Vision products and Single Channel Ground and Airborne Radio Systems (SINCGARS). Revenue also declined 5% within our Information and Technical Services segment primarily due to the completion of an Advanced Information Systems contract.
Operating income for the three months ended September 30, 2012 was $143, reflecting a decrease of $13 or 8% compared to the corresponding prior year period primarily due to lower revenue. Overall, operating margin increased quarter-over-quarter to 10.5% from 10.2% primarily due to lower selling, general and administrative expenses.
Further details related to the quarter are contained in the Discussion of Financial Results 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, 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 measure, which may not be comparable to similarly titled measures reported by other companies, to be a key performance indicator:
| Adjusted net income defined as net income, adjusted to exclude items that include, but are not limited to significant charges or credits that impact current results, but are not related to our ongoing operations, unusual and infrequent non-operating items and non-operating tax settlements or adjustments. A reconciliation of adjusted net income is provided below. |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Net income |
$ | 88 | $ | 101 | $ | 244 | $ | 262 | ||||||||
Separation costs, net of tax |
4 | 6 | 19 | 15 | ||||||||||||
Reversal of separation related tax receivable write-down |
(4 | ) | | (4 | ) | | ||||||||||
Reversal of separation related tax items |
(4 | ) | | | | |||||||||||
Adjusted net income |
$ | 84 | $ | 107 | $ | 259 | $ | 277 |
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DISCUSSION OF FINANCIAL RESULTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
Selected financial highlights are presented in the table below:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2012 | 2011 | Change | 2012 | 2011 | Change | |||||||||||||||||||
Product and service revenue |
$ | 1,361 | $ | 1,529 | (11.0 | )% | $ | 4,161 | $ | 4,359 | (4.5 | )% | ||||||||||||
Cost of product and service revenue |
1,083 | 1,198 | (9.6 | )% | 3,305 | 3,461 | (4.5 | )% | ||||||||||||||||
Operating expense |
135 | 175 | (22.9 | )% | 430 | 506 | (15.0 | )% | ||||||||||||||||
Operating income |
143 | 156 | (8.3 | )% | 426 | 392 | 8.7 | % | ||||||||||||||||
Operating margin |
10.5 | % | 10.2 | % | 10.2 | % | 9.0 | % | ||||||||||||||||
Interest expense |
9 | 1 | 800 | % | 29 | 1 | 2,800 | % | ||||||||||||||||
Other expense (income), net |
(4 | ) | 1 | (500 | )% | 3 | (13 | ) | 123 | % | ||||||||||||||
Income tax expense |
50 | 53 | (5.7 | )% | 150 | 142 | 5.6 | % | ||||||||||||||||
Effective tax rate |
36.2 | % | 34.4 | % | 38.1 | % | 35.1 | % | ||||||||||||||||
Net income |
$ | 88 | $ | 101 | (12.9 | )% | $ | 244 | $ | 262 | (6.9 | )% |
Revenue
Revenue for the three and nine months ended September 30, 2012 decreased $168 or 11.0% and $198 or 4.5%, respectively, as compared to the same prior year periods. The following table illustrates revenue for our segments:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2012 | 2011 | Change | 2012 | 2011 | Change | |||||||||||||||||||
C4ISR Electronics & Systems |
$ | 611 | $ | 746 | (18.1 | )% | $ | 1,884 | $ | 2,114 | (10.9)% | |||||||||||||
Information & Technical Services |
750 | 786 | (4.6 | )% | 2,277 | 2,250 | 1.2% | |||||||||||||||||
Eliminations |
| (3 | ) | | (5 | ) | ||||||||||||||||||
Total Revenue |
$ | 1,361 | $ | 1,529 | (11.0 | )% | $ | 4,161 | $ | 4,359 | (4.5)% |
Revenue from our C4ISR Electronics and Systems segment decreased $135 and $230 for the three and nine months ended September 30, 2012, respectively, as compared with the same periods in 2011. The decrease in revenue for the three and nine months ended September 30, 2012 was primarily due to volume declines in surge-related products, including Night Vision products of approximately $87 and $135, respectively, SINCGARS products of approximately $63 and $124, respectively, and Counter RCIED Electronic Warfare (CREW) 2.1 and special purpose jammers products of approximately $10 and $35, respectively. The decrease in revenue for the three and nine months ended September 30, 2012 as compared with the same prior year periods was partially offset by higher revenue from the sales of our Band C Upgrade kits for legacy CREW products of approximately $45 and $75, respectively. Additionally, for the nine months ended September 30, 2012, sales of other counter-IED systems increased by approximately $31 as compared to the same period in 2011.
Revenue from our Information and Technical Services segment decreased $36 for the three months ended September 30, 2012 as compared with the same period in 2011. The decrease in revenue was
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primarily due to lower revenue on our Technology and Systems Engineering Bridge (TSE Bridge) program of approximately $19 and lower activity on our Kuwait Based Operations and Security Support Services (K-BOSSS) contract of approximately $15 and our Total Army Communications for Southwest Asia, Central Asia and Africa (TACSWACAA) program of approximately $14. The TSE Bridge program, performed in our Advanced Information Systems area, ended in late 2011. The decrease in revenue for the three months ended September 30, 2012 as compared with the same prior year period was partially offset by higher revenue from Afghan National Security Forces (ANSF) Facilities Support programs of approximately $14.
Revenue from our Information and Technical Services segment increased $27 for the nine months ended September 30, 2012 as compared with the same period in 2011. The increase in revenue was primarily due to efforts to support NASA under our Space Communication and Networks Services (SCNS) contract, which had a revenue increase of approximately $52, and efforts to support the U.S. Armed Services on our Afghanistan Programs, including the ANSF Facilities Support programs and the Logistics Civilian Augmentation Program (LOGCAP), which had revenue increases of approximately $51 and $30, respectively. The SCNS contract provides most of the communications and tracking services for a wide range of Earth-orbiting spacecraft, including the International Space Station. The increase in revenue for the nine months ended September 30, 2012 was partially offset by lower revenue on the TSE Bridge program of approximately $56, and lower net revenue on our Middle East Programs, including a decrease on the Kuwait based Army Preposition Stock-5 (APS-5 Kuwait) contract of approximately $54.
Cost of Revenue and Operating Expenses
Cost of product and service revenue and other operating expenses are comprised of the following:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2012 | 2011 | Change | 2012 | 2011 | Change | |||||||||||||||||||
Cost of product revenue |
$ | 434 | $ | 510 | (14.9 | )% | $ | 1,328 | $ | 1,465 | (9.4 | )% | ||||||||||||
% of product revenue |
71.0 | % | 68.5 | % | 70.5 | % | 69.4 | % | ||||||||||||||||
Cost of service revenue |
649 | 688 | (5.7 | )% | 1,977 | 1,996 | (1.0 | )% | ||||||||||||||||
% of service revenue |
86.5 | % | 87.6 | % | 86.8 | % | 88.8 | % | ||||||||||||||||
Selling, general and administrative expenses |
114 | 150 | (24.0 | )% | 377 | 429 | (12.1 | )% | ||||||||||||||||
% of total revenue |
8.4 | % | 9.8 | % | 9.1 | % | 9.8 | % | ||||||||||||||||
Research and development expenses |
18 | 24 | (25.0 | )% | 48 | 72 | (33.3 | )% | ||||||||||||||||
% of total revenue |
1.3 | % | 1.6 | % | 1.2 | % | 1.7 | % | ||||||||||||||||
Restructuring and asset impairment charges, net |
3 | 1 | 200 | % | 5 | 5 | |
Cost of Product and Service Revenue
The decrease in cost of product revenue of $76 or 14.9% and $137 or 9.4% for the three and nine months ended September 30, 2012, respectively, as compared to the same periods in 2011 was primarily due to lower revenue in our C4ISR Electronics and Systems segment. The cost of product revenue as a percentage of product revenue increased for the three and nine months ended September 30, 2012 as compared to the corresponding periods in 2011 due to a net sales mix of lower margin products.
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The decrease in cost of service revenue of $39 or 5.7% for the three months ended September 30, 2012 as compared to the same period in 2011 was primarily due to lower revenue in our Information and Technical Services segment. The cost of service revenue as a percentage of service revenue decreased for the three months ended September 30, 2012 as compared to the corresponding period in 2011 primarily due to productivity improvements and contract pricing adjustments on several contracts in our Air Traffic Management and Afghanistan Programs areas.
The decrease in cost of service revenue of $19 or 1.0% for the nine months ended September 30, 2012 as compared to the same period in 2011 was primarily due to productivity improvements in our Information and Technical Services segment. The cost of service revenue as a percentage of service revenue decreased for the nine months ended September 30, 2012 as compared to the corresponding period in 2011 primarily due to productivity improvements and contract pricing adjustments on several contracts in our Air Traffic Management and Afghanistan Programs areas.
Selling, General & Administrative Expenses (SG&A)
SG&A expenses as a percent of total revenue were 8.4% and 9.1% for the three and nine months ended September 30, 2012, respectively, compared to 9.8% in both of the same periods in 2011. The decrease in SG&A expenses as a percent of total revenue as compared to the same periods in 2011 was due to lower SG&A expenses, partially offset by lower revenue in both periods. For the three and nine months ended September 30, 2012, SG&A expenses decreased as compared to the same periods in 2011 primarily due to the absence of general corporate expense allocations from ITT of $31 and $90, respectively, and cost reductions partially resulting from prior year restructuring in our C4ISR Electronics and Systems segment, partially offset by higher net periodic benefit costs of $10 and $29, respectively, and higher general corporate expenses necessary to operate as a stand-alone company. The Corporate expense allocations received from ITT during the three and nine months ended September 30, 2011 included allocations for pension and other defined benefit postretirement plan costs of $27 and $67, respectively.
Research and Development Expenses (R&D)
The decrease in R&D expenses of $6 or 25.0% and $24 or 33.3% for the three and nine months ended September 30, 2012, respectively, as compared to the same periods in 2011 primarily reflects the completion of certain R&D projects for integrated electronic warfare systems, other communication technologies and night vision technologies primarily within our C4ISR Electronics and Systems segment.
Restructuring and Asset Impairment Charges, Net
During the three and nine months ended September 30, 2012, we recognized net restructuring and asset impairment charges of $3 and $5, respectively. Restructuring and asset impairment charges, net, for the three and nine months ended September 30, 2011 were $1 and $5, respectively. The period-over-period changes in restructuring and asset impairment charges, net, were not significant.
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Operating Income
The following table illustrates the operating income results of our business segments, including operating margin results.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2012 | 2011 | Change | 2012 | 2011 | Change | |||||||||||||||||||
C4ISR Electronics & Systems |
$ | 84 | $ | 107 | (21.5 | )% | $ | 261 | $ | 278 | (6.1 | )% | ||||||||||||
Operating margin |
13.7 | % | 14.3 | % | 13.9 | % | 13.2 | % | ||||||||||||||||
Information and Technical Services |
59 | 49 | 20.4 | % | 165 | 114 | 44.7 | % | ||||||||||||||||
Operating margin |
7.9 | % | 6.2 | % | 7.2 | % | 5.1 | % | ||||||||||||||||
Total operating income |
$ | 143 | $ | 156 | (8.3 | )% | $ | 426 | $ | 392 | 8.7 | % | ||||||||||||
Total operating margin |
10.5 | % | 10.2 | % | 10.2 | % | 9.0 | % |
During the performance of long-term sale contracts, estimated final contract prices and costs are reviewed periodically and revisions are made as required and recorded in income in the period in which they are determined. Changes in estimated revenues, cost of revenue and the related effect to operating income are recognized using a cumulative catch-up adjustment which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a contracts percent complete. Net favorable cumulative catch-up adjustments related to prior periods increased operating income by approximately $26 and $79 for the three and nine months ended September 30, 2012, respectively, and by approximately $52 and $127 for the three and nine months ended September 30, 2011, respectively. Productivity improvements and contract pricing adjustments primarily contributed to the net favorable cumulative catch-up adjustments in the current three and nine month periods.
Operating income at our C4ISR Electronics and Systems segment for the three months ended September 30, 2012 decreased $23 or 21.5% as compared to the same period in 2011. Operating income as a percentage of revenue was 13.7% for the three months ended September 30, 2012 as compared to 14.3% for the same period in 2011. The decrease in operating margin was primarily due to higher cost of product revenue as a percentage of product revenue for the three months ended September 30, 2012 as compared to the same period in 2011.
Operating income at our C4ISR Electronics and Systems segment for the nine months ended September 30, 2012 decreased $17 or 6.1% as compared to the same period in 2011. Operating income as a percentage of revenue was 13.9% for the nine months ended September 30, 2012 as compared to 13.2% for the same period in 2011. The increase in operating margin was primarily due to lower SG&A expenses as a percentage of product revenue for the nine months ended September 30, 2012 as compared to the same period in 2011.
Operating income at our Information and Technical Services segment for the three and nine months ended September 30, 2012 increased $10 or 20.4% and $51 or 44.7%, respectively, as compared to the same periods in 2011. Operating income as a percentage of revenue for the three and nine months ended September 30, 2012 was 7.9% and 7.2%, respectively, as compared to 6.2% and 5.1% for the same periods in 2011. The increase in operating margin was primarily due to lower cost of service revenue as a percentage of service revenue for both the three and nine months ended September 30, 2012 as compared to the same periods in 2011.
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Impact to Operating Income from Postretirement Expense
We recorded net periodic benefit costs of $12 and $36 for the three and nine months ended September 30, 2012, respectively, as compared to $2 and $7, respectively, in the same periods in 2011. During the three and nine months ended September 30, 2011, we received allocations from ITT for pension and other defined benefit postretirement plan costs of $27 and $67, respectively.
Total postretirement defined benefit plan costs, including both net periodic benefit costs and the allocations from ITT, decreased $17 quarter-over-quarter and $38 year-to-date as compared to the same periods in 2011. This decrease is primarily attributable to a longer amortization period for the net actuarial losses partially offset by higher unamortized net actuarial losses and the assumption of the full costs of certain defined benefit plans received from ITT in connection with the Spin-off (Transferred Plans). Beginning on January 1, 2012, we are using a new amortization period for the ITT Salaried Retirement Plan (U.S. SRP), our largest defined benefit pension plan, as a result of changes to the plan from the Spin-off and other plan modifications that caused almost all plan participants to stop accruing future benefits. Net actuarial losses will now be amortized over the average remaining life expectancy of the plan participants instead of the average remaining service period of plan participants.
Interest Expense, Net
For the three and nine months ended September 30, 2012, the Company recorded interest expense, net, of $9 and $29, respectively, compared to $1 for both periods in 2011. Interest expense, net, is primarily related to our $650 senior notes issued in late September 2011.
Other Expense (Income), Net
For the three months ended September 30, 2012 and 2011, the Company recorded other income, net, of $4 and other expense, net, of $1, respectively. The quarter-over-quarter change was not significant.
For the nine months ended September 30, 2012, the Company recorded other expense, net, of $3 compared to other income, net, of $13 in the same period in 2011. Other income, net, was primarily related to our sale of an investment in marketable securities during 2011.
Income Tax Expense
For the three and nine months ended September 30, 2012, the Company recorded income tax provisions of $50 and $150, respectively, which represents effective tax rates of 36.2% and 38.1 %, respectively, as compared to $53 or 34.4% and $142 or 35.1%, respectively, during the same prior year periods. The increase in the quarterly and year-to-date effective tax rates as compared to the same periods in 2011 were primarily due to reduced U.S. manufacturing deductions and the expiration of the federal research and development credit, which expired at the end of 2011. The tax rate in the third quarter of 2012 was also decreased by discrete items related to the Spin-off.
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
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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 decreased $0.6 billion, to $3.7 billion, during the nine months ended September 30, 2012 as compared to the same period in 2011, primarily due to the absence of several large funded orders within our Middle East Programs received during the first nine months of 2011. At September 30, 2012, total backlog was $10.5 billion compared to $11.7 billion at December 31, 2011. The decrease in total backlog relates primarily to lower backlog for Night Vision products and on previous awards within our Middle East and Afghanistan Programs.
Backlog consisted of the following:
September 30, | December 31, | |||||||
(In billions) | 2012 | 2011 | ||||||
Funded backlog |
$ | 3.2 | $ | 3.6 | ||||
Unfunded backlog |
7.3 | 8.1 | ||||||
Total backlog |
$ | 10.5 | $ | 11.7 |
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We expect to fund our ongoing working capital, capital expenditures, strategic investments, 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. We believe our $600 credit facility and commercial paper program 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. A significant portion of our cash is held by our foreign subsidiaries. We manage our cash requirements considering available funds among our subsidiaries and the cost effectiveness with which those funds can be accessed. We continue to look for opportunities to access cash balances in excess of local operating requirements to meet liquidity needs in a cost-efficient manner.
Funding of Pension Plans
Funding requirements under applicable laws and regulations are a major consideration in making contributions to our U.S. pension plans. 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. With respect to U.S. qualified pension plans, we intend to contribute annually not less than the required minimum funding thresholds.
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The Moving Ahead for Progress in the 21st Century Act, which was signed into law on July 6, 2012, includes an interest rate stabilization provision that will impact the minimum funding requirements. We expect that this provision will reduce our minimum funding thresholds for the remainder of 2012 and for the next two years thereafter.
At December 31, 2011, our defined benefit pension plans were underfunded by $1.9 billion. During the nine months ended September 30, 2012, we made total contributions of $265 to our qualified pension plans. We estimate that our minimum funding requirements for the remainder of 2012 will not exceed $2.
Future required contributions will depend primarily on the actual annual return on assets and the discount rate used to measure the benefit obligation at the end of each year. Depending on these factors, and the resulting funded status of our pension plans, the level of future statutory minimum contributions could be material.
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 August 14, 2012, the Board of Directors declared a cash dividend of $0.1033 per share, payable on October 1, 2012 to shareholders of record on August 31, 2012. During the nine months ended September 30, 2012, we declared three quarterly dividends totaling $59 or $0.3099 per share.
On October 11, 2012, the Board of Directors declared a cash dividend of $0.1033 per share, payable on January 1, 2013, to shareholders of record on November 16, 2012.
Sources and Uses of Liquidity
The following table provides the net cash provided by or used in operating activities, investing activities and financing activities.
Nine Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
Operating Activities |
$ | 97 | $ | 343 | ||||
Investing Activities |
(127 | ) | (45 | ) | ||||
Financing Activities |
102 | (250 | ) | |||||
Foreign Exchange |
6 | (2 | ) | |||||
Net change in cash and cash equivalents |
$ | 78 | $ | 46 |
Net cash provided by operating activities decreased $246 for the nine months ended September 30, 2012 as compared to the same period in 2011, primarily due to a $260 increase in postretirement benefit plans payments and changes in other liabilities of $169 partially offset by changes in deferred taxes of $128.
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Net cash used in investing activities increased $82 for the nine months ended September 30, 2012 as compared to the same period in 2011, primarily due to net cash paid for acquisitions of $42 and higher capital expenditures related to facilities and equipment to support new and existing products of $31.
Net cash provided by financing activities increased $352 for the nine months ended September 30, 2012 as compared to the same period in 2011, primarily due to net borrowings under our commercial paper program of $134 to fund working capital requirements and contributions to our defined benefit pension plans, and the absence of $899 of cash transfers to our former Parent net of proceeds from the issuance of debt of $649. The increase in net cash provided by financing activities was partially offset by dividend payments of $39.
Capital Resources
At September 30, 2012, the Company had cash and cash equivalents of $194 and a $600 revolving credit facility which expires in October 2015. There were no borrowings outstanding under the credit facility and there was $134 of commercial paper outstanding under our commercial paper program, resulting in net borrowing capacity under the credit facility of $466 as of September 30, 2012.
Borrowings under the credit facility are unsecured and bear interest at rates based, at our option, on the Eurodollar rate or a bank defined alternative base rate. Each banks obligation to make loans under the credit facility is subject to, among other things, our compliance with various representations, warranties and covenants.
In 2012, we have issued and expect to continue to issue commercial paper periodically. The Companys commercial paper program generally enables the Company to borrow short-term funds at competitive rates. The commercial paper program is fully supported by available borrowing capacity under our credit facility. As with all other financing programs, our access to the commercial paper market will be impacted by many factors, including our credit ratings, liquidity of the capital markets, and state of the economy. As such, we cannot assure that we will have continued access to the commercial paper market or that the terms of the commercial paper will be acceptable to us.
In connection with the Spin-off, on September 20, 2011, we issued $250 of 4.25% senior notes due in 2016 and $400 of 5.55% senior notes due in 2021. Interest on the senior notes is payable on April 1 and October 1 of each year. The senior notes are senior unsecured obligations and rank equally with all of our existing and future senior unsecured indebtedness. The senior notes have covenants that restrict our ability to, subject to exceptions, incur indebtedness secured by liens or engage in sale and leaseback transactions.
During the third quarter of 2012, we completed an exchange of all the senior notes for new registered senior notes with terms substantially identical in all material respects to the senior notes, except for the elimination of the transfer restrictions and related rights.
The commercial paper, credit facility and senior notes are discussed further in Note 9, Debt, in the notes to the unaudited Condensed Consolidated and Combined Financial Statements.
Contractual Obligations
There have been no material changes to our contractual obligations from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2011.
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Off-Balance Sheet Arrangements
At September 30, 2012, we had no significant off-balance sheet arrangements other than operating leases and certain indemnifications. We do not have a liability recorded for our historic indemnifications and are not aware of any claims or other information that we believe would give rise to material payments under such indemnities. 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 provide to them.
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. Management believes that the accounting estimates employed and the resulting balances are reasonable; however, actual results in these areas could differ from managements estimates under different assumptions or conditions.
There have been no significant changes in our critical accounting policies, estimates and judgments as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.
Recent Accounting Pronouncements and Accounting Standards Updates
See Note 2, Recent Accounting Pronouncements, to the unaudited Condensed Consolidated and 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 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. The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the Companys historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Item 1A, Risk Factors, and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2011, and those described from time to time in our future reports filed with the Securities and Exchange Commission.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our main exposure to market risk relates to interest rates and foreign currency exchange rates.
Our outstanding long-term debt balances are fixed rate debt. While changes in interest rates will have no impact on the interest we pay on our fixed rate debt, interest on our commercial paper will be exposed to interest rate fluctuations. Our sensitivity to a one percent change in interest rates for our commercial paper, assuming amounts outstanding at September 30, 2012 remained outstanding for one year, would not be material to the financial statements. We do not consider the market risk exposure to foreign currency exchange rates to be material to the financial statements.
We may use derivative financial instruments to manage our exposure to fluctuations in foreign currency exchange rates and interest rates. The Company does not use derivative financial instruments for trading or speculative purposes. Credit risk related to derivative financial instruments is considered minimal and is managed by requiring high credit standards for counterparties.
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, 2012. Based on that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2012, the Companys disclosure controls and procedures were effective to ensure that information required to be disclosed in reports the Company files or submits under the Exchange Act are (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, 2012 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.
Page | 35
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, personal injury claims, employment and pension matters, and commercial or contractual disputes, sometimes related to acquisitions or divestitures.
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.
See Note 13, Commitments and Contingencies, to the unaudited Condensed Consolidated and Combined Financial Statements for further information.
The Risk Factors section, under Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
(a) See the Exhibit Index for a list of exhibits filed herewith.
Page | 36
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. | ||||
(Registrant) | ||||
November 2, 2012 | /s/ GREGORY P. KUDLA | |||
(Date) | Gregory P. Kudla | |||
Chief Accounting Officer (Principal Accounting Officer) |
Page | 37
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) | Amended and Restated By-laws of Exelis Inc. | Incorporated by reference to Exhibit 3.1 of Exelis Inc.s Form 8-K Current Report filed on May 11, 2012 (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 4.5 of Exelis Inc.s Form S-4 Registration Statement filed on May 25, 2012 (CIK No. 1524471, File No. 333-181682). | ||
(4.3) | Form of Exelis Inc. 5.550% Senior Notes due 2021 | Incorporated by reference to Exhibit 4.5 of Exelis Inc.s Form S-4 Registration Statement filed on May 25, 2012 (CIK No. 1524471, File No. 333-181682). | ||
(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). | ||
(11) | Statement re computation of per share earnings | Information required to be presented in Exhibit 11 is provided under Earnings Per Share in Note 3 to the Condensed Consolidated and Combined Financial Statements in Part I, Item 1 Financial Statements of Exelis Inc.s Quarterly Report on Form 10-Q for the period ended September 30, 2012 in accordance with the provisions of Financial Accounting Standards Board Accounting Standards Codification 260, Earnings Per Share. | ||
(12) | Statement re computation of ratios | Filed herewith. |
Page | 38
EXHIBIT NUMBER |
DESCRIPTION |
LOCATION | ||
(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. | ||
(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 quarterly period ended September 30, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated and Combined Statements of Operations, (ii) Condensed Consolidated and Combined Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated and Combined Statements of Cash Flows and (v) Notes to Condensed Consolidated and Combined Financial Statements. | Submitted electronically with this Report. |
Page | 39
EXHIBIT 12
EXELIS INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Nine Months Ended September 30, |
Year Ended December 31, | |||||||||||||||||||||||
(IN MILLIONS, EXCEPT RATIO) | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||
Earnings |
||||||||||||||||||||||||
Income from continuing operations before income tax expense |
$ | 394 | $ | 537 | $ | 696 | $ | 700 | $ | 657 | $ | 438 | ||||||||||||
Add Fixed Charges |
||||||||||||||||||||||||
Interest expense |
29 | 10 | | 1 | 2 | | ||||||||||||||||||
Interest component of rental expense(a) |
12 | 15 | 14 | 14 | 13 | 8 | ||||||||||||||||||
Total earnings available for fixed charges |
$ | 435 | $ | 562 | $ | 710 | $ | 715 | $ | 672 | $ | 446 | ||||||||||||
Total Fixed Charges |
$ | 41 | $ | 25 | $ | 14 | $ | 15 | $ | 15 | $ | 8 | ||||||||||||
Ratio of earnings to fixed charges |
10.6 | 22.5 | 50.7 | 47.7 | 44.8 | 55.8 |
(a) | Represents the portion of operating leases which management believes is a reasonable representation of an interest factor. |
EXHIBIT 31.1
CERTIFICATION OF DAVID F. MELCHER PURSUANT TO SEC. 302
OF THE SARBANES-OXLEY ACT OF 2002
I, David F. Melcher, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2012;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its combined subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
November 2, 2012 | /S/ DAVID F. MELCHER | |||
(Date) | David F. Melcher | |||
Chief Executive Officer and President |
EXHIBIT 31.2
CERTIFICATION OF PETER J. MILLIGAN PURSUANT TO SEC. 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Peter J. Milligan, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2012;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its combined subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
November 2, 2012 | /S/ PETER J. MILLIGAN | |||
(Date) | Peter J. Milligan | |||
Senior Vice President and Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Exelis Inc. (the Company) on Form 10-Q for the period ended September 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, David F. Melcher, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
November 2, 2012 | /S/ DAVID F. MELCHER | |||
(Date) | David F. Melcher | |||
Chief Executive Officer and President |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Exelis, Inc. (the Company) on Form 10-Q for the period ended September 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Peter J. Milligan, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
November 2, 2012 | /S/ PETER J. MILLIGAN | |||
(Date) | Peter J. Milligan | |||
Senior Vice President and Chief Financial Officer |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Receivables, Net (Detail) (USD $)
In Millions, unless otherwise specified |
Sep. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Financing Receivable, Recorded Investment, Past Due [Line Items] | ||
Billed receivables | $ 435 | $ 463 |
Unbilled contract receivables | 639 | 559 |
Other | 10 | 42 |
Receivables, gross | 1,084 | 1,064 |
Allowance for doubtful accounts | (4) | (3) |
Receivables, net | $ 1,080 | $ 1,061 |
Weighted Average Assumptions (Detail) (USD $)
|
9 Months Ended |
---|---|
Sep. 30, 2012
|
|
Share Based Compensation Arrangements By Share Based Payment Award Options [Line Items] | |
Dividend yield | 3.69% |
Expected volatility | 27.10% |
Expected life (in years) | 7 years |
Risk-free rates | 1.41% |
Grant date fair value (in whole dollars) | $ 1.96 |
Related Party Transactions - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | |||
---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2012
|
Sep. 30, 2011
|
Sep. 30, 2012
|
Sep. 30, 2011
|
Sep. 30, 2011
Itt
|
Sep. 30, 2011
Itt
|
Sep. 30, 2012
Xylem And Itt
|
Sep. 30, 2012
Xylem And Itt
|
Dec. 31, 2011
Xylem And Itt
|
|
Related Party Transaction [Line Items] | |||||||||
Allocation of general corporate expenses | $ 114 | $ 150 | $ 377 | $ 429 | $ 31 | $ 90 | |||
Amount of services received by entity from related party | 1 | 2 | |||||||
Amount of services provided by entity to related party | 1 | 2 | |||||||
Total payables due from Exelis | 10 | 10 | 10 | ||||||
Total receivables due to Exelis | $ 8 | $ 8 | $ 42 |
Summary of Debt (Detail) (USD $)
In Millions, unless otherwise specified |
Sep. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Debt Instrument [Line Items] | ||
Short-term debt | $ 134 | |
Long-term debt | 650 | 650 |
Unamortized debt discount | (1) | (1) |
Total long-term debt | 649 | 649 |
Total debt | 783 | 649 |
Commercial Paper
|
||
Debt Instrument [Line Items] | ||
Short-term debt | $ 134 |
Earnings Per Share (Detail)
In Millions, unless otherwise specified |
3 Months Ended | 9 Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2012
|
Sep. 30, 2011
|
Sep. 30, 2012
|
Sep. 30, 2011
|
|||||||
Reconciliation Of Basic Weighted Average Shares To Diluted Weighted Average Shares [Line Items] | ||||||||||
Weighted average common shares outstanding | 186.8 | 184.6 | 186.3 | 184.6 | ||||||
Add: Weighted average restricted stock awards outstanding | 0.8 | [1] | 1.6 | [1] | 1.0 | [1] | 1.6 | [1] | ||
Basic weighted average common shares outstanding | 187.6 | 186.2 | 187.3 | 186.2 | ||||||
Add: Dilutive impact of stock options | 0.4 | 0.8 | 0.5 | 0.8 | ||||||
Add: Dilutive impact of restricted stock units | 0.7 | 0.1 | 0.5 | 0.1 | ||||||
Diluted weighted average common shares outstanding | 188.7 | 187.1 | 188.3 | 187.1 | ||||||
|
Range of Estimated Loss Environmental Matters (Detail) (USD $)
In Millions, unless otherwise specified |
Sep. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Contingencies And Commitments [Line Items] | ||
Low-end range | $ 19 | $ 20 |
High-end range | 46 | 53 |
Number of active environmental investigations and remediation sites | $ 22 | $ 23 |
INVENTORIES, NET (Tables)
|
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2012
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Inventories, net | Inventories, net were comprised of the following:
|
Postretirement Benefit Plans - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified |
9 Months Ended | |
---|---|---|
Sep. 30, 2012
|
Sep. 30, 2011
|
|
Defined Benefit Plan Disclosure [Line Items] | ||
Defined benefit pension plans contributions by employer | $ 265 | $ 33 |
Pension plan contribution, minimum funding requirements | $ 2 |
Inventories, Net - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified |
Sep. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Deferred Costs Capitalized Prepaid And Other Assets Disclosure [Line Items] | ||
Deferred production costs in excess of aggregate estimated average cost | $ 2 | $ 29 |
Shareholders' Equity (Parenthetical) (Detail) (USD $)
In Millions, unless otherwise specified |
Sep. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Component Of Accumulated Other Comprehensive Loss [Line Items] | ||
Unamortized defined benefit plan costs, tax | $ 1,080 | $ 1,116 |
Compensation Costs (Detail) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2012
|
Sep. 30, 2011
|
Sep. 30, 2012
|
Sep. 30, 2011
|
|
Components Of Salaries And Benefits [Line Items] | ||||
Compensation cost on equity-based awards | $ 4 | $ 4 | $ 16 | $ 12 |
Compensation cost on liability-based awards | 1 | (1) | 2 | |
Total compensation costs, pre-tax | 5 | 3 | 18 | 12 |
Future tax benefit | $ 2 | $ 1 | $ 7 | $ 4 |
Segment Assets (Detail) (USD $)
In Millions, unless otherwise specified |
Sep. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Operating Statistics [Line Items] | ||
Total assets | $ 5,082 | $ 5,099 |
C4ISR Electronics and Systems
|
||
Operating Statistics [Line Items] | ||
Total assets | 3,150 | 3,168 |
Information and Technical Services
|
||
Operating Statistics [Line Items] | ||
Total assets | 1,253 | 1,186 |
Corporate and Other
|
||
Operating Statistics [Line Items] | ||
Total assets | $ 679 | $ 745 |
Summary of Long-Term Debt (Detail) (USD $)
In Millions, unless otherwise specified |
Sep. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Debt Instrument [Line Items] | ||
Carrying Value | $ 650 | $ 650 |
Fair Value | 702 | 657 |
Senior Notes Due 2016
|
||
Debt Instrument [Line Items] | ||
Interest rate | 4.25% | |
Carrying Value | 250 | 250 |
Fair Value | 264 | 252 |
Senior Notes Due 2021
|
||
Debt Instrument [Line Items] | ||
Interest rate | 5.55% | |
Carrying Value | 400 | 400 |
Fair Value | $ 438 | $ 405 |
Shareholders' Equity
|
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2012
|
||||||||||||||||||||||||||||||||||||||||||||||
Shareholders' Equity | NOTE 4 SHAREHOLDERS’ EQUITY Capital Stock As of September 30, 2012 and December 31, 2011, our authorized capital was comprised of 750 shares of common stock and 50 shares of preferred stock. As of September 30, 2012 and December 31, 2011, there were 187.6 and 186.2 shares of common stock ($0.01 par value in whole dollars), respectively, issued and outstanding. No preferred stock was issued and outstanding at September 30, 2012 and December 31, 2011. Accumulated Other Comprehensive Loss The following table provides the components of accumulated other comprehensive loss:
Unamortized defined benefit plan costs consist primarily of actuarial loss, net of tax, totaling $1,605 and $1,656 as of September 30, 2012 and December 31, 2011, 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. The changes in unamortized defined benefit plan cost included in other comprehensive income in the unaudited Condensed Consolidated and Combined Statements of Comprehensive Income were reduced by tax of $9 and $26 for the three and nine month ended September 30, 2012, respectively, and less than $1 for both the three and nine months ended September 30, 2011. Dividends On August 14, 2012, the Board of Directors declared a cash dividend of $0.1033 per share, payable on October 1, 2012 to shareholders of record on August 31, 2012. During the nine months ended September 30, 2012, we declared three quarterly dividends totaling $59 or $0.3099 per share. |
Subsequent Event - Additional Information (Detail) (USD $)
|
3 Months Ended |
---|---|
Sep. 30, 2012
|
|
Subsequent Event [Line Items] | |
Cash Dividend Declared | $ 0.1033 |
Dividends Payable, Date to be Paid | Jan. 01, 2013 |
Dividends Payable, Date of Record | Nov. 16, 2012 |